Fifth Third Bank 2013 Annual Report Download - page 41

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
39 Fifth Third Bancorp
Noninterest Income
Noninterest income increased $228 million, or eight percent, for the year ended December 31, 2013 compared to the year ended December 31,
2012. The components of noninterest income are as follows:
TABLE 7: NONINTEREST INCOME
For the years ended December 31 ($ in millions) 2013 2012 2011 2010 2009
Mortgage banking net revenue $ 700 845 597 647 553
Service charges on deposits 549 522 520 574 632
Corporate banking revenue 400 413 350 364 372
Investment advisory revenue 393 374 375 361 326
Card and processing revenue 272 253 308 316 615
Gain on sale of the processing business - - - - 1,758
Other noninterest income 879 574 250 406 479
Securities gains (losses), net 21 15 46 47 (10)
Securities gains, net, non-qualifying hedges on mortgage servicing rights 13 3 9 14 57
Total noninterest income $ 3,227 2,999 2,455 2,729 4,782
M
ortgage banking net revenu
e
Mortgage banking net revenue decreased $145 million, or 17%, in 2013 compared to 2012. The components of mortgage banking net revenue are
as follows:
TABLE 8: COMPONENTS OF MORTGAGE BANKING NET REVENUE
For the years ended December 31 ($ in millions) 2013 2012 2011
Origination fees and gains on loan sales $453 821 396
Net mortgage servicing revenue:
Gross mortgage servicing fees 251 250 234
Mortgage servicing rights amortization (166) (186) (135)
Net valuation adjustments on servicing rights and free-standing derivatives
entered into to economically hedge MSR 162 (40) 102
Net mortgage servicing revenue 247 24 201
Mortgage banking net revenue $700 845 597
Origination fees and gains on loan sales decreased $368 million in
2013 compared to 2012 primarily as the result of a decrease in profit
margins on sold residential mortgage loans coupled with an 11%
decrease in residential mortgage loan originations. Residential
mortgage loan originations decreased to $22.3 billion in 2013 from
$25.2 billion in 2012. The decrease in originations is primarily due to
a decrease in refinancing activity during the second half of 2013 as
mortgage rates continued to rise and fewer borrowers were able to
achieve savings by refinancing their mortgages.
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
increased $223 million in 2013 compared to 2012 driven primarily
by increases of $202 million in net valuation adjustments.
Additionally, servicing rights amortization decreased by $20 million
in 2013 compared to 2012 driven by lower prepayments due to an
increase in interest rates in 2013 compared to 2012.
The net valuation adjustment gain of $162 million during 2013
included a recovery of temporary impairment of $192 million on
MSRs partially offset by $30 million in losses from derivatives
economically hedging the MSRs. 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. 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. Mortgage rates increased during 2013 which
caused modeled prepayments speeds to slow, and led to the
recovery of temporary impairment on servicing rights during the
year. Mortgage rates decreased in 2012 causing modeled prepayment
speeds to increase, which led to the temporary impairment on
servicing rights in 2012. 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. The Bancorp
recognized net gains of $13 million and $3 million during the years
ended 2013 and 2012, respectively, recorded in securities gains, net,
non-qualifying hedges on mortgage servicing rights in the Bancorp’s
Consolidated Statement of Income.
The Bancorp’s total residential loans serviced as of December
31, 2013 and 2012 was $82.7 billion and $77.3 billion, respectively,
with $69.2 billion and $62.5 billion, respectively, of residential
mortgage loans serviced for others.
Service charges on deposits
Service charges on deposits increased $27 million in 2013 compared
to 2012. Commercial deposit revenue increased $17 million in 2013
compared to 2012 primarily due to increased treasury management
fees as a result of pricing changes implemented in the third quarter
of 2012 and the third quarter of 2013 and the acquisition of new
customers. Consumer deposit revenue increased $10 million due to
an increase in consumer checking fees due to new deposit product