Fifth Third Bank 2009 Annual Report Download - page 40

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
38 Fifth Third Bancorp
continued to be primarily associated with commercial home builder
and developer loans and consumer residential real estate loans, and
was disproportionately concentrated in Michigan and Florida. In
aggregate, Florida and Michigan represented approximately 53% of
total losses during the quarter but only 27% of total loans and
leases. Commercial net charge-offs were $468 million in the fourth
quarter of 2009, a decrease of $32 million from the third quarter of
2009 and a decrease of $159 million from the fourth quarter of
2008 excluding the loans that were sold or transferred to held-for-
sale. Results from the fourth quarter of 2008 include net charge-
offs of $800 million on commercial loans that were either sold or
transferred to held-for-sale during that quarter. The provision for
loan and lease losses totaled $776 million in the fourth quarter of
2009, exceeding net charge-offs by $68 million. In comparison, the
provision for loan and lease losses totaled $952 million in the third
quarter of 2009, exceeding net charge-offs by $196 million, and
totaled $2.4 billion in the fourth quarter of 2008, which exceeded
net charge-offs by $729 million.
COMPARISON OF THE YEAR ENDED 2008 WITH 2007
Net loss available to common shareholders for the year ended 2008
was $2.2 billion, or $3.91 per diluted share, compared to net
income available to common shareholders of $1.1 billion, or $1.98
per diluted share, in 2007. Overall, increases in net interest income
and fee revenue were offset by an increase in the provision for loan
and lease losses of $3.9 billion over 2007 coupled with a goodwill
impairment charge of $965 million. This increase in provision
expense reflected the significant decline in general economic
conditions in 2008, specifically in the Bancorp’s key lending
markets, which led to an increase in impaired commercial loans,
higher losses, increased estimated loss factors due to negative
trends in overall delinquencies, and increased loss estimates once a
loan becomes delinquent as a result of the deterioration in real
estate collateral values. The goodwill impairment charge reflected a
decline in estimated fair values of two of the Bancorp’s business
reporting units below their carrying values and the determination
that the implied fair values of the reporting units were less than
their carrying values.
Net interest income (FTE) increased 17% compared to 2007.
Net interest margin increased to 3.54% in 2008 from 3.36% in
2007. The increase in 2008 was driven by the positive impact from
the accretion of the discounts on acquired loans, primarily from the
acquisition of First Charter, which increased net interest margin
approximately 34 bp, partially offset by a reduction to interest
income on commercial leases as a result of the recalculation of cash
flows on certain leveraged leases, as well as an increase in
nonperforming loans.
Noninterest income increased 19% compared to 2007. This
was driven in part by a $273 million gain from the redemption of a
portion of the Bancorp’s ownership interest in Visa, Inc., partially
offset by $104 million in OTTI charges on FNMA and FHLMC
preferred stock and certain bank trust preferred securities. Growth
occurred in several categories compared to 2007. Card and
processing revenue increased 11% due to higher transaction
volumes. Service charges on deposits grew 11% due to decreased
earnings credits and higher customer activity. Corporate banking
revenue increased 21% as the Bancorp realized growth from the
buildout of its suite of commercial products in 2007. Mortgage
banking net revenue increased 50% due to higher sales margins,
increased volume of portfolio loans sold and the impact of a newly
adopted U.S. GAAP accounting standard in 2008.
Noninterest expense increased $1.3 billion, or 38% compared
to 2007. Noninterest expense in 2008 included the previously
mentioned goodwill impairment charge of $965 million and an
additional $65 million in mortgage origination costs from the
adoption of newly issued U.S. GAAP accounting guidance, partially
offset by $99 million in net reductions related to Visa litigation
reserves and Visa’s funding of an escrow account. Noninterest
expense in 2007 included charges of $172 million related to the
indemnification of estimated current and future Visa litigation
settlements. Excluding these items, noninterest expense increased
16% due to volume-related processing expenses, higher FDIC
insurance, increased provision for unfunded commitments and
higher loan and lease expense.
In 2008, net charge-offs as a percent of average loans and
leases were 323 bp compared to 61 bp in 2007. This increase was
impacted by commercial loan net charge-offs as homebuilders,
developers and related suppliers were affected by the downturn in
the real estate markets. In addition, residential mortgage charge-
offs increased to $243 million in 2008, compared to $43 million in
2007, reflecting increased foreclosure rates in the Bancorp’s key
lending markets. At December 31, 2008, nonperforming assets as a
percent of loans and leases increased to 2.96% from 1.32% at
December 31, 2007. The Bancorp increased its allowance for loan
and lease losses as percent of loans and leases from 1.17% as of
December 31, 2007 to 3.31% as of December 31, 2008.
During 2007, the Bancorp completed its acquisition of R-G
Crown Bank (“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, in 2007 the
Bancorp announced its introduction into the North Carolina
markets of Charlotte and Raleigh with an agreement to acquire
First Charter Corporation ("First Charter") and completed the
acquisition on June 6, 2008, adding approximately $4.8 billion in
assets and $3.2 billion in deposits.