Fifth Third Bank 2013 Annual Report Download - page 74

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
72 Fifth Third Bancorp
Analysis of Net Loan Charge-offs
Net charge-offs were 58 bps and 85 bps of average portfolio loans
and leases for the years ended December 31, 2013 and 2012,
respectively. Table 52 provides a summary of credit loss experience
and net charge-offs as a percentage of average portfolio loans and
leases outstanding by loan category.
The ratio of commercial loan and lease net charge-offs to
average portfolio commercial loans and leases decreased to 44 bps
during 2013 compared to 63 bps in 2012, as a result of decreases in
net charge-offs of $77 million coupled with an increase in average
portfolio commercial loan and lease balances of $3.7 billion.
Decreases in net charge-offs were realized across all commercial
loan types, excluding commercial and industrial loans which
increased primarily due to a $43 million charge-off on a single large
credit during the fourth quarter of 2013, and were primarily due to
improvements in general economic conditions and previous actions
taken by the Bancorp to address problem loans. Actions taken by
the Bancorp included suspending homebuilder and developer
lending in 2007 and non-owner occupied commercial real estate
lending in 2008 and tightened underwriting standards across all
commercial loan product offerings. The Bancorp resumed
homebuilder and developer lending and non-owner occupied
commercial real estate lending in the third quarter of 2011. Net
charge-offs for 2013 related to non-owner occupied commercial real
estate were $27 million compared to $87 million in 2012. Net
charge-offs related to non-owner occupied commercial real estate
are recorded in the commercial mortgage loans and commercial
construction loans captions in Table 52. Net charge-offs on these
loans represented 12% of total commercial loan and lease net
charge-offs in 2013 and 29% in 2012.
The ratio of consumer loan and lease net charge-offs to
average consumer loans and leases decreased to 77 bps in 2013
compared to 113 bps in 2012. Net charge-offs on residential
mortgage loans, which typically involve partial charge-offs based
upon appraised values of underlying collateral, decreased $62
million from the prior year as a result of improvements in
delinquencies and a decrease in the average loss recorded per
charge-off. The Bancorp’s Florida and Michigan markets, in
aggregate, accounted for 42% and 66% of net charge-offs on
residential mortgage loans in the portfolio in 2013 and 2012,
respectively. The Bancorp expects the composition of the residential
mortgage portfolio to improve as it continues to retain high quality,
shorter duration residential mortgage loans that are originated
through its branch network as a low-cost, refinance product of
conforming residential mortgage loans.
Home equity net charge-offs decreased $60 million compared
to the prior year, primarily due to improvements in loss severities
and delinquencies, partially offset by the impact of the change in the
home equity charge-off policy during the fourth quarter of 2013.
Home equity loans and lines of credit that have been in default 120
days or more are assessed for a charge-off if the senior lien has been
in default 120 days or more. 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 $9 million
compared to 2012, due to the origination of high credit quality loans
and higher resale on automobiles sold at auction.
Credit card and other consumer loans and leases net charge-
offs increased $5 million from 2012. Credit card net charge-offs
increased $4 million from the prior year. The Bancorp utilizes a risk-
adjusted pricing methodology to ensure adequate compensation is
received for those products that have higher credit costs. Other
consumer loan net charge-offs remained relatively flat compared to
the same period in the prior year.