Fifth Third Bank 2005 Annual Report Download - page 37

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 35
FOURTH QUARTER REVIEW
The Bancorp’s 2005 fourth quarter earnings per diluted share were
$.60 compared to $.31 per diluted share for the same period in
2004. Fourth quarter net income totaled $332 million compared to
$176 million in the same quarter last year. Return on average assets
and return on average equity were 1.27% and 13.9%, respectively,
compared to 0.72% and 7.6% in 2004’s fourth quarter. Fourth
quarter 2004 earnings were negatively impacted by $326 million in
total pre-tax ($208 million after-tax) debt termination charges and
securities losses, or $.37 per diluted share, related to the balance
sheet initiatives undertaken. The Bancorp’s efficiency ratio was
55.6% in the fourth quarter compared to 76.0% last year and
53.5% in the previous quarter.
Compared to the fourth quarter of 2004, net interest income
(FTE) decreased two percent, despite five percent growth in
average earning assets, due to a 24 bp decline in the net interest
margin (FTE). Compared to the third quarter of 2005, net interest
income (FTE) decreased by $10 million due to five basis points of
contraction in net interest margin (FTE). The decline in net
interest margin in the fourth quarter was primarily the result of the
higher cost of wholesale funding relative to previous periods.
Improved performance in certain business line revenue
segments resulted in good noninterest income performance in the
fourth quarter of 2005. Overall noninterest income, excluding
operating lease revenues and securities gains and losses, increased
by 18% over the same quarter last year and 16% on an annualized
sequential basis.
Electronic payment processing revenues increased 16% over
the same quarter last year as a result of continuing momentum in
attracting new customer relationships and moderated by slower
growth in the level of retail sales transaction volumes in the fourth
quarter of 2005.
Sales of retail deposit accounts and corporate treasury
management products led to an increase in deposit service
revenues of six percent over the same quarter last year. Retail
deposit revenues strengthened in the latter half of 2005 and
increased by seven percent over the same quarter last year.
Commercial deposit revenues increased by three percent over the
same quarter last year with good growth in the number of
relationships mitigated by the impacts of higher earnings credits on
commercial deposit accounts. Compared to the third quarter of
2005, deposit service revenues declined modestly primarily due to a
decrease in consumer overdraft related revenues.
Investment advisory revenues increased by five percent over
the same quarter last year. The Bancorp continues to focus its
efforts on improving execution in retail brokerage and growing the
institutional money management business by improving
penetration and cross-sell in our large middle market commercial
customer base.
Mortgage banking net revenue totaled $42 million in the
fourth quarter compared to $24 million in 2004’s fourth quarter.
Mortgage originations remained strong and totaled $2.5 billion in
the fourth quarter versus $2.9 billion last quarter and $2.0 billion in
the fourth quarter of last year. Fourth quarter mortgage banking
net service revenue was comprised of $65 million in total mortgage
banking fees and loan sales, less $13 million in amortization and
valuation adjustments on mortgage servicing rights and less $10
million of losses and mark-to-market adjustments on both settled
and outstanding free-standing derivative financial instruments.
Other noninterest income totaled $165 million in the fourth
quarter compared to $125 million in the same quarter last year.
Other noninterest income increased by 32% primarily due to
strong growth in commercial banking revenues, customer interest
rate derivative sales, bank owned life insurance and cardholder fees.
Compared to the third quarter of 2005, other noninterest income
increased by $20 million due to very strong growth in commercial
banking revenues and customer interest rate derivative sales.
Total noninterest expense decreased by 18% compared to the
same quarter last year. Comparisons to the prior year quarter are
impacted by the previously disclosed $247 million charge related to
the early retirement of approximately $2.8 billion of long-term debt
in the fourth quarter of 2004. Exclusive of the impact of this
termination charge, total noninterest expense increased by 11% in
the fourth quarter primarily due to increases in sales force
headcount, information technology and occupancy expenditures
related to the addition of 63 de-novo banking centers in 2005 that
did not involve relocation. Compared to the third quarter of 2005,
total noninterest expense increased by $31 million due to growth in
volume-related bankcard costs, approximately $9 million in fraud
related expenses and approximately $10 million in sales tax related
expense.
Fourth quarter credit quality trends reflect an elevated level of
net charge-offs associated with approximately $27 million in
previously discussed losses to bankrupt commercial airline carriers
and a $15 million increase in consumer loan and lease losses
associated with increased personal bankruptcies declared prior to
the recently enacted reform legislation. Net charge-offs as a
percentage of average loans and leases were 67 bp in the fourth
quarter, compared to 38 bp last quarter and 44 bp in the fourth
quarter of 2004. Net charge-offs were $117 million in the fourth
quarter, compared to $65 million in the same quarter last year and
$64 million in the third quarter of 2005. The provision for loan
and lease losses totaled $134 million in the fourth quarter
compared to $65 million in the same quarter last year and $69
million in the third quarter of 2005.