Fifth Third Bank 2011 Annual Report Download - page 47

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 45
FOURTH QUARTER REVIEW
The Bancorp’s 2011 fourth quarter net income available to common
shareholders was $305 million, or $0.33 per diluted share, compared
to net income available to common shareholders of $373 million, or
$0.40 per diluted share, for the third quarter of 2011 and net income
available to common shareholders of $270 million, or $0.33 per
diluted share, for the fourth quarter of 2010. Fourth quarter 2011
earnings included a $54 million charge to noninterest income related
to changes in the fair value of a swap liability that the Bancorp
entered into in conjunction with its sale of Visa, Inc Class B shares
in 2009, a $30 million decrease in debit interchange revenue due to
changes in debit interchange regulations and $10 million in positive
valuation adjustments on puts and warrants associated with the sale
of the processing business. Third quarter 2011 results included $28
million of costs related to the termination of certain FHLB
borrowings and hedging transactions and a $17 million reduction in
other noninterest income related to the valuation of a total return
swap entered into as part of the sale of Visa, Inc. Class B shares.
Fourth quarter 2010 earnings included the impact of a $17 million
charge related to the early extinguishment of $1.0 billion in FHLB
borrowings as well as $21 million in net investment securities gains.
Provision expense was $55 million in the fourth quarter of 2011,
down from $87 million in the third quarter of 2011 and $166 million
in the fourth quarter of 2010. Both the sequential decrease and the
decline from the fourth quarter of 2010 reflect improved credit
trends, as evidenced by a decrease in net charge-offs and
improvements in nonperforming assets and delinquent loans. The
ALLL to loan and lease ratio was 2.78% as of December 31, 2011,
compared to 3.08% as of September 30, 2011 and 3.88% as of
December 31, 2010.
Fourth quarter 2011 net interest income of $920 million
increased $18 million from the third quarter of 2011 and $1 million
from the same period a year ago. The increase from the third
quarter of 2011 was driven by both a decline in interest expense and
an increase in interest income. Interest expense declined $16 million
from the third quarter of 2011, driven by lower deposit costs,
including the $16 million impact of continued run-off of high-rate
CDs and their replacement into lower yielding products. Interest
income increased $2 million from the third quarter of 2011 as an
increase in average loans was partially offset by a decline in average
securities and lower yields on average interest earning assets. Net
interest income was flat in comparison to the fourth quarter of
2010, largely due to lower loan and investment securities yields
partially offset by higher average loan balances, run-off in higher-
priced CDs, and mix shift to lower cost deposit products.
Fourth quarter 2011 noninterest income of $550 million
decreased $115 million compared to the third quarter of 2011 and
$106 million compared to the fourth quarter of 2010. The sequential
decline was driven by a $54 million reduction in income due to the
increase in fair value of the liability related to the total return swap
entered into as part of the 2009 sale of Visa, Inc. Class B shares, as
well as a $22 million decrease in mortgage banking net revenue.
Compared to the fourth quarter of 2010, the decline was driven by
decreases of $31 million in other noninterest income, $21 million in
card and processing fees and $16 million in securities gains, net. The
fourth quarter of 2011 included a benefit of $10 million in mark-to-
market adjustments on warrants and put options related to the sale
of the processing business, compared to a benefit of $3 million in
the third quarter of 2011 and the fourth quarter of 2010.
Mortgage banking net revenue was $156 million in the fourth
quarter of 2011, compared to $178 million in the third quarter of
2011 and $149 million in the fourth quarter of 2010. Fourth quarter
originations were $7.1 billion, compared to $4.5 billion in the
previous quarter and $7.4 billion in the same quarter last year. These
originations resulted in gains on mortgage loan sales of $152 million
in the fourth quarter of 2011, compared to $119 million in the third
quarter of 2011 and $158 million in the fourth quarter of 2010. Gain
on sale margins declined from third quarter of 2011 and fourth
quarter of 2010 levels, due to increased competition for originations
as volumes slowed during the quarter. Also impacting mortgage
banking net revenue was net valuation adjustments on MSRs and
MSR derivatives. In the fourth quarter of 2011 and 2010, losses on
the Bancorp’s free-standing MSR derivatives exceeded impairment
reversal recorded against the hedged MSRs. These factors led to a
net loss of $54 million on the net valuation adjustments on MSRs in
the fourth quarter of 2011, compared to a net zero and a net loss of
$67 million in the third quarter of 2011 and the fourth quarter of
2010, respectively. A net loss on non-qualifying hedges on MSR of
$3 million in the fourth quarter of 2011 was included in noninterest
income within the Consolidated Statements of Income, but shown
separate from mortgage banking net revenue. Net gains on non-
qualifying hedges on mortgage servicing rights were $6 million and
$14 million in the third quarter of 2011 and the fourth quarter of
2010, respectively.
Service charges on deposits of $136 million increased one
percent sequentially and decreased three percent compared to the
fourth quarter of 2010. Retail service charges were flat sequentially
and declined by seven percent from a year ago, largely driven by the
impact of Regulation E. Commercial service charges increased two
percent sequentially due to reductions in earnings credit rates and
account growth and were flat when compared to the same quarter
last year.
Corporate banking revenue of $82 million decreased $5 million
from the previous quarter and decreased $21 million from the
fourth quarter of 2010. The sequential decline was primarily driven
by lower foreign exchange, interest rate derivative, and lease
remarketing fees. The year-over-year decline was driven by these
factors as well as lower syndication fees and institutional sales
revenue.
Investment advisory revenue of $90 million decreased two
percent sequentially and three percent from the fourth quarter of
2010. Sequential and year-over-year declines were driven by lower
securities and brokerage revenue, institutional trust fees, and mutual
fund fees partially offset by higher private client service revenue.
Card and processing revenue of $60 million decreased $18
million compared to the third quarter of 2011 and $20 million from
the fourth quarter of 2010. Both decreases were driven by the
impact of the recently enacted debit interchange legislation partially
offset by increased transaction volumes and mitigation activity in
response to the debit interchange legislation.
The net gain on investment securities was $5 million in the
fourth quarter of 2011 compared to a net gain of $26 million in the
third quarter of 2011 and a net gain of $21 million in the fourth
quarter of 2010.
Noninterest expense of $993 million increased $47 million
sequentially and increased $6 million from the fourth quarter of
2010. Fourth quarter 2011 expenses included $14 million of reserve
related costs associated with bankcard association membership
litigation and $5 million in other litigation reserve additions. Third
quarter 2011 expenses included $28 million of costs related to the
termination of certain FHLB borrowings and hedging transactions,
while fourth quarter 2010 results included $17 million of expenses
related to the early termination of $1.0 billion in FHLB borrowings.
Excluding these items, noninterest expense increased six percent
from the third quarter of 2011 and was flat compared with the
fourth quarter of 2010, driven by increased mortgage fulfillment
costs and $6 million of pension settlements.
Net charge-offs totaled $239 million in the fourth quarter of
2011, compared to $262 million in the third quarter of 2011 and
$356 million in the fourth quarter of 2010. The decreases in net
charge-offs from both periods reflects continued improvement in
the credit quality of portfolio loans. Commercial net charge-offs
were $113 million in the fourth quarter of 2011, compared to $136