Fifth Third Bank 2009 Annual Report Download - page 39

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 37
FOURTH QUARTER REVIEW
The Bancorp’s 2009 fourth quarter net loss available to common
shareholders was $160 million, or $0.20 per diluted share,
compared to a net loss available to common shareholders of $159
million, or $0.20 per diluted share, for the third quarter of 2009 and
a net loss available to common shareholders of $2.2 billion, or
$3.78 per diluted share, for the fourth quarter of 2008. Fourth
quarter 2009 earnings included the benefit of a $20 million pre-tax,
mark-to-market adjustment on warrants related to the Processing
Business Sale, recorded in other noninterest income, offset by a
$22 million pre-tax litigation reserve recorded in other noninterest
expense for litigation associated with a bank card association
membership. Third quarter 2009 results included a pre-tax benefit
of $317 million from the sale of the Bancorp’s Visa, Inc. Class B
common shares and the release of related Visa litigation reserves.
Fourth quarter 2008 earnings were impacted by a $965 million
goodwill impairment charge, a $40 million OTTI charge on certain
securities and a $34 million charge to lower the cash surrender
value of a BOLI policy. Provision expense was $776 million in the
fourth quarter of 2009, down from $952 million in the third
quarter of 2009 and $2.4 billion in the fourth quarter of 2008. The
decline from the third quarter of 2009 is reflective of a slight
improvement in credit trends as evidenced by a decline in net
charge-offs. Provision expense in the fourth quarter of 2008
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 and recognized net charge-offs
of $800 million. The allowance to loan and lease ratio was 4.88% as
of December 31, 2009, compared to 4.69% as of September 30,
2009 and 3.31% as of December 31, 2008.
Fourth quarter 2009 net interest income (FTE) of $882
million increased $8 million from the third quarter of 2009 and
decreased $15 million from the same period a year ago. Net interest
income was affected by the loan discount accretion related to the
second quarter of 2008 acquisition of First Charter which resulted
in increases to net interest income of $23 million in the fourth
quarter 2009, $27 million in the third quarter, and $81 million in
the fourth quarter of 2008. Excluding these benefits, net interest
income increased $12 million from the third quarter of 2009 and
increased $43 million from the fourth quarter of 2008. Both the
sequential and year-over-year increases were largely driven by the
runoff of higher cost term deposits throughout the year.
Noninterest income, excluding securities gains and losses of
$649 million, decreased $194 million compared to the third quarter
of 2009 and decreased $33 million compared to the fourth quarter
of 2008. Fourth quarter 2009 results included a benefit of $20
million in mark-to-market adjustments on warrants related to the
Processing Business Sale while third quarter results included a $244
million gain from the sale of the Bancorp’s Visa, Inc. Class B
shares. The decrease from the fourth quarter of 2008 was driven by
a decrease in card and processing revenue due to the Processing
Businesses Sale in the second quarter of 2009 and a decline in
corporate banking revenue, partially offset by strong mortgage
banking net revenue. The fourth quarter of 2008 also included a
$34 million charge to reduce the cash surrender value of one of the
Bancorp’s BOLI policies.
Service charges on deposits of $159 million decreased three
percent sequentially and decreased two percent compared with the
fourth quarter of 2008. Retail service charges declined six percent
from the third quarter of 2009 and three percent from a year ago,
largely driven by a reduction in NSF fees due to changes in
overdraft policies. Commercial service charges increased one
percent from the third quarter of 2009 and decreased one percent
from the same quarter last year.
Mortgage banking net revenue was $132 million in the fourth
quarter of 2009, compared to $140 million in the third quarter of
2009 and a net loss of $29 million in the fourth quarter of 2008.
Fourth quarter originations were $4.8 billion, compared to $4.6
billion from the previous quarter and $2.1 billion from the same
quarter last year. These originations resulted in gains on mortgage
loan sales activity of $97 million in the fourth quarter of 2009,
compared to $96 million in the third quarter of 2009 and $45
million in the fourth quarter of 2008. Including net securities gains
on non-qualifying hedges on mortgage servicing rights, mortgage
banking net revenue in the fourth quarter of 2009 decreased $8
million compared to the third quarter of 2009 and increased $65
million compared to the fourth quarter of 2008.
Corporate banking revenue of $98 million increased by $12
million, or 15%, from the previous quarter and decreased $23
million, or 19%, on a year-over-year basis. The sequential increase
was driven primarily by growth in institutional sales, interest rate
derivative sales revenue and business lending fees, partially offset
by a decline in foreign exchange revenue. On a year-over-year
basis, lower foreign exchange and interest rate derivative sales
revenue more than offset growth in institutional sales and business
lending fees.
Investment advisory revenue of $77 million increased four
percent sequentially and decreased two percent from the fourth
quarter of 2008. The sequential growth was driven by increases in
institutional trust revenue, brokerage fees and private client
revenue, partially offset by a 14% decline in mutual fund fees due
to lower mutual fund balances. Compared to the fourth quarter of
2008, institutional trust revenue and private client service revenue
increased 13% and five percent, respectively, but were more than
offset by declines in mutual fund fees of 27% and brokerage fees
of seven percent.
Card and processing revenue of $76 million increased three
percent compared to the third quarter of 2009 and decreased 67%
from the fourth quarter of 2008 as a result of the Processing
Business Sale in the second quarter of 2009. As part of the
transaction, the Bancorp retained certain debit and credit card
interchange revenue and sold the financial institutions and
merchant processing portions of the business, which historically
comprised approximately 70% of total card and processing
revenue. Card issuer interchange revenue increased five percent
sequentially and 12% year-over-year, due to strong growth in debit
card transaction volumes, partially offset by lower credit card
usage.
The net gains on investment securities was $2 million in the
fourth quarter of 2009 compared to a net gain of $8 million in the
third quarter of 2009 and a net loss of $40 million in the fourth
quarter of 2008. The fourth quarter of 2008 loss was driven by an
OTTI charge of $40 million on certain securities.
Noninterest expense of $967 million increased $91 million
sequentially and decreased $1.1 billion from the fourth quarter of
2008. Fourth quarter 2009 results included a $22 million reserve
established for litigation related to bank card association
memberships. Third quarter 2009 results include the Visa litigation
reserve reversal of $73 million and $10 million of seasonal pension
settlement expense. Excluding these items, noninterest expense
increased $6 million driven by higher FDIC insurance premiums,
partially offset by a decrease in the provision for unfunded
commitments. The decrease in noninterest expense from a year ago
was driven by a $965 million charge to record goodwill impairment
in the fourth quarter of 2008. Excluding these charges, noninterest
expense decreased $112 million from a year ago, driven primarily
by a decrease in processing expenses from the Processing Business
Sale, as well as a decrease in the provision for unfunded
commitments, partially offset by higher FDIC insurance premiums.
Net charge-offs totaled $708 million in the fourth quarter of
2009, compared to $756 million in the third quarter of 2009 and
$1.6 billion in the fourth quarter of 2008. Loss experience