Fifth Third Bank 2010 Annual Report Download - page 63

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 61
credit quality, strong capital ratios and diverse funding sources, in
addition to disciplined liquidity monitoring procedures.
The Bancorp’s senior debt credit ratings are summarized in
Table 46. The ratings reflect the ratings agencies view on the
Bancorp’s capacity to meet financial commitments.* Additional
information on senior debt credit ratings is as follows:
• Moody’s “Baa1” rating is considered medium-grade
obligations and is the fourth highest ranking within its
overall classification system;
• Standard & Poor’s “BBB” rating indicates the obligor’s
capacity to meet its financial commitment is adequate
and is the fourth highest ranking within its overall
classification system;
• Fitch Ratings’ “A-” rating is considered high credit
quality and is the third highest ranking within its overall
classification system; and
• DBRS Ltd.’s “A (low)” rating is considered satisfactory
credit quality and is the third highest ranking within its
overall classification system.
Additionally, the Bancorp’s subsidiary bank (Fifth Third Bank)
also receives independent credit ratings. On November 1, 2010,
Moody’s downgraded ten large regional banks, including Fifth
Third Bank, due to the passage of the Dodd-Frank Act. The Act
signaled the government’s intent to limit support for individual
banks, thus reducing Moody’s support assumptions for these
banks. Fifth Third Bank’s credit ratings for Short-Term, Long-
Term Deposit, Senior Debt and Subordinated Debt were
downgraded to P-2, A3, A3 and Baa1, respectively, from P-1, A2,
A2 and A3, respectively. Additionally, Moody’s changed Fifth
Third Bancorp and Fifth Third Bank’s outlook from negative to
stable. During 2010, DBRS Investors Service downgraded the
long-term debt rating and deposit ratings for the Bancorp’s
subsidiary to “A” from “AH”.
* As an investor, you should be aware that a security rating is not
a recommendation to buy, sell or hold securities, that it may be
subject to revision or withdrawal at any time by the assigning
rating organization and that each rating should be evaluated
independently of any other rating.
CAPITAL MANAGEMENT
Management, including the Bancorp’s Board of Directors,
regularly reviews the Bancorp’s capital position to help ensure it is
appropriately positioned under various operating environments.
2009 Capital Actions
On May 7, 2009, the Bancorp announced its SCAP results which
indicated that the Bancorp’s Tier 1 common equity would be
required to be augmented to maintain a capital buffer above the
newly required four percent threshold of the Tier 1 common
equity ratio under the more adverse scenario of the assessment.
The total amount required, prior to considering activities by the
Bancorp since the end of the fourth quarter of 2008, was $2.6
billion.
After considering such activities, primarily the Processing
Business Sale, the indicated additional net Tier I common equity
required was $1.1 billion. To address the SCAP results the
Bancorp undertook a number of capital actions during the second
quarter of 2009. The Bancorp completed a $1 billion common
stock offering and issued approximately 158 million shares at an
average price of $6.33. In addition, the Bancorp completed an
exchange of a portion of its Series G preferred stock for
2,158.8272 shares of its common stock, no par value, and $8,250
in cash, for each set of 250 validly tendered and accepted
depositary shares. The Bancorp issued approximately 60 million
shares of common stock and paid $230 million in cash in
exchange for 7 million depositary shares. After settlement of the
exchange offer, 4,112,750 depositary shares representing 16,451
shares of Series G preferred stock remained outstanding. As a
result of this exchange, the Bancorp increased its common equity
by $441 million. The Bancorp also sold its Visa, Inc. Class B
common shares resulting in an additional $187 million benefit to
equity.
2011 Capital Actions
On January 25, 2011, the Bancorp raised $1.7 billion in new
common equity through the issuance of 121,428,572 shares of
common stock in an underwriting offering at an initial price of
$14.00 per share. On January 24, 2011, the underwriters exercised
their option to purchase an additional 12,142,857 shares at the
offering price of $14.00 per share. In connection with this
exercise, the Bancorp elected that all such additional shares be
sold and the Bancorp entered into a forward sale agreement which
resulted in a final net payment of 959,821 shares on February 4,
2011.
On February 2, 2011, the Bancorp redeemed all 136,320
shares of its Series F Preferred Stock held by the U.S. Treasury
totaling $3.4 billion. The Bancorp used the net proceeds from the
common stock and senior notes offerings previously described
and other funds to redeem the Series F Preferred Stock.
In connection with the redemption of the Series F Preferred
Stock, the Bancorp accelerated the accretion of the remaining
issuance discount on the Series F Preferred Stock and recorded a
corresponding reduction in retained earnings of $153 million.
Dividends of $15 million were paid on February 2, 2011
when the Series F Preferred Stock was redeemed. The Bancorp
notified the U.S. Treasury on February 17, 2011, of its intention to
negotiate for the purchase of the warrants issued to the U.S.
Treasury in connection with the CPP preferred stock investment.
These transactions will be reflected in the Bancorp’s
consolidated financial statements for the quarter ended March 31,
2011. Note 32 of the Notes to Consolidated Financial Statements
provides additional information regarding the redemption of the
Series F Preferred Stock and the January 2011 common stock
offering.
TABLE 47: CAPITAL RATIOS
A
s of December 31 ($ in millions) 2010 2009 2008 2007 2006
A
verage equity as a percent of average assets 12.22 % 11.36 8.78 9.35 9.32
Tangible equity as a percent of tangible assets 10.42 9.71 7.86 6.14 7.95
Tangible common equity as a percent of tangible assets 7.04 6.45 4.23 6.14 7.95
Tier I capital $13,965 13,428 11,924 8,924 8,625
Total risk-based capital 18,173 17,648 16,646 11,733 11,385
Risk-weighted assets 100,193 100,933 112,622 115,529 102,823
Regulatory capital ratios:
Tier I capital 13.94 % 13.30 10.59 7.72 8.39
Total risk-based capital 18.14 17.48 14.78 10.16 11.07
Tier I leverage 12.79 12.34 10.27 8.50 8.44
Tier I common equity 7.50 6.99 4.37 5.72 8.22