Fifth Third Bank 2009 Annual Report Download - page 52

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
50 Fifth Third Bancorp
A summary of nonperforming assets is included in Table 41.
Nonperforming assets include nonaccrual loans and leases for
which ultimate collectability of the full amount of the principal
and/or interest is uncertain; restructured consumer loans which
are 90 days past due based on the restructured terms and credit
card loans immediately upon restructuring; restructured
commercial loans which have not yet met the requirements to be
classified as a performing asset; and other assets, including other
real estate owned and repossessed equipment. Loans are reported
on a nonaccrual status if principal or interest has been in default
for 90 days or more unless the loan is both well-secured and in the
process of collection. When a loan is placed on nonaccrual status,
the accrual of interest, amortization of loan premiums, accretion
of loan discounts 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 the principal is deemed a loss, the loss amount is
charged off to the allowance for loan and lease losses.
Total nonperforming assets were $3.5 billion at December
31, 2009, compared to $2.5 billion at December 31, 2008. At
December 31, 2009, $224 million of nonaccrual commercial loans
were held-for-sale, consisting primarily of real estate secured loans
in Michigan and Florida, and were carried at the lower of cost or
market. Nonperforming assets as a percentage of total loans,
leases and other assets, including other real estate owned and
nonaccrual loans held for sale, was 4.38% and 2.89% as of
December 31, 2009 and 2008, respectively. Excluding the held-
for-sale nonaccrual loans, nonperforming assets as a percentage of
total loans, leases and other assets, including other real estate
owned, as of December 31, 2009 was 4.22% compared to 2.38%
as of December 31, 2008. The composition of nonaccrual loans
and leases continues to be concentrated in real estate as 77% of
nonaccrual loans were secured by real estate as of December 31,
2009 compared to approximately 82% as of December 31, 2008.
Excluding the $224 million of nonperforming loans held-for-
sale, commercial nonperforming loans and leases increased from
$1.9 billion at December 31, 2008 to $2.3 billion as of December
31, 2009. This was driven by the real estate and construction
industries in Florida and Michigan. As of December 31, 2009 and
2008, these states combined to represent 43% and 46%,
respectively, of total commercial nonaccrual credits. Additionally,
as of December 31, 2009 restructured commercial loans totaled
$115 million, $47 million of which were on nonaccrual status. As
shown in Table 25, the real estate and construction industries
contributed approximately two-thirds of the year-over-year
increase in nonaccrual credits. Of the $1.8 billion of real estate
and construction nonaccrual credits, including held for sale loans,
$565 million is related to homebuilders or developers.
Consumer nonperforming loans and leases increased to $555
million as of December 31, 2009, compared to $370 million at
December 31, 2008, driven by a $178 million increase in
restructured consumer loans and leases on nonaccrual. Due to the
continued challenging credit environment, an increased volume of
restructured consumer loans were put back on nonaccrual status.
The Bancorp has devoted significant attention to loss mitigation
activities and has proactively restructured certain loans. Consumer
restructured loans on accrual status totaled $1.4 billion and $494
million as of December 31, 2009 and 2008, respectively, driven by
an increased volume of restructured loans. As of December 31,
2009, the redefault rate on consumer restructured loans was 26%.
Ohio, Michigan and Florida accounted for 62% of total consumer
nonperforming assets at December 31, 2009.
In 2009 and 2008, approximately $20 million and $10 million,
respectively, of interest income was recognized on a cash basis for
loans on nonaccrual. In 2009 and 2008, additional interest income
of approximately $236 million and $282 million, respectively,
would have been recorded if the loans and leases on nonaccrual
status 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.
Analysis of Net Loan Charge-offs
Net charge-offs were 320 bp of average loans and leases for 2009,
compared to 323 bp for 2008. Table 42 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 decreased to 3.27% in 2009
compared to 3.99% in 2008, due primarily to net charge-offs of
$800 million on $1.3 billion in criticized or impaired loans moved
to held-for-sale or sold in the fourth quarter of 2008. Net charge-
offs for 2009 included $358 million related to homebuilders and
developers, a decrease from $812 million, or 40%, of total
commercial net charge-offs in 2008. Approximately 31% of net
charge-offs greater than $2 million in 2009 involved loans in the
construction or real estate industries. The states of Florida and
Michigan continued to experience the most stress, accounting for
approximately 44% of the total net charge-offs in the commercial
loan product portfolio in 2009. For the year ended December 31,
2008, Florida and Michigan accounted for approximately 63% of
total commercial net charge-offs.
The ratio of consumer loan net charge-offs to average
consumer loans outstanding increased to 3.10% in 2009 compared
to 2.08% in 2008. Residential mortgage charge-offs increased to
$357 million in 2009 compared to $243 million in 2008, reflecting
increased foreclosure rates in the Bancorp’s key lending markets
coupled with an increase in severity of loss on mortgage loans.
Florida and Michigan continue to rank 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 foreclosed real estate is a significant contributor to
declining home prices. Florida affiliates continue to experience the
most stress and accounted for over half of the residential
mortgage charge-offs in 2009. Home equity charge-offs increased
to $322 million, or 2.57% of average loans, and continue to
display distinct charge-off differences between lines and loans
originated through the retail channel and those originated through
brokered channels. Brokered home equity represented 42% of
home equity charge-offs during 2009 despite representing only
17% of home equity lines and loans as of December 31, 2009.
Excluding home equity lines and loans originated through
brokered channels, home equity charge-offs to average home
equity loans were 148 bp. 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, and eliminated this channel of origination at the end of 2007.
In addition, management actively manages lines of credit and
makes reductions in lending limits when it believes it is necessary
based on FICO score deterioration and property devaluation. The
ratio of automobile loan net charge-offs to average automobile
loans was 1.68% for 2009, an increase of 12 bp compared to 2008
displaying an increase due to a shift in the portfolio to a higher
percentage of used automobiles and an increase in loss severity
due to increased market depreciation of used automobiles. The
net charge-off ratio on credit card balances was 8.87% in 2009.
Increases in the charge-off ratio over the previous two years
reflect seasoning in the credit card portfolio and general economic
conditions compared to 2008. Management expects trends in the
charge-off ratio on credit card balances to be consistent with
general economic trends, such as unemployment and personal
bankruptcy filings. The Bancorp employs a risk-adjusted pricing
methodology to help ensure adequate compensation is received
for those products that have higher credit costs.