Fifth Third Bank 2008 Annual Report Download - page 33

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 31
contingent liquidity facilities, average commercial loans increased
approximately 17% compared to 2007. Average core deposits
increased four percent due to growth in interest checking and
foreign office deposits.
Net charge-offs as a percent of average loans and leases
increased to 436 bp from 36 bp in 2007. Net charge-offs
increased in comparison to 2007 due to weakening economies and
the continuing deterioration of credit within the Bancorp’s
footprint, particularly in Michigan and Florida, involving
commercial loans and commercial mortgage loans. Additionally,
in the fourth quarter of 2008, the Bancorp sold or transferred to
held-for-sale $1.3 billion in commercial loans and commercial
mortgage loans, resulting in $800 million in charge-offs on those
loans, or 185 bp.
Noninterest income increased $97 million compared to 2007
due to corporate banking revenue growth of $73 million and
increased service charges on deposits of $32 million, both up
21%. Corporate banking revenue increased as a result of growth
in foreign exchange derivative income, which increased $38
million, to $90 million, during 2008 and in business lending fees,
which increased $16 million, or 26%, compared to 2007. The
increase in service charges on deposits was a result of higher
volume-related business service charges (net of discounts) and a
reduction in the amount of offsetting earnings credits as short-
term rates were lower in 2008 than 2007.
Noninterest expense increased $868 million compared to
2007 primarily due to goodwill impairment of $750 million in
2008. The impairment charge was taken in the fourth quarter of
2008 due to the decline in the estimated fair value of the
Commercial Banking segment below its carrying value and the
determination that the implied fair value of the goodwill was less
than its carrying value. Also contributing to the growth in
noninterest expense was sales incentives, which increased 22% to
$106 million compared to 2007 as a result of increased revenues,
especially foreign exchange derivative income. Additionally, other
noninterest expense increased due to growth in loan expenses of
$33 million, to $65 million, during 2008 from increased collection
activities.
Comparison of 2007 with 2006
Net income increased $5 million compared to 2006 as a result of
continued success in the sale of corporate banking services, offset
by a higher provision for loan and lease losses and growth in
noninterest expense.
Net interest income was modestly lower in comparison to
2006 due to a 32 bp decline in the spread between loan yields and
the related FTP charge. Average loans and leases increased nine
percent over 2006, to $35.7 billion, with growth concentrated in
C&I loans and commercial mortgage loans. The increase in
commercial mortgage loans can be attributed to loans acquired
from R-G Crown Bank (Crown) in November 2007 and to the
conversion of construction loans to permanent financing
throughout 2007. Average core deposits increased modestly to
$15.9 billion in 2007 compared to 2006. Net charge-offs as a
percent of average loans increased from 31 bp in 2006 to 36 bp in
2007 as the segment experienced an increase in charge-offs of
commercial mortgage loans in parts of its footprint, specifically
eastern Michigan and northeastern Ohio.
Noninterest income increased $82 million, or 17%, compared
to 2006 largely due to an increase in corporate banking revenue of
$49 million, or 17%. Increases in corporate banking revenue
occurred in all subcaptions as a result of a build-out of its
commercial product offerings by the Commercial Banking
segment.
Noninterest expense increased $72 million, or 10%, in 2007
compared to 2006 primarily due to higher sales related incentives
expense and a volume-related increase in affordable housing
investments expense.
Branch Banking
Branch Banking provides a full range of deposit and loan and
lease products to individuals and small businesses through 1,307
full-service banking centers. Branch Banking offers depository
and loan products, such as checking and savings accounts, home
equity loans and lines of credit, credit cards and loans for
automobile and other personal financing needs, as well as
products designed to meet the specific needs of small businesses,
including cash management services. Table 15 contains selected
financial data for the Branch Banking segment.
Comparison of 2008 with 2007
Net income decreased $52 million, or eight percent, compared to
2007 as increases in net interest income and service fees were
more than offset by a higher provision for loan and lease losses
and increased salaries & incentives and net occupancy expense.
Net interest income increased 14% compared to 2007 due to the
increase in volume of higher yielding credit cards coupled with the
FTP impact for increases in deposit balances. Also impacting net
interest income was the accretion of purchase accounting
adjustments, totaling $43 million, primarily related to the second
quarter acquisition of First Charter. Average loans and leases
increased seven percent compared to 2007 as home equity loans
grew five percent due to acquisitions since 2007. The segment
grew credit card balances by $396 million, or 36%, resulting from
an increased focus on relationships with its current customers
through the cross-selling of credit cards. Average core deposits
were up three percent compared to 2007 primarily due to
acquisitions since 2007.
Net charge-offs as a percent of average loan and leases
increased in 2008 to 194 bp from 95 bp in 2007. Net charge-offs
increased in comparison to 2007 as the segment experienced
higher charge-offs involving brokered home equity lines and
loans, commercial loans and credit cards. The increase of $63
million in charge-offs on home equity reflected borrower stress
and a decrease in home prices primarily within the Bancorp’s
footprint. Commercial loan charge-offs increased $41 million
compared to 2007 due to the weakening economy and the
TABLE 15: BRANCH BANKING
For the years ended December 31
($ in millions) 2008 2007 2006
Net interest income $1,662 1,464 1,300
Provision for loan and lease losses 352 162 108
Noninterest income:
Electronic payment processing 189 174 159
Service charges on deposits 447 421 365
Corporate banking revenue 12 13 15
Investment advisory revenue 84 90 87
Mortgage banking net revenue 13 75
Other noninterest income 67 73 80
Securities gains (losses), net - --
Noninterest expense:
Salaries, incentives and benefits 517 479 455
Net occupancy expense 159 136 121
Payment processing expense 6 615
Technology and communications 16 14 13
Equipment expense 44 37 32
Goodwill impairment - --
Other noninterest expense 503 450 398
Income before taxes 877 958 869
Applicable income tax expense 309 338 306
Net income $568 620 563
Average Balance Sheet Data
Consumer loans $12,665 11,838 11,461
Commercial loans 5,596 5,169 5,289
Demand deposits 6,006 5,756 5,839
Interest checking 7,845 8,692 10,578
Certificates $100,000 and over & other time 13,749 13,729 13,031
Savings and money market 16,184 14,623 11,886