Fifth Third Bank 2010 Annual Report Download - page 43

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 41
FOURTH QUARTER REVIEW
The Bancorp’s 2010 fourth quarter net income available to
common shareholders was $270 million, or $0.33 per diluted
share, compared to net income available to common shareholders
of $175 million, or $0.22 per diluted share, for the third quarter of
2010 and a net loss available to common shareholders of $160
million, or $0.20 per diluted share, for the fourth quarter of 2009.
Fourth quarter 2010 earnings included the impact of a $17 million
charge related to the early extinguishment of $1.0 billion in FHLB
borrowings as well as $21 million in net investment securities
gains. Third quarter 2010 results included a $127 million benefit,
net of expenses, from the settlement of litigation associated with
one of the Bancorp’s BOLI policies. Fourth quarter 2009 earnings
were impacted by the benefit of a $20 million pre-tax, mark-to-
market adjustment on warrants related to the Processing Business
Sale, offset by a $22 million pre-tax litigation reserve for litigation
associated with a bank card association membership. Provision
expense was $166 million in the fourth quarter of 2010, down
from $457 million in the third quarter of 2010 and $776 million in
the fourth quarter of 2009. Both the sequential decrease and the
decline from the fourth quarter of 2009 reflect improved credit
trends, as evidenced by a decrease in net charge-offs and
improvements in nonperforming assets and delinquent loans. The
allowance to loan and lease ratio was 3.88% as of December 31,
2010, compared to 4.20% as of September 30, 2010 and 4.88% as
of December 31, 2009.
Fourth quarter 2010 net interest income of $919 million
increased $3 million from the third quarter of 2010 and increased
$37 million from the same period a year ago. Net interest income
was affected by the loan and deposit discount accretion related to
the acquisition of First Charter in the second quarter of 2008,
which resulted in increases to net interest income of $15 million in
the fourth quarter 2010, $14 million in the third quarter 2010 and
$23 million in the fourth quarter of 2009. Excluding these
benefits, net interest income increased $2 million from the third
quarter of 2010 and increased $45 million from the fourth quarter
of 2009. The increase from the fourth quarter of 2009 was driven
by a 20 bp increase in the net interest margin, largely the result of
a mix shift from higher cost term deposits to lower cost deposit
products throughout 2010.
Noninterest income decreased $171 million compared to the
third quarter of 2010 and increased $5 million compared to the
fourth quarter of 2009. The sequential decline was driven by a
$152 million benefit from the settlement of litigation related to
one of the Bancorp’s BOLI policies in the third quarter of 2010,
as well as a 36% decrease in mortgage banking net revenue,
partially offset by an increase in corporate banking revenue.
Compared to the fourth quarter of 2009, increases in corporate
banking revenue, mortgage banking net revenue, investment
advisory revenue and card and processing revenue were largely
offset by a decrease in service charges on deposits and a $28
million decline in TSA revenue related to the Processing Business
Sale. The fourth quarter of 2010 included a benefit of $3 million
in mark-to-market adjustments on warrants and put options
related to the Processing Business Sale, compared to a negative $5
million adjustment in the third quarter of 2010 and a $20 million
benefit in the fourth quarter of 2009.
Mortgage banking net revenue was $149 million in the fourth
quarter of 2010, compared to $232 million in the third quarter of
2010 and $132 million in the fourth quarter of 2009. Fourth
quarter originations were $7.4 billion, compared to $5.6 billion in
the previous quarter and $4.8 billion in the same quarter last year.
These originations resulted in gains on mortgage loan sales activity
of $158 million in the fourth quarter of 2010, compared to $173
million in the third quarter of 2010 and $97 million in the fourth
quarter of 2009. Gain on sale margins declined compared to
record levels in the third quarter of 2010 due to rising mortgage
interest rates in the fourth quarter of 2010 but increased
compared to the fourth quarter of 2009 due to declining mortgage
interest rates in the fourth quarter of 2010 compared with the
fourth quarter of 2009. Also impacting mortgage banking net
revenue was net valuation adjustments on MSRs and MSR
derivatives. In the fourth quarter of 2010, losses on the Bancorp’s
free-standing MSR derivatives exceeded impairment reversal
recorded against the hedged MSRs. By comparison, in both the
third quarter of 2010 and the fourth quarter of 2009, gains on the
MSR derivatives exceeded impairment losses recognized against
the hedged MSRs. These factors led to a net loss of $20 million on
the net valuation adjustments on MSRs in the fourth quarter of
2010, compared to net gains of $46 million and $9 million in the
third quarter of 2010 and the fourth quarter of 2009, respectively.
A net gain on non-qualifying hedges on mortgage servicing rights
of $14 million in the fourth quarter of 2010 was included in
noninterest income within the Consolidated Statements of
Income, but shown separate from mortgage banking net revenue.
Net gains on non-qualifying hedges on mortgage servicing rights
were immaterial in both the third quarter of 2010 and the fourth
quarter of 2009.
Service charges on deposits of $140 million decreased three
percent sequentially and decreased 12% compared to the fourth
quarter of 2009. Retail service charges declined nine percent from
the third quarter of 2010 and 26% from a year ago, largely driven
by the impact of Regulation E. Commercial service charges
increased three percent sequentially and two percent from the
same quarter last year due to an increase in fees for treasury
management services.
Corporate banking revenue of $103 million increased $17
million, or 21%, from the previous quarter and increased $14
million, or 16%, from the fourth quarter of 2009. The sequential
increase was driven primarily by higher loan syndication fee
revenue and lease remarketing fees, as well as growth in business
lending fees and foreign exchange revenue due primarily to higher
loan volumes. Compared to the fourth quarter of 2009, increased
loan syndication and lease remarketing fees, as well as revenue
from interest rate derivative sales and business lending fees, more
than offset a decline in institutional sales.
Investment advisory revenue of $93 million increased four
percent sequentially and eight percent from the fourth quarter of
2009. The sequential growth was driven by higher private client
service revenue, institutional trust revenue and brokerage fees due
to market value increases and improved sales production resulting
in improved net asset and account growth. Including the
previously mentioned impacts, the increase from the fourth
quarter of 2009 also reflected an overall increase in equity and
bond market values.
Card and processing revenue of $81 million increased five
percent compared to the third quarter of 2010 and increased
seven percent from the fourth quarter of 2009. Both increases
were driven by higher transaction volumes.
The net gain on investment securities was $21 million in the
fourth quarter of 2010 compared to a net gain of $4 million in the
third quarter of 2010 and a net gain of $2 million in the fourth
quarter of 2009.
Noninterest expense of $987 million increased $8 million
sequentially and increased $20 million from the fourth quarter of
2009. Fourth quarter 2010 results included $17 million of
expenses related to the early termination of $1.0 billion in FHLB
borrowings as well as $11 million of expenses related to the TSA.
Third quarter 2010 results included $25 million in legal expenses
associated with the settlement of litigation associated with one of
the Bancorp’s BOLI policies and $13 million of expenses related
to the TSA, while fourth quarter 2009 included a $22 million
reserve established for litigation associated with bank card