Fifth Third Bank 2008 Annual Report Download - page 49

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 47
In 2008, the Bancorp has not substantively changed any
material aspect of its overall approach in the determination of the
allowance for loan and lease losses and there have been no
material changes in assumptions or estimation techniques as
compared to prior periods that impacted the determination of the
current period allowance. In addition to the allowance for loan
and lease losses, the Bancorp maintains a reserve for unfunded
commitments recorded in other liabilities in the Consolidated
Balance Sheets. The methodology used to determine the
adequacy of this reserve is similar to the Bancorp’s methodology
for determining the allowance for loan and lease losses. The
provision for unfunded commitments is included in other
noninterest expense in the Consolidated Statements of Income.
Certain inherent, but undetected losses are probable within
the loan and lease portfolio. An unallocated component to the
allowance for loan and lease losses is maintained to recognize the
imprecision in estimating and measuring loss. The Bancorp’s
current methodology for determining this measure is based on
historical loss rates, current credit grades, specific allocation on
impaired commercial credits above specified thresholds and other
qualitative adjustments. Approximately 81% of the required
reserves come from the baseline historical loss rates, specific
reserve estimates and current credit grades; while 19% comes
from qualitative adjustments. As a result, the required reserves
tend to slightly lag the deterioration in the portfolio due to the
heavy reliance on realized historical losses and the credit grade
rating process. The unallocated allowance as a percent of total
portfolio loans and leases for the year ended December 31, 2008
was .33%, or 10% of the total allowance, compared to .06%, or
5% of the total allowance, as of December 31, 2007. The increase
in the unallocated allowance compared to the prior year was a
result of the steep decline in real estate prices, market volatility in
the second half of 2008 and economic deterioration in some of
the Bancorp’s lending markets, for which the deterioration had
not yet been captured in the historical loss rates and where the
extent of deterioration cannot be determined.
As shown in Table 34, the allowance for loan and lease losses
as a percent of the total loan and lease portfolio increased to
3.31% at December 31, 2008, compared to 1.17% at December
31, 2007. Total allowance for loan and lease losses totaled $2.8
billion and $937 million as of December 31, 2008 and 2007,
respectively. This increase is reflective of a number of factors
including: the increase in commercial impaired loans which are
individually reviewed and allowed for, increased estimated loss
factors due to negative trends in overall delinquencies, increased
loss estimates once a loan becomes delinquent due to
deterioration in the real estate collateral values in some of the
Bancorp’s key lending markets and declines in general economic
conditions that are used to determine an economic factor
adjustment. These factors were the primary drivers of the
increased reserve amounts for most of the Bancorp’s loan
categories.
Impaired commercial loans increased to $1.5 billion as of
December 31, 2008 compared to $494 million as of December 31,
2007. Impaired commercial loans above specified thresholds
require individual review to determine loan and lease reserves. In
addition to the increased volume of impaired commercial loans,
required loan and lease reserves on these loans were generally
higher due to the deterioration in collateral values.
Delinquency trends have increased across most product lines
and credit grades, leading to increases in expected loss rates and,
therefore, increased reserve requirements for those products. In
TABLE 33: CHANGES IN ALLOWANCE FOR CREDIT LOSSES
For the years ended December 31 ($ in millions) 2008 2007 2006 2005 2004
Balance, beginning of year $1,032 847 814 785 770
Net losses charged off (2,710) (462) (316) (299) (252)
Provision for loan and lease losses 4,560 628 343 330 268
Net change in reserve for unfunded commitments 100 19 6 (2) (1)
Balance, end of year $2,982 1,032 847 814 785
Components of allowance for credit losses:
Allowance for loan and lease losses $2,787 937 771 744 713
Reserve for unfunded commitments 195 95 76 70 72
Total allowance for credit losses $2,982 1,032 847 814 785
TABLE 34: ATTRIBUTION OF ALLOWANCE FOR LOAN AND LEASE LOSSES TO PORTFOLIO LOANS AND LEASES
As of December 31 ($ in millions) 2008 2007 2006 2005 2004
Allowance attributed to:
Commercial loans $824 271 252 201 210
Commercial mortgage loans 363 135 95 78 73
Commercial construction loans 252 98 49 46 42
Residential mortgage loans 388 67 51 38 45
Consumer loans 611 287 247 183 160
Lease financing 70 32 29 56 47
Unallocated 279 47 48 142 136
Total allowance for loan and lease losses $2,787 937 771 744 713
Portfolio loans and leases:
Commercial loans $29,197 24,813 20,831 19,253 16,107
Commercial mortgage loans 12,502 11,862 10,405 9,188 7,636
Commercial construction loans 5,114 5,561 6,168 6,342 4,347
Residential mortgage loans 9,385 10,540 8,830 7,847 7,366
Consumer loans 23,509 22,943 23,204 22,006 18,875
Lease financing 4,436 4,534 4,915 5,289 5,477
Total portfolio loans and leases $84,143 80,253 74,353 69,925 59,808
Attributed allowance as a percent of respective portfolio loans:
Commercial loans 2.82 % 1.09 1.21 1.05 1.31
Commercial mortgage loans 2.90 1.14 .91 .85 .96
Commercial construction loans 4.93 1.77 .80 .72 .96
Residential mortgage loans 4.13 .63 .58 .49 .61
Consumer loans 2.60 1.25 1.06 .83 .85
Lease financing 1.58 .69 .59 1.06 .86
Unallocated (as a percent of total portfolio loans and leases) .33 .06 .06 .20 .23
Total portfolio loans and leases 3.31 % 1.17 1.04 1.06 1.19