Fifth Third Bank 2004 Annual Report Download - page 24

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
22 Fifth Third Bancorp
Bancorp’s adoption of FIN 46. The Bancorp expects operating lease
revenue to decline in 2005 as the leases mature.
The major components of other noninterest income for each
of the last fi ve years are shown in Table 9. In the second and third
quarters of 2004, the Bancorp sold certain small merchant process-
ing contracts resulting in a total gain of $157 million. The other
component was impacted by the $22 million gain on the securitiza-
tion and sale of $903 million of home equity lines of credit in 2003.
The remaining categories in 2004 are fl at to down as compared to
2003.
Noninterest Expense
The Bancorp continues to focus on effi ciency initiatives as part of
its core emphasis on operating leverage. These initiatives include
increasing levels of process automation, the rationalization and
reduction of non-core businesses as they relate to the Bancorp’s
retail and middle market customer base, an increased emphasis on
required returns on invested capital and related opportunities for
continued growth.
Operating expense levels are often measured using an effi -
ciency ratio (noninterest expense divided by the sum of net interest
income (FTE) and noninterest income). The effi ciency ratio was
53.9% and 47.0% for 2004 and 2003, respectively.
Noninterest expense increased 17% in 2004 compared to 2003.
Comparisons to the prior year are impacted by (i) $247 million of
charges related to the early retirement of approximately $2.8 billion
of long-term debt in the fourth quarter of 2004; (ii) a charge of $78
million related to the early retirement of approximately $1 billion
of Federal Home Loan Bank (“FHLB”) advances in the second
quarter of 2004; (iii) a charge of $20 million related to the early
retirement of approximately $200 million of FHLB advances in
2003 and; (iv) a $31 million pre-tax recovery in 2003 of previously
charged off treasury clearing and settlement account balances. Each
of these items was recorded in other noninterest expense. Exclud-
ing the impact of these items, noninterest expense increased three
percent compared to 2003; comparisons being provided to supple-
ment an understanding of the fundamental trends in noninterest
expense.
Total personnel costs (salaries, wages and incentives plus
employee benefi ts) increased by less than one percent in 2004
compared to 2003, and included $87 million in total stock
compensation expense compared to $110 million in 2003. The year
over year decrease in stock compensation expense was offset by an
increase in profi t sharing expense to $69 million in 2004 from $48
million in 2003. Signifi cant investments in the sales force contrib-
uted to a four percent increase in full time equivalent employees
from 2003 to 2004. Full time equivalent employees totaled 19,659
as of December 31, 2004 compared to 18,899 as of December
31, 2003. Net occupancy expenses increased primarily due to $10
million of higher depreciation expense related to the increase in
banking centers and expansion of the Bancorp’s main operations
center and $10 million of higher repairs and maintenance expense.
Pension Plans
Pension costs, included in employee benefi ts, declined to $16 million
in 2004 compared to $31 million in 2003. The decrease is primarily
due to lower amortization of actuarial losses and lower settlement
expense. The Bancorp’s net pension expense for 2004 is based upon
specifi c actuarial assumptions, including an expected long-term
rate of return on plan assets of 8.75%. The expected long-term
rate of return on plan assets assumption refl ects the average return
expected on the assets invested to provide for the plan’s liabilities.
In determining the expected long-term rate of return on plan assets
assumption, the Bancorp evaluated actuarial and economic inputs,
including long-term infl ation rate assumptions and broad equity
and bond indices long-term return projections as well as actual long-
term plan performance. The discount rate assumption refl ects the
yield of a portfolio of high quality fi xed-income instruments that
have a similar duration to the plan’s liabilities. The discount rate
determined on this basis has decreased from 6.00% at December
31, 2003 to 5.85% at December 31, 2004. Lowering the expected
rate of return on plan assets by .25% (8.75% to 8.50%) and by
lowering the discount rate by .25% (6.00% to 5.75%) would have
increased the 2004 pension expense by approximately $1 million.
The Bancorp based the determination of pension expense on
a market-related valuation of assets. This market-related valuation
recognizes investment gains or losses over a three-year period from
the year in which they occur. Investment gains or losses for this
purpose are the difference between the expected return calculated
using the market-related value of assets and the actual return based
on the market-related value of assets. Since the market-related
value of assets recognizes gains or losses over a three-year period,
the future value of assets will be impacted as previously deferred
gains or losses are recorded. As of December 31, 2004 the Bancorp
TABLE 11: COMPONENTS OF OTHER NONINTEREST EXPENSE
For the Years Ended December 31 ($ in millions) 2004 2003 2002 2001 2000
Marketing and communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 99 99 96 102 97
Postal and courier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 49 48 50 45
Bankcard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 176 142 103 72
Intangible and goodwill amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 40 37 71 60
Franchise and other taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 33 30 18 28
Loan and lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 106 91 62 39
Printing and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 35 37 40 41
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 35 38 34 34
Data processing and operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 97 82 70 86
Debt prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325 20—11
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309 255 285 209 162
Total other noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,310 945 886 760 665
TABLE 10: NONINTEREST EXPENSE
For the Years Ended December 31 ($ in millions) 2004 2003 2002 2001 2000
Salaries, wages and incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,018 1,031 1,029 959 893
Employee benefi ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261 240 201 148 144
Equipment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 82 79 91 100
Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 159 142 146 138
Operating lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 94———
Merger-related charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 349 87
Other noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,310 945 886 760 665
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,972 2,551 2,337 2,453 2,027