Fifth Third Bank 2008 Annual Report Download - page 29

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 27
Merchant processing revenue increased 11%, to $341 million,
compared to 2007 as the growth in the number of merchants and
transaction volumes compared to 2007 was partially offset by
lower average dollar amounts per transaction due to lower
consumer spending in the fourth quarter of 2008. Financial
institutions revenue increased to $324 million, up seven percent,
compared to 2007 due to higher transaction volumes as a result of
continued success in attracting financial institution customers.
Card issuer interchange increased 16%, to $247 million, compared
to 2007 due to continued growth related to debit and credit card
usage. The Bancorp processed approximately 28.4 billion
transactions during 2008 compared to approximately 26.7 billion
transactions during 2007 and handles electronic processing for
over 169,000 merchant locations worldwide.
TABLE 7: COMPONENTS OF ELECTRONIC PAYMENT
PROCESSING REVENUE
For the years ended December 31
($ in millions) 2008 2007 2006
Merchant processing revenue $341 308 255
Financial institutions revenue 324 305 279
Card issuer interchange 247 213 183
Electronic payment processing revenue $912 826 717
Service charges on deposits increased to $641 million, up $62
million, or 11%, in 2008 compared to 2007. Commercial deposit
revenue, net of earnings credits, increased $44 million, or 18%,
compared to 2007. Gross commercial deposit revenue grew six
percent, to $534 million, compared to 2007. The overall increase
was primarily impacted by a decrease in earnings credits of $35
million, or 54%, on compensating balances resulting from the
decline in short-term interest rates. Commercial customers
receive earnings credits to offset the fees charged for banking
services on their deposit accounts such as account maintenance,
lockbox, ACH transactions, wire transfers and other ancillary
corporate treasury management services. Earnings credits are
based on the customer’s average balance in qualifying deposits
multiplied by the crediting rate. Qualifying deposits include
demand deposits and interest-bearing checking accounts. The
Bancorp has a standard crediting rate that is adjusted as necessary
based on competitive market conditions and changes in short-
term interest rates. Retail deposit revenue increased five percent,
to $348 million, in 2008 compared to 2007. The increase in retail
service charges was attributable to higher customer activity.
Deposit generation and growth in the number of customer
deposit account relationships continue to be a primary focus of
the Bancorp.
Corporate banking revenue increased $77 million, or 21%, in
2008 over 2007, and reflects benefits from the broadening of the
Bancorp’s suite of commercial products. Foreign exchange
derivative income of $106 million, increased $46 million
compared to 2007 due to volume increases. Growth also occurred
in fees associated with business lending and asset securitizations,
which grew $13 million and $12 million, respectively, compared to
2007. The Bancorp is committed to providing a comprehensive
range of financial services to large and middle-market businesses.
Investment advisory revenue decreased $29 million, or eight
percent, from 2007 due to the significant decline in equity markets
in 2008 as the Bancorp experienced broad-based decreases in
several categories. Brokerage fee income, which includes Fifth
Third Securities income, decreased 11%, or $12 million, in 2008 as
investors migrated balances from stock and bond funds to money
markets funds due to market volatility. Mutual fund revenue
decreased 12%, to $53 million, in 2008 due to a shift to lower
yielding investments and lower asset values. As of December 31,
2008, the Bancorp had approximately $179 billion in assets under
care and managed $25 billion in assets for individuals,
corporations and not-for-profit organizations.
Mortgage banking net revenue increased to $199 million in
2008 from $133 million in 2007. The components of mortgage
banking net revenue for the year ended December 31, 2008 and
2007 are shown in Table 8.
TABLE 8: COMPONENTS OF MORTGAGE BANKING NET
REVENUE
For the years ended December 31
($ in millions) 2008 2007 2006
Origination fees and gains on loan sales $260 79 92
Servicing revenue:
Servicing fees 164 145 121
Servicing rights amortization (107) (92) (68)
Net valuation adjustments on servicing
rights and free-standing derivatives
entered into to economically hedge MSR (118) 110
Net servicing revenue (expense) (61) 54 63
Mortgage banking net revenue $199 133 155
Mortgage banking net revenue increased $66 million
compared to 2007 due to higher sales margins on loans sold,
higher sales volume of portfolio loans, and the impact of the
adoption of SFAS No. 159 for residential mortgage loans held for
sale, offset by lower net valuation adjustments. Mortgage
originations decreased three percent, from $11.9 billion to $11.5
billion, in comparison to 2007 as application volumes decreased
during the second half of 2008 as a result of market disruptions.
Mortgage originations rebounded during the fourth quarter of
2008 as a result of the declining interest rate environment. The
increase in sales margins on loans sold and sales volume of
portfolio loans contributed $151 million and $13 million,
respectively, to the increase in mortgage banking net revenue.
The adoption of SFAS No. 159 on January 1, 2008 for residential
mortgage loans held for sale also contributed approximately $65
million to the increase in mortgage banking net revenue. Prior to
adoption, mortgage loan origination costs were capitalized as part
of the carrying amount of the loan and recognized as a reduction
of mortgage banking net revenue upon the sale of the loans.
Subsequent to the adoption, mortgage loan origination costs are
recognized as expense when incurred and included in noninterest
expense within the Consolidated Statements of Income.
Mortgage net servicing revenue decreased $115 million
compared to 2007. Net servicing revenue is comprised of gross
servicing fees and related amortization as well as valuation
adjustments on mortgage servicing rights and mark-to-market
TABLE 6: NONINTEREST INCOME
For the years ended December 31 ($ in millions) 2008 2007 2006 2005 2004
Electronic payment processing revenue $912 826 717 622 521
Service charges on deposits 641 579 517 522 515
Corporate banking revenue 444 367 318 299 228
Investment advisory revenue 353 382 367 358 363
Mortgage banking net revenue 199 133 155 174 178
Other noninterest income 363 153 299 360 587
Securities gains (losses), net (86) 21 (364) 39 (37)
Securities gains, net – non-qualifying hedges on mortgage servicing
rights 120 63 --
Total noninterest income $2,946 2,467 2,012 2,374 2,355