Fifth Third Bank 2003 Annual Report Download - page 51

FIFTH THIRD BANCORP AND SUBSIDIARIES
49
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
2003 from $2.7 billion in 2002 despite a 34 basis point (bp) decrease
in net interest margin. The improvement in 2003’s net interest income
was attributable to a $12.2 billion (18%) increase in average interest-
earning assets mitigated by the 34 bp reduction in the net interest
margin. The net interest margin decreased from 3.96% in 2002 to
3.62% in 2003 compared to a 14 bp increase from 2001 to 2002.
Contraction in the net interest margin in the current year is
attributable to the effect of the absolute level of interest rates on
earning asset yields, the impact of higher origination volumes at lower
market rates of interest and accelerated prepayment rates experienced
in all earning-asset classes due to the lowest level of interest rates seen
in over 40 years. Specifically, the yield on average interest-earning
assets declined 108 bps from 2002; primarily attributable to a decrease
in average yields on loans and leases and taxable securities of 100 bps
and 123 bps, respectively. The negative effects of lower asset yields were
offset by a 94 bp decrease in the cost of interest-bearing liabilities in
2003 resulting from faster repricing of borrowed funds and lower year-
over-year deposit rates on existing accounts as well as the continued
improvement in the overall mix of interest-bearing liabilities. The
Bancorp realized an overall increase in total average deposits between
years of approximately $5.6 billion highlighted by a 13% year-over-
year increase in average transaction account balances reflecting the
Bancorp’s emphasis on deposits as an important source of funding.
The contribution of free funding to the net interest margin was
reduced to 34 bps in 2003, from 54 bps in 2002, despite the benefits
of a $1.5 billion increase in average demand deposits, due to the lower
interest rate environment. Additional contraction in the net interest
margin is attributable to the implementation of SFAS No. 150 during
2003, and the resulting reclassification of approximately $20 million of
minority interest expense into interest expense, in comparison to 2002.
See Note 1 of the Notes to Consolidated Financial Statements for
further discussion of adoption of SFAS No. 150. The Bancorp expects
that net interest margin and net interest income trends in coming
periods will be dependent upon the magnitude of deposit growth in
relation to balance sheet growth and the speed of interest rate changes
in an improving economy, with expected net interest income growth
trending in-line with expected growth in the overall balance sheet in
the mid to high single digit range.
Average interest-earning assets increased by 18% to $81.4 billion
in 2003, an increase of $12.2 billion from 2002. During 2002,
average interest-earning assets grew by 7% over 2001. In 2003, sales
and securitizations of loans and leases, excluding gains realized,
totaled approximately $15.6 billion compared to $9.7 billion in
2002. The Bancorp continues to use loan sales and securitizations to
manage the composition of the balance sheet, to limit balance sheet
leverage due to exceptionally strong demand experienced in certain
asset classes relative to the entire portfolio and to improve balance
sheet liquidity. Sales and securitizations permit the Bancorp to grow
the origination and servicing functions and to increase revenues
without increasing capital leverage.
Average interest-bearing liabilities grew to $65.1 billion during
2003, an increase of 19% over the $54.8 billion average in 2002.
Average transaction deposits (which excludes time deposits,
certificates of deposit with balances greater than $100,000 and
foreign office deposits) increased $4.6 billion, or 13%, over 2002
and remain the Bancorp’s most important and lowest cost source of
funding.
Table 3 shows changes in tax-equivalent interest income, interest
expense, and net interest income due to volume and rate variances
for major categories of earning assets and interest-bearing liabilities.
Other Operating Income
Table 4 shows the components of other operating income for each of
the last five years. Total other operating income increased 14% in
2003 and 22% in 2002. As previously discussed, the early adoption
Table 3–Analysis of Net Interest Income Changes (Taxable Equivalent Basis)
2003 Compared to 2002 2002 Compared to 2001
($ in millions) Volume(a) Yield/Rate(a) Total Volume Yield/Rate Total
Increase (Decrease) in Interest Income:
Loans and Leases. . . . . . . . . . . . . . . . . . . . . . . . . . $393 $(493) $(100) $ 50 $(660) $(610)
Securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 (304) (31) 221 (177) 44
Exempt from Income Taxes. . . . . . . . . . . . . . . . . . (3) (1) (4) (12) (4) (16)
Other Short-Term Investments . . . . . . . . . . . . . . . (1) (2) (3) 4 (8) (4)
Total Interest Income Change . . . . . . . . . . . . . . . . 662 (800) (138) 263 (849) (586)
Increase (Decrease) in Interest Expense:
Interest Checking . . . . . . . . . . . . . . . . . . . . . . . . . 40 (147) (107) 105 (120) (15)
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21) (73) (94) 107 (123) (16)
Money Market . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 (22) 5 (27) 16 (11)
Other Time Deposits . . . . . . . . . . . . . . . . . . . . . . (75) (68) (143) (190) (198) (388)
Certificates — $100,000 and over . . . . . . . . . . . . . 30 (40) (10) (82) (50) (132)
Foreign Office Deposits . . . . . . . . . . . . . . . . . . . . 24 (15) 9 1 (63) (62)
Federal Funds Purchased . . . . . . . . . . . . . . . . . . . . 47 (21) 26 (16) (85) (101)
Other Short-Term Borrowings . . . . . . . . . . . . . . . 20 (32) (12) (39) (98) (137)
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . 51 (69) (18) 72 (58) 14
Total Interest Expense Change . . . . . . . . . . . . . . . 143 (487) (344) (69) (779) (848)
Increase (Decrease) in Net Interest Income
on a Taxable Equivalent Basis . . . . . . . . . . . . . . . . $519 $(313) $ 206 $332 $(70) $ 262
Decrease in Taxable Equivalent Adjustment . . . . . . —6
Net Interest Income Change . . . . . . . . . . . . . . . . . $ 206 $ 268
(a) Changes not solely attributable to changes in volume or rates are allocated consistently in proportion to the absolute dollar amount of the change in volume and rates.