Fifth Third Bank 2006 Annual Report Download - page 5

average equity were 1.13 percent and 12.1 percent, respectively,
significantly below what we would normally expect and below
the 1.50 percent and 16.6 percent, respectively, that we realized
in 2005.
Net interest income of $2.9 billion on a tax-equivalent basis
declined 3 percent from 2005. This result reflected our previous
negative sensitivity to rising short-term rates, offset by solid
average loan and core deposit growth of 8 percent and 5 percent,
respectively. During 2006, we saw a continuation of strong average
commercial loan growth, up 10 percent. Average consumer loan
growth remained solid, up 6 percent, though below the levels we
and the industry experienced several years ago with a more
favorable rate environment. Going forward, we expect continued
strong loan and core deposit growth, combined with the benefits
of our balance sheet actions, to drive improved net interest income
performance despite an expected continued flat to inverted yield
curve.
Noninterest income of $2.2 billion declined 14 percent from 2005,
reflecting net securities losses of $364 million in 2006 — primarily
the result of our fourth-quarter balance sheet actions — compared
with net securities gains of $39 million in 2005. We continued to
experience strong growth in electronic payment processing
revenue — our largest noninterest income category — up 15
percent from 2005. Corporate banking revenue also grew a solid
7 percent.
Noninterest expense of $3.1 billion grew 4 percent from 2005
levels, despite the inclusion of $49 million in expenses related to
the extinguishment of financing agreements in the third and fourth
quarters to reduce interest rate sensitivity. Expense growth was
otherwise held to 3 percent, reflecting continued strong growth in
our processing business offset by expense controls.
Credit costs remained consistent with the levels of 2005, with
provision expense up 4 percent over the prior year and net charge-
offs up 6 percent, though declining slightly as a percentage of
average loans to 0.44 percent from 0.45 percent in 2005.
As we look into 2007, we would expect to see upward pressure on
credit. We don’t have a crystal ball, but at this point we don’t see
significant economic deterioration on the near horizon, and don’t
expect a significant upward move in credit costs. Given Fifth Third’s
strong presence in Midwest markets, we have been experiencing
slower economic growth and higher levels of credit losses than
banks in other regions for some time. Fifth Third is a lending
company, and we are in the risk business. The ebbs and flows of
the credit cycle are to be expected and do not change our attitude
on that front.
Commitment to our Shareholders and our Communities
We at Fifth Third are deeply aware that you, our shareholders,
own the Company, and that we are accountable to you. Thus,
we are proud to maintain among the very highest corporate
governance ratings in the industry. Our Corporate Governance
Quotient, as published by Institutional Shareholder Services, is
in the top 4 percent of companies in the S&P 500 and in the top
1 percent of all U.S. banks.
I have always believed that Fifth Third and the cities and regions it
serves are mutually dependent — and we have always acted upon
that belief. Thus, I am especially proud that Fifth Third’s Ohio and
Michigan banks each received an “Outstanding” rating on our most
recent Community Reinvestment Act performance evaluation by
the Federal Reserve Bank.
Commitment to the Future
I’d like to take this opportunity to express my deep appreciation to
all the constituents that make Fifth Third a great company — our
customers, our 21,362 employees, our board members, and the
citizens of the communities served by our 19 affiliates. Our
employees, in particular, have accomplished tremendous things
at Fifth Third during my tenure, never more so than during the
past year.
2006 was a difficult year for Fifth Third — make no mistake about
it. But I believe the Company as it enters 2007 is in its strongest
position ever. Our balance sheet is very strong and well-capitalized.
We have the broadest and deepest management team we’ve ever
had. Our technology platform is robust and scalable. And we have
strong positions in our Midwest markets, with solid footholds in
growth markets. We are better positioned to deliver organic
growth than ever before in our history, through our strong sales
culture and increased focus on customer service and satisfaction,
and through our successful de novo activities. And we are well
positioned to participate in what will continue to be a consolidating
industry for many years ahead.
Thank you for the opportunity to have served you for the last
36 years.
Sincerely,
George A. Schaefer, Jr.
Chairman & Chief Executive Officer
February 2007
Fifth Third Bancorp LETTER FROM THE CHAIRMAN & CEO
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