Fifth Third Bank 2007 Annual Report Download - page 44

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp
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increase in consumer nonaccrual credits is primarily attributable to
the housing markets in the Michigan and Florida affiliates and the
restructuring of certain high risk loans. Michigan and Florida
nonaccrual credits accounted for 63% of the increase in nonaccrual
credits in the consumer loan portfolio and, as of December 31,
2007, represented approximately half of the consumer nonaccrual
credits. The Bancorp has devoted significant attention to loss
mitigation activities and, during the past year, decreased the timing
between delinquency and repossession of automobiles and
proactively restructured certain real estate loans. Consumer
restructured loans are recorded as nonaccrual credits until there is a
sustained period of payment by the borrower, generally a minimum
of six months of payments in accordance with the loans’ modified
terms. Consumer restructured loans contributed approximately
$80 million to nonaccrual loans as of December 31, 2007.
Included in nonaccrual credits as of December 31, 2007 were
$43 million of loans and leases currently performing in accordance
with contractual terms, but for which there were serious doubts as
to the ability of the borrower to comply with such terms. For the
years 2007 and 2006, interest income of $22 million and $10
million, respectively, was recorded on nonaccrual and renegotiated
loans and leases. For the years ended 2007 and 2006, additional
interest income of $144 million and $85 million, respectively,
would have been recorded if the nonaccrual and renegotiated loans
and leases had been current in accordance with the original terms.
Although this value helps demonstrate the costs of carrying
nonaccrual credits, the Bancorp does not expect to recover the full
amount of interest as nonaccrual loans and leases are generally
carried below their principal balance.
Analysis of Net Loan Charge-offs
Net charge-offs as a percent of average loans and leases were 61 bp
for 2007, compared to 44 bp for 2006. Table 32 provides a
summary of credit loss experience and net charge-offs as a
percentage of average loans and leases outstanding by loan
category.
The ratio of commercial loan net charge-offs to average
commercial loans outstanding increased to 43 bp in 2007
compared to 34 bp in 2006 due to increases in net charge-offs in
the commercial mortgage and commercial construction captions as
homebuilders and developers were affected by the downturn in the
real estate markets. Commercial net charge-offs in the Michigan
affiliates grew $30 million over 2006, with the most stress
appearing in the Detroit metro area. Commercial net charge-offs
in the Florida affiliates grew $13 million over 2006. The Chicago
affiliate also displayed a $21 million increase in commercial charge-
offs, primarily due to a $15 million fraud related loss during the
fourth quarter of 2007.
The ratio of consumer loan net charge-offs to average
consumer loans outstanding increased to 84 bp in 2007 compared
to 55 bp in 2006. Residential mortgage charge-offs increased 21 bp
compared to 2006, reflecting increased foreclosure rates in the
Bancorp’s key lending markets and the related increase in severity
of loss on mortgage loans. During 2007, Florida, Michigan and
Ohio were ranked among the top states in total mortgage
foreclosures. These foreclosures not only added to the volume of
charge-offs, but also hampered the Bancorp’s ability to recover the
value of the homes collateralizing the mortgages as they
contributed to declining home prices. Florida affiliates experienced
the most stress, with residential mortgage net charge-offs
increasing $11 million over 2006. Home equity charge-offs
increased $41 million to 82 bp of average loans, primarily due to
increases in the Michigan and Florida affiliates and among those
products originated through a broker channel. Brokered home
equity loans represented 50% of home equity charge-offs during
2007 despite representing only 23% of home equity lines and loans
as of December 31, 2007. Management responded to the
performance of the brokered home equity portfolio by reducing
originations in 2007 of this product by 64% compared to 2006 and,
at the end of 2007, eliminating this channel of origination. The
ratio of automobile loan net charge-offs to average automobile
TABLE 31: SUMMARY OF NONPERFORMING ASSETS AND DELINQUENT LOANS
As of December 31 ($ in millions) 2007 2006 2005 2004 2003
Commercial loans $175 127 140 105 110
Commercial mortgage loans 243 84 51 51 42
Commercial construction loans 249 54 31 13 19
Commercial leases 56 5 5 19
Residential mortgages loans(a) 121 38 30 24 25
Home equity(b)(d) 91 40
Automobile loans(d) 33
Credit card(c) 5-- - -
Other consumer loans and leases(d) 1- 37 30 27
Total nonaccrual loans and leases 893 352 294 228 242
Commercial renegotiated loans and leases --- 1 8
Repossessed personal property and other real estate owned 171 103 67 74 69
Total nonperforming assets $1,064 455 361 303 319
Commercial loans $44 38 20 21 14
Commercial mortgage loans 73 17 7 8 8
Commercial construction loans 67 67 5 4
Commercial leases 421 1 1
Residential mortgages loans(e) 186 68 53 43 51
Home equity(d) 72 51
Automobile loans(d) 13 11
Credit card 31 16 10 13 13
Other consumer loans and leases(d) 11 57 51 54
Total 90 days past due loans and leases $491 210 155 142 145
Nonperforming assets as a percent of total loans, leases and other assets,
including other real estate owned 1.32 % .61 .52 .51 .61
Allowance for loan and lease losses as a percent of nonperforming assets 88 170 206 235 219
(a) Residential mortgage nonaccrual loans include debt restructurings of $29 million as of December 31, 2007.
(b) Home equity nonaccrual loans include debt restructurings of $46 million as of December 31, 2007.
(c) All nonaccrual credit card balances are the result of debt restructurings.
(d) Prior to 2006, other consumer loans and leases include home equity, automobile and other consumer loans and leases.
(e) Information for all periods presented excludes advances made pursuant to servicing agreements to Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are
insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. As of December 31, 2007, 2006 and 2005, these advances were $25 million, $14
million and $13 million, respectively. Information prior to 2004 was not available.