Fifth Third Bank 2013 Annual Report Download - page 53

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
51 Fifth Third Bancorp
redemption of Fifth Third Capital Trust IV TruPS, an $8 million
contribution to Fifth Third Foundation, and $8 million in severance
expense. Third quarter 2013 expenses included $30 million in
charges to increase litigation reserves, $5 million in severance
expense, $5 million in large bank assessment fees and a $3 million
benefit associated with the mortgage representation and warranty
reserve due to improving underlying purchase metrics. Fourth
quarter 2012 expenses included $134 million of debt extinguishment
costs associated with the termination of $1 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.
Net charge-offs were $148 million in the fourth quarter of
2013, or 67 bps of average loans on an annualized basis, compared
with net charge-offs of $109 million in the third quarter 2013 and
$147 million in the fourth quarter 2012. During the fourth quarter
of 2013, the Bancorp restructured a single large credit resulting in a
charge-off of $43 million. Additionally, during the fourth quarter of
2013, the Bancorp modified its charge-off policy for home equity
loans and lines of credit to assess for a charge-off when such loans
have been past due 120 days if the senior lien is also 120 or more
days past due. This resulted in additional home equity net charge-
offs of $6 million.
TABLE 18: QUARTERLY INFORMATION (unaudited)
2013 2012
For the three months ended ($ in millions, except per share data) 12/31 9/30 6/30 3/31 12/31 9/30 6/30 3/31
Net interest income (FTE) $ 905 898 885 893 903 907 899 903
Provision for loan and lease losses 53 51 64 62 76 65 71 91
Noninterest income 703 721 1,060 743 880 671 678 769
Noninterest expense 989 959 1,035 978 1,163 1,006 937 973
Net income attributable to Bancorp 402 421 591 422 399 363 385 430
Net income available to common shareholders 383 421 582 413 390 354 376 421
Earnings per share, basic 0.44 0.47 0.67 0.47 0.44 0.39 0.41 0.46
Earnings per share, diluted 0.43 0.47 0.65 0.46 0.43 0.38 0.40 0.45
COMPARISON OF THE YEAR ENDED 2012 WITH 2011
The Bancorp’s net income available to common shareholders for
the year ended December 31, 2012 was $1.5 billion, or $1.66 per
diluted share, which was net of $35 million in preferred stock
dividends. 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 preferred stock dividends during
2011 included $153 million in discount accretion resulting from the
Bancorp’s repurchase of Series F preferred stock. Overall, credit
trends improved in 2012, and as a result, the provision for loan and
lease losses decreased to $303 million in 2012 compared to $423
million in 2011.
Net interest income was $3.6 billion for the years ended
December 31, 2012 and 2011. Net interest income was positively
impacted in 2012 by an increase in average loans and leases of $4.6
billion as well as a decrease in interest expense compared to the year
ended December 31, 2011. Average interest-earning assets increased
$4.0 billion in 2012 while average interest-bearing liabilities were
relatively flat compared to the prior year. In addition, net interest
income in 2012 compared to the prior year was negatively impacted
by a 28 bps decrease in average yield on average interest-earning
assets partially offset by a 21 bps decrease in the average rate paid
on interest bearing liabilities, coupled with a mix shift to lower cost
deposits.
Noninterest income increased $544 million, or 22%, in 2012
compared to 2011. The increase from the prior year was primarily
due to an increase in mortgage banking net revenue, corporate
banking revenue and other noninterest income partially offset by a
decrease in card and processing revenue. Mortgage banking net
revenue increased $248 million, or 41%, primarily due to an increase
in origination fees and gains on loan sales partially offset by an
increase in losses on net valuation adjustments on servicing rights
and free-standing derivatives entered into to economically hedge the
MSR portfolio. Corporate banking revenue increased $63 million, or
18%, primarily due to increases in syndication fees, business lending
fees, lease remarketing fees and institutional sales. Other noninterest
income increased $324 million primarily due to a $115 million gain
from the Vantiv, Inc. IPO recognized in the first quarter of 2012
and a $157 million gain from the sale of Vantiv, Inc. shares in the
fourth quarter of 2012. Card and processing revenue decreased $55
million, or 18%, primarily as the result of the full year impact of the
implementation of the Dodd-Frank Act’s debit card interchange fee
cap in the fourth quarter of 2011.
Noninterest expense increased $323 million, or nine percent, in
2012 compared to 2011 primarily due to an increase of $170 million
in total personnel costs (salaries, wages and incentives plus
employee benefits); an increase of $53 million in the provision for
representation and warranty claims related to residential mortgage
loans sold to third parties; an increase of $177 million in debt
extinguishment costs; and a $44 million decrease in the benefit from
the provision for unfunded commitments and letters of credit. This
activity was partially offset by an $87 million decrease in FDIC
insurance and other taxes.
Net charge-offs as a percent of average portfolio loans and
leases decreased to 0.85% during 2012 compared to 1.49% during
2011 largely due to improved credit trends across all commercial
and consumer loan types, excluding commercial leases.
The Bancorp took a number of actions that impacted its capital
position in 2012. On March 13, 2012, the Bancorp announced the
results of its capital plan submitted to the FRB as part of the 2012
CCAR. The FRB indicated to the Bancorp that it did not object to
the following capital actions: a continuation of its quarterly common
dividend of $0.08 per share; the redemption of up to $1.4 billion in
certain TruPS and the repurchase of common shares in an amount
equal to any after-tax gains realized by the Bancorp from the sale of
Vantiv, Inc. common shares by either the Bancorp or Vantiv, Inc.
The FRB indicated to the Bancorp that it did object to other
elements of its capital plan, including potential increases in its
quarterly common dividend and the initiation of other common
share repurchases.
The Bancorp resubmitted its capital plan to the FRB in the
second quarter of 2012. The resubmitted plan included capital
actions and distributions for the covered period through March 31,
2013 that were substantially similar to those included in the original
submission, with adjustments primarily reflecting the change in the
expected timing of capital actions and distributions relative to the
timing assumed in the original submission. On August 21, 2012, the