Fifth Third Bank 2012 Annual Report Download - page 40

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
38 Fifth Third Bancorp
Noninterest Income
Noninterest income increased $544 million, or 22%, for the year ended December 31, 2012 compared to the year ended December 31, 2011. The
components of noninterest income are as follows:
TABLE 6: NONINTEREST INCOME
For the years ended December 31 ($ in millions) 2012 2011 2010 2009 2008
Mortgage banking net revenue $ 845 597 647 553 199
Service charges on deposits 522 520 574 632 641
Corporate banking revenue 413 350 364 372 431
Investment advisory revenue 374 375 361 326 366
Card and processing revenue 253 308 316 615 912
Gain on sale of the processing business - - - 1,758 -
Other noninterest income 574 250 406 479 363
Securities gains (losses), net 15 46 47 (10) (86)
Securities gains, net, non-qualifying hedges on mortgage servicing rights 3 9 14 57 120
Total noninterest income $ 2,999 2,455 2,729 4,782 2,946
M
ortgage banking net revenu
e
Mortgage banking net revenue increased $248 million, or 41%, in 2012 compared to 2011. The components of mortgage banking net revenue are
as follows:
TABLE 7: COMPONENTS OF MORTGAGE BANKING NET REVENUE
For the years ended December 31 ($ in millions) 2012 2011 2010
Origination fees and gains on loan sales $821 396 490
Net servicing revenue:
Gross servicing fees 250 234 221
Servicing rights amortization (186) (135) (137)
Net valuation adjustments on servicing rights and free-standing derivatives
entered into to economically hedge MSR (40) 102 73
Net servicing revenue 24 201 157
Mortgage banking net revenue $845 597 647
Origination fees and gains on loan sales increased $425 million in
2012 compared to 2011 primarily as the result of a 36% increase in
residential mortgage loan originations coupled with an increase in
profit margins on sold residential mortgage loans. Residential
mortgage loan originations increased to $25.2 billion during 2012
compared to $18.6 billion during 2011. The increase in originations
is primarily due to strong refinancing activity as mortgage rates
remain at historical lows coupled with an increase in refinancing
activity under the HARP 2.0 program.
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
decreased $177 million in 2012 compared to 2011 driven primarily
by decreases of $142 million in net valuation adjustments.
Additionally, servicing rights amortization increased by $51 million
in 2012 compared to 2011 driven by higher prepayments due to
declining market interest rates and increased MSR volume.
The net valuation adjustment loss of $40 million during 2012
included $103 million of temporary impairment on the MSRs
partially offset by $63 million in gains from derivatives economically
hedging the MSRs. Mortgage rates decreased during 2012 compared
to 2011 causing modeled prepayments speeds to increase, which led
to the temporary impairment on the servicing rights for the year
ended 2012. In the second half of 2011 and continuing throughout
2012, the Bancorp utilized a macro hedging strategy for the MSR
portfolio whereby it reduced the amount of hedges and relied on
income from new production to offset declines in the net valuation
of MSRs and the related hedges of the MSR portfolio in the down
rate environment. The net valuation adjustment gain 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 in 2011 was reflective of refinancing activity in
recent years that 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 benefited from
the positive carry of the hedge and the widening spread between
mortgage and swap rates. Gross servicing fees increased $16 million
in 2012 compared to 2011 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, 2012 and 2011 was $77.3 billion and
$70.6 billion, respectively, with $62.5 billion and $57.1 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 11 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 12 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 $3 million and $9 million in 2012 and
2011, respectively, and were recorded in securities gains, net, non-