Fifth Third Bank 2010 Annual Report Download - page 31

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 29
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, or 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 2010, 2009 and 2008.
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 was $3.6 billion for the year ended
December 31, 2010, compared to $3.4 billion in 2009. Net interest
income was affected by the amortization and accretion of
premiums and discounts on acquired loans and deposits, primarily
from the acquisition of First Charter that increased net interest
income by $68 million during 2010, compared to an increase of
$136 million during 2009. Excluding this impact, net interest
income increased $317 million, or 10%, in 2010 compared to
2009. The purchase accounting accretion reflects the high
discount rate in the market at the time of the acquisition; the total
loan discounts are being accreted into net interest income over the
remaining period to maturity of the loans acquired. Based upon
the remaining period to maturity, and excluding the impact of
prepayments, the Bancorp anticipates recognizing approximately
$41 million in additional net interest income during 2011 as a
result of the amortization and accretion of premiums and
discounts on acquired loans and deposits.
For the year ended December 31, 2010, net interest income
was positively impacted by a decrease of $5.6 billion in average
interest-bearing liabilities as well as a mix shift to lower cost core
deposits from 2009. This was primarily a result of runoff of higher
priced term deposits as well as the benefit of lower rates offered
on new term deposits. In addition, 2010 benefitted from a $3.2
billion increase in the free funding position. This benefit was
partially offset by a $2.6 billion decrease in average interest
earning assets from 2009. The shift in funding position, as well as
improved pricing on commercial loans, led to a 39 bp increase in
the net interest rate spread to 3.39% in 2010 compared to 2009.
Net interest margin was 3.66% in 2010, compared to 3.32%
in 2009. For 2010 and 2009, the accretion of the discounts on
acquired loans and deposits increased the net interest margin by 7
bp and 14 bp, respectively. Excluding the accretion of discounts
on acquired loans and deposits, net interest margin was up 41 bp
from 2009, driven by improved pricing on new commercial loan
originations, the shift in funding composition to lower cost core
deposits, an increase in free-funding balances and a decrease in
the average rates paid on interest bearing liabilities.
Average interest-earning assets decreased three percent from
2009. Average commercial loans decreased $3.9 billion due to
decreases across all commercial loan categories, and average
consumer loans decreased $239 million due primarily to decreases
in average residential mortgage, home equity and other consumer
loans and leases, partially offset by an increase in average
automobile loans. In addition, average investment securities
decreased $729 million, or four percent, compared to 2009. The
declines in average loans and investment securities were partially
offset by a $2.3 billion increase in average other short-term
investments, which includes interest bearing cash held at the
Federal Reserve. For further discussion on the Bancorp’s loan and
lease and investment securities portfolios, see the Loan and Lease
and Investment Securities sections, respectively, of MD&A.
Interest income from loans and leases decreased $112 million
compared to 2009. Excluding the accretion of discounts on
acquired loans in 2010 and 2009, interest income from loans and
leases decreased $46 million, or one percent, compared to the
prior year. The year-over-year decrease in interest income from
loans and leases is a result of a five percent decline in average
balances, partially offset by an 11 bp increase in the average yield.
Interest income from investment securities decreased nine percent
compared to 2009 due to a 68 bp decrease in the weighted-
average yield and a four percent decline in average balances.
Average interest-bearing core deposits increased $4.0 billion,
or eight percent, compared to 2009, primarily due to increased
interest checking, savings, money market and foreign office
deposits, partially offset by a decline in other time deposits. The
cost of interest-bearing core deposits was 0.83% in 2010; a
decrease of 45 bp from 2009. The decrease is a result of a mix
TABLE 4: CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ in millions, except per share data) 2010 2009 2008 2007 2006
Interest income (FTE) $4,507 4,687 5,630 6,051 5,981
Interest expense 885 1,314 2,094 3,018 3,082
Net interest income (FTE) 3,622 3,373 3,536 3,033 2,899
Provision for loan and lease losses 1,538 3,543 4,560 628 343
Net interest income (loss) after provision for loan and lease losses (FTE) 2,084 (170) (1,024) 2,405 2,556
Noninterest income 2,729 4,782 2,946 2,467 2,012
Noninterest expense 3,855 3,826 4,564 3,311 2,915
Income (loss) before income taxes and cumulative effect (FTE) 958 786 (2,642) 1,561 1,653
Fully taxable equivalent adjustment 18 19 22 24 26
A
pplicable income tax expense (benefit) 187 30 (551) 461 443
Income (loss) before cumulative effect 753 737 (2,113) 1,076 1,184
Cumulative effect of change in accounting principle, net of tax --- -4
Net income (loss) 753 737 (2,113) 1,076 1,188
Less: Net income attributable to noncontrolling interest --- --
Net income (loss) attributable to Bancorp 753 737 (2,113) 1,076 1,188
Dividends on preferred stock 250 226 67 1 -
Net income (loss) available to common shareholders $503 511 (2,180) 1,075 1,188
Earnings per share $0.63 0.73 (3.91) 1.99 2.13
Earnings per diluted share 0.63 0.67 (3.91) 1.98 2.12
Cash dividends declared per common share 0.04 0.04 0.75 1.70 1.58