Fifth Third Bank 2010 Annual Report Download - page 40

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
38 Fifth Third Bancorp
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 and automobile dealers. The following table
contains selected financial data for the Consumer Lending
segment.
Comparison of 2010 with 2009
Consumer Lending reported a net loss of $40 million in 2010
compared to net income of $23 million in 2009 due to a decrease
in net interest income and an increase in noninterest expense
partially offset by an increase in noninterest income. Net interest
income decreased $76 million, or 15%, from 2009 primarily due to
a decrease in yields on average interest earning assets, which
includes the impact of a $21 million decrease in the accretion of
discounts on loans associated with the acquisition of First Charter
in 2008, partially offset by a decrease in funding costs during 2010.
Provision for loan and lease losses increased $8 million, or
one percent, from 2009. Net charge-offs as a percent of average
loans and leases decreased from 313 bp in 2009 to 309 bp in 2010.
The increase in provision for loan and lease losses from the prior
year was the result of a 23% increase in net charge-offs on
residential mortgage loans primarily due to $123 million in charge-
offs taken on $228 million of portfolio loans which were sold
during the third quarter of 2010. Automobile loan net charge-offs
decreased $44 million compared to 2009 as a result of tighter
underwriting standards implemented in 2008, maturation of the
automobile portfolio and higher resale values on automobiles sold
at auction. Home equity net charge-offs decreased $24 million
from 2009 due to run off of brokered home equity loans, the
origination of which were discontinued in 2007.
Noninterest income increased $35 million, or six percent, as
the result of an increase in mortgage banking net revenue partially
offset by a decrease in other noninterest income. Mortgage
banking net revenue increased $93 million, or 18%, from 2009
primarily due to an $89 million increase in net servicing revenue.
The increase in net servicing revenue was driven by a $56 million
increase in net valuation adjustments on MSRs and MSR
derivatives and a $24 million increase in servicing fees. Residential
mortgage loans serviced for others at December 31, 2010 and
2009 were $54.2 billion and $48.6 billion, respectively. Other
noninterest income decreased $58 million, or 57%, primarily due
to decreases in securities gains related to mortgage servicing rights
hedging activities and an increase in bankcard rewards program
costs recognized within fee income.
Noninterest expense increased $48 million, or nine percent,
due to increases in salaries, incentives and benefits and other
noninterest expense. Salaries, incentives and benefits increased
$13 million, or seven percent, from 2009 due to the continued
high levels of mortgage loan originations in 2010. Other
noninterest expense increased $35 million, or 11%, from 2009
primarily as a result of a $48 million increase in the representation
and warranty reserve partially offset by a $13 million decrease in
loan and lease expense.
Average consumer loans were flat compared to 2009 as a
$1.7 billion increase in automobile loans was offset by decreases in
all other consumer loan and lease products. Average residential
mortgage loans decreased $1.3 billion from 2009 due to a decrease
in origination activity during the first half of 2010. Average home
equity loans decreased $144 million from 2009 due to the
previously mentioned run off of brokered home equity loans. The
increase in automobile loans was due to a change in U.S. GAAP
that required the Bancorp to consolidate certain automobile loans
on January 1, 2010 and a strategic focus to increase automobile
lending during 2010 through consistent and competitive pricing,
enhanced customer service with our dealership network and
disciplined sales execution. The automobile loans consolidated
due to the change in U.S. GAAP had an average balance of $920
million during 2010. Average consumer leases decreased $245
million due to run off of consumer leases which were
discontinued in the fourth quarter of 2008.
Comparison of 2009 with 2008
Consumer Lending reported net income of $23 million in 2009
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, increases in net interest income and mortgage banking
net revenue in 2009 more than offset the growth in provision for
loan and lease losses.
Net interest income increased $13 million in 2009 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.
Mortgage banking net revenue increased $342 million due to
an increase in residential mortgage originations from $11.2 billion
in 2008 to $20.7 billion in 2009 due to lower interest rates and
government incentive programs offered to home buyers as well as
higher sales margins on sold loans. The decrease in other
noninterest income to $101 million in 2009 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 $36 million in other
credit related expenses and an increase in FDIC insurance
expenses.
Average residential mortgage loans and average automobile
loans remained relatively flat compared to 2008. Net charge-offs
as a percent of average loan and leases increased from 223 bp in
2008 to 313 bp in 2009.
TABLE 16: CONSUMER LENDING
For the years ended December 31
($ in millions) 2010 2009 2008
Income Statement Data
Net interest income $418 494 481
Provision for loan and lease losses 582 574 441
Noninterest income:
Mortgage banking net revenue 619 526 184
Other noninterest income 43 101 167
Noninterest expense:
Salaries, incentives and benefits 200 187 137
Goodwill impairment - - 215
Other noninterest expense 359 324 268
Income (loss) before taxes (61) 36 (229)
Applicable income tax expense
(benefit) (21) 13 (81)
Net income (loss) ($40) $23 (148)
Average Balance Sheet Data
Residential mortgage loans $9,384 10,650 10,698
Home equity 851 995 1,142
Automobile loans 9,713 8,024 7,984
Consumer leases 384 629 797