Fifth Third Bank 2008 Annual Report Download - page 31

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 29
Net occupancy expenses increased $31 million, or 11%, in
2008 compared to 2007 due to the addition of 80 new banking
centers. Growth in the number of banking centers was primarily
driven by acquisitions, which added 69 banking centers since
2007.
Payment processing expense, which includes third-party
processing expenses, card management fees and other bankcard
processing, increased 12% in 2008 compared to 2007 due to
higher network charges of $24 million from increased processing
volumes for both the merchant and financial institutions
businesses.
Total other noninterest expense increased by $100 million, or
10%, in 2008 compared to 2007. The components of other
noninterest expense are shown in Table 11. Loan processing
expense was higher in comparison to 2007 as a result of increased
collection activities. Increased professional service fees compared
to 2007 resulted from legal expenses of $36 million stemming
from the CitFed litigation. FDIC insurance and other taxes were
higher due to the depletion of the Bancorp’s prior FDIC
insurance premium credits in 2008. The provision for unfunded
commitments increased $82 million compared to 2007 due to
higher estimates of inherent losses resulting from deterioration in
the credit quality of the underlying borrowers. The credit
component of fair value marks on counterparty derivatives
increased due to deterioration in the credit quality of the
Bancorp’s customers.
In December 2008, the FDIC approved a final rule on
deposit assessment rates for the first quarter of 2009. The rule
raised assessment rates uniformly by 7 bp (annually) for the first
quarter of 2009 only. The FDIC issued another final rule during
the first quarter of 2009 changing the way the FDIC’s assessment
system differentiates for risk, makes corresponding changes to
assessment rates beginning with the second quarter of 2009, and
makes certain technical and other changes to the assessment rules.
In addition, the FDIC issued an interim rule that provides for a 20
bp special assessment on June 30, 2009. The increase in
assessment rates effective January 1, 2009 will approximately
double the Bancorp's expected assessment for 2009’s first quarter.
The Bancorp believes the assessment rates subsequent to the first
quarter 2009 will be significantly higher than the first quarter of
2009. As a result, the Bancorp expects that increased FDIC
insurance expense in 2009 will have an adverse impact on its
results of operations.
In addition to the standard deposit insurance assessments, as
noted above, in the third quarter of 2008, the FDIC announced
the Temporary Liquidity Guarantee Program (TLGP), which
temporarily guarantees the senior debt of participating FDIC-
insured institutions and certain holding companies, as well as
deposits in noninterest-bearing deposit transaction accounts. The
Bancorp expects assessments related to the TLGP to have an
adverse impact on its results of operations.
The efficiency ratio (noninterest expense divided by the sum
of net interest income (FTE) and noninterest income) was 70.4%
and 60.2% for 2008 and 2007, respectively. Excluding the
goodwill impairment charge of $965 million in 2008, the efficiency
ratio was 55.5% (comparison being provided to supplement an
understanding of fundamental trends). The Bancorp continues to
focus on efficiency initiatives, as part of its core emphasis on
operating leverage and on expense control.
Applicable Income Taxes
The Bancorp’s income (loss) before income taxes, applicable
income tax expense and effective tax rate for each of the periods
indicated are shown in Table 12. Applicable income tax expense
for all periods includes the benefit from tax-exempt income, tax-
advantaged investments and general business tax credits, partially
offset by the effect of nondeductible expenses. The effective tax
rate for the year ended December 31, 2008 was primarily impacted
by the pre-tax loss in 2008, partially offset by tax expense of
approximately $140 million in the second quarter of 2008 required
for interest related to the tax treatment of certain of the Bancorp’s
leveraged leases for previous tax years and the nondeductible
portion of the charge of $965 million to record impairment of
goodwill.
TABLE 11: COMPONENTS OF OTHER NONINTEREST
EXPENSE
For the years ended December 31
($ in millions) 2008 2007 2006
Loan processing $188 119 93
Marketing 102 84 78
Professional services fees 102 54 41
Provision for unfunded commitments and
letters of credit 98 16 5
FDIC insurance and other taxes 73 31 39
Affordable housing investments 67 57 42
Intangible asset amortization 56 42 45
Travel 54 54 52
Postal and courier 54 52 49
Recruitment and education 33 41 51
Operating lease 32 22 18
Supplies 31 31 28
Visa litigation (accrual) settlement (99) 172 -
Debt termination --49
Other 298 214 173
Total other noninterest expense $1,089 989 763
TABLE 12: APPLICABLE INCOME TAXES
For the years ended December 31 ($ in millions) 2008 2007 2006 2005 2004
Income (loss) before income taxes and cumulative effect ($2,664) 1,537 1,627 2,208 2,237
Applicable income tax expense (benefit) (551) 461 443 659 712
Effective tax rate (20.7%) 30.0 27.2 29.9 31.8