Fifth Third Bank 2008 Annual Report Download - page 48

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
46 Fifth Third Bancorp
home equity portfolio by reducing originations in 2007 of this
product by 64% compared to 2006 and, at the end of 2007,
eliminating this channel of origination. In addition, management
actively manages lines of credit and makes reductions in lending
limits when it believes it is necessary based on FICO score
deterioration and property devaluation. The ratio of automobile
loan net charge-offs to average automobile loans was 156 bp for
2008, an increase of 73 bp compared to 2007 displaying an
expected increase due to a shift in the portfolio to a higher
percentage of used automobiles and an increase in loss severity
due to increased market depreciation of used automobiles. The
net charge-off ratio on credit card balances was 551 bp in 2008.
Increases in the charge-off ratio over the previous two years
reflects seasoning in the credit card portfolio and general
economic conditions compared to 2007 and for 2006, due to
increased personal bankruptcies in 2005 in anticipation of the
changes in bankruptcy law. Management expects trends in the
charge-off ratio on credit card balances to be consistent with
general economic trends, such as unemployment and personal
bankruptcy filings. The Bancorp employs a risk-adjusted pricing
methodology to help ensure adequate compensation is received
for those products that have higher credit costs.
Allowance for Credit Losses
The allowance for credit losses is comprised of the allowance for
loan and lease losses and the reserve for unfunded commitments.
The allowance for loan and lease losses provides coverage for
probable and estimable losses in the loan and lease portfolio. The
Bancorp evaluates the allowance each quarter to determine its
adequacy to cover inherent losses. Several factors are taken into
consideration in the determination of the overall allowance for
loan and lease losses, including an unallocated component. These
factors include, but are not limited to, the overall risk profile of
the loan and lease portfolios, net charge-off experience, the extent
of impaired loans and leases, the level of nonaccrual loans and
leases, the level of 90 days past due loans and leases and the
overall percentage level of the allowance for loan and lease losses.
The Bancorp also considers overall asset quality trends, credit
administration and portfolio management practices, risk
identification practices, credit policy and underwriting practices,
overall portfolio growth, portfolio concentrations and current
national and local economic conditions that might impact the
portfolio. More information on the allowance for loan and lease
losses can be found in the Critical Accounting Policies section of
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
TABLE 32: SUMMARY OF CREDIT LOSS EXPERIENCE
For the years ended December 31 ($ in millions) 2008 2007 2006 2005 2004
Losses charged off:
Commercial loans ($667) (121) (131) (99) (95)
Commercial mortgage loans (618) (46) (27) (13) (14)
Commercial construction loans (750) (29) (7) (5) (7)
Commercial leases -(1) (4) (38) (8)
Residential mortgage loans (243) (43) (23) (19) (15)
Home equity (212) (106) (65) (60) (52)
Automobile loans (168) (117) (87) (63) (56)
Credit card (101) (54) (36) (46) (35)
Other consumer loans and leases (32) (27) (28) (30) (39)
Total losses (2,791) (544) (408) (373) (321)
Recoveries of losses previously charged off:
Commercial loans 18 12 24 24 14
Commercial mortgage loans 523 35
Commercial construction loans 2-- 1-
Commercial leases 115 11
Residential mortgage loans --- --
Home equity 79 9 10 10
Automobile loans 34 32 30 18 18
Credit card 785 56
Other consumer loans and leases 718 16 12 15
Total recoveries 81 82 92 74 69
Net losses charged off:
Commercial loans (649) (109) (107) (75) (81)
Commercial mortgage loans (613) (44) (24) (10) (9)
Commercial construction loans (748) (29) (7) (4) (7)
Commercial leases 1- 1 (37) (7)
Residential mortgage loans (243) (43) (23) (19) (15)
Home equity (205) (97) (56) (50) (42)
Automobile loans (134) (85) (57) (45) (38)
Credit card (94) (46) (31) (41) (29)
Other consumer loans and leases (25) (9) (12) (18) (24)
Total net losses charged off ($2,710) (462) (316) (299) (252)
Net charge-offs as a percent of average loans and leases (excluding held for sale):
Commercial loans 2.31 % .49 .53 .41 .54
Commercial mortgage loans 4.80 .40 .25 .10 .12
Commercial construction loans 12.80 .51 .11 .08 .17
Commercial leases (.02) .01 (.03) 1.06 .21
Total commercial loans and leases 3.99 .43 .34 .35 .35
Residential mortgage loans 2.47 .48 .27 .23 .25
Home equity 1.67 .82 .46 .44 .44
Automobile loans 1.56 .83 .60 .53 .48
Credit card 5.51 3.55 3.65 5.65 3.92
Other consumer loans and leases 2.10 .83 .91 1.06 .98
Total consumer loans and leases 2.08 .84 .55 .57 .56
Total net losses charged of
f
3.23 % .61 .44 .45 .45