Fifth Third Bank 2011 Annual Report Download - page 48

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
46 Fifth Third Bancorp
million in the third quarter of 2011 and $173 million in the fourth
quarter of 2010. Consumer net charge-offs were $126 million in the
fourth quarter and third quarter of 2011 and $183 million in the
fourth quarter of 2010.
COMPARISON OF THE YEAR ENDED 2010 WITH 2009
Net income available to common shareholders for the year ended
December 31, 2010 was $503 million, or $0.63 per diluted share,
compared to net income available to common shareholders of $511
million, or $0.67 per diluted share, in 2009. Overall, $152 million of
noninterest income from the settlement of litigation associated with
one of the Bancorp’s BOLI policies as well as an increase in
mortgage banking net revenue and a decrease in the provision for
loan and lease losses of $2.0 billion compared to 2009, were partially
offset by decreases in noninterest income and card and processing
revenue as well as $110 million of noninterest expense from charges
to representation and warranty reserves related to residential
mortgage loans sold to third parties. Results for 2009 also included a
$106 million tax benefit as a result of the Bancorp’s decision to
surrender one of its BOLI policies and a $55 million income tax
benefit from an agreement with the IRS to settle all of the
Bancorp’s disputed leverage leases for all open years. These benefits
were partially offset by a $54 million BOLI charge reflecting
reserves recorded in the connection with the intent to surrender the
policy. While the Bancorp continued to be affected by rising
unemployment rates, weakened housing markets, particularly in the
upper Midwest and Florida, and a challenging credit environment,
credit trends began to show signs of stabilization in late 2009, which
led to the decrease in provision expense from $3.5 billion at
December 31, 2009 to $1.5 billion at December 31, 2010.
Net interest income increased to $3.6 billion, from $3.4 billion
in 2009. The primary reason for the seven percent increase in net
interest income was a 39 bps increase in the net interest rate spread
due to the runoff of higher priced term deposits in 2010 and the
benefit of lower rates offered on new term deposits, as well as
improved pricing on commercial loans. These benefits were partially
offset by a decrease in the accretion of purchase accounting
adjustments related to the 2008 acquisition of First Charter, which
were $68 million in 2010, compared to $136 million in 2009. Net
interest margin was 3.66% in 2010, an increase of 34 bps from 2009.
Noninterest income decreased 43% to $2.7 billion in 2010
compared to $4.8 billion in 2009, driven primarily by the sale of the
processing business in the second quarter of 2009, which resulted in
a gain of $1.8 billion, as well as a $244 million gain related to the sale
of the Bancorp’s Visa, Inc. Class B shares in 2009. Mortgage
banking net revenue increased $94 million as a result of strong net
servicing revenue and higher margins on sold loans, partially offset
by a decline in mortgage originations. Card and processing revenue
decreased 49% due to the sale of the processing business in the
second quarter of 2009. Service charges on deposits decreased $58
million primarily due to the impact of new overdraft regulation and
policies which resulted in a decrease in overdraft occurrences.
Investment advisory revenue increased $35 million as the result of
improved market performance and sales production that drove an
increase in brokerage activity and assets under care. Corporate
banking revenue decreased two percent largely due to decreases in
international income and lease remarketing fees, partially offset by
growth in syndication and business lending fees.
Noninterest expense increased $29 million, or one percent,
compared to 2009. Noninterest expense in 2010 included $25
million in legal fees associated with the settlement of claims with the
insurance carrier on one of the Bancorp’s BOLI policies while
noninterest expense in 2009 included a $73 million reduction in the
Visa litigation reserve as well as a $55 million FDIC special
assessment charge. Total personnel costs increased $94 million, or
six percent in 2010 compared to 2009, due primarily to investments
in the sales force in 2010. In addition, charges to representation and
warranty reserves related to residential mortgage loans sold to third-
parties totaled $110 million in 2010, compared to $31 million in
2009 due to a higher volume of repurchase demands. Partially
offsetting these negative impacts was a $123 million decrease in the
provision for unfunded commitments and letters of credit due to
lower estimates of inherent losses as the result of a decrease in
delinquent loans driven by moderation in economic conditions
during 2010. In addition, card and processing expense decreased
$85 million compared to 2009 due to the sale of the processing
business in the second quarter of 2009. Noninterest expense in 2010
and 2009 included $242 million and $269 million, respectively, of
FDIC insurance and other taxes.
Net charge-offs as a percent of average loans and leases
decreased to 3.02% in 2010 compared to 3.20% in 2009. In the
third quarter of 2010, the Bancorp took significant actions to reduce
credit risk. Residential mortgage loans in the Bancorp’s portfolio
with a carrying value of $228 million were sold for $105 million,
generating $123 million in net charge-offs. Additionally, commercial
loans with a carrying value prior to transfer of $961 million were
transferred to held-for-sale, generating $387 million in net charge-
offs. Including the impact of these actions, nonperforming assets as
a percent of loans, leases and other assets, including other real estate
owned (excluding nonaccrual loans held for sale) decreased to
2.79% at December 31, 2010, from 4.22% at December 31, 2009.
The Bancorp took a number of actions to strengthen its capital
position in 2009. On June 4, 2009, the Bancorp completed an at-
the-market offering resulting in the sale of $1 billion of its common
shares at an average share price of $6.33. In addition, on June 17,
2009, the Bancorp completed its offer to exchange shares of its
common stock and cash for shares of its Series G convertible
preferred stock. As a result, the Bancorp recognized an increase in
net income available to common shareholders of $35 million based
upon the difference in carrying value of the Series G preferred
shares and the fair value of the common shares and cash issued.