Fifth Third Bank 2011 Annual Report Download - page 37

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 35
Noninterest Income
Noninterest income decreased $274 million, or 10%, for the year ended December 31, 2011 compared to the year ended December 31, 2010. The
components of noninterest income are as follows:
TABLE 7: NONINTEREST INCOME
For the years ended December 31 ($ in millions) 2011 2010 2009 2008 2007
Mortgage banking net revenue $ 597 647 553 199 133
Service charges on deposits 520 574 632 641 579
Investment advisory revenue 375 361 326 366 382
Corporate banking revenue 350 364 372 431 367
Card and processing revenue 308 316 615 912 826
Gain on sale of the processing business - - 1,758 - -
Other noninterest income 250 406 479 363 153
Securities gains (losses), net 46 47 (10) (86) 21
Securities gains, net, non-qualifying hedges on mortgage servicing rights 9 14 57 120 6
Total noninterest income $ 2,455 2,729 4,782 2,946 2,467
Mortgage banking net revenue
Mortgage banking net revenue decreased $50 million in 2011 compared to 2010. The components of mortgage banking net revenue are as follows:
TABLE 8: COMPONENTS OF MORTGAGE BANKING NET REVENUE
For the years ended December 31 ($ in millions) 2011 2010 2009
Origination fees and gains on loan sales $396 490 485
Net servicing revenue:
Gross servicing fees 234 221 197
Servicing rights amortization (135) (137) (146)
Net valuation adjustments on servicing rights and free-standing derivatives
entered into to economically hedge MSR 102 73 17
Net servicing revenue 201 157 68
Mortgage banking net revenue $597 647 553
Origination fees and gains on loan sales decreased $94 million in
2011 compared to 2010 primarily as the result of a 26% decrease in
the profit margin on sold residential mortgage loans due to a
decrease in interest rates and an eight percent decrease in residential
mortgage loan originations compared to 2010. Residential mortgage
loan originations decreased to $18.6 billion during 2011 compared
to $20.3 billion during 2010. The decrease in originations is
primarily due to a decrease in refinancing activity as many customers
have taken advantage of the low interest rate environment in prior
years.
Net servicing revenue is comprised of gross servicing fees and
related servicing rights amortization as well as valuation adjustments
on MSRs and mark-to-market adjustments on both settled and
outstanding free-standing derivative financial instruments used to
economically hedge the MSR portfolio. Net servicing revenue
increased $44 million in 2011 compared to 2010 driven primarily by
an increase in valuation adjustments and gross servicing fees. The
net valuation adjustment of $102 million during 2011 included $344
million in gains from derivatives economically hedging the MSRs
partially offset by $242 million in temporary impairment on the
MSR portfolio. The gain in the net valuation adjustment is reflective
of refinancing activity in recent years that has contributed to
prepayments being less sensitive to lower mortgage rates due to
customers taking advantage of lower rates in earlier periods as well
as the impact of tighter underwriting standards. Additionally, the net
MSR/hedge position has benefited from the positive carry of the
hedge and the widening spread between mortgage and swap rates.
Gross servicing fees increased $13 million in 2011 compared to
2010 as a result of an increase in the size of the Bancorp’s servicing
portfolio. The Bancorp’s total residential loans serviced as of
December 31, 2011 and 2010 was $70.6 billion and $63.2 billion,
respectively, with $57.1 billion and $54.2 billion, respectively, of
residential mortgage loans serviced for others.
Servicing rights are deemed impaired when a borrower’s loan
rate is distinctly higher than prevailing rates. Impairment on
servicing rights is reversed when the prevailing rates return to a level
commensurate with the borrower’s loan rate. Further detail on the
valuation of MSRs can be found in Note 12 of the Notes to
Consolidated Financial Statements. The Bancorp maintains a non-
qualifying hedging strategy to manage a portion of the risk
associated with changes in the valuation on the MSR portfolio. See
Note 13 of the Notes to Consolidated Financial Statements for
more information on the free-standing derivatives used to
economically hedge the MSR portfolio.
In addition to the derivative positions used to economically
hedge the MSR portfolio, the Bancorp acquires various securities as
a component of its non-qualifying hedging strategy. Net gains on
sales of these securities were $9 million and $14 million in 2011 and
2010, respectively, and were recorded in securities gains, net, non-
qualifying hedges on mortgage servicing rights in the Bancorp’s
Consolidated Statements of Income.
Service charges on deposits
Service charges on deposits decreased $54 million in 2011 compared
to 2010. Consumer deposit revenue decreased $59 million in 2011
compared to 2010 primarily due to the impact of Regulation E and
new overdraft policies that resulted in a decrease in overdraft
occurrences. Regulation E became effective on July 1, 2010 for new
accounts and August 15, 2010 for existing accounts. Regulation E is
a FRB rule that prohibits financial institutions from charging
consumers fees for paying overdrafts on ATMs and one-time debit
card transactions unless a consumer consents, or opts in, to the
overdraft service for those types of transactions.
Commercial deposit revenue increased $5 million in 2011
compared to 2010 primarily due to an increase in commercial
account relationships and a decrease in earnings credits paid on
customer balances as the result of a decrease in the crediting rate
applied to balances. Commercial customers receive earnings credits
to offset the fees charged for banking services on their deposit
accounts such as account maintenance, lockbox, ACH transactions,