MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES ALLL  Reserve for Unfunded Commitments  The Bancorp estimates income tax expense based on amounts  expected to be owed to the various tax jurisdictions in which the  Bancorp conducts business. On a quarterly basis, management  assesses the reasonableness of its effective tax rate based upon its  current estimate of the amount and components of net income,  tax credits and the applicable statutory tax rates expected for the  full year. The estimated income tax expense is recorded in the  Consolidated Statements of Income.  Deferred income tax assets and liabilities are determined  using the balance sheet method and are reported in other assets  and accrued taxes, interest and expenses, respectively in the  Consolidated Balance Sheets. Under this method, the net deferred  tax asset or liability is based on the tax effects of the differences  between the book and tax basis of assets and liabilities, and  recognizes enacted changes in tax rates and laws. Deferred tax  assets are recognized to the extent they exist and are subject to a  valuation allowance based on management’s judgment that  realization is more-likely-than-not. This analysis is performed on a  quarterly basis and includes an evaluation of all positive and  negative evidence to determine whether realization is more-likely- than-not.  Homogenous loans and leases in the residential mortgage and  consumer portfolio segments are not individually risk graded.  Rather, standard credit scoring systems and delinquency monitoring are used to assess credit risks, and allowances are  established based on the expected net charge-offs. Loss rates are  based on the average net charge-off history by loan category.  Historical loss rates may be adjusted for significant factors that, in  management’s judgment, are necessary to reflect losses inherent in  Historical credit loss rates are applied to commercial loans  that are not impaired or are impaired, but smaller than the  established threshold of $1 million and thus not subject to specific  allowance allocations. The loss rates are derived from a migration  analysis, which tracks the historical net charge-off experience  sustained on loans according to their internal risk grade. The risk  grading system currently utilized for allowance analysis purposes  encompasses ten categories. Larger commercial loans included within aggregate borrower  relationship balances exceeding $1 million that exhibit probable or  observed credit weaknesses, as well as loans that have been  modified in a TDR, are subject to individual review for  impairment. The Bancorp considers the current value of collateral,  credit quality of any guarantees, the loan structure, and other  factors when evaluating whether an individual loan is impaired.  Other factors may include the industry of the borrower, size and  financial condition of the borrower, cash flow, leverage of the  borrower, and the Bancorp’s evaluation of the borrower’s  management. When individual loans are impaired, allowances are  determined based on management’s estimate of the borrower’s  ability to repay the loan given the availability of collateral, other  sources of cash flow, as well as evaluation of legal options  available to the Bancorp. Allowances for impaired loans are  measured based on the present value of expected future cash  flows discounted at the loan’s effective interest rate, fair value of  the underlying collateral or readily observable secondary market  values. The Bancorp evaluates the collectability of both principal  and interest when assessing the need for a loss accrual.  The reserve for unfunded commitments is maintained at a level  believed by management to be sufficient to absorb estimated  probable losses related to unfunded credit facilities and is included  in other liabilities in the Consolidated Balance Sheets. The  determination of the adequacy of the reserve is based upon an  evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience, credit  risk grading and historical loss rates based on credit grade  migration. Net adjustments to the reserve for unfunded commitments are included in other noninterest expense in the  Consolidated Statements of Income.  The Bancorp disaggregates its portfolio loans and leases into  portfolio segments for purposes of determining the ALLL. The  Bancorp’s portfolio segments include commercial, residential  mortgage, and consumer. The Bancorp further disaggregates its  portfolio segments into classes for purposes of monitoring and  assessing credit quality based on certain risk characteristics.  Classes within the commercial portfolio segment include commercial & industrial, commercial mortgage owner-occupied,  commercial mortgage nonowner-occupied, commercial construction, and commercial leasing. The residential mortgage  portfolio segment is also considered a class. Classes within the  consumer segment include home equity, automobile, credit card,  and other consumer loans and leases. For an analysis of the  Bancorp’s ALLL by portfolio segment and credit quality information by class, see Note 7 of the Notes to Consolidated  Financial Statements. The Bancorp’s primary market areas for lending are the  Midwestern and Southeastern regions of the United States. When  evaluating the adequacy of allowances, consideration is given to  these regional geographic concentrations and the closely associated effect changing economic conditions have on the  Bancorp’s customers.  Loans acquired by the Bancorp through a purchase business  combination are recorded at fair value as of the acquisition date.  The Bancorp does not carry over the acquired company’s ALLL,  nor does the Bancorp add to its existing ALLL as part of purchase  accounting.  The Bancorp’s current methodology for determining the  ALLL is based on historical loss rates, current credit grades,  specific allocation on TDRs and impaired commercial credits  above specified thresholds and other qualitative adjustments.  Allowances on individual commercial loans and historical loss  rates are reviewed quarterly and adjusted as necessary based on  changing borrower and/or collateral conditions and actual  collection and charge-off experience. An unallocated allowance is  maintained to recognize the imprecision in estimating and  measuring losses when evaluating allowances for individual loans  or pools of loans. the portfolio. Factors that management considers in the analysis  include the effects of the national and local economies; trends in  the nature and volume of delinquencies, charge-offs and nonaccrual loans; changes in loan mix; credit score migration  comparisons; asset quality trends; risk management and loan  administration; changes in the internal lending policies and credit  standards; collection practices; and examination results from bank  regulatory agencies and the Bancorp’s internal credit reviewers. The Bancorp’s Consolidated Financial Statements are prepared in  accordance with U.S. GAAP. Certain accounting policies require  management to exercise judgment in determining methodologies,  economic assumptions and estimates that may materially affect  the value of the Bancorp’s assets or liabilities and results of  operations and cash flows. The Bancorp's critical accounting  policies include the accounting for the ALLL, reserve for  unfunded commitments, income taxes, valuation of servicing  rights, fair value measurements and goodwill. No material changes  were made to the valuation techniques or models described below  during the year ended December 31, 2010. Income Taxes  20 Fifth Third Bancorp