Fifth Third Bank 2014 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 2014 fourth quarter net income available to common
shareholders was $362 million, or $0.43 per diluted share, compared
to net income available to common shareholders of $328 million, or
$0.39 per diluted share, for the third quarter of 2014 and net income
available to common shareholders of $383 million, or $0.43 per
diluted share, for the fourth quarter of 2013. Fourth quarter 2014
earnings included a $56 million positive adjustment on the valuation
of the warrant associated with the sale of Vantiv Holding, LLC, a
$23 million gain from Vantiv Inc. pursuant to a tax receivable
agreement and a $19 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. Third quarter 2014 results included a $53 million
negative adjustment on the valuation of the warrant associated with
the sale of Vantiv Holding, LLC. 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.
Fourth quarter 2014 net interest income of $888 million
decreased $20 million from the third quarter of 2014 and $17
million from the same period a year ago. Interest income decreased
$7 million from the third quarter of 2014 primarily driven by the
effects of loan repricing and lower average investment securities
balances. Interest expense increased $13 million from the third
quarter of 2014 primarily driven by the issuance of $850 million of
long-term debt during the third quarter and higher deposit costs
during the quarter. The decrease in net interest income in
comparison to the fourth quarter of 2013 was driven by the effects
of loan repricing and higher interest expense from increased long-
term debt balances, partially offset by higher average investment
securities balances and average loan balances.
Fourth quarter 2014 noninterest income of $653 million
increased $133 million compared to the third quarter of 2014 and
decreased $50 million compared to the fourth quarter of 2013. The
increase from the third quarter of 2014 was primarily due to
increases in other noninterest income and corporate banking
revenue. The year-over-year decline was primarily the result of lower
mortgage banking net revenue and other noninterest income,
partially offset by higher corporate banking revenue.
Service charges on deposits of $142 million decreased $3
million from the previous quarter and were flat compared to the
fourth quarter of 2013. The decrease from the third quarter of 2014
was primarily due to a decrease in commercial service charges due to
a decrease in treasury management fees and a decrease in retail
service charges due to lower overdraft occurrences.
Corporate banking revenue of $120 million increased $20
million from the previous quarter and $26 million from the fourth
quarter of 2013. The increase from the third quarter of 2014 was
primarily due to a $13 million increase in syndication fees during the
fourth quarter of 2014 due to the investment in resources in the
commercial business. In addition, the increase from the third
quarter of 2014 was due to an increase in business lending fees and
an increase in foreign exchange fees, partially offset by a decrease in
institutional sales revenue. The year-over-year increase was driven
by higher syndication fees and lease remarketing fees. The increase
in syndication fees from the fourth quarter of 2013 was due to the
investment in resources in the commercial business and a
strengthening economy. The increase in lease remarketing fees year-
over-year was impacted by a $9 million write-down of equipment
value on an operating lease during the fourth quarter of 2013.
Investment advisory revenue of $100 million decreased $3
million from the previous quarter and increased $2 million from the
fourth quarter of 2013. The decline from the third quarter of 2014
was due to a decrease in private client service fees and insurance
fees relative to elevated levels in the third quarter, as well as a
decrease in securities and brokerage fees due to a continued shift
from transaction-based fees to recurring revenue streams. The year-
over-year increase was due to an increase in personal asset
management fees due to market-related growth, partially offset by a
decrease in securities and brokerage fees.
Mortgage banking net revenue was $61 million in both the
fourth and third quarters of 2014 and $126 million in the fourth
quarter of 2013. Fourth quarter 2014 originations were $1.7 billion,
compared with $2.1 billion in the previous quarter and $2.6 billion
in the fourth quarter of 2013. Fourth quarter 2014 originations
resulted in gains of $36 million on mortgages sold, compared with
gains of $34 million during the previous quarter and $60 million
during the fourth quarter of 2013. The increase from the prior
quarter was driven by higher gain on sale margins, partially offset by
lower production. The decrease from the prior year was due to
lower production, including Fifth Third’s exit from the broker
channel, partially offset by higher gain on sale margins. Mortgage
servicing fees were $60 million in the fourth quarter of 2014, $61
million in the third quarter of 2014 and $63 million in the fourth
quarter of 2013. 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 negative $34 million in both the fourth
and third quarters of 2014 and positive $3 million in the fourth
quarter of 2013.
Card and processing revenue of $76 million increased $1
million compared to the third quarter of 2014 and $5 million from
the fourth quarter of 2013. The increases from both periods were
driven by higher transaction volumes and an increase in the number
of actively used cards.
Other noninterest income of $150 million increased $117
million compared to the third quarter of 2014 and decreased $20
million from the fourth quarter of 2013. Fourth quarter 2014
results included a $56 million positive valuation adjustment on the
Vantiv Holding, LLC warrant and $23 million in gains pursuant to
Fifth Third’s tax receivable agreement with Vantiv Holding, LLC.
This compares with a $53 million negative warrant valuation
adjustment in the third quarter of 2014, and a $91 million positive
warrant valuation adjustment in the fourth quarter of 2013 as well as
$9 million in gains pursuant to Fifth Third’s tax receivable
agreement with Vantiv Holding, LLC, recognized in the fourth
quarter of 2013. 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 $19 million, $3 million and $18
million in the fourth quarter of 2014, the third quarter of 2014 and
the fourth quarter of 2013, respectively.
The net gains on investment securities were $4 million in the
fourth quarter of 2014, $3 million in the third quarter of 2014 and
$2 million in the fourth quarter of 2013.
Noninterest expense of $918 million increased $30 million
from the previous quarter and decreased $71 million from the
fourth quarter of 2013. The increase in noninterest expense
compared to the third quarter of 2014 was driven by an increase in
personnel costs, an increase in provision expense from the reserve
for unfunded commitments and an increase in operational losses in
the fourth quarter of 2014. The decrease in noninterest expense