Fifth Third Bank 2005 Annual Report Download - page 36

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp
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equivalent sales employees from 1,184 to 1,401 at the end of 2005.
The provision for loan and lease losses increased $23 million
over 2004 primarily as a result of the previously discussed losses to
bankrupt commercial airline carriers.
Retail Banking
Retail Banking provides a full range of deposit and loan and lease
products to individuals and small businesses, and includes the
branch network, consumer finance and mortgage banking.
Through 1,119 banking centers, Retail Banking offers depository
and loan products, such as checking and savings accounts, home
equity lines of credit, credit cards and loans for automobile and
other personal financing needs, as well as products designed to
meet the specific needs of small businesses, including cash
management services. Consumer finance services generally include
the Bancorp’s indirect lending activities, which include loans to
consumers through dealers and federal and private student
education loans. Mortgage banking activities include the
origination, retention and servicing of mortgage loans, sales and
securitizations of mortgage loans or pools of mortgage loans and
all associated hedging activities.
Net income increased $28 million compared to 2004. Average
loans and leases increased 12% to $33.5 billion compared to 2004
as a result of increases in direct installment and residential
mortgage, up 15% and 22%, respectively. Average core deposits
increased three percent to $37.8 billion compared to 2004 with
double-digit increases in savings, money market, demand deposits
and consumer time deposits mitigated by a 15% decrease in
interest checking. As a result of the growth in average loans and
core deposits and the related net FTP impact, net interest income
increased 11% compared to 2004.
Noninterest income declined seven percent from 2004.
Increases in electronic payment processing revenue from bankcard
interchange, up 35% over 2004, were offset by slight decreases in
consumer and business fees and mortgage banking net revenue and
a $103 million decrease in operating lease revenue from the
continued maturity of consumer automobile leases.
Noninterest expense increased four percent compared to 2004
as lower operating lease expenses partially offset the increased
employee related expenses, net occupancy costs resulting from the
increase in banking centers and higher information technology
expenses. Since 2004, acquisitions have accounted for 74 of the
108 net new banking centers that did not involve relocation or
consolidation of existing facilities, complementing the ongoing de-
novo growth. The Bancorp continues to position itself for
sustained long-term growth through new banking center additions
in key markets.
The retail business segment was also affected by increased
personal bankruptcies declared prior to the recently enacted reform
legislation, which resulted in an increase in net charge-offs of
approximately $15 million above recent trends. Overall, the
provision for loan and lease losses increased by $27 million over
2004.
Investment Advisors
Investment Advisors provides a full range of investment
alternatives for individuals, companies and not-for-profit
organizations. Investment Advisors primary services include trust,
institutional, retirement, private client, asset management and
broker-dealer services. Fifth Third Securities, Inc., an indirect
wholly-owned subsidiary of the Bancorp, offers full service retail
brokerage services to individual clients. Fifth Third Asset
Management, Inc., an indirect wholly-owned subsidiary of the
Bancorp, provides asset management services and also advises the
Bancorp’s proprietary family of mutual funds.
Net income increased eight percent to $127 million compared
to 2004. The increase resulted from a 26% improvement in net
interest income due to strong average loan and core deposit
growth, up 23% and 13%, respectively. Total average loans were
$2.6 billion and total average core deposits were $4.0 billion in
2005.
Noninterest income declined three percent from 2004 due to
a decline in retail brokerage and retirement planning service
revenues. Noninterest expense increased five percent largely as a
result of increased sales force and information technology
investments. In order to capitalize on an expanding customer base
and additional growth opportunities, 91 full-time equivalent sales
employees have been added since the end of 2004.
Processing Solutions
Fifth Third Processing Solutions provides electronic funds transfer,
debit, credit and merchant transaction processing, operates the
Jeanie® ATM network and provides other data processing services
to affiliated and unaffiliated customers.
Net income decreased $87 million compared to 2004 largely
due to the $157 million pretax gain resulting from the sale of
certain third-party sourced merchant processing contracts in the
prior year. Excluding the impact of the sale, net income increased
by approximately 12% due to strong revenue growth across nearly
all lines of business (comparison being provided to supplement an
understanding of the fundamental trends). EFT revenue was up
19% over last year primarily due to new customer additions.
Merchant revenue increased 15% due to increased volume at
existing customers and new customer additions.
Noninterest expense was up largely due to sales force
additions and information technology investments. Trends seen in
2005 are representative of strong continuing momentum in
attracting new customer relationships and good results in the level
of retail sales activity. The Bancorp continues to see significant
opportunities to attract new financial institution customers and
retailers within this segment.
Other/Eliminations
Other/Eliminations includes the unallocated portion of the
investment portfolio, certain non-core deposit funding, unassigned
equity and certain support activities and other items not attributed
to the business segments.
The results of Other/Eliminations were negatively impacted
by a decrease of $194 million in interest income from the
investment securities portfolio from 2004 due primarily to the sale
of approximately $6.4 billion in investment securities in the fourth
quarter of 2004 as a result of the balance sheet repositioning. A
$468 million increase in interest expense from wholesale funding
and other borrowings in 2005 from 2004 also negatively impacted
this category. The increase in interest expense resulted from the
average interest rate on wholesale funding and other borrowings
increasing from 1.98% in 2004 to 3.36% in 2005.