Fifth Third Bank 2007 Annual Report Download - page 36

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp
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Comparison of 2006 with 2005
Net income increased $19 million, or 26%, compared to 2005 as a
result of an increase in net interest income and modest growth in
investment advisory revenue. Net interest income increased 14%,
to $139 million as the segment benefited from the liquidity
premium placed on deposit accounts as previously discussed.
Noninterest income increased three percent from 2005 as the
$7 million increase in Private Bank revenues was mitigated by a
decrease in mutual fund revenue of $3 million. The decrease in
mutual fund revenue was primarily the result of the deployment of
an open architecture on proprietary fund sales. Noninterest
expenses decreased modestly compared to the prior year due to
the focus on expense control.
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. Table
18 contains selected financial data for the Processing Solutions
segment.
Comparison of 2007 with 2006
Net income increased $15 million, or 11%, versus the prior year as
electronic payment processing revenues (the sum of merchant
processing, financial institutions processing and card issuer
interchange revenues) continued to produce double-digit
increases. Merchant processing increased $55 million, or 21%,
due to the addition and conversion of large national clients
throughout the year. Card issuer interchange revenues increased
primarily due to new customer additions and the resulting higher
card sales volumes from the success in the Bancorp’s initiative to
increase credit card penetration of its customer base. The
Bancorp continues to see significant opportunities to attract new
financial institution customers and retailers within this business
segment.
The strong increase in noninterest income was mitigated by a
19% increase in noninterest expense due to network charges
resulting from increased transaction volume in addition to
expenses related to the conversion of large national merchant
contracts. Expenses are expected to moderate in future periods to
be more consistent with revenue growth while reflecting spread
pressure relating to the renewal of current customer contracts.
Comparison of 2006 with 2005
Net income increased $15 million, or 12%, versus the prior year as
a result of increases in electronic payment processing fees
mitigated by increases in personnel costs and payment processing
expenses. Compared to 2006, merchant processing revenues and
financial institution revenue increased 16%, while card issuer
interchange earned on credit cards transactions increased 20%.
Noninterest expense increased 20% primarily due to
headcount additions, investment in information technology and
transaction processing costs. Salaries, incentives and benefits
increased 33% with the addition of over 300 employees.
General Corporate and Other
General Corporate and Other includes the unallocated portion of
the investment securities portfolio, securities gains/losses, certain
non-core deposit funding, unassigned equity, provision expense in
excess of net charge-offs and certain support activities and other
items not attributed to the business segments.
Comparison of 2007 with 2006
The results of General Corporate and Other were primarily
impacted by the increase in provision expense compared to the
prior year. Provision expense over charge-offs increased by
approximately $139 million compared to 2006 as the allowance
for loan and lease losses as a percentage of loan and leases
increased from 1.04% as of December 31, 2006 to 1.17% as of
December 31, 2007. The increase is attributable to a number of
factors including an increase in delinquencies, increases in the
severity of loss due to real estate price deterioration in some the
Bancorp’s key lending markets, the increase in automobile loans
and credit card balances and a modest decline in economic
conditions.
Comparison of 2006 with 2005
The results of General Corporate and Other were primarily
impacted by the balance sheet actions in the fourth quarter of
2006 and the related loss on the sale of securities. General
Corporate and Other was also impacted by wholesale funding
repricing at a faster rate than securities as a result of rising short-
term rates in the first half of 2006. The Bancorp experienced an
increase in the average interest rate on wholesale funding from
3.36% in 2005 to 5.02% in 2006 compared to an increase in the
average interest rate on securities from 4.36% in 2005 to 4.56% in
2006.
TABLE 18: PROCESSING SOLUTIONS
For the years ended December 31
($ in millions) 2007 2006 2005
Income Statement Data
Net interest income $(6) (3) (9)
Provision for loan and lease losses 11 918
Noninterest income:
Merchant processing 314 259 224
Financial institutions processing 319 290 250
Card issuer interchange 66 52 43
Other noninterest income 43 34 41
Noninterest expense:
Salaries, incentives and benefits 75 70 53
Payment processing expense 237 169 127
Other noninterest expenses 176 171 162
Income before taxes 237 213 189
Applicable income taxes 84 75 66
Net income $153 138 123