Fifth Third Bank 2008 Annual Report Download - page 37

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 35
FOURTH QUARTER REVIEW
The Bancorp’s 2008 fourth quarter net loss was $2.2 billion, or
$3.82 per diluted share, compared to a net loss of $81 million, or
$0.14 per diluted share, for the third quarter of 2008 and net
income of $16 million, or $0.03 per diluted share, for the fourth
quarter of 2007. Fourth quarter 2008 earnings were negatively
impacted by a number of charges including: a $965 million charge
to record impairment on goodwill, $40 million in OTTI charges on
securities, a $34 million charge to lower the current cash surrender
value of one of the Bancorp’s BOLI policies and provision expense
of $2.4 billion. Provision expense included the effect of actions
taken to address areas of the loan portfolio exhibiting the most
significant credit deterioration as the Bancorp sold or transferred to
held-for-sale loans with a carrying value of approximately $1.3
billion. Approximately 90% of these loans were commercial real
estate secured loans in Florida and Michigan. Overall, net charge-
offs on loans sold or transferred to held-for-sale during the fourth
quarter totaled $800 million. Additionally, provision expense was
impacted by a significant increase in the reserve for loan and lease
losses to $2.8 billion, resulting in an allowance to loan and lease
ratio of 3.31% as of December 31, 2008, compared to 2.41% as of
September 30, 2008 and 1.17% as of December 31, 2007. Fourth
quarter 2007 earnings were negatively impacted by a charge of $177
million to lower the current cash surrender value of one of the
Bancorp’s BOLI policies and a charge of $94 million related to
Visa members’ indemnification of future litigation settlements.
Fourth quarter 2008 net interest income (FTE) of $897
million decreased $171 million from the third quarter of 2008 and
increased $112 million from the same period a year ago. Third and
fourth quarter net interest income was affected by the loan
discount accretion related to the second quarter of 2008 acquisition
of First Charter. Excluding the benefit of the loan discount
accretion of $81 million in the fourth quarter and $215 million in
the third quarter, net interest income declined $37 million, or four
percent, from the third quarter of 2008 and increased $31 million,
or four percent, from the fourth quarter of 2007. The sequential
decline was driven by a number of factors which included the
effect of higher nonperforming loan balances, a change in the mix
of deposits to higher priced savings and time deposits as a result of
the highly competitive pricing environment and the effect of a
greater concentration in lower yielding commercial loans. The
year-over-year increase in net interest income was due to the nine
percent growth in interest-earning assets, partially offset by margin
compression due to the factors above.
Noninterest income of $642 million decreased by $75 million
compared to the third quarter of 2008 and increased $133 million
compared to the fourth quarter of 2007. Fourth quarter 2008
results included a $34 million charge to reduce the cash surrender
value of one of the Bancorp’s BOLI policies, compared to a charge
of $27 million in the third quarter of 2008 and a $177 million
charge in the fourth quarter of 2007. Third quarter results were
also impacted by a $76 million gain related to a satisfactory
resolution of the CitFed litigation. Excluding the above items and
non-mortgage related securities gains/losses, noninterest income
decreased $15 million, or two percent, compared to the sequential
quarter and increased $38 million, or six percent, compared to the
same quarter a year ago. The sequential decrease is a result of
lower consumer activity levels, including average credit and debit
card transaction and consumer deposit activity, while the year-over-
year increase is a result of the growth in customers, particularly in
commercial and Fifth Third Processing Solutions.
Electronic payment processing (EPP) revenue of $230 million
declined two percent compared to the third quarter of 2008 and
increased three percent from the fourth quarter of 2007. Merchant
processing revenue was flat sequentially and compared to the same
quarter last year, as the benefit of continued account acquisition
was offset by a decline in average dollar amount per credit card
transaction due to lower consumer spending. Financial institutions
revenue decreased three percent compared with the previous
quarter, relating to lower transaction volumes in a weaker
economic environment, and grew four percent from the fourth
quarter of 2007 on higher transaction volumes. Card issuer
interchange revenue declined two percent sequentially, driven
primarily by a decline in the average dollar amount per debit and
credit card transaction. Card issuer interchange revenue increased
seven percent from the previous year, driven by higher credit card
transactions as a result of the Bancorp’s credit card growth
initiative, partially offset by a lower dollar amount per transaction.
Service charges on deposits of $162 million decreased six
percent sequentially and increased two percent compared with the
same quarter last year. Retail service charges decreased 12% from
the third quarter of 2008 and seven percent from the fourth
quarter of 2007 due to lower checking account transaction
volumes. Commercial service charges increased three percent
sequentially and 14% compared with last year. This growth
primarily reflected an increase in customer accounts and lower
market interest rates, as reduced earnings credit rates paid on
customer balances have resulted in higher realized net services fees
to pay for treasury management services.
Corporate banking revenue of $121 million increased by $17
million, or 16% from the previous quarter and $15 million, or 14%
on a year-over-year basis and was driven by growth in most
subcaptions as the Bancorp realized gains from the build out of its
commercial product offerings in 2007.
Investment advisory revenue of $78 million was down 13%
sequentially and 17% from the fourth quarter of 2007 reflecting
lower asset values on market declines and a shift in assets from
equity products to lower yielding money market funds due to
extreme market volatility.
Mortgage banking net revenue was a net loss of $29 million in
the fourth quarter of 2008, a net gain of $45 million in the third
quarter of 2008 and a net gain of $26 million in the fourth quarter
of 2007. Including securities gains on non-qualifying hedges on
MSRs, income from mortgage banking activity was flat compared
to the third quarter of 2008 and increased $35 million compared to
the fourth quarter of 2007. Fourth quarter originations were $2.1
billion, compared to $2.0 billion from the previous quarter and $2.7
billion from the same quarter last year. The adoption of SFAS No.
159 for mortgage banking in the first quarter of 2008 contributed
$12 million of the year-over-year increase in mortgage banking
revenue, with corresponding origination costs recorded in
noninterest expense.
Net losses on investment securities were $40 million in the
fourth quarter of 2008 compared with a net loss of $63 million last
quarter. The fourth quarter losses were driven by an OTTI charge
of $37 million on trust preferred securities. As of December 31,
2008, the Bancorp held $154 million in trust preferred securities.
Noninterest expense of $2.0 billion increased $1.1 billion both
sequentially and from a year ago. The significant increase in
expenses was primarily driven by the $965 million charge to record
goodwill impairment in the fourth quarter of 2008. Excluding this
charge, noninterest expense of $1.1 billion increased $90 million
sequentially and $117 million from a year ago. Fourth quarter
results included higher expenses related to the difficult operating
environment that included higher provision for unfunded
commitments, higher reinsurance reserve accruals to cover losses
on proprietary private residential mortgage insurance and increased
derivative counterparty marks. The combination of these expenses
accounted for expense increases of $91 million sequentially and $96
million compared to the previous year. Additionally, fourth quarter
2008 results included an estimated net $8 million charge due to
changes in loss estimates related to our indemnification obligation
with Visa, while third quarter results included a $45 million charge