Fifth Third Bank 2008 Annual Report Download - page 35

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 33
loans in addition to careful consideration of underwriting and
collection standards. As of December 31, 2008, the Bancorp had
restructured approximately $462 million and $248 million of
residential mortgage loans and home equity loans, respectively, to
mitigate losses due to declining collateral values.
Mortgage originations decreased to $11.2 billion in 2008
from $11.4 billion in 2007 due to lower application volumes in the
second half of 2008 resulting from market disruptions. The
increase in sales margins on loans held for sale and sales volume
of portfolio loans were the primary reasons for increased
mortgage banking net revenue compared to 2007. Also
contributing to the increase in mortgage banking net revenue in
2008 was the $65 million impact from the adoption of SFAS No.
159, as of January 1, 2008, on residential mortgage loans held for
sale. 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 in earnings when incurred, which
primarily drove the increase in salaries and incentives in
comparison to 2007. The increase in other noninterest expense
compared to 2007 can be attributed to higher loan processing
costs from increased collection activities.
Comparison of 2007 with 2006
Net income decreased $50 million, or 28%, compared to 2006
despite increased originations, due to an increase in provision for
loan and lease losses and decreased gain on sale margins.
Average residential mortgage loans increased seven percent
compared to 2006 due to increased mortgage originations and
loans acquired from Crown. Net charge-offs increased to 73 bp
in 2007, an increase from 47 bp in 2006, due to greater severity of
loss on residential mortgages and automobile loans related to
declining real estate prices and a market surplus of used
automobiles, respectively.
Noninterest income decreased 14% compared to 2006 due to
a decline in mortgage banking net revenue. The Bancorp’s
mortgage originations were $11.4 billion and $9.4 billion in 2007
and 2006, respectively. Despite the increase in originations, gain
on sale margins decreased due to widening credit spreads in the
residential mortgage market, resulting in a decrease in mortgage
banking net revenue of $26 million, or 18%.
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
17 contains selected financial data for the Processing Solutions
segment.
Comparison of 2008 with 2007
Net income increased $19 million, or 12%, compared to 2007 as
the segment continues to increase its presence in the electronic
payment processing business. The segment continues to realize
year-over-year growth in transaction volumes and revenue growth,
despite the negative effect of the slowdown in consumer
spending, due to the addition and conversion of large national
clients over the past year and current initiatives involving
merchant pricing and sales. Financial institutions processing
revenues increased $50 million, or 16%, driven by higher
transaction volumes. Merchant processing revenue increased $29
million, or nine percent, over 2007 as growth in the number of
merchants and overall transaction volume was partially offset by
lower average dollar amounts per transaction. Growth in card
issuer interchange of $17 million, or 25%, can be attributed to
organic growth in the Bancorp’s credit card portfolio.
Payment processing expense increased $28 million, or 12%,
from 2007 due to higher network charges of $189 million, an
increase of $23 million, or 14% from 2007. The increase in
network charges is a result of increased transaction volumes as
financial institution transactions and merchant transactions
processed both increased in comparison to 2007. Noninterest
expense also increased due to higher volume-related technology
and communications expense.
Comparison of 2007 with 2006
Net income increased $24 million, or 17%, versus the prior year as
electronic payment processing revenues continued to produce
double-digit increases. Merchant processing increased $55 million
due to the addition and conversion of large national clients
throughout 2007. Card issuer interchange revenues increased
primarily due to new customer additions and the resulting higher
card sales volumes from the success in the Bancorp’s initiative to
increase credit card penetration of its customer base.
The strong increase in noninterest income was mitigated by a
19% increase in noninterest expense due to network charges
resulting from increased transaction volume in addition to
expenses related to the conversion of large merchant contracts.
TABLE 17: PROCESSING SOLUTIONS
For the years ended December 31
($ in millions) 2008 2007 2006
Net interest income $7 (6) (3)
Provision for loan and lease losses 16 11 9
Noninterest income:
Electronic payment processing 796 700 601
Service charges on deposits 1 (1) (1)
Corporate banking revenue - 31
Investment advisory revenue - --
Mortgage banking net revenue - --
Other noninterest income 46 41 35
Securities gains (losses), net - -(1)
Noninterest expense:
Salaries, incentives and benefits 80 75 70
Net occupancy expense 4 43
Payment processing expense 265 237 169
Technology and communications 42 31 32
Equipment expense 2 44
Goodwill impairment - --
Other noninterest expense 161 123 130
Income before taxes 280 252 215
Applicable income tax expense 98 89 76
Net income $182 163 139