Fifth Third Bank 2009 Annual Report Download - page 46

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
44 Fifth Third Bancorp
committees are also reviewed and approved by the Risk and
Compliance Committee of the Board of Directors.
Finally, Credit Risk Review is an independent function
responsible for evaluating the sufficiency of underwriting,
documentation and approval processes for consumer and
commercial credits, the accuracy of risk grades assigned to
commercial credit exposure, appropriate accounting for charge-
offs, and non-accrual status and specific reserves. Credit Risk
Review reports directly to the Risk and Compliance Committee of
the Board of Directors and administratively to the Director of
Internal Audit.
CREDIT RISK MANAGEMENT
The objective of the Bancorp’s credit risk management strategy is
to quantify and manage credit risk on an aggregate portfolio basis,
as well as to limit the risk of loss resulting from an individual
customer default. The Bancorp’s credit risk management strategy
is based on three core principles: conservatism, diversification and
monitoring. The Bancorp believes that effective credit risk
management begins with conservative lending practices. These
practices include conservative exposure and counterparty limits
and conservative underwriting, documentation and collection
standards. The Bancorp’s credit risk management strategy also
emphasizes diversification on a geographic, industry and customer
level as well as regular credit examinations and monthly
management reviews of large credit exposures and credits
experiencing deterioration of credit quality. Corporate officers
with the authority to extend credit are delegated specific authority
amounts, the utilization of which is closely monitored.
Underwriting activities are centralized, and ERM manages the
policy and the authority delegation process directly. The Credit
Risk Review function, which reports to the Risk and Compliance
Committee of the Board of Directors, provides objective
assessments of the quality of underwriting and documentation, the
accuracy of risk grades and the charge-off, nonaccrual and reserve
analysis process. The Bancorp’s credit review process and overall
assessment of required allowances is based on quarterly
assessments of the probable estimated losses inherent in the loan
and lease portfolio. The Bancorp uses these assessments to
promptly identify potential problem loans or leases within the
portfolio, maintain an adequate reserve and take any necessary
charge-offs. In addition to the individual review of larger
commercial loans that exhibit probable or observed credit
weaknesses, the commercial credit review process includes the use
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 nine 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
General economic conditions remained weak throughout 2009,
which negatively impacted a majority of the Bancorp’s loan and
lease products. Geographically, the Bancorp experienced the most
stress in 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 in automobile manufacturing and the
state’s economic downturn. Among commercial portfolios, the
homebuilder and developer and remaining non-owner occupied
commercial real estate portfolios remained under stress
throughout 2009. Among consumer portfolios, residential
mortgage and brokered home equity portfolios exhibited the most
stress. Management suspended homebuilder and developer
lending in the fourth quarter of 2007 and new commercial non-
owner occupied real estate lending in the second quarter of 2008,
discontinued the origination of brokered home equity products at
the end of 2007, and raised underwriting standards across both
the commercial and consumer loan product offerings. During the
fourth quarter of 2008, 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 loans. Throughout 2009, the Bancorp
continued to aggressively engage in other loss mitigation
techniques such as reducing lines of credit, restructuring certain
commercial and consumer loans, tightening underwriting
standards on commercial loans and across the consumer loan
portfolio, as well as expanding commercial and consumer loan
workout teams. The following credit information presents the
Bancorp’s loan portfolio diversification, loan portfolios with
elevated levels of risk, 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. The
Bancorp has commercial loan concentration limits based on
industry, lines of business within the commercial segment and
credit product type.
The risk within the commercial loan and lease 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 pro-forma analysis
requirements. The Bancorp requires an appraisal of collateral be
performed at origination and on an as-needed basis, in conformity
with market conditions and regulatory requirements. Independent
reviews are performed on appraisals to ensure the appraiser is
qualified and consistency in the evaluation process exists.
As part of its commercial lending, the Bancorp participates in
Shared National Credit (SNC) loans, which are facilities greater
than $20 million shared by three or more federally supervised
financial institutions that are reviewed by regulatory authorities at
the agent bank level. At December 31, 2009, the Bancorp was a
participant to SNC loans with an outstanding balance to the
Bancorp of $6.4 billion with a total exposure of $20.0 billion. C&I
loans make up a majority of SNC loans, totaling $5.5 billion at
December 31, 2009. SNC loans adhere to the same credit
underwriting standards as other commercial loans held by the
Bancorp.
Table 25 provides detail on total commercial loan and leases,
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 loans and leases.