THE POWER OF
PERSEVERANCE
2009
ANNUAL REPORT
CORPORATE
PROFILE
Fifth Third Bancorp is a diversified financial services
company headquartered in Cincinnati, Ohio. The
Company has $113 billion in assets, operates 16
affiliates with 1,309 full-service Banking Centers,
including 103 Bank Mart® locations open seven
days a week inside select grocery stores and 2,358
ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois,
Florida, Tennessee, West Virginia, Pennsylvania,
Missouri, Georgia and North Carolina. Fifth Third
operates four main businesses: Commercial Banking,
Branch Banking, Consumer Lending, and Investment
Advisors. Fifth Third also has a 49 percent interest in
Fifth Third Processing Solutions, LLC. Fifth Third is
among the largest money managers in the Midwest
and, as of December 31, 2009, had $187 billion in
assets under care, of which it managed $25 billion
for individuals, corporations and not-for-profit
organizations. Investor information and press releases
can be viewed at www.53.com. Fifth Third’s common
stock is traded on the NASDAQ® National Global
Select Market under the symbol “FITB.” Member FDIC.
A MESSAGE TO
OUR SHAREHOLDERS
KEvin T. KAbAT
ChAirMAn, PrESidEnT And ChiEf ExECuTivE OffiCEr
Dear Shareholders:
While overall conditions improved this year, 2009 still presented a challenging environ-
ment for the banking industry. Despite these headwinds, Fifth Third took important steps on
a number of fronts to position the Company well for the current environment and the future.
We’ve strengthened the Company’s capital position to industry-leading levels, we’ve dealt with
root causes of elevated credit losses which we and our competitors are experiencing, and we’ve
otherwise maintained strong operating results throughout the economic downturn. Due to
these actions, we believe our prospects for success are strong as we move into 2010, a year that
should provide for improved results, particularly in terms of credit.
Entering this economic cycle, Fifth Third was in the midst of a strategic transition. We were
actively engaged in strengthening our management team, solidifying our footprint with the
integration of our Southeastern acquisitions, and well into implementing a strategic plan that
included improving customer satisfaction and employee engagement. Even in this downturn,
we’ve made substantial progress on all of these initiatives, which will contribute significantly
to our bottom line results as we emerge from this economic cycle. We’ve been proactive in con-
fronting challenges and have led other financial institutions in adjusting our product offerings
to meet customer needs, modifying loans, conducting internal stress tests, and developing long-
term capital plans. We’re now beginning to see investor focus return to long-term profitability
and normalized earnings potential and away from worst-case scenarios and capital adequacy.
fifth third bancorp | 2009 annual report
1
Overall, I’m pleased with the performance of our core
businesses in 2009 and, as credit trends improve, I expect to
see more of our top-line results benefit the bottom line. I am
also pleased that our stock outperformed industry benchmarks
in 2009. Fifth Third’s stock price appreciated by 18 percent
during 2009, compared with a 9 percent decline for the S&P
Commercial Banks index. That appreciation in share price
ranked third of the 14 banks included in the Index.
review of significant events
We have seen a number of unprecedented developments
over the past 18 months or so, and I’d like to share a few words
about those events and our actions throughout this period.
The financial crisis, which began in 2007, intensified in the
latter part of 2008. It has since surpassed any our industry
has experienced since the 1930s. In the first half of 2008, we
at Fifth Third concluded that the economic downturn was
likely to deepen and, as a result, we would experience an
increased level of credit losses into 2009. This expectation
has proven to be accurate. Based on our internal stress tests
at the time, we developed a three-part capital plan to posi-
tion ourselves for the expected downturn. We raised $1.1
billion in convertible preferred stock in June 2008, made
the difficult decision to reduce our dividend, and began to
explore what eventually became the sale of a controlling
interest in Fifth Third Processing Solutions, our payments
processing business.
In the fall of 2008, the U.S. government launched a variety
of programs to address the financial crisis. This included the
Capital Purchase Program (CPP), under which investments
were made in healthy bank holding companies to main-
tain lending in their communities. Fifth Third accepted an
investment under the CPP of $3.4 billion in preferred stock
and associated warrants. In 2009, we paid approximately
$170 million in dividend payments on the U.S. Treasury’s
investment. We expect to repay this investment, subject to
regulatory approval, as soon as practical in a manner that
considers the interests of all of our constituencies, including
shareholders.
In early 2009, the Federal Reserve and U.S. Treasury an-
nounced the Supervisory Capital Assessment Program (SCAP)
for the 19 largest U.S. bank holding companies, including
Fifth Third, to evaluate the levels and quality of capital for
these banks. These “stress tests” utilized assumptions about
the future that were significantly more adverse than gener-
ally expected at the time. Even under these conservative as-
sumptions, Fifth Third’s capital levels remained significantly
above regulatory “well-capitalized” minimums. However,
we, and a number of other commercial banks participating
in the SCAP process, were asked to commit to increase the
common equity component of our overall capital base. We
subsequently generated $2 billion of Tier 1 common equity,
relative to what was assumed under the SCAP – nearly
80 percent more than our $1.1 billion commitment – creating
a larger additional capital “buffer” than any of these other
commercial banks.
We also announced and completed the sale of a control-
ling interest in our payments processing business to Advent
International in the first half of 2009. This transaction closed
in June 2009 and generated $1.3 billion in capital in a highly
efficient manner. We also retain significant ownership in the
joint venture and its ongoing value creation. Additionally,
Advent’s expertise in international payments processing
increases the potential to unlock growth opportunities for Fifth
Third Processing Solutions in previously untapped markets.
As 2009 progressed, economic trends improved and our
results have significantly surpassed those assumed under
the government’s stress test adverse scenario. We’ve also
seen a number of early indicators emerge suggesting further
improvement in the economy may be developing, although
growth is not yet robust. For example, S&P Case-Shiller data
showed housing price stabilization in the latter part of 2009.
Unemployment also has seen some stabilization while remain-
ing at elevated levels nationally. The U.S. also experienced
positive Gross Domestic Product (GDP) growth during the
last few months of 2009, a positive sign. We’re seeing early
signs of recovery, and we’re optimistic that the environment
will continue to improve in 2010.
As you might imagine, the volatility in the economy has
had a significant impact on customer behavior. Commercial
loan demand remains low, and credit line utilization is the
lowest I’ve seen in my career. Customers continue to be cau-
tious in early 2010, although we’ve begun to see some signs
of renewed appetite for expansion and investment. Retail
customers also are showing a great deal of conservatism.
Savings rates as a percentage of disposable income continue
2
fifth third bancorp | 2009 annual report
“ wE’rE MAkinG STrOnG
PArTnErShiPS wiTh CuSTOMErS
durinG ThiS diffiCulT TiME,
And EvEry CuSTOMEr
wE hElP STAy in hiS Or hEr
hOME TOdAy PrOvidES
A STrOnG fOundATiOn fOr
A lifElOnG rElATiOnShiP
wiTh fifTh Third.”
fifth third bancorp | 2009 annual report
3
to climb as Americans reduce their household debts and
remain reluctant to take on additional leverage. Although
this deleveraging will slow the pace of recovery, consumer
debt burdens have proven unsustainable and this process
will help provide a more stable foundation for future eco-
nomic prosperity.
Even though demand was lower in 2009, we continued
to lend prudently and extended over $75 billion of credit.
We had a record year for mortgage originations in 2009
and financed $23 billion of mortgages. These strong results
reflect the currently low interest rate environment, strong
sales performance, and the disappearance of many non-bank
competitors from the market. I’m pleased with our results,
particularly because we’ve significantly enhanced our credit
risk management over the past several years. We eliminated
all brokered home equity production in 2007, and suspended
residential development and non-owner occupied Commercial
Real Estate lending in early 2008 until excess inventories are
reduced. Additionally, we’ve implemented strict geographic
and industry concentration limits over the past several years
to ensure our exposures to each market are appropriate given
economic conditions.
While prevention of future problems is important, we also
recognize that working through existing troubled situations
is critical to our long-term performance. Fifth Third has in-
vested significantly in loss mitigation, and nearly 5 percent of
our workforce is currently dedicated to working out problem
loans. We now have more than 250 professionals working
with commercial borrowers across our footprint on a wide
variety of issues. We’ve also established dedicated teams who
conduct weekly reviews of particular portfolios – including
auto manufacturing and dealerships, residential construc-
tion, and non-owner occupied commercial real estate. These
actions enhanced our performance in 2009, as well as our
lending infrastructure for the future.
Within our consumer lending business, we have nearly 600
people helping customers work through loan payment issues.
Since inception, we’ve restructured more than $2.7 billion of
consumer loans. I’m proud that we started this program in
early 2007, well ahead of the initiation of the government’s
mortgage modification programs. We’ve deployed people door-
to-door, hosted town hall meetings, and made Fifth Third’s
“eBus” available throughout our footprint to educate people
about their options to restructure loans. Overall, we’ve found
that establishing constructive relationships early on has been
the best way to optimize outcomes for distressed customers
and Fifth Third. This initiative has been very successful, and
our re-default rates have generally been better than industry
averages. We’re making strong partnerships with customers
during this difficult time, and every customer we help stay
in his or her home today provides a strong foundation for a
lifelong relationship with Fifth Third.
2009 results
Turning to financial results in 2009, we reported net
income of $737 million or $511 million of net income to
common shareholders after preferred dividends. These results
included a $1.1 billion after-tax gain on our processing trans-
action and $206 million in net benefit to earnings related to
our interest in Visa, Inc.
While below 2008 levels, net loan losses remained el-
evated at $2.6 billion. Additionally, we increased the loan
loss reserve by providing nearly $1 billion in excess of net
loan losses during 2009. At year-end, our loan loss reserves
were among the strongest coverage levels in the industry, at
4.88 percent of loans and 116 percent of nonperforming as-
sets. We currently expect net loan losses to decline in 2010.
We don’t expect significant further reserve building to be
necessary given our reserve position and expectation for an
improvement in credit losses in 2010.
Our capital position also is strong on both an absolute
basis and relative to our peers. We’ve been proactive in
managing our capital position throughout this cycle, as evi-
denced by our Tier 1 capital ratio of 13.3 percent at year-end
compared with 10.6 percent at the end of 2008. Our Tangible
Common Equity (TCE) ratio of 6.5 percent also increased
significantly from 2008 and compares very favorably with
our peers.
While credit and capital have been focus areas for the
industry during the past year, we continue to have positive
momentum in a number of our businesses. In 2009 we
generated $553 million of mortgage banking revenue, an
increase of $354 million, or 178 percent compared with
2008. Net interest margin expanded significantly, rising
every quarter since 1Q 2009. We also had an exceptional
4
fifth third bancorp | 2009 annual report
“ BAnkS hAvE rETurnEd TO ThEir
TrAdiTiOnAl PriMAry rOlE in CrEdiT
MArkET inTErMEdiATiOn, And ThAT
PlAyS TO ThE STrEnGThS
Of COMMuniTy And rEGiOnAl BAnkS
likE fifTh Third.”
year for deposit growth, growing deposits in every one of our
affiliate markets, and increasing our deposit market share in
75 percent of them. Demand deposits were up $4.1 billion,
or 27 percent on a year-over-year basis, fueled by strong
growth in both the consumer and commercial deposit books,
and core deposits increased $9.8 billion, or 15 percent on a
year-over-year basis.
These results represent our continued commitment to
executing our strategic plan across all of our businesses. We
believe we are well-prepared for the future given our con-
tinued strong pre-provision profitability and robust reserve
and capital levels.
strategic initiatives and
lines of business
In 2009, we made considerable progress executing our
strategic plan, as we continued to innovate and present a
consistent brand experience across all of our lines of busi-
ness and affiliates.
Our Commercial Banking line of business produced
strong deposit growth in 2009. End of year demand
deposits increased $3.7 billion on a year-over-year basis,
and core deposits increased $7.9 billion on a year-over-
year basis. Our new Remote Deposit Capture product is an
industry-leading solution and continues to be adopted by
customers, bringing our total number of scanners to 4,200,
a 20 percent increase.
We’ve also had continued success within Branch Banking.
We’ve increased both the number of households we serve
and also the depth of those relationships, with the average
number of products per household increasing by more than a
third since 2007. During 2009 we also successfully introduced
a number of new retail products. Our high-value checking
products – including our Gold, Secure and Rewards checking
accounts – bundle services such as identity theft protection
with a traditional transaction account and include product
discounts as well. All of these products deliver value-added
fee-based services to customers rather than relying heavily on
transaction fees for revenue generation. We also continued
to see increased levels of customer satisfaction, and 2009
was the third consecutive year that the Bank experienced
double-digit growth in customer loyalty. Our mobile bank-
ing platform now has more than 25,000 customers accessing
their accounts through mobile devices, and our application,
53.mobi, was rated “A - Exceptional” by ABI Research as one
fifth third bancorp | 2009 annual report
5
of the top customer-friendly mobile banking sites.
As I mentioned earlier, 2009 was a record year for our
Consumer Lending line of business, where we generated
over $500 million of mortgage banking revenue. It also was
a strong year for our auto lending operations, which contin-
ued to perform well and benefitted from the retrenchment of
other competitors. In 2009 we increased market share and
improved credit quality for our auto lending operations – a
result that we’re very pleased with considering the operat-
ing environment. Our credit card business outperformed the
industry in 2009 and remains an important relationship
product with our existing customer base. We remain commit-
ted to offering responsible credit solutions to our customers
while maintaining a focus on long-term value creation for
our shareholders.
Our Investment Advisors business was negatively affected
by the market turmoil in the early part of 2009. Our advisors
worked closely with customers during this time to find ways
to help them mitigate the effects of this turmoil and plan
for their futures. These activities have resulted in improved
service levels and customer satisfaction. Within our retail
brokerage segment we posted strong growth in 2009, with
net new brokerage assets of $648 million and year-over-year
insurance revenue growth of 99 percent.
We continue to remain focused on the things we can
control and which add value, and to execute on our core
strategies. We also expect to maintain or develop a market-
leading position where we operate, and expect numerous
opportunities to deepen our presence in our markets as the
industry consolidates further over the next several years.
looking forward
While we expect better economic conditions and improved
business results in 2010, it will likely be a challenging year
as the economy remains under pressure. Financial regulators
in the U.S. and abroad are considering a wide variety of pro-
posals that will have an impact on all financial institutions.
Many of these proposals focus on size and capital markets
activities, like proprietary trading, which have never been
significant at Fifth Third. Fifth Third’s focus is – and has
always been – traditional banking on a regional and com-
munity basis. We support a number of proposed regulations
to the extent they do not hinder our ability to continue to
extend credit to customers at a reasonable cost.
I believe that the role of strong regional commercial banks
has been reaffirmed by the crisis. Many of the exotic or inap-
propriate types of credit that played such a significant role
in the financial crisis were fueled by non-bank lenders and
secondary loan markets. These sources of credit nearly disap-
peared during the crisis, and may never fully recover or return.
As a result, banks have returned to their traditional primary
role in credit market intermediation, and that plays to the
strengths of community and regional banks like Fifth Third.
We at Fifth Third remain committed to our local markets
and contributing to their economic recovery, by:
• meeting the credit, investment and savings needs of our
communities
• providing a strong value proposition for our customers,
with appropriate products meeting the financial needs
of customers at a fair price
• offering convenience to our customers through our branch
network and other delivery channels
• understanding and supporting local markets and acting
as a good community citizen
Going forward, we will invest in talent management and
promise career development opportunities for our employees.
We will provide tailored solutions for the financial needs of
our customers. And, for our shareholders, we are pledged to
reward your investment in our Company by continuing to
lead, innovate, and outperform our competitors as we move
forward into the future.
Thank you for your confidence in Fifth Third through an
unforgiving and unpredictable environment. We look forward
to better times and better performance in 2010.
Sincerely,
Kevin T. Kabat
Chairman, President and Chief Executive Officer
February 2010
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fifth third bancorp | 2009 annual report
COrPOrATE gOvERnAncE
fifth third bancorp
board of directors
frOM lEfT TO riGhT:
FROnT ROw
JAMES P. hACkETT
kEvin T. kABAT
MArShA C. williAMS
dr. MiTChEl d. livinGSTOn
SEcOnD ROw
GAry r. hEMinGEr
ThOMAS w. TrAylOr
THiRD ROw
dudlEy S. TAfT
JEwEll d. hOOvEr
FOURTH ROw
hEndrik G. MEiJEr
FiFTH ROw
JOhn J. SChiff Jr.
dArryl f. AllEn
SixTH ROw
ulySSES l. BridGEMAn Jr.
SEvEnTH ROw
EMErSOn l. BruMBACk
Fifth Third Bancorp is committed to maintaining strong
corporate governance practices, and is an industry leader in
the area. As measured by RiskMetrics Group as of January
13, 2010, Fifth Third’s Corporate Governance Quotient out-
performed 92.4 percent of the companies in the S&P 500 and
100 percent of the companies in the “Banks” group.
Fifth Third Bancorp’s board is controlled by a majority of
independent outsiders. In October 2009, Fifth Third appointed
two new board members with substantial financial services
experience. Together, Jewell Hoover and Emerson Brumback
bring more than 60 years of finance and corporate governance
experience to the board.
The Company also revamped several of its committees
to provide more direct oversight of key operational risk ele-
ments. This includes reformatting the Executive Committee
as a Finance Committee, and changing the focus of the Risk
and Compliance Committee to incorporate best practices on
Enterprise Risk Management reporting.
For more on Fifth Third’s corporate governance policies
and practices, visit www.53.com.
fifth third bancorp | 2009 annual report
7
BrAnCh bAnKing
“In this environment it’s comforting to know that I have the right team behind me. I have both business
and personal accounts with Fifth Third Bank and appreciate the flexibility and guidance they provide
me, especially this past year. We haven’t found any bank that can compete with Fifth Third.”
MaMie cokley
| detroit, Michigan
2009 HigHLigHTS
• $2.5 billion total revenue
• $18.4 billion average loans
• 1,309 full-service
banking centers
• $44.6 billion average
core deposits
• 2,358 full-service ATMs
• 1.4 million online
banking customers
bUSinESS DEScRipTiOn
Fifth Third provides a full range of deposit and lending
products to individuals and small businesses in 12 states in
the Midwest and Southeast. Our 3.8 million customers can
transact business 24-hours-a-day, seven days a week through
our Fifth Third ATM network and our comprehensive online
banking service. Through these channels, Fifth Third strives
to provide exceptional products, convenience and service to
our customers within our geographic footprint.
cUSTOmER FOcUS
Branch Banking provides deposit, lending and investment
products and services for customers at every stage of life or
career. Branch Banking’s 9,600 employees provide knowledge-
able and reliable guidance, whether customers meet with them
personally or via any of our automated banking solutions. Our
business bankers can provide full solutions to a small business
customer including loans, treasury management products,
employee savings plans, or employee banking programs.
Whether saving for a home, a child’s education, planning for
retirement or building a business, our associates consult with
our customers, help determine their needs and provide solu-
tions that meet their goals both today and tomorrow.
STRATEgy
Fifth Third continues to focus on the implementation of
its branded sales and service process. Through this process,
the Bank was able to improve its 90-day new customer cross-
sell ratio by 18 percent during 2009 and significantly reduce
its number of single-service households. This helped to drive
growth in annual revenue per household in 2009.
During 2009, Fifth Third also focused on developing and
marketing several packaged checking products, designed to
provide significant customer benefits for a standard monthly
fee. Packages such as Gold, Rewards, Secure and Balance Builder
checking were launched to drive growth in fee income from
value-added services that are bundled with deposit accounts.
8
fifth third bancorp | 2009 annual report
COnSuMEr
LEnDing
bUSinESS DEScRipTiOn
Consumer Lending provides loan solutions to customers
across and beyond Fifth Third’s footprint. Our loan products
include real estate-secured mortgages, home equity loans and
lines, credit cards, and federal and private student education
loans. Consumer Lending also partners with a network of auto
dealers that originate loans on the Bank’s behalf, otherwise
known as Auto Lending. Whether in need of a first mortgage
or college loan, our customers know we offer a solution to
help them achieve their goals.
cUSTOmER FOcUS
We recognize that personal loans are often a vital ele-
ment for the prosperity of our customers. We deliver a full
spectrum of competitive lending solutions that correspond
to their financial situations. Throughout the entire customer
experience, we strive to provide expert advice and outstand-
ing service. To help prepare for major life moments like
buying a car or for purchasing every day necessities, Fifth
Third provides lending solutions that fit our customers’ needs
today and tomorrow.
STRATEgy
Fifth Third understands that each customer has unique
needs. To evolve with the dynamic marketplace and meet the
changing needs of customers as they progress through life, we
continue to adjust our lending solutions. Our strategic focus
is to surround each new and existing customer with a team
of professional bankers committed to providing complete
banking solutions in order to profitably grow market share.
Our sales and service associates strive to achieve the highest
ratings for customer experience while delivering operational
excellence. In 2009, we advanced our mortgage origination
market share within the top 20, and are now fourth in market
share within the non-captive prime auto lending space.
2009 HigHLigHTS
• $1.1 billion total revenue
• $20.5 billion average loans
• $59 billion mortgage servicing portfolio
• 7,600 dealer indirect auto lending network
“Economic and health reasons
led us to try a mortgage
opportunity that turned out
to be a scam. With medical
bills piling up, we didn’t know
what to do. Finally, we turned
to Fifth Third Bank. They were
wonderful in explaining options
and helping us through the
legal process of getting the
deed back to our house.”
kirsten Miller
Martinsburg, west virginia
fifth third bancorp | 2009 annual report
9
2009 HigHLigHTS
• $2 billion total revenue • $41.4 billion average loans • $18.4 billion average core deposits • 765 corporate client relationships
• 13,500 middle market client relationships • 272,750 treasury management relationships (includes small business relationships in Branch Banking)
COMMErCiAl bAnKing
“From providing credit facilities to other banking needs, Fifth Third Bank has been a strong supporter of Delek US
Holdings. After our syndicated credit agent went out of business, Fifth Third stepped in as our agent and this year
helped us extend our credit facility – this in a time when many in the banking industry stopped lending. We know
that Fifth Third Bank is there to support our growth.”
ezra (uzi) yeMin
| ceo, delek us holdings
| nashville, tennessee
bUSinESS DEScRipTiOn
STRATEgy
Fifth Third’s Commercial line of business serves clients rang-
ing from middle market companies with $10 million in annual
revenue to some of the largest companies in the world. In addition
to the traditional lending and depository offerings, our products
and services include global cash management, foreign exchange
and international trade finance, derivatives and capital markets
services, asset-based lending, real estate finance, public finance,
commercial leasing and syndicated finance.
cUSTOmER FOcUS
Fifth Third has more than 150 years of commercial banking
experience and, throughout our history has always believed
in managing relationships at the local level. Through our
affiliate model, which allows us to remain close to the com-
munities we serve, Fifth Third is able to offer the high level
of service of a local bank while maintaining the financial
strength and capabilities that come with being one of the
largest banks in the country.
We strive to offer complete financial solutions to our clients.
We believe the focus should be on our total relationship with
our clients. Keeping in close contact with customers and of-
fering customizable solutions is more important than ever
in today’s demanding operating environment.
We are committed to delivering integrated solutions that
leverage Fifth Third’s core payables and receivables process
and enable our clients to manage their business processes
more efficiently and cost effectively.
Fifth Third continues to deliver innovative and integrated
treasury management solutions for our customers. During
2009, we built upon the success of our remote deposit cap-
ture product, processing over 29 million checks totaling
$54 billion from 4,200 locations, representing 15 percent
growth in the value of transactions processed in 2008. We
also had continued success with our Healthcare Revenue
Cycle Management Solution, RevLink, adding multiple new
relationships during 2009. Fifth Third processed more than
1.7 million claim payment transactions in 2009, representing
over 300 percent growth compared with 2008.
With a focus on continued national growth, we expanded
our market penetration with Remote Currency Manager,
an innovative solution that uses a smart safe provided by
a Bank-approved courier to help automate the cash han-
dling process from the time cash is collected to the time it
is deposited and credited to a customer’s account. We now
support nearly 3,200 locations across the country, compared
with 874 in 2008.
10
fifth third bancorp | 2009 annual report
“We wanted to accomplish a lot in
2009 – from transferring the business
to our children to ensuring we would
have enough for retirement – but
the uncertainty of last year made it
difficult to make big decisions. Our
Fifth Third Private Bank team helped
us explore our options and we were
able to transfer our business before the
end of the year – helping to preserve
what we built over the last 35 years.”
williaM and barbara sieczkowski
new lenox, illinois
2009 HigHLigHTS
• $493 million total revenue
• $25 billion assets under
• $3.1 billion average loans
• $4.9 billion average core deposits
management; $187 billion
assets under care
invESTMEnT
ADviSORS
bUSinESS DEScRipTiOn
Investment Advisors is comprised of four distinct busi-
nesses: Fifth Third Private Bank, Fifth Third Retail Brokerage,
Fifth Third Asset Management and Fifth Third Institutional
Services. We have more than 100 years of experience helping
our individual, business and institutional clients build and
manage their wealth.
cLiEnT FOcUS
Clients receive specialized advice from each of our four
business lines. Fifth Third Private Bank simplifies financial
complexity for the Bank’s most affluent clients, by challenging
and collaborating with them to articulate and achieve their
goals. Through our proprietary Life 360SM process, we start
with a complete understanding of each client’s life, values and
financials before building the plan most appropriate for them.
We do this with customized teams offering holistic advice and
solutions spanning wealth planning, trust and estate services,
private banking, investments, hedging and insurance.
Fifth Third Retail Brokerage serves individuals and families
by offering retirement, investment and education planning,
managed money, annuities, transactional brokerage and
insurance services. Fifth Third Asset Management provides
asset management services to institutional clients and also
advises the Company’s proprietary family of mutual funds,
Fifth Third Funds. Fifth Third Institutional Services provides
consulting, investment and record-keeping services for cor-
porations, financial institutions, foundations, endowments
and not-for-profit organizations. Products include retirement
plans, endowment management, planned giving, and global
and domestic custody services.
STRATEgy
Investment Advisors serves to deepen and enhance the
Bank’s most important client relationships by collaborating
with our Retail, Commercial and Business Banking partners. We
begin by completely understanding each client’s unique needs,
goals and circumstances. For our most affluent individuals and
families, we have teams of professionals to design unbiased
solutions and meet all of their wealth management needs in
one place. For our Retail clients, we offer a comprehensive
suite of brokerage and insurance solutions to complement
their existing banking products and services. For institutions
and corporations, our retirement, asset management and
custody capabilities mean they can turn to Fifth Third for
more than just their capital needs. By leveraging our internal
company partnerships, Investment Advisors provides the Bank
with ongoing fee revenue at low incremental capital, and our
clients with complete, powerful financial solutions from one
trusted advisor.
fifth third bancorp | 2009 annual report
11
COMMuniTy
giving
“The most important thing I learned from Young Bankers Club
is how to take care of my money and how to use it properly.
Now that I know these things, I can think about my future and
the goals that will help me achieve my dreams. I want to thank
my leader, Rob, too. I wish and hope I can be like him someday
and have a good job and a house.”
Jesse escobedo
| cincinnati, ohio
who participated in fifth third bank’s financial literacy program
for kids, the young bankers club, in cincinnati last year.
As a financial institution, Fifth Third Bank knows first-
hand the impact that sound money management has on
an individual’s ability to make their dreams come true. We
focus our community commitment on ensuring that people,
including young children, gain a solid foundation in money
management, banking basics and investing. Increasing
financial literacy at any age helps to open doors and assists
people in building a better tomorrow for themselves and
their families.
We begin our financial literacy programs at an early
age with the Young Bankers Club (YBC). Established by Fifth
Third and several community partners in 2004, YBC sends
employee volunteer teachers into fifth-grade classrooms for
10 weeks, teaching a curriculum that meets local and state
educational standards in mathematics and social studies.
Classes include lessons on saving, needs versus wants, bud-
geting, and managing a checking account. The classes end
with a special graduation ceremony. Nearly 5,000 kids have
graduated since the program began.
In 2009, Fifth Third piloted a six-week financial literacy
program for ninth-graders, Fifth Third Bank Smart Bankers
Club. Similar to YBC, Smart Bankers involves employee vol-
unteers teaching money management skills to high school
students as they begin to work and maintain savings and
checking accounts. Smart Bankers Club was piloted at Fifth
Third’s partner-in-education school, Schroder High School in
Cincinnati. There are plans to expand the program in 2010.
Fifth Third Bank’s financial literacy programs extend well
into adulthood. The Fifth Third Homeownership Mobile, or
eBus, travels throughout the footprint to underserved com-
munities. Staffed with Bank professionals, the eBus takes
financial literacy directly to people most in need of it. On
board the bus, individuals can get their credit score, learn
about the value of their credit and how to raise or maintain
their score. They also can receive personalized information
about avoiding foreclosure or obtaining a mortgage or other
consumer loan.
In addition to promoting financial literacy in youth and
adults, Fifth Third Bank is active in supporting programs that
give kids a good start in life. One of these programs, Project
SEARCH, is a unique school-to-work transition program for
students with developmental disabilities. The Bank was an
original collaborator on the program and today operates three
Project SEARCH campuses. Project SEARCH is a special, rotating
internship program for high school students, who spend their
days rotating through three work experiences for 10 weeks.
Upon completion, the graduates are eligible for employment.
Since 2004, 77 students have graduated and 17 are now
Bank employees. We also operate the Fifth Third Scholarship
Program, which annually provides a $2,500 scholarship for
higher education to children of Bank employees.
Fifth Third Bank also supports the community in many
other ways: through the Fifth Third Foundation, which made
grants of over $4 million in 2009; Fifth Third Community
Development Corporation, which invested $185.4 million in
revitalization projects last year; and through many corporate
community sponsorships like the NAACP national convention
in Cincinnati, Ohio. We and our employees also continue to
be a major funder of United Way, providing nearly $8 mil-
lion in 2009. We also encourage our employees’ generosity
as they volunteer at thousands of non-profit organizations
throughout our markets.
More information about Fifth Third Bank’s commu-
nity commitment can be found in the Fifth Third Bancorp
Corporate Social Responsibility Report, which will be avail-
able online at www.53.com in May, 2010.
12
fifth third bancorp | 2009 annual report
2009 ANNUAL REPORT
FINANCIAL CONTENTS
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Selected Financial Data
Overview
Non-GAAP Financial Measures
Critical Accounting Policies
Risk Factors
Statements of Income Analysis
Business Segment Review
Fourth Quarter Review
Balance Sheet Analysis
Risk Management
Off-Balance Sheet Arrangements
Contractual Obligations and Other Commitments
Management’s Assessment as to the Effectiveness of Internal Control over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Summary of Significant Accounting and Reporting Policies
Supplemental Cash Flow Information
Business Combinations and Asset Acquisitions
Restrictions on Cash and Dividends
Securities
Loans and Leases and Allowance for Loan and Lease Losses
Loans with Deteriorated Credit Quality Acquired in a Transfer
Bank Premises and Equipment
Goodwill
Intangible Assets
Sales of Receivables and Servicing Rights
Derivatives
Other Assets
Short-Term Borrowings
Long-Term Debt
68
74
74
75
75
77
78
79
79
80
80
83
87
88
89
Annual Report on Form 10-K
Consolidated Ten Year Comparison
Directors and Officers
Corporate Information
Commitments, Contingent Liabilities and Guarantees
Legal and Regulatory Proceedings
Processing Business Sale
Related Party Transactions
Income Taxes
Retirement and Benefit Plans
Accumulated Other Comprehensive Income
Common, Preferred and Treasury Stock
Stock-Based Compensation
Other Noninterest Income and Other Noninterest Expense
Earnings Per Share
Fair Value Measurements
Certain Regulatory Requirements and Capital Ratios
Parent Company Financial Statements
Segments
14
15
17
18
21
26
32
37
39
43
60
61
62
63
64
65
66
67
90
93
93
93
94
96
98
99
100
102
103
104
109
110
111
114
129
130
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements about Fifth Third Bancorp and/or the company as combined acquired entities within the meaning of Section 27A of the Securities Act of
1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, that involve inherent
risks and uncertainties. This report may contain certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and
business of Fifth Third Bancorp and/or the combined company including statements preceded by, followed by or that include the words or phrases such as “will likely result,” “may,” “are
expected to,” “is anticipated,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,”
“remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. There are a number of important factors that could
cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) general
economic conditions and weakening in the economy, specifically the real estate market, either nationally or in the states in which Fifth Third, one or more acquired entities and/or the combined
company do business, are less favorable than expected; (2) deteriorating credit quality; (3) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or
other economic conditions; (4) changes in the interest rate environment reduce interest margins; (5) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions;
(6) Fifth Third’s ability to maintain required capital levels and adequate sources of funding and liquidity; (7) maintaining capital requirements may limit Fifth Third’s operations and potential
growth; (8) changes and trends in capital markets; (9) problems encountered by larger or similar financial institutions may adversely affect the banking industry and/or Fifth Third
(10) competitive pressures among depository institutions increase significantly; (11) effects of critical accounting policies and judgments; (12) changes in accounting policies or procedures as may
be required by the Financial Accounting Standards Board (FASB) or other regulatory agencies; (13) legislative or regulatory changes or actions, or significant litigation, adversely affect Fifth
Third, one or more acquired entities and/or the combined company or the businesses in which Fifth Third, one or more acquired entities and/or the combined company are engaged; (14) ability
to maintain favorable ratings from rating agencies; (15) fluctuation of Fifth Third’s stock price; (16) ability to attract and retain key personnel; (17) ability to receive dividends from its
subsidiaries; (18) potentially dilutive effect of future acquisitions on current shareholders’ ownership of Fifth Third; (19) effects of accounting or financial results of one or more acquired entities;
(20) difficulties in separating Fifth Third Processing Solutions from Fifth Third; (21) loss of income from any sale or potential sale of businesses that could have an adverse effect on Fifth
Third’s earnings and future growth; (22) ability to secure confidential information through the use of computer systems and telecommunications networks; and (23) the impact of reputational
risk created by these developments on such matters as business generation and retention, funding and liquidity.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis (MD&A) of certain significant factors that have affected Fifth Third Bancorp’s (the “Bancorp” or “Fifth
Third”) financial condition and results of operations during the periods included in the Consolidated Financial Statements, which are a part of this filing.
Reference to the Bancorp incorporates the parent holding company and all consolidated subsidiaries.
TABLE 1: SELECTED FINANCIAL DATA
For the years ended December 31 ($ in millions, except per share data)
Income Statement Data
Net interest income (a)
Noninterest income
Total revenue (a)
Provision for loan and lease losses
Noninterest expense
Net income (loss)
Net income (loss) available to common shareholders
Common Share Data
Earnings per share, basic (b)
Earnings per share, diluted (b)
Cash dividends per common share
Market value per share
Book value per share
Financial Ratios
Return on assets
Return on average common equity
Average equity as a percent of average assets
Tangible equity (c)
Tangible common equity (d)
Net interest margin (a)
Efficiency (a)
Credit Quality
Net losses charged off
Net losses charged off as a percent of average loans and leases
Allowance for loan and lease losses as a percent of loans and leases
Allowance for credit losses as a percent of loans and leases (e)
Nonperforming assets as a percent of loans, leases and other assets,
including other real estate owned (f)(g)
2009
$3,373
4,782
8,155
3,543
3,826
737
511
$.73
.67
.04
9.75
12.44
.64 %
5.6
11.36
9.71
6.45
3.32
46.9
$2,581
3.20 %
4.88
5.27
4.22
2008
3,536
2,946
6,482
4,560
4,564
(2,113)
(2,180)
(3.91)
(3.91)
.75
8.26
13.57
(1.85)
(23.0)
8.78
7.86
4.23
3.54
70.4
2,710
3.23
3.31
3.54
2.38
2007
3,033
2,467
5,500
628
3,311
1,076
1,075
1.99
1.98
1.70
25.13
17.18
1.05
11.2
9.35
6.05
6.14
3.36
60.2
462
.61
1.17
1.29
1.25
2006
2,899
2,012
4,911
343
2,915
1,188
1,188
2.13
2.12
1.58
40.93
18.00
1.13
12.1
9.32
7.79
7.95
3.06
59.4
316
.44
1.04
1.14
.61
2005
2,996
2,374
5,370
330
2,801
1,549
1,548
2.79
2.77
1.46
37.72
16.98
1.50
16.6
9.06
6.87
7.22
3.23
52.1
299
.45
1.06
1.16
.52
Average Balances
Loans and leases, including held for sale
Total securities and other short-term investments
Total assets
Transaction deposits (h)
Core deposits (i)
Wholesale funding (j)
Shareholders’ equity
Regulatory Capital Ratios
Tier I capital
Total risk-based capital
Tier I leverage
Tier I common equity
(a) Amounts presented on a fully taxable equivalent basis (FTE). The taxable equivalent adjustments for years ended December 31, 2009, 2008, 2007, 2006 and 2005 were $19 million, $22
78,348
12,034
102,477
50,987
61,765
27,254
9,583
85,835
14,045
114,296
52,680
63,815
36,261
10,038
73,493
21,288
105,238
49,678
60,178
31,691
9,811
67,737
24,999
102,876
48,177
56,668
33,615
9,317
$83,391
18,135
114,856
55,235
69,338
28,539
13,053
13.31 %
17.48
12.43
7.00
7.72
10.16
8.50
5.72
8.35
10.42
8.08
8.17
10.59
14.78
10.27
4.37
8.39
11.07
8.44
8.22
million, $24 million, $26 million and $31 million, respectively.
(b) See Note 1 of the Notes to Consolidated Financial Statements for further information.
(c) The tangible equity ratio is calculated as tangible equity (shareholders’ equity less goodwill, intangible assets and accumulated other comprehensive income) divided by tangible assets (total assets less
goodwill, intangible assets and tax effected accumulated other comprehensive income.). For further information, see the Non-GAAP Financial Measures section of the MD&A
(d) The tangible common equity ratio is calculated as tangible common equity (shareholders’ equity less preferred stock, goodwill, intangible assets and accumulated other comprehensive income) divided
by tangible assets (defined above.) For further information, see the Non-GAAP Financial Measures section of the MD&A.
(e) The allowance for credit losses is the sum of the allowance for loan and lease losses and the reserve for unfunded commitments.
(f) Excludes nonaccrual loans held for sale.
(g) The Bancorp modified its nonaccrual policy in 2009 to exclude consumer troubled debt restructuring (TDR) loans less than 90 days past due as they were performing in accordance with
restructuring terms. For comparability purposes, prior periods were adjusted to reflect this reclassification.
(h) Includes demand, interest checking, savings, money market and foreign office deposits.
(i) Includes transaction deposits plus other time deposits.
(j) Includes certificates $100,000 and over, other foreign office deposits, federal funds purchased, short-term borrowings and long-term debt.
TABLE 2: QUARTERLY INFORMATION (unaudited)
For the three months ended ($ in millions, except per share data)
Net interest income (FTE)
Provision for loan and lease losses
Noninterest income
Noninterest expense
Net income (loss)
Net income (loss) available to common shareholders
Earnings per share, basic (a)
Earnings per share, diluted (a)
(a) See Note 1 of the Notes to Consolidated Financial Statements for further information.
14 Fifth Third Bancorp
2009
12/31
$882
776
651
967
(98)
(160)
(.20)
(.20)
9/30
874
952
851
876
(97)
(159)
(.20)
(.20)
6/30
836
1,041
2,583
1,021
882
856
1.35
1.15
3/31
781
773
697
962
50
(26)
(.04)
(.04)
12/31
$897
2,356
642
2,022
(2,142)
(2,184)
(3.78)
(3.78)
2008
9/30
1,068
941
717
967
(56)
(81)
(.14)
(.14)
6/30
744
719
722
858
(202)
(202)
(.37)
(.37)
3/31
826
544
864
715
286
286
.54
.54
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This overview of management’s discussion and analysis highlights
selected information in the financial results of the Bancorp and
may not contain all of the information that is important to you.
trends, events,
For a more complete understanding of
commitments, uncertainties, liquidity, capital resources and critical
accounting policies and estimates, you should carefully read this
entire document. Each of these items could have an impact on the
Bancorp’s financial condition, results of operations and cash
flows.
The Bancorp is a diversified financial services company
headquartered in Cincinnati, Ohio. At December 31, 2009, the
Bancorp had $113 billion in assets, operated 16 affiliates with
1,309 full-service Banking Centers including 103 Bank Mart®
locations open seven days a week inside select grocery stores and
2,358 Jeanie® ATMs in the Midwestern and Southeastern regions
of the United States. The Bancorp reports on four business
segments: Commercial Banking, Branch Banking, Consumer
Lending and Investment Advisors.
The Bancorp believes that banking is first and foremost a
relationship business where the strength of the competition and
challenges for growth can vary in every market. The Bancorp
believes its affiliate operating model provides a competitive
advantage by keeping the decisions close to the customer and by
emphasizing
its affiliate
operating model, individual managers from the banking center to
the executive level are given the opportunity to tailor financial
solutions for their customers.
relationships. Through
individual
The Bancorp’s revenues are dependent on both net interest
income and noninterest income. For the year ended December 31,
2009, net interest income, on a fully taxable equivalent (FTE)
basis, and noninterest income provided 41% and 59% of total
revenue, respectively. Changes in interest rates, credit quality,
economic trends and the capital markets are primary factors that
drive the performance of the Bancorp. As discussed later in the
identification, measurement,
Risk Management section, risk
monitoring, control and reporting are
the
important
management of risk and to the financial performance and capital
strength of the Bancorp.
to
Net interest income is the difference between interest income
earned on assets such as loans, leases and securities, and interest
expense incurred on liabilities such as deposits, short-term
borrowings and long-term debt. Net interest income is affected by
the general level of interest rates, the relative level of short-term
and long-term interest rates, changes in interest rates and changes
in the amount and composition of interest-earning assets and
interest-bearing liabilities. Generally, the rates of interest the
Bancorp earns on its assets and pays on its liabilities are
established for a period of time. The change in market interest
rates over time exposes the Bancorp to interest rate risk through
potential adverse changes to net interest income and financial
position. The Bancorp manages this risk by continually analyzing
and adjusting the composition of its assets and liabilities based on
their payment streams and interest rates, the timing of their
maturities and their sensitivity to changes in market interest rates.
Additionally, in the ordinary course of business, the Bancorp
enters into certain derivative transactions as part of its overall
strategy to manage its interest rate and prepayment risks. The
Bancorp is also exposed to the risk of losses on its loan and lease
portfolio as a result of changing expected cash flows caused by
loan defaults and inadequate collateral due to a weakened
economy within the Bancorp’s footprint.
Net interest income, net interest margin and the efficiency
ratio are presented in Management’s Discussion and Analysis of
Financial Condition and Results of Operations on an FTE basis.
The FTE basis adjusts for the tax-favored status of income from
certain loans and securities held by the Bancorp that are not
taxable for federal income tax purposes. The Bancorp believes
this presentation to be the preferred industry measurement of net
interest income as it provides a relevant comparison between
taxable and non-taxable amounts.
Noninterest income is derived primarily from service charges
on deposits, mortgage banking revenue, corporate banking
revenue, fiduciary and investment management fees and card and
processing revenue. Noninterest expense is primarily driven by
personnel costs and occupancy expenses, costs incurred in the
origination of loans and leases, and insurance expenses paid to the
Federal Depository Insurance Corporation (FDIC).
On June 30, 2009, the Bancorp completed the sale
(hereinafter the “Processing Business Sale”) of a majority interest
in its merchant acquiring and financial institutions processing
business. As a result of the sale, the Bancorp recognized a pre-tax
gain of approximately $1.8 billion. Under the terms of the sale,
Advent International acquired an approximate 51% interest in the
business. The Bancorp accounts for the retained noncontrolling
interest in the business under the equity method of accounting.
Earnings Summary
During 2009, the Bancorp continued to be affected by a
challenging credit environment and the continued economic
slowdown. The Bancorp’s net income available to common
shareholders was $511 million, or $0.67 per diluted share, which
included $226 million in preferred stock dividends. The Bancorp’s
net loss available to common shareholders was $2.2 billion, or
$3.91 per diluted share, for 2008, which included $67 million in
preferred stock dividends. The Bancorp’s results for both years
reflect a number of significant items.
Such items affecting 2009 include:
•
•
•
•
•
•
•
•
•
$1.8 billion of noninterest income from the Processing
Business Sale to Advent International;
$244 million of noninterest income from the sale of the
Bancorp’s Visa, Inc. Class B common shares and a $73
million reduction to noninterest expense from the
release of Visa litigation reserves;
$136 million of net interest income due to the accretion
of purchase accounting adjustments related to loans and
deposits from acquisitions during 2008;
$106 million income tax benefit from the decision to
surrender one of the Bancorp’s bank owned life
insurance (BOLI) policies and the determination that
previously recorded losses on the policy are now tax
deductible;
$55 million of noninterest expense from a special
assessment by the FDIC;
$55 million income tax benefit from an agreement with
the Internal Revenue Service (IRS) to settle all of the
Bancorp’s disputed leverage leases for all open years;
$53 million in charges to other noninterest income
reflecting reserves recorded in connection with the
intent to surrender one of the Bancorp’s BOLI policies
as well as losses related to market value declines;
$35 million increase to net income available to common
shareholders from the exchange of 63% of outstanding
Series G preferred shares for approximately 60 million
common shares and $230 million in cash; and
Preferred stock dividends of $226 million in 2009
compared to $67 million in 2008 due to the issuance of
senior preferred stock and
related warrants on
December 31, 2008 to the U.S. Department of Treasury
(U.S. Treasury) under the Capital Purchase Program
(CPP) in exchange for $3.4 billion in cash.
Fifth Third Bancorp 15
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For comparison purposes, such items affecting 2008 include:
•
•
•
•
•
•
•
$965 million of noninterest expense due to a goodwill
impairment charge;
$358 million of net interest income due to the accretion
of purchase accounting adjustments related to loans and
deposits from acquisitions during 2008;
$273 million of other noninterest income related to the
redemption of a portion of Fifth Third’s ownership
interests in Visa, Inc. and $99 million in net reductions
to noninterest expense to reflect the recognition of the
Bancorp’s proportional share of the Visa escrow
account;
$229 million after-tax impact of charges relating to a
change in the projected timing of cash flows relating to
income taxes for certain leveraged leases;
$215 million reduction to other noninterest income to
reflect a decline in the cash surrender value of one of
the Bancorp’s BOLI policies;
$104 million reduction to noninterest income due to
other-than-temporary impairment (OTTI) charges on
Federal National Mortgage Association (FNMA) and
Federal Home Loan Mortgage Corporation (FHLMC)
preferred stock and certain bank
trust preferred
securities; and
$76 million of other noninterest income, partially offset
by $36 million in related litigation expense, due to the
successful resolution of a prior court case.
Net interest income (FTE) decreased to $3.4 billion, from
$3.5 billion in 2008. The primary reason for the five percent
decrease in net interest income was a 21 basis point (bp) decline in
the net interest rate spread. Additionally, the benefit from the
accretion of purchase accounting adjustments related to the 2008
acquisition of First Charter was $136 million in 2009, compared to
$358 million in 2008. Net interest margin was 3.32% in 2009, a
decrease of 22 bp from 2008.
Noninterest income increased 62%, from $2.9 billion to $4.8
billion, in 2009, driven primarily by the Processing Business Sale
in the second quarter of 2009, which resulted in a pre-tax gain of
$1.8 billion, as well as a $244 million gain related to the sale of the
Bancorp’s Visa, Inc. Class B shares and gains on mortgages sold.
Mortgage banking net revenue increased $354 million resulting
from strong growth in originations, which were up 89% to $21.7
billion in 2009 compared to $11.5 billion in 2008. Card and
processing revenue decreased 33% due to the Processing Business
Sale in the second quarter of 2009. Corporate banking revenue
decreased 10% largely due to a lower volume of interest rate
derivatives sales and foreign exchange revenue, partially offset by
growth in institutional sales and business lending fees.
Noninterest expense decreased $738 million compared to
2008. Noninterest expense in 2008 included a $965 million charge
due to goodwill impairment. Excluding this charge, noninterest
expense increased $227 million due primarily to an increase of
$196 million of FDIC insurance and other taxes as the result of an
increase in deposit insurance and participation in the Temporary
Liquidity Guarantee Program (TLGP), as well as increased loan
related expenses from higher mortgage origination volume and
expenses incurred from the management of problem assets. These
amounts were partially offset by lower card and processing
expense due to the Processing Business Sale on June 30, 2009. In
addition to the goodwill impairment charge, noninterest expense
in 2008 included $36 million in litigation expenses due to the
successful resolution of a prior court case, offset by a $99 million
reduction to expenses related to the reversal of a portion of the
Visa litigation reserve and Visa’s funding of an escrow account.
For further information on the change in assessment rates during
2009, the FDIC special assessment in the second quarter of 2009
and
the noninterest expense section of
Management’s Discussion and Analysis.
the TLGP, see
The Bancorp does not originate subprime mortgage loans,
does not hold credit default swaps and does not hold asset-backed
securities backed by subprime mortgage loans in its securities
portfolio. However, the Bancorp has exposure to disruptions in
the capital markets and weakening economic conditions.
Throughout 2009, the Bancorp continued to be affected by rising
unemployment rates, weakened housing markets, particularly in
the upper Midwest and Florida, and a challenging credit
environment. Credit trends began to show signs of stabilization in
the fourth quarter of 2009 and, as a result, the provision for loan
and lease losses decreased to $3.5 billion for the year ended
December 31, 2009 compared to $4.6 billion during 2008. Net
charge-offs as a percent of average loans and leases remained
steady at 3.20% in 2009 compared to 3.23% in 2008. At
December 31, 2009, nonperforming assets as a percent of loans,
leases and other assets, including other real estate owned
(excluding nonaccrual loans held for sale) increased to 4.22%
from 2.38% at December 31, 2008. Refer to the Credit Risk
Management section in Management’s Discussion and Analysis
for more information on credit quality.
The Bancorp continued to take actions to strengthen its
capital position in 2009. On June 4, 2009, the Bancorp completed
an at-the-market offering resulting in the sale of $1 billion of its
common shares at an average share price of $6.33. In addition, on
June 17, 2009, the Bancorp completed its offer to exchange shares
of its common stock and cash for shares of its Series G
convertible preferred stock. As a result, the Bancorp recognized
an increase in net income available to common shareholders of
$35 million based upon the difference in carrying value of the
Series G preferred shares and the fair value of the common shares
issued. See the Capital Management section of
and cash
Management’s Discussion and Analysis for further information on
the Bancorp’s capital transactions.
The Bancorp’s capital ratios exceed the “well-capitalized”
guidelines as defined by the Board of Governors of the Federal
Reserve System (FRB). As of December 31, 2009, the Tier 1
capital ratio was 13.31%, the Tier 1 leverage ratio was 12.43% and
the total risk-based capital ratio was 17.48%.
16 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NON-GAAP FINANCIAL MEASURES
The Bancorp considers various measures when evaluating capital
utilization and adequacy, including the tangible equity ratio and
tangible common equity ratio, in addition to capital ratios defined
by banking regulators. These calculations are
intended to
complement the capital ratios defined by banking regulators for
both absolute and comparative purposes. Because accounting
principles generally accepted in the United States of America (U.S.
GAAP) do not include capital ratio measures, the Bancorp
believes there are no comparable U.S. GAAP financial measures
to these ratios.
The Bancorp believes these Non-GAAP measures are
important because they reflect the level of capital available to
conditions. Additionally,
withstand
unexpected market
TABLE 3: NON-GAAP FINANCIAL MEASURES
($ in millions)
Total shareholders’ equity
Less:
Goodwill
Intangible assets
Accumulated other comprehensive income
Tangible equity (a)
Less: preferred stock
Tangible common equity (b)
Total assets
Less:
Goodwill
Intangible assets
Accumulated other comprehensive income, before tax
Tangible assets, excluding unrealized gains / losses (c)
Ratios:
Tangible equity (a) / (c)
Tangible common equity (b) / (c)
RECENT ACCOUNTING STANDARDS
Note 1 of the Notes to Consolidated Financial Statements
provides a discussion of the significant new accounting standards
adopted by the Bancorp during 2009 and 2008 and the expected
impact of significant accounting standards issued, but not yet
required to be adopted.
presentation of these measures allows readers to compare certain
aspects of the Bancorp’s capitalization to other organizations.
However, because there are no standardized definitions for these
ratios, the Bancorp’s calculations may not be comparable with
other organizations, and the usefulness of these measures to
investors may be limited. As a result, the Bancorp encourages
readers to consider its Consolidated Financial Statements in their
entirety and not to rely on any single financial measure.
reconciles Non-GAAP
following
financial
table
The
measures to U.S. GAAP as of December 31:
2009
$13,497
2008
12,077
(2,417)
(106)
(241)
10,733
(3,609)
7,124
(2,624)
(168)
(98)
9,187
(4,241)
4,946
113,380
119,764
(2,417)
(106)
(370)
$110,487
(2,624)
(168)
(151)
116,821
9.71%
6.45%
7.86%
4.23%
Fifth Third Bancorp 17
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The Bancorp’s Consolidated Financial Statements are prepared in
accordance with accounting principles generally accepted in the
United States of America. Certain accounting policies require
management to exercise judgment in determining methodologies,
economic assumptions and estimates that may materially affect
the value of the Bancorp’s assets or liabilities and results of
operations and cash flows. The Bancorp's critical accounting
policies include the accounting for allowance for loan and lease
taxes,
losses, reserve for unfunded commitments,
valuation of servicing rights, fair value measurements and
goodwill. No material changes were made to the valuation
techniques or models described below during the year ended
December 31, 2009.
income
loss experience and such factors that,
Allowance for Loan and Lease Losses
The Bancorp maintains an allowance to absorb probable loan and
lease losses inherent in the portfolio. The allowance is maintained
at a level the Bancorp considers to be adequate and is based on
ongoing quarterly assessments and evaluations of the collectability
and historical loss experience of loans and leases. Credit losses are
charged and recoveries are credited to the allowance. Provisions
for loan and lease losses are based on the Bancorp’s review of the
in
historical credit
management’s judgment, deserve consideration under existing
economic conditions in estimating probable credit losses. In
determining the appropriate level of the allowance, the Bancorp
losses using a range derived from “base” and
estimates
“conservative” estimates. The Bancorp’s strategy for credit risk
management includes a combination of conservative exposure
limits significantly below legal lending limits and conservative
underwriting, documentation and collections standards. The
strategy also emphasizes diversification on a geographic, industry
and customer level, regular credit examinations and quarterly
management reviews of
loans
experiencing deterioration of credit quality.
large credit exposures and
Larger commercial loans that exhibit probable or observed
credit weakness are subject to individual review. When individual
loans are
impaired, allowances are determined based on
management’s estimate of the borrower’s ability to repay the loan
given the availability of collateral and other sources of cash flow,
as well as evaluation of legal options available to the Bancorp. Any
allowances for impaired loans are measured based on the present
value of expected future cash flows discounted at the loan’s
effective interest rate, the fair value of the underlying collateral or
readily observable secondary market values. The Bancorp
evaluates the collectability of both principal and interest when
assessing the need for a loss accrual. Historical loss rates are
applied to commercial loans that are not impaired or are impaired
but smaller than an established threshold and thus not subject to
individual review. The loss rates are derived from a migration
analysis, which tracks the historical net charge-off experience
sustained on loans according to their internal risk grade. The risk
grading system currently utilized for allowance analysis purposes
encompasses ten categories.
Homogenous loans and leases, such as consumer installment,
revolving and residential mortgage loans, are not individually risk
graded. Rather, standard credit scoring systems and delinquency
monitoring are used to assess credit risks. Allowances are
established for each pool of loans based on the expected net
charge-offs. Loss rates are based on the average net charge-off
history by loan category. Historical loss rates for commercial and
consumer loans may be adjusted for significant factors that, in
management’s judgment, are necessary to reflect losses inherent in
the portfolio. Factors that management considers in the analysis
include the effects of the national and local economies; trends in
the nature and volume of delinquencies, charge-offs and
18 Fifth Third Bancorp
nonaccrual loans; changes in loan mix; credit score migration
comparisons; asset quality trends; risk management and loan
administration; changes in the internal lending policies and credit
standards; collection practices; and examination results from bank
regulatory agencies and the Bancorp’s internal credit examiners.
specified
The Bancorp’s current methodology for determining the
allowance for loan and lease losses is based on historical loss rates,
current credit grades, specific allocation on impaired commercial
thresholds and other qualitative
credits above
adjustments. Allowances on individual loans and historical loss
rates are reviewed quarterly and adjusted as necessary based on
changing borrower and/or collateral conditions and actual
collection and charge-off experience. An unallocated allowance is
maintained to recognize the imprecision in estimating and
measuring loss when evaluating allowances for individual loans or
pools of loans.
Loans acquired by the Bancorp through a purchase business
combination are recorded at fair value as of the acquisition date.
The Bancorp does not carry over the acquired company’s
allowance for loan and lease losses, nor does the Bancorp add to
its existing allowance for the acquired loans as part of purchase
accounting.
The Bancorp’s primary market areas for lending are the
Midwestern and Southeastern regions of the United States. When
evaluating the adequacy of allowances, consideration is given to
these
the closely
associated effect changing economic conditions have on the
Bancorp’s customers.
regional geographic concentrations and
Reserve for Unfunded Commitments
The reserve for unfunded commitments is maintained at a level
believed by management to be sufficient to absorb estimated
probable losses related to unfunded credit facilities and is included
in other liabilities in the Consolidated Balance Sheets. The
determination of the adequacy of the reserve is based upon an
evaluation of
including an
the unfunded credit facilities,
assessment of historical commitment utilization experience, credit
risk grading and historical loss rates based on credit grade
migration. Net adjustments
the reserve for unfunded
to
commitments are included in other noninterest expense in the
Consolidated Statements of Income.
Income Taxes
The Bancorp estimates income tax expense based on amounts
expected to be owed to the various tax jurisdictions in which the
Bancorp conducts business. On a quarterly basis, management
assesses the reasonableness of its effective tax rate based upon its
current estimate of the amount and components of net income,
tax credits and the applicable statutory tax rates expected for the
full year. The estimated income tax expense is recorded in the
Consolidated Statements of Income.
Deferred income tax assets and liabilities are determined
using the balance sheet method and are reported in other assets
and accrued taxes, interest and expenses, respectively in the
Consolidated Balance Sheets. Under this method, the net deferred
tax asset or liability is based on the tax effects of the differences
between the book and tax basis of assets and liabilities, and
recognizes enacted changes in tax rates and laws. Deferred tax
assets are recognized to the extent they exist and are subject to a
valuation allowance based on management’s
judgment that
realization is more-likely-than-not. This analysis is performed on a
quarterly basis and includes an evaluation of all positive and
negative evidence to determine whether realization is more-likely-
than-not.
Accrued taxes represent the net estimated amount due to
taxing jurisdictions and are reported in accrued taxes, interest and
expenses in the Consolidated Balance Sheets. The Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
evaluates and assesses the relative risks and appropriate tax
treatment of transactions and filing positions after considering
statutes, regulations, judicial precedent and other information and
maintains tax accruals consistent with its evaluation of these
relative risks and merits. Changes to the estimate of accrued taxes
occur periodically due to changes in tax rates, interpretations of
tax laws, the status of examinations being conducted by taxing
authorities and changes to statutory, judicial and regulatory
guidance that impact the relative risks of tax positions. These
changes, when they occur, can affect deferred taxes and accrued
taxes as well as the current period’s income tax expense and can
be significant to the operating results of the Bancorp. For
additional information on income taxes, see Note 20 of the Notes
to Consolidated Financial Statements.
Valuation of Servicing Rights
When the Bancorp sells loans through either securitizations or
individual loan sales in accordance with its investment policies, it
often obtains servicing rights. Servicing rights resulting from loan
sales are initially recorded at fair value and subsequently amortized
in proportion to, and over the period of, estimated net servicing
income. Servicing rights are assessed for impairment monthly,
based on fair value, with temporary impairment recognized
through a valuation allowance and permanent
impairment
recognized through a write-off of the servicing asset and related
valuation allowance. Key economic assumptions used
in
measuring any potential impairment of the servicing rights include
the prepayment speeds of the underlying loans, the weighted-
average life, the discount rate, the weighted-average coupon and
the weighted-average default rate, as applicable. The primary risk
of material changes to the value of the servicing rights resides in
the potential volatility
in the economic assumptions used,
particularly the prepayment speeds.
The Bancorp monitors risk and adjusts
its valuation
allowance as necessary to adequately reserve for impairment in the
servicing portfolio. For purposes of measuring impairment, the
mortgage servicing rights are stratified into classes based on the
financial asset type and interest rates. Fees received for servicing
loans owned by investors are based on a percentage of the
outstanding monthly principal balance of such loans and are
included in noninterest income in the Consolidated Statements of
Income as loan payments are received. Costs of servicing loans are
charged to expense as incurred. For additional information on
servicing rights, see Note 11 of the Notes to Consolidated
Financial Statements.
Fair Value Measurements
The Bancorp measures fair value in accordance with U.S. GAAP,
which defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Valuation
techniques the Bancorp uses to measure fair value include the
market approach, income approach and cost approach. The
market approach uses prices or relevant information generated by
market transactions involving identical or comparable assets or
liabilities. The income approach involves discounting future
amounts to a single present amount and is based on current
market expectations about those future amounts. The cost
approach is based on the amount that currently would be required
to replace the service capacity of the asset.
U.S. GAAP establishes a fair value hierarchy, which
prioritizes the inputs to valuation techniques used to measure fair
value into three broad levels. The fair value hierarchy gives the
highest priority to quoted prices in active markets for identical
assets or
lowest priority to
unobservable inputs (Level 3). An instrument’s categorization
within the fair value hierarchy is based upon the lowest level of
fair value
input
liabilities (Level 1) and the
is significant
instrument’s
that
the
to
measurement. The three levels within the fair value hierarchy are
described as follows:
Level 1 - Quoted prices (unadjusted) in active markets
for identical assets or liabilities that the Bancorp has the
ability to access at the measurement date.
Level 2 - Inputs other than quoted prices included within
Level 1 that are observable for the asset or liability,
either directly or indirectly. Level 2 inputs include:
quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or
liabilities in markets that are not active; inputs other
than quoted prices that are observable for the asset or
liability; and inputs that are derived principally from or
corroborated by observable market data by correlation
or other means.
Level 3 - Unobservable inputs for the asset or liability for
which there is little, if any, market activity at the
measurement date. Unobservable inputs reflect the
Bancorp’s own assumptions about what market
participants would use to price the asset or liability. The
inputs are developed based on the best information
available in the circumstances, which might include the
Bancorp’s own
internally
developed pricing models and discounted cash flow
methodologies, as well as instruments for which the fair
value determination requires significant management
judgment.
financial data such as
The Bancorp's fair value measurements involve various
valuation techniques and models, which involve inputs that are
observable, when available, and include the following significant
instruments: available-for-sale and trading securities, residential
mortgage loans held for sale and certain derivatives. The following
is a summary of valuation techniques utilized by the Bancorp for
its significant assets and liabilities measured at fair value on a
recurring basis.
Available-for-sale and trading securities
Where quoted prices are available in an active market,
securities are classified within Level 1 of the valuation
hierarchy. Level 1 securities include government bonds
and exchange traded equities. If quoted market prices
are not available, then fair values are estimated using
pricing models, quoted prices of securities with similar
characteristics, or discounted cash flows. Examples of
such instruments, which would generally be classified
within Level 2 of the valuation hierarchy, include
corporate and municipal bonds, mortgage-backed
securities, asset-backed securities and Variable Rate
Demand Notes (VRDNs). In certain cases where there
is limited activity or less transparency around inputs to
the valuation, securities are classified within Level 3 of
the valuation hierarchy. Securities classified within Level
3 consist primarily of residual interests in securitizations
of automobile loans. These residual interests are valued
integrate
using discounted cash flow models that
significant unobservable inputs, including discount rates,
prepayment speeds, and loss rates which are estimated
based on actual performance of similar loans transferred
in previous securitizations. Trading securities classified
as Level 3 consist of auction rate securities. Due to the
illiquidity in the market for these types of securities at
December 31, 2009, the Bancorp measured fair value
using a discount rate commensurate with the assumed
holding period.
Fifth Third Bancorp 19
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The fair value of a reporting unit is the price that would be
received to sell the unit as a whole in an orderly transaction
between market participants at the measurement date. Since none
of the Bancorp’s reporting units are publicly traded, individual
reporting unit fair value determinations cannot be directly
correlated to the Bancorp’s stock price. To determine the fair
value of a reporting unit, the Bancorp employs an income-based
approach, utilizing the reporting unit’s forecasted cash flows
(including a terminal value approach to estimate cash flows
beyond the final year of the forecast) and the reporting unit’s
estimated cost of equity as the discount rate. Additionally, the
Bancorp determines its market capitalization based on the average
of the closing price of the Bancorp's stock during the month
including the measurement date, incorporating an additional
control premium, and allocates this market-based fair value
measurement to the Bancorp's reporting units in order to
corroborate the results of the income approach.
When required to perform Step 2, the Bancorp compares the
implied fair value of a reporting unit’s goodwill with the carrying
amount of that goodwill. If the carrying amount exceeds the
implied fair value, an impairment loss equal to that excess amount
is recognized. An impairment loss recognized cannot exceed the
carrying amount of that goodwill and cannot be reversed even if
the fair value of the reporting unit recovers.
During Step 2, the Bancorp determines the implied fair value
of goodwill for a reporting unit by assigning the fair value of the
reporting unit to all of the assets and liabilities of that unit
(including any unrecognized intangible assets) as if the reporting
unit had been acquired in a business combination. The excess of
the fair value of the reporting unit over the amounts assigned to
its assets and liabilities is the implied fair value of goodwill. This
assignment process is only performed for purposes of testing
goodwill for impairment. The Bancorp does not adjust the
carrying values of recognized assets or liabilities (other than
goodwill, if appropriate), nor recognize previously unrecognized
intangible assets in the Consolidated Financial Statements as a
result of this assignment process. Refer to Note 9 of the Notes to
Consolidated Financial Statements for further
information
regarding the Bancorp’s goodwill.
Residential mortgage loans held for sale
For residential mortgage loans held for sale, fair value is
estimated based upon mortgage-backed securities prices
and spreads to those prices or, for certain assets,
discounted cash flow models that may incorporate the
anticipated portfolio composition, credit spreads of
asset-backed securities with similar collateral, and market
conditions. Therefore, these loans are classified within
Level 2 of the valuation hierarchy.
Derivatives
Exchange-traded derivatives valued using quoted prices
are classified within Level 1 of the valuation hierarchy.
However, few classes of derivative contracts are listed
on an exchange. Most derivative contracts are valued
using discounted cash flow or other models that
incorporate current market interest rates, credit spreads
assigned to the derivative counterparties, and other
market parameters. The majority of the Bancorp's
derivative positions are valued utilizing models that use
as their basis readily observable market parameters and
are classified within Level 2 of the valuation hierarchy.
Such derivatives include basic and structured interest
rate swaps and options. Derivatives that are valued
based upon models with significant unobservable
market parameters are classified within Level 3 of the
valuation hierarchy. At December 31, 2009, derivatives
classified as Level 3, which are valued using an option-
pricing model containing unobservable inputs, consisted
primarily of warrants and put rights associated with the
Processing Business Sale and a total return swap
associated with the Bancorp’s sale of its Visa, Inc. Class
B shares. Level 3 derivatives also include interest rate
lock commitments, which utilize internally generated
loan closing
significant
rate assumptions as a
unobservable input in the valuation process.
Valuation techniques and parameters used for measuring
assets and liabilities are reviewed and validated by the Bancorp on
a quarterly basis. Additionally, the Bancorp monitors the fair
values of significant assets and liabilities using a variety of
methods including the evaluation of pricing runs and exception
reports based on certain analytical criteria, comparison to previous
trades and overall review and assessments for reasonableness.
In addition to the assets and liabilities measured at fair value
on a recurring basis, the Bancorp measures servicing rights,
certain loans and long-lived assets at fair value on a nonrecurring
basis. Refer to Note 27 of the Notes to Consolidated Financial
Statements for further information on fair value measurements.
Goodwill
Business combinations entered into by the Bancorp typically
include the acquisition of goodwill. U.S. GAAP requires goodwill
to be tested for impairment at the Bancorp’s reporting unit level
on an annual basis, which for the Bancorp is September 30, and
more frequently if events or circumstances indicate that there may
be impairment. The Bancorp has determined that its segments
qualify as reporting units under U.S. GAAP. Impairment exists
when a reporting unit’s carrying amount of goodwill exceeds its
implied fair value, which is determined through a two-step
impairment test. The first step (Step 1) compares the fair value of
a reporting unit with its carrying amount, including goodwill. If
the carrying amount of the reporting unit exceeds its fair value,
the second step (Step 2) of the goodwill impairment test is
performed to measure the impairment loss amount, if any.
20 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISK FACTORS
The risks listed here are not the only risks that Fifth Third faces.
Additional risks that are not presently known or that Fifth Third
presently deems to be immaterial could also have a material,
adverse impact on our financial condition, the results of our
operations, or our business.
RISKS RELATING TO ECONOMIC AND MARKET
CONDITIONS
Weakness in the economy and in the real estate market,
including specific weakness within Fifth Third’s geographic
footprint, has adversely affected Fifth Third and may
continue to adversely affect Fifth Third.
If the strength of the U.S. economy in general and the strength of
the local economies in which Fifth Third conducts operations
continues to decline or does not improve in a reasonable time
frame, this could result in, among other things, a deterioration in
credit quality or a reduced demand for credit, including a resultant
effect on Fifth Third’s loan portfolio and allowance for loan and
lease losses and in the receipt of lower proceeds from the sale of
loans and foreclosed properties. A significant portion of Fifth
Third’s residential mortgage and commercial real estate loan
portfolios are comprised of borrowers in Michigan, Northern
Ohio and Florida, which markets have been particularly adversely
affected by job losses, declines in real estate value, declines in
home sale volumes, and declines in new home building. These
factors could result in higher delinquencies, greater charge-offs
and increased losses on the sale of foreclosed real estate in future
periods, which would materially adversely affect Fifth Third’s
financial condition and results of operations.
Changes in interest rates could affect Fifth Third’s income
and cash flows.
Fifth Third’s income and cash flows depend to a great extent on
the difference between the interest rates earned on interest-
earning assets such as loans and investment securities, and the
interest rates paid on interest-bearing liabilities such as deposits
and borrowings. These rates are highly sensitive to many factors
that are beyond Fifth Third’s control, including general economic
conditions and the policies of various governmental and
regulatory agencies (in particular, the FRB). Changes in monetary
policy, including changes in interest rates, will influence the
origination of loans, the prepayment speed of loans, the purchase
of investments, the generation of deposits and the rates received
on loans and investment securities and paid on deposits or other
sources of funding. The impact of these changes may be
magnified if Fifth Third does not effectively manage the relative
sensitivity of its assets and liabilities to changes in market interest
rates. Fluctuations in these areas may adversely affect Fifth Third
and its shareholders.
Changes and trends in the capital markets may affect Fifth
Third’s income and cash flows.
Fifth Third enters into and maintains trading and investment
positions in the capital markets on its own behalf and manages
investment positions on behalf of its customers. These investment
positions include derivative financial instruments. The revenues
and profits Fifth Third derives from managing proprietary and
customer trading and investment positions are dependent on
market prices. If Fifth Third does not correctly anticipate market
changes and trends, Fifth Third may experience a decline in
investment advisory revenue or investment or trading losses that
may materially affect Fifth Third. Losses on behalf of its
customers could expose Fifth Third to litigation, credit risks or
loss of revenue from those customers. Additionally, substantial
losses in Fifth Third’s trading and investment positions could lead
to a loss with respect to those investments and may adversely
affect cash flows and funding costs.
The removal or reduction in stimulus activities sponsored by
the Federal Government and its agents may have a negative
impact on Fifth Third’s results and operations.
The Federal Government has intervened in an unprecedented
manner to stimulate economic growth. Some of these activities
have included the following:
• Target fed funds rates which have remained close to
zero percent;
• Mortgage rates that have remained at historical lows in
part due to the Federal Reserve Bank of New York’s
$1.25
trillion mortgage-backed securities purchase
program;
• Bank funding that has remained stable through an
increase in FDIC deposit insurance to a covered limit
of $250,000 per account from the previous coverage
limit of $100,000; and
• Housing demand
that has been stimulated by
homebuyer tax credits.
The expiration or rescission of any of these programs may
have an adverse impact on Fifth Third’s operating results by
increasing interest rates, increasing the cost of funding, and
reducing the demand for loan products, including mortgage loans.
Problems encountered by financial institutions larger or
similar to Fifth Third could adversely affect financial
markets generally and have indirect adverse effects on Fifth
Third.
The commercial soundness of many financial institutions may be
closely interrelated as a result of credit, trading, clearing or other
relationships between the institutions. As a result, concerns about,
or a default or threatened default by, one institution could lead to
significant market-wide liquidity and credit problems, losses or
defaults by other institutions. This is sometimes referred to as
“systemic risk” and may adversely affect financial intermediaries,
such as clearing agencies, clearing houses, banks, securities firms
and exchanges, with which the Bancorp interacts on a daily basis,
and therefore could adversely affect Fifth Third.
Fifth Third’s stock price is volatile.
Fifth Third’s stock price has been volatile in the past and several
factors could cause the price to fluctuate substantially in the
future. These factors include:
• Actual or anticipated variations in earnings;
• Changes in analysts’ recommendations or projections;
•
Fifth Third’s announcements of developments related to
its businesses;
• Operating and stock performance of other companies
deemed to be peers;
• Actions by government regulators;
• New technology used or services offered by traditional
and non-traditional competitors; and
• News reports of trends, concerns and other issues
related to the financial services industry.
Fifth Third’s stock price may fluctuate significantly in the future,
and these fluctuations may be unrelated to Fifth Third’s
performance. General market price declines or market volatility in
the future could adversely affect the price of its common stock,
and the current market price of such stock may not be indicative
of future market prices.
Fifth Third Bancorp 21
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISKS RELATING TO OUR GENERAL BUSINESS
Deteriorating credit quality, particularly in real estate loans,
has adversely impacted Fifth Third and may continue to
adversely impact Fifth Third.
Fifth Third has experienced a downturn in credit performance and
credit conditions and the performance of its loan portfolio could
deteriorate in the future. The downturn caused Fifth Third to
increase its allowance for loan and lease losses, driven primarily by
higher allocations related to residential mortgage and home equity
loans, commercial real estate loans and loans of entities related to
or dependent upon the real estate industry. If the performance of
Fifth Third’s loan portfolio does not improve or stabilize,
additional increases in the allowance for loan and lease losses may
be necessary in the future. Accordingly, a decrease in the quality of
Fifth Third’s credit portfolio could have a material adverse effect
on earnings and results of operations.
Fifth Third must maintain adequate sources of funding and
liquidity.
Fifth Third must maintain adequate funding sources in the normal
course of business to support its operations and fund outstanding
liabilities. Fifth Third’s ability to maintain sources of funding and
liquidity could be impacted by changes in the capital markets in
which it operates. Additionally, if Fifth Third sought additional
sources of capital, liquidity or funding, those additional sources
could dilute current shareholders’ ownership interests.
If Fifth Third does not adjust to rapid changes in the
financial services industry, its financial performance may
suffer.
Fifth Third’s ability to deliver strong financial performance and
returns on investment to shareholders will depend in part on its
ability to expand the scope of available financial services to meet
the needs and demands of its customers. In addition to the
challenge of competing against other banks in attracting and
retaining customers for traditional banking services, Fifth Third’s
competitors also include securities dealers, brokers, mortgage
bankers, investment advisors, specialty finance and insurance
companies who seek to offer one-stop financial services that may
include services that banks have not been able or allowed to offer
to their customers in the past or may not be currently able or
allowed to offer. This increasingly competitive environment is
primarily a result of changes in regulation, changes in technology
and product delivery systems, as well as the accelerating pace of
consolidation among financial service providers.
If Fifth Third is unable to grow its deposits, it may be
subject to paying higher funding costs.
The total amount that Fifth Third pays for funding costs is
dependent, in part, on Fifth Third’s ability to grow its deposits. If
Fifth Third is unable to sufficiently grow its deposits, it may be
subject to paying higher funding costs. This could materially
adversely affect Fifth Third’s earnings and results of operations.
Fifth Third’s ability to receive dividends from its subsidiaries
accounts for most of its revenue and could affect its liquidity
and ability to pay dividends.
Fifth Third Bancorp is a separate and distinct legal entity from its
subsidiaries. Fifth Third Bancorp typically receives substantially all
of its revenue from dividends from its subsidiaries. These
dividends are the principal source of funds to pay dividends on
Fifth Third Bancorp’s stock and interest and principal on its debt.
Various federal and/or state laws and regulations limit the amount
of dividends that Fifth Third’s bank and certain nonbank
subsidiaries may pay. Also, Fifth Third Bancorp’s right to
participate
in a distribution of assets upon a subsidiary’s
liquidation or reorganization is subject to the prior claims of that
22 Fifth Third Bancorp
subsidiary’s creditors. Limitations on Fifth Third Bancorp’s ability
to receive dividends from its subsidiaries could have a material
adverse effect on Fifth Third Bancorp’s liquidity and ability to pay
dividends on stock or interest and principal on its debt.
The financial services industry is highly competitive and
creates competitive pressures that could adversely affect
Fifth Third’s revenue and profitability.
The financial services industry in which Fifth Third operates is
highly competitive. Fifth Third competes not only with
commercial banks, but also with insurance companies, mutual
funds, hedge funds, and other companies offering financial
services in the U.S., globally and over the internet. Fifth Third
competes on the basis of several factors, including capital, access
to capital, revenue generation, products, services, transaction
execution, innovation, reputation and price. Over time, certain
sectors of the financial services industry have become more
concentrated, as institutions involved in a broad range of financial
services have been acquired by or merged into other firms.
Recently, this trend accelerated considerably, as several major U.S.
financial institutions consolidated, were forced to merge, received
substantial government
into
conservatorship by the U.S. Government. These developments
could result in Fifth Third’s competitors gaining greater capital
and other resources, such as a broader range of products and
services and geographic diversity. Fifth Third may experience
pricing pressures as a result of these factors and as some of its
competitors seek to increase market share by reducing prices.
assistance or were placed
The Bancorp and/or the holders of its securities could be
adversely affected by unfavorable ratings from rating
agencies.
The Bancorp’s ability to access the capital markets is important to
its overall funding profile. This access is affected by the ratings
assigned by rating agencies to the Bancorp, certain of its
subsidiaries and particular classes of securities they issue. The
interest rates that the Bancorp pays on its securities are also
influenced by, among other things, the credit ratings that it, its
subsidiaries and/or its securities receive from recognized rating
agencies. A downgrade to the Bancorp’s, or its subsidiaries’, credit
rating could affect its ability to access the capital markets, increase
its borrowing costs and negatively impact its profitability. A
ratings downgrade to the Bancorp, its subsidiaries or their
securities could also create obligations or liabilities to the Bancorp
under the terms of its outstanding securities that could increase
the Bancorp’s costs or otherwise have a negative effect on the
Bancorp’s
financial condition.
Additionally, a downgrade of the credit rating of any particular
security issued by the Bancorp or its subsidiaries could negatively
affect the ability of the holders of that security to sell the securities
and the prices at which any such securities may be sold. During
2009, Moody's Investors Service downgraded the Bancorp’s issuer
rating to “Baa1” from “A2” and downgraded the long term debt
rating and deposit ratings for the Bancorp’s bank subsidiary to
“A2”
from “A1.” Standard & Poor's Investors Service
downgraded the Bancorp’s issuer rating to “BBB” from “A-” and
downgraded the long term debt rating and deposit ratings for the
Bancorp’s bank subsidiary to “BBB+” from “A.” DBRS Investors
Service downgraded the Bancorp’s issuer rating to “A” from
“AAL” and downgraded the long term debt rating and deposit
ratings for the Bancorp’s bank subsidiary to “AH” from “AA.”
results of operations or
Fifth Third could suffer if it fails to attract and retain skilled
personnel.
As Fifth Third continues to grow, its success depends, in large
individuals.
its ability to attract and retain key
part, on
Competition for qualified candidates in the activities and markets
that Fifth Third serves is great and Fifth Third may not be able to
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
its business
strategies and may
hire these candidates and retain them. If Fifth Third is not able to
hire or retain these key individuals, Fifth Third may be unable to
execute
suffer adverse
consequences to its business, operations and financial condition.
Pursuant to the standardized terms of the Treasury Capital
Purchase program (CPP), among other things, Fifth Third has
agreed to institute certain restrictions on the compensation of
certain senior management positions, which could have an adverse
effect on Fifth Third’s ability to hire or retain the most qualified
senior management. It is possible that the U.S. Treasury may, as it
is permitted to do, impose further requirements on Fifth Third. In
2009, the Federal Reserve issued a comprehensive proposal
intended
incentive
compensation policies don’t encourage excessive risk taking. In
addition, the FDIC recently issued a request for comments on
whether banks with compensation plans that encourage excessive
risk taking should be charged at higher deposit assessment rates
than such banks would otherwise be charged. If Fifth Third is
unable to attract and retain qualified employees, or do so at rates
necessary to maintain its competitive position, or if compensation
costs required to attract and retain employees become more
expensive, Fifth Third’s performance, including its competitive
position, could be materially adversely affected.
that a bank organization’s
to ensure
Fifth Third’s mortgage banking revenue can be volatile from
quarter to quarter.
Fifth Third earns revenue from the fees Fifth Third receives for
originating mortgage loans and for servicing mortgage loans.
When rates rise, the demand for mortgage loans tends to fall,
reducing the revenue Fifth Third receives from loan originations.
At the same time, revenue from our mortgage servicing rights
(MSRs) can increase through increases in fair value. When rates
fall, mortgage originations tend to increase and the value of our
MSRs tends to decline, also with some offsetting revenue effect.
Even though they can act as a “natural hedge,” the hedge is not
perfect, either in amount or timing. For example, the negative
effect on revenue from a decrease in the fair value of residential
MSRs is immediate, but any offsetting revenue benefit from more
originations and the MSRs relating to the new loans would accrue
over time. It is also possible that, because of the recession and
deteriorating housing market, even if interest rates were to fall,
mortgage originations may also fall or any increase in mortgage
originations may not be enough to offset the decrease in the
MSRs value caused by the lower rates.
Fifth Third typically uses derivatives and other instruments to
hedge our mortgage banking interest rate risk. Fifth Third
generally does not hedge all of our risks, and the fact that Fifth
Third attempts to hedge any of the risks does not mean Fifth
Third will be successful. Hedging is a complex process, requiring
sophisticated models and constant monitoring, and is not a
perfect science. Fifth Third may use hedging instruments tied to
U.S. Treasury rates, LIBOR or Eurodollars that may not perfectly
correlate with the value or income being hedged. Fifth Third
could incur significant losses from our hedging activities. There
may be periods where Fifth Third elects not to use derivatives and
other instruments to hedge mortgage banking interest rate risk.
The preparation of Fifth Third’s financial statements
requires the use of estimates that may vary from actual
results.
in
The preparation of consolidated
conformity with accounting principles generally accepted in the
United States of America requires management
to make
significant estimates that affect the financial statements. Two of
Fifth Third’s most critical estimates are the level of the allowance
for loan and lease losses and the valuation of mortgage servicing
rights. Due to the uncertainty of estimates involved, Fifth Third
statements
financial
may have to significantly increase the allowance for loan and lease
losses and/or sustain credit losses that are significantly higher
than the provided allowance and could recognize a significant
provision for impairment of its mortgage servicing rights. If Fifth
Third’s allowance for loan and lease losses is not adequate, Fifth
Third’s business, financial condition, including its liquidity and
capital, and results of operations could be materially adversely
affected. For more information on the sensitivity of these
estimates, please refer to the Critical Accounting Policies section.
its
Fifth Third regularly reviews its litigation reserves for
adequacy considering
litigation risks and probability of
incurring losses related to litigation. However, Fifth Third cannot
be certain that its current litigation reserves will be adequate over
time to cover its losses in litigation due to higher than anticipated
settlement costs, prolonged litigation, adverse judgments, or other
factors that are largely outside of Fifth Third’s control. If Fifth
Third’s litigation reserves are not adequate, Fifth Third’s business,
financial condition, including its liquidity and capital, and results
of operations could be materially adversely affected. Additionally,
in the future, Fifth Third may increase its litigation reserves, which
could have a material adverse effect on its capital and results of
operations.
Changes in accounting standards could impact Fifth Third’s
reported earnings and financial condition.
The accounting standard setters, including FASB, U.S. Securities
and Exchange Commission (SEC) and other regulatory bodies,
periodically change the financial accounting and reporting
the preparation of Fifth Third’s
standards
consolidated financial statements. These changes can be hard to
predict and can materially impact how Fifth Third records and
reports its financial condition and results of operations. In some
cases, Fifth Third could be required to apply a new or revised
standard retroactively, which would result in the recasting of Fifth
Third’s prior period financial statements.
that govern
Future acquisitions may dilute current shareholders’
ownership of Fifth Third and may cause Fifth Third to
become more susceptible to adverse economic events.
Future business acquisitions could be material to Fifth Third and
it may issue additional shares of stock to pay for those
acquisitions, which would dilute current shareholders’ ownership
interests. Acquisitions also could require Fifth Third to use
substantial cash or other liquid assets or to incur debt. In those
events, Fifth Third could become more susceptible to economic
downturns and competitive pressures.
Difficulties in combining the operations of acquired entities
with Fifth Third’s own operations may prevent Fifth Third
from achieving the expected benefits from its acquisitions.
Inherent uncertainties exist when integrating the operations of an
acquired entity. Fifth Third may not be able to fully achieve its
strategic objectives and planned operating efficiencies in an
acquisition. In addition, the markets and industries in which Fifth
Third and its potential acquisition targets operate are highly
competitive. Fifth Third may lose customers or the customers of
acquired entities as a result of an acquisition. Future acquisition
and integration activities may require Fifth Third to devote
substantial time and resources and as a result Fifth Third may not
be able to pursue other business opportunities.
After completing an acquisition, Fifth Third may find certain
items are not accounted for properly in accordance with financial
accounting and reporting standards. Fifth Third may also not
realize the expected benefits of the acquisition due to lower
financial results pertaining to the acquired entity. For example,
Fifth Third could experience higher charge offs than originally
anticipated related to the acquired loan portfolio.
Fifth Third Bancorp 23
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third may sell or consider selling one or more of its
businesses. Should it determine to sell such a business, it
may not be able to generate gains on sale or related increase
in shareholders’ equity commensurate with desirable levels.
Moreover, if Fifth Third sold such businesses, the loss of
income could have an adverse effect on its earnings and
future growth.
Fifth Third owns several non-strategic businesses that are not
significantly synergistic with its core financial services businesses.
Fifth Third has, from time to time, considered the sale of such
businesses. If it were to determine to sell such businesses, Fifth
Third would be subject to market forces that may make
completion of a sale unsuccessful or may not be able to do so
within a desirable time frame. If Fifth Third were to complete the
sale of non-core businesses, it would suffer the loss of income
from the sold businesses, and such loss of income could have an
adverse effect on its future earnings and growth.
Material breaches in security of Fifth Third’s systems may
have a significant effect on Fifth Third’s business.
Fifth Third collects, processes and stores sensitive consumer data
by utilizing computer systems and telecommunications networks
operated by both Fifth Third and third party service providers.
Fifth Third has security, backup and recovery systems in place, as
well as a business continuity plan to ensure the system will not be
inoperable. Fifth Third also has security to prevent unauthorized
access to the system. In addition, Fifth Third requires its third
party service providers to maintain similar controls. However,
Fifth Third cannot be certain that the measures will be successful.
A security breach in the system and loss of confidential
information such as credit card numbers and related information
could result in losing the customers’ confidence and thus the loss
of their business as well as additional significant costs for privacy
monitoring activities.
Fifth Third is exposed to operational and reputational risk.
Fifth Third is exposed to many types of operational risk, including
reputational risk, legal and compliance risk, the risk of fraud or
theft by employees, customers or outsiders, unauthorized
transactions by employees, operating system disruptions or
operational errors.
Negative public opinion can result from Fifth Third’s actual
or alleged conduct in activities, such as lending practices, data
security, corporate governance and acquisitions, and may damage
Fifth Third’s reputation. Negative public opinion has been
observed in relation to banks participating in the Treasury’s
Troubled Asset Relief Program (TARP), in which Fifth Third was
a participant. Should Fifth Third not be able to repay its TARP
borrowing or make repayment subsequent to its regional peers,
Fifth Third may be the focus of increased negative attention.
taken by government regulators and
Additionally, actions
community organizations may also damage Fifth Third’s
reputation. This negative public opinion can adversely affect Fifth
Third’s ability to attract and keep customers and can expose it to
litigation and regulatory action.
Fifth Third’s necessary dependence upon automated systems
to record and process its transaction volume poses the risk that
technical system flaws or employee errors,
tampering or
manipulation of those systems will result in losses and may be
difficult to detect. Fifth Third may also be subject to disruptions
of its operating systems arising from events that are beyond its
control
(for example, computer viruses or electrical or
telecommunications outages). Fifth Third is further exposed to
the risk that its third party service providers may be unable to
fulfill their contractual obligations (or will be subject to the same
risk of fraud or operational errors as Fifth Third). These
24 Fifth Third Bancorp
disruptions may interfere with service to Fifth Third’s customers
and result in a financial loss or liability.
The inability of FTPS to succeed as a stand-alone entity
could have a negative impact on Fifth Third’s operating
results and financial condition.
During the second quarter of 2009, Fifth Third sold an
approximate 51% interest in Fifth Third Processing Solutions
(FTPS) to Advent International. Prior to the sale, FTPS relied on
Fifth Third to support its operating and administrative functions.
Fifth Third has entered into agreements to provide FTPS certain
services during the deconversion period. Fifth Third’s operating
results may suffer if the cost of providing these services exceeds
the amount received from FTPS. As part of the sale, FTPS also
assumed loans owed Fifth Third. Repayment of these loans is
contingent on future cash flows and profitability at FTPS.
In connection with the sale, Fifth Third provided Advent with
certain put rights that are exercisable in the event of three unlikely
circumstances. Based on Fifth Third’s current ownership share in
FTPS of approximately 49%, FTPS is accounted for under the
equity method and is not consolidated. The exercise of the put
rights would result in FTPS becoming a wholly owned subsidiary
of Fifth Third. As a result, FTPS would be consolidated and
would subject Fifth Third to the risks inherent in integrating a
business. Additionally, such a change in the accounting treatment
for FTPS may adversely impact Fifth Third’s capital.
Weather related events or other natural disasters may have
an effect on the performance of our loan portfolios,
especially in our coastal markets, thereby adversely
impacting our results of operations.
Fifth Third’s footprint stretches from the upper midwestern to
lower southeastern regions of the United States. This area has
experienced weather events including hurricanes and other natural
disasters. The nature and level of these events and the impact of
global climate change upon their frequency and severity cannot be
predicted. If large scale events occur, they may significantly impact
our loan portfolios by damaging properties pledged as collateral as
well as impairing our borrower’s ability to repay their loans.
RISKS RELATED TO THE LEGAL AND REGULATORY
ENVIRONMENT
As a regulated entity, Fifth Third must maintain certain
capital requirements that may limit its operations and
potential growth.
Fifth Third is a bank holding company and a financial holding
company. As such, Fifth Third is subject to the comprehensive,
consolidated supervision and regulation of
the Board of
Governors of the Federal Reserve System, including risk-based
and leverage capital requirements. Fifth Third must maintain
certain risk-based and leverage capital ratios as required by its
banking regulators and which can change depending upon general
economic conditions and Fifth Third’s particular condition, risk
profile and growth plans. Compliance with
the capital
requirements, including leverage ratios, may limit operations that
require the intensive use of capital and could adversely affect Fifth
Third’s ability to expand or maintain present business levels.
Fifth Third’s subsidiary bank must remain well-capitalized for
Fifth Third to retain its status as a financial holding company. In
addition, failure by Fifth Third’s bank subsidiary to meet
applicable capital guidelines could subject the bank to a variety of
enforcement
regulatory
authorities. These include limitations on the ability to pay
dividends, the issuance by the regulatory authority of a capital
remedies available
federal
the
to
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
directive to increase capital, and the termination of deposit
insurance by the FDIC.
The Bancorp’s business, financial condition and results of
operations could be adversely affected by new or changed
regulations and by the manner in which such regulations are
applied by regulatory authorities.
Current economic conditions, particularly in the financial markets,
have resulted in government regulatory agencies placing increased
focus on and scrutiny of the financial services industry. The U.S.
Government has
intervened on an unprecedented scale,
responding to what has been commonly referred to as the
financial crisis. In addition to the Bancorp’s participation in
Treasury’s CPP and CAP, the U.S. Government has taken steps
that include enhancing the liquidity support available to financial
institutions, establishing a commercial paper funding facility,
temporarily guaranteeing money market funds and certain types of
debt issuances, and increasing insured deposits. These programs
subject the Bancorp and other financial institutions who have
participated in these programs to additional restrictions, oversight
and/or costs that may have an impact on the Bancorp’s business,
financial condition, results of operations or the price of its
common stock.
Compliance with such
regulation and scrutiny may
significantly increase the Bancorp’s costs, impede the efficiency of
its internal business processes, require it to increase its regulatory
capital and limit its ability to pursue business opportunities in an
efficient manner. The Bancorp also will be required to pay
because market
significantly
developments have significantly depleted the insurance fund of
the FDIC and reduced the ratio of reserves to insured deposits.
The increased costs associated with anticipated regulatory and
political scrutiny could adversely impact the Bancorp’s results of
operations.
higher FDIC
premiums
New proposals for legislation continue to be introduced in
the U.S. Congress that could further substantially increase
regulation of the financial services industry. In January, the
Obama administration proposed a tax on the fifty largest bank
holding companies in the United States designed to recover losses
incurred as a result of the Treasury’s TARP program. The
proposal has not been finalized and the amount of the possible
tax has not been determined. Federal and state regulatory agencies
also frequently adopt changes to their regulations and/or change
the manner in which existing regulations are applied. The Bancorp
cannot predict whether any pending or future legislation will be
adopted or the substance and impact of any such new legislation
on the Bancorp. Additional regulation could affect the Bancorp in
a substantial way and could have an adverse effect on its business,
financial condition and results of operations.
Deposit insurance premiums levied against Fifth Third may
increase if the number of bank failures do not subside or the
cost of resolving failed banks increases.
The FDIC maintains a Deposit Insurance Fund (DIF) to resolve
the cost of bank failures. The DIF is funded by fees assessed on
insured depository
including Fifth Third. The
magnitude and cost of resolving an increased number of bank
failures have reduced the DIF. In 2009, the FDIC collected a
special assessment
the DIF. In addition, a
prepayment of an estimated amount of future deposit insurance
premiums was made on December 30, 2009. Future deposit
premiums paid by Fifth Third depend on the level of the DIF and
the magnitude and cost of future bank failures.
to replenish
institutions
The Bancorp is subject to extensive state and federal regulation,
supervision and legislation that govern almost all aspects of its
operations and limit the businesses in which the Bancorp may
engage. These laws and regulations may change from time to time
and are primarily intended for the protection of consumers,
depositors and the deposit insurance funds. The impact of any
changes to laws and regulations or other actions by regulatory
agencies may negatively impact the Bancorp or its ability to
increase the value of its business. Additionally, actions by
regulatory agencies or significant litigation against the Bancorp
could cause it to devote significant time and resources to
defending itself and may lead to penalties that materially affect the
Bancorp and its shareholders. Future changes in the laws,
including tax laws, or, as a participant in the Capital Purchase
Program under EESA, the rules and regulations promulgated
under EESA or ARRA, or regulations or their interpretations or
enforcement may also be materially adverse to the Bancorp and its
shareholders or may require the Bancorp to expend significant
time and resources to comply with such requirements.
Fifth Third and other financial institutions have been the
subject of increased litigation which could result in legal
liability and damage to its reputation.
Fifth Third and certain of its directors and officers have been
named from time to time as defendants in various class actions
and other litigation relating to Fifth Third’s business and activities.
Past, present and future litigation have included or could
include claims for substantial compensatory and/or punitive
damages or claims for indeterminate amounts of damages. Fifth
Third is also involved from time to time in other reviews,
investigations and proceedings (both formal and informal) by
governmental and self-regulatory agencies regarding its business.
These matters also could result in adverse judgments, settlements,
fines, penalties, injunctions or other relief. Like other large
financial institutions and companies, Fifth Third is also subject to
risk from potential employee misconduct,
including non-
compliance with policies and improper use or disclosure of
confidential information. Substantial legal liability or significant
regulatory action against Fifth Third could materially adversely
affect its business, financial condition or results of operations
and/or cause significant reputational harm to its business.
Fifth Third’s ability to pay or increase dividends on its
common stock or to repurchase its capital stock is restricted
by the terms of the U.S. Treasury’s preferred stock
investment in Fifth Third.
In December 2008, Fifth Third sold $3.4 billion of its Series F
Preferred Stock to the U.S. Treasury pursuant to the terms of the
CPP. For so long as any preferred stock issued under the CPP
remains outstanding, those terms prohibit Fifth Third from
increasing dividends on its common stock, and from making
certain repurchases of equity securities, including its common
stock, without the U.S. Treasury’s consent until the third
anniversary of the U.S. Treasury’s investment or until the U.S.
Treasury has transferred all of the preferred stock it purchased
under the CPP to third parties. Furthermore, as long as the
preferred stock issued to the U.S. Treasury is outstanding,
dividend payments and repurchases or redemptions relating to
certain equity securities, including Fifth Third’s common stock,
are prohibited until all accrued and unpaid dividends are paid on
such preferred stock, subject to certain limited exceptions.
Legislative or regulatory compliance, changes or actions or
significant litigation, could adversely impact the Bancorp or
the businesses in which the Bancorp is engaged.
Fifth Third Bancorp 25
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STATEMENTS OF INCOME ANALYSIS
Net Interest Income
Net interest income is the interest earned on debt securities, loans
and leases (including yield-related fees) and other interest-earning
assets less the interest paid for core deposits (includes transaction
deposits and other time deposits) and wholesale funding (includes
certificates $100,000 and over, other deposits, federal funds
purchased, short-term borrowings and long-term debt). The net
interest margin is calculated by dividing net interest income by
average interest-earning assets. Net interest rate spread is the
difference between the average rate earned on interest-earning
assets and the average rate paid on interest-bearing liabilities. Net
interest margin is typically greater than net interest rate spread due
to the interest income earned on those assets that are funded by
non-interest-bearing liabilities, on free-funding, such as demand
deposits or shareholders’ equity.
in the average
Table 5 presents the components of net interest income, net
interest margin and net interest spread for 2009, 2008 and 2007.
Nonaccrual loans and leases and loans held for sale have been
included
lease balances. Average
loan and
outstanding securities balances are based on amortized cost with
any unrealized gains or losses on available-for-sale securities
included in other assets. Table 6 provides the relative impact of
changes in the balance sheet and changes in interest rates on net
interest income.
Net interest income (FTE) was $3.4 billion for the year
ended December 31, 2009, compared to $3.5 billion in 2008. Net
interest income was affected by the amortization and accretion of
premiums and discounts on acquired loans and deposits, primarily
from the First Charter Acquisition, that increased net interest
income by $136 million during 2009, compared to an increase of
$358 million during 2008. Additionally, 2008 was impacted by the
recalculation of cash flows on certain leveraged leases that
reduced interest income on commercial leases by approximately
$130 million. Excluding these impacts, net interest income
decreased $71 million, or two percent, in 2009 compared to 2008.
Net interest income was negatively impacted by the decline in
market interest rates over the year as the Bancorp’s assets have
repriced faster than its liabilities. The net interest rate spread was
down 21 bp to 3.00% in 2009, which led to a decline in net
interest income of $284 million compared to 2008. Partially
offsetting the negative impact of declining market rates were
improved pricing spreads on loan originations as well as a shift in
funding composition to lower cost core deposits, as higher priced
term deposits issued in the second half of 2008 continued to
mature throughout 2009. For the year ended December 31, 2009,
net interest income was further impacted by an increase of $1.6
billion in average interest-earning assets and a decline of $5.0
billion in average interest-bearing liabilities driven by growth in
the Bancorp’s free-funding position. This led to an increase of
$121 million in net interest income.
Net interest margin was 3.32% in 2009, compared to 3.54%
in 2008. For 2009 and 2008, the accretion of the discounts on
acquired loans and deposits increased the net interest margin by
14 bp and 36 bp, respectively. Additionally, 2008 included the
negative impact of the leveraged lease charge that reduced the net
interest margin by 13 bp. Exclusive of the accretion of discounts
on acquired loans and deposits and the leveraged lease charge, net
interest margin was down 13 bp on a year-over-year basis due to
the previously mentioned decline in net interest rate spread and
the growth in average interest earning assets.
securities
automobile
Average interest-earning assets increased 2% from 2008
primarily due to an increase in the average investment portfolio,
partially offset by decreases in average commercial loans. The
increase in the average investment portfolio of $4.1 billion, or
29%, over 2008 was due to an increase in purchases of agency
mortgage-backed
asset-backed
and
securities, the purchase of investment grade commercial paper
from an unconsolidated qualifying special purpose entity (QSPE)
and an increase in VRDNs held in the Bancorp’s trading portfolio.
The decrease in average total commercial loans of five percent
was due primarily to the decrease in commercial construction
loans as a result of the suspension of new originations on non-
owner occupied commercial real estate loans in the second quarter
of 2008. Additionally, the decrease in commercial loans and
line
commercial mortgage
in
utilization, overall customer demand for commercial
loan
products, net charge-offs as well as implementation of tighter
underwriting standards.
loans was due to decreases
Interest income (FTE) from loans and leases decreased $1.0
billion compared to 2008. Exclusive of the accretion of discounts
on acquired loans in 2009 and 2008 and the leveraged lease charge
during 2008, interest income (FTE) from loans and leases
decreased $925 million, or 20%, compared to the prior year. The
year-over-year decrease in interest income from loans and leases is
a result of a three percent decline in average loans as well as the
repricing of variable rate loans in a declining rate environment,
which led to a 104 bp decrease in average rates. Interest income
(FTE) from investment securities and short-term investments
increased nine percent compared to 2008. The increase in interest
income from investment securities was a result of the 29%
increase in the average investment portfolio partially offset by a 77
bp decrease in the weighted-average yield.
TABLE 4: CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ in millions, except per share data)
Interest income (FTE)
Interest expense
Net interest income (FTE)
Provision for loan and lease losses
Net interest income (loss) after provision for loan and lease losses (FTE)
Noninterest income
Noninterest expense
Income (loss) before income taxes and cumulative effect (FTE)
Fully taxable equivalent adjustment
Applicable income taxes
Income (loss) before cumulative effect
Cumulative effect of change in accounting principle, net of tax
Net income (loss)
Dividends on preferred stock
Net income (loss) available to common shareholders
Earnings per share, basic
Earnings per share, diluted
Cash dividends declared per common share
26 Fifth Third Bancorp
2009
$4,687
1,314
3,373
3,543
(170)
4,782
3,826
786
19
30
737
-
737
226
$511
$0.73
0.67
0.04
2008
5,630
2,094
3,536
4,560
(1,024)
2,946
4,564
(2,642)
22
(551)
(2,113)
-
(2,113)
67
(2,180)
(3.91)
(3.91)
0.75
2007
6,051
3,018
3,033
628
2,405
2,467
3,311
1,561
24
461
1,076
-
1,076
1
1,075
1.99
1.98
1.70
2006
5,981
3,082
2,899
343
2,556
2,012
2,915
1,653
26
443
1,184
4
1,188
-
1,188
2.13
2.12
1.58
2005
5,026
2,030
2,996
330
2,666
2,374
2,801
2,239
31
659
1,549
-
1,549
1
1,548
2.79
2.77
1.46
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 5: CONSOLIDATED AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME (FTE)
For the years ended December 31
2009
Revenue/
Cost
Average
Yield/Rate
Average
Balance
Average
Yield/Rate
Average
Balance
2008
Revenue/
Cost
2007
Revenue/
Cost
Average
Yield/Rate
$1,162
545
134
150
4.22 %
4.35
2.90
4.24
1,991 4.13
5.53
4.15
6.31
10.10
8.49
5.57
4.73
602
520
556
193
86
1,957
3,948
721
17
1
4,687
4.28
7.19
0.14
4.62
$28,426
12,776
5,846
3,680
50,728
10,993
12,269
8,925
1,708
1,212
35,107
85,835
13,082
342
621
99,880
2,490
13,411
(1,485)
$114,296
$1,520
866
342
18
5.35 %
6.78
5.85
0.49
2,746 5.41
6.41
5.71
6.34
9.77
5.28
6.27
5.77
705
701
566
167
64
2,203
4,949
$22,351
11,078
5,661
3,683
42,773
10,489
11,887
10,704
1,276
1,219
35,575
78,348
$1,639
801
421
158
7.33 %
7.23
7.44
4.29
3,019 7.06
6.13
7.54
6.30
10.39
5.36
6.78
6.93
642
897
674
133
65
2,411
5,430
643
25
13
5,630
4.91
7.35
2.15
5.64
11,131
499
404
90,382
2,275
10,613
(793)
$102,477
566
36
19
6,051
5.08
7.29
4.80
6.70
($ in millions)
Assets
Interest-earning assets:
Loans and leases (a):
Commercial loans
Commercial mortgage
Commercial construction
Commercial leases
Subtotal - commercial
Residential mortgage
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Subtotal - consumer
Total loans and leases
Securities:
Taxable
Exempt from income taxes (a)
Other short-term investments
Total interest-earning assets
Cash and due from banks
Other assets
Allowance for loan and lease losses
Total assets
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing core deposits:
Interest checking
Savings
Money market
Foreign office deposits
Other time deposits
Total interest-bearing core deposits
Certificates - $100,000 and over
Other foreign office deposits
Federal funds purchased
Other short-term borrowings
Long-term debt
Average
Balance
$27,556
12,511
4,638
3,543
48,248
10,886
12,534
8,807
1,907
1,009
35,143
83,391
16,861
239
1,035
101,526
2,329
14,266
(3,265)
$114,856
$15,070
16,875
4,320
2,108
14,103
52,476
10,367
157
517
6,463
11,035
81,015
16,862
3,926
101,803
13,053
$114,856
$40
127
26
10
470
673
280
-
1
42
318
1,314
0.26 %
0.75
0.60
0.45
3.33
1.28
2.70
0.20
0.20
0.64
2.89
1.62
$128
224
118
34
411
915
324
50
70
178
557
2,094
$14,191
16,192
6,127
2,153
11,135
49,798
9,531
2,067
2,975
7,785
13,903
86,059
14,017
4,182
104,258
10,038
$114,296
0.91 %
1.38
1.92
1.60
3.69
1.84
3.40
2.42
2.34
2.29
4.01
2.43
$14,820
14,836
6,308
1,762
10,778
48,504
6,466
1,393
3,646
3,244
12,505
75,758
13,261
3,875
92,894
9,583
$102,477
$318
456
269
73
495
1,611
328
68
184
140
687
3,018
2.14 %
3.07
4.26
4.15
4.59
3.32
5.07
4.91
5.04
4.32
5.50
3.98
Total interest-bearing liabilities
Demand deposits
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest income
Net interest margin
Net interest rate spread
Interest-bearing liabilities to interest-earning assets
(a) The fully taxable-equivalent adjustments included in the above table are $19 million, $22 million and $24 million for the years ended December 31, 2009, 2008 and 2007, respectively.
3.32 %
3.00
79.80
3.54 %
3.21
86.16
$3,373
$3,536
$3,033
3.36 %
2.72
83.82
Average interest-bearing core deposits increased $2.7 billion,
or five percent, compared to last year, primarily due to increased
interest checking, savings other time deposits balances, partially
offset by a decline in money market deposits. The cost of interest-
bearing core deposits was 1.28% in 2009; a decrease of 56 bp
from 1.84% in 2008. The year-over-year decrease is a result of the
decrease in short-term market interest rates as the federal funds
rate steadily declined over the course of 2008 and remained at a
historically low rate throughout 2009.
Interest expense on wholesale funding decreased 46%
compared to the prior year due to a 21% decrease in average
balances and a 100 bp decrease in the average rate. In 2009,
wholesale funding represented 35% of interest-bearing liabilities,
down from 42% in 2008. Impacting this change was a decrease in
average long-term debt of $2.9 billion, or 21%, which included a
yield decrease of 112 bp compared to 2008. This was driven by a
$1.0 billion FHLB advance maturing in the first quarter of 2009
and $1.2 billion in bank notes maturing in the second quarter of
2009, which were the primary factors of the reduction in interest
expense on long term debt of $239 million. Further impacting the
wholesale funding balance was a $3.8 billion, or a 35%, decline in
average short-term borrowings, including federal funds purchased,
as well as a 169 bp decline in the average rate on short term
borrowings, compared to 2008, which led to reductions in interest
expense of $59 million and $146 million, respectively. The
decreased reliance on wholesale funding in 2009 was a result of
the increase in the Bancorp’s average equity position compared to
2008 due to the issuance of $1 billion of common stock in the
second quarter of 2009 and from the sale of $3.4 billion of senior
preferred shares and related warrants to the U.S. Treasury on
December 31, 2008 under its Capital Purchase Program (CPP).
For more information on the Bancorp’s interest rate risk
management, including estimated earnings sensitivity to changes
in market interest rates, see the Market Risk Management section
of Management’s Discussion and Analysis.
Fifth Third Bancorp 27
($ in millions)
Assets
Increase (decrease) in interest income:
Loans and leases:
Commercial loans
Commercial mortgage
Commercial construction
Commercial leases
Subtotal - commercial
Residential mortgage
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Subtotal - consumer
Total loans and leases
Securities:
Taxable
Exempt from income taxes
Other short-term investments
Total interest-earning assets
Cash and due from banks
Other assets
Allowance for loan and lease losses
Total change in interest income
Liabilities and Shareholders’ Equity
Increase (decrease) in interest expense:
Interest-bearing core deposits:
Interest checking
Savings
Money market
Foreign office deposits
Other time deposits
Total interest-bearing core deposits
Certificates - $100,000 and over
Other foreign office deposits
Federal funds purchased
Other short-term borrowings
Long-term debt
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 6: CHANGES IN NET INTEREST INCOME (FTE) ATTRIBUTED TO VOLUME AND YIELD/RATE (a)
For the years ended December 31
2009 Compared to 2008
2008 Compared to 2007
Volume
Yield/Rate
Total
Volume
Yield/Rate
Total
($45)
(17)
(60)
(1)
(123)
(7)
15
(7)
20
(12)
9
(114)
169
(7)
5
53
(313)
(304)
(148)
133
(632)
(96)
(196)
(3)
6
34
(255)
(887)
(91)
(1)
(17)
(996)
(358)
(321)
(208)
132
(755)
(103)
(181)
(10)
26
22
(246)
(1,001)
78
(8)
(12)
(943)
$385
117
13
-
515
32
28
(113)
42
-
(11)
504
96
(11)
8
597
(504)
(52)
(92)
(140)
(788)
31
(224)
5
(8)
(1)
(197)
(985)
(19)
-
(14)
(1,018)
(119)
65
(79)
(140)
(273)
63
(196)
(108)
34
(1)
(208)
(481)
77
(11)
(6)
(421)
$53
(996)
(943)
$597
(1,018)
(421)
$8
9
(28)
(1)
102
90
27
(25)
(33)
(26)
(101)
(68)
(96)
(106)
(64)
(23)
(43)
(332)
(71)
(25)
(36)
(110)
(138)
(712)
(88)
(97)
(92)
(24)
59
(242)
(44)
(50)
(69)
(136)
(239)
(780)
($13)
39
(7)
13
16
48
125
26
(29)
127
71
368
(177)
(271)
(144)
(52)
(100)
(744)
(129)
(44)
(85)
(89)
(201)
(1,292)
(190)
(232)
(151)
(39)
(84)
(696)
(4)
(18)
(114)
38
(130)
(924)
(1,292)
(924)
274
503
Total interest-bearing liabilities
Demand deposits
Other liabilities
Total change in interest expense
Shareholders’ equity
Total liabilities and shareholders’ equity
Total change in net interest income
(a) Changes in interest not solely due to volume or yield/rate are allocated in proportion to the absolute amount of change in volume or yield/rate.
(284)
(780)
(712)
(163)
$121
(68)
368
$229
Provision for Loan and Lease Losses
The Bancorp provides as an expense an amount for probable loan
and lease losses within the loan and lease portfolio that is based
on factors previously discussed in the Critical Accounting Policies
section. The provision is recorded to bring the allowance for loan
and lease losses to a level deemed appropriate by the Bancorp to
cover losses inherent in the portfolio. Actual credit losses on loans
and leases are charged against the allowance for loan and lease
loans actually removed from the
losses. The amount of
Consolidated Balance Sheets is referred to as charge-offs. Net
charge-offs include current period charge-offs less recoveries on
previously charged-off loans and leases.
The provision for loan and lease losses decreased to $3.5
billion in 2009 compared to $4.6 billion in 2008. The decrease in
the provision expense from the prior year was due to a decline in
the growth rate of commercial and consumer delinquencies and a
decline in the growth of loss estimates once the loans become
delinquent. As of December 31, 2009, the allowance for loan and
28 Fifth Third Bancorp
lease losses as a percent of loans and leases increased to 4.88%
from 3.31% at December 31, 2008.
Refer to the Credit Risk Management section for more
detailed information on the provision for loan and lease losses
including an analysis of the loan portfolio composition, non-
performing assets, net charge-offs, and other factors considered
by the Bancorp in assessing the credit quality of the loan portfolio
and the allowance for loan and lease losses.
Noninterest Income
For the year ended December 31, 2009, noninterest income
increased by $1.8 billion, or 62%, on a year-over-year basis, driven
primarily by the Processing Business Sale in the second quarter of
2009 as well as strong growth in mortgage banking net revenue,
partially offset by lower card and processing revenue in the second
half of 2009. The components of noninterest income are shown
in Table 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 7: NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Service charges on deposits
Card and processing revenue
Mortgage banking net revenue
Corporate banking revenue
Investment advisory revenue
Gain on sale of processing business
Other noninterest income
Securities gains (losses), net
Securities gains, net – non-qualifying hedges on mortgage servicing rights
Total noninterest income
Service charges on deposits decreased $9 million, or one percent,
to $632 million in 2009 compared to 2008. This was driven by a
$15 million, or four percent, decrease in consumer service charges
and an increase of $6 million, or two percent, in commercial
service charges compared to 2008. Commercial deposit revenue
increased to $299 million reflecting an increase in customer
accounts and lower market interest rates, as reduced earnings
credits paid on customer balances have resulted in higher realized
net service fees to pay for treasury management services.
Commercial customers receive earnings credits to offset the fees
charged for banking services on their deposit accounts such as
account maintenance, lockbox, ACH transactions, wire transfers
and other ancillary corporate treasury management services.
Earnings credits are based on the customer’s average balance in
qualifying deposits multiplied by the crediting rate. Qualifying
deposits include demand deposits and interest-bearing checking
accounts. The Bancorp has a standard crediting rate that is
adjusted as necessary based on competitive market conditions and
changes in short-term interest rates. Consumer deposit revenue
decreased four percent, to $333 million in 2009 compared to
2008, which is attributable to lower Insufficient Funds (NSF) fees
due to a change in the Bancorp’s overdraft policy. Deposit
generation and growth in the number of customer deposit
account relationships continue to be a primary focus of the
Bancorp.
Mortgage banking net revenue increased to $553 million in
2009 from $199 million in 2008. The components of mortgage
banking net revenue for the years ended December 31, 2009, 2008
and 2007 are shown in Table 8.
TABLE 8: COMPONENTS OF MORTGAGE BANKING NET
REVENUE
For the years ended December 31
($ in millions)
Origination fees and gains on loan sales
Servicing revenue:
Servicing fees
Servicing rights amortization
Net valuation adjustments on servicing
rights and free-standing derivatives
entered into to economically hedge MSR
197
(146)
2009
$485
164
(107)
2008
260
2007
79
145
(92)
Net servicing revenue (expense)
Mortgage banking net revenue
17
68
$553
(118)
(61)
199
1
54
133
Mortgage banking net revenue increased by $354 million
compared to 2008 due to strong growth in originations and higher
margins on sold loans. Mortgage originations increased to $21.7
billion, up 89% from $11.5 billion in 2008 due to lower interest
rates and government incentive programs, which have been
designed to provide significant tax and other incentives to home
buyers. Originations in 2009 resulted in gains on mortgage loan
sales activity of $485 million compared to $260 million in 2008. It
remains the intent of the Bancorp to sell a majority of the
mortgage loans it originates.
Mortgage net servicing revenue increased $129 million
compared to 2008. Net servicing revenue is comprised of gross
servicing fees and related servicing rights amortization as well as
2009
$632
615
553
399
299
1,758
479
(10)
57
$4,782
2008
641
912
199
444
353
-
363
(86)
120
2,946
2007
579
826
133
367
382
-
153
21
6
2,467
2006
517
717
155
318
367
-
299
(364)
3
2,012
2005
522
622
174
299
358
-
360
39
-
2,374
valuation adjustments on mortgage servicing rights and mark-to-
market adjustments on both settled and outstanding free-standing
derivative financial instruments. As discussed in more detail
below, the increase in net servicing revenue was primarily due to a
net gain of $17 million on the net valuation adjustments on
mortgage servicing rights (MSRs) and MSR derivatives, compared
to a net loss of $118 million in the prior year. The Bancorp’s total
residential mortgage loans serviced at December 31, 2009 and
2008 was $58.5 billion and $50.7 billion, respectively, with $48.6
billion and $40.4 billion, respectively, of residential mortgage loans
serviced for others.
Servicing rights are deemed temporarily impaired when a
borrower’s loan rate is distinctly higher than prevailing rates.
Temporary impairment on servicing rights is reversed when the
prevailing rates return to a
level commensurate with the
borrower’s loan rate. Further information on the valuation of
mortgage servicing rights and free-standing derivatives used to
hedge the MSR portfolio can be found in Note 11 of the Notes to
Consolidated Financial Statements. The Bancorp maintains a non-
qualifying hedging strategy to manage a portion of the risk
associated with changes in impairment on the MSR portfolio. The
Bancorp recognized a gain from MSR derivatives of $41 million,
offset by a temporary impairment of $24 million, resulting in a net
gain of $17 million for the year ended December 31, 2009 related
to changes in fair value and settlement of free-standing derivatives
purchased to economically hedge the MSR portfolio. For the year
ended December 31, 2008, the Bancorp recognized a gain from
MSR derivatives of $89 million, offset by a temporary impairment
of $207 million, resulting in a net loss of $118 million. In addition
to the derivative positions used to economically hedge the MSR
portfolio, the Bancorp acquires various securities as a component
of its non-qualifying hedging strategy. A gain on non-qualifying
hedges on mortgage servicing rights of $57 million and $120
million in 2009 and 2008, respectively, was included in noninterest
income within the Consolidated Statements of Income, but is
shown separate from mortgage banking net revenue.
Corporate banking revenue decreased $45 million, or 10%, in
2009, largely due to a lower volume of interest rate derivative sales
and foreign exchange revenue, partially offset by growth in
institutional sales and business lending fees. Foreign exchange
derivative income of $76 million decreased $30 million compared
to 2008 and income on interest rate derivatives was down $29
million to $21 million in 2009, both of which were driven by
volume declines. Fees associated with business lending grew 22%
to $103 million, compared to 2008. The Bancorp is committed to
providing a comprehensive range of financial services to large and
middle-market businesses.
Investment advisory revenue decreased $54 million, or 15%,
from 2008 as the Bancorp experienced broad-based declines in all
categories within investment advisory revenue. Brokerage fee
income, which includes Fifth Third Securities income, decreased
18%, or $18 million, in 2009 as investors continued to migrate
balances from stock and bond funds to money market funds
resulting in reduced commission-based transactions. Mutual fund
revenue decreased 28%, to $38 million, in 2009 reflecting lower
Fifth Third Bancorp 29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
valuations on assets under management and a continued shift to
money market funds and lower fee products. As of December 31,
2009, the Bancorp had approximately $187 billion in assets under
care and managed $25 billion
individuals,
corporations and not-for-profit organizations.
in assets for
in
interest
On June 30, 2009, the Bancorp completed the sale of a
majority
its merchant acquiring and financial
institutions processing businesses. The Processing Business Sale
generated a pre-tax gain of $1.8 billion ($1.1 billion after-tax). As
part of the transaction, the Bancorp retained certain debit and
credit card interchange revenue and sold the financial institutions
and merchant processing portions of the business, which
historically comprised approximately 70% of total card and
processing revenue. As a result of the sale, card and processing
revenue decreased $297 million, or 33%, in 2009 compared to
2008. Card issuer interchange increased 6%, to $262 million,
compared to 2008 due to strong growth in debit card transaction
volumes, partially offset by lower credit card usage. Merchant
processing and financial institutions revenue was $174 million and
$179 million, respectively, in 2009, which represents activity prior
to the Processing Business Sale.
Other noninterest income increased $116 million in 2009
compared to 2008. The components of other noninterest income
are shown in Table 9. The increase was primarily due to net gains
from the sale of loans of $38 million in 2009, net of charges of
$54 million on certain held-for-sale commercial loans, compared
to losses of $11 million on loan sales in 2008, and lower losses on
bank owned life insurance. During 2009, the Bancorp recognized
$53 million in charges to record a reserve in connection with the
intent to surrender one of the Bancorp’s BOLI policies as well as
losses related to market value declines, compared to charges of
$215 million to lower the cash surrender value of one of the
policies for the year ended December 31, 2008. Additionally, the
year ended December 31, 2009 benefited from a $244 million gain
relating to the sale of the Bancorp’s Visa, Inc. Class B shares, $76
million in revenue related to the Transition Service Agreement
(TSA) entered into as part of the Processing Business Sale, and
$18 million in mark-to-market adjustments on warrants and put
options related to the Processing Business Sale. The year ended
December 31, 2008 was impacted by a $273 million gain from the
redemption of a portion of the Bancorp’s ownership interest in
Visa, Inc. and a $76 million gain related to the satisfactory
resolution of litigation associated with a prior acquisition.
Net securities losses totaled $10 million in 2009 compared to
$86 million of net securities losses during 2008. The net securities
losses in 2008 include OTTI charges of $38 million and $29
million relating
to FHLMC and FNMA preferred stock,
respectively, along with OTTI charges of $37 million related to
certain bank trust preferred securities.
Noninterest Expense
Total noninterest expense decreased $738 million, or 16%, in 2009
compared to 2008. The components of noninterest expense are
shown in Table 10. Noninterest expense in 2009 included a $73
million reduction in the Visa litigation reserve as well as a $55
million FDIC special assessment charge. Noninterest expense in
TABLE 10: NONINTEREST EXPENSE
For the years ended December 31 ($ in millions)
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Card and processing expense
Technology and communications
Equipment expense
Goodwill impairment
Other noninterest expense
Total noninterest expense
Efficiency ratio
30 Fifth Third Bancorp
TABLE 9: COMPONENTS OF OTHER NONINTEREST
INCOME
For the years ended December 31
($ in millions)
Operating lease income
Cardholder fees
Insurance income
Consumer loan and lease fees
Gain (loss) on loan sales
Banking center income
Gain on sale/redemption of Visa, Inc.
2009
$59
48
47
43
38
22
2008
47
58
36
51
(11)
31
ownership interests
Loss on sale of other real estate owned
Bank owned life insurance loss
Litigation settlement
Other
Total other noninterest income
244
(70)
(2)
-
50
$479
273
(60)
(156)
76
18
363
2007
32
56
32
46
25
29
-
(14)
(106)
-
53
153
2008
included a $965 million charge to record goodwill
impairment, $99 million in net reductions to noninterest expense
to reflect the recognition of the Bancorp’s proportional share of
the Visa escrow account, $36 million in legal expenses related to
litigation associated with a prior acquisition and $20 million in
acquisition-related expenses. Excluding these items, noninterest
expense increased $202 million, or six percent, due to increased
loan related expenses from higher mortgage origination volumes
and expenses incurred from the management of problem assets
and higher FDIC insurance costs from an increase in assessment
rates during 2009, partially offset by lower card and processing
expense due to the Processing Business Sale on June 30, 2009.
Total personnel costs (salaries, wages and incentives plus
employee benefits) increased $35 million, or two percent in 2009
compared to 2008 due primarily to increased insurance costs,
retirement plan contributions and deferred compensation
expenses. As of December 31, 2009, the Bancorp employed
21,901 employees, of which 6,772 were officers and 2,370 were
part-time employees. Full-time equivalent employees totaled
20,998 as of December 31, 2009 compared to 21,476 as of
December 31, 2008.
Card and processing expense, which includes third-party
processing expenses, card management fees and other bankcard
processing, decreased $81 million, or 29%, in 2009 compared to
2008 due primarily to the Processing Business Sale in the second
quarter of 2009. As part of the sale, the Bancorp entered into a
transition service agreement (TSA) that resulted in the Bancorp
incurring approximately $76 million in operating expenses that
were offset with revenue from the TSA that was recorded in other
noninterest income.
Total other noninterest expense increased $282 million, or
26%, in 2009 compared to 2008. The components of other
noninterest expense are shown in Table 11. Loan and lease
expense was higher compared to 2008 as a result of increased
closing expenses resulting from growth in residential mortgage
loan originations and higher expenses incurred in the management
of problem assets. FDIC insurance and other taxes were higher
due to a special assessment of $55 million in 2009 as well as
increased assessment rates. These were partially offset by lower
professional service fees and marketing expenses. The provision
2009
$1,339
311
308
193
181
123
-
1,371
$3,826
46.9%
2008
1,337
278
300
274
191
130
965
1,089
4,564
70.4
2007
1,239
278
269
244
169
123
-
989
3,311
60.2
2006
1,174
292
245
184
141
116
-
763
2,915
59.4
2005
1,133
283
221
145
142
105
-
772
2,801
52.1
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for unfunded commitments was consistent with 2008 as estimates
of inherent losses resulting from deterioration in the credit quality
of the underlying borrowers remained high.
The Bancorp incurred $269 million of FDIC insurance and
other taxes in 2009 compared to $73 million in 2008 as the result
of an increase in deposit insurance and for participation in the
TLGP. In December 2008, the FDIC implemented an interim rule
under the FDIC restoration plan which increased the deposit
insurance assessment rates 7 bp from the 2008 level for all banks
for the first quarter of 2009. In February 2009, the FDIC adopted
the final rule for the FDIC restoration plan that, effective April 1,
2009, made the assessment rates more risk sensitive and widened
the range (7.0-77.5 bp) the FDIC may charge banks. Additionally,
the FDIC imposed a special assessment, effective June 30, 2009,
on each insured depository institution calculated as 5 bp of total
assets less Tier 1 capital. As a result, the Bancorp recognized a $55
million special assessment charge in the second quarter of 2009.
The Bancorp participates in the FDIC’s TLGP which
temporarily guarantees qualifying senior debt of participating
FDIC-insured institutions and certain holding companies, as well
as deposits in qualifying noninterest-bearing deposit transaction
accounts. The Bancorp did not have qualifying senior debt insured
under the TLGP in 2009, but did have qualifying deposit
accounts.
The efficiency ratio (noninterest expense divided by the sum
of net interest income (FTE) and noninterest income) was 46.9%
and 70.4% for 2009 and 2008, respectively. Excluding the
goodwill impairment charge of $965 million in 2008, the efficiency
ratio was 55.5% (comparison being provided to supplement an
understanding of fundamental trends). The Bancorp continues to
focus on efficiency initiatives, as part of its core emphasis on
operating leverage and on expense control.
Applicable Income Taxes
The Bancorp’s income (loss) before income taxes, applicable
income tax expense (benefit) and effective tax rate for each of the
periods indicated are shown in Table 12. Applicable income tax
expense for all periods includes the benefit from tax-exempt
TABLE 11: COMPONENTS OF OTHER NONINTEREST
EXPENSE
For the years ended December 31
($ in millions)
FDIC insurance and other taxes
Loan and lease
Provision for unfunded commitments and
2008
73
188
2009
$269
234
letters of credit
Affordable housing investments
impairment
Marketing
Professional services fees
Intangible asset amortization
Postal and courier
Insurance expense
Travel
Operating lease
Recruitment and education
Supplies
Other real estate owned expense
Data processing
Visa litigation reserve
Other
Total other noninterest expense
99
98
83
79
63
57
53
50
41
39
30
25
24
21
(73)
277
$1,371
67
102
102
56
54
30
54
32
33
31
11
14
(99)
243
1,089
2007
31
119
16
57
84
54
42
52
17
54
22
41
31
6
14
172
177
989
income, tax-advantaged investments and general business tax
credits, partially offset by the effect of nondeductible expenses.
The effective tax rate for the tax year ended December 31, 2009
was primarily impacted by $112 million in tax credits, a $106
million tax benefit related to the decision to surrender one of the
Bancorp’s BOLI policies and the determination that losses on the
policy recorded in prior periods are now tax deductible, and a $55
million reduction in income tax expense related to the Bancorp’s
leveraged lease litigation settlement with the IRS. The effective tax
rate for the year ended December 31, 2008 was primarily impacted
by the pre-tax loss for the year partially offset by tax expense of
approximately $140 million required for interest related to the tax
treatment of certain of the Bancorp’s leveraged leases for previous
years and the nondeductible portion of the goodwill impairment
charge. Additionally, see Note 20 of the Notes to Consolidated
Financial Statements for further information on income taxes.
TABLE 12: APPLICABLE INCOME TAXES
For the years ended December 31 ($ in millions)
Income (loss) before income taxes and cumulative effect
Applicable income tax expense (benefit)
Effective tax rate
2009
$767
30
3.9%
2008
(2,664)
(551)
(20.7)
2007
1,537
461
30.0
2006
1,627
443
27.2
2005
2,208
659
29.9
Fifth Third Bancorp 31
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the business segments include allocations for shared services and
headquarters expenses. Even with these allocations, the financial
results are not necessarily indicative of the business segments’
financial condition and results of operations as if they existed as
independent entities. Additionally, the business segments form
synergies by taking advantage of cross-sell opportunities and when
funding operations by accessing the capital markets as a collective
unit. Net income (loss) available to common shareholders by
business segment is summarized in Table 13.
2009
TABLE 13: BUSINESS SEGMENT NET INCOME (LOSS)
AVAILABLE TO COMMON SHAREHOLDERS
For the years ended December 31
($ in millions)
Income Statement Data
Commercial Banking
Branch Banking
Consumer Lending
Investment Advisors
General Corporate and Other
Net income (loss)
Dividends on preferred stock
Net income (loss) available to common
(733)
632
(148)
98
(1,962)
(2,113)
67
($120)
324
23
53
457
737
226
714
642
120
99
(499)
1,076
1
2008
2007
shareholders
$511
(2,180)
1,075
BUSINESS SEGMENT REVIEW
At December 31, 2009, the Bancorp reports on four business
segments: Commercial Banking, Branch Banking, Consumer
Lending and Investment Advisors. Further detailed financial
information on each business segment is included in Note 30 of
the Notes to Consolidated Financial Statements.
Results of the Bancorp’s business segments are presented
based on its management structure and management accounting
practices. The structure and accounting practices are specific to
the Bancorp; therefore, the financial results of the Bancorp’s
business segments are not necessarily comparable with similar
information for other financial institutions. The Bancorp refines
its methodologies from time to time as management accounting
practices are improved and businesses change.
On June 30, 2009, the Bancorp completed the Processing
Business Sale, which represented the sale of a majority interest in
the Bancorp’s merchant acquiring and financial institutions
processing businesses. Financial data for the merchant acquiring
and financial institutions processing businesses was originally
reported in the former Processing Solutions segment through
June 30, 2009. As a result of the sale, the Bancorp no longer
presents Processing Solutions as a segment and therefore,
historical financial information for the merchant acquiring and
financial institutions processing businesses has been reclassified
under General Corporate and Other for all periods presented.
Interchange revenue previously recorded
in the Processing
Solutions segment and associated with cards currently included in
Branch Banking is now included in the Branch Banking segment
for all periods presented. Additionally, the Bancorp retained its
retail credit card and commercial multi-card service businesses,
which were also originally reported in the former Processing
Solutions segment through June 30, 2009, and are now included in
the Consumer Lending and Commercial Banking segments,
respectively, for all periods presented. Revenue from the
remaining ownership interest in the Processing Business is
recorded in General Corporate and Other as noninterest income.
The Bancorp manages interest rate risk centrally at the
corporate level by employing a funds transfer pricing (FTP)
methodology. This methodology insulates the business segments
from interest rate volatility, enabling them to focus on serving
customers through loan originations and deposit taking. The FTP
system assigns charge rates and credit rates to classes of assets and
liabilities, respectively, based on expected duration and the
London Interbank Offered Rate (LIBOR) swap curve. Matching
duration allocates interest income and interest expense to each
segment so its resulting net interest income is insulated from
interest rate risk. In a rising rate environment, the Bancorp
benefits from the widening spread between deposit costs and
wholesale funding costs. However, the Bancorp’s FTP system
credits this benefit to deposit-providing businesses, such as
Branch Banking and Investment Advisors, on a duration-adjusted
basis. The net impact of the FTP methodology is captured in
General Corporate and Other.
Management made changes to the FTP methodology during
2009 to update the calculation of FTP charges and credits to each
of the Bancorp’s business segments. Changes to the FTP
methodology were applied retroactively to the year ended
December 31, 2008 and included updating rates to reflect
significant increases in the Bancorp’s liquidity premiums. The
increased spreads reflect the Bancorp’s liability structure and are
spreads.
more weighted
Management reviews FTP spreads periodically based on the
extent of changes in market spreads.
retail product pricing
towards
The business segments are charged provision expense based
on the actual net charge-offs experienced by the loans owned by
each segment. Provision expense in excess of net charge-offs are
captured in General Corporate and Other. The financial results of
32 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
to
Commercial Banking
Commercial Banking offers banking, cash management and
financial services
large and middle-market businesses,
government and professional customers. In addition to the
traditional lending and depository offerings, Commercial Banking
products and services include, among others, foreign exchange
and international trade finance, derivatives and capital markets
services, asset-based lending, real estate finance, public finance,
commercial leasing and syndicated finance. Table 14 contains
selected financial data for the Commercial Banking segment.
TABLE 14: COMMERCIAL BANKING
For the years ended December 31
($ in millions)
Income Statement Data
Net interest income (FTE) (a)
Provision for loan and lease losses
Noninterest income:
2009
$1,383
1,360
2008
2007
1,567
1,864
1,312
127
Corporate banking revenue
Service charges on deposits
Other noninterest income
Noninterest expense:
Salaries, incentives and benefits
Goodwill impairment
Other noninterest expense
Income (loss) before taxes
Applicable income tax expense
(benefit)
Net income (loss)
Average Balance Sheet Data
Commercial loans
Demand deposits
Interest checking
Savings and money market
Certificates $100,000 and over and other
time
357
196
56
414
186
78
221
-
768
(357)
243
750
675
(1,287)
(237)
($120)
(554)
(733)
344
152
81
255
-
540
967
253
714
$41,341
8,581
6,018
2,457
43,198
6,206
4,632
4,046
35,696
5,944
4,107
4,462
4,376
1,275
2,293
1,835
1,855
1,486
Foreign office deposits
(a) Includes taxable equivalent adjustments of $13 million for 2009, $15 million for 2008,
and $14 million for 2007.
Comparison of 2009 with 2008
Commercial Banking incurred a net loss of $120 million compared
to a net loss of $733 million in 2008. This improvement was
primarily due to a $750 million goodwill impairment charge taken
in 2008 and a decrease in provision for loan and lease losses of
$504 million. The net loss in 2009 was driven by continued high
levels of provision for loan and lease losses. Net interest income
decreased $184 million or 12% driven by a $144 million decrease
in the accretion of discounts on loans and deposits associated with
the acquisition of First Charter in the second quarter of 2008. In
addition, a decrease in average commercial loans combined with
increases in average core deposits and higher priced certificates
$100,000 and over and other time deposits from 2008 negatively
impacted net interest income. Average commercial loans and
leases decreased $1.9 billion, or four percent, compared to the
prior year and included decreases of $1.2 billion and $267 million
in
commercial mortgages,
respectively. The overall decrease in commercial loans and leases
is due to lower utilization rates on corporate lines, net charge-offs
and tighter lending standards that were implemented throughout
the second half of 2008 and continued throughout 2009.
construction
commercial
and
Average core deposits increased 10% compared to 2008 as
the Commercial Banking segment experienced growth in both
demand deposits and interest checking accounts partially offset by
a decline in savings accounts. Commercial customers opted to
shift money out of savings and money market accounts into
demand deposits and interest checking accounts due to increased
attractiveness as a result of protection through FDIC insurance of
demand deposit and interest checking accounts and a lower
economic benefit from sweeping balances into interest-bearing
vehicles. As a participant in the TLGP program the Bancorp
opted into the Transaction Account Guarantee (TAG) program
which provides commercial customers unlimited FDIC insurance
on demand deposit accounts in addition to other qualifying
transactional accounts. Commercial customers also increased
balances in certificates $100,000 and over and other time deposits
as a result of certificates purchased in the second half of 2008 that
matured at the end of 2009. Provision expense declined from $1.9
billion in 2008 to $1.4 billion in 2009 primarily due to a decrease
in net charge-offs as net charge-offs as a percent of average loans
and leases decreased to 329 bp in 2009. Net charge-offs decreased
in comparison to prior year primarily due to $800 million of
charge-offs incurred in the fourth quarter of 2008 when the
Bancorp sold or transferred to held-for-sale $1.3 billion in
commercial loans and commercial mortgage loans. Economic
conditions continued to weaken throughout 2009 and the
continuing deterioration of credit within the Bancorp’s footprint,
particularly in Michigan and Florida, continued to cause high
amounts of charge-offs throughout 2009.
Noninterest income declined $69 million or 10% from 2008
due to a $57 million decrease in corporate banking revenue and a
$22 million decline of other noninterest income, partially offset by
an increase in service charges on deposits of $10 million.
Corporate banking revenue decreased from the prior year
primarily due to a decline of $30 million in international income
and a decline of $28 million on derivative fee income. Other
noninterest income decreased from the prior year due to valuation
write-downs on loans held for sale of $52 million partially offset
by a net gain of $24 million on loan and OREO sales. Deposit fee
income increased from the prior year due to a reduction of
business service discounts provided to customers.
Noninterest expense decreased $679 million compared to
2008 primarily due to goodwill impairment of $750 million taken
in 2008. Excluding the goodwill impairment charge, noninterest
expense increased $71 million from 2008 due to increases in
FDIC expenses of $52 million, loan and lease expenses of $26
million and $20 million in other losses and adjustments primarily
due to realized credit losses on derivatives, partially offset by a
decrease in salary and benefit expense of $22 million.
Comparison of 2008 with 2007
Commercial Banking incurred a net loss of $733 million in 2008
compared to net income of $714 million in 2007 as growth in net
interest income and corporate banking revenue was more than
offset by increased provision for loan and lease losses and a
goodwill impairment charge. Net interest income increased $255
million compared to 2007, primarily due to accretion of loan
discounts on acquired loans which contributed $204 million to net
interest income in 2008. Average commercial loans and leases
increased 21% to $43.2 billion due to acquisition activity and the
purchase of assets from an unconsolidated QSPE under a liquidity
asset purchase agreement with the Bancorp.
Provision expense increased $1.7 billion in 2008 as a result of
an increase in net charge-offs. Net charge-offs as a percent of
average loans and leases increased to 435 bp from 36 bp in 2007
due to weakening economic conditions and the continuing
deterioration of credit within the Bancorp’s footprint, particularly
in Michigan and Florida. Additionally, net charge-offs were
impacted by $800 million in net charge-offs resulting from the sale
or transfer to held-for-sale of $1.3 billion in commercial loans and
commercial mortgage loans in the fourth quarter of 2008.
Noninterest income increased $101 million compared to
2007 due to corporate banking revenue growth of $70 million and
increased service charges on deposits of $34 million.
Noninterest expense increased $873 million compared to
2007 primarily due to goodwill impairment of $750 million in
2008 as well as sales incentives, which increased 21% to $105
million and growth in loan expenses of $33 million, to $64 million
in 2008.
Fifth Third Bancorp 33
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Branch Banking
Branch Banking provides a full range of deposit and loan and
lease products to individuals and small businesses through 1,309
full-service banking centers. Branch Banking offers depository
and loan products, such as checking and savings accounts, home
equity loans and lines of credit, credit cards and loans for
automobile and other personal financing needs, as well as
products designed to meet the specific needs of small businesses,
including cash management services. Table 15 contains selected
financial data for the Branch Banking segment.
TABLE 15: BRANCH BANKING
For the years ended December 31
($ in millions)
Net interest income
Provision for loan and lease losses
Noninterest income:
Service charges on deposits
Card and processing revenue
Investment advisory revenue
Other noninterest income
Noninterest expense:
Salaries, incentives and benefits
Net occupancy and equipment
expense
Other noninterest expense
Income before taxes
Applicable income tax expense
Net income
Average Balance Sheet Data
Consumer loans
Commercial loans
Demand deposits
Interest checking
Certificates $100,000 and over & other time
Savings and money market
2009
2008
2007
$1,559
585
1,714
352
1,463
162
428
264
84
122
502
217
653
500
176
$324
447
246
84
130
517
203
573
976
344
632
421
220
90
121
479
173
510
991
349
642
$13,096
5,335
6,363
7,395
16,995
17,010
12,665
5,600
6,008
7,845
13,749
16,184
11,838
5,131
5,756
8,692
13,419
14,621
Comparison of 2009 with 2008
Net income decreased $308 million, or 49%, compared to 2008
driven by a decrease in net interest income and service fees
combined with a higher provision for loan and lease losses. Net
interest income decreased $155 million, or nine percent, compared
to 2008. This decrease was primarily due to a decline of $27
million on the accretion of discounts on loans and deposits
associated with the acquisition of First Charter in 2008 combined
with an increase in interest expense as a result of a higher average
balance in certificates $100,000 and over and other time deposits.
At the end of 2008, customers took advantage of competitive
pricing on short term certificates $100,000 and over, which
resulted in an increase to interest expense in 2009. Average loans
and leases increased one percent compared to 2008 as a three
percent growth in consumer loans was partially offset by a five
percent decrease in commercial loans. Home equity loans grew
four percent due to a low interest rate environment throughout
2009. The segment grew credit card balances by $211 million, or
14%, resulting from an increased focus on relationships with its
current customers through the cross-selling of credit cards. The
average commercial loan product balance, a subset of total
commercial loans, decreased $229 million, or eight percent due to
tighter lending standards implemented in 2008 that continued
throughout 2009 and a decrease in customer line utilization rates.
Average core deposits were up eight percent compared to 2008
primarily due to strong growth
in short term consumer
certificates, which were sold in late 2008 and a five percent
34 Fifth Third Bancorp
increase in average savings and money market account balances as
customers continued to cut spending and increase savings.
Net charge-offs as a percent of average loan and leases
increased in 2009 to 317 bp compared to 194 bp in 2008. Net
charge-offs increased in comparison to 2008 as the segment
experienced higher charge-offs involving home equity lines and
loans, commercial loans and credit cards. The increase of $91
million in net charge-offs on home equity products reflected
borrower stress and a decrease in home values primarily within
the Bancorp’s footprint. Charge-offs
involving credit cards
increased $75 million compared to 2008 due to an increase in
unemployment and bankruptcy filings in 2009. Commercial loan
charge-offs increased $52 million compared to 2008 due to the
the continuing deterioration of
weakening economy and
commercial credit, particularly in Michigan and Florida.
Noninterest income was relatively flat compared to 2008 as
decreases in deposit fees and retail service fees, included in other
noninterest income, were offset by an increase in card and
processing revenue. Deposit fees, including consumer overdraft
fees, declined $19 million, or four percent, from the prior year due
to changes in the fee structure charged to consumers for
overdrawn account balances. Retail service fees decreased $10
million or 11% from the prior year due to a decrease of $7 million,
or 13%, in bankcard fees and a decrease of $3 million, or 13% in
banking center fees. Card and processing revenue increased $18
million from 2008 due to a nine percent increase in interchange
revenue associated with
in debit card
transactions.
increased activity
Noninterest expense increased $80 million, or six percent,
compared to 2008 primarily due to an increase in FDIC related
expenses of $86 million as a result of a special assessment charged
in 2009 coupled with an increase in assessment rates.
Comparison of 2008 with 2007
Net income decreased $9 million in 2008, or one percent,
compared to 2007 as increases in net interest income and service
fees were more than offset by higher provision for loan and lease
losses and increased personnel and occupancy expense. Net
interest income increased 17% compared to 2007 due to the
increase in volume of higher yielding credit cards and the
accretion of discounts on loans and deposits totaling $43 million,
primarily related to the second quarter acquisition of First Charter.
Average loans and leases increased eight percent compared to
2007 as home equity loans grew five percent primarily due to
acquisitions. In addition, credit card balances grew by $396
million, or 36%. Average core deposits were up three percent
compared to 2007 primarily due to acquisitions since 2007.
Net charge-offs as a percent of average loan and leases
increased in 2008 to 194 bp from 95 bp in 2007. Net charge-offs
increased in comparison to 2007 as the segment experienced
higher charge-offs involving brokered home equity lines and
loans, commercial loans and credit cards due to the weakening
economy and the continuing deterioration of credit quality
particularly in Michigan and Florida.
Noninterest income increased $54 million, or six percent,
compared to 2007 primarily due to an increase in service charges
on deposits of $26 million, or six percent, and an increase in card
and processing revenue of $26 million, or 12%.
Noninterest expense
increased $128 million, or 11%,
compared to 2007 as salaries and incentives increased eight
percent and net occupancy and equipment costs increased 17%.
Other noninterest expense increased 12%, which can be attributed
to higher loan costs associated with collections.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consumer Lending
Consumer Lending includes the Bancorp’s mortgage, home
equity, automobile and other indirect lending activities. Mortgage
and home equity lending activities include the origination,
retention and servicing of mortgage and home equity loans or
lines of credit, sales and securitizations of those loans or pools of
loans or lines of credit and all associated hedging activities. Other
indirect lending activities include loans to consumers through
mortgage brokers, automobile dealers and federal and private
student education loans. Table 16 contains selected financial data
for the Consumer Lending segment.
TABLE 16: CONSUMER LENDING
For the years ended December 31
($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Mortgage banking net revenue
Other noninterest income
Noninterest expense:
Salaries, incentives and benefits
Goodwill impairment
Other noninterest expense
Income (loss) before taxes
Applicable income tax expense (benefit)
Net income (loss)
Average Balance Sheet Data
Residential mortgage loans
Home equity
Automobile loans
Consumer leases
2009
2008
2007
$494
574
526
101
187
-
324
36
13
$23
481
441
184
167
137
215
268
(229)
(81)
(148)
412
159
122
92
77
-
204
186
66
120
$10,650
995
8,024
629
10,698
1,142
7,984
797
10,156
1,328
9,712
917
Comparison of 2009 with 2008
Consumer Lending reported net income of $23 million compared
to a net loss of $148 million in 2008 primarily due to a goodwill
impairment charge of $215 million taken in 2008. In addition, in
2009 increases in net interest income and mortgage banking net
revenue more than offset the growth in provision for loan and
lease losses.
Net interest income increased $13 million from the prior year
primarily due to a decrease in funding costs driven by low interest
rates throughout 2009 partially offset by a decrease of $17 million
on the accretion of discounts on loans and deposits associated
with the acquisition of First Charter in 2008. Residential mortgage
originations increased to $20.7 billion in 2009 from $11.2 billion
in 2008 due to lower interest rates as well as government incentive
programs, which have been designed to provide significant tax
and other incentives to home buyers. The increase in volume as
well as higher sales margins on loans held for sale were the
primary reasons for the $342 million increase in mortgage banking
net revenue compared to 2008. The decrease in other noninterest
income to $101 million is attributable to decreases in securities
gains related to mortgage servicing rights hedging activities.
The increase in salaries, incentives and benefits compared to
2008 was driven by employee costs that were necessary to manage
the increase in residential mortgage originations. The $56 million
increase in other noninterest expense compared to 2008 is
attributed to a $20 million increase in loan processing costs as a
result of increased mortgage originations and $36 million in other
credit related expenses and an increase in FDIC insurance
expenses.
Net charge-offs as a percent of average loan and leases
increased from 223 bp in 2008 to 313 bp in 2009. Net charge-offs
in 2009 on residential mortgage loans increased $114 million
compared to the prior year. Residential mortgage charge-offs
increased due to a weakened economy and deteriorating real estate
values within the Bancorp’s footprint, particularly in Michigan and
Florida. During 2009, Michigan and Florida accounted for
approximately 75% of the residential mortgage charge-offs while
only accounting for approximately 42% of all residential mortgage
portfolio loans outstanding. The Consumer Lending segment
continues to focus on managing credit risk through the
restructuring of certain residential mortgage loans and careful
consideration of underwriting and collection standards. As of
December 31, 2009, the Bancorp had restructured approximately
$1.1 billion of residential mortgage loans in an effort to mitigate
losses.
Comparison of 2008 with 2007
Consumer Lending incurred a net loss of $148 million in 2008
compared to net income of $120 million in 2007 as the increases
in net interest income, mortgage banking net revenue and
securities gains were more than offset by growth in provision for
loan and lease losses and a goodwill impairment charge of $215
million.
Net interest income was impacted by accretion of discounts
on loans and deposits, totaling $60 million in 2008, primarily
related to the second quarter acquisition of First Charter. Average
residential mortgage loans increased five percent compared to
2007 due to acquisitions, including R-G Crown Bank in the fourth
quarter of 2007 and First Charter in the second quarter of 2008.
Average automobile loans decreased 18% compared to 2007 due
to securitizations totaling $2.7 billion in 2008. Net charge-offs as a
percent of average loan and leases increased from 73 bp in 2007
to 223 bp in 2008.
The increase in sales margins on loans held for sale and sales
volume of portfolio loans were the primary reasons for the
increase in mortgage banking net revenue compared to 2007.
Residential mortgage originations decreased to $11.2 billion in
2008 from $11.4 billion in 2007 due to lower application volumes
in the second half of 2008 resulting from market disruptions. Also
contributing to the increase in mortgage banking net revenue in
2008 was a $65 million benefit from the adoption of the fair value
option under U.S. GAAP, on January 1, 2008, for residential
mortgage loans held for sale. Prior to adoption, mortgage loan
origination costs were capitalized as part of the carrying amount
of the loan and recognized as a reduction of mortgage banking net
revenue upon the sale of the loans. Subsequent to the adoption,
mortgage loan origination costs are recognized in earnings when
incurred, which primarily drove the increase in salaries and
incentives in comparison to 2007.
Fifth Third Bancorp 35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for
Investment Advisors
investment
Investment Advisors provides a full range of
alternatives
individuals, companies and not-for-profit
organizations. Investment Advisors is made up of four main
businesses: Fifth Third Securities, Inc., (FTS) an indirect wholly-
owned subsidiary of the Bancorp; Fifth Third Asset Management,
Inc., an indirect wholly-owned subsidiary of the Bancorp; Fifth
Third Private Banking; and Fifth Third Institutional services. FTS
offers full service retail brokerage services to individual clients and
broker dealer services to the institutional marketplace. Fifth Third
Asset Management, Inc., provides asset management services and
also advises the Bancorp’s proprietary family of mutual funds.
Fifth Third Private Banking offers holistic strategies to affluent
clients in wealth planning, investing, insurance and wealth
protection. Fifth Third Institutional services provide advisory
services for institutional clients including states and municipalities.
Table 17 contains selected financial data for the Investment
Advisors segment.
TABLE 17: INVESTMENT ADVISORS
For the years ended December 31
($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Investment advisory revenue
Other noninterest income
Noninterest expense:
Salaries, incentives and benefits
Other noninterest expense
Income before taxes
Applicable income tax expense
Net income
Average Balance Sheet Data
Loans
Core deposits
2009
2008
2007
$157
57
315
21
140
214
82
29
$53
191
49
354
32
159
217
152
54
98
153
12
386
22
167
228
154
55
99
$3,112
4,939
3,527
4,666
3,206
4,959
Comparison of 2009 with 2008
Net income decreased $45 million, or 46%, compared to 2008 as
decreases in net interest income and investment advisory revenue
were only partially offset by lower salaries and benefit expenses.
Average loans decreased from $3.5 billion in 2008 to $3.1 billion
in 2009 due to a decrease in commercial loans of $402 million
while the balance in average consumer loans was flat compared to
2008. Average core deposits increased six percent compared to
2008 due to an increase in average foreign deposits of $642
million partially offset by a decrease in average savings balance of
$359 million.
Noninterest
income decreased $50 million, or 13%,
compared to 2008, as investment advisory income decreased 11%,
to $315 million, with private client services income declining $14
million or 10% and institutional income declining $13 million or
16%, driven by lower asset values on assets managed compared to
2008. Also included within investment advisory revenue is
securities and brokerage income, which declined $10 million or
nine percent compared to 2008, reflecting a decline in transaction-
based revenue as well as the continued shift in assets from equity
products to lower yielding money market funds due to market
volatility through much of 2009.
Noninterest expense decreased $22 million, or six percent,
compared to 2008 as the segment continued to focus on expense
control by reducing personnel and reducing performance based
compensation.
Comparison of 2008 with 2007
Net income decreased $1 million in 2008 compared to 2007 as
higher net interest income and lower operating expenses were
offset by higher provision for loan and lease losses and lower
investment advisory revenue.
36 Fifth Third Bancorp
Noninterest income decreased $22 million in 2008 compared
to 2007, as investment advisory revenue decreased to $354
million. Included in the decrease of investment advisory income
was a decline in broker income of $11 million driven by clients
moving to lower fee, cash based products from equity products
due to extreme market volatility and a decline in transaction based
revenues. Additionally,
revenue within
institutional
investment advisory revenue decreased $7 million due to overall
lower asset values. Noninterest expense decreased $19 million
compared to 2007 as the segment continued to focus on expense
control.
trust
General Corporate and Other
General Corporate and Other includes the unallocated portion of
the investment securities portfolio, securities gains/losses, certain
non-core deposit funding, unassigned equity, provision expense in
excess of net charge-offs, the payment of preferred stock
dividends, historical financial information for the merchant
acquiring and financial institutions processing businesses and
certain support activities and other items not attributed to the
business segments.
Comparison of 2009 with 2008
The results of General Corporate and Other were primarily
impacted by a $1.8 billion pre-tax gain ($1.1 billion after tax)
resulting from the Processing Business Sale in 2009 and provision
expense in excess of net charge-offs of $1 billion in 2009. Current
year results also include an $18 million benefit in noninterest
income due to mark-to-market adjustments on warrants and put
options related to the Processing Business Sale. A $106 million tax
benefit was recognized in 2009 as a result of the Bancorp’s
decision to surrender one of its BOLI policies partially offset by a
$54 million BOLI charge reflecting reserves recorded in the
connection with the intent to surrender the policy. Additionally,
the Bancorp recorded a $244 million gain on the sale of its Visa
Inc., Class B shares and a $73 million benefit from the reversal of
Visa litigation reserve in non-interest expense. These benefits were
partially offset by $226 million in preferred stock dividends and a
$22 million pre-tax litigation reserve accrual recorded in other
noninterest expense for litigation associated with bank card
association membership. Provision expense in excess of net
charge-offs decreased from $1.9 billion in 2008 to $1 billion in
2009.
Comparison of 2008 with 2007
Results were primarily impacted by the significant increase in the
provision expense in excess of net charge-offs, which increased
from $167 million in 2007 to $1.9 billion in 2008. The results in
2008 also included: $273 million in income related to the
redemption of a portion of Fifth Third’s ownership interests in
Visa, $99 million in net reductions to noninterest expense to
reflect the reversal of a portion of the litigation reserve related to
the Bancorp’s indemnification of Visa, $229 million after-tax
impact of charges relating to certain leveraged leases, charges
related to a reduction in the current cash surrender value of one of
the Bancorp’s BOLI policies totaling $215 million, OTTI charges
totaling $104 million from FNMA and FHLMC preferred stock
and certain bank trust preferred securities, a net benefit of $40
million from the resolution of a prior litigation partially offset by
$67 million in preferred stock dividends in 2008. The results in
2007 included a charge of $177 million related to a reduction in
the current cash surrender value of one of the Bancorp’s BOLI
policies and charges totaling $172 million in Visa related charges.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOURTH QUARTER REVIEW
The Bancorp’s 2009 fourth quarter net loss available to common
shareholders was $160 million, or $0.20 per diluted share,
compared to a net loss available to common shareholders of $159
million, or $0.20 per diluted share, for the third quarter of 2009 and
a net loss available to common shareholders of $2.2 billion, or
$3.78 per diluted share, for the fourth quarter of 2008. Fourth
quarter 2009 earnings included the benefit of a $20 million pre-tax,
mark-to-market adjustment on warrants related to the Processing
Business Sale, recorded in other noninterest income, offset by a
$22 million pre-tax litigation reserve recorded in other noninterest
expense for litigation associated with a bank card association
membership. Third quarter 2009 results included a pre-tax benefit
of $317 million from the sale of the Bancorp’s Visa, Inc. Class B
common shares and the release of related Visa litigation reserves.
Fourth quarter 2008 earnings were impacted by a $965 million
goodwill impairment charge, a $40 million OTTI charge on certain
securities and a $34 million charge to lower the cash surrender
value of a BOLI policy. Provision expense was $776 million in the
fourth quarter of 2009, down from $952 million in the third
quarter of 2009 and $2.4 billion in the fourth quarter of 2008. The
decline from the third quarter of 2009 is reflective of a slight
improvement in credit trends as evidenced by a decline in net
charge-offs. Provision expense in the fourth quarter of 2008
included the effect of actions taken to address areas of the loan
portfolio exhibiting the most significant credit deterioration as the
Bancorp sold or transferred to held-for-sale loans with a carrying
value of approximately $1.3 billion and recognized net charge-offs
of $800 million. The allowance to loan and lease ratio was 4.88% as
of December 31, 2009, compared to 4.69% as of September 30,
2009 and 3.31% as of December 31, 2008.
Fourth quarter 2009 net interest income (FTE) of $882
million increased $8 million from the third quarter of 2009 and
decreased $15 million from the same period a year ago. Net interest
income was affected by the loan discount accretion related to the
second quarter of 2008 acquisition of First Charter which resulted
in increases to net interest income of $23 million in the fourth
quarter 2009, $27 million in the third quarter, and $81 million in
the fourth quarter of 2008. Excluding these benefits, net interest
income increased $12 million from the third quarter of 2009 and
increased $43 million from the fourth quarter of 2008. Both the
sequential and year-over-year increases were largely driven by the
runoff of higher cost term deposits throughout the year.
Noninterest income, excluding securities gains and losses of
$649 million, decreased $194 million compared to the third quarter
of 2009 and decreased $33 million compared to the fourth quarter
of 2008. Fourth quarter 2009 results included a benefit of $20
million in mark-to-market adjustments on warrants related to the
Processing Business Sale while third quarter results included a $244
million gain from the sale of the Bancorp’s Visa, Inc. Class B
shares. The decrease from the fourth quarter of 2008 was driven by
a decrease in card and processing revenue due to the Processing
Businesses Sale in the second quarter of 2009 and a decline in
corporate banking revenue, partially offset by strong mortgage
banking net revenue. The fourth quarter of 2008 also included a
$34 million charge to reduce the cash surrender value of one of the
Bancorp’s BOLI policies.
Service charges on deposits of $159 million decreased three
percent sequentially and decreased two percent compared with the
fourth quarter of 2008. Retail service charges declined six percent
from the third quarter of 2009 and three percent from a year ago,
largely driven by a reduction in NSF fees due to changes in
overdraft policies. Commercial service charges increased one
percent from the third quarter of 2009 and decreased one percent
from the same quarter last year.
Mortgage banking net revenue was $132 million in the fourth
quarter of 2009, compared to $140 million in the third quarter of
2009 and a net loss of $29 million in the fourth quarter of 2008.
Fourth quarter originations were $4.8 billion, compared to $4.6
billion from the previous quarter and $2.1 billion from the same
quarter last year. These originations resulted in gains on mortgage
loan sales activity of $97 million in the fourth quarter of 2009,
compared to $96 million in the third quarter of 2009 and $45
million in the fourth quarter of 2008. Including net securities gains
on non-qualifying hedges on mortgage servicing rights, mortgage
banking net revenue in the fourth quarter of 2009 decreased $8
million compared to the third quarter of 2009 and increased $65
million compared to the fourth quarter of 2008.
Corporate banking revenue of $98 million increased by $12
million, or 15%, from the previous quarter and decreased $23
million, or 19%, on a year-over-year basis. The sequential increase
was driven primarily by growth in institutional sales, interest rate
derivative sales revenue and business lending fees, partially offset
by a decline in foreign exchange revenue. On a year-over-year
basis, lower foreign exchange and interest rate derivative sales
revenue more than offset growth in institutional sales and business
lending fees.
Investment advisory revenue of $77 million increased four
percent sequentially and decreased two percent from the fourth
quarter of 2008. The sequential growth was driven by increases in
institutional trust revenue, brokerage fees and private client
revenue, partially offset by a 14% decline in mutual fund fees due
to lower mutual fund balances. Compared to the fourth quarter of
2008, institutional trust revenue and private client service revenue
increased 13% and five percent, respectively, but were more than
offset by declines in mutual fund fees of 27% and brokerage fees
of seven percent.
Card and processing revenue of $76 million increased three
percent compared to the third quarter of 2009 and decreased 67%
from the fourth quarter of 2008 as a result of the Processing
Business Sale in the second quarter of 2009. As part of the
transaction, the Bancorp retained certain debit and credit card
interchange revenue and sold the financial
institutions and
merchant processing portions of the business, which historically
comprised approximately 70% of total card and processing
revenue. Card issuer interchange revenue increased five percent
sequentially and 12% year-over-year, due to strong growth in debit
card transaction volumes, partially offset by lower credit card
usage.
The net gains on investment securities was $2 million in the
fourth quarter of 2009 compared to a net gain of $8 million in the
third quarter of 2009 and a net loss of $40 million in the fourth
quarter of 2008. The fourth quarter of 2008 loss was driven by an
OTTI charge of $40 million on certain securities.
litigation related
Noninterest expense of $967 million increased $91 million
sequentially and decreased $1.1 billion from the fourth quarter of
2008. Fourth quarter 2009 results included a $22 million reserve
to bank card association
established for
memberships. Third quarter 2009 results include the Visa litigation
reserve reversal of $73 million and $10 million of seasonal pension
settlement expense. Excluding these items, noninterest expense
increased $6 million driven by higher FDIC insurance premiums,
partially offset by a decrease in the provision for unfunded
commitments. The decrease in noninterest expense from a year ago
was driven by a $965 million charge to record goodwill impairment
in the fourth quarter of 2008. Excluding these charges, noninterest
expense decreased $112 million from a year ago, driven primarily
by a decrease in processing expenses from the Processing Business
Sale, as well as a decrease in the provision for unfunded
commitments, partially offset by higher FDIC insurance premiums.
Net charge-offs totaled $708 million in the fourth quarter of
2009, compared to $756 million in the third quarter of 2009 and
$1.6 billion in the fourth quarter of 2008. Loss experience
Fifth Third Bancorp 37
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued to be primarily associated with commercial home builder
and developer loans and consumer residential real estate loans, and
was disproportionately concentrated in Michigan and Florida. In
aggregate, Florida and Michigan represented approximately 53% of
total losses during the quarter but only 27% of total loans and
leases. Commercial net charge-offs were $468 million in the fourth
quarter of 2009, a decrease of $32 million from the third quarter of
2009 and a decrease of $159 million from the fourth quarter of
2008 excluding the loans that were sold or transferred to held-for-
sale. Results from the fourth quarter of 2008 include net charge-
offs of $800 million on commercial loans that were either sold or
transferred to held-for-sale during that quarter. The provision for
loan and lease losses totaled $776 million in the fourth quarter of
2009, exceeding net charge-offs by $68 million. In comparison, the
provision for loan and lease losses totaled $952 million in the third
quarter of 2009, exceeding net charge-offs by $196 million, and
totaled $2.4 billion in the fourth quarter of 2008, which exceeded
net charge-offs by $729 million.
COMPARISON OF THE YEAR ENDED 2008 WITH 2007
Net loss available to common shareholders for the year ended 2008
was $2.2 billion, or $3.91 per diluted share, compared to net
income available to common shareholders of $1.1 billion, or $1.98
per diluted share, in 2007. Overall, increases in net interest income
and fee revenue were offset by an increase in the provision for loan
and lease losses of $3.9 billion over 2007 coupled with a goodwill
impairment charge of $965 million. This increase in provision
expense reflected the significant decline in general economic
conditions in 2008, specifically in the Bancorp’s key lending
markets, which led to an increase in impaired commercial loans,
higher losses, increased estimated loss factors due to negative
trends in overall delinquencies, and increased loss estimates once a
loan becomes delinquent as a result of the deterioration in real
estate collateral values. The goodwill impairment charge reflected a
decline in estimated fair values of two of the Bancorp’s business
reporting units below their carrying values and the determination
that the implied fair values of the reporting units were less than
their carrying values.
Net interest income (FTE) increased 17% compared to 2007.
Net interest margin increased to 3.54% in 2008 from 3.36% in
2007. The increase in 2008 was driven by the positive impact from
the accretion of the discounts on acquired loans, primarily from the
acquisition of First Charter, which increased net interest margin
approximately 34 bp, partially offset by a reduction to interest
income on commercial leases as a result of the recalculation of cash
flows on certain leveraged leases, as well as an increase in
nonperforming loans.
Noninterest income increased 19% compared to 2007. This
was driven in part by a $273 million gain from the redemption of a
portion of the Bancorp’s ownership interest in Visa, Inc., partially
offset by $104 million in OTTI charges on FNMA and FHLMC
preferred stock and certain bank trust preferred securities. Growth
occurred in several categories compared to 2007. Card and
processing revenue increased 11% due to higher transaction
volumes. Service charges on deposits grew 11% due to decreased
earnings credits and higher customer activity. Corporate banking
revenue increased 21% as the Bancorp realized growth from the
buildout of its suite of commercial products in 2007. Mortgage
banking net revenue increased 50% due to higher sales margins,
increased volume of portfolio loans sold and the impact of a newly
adopted U.S. GAAP accounting standard in 2008.
Noninterest expense increased $1.3 billion, or 38% compared
to 2007. Noninterest expense in 2008 included the previously
mentioned goodwill impairment charge of $965 million and an
additional $65 million in mortgage origination costs from the
adoption of newly issued U.S. GAAP accounting guidance, partially
offset by $99 million in net reductions related to Visa litigation
reserves and Visa’s funding of an escrow account. Noninterest
expense in 2007 included charges of $172 million related to the
indemnification of estimated current and future Visa litigation
settlements. Excluding these items, noninterest expense increased
16% due to volume-related processing expenses, higher FDIC
insurance, increased provision for unfunded commitments and
higher loan and lease expense.
In 2008, net charge-offs as a percent of average loans and
leases were 323 bp compared to 61 bp in 2007. This increase was
impacted by commercial loan net charge-offs as homebuilders,
developers and related suppliers were affected by the downturn in
the real estate markets. In addition, residential mortgage charge-
offs increased to $243 million in 2008, compared to $43 million in
2007, reflecting increased foreclosure rates in the Bancorp’s key
lending markets. At December 31, 2008, nonperforming assets as a
percent of loans and leases increased to 2.96% from 1.32% at
December 31, 2007. The Bancorp increased its allowance for loan
and lease losses as percent of loans and leases from 1.17% as of
December 31, 2007 to 3.31% as of December 31, 2008.
During 2007, the Bancorp completed its acquisition of R-G
Crown Bank
(“Crown”), a subsidiary of R&G Financial
Corporation, with $2.8 billion in assets and $1.7 billion in deposits
located in Florida and Augusta, Georgia. Additionally, in 2007 the
Bancorp announced its introduction into the North Carolina
markets of Charlotte and Raleigh with an agreement to acquire
First Charter Corporation ("First Charter") and completed the
acquisition on June 6, 2008, adding approximately $4.8 billion in
assets and $3.2 billion in deposits.
38 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BALANCE SHEET ANALYSIS
Loans and Leases
Total loans and leases, including loans held for sale, at December
31, 2009, decreased $6.7 billion, or eight percent, compared to
December 31, 2008. The decrease in total loans and leases was
primarily due to a $3.5 billion decrease in the commercial loans
portfolio and a $1.5 billion decrease
the commercial
construction portfolio.
in
Total commercial loans and leases decreased $5.9 billion, or
12%, compared to December 31, 2008. Lower customer demand,
net charge-offs of $1.6 billion, a decrease in line utilization, and
tighter underwriting standards implemented since the third quarter
of 2008 and applied to new commercial originations and renewals
contributed to the decrease in commercial loans and leases. The
commercial loan product balance decreased $3.5 billion, or 12%
from December 31, 2008 due to net charge-offs of $718 million
and an overall decrease in customer line utilization to 33% at
December 31, 2009 compared to 54% at December 31, 2008.
loan product balance at
Included within
December 31, 2009 is $1.24 billion in loans issued in conjunction
with the Processing Business Sale in the second quarter of 2009.
Commercial mortgage loans decreased $795 million, or six percent
from December 31, 2008 due to net charge-offs of $422 million,
tighter lending requirements, and the Bancorp’s effort to limit
overall
commercial mortgages. Commercial
construction loans decreased $1.5 billion, or 27%, primarily due to
management’s strategy to suspend new lending on commercial
non-owner occupied real estate in the second quarter of 2008.
Other factors contributing to the decrease
in commercial
construction loans included net charge offs of $416 million along
with continued pay downs on existing loans.
the commercial
exposure
to
Total consumer loans and leases decreased $826 million, or
two percent, from December 31, 2008. Residential mortgage loans
decreased $446 million, or four percent, from December 31, 2008
due to approximately $188 million of portfolio loans sales during
2009, net charge-offs of $356 million, as well as normal principal
pay downs. This decline in residential mortgage loans occurred
despite the 81% increase in mortgage originations compared to
2008 as the Bancorp sells nearly all of its newly originated
mortgage loans at or near loan closing. Home equity loans
decreased $578 million, or five percent, from December 31, 2008
due to tighter underwriting standards on loan to value ratios and
net charge-offs of $322 million. Other consumer loans and leases,
primarily made up automobile leases and student loans designated
as held-for-sale, decreased $382 million, or 32%, compared to the
prior year end due to a decline in new originations as a result of
tighter underwriting standards across the other consumer loan and
lease portfolio. The growth in automobile loans of $401 million,
or five percent, compared to December 31, 2008 was primarily the
result of an increase in automobile loan originations due to the
federal government offering cash rebates on new automobile
purchases in the “Cash for Clunkers” program. Credit card loans
increased $179 million, or 10%, from December 31, 2008 as a
result of the Bancorp’s continued success in cross-selling credit
cards to its existing retail customer base, but was partially offset by
net charge-offs of $169 million.
Average total commercial loans and leases decreased $2.5
billion, or five percent, compared to December 31, 2008. The
decrease in average total commercial loans and leases was driven
by the aforementioned reasons as the Bancorp experienced
declines in all commercial loan categories compared to December
31, 2008.
Average total consumer loans and leases were flat compared
to 2008 as declines in other consumer loans and leases, driven by
tighter underwriting standards, were offset by increases in credit
card loans and home equity loans. Increases in average credit card
loans of 12% are a result of cross-selling to the existing customer
base and increases in average home equity loans of two percent
was primarily due to the impact of acquisition activity in 2008.
TABLE 18: COMPONENTS OF TOTAL LOANS AND LEASES (INCLUDES HELD FOR SALE)
As of December 31 ($ in millions)
Commercial:
2008
2009
Commercial loans
Commercial mortgage
Commercial construction
Commercial leases
Subtotal - commercial
Consumer:
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Subtotal - consumer
Total loans and leases
Total loans and leases (excludes held for sale)
$25,687
11,936
3,871
3,535
45,029
9,846
12,174
8,995
1,990
812
33,817
$78,846
$76,779
29,220
12,731
5,335
3,666
50,952
10,292
12,752
8,594
1,811
1,194
34,643
85,595
84,143
2007
26,079
11,967
5,561
3,737
47,344
11,433
11,874
11,183
1,591
1,157
37,238
84,582
80,253
TABLE 19: COMPONENTS OF AVERAGE TOTAL LOANS AND LEASES (INCLUDES HELD FOR SALE)
As of December 31 ($ in millions)
2007
Commercial:
2008
2009
Commercial loans
Commercial mortgage
Commercial construction
Commercial leases
Subtotal - commercial
Consumer:
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Subtotal - consumer
Total average loans and leases
Total average portfolio loans and leases (excludes held for sale)
$27,556
12,511
4,638
3,543
48,248
10,886
12,534
8,807
1,907
1,009
35,143
$83,391
$80,681
28,426
12,776
5,846
3,680
50,728
10,993
12,269
8,925
1,708
1,212
35,107
85,835
83,895
22,351
11,078
5,661
3,683
42,773
10,489
11,887
10,704
1,276
1,219
35,575
78,348
76,033
2006
20,831
10,405
6,168
3,841
41,245
9,905
12,154
10,028
1,004
1,167
34,258
75,503
74,353
2006
20,504
9,797
6,015
3,730
40,046
9,574
12,070
9,570
838
1,395
33,447
73,493
72,447
2005
19,377
9,188
6,342
3,698
38,605
8,991
11,805
9,396
788
1,644
32,624
71,229
69,925
2005
18,310
8,923
5,525
3,495
36,253
8,982
11,228
8,649
728
1,897
31,484
67,737
66,685
Fifth Third Bancorp 39
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 20: COMPONENTS OF INVESTMENT SECURITIES
As of December 31 ($ in millions)
Available-for-sale and other: (amortized cost basis)
U.S. Treasury and Government agencies
U.S. Government sponsored agencies
Obligations of states and political subdivisions
Agency mortgage-backed securities
Other bonds, notes and debentures
Other securities
Total available-for-sale and other
Held-to-maturity:
Obligations of states and political subdivisions
Other bonds, notes and debentures
Total held-to-maturity
Trading:
Variable rate demand notes
Other securities
Total trading
2009
$464
2,143
240
11,074
2,541
1,417
$17,879
$350
5
$355
$235
120
$355
2008
186
1,651
323
8,529
613
1,248
12,550
355
5
360
1,140
51
1,191
2007
3
160
490
8,738
385
1,045
10,821
351
4
355
-
171
171
2006
1,396
100
603
7,999
172
966
11,236
345
11
356
-
187
187
2005
506
2,034
657
16,127
2,119
1,090
22,533
378
11
389
-
117
117
Investment Securities
The Bancorp uses investment securities as a means of managing
interest rate risk, providing liquidity support and providing
collateral for pledging purposes. As of December 31, 2009, total
investment securities were $18.9 billion compared to $14.3 billion
at December 31, 2008. See Note 1 of the Notes to Consolidated
Financial Statements
the Bancorp’s classification of
investment securities and management’s evaluation of securities in
an unrealized loss position for OTTI. During the year ended
December 31, 2009, OTTI on available-for-sale and held-to-
maturity securities was immaterial to the Bancorp’s consolidated
financial statements.
for
At December 31, 2009, the Bancorp’s investment portfolio
primarily consisted of AAA-rated agency mortgage-backed
securities. The investment portfolio includes FHLMC preferred
stock and FNMA preferred securities with carrying values as of
December 31, 2009 and 2008 of $3 million and $1 million,
respectively, after recognizing OTTI charges of $67 million during
2008. The Bancorp also recognized OTTI charges of $37 million
on certain trust preferred securities in 2008, which have a carrying
value of $102 million and $79 million, as of December 31, 2009
and 2008, respectively. Upon a change in U.S. GAAP in 2009, the
Bancorp concluded that the OTTI charges on these trust
preferred debt securities were due to non-credit related factors
and therefore, recognized an increase of $37 million to the
investment balance and related unrealized losses. See Note 1 to
the Notes to Consolidated Financial Statements for further
information on the Bancorp’s accounting for OTTI.
The Bancorp did not hold asset-backed securities backed by
subprime mortgage loans in its investment portfolio at or for the
year ended December 31, 2009. Additionally,
there was
approximately $178 million of securities classified as below
investment grade as of December 31, 2009, the majority of which
was made up of the above mentioned trust preferred securities.
Trading securities decreased from $1.2 billion at December
31, 2008 to $355 million at December 31, 2009. The decrease was
driven by the sale of VRDNs which were held by the Bancorp in
its trading securities portfolio. These securities were purchased
from the market during 2008 and 2009 through FTS who was also
the remarketing agent. During the fourth quarter of 2009, the
rates on these securities began to decline substantially, and as a
result the Bancorp sold a majority of its VRDNs and replaced
them with higher-yielding investments. For more information on
the VRDNs, see Note 16 of the Notes to Consolidated Financial
Statements. Included in trading securities as of December 31,
2009 were $13 million of auction rate securities, which had an
unrealized loss of $4 million. The Bancorp did not hold auction
rate securities in its trading portfolio during 2008.
On an amortized cost basis, as of December 31, 2009,
available-for-sale securities increased $5.3 billion from December
40 Fifth Third Bancorp
31, 2008. In the first quarter of 2009, financial market volatility
created attractive investment opportunities. As a result, the
Bancorp purchased $1.4 billion in AAA-rated automobile asset-
backed securities and $1.5 billion of agency issued mortgage
backed securities and debentures to manage the interest rate risk
of the Bancorp. In addition, during the fourth quarter of 2009 the
Bancorp continued to purchase similar agency and non-agency
mortgage-backed securities to replace the VRDNs, as the rates on
mortgage-backed and other available-for-sale securities presented
better investment opportunities than the VRDNs, which were
experiencing declining coupon rates. At December 31, 2009,
available-for-sale securities increased to 18% of interest-earning
assets, compared to 12% at December 31, 2008, primarily due to a
30% increase in agency mortgage-backed securities as discussed
above, and a two percent decrease in total interest earning assets,
driven by a $6.7 billion, or eight percent, decline in total loans and
leases. The estimated weighted-average life of the debt securities
in the available-for-sale portfolio was 4.4 years at December 31,
2009 compared to 3.2 years at December 31, 2008. The increase in
the weighted-average life of the debt securities portfolio was
lives of agency
primarily driven by
mortgage-backed securities. This can be attributed to a general
decline in estimates of prepayment speeds as the combination of a
portfolio with lower coupon rates compared to prior year and the
stabilization of mortgage interest rates has led to a portfolio with a
longer average life. At December 31, 2009, the fixed-rate securities
within the available-for-sale securities portfolio had a weighted-
average yield of 4.48% compared to 5.08% at December 31, 2008.
Since the second half of 2007, the Bancorp purchased
investment grade commercial paper from an unconsolidated
QSPE that is wholly owned by an independent third-party. The
commercial paper has maturities ranging from one day to 90 days
and is backed by the assets held by the QSPE. As of December
31, 2009 and 2008, the Bancorp held $805 million and $143
million, respectively, of this commercial paper in its available-for-
sale portfolio. Refer to the Off-balance Sheet Arrangements
section in Management’s Discussion and Analysis for more
information on the QSPE.
the weighted-average
Information presented in Table 21 is on a weighted-average
life basis, anticipating future prepayments. Yield information is
presented on an FTE basis and is computed using historical cost
balances. Maturity and yield calculations for the total available-for-
sale portfolio exclude equity securities that have no stated yield or
maturity. Market rates began to decline in the fourth quarter of
2008 and throughout 2009. This market rate decline led to
unrealized gains on agency mortgage-backed securities of $323
million and $152 million as of December 31, 2009 and 2008,
respectively. Total net unrealized gains on the available-for-sale
securities portfolio was $334 million at December 31, 2009
compared to $178 million at December 31, 2008.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 21: CHARACTERISTICS OF AVAILABLE-FOR-SALE AND OTHER SECURITIES
As of December 31, 2009 ($ in millions)
U.S. Treasury and Government agencies:
Average life of one year or less
Average life 1 – 5 years
Average life 5 – 10 years
Average life greater than 10 years
Total
U.S. Government sponsored agencies:
Average life of one year or less
Average life 1 – 5 years
Average life 5 – 10 years
Average life greater than 10 years
Total
Obligations of states and political subdivisions (a):
Average life of one year or less
Average life 1 – 5 years
Average life 5 – 10 years
Average life greater than 10 years
Total
Agency mortgage-backed securities:
Average life of one year or less
Average life 1 – 5 years
Average life 5 – 10 years
Average life greater than 10 years
Total
Other bonds, notes and debentures (b):
Average life of one year or less
Average life 1 – 5 years
Average life 5 – 10 years
Average life greater than 10 years
Total
Other securities (c)
Total available-for-sale and other securities
Amortized Cost
Fair Value
Weighted-
Average Life (in
years)
Weighted-
Average Yield
$141
75
247
1
464
85
133
1,925
-
2,143
139
14
48
39
240
233
3,725
7,115
1
11,074
1,203
1,028
182
128
2,541
1,417
$17,879
$142
75
240
1
458
86
135
1,921
-
2,142
139
15
48
41
243
238
3,839
7,304
1
11,382
1,206
1,054
192
117
2,569
1,419
$18,213
0.5
2.3
9.6
11.8
5.6
0.3
1.8
6.9
-
6.4
0.2
3.0
6.6
11.6
3.5
0.6
3.1
6.1
10.1
5.0
0.2
2.0
7.5
17.1
2.1
4.4
2.09%
1.27
3.40
1.46
2.65
2.86
2.66
3.63
-
3.54
7.44
7.24
6.87
3.91
6.74
4.92
4.69
4.95
4.22
4.88
2.20
6.13
7.13
7.45
4.28
4.48%
(a) Taxable-equivalent yield adjustments included in the above table are 2.59%, 1.14%, 0.20%, 0.01% and 1.61% for securities with an average life of one year or less, 1-5 years, 5-10 years,
greater than 10 years and in total, respectively.
(b) Other bonds, notes, and debentures consist of commercial paper, non-agency mortgage backed securities, certain other asset backed securities (primarily automobile and commercial loan backed
(c) Other securities consist of Federal Home Loan Bank (FHLB) and Federal Reserve Bank restricted stock holdings that are carried at par, FHLMC and FNMA preferred stock, certain
securities) and corporate bond securities.
mutual fund holdings and equity security holdings.
Deposits
Deposit balances represent an important source of funding and
revenue growth opportunity. The Bancorp is continuing to focus
on core deposit growth in its retail and commercial franchises by
offering competitive rates and enhancing its product offerings. At
December 31, 2009, core deposits represented 68% of the
Bancorp’s asset funding base, compared to 56% at December 31,
2008.
Core deposits increased $9.8 billion or 15% compared to
2008 primarily due to a $5.7 billion increase in interest checking
and $4.1 billion increase in demand deposits. A majority of the
increase in interest checking was due to a $4.0 billion increase in
the balance of public fund deposits, driven by strong growth in
the fourth quarter of 2009 and a $1.6 billion increase in consumer
accounts due to runoff of higher priced certificates originated in
the second half of 2008. The growth in the demand deposit
account balances can be attributed to a $3.4 billion increase in
commercial demand deposit accounts as commercial customers
took advantage of increased protection provided by FDIC
insurance programs in 2009.
Included in core deposits are foreign office deposits, which
are Eurodollar sweep accounts for the Bancorp’s commercial
customers. These accounts bear interest at rates slightly higher
than money market accounts, but the Bancorp does not have to
pay FDIC insurance nor hold collateral. The Bancorp uses these
deposits, as well as certificates of deposit $100,000 and over, as a
method to fund earning asset growth. Certificates $100,000 and
over at December 31, 2009 decreased by $4.2 billion compared to
December 31, 2008 as customers opted to maintain their balances
in liquid accounts due to lower pricing on certificates in 2009.
On an average basis, core deposits increased $5.5 billion or
nine percent primarily due to increases in other time deposits of
$3.0 billion, demand deposits of $2.8 billion, and savings deposits
of $683 million, partially offset by a decrease in money market
accounts of $1.8 billion. Average other time deposits balances
increased compared to the prior year as customers took advantage
of competitive rates in the fourth quarter of 2008 on short term
certificates which matured in the second half of 2009. Average
demand and savings accounts increased compared to the prior
year as customers preferred to hold cash in the second half of
2009 due to lower pricing on certificates. Average money market
accounts decreased from 2008 due to lower interest rates offered
on accounts in 2009.
Fifth Third Bancorp 41
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 22: DEPOSITS
As of December 31 ($ in millions)
Demand
Interest checking
Savings
Money market
Foreign office
Transaction deposits
Other time
Core deposits
Certificates - $100,000 and over
Other
Total deposits
TABLE 23: AVERAGE DEPOSITS
As of December 31 ($ in millions)
Demand
Interest checking
Savings
Money market
Foreign office
Transaction deposits
Other time
Core deposits
Certificates - $100,000 and over
Other
Total average deposits
Borrowings
Total borrowings declined $11.7 billion from December 31, 2008,
as the result of a combination of balance sheet activity and capital
actions taken by the Bancorp throughout 2009. Portfolio loan
balances declined $7.4 billion from December 31, 2008. This,
coupled with increases in deposits of $5.7 billion from December
31, 2008, resulted in a decrease of the funding position of
approximately $13.1 billion. Further, in the second quarter of
2009, the Processing Business Sale provided $562 million of cash,
and the Bancorp raised an additional $1.0 billion through the
issuance of common equity
in the public market, further
decreasing the Bancorp’s funding position needs. As of December
31, 2009 and December 31, 2008, total borrowings as a percentage
of interest-bearing liabilities were 16% and 27%, respectively.
TABLE 24: BORROWINGS
As of December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total borrowings
2009
$19,411
19,935
17,898
4,431
2,454
64,129
12,466
76,595
7,700
10
$84,305
2009
$16,862
15,070
16,875
4,320
2,108
55,235
14,103
69,338
10,367
157
$79,862
2008
15,287
14,222
16,063
4,689
2,144
52,405
14,350
66,755
11,851
7
78,613
2008
14,017
14,191
16,192
6,127
2,153
52,680
11,135
63,815
9,531
2,067
75,413
2007
14,404
15,254
15,635
6,521
2,572
54,386
11,440
65,826
6,738
2,881
75,445
2007
13,261
14,820
14,836
6,308
1,762
50,987
10,778
61,765
6,466
1,393
69,624
2006
14,331
15,993
13,181
6,584
1,353
51,442
10,987
62,429
6,628
323
69,380
2006
13,741
16,650
12,189
6,366
732
49,678
10,500
60,178
5,795
2,979
68,952
2005
14,609
18,282
11,276
6,129
421
50,717
9,313
60,030
4,343
3,061
67,434
2005
13,868
18,884
10,007
5,170
248
48,177
8,491
56,668
4,001
3,719
64,388
Total short-term borrowings were $1.6 billion at December
31, 2009, down from $10.2 billion at December 31, 2008. The
Bancorp’s overall reduced reliance on short-term funding can be
attributed
to declining asset balances and strong deposit
performance.
Long-term debt at December 31, 2009 decreased 23%
compared to December 31, 2008. This was due in part to a $1.0
billion FHLB advance maturing in the first quarter of 2009 and
$1.2 billion in bank notes maturing in the second quarter of 2009,
neither of which were replaced due to the Bancorp’s strong
liquidity position.
Information on the average rates paid on borrowings is
included within the Statements of Income Analysis. Additionally,
refer to the Liquidity Risk Management section for a discussion
on the role of borrowings in the Bancorp’s liquidity management.
2009
$182
1,415
10,507
$12,104
2008
287
9,959
13,585
23,831
2007
4,427
4,747
12,857
22,031
2006
1,421
2,796
12,558
16,775
2005
5,323
4,246
15,227
24,796
42 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISK MANAGEMENT
Managing risk is an essential component of successfully operating
a financial services company. The Bancorp’s risk management
function is responsible for the identification, measurement,
monitoring, control and reporting of risk and mitigation of those
risks that are inconsistent with the Bancorp’s risk profile. The
led by the
Enterprise Risk Management division (ERM),
Bancorp’s Chief Risk Officer, ensures consistency
in the
Bancorp’s approach to managing and monitoring risk within the
structure of the Bancorp’s affiliate operating model. In addition,
the Internal Audit division provides an independent assessment of
the Bancorp’s internal control structure and related systems and
processes.
that comprise an
The assumption of risk requires robust and active risk
management practices
integrated and
comprehensive set of activities, measures and strategies that apply
to the entire organization. The Bancorp has established a Risk
Appetite Framework that provides the foundations of corporate
risk capacity, risk appetite and risk tolerances. The Bancorp’s risk
capacity is represented by its available financial resources. Risk
capacity sets an absolute limit on risk-assumption in the Bancorp’s
annual and strategic plans. Our policy currently discounts our risk
capacity by five percent to provide a buffer; as a result, the
Bancorp’s risk appetite is limited by policy to 95% of our risk
capacity.
Economic capital is the amount of unencumbered financial
resources necessary to support the Bancorp’s risks. We measure
economic capital under the assumption that we expect to maintain
debt ratings at strong investment grade levels over time. Our
capital policies require that the economic capital necessary in our
business not exceed our risk capacity less the aforementioned
buffer.
Risk appetite is the aggregate amount of risk the Bancorp is
willing to accept in pursuit of its strategic and financial objectives.
By establishing boundaries around risk taking and business
decisions, and by incorporating the needs and goals of our
shareholders, regulators, rating agencies and customers, the
Bancorp’s risk appetite is aligned with its priorities and goals. The
formulation of risk appetite considers the Bancorp’s risk capacity,
its financial position, the resilience of its reputation and brand and
its core competencies. Risk tolerance is the maximum amount of
risk applicable to each of the eight specific risk categories included
in its Enterprise Risk Management Framework. This is expressed
both qualitatively, describing which risks may be taken, and
quantitatively, describing
tolerance. The
Bancorp’s risk appetite and risk tolerances are supported by risk
targets and risk limits. Those limits are used to monitor the
amount of risk assumed at a granular level, which include key risk
indicators, performance indicators and quantitative metrics for
shocks and sensitivity measurements.
the magnitude of
The risks faced by the Bancorp include, but are not limited to,
credit, market, liquidity, operational, regulatory compliance, legal,
reputational and strategic. Each of these risks are managed
through the Bancorp’s risk program, including an Enterprise Risk
includes the following key
Management Framework. ERM
functions:
soundness within an
• Commercial Credit Risk Management provides safety
and
independent portfolio
management framework that supports the Bancorp’s
commercial loan growth strategies and underwriting
practices,
and
portfolio
appropriate risk controls;
optimization
ensuring
• Risk Strategies and Reporting
is responsible for
quantitative analysis needed to support the commercial
dual grading system, allowance for loan and lease losses
(ALLL) methodology and analytics needed to assess
credit risk and develop mitigation strategies related to
that risk. The department also provides oversight,
reporting and monitoring of commercial underwriting
and credit administration processes. The Risk Strategies
and Reporting department is also responsible for the
economic capital program;
an
• Consumer Credit Risk Management provides safety and
independent management
soundness within
framework that supports the Bancorp’s consumer loan
growth strategies, ensuring portfolio optimization,
appropriate risk controls and oversight, reporting, and
monitoring of underwriting and credit administration
processes;
including ensuring consistency
• Operational Risk Management works with the line of
business risk managers, affiliates and lines of business to
maintain processes to monitor and manage all aspects of
in
operational risk
application of enterprise operational risk programs,
Sarbanes-Oxley compliance, and serving as a policy
clearinghouse for the Bancorp. In addition, the Bank
Protection
fraud
prevention and detection and provides investigative and
recovery services for the Bancorp;
function oversees and manages
• Capital Markets Risk Management is responsible for
instituting, monitoring, and
reporting appropriate
trading limits, monitoring liquidity, interest rate risk, and
risk tolerances within the Treasury, Mortgage Company,
and Capital Markets groups and utilizing a value at risk
model for Bancorp market risk exposure;
• Regulatory Compliance Risk Management ensures that
processes are in place to monitor and comply with
federal and state banking regulations, including fiduciary
compliance processes. The function also has the
responsibility for maintenance of an enterprise-wide
compliance framework; and
• The ERM division creates and maintains other
functions, committees or processes as are necessary to
effectively manage risk throughout the Bancorp.
through multiple management
Risk management oversight and governance is provided by
the Risk and Compliance Committee of the Board of Directors
and
committees whose
membership includes a broad cross-section of line of business,
affiliate and support representatives. The Risk and Compliance
Committee of the Board of Directors consists of six outside
directors and has the responsibility for the oversight of risk
management for the Bancorp, as well as for the Bancorp’s overall
aggregate risk profile. The Risk and Compliance Committee of the
Board of Directors has approved
the formation of key
management governance committees that are responsible for
evaluating risks and controls. The primary committee responsible
for the oversight of risk management is the Enterprise Risk
Management Committee (ERMC). Committees accountable to the
ERMC, which support the core risk programs, are the Corporate
Credit Committee,
the
Management Compliance Committee,
the Executive Asset
Liability Management Committee and the Enterprise Marketing
Committee. Other committees accountable to the ERMC include
the Loan Loss Reserve Committee, Capital Committee and the
Retail Distribution Governance Committee. There are also new
products and initiatives processes applicable to every line of
business to ensure an appropriate standard readiness assessment is
performed before
initiative.
Significant risk policies approved by the management governance
the Operational Risk Committee,
launching a new product or
Fifth Third Bancorp 43
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
committees are also reviewed and approved by the Risk and
Compliance Committee of the Board of Directors.
Finally, Credit Risk Review is an independent function
responsible for evaluating the sufficiency of underwriting,
documentation and approval processes for consumer and
commercial credits, the accuracy of risk grades assigned to
commercial credit exposure, appropriate accounting for charge-
offs, and non-accrual status and specific reserves. Credit Risk
Review reports directly to the Risk and Compliance Committee of
the Board of Directors and administratively to the Director of
Internal Audit.
the utilization of which
CREDIT RISK MANAGEMENT
The objective of the Bancorp’s credit risk management strategy is
to quantify and manage credit risk on an aggregate portfolio basis,
as well as to limit the risk of loss resulting from an individual
customer default. The Bancorp’s credit risk management strategy
is based on three core principles: conservatism, diversification and
monitoring. The Bancorp believes that effective credit risk
management begins with conservative lending practices. These
practices include conservative exposure and counterparty limits
and conservative underwriting, documentation and collection
standards. The Bancorp’s credit risk management strategy also
emphasizes diversification on a geographic, industry and customer
level as well as regular credit examinations and monthly
management reviews of
large credit exposures and credits
experiencing deterioration of credit quality. Corporate officers
with the authority to extend credit are delegated specific authority
is closely monitored.
amounts,
Underwriting activities are centralized, and ERM manages the
policy and the authority delegation process directly. The Credit
Risk Review function, which reports to the Risk and Compliance
Committee of the Board of Directors, provides objective
assessments of the quality of underwriting and documentation, the
accuracy of risk grades and the charge-off, nonaccrual and reserve
analysis process. The Bancorp’s credit review process and overall
assessment of required allowances
is based on quarterly
assessments of the probable estimated losses inherent in the loan
and lease portfolio. The Bancorp uses these assessments to
promptly identify potential problem loans or leases within the
portfolio, maintain an adequate reserve and take any necessary
charge-offs. In addition to the individual review of larger
commercial loans that exhibit probable or observed credit
weaknesses, the commercial credit review process includes the use
of two risk grading systems. The risk grading system currently
utilized for reserve analysis purposes encompasses ten categories.
The Bancorp also maintains a dual risk rating system that provides
for thirteen probabilities of default grade categories and an
additional nine grade categories for estimating actual losses given
an event of default. The probability of default and loss given
default evaluations are not separated in the ten-grade risk rating
system. The Bancorp has completed significant validation and
testing of the dual risk rating system. Scoring systems, various
analytical tools and delinquency monitoring are used to assess the
credit risk
loan
portfolios.
the Bancorp’s homogenous consumer
in
Overview
General economic conditions remained weak throughout 2009,
which negatively impacted a majority of the Bancorp’s loan and
lease products. Geographically, the Bancorp experienced the most
stress in Michigan and Florida due to the decline in real estate
prices. Real estate price deterioration, as measured by the Home
Price Index, was most prevalent in Florida due to past real estate
price appreciation and related over-development, and in Michigan
due in part to cutbacks in automobile manufacturing and the
44 Fifth Third Bancorp
remained under
state’s economic downturn. Among commercial portfolios, the
homebuilder and developer and remaining non-owner occupied
stress
commercial
real estate portfolios
throughout 2009. Among consumer portfolios,
residential
mortgage and brokered home equity portfolios exhibited the most
stress. Management suspended homebuilder and developer
lending in the fourth quarter of 2007 and new commercial non-
owner occupied real estate lending in the second quarter of 2008,
discontinued the origination of brokered home equity products at
the end of 2007, and raised underwriting standards across both
the commercial and consumer loan product offerings. During the
fourth quarter of 2008, in an effort to reduce loan exposure to the
real estate and construction industries and obtain the highest
realizable value, the Bancorp sold or moved to held-for-sale $1.3
billion in commercial loans. Throughout 2009, the Bancorp
continued to aggressively engage
loss mitigation
techniques such as reducing lines of credit, restructuring certain
commercial and consumer
tightening underwriting
standards on commercial loans and across the consumer loan
portfolio, as well as expanding commercial and consumer loan
workout teams. The following credit information presents the
Bancorp’s loan portfolio diversification, loan portfolios with
elevated levels of risk, an analysis of nonperforming loans and
loans charged-off, and a discussion of the allowance for credit
losses.
in other
loans,
Commercial Portfolio
The Bancorp’s credit
includes
minimizing concentrations of risk through diversification. The
Bancorp has commercial loan concentration limits based on
industry, lines of business within the commercial segment and
credit product type.
risk management strategy
The risk within the commercial loan and lease portfolio is
managed and monitored through an underwriting process utilizing
detailed origination policies, continuous loan level reviews, the
monitoring of industry concentration and product type limits and
continuous portfolio risk management reporting. The origination
policies for commercial real estate outline the risks and
underwriting requirements for owner occupied, non-owner
occupied and construction lending. Included in the policies are
maturity and amortization terms, maximum loan-to-values (LTV),
minimum debt service coverage ratios, construction
loan
requirements, pre-leasing
monitoring procedures, appraisal
requirements (as applicable) and sensitivity and pro-forma analysis
requirements. The Bancorp requires an appraisal of collateral be
performed at origination and on an as-needed basis, in conformity
with market conditions and regulatory requirements. Independent
reviews are performed on appraisals to ensure the appraiser is
qualified and consistency in the evaluation process exists.
As part of its commercial lending, the Bancorp participates in
Shared National Credit (SNC) loans, which are facilities greater
than $20 million shared by three or more federally supervised
financial institutions that are reviewed by regulatory authorities at
the agent bank level. At December 31, 2009, the Bancorp was a
participant to SNC loans with an outstanding balance to the
Bancorp of $6.4 billion with a total exposure of $20.0 billion. C&I
loans make up a majority of SNC loans, totaling $5.5 billion at
December 31, 2009. SNC loans adhere to the same credit
underwriting standards as other commercial loans held by the
Bancorp.
Table 25 provides detail on total commercial loan and leases,
including held-for-sale, by major industry classification (as defined
by the North American Industry Classification System), by loan
size and by state, illustrating the diversity and granularity of the
Bancorp’s commercial loans and leases.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 25: COMMERCIAL LOAN AND LEASE PORTFOLIO EXPOSURE (a)
Outstanding
2009
Exposure Nonaccrual
Outstanding
2008
Exposure
Nonaccrual
As of December 31 ($ in millions)
By industry:
Real estate
Manufacturing
Financial services and insurance
Construction
Healthcare
Retail trade
Business services
Transportation and warehousing
Wholesale trade
Other services
Accommodation and food
Communication and information
Mining
Entertainment and recreation
Individuals
Public administration
Agribusiness
Utilities
Other
Total
By loan size:
Less than $200,000
$200,000 to $1 million
$1 million to $5 million
$5 million to $10 million
$10 million to $25 million
Greater than $25 million
Total
By state:
Ohio
Michigan
Florida
Illinois
Indiana
Kentucky
North Carolina
Tennessee
Pennsylvania
All other states
$10,142
6,320
4,375
3,778
3,019
2,692
2,656
2,516
2,259
1,133
1,024
796
769
744
741
684
588
475
318
$45,029
3 %
12
26
13
24
22
100 %
28 %
16
9
8
6
5
3
2
2
21
11,622
13,093
8,702
5,281
4,921
5,552
4,595
3,003
4,632
1,558
1,505
1,346
1,182
949
905
877
742
1,310
679
72,454
2
9
20
11
26
32
100
1,001
223
44
765
73
114
54
55
52
37
63
8
18
17
21
-
65
-
6
2,616
4
18
39
18
17
4
100
11,925
7,382
3,601
5,030
3,081
3,621
2,925
2,726
2,567
1,203
1,163
951
838
765
1,053
725
635
584
178
50,953
3
12
25
14
23
23
100
14,428
14,310
8,164
7,788
5,057
6,874
5,141
3,224
4,772
1,712
1,560
1,547
1,275
1,009
1,354
938
815
1,231
369
81,568
2
9
21
13
24
31
100
583
92
28
698
20
167
38
26
25
22
38
19
18
35
38
-
21
-
11
1,879
5
21
45
20
9
-
100
31
14
7
9
6
5
3
2
2
21
100
15
18
26
9
6
4
1
4
-
17
100
26
17
9
8
7
5
3
3
2
20
100
30
16
8
9
7
5
3
2
2
18
100
14
22
25
8
8
5
4
3
1
10
100
100 %
Total
(a) Outstanding reflects total commercial customer loan and lease balances, including held for sale and net of unearned income, and exposure reflects total commercial customer lending commitments.
The Bancorp has identified certain categories of loans which it believes represent a higher level of risk, as compared to the rest of the
Bancorp’s loan portfolio, due to economic or market conditions in the Bancorp’s key lending areas. Tables 26 – 33 provide analysis of each of
the categories of loans as of and for the years ended December 31, 2009 and 2008.
TABLE 26: NON-OWNER OCCUPIED COMMERCIAL REAL ESTATE
As of December 31, 2009 ($ in millions)
By State:
Ohio
Michigan
Florida
Illinois
North Carolina
Indiana
All other states
Total
Outstanding
$2,917
2,003
1,517
820
716
531
1,037
$9,541
Exposure
3,250
2,193
1,611
935
768
553
1,345
10,655
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2009
14
16
7
4
3
-
3
47
204
173
384
109
146
49
154
1,219
111
153
229
48
54
27
99
721
Fifth Third Bancorp 45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 27: NON-OWNER OCCUPIED COMMERCIAL REAL ESTATE
As of December 31, 2008 ($ in millions)
By State:
Ohio
Michigan
Florida
Illinois
North Carolina
Indiana
All other states
Total
Outstanding
$3,068
2,379
1,864
928
925
628
1,326
$11,118
Exposure
3,738
2,827
2,160
1,135
1,242
760
1,804
13,666
TABLE 28: HOME BUILDER AND DEVELOPER (a)
As of December 31, 2009 ($ in millions)
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2008
9
61
60
3
6
10
6
155
144
124
89
71
25
66
96
615
56
215
157
20
6
37
28
519
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2009
By State:
Ohio
Florida
Michigan
North Carolina
Indiana
All other states
Total
34
98
77
49
9
91
358
(a) Home Builder and Developer loans, exclusive of commercial and industrial loans with an outstanding balance of $200 million and a total exposure of $461 million are also included in Table 26:
73
136
63
95
12
94
473
2
4
7
3
-
3
19
Outstanding
$346
318
278
229
108
284
$1,563
Exposure
542
336
351
260
133
383
2,005
Non-Owner Occupied Commercial Real Estate
.
TABLE 29: HOME BUILDER AND DEVELOPER (a)
As of December 31, 2008 ($ in millions)
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2008
By State:
Ohio
Florida
Michigan
North Carolina
Indiana
All other states
Total
42
122
166
5
10
22
367
(a) Home Builder and Developer loans, exclusive of commercial and industrial loans with an outstanding balance of $332 million and a total exposure of $798 million are also included in Table 27:
67
73
79
35
19
92
365
2
4
7
3
-
3
19
Outstanding
$491
482
449
415
121
523
$2,481
Exposure
856
618
732
661
196
712
3,775
Non-Owner Occupied Commercial Real Estate
TABLE 30: AUTOMOBILE DEALERS
As of December 31, 2009 ($ in millions)
By State:
Ohio
Illinois
Michigan
Florida
Tennessee
All other states
Total
TABLE 31: AUTOMOBILE DEALERS
As of December 31, 2008 ($ in millions)
By State:
Ohio
Illinois
Michigan
Florida
Tennessee
All other states
Total
46 Fifth Third Bancorp
Outstanding
$325
232
207
114
100
215
$1,193
Exposure
569
380
340
190
191
319
1,989
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2009
3
-
2
1
-
-
6
14
19
3
9
-
9
54
30
19
7
14
1
6
77
Outstanding
$630
401
324
148
146
353
$2,002
Exposure
1,050
610
518
187
231
522
3,118
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2008
1
-
-
1
-
2
4
42
26
5
11
-
11
95
41
53
3
6
-
7
110
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 32: AUTOMOBILE MANUFACTURING
As of December 31, 2009 ($ in millions)
By State:
Michigan
Ohio
Illinois
Kentucky
All other states
Total
TABLE 33: AUTOMOBILE MANUFACTURING
As of December 31, 2008 ($ in millions)
By State:
Michigan
Ohio
Illinois
Kentucky
All other states
Total
Outstanding
$221
93
47
32
9
$402
Exposure
468
276
138
48
73
1,003
Outstanding
$288
184
69
47
29
$617
Exposure
793
401
148
95
144
1,581
For the Year Ended
December 31, 2009
Nonaccrual
Net Charge-offs
12
2
-
-
-
14
14
2
-
-
-
16
For the Year Ended
December 31, 2008
Nonaccrual
Net Charge-offs
1
2
-
1
-
4
1
-
-
-
3
4
90 Days
Past Due
-
-
-
-
-
-
90 Days
Past Due
-
-
-
-
-
-
Consumer Portfolio
The Bancorp’s consumer portfolio is materially comprised of
three categories of loans: residential mortgage loans, home equity
loans, and automobile loans. While each of these loans has unique
features, they have a common risk characteristic of loan amount
to collateral value.
Residential Mortgage Portfolio
The Bancorp manages credit risk in the mortgage portfolio
through conservative underwriting and documentation standards
and geographic and product diversification. The Bancorp may also
package and sell loans in the portfolio or may purchase mortgage
insurance for the loans sold in order to mitigate credit risk.
The Bancorp does not originate mortgage loans that permit
customers to defer principal payments or make payments that are
less than the accruing interest. The Bancorp originates both fixed
and adjustable rate residential mortgage loans. Resets of rates on
adjustable rate mortgages are not expected to have a material
impact on credit costs in the current interest rate environment, as
approximately $1.2 billion of adjustable rate residential mortgage
loans will have rate resets in 2010 and a material amount of those
loans are expected to have either no increase or a decrease in
monthly payments, due to the decrease in index rates over the
past year.
Certain residential mortgage products have contractual
features that may increase credit exposure to the Bancorp in the
event of a decline in housing prices. These types of mortgage
products offered by the Bancorp include loans with high LTV
ratios, multiple loans on the same collateral that when combined
result in an LTV greater than 80% (80/20 loans) and interest-only
loans. The Bancorp monitors residential mortgages loans with
greater than 80% LTV ratio and no mortgage insurance as it
believes these loans represent a higher level of risk. Tables 34 and
35 provide analysis of the residential mortgage loans outstanding
with a greater than 80% LTV ratio and no mortgage insurance as
of December 31, 2009 and 2008, respectively.
TABLE 34: RESIDENTIAL MORTGAGE LOANS OUTSTANDING, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
As of December 31, 2009 ($ in millions)
By State:
Ohio
Florida
Michigan
North Carolina
Indiana
Kentucky
Illinois
All other states
Total
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2009
4
9
3
5
1
1
1
2
26
25
50
13
9
7
3
6
8
121
18
68
21
8
4
2
2
5
128
Outstanding
$673
388
350
169
145
92
62
141
$2,020
Fifth Third Bancorp 47
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 35: RESIDENTIAL MORTGAGE LOANS OUTSTANDING, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
As of December 31, 2008 ($ in millions)
By State:
Ohio
Florida
Michigan
North Carolina
Indiana
Kentucky
Illinois
All other states
Total
Outstanding
$760
495
397
202
168
110
69
173
$2,374
90 Days
Past Due
7
16
3
2
1
1
1
5
36
For the Year Ended
December 31, 2008
Nonaccrual
Net Charge-offs
24
51
17
4
6
3
4
2
111
14
67
15
2
3
1
-
2
104
Home Equity Portfolio
The home equity portfolio is managed in two categories, loans
outstanding with a LTV greater than 80% and those loans with a
LTV of less than 80%. The carrying value of the greater than 80%
LTV home equity loans and less than 80% LTV home equity
loans are $5.0 billion and $7.2 billion, respectively, as of
December 31, 2009. Of the total $12.2 billion of outstanding
home equity loans, 82% reside within the Bancorp’s Midwest
footprint of Ohio, Michigan, Kentucky, Indiana and Illinois. The
portfolio has an average FICO score of 730 as of December 31,
2009 compared with 736 as of December 31, 2008.
The Bancorp stopped origination of brokered home equity
loans during the fourth quarter of 2007. In addition, the Bancorp
actively manages lines of credit and makes reductions in lending
limits when it believes it is necessary based on FICO score
deterioration and property devaluation. The Bancorp believes that
home equity loans with a greater than 80% LTV ratio present a
higher level of risk. The following tables provide analysis of these
loans as of December 31, 2009 and 2008.
TABLE 36: HOME EQUITY LOANS OUTSTANDING WITH LTV GREATER THAN 80%
As of December 31, 2009 ($ in millions)
By State:
Ohio
Michigan
Illinois
Indiana
Kentucky
Florida
All other states
Total
Outstanding
$1,727
1,091
505
499
471
198
523
$5,014
Exposure
2,465
1,417
689
691
672
248
618
6,800
For the Year Ended
December 31, 2009
90 Days
Past Due
Nonaccrual
Net Charge-offs
13
14
5
5
4
8
9
58
6
6
3
2
2
3
5
27
43
61
32
13
12
35
37
233
TABLE 37: HOME EQUITY LOANS OUTSTANDING WITH LTV GREATER THAN 80%
As of December 31, 2008 ($ in millions)
By State:
Ohio
Michigan
Illinois
Indiana
Kentucky
Florida
All other states
Total
Outstanding
$1,844
1,179
527
544
524
224
591
$5,433
Exposure
2,770
1,575
763
769
764
295
707
7,643
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2008
13
15
7
5
3
7
10
60
6
7
6
3
2
3
5
32
30
43
14
9
8
24
28
156
48 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Automobile Portfolio
The automobile portfolio is characterized by direct and indirect
lending products to consumers. As of December 31, 2009, the
automobile loan portfolio was comprised of approximately 47%
in new automobile loans. It is a common competitive practice to
advance on automobile loans an amount in excess of the
automobile value due to the inclusion of taxes, title, and other fees
paid at closing. The Bancorp monitors its exposure to these higher
risk accounts. The following tables provide analysis of the
Bancorp’s automobile loans with a LTV at origination greater than
100% as of December 31, 2009 and 2008.
TABLE 38: AUTOMOBILE LOANS OUTSTANDING WITH LTV GREATER THAN 100%
As of December 31, 2009 ($ in millions)
By State:
Ohio
Illinois
Michigan
Indiana
Florida
Kentucky
All other states
Total
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2009
1
1
1
-
1
-
6
10
-
-
-
-
-
-
1
1
9
9
6
5
11
4
46
90
Outstanding
$422
357
252
215
193
177
2,067
$3,683
TABLE 39: AUTOMOBILE LOANS OUTSTANDING WITH LTV GREATER THAN 100%
As of December 31, 2008 ($ in millions)
By State:
Ohio
Illinois
Michigan
Indiana
Florida
Kentucky
All other states
Total
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2008
2
1
1
1
1
1
6
13
-
-
-
-
-
-
1
1
10
11
6
5
9
4
37
82
Outstanding
$467
365
301
249
215
205
1,683
$3,485
loans, home equity
loans and automobile
Analysis of Nonperforming Assets
Prior to 2009, certain consumer loans (including residential
mortgage
loans)
modified in a troubled debt restructuring (TDR) were maintained
on nonaccrual status until the Bancorp believed repayment under
the revised terms was reasonably assured and a sustained period
of repayment performance was achieved (typically defined as six
months for a monthly amortizing loan). Beginning in 2009, based
on published guidance with respect to TDR’s from certain
banking regulators and to conform to general practices within the
banking industry, the Bancorp determined it was appropriate to
maintain these consumer loans modified as part of a TDR on
is reasonable assurance of
accrual status, provided
there
repayment and of performance according to the modified terms
based upon a current, well-documented credit evaluation.
Management believes this policy is reflective of recent regulatory
guidance and provides better comparability to other financial
institutions. Accordingly, during the first quarter of 2009, the
Bancorp reclassified from nonaccrual to accrual status the
consumer loans modified as part of a TDR that were less than 90
days past due as measured by their restructured terms. For
comparability purposes, prior periods were adjusted to reflect this
reclassification. The
this
reclassification was immaterial to the Bancorp’s Consolidated
Financial Statements. The effect of this reclassification on other
amounts previously reported in prior periods is as follows:
effect of
statement
income
TABLE 40: IMPACT OF POLICY CHANGE ON REPORTED RESTRUCTURED LOANS
December 31, 2008 ($ in millions)
Restructured loans (nonaccrual)
Residential mortgage loans
Home equity
Automobile loans
Nonperforming assets as a percent of loans, leases and other assets, including other real estate owned
December 31, 2007 ($ in millions)
Restructured loans (nonaccrual)
Residential mortgage loans
Home equity
Automobile loans
Nonperforming assets as a percent of loans, leases and other assets, including other real estate owned
As Previously
Reported
As Reflected Under
New Policy
$342
196
6
2.96%
$29
46
-
1.32%
20
29
1
2.38
27
11
-
1.25
Fifth Third Bancorp 49
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
loans
restructuring;
immediately upon
A summary of nonperforming assets is included in Table 41.
Nonperforming assets include nonaccrual loans and leases for
which ultimate collectability of the full amount of the principal
and/or interest is uncertain; restructured consumer loans which
are 90 days past due based on the restructured terms and credit
card
restructured
commercial loans which have not yet met the requirements to be
classified as a performing asset; and other assets, including other
real estate owned and repossessed equipment. Loans are reported
on a nonaccrual status if principal or interest has been in default
for 90 days or more unless the loan is both well-secured and in the
process of collection. When a loan is placed on nonaccrual status,
the accrual of interest, amortization of loan premiums, accretion
of loan discounts and amortization or accretion of deferred net
loan fees or costs are discontinued and previously accrued, but
unpaid interest is reversed. Commercial loans on nonaccrual status
are reviewed for impairment at least quarterly. If the principal or a
portion of the principal is deemed a loss, the loss amount is
charged off to the allowance for loan and lease losses.
Total nonperforming assets were $3.5 billion at December
31, 2009, compared to $2.5 billion at December 31, 2008. At
December 31, 2009, $224 million of nonaccrual commercial loans
were held-for-sale, consisting primarily of real estate secured loans
in Michigan and Florida, and were carried at the lower of cost or
market. Nonperforming assets as a percentage of total loans,
leases and other assets, including other real estate owned and
nonaccrual loans held for sale, was 4.38% and 2.89% as of
December 31, 2009 and 2008, respectively. Excluding the held-
for-sale nonaccrual loans, nonperforming assets as a percentage of
total loans, leases and other assets, including other real estate
owned, as of December 31, 2009 was 4.22% compared to 2.38%
as of December 31, 2008. The composition of nonaccrual loans
and leases continues to be concentrated in real estate as 77% of
nonaccrual loans were secured by real estate as of December 31,
2009 compared to approximately 82% as of December 31, 2008.
Excluding the $224 million of nonperforming loans held-for-
sale, commercial nonperforming loans and leases increased from
$1.9 billion at December 31, 2008 to $2.3 billion as of December
31, 2009. This was driven by the real estate and construction
industries in Florida and Michigan. As of December 31, 2009 and
2008, these states combined to represent 43% and 46%,
respectively, of total commercial nonaccrual credits. Additionally,
as of December 31, 2009 restructured commercial loans totaled
$115 million, $47 million of which were on nonaccrual status. As
shown in Table 25, the real estate and construction industries
contributed approximately
the year-over-year
increase in nonaccrual credits. Of the $1.8 billion of real estate
and construction nonaccrual credits, including held for sale loans,
$565 million is related to homebuilders or developers.
two-thirds of
Consumer nonperforming loans and leases increased to $555
million as of December 31, 2009, compared to $370 million at
December 31, 2008, driven by a $178 million increase in
restructured consumer loans and leases on nonaccrual. Due to the
continued challenging credit environment, an increased volume of
restructured consumer loans were put back on nonaccrual status.
The Bancorp has devoted significant attention to loss mitigation
activities and has proactively restructured certain loans. Consumer
restructured loans on accrual status totaled $1.4 billion and $494
million as of December 31, 2009 and 2008, respectively, driven by
an increased volume of restructured loans. As of December 31,
2009, the redefault rate on consumer restructured loans was 26%.
Ohio, Michigan and Florida accounted for 62% of total consumer
nonperforming assets at December 31, 2009.
In 2009 and 2008, approximately $20 million and $10 million,
respectively, of interest income was recognized on a cash basis for
loans on nonaccrual. In 2009 and 2008, additional interest income
of approximately $236 million and $282 million, respectively,
would have been recorded if the loans and leases on nonaccrual
50 Fifth Third Bancorp
status had been current in accordance with the original terms.
Although this value helps demonstrate the costs of carrying
nonaccrual credits, the Bancorp does not expect to recover the
full amount of interest.
Analysis of Net Loan Charge-offs
Net charge-offs were 320 bp of average loans and leases for 2009,
compared to 323 bp for 2008. Table 42 provides a summary of
credit loss experience and net charge-offs as a percentage of
average loans and leases outstanding by loan category.
The ratio of commercial loan net charge-offs to average
commercial loans outstanding decreased to 3.27% in 2009
compared to 3.99% in 2008, due primarily to net charge-offs of
$800 million on $1.3 billion in criticized or impaired loans moved
to held-for-sale or sold in the fourth quarter of 2008. Net charge-
offs for 2009 included $358 million related to homebuilders and
developers, a decrease from $812 million, or 40%, of total
commercial net charge-offs in 2008. Approximately 31% of net
charge-offs greater than $2 million in 2009 involved loans in the
construction or real estate industries. The states of Florida and
Michigan continued to experience the most stress, accounting for
approximately 44% of the total net charge-offs in the commercial
loan product portfolio in 2009. For the year ended December 31,
2008, Florida and Michigan accounted for approximately 63% of
total commercial net charge-offs.
The ratio of consumer loan net charge-offs to average
consumer loans outstanding increased to 3.10% in 2009 compared
to 2.08% in 2008. Residential mortgage charge-offs increased to
$357 million in 2009 compared to $243 million in 2008, reflecting
increased foreclosure rates in the Bancorp’s key lending markets
coupled with an increase in severity of loss on mortgage loans.
Florida and Michigan continue to rank among the top states in
total mortgage foreclosures. These foreclosures not only added to
the volume of charge-offs, but also hampered the Bancorp’s
ability to recover the value of the homes collateralizing the
mortgages as foreclosed real estate is a significant contributor to
declining home prices. Florida affiliates continue to experience the
most stress and accounted for over half of the residential
mortgage charge-offs in 2009. Home equity charge-offs increased
to $322 million, or 2.57% of average loans, and continue to
display distinct charge-off differences between lines and loans
originated through the retail channel and those originated through
brokered channels. Brokered home equity represented 42% of
home equity charge-offs during 2009 despite representing only
17% of home equity lines and loans as of December 31, 2009.
Excluding home equity lines and loans originated through
brokered channels, home equity charge-offs to average home
equity loans were 148 bp. Management responded to the
performance of the brokered home equity portfolio by reducing
originations in 2007 of this product by 64% compared to 2006
and, and eliminated this channel of origination at the end of 2007.
In addition, management actively manages lines of credit and
makes reductions in lending limits when it believes it is necessary
based on FICO score deterioration and property devaluation. The
ratio of automobile loan net charge-offs to average automobile
loans was 1.68% for 2009, an increase of 12 bp compared to 2008
displaying an increase due to a shift in the portfolio to a higher
percentage of used automobiles and an increase in loss severity
due to increased market depreciation of used automobiles. The
net charge-off ratio on credit card balances was 8.87% in 2009.
Increases in the charge-off ratio over the previous two years
reflect seasoning in the credit card portfolio and general economic
conditions compared to 2008. Management expects trends in the
charge-off ratio on credit card balances to be consistent with
general economic trends, such as unemployment and personal
bankruptcy filings. The Bancorp employs a risk-adjusted pricing
methodology to help ensure adequate compensation is received
for those products that have higher credit costs.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 41: SUMMARY OF NONPERFORMING ASSETS AND DELINQUENT LOANS
As of December 31 ($ in millions)
Nonaccrual loans and leases:
2009
2008
2007
2006
2005
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Other consumer loans and leases
Restructured loans and leases:
Commercial loans
Residential mortgage loans (a)
Home equity (a)
Automobile loans (a)
Credit card
Total nonperforming loans and leases
Repossessed personal property and other real estate owned
Total nonperforming assets (b)
Nonaccrual loans held for sale
Total nonperforming assets including loans held for sale
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans(c)
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total 90 days past due loans and leases
Nonperforming assets as a percent of total loans, leases and other assets,
$734
898
646
67
275
21
1
-
47
137
33
1
87
2,947
297
3,244
224
$3,468
$118
59
17
4
189
99
17
64
-
$567
541
482
362
21
259
26
5
-
-
20
29
1
30
1,776
230
2,006
473
2,479
76
136
74
4
198
96
21
56
1
662
175
243
249
5
92
45
3
1
-
27
11
-
5
856
171
1,027
-
1,027
44
73
67
4
186
72
13
31
1
491
127
84
54
6
38
40
3
-
-
-
-
-
-
352
103
455
-
455
38
17
6
2
68
51
11
16
1
210
140
51
31
5
30
-
-
37
-
-
-
-
-
294
67
361
-
361
20
7
7
1
53
10
57
155
including other real estate owned (b)
.52
Allowance for loan and lease losses as a percent of nonperforming assets (b)
206
(a) During 2009, the Bancorp modified its consumer nonaccrual policy to exclude troubled debt restructured loans that were less than 90 days past due because they were performing in accordance with
4.22 %
116
1.25
93
2.38
139
.61
170
the restructured terms. For comparability purposes, prior periods were adjusted to reflect this reclassification.
(b) Does not include nonaccrual loans held for sale.
(c) Information for all periods presented excludes advances made pursuant to servicing agreements to Government National Mortgage Association (GNMA) mortgage pools whose repayments are
insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. As of December 31, 2009, 2008, 2007, 2006 and 2005, these advances were $130
million, $40 million, $25 million, $14 million and $13 million, respectively.
Fifth Third Bancorp 51
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 42: SUMMARY OF CREDIT LOSS EXPERIENCE
For the years ended December 31 ($ in millions)
Losses charged off:
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total losses
Recoveries of losses previously charged off:
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total recoveries
Net losses charged off:
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
2009
($768)
(436)
(420)
(11)
(359)
(330)
(189)
(178)
(28)
(2,719)
50
14
4
4
2
8
41
8
7
138
(718)
(422)
(416)
(7)
(357)
(322)
(148)
(170)
(21)
($2,581)
Total net losses charged off
Net charge-offs as a percent of average loans and leases (excluding held for sale):
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total consumer loans and leases
Total net losses charged off
2.61 %
3.43
9.24
0.22
3.27
4.15
2.57
1.68
8.87
2.14
3.10
3.20 %
2008
(667)
(618)
(750)
-
(243)
(212)
(168)
(101)
(32)
(2,791)
18
5
2
1
-
7
34
7
7
81
(649)
(613)
(748)
1
(243)
(205)
(134)
(94)
(25)
(2,710)
2.31
4.80
12.80
(.02)
3.99
2.47
1.67
1.56
5.51
2.10
2.08
3.23
2007
(121)
(46)
(29)
(1)
(43)
(106)
(117)
(54)
(27)
(544)
12
2
-
1
-
9
32
8
18
82
(109)
(44)
(29)
-
(43)
(97)
(85)
(46)
(9)
(462)
.49
.40
.51
.01
.43
.48
.82
.83
3.55
.83
.84
.61
2006
(131)
(27)
(7)
(4)
(23)
(65)
(87)
(36)
(28)
(408)
24
3
-
5
-
9
30
5
16
92
(107)
(24)
(7)
1
(23)
(56)
(57)
(31)
(12)
(316)
.53
.25
.11
(.03)
.34
.27
.46
.60
3.65
.91
.55
.44
2005
(99)
(13)
(5)
(38)
(19)
(60)
(63)
(46)
(30)
(373)
24
3
1
1
-
10
18
5
12
74
(75)
(10)
(4)
(37)
(19)
(50)
(45)
(41)
(18)
(299)
.41
.10
.08
1.06
.35
.23
.44
.53
5.65
1.06
.57
.45
Allowance for Credit Losses
The allowance for credit losses is comprised of the allowance for
loan and lease losses and the reserve for unfunded commitments.
The allowance for loan and lease losses provides coverage for
probable and estimable losses in the loan and lease portfolio. The
Bancorp evaluates the allowance each quarter to determine its
adequacy to cover inherent losses. Several factors are taken into
consideration in the determination of the overall allowance for
loan and lease losses, including an unallocated component. These
factors include, but are not limited to, the overall risk profile of
the loan and lease portfolios, net charge-off experience, the extent
and portfolio management practices,
of impaired loans and leases, the level of nonaccrual loans and
leases, the level of 90 days past due loans and leases and the
overall percentage level of the allowance for loan and lease losses.
The Bancorp also considers overall asset quality trends, credit
risk
administration
identification practices, credit policy and underwriting practices,
overall portfolio growth, portfolio concentrations and current
national and local economic conditions that might impact the
portfolio. More information on the allowance for loan and lease
losses can be found in the Critical Accounting Policies section of
Management’s Discussion and Analysis.
52 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In 2009, the Bancorp did not substantively change any
material aspect of its overall approach in the determination of the
allowance for loan and lease losses and there have been no
material changes in assumptions or estimation techniques as
compared to prior periods that impacted the determination of the
current period allowance. In addition to the allowance for loan
and lease losses, the Bancorp maintains a reserve for unfunded
commitments recorded in other liabilities in the Consolidated
Balance Sheets. The methodology used to determine the adequacy
of this reserve is similar to the Bancorp’s methodology for
determining the allowance for loan and lease losses. The provision
for unfunded commitments is included in other noninterest
expense in the Consolidated Statements of Income.
specified
Certain inherent, but unconfirmed losses are probable within
the loan and lease portfolio. The Bancorp’s current methodology
for determining the level of losses is based on historical loss rates,
current credit grades, specific allocation on impaired commercial
credits above
thresholds and other qualitative
adjustments. Due to the heavy reliance on realized historical losses
and the credit grade rating process, the model derived required
reserves tend to slightly lag the deterioration in the portfolio, in a
stable or deteriorating credit environment, and tend not to be as
responsive when improved conditions have presented themselves.
Given these model limitations, the qualitative adjustment factors
may be incremental or decremental to the quantitative model
results. An unallocated component to the allowance for loan and
lease losses is maintained to recognize the imprecision in
estimating and measuring loss. The unallocated allowance as a
percent of total portfolio loans and leases for the year ended
December 31, 2009 was .25%, or five percent of the total
allowance, compared to .33%, or 10% of the total allowance, as of
December 31, 2008. The decrease in the unallocated allowance
compared to the prior year was a result of many of the impacts of
recent economic events being more fully incorporated into the
historical loss rates within the portfolio specific models as well as
early signs of stabilization in real estate values in certain of the
Bancorp’s lending markets. These recent economic events include,
but are not limited to, falling home prices, rising unemployment,
bankruptcy filings and fluctuating commodity prices.
As shown in Table 44, the allowance for loan and lease losses
as a percent of the total loan and lease portfolio increased to
4.88% at December 31, 2009, compared to 3.31% at December
31, 2008. Total allowance for loan and lease losses totaled $3.7
billion and $2.8 billion as of December 31, 2009 and 2008,
respectively. This increase is reflective of a number of factors
including the increase in delinquencies, increased loss estimates
due to the real estate price deterioration in some of the Bancorp’s
key lending markets, increased stress in the commercial loan and
lease portfolio and the general decline in economic conditions.
These factors were the primary drivers of the increased reserve
amounts for most of the Bancorp’s loan categories.
The Bancorp’s determination of
for
commercial loans is sensitive to the risk grades it assigns to these
loans. In the event that 10% of commercial loans in each risk
the allowance
category would experience a downgrade of one risk category, the
allowance for commercial loans would increase by approximately
$210 million at December 31, 2009. In addition, the Bancorp’s
determination of the allowance for residential and consumer loans
is sensitive to changes in estimated loss rates. In the event that
estimated loss rates would increase by 10%, the allowance for
residential and consumer loans would increase by approximately
$104 million at December 31, 2009. As several qualitative and
quantitative factors are considered in determining the allowance
for loan and lease losses, these sensitivity analyses do not
necessarily reflect the nature and extent of future changes in the
allowance for loan and lease losses. They are intended to provide
insights into the impact of adverse changes to risk grades and
estimated loss rates and do not imply any expectation of future
deterioration in the risk ratings or loss rates. Given current
processes employed by the Bancorp, management believes the risk
grades and estimated loss rates currently assigned are appropriate.
Impaired commercial loans subject to specific evaluation
increased to $1.7 billion as of December 31, 2009 compared to
$1.5 billion as of December 31, 2008. Impaired commercial loans
above specified thresholds require individual review to determine
loan and lease reserves. In addition to the increased volume of
impaired commercial loans, required loan and lease reserves on
these loans were generally higher due to the deterioration in
collateral values.
Delinquency trends have increased across most product lines
and credit grades, leading to increases in loss rates and, therefore,
increased reserve requirements for those products. In general, the
increase in historical loss reserve factors was responsible for over
half of the year-over-year increase in the allowance for loan and
lease losses.
Real estate price deterioration, as measured by the Home
Price Index, was most prevalent in some of the key lending
markets of the Bancorp, with metropolitan areas in Florida,
Michigan and Ohio experiencing some of the most severe declines
nationally. The deterioration in real estate values increased the
inherent loss once a loan defaults, particularly for residential
mortgage and home equity loans with high loan-to-value ratios.
trends
Economic
such as gross domestic product,
unemployment rate, home sales and inventory and bankruptcy
filings have historically provided indicators of trends in loan and
lease loss rates. Compared to the prior year, negative trends in
general economic conditions in the national and local economies
caused increases in reserve factors used to determine the losses
inherent within the loan and lease portfolio.
The Bancorp continually reviews its credit administration and
loan and lease portfolio and makes changes based on the
performance of its products. Management discontinued the
origination of brokered home equity products at the end of 2007,
suspended homebuilder lending in the fourth quarter of 2007 and
new commercial non-owner occupied real estate lending in 2008,
and raised underwriting standards across both the commercial and
consumer loan product offerings.
TABLE 43: CHANGES IN ALLOWANCE FOR CREDIT LOSSES
For the years ended December 31 ($ in millions)
Balance, beginning of year
Net losses charged off
Provision for loan and lease losses
Net change in reserve for unfunded commitments
Balance, end of year
Components of allowance for credit losses:
Allowance for loan and lease losses
Reserve for unfunded commitments
Total allowance for credit losses
2009
$2,982
(2,581)
3,543
99
$4,043
$3,749
294
$4,043
2008
1,032
(2,710)
4,560
100
2,982
2,787
195
2,982
2007
847
(462)
628
19
1,032
937
95
1,032
2006
814
(316)
343
6
847
771
76
847
2005
785
(299)
330
(2)
814
744
70
814
Fifth Third Bancorp 53
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 44: ATTRIBUTION OF ALLOWANCE FOR LOAN AND LEASE LOSSES TO PORTFOLIO LOANS AND LEASES
As of December 31 ($ in millions)
2006
Allowance attributed to:
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Consumer loans
Consumer leases
Unallocated
2007
2008
2009
$1,282
734
380
121
375
660
4
193
$3,749
824
363
252
61
388
611
9
279
2,787
271
135
98
27
67
287
5
47
937
252
95
49
24
51
247
5
48
771
2005
201
78
46
46
38
183
10
142
744
19,253
9,188
6,342
3,695
7,847
22,006
1,594
69,925
1.05
.85
.72
1.25
.49
.83
.63
.20
1.06
$25,683
11,803
3,784
3,535
8,035
23,439
500
$76,779
4.99 %
6.22
10.04
3.42
4.67
2.81
.80
.25
4.88 %
29,197
12,502
5,114
3,666
9,385
23,509
770
84,143
2.82
2.90
4.93
1.66
4.13
2.60
1.17
.33
3.31
24,813
11,862
5,561
3,737
10,540
22,943
797
80,253
1.09
1.14
1.77
.72
.63
1.25
.63
.06
1.17
20,831
10,405
6,168
3,842
8,830
23,204
1,073
74,353
1.21
.91
.80
.62
.58
1.06
.47
.06
1.04
Total allowance for loan and lease losses
Portfolio loans and leases:
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Consumer loans
Consumer leases
Total portfolio loans and leases
Attributed allowance as a percent of respective portfolio loans:
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Consumer loans
Consumer leases
Unallocated (as a percent of total portfolio loans and leases)
Total portfolio loans and leases
54 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARKET RISK MANAGEMENT
Market risk arises from the potential for market fluctuations in
interest rates, foreign exchange rates and equity prices that may
result in potential reductions in net income. Interest rate risk, a
component of market risk, is the exposure to adverse changes in
net interest income or financial position due to changes in interest
rates. Management considers interest rate risk a prominent market
risk in terms of its potential impact on earnings. Interest rate risk
can occur for any one or more of the following reasons:
• Assets and liabilities may mature or reprice at different
•
times;
Short-term and long-term market interest rates may change
by different amounts; or
• The expected maturity of various assets or liabilities may
shorten or lengthen as interest rates change.
In addition to the direct impact of interest rate changes on net
interest income, interest rates can indirectly impact earnings
through their effect on loan demand, credit losses, mortgage
originations, the value of servicing rights and other sources of the
Bancorp’s earnings. Stability of the Bancorp’s net income is largely
dependent upon the effective management of interest rate risk.
Management continually reviews the Bancorp’s balance sheet
composition and earnings flows and models the interest rate risk,
and possible actions to reduce this risk, given numerous possible
future interest rate scenarios.
Net Interest Income (NII) Simulation Model
The Bancorp employs a variety of measurement techniques to
identify and manage its interest rate risk, including the use of an
NII simulation model to analyze the sensitivity of net interest
income to changing interest rates. The model is based on
contractual and assumed cash flows and repricing characteristics
for all of the Bancorp’s financial instruments and incorporates
market-based assumptions regarding the effect of changing
interest rates on the prepayment rates of certain assets and
liabilities. The model also includes senior management projections
of the future volume and pricing of each of the product lines
offered by the Bancorp as well as other pertinent assumptions.
Actual results may differ from these simulated results due to
timing, magnitude and frequency of interest rate changes as well
as changes in market conditions and management strategies.
includes
(ALCO), which
The Bancorp’s Executive Asset Liability Management
senior management
Committee
representatives and
is accountable to the Enterprise Risk
Management Committee, monitors and manages interest rate risk
within Board approved policy limits. In addition to the risk
management activities of ALCO, the Bancorp has a Market Risk
Management function as part of ERM that provides independent
oversight of market risk activities. The Bancorp’s interest rate risk
exposure is currently evaluated by measuring the anticipated
change in net interest income over 12-month and 24-month
horizons assuming a 100 bp parallel ramped increase and a 200 bp
parallel ramped increase in interest rates. The Fed Funds interest
rate, targeted by the Federal Reserve at a range of 0% to 0.25%, is
currently set at a level that would be negative in parallel ramped
decrease scenarios; therefore, those scenarios were omitted from
the interest rate risk analyses for December 31, 2009. In
accordance with the current policy, the rate movements are
assumed to occur over one year and are sustained thereafter.
At December 31, 2009, the Bancorp’s simulated exposure to
a change in interest rates as described above was effectively
neutral in year one and asset sensitive in year two. Table 45 shows
the Bancorp's estimated net interest income sensitivity profile and
ALCO policy limits as of December 31, 2009:
TABLE 45: ESTIMATED NII SENSITIVITY PROFILE
Percent Change in NII
(FTE)
ALCO Policy Limits
Change in
Interest
Rates (bp)
+200
+100
12
Months
(0.15%)
0.10
13 to 24
Months
1.45
1.08
12
Months
(5.00)
-
13 to 24
Months
(7.00)
-
Market Value of Equity
The Bancorp also employs market value of equity (MVE) as a
measurement tool in managing interest rate risk. Whereas the
earnings simulation highlights exposures over a relatively short
time horizon, the MVE analysis incorporates all cash flows over
the estimated remaining life of all balance sheet and derivative
positions. The MVE of the balance sheet, at a point in time, is
defined as the discounted present value of asset and derivative
cash flows less the discounted value of liability cash flows. The
sensitivity of MVE to changes in the level of interest rates is a
measure of longer-term interest rate risk. MVE values only the
current balance sheet and does not incorporate the growth
assumptions used in the earnings simulation model. As with the
earnings simulation model, assumptions about the timing and
variability of balance sheet cash flows are critical in the MVE
important are the assumptions driving
analysis. Particularly
prepayments and the expected changes in balances and pricing of
the transaction deposit portfolios. The following table shows the
Bancorp’s MVE sensitivity profile as of December 31, 2009:
TABLE 46: ESTIMATED MVE SENSITIVITY PROFILE
Change in
Interest Rates (bp)
+200
+100
+25
-25
Change in MVE
(3.07%)
(0.86)
0.09
(0.08)
ALCO Policy Limits
(15.0)
This MVE profile suggests that the Bancorp would benefit
modestly from an initial increase in rates, but would lose value as
rates continue to rise. While an instantaneous shift in interest rates
is used in this analysis to provide an estimate of exposure, the
Bancorp believes that a gradual shift in interest rates would have a
much more modest impact. Since MVE measures the discounted
present value of cash flows over the estimated
lives of
instruments, the change in MVE does not directly correlate to the
degree that earnings would be impacted over a shorter time
horizon (e.g., the current fiscal year). Further, MVE does not take
into account factors such as future balance sheet growth, changes
in product mix, changes in yield curve relationships and changing
product spreads that could mitigate the adverse impact of changes
in interest rates. The NII simulation and MVE analyses do not
necessarily
that management may
undertake to manage this risk in response to anticipated changes
in interest rates.
include certain actions
Use of Derivatives to Manage Interest Rate Risk
An integral component of the Bancorp’s interest rate risk
management strategy is its use of derivative instruments to
minimize significant fluctuations in earnings caused by changes in
market interest rates. Examples of derivative instruments that the
Bancorp may use as part of its interest rate risk management
strategy include interest rate swaps, interest rate floors, interest
rate caps, forward contracts, principal only swaps, options and
swaptions.
As part of its overall risk management strategy relative to its
mortgage banking activity, the Bancorp enters into forward
Fifth Third Bancorp 55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for as
free-standing derivatives
to
contracts accounted
economically hedge interest rate lock commitments that are also
considered free-standing derivatives. Additionally, the Bancorp
economically hedges its exposure to mortgage loans held for sale.
The Bancorp also establishes derivative contracts with major
financial institutions to economically hedge significant exposures
assumed in commercial customer accommodation derivative
contracts. Generally, these contracts have similar terms in order to
protect the Bancorp from market volatility. Credit risk arises from
the possible inability of counterparties to meet the terms of their
contracts, which the Bancorp minimizes through collateral
arrangements, approvals, limits and monitoring procedures. The
notional amount and fair values of these derivatives as of
December 31, 2009 are included in Note 12 of the Notes to
Consolidated Financial Statements.
Portfolio Loans and Leases and Interest Rate Risk
Although the Bancorp’s portfolio loans and leases contain both
fixed and floating/adjustable rate products, the rates of interest
earned by the Bancorp on the outstanding balances are generally
established for a period of time. The interest rate sensitivity of
loans and leases is directly related to the length of time the rate
earned is established. Table 47 summarizes the expected principal
cash flows of the Bancorp’s portfolio loans and leases as of
December 31, 2009. Additionally, Table 48 displays a summary of
expected principal cash flows occurring after one year, as of
December 31, 2009.
Residential Mortgage Servicing Rights and Interest Rate
Risk
The net carrying amount of the residential MSR portfolio was
$699 million and $496 million as of December 31, 2009 and 2008,
respectively. The value of servicing rights can fluctuate sharply
depending on changes in interest rates and other factors.
Generally, as interest rates decline and loans are prepaid to take
advantage of refinancing, the total value of existing servicing
rights declines because no further servicing fees are collected on
repaid loans. The Bancorp maintains a non-qualifying hedging
TABLE 47: PORTFOLIO LOAN AND LEASE PRINCIPAL CASH FLOWS
strategy relative to its mortgage banking activity in order to
manage a portion of the risk associated with changes in the value
of its MSR portfolio as a result of changing interest rates.
Mortgage rates declined slightly during 2009 compared to
2008. The decrease in rates caused prepayment assumptions to
increase and led to $24 million in temporary impairment of
servicing rights during the year ended December 31, 2009
compared to the $207 million in temporary impairment in 2008.
Servicing rights are deemed temporarily
impaired when a
borrower’s loan rate is distinctly higher than prevailing rates.
Temporary impairment on servicing rights is reversed when the
prevailing rates return to a
level commensurate with the
borrower’s loan rate. Offsetting the mortgage servicing rights
valuation, the Bancorp recognized net gains of $98 million and
$209 million on its non-qualifying hedging strategy for the years
ended December 31, 2009 and 2008, respectively. The net gains
on non-qualifying hedging strategy for 2009 and 2008 include $57
million and $120 million, respectively, of net gains on the sale of
securities. See Note 11 of the Notes to Consolidated Financial
Statements for further discussion on servicing rights and the
instruments used to hedge interest rate risk on MSRs.
Foreign Currency Risk
The Bancorp enters into foreign exchange derivative contracts to
economically hedge certain foreign denominated loans. The
derivatives are classified as free-standing instruments with the
revaluation gain or loss being recorded in other noninterest
income in the Consolidated Statements of Income. The balance of
the Bancorp’s foreign denominated loans at December 31, 2009
and 2008 was approximately $272 million and $307 million,
respectively. The Bancorp also enters into foreign exchange
contracts for the benefit of commercial customers involved in
international trade to hedge their exposure to foreign currency
fluctuations. The Bancorp has internal controls in place to help
ensure excessive risk is not being taken in providing this service to
customers. These controls include an independent determination
of currency volatility and credit equivalent exposure on these
contracts, counterparty credit approvals and country limits.
As of December 31, 2009 ($ in millions)
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Subtotal - commercial
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Subtotal - consumer
Total
Less than 1 year
$13,178
4,421
2,081
540
20,220
1,938
1,911
3,284
163
417
7,713
$27,933
1-5 years
10,245
5,264
953
1,448
17,910
2,711
5,190
5,254
1,827
356
15,338
33,248
Greater than 5
years
2,260
2,118
750
1,547
6,675
3,386
5,073
457
-
7
8,923
15,598
Total
25,683
11,803
3,784
3,535
44,805
8,035
12,174
8,995
1,990
780
31,974
76,779
TABLE 48: PORTFOLIO LOAN AND LEASE PRINCIPAL CASH FLOWS OCCURRING AFTER ONE YEAR
Interest Rate
As of December 31, 2009 ($ in millions)
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Subtotal - commercial
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Subtotal – consumer
Total
56 Fifth Third Bancorp
Fixed
$3,851
2,610
733
2,995
10,189
3,740
1,831
5,663
1,032
349
12,615
$22,804
Floating or Adjustable
8,654
4,772
970
-
14,396
2,357
8,432
48
795
14
11,646
26,042
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 49: AGENCY RATINGS
As of February 26, 2010
Fifth Third Bancorp:
Commercial paper
Senior debt
Subordinated debt
Fifth Third Bank:
Short-term
Long-term deposit
Senior debt
Subordinated debt
Moody’s
Standard and Poor’s
Prime-2
Baa1
Baa2
Prime-1
A2
A2
A3
A-2
BBB
BBB-
A-2
BBB+
BBB+
BBB
Fitch
F1
A-
BBB+
F1
A
A-
BBB+
DBRS
R-1L
A
AL
R-1M
AH
AH
A
LIQUIDITY RISK MANAGEMENT
The goal of liquidity management is to provide adequate funds to
meet changes in loan and lease demand, unexpected deposit
withdrawals and other contractual obligations. A summary of
certain obligations and commitments to make future payments
under contracts is included in Table 52. Mitigating liquidity risk is
accomplished by maintaining liquid assets in the form of
investment securities, maintaining sufficient unused borrowing
capacity in the debt markets and delivering consistent growth in
core deposits. Cash flows from estimated
lease
repayment are included in Table 47. Of the $17.9 billion
(amortized cost basis) of securities in the available-for-sale
portfolio at December 31, 2009, $4.9 billion in principal and
interest is expected to be received in the next 12 months and an
additional $2.3 billion is expected to be received in the next 13 to
24 months. For further information on the Bancorp’s available-
for-sale securities portfolio, see the Investment Securities section
of the MD&A.
loan and
In addition to available-for-sale securities, asset-driven
liquidity is provided by the Bancorp’s ability to sell or securitize
loan and lease assets. In order to reduce the exposure to interest
rate fluctuations and to manage liquidity, the Bancorp has
developed securitization and sale procedures for several types of
interest-sensitive assets. A majority of the long-term, fixed-rate
single-family residential mortgage loans underwritten according to
FHLMC or FNMA guidelines are sold for cash upon origination.
Additional assets such as jumbo fixed-rate residential mortgages,
certain commercial loans, home equity loans, automobile loans
and other consumer loans are also capable of being securitized or
sold. For the year ended December 31, 2009 and 2008, loans
totaling $21.8 billion and $15.7 billion, respectively, were sold,
securitized or transferred off-balance sheet. Recent developments
in accounting standards may impact the level and types of
structures that the Bancorp is able to utilize in order to securitize
or transfer assets off-balance sheet beginning in 2010. For further
information on the transfer of financial assets and consolidation
of VIEs, see Note 1 of the Notes to Consolidated Financial
Statements.
Core deposits have historically provided the Bancorp with a
sizeable source of relatively stable and low cost funds. The
Bancorp’s average core deposits and shareholders’ equity funded
72% of its average total assets during 2009 compared to 65%
during 2008. In addition to core deposit funding, the Bancorp also
accesses a variety of other short-term and long-term funding
sources, which include the use of various regional Federal Home
Loan Banks. Certificates carrying a balance of $100,000 or more
and deposits in the Bancorp’s foreign branch located in the
Cayman Islands are wholesale funding tools utilized to fund asset
growth. Management does not rely on any one source of liquidity
and manages availability in response to changing balance sheet
needs.
The Bancorp has a shelf registration in place with the SEC
permitting ready access to the public debt markets and qualifies as
a “well-known seasoned issuer” under SEC rules. As of December
31, 2009, $8.8 billion of debt or other securities were available for
issuance from this shelf registration under the current Bancorp’s
Board of Directors’ authorizations, however, access to these
markets may depend on market conditions. The Bancorp also has
$18.2 billion of funding available for issuance through private
offerings of debt securities pursuant to its bank note program and
currently has approximately $25.8 billion of borrowing capacity
available through secured borrowing sources including the Federal
Home Loan Banks and Federal Reserve Banks. The Bancorp has
approximately $6.8 billion of unsecured
long-term debt
outstanding as of December 31, 2009. Long-term debt with a
principal balance of $800 million and a carrying value of $815
million will mature during 2010.
The Bancorp’s senior debt credit ratings as of February 26,
2010 are summarized in Table 49. The ratings reflect the ratings
agencies view on the Bancorp’s capacity to meet financial
commitments. * Additional information on senior debt credit
ratings is as follows:
•
• Moody’s “Baa1” rating is considered medium-grade
obligations and is the fourth highest ranking within its
overall classification system;
Standard & Poor’s “BBB” rating indicates the obligor’s
capacity to meet its financial commitment is adequate
and is the fourth highest ranking within its overall
classification system;
Fitch Ratings’ “A-” rating is considered high credit
quality and is the third highest ranking within its overall
classification system; and
•
• DBRS Ltd.’s “A” rating is considered satisfactory credit
quality and is the third highest ranking within its overall
classification system.
* As an investor, you should be aware that a security rating is not
a recommendation to buy, sell or hold securities, that it may be
subject to revision or withdrawal at any time by the assigning
rating organization and that each rating should be evaluated
independently of any other rating.
Fifth Third Bancorp 57
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL MANAGEMENT
2008 Capital Actions
Management,
including the Bancorp’s Board of Directors,
regularly reviews the Bancorp’s capital position to help ensure it is
appropriately positioned under various operating environments.
Due to the deterioration in credit trends during 2008 and the
uncertainty involving future economic trends, management carried
out actions throughout 2008 to increase the Bancorp’s capital
position. During the second quarter of 2008, the Bancorp issued
approximately $1 billion in Tier 1 capital in the form of
convertible preferred shares (Series G). In addition, the Bancorp’s
Board of Directors reduced the quarterly dividend on its common
stock to $.01 per share to allow for further retention of capital.
On October 14, 2008, the U.S. Treasury announced a series of
initiatives to strengthen market stability, improve the strength of
financial institutions and enhance market liquidity. Among the
initiatives, the U.S. Treasury created a voluntary Capital Purchase
Program (CPP) as part of its efforts to provide a firmer capital
foundation for financial
increase credit
availability to consumers and businesses. As part of the program,
eligible financial institutions were able to sell equity interests to
the U.S. Treasury in amounts equal to one to three percent of the
institution’s risk-weighted assets. These equity interests constitute
Tier 1 capital. On December 31, 2008, the Bancorp issued $3.4
billion in senior preferred stock (Series F) and related warrants
under the terms of the CPP to the U.S. Treasury. The proceeds
from the issuance to the U.S. Treasury were allocated based on
the relative fair value of the warrants as compared with the fair
value of the preferred stock. The fair value of the warrants was
determined using a Black-Scholes valuation model. The
assumptions used in the warrant valuation were a dividend yield of
0.4%, stock price volatility of 51% and a risk-free interest rate of
2.5%. The fair value of the preferred stock was determined using a
discounted cash flow analysis based on assumptions regarding the
market rate for preferred stock, which was estimated to be
approximately 13% at the date of issuance.
institutions and to
Supervisory Capital Assessment Program (SCAP) Results
On May 7, 2009, the Bancorp announced its SCAP results which
indicated that the Bancorp’s Tier 1 and Total risk-based capital
ratios were expected to continue to exceed the levels required to
maintain a “well-capitalized” status under the more adverse
scenario as defined by the assessment. As a result, the Bancorp
was not required to raise additional overall capital. The SCAP
results did indicate that the Bancorp’s Tier 1 common equity
would be required to be augmented to maintain a capital buffer
above the newly required four percent threshold of the Tier 1
common equity ratio under the more adverse scenario of the
assessment. The total amount required, prior to considering
activities by the Bancorp since the end of the fourth quarter of
2008, was $2.6 billion. After considering such activities, including
the Processing Business Sale, the indicated additional net Tier 1
TABLE 50: CAPITAL RATIOS
As of December 31 ($ in millions)
Average equity as a percent of average assets
Tangible equity as a percent of tangible assets
Tangible common equity as a percent of tangible assets
Tier I capital
Total risk-based capital
Risk-weighted assets
Regulatory capital ratios:
Tier I capital
Total risk-based capital
Tier I leverage
Tier I common equity
58 Fifth Third Bancorp
common equity required was $1.1 billion. The $1.1 billion
requirement was after consideration of the Bancorp’s previously
announced Processing Business Sale, but before consideration of
any other measures that management believed to be available to
the Bancorp to generate additional Tier 1 common equity. During
the second quarter of 2009, in order to raise additional capital to
augment Tier 1 common equity, the Bancorp completed a $1
billion common stock offering and an exchange of a portion of its
Series G preferred stock. As a result of the Processing Business
Sale, the common stock offering, and the exchange of the
preferred stock, the Bancorp exceeded its Tier 1 common equity
requirement under the SCAP assessment by approximately $650
million. Additionally, in July of 2009, the Bancorp sold its Visa,
Inc. Class B common shares resulting in an additional $187
million benefit to equity.
Common Stock Offering
On June 4, 2009, the Bancorp announced the successful
completion of its $1 billion at-the-market offering of its common
shares. Through this offering, the Bancorp issued approximately
158 million shares at an average price of $6.33.
Preferred Series G Exchange
On June 17, 2009, the Bancorp completed its offer to exchange
2,158.8272 shares of its common stock, no par value, and $8,250
in cash, for each set of 250 validly tendered and accepted
depositary shares. The Bancorp issued approximately 60 million
shares of common stock and paid $230 million in cash in
exchange for 7 million depositary shares. Overall, $696 million in
liquidation amount of the Bancorp’s depositary shares were validly
tendered, not withdrawn and exchanged, which represented 63%
of the aggregate liquidation amount of its depositary shares. An
aggregate of 7 million depositary shares representing 27,849 shares
of Series G preferred stock were retired upon receipt. At the time
of exchange, the Bancorp recognized an increase to retained
earnings and net income available to common shareholders of $35
million, calculated as the difference between the carrying amount
of the Series G preferred stock exchanged and the sum of the fair
value of the common stock plus cash delivered. After settlement
of the exchange offer, 4,112,750 depositary shares representing
16,451 shares of Series G preferred stock remained outstanding.
As a result of this exchange, the Bancorp increased its common
equity by $441 million.
Capital Ratios
The Federal Reserve Board established quantitative measures that
assign risk weightings to assets and off-balance sheet items and
also define and set minimum regulatory capital requirements (risk-
based capital ratios). Additionally, the guidelines define “well-
capitalized” ratios for Tier I and total risk-based capital as 6% and
10%, respectively. The Bancorp exceeded these “well-capitalized”
ratios for all periods presented.
2008
2009
11.36 % 8.78
7.86
9.71
4.23
6.45
$13,428
17,635
100,862
13.31 %
17.48
12.43
7.00
11,924
16,646
112,622
10.59
14.78
10.27
4.37
2007
9.35
6.14
6.14
8,924
11,733
115,529
7.72
10.16
8.50
5.72
2006
9.32
7.95
7.95
8,625
11,385
102,823
8.39
11.07
8.44
8.22
2005
9.06
7.23
7.22
8,209
10,240
98,293
8.35
10.42
8.08
8.17
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Dividend Policy and Stock Repurchase Program
The Bancorp’s common stock dividend policy reflects its earnings
outlook, desired payout ratios, the need to maintain adequate
capital levels and alternative investment opportunities. In 2009,
the Bancorp paid dividends per common share of $0.04, a
decrease from the $0.75 paid in 2008. The reduction in quarterly
common dividend was in response to the difficult operating
environment and the additional capital that may be needed. The
Bancorp’s quarterly dividend per common share for the fourth
quarter of 2009 was $0.01.
As previously discussed, the Bancorp has issued $3.4 billion
in senior preferred stock and related warrants to the U.S. Treasury
as part of the CPP. Upon issuance, the Bancorp agreed to limit
dividends to common stock holders to the quarterly dividend rate
paid prior to October 14, 2008, which was $0.15. This restriction
is in effect until the earlier of December 31, 2011 or the date upon
which the Series F senior preferred shares are redeemed in whole
or transferred to an unaffiliated third party.
The Bancorp’s repurchase of equity securities is shown in
Table 51. On May 21, 2007, the Bancorp announced that its
Board of Directors had authorized management to purchase 30
million shares of the Bancorp’s common stock through the open
market or in any private transaction. The authorization does not
include specific price targets or an expiration date. Under the
agreement with the U.S. Treasury, as part of the CPP, the Bancorp
is restricted in its repurchases of its common stock. This
restriction is in effect until the earlier of December 31, 2011 or the
date upon which the Series F senior preferred shares are redeemed
in whole or transferred to an unaffiliated third party.
TABLE 51: SHARE REPURCHASES
For the years ended December 31
15,807,045
Shares authorized for repurchase at January 1
30,000,000
Additional authorizations
(26,605,527)
Shares repurchases (a)
19,201,518
Shares authorized for repurchase at December 31
Average price paid per share
40.70
(a) Excludes 265,802, 63,270 and 365,867 shares repurchased during 2009, 2008 and 2007, respectively, in connection with various employee compensation plans. These repurchases
are not included in the calculation for average price paid and do not count against the maximum number of shares that may yet be repurchased under the Board of Directors’
authorization.
19,201,518
-
-
19,201,518
N/A
19,201,518
-
-
19,201,518
N/A
2008
2009
2007
Fifth Third Bancorp 59
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OFF-BALANCE SHEET ARRANGEMENTS
The Consolidated Financial Statements include the accounts of
the Bancorp and its majority-owned subsidiaries and variable
interest entities (VIEs) in which the Bancorp has been determined
to be the primary beneficiary. Other entities, including certain
joint ventures, in which the Bancorp has the ability to exercise
significant influence over operating and financial policies of the
investee, but upon which the Bancorp does not possess control,
are accounted for by the equity method and not consolidated.
Those entities in which the Bancorp does not have the ability to
exercise significant influence are generally carried at the lower of
cost or fair value.
In the ordinary course of business, the Bancorp enters into
financial transactions to extend credit and various forms of
commitments and guarantees that may be considered off-balance
sheet arrangements. These transactions involve varying elements
of market, credit and liquidity risk. The nature and extent of these
transactions are provided in Note 16 of the Notes to Consolidated
Financial Statements. In addition, the Bancorp uses conduits, asset
securitizations and certain defined guarantees to provide a source
of funding. The use of these investment vehicles involves
differing degrees of risk. A discussion in further detail of these
transactions is provided below.
floating-rate,
recourse, certain primarily
Commercial Loan Sales to a QSPE
Through 2008, the Bancorp had transferred at par, subject to
credit
short-term
investment grade commercial loans to an unconsolidated QSPE
that is wholly owned by an independent third-party. The
outstanding balance of these loans at December 31, 2009 and
2008 was $771 million and $1.9 billion, respectively. These loans
may be transferred back to the Bancorp upon the occurrence of
certain specified events. These events include borrower default on
the loans transferred, ineligible loans transferred by the Bancorp
to the QSPE, the inability of the QSPE to issue commercial
paper, and in certain circumstances, bankruptcy preferences
initiated against underlying borrowers. The maximum amount of
credit risk in the event of nonperformance by the underlying
borrowers is approximately equivalent to the total outstanding
balance. During the years ended December 31, 2009 and 2008, the
QSPE did not transfer any loans back to the Bancorp as a result
of a credit event.
The QSPE issues commercial paper and uses the proceeds to
fund the acquisition of commercial loans transferred to it by the
Bancorp. The ability of the QSPE to issue commercial paper is a
function of general market conditions and the credit rating of the
liquidity provider. In the event the QSPE is unable to issue
commercial paper, the Bancorp has agreed to provide liquidity
support in the form of a line of credit to the QSPE and the
repurchase of assets from the QSPE. As of December 31, 2009
and 2008, the liquidity asset purchase agreement (LAPA) was $1.4
billion and $2.8 billion, respectively. In addition to the liquidity
support options discussed above, the Bancorp has also purchased
commercial paper issued by the QSPE. Beginning in 2008 and
continuing
the year ended December 31, 2009,
dislocation in the short-term funding market caused the QSPE
difficulty in obtaining sufficient funding through the issuance of
commercial paper. As a result, the Bancorp purchased commercial
paper throughout 2008 and 2009. As of December 31, 2009 and
2008, the Bancorp held approximately $805 million and $143
million, respectively, of asset-backed commercial paper issued by
the QSPE, representing 87% and 7%, respectively, of the total
commercial paper issued by the QSPE.
through
During 2008 the Bancorp repurchased $686 million of
commercial loans at par from the QSPE under the LAPA. The
Bancorp did not purchase any commercial loans from the QSPE
during 2009. Fair value adjustments of $3 million were recorded
60 Fifth Third Bancorp
on these loans upon repurchase. As of December 31, 2009 and
2008, there were no outstanding balances on the line of credit
from the Bancorp to the QSPE.
In June of 2009, the FASB issued guidance amending the
accounting for QSPEs and the consolidation of VIEs. Upon
adoption of this guidance on January 1, 2010, the Bancorp has
determined that it is the primary beneficiary (and therefore
consolidator) of this QSPE. Refer to Note 1 of the Notes to
Consolidated Financial Statements for further details regarding the
guidance and the related impact of adoption by the Bancorp.
Loan Securitizations
The Bancorp utilizes securitization trusts, formed by independent
third parties to facilitate the securitization process of residential
mortgage loans, certain automobile loans and other consumer
loans. During 2008, the Bancorp sold $2.7 billion of automobile
loans in three separate transactions. Each transaction isolated the
related loans through the use of a securitization trust or a conduit,
formed as QSPEs, to facilitate the securitization process in
accordance with U.S. GAAP. The QSPEs issued asset-backed
securities with varying levels of credit subordination and payment
priority. The investors in these securities have no credit recourse
to the Bancorp’s other assets for failure of debtors to pay when
due. During 2008 and 2009, required repurchases of previously
transferred automobile loans from the QSPE were immaterial to
the Bancorp’s Consolidated Financial Statements. For further
information on these automobile securitizations, see Note 11 of
the Notes to Consolidated Financial Statements. Upon adoption
on January 1, 2010 of the FASB guidance on the accounting for
QSPEs and VIEs, the Bancorp has determined that it is the
primary beneficiary (and therefore consolidator) of these QSPEs.
Refer to Note 1 of the Notes to Consolidated Financial
Statements for further information regarding the impact of new
accounting guidance on the QSPEs related to the automobile
securitizations.
Residential Mortgage Loan Sales
The Bancorp previously sold certain residential mortgage loans in
the secondary market with credit recourse. In the event of any
customer default, pursuant to the credit recourse provided, the
Bancorp is required to reimburse the third party. The maximum
amount of credit risk in the event of nonperformance by the
underlying borrowers is equivalent to the total outstanding
balance. In the event of nonperformance, the Bancorp has rights
to the underlying collateral value securing the loan. At December
31, 2009 and 2008, the outstanding balances on these loans sold
with credit recourse were approximately $1.1 billion and $1.3
billion, respectively. At December 31, 2009 and 2008, the Bancorp
maintained an estimated credit loss reserve on these loans sold
with credit recourse of approximately $21 million and $20 million,
respectively, recorded in other liabilities in the Consolidated
Balance Sheets. To determine the credit loss reserve, the Bancorp
used an approach that is consistent with its overall approach in
estimating credit losses for various categories of residential
mortgage loans held in its loan portfolio. In addition, conforming
residential mortgage loans sold to unrelated third parties are
generally sold with representation and warranty recourse
provisions. Under these provisions, the Bancorp is required to
repurchase any previously sold loan for which the representation
or warranty of the Bancorp proves to be inaccurate, incomplete or
misleading. As of December 31, 2009 and 2008, the Bancorp
maintained a reserve related to these loans sold with the
representation and warranty recourse provision of $17 million and
$6 million, respectively. For further information on residential
mortgage loans sold with recourse, see Note 16 of the Notes to
Consolidated Financial Statements.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Private Mortgage Insurance
For certain mortgage loans originated by the Bancorp, borrowers
may be required to obtain private mortgage insurance (PMI)
provided by third-party insurers. In some instances, these insurers
cede a portion of the PMI premiums to the Bancorp, and the
Bancorp provides reinsurance coverage within a specified range of
the total PMI coverage. The Bancorp’s reinsurance coverage
typically ranges from 5% to 10% of the total PMI coverage. The
Bancorp's maximum exposure in the event of nonperformance by
the underlying borrowers is equivalent to the Bancorp's total
outstanding reinsurance coverage, which was $182 million and
$170 million, respectively, at December 31, 2009 and 2008. As of
December 31, 2009 and 2008, the Bancorp maintained a reserve
of $44 million and $13 million, respectively, related to exposures
within the reinsurance portfolio. During the second quarter of
2009,
the practice of providing
reinsurance of private mortgage insurance for newly originated
mortgage loans.
the Bancorp suspended
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The Bancorp has certain obligations and commitments to make
future payments under contracts. The aggregate contractual
obligations and commitments at December 31, 2009 are shown in
Table 52. As of December 31, 2009, the Bancorp has
unrecognized tax benefits that, if recognized, would impact the
effective tax rate in future periods. Due to the uncertainty of the
amounts to be ultimately paid as well as the timing of such
payments, all uncertain tax liabilities that have not been paid have
been excluded from the Contractual Obligations and Other
Commitments table. Further detail on the impact of income taxes
is located in Note 20 of the Notes to Consolidated Financial
Statements.
TABLE 52: CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
As of December 31, 2009 ($ in millions)
Contractually obligated payments due by period:
Deposits without a stated maturity (a)
Time deposits (b)
Long-term debt (c)
Forward contracts to sell mortgage loans (d)
Short-term borrowings (e)
Noncancelable lease obligations (f)
Partnership investment commitments (g)
Pension obligations (h)
Purchase obligations (i)
Capital lease obligations
Total contractually obligated payments due by period
Other commitments by expiration period:
Commitments to extend credit (j)
Letters of credit (k)
Total other commitments by expiration period
Less than
1 year
1-3 years
3-5 years
Greater than
5 years
$64,139
13,606
815
3,633
1,597
91
235
19
43
14
$84,192
$25,411
2,459
$27,870
-
835
1,029
-
-
168
-
38
9
27
2,106
17,270
3,498
20,768
-
61
1,839
-
-
150
-
33
-
3
2,086
-
444
444
-
5,664
6,824
-
-
497
-
73
-
-
13,058
-
256
256
Total
64,139
20,166
10,507
3,633
1,597
906
235
163
52
44
101,442
42,681
6,657
49,338
(a)
Includes demand, interest checking, savings, money market and foreign office deposits. For additional information, see the Deposits discussion in the Balance Sheet Analysis section of
Management’s Discussion and Analysis.
(b) Includes other time and certificates $100,000 and over. For additional information, see the Deposits discussion in the Balance Sheet Analysis section of Management’s Discussion
(c)
and Analysis.
In the banking industry, interest-bearing obligations are principally used to fund interest-earning assets. As such, interest charges on contractual obligations were excluded from
reported amounts, as the potential cash outflows would have corresponding cash inflows from interest-earning assets. See Note 15 of the Notes to Consolidated Financial Statements
for additional information on these debt instruments.
(d) See Note 11 of the Notes to Consolidated Financial Statements for additional information on forward contracts to sell residential mortgage loans.
(e)
Includes federal funds purchased and borrowings with an original maturity of less than one year. For additional information, see Note 14 of the Notes to Consolidated Financial
Statements.
Includes rental commitments.
Includes low-income housing, historic tax investments and market tax credits.
(f)
(g)
(h) See Note 21 of the Notes to Consolidated Financial Statements for additional information on pension obligations.
(i) Represents agreements to purchase goods or services and includes commitments to various general contractors for work related to banking center construction.
(j) Commitments to extend credit are agreements to lend, typically having fixed expiration dates or other termination clauses that may require payment of a fee. Many of the commitments
to extend credit may expire without being drawn upon. The total commitment amounts do not necessarily represent future cash flow requirements. For additional information, see
Note 16 of the Notes to Consolidated Financial Statements.
(k) Letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. For additional information, see Note 16 of the Notes to
Consolidated Financial Statements.
Fifth Third Bancorp 61
MANAGEMENT’S ASSESSMENT AS TO THE EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING
The Bancorp conducted an evaluation, under the supervision and with the participation of the Bancorp’s management, including the
Bancorp’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Bancorp’s disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act). Based on the foregoing, as of the
end of the period covered by this report, the Bancorp’s Chief Executive Officer and Chief Financial Officer concluded that the Bancorp’s
disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the
Bancorp files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required and information is
accumulated and communicated to management on a timely basis.
The management of Fifth Third Bancorp is responsible for establishing and maintaining adequate internal control, designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of America. The Bancorp’s management assessed the
effectiveness of the Bancorp’s internal control over financial reporting as of December 31, 2009. Management’s assessment is based on the
criteria established in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and was designed to provide reasonable assurance that the Bancorp maintained effective internal control over financial reporting
as of December 31, 2009. Based on this assessment, management believes that the Bancorp maintained effective internal control over financial
reporting as of December 31, 2009. The Bancorp’s independent registered public accounting firm, that audited the Bancorp’s consolidated
financial statements included in this annual report, has issued an audit report on our internal control over financial reporting as of December
31, 2009. This report appears on page 63 of the annual report.
The Bancorp’s management also conducted an evaluation of internal control over financial reporting to determine whether any changes
occurred during the year covered by this report that have materially affected, or are reasonably likely to materially affect, the Bancorp’s internal
control over financial reporting. Based on this evaluation, there has been no such change during the year covered by this report.
Kevin T. Kabat
President and Chief Executive Officer
February 26, 2010
Daniel T. Poston
Executive Vice President and Chief Financial Officer
February 26, 2010
62 Fifth Third Bancorp
To the Shareholders and Board of Directors of Fifth Third Bancorp:
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the internal control over financial reporting of Fifth Third Bancorp and subsidiaries (the “Bancorp”) as of December 31, 2009,
based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Bancorp's management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment as to the Effectiveness
of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Bancorp's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal
executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009,
based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended December 31, 2009 of the Bancorp and our report dated February 26, 2010
expressed an unqualified opinion on those consolidated financial statements.
Cincinnati, Ohio
February 26, 2010
To the Shareholders and Board of Directors of Fifth Third Bancorp:
We have audited the accompanying consolidated balance sheets of Fifth Third Bancorp and subsidiaries (the “Bancorp”) as of December 31,
2009 and 2008, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2009. These consolidated financial statements are the responsibility of the Bancorp's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fifth Third Bancorp
and subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Bancorp’s
internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2010 expressed an unqualified
opinion on the Bancorp's internal control over financial reporting.
Cincinnati, Ohio
February 26, 2010
Fifth Third Bancorp 63
CONSOLIDATED BALANCE SHEETS
2009
2008
$2,318
18,213
355
355
3,369
2,067
2,739
12,728
360
1,191
3,578
1,452
29,197
12,502
5,114
3,666
9,385
12,752
8,594
1,811
1,122
84,143
(2,787)
81,356
2,494
463
2,624
168
499
10,112
119,764
25,683
11,803
3,784
3,535
8,035
12,174
8,995
1,990
780
76,779
(3,749)
73,030
2,400
499
2,417
106
700
7,551
$113,380
As of December 31 ($ in millions, except share data)
Assets
Cash and due from banks
Available-for-sale and other securities (a)
Held-to-maturity securities (b)
Trading securities
Other short-term investments
Loans held for sale (c)
Portfolio loans and leases:
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans (d)
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Portfolio loans and leases
Allowance for loan and lease losses
Portfolio loans and leases, net
Bank premises and equipment
Operating lease equipment
Goodwill
Intangible assets
Servicing rights
Other assets
Total Assets
Liabilities
Deposits:
Demand
Interest checking
Savings
Money market
Other time
Certificates - $100,000 and over
Foreign office and other
Total deposits
Federal funds purchased
Other short-term borrowings
Accrued taxes, interest and expenses
Other liabilities
Long-term debt
Total Liabilities
Shareholders’ Equity
Common stock (e)
Preferred stock (f)
Capital surplus (g)
Retained earnings
Accumulated other comprehensive income
Treasury stock
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
(a) Amortized cost of $17,879 and $12,550 at December 31, 2009 and 2008, respectively.
(b) Fair value of $355 and $360 at December 31, 2009 and 2008, respectively.
(c) Includes $1,470 and $881 of residential mortgage loans held for sale measured at fair value at December 31, 2009 and 2008, respectively.
(d) Includes $26 and $7 of residential mortgage loans measured at fair value at December 31, 2009 and 2008, respectively.
(e) Common shares: Stated value $2.22 per share; authorized 2,000,000,000; outstanding at December 31, 2009 – 795,068,164 (excludes 6,436,024 treasury shares) and December 31,
$15,287
14,222
16,063
4,689
14,350
11,851
2,151
78,613
287
9,959
2,029
3,214
13,585
107,687
$19,411
19,935
17,898
4,431
12,466
7,700
2,464
84,305
182
1,415
773
2,701
10,507
99,883
1,779
3,609
1,743
6,326
241
(201)
13,497
$113,380
1,295
4,241
848
5,824
98
(229)
12,077
119,764
2008 – 577,386,612 (excludes 6,040,492 treasury shares).
(f) 317,680 shares of undesignated no par value preferred stock are authorized of which none had been issued; 5.0% cumulative Series F perpetual preferred stock with a $25,000
liquidation preference: 136,320 issued and outstanding at December 31, 2009 and December 31, 2008; 8.5% non-cumulative Series G convertible (into 2,159.8272 common shares)
perpetual preferred stock with a $25,000 liquidation preference: 46,000 authorized, 16,451 and 44,300 issued and outstanding at December 31, 2009 and December 31, 2008,
respectively.
(g) Includes ten-year warrants initially valued at $239 to purchase up to 43,617,747 shares of common stock, no par value, related to Series F preferred stock, at an initial exercise price
of $11.72 per share.
See Notes to Consolidated Financial Statements.
64 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ in millions, except per share data)
Interest Income
Interest and fees on loans and leases
Interest on securities
Interest on other short-term investments
Total interest income
Interest Expense
Interest on deposits
Interest on other short-term borrowings
Interest on long-term debt
Total interest expense
Net Interest Income
Provision for loan and lease losses
Net Interest Income (Loss) After Provision for Loan and Lease Losses
Noninterest Income
Service charges on deposits
Card and processing revenue
Mortgage banking net revenue
Corporate banking revenue
Investment advisory revenue
Gain on sale of processing business
Other noninterest income
Securities gains (losses), net
Securities gains - non-qualifying hedges on mortgage servicing rights
Total noninterest income
Noninterest Expense
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Card and processing expense
Technology and communications
Equipment expense
Goodwill impairment
Other noninterest expense
Total noninterest expense
Income (Loss) Before Income Taxes
Applicable income tax expense (benefit)
Net Income (Loss)
Dividends on preferred stock
Net Income (Loss) Available to Common Shareholders
Earnings Per Share
Earnings Per Diluted Share
See Notes to Consolidated Financial Statements.
2009
2008
2007
$3,934
733
1
4,668
4,935
660
13
5,608
5,418
590
19
6,027
953
43
318
1,314
3,354
3,543
(189)
1,289
248
557
2,094
3,514
4,560
(1,046)
2,007
324
687
3,018
3,009
628
2,381
632
615
553
399
299
1,758
479
(10)
57
4,782
641
912
199
444
353
-
363
(86)
120
2,946
1,339
311
308
193
181
123
-
1,371
3,826
767
30
1,337
278
300
274
191
130
965
1,089
4,564
(2,664)
(551)
989
3,311
1,537
461
737 (2,113) 1,076
1
1,075
1.99
1.98
67
(2,180)
(3.91)
(3.91)
226
$511
$0.73
$0.67
579
826
133
367
382
-
153
21
6
2,467
1,239
278
269
244
169
123
-
Fifth Third Bancorp 65
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Common Preferred Capital
Surplus
Stock
9
$1,295
Stock
1,812
Accumulated
Other
Retained Comprehensive Treasury
Stock
Income (Loss)
Earnings
(1,232)
(179)
8,317
1,076
($ in millions, except per share data)
Balance at December 31, 2006
Net income
Other comprehensive income
Comprehensive income
Cash dividends declared:
Common stock at $1.70 per share
Preferred stock
Shares acquired for treasury
Stock-based compensation expense
Impact of cumulative effect of change in accounting principle
Restricted stock grants
Stock-based awards exercised, including treasury shares issued
Loans repaid related to the exercise of stock-based awards, net
Change in corporate tax benefit related to stock-based
compensation
1,295
Employee stock ownership through benefit plans
Impact of diversification of nonqualified deferred compensation plan
Other
Balance at December 31, 2007
Net loss
Other comprehensive income
Comprehensive loss
Cash dividends declared:
Common stock at $0.75 per share
Preferred stock
Dividends on redemption of preferred shares
Issuance of preferred shares, Series G
Issuance of preferred shares, Series F
Shares issued in business combinations
Retirement of preferred shares, Series D, E
Stock-based compensation expense
Restricted stock grants
Stock-based awards exercised, including treasury shares issued
Loans repaid related to the exercise of stock-based awards, net
Change in corporate tax benefit related to stock-based
1,072
3,169
(9)
compensation
Other
Balance at December 31, 2008
Net income
Other comprehensive income
Comprehensive income
Cash dividends declared:
Common stock at $0.04 per share
Preferred stock
Accretion of preferred dividends, Series F
Issuance of common shares
Dividends on exchange of preferred shares, Series G
Exchange of preferred shares, Series G
Stock-based compensation expense
Restricted stock grants
Stock-based awards exercised, including treasury shares issued
Change in corporate tax benefit related to stock-based
compensation
Reversal of OTTI
Other
Balance at December 31, 2009
$1,295
4,241
41
(674)
351
133
$1,779
1
3,609
See Notes to Consolidated Financial Statements.
66 Fifth Third Bancorp
60
(59)
(39)
2
2
1
1,779
9
239
(1,071)
56
(136)
(2)
4
(16)
(5)
848
635
272
46
(27)
1
(29)
(3)
1,743
53
(1,084)
59
86
(38)
(126)
(2,209)
224
98
143
1,841
136
2
1
(229)
27
(1)
241
2
(201)
(914)
(1)
1
(98)
38
(8)
2
8,413
(2,113)
(413)
(48)
(19)
1
3
5,824
737
(29)
(220)
(41)
35
(1)
24
(3)
6,326
Total
10,022
1,076
53
1,129
(914)
(1)
(1,084)
61
(98)
-
47
2
2
-
(8)
3
9,161
(2,113)
224
(1,889)
(413)
(48)
(19)
1,072
3,408
770
(9)
57
-
-
4
(16)
(1)
12,077
737
143
880
(29)
(220)
-
986
35
(269)
45
-
-
(29)
24
(3)
13,497
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 ($ in millions)
Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for loan and lease losses
Depreciation, amortization and accretion
Stock-based compensation expense
Provision (benefit) for deferred income taxes
Realized securities gains
Realized securities gains - non-qualifying hedges on mortgage servicing rights
Realized securities losses
Realized securities losses - non-qualifying hedges on mortgage servicing rights
Provision for mortgage servicing rights
Net losses (gains) on sales of loans
Capitalized mortgage servicing rights
Loss on recalculation of the timing of tax benefits on leveraged leases
Impairment charges on goodwill
Loans originated for sale, net of repayments
Proceeds from sales of loans held for sale
Decrease in trading securities
Gain on sale of processing business, net of tax
Dividends representing return on equity method investments
Decrease (increase) in other assets
(Decrease) increase in accrued taxes, interest and expenses
Excess tax benefit related to stock-based compensation
Increase (decrease) in other liabilities
Net Cash Provided by (Used In) Operating Activities
Investing Activities
Proceeds from sales of available-for-sale securities
Proceeds from calls, paydowns and maturities of available-for-sale securities
Purchases of available-for-sale securities
Proceeds from calls, paydowns and maturities of held-to-maturity securities
Purchases of held-to-maturity securities
Decrease (increase) in other short-term investments
Net decrease (increase) in loans and leases
Proceeds from sales of loans
Increase in operating lease equipment
Purchases of bank premises and equipment
Proceeds from disposal of bank premises and equipment
Dividends representing return of equity method investments
Proceeds from sale of processing business
Net cash (paid) acquired in business combinations
Net Cash Provided by (Used In) Investing Activities
Financing Activities
Increase (decrease) in core deposits
(Decrease) increase in certificates - $100,000 and over, including other foreign office
(Decrease) increase in federal funds purchased
(Decrease) increase in other short-term borrowings
Proceeds from issuance of long-term debt
Repayment of long-term debt
Purchases of treasury stock
Issuance of common shares
Issuance of preferred shares, Series G, F
Exchange of preferred shares, Series G
Dividends on exchange of preferred shares, Series G
Payment of cash dividends
Retirement of preferred shares, Series D, E
Dividends on redemption of preferred shares, Series D, E
Exercise of stock-based awards, net
Excess tax benefit related to stock-based compensation
Other, net
Net Cash (Used In) Provided by Financing Activities
(Decrease) Increase in Cash and Due from Banks
Cash and Due from Banks at Beginning of Year
Cash and Due from Banks at End of Year
Cash Payments
Interest
Income taxes
See Notes to Consolidated Financial Statements. Note 2 contains noncash investing and financing activities.
2009
$737
3,543
341
45
184
(27)
(64)
37
7
24
60
(373)
-
-
(22,196)
21,504
1,000
(1,052)
22
826
(1,200)
-
376
3,794
3,750
117,901
(126,942)
3
-
209
5,497
331
(75)
(173)
20
9
562
(16)
1,076
9,550
(4,159)
(104)
(8,544)
527
(3,065)
(2)
986
-
(269)
35
(247)
-
-
-
-
1
(5,291)
(421)
2,739
$2,318
2008
(2,113)
4,560
8
57
(1,140)
(41)
(120)
127
-
207
(47)
(195)
130
965
(11,527)
11,273
134
-
13
(478)
925
-
355
3,093
7,226
67,883
(76,317)
3
(11)
(2,910)
(6,553)
5,216
(142)
(410)
34
11
-
66
(5,904)
(2,820)
1,927
(4,352)
4,478
2,157
(2,272)
-
-
4,480
-
-
(687)
(9)
(19)
4
-
3
2,890
79
2,660
2,739
2007
1,076
628
367
61
(178)
(16)
(6)
2
-
22
112
(207)
-
-
(13,125)
11,027
16
-
14
53
194
(4)
(741)
(705)
2,071
13,468
(15,541)
11
(11)
224
(6,181)
745
(172)
(459)
46
19
-
(230)
(6,010)
2,225
2,101
3,006
1,951
4,801
(5,494)
(1,084)
-
-
-
-
(898)
-
-
49
4
9
6,670
(45)
2,705
2,660
$1,416
109
2,053
416
2,996
535
Fifth Third Bancorp 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Nature of Operations
Fifth Third Bancorp (Bancorp), an Ohio corporation, conducts its
principal lending, deposit gathering, transaction processing and
service advisory activities through its banking and non-banking
subsidiaries from banking centers
the
Midwestern and Southeastern regions of the United States.
throughout
located
Basis of Presentation
The Consolidated Financial Statements include the accounts of
the Bancorp and its majority-owned subsidiaries and variable
interest entities in which the Bancorp has been determined to be
the primary beneficiary. Other entities, including certain joint
ventures, in which the Bancorp has the ability to exercise
significant influence over operating and financial policies of the
investee, but upon which the Bancorp does not possess control,
are accounted for by the equity method and not consolidated.
Those entities in which the Bancorp does not have the ability to
exercise significant influence are generally carried at the lower of
cost or fair value. Intercompany transactions and balances have
been eliminated. Certain prior period data has been reclassified to
conform to current period presentation. The Bancorp has
evaluated subsequent events through February 26, 2010, the date
to
of
determine if either recognition or disclosure of significant events
or transactions is required.
the Consolidated Financial Statements,
issuance of
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (U.S. GAAP) requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ
from those estimates.
as
are
classified
available-for-sale when,
Securities
Securities are classified as held-to-maturity, available-for-sale or
trading on the date of purchase. Only those securities which
management has the intent and ability to hold to maturity are
classified as held-to-maturity and reported at amortized cost.
Securities
in
management’s judgment, they may be sold in response to, or in
anticipation of, changes in market conditions. Securities are
classified as trading when bought and held principally for the
purpose of selling them in the near term. Available-for-sale and
trading securities are reported at fair value with unrealized gains
and losses, net of related deferred income taxes, included in other
comprehensive income and noninterest income, respectively. The
fair value of a security is determined based on quoted market
prices. If quoted market prices are not available, fair value is
determined based on quoted prices of similar instruments or
discounted cash flow models that incorporate market inputs and
assumptions including discount rates, prepayment speeds, and loss
rates. Realized securities gains or losses are reported within
noninterest income in the Consolidated Statements of Income.
The cost of securities sold is based on the specific identification
method.
securities
Available-for-sale
and held-to-maturity
are
reviewed quarterly for possible other-than-temporary impairment
(OTTI). For debt securities, if the Bancorp intends to sell the debt
security or will more likely than not be required to sell the debt
security before recovery of the entire amortized cost basis, then an
OTTI has occurred. However, even if the Bancorp does not
intend to sell the debt security and will not likely be required to
sell the debt security before recovery of its entire amortized cost
basis, the Bancorp must evaluate expected cash flows to be
received and determine if a credit loss has occurred. In the event
of a credit loss, the credit component of the impairment is
the non-credit
recognized within noninterest
income and
68 Fifth Third Bancorp
is
through
recognized
accumulated
component
other
comprehensive income. For equity securities, the Bancorp's
management evaluates the securities in an unrealized loss position
in the available-for-sale portfolio for OTTI on the basis of the
duration of the decline in value of the security and severity of that
decline as well as the Bancorp’s intent and ability to hold these
securities for a period of time sufficient to allow for any
anticipated recovery in the market value. If it is determined that
the impairment on an equity security is other than temporary, an
impairment loss equal to the difference between the carrying value
of the security and its fair value is recognized within noninterest
income.
loans
interest
income for commercial
Loans and Leases
Interest income on loans and leases is based on the principal
balance outstanding computed using the effective interest method.
The accrual of
is
discontinued when there is a clear indication that the borrower’s
cash flow may not be sufficient to meet payments as they become
due. Such loans are also placed on nonaccrual status when the
principal or interest is past due ninety days or more, unless the
loan is both well secured and in the process of collection. When a
loan is placed on nonaccrual status, all previously accrued and
unpaid interest is charged against income and the loan is
accounted for on either the cost recovery or cash basis method
thereafter, until qualifying for return to accrual status. Generally, a
loan is returned to accrual status when all delinquent interest and
principal payments become current in accordance with the terms
of the loan agreement or when the loan is both well secured and
in the process of collection. Consumer loans and revolving lines
of credit for equity lines that have principal and interest payments
that have become past due one hundred and twenty days and
residential mortgage loans and credit cards that have principal and
interest payments that have become past due one hundred and
eighty days are charged off to the allowance for loan and lease
losses. Commercial loans above a specified threshold are subject
identify charge-offs. Refer to the
to
Allowance for Loan and Lease Losses section for further
discussion.
individual review to
A loan is accounted for as a troubled debt restructuring if the
Bancorp, for economic or legal reasons related to the borrower's
financial difficulties, grants a concession to the borrower that it
would not otherwise consider. A troubled debt restructuring
typically involves a modification of terms such as a reduction of
the stated interest rate or face amount of the loan, a reduction of
accrued interest, or an extension of the maturity date(s) at a stated
interest rate lower than the current market rate for a new loan
with similar risk. The Bancorp measures the impairment loss of a
troubled debt restructuring based on the difference between the
original loan’s carrying amount and the present value of expected
future cash flows discounted at the original effective yield of the
loan. Beginning with the first quarter of 2009, based on published
guidance with respect to troubled debt restructurings from certain
banking regulators and to conform to general practices within the
banking industry, the Bancorp determined it was appropriate to
maintain consumer loans modified as part of a troubled debt
restructuring on accrual status, provided there is reasonable
assurance of repayment and of performance according to the
modified terms based upon a current, well-documented credit
evaluation. Management believes this policy is reflective of recent
regulatory guidance and provides better comparability to other
financial institutions. Troubled debt restructurings on commercial
loans remain on nonaccrual status until a six-month payment
history is sustained. During the nonaccrual period, troubled debt
restructurings on commercial loans are accounted for using the
cash basis method, provided that full repayment of principal
under the modified terms of the loan is reasonably assured.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loan and lease origination and commitment fees and direct
loan and lease origination costs are deferred and the net amount is
amortized over the estimated life of the related loans, leases or
commitments as a yield adjustment.
Direct financing leases are carried at the aggregate of lease
payments plus estimated residual value of the leased property, less
unearned income. Interest income on direct financing leases is
recognized over the term of the lease to achieve a constant
periodic rate of return on the outstanding investment. Interest
income on leveraged leases is recognized over the term of the
lease to achieve a constant rate of return on the outstanding
investment in the lease, net of the related deferred income tax
liability, in the years in which the net investment is positive.
Conforming fixed rate residential mortgage loans are typically
classified as held for sale upon origination based upon
management’s intent to sell all the production of these loans. The
Bancorp has elected to measure residential mortgage loans held
for sale under the fair value option as allowed under U.S. GAAP.
Management’s intent to sell residential mortgage loans classified as
held for sale may change over time due to such factors as changes
in the overall liquidity in markets or changes in characteristics
specific to certain loans held for sale. Consequently, these loans
may be reclassified to loans held for investment and maintained in
the Bancorp’s loan portfolio. In such cases, the loans will continue
to be measured at fair value. All other loans held for sale continue
to be valued at the lower of cost or market. For residential
mortgage loans held for sale, fair value is estimated based upon
mortgage-backed securities prices and spreads to those prices or,
loans, discounted cash flow models that may
for certain
incorporate the anticipated portfolio composition, credit spreads
of asset-backed securities with similar collateral, and market
conditions. These fair value marks are recorded to income in
mortgage banking net revenue. The Bancorp generally has
commitments to sell residential mortgage loans held for sale in the
secondary market. Gains or losses on sales are recognized in
mortgage banking net revenue upon delivery.
Impaired loans and leases are measured based on the present
value of expected future cash flows discounted at the loan’s
effective interest rate, the fair value of the underlying collateral or
readily observable secondary market values. The Bancorp
evaluates the collectibility of both principal and interest when
assessing the need for a loss accrual.
Other Real Estate Owned
Other real estate owned (OREO), which is included in other
assets, represents property acquired through foreclosure or other
proceedings. OREO is carried at the lower of cost or fair value,
less costs to sell. All property is periodically evaluated and
decreases in carrying value are recognized as reductions in other
noninterest income in the Consolidated Statements of Income.
Allowance for Loan and Lease Losses
The Bancorp maintains an allowance to absorb probable loan and
lease losses inherent in the portfolio. The allowance is maintained
at a level the Bancorp considers to be adequate and is based on
ongoing quarterly assessments and evaluations of the collectibility
and historical loss experience of loans and leases. Credit losses are
charged and recoveries are credited to the allowance. Provisions
for loan and lease losses are based on the Bancorp’s review of the
historical credit
in
management’s judgment, deserve consideration under existing
economic conditions in estimating probable credit losses. In
determining the appropriate level of the allowance, the Bancorp
estimates
losses using a range derived from “base” and
“conservative” estimates. The Bancorp's strategy for credit risk
management includes a combination of conservative exposure
limits significantly below legal lending limits and conservative
underwriting, documentation and collections standards. The
strategy also emphasizes diversification on a geographic, industry
loss experience and such factors that,
and customer level, regular credit examinations and quarterly
management reviews of
loans
experiencing deterioration of credit quality.
large credit exposures and
Larger commercial loans that exhibit probable or observed
individual review. When
credit weaknesses are subject to
individual loans are impaired, allowances are determined based on
management’s estimate of the borrower’s ability to repay the loan
given the availability of collateral, other sources of cash flow, as
well as evaluation of legal options available to the Bancorp. Any
allowances for impaired loans are measured based on the present
value of expected future cash flows discounted at the loan’s
effective interest rate, fair value of the underlying collateral or
readily observable secondary market values. The Bancorp
evaluates the collectibility of both principal and interest when
assessing the need for a loss accrual. Historical credit loss rates
are applied to commercial loans that are not impaired or are
impaired, but smaller than an established threshold and thus not
subject to individual review. The loss rates are derived from a
migration analysis, which tracks the historical net charge-off
experience sustained on loans according to their internal risk
grade. The risk grading system currently utilized for allowance
analysis purposes encompasses ten categories.
Homogenous loans and leases, such as consumer installment,
revolving and residential mortgage loans, are not individually risk
graded. Rather, standard credit scoring systems and delinquency
monitoring are used to assess credit risks. Allowances are
established for each pool of loans based on the expected net
charge-offs. Loss rates are based on the average net charge-off
history by loan category. Historical loss rates for commercial and
consumer loans may be adjusted for significant factors that, in
management’s judgment, are necessary to reflect losses inherent in
the portfolio. Factors that management considers in the analysis
include the effects of the national and local economies; trends in
the nature and volume of delinquencies, charge-offs and
nonaccrual loans; changes in loan mix; credit score migration
comparisons; asset quality trends; risk management and loan
administration; changes in the internal lending policies and credit
standards; collection practices; and examination results from bank
regulatory agencies and the Bancorp’s internal credit examiners.
specified
The Bancorp’s current methodology for determining the
allowance for loan and lease losses is based on historical loss rates,
current credit grades, specific allocation on impaired commercial
thresholds and other qualitative
credits above
adjustments. Allowances on individual loans and historical loss
rates are reviewed quarterly and adjusted as necessary based on
changing borrower and/or collateral conditions and actual
collection and charge-off experience. An unallocated allowance is
maintained to recognize the imprecision in estimating and
measuring losses when evaluating allowances for individual loans
or pools of loans.
Loans acquired by the Bancorp through a purchase business
combination are evaluated for possible credit impairment at
acquisition. Reductions to the carrying value of the acquired loans
as a result of credit impairment are recorded as an adjustment to
goodwill. The Bancorp does not carry over the acquired
company’s allowance for loan and lease losses, nor does the
Bancorp add to its existing allowance for the acquired loans as
part of purchase accounting.
The Bancorp’s primary market areas for lending are the
Midwestern and Southeastern regions of the United States. When
evaluating the adequacy of allowances, consideration is given to
the closely
these
associated effect changing economic conditions have on the
Bancorp’s customers.
regional geographic concentrations and
In the current year, the Bancorp has not substantively
changed any material aspect to its overall approach to determining
its allowance for loan and lease losses. There have been no
material changes in criteria or estimation techniques as compared
Fifth Third Bancorp 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to prior periods that impacted the determination of the current
period allowance for loan and lease losses.
Reserve for Unfunded Commitments
The reserve for unfunded commitments is maintained at a level
believed by management to be sufficient to absorb estimated
probable losses related to unfunded credit facilities and is included
in other liabilities in the Consolidated Balance Sheets. The
determination of the adequacy of the reserve is based upon an
evaluation of
including an
the unfunded credit facilities,
assessment of historical commitment utilization experience, credit
risk grading and credit grade migration. Net adjustments to the
reserve for unfunded commitments are
in other
noninterest expense in the Consolidated Statements of Income.
included
Loan Sales and Securitizations
When the Bancorp sells loans through either securitizations or
individual loan sales in accordance with its investment policies, it
may obtain one or more subordinated tranches, servicing rights,
interest-only strips, credit recourse, other residual interests and in
some cases, a cash reserve account, all of which are considered
interests that continue to be held by the Bancorp in the securitized
or sold loans. Gains or losses recognized on the sale or
securitization of the loans depend in part on the previous carrying
amount of the financial assets sold or securitized. At the date of
transfer, obtained servicing rights are recorded at fair value and
the remaining carrying value of the transferred financial assets is
allocated between the assets sold and remaining interests that
continue to be held by the Bancorp based on their relative fair
values at the date of sale or securitization. See the Accounting and
Reporting Developments section of this Note for further
discussion on developments in the accounting for transfers of
financial assets.
Interests that continue to be held by the Bancorp from
securitized or sold loans, excluding servicing rights, are carried at
fair value. To obtain fair value of such interests, quoted market
prices are used, if available. If quoted prices are not available, the
Bancorp calculates fair value based on the present value of future
expected cash flows using management’s best estimates for the
key assumptions, including credit losses, prepayment speeds,
forward yield curves and discount rates commensurate with the
risks involved. Gain or loss on sale or securitization of loans is
reported as a component of noninterest
the
Consolidated Statements of Income. Adjustments to fair value for
interests that continue to be held by the Bancorp classified as
available-for-sale securities are included in accumulated other
comprehensive income in the Consolidated Balance Sheets or in
noninterest income in the Consolidated Statements of Income if
the fair value has declined below the carrying amount and such
decline has been determined
to be other-than-temporary.
Adjustments to fair value for interests that continue to be held by
the Bancorp classified as trading securities are recorded within
other noninterest income in the Consolidated Statements of
Income.
income
in
Servicing rights resulting from residential mortgage and
commercial loan sales are initially recorded at fair value and
subsequently amortized in proportion to and over the period of
estimated net servicing revenues and are reported as a component
of mortgage banking net revenue and corporate banking revenue,
respectively, in the Consolidated Statements of Income. Servicing
rights are assessed for impairment monthly, based on fair value,
with temporary impairment recognized through a valuation
allowance and permanent impairment recognized through a write-
off of the servicing asset and related valuation allowance. Key
economic assumptions used
in measuring any potential
impairment of the servicing rights include the prepayment speeds
of the underlying loans, the weighted-average life, the discount
rate, the weighted-average coupon and the weighted-average
default rate, as applicable. The primary risk of material changes to
70 Fifth Third Bancorp
the value of the servicing rights resides in the potential volatility in
the economic assumptions used, particularly the prepayment
speeds. The Bancorp monitors risk and adjusts its valuation
allowance as necessary to adequately reserve for impairment in the
servicing portfolio. For purposes of measuring impairment, the
mortgage servicing rights are stratified into classes based on the
financial asset type (fixed-rate vs. adjustable-rate) and interest
rates. Fees received for servicing loans owned by investors are
based on a percentage of the outstanding monthly principal
balance of such loans and are included in noninterest income in
the Consolidated Statements of Income as loan payments are
received. Costs of servicing loans are charged to expense as
incurred.
Bank Premises and Equipment
Bank premises and equipment, including leasehold improvements,
are carried at cost less accumulated depreciation and amortization.
Depreciation is calculated using the straight-line method based on
estimated useful lives of the assets for book purposes, while
income tax purposes.
is used for
accelerated depreciation
Amortization of leasehold improvements is computed using the
straight-line method over the lives of the related leases or useful
lives of the related assets, whichever is shorter. The Bancorp tests
its long-lived assets for impairment through both a probability-
weighted and primary-asset approach whenever events or changes
in circumstances dictate. Maintenance, repairs and minor
improvements are charged to noninterest expense
in the
Consolidated Statements of Income as incurred.
the Bancorp designates
Derivative Financial Instruments
The Bancorp accounts for its derivatives as either assets or
through adjustments
liabilities measured at fair value
to
accumulated other comprehensive
income and/or current
earnings, as appropriate. On the date the Bancorp enters into a
the derivative
derivative contract,
instrument as either a fair value hedge, cash flow hedge or as a
free-standing derivative instrument. For a fair value hedge,
changes in the fair value of the derivative instrument and changes
in the fair value of the hedged asset or liability or of an
unrecognized firm commitment attributable to the hedged risk are
recorded in current period net income. For a cash flow hedge,
changes in the fair value of the derivative instrument, to the extent
that
in accumulated other
comprehensive income and subsequently reclassified to net
income in the same period(s) that the hedged transaction impacts
net income. For free-standing derivative instruments, changes in
fair values are reported in current period net income.
is effective, are
recorded
it
Prior to entering into a hedge transaction, the Bancorp
formally documents the relationship between hedging instruments
and hedged items, as well as the risk management objective and
strategy for undertaking various hedge transactions. This process
includes linking all derivative instruments that are designated as
fair value or cash flow hedges to specific assets or liabilities on the
balance sheet or to specific forecasted transactions, along with a
formal assessment at both inception of the hedge and on an
ongoing basis as to the effectiveness of the derivative instrument
in offsetting changes in fair values or cash flows of the hedged
item. If it is determined that the derivative instrument is not
highly effective as a hedge, hedge accounting is discontinued and
the adjustment to fair value of the derivative instrument is
recorded in net income.
Income Taxes
The Bancorp estimates income tax expense based on amounts
expected to be owed to the various tax jurisdictions in which the
Bancorp conducts business. On a quarterly basis, management
assesses the reasonableness of its effective tax rate based upon its
current estimate of the amount and components of net income,
tax credits and the applicable statutory tax rates expected for the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
full year. The estimated income tax expense is recorded in the
Consolidated Statements of Income.
Deferred income tax assets and liabilities are determined
using the balance sheet method and are reported in other assets
and accrued taxes, interest and expenses, respectively, in the
Consolidated Balance Sheets. Under this method, the net deferred
tax asset or liability is based on the tax effects of the differences
between the book and tax basis of assets and liabilities, and
reflects enacted changes in tax rates and laws. Deferred tax assets
are recognized to the extent they exist and are subject to a
valuation allowance based on management’s
judgment that
realization is more-likely-than-not. This analysis is performed on a
quarterly basis and includes an evaluation of all positive and
negative evidence to determine whether realization is more-likely-
than-not.
Accrued taxes represent the net estimated amount due to
taxing jurisdictions and are reported in accrued taxes, interest and
expenses in the Consolidated Balance Sheets. The Bancorp
evaluates and assesses the relative risks and appropriate tax
treatment of transactions and filing positions after considering
statutes, regulations, judicial precedent and other information and
maintains tax accruals consistent with its evaluation of these
relative risks and merits. Changes to the estimate of accrued taxes
occur periodically due to changes in tax rates, interpretations of
tax laws, the status of examinations being conducted by taxing
authorities and changes to statutory, judicial and regulatory
guidance that impact the relative risks of tax positions. These
changes, when they occur, can affect deferred taxes and accrued
taxes as well as the current period’s income tax expense and can
be significant to the operating results of the Bancorp. For
additional information on income taxes, see Note 20.
income available
Earnings Per Share
In accordance with U.S. GAAP, basic earnings per share is
computed by dividing net
to common
shareholders by the weighted-average number of shares of
common stock outstanding during the period. Earnings per
diluted share is computed by dividing adjusted net income
available to common shareholders by the weighted-average
number of shares of common stock and common stock
equivalents outstanding during the period. Dilutive common stock
equivalents represent
the assumed conversion of dilutive
convertible preferred stock and the exercise of dilutive stock-
based awards.
Goodwill
Business combinations entered into by the Bancorp typically
include the acquisition of goodwill. U.S. GAAP requires goodwill
to be tested for impairment at the Bancorp’s reporting unit level
on an annual basis, which for the Bancorp is September 30, and
more frequently if events or circumstances indicate that there may
be impairment. The Bancorp has determined that its segments
qualify as reporting units under U.S. GAAP. Impairment exists
when a reporting unit’s carrying amount of goodwill exceeds its
implied fair value, which is determined through a two-step
impairment test. The first step (Step 1) compares the fair value of
a reporting unit with its carrying amount, including goodwill. If
the carrying amount of the reporting unit exceeds its fair value,
the second step (Step 2) of the goodwill impairment test is
performed to measure the impairment loss amount, if any.
The fair value of a reporting unit is the price that would be
received to sell the unit as a whole in an orderly transaction
between market participants at the measurement date. Since none
of the Bancorp’s reporting units are publicly traded, individual
reporting unit fair value determinations cannot be directly
correlated to the Bancorp’s stock price. To determine the fair
value of a reporting unit, the Bancorp employs an income-based
approach, utilizing the reporting unit’s forecasted cash flows
(including a terminal value approach to estimate cash flows
beyond the final year of the forecast) and the reporting unit’s
estimated cost of equity as the discount rate. Additionally, the
Bancorp determines its market capitalization based on the average
of the closing price of the Bancorp's stock during the month
including the measurement date, incorporating an additional
control premium, and allocates this market-based fair value
measurement to the Bancorp's reporting units in order to
corroborate the results of the income approach.
When required to perform Step 2, the Bancorp compares the
implied fair value of a reporting unit’s goodwill with the carrying
amount of that goodwill. If the carrying amount exceeds the
implied fair value, an impairment loss equal to that excess amount
is recognized. An impairment loss recognized cannot exceed the
carrying amount of that goodwill and cannot be reversed even if
the fair value of the reporting unit recovers.
During Step 2, the Bancorp determines the implied fair value
of goodwill for a reporting unit by assigning the fair value of the
reporting unit to all of the assets and liabilities of that unit
(including any unrecognized intangible assets) as if the reporting
unit had been acquired in a business combination. The excess of
the fair value of the reporting unit over the amounts assigned to
its assets and liabilities is the implied fair value of goodwill. This
assignment process is only performed for purposes of testing
goodwill for impairment. The Bancorp does not adjust the
carrying values of recognized assets or liabilities (other than
goodwill, if appropriate), nor recognize previously unrecognized
intangible assets in the Consolidated Financial Statements as a
result of this assignment process. Refer to Note 9 for further
information regarding the Bancorp’s goodwill.
Other
Securities and other property held by Fifth Third Investment
Advisors, a division of the Bancorp’s banking subsidiary, in a
fiduciary or agency capacity are not included in the Consolidated
Balance Sheets because such items are not assets of the
subsidiaries. Investment advisory revenue in the Consolidated
Statements of Income is recognized on the accrual basis.
Investment advisory service revenues are recognized monthly
based on a fee charged per transaction processed and/or a fee
charged on the market value of average account balances
associated with individual contracts.
The Bancorp recognizes revenue from
its card and
processing services on an accrual basis as such services are
performed, recording revenues net of certain costs (primarily
interchange fees charged by credit card associations) not
controlled by the Bancorp.
The Bancorp purchases life insurance policies on the lives of
certain directors, officers and employees and is the owner and
beneficiary of the policies. The Bancorp invests in these policies,
known as BOLI, to provide an efficient form of funding for long-
term retirement and other employee benefits costs. The Bancorp
records
the
these BOLI policies within other assets
Consolidated Balance Sheets at each policy’s respective cash
surrender value, with changes recorded in other noninterest
income in the Consolidated Statements of Income.
in
Other intangible assets consist of core deposit intangibles,
lists, non-competition agreements and cardholder
customer
relationships. Other intangibles are amortized on either a straight-
line or an accelerated basis over their useful lives. The Bancorp
reviews other intangible assets for impairment whenever events or
changes in circumstances indicate that carrying amounts may not
be recoverable.
Acquisitions of treasury stock are carried at cost. Reissuance
of shares in treasury for acquisitions, exercises of stock-based
awards or other corporate purposes is recorded based on the
specific identification method.
Advertising costs are generally expensed as incurred.
Fifth Third Bancorp 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting and Reporting Developments
Business Combinations
In December 2007, the FASB issued amended guidance related to
accounting for business combinations. The amended guidance
retains the fundamental requirement that the acquisition method
of accounting (formerly referred to as purchase method) be used
for all business combinations and that an acquirer be identified for
each business combination. Under the amended guidance, the
acquirer is defined as the entity that obtains control of one or
more businesses in the business combination with the acquisition
date being the date that the acquirer achieves control. The
amended guidance requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in
the acquiree at the acquisition date, measured at their fair values.
The acquirer is generally required to recognize acquisition-related
costs and restructuring costs separately from the business
combination as period expenses. The Bancorp's adoption of the
FASB’s amended guidance for business combinations impacts the
accounting and reporting of business combinations for which the
acquisition date is on or after January 1, 2009.
Noncontrolling Interests
In December 2007, the FASB issued guidance establishing new
accounting and reporting standards that require the ownership
interests in subsidiaries held by parties other than the parent be
clearly identified, labeled, and presented in the consolidated
statement of financial position within equity, but separate from
the parent's equity. The new guidance also requires the amount of
consolidated net income attributable to the parent and to the
noncontrolling interest be clearly identified and presented on the
face of the consolidated statement of income. In addition, when a
subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary shall be initially measured at
fair value, with the gain or loss on the deconsolidation of the
subsidiary measured using the fair value of any noncontrolling
equity investment rather than the carrying amount of that retained
investment. The new guidance also clarifies that changes in a
parent's ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its
controlling financial interest. The guidance also includes expanded
disclosure requirements regarding the interests of the parent and
its noncontrolling interest. The adoption of this Update on
January 1, 2009 did not have a material impact on the Bancorp's
Consolidated Financial Statements. The Processing Business Sale
in June of 2009 was accounted for under this guidance. See Note
18 for further discussion.
Earnings Per Share
In June 2008, the FASB issued guidance stating that unvested
share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method described in
ASC Topic 260, “Earnings Per Share”. This guidance was
effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those years.
All prior-period earnings per share data presented has been
adjusted retrospectively to conform with the provisions of this
guidance.
Other-Than-Temporary Impairment
In April 2009, the FASB
issued guidance amending the
recognition and measurement guidance related to other-than-
temporary impairment (OTTI) for debt securities. This amended
guidance requires that an OTTI shall be recognized in earnings if
the Bancorp intends to sell the security or more likely than not
will be required to sell the security before recovery of its
72 Fifth Third Bancorp
amortized cost basis. If the Bancorp does not intend to sell the
security, and it is not likely that the Bancorp will be required to
sell the security before recovery of its cost basis, the amount
related to credit losses shall be recognized in earnings, and the fair
value adjustment related to all other factors shall be recorded in
other comprehensive income, net of applicable taxes. The
guidance was effective for interim and annual reporting periods
ending after June 15, 2009 and was required to be applied to
existing and new investments held by the Bancorp as of the
beginning of the interim period in which it was adopted. During
2008, the Bancorp recognized a pre-tax OTTI charge of $37
million ($24 million after tax) on certain bank trust preferred debt
securities classified as available-for-sale. In connection with its
adoption of this guidance, the Bancorp concluded that the decline
in fair value in 2008 and related OTTI on these trust preferred
debt securities was due to non-credit related factors. Therefore,
upon adoption of this guidance in the second quarter of 2009, the
Bancorp recognized an after-tax increase of $24 million to the
opening balance of retained earnings and a corresponding
decrease to accumulated other comprehensive income.
Determining Fair Value in Markets That Are Not Orderly
In April 2009, the FASB issued guidance on determining fair value
in markets that are not orderly. The guidance reiterates that fair
value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the
measurement date under current market conditions. This guidance
utilizes a two-step process to determine whether there has been a
significant decrease in the volume and level of activity for an asset
or liability when compared with normal market activity for the
asset or liability, and whether a transaction is not orderly. If it is
determined that there has been a significant decrease in the
volume and level of activity for the asset or liability in relation to
normal market activity for the asset or liability, transactions or
quoted prices may not be determinative of fair value. Accordingly,
further analysis of the transactions or quoted prices is needed, and
a significant adjustment to the transactions or quoted prices may
be necessary to estimate fair value. This guidance is effective for
interim and annual periods ending after June 15, 2009. The
Bancorp's adoption of this guidance in the second quarter of 2009
did not have a material impact on the Bancorp’s Consolidated
Financial Statements.
Subsequent Events
In May 2009, the FASB issued guidance which establishes general
standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are
issued. The guidance reflects the principles underpinning previous
subsequent event guidance in existing accounting literature and
U.S. Auditing Standards (AU) Section 560, “Subsequent Events”,
therefore the Bancorp’s adoption of this guidance on June 30,
2009 did not result in changes in the subsequent events that the
Bancorp reports either through recognition or disclosure in the
Bancorp's Consolidated Financial Statements.
FASB Accounting Standards Codification
In June 2009, the FASB issued an Accounting Standards Update
which amended the FASB Accounting Standards Codification
(ASC) for the issuance of Statement No. 168, “The FASB
Accounting Standards Codification and
the Hierarchy of
Generally Accepted Accounting Principles”. This Update
established the Codification as the single source of authoritative
U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the
SEC under authority of federal securities laws are also sources of
authoritative U.S. GAAP for SEC registrants. This Update was
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The Bancorp has
incorporated the disclosure requirements of this Update by
reference to the ASC
in these Notes to the Bancorp’s
Consolidated Financial Statements.
Transfers of Financial Assets
In June 2009, the FASB issued guidance amending the accounting
for the transfers of financial assets. This amended guidance
removes the concept of a “qualifying special-purpose entity”
(QSPE), changes the requirements for derecognizing financial
assets and measuring gains or losses on the sale of financial assets,
and requires additional disclosures about transfers of financial
assets and a transferor’s continuing involvement in transferred
financial assets. The amended guidance is effective for interim and
annual periods beginning after November 15, 2009, with early
adoption prohibited. The Bancorp’s implementation of the
amended guidance on January 1, 2010 will impact its structuring
of securitizations and other transfers of financial assets, including
guaranteed mortgage securitizations,
in order to meet the
amended sale treatment criteria under the new guidance. In
addition, see the discussion below regarding amended guidance on
the consolidation of variable interest entities and the impact on
the Bancorp's Consolidated Financial Statements for assets
previously transferred to QSPEs.
impact
that most significantly
Consolidation of Variable Interest Entities
In June 2009, the FASB issued guidance amending the accounting
for the consolidation of variable interest entities (VIEs). This new
guidance amends the methodology for determining the primary
beneficiary (and therefore consolidator) of a VIE and will require
such assessment to be performed on an ongoing basis. Under this
new guidance, the primary beneficiary of a VIE is defined as the
enterprise that has both (1) the power to direct activities of the
VIE
the VIE’s economic
performance, and (2) the obligation to absorb losses or right to
receive benefits from the VIE that could potentially be significant
to the VIE. Upon transition, if the Bancorp is required to
consolidate a VIE as a result of initial application of the amended
guidance, the Bancorp must initially measure the assets, liabilities,
and noncontrolling interest of the VIE at their carrying amounts,
defined as the amounts at which the assets, liabilities, and
noncontrolling interests would have been carried in the Bancorp’s
Consolidated Financial Statements when the Bancorp first met the
conditions to be the primary beneficiary under the amended
guidance. If determining the carrying amounts is not practical,
then the Bancorp shall measure the assets, liabilities, and
noncontrolling interests of the VIE at fair value on the date the
amended guidance first applies. Any difference between the
amounts added to the Bancorp’s Consolidated Balance Sheets and
the amounts of any previously recognized interests in the newly
consolidated entity must be recognized as a cumulative effect
adjustment to retained earnings. Due to the concurrent issuance
and effective date of the previously discussed amended guidance
for the transfers of financial assets and the removal of the QSPE
concept, the Bancorp was required to assess all VIEs, including
those formed as QSPEs in transfers that occurred prior to January
1, 2010, to determine whether the Bancorp is the primary
beneficiary of the entity under the amended guidance. The
Bancorp will also be required under the amended guidance to
provide additional disclosures about its involvement with VIEs,
any significant changes in risk exposure due to that involvement,
and how that involvement affects the Bancorp’s Consolidated
Financial Statements. The amended guidance is effective for
interim and annual periods beginning after November 15, 2009,
with early adoption prohibited.
The Bancorp previously transferred, subject to credit
recourse, certain primarily floating-rate, short-term, investment
grade commercial loans to an unconsolidated QSPE that is
wholly-owned by an independent third party. This QSPE issues
commercial paper and uses the proceeds to fund the acquisition of
commercial loans transferred to it by the Bancorp. In addition, the
Bancorp previously sold automobile and home equity loans,
isolated through the use of securitization trusts and conduits
formed as unconsolidated QSPEs, to facilitate the securitization
process. The Bancorp has determined that upon adoption of the
amended guidance for the transfers of financial assets and
consolidation of VIEs, it is the primary beneficiary of each of
these QSPEs and, therefore, is required to consolidate the entities
on January 1, 2010. The consolidation of these entities on January
1, 2010 will result in an increase in total assets of approximately
$1.3 billion, a negative adjustment of $1 million to accumulated
other comprehensive income and a negative cumulative effect
adjustment to retained earnings of $76 million. Additionally, the
impact of consolidating these entities will not have a material
effect on the Bancorp's regulatory capital ratios.
that
liabilities, clarifying
Measuring Liabilities at Fair Value
In August 2009, the FASB issued an Accounting Standards
Update which provides amendments to the Codification for the
fair value measurement of
in
circumstances in which a quoted price in an active market for the
identical liability is not available, a reporting entity is required to
measure fair value using either the quoted price of the identical
liability when traded as an asset, quoted prices for similar liabilities
or similar liabilities when traded as assets, or another valuation
technique that is consistent with ASC Topic 820, "Fair Value
Measurements and Disclosures". The amendments in this Update
also clarify that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction
that prevents the transfer of the liability. The amendments in this
Update also clarify that both a quoted price in an active market for
the identical liability at the measurement date and the quoted price
for the identical liability when traded as an asset in an active
market, when no adjustments to the quoted price of the asset are
required, are Level 1 fair value measurements. The guidance
provided in this Update is effective for the first reporting period
beginning after its issuance. The adoption of the amendments in
this Update on October 1, 2009 did not have a material impact on
the Bancorp’s Consolidated Financial Statements.
Fair Value of Alternative Investments
In September 2009, the FASB issued an Accounting Standards
Update applying to certain investments that do not have a readily
determinable fair value, commonly referred to as alternative
investments. Examples of these investees may include hedge
funds, private equity funds, real estate funds, venture capital
funds, offshore fund vehicles, and funds of funds. This Update
creates a practical expedient to measure the fair value on the basis
of the net asset value per share of the investment (or its
equivalent) determined as of the reporting entity's measurement
date. Therefore certain attributes, such as restrictions on
redemption, and transaction prices from principal-to-principal or
brokered transactions will not be considered in measuring the fair
value of the investment if the practical expedient is used. This
Update also requires disclosures by major category of investment
about the attributes of those investments, such as the nature of
any restrictions on the investor's ability to redeem its investments
at the measurement date, any unfunded commitments, and the
investment strategies of the investees. The amendments in this
Update are effective for interim and annual periods ending after
December 15, 2009. The adoption of this Update on December
31, 2009 did not have a material impact on the Bancorp’s
Consolidated Financial Statements.
Fifth Third Bancorp 73
2. SUPPLEMENTAL CASH FLOW INFORMATION
Noncash investing and financing activities are presented in the following table for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Transfers of portfolio loans to held-for-sale loans
Transfers of held-for-sale loans to portfolio loans
Transfers of portfolio loans to available-for-sale securities
Transfers of held-for-sale loans to trading securities
Transfers of portfolio loans to trading securities
Transfers of portfolio loans to other real estate owned
Noncash activities from acquisitions:
Fair value of tangible assets acquired
Goodwill and identifiable intangible assets acquired
Contingent consideration
Liabilities assumed
Common stock issued
2009
$45
47
-
136
-
377
2008
$532
1,692
430
268
92
303
2007
$1,982
782
-
-
-
142
7
13
(4)
-
-
4,368
1,194
-
(4,858)
(770)
2,446
297
-
(2,513)
-
3. BUSINESS COMBINATIONS AND ASSET ACQUISITIONS
First Charter
On June 6, 2008, the Bancorp acquired 100% of the outstanding
stock of First Charter, a full service financial
institution
headquartered
in Charlotte, North Carolina. First Charter
operated 57 branches in North Carolina and two in suburban
Atlanta, Georgia. The acquisition of First Charter expanded the
Bancorp's footprint into the Charlotte, North Carolina market and
strengthened the Bancorp's presence in Georgia.
Under the terms of the transaction, the Bancorp paid $31.00
share, or approximately $1.1 billion.
per First Charter
Consideration was paid in the form of approximately 70% Fifth
Third common stock and 30% cash. First Charter common stock
shareholders who received shares of Fifth Third common stock in
the merger received 1.7412 shares of Fifth Third common stock
for each share of First Charter common stock, resulting in the
issuance of 42.9 million shares of Fifth Third common stock. The
common stock issued to affect the transaction was valued at
$17.80 per share, the average closing price of the Bancorp’s
common stock on the five previous trading days ending on the
trading day immediately prior to the closing date.
The assets and liabilities of First Charter were recorded on
the Consolidated Balance Sheets at their respective fair values as
of the closing date. The results of First Charter's operations were
included in the Bancorp’s Consolidated Statements of Income
from the date of acquisition. In addition, the Bancorp realized
charges against its earnings for acquisition-related expenses of $17
million during 2008. The acquisition-related expenses consisted
primarily of consulting, marketing, travel and relocation, and other
costs associated with system conversions.
The transaction resulted in total intangible assets of $1.2
billion based upon the purchase price, the fair values of the
acquired assets and assumed liabilities and applicable purchase
accounting adjustments. Of this total intangibles amount, $56
million was allocated to core deposit intangibles, $9 million was
allocated to customer lists and $2 million was allocated to lease
intangibles. The remaining $1.1 billion of intangible assets was
recorded as goodwill, which is non-deductible for tax purposes.
The pro forma effect and the financial results of First Charter
included in the results of operations subsequent to the date of
acquisition were immaterial to the Bancorp’s financial condition
or the operating results for the periods presented.
R-G Crown
On November 2, 2007, the Bancorp acquired 100% of the
outstanding stock of R-G Crown Bank, FSB (Crown) from R&G
Financial Corporation (R&G Financial). Crown operated 30
in Augusta, Georgia. The
branches
in Florida and three
74 Fifth Third Bancorp
acquisition strengthened the Bancorp’s presence in the Greater
Orlando and Tampa Bay markets and also expanded its footprint
into the Jacksonville, Florida and Augusta, Georgia markets.
Under the terms of the transaction, the Bancorp paid $259
million to R&G Financial and assumed $50 million of trust
preferred securities. Additionally, Fifth Third Financial paid
approximately $16 million to R-G Crown Real Estate, LLC to
acquire land leased by Crown for certain branches. The assets and
liabilities of Crown were recorded on the Bancorp’s Consolidated
Balance Sheets at their respective fair values as of the closing date.
The results of Crown’s operations were included in the Bancorp’s
Consolidated Statements of Income from the date of acquisition.
In addition, the Bancorp realized charges against its earnings for
Crown acquisition-related expenses of $7 million in 2007 and $1
in 2008. The acquisition-related expenses consisted
million
primarily of marketing, consulting, travel, and other costs
associated with system conversions.
The transaction resulted in total intangible assets of $287
million based upon the purchase price, the fair values of the
acquired assets and assumed liabilities and applicable purchase
accounting adjustments. Of this total intangibles amount, $19
million was allocated to core deposit intangibles and the remaining
$268 million was recorded as goodwill. The tax deductible portion
of goodwill associated with the transaction was $249 million, with
the remaining $19 million non-deductible for tax purposes.
The pro forma effect of the financial results of Crown
included in the results of operations subsequent to the date of
acquisition were immaterial to the Bancorp’s financial condition
and operating results for the periods presented.
Other
On October 31, 2008, banking regulators declared Bradenton,
Florida-based Freedom Bank insolvent and the FDIC was named
receiver. The FDIC approved the assumption of all deposits by
the Bancorp, which approximated $257 million. The FDIC
retained substantially all of Freedom Bank's loan portfolio for
later disposition. As part of the asset acquisition, the Bancorp
recorded a core deposit intangible of $3 million.
On May 2, 2008, the Bancorp completed its purchase of nine
branches located in Atlanta, Georgia from First Horizon National
Corporation (First Horizon). Under terms of the deal, the
Bancorp acquired the nine branches and assumed the related
deposits of $114 million. First Horizon retained all loans held at
the branches. As part of the asset acquisition, the Bancorp
recorded a core deposit intangible of $1 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRICTIONS ON CASH AND DIVIDENDS
The Federal Reserve Bank requires banks to maintain minimum
average reserve balances. The amount of the reserve requirement
for the Bancorp was approximately $81 million and $406 million
at December 31, 2009 and 2008, respectively. Dividends paid by
the Bancorp are subject to various federal and state regulatory
limitations. The dividends paid by the Bancorp’s state chartered
bank are subject to regulations and limitations prescribed by the
appropriate state authority. Under these provisions, the Bancorp’s
state chartered bank was unable to pay a dividend at December
31, 2009, and the dividend limitation was $492 million at
December 31, 2008. The Bancorp’s nonbank subsidiaries are also
limited by certain federal and state statutory provisions and
regulations covering the amount of dividends that may be paid in
any given year. Based on retained earnings at December 31, 2009
and 2008, the dividend limitation of the Bancorp’s nonbank
subsidiaries under these provisions was $87 million and $50
million, respectively.
On December 31, 2008, the Bancorp sold approximately $3.4
billion in senior preferred stock and related warrants to the U.S.
Treasury under the terms of the Capital Purchase Program (CPP).
The terms include restrictions on common stock dividends, which
require the U.S. Treasury’s consent to increase common stock
dividends for a period of three years from the date of investment
unless the preferred shares are redeemed in whole or the U.S.
Treasury has transferred all of the preferred shares to a third
party. For the Bancorp, approval from the U.S. Treasury will be
required for common stock dividends in excess of $0.15 per share
of common stock. In addition, no dividends can be declared or
paid on the Bancorp’s common stock unless all accrued and
unpaid dividends have been paid on the preferred shares and
certain other outstanding securities.
5. SECURITIES
The following table provides the amortized cost, fair value and unrealized gains and losses for the major categories of the available-for-sale and
held-to-maturity securities portfolio as of December 31:
($ in millions)
Available-for-sale and other:
U.S. Treasury and
Government agencies
U.S. Government sponsored
agencies
Obligations of states and
political subdivisions
Agency mortgage-backed
securities
Other bonds, notes and
debentures
Other securities(a)
Total
Held-to-maturity:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
2009
2008
$464
2,143
240
11,074
2,541
1,417
$17,879
2
32
3
315
57
2
411
(8)
(33)
-
(7)
(29)
-
(77)
458
2,142
243
11,382
2,569
1,419
18,213
186
1,651
323
8,529
613
1,248
12,550
4
83
4
157
-
-
248
-
(4)
(1)
(5)
(43)
(17)
(70)
190
1,730
326
8,681
570
1,231
12,728
Obligations of states and
political subdivisions
Other debt securities
-
-
Total
-
(a) Other securities consist of FHLB and Federal Reserve Bank restricted stock holdings of $551 million and $342 million at December 31, 2009, respectively, and $545 million and $252 million
$350
5
$355
350
5
355
355
5
360
355
5
360
-
-
-
-
-
-
-
-
-
at December 31, 2008, respectively, that are carried at cost, and certain mutual fund holdings and equity security holdings.
For the years ended December 31, 2009, 2008 and 2007, gross
realized gains on the sale of available-for-sale securities were $91
million, $161 million and $28 million respectively while gross
realized losses were $34 million, $130 million and $1 million,
respectively.
At December 31, 2009 and 2008, securities with a fair value
of $14.2 billion and $9.2 billion, respectively, were pledged to
secure borrowings, public deposits, trust funds and for other
purposes as required or permitted by law.
The amortized cost and fair value of available-for-sale and held-to-maturity securities at December 31, 2009, by contractual maturity, are
shown in the following table:
($ in millions)
Debt securities: (a)
1,081
Under 1 year
1,560
1-5 years
2,773
5-10 years
11,380
Over 10 years
1,419
Other securities
Total
18,213
(a) Actual maturities may differ from contractual maturities when there exists a right to call or prepay obligations with or without call or prepayment penalties.
$1,079
1,519
2,766
11,098
1,417
$17,879
Fair Value
Available-for-Sale & Other
Amortized
Cost
Held-to-Maturity
Amortized
Cost
Fair Value
-
153
171
31
-
355
-
153
171
31
-
355
Fifth Third Bancorp 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides the fair value and gross unrealized losses on available-for-sale securities in an unrealized loss position, aggregated
by investment category and length of time the individual securities have been in a continuous unrealized loss position, as of December 31,
2009 and 2008:
($ in millions)
2009
U.S. Treasury and Government agencies
U.S. Government sponsored agencies
Obligations of states and political subdivisions
Agency mortgage-backed securities
Other bonds, notes and debentures
Other securities
Total
2008
U.S. Treasury and Government agencies
U.S. Government sponsored agencies
Obligations of states and political subdivisions
Agency mortgage-backed securities
Other bonds, notes and debentures
Other securities
Total
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$288
1,024
4
1,583
782
2
$3,683
$1
367
5
480
184
37
$1,074
(8)
(15)
-
(7)
(15)
-
(45)
-
(4)
(1)
(2)
(23)
(17)
(47)
1
347
3
-
108
-
459
1
-
3
876
81
2
963
-
(18)
-
-
(14)
-
(32)
-
-
-
(3)
(20)
-
(23)
289
1,371
7
1,583
890
2
4,142
2
367
8
1,356
265
39
2,037
(8)
(33)
-
(7)
(29)
-
(77)
-
(4)
(1)
(5)
(43)
(17)
(70)
The Bancorp’s management has evaluated the securities in an
unrealized loss position in the available-for-sale and held-to-
maturity portfolios on the basis of both the duration of the decline
in value of the security and the severity of that decline, and
maintains the intent and ability to hold these securities to the
earlier of the recovery of the loss or maturity. At December 31,
2009 and 2008, two percent and 26%, respectively, of unrealized
losses in the available-for-sale securities portfolio were represented
by non-rated securities.
Trading securities were $355 million as of December 31, 2009
compared to $1.2 billion at December 31, 2008. Gross realized
gains and losses on trading securities were approximately $1 million
and $2 million, respectively, for the year ended December 31, 2009.
Gross unrealized losses on trading securities were $8 million and
gross unrealized gains were immaterial to the Bancorp for the year
ended December 31, 2009. Gross realized gains on trading
securities for the year ended December 31, 2008 were $3 million,
while gross realized losses as well as gross unrealized gains and
losses were immaterial to the Bancorp. Gross realized and
unrealized gains and losses on trading securities were immaterial to
the Bancorp for the year ended December 31, 2007.
Other-Than-Temporary Impairments (OTTI)
If the fair value of an available-for-sale or held-to-maturity security
is less than its amortized cost basis, the Bancorp must determine
whether an OTTI has occurred. Under U.S. GAAP, the
recognition and measurement requirements related to OTTI differ
for debt and equity securities. See Note 1 of the Notes to
Consolidated Financial Statements for further information on the
Bancorp’s accounting for OTTI.
During 2008, the Bancorp recognized a pre-tax OTTI charge
of $67 million on FHLMC and FNMA preferred stock included in
other securities as well as a pre-tax OTTI charge of $37 million on
certain bank trust preferred securities classified as available-for-sale.
Upon a change in U.S. GAAP in 2009, the Bancorp concluded that
the OTTI charges on the trust preferred securities were due to
non-credit related factors. Therefore, the Bancorp recognized an
increase of $37 million to the investment balance and related
unrealized losses. During the year ended December 31, 2009,
OTTI
recognized on available-for-sale or held-to-maturity
securities was immaterial to the Bancorp’s consolidated financial
statements.
76 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The following table provides a summary of the total loans and leases classified by primary purpose as of December 31:
($ in millions)
Loans and leases held for sale:
Commercial loans
Commercial mortgage loans
Commercial construction loans
Residential mortgage loans
Other consumer loans and leases
Total loans and leases held for sale
Portfolio loans and leases:
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total consumer loans and leases
Total portfolio loans and leases
2009
$4
134
87
1,811
31
$2,067
$25,683
11,803
3,784
3,535
44,805
8,035
12,174
8,995
1,990
780
31,974
$76,779
2008
23
229
221
906
73
1,452
29,197
12,502
5,114
3,666
50,479
9,385
12,752
8,594
1,811
1,122
33,664
84,143
Total portfolio loans and leases were recorded net of unearned
income, which totaled $1.2 billion and $1.4 billion as of December
31, 2009 and 2008, respectively. Additionally, unamortized
premiums and discounts, deferred loan fees and costs, and fair
value adjustments (associated with acquired loans or loans
designated as fair value upon origination) were $242 million and
$421 million as of December 31, 2009 and 2008, respectively.
The Bancorp diversifies its loan and lease portfolio by
offering a variety of loan and lease products with various payment
terms and rate structures. Lending activities are concentrated
within those states in which the Bancorp has banking centers and
are primarily located in the Midwestern and Southeastern regions
of the United States. The Bancorp’s commercial loan portfolio
consists of lending to various industry types. Management
periodically reviews the performance of its loan and lease
products to ensure they are performing within acceptable interest
rate and credit risk levels and changes are made to underwriting
policies and procedures as needed. The Bancorp maintains an
allowance to absorb loan and lease losses inherent in the portfolio.
In 2009, approximately $20 million of interest income was
recognized on a cash basis for loans on nonaccrual compared to
approximately $10 million in 2008.
Transactions in the allowance for loan and lease losses for the years ended December 31:
($ in millions)
Balance at January 1
Losses charged off
Recoveries of losses previously charged off
Provision for loan and lease losses
Balance at December 31
2009
$2,787
(2,719)
138
3,543
$3,749
2008
937
(2,791)
81
4,560
2,787
2007
771
(544)
82
628
937
Larger commercial loans that exhibit probable or observed credit weaknesses are subject to individual review. The balance of these impaired
loans and related valuation allowance were as follows:
($ in millions)
Impaired loans with allowance
Impaired loans without allowance
Total impaired loans
Average impaired loans
2009
Loan
Balance
$1,468
214
$1,682
$1,053
Allowance
$510
-
$510
2008
Loan
Balance
1,222
270
1,492
822
Allowance
534
-
534
2007
Loan
Balance
306
188
494
280
Allowance
118
-
118
The following table summarizes the Bancorp’s nonperforming and delinquent loans included in the Bancorp’s portfolio of loans and leases as
of December 31:
2008
($ in millions)
1,696
Nonaccrual loans and leases
80
Restructured nonaccrual loans and leases (a)
1,776
Total nonperforming loans and leases
230
Repossessed personal property and other real estate owned
2,006
Total nonperforming assets (b)
Total 90 days past due loans and leases
662
(a)Represents loans modified as part of a troubled debt restructuring. During 2009, the Bancorp modified its consumer nonaccrual policy to exclude troubled debt restructured loans that
were less than 90 days past due because they were performing in accordance with the restructured terms. For comparability purposes, December 31, 2008 was adjusted to reflect this
reclassification.
2009
$2,642
305
2,947
297
$3,244
$567
(b)Does not include $224 million and $473 million of nonaccrual loans held for sale at December 31, 2009 and 2008, respectively, which are held at the lower of cost or market value
and not included in the allowance for loan and lease losses.
Fifth Third Bancorp 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As shown previously, the Bancorp engages in commercial and
consumer lease products primarily related to the financing of
commercial equipment and automobiles. The Bancorp had $3.2
billion of direct financing leases and $2.0 billion of leveraged
leases at December 31, 2009 compared to $3.4 billion and $2.4
billion, respectively, at December 31, 2008.
The components of the investment in lease financing at December 31:
($ in millions)
Rentals receivable, net of principal and interest on nonrecourse debt
Estimated residual value of leased assets
Initial direct cost, net of amortization
Gross investment in lease financing
Unearned income
Net investment in lease financing
The Bancorp periodically reviews residual values associated with
its leasing portfolio. Declines in residual values that are deemed to
be other-than-temporary are recognized as a loss. The Bancorp
recognized $1 million in residual value write-downs related to
consumer automobile leases and $4 million on commercial leases
for the year ended December 31, 2009 compared to $3 million in
residual value write-downs related to consumer automobile leases
Pre-tax income from leveraged leases for 2009 was $57 million
compared to a pre-tax loss in 2008 of $97 million and pre-tax
income in 2007 of $47 million. The tax effect of this income was
an expense of $10 million in 2009, a tax benefit of $37 million in
2008 and tax expense of $18 million in 2007.
2009
$4,174
1,028
19
5,221
(1,186)
$4,035
2008
4,415
1,381
24
5,820
(1,384)
4,436
for the year ended December 31, 2008. In 2008, residual value
write-downs on commercial
immaterial to the
Bancorp. At December 31, 2009, the minimum future lease
payments receivable for each of the years 2010 through 2014 was
$1.1 billion, $1.1 billion, $.8 billion, $.5 billion and $.6 billion,
respectively.
leases were
expected to be collected as an amount that should not be accreted
into interest income (nonaccretable difference). The remaining
amount representing the difference in the expected cash flows of
acquired loans and the initial investment in the acquired loans is
accreted into interest income over the remaining life of the loan or
pool of loans (accretable yield). A summary of activity is provided.
7. LOANS WITH DETERIORATED CREDIT QUALITY ACQUIRED IN A TRANSFER
In 2008 and 2007, the Bancorp acquired certain loans for which
there was evidence of deterioration of credit quality since
origination and for which it was probable, at acquisition, that all
contractually required payments would not be collected. These
loans were evaluated either individually or segregated into pools
based on common risk characteristics and accounted for under
U.S. GAAP guidance for loans acquired with deteriorated credit
quality. U.S. GAAP requires acquired loans to be recorded at their
initial fair value and prohibits carrying over valuation allowances
when applying purchase accounting. Loans carried at fair value,
mortgage loans held for sale and loans under revolving credit
agreements are excluded from the scope of this guidance on loans
acquired with deteriorated credit quality. During the years ended
December 31, 2009 and 2008, the Bancorp recorded provision
expense for loans acquired with deteriorated credit quality of $21
million and $35 million, respectively,
in the Consolidated
Statements of Income. For the year ended December 31, 2007,
there was no provision expense recorded for these loans. In
addition, as of December 31, 2009 and 2008, the Bancorp
maintained an allowance for loan and lease losses of $21 million
and $6 million, respectively, on these loans.
($ in millions)
Balance as of December 31, 2006
Additions
Accretion
Reclassifications from (to) nonaccretable difference
Balance as of December 31, 2007
Additions
Accretion
Reclassifications from (to) nonaccretable difference
Balance as of December 31, 2008
Additions
Accretion
Reclassifications from (to) nonaccretable difference
Balance as of December 31, 2009
Accretable
Yield
$ -
8
(2)
-
$6
24
(15)
13
$28
-
(6)
(13)
$9
The following table reflects the outstanding balance of all
contractually required payments and carrying amounts of loans
acquired with deteriorated credit quality at December 31:
($ in millions)
Commercial
Consumer
Outstanding balance
Carrying amount
2009
$158
58
$216
$71
2008
224
87
311
106
At the acquisition date, the Bancorp determines the excess of the
loan’s contractually required payments over all cash flows
The following table reflects loans that were acquired with
deteriorated credit quality during 2009 and 2008:
($ in millions)
Contractually required payments receivable
at acquisition:
Commercial
Consumer
Total
Cash flows expected to be collected at acquisition
Fair value of acquired loans at acquisition
2009
2008
$ -
-
$ -
$ -
-
182
34
216
90
66
78 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. BANK PREMISES AND EQUIPMENT
The following is a summary of bank premises and equipment at December 31:
($ in millions)
Land and improvements
Buildings
Equipment
Leasehold improvements
Construction in progress
Accumulated depreciation and amortization
Total
Depreciation and amortization expense related to bank premises
and equipment was $227 million in 2009, $218 million in 2008 and
$205 million in 2007.
Occupancy expense for cancelable and noncancelable leases
was $102 million for 2009, $98 million for 2008 and $85 million
for 2007. Occupancy expense has been reduced by rental income
from leased premises of $16 million in 2009, $13 million in 2008
and $12 million in 2007.
Estimated Useful Life
5 to 50 yrs.
3 to 20 yrs.
3 to 40 yrs.
2009
$748
1,539
1,354
401
105
(1,747)
$2,400
2008
743
1,518
1,317
378
120
(1,582)
2,494
The Bancorp’s subsidiaries have entered into a number of
noncancelable and capital lease agreements with respect to bank
premises and equipment. The following table provides the future
minimum payments under capital leases and non-cancelable
operating leases with terms greater than one year at December 31,
2009:
($ in millions)
Year ended December 31,
2010
2011
2012
2013
2014
Thereafter
Total minimum lease payments
Amounts representing interest
Present value of net minimum
lease payments
Operating
Leases
Capital
Leases
$91
86
82
78
72
497
$906
-
-
16
15
14
4
0
1
50
5
45
9. GOODWILL
Business combinations entered into by the Bancorp typically include the acquisition of goodwill. Acquisition activity includes acquisitions in
the respective period, in addition to purchase accounting adjustments related to previous acquisitions. Changes in the net carrying amount of
goodwill by reporting segment for the years ended December 31, 2009 and 2008 were as follows:
Commercial
Banking
Branch
Banking
Consumer
Lending
Investment
Advisors
($ in millions)
Balance as of December 31, 2007
Acquisition activity
Impairment
Balance as of December 31, 2008
$995
369
(750)
614
950
707
-
1,657
182
33
(215)
-
Acquisition activity
Sale of Processing Business
Balance as of December 31, 2009
(a) As a result of the Processing Business Sale on June 30, 2009, Processing Solutions is no longer a segment of the Bancorp.
(1)
-
1,656
(1)
-
$613
-
-
-
Processing
Solutions (a)
205
-
-
205
7
(212)
-
Total
2,470
1,119
(965)
2,624
5
(212)
2,417
138
10
-
148
-
-
148
The Bancorp completed its annual goodwill impairment test as of
September 30, 2009 and determined that no impairment existed.
The Bancorp evaluates goodwill at the segment
level for
impairment. In Step 1 of the goodwill impairment test, the
Bancorp compared the fair value of each reporting unit to its
carrying amount, including goodwill. To determine the fair value
of a reporting unit, the Bancorp employed an income-based
approach utilizing the reporting unit’s forecasted cash flows
(including a terminal value approach to estimate cash flows
beyond the final year of the forecast) and the reporting unit’s
estimated cost of equity as the discount rate. The Bancorp
believes that this discounted cash flows (DCF) method, using
management projections for the respective reporting units and an
appropriate risk adjusted discount rate, is most reflective of a
market participant’s view of fair values given current market
conditions. Under the DCF method, the forecasted cash flows
were developed for each reporting unit by considering several key
business drivers such as new business initiatives, client retention
standards, market share changes, anticipated loan and deposit
growth, forward
interest rates, historical performance, and
industry and economic trends, among other considerations. The
long-term growth rate used in determining the terminal value of
each reporting unit was estimated at three percent based on the
Bancorp’s assessment of the minimum expected terminal growth
rate of each reporting unit, as well as broader economic
considerations such as gross domestic product and inflation.
Discount rates were estimated based on a Capital Asset Pricing
Model, which considers the risk-free interest rate, market risk
premium, beta, and in some cases, unsystematic risk and size
premium adjustments specific to a particular reporting unit. The
discount rates used to develop the estimated fair value of the
reporting units ranged from 17.0% to 18.4%. Based on the results
Fifth Third Bancorp 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the Step 1 test, the Bancorp determined that the fair value of
the Commercial Banking, Branch Banking, and Investment
Advisors reporting units exceeded their respective carrying values,
and consequently no further testing was required.
On June 30, 2009, the Bancorp completed the Processing
Business Sale, which resulted in a $212 million reduction of
goodwill for the Bancorp. See Note 18 for further information
regarding the Processing Business Sale.
On June 6, 2008, the Bancorp acquired First Charter, which
resulted in the recognition of $1.1 billion of goodwill.
During the fourth quarter of 2008, the Bancorp determined
that the fair value of certain reporting units had more-likely-than-
10. INTANGIBLE ASSETS
Intangible assets consist of servicing rights, core deposit
intangibles, customer
lists, non-compete agreements and
cardholder relationships. Intangible assets, excluding servicing
rights, are amortized on either a straight-line or an accelerated
basis over their estimated useful lives and have an estimated
weighted-average life at December 31, 2009 of 2.8 years. The
($ in millions)
As of December 31, 2009:
Mortgage servicing rights
Core deposit intangibles
Other consumer and commercial servicing rights
Other
Total intangible assets
As of December 31, 2008:
Mortgage servicing rights
Core deposit intangibles
Other consumer and commercial servicing rights
Other
Total intangible assets
not decreased below their carrying values and therefore an interim
impairment test was performed as of December 31, 2008. The
Bancorp determined that the Commercial Banking and Consumer
Lending reporting units’ goodwill carrying amounts exceeded their
associated implied fair values by $750 million and $215 million,
respectively. The resulting $965 million goodwill impairment
charge was recorded in the fourth quarter of 2008 and represents
the total amount of accumulated impairment losses as of
December 31, 2009 and 2008.
intangible assets for possible
impairment
Bancorp reviews
whenever events or changes in circumstances indicate that
carrying amounts may not be recoverable. For more information
on servicing rights, see Note 11. The details of the Bancorp’s
intangible assets are shown in the following table.
Gross Carrying
Amount
Accumulated
Amortization
Valuation
Allowance
Net Carrying
Amount
$1,987
487
12
53
$2,539
$1,614
487
13
61
$2,175
(1,008)
(397)
(11)
(37)
(1,453)
(862)
(346)
(10)
(34)
(1,252)
(280)
-
-
-
(280)
(256)
-
-
-
(256)
699
90
1
16
806
496
141
3
27
667
As of December 31, 2009, all of the Bancorp’s intangible assets were being amortized. Amortization expense recognized on intangible assets,
including servicing rights, for the years ending December 31, 2009, 2008 and 2007 was $204 million, $164 million and $135 million
respectively. Estimated amortization expense, including servicing rights, for the years ending December 31, 2010 through 2014 is as follows:
($ in millions)
2010
2011
2012
2013
2014
$239
178
130
103
80
11. SALES OF RECEIVABLES AND SERVICING RIGHTS
Residential Mortgage Loan Sales
The Bancorp sold fixed and adjustable rate residential mortgage
loans during 2009 and 2008. In those sales, the Bancorp obtained
servicing responsibilities and the investors have no recourse to the
Bancorp’s other assets for failure of debtors to pay when due. The
Bancorp receives annual servicing fees based on a percentage of
the outstanding balance. The Bancorp identifies classes of servicing
assets based on financial asset type and interest rates.
For the years ended December 31, 2009, 2008 and 2007, the
Bancorp recognized gains of $485 million, $260 million and $79
million, respectively, on residential mortgage loan sales activity of
$20.6 billion, $11.5 billion and $10.1 billion, respectively.
Additionally, the Bancorp recognized $197 million, $164 million
and $145 million in servicing fees on residential mortgages for the
years ended December 31, 2009, 2008 and 2007, respectively. The
gains on sales of residential mortgages and servicing fees related to
residential mortgages are included in mortgage banking net revenue
in the Consolidated Statements of Income. Refer to Note 16 for
further information on residential mortgage loans sold with
recourse.
80 Fifth Third Bancorp
Automobile Loan Securitizations
During 2008, the Bancorp sold $2.7 billion of automobile loans in
three separate transactions, recognizing gains of $15 million, offset
by $26 million in losses on related hedges. Each transaction
isolated the related loans through the use of a securitization trust or
a conduit, formed as QSPEs, to facilitate the securitization process.
The QSPEs issued asset-backed securities with varying levels of
credit subordination and payment priority. The investors in these
securities have no credit recourse to the Bancorp’s other assets for
failure of debtors to pay when due. During 2008 and 2009,
required repurchases of previously transferred automobile loans
from the QSPE were immaterial to the Bancorp’s Consolidated
Financial Statements.
In each of these sales, the Bancorp obtained servicing
responsibilities, but no servicing asset or liability was recorded as
the market based servicing
fee was considered adequate
compensation. For the years ended December 31, 2009 and 2008,
the Bancorp recognized $8 million and $9 million, respectively, of
servicing fees on these automobile loans. The servicing fees are
in the Consolidated
included
Statements of Income.
in other noninterest
income
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2009 and 2008, the Bancorp held retained
interests in the QSPEs in the form of asset-backed securities
totaling $63 million and $51 million, respectively, and residual
interests totaling $98 million and $124 million, respectively. These
retained interests are included in available-for-sale securities in the
Consolidated Balance Sheets. During the years ended December
31, 2009 and 2008, the Bancorp received cash flows of $4 million
and $3 million, respectively, from the asset-backed securities and
$34 million and $37 million, respectively, from the residual
interests. The asset-backed securities are measured at fair value
using quoted market prices for similar assets. The residual interests
are measured at fair value based on the present value of future
expected cash flows using management’s best estimates for the key
assumptions, which are further discussed later in this footnote.
Commercial Loan Sales to a QSPE
During 2008, the Bancorp transferred, subject to credit recourse,
certain primarily floating-rate, short-term,
investment grade
commercial loans to an unconsolidated QSPE that is wholly owned
by an independent third-party. The transfers of loans to the QSPE
were accounted for as sales. The QSPE issues commercial paper
and uses the proceeds to fund the acquisition of commercial loans
transferred to it by the Bancorp. The Bancorp did not transfer any
new loans to the QSPE during 2009.
For the years ended December 31, 2009 and 2008, the
Bancorp collected $6 million and $13 million, respectively, in
servicing fees from the QSPE. For the year ended December 31,
2008, the Bancorp collected $334 million in net cash proceeds
from loan transfers to the QSPE. Refer to Note 16 for further
discussion on the liquidity support and credit enhancement
provided by the Bancorp to this QSPE.
Servicing Assets & Residual Interests
As of December 31, 2009 and 2008, the key economic assumptions
used in measuring the interests that continued to be held by the
Bancorp at the date of sale or securitization resulting from
transactions completed during the years ended December 31, 2009
and 2008 were as follows:
Rate
Residential mortgage loans:
Servicing assets
Servicing assets
Fixed
Adjustable
December 31, 2009
December 31, 2008
Weighted-
Average
Life
(in years)
Prepayment
Speed
(annual)
Discount
Rate
(annual)
Weighted-
Average
Default
Rate
Weighted-
Average
Life
(in years)
Prepayment
Speed
(annual)
Discount
Rate
(annual)
Weighted-
Average
Default
Rate
6.6
2.7
12.0%
35.5
9.8%
10.8
N/A
N/A
5.9
2.7
19.2%
30.8
9.7%
14.5
N/A
N/A
Based on historical credit experience, expected credit losses for
residential mortgage loan servicing assets have been deemed
immaterial, as the Bancorp sold the majority of the underlying
loans without recourse. At December 31, 2009 and 2008, the
Bancorp serviced $48.6 billion and $40.4 billion, respectively, of
residential mortgage loans for other investors.
The value of interests that continue to be held by the
Bancorp is subject to credit, prepayment and interest rate risks on
the sold financial assets. At December 31, 2009, the sensitivity of
the current fair value of residual cash flows to immediate 10% and
20% adverse changes in those assumptions are as follows:
Prepayment Speed
Assumption
Impact of Adverse
Change on Fair
Value
10% 20%
Rate
Weighted-
Average
Life (in
years)
Residual Servicing Cash Flows
Impact of Adverse
Change on Fair
Value
10% 20%
Discount
Rate
Weighted-Average
Default
Impact of Adverse
Change on Fair
Value
Rate
10%
20%
5.3
3.3
1.6
16.1% $34
2
24.1
27.4
1
65
4
2
10.4%
11.2
11.4
$24
1
3
46
2
- %
-
5
2.1
$-
-
1
-
-
3
Fair
Value
$667
32
102
($ in millions)
Rate
Residential mortgage loans:
Servicing assets
Servicing assets
Automobile loans:
Residual interest
Fixed
Adjustable
Fixed
These sensitivities are hypothetical and should be used with
caution. As the figures indicate, changes in fair value based on a
10% variation in assumptions typically cannot be extrapolated
because the relationship of the change in assumption to the change
in fair value may not be linear. Also, in the previous table, the
effect of a variation in a particular assumption on the fair value of
the interests that continue to be held by the Bancorp is calculated
without changing any other assumption; in reality, changes in one
factor may result in changes in another (for example, increases in
market interest rates may result in lower prepayments and
increased credit losses), which might magnify or counteract the
sensitivities.
Fifth Third Bancorp 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the servicing asset related to residential mortgage loans for the years ended December 31:
($ in millions)
Carrying amount as of the beginning of period
Servicing obligations that result from transfer of residential mortgage loans
Acquisitions
Amortization
Carrying amount before valuation allowance
Valuation allowance for servicing assets:
Beginning balance
Servicing impairment
Ending balance
Carrying amount as of the end of the period
2009
$752
373
-
(146)
979
(256)
(24)
(280)
$699
2008
662
196
1
(107)
752
(49)
(207)
(256)
496
in the MSR valuation allowance,
Temporary impairment or impairment recovery, effected through a
change
is captured as a
component of mortgage banking net revenue in the Consolidated
Statements of Income. The Bancorp maintains a non-qualifying
hedging strategy to manage a portion of the risk associated with
changes in value of the MSR portfolio. This strategy includes the
purchase of
(principal-only swaps,
swaptions and interest rate swaps) and various available-for-sale
securities. The interest income, mark-to-market adjustments and
gain or loss from sale activities associated with these portfolios are
expected to economically hedge a portion of the change in value of
the MSR portfolio caused by fluctuating discount rates, earnings
rates and prepayment speeds.
free-standing derivatives
The fair value of the servicing asset is based on the present
value of expected future cash flows. The following table displays
the beginning and ending fair value for the years ended December
31:
($ in millions)
Fixed rate residential mortgage loans:
Fair value at beginning of period
Fair value at end of period
Adjustable rate residential mortgage loans:
Fair value at beginning of period
Fair value at end of period
2009
2008
$458
667
38
32
$565
458
50
38
During 2009, 2008 and 2007, the Bancorp recognized net gains of
$57 million, $120 million and $6 million, respectively, which were
classified as securities gains in noninterest income, related to sales
of available-for-sale securities purchased to economically hedge the
MSR portfolio. During 2009, 2008 and 2007, the Bancorp
recognized net gains of $41 million, $89 million and $23 million,
respectively, classified as mortgage banking net revenue
in
noninterest income, related to changes in fair value and settlement
of free-standing derivatives purchased to economically hedge the
MSR portfolio.
As of December 31, 2009 and December 31, 2008, other
assets included free-standing derivative instruments related to the
MSR portfolio with a fair value of $114 million and $218 million,
respectively, and other liabilities included free-standing derivative
instruments with a fair value of $24 million and $77 million,
respectively. Also as of December 31, 2009 and December 31,
2008, the outstanding notional amounts on the free-standing
derivative instruments related to the MSR portfolio totaled $8.6
billion and $8.5 billion, respectively. As of December 31, 2009, and
December 31, 2008, the available-for-sale securities portfolio
included $449 million and $1.1 billion, respectively, of securities
related to the non-qualifying hedging strategy.
The following table provides a summary of the total loans and
leases managed by the Bancorp, including loans securitized and
loans in the unconsolidated QSPEs as of and for the years ended
December 31:
Balance
Balance of Loans 90
Days or More Past Due
Net Credit
Losses
($ in millions)
2009
$26,458
11,936
3,921
3,535
9,795
12,437
10,226
2,802
$81,110
Commercial loans
Commercial mortgage
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity loans
Automobile loans
Other consumer loans and leases
Total loans and leases managed and securitized (a)
Less:
Automobile loans securitized
Home equity loans securitized
Residential mortgage loans securitized
Commercial loans sold to unconsolidated QSPE
Loans held for sale
Total portfolio loans and leases
(a) Excluding securitized assets that the Bancorp continues to service, but has no other continuing involvement.
82 Fifth Third Bancorp
$1,230
263
-
771
2,067
$76,779
2008
31,163
12,952
5,477
3,666
9,946
13,025
10,539
3,007
89,775
1,946
273
18
1,943
1,452
84,143
2009
$118
59
16
4
189
100
18
65
$569
2008
76
136
74
4
198
98
22
57
665
2009
$718
422
417
8
355
325
156
190
$2,591
2008
649
613
749
(1)
242
207
141
118
2,718
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. DERIVATIVES
The Bancorp maintains an overall risk management strategy that
incorporates the use of derivative instruments to reduce certain risks
related to interest rate, prepayment and foreign currency volatility.
Additionally, the Bancorp holds derivative instruments for the benefit
of its commercial customers. The Bancorp does not enter into
derivative instruments for speculative purposes.
the
The Bancorp’s interest rate risk management strategy involves
modifying
financial
repricing characteristics of certain
instruments so that changes in interest rates do not adversely affect
the Bancorp’s net interest margin and cash flows. Derivative
instruments that the Bancorp may use as part of its interest rate risk
management strategy include interest rate swaps, interest rate floors,
interest rate caps, forward contracts, options and swaptions. Interest
rate swap contracts are exchanges of interest payments, such as fixed-
rate payments for floating-rate payments, based on a common
notional amount and maturity date. Interest rate floors protect
against declining rates, while interest rate caps protect against rising
interest rates. Forward contracts are contracts in which the buyer
agrees to purchase, and the seller agrees to make delivery of, a
specific financial instrument at a predetermined price or yield.
Options provide the purchaser with the right, but not the obligation,
to purchase or sell a contracted item during a specified period at an
agreed upon price. Swaptions are financial instruments granting the
owner the right, but not the obligation, to enter into or cancel a swap.
Prepayment volatility arises mostly from changes in fair value
of the
loans and
mortgage-backed securities. The Bancorp may enter into various free-
standing derivatives (principal-only swaps, swaptions, floors, options
and interest rate swaps) to economically hedge prepayment volatility.
Principal-only swaps are total return swaps based on changes in the
value of the underlying mortgage principal-only trust.
largely fixed-rate MSR portfolio, mortgage
loans denominated
Foreign currency volatility occurs as the Bancorp enters into
certain
foreign currencies. Derivative
instruments that the Bancorp may use to economically hedge these
foreign denominated loans include foreign exchange swaps and
forward contracts.
in
The Bancorp also enters into derivative contracts (including
foreign exchange contracts, commodity contracts and interest rate
swaps, floors and caps) for the benefit of commercial customers. The
Bancorp may economically hedge significant exposures related to these
into offsetting third-party
free-standing derivatives by entering
contracts with approved, reputable counterparties with substantially
matching terms and currencies. Credit risk arises from the possible
inability of counterparties to meet the terms of their contracts. The
Bancorp’s exposure is limited to the replacement value of the
contracts rather than the notional, principal or contract amounts. The
Bancorp minimizes the credit risk through credit approvals, limits,
counterparty collateral and monitoring procedures. For the years
ended December 31, 2009 and 2008, valuation adjustments related to
the credit risk associated with certain counterparties of customer
accommodation derivative contracts negatively impacted their fair
value by $3 million and $31 million, respectively.
and
In measuring the fair value of derivative liabilities, the
Bancorp considers its own credit risk, taking into consideration
requirements of certain derivative
collateral maintenance
instruments with
the duration of
counterparties
counterparties that do not require collateral maintenance. As of
December 31, 2009 and 2008, the Bancorp’s derivative liabilities
consisted primarily of liabilities with counterparties that require
collateral to be maintained to offset changes in fair value of the
derivatives, including changes in fair value due to the Bancorp’s
credit risk. The posting of collateral has been determined to
remove the need for consideration of credit risk. As a result, the
Bancorp determined that the impact of the Bancorp’s credit risk
to the valuation of its derivative liabilities was immaterial to the
Bancorp’s Consolidated Financial Statements.
The Bancorp holds certain derivative instruments that
qualify for hedge accounting treatment under U.S. GAAP and are
designated as either fair value hedges or cash flow hedges.
Derivative instruments that do not qualify for hedge accounting
treatment, or for which hedge accounting is not established, are
held as free-standing derivatives and provide the Bancorp an
economic hedge. All customer accommodation derivatives are
held as free-standing derivatives.
The fair value of derivative instruments is presented on a
gross basis, even when the derivative instruments are subject to
master netting arrangements. Derivative instruments with a
positive fair value at year end are reported in other assets in the
Consolidated Balance Sheets. Derivative instruments with a
negative fair value at year end are reported in other liabilities in
the Consolidated Balance Sheets. Cash collateral payables and
receivables associated with the derivative instruments are not
added to or netted against the fair value amounts.
Fifth Third Bancorp 83
The following table reflects the notional amounts and fair values for all derivative instruments included in the Consolidated Balance Sheets as
of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Qualifying hedging instruments:
Fair value hedges:
Interest rate swaps related to long-term debt
Interest rate swaps related to time deposits
Total fair value hedges
Cash flow hedges:
Interest rate floors related to commercial loans
Interest rate swaps related to commercial loans
Interest rate caps related to long-term debt
Total cash flow hedges
Total derivatives designated as qualifying hedging instruments
Derivatives not designated as qualifying hedging
instruments
Free-standing derivatives – risk management and other
business purposes:
Derivative instruments related to MSR portfolio
Derivative instruments related to held for sale mortgage
loans
Derivative instruments related to interest rate risk
Foreign exchange contracts
Put options associated with the Processing Business Sale
Stock warrants associated with the Processing Business
Sale
Swap associated with the sale of Visa, Inc. Class B shares
Total free-standing derivatives – risk management and other
business purposes
Free-standing derivatives - customer accommodation:
Interest rate contracts for customers
Interest rate lock commitments
Commodity contracts for customers
Foreign exchange contracts for customers
Derivative instruments related to equity linked CDs
Total free-standing derivatives – customer accommodation
Total derivatives not designated as qualifying hedging
instruments
Total
2009
Fair value
2008
Fair value
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Notional
Amount
Derivative
Assets
Derivative
Liabilities
$5,155
771
1,500
3,500
2,750
8,592
3,633
410
-
667
152
522
28,628
1,489
805
10,997
113
$275
-
275
162
33
44
239
514
114
33
4
-
-
75
-
226
719
3
63
206
2
993
1,219
1,733
5,430
1,575
1,500
3,000
1,750
8,533
5,817
886
176
-
-
-
31,731
3,792
949
13,167
114
$ -
6
6
-
-
-
-
6
24
2
2
-
9
-
55
92
753
8
58
169
2
990
1,082
1,088
823
-
823
216
-
1
217
1,040
218
6
5
1
-
-
-
230
1,228
24
167
534
2
1,955
2,185
3,225
-
19
19
-
22
-
22
41
77
42
4
2
-
-
-
125
1,257
2
156
478
2
1,895
2,020
2,061
During 2006, the Bancorp terminated certain interest rate
swaps designated as fair value hedges of long-term debt. The
amount equal to the cumulative fair value adjustment to the hedged
items at the date of termination is amortized as an adjustment to
interest expense over the remaining term of the long-term debt.
During 2009, the term of the related debt expired, and
amortization of net deferred losses on these terminated fair value
hedges for the year ended December 31, 2009 was immaterial to
the Bancorp’s Consolidated Statements of Income. For the years
ended December 31, 2008 and 2007, $6 million and $11 million,
respectively, in deferred losses, net of tax, on the terminated fair
value hedges was amortized into interest expense.
Fair Value Hedges
The Bancorp may enter into interest rate swaps to convert its
fixed-rate, long-term debt or time deposits to floating-rate.
Decisions to convert fixed-rate debt or time deposits to floating are
made primarily through consideration of the asset/liability mix of
the Bancorp, the desired asset/liability sensitivity and interest rate
levels. For the years ended December 31, 2009 and 2008, certain
interest rate swaps met the criteria required to qualify for the
shortcut method of accounting. Based on this shortcut method of
accounting treatment, no ineffectiveness is assumed. For interest
rate swaps that do not meet the shortcut requirements, an
assessment of hedge effectiveness was performed and such swaps
were accounted for using the “long-haul” method. The long-haul
method requires a quarterly assessment of hedge effectiveness and
measurement of ineffectiveness. For interest rate swaps accounted
for as a
long-haul method,
ineffectiveness is the difference between the changes in the fair
value of the interest rate swap and changes in fair value of the
long-term debt attributable to the risk being hedged. The
ineffectiveness on interest rate swaps hedging long-term debt or
time deposits
the
Consolidated Statements of Income.
fair value hedge using
is reported within
interest expense
the
in
84 Fifth Third Bancorp
The following table reflects the change in fair value of interest rate contracts, designated as fair value hedges, as well as the change in fair value
of the related hedged items, included in the Consolidated Statements of Income:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, ($ in millions)
Interest rate contracts:
Consolidated Statements of
Income Caption
2009
2008
2007
Change in fair value of interest rate swaps hedging long-term debt
Change in fair value of hedged long-term debt
Change in fair value of interest rate swaps hedging time deposits
Change in fair value of hedged time deposits
Interest on long-term debt
Interest on long-term debt
Interest on deposits
Interest on deposits
($548)
538
4
(3)
(776)
765
(19)
19
105
(109)
-
-
Cash Flow Hedges
The Bancorp may enter into interest rate swaps to convert
floating-rate assets and liabilities to fixed rates or to hedge certain
forecasted transactions. The assets or liabilities are typically
grouped and share the same risk exposure for which they are
being hedged. The Bancorp may also enter into interest rate caps
and floors to limit cash flow variability of floating rate assets and
liabilities. As of December 31, 2009, all hedges designated as cash
flow hedges are assessed for effectiveness using regression
analysis. Ineffectiveness is generally measured as the amount by
which the cumulative change in the fair value of the hedging
instrument exceeds the present value of the cumulative change in
the hedged item’s expected cash flows. Ineffectiveness is reported
within other noninterest income in the Consolidated Statements
of Income. The effective portion of the gains or losses on cash
flow hedges
accumulated other
reported within
comprehensive income and are reclassified from accumulated
other comprehensive income to current period earnings when the
forecasted transaction affects earnings. As of December 31, 2009,
the maximum length of time over which the Bancorp is hedging
its exposure to the variability in future cash flows related to the
forecasted issuance of floating rate debt is 39 months.
are
Reclassified gains and losses on interest rate floors related to
commercial loans and interest rate caps related to debt are
and
income
interest
recorded
flow hedges were
recorded within
interest expense,
respectively. As of December 31, 2009 and 2008, $105 million
and $88 million, respectively, of deferred gains, net of tax, on
in accumulated other
cash
comprehensive income. As of December 31, 2009, $73 million in
net deferred gains, net of tax, recorded in accumulated other
comprehensive income are expected to be reclassified into
earnings during the next twelve months. During the years ended
December 31, 2009 and 2008, there were no gains or losses
reclassified into earnings associated with the discontinuance of
cash flow hedges because it was probable that the original
forecasted transaction would not occur. During the year ended
December 31, 2007, $22 million of losses were reclassified into
earnings as it was determined that the original forecasted
transaction was no longer probable of occurring by the end of the
originally specified time period or within the additional period of
time as defined in U.S. GAAP.
The following table presents the net gains recorded in the
Consolidated Statements of Income and accumulated other
comprehensive
instruments
designated as cash flow hedges. Included in the ineffectiveness
for the year ended December 31, 2007 are certain terminated
interest rate swaps previously designated as cash flow hedges.
to derivative
relating
income
For the year ended December 31:
($ in millions)
Interest rate contracts
Amount of gain
recognized in OCI
2008
100
2007
42
2009
$75
Amount of gain reclassified
from OCI into net interest
income
2008
3
2009
49
2007
1
Amount of ineffectiveness
recognized in other
noninterest income
2009
(1)
2008
1
2007
(21)
Free-Standing Derivative Instruments – Risk Management
and Other Business Purposes
The Bancorp enters into foreign exchange derivative contracts to
economically hedge certain foreign denominated loans. Derivative
instruments that the Bancorp may use to economically hedge these
foreign denominated loans include foreign exchange swaps and
forward contracts. The Bancorp does not designate
these
instruments against the foreign denominated loans, and therefore,
does not obtain hedge accounting treatment. Revaluation gains and
losses on these foreign currency derivative contracts are recorded
within other noninterest income in the Consolidated Statements of
Income, as are revaluation gains and losses on foreign denominated
loans.
As part of its overall risk management strategy relative to its
mortgage banking activity, the Bancorp may enter into various free-
standing derivatives
(principal-only swaps, swaptions, floors,
options and interest rate swaps) to economically hedge changes in
fair value of its largely fixed-rate MSR portfolio. Principal-only
swaps hedge the mortgage-LIBOR spread because these swaps
appreciate in value as a result of tightening spreads. Principal-only
swaps also provide prepayment protection by increasing in value
when prepayment speeds increase, as opposed to MSRs that lose
value in a faster prepayment environment. Receive fixed/pay
floating interest rate swaps and swaptions increase in value when
interest rates do not increase as quickly as expected.
The Bancorp enters into forward contracts to economically
hedge the change in fair value of certain residential mortgage loans
held for sale due to changes in interest rates. The Bancorp may also
enter into forward swaps to economically hedge the change in fair
value of certain commercial mortgage loans held for sale due to
changes in interest rates. Interest rate lock commitments issued on
residential mortgage loan commitments that will be held for sale are
also considered free-standing derivative instruments and the interest
rate exposure on these commitments is economically hedged
primarily with forward contracts. Revaluation gains and losses from
free-standing derivatives related to mortgage banking activity are
recorded as a component of mortgage banking net revenue in the
Consolidated Statements of Income.
Additionally, the Bancorp may enter into free-standing
derivative instruments (options, swaptions and interest rate swaps)
in order to minimize significant fluctuations in earnings and cash
flows caused by interest rate and prepayment volatility. The gains
and losses on these derivative contracts are recorded within other
noninterest income in the Consolidated Statements of Income.
In conjunction with the Processing Business Sale in 2009,
the Bancorp received warrants and issued put options, which are
accounted for as free-standing derivatives. Refer to Note 27 for
further discussion of significant inputs and assumptions used in the
valuation of these instruments.
Fifth Third Bancorp 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In conjunction with the sale of its Visa, Inc. Class B shares in
2009, the Bancorp entered into a total return swap in which the
Bancorp will make or receive payments based on subsequent
changes in the conversion rate of the Class B shares into Class A
shares. This total return swap is accounted for as a free-standing
derivative. See Note 27 of the Notes to Consolidated Financial
Statements for further discussion of significant inputs and
assumptions used in the valuation of this instrument.
The net gains (losses) recorded
in the Consolidated
Statements of Income relating
to free-standing derivative
instruments used for risk management and other business
purposes are summarized in the following table:
For the year ended December 31, ($ in millions)
Interest rate contracts:
Consolidated Statements of
Income Caption
2009
2008
2007
Forward contracts related to commercial mortgage loans held for sale
Forward contracts related to residential mortgage loans held for sale
Derivative instruments related to MSR portfolio
Derivative instruments related to interest rate risk
Corporate banking revenue
Mortgage banking net revenue
Mortgage banking net revenue
Other noninterest income
$ -
55
41
3
Foreign exchange contracts:
Foreign exchange contracts
Equity contracts:
Warrants associated with Processing Business Sale
Put options associated with Processing Business Sale
Swap associated with sale of Visa, Inc. Class B shares
Other noninterest income
(10)
Other noninterest income
Other noninterest income
Other noninterest income
13
5
(2)
(8)
(17)
89
1
29
-
-
-
(6)
(8)
23
(1)
(19)
-
-
-
in
the risk participation agreements
2008, the total notional amount of the risk participation agreements
was approximately $810 million and $1.0 billion, respectively, and
the fair value for each period was a liability of $2 million, which is
included in interest rate contracts for customers. The Bancorp’s
maximum exposure
is
contingent on the fair value of the underlying interest rate derivative
contracts in an asset position at the time of default. The Bancorp
monitors the credit risk associated with the underlying customers in
the risk participation agreements through the same risk grading
system currently utilized for establishing loss reserves in its loan and
lease portfolio. Under this risk rating system as of December 31,
2009, approximately $519 million in notional amount of the risk
participation agreements were classified average or better;
approximately $271 million were classified as watch-list or special
mention; and approximately $20 million were classified as
substandard. As of December 31, 2009, the risk participation
agreements had an average life of approximately 2.1 years.
The Bancorp previously offered its customers an equity-linked
certificate of deposit that had a return linked to equity indices.
Under U.S. GAAP, a certificate of deposit that pays interest based
on changes on an equity index is a hybrid instrument that requires
separation into a host contract (the certificate of deposit) and an
embedded derivative contract (written equity call option). The
Bancorp entered into offsetting derivative contracts to economically
hedge the exposure taken through the issuance of equity-linked
certificates of deposit. Both the embedded derivative and the
derivative contract entered into by the Bancorp are recorded as free-
standing derivatives and recorded at fair value with offsetting gains
and
the
Consolidated Statements of Income.
recognized within noninterest
income
losses
in
Free-Standing Derivative Instruments – Customer
Accommodation
The majority of the free-standing derivative instruments the
Bancorp enters into are for the benefit of its commercial customers.
These derivative contracts are not designated against specific assets
or liabilities on the Bancorp’s Consolidated Balance Sheets or to
forecasted transactions and, therefore, do not qualify for hedge
accounting. These instruments include foreign exchange derivative
contracts entered into for the benefit of commercial customers
involved in international trade to hedge their exposure to foreign
currency fluctuations and commodity contracts to hedge such items
as natural gas and various other derivative contracts. The Bancorp
may economically hedge significant exposures related to these
derivative contracts entered into for the benefit of customers by
entering
into offsetting contracts with approved, reputable,
independent counterparties with substantially matching terms. The
Bancorp hedges its interest rate exposure on commercial customer
transactions by executing offsetting swap agreements with primary
dealers. Revaluation gains and losses on interest rate, foreign
exchange, commodity and other commercial customer derivative
contracts are recorded as a component of corporate banking
revenue in the Consolidated Statements of Income.
The Bancorp enters into risk participation agreements, under
which the Bancorp assumes credit exposure relating to certain
underlying interest rate derivative contracts. The Bancorp only
enters into these risk participation agreements in instances in which
the Bancorp has participated in the loan that the underlying interest
rate derivative contract was designed to hedge. The Bancorp will
make payments under these agreements if a customer defaults on its
obligation to perform under the terms of the underlying interest rate
derivative contract. As of December 31, 2009 and December 31,
86 Fifth Third Bancorp
The net gains (losses) recorded in the Consolidated Statements of Income relating to free-standing derivative instruments used for customer
accommodation are summarized in the following table:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, ($ in millions)
Interest rate contracts:
Consolidated Statements of
Income Caption
2009
2008
2007
Interest rate contracts for customers (contract revenue)
Interest rate contracts for customers (credit losses)
Interest rate contracts for customers (credit component of fair value
Corporate banking revenue
Other noninterest expense
adjustment)
Interest rate lock commitments
Commodity contracts:
Commodity contracts for customers (contract revenue)
Commodity contracts for customers (credit component of fair value
adjustment)
Foreign exchange contracts:
Foreign exchange contracts for customers (contract revenue)
Foreign exchange contracts for customers (credit component of fair
value adjustment)
Other noninterest expense
Mortgage banking net revenue
Corporate banking revenue
Other noninterest expense
Corporate banking revenue
Other noninterest expense
$21
(33)
(7)
129
6
2
76
2
50
(5)
(27)
54
7
(3)
106
(7)
13. OTHER ASSETS
The following table provides the components of other assets included in the Consolidated Balance Sheets as of December 31:
($ in millions)
Bank owned life insurance
Derivative instruments
Partnership investments
Accounts receivable and drafts-in-process
Investment in FTPS Holding, LLC
Accrued interest receivable
Other real estate owned
Prepaid expenses
Income tax receivable
Deferred tax asset
Deposit with IRS
Other
Total
2009
$1,763
1,733
1,179
892
521
417
297
282
98
26
-
343
$7,551
52
-
-
3
2
-
60
-
2008
1,777
3,225
1,121
1,188
-
478
231
84
488
301
1,007
212
10,112
The Bancorp purchases life insurance policies on the lives of
certain directors, officers and employees and is the owner and
beneficiary of the policies. The Bancorp invests in these policies,
known as BOLI, to provide an efficient form of funding for long-
term retirement and other employee benefits costs. Therefore, the
Bancorp’s BOLI policies are
long-term
investments to provide funding for future payment of long-term
liabilities. The Bancorp records these BOLI policies within other
assets in the Consolidated Balance Sheets at each policy’s
respective cash surrender value, with changes recognized in other
noninterest income in the Consolidated Statements of Income.
intended
to be
Certain BOLI policies have a stable value agreement through
either a large, well-rated bank or multi-national insurance carrier
that provides limited cash surrender value protection from
declines in the value of each policy’s underlying investments.
During 2008 and 2009, the value of the investments underlying
one of the Bancorp’s BOLI policies continued to decline due to
disruptions in the credit markets, widening of credit spreads
between U.S. treasuries/swaps versus municipal bonds and bank
trust preferred securities, and illiquidity in the asset-backed
securities market. These factors caused the cash surrender value to
decline further beyond the protection provided by the stable value
agreement. As a result of exceeding the cash surrender value
protection, the Bancorp recorded charges totaling $10 million and
$215 million during 2009 and 2008, respectively, to reflect declines
in the policy's cash surrender value. The cash surrender value of
this BOLI policy was $237 million and $291 million at December
31, 2009 and 2008, respectively.
During 2009, the Bancorp notified the related insurance
carrier of its intent to surrender this BOLI policy. Due to the fact
the Bancorp has not yet decided the manner in which it will
surrender the policy, which may impact the cash surrender value
protection, and because of ongoing developments in existing
litigation with the insurance carrier, the Bancorp recognized
charges of $43 million in 2009 to fully reserve for the potential
loss of the cash surrender value protection associated with the
policy. In addition, the Bancorp recognized tax benefits of $106
million in 2009 related to losses recorded in prior periods on this
policy that are now expected to be tax deductible.
The Bancorp
incorporates the utilization of derivative
instruments as part of its overall risk management strategy to
reduce certain risks related to interest rate, prepayment and
foreign currency volatility. The Bancorp also holds derivatives
instruments for the benefit of its commercial customers. For
further information on derivative instruments, see Note 12.
Fifth Third Community Development Corporation (CDC), a
wholly owned subsidiary of the Bancorp, was created to invest in
projects to create affordable housing, revitalize business and
residential areas, and preserve historic landmarks. CDC generally
co-invests with other unrelated companies and/or individuals and
typically makes investments in a separate legal entity that owns the
property under development. The entities are usually limited
partnerships, and CDC serves as a limited partner. The developers
are the general partners that oversee the day-to-day operations of
the entity. The Bancorp has determined that these entities are
VIEs and the Bancorp’s investments represent variable interests.
The Bancorp has also determined it is not the primary beneficiary
of the VIEs because the general partners are more closely
associated to the VIEs and will absorb the majority of the VIEs’
expected losses. Therefore, the Bancorp accounts for these
investments using the equity method of accounting. These
investments, including the unfunded commitment amounts, had
carrying values of $1.1 billion and $1.0 billion as of December 31,
2009 and 2008, respectively. At December 31, 2009 and 2008, the
Fifth Third Bancorp 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
liability related to the unfunded commitments was $235 million
and $302 million, respectively, and was included in other liabilities
in the Consolidated Balance Sheets. The Bancorp’s maximum
exposure to loss as a result of its involvement with the VIEs is
limited to the carrying amounts of the investments.
On June 30, 2009, the Bancorp sold an approximate 51%
interest in its Processing Business to Advent International
(Advent). The resulting new company was named FTPS Holding,
LLC
(FTPS). The Bancorp’s remaining approximate 49%
ownership in FTPS is accounted for under the equity method of
accounting. For further information on FTPS, see Notes 18 and
19.
Included in prepaid expenses at December 31, 2009 was
prepaid FDIC insurance totaling $223 million. Due to the
increased frequency of bank failures during 2009, the Federal
Deposit Insurance Corporation (FDIC) deposit insurance fund
used a significant amount of its liquid assets to protect depositors
of failed institutions. The FDIC’s projections of the fund’s
14. SHORT-TERM BORROWINGS
Borrowings with original maturities of one year or less are
classified as short term, and include federal funds purchased and
other short-term borrowings. Federal funds purchased are excess
balances in reserve accounts held at Federal Reserve Banks that
the Bancorp purchased from other member banks on an
overnight basis. Other short-term borrowings include securities
sold under repurchase agreements, FHLB advances and other
borrowings with original maturities of one year or less.
($ in millions)
As of December 31:
Federal funds purchased
Other short-term borrowings
Average for the years ended December 31:
Federal funds purchased
Other short-term borrowings
Maximum month-end balance:
Federal funds purchased
Other short-term borrowings
liquidity position in 2010 and 2011 indicate liquidity needs could
significantly exceed liquid assets on hand. Consequently, the
FDIC Board voted to require insured depository institutions to
prepay an estimated amount of deposit insurance premiums by
December 30, 2009 to replenish the deposit insurance fund.
As of December 31, 2008, other assets included a deposit of
approximately $1.0 billion with the IRS pertaining to Internal
Revenue Code section 6603 for taxes associated with the
leveraged lease portfolio. The deposit enabled the Bancorp to stop
the accrual of interest, to the extent of the deposit, on the
disputed taxes. During 2009, the Bancorp reached an agreement
with the IRS to settle all of the Bancorp’s disputed leveraged
leases for all open years. As a result of this settlement agreement,
$750 million of the Bancorp's deposit balance was applied against
outstanding tax and interest, and the remaining balance was
subsequently returned to the Bancorp in April of 2009.
The Bancorp had no outstanding balance under the Federal
Reserve Bank’s Term Auction Facility funds (TAF) at December
31, 2009. There were $5.0 billion of TAF borrowings outstanding
at December 31, 2008.
A summary of short-term borrowings and weighted-average
rates follows:
2009
2008
Amount
Rate
Amount
Rate
$182
1,415
$517
6,463
$1,160
11,076
0.11%
0.16
0.20%
0.64
$287
9,959
$2,975
7,785
$6,233
13,864
.18%
1.42
2.34%
2.29
88 Fifth Third Bancorp
15. LONG-TERM DEBT
The following table is a summary of the Bancorp’s long-term borrowings at December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Parent Company
Senior:
Fixed-rate notes
Extendable notes
Subordinated(b):
Floating-rate notes
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Junior subordinated (a):
Fixed-rate notes (c)
Fixed-rate notes (c)
Fixed-rate notes (c)
Fixed-rate notes (c)
Subsidiaries
Senior:
Fixed-rate bank notes
Floating-rate bank notes
Extendable bank notes
Subordinated(b):
Fixed-rate bank notes
Junior subordinated(a):
Floating-rate bank notes
Floating-rate debentures
Floating-rate debentures
Federal Home Loan Bank advances
Other
Total
(a) Qualify as Tier I capital for regulatory capital purposes.
(b) Qualify as Tier II capital for regulatory capital purposes.
(c) Future periods of debt are floating.
The Bancorp pays down long-term debt in accordance with
contractual terms over maturity periods summarized in the above
table. Contractually obligated payments for long-term debt as of
December 31, 2009 are due over the following periods: $815
million in 2010; $14 million in 2011, $1.0 billion in 2012, $1.8
billion in 2013, $35 million in 2014 and $6.8 billion after 2014. At
December 31, 2009 the Bancorp had outstanding principal
balances of $10.2 billion, discounts and premiums of negative $15
million and additions for mark-to-market adjustments on its
hedged debt of $272 million. At December 31, 2008, the Bancorp
had outstanding principal balances of $12.8 billion, discounts and
premiums of negative $16 million and additions for mark-to-
market adjustments on its hedged debt of $813 million.
Parent Company Long-Term Borrowings
In April 2008, the Bancorp issued $750 million of senior notes to
third party investors. The senior notes bear a fixed rate of interest
of 6.25% per annum. The Bancorp entered into interest rate
swaps to convert $675 million to floating rate and, at December
31, 2009, paid a rate of 2.69%. The notes are unsecured, senior
obligations of the Bancorp. Payment of the full principal amount
of the notes will be due upon maturity on May 1, 2013. The notes
are not subject to redemption at the Bancorp's option at any time
prior to maturity.
Senior extendable notes totaling $31 million matured on
April 23, 2009.
The subordinated floating-rate notes due in 2016 pay interest
at three-month LIBOR plus 42 bp. The Bancorp has entered into
interest rate swaps to convert its subordinated fixed-rate notes due
in 2017 and 2018 to floating-rate, which was 0.70% and 0.47%,
respectively, at December 31, 2009. Of the $1 billion in 8.25%
subordinated fixed rate notes due in 2038, approximately $705
million were subsequently hedged to floating and paid a rate of
3.31% at December 31, 2009.
The 6.50% junior subordinated notes due in 2067 pay a fixed
Maturity
Interest Rate
2009
2008
2013
2016
2017
2018
2038
2067
2067
2067
2068
2010
2013
2015
6.25%
0.67%
5.45%
4.50%
8.25%
6.50%
7.25%
7.25%
8.88%
4.20%
0.38%
4.75%
2032 – 2033
2033 – 2034
2035
2010 - 2037
2010 - 2032
3.35% - 4.26%
3.04% - 3.15%
1.67% - 1.94%
0% - 8.34%
Varies
$785
-
250
572
533
1,024
750
606
886
389
804
500
-
544
52
67
62
2,564
119
$10,507
801
31
250
588
572
1,326
750
639
942
427
1,137
500
1,197
573
52
67
49
3,565
119
13,585
rate of 6.50% until 2017, then convert to a floating rate at three-
month LIBOR plus 137 bp until 2047. Thereafter, the notes pay a
floating rate at one-month LIBOR plus 237 bp. The junior
subordinated notes due in 2067, with a carrying amount of $606
million and an outstanding principal balance of $575 million at
December 31, 2009, pay a fixed rate of 7.25% until 2057, then
convert to a floating rate at three-month LIBOR plus 257 bp. The
Bancorp entered into interest rate swaps to convert $500 million
of the fixed-rate debt into a floating rate. At December 31, 2009,
the weighted-average rate paid on these swaps was 1.00%. The
7.25% junior subordinated notes due in 2067, with a current
carrying amount of $886 million and an outstanding principal
balance of $863 million at December 31, 2009, pay a fixed rate of
7.25% until 2057, then convert to a floating rate at three-month
LIBOR plus 303 bp thereafter. The Bancorp entered into interest
rate swaps to convert $700 million of the fixed-rate debt into a
floating rate. At December 31, 2009, the weighted-average rate
paid on the swaps was 1.42%. The obligations were issued to
Fifth Third Capital Trusts IV, V and VI, respectively. The
Bancorp has fully and unconditionally guaranteed all obligations
under the trust preferred securities issued by Fifth Third Capital
Trusts IV, V and VI. In addition, the Bancorp entered into
replacement capital covenants for the benefit of holders of long-
term debt senior to the junior subordinated notes that limits,
subject to certain restrictions, the Bancorp’s ability to redeem the
junior subordinated notes prior to their scheduled maturity.
The 8.88% junior subordinated notes due in 2068, with a
current carrying value of $389 million and an outstanding
principal balance of $400 million at December 31, 2009, pay a
fixed rate until 2058, then convert to floating rate at three month
LIBOR plus 500 bp. The Bancorp entered into an interest rate
swap to convert $275 million of the fixed rate debt into a floating
rate. At December 31, 2009, the rate paid on the swap was 3.53%.
The obligations were issued by Fifth Third Capital Trust VII. The
Fifth Third Bancorp 89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bancorp’s obligations under the transaction documents, taken
together, have the effect of providing a full and unconditional
guarantee by the Bancorp, on a subordinated basis, of the
payment obligations under the trust preferred securities. The
junior subordinated notes may be redeemed at the option of the
Bancorp on or after May 15, 2013, or in certain other limited
circumstances, at a redemption price of 100% of the principal
amount plus accrued but unpaid interest. All redemptions are
subject to certain conditions and generally require approval by the
Federal Reserve Board.
Subsidiary Long-Term Borrowings
The senior fixed-rate bank notes with a carrying value of $804
million mature in 2010. The Bancorp entered into an interest rate
swap to convert this fixed-rate debt into floating rate. At
December 31, 2009, the rate paid on this swap was 0.31%. In
April of 2009, the Bancorp repaid $275 million in senior fixed rate
bank notes maturing in 2019.
The senior floating-rate bank notes due in 2013 pay a floating
rate at three-month LIBOR plus 11 bp.
Senior extendable notes totaling $400 million and $797
million matured on April 27, 2009
For the subordinated fixed-rate bank notes due in 2015, the
Bancorp entered into interest rate swaps to convert the fixed-rate
debt into floating rate. At December 31, 2009, the weighted-
average rate paid on the swaps was 0.38%.
The junior subordinated floating-rate bank notes due in 2032
and 2033 were assumed by a subsidiary of the Bancorp as part of
the acquisition of Crown in November 2008. Two of the notes
pay a floating rate at three-month LIBOR plus 310 and 325 bp.
The third note pays a floating rate at six-month LIBOR plus 370
bp.
The three-month LIBOR plus 290 bp and the three-month
LIBOR plus 279 bp junior subordinated debentures due in 2033
and 2034, respectively, were assumed by a subsidiary of the
Bancorp in connection with the acquisition of First National
Bank. The obligations were issued to FNB Statutory Trusts I and
II, respectively.
The junior subordinated floating-rate bank notes due in 2035
were assumed by a subsidiary of the Bancorp as part of the
acquisition of First Charter in May 2008. The obligations were
issued to First Charter Capital Trust I and II, respectively. The
notes of First Charter Capital Trust I and II pay floating at three-
month LIBOR plus 169 bp and 142 bp, respectively. The Bancorp
has fully and unconditionally guaranteed all obligations under the
acquired trust preferred securities issued by First Charter Capital
Trust I and II.
At December 31, 2009, FHLB advances have rates ranging
from 0% to 8.34%, with interest payable monthly. The advances
are secured by certain residential mortgage loans and securities
totaling $15.0 billion. At December 31, 2009, $1.5 billion of
FHLB advances are floating rate. The Bancorp entered into an
interest rate swap with a notional value of $500 million to convert
the floating rate advances to a fixed rate. At December 31, 2009,
the interest rate paid on this swap was 2.63%. The Bancorp has an
interest rate cap, with a notional amount of $1.0 billion, held
against the remaining floating rate FHLB advance borrowings.
The $2.6 billion in advances mature as follows: $1 million in
2010, $2 million in 2011, $1.0 billion in 2012, $500 million in 2013
and $1.1 billion in 2014 and thereafter.
Medium-term senior notes and subordinated bank notes with
maturities ranging from one year to 30 years can be issued by the
Bancorp’s subsidiary bank, of which $1.8 billion was outstanding
at December 31, 2009 with $18.2 billion available for future
issuance.
16. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES
The Bancorp, in the normal course of business, enters into
financial
instruments and various agreements to meet the
financing needs of its customers. The Bancorp also enters into
certain transactions and agreements to manage its interest rate and
prepayment risks, provide funding, equipment and locations for
its operations and invest in its communities. These instruments
and agreements involve, to varying degrees, elements of credit
risk, counterparty risk and market risk in excess of the amounts
recognized in the Bancorp’s Consolidated Balance Sheets. The
creditworthiness of counterparties for all
instruments and
agreements is evaluated on a case-by-case basis in accordance with
the Bancorp’s credit policies. The Bancorp’s
significant
commitments, contingent liabilities and guarantees in excess of
the amounts recognized in the Consolidated Balance Sheets are
discussed in further detail as follows:
Commitments to extend credit
Commitments to extend credit are agreements to lend, typically
having fixed expiration dates or other termination clauses that
may require payment of a fee. Since many of the commitments to
extend credit may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
flow requirements. The Bancorp is exposed to credit risk in the
event of nonperformance by the counterparty for the amount of
the contract. Fixed-rate commitments are also subject to market
risk resulting from fluctuations in interest rates and the Bancorp’s
exposure
those
commitments. As of December 31, 2009 and 2008, the Bancorp
had a reserve for unfunded commitments totaling $294 million
and $195 million, respectively, included in other liabilities in the
Consolidated Balance Sheets.
replacement value of
limited
the
to
is
Commitments
The Bancorp has certain commitments to make future payments
under contracts. The following table reflects a summary of
significant commitments:
($ in millions)
Commitments to extend credit
Letters of credit (including standby letters
of credit)
Forward contracts to sell mortgage loans
Noncancelable lease obligations
Capital commitments for private equity
investments
Capital lease obligations
Capital expenditures
Purchase obligations
90 Fifth Third Bancorp
2009
$42,591
2008
49,391
6,657
3,633
906
90
44
27
25
8,951
3,235
937
79
38
68
43
Letters of credit
Standby and commercial
letters of credit are conditional
commitments issued to guarantee the performance of a customer
to a third party. At December 31, 2009, approximately $2.5 billion
of letters of credit expire within one year (including $40 million
issued on behalf of commercial customers to facilitate trade
payments in dollars and foreign currencies), $3.9 billion expire
between one and five years and $257 million expire thereafter.
Standby letters of credit are considered guarantees in accordance
with U.S. GAAP. At December 31, 2009 and 2008, the reserve
related to these standby letters of credit was $6 million and $3
million, respectively. Approximately 58% and 66% of the total
standby letters of credit were secured as of December 31, 2009
and 2008, respectively. In the event of nonperformance by the
customers, the Bancorp has rights to the underlying collateral,
which can include commercial real estate, physical plant and
property, inventory, receivables, cash and marketable securities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bancorp monitors the credit risk associated with the standby
letters of credit using the same dual risk rating system utilized for
estimating probabilities of default within its loan and lease
portfolio. Under this risk rating as of December 31, 2009,
approximately $5.0 billion of the standby letters of credit were
classified as average or better; approximately $1.3 billion were
classified as watch-list or special mention; and approximately $357
million were classified as either substandard or doubtful.
At December 31, 2009 and 2008, the Bancorp had
outstanding letters of credit that were supporting certain securities
issued as variable rate demand notes (VRDNs). The Bancorp
facilitates financing for its commercial customers, which consist of
companies and municipalities, by marketing the VRDNs to
investors. The VRDNs pay interest to holders at a rate of interest
that fluctuates based upon market demand. The VRDNs generally
have long-term maturity dates, but can be tendered by the holder
for purchase at par value upon proper advance notice. When the
VRDNs are tendered, a remarketing agent generally finds another
investor to purchase the VRDNs to keep the securities
outstanding in the market. As of December 31, 2009 and 2008,
Fifth Third Securities, Inc. (FTS) acted as the remarketing agent to
issuers on approximately $3.4 billion and $4.2 billion, respectively,
of VRDNs. As remarketing agent, FTS is responsible for finding
purchasers for VRDNs that are put by investors. The Bancorp
issues letters of credit, as a credit enhancement, to the VRDNs
remarketed by FTS, in addition to approximately $936 million and
$2.0 billion in VRDNs remarketed by third parties at December
31, 2009 and 2008, respectively. These letters of credit are
included in the total letters of credit balance provided in the
previous table. At December 31, 2009 and 2008, FTS held $47
million and $388 million, respectively, of these VRDN’s in its
portfolio and classified them as trading securities. The Bancorp
purchased $188 million and $752 million of the VRDNs from the
market, through FTS, and held them in its trading securities
portfolio at December 31, 2009 and 2008, respectively. For the
VRDNs remarketed by third parties,
in some cases, the
remarketing agent has failed to remarket the securities and has
instructed the indenture trustee to draw upon approximately $45
million and $173 million of letters of credit issued by the Bancorp
at December 31, 2009 and 2008, respectively. The Bancorp
recorded these draws as commercial loans in its Consolidated
Balance Sheets.
Forward contracts to sell mortgage loans
The Bancorp enters into forward contracts to economically hedge
the change in fair value of certain residential mortgage loans held
for sale due to changes in interest rates. The outstanding notional
amounts of these forward contracts were $3.6 billion and $3.2
billion as of December 31, 2009 and December 31, 2008,
respectively.
typically ranges from 5% to 10% of the total PMI coverage. The
Bancorp's maximum exposure in the event of nonperformance by
the underlying borrowers is equivalent to the Bancorp's total
outstanding reinsurance coverage, which was $182 million and
$170 million, respectively, at December 31, 2009 and 2008. As of
December 31, 2009 and 2008, the Bancorp maintained a reserve
of $44 million and $13 million, respectively, related to exposures
within the reinsurance portfolio. During the second quarter of
2009,
the practice of providing
reinsurance of private mortgage insurance for newly originated
mortgage loans.
the Bancorp suspended
Legal claims
There are legal claims pending against the Bancorp and its
subsidiaries that have arisen in the normal course of business. See
Note 17 for additional information regarding these proceedings.
Guarantees
The Bancorp has performance obligations upon the occurrence of
certain events under financial guarantees provided in certain
contractual arrangements as discussed in the following sections.
Residential mortgage loans sold with recourse
The Bancorp previously sold certain residential mortgage loans in
the secondary market with credit recourse. In the event of any
customer default, pursuant to the credit recourse provided, the
Bancorp is required to reimburse the third party. The maximum
amount of credit risk in the event of nonperformance by the
underlying borrowers is equivalent to the total outstanding
balance. In the event of nonperformance, the Bancorp has rights
to the underlying collateral value securing the loan. At December
31, 2009 and 2008, the outstanding balances on these loans sold
with credit recourse were approximately $1.1 billion and $1.3
billion, respectively, and the delinquency rates were approximately
8.10% and 6.40%, respectively. At December 31, 2009 and 2008,
the Bancorp maintained an estimated credit loss reserve on these
loans sold with credit recourse of approximately $21 million and
$20 million, respectively, recorded in other liabilities in the
Consolidated Balance Sheets. To determine the credit loss reserve,
the Bancorp used an approach that is consistent with its overall
approach in estimating credit losses for various categories of
residential mortgage loans held in its loan portfolio. In addition,
conforming residential mortgage loans sold to unrelated third
parties are generally sold with representation and warranty
recourse provisions. Under these provisions, the Bancorp is
required to repurchase any previously sold loan for which the
representation or warranty of the Bancorp proves to be
inaccurate, incomplete or misleading. As of December 31, 2009
and 2008, the Bancorp maintained a reserve related to these loans
sold with the representation and warranty recourse provision of
$17 million and $6 million, respectively.
Noncancelable lease obligations
The Bancorp’s subsidiaries have entered into a number of
noncancelable
rental
commitments under noncancelable lease agreements are shown in
the previous table. The Bancorp or its subsidiaries have also
entered into a limited number of agreements for work related to
banking center construction and to purchase goods or services.
agreements. The minimum
lease
Contingent Liabilities
Private mortgage reinsurance
For certain mortgage loans originated by the Bancorp, borrowers
may be required to obtain private mortgage insurance (PMI)
provided by third-party insurers. In some instances, these insurers
cede a portion of the PMI premiums to the Bancorp, and the
Bancorp provides reinsurance coverage within a specified range of
the total PMI coverage. The Bancorp’s reinsurance coverage
floating-rate,
recourse, certain primarily
Liquidity support and credit enhancement provided to an unconsolidated
QSPE
Through 2008, the Bancorp had transferred at par, subject to
credit
short-term
investment grade commercial loans to an unconsolidated QSPE
that is wholly owned by an independent third-party. The Bancorp
did not transfer any new loans to the QSPE during the year ended
December 31, 2009. No gains or losses were recognized on the
transfers to the QSPE for the year December 31, 2008. Generally,
the loans transferred provide a lower yield due to their investment
grade nature and, therefore, transferring these loans to the QSPE
allows the Bancorp to reduce its interest rate exposure to these
lower yielding
loan assets while maintaining the customer
relationships. The outstanding balance of these loans at December
31, 2009 and 2008 was $771 million and $1.9 billion, respectively.
As of December 31, 2009, the loans transferred had a weighted
Fifth Third Bancorp 91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expense incurred as a result of customers failing to comply with
margin or margin maintenance calls on all margin accounts. The
margin account balance held by the brokerage clearing agent as of
December 31, 2009 was $8 million compared to $10 million as of
December 31, 2008. In the event of any customer default, FTS
has rights to the underlying collateral provided. Given the
existence of the underlying collateral provided and negligible
historical credit losses, the Bancorp does not maintain a loss
reserve related to the margin accounts.
Long-term borrowing obligations
The Bancorp had fully and unconditionally guaranteed certain
long-term borrowing obligations issued by wholly-owned issuing
trust entities of $2.8 billion as of December 31, 2009 and 2008.
in accordance with
Visa litigation
The Bancorp, as a member bank of Visa prior to Visa’s
completion of their IPO on March 19, 2008, had certain
indemnification obligations pursuant to Visa’s certificate of
incorporation and bylaws and
their
membership agreements. In accordance with Visa’s by-laws prior
to the IPO, the Bancorp could have been required to indemnify
Visa for the Bancorp’s proportional share of losses based on the
pre-IPO membership interests. In contemplation of the IPO, Visa
announced that it had completed restructuring transactions during
the fourth quarter of 2007. As part of this restructuring, the
Bancorp’s indemnification obligation was modified to include only
certain known litigation as of the date of the restructuring. This
modification triggered a requirement to recognize a $3 million
liability in 2007 equal to the fair value of the indemnification
obligation. Additionally during 2007, the Bancorp recorded $169
million for its share of litigation formally settled by Visa and for
probable future litigation settlements, and during 2008, the
Bancorp recorded additional reserves of $71 million for probable
future litigation settlements. In connection with the IPO in 2008,
Visa retained a portion of the proceeds, totaling $169 million, to
fund an escrow account in order to resolve existing litigation
settlements as well as fund potential future litigation settlements.
During 2009, Visa announced it had deposited an additional
$700 million into the litigation escrow account. As a result of this
funding, the Bancorp recorded its proportional share of $29
million of these additional funds as a reduction to its net Visa
litigation reserve liability and a reduction to noninterest expense.
Later in 2009, the Bancorp completed the sale of its Visa, Inc.
Class B shares for proceeds of $300 million. As part of this
transaction the Bancorp entered into a total return swap in which
the Bancorp will make or receive payments based on subsequent
changes in the conversion rate of the Class B shares into Class A
shares. The swap terminates on the later of the third anniversary
of Visa’s IPO or the date on which certain pre-specified litigation
is finally settled. As a result of the sale of Class B shares and
entering into the swap contract, the Bancorp reversed its net Visa
litigation reserve liability and recognized a free-standing derivative
liability with an initial fair value of $55 million. See Note 12 for
further discussion on this total return swap. The sale of the Class
B shares, recognition of the derivative liability and reversal of the
net litigation reserve liability resulted in a pre-tax benefit of $288
million ($187 million after-tax) recognized by the Bancorp in
2009.
average life of 2.2 years. These loans may be transferred back to
the Bancorp upon the occurrence of certain specified events.
These events include borrower default on the loans transferred,
ineligible loans transferred by the Bancorp to the QSPE, the
inability of the QSPE to issue commercial paper, and in certain
circumstances, bankruptcy preferences initiated against underlying
borrowers. The maximum amount of credit risk in the event of
nonperformance by the underlying borrowers is approximately
equivalent to the total outstanding balance. During the years
ended December 31, 2009 and 2008, the QSPE did not transfer
any loans back to the Bancorp as a result of a credit event.
The Bancorp monitors the credit risk associated with the
underlying borrowers through the same risk grading system
currently utilized for establishing loss reserves in its loan and lease
portfolio. Under this risk rating system as of December 31, 2009,
approximately $683 million of the loans in the QSPE were
classified average or better; approximately $24 million were
classified as watch-list or special mention; approximately $36
million were classified as substandard; and approximately $28
million were classified as doubtful. At December 31, 2009 and
2008, the Bancorp’s loss reserve related to the credit enhancement
provided to the QSPE was $45 million and $37 million,
respectively, and was recorded
in the
Consolidated Balance Sheets. To determine the credit loss reserve,
the Bancorp used an approach that is consistent with its overall
approach in estimating credit losses for various categories of
commercial loans held in its loan portfolio.
in other
liabilities
The QSPE issues commercial paper and uses the proceeds to
fund the acquisition of commercial loans transferred to it by the
Bancorp. The ability of the QSPE to issue commercial paper is a
function of general market conditions and the credit rating of the
liquidity provider. In the event the QSPE is unable to issue
commercial paper, the Bancorp has agreed to provide liquidity
support in the form of a line of credit to the QSPE and the
repurchase of assets from the QSPE. As of December 31, 2009
and 2008, the liquidity asset purchase agreement (LAPA) was $1.4
billion and $2.8 billion, respectively. In addition to the liquidity
support options discussed above, the Bancorp has also purchased
commercial paper issued by the QSPE. Beginning in 2008 and
continuing
the year ended December 31, 2009,
dislocation in the short-term funding market caused the QSPE
difficulty in obtaining sufficient funding through the issuance of
commercial paper. As a result, the Bancorp purchased commercial
paper throughout 2008 and 2009. As of December 31, 2009 and
2008, the Bancorp held approximately $805 million and $143
million, respectively, of asset-backed commercial paper issued by
the QSPE, representing 87% and 7%, respectively, of the total
commercial paper issued by the QSPE.
through
During 2008, the Bancorp repurchased $686 million of
commercial loans at par from the QSPE under the LAPA. Fair
value adjustments of $3 million were recorded on these loans
upon repurchase. There were no LAPA purchases in 2009. As of
December 31, 2009 and 2008, there were no outstanding balances
on the line of credit from the Bancorp to the QSPE.
In June of 2009, the FASB issued guidance amending the
accounting for QSPE’s and the consolidation of VIEs. Upon
adoption of this guidance on January 1, 2010, the Bancorp has
determined that it is the primary beneficiary (and therefore
consolidator) of this QSPE. Refer to Note 1 of the Notes to
Consolidated Financial Statements for further details regarding the
guidance and the related impact of adoption by the Bancorp.
Margin accounts
FTS, a subsidiary of the Bancorp, guarantees the collection of all
margin account balances held by its brokerage clearing agent for
the benefit of FTS customers. FTS is responsible for payment to
its brokerage clearing agent for any loss, liability, damage, cost or
92 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interchange
17. LEGAL AND REGULATORY PROCEEDINGS
During April 2006, the Bancorp was added as a defendant in a
consolidated antitrust class action lawsuit originally filed against
Visa®, MasterCard® and several other major financial institutions
in the United States District Court for the Eastern District of
New York. The plaintiffs, merchants operating commercial
businesses throughout the U.S. and trade associations, claim that
the
fees charged by card-issuing banks are
unreasonable and seek injunctive relief and unspecified damages.
In addition to being a named defendant, the Bancorp is also
subject to a possible indemnification obligation of Visa as
discussed in Note 16. Accordingly, prior to the sale of its Class B
shares during 2009, the Bancorp had recorded a litigation reserve
of $243 million to account for its potential exposure in this and
related litigation. Additionally, the Bancorp had also recorded its
proportional share of $199 million of the Visa escrow account
funded with proceeds from the Visa IPO along with several
subsequent fundings. Upon the Bancorp’s sale of its Visa, Inc.
Class B shares during 2009, and the recognition of the total return
swap that transfers conversion risk of the Class B shares back to
the Bancorp, the Bancorp reversed the remaining net litigation
reserve. Refer to Note 16 for further information regarding the
Bancorp’s net litigation reserve and ownership interest in Visa.
This antitrust litigation is still in the pre-trial phase.
In September 2007, Ronald A. Katz Technology Licensing,
L.P. (Katz) filed a suit in the United States District Court for the
Southern District of Ohio against the Bancorp and it’s Ohio
banking subsidiary. In the suit, Katz alleges that the Bancorp and
its Ohio bank are infringing on Katz’s patents for interactive call
processing technology by offering certain automated telephone
banking and other services. This lawsuit is one of many related
patent infringement suits brought by Katz in various courts
against numerous other defendants. Katz is seeking unspecified
18. PROCESSING BUSINESS SALE
On June 30, 2009, the Bancorp completed the sale of a majority
interest in its merchant acquiring and financial institutions
processing businesses (Processing Business). Under the terms of
the sale, an unrelated
third party, Advent, acquired an
approximate 51% interest in the Processing Business for cash and
warrants. The Bancorp retained the remaining approximate 49%
interest in the Processing Business and, as part of the sale, the
Processing Business assumed loans totaling $1.25 billion owed to
the Bancorp.
As a result of the sale, the Bancorp recognized a pre-tax gain
of approximately $1.8 billion ($1.1 billion after-tax), which was
recorded in other noninterest income. Of the $1.8 billion gain,
approximately $848 million was the result of marking the
Bancorp’s retained interest in the Processing Business to fair
value.
At the time of the sale, the initial fair value of the warrants
was determined to be $62 million. The initial fair value of the
warrants was calculated using a Black-Scholes option valuation
model using probability weighted scenarios, assuming expected
terms of 10 to 20 years, expected volatilities of 37.5% to 44.4%,
risk free rates of 4.03% to 4.33%, and expected dividend rates of
0%. The expected volatilities were based on historical and implied
volatilities of comparable companies assuming similar expected
19. RELATED PARTY TRANSACTIONS
The Bancorp maintains written policies and procedures covering
related party transactions to principal shareholders, directors and
executives of the Bancorp. These procedures cover transactions
such as employee-stock purchase loans, personal lines of credit,
residential secured loans, overdrafts, letters of credit and increases
in indebtedness. Such transactions are subject to the Bancorp’s
monetary damages and penalties as well as injunctive relief in the
suit. Management believes there are substantial defenses to these
claims and intends to defend them vigorously. The impact of the
final disposition of this lawsuit cannot be assessed at this time.
In 2008, five putative securities class action complaints were
filed against the Bancorp and its Chief Executive Officer, among
other parties. The five cases have been consolidated, and are
currently pending in the United States District Court for the
Southern District of Ohio. The lawsuits allege violations of federal
securities laws related to disclosures made by the Bancorp in press
releases and filings with the SEC regarding its quality and
sufficiency of capital, credit losses and related matters, and seeking
unquantified damages on behalf of putative classes of persons
who either purchased the Bancorp’s securities, or acquired the
Bancorp’s securities pursuant to the First Charter Corporation
Acquisition. In addition to the foregoing, two cases were filed in
the United States District Court for the Southern District of Ohio
against the Bancorp and certain officers alleging violations of
ERISA based on allegations similar to those set forth in the
securities class action cases filed during the same period of time.
The two cases alleging violations of ERISA have also been
consolidated. These cases remain in the early stages of litigation.
The impact of the final disposition of these lawsuits cannot be
assessed at this time.
The Bancorp and its subsidiaries are not parties to any other
material litigation. However, there are other litigation matters that
arise in the normal course of business. While it is impossible to
ascertain the ultimate resolution or range of financial liability with
respect to these contingent matters, management believes any
resulting liability from these other actions would not have a
material effect upon the Bancorp’s consolidated financial position,
results of operations or cash flows.
terms. Refer to Notes 12 and 27 for further information regarding
the current fair value of these warrants.
In connection with the sale, the Bancorp provided Advent
with certain put rights that are exercisable in the event of three
unlikely circumstances. At the time of the sale, the Bancorp
initially valued the put rights at approximately $14 million. The
initial fair value of the put rights was calculated using a Black-
Scholes option valuation model using probability weighted
scenarios, assuming expected terms of 1 to 4.5 years, expected
volatilities of 39.6% to 56.9%, risk free rates of 0.48% to 2.34%,
and expected dividend rates of 0%. The expected volatilities were
implied volatilities of comparable
based on historical and
companies assuming similar expected terms. Refer to Notes 12
and 27 for further information regarding the current fair value of
these put rights.
The fair value of the Bancorp’s retained noncontrolling
interest in the Processing Business at the time of sale, exclusive of
the warrants, was $524 million, and was based on the price
Advent paid for its ownership interest in the Processing Business.
The Bancorp has deemed the Processing Business to be a related
party and prospectively accounts for its retained noncontrolling
interest in the Processing Business under the equity method of
accounting. Refer to Note 19 for further details regarding the
Bancorp’s involvement with related parties.
normal underwriting and approval procedures. Prior to the closing
of a loan to a related party, Compliance Risk Management must
approve and determine whether the transaction requires approval
from or a post notification be sent to the Bancorp’s Board of
Directors. At December 31, 2009 and 2008, certain directors,
executive officers, principal holders of Bancorp common stock,
Fifth Third Bancorp 93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
associates of such persons, and affiliated companies of such
persons were indebted, including undrawn commitments to lend,
to the Bancorp’s banking subsidiary.
The following table summarizes the Bancorp’s activities with its
principal shareholders, directors and executives at December 31:
($ in millions)
Commitments to lend, net of participations:
Directors and their affiliated companies
Executive officers
Total
2009
2008
$143
6
149
339
7
346
Outstanding balance on loans, net of
participations and undrawn commitments
68
143
The commitments to lend are in the form of loans and
guarantees for various business and personal interests. This
indebtedness was incurred in the ordinary course of business on
substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with
unrelated parties. This indebtedness does not involve more than
the normal risk of repayment or present other features
unfavorable to the Bancorp. The decrease in commitments to lend
and outstanding balances on loans as of December 31, 2009
compared to December 31, 2008 is due to the Bancorp merging
its Fifth Third Bank (Michigan) and Fifth Third Bank N.A.
charters into the Fifth Third Bank (Ohio) charter on September
30, 2009 and the resulting reduction in individuals that qualify as
related parties.
On June 30, 2009, the Bancorp completed the sale of a
majority interest in its Processing Businesses, FTPS. Advent
acquired an approximate 51% interest in FTPS for cash and
warrants. The Bancorp retained the remaining approximate 49%
interest in FTPS and, as part of the sale, FTPS assumed loans
totaling $1.25 billion owed to the Bancorp. The Bancorp
recognized $15 million in noninterest income as part of its equity
method investment in FTPS for the year ended December 31,
2009 and received quarterly distributions totaling $18 million
during 2009.
involve
support,
including
transition
The Bancorp and FTPS have various agreements in place
covering services relating to the operations of FTPS. The services
provided by the Bancorp to FTPS were required to support FTPS
as a stand alone entity during the deconversion period. These
product
services
development, risk management, legal, accounting and general
business resources. FTPS paid the Bancorp $76 million for these
services for the year ended December 31, 2009. Other services
provided to FTPS by the Bancorp, which will continue beyond
the deconversion period, include treasury management, clearing,
settlement, sponsorship, data center support and office space.
FTPS paid the Bancorp $14 million for these services for the year
ended December 31, 2009. In addition to the previously
mentioned services, the Bancorp has entered into an agreement
under which FTPS will provide processing services to the
Bancorp. The total amount of fees relating to the processing
services provided to the Bancorp by FTPS totaled $33 million for
the year ended December 31, 2009.
The loans to FTPS had a balance of $1.24 billion at
December 31, 2009. The total amount of interest income relating
to the loans was $60 million for the year ended December 31,
2009 and is included in interest and fees on loans and leases in the
Consolidated Statements of Income. FTPS has an additional line
of credit with the Bancorp for $125 million, which was not drawn
upon during the year ended December 31, 2009.
20. INCOME TAXES
The Bancorp and its subsidiaries file a consolidated federal income tax return. The following is a summary of applicable income taxes included
in the Consolidated Statements of Income at December 31:
($ in millions)
Current income tax (benefit) expense:
U.S. income taxes
State and local income taxes
Non-U.S. income taxes
Total current tax (benefit) expense
Deferred income tax expense (benefit):
U.S. income taxes
State and local income taxes
Non-U.S. income taxes
Total deferred tax expense (benefit)
Applicable income tax expense (benefit)
2009
2008
2007
($157)
6
(3)
(154)
190
(8)
2
184
$30
560
25
3
588
623
16
-
639
(1,090)
(47)
(2)
(1,139)
(551)
(197)
19
-
(178)
461
A reconciliation between the statutory U.S. income tax rate and the Bancorp’s effective tax rate for the years ended December 31:
Statutory tax rate
Increase (decrease) resulting from:
State taxes, net of federal benefit
Tax-exempt income
Credits
Dividends on subsidiary preferred stock
Goodwill
Interest to taxing authority, net of tax
Other, net
Effective tax rate
2009
35.0%
2008
(35.0)
2007
35.0
(.1)
(18.7)
(14.6)
-
8.7
(7.6)
1.2
3.9%
(.5)
1.5
(3.6)
-
11.9
5.1
(.1)
(20.7)
1.5
1.4
(5.0)
(2.5)
-
.1
(.5)
30.0
Tax-exempt income in the rate reconciliation table includes
interest on municipal bonds, interest on tax-exempt lending,
income/charges on life insurance policies held by the Bancorp,
and certain gains on sales of leases. During 2009, the Bancorp
notified the carrier of one of the Bancorp’s policies of its intent to
94 Fifth Third Bancorp
surrender a certain BOLI policy and was therefore required to
establish a deferred tax asset relating to the investment. As a
result, tax expense for the year was favorably impacted by $106
million. Tax expense was adversely impacted in 2008 and 2007 by
$78 million and $64 million, respectively relating to the same
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BOLI policy. See Note 13 for a further discussion of those
charges.
in
taxes,
interest and expenses
Deferred income taxes are included as a component of other
assets and accrued
the
Consolidated Balance Sheets. At December 31, 2009 and 2008,
the Bancorp had recorded deferred tax assets of $81 million and
$58 million, respectively related to state net operating loss
carryforwards. These deferred tax assets relating to state net
operating losses were net of specific valuation allowances,
primarily resulting from leasing operations, of $15 million and $2
million at December 31, 2009 and 2008, respectively. If these
carry forwards are not utilized, they will expire in varying amounts
through 2029. Additionally, at December 31, 2009, the Bancorp
had federal general business tax credit carryforwards of $42
million. If unused, these credit carryforwards will expire in 2029.
The Bancorp did not have any general business tax credit
carryforwards at December 31, 2008.
The Bancorp has determined that a valuation allowance is
not needed against the remaining deferred tax assets as of
December 31, 2009 or 2008 as the Bancorp has considered the
positive and negative evidence and based upon that evidence
believes it is more likely than not that the deferred tax asset will be
recognized. This is based upon the fact that there is sufficient
taxable income in the carry back period to absorb a significant
portion of the deferred tax assets. The remaining deferred tax
assets will be absorbed by future reversals of existing taxable
temporary differences.
During 2009, the Bancorp also settled its outstanding
dispute with the Internal Revenue Service relating to certain
leveraged lease transactions. This settlement had a favorable
impact on income tax for 2009 of $55 million primarily through
the reduction of previously accrued interest expense. The accrual
of this interest expense had an adverse impact on tax expense for
2008 and 2007. The Bancorp is in the process of filing amended
state income tax returns to reflect that settlement. Statutes of
Limitations remain open for tax years 2004-2009 and on a limited
basis from 1998 through 2003. The Bancorp
is currently
addressing non-leasing items as part of the appeals process
relating to tax years 2004 and 2005 and the Internal Revenue
($ in millions)
Unrecognized tax benefits at January 1
Gross increases for tax positions taken during prior period
Gross decreases for tax positions taken during prior period
Gross increases for tax positions taken during current period
Settlements with taxing authorities
Lapse of applicable statute of limitations
Unrecognized tax benefits at December 31
Service is currently auditing 2006 and 2007. Any uncertain tax
positions are considered in the calculation of unrecognized tax
benefits discussed below.
At December 31, 2009 and at December 31, 2008, the
Bancorp had unrecognized tax benefits of $82 million and $959
million, respectively. Those balances included $81 million and $83
million, respectively, of tax positions that, if recognized, would
impact the effective tax rate and another $1 million at December
31, 2008 that would impact goodwill. The remaining $1 million
and $875 million, respectively, is related to tax positions for which
the ultimate deductibility is highly certain but for which there is
uncertainty about the timing of the deductions. Substantially all of
the reduction of uncertain tax positions related to the settlement
of certain leasing items with the IRS. It is reasonably possible that
the amount of unrecognized benefit with respect to some of the
Bancorp’s uncertain tax positions could decrease by as much as
$70 million during the next 12 months.
Any interest and penalties incurred in connection with
income taxes are recorded as a component of tax expense. For
the year ended December 31, 2009, the Bancorp accrued interest
of $3 million, net of the related tax benefit. This $3 million is
exclusive of the $55 million interest reduction discussed above
relating to the leasing settlement. At December 31, 2009 and 2008,
the Bancorp had accrued interest liabilities, net of the related tax
benefits, of $13 million and $210 million,
respectively.
Substantially all of the reduction of accrued interest related to the
settlement of certain leasing items with the IRS. No material
liabilities were recorded for penalties.
Retained earnings at December 31, 2009 included $157
million in allocations of earnings for bad debt deductions of
former thrift subsidiaries for which no income tax has been
provided. Under current tax law, if certain of the Bancorp’s
subsidiaries use these bad debt reserves for purposes other than to
absorb bad debt losses, they will be subject to federal income tax
at the current corporate tax rate.
The following table provides a reconciliation of the
beginning and ending amounts of the Bancorp’s unrecognized tax
benefits.
2009
$959
16
(329)
1
(563)
(2)
$82
2008
469
496
(8)
4
-
(2)
959
2007
446
-
-
47
(4)
(20)
469
Deferred income taxes are included as a component of other assets in the Consolidated Balance Sheets and are comprised of the following
temporary differences at December 31:
($ in millions)
Deferred tax assets:
Allowance for loan & lease losses
Deferred compensation
Impairment reserves
Reserve for unfunded commitments
State net operating losses
Accrued interest
Other
Total deferred tax assets
Deferred tax liabilities:
Lease financing
Investments in JV and partnership interests
Mortgage servicing rights
Other comprehensive income
Bank premises and equipment
State deferred taxes
Other
Total deferred tax liabilities
Total net deferred tax asset
2009
2008
$1,312
147
145
103
81
2
222
$2,012
$898
481
191
130
88
60
138
$1,986
$26
975
171
4
68
58
104
256
1,636
849
12
149
53
96
44
132
1,335
301
Fifth Third Bancorp 95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. RETIREMENT AND BENEFIT PLANS
The Bancorp recognizes the overfunded and underfunded status
of its pension plans as an asset and liability, respectively. The
underfunded amounts recognized in other liabilities in the
Consolidated Balance Sheets as of December 31, 2009 and 2008
were as follows:
($ in millions)
Prepaid benefit cost
Accrued benefit liability
Net underfunded status
2009
$ -
(35)
($35)
2008
-
(84)
(84)
There were no Bancorp pension plans that had an overfunded
status at December 31, 2009 and 2008. The following table
summarizes the defined benefit retirement plans as of and for the
years ended December 31:
Plans with an Underfunded Status
($ in millions)
Fair value of plan assets at January 1
Actual return on assets
Contributions
Settlement
Benefits paid
Fair value of plan assets at December 31
Projected benefit obligation at January 1
Service cost
Interest cost
Settlement
Actuarial loss
Benefits paid
Projected benefit obligation at December 31
Unfunded projected benefit obligation recognized in
the Consolidated Balance Sheets as a liability
2009
$144
29
39
(19)
(11)
182
$228
-
12
(19)
7
(11)
$217
2008
237
(70)
4
(17)
(10)
144
$236
-
13
(17)
6
(10)
$228
($35)
($84)
The estimated net actuarial loss and prior service cost for the
defined benefit pension plans that will be amortized from
accumulated other comprehensive income into net periodic
benefit cost during 2010 are $12 million and $1 million,
respectively.
The following table summarizes net periodic benefit cost and
other changes in plan assets and benefit obligations recognized in
other comprehensive income for the years ended December 31:
2009
2008
2007
($ in millions)
Components of net periodic benefit cost:
Service cost
Interest cost
Expected return on assets
Amortization of net actuarial loss
Amortization of net prior service cost
Settlement
Net periodic benefit cost
Other changes in plan assets and benefit
obligations recognized in other
comprehensive income:
Net actuarial (loss) gain
Net prior service cost
Amortization of net actuarial loss
Amortization of prior service cost
Settlement
Total recognized in other comprehensive
income
$ -
12
(12)
15
1
13
$29
($10)
-
(15)
(1)
(13)
(39)
Total recognized in net periodic benefit
cost and other comprehensive income
($10)
96 Fifth Third Bancorp
-
13
(18)
7
1
10
13
93
-
(7)
(1)
(10)
75
88
-
14
(19)
7
1
7
10
10
-
(7)
(1)
(7)
(5)
5
Fair Value Measurements of Plan Assets
The following table summarizes Plan assets measured at fair value
on a recurring basis as of December 31, 2009:
Fair Value Measurements Using (a)
Level 1
Level 2
Level 3
($ in million)
Equity securities:
Growth equity securities
Value equity securities
Total equity securities (b)
Mutual & exchange traded funds:
Money market funds
International funds
Commodity funds
Total mutual & exchange
traded funds
Debt securities:
U.S Treasury obligations
U.S. Govt. agencies (c)
Agency mortgage backed
Corporate bonds (d)
Total debt securities
$52
49
101
6
28
9
43
6
-
-
-
6
-
-
-
-
-
-
-
-
3
27
2
32
Total
Fair
Value
$52
49
101
6
28
9
43
6
3
27
2
38
$182
-
-
-
-
-
-
-
-
-
-
-
-
-
Total plan assets
(a) For further information on fair value hierarchy levels, see Note 27.
(b)
(c)
(d)
Includes holdings in Bancorp common stock
Includes debt securities issued by U.S. Government sponsored agencies
Includes private label asset backed securities
$150
32
The following is a description of the valuation methodologies
used for instruments measured at fair value, as well as the general
classification of such instruments pursuant to the valuation
hierarchy.
Equity securities
The Plan measures common stock using quoted prices which are
available in an active market and classifies these investments
within Level 1 of the valuation hierarchy.
Mutual and exchange traded funds
All of the Plan’s mutual and exchange traded funds are publicly
traded. The Plan measures the value of these investments using
the fund’s quoted prices that are available in an active market and
classifies these investments within Level 1 of the valuation
hierarchy.
Debt securities
For certain U.S. Treasury and federal agency obligations, the Plan
measures the fair value based on quoted prices, which are
available in an active market and classifies these investments
within Level 1 of the valuation hierarchy. Where quoted prices are
not available, the Plan measures the fair value of these
investments based on matrix pricing models that include the bid
price, which factors in the yield curve and other characteristics of
the security including the interest rate, prepayment speeds and
length of maturity. Therefore, these investments are classified
within Level 2 of the valuation hierarchy.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plan Assumptions
The Plan assumptions are evaluated annually and are updated as
necessary. The discount rate assumption reflects the yield on a
portfolio of high quality fixed-income instruments that have a
similar duration to the plan’s liabilities. The expected long-term
rate of return assumption reflects the average return expected on
the assets invested to provide for the plan’s liabilities. In
determining the expected long-term rate of return, the Bancorp
evaluated actuarial and economic inputs, including long-term
inflation rate assumptions and broad equity and bond indices
long-term return projections, as well as actual long-term historical
plan performance.
The following table summarizes the plan assumptions for
the years ended December 31:
Weighted-average assumptions
For measuring benefit obligations at
year end:
Discount rate
Rate of compensation increase
Expected return on plan assets
For measuring net periodic benefit cost:
Discount rate
Rate of compensation increase
Expected return on plan assets
2009
2008
2007
5.88 %
5.00
8.50
6.11
5.00
8.50
6.11
5.00
8.53
6.45
5.00
8.50
6.26
5.00
8.52
5.80
5.00
8.50
Lowering both the expected rate of return on the plan and
the discount rate by 0.25% would have increased the 2009
pension expense by approximately $1 million.
Based on the actuarial assumptions, the Bancorp does not
expect to contribute to the Plan in 2010. Estimated pension
benefit payments, which reflect expected future service, are $19
million in 2010, $19 million in 2011, $19 million in 2012, $17
million in 2013 and $16 million in 2014. The total estimated
payments for the years 2015 through 2019 is $73 million.
Investment Policies and Strategies
The Bancorp’s policy for the investment of plan assets is to
employ investment strategies that achieve a range of weighted-
average target asset allocations relating to equity securities
(including the Bancorp’s common stock), fixed income securities
(including federal agency obligations, corporate bonds and notes)
and cash. The following table provides the Bancorp’s targeted and
actual weighted-average asset allocations by asset category for
2009 and 2008:
Weighted-average asset allocation
Equity securities
Bancorp common stock
Total equity securities (a)
Total fixed income securities
Cash
Total
(a) Includes mutual and exchange traded funds.
Targeted
range
70 – 80%
20 – 25
0 - 5
2009
71%
2
73
24
3
100%
2008
68
2
70
27
3
100
The risk tolerance for the plan is determined by management
to be “moderate to aggressive”, recognizing that higher returns
involve some volatility and that periodic declines in the portfolio’s
value are tolerated in an effort to achieve real capital growth.
There were no significant concentrations of risk associated with
the investments of the Bancorp’s benefit and retirement plans at
December 31, 2009 and 2008.
Permitted asset classes of the plan include cash and cash
equivalents, fixed income (domestic and non-U.S. bonds), equities
(U.S., non-U.S., emerging markets and REITS), equipment leasing
precious metals, commodity transactions and mortgages. The Plan
utilizes derivative instruments including puts, calls, straddles or
other option strategies, as approved by management.
Prohibited asset classes of the plan include venture capital,
short sales, limited partnerships and leveraged transactions. Per
the Employee Retirement Income Security Act (ERISA), the
Bancorp’s common stock cannot exceed ten percent of the fair
value of plan assets.
Fifth Third Bank, as Trustee, is expected to manage the plan
assets in a manner consistent with the plan agreement and other
regulatory, federal and state laws. The Fifth Third Bank Pension,
Profit Sharing and Medical Plan Committee (the “Committee”) is
the plan administrator. The Trustee is required to provide to the
Committee monthly and quarterly reports covering a list of plan
assets, portfolio performance, transactions and asset allocation.
The Trustee is also required to keep the Committee apprised of
any material changes in the Trustee’s outlook and recommended
investment policy.
Other Information on Retirement and Benefit Plans
The accumulated benefit obligation for all defined benefit plans
was $217 million and $227 million at December 31, 2009 and
2008, respectively. At December 31, 2009 and 2008, amounts
relating to the Bancorp’s defined benefit plans with benefit
obligations exceeding assets were as follows:
($ in millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2009
$217
217
182
2008
228
227
144
As of December 31, 2009 and 2008, $160 million and $124
million, respectively, of plan assets were managed by Fifth Third
Bank, a subsidiary of the Bancorp, through common trust and
mutual funds and included $3 million of Bancorp common stock
for both years. Plan assets are not expected to be returned to the
Bancorp during 2010.
The Bancorp’s qualified defined benefit plan’s benefits were
frozen
in 1998, except for grandfathered employees. The
Bancorp’s other retirement plans consist of nonqualified,
supplemental retirement plans, which are funded on an as needed
basis. A majority of these plans were obtained in acquisitions from
prior years.
The Bancorp’s profit sharing plan expense was $17 million
for 2009, $18 million for 2008 and $13 million for 2007.
Expenses recognized during the years ended December 31, 2009,
2008 and 2007 for matching contributions to the Bancorp’s
defined contribution savings plans were $36 million, $37 million
and $37 million, respectively.
Fifth Third Bancorp 97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. ACCUMULATED OTHER COMPREHENSIVE INCOME
The activity of the components of other comprehensive income and accumulated other comprehensive income for the years ended December
31, 2009, 2008 and 2007 was as follows:
Total Other
Comprehensive Income
Pretax
Activity
Tax
Effect
Net
Activity
$248
(57)
(37)
154
75
(49)
26
-
39
39
$219
$353
(31)
322
100
(3)
97
-
(74)
(74)
$345
$60
(21)
39
42
(1)
41
-
3
3
$83
(86)
20
13
(53)
(26)
17
(9)
-
(14)
(14)
(76)
(123)
10
(113)
(35)
1
(34)
-
26
26
(121)
(23)
9
(14)
(15)
-
(15)
-
(1)
(1)
(30)
162
(37)
(24)
101
49
(32)
17
-
25
25
143
230
(21)
209
65
(2)
63
-
(48)
(48)
224
37
(12)
25
27
(1)
26
-
2
2
53
Total Accumulated Other
Comprehensive Income
Beginning
Balance
Net
Activity
Ending
Balance
115
101
216
88
17
105
(105)
98
25
143
(80)
241
(94)
209
115
25
63
88
(57)
(126)
(48)
224
(105)
98
(119)
25
(94)
(1)
(59)
(179)
26
2
53
25
(57)
(126)
($ in millions)
2009
Unrealized holding gains on available-for-sale securities arising during period
Reclassification adjustment for net gains included in net income
Reclassification adjustment related to prior OTTI charges
Net unrealized gains on available-for-sale securities
Unrealized holding gains on cash flow hedge derivatives arising during period
Reclassification adjustment for net gains on cash flow hedge
derivatives included in net income
Net unrealized gains on cash flow hedge derivatives
Defined benefit plans:
Net prior service cost
Net actuarial loss
Defined benefit plans, net
Total
2008
Unrealized holding gains on available-for-sale securities arising during period
Reclassification adjustment for net gains included in net loss
Net unrealized gains (losses) on available-for-sale securities
Unrealized holding gains on cash flow hedge derivatives
Reclassification adjustment for net gains on cash flow hedge
derivatives included in net loss
Net unrealized gains on cash flow hedge derivatives
Defined benefit plans:
Net prior service cost
Net actuarial loss
Defined benefit plans, net
Total
2007
Unrealized holding gains on available-for-sale securities arising during period
Reclassification adjustment for net gains included in net income
Net unrealized gains (losses) on available-for-sale securities
Unrealized holding gains on cash flow hedge derivatives
Reclassification adjustment for net gains on cash flow hedge
derivatives included in net income
Net unrealized gains (losses) on cash flow hedge derivatives
Defined benefit plans:
Net prior service cost
Net actuarial gain
Defined benefit plans, net
Total
98 Fifth Third Bancorp
23. COMMON, PREFERRED AND TREASURY STOCK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the share activity within common, preferred and treasury stock for the years ended December 31:
($ in millions, except share data)
Shares at December 31, 2006
Shares acquired for treasury
Stock-based awards exercised, including treasury shares issued
Restricted stock grants
Employee stock ownership through benefit plans
Shares at December 31, 2007
Issuance of preferred shares, Series G
Issuance of preferred shares, Series F
Redemption of preferred shares, Series D, E
Stock-based awards exercised, including treasury shares issued
Restricted stock grants
Shares issued in business combinations
Employee stock ownership through benefit plans
Shares at December 31, 2008
Issuance of common shares
Exchange of preferred shares, Series G
Accretion from dividends on preferred shares, Series F
Restricted stock forfeitures
Restricted stock grants
Other
Shares at December 31, 2009
In 2008, 8.5% non-cumulative Series G convertible preferred
stock was issued in the second quarter. The depository shares
represented shares of its convertible preferred stock and had a
liquidation preference of $25,000 per share. The preferred stock is
convertible at any time, at the option of the shareholder, into
2,159.8272 shares of common stock, representing a conversion
price of approximately $11.575 per share of common stock. As of
December 31, 2008, Series G preferred stock had 44,300 shares
outstanding and 1,700 shares reserved for issuance.
On December 31, 2008, the U.S. Treasury purchased
approximately $3.4 billion, or 136,320 shares, of the Bancorp’s
Fixed Rate Cumulative Perpetual Preferred Stock, Series F, with a
liquidation preference of $25,000 per share and related 10-year
warrants in the amount of 15% of the preferred stock investment.
The warrants allow the U.S. Treasury to purchase up to
43,617,747 shares of the Bancorp’s common stock with an
exercise price of $11.72. The Series F senior preferred stock was
issued complying with the terms established by the CPP. Per the
program terms, the U.S. Treasury’s investment consists of senior
preferred stock with a five percent dividend for each of the first
five years of investment and nine percent thereafter, unless the
shares are redeemed. The shares are callable by the Bancorp at par
after three years and may be repurchased at any time under certain
circumstances. The terms also
include restrictions on the
repurchase of common stock and an increase in common stock
dividends, which require the U.S. Treasury’s consent, for a period
of three years from the date of investment unless the preferred
shares are redeemed in whole or the U.S. Treasury has transferred
all of the preferred shares to a third party.
The proceeds from issuance of the Series F preferred stock
were allocated to the preferred stock and to the warrants based on
their relative fair values, which resulted in an initial book value of
$3.2 billion for the preferred stock and $239 million for the
warrants. The resulting discount to the preferred stock is being
accreted over five years through retained earnings as a preferred
stock dividend, resulting in an effective yield of 6.7% for the
Series F preferred stock for the first five years. The warrants will
remain in capital surplus at their initial book value until they are
exercised or expire.
The CPP terms also required that preferred stock issued to
U.S. Treasury rank senior to, or pari passu with, other preferred
stock. In order to meet the U.S. Treasury’s standard terms, in the
fourth quarter of 2008, the Bancorp repurchased its Series D and
Preferred Stock
Shares
Common Stock
Value
$1,295
-
-
-
-
$1,295
-
-
-
-
-
-
-
$1,295
351
133
-
-
-
-
$1,779
Shares
583,427,104
-
-
-
-
583,427,104
-
-
-
-
-
-
-
583,427,104
157,955,960
60,121,124
-
-
-
-
801,504,188
Value
$9
-
-
-
-
$9
1,072
3,169
(9)
-
-
-
-
$4,241
-
(674)
41
-
-
1
$3,609
9,250
-
-
-
-
9,250
44,300
136,320
(9,250)
-
-
-
-
180,620
-
(27,849)
-
-
-
-
152,771
Treasury Stock
Value
$1,232
1,084
(86)
(59)
38
$2,209
-
-
-
(2)
(136)
(1,841)
(1)
$229
-
-
-
5
(32)
(1)
$201
Shares
27,900,029
26,605,527
(2,057,301)
(1,178,259)
212,504
51,482,500
-
-
-
-
(2,551,432)
(42,890,576)
-
6,040,492
-
-
-
819,796
(751,464)
327,200
6,436,024
Series E preferred stock. The preferred stock was repurchased for
aggregate consideration in cash of approximately $28 million, in
which $9 million par value was accounted for as retirement of the
Series D and Series E preferred stock and the remaining $19
million was recognized as dividends paid to the holders of the
preferred stock.
On May 7, 2009, the Bancorp announced the SCAP results.
While not required to raise additional overall capital, the Bancorp
was required to augment its existing capital base to maintain a
capital buffer above the newly required four percent threshold of
the Tier I common equity ratio. As a result, the Bancorp initiated
a number of capital actions including the offer to exchange Series
G preferred shares and a common stock offering.
On June 4, 2009, the Bancorp announced the successful
completion of a $1 billion at-the-market offering of its common
shares. Through this offering, the Bancorp issued approximately
158 million shares at an average price of $6.33.
On June 17, 2009, the Bancorp completed its offer to
exchange 2,158.8272 shares of its common stock, no par value,
and $8,250 in cash, for each set of 250 validly tendered and
accepted depositary shares. The Bancorp issued approximately 60
million shares of common stock and paid $230 million in cash in
exchange for 7 million depositary shares. Overall, $696 million in
liquidation amount of the Bancorp’s depositary shares were validly
tendered, not withdrawn and exchanged, which represented 63%
of the aggregate liquidation amount of its depositary shares. An
aggregate of 7 million depositary shares representing 27,849 shares
of Series G preferred stock were retired upon receipt. At the time
of exchange, the Bancorp recognized an increase to retained
earnings and net income available to common shareholders of $35
million, calculated as the difference between the carrying amount
of the Series G preferred stock exchanged and the sum of the fair
value of the common stock plus cash delivered. After settlement
of the exchange offer and as of December 31, 2009, 4,112,750
depositary shares representing 16,451 shares of Series G preferred
stock remained outstanding. As a result of this exchange, the
Bancorp increased its common equity by $441 million.
During 2009 and 2008, the Bancorp repurchased an
immaterial amount of common stock. During 2007, the Bancorp
repurchased approximately 27 million shares of its common stock,
representing five percent of total outstanding shares, in open
market transactions for $1.1 billion.
Fifth Third Bancorp 99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24. STOCK-BASED COMPENSATION
The Bancorp has historically emphasized employee stock
ownership. The following table provides detail of the number of
shares to be issued upon exercise of outstanding stock-based
awards and remaining shares available for future issuance under all
of the Bancorp’s equity compensation plans as of December 31,
2009:
Number of Shares to Be
Issued Upon Exercise
Plan Category (shares in thousands)
Equity compensation plans approved by shareholders:
Stock options (a)
Stock appreciation rights (SARs)
Restricted stock
Phantom stock units
Performance units
Performance-based restricted stock
Employee stock purchase plan
Total shares
(a) Excludes 2.1 million outstanding options awarded under plans assumed by the Bancorp in connection with certain mergers and acquisitions. The Bancorp has not made any awards under these
Shares Available
for Future Issuance
15,271(b)
(b)
(b)
(b)
N/A
(b)
(b)
11,184(f)
26,455
13,405
(c)
4,645
(d)
(e)
32
$53.60
(c)
N/A
N/A
N/A
N/A
Weighted-Average
Exercise Price
18,082
plans and will make no additional awards under these plans. The weighted-average exercise price of the outstanding options is $21.74 per share.
(b) Under the 2008 Incentive Compensation Plan, 33 million shares of stock were authorized for issuance as incentive and nonqualified stock options, SARs, restricted stock and restricted stock
units, performance shares and performance restricted stock awards.
(c) At December 31, 2009, approximately 28.6 million SARs were outstanding at a weighted-average grant price of $26.82. The number of shares to be issued upon exercise will be determined at
vesting based on the difference between the grant price and the market price at the date of exercise.
(d) Phantom stock units are settled in cash.
(e) The number of shares to be issued is dependent upon the Bancorp achieving certain predefined performance targets and ranges from zero shares to approximately 2.3 million shares.
(f) Represents remaining shares of Fifth Third common stock under the Bancorp’s 1993 Stock Purchase Plan, as amended and restated, including an additional 1.5 million shares approved by
shareholders on March 28, 2007 and an additional 12 million shares approved by shareholders on April 21, 2009.
Stock-based awards are eligible for issuance under the Bancorp’s
Incentive Compensation Plan to key employees and directors of
the Bancorp and its subsidiaries. The Incentive Compensation
Plan was approved by shareholders on April 15, 2008, which
authorizes the issuance of up to 33 million shares as equity
compensation and provides for incentive and nonqualified stock
options, stock appreciation rights, restricted stock and restricted
stock units, and performance share and restricted stock awards.
Based on total stock-based awards outstanding (including stock
options,
stock and
performance units) and shares remaining for future grants under
the 2008 Incentive Compensation Plan, the Bancorp’s total
overhang is eight percent. The overhang measurement represents
the potential dilution to which the Bancorp’s shareholders of
common stock are exposed due to the potential that stock-based
compensation will be awarded to executives, directors or key
employees of the Bancorp. Stock options, SARs, restricted stock
and performance units outstanding represent approximately six
percent of the Bancorp’s issued shares at December 31, 2009.
stock appreciation
restricted
rights,
All of the Bancorp’s stock-based awards are to be settled
with stock with the exception of phantom stock units and a
portion of the performance shares that are to be settled in cash.
The Bancorp has historically used treasury stock to settle stock-
based awards, when available. Stock options, issued at fair value
based on the closing price of the Bancorp’s common stock on the
date of grant, have up to ten-year terms and vest and become fully
exercisable ratably over a three or four year period of continued
employment. SARs, issued at fair market value based on the
closing price of the Bancorp’s common stock on the date of grant,
have up to ten-year terms and vest and become exercisable either
ratably or fully over a four year period of continued employment.
The Bancorp does not grant discounted stock options or SARs,
re-price previously granted stock options or SARs, or grant reload
stock options. Restricted stock grants vest either after four years
or ratably after three, four and five years of continued
employment and include dividend and voting rights. Performance
share and performance restricted stock awards have three-year
cliff vesting terms with performance or market conditions as
defined by the plan.
During 2009, the Bancorp’s Board of Directors approved the
use of phantom stock units as part of its compensation for
executives. The phantom stock units were issued under the
Bancorp’s Incentive Compensation Plan. The number of phantom
100 Fifth Third Bancorp
stock units is determined each pay period by dividing the amount
of salary to be paid in phantom stock units for that pay period, by
the reported closing price of the Bancorp’s common stock on the
pay date for such pay period. The phantom stock units do not
include any rights to receive dividends or dividend equivalents and
will be settled in cash upon the earlier to occur of June 15, 2011 or
the executive’s death. The amount to be paid on settlement of the
phantom stock units will be equal to the total amount of phantom
stock units settled at the reported closing price of the Bancorp’s
common stock on the settlement date.
Under U.S. GAAP, the Bancorp recognizes compensation
expense for the grant-date fair value of stock-based compensation
issued over its requisite service period. The grant-date fair value of
stock options and SARs is measured using the Black-Scholes
option-pricing model. Awards with a graded vesting are expensed
on a straight-line basis.
The Bancorp uses assumptions, which are evaluated and
revised as necessary, in estimating the grant-date fair value of each
SAR grant. The weighted-average assumptions were as follows for
the years ended:
2007
6
22%
4.4%
4.6%
2009
6
73%
1.3%
2.2%
2008
6
30%
8.7%
3.3%
Expected life (in years)
Expected volatility
Expected dividend yield
Risk-free interest rate
The expected option life is derived from historical exercise
patterns and represents the amount of time that options granted
are expected to be outstanding. The expected volatility is based on
a combination of historical and implied volatilities of the
Bancorp’s common stock. The expected dividend yield is based
on annual dividends divided by the Bancorp’s stock price. The
risk-free interest rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the
time of grant.
Stock-based compensation expense was $51 million, $56
million and $63 million for the years ended December 31, 2009,
2008 and 2007, respectively, included as compensation expense in
the Consolidated Statements of Income. The total related income
tax benefit recognized was $18 million, $20 million and $22
million for the years ended December 31, 2009, 2008 and 2007,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock options
Stock options granted during 2009 were immaterial to the
Bancorp’s Consolidated Financial Statements. The weighted-
average grant-date fair value of stock options granted for the years
ended 2008 and 2007 was $2.87 and $7.39 per share, respectively.
The total intrinsic value of options exercised was immaterial
to the Bancorp’s Consolidated Financial Statements in 2009. The
total intrinsic value of options exercised was $1 million and $28
million in 2008 and 2007, respectively. Cash received from
options exercised during 2009 was immaterial to the Bancorp’s
Consolidated Financial Statements in 2009. Cash received from
options exercised was $3 million and $48 million in 2008 and
2007, respectively. Tax benefits realized from exercised options
during 2009 were immaterial to the Consolidated Financial
Statements during 2009. The actual tax benefit realized from
exercised options was $1 million and $7 million in 2008 and 2007,
respectively. All stock options were vested at December 31, 2008,
therefore, no stock options vested during 2009. The total grant-
date fair value of stock options that vested during 2008 was
immaterial to the Bancorp’s Consolidated Financial Statements.
The total grant-date fair value of stock options that vested during
2007 was $16 million. As of December 31, 2009, the aggregate
intrinsic value of both outstanding options and exercisable
options was immaterial to the Consolidated Financial Statements.
The following tables include a summary of stock-based
compensation transactions for the previous three fiscal years.
Stock Options (shares in thousands)
Outstanding at January 1
Granted (a)
Exercised
Forfeited or expired
Outstanding at December 31
Exercisable at December 31
(a)
2009
2008
2007
Weighted-
Average
Exercise Price
$48.97
8.59
8.33
48.06
$49.29
$49.29
Shares
20,564
1
(11)
(5,050)
15,504
15,504
Shares
23,645
1,133
(202)
(4,012)
20,564
20,564
Weighted-
Average
Exercise Price
$49.07
11.57
15.32
40.73
$48.97
$48.97
Shares
26,900
4
(2,068)
(1,191)
23,645
23,628
Weighted-
Average
Exercise Price
$47.58
40.98
26.91
53.87
$49.07
$49.07
2008 Options granted include 1,131 options assumed as part of the First Charter Corporation acquisition completed on June 6, 2008. These options were granted under a First Charter
Corporation Plan assumed by the Bancorp.
The following table summarizes outstanding and exercisable stock options by exercise price at December 31, 2009:
Exercise Price per Share
Under $10.00
$10.01-$25.00
$25.01-$40.00
$40.01-$55.00
Over $55.00
All stock options
Outstanding and Exercisable Stock Options
Number of
Options at
Year End
(000’s)
309
1,045
636
9,518
3,996
15,504
Weighted-
Average
Exercise
Price
$9.30
14.84
34.35
48.07
66.66
$49.29
Weighted-
Average
Remaining
Contractual Life
(in years)
1.51
3.53
1.68
1.63
2.24
1.91
Stock Appreciation Rights
The weighted-average grant-date fair value of SARs granted was
$2.41, $2.09 and $6.24 per share for the years ended 2009, 2008
and 2007, respectively. The total grant-date fair value of SARs that
vested during 2009, 2008 and 2007 was $26 million, $61 million
and $19 million, respectively.
At December 31, 2009, there was $33 million of stock-based
compensation expense related to nonvested SARs not yet
recognized. The expense is expected to be recognized over a
remaining weighted-average period of approximately 2.5 years.
Stock Appreciation Rights (shares in thousands)
Outstanding at January 1
Granted
Exercised
Forfeited or expired
Outstanding at December 31
Exercisable at December 31
Shares
22,508
8,398
-
(2,335)
28,571
12,254
2009
2008
2007
Weighted-
Average
Grant Price
$35.43
4.05
-
27.93
$26.82
$40.38
Shares
17,526
6,836
-
(1,854)
22,508
8,352
Weighted-
Average
Grant Price
$41.81
19.25
-
36.03
$35.43
$44.46
Weighted-
Average
Grant Price
$43.43
38.45
39.36
41.36
$41.81
$41.45
Shares
13,053
6,613
(56)
(2,084)
17,526
2,972
Fifth Third Bancorp 101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock
The total grant-date fair value of restricted stock that vested
during 2009, 2008 and 2007 was $36 million, $24 million and $2
million, respectively. At December 31, 2009, there was $56 million
of stock-based compensation expense related to nonvested
restricted stock not yet recognized. The expense is expected to be
recognized over a
remaining weighted-average period of
approximately 2.7 years.
Restricted Stock (shares in thousands)
Nonvested at January 1
Granted
Vested
Forfeited
Nonvested at December 31
2009
2008
2007
Weighted-
Average
Grant-Date
Fair Value
$29.04
4.72
40.84
23.86
$23.85
Shares
5,584
751
(870)
(820)
4,645
Shares
3,519
3,157
(486)
(606)
5,584
Weighted-
Average
Grant-Date
Fair Value
$40.80
19.27
48.62
30.72
$29.04
Weighted-
Average
Grant-Date
Fair Value
$40.28
38.19
48.28
40.95
$40.80
Shares
2,380
1,622
(39)
(444)
3,519
Other stock-based compensation
Phantom stock units were issued starting in 2009. A total of 300
thousand shares were granted with a weighted average grant price
of $9.88. The phantom stock units vest immediately, however,
none were settled during 2009.
targets are based on
Performance-based awards are payable in stock and cash
contingent upon the Bancorp achieving certain predefined
performance targets over the three-year measurement period.
the Bancorp’s
These performance
performance relative to a defined peer group. Approximately 1.1
million, 186 thousand and 132 thousand shares of performance-
based awards were granted during 2009, 2008 and 2007,
respectively. These awards were granted at a weighted-average
grant-date fair value of $3.96, $19.18 and $39.89 per share during
2009, 2008 and 2007, respectively.
Performance-based restricted shares are payable in stock and
are contingent upon the Bancorp achieving certain predefined
performance targets over the one-year measurement period. These
performance targets are based on the Bancorp’s performance
relative to a defined peer group. If performance targets are met,
the shares are vested over a three-year period. There were no
performance-based
restricted shares granted during 2009.
Approximately 180 thousand and 137 thousand performance-
based restricted shares were granted during 2008 and 2007,
respectively. These shares were granted at a weighted-average
grant-date fair value of $23.39 and $38.27 per share during 2008
and 2007, respectively. The performance condition related to the
in 2007,
performance-based restricted shares was achieved
however, it was not achieved in 2008.
The Bancorp sponsors a stock purchase plan that allows
qualifying employees to purchase shares of the Bancorp’s
common stock with a 15% match. During the years ended
December 31, 2009, 2008 and 2007, respectively, there were 1.3
million, 712 thousand and 333 thousand shares purchased by
participants
stock-based
compensation expense of $1 million for 2009 and $2 million for
each of the years ended 2008 and 2007.
the Bancorp
recognized
and
25. OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE
The following presents the major components of other noninterest income and other noninterest expense for the years ended December 31:
($ in millions)
Other noninterest income:
Operating lease income
Cardholder fees
Insurance income
Consumer loan and lease fees
Gain (loss) on loan sales
Banking center income
Gain on sale/redemption of Visa, Inc. ownership interests
Loss on sale of OREO
Bank owned life insurance loss
Litigation settlement
Other
Total
Other noninterest expense:
FDIC insurance and other taxes
Loan and lease expense
Provision for unfunded commitments and letters of credit
Affordable housing investments impairment
Marketing
Professional services fees
Intangible asset amortization
Postal and courier
Insurance
Travel
Operating lease
Recruitment and education
Supplies
OREO expense
Data processing
Visa litigation reserve
Other
Total
102 Fifth Third Bancorp
2009
$59
48
47
43
38
22
244
(70)
(2)
-
50
$479
$269
234
99
83
79
63
57
53
50
41
39
30
25
24
21
(73)
277
$1,371
2008
2007
47
58
36
51
(11)
31
273
(60)
(156)
76
18
363
73
188
98
67
102
102
56
54
30
54
32
33
31
11
14
(99)
243
1,089
32
56
32
46
25
29
-
(14)
(106)
-
53
153
31
119
16
57
84
54
42
52
17
54
22
41
31
6
14
172
177
989
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26. EARNINGS PER SHARE
The calculation of earnings per share and the reconciliation of earnings per share to earnings per diluted share for the years ended December 31:
(in millions, except per share data)
Earnings per share:
Net income (loss)
Dividends on preferred stock
Net income (loss) available to common
shareholders
Income (loss) allocated to participating
securities
Net income (loss) allocated to common
shareholders
Earnings per diluted share:
Net income (loss) available to common
shareholders
Effect of dilutive securities:
Stock based awards
Convertible preferred stock (a) (b)
Net income (loss) available to common
shareholders plus assumed conversions
Income (loss) allocated to participating
securities
Net income (loss) allocated to common
2009
Average
Shares
Per Share
Amount
Income
$737
226
511
4
Income
($2,113)
67
(2,180)
(21)
2008
Average
Shares
Per Share
Amount
Income
2007
Average
Shares
Per Share
Amount
$1,076
1
1,075
5
$507
696
$0.73
($2,159)
553
($3.91)
$1,070
538
$1.99
$511
(21)
490
4
2
28
-
(0.06)
($2,180)
-
(2,180)
(21)
-
-
-
-
$1,075
-
1,076
5
2
-
(.01)
-
shareholders
$1.98
(a) The additive effect to income from dividends on convertible preferred stock for the year ended December 31, 2009 included preferred dividends of $14 million for Series G preferred shares, offset
($2,159)
($3.91)
$1,071
$0.67
$486
726
553
540
by a $35 million reduction to preferred dividends due to the conversion of a portion of Series G preferred shares during the second quarter of 2009.
(b) The additive effect to income from dividends on convertible preferred stock is $.580 million and the average share dilutive effect from convertible preferred stock is .308 million shares for the year
ended December 31, 2007.
The Bancorp calculates earnings per share pursuant to the two-
class method. The two-class method is an earnings allocation
formula that determines earnings per share separately for common
stock and participating securities according to dividends declared
and participation rights in undistributed earnings. For purposes of
calculating earnings per share under the two-class method,
restricted shares that contain nonforfeitable rights to dividends are
the
considered participating securities until vested. While
dividends declared per share on such restricted shares are the
same as dividends declared per common share outstanding, the
dividends recognized on such restricted shares may be less
because dividends paid on restricted shares that are expected to be
forfeited are reclassified to compensation expense during the
period when forfeiture is expected.
For the year ended December 31, 2009, there were 44 million
shares under warrants related to the Bancorp’s Series F preferred
stock from the Capital Purchase Plan (CPP) that were excluded
from the computation of net income per diluted share, as their
inclusion would have been anti-dilutive to earnings per share due
to the exercise price of the shares being greater than the average
market price of the common shares. The warrants have an initial
exercise price of $11.72 per share. In addition, the diluted earnings
per share computation for the year ended December 31, 2009
excludes 17 million stock options and 23 million stock
appreciation rights that had not yet been exercised, 4 million
shares of unvested restricted stock and 36 million shares related to
the Bancorp’s Series G preferred stock that were not part of the
conversion of preferred shares in the second quarter of 2009. The
shares were excluded from the computation of net income per
diluted share because their inclusion would have been anti-dilutive
to earnings per share.
Due to the net loss for the year ended December 31, 2008,
the diluted earnings per share calculation excluded all common
stock equivalents, including 43 million stock options and stock
appreciation rights, 6 million shares of restricted stock, 96 million
common shares from convertible preferred stock and 44 million
shares under warrants related to the CPP as their inclusion would
have been anti-dilutive to earnings per share.
At December 31, 2007, 36 million shares were excluded from
the computation of net income per diluted share. These shares
consisted of options and stock appreciation rights that had not yet
been exercised and unvested restricted stock.
Fifth Third Bancorp 103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27. FAIR VALUE MEASUREMENTS
The Bancorp measures certain financial assets and liabilities at fair
value in accordance with U.S. GAAP, which defines fair value as
the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at
the measurement date. U.S. GAAP also establishes a fair value
hierarchy, which prioritizes the inputs to valuation techniques
used to measure fair value into three broad levels. The fair value
hierarchy gives the highest priority to quoted prices in active
markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). A financial instrument’s
categorization within the fair value hierarchy is based upon the
lowest level of input that is significant to the instrument’s fair
value measurement. The three levels within the fair value
hierarchy are described as follows:
Level 1 - Quoted prices (unadjusted) in active markets for
identical assets or liabilities that the Bancorp has the ability
to access at the measurement date.
Level 2 - Inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly or indirectly. Level 2 inputs include: quoted prices
for similar assets or liabilities in active markets; quoted prices
for identical or similar assets or liabilities in markets that are
not active;
inputs other than quoted prices that are
observable for the asset or liability; and inputs that are
derived principally from or corroborated by observable
market data by correlation or other means.
is
little,
reflect
Level 3 - Unobservable inputs for the asset or liability for
if any, market activity at the
which there
measurement date. Unobservable
the
inputs
Bancorp’s own assumptions about what market participants
would use to price the asset or liability. The inputs are
developed based on the best information available in the
circumstances, which might include the Bancorp’s own
financial data such as internally developed pricing models,
discounted cash flow methodologies, as well as instruments
for which the fair value determination requires significant
management judgment.
Assets and Liabilities Measured at Fair Value on a
Recurring Basis
The following tables summarize assets and liabilities measured at
fair value on a recurring basis, including financial instruments in
which the Bancorp has elected the fair value option.
As of December 31, 2009 ($ in millions)
Assets:
Available-for-sale securities:
U.S. Treasury and Government agencies
U.S. Government sponsored agencies
Obligations of states and political subdivisions
Agency mortgage-backed securities
Residual interests in securitizations
Other bonds, notes and debentures
Other securities (a)
Available-for-sale securities (a)
Trading securities:
Obligations of states and political subdivisions
Agency mortgage-backed securities
Other bonds, notes and debentures
Other securities
Trading securities
Residential mortgage loans held for sale
Residential mortgage loans (b)
Derivative instruments
Total assets
Liabilities:
Other liabilities (c)
Total liabilities
Fair Value Measurements Using
Level 1
Level 2
Level 3
Total Fair Value
$458
-
-
-
-
-
517
975
-
-
-
61
61
-
-
33
$1,069
$6
$6
-
2,142
243
11,382
-
2,395
9
16,171
-
-
-
-
174(d)
-
-
174
56
24
201
-
281
1,470
-
1,616
19,538
1,013
1,013
1
-
4
8
13
-
26
84
297
75
75
$458
2,142
243
11,382
174
2,395
526
17,320
57
24
205
69
355
1,470
26
1,733
$20,904
$1,094
$1,094
104 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2008 ($ in millions)
Assets:
Available-for-sale securities (a)
Trading securities
Residential mortgage loans held for sale
Residential mortgage loans (b)
Derivative instruments
Total assets
Fair Value Measurements Using
Level 1
Level 2
Level 3
$634
1
-
-
6
$641
11,151
1,190
881
-
3,189
16,411
146(d)
-
-
7
30
183
Total Fair Value
$11,931
1,191
881
7
3,225
$17,235
Liabilities:
Other liabilities (c)
Total liabilities
(a) Excludes FHLB and FRB restricted stock totaling $551 million and $342 million, respectively, at December 31, 2009 and $545 million and $252 million, respectively, at December 31,
$2,049
$2,049
2,013
2,013
$30
$30
6
6
2008.
(b) Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.
(c) Includes derivatives with a negative fair value and short positions.
(d) See Note 11 for a sensitivity analysis on these level 3 assets.
The following is a description of the valuation methodologies
used for significant instruments measured at fair value, as well as
the general classification of such instruments pursuant to the
valuation hierarchy.
Available-for-sale and trading securities
Where quoted prices are available in an active market, securities
are classified within Level 1 of the valuation hierarchy. Level 1
securities
include government bonds and exchange traded
equities. If quoted market prices are not available, then fair values
are estimated using pricing models, quoted prices of securities
with similar characteristics, or discounted cash flows. Examples
of such instruments, which would generally be classified within
Level 2 of the valuation hierarchy, include corporate and
municipal bonds, mortgage-backed securities, asset-backed
securities and VRDNs. In certain cases where there is limited
activity or less transparency around inputs to the valuation,
securities are classified within Level 3 of the valuation hierarchy.
Available-for-sale securities classified within Level 3 consist
primarily of residual interests in securitizations of automobile
loans. These residual interests are valued using discounted cash
flow models that integrate significant unobservable inputs,
including discount rates, prepayment speeds, and loss rates which
are estimated based on actual performance of similar loans
transferred in previous securitizations. Refer to Note 11 for
further information on residual interests. Trading securities
classified as Level 3 consist of auction rate securities. Due to the
illiquidity in the market for these types of securities at December
31, 2009, the Bancorp measured fair value using a discount rate
based on the assumed holding period.
Residential mortgage loans held for sale and held for investment
For residential mortgage loans held for sale, fair value is estimated
based upon mortgage-backed securities prices and spreads to
those prices or, for certain assets, discounted cash flow models
that may incorporate the anticipated portfolio composition, credit
spreads of asset-backed securities with similar collateral, and
market conditions. Residential mortgage loans held for sale are
classified within Level 2 of the valuation hierarchy. For residential
mortgage loans reclassified from held for sale to held for
investment, the fair value estimation is based primarily on the
underlying collateral values. Therefore, these loans are classified
within Level 3 of the valuation hierarchy.
Derivatives
Exchange-traded derivatives valued using quoted prices are
classified within Level 1 of the valuation hierarchy. Most
derivative contracts are valued using discounted cash flow or
other models that incorporate current market interest rates, credit
spreads assigned to the derivative counterparties, and other
market parameters and, therefore, are classified within Level 2 of
the valuation hierarchy. Such derivatives include basic and
structured interest rate swaps and options. Derivatives that are
valued based upon models with significant unobservable market
parameters are classified within Level 3 of the valuation hierarchy.
At December 31, 2009, derivatives classified as Level 3, which are
valued using an option-pricing model containing unobservable
inputs, consisted primarily of warrants and put rights associated
with the Processing Business Sale and a total return swap
associated with the Bancorp’s sale of its Visa, Inc. Class B shares.
Level 3 derivatives also include interest rate lock commitments,
which utilize internally generated loan closing rate assumptions as
a significant unobservable input in the valuation process.
The warrants associated with the Processing Business Sale
allow the Bancorp to purchase an incremental 10% nonvoting
interest in FTPS under certain defined conditions involving
change of control. The fair value of the warrants is calculated
using a Black-Scholes option valuation model using probability
weighted scenarios assuming expected terms of 9.5 to 19.5 years,
expected volatilities of 36.7% to 41.1%, risk free rates of 3.96%
to 4.68%, and expected dividend rates of 0%. The expected
volatilities were based on historical and implied volatilities of
comparable companies assuming similar expected terms.
In connection with the Processing Business Sale, the
Bancorp provided Advent with certain put options that are
exercisable in the event of certain circumstances. The fair value of
the put rights was calculated using a Black-Scholes option
valuation model using probability weighted scenarios assuming
expected terms of .5 to 4 years, expected volatilities of 31.3% to
50.2%, risk free rates of 0.27% to 2.23%, and expected dividend
rates of 0%. The expected volatilities were based on historical and
implied volatilities of comparable companies assuming similar
expected terms.
Under the terms of the total return swap, the Bancorp will
make or receive payments based on subsequent changes in the
conversion rate of the Visa Class B shares into Class A shares.
The fair value of the total return swap was calculated using a
discounted cash flow model based on unobservable inputs
consisting of management’s estimate of the probability of certain
litigation scenarios, timing of litigation settlements and payments
related to the swap.
The net fair value of the interest rate lock commitments at
December 31, 2009 was negative $5 million. At December 31,
2009, immediate decreases in current interest rates of 25 bp and
50 bp would result in increases in the fair value of the interest rate
lock commitments of approximately $13 million and $23 million,
respectively. Immediate increases of current interest rates of 25
bp and 50 bp would result in decreases in the fair value of the
Fifth Third Bancorp 105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interest rate lock commitments of approximately $15 million and
$32 million, respectively, at December 31, 2009. The decrease in
fair value of interest rate lock commitments at December 31,
2009 due to immediate 10% and 20% adverse changes in the
assumed loan closing rates would be approximately $.5 million
and $1 million, respectively, and the increase in fair value due to
immediate 10% and 20% favorable changes in the assumed loan
closing rates would be approximately $.5 million and $1 million,
respectively. These sensitivities are hypothetical and should be
used with caution, as changes in fair value based on a variation in
assumptions
the
relationship of the change in assumptions to the change in fair
value may not be linear.
typically cannot be extrapolated because
The following tables are a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable
inputs (Level 3):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
For the year ended December 31, 2009 ($ in millions)
Beginning balance
Total gains or losses (realized/unrealized):
Included in earnings
Included in other comprehensive income
Purchases, sales, issuances and settlements, net
Transfers in and/or out of Level 3 (b)
Ending balance
The amount of total gains or losses for the period included in
earnings attributable to the change in unrealized gains or losses
relating to assets still held at December 31, 2009 (c)
Residual
Interests in
Securitizations
$146
Trading
Securities
$ -
10
3
15
-
$174
$6
(4)
-
17
$13
(4)
Residential
Mortgage
Loans
7
(2)
-
(8)
29
26
Derivatives,
Net (a)
24
Total
Fair Value
$177
145
-
(160)
-
9
149
3
(136)
29
$222
(2)
16
$16
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Residual
Interests in
Securitizations
$10
Residential
Mortgage
Loans
Derivatives,
Net (a)
(4)
Total
Fair Value
$6
For the year ended December 31, 2008 ($ in millions)
Beginning balance
Total gains or losses (realized/unrealized):
Included in earnings
Included in other comprehensive income
Purchases, sales, issuances and settlements, net
Transfers in and/or out of Level 3 (b)
Ending balance
The amount of total gains or losses for the period included in earnings
attributable to the change in unrealized gains or losses relating to assets still
held at December 31, 2008 (c)
(a) Net derivatives include derivative assets and liabilities of $84 million and $75 million, respectively, at December 31, 2009, and derivative assets and liabilities
38
1
124
8
$177
(15)
1
150
-
$146
54
-
(26)
-
24
(1)
-
-
8
7
(1)
($15)
$11
27
-
of $30 million and $6 million, respectively, at December 31, 2008.
Includes residential mortgage loans held for sale that were transferred to held for investment.
Includes interest income and expense.
(b)
(c)
The total gains and losses included in earnings for assets and liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) were recorded in the Consolidated Statements of Income as follows:
($ in millions)
Interest income
Corporate banking revenue
Mortgage banking net revenue
Other noninterest income
Securities losses, net
Other noninterest expense
Total gains
2009
$15
1
127
15
(5)
(4)
$149
2008
7
(4)
53
5
(23)
-
38
The total gains and losses included in earnings attributable to changes in unrealized gains and losses related to Level 3 assets and liabilities still
held at year end were recorded in the Consolidated Statements of Income as follows:
($ in millions)
Interest income
Corporate banking revenue
Mortgage banking net revenue
Other noninterest income
Securities losses, net
Other noninterest expense
Total gains
106 Fifth Third Bancorp
2009
$11
1
(7)
20
(5)
(4)
$16
2008
$7
1
21
5
(23)
-
$11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an
ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.
Fair Value Measurements Using
($ in millions)
Commercial loans held for sale
Residential mortgage loans held for sale
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Mortgage servicing rights
Other real estate owned property
Total
Level 1
$60
-
64
37
40
-
-
-
$201
Level 2
-
-
-
-
-
-
-
-
-
Level 3
163
55
243
303
199
1
699
461
2,124
($ in millions)
Commercial loans held for sale
Commercial loans
Commercial mortgage loans
Commercial construction loans
Mortgage servicing rights
Total
Fair Value Measurements Using
Level 1
$90
-
-
-
-
$90
Level 2
-
-
-
-
-
Level 3
383
512
461
743
496
2,595
Total Losses
Year Ended
December 31, 2009
($56)
(2)
(217)
(136)
(150)
(2)
(24)
(131)
($718)
Total Losses
Year Ended
December 31, 2008
($523)
(298)
(186)
(274)
(207)
($1,488)
Total
$223
55
307
340
239
1
699
461
$2,325
Total
$473
512
461
743
496
$2,685
During 2009, the Bancorp transferred certain commercial loans
with a fair value of $45 million from the portfolio to loans held
for sale. The fair value of these loans was based on bids from
potential buyers and, therefore, were classified within Level 1 of
the valuation hierarchy. During the fourth quarter of 2008, the
Bancorp transferred certain commercial, commercial mortgage
and commercial construction loans from the portfolio to loans
held for sale. During 2009, the Bancorp recorded $56 million in
impairment adjustments on these loans. As of December 31,
2009, loans with a fair value of $60 million were based on bids
from potential buyers and, therefore, classified within Level 1 of
the valuation hierarchy and loans with a fair value of $163 million
were based on appraisals of the underlying collateral value and,
therefore, classified within Level 3 of the valuation hierarchy.
During 2009, the Bancorp purchased residential mortgage
loans with a principal balance of $57 million. The Bancorp
subsequently recorded nonrecurring
impairment adjustments
totaling $2 million during 2009. Such amounts are generally based
on the fair value of the underlying collateral supporting the loan
and, therefore, were classified within Level 3 of the valuation
hierarchy.
During 2009 and 2008, the Bancorp recorded nonrecurring
impairment adjustments to certain commercial, commercial
mortgage and commercial construction loans and commercial
leases held for investment. Such amounts are generally based on
the fair value of the underlying collateral supporting the loan and
were classified within Level 3 of the valuation hierarchy. Amounts
that are based on bids for the loans in active markets were
classified within Level 1 of the valuation hierarchy. In cases where
the carrying value exceeds the fair value of the collateral or
quoted bids, an impairment loss is recognized. The fair values and
recognized impairment losses are reflected in the previous table.
During 2009 and 2008, the Bancorp recognized temporary
impairments of $24 million and $207 million, respectively, in
certain classes of the MSR portfolio in which the carrying value
was adjusted to fair value as of December 31, 2009 and 2008,
respectively. MSRs do not currently trade in an active, open
market with readily observable prices. While sales of MSRs do
occur, the precise terms and conditions typically are not readily
available. Accordingly, the Bancorp estimates the fair value of
MSRs using discounted cash
flow models with certain
unobservable inputs, primarily prepayment speed assumptions,
resulting in a classification within Level 3 of the valuation
hierarchy. Refer to Note 11 for further information on the
Bancorp’s MSRs.
the Bancorp
During 2009,
recorded nonrecurring
adjustments to certain commercial and residential real estate
properties classified as other real estate owned (OREO) and
measured at the lower of carrying amount or fair value, less costs
to sell. Such fair value amounts are generally based on appraisals
of the property values, resulting in a classification within Level 3
of the valuation hierarchy. In cases where the carrying amount
exceeds the fair value, less costs to sell, an impairment loss is
recognized. The previous
fair value
table
measurements of the properties before deducting the estimated
costs to sell.
reflects
the
specific
Fair Value Option
The Bancorp has elected to measure residential mortgage loans
held for sale under the fair value option as allowed under U.S.
GAAP. Management’s intent to sell residential mortgage loans
classified as held for sale may change over time due to such
factors as changes in the overall liquidity in markets or changes in
characteristics
sale.
to certain
Consequently, these loans may be reclassified to loans held for
investment and maintained in the Bancorp’s loan portfolio. In
such cases, the loans will continue to be measured at fair value.
Residential loans with fair values of $29 million and $8 million,
respectively, were transferred to the Bancorp’s portfolio during
2009 and 2008. Losses related to fair value adjustments on these
loans were $2 million and $1 million, during 2009 and 2008,
respectively.
loans held
for
Fair value changes included in earnings for instruments for
which the fair value option was elected included losses of $162
million and gains of $13 million, respectively during 2009 and
Fifth Third Bancorp 107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2008. These gains and losses are reported as mortgage banking
net revenue in the Consolidated Statements of Income.
Losses included in earnings attributable to changes in
instrument-specific credit risk for residential mortgage loans
measured at fair value were $4 million and $1 million,
respectively, during 2009 and 2008. Interest on residential
mortgage loans measured at fair value is accrued as it is earned
using the effective interest method and is reported as interest
income in the Consolidated Statements of Income.
The following tables summarize the difference between the aggregate fair value and the aggregate unpaid principal balance for residential
mortgage loans measured at fair value.
($ in millions)
As of December 31, 2009
Residential mortgage loans measured at fair value
Past due loans of 90 days or more
Nonaccrual loans
As of December 31, 2008
Residential mortgage loans measured at fair value
Past due loans of 90 days or more
Nonaccrual loans
Aggregate
Fair Value
Aggregate Unpaid
Principal Balance
Difference
$1,496
3
1
$888
2
-
1,463
4
1
848
3
-
$33
(1)
-
$40
(1)
-
Fair Value of Certain Financial Instruments
The following table summarizes carrying amounts and estimated fair values for certain financial instruments, excluding financial instruments
measured at fair value on a recurring basis at December 31:
2009
2008
Carrying
Amount
Fair Value
$2,318
893
355
3,369
543
73,004
2,318
893
355
3,369
543
68,748
84,305
182
1,415
10,507
84,544
182
1,415
9,899
Carrying
Amount
2,739
797
360
3,578
571
81,349
78,613
287
9,959
13,585
Fair Value
2,739
797
360
3,578
571
74,234
79,145
287
9,969
11,022
Loans held for sale
Fair values for commercial loans held for sale were valued based
on executable broker quotes when available, or on the fair value
of the underlying collateral. Fair values for other consumer loans
held for sale are based on contractual values upon which the loans
may be sold to a third party, and approximate their carrying value.
Portfolio loans and leases, net
Fair values were estimated by discounting future cash flows using
the current market rates as similar loans would be made to
borrowers for the same remaining maturities.
Long-term debt
Fair value of long-term debt was based on quoted market prices,
when available, or a discounted cash flow calculation using
LIBOR/swap interest rates and, in some cases, a spread for new
issues for borrowings of similar terms.
($ in millions)
Financial assets:
Cash and due from banks
Other securities
Held-to-maturity securities
Other short-term investments
Loans held for sale
Portfolio loans and leases, net
Financial liabilities:
Deposits
Federal funds purchased
Other short-term borrowings
Long-term debt
Cash and due from banks, other securities, other short-term investments,
deposits, federal funds purchased and other short-term borrowings
For financial instruments with a short-term or no stated maturity,
prevailing market rates and limited credit risk, carrying amounts
approximate fair value. Those financial instruments include cash
and due from banks, FHLB and FRB restricted stock, other short-
term investments, certain deposits (demand, interest checking,
savings, money market and foreign office deposits), and federal
funds purchased. Fair values for other time deposits, certificates
of deposit $100,000 and over, and other short-term borrowings
were estimated using a discounted cash flow calculation that
applied prevailing LIBOR/swap interest rates for the same
maturities.
Held-to-maturity securities
The Bancorp's held-to-maturity securities are primarily composed
of instruments that provide income tax credits as the economic
return on the investment. The fair value of these instruments is
estimated based on current U.S. Treasury tax credit rates.
108 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28. CERTAIN REGULATORY REQUIREMENTS AND CAPITAL RATIOS
The principal source of income and funds for the Bancorp (parent
company) are dividends from its subsidiaries. During 2009, the
amount of dividends the bank subsidiaries could pay to the
Bancorp without prior approval of regulatory agencies was limited
to their 2009 eligible net profits and the adjusted retained 2008 and
2007 net income of those subsidiaries.
The Bancorp’s subsidiary banks must maintain cash reserve
balances when total reservable deposit liabilities are greater than
the regulatory exemption. These reserve requirements may be
satisfied with vault cash and noninterest-bearing cash balances on
reserve with a Federal Reserve Bank. In 2009 and 2008, the
subsidiary banks were required to maintain average cash reserve
balances of $439 million and $403 million, respectively.
The FRB adopted guidelines pursuant to which it assesses the
adequacy of capital in examining and supervising a bank holding
company and in analyzing applications to it under the Bank
Holding Company Act of 1956, as amended. These guidelines
include quantitative measures that assign risk weightings to assets
and off-balance sheet items, as well as define and set minimum
regulatory capital requirements. All bank holding companies are
required to maintain core capital (Tier I) of at least four percent of
risk-weighted assets and off-balance sheet items (Tier I capital
ratio), total capital of at least eight percent of risk-weighted assets
and off-balance sheet items (Total risk-based capital ratio) and Tier
I capital of at least three percent of adjusted quarterly average
assets (Tier I leverage ratio). Failure to meet the minimum capital
requirements can initiate certain actions by regulators that could
have a direct material effect on the Consolidated Financial
Statements of the Bancorp.
Tier I capital consists principally of shareholders’ equity
including Tier I qualifying trust preferred securities or notes
payable pertaining to unconsolidated special purpose entities that
issue trust preferred securities. It excludes unrealized gains and
losses on available-for-sale securities and unrecognized pension
actuarial gains and losses and prior service cost, goodwill and
certain other intangibles.
Tier II capital consists principally of perpetual and trust
preferred stock that is not eligible to be included as Tier I capital,
term subordinated debt, intermediate-term preferred stock and,
subject to limitations, general allowances for loan and lease losses.
Assets are adjusted under the risk-based guidelines to take into
account different risk characteristics. Average assets for this
purpose does not include goodwill and any other intangible assets
($ in millions)
Total risk-based capital (to risk-weighted assets): (a)
Fifth Third Bancorp (Consolidated)
Fifth Third Bank (Ohio)
Fifth Third Bank (Michigan) (b)
Fifth Third Bank, N.A. (b)
Tier I capital (to risk-weighted assets):
Fifth Third Bancorp (Consolidated)
Fifth Third Bank (Ohio)
Fifth Third Bank (Michigan) (b)
Fifth Third Bank, N.A. (b)
Tier I leverage (to average assets):
Fifth Third Bancorp (Consolidated)
Fifth Third Bank (Ohio)
Fifth Third Bank (Michigan) (b)
Fifth Third Bank, N.A. (b)
and investments that the FRB determines should be deducted
from Tier I capital.
The supervisory agencies, including the Bancorp’s primary
regulator, the Federal Reserve Bank of Cleveland, have issued
regulations regarding the capital adequacy of subsidiary banks.
These requirements are substantially similar to those adopted by
the FRB regarding bank holding companies, as described
previously. In addition, the federal banking agencies have issued
substantially similar regulations to implement the system of
prompt corrective action established by Section 38 of the Federal
Deposit Insurance Act. Under the regulations, a bank generally
shall be deemed to be well-capitalized if it has a Total risk-based
capital ratio of 10% or more, a Tier I capital ratio of six percent or
more, a Tier I leverage ratio of five percent or more and is not
subject to any written capital order or directive. If an institution
becomes undercapitalized, it would become subject to significant
additional oversight, regulations and requirements as mandated by
the Federal Deposit Insurance Act.
On September 30, 2009 the Bancorp merged its Fifth Third
Bank (Michigan) and Fifth Third Bank N.A. charters into the Fifth
Third Bank (Ohio) charter. As a result, regulatory capital
requirements are only applicable to the Bancorp and its subsidiary
bank, Fifth Third Bank (Ohio) as of December 31, 2009. The
Bancorp and its subsidiary bank had Tier I, Total risk-based capital
and Tier I leverage ratios above the well-capitalized levels at
December 31, 2009 and 2008. As of December 31, 2009, the most
recent notification from the FRB categorized the Bancorp and
each its subsidiary bank as well-capitalized under the regulatory
framework for prompt corrective action. To continue to qualify
for financial holding company status pursuant to the Gramm-
Leach-Bliley Act of 1999, the Bancorp’s subsidiary banks must,
among other things, maintain “well-capitalized” capital ratios.
in
Bank regulatory authorities
the United States and
international bank supervisory organizations, principally the Basel
Committee on Banking Supervision, are currently considering
changes to the risk-based capital adequacy framework for banks,
including emphasis on credit, market and operational risk
components, which ultimately could affect the appropriate capital
guidelines for bank holding companies such as the Bancorp. The
following table presents capital and risk-based capital and leverage
ratios for the Bancorp and its significant subsidiary banks at
December 31:
2009
2008
Amount
Ratio
Amount
Ratio
17.48 %
$17,635
15,648
15.56
N/A N/A
N/A N/A
$16,646
6,444
6,664
948
14.78 %
10.92
12.95
17.59
13.31
13,428
13,575
13.49
N/A N/A
N/A N/A
12.43
13,428
13,575
12.69
N/A N/A
N/A N/A
11,924
4,799
5,692
880
11,924
4,799
5,692
880
10.59
8.13
11.06
16.33
10.27
7.03
10.45
14.11
(a) Under the banking agencies risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The
aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together resulting in the Bancorp’s total
risk-weighted assets.
(b) The Bancorp merged its Fifth Third Bank (Michigan) and Fifth Third Bank N.A. charters into the Fifth Third Bank (Ohio) charter on September 30, 2009. As such, amounts
and ratios are not applicable (N/A) as of December 31, 2009.
Fifth Third Bancorp 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statements of Cash Flows (Parent Company Only)
For the years ended December 31
Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss)
$737
2009
(2,113)
2008
2007
1,076
to net cash provided by operating
activities:
Provision (benefit) for deferred income
taxes
Decrease (increase) in other assets
Increase in accrued expenses and other
liabilities
(Decrease) increase in undistributed
earnings of subsidiaries
Goodwill impairment
Other, net
Net Cash Provided by (Used in)
Operating Activities
Investing Activities
Decrease (increase) in short-term
investments
Capital contribution to subsidiaries
Decrease in held-to-maturity and available-
for-sale securities
Increase in loans to subsidiaries
Net cash paid in business combinations
Net Cash Used in Investing Activities
Financing Activities
(Increase) decrease in other short-term
borrowings
Proceeds from issuance of long-term debt
Repayment of long-term debt
Payment of cash dividends
Issuance of preferred stock, series F, G
Issuance of common stock
Exercise of stock-based awards
Dividends on exchange of preferred shares,
Series G
Exchange of preferred shares, Series G
Retirement of preferred shares, series D, E
Dividends on redemption of preferred
shares, series D, E
Purchases of treasury stock
Other, net
Net Cash (Used in) Provided by
Financing Activities
Decrease in Cash
Cash at Beginning of Year
Cash at End of Year
2
83
591
(869)
-
(6)
11
(85)
40
1,903
57
(5)
(7)
(98)
132
(276)
-
46
538
(192)
873
1,158
(1,600)
(2,423)
(2,000)
-
(117)
-
(559)
-
(42)
(328)
(4,793)
(503)
-
(31)
(247)
-
987
-
35
(269)
-
-
-
(10)
(38)
(59)
61
$2
763
2,126
(1,714)
(687)
4,480
-
4
-
-
(9)
(19)
-
(13)
4,931
(54)
115
61
(304)
-
6
(565)
-
(863)
13
2,135
(209)
(898)
-
-
50
-
-
-
-
(1,084)
(30)
(23)
(13)
128
115
2008
2009
2007
29. PARENT COMPANY FINANCIAL STATEMENTS
($ in millions)
Condensed Statements of Income (Parent Company Only)
For the years ended December 31
Income
Dividends from subsidiaries
Interest on loans to subsidiaries
Other
Total income
Expenses
Interest
Goodwill impairment
Other
Total expenses
Income (Loss) Before Income Taxes and
Change in Undistributed Earnings of
Subsidiaries
222
-
20
242
162
-
80
242
900
75
9
984
293
57
24
374
$ -
39
-
39
-
80
-
80
(203)
71
(294)
84
742
58
Applicable income tax benefit
Income (Loss) Before Change in
Undistributed Earnings of Subsidiaries
(132)
(210)
800
(Decrease) increase in undistributed
earnings of subsidiaries
Net Income (Loss)
869
$737
(1,903)
(2,113)
276
1,076
Condensed Balance Sheets (Parent Company Only)
As of December 31
Assets
Cash
Short-term investments
Loans to subsidiaries
Investment in subsidiaries
Goodwill
Other assets
Total Assets
Liabilities
Commercial paper and other short-term
borrowings
Accrued expenses and other liabilities
Long-term debt
Total Liabilities
Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
2009
2008
$2
2,350
1,360
16,105
80
381
$20,278
$280
695
5,806
6,781
13,497
$20,278
61
3,508
1,243
13,453
80
959
19,304
783
119
6,325
7,227
12,077
19,304
110 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30. BUSINESS SEGMENTS
The Bancorp reports on four business segments: Commercial
Banking, Branch Banking, Consumer Lending and Investment
Advisors.
Results of the Bancorp’s business segments are presented
based on its management structure and management accounting
practices. The structure and accounting practices are specific to
the Bancorp; therefore, the financial results of the Bancorp’s
business segments are not necessarily comparable with similar
information for other financial institutions. The Bancorp refines
its methodologies from time to time as management accounting
practices are improved and businesses change.
On June 30, 2009, the Bancorp completed the Processing
Business Sale, which represented the sale of a majority interest in
the Bancorp’s merchant acquiring and financial institutions
Processing Businesses. Financial data for the merchant acquiring
and financial institutions processing businesses was originally
reported in the former Processing Solutions segment through
June 30, 2009. As a result of the sale, the Bancorp no longer
presents Processing Solutions as a segment and therefore,
historical financial information for the merchant acquiring and
financial institutions Processing Businesses has been reclassified
under General Corporate/Other for all periods presented.
in the Processing
Interchange revenue previously recorded
Solutions segment and associated with cards currently included in
Branch Banking, is now included in the Branch Banking segment
for all periods presented. Additionally, the Bancorp retained its
retail credit card and commercial multi-card service businesses,
which were also originally reported in the former Processing
Solutions segment through June 30, 2009, and are now included in
the Consumer Lending and Commercial Banking segments,
respectively, for all periods presented. Revenue from the
remaining ownership interest in the Processing Businesses is
recorded in General Corporate and Other as noninterest income.
The Bancorp manages interest rate risk centrally at the
corporate
level by employing an FTP methodology. This
methodology insulates the business segments from interest rate
volatility, enabling them to focus on serving customers through
loan originations and deposit taking. The FTP system assigns
charge rates and credit rates to classes of assets and liabilities,
respectively, based on expected duration and the LIBOR swap
curve. Matching duration allocates interest income and interest
expense to each segment so its resulting net interest income is
insulated from interest rate risk. In a rising rate environment, the
Bancorp benefits from the widening spread between deposit costs
and wholesale funding costs. However, the Bancorp’s FTP system
credits this benefit to deposit-providing businesses, such as
Branch Banking and Investment Advisors, on a duration-adjusted
basis. The net impact of the FTP methodology is captured in
General Corporate and Other.
Management made changes to the FTP methodology during
2009 to update the calculation of FTP charges and credits to each
of the Bancorp’s business segments. Changes to the FTP
methodology were applied retroactively for the year ended 2008
and included updating rates to reflect significant increases in the
Bancorp’s liquidity premiums. The increased spreads reflect the
Bancorp’s liability structure and are more weighted towards retail
product pricing spreads. Management will review FTP spreads
periodically based on the extent of changes in market spreads.
The business segments are charged provision expense based
on the actual net charge-offs experienced by the loans owned by
each segment. Provision expense attributable to loan growth and
changes in factors in the allowance for loan and lease losses are
captured in General Corporate and Other. The financial results of
the business segments include allocations for shared services and
headquarters expenses. Even with these allocations, the financial
results are not necessarily indicative of the business segments’
financial condition and results of operations as if they existed as
independent entities. Additionally, the business segments form
synergies by taking advantage of cross-sell opportunities and when
funding operations, by accessing the capital markets as a collective
unit.
Fifth Third Bancorp 111
Results of operations and average assets by segment for each of the three years ended December 31 are:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2009 ($ in millions)
Net interest income (a)
Provision for loan and lease losses
Net interest income (loss) after provision for loan
Commercial
Banking
$1,383
1,360
Branch
Banking
1,559
585
Consumer
Lending
494
574
Investment
Advisors
157
57
General
Corporate
(220)
967
Eliminations
-
-
Total
3,373
3,543
and lease losses
Noninterest income:
Service charges on deposits
Card and processing revenue
Mortgage banking net revenue
Corporate banking revenue
Investment advisory revenue
Gain on sale of Processing Business
Other noninterest income
Securities gains (losses), net
Total noninterest income
Noninterest expense:
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Card and processing expense
Technology and communications
Equipment expense
Other noninterest expense
Total noninterest expense
Income (loss) before income taxes
Applicable income tax expense (benefit) (a)
Net income (loss)
Dividends on preferred stock
Net income (loss) available to common
23
196
28
-
357
7
-
20
1
609
186
35
17
1
6
3
741
989
(357)
(237)
(120)
-
974
428
264
26
10
84
-
86
-
898
396
106
169
68
16
48
569
1,372
500
176
324
-
(80)
-
4
526
-
-
-
40
57
627
160
27
7
2
2
1
312
511
36
13
23
-
100
8
1
1
11
315
-
-
-
336
117
23
10
-
2
1
201
354
82
29
53
-
shareholders
Average assets
(a) Includes fully taxable-equivalent adjustments of $19 million.
(b) Card and processing revenues provided to the banking segments are eliminated in the Consolidated Statements of Income.
(c) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income
($120)
$46,082
23
22,623
324
50,019
53
5,679
(1,187)
-
-
357
-
21
(24)
1,758
333
(11)
2,434
480
120
105
122
155
70
(330)
722
525
68
457
226
231
(9,547)
-
(39)(b)
-
-
(83)(c)
-
-
-
(122)
-
-
-
-
-
-
(122)
(122)
-
-
-
-
-
-
(170)
632
615
553
399
299
1,758
479
47
4,782
1,339
311
308
193
181
123
1,371
3,826
786
49
737
226
511
114,856
2008 ($ in millions)
Net interest income (a)
Provision for loan and lease losses
Net interest income (loss) after provision for loan
Commercial
Banking
$1,567
1,864
Branch
Banking
1,714
352
Consumer
Lending
481
441
Investment
Advisors
191
49
General
Corporate
(417)
1,854
Eliminations
-
-
Total
3,536
4,560
and lease losses
Noninterest income:
Service charges on deposits
Card and processing revenue
Mortgage banking net revenue
Corporate banking revenue
Investment advisory revenue
Other noninterest income
Securities gains (losses), net
Total noninterest income
Noninterest expense:
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Card and processing expense
Technology and communications
Equipment expense
Goodwill impairment
Other noninterest expense
Total noninterest expense
Income (loss) before income taxes
Applicable income tax expense (benefit) (a)
Net income (loss)
Dividends on preferred stock
Net income (loss) available to common
(297)
1,362
186
26
-
414
5
47
-
678
208
35
17
1
7
4
750
646
1,668
(1,287)
(554)
(733)
-
447
246
13
12
84
105
-
907
409
108
159
45
16
44
-
512
1,293
976
344
632
-
40
-
3
184
-
-
40
124
351
111
26
8
6
2
1
215
251
620
(229)
(81)
(148)
-
142
9
2
1
18
354
2
-
386
133
26
10
-
2
1
-
204
376
152
54
98
-
shareholders
Average assets
(a) Includes fully taxable-equivalent adjustments of $22 million.
(b) Card and processing revenues provided to the banking segments are eliminated in the Consolidated Statements of Income.
(c) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income.
($733)
$47,834
(148)
23,294
632
46,182
98
5,496
(2,271)
-
(1,024)
(1)
701
1
-
(6)
169
(90)
774
476
83
106
222
164
80
-
(374)
757
(2,254)
(292)
(1,962)
67
(2,029)
(8,510)
-
(66)(b)
-
-
(84)(c)
-
-
(150)
-
-
-
-
-
-
-
(150)
(150)
-
-
-
-
-
-
641
912
199
444
353
363
34
2,946
1,337
278
300
274
191
130
965
1,089
4,564
(2,642)
(529)
(2,113)
67
(2,180)
114,296
112 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2007 ($ in millions)
Net interest income (a)
Provision for loan and lease losses
Net interest income after provision for loan and lease
Commercial
Banking
$1,312
127
Branch
Banking
1,463
162
Consumer
Lending
412
159
Investment
Advisors
153
12
General
Corporate
(307)
168
Eliminations
-
-
Total
3,033
628
1,185
1,301
152
15
-
344
3
63
-
577
421
220
7
12
90
102
-
852
253
-
-
122
-
-
86
6
214
141
7
1
2
10
386
2
-
408
losses
Noninterest income:
Service charges on deposits
Card and processing revenue
Mortgage banking net revenue
Corporate banking revenue
Investment advisory revenue
Other noninterest income
Securities gains (losses), net
Total noninterest income
Noninterest expense:
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Card and processing expense
Technology and communications
Equipment expense
Other noninterest expense
213
42
15
-
6
3
516
795
967
253
714
-
$714
$38,830
379
100
136
46
14
37
450
1,162
991
349
642
-
642
44,615
51
26
8
4
1
1
190
281
186
66
120
-
120
23,923
140
27
10
-
2
1
215
395
154
55
99
-
99
5,891
Total noninterest expense
Income before income taxes
Applicable income tax expense (benefit) (a)
Net income
Dividends on preferred stock
Net income available to common shareholders
Average assets
(a) Includes fully taxable-equivalent adjustments of $24 million.
(b) Card and processing revenues provided to the banking segments are eliminated in the Consolidated Statements of Income.
(c) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income.
(475)
(1)
633
2
1
(5)
(100)
21
551
456
83
100
194
146
81
(247)
813
(737)
(238)
(499)
1
(500)
(10,782)
-
-
(43)(b)
-
-
(92)(c)
-
-
(135)
-
-
-
-
-
-
(135)
(135)
-
-
-
-
-
-
2,405
579
826
133
367
382
153
27
2,467
1,239
278
269
244
169
123
989
3,311
1,561
485
1,076
1
1,075
102,477
Fifth Third Bancorp 113
ANNUAL REPORT ON FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
Commission file number 001-33653
Incorporated in the State of Ohio
I.R.S. Employer Identification No. 31-0854434
Address: 38 Fountain Square Plaza
Cincinnati, Ohio 45263
Telephone: (800) 972-3030
Securities registered
pursuant to Section
12(b) of the Act:
Common Stock, Without
Par Value
8.5% Non-Cumulative Series G
Convertible Perpetual Preferred
Stock
7.25% Trust Preferred Securities
of Fifth Third Capital Trust V
7.25% Trust Preferred Securities
of Fifth Third Capital Trust VI
8.875% Trust Preferred Securities
of Fifth Third Capital Trust VII
Name of exchange on
on which registered:
The NASDAQ Stock
Market LLC
The NASDAQ Stock
Market LLC
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Indicate by checkmark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes: ⌧ No: (cid:133)
Indicate by checkmark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes: (cid:133) No: ⌧
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: ⌧ No: (cid:133)
Indicate by check mark whether the Registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes: ⌧ No: (cid:133)
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (§229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. (cid:133)
114 Fifth Third Bancorp
Large accelerated filer ⌧ Accelerated filer (cid:133)
Non-accelerated filer (cid:133) (Do not check if a smaller reporting company)
Smaller reporting company (cid:133)
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes: (cid:133) No: ⌧
There were 794,915,755 shares of the Bancorp’s Common Stock,
without par value, outstanding as of January 31, 2010. The
Aggregate Market Value of the Voting Stock held by non-affiliates
of the Bancorp was $4,912,264,394 as of June 30, 2009.
DOCUMENTS INCORPORATED BY REFERENCE
This report incorporates into a single document the requirements of
the U.S. Securities and Exchange Commission (SEC) with respect
to annual reports on Form 10-K and annual reports to shareholders.
The Bancorp’s Proxy Statement for the 2010 Annual Meeting of
Shareholders is incorporated by reference into Part III of this
report.
Only
those sections of
this 2009 Annual Report
to
Shareholders that are specified in this Cross Reference Index
constitute part of the Registrant’s Form 10-K for the year ended
December 31, 2009. No other information contained in this 2009
Annual Report to Shareholders shall be deemed to constitute any
part of this Form 10-K nor shall any such information be
incorporated into the Form 10-K and shall not be deemed “filed” as
part of the Registrant’s Form 10-K.
10-K Cross Reference Index
PART I
Item 1.
15-16, 115-121
30
32-36, 111-113
27
Business
Employees
Segment Information
Average Balance Sheets
Analysis of Net Interest Income and Net Interest Income
Changes
Investment Securities Portfolio
Loan and Lease Portfolio
Risk Elements of Loan and Lease Portfolio
Deposits
Return on Equity and Assets
Short-term Borrowings
26-28
40-41, 75-76
39, 77-78
44-54
41-42
14
42, 88
21-25
None
121
93
None
122
122
14
14-42
43-61
64-113
None
62
None
124
124
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Executive Officers of the Bancorp
PART II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market
Item 8.
Item 9.
Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
100-102, 124
Item 13. Certain Relationships and Related Transactions, and
Director Independence
Principal Accounting Fees and Services
Item 14.
PART IV
Item 15. Exhibits, Financial Statement Schedules
SIGNATURES
124
124
124-127
128
ANNUAL REPORT ON FORM 10-K
AVAILABILITY OF FINANCIAL INFORMATION
Fifth Third Bancorp (the “Bancorp”) files reports with the SEC.
Those reports include the annual report on Form 10-K,
quarterly reports on Form 10-Q, current event reports on Form
8-K and proxy statements, as well as any amendments to those
reports. The public may read and copy any materials the
Bancorp files with the SEC at the SEC’s Public Reference
Room at 450 Fifth Street, NW, Washington, DC 20549. The
public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an internet site that contains reports, proxy and
information statements and other information regarding issuers
that file electronically with the SEC at www.sec.gov. The
Bancorp’s annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, proxy statements, and
amendments to those reports filed or furnished pursuant to
section 13(a) or 15(d) of the Exchange Act are accessible at no
cost on the Bancorp’s web site at www.53.com on a same day
basis after they are electronically filed with or furnished to the
SEC.
PART I
ITEM 1. BUSINESS
General Information
Fifth Third Bancorp, an Ohio corporation organized in 1975, is
a bank holding company as defined by the Bank Holding
Company Act of 1956, as amended (the “BHCA”), and is
registered as such with the Board of Governors of the Federal
Reserve System (FRB). The Bancorp’s principal office is
located in Cincinnati, Ohio.
The Bancorp’s subsidiaries provide a wide range of
financial products and services to the retail, commercial,
financial, governmental, educational and medical sectors,
including a wide variety of checking, savings and money
market accounts, and credit products such as credit cards,
installment loans, mortgage loans and leases. Fifth Third Bank
the Federal Deposit
has deposit
Insurance Corporation (FDIC) through the Deposit Insurance
Fund. Refer to Exhibit 21 filed as an attachment to this Annual
Report on Form 10-K for a list of all the subsidiaries of the
Bancorp as of December 31, 2009.
insurance provided by
Additional information regarding the Bancorp’s businesses
is included in Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
Competition
The Bancorp competes for deposits, loans and other banking
services in its principal geographic markets as well as in
selected national markets as opportunities arise. In addition to
the challenge of attracting and retaining customers for
traditional banking services, the Bancorp’s competitors include
securities dealers, brokers, mortgage bankers,
investment
advisors and insurance companies. These competitors, with
focused products
targeted at highly profitable customer
segments, compete across geographic boundaries and provide
customers increasing access to meaningful alternatives to
banking services in nearly all significant products. The
increasingly competitive environment is a result primarily of
changes in regulation, changes in technology, product delivery
systems and the accelerating pace of consolidation among
financial service providers. These competitive trends are likely
to continue.
Acquisitions
The Bancorp’s strategy for growth includes strengthening its
presence in core markets, expanding into contiguous markets
and broadening its product offerings while taking into account
the integration and other risks of growth. The Bancorp
evaluates strategic acquisition opportunities and conducts due
diligence activities in connection with possible transactions. As
a result, discussions, and in some cases, negotiations may take
place and future acquisitions involving cash, debt or equity
securities may occur. These typically involve the payment of a
premium over book value and current market price, and
therefore, some dilution of book value and net income per share
may occur with any future transactions.
Additional information regarding acquisitions is included
in the Regulation and Supervision section in addition to Note 3
of the Notes to Consolidated Financial Statements.
laws and regulations applicable
Regulation and Supervision
In addition to the generally applicable state and federal laws
governing businesses and employers, the Bancorp and its
subsidiary bank are subject to extensive regulation by federal
and state
to financial
institutions and their parent companies. Virtually all aspects of
the business of the Bancorp and its subsidiary bank are subject
to specific requirements or restrictions and general regulatory
oversight. The principal objectives of state and federal banking
laws are the maintenance of the safety and soundness of
financial institutions and the federal deposit insurance system
and the protection of consumers or classes of consumers, rather
than the specific protection of shareholders of a bank or the
parent company of a bank, such as the Bancorp. In addition, the
supervision, regulation and examination of the Bancorp and its
subsidiaries by the bank regulatory agencies is not intended for
the protection of the Bancorp’s security holders. To the extent
the following material describes statutory or regulatory
provisions, it is qualified in its entirety by reference to the
particular statute or regulation.
The Bancorp is subject to regulation and supervision by the
FRB and the Ohio Division of Financial Institutions (the
“Division). The Bancorp is required to file various reports with,
and is subject to examination by, the FRB and the Division. The
FRB has the authority to issue orders to bank holding
companies to cease and desist from unsound banking practices
and violations of conditions imposed by, or violations of
agreements with, the FRB. The FRB is also empowered to
assess civil money penalties against companies or individuals
who violate the BHCA or orders or regulations thereunder, to
order termination of non-banking activities of non-banking
subsidiaries of bank holding companies, and
to order
termination of ownership and control of a non-banking
subsidiary by a bank holding company.
The BHCA requires the prior approval of the FRB, for a
bank holding company to acquire substantially all the assets of
a bank or acquiring direct or indirect ownership or control of
more than 5% of any class of the voting shares of any bank,
bank holding company or savings association, or increasing any
such non-majority ownership or control of any bank, bank
holding company or savings association, or merging or
consolidating with any bank holding company.
The Riegle-Neal
Interstate Banking and Branching
Efficiency Act of 1994 generally authorizes bank holding
companies to acquire banks located in any state, subject to
certain state-imposed age and deposit concentration limits, and
also generally authorizes interstate bank holding company and
bank mergers and to a lesser extent, interstate branching.
The Gramm-Leach-Bliley Act of 1999 (GLBA) permits a
qualifying bank holding company to become a financial holding
company (FHC) and thereby to engage directly or indirectly in
a broader range of activities than had previously been permitted
for a bank holding company under the BHCA. Permitted
Fifth Third Bancorp 115
ANNUAL REPORT ON FORM 10-K
activities include securities underwriting and dealing, insurance
underwriting and brokerage, merchant banking and other
activities that are declared by the FRB, in cooperation with the
Treasury Department, to be “financial in nature or incidental
thereto” or are declared by the FRB unilaterally to be
“complementary” to financial activities. In addition, a FHC is
allowed to conduct permissible new financial activities or
acquire permissible non-bank financial companies with after-
the-fact notice to the FRB. A bank holding company may elect
to become a FHC if each of its subsidiary banks is “well
capitalized,” is “well managed” and has at least a “Satisfactory”
rating under the Federal Community Reinvestment Act (CRA).
In 2000, the Bancorp elected and qualified for FHC status under
the GLBA.
Unless a bank holding company becomes a FHC under
GLBA, the BHCA also prohibits a bank holding company from
acquiring a direct or indirect interest in or control of more than
5% of any class of the voting shares of a company that is not a
bank or a bank holding company and from engaging directly or
indirectly in activities other than those of banking, managing or
controlling banks or furnishing services to its subsidiary banks,
except that it may engage in and may own shares of companies
engaged in certain activities the FRB has determined to be so
closely related to banking or managing or controlling banks as
to be proper incident thereto.
The FRB has authority to prohibit bank holding companies
from paying dividends if such payment is deemed to be an
unsafe or unsound practice. The FRB has indicated generally
that it may be an unsafe or unsound practice for bank holding
companies to pay dividends unless a bank holding company’s
net income is sufficient to fund the dividends and the expected
rate of earnings retention is consistent with the organization’s
capital needs, asset quality and overall financial condition. The
Bancorp depends in part upon dividends received from its
subsidiary bank to fund its activities, including the payment of
dividends and its subsidiary bank is subject to regulatory
limitations on the amount of dividends it may declare and pay.
Under FRB policy, a bank holding company is expected to
act as a source of financial and managerial strength to each of
its subsidiary banks and to commit resources to their support.
This support may be required at times when the bank holding
company may not have the resources to provide it. Similarly,
under the cross-guarantee provisions of the Federal Deposit
Insurance Act (FDIA), the FDIC can hold any FDIC-insured
depository institution liable for any loss suffered or anticipated
by the FDIC in connection with (1) the “default” of a
commonly controlled FDIC-insured depository institution; or
(2) any assistance provided by the FDIC to a commonly
controlled FDIC-insured depository institution “in danger of
default.”
Prior to September 30, 2009, the Bancorp owned two state
banks, Fifth Third Bank and Fifth Third Bank (Michigan),
chartered under the laws of Ohio and Michigan, respectively
and one national bank, Fifth Third Bank, N.A. On September
30, 2009 Fifth Third Bank, N.A., and Fifth Third Bank
(Michigan) merged with and into Fifth Third Bank, the Ohio
chartered bank (the “consolidation”). These banks are subject to
extensive state regulation and examination by the appropriate
state banking agency in the particular state or states where each
state bank is chartered, by the FRB, and by the FDIC, which
insures the deposits of each of the state banks to the maximum
extent permitted by law. The federal and state laws and
regulations that are applicable to banks regulate, among other
matters, the scope of their business, their investments, their
reserves against deposits, the timing of the availability of
116 Fifth Third Bancorp
deposited funds, the amount of loans to individual and related
borrowers and the nature, amount of and collateral for certain
loans, and the amount of interest that may be charged on loans.
Various state consumer laws and regulations also affect the
operations of the state banks.
to
Prior
the consolidation,
the Bancorp’s national
subsidiary bank, Fifth Third Bank, N.A. was subject to
regulation and examination primarily by the Office of the
Comptroller of the Currency (OCC) and secondarily by the
FRB and the FDIC, which insures the deposits to the maximum
extent permitted by law. The federal laws and regulations that
are applicable to national banks regulate, among other matters,
the scope of their business, their investments, their reserves
against deposits, the timing of the availability of deposited
funds, the amount of loans to individual and related borrowers
and the nature, amount of and collateral for certain loans, and
the amount of interest that may be charged on loans.
In 2006, the Federal Deposit Insurance Reform Act of
2005 was signed into law (FDIRA). Pursuant to the FDIRA, the
Bank Insurance Fund and Savings Association Fund were
merged to create the Deposit Insurance Fund (the “DIF”). The
FDIC was granted broader authority in adjusting deposit
insurance premium rates and more flexibility in establishing the
designated reserve ratio. FDIRA provided assessment credits to
insured depository institutions that could be used to offset 100%
of insurance premiums in 2007 and 90% of premiums in 2008-
2010 or until they are fully exhausted. The Bancorp fully
exhausted its assessment credits in the second quarter of 2008.
Insured depository institutions are placed into one of four risk
categories under FDIRA, with the vast majority qualifying for
Risk Category I. Risk Category I institutions insurance
premiums are based upon CAMELS ratings, long-term debt
issuer ratings (if applicable) and various financial ratios derived
from the Consolidated Report of Condition and Income (Call
Report). In December 2008, the FDIC issued a final rule that
raised the then current assessment rates uniformly by 7 basis
points for the first quarter of 2009 assessment, which resulted in
annualized assessment rates for Risk Category I institutions
ranging from 12 to 14 basis points. In February 2009, the FDIC
issued final rules to amend the DIF restoration plan, change the
risk-based assessment system and set assessment rates for Risk
Category I institutions beginning in the second quarter of 2009.
For Risk Category I institutions that have long-term debt issuer
ratings, the FDIC determines the initial base assessment rate
using a combination of weighted-average CAMELS component
ratings, long-term debt issuer ratings (converted to numbers and
averaged) and the financial ratios method assessment rate (as
defined), each equally weighted. The initial base assessment
rates for Risk Category I institutions range from 12 to 16 basis
points, on an annualized basis. After the effect of potential
base-rate adjustments, total base assessment rates range from 7
to 24 basis points. The potential adjustments to a Risk
Category I institution’s initial base assessment rate, include (i) a
potential decrease of up to 5 basis points for long-term
unsecured debt, including senior and subordinated debt and
(ii) a potential increase of up to 8 basis points for secured
liabilities in excess of 25% of domestic deposits.
In May 2009, as part of its efforts to rebuild the DIF, the
FDIC issued a final rule which levied a special assessment
applicable to all insured depository institutions totaling 5 basis
points of each institution’s total assets less Tier 1 capital as of
June 30, 2009, not to exceed 10 basis points of domestic
deposits. In lieu of further special assessments, in November
2009, the FDIC issued a rule that required all insured depository
institutions, with limited exceptions, to prepay their estimated
ANNUAL REPORT ON FORM 10-K
quarterly risk-based assessments for the fourth quarter of 2009
and for all of 2010, 2011 and 2012. The FDIC also adopted a
uniform three-basis point increase in assessment rates effective
on January 1, 2011.
Federal law, Sections 23A and 23B of the Federal Reserve
Act, restricts transactions between a bank and an affiliated
company, including a parent bank holding company. The
subsidiary banks are subject to certain restrictions on loans to
affiliated companies, on investments in the stock or securities
thereof, on the taking of such stock or securities as collateral for
loans to any borrower, and on the issuance of a guarantee or
letter of credit on their behalf. Among other things, these
restrictions limit the amount of such transactions, require
collateral in prescribed amounts for extensions of credit,
prohibit the purchase of low quality assets and require that the
terms of such transactions be substantially equivalent to terms
of similar transactions with non-affiliates. One result of these
restrictions is a limitation on the subsidiary banks to fund the
Bancorp. Generally, each subsidiary bank is limited in its
extensions of credit to any affiliate to 10% of the subsidiary
bank’s capital and its extension of credit to all affiliates to 20%
of the subsidiary bank’s capital.
The CRA generally requires insured depository institutions
to identify the communities they serve and to make loans and
investments and provide services that meet the credit needs of
these communities. Furthermore, the CRA requires the FRB to
evaluate the performance of each of the subsidiary banks in
helping to meet the credit needs of their communities. As a part
of the CRA program, the subsidiary banks are subject to
periodic examinations by
the FRB, and must maintain
comprehensive records of their CRA activities for this purpose.
During these examinations, the FRB rates such institutions’
compliance with CRA as “Outstanding,” “Satisfactory,” “Needs
to Improve" or "Substantial Noncompliance.” Failure of an
institution to receive at least a “Satisfactory” rating could
inhibit such institution or its holding company from undertaking
certain activities, including engaging in activities permitted as a
financial holding company under the GLBA and acquisitions of
other financial institutions, or, as discussed above, require
divestitures. The FRB must take into account the record of
performance of banks in meeting the credit needs of the entire
community served,
low- and moderate-income
neighborhoods. Fifth Third Bank, Fifth Third Bank (Michigan)
and Fifth Third Bank, N.A. all received a “Satisfactory” CRA
rating. Because the Bancorp is an FHC, with limited exceptions,
the Bancorp may not commence any new financial activities or
acquire control of any companies engaged in financial activities
in reliance on the GLBA if any of the subsidiary banks receives
a CRA rating of less than “Satisfactory.”
including
The FRB has established capital guidelines for financial
holding companies. The FRB and the OCC have also issued
regulations establishing capital requirements for banks. Failure
to meet capital requirements could subject the Bancorp and its
subsidiary bank to a variety of restrictions and enforcement
actions. In addition, as discussed previously, the Bancorp’s
subsidiary bank must remain well capitalized for the Bancorp to
retain its status as a financial holding company.
The minimum risk-based capital requirements adopted by
the federal banking agencies follow the Capital Accord of the
Basel Committee on Banking Supervision. In 2004, the Basel
Committee published its new capital guidelines (Basel II)
governing the capital adequacy of large, internationally active
banking organizations (core” banking organizations with at
least $250 billion in total assets or at least $10 billion in foreign
exposure). The final rule to implement the advanced approaches
of Basel II for core banking organizations became effective on
April 1, 2008. Under Basel II, after a transition period, core
banking organizations are required to enhance the measurement
and management of their risks, including credit risk and
operational risk, through the use of advanced approaches for
calculating risk-based capital requirements. Other U.S. banking
organizations may elect to adopt the requirements of this rule (if
they meet applicable qualification requirements), but they are
not required to apply them.
rule
In July 2008, the federal banking agencies issued a
proposed
that would give all non-core banking
organizations, which are not required to adopt Basel II’s
advance approaches, such as Bancorp, with the option to adopt
a new risk-based framework. This framework would adopt the
standardized approach of Basel II for credit risk, the basic
indicator approach of Basel II for operational risk, and related
disclosure requirements. The proposed rule, if adopted, will
replace the earlier proposal to adopt the so-called Basel IA
option. Until such time as the new rules for non-core banking
organizations are adopted, Bancorp is unable to predict whether
it will adopt a standardized approach under Basel II.
entitled
“Principles
On September 3, 2009,
the United States Treasury
issued a policy statement (the
Department (“Treasury”)
“Treasury Policy Statement”)
for
Reforming the U.S. and International Regulatory Capital
Framework for Banking Firms.” The Treasury Policy Statement
was developed in consultation with the U.S. bank regulatory
agencies and contemplates changes to the existing regulatory
capital regime that would involve substantial revisions to, if not
replacement of, major parts of the Basel I and Basel II capital
frameworks and affect all regulated banking organizations and
other systemically important institutions. The Treasury Policy
Statement calls for, among other things, stronger and higher
capital requirements for all banking firms. The Treasury Policy
Statement suggested that changes to the regulatory capital
framework be phased in over a period of several years. Treasury
seeks to reach a comprehensive international agreement on the
framework by December 31, 2010, with the implementation of
reforms by December 31, 2012. However, it remains possible
that U.S. bank regulatory agencies could officially adopt, or
informally implement, new capital standards at an earlier date.
On December 17, 2009, the Basel Committee issued a set
of proposals (the “Capital Proposals”) that would significantly
revise the definitions of Tier 1 capital and Tier 2 capital, with
the most significant changes being to Tier 1 capital. Most
the Capital Proposals would disqualify certain
notably,
structured capital instruments, such as trust preferred securities,
from Tier 1 capital status. The Capital Proposals would also re-
emphasize that common equity is the predominant component
of Tier 1 capital by adding a minimum common equity to risk-
weighted assets ratio and requiring that goodwill, general
intangibles and certain other items that currently must be
deducted from Tier 1 capital instead be deducted from common
equity as a component of Tier 1 capital. The Capital Proposals
also leave open the possibility that the Basel Committee will
recommend changes to the minimum Tier 1 capital and total
capital ratios of 4.0% and 8.0%, respectively.
Concurrently with the release of the Capital Proposals, the
Basel Committee also released a set of proposals related to
liquidity risk exposure (the “Liquidity Proposals,” and together
with the Capital Proposals, the “2009 Basel Committee
Proposals”). The Liquidity Proposals include two measures of
liquidity based on risk exposure, one based on a 30-day time
horizon under an acute liquidity stress scenario and one
Fifth Third Bancorp 117
ANNUAL REPORT ON FORM 10-K
designed to promote more medium and long-term funding of
the assets and activities of banks over a one-year time horizon.
Comments on the 2009 Basel Committee Proposals are due
by April 16, 2010, with the expectation that the Basel
Committee will release a comprehensive set of proposals by
December 31, 2010 and
final provisions will be
that
implemented by December 31, 2012. The U.S. bank regulators
have urged comment on the 2009 Basel Committee Proposals.
Ultimate implementation of such proposals in the U.S. will be
subject to the discretion of the U.S. bank regulators and the
regulations or guidelines adopted by such agencies may, of
course, differ from the 2009 Basel Committee Proposals and
other proposals that the Basel Committee may promulgate in
the future.
The FRB, FDIC and other bank regulatory agencies have
adopted final guidelines (the “Guidelines) for safeguarding
confidential, personal customer information. The Guidelines
require each financial institution, under the supervision and
ongoing oversight of its Board of Directors or an appropriate
committee thereof, to create, implement and maintain a
comprehensive written information security program designed
to ensure
the security and confidentiality of customer
information, protect against any anticipated threats or hazards to
the security or integrity of such information and protect against
unauthorized access to or use of such information that could
result in substantial harm or inconvenience to any customer.
The Bancorp has adopted a customer information security
program that has been approved by the Bancorp’s Board of
Directors (the “Board).
the statute requires explanations
The GLBA requires financial institutions to implement
policies and procedures regarding the disclosure of nonpublic
personal information about consumers to non-affiliated third
parties. In general,
to
consumers on policies and procedures regarding the disclosure
of such nonpublic personal information, and, except as
otherwise
such
information except as provided in the subsidiary banks policies
and procedures. The subsidiary banks have implemented a
privacy policy effective since the GLBA became law, pursuant
to which all of its existing and new customers are notified of the
privacy policies.
law, prohibits disclosing
required by
The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001 (the “Patriot Act), designed to deny terrorists and
others the ability to obtain access to the United States financial
system, has significant implications for depository institutions,
brokers, dealers and other businesses involved in the transfer of
money. The Patriot Act, as implemented by various federal
regulatory agencies, requires financial institutions, including the
Bancorp and its subsidiaries, to implement new policies and
procedures or amend existing policies and procedures with
laundering,
respect
to, among other matters, anti-money
compliance, suspicious activity and currency
transaction
reporting and due diligence on customers. The Patriot Act and
its underlying regulations also permit information sharing for
counter-terrorist purposes between federal law enforcement
agencies and financial institutions, as well as among financial
institutions, subject to certain conditions, and require the FRB
the
(and other
effectiveness of an applicant in combating money laundering
activities when considering applications filed under Section 3 of
the BHCA or the Bank Merger Act. The Bancorp’s Board has
approved policies and procedures that are believed to be
compliant with the Patriot Act.
federal banking agencies)
to evaluate
118 Fifth Third Bancorp
Certain mutual fund and unit investment trust custody and
administrative clients are regulated as “investment companies”
as that term is defined under the Investment Company Act of
1940, as amended (the “ICA), and are subject to various
examination and reporting requirements. The provisions of the
ICA and the regulations promulgated thereunder prescribe the
type of institution that may act as a custodian of investment
company assets, as well as the manner in which a custodian
administers the assets in its custody. As a custodian for a
number of investment company clients, these regulations
require, among other things, that certain minimum aggregate
capital, surplus and undivided profit levels are maintained by
the subsidiary banks. Additionally, arrangements with clearing
agencies or other securities depositories must meet ICA
requirements for segregation of assets, identification of assets
and client approval. Future legislative and regulatory changes in
laws and regulations governing custody of
the existing
to
investment company assets, particularly with respect
custodian qualifications, may have a material and adverse
impact on the Bancorp. Currently, management believes the
Bancorp is in compliance with all minimum capital and
securities depository requirements. Further, the Bancorp is not
aware of any proposed or pending regulatory developments,
which, if approved, would adversely affect its ability to act as
custodian to an investment company.
Investment companies are also subject to extensive record
keeping and reporting requirements. These requirements dictate
the type, volume and duration of the record keeping the
Bancorp undertakes, either in the role as custodian for an
investment company or as a provider of administrative services
to an investment company. Further, specific ICA guidelines
must be followed when calculating the net asset value of a
client mutual fund. Consequently, changes in the statutes or
regulations governing recordkeeping and reporting or valuation
calculations will affect the manner in which operations are
conducted.
New legislation or regulatory requirements could have a
significant impact on the information reporting requirements
applicable to the Bancorp and may in the short term adversely
affect the Bancorp’s ability to service clients at a reasonable
cost. Any failure to provide such support could cause the loss of
customers and have a material adverse effect on financial
results. Additionally, legislation or regulations may be proposed
or enacted to regulate the Bancorp in a manner that may
adversely affect financial results. Furthermore, the mutual fund
industry may be significantly affected by new laws and
regulations.
The GLBA amended the federal securities laws to
eliminate the blanket exceptions that banks traditionally have
had from the definition of “broker” and “dealer.” The GLBA
also required that there be certain transactional activities that
would not be “brokerage” activities, which banks could effect
without having to register as a broker. In September 2007, the
FRB and SEC approved Regulation R to govern bank securities
to conduct
activities. Various exemptions permit banks
activities that would otherwise constitute brokerage activities
under the securities laws. Those exemptions include conducting
brokerage activities related to trust, fiduciary and similar
services, certain services and also conducting a de minimis
number of riskless principal transactions, certain asset-backed
transactions and certain securities lending transactions. The
Bancorp only conducts non-exempt brokerage activities through
its affiliated registered broker-dealer.
The Sarbanes-Oxley Act of 2002, (Sarbanes-Oxley)
implements a broad range of corporate governance and
ANNUAL REPORT ON FORM 10-K
to
increase
including
(ii) auditor
responsibility measures,
in
requirements
accounting measures for public companies (including publicly-
held bank holding companies such as the Bancorp) designed to
promote honesty and transparency in corporate America.
Sarbanes-Oxley’s principal provisions, many of which have
been interpreted through regulations, provide for and include,
among other things: (i) the creation of an independent
accounting oversight board;
independence
provisions that restrict non-audit services that accountants may
their audit clients; (iii) additional corporate
provide
governance and
the
requirement that the chief executive officer and chief financial
officer of a public company certify financial statements; (iv) the
forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer’s securities by directors and
senior officers in the twelve month period following initial
publication of any financial statements that later require
the oversight of, and
restatement; (v) an
to, audit
enhancement of certain
committees of public companies and how they interact with the
Bancorp’s independent auditors; (vi) requirements that audit
committee members must be independent and are barred from
accepting consulting, advisory or other compensatory fees from
the issuer; (vii) requirements that companies disclose whether at
least one member of the audit committee is a ‘financial expert’
(as such term is defined by the SEC) and if not discussed, why
the audit committee does not have a financial expert; (viii)
insiders,
expanded disclosure requirements for corporate
including accelerated reporting of stock transactions by insiders
and a prohibition on insider trading during pension blackout
periods; (ix) a prohibition on personal loans to directors and
officers, except certain loans made by insured financial
institutions on nonpreferential terms and in compliance with
other bank regulatory requirements; (x) disclosure of a code of
ethics and filing a Form 8-K for a change or waiver of such
code;
the
effectiveness of internal control over financial reporting and the
Bancorp’s Independent Registered Public Accounting Firm
attest to the assessment; and (xii) a range of enhanced penalties
for fraud and other violations.
that management assess
requirements
relating
(xi)
Additional information regarding regulatory matters is
included in Note 28 of the Notes to Consolidated Financial
Statements.
Emergency Economic Stabilization Act of 2008
On October 3, 2008, in response to the stresses experienced in
the financial markets, the Emergency Economic Stabilization
Act (EESA) was enacted. EESA authorizes the Secretary of the
Treasury to purchase up to $700 billion in troubled assets from
financial institutions under the Troubled Asset Relief Program
or TARP. Troubled assets include residential or commercial
mortgages and related instruments originated prior to March 14,
2008 and any other financial instrument that the Secretary
determines, after consultation with the Chairman of the Board
of Governors of the Federal Reserve System, the purchase of
which is necessary to promote financial stability. In December
2009, Treasury extended TARP, scheduled to expire on
December 31, 2009, to October 3, 2010.
Capital Purchase Program
Pursuant to its authority under EESA, Treasury created the
TARP Capital Purchase Program (CPP) under which the
Treasury Department will invest up to $250 billion in senior
preferred stock of U.S. banks and savings associations or their
holding companies. Qualifying financial institutions may issue
senior preferred stock with a value equal to not less than 1% of
risk-weighted assets and not more than the lesser of $25 billion
or 3% of risk-weighted assets. The senior preferred stock will
pay dividends at the rate of 5% per annum until the fifth
anniversary of the investment and thereafter at the rate of
9% per annum. Under the original terms of the CPP purchase
agreement, CPP recipients were prohibited from redeeming the
senior preferred stock for three years, unless they earlier
completed a qualified equity offering of Tier 1 capital
qualifying securities in an amount equal to the liquidation
preference of the CPP investment. Under the American
Recovery and Reinvestment Act of 2009, the Secretary of
Treasury shall permit any recipient of funds under the TARP to
repay such funds without regard to the source of the funds or
any waiting period, subject to consultation with the appropriate
federal banking agency. Until the third anniversary of the
issuance of the senior preferred, the consent of the U.S.
Treasury will be required for any increase in the dividends on
the common stock or for any stock repurchases unless the
senior preferred has been redeemed in its entirety or the
Treasury has transferred the senior preferred to third parties.
The senior preferred will not have voting rights other than the
right to vote as a class on the issuance of any preferred stock
ranking senior, any change in its terms or any merger, exchange
or similar transaction that would adversely affect its rights. The
senior preferred will also have the right to elect two directors if
dividends have not been paid for six periods. The senior
transferable and participating
preferred will be
institutions will be required to file a shelf registration statement
covering the senior preferred. The issuing institution must grant
the Treasury piggyback registration rights. Prior to issuance, the
financial institution and its senior executive officers must
modify or terminate all benefit plans and arrangements to
comply with EESA. Senior executives must also waive any
claims against the Department of Treasury.
freely
In connection with the issuance of the senior preferred,
participating institutions must issue to Treasury immediately
exercisable 10-year warrants to purchase common stock with an
aggregate market price equal to 15% of the amount of senior
preferred. The exercise price of the warrants will equal the
average closing price of the common stock for the 20 trading
days prior to the date of the Treasury’s approval. Treasury may
only exercise or transfer one-half of the warrants prior to the
earlier of December 31, 2009 or the date the issuing financial
institution has received proceeds equal to the senior preferred
investment from one or more offerings of common or preferred
stock qualifying as Tier 1 capital. Treasury will not exercise
voting rights with respect to any shares of common stock
acquired through exercise of the warrants. The financial
institution must file a shelf registration statement covering the
warrants and underlying common stock as soon as practicable
after issuance and grant piggyback registration rights. The
number of warrants will be reduced by one-half if the financial
institution raises capital equal to the amount of the senior
preferred through one or more offerings of common stock or
preferred stock qualifying as Tier 1 capital. If the financial
institution does not have sufficient authorized shares of
common stock available to satisfy the warrants or their issuance
otherwise
financial
institution must call a meeting of shareholders for that purpose
as soon as practicable after the date of investment. The exercise
price of the warrants will be reduced by 15% for each six
months that lapse before shareholder approval subject to a
maximum reduction of 45%.
shareholder approval,
requires
the
On December 31, 2008, Bancorp entered into a Letter
Agreement (including the Securities Purchase Agreement—
Fifth Third Bancorp 119
ANNUAL REPORT ON FORM 10-K
therein,
reference
incorporated by
Standard Terms
the
“Purchase Agreement) with Treasury pursuant to which the
Company issued and sold to Treasury for an aggregate purchase
price of approximately $3.4 billion in cash: (i) 136,320 shares
of the Company’s Fixed Rate Cumulative Perpetual Preferred
Stock, Series F, having a liquidation preference of $25,000 per
share (the “Series F Preferred Stock), and (ii) a ten-year warrant
to purchase up to 43,617,747 shares of the Company’s common
stock, no par value per share, at an initial exercise price of
$11.72 per share.
In the Purchase Agreement, the Bancorp agreed that, until
such time as Treasury ceases to own any debt or equity
securities of the Bancorp acquired pursuant to the Purchase
Agreement, the Bancorp will take all necessary action to ensure
that its benefit plans with respect to its senior executive officers
comply with Section 111(b) of EESA as implemented by any
guidance or regulation under the EESA that has been issued and
is in effect as of the date of issuance of the Series F Preferred
Stock and the Warrant, and has agreed to not adopt any benefit
plans with respect to, or which covers, its senior executive
officers that do not comply with the EESA.
Importantly, the CPP may be unilaterally amended by the
Treasury. Accordingly, the Company may be subject to further
restrictions or obligations as a result of its participation in the
CPP or redemption of CPP.
the TLGP was
TLG Program
Pursuant to EESA, on November 21, 2008, the FDIC adopted a
final rule relating to the Temporary Liquidity Guaranty
Program (TLGP). Included within
the
Transaction Account Guarantee Program in which the FDIC
will provide full FDIC deposit insurance coverage for all non-
interest-bearing transaction accounts through June 30, 2010
(extended from December 31, 2009 subject to an opt-out
provision, by subsequent amendment). Coverage under the
Transaction Account Guarantee Program was available for the
first 30 days without charge. Thereafter, the fee assessment for
deposit insurance coverage is assessed on a quarterly basis at an
annualized 10 basis points per quarter on amounts in covered
accounts exceeding $250,000 for 2008. During the six month
extension period in 2010, the fee assessment increases to 15
basis points per quarter for institutions in Risk Category I of the
risk based premium system. The Company elected to participate
in the Transaction Account Guarantee Program and not opt out
of the six month extension.
Capital Assistance Program
On February 25, 2009, under its Financial Stability Plan,
Treasury announced the Capital Assistance Program (“CAP”).
The CAP did not replace the CPP and was open to qualifying
institutions regardless of whether they participated in the CPP.
The deadline to apply for the CAP was November 9, 2009.
Bancorp did not participate in the CAP.
Term Asset-Backed Securities Loan Facility
the Term Asset-Backed Securities Loan Facility
Under
(“TALF”),
is
the Federal Reserve Bank of New York
authorized to lend up to $200 billion to eligible owners of
certain AAA-rated asset backed securities backed by newly and
recently originated auto loans, credit card loans, student loans,
and SBA-guaranteed small business loans, and commercial
mortgage-backed securities (“CMBS”). Any U.S. company that
owns eligible collateral may borrow from the TALF, provided
the company maintains an account relationship with a primary
dealer. The facility will cease making loans collateralized by
newly issued CMBS on June 30, 2010, and loans collateralized
120 Fifth Third Bancorp
by all other types of TALF-eligible newly issued and legacy
CMBS on March 31, 2010, unless the FRB extends the facility.
Supervisory Capital Assessment Program
On February 10, 2009, Treasury announced a new financial
stability plan (the “Financial Stability Plan”), which builds upon
existing programs and earmarks the second $350 billion of
unused funds originally authorized under EESA. Pursuant to the
CAP, the Bancorp, along with the other domestic bank holding
companies with assets of more than $100 billion at December
31, 2008, was subject to a forward-looking stress test called the
Supervisory Capital Assessment Program (the “SCAP”). The
SCAP exam evaluated the projected level and quality of each
institution’s capital during specified economic scenarios
through the end of 2010, which included a baseline scenario,
reflecting a consensus estimate of private-sector forecasters, and
a more adverse scenario, reflecting an economic situation more
severe than is generally anticipated.
On May 7, 2009, the Bancorp announced its SCAP results.
The results of the SCAP assessment indicated that the
Bancorp’s Tier 1 Capital and Total Risk-Based Capital ratios
were expected to continue to exceed the levels required to
maintain a “well-capitalized” status under the more adverse
scenario as defined by the assessment. As a result, the Bancorp
was not required to raise additional overall capital. The SCAP
results did indicate that the Bancorp’s Tier 1 common equity
would be required to be augmented to maintain a capital buffer
above the newly required four percent threshold of the Tier 1
common equity ratio under the more adverse scenario of the
assessment. The total amount required, prior to considering
activities by the Bancorp since the end of the fourth quarter of
2008, was $2.6 billion. After considering such activities,
including the sale of the Bancorp’s processing business, the
indicated additional net Tier 1 common equity required was
$1.1 billion. During the second quarter of 2009, in order to raise
additional capital to augment Tier 1 common equity, the
Bancorp completed a $1 billion common stock offering and an
exchange of a portion of its Series G preferred stock. As a result
of the common stock offering, the exchange of the preferred
stock, and the sale of its processing business, the Bancorp
exceeded its Tier 1 common equity requirement under the
SCAP assessment by approximately $650 million. Additionally,
in July of 2009, the Bancorp sold its Visa, Inc. Class B common
shares resulting in an additional net $206 million benefit to
equity.
Regulatory Reform
Incentive Compensation Proposals. On October 22, 2009, the
FRB proposed guidance on incentive compensation intended to
ensure that the incentive compensation policies of banking
organizations do not undermine the safety and soundness of
such organizations by encouraging excessive risk-taking.
The guidance would apply to all banking organizations
supervised by the FRB and covers all employees that have the
ability to materially affect the risk profile of an organization,
either individually or as part of a group. The proposed guidance
would apply to incentive compensation arrangements for: (i)
senior executives and others who are responsible for oversight
of the organization’s firm-wide activities or material business
lines; (ii) individual employees, including non-executives,
whose activities may expose the organization to material
amounts of risk; and (iii) groups of employees who are subject
to the same or similar incentive compensation arrangements and
who, in the aggregate, may expose the organization to material
amounts of risk.
ANNUAL REPORT ON FORM 10-K
to
the
proposals.
administration’s
nation’s financial institutions, including rules and regulations
related
Separate
comprehensive financial reform bills intended to address the
proposals set forth by the administration were introduced in
both houses of Congress in the second half of 2009 and remain
under review by both the U.S. House of Representatives and the
U.S. Senate. The Bancorp cannot predict whether or in what
form further legislation or regulations may be adopted or the
extent to which the Bancorp and its subsidiaries may be
affected thereby.
ITEM 2. PROPERTIES
The Bancorp’s executive offices and the main office of Fifth
Third Bank are located on Fountain Square Plaza in downtown
Cincinnati, Ohio in a 32-story office tower, a five-story office
building with an attached parking garage and a separate ten-
story office building known as the Fifth Third Center, the
William S. Rowe Building and the 530 Building, respectively.
The Bancorp’s main operations center is located in Cincinnati,
Ohio, in a three-story building with an attached parking garage
known as the Madisonville Operations Center. A subsidiary of
the Bancorp owns 100% of these buildings.
At December 31, 2009, the Bancorp, through its banking
and non-banking subsidiaries, operated 1,309 banking centers,
of which 896 were owned, 278 were leased and 135 for which
the buildings are owned but the land is leased. The banking
centers are located in the states of Ohio, Kentucky, Indiana,
Michigan, Illinois, Florida, Tennessee, North Carolina, West
Virginia, Pennsylvania, Missouri, and Georgia. The Bancorp’s
significant owned properties are owned free from mortgages
and major encumbrances.
In connection with the proposed guidance, the Federal
Reserve also announced that it will conduct a special horizontal
review of incentive compensation practices at 28 large complex
banking organizations to ensure the organizations do not
encourage excessive risk taking and otherwise comply with the
principles set forth in the proposed guidance. Enforcement
actions may be taken against a banking organization if its
incentive compensation arrangements, or
risk-
management control or governance processes, pose a risk to the
organization’s safety and soundness and the organization is not
taking prompt and effective measures
the
deficiencies.
to correct
related
In addition, on January 12, 2010, the FDIC announced that
it would seek public comment on whether banks with
compensation plans that encourage risky behavior should be
charged at higher deposit assessment rates than such banks
would otherwise be charged.
The scope and content of the U.S. banking regulators’
policies on executive compensation are continuing to develop
and are likely to continue evolving in the near future. It cannot
be determined at this time whether compliance with such
policies will adversely affect the Corporation’s ability to hire,
retain and motivate its key employees.
The Financial Crisis Responsibility Fee
On January 14, 2010, the current administration announced a
proposal to impose a Financial Crisis Responsibility Fee on
those financial institutions with over $50 billion in consolidated
assets. Such Financial Crisis Responsibility Fee would be
collected by the Internal Revenue Service and would be
approximately fifteen basis points, or 0.15%, of an amount
calculated by subtracting a covered institution’s Tier I capital
and FDIC-assessed deposits (and/or an adjustment for insurance
liabilities covered by state guarantee funds) from such
institution’s total assets.
The Financial Crisis Responsibility Fee, if implemented as
proposed, would go into effect on June 30, 2010 and remain in
place for at least ten years. Treasury would be asked to report
after five years on the effectiveness of the Financial Crisis
Responsibility Fee as well as its progress in repaying projected
losses to the U.S. government as a result of TARP. If losses to
the U.S. government as a result of TARP have not been
recouped after ten years, the Financial Crisis Responsibility Fee
would remain in place until such losses have been recovered.
(i) to
reassess and
Legislative Reform.
In 2009, the U.S. President’s administration proposed a wide
range of regulatory reforms that, if enacted, may have
significant effects on the financial services industry in the
United States. Significant aspects of the administration’s
proposals that may affect the Bancorp included, among other
things, proposals:
increase capital
requirements for banks and bank holding companies and
examine the types of instruments that qualify as regulatory
capital; (ii) to create a federal consumer financial protection
the primary federal consumer protection
agency
supervisor with
and
enforcement authority with respect to consumer financial
products and services; (iii) to further limit the ability of banks to
engage in transactions with affiliates; and (iv) to subject all
“over-the-counter” derivatives markets
to comprehensive
regulation.
examination,
supervision
to be
broad
The U.S. Congress, state lawmaking bodies and federal and
state regulatory agencies continue to consider a number of
wide-ranging and comprehensive proposals for altering the
structure, regulation and competitive relationships of the
Fifth Third Bancorp 121
ANNUAL REPORT ON FORM 10-K
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The information required by this item is included in the
Corporate Information found on the inside of the back cover
and
the
subsidiaries can pay to the Bancorp discussed in Note 28 of the
Notes to the Consolidated Financial Statements. Additionally,
as of December 31, 2009, the Bancorp had approximately
59,426 shareholders of record.
the discussion of dividend
limitations
that
in
Issuer Purchases of Equity Securities
Shares
Purchased
(a)
Average
Price
Paid Per
Share
Maximum
Shares that
May Be
Purchased
Under the
Plans or
Period
Programs
19,201,518
October 2009
19,201,518
November 2009
19,201,518
December 2009
19,201,518
Total
(a) The Bancorp repurchased 15,459, 0, and 3,409 shares during October,
November and December of 2009 in connection with various
employee compensation plans of the Bancorp. These purchases are
not included against the maximum number of shares that may yet be
purchased under the Board of Directors authorization.
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
-
-
-
-
$-
-
-
$-
-
-
-
-
EXECUTIVE OFFICERS OF THE BANCORP
Officers are appointed annually by the Board of Directors at the
meeting of Directors
the Annual
Meeting of Shareholders. The names, ages and positions of the
Executive Officers of the Bancorp as of February 26, 2010 are
listed below along with their business experience during the
past 5 years:
immediately following
Kevin T. Kabat, 53. Chairman, President and Chief Executive
Officer of the Bancorp since June 2008, June 2006 and April
2007, respectively. Previously, Mr. Kabat was Executive Vice
President of the Bancorp since December 2003.
Greg D. Carmichael, 48. Executive Vice President and Chief
Operating Officer of the Bancorp since June 2006. Prior to that
he was the Executive Vice President and Chief Information
Officer of the Bancorp since June 2003
Mark D. Hazel, 44. Senior Vice President and Controller of the
Bancorp since February 2010. Prior to that he was the Assistant
Controller of the Bancorp since 2006 and was the Controller of
Nonbank entities since 2003.
Gregory L. Kosch, 50. Executive Vice President of the
Bancorp since June 2005. Previously, Mr. Kosch was Senior
Vice President and head of the Bancorp’s Commercial Division
in the Chicago affiliate since June 2002.
Bruce K. Lee, 49. Executive Vice President of the Bancorp
since June 2005. Previously, Mr. Lee was President and CEO
of Fifth Third Bank (Northwestern Ohio) since July 2002.
Daniel T. Poston, 51. Executive Vice President of the Bancorp
since June 2003, and Chief Financial Officer of the Bancorp
since September 2009. Previously, Mr. Poston was
the
Controller of the Bancorp from July 2007 to May 2008 and
from November 2008 to September 2009. Previously, Mr.
Poston was the Chief Financial Officer of the Bancorp from
May 2008 to November 2008. Formerly, Mr. Poston was the
Auditor of the Bancorp since October 2001 and was Senior
Vice President of the Bancorp and Fifth Third Bank since
January 2002.
Paul L. Reynolds, 48. Executive Vice President, Secretary and
General Counsel of the Bancorp since September 1999, January
2002 and January 2002, respectively.
Mahesh Sankaran, 47. Senior Vice President and Treasurer of
the Bancorp since June 2006. Previously, Mr. Sankaran was
Treasurer for Huntington Bancshares Incorporated since
February 2005. Prior to that Mr. Sankaran was Treasurer for
Compass Bankshares, Inc.
Robert A. Sullivan, 54. Senior Executive Vice President of the
Bancorp since December 2002.
Mary E. Tuuk, 45. Executive Vice President and Chief Risk
Officer of the Bancorp since June 2007. Previously, Ms. Tuuk
was Senior Vice President of Fifth Third Bancorp since 2003.
Terry E. Zink, 58. Executive Vice President of the Bancorp
since March 2007 and President and CEO of Fifth Third Bank
(Chicago) since January 2005.
122 Fifth Third Bancorp
ANNUAL REPORT ON FORM 10-K
The following performance graphs do not constitute soliciting material and should not be deemed filed or incorporated by
reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent the Bancorp specifically incorporates the performance graphs by reference therein.
Total Return Analysis
The graphs below summarize the cumulative return experienced by the Bancorp's shareholders over the years 2005 through 2009, and
2000 through 2009, respectively, compared to the S&P 500 Stock and the S&P Banks indices.
FIFTH THIRD BANCORP VS. MARKET INDICES
5 Year Return
40.00%
20.00%
0.00%
-20.00%
-40.00%
-60.00%
-80.00%
x
e
d
n
I
n
r
u
t
e
R
l
a
t
o
T
-100.00%
2004
10 Year Return
x
e
d
n
I
n
r
u
t
e
R
l
a
t
o
T
60.00%
40.00%
20.00%
0.00%
-20.00%
-40.00%
-60.00%
-80.00%
-100.00%
2005
2006
2007
2008
2009
FITB
S&P 500 (SPX)
S&P Banks Index (BIX)
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
FITB
S&P 500 (SPX)
S&P Banks Index (BIX)
Fifth Third Bancorp 123
ANNUAL REPORT ON FORM 10-K
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
The information required by this item relating to the Executive
Officers of the Registrant is included in PART I under
“EXECUTIVE OFFICERS OF THE BANCORP.”
The information required by this item concerning Directors
and the nomination process is incorporated herein by reference
under the caption “ELECTION OF DIRECTORS” of the
Bancorp’s Proxy Statement for the 2010 Annual Meeting of
Shareholders.
The information required by this item concerning the Audit
Committee and Code of Business Conduct and Ethics is
captions
incorporated herein by
“CORPORATE GOVERNANCE”
“BOARD OF
DIRECTORS,
ITS COMMITTEES, MEETINGS AND
FUNCTIONS” of the Bancorp’s Proxy Statement for the 2010
Annual Meeting of Shareholders.
reference under
and
the
The information required by this item concerning Section
16
is
(a) Beneficial Ownership Reporting Compliance
incorporated herein by reference under the caption “SECTION
16
REPORTING
COMPLIANCE” of the Bancorp’s Proxy Statement for the 2010
Annual Meeting of Shareholders.
OWNERSHIP
BENEFICIAL
(a)
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference under the captions “COMPENSATION DISCUSSION
“COMPENSATION OF NAMED
AND ANALYSIS,”
DIRECTORS,”
EXECUTIVE
“COMPENSATION
and
“COMPENSATION COMMITTEE
INTERLOCKS AND
INSIDER PARTICIPATION” of the Bancorp’s Proxy Statement
for the 2010 Annual Meeting of Shareholders.
COMMITTEE
OFFICERS
REPORT”
AND
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Security ownership information of certain beneficial owners and
management is incorporated herein by reference under the
captions “CERTAIN BENEFICIAL OWNERS,” “ELECTION
OF DIRECTORS,” “COMPENSATION DISCUSSION AND
ANALYSIS”
“COMPENSATION OF NAMED
EXECUTIVE OFFICERS AND DIRECTORS” of the Bancorp’s
Proxy Statement for the 2010 Annual Meeting of Shareholders.
and
The information required by this item concerning Equity
Compensation Plan information is included in Note 24 of the
Notes to the Consolidated Financial Statements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by
reference under the captions “CERTAIN TRANSACTIONS”,
“CORPORATE
“ELECTION
ITS
GOVERNANCE” and “BOARD OF DIRECTORS,
COMMITTEES, MEETINGS AND FUNCTIONS” of
the
Bancorp’s Proxy Statement for the 2010 Annual Meeting of
Shareholders.
DIRECTORS”,
OF
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
The information required by this item is incorporated herein by
reference under the caption “PRINCIPAL INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM FEES” of the
Bancorp’s Proxy Statement for the 2010 Annual Meeting of
Shareholders.
124 Fifth Third Bancorp
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
Financial Statements Filed
Report of Independent Registered Public Accounting Firm
Fifth Third Bancorp and Subsidiaries Consolidated Financial
Statements
Notes to Consolidated Financial Statements
Pages
63
64-67
68-113
The schedules for the Bancorp and its subsidiaries are omitted
because of the absence of conditions under which they are
required, or because the information is set forth in the
Consolidated Financial Statements or the notes thereto.
The following lists the Exhibits to the Annual Report on Form 10-K.
2.1
Master Investment Agreement (excluding exhibits and schedules)
dated as of March 27, 2009 and amended as of June 30, 2009,
among Fifth Third Bank, Fifth Third Financial Corporation,
Advent-Kong Blocker Corp., FTPS Holding, LLC and Fifth Third
Processing Solutions, LLC. Incorporated by reference to the
Registrant’s Current Report on Form 8-K filed with the
Commission on July 2, 2009.
Second Amended Articles of Incorporation of Fifth Third Bancorp,
as amended. Incorporated by reference to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2008.
Code of Regulations of Fifth Third Bancorp, as amended.
Incorporated by reference to the Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2008.
Junior Subordinated Indenture, dated as of March 20, 1997 between
Fifth Third Bancorp and Wilmington Trust Company, as Debenture
Trustee. Incorporated by reference to Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission
on March 26, 1997.
Amended and Restated Trust Agreement, dated as of March 20,
1997 of Fifth Third Capital Trust II, among Fifth Third Bancorp, as
Depositor, Wilmington Trust Company, as Property Trustee, and
the Administrative Trustees named therein. Incorporated by
reference to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 26, 1997.
Guarantee Agreement, dated as of March 20, 1997 between Fifth
Third Bancorp, as Guarantor, and Wilmington Trust Company, as
Guarantee Trustee. Incorporated by reference to Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 26, 1997.
Agreement as to Expense and Liabilities, dated as of March 20,
1997 between Fifth Third Bancorp, as the holder of the Common
Securities of Fifth Third Capital Trust I and Fifth Third Capital
Trust II. Incorporated by reference to Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission
on March 26, 1997.
3.1
3.2
4.1
4.2
4.3
4.4
4.5
Indenture, dated as of May 23, 2003, between Fifth Third Bancorp
and Wilmington Trust Company, as Trustee. Incorporated by
reference to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 22, 2003.
4.6
Global security representing Fifth Third Bancorp’s $500,000,000
4.50% Subordinated Notes due 2018. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 22, 2003.
4.7
First Supplemental Indenture, dated as of December 20, 2006,
4.8
4.9
between Fifth Third Bancorp and Wilmington Trust Company, as
Trustee. Incorporated by reference to Registrant's Annual Report on
Form 10-K filed for the fiscal year ended December 31, 2006.
Global security representing Fifth Third Bancorp’s $500,000,000
5.45% Subordinated Notes due 2017. Incorporated by reference to
Registrant's Annual Report on Form 10-K filed for the fiscal year
ended December 31, 2006.
Global security representing Fifth Third Bancorp’s $250,000,000
Floating Rate Subordinated Notes due 2016. Incorporated by
reference to Registrant's Annual Report on Form 10-K filed for the
fiscal year ended December 31, 2006.
4.10 First Supplemental Indenture dated as of March 30, 2007 between
Fifth Third Bancorp and Wilmington Trust Company, as trustee, to
the Junior Subordinated Indenture dated as of May 20, 1997
between Fifth Third and the Trustee. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on March 30, 2007.
4.11 Certificate Representing $500,000,000.00 of 6.50% Junior
10-Q filed for the quarter ended June 30, 2007.
ANNUAL REPORT ON FORM 10-K
Subordinated Notes of Fifth Third Bancorp. Incorporated by
reference to Registrant's Quarterly Report on Form 10-Q filed for
the quarter ended March 31, 2007.
4.12 Certificate Representing $250,010,000.00 of 6.50% Junior
Subordinated Notes of Fifth Third Bancorp. Incorporated by
reference to Registrant's Quarterly Report on Form 10-Q filed for
the quarter ended March 31, 2007.
4.13 Amended and Restated Declaration of Trust dated as of March 30,
2007 of Fifth Third Capital Trust IV among Fifth Third Bancorp, as
Sponsor, Wilmington Trust Company, as Property Trustee and
Delaware Trustee, and the Administrative Trustees named therein.
Incorporated by reference to Registrant's Quarterly Report on Form
10-Q filed for the quarter ended March 31, 2007.
4.14 Certificate Representing 500,000 6.50% Trust Preferred Securities
of Fifth Third Capital Trust IV (liquidation amount $1,000 per Trust
Preferred Security). Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q filed for the quarter ended March
31, 2007.
4.15 Certificate Representing 250,000 6.50% Trust Preferred Securities
of Fifth Third Capital Trust IV (liquidation amount $1,000 per Trust
Preferred Security). Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q filed for the quarter ended March
31, 2007.
4.16 Certificate Representing 10 6.50% Common Securities of Fifth
Third Capital Trust IV (liquidation amount $1,000 per Common
Security). Incorporated by reference to Registrant's Quarterly
Report on Form 10-Q filed for the quarter ended March 31, 2007.
4.17 Guarantee Agreement, dated as of March 30, 2007 between Fifth
Third Bancorp, as Guarantor, and Wilmington Trust Company, as
Guarantee Trustee. Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q filed for the quarter ended March
31, 2007.
4.18 Agreement as to Expense and Liabilities, dated as of March 30,
2007 between Fifth Third Bancorp and Fifth Third Capital Trust IV.
Incorporated by reference to Registrant's Quarterly Report on Form
10-Q filed for the quarter ended March 31, 2007.
4.19 Replacement Capital Covenant of Fifth Third Bancorp dated as of
March 30, 2007. Incorporated by reference to Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on March 30, 2007.
4.20 Second Supplemental Indenture dated as of August 8, 2007 between
Fifth Third Bancorp and Wilmington Trust Company, as trustee, to
the Junior Subordinated Indenture dated as of May 20, 1997
between Fifth Third and the Trustee. Incorporated by reference to
Registrant’s Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on August 8, 2007.
4.21 Certificate Representing $500,010,000 of 7.25% Junior
Subordinated Notes of Fifth Third Bancorp. Incorporated by
reference to Registrant’s Registration Statement on Form 8-A filed
with the Securities and Exchange Commission on August 8, 2007.
4.22 Amended and Restated Declaration of Trust dated as of August 8,
2007 of Fifth Third Capital Trust V among Fifth Third Bancorp, as
Sponsor, Wilmington Trust Company, as Property Trustee and
Delaware Trustee, and the Administrative Trustees named therein.
Incorporated by reference to Registrant’s Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on
August 8, 2007.
4.23 Certificate Representing 20,000,000 7.25% Trust Preferred
Securities of Fifth Third Capital Trust V (liquidation amount $25
per Trust Preferred Security). Incorporated by reference to
Registrant’s Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on August 8, 2007.
4.24 Certificate Representing 400 7.25% Trust Preferred Securities of
Fifth Third Capital Trust V (liquidation amount $25 per Trust
Preferred Security). Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q filed for the quarter ended June 30,
2007.
4.25 Guarantee Agreement, dated as of August 8, 2007 between Fifth
Third Bancorp, as Guarantor, and Wilmington Trust Company, as
Guarantee Trustee. Incorporated by reference to Registrant’s
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on August 8, 2007.
4.26
Agreement as to Expense and Liabilities, dated as of August 8,
2007 between Fifth Third Bancorp and Fifth Third Capital Trust V.
Incorporated by reference to Registrant's Quarterly Report on Form
4.27 Replacement Capital Covenant of Fifth Third Bancorp dated as of
August 8, 2007. Incorporated by reference to Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on August 8, 2007.
4.28 Third Supplemental Indenture dated as of October 30, 2007
between Fifth Third Bancorp and Wilmington Trust Company, as
trustee, to the Junior Subordinated Indenture dated as of May 20,
1997 between Fifth Third and the trustee. Incorporated by reference
to Registrant’s Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on October 31, 2007.
4.29 Certificate Representing $862,510,000 of 7.25% Junior
Subordinated Notes of Fifth Third Bancorp. Incorporated by
reference to Registrant’s Registration Statement on Form 8-A filed
with the Securities and Exchange Commission on October 31, 2007.
4.30 Amended and Restated Declaration of Trust dated as of October 30,
2007 of Fifth Third Capital Trust VI among Fifth Third Bancorp, as
Sponsor, Wilmington Trust Company, as Property Trustee and
Delaware Trustee, and the Administrative Trustees named therein.
Incorporated by reference to Registrant’s Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on
October 31, 2007.
4.31 Certificate Representing 20,000,000 7.25% Trust Preferred
Securities of Fifth Third Capital Trust VI (liquidation amount $25
per Trust Preferred Security). Incorporated by reference to
Registrant’s Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on October 31, 2007. (Issuer
also entered into an identical certificate on October 30, 2007
representing $362,500,000 in aggregate liquidation amount of
7.25% Trust Preferred Securities of Fifth Third Capital Trust VI.)
4.32 Certificate Representing 400 7.25% Common Securities of Fifth
Third Capital Trust VI (liquidation amount $25 per Trust Preferred
Security). Incorporated by reference to Registrant's Quarterly
Report on Form 10-Q filed for the quarter ended September 30,
2007.
4.33 Guarantee Agreement, dated as of October 30, 2007 between Fifth
Third Bancorp, as Guarantor, and Wilmington Trust Company, as
Guarantee Trustee. Incorporated by reference to Registrant’s
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on October 31, 2007.
4.34 Agreement as to Expense and Liabilities, dated as of October 30,
2007 between Fifth Third Bancorp and Fifth Third Capital Trust VI.
Incorporated by reference to Registrant's Quarterly Report on Form
10-Q filed for the quarter ended September 30, 2007.
4.35 Replacement Capital Covenant of Fifth Third Bancorp dated as of
October 30, 2007. Incorporated by reference to Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on October 31, 2007.
4.36 Global security dated as of March 4, 2008 representing Fifth Third
Bancorp’s $500,000,000 8.25% Subordinated Notes due 2038.
Incorporated by reference to Registrant's Quarterly Report on Form
10-Q filed for the quarter ended March 31, 2008. (1)
4.37 Indenture for Senior Debt Securities dated as of April 30, 2008
between Fifth Third Bancorp and Wilmington Trust Company, as
trustee. Incorporated by reference to Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission
on May 6, 2008.
4.38 Global security dated as of April 30, 2008 representing Fifth Third
Bancorp’s $500,000,000 6.25% Senior Notes due 2013.
Incorporated by reference to Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on May 6,
2008. (2)
4.39 Fourth Supplemental Indenture dated as of May 6, 2008 between
Fifth Third Bancorp and Wilmington Trust Company, as trustee, to
the Junior Subordinated Indenture dated as of May 20, 1997
between Fifth Third and the Trustee. Incorporated by reference to
Registrant’s Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on May 6, 2008.
4.40 $400,010,000.00 8.875% Junior Subordinated Note dated as of May
6, 2008 of Fifth Third Bancorp. Incorporated by reference to
Registrant’s Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on May 6, 2008.
Fifth Third Bancorp 125
ANNUAL REPORT ON FORM 10-K
4.41 Amended and Restated Declaration of Trust of Fifth Third Capital
Trust VII dated as of May 6, 2008 among Fifth Third Bancorp, as
Sponsor, Wilmington Trust Company, as Property Trustee and
Delaware Trustee, and the Administrative Trustees named therein.
Incorporated by reference to Registrant’s Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on
May 6, 2008.
4.42 Certificate dated as of May 6, 2008 representing 16,000,000
($400,000,000) 8.875% Trust Preferred Securities of Fifth Third
Capital Trust VII (liquidation amount $25 per Trust Preferred
Security). Incorporated by reference to Registrant’s Registration
Statement on Form 8-A filed with the Securities and Exchange
Commission on May 6, 2008.
4.43 Certificate dated as of May 6, 2008 representing 400 ($10,000)
8.875% Common Securities of Fifth Third Capital Trust VII
(liquidation amount $25 per Common Security). Incorporated by
reference to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 6, 2008.
4.44 Guarantee Agreement dated as of May 6, 2008 for Fifth Third
Capital Trust VII between Fifth Third Bancorp, as Guarantor, and
Wilmington Trust Company, as Guarantee Trustee. Incorporated by
reference to Registrant’s Registration Statement on Form 8-A filed
with the Securities and Exchange Commission on May 6, 2008.
4.45 Agreement as to Expense and Liabilities, dated as of May 6, 2008
between Fifth Third Bancorp and Fifth Third Capital Trust VII.
Incorporated by reference to Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on May 6,
2008.
4.46 Deposit Agreement dated June 25, 2008, between Fifth Third
Bancorp, Wilmington Trust Company, as depositary and conversion
agent and American Stock Transfer and Trust Company, as transfer
agent, and the holders from time to time of the Receipts described
therein. Incorporated by reference to Exhibit 4.3 of the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 25, 2008.
4.47 Form of Certificate Representing the 8.50 % Non-Cumulative
Perpetual Convertible Preferred Stock, Series G, of Fifth Third
Bancorp. Incorporated by reference to Exhibit 4.2 of the
Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on June 25, 2008.
4.48 Form of Depositary Receipt for the 8.50 % Non-Cumulative
Perpetual Convertible Preferred Stock, Series G, of Fifth Third
Bancorp. Incorporated by reference to Exhibit 4.4 of the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 25, 2008.
4.49 Warrant to Purchase up to 43,617,747 shares of Common Stock.
Incorporated by reference to Exhibit 4.1 of the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on December 31, 2008.
10.1 Fifth Third Bancorp Unfunded Deferred Compensation Plan for
Non-Employee Directors. Incorporated by reference to Registrant’s
Annual Report on Form 10-K filed for fiscal year ended December
31, 1985. *
10.2 Fifth Third Bancorp 1990 Stock Option Plan. Incorporated by
reference to Registrant’s filing with the Securities and Exchange
Commission as an exhibit to the Registrant’s Registration Statement
on Form S-8, Registration No. 33-34075. *
10.3 Fifth Third Bancorp 1987 Stock Option Plan. Incorporated by
reference to Registrant’s filing with the Securities and Exchange
Commission as an exhibit to the Registrant’s Registration Statement
on Form S-8, Registration No. 33-13252. *
10.4 Indenture effective November 19, 1992 between Fifth Third
Bancorp, Issuer and NBD Bank, N.A., Trustee. Incorporated by
reference to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 18, 1992 and
as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-
3, Registration No. 33-54134.
10.5 Fifth Third Bancorp Master Profit Sharing Plan, as Amended.
Incorporated by reference to Registrant’s Annual Report on Form
10-K filed for the fiscal year ended December 31, 2004. *
10.6 Fifth Third Bancorp Incentive Compensation Plan. Incorporated by
reference to Registrant’s Proxy Statement dated February 19, 2004. *
10.7 Amended and Restated Fifth Third Bancorp 1993 Stock Purchase
Plan. Incorporated by reference to Registrant’s Annual Report on
Form 10-K filed for the fiscal year ended December 31, 2003. *
126 Fifth Third Bancorp
10.8 Fifth Third Bancorp 1998 Long-Term Incentive Stock Plan, as
Amended. Incorporated by reference to the Exhibits to Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003.*
10.9 Fifth Third Bancorp Non-qualified Deferred Compensation Plan, as
Amended and Restated. Incorporated by reference to Registrant’s
Annual Report on Form 10-K filed for the fiscal year ended
December 31, 2007. *
10.10 CNB Bancshares, Inc. 1999 Stock Incentive Plan, 1995 Stock
Incentive Plan, 1992 Stock Incentive Plan and Associate Stock
Option Plan; and Indiana Federal Corporation 1986 Stock Option
and Incentive Plan. Incorporated by reference to Registrant’s filing
with the Securities and Exchange Commission as an exhibit to a
Registration Statement on Form S-4, Registration No. 333-84955
and by reference to CNB Bancshares Annual Report on Form 10-K,
as amended, for the fiscal year ended December 31, 1998. *
10.11 Fifth Third Bancorp Stock Option Gain Deferral Plan. Incorporated
by reference to Registrant’s Proxy Statement dated February 9,
2001.*
10.12 Amendment No. 1 to Fifth Third Bancorp Stock Option Gain
Deferral Plan. Incorporated by reference to Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on May 26, 2006. *
10.13 Old Kent Executive Stock Option Plan of 1986, as Amended.
Incorporated by reference to the following filings by Old Kent
Financial Corporation with the Securities and Exchange
Commission: Exhibit 10 to Form 10-Q for the quarter ended
September 30, 1995; Exhibit 10.19 to Form 8-K filed on March 5,
1997; Exhibit 10.3 to Form 8-K filed on March 2, 2000. *
10.14 Old Kent Stock Option Incentive Plan of 1992, as Amended.
Incorporated by reference to the following filings by Old Kent
Financial Corporation with the Securities and Exchange
Commission: Exhibit 10(b) to Form 10-Q for the quarter ended
June 30, 1995; Exhibit 10.20 to Form 8-K filed on March 5, 1997;
Exhibit 10(d) to Form 10-Q for the quarter ended June 30, 1997;
Exhibit 10.3 to Form 8-K filed on March 2, 2000. *
10.15 Old Kent Executive Stock Incentive Plan of 1997, as Amended.
Incorporated by reference to Old Kent Financial Corporation’s
Annual Meeting Proxy Statement dated March 1, 1997. *
10.16 Old Kent Stock Incentive Plan of 1999. Incorporated by reference
to Old Kent Financial Corporation’s Annual Meeting Proxy
Statement dated March 1, 1999. *
10.17 Notice of Grant of Performance Units and Award Agreement.
Incorporated by reference to Registrant’s Annual Report on Form
10-K filed for the fiscal year ended December 31, 2004. *
10.18 Notice of Grant of Restricted Stock and Award Agreement (for
Executive Officers). Incorporated by reference to Registrant’s
Annual Report on Form 10-K filed for the fiscal year ended
December 31, 2004. *
10.19 Notice of Grant of Stock Appreciation Rights and Award
Agreement. Incorporated by reference to Registrant’s Annual
Report on Form 10-K filed for the fiscal year ended December 31,
2004. *
10.20 Notice of Grant of Restricted Stock and Award Agreement (for
Directors). Incorporated by reference to Registrant’s Annual
Report on Form 10-K filed for the fiscal year ended December 31,
2004. *
10.21 Franklin Financial Corporation 1990 Incentive Stock Option Plan.
Incorporated by reference to Franklin Financial Corporation’s
Annual Report on Form 10-K for the year ended December 31,
1989.*
10.22 Franklin Financial Corporation 2000 Incentive Stock Option Plan.
Incorporated by reference to Franklin Financial Corporation’s
Registration Statement on Form S-8, Registration No. 333-52928. *
10.23 Amended and Restated First National Bankshares of Florida, Inc.
2003 Incentive Plan. Incorporated by reference to First National
Bankshares of Florida, Inc.’s Annual Report on Form 10-K for the
year ended December 31, 2003. *
10.24 Southern Community Bancorp Equity Incentive Plan. Incorporated
by reference to Southern Community Bancorp’s Registration
Statement on Form SB-2, Registration No. 333-35548. *
10.25 Southern Community Bancorp Director Statutory Stock Option Plan.
Incorporated by reference to Southern Community Bancorp’s
Registration Statement on Form SB-2, Registration No. 333-35548. *
ANNUAL REPORT ON FORM 10-K
10.26 Peninsula Bank of Central Florida Key Employee Stock Option
Plan. Incorporated by reference to Southern Community Bancorp’s
Annual Report on Form 10-K for the year ended December 31,
2003. *
10.27 Peninsula Bank of Central Florida Director Stock Option Plan.
Incorporated by reference to Southern Community Bancorp’s
Annual Report on Form 10-K for the year ended December 31,
2003. *
10.28 First Bradenton Bank Amended and Restated Stock Option Plan.
Incorporated by reference to Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2004. *
10.29 Letter Agreement with R. Mark Graf. Incorporated by reference to
the Exhibits to Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2005. *
10.30 Amendment Dated January 16, 2006 to the Letter Agreement with
R. Mark Graf. Incorporated by reference to Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on January 17, 2006.
10.31 Separation Agreement between Fifth Third Bancorp and Neal E.
Arnold dated as of December 14, 2005. Incorporated by reference
to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 22, 2005. *
10.32 Stipulation and Agreement of Settlement dated March 29, 2005, as
Amended. Incorporated by reference to Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission
on November 18, 2005.
10.33 Amendment to Stipulation dated May 10, 2005. Incorporated by
reference to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 18, 2005.
10.34 Second Amendment to Stipulation dated August 12, 2005.
Incorporated by reference to Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on
November 18, 2005.
10.35 Order and Final Judgment of the United States District Court for the
Southern District of Ohio. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on November 18, 2005.
10.36 Offer letter from Fifth Third Bancorp to Ross J. Kari. Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on November 12, 2008. *
10.37 Separation Agreement between Fifth Third Bancorp and
Christopher G. Marshall dated May 1, 2008. Incorporated by
reference to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 2, 2008. *
10.38 Letter Agreement, dated December 31, 2008, including Securities
Purchase Agreement – Standard Terms incorporated by reference
therein, between the Company and the United States Department of
the Treasury. Incorporated by reference to Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on December 31, 2008.
10.39 Form of Waiver, executed by each of Messrs. Kevin Kabat, Ross
Kari, Greg Carmichael, Charles Drucker, Bruce Lee, Dan Poston,
Robert A. Sullivan and Terry Zink. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on December 31, 2008. *
10.40 Form of Letter Agreement, executed by each of Messrs. Kevin
Kabat, Ross Kari, Greg Carmichael, Charles Drucker, Bruce Lee,
Dan Poston, Robert A. Sullivan and Terry Zink with the Company.
Incorporated by reference to Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on
December 31, 2008. *
10.41 Form of Executive Agreements effective December 31, 2008,
between Fifth Third Bancorp and Kevin T. Kabat, Robert A.
Sullivan, Greg D. Carmichael, Ross Kari, Bruce K. Lee, Charles D.
Drucker and Terry Zink. Incorporated by reference to Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 31, 2008. *
10.42 Form of Executive Agreements effective December 31, 2008,
between Fifth Third Bancorp and Nancy Phillips, Daniel T. Poston,
Paul L. Reynolds and Mary E. Tuuk. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on December 31, 2008. *
10.43 Form of Executive Agreement effective December 31, 2008,
between Fifth Third Bancorp and Mahesh Sankaran. Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on December 31, 2008. *
10.44 Warrant dated June 30, 2009 issued by FTPS Holding, LLC to Fifth
Third Bank. Incorporated by reference to the Registrant’s Current
Report on Form 8-K filed with the Commission on July 2, 2009.
10.45 Amended & Restated Limited Liability Company Agreement
(excluding certain exhibits) dated as of June 30, 2009 among
Advent-Kong Blocker Corp., Fifth Third Bank, FTPS Partners,
LLC, JPDN Enterprises, LLC and FTPS Holding, LLC.
Incorporated by reference to the Registrant’s Current Report on
Form 8-K filed with the Commission on July 2, 2009.
10.46 Amendment and Restatement Agreement and Reaffirmation
(excluding certain schedules) dated as of June 30, 2009 among Fifth
Third Processing Solutions, LLC, FTPS Holding, LLC, Card
Management Company, LLC, Fifth Third Holdings, LLC and Fifth
Third Bank. Incorporated by reference to the Registrant’s Current
Report on Form 8-K filed with the Commission on July 2, 2009.
10.47 Registration Rights Agreement dated as of June 30, 2009 among
Advent-Kong Blocker Corp., Fifth Third Bank, FTPS Partners,
LLC, JPDN Enterprises, LLC and FTPS Holding, LLC.
Incorporated by reference to the Registrant’s Current Report on
Form 8-K filed with the Commission on July 2, 2009.
10.48 Form of Agreement Regarding Portion of Salary Payable in
Phantom Stock Units dated October 16, 2009 executed by Kevin
Kabat, Greg Carmichael, Greg Kosch, Bruce Lee, Dan Poston, Paul
Reynolds, Robert Sullivan, and Terry Zink. Incorporated by
reference to the Registrant’s Quarterly Report on 10-Q for the
quarter ended September 30, 2009. *
12.1 Computations of Consolidated Ratios of Earnings to Fixed Charges.
12.2 Computations of Consolidated Ratios of Earnings to Combined
Fixed Charges and Preferred Stock Dividend Requirements.
Code of Ethics. Incorporated by reference to Exhibit 14 of the
Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 23, 2007.
Fifth Third Bancorp Subsidiaries, as of December 31, 2009.
Consent of Independent Registered Public Accounting Firm-
14
21
23
Deloitte & Touche LLP.
31(i) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by Chief Executive Officer.
31(ii) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by Chief Financial Officer.
32(i) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by
Chief Executive Officer.
32(ii) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by
Chief Financial Officer.
99.1 Certification Pursuant to Section 111 (b)(4) of the Emergency
Economic Stabilization Act of 2008 by Chief Executive Officer
99.2 Certification Pursuant to Section 111 (b)(4) of the Emergency
Economic Stabilization Act of 2008 by Chief Financial Officer
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the
Consolidated Balance Sheets, (ii) the Consolidated Statements of
Income, (iii) the Consolidated Statements of Changes in
Shareholders’ Equity, (iv) the Consolidated Statements of Cash
Flows, and (v) the Notes to Consolidated Financial Statements
tagged as blocks of text. **
(1) Fifth Third Bancorp also entered into an identical security on March 4, 2008
representing an additional $500,000,000 of its 8.25% Subordinated Notes due
2038.
(2) Fifth Third Bancorp also entered into an identical security on April 30, 2008
representing an additional $250,000,000 of its 6.25% Senior Notes due 2013.
* Denotes management contract or compensatory plan or arrangement.
** As provided in Rule 406T of Regulation S-T, this information is furnished
and not filed for purposes of Sections 11 and 12 of the Securities Act of
1933 and Section 18 of the Securities Exchange Act of 1934.
Fifth Third Bancorp 127
ANNUAL REPORT ON FORM 10-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIFTH THIRD BANCORP
Registrant
Kevin T. Kabat
Chairman, President and CEO
Principal Executive Officer
February 26, 2010
Pursuant to requirements of the Securities Exchange Act of
1934, this report has been signed on February 26, 2010 by the
following persons on behalf of the Registrant and in the
capacities indicated.
OFFICERS:
Kevin T. Kabat
Chairman, President and CEO
Principal Executive Officer
Daniel T. Poston
Executive Vice President and CFO
Principal Financial Officer
Mark D. Hazel
Senior Vice President and Controller
Principal Accounting Officer
DIRECTORS:
Darryl F. Allen
Ulysses L. Bridgeman, Jr.
Emerson L. Brumback
James P. Hackett
Gary R. Heminger
Jewell D. Hoover
Kevin T. Kabat
Mitchel D. Livingston, Ph.D.
Hendrik G. Meijer
John J. Schiff, Jr.
Dudley S. Taft
Thomas W. Traylor
Marsha C. Williams
128 Fifth Third Bancorp
AVERAGE ASSETS ($ IN MILLIONS)
CONSOLIDATED TEN YEAR COMPARISON
Year
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Loans and
Leases
$83,391
85,835
78,348
73,493
67,737
57,042
52,414
45,539
44,888
42,690
Interest-Earning Assets
Interest-Bearing
Deposits in
Banks (a)
$1,023
183
147
144
113
195
215
184
132
82
Federal Funds
Sold (a)
$12
438
257
252
88
120
92
155
69
118
Securities
$17,100
13,424
11,630
20,910
24,806
30,282
28,640
23,246
19,737
18,630
Total
$101,526
99,880
90,382
94,799
92,744
87,639
81,361
69,124
64,826
61,520
Cash and Due
from Banks
$2,329
2,490
2,275
2,477
2,750
2,216
1,600
1,551
1,482
1,456
Other
Assets
$14,266
13,411
10,613
8,713
8,102
5,763
5,250
5,007
5,000
4,229
Total
Average
Assets
$114,856
114,296
102,477
105,238
102,876
94,896
87,481
75,037
70,683
66,611
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS ($ IN MILLIONS)
Deposits
Year
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Demand
$16,862
14,017
13,261
13,741
13,868
12,327
10,482
8,953
7,394
6,257
Interest
Checking
$15,070
14,191
14,820
16,650
18,884
19,434
18,679
16,239
11,489
9,531
Savings
$16,875
16,192
14,836
12,189
10,007
7,941
8,020
9,465
4,928
5,799
Money
Market
$4,320
6,127
6,308
6,366
5,170
3,473
3,189
1,162
2,552
939
INCOME ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Other
Time
$14,103
11,135
10,778
10,500
8,491
6,208
6,426
8,855
13,473
13,716
Certificates
- $100,000
and Over
$10,367
9,531
6,466
5,795
4,001
2,403
3,832
2,237
3,821
4,283
Foreign
Office
$2,265
4,220
3,155
3,711
3,967
4,449
3,862
2,018
1,992
3,896
Total
$79,862
75,413
69,624
68,952
64,388
56,235
54,490
48,929
45,649
44,421
Short-Term
Borrowings
$6,980
10,760
6,890
8,670
9,511
13,539
12,373
7,191
8,799
9,725
Total
$86,842
86,173
76,514
77,622
73,899
69,774
66,863
56,120
54,448
54,146
Per Share (b) (c)
Originally Reported
Year
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Interest
Income
$4,668
5,608
6,027
5,955
4,995
4,114
3,991
4,129
4,709
4,947
Interest
Expense
$1,314
2,094
3,018
3,082
2,030
1,102
1,086
1,430
2,278
2,697
Noninterest
Income
$4,782
2,946
2,467
2,012
2,374
2,355
2,398
2,111
1,732
1,430
Noninterest
Expense
$3,826
4,564
3,311
2,915
2,801
2,863
2,466
2,265
2,397
1,981
Net Income
(Loss)
Available to
Common
Shareholders
$511
(2,180)
1,075
1,188
1,548
1,524
1,664
1,530
1,001
1,054
Earnings
$0.73
(3.91)
1.99
2.13
2.79
2.72
2.91
2.64
1.74
1.86
Diluted
Earnings
$0.67
(3.91)
1.98
2.12
2.77
2.68
2.87
2.59
1.70
1.83
Dividends
Declared
.04
.75
1.70
1.58
1.46
1.31
1.13
.98
.83
.70
Earnings
$0.73
(3.94)
2.00
2.14
2.79
2.72
2.91
2.64
1.74
1.70
Diluted
Earnings
$0.67
(3.94)
1.99
2.13
2.77
2.68
2.87
2.59
1.70
1.68
MISCELLANEOUS AT DECEMBER 31 ($ IN MILLIONS, EXCEPT SHARE DATA)
Shareholders’ Equity
Year
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Common Shares
Outstanding (c)
795,068,164
577,386,612
532,671,925
556,252,674
555,623,430
557,648,989
566,685,301
574,355,247
582,674,580
569,056,843
Common
Stock
$1,779
1,295
1,295
1,295
1,295
1,295
1,295
1,295
1,294
1,263
Preferred
Stock
$3,609
4,241
9
9
9
9
9
9
9
9
Capital
Surplus
$1,743
848
1,779
1,812
1,827
1,934
1,964
2,010
1,943
1,454
Retained
Earnings
$6,326
5,824
8,413
8,317
8,007
7,269
6,481
5,465
4,502
3,982
Accumulated
Other
Comprehensive
Income
$241
98
(126)
(179)
(413)
(169)
(120)
369
8
28
Treasury
Stock
($201)
(229)
(2,209)
(1,232)
(1,279)
(1,414)
(962)
(544)
(4)
(1)
Book Value
Per
Share (b)
$12.44
13.57
17.18
18.00
16.98
15.99
15.29
14.98
13.31
11.83
Allowance
for Loan
and Lease
Losses
$3,749
2,787
937
771
744
713
697
683
624
609
Total
$13,497
12,077
9,161
10,022
9,446
8,924
8,667
8,604
7,752
6,735
(a) Federal funds sold and interest-bearing deposits in banks are combined in other short-term investments in the Consolidated Financial Statements.
(b) Adjusted for accounting guidance relating to the calculation of earnings per share, which was adopted retroactively on January 1, 2009.
(c) Adjusted for stock splits in 2000.
Fifth Third Bancorp 129
FIFTH THIRD BANCORP
BOARD COMMITTEES
Finance Committee
Kevin T. Kabat, Chair
James P. Hackett
Gary R. Heminger
Dudley S. Taft
Audit Committee
Darryl F. Allen, Chair
Ulysses L. Bridgeman, Jr.
Emerson L. Brumback
Marsha C. Williams
Compensation Committee
Gary R. Heminger, Chair
Mitchel D. Livingston, Ph. D.
Hendrik G. Meijer
Nominating and Corporate
Governance Committee
James P. Hackett, Chair
Darryl F. Allen
Marsha C. Williams
Risk and Compliance
Committee
Marsha C. Williams, Chair
Ulysses L. Bridgeman, Jr.
Jewell D. Hoover
Hendrik G. Meijer
Dudley S. Taft
Thomas W. Traylor
Trust Committee
Mitchel D. Livingston, Ph.D.,
Chair
Kevin T. Kabat
John J. Schiff, Jr.
DIRECTORS AND OFFICERS
DIRECTORS EMERITI
Neil A. Armstrong
Philip G. Barach
Vincent H. Beckman
J. Kenneth Blackwell
Milton C. Boesel, Jr.
Douglas G. Cowan
Thomas L. Dahl
Ronald A. Dauwe
Gerald V. Dirvin
Thomas B. Donnell
Nicholas M. Evans
Richard T. Farmer
Louis R. Fiore
John D. Geary
Ivan W. Gorr
Joseph H. Head, Jr.
William G. Kagler
William J. Keating
Jerry L. Kirby
Robert B. Morgan
Michael H. Norris
David E. Reese
C. Wesley Rowles
Donald B. Shackelford
David B. Sharrock
Stephen Stranahan
Dennis J. Sullivan, Jr.
N. Beverley Tucker, Jr.
Alton C. Wendzel
FIFTH THIRD BANCORP
OFFICERS
Kevin T. Kabat
Chairman, President & CEO
Greg D. Carmichael
Executive Vice President &
Chief Operating Officer
Mark D. Hazel
Senior Vice President &
Controller
Gregory L. Kosch
Executive Vice President
Bruce K. Lee
Executive Vice President
Daniel T. Poston
Executive Vice President &
Chief Financial Officer
Paul L. Reynolds
Executive Vice President, Secretary &
Chief Administrative Officer
Mahesh Sankaran
Senior Vice President & Treasurer
Robert A. Sullivan
Senior Executive Vice President
Mary E. Tuuk
Executive Vice President &
Chief Risk Officer
Terry E. Zink
Executive Vice President
AFFILIATE CHAIRMEN
Charlie W. Brinkley, Jr.
Central Florida
H. Lee Cooper
Southern Indiana
Gordon E. Inman
Tennessee
Donald B. Shackelford
Central Ohio
John S. Szuch
Northwestern Ohio
REGIONAL PRESIDENTS
Todd F. Clossin
Dan W. Hogan
Robert A. Sullivan
Michelle L. VanDyke
Terry E. Zink
AFFILIATE PRESIDENTS
& CEOs
Samuel G. Barnes
Central Kentucky
John H. Bultema III
Western Michigan
David A. Call
South Florida
Todd F. Clossin
Northeastern Ohio
John N. Daniel
Southern Indiana
Karen Dee
Central Florida
David Girodat
Eastern Michigan
Dan W. Hogan
Tennessee
Robert E. James, Jr.
North Carolina
Brian P. Keenan
Tampa Bay
Robert W. LaClair
Northwestern Ohio
Philip R. McHugh
Louisville
Jordan A. Miller, Jr.
Central Ohio
John E. Pelizzari
Central Indiana
Robert A. Sullivan
Cincinnati
Terry E. Zink
Chicago
FIFTH THIRD BANCORP
DIRECTORS
Kevin T. Kabat
Chairman, President & CEO
Fifth Third Bancorp
Darryl F. Allen
Retired Chairman
President & CEO
Aeroquip-Vickers, Inc.
Ulysses L. Bridgeman, Jr.
President
ERJ Inc. and Manna, Inc.
Emerson L. Brumback
Retired President & COO
M&T Bank.
James P. Hackett
President & CEO
Steelcase, Inc.
Gary R. Heminger
Executive Vice President
Marathon Oil Corporation
Jewell D. Hoover
Principal
Hoover and Associates, LLC
Mitchel D. Livingston, Ph.D.
Vice President for Student Affairs
and Services
University of Cincinnati
Hendrik G. Meijer
Co-Chairman & CEO
Meijer, Inc.
John J. Schiff, Jr.
Chairman
Cincinnati Financial Corporation &
Cincinnati Insurance Company
Dudley S. Taft
President
Taft Broadcasting Company
Thomas W. Traylor
Chairman & CEO
Traylor Bros., Inc.
Marsha C. Williams
Senior Vice President & Chief
Financial Officer
Orbitz Worldwide, Inc.
130 Fifth Third Bancorp
2009
FinAnCiAl HIgHLIgHts
FOR tHE yEaRs EndEd dEcEmbER 31
$ In mILLIOns, ExcEPt PER sHaRE data
2009
2008
2007
EaRnIngs and dIvIdEnds
Net Income (Loss)
$
Common Dividends Declared
Preferred Dividends Declared
PER cOmmOn sHaRE
Earnings
$
Diluted Earnings
Cash Dividends
Book Value
at yEaR-End
737
29
220
0.73
0.67
0.04
12.44
$
(2,113)
$
1,076
413
48
(3.91)
(3.91)
0.75
13.57
$
$
914
1
1.99
1.98
1.70
17.18
Assets
$ 113,380
$
119,764
$
110,962
Total Loans and Leases
Deposits
Shareholder’s Equity
KEy RatIOs
Net Interest Margin
Efficiency Ratio
Tier 1 Ratio
Total Capital Ratio
Tangible Equity Ratio
actuaLs
78,846
84,305
13,497
3.32%
46.9%
13.31%
17.48%
9.71%
85,595
78,613
12,077
3.54%
70.4%
10.59%
14.78%
7.86%
84,582
75,445
9,161
3.36%
60.2%
7.72%
10.16%
6.14%
Common Shares Outstanding (000’s)
795,068
577,387
532,672
Banking Centers
ATMs
Full-Time Equivalent Employees
1,309
2,358
20,998
1,307
2,341
21,476
1,227
2,211
21,683
dEPOsIt and dEbt RatIngs
as OF 12/31/09
mOOdy’s
standaRd
& POOR’s
FItcH
dbRs
FIFtH tHIRd bancORP
Short Term
Senior Debt
FIFtH tHIRd banK
Short-Term Deposit
Long-Term Deposit
Senior Debt
P-2
Baa1
P-1
A2
A2
A-2
BBB
A-2
BBB+
BBB+
F1
A-
F1
A
A-
R-1 (low)
A
R-1 (middle)
A (high)
A (high)
stOcK PERFORmancE
HIgH
dIvIdEnds PaId
dIvIdEnds PaId
LOW
PER sHaRE
HIgH
LOW
PER sHaRE
2009
2008
Fourth Quarter
$
10.92
$ 8.76
$ 0.01
$ 14.75
$ 6.32
$ 0.01
Third Quarter
Second Quarter
First Quarter
11.20
9.15
8.65
6.33
2.50
1.01
0.01
0.01
0.01
21.00
23.75
28.58
7.96
8.96
20.25
0.15
0.15
0.44
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