Fifth Third Bank 2007 Annual Report Download - page 37

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 3
5
FOURTH QUARTER REVIEW
The Bancorp’s 2007 fourth quarter net income was $16 million, or
$.03 per diluted share, compared to $325 million, or $.61 per
diluted share, in the third quarter of 2007 and $66 million, or $.12
per diluted share, for the fourth quarter of 2006. Return on
average assets and return on average equity for the fourth quarter
of 2007 were .06% and .7%, respectively, compared to 1.26% and
13.8% in the third quarter of 2007 and .25% and 2.6% in 2006’s
fourth quarter. Fourth quarter 2007 earnings and ratios were
negatively impacted by a charge of $177 million to lower the
current cash surrender value of one of the Bancorp’s BOLI
policies, a charge of $94 million related to Visa members’
indemnification of future litigation settlements, as well as $8
million in acquisition-related costs. The BOLI charge reflected an
additional $22 million recorded subsequent to the Bancorp’s
issuance of fourth quarter of 2007 earnings. In the fourth quarter
of 2006, earnings and ratios were negatively impacted by $454
million in total pretax losses and charges related to balance sheet
actions taken to improve the asset/liability profile of the Bancorp.
Fourth quarter 2007 net interest income (FTE) of $785
million increased $25 million, or three percent, from the third
quarter of 2007 and $41 million, or six percent, from the same
period a year ago. Sequential growth in net interest income was
primarily driven by a five percent increase in earning assets and
lower funding costs, both in core deposits and wholesale
borrowings, resulting from lower market interest rates. These
positive effects were partially offset by lower loan yields related to
lower market interest rates, the reversal of previously recognized
interest on higher nonperforming assets, and the impact of the
issuance of trust preferred securities during the third and fourth
quarters. Increases in net interest income compared to the fourth
quarter of 2006 were primarily a result of the balance sheet actions
in the prior year, mitigated by the issuance of $2.2 billion in trust
preferred securities throughout 2007. The net interest margin was
3.29%, a 5 bp decrease from the third quarter of 2007 and a 13 bp
increase over the fourth quarter of 2006.
Noninterest income of $509 million decreased by $172 million
compared to the third quarter of 2007 and increased $328 million
compared to the fourth quarter of 2006. Fourth quarter 2007
results include a $177 million charge to reduce the cash surrender
value of one of the Bancorp’s BOLI policies and $22 million
related to the termination of cash flow hedges on automobile loans
held for sale. Third quarter results included a gain of $15 million
on the sale of FDIC deposit insurance credits. Fourth quarter of
2006 results include $415 million in losses on securities and
derivatives related to the Bancorp’s fourth quarter of 2006 balance
sheet actions. Excluding those charges, sequential noninterest
income growth was $42 million, or six percent, and year-over-year
noninterest income growth was $112 million, or 19%, with strong
growth in service charges on deposits, corporate banking and
electronic payment processing revenue.
Electronic payment processing revenue of $223 million
increased five percent sequentially and 15% compared with last
year. Compared with a year ago, growth was driven by continued
strong merchant processing results and strong growth in card
issuer interchange driven by higher card usage and an increase in
credit card accounts stemming from success in the Bancorp’s
initiative to increase customer credit card penetration.
Service charges on deposits of $160 million increased six
percent from the third quarter of 2007 and 30% versus the same
quarter last year. Retail service charges increased three percent
from the third quarter, driven by higher levels of customer activity
and modest growth in transaction accounts. Retail service charges
grew 41% compared with the fourth quarter of 2006, driven by
higher levels of customer activity and comparisons to the unusual
weakness experienced in the same quarter last year. Commercial
service charges increased 10% sequentially and 19% compared with
last year, primarily due to lower earnings credits on commercial
deposit accounts and fee growth associated with new product and
service offerings.
Investment advisory revenue of $94 million decreased one
percent sequentially and increased four percent over fourth quarter
of 2006. Private banking revenue increased two percent
sequentially, largely due to higher insurance revenue, and nine
percent from the same quarter last year on continued strong results
particularly in wealth planning and trust. Brokerage fee revenue
declined seven percent sequentially, reflecting the volatility in
equity markets in the fourth quarter of 2007, and was flat
compared with a year ago as the effect of adverse market
conditions offset growth in the number of licensed brokers.
Corporate banking revenue of $106 million increased 17%
sequentially and 29% over the fourth of 2006, reflecting the build
out of the Bancorp’s corporate banking capabilities. The Bancorp
realized growth both sequentially and year-over-year in all sub
captions of corporate banking revenue.
Mortgage banking net revenue totaled $26 million in the
fourth and third quarter of 2007 and $30 million in the fourth
quarter of 2006. Mortgage originations of $2.7 billion decreased
from $3.0 billion in the third quarter of 2007 and increased from
$2.3 billion in the fourth quarter of 2006. Gains on loan sales of
$18 million increased from $9 million in the third quarter and
decreased from $23 million in fourth quarter of 2006.
Improvement in the liquidity of the residential mortgage market
during the fourth quarter of 2007 drove the higher gains on loan
sales compared with the third quarter. Net servicing revenue,
before MSR valuation adjustments, of $14 million in the fourth
quarter was consistent with the third quarter of 2007 and increased
$2 million over the fourth quarter of 2006.
Noninterest expense of $940 million increased 10% from
third quarter of 2007 and increased 24% from the fourth quarter of
2006. Comparisons reflect expenses accrued related to future Visa
litigation settlements of $94 million in the fourth quarter of 2007
and $78 million related to the Visa/American Express settlement
in the third quarter of 2007. Exclusive of the Visa accruals and a
$39 million charge associated with the termination of financing
agreements in the fourth quarter of 2006, noninterest expense
increased nine percent compared to the third quarter of 2006 and
17% compared to the same quarter last year. Both sequential and
year-over-year increases were driven by volume-based increases in
payment processing expense, higher de novo related occupancy
expense and increased provision expense for unfunded loan
commitments.
Net charge-offs as a percentage of average loans and leases
were 89 bp, or $174 million, in the fourth quarter, compared with
60 bp, or $115 million, last quarter and 52 bp, or $97 million, in the
fourth quarter of 2006. The increase was the result of commercial
and consumer real estate loans concentrated in Michigan, northern
Ohio and Florida. Comparisons were also affected by a $15
million fraud-related commercial loan charge-off in the fourth
quarter of 2007.
Average loan and lease balances grew five percent sequentially
and nine percent from the fourth quarter last year. Crown
contributed approximately one percent of the sequential and year-
over-year growth, primarily in commercial and residential mortgage
loans. The Bancorp continued to grow credit card balances,
increasing seven percent over the sequential quarter and 60% over
the fourth quarter of 2006. Average core deposits were up three
percent compared to the third quarter of 2007 and the fourth
quarter of 2006. Crown contributed approximately one percent of
the sequential and year-over-year growth. The Bancorp continued
to generate overall deposit growth while realizing a mix shift from
interest checking to savings accounts.