Fifth Third Bank 2011 Annual Report Download - page 20

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
18 Fifth Third Bancorp
Treasury the right to purchase 43,617,747 shares of the Bancorp’s
common stock at $11.72 per share.
Redemption of Trust Preferred Securities
On March 18, 2011, the Bancorp announced that the FRB did not
object to the Bancorp’s capital plan submitted under the FRB’s 2011
CCAR. Pursuant to this plan, during the second quarter of 2011 the
Bancorp redeemed certain trust preferred securities, totalling $452
million, which related to the Fifth Third Capital Trust VII, First
National Bankshares Statutory Trust I and R&G Capital Trust II,
LLT. During the third quarter of 2011, pursuant to the previously
mentioned plan, the Bancorp redeemed certain trust preferred
securities, totalling $40 million, which related to the R&G Crown
Cap Trust IV and First National Bankshares Statutory Trust II.
During the fourth quarter of 2011, pursuant to the previously
mentioned plan, the Bancorp redeemed certain trust preferred
securities, totalling $25 million, which related to the RG Crown Cap
Trust I. As a result of these redemptions, the Bancorp recorded a $7
million gain on the extinguishment of this debt within other
noninterest expense in the Bancorp’s Consolidated Statements of
Income.
Legislative Developments
On July 21, 2010, the Dodd-Frank Act was signed into law. This act
implements changes to the financial services industry and affects the
lending, deposit, investment, trading and operating activities of
financial institutions and their holding companies. The legislation
establishes a CFPB responsible for implementing and enforcing
compliance with consumer financial laws, changes the methodology
for determining deposit insurance assessments, gives the FRB the
ability to regulate and limit interchange rates charged to merchants
for the use of debit cards, enacts new limitations on proprietary
trading, broadens the scope of derivative instruments subject to
regulation, requires on-going stress tests and the submission of
annual capital plans for certain organizations and requires changes
to regulatory capital ratios. This act also calls for federal regulatory
agencies to conduct multiple studies over the next several years in
order to implement its provisions.
The Bancorp was impacted by a number of the components of
the Dodd-Frank Act which were implemented during 2011. The
CFPB began operations on July 21, 2011. The CFPB holds primary
responsibility for regulating consumer protection by enforcing
existing consumer laws, writing new consumer legislation,
conducting bank examinations, monitoring and reporting on
markets, as well as collecting and tracking consumer complaints.
The FRB final rule implementing the Dodd-Frank Act’s “Durbin
Amendment”, which limits debit card interchange fees, was issued
on July 21, 2011 for transactions occurring after September 30,
2011. The final rule establishes a cap on the fees banks with more
than $10 billion in assets can charge merchants for debit card
transactions. The fee was set at $.21 per transaction plus an
additional 5 bps of the transaction amount and $.01 to cover fraud
losses. The FRB repealed Regulation Q as mandated by the Dodd-
Frank Act on July 21, 2011. Regulation Q was implemented as part
of the Glass-Steagall Act in the 1930’s and provided a prohibition
against the payment of interest on demand deposits. While the total
impact of the Dodd-Frank Act on Fifth Third is not currently
known, the impact is expected to be substantial and may have an
adverse impact on Fifth Third’s financial performance and growth
opportunities.
TABLE 3: CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ in millions, except per share data) 2011 2010 2009 2008 2007
Interest income (FTE) $4,236 4,507 4,687 5,630 6,051
Interest expense 661 885 1,314 2,094 3,018
Net interest income (FTE) 3,575 3,622 3,373 3,536 3,033
Provision for loan and lease losses 423 1,538 3,543 4,560 628
Net interest income (loss) after provision for loan and lease losses (FTE) 3,152 2,084 (170) (1,024) 2,405
Noninterest income 2,455 2,729 4,782 2,946 2,467
Noninterest expense 3,758 3,855 3,826 4,564 3,311
Income (loss) before income taxes (FTE) 1,849 958 786 (2,642) 1,561
Fully taxable equivalent adjustment 18 18 19 22 24
A
pplicable income tax expense (benefit) 533 187 30 (551) 461
Net income (loss) 1,298 753 737 (2,113) 1,076
Less: Net income attributable to noncontrolling interests 1 - - - -
Net income (loss) attributable to Bancorp 1,297 753 737 (2,113) 1,076
Dividends on preferred stock 203 250 226 67 1
Net income (loss) available to common shareholders $1,094 503 511 (2,180) 1,075
Earnings per share $1.20 0.63 0.73 (3.91) 1.99
Earnings per diluted share 1.18 0.63 0.67 (3.91) 1.98
Cash dividends declared per common share $0.28 0.04 0.04 0.75 1.70
Earnings Summary
The Bancorp’s net income available to common shareholders for
the year ended December 31, 2011 was $1.1 billion, or $1.18 per
diluted share, which was net of $203 million in preferred stock
dividends. The Bancorp’s net income available to common
shareholders for the year ended December 31, 2010 was $503
million, or $0.63 per diluted share, which was net of $250 million in
preferred stock dividends. The preferred stock dividends during
2011 included $153 million in discount accretion resulting from the
Bancorp’s repurchase of Series F preferred stock.
Net interest income was $3.6 billion for the years ended
December 31, 2011 and 2010. Net interest income in 2011
compared to the prior year was impacted by a 22 bps decrease in
average yield on average interest earning assets offset by a 25 bps
decrease in the average rate paid on interest bearing liabilities and a
$3.2 billion decrease in average interest bearing liabilities, coupled
with a mix shift to lower cost deposits. Net interest margin was
3.66% for the years ended December 31, 2011 and 2010.
Noninterest income decreased $274 million, or 10%, in 2011
compared to 2010 primarily as the result of $152 million litigation
settlement related to one of the Bancorp’s BOLI policies during the
third quarter of 2010, a $54 million decrease in service charges on
deposits primarily due to the impact of Regulation E and a $50
million decrease in mortgage banking net revenue primarily as the
result of a decrease in origination fees and a decrease in gains on
loan sales partially offset by an increase in net servicing revenue.