Fifth Third Bank 2009 Annual Report Download - page 35

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 33
Commercial Banking
Commercial Banking offers banking, cash management and
financial services to large and middle-market businesses,
government and professional customers. In addition to the
traditional lending and depository offerings, Commercial Banking
products and services include, among others, foreign exchange
and international trade finance, derivatives and capital markets
services, asset-based lending, real estate finance, public finance,
commercial leasing and syndicated finance. Table 14 contains
selected financial data for the Commercial Banking segment.
Comparison of 2009 with 2008
Commercial Banking incurred a net loss of $120 million compared
to a net loss of $733 million in 2008. This improvement was
primarily due to a $750 million goodwill impairment charge taken
in 2008 and a decrease in provision for loan and lease losses of
$504 million. The net loss in 2009 was driven by continued high
levels of provision for loan and lease losses. Net interest income
decreased $184 million or 12% driven by a $144 million decrease
in the accretion of discounts on loans and deposits associated with
the acquisition of First Charter in the second quarter of 2008. In
addition, a decrease in average commercial loans combined with
increases in average core deposits and higher priced certificates
$100,000 and over and other time deposits from 2008 negatively
impacted net interest income. Average commercial loans and
leases decreased $1.9 billion, or four percent, compared to the
prior year and included decreases of $1.2 billion and $267 million
in commercial construction and commercial mortgages,
respectively. The overall decrease in commercial loans and leases
is due to lower utilization rates on corporate lines, net charge-offs
and tighter lending standards that were implemented throughout
the second half of 2008 and continued throughout 2009.
Average core deposits increased 10% compared to 2008 as
the Commercial Banking segment experienced growth in both
demand deposits and interest checking accounts partially offset by
a decline in savings accounts. Commercial customers opted to
shift money out of savings and money market accounts into
demand deposits and interest checking accounts due to increased
attractiveness as a result of protection through FDIC insurance of
demand deposit and interest checking accounts and a lower
economic benefit from sweeping balances into interest-bearing
vehicles. As a participant in the TLGP program the Bancorp
opted into the Transaction Account Guarantee (TAG) program
which provides commercial customers unlimited FDIC insurance
on demand deposit accounts in addition to other qualifying
transactional accounts. Commercial customers also increased
balances in certificates $100,000 and over and other time deposits
as a result of certificates purchased in the second half of 2008 that
matured at the end of 2009. Provision expense declined from $1.9
billion in 2008 to $1.4 billion in 2009 primarily due to a decrease
in net charge-offs as net charge-offs as a percent of average loans
and leases decreased to 329 bp in 2009. Net charge-offs decreased
in comparison to prior year primarily due to $800 million of
charge-offs incurred in the fourth quarter of 2008 when the
Bancorp sold or transferred to held-for-sale $1.3 billion in
commercial loans and commercial mortgage loans. Economic
conditions continued to weaken throughout 2009 and the
continuing deterioration of credit within the Bancorp’s footprint,
particularly in Michigan and Florida, continued to cause high
amounts of charge-offs throughout 2009.
Noninterest income declined $69 million or 10% from 2008
due to a $57 million decrease in corporate banking revenue and a
$22 million decline of other noninterest income, partially offset by
an increase in service charges on deposits of $10 million.
Corporate banking revenue decreased from the prior year
primarily due to a decline of $30 million in international income
and a decline of $28 million on derivative fee income. Other
noninterest income decreased from the prior year due to valuation
write-downs on loans held for sale of $52 million partially offset
by a net gain of $24 million on loan and OREO sales. Deposit fee
income increased from the prior year due to a reduction of
business service discounts provided to customers.
Noninterest expense decreased $679 million compared to
2008 primarily due to goodwill impairment of $750 million taken
in 2008. Excluding the goodwill impairment charge, noninterest
expense increased $71 million from 2008 due to increases in
FDIC expenses of $52 million, loan and lease expenses of $26
million and $20 million in other losses and adjustments primarily
due to realized credit losses on derivatives, partially offset by a
decrease in salary and benefit expense of $22 million.
Comparison of 2008 with 2007
Commercial Banking incurred a net loss of $733 million in 2008
compared to net income of $714 million in 2007 as growth in net
interest income and corporate banking revenue was more than
offset by increased provision for loan and lease losses and a
goodwill impairment charge. Net interest income increased $255
million compared to 2007, primarily due to accretion of loan
discounts on acquired loans which contributed $204 million to net
interest income in 2008. Average commercial loans and leases
increased 21% to $43.2 billion due to acquisition activity and the
purchase of assets from an unconsolidated QSPE under a liquidity
asset purchase agreement with the Bancorp.
Provision expense increased $1.7 billion in 2008 as a result of
an increase in net charge-offs. Net charge-offs as a percent of
average loans and leases increased to 435 bp from 36 bp in 2007
due to weakening economic conditions and the continuing
deterioration of credit within the Bancorp’s footprint, particularly
in Michigan and Florida. Additionally, net charge-offs were
impacted by $800 million in net charge-offs resulting from the sale
or transfer to held-for-sale of $1.3 billion in commercial loans and
commercial mortgage loans in the fourth quarter of 2008.
Noninterest income increased $101 million compared to
2007 due to corporate banking revenue growth of $70 million and
increased service charges on deposits of $34 million.
Noninterest expense increased $873 million compared to
2007 primarily due to goodwill impairment of $750 million in
2008 as well as sales incentives, which increased 21% to $105
million and growth in loan expenses of $33 million, to $64 million
in 2008.
TABLE 14: COMMERCIAL BANKING
For the years ended December 31
($ in millions) 2009 2008 2007
Income Statement Data
Net interest income (FTE) (a) $1,383 1,567 1,312
Provision for loan and lease losses 1,360 1,864 127
Noninterest income:
Corporate banking revenue 357 414 344
Service charges on deposits 196 186 152
Other noninterest income 56 78 81
Noninterest expense:
Salaries, incentives and benefits 221 243 255
Goodwill impairment - 750 -
Other noninterest expense 768 675 540
Income (loss) before taxes (357) (1,287) 967
Applicable income tax expense
(benefit) (237) (554) 253
Net income (loss) ($120) (733) 714
Average Balance Sheet Data
Commercial loans $41,341 43,198 35,696
Demand deposits 8,581 6,206 5,944
Interest checking 6,018 4,632 4,107
Savings and money market 2,457 4,046 4,462
Certificates $100,000 and over and other
time 4,376 2,293 1,855
Foreign office deposits 1,275 1,835 1,486
(a) Includ
e
s taxable equivalent adjustments of $13 million for 2009, $15 million for 2008,
and $14 million for 2007.