Credit Costs Weigh on Regionals

New York-Rising credit costs and asset writedowns continued to pressure regional banks that are big players in the mortgage industry late last year.

Fifth Third Bancorp, Cincinnati, lost $2.2 billion in the fourth quarter, with a $965 million goodwill impairment charge (reflecting a drop in the firm's market capitalization) and a $729 million credit loss provision taking a toll on the firm.

The bank transferred $1.6 billion of loans, the vast majority of them backed by commercial real estate in Florida or Michigan, to its held-for-sale account, reflecting the company's desire to unload assets "exhibiting the most significant credit deterioration."

Other steps taken by the company to reduce its credit exposure include suspending the origination of residential homebuilding and development loans. The company also discontinued the production of broker-originated home-equity loans in 2007. Brokered home-equity loans still totaled $2.3 billion, or 18% of Fifth Third's consumer loan portfolio, late last year.

The company also modified $218 million of consumer loans in the fourth quarter, a move designed to increase the likelihood of repayment by borrowers.

Fifth Third also lost $96 million as a result of a mark-to-market charge against its mortgage servicing rights.

The bank said that after charge-offs, the loans that have been sold or transferred are now valued at roughly 33% of their contractual balances.

Fifth Third increased its loss reserve to $2.8 billion, or 3.31% of all loans and leases.

In other earnings news, SunTrust Bank, Atlanta, earned $747 million in 2008, less than half its 2007 earnings, as higher charge-offs and reserve building ate into revenue. CEO James Wells said job losses and declining home values were to blame.

"We are under no illusions as to the severity of this credit cycle," he said in a news release. "Managing successfully through it remains our number one priority."

SunTrust's credit provision rose to $962.5 million in the fourth quarter. The company also recorded $236 million of operating losses, primarily related to insurance claim denials and borrower misrepresentations, the company said, and $100 million was charged to mortgage reinsurance reserves. SunTrust also took a $370 million impairment charge to its mortgage servicing rights.

Huntington Bancshares, Columbus, Ohio, swung to a fourth-quarter loss of $417 million, largely driven by a $454 million pretax charge related to its stake in Franklin Credit Management Co., $162 million of credit reserve building and $142 million of "market-related losses."

CEO Stephen Steinour said credit losses on the bank's home equity and mortgage portfolios "were in line with expectations."

However, Franklin Credit Management's cash flows deteriorated significantly due to weakening performance of Franklin's mortgage and home equity assets.

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