Fifth Third Bank 2009 Annual Report Download - page 18

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
16 Fifth Third Bancorp
For comparison purposes, such items affecting 2008 include:
• $965 million of noninterest expense due to a goodwill
impairment charge;
• $358 million of net interest income due to the accretion
of purchase accounting adjustments related to loans and
deposits from acquisitions during 2008;
• $273 million of other noninterest income related to the
redemption of a portion of Fifth Third’s ownership
interests in Visa, Inc. and $99 million in net reductions
to noninterest expense to reflect the recognition of the
Bancorp’s proportional share of the Visa escrow
account;
• $229 million after-tax impact of charges relating to a
change in the projected timing of cash flows relating to
income taxes for certain leveraged leases;
• $215 million reduction to other noninterest income to
reflect a decline in the cash surrender value of one of
the Bancorp’s BOLI policies;
• $104 million reduction to noninterest income due to
other-than-temporary impairment (OTTI) charges on
Federal National Mortgage Association (FNMA) and
Federal Home Loan Mortgage Corporation (FHLMC)
preferred stock and certain bank trust preferred
securities; and
• $76 million of other noninterest income, partially offset
by $36 million in related litigation expense, due to the
successful resolution of a prior court case.
Net interest income (FTE) decreased to $3.4 billion, from
$3.5 billion in 2008. The primary reason for the five percent
decrease in net interest income was a 21 basis point (bp) decline in
the net interest rate spread. Additionally, the benefit from the
accretion of purchase accounting adjustments related to the 2008
acquisition of First Charter was $136 million in 2009, compared to
$358 million in 2008. Net interest margin was 3.32% in 2009, a
decrease of 22 bp from 2008.
Noninterest income increased 62%, from $2.9 billion to $4.8
billion, in 2009, driven primarily by the Processing Business Sale
in the second quarter of 2009, which resulted in a pre-tax gain of
$1.8 billion, as well as a $244 million gain related to the sale of the
Bancorp’s Visa, Inc. Class B shares and gains on mortgages sold.
Mortgage banking net revenue increased $354 million resulting
from strong growth in originations, which were up 89% to $21.7
billion in 2009 compared to $11.5 billion in 2008. Card and
processing revenue decreased 33% due to the Processing Business
Sale in the second quarter of 2009. Corporate banking revenue
decreased 10% largely due to a lower volume of interest rate
derivatives sales and foreign exchange revenue, partially offset by
growth in institutional sales and business lending fees.
Noninterest expense decreased $738 million compared to
2008. Noninterest expense in 2008 included a $965 million charge
due to goodwill impairment. Excluding this charge, noninterest
expense increased $227 million due primarily to an increase of
$196 million of FDIC insurance and other taxes as the result of an
increase in deposit insurance and participation in the Temporary
Liquidity Guarantee Program (TLGP), as well as increased loan
related expenses from higher mortgage origination volume and
expenses incurred from the management of problem assets. These
amounts were partially offset by lower card and processing
expense due to the Processing Business Sale on June 30, 2009. In
addition to the goodwill impairment charge, noninterest expense
in 2008 included $36 million in litigation expenses due to the
successful resolution of a prior court case, offset by a $99 million
reduction to expenses related to the reversal of a portion of the
Visa litigation reserve and Visa’s funding of an escrow account.
For further information on the change in assessment rates during
2009, the FDIC special assessment in the second quarter of 2009
and the TLGP, see the noninterest expense section of
Management’s Discussion and Analysis.
The Bancorp does not originate subprime mortgage loans,
does not hold credit default swaps and does not hold asset-backed
securities backed by subprime mortgage loans in its securities
portfolio. However, the Bancorp has exposure to disruptions in
the capital markets and weakening economic conditions.
Throughout 2009, the Bancorp continued to be affected by rising
unemployment rates, weakened housing markets, particularly in
the upper Midwest and Florida, and a challenging credit
environment. Credit trends began to show signs of stabilization in
the fourth quarter of 2009 and, as a result, the provision for loan
and lease losses decreased to $3.5 billion for the year ended
December 31, 2009 compared to $4.6 billion during 2008. Net
charge-offs as a percent of average loans and leases remained
steady at 3.20% in 2009 compared to 3.23% in 2008. At
December 31, 2009, nonperforming assets as a percent of loans,
leases and other assets, including other real estate owned
(excluding nonaccrual loans held for sale) increased to 4.22%
from 2.38% at December 31, 2008. Refer to the Credit Risk
Management section in Management’s Discussion and Analysis
for more information on credit quality.
The Bancorp continued to take actions to strengthen its
capital position in 2009. On June 4, 2009, the Bancorp completed
an at-the-market offering resulting in the sale of $1 billion of its
common shares at an average share price of $6.33. In addition, on
June 17, 2009, the Bancorp completed its offer to exchange shares
of its common stock and cash for shares of its Series G
convertible preferred stock. As a result, the Bancorp recognized
an increase in net income available to common shareholders of
$35 million based upon the difference in carrying value of the
Series G preferred shares and the fair value of the common shares
and cash issued. See the Capital Management section of
Management’s Discussion and Analysis for further information on
the Bancorp’s capital transactions.
The Bancorp’s capital ratios exceed the “well-capitalized”
guidelines as defined by the Board of Governors of the Federal
Reserve System (FRB). As of December 31, 2009, the Tier 1
capital ratio was 13.31%, the Tier 1 leverage ratio was 12.43% and
the total risk-based capital ratio was 17.48%.