Fifth Third Bank 2012 Annual Report Download - page 51

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
49 Fifth Third Bancorp
FOURTH QUARTER REVIEW
The Bancorp’s 2012 fourth quarter net income available to common
shareholders was $390 million, or $0.43 per diluted share, compared
to net income available to common shareholders of $354 million, or
$0.38 per diluted share, for the third quarter of 2012 and net income
available to common shareholders of $305 million, or $0.33 per
diluted share, for the fourth quarter of 2011. Fourth quarter 2012
earnings included a $157 million gain on the sale of Vantiv shares,
$134 million in debt extinguishment costs associated with the
termination of $1.0 billion of FHLB borrowings and $38 million of
mortgage representation and warranty provision expense primarily
due to additional information obtained from FHLMC regarding
future mortgage repurchase and file requests. Third quarter 2012
results included $26 million in debt extinguishment costs associated
with the redemption of certain TruPS, a $16 million negative
adjustment on the valuation of the warrant associated with the
processing business sale, $13 million in gains recognized on the sale
of certain FTAM funds, and charges of $34 million related to the
mortgage representation and warranty reserve. Fourth quarter 2011
earnings included a $54 million charge related to changes in the fair
value of a swap liability that the Bancorp entered into in conjunction
with its sale of Visa, Inc. Class B shares in 2009 and $10 million in
positive valuation adjustments on puts and warrants associated with
the sale of the processing business. The ALLL to loan and lease
ratio was 2.16% as of December 31, 2012, compared to 2.32% as of
September 30, 2012 and 2.78% as of December 31, 2011.
Fourth quarter 2012 net interest income of $903 million
decreased $4 million from the third quarter of 2012 and $17 million
from the same period a year ago. The decrease from the third
quarter of 2012 was driven by a decrease in interest income, partially
offset by a decline in interest expense. Interest income decreased $7
million from the third quarter of 2012 as the benefit of average
loans and leases growth was more than offset by a decline in interest
income attributable to loan repricing, primarily in the commercial
and industrial, auto, and residential mortgage portfolios, as well as
lower reinvestment rates on the securities portfolio. Interest expense
declined $3 million from the third quarter of 2012, driven by higher
demand deposit balances and continued runoff in consumer CD
balances due to the low interest rate environment and their
replacement into lower yielding products. The decline in net interest
income in comparison to the fourth quarter of 2011 was driven by
lower asset yields partially offset by higher average loan balances,
run-off in higher-priced CDs and a mix shift to lower cost deposit
products.
Fourth quarter 2012 noninterest income of $880 million
increased $209 million compared to the third quarter of 2012 and
$330 million compared to the fourth quarter of 2011. The sequential
and year-over-year increases were both driven by a $157 million gain
from the sale of Vantiv shares and higher mortgage banking and
corporate banking revenue. Fourth quarter 2012 noninterest income
included a $19 million negative valuation adjustment on the Vantiv
warrants, compared with a $16 million negative valuation
adjustment in the third quarter of 2012 and a $10 million positive
valuation adjustment on the Vantiv warrant and put instruments in
the fourth quarter of 2011. Fourth quarter 2012 results also included
a $15 million charge related to the valuation of the total return swap
entered into as part of the 2009 sale of Visa, Inc. Class B shares.
Negative valuation adjustments on this swap were $1 million in the
third quarter of 2012 and $54 million in the fourth quarter of 2011.
Third quarter 2012 results also included $13 million in gains
recognized on the sale of certain FTAM funds.
Mortgage banking net revenue was $258 million in the fourth
quarter of 2012, compared to $200 million in the third quarter of
2012 and $156 million in the fourth quarter of 2011. Fourth quarter
2012 originations were $7.0 billion, compared with $5.8 billion in
the previous quarter and $7.1 billion in the fourth quarter of 2011.
Fourth quarter 2012 originations resulted in gains of $239 million
on mortgages sold, reflecting higher mortgage sales revenue partially
offset by lower gain on sale margins. This compares with gains of
$226 million during the third quarter of 2012 and $152 million
during the fourth quarter of 2011. Mortgage servicing fees in the
fourth quarter of 2012 were $64 million, compared with $62 million
in the third quarter of 2012 and $58 million in the fourth quarter of
2011. Mortgage banking net revenue is also affected by net servicing
asset value adjustments, which include MSR amortization and MSR
valuation adjustments. These factors led to a net loss of $45 million
on the net valuation adjustments on MSRs in the fourth quarter of
2012 compared to a net loss of $88 million in the third quarter of
2012 and a net loss of $54 million in the fourth quarter of 2011. Net
losses on nonqualifying hedges on mortgage servicing rights were $2
million and $3 million in the fourth quarter of 2012 and 2011,
respectively, and net gains on nonqualifying hedges on mortgage
servicing rights were $5 million during the third quarter of 2012.
Service charges on deposits of $134 million increased $6
million sequentially and decreased $2 million compared to the
fourth quarter of 2011. Retail service charges grew 10 percent
sequentially largely due to a seasonal increase in consumer
overdrafts as well as the initial benefit of the transition to the
Bancorp’s new and simplified deposit product offerings. Compared
with the fourth quarter of 2011, retail service charges decreased 11
percent primarily due to changes in the Bancorp’s overdraft policies
during 2012. Commercial service charges increased two percent
sequentially and six percent from a year ago primarily as a result of
higher treasury management fees.
Corporate banking revenue of $114 million increased $13
million from the previous quarter and $32 million from the fourth
quarter of 2011. The sequential increase was primarily driven by
higher syndication fees, business lending fees, and derivative fees,
which benefited from accelerated activity in anticipation of changes
to tax rules. The increase from the fourth quarter of 2011 was
primarily driven by increased syndication fees and business lending
fees as a result of the Bancorp’s investments in the capital markets
and treasury management capabilities, which are creating more
opportunities and increased production.
Investment advisory revenue of $93 million increased $1
million sequentially and $3 million from the fourth quarter of 2011.
Sequential and year-over-year increases were driven by higher
private client services and institutional trust fees, which benefited
from improvement in equity and bond market values, partially offset
by lower mutual fund fees largely due to the sale of certain Fifth
Third funds in the third quarter of 2012.
Card and processing revenue of $66 million increased $1
million compared to the third quarter of 2012 and $6 million from
the fourth quarter of 2011. Both increases were driven by higher
transaction volumes and higher levels of consumer spending.
The net gain on investment securities was $2 million in both
the fourth and third quarters of 2012 and a net gain of $5 million in
the fourth quarter of 2011.
Noninterest expense of $1.2 billion increased $157 million
sequentially and increased $170 million from the fourth quarter of
2011. Fourth quarter 2012 expenses included $134 million of debt
extinguishment costs associated with the termination of $1.0 billion
of FHLB debt; $38 million of expenses associated with the
mortgage representation and warranty reserve; and $13 million in
charges to increase litigation reserves. Third quarter 2012 expenses
included $26 million of debt extinguishment costs associated with
the redemption of TruPS and $34 million of expenses associated
with the mortgage representation and warranty reserve. Fourth
quarter 2011 expenses included $14 million in charges to increase