Fifth Third Bank 2008 Annual Report Download - page 38

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
36 Fifth Third Bancorp
related to Visa litigation, $36 million related to legal expenses
associated with the satisfactory resolution of a the CitFed litigation,
and $7 million in seasonally higher pension expense. Fourth
quarter 2007 results included a $94 million charge due to Visa
litigation and $8 million in acquisition related expenses. On a year-
over-year comparison basis, acquisitions added approximately $26
million of additional operating expense, and the impact of the
adoption of SFAS No. 159 on the classification of mortgage
origination costs has added approximately $12 million. Remaining
expense growth on both a sequential and year-over-year basis was
attributable to higher volume-related payment processing expense,
increased equipment and occupancy expense, and higher loan and
lease processing costs as a result of increased collection activities.
Net charge-offs totaled $1.6 billion in the fourth quarter.
Results included net charge-offs of $800 million on commercial
loans that were either sold or transferred to held-for-sale during the
quarter. Loss experience continued to be primarily associated with
commercial residential builder and developer loans and consumer
residential real estate loans, and to be disproportionately
concentrated in Michigan and Florida. In aggregate, Florida and
Michigan represented approximately 66% of total losses during the
quarter and less than 30% of total loans and leases. Losses on
commercial and consumer real estate loans in these states
represented approximately 56% of total fourth quarter net charge-
offs. Net charge-offs on loans to homebuilders and developers
represented $568 million, or 35% of total net charge-offs.
Provision for loan and lease losses totaled $2.8 billion in the fourth
quarter of 2008, exceeding net charge-offs by $729 million. The
increase in the allowance for loan and lease losses was reflective of
a number of factors including; increased estimated loss factors due
to negative trends in nonperforming assets and overall
delinquencies; increased loss estimates due to the real estate price
deterioration in some of the Bancorp’s key lending markets; and
significant declines in general economic conditions.
COMPARISON OF THE YEAR ENDED 2007 WITH 2006
Net income for the year ended 2007 was $1.1 billion, or $1.99 per
diluted share, a nine percent decrease compared to $1.2 billion, or
$2.13 per diluted share, earned in 2006. Overall, increases in net
interest margin and fee revenue were offset by a $177 million
charge to lower the current cash surrender value of one of the
Bancorp’s BOLI policies and increased provision for loan and lease
losses. The BOLI charge reflected a decrease in the cash surrender
value due to declines in the value of the policy’s underlying
investments due to significant disruptions in the financial markets
and widening credit spreads. Provision for loan and lease losses
increased $285 million over 2006 to $628 million, a result of the
deteriorating credit environment.
Net interest income (FTE) increased five percent compared to
2006. Net interest margin increased to 3.36% in 2007 from 3.06%
in 2006 largely due to the balance sheet actions taken in the fourth
quarter of 2006 to improve the asset/liability mix of the Bancorp
and reduce the size of the Bancorp’s available-for-sale securities
portfolio to a size that was more consistent with its liquidity,
collateral and interest rate risk management requirements.
Noninterest income increased 23% compared to 2006.
Noninterest income in 2007 reflects the impact of the previously
mentioned $177 million BOLI charge, while the 2006 results
included $415 million in losses related to the fourth quarter balance
sheet actions. Excluding these items, noninterest income increased
nine percent compared to 2006 with growth in electronic payment
processing, service charges on deposits and corporate banking
revenue partially offset by lower mortgage banking net revenue.
Noninterest expense increased 14% compared to 2006.
Noninterest expense in 2007 included $172 million in charges
related to the Bancorp’s indemnification of estimated current and
future Visa litigation settlements and $8 million of acquisition-
related costs, while 2006 results included $49 million in charges
related to the termination of debt and other financing agreements.
Excluding these items, noninterest expense increased nine percent
resulting from volume-based transaction growth in payment
processing, higher technology related expenses reflecting
infrastructure upgrades and higher occupancy expense from
continued de novo banking center growth. During 2007, the
Bancorp opened 77 additional banking centers through acquisitions
and de novo expansion.
In 2007, net charge-offs as a percent of average loans and
leases were 61 bp compared to 44 bp in 2006. A majority of the
increase in net charge-offs were due to the weakened real estate
markets in the Upper Midwest and Florida, which suppressed
collateral values. At December 31, 2007, nonperforming assets as a
percent of loans and leases increased to 1.32% from .61% at
December 31, 2006. The Bancorp increased its allowance for loan
and lease losses as percent of loans and leases from 1.04% as
December 31, 2006 to 1.17% as of December 31, 2007.
During 2007, the Bancorp completed its acquisition of Crown,
a subsidiary of R&G Financial Corporation, with $2.8 billion in
assets and $1.7 billion in deposits located in Florida and Augusta,
Georgia. Additionally, on August 16, 2007, the Bancorp
announced its introduction into the North Carolina markets of
Charlotte and Raleigh with an agreement to acquire First Charter,
which was completed in the second quarter of 2008.