Fifth Third Bank 2006 Annual Report Download - page 28

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp
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(a) The net taxable-equivalent adjustments included in the above table are $26 million, $31 million and $36 million for the years ended December 31, 2006, 2005 and 2004, respectively.
The cost of interest-bearing core deposits was 3.18% in 2006,
up from 2.10% in 2005. Despite the increasing deposit rates, the
relative cost advantage of interest-bearing core deposits compared
to wholesale funding increased from 126 bp in 2005 to 183 bp in
2006. Due to the increasing relative cost advantage of core
deposits, the Bancorp has continued to expand its branching
network to increase its presence in markets that offer the best
growth prospects. In 2006, the Bancorp added 51 net new
banking centers with plans to add a similar amount in 2007.
Interest income (FTE) from loans and leases increased $1.1
billion, or 28%, compared to 2005. The increase resulted from
the growth in average loans and leases of eight percent as well as a
102 bp increase in average rates. Average commercial loans and
leases grew 10% in 2006 due to growth in all subcategories. The
yield on commercial loans and leases expanded by 117 bp to
7.07% in 2006. The yield expansion was greatest in commercial
loans and commercial construction due to the increase in short-
term interest rates and the subsequent repricing. Average
consumer loans and leases increased by six percent in 2006 driven
primarily by the 23% increase in residential construction and nine
percent increase in other consumer loans. Other consumer loans
primarily consist of direct and indirect home equity lines and
loans, direct and indirect auto loans and credit cards. The average
consumer loan and lease yield increased 83 bp to 6.52%.
Interest income (FTE) from investment securities and short-
term investments decreased $126 million to $970 million in 2006
compared to 2005 due to the previously mentioned reduction of
the investment securities portfolio. The average yield on taxable
securities increased by only 15 bp as a result of the relative
stability in longer-term interest rates.
The interest on core deposits increased $562 million, or 63%,
in 2006 over 2005 due to increases in short-term interest rates and
increasing average balances. Average interest-bearing core
deposits increased $3.2 billion, or seven percent, compared to
2005. The Bancorp continues to focus on growing its core
deposit balances in order to improve the funding mix and
improve net interest margin trends. The growth in noninterest-
bearing funds and other core deposits is a critical component in
the growth of net interest income.
The interest on wholesale funding increased by $490 million,
or 43%, in 2006 compared to 2005 due to increasing short-term
interest rates partially offset by a $1.4 billion, or four percent,
decrease in average balances. Throughout 2006, the Bancorp used
the proceeds from the securities portfolio to lessen its reliance on
TABLE 4: CONSOLIDATED AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME (FTE)
For the years ended December 31 2006 2005 2004
($ in millions)
Average
Balance
Revenue/
Cost
Average
Yield/Rate
A
verage
Balance
Revenue/
Cost
Average
Yield/Rate
Average
Balance
Revenue/
Cost
Average
Yield/Rate
Assets
Interest-earning assets:
Loans and leases (a):
Commercial loans $20,400 $1,479 7.25 % $18,241 $1,063 5.83 % $14,908 $682 4.57 %
Commercial mortgage 9,797 700 7.15 8,923 551 6.17 7,391 387 5.23
Commercial construction 6,015 460 7.64 5,525 342 6.19 3,807 181 4.76
Commercial leases 3,730 185 4.97 3,495 179 5.11 3,296 181 5.49
Subtotal - commercial 39,942 2,824 7.07 36,184 2,135 5.90 29,402 1,431 4.87
Residential mortgage 8,855 525 5.93 8,396 463 5.52 6,454 357 5.52
Residential construction 719 43 6.02 586 32 5.48 347 17 4.99
Other consumer loans 22,649 1,556 6.87 20,749 1,216 5.86 18,542 947 5.10
Consumer leases 1,328 63 4.72 1,822 84 4.59 2,297 108 4.71
Subtotal - consumer 33,551 2,187 6.52 31,553 1,795 5.69 27,640 1,429 5.17
Total loans and leases 73,493 5,011 6.82 67,737 3,930 5.80 57,042 2,860 5.01
Securities:
Taxable 20,306 904 4.45 24,017 1,032 4.30 29,365 1,217 4.15
Exempt from income taxes (a) 604 45 7.38 789 58 7.39 917 68 7.44
Other short-term investments 378 21 5.52 193 6 2.89 315 5 1.48
Total interest-earning assets 94,781 5,981 6.31 92,736 5,026 5.42 87,639 4,150 4.73
Cash and due from banks 2,495 2,758 2,216
Other assets 8,713 8,102 5,763
Allowance for loan and lease losses (751) (720) (722)
Total assets $105,238 $102,876 $94,896
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest checking $16,650 $398 2.39 % $18,884 $314 1.66 % $19,434 $174 .89 %
Savings 12,189 363 2.98 10,007 176 1.76 7,941 58 .72
Money market 6,366 261 4.10 5,170 140 2.71 3,473 39 1.12
Other time deposits 10,500 433 4.12 8,491 263 3.09 6,208 162 2.62
Certificates - $100,000 and over 5,795 278 4.80 4,001 129 3.22 2,403 48 1.99
Foreign office deposits 3,711 177 4.76 3,967 126 3.17 4,449 58 1.31
Federal funds purchased 4,148 208 5.02 4,225 138 3.26 5,896 77 1.30
Short-term bank notes --- 248 6 2.60 1,003 15 1.46
Other short-term borrowings 4,522 194 4.28 5,038 138 2.74 6,640 78 1.14
Long-term debt 14,247 770 5.40 16,384 600 3.66 13,323 393 2.95
Total interest-bearing liabilities 78,128 3,082 3.94 76,415 2,030 2.66 70,770 1,102 1.56
Demand deposits 13,741 13,868 12,327
Other liabilities 3,558 3,276 2,939
Total liabilities 95,427 93,559 86,036
Shareholders’ equity 9,811 9,317 8,860
Total liabilities and shareholders’ equity $105,238 $102,876 $94,896
Net interest income margin $2,899 3.06% $2,996 3.23% $3,048 3.48%
Net interest rate spread 2.37 2.76 3.17
Interest-bearing liabilities to interest-earning assets 82.43 82.40 80.75