Fifth Third Bank 2009 Annual Report Download - page 37

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 35
Consumer Lending
Consumer Lending includes the Bancorp’s mortgage, home
equity, automobile and other indirect lending activities. Mortgage
and home equity lending activities include the origination,
retention and servicing of mortgage and home equity loans or
lines of credit, sales and securitizations of those loans or pools of
loans or lines of credit and all associated hedging activities. Other
indirect lending activities include loans to consumers through
mortgage brokers, automobile dealers and federal and private
student education loans. Table 16 contains selected financial data
for the Consumer Lending segment.
Comparison of 2009 with 2008
Consumer Lending reported net income of $23 million compared
to a net loss of $148 million in 2008 primarily due to a goodwill
impairment charge of $215 million taken in 2008. In addition, in
2009 increases in net interest income and mortgage banking net
revenue more than offset the growth in provision for loan and
lease losses.
Net interest income increased $13 million from the prior year
primarily due to a decrease in funding costs driven by low interest
rates throughout 2009 partially offset by a decrease of $17 million
on the accretion of discounts on loans and deposits associated
with the acquisition of First Charter in 2008. Residential mortgage
originations increased to $20.7 billion in 2009 from $11.2 billion
in 2008 due to lower interest rates as well as government incentive
programs, which have been designed to provide significant tax
and other incentives to home buyers. The increase in volume as
well as higher sales margins on loans held for sale were the
primary reasons for the $342 million increase in mortgage banking
net revenue compared to 2008. The decrease in other noninterest
income to $101 million is attributable to decreases in securities
gains related to mortgage servicing rights hedging activities.
The increase in salaries, incentives and benefits compared to
2008 was driven by employee costs that were necessary to manage
the increase in residential mortgage originations. The $56 million
increase in other noninterest expense compared to 2008 is
attributed to a $20 million increase in loan processing costs as a
result of increased mortgage originations and $36 million in other
credit related expenses and an increase in FDIC insurance
expenses.
Net charge-offs as a percent of average loan and leases
increased from 223 bp in 2008 to 313 bp in 2009. Net charge-offs
in 2009 on residential mortgage loans increased $114 million
compared to the prior year. Residential mortgage charge-offs
increased due to a weakened economy and deteriorating real estate
values within the Bancorp’s footprint, particularly in Michigan and
Florida. During 2009, Michigan and Florida accounted for
approximately 75% of the residential mortgage charge-offs while
only accounting for approximately 42% of all residential mortgage
portfolio loans outstanding. The Consumer Lending segment
continues to focus on managing credit risk through the
restructuring of certain residential mortgage loans and careful
consideration of underwriting and collection standards. As of
December 31, 2009, the Bancorp had restructured approximately
$1.1 billion of residential mortgage loans in an effort to mitigate
losses.
Comparison of 2008 with 2007
Consumer Lending incurred a net loss of $148 million in 2008
compared to net income of $120 million in 2007 as the increases
in net interest income, mortgage banking net revenue and
securities gains were more than offset by growth in provision for
loan and lease losses and a goodwill impairment charge of $215
million.
Net interest income was impacted by accretion of discounts
on loans and deposits, totaling $60 million in 2008, primarily
related to the second quarter acquisition of First Charter. Average
residential mortgage loans increased five percent compared to
2007 due to acquisitions, including R-G Crown Bank in the fourth
quarter of 2007 and First Charter in the second quarter of 2008.
Average automobile loans decreased 18% compared to 2007 due
to securitizations totaling $2.7 billion in 2008. Net charge-offs as a
percent of average loan and leases increased from 73 bp in 2007
to 223 bp in 2008.
The increase in sales margins on loans held for sale and sales
volume of portfolio loans were the primary reasons for the
increase in mortgage banking net revenue compared to 2007.
Residential mortgage originations decreased to $11.2 billion in
2008 from $11.4 billion in 2007 due to lower application volumes
in the second half of 2008 resulting from market disruptions. Also
contributing to the increase in mortgage banking net revenue in
2008 was a $65 million benefit from the adoption of the fair value
option under U.S. GAAP, on January 1, 2008, for residential
mortgage loans held for sale. Prior to adoption, mortgage loan
origination costs were capitalized as part of the carrying amount
of the loan and recognized as a reduction of mortgage banking net
revenue upon the sale of the loans. Subsequent to the adoption,
mortgage loan origination costs are recognized in earnings when
incurred, which primarily drove the increase in salaries and
incentives in comparison to 2007.
TABLE 16: CONSUMER LENDING
For the years ended December 31
($ in millions) 2009 2008 2007
Income Statement Data
Net interest income $494 481 412
Provision for loan and lease losses 574 441 159
Noninterest income:
Mortgage banking net revenue 526 184 122
Other noninterest income 101 167 92
Noninterest expense:
Salaries, incentives and benefits 187 137 77
Goodwill impairment - 215 -
Other noninterest expense 324 268 204
Income (loss) before taxes 36 (229) 186
Applicable income tax expense (benefit) 13 (81) 66
Net income (loss) $23 (148) 120
Average Balance Sheet Data
Residential mortgage loans $10,650 10,698 10,156
Home equity 995 1,142 1,328
Automobile loans 8,024 7,984 9,712
Consumer leases 629 797 917