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## 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. 

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## 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. 

