Fifth Third Bank 2012 Annual Report Download - page 37

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
35 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 yield 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 4 presents the components of net interest income, net
interest margin and net interest rate spread for the years ended
December 31, 2012, 2011 and 2010. 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 5 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 the years ended
December 31, 2012 and 2011. 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 $31 million during 2012 and
$40 million during 2011. 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 $9 million in additional net interest
income during 2013 as a result of the amortization and accretion of
premiums and discounts on acquired loans and deposits.
For the year ended December 31, 2012, net interest income
was positively impacted by an increase in average loans and leases of
$4.6 billion as well as a decrease in interest expense compared to the
year ended December 31, 2011. In addition, net interest income
benefited from the free funding provided by a $3.8 billion increase
in average demand deposits in 2012 compared to 2011. Average
interest-earning assets increased by $4.0 billion in 2012 while
average interest-bearing liabilities were flat compared to the prior
year. These benefits were offset by lower yields on the Bancorp’s
interest-earning assets. The increase in average loans and leases for
the year ended December 31, 2012 was driven primarily by an
increase of 15% in average commercial and industrial loans and an
increase of 18% in average residential mortgage loans. For more
information on the Bancorp’s loan and lease portfolio, see the
Loans and Leases section of the Balance Sheet analysis of MD&A.
The decrease in interest expense was primarily the result of
decreases in the rates paid on average interest-bearing liabilities of
21 bps, primarily due to lower rates offered on savings account
balances and other time deposits, compared to the year ended
December 31, 2011, coupled with a continued mix shift to lower
cost core deposits. For the year ended December 31, 2012, the net
interest rate spread decreased to 3.35% from 3.42% in 2011 as the
benefit from a decrease in rates on average interest-bearing liabilities
was more than offset by a 28 bps decrease in yield on average
interest-earnings assets.
Net interest margin was 3.55% for the year ended December
31, 2012 compared to 3.66% for the year ended December 31, 2011.
Net interest margin was impacted by the amortization and accretion
of premiums and discounts on acquired loans and deposits that
resulted in an increase in net interest margin of 3 bps during 2012
compared to 5 bps during 2011. Exclusive of these amounts, net
interest margin decreased 9 bps for the year ended December 31,
2012 compared to the prior year driven primarily by the previously
mentioned decline in the yield on average interest-earning assets and
higher average balances on interest-earning assets, partially offset by
a mix shift to lower cost core deposits, the decline in rates paid on
interest-bearing liabilities and an increase in free funding balances.
Interest income from loans and leases decreased $37 million, or
one percent, compared to the year ended December 31, 2011 driven
primarily by a 29 bps decrease in average loans and leases yields
attributable to loan repricing, mainly in the commercial and
industrial loan portfolio as well as in the automobile and residential
mortgage portfolios, partially offset by a six percent increase in
average loans and leases. Interest income from investment securities
and short-term investments decreased $74 million, or 12%, from the
prior year primarily as the result of a 44 bps decrease in the average
yield of taxable securities due to paydowns and the sale of higher
yielding agency mortgage-backed securities coupled with the
reinvestment into lower yielding securities.
Average core deposits increased $3.8 billion, or five percent,
compared to the year ended December 31, 2011 primarily due to an
increase in average interest checking deposits and average demand
deposits partially offset by a decrease in average foreign office
deposits and average other time deposits. The cost of average core
deposits decreased to 21 bps for the year ended December 31, 2012
compared to 36 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 64 bps decrease in the
rates paid on average other time deposits and a 14 bps decrease in
the rate paid on average savings deposits compared to year ended
December 31, 2011.
Interest expense on average wholesale funding for the year
ended December 31, 2012 decreased $38 million, or 10%, compared
to the prior year, primarily as the result of a 49 bps decrease in the
rate paid on average certificates $100,000 and over and a $554
million decrease in average certificates $100,000 and over, coupled
with a $1.1 billion decrease in average long-term debt. These
impacts were partially offset by a 16 bps increase in the rate paid on
average long-term debt. 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, 2012, wholesale
funding represented 24% of interest-bearing liabilities compared to
23% 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.