Fifth Third Bank 2004 Annual Report Download - page 23

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 21
TABLE 9: COMPONENTS OF OTHER NONINTEREST INCOME
For the Years Ended December 31 ($ in millions) 2004 2003 2002 2001 2000
Cardholder fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48 59 51 50 42
Consumer loan and lease fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 65 70 59 49
Commercial banking revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 178 157 125 86
Bank owned life insurance income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 62 62 52 43
Insurance income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 28 55 49 48
Gain on sale of branches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ——743 —
Gain on sale of property and casualty insurance product lines . . . . . . . . . . . ——26 — —
Gain on sale of small merchant processing contracts . . . . . . . . . . . . . . . . . . . 157 —— — —
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 189 152 164 121
Total other noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 671 581 580 542 389
TABLE 8: COMPONENTS OF MORTGAGE BANKING NET REVENUE
For the Years Ended December 31 ($ in millions) 2004 2003 2002 2001 2000
Total mortgage banking fees and loan sales . . . . . . . . . . . . . . . . . . . . . . . . . . $ 219 466 386 354 315
Net (losses) gains and mark-to-market adjustments on both settled and
outstanding free-standing derivative fi nancial instruments . . . . . . . . . . . . (9) 14 98 20 —
Net valuation adjustments and amortization on mortgage servicing rights . . (32) (178) (296) (311) (59)
Mortgage banking net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 178 302 188 63 256
TABLE 7: NONINTEREST INCOME
For the Years Ended December 31 ($ in millions) 2004 2003 2002 2001 2000
Electronic payment processing revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 622 575 512 347 252
Service charges on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 515 485 431 367 298
Mortgage banking net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 302 188 63 256
Investment advisory revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360 332 325 298 275
Other noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 671 581 580 542 389
Operating lease revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 124 — — —
Securities (losses) gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37) 81 114 28 6
Securities gains, net – non-qualifying hedges on mortgage servicing rights . . —3 33 143 —
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,465 2,483 2,183 1,788 1,476
rary impairment recognized in 2003. Servicing rights are deemed
impaired when a borrower’s loan rate is distinctly higher than
prevailing market rates. As temporary impairment was recognized
on the MSR portfolio in 2003 due to falling primary and second-
ary mortgage rates and earnings rates and corresponding increases
in prepayment speeds, the Bancorp sold certain securities that
were held at the time as a component of an overall non-qualifying
hedging strategy it maintained in order to manage a portion of the
risk associated with changes in impairment on its MSR portfolio.
As a result, the Bancorp realized net gains of $3 million in 2003
that were captured as a component of other noninterest income in
the Consolidated Statements of Income. In addition, the Bancorp
recognized a net loss of $10 million and a net gain of $15 million
in 2004 and 2003, respectively, related to changes in fair value and
settlement of free-standing derivatives purchased to economically
hedge the MSR portfolio. As of December 31, 2003, the Bancorp
no longer held any available-for-sale securities related to its non-
qualifying hedging strategy.
In 2004, the Bancorp primarily used principal only swaps and
swaptions to hedge the economic risk of the MSR portfolio as they
are deemed to be the best available instrument for several reasons.
Principal only swaps hedge the mortgage-LIBOR spread because
they appreciate in value as a result of tightening spreads. They also
provide prepayment protection as they increase in value as prepay-
ment speeds increase, as opposed to MSRs that lose value in a faster
prepayment environment. Swaptions are positive convexity hedges
primarily used to hedge the negative convexity of the MSR port-
folio. Due to an increasing interest rate environment in 2004, the
Bancorp increased the level of purchased options/swaptions used
to economically hedge the MSR portfolio as compared to 2003. As
of December 31, 2004 and 2003, the Bancorp held a combination
of free-standing derivatives, including principal only swaps, swap-
tions and interest rate swaps with a fair value of $4 million and $8
million, respectively, on an outstanding notional amount of $1.9
billion and $.9 billion, respectively. The increase in the derivative
outstanding notionals at December 31, 2004 as compared to 2003
was primarily due to the level of current interest rates.
The Bancorp expects the core contribution of mortgage bank-
ing to total revenues to remain relatively fl at from 2004 levels as
refi nance activity and new applications continue to moderate.
The Bancorp’s total residential mortgage loan servicing port-
folio at the end of 2004 and 2003 was $30.6 billion and $30.0
billion, respectively, with $23.0 billion and $24.5 billion, respec-
tively, of loans serviced for others.
The increase of $28 million, or eight percent, in investment
advisory service revenue in 2004 compared to 2003 resulted primar-
ily from strengthening sales in retirement plan services, improved
institutional asset management and mutual fund revenues. The
Bancorp is one of the largest money managers in the Midwest and
as of December 31, 2004 had over $182 billion in assets under
care, $34 billion of assets under management and $13 billion in its
proprietary Fifth Third Funds.*
The increase in operating lease revenue is due to the consoli-
dation beginning in the third quarter of 2003 of a special purpose
entity (“SPE”) formed for the purpose of the sale and subsequent
leaseback of leased autos. The consolidation was the result of the
*FIFTH THIRD FUNDS® PERFORMANCE DISCLOSURE
Investments in the Fifth Third Funds are: NOT INSURED BY THE FDIC or any other government agency, are not deposits or obli-
gations of, or guaranteed by, any bank, the distributor or any of their affi liates, and involve investment risks, including the possible
loss of the principal amount invested. An investor should consider the fund’s investment objectives, risks, and charges and expenses carefully before
investing or sending money. This and other important information about the investment company can be found in the fund’s prospectus. To obtain a
prospectus, please call 1-800-282-5706 or visit www.53.com. Please read the prospectus carefully before investing.