Fifth Third Bank 2012 Annual Report Download - page 19

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
17 Fifth Third Bancorp
per share, an increase of $0.02 per share from the second quarter of
2012.
Vantiv, Inc. IPO
On June 30, 2009, the Bancorp completed the sale of a majority
interest in its processing business to Advent International. As part
of this transaction, the processing business was contributed into a
partnership now known as Vantiv Holding, LLC. Vantiv, Inc.,
formed by Advent International and owned by certain funds
managed by Advent International, acquired an approximate 51%
interest in Vantiv Holding, LLC for cash and warrants. The Bancorp
retained the remaining approximate 49% interest in Vantiv Holding,
LLC and accounted for it as an equity method investment in the
Bancorp’s Consolidated Financial Statements.
During the first quarter of 2012, Vantiv, Inc. priced an IPO of
its shares and contributed the net proceeds to Vantiv Holding, LLC
for additional ownership interests. As a result of this offering, the
Bancorp’s ownership of Vantiv Holding, LLC was reduced to
approximately 39% and the Bancorp’s investment continued to be
accounted for as an equity method investment in the Bancorp’s
Consolidated Financial Statements. The impact of the capital
contributions to Vantiv Holding, LLC and the resulting dilution in
the Bancorp’s interest resulted in the recognition of a pre-tax gain of
$115 million ($75 million after-tax) by the Bancorp in the first
quarter of 2012.
Vantiv, Inc. Share Sale
During the fourth quarter of 2012, Vantiv, Inc. priced a secondary
offering of 12,454,545 shares of Class A Common Stock of Vantiv,
Inc. sold on behalf of the Bancorp. As a result of this offering, the
Bancorp’s ownership of Vantiv Holding, LLC was reduced to
approximately 33% and the Bancorp’s investment continued to be
accounted for as an equity method investment in the Bancorp’s
Consolidated Financial Statements. The carrying value of the
Bancorp’s investment in Vantiv Holding, LLC was $563 million as
of December 31, 2012. The impact of the sale of the Bancorp’s
interest in Vantiv Holding, LLC resulted in the recognition of a pre-
tax gain of $157 million ($102 million after-tax) by the Bancorp in
the fourth quarter of 2012.
As of December 31, 2012, the Bancorp continued to hold
approximately 70 million units of Vantiv Holding, LLC and a
warrant to purchase approximately 20 million incremental Vantiv
Holding, LLC non-voting units, both of which may be exchanged
for common stock of Vantiv, Inc. on a one for one basis or at
Vantiv, Inc.’s option for cash. In addition, the Bancorp holds
approximately 70 million Class B common shares of Vantiv, Inc.
The Class B common shares give the Bancorp voting rights, but no
economic interest in Vantiv, Inc. The voting rights attributable to
the Class B common shares are limited to 18.5% of the voting
power in Vantiv, Inc. at any time other than in connection with a
stockholder vote with respect to a change in control in Vantiv, Inc.
These securities are subject to certain terms and restrictions.
Accelerated Share Repurchase Transactions
Following the Vantiv, Inc. IPO, the Bancorp entered into an
accelerated share repurchase transaction with a counterparty
pursuant to which the Bancorp purchased 4,838,710 shares, or
approximately $75 million, of its outstanding common stock on
April 26, 2012. As part of this transaction, and all subsequent
accelerated share repurchase transactions in 2012, the Bancorp
entered into a forward contract in which the final number of shares
to be delivered at settlement of the accelerated share repurchase
transaction was based on a discount to the average daily volume-
weighted average price of the Bancorp’s common stock during the
term of the Repurchase Agreement. The accelerated share
repurchase was treated as two separate transactions (i) the
acquisition of treasury shares on the acquisition date and (ii) a
forward contract indexed to the Bancorp’s stock. At settlement of
the April 2012 forward contract on June 1, 2012, the Bancorp
received an additional 631,986 shares which were recorded as an
adjustment to the basis in the treasury shares purchased on the
acquisition date.
Consistent with the 2012 CCAR plan, on August 23, 2012, the
Bancorp entered into an accelerated share repurchase transaction
with a counterparty pursuant to which the Bancorp purchased
21,531,100 shares, or approximately $350 million, of its outstanding
common stock on August 28, 2012. At settlement of the forward
contract on October 24, 2012, the Bancorp received an additional
1,444,047 shares which were recorded as an adjustment to the basis
in the treasury shares purchased on the acquisition date.
Additionally, on November 6, 2012, the Bancorp entered into
an accelerated share repurchase transaction with a counterparty
pursuant to which the Bancorp purchased 7,710,761 shares, or
approximately $125 million, of its outstanding common stock on
November 9, 2012. At settlement of the forward contract on
February 12, 2013, the Bancorp received an additional 657,917
shares which were recorded as an adjustment to the basis in the
treasury shares purchased on the acquisition date.
Following the sale of a portion of the Bancorp’s shares of Class
A Vantiv, Inc. common stock, the Bancorp entered into an
accelerated share repurchase transaction on December 14, 2012
with a counterparty pursuant to which the Bancorp purchased
6,267,410 shares, or approximately $100 million, of its outstanding
common stock on December 19, 2012. The Bancorp expects the
settlement of the transaction to occur on March 14, 2013.
Redemption of TruPS
On August 8, 2012, consistent with the 2012 CCAR plan, the
Bancorp redeemed all $862.5 million of the outstanding TruPS
issued by Fifth Third Capital Trust VI. These securities had a
distribution rate of 7.25% and a scheduled maturity date
of November 15, 2067. Pursuant to the terms of the TruPS, the
securities of Fifth Third Capital Trust VI were redeemable within
ninety days of a Capital Treatment Event. The Bancorp determined
that a Capital Treatment Event occurred upon the authorization for
publication in the Federal Register of a Joint Notice of Proposed
Rulemaking by the Board of Governors of the Federal Reserve
System, the FDIC and the Office of the Comptroller of the
Currency addressing, among other matters, Section 171 of the
Dodd-Frank Act of 2010 and providing detailed information
regarding the cessation of Tier I risk-based capital treatment for
outstanding TruPS. The redemption price was $25 per security,
which reflected 100% of the liquidation amount, plus accrued and
unpaid distributions through the actual redemption date of
$0.422917 per security. The Bancorp recognized a $9 million loss on
extinguishment of these TruPS within other noninterest expense in
the Bancorp’s Consolidated Statements of Income.
Additionally, on August 15, 2012, the Bancorp redeemed all
$575 million of the outstanding TruPS issued by Fifth Third Capital
Trust V. The Fifth Third Capital Trust V securities had a
distribution rate of 7.25% and a scheduled maturity date of August
15, 2067, and were redeemable at any time on or after August 15,
2012. The redemption price was $25 per security, which reflected
100% of the liquidation amount, plus accrued and unpaid
distributions through the actual redemption date of $0.453125 per
security. The Bancorp recognized a $17 million loss on
extinguishment within other noninterest expense in the Bancorp’s
Consolidated Statements of Income.