Fifth Third Bank 2008 Annual Report Download - page 44

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
42 Fifth Third Bancorp
of two risk grading systems. The risk grading system currently
utilized for reserve analysis purposes encompasses ten categories.
The Bancorp also maintains a dual risk rating system that provides
for thirteen probabilities of default grade categories and an
additional six grade categories for estimating actual losses given an
event of default. The probability of default and loss given default
evaluations are not separated in the ten-grade risk rating system.
The Bancorp has completed significant validation and testing of
the dual risk rating system. Scoring systems, various analytical
tools and delinquency monitoring are used to assess the credit risk
in the Bancorp’s homogenous consumer loan portfolios.
Overview
During 2008, general economic conditions continued to
deteriorate which had an adverse impact across the majority of the
Bancorp’s loan and lease products. Geographically, the Bancorp
experienced the most stress in the states of Michigan and Florida
due to the decline in real estate prices. Real estate price
deterioration, as measured by the Home Price Index, was most
prevalent in Florida due to past real estate price appreciation and
related over-development, and in Michigan due in part to cutbacks
by automobile manufacturers. The year-over-year deterioration in
home prices has been as high as 20% in some of the Bancorp’s
hardest hit geographies. Among portfolios, the commercial
homebuilder and developer, non-owner occupied residential
mortgage and brokered home equity portfolios exhibited the most
stress. Management suspended new lending to homebuilders and
to commercial non-owner occupied real estate, discontinued the
origination of brokered home equity products and raised
underwriting standards on non-owner occupied residential
mortgages. During the fourth quarter, in an effort to reduce loan
exposure to the real estate and construction industries and obtain
the highest realizable value, the Bancorp sold or moved to held-
for-sale $1.3 billion in commercial loan balances. The Bancorp
recognized $800 million in net charge-offs on these loans with
approximately 49% of the losses representing real estate secured
loans in Florida and 44% of the losses representing real estate
secured loans in Michigan. Throughout 2008, the Bancorp
aggressively engaged in other loss mitigation techniques such as
reducing lines of credit, restructuring certain consumer loans,
tightening certain underwriting standards and expanding
commercial and consumer loan workout teams. The following
credit information presents the Bancorp’s loan portfolio
diversification, an analysis of nonperforming loans and loans
charged-off and a discussion of the allowance for credit losses.
Commercial Portfolio
The Bancorp’s credit risk management strategy includes
minimizing concentrations of risk through diversification. Table
27 provides breakouts of the total commercial loan and lease
portfolio, including held for sale, by major industry classification
(as defined by the North American Industry Classification
System), by loan size and by state, illustrating the diversity and
granularity of the Bancorp’s commercial portfolio. The Bancorp
has commercial loan concentration limits based on industry, lines
of business within the commercial segment and real estate project
type.
As of December 31, 2008, the Bancorp had homebuilder
exposure of $4.0 billion and outstanding loans of $2.7 billion with
$366 million of portfolio commercial loans and $215 million in
held-for-sale commercial loans in nonaccrual loans. As of
December 31, 2008, approximately 41% of the outstanding loans
to homebuilders are located in the states of Michigan and Florida
and represent approximately 58% of the nonaccrual loans. As of
December 31, 2007, the Bancorp had homebuilder exposure of
$4.4 billion, outstanding loans of $2.9 billion with $176 million in
nonaccrual loans.
The risk within the commercial real estate portfolio is
managed and monitored through an underwriting process utilizing
detailed origination policies, continuous loan level reviews, the
monitoring of industry concentration and product type limits and
continuous portfolio risk management reporting. The origination
policies for commercial real estate outline the risks and
underwriting requirements for owner occupied, non-owner
occupied and construction lending. Included in the policies are
maturity and amortization terms, maximum loan-to-values (LTV),
minimum debt service coverage ratios, construction loan
monitoring procedures, appraisal requirements, pre-leasing
requirements (as applicable) and sensitivity and proforma analysis
requirements.
The commercial real estate portfolio is diversified by product
type, loan size and geographical location with concentration levels
established to manage the exposure. Appraisals are obtained
from qualified appraisers and are reviewed by an independent
appraisal review group to ensure independence and consistency in
the valuation process. Appraisal values are updated on an as
needed basis, in conformity with market conditions and regulatory
requirements. Table 26 provides further information on the
location of commercial real estate and construction industry loans
and leases.
The commercial portfolio has minimal direct exposure to
auto manufactures and their suppliers, although any further
deterioration of those industries would have negative impacts
across the Bancorp’s lending products. As of December 31, 2008,
the Bancorp had automobile dealer exposure, included within the
retail trade industry, of $3.1 billion and outstanding loans of $2.0
billion with $113 million in nonaccrual loans.
TABLE 26: COMMERCIAL REAL ESTATE AND CONSTRUCTION LOANS AND LEASES BY STATE
Outstanding Nonaccrual
As of December 31 ($ in millions) 2008 2007 2008 2007
Ohio $4,247 4,167 $180 84
Michigan 3,930 4,692 302 179
Florida 2,374 2,790 399 79
Illinois 1,384 1,425 95 21
Indiana 1,108 1,298 86 26
North Carolina 802 21 49 -
Kentucky 788 791 24 7
Tennessee 455 496 51 4
All other states 1,866 1,110 95 5
Total $16,954 16,790 $1,281 405