Fifth Third Bank 2012 Annual Report Download - page 48

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
46 Fifth Third Bancorp
Comparison of 2012 with 2011
Net income was $223 million in 2012 compared to net income of
$56 million in 2011. The increase was driven by an increase in
noninterest income and a decline in the provision for loan and lease
losses, partially offset by an increase in noninterest expense and a
decrease in net interest income. Net interest income decreased $29
million due to lower yields on average residential mortgage and
automobile loans, partially offset by increases in average residential
mortgage and average automobile loans and favorable decreases in
the FTP charge applied to the segment.
Provision for loan and lease losses decreased $85 million
compared to the prior year as delinquency metrics and underlying
loss trends improved across all consumer loan types. Net charge-
offs as a percent of average loans and leases decreased to 88 bps for
2012 compared to 134 bps for 2011.
Noninterest income increased $246 million primarily due to
increases in mortgage banking net revenue of $245 million driven by
an increase in gains on residential mortgage loan sales of $424
million due to an increase in profit margins on sold loans coupled
with higher origination volumes. This increase was partially offset
by a decrease in net residential mortgage servicing revenue of $178
million, primarily driven by a decrease of $142 million in net
valuation adjustments on MSRs and free-standing derivatives
entered into to economically hedge the MSRs.
Noninterest expense increased $44 million driven by salaries,
incentives and benefits which increased $48 million primarily as a
result of higher mortgage loan originations.
Average consumer loans and leases increased $1.1 billion from
the prior year. Average automobile loans increased $526 million due
to a strategic focus to increase automobile lending throughout 2011
and 2012 through consistent and competitive pricing, disciplined
sales execution, and enhanced customer service with our dealership
network. Average residential mortgage loans increased $795 million
as a result of higher origination volumes. Average home equity loans
decreased $87 million due to continued runoff in the discontinued
brokered home equity product. Average consumer leases decreased
$123 million due to runoff as the Bancorp discontinued this product
in the fourth quarter of 2008.
Comparison of 2011 with 2010
Net income was $56 million in 2011 compared to a net loss of $26
million in 2010. The increase was driven by a decline in the
provision for loan and lease losses, partially offset by decreases in
noninterest income and net interest income and an increase in
noninterest expense. Net interest income decreased $62 million due
to a decline in average loan balances for residential mortgage, home
equity, and consumer leases as well as lower yields on average
residential mortgage and automobile loans, partially offset by
favorable decreases in the FTP charge applied to the segment.
Provision for loan and lease losses decreased $308 million
compared to the prior year, as delinquency metrics and underlying
loss trends improved across all consumer loan types. Additionally,
2010 included charge-offs of $123 million on the sale of $228
million of portfolio loans. Net charge-offs as a percent of average
loans and leases decreased to 134 bps for 2011 compared to 305 bps
for 2010.
Noninterest income decreased $40 million primarily due to
decreases in mortgage banking net revenue of $34 million. The
decrease from 2010 was driven by declines in origination fees and
gains on loan sales of $78 million due to decreased margins and
lower origination volumes, partially offset by an increase in net
servicing revenue of $44 million.
Noninterest expense increased $80 million driven in part by
increased FDIC insurance expense, as the methodology used to
determine FDIC insurance premiums changed in 2011 from one
based on domestic deposits to one based on total assets less tangible
equity. Additional changes were due to an increase of $41 million in
the provision for representation and warranty claims related to
residential mortgage loans sold to third parties and an increase of
$21 million in losses on escrow advances to borrowers relating to
bank owned residential mortgages.
Average consumer loans and leases increased $558 million
from the prior year. Average automobile loans increased $952
million due to a strategic focus to increase automobile lending
throughout 2010 and 2011. This increase was partially offset by
declines across all other types of consumer loans. Average
residential mortgage loans decreased $36 million as a result of the
lower origination volumes. Average home equity loans decreased
$121 million due to continued runoff in the discontinued brokered
home equity product. Average consumer leases decreased $226
million due to runoff as the Bancorp discontinued this product in
the fourth quarter of 2008.
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Investment Advisors
Investment Advisors provides a full range of investment alternatives
for individuals, companies and not-for-profit organizations.
Investment Advisors is made up of four main businesses: FTS, an
indirect wholly-owned subsidiary of the Bancorp; FTAM, an
indirect wholly-owned subsidiary of the Bancorp; Fifth Third
Private Bank; and Fifth Third Institutional Services. FTS offers full
service retail brokerage services to individual clients and broker
dealer services to the institutional marketplace. FTAM provides
asset management services and previously advised the Bancorp’s
proprietary family of mutual funds. Fifth Third Private Bank offers
holistic strategies to affluent clients in wealth planning, investing,
insurance and wealth protection. Fifth Third Institutional Services
provides advisory services for institutional clients including states
and municipalities.
As previously mentioned, the Bancorp announced that FTAM
entered into two agreements under which a third party would
acquire assets of 16 mutual funds from FTAM and another third
party would acquire certain assets relating to the management of
Fifth Third money market funds. Both transactions were completed
in the third quarter of 2012. Upon completion of the transactions,
the Bancorp recognized a $13 million gain on sale within other
noninterest income in the Bancorp’s Consolidated Statements of
Income.