Fifth Third Bank 2010 Annual Report Download - page 56

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
54 Fifth Third Bancorp
result of the Bancorp’s foreclosure, during the fourth quarter of
2010, on a commercial loan collateralized by individual consumer
loans with a carrying value of $78 million that were classified as
nonaccrual loans at December 31, 2010. Consumer restructured
loans on accrual status totaled $1.6 billion and $1.4 billion as of
December 31, 2010 and 2009, respectively, driven by an increased
volume of restructured loans. As of December 31, 2010, redefault
rates on restructured residential mortgage, home equity loans and
credit card loans were 27%, 18% and 20%, respectively.
Repossessed personal property and OREO increased from
$297 million at December 31, 2009 to $494 million at December
31, 2010, driven by higher levels of foreclosures on commercial
mortgage loans. At December 31, 2010 OREO totaled $467
million and included $351 million of commercial assets and $116
million of consumer assets. Properties in Michigan and Florida
accounted for 49% of foreclosed real estate at December 31,
2010.
In 2010 and 2009, approximately $10 million and $20 million,
respectively, of interest income was recognized on a cash basis for
loans on nonaccrual. In 2010 and 2009, additional interest income
of approximately $206 million and $236 million, respectively,
would have been recorded if the nonaccrual and renegotiated
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 302 bp of average loans and leases for 2010,
compared to 320 bp for 2009. Table 39 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 3.10% in 2010
compared to 3.27% in 2009. This improvement was primarily due
to actions taken by the Bancorp to address problem loans,
reflected by significant net charge-offs recorded in 2008 and 2009
and the impact of loss mitigation activities such as suspending
home builder and developer lending and non-owner occupied
commercial real estate lending in 2007 and 2008, respectively, and
tighter underwriting standards implemented on commercial loan
products over the past three years. Net charge-offs for 2010
included $625 million related to non-owner occupied commercial
real-estate, a decrease from $721 million in 2009. Charge-offs on
these loans represented 46% of all commercial net charge-offs in
2010 and 2009. Florida and Michigan continued to experience the
most stress, accounting for approximately 48% of the total net
charge-offs in the commercial loan product portfolio in 2010
compared to 44% in 2009.
The ratio of consumer loan net charge-offs to average
consumer loans outstanding decreased to 2.92% in 2010
compared to 3.10% in 2009. Compared to 2009, total consumer
net charge-offs decreased $54 million to $964 million in 2010.
Residential mortgage loan net charge-offs increased $82 million to
$439 million during 2010. The ratio of residential mortgage net
charge-offs to average residential mortgage loans increased from
4.15% in 2009 to 5.49% in 2010. These increases were primarily
due to $123 million in charge-offs taken on $228 million of
portfolio residential mortgage loans sold during the third quarter
of 2010. The Bancorp’s Florida and Michigan markets continue to
experience the most stress as residential mortgage loan charge-offs
in these states accounted for 72% of residential mortgage net
charge-offs during 2010.
Home equity net charge-offs decreased $58 million to $264
million during 2010. The ratio of home equity net charge-offs to
average home equity loans decreased from 2.57% in 2009 to
2.20% in 2010. These decreases are primarily due to a $33 million
decrease in net charge-offs on the brokered home equity portfolio
and a $20 million decrease in net charge-offs in the Florida and
Michigan markets on home equity products originated by the
Bancorp. Management responded to the performance of the
brokered home equity portfolio by eliminating 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.
Automobile loan net charge offs decreased $60 million to $88
million in 2010. The ratio of automobile loan net charge-offs to
average automobile loans was .85% for 2010, a decrease of 83 bp
compared to 2009. These decreases are the result of
improvements in delinquencies and loss severity as well as
improvements made in underwriting over the past three years.
Credit card net charge-offs decreased $15 million to $155
million in 2010. The net charge-off ratio on credit card balances
decreased from 8.87% in 2009 to 8.28% in 2010. The decreases
from the prior year are primarily due to the Bancorp actively
managing open credit card balances and a decrease in delinquency
trends throughout 2010 as general economic conditions began to
show signs of improvement. 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.