Fifth Third Bank 2014 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, other 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 8 presents the components of net interest income, net
interest margin and net interest rate spread for the years ended
December 31, 2014, 2013 and 2012. 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 9 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 both the years ended
December 31, 2014 and 2013. Net interest income was positively
impacted by an increase in average taxable securities of $5.4 billion
for the year ended December 31, 2014 coupled with an increase in
yields on these securities of 16 bps for the year ended December 31,
2014 compared to the year ended December 31, 2013. Net interest
income also included the benefit of an increase in average loans and
leases of $2.0 billion for the year ended December 31, 2014, as well
as a decrease in the rates paid on long-term debt for the year ended
December 31, 2014 compared to the year ended December 31,
2013. These benefits were partially offset by lower yields on loans
and leases and an increase in average long-term debt of $5.0 billion
for the year ended December 31, 2014 compared to the year ended
December 31, 2013. For the year ended December 31, 2014, the net
interest rate spread decreased to 2.94% from 3.15% in 2013 driven
by a 21 bps decrease in yields on average interest-earning assets for
the year ended December 31, 2014.
Net interest margin was 3.10% for the year ended December
31, 2014 compared to 3.32% for the year ended December 31, 2013.
The decrease from December 31, 2013 was driven primarily by the
previously mentioned decrease in the net interest rate spread,
partially offset by increases in average free funding balances.
Interest income from loans and leases decreased $148 million,
or four percent, compared to the year ended December 31, 2013
primarily due to a decrease of 25 bps in yields on average loans and
leases partially offset by an increase of two percent in average loans
and leases for the year ended December 31, 2014 compared to the
year ended December 31, 2013. The increase in average loans and
leases for the year ended December 31, 2014 was driven primarily
by an increase of nine percent in average commercial and industrial
loans partially offset by a decrease in average residential mortgage
loans of eight percent compared to the year ended December 31,
2013. For more information on the Bancorp’s loan and lease
portfolio, refer to the Loans and Leases subsection of the Balance
Sheet Analysis section of MD&A. Interest income from investment
securities and other short-term investments increased $206 million
compared to the year ended December 31, 2013 driven by the
factors discussed above.
Average core deposits increased $6.8 billion, or eight percent,
compared to the year ended December 31, 2013 primarily due to an
increase in average money market deposits, average interest
checking deposits and average demand deposits, partially offset by a
decrease in average savings deposits. The cost of average interest
bearing core deposits was 27 bps for both the years ended
December 31, 2014 and 2013. Interest expense on money market
deposits increased during the year ended December 31, 2014
compared to the year ended December 31, 2013 driven by a $5.2
billion increase in average money market deposits and a 10 bps
increase in the rate paid on average money market deposits. This
increase was partially offset by a decrease of 27 bps in the rate paid
on other time deposits for the year ended December 31, 2014
compared to the year ended December 31, 2013. Refer to the
Deposits subsection of the Balance Sheet Analysis section of
MD&A for additional information on the Bancorp’s deposits.
Interest expense on average wholesale funding for the year
ended December 31, 2014 increased $23 million, or nine percent,
compared to the year ended December 31, 2013, primarily due to an
increase in interest expense related to long-term debt partially offset
by a decrease in average certificates $100,000 and over. Interest
expense on long-term debt increased during the year ended
December 31, 2014 compared to the year ended December 31, 2013
driven by a $5.0 billion increase in average long-term debt partially
offset by a 67 bps decrease in the rate paid on long-term debt
primarily due to the redemption of $750 million of outstanding
TruPS during the fourth quarter of 2013 and the lower cost of new
debt issuances in 2014. Interest expense on average certificates
$100,000 and over decreased during the year ended December 31,
2014 compared to the year ended December 31, 2013 driven
primarily by a $2.4 billion decrease in average certificates $100,000
and over partially offset by a 7 bps increase in the rate paid on
average certificates $100,000 and over. Refer to the Borrowings
subsection of the Balance Sheet Analysis section of MD&A for
additional information on the Bancorp’s borrowings. During both
the years ended December 31, 2014 and 2013, wholesale funding
represented 24% of average interest-bearing liabilities. For more
information on the Bancorp’s interest rate risk management,
including estimated earnings sensitivity to changes in market interest
rates, refer to the Market Risk Management section of MD&A.