Fifth Third Bank 2007 Annual Report Download - page 43

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 41
previously sold certain of these mortgage products in the secondary
market with recourse. The outstanding balances and delinquency
rates for these loans sold with recourse as of December 31, 2007
and 2006 were $1.5 billion and 3.03% and $1.3 billion and 1.74%,
respectively. Charge-offs on recourse loans were not material for
the years ended December 31, 2007 and 2006. The balance of the
mortgage portfolio not included in Table 29 is characterized by in
footprint mortgage loans with less than 80% loan-to-value, with
approximately two-thirds representing fixed rate mortgages.
The Bancorp originates certain non-conforming residential
mortgage loans known as “Alt-A” loans. Borrower qualifications
are comparable to other conforming residential mortgage products
and the Bancorp has sold, without recourse, the majority of these
loans into the secondary market. For the years ended December
31, 2007 and 2006, the Bancorp originated $756 million and $341
million of Alt-A mortgage loans. During 2007, approximately $152
million of Alt-A mortgage loans were moved from held for sale to
held for investment, and an impairment charge of approximately $3
million was recognized in mortgage banking net revenue. As of
December 31, 2007, the Bancorp held $134 million of Alt-A
mortgage loans for investment with approximately $2.5 million in
nonaccrual. As market conditions for these loans changed
throughout 2007, management responded by making adjustments
to underwriting standards and Alt-A loans are being underwritten
and sold under an agency flow sale agreement.
Home Equity Portfolio
The home equity portfolio is characterized by 86% of outstanding
balances within the Bancorp’s Midwest footprint of Ohio,
Michigan, Kentucky, Indiana and Illinois. The portfolio has an
average FICO score of 734 as of December 31, 2007, comparable
with 735 at December 31, 2006 and 738 at December 31, 2005.
Further detail on location and origination LTV ratios is included in
Table 30.
Analysis of Nonperforming Assets
A summary of nonperforming assets is included in Table 31.
Nonperforming assets include: (i) nonaccrual loans and leases for
which ultimate collectibility of the full amount of the principal
and/or interest is uncertain; (ii) restructured consumer loans which
have not yet met the requirements to be classified as a performing
asset; (iii) commercial loans and leases that have been renegotiated
to provide for a reduction or deferral of interest or principal
because of deterioration in the financial position of the borrower
and (iv) other assets, including other real estate owned and
repossessed equipment. Loans are placed on nonaccrual status
when the principal or interest is past due 90 days or more (unless
the loan is both well secured and in process of collection) and
payment of the full principal and/or interest under the contractual
terms of the loan are not expected. Additionally, loans are placed
on nonaccrual status upon deterioration of the financial condition
of the borrower or upon the restructuring of the loan. When a
loan is placed on nonaccrual status, the accrual of interest,
amortization of loan premium, accretion of loan discount and
amortization or accretion of deferred net loan fees or costs are
discontinued and previously accrued but unpaid interest is
reversed. Commercial loans on nonaccrual status are reviewed for
impairment at least quarterly. If the principal or a portion of
principal is deemed a loss, the loss amount is charged off to the
allowance for loan and lease losses.
As of December 31, 2007 and 2006, nonperforming assets as
a percentage of total loans and leases and other assets, including
other real estate owned were 1.32% and .61%, respectively. Total
nonperforming assets were $1.1 billion at December 31, 2007, an
increase of $609 million compared to $455 million at December 31,
2006. The composition of nonaccrual credits continues to shift as
84% of nonaccrual credits were secured by real estate as of
December 31, 2007 compared to 69% as of December 31, 2006
and 48% as of December 31, 2005.
Commercial nonaccrual credits increased from $271 million as
of December 31, 2006 to $672 million as of December 31, 2007.
The majority of the increase was driven by the real estate and
construction industries in the Southern Florida, Northeastern Ohio
and Eastern Michigan affiliates. These affiliates combined to
account for 42% of commercial nonaccrual credits as of December
31, 2007. As shown in Table 26, the real estate and construction
industries contributed to more than two-thirds of the increase in
nonaccrual credits. At year end, a total of $57 million in
nonaccrual credits were the result of the Crown acquisition.
Consumer nonaccrual credits increased from $81 million as of
December 31, 2006 to $221 million as of December 31, 2007. The
TABLE 28: RESIDENTIAL MORTGAGE ORIGINATIONS
For the years ended December 31 ($ in millions) 2007 Percent of total 2006 Percent of total
Greater than 80% LTV with no mortgage insurance $265 2% $679 7%
Interest-only 1,720 15 1,283 14
Greater than 80% LTV and interest-only 265 2 180 2
80/20 loans 212 2 431 5
80/20 loans and interest only 62 1 17 -
TABLE 29: RESIDENTIAL MORTGAGE OUTSTANDINGS
2007 2006
As of December 31 ($ in millions) Balance
Percent
of total
Delinquency
Ratio Balance
Percen
t
of total
Delinquency
Ratio
Greater than 80% LTV with no mortgage insurance $2,146 21 % 8.93% $1,893 23% 3.79%
Interest-only 1,620 16 1.83 1,227 15 .14
Greater than 80% LTV and interest-only 493 5 5.36 560 7 1.15
80/20 loans - - - 28 - .72
TABLE 30: HOME EQUITY OUTSTANDINGS
2007 2006
As of December 31 ($ in millions)
LTV less
than 80%
LTV greater
than 80%
Delinquency
Ratio
LTV less
than 80%
LTV greater
than 80%
Delinquency
Ratio
Ohio $1,873 $2,039 1.50% $2,006 $2,124 1.30%
Michigan 1,393 1,295 2.06 1,529 1,354 1.69
Indiana 628 641 1.95 684 686 1.66
Illinois 637 545 1.66 617 582 1.19
Kentucky 508 594 1.52 533 631 1.11
Florida 536 291 2.93 418 229 .96
All other states 174 689 3.07 153 678 1.61
Total $5,749 $6,094 1.90% $5,940 $6,284 1.41%