Fifth Third Bank 2013 Annual Report Download - page 38

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
36 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 5 presents the components of net interest income, net
interest margin and net interest rate spread for the years ended
December 31, 2013, 2012 and 2011. 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 6 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, 2013 and 2012. Included within net interest income
are amounts related to the amortization and accretion of premiums
and discounts on acquired loans and deposits, primarily as a result
of acquisitions in previous years, which increased net interest
income by $17 million during 2013 and $31 million during 2012.
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 $5
million in additional net interest income during 2014 as a result of
the amortization and accretion of premiums and discounts on
acquired loans and deposits.
For the year ended December 31, 2013, net interest income
was negatively impacted by a 36 bps decline in yields on the
Bancorp’s interest-earning assets compared to the year ended
December 31, 2012. The decrease in yields on interest earning assets
was partially offset by an increase in average loans and leases of $4.3
billion as well as a decrease in interest expense compared to the
prior year. The decrease in interest expense was primarily the result
of a 59 bps decrease in the rate paid on average long-term debt
coupled with a $1.1 billion decrease in average long-term debt for
the year ended December 31, 2013 compared to the year ended
December 31, 2012. For the year ended December 31, 2013, the net
interest rate spread decreased to 3.15% from 3.35% in 2012 as the
benefit of the decreases in rates on interest-bearing liabilities was
more than offset by a decrease in yield on average interest-earning
assets.
Net interest margin was 3.32% for the year ended December
31, 2013 compared to 3.55% for the year ended December 31, 2012.
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 2 bps during 2013
compared to 3 bps during 2012. Exclusive of these amounts, net
interest margin decreased 22 bps for the year ended December 31,
2013 compared to the prior year driven primarily by the previously
mentioned decline in the yield on average interest-earning assets
coupled with an increase in average interest-earning assets, partially
offset by a decrease in interest expense primarily related to long-
term debt.
Interest income from loans and leases decreased $126 million,
or four percent, compared to the year ended December 31, 2012
primarily due to a decrease of 34 bps in yields on average loans and
leases partially offset by an increase of five percent in average loans
and leases for the year ended December 31, 2013 compared to 2012.
The increase in average loans and leases for the year ended
December 31, 2013 was driven primarily by an increase of 15% in
average commercial and industrial loans and an increase of eight
percent in average residential mortgage loans compared to the year
ended December 31, 2012. For more information on the Bancorp’s
loan and lease portfolio, see the Loans and Leases section of the
Balance Sheet Analysis of the MD&A. In addition, interest income
from investment securities and other short-term investments
decreased $6 million, or one percent, compared to the year ended
2012 primarily due to a 29 bps decrease in the average yield on
taxable securities partially offset by an increase of $1.1 billion in
average taxable securities.
Average core deposits increased $4.3 billion, or five percent,
compared to the year ended December 31, 2012 primarily due to an
increase in average money market deposits and average demand
deposits partially offset by a decrease in average savings deposits.
The cost of interest bearing core deposits decreased to 27 bps for
the year ended December 31, 2013 from 31 bps for the year ended
December 31, 2012. This decrease was primarily the result of a mix
shift to lower cost interest bearing core deposits as a result of run-
off of higher priced CDs combined with decreases of 5 bps in the
rate paid on average savings deposits and a decrease of 26 bps on
average other time deposits compared to the year ended December
31, 2012.
Interest expense on average wholesale funding for the year
ended December 31, 2013 decreased $83 million, or 24%, compared
to the prior year, primarily due to a decrease in the rates paid on
average long-term debt of 59 bps for the year ended December 31,
2013 compared to 2012 coupled with a decrease of $1.1 billion in
average long-term debt. The reduction in higher cost long-term debt
was primarily the result of the full year impact of the redemption of
outstanding TruPS and FHLB debt in the second half of 2012. In
the third quarter of 2012, the Bancorp redeemed $1.4 billion of
outstanding TruPS which had a 7.25% distribution rate.
Additionally, in the fourth quarter of 2012, the Bancorp terminated
$1.0 billion of FHLB debt with a fixed rate of 4.56%. These
decreases were partially offset by the issuance of $1.3 billion of
unsecured senior bank notes in the first quarter of 2013. Refer to
the Borrowings section of MD&A for additional information on the
Bancorp’s changes in average borrowings. During the years ended
December 31, 2013 and 2012, wholesale funding represented 24%
of interest-bearing liabilities. 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.