Fifth Third Bank 2009 Annual Report Download - page 28

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
26 Fifth Third Bancorp
STATEMENTS OF INCOME ANALYSIS
Net Interest Income
Net interest income is the interest earned on debt securities, loans
and leases (including yield-related fees) and other interest-earning
assets less the interest paid for core deposits (includes transaction
deposits and other time deposits) and wholesale funding (includes
certificates $100,000 and over, other deposits, federal funds
purchased, short-term borrowings and long-term debt). The net
interest margin is calculated by dividing net interest income by
average interest-earning assets. Net interest rate spread is the
difference between the average rate earned on interest-earning
assets and the average rate paid on interest-bearing liabilities. Net
interest margin is typically greater than net interest rate spread due
to the interest income earned on those assets that are funded by
non-interest-bearing liabilities, on free-funding, such as demand
deposits or shareholders’ equity.
Table 5 presents the components of net interest income, net
interest margin and net interest spread for 2009, 2008 and 2007.
Nonaccrual loans and leases and loans held for sale have been
included in the average loan and lease balances. Average
outstanding securities balances are based on amortized cost with
any unrealized gains or losses on available-for-sale securities
included in other assets. Table 6 provides the relative impact of
changes in the balance sheet and changes in interest rates on net
interest income.
Net interest income (FTE) was $3.4 billion for the year
ended December 31, 2009, compared to $3.5 billion in 2008. Net
interest income was affected by the amortization and accretion of
premiums and discounts on acquired loans and deposits, primarily
from the First Charter Acquisition, that increased net interest
income by $136 million during 2009, compared to an increase of
$358 million during 2008. Additionally, 2008 was impacted by the
recalculation of cash flows on certain leveraged leases that
reduced interest income on commercial leases by approximately
$130 million. Excluding these impacts, net interest income
decreased $71 million, or two percent, in 2009 compared to 2008.
Net interest income was negatively impacted by the decline in
market interest rates over the year as the Bancorp’s assets have
repriced faster than its liabilities. The net interest rate spread was
down 21 bp to 3.00% in 2009, which led to a decline in net
interest income of $284 million compared to 2008. Partially
offsetting the negative impact of declining market rates were
improved pricing spreads on loan originations as well as a shift in
funding composition to lower cost core deposits, as higher priced
term deposits issued in the second half of 2008 continued to
mature throughout 2009. For the year ended December 31, 2009,
net interest income was further impacted by an increase of $1.6
billion in average interest-earning assets and a decline of $5.0
billion in average interest-bearing liabilities driven by growth in
the Bancorp’s free-funding position. This led to an increase of
$121 million in net interest income.
Net interest margin was 3.32% in 2009, compared to 3.54%
in 2008. For 2009 and 2008, the accretion of the discounts on
acquired loans and deposits increased the net interest margin by
14 bp and 36 bp, respectively. Additionally, 2008 included the
negative impact of the leveraged lease charge that reduced the net
interest margin by 13 bp. Exclusive of the accretion of discounts
on acquired loans and deposits and the leveraged lease charge, net
interest margin was down 13 bp on a year-over-year basis due to
the previously mentioned decline in net interest rate spread and
the growth in average interest earning assets.
Average interest-earning assets increased 2% from 2008
primarily due to an increase in the average investment portfolio,
partially offset by decreases in average commercial loans. The
increase in the average investment portfolio of $4.1 billion, or
29%, over 2008 was due to an increase in purchases of agency
mortgage-backed securities and automobile asset-backed
securities, the purchase of investment grade commercial paper
from an unconsolidated qualifying special purpose entity (QSPE)
and an increase in VRDNs held in the Bancorp’s trading portfolio.
The decrease in average total commercial loans of five percent
was due primarily to the decrease in commercial construction
loans as a result of the suspension of new originations on non-
owner occupied commercial real estate loans in the second quarter
of 2008. Additionally, the decrease in commercial loans and
commercial mortgage loans was due to decreases in line
utilization, overall customer demand for commercial loan
products, net charge-offs as well as implementation of tighter
underwriting standards.
Interest income (FTE) from loans and leases decreased $1.0
billion compared to 2008. Exclusive of the accretion of discounts
on acquired loans in 2009 and 2008 and the leveraged lease charge
during 2008, interest income (FTE) from loans and leases
decreased $925 million, or 20%, compared to the prior year. The
year-over-year decrease in interest income from loans and leases is
a result of a three percent decline in average loans as well as the
repricing of variable rate loans in a declining rate environment,
which led to a 104 bp decrease in average rates. Interest income
(FTE) from investment securities and short-term investments
increased nine percent compared to 2008. The increase in interest
income from investment securities was a result of the 29%
increase in the average investment portfolio partially offset by a 77
bp decrease in the weighted-average yield.
TABLE 4: CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ in millions, except per share data) 2009 2008 2007 2006 2005
Interest income (FTE) $4,687 5,630 6,051 5,981 5,026
Interest expense 1,314 2,094 3,018 3,082 2,030
Net interest income (FTE) 3,373 3,536 3,033 2,899 2,996
Provision for loan and lease losses 3,543 4,560 628 343 330
Net interest income (loss) after provision for loan and lease losses (FTE) (170) (1,024) 2,405 2,556 2,666
Noninterest income 4,782 2,946 2,467 2,012 2,374
Noninterest expense 3,826 4,564 3,311 2,915 2,801
Income (loss) before income taxes and cumulative effect (FTE) 786 (2,642) 1,561 1,653 2,239
Fully taxable equivalent adjustment 19 22 24 26 31
A
pplicable income taxes 30 (551) 461 443 659
Income (loss) before cumulative effect 737 (2,113) 1,076 1,184 1,549
Cumulative effect of change in accounting principle, net of tax --- 4-
Net income (loss) 737 (2,113) 1,076 1,188 1,549
Dividends on preferred stock 226 67 1 - 1
Net income (loss) available to common shareholders $511 (2,180) 1,075 1,188 1,548
Earnings per share, basic $0.73 (3.91) 1.99 2.13 2.79
Earnings per share, diluted 0.67 (3.91) 1.98 2.12 2.77
Cash dividends declared per common share 0.04 0.75 1.70 1.58 1.46