Fifth Third Bank 2008 Annual Report Download - page 27

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 25
increased 10% compared to 2007. The increase in interest income
from investment securities was a result of the 17% increase in the
average investment portfolio offset by a decrease in the weighted-
average yield.
Core deposits increased $2.0 billion, or three percent,
compared to last year. The cost of interest-bearing core deposits
was 1.84% in 2008, which was a decrease of 148 bp from 3.32%
in 2007. The year-over-year decrease is a result of the decrease in
short-term market interest rates as, over the past year, the federal
funds target rate decreased 400 bp to a target of 0.25% at
December 31, 2008 compared to 4.25% at December 31, 2007.
Partially offsetting the decrease in the market rates was the highly
competitive rate environment for core deposits, which was created
by disruptions in the credit markets. Some relief from the highly
competitive deposit pricing was experienced at the end of the
fourth quarter as a number of bank consolidations were
completed. The relief in competitive deposit pricing is expected
to be somewhat muted in 2009, as customers began moving
balances into higher yielding time deposits during the fourth
quarter of 2008. Interest expense on wholesale funding decreased
16% compared to the prior year, despite a 33% increase in average
balances. Overall, the growth in average loans and leases since
2007 outpaced core deposit growth by $5.5 billion. In 2008,
wholesale funding represented 42% of interest-bearing liabilities,
up from 36% in 2007. The Bancorp issued $750 million of senior
notes in April 2008 and $400 million of trust preferred securities
in May 2008. The Bancorp’s equity funding position increased
approximately $500 million compared to 2007 from the issuance
of $1.1 billion in preferred shares during the second quarter of
2008. Additionally, on December 31, 2008 the Bancorp sold $3.4
billion of senior preferred shares and related warrants to the U.S.
Treasury under its CPP. For more information on the Bancorp’s
interest rate risk management, including estimated earnings
sensitivity to changes in market interest rates, see the Market Risk
Management section of Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
TABLE 4: CONSOLIDATED AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME (FTE)
For the years ended December 31 2008 2007 2006
($ in millions)
Average
Balance
Revenue/
Cost
Average
Yield/Rate
A
verage
Balance
Revenue/
Cost
Average
Yield/Rate
Average
Balance
Revenue/
Cost
Average
Yield/Rate
Assets
Interest-earning assets:
Loans and leases (a):
Commercial loans $28,426 $1,520 5.35 % $22,351 $1,639 7.33 % $20,504 $1,479 7.21 %
Commercial mortgage 12,776 866 6.78 11,078 801 7.23 9,797 700 7.15
Commercial construction 5,846 342 5.85 5,661 421 7.44 6,015 460 7.64
Commercial leases 3,680 18 0.49 3,683 158 4.29 3,730 185 4.97
Subtotal - commercial 50,728 2,746 5.41 42,773 3,019 7.06 40,046 2,824 7.05
Residential mortgage 10,993 705 6.41 10,489 642 6.13 9,574 568 5.94
Home equity 12,269 701 5.71 11,887 897 7.54 12,070 900 7.45
Automobile loans 8,925 566 6.34 10,704 674 6.30 9,570 552 5.77
Credit card 1,708 167 9.77 1,276 133 10.39 838 99 11.84
Other consumer loans and leases 1,212 64 5.28 1,219 65 5.36 1,395 68 4.87
Subtotal - consumer 35,107 2,203 6.27 35,575 2,411 6.78 33,447 2,187 6.54
Total loans and leases 85,835 4,949 5.77 78,348 5,430 6.93 73,493 5,011 6.82
Securities:
Taxable 13,082 643 4.91 11,131 566 5.08 20,306 904 4.45
Exempt from income taxes (a) 342 25 7.35 499 36 7.29 604 45 7.38
Other short-term investments 621 13 2.15 404 19 4.80 396 21 5.27
Total interest-earning assets 99,880 5,630 5.64 90,382 6,051 6.70 94,799 5,981 6.31
Cash and due from banks 2,490 2,275 2,477
Other assets 13,411 10,613 8,713
Allowance for loan and lease losses (1,485) (793) (751)
Total assets $114,296 $102,477 $105,238
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing core deposits:
Interest checking $14,095 $126 0.89 % $14,820 $318 2.14 % $16,650 $398 2.39 %
Savings 16,192 224 1.38 14,836 456 3.07 12,189 363 2.98
Money market 6,127 118 1.92 6,308 269 4.26 6,366 261 4.10
Foreign office deposits 2,153 34 1.60 1,762 73 4.15 732 29 3.93
Other time deposits 11,135 411 3.69 10,778 495 4.59 10,500 433 4.12
Total interest-bearing core deposits 49,702 913 1.84 48,504 1,611 3.32 46,437 1,484 3.20
Certificates - $100,000 and over 9,531 324 3.40 6,466 328 5.07 5,795 278 4.80
Other foreign office deposits 2,163 52 2.42 1,393 68 4.91 2,979 148 4.97
Federal funds purchased 2,975 70 2.34 3,646 184 5.04 4,148 208 5.02
Other short-term borrowings 7,785 178 2.29 3,244 140 4.32 4,522 194 4.28
Long-term debt 13,903 557 4.01 12,505 687 5.50 14,247 770 5.40
Total interest-bearing liabilities 86,059 2,094 2.43 75,758 3,018 3.98 78,128 3,082 3.94
Demand deposits 14,017 13,261 13,741
Other liabilities 4,182 3,875 3,558
Total liabilities 104,258 92,894 95,427
Shareholders’ equity 10,038 9,583 9,811
Total liabilities and shareholders’ equity $114,296 $102,477 $105,238
Net interest income $3,536 $3,033 $2,899
Net interest margin 3.54 % 3.36 % 3.06 %
Net interest rate spread 3.21 2.72 2.37
Interest-bearing liabilities to interest-earning assets 86.16 83.82 82.41
(a) The fully taxable-equivalent adjustments included in the above table are $22 million, $24 million and $26 million for the years ended December 31, 2008, 2007 and 2006, respectively.