MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 42 Fifth Third Bancorp 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 six 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 During 2008, general economic conditions continued to deteriorate which had an adverse impact across the majority of the Bancorp’s loan and lease products.
Geographically, the Bancorp experienced the most stress in the states of 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 by automobile manufacturers.
The year-over-year deterioration in home prices has been as high as 20% in some of the Bancorp’s hardest hit geographies.
Among portfolios, the commercial homebuilder and developer, non-owner occupied residential mortgage and brokered home equity portfolios exhibited the most stress.
Management suspended new lending to homebuilders and to commercial non-owner occupied real estate, discontinued the origination of brokered home equity products and raised underwriting standards on non-owner occupied residential mortgages.
During the fourth quarter, 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 heldfor-sale $1.3 billion in commercial loan balances.
The Bancorp recognized $800 million in net charge-offs on these loans with approximately 49% of the losses representing real estate secured loans in Florida and 44% of the losses representing real estate secured loans in Michigan.
Throughout 2008, the Bancorp aggressively engaged in other loss mitigation techniques such as reducing lines of credit, restructuring certain consumer loans, tightening certain underwriting standards and expanding commercial and consumer loan workout teams.
The following credit information presents the Bancorp’s loan portfolio diversification, 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.
Table 27 provides breakouts of the total commercial loan and lease portfolio, 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 portfolio.
The Bancorp has commercial loan concentration limits based on industry, lines of business within the commercial segment and real estate project type.
As of December 31, 2008, the Bancorp had homebuilder exposure of $4.0 billion and outstanding loans of $2.7 billion with $366 million of portfolio commercial loans and $215 million in held-for-sale commercial loans in nonaccrual loans.
As of December 31, 2008, approximately 41% of the outstanding loans to homebuilders are located in the states of Michigan and Florida and represent approximately 58% of the nonaccrual loans.
As of December 31, 2007, the Bancorp had homebuilder exposure of $4.4 billion, outstanding loans of $2.9 billion with $176 million in nonaccrual loans.
The risk within the commercial real estate 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 proforma analysis requirements.
The commercial real estate portfolio is diversified by product type, loan size and geographical location with concentration levels established to manage the exposure.
Appraisals are obtained from qualified appraisers and are reviewed by an independent appraisal review group to ensure independence and consistency in the valuation process.
Appraisal values are updated on an as needed basis, in conformity with market conditions and regulatory requirements.
Table 26 provides further information on the location of commercial real estate and construction industry loans and leases.
The commercial portfolio has minimal direct exposure to auto manufactures and their suppliers, although any further deterioration of those industries would have negative impacts across the Bancorp’s lending products.
As of December 31, 2008, the Bancorp had automobile dealer exposure, included within the retail trade industry, of $3.1 billion and outstanding loans of $2.0 billion with $113 million in nonaccrual loans.
## Table 0 ##
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS equity certificates, with varying levels of credit subordination and payment priority.
The Bancorp does not hold any of the notes or equity certificates issued by the trust, and the investors in these securities have no credit recourse to the Bancorp’s assets for failure of debtors to pay when due.
In August of 2013, the Bancorp transferred approximately $1.3 billion in fixed-rate consumer automobile loans to a bankruptcy remote trust which was deemed to be a VIE.
The Bancorp concluded that it is the primary beneficiary of the VIE and, therefore, has consolidated this VIE.
The primary purposes for which the VIE was created were to issue asset backed securities with varying levels of credit subordination and payment priority and to provide the Bancorp with access to liquidity for its originated loans.
The assets of the VIE are restricted to the settlement of the notes and other obligations of the VIE.
Third-party holders of the notes do not have recourse to the general assets of the Bancorp.
Liquidity Coverage Ratio and Net Stable Funding Ratio The BCBS’ key reform within the Basel III framework to strengthen international liquidity standards was the introduction of the LCR and NSFR.
On January 7, 2013, the BCBS issued a final standard for the LCR applicable to large internationally active banking organizations, which would phase in the LCR beginning in 2015 with full implementation in 2019.
The BCBS plans on introducing the NSFR final standard in the next two years.
The BCBS’ LCR would promote the short-term resilience of a bank's liquidity profile by ensuring an adequate level of unencumbered high-quality liquid assets that can be converted into cash easily and immediately in private markets to meet its liquidity needs within 30 calendar days.
Financial institutions subject to the LCR generally would be expected to hold unencumbered highquality assets of at least 100% of net cash flows over the next 30 calendar days upon full implementation in 2019.
The BCBS’ NSFR is intended to promote medium and longterm funding of the assets and activities of financial institutions.
This ratio would establish a minimum acceptable amount of stable funding based on the liquidity characteristics of a financial institution’s assets and activities over a one year horizon.
Management is currently monitoring the progress of the BCBS’ work on the NSFR.
Section 165 of the Dodd-Frank Act requires the FRB to establish enhanced liquidity standards for BHCs with total assets of $50 billion or greater.
On October 24, 2013, the U. S.  Banking Agencies issued an NPR that would implement a LCR requirement that is generally consistent with the international LCR standards published by the BCBS for large internationally active banking organizations, generally those with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure.
Additionally, a Modified LCR requirement was proposed for BHC’s with total consolidated assets of at least $50 billion that are not large internationally active banking organizations, like Fifth Third.
The Modified LCR requirement incorporates a shorter (21-calendar days) stress scenario for calculating total net cash outflows than the LCR’s 30 calendar day requirement.
Therefore, the estimated net cash outflows for the Modified LCR generally would be 70% of the LCR’s estimated net cash outflows.
The NPR’s transition period will begin on January 1, 2015 whereby LCR and Modified LCR entities must comply with a minimum ratio of 80%.
On January 1, 2016 and 2017, the minimum ratio would increase to 90% and 100%, respectively.
The NPR was open for public comment until January 31, 2014.
Management is currently reviewing the NPR and evaluating its impact upon the Bancorp’s Consolidated Financial Statements.
Credit Ratings The cost and availability of financing to the Bancorp are impacted by its credit ratings.
A downgrade to the Bancorp’s credit ratings could affect its ability to access the credit markets and increase its borrowing costs, thereby adversely impacting the Bancorp’s financial condition and liquidity.
Key factors in maintaining high credit ratings include a stable and diverse earnings stream, strong credit quality, strong capital ratios and diverse funding sources, in addition to disciplined liquidity monitoring procedures.
The Bancorp’s credit ratings are summarized in Table 59.
The ratings reflect the ratings agencies view on the Bancorp’s capacity to meet financial commitments.
* * As an investor, you should be aware that a security rating is not a recommendation to buy, sell or hold securities, that it may be subject to revision or withdrawal at any time by the assigning rating organization and that each rating should be evaluated independently of any other rating.
Additional information on the credit rating ranking within the overall classification system is located on the website of each credit rating agency.
## Table 1 ##
CAPITAL MANAGEMENT Management regularly reviews the Bancorp’s capital levels to help ensure it is appropriately positioned under various operating environments.
The Bancorp has established a Capital Committee which is responsible for making capital plan recommendations to management.
These recommendations are reviewed by the ERM Committee and the capital plan is approved by the board.
The Capital Committee is responsible for execution oversight of the capital actions of the capital plan.
Capital Ratios The U.
S banking agencies established quantitative measures that assign risk weightings to assets and off-balance sheet items and also define and set minimum regulatory capital requirements.
The U. S.  banking agencies define “well capitalized” ratios for Tier I and total risk-based capital as 6% and 10%, respectively.
The Bancorp exceeded these “well-capitalized” ratios for all periods presented.
The Basel II advanced approach framework was finalized by U. S.  banking agencies in 2007.
Core banks, defined as those with consolidated total assets in excess of $250 billion or on balance
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS to 100 million shares of its outstanding common stock in the open market or in privately negotiated transactions, and to utilize any derivative or similar instrument to affect share repurchase transactions.
This share repurchase authorization replaced the Board’s previous authorization.
On May 21, 2013, the Bancorp entered into an accelerated share repurchase transaction with a counterparty pursuant to which the Bancorp purchased 25,035,519 shares, or approximately $539 million, of its outstanding common stock on May 24, 2013.
The Bancorp repurchased the shares of its common stock as part of its 100 million share repurchase program previously announced on March 19, 2013.
At settlement of the forward contract on October 1, 2013, the Bancorp received an additional 4,270,250 shares which were recorded as an adjustment to the basis in the treasury shares purchased on the acquisition date.
On November 13, 2013, the Bancorp entered into an accelerated share repurchase transaction with a counterparty pursuant to which the Bancorp purchased 8,538,423 shares, or approximately $200 million, of its outstanding common stock on November 18, 2013.
The Bancorp repurchased the shares of its common stock as part of its Board approved 100 million share repurchase program previously announced on March 19, 2013.
The Bancorp expects the settlement of the transaction to occur on or before February 28, 2014.
On December 10, 2013, the Bancorp entered into an accelerated share repurchase transaction with a counterparty pursuant to which the Bancorp purchased 19,084,195 shares, or approximately $456 million, of its outstanding common stock on December 13, 2013.
The Bancorp repurchased the shares of its common stock as part of its Board approved 100 million share repurchase program previously announced on March 19, 2013.
The Bancorp expects the settlement of the transaction to occur on or before March 26, 2014.
On January 28, 2014, the Bancorp entered into an accelerated share repurchase transaction with a counterparty pursuant to which the Bancorp purchased 3,950,705 shares, or approximately $99 million, of its outstanding common stock on January 31, 2014.
The Bancorp repurchased the shares of its common stock as part of its Board approved 100 million share repurchase program previously announced on March 19, 2013.
The Bancorp expects the settlement of the transaction to occur on or before March 26, 2014.
## Table 2 ##
(a) In March 2013, the Bancorp announced that its Board of Directors had authorized management to purchase 100 million shares of the Bancorp’s common stock through the open market or in any private transaction.
The authorization does not include specific price targets or an expiration date.
This share repurchase authorization replaces the Board’s previous authorization pursuant to which approximately 54 million shares remained available for repurchase by the Bancorp.
(b) Excludes 1,863,097, 2,059,003 and 1,164,254 shares repurchased during 2013, 2012, and 2011, respectively, in connection with various employee compensation plans.
These repurchases are not included in the calculation for average price paid and do not count against the maximum number of shares that may yet be repurchased under the Board of Directors’ authorization.
Stress Tests and CCAR The FRB issued guidelines known as CCAR, which provide a common, conservative approach to ensure BHCs, including the Bancorp, hold adequate capital to maintain ready access to funding, continue operations and meet their obligations to creditors and counterparties, and continue to serve as credit intermediaries, even in adverse conditions.
The CCAR process requires the submission of a comprehensive capital plan that assumes a minimum planning horizon of nine quarters under various economic scenarios.
The mandatory elements of the capital plan are an assessment of the expected use and sources of capital over the planning horizon, a description of all planned capital actions over the planning horizon, a discussion of any expected changes to the Bancorp’s business plan that are likely to have a material impact on its capital adequacy or liquidity, a detailed description of the Bancorp’s process for assessing capital adequacy and the Bancorp’s capital policy.
The capital plan must reflect the revised capital framework that the FRB adopted in connection with the implementation of the Basel III accord, including the framework’s minimum regulatory capital ratios and transition arrangements.
The FRB’s review of the capital plan will assess the comprehensiveness of the capital plan, the reasonableness of the assumptions and the analysis underlying the capital plan.
Additionally, the FRB reviews the robustness of the capital adequacy process, the capital policy and the Bancorp’s ability to maintain capital above the minimum regulatory capital ratios as they transition to Basel III and above a Basel I Tier 1 common ratio of 5 percent under baseline and stressful conditions throughout a ninequarter planning horizon.
The FRB issued stress testing rules that implement section 165(i)(1) and (i)(2) of the DFA.
Large BHCs, including the Bancorp, are subject to the final stress testing rules.
The rules require both supervisory and company-run stress tests, which provide forwardlooking information to supervisors to help assess whether institutions have sufficient capital to absorb losses and support operations during adverse economic conditions.
In March of 2013, the FRB announced it had completed the 2013 CCAR.
For BHCs that proposed capital distributions in their plan, the FRB either objected to the plan or provided a nonobjection whereby the FRB concurred with the proposed 2013 capital distributions.
The FRB indicated to the Bancorp that it did not object to the following proposed capital actions for the period beginning April 1, 2013 and ending March 31, 2014: ?
Increase in the quarterly common stock dividend to $0.12 per share; ?
Repurchase of up to $750 million in TruPS subject to the determination of a regulatory capital event and replacement with the issuance of a similar amount of Tier II-qualifying subordinated debt; ?
Conversion of the $398 million in outstanding Series G 8.5% convertible preferred stock into approximately 35.5 million common shares issued to the holders.
If this conversion were to occur, the Bancorp would intend to repurchase common shares equivalent to those issued in the conversion up to $550 million in market value, and issue $550 million in preferred stock;

<table><tr><td></td><td colspan="2">Outstanding</td><td colspan="2">Nonaccrual</td></tr><tr><td>As of December 31 ($ in millions)</td><td> 2008</td><td>2007</td><td> 2008</td><td>2007</td></tr><tr><td>Ohio</td><td> $4,247</td><td>4,167</td><td> $180</td><td>84</td></tr><tr><td>Michigan</td><td> 3,930</td><td>4,692</td><td> 302</td><td>179</td></tr><tr><td>Florida</td><td> 2,374</td><td>2,790</td><td> 399</td><td>79</td></tr><tr><td>Illinois</td><td> 1,384</td><td>1,425</td><td> 95</td><td>21</td></tr><tr><td>Indiana</td><td> 1,108</td><td>1,298</td><td> 86</td><td>26</td></tr><tr><td>North Carolina</td><td> 802</td><td>21</td><td> 49</td><td>-</td></tr><tr><td>Kentucky</td><td> 788</td><td>791</td><td> 24</td><td>7</td></tr><tr><td>Tennessee</td><td> 455</td><td>496</td><td> 51</td><td>4</td></tr><tr><td>All other states</td><td> 1,866</td><td>1,110</td><td> 95</td><td>5</td></tr><tr><td>Total</td><td> $16,954</td><td>16,790</td><td> $1,281</td><td>405</td></tr></table>
<table><tr><td> As of February 24, 2014</td><td>Moody’s</td><td>Standard and Poor’s</td><td>Fitch</td><td>DBRS</td></tr><tr><td>Fifth Third Bancorp:</td><td></td><td></td><td></td><td></td></tr><tr><td>Short-term</td><td>No rating</td><td>A-2</td><td>F1</td><td>R-1L</td></tr><tr><td>Senior debt</td><td>Baa1</td><td>BBB+</td><td>A</td><td>AL</td></tr><tr><td>Subordinated debt</td><td>Baa2</td><td>BBB</td><td>A-</td><td>BBBH</td></tr><tr><td>Fifth Third Bank:</td><td></td><td></td><td></td><td></td></tr><tr><td>Short-term</td><td>P-2</td><td>A-2</td><td>F1</td><td>R-1L</td></tr><tr><td>Long-term deposit</td><td>A3</td><td>No rating</td><td>A+</td><td>A</td></tr><tr><td>Senior debt</td><td>A3</td><td>A-</td><td>A</td><td>A</td></tr><tr><td>Subordinated debt</td><td>Baa1</td><td>BBB+</td><td>A-</td><td>AL</td></tr></table>
<table><tr><td>For the years ended December 31</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Shares authorized for repurchase at January 1</td><td>63,046,682</td><td>19,201,518</td><td>19,201,518</td></tr><tr><td>Additional authorizations<i><sup>(a)</sup></i></td><td>45,541,057</td><td>86,269,178</td><td>-</td></tr><tr><td>Share repurchases<i><sup>(b)</sup></i></td><td>-65,516,126</td><td>-42,424,014</td><td>-</td></tr><tr><td>Shares authorized for repurchase at December 31</td><td>43,071,613</td><td>63,046,682</td><td>19,201,518</td></tr><tr><td>Average price paid per share</td><td>$18.80</td><td>$14.82</td><td>N/A</td></tr></table>

Question: Which year is the Outstanding of Michigan the least?
Answer: 2008