Fifth Third Bank 2011 Annual Report Download - page 68

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
66 Fifth Third Bancorp
economy. The Bancorp considers home price index trends in its
footprint when determining the national and local economy
qualitative factor. The Bancorp also considers the volatility of
collateral valuation trends when determining the unallocated
component of the ALLL.
TABLE 49: CHANGES IN ALLOWANCE FOR CREDIT LOSSES
For the years ended December 31 ($ in millions) 2011 2010 2009 2008 2007
A
LLL:
Balance, beginning of period $ 3,004 3,749 2,787 937 771
Impact of change in accounting principle - 45 - - -
Losses charged off (1,314) (2,485) (2,719) (2,791) (544)
Recoveries of losses previously charged off 142 157 138 81 82
Provision for loan and lease losses 423 1,538 3,543 4,560 628
Balance, end of period $ 2,255 3,004 3,749 2,787 937
Reserve for unfunded commitments:
Balance, beginning of period $ 227 294 195 95 76
Impact of change in accounting principle - (43) - - -
Provision for loan and lease losses (46) (24) 99 100 19
Balance, end of period $ 181 227 294 195 95
In 2011, the Bancorp did not substantively change any material
aspect of its overall approach in the determination of the ALLL 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
ALLL, 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 ALLL.
The provision for unfunded commitments is included in other
noninterest expense in the Consolidated Statements of Income.
Certain inherent, but unconfirmed losses are probable within
the loan and lease portfolio. The Bancorp’s current methodology
for determining the level of losses is based on historical loss rates,
current credit grades, specific allocation on impaired commercial
credits above specified thresholds and other qualitative adjustments.
Due to the heavy reliance on realized historical losses and the credit
grade rating process, the model-derived required reserves tend to
slightly lag behind the deterioration in the portfolio, in a stable or
deteriorating credit environment, and tend not to be as responsive
when improved conditions have presented themselves. Given these
model limitations, the qualitative adjustment factors may be
incremental or decremental to the quantitative model results.
An unallocated component to the ALLL is maintained to
recognize the imprecision in estimating and measuring loss. The
unallocated allowance as a percent of total portfolio loans and leases
at December 31, 2011 and 2010 was 0.17% and 0.19%, respectively.
The unallocated allowance increased from five percent at December
31, 2010 to six percent of the total allowance for December 31,
2011. The increase in the unallocated allowance as a percentage of
the total allowance was driven by additional sustained market
volatility in the U.S. markets that has provided indications that loss
events may be occurring at a rate greater than the rate captured
within the Bancorp’s model.
As shown in Table 50, the ALLL as a percent of the total loan
and lease portfolio was 2.78% at December 31, 2011, compared to
3.88% at December 31, 2010. The ALLL was $2.3 billion as of
December 31, 2011, compared to $3.0 billion at December 31, 2010.
The decrease is reflective of a number of factors including decreases
in nonperforming loans and leases, improved delinquency metrics in
commercial and consumer loans and leases and improvement in
underlying loss trends.
The Bancorp’s determination of the ALLL for commercial
loans is sensitive to the risk grades it assigns to these loans. In the
event that 10% of commercial loans in each risk category would
experience a downgrade of one risk category, the allowance for
commercial loans would increase by approximately $132 million at
December 31, 2011. In addition, the Bancorp’s determination of the
allowance for residential and consumer loans is sensitive to changes
in estimated loss rates. In the event that estimated loss rates would
increase by 10%, the allowance for residential and consumer loans
would increase by approximately $59 million at December 31, 2011.
As several qualitative and quantitative factors are considered in
determining the ALLL, these sensitivity analyses do not necessarily
reflect the nature and extent of future changes in the ALLL. They
are intended to provide insights into the impact of adverse changes
to risk grades and estimated loss rates and do not imply any
expectation of future deterioration in the risk ratings or loss rates.
Given current processes employed by the Bancorp, management
believes the risk grades and estimated loss rates currently assigned
are appropriate.
The Bancorp continually reviews its credit administration and
loan and lease portfolio and makes changes based on the
performance of its products. As previously discussed, management
discontinued the origination of brokered home equity products at
the end of 2007, suspended homebuilder lending in 2007 and new
commercial non-owner occupied real estate lending in 2008, and
tightened underwriting standards across both the commercial and
consumer loan product offerings.