Fifth Third Bank 2001 Annual Report Download - page 43

FIFTH THIRD BANCORP AND SUBSIDIARIES
41
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
compared to $40.4 thousand in 1997, a compounded annual growth
rate of 14% as the chart on page 39 illustrates. Employee benefits
expense increased 3% in 2001 resulting primarily from the increased
expense from retirement plans. Full-time-equivalent (FTE)
employees were 18,373 at December 31, 2001, down from a peak of
21,290 at December 31, 1999 and 20,468 at December 31, 2000.
Equipment expense decreased 3% in 2001 due to dispositions
related to the Old Kent acquisition, while the addition of ATMs
and software and processing technology upgrades led to an increase
of 1% in equipment expense in 2000. Net occupancy expenses
increased 6% in 2001 and 5% in 2000. Contributing to net
occupancy expense growth was the utilization of additional office
rental space to support growth and repairs and maintenance expense
to the existing branch network.
Volume-related expenses and higher loan and lease processing
costs from strong origination volumes in our processing and fee
businesses contributed to the increases in 2001 and 2000 other
operating expenses. Other operating expenses increased to $755.6
million in 2001, up $89.1 million or 13% over 2000 and increased
$16.8 million or 3% in 2000 over 1999. This increase was primarily
due to the increase in loan and lease expense, bankcard expense, and
marketing and communication expense. Loan and lease and bankcard
expense increased $54.7 million or 49% in 2001 and $10.9 million
or 11% in 2000 due to strong origination volumes. Marketing and
communications expense increased $6.9 million to $135.7 million in
2001 and increased $3.3 million in 2000, primarily due to the
continued promotion of the Bancorp’s diversified loan, investment
and deposit products.
Total operating expenses for 2001 and 2000 include pretax
merger-related charges of $348.6 million and $87.0 million,
respectively. For 2001, the merger charge relates directly to the
acquisition of Old Kent. These charges consist of employee severance
and benefit obligations, professional fees, costs to eliminate duplicate
facilities and equipment, conversion expenses and divestiture and
shutdown charges (including losses incurred on the sale of Old Kent’s
out-of-market mortgage operations and a loss incurred on the sale of
Old Kent’s subprime mortgage lending portfolio in order to align Old
Kent with the Bancorp’s asset/liability management policies). For
2000, the merger charge relates to Grand Premier, Merchants and
additional charges incurred in connection with the integration of
CNB. These charges consist primarily of employee severance and
benefit obligations, costs to eliminate duplicate facilities and
equipment, contract terminations, conversion expenses, professional
due to an increase in direct installment loan originations; cardholder
fees from the credit card portfolio provided $49.7 million, an
increase of 19% over 2000 due to an overall increase in credit card
accounts; and income from BOLI provided $52.2 million and
$43.2 million in 2001 and 2000, respectively. In addition, other
service charges and fees in 2001 included a gain of $42.7 million on
the sale of eleven branches in Arizona. Other service charges and
fees were $164.5 million in 2001, compared to $121.3 million in
2000, an increase of 36%.
The commercial banking revenue component of other service
charges and fees of $86.0 million in 2000 represented an increase of
28% over 1999 and resulted primarily from growth in international
department revenue. Consumer loan and lease fees decreased 15% to
$48.9 million in 2000, compared to $57.4 million in 1999 and
cardholder fees provided $41.8 million, up 1%. Other service charges
and fees were $121.3 million in 2000, compared to $111.6 million in
1999, an increase of 9%.
Operating Expenses
The Bancorp’s proven expense discipline continues to drive its
efficiency ratio to levels well below its peer group and the banking
industry through the consistent generation of revenue at a rate faster
than expenses. The Bancorp’s success in controlling operating expenses
comes from efficient staffing, a constant focus on process
improvement and centralization of various internal functions such as
data processing, loan servicing and corporate overhead functions.
Operating expense levels are often measured using an efficiency
ratio (operating expenses divided by the sum of taxable equivalent
net interest income and other operating income including securities
gains from the mortgage servicing rights non-qualifying hedging
program). As the chart on page 39 illustrates, the Bancorp’s ratio has
remained well below our peers, at 46.9% for 2001 and 48.5% for
2000. Total operating expenses increased 9% in 2001 and 3% in
2000, excluding merger-related charges of $348.6 million and $87.0
million, respectively. Salaries, wages and incentives comprised 42%
and 43% of total operating expenses, excluding merger-related
charges, in 2001 and 2000, respectively. Compensation increased
8% in 2001 and 3% in 2000 as a result of more variable
compensation for increased sales production, acquisitions and
additional personnel to support sales and volume-related business.
The Bancorp’s productivity ratios, which measure the degree of
efficiency of our employees, have shown improvement since 1997.
Operating earnings per employee were $71.8 thousand for 2001,
Reserve For Credit Losses Five Year History
($ in millions) 2001 2000 1999 1998 1997
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 609.3 572.9 532.2 509.2 483.6
Provision for credit losses. . . . . . . . . . . . . . . . . . . . . . . . 200.6 125.7 143.2 156.2 176.6
Merger-related provision for credit losses . . . . . . . . . . . . 35.4 12.0 26.2 20.2 —
Losses charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 308.6) ( 175.8) ( 209.3) ( 204.6) ( 196.5)
Recoveries of losses previously charged off . . . . . . . . . . . 81.5 67.1 67.7 54.9 48.8
Reserve of acquired institutions and other. . . . . . . . . . . . 5.9 7.4 12.9 ( 3.7) ( 3.3)
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . $ 624.1 609.3 572.9 532.2 509.2
Loans and leases outstanding at December 31 . . . . . . . . . $41,547.9 $42,530.4 $38,836.6 $34,115.4 $33,906.1
Reserve as a percent of loans and leases outstanding . . . . 1.50% 1.43% 1.48% 1.56% 1.50%
Average loans and leases (a) . . . . . . . . . . . . . . . . . . . . . . $42,339.1 $41,303.0 $36,542.7 $33,930.0 $32,790.0
Net charge-offs as a percent of average loans and
leases outstanding (b) . . . . . . . . . . . . . . . . . . . . . . . . . .45% .23% .32% .38% .45%
Reserve as a percent of total nonperforming assets. . . . . . 265% 304% 371% 301% 250%
Reserve as a percent of total underperforming assets . . . . 156% 185% 241% 189% 183%
(a) Average loans and leases exclude loans held for sale.
(b) Excludes merger-related provision for credit losses.