Fifth Third Bank 2011 Annual Report Download - page 34

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
32 Fifth Third Bancorp
STATEMENTS OF INCOME ANALYSIS
Net Interest Income
Net interest income is the interest earned on securities, loans and
leases (including yield-related fees) and other interest-earning assets
less the interest paid for core deposits (includes transaction deposits
and other time deposits) and wholesale funding (includes certificates
of deposit $100,000 and over, other deposits, federal funds
purchased, short-term borrowings and long-term debt). The net
interest margin is calculated by dividing net interest income by
average interest-earning assets. Net interest rate spread is the
difference between the average rate earned on interest-earning assets
and the average rate paid on interest-bearing liabilities. Net interest
margin is typically greater than net interest rate spread due to the
interest income earned on those assets that are funded by
noninterest-bearing liabilities, or free funding, such as demand
deposits or shareholders’ equity.
Table 5 presents the components of net interest income, net
interest margin and net interest rate spread for the years ended
December 31, 2011, 2010 and 2009. Nonaccrual loans and leases
and loans held for sale have been included in the average loan and
lease balances. Average outstanding securities balances are based on
amortized cost with any unrealized gains or losses on available-for-
sale securities included in other assets. Table 6 provides the relative
impact of changes in the balance sheet and changes in interest rates
on net interest income.
Net interest income was $3.6 billion for each of the years
ended December 31, 2011 and 2010. Included within net interest
income are amounts related to the accretion of discounts on
acquired loans and deposits, primarily as a result of acquisitions in
previous years, which increased net interest income by $40 million
during 2011 and $68 million during 2010. The original purchase
accounting discounts reflected the high discount rates in the market
at the time of the acquisitions; the total loan discounts are being
accreted into net interest income over the remaining period to
maturity of the loans acquired. Based upon the remaining period to
maturity, and excluding the impact of prepayments, the Bancorp
anticipates recognizing approximately $15 million in additional net
interest income during 2012 as a result of the amortization and
accretion of premiums and discounts on acquired loans and
deposits.
For the year ended December 31, 2011, net interest income
was adversely impacted by lower yields on both the commercial and
consumer loan portfolios partially offset by an increase in average
consumer loans and a decrease in interest expense compared to the
year ended December 31, 2010. Yields on the commercial and
consumer loan portfolio decreased throughout 2011 as the result of
low interest rates during the year. Average consumer loans increased
primarily as the result of increases in average residential mortgage
loans and automobile loans partially offset by a decrease in home
equity loans compared to the year ended December 31, 2010. The
decrease in interest expense was primarily the result of a $3.2 billion
decrease in average interest bearing liabilities from the year ended
December 31, 2010, coupled with a continued mix shift to lower
cost core deposits as well as the benefit of lower rates offered on
savings account balances and other time deposits. The decrease in
average interest bearing liabilities was the result of migration from
certificates of deposit into demand deposit accounts due to low
interest rates during 2011. For the year ended December 31, 2011,
the net interest rate spread increased to 3.42% from 3.39% in 2010
as the benefit of a 25 bps decrease in rates on interest bearing
liabilities was partially offset by a 22 bps decrease in yield on average
interest earnings assets.
Net interest margin was 3.66% for the years ended December
31, 2011 and 2010. Net interest margin was impacted by the
amortization and accretion of premiums and discounts on acquired
loans and deposits that resulted in an increase of 5 bps during 2011
compared to 7 bps during 2010. Exclusive of these amounts, net
interest margin increased 2 bps for the year ended December 31,
2011 compared to the prior year primarily as the result of the
previously mentioned mix shift to lower cost core deposits during
2011, an increase in free funding balances and a decrease in average
interest earnings assets partially offset by the previously mentioned
decrease on the yield of average loans and leases.
Total average interest-earning assets decreased one percent for
the year ended December 31, 2011 compared to the prior year
primarily as the result of an 11% decrease in the average investment
portfolio and a one percent decrease in average commercial loans;
partially offset by a four percent increase in average consumer loans.
For more information on the Bancorp’s investment securities
portfolio and loan and lease portfolio, see the Investment Securities
and Loan and Lease sections of MD&A.
Interest income from loans and leases decreased $207 million,
or five percent, compared to the year ended December 31, 2010
driven primarily by a 32 bps decrease in average loan yields partially
offset by a four percent increase in average consumer loans. Yields
across much of the loan and lease portfolio decreased as the result
of lower interest rates on newly originated loans and a decline in
interest rates on automobile loans due to increased competition.
Exclusive of the amortization and accretion of premiums and
discounts on acquired loans, interest income from loans and leases
decreased $179 million compared to the year ended December 31,
2010. Interest income from investment securities and short-term
investments decreased $64 million, or 10%, from the prior year
primarily as the result of a $2.2 billion decrease in the average
balance and a 16 bps decrease in the average yield of taxable
securities.
Average core deposits increased $2.5 billion, or three percent,
compared to the year ended December 31, 2010 primarily due to an
increase in average demand deposits and average savings deposits
partially offset by a decrease in average time deposits. The cost of
average core deposits decreased to 36 bps for the year ended
December 31, 2011 compared to 61 bps from the prior year. This
decrease was primarily the result of a mix shift to lower cost core
deposits as a result of runoff of higher priced CDs combined with a
24 bps decrease in rates on average savings deposits and a 39 bps
decrease in rates on average time deposits compared to year ended
December 31, 2010.
Interest expense on wholesale funding for the year ended
December 31, 2011 decreased $38 million, or nine percent,
compared to the prior year, primarily as a result of a $2.0 billion
decrease in the average balance partially offset by a 4 bps increase in
the rate. Refer to the Borrowings section of MD&A for additional
information on the Bancorp’s changes in average borrowings.
During the year ended December 31, 2011, wholesale funding
represented 23% of interest bearing liabilities compared to 25%
during the prior year. For more information on the Bancorp’s
interest rate risk management, including estimated earnings
sensitivity to changes in market interest rates, see the Market Risk
Management section of MD&A.