Fifth Third Bank 2007 Annual Report Download - page 4
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president & CeO
2007wasperhapsthemostchallengingyearthatthe
industryhasseeninthelast30years.Duringtherstpart
oftheyear,ournewmanagementteamoutlinedathree-
yearstrategicplantopositiontheCompanyforfuture
growth.Wemadesignicantstridesexecutingonthisplan,
andI’lldiscussthesesuccesseslaterinthisletter.Atthe
sametime,marketandeconomicconditionscreated
anoperatingenvironmentthatovershadowedsomeof
thoseachievements.
Themostsignicantfactorsimpactingthenancialsector
in2007originatedintheU.S.residentialrealestatemarkets.
Anumberoflargenancialinstitutionsannouncedlosses
rangingfromthehundredsofmillionstobillionsofdollars.
Theselossesstemmedfromsecuritiescollateralized
withsubprimemortgagesandothertroubledassets.
Additionally,delinquentandnonperformingloansincreased
innearlyeverycategory.ItisimportanttonotethatFifth
Thirddoesnotoriginateorholdsubprimeloans,nordo
weholdcollateralizeddebtobligations(CDOs)orasset-
backedsecuritiesbackedbysubprimeloansinoursecurities
portfolio.However,asalendinginstitution,wehave
exposuretohousingmarketswhichweakenedconsiderably
throughouttheentirecountry.Therewasparticular
weaknessintheupperMidwestandFlorida,wherewehavea
signicantpresence.Investorconcernsrelatedtorisingloan
defaultsinsubprimelendingandotherareasrelatedtoreal
estateledtosignicantdecreasesinthemarketvaluation
ofvirtuallyeverymajorU.S.bank.FifthThird’stotalreturn
in2007–thechangeinourstockpriceplusdividends–
wasadisappointing-35percent,inlinewithothermajor
Midwesterninstitutionsaswellasthe-30percenttotal
returnproducedbytheS&PBankCompositeIndex.
Weareinthemiddleofadifcultcreditcycle,andacertain
amountofnegativesentimentiswarranted.However,as
bankers,weshouldanddoexpectthatwewillexperience
thesecycles.Bankingisarisk-takingbusiness,andlosses
comewiththeterritory.Thatbeingsaid,wehavetakena
numberofstepstodealwiththecurrentcreditcycleandto
reducetheproblemswewillexperiencein2008andbeyond.
Giventhedifcultiesfacingmanyofourcustomers,we
havebeeninterveningearlierinproblemcreditsituations
andareactivelyworkingtoidentifyhigherriskaccounts.
Forexample,whenacustomer’screditleshowspotential
weakness,wearemakingproactivecallingeffortstoform
cooperativerelationshipswiththeseborrowers.Whenwe
dohavedelinquencies,we’reworkingwithourcustomersto
understandthereasonforthedelinquencyandaborrower’s
capacitytopay.Whennecessaryandwarranted,weare
modifyingloantermsovershorttimehorizonsinorderto
giveourborrowerstimetoregaintheirfooting.During2007,
werestructured$80millioninmortgage,homeequityand
creditcardloanstoprovideourcustomerswithamore
workableloanarrangement.Helpingourcustomersduring
thischallengingtimewillhelpformlong-termbenecial
relationshipswiththem.Wearecommittedtohelpingour
clientsandourcommunitiesintheirworsttimessothat
they’llturntousintheirbesttimes.
Severalotherstepsweretakenthroughout2007tohelp
reducepotentiallyhighercreditlosses.Firstwasthe
decisiontoterminatetheproductsofferedbyHome
EquityofAmerica,anentitythatbecamepartofFifth
Thirdanumberofyearsagothroughanacquisition.Home
EquityofAmericaofferedbrokeredhomeequityloans
onanationallevel.Additionally,inresponsetomarket
conditions,webegantoaggressivelylimitbrokeredhome
equityproductionearlyintheyearandultimatelyshut
downourproductionaltogether.Finally,wesetupaow
saleagreementwithanagencyservicertoremovetherisk
posedtoourbalancesheetfromoriginating“Alt-A”loans.
Separatelyandcollectively,theseactionshaveandwillhelp
usavoidpotentiallyhighercreditlosses.
Whiletheseandotherstepshavehelpedtopartiallyinsulate
usfromtheindustrydownturn,wearenotimmuneto
broadertrends.TheMidwesteconomyasawholehasbeen
weakerthantherestofthecountry,andtheFloridareal
estatemarkethassoftenedsubstantially.Michigan,Ohio
andFloridaaccountforthreeofthetopveforeclosure
ratesbystate,withIndianaandIllinoisalsorankinginthe
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