Fifth Third Bank 2013 Annual Report Download - page 52

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
50 Fifth Third Bancorp
FOURTH QUARTER REVIEW
The Bancorp’s 2013 fourth quarter net income available to common
shareholders was $383 million, or $0.43 per diluted share, compared
to net income available to common shareholders of $421 million, or
$0.47 per diluted share, for the third quarter of 2013 and net income
available to common shareholders of $390 million, or $0.43 per
diluted share, for the fourth quarter of 2012. Fourth quarter 2013
earnings included a $91 million positive adjustment on the valuation
of the warrant associated with the sale of Vantiv Holding, LLC, $69
million in net charges to increase litigation reserves, an $18 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 and $8 million of
debt extinguishment costs associated with the redemption of TruPS
issued by Fifth Third Capital Trust IV. Third quarter 2013 results
included an $85 million gain on the sale of Vantiv Inc. shares, $30
million in net charges to increase litigation reserves and a $6 million
positive adjustment on the valuation of the warrant associated with
the sale of Vantiv Holding, LLC. Fourth quarter 2012 earnings
included a $157 million gain on the sale of Vantiv Inc. 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 file requests. The ALLL as a percentage of
portfolio loans and leases was 1.79% as of December 31, 2013,
compared to 1.92% as of September 30, 2013 and 2.16% as of
December 31, 2012.
Fourth quarter 2013 net interest income of $905 million
increased $7 million from the third quarter of 2013 and $2 million
from the same period a year ago. Interest income increased $10
million from the third quarter of 2013 primarily driven by higher
balances and yields on investment securities. Interest expense
increased $3 million from the third quarter of 2013 primarily driven
by the issuance of $2.5 billion of long-term debt during the quarter,
partially offset by the benefit from high-priced CDs that matured
during the quarter. The increase in net interest income in
comparison to the fourth quarter of 2012 was driven by higher
average loan balances, lower long-term debt expense due to a
reduction in higher cost average long-term debt and run-off of
higher priced CDs, partially offset by lower yields on interest-
earning assets.
Fourth quarter 2013 noninterest income of $703 million
decreased $18 million compared to the third quarter of 2013 and
$177 million compared to the fourth quarter of 2012. The decrease
from the third quarter of 2013 was primarily due to lower corporate
banking revenue and other noninterest income. The year-over year
decline was primarily the result of lower mortgage banking net
revenue, corporate banking revenue and other noninterest income.
Mortgage banking net revenue was $126 million in the fourth
quarter of 2013, compared to $121 million in the third quarter of
2013 and $258 million in the fourth quarter of 2012. Fourth quarter
2013 originations were $2.6 billion, compared with $4.8 billion in
the previous quarter and $7.0 billion in the fourth quarter of 2012.
Fourth quarter 2013 originations resulted in gains of $60 million on
mortgages sold, compared with gains of $74 million during the
previous quarter and $239 million during the fourth quarter of 2012.
The decrease from the prior quarter reflected the lower production
partially offset by increased gain on sale margins, while the decrease
from the prior year reflected lower production and lower gain on
sale margins. Mortgage servicing fees were $63 million in both the
fourth and third quarters of 2013 compared with $64 million in the
fourth quarter of 2012. Mortgage banking net revenue is also
affected by net servicing asset valuation adjustments, which include
MSR amortization and MSR valuation adjustments, including mark-
to-market adjustments on free-standing derivatives used to
economically hedge the MSR portfolio. These net servicing asset
valuation adjustments were positive $2 million in the fourth quarter
of 2013, negative $16 million in the third quarter of 2013 and
negative $45 million in the fourth quarter of 2012. Net gains on
nonqualifying hedges on MSRs were zero in the fourth quarter of
2013, compared with net gains of $5 million in the third quarter of
2013 and net losses of $2 million in the fourth quarter of 2012.
Service charges on deposits of $142 million increased $2
million from the previous quarter and $8 million compared to the
fourth quarter of 2012. Retail service charges were flat compared to
the previous quarter and increased six percent from the fourth
quarter of 2012. The year over-year increase was primarily related to
the transition to the Bancorp’s new and simplified deposit product
offerings. Commercial service charges increased two percent from
the previous quarter and six percent from a year ago primarily as a
result of new customer accounts and higher treasury management
fees.
Corporate banking revenue of $94 million decreased $8 million
from the previous quarter and $20 million from the fourth quarter
of 2012. The decrease from the third quarter of 2013 was primarily
driven by lower lease remarketing fees and syndication fees, partially
offset by higher institutional sales revenue, foreign exchange fees
and business lending fees. The year-over-year decline was primarily
driven by lower lease remarketing fees, syndication fees, derivative
fees and letter of credit fees, which benefited the year-ago quarter
due to higher activity in anticipation of changes to tax rules. The
decline in lease remarketing fees was driven by a $9 million write-
down of equipment value on an operating lease during the fourth
quarter of 2013.
Investment advisory revenue of $98 million increased $1
million from the previous quarter and $5 million from the fourth
quarter of 2012. The increase from the third quarter of 2013 and
from the previous year was attributable to higher brokerage fees and
private client services revenue reflecting strong production and
market performance. These increases were partially offset by a
decrease in institutional trust fees.
Card and processing revenue of $71 million increased $2
million compared to the third quarter of 2013 and $5 million from
the fourth quarter of 2012. Both increases were driven by higher
transaction volumes.
Other noninterest income of $170 million decreased $15
million compared to the third quarter of 2013 and $45 million from
the fourth quarter of 2012. Fourth quarter 2013 results included a
$91 million positive valuation adjustment on the Vantiv Holding,
LLC warrant as well as $9 million in payments received pursuant to
Fifth Third’s tax receivable agreement with Vantiv Holding, LLC.
This compares with an $85 million gain on the sale of Vantiv Inc.
shares and a $6 million positive warrant valuation adjustment in the
third quarter of 2013, and a $157 million gain on the sale of Vantiv
Inc. shares and a $19 million negative warrant valuation adjustment
in the fourth quarter of 2012. Quarterly results also included charges
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 $18 million, $2 million, and $15
million in the fourth quarter of 2013, the third quarter of 2013 and
the fourth quarter of 2012, respectively.
The net gain on investment securities was $2 million in the
fourth and third quarters of 2013 and the fourth quarter of 2012.
Noninterest expense of $989 million increased $30 million
from the previous quarter and decreased $174 million from the
fourth quarter of 2012. Fourth quarter 2013 expenses included $69
million in charges to increase litigation reserves, a $25 million
benefit associated with the mortgage representation and warranty
reserve, $8 million of debt extinguishment costs associated with the