Fifth Third Bank 2003 Annual Report Download - page 49

FIFTH THIRD BANCORP AND SUBSIDIARIES
47
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
This report includes forward-looking statements within the
meaning of Sections 27A of the Securities Act of 1933, as amended,
and Rule 175 promulgated thereunder, and 21E of the Securities
Exchange Act of 1934, as amended, and Rule 3b-6 promulgated
thereunder, that involve inherent risks and uncertainties. This report
contains certain forward-looking statements with respect to the
financial condition, results of operations, plans, objectives, future
performance and business of the Bancorp including statements
preceded by, followed by or that include the words or phrases such as
“believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,”
“continue,” “remain,” “pattern” or similar expressions or future or
conditional verbs such as “will,” “would,” “should,” “could,”
“might,” “can,” “may” or similar expressions. There are a number of
important factors that could cause future results to differ materially
from historical performance and these forward-looking statements.
Factors that might cause such a difference include, but are not
limited to: (1) competitive pressures among depository institutions
increase significantly; (2) changes in the interest rate environment
reduce interest margins; (3) prepayment speeds, loan sale volumes,
charge-offs and loan loss provisions; (4) general economic conditions,
either national or in the states in which the Bancorp does business,
are less favorable than expected; (5) political developments, wars or
other hostilities may disrupt or increase volatility in securities
markets or other economic conditions; (6) legislative or regulatory
changes or actions adversely affect the businesses in which the
Bancorp is engaged; (7) changes and trends in the securities markets;
(8) a delayed or incomplete resolution of regulatory issues; (9) the
impact of reputational risk created by these developments on such
matters as business generation and retention, funding and liquidity;
and (10) the outcome of regulatory and legal proceedings. The
Bancorp undertakes no obligation to release revisions to these
forward-looking statements or reflect events or circumstances after
the date of this report.
The data presented in the following pages should be read in
conjunction with the audited Consolidated Financial Statements on
pages 17 to 45 of this report.
Results Of Operations
Summary
The Bancorp’s net income was $1.8 billion in 2003, up 7%
compared to $1.6 billion in 2002. Earnings per diluted share were
$3.03 for the year, up 10% from $2.76 in 2002. Net income for
2003 includes an after-tax charge of $11 million, or $.02 per
diluted share, for a nonrecurring cumulative effect of a change in
accounting principle related to the early adoption of FIN 46. The
early adoption of FIN 46 required the Bancorp to consolidate a
special purpose entity involved in the sale-leaseback of certain auto
leases as the Bancorp was deemed to be the primary beneficiary
under the provisions of this new Interpretation. Early adoption of
the provisions of this Interpretation required the Bancorp to
consolidate these operating lease assets and a corresponding liability
as well as recognize the after-tax cumulative effect charge of $11
million representing the difference between the carrying value of the
leased autos sold and the carrying value of the newly consolidated
obligation. Consolidation of these operating lease assets did not
impact risk-based capital ratios or bottom line income statement
trends; however, lease payments on the operating lease assets are
now reflected as a component of other operating income and
depreciation expense is now reflected as component of operating
expenses.
Net income for 2003 also includes after-tax income from
discontinued operations of $44 million, or $.08 per diluted share.
In December 2003, the Bancorp completed the sale of its corporate
trust business enabling the Bancorp to refine its focus and reinvest
in core middle market business activities that the Bancorp believes
provide the best return to shareholders. Corporate trust services has
been a relatively small contributor to both total revenues and
earnings in all periods. See Note 22 of the Notes to Consolidated
Financial Statements for further discussion.
Cash dividends for 2003 increased 15% to $1.13 per common
share compared to 2002. The Bancorp’s net interest income, net
income, earnings per share, earnings per diluted share, dividends per
share, dividend payout ratio, net income to average assets, referred
to as return on average assets (ROA), return on average
shareholders’ equity (ROE), net interest margin and efficiency ratio
for the most recent five years are as follows:
Table 1–Operating Data
2003 2002 2001 2000 1999
Net interest income
($ in millions, taxable
equivalent) . . . . . . . . . $2,944 2,738 2,476 2,297 2,213
Net income ($ in millions) 1,754 1,634 1,093 1,140 947
Earnings per share (a). . . 3.07 2.82 1.90 2.02 1.68
Earnings per diluted
share (a) . . . . . . . . . . . 3.03 2.76 1.86 1.98 1.66
Cash dividends per
common share (b). . . . 1.13 .98 .83 .70 .59
Dividend payout ratio (c) 37.3% 35.5 44.7 38.2 40.9
ROA . . . . . . . . . . . . . . . 2.01% 2.18 1.55 1.71 1.57
ROE . . . . . . . . . . . . . . . 20.4% 19.9 15.1 19.1 17.3
Net interest margin
(taxable equivalent) . . . 3.62% 3.96 3.82 3.73 3.96
Efficiency ratio. . . . . . . . 45.0% 44.9 54.8 50.8 53.3
(a) Per share amounts have been adjusted for the three-for-two stock split
effected in the form of stock dividends paid July 14, 2000.
(b) Cash dividends per common share are those the Bancorp declared prior
to the merger with Old Kent in 2001.
(c) As originally reported prior to the merger with Old Kent in 2001.
Net interest income, net interest margin, net interest rate spread,
weighted-average yields on investment securities and the efficiency
ratio are presented in Management’s Discussion and Analysis of
Financial Condition and Results of Operations on a fully taxable-
equivalent (FTE) basis as the interest on certain loans and securities
held by the Bancorp are not taxable for federal income tax purposes.
The FTE basis adjusts for the tax-favored status of income from certain
loans and securities. The Bancorp believes this measure to be the
preferred industry measurement of net interest income and provides
relevant comparison between taxable and non-taxable amounts.
Net Interest Income
Net interest income is the difference between interest income on
earning assets such as loans, leases and securities, and interest
expense paid on liabilities such as deposits and borrowings, and
continues to be the Bancorp’s largest revenue source. Net interest
income is affected by the general level of interest rates, changes in
interest rates and by changes in the amount and composition of
interest-earning assets and interest-bearing liabilities. The relative
performance of the lending and deposit-raising functions is
frequently measured by two statistics – net interest margin and net