Fifth Third Bank 2012 Annual Report Download - page 73

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
71 Fifth Third Bancorp
restructured is determined on a pooled basis with the segmentation
being based on the similarity of credit risk characteristics. Loss
factors for real estate backed consumer loans are developed for each
pool based on the trailing twelve month historical loss rate, as
adjusted for certain prescriptive loss rate factors and certain
qualitative adjustment factors. The prescriptive loss rate factors and
qualitative adjustments are designed to reflect risks associated with
current conditions and trends which are not believed to be fully
reflected in the trailing twelve month historical loss rate. For real
estate backed consumer loans, the prescriptive loss rate factors
include adjustments for delinquency trends, LTV trends, refreshed
FICO score trends and product mix, and the qualitative factors
include adjustments for credit administration and portfolio
management practices, credit policy and underwriting practices and
the national and local 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.
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 $154 million at
December 31, 2012. 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 $51 million at December 31, 2012.
As several qualitative and quantitative factors are considered in
determining the ALLL, these sensitivity analyses do not necessarily
reflect the nature and extent of future changes in the ALLL. They
are intended to provide insights into the impact of adverse changes
to risk grades and estimated loss rates and do not imply any
expectation of future deterioration in the risk ratings or loss rates.
Given current processes employed by the Bancorp, management
believes the risk grades and estimated loss rates currently assigned
are appropriate.
TABLE 52: CHANGES IN ALLOWANCE FOR CREDIT LOSSES
For the years ended December 31 ($ in millions) 2012 2011 2010 2009 2008
A
LLL:
Balance, beginning of period $ 2,255 3,004 3,749 2,787 937
Impact of change in accounting principle - - 45 - -
Losses charged off (837) (1,314) (2,485) (2,719) (2,791)
Recoveries of losses previously charged off 133 142 157 138 81
Provision for loan and lease losses 303 423 1,538 3,543 4,560
Balance, end of period $ 1,854 2,255 3,004 3,749 2,787
Reserve for unfunded commitments:
Balance, beginning of period $ 181 227 294 195 95
Impact of change in accounting principle - - (43) - -
Provision for unfunded commitments (2) (46) (24) 99 100
Balance, end of period $ 179 181 227 294 195
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 restructured residential
mortgage and consumer loans and other qualitative adjustments.
Due to the heavy reliance on realized historical losses and the credit
grade rating process, the model-derived estimate of ALLL tends 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, 2012 and 2011 was 0.13% and 0.17%, respectively.
The unallocated allowance was six percent of the total allowance as
of December 31, 2012 and 2011.
As shown in Table 53, the ALLL as a percent of portfolio loan
and leases was 2.16% at December 31, 2012, compared to 2.78% at
December 31, 2011. The ALLL was $1.9 billion as of December 31,
2012, compared to $2.3 billion at December 31, 2011. 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.