Fifth Third Bank 2004 Annual Report Download - page 25

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 23
BALANCE SHEET ANALYSIS
TABLE 12: APPLICABLE INCOME TAXES
For the Years Ended December 31 ($ in millions) 2004 2003 2002 2001 2000
Income from continuing operations before income taxes, minority interest
and cumulative effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,237 2,438 2,299 1,530 1,561
Applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 712 786 734 523 511
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.8% 32.3 31.9 34.2 32.7
TABLE 13: COMPONENTS OF LOAN PORTFOLIO (INCLUDING HELD FOR SALE)
As of December 31 ($ in millions) 2004 2003 2002 2001 2000
Commercial loans:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,058 14,226 12,786 10,909 10,734
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,636 6,894 5,885 6,085 6,227
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,348 3,301 3,009 3,103 2,819
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,426 3,264 3,019 2,487 2,571
Total commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,468 27,685 24,699 22,584 22,351
Consumer loans:
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,093 17,429 14,584 12,138 11,249
Mortgage and construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,912 5,865 7,123 6,815 7,570
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 843 762 537 448 361
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,051 2,448 2,343 1,743 2,654
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,899 26,504 24,587 21,144 21,834
Total loan portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,367 54,189 49,286 43,728 44,185
Loans
Table 13 summarizes the end of period commercial and consumer
loans and leases, including loans held for sale, by major category.
Commercial loan and lease outstandings, including loans held for
sale, increased 14% compared to December 31, 2003. The increase
in commercial loans and leases was attributable to growth in middle-
market and small business loan originations, the strength of new
customer additions, the acquisition of $441 million of commercial
loans obtained in the Franklin Financial acquisition in 2004 and
strong results in several markets, including Cincinnati, Chicago
and Indianapolis.
Consumer loan and lease outstandings, including loans held
for sale, increased nine percent compared to 2003. Consumer loan
comparisons to the prior periods are impacted by the securitization
and sale of $750 million of automotive loans and $140 million of
consumer loans obtained in the Franklin Financial acquisition in
2004. Consumer installment loan originations were $6.9 billion in
2004 compared to $7.4 billion in 2003. The Bancorp is continuing
to devote signifi cant focus on producing retail-based loan origi-
nations given the strong credit performance and attractive yields
available in these products. Residential mortgage and construction
loans, including held for sale, increased 35% compared to 2003 as
the overall proportion of retained originations increased. Compari-
sons to prior periods are dependent upon the volume and timing
of originations as well as the timing of loan sales. Residential mort-
gage originations totaled $8.4 billion in 2004 compared to $16.0
had cumulative losses of approximately $101 million, which remain
to be recognized in the calculation of the market-related value of
assets. These unrecognized net actuarial losses result in an increase
in the Bancorp’s future pension expense depending on several
factors, including whether such losses at each measurement date
exceed the corridor in accordance with SFAS No. 87, “Employers’
Accounting for Pensions.”
The value of the plan assets has decreased from $223 million
at December 31, 2003 to $201 million at December 31, 2004
as settlements and benefi ts paid exceeded the investment returns
and contributions made during 2004. The Bancorp’s unfunded
plan status, net of benefi t obligations, increased from $41 million
at December 31, 2003 to an unfunded status of $53 million at
December 31, 2004. During 2004, the Bancorp made $3 million in
cash contributions to the plan and believes that, based on the actu-
arial assumptions, no cash contribution to the plan will be required
in 2005.
Applicable Income Taxes
The Bancorp’s income from continuing operations before income
taxes, applicable income tax expense and effective tax rate for each
of the periods indicated are shown in Table 12. Applicable income
tax expense for all periods include the benefi t from tax-exempt
income, tax-advantaged investments and general business tax cred-
its, partially offset by the effect of nondeductible expenses.
Comparison of 2003 with 2002
Net income in 2003 increased to $1.7 billion compared to $1.5
billion in 2002. Earnings per diluted share were $2.87 compared
to $2.59.
Return on average assets was 1.90% and return on average
shareholders’ equity was 19.0% compared to 2.04% and 18.4%,
respectively, in 2002.
Net interest income (FTE) was $2.9 billion in 2003 compared
to $2.7 billion in 2002. The net interest margin declined to 3.62%
in 2003 from 3.96% in 2002, which is attributable to the low abso-
lute levels of interest rates in 2003 and corresponding impact of
accelerated prepayments across all asset classes and higher origina-
tion volumes at the lower rates. The decline in net interest margin
was offset by an 18% increase in average earning assets from 2002
to 2003.
Noninterest income increased 14% to $2.5 billion in 2003
compared to $2.2 billion in 2002. The increase in 2003 was driven,
in part, by mortgage banking as a result of the large volume of
mortgage originations due to the interest rate declines in the fi rst
half of 2003. The increase was also due, in part, to the adoption of
FIN 46 in the third quarter of 2003 and the resulting recognition
of $124 million of operating lease revenue.
Noninterest expense totaled $2.6 billion in 2003 compared
to $2.3 billion in 2002. The increase, in part, resulted from the
adoption of FIN 46 in the third quarter of 2003 and the resulting
recognition of $94 million of operating lease expense. Remaining
increases were largely related to the expansion of the sale force and
investment in additional banking centers.
The provision for loan and lease losses was $399 million in 2003
compared to $246 million in 2002. During 2003, net charge-offs
were $312 million, or .63% of average loans and leases outstanding,
compared to $187 million, or .43%, during 2002. The increase in
charge-offs was largely refl ective of the overall challenging economic
landscape in 2003 and growth in the overall loan portfolio.