Charting the Course
with Confidence
2010 ANNUAL REPORT
Corporate
Profile
Fifth Third Bancorp is a diversified financial services
company headquartered in Cincinnati, Ohio. The
Company has $111 billion in assets, operates 15 affiliates
with 1,312 full-service Banking Centers, including
103 Bank Mart® locations open seven days a week
inside select grocery stores and 2,445 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% interest in Fifth Third Processing
Solutions, LLC. Fifth Third is among the largest money
managers in the Midwest and, as of December 31,
2010, had $266 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.
Kevin T. Kabat
President and
Chief Executive Officer
A Message to Our Shareholders
Dear Shareholders,
Last year marked an important turning point for
Fifth Third, as many of the actions we’ve taken over
the past several years had a direct and positive
impact on our results. Fifth Third took aggressive
action early in the credit cycle and I’m pleased with
the progress we’ve shown through improved credit
trends, continued strong operating metrics and our
strong capital position. We returned to profitability
in early 2010 and have continued to generate
increasing levels of earnings through the remainder
of the year – over $750 million in net income for the
full year. Our return on assets was 0.7 percent in 2010
and 1.2 percent in the most recent quarter, which
demonstrates our progress to normalized levels.
In February 2011, we fully repaid the U.S. Department
of Treasury’s $3.4 billion investment in preferred
stock under its Troubled Asset Relief Program (TARP)
Capital Purchase Program. Since December 2008,
we’ve paid more than $350 million of dividends to
the American taxpayers, who will also benefit from
the disposition of the warrants issued in conjunction
with that investment. We are pleased to close this
chapter in our history and move forward into a
period that we believe will be marked by continued
improvement in results, enhanced shareholder value
and prudent management of our capital.
Getting to where we are today didn’t happen by
chance. We began taking aggressive actions to
position the Company for the coming storm back in
2007, and we have seen and will continue to see the
benefit of those actions. Our story is about more
than aggressively attacking credit issues - it’s about
improving the levels of customer satisfaction and
employee engagement, continuing to invest in our
already strong earnings capacity and deepening
customer relationships through new products and
services. These are part of a strategic plan that,
along with relentless focus on execution, allows us
to chart our future course with confidence.
Our strategic agenda as we move forward is
focused on opportunities
in markets where
we are underpenetrated and on continuous
improvement of the customer experience, both of
which aim for deeper customer relationships and
improved retention. This focus contributes to our
overall goal of positioning Fifth Third as a unique
value proposition – a bank with the capabilities,
technology and products of the largest banks in
the country and with the service and local touch
2010 ANNUAL REPORT
1
typically associated with a community bank. We’re
making great progress on this front. In the most
recent University of Michigan American Customer
Satisfaction Index (ACSI), Fifth Third’s overall
score was the highest we have ever received –
significantly above the average for the industry
and other large peers. This is a testament to our
commitment in making customer satisfaction one of
our top priorities and it emphasizes the importance
of working with our customers as valued partners
in their financial decision making.
Our core businesses remain strong and we remain
focused on providing quality products to our
customers. We see significant opportunity in our
markets today and our sales force continues to win
new business throughout our footprint. We see that
in stronger relative loan growth, deposit growth
and fee growth compared with our competitors.
Subsequently, our stock continued its recovery and
significantly outperformed the industry in 2010,
with a total shareholder return (stock price plus
dividends) of 51 percent compared with 20 percent
for the S&P Banks Index.
Significant events in the
banking industry
There have been a number of legislative and
regulatory developments within the banking
industry during 2010. Many of these are aimed
at reducing risk in the industry and protecting
the economy and taxpayers from the effects of
financial system dislocations. We wholeheartedly
support a strong global financial system and feel
that many of the changes will ultimately prove to be
beneficial. There will be additional costs associated
with implementing many new regulations; however,
we are prepared to address any challenges that
may lie ahead. We’ve demonstrated success
throughout a difficult operating environment and
we expect to generate sustainable growth in the
new operating environment.
Overdraft regulation, sometimes referred to as
“Reg E,” went into effect in the middle of the year
and prohibits banks from processing electronic
withdrawal transactions and charging overdraft
fees in accounts that lack sufficient funds, unless
the customer has “opted-in” to the program. Many
of our customers have opted-in, and therefore
approved such payments, or have otherwise
arranged for overdraft protection.
In the second half of the year, the Dodd-Frank
Act – with multiple elements aimed at financial
reform – was signed into law. A significant focus of
the financial reform bill is reducing or eliminating
activities not related to traditional banking –
activities that are inherently volatile, add complexity,
and create
interconnections across financial
companies. Fifth Third’s business model is largely
driven by traditional banking activities, which are
generally not the focus of the legislation, and we
believe we are well-positioned to adapt and even
benefit from changing regulations. An additional
element of the Dodd-Frank Act, unrelated to the
financial crisis, is commonly referred to as the
“Durbin Amendment.” This requires the Federal
Reserve to limit debit interchange rates charged to
merchants by issuers. Significant limits have been
proposed on such interchange rates that unless
mitigated, would prevent us and other banks from
fully recapturing the costs of operating our debit
card businesses. While no one knows what the
final rules and limits will be, we are confident that
we can offset a substantial portion of the impact
through mitigation strategies.
New capital proposals were another focal point of
financial reform in 2010. Both the Dodd-Frank Act
and “Basel III” (an international capital standard)
were introduced to establish future guidelines
regarding the minimum amounts and types of
capital we may be required to maintain. While
we are still awaiting clarity on what the U.S. rules
will be, we do not expect them to present any
significant difficulty for Fifth Third. Despite the
lack of final rules, the publication of Basel III and
the stabilization and relative improvement in the
economy have begun to provide the industry with
important direction regarding capital requirements
in the future.
Finally, as previously noted, in February of 2011
Fifth Third fully repaid the $3.4 billion in preferred
stock that was issued under the government’s
Troubled Asset Relief Program. Fifth Third issued
$1.7 billion of common equity and $1 billion of
senior debt to facilitate this repayment. Fifth Third’s
capital levels upon repayment substantially exceed
all capital standards as they exist today and we
2
FIFTH THIRD BANCORP
Total Shareholder Return (12/31/09 - 12/31/10)*
*See Total Return Analysis section in the Annual Report on Form 10-K for Fifth Third Bancorp’s 5-year and 10-year total return analysis.
believe they will also exceed the fully phased-in
Basel III proposed capital requirements. Now that
we have this behind us and based on our strong
financial results and capital position, we expect
to have greater flexibility in managing our capital,
including dividends.
Despite the headwinds we have faced, we are
generating solid levels of earnings and expect
results to further
improve. Change can be
challenging, but how a company deals with change
determines its success and ultimately its return to
shareholders. We are confident that we are up to
the challenge.
2010 results
For the full year 2010, we reported net income of
$753 million, an increase from our 2009 results that
included the benefit of a $1.1 billion after-tax gain
on the sale of a 51 percent interest in Fifth Third
Processing Solutions.
Core operating results remained strong. We’ve
maintained consistently strong pre-tax pre-
provision net revenue (revenue minus expenses) –
nearly $2.5 billion in 2010 – which is relatively high
compared with our asset base and has enabled
us to absorb losses better and generate stronger
profits compared with many peer institutions.
interest
income and net
Net
interest margin
continued to expand as we lowered our excess
liquidity and benefited from deposit repricing. We
have begun to see some stabilization in our loan
balances and continue to see solid loan production,
particularly in commercial and industrial (C&I)
loans. Within C&I, origination volumes have been at
historically high levels, but paydowns also remain
high. Within consumer loans, auto loan originations
have been very strong and our mortgage production
picked up in the latter half of the year. Overall, we’ve
been pleased with our lending volumes throughout
the year and believe that we have some positive
momentum heading into 2011. We also continued
to grow high-value transaction deposit accounts in
2010, with average balances increasing 19 percent,
or $10.4 billion, over last year.
Our provision expense for loan and lease losses
declined more than $2 billion from 2009, reflecting
significantly lower net charge-offs and reductions
in problem assets. We finished the year strong
with fourth quarter net charge-offs dropping
below 2 percent of average loans on an annualized
basis, significantly better than most large peers.
2010 ANNUAL REPORT
3
The improvement in credit trends resulted in
reductions of our loan loss reserves by $745
million during the year; however, these reserves
are still among the strongest coverage levels in the
industry, at 3.88 percent of loans and 179 percent of
nonperforming loans.
Noninterest income benefited from solid mortgage
banking revenue of $647 million in 2010, an increase
of 17 percent over 2009. Our investment advisory
revenue increased 11 percent over the prior year
and deposit fees declined only 9 percent despite
the impact of the overdraft regulation.
Our capital position remains robust. Our Tier 1
capital ratio was 13.9 percent at year-end compared
with 13.3 percent at the end of 2009. Our tangible
common equity (TCE) ratio including unrealized
gains on securities, which increased to 7.3 percent,
continues to compare favorably with our peers and
is even more favorable when viewed in light of our
capital raise at the beginning of 2011. Given our
capital position and our strong reserve position,
Fifth Third has one of the strongest balance sheets
among commercial banks.
Strategic initiatives and
Lines of Business
Fifth Third has a simple overall value proposition
– we have the resources and technology to offer
products competitive with the largest banks in the
country for traditional banking business, but our
customer service rivals that of most community
banks. By focusing on this “sweet spot,” we
believe we are able to drive differentiation to our
customers and value creation for our shareholders.
Our strategic plan is designed to further improve
that position through a variety of initiatives that
have the ultimate goal of developing deeper
customer relationships and growing our customer
base through the strength of the Fifth Third brand.
line of business
Our Commercial Banking
is
focused on maintaining a close relationship with
our customers, developing new value-added
products based on customer needs, and continuing
to enhance sales processes. We strive to develop
innovative solutions for our customers, such as
our Remote Currency Manager product, which
has enhanced our suite of treasury management
product offerings. We’ve also hired exceptional
talent across our footprint, and we expect this to
contribute to our revenue growth going forward.
Recently, we’ve begun to see some positive
signs within C&I lending, particularly within the
manufacturing and health care industries, and
we have seen significant growth in core deposits,
posting a 32 percent increase over last year.
Our Branch Banking line of business has continued
to post strong results. We have been successful
in introducing new product bundles in the last
few years, such as our Secure Checking Package
that combines identity theft protection with a
traditional checking account. Our Relationship
Savings product has attracted over $9 billion in
balances since inception and has more than tripled
in balances this year alone. We were one of the first
of our peers to eliminate free checking products,
and we continue to focus on providing value-added
products to our customers. Customer service
remains a top priority and during 2010 we expanded
our traditional branch hours on weeknights and
weekends at many locations in order to be even
more accessible to our customers. Additionally, we
have hired over 100 small business banking officers
focused on customers in the $1 million to $3 million
revenue range, as we see additional opportunities
in this underpenetrated market space and are
committed to fostering economic growth through
investing in this area.
Our Consumer Lending line of business had another
outstanding year. Our mortgage originations
exceeded $18 billion and we generated over $600
million of mortgage banking revenue. Our recent J.D.
Power Mortgage Origination Customer Satisfaction
scores
improved significantly compared with
2009 results. Our J.D. Power Mortgage Servicer
Satisfaction score increased – ranking Fifth Third in
the top five - while the industry average declined
compared with 2009. Our auto lending operations
continued to perform well as we maintained
strong credit quality and pricing discipline, while
generating more than $5 billion in originations.
We remain committed to offering responsible
credit solutions to our customers and helping them
through our mortgage modification programs,
while also keeping long-term value creation for
shareholders a priority.
Investment Advisors business benefited
Our
from the overall lift in the equity and bond
4
FIFTH THIRD BANCORP
“Change can be challenging,
but how a company deals
with change determines its
success and ultimately its
return to shareholders.”
markets throughout 2010. As a result of market
performance and continued investment in our
sales force, investment advisory revenue increased
more than $30 million compared with 2009.
Additionally, assets under care were up 46 percent
on a year-over-year basis, reflecting inflows from
new business won in 2010. In terms of year-over-
year revenue growth, Fifth Third’s retail brokerage
segment outperformed its peers throughout 2010
as it has shifted its focus from a single product
approach to a full-service advisory model. We
believe this business is well-positioned for future
market growth.
Looking to 2011 and beyond, we expect to continue
our organic growth strategy, with the ultimate goal
of developing or maintaining a market leading
position in a majority of our markets. We have
found that in markets where we have a top three
market share we consistently have higher deposits
per branch, as well as more products per customer.
Fifth Third is currently in the top three in just under
half of our markets and we are targeting being in
the top three in about two-thirds of our markets
over the next several years. This strategy, coupled
with our customer experience initiatives, should
strengthen our position in the future.
Economic overview and outlook
As we entered 2010 we started to see some
in economic trends and signs
improvement
pointing to an economic recovery - although
we expect it will take some time before we see
meaningful, sustained economic growth. The U.S.
Gross Domestic Product (GDP) has seen positive
growth throughout the year. There has been
some stabilization in home prices although values
continue to decline in some markets and there has
not been any substantial growth in most others. The
unemployment rate also appears to have stabilized
although it remains at elevated levels. All of this
has contributed to uncertainty in the markets,
yet despite this uncertainty we’ve demonstrated
continued improvement through our profitability.
Despite the challenging operating environment, we
have continued to lend and have extended more
than $86 billion of credit in 2010, an increase of
15 percent from the previous year. Our mortgage
originations have outperformed the Mortgage
Bankers Association (MBA) forecast each quarter
in 2010.
Commercial loan demand has started to pick up
and credit line utilization appears to have stabilized.
Customers remain cautious, although we continue
to have optimistic conversations with our customers
about business expansion and investment. We
remain focused on developing and maintaining
relationships with our customers so that as they are
ready to invest in business expansion we are there
to assist them with their plans.
2010 ANNUAL REPORT
5
Fifth Third is also committed to helping our
customers stay in their homes, and we continue
to offer many options to help achieve this. We
recognize that finding mutually beneficial solutions
is the best way to operate. We continue to outpace
the industry in permanent modification conversions
in the government’s Home Affordable Modification
Program (HAMP). Of Fifth Third’s portfolio eligible
for HAMP consideration, more than 78 percent
of those trial plans have been converted to
permanent modifications, which is nearly double
the national average. Additionally, Fifth Third has
been providing its “You Have Options” program for
bank-owned mortgages, which offers various loan
modifications based on each customer’s specific
financial situation. We started this program in early
2007, well ahead of the government’s mortgage
modification program, and have seen great success.
We have modified $2.3 billion of these loans since
the inception of the program.
We anticipate steady, modest growth in 2011.
We’re not expecting a double dip recession but
economic activity is not at full capacity. We will
continue to execute on our core growth strategies
that we expect to build value for our shareholders,
particularly as the economy improves.
Looking forward
We have made a number of positive strides over the
course of the year – a return to profitability, proactive
management of our credit portfolio, significant
improvement in our risk management capabilities,
and improved customer satisfaction scores. Many
of these positive outcomes are attributable to
the hard work and dedication of our employees
in a challenging operating environment. We have
maintained the advantages of our strong sales
culture while significantly increasing our focus on
customer satisfaction and employee engagement.
There will likely still be headwinds in 2011, in part
due to the regulatory changes that will continue to
evolve. However, our traditional banking model is
consistent with the objectives of financial reform,
and it is this traditional banking focus that we
expect will position us well for the future. We’ve
endured one of the most trying economic and
banking periods in history and we have made many
difficult decisions that we believe were in the best
long-term interests of our shareholders. We have
made the appropriate investments over time,
without indiscriminate expense cuts, in order to
preserve and increase future revenue opportunities.
Our actions and investments have positioned us
well, and we will continue to focus on enhancing
our performance in the future to enable us to
deliver results and returns that create value to you
as shareholders.
Thank you for your continued support of Fifth Third.
I appreciate your loyalty, especially throughout
the difficult times, and I look forward to taking
advantage of the positive momentum we have
going into 2011.
Sincerely,
Kevin T. Kabat
President and Chief Executive Officer
February 2011
6
FIFTH THIRD BANCORP
Front row: Dudley S. Taft, Jewell D. Hoover, John J. Schiff Jr., Kevin T. Kabat, William M. Isaac
Second row: Dr. Mitchel D. Livingston, James P. Hackett, Darryl F. Allen, Marsha C. Williams
Third row: Emerson L. Brumback, Hendrik G. Meijer, Gary R. Heminger, Ulysses L. Bridgeman Jr.
Corporate Governance
Fifth Third Bancorp is committed to maintaining
strong corporate governance practices. As
measured by RiskMetrics Group, Fifth Third’s
Governance Risk Indicators (GRId) classify Audit,
Board Structure, Compensation and Shareholder
Rights as Low Concern, the best possible rating.
Fifth Third’s board is controlled by a majority of
independent outsiders. In May of 2010, Fifth Third
appointed William Isaac to the role of chairman of
the board. Mr. Isaac brings a wealth of experience
to the board, having spent his career in the banking
industry and serving as Chairman of the FDIC
from 1981 to 1985. The addition of a non-executive
chairman to the board of directors improves our
already strong corporate governance practices and
provides support to the executive leadership team.
For more on Fifth Third’s corporate governance,
visit www.53.com.
2010 ANNUAL REPORT
7
Branch Banking
2010 Highlights
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Business Description
Branch Banking provides a full range of deposit
and lending products to individuals and small
businesses in 12 states in the Midwestern and
Southeastern regions of the United States. Branch
Banking offers depository and loan products, such
as checking and savings accounts, home equity
loans and lines of credit, credit cards and direct
loans for automobiles and other personal financing
needs, as well as products designed to meet the
specific needs of small businesses, including cash
management services.
Customer Focus
As the needs of our customers change, Fifth Third is
looking toward the future and tailoring its offerings
to reflect how people want to bank today. To add
convenience to the branch banking experience,
we extended operating hours at a majority of our
banking centers across our footprint. In addition
to the branch network, which includes BankMart®
locations inside select grocery stores, Fifth Third
offers online, ATM, telephone and mobile banking
services that are available 24 hours a day, seven
days a week.
Whether saving for a home or a child’s education,
planning for retirement, or building a business,
customers can depend on our knowledgeable and
reliable employees to provide banking products
that meet their needs and help reach their goals.
Likewise, our business bankers provide full solutions
including loans, treasury management products,
employee savings plans and employee banking
programs to small business customers.
Strategy
Fifth Third continues to enhance its branded sales
and service process, which drove a 13 percent
improvement in our 90-day new customer cross-
sell ratio during 2010 and contributed to account
growth of 8 percent compared with the prior year.
During 2010, Fifth Third continued to offer several
packaged checking products designed to provide
significant customer benefits for a standard
monthly fee. These products, which include Gold,
Rewards and Secure checking, drove growth in fee
income from value-added services that are bundled
with deposit accounts. Balances of the Relationship
Savings product, which doubles a customer’s
interest rate when accompanied by an active
checking account, more than tripled over the year.
8
FIFTH THIRD BANCORP
Consumer Lending
2010 Highlights
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Business Description
Consumer Lending provides
loan solutions
to customers across and beyond Fifth Third’s
footprint. Our loan products include mortgages
and home equity loans and lines. Consumer
Lending also partners with a network of auto
dealers that originate loans on the Bank’s behalf.
Whether in need of a mortgage or a new car, our
customers know we offer a solution to help them
achieve their goals.
Customer Focus
We recognize that personal loans are often a vital
element 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 outstanding
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.
We also support homeownership by offering a
variety of refinancing and workout arrangements
to give our customers options. While each situation
is different, we intend to work toward mutually
beneficial outcomes with our borrowers. Some
alternative modification options may
include
changing the terms of the original loan to make the
payments more affordable, primarily by lowering
interest rates and extending the terms.
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 2010, we
advanced our mortgage origination market share
within the top 20, and remain a top five market
share leader within the non-captive prime auto
lending space.
2010 ANNUAL REPORT
9
Commercial Banking
2010 Highlights
(cid:116)(cid:1)(cid:5)(cid:19)(cid:15)(cid:19)(cid:1)(cid:67)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:1)(cid:85)(cid:80)(cid:85)(cid:66)(cid:77)(cid:1)(cid:83)(cid:70)(cid:87)(cid:70)(cid:79)(cid:86)(cid:70)
(cid:116)(cid:1)(cid:5)(cid:20)(cid:25)(cid:15)(cid:21)(cid:1)(cid:67)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:1)(cid:66)(cid:87)(cid:70)(cid:83)(cid:66)(cid:72)(cid:70)(cid:1)(cid:77)(cid:80)(cid:66)(cid:79)(cid:84)(cid:1)
(cid:116)(cid:1)(cid:5)(cid:19)(cid:21)(cid:15)(cid:19)(cid:1)(cid:67)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:1)(cid:66)(cid:87)(cid:70)(cid:83)(cid:66)(cid:72)(cid:70)(cid:1)(cid:68)(cid:80)(cid:83)(cid:70)(cid:1)(cid:69)(cid:70)(cid:81)(cid:80)(cid:84)(cid:74)(cid:85)(cid:84)
(cid:116)(cid:1)(cid:18)(cid:13)(cid:20)(cid:22)(cid:17)(cid:1)(cid:77)(cid:66)(cid:83)(cid:72)(cid:70)(cid:1)(cid:68)(cid:80)(cid:83)(cid:81)(cid:80)(cid:83)(cid:66)(cid:85)(cid:70)(cid:1)(cid:68)(cid:77)(cid:74)(cid:70)(cid:79)(cid:85)(cid:1)(cid:83)(cid:70)(cid:77)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:84)(cid:73)(cid:74)(cid:81)(cid:84)
(cid:116)(cid:1)(cid:18)(cid:25)(cid:13)(cid:22)(cid:17)(cid:17)(cid:1)(cid:78)(cid:74)(cid:69)(cid:69)(cid:77)(cid:70)(cid:1)(cid:78)(cid:66)(cid:83)(cid:76)(cid:70)(cid:85)(cid:1)(cid:68)(cid:77)(cid:74)(cid:70)(cid:79)(cid:85)(cid:1)(cid:83)(cid:70)(cid:77)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:84)(cid:73)(cid:74)(cid:81)(cid:84)
(cid:116)(cid:1)(cid:19)(cid:20)(cid:23)(cid:13)(cid:22)(cid:17)(cid:17)(cid:1)(cid:53)(cid:83)(cid:70)(cid:66)(cid:84)(cid:86)(cid:83)(cid:90)(cid:1)(cid:46)(cid:66)(cid:79)(cid:66)(cid:72)(cid:70)(cid:78)(cid:70)(cid:79)(cid:85)(cid:1)(cid:77)(cid:70)(cid:66)(cid:69)(cid:1)(cid:66)(cid:68)(cid:68)(cid:80)(cid:86)(cid:79)(cid:85)(cid:84)
Business Description
Fifth Third’s Commercial line of business offers
banking, cash management and financial services
to large and middle market businesses, government
and professional customers. In addition to the
traditional
lending and depository offerings,
commercial 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. Our Commercial line of business serves
clients ranging from middle market companies with
$20 million in annual revenue to some of the largest
companies in the world.
Customer Focus
Fifth Third has a long tradition of commercial
banking experience. In addition to offering complete
financial solutions to our clients, we believe the
focus should be on our total relationship with them.
In 2010, to support the focus on developing those
trusted advisor relationships, we implemented a
customer experience initiative to provide quick and
consistent feedback from our clients to the sales
teams. Keeping in close contact with customers and
offering specific solutions is more important than
ever in today’s demanding operating environment.
Strategy
Our Commercial line of business delivers innovative
and client-specific solutions that leverage Fifth
Third’s expertise in treasury management, capital
markets and international products and services.
Our sales process drives the delivery of financial
solutions through a relationship team consisting of
subject matter experts to ensure that all aspects of
client needs are assessed and met.
During 2010, Fifth Third continued to invest in
treasury management solutions with the rollout of a
Working Capital Management tool, implementation of
the Sales Resource Center, and enhancements to the
Remote Currency Manager and RevLink products. Our
Remote Currency Manager product, which automates
cash handling in the marketplace, processed $4.7
billion in transactions through 4,300 locations in 2010.
The RevLink product, which accelerates the posting
of paper-based claim payments for healthcare
providers, processed 7.2 million payment transactions,
accounting for $5 billion in claim payments, a 400
percent increase from the prior year.
Fifth Third also invested in improved capital markets
solutions for our clients, assembling a team of
strategists who consult with middle market clients
in areas such as capital structure, currency risk and
private equity offerings. In 2010, this team helped
drive an increase in capital markets revenue of 9
percent.
10
FIFTH THIRD BANCORP
Investment Advisors
2010 Highlights
(cid:116)(cid:1)(cid:5)(cid:21)(cid:26)(cid:21)(cid:1)(cid:78)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:1)(cid:85)(cid:80)(cid:85)(cid:66)(cid:77)(cid:1)(cid:83)(cid:70)(cid:87)(cid:70)(cid:79)(cid:86)(cid:70)
(cid:116)(cid:1)(cid:1)(cid:5)(cid:19)(cid:15)(cid:23)(cid:1)(cid:67)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:1)(cid:66)(cid:87)(cid:70)(cid:83)(cid:66)(cid:72)(cid:70)(cid:1)(cid:77)(cid:80)(cid:66)(cid:79)(cid:84)
(cid:116)(cid:1)(cid:5)(cid:22)(cid:15)(cid:26)(cid:1)(cid:67)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:1)(cid:66)(cid:87)(cid:70)(cid:83)(cid:66)(cid:72)(cid:70)(cid:1)(cid:68)(cid:80)(cid:83)(cid:70)(cid:1)(cid:69)(cid:70)(cid:81)(cid:80)(cid:84)(cid:74)(cid:85)(cid:84)
(cid:116)(cid:1)(cid:5)(cid:19)(cid:22)(cid:1)(cid:67)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:1)(cid:66)(cid:84)(cid:84)(cid:70)(cid:85)(cid:84)(cid:1)(cid:86)(cid:79)(cid:69)(cid:70)(cid:83)(cid:1)(cid:78)(cid:66)(cid:79)(cid:66)(cid:72)(cid:70)(cid:78)(cid:70)(cid:79)(cid:85)(cid:1)
(cid:116)(cid:1)(cid:1)(cid:5)(cid:19)(cid:23)(cid:23)(cid:1)(cid:67)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:1)(cid:66)(cid:84)(cid:84)(cid:70)(cid:85)(cid:84)(cid:1)(cid:86)(cid:79)(cid:69)(cid:70)(cid:83)(cid:1)(cid:68)(cid:66)(cid:83)(cid:70)
Business Description
Investment Advisors is comprised of five distinct
businesses: Fifth Third Private Bank, Fifth Third
Securities, Fifth Third Asset Management, Fifth Third
Institutional Services and Fifth Third Insurance. 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
business lines. Fifth Third Private Bank simplifies
financial complexity for the Bank’s most affluent
clients by collaborating with them to articulate and
achieve their goals. Fifth Third Securities serves
individuals and families by offering retirement,
investment and education planning, managed
money, annuities, and transactional brokerage
services. Fifth Third Insurance offers a number
of insurance products and services such as life
insurance,
insurance, disability
income protection, and annuities to help clients
minimize risk and protect their wealth. Fifth Third
long-term care
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 corporations, 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 that meet all of their
wealth management needs in one place. For our
Retail clients, we offer a comprehensive suite of
investment 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 provides our clients with complete, powerful
financial solutions from one trusted advisor.
2010 ANNUAL REPORT
11
Students from Schroder High School in Cincinnati, Ohio, will be taught Dave Ramsey’s financial literacy high school curriculum thanks to a new partnership
between Fifth Third Bank and The Lampo Group. At the press conference announcement, the students were joined by Mary Ronan, superintendent of
Cincinnati Public Schools; Gail Williams, community relations manager for Fifth Third Bank; Bob Sullivan, former president and CEO of Fifth Third Bank
(Greater Cincinnati); Jim King, vice president of high school curriculums, The Lampo Group; and Kevin Boyce, former Ohio State Treasurer.
Community Giving
Integral to our continued success is the health and
vitality of the communities we serve. Our community
giving is centered on empowering people — the
individuals who are the backbone of families, non-
profit and faith-based organizations, businesses and
government that make a community strong.
The Bank’s priority is to give people access to the
tools and knowledge they need to be successful.
Since fulfillment of nearly any goal begins with
understanding money, knowing how to use it wisely
and having the means to invest for the future, Fifth
Third Bank’s mission is financial empowerment.
We have developed several signature programs and
partnerships that help people become financially
sound. The Fifth Third Bank Young Bankers Club is
designed for fifth-grade students and teaches the
basics of money using a curriculum that meets state
and local educational standards in mathematics and
social studies. Nearly 6,000 students have graduated
from Young Bankers Club since 2004.
Our financial empowerment programs grow with the
children and, when they reach the ninth grade, they
can take the Bank’s six-week financial literacy course,
Smart Bankers Club. Smart Bankers Club teaches
including
teenagers about money management,
budgeting, understanding credit and maintaining
bank accounts.
In 2010, Fifth Third Bank announced an innovative
partnership with The Lampo Group, the company of
nationally-syndicated radio talk show host and money
management expert Dave Ramsey, to expand our suite
of financial programs further into high school. Fifth
Third Bank is sponsoring Ramsey’s “Foundations in
Personal Finance” curriculum for 11th- and 12th-grade
students in select high schools throughout our 12-state
footprint. Our sponsorship enables students to take
the course at no cost to the school or to themselves,
just as many states are adopting legislation that
mandates financial literacy education in schools. The
pilot program includes 11,000 students throughout
2010 and 2011.
The Bank also offers additional financial empowerment
programs for adults. The eBus, a 40-foot retrofitted
bus, travels to traditionally underserved communities
to take financial education and services directly
to people in those neighborhoods. On the bus,
individuals can get their credit score, learn how to
obtain a mortgage or avoid foreclosure and receive
individualized financial counseling. The Bank’s Dream
Guard initiative also helps empower individuals by
providing tips and advice on topics ranging from ways
to reduce everyday expenses, to extend the life of what
you own and many other topics related to budgeting,
planning and using money wisely in challenging times.
Dream Guard tip sheets are available for free on the
Bank’s website, www.53.com.
In addition to its emphasis on financial empowerment,
Fifth Third Bank is an active supporter of many
charitable organizations, community development
projects and neighborhood activities that make a
positive impact in people’s lives. In 2010, the Bank
made $2.5 million in grants through its corporate
foundation, the Fifth Third Foundation and It invested
$254 million in revitalization projects through the Fifth
Third Community Development Corporation (CDC).
Through our many Bank departments,
including
those focused on meeting Community Reinvestment
Act (CRA) requirements, we supported thousands
of local events and initiatives, and our employees
volunteered both their time and money to causes
they believe in, from raising $7 million for the United
Way to environmental causes, fundraising walks and
more. More information can be found in the Fifth Third
Bancorp Corporate Social Responsibility Report, which
will be available in May 2011 at www.53.com/csrreport.
12
FIFTH THIRD BANCORP
2010 AN
FINAN
ANNUAL REP
NCIAL CONT
PORT
TENTS
nalysis of Financ
cial Condition an
nd Results of Op
perations
Commitments
the Effectiveness
ed Public Accoun
s of Internal Con
nting Firm
ntrol over Financ
cial Reporting
cial Measures
g Policies
me Analysis
Review
view
ysis
s
lossary of Terms
Gl
iscussion and An
Management’s Di
M
Data
elected Financial D
Se
verview
Ov
on-GAAP Financ
N
Cr
ritical Accounting
isk Factors
Ri
atements of Incom
St
Bu
usiness Segment R
ourth Quarter Rev
Fo
alance Sheet Analy
Ba
isk Management
Ri
ff-Balance Sheet A
O
Co
ontractual Obligat
Management’s As
M
eports of Indepe
Re
inancial Stateme
Fi
onsolidated Balan
Co
onsolidated Statem
Co
onsolidated Statem
Co
onsolidated Statem
Co
Arrangements
tions and Other C
ssessment as to t
endent Registere
ents
ce Sheets
ments of Income
ments of Changes
ments of Cash Flo
in Equity
ows
the Allowance for
rated Credit Qual
Equipment
r Loan and Lease L
lity Acquired in a T
Losses
Transfer
Notes to Consolid
N
dated Financial S
Statements
cant Accounting a
and Reporting Pol
n
Flow Information
cquisitions
ions and Asset Ac
h and Dividends
licies
Su
ummary of Signific
upplemental Cash
Su
usiness Combinati
Bu
estrictions on Cas
Re
ecurities
Se
oans and Leases
Lo
redit Quality and t
Cr
oans with Deterio
Lo
ank Premises and
Ba
oodwill
G
In
ntangible Assets
Va
ariable Interest En
ales of Receivables
Sa
erivatives
D
O
ther Assets
hort-Term Borrow
Sh
ntities
s and Servicing Ri
ights
wings
An
Co
D
Co
nnual Report on
onsolidated Ten
irectors and Offi
orporate Informa
Form 10-K
n Year Compariso
icers
ation
on
Guarantees
7
72
7
78
7
78
79
7
7
79
8
81
8
82
85
8
86
8
8
86
8
87
8
88
90
9
9
93
9
97
98
9
Long-T
Commi
Legal an
Related
Income
Retirem
Accumu
Commo
Stock-B
Other N
Earning
Fair Va
Certain
Parent
Busines
Subsequ
ent Liabilities and
oceedings
ns
Term Debt
itments, Continge
nd Regulatory Pro
d Party Transaction
e Taxes
ment and Benefit P
ulated Other Com
on, Preferred and
Based Compensati
Noninterest Incom
gs Per Share
s
alue Measurement
irements and Cap
n Regulatory Requi
ial Statements
Company Financi
ss Segments
uent Events
Plans
mprehensive Incom
Treasury Stock
ion
me and Other No
me
e
ninterest Expense
pital Ratios
ORWARD-LOO
FO
his report may contain
Th
33, as amended, and
19
ks and uncertainties.
risk
usiness of Fifth Third
bu
pected to,” “is anticip
exp
emain,” or similar exp
“re
use future results to d
cau
onomic conditions an
eco
mpany do business, a
com
her economic conditi
oth
) Fifth Third’s ability
(6)
owth; (8) changes an
gro
0) competitive pressur
(10
required by the Fina
be
hird, one or more acq
Th
e recently enacted Do
the
hird’s stock price; (16
Th
areholders’ ownership
sha
hird; (21) loss of inco
Th
formation through th
inf
neration and retention
gen
OKING STATE
n forward-looking sta
Rule 175 promulgate
This report may con
d Bancorp and/or the
pated,” “estimate,” “
pressions, or future or
differ materially from
nd weakening in the e
are less favorable than
ons; (4) changes in th
to maintain required
nd trends in capital
res among depository
ancial Accounting Sta
quired entities and/or
odd-Frank Wall Stree
6) ability to attract a
p of Fifth Third; (19)
ome from any sale o
he use of computer s
n, funding and liquidi
EMENTS
atements about Fifth
ed thereunder, and Se
ntain certain forward
e combined company
“forecast,” “projected
r conditional verbs su
historical performan
conomy, specifically t
n expected; (2) deterio
he interest rate enviro
d capital levels and ad
markets; (9) problem
y institutions increase
andards Board (FASB
the combined compa
et Reform and Consu
and retain key person
effects of accounting
or potential sale of b
systems and telecomm
ty.
Third Bancorp and/o
ection 21E of the Sec
d-looking statements
y including statement
d,” “intends to,” or m
uch as “will,” “would,
nce and these forward
the real estate market
orating credit quality; (
onment reduce interes
dequate sources of fu
ms encountered by l
significantly; (11) effe
B) or other regulatory
any or the businesses
umer Protection Act (
nnel; (17) ability to r
g or financial results o
businesses that could
munications network
or the company as co
curities Exchange Act
with respect to the
ts preceded by, follow
may include other sim
,” “should,” “could,”
d-looking statements.
t, either nationally or i
(3) political developm
st margins; (5) prepay
unding and liquidity; (
larger or similar fina
ects of critical accoun
y agencies; (13) legisl
in which Fifth Third
(Dodd-Frank Act); (1
receive dividends fro
of one or more acquir
have an adverse eff
ks; and (23) the impa
ombined acquired ent
t of 1934, as amende
financial condition, r
wed by or that includ
milar words or phrase
“might,” “can,” or si
Factors that might ca
in the states in which
ments, wars or other ho
yment speeds, loan ori
(7) maintaining capita
ancial institutions ma
nting policies and judg
ative or regulatory ch
, one or more acquire
14) ability to maintain
om its subsidiaries; (1
red entities; (20) diffi
fect on Fifth Third’s
act of reputational ris
tities within the mean
ed, and Rule 3b-6 pro
results of operations,
de the words or phras
es such as “believes,”
imilar verbs. There ar
ause such a difference
Fifth Third, one or m
ostilities may disrupt
igination and sale vol
al requirements may l
ay adversely affect t
gments; (12) changes i
hanges or actions, or
ed entities and/or the
n favorable ratings fro
18) potentially dilutiv
culties in separating F
earnings and future
sk created by these d
ning of Section 27A o
omulgated thereunder
plans, objectives, fu
ses such as “will likel
” “plans,” “trend,” “o
re a number of impor
e include, but are not
more acquired entities
or increase volatility i
lumes, charge-offs an
limit Fifth Third’s op
the banking industry
in accounting policies
significant litigation,
e combined company
om rating agencies; (1
ve effect of future ac
Fifth Third Processin
growth; (22) ability
developments on suc
of
of the Securities Act o
nt
r, that involve inheren
nd
uture performance an
re
ly result,” “may,” “ar
,”
objective,” “continue,
ld
rtant factors that coul
t limited to: (1) gener
al
ed
s and/or the combine
or
in securities markets o
ns;
nd loan loss provision
al
perations and potentia
y and/or Fifth Third
d;
ay
s or procedures as ma
th
, adversely affect Fift
ng
are engaged, includin
th
15) fluctuation of Fift
nt
cquisitions on curren
th
g Solutions from Fift
al
to secure confidentia
ss
ch matters as busines
14
15
16
19
20
23
29
35
41
43
48
63
65
66
67
68
69
70
71
99
101
104
104
105
108
110
111
112
115
116
117
124
125
126
128
129
145
146
GLOSSARY OF TERMS
Fifth Third Bancorp provides the following list of acronyms as a tool for the reader. The acronyms identified below are used in Management’s
Discussion & Analysis of Financial Condition & Results of Operations, the Consolidated Financial Statements and in the Notes to
Consolidated Financial Statements.
ALCO: Asset Liability Management Committee
ALLL: Allowance for Loan and Lease Losses
ARM: Adjustable Rate Mortgage
ASC: Accounting Standards Codification
BOLI: Bank Owned Life Insurance
bp: Basis Point(s)
C&I: Commercial and Industrial
CARD: Card Accountability, Responsibility and Disclosure
CDC: Fifth Third Community Development Corporation
CPP: Capital Purchase Program
DCF: Discounted Cash Flow
DIF: Deposit Insurance Fund
EESA: Emergency Economic Stabilization Act of 2008
ERISA: Employee Retirement Income Security Act
ERM: Enterprise Risk Management
ERMC: Enterprise Risk Management Committee
EVE: Economic Value of Equity
FASB: Financial Accounting Standards Board
FDIC: Federal Deposit Insurance Corporation
FHLB: Federal Home Loan Bank
FHLMC: Federal Home Loan Mortgage Corporation
FICO: Fair Isaac Corporation (credit rating)
FNMA: Federal National Mortgage Association
FRB: Federal Reserve Bank
FTAM: Fifth Third Asset Management, Inc.
FTE: Fully Taxable Equivalent
FTP: Funds Transfer Pricing
FTPS: Fifth Third Processing Solutions
FTS: Fifth Third Securities
GNMA: Government National Mortgage Association
IPO: Initial Public Offering
IRS: Internal Revenue Service
LAPA: Liquid Asset Purchase Agreement
LIBOR: London InterBank Offered Rate
LTV: Loan-to-Value
MD&A: Management’s Discussion & Analysis of Financial
Condition and Results of Operations
MSR: Mortgage Servicing Right
NII: Net Interest Income
OCI: Other Comprehensive Income
OREO: Other Real Estate Owned
OTTI: Other-Than-Temporary Impairment
PMI: Private Mortgage Insurance
QSPE: Qualifying Special-Purpose Entity
RSA: Restricted Stock Award
SAR: Stock Appreciation Right
SEC: United States Securities and Exchange Commission
SCAP: Supervisory Capital Assessment Program
TAG: Transaction Account Guarantee
TARP: Troubled Asset Relief Program
TLGP: Temporary Liquidity Guarantee Program
TDR: Troubled Debt Restructuring
TSA: Transition Service Agreement
U.S.: United States of America
U.S. GAAP: Accounting principles generally accepted in the
United States of America
VIE: Variable Interest Entity
VRDN: Variable Rate Demand Note
14 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is 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) attributable to Bancorp
Net income (loss) available to common shareholders
Common Share Data
Earnings per share, basic
Earnings per share, diluted
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 (b)
Tangible common equity (b)
Net interest margin (a)
Efficiency (a)
Credit Quality
Net losses charged off
Net losses charged off as a percent of average loans and leases
ALLL as a percent of loans and leases
Allowance for credit losses as a percent of loans and leases (c)
Nonperforming assets as a percent of loans, leases and other assets,
including other real estate owned (d)(e)
2010
$3,622
2,729
6,351
1,538
3,855
753
503
$.63
.63
.04
14.68
13.06
.67 %
5.0
12.22
10.42
7.04
3.66
60.7
$2,328
3.02 %
3.88
4.17
2.79
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
Average Balances
Loans and leases, including held for sale
Total securities and other short-term investments
Total assets
Transaction deposits (f)
Core deposits (g)
Wholesale funding (h)
Bancorp shareholders’ equity
Regulatory Capital Ratios
Tier I capital
Total risk-based capital
Tier I leverage
Tier I common equity (b)
(a) Amounts presented on an FTE basis. The FTE adjustments for years ended December 31, 2010, 2009, 2008, 2007 and 2006 were $18, $19, $22, $24 and $26, respectively.
(b) The tangible equity, tangible common equity and Tier I common equity ratios are non-GAAP measures. For further information, see the Non-GAAP Financial Measures section of MD&A.
(c) The allowance for credit losses is the sum of the ALLL and the reserve for unfunded commitments.
(d) Excludes nonaccrual loans held for sale.
(e) The Bancorp modified its nonaccrual policy in 2009 to exclude consumer TDR loans less than 90 days past due as they were performing in accordance with restructuring terms. For comparability
85,835
14,045
114,296
52,680
63,815
36,261
10,038
83,391
18,135
114,856
55,235
69,338
28,539
13,053
78,348
12,034
102,477
50,987
61,765
27,254
9,583
73,493
21,288
105,238
49,678
60,178
31,691
9,811
$79,232
19,699
112,434
65,662
76,188
18,917
13,737
13.94 %
18.14
12.79
7.50
10.59
14.78
10.27
4.37
8.39
11.07
8.44
8.22
7.72
10.16
8.50
5.72
13.30
17.48
12.34
6.99
purposes, prior periods were adjusted to reflect this reclassification.
(f) Includes demand, interest checking, savings, money market and foreign office deposits.
(g) Includes transaction deposits plus other time deposits.
(h) 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) attributable to Bancorp
Net income (loss) available to common shareholders
Earnings per share, basic
Earnings per share, diluted
2010
2009
12/31
$919
166
656
987
333
270
.34
.33
9/30
916
457
827
979
238
175
.22
.22
6/30
887
325
620
935
192
130
.16
.16
3/31
901
590
627
956
(10)
(72)
(.09)
(.09)
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)
Fifth Third Bancorp 15
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Fifth Third Bancorp is a diversified financial services company
headquartered in Cincinnati, Ohio. At December 31, 2010, the
Bancorp had $111 billion in assets and operated 15 affiliates with
1,312 full-service Banking Centers including 103 Bank Mart®
locations open seven days a week inside select grocery stores and
2,445 Jeanie® ATMs in 12 states throughout 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 also has a 49% interest in Fifth Third Processing
Solutions, LLC.
This overview of MD&A highlights selected information in
the financial results of the Bancorp and may not contain all of the
information that is important to you. For a more complete
understanding of trends, events, 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 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 emphasizing individual relationships. Through its
affiliate operating model, individual managers at all levels within
the affiliates are given the opportunity to tailor financial solutions
for their customers.
The Bancorp’s revenues are dependent on both net interest
income and noninterest income. For the year ended December 31,
2010, net interest income, on an FTE basis, and noninterest
income provided 58% and 42% 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 Risk Management section,
risk
identification, measurement, monitoring, control and
reporting are important to the management of risk and to the
financial performance and capital strength of the Bancorp.
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 MD&A 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
16 Fifth Third Bancorp
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 mortgage
banking net revenue, service charges on deposits, 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 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.
Common Stock and Senior Notes Offerings
On January 25, 2011, the Bancorp raised $1.7 billion in new
common equity through the issuance of 121,428,572 shares of
common stock in an underwriting offering at an initial price of
$14.00 per share. On January 24, 2011, the underwriters exercised
their option to purchase an additional 12,142,857 shares at the
offering price of $14.00 per share. In connection with this
exercise, the Bancorp entered into a forward sale agreement which
resulted in a final net payment of 959,821 shares on February 4,
2011.
On January 25, 2011, the Bancorp issued $1.0 billion of
senior notes to third party investors, and entered into a
Supplemental Indenture dated January 25, 2011 with Wilmington
Trust Company, as Trustee, which modifies the existing Indenture
for Senior Debt Securities dated April 30, 2008 between the
Bancorp and the Trustee. The Supplemental Indenture and the
Indenture define the rights of the Senior Notes, which Senior
Notes are represented by Global Securities dated as of January 25,
2011. The senior notes bear a fixed rate of interest of 3.625% per
annum. The notes are unsecured, senior obligations of the
Bancorp. Payment of the full principal amount of the notes will be
due upon maturity on January 25, 2016. The notes will not be
subject to the redemption at the Bancorp’s option at any time
prior to maturity.
Repurchase of Outstanding TARP Preferred Stock
As further discussed in Note 24 of the Notes to Consolidated
Financial Statements, on December 31, 2008, the Bancorp issued
$3.4 billion of Fixed Rate Cumulative Perpetual Preferred Stock,
Series F, and related warrants to the U.S. Treasury under the U.S.
Treasury’s CPP.
On February 2, 2011, the Bancorp redeemed all 136,320
shares of its Series F Preferred Stock held by the U.S. Treasury.
As discussed above, the net proceeds from the Bancorp’s January
2011 common stock and senior notes offerings and other funds
were used to redeem the $3.4 billion of Series F Preferred Stock.
In connection with the redemption of the Series F preferred
Stock, the Bancorp accelerated the accretion of the remaining
issuance discount on the Series F Preferred Stock and recorded a
corresponding reduction in retained earnings of $153 million. This
resulted in a one-time, noncash reduction in net income available
to common shareholders and related basic and diluted earnings
per share. This transaction will be reflected in the Bancorp’s
Consolidated Financial Statements for the quarter ended March
31, 2011.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Dividends of $15 million were paid on February 2, 2011
when the Series F Preferred Stock was redeemed. The Bancorp
paid total dividends of $356 million to the U.S. Treasury while the
Series F Preferred Stock was outstanding. The Bancorp notified
the U.S. Treasury on February 17, 2011, of its intention to
negotiate for the purchase of the warrants issued to the U.S.
Treasury in connection with the CPP preferred stock investment.
Recent Legislative Developments
On July 21, 2010, the Dodd-Frank Act was signed into law. This
act significantly changes the financial services industry and affects
the lending, deposit, investment, trading and operating activities
of financial
institutions and their holding companies. The
legislation establishes a Bureau of Consumer Financial Protection,
changes the base for deposit insurance assessments, gives the
Federal Reserve the ability to regulate and limit interchange rates
charged to merchants for the use of debit cards, and excludes
certain instruments currently included in determining Tier I
regulatory capital. This act calls for federal regulatory agencies to
adopt hundreds of new rules and conduct multiple studies over
the next several years in order to implement its provisions. While
the total impact of this legislation on Fifth Third is not currently
known, the impact is expected to be substantial and may have an
adverse impact on Fifth Third’s financial performance and growth
opportunities.
Earnings Summary
The Bancorp’s net income available to common shareholders for
2010 was $503 million, or $0.63 per diluted share, which was net
of $250 million in preferred stock dividends. The Bancorp’s net
income available to common shareholders was $511 million, or
$0.67 per diluted share, for 2009, which was net of $226 million in
preferred stock dividends. The Bancorp’s results for both years
reflect a number of significant items.
Such items affecting 2010 include:
•
•
•
$152 million of noninterest income from the settlement
of litigation associated with one of the Bancorp’s BOLI
policies and $25 million of noninterest expense from
related legal fees;
$110 million of noninterest expense from charges to
to
related
representation and warranty
residential mortgage loans sold to third-parties; and
$68 million of net interest income due to the accretion
of purchase accounting adjustments related to loans and
deposits from acquisitions during 2008.
reserves
For comparison purposes, 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 BOLI policies and the
determination that previously recorded losses on the
policy are tax deductible;
$31 million of noninterest expense from charges to
representation and warranty
to
residential mortgage loans sold to third-parties;
$55 million of noninterest expense from a special
assessment by the FDIC;
reserves
related
•
•
•
$55 million income tax benefit from an agreement with
the 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; and
$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.
Net interest income increased to $3.6 billion, from $3.4
billion in 2009. The primary reason for the seven percent increase
in net interest income was a 39 bp increase in the net interest rate
spread due to the runoff of higher priced term deposits in 2010
and the benefit of lower rates offered on new term deposits, as
well as improved pricing on commercial loans. These benefits
were partially offset by a decrease in the accretion of purchase
accounting adjustments related to the 2008 acquisition of First
Charter, which were $68 million in 2010, compared to $136
million in 2009. Net interest margin was 3.66% in 2010, an
increase of 34 bp from 2009.
Noninterest income decreased 43% to $2.7 billion in 2010
compared 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
in 2009. Mortgage banking net revenue increased $94 million as a
result of strong net servicing revenue and higher margins on sold
loans, partially offset by a decline in mortgage originations. Card
and processing revenue decreased 49% due to the Processing
Business Sale in the second quarter of 2009. Service charges on
deposits decreased $58 million primarily due to the impact of new
overdraft regulation and policies which resulted in a decrease in
overdraft occurrences. Investment advisory revenue increased $35
million as the result of improved market performance and sales
production that drove an increase in brokerage activity and assets
under care. Corporate banking revenue decreased two percent
largely due to decreases in international income and lease
remarketing fees, partially offset by growth in syndication and
business lending fees.
Noninterest expense increased $29 million, or one percent,
compared to 2009. Noninterest expense in 2010 included $25
million in legal fees associated with the settlement of claims with
the insurance carrier on one of the Bancorp’s BOLI policies while
noninterest expense in 2009 included a $73 million reduction in
the Visa litigation reserve as well as a $55 million FDIC special
assessment charge. Total personnel costs increased $94 million, or
six percent
in 2010 compared to 2009, due primarily to
investments in the sales force in 2010. In addition, charges to
to residential
representation and warranty reserves related
mortgage loans sold to third-parties totaled $110 million in 2010,
compared to $31 million in 2009 due to a higher volume of
repurchase demands. Partially offsetting these negative impacts
was a $123 million decrease in the provision for unfunded
commitments and letters of credit due to lower estimates of
inherent losses as the result of a decrease in delinquent loans
driven by moderation in economic conditions during 2010. In
addition, card and processing expense decreased $85 million
compared to 2009 due to the Processing Business Sale in June of
2009. Noninterest expense in 2010 and 2009 included $242
million and $269 million, respectively, of FDIC insurance and
other taxes.
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
Fifth Third Bancorp 17
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
portfolio. However, the Bancorp has exposure to disruptions in
the capital markets and weakened economic conditions.
Throughout 2010, the Bancorp continued to be affected by high
unemployment rates, weakened housing markets, particularly in
the upper Midwest and Florida, and a challenging credit
environment. Credit trends, however, continued to show signs of
moderation in 2010 and, as a result, the provision for loan and
lease losses decreased to $1.5 billion for the year ended December
31, 2010, compared to $3.5 billion during 2009.
Net charge-offs as a percent of average loans and leases
decreased to 3.02% in 2010 compared to 3.20% in 2009. In the
third quarter of 2010, the Bancorp took significant actions to
reduce credit risk. Residential mortgage loans in the Bancorp’s
portfolio with a carrying value of $228 million were sold for $105
million, generating $123 million in net charge-offs. Additionally,
commercial loans with a carrying value prior to transfer of $961
million were transferred to held-for-sale, generating $387 million
in net charge-offs. Including the impact of these actions,
nonperforming assets as a percent of loans, leases and other
assets, including other real estate owned (excluding nonaccrual
loans held for sale) decreased to 2.79% at December 31, 2010,
from 4.22% at December 31, 2009. Refer to the Credit Risk
Management section in MD&A for more information on credit
quality.
The Bancorp took a number of 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
$35 million based upon the difference in carrying value of the
Series G preferred shares and the fair value of the common shares
and cash issued. See the Capital Management section of MD&A
for further information on the Bancorp’s capital transactions.
The Bancorp’s capital ratios exceed the “well-capitalized”
guidelines as defined by the Board of Governors of the Federal
Reserve System. As of December 31, 2010, the Tier 1 capital ratio
was 13.94%, the Tier 1 leverage ratio was 12.79% and the total
risk-based capital ratio was 18.14%.
18 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NON-GAAP FINANCIAL MEASURES
The Bancorp considers various measures when evaluating capital
utilization and adequacy, including the tangible equity ratio,
tangible common equity ratio and tier I common equity ratio, in
addition to capital ratios defined by banking regulators. These
calculations are intended to complement the capital ratios defined
by banking regulators for both absolute and comparative
purposes. Because U.S. GAAP does not include capital ratio
measures, the Bancorp believes there are no comparable U.S.
GAAP financial measures to these ratios. Tier I common equity is
not formally defined by U.S. GAAP or codified in the federal
banking regulations and, therefore, is considered to be a non-
GAAP financial measure. Since analysts and banking regulators
may assess the Bancorp’s capital adequacy using these ratios, the
Bancorp believes they are useful to provide investors the ability to
assess its capital adequacy on the same basis.
TABLE 3: NON-GAAP FINANCIAL MEASURES
($ in millions)
Total Bancorp shareholders’ equity (U.S. GAAP)
Less:
Goodwill
Intangible assets
Accumulated other comprehensive income
Tangible equity (1)
Less: preferred stock
Tangible common equity (2)
Total assets (U.S. GAAP)
Less:
Goodwill
Intangible assets
Accumulated other comprehensive income, before tax
Tangible assets, excluding unrealized gains / losses (3)
Total Bancorp shareholders’ equity (U.S. GAAP)
Goodwill and certain other intangibles
Unrealized gains
Qualifying trust preferred securities
Other
Tier I capital
Less: Preferred stock
Qualifying trust preferred securities
Qualified noncontrolling interest in consolidated subsidiaries
Tier I common equity (4)
unexpected market
The Bancorp believes these non-GAAP measures are
important because they reflect the level of capital available to
withstand
conditions. Additionally,
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.
The following table reconciles non-GAAP financial measures
to U.S. GAAP as of December 31:
2010
$14,051
2009
$13,497
(2,417)
(62)
(314)
11,258
(3,654)
7,604
(2,417)
(106)
(241)
10,733
(3,609)
7,124
111,007
113,380
(2,417)
(62)
(483)
$108,045
14,051
(2,546)
(314)
2,763
11
13,965
(3,654)
(2,763)
(30)
7,518
(2,417)
(106)
(370)
$110,487
$13,497
(2,565)
(241)
2,763
(26)
13,428
(3,609)
(2,763)
-
7,056
Risk-weighted assets (5) (a)
100,193
100,933
Ratios:
9.71%
Tangible equity (1) / (3)
6.45%
Tangible common equity (2) / (3)
Tier I common equity (4) / (5)
6.99%
(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
10.42%
7.04%
7.50%
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.
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 2010 and 2009 and the expected
impact of significant accounting standards issued, but not yet
required to be adopted.
Fifth Third Bancorp 19
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 U.S. GAAP. 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 the ALLL, reserve for
unfunded commitments, income taxes, 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, 2010.
ALLL
The Bancorp disaggregates its portfolio loans and leases into
portfolio segments for purposes of determining the ALLL. The
Bancorp’s portfolio segments include commercial, residential
mortgage, and consumer. The Bancorp further disaggregates its
portfolio segments into classes for purposes of monitoring and
assessing credit quality based on certain risk characteristics.
Classes within
include
commercial & industrial, commercial mortgage owner-occupied,
commercial
commercial mortgage
construction, and commercial leasing. The residential mortgage
portfolio segment is also considered a class. Classes within the
consumer segment include home equity, automobile, credit card,
and other consumer loans and leases. For an analysis of the
Bancorp’s ALLL by portfolio segment and credit quality
information by class, see Note 7 of the Notes to Consolidated
Financial Statements.
the commercial portfolio segment
nonowner-occupied,
in a TDR, are subject to
Larger commercial loans included within aggregate borrower
relationship balances exceeding $1 million that exhibit probable or
observed credit weaknesses, as well as loans that have been
modified
individual review for
impairment. The Bancorp considers the current value of collateral,
credit quality of any guarantees, the loan structure, and other
factors when evaluating whether an individual loan is impaired.
Other factors may include the industry of the borrower, size and
financial condition of the borrower, cash flow, leverage of the
borrower, and the Bancorp’s evaluation of the borrower’s
management. 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, other
sources of cash flow, as well as evaluation of legal options
available to the Bancorp. 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 collectability 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 the
established threshold of $1 million and thus not subject to specific
allowance allocations. 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 in the residential mortgage and
consumer portfolio segments are not individually risk graded.
Rather, standard credit scoring systems and delinquency
monitoring are used to assess credit risks, and allowances are
established based on the expected net charge-offs. Loss rates are
based on the average net charge-off history by loan category.
Historical loss rates may be adjusted for significant factors that, in
management’s judgment, are necessary to reflect losses inherent in
20 Fifth Third Bancorp
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 reviewers.
The Bancorp’s current methodology for determining the
ALLL is based on historical loss rates, current credit grades,
specific allocation on TDRs and impaired commercial credits
above specified thresholds and other qualitative adjustments.
Allowances on individual commercial 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 recorded at fair value as of the acquisition date.
The Bancorp does not carry over the acquired company’s ALLL,
nor does the Bancorp add to its existing ALLL 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
the reserve for unfunded
to
migration. Net adjustments
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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 21 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
in
valuation allowance. Key economic assumptions used
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 13 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
liabilities (Level 1) and the
that
within the fair value hierarchy is based upon the lowest level of
input
fair value
measurement. The three levels within the fair value hierarchy are
described as follows:
is significant
instrument’s
the
to
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 investment and 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.
other
securities,
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 are classified within Level 2 of
the valuation hierarchy, include agency and non-agency
mortgage-backed
asset-backed
securities, obligations of U.S. Government sponsored
agencies, and corporate and municipal bonds. Agency
mortgage-backed
securities, obligations of U.S.
Government sponsored agencies, and corporate and
municipal bonds are generally valued using a market
approach based on observable prices of securities with
similar characteristics. Non-agency mortgage-backed
securities and other asset-backed securities are generally
valued using an income approach based on discounted
cash
speeds,
performance of underlying collateral and specific
tranche-level attributes. 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. 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
incorporating
prepayment
flows,
Fifth Third Bancorp 21
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
31, 2010, 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 ARM loans,
discounted cash flow models that may incorporate the
anticipated portfolio composition, credit spreads of
asset-backed securities with similar collateral, and market
conditions. The anticipated portfolio composition
includes the effect of interest rate spreads and discount
rates due to loan characteristics such as the state in
which the loan was originated, the loan amount and the
ARM margin. Residential mortgage loans held for sale
that are valued based on mortgage-backed securities
prices are classified within Level 2 of the valuation
hierarchy as the valuation is based on external pricing
for similar instruments. ARM loans classified as held for
sale are also classified within Level 2 of the valuation
hierarchy due to the use of observable inputs in the
discounted cash flow model. These observable inputs
include interest rate spreads from agency mortgage-
backed securities market rates and observable discount
rates. 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
and certain over-the-counter derivatives valued using
active bids are classified within Level 1 of the valuation
hierarchy. Most of the Bancorp’s 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, 2010, 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.
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
22 Fifth Third Bancorp
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 28 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.
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 10 of the Notes
to Consolidated Financial Statements for further information
regarding the Bancorp’s goodwill.
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 its financial condition, the results of its
operations, or its 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
declines 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 ALLL 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 could 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 than 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.
The price for shares of Fifth Third’s common stock 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 for
shares of Fifth Third’s common stock, and the current market
price of such shares may not be indicative of future market prices.
23 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISKS RELATING TO FIFTH THIRD’S 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 ALLL, 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
improve and/or stabilize,
portfolio does not continue to
additional increases in the ALLL 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, as well as meet regulatory expectations. 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, as well as
regulatory expectations, limit the amount of dividends that Fifth
24 Fifth Third Bancorp
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 subsidiary’s creditors. Limitations on
Fifth Third’s ability to receive dividends from its subsidiaries
could have a material adverse effect on Fifth Third’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
Fifth Third and/or the holders of its securities could be
adversely affected by unfavorable ratings from rating
agencies.
Fifth Third’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 Fifth Third, certain of its
subsidiaries and particular classes of securities they issue. The
interest rates that Fifth Third 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 Fifth Third 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 Fifth Third, its subsidiaries or their securities
could also create obligations or liabilities to Fifth Third under the
terms of its outstanding securities that could increase Fifth Third’s
costs or otherwise have a negative effect on the Bancorp’s results
of operations or financial condition. Additionally, a downgrade of
the credit rating of any particular security issued by Fifth Third 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. On November 1, 2010, citing their view
that the likelihood of government support in the future for larger
regional banks had declined, Moody’s downgraded ten large
regional banks, including Fifth Third’s subsidiary bank, Fifth
Third Bank. Fifth Third Bank’s credit ratings for short-term
obligations, long-term deposit and senior debt were downgraded
to P2, A3 and A3, respectively, from P1, A2 and A2, respectively.
During 2010, DBRS Investors Service downgraded Fifth Third’s
issuer rating to “AL” from “A” and downgraded the long term
debt rating and deposit ratings for Fifth Third’s bank subsidiary to
“A” from “AH.”
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
its business
strategies and may
Fifth Third could suffer if it fails to attract and retain skilled
personnel.
As Fifth Third continues to grow, its success depends, in large
part, on
individuals.
its ability to attract and retain key
Competition for qualified candidates in the activities and markets
that Fifth Third serves is great and Fifth Third may not be able to
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 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 June 2010, the federal banking
joint guidance on executive compensation
agencies
incentive
intended
compensation policies don’t encourage excessive risk taking. In
addition, the Dodd-Frank Act requires those agencies to adopt
guidance or rules to enhance the reporting of
incentive
compensation and to prohibit certain compensation arrangements.
Also in 2010, the FDIC 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
issued
to ensure
Fifth Third’s mortgage banking revenue can be volatile from
quarter to quarter.
Fifth Third earns revenue from the fees it 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 MSRs can increase through increases in fair value.
When rates fall, mortgage originations tend to increase and the
value of 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 its mortgage banking interest rate risk. Fifth Third generally
does not hedge all of its risks, and the fact that Fifth Third
attempts to hedge any of the risks does not mean Fifth Third will
requiring
be successful. Hedging
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 its hedging activities. There
may be periods where Fifth Third elects not to use derivatives and
other instruments to hedge mortgage banking interest rate risk.
is a complex process,
financial
statements
The preparation of Fifth Third’s financial statements
requires the use of estimates that may vary from actual
results.
The preparation of consolidated
in
conformity with U.S. GAAP requires management to make
significant estimates that affect the financial statements. Two of
Fifth Third’s most critical estimates are the level of the ALLL and
the valuation of mortgage servicing rights. Due to the uncertainty
of estimates involved, Fifth Third may have to significantly
losses that are
increase the ALLL and/or sustain credit
significantly higher than the provided allowance and could
recognize a significant provision for impairment of its mortgage
servicing rights. If Fifth Third’s ALLL is not adequate, Fifth
Third’s business, financial condition, including its liquidity and
capital, and results of operations could be materially adversely
affected.
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 the FASB, the SEC and
other regulatory bodies, periodically change
financial
accounting and reporting standards that govern the preparation of
Fifth Third’s consolidated financial statements. These changes can
be hard to predict and can materially impact how Fifth Third
its financial condition and results of
records and reports
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.
the
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
Fifth Third Bancorp 25
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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, environmental risks
from its properties, 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 U.S. Treasury’s
in which Fifth Third was a participant.
TARP program,
Additionally, actions
taken by government regulators and
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
tampering or
technical system flaws or employee errors,
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
26 Fifth Third Bancorp
fulfill their contractual obligations (or will be subject to the same
risk of fraud or operational errors as Fifth Third). These
disruptions may interfere with service to Fifth Third’s customers
and result in a financial loss or liability.
to provide FTPS certain services during
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 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
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
International 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 Fifth Third’s loan portfolios,
especially in its coastal markets, thereby adversely impacting
its 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
its loan portfolios by damaging properties pledged as collateral as
well as impairing its 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 FRB, 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
limit
operations that require the intensive use of capital and could
adversely affect Fifth Third’s ability to expand or maintain present
business levels.
requirements,
ratios, may
including
leverage
Fifth Third’s subsidiary bank must remain well-capitalized,
well-managed and maintain at least a “Satisfactory” CRA rating
for Fifth Third to retain its status as a financial holding company.
Failure to meet these requirements could result in the FRB placing
limitations or conditions on Fifth Third’s activities (and the
commencement of new activities) and could ultimately result in
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the loss of financial holding company status. In addition, failure
by Fifth Third’s bank subsidiary to meet applicable capital
guidelines could subject the bank to a variety of enforcement
remedies available to the federal regulatory authorities. These
include limitations on the ability to pay dividends, the issuance by
the regulatory authority of a capital directive to increase capital,
and the termination of deposit insurance by the FDIC.
to
financial
Fifth Third’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 U.S.
Treasury’s CPP and Capital Assistance Program, the U.S.
Government has taken steps that include enhancing the liquidity
support available
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.
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 may be required to pay
significantly
because market
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.
Compliance with such
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. 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.
Fifth Third is subject to various regulatory requirements that
limit its operations and potential growth.
Under federal and state laws and regulations pertaining to the
safety and soundness of insured depository institutions and their
holding companies, the FRB and the Ohio Division of Financial
Institutions have the authority to compel or restrict certain actions
by Fifth Third and its subsidiary bank. Fifth Third and its
subsidiary bank are subject to such supervisory authority and,
more generally, must, in certain instances, obtain prior regulatory
approval before engaging in certain activities or corporate
decisions. There can be no assurance that such approvals, if
required, would be forthcoming or that such approvals would be
granted in a timely manner. Failure to receive any such approval, if
required, could limit or impair Fifth Third’s operations, restrict its
growth and/or affect its dividend policy. Such actions and
activities subject to prior approval include, but are not limited to,
increasing dividends paid by Fifth Third or its subsidiary bank,
purchasing or redeeming any shares of its stock, entering into a
merger or acquisition transaction, acquiring or establishing new
branches, and entering into new businesses.
In addition, Fifth Third, as well as other financial institutions
more generally, have recently been subjected to increased scrutiny
from regulatory authorities stemming from broader systemic
regulatory concerns, including with respect to stress testing,
capital levels, asset quality, provisioning and other prudential
matters, arising as a result of the recent financial crisis and efforts
to ensure that financial institutions take steps to improve their risk
management and prevent future crises.
In some cases, regulatory agencies may take supervisory
actions that are considered to be confidential supervisory
information which may not be publicly disclosed. Finally, as part
of Fifth Third’s regular examination process, Fifth Third’s and its
subsidiary bank’s respective regulators may advise it and its
subsidiary bank to operate under various restrictions as a
prudential matter. Such supervisory actions or restrictions, if and
in whatever manner imposed, could have a material adverse effect
on Fifth Third’s business and results of operations.
in
to
time
requests,
Fifth Third and/or its affiliates are or may become involved
from time to time in information-gathering requests,
investigations and proceedings by government and self-
regulatory agencies which may lead to adverse
consequences.
Fifth Third and/or its affiliates are or may become involved from
time
reviews,
information-gathering
investigations and proceedings (both formal and informal) by
government and self-regulatory agencies, including the SEC,
regarding their respective businesses. Such matters may result in
material adverse consequences, including without
limitation,
adverse judgments, settlements, fines, penalties, injunctions or
other actions, amendments and/or restatements of Fifth Third’s
SEC filings and/or financial statements, as applicable, and/or
determinations of material weaknesses in its disclosure controls
and procedures. The SEC is investigating and has made several
requests for information, including by subpoena, concerning
issues which Fifth Third understands relate to accounting and
reporting matters involving certain of its commercial loans. This
could lead to an enforcement proceeding by the SEC which, in
turn, may result
in one or more such material adverse
consequences.
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 DIF to resolve the cost of bank failures.
The DIF is funded by fees assessed on insured depository
institutions 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 to
replenish 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.
Legislative or regulatory compliance, changes or actions or
significant litigation, could adversely impact the Bancorp or
the businesses in which the Bancorp is engaged.
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
Fifth Third Bancorp 27
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Fifth Third’s ability to pay dividends or repurchase stock is subject
to regulatory requirements and the need to meet regulatory
expectations.
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 CPP under the
EESA, the rules and regulations promulgated thereunder or the
American Recovery and Reinvestment Act of 2009, 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.
On July 21, 2010 the President of the United States signed
into law the Dodd-Frank Act. The Dodd-Frank Act will have
material implications for Fifth Third and the entire financial
services industry. Among other things it will or potentially could:
• Result in Fifth Third being subject to enhanced oversight
and scrutiny as a result of being a bank holding company
with $50 billion or more in consolidated assets;
• Result in the appointment of the FDIC as receiver of Fifth
Third in an orderly liquidation proceeding, if the Secretary
of the U.S. Treasury, upon recommendation of two-thirds
of the FRB and the FDIC and in consultation with the
President of the United States, finds Fifth Third to be in
default or danger of default;
• Affect the levels of capital and liquidity with which Fifth
Third must operate and how it plans capital and liquidity
levels (including a phased-in elimination of Fifth Third’s
existing trust preferred securities as Tier 1 capital);
• Subject Fifth Third to new and/or higher fees paid to
various regulatory entities, including but not limited to
deposit insurance fees to the FDIC;
• Impact Fifth Third’s ability to invest in certain types of
entities or engage in certain activities;
• Impact a number of Fifth Third’s business and risk
management strategies;
• Restrict the revenue that Fifth Third generates from
interchange fee revenue
certain businesses,
generated by Fifth Third’s credit card business;
including
• Subject Fifth Third to a new Consumer Financial
Protection Bureau, which will have very broad rule-making
and enforcement authorities; and
• Subject Fifth Third to oversight and regulation by a new
and different litigation and regulatory regime.
As the Dodd-Frank Act requires that many studies be conducted
and that hundreds of regulations be written in order to fully
implement it, the full impact of this legislation on Fifth Third, its
business strategies and financial performance cannot be known at
this time, and may not be known for a number of years. However,
these impacts are expected to be substantial and some of them are
likely to adversely affect Fifth Third and its financial performance.
The extent to which Fifth Third can adjust its strategies to offset
such adverse impacts also is not known at this time.
28 Fifth Third Bancorp
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, or 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 2010, 2009 and 2008.
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 was $3.6 billion for the year ended
December 31, 2010, compared to $3.4 billion in 2009. Net interest
income was affected by the amortization and accretion of
premiums and discounts on acquired loans and deposits, primarily
from the acquisition of First Charter that increased net interest
income by $68 million during 2010, compared to an increase of
$136 million during 2009. Excluding this impact, net interest
income increased $317 million, or 10%, in 2010 compared to
2009. The purchase accounting accretion reflects the high
discount rate in the market at the time of the acquisition; the total
loan discounts are being accreted into net interest income over the
remaining period to maturity of the loans acquired. Based upon
the remaining period to maturity, and excluding the impact of
prepayments, the Bancorp anticipates recognizing approximately
$41 million in additional net interest income during 2011 as a
result of the amortization and accretion of premiums and
discounts on acquired loans and deposits.
For the year ended December 31, 2010, net interest income
was positively impacted by a decrease of $5.6 billion in average
interest-bearing liabilities as well as a mix shift to lower cost core
deposits from 2009. This was primarily a result of runoff of higher
priced term deposits as well as the benefit of lower rates offered
on new term deposits. In addition, 2010 benefitted from a $3.2
billion increase in the free funding position. This benefit was
partially offset by a $2.6 billion decrease in average interest
earning assets from 2009. The shift in funding position, as well as
improved pricing on commercial loans, led to a 39 bp increase in
the net interest rate spread to 3.39% in 2010 compared to 2009.
Net interest margin was 3.66% in 2010, compared to 3.32%
in 2009. For 2010 and 2009, the accretion of the discounts on
acquired loans and deposits increased the net interest margin by 7
bp and 14 bp, respectively. Excluding the accretion of discounts
on acquired loans and deposits, net interest margin was up 41 bp
from 2009, driven by improved pricing on new commercial loan
originations, the shift in funding composition to lower cost core
deposits, an increase in free-funding balances and a decrease in
the average rates paid on interest bearing liabilities.
Average interest-earning assets decreased three percent from
2009. Average commercial loans decreased $3.9 billion due to
decreases across all commercial loan categories, and average
consumer loans decreased $239 million due primarily to decreases
in average residential mortgage, home equity and other consumer
loans and leases, partially offset by an increase in average
automobile loans. In addition, average investment securities
decreased $729 million, or four percent, compared to 2009. The
declines in average loans and investment securities were partially
offset by a $2.3 billion increase in average other short-term
investments, which includes interest bearing cash held at the
Federal Reserve. For further discussion on the Bancorp’s loan and
lease and investment securities portfolios, see the Loan and Lease
and Investment Securities sections, respectively, of MD&A.
Interest income from loans and leases decreased $112 million
compared to 2009. Excluding the accretion of discounts on
acquired loans in 2010 and 2009, interest income from loans and
leases decreased $46 million, or one percent, compared to the
prior year. The year-over-year decrease in interest income from
loans and leases is a result of a five percent decline in average
balances, partially offset by an 11 bp increase in the average yield.
Interest income from investment securities decreased nine percent
compared to 2009 due to a 68 bp decrease in the weighted-
average yield and a four percent decline in average balances.
Average interest-bearing core deposits increased $4.0 billion,
or eight percent, compared to 2009, primarily due to increased
interest checking, savings, money market and foreign office
deposits, partially offset by a decline in other time deposits. The
cost of interest-bearing core deposits was 0.83% in 2010; a
decrease of 45 bp from 2009. The decrease is a result of a mix
TABLE 4: CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ 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 tax expense (benefit)
Income (loss) before cumulative effect
Cumulative effect of change in accounting principle, net of tax
Net income (loss)
Less: Net income attributable to noncontrolling interest
Net income (loss) attributable to Bancorp
Dividends on preferred stock
Net income (loss) available to common shareholders
Earnings per share
Earnings per diluted share
Cash dividends declared per common share
2010
$4,507
885
3,622
1,538
2,084
2,729
3,855
958
18
187
753
-
753
-
753
250
$503
$0.63
0.63
0.04
2009
4,687
1,314
3,373
3,543
(170)
4,782
3,826
786
19
30
737
-
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)
-
(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
-
1,076
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
-
1,188
2.13
2.12
1.58
Fifth Third Bancorp 29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
shift to lower cost core deposits and a decrease in rates on average
time deposits of 71 bp compared to 2009.
Interest expense on wholesale funding decreased 35%
compared to the prior year due to a 34% decrease in average
balances and a 45 bp decrease in average rates. In 2010, wholesale
funding represented 25% of interest-bearing liabilities, down from
35% in 2009. Impacting this change was a decrease of $4.8 billion
in average other short term borrowings due to the repayment of
Term Auction Facility funds and FHLB advances which had an
average balance of $3.7 billion and $1.2 billion, respectively, in
2009. In addition, average certificates of deposit over $100,000
decreased $4.3 billion from 2009 due to maturities throughout
2010. The decreased reliance on wholesale funding in 2010 was a
result of the growth of core deposits and a decline in average
interest earning assets. For more information on the Bancorp’s
interest rate risk management, including estimated earnings
sensitivity to changes in market interest rates, see the Market Risk
Management section of MD&A.
.
TABLE 5: CONSOLIDATED AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
2010
For the years ended December 31
Revenue/
Cost
2009
Revenue/
Cost
Average
Yield/Rate
Average
Yield/Rate
Average
Balance
Average
Balance
Average
Balance
($ in millions)
Assets
Interest-earning assets:
Loans and leases (a):
2008
Revenue/
Cost
Average
Yield/Rate
$26,334
11,585
3,066
3,343
44,328
9,868
11,996
10,427
1,870
743
34,904
79,232
16,054
317
3,328
98,931
2,245
14,841
(3,583)
$112,434
$1,238
476
93
147
4.70 %
4.11
3.01
4.40
1,954 4.41
4.84
4.00
5.83
10.73
15.58
5.39
4.84
478
479
608
201
116
1,882
3,836
650
13
8
4,507
4.05
3.92
0.25
4.56
$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
$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
$28,426
12,776
5,846
3,680
50,728
10,993
12,269
8,925
1,708
1,212
35,107
85,835
$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
721
17
1
4,687
4.28
7.19
0.14
4.62
13,082
342
621
99,880
2,490
13,411
(1,485)
$114,296
643
25
13
5,630
4.91
7.35
2.15
5.64
$18,218
19,612
4,808
3,355
10,526
56,519
6,083
6
291
1,635
10,902
75,436
19,669
3,580
98,685
13,749
$112,434
$52
107
19
12
276
466
125
-
1
3
290
885
0.29 %
0.55
0.40
0.35
2.62
0.83
2.06
0.13
0.17
0.21
2.65
1.17
$40
127
26
10
470
673
280
-
1
42
318
1,314
$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
0.26 %
0.75
0.60
0.45
3.33
1.28
2.70
0.20
0.20
0.64
2.89
1.62
$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
Total interest-bearing liabilities
Demand deposits
Other liabilities
Total liabilities
Equity
Total liabilities and equity
Net interest income
Net interest margin
Net interest rate spread
Interest-bearing liabilities to interest-earning assets
(a) The FTE adjustments included in the above table are $18, $19 and $22 for the years ended December 31, 2010, 2009 and 2008, respectively.
3.66 %
3.39
76.25
3.00
79.80
3.32 %
$3,622
$3,373
$128
224
118
34
411
915
324
50
70
178
557
2,094
0.91 %
1.38
1.92
1.60
3.69
1.84
3.40
2.42
2.34
2.29
4.01
2.43
$3,536
3.54 %
3.21
86.16
Commercial and industrial 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 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 - $100,000 and over
Other foreign office deposits
Federal funds purchased
Other short-term borrowings
Long-term debt
30 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 6: CHANGES IN NET INTEREST INCOME ATTRIBUTED TO VOLUME AND YIELD/RATE (a)
For the years ended December 31
2010 Compared to 2009
2009 Compared to 2008
Volume
Yield/Rate
Total
Volume
Yield/Rate
Total
($ in millions)
Assets
Increase (decrease) in interest income:
Loans and leases:
Commercial and industrial 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 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
($53)
(39)
(46)
(8)
(146)
(53)
(22)
97
(4)
(27)
(9)
(155)
(34)
6
5
(178)
129
(30)
5
5
109
(71)
(19)
(45)
12
57
(66)
43
(37)
(10)
2
(2)
76
(69)
(41)
(3)
(37)
(124)
(41)
52
8
30
(75)
(112)
(71)
(4)
7
(180)
($178)
(2)
(180)
($45)
(17)
(60)
(1)
(123)
(7)
15
(7)
20
(12)
9
(114)
169
(7)
5
53
$53
$8
18
2
4
(105)
(73)
(98)
-
-
(21)
(3)
(195)
4
(38)
(9)
(2)
(89)
(134)
(57)
-
-
(18)
(25)
(234)
12
(20)
(7)
2
(194)
(207)
(155)
-
-
(39)
(28)
(429)
$8
9
(28)
(1)
102
90
27
(25)
(33)
(26)
(101)
(68)
(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)
(996)
(943)
(96)
(106)
(64)
(23)
(43)
(332)
(71)
(25)
(36)
(110)
(138)
(712)
(88)
(97)
(92)
(24)
59
(242)
(44)
(50)
(69)
(136)
(239)
(780)
(712)
(780)
(284)
(163)
Total interest-bearing liabilities
Demand deposits
Other liabilities
Total change in interest expense
Equity
Total liabilities and 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.
(234)
(429)
(195)
232
249
$17
(68)
$121
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 ALLL 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 ALLL. The amount of loans actually removed from
the 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 $1.5
billion in 2010 compared to $3.5 billion in 2009. The decrease in
provision expense from the prior year was due to decreases in
nonperforming assets and delinquencies in commercial and
consumer loans. In addition to these trends, signs of moderation
in general economic conditions during 2010 further contributed to
a decrease in expected loss rates. As of December 31, 2010, the
ALLL as a percent of loans and leases decreased to 3.88%, from
4.88% at December 31, 2009.
Refer to the Credit Risk Management section for more
detailed information on the provision for loan and lease losses
including an analysis of the loan portfolio composition, non-
performing assets, net charge-offs, and other factors considered
by the Bancorp in assessing the credit quality of the loan portfolio
and the ALLL.
Fifth Third Bancorp 31
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 7: NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Mortgage banking net revenue
Service charges on deposits
Corporate banking revenue
Investment advisory revenue
Card and processing 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
2010
$647
574
364
361
316
-
406
47
14
$2,729
2009
553
632
372
326
615
1,758
479
(10)
57
4,782
2008
199
641
431
366
912
-
363
(86)
120
2,946
2007
133
579
367
382
826
-
153
21
6
2,467
2006
155
517
318
367
717
-
299
(364)
3
2,012
Noninterest Income
Total noninterest income decreased $2.1 billion, or 43%, in 2010
compared to 2009, due primarily to the Processing Business Sale
in the second quarter of 2009 as well as decreases in service
charges on deposits, corporate banking revenue and card and
processing revenue, partially offset by strong growth in mortgage
banking net revenue and investment advisory revenue. The
components of noninterest income are shown in Table 7.
Mortgage banking net revenue increased to $647 million in
2010 from $553 million in 2009. The components of mortgage
banking net revenue for the years ended December 31, 2010, 2009
and 2008 are shown in Table 8.
TABLE 8: COMPONENTS OF MORTGAGE BANKING NET
REVENUE
For the years ended December 31
($ 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
221
(137)
2010
$490
197
(146)
2009
485
2008
260
164
(107)
73
157
$647
17
68
553
(118)
(61)
199
Net servicing revenue (expense)
Mortgage banking net revenue
Origination fees and gains on loan sales increased $5 million
compared to 2009 as higher margins on loans sold were largely
offset by a decline in mortgage originations due to the homebuyer
tax credit expiring in the second quarter of 2010, as well as tighter
underwriting standards and declining home values. Mortgage
originations were $20.3 billion in 2010 compared to $21.7 billion
in 2009.
Mortgage net servicing revenue
increased $89 million
compared to 2009. Net servicing revenue is comprised of gross
servicing fees and related servicing rights amortization as well as
valuation adjustments on mortgage servicing rights and mark-to-
market adjustments on both settled and outstanding free-standing
derivative financial instruments. The increase in net servicing
revenue was driven by an increase of $24 million in servicing fees
due to an increase in residential mortgage loans serviced and a $9
million decrease in servicing rights amortization due to a decline
in prepayments. The Bancorp’s total residential mortgage loans
serviced at December 31, 2010 and 2009 was $63.2 billion and
$58.5 billion, respectively, with $54.2 billion and $48.6 billion,
respectively, of residential mortgage loans serviced for others.
Also impacting the increase in net servicing revenue were
improvements in net valuation adjustments on MSRs and MSR
derivatives as gains on the Bancorp’s free-standing MSR
derivatives exceeded impairment losses recorded against the
hedged MSRs. This was a result of a widening spread between
swap rates and primary and secondary market mortgage rates as
swap rates declined more than primary and secondary market
32 Fifth Third Bancorp
mortgage rates over the year, as well as a positive carry in the net
MSR hedge position. These factors led to a net gain of $73 million
on the net valuation adjustments on MSRs, compared to a net
gain of $17 million in 2009.
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
MSRs can be found in Note 13 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 the valuation on the MSR portfolio. See Note 14 of the
Notes to Consolidated Financial Statements for more information
on the free-standing derivatives used to hedge the MSR portfolio.
The Bancorp recognized a gain from MSR derivatives of
$109 million, offset by a temporary impairment of $36 million,
resulting in a net gain of $73 million for the year ended December
31, 2010. For the year ended December 31, 2009, 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. 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 these non-qualifying hedges on mortgage
servicing rights of $14 million and $57 million in 2010 and 2009,
respectively, was included in noninterest income within the
Consolidated Statements of Income, but is shown separate from
mortgage banking net revenue.
Service charges on deposits decreased $58 million, or nine
percent, to $574 million in 2010 compared to 2009. Consumer
deposit revenue decreased $56 million from 2009 as the impact of
Regulation E and new overdraft policies resulted in a decrease in
overdraft occurrences. Regulation E is a Federal Reserve Board
rule that prohibits financial institutions from charging customers
fees for paying overdrafts on ATMs and one-time debit card
transactions unless a customer consents to the overdraft service
for those types of transactions. Regulation E became effective on
July 1, 2010 for new accounts and August 15, 2010 for existing
accounts.
Commercial deposit revenue was flat compared to 2009 as a
two percent increase in service fees for treasury management
services was largely offset by an increase in earnings credits paid
on customer balances. 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. Earning 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Corporate banking revenue decreased $8 million, or two
percent, in 2010, largely due to decreases in international income
and
in
lease remarketing fees, partially offset by growth
syndication and business lending fees. Foreign exchange derivative
income of $63 million decreased 17% driven by volume declines.
Loan syndication fees were $28 million in 2010, compared to $8
million in 2009.
Investment advisory revenue increased $35 million, or 11%,
from 2009 as the result of improved market performance and
sales production that drove an increase in brokerage activity and
assets under care. Brokerage fee income, which includes Fifth
Third Securities income, increased $23 million in 2010 as investors
migrated balances to stock and bond funds due to improved
market performance, which
commission-based
transactions. As of December 31, 2010, the Bancorp had $266
billion in assets under care and managed $25 billion in assets for
individuals, corporations and not-for-profit organizations.
increased
in
interest
On June 30, 2009, the Bancorp completed the sale of a
its merchant acquiring and financial
majority
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 $299 million, or 49%, compared to 2009. Card
issuer interchange, which was retained by the Bancorp, increased
eight percent, to $284 million, compared to 2009 due to strong
growth in debit and credit card transaction volumes.
Other noninterest income decreased $73 million in 2010
compared to 2009. The components of other noninterest income
are shown in Table 9. The decrease was primarily due a $244
million gain relating to the sale of the Bancorp’s Visa, Inc. Class B
shares in 2009 and a $27 million decrease in revenue in 2010
related to the TSA entered into as part of the Processing Business
Sale, partially offset by an increase of $196 million in BOLI
income. The year ended December 31, 2010 includes a $152
million litigation settlement related to one of the Bancorp’s BOLI
policies while 2009 includes $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.
Net securities gains totaled $47 million in 2010 compared to
$10 million of net securities losses during 2009.
Noninterest Expense
in 2010
Total noninterest expense remained relatively flat
compared to 2009 as increases in salaries, wages and incentives
and the expense for representation and warranties were largely
offset by a decrease in the provision for unfunded commitments
and letters of credit, lower FDIC insurance and other taxes and a
decrease in card and processing expense. The components of
noninterest expense are shown in Table 10. Noninterest expense
in 2010 included $49 million of expenses related to the TSA and
$25 million in legal fees associated with the settlement of claims
TABLE 10: NONINTEREST EXPENSE
For the years ended December 31 ($ in millions)
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Equipment expense
Card and processing expense
Goodwill impairment
Other noninterest expense
Total noninterest expense
Efficiency ratio
TABLE 9: COMPONENTS OF OTHER NONINTEREST
INCOME
For the years ended December 31
($ in millions)
BOLI income (loss)
Operating lease income
Gain (loss) on loan sales
TSA revenue
Insurance income
Cardholder fees
Consumer loan and lease fees
Banking center income
Loss on sale of OREO
Gain on sale/redemption of Visa,
Inc. ownership interests
2010
194
62
51
49
38
36
32
22
(78)
2009
(2)
59
38
76
47
48
43
22
(70)
Litigation settlement
Other, net
Total other noninterest income
-
-
-
$406
244
-
(26)
$479
2008
(156)
47
(11)
-
36
58
51
31
(60)
273
76
18
363
with the insurance carrier on one of the Bancorp’s BOLI policies
Noninterest expense in 2009 included $76 million of expense
related to the TSA and a $55 million FDIC special assessment
charge, partially offset by a $73 million reduction in the Visa
litigation reserve.
Total personnel costs (salaries, wages and incentives plus
employee benefits) increased $94 million, or six percent in 2010
compared to 2009 due primarily to increased base, variable and
incentive compensation, partially offset by
lower deferred
compensation. Base and incentive compensation increased due
primarily to investments in the sales force and expanded banking
center hours during 2010. As of December 31, 2010, the Bancorp
employed 21,613 employees, of which 6,742 were officers and
2,519 were part-time employees. Full-time equivalent employees
totaled 20,838 as of December 31, 2010 compared to 20,998 as of
in full-time equivalent
December 31, 2009. The decrease
employees is primarily due to the transfer of employees on
January 1, 2010 from the Processing Business Sale, partially offset
by an increase in the sales force in 2010.
Card and processing expense includes third-party processing
expenses, card management fees and other bankcard processing
expenses. Card and processing expense decreased $85 million, or
44%, in 2010 compared to 2009 due to the Processing Business
Sale in June of 2009.
Total other noninterest expense increased $23 million in
2010 compared to 2009. The components of other noninterest
expense are shown in Table 11. The increase from 2009 was
primarily due to increased charges to representation and warranty
reserves related to residential mortgage loans sold to third-parties,
as well as higher impairment on affordable housing investments,
higher marketing expense due to increased consumer marketing
campaigns and an increase in professional services fees primarily
due to legal expenses related to the settlement of one of the
Bancorp’s BOLI policies. The increase in affordable housing
investment impairment was due to an increase in the volume of
investments. These impacts were partially offset by a decrease in
the provision for unfunded commitments and letters of credit,
lower FDIC insurance and other taxes and a decrease in intangible
asset amortization due to certain customer deposit intangibles
2010
$1,430
314
298
189
122
108
-
1,394
$3,855
60.7%
2009
1,339
311
308
181
123
193
-
1,371
3,826
46.9
2008
1,337
278
300
191
130
274
965
1,089
4,564
70.4
2007
1,239
278
269
169
123
244
-
989
3,311
60.2
2006
1,174
292
245
141
116
184
-
763
2,915
59.4
Fifth Third Bancorp 33
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 11: COMPONENTS OF OTHER NONINTEREST
EXPENSE
For the years ended December 31
($ in millions)
FDIC insurance and other taxes
Loan and lease
Losses and adjustments
Affordable housing investments
2009
269
234
110
2010
$242
211
187
impairment
Marketing
Professional services fees
Travel
Postal and courier
Intangible asset amortization
Insurance expense
Operating lease
OREO
Recruitment and education
Supplies
Data processing
Visa litigation reserve
Provision for unfunded commitments and
letters of credit
Other
Total other noninterest expense
2008
73
188
95
67
102
102
54
54
56
30
32
11
33
31
14
(99)
100
98
77
51
48
43
42
41
33
31
24
24
-
83
79
63
41
53
57
50
39
24
30
25
21
(73)
(24)
166
$1,394
99
167
1,371
98
148
1,089
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, 2010
was primarily impacted by $133 million in tax credits, a $26
million tax benefit resulting from the settlement of certain
uncertain tax positions with the IRS and $25 million of non-cash
charges relating to previously recognized tax benefits associated
with stock-based compensation that will not be realized. 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. See Note 21 of
the Notes to Consolidated Financial Statements for further
information on income taxes.
2010
$940
187
19.8%
2009
767
30
3.9
2008
(2,664)
(551)
20.7
2007
1,537
461
30.0
2006
1,627
443
27.2
from previous acquisitions being fully amortized. Additionally, the
Bancorp recorded a $73 million reversal of the Visa litigation
reserve in 2009. The expense for representation and warranties,
which is included in losses and adjustments, totaled $110 million
and $31 million in 2010 and 2009, respectively, with the increase
resulting primarily from a higher volume of repurchase demands.
The decrease in the provision for unfunded commitments was
due to lower estimates of inherent losses resulting from a decrease
in delinquent loans as general economic conditions began to show
signs of moderation in 2010.
The Bancorp incurred $242 million of expense for FDIC
insurance and other taxes in 2010 compared to $269 million in
2009. Effective June 30, 2009, the FDIC imposed a special
assessment on each insured depository institution calculated as 5
bp of total assets less Tier 1 capital which resulted in the Bancorp
incurring a $55 million special assessment charge in the second
quarter of 2009. Due to the passage of the Dodd-Frank Act, the
FDIC was required to redefine the deposit insurance assessment
base, make changes to assessment rate methodology and
implement new DIF dividend provisions. The FDIC adopted the
final rule on February 7, 2011, that revises the risk-based
assessment system for all large insured depository institutions. The
Bancorp anticipates a decline in FDIC insurance for the year
ended December 31, 2011, compared to levels incurred for the
year ended December 31, 2010.
The efficiency ratio (noninterest expense divided by the sum
of net interest income and noninterest income) was 60.7% and
46.9% for 2010 and 2009, respectively. The increase from 2009
was driven by the Processing Business Sale which resulted in a
pre-tax gain of $1.8 billion in 2009. Excluding the gain from the
Processing Business Sale, the efficiency ratio was 60.0% for 2009.
The Bancorp continues to focus on efficiency initiatives, as part of
its core emphasis on operating leverage and on expense control.
Applicable Income Taxes
The Bancorp’s income (loss) before income taxes, applicable
income tax expense (benefit) and effective tax rate for each of the
periods indicated are shown in Table 12. Applicable income tax
expense for all periods includes the benefit from tax-exempt
TABLE 12: APPLICABLE INCOME TAXES
For the years ended December 31 ($ in millions)
Income (loss) before income taxes and cumulative effect
Applicable income tax expense (benefit)
Effective tax rate
34 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS SEGMENT REVIEW
At December 31, 2010, the Bancorp reports on four business
segments: Commercial Banking, Branch Banking, Consumer
Lending and Investment Advisors. Additional detailed financial
information on each business segment is included in Note 31 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
level by employing a FTP methodology. This
corporate
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.
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 ALLL 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
independent entities.
they existed as
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) by business segment is summarized in the
following table.
if
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)
Less: Net income attributable to
(733)
632
(148)
98
(1,962)
(2,113)
(120)
324
23
53
457
737
$165
201
(40)
29
398
753
2008
2009
2010
noncontrolling interest
Net income (loss) attributable to Bancorp
Dividends on preferred stock
Net income (loss) available to common
-
753
250
-
737
226
-
(2,113)
67
shareholders
$503
511
(2,180)
Fifth Third Bancorp 35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Commercial Banking
Commercial Banking offers banking, cash management and
financial services to large and middle-market businesses and
government and professional customers. In addition to the
traditional lending and depository offerings, Commercial Banking
products and services include global cash management, foreign
exchange and international trade finance, derivatives and capital
markets services, asset-based lending, real estate finance, public
finance, commercial leasing and syndicated finance. The following
table contains selected financial data for the Commercial Banking
segment.
TABLE 14: COMMERCIAL BANKING
For the years ended December 31
($ in millions)
Income Statement Data
Net interest income (FTE) (a)
Provision for loan and lease
2010
$1,545
2009
2008
1,383
1,567
1,159
1,360
1,864
losses
Noninterest income:
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 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
346
199
90
254
-
736
31
(134)
$165
353
196
60
221
-
768
(357)
(237)
(120)
$38,304
10,872
8,432
2,823
41,341
8,581
6,018
2,457
3,014
2,017
4,376
1,275
401
186
91
243
750
675
(1,287)
(554)
(733)
43,198
6,206
4,632
4,046
2,293
1,835
Foreign office deposits
(a) Includes FTE adjustments of $14 for 2010, $13 for 2009 and $15 for 2008
Comparison of 2010 with 2009
Commercial Banking realized net income of $165 million in 2010
compared to a net loss of $120 million in 2009. This improvement
was primarily due to an increase in net interest income and a
decrease in provision for loan and lease losses partially offset by
growth in salaries, incentives and benefits. Net interest income
increased $162 million, or 12%, primarily due to a mix shift from
higher cost term deposits to lower cost deposit products which
resulted in a decrease to interest expense of 34% during 2010.
This improvement was partially offset by the negative impact to
net interest income of a decrease in average commercial loans
during 2010 and a decrease of $35 million in the accretion of
discounts on loans associated with the acquisition of First Charter
in 2008.
Provision for loan and lease losses decreased $201 million, or
15%, from 2009. Net charge-offs as a percent of average loans
and leases decreased from 329 bp in 2009 to 302 bp in 2010.
These decreases are primarily due to actions taken by the Bancorp
to address problem loans which resulted in significant net charge-
offs recorded in 2008 and 2009, as well as the impact of loss
mitigation activities such as suspending home builder and
developer lending and non-owner occupied commercial real estate
lending in 2007 and 2008, respectively, and tighter underwriting
standards across commercial loan product offerings.
Noninterest income increased $26 million, or four percent,
from 2009 primarily as a result of $24 million increase in gains on
private equity investments, included in other noninterest income,
and a $5 million increase in card and processing revenue due to an
36 Fifth Third Bancorp
increase in commercial credit card activity, partially offset by a $7
million decrease in corporate banking revenue. Corporate banking
revenue decreased from the prior year primarily as a result of a $6
million decrease in fees on letters of credit.
Noninterest expense was flat compared to 2009 due to an
increase in salaries, incentives and benefits offset by a decrease in
other noninterest expense. Salaries,
incentives and benefits
increased $33 million, or 15%, due to compensation related to
improved performance in the segment and an increase in
headcount during 2010. Loan and lease expense decreased $32
million, or four percent, as a result of lower loan demand during
2010, a decrease in collection related expenses and a decrease in
FDIC expenses due to a special assessment in the second quarter
of 2009.
Average commercial loans and leases decreased $3.0 billion,
or seven percent, compared to the prior year due to decreases
across all commercial loan categories. Commercial construction
loans decreased $1.5 billion, commercial and industrial loans
decreased $655 million, commercial mortgage loans decreased
$631 million and commercial leases decreased $209 million. These
decreases were the result of lower customer demand for new
originations, lower utilization rates on corporate lines and tighter
underwriting standards applied to both new commercial loan
originations and renewals. These impacts were partially offset by
the consolidation of $724 million of commercial and industrial
loans on January 1, 2010, which had a remaining balance of $372
million at December 31, 2010.
Average core deposits increased $5.8 billion, or 32%,
compared to 2009 due to the migration of higher priced
certificates of deposit into transaction accounts, as well as the
impact of historically low interest rates and excess customer
liquidity.
Comparison of 2009 with 2008
Commercial Banking reported a net loss of $120 million in 2009
compared to a net loss of $733 million in 2008. This improvement
was due to a $750 million goodwill impairment charge taken in
2008 and a $504 million decrease in the provision for loan and
lease losses in 2009, partially offset by a decrease in net interest
income of $184 million. The decrease in net interest income
compared to 2008 was primarily due to a decrease in the accretion
of
loans and deposits which
contributed $204 million to net interest income in 2008 compared
to $60 million in 2009. Average commercial loans and leases
decreased $1.9 billion, or four percent, due to lower utilization
rates on corporate lines, net charge-offs and tighter lending
standards implemented in the second half of 2008 and continued
throughout 2009.
loan discounts on acquired
Provision expense decreased from $1.9 billion in 2008 to $1.4
billion in 2009. Net charge-offs as a percent of average loans and
leases decreased to 329 bp from 432 bp in 2008 due primarily to
$800 million in net charge-offs in 2008 resulting from the sale or
transfer to held-for-sale of $1.3 billion in commercial and
industrial loans and commercial mortgage loans in the fourth
quarter of 2008.
Noninterest income decreased $69 million compared to 2008
due to a decrease in corporate banking revenue of $48 million and
a $31 million decline in other noninterest income, partially offset
by a $10 million increase in service charges on deposits.
Noninterest expense decreased $679 million compared to
2008 primarily due to goodwill impairment of $750 million in
2008. Excluding the goodwill impairment charge, noninterest
expense increased $71 million due to increases in FDIC and loan
and leases expenses.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Branch Banking
Branch Banking provides a full range of deposit and loan and
lease products to individuals and small businesses through 1,312
full-service banking centers. Branch Banking offers depository
and loan products, such as checking and savings accounts, home
equity loans and lines of credit, credit cards and loans for
automobiles and other personal financing needs, as well as
products designed to meet the specific needs of small businesses,
including cash management services. The following table contains
selected financial data for the Branch Banking segment.
TABLE 15: BRANCH BANKING
For the years ended December 31
($ 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
Card and processing 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
Savings and money market
Other time
2010
$1,501
2009
1,559
2008
1,714
542
369
303
106
115
552
223
102
664
311
110
$201
585
428
264
84
122
502
217
68
585
500
176
324
352
447
246
84
130
517
203
45
528
976
344
632
$12,944
4,815
6,936
7,332
19,963
12,712
13,096
5,335
6,363
7,395
17,010
16,995
12,665
5,600
6,008
7,845
16,184
13,749
Comparison of 2010 with 2009
Net income decreased $123 million, or 38%, compared to 2009
driven by an increase in noninterest expense and a decrease in net
interest income partially offset by a decrease in provision for loan
and lease losses. Net interest income decreased $58 million, or
four percent, compared to 2009 as the impact of lower loan
balances more than offset a favorable shift in the segment’s
deposit mix towards lower cost transaction deposits.
Provision for loan and lease losses decreased $43 million, or
seven percent, from 2009. Net charge-offs as a percent of average
loans and leases decreased from 317 bp in 2009 to 305 bp in 2010
as a result of a 36 bp decrease in consumer net charge-offs as a
percent of average consumer loans partially offset by a 52 bp
increase in commercial net charge-offs as a percent of average
commercial loans. The decrease in consumer net charge-offs was
primarily the result of a decrease in delinquencies, tighter
underwriting standards and signs of improvement in economic
conditions during 2010. The increase in commercial net charge-
offs was primarily due to $24 million of charge-offs taken on $60
million of commercial loans which were sold or moved to held for
sale during the third quarter of 2010.
Noninterest income decreased $5 million, or one percent,
from 2009 as decreases in service charges on deposits and other
noninterest income were partially offset by increases in card and
processing revenue and investment advisory revenue. Service
charges on deposits decreased $59 million, or 14%, compared to
2009 as a result of new regulations in 2010 that decreased income
on overdrafts. Card and processing revenue increased $39 million,
or 15%, from 2009 primarily due to an increase in debit and credit
card transactions that resulted in a 13% increase in both credit and
debit card interchange revenue. Investment advisory revenue
increased $22 million, or 26%, compared to 2009 primarily due to
an increase in retail brokerage transactions. Other noninterest
income decreased $7 million, or six percent, primarily due to the
CARD Act of 2009, which resulted in the reduction of certain
credit card fees.
Noninterest expense increased $169 million, or 12%, from
2009 due to increases in each category. Salaries, incentives and
benefits increased $50 million, or 10%, from the prior year due
primarily to additional branch personnel related to expanded
branch hours of operation and greater
incentive accruals
attributable to success in opening new deposit and brokerage
accounts. Net occupancy and equipment expense increased $6
million, or three percent, as a result of increases to rent expenses
during 2010. Card and processing expense increased $34 million,
or 50%, from 2009 due to increased costs associated with an
increase in credit and debit card transaction volumes during 2010.
Other noninterest expense increased $79 million, or 14%, due to
increases in loan and lease expense, marketing expense and other
allocated shared service expenses.
Average consumer loans decreased $152 million, or one
percent, and average commercial loans decreased $520 million, or
10%. The decrease in average consumer loans was the result of a
$311 million decrease in home equity loans due to a decrease in
demand and tighter underwriting standards that limited allowable
loan to value ratios, partially offset by a $254 million increase in
residential mortgage loans due to management’s decision to retain
certain residential mortgage loans in portfolio upon origination.
The decrease in average commercial loans was due to lower
customer demand for new originations, lower utilization rates on
corporate lines and tighter underwriting standards applied to both
new commercial loan originations and renewals.
Average core deposits were flat compared to 2009 as runoff
of higher priced consumer certificates of deposit, included in
other time deposits, was replaced with growth in transaction
accounts due to excess customer liquidity and low interest rates.
Comparison of 2009 with 2008
Net income decreased $308 million, or 49%, in 2009 compared to
2008 driven by decreases in net interest income and service fees
combined with a higher provision for loan and lease losses. Net
interest income decreased nine percent compared to 2008 due to a
$27 million decline in the accretion of discounts on acquired loans
and deposits combined with an increase in interest expense due to
higher average balances in other time deposits.
Net charge-offs as a percent of average loan and leases
increased to 317 bp in 2009, from 194 bp in 2008. Net charge-offs
increased compared to 2008 as the segment experienced higher
charge-offs on home equity lines and loans, commercial loans and
credit cards reflecting borrower stress and a decrease in home
values primarily within the Bancorp’s footprint.
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.
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.
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. In addition,
credit card balances grew $211 million, or 14%. Average core
deposits were up eight percent compared to 2008 primarily due to
growth in short term consumer certificates.
Fifth Third Bancorp 37
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consumer Lending
Consumer Lending includes the Bancorp’s mortgage, home
equity, automobile and other indirect lending activities. Mortgage
and home equity lending activities include the origination,
retention and servicing of mortgage and home equity loans or
lines of credit, sales and securitizations of those loans or pools of
loans or lines of credit and all associated hedging activities. Other
indirect lending activities include loans to consumers through
mortgage brokers and automobile dealers. The following table
contains selected financial data for the Consumer Lending
segment.
TABLE 16: CONSUMER LENDING
For the years ended December 31
($ 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
2010
2009
2008
$418
582
619
43
200
-
359
(61)
(21)
($40)
$9,384
851
9,713
384
494
574
526
101
187
-
324
36
13
$23
481
441
184
167
137
215
268
(229)
(81)
(148)
10,650
995
8,024
629
10,698
1,142
7,984
797
Comparison of 2010 with 2009
Consumer Lending reported a net loss of $40 million in 2010
compared to net income of $23 million in 2009 due to a decrease
in net interest income and an increase in noninterest expense
partially offset by an increase in noninterest income. Net interest
income decreased $76 million, or 15%, from 2009 primarily due to
a decrease in yields on average interest earning assets, which
includes the impact of a $21 million decrease in the accretion of
discounts on loans associated with the acquisition of First Charter
in 2008, partially offset by a decrease in funding costs during 2010.
Provision for loan and lease losses increased $8 million, or
one percent, from 2009. Net charge-offs as a percent of average
loans and leases decreased from 313 bp in 2009 to 309 bp in 2010.
The increase in provision for loan and lease losses from the prior
year was the result of a 23% increase in net charge-offs on
residential mortgage loans primarily due to $123 million in charge-
offs taken on $228 million of portfolio loans which were sold
during the third quarter of 2010. Automobile loan net charge-offs
decreased $44 million compared to 2009 as a result of tighter
underwriting standards implemented in 2008, maturation of the
automobile portfolio and higher resale values on automobiles sold
at auction. Home equity net charge-offs decreased $24 million
from 2009 due to run off of brokered home equity loans, the
origination of which were discontinued in 2007.
Noninterest income increased $35 million, or six percent, as
the result of an increase in mortgage banking net revenue partially
offset by a decrease in other noninterest income. Mortgage
banking net revenue increased $93 million, or 18%, from 2009
primarily due to an $89 million increase in net servicing revenue.
The increase in net servicing revenue was driven by a $56 million
increase in net valuation adjustments on MSRs and MSR
derivatives and a $24 million increase in servicing fees. Residential
mortgage loans serviced for others at December 31, 2010 and
2009 were $54.2 billion and $48.6 billion, respectively. Other
38 Fifth Third Bancorp
noninterest income decreased $58 million, or 57%, primarily due
to decreases in securities gains related to mortgage servicing rights
hedging activities and an increase in bankcard rewards program
costs recognized within fee income.
Noninterest expense increased $48 million, or nine percent,
due to increases in salaries, incentives and benefits and other
noninterest expense. Salaries, incentives and benefits increased
$13 million, or seven percent, from 2009 due to the continued
in 2010. Other
high
noninterest expense increased $35 million, or 11%, from 2009
primarily as a result of a $48 million increase in the representation
and warranty reserve partially offset by a $13 million decrease in
loan and lease expense.
levels of mortgage
loan originations
Average consumer loans were flat compared to 2009 as a
$1.7 billion increase in automobile loans was offset by decreases in
all other consumer loan and lease products. Average residential
mortgage loans decreased $1.3 billion from 2009 due to a decrease
in origination activity during the first half of 2010. Average home
equity loans decreased $144 million from 2009 due to the
previously mentioned run off of brokered home equity loans. The
increase in automobile loans was due to a change in U.S. GAAP
that required the Bancorp to consolidate certain automobile loans
on January 1, 2010 and a strategic focus to increase automobile
lending during 2010 through consistent and competitive pricing,
enhanced customer service with our dealership network and
disciplined sales execution. The automobile loans consolidated
due to the change in U.S. GAAP had an average balance of $920
million during 2010. Average consumer leases decreased $245
million due to run off of consumer
leases which were
discontinued in the fourth quarter of 2008.
Comparison of 2009 with 2008
Consumer Lending reported net income of $23 million in 2009
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, increases in net interest income and mortgage banking
net revenue in 2009 more than offset the growth in provision for
loan and lease losses.
Net interest income increased $13 million in 2009 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.
Mortgage banking net revenue increased $342 million due to
an increase in residential mortgage originations from $11.2 billion
in 2008 to $20.7 billion in 2009 due to lower interest rates and
government incentive programs offered to home buyers as well as
higher sales margins on sold loans. The decrease in other
noninterest income to $101 million in 2009 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 $36 million in other
credit related expenses and an increase in FDIC insurance
expenses.
Average residential mortgage loans and average automobile
loans remained relatively flat compared to 2008. Net charge-offs
as a percent of average loan and leases increased from 223 bp in
2008 to 313 bp in 2009.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for
Investment Advisors
investment
Investment Advisors provides a full range of
alternatives
individuals, companies and not-for-profit
organizations. Investment Advisors is made up of four main
businesses: FTS, an indirect wholly-owned subsidiary of the
Bancorp; FTAM, an indirect wholly-owned subsidiary of the
Bancorp; Fifth Third Private Bank; and Fifth Third Institutional
Services. FTS offers full service retail brokerage services to
individual clients and broker dealer services to the institutional
marketplace. Fifth Third Asset Management, Inc. provides asset
management services and also advises the Bancorp’s proprietary
family of mutual funds. Fifth Third Private Banking offers holistic
strategies to affluent clients
investing,
insurance and wealth protection. Fifth Third Institutional Services
provide advisory services for institutional clients including states
and municipalities. The following table contains selected financial
data for the Investment Advisors segment.
in wealth planning,
TABLE 17: INVESTMENT ADVISORS
For the years ended December 31
($ 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 and leases
Core deposits
2010
2009
2008
$138
44
346
10
156
249
45
16
$29
157
57
315
21
140
214
82
29
$53
191
49
354
32
159
217
152
54
98
$2,574
5,897
3,112
4,939
3,527
4,666
Comparison of 2010 with 2009
Net income decreased $24 million, or 45%, compared to 2009 as a
decrease in net interest income and an increase in noninterest
expense were partially offset by a decrease in provision for loan
and lease losses and an increase in investment advisory revenue.
Net interest income decreased $19 million, or 12%, from 2009
due to a decrease in average loans and leases partially offset by an
increase in the yield on interest earning assets.
Provision for loan and lease losses decreased $13 million, or
23%, from 2009. Net charge-offs as a percent of average loans
and leases decreased from 183 bp in 2009 to 171 bp in 2010
reflecting moderation of general economic conditions during
2010.
Noninterest income increased $20 million, or six percent,
compared to 2009 due to an increase in investment advisory
revenue partially offset by a decrease in other noninterest income.
Investment advisory revenue increased $31 million, or 10%,
compared to 2009 due to increases in securities and broker
income, private client service income and institutional income.
Securities and broker income increased $18 million, or 17%, from
2009 due to continued expansion of the sales force and effective
sales management, resulting in strong net asset and account
growth. Private client service income increased $11 million, or
eight percent, and institutional income increased $5 million, or
seven percent, from 2009 due to increases in the market value of
managed assets and an increase in transaction activity. Assets
under care increased from $182 billion at December 31, 2009 to
$266 billion at December 31, 2010 and managed assets increased
from $24 billion at December 31, 2009 to $25 billion at December
31, 2010.
Noninterest expense
increased $51 million, or 14%,
compared to 2009 due to an increase in salaries, incentives and
benefits and other noninterest expense. Salaries, incentives and
benefits increased $16 million, or 11%, primarily due to the
expansion of the sales force and compensation related to
improved performance in investment advisory revenue related
fees. Other noninterest expense increased $35 million, or 16%,
primarily due to an increase in expenses associated with the
revenue sharing agreement between Investment Advisors and
Branch Banking.
Average loans and leases decreased $538 million, or 17%,
from 2009 primarily due to a $418 million decrease in commercial
loans as a result of a decrease in demand and decrease in line
utilization rates among the Bancorp’s high net worth customers
due to excess liquidity. Average core deposits increased $958
million, or 19%, compared to 2009 primarily due to growth in
interest checking and foreign deposits as customers have opted to
maintain excess funds in liquid transaction accounts as rates
remained near historic lows.
Comparison of 2009 with 2008
Net income decreased $45 million in 2009, 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.
Noninterest income decreased $50 million in 2009 compared
to 2008, as investment advisory revenue decreased $39 million,
with private client services income declining $14 million and
institutional income declining $13 million, 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.
Fifth Third Bancorp 39
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General Corporate and Other
General Corporate and Other includes the unallocated portion of
the investment securities portfolio, securities gains and losses,
certain non-core deposit funding, unassigned equity, provision
expense in excess of net charge-offs or income from the reduction
of ALLL, 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 2010 with 2009
The results for 2010 were impacted by $789 million in income due
to a reduction in the ALLL during 2010 compared to $967 million
of provision expense recorded in excess of net charge-offs during
2009. The decrease in provision expense was due to a decrease in
nonperforming assets and improvement in credit trends as general
economic conditions began to show signs of moderation. The
2010 results were also impacted by $152 million of noninterest
income recognized from the settlement of litigation associated
with one of the Bancorp’s BOLI policies and $25 million of
noninterest expense from related legal fees associated with the
settlement. The results for 2009 were primarily impacted by a $1.8
billion pre-tax gain ($1.1 billion after tax) resulting from the
Processing Business Sale in the second quarter of 2009. Results
for 2009 also included a $244 million gain on the sale of the
Bancorp’s Visa Inc., Class B shares and a $73 million benefit from
the reversal of the Visa litigation reserve, an $18 million benefit in
income due to mark-to-market adjustments on
noninterest
warrants and put options related to the Processing Business Sale
and a $106 million tax benefit as a result of the Bancorp’s decision
to surrender one of its BOLI policies. These benefits were
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 dividends on preferred stock
of $226 million during 2009 compared to $250 million during
2010.
Comparison of 2009 with 2008
The results for 2009 were primarily impacted by the previously
mentioned Processing Business Sale, gain on the sale of the
Bancorp’s Visa Inc., Class B shares and benefit from the reversal
of the Visa litigation reserve, mark-to-market adjustments on
warrants and put options related to the Processing Business Sale,
and the tax benefit as a result of the Bancorp’s decision to
surrender one of its BOLI policies, partially offset by charges
reflecting reserves recorded in the connection with the intent to
surrender the policy. The results for 2008 were impacted by $273
million in income related to the redemption of a portion of Fifth
Third’s ownership interest 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, and $215 million in charges related to reduction
in the cash surrender value of one of the Bancorp’s BOLI policies.
Provision expense in excess of net charge-offs decreased from
$1.9 billion in 2008 to $967 million in 2009. Dividends on
preferred stock increased from $67 million in 2008 to $226 million
in 2009.
40 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOURTH QUARTER REVIEW
The Bancorp’s 2010 fourth quarter net income available to
common shareholders was $270 million, or $0.33 per diluted
share, compared to net income available to common shareholders
of $175 million, or $0.22 per diluted share, for the third quarter of
2010 and a net loss available to common shareholders of $160
million, or $0.20 per diluted share, for the fourth quarter of 2009.
Fourth quarter 2010 earnings included the impact of a $17 million
charge related to the early extinguishment of $1.0 billion in FHLB
borrowings as well as $21 million in net investment securities
gains. Third quarter 2010 results included a $127 million benefit,
net of expenses, from the settlement of litigation associated with
one of the Bancorp’s BOLI policies. Fourth quarter 2009 earnings
were impacted by the benefit of a $20 million pre-tax, mark-to-
market adjustment on warrants related to the Processing Business
Sale, offset by a $22 million pre-tax litigation reserve for litigation
associated with a bank card association membership. Provision
expense was $166 million in the fourth quarter of 2010, down
from $457 million in the third quarter of 2010 and $776 million in
the fourth quarter of 2009. Both the sequential decrease and the
decline from the fourth quarter of 2009 reflect improved credit
trends, as evidenced by a decrease in net charge-offs and
improvements in nonperforming assets and delinquent loans. The
allowance to loan and lease ratio was 3.88% as of December 31,
2010, compared to 4.20% as of September 30, 2010 and 4.88% as
of December 31, 2009.
Fourth quarter 2010 net interest income of $919 million
increased $3 million from the third quarter of 2010 and increased
$37 million from the same period a year ago. Net interest income
was affected by the loan and deposit discount accretion related to
the acquisition of First Charter in the second quarter of 2008,
which resulted in increases to net interest income of $15 million in
the fourth quarter 2010, $14 million in the third quarter 2010 and
$23 million in the fourth quarter of 2009. Excluding these
benefits, net interest income increased $2 million from the third
quarter of 2010 and increased $45 million from the fourth quarter
of 2009. The increase from the fourth quarter of 2009 was driven
by a 20 bp increase in the net interest margin, largely the result of
a mix shift from higher cost term deposits to lower cost deposit
products throughout 2010.
Noninterest income decreased $171 million compared to the
third quarter of 2010 and increased $5 million compared to the
fourth quarter of 2009. The sequential decline was driven by a
$152 million benefit from the settlement of litigation related to
one of the Bancorp’s BOLI policies in the third quarter of 2010,
as well as a 36% decrease in mortgage banking net revenue,
partially offset by an increase in corporate banking revenue.
Compared to the fourth quarter of 2009, increases in corporate
banking revenue, mortgage banking net revenue, investment
advisory revenue and card and processing revenue were largely
offset by a decrease in service charges on deposits and a $28
million decline in TSA revenue related to the Processing Business
Sale. The fourth quarter of 2010 included a benefit of $3 million
in mark-to-market adjustments on warrants and put options
related to the Processing Business Sale, compared to a negative $5
million adjustment in the third quarter of 2010 and a $20 million
benefit in the fourth quarter of 2009.
Mortgage banking net revenue was $149 million in the fourth
quarter of 2010, compared to $232 million in the third quarter of
2010 and $132 million in the fourth quarter of 2009. Fourth
quarter originations were $7.4 billion, compared to $5.6 billion in
the previous quarter and $4.8 billion in the same quarter last year.
These originations resulted in gains on mortgage loan sales activity
of $158 million in the fourth quarter of 2010, compared to $173
million in the third quarter of 2010 and $97 million in the fourth
quarter of 2009. Gain on sale margins declined compared to
record levels in the third quarter of 2010 due to rising mortgage
interest rates in the fourth quarter of 2010 but increased
compared to the fourth quarter of 2009 due to declining mortgage
interest rates in the fourth quarter of 2010 compared with the
fourth quarter of 2009. Also impacting mortgage banking net
revenue was net valuation adjustments on MSRs and MSR
derivatives. In the fourth quarter of 2010, losses on the Bancorp’s
free-standing MSR derivatives exceeded impairment reversal
recorded against the hedged MSRs. By comparison, in both the
third quarter of 2010 and the fourth quarter of 2009, gains on the
MSR derivatives exceeded impairment losses recognized against
the hedged MSRs. These factors led to a net loss of $20 million on
the net valuation adjustments on MSRs in the fourth quarter of
2010, compared to net gains of $46 million and $9 million in the
third quarter of 2010 and the fourth quarter of 2009, respectively.
A net gain on non-qualifying hedges on mortgage servicing rights
of $14 million in the fourth quarter of 2010 was included in
noninterest
income within the Consolidated Statements of
Income, but shown separate from mortgage banking net revenue.
Net gains on non-qualifying hedges on mortgage servicing rights
were immaterial in both the third quarter of 2010 and the fourth
quarter of 2009.
Service charges on deposits of $140 million decreased three
percent sequentially and decreased 12% compared to the fourth
quarter of 2009. Retail service charges declined nine percent from
the third quarter of 2010 and 26% from a year ago, largely driven
by the impact of Regulation E. Commercial service charges
increased three percent sequentially and two percent from the
same quarter last year due to an increase in fees for treasury
management services.
Corporate banking revenue of $103 million increased $17
million, or 21%, from the previous quarter and increased $14
million, or 16%, from the fourth quarter of 2009. The sequential
increase was driven primarily by higher loan syndication fee
revenue and lease remarketing fees, as well as growth in business
lending fees and foreign exchange revenue due primarily to higher
loan volumes. Compared to the fourth quarter of 2009, increased
loan syndication and lease remarketing fees, as well as revenue
from interest rate derivative sales and business lending fees, more
than offset a decline in institutional sales.
Investment advisory revenue of $93 million increased four
percent sequentially and eight percent from the fourth quarter of
2009. The sequential growth was driven by higher private client
service revenue, institutional trust revenue and brokerage fees due
to market value increases and improved sales production resulting
in improved net asset and account growth. Including the
previously mentioned impacts, the increase from the fourth
quarter of 2009 also reflected an overall increase in equity and
bond market values.
Card and processing revenue of $81 million increased five
percent compared to the third quarter of 2010 and increased
seven percent from the fourth quarter of 2009. Both increases
were driven by higher transaction volumes.
The net gain on investment securities was $21 million in the
fourth quarter of 2010 compared to a net gain of $4 million in the
third quarter of 2010 and a net gain of $2 million in the fourth
quarter of 2009.
Noninterest expense of $987 million increased $8 million
sequentially and increased $20 million from the fourth quarter of
2009. Fourth quarter 2010 results included $17 million of
expenses related to the early termination of $1.0 billion in FHLB
borrowings as well as $11 million of expenses related to the TSA.
Third quarter 2010 results included $25 million in legal expenses
associated with the settlement of litigation associated with one of
the Bancorp’s BOLI policies and $13 million of expenses related
to the TSA, while fourth quarter 2009 included a $22 million
reserve established for litigation associated with bank card
Fifth Third Bancorp 41
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
memberships and $39 million of expenses related to the TSA.
Excluding these items, noninterest expense increased $16 million
sequentially and $25 million from the fourth quarter of 2009
driven by higher compensation expense due to sales force
lower credit-related expenses.
expansion, partially offset by
Expenses incurred related to problem assets totaled $53 million in
the fourth quarter of 2010, compared to $67 million in the third
quarter of 2010 and $73 million in the fourth quarter of 2009.
Net charge-offs totaled $356 million in the fourth quarter of
2010, compared to $956 million in the third quarter of 2010 and
$708 million in the fourth quarter of 2009. Third quarter 2010 net
charge-offs included $510 million related to the sale or transfer of
loans to held-for-sale. Excluding these losses, net charge-offs
declined $90 million from the third quarter of 2010. The decreases
in net charge-offs from both periods reflects continued
improvement in the credit quality of portfolio loans. Commercial
net charge-offs were $173 million in the fourth quarter of 2010,
compared to $627 million in the third quarter of 2010 and $468
million in the fourth quarter of 2009. Third quarter 2010 net
charge-offs include $387 million from the transfer of commercial
loans to held-for-sale. Excluding these losses, commercial net
charge-offs declined $67 million from the third quarter of 2010.
Consumer net charge-offs were $183 million in the fourth quarter
of 2010, compared to $329 million in the third quarter of 2010
and $240 million in the fourth quarter of 2009. Third quarter 2010
net charge-offs include $123 million in net charge-offs on the sale
of portfolio residential mortgage loans during the quarter.
Excluding these losses, consumer net charge-offs decreased $23
million from the third quarter of 2010. The provision for loan and
lease losses totaled $166 million in the fourth quarter of 2010
compared to $457 million in the third quarter of 2010 and $776
million in the fourth quarter of 2009. The decrease from each
quarter was primarily due to a decline in delinquent loans and net
charge-offs.
COMPARISON OF THE YEAR ENDED 2009 WITH 2008
Net income available to common shareholders for the year ended
2009 was $511 million, or $0.67 per diluted share, compared to a
net loss available to common shareholders of $2.2 billion, or $3.91
per diluted share, in 2008. Overall, a $1.8 billion pre-tax gain on
the Processing Business Sale and $244 million of noninterest
income on the sale of the Bancorp’s Visa, Inc. Class B shares as
well as an increase in mortgage banking net revenue and a
decrease in the provision for loan and lease losses of $1.0 billion
compared to 2008, were partially offset by decreases in net interest
income and card and processing revenue. In addition, the Bancorp
recorded a $965 million goodwill impairment charge in 2008.
While
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
late 2009, which led to the decrease in provision expense. The
2008 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.
the Bancorp continued
Net interest income decreased five percent compared to
2008. This was primarily due to a 21 bp decline in the net interest
rate spread, as well as a decrease in the benefit from the accretion
of purchase accounting adjustments related
the 2008
acquisition of First Charter, which added $136 million to net
interest income in 2009 compared to $358 million in 2008. Net
interest margin decreased to 3.32% in 2009 from 3.54% in 2008.
to
Noninterest income increased 62% compared to 2008. This
was 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. Mortgage banking net revenue increased
$354 million as a result of strong growth in originations, which
were up 89% to $21.7 billion in 2009. Card and processing
revenue decreased 33% compared to 2008 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, or 16%
compared to 2008. Noninterest expense in 2008 included the
previously mentioned goodwill
impairment charge of $965
million. 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 TLGP, as well as increased loan
related expenses from higher mortgage origination volume and
expenses incurred from the management of problem assets.
In 2009, net charge-offs as a percent of average loans and
leases remained relatively steady at 320 bp, compared to 323 bp in
2008. This was impacted by a decrease of $446 million in
commercial loan net charge-offs due primarily to net charge-offs
of $800 million on $1.3 billion on loans moved to held-for-sale or
sold in the fourth quarter of 2008. These actions were taken to
address areas of the loan portfolio exhibiting the most significant
credit deterioration. In addition, residential mortgage net 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. At December 31, 2009, nonperforming assets as
a percent of loans and leases increased to 4.22% from 2.38% at
December 31, 2008. The Bancorp increased its allowance for loan
and lease losses as percent of loans and leases from 3.31% as of
December 31, 2008 to 4.88% as of December 31, 2009.
The Bancorp took a number of 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
and cash issued. See the Capital Management section of MD&A
for further information on the Bancorp’s capital transactions.
42 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BALANCE SHEET ANALYSIS
Loans and Leases
The Bancorp classifies its loans and leases based upon the primary
purpose of the loan. Table 18 summarizes end of period loans and
leases, including loans held for sale, and Table 19 summarizes
average total loans and leases, including loans held for sale.
At December 31, 2010, total loans and leases, including loans
held for sale, increased $861 million, or one percent, compared to
December 31, 2009. The increase consisted of a $2.1 billion
increase in consumer loans partially offset by a $1.3 billion
decrease in commercial loans. In accordance with a change in U.S.
GAAP, on January 1, 2010 the Bancorp consolidated certain
commercial and industrial, automobile and home equity loans with
remaining outstanding balances of $372 million, $648 million and
$241 million, respectively, at December 31, 2010. Excluding the
impact of this change in U.S. GAAP, total loans and leases were
relatively flat compared to December 31, 2009. For further
discussion on this change in U.S. GAAP, refer to Note 1 of the
Notes to Consolidated Financial Statements.
in commercial construction
Total commercial loans and leases decreased $1.3 billion, or
three percent, compared to December 31, 2009 primarily as the
loans and
result of decreases
commercial mortgage loans, partially offset by an increase in
commercial and industrial loans. Commercial construction loans
decreased $1.8 billion, or 45%, from December 31, 2009 primarily
due to management’s strategy to suspend new lending on
commercial non-owner occupied real estate beginning in 2008 and
the outflow of completed construction projects that were
transitioned to commercial mortgage loans. Despite the transition
of commercial construction loans, commercial mortgage loans
decreased $944 million, or eight percent, from December 31, 2009
due to tighter underwriting standards on commercial real estate
loans in an overall effort to limit exposure to commercial real
estate. Commercial and industrial loans increased $1.6 billion, or
six percent, compared to December 31, 2009 as a result of the
previously mentioned change in U.S. GAAP and an increase in
new loan originations activity, primarily due to an increase in
customer demand with continued growth in the manufacturing
and healthcare industries. This increase was partially offset by an
$856 million decrease in loans originally issued to FTPS in
conjunction with the Processing Business Sale; FTPS refinanced
the original $1.25 billion in loans into a larger syndicated loan
structure in connection with an acquisition.
Total consumer loans and leases increased $2.1 billion, or six
percent, from December 31, 2009. This increase was primarily the
result of increases in automobile loans and residential mortgage
loans, partially offset by a decrease in home equity loans.
Automobile loans increased $2.0 billion, or 22%, compared to
December 31, 2009 primarily as a result of the previously
mentioned impact on automobile loans due to the change in U.S.
GAAP and a strategic focus to increase automobile lending during
2010 through consistent and competitive pricing, enhanced
customer service with our dealership network and disciplined sales
execution. Residential mortgage loans increased $1.0 billion, or
10%, from December 31, 2009 as a result of a 51% increase in
origination activity for the fourth quarter of 2010 compared to the
fourth quarter of 2009 and management’s decision in the third
quarter of 2010 to retain certain mortgage loans primarily
originated through the Bancorp’s retail branches. Home equity
loans decreased $660 million, or five percent, from December 31,
2009 as tighter underwriting standards and a decrease in customer
demand were partially offset by the previously mentioned impact
on home equity loans due to the change in U.S. GAAP. Credit
card loans decreased $94 million, or five percent, as a result of a
decrease in new account origination activity throughout 2010.
Other consumer loans and leases, primarily made up of student
loans designated as held for sale and automobile leases, decreased
$110 million, or 14%, due to a decline in new originations driven
by tighter underwriting standards.
Average commercial loans and leases decreased $3.9 billion,
or eight percent, compared to 2009. The decrease in average
commercial loans consisted of a decrease of $1.6 billion, or 34%,
in average commercial construction loans, $1.2 billion, or four
percent, in average commercial and industrial loans and $926
million, or seven percent, in average commercial mortgage loans.
These decreases were driven by lower customer line utilization
rates, lower demand for new loans and tighter underwriting
standards on commercial real estate loans to manage risk, partially
offset by the impact of the previously discussed change in U.S.
GAAP. Commercial and industrial loans experienced an increase
in origination activity primarily during the fourth quarter of 2010
which led to a higher period end balance at December 31, 2010
compared to December 31, 2009
Average consumer loans and leases were relatively flat
compared to 2009. An increase in average automobile loans of
$1.6 billion, or 18%, was offset by decreases in average residential
mortgage loans of $1.0 billion, or nine percent, and average home
equity loans of $538 million, or four percent. The impact of the
previously mentioned consolidation of automobile and home
equity loans was largely offset by a decrease in customer demand
and
standards. Residential mortgage
originations in 2009 were higher than in 2010 resulting in a lower
annual average; however volume of new originations during the
fourth quarter of 2010 were greater than the fourth quarter of
2009 resulting in a higher period end balance at December 31,
2010 compared to December 31, 2009.
tighter underwriting
TABLE 18: COMPONENTS OF TOTAL LOANS AND LEASES (INCLUDES HELD FOR SALE)
As of December 31 ($ in millions)
Commercial:
2009
2010
Commercial and industrial 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)
$27,275
10,992
2,111
3,378
43,756
10,857
11,513
10,983
1,896
702
35,951
$79,707
$77,491
25,687
11,936
3,871
3,535
45,029
9,846
12,174
8,995
1,990
812
33,817
78,846
76,779
2008
29,220
12,731
5,335
3,666
50,952
10,292
12,752
8,594
1,811
1,194
34,643
85,595
84,143
2007
26,079
11,967
5,561
3,737
47,344
11,433
11,874
11,183
1,591
1,157
37,238
84,582
80,253
2006
20,831
10,405
6,168
3,841
41,245
9,905
12,154
10,028
1,004
1,167
34,258
75,503
74,353
Fifth Third Bancorp 43
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 19: COMPONENTS OF AVERAGE TOTAL LOANS AND LEASES (INCLUDES HELD FOR SALE)
As of December 31 ($ in millions)
2008
Commercial:
2009
2010
Commercial and industrial 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)
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, 2010, total
investment securities were $16.1 billion compared to $18.9 billion
at December 31, 2009. See Note 1 of the Notes to Consolidated
Financial Statements for the Bancorp’s methodology for both
classifying investment securities and management’s evaluation of
securities in an unrealized loss position for OTTI.
At December 31, 2010, the Bancorp’s investment portfolio
primarily consisted of AAA-rated agency mortgage-backed
securities. In 2010, the Bancorp recognized $3 million of OTTI
on its investment securities portfolio. During the year ended
December 31, 2009, OTTI was immaterial to the Consolidated
Financial Statements. In 2008, the Bancorp recognized OTTI
charges of $67 million on FHLMC and FNMA preferred stock
and $37 million on certain trust preferred securities. Upon a
change in U.S. GAAP in 2009, the Bancorp concluded that the
OTTI charges on these trust preferred securities were due to non-
credit related factors and therefore, recognized an increase of $37
million to the investment balance and related unrealized losses.
The Bancorp did not hold asset-backed securities backed by
subprime mortgage loans in its investment portfolio as of, or for
the years ended December 31, 2010 and 2009. Additionally, there
was approximately $137 million of securities classified as below
investment grade as of December 31, 2010, compared to $178
million as of December 31, 2009.
As of December 31, 2010, available-for-sale securities on an
amortized cost basis decreased $3.0 billion from December 31,
2009. The decrease included the impact of a change in U.S.
GAAP that required the Bancorp to consolidate certain VIEs,
resulting in the elimination of $805 million in commercial paper
and $236 million of residual interests classified as available-for-sale
TABLE 20: COMPONENTS OF INVESTMENT SECURITIES
As of December 31 ($ 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 (amortized cost basis):
Obligations of states and political subdivisions
Other bonds, notes and debentures
Total held-to-maturity
Trading (fair value):
Variable rate demand notes
Other securities
Total trading
44
Fifth Third Bancorp
$26,334
11,585
3,066
3,343
44,328
9,868
11,996
10,427
1,870
743
34,904
$79,232
$77,045
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
2007
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
20,504
9,797
6,015
3,730
40,046
9,574
12,070
9,570
838
1,395
33,447
73,493
72,447
securities on January 1, 2010. Further impacting the available-for-
sale securities were approximately $1.1 billion in sales and
paydowns on agency mortgage-backed securities, primarily related
to the FNMA and FHLMC delinquent loan buy-back programs in
the second quarter of 2010, and management’s decision not to
fully reinvest cash flows in securities due to the low market rate
environment. In addition, sales of $579 million of FNMA and
FHLMC agency debentures, $151 million of commercial
mortgage-backed securities and commercial mortgage obligations
and $103 million of trust preferred securities as well as $150
million in paydowns on other asset-backed securities further drove
the decline from December 31, 2009.
At December 31, 2010, available-for-sale securities decreased
to 15% of interest-earning assets, compared to 18% at December
31, 2009. This was due to a 17% decrease in the available-for-sale
portfolio as discussed above, partially offset by the impact of a
four percent decline in average interest earning assets. The
estimated weighted-average life of the debt securities in the
available-for-sale portfolio was 4.4 years at December 31, 2010
and 2009. At December 31, 2010, the fixed-rate securities within
the available-for-sale securities portfolio had a weighted-average
yield of 4.24% compared to 4.48% at December 31, 2009.
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 declined from 2009, which led to net
unrealized gains on agency mortgage-backed securities of $403
million, compared to $323 million as of December 31, 2009. Total
net unrealized gains on the available-for-sale securities portfolio
were $495 million at December 31, 2010, compared to $334
million at December 31, 2009.
2010
$225
1,564
170
10,570
1,338
1,052
$14,919
$348
5
$353
$106
188
$294
2009
$464
2,143
240
11,074
2,541
1,417
17,879
350
5
355
235
120
355
2008
186
1,651
323
8,529
613
1,248
12,550
355
5
360
1,140
51
1,191
2007
3
160
490
8,738
385
1,045
10,821
351
4
355
-
171
171
2006
1,396
100
603
7,999
172
966
11,236
345
11
356
-
187
187
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 21: CHARACTERISTICS OF AVAILABLE-FOR-SALE AND OTHER SECURITIES
As of December 31, 2010 ($ 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
$25
100
100
-
225
80
51
1,433
-
1,564
126
4
8
32
170
264
8,579
1,668
59
10,570
131
801
337
69
1,338
1,052
$14,919
$25
101
104
-
230
81
51
1,513
-
1,645
126
5
9
32
172
270
8,956
1,689
58
10,973
131
812
330
69
1,342
1,052
$15,414
0.3
1.4
8.9
-
4.6
0.2
1.7
5.9
-
5.5
0.1
2.8
9.4
11.0
2.7
0.7
3.8
6.8
10.3
4.2
0.5
2.6
6.0
23.0
4.3
4.4
0.91%
1.20
3.57
-
2.22
3.35
1.54
3.75
-
3.66
4.20
8.21
6.27
5.98
4.73
4.85
4.40
4.30
4.09
4.40
1.11
4.37
3.60
7.21
4.00
4.24%
(a) Taxable-equivalent yield adjustments included in the above table are 1.45%, 2.83%, 2.16%, 2.06% and 1.63% 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 non-agency mortgage backed securities, certain other asset backed securities (primarily automobile and commercial loan backed securities) and
(c) Other securities consist of FHLB and FRB restricted stock holdings that are carried at par, FHLMC and FNMA preferred stock, certain mutual fund holdings and equity security
corporate bond securities.
holdings.
Trading securities decreased from $355 million at December
31, 2009 to $294 million at December 31, 2010. 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 and into
2010, 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 agency mortgage-backed
securities classified as available-for-sale. The Bancorp continued
to sell the VRDNs throughout 2010, resulting in the decrease
from December 31, 2009. For more information on the VRDNs,
see Note 18 of the Notes to Consolidated Financial Statements.
Included in trading securities as of December 31, 2010 were $6
million of auction rate securities, which had an unrealized loss of
$1 million. The Bancorp held $13 million of auction rate securities
in its trading portfolio at December 31, 2009, which had an
unrealized loss of $4 million.
Fifth Third Bancorp 45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 22: DEPOSITS
As of December 31 ($ 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
Deposits
Deposit balances represent an important source of funding and
revenue growth opportunity. The Bancorp continues to focus on
core deposit growth in its retail and commercial franchises by
improving customer satisfaction, building complete relationships
and offering competitive rates. At December 31, 2010, core
deposits represented 70% of the Bancorp’s asset funding base
compared to 68% at December 31, 2009.
Core deposits increased $765 million, or one percent,
compared to 2009 due primarily to increases of $3.0 billion in
savings and $2.0 billion in demand deposits which was primarily
the result of excess customer liquidity. In addition, foreign office
deposits increased $1.3 billion due to an increase in commercial
customer deposits due to excess customer liquidity, and those
customers opting to sweep additional funds into these accounts
for the higher interest rates. These increases were partially offset
by the continued run-off of higher priced certificates included in
other time deposits, which declined $4.7 billion, or 38%,
compared to December 31, 2009, as well as a decline in interest
2010
$21,413
18,560
20,903
5,035
3,721
69,632
7,728
77,360
4,287
1
$81,648
2010
$19,669
18,218
19,612
4,808
3,355
65,662
10,526
76,188
6,083
6
$82,277
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
checking due primarily to rate management actions on single
product public funds accounts in the second half of 2010.
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 pledge 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, 2010 decreased $3.4 billion compared to
December 31, 2009 as customers opted to maintain their balances
in liquid accounts due to historically low interest rates.
On an average basis, core deposits increased $6.9 billion, or
10%, due to increases in interest checking of $3.1 billion, demand
deposits of $2.8 billion, savings deposits of $2.7 billion and
foreign office deposits of $1.2 billion, partially offset by a decrease
in other time deposits of $3.6 billion. This activity was the result
of the migration of higher priced certificates included in other
time deposits into transaction accounts, as well as the impact of
historically low rates and excess customer liquidity.
46 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Borrowings
Total borrowings declined $693 million from December 31, 2009,
as the result of a decrease in long-term debt partially offset by an
increase
in federal funds purchased and other short-term
borrowings.
Long-term debt at December 31, 2010 decreased $949
million, or nine percent, compared to December 31, 2009
primarily as the result of the repayment of $1.0 billion in FHLB
advances during the fourth quarter of 2010 and the maturity of
$800 million of long-term debt in the first quarter of 2010. These
declines were partially offset by the impact of a change in U.S.
GAAP which required the Bancorp to consolidate long-term debt
on January 1, 2010 that had an outstanding balance of $692
million as of December 31, 2010.
Average borrowings declined $5.2 billion from 2009,
primarily as a result of repayment of term auction facility funds
and FHLB advances throughout 2009 which contributed $3.7
billion and $1.2 billion, respectively, to average balances in 2009.
These repayments were made possible by a decrease in loan
demand combined with growth in deposits during 2009. See the
Capital Management Section for additional information.
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.
On January 25, 2011, the Bancorp issued $1.0 billion of
senior notes to third party investors, bearing a fixed rate of
interest of 3.625% per annum. The notes are unsecured, senior
obligations of the Bancorp and mature on January 25, 2016. See
Note 32 of the Notes to Consolidated Financial Statement for
further information on the debt issuance.
TABLE 24: BORROWINGS
As of December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total borrowings
TABLE 25: AVERAGE BORROWINGS
As of December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total borrowings
2010
$279
1,574
9,558
$11,411
2010
$291
1,635
10,902
$12,828
2009
182
1,415
10,507
12,104
2009
517
6,463
11,035
18,015
2008
287
9,959
13,585
23,831
2008
2,975
7,785
13,903
24,663
2007
4,427
4,747
12,857
22,031
2007
3,646
3,244
12,505
19,395
2006
1,421
2,796
12,558
16,775
2006
4,148
8,670
14,247
27,065
Fifth Third Bancorp 47
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
approach includes processes for identifying, assessing, managing,
monitoring and reporting risks. The ERM division, led by the
Bancorp’s Chief Risk Officer, ensures the consistency and
adequacy of the Bancorp’s risk management approach 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
integrated and
management practices
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. The Bancorp’s policy currently
discounts its risk capacity by five percent to provide a buffer; as a
result, the Bancorp’s risk appetite is limited by policy to 95% of its
risk capacity.
Economic capital is the amount of unencumbered financial
resources necessary to support the Bancorp’s risks. The Bancorp
measures economic capital under the assumption that it expects to
maintain debt ratings at strong investment grade levels over time.
The Bancorp’s capital policies require that the economic capital
necessary in its business not exceed its 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 its
shareholders, regulators, rating agencies and customers, the
Bancorp’s risk appetite is aligned with its priorities and goals. 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 primarily in qualitative
terms. 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.
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 is managed through
the Bancorp’s risk program. ERM includes the following key
functions:
•
•
•
soundness within
Enterprise Risk Management Programs is responsible
for developing and overseeing the implementation of risk
programs and reporting that facilitate a broad integrated
view of risk. The department also leads the ongoing
development of a strong risk management culture and the
framework, policies and committees that support effective
risk governance;
Commercial Credit Risk Management provides safety
and
independent portfolio
an
management framework that supports the Bancorp’s
commercial
loan growth strategies and underwriting
practices, ensuring portfolio optimization and appropriate
risk controls;
Risk Strategies and Reporting
is responsible for
quantitative analysis needed to support the commercial
dual grading system, ALLL methodology and analytics
needed to assess credit risk and develop mitigation
strategies related to that risk. The department also
48 Fifth Third Bancorp
provides oversight,
and monitoring of
reporting
commercial underwriting and credit administration
processes. The Risk Strategies and Reporting department
is also responsible for the economic capital program;
Consumer Credit Risk Management provides safety and
soundness within an independent management framework
loan growth
that supports the Bancorp’s consumer
strategies, ensuring portfolio optimization, appropriate
risk controls and oversight, reporting, and monitoring of
underwriting and credit administration processes;
Operational Risk Management works with affiliates and
lines of business to maintain processes to monitor and
manage all aspects of operational risk including ensuring
consistency in application of operational risk programs
and Sarbanes-Oxley compliance;
Bank Protection oversees
fraud
prevention and detection and provides investigative and
recovery services for the Bancorp;
Capital Markets Risk Management is responsible for
instituting, monitoring, and reporting appropriate trading
limits, monitoring liquidity, interest rate risk, and risk
tolerances within Treasury, Mortgage, 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
fiduciary
and
regulations,
state banking
compliance processes. The
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.
including
function also has
and manages
•
•
•
•
•
•
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 five 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
the formation of key
Board of Directors has approved
management governance committees that are responsible for
evaluating risks and controls. The primary committee responsible
for the oversight of risk management is the ERMC. Committees
accountable to the ERMC, which support the core risk programs,
are the Corporate Credit Committee, the Operational Risk
Committee,
the
Executive Asset Liability Management Committee and the
Enterprise Marketing Committee. Other committees accountable
to the ERMC oversee the ALLL, capital and community
reinvestment act/fair lending functions. 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
committees are also reviewed and approved by the Risk and
Compliance Committee of the Board of Directors.
the Management Compliance Committee,
launching a new product or
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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Lending officers with
the authority to extend credit are delegated specific authority
amounts,
is closely monitored.
Underwriting activities are centrally managed, 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 the adequacy of the allowance for credit losses 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 six grade categories for estimating 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
in the Bancorp's homogenous consumer and small business loan
portfolios.
Overview
General economic conditions remained weak throughout most of
2009, but showed some signs of moderation during 2010. These
conditions negatively impacted the 2009 performance of a
majority of the Bancorp's loan and lease products. Geographically,
the Bancorp continues to experience the most stress in Michigan
and Florida due to the decline in real estate values. Real estate
value 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 state's economic
downturn. Among commercial portfolios, the homebuilder and
developer and the remaining non-owner occupied commercial real
estate portfolios remained under stress throughout 2009 and 2010.
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 tightened underwriting standards across both the commercial
and consumer loan product offerings. Since the fourth quarter of
2008, in an effort to reduce loan exposure to the real estate and
construction industries, the Bancorp has sold certain consumer
loans and sold or transferred to held for sale certain commercial
loans. Throughout 2009 and 2010, the Bancorp continued to
aggressively engage in other loss mitigation strategies such as
reducing credit commitments, restructuring certain commercial
and consumer
loans, tightening underwriting standards on
commercial loans and across the consumer loan portfolio, as well
as utilizing expanded commercial and consumer loan workout
teams. In the financial services
industry, there has been
heightened focus on foreclosure activity and processes in recent
months due to issues concerning documentation supporting
foreclosures. Fifth Third actively works with borrowers
experiencing difficulties and has modified or provided forbearance
to borrowers on approximately $1.8 billion of its own mortgages
during the past several years where a workable solution could be
found. Foreclosure is a last resort, and the Bancorp undertakes
foreclosures only when it believes they are necessary and
appropriate and are careful to ensure that customer and loan data
are accurate. The Bancorp conducted reviews of its foreclosure
processes and procedures in the third quarter of 2010, which did
not reveal any material deficiencies, and has continued to expand
and extend these reviews and improve its processes as additional
aspects of the industry’s foreclosure practices have come under
intensified scrutiny and criticism. These reviews are ongoing and
the Bancorp may determine to amend
its processes and
procedures as a result of these reviews. While any impact to the
Bancorp that ultimately results from continued reviews cannot yet
be determined, management currently believes that such impact
will not materially adversely affect the Bancorp's results of
operations, liquidity or capital resources.
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 LTV, minimum debt
service coverage ratios, construction loan monitoring procedures,
appraisal requirements, pre-leasing 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. It is the Bancorp’s policy to obtain an “as
is value” appraisal annually on all criticized assets. Independent
reviews are performed on appraisals to ensure the appraiser is
qualified and consistency in the evaluation process exists.
Fifth Third Bancorp 49
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Table 26 provides detail on total commercial loan and leases, excluding 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.
TABLE 26: COMMERCIAL LOAN AND LEASE PORTFOLIO EXPOSURE
As of December 31 ($ in millions)
By industry:
Real estate
Manufacturing
Financial services and insurance
Healthcare
Business services
Wholesale trade
Construction
Retail trade
Transportation and warehousing
Other services
Communication and information
Accommodation and food
Mining
Entertainment and recreation
Individuals
Public administration
Utilities
Agribusiness
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
Illinois
Florida
Indiana
Kentucky
North Carolina
Tennessee
Pennsylvania
All other states
Total
Outstanding
2010
Exposure Nonaccrual
Outstanding
2009
Exposure
Nonaccrual
$8,295
7,202
3,830
3,402
3,314
2,926
2,789
2,548
2,074
1,062
1,004
953
851
788
690
616
595
483
40
$43,462
3 %
10
21
13
25
28
100 %
25 %
15
8
8
6
5
3
3
2
25
100 %
9,532
14,979
8,184
5,421
5,379
5,689
4,124
5,377
2,566
1,473
1,668
1,476
1,443
1,012
830
848
1,600
621
119
72,341
2
8
17
11
25
37
100
29
13
8
7
6
4
3
3
2
25
100
378
149
78
35
50
18
242
48
15
35
7
26
19
7
10
9
-
85
3
1,214
8
25
34
8
19
6
100
17
22
8
17
7
5
4
1
1
18
100
10,091
6,289
4,354
3,004
2,643
2,248
3,759
2,678
2,503
1,127
792
1,019
765
740
737
681
473
585
317
44,805
3
12
26
13
24
22
100
28
16
8
9
6
5
3
2
2
21
100
11,622
13,093
8,702
4,921
4,595
4,632
5,281
5,552
3,003
1,558
1,346
1,505
1,182
949
905
877
1,310
742
679
72,454
2
9
20
11
26
32
100
31
14
9
7
6
5
3
2
2
21
100
915
204
40
67
49
48
700
104
51
33
8
58
16
15
19
-
-
59
6
2,392
4
18
39
18
17
4
100
15
18
9
26
6
4
1
4
-
17
100
The Bancorp has identified certain categories of commercial loans
which it believes represent a higher level of risk, as compared to
the rest of the Bancorp’s commercial loan portfolio, due to
economic or market conditions in the Bancorp’s key lending areas.
Tables 27 – 30 provide analysis of each of the categories of
commercial loans, excluding loans held for sale, as of and for the
years ended December 31, 2010 and 2009.
TABLE 27: NON-OWNER OCCUPIED COMMERCIAL REAL ESTATE
As of December 31, 2010 ($ in millions)
By State:
Ohio
Michigan
Florida
Illinois
North Carolina
Indiana
All other states
Total
50 Fifth Third Bancorp
Outstanding
$2,332
1,695
935
568
392
387
751
$7,060
Exposure
2,565
1,809
1,022
654
438
419
823
7,730
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2010
2
2
1
-
-
-
-
5
90
85
120
39
37
19
39
429
119
123
180
65
58
32
48
625
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 28: NON-OWNER OCCUPIED COMMERCIAL REAL ESTATE
As of December 31, 2009 ($ 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
$9,541
Exposure
3,250
2,193
1,611
935
768
553
1,345
10,655
TABLE 29: HOME BUILDER AND DEVELOPER (a)
As of December 31, 2010 ($ in millions)
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
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2010
By State:
Ohio
Michigan
Florida
North Carolina
Indiana
All other states
Total
39
65
81
33
13
43
274
(a) Home Builder and Developer loans, exclusive of commercial and industrial loans with an outstanding balance of $134 and a total exposure of $319 are also included in Table 27: Non-Owner
35
23
44
10
8
20
140
-
1
-
-
-
-
1
Outstanding
$202
151
103
68
67
108
$699
Exposure
331
212
117
80
85
159
984
Occupied Commercial Real Estate
.
TABLE 30: HOME BUILDER AND DEVELOPER (a)
As of December 31, 2009 ($ in millions)
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2009
By State:
Ohio
Michigan
Florida
North Carolina
Indiana
All other states
Total
34
77
98
49
9
91
358
(a) Home Builder and Developer loans, exclusive of commercial and industrial loans with an outstanding balance of $200 and a total exposure of $461 are also included in Table 28: Non-Owner
73
63
136
95
12
94
473
2
7
4
3
-
3
19
Outstanding
$346
278
318
229
108
284
$1,563
Exposure
542
351
336
260
133
383
2,005
Occupied Commercial Real Estate
Consumer Portfolio
The Bancorp’s consumer portfolio is materially comprised of
three categories of loans: residential mortgage, home equity, and
automobile loans. The Bancorp has identified certain categories
within these loan types which it believes represent a higher level
of risk compared to the rest of the consumer loan portfolio due to
high 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 $1.3 billion of adjustable rate residential mortgage
loans will have rate resets in 2011, with less than one percent of
those resets expected to experience an increase in monthly
payments.
Certain residential mortgage products have contractual
features that may increase credit exposure to the Bancorp in the
event of a decline in housing prices. These types of mortgage
products offered by the Bancorp include loans with high LTV
ratios, multiple loans on the same collateral that when combined
result in an LTV greater than 80% (80/20 loans) and interest-only
loans. The Bancorp monitors residential mortgages loans with
greater than 80% LTV ratio and no mortgage insurance as it
believes these loans represent a higher level of risk. Tables 31 and
32 provide analysis of the residential mortgage loans outstanding
with a greater than 80% LTV ratio and no mortgage insurance as
of December 31, 2010 and 2009, respectively.
Fifth Third Bancorp 51
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 31: RESIDENTIAL MORTGAGE LOANS OUTSTANDING, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
As of December 31, 2010 ($ in millions)
By State:
Ohio
Michigan
Florida
North Carolina
Indiana
Kentucky
Illinois
All other states
Total
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2010
3
2
4
1
1
1
-
3
15
24
20
31
7
4
3
1
5
95
22
21
56
12
6
2
4
8
131
Outstanding
$569
294
294
131
111
78
67
122
$1,666
TABLE 32: RESIDENTIAL MORTGAGE LOANS OUTSTANDING, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
As of December 31, 2009 ($ in millions)
By State:
Ohio
Michigan
Florida
North Carolina
Indiana
Kentucky
Illinois
All other states
Total
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 were $4.6 billion and $6.9 billion, respectively, as of
December 31, 2010. Of the total $11.5 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 at loan origination of 734 at
December 31, 2010 compared to 730 at December 31, 2009.
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2009
4
3
9
5
1
1
1
2
26
25
13
50
9
7
3
6
8
121
18
21
68
8
4
2
2
5
128
Outstanding
$673
350
388
169
145
92
62
141
$2,020
The Bancorp actively manages lines of credit and makes
reductions in lending limits when it believes it is necessary based
on FICO score deterioration and property devaluation. The
Bancorp believes that home equity loans with a greater than 80%
LTV ratio present a higher level of risk. The following tables
provide analysis of these loans as of December 31, 2010 and 2009.
TABLE 33: HOME EQUITY LOANS OUTSTANDING WITH LTV GREATER THAN 80%
As of December 31, 2010 ($ in millions)
By State:
Ohio
Michigan
Illinois
Indiana
Kentucky
Florida
All other states
Total
Outstanding
$1,576
998
482
451
421
172
466
$4,566
Exposure
2,288
1,317
662
638
614
218
568
6,305
For the Year Ended
December 31, 2010
90 Days
Past Due
Nonaccrual
Net Charge-offs
9
9
5
4
3
8
7
45
7
5
3
2
2
4
4
27
35
50
22
10
9
21
28
175
TABLE 34: HOME EQUITY LOANS OUTSTANDING WITH LTV GREATER THAN 80%
As of December 31, 2009 ($ in millions)
By State:
Ohio
Michigan
Illinois
Indiana
Kentucky
Florida
All other states
Total
52 Fifth Third Bancorp
Outstanding
$1,727
1,091
505
499
471
198
523
$5,014
Exposure
2,465
1,417
689
691
672
248
618
6,800
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2009
13
14
5
5
4
8
9
58
6
6
3
2
2
3
5
27
43
61
32
13
12
35
37
233
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Automobile Portfolio
The automobile portfolio is characterized by direct and indirect
lending products to consumers. As of December 31, 2010, the
automobile loan portfolio was comprised of approximately 48%
in new automobile loans. It is a common practice to advance on
automobile loans an amount in excess of the automobile value
due to the inclusion of taxes, title, and other fees paid at closing.
The Bancorp monitors its exposure to these higher risk accounts.
The following tables provide analysis of the Bancorp’s automobile
loans with a LTV at origination greater than 100% as of
December 31, 2010 and 2009.
TABLE 35: AUTOMOBILE LOANS OUTSTANDING WITH LTV GREATER THAN 100%
As of December 31, 2010 ($ 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, 2010
1
1
-
1
-
-
4
7
-
-
-
-
-
-
2
2
5
5
4
3
5
3
33
58
Outstanding
$447
375
269
208
199
181
2,451
$4,130
TABLE 36: AUTOMOBILE LOANS OUTSTANDING WITH LTV GREATER THAN 100%
As of December 31, 2009 ($ in millions)
By State:
Ohio
Illinois
Michigan
Indiana
Florida
Kentucky
All other states
Total
loans
restructuring;
immediately upon
Analysis of Nonperforming Assets
A summary of nonperforming assets is included in Table 37.
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 OREO
and repossessed equipment. Typically, commercial loans, home
equity, automobile and other consumer loans and leases are
reported on 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. Residential mortgage loans are
typically placed on nonaccrual status when principal and interest
payments have become past due 150 days unless such loans are
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 level of 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 ALLL.
Total nonperforming assets were $2.5 billion at December
31, 2010, compared to $3.5 billion at December 31, 2009. At
December 31, 2010, $294 million of nonaccrual commercial loans
were held-for-sale, a significant portion of which were real estate
secured loans in Michigan and Florida. Nonperforming assets as a
percentage of total loans, leases and other assets, including OREO
and nonaccrual loans held for sale, was 3.08% and 4.38% as of
December 31, 2010 and 2009, respectively. Excluding the held-
for-sale nonaccrual loans, nonperforming assets as a percentage of
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
total loans, leases and other assets, including OREO, as of
December 31, 2010 was 2.79% compared to 4.22% as of
December 31, 2009. The composition of nonaccrual loans and
leases continues to be concentrated in real estate as 66% of
nonaccrual loans were secured by real estate as of December 31,
2010 compared to approximately 77% as of December 31, 2009.
in
the
general
Commercial nonperforming loans and leases decreased to
$1.6 billion at December 31, 2010 from $2.6 billion at December
31, 2009 due to the impact of previous loss mitigation actions and
moderation
conditions. Excluding
economic
nonperforming loans held-for-sale, commercial nonperforming
loans and leases decreased from $2.3 billion at December 31, 2009
to $1.3 billion as of December 31, 2010. These decreases were due
to the previously discussed factors and the impact of commercial
nonperforming loans transferred to held for sale during the third
quarter of 2010. The Bancorp transferred commercial loans with a
carrying value prior to transfer of $961 million to held for sale
during
third quarter, of which $694 million were
nonperforming. Of those loans transferred in the third quarter of
2010, 52% were secured by non-owner occupied real estate,
including 22% secured by developed and undeveloped land.
Approximately 40% of those transferred loans were in Florida or
Michigan. The remaining balance of the loans transferred during
the third quarter of 2010 was $223 million at December 31, 2010.
Consumer nonperforming loans and leases decreased to $466
million as of December 31, 2010, compared to $555 million at
December 31, 2009, driven primarily by a $144 million decrease in
residential mortgage loans on nonaccrual, partially offset by an
$84 million increase in other consumer loans. The decrease in
residential mortgage loans was primarily the result of $205 million
of nonperforming residential mortgage loans sold during the third
quarter of 2010. The increase in other consumer loans was the
Fifth Third Bancorp 53
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
charge-offs in the commercial loan product portfolio in 2010
compared to 44% in 2009.
The ratio of consumer loan net charge-offs to average
consumer
in 2010
loans outstanding decreased to 2.92%
compared to 3.10% in 2009. Compared to 2009, total consumer
net charge-offs decreased $54 million to $964 million in 2010.
Residential mortgage loan net charge-offs increased $82 million to
$439 million during 2010. The ratio of residential mortgage net
charge-offs to average residential mortgage loans increased from
4.15% in 2009 to 5.49% in 2010. These increases were primarily
due to $123 million in charge-offs taken on $228 million of
portfolio residential mortgage loans sold during the third quarter
of 2010. The Bancorp’s Florida and Michigan markets continue to
experience the most stress as residential mortgage loan charge-offs
in these states accounted for 72% of residential mortgage net
charge-offs during 2010.
Home equity net charge-offs decreased $58 million to $264
million during 2010. The ratio of home equity net charge-offs to
average home equity loans decreased from 2.57% in 2009 to
2.20% in 2010. These decreases are primarily due to a $33 million
decrease in net charge-offs on the brokered home equity portfolio
and a $20 million decrease in net charge-offs in the Florida and
Michigan markets on home equity products originated by the
Bancorp. Management responded to the performance of the
brokered home equity portfolio by eliminating 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.
Automobile loan net charge offs decreased $60 million to $88
million in 2010. The ratio of automobile loan net charge-offs to
average automobile loans was .85% for 2010, a decrease of 83 bp
result of
compared
improvements in delinquencies and loss severity as well as
improvements made in underwriting over the past three years.
to 2009. These decreases are
the
Credit card net charge-offs decreased $15 million to $155
million in 2010. The net charge-off ratio on credit card balances
decreased from 8.87% in 2009 to 8.28% in 2010. The decreases
from the prior year are primarily due to the Bancorp actively
managing open credit card balances and a decrease in delinquency
trends throughout 2010 as general economic conditions began to
show signs of improvement. 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.
result of the Bancorp’s foreclosure, during the fourth quarter of
2010, on a commercial loan collateralized by individual consumer
loans with a carrying value of $78 million that were classified as
nonaccrual loans at December 31, 2010. Consumer restructured
loans on accrual status totaled $1.6 billion and $1.4 billion as of
December 31, 2010 and 2009, respectively, driven by an increased
volume of restructured loans. As of December 31, 2010, redefault
rates on restructured residential mortgage, home equity loans and
credit card loans were 27%, 18% and 20%, respectively.
Repossessed personal property and OREO increased from
$297 million at December 31, 2009 to $494 million at December
31, 2010, driven by higher levels of foreclosures on commercial
mortgage loans. At December 31, 2010 OREO totaled $467
million and included $351 million of commercial assets and $116
million of consumer assets. Properties in Michigan and Florida
accounted for 49% of foreclosed real estate at December 31,
2010.
In 2010 and 2009, approximately $10 million and $20 million,
respectively, of interest income was recognized on a cash basis for
loans on nonaccrual. In 2010 and 2009, additional interest income
of approximately $206 million and $236 million, respectively,
would have been recorded if the nonaccrual and renegotiated
loans and leases on nonaccrual 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 302 bp of average loans and leases for 2010,
compared to 320 bp for 2009. Table 39 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 3.10% in 2010
compared to 3.27% in 2009. This improvement was primarily due
to actions taken by the Bancorp to address problem loans,
reflected by significant net charge-offs recorded in 2008 and 2009
and the impact of loss mitigation activities such as suspending
home builder and developer lending and non-owner occupied
commercial real estate lending in 2007 and 2008, respectively, and
tighter underwriting standards implemented on commercial loan
products over the past three years. Net charge-offs for 2010
included $625 million related to non-owner occupied commercial
real-estate, a decrease from $721 million in 2009. Charge-offs on
these loans represented 46% of all commercial net charge-offs in
2010 and 2009. Florida and Michigan continued to experience the
most stress, accounting for approximately 48% of the total net
54 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 37: SUMMARY OF NONPERFORMING ASSETS AND DELINQUENT LOANS
As of December 31 ($ in millions)
Nonaccrual loans and leases:
2010
2009
2008
2007
2006
Commercial and industrial loans (a)
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Other consumer loans and leases (a)
Restructured loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans (b)
Home equity (b)
Automobile loans (b)
Credit card
Total nonperforming loans and leases
Repossessed personal property and other real estate owned
Total nonperforming assets (c)
Nonaccrual loans held for sale
Total nonperforming assets including loans held for sale
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans(d)
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,
$473
407
182
11
152
23
1
84
95
28
10
8
116
33
2
55
1,680
494
2,174
294
$2,468
$16
11
3
-
100
89
13
42
-
$274
734
898
646
67
275
21
1
-
35
4
8
-
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
including other real estate owned (c)
.61
Allowance for loan and lease losses as a percent of nonperforming assets (b)
170
(a) Nonaccrual loans and leases reflect a reclassification of $84 million in nonperforming loans from commercial and industrial loans to other consumer loans and leases which occurred after the
Bancorp’s Form 8-K was filed on January 19, 2011. This reclassification was primarily a result of the determination that consumer loans obtained in the foreclosure of a commercial loan were
more appropriately categorized as other consumer loans and leases in accordance with regulatory guidance.
2.79 %
138
2.38
139
1.25
93
4.22
116
(b) During 2009, the Bancorp modified its consumer nonaccrual policy to exclude TDR loans that were less than 90 days past due because they were performing in accordance with the restructured
terms. For comparability purposes, prior periods were adjusted to reflect this reclassification.
(c) Excludes nonaccrual loans held for sale.
(d) Information for all periods presented excludes advances made pursuant to servicing agreements to GNMA mortgage pools whose repayments are insured by the Federal Housing Administration or
guaranteed by the Department of Veterans Affairs. As of December 31, 2010, 2009, 2008, 2007 and 2006, these advances were $279, $130, $40, $25 and $14, respectively.
Troubled Debt Restructurings
If a borrower is experiencing financial difficulty, the Bancorp may
consider, in certain circumstances, modifying the terms of their
loan to maximize collection of amounts due. Typically, these
modifications reduce the loan interest rate, extend the loan term,
or in limited circumstances, reduce the principal balance of the
loan. These modifications are classified as TDRs.
At the time of modification, the Bancorp maintains certain
consumer loan TDRs (including residential mortgage loans, home
equity loans, and other consumer loans) on accrual status,
TABLE 38: PERFORMING AND NONPERFORMING TDRs
provided there
is reasonable assurance of repayment and
performance according to the modified terms based upon a
current, well-documented credit evaluation. Commercial loan
TDRs and credit card TDRs are classified as nonaccrual loans and
are typically returned to accrual status upon a six month period of
sustained performance under the restructured terms. These
from
approaches are consistent with published guidance
regulatory agencies. The following table summarizes TDRs by
loan type and delinquency status.
Performing
30-89 Days Past
90 Days or More
As of December 31, 2010 ($ in millions)
$369
Commercial
1,182
Residential mortgages(a)
444
Home equity
101
Credit card
37
Other consumer
Total
$2,133
(a) Information includes advances made pursuant to servicing agreements to GNMA mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the
$227
950
364
46
32
$1,619
141
116
33
55
2
347
-
67
47
-
3
117
1
49
-
-
-
50
Nonaccrual
Past Due
Current
Total
Due
Department of Veterans Affairs. As of December 31, 2010, these advances represented $44 of current loans, $17 of 30-89 days past due loans and $22 of 90 days or more past due loans.
Fifth Third Bancorp 55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 39: SUMMARY OF CREDIT LOSS EXPERIENCE
For the years ended December 31 ($ in millions)
Losses charged off:
Commercial and industrial 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 and industrial 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 and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
2010
($631)
(541)
(265)
(7)
(441)
(276)
(132)
(164)
(28)
(2,485)
45
17
13
5
2
12
44
9
10
157
(586)
(524)
(252)
(2)
(439)
(264)
(88)
(155)
(18)
($2,328)
Total net losses charged off
Net charge-offs as a percent of average loans and leases (excluding held for sale):
Commercial and industrial 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
2.23 %
4.58
8.48
0.05
3.10
5.49
2.20
0.85
8.28
2.58
2.92
3.02 %
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)
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
Allowance for Credit Losses
The allowance for credit losses is comprised of the ALLL and the
reserve for unfunded commitments. The ALLL provides coverage
for probable and estimable losses in the loan and lease portfolio.
The Bancorp evaluates the ALLL each quarter to determine its
adequacy to cover inherent losses. Several factors are taken into
consideration in the determination of the overall ALLL, 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 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 ALLL.
The Bancorp also considers overall asset quality trends, credit
administration
risk
identification practices, credit policy and underwriting practices,
overall portfolio growth, portfolio concentrations and current
the Critical
local economic conditions. See
national and
Accounting Policies section for more information.
and portfolio management practices,
In 2010 the Bancorp did not substantively change any
material aspect of its overall approach in the determination of the
ALLL 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
56 Fifth Third Bancorp
the ALLL, 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 ALLL. The provision for unfunded commitments
is included in other noninterest expense in the Consolidated
Statements of Income.
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 loans modified in a
TDR and impaired commercial credits above specified 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
the
deterioration in the portfolio, in a stable or deteriorating credit
environment, and tend not to be as responsive when improved
conditions have presented
these model
limitations, the qualitative adjustment factors may be incremental
or decremental to the quantitative model results. An unallocated
is maintained to recognize the
component to the ALLL
imprecision in estimating and measuring loss. The unallocated
allowance as a percent of total portfolio loans and leases for the
themselves. Given
to slightly
tend
lag
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
year ended December 31, 2010 was .19%, or five percent of the
total ALLL, compared to .25%, or five percent of the total ALLL,
as of December 31, 2009. The unallocated allowance was held
consistent to the total ALLL due to many of the impacts of recent
economic events being more fully incorporated into the historical
loss rates within the portfolio specific models and stabilization in
general economic factors including real estate values in certain of
the Bancorp’s lending markets.
The ALLL as a percent of the total loan and lease portfolio
decreased to 3.88% at December 31, 2010, compared to 4.88% at
December 31, 2009. Total ALLL was $3.0 billion and $3.7 billion
as of December 31, 2010 and 2009, respectively. This decrease is
reflective of a number of factors including decreases in net charge-
offs and delinquencies and signs of moderation in general
economic conditions during 2010.
the allowance
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
category would experience a downgrade of one risk category, the
allowance for commercial loans would increase by approximately
$156 million at December 31, 2010. In addition, the Bancorp’s
determination of the allowance for residential mortgage loans and
consumer loans is sensitive to changes in estimated loss rates. In
the event that estimated loss rates would increase 10%, the
allowance for residential mortgage loans and consumer loans
would increase approximately $31 million and $56 million,
respectively at December 31, 2010. As several qualitative and
quantitative factors are considered in determining the ALLL, these
sensitivity analyses do not necessarily reflect the nature and extent
of future changes in the ALLL. 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.
Total impaired loans consist of loans and leases that are
restructured in a troubled debt restructuring and larger commercial
loans included with aggregate borrower relationship balances
exceeding $1 million that exhibit probable or observed credit
weaknesses. Impaired loans are subject to individual review and
decreased from $3.3 billion as of December 31, 2009 to $2.9
billion as of December 31, 2010.
The Bancorp continually reviews its credit administration and
loan and lease portfolio and makes changes based on the
performance of its products. Management discontinued the
origination of brokered home equity products at the end of 2007,
suspended homebuilder lending in the fourth quarter of 2007 and
new commercial non-owner occupied real estate lending in 2008,
and raised underwriting standards across both the commercial and
consumer loan product offerings.
TABLE 40: CHANGES IN ALLOWANCE FOR CREDIT LOSSES
For the years ended December 31 ($ in millions)
Balance beginning of period
Impact of change in accounting principle
Net losses charged off
Provision for loan and lease losses
Balance, end of year
Reserve for unfunded commitments:
Balance beginning of period
Impact of change in accounting principle
Provision for unfunded commitments
Balance, end of year
2010
$3,749
45
(2,328)
1,538
$3,004
294
(43)
(24)
$227
2009
2,787
-
(2,581)
3,543
3,749
195
-
99
294
2008
937
-
(2,710)
4,560
2,787
95
-
100
195
2007
771
-
(462)
628
937
76
-
19
95
TABLE 41: ATTRIBUTION OF ALLOWANCE FOR LOAN AND LEASE LOSSES TO PORTFOLIO LOANS AND LEASES
As of December 31 ($ in millions)
Allowance attributed to:
2008
2009
2007
2010
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Consumer loans
Consumer leases
Unallocated
Total ALLL
Portfolio loans and leases:
Commercial and industrial 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 and industrial 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
$1,123
597
158
111
310
554
1
150
$3,004
$27,191
10,845
2,048
3,378
8,956
24,801
272
$77,491
4.13 %
5.50
7.71
3.29
3.35
2.23
.37
.19
3.88 %
1,282
734
380
121
375
660
4
193
3,749
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
824
363
252
61
388
611
9
279
2,787
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
271
135
98
27
67
287
5
47
937
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
2006
744
-
(316)
343
771
70
-
6
76
2006
252
95
49
24
51
247
5
48
771
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
Fifth Third Bancorp 57
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 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.
The Bancorp’s Executive ALCO, which includes senior
management 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, 2010. In
accordance with the current policy, the rate movements are
assumed to occur over one year and are sustained thereafter.
At December 31, 2010, the Bancorp’s simulated exposure to
a change in interest rates as described above reflects moderate
asset sensitivity in year one with increased asset sensitivity in year
two. Table 42 shows the Bancorp's estimated net interest income
sensitivity profile and ALCO policy limits as of December 31,
2010.
58 Fifth Third Bancorp
TABLE 42: ESTIMATED NII SENSITIVITY PROFILE
Percent Change in NII
(FTE)
ALCO Policy Limits
Change in
Interest
Rates (bp)
+200
+100
12
Months
1.02%
0.49
13 to 24
Months
4.99
2.73
12
Months
(5.00)
-
13 to 24
Months
(7.00)
-
Economic Value of Equity
The Bancorp employs EVE as a measurement tool in managing
interest rate risk. Whereas the earnings simulation highlights
exposures over a relatively short time horizon, the EVE analysis
incorporates all cash flows over the estimated remaining life of all
balance sheet and derivative positions. The EVE 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 EVE to changes in the level
of interest rates is a measure of longer-term interest rate risk. EVE
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 EVE
analysis. Particularly
important are the assumptions driving
prepayments and the expected changes in balances and pricing of
the transaction deposit portfolios. The following table shows the
Bancorp’s EVE sensitivity profile as of December 31, 2010.
TABLE 43: ESTIMATED EVE SENSITIVITY PROFILE
Change in
Interest Rates (bp)
+200
+100
+25
-25
Change in EVE
(1.62%)
(0.50)
(0.09)
(0.13)
ALCO Policy Limits
(15.0)
that
This EVE profile suggests
the Bancorp would
experience a slight adverse effect from an initial increase in rates,
and that the adverse impact would become greater 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 EVE measures the discounted
present value of cash flows over the estimated
lives of
instruments, the change in EVE does not directly correlate to the
degree that earnings would be impacted over a shorter time
horizon (e.g., the current fiscal year). Further, EVE 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 EVE analyses do not
that management may
necessarily
undertake to manage this risk in response to anticipated changes
in interest rates.
include certain actions
The Bancorp regularly evaluates its exposures to LIBOR and
Prime basis risks, nonparallel shifts in the yield curve and
embedded options risk. In addition, the impact on NII and EVE
of extreme changes in interest rates is modeled, wherein the
Bancorp employs the use of yield curve shocks and environment-
specific scenarios.
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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
strategy include interest rate swaps, interest rate floors, interest
rate caps, forward contracts, principal only swaps, options and
swaptions.
for as
free-standing derivatives
As part of its overall risk management strategy relative to its
mortgage banking activity, the Bancorp enters into forward
contracts accounted
to
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. See
Note 14 of the Notes to Consolidated Financial Statements for
further information on these derivatives.
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 44 displays the expected principal cash
flows of the Bancorp’s portfolio loans and leases as of December
31, 2010. Table 45 displays a summary of expected principal cash
flows occurring after one year as of December 31, 2010.
Residential Mortgage Servicing Rights and Interest Rate Risk
The net carrying amount of the residential MSR portfolio was
$822 million and $699 million as of December 31, 2010 and 2009,
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
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 during 2010 and 2009. The decrease
in rates caused prepayment assumptions to increase and led to $36
million in temporary impairment of servicing rights during the
year ended December 31, 2010 compared to $24 million in
temporary impairment in 2009. 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 $123 million and $98 million on its non-qualifying
hedging strategy for the years ended December 31, 2010 and
2009, respectively. The net gains from the Bancorp’s non-
qualifying hedging strategy for 2010 and 2009 include $14 million
and $57 million, respectively, of net gains on the sale of securities.
See Note 13 of the Notes to Consolidated Financial Statements
for further discussion on servicing rights.
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, 2010
and 2009 was approximately $283 million and $272 million,
respectively. The Bancorp also enters into foreign exchange
contracts for the benefit of commercial customers involved in
international trade to hedge their exposure to foreign currency
fluctuations. The Bancorp has internal controls in place to help
ensure excessive risk is not being taken in providing this service to
customers. These controls include an independent determination
of currency volatility and credit equivalent exposure on these
contracts, counterparty credit approvals and country limits.
TABLE 44: PORTFOLIO LOAN AND LEASE PRINCIPAL CASH FLOWS
As of December 31, 2010 ($ in millions)
Commercial and industrial 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
$9,755
5,414
1,146
522
16,837
1,437
1,656
4,324
191
517
8,125
$24,962
1-5 years
14,794
4,390
655
1,365
21,204
3,544
4,241
6,399
1,705
160
16,049
37,253
Over 5 years
2,642
1,041
247
1,491
5,421
3,975
5,616
260
-
4
9,855
15,276
Total
27,191
10,845
2,048
3,378
43,462
8,956
11,513
10,983
1,896
681
34,029
77,491
TABLE 45: PORTFOLIO LOAN AND LEASE PRINCIPAL CASH FLOWS OCCURRING AFTER ONE YEAR
As of December 31, 2010 ($ in millions)
Commercial and industrial 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
Fixed
$3,350
1,934
259
2,856
8,399
5,127
1,472
6,601
770
128
14,098
$22,497
Interest Rate
Floating or Adjustable
14,086
3,497
643
-
18,226
2,392
8,385
58
935
36
11,806
30,032
Fifth Third Bancorp 59
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 46: AGENCY RATINGS
As of February 28, 2011
Fifth Third Bancorp:
Short-term
Senior debt
Subordinated debt
Fifth Third Bank:
Short-term
Long-term deposit
Senior debt
Subordinated debt
Moody’s
Standard and Poor’s
P-2
Baa1
Baa2
P-2
A3
A3
Baa1
A-2
BBB
BBB-
A-2
No rating
BBB+
BBB
Fitch
F1
A-
BBB+
F1
A
A-
BBB+
DBRS
R-1L
AL
BBBH
R-1L
A
A
A (low)
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. 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. A summary of certain obligations and commitments
to make future payments under contracts is included in Note 18
of the Notes to Consolidated Financial Statements.
The Bancorp maintains a contingency funding plan that
assesses the liquidity needs under various scenarios of market
conditions, asset growth and credit rating downgrades. The plan
includes liquidity stress testing which measures various sources
and uses of funds under the different scenarios. The contingency
plan provides for ongoing monitoring of unused borrowing
capacity and available sources of contingent liquidity to prepare
for unexpected liquidity needs and to cover unanticipated events
that could affect liquidity.
The Bancorp has approximately $6.8 billion of unsecured
long-term debt outstanding as of December 31, 2010. Long-term
debt with a principal balance of $15 million and a carrying value
of $14 million will mature during 2011.
Sources of Funds
The Bancorp’s primary sources of funds relate to cash flows from
loan and lease repayments, payments from securities related to
sales and maturities, the sale or securitization of loans and leases
and funds generated by core deposits, in addition to the use of
public and private debt offerings.
loan and
Projected contractual maturities from
lease
repayments are included in Table 44 of the Market Risk
Management section. Of the $15.4 billion of securities in the
available-for-sale portfolio at December 31, 2010, $4.0 billion in
principal and interest is expected to be received in the next 12
months and an additional $2.5 billion is expected to be received in
the next 13 to 24 months. For further information on the
Bancorp’s
the
Investment Securities section of the MD&A.
securities portfolio,
available-for-sale
see
fixed-rate
single-family
residential mortgage
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-
loans
term,
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
lines and loans, automobile loans and other consumer loans are
also capable of being securitized or sold. For the years ended
December 31, 2010 and 2009, loans totaling $18.2 billion and
$21.8 billion, respectively, were sold, securitized or transferred
off-balance sheet. For further information on the transfer of
financial assets, see Note 12 of the Notes to Consolidated
Financial Statements.
60 Fifth Third Bancorp
to
funding
tools utilized
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
80% of its average total assets during 2010 compared to 72%
during 2009. 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 the FHLB system. Certificates
of deposit carrying a balance of $100,000 or more and deposits in
the Bancorp’s foreign branch located in the Cayman Islands are
wholesale
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 previously participated in the FDIC’s TAG
program that was adopted on November 21, 2008 under EESA.
The TAG program provides insurance to any funds held in
qualifying noninterest-bearing transaction accounts without limit.
On April 13, 2010, the FDIC adopted an interim final rule
extending the TAG program for six months, through December
31, 2010, with the possibility of extending the program an
additional twelve months without further rulemaking. As a
participant in the TAG program, the Bancorp was required to
decide whether to opt out of the program on or before April 30,
2010. The Bancorp opted out of the TAG program effective July
1, 2010. After this date, customer accounts that qualified under
the TAG program are no longer guaranteed in full, but are insured
up to $250,000 under the FDIC’s general deposit insurance rules.
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, 2010, $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
$19.0 billion of funding available for issuance through private
offerings of debt securities pursuant to its bank note program and
currently has approximately $25.3 billion of borrowing capacity
available through secured borrowing sources including the FHLB
and FRB.
On January 25, 2011, the Bancorp raised $1.7 billion in new
common equity through the issuance of 121,428,572 shares of
common stock in an underwriting offering at an initial price of
$14.00 per share. Additionally, on January 25, 2011, the Bancorp
sold $1.0 billion in aggregate principal amount of 3.625% Senior
Notes due January 25, 2016. Note 32 of the Notes to
additional
Consolidated
information regarding the common equity and senior notes
offerings.
Statements
Financial
provides
Credit Ratings
The cost and availability of financing to the Bancorp are impacted
by its credit ratings. A downgrade to the Bancorp’s credit ratings
could affect its ability to access the credit markets and increase its
borrowing costs, thereby adversely impacting the Bancorp’s
financial condition and liquidity. Key factors in maintaining high
credit ratings include a stable and diverse earnings stream, strong
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
credit quality, strong capital ratios and diverse funding sources, in
addition to disciplined liquidity monitoring procedures.
The Bancorp’s senior debt credit ratings are summarized in
Table 46. 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 (low)” rating is considered satisfactory
credit quality and is the third highest ranking within its
overall classification system.
Additionally, the Bancorp’s subsidiary bank (Fifth Third Bank)
also receives independent credit ratings. On November 1, 2010,
Moody’s downgraded ten large regional banks, including Fifth
Third Bank, due to the passage of the Dodd-Frank Act. The Act
signaled the government’s intent to limit support for individual
banks, thus reducing Moody’s support assumptions for these
banks. Fifth Third Bank’s credit ratings for Short-Term, Long-
Term Deposit, Senior Debt and Subordinated Debt were
downgraded to P-2, A3, A3 and Baa1, respectively, from P-1, A2,
A2 and A3, respectively. Additionally, Moody’s changed Fifth
Third Bancorp and Fifth Third Bank’s outlook from negative to
stable. During 2010, DBRS Investors Service downgraded the
long-term debt rating and deposit ratings for the Bancorp’s
subsidiary to “A” from “AH”.
* 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.
CAPITAL MANAGEMENT
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.
2009 Capital Actions
On May 7, 2009, the Bancorp announced its SCAP results which
indicated 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, primarily the Processing
Business Sale, the indicated additional net Tier I common equity
required was $1.1 billion. To address the SCAP results the
Bancorp undertook a number of capital actions during the second
quarter of 2009. The Bancorp completed a $1 billion common
stock offering and issued approximately 158 million shares at an
average price of $6.33. In addition, the Bancorp completed an
exchange of a portion of its Series G preferred stock for
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. 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. The Bancorp also sold its Visa, Inc. Class B
common shares resulting in an additional $187 million benefit to
equity.
2011 Capital Actions
On January 25, 2011, the Bancorp raised $1.7 billion in new
common equity through the issuance of 121,428,572 shares of
common stock in an underwriting offering at an initial price of
$14.00 per share. On January 24, 2011, the underwriters exercised
their option to purchase an additional 12,142,857 shares at the
offering price of $14.00 per share. In connection with this
exercise, the Bancorp elected that all such additional shares be
sold and the Bancorp entered into a forward sale agreement which
resulted in a final net payment of 959,821 shares on February 4,
2011.
On February 2, 2011, the Bancorp redeemed all 136,320
shares of its Series F Preferred Stock held by the U.S. Treasury
totaling $3.4 billion. The Bancorp used the net proceeds from the
common stock and senior notes offerings previously described
and other funds to redeem the Series F Preferred Stock.
In connection with the redemption of the Series F Preferred
Stock, the Bancorp accelerated the accretion of the remaining
issuance discount on the Series F Preferred Stock and recorded a
corresponding reduction in retained earnings of $153 million.
Dividends of $15 million were paid on February 2, 2011
when the Series F Preferred Stock was redeemed. The Bancorp
notified the U.S. Treasury on February 17, 2011, of its intention to
negotiate for the purchase of the warrants issued to the U.S.
Treasury in connection with the CPP preferred stock investment.
These transactions will be reflected
in the Bancorp’s
consolidated financial statements for the quarter ended March 31,
2011. Note 32 of the Notes to Consolidated Financial Statements
provides additional information regarding the redemption of the
Series F Preferred Stock and the January 2011 common stock
offering.
TABLE 47: CAPITAL RATIOS
As of December 31 ($ 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
2010
2009
12.22 % 11.36
9.71
10.42
6.45
7.04
13,428
$13,965
17,648
18,173
100,933
100,193
13.94 %
18.14
12.79
7.50
13.30
17.48
12.34
6.99
2008
8.78
7.86
4.23
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
Fifth Third Bancorp 61
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Additionally, although the assessed
companies under SCAP were only required to demonstrate that
they met the 4% Tier I common equity ratio requirement for the
period evaluated in the SCAP, it is reasonable to assume the
supervisory agencies expect the 19 large bank holding companies
assessed under the SCAP stress tests to maintain their Tier I
common equity ratio above 4%, although no formal requirement
exists.
On November 17, 2010, the Federal Reserve issued a revised
temporary addendum to Supervision and Regulation letter 09-4,
"Dividend Increases and Other Capital Distributions for the 19
Supervisory Capital Assessment Program Firms." This letter
requires the 19 financial institutions including the Bancorp, to
undergo a review of their capital planning processes and plans
regarding capital redistribution and absorption activity. As part of
this review, the Bancorp was required to submit a comprehensive
capital plan by January 7, 2011, that demonstrated its ability to
withstand losses under “adverse” economic conditions over the
next two years. The Bancorp submitted all of its documents
according to the regulatory timeline. The results of this assessment
process are not expected to be made public.
Current provisions of the recently enacted Dodd-Frank Act
will phase out the inclusion of certain trust preferred securities as
a component of Tier I capital beginning January 1, 2013. At
December 31, 2010, the Bancorp’s Tier I capital included $2.8
billion of trust preferred securities representing approximately 276
bp of risk-weighted assets.
The Bancorp manages the adequacy of its capital, including
Tier I common equity, by conducting ongoing internal stress tests
and ensuring the results are properly considered in capital
planning. It is the intent of the Bancorp’s capital planning process
to ensure that the Bancorp’s capital positions remain in excess of
well-capitalized minimums as defined by the Board of Governors
of the Federal Reserve System
in the “Capital Adequacy
Guidelines for Bank Holding Companies,” and any other
regulatory requirements. The Bancorp’s Tier I common equity
ratio was 7.50% as of December 31, 2010.
Dividend Policy and Stock Repurchase Program
The Bancorp’s common stock dividend policy and stock
repurchase program reflect its earnings outlook, desired payout
ratios, the need to maintain adequate capital levels, alternative
investment opportunities and the need to comply with safe and
sound banking practices as well as meet regulatory expectations.
In each of the years ended December 31, 2010 and 2009, the
Bancorp paid dividends per common share of $0.04.
The Bancorp issued $3.4 billion in senior preferred stock
(Series F) 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 was in effect
until the earlier of December 31, 2011 or the date upon which the
Series F senior preferred shares were redeemed in whole or
transferred to an unaffiliated third party. On February 2, 2011, the
Bancorp repurchased all $3.4 billion of its Series F Preferred Stock
held by the U.S. Treasury.
The Bancorp’s repurchase of common stock is shown in
Table 48. The Bancorp’s Board of Directors had previously
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 was in effect
until the earlier of December 31, 2011 or the date upon which the
Series F senior preferred shares were redeemed in whole or
transferred to an unaffiliated third party. On February 2, 2011, the
Bancorp repurchased all $3.4 billion of its Series F Preferred Stock
held by the U.S. Treasury.
TABLE 48: SHARE REPURCHASES
For the years ended December 31
19,201,518
Shares authorized for repurchase at January 1
-
Additional authorizations
-
Shares repurchases (a)
19,201,518
Shares authorized for repurchase at December 31
Average price paid per share
N/A
(a) Excludes 333,808, 265,802 and 63,270 shares repurchased during 2010, 2009 and 2008, respectively, in connection with various employee compensation plans. These repurchases are not
19,201,518
-
-
19,201,518
N/A
19,201,518
-
-
19,201,518
N/A
2009
2008
2010
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.
62 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OFF-BALANCE SHEET ARRANGEMENTS
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.
include
loan criteria,
Residential Mortgage Loan Sales
Conforming residential mortgage loans sold to unrelated third
parties are generally sold with representation and warranty
recourse provisions. Such provisions
loan’s
the
including certain
compliance with applicable
documentation standards per agreements with the unrelated third
parties. Additional reasons for the Bancorp having to repurchase
the loans include appraisal standards with the collateral, fraud
related to the loan application and the rescission of mortgage
insurance. 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, 2010, and 2009, the Bancorp
maintained reserves related to these
loans sold with the
representation and warranty recourse provisions totaling $85
million and $37 million, respectively.
For the years ended December 31, 2010 and 2009, the
Bancorp paid $47 million and $19 million, respectively, in the
form of make whole payments and repurchased approximately
$83 million and $61 million, respectively, of loans to satisfy third
party representation and warranty claims. Total repurchase
demand requests during 2010 were $365 million compared to
$210 million during 2009. Total outstanding repurchase demand
inventory was $162 million at December 31, 2010, compared to
$119 million at December 31, 2009.
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, 2010 and 2009, the outstanding balances on these loans sold
with credit recourse were approximately $916 million and $1.1
billion, respectively. At December 31, 2010 and 2009, the Bancorp
maintained an estimated credit loss reserve on these loans sold
with credit recourse of approximately $16 million and $21 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. For further information
on residential mortgage loans sold with recourse, see Note 18 of
the Notes to Consolidated Financial Statements.
Private Mortgage Insurance
For certain mortgage loans originated by the Bancorp, borrowers
may be required to obtain 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. During the second quarter of 2009, the
Bancorp suspended the practice of providing reinsurance of
private mortgage insurance for newly originated mortgage loans.
The Bancorp’s maximum exposure
the event of
nonperformance by the underlying borrowers is equivalent to the
in
Bancorp’s total outstanding reinsurance coverage, which was $122
million and $182 million, respectively, at December 31, 2010 and
2009. As of December 31, 2010 and 2009, the Bancorp
maintained a reserve of $42 million and $44 million, respectively,
related to exposures within the reinsurance portfolio. The reserve
was flat year over year as increases to the reserve resulting from
estimated losses outpacing paid claims were offset by a decrease
relating to a reinsurance agreement termination. In the third
quarter of 2010, the Bancorp allowed one of its third-party
insurers to terminate its reinsurance agreement with the Bancorp.
This resulted in the Bancorp releasing collateral to the insurer in
the form of investment securities and other assets with a carrying
value of $19 million, and the insurer assuming the Bancorp’s
obligations under the reinsurance agreement, resulting in a
decrease to the Bancorp’s reserve liability of $20 million and a
decrease to the Bancorp’s maximum exposure of $53 million.
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 12 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 determined it
was the primary beneficiary (and therefore consolidator) of these
QSPEs. 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.
floating-rate,
recourse, certain primarily
Commercial Loan Sales to a QSPE
Through 2008, the Bancorp had transferred at par, subject to
short-term
credit
investment grade commercial loans to a VIE, which prior to
January 1, 2010, was an unconsolidated QSPE that was wholly
owned by an independent third-party. Generally, the loans
transferred to the VIE provided a lower yield due to their
investment grade nature and, therefore, transferring these loans
allowed 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 was $771 million. These loans may have been transferred
back to the Bancorp upon the occurrence of certain specified
events. These events included borrower default on the loans
transferred, ineligible loans transferred by the Bancorp to the VIE,
the inability of the VIE 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 was approximately
equivalent to the total outstanding balance. At December 31,
2009, the Bancorp’s loss reserve related to the credit enhancement
provided to the VIE was $45 million and was recorded in other
liabilities in the Consolidated Balance Sheets. During the year
Fifth Third Bancorp 63
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ended December 31, 2009, the VIE did not transfer any loans
back to the Bancorp as a result of a credit event.
The VIE issued commercial paper and used the proceeds to
fund the acquisition of commercial loans transferred to it by the
Bancorp. The ability of the VIE to issue commercial paper was a
function of general market conditions and the credit rating of the
liquidity provider. In the event the VIE was unable to issue
commercial paper, the Bancorp agreed to provide liquidity
support in the form of a line of credit to the VIE and the
repurchase of assets from the VIE. As of December 31, 2009, the
LAPA was $1.4 billion. In addition to the liquidity support
options discussed above, the Bancorp also purchased commercial
paper issued by the VIE. Beginning in 2008 and continuing
through the year ended December 31, 2009, dislocation in the
short-term funding market caused the VIE difficulty in obtaining
sufficient funding through the issuance of commercial paper. As a
result, the Bancorp purchased commercial paper throughout 2009.
As of December 31, 2009, the Bancorp held $805 million of asset-
backed commercial paper issued by the VIE, representing 87% of
the total commercial paper issued by the VIE.
Effective January 1, 2010, with the adoption of guidance
amending the accounting for QSPEs and the consolidation of
VIEs, the Bancorp determined it was the primary beneficiary (and
therefore consolidator) of this VIE. Refer to Note 1 of the Notes
to Consolidated Financial Statements for further details regarding
the guidance and the related impact of adoption by the Bancorp.
64 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The Bancorp has certain obligations and commitments to make
future payments under contracts. The aggregate contractual
obligations and commitments at December 31, 2010 are shown in
Table 49. As of December 31, 2010, the Bancorp has unrecognized
tax benefits that, if recognized, would impact the effective tax rate
in future periods. Due to the uncertainty of the amounts to be
ultimately paid as well as the timing of such payments, all uncertain
tax liabilities that have not been paid have been excluded from the
Contractual Obligations and Other Commitments table. For
further detail on the impact of income taxes see Note 21 of the
Notes to Consolidated Financial Statements.
TABLE 49: CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
As of December 31, 2010 ($ 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:
Less than
1 year
1-3 years
3-5 years
Greater than
5 years
$69,632
7,831
14
6,389
1,853
91
154
19
66
14
$86,063
-
308
2,519
-
-
170
88
37
29
17
3,168
-
74
599
-
-
154
24
33
17
-
901
-
3,803
6,426
-
-
454
20
70
-
1
10,774
Total
69,632
12,016
9,558
6,389
1,853
869
286
159
112
32
100,906
Commitments to extend credit (j)
Letters of credit (k)
$28,442
2,367
$30,809
(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
Total other commitments by expiration period
11,190
2,704
13,894
43,870
5,516
49,386
4,195
229
4,424
43
216
259
MD&A.
(b) Includes other time and certificates $100,000 and over. For additional information, see the Deposits discussion in the Balance Sheet Analysis section of MD&A.
(c)
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 17 of the Notes to Consolidated Financial Statements
for additional information on these debt instruments.
(d) See Note 14 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 16 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 22 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 18 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 18 of the Notes to Consolidated
Financial Statements.
Fifth Third Bancorp 65
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, 2010. 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, 2010. Based on this assessment, management believes that the Bancorp maintained effective internal control over financial
reporting as of December 31, 2010. 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, 2010. This report appears on page 67 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 28, 2011
Daniel T. Poston
Executive Vice President and Chief Financial Officer
February 28, 2011
66 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, 2010,
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, 2010,
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, 2010 of the Bancorp and our report dated February 28, 2011
expressed an unqualified opinion on those consolidated financial statements.
Cincinnati, Ohio
February 28, 2011
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,
2010 and 2009, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended
December 31, 2010. 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, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2010, 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, 2010, 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 28, 2011 expressed an unqualified
opinion on the Bancorp's internal control over financial reporting.
Cincinnati, Ohio
February 28, 2011
Fifth Third Bancorp 67
CONSOLIDATED BALANCE SHEETS
2010
2009
$2,159
15,414
353
294
1,515
2,216
2,318
18,213
355
355
3,369
2,067
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
27,191
10,845
2,048
3,378
8,956
11,513
10,983
1,896
681
77,491
(3,004)
74,487
2,389
479
2,417
62
822
8,400
$111,007
As of December 31 ($ in millions, except share data)
Assets
Cash and due from banks (a)
Available-for-sale and other securities (b)
Held-to-maturity securities (c)
Trading securities
Other short-term investments (a)
Loans held for sale (d)
Portfolio loans and leases:
Commercial and industrial loans
Commercial mortgage loans (a)
Commercial construction loans
Commercial leases
Residential mortgage loans (e)
Home equity (a)
Automobile loans (a)
Credit card
Other consumer loans and leases
Portfolio loans and leases
Allowance for loan and lease losses (a)
Portfolio loans and leases, net
Bank premises and equipment
Operating lease equipment
Goodwill
Intangible assets
Servicing rights
Other assets (a)
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 (a)
Long-term debt (a)
Total Liabilities
Equity
1,779
Common stock (f)
3,609
Preferred stock (g)
1,743
Capital surplus (h)
6,326
Retained earnings
241
Accumulated other comprehensive income
(201)
Treasury stock
13,497
Total Bancorp shareholders’ equity (i)
-
Noncontrolling interest
13,497
Total Equity
Total Liabilities and Equity
113,380
(a) At December 31, 2010, $52 of cash, $7 of other short-term investments, $29 of commercial mortgage loans, $241 of home equity loans, $648 of automobile loans, ($14) of allowance
for loan and lease losses, $7 of other assets, $12 of other liabilities and $692 of long-term debt from consolidated VIEs are included in their respective Balance Sheet captions above.
See Note 12.
$21,413
18,560
20,903
5,035
7,728
4,287
3,722
81,648
279
1,574
889
2,979
9,558
96,927
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
3,654
1,715
6,719
314
(130)
14,051
29
14,080
$111,007
(b) Amortized cost of $14,919 and $17,879 at December 31, 2010 and 2009, respectively.
(c) Fair value of $353 and $355 at December 31, 2010 and 2009, respectively.
(d) Includes $1,892 and $1,470 of residential mortgage loans held for sale measured at fair value at December 31, 2010 and 2009, respectively.
(e) Includes $46 and $26 of residential mortgage loans measured at fair value at December 31, 2010 and 2009, respectively.
(f) Common shares: Stated value $2.22 per share; authorized 2,000,000,000; outstanding at December 31, 2010 – 796,272,522 (excludes 5,231,666 treasury shares) and December 31,
2009 – 795,068,164 (excludes 6,436,024 treasury shares).
(g) 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, 2010 and December 31, 2009; 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 issued and outstanding at December 31, 2010 and December 31, 2009.
(h) 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 $11.72 per share.
(i) See Note 32 for additional information on capital actions taken by the Bancorp subsequent to December 31, 2010.
See Notes to Consolidated Financial Statements.
68 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ 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
Mortgage banking net revenue
Service charges on deposits
Corporate banking revenue
Investment advisory revenue
Card and processing 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
Technology and communications
Equipment expense
Card and processing expense
Goodwill impairment
Other noninterest expense
Total noninterest expense
Income (Loss) Before Income Taxes
Applicable income tax expense (benefit)
Net Income (Loss)
Less: Net income attributable to noncontrolling interest
Net income (loss) attributable to Bancorp
Dividends on preferred stock
Net Income (Loss) Available to Common Shareholders
Earnings Per Share
Earnings Per Diluted Share
See Notes to Consolidated Financial Statements.
2010
2009
2008
$3,823
658
8
4,489
3,934
733
1
4,668
4,935
660
13
5,608
591
4
290
885
3,604
1,538
2,066
647
574
364
361
316
-
406
47
14
2,729
953
43
318
1,314
3,354
3,543
(189)
1,289
248
557
2,094
3,514
4,560
(1,046)
553
632
372
326
615
1,758
479
(10)
57
4,782
199
641
431
366
912
-
363
(86)
120
2,946
1,430
314
298
189
122
108
-
1,394
3,855
940
187
753
-
753
250
$503
$0.63
$0.63
1,339
311
308
181
123
193
-
1,371
3,826
767
30
1,337
278
300
191
130
274
965
1,089
4,564
(2,664)
(551)
737 (2,113)
-
(2,113)
67
(2,180)
(3.91)
(3.91)
-
737
226
511
0.73
0.67
Fifth Third Bancorp 69
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Bancorp Shareholders’ Equity
Accumulated
Other
Common Preferred
Stock
Stock
Capital
Surplus
$1,295
9
1,779
Retained Comprehensive
Income (Loss)
Earnings
(126)
8,413
(2,113)
Treasury
Stock
(2,209)
224
1,072
3,169
(9)
239
(1,071)
56
(136)
1,295
4,241
41
351
133
(674)
(2)
4
(16)
(5)
848
635
272
46
(27)
1
(29)
1,779
1
3,609
(3)
1,743
45
$1,779
3,654
45
(62)
(10)
1
(2)
1,715
(413)
(48)
(19)
1
3
5,824
737
(29)
(220)
(41)
35
(1)
24
(3)
6,326
753
(32)
(205)
(45)
(1)
(77)
98
143
241
73
6,719
314
1,841
136
2
1
(229)
27
(1)
2
(201)
62
6
3
(130)
Total
Bancorp
Non-
Shareholders’ controlling
Interest
Equity
9,161
(2,113)
224
(1,889)
(413)
(48)
(19)
1,072
3,408
770
(9)
57
-
-
4
(16)
(1)
12,077
737
143
880
(29)
(220)
-
986
35
(269)
45
-
-
(29)
24
(3)
13,497
753
73
826
(32)
(205)
-
44
-
(4)
1
(77)
-
1
14,051
-
29
29
Total
Equity
9,161
(2,113)
224
(1,889)
(413)
(48)
(19)
1,072
3,408
770
(9)
57
-
-
4
(16)
(1)
12,077
737
143
880
(29)
(220)
-
986
35
(269)
45
-
-
(29)
24
(3)
13,497
753
73
826
(32)
(205)
-
44
-
(4)
1
(77)
29
1
14,080
($ in millions, except per share data)
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 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
Net income
Other comprehensive income
Comprehensive income
Cash dividends declared:
Common stock at $0.04 per share
Preferred stock
Accretion of preferred dividends, Series F
Stock-based compensation expense
Restricted stock grants
Stock-based awards exercised, including
treasury shares issued
Loans repaid related to the exercise of stock-
based awards, net
Impact of cumulative effect of change in
accounting principle
Noncontrolling interest
Other
Balance at December 31, 2010
See Notes to Consolidated Financial Statements.
70 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 ($ in millions)
Operating Activities
Net income (loss) attributable to Bancorp
Adjustments to reconcile net income (loss) attributable to Bancorp to net cash provided by 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 and fair value adjustments on loans held for sale
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
Dividends representing return on equity method investments
Excess tax benefit related to stock-based compensation
Gain on sale of processing business, net of tax
Net change in:
Trading securities
Other assets
Accrued taxes, interest and expenses
Other liabilities
Net Cash Provided by Operating Activities
Investing Activities
Sales:
Available-for-sale securities
Loans
Disposal of bank premises and equipment
Repayments / maturities:
Available-for-sale securities
Held-to-maturity securities
Purchases:
Available-for-sale securities
Held-to-maturity securities
Bank premises and equipment
Restricted cash from the initial consolidation of variable interest entities
Dividends representing return of equity method investments
Proceeds from sale of processing business
Net cash (paid) acquired in business combinations
Net change in:
Other short-term investments
Loans and leases
Operating lease equipment
Net Cash Provided by (Used In) Investing Activities
Financing Activities
Net change in:
Core deposits
Certificates - $100,000 and over, including other foreign office
Federal funds purchased
Other short-term borrowings
Proceeds from issuance of long-term debt
Repayment of long-term debt
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
Dividends paid on common shares
Dividends paid on preferred shares
Retirement of preferred shares, Series D, E
Dividends on redemption of preferred shares, Series D, E
Capital contribution from noncontrolling interest
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.
2010
$753
1,538
457
64
176
(60)
(14)
13
-
36
114
(297)
-
-
(18,231)
18,634
31
(4)
-
67
9
(63)
82
3,305
2,578
538
10
4,620
1
(5,218)
(1)
(224)
63
8
-
-
1,861
(2,507)
(21)
1,708
784
(3,429)
97
38
14
(2,473)
-
-
-
-
(32)
(205)
-
-
30
4
(5,172)
(159)
2,318
$2,159
2009
737
3,543
341
45
184
(27)
(64)
37
7
24
116
(373)
-
-
(22,252)
21,504
22
-
(1,052)
1,000
826
(1,200)
376
3,794
3,750
331
20
117,901
3
(126,942)
-
(173)
-
9
562
(16)
209
5,497
(75)
1,076
9,550
(4,159)
(104)
(8,544)
527
(3,065)
986
-
(269)
35
(27)
(220)
-
-
-
(1)
(5,291)
(421)
2,739
$2,318
$920
79
1,416
109
2008
(2,113)
4,560
8
57
(1,140)
(41)
(120)
127
-
207
(47)
(195)
130
965
(11,527)
11,273
13
-
-
134
(478)
925
355
3,093
7,226
5,216
34
67,883
3
(76,317)
(11)
(410)
-
11
-
66
(2,910)
(6,553)
(142)
(5,904)
(2,820)
1,927
(4,352)
4,478
2,157
(2,272)
-
4,480
-
-
(639)
(48)
(9)
(19)
-
7
2,890
79
2,660
2,739
2,053
416
Fifth Third Bancorp 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Nature of Operations
Fifth Third Bancorp, an Ohio corporation, conducts its principal
lending, deposit gathering, transaction processing and service
its banking and non-banking
advisory activities
subsidiaries from banking centers
the
Midwestern and Southeastern regions of the United States.
throughout
through
located
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 recognized within
noninterest income and the non-credit component is recognized
through 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.
into
interest
Purchased
Portfolio Loans and Leases
Basis of Accounting
Portfolio loans and leases are generally reported at the principal
amount outstanding, net of unearned income, deferred loan fees
and costs, and any direct principal charge-offs. Direct loan
origination fees and costs are deferred and the net amount is
amortized over the estimated life of the related loans as a yield
adjustment. Interest income is recognized based on the principal
balance outstanding computed using the effective interest method.
loans are evaluated for evidence of credit
deterioration at acquisition and recorded at their initial fair value.
For loans acquired with no evidence of credit deterioration, the
fair value discount or premium is amortized over the contractual
life of the loan as an adjustment to yield. For loans acquired with
evidence of credit deterioration, the Bancorp determines at the
acquisition date the excess of the loan’s contractually required
payments over all cash flows expected to be collected as an
amount that should not be accreted
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). Subsequent to the purchase date, increases in
expected cash flows over those expected at the purchase date are
recognized prospectively as interest income over the remaining
life of the loan. The present value of any decreases in expected
cash flows after the purchase date is recognized by recording an
ALLL or a direct charge-off. Subsequent to the purchase date, the
methods utilized to estimate the required ALLL is similar to
originated loans. 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.
The Bancorp’s
lease portfolio consists of both direct
financing and leveraged leases. 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. Leveraged leases are carried at the aggregate of lease
payments (less nonrecourse debt payments) plus estimated
residual value of the leased property, less unearned income.
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.
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.
Use of Estimates
The preparation of financial statements in conformity with 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.
Cash and Due From Banks
Cash and due from banks consist of currency and coin, cash items
in the process of collection and due from banks. Currency and
coin includes both U.S. and foreign currency owned and held at
Fifth Third offices and that is in-transit to the FRB. Cash items in
the process of collection include checks and drafts that are drawn
on another depository institution or the FRB that are payable
immediately upon presentation in the U.S. Balances due from
banks include non-interest bearing balances that are funds on
deposit at other depository institutions or the FRB.
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.
Available-for-sale and held-to-maturity
securities with
unrealized losses are reviewed quarterly for possible 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
72 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
income. Commercial
Nonaccrual Loans
When a loan is placed on nonaccrual status, the accrual of interest
is discontinued and all previously accrued and unpaid interest is
charged against
loans are placed on
nonaccrual status 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. Residential mortgage loans that have principal and
interest payments that have become past due 150 days are placed
on nonaccrual status unless such loans are both well secured and
in the process of collection. Home equity, automobile, and other
consumer loans and leases that have principal and interest
payments that have become past due ninety days are placed on
nonaccrual status unless the loan is both well secured and in the
process of collection. Nonaccrual commercial loans, other than
loans modified in a TDR, are accounted for on the cost recovery
method. Nonaccrual residential mortgage loans and nonaccrual
consumer loans are accounted for on the cash basis method.
Nonaccrual loans may be returned to accrual status when all
delinquent interest and principal payments become current in
accordance with the loan agreement or when the loan is both well-
secured and in the process of collection.
Commercial
loans on nonaccrual status, as well as
commercial loans above a specified threshold are subject to an
individual review to identify charge-offs. Residential mortgage
loans and credit card loans that have principal and interest
payments that have become past due 180 days are charged off to
the ALLL, unless such loans are both well-secured and in the
process of collection. Home equity, automobile and other
consumer loans and leases that have principal and interest
payments that have become past due one hundred and twenty
days are charged off to the ALLL, unless such loans are both well-
secured and in the process of collection.
Restructured Loans
A loan is accounted for as a TDR 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 TDR 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 TDR 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 TDRs 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 TDR 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 regulatory guidance and provides better comparability
to other financial institutions. TDRs on commercial loans remain
on nonaccrual status until a six-month payment history is
sustained. During the nonaccrual period, TDRs on commercial
loans are accounted for using the cash basis method for income
recognition, provided that full repayment of principal under the
modified terms of the loan is reasonably assured.
Impaired Loans
A loan is considered to be impaired when, based on current
information and events, it is probable that the Bancorp will be
unable to collect all amounts due (including both principal and
interest) according to the contractual terms of the loan agreement.
For loans modified in a TDR, the contractual terms of the loan
agreement refer to the terms specified in the original loan
agreement. A loan restructured in a TDR is no longer considered
impaired in years after the restructuring if the restructuring
agreement specifies a rate equal to or greater than the rate the
Bancorp was willing to accept at the time of the restructuring for a
new loan with comparable risk and the loan is not impaired based
on the terms specified by the restructuring agreement. Refer to
the ALLL section for discussion regarding the Bancorp’s
methodology for identifying impaired loans and determination of
the need for a loss accrual.
Loans Held for Sale
Loans held for sale represent conforming fixed rate residential
mortgage loan originations intended to be sold in the secondary
market, commercial loans and other loans that management has
an active plan to sell. Loans held for sale may be carried at the
lower of cost or fair value, or carried at fair value where the
Bancorp has elected the fair value option of accounting under
U.S. GAAP. The Bancorp has elected to measure residential
mortgage loans originated as held for sale under the fair value
option. For loans in which the Bancorp has not elected the fair
value option, the lower of cost or fair value is determined at the
individual loan level.
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,
thereafter, reported within the Bancorp’s residential mortgages
class of portfolio loans and leases. In such cases, the residential
mortgage loans will continue to be measured at fair value. The fair
value of residential mortgage loans is estimated based upon
mortgage-backed securities prices and spreads to those prices or,
for certain ARM loans, discounted cash flow models that may
incorporate the anticipated portfolio composition, credit spreads
of asset-backed securities with similar collateral, and market
conditions. The anticipated portfolio composition includes the
effects of interest rate spreads and discount rates due to loan
characteristics such as the state in which the loan was originated,
the loan amount and the ARM margin. These fair value marks are
recorded as a component of noninterest 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.
Loans held for sale are placed on nonaccrual status consistent
with the Bancorp’s nonaccrual policy for portfolio loans and
leases.
Other Real Estate Owned
OREO, which is included in other assets, represents property
acquired through foreclosure or other proceedings and is carried
at the lower of cost or fair value, less costs to sell. All OREO
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 disaggregates its portfolio loans and leases into
portfolio segments for purposes of determining the ALLL. The
Bancorp’s portfolio segments include commercial, residential
mortgage, and consumer. The Bancorp further disaggregates its
portfolio segments into classes for purposes of monitoring and
assessing credit quality based on certain risk characteristics.
include
Classes within
the commercial portfolio segment
Fifth Third Bancorp 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
nonowner-occupied,
commercial & industrial, commercial mortgage owner-occupied,
commercial mortgage
commercial
construction, and commercial leasing. The residential mortgage
portfolio segment is also considered a class. Classes within the
consumer segment include home equity, automobile, credit card,
and other consumer loans and leases. For an analysis of the
Bancorp’s ALLL by portfolio segment and credit quality
information by class, see Note 7.
The Bancorp maintains the ALLL to absorb probable loan
and lease losses inherent in its portfolio segments. The ALLL 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 ALLL.
Provisions for loan and lease losses are based on the Bancorp’s
review of the historical credit loss experience and such factors
that, in management’s judgment, deserve consideration under
existing economic conditions in estimating probable credit losses.
In determining the appropriate level of the ALLL, 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
and customer level, regular credit examinations and quarterly
management reviews of
loans
experiencing deterioration of credit quality.
large credit exposures and
The Bancorp’s current methodology for determining the
ALLL is based on historical loss rates, current credit grades,
specific allocation on loans modified in a TDR and impaired
commercial credits above specified
thresholds and other
qualitative adjustments. Allowances on individual commercial
loans, TDRs 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
losses when
the
evaluating allowances for individual loans or pools of loans.
in estimating and measuring
imprecision
in a TDR, are subject to
Larger commercial loans included within aggregate borrower
relationship balances exceeding $1 million that exhibit probable or
observed credit weaknesses, as well as loans that have been
modified
individual review for
impairment. The Bancorp considers the current value of collateral,
credit quality of any guarantees, the guarantor’s liquidity and
willingness to cooperate, the loan structure, and other factors
when evaluating whether an individual loan is impaired. Other
factors may include the industry and geographic region of the
borrower, size and financial condition of the borrower, cash flow,
leverage of the borrower, and the Bancorp’s evaluation of the
borrower’s management. 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, other sources of cash flow, as well as evaluation of legal
options available to the Bancorp. 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 the
established threshold of $1 million and thus not subject to specific
allowance allocations. 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
74 Fifth Third Bancorp
encompasses ten categories.
Homogenous loans and leases in the residential mortgage and
consumer portfolio segments are not individually risk graded.
Rather, standard credit scoring systems and delinquency
monitoring are used to assess credit risks, and allowances are
established based on the expected net charge-offs. Loss rates are
based on the average net charge-off history by loan category.
Historical loss rates 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.
The Bancorp’s primary market areas for lending are the
Midwestern and Southeastern regions of the Unites 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
In the current year, the Bancorp has not substantively
changed any material aspect to its overall approach to determining
its ALLL for any of its portfolio segments. There have been no
material changes in criteria or estimation techniques as compared
to prior periods that impacted the determination of the current
period ALLL for any of the Bancorp’s portfolio segments.
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. This process takes into
consideration the same risk elements that are analyzed in the
determination of the adequacy of the Bancorp’s ALLL, as
discussed above. Net adjustments to the reserve for unfunded
commitments are included in other noninterest expense in the
Consolidated Statements of Income.
Loan Sales and Securitizations
When the Bancorp sells loans through either securitizations or
individual loan sales in accordance with its investment policies, it
is required to assess whether the entity holding the sold or
securitized loans is a VIE and whether the Bancorp is the primary
beneficiary and therefore consolidator of that VIE. If the
Bancorp holds the power to direct activities most significant to
the economic performance of the VIE and has the obligation to
absorb losses or right to receive benefits that could potentially be
significant to the VIE, then the Bancorp will generally be deemed
the primary beneficiary of the VIE. When the Bancorp previously
sold loans into isolated trusts or conduits, it obtained one or more
subordinated tranches or other residual interests in these trusts or
conduits, as well as the servicing rights to the underlying loans. As
a result, effective with the January 1, 2010 adoption of the VIE
consolidation guidance further discussed in the Accounting and
Reporting Developments section below, the Bancorp was required
to consolidate these VIEs, and accordingly, the underlying loans
and other assets and liabilities of these VIEs are included in the
Bancorp’s Consolidated Balance Sheet as of December 31, 2010.
Prior to the January 1, 2010 adoption of the VIE
the subordinated
consolidation guidance referenced above,
tranches and other residual interests in the trusts and conduits
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
referenced above were carried at fair value and included in
available-for-sale securities. The fair value of such interests were
based on quoted market prices, if available. If quoted prices were
not available, fair value was 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. Gains or losses recognized on the sale or
securitization of such loans prior to January 1, 2010 were reported
as a component of noninterest income in the Consolidated
Statements of Income and were based on the previous carrying
amount of the loans sold or securitized, as well as the fair value of
the servicing rights and other interests obtained by the Bancorp at
the date of sale or securitization. Adjustments to the fair value of
such interests prior to January 1, 2010 were 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 had declined below the
carrying amount and such decline was determined to be other-
than-temporary.
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
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
accelerated depreciation
income tax purposes.
is used for
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
in the
improvements are charged to noninterest expense
Consolidated Statements of Income as incurred.
Derivative Financial Instruments
The Bancorp accounts for its derivatives as either assets or
to
through adjustments
liabilities measured at fair value
income and/or current
accumulated other comprehensive
the Bancorp designates
earnings, as appropriate. On the date the Bancorp enters into a
derivative contract,
the derivative
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
in accumulated other
that
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
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 21.
Fifth Third Bancorp 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
the assumed conversion of dilutive
equivalents represent
convertible preferred stock and the exercise of dilutive stock-
based awards and warrants.
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
considered participating securities until vested. While
the
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.
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
76 Fifth Third Bancorp
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 10 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,
customer
lists, non-competition agreements and cardholder
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.
Securities sold under repurchase agreements are accounted
for as collateralized financing transactions and included in other
short-term borrowings in the Consolidated Balance Sheets at the
amounts which the securities were sold plus accrued interest.
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.
Accounting and Reporting Developments
Transfers of Financial Assets
In June 2009, the FASB issued guidance amending the accounting
for the transfers of financial assets. This amended guidance
removed the concept of a QSPE, changed the requirements for
derecognizing financial assets and measuring gains or losses on
the sale of financial assets, and required additional disclosures
about transfers of financial assets and a transferor’s continuing
involvement in transferred financial assets. The amended guidance
was adopted by the Bancorp on January 1, 2010 on a prospective
basis and may impact the Bancorp’s structuring of securitizations
and other transfers of financial assets, including guaranteed
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
mortgage securitizations, in order to meet the amended sale
treatment criteria under the amended guidance. In addition, see
the discussion below regarding amended guidance on the
impact on the Bancorp’s
consolidation of VIEs and the
assets previously
Consolidated Financial Statements
transferred to QSPEs.
for
Consolidation of Variable Interest Entities
In June 2009, the FASB issued guidance amending the accounting
for the consolidation of VIEs. This guidance, adopted by the
Bancorp on January 1, 2010, amends the methodology for
determining the primary beneficiary (and therefore consolidator)
of a VIE and requires 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 that most significantly impact 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. 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 was the
primary beneficiary of the VIE under the amended guidance. The
Bancorp is also required under the amended guidance to provide
additional disclosures about
involvement with both
consolidated and non-consolidated VIEs, any significant changes
involvement, and how that
in risk exposure due to that
involvement affects
the Bancorp’s Consolidated Financial
Statements. See Note 12 for further discussion.
its
In accordance with the transition guidance for the initial
consolidation of VIEs resulting from the adoption of the
amended guidance, the Bancorp initially measured the assets and
liabilities of newly consolidated VIEs at their carrying amounts,
defined as the amounts at which the assets and liabilities would
have been carried in the Bancorp’s Consolidated Financial
Statements if the amended guidance had been effective when the
Bancorp first met the conditions to be the primary beneficiary
under the amended guidance. The difference between the
amounts added to the Bancorp’s Consolidated Balance Sheets and
the amounts of previously recognized interests in the newly
consolidated VIEs was recognized as a cumulative effect
adjustment to retained earnings. The consolidation of these VIEs
on January 1, 2010 resulted in an increase in total assets of
approximately $1.3 billion, a negative adjustment of $1 million to
income and a negative
accumulated other comprehensive
cumulative effect adjustment to retained earnings of $77 million.
The impact of consolidating these VIEs did not have a material
effect on the Bancorp’s regulatory capital ratios.
In February 2010, the FASB issued guidance deferring the above
amendments to the consolidation of VIEs for a reporting entity’s
interest in registered money market funds. In addition, the deferral
also applies to a reporting entity’s interest in entities meeting either of
the following two criteria: (1) the entity has all the attributes of an
investment company as specified in ASC Topic 946, “Financial
Services - Investment Companies,” or (2) it is an entity for which it is
acceptable based on
industry practice to apply measurement
principles that are consistent with those in ASC Topic 946 (including
recognizing changes in fair value currently in the statement of
operations) for financial reporting purposes. The deferral does not
apply to those entities in situations in which a reporting entity has the
explicit or implicit obligation to fund losses of an entity that could
potentially be significant to the entity. As a result of this deferral, the
Bancorp has determined that its interests in private equity funds,
mutual funds and money market funds are not subject to the above
amended guidance for the consolidation of VIEs. For entities that
meet the deferral criteria, the primary beneficiary of the VIE is the
enterprise that will absorb a majority of the VIE’s expected losses or
receive a majority of the VIE’s expected residual returns.
Disclosures about Fair Value Measurements
In January 2010, the FASB issued new guidance clarifying current
fair value disclosure requirements and also requiring certain
additional disclosures about fair value measurements. The
disclosure
this new guidance were
implemented by the Bancorp during the first quarter of 2010 and
are included in Note 28.
requirements under
Embedded Credit Derivatives
In March 2010, the FASB issued guidance clarifying the type of
embedded credit derivative that is exempt from bifurcation
requirements. Under the guidance, the only form of embedded
credit derivative that qualifies for the exemption is one that is
related only to the subordination of one financial instrument to
another. The adoption of this guidance on July 1, 2010 did not
have a material impact on the Bancorp’s Consolidated Financial
Statements.
Modification of a Loan Included in a Pool Accounted for as a Single Asset
In April 2010, the FASB
issued guidance clarifying that
modifications of loans that are accounted for within a pool under
ASC Subtopic 310-30 do not result in the removal of those loans
from the pool even if the modification of those loans would
otherwise be considered a TDR. Under the new guidance, an
entity will continue to be required to consider whether the pool of
assets in which the loan is included is impaired if expected cash
flows for the pool change. The adoption of this guidance on July
1, 2010 did not have a material impact on the Bancorp’s
Consolidated Financial Statements.
Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses
In July 2010, the FASB issued guidance that requires the Bancorp
to disclose a greater level of disaggregated information about the
credit quality of its loans and leases and the ALLL. The new
guidance defines two levels of disaggregation—portfolio segment
and class. A portfolio segment is defined as the level at which the
Bancorp develops and documents a systematic method for
determining its ALLL. Classes generally represent a further
disaggregation of a portfolio segment based on certain risk
characteristics. The new disclosures relating to information as of
the end of a reporting period are effective for interim and annual
reporting periods ending on or after December 15, 2010 and have
been included in Note 7. The new disclosures about activity that
occurs during a reporting period are effective for interim and
annual reporting periods beginning on or after December 15,
2010.
In January 2011, the FASB issued guidance that temporarily
delayed the effective date of the disclosures about TDR’s that are
included in this July 2010 guidance on disclosures about credit
quality and the ALLL. The TDR disclosure guidance will be
coordinated with the FASB’s proposed guidance for determining
what constitutes a TDR and is currently anticipated to be effective
for interim and annual periods ending after June 15, 2011.
Fifth Third Bancorp 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2010
2. SUPPLEMENTAL CASH FLOW INFORMATION
Noncash investing and financing activities are presented in the following table for the years ended December 31:
($ in millions)
Transfers:
Portfolio loans to held for sale loans
Held for sale loans to portfolio loans
Portfolio loans to available-for-sale securities
Portfolio loans to trading securities
Held for sale loans to trading securities
Portfolio loans to OREO
Held for sale loans to OREO
Acquisitions:
Fair value of tangible assets acquired
Goodwill and identifiable intangible assets acquired
Contingent consideration
Liabilities assumed
Common stock issued
Impact of change in accounting principle:
Decrease in available-for-sale securities, net
Increase in portfolio loans
Decrease in demand deposits
Increase in other short-term borrowings
Increase in long-term debt
$650
160
-
-
-
662
68
941
2,217
18
122
1,344
-
-
-
-
-
2009
2008
$45
47
-
-
136
377
36
7
13
(4)
-
-
-
-
-
-
-
$532
1,692
430
92
268
303
-
4,368
1,194
-
(4,858)
(770)
-
-
-
-
-
3. BUSINESS COMBINATIONS AND ASSET ACQUISITIONS
First Charter Corporation
On June 6, 2008, the Bancorp acquired 100% of the outstanding
institution
stock of First Charter, a full service financial
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.
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.
Under the terms of the transaction, the Bancorp paid $31.00
per First Charter share, or $1.1 billion. 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 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.
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.
78 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRICTIONS ON CASH AND DIVIDENDS
The FRB requires that banks hold cash in reserve against deposit
liabilities, known as the reserve requirement. The amount of the
reserve requirement
is currently calculated based on net
transaction account deposits, and is satisfied with vault cash.
When vault cash alone is not sufficient to meet the reserve
requirement, the remaining amount must be satisfied with funds
held at the FRB. At December 31, 2010 and 2009, the Bancorp’s
reserve requirements were satisfied with vault cash. The dividends
paid by the Bancorp’s state chartered bank and nonbank
subsidiaries are subject to regulations and limitations prescribed
by the appropriate state authority. The Bancorp’s state chartered
bank paid the Bancorp $1.4 billion in dividends during the year
ended December 31, 2010 and did not pay a dividend during the
year ended December 31, 2009. Based on retained earnings at
December 31, 2010 and 2009, the dividend limitation of the
Bancorp’s nonbank subsidiaries under these provisions was $150
million and $87 million, respectively.
On December 31, 2008, the Bancorp sold $3.4 billion in
senior preferred stock and related warrants to the U.S. Treasury
under the terms of the 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. Also, 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. Additionally, the
Bancorp’s ability to pay dividends on its common stock is limited
by its need to maintain adequate capital levels, comply with safe
and sound banking practices and meet regulatory expectations.
On February 2, 2011, the Bancorp redeemed all 136,320
shares of its Series F preferred stock held by the U.S Treasury
under the CPP totaling $3.4 billion. See Note 32 for further
information on the redemption of the preferred shares.
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:
2010
2009
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$225
1,564
170
10,570
1,338
1,052
$14,919
5
81
2
435
19
-
542
-
-
-
(32)
(15)
-
(47)
230
1,645
172
10,973
1,342
1,052
15,414
464
2,143
240
11,074
2,541
1,417
17,879
2
32
3
315
57
2
411
(8)
(33)
-
(7)
(29)
-
(77)
458
2,142
243
11,382
2,569
1,419
18,213
($ 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:
Obligations of states and
political subdivisions
Other debt securities
$348
5
$353
-
-
-
-
-
-
348
5
353
350
5
355
-
-
-
-
-
-
350
5
355
Total
(a) Other securities consist of FHLB and FRB restricted stock holdings of $524 and $344 at December 31, 2010, respectively, and $551 and $342 at December 31, 2009, respectively, that are
carried at cost, and certain mutual fund holdings and equity security holdings.
The following table presents realized gains and losses recognized in income from available-for-sale securities for the years ended December 31:
($ in millions)
Realized gains
Realized losses
Net realized gains
2010
$69
(13)
$56
2009
91
(34)
57
2008
161
(130)
31
Trading securities totaled $294 million as of December 31, 2010
compared to $355 million at December 31, 2009. Gross realized
gains and gross realized losses on trading securities were $1 million
each for the year ended December 31, 2010. Gross unrealized gains
and gross unrealized losses on trading securities were $8 million
each. for the year ended December 31, 2010. Gross realized gains
and losses on trading securities were $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.
At December 31, 2010 and 2009, securities with a fair value of
$11.3 billion and $14.2 billion, respectively, were pledged to secure
borrowings, public deposits, trust funds, derivative contracts and
for other purposes as required or permitted by law.
Fifth Third Bancorp 79
The amortized cost and fair value of available-for-sale and held-to-maturity securities at December 31, 2010, by contractual maturity, are
shown in the following table:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Debt securities: (a)
633
Under 1 year
9,925
1-5 years
3,645
5-10 years
159
Over 10 years
1,052
Other securities
Total
15,414
(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.
$626
9,535
3,546
160
1,052
$14,919
Fair Value
Available-for-Sale & Other
Amortized
Cost
Held-to-Maturity
Amortized
Cost
Fair Value
21
190
116
26
-
353
21
190
116
26
-
353
The following table provides the fair value and gross unrealized losses on available-for-sale securities in an unrealized loss position, aggregated
by investment category and length of time the individual securities have been in a continuous unrealized loss position, as of December 31:
($ in millions)
2010
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
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
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$ -
-
11
1,555
563
-
$2,129
$288
1,024
4
1,583
782
2
$3,683
-
-
-
(32)
(10)
-
(42)
(8)
(15)
-
(7)
(15)
-
(45)
1
-
4
-
47
-
52
1
347
3
-
108
-
459
-
-
-
-
(5)
-
(5)
-
(18)
-
-
(14)
-
(32)
1
-
15
1,555
610
-
2,181
289
1,371
7
1,583
890
2
4,142
-
-
-
(32)
(15)
-
(47)
(8)
(33)
-
(7)
(29)
-
(77)
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 for further information
on the Bancorp’s accounting for OTTI.
During the year ended December 31, 2010, the Bancorp
recognized $3 million in OTTI on its available-for-sale debt
securities, however, no OTTI was recognized on held-to-maturity
debt securities. During the year ended December 31, 2009, OTTI
recognized on available-for-sale and held-to-maturity debt
securities was immaterial to the Bancorp’s consolidated financial
statements. In addition, for the years ended December 31, 2010,
2009 and 2008, OTTI recognized on available-for-sale equity
securities was immaterial to the Bancorp’s consolidated financial
statements. At December 31, 2010 less than one percent of
unrealized losses in the available-for-sale securities portfolio were
represented by non-rated securities, compared to two percent at
December 31, 2009.
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 debt securities classified as available-
for-sale. Upon a change in U.S. GAAP and adoption by the
Bancorp in the second quarter of 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 $37 million to the investment balance and related
unrealized losses during the year ended December 31, 2009.
80 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LOANS AND LEASES
The following table provides a summary of the total loans and leases classified by primary purpose as of December 31:
($ in millions)
Loans and leases held for sale:
Commercial and industrial 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 and industrial 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
2010
$83
147
63
1,901
22
$2,216
$27,191
10,845
2,048
3,378
43,462
8,956
11,513
10,983
1,896
681
34,029
$77,491
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
Total portfolio loans and leases were recorded net of unearned
income, which totaled $1.0 billion and $1.2 billion as of December
31, 2010 and 2009, 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), totaled a net discount
of $19 million and $106 million as of December 31, 2010 and
2009, 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 evaluate whether 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. For further information on credit quality and the
ALLL, see Note 7.
The Bancorp engages in commercial and consumer lease
products primarily related to the financing of commercial
equipment and automobiles. The Bancorp had $3.0 billion of
direct financing leases and $1.7 billion of leveraged leases at
December 31, 2010 compared to $3.2 billion and $2.0 billion,
respectively, at December 31, 2009.
Pre-tax income from leveraged leases for 2010 was $49
million compared to pre-tax income in 2009 of $57 million and a
pre-tax loss in 2008 of $97 million. The tax effect of this income
was an expense of $10 million in each of the years ended 2010 and
2009 and a tax benefit of $37 million in 2008.
The components of the investment in lease financing at December 31:
($ 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 (a)
(a) The accumulated allowance for uncollectible minimum lease payments was $112 and $125 at December 31, 2010 and 2009, respectively.
2010
$3,775
900
16
4,691
(1,040)
$3,651
2009
4,174
1,028
19
5,221
(1,186)
4,035
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. Residual value
write-downs related to consumer automobile leases for the year
ended December 31, 2010 were immaterial to the Consolidated
Financial Statements. The Bancorp recognized $1 million and $3
in residual value write-downs related to consumer
million
automobile leases for the years ended December 31, 2009 and
2008, respectively. The Bancorp recognized an immaterial amount
of residual value write-downs related to commercial leases in 2010
and 2008 and $4 million for the year ended December 31, 2009.
At December 31, 2010, the minimum future lease payments
receivable for each of the years 2011 through 2015 was $860
million, $686 million, $492 million, $457 million and $251 million,
respectively.
Fifth Third Bancorp 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CREDIT QUALITY AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES
Effective December 31, 2010, the Bancorp adopted new
disclosure requirements that require disaggregation of disclosures
related to the ALLL by portfolio segment and disclosures related
to credit quality of loans and leases by class. The Bancorp’s
portfolio segments represent the level of disaggregation at which
the Bancorp determines the ALLL. The Bancorp’s classes
represent the level of dissagregation at which the Bancorp
monitors the credit quality and risk characteristics of the portfolio
segments. The new disclosure requirements do not apply to
periods ending before December 15, 2010. Therefore, certain
disclosures are presented on a comparative basis in aggregate and
then on a disaggregated basis as of December 31, 2010.
Allowance for Loan and Lease Losses
The following table summarizes transactions in the ALLL for the years ended December 31:
($ in millions)
Balance at January 1
Impact of change in accounting principle
Losses charged off
Recoveries of losses previously charged off
Provision for loan and lease losses
Balance at December 31
2010
$3,749
45
(2,485)
157
1,538
$3,004
2009
$2,787
-
(2,719)
138
3,543
$3,749
2008
$937
-
(2,791)
81
4,560
$2,787
The following table provides a summary of the ALLL and related loans and leases classified by portfolio segment as of December 31, 2010:
Residential
Mortgage
Consumer
Unallocated
Total
Commercial
($ in millions)
Allowance for loan and lease losses (a):
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
Unallocated
Total allowance for loan and lease losses
Loans and leases (b):
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
Total portfolio loans and leases
(a) Includes $15 related to leveraged leases.
(b) Excludes $46 of residential mortgage loans measured at fair value, and includes $1,039 of leveraged leases, net of unearned income.
$209
1,779
1
-
$1,989
$1,076
42,382
4
$43,462
1,180
7,718
12
8,910
119
189
2
-
310
107
448
-
-
555
651
24,414
8
25,073
-
-
-
150
150
-
-
-
-
$435
2,416
3
150
$3,004
$2,907
74,514
24
$77,445
Credit Risk Profile
For purposes of monitoring
the credit quality and risk
characteristics of its commercial portfolio segment, the Bancorp
disaggregates the segment into the following classes: commercial
and industrial, commercial mortgage owner-occupied, commercial
mortgage nonowner-occupied, commercial construction and
commercial leasing.
To facilitate the monitoring of credit quality within the
commercial portfolio segment, and for purposes of analyzing
historical loss rates used in the determination of the ALLL for the
commercial portfolio segment, the Bancorp utilizes the following
categories of credit grades: pass, special mention, substandard,
doubtful or loss. The five categories, which are derived from
standard regulatory rating definitions, are assigned upon initial
approval of credit to borrowers and updated periodically
thereafter. Pass ratings, which are assigned to those borrowers that
do not have identified potential or well defined weaknesses and
for which there is a high likelihood of orderly repayment, are
updated periodically based on the size and credit characteristics of
the borrower. All other categories are updated on a quarterly basis
during the month preceding the end of the calendar quarter.
The Bancorp assigns a special mention rating to loans and
leases that have potential weaknesses that deserve management’s
close attention. If left uncorrected, these potential weaknesses
may, at some future date, result in the deterioration of the
repayment prospects for the loan or lease or the Bancorp’s credit
position.
82 Fifth Third Bancorp
The Bancorp assigns a substandard rating to loans and
leases that are inadequately protected by the current sound worth
and paying capacity of the borrower or of the collateral pledged.
Substandard loans and leases have well defined weaknesses or
weaknesses that could jeopardize the orderly repayment of the
debt. Loans and leases in this grade also are characterized by the
distinct possibility that the Bancorp will sustain some loss if the
deficiencies noted are not addressed and corrected.
The Bancorp assigns a doubtful rating to loans and leases
that have all the attributes of a substandard rating with the added
characteristic that the weaknesses make collection or liquidation
in full, on the basis of currently existing facts, conditions, and
values, highly questionable and improbable. The possibility of
loss is extremely high, but because of certain important and
reasonable specific pending factors that may work to the
advantage of and strengthen the credit quality of the loan or
lease, its classification as an estimated loss is deferred until its
more exact status may be determined. Pending factors may
include a proposed merger or acquisition, liquidation proceeding,
capital injection, perfecting liens on additional collateral or
refinancing plans.
Loans and
loss are considered
uncollectible and are charged off in the period in which they are
determined uncollectible. Because loans and leases in this
category are fully charged down, they are not included in the
following tables.
leases classified as
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the credit risk profile of the Bancorp’s commercial portfolio segment, by class, as of December 31, 2010:
Credit Grade ($ in millions)
Pass
Special Mention
Substandard
Doubtful
Total
Commercial &
Industrial Loans
$23,147
1,406
2,541
97
$27,191
Commercial
Mortgage Loans
Owner-Occupied
4,034
430
854
22
5,340
Commercial
Mortgage Loans
Nonowner-Occupied
3,620
647
1,174
64
5,505
Commercial
Construction
Commercial
Leases
1,034
416
540
58
2,048
3,269
60
48
1
3,378
For purposes of monitoring
the credit quality and risk
characteristics of its consumer portfolio segment, the Bancorp
disaggregates the segment into the following classes: home equity,
automobile loans, credit card, and other consumer loans and
leases. The Bancorp’s residential mortgage portfolio segment is
also a separate class.
The Bancorp considers repayment performance as the best
indicator of credit quality for residential mortgage and consumer
loans. Residential mortgage loans that have principal and interest
payments that have become past due one hundred fifty days are
classified as nonperforming unless such loans are both well
secured and in the process of collection. Home equity,
automobile, and other consumer loans and leases that have
principal and interest payments that have become past due ninety
days are classified as nonperforming unless the loan is both well
secured and in the process of collection. Credit card loans that
have been modified in a TDR are classified as nonperforming
unless such loans have a sustained repayment performance of six
months or greater and are reasonably assured of repayment in
accordance with the restructured terms. All other loans and leases
are classified as performing. Well secured loans are collateralized
by perfected security interests in real and/or personal property for
which the Bancorp estimates proceeds from sale would be
sufficient to recover the outstanding principal and accrued interest
balance of the loan and pay all costs to sell the collateral. The
Bancorp considers a loan in the process of collection if collection
efforts or legal action is proceeding and the Bancorp expects to
collect funds sufficient to bring the loan current or recover the
entire outstanding principal and accrued interest balance.
The following table summarizes the credit risk profile of the Bancorp’s residential mortgage and consumer portfolio segments, by class, as
of December 31, 2010:
($ in millions)
Performing
Nonperforming
Total
(a) Excludes $46 of loans measured at fair value.
Residential
Mortgage Loans(a)
$8,642
268
$8,910
Home Equity
11,457
56
11,513
Automobile
Loans
Credit
Card
10,980
3
10,983
1,841
55
1,896
Other Consumer
Loans and Leases
597
84
681
Age Analysis of Past Due Loans and Leases
The following table summarizes the Bancorp’s recorded investment in portfolio loans and leases by age and class as of December 31, 2010:
Portfolio Loans and Leases ($ in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied
Commercial mortgage nonowner-occupied
Commercial construction
Commercial leasing
Residential mortgage loans (a)
Consumer:
Home equity loans
Automobile loans
Credit card loans
Other consumer loans and leases
Total portfolio loans and leases (a)
(a) Excludes $46 of loans measured at fair value.
(b) Includes accrual and nonaccrual loans and leases.
30-89 Days
Past Due
90 Days
and
Greater (b)
Total Past
Due
Current
Loans and
Leases
Total Loans
and Leases
90 Days Past
Due and Still
Accruing
$201
50
38
72
10
138
148
96
35
3
$791
303
139
215
145
7
368
145
15
90
6
1,433
504
189
253
217
17
506
293
111
125
9
2,224
26,687
5,151
5,252
1,831
3,361
8,404
11,220
10,872
1,771
672
75,221
$27,191
5,340
5,505
2,048
3,378
8,910
11,513
10,983
1,896
681
$77,445
$16
8
3
3
-
100
89
13
42
-
$274
Impaired Loans and Leases
Larger commercial loans included within aggregate borrower
relationship balances exceeding $1 million that exhibit probable
or observed credit weaknesses are subject to individual review.
The Bancorp also performs an individual review on loans that are
restructured in a troubled debt restructuring. The Bancorp
considers the current value of collateral, credit quality of any
guarantees, the loan structure, and other factors when evaluating
whether an individual loan is impaired. Other factors may include
the geography and industry of the borrower, size and financial
condition of the borrower, cash flow and leverage of the
borrower, and the Bancorp’s evaluation of the borrower’s
management.
Fifth Third Bancorp 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the Bancorp’s recorded investment in impaired loans and leases and related allowance as of December 31:
($ in millions)
With a related allowance recorded:
Commercial
Residential mortgage
Consumer
Total with a related allowance recorded
With no related allowance recorded:
Commercial
Residential mortgage
Consumer
Total with no related allowance recorded
Total impaired loans and leases
2010
Recorded
Investment
Allowance
2009
Recorded
Investment
Allowance
$695
1,071
607
$2,373
$385
121
52
558
$2,931
210
121
107
438
-
-
-
-
-
$1,468
960
519
$2,947
$214
68
59
341
$3,288
510
108
36
654
-
-
-
-
-
The average balance of impaired loans during 2010, 2009, and 2008 was $3.2 billion, $2.9 billion and $1.5 billion, respectively. Interest income
recognized on impaired loans during 2010, 2009, and 2008 was $74 million, $54 million, and $12 million, respectively.
The following table summarizes the Bancorp’s recorded investment in impaired loans and related allowance by class as of December 31, 2010:
($ in millions)
With a related allowance recorded:
Commercial:
Commercial and industrial loans
Commercial mortgage loans owner-occupied
Commercial mortgage loans nonowner-occupied
Commercial construction loans
Commercial leasing
Restructured residential mortgage loans
Restructured consumer loans:
Home equity
Automobile
Credit card
Other
Total impaired loans with a related allowance
With no related allowance recorded:
Commercial:
Commercial and industrial loans
Commercial mortgage loans owner-occupied
Commercial mortgage loans nonowner-occupied
Commercial construction loans
Commercial leasing
Restructured residential mortgage loans
Restructured consumer loans:
Home equity
Automobile
Total impaired loans with no related allowance
Recorded
Investment
Unpaid Principal
Balance
Allowance
$291
37
202
150
15
1,071
$397
32
100
78
$2,373
$153
99
108
8
17
121
$46
6
$558
404
49
386
240
15
1,126
400
33
100
78
2,831
194
113
126
24
17
146
48
6
674
128
4
40
31
7
121
53
5
18
31
438
-
-
-
-
-
-
-
-
-
Nonperforming Assets
The following table summarizes the total nonperforming and delinquent loans and leases as of December 31:
($ in millions)
Nonaccrual loans and leases
Restructured nonaccrual loans and leases
Total nonperforming loans and leases
OREO and other repossessed personal property (a)
Total nonperforming assets (b)
Total loans and leases 90 days past due and still accruing
(a) Excludes $38 and $15 of OREO related to government insured loans at December 31, 2010 and 2009, respectively.
(b) Excludes $294 and $224 of nonaccrual loans held for sale at December 31, 2010 and 2009, respectively.
2010
$1,333
347
1,680
494
$2,174
$274
2009
$2,642
305
2,947
297
$3,244
$567
84 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest income recognized on a cash basis for loans on nonaccrual status during 2010, 2009, and 2008, was $25 million, $20 million, and $10
million, respectively.
The following table summarizes the Bancorp’s nonperforming loans and leases, by class, as of December 31, 2010:
($in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage loans owner-occupied
Commercial mortgage loans nonowner-occupied
Commercial construction
Commercial leasing
Total Commercial
Residential mortgage loans
Consumer:
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total Consumer
Total nonperforming loans and leases
(a) Excludes $294 and $224 of nonaccrual loans held for sale at December 31, 2010 and 2009, respectively.
Nonperforming
Loans & Leases (a)
$568
168
267
192
19
$1,214
$268
56
3
55
84
$198
$1,680
accreted into interest income over the remaining life of the loan or
pool of loans (accretable yield). A summary of activity is provided.
8. LOANS WITH DETERIORATED CREDIT QUALITY ACQUIRED IN A TRANSFER
The Bancorp has 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, 2010, 2009 and 2008, the Bancorp recorded
provision expense for loans acquired with deteriorated credit
quality of $6 million, $21 million and $35 million, respectively, in
the Consolidated Statements of Income. In addition, as of
December 31, 2010 and 2009, the Bancorp maintained an
allowance for loan and lease losses of $3 million and $21 million,
respectively, on these loans.
net
net
($ in millions)
Balance as of December 31, 2007
Additions
Accretion
Disposals
Reclassifications from (to) nonaccretable difference,
Balance as of December 31, 2008
Additions
Accretion
Disposals
Reclassifications from (to) nonaccretable difference,
Balance as of December 31, 2009
Additions
Accretion
Disposals
Reclassifications from (to) nonaccretable difference,
Accretable
Yield
$6
24
(15)
-
13
$28
-
(6)
-
(13)
$9
-
(2)
(2)
(3)
$2
The following table reflects the outstanding balance of all
contractually required payments and carrying amounts of loans
acquired with deteriorated credit quality at December 31:
($ in millions)
Commercial
Consumer
Outstanding balance
Carrying amount
2010
$15
58
$73
$24
2009
158
58
216
71
At the acquisition date, the Bancorp determines the excess of the
loan’s contractually required payments over all cash flows
expected to be collected as an amount that should not be accreted
into interest income (nonaccretable difference). The remaining
amount representing the difference in the expected cash flows of
acquired loans and the initial investment in the acquired loans is
net
Balance as of December 31, 2010
The following table reflects loans that were acquired with
deteriorated credit quality during the years ended December 31:
($ 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
2010
2009
2008
$ -
23
$23
$8
8
-
-
-
-
-
182
34
216
90
66
Fifth Third Bancorp 85
9. BANK PREMISES AND EQUIPMENT
The following is a summary of bank premises and equipment at December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ 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 $225 million in 2010, $227 million in 2009 and
$218 million in 2008.
Gross occupancy expense for cancelable and noncancelable
leases was $98 million in 2010, $102 million in 2009 and $98
million in 2008, which is reduced by rental income from leased
premises of $19 million in 2010, $16 million in 2009 and $13
million in 2008.
($ in millions)
Year ended December 31,
2011
2012
2013
2014
2015
Thereafter
Total minimum lease payments
Amounts representing interest
Present value of net minimum lease payments
Estimated Useful Life
5 to 50 yrs.
3 to 20 yrs.
3 to 40 yrs.
2010
$797
1,593
1,296
393
92
(1,782)
$2,389
2009
748
1,539
1,354
401
105
(1,747)
2,400
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 annual
future minimum payments under capital leases and noncancelable
operating leases at December 31, 2010:
Operating Leases
Capital Leases
$91
87
83
79
75
454
$869
-
-
12
13
3
-
-
1
29
3
32
10. 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. During
the fourth quarter of 2008, the Bancorp determined that the
Commercial Banking and Consumer Lending segments’ goodwill
carrying amounts exceeded their associated implied fair values by
$750 million and $215 million, respectively. The resulting $965
million goodwill impairment charge was recorded in the fourth
quarter of 2008 and represents the total amount of accumulated
impairment losses as of December 31, 2010.
Changes in the net carrying amount of goodwill by reporting segment for the years ended December 31, 2010 and 2009 were as follows:
Commercial
($ in millions)
Banking
Balance as of December 31, 2008
$614
Acquisition activity
(1)
Sale of Processing Business
-
Balance as of December 31, 2009
613
Acquisition activity
-
$613
Balance as of December 31, 2010
(a) As a result of the Processing Business Sale on June 30, 2009, Processing Solutions is no longer a segment of the Bancorp.
Consumer
Lending
-
-
-
-
-
-
Branch
Banking
1,657
(1)
-
1,656
-
1,656
Investment
Advisors
148
-
-
148
-
148
Processing
Solutions (a)
205
7
(212)
-
Total
2,624
5
(212)
2,417
-
2,417
The Bancorp conducts its evaluation of goodwill impairment as of
September 30th each year, and more frequently if events or
circumstances indicate that there may be impairment. The
Bancorp completed its annual goodwill impairment test as of
September 30, 2010 and determined that no impairment existed.
The Bancorp evaluates goodwill for impairment at the segment
level.
In Step 1 of the goodwill impairment test, the Bancorp
compared the fair value of each segment to its carrying amount,
including goodwill. To determine the fair value of a segment, the
Bancorp employed an
income-based approach utilizing the
segment’s forecasted cash flows (including a terminal value
approach to estimate cash flows beyond the final year of the
forecast) and the segment’s estimated cost of equity as the
discount rate. The Bancorp believes that this DCF method, using
management projections for the respective segments and an
appropriate risk adjusted discount rate, is most reflective of a
market participant’s view of fair values given current market
86 Fifth Third Bancorp
conditions. Under the DCF method, the forecasted cash flows
were developed for each segment 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, recent and
anticipated regulatory changes, and industry and economic trends,
among other considerations.
The long-term growth rate used in determining the terminal
value of each segment was estimated at three percent based on the
Bancorp’s assessment of the long-term expected growth rate of
each segment, as well as broader economic considerations such as
long-term expectations for gross domestic product and inflation.
The cash flow growth rate required to avoid failing Step 1 was
determined to be negative 0.5%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The discount rates used in the goodwill impairment test as of
September 30, 2010 to develop the estimated fair value of the
segments were as follows:
Commercial Banking
Branch Banking
Investment Advisors
Discount
Rate
16.7%
16.0%
17.4%
Discount rates were estimated based on a capital asset pricing
model, which considers the risk-free interest rate, an estimated
equity risk premium, an estimated beta for the Bancorp’s common
stock and size premium adjustments specific to each particular
segment.
Based on the results of the Step 1 test, the Bancorp
determined that the fair value of the Commercial Banking, Branch
Banking, and Investment Advisors segments exceeded their
respective carrying values, and consequently, no further testing
was required.
The Step 1 analysis prepared for the Bancorp’s Branch
Banking segment resulted in the unit’s fair value exceeding its
carrying value, including goodwill, by 7%. The key assumptions
11. 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, 2010 of 3.5 years. The
($ in millions)
As of December 31, 2010:
Mortgage servicing rights
Core deposit intangibles
Other
Total intangible assets
As of December 31, 2009:
Mortgage servicing rights
Core deposit intangibles
Other consumer and commercial servicing rights
Other
Total intangible assets
used in estimating the fair value for the segment include deposit
and loan growth rates, forecasted changes in the absolute and
relative levels of interest rates, and the impact of recent and
anticipated regulatory changes affecting retail banking. The
Bancorp forecasts its deposit growth based on an assessment of
its expected funding needs, which includes an analysis of expected
growth in loan and investment balances as well as availability and
expected use of alternative funding sources over that period. The
Bancorp looks at forward interest rate curves to forecast the
future expected interest rate levels, which impact the revenue
from the spread earned on loan balances as well as the funding
benefit generated by the deposit base. The sensitivity of the
Bancorp’s deposit rates to changes in LIBOR is also a key factor
considered in this analysis. The Bancorp also considered the
potential impact of recent and anticipated regulatory changes that
may impact overdraft revenue, debit interchange revenue and
credit card revenue in 2011 and beyond. Changes in these key
assumptions could negatively impact the fair value of the Branch
Banking segment in future periods. These changes would include
unanticipated regulatory changes, movements in interest rates and
economic
the Branch Banking segment’s
profitability.
trends affecting
intangible assets for possible
Bancorp reviews
impairment
whenever events or changes in circumstances indicate that
carrying amounts may not be recoverable. For more information
on servicing rights, see Note 13. The details of the Bancorp’s
intangible assets are shown in the following table.
Gross Carrying
Amount
Accumulated
Amortization
Valuation
Allowance
Net Carrying
Amount
$2,284
439
44
$2,767
$1,987
487
12
53
$2,539
(1,146)
(389)
(32)
(1,567)
(1,008)
(397)
(11)
(37)
(1,453)
(316)
-
-
(316)
(280)
-
-
-
(280)
822
50
12
884
699
90
1
16
806
As of December 31, 2010, 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, 2010, 2009 and 2008 was $181 million, $204 million and $164 million,
respectively. Estimated amortization expense, including servicing rights, for the years ending December 31, 2011 through 2015 is as follows:
($ in millions)
2011
2012
2013
2014
2015
Mortgage
Servicing Rights
$201
163
133
109
90
Other Intangible
Assets
Total
22
13
8
4
2
$223
176
141
113
92
Fifth Third Bancorp 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. VARIABLE INTEREST ENTITIES
The Bancorp, in the normal course of business, engages in a
variety of activities that involve VIEs, which are legal entities that
lack sufficient equity to finance their activities, or the equity
investors of the entities as a group lack any of the characteristics
of a controlling interest. Unless the VIE qualifies for the deferral
of the amended VIE consolidation guidance discussed in Note 1,
the primary beneficiary of a VIE is the enterprise that has both
the power to direct the activities most significant to the economic
performance of the VIE and the obligation to absorb losses or
right to receive benefits that could potentially be significant to the
VIE. The Bancorp evaluates its interest in certain entities to
determine if these entities meet the definition of a VIE and
whether the Bancorp is the primary beneficiary and should
consolidate the entity based on the variable interests it held both
($ in millions)
Assets:
Cash and due from banks
Other short-term investments
Commercial mortgage loans
Home equity
Automobile loans
Allowance for loan and lease losses
Other assets
Total assets
Liabilities:
Other liabilities
Long-term debt
Total liabilities
Noncontrolling interest
Home Equity and Automobile Loan Securitizations
The Bancorp previously sold $903 million of home equity lines of
credit to an isolated trust. Additionally, the Bancorp previously
sold $2.7 billion of automobile loans to an isolated trust and
conduits in three separate transactions. Each of these transactions
isolated the related loans through the use of a VIE that, under
accounting guidance effective prior to January 1, 2010, was not
consolidated by the Bancorp. The VIEs were funded through
loans from large multi-seller asset-backed commercial paper
conduits sponsored by third party agents, asset-backed securities
issued with varying levels of credit subordination and payment
priority, and residual interests. The Bancorp retained residual
interests in these entities and, therefore, has an obligation to
absorb losses and a right to receive benefits from the VIEs that
could potentially be significant to the VIEs. In addition, the
Bancorp retained servicing rights for the underlying loans and,
therefore, holds the power to direct the activities of the VIEs that
most significantly impact the economic performance of the VIEs.
As a result, the Bancorp determined it is the primary beneficiary
of these VIEs and, effective January 1, 2010, these VIEs have
been consolidated in the Bancorp’s Consolidated Financial
Statements. The assets of each VIE are restricted to the
settlement of the long-term debt and other liabilities of the
respective entity. Third-party holders of this debt do not have
recourse to the general assets of the Bancorp.
The economic performance of the VIEs is most significantly
impacted by the performance of the underlying loans. The
principle risks to which the entities are exposed include credit risk
and interest rate risk. Credit risk is managed through credit
accounts,
enhancement
form
overcollateralization,
the
subordination of certain classes of asset-backed securities to other
classes, and in the case of the home equity transaction, an
reserve
the
the
excess
interest on
loans,
of
in
88 Fifth Third Bancorp
at inception and when there is a change in circumstances that
require a reconsideration. If the Bancorp is determined to be the
primary beneficiary of a VIE, it must account for the VIE as a
consolidated subsidiary. If the Bancorp is determined not to be
the primary beneficiary of a VIE but holds a variable interest in
the entity, such variable interests are accounted for under the
equity method of accounting or other accounting standards as
appropriate.
Consolidated VIEs
The following table provides a summary of the classifications of
consolidated VIE assets, liabilities and noncontrolling interest
included in the Bancorp’s Consolidated Balance Sheets as of
December 31, 2010:
Home Equity
Securitization
Automobile Loan
Securitizations
CDC
Investment
Total
$7
-
-
241
-
(5)
1
$244
$ -
133
$133
45
7
-
-
648
(8)
5
697
12
559
571
-
-
29
-
-
(1)
1
29
-
-
-
$29
$52
7
29
241
648
(14)
7
970
$12
692
$704
$29
insurance policy with a third party guaranteeing payment of
accrued and unpaid interest and principal on the securities.
Interest rate risk is managed by interest rate swaps between the
VIEs and third parties.
CDC Investment
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 formed as limited partnerships and LLCs, and CDC
typically invests as a limited partner/investor member in the form
of equity contributions. The economic performance of the VIEs
is driven by the performance of their underlying investment
projects as well as the VIEs’ ability to operate in compliance with
the rules and regulations necessary for the qualification of tax
credits generated by equity investments. Typically, the general
partner or managing member will be the party that has the right
to make decisions that will most significantly impact the
economic performance of the entity. The Bancorp serves as the
in a business
managing member of one LLC
revitalization project. The Bancorp has provided
an
indemnification guarantee to the investor member of this LLC
related to the qualification of tax credits generated by investor
members’ investment. Accordingly, the Bancorp concluded that it
is the primary beneficiary and, therefore, has consolidated this
VIE. As a result, the VIE is presented as a noncontrolling interest
in the Bancorp’s Consolidated Financial Statements. This
presentation includes reporting separately the equity attributable
to the noncontrolling interest in the Consolidated Balance Sheets
and Consolidated Statements of Changes in Equity. Additionally,
invested
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the net income attributable to the noncontrolling interest is
reported separately in the Consolidated Statements of Income.
The Bancorp’s maximum exposure related to this indemnification
at December 31, 2010 is $9 million, which is based on an amount
required to meet the investor member’s defined target rate of
return.
Non-consolidated VIEs
The following table provides a summary of assets and liabilities
carried on the Bancorp’s Consolidated Balance Sheet as of
December 31, 2010 related to non-consolidated VIEs for which
the Bancorp holds a variable interest, but is not the primary
beneficiary to the VIE, as well as the Bancorp’s maximum
exposure to losses associated with its interests in the entities:
($ in millions)
CDC investments
Private equity investments
Money market funds
Loans provided to VIEs
Restructured loans
CDC Investments
As noted previously, CDC typically invests in VIEs as a limited
partner or investor member in the form of equity contributions.
The Bancorp has determined that it is not the primary beneficiary
of these VIEs because it lacks the power to direct the activities that
most significantly impact the economic performance of the
underlying project or the VIEs’ ability to operate in compliance
with the rules and regulations necessary for the qualification of tax
credits generated by equity investments. This power is held by the
general partners/managing members who exercise full and
exclusive control of the operations of the VIEs. Accordingly, the
Bancorp accounts for these investments under the equity method
of accounting.
The Bancorp’s funding requirements are limited to its invested
capital and any additional unfunded commitments for future equity
contributions. 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, including the unfunded commitments. As of
December 31, 2010 and 2009, the carrying amounts of these
investments, which are included in other assets in the Consolidated
Balance Sheets, were $1.2 billion and $1.1 billion, respectively.
Also, as of December 31, 2010 and 2009, the liabilities related to
the unfunded commitments, which are included in other liabilities
in the Consolidated Balance Sheets, were $286 million and $235
liquidity
million, respectively. The Bancorp has no other
arrangements or obligations to purchase assets of the VIEs that
would expose the Bancorp to a loss. In certain arrangements, the
general partner/managing member of the VIE has guaranteed a
level of projected tax credits to be received by the limited
partners/investor members, thereby minimizing a portion of the
Bancorp’s risk.
Private Equity Investments
The Bancorp invests as a limited partner in private equity funds
which provide the Bancorp with an opportunity to obtain higher
rates of return on invested capital, while also creating cross-selling
opportunities for the Bancorp’s commercial products. Each of the
limited partnerships has an unrelated third-party general partner
responsible for appointing the fund manager. The Bancorp has not
been appointed fund manager for any of these private equity funds.
The funds finance primarily all of their activities from the partners’
capital contributions and investment returns. The private equity
funds qualify for the deferral of the amended VIE consolidation
the VIE
guidance discussed
consolidation guidance still applicable to the funds, the Bancorp
has determined that it is not the primary beneficiary of the funds
because it does not absorb a majority of the funds’ expected losses
or receive a majority of the funds’ expected residual returns.
in Note 1. However, under
Total
Assets
Total
Liabilities
Maximum
Exposure
$1,241
129
148
1,175
12
$286
3
-
-
-
$1,241
322
158
1,908
13
Therefore, the Bancorp accounts for its investments in these
limited partnerships under the equity method of accounting.
The Bancorp is exposed to losses arising from a negative
performance of the underlying investments in the private equity
funds. As a limited partner, the Bancorp’s maximum exposure to
loss is limited to the carrying amounts of the investments plus
unfunded commitments. As of December 31, 2010 and 2009, the
carrying amounts of these investments, which are included in other
assets in the Consolidated Balance Sheets, were $129 million and
$98 million, respectively. Also as of December 31, 2010 and 2009,
the unfunded commitment amounts to the funds were $193 million
and $90 million, respectively. The Bancorp made capital
contributions of $34 million to private equity funds during the year
ended December 31, 2010.
Money Market Funds
Under U.S. GAAP, money market funds are generally not
considered VIEs because they are generally deemed to have
sufficient equity at risk to finance their activities without additional
subordinated financial support, and the fund shareholders do not
lack the characteristics of a controlling interest. However, when a
situation arises where an investment manager provides credit
support to a fund, even when not contractually required to do so,
the investment manager is deemed under U.S. GAAP to have
provided an implicit guarantee of the fund’s performance to the
fund’s shareholders. Such an implicit guarantee would require the
investment manager and other variable
interest holders to
reconsider the VIE status of the fund, as well as all other similar
funds where such an implicit guarantee is now deemed to exist.
In the fourth quarter of 2010, the Bancorp voluntarily
provided credit support of less than $1 million to a money market
fund managed by FTAM. Accordingly, the Bancorp was required
to analyze the money market funds and similar funds managed by
FTAM under the VIE consolidation guidance still applicable to
these funds in order to determine the primary beneficiary of each
fund. In analyzing these funds, the Bancorp determined that
interest rate risk and credit risk are the two main risks to which the
funds are exposed. After analyzing the interest rate risk variability
and credit risk variability associated with these funds, the Bancorp
determined that it is not the primary beneficiary of these funds
because it does not absorb a majority of the funds’ expected losses
or receive a majority of the funds’ expected residual returns.
Therefore, the Bancorp’s investments in these funds are included
as other securities in the Bancorp’s Consolidated Balance Sheets.
Loans Provided to VIEs
The Bancorp has provided funding to certain unconsolidated VIEs
sponsored by third parties. These VIEs are generally established to
finance certain consumer and small business loans originated by
third parties. The entities are primarily funded through the issuance
Fifth Third Bancorp 89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of a loan from the Bancorp or syndication through which the
Bancorp is involved. The sponsor/administrator of the entities is
responsible for servicing the underlying assets in the VIEs. Because
the sponsor/administrator, not the Bancorp, holds the servicing
responsibilities, which include the establishment and employment
of default mitigation policies and procedures, the Bancorp does not
hold the power to direct the activities most significant to the
economic performance of the entity and, therefore, is not the
primary beneficiary.
The principle risk to which these entities are exposed is credit
risk related to the underlying assets. The Bancorp’s maximum
exposure to loss is equal to the carrying amounts of the loans and
unfunded commitments to the VIEs. As of December 31, 2010
and 2009, the Bancorp had outstanding loans to these VIEs of $1.2
billion included in commercial loans in the Consolidated Balance
Sheets. Also as of December 31, 2010 and 2009, the Bancorp’s
unfunded commitments to these entities were $733 million and
$539 million, respectively. The loans and unfunded commitments
to these VIEs are included in the Bancorp’s overall analysis of the
allowance for loan and lease losses and reserve for unfunded
commitments, respectively. The Bancorp does not provide any
implicit or explicit liquidity guarantees or principal value guarantees
to these VIEs.
Restructured Loans
As part of loan restructuring efforts in 2009 and 2010, the Bancorp
received equity capital from certain borrowers to facilitate the
restructuring of the borrower’s debt. These borrowers meet the
definition of a VIE because the Bancorp was involved in their
refinancing and because their equity capital is insufficient to fund
ongoing operations. These restructurings were intended to provide
the VIEs with serviceable debt levels while providing the Bancorp
13. SALES OF RECEIVABLES AND SERVICING RIGHTS
Residential Mortgage Loan Sales
The Bancorp sold fixed and adjustable rate residential mortgage
loans during 2010, 2009 and 2008. In those sales, the Bancorp
obtained servicing responsibilities and the investors have no
recourse to the Bancorp’s other assets for failure of debtors to pay
when due. The Bancorp receives annual servicing fees based on a
percentage of the outstanding balance. The Bancorp identifies
classes of servicing assets based on financial asset type and interest
rates.
($ in millions)
Residential mortgage loan sales
Origination fees and gains on loan sales
Servicing fees
an opportunity to maximize the recovery of the loans. The VIEs
finance their operations from earned income, capital contributions,
and through restructured debt agreements. Assets of the VIEs are
used to settle their specific obligations, including loan payments
due to the Bancorp. The Bancorp continues to maintain its
relationship with these VIEs as a lender and minority shareholder,
however, it is not involved in management decisions and does not
have sufficient voting rights to control the membership of the
respective boards. Therefore, the Bancorp accounts for its equity
investments in these VIEs under the equity method or cost
method based on its percentage of ownership and ability to
exercise significant influence.
The Bancorp’s maximum exposure to loss as a result of its
involvement with these VIEs is limited to the equity investments,
the principal and accrued interest on the outstanding loans, and any
unfunded commitments. Due to the VIEs’ short-term cash deficit
projections at the restructuring dates, the Bancorp determined that
the fair value of its equity investments in these VIEs was zero. As
of December 31, 2010, the Bancorp’s carrying value of these equity
investments was zero. Additionally, as of December 31, 2010 and
2009, the Bancorp had outstanding loans to these VIEs of $12
million and $23 million, respectively, included in commercial loans
in the Consolidated Balance Sheets. The Bancorp’s unfunded loan
commitments to these VIEs were $1 million as of December 31,
2010 and 2009. The loans and unfunded commitments to these
VIEs are included in the Bancorp’s overall analysis of the
allowance for loan and lease losses and reserve for unfunded
commitments, respectively. The Bancorp does not provide any
implicit or explicit liquidity guarantees or principal value guarantees
to these VIEs.
Information related to residential mortgage loan sales and the
Bancorp’s mortgage banking activity, which is included in mortgage
banking net revenue in the Consolidated Statements of Income for
the years ended December 31 is as follows:
2010
$17,861
2009
20,605
2008
11,529
490
221
485
197
260
164
Servicing Assets
The following table presents changes in the servicing assets related to residential mortgage loans for the years ended:
($ in millions)
Carrying amount as of the beginning of period
Servicing obligations that result from transfer of residential mortgage loans
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
2010
$979
297
(138)
1,138
(280)
(36)
(316)
$822
2009
752
373
(146)
979
(256)
(24)
(280)
699
90 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in the MSR valuation allowance,
Temporary impairment or impairment recovery, effected through a
change
is captured as a
component of mortgage banking net revenue in the Consolidated
Statements of Income. The Bancorp maintains a non-qualifying
hedging strategy to manage a portion of the risk associated with
changes in value of the MSR portfolio. This strategy includes the
purchase of free-standing derivatives and various available-for-sale
securities. The interest income, mark-to-market adjustments and
gain or loss from sale activities associated with these portfolios are
expected to economically hedge a portion of the change in value of
the MSR portfolio caused by fluctuating discount rates, earnings
rates and prepayment speeds.
The fair value of the servicing asset is based on the present value of expected future cash flows. The following table displays the beginning and
ending fair value for the years ended December 31:
($ 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
2010
$667
791
32
31
2009
458
667
38
32
The following table presents activity related to valuations of the MSR portfolio and the impact of the non-qualifying hedging strategy, which is
included in the Consolidated Statements of Income for the years ended December 31:
($ in millions)
Securities gains, net – non-qualifying hedges on MSRs
Changes in fair value and settlement of free-standing derivatives purchased
to economically hedge the MSR portfolio (Mortgage banking net revenue)
Provision for MSR impairment (Mortgage banking net revenue)
2010
$14
2009
57
2008
120
109
(36)
41
(24)
89
(207)
As of December 31, 2010 and 2009, 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, 2010
and 2009 were as follows:
Rate
Residential mortgage loans:
Servicing assets
Servicing assets
Fixed
Adjustable
December 31, 2010
December 31, 2009
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
6.7
3.6
10.7%
23.3
10.3%
11.3
N/A
N/A
6.6
2.7
12.0%
35.5
9.8%
10.8
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, 2010 and 2009, the
Bancorp was servicing $54.2 billion and $48.6 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, 2010, the sensitivity of the current fair
value of residual cash flows to immediate 10% and 20% adverse
changes in those assumptions are as follows:
Weighted-
Average
Life (in
years)
Fair
Value
Prepayment Speed
Assumption
Impact of Adverse
Change on Fair
Value
10% 20%
Rate
Residual Servicing Cash Flows
Impact of Adverse
Change on Fair
Value
Discount
Rate
Weighted-Average
Default
Impact of Adverse
Change on Fair
Value
10%
20%
Rate
10%
20%
$791
31
5.9
3.0
13.0% ($36)
(2)
26.2
(70)
(3)
10.6%
11.9
($30)
(1)
(58)
(2)
- %
-
$ -
-
-
-
($ in millions)
Rate
Residential mortgage loans:
Servicing assets
Servicing assets
Fixed
Adjustable
These sensitivities are hypothetical and should be used with
caution. As the figures indicate, changes in fair value based on a
10% and 20% 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.
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
Fifth Third Bancorp 91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
expected cash flows using management’s best estimates for the key
assumptions.
Upon adoption on January 1, 2010 of the FASB guidance on
the accounting for QSPEs and VIEs, the Bancorp determined that
it is the primary beneficiary (and therefore consolidator) of these
QSPEs. Refer to Note 1 for further details.
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
included
in the Consolidated
Statements of Income.
in other noninterest
income
As of December 31, 2009, the Bancorp held retained interests
in the QSPEs in the form of asset-backed securities totaling $63
million and residual interests totaling $98 million. These retained
interests were 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 were measured at fair value
using quoted market prices for similar assets. The residual interests
were measured at fair value based on the present value of future
Commercial Loan Sales to a QSPE
Through 2008, the Bancorp transferred, subject to credit recourse,
investment grade
certain primarily floating-rate, short-term,
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 issued commercial paper
and used 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,
2009, the Bancorp collected $334 million in net cash proceeds
from loan transfers to the QSPE.
Upon adoption on January 1, 2010 of the FASB guidance on
the accounting for QSPEs and VIEs, the Bancorp determined that
it is the primary beneficiary (and therefore consolidator) of this
QSPE. Refer to Note 1 for further details.
The following table provides a summary of the total loans and leases managed by the Bancorp, including loans securitized and loans in VIEs
that were not consolidated prior to January 1, 2010, as of and for the years ended December 31:
Balance of Loans 90
Days or More Past Due
2010
$16
11
3
-
100
89
13
42
$274
2009
118
59
16
4
189
100
18
65
569
Net Credit
Losses
2010
$586
524
252
2
439
264
88
173
$2,328
2009
718
422
417
8
355
325
156
190
2,591
Balance
($ in millions)
Commercial and industrial 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
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.
2010
$27,275
10,992
2,111
3,378
10,857
11,513
10,983
2,598
$79,707
$ -
-
-
2,216
$77,491
2009
26,458
11,936
3,921
3,535
9,795
12,437
10,226
2,802
81,110
1,230
263
771
2,067
76,779
92 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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 unhedged speculative derivative positions.
The Bancorp’s interest rate risk management strategy involves
modifying
the repricing characteristics of certain financial
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 largely fixed-rate MSR portfolio, mortgage 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.
loans denominated
Foreign currency volatility occurs as the Bancorp enters into
certain
in foreign currencies. Derivative
instruments that the Bancorp may use to economically hedge these
foreign denominated loans include foreign exchange swaps and
forward contracts.
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
and other business purposes. The Bancorp may economically
hedge significant exposures
free-standing
derivatives by entering into offsetting third-party 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
related
these
to
Bancorp’s exposure is limited to the replacement value of the
contracts rather than the notional, principal or contract amounts.
Credit risk
limits,
counterparty collateral and monitoring procedures.
through credit approvals,
is minimized
The Bancorp’s derivative assets consist primarily of contracts
in which the Bancorp requires the counterparties to provide
collateral in the form of cash and securities to offset changes in the
fair value of the derivatives, including changes in the fair value due
to credit risk of the counterparty. As of December 31, 2010 and
2009, the balance of collateral held by the Bancorp for derivative
assets was $903 million and $548 million, respectively. Valuation
adjustments related to the credit risk associated with certain
counterparties of customer accommodation derivative contracts
negatively impacted the fair value of those contracts by $2 million
and $3 million at December 31, 2010 and 2009, respectively.
requirements of
In measuring the fair value of derivative liabilities, the
Bancorp considers its own credit risk, taking into consideration
certain derivative
collateral maintenance
counterparties and the duration of instruments with counterparties
that do not require collateral maintenance. The Bancorp’s
derivative liabilities consist primarily of contracts that require
collateral to be maintained in the form of cash and securities to
offset changes in fair value of the derivatives, including changes in
fair value due to the Bancorp’s credit risk. As of December 31,
2010 and 2009, the balance of collateral posted by the Bancorp for
derivative liabilities was $680 million and $726 million, respectively.
The posting of collateral has been determined to remove the need
for consideration of credit risk. As a result, the Bancorp
determined that the impact of the Bancorp’s credit risk to the
valuation of
immaterial to the
liabilities was
its derivative
Bancorp’s Consolidated Financial Statements.
The Bancorp holds certain derivative instruments that qualify
for hedge accounting treatment and are designated as either fair
value hedges or cash flow hedges. Derivative instruments that do
not qualify for hedge accounting treatment, or for which hedge
accounting is not established, are held as free-standing derivatives
and provide the Bancorp an economic hedge. All customer
accommodation derivatives are held as free-standing derivatives.
The fair value of derivative instruments is presented on a
gross basis, even when the derivative instruments are subject to
master netting arrangements. Derivative
instruments with a
positive fair value are reported in other assets in the Consolidated
Balance Sheets while derivative instruments with a negative fair
value are reported in other liabilities in the Consolidated Balance
Sheets. Cash collateral payables and receivables associated with the
derivative instruments are not added to or netted against the fair
value amounts.
Fifth Third Bancorp 93
The following table reflects the notional amounts and fair values for all derivative instruments included in the Consolidated Balance Sheets as
of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ 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 C&I loans
Interest rate swaps related to C&I loans
Interest rate caps related to long-term debt
Interest rate swaps 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:
Interest rate contracts related to MSRs
Forward contracts related to held for sale mortgage loans
Interest rate swaps related to long-term debt
Foreign exchange contracts for trading purposes
Put options associated with Processing Business Sale
Stock warrants associated with 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
Foreign exchange contracts
Derivative instruments related to equity linked CDs
Total free-standing derivatives – customer accommodation
Total derivatives not designated as qualifying hedging
instruments
Total
2010
Fair value
2009
Fair value
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Notional
Amount
Derivative
Assets
Derivative
Liabilities
$4,355
-
1,500
3,000
1,500
1,190
12,477
6,389
173
2,494
769
175
363
26,817
1,772
1,878
17,998
70
$442
-
442
153
8
4
-
165
607
141
90
3
4
-
79
-
317
701
9
99
339
2
1,150
$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
$ -
-
-
-
-
-
31
31
31
81
14
1
4
8
-
18
126
735
9
92
319
2
1,157
$275
-
275
162
33
44
-
239
514
114
33
4
-
-
75
-
226
719
3
63
206
2
993
$ -
6
6
-
-
-
-
-
6
24
2
2
-
9
-
55
92
753
8
58
169
2
990
1,467
$2,074
1,283
$1,314
1,219
$1,733
1,082
$1,088
fair value hedge using
were accounted for using the “long-haul” method. The long-haul
method requires a quarterly assessment of hedge effectiveness and
measurement of ineffectiveness. For interest rate swaps accounted
for as a
long-haul method,
ineffectiveness is the difference between the changes in the fair
value of the interest rate swap and changes in fair value of the
long-term debt attributable to the risk being hedged. The
ineffectiveness on interest rate swaps hedging long-term debt or
time deposits
the
Consolidated Statements of Income.
is reported within
interest expense
the
in
Fair Value Hedges
The Bancorp may enter into interest rate swaps to convert its
fixed-rate, long-term debt or time deposits to floating-rate.
Decisions to convert fixed-rate debt or time deposits to floating are
made primarily through consideration of the asset/liability mix of
the Bancorp, the desired asset/liability sensitivity and interest rate
levels. For the years ended December 31, 2010 and 2009, certain
interest rate swaps met the criteria required to qualify for the
shortcut method of accounting. Based on this shortcut method of
accounting treatment, no ineffectiveness is assumed. For interest
rate swaps that do not meet the shortcut requirements, an
assessment of hedge effectiveness was performed and such swaps
94 Fifth Third Bancorp
The following table reflects the change in fair value of interest rate contracts, designated as fair value hedges, as well as the change in fair value
of the related hedged items, included in the Consolidated Statements of Income:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, ($ in millions)
Interest rate contracts:
Consolidated Statements of
Income Caption
2010
2009
2008
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
$167
(168)
6
(6)
(548)
538
4
(3)
(776)
765
(19)
19
Cash Flow Hedges
The Bancorp may enter into interest rate swaps to convert
floating-rate assets and liabilities to fixed rates or to hedge certain
forecasted transactions. The assets or liabilities are typically
grouped and share the same risk exposure for which they are
being hedged. The Bancorp may also enter into interest rate caps
and floors to limit cash flow variability of floating rate assets and
liabilities. As of December 31, 2010, all hedges designated as cash
flow hedges are assessed for effectiveness using regression
analysis. Ineffectiveness is generally measured as the amount by
which the cumulative change in the fair value of the hedging
instrument exceeds the present value of the cumulative change in
the hedged item’s expected cash flows. Ineffectiveness is reported
within other noninterest income in the Consolidated Statements
of Income. The effective portion of the gains or losses on cash
flow hedges
accumulated other
reported within
comprehensive income and are reclassified from accumulated
other comprehensive income to current period earnings when the
forecasted transaction affects earnings. As of December 31, 2010,
the maximum length of time over which the Bancorp is hedging
its exposure to the variability in future cash flows related to the
forecasted issuance of floating rate debt is 27 months.
are
For the year ended December 31: ($ in millions)
Amount of gain recognized in OCI
Amount of gain reclassified from OCI into net interest income
Amount of ineffectiveness recognized in other noninterest income
Free-Standing Derivative Instruments – Risk Management
and Other Business Purposes
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.
the mortgage-LIBOR spread
Principal-only swaps hedge
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.
into
enters
forward
contracts
The Bancorp
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
forward contracts.
economically hedged primarily with
Revaluation gains and losses from free-standing derivatives
related to mortgage banking activity are recorded as a
Reclassified gains and losses on interest rate floors and
swaps related to commercial loans and interest rate caps and
swaps related to debt are recorded within interest income and
interest expense, respectively. As of December 31, 2010 and
2009, $67 million and $105 million, respectively, of deferred
gains, net of tax, on cash flow hedges were recorded in
accumulated other comprehensive income. As of December 31,
2010, $45 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.
to
income relating
The following table presents the net gains recorded in the
Consolidated Statements of Income and accumulated other
interest rate contracts
comprehensive
designated as cash flow hedges. Included in the ineffectiveness
for the year ended December 31, 2010 are certain terminated
interest rate caps previously designated as cash flow hedges on
debt. In conjunction with these terminations, the Bancorp
losses from accumulated other
reclassified $17 million of
comprehensive income 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 by U.S. GAAP.
2010
$2
60
6
2009
75
49
(1)
2008
100
3
1
component of mortgage banking net
Consolidated Statements of Income.
revenue
in
the
The Bancorp previously entered 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.
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 28
for further discussion of significant inputs and assumptions
used in the valuation of these instruments.
In conjunction with the sale of Visa, Inc. Class B shares in
2009, the Bancorp entered into a total return swap in which
Fifth Third Bancorp 95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 28 for further
discussion of significant inputs and assumptions used in the
valuation of this instrument.
The Bancorp enters into certain derivatives (forwards,
futures and options) related to its foreign exchange business.
These derivative contracts are not designated against specific
assets or liabilities or to forecasted transactions. Therefore,
For the year ended December 31, ($ in millions)
Interest rate contracts:
these instruments do not qualify for hedge accounting. The
Bancorp economically hedges the exposures related to these
derivative contracts by entering into offsetting contracts with
approved,
counterparties with
independent
substantially similar terms.
reputable,
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:
Consolidated Statements of
Income Caption
2010
2009
2008
Interest rate contracts related to MSR portfolio
Forward contracts related to commercial mortgage loans held for sale
Forward contracts related to residential mortgage loans held for sale
Interest rate swaps related to long-term debt
Mortgage banking net revenue
Corporate banking revenue
Mortgage banking net revenue
Other noninterest income
$109
-
40
2
41
-
55
3
Foreign exchange contracts:
Foreign exchange contracts for trading purposes
Other noninterest income
-
(10)
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
Other noninterest income
Other noninterest income
4
1
(19)
13
5
(2)
89
(8)
(17)
1
29
-
-
-
instruments
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
include foreign
for hedge accounting. These
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, 2010 and 2009, the total notional amount of the risk
participation agreements was $851 million and $810 million,
respectively, and the fair value was a liability of $1 million and $2
million, respectively, at December 31, 2010 and 2009, which is
included in interest rate contracts for customers. The Bancorp’s
maximum exposure in the risk participation agreements 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, 2010, $744 million in notional amount of the risk
participation agreements were classified pass; $37 million were
classified as special mention; $69 million were classified as
substandard; and $1 million were classified as doubtful. As of
December 31, 2010, the risk participation agreements had an
average life of 1.9 years.
The Bancorp previously offered its customers an equity-linked
certificate of deposit that had a return linked to equity indices.
Under U.S. GAAP, a certificate of deposit that pays interest
based on changes on an equity index is a hybrid instrument that
requires separation into a host contract (the certificate of deposit)
and an embedded derivative contract (written equity call option).
The Bancorp entered into offsetting derivative contracts to
economically hedge the exposure taken through the issuance of
the embedded
equity-linked certificates of deposit. Both
derivative and the derivative contract entered into by the Bancorp
are recorded as free-standing derivatives and recorded at fair
value with offsetting gains and
losses recognized within
noninterest income in the Consolidated Statements of Income.
96 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net gains (losses) recorded in the Consolidated Statements of Income relating to free-standing derivative instruments used for customer
accommodation are summarized in the following table:
For the year ended December 31, ($ in millions)
Interest rate contracts:
Interest rate contracts for customers (contract revenue)
Interest rate contracts for customers (credit losses)
Interest rate contracts for customers (credit component of fair value
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)
Consolidated Statements of
Income Caption
2010
2009
2008
Corporate banking revenue
Other noninterest expense
Other noninterest expense
Mortgage banking net revenue
Corporate banking revenue
Other noninterest expense
Corporate banking revenue
Other noninterest expense
$26
(22)
(1)
187
8
-
63
(1)
21
(33)
(7)
129
6
2
76
2
50
(5)
(27)
54
7
(3)
106
(7)
15. OTHER ASSETS
The following table provides the components of other assets included in the Consolidated Balance Sheets as of December 31:
($ in millions)
Derivative instruments
Bank owned life insurance
Partnership investments
Accounts receivable and drafts-in-process
OREO and other repossessed personal property
Investment in FTPS Holding, LLC
Accrued interest receivable
Prepaid expenses
Deferred tax asset
Income tax receivable
Other
Total
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 14.
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 intended to be 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.
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
2010
$2,074
1,715
1,367
1,023
532
522
413
133
13
1
607
$8,400
2009
1,733
1,763
1,179
892
312
521
417
282
26
98
328
7,551
policy’s cash surrender value. The cash surrender value of this
BOLI policy was $237 million at December 31, 2009.
During 2009, the Bancorp notified the related insurance
carrier of its intent to surrender this BOLI policy. Due to the fact
the Bancorp had not yet decided the manner in which it would
surrender the policy, which may have impacted the cash surrender
value protection, and because of ongoing developments
in
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.
During 2010, an agreement to settle the claims with the
insurance carrier was reached among the parties to the litigation.
As a result of this settlement and the corresponding receipt of
settlement proceeds from the insurance carrier in the third quarter
of 2010, the Bancorp recorded $152 million in other noninterest
income and $25 million associated with legal fees related to the
settlement
the Bancorp’s
Consolidated Statements of Income.
in other noninterest expense
in
CDC, a partnership investment and wholly owned subsidiary
of the Bancorp, was created to invest in projects to create
affordable housing, revitalize business and residential areas, and
preserve historic landmarks. The Bancorp has determined that
these entities are VIEs and the Bancorp’s investments represent
variable interests. See Note 12 for further information.
On June 30, 2009, the Bancorp sold an approximate 51%
interest in its Processing Business to Advent International. The
resulting new company was named FTPS Holding, LLC. The
Bancorp’s remaining approximate 49% ownership in FTPS is
accounted for under the equity method of accounting.
Fifth Third Bancorp 97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SHORT-TERM BORROWINGS
Borrowings with original maturities of one year or less are
classified as short term, and include federal funds purchased and
other short-term borrowings. Federal funds purchased are excess
balances in reserve accounts held at Federal Reserve Banks that
the Bancorp purchased from other member banks on an
overnight basis. Other short-term borrowings include securities
($ 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 for the years ended December 31:
Federal funds purchased
Other short-term borrowings
sold under repurchase agreements, derivative collateral, FHLB
advances and other borrowings with original maturities of one
year or less.
A summary of short-term borrowings and weighted-average
rates follows:
2010
2009
Amount
Rate
Amount
Rate
$279
1,574
$291
1,635
$422
1,975
0.18%
0.14
0.17%
0.21
$182
1,415
$517
6,463
$1,160
11,076
0.11%
0.16
0.20%
0.64
98 Fifth Third Bancorp
17. LONG-TERM DEBT
The following table is a summary of the Bancorp’s long-term borrowings at December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Parent Company
Senior:
Fixed-rate notes
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:
Floating-rate bank notes
Fixed-rate bank notes
Subordinated: (b)
Fixed-rate bank notes
Junior subordinated: (a)
Floating-rate bank notes
Floating-rate debentures
Floating-rate debentures
FHLB advances
Notes associated with consolidated VIEs:
Automobile loan securitizations:
Fixed-rate notes
Floating-rate notes
Home equity securitization:
Floating-rate notes
Other
Total
(a) Qualify as Tier I capital for regulatory capital purposes. See Note 29 for further information.
(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, 2010 are due over the following periods: $14
million in 2011; $15 million in 2012, $1.9 billion in 2013, $30
million in 2014, $1.0 billion in 2015 and $6.6 billion after 2015.
At December 31, 2010 the Bancorp had outstanding principal
balances of $9.1 billion, discounts and premiums of negative $15
million and additions for mark-to-market adjustments on its
hedged debt of $439 million. 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. The
Bancorp is in compliance with all debt covenants at December 31,
2010.
Under recent regulatory developments, certain of the
Bancorp’s trust preferred securities are callable at par as of certain
dates, or may become callable at par under certain circumstances.
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, 2010, paid a rate of 2.70%. 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. 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 pay
Maturity
Interest Rate
2010
2009
2013
2016
2017
2018
2038
2067
2067
2067
2068
2013
2015
6.25%
0.72%
5.45%
4.50%
8.25%
6.50%
7.25%
7.25%
8.88%
0.39%
4.75%
2032 - 2033
2033 - 2034
2035
2011 - 2040
2013
2013 - 2015
2023
2011 - 2039
3.40% - 4.15%
3.09% - 3.20%
1.72% - 1.99%
0% - 8.34%
4.81%
0.76% - 2.26%
0.51%
Varies
$797
250
613
584
1,034
750
613
907
400
499
-
561
51
67
62
1,561
99
460
133
117
$9,558
785
250
572
533
1,024
750
606
886
389
500
804
544
52
67
62
2,564
-
-
-
119
10,507
interest at three-month LIBOR plus 42 bp and 25 bp, respectively,
at December 31, 2010. The rates paid on the swaps hedging the
subordinated floating-rate notes due in 2017 and 2018 were 0.72%
and 0.55%, respectively, at December 31, 2010. Of the $1.0 billion
in 8.25% subordinated fixed rate notes due in 2038, $705 million
were subsequently hedged to floating and paid a rate of 3.35% at
December 31, 2010.
The 6.50% junior subordinated notes due in 2067 pay a fixed
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. Junior
subordinated notes due in 2067, with a carrying amount of $613
million and an outstanding principal balance of $575 million at
December 31, 2010, 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, 2010,
the weighted-average rate paid on these swaps was 1.01%. Junior
subordinated notes due in 2067, with a carrying amount of $907
million and an outstanding principal balance of $863 million at
December 31, 2010, 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, 2010, the weighted-average rate paid on the swaps
was 1.44%. The obligations were issued to Fifth Third Capital
Trusts IV, V and VI, respectively. The Bancorp has fully and
unconditionally guaranteed all obligations under
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
the
Fifth Third Bancorp 99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and 2033 were assumed by a subsidiary of the Bancorp as part of
the acquisition of RG Crown in November 2008. Two of the
notes due in 2032 and 2033 pay floating rates at three-month
LIBOR plus 325 and 310 bp, respectively. A third note, due in
2032, 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
in 2005. 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, 2010, 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 $12.7 billion. At December 31, 2010, $500 million 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 of 2.63%. In November
2010, the Bancorp repaid a floating-rate advance of $1.0 billion
due in 2012 and terminated the interest rate cap associated with
this advance. The Bancorp
this
extinguishment of debt of $1 million. The $1.6 billion in advances
mature as follows: $2 million in 2011, $500 million in 2013, $3
million in 2014, $5 million in 2015 and $1.1 billion thereafter.
recognized a gain on
As previously discussed in Note 12, the Bancorp was
determined to be the primary beneficiary of VIEs associated with
certain automobile loan and home equity securitizations and,
effective January 1, 2010, these VIEs have been consolidated in
the Bancorp’s Consolidated Financial Statements. As of
December 31, 2010, the outstanding long-term debt associated
with the automobile
loan securitizations and home equity
securitization was $559 million and $133 million, respectively.
Third-party holders of this debt do not have recourse to the
general assets of the Bancorp.
the Bancorp’s ability
junior
restrictions,
subordinated notes prior
their scheduled maturity. In
November 2010, the Bancorp amended the debt covenants to
remove a requirement to issue replacement capital securities at
least 180 days prior to calling the trust preferred securities.
redeem
the
to
to
The 8.88% junior subordinated notes due in 2068, with a
current carrying value and outstanding principal balance of $400
million at December 31, 2010, 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, 2010,
the rate paid on the swap was 3.54%. The obligations were issued
by Fifth Third Capital Trust VII. The 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 FRB.
On January 25, 2011, the Bancorp issued $1.0 billion of
senior notes to third party investors. The senior notes bear a fixed
rate of interest of 3.625% per annum. The notes are unsecured,
senior obligations of the Bancorp. Payment of the full principal
amount of the notes will be due upon maturity on January 25,
2016. The notes will not be subject to the redemption at the
Bancorp’s option at any time prior to maturity. See Note 32 for
further information.
Subsidiary Long-Term Borrowings
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 $1.0 billion was outstanding
at December 31, 2010 with $19.0 billion available for future
issuance. The senior floating-rate bank notes due in 2013 pay a
floating rate at three-month LIBOR plus 11 bp. For the
subordinated fixed-rate bank notes due in 2015, the Bancorp
entered into interest rate swaps to convert the fixed-rate debt into
floating rate. At December 31, 2010, the weighted-average rate
paid on the swaps was 0.39%.
The senior fixed-rate bank notes matured and were paid in
February of 2010.
The junior subordinated floating-rate bank notes due in 2032
100 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES
The Bancorp, in the normal course of business, enters into
financial
instruments and various agreements to meet the
financing needs of its customers. The Bancorp also enters into
certain transactions and agreements to manage its interest rate and
prepayment risks, provide funding, equipment and locations for
its operations and invest in its communities. These instruments
and agreements involve, to varying degrees, elements of credit
risk, counterparty risk and market risk in excess of the amounts
recognized in the Bancorp’s Consolidated Balance Sheets. The
creditworthiness of counterparties for all
instruments and
agreements is evaluated on a case-by-case basis in accordance with
the Bancorp’s credit policies. The Bancorp’s
significant
commitments, contingent liabilities and guarantees in excess of
the amounts recognized in the Consolidated Balance Sheets are
discussed in further detail as follows:
Commitments
The Bancorp has certain commitments to make future payments
under contracts. The following table reflects a summary of
significant commitments as of December 31:
($ in millions)
Commitments to extend credit
Forward contracts to sell mortgage loans
Letters of credit
Noncancelable lease obligations
Capital commitments for private equity
investments
Purchase obligations
Capital expenditures
Capital lease obligations
2010
$43,677
6,389
5,516
869
2009
42,591
3,633
6,657
906
193
64
48
32
90
25
27
44
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, 2010 and 2009, the Bancorp
had a reserve for unfunded commitments totaling $227 million
and $294 million, respectively, included in other liabilities in the
Consolidated Balance Sheets.
replacement value of
limited
the
to
is
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 $6.4 billion and $3.6
billion as of December 31, 2010 and 2009, respectively.
Letters of credit
Standby and commercial
letters of credit are conditional
commitments issued to guarantee the performance of a customer
to a third party and as of December 31, 2010, are summarized by
expiration in the following table:
($ in millions)
Less than 1 year (a)
1-5 years (a)
Over 5 years
Total
(a) Includes $67 of less than 1 year and $1 of 1-5 years issued on behalf of commercial
$2,367
2,933
216
$5,516
customers to facilitate trade payments in U.S. dollars and foreign currencies.
Standby letters of credit accounted for 99% of total letters of
credit at December 31, 2010 and 2009 and are considered
guarantees in accordance with U.S. GAAP. Approximately 54%
and 58% of the total standby letters of credit were secured as of
December 31, 2010 and 2009, 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. At December 31, 2010 and 2009, the
reserve related to these standby letters of credit was $10 million
and $6 million, respectively. The Bancorp monitors the credit risk
associated with letters of credit using the same risk rating system
utilized for establishing loss reserves within its loan and lease
portfolio. Risk ratings as of December 31, 2010 under this risk
rating system are summarized in the following table:
($ in millions)
Pass
Special mention
Substandard
Doubtful
Loss
Total
$4,944
193
360
17
2
$5,516
At December 31, 2010 and 2009, the Bancorp had outstanding
letters of credit that were supporting certain securities issued as
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, 2010 and 2009, FTS acted as the remarketing agent
to issuers on $3.4 billion 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
$563 million and $936 million in VRDNs remarketed by third
parties at December 31, 2010 and 2009, respectively. These letters
of credit are included in the total letters of credit balance provided
in the previous table. At December 31, 2010 and 2009, FTS held
$1 million and $47 million, respectively, of these VRDNs in its
portfolio and classified them as trading securities. At December
31, 2010 and 2009 the Bancorp held $105 million and $188
million, respectively, of VRDNs which were purchased from the
market, through FTS and held in its trading securities portfolio.
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 $11 million and $45
million of letters of credit issued by the Bancorp at December 31,
2010 and 2009, respectively. The Bancorp recorded these draws as
commercial loans in its Consolidated Balance Sheets.
Fifth Third Bancorp 101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
lease
agreements. The minimum
Noncancelable lease obligations and other commitments
The Bancorp’s subsidiaries have entered into a number of
noncancelable
rental
commitments under noncancelable lease agreements are shown in
its
the summary of commitments table. The Bancorp or
subsidiaries have also entered into a limited number of agreements
for work related to banking center construction and to purchase
goods or services.
Contingent Liabilities
to
the Bancorp's
Private mortgage reinsurance
For certain mortgage loans originated by the Bancorp, borrowers
may be required to obtain 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
total outstanding reinsurance
coverage, which was $122 million and $182 million at December
31, 2010 and 2009, respectively. As of December 31, 2010 and
2009, the Bancorp maintained a reserve of $42 million and $44
million, respectively, related to exposures within the reinsurance
portfolio. During the second quarter of 2009, the Bancorp
suspended the practice of providing reinsurance of private
mortgage insurance for newly originated mortgage loans. In the
third quarter of 2010, the Bancorp allowed one of its third-party
insurers to terminate its reinsurance agreement with the Bancorp,
resulting in the Bancorp releasing collateral to the insurer in the
form of investment securities and other assets with a carrying
value of $19 million, and the insurer assuming the Bancorp’s
obligations under the reinsurance agreement, resulting in a
decrease to the Bancorp’s reserve liability of $20 million and
decrease in the Bancorp’s maximum exposure of $53 million.
Legal claims
There are legal claims pending against the Bancorp and its
subsidiaries that have arisen in the normal course of business. See
Note 19 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 credit 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. The
outstanding balances on these loans sold with credit recourse were
$916 million at December 31, 2010 and $1.1 billion at December
31, 2009 and the delinquency rates were approximately 8.7% and
8.1%, respectively. At December 31, 2010 and 2009, the Bancorp
maintained an estimated credit loss reserve on these loans sold
with credit recourse of $16 million and $21 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 residential mortgage loans held in its loan portfolio.
102 Fifth Third Bancorp
Residential mortgage loans sold with representation and warranty provisions
Conforming residential mortgage loans sold to unrelated third
parties are generally sold with representation and warranty
provisions. A contractual liability arises only in the event of a
breach of these representations and warranties and, in general,
only when a loss results from the breach. The Bancorp may be
required to repurchase any previously sold loan or indemnify
(make whole) the investor or insurer for which the representation
or warranty of the Bancorp proves to be inaccurate, incomplete or
misleading.
The Bancorp establishes a residential mortgage repurchase
reserve related to various representations and warranties that
reflect management’s estimate of losses based on a combination
of factors. Such factors incorporate historical investor audit and
repurchase demand rates, appeals success rates and historical loss
severity. At the time of a loan sale, the Bancorp records a
representation and warranty reserve at the estimated fair value of
the Bancorp’s guarantee and continually updates the reserve
during the life of the loan as losses in excess of the reserve
become probable and reasonably estimable. The provision for the
estimated fair value of the representation and warranty guarantee
arising from the loan sale is recorded as an adjustment to the gain
on sale, which is included in other noninterest income at the time
of sale. Updates to the reserve are recorded in other noninterest
expense. The majority of repurchase demands occur within the
first 36 months following origination.
As of December 31, 2010 and 2009, the Bancorp maintained
reserves related to these loans sold with representation and
warranty provisions totaling $85 million and $37 million,
respectively. The following table summarizes activity in the
reserve for representation and warranty provisions for the years
ended December 31:
($ in millions)
Balance, beginning of period
Net additions to the reserve
Losses charged against the reserve
Balance, end of period
2010
$37
115
(67)
$85
2009
12
65
(40)
37
floating-rate,
recourse, certain primarily
Liquidity support and credit enhancement agreement
Through 2008, the Bancorp had transferred at par, subject to
credit
short-term
investment grade commercial loans to a VIE, which prior to
January 1, 2010, was an unconsolidated special purpose entity
wholly-owned by an independent third party. The VIE issued
asset-backed commercial paper and used the proceeds to fund the
acquisition of commercial loans transferred to it by the Bancorp.
Generally, the loans transferred to the VIE provided a lower yield
due to their investment grade nature and, therefore, transferring
these loans allowed 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 was $771 million. At December 31, 2009, the
Bancorp’s loss reserve related to the credit enhancement provided
to the VIE was $45 million and was recorded in other liabilities in
the Consolidated Balance Sheets. To determine the credit loss
reserve, the Bancorp used an approach that was consistent with its
overall approach in estimating credit losses for various categories
of commercial loans held in its loan portfolio.
In the event the VIE was unable to issue commercial paper,
the Bancorp agreed to provide liquidity support in the form of a
line of credit and the repurchase of assets from the VIE. As of
December 31, 2009, the liquidity asset purchase agreement was
$1.4 billion. In addition, due to dislocation in the short-term
funding market which caused the VIE difficulty in obtaining
sufficient funding through the issuance of commercial paper, the
Bancorp purchased commercial paper from the VIE throughout
2008 and 2009. As of December 31, 2009, the Bancorp held $805
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million of commercial paper issued by the VIE, representing 87%
of the VIE’s total commercial paper then outstanding. Effective
January 1, 2010 with the adoption of amended accounting
guidance regarding the consolidation of VIEs, the Bancorp was
required to consolidate the assets and liabilities of this VIE. See
Note 1 for further information on the amended accounting
guidance.
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 its customers. FTS is responsible for payment to its
brokerage clearing agent for any loss, liability, damage, cost or
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 was
$10 million and $8 million at December 31, 2010 and 2009,
respectively. 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 with a carrying value of $2.9 billion and $2.8 billion
as of December 31, 2010 and 2009, respectively. See Note 17 for
further information on these long-term borrowing obligations.
Visa litigation
The Bancorp, as a member bank of Visa prior to Visa’s
reorganization and initial public offerings of its Class A common
shares in 2008, had certain indemnification obligations pursuant to
Visa’s certificate of incorporation and by-laws and in accordance
with 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. As part of its
reorganization and IPO, the Bancorp’s indemnification obligation
was modified to include only certain known litigation (the
“Covered Litigation”) as of the date of the restructuring. This
modification triggered a requirement to recognize a $3 million
liability for the year ended December 31, 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. In conjunction with the IPO, the Bancorp received
10.1 million of Visa’s Class B shares based on the Bancorp’s
membership percentage in Visa prior to the IPO. The Class B
shares are not transferable (other than to another member bank)
until the later of the third anniversary of the IPO closing or the
date which the Covered Litigation has been resolved; therefore,
the Bancorp’s Class B shares were classified in other assets and
accounted for at their carryover basis of $0. Visa deposited $3
billion of the proceeds from the IPO into a litigation escrow
account, established for the purpose of funding judgments in, or
settlements of, the Covered Litigation. If Visa’s
litigation
committee determines that the escrow account is insufficient, then
Visa will issue additional Class A shares and deposit the proceeds
from the sale of the shares into the litigation escrow account.
When Visa funds the litigation escrow account, the Class B shares
are subject to dilution through an adjustment in the conversion
rate of Class B shares into Class A shares. During 2008, the
Bancorp recorded additional reserves of $71 million for probable
future settlements related to the Covered Litigation and recorded
its proportional share of $169 million of the Visa escrow account
net against the Bancorp’s litigation reserve.
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 the Covered Litigation is
finally settled. The Bancorp calculates the fair value of the swap
based on its estimate of the probability and timing of certain
the resulting
Covered Litigation settlement scenarios and
payments related to the swap. The counterparty to the swap as a
result of its ownership of the Class B shares will be impacted by
dilutive adjustments to the conversion rate of the Class B shares
into Class A shares caused by any Covered Litigation losses in
excess of the litigation escrow account. If actual judgments in, or
settlements of, the Covered Litigation significantly exceed current
expectations, then additional funding by Visa of the litigation
escrow account and the resulting dilution of the Class B shares
could result in a scenario where the Bancorp’s ultimate exposure
associated with the Covered Litigation (the “Visa Litigation
Exposure”) exceeds the value of the Class B shares owned by the
swap counterparty (the “Class B Value”). In the event the
Bancorp concludes that it is probable that the Visa Litigation
Exposure exceeds the Class B Value, the Bancorp would record a
litigation reserve liability and a corresponding amount of other
noninterest expense for the amount of the excess. Any such
litigation reserve liability would be separate and distinct from the
fair value derivative liability associated with the total return swap.
As of the date of the Bancorp’s sale of Visa Class B shares
and through December 31, 2010, the Bancorp has concluded that
it is not probable that the Visa Covered Litigation Exposure will
exceed the Class B Value. Based on this determination, upon the
sale of Class B shares, the Bancorp reversed its net Visa litigation
reserve liability and recognized a free-standing derivative liability
associated with the total return swap with an initial fair value of
$55 million. 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 for the year ended December 31,
2009. In the second quarter of 2010, Visa funded an additional
$500 million into the escrow account which resulted in further
dilution in the conversion of Class B shares into Class A shares
and required the Bancorp to make a $20 million cash payment
(which reduced the swap liability) to the swap counterparty in
accordance with the terms of the swap contract. In the fourth
quarter of 2010, Visa funded an additional $800 million into the
litigation escrow account which resulted in further dilution in the
conversion of Class B shares into Class A shares and required the
Bancorp to make a $35 million cash payment (which reduced the
swap liability) to the swap counterparty in accordance with the
terms of the swap contract. The fair value of the swap liability was
$18 million and $55 million as of December 31, 2010 and 2009,
respectively.
Fifth Third Bancorp 103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interchange
19. 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 18 and has also entered into with Visa,
MasterCard and certain other named defendants judgement and
loss sharing agreements that attempt to allocate financial
responsibility to the parties thereto in the event certain settlements
or judgments occur. Accordingly, prior to the sale of 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 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
related to the Bancorp’s exposure through Visa. Additionally, the
Bancorp has remaining reserves related to this litigation of $30
million and $22 million as of December 31, 2010 and 2009,
respectively. Refer to Note 18 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 its 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
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.
For the year ended December 31, 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 acquisition of First Charter Corporation. These cases
20. 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
normal underwriting and approval procedures. Prior to the closing
of a loan to a related party, Compliance Risk Management must
104 Fifth Third Bancorp
remain in the discovery stages of litigation. The impact of the final
disposition of these lawsuits cannot be assessed at this time. 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 were dismissed by the trial court, and
are being appealed to the United States Sixth Circuit Court of
Appeals.
On September 16, 2010, Edward P. Zemprelli (Zemprelli)
filed a lawsuit in the Hamilton County, Ohio Court of Common
Pleas. The lawsuit is a purported derivative action brought by a
shareholder of the Bancorp against certain of the Bancorp’s
officers and directors, and which names the Bancorp as a nominal
defendant. In the lawsuit, Zemprelli brings claims for breach of
fiduciary duty, waste of corporate assets, and unjust enrichment
against the defendant officers and directors. The alleged basis for
these claims is that the defendant officers and directors attempted
to disguise from the public the truth about the credit quality of the
Bancorp’s loan portfolio, its capital position, and its need to raise
is seeking
capital. Zemprelli, on behalf of the Bancorp,
unspecified money damages allegedly sustained by the Bancorp as
a result of the defendants’ conduct, as well as injunctive relief. The
case is in the early stages of litigation. The impact of the final
disposition of this lawsuit 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.
judgments, settlements,
investigations and proceedings
in material adverse consequences,
The Bancorp and/or its affiliates are or may become
involved from time to time in information-gathering requests,
reviews,
(both formal and
informal) by government and self-regulatory agencies, including
the SEC, regarding their respective businesses. Such matters may
result
including without
fines, penalties,
limitation, adverse
injunctions or other actions, amendments and/or restatements of
Fifth Third’s SEC filings and/or financial statements, as
applicable, and/or determinations of material weaknesses in our
disclosure controls and procedures. The SEC is investigating and
has made several requests for information, including by subpoena,
concerning issues which Fifth Third understands relate to
accounting and reporting matters
its
commercial loans. This could lead to an enforcement proceeding
by the SEC which, in turn, may result in one or more such
material adverse consequences.
involving certain of
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, 2010 and 2009, certain directors,
executive officers, principal holders of Bancorp common stock,
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
2010
2009
$157
3
160
143
6
149
Outstanding balance on loans, net of
participations and undrawn commitments
74
68
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.
On June 30, 2009, the Bancorp completed the sale of a
majority interest in its Processing Businesses, FTPS. Advent
International acquired an approximate 51% interest in FTPS for
cash and warrants. The Bancorp
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 $26 million and $15 million, respectively, in
noninterest income as part of its equity method investment in
FTPS for the years ended December 31, 2010 and 2009 and
received distributions totaling $25 million and $18 million,
respectively, during 2010 and 2009.
retained
the
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 standalone entity during the deconversion period. These
services involve transition support, including product development,
risk management, legal, accounting and general business resources.
FTPS paid the Bancorp $49 million and $76 million, respectively,
for these services for the years ended December 31, 2010 and
2009. Other services provided to FTPS by the Bancorp, which will
include treasury
continue beyond the deconversion period,
management, clearing, settlement, sponsorship, data center support
and office space. FTPS paid the Bancorp $34 million and $14
million, respectively, for these services for the years ended
December 31, 2010 and 2009. In addition to the previously
mentioned services, the Bancorp 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 $64 million and $33 million,
respectively, for the years ended December 31, 2010 and 2009.
During the fourth quarter of 2010, FTPS refinanced its debt
into a larger syndicated loan structure that included the Bancorp.
As a result, loans to FTPS declined to $381 million as of December
31, 2010 from $1.24 billion at December 31, 2009. The Bancorp
recognized $4 million in syndication fees in 2010 associated with
the refinanced loan to FTPS. The amount of FTPS’ line of credit
with the Bancorp was also reduced to $50 million as of December
31, 2010 from $125 million as of December 31, 2009. FTPS did
not draw upon its lines of credit during the years ended December
31, 2010 or 2009. Interest income relating to the loans was $102
million and $60 million, respectively, for the years ended December
31, 2010 and 2009 and is included in interest and fees on loans and
leases in the Consolidated Statements of Income.
21. INCOME TAXES
The Bancorp and its subsidiaries file a consolidated federal income tax return. The following is a summary of applicable income taxes included in
the Consolidated Statements of Income for the years ended December 31:
($ 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)
2010
2009
2008
($5)
16
-
11
165
11
-
176
$187
(157)
6
(3)
(154)
190
(8)
2
184
30
560
25
3
588
(1,090)
(47)
(2)
(1,139)
(551)
The following is 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
Goodwill
Interest to taxing authority, net of tax
Other changes in unrecognized tax benefits
Unrealized stock-based compensation benefits
Other, net
Effective tax rate
2010
35.0%
2009
35.0
2008
(35.0)
1.8
(3.6)
(14.1)
-
(0.8)
(1.8)
2.5
0.8
19.8%
(.1)
(18.7)
(14.6)
8.7
(7.6)
-
0.6
0.6
3.9
(.5)
1.5
(3.6)
11.9
5.1
-
-
(.1)
(20.7)
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 that are exempt from federal
taxation.
During 2010, the Bancorp settled its outstanding dispute with
the IRS relating to a specific capital raising transaction. This
favorable settlement reduced income tax expense (including
interest) by $19 million. During 2009, the Bancorp settled its
outstanding dispute with the IRS relating to certain leveraged
Fifth Third Bancorp 105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
lease transactions. This favorable settlement reduced income
tax expense (including interest) by $6 million and $55 million
for 2010 and 2009, respectively. The accrual of interest expense
for these items had an adverse impact on income tax expense
for 2008.
During 2009, the Bancorp notified the carrier of one of the
Bancorp’s policies of its intent to surrender a certain BOLI
policy and was therefore required to establish a deferred tax
asset relating to the difference between its financial reporting
and tax basis of its investment. As a result, income tax expense
for 2009 was favorably impacted by $106 million. Income tax
expense was adversely impacted in 2008 by $78 million relating
to the same BOLI policy.
The following table provides a summary of the Bancorp’s unrecognized tax benefits as of December 31:
($ in millions)
Tax positions that would impact the effective tax rate, if recognized
Tax positions where the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of the deduction
Unrecognized tax benefits
2010
$15
1
$16
2009
81
1
82
The following table provides a reconciliation of the beginning and ending amounts of the Bancorp’s unrecognized tax benefits:
($ 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
The Bancorp’s unrecognized tax benefits as of December 31,
2010 relate largely to U.S. state income tax exposures from taking
tax positions where the Bancorp believes it is likely that upon
examination a state will take a position contrary to the position
taken by the Bancorp.
Substantially all of the reduction of unrecognized tax benefits
during 2010 related to the settlement of the Bancorp’s dispute with
the IRS relating to the specific capital raising transaction
2010
$82
4
(23)
2
(48)
(1)
$16
2009
959
16
(329)
1
(563)
(2)
82
2008
469
496
(8)
4
-
(2)
959
mentioned previously. Similarly, substantially all of the reduction
of unrecognized tax benefits during 2009 related to the settlement
of certain leveraged lease transactions with the IRS.
The Bancorp believes it is unlikely that its unrecognized tax
benefits will change by a material amount during the next 12
months.
Deferred income taxes are comprised of the following items at December 31:
($ in millions)
Deferred tax assets:
Allowance for loan & lease losses
Impairment reserves
Deferred compensation
Reserve for unfunded commitments
State net operating losses
Other
Total deferred tax assets
Deferred tax liabilities:
Lease financing
Investments in joint ventures and partnership interests
MSRs
Other comprehensive income
Bank premises and equipment
State deferred taxes
Other
Total deferred tax liabilities
Total net deferred tax (liability) asset
2010
2009
$1,051
144
136
79
66
273
$1,749
$801
481
190
169
69
53
130
$1,893
($144)
1,312
145
147
103
81
224
2,012
898
481
191
130
88
60
138
1,986
26
Deferred tax assets are included as a component of other assets in
the Consolidated Balance Sheets. Deferred tax liabilities are
included as a component of accrued taxes, interest and expenses in
the Consolidated Balance Sheets.
At December 31, 2010 and 2009, the Bancorp had recorded
deferred tax assets of $66 million and $81 million, respectively,
related to state net operating loss carryforwards. The deferred tax
assets relating to state net operating losses are presented net of
specific valuation allowances, primarily resulting from leasing
operations, of $25 million and $15 million at December 31, 2010
and 2009, respectively. If these carry forwards are not utilized, they
will expire in varying amounts through 2030. Additionally, at
December 31, 2010 and 2009, the Bancorp had federal general
106 Fifth Third Bancorp
business tax credit carryforwards of $45 million and $42 million,
respectively. If unused, these credit carryforwards will expire in
2030.
The Bancorp has determined that a valuation allowance is not
needed against the remaining deferred tax assets as of December
31, 2010 or 2009. The Bancorp considered all of the positive and
negative evidence available to determine whether it is more likely
than not that the deferred tax assets will ultimately be realized and,
based upon that evidence, the Bancorp believes it is more likely
than not that the deferred tax assets recorded at December 31,
2010 and 2009 will ultimately be realized. The Bancorp reached this
conclusion as the Bancorp has taxable income in the carryback
period and it is expected that the Bancorp’s remaining deferred tax
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assets will be realized through the reversal of its existing taxable
temporary differences and its projected future taxable income.
As required under U.S. GAAP, the Bancorp recognized a
deferred tax asset for compensation expense recognized for
financial reporting that may be deductible for tax purposes in the
future for certain stock-based awards granted to its employees. As
a result of the Bancorp’s stock price as of December 31, 2010, as
much as $24 million of deferred tax assets previously established
for these stock-based awards will not be realized within the next 12
months and will negatively impact the Bancorp’s income tax
expense in 2011. The Bancorp cannot predict its stock price or
whether its employees will exercise other stock-based awards with
lower exercise prices in the future; therefore, it is possible that the
impact to income tax expense will be greater than or less than $24
million in 2011.
The IRS concluded its audit for 2006 and 2007 during the
third quarter of 2010. As a result, all issues have been resolved with
the IRS through 2007. The statute of limitations for the Bancorp’s
federal income tax returns remains open for tax years 2007 through
2010. The IRS is currently auditing the Bancorp’s federal income
tax returns for 2008 and 2009. On occasion, as various state and
local taxing jurisdictions examine the returns of the Bancorp and
its subsidiaries, the Bancorp may agree to extend the statute of
limitations for a short period of time. Otherwise, with the
exception of a few states with insignificant uncertain tax positions,
the statutes of limitations for state income tax returns remain open
only for tax years in accordance with each state’s statutes.
Any interest and penalties incurred in connection with income
taxes are recorded as a component of income tax expense in the
Consolidated Financial Statements. During the years ended
December 31, 2010 and 2009, the Bancorp recognized an interest
benefit of $8 million and
interest expense of $3 million,
respectively, net of the related tax impact. This $3 million
recognized in 2009 is exclusive of the $55 million interest reduction
discussed previously. At December 31, 2010 and 2009, the
Bancorp had accrued interest liabilities, net of the related tax
benefits, of $1 million and $13 million, respectively. No material
liabilities were recorded for penalties.
Retained earnings at December 31, 2010 and 2009 included
$157 million in allocations of earnings for bad debt deductions of
former thrift subsidiaries for which no income tax has been
provided. Under current tax law, if certain of the Bancorp’s
subsidiaries use these bad debt reserves for purposes other than to
absorb bad debt losses, they will be subject to federal income tax at
the current corporate tax rate.
Fifth Third Bancorp 107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. RETIREMENT AND BENEFIT PLANS
The Bancorp recognizes the overfunded and underfunded status
of its pension plans as an asset and liability, respectively. The
overfunded and underfunded amounts recognized in other assets
and other liabilities, respectively, in the Consolidated Balance
Sheets were as follows as of December 31:
($ in millions)
Prepaid benefit cost
Accrued benefit liability
Net underfunded status
2010
$4
(34)
($30)
2009
-
(35)
(35)
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
The following tables summarize the defined benefit retirement
plans as of and for the years ended December 31:
Total recognized in net periodic benefit
cost and other comprehensive income
2
-
(12)
(1)
-
(11)
$ -
(10)
-
(15)
(1)
(13)
(39)
(10)
93
-
(7)
(1)
(10)
75
88
Plans with an Overfunded Status (a)
($ 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
Overfunded projected benefit obligation recognized
in the Consolidated Balance Sheets as an asset
2010
$182
31
-
-
(16)
$197
$183
-
10
-
16
(16)
$193
2009
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(a) The Bancorp’s defined benefit plan had an overfunded status at December 31,
2010. The plan was underfunded at December 31, 2009 and is reflected in the
Underfunded Status table.
$4
Plans with an Underfunded Status
($ 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
the Consolidated Balance Sheets as a liability
2010
$ -
-
4
-
(4)
$ -
$34
-
2
-
2
(4)
$34
2009
144
29
39
(19)
(11)
182
228
-
12
(19)
7
(11)
217
($34)
(35)
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 2011 are $11 million and $1 million,
respectively.
The following table summarizes net periodic benefit cost and
other changes in plan assets and benefit obligations recognized in
other comprehensive income for the years ended December 31:
($ 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
108 Fifth Third Bancorp
2010
2009
2008
$ -
12
(14)
12
1
-
$11
-
12
(12)
15
1
13
29
-
13
(18)
7
1
10
13
Fair Value Measurements of Plan Assets
The following table summarizes plan assets measured at fair value
on a recurring basis as of December 31:
Fair Value Measurements Using (a)
2010 ($ in millions)
Equity securities:
Equity securities (Growth) (b)
Equity securities (Value)
Total equity securities
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
Non-agency mortgage
backed
Corporate bonds (d)
Total debt securities
Total plan assets
Level 1
Level 2
Level 3
$58
53
111
6
30
11
47
7
-
-
-
-
7
$165
-
-
-
-
-
-
-
-
1
24
6
1
32
32
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
Fair
Value
$58
53
111
6
30
11
47
7
1
24
6
1
39
$197
Fair Value Measurements Using (a)
Level 1
Level 2
Level 3
2009 ($ in millions)
Equity securities:
Equity securities (Growth) (b)
Equity securities (Value)
Total equity securities
Mutual & exchange traded funds:
Money market funds
International funds
Commodity funds
Total mutual & exchange
traded funds
$52
49
101
6
28
9
43
-
-
-
-
-
-
-
Debt securities:
U.S Treasury obligations
U.S. Govt. agencies (c)
Agency mortgage backed
Corporate bonds (d)
Total debt securities
Total plan assets
(a) For further information on fair value hierarchy levels, see Note 28.
(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
6
-
-
-
6
$150
-
3
27
2
32
32
Total
Fair
Value
$52
49
101
6
28
9
43
6
3
27
2
38
$182
-
-
-
-
-
-
-
-
-
-
-
-
-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and non-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.
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
2010
2009
2008
5.39 %
5.00
8.25
5.88
5.00
8.25
5.88
5.00
8.50
6.11
5.00
8.50
6.11
5.00
8.53
6.45
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 2010 pension
expense by approximately $1 million.
Based on the actuarial assumptions, the Bancorp does not
expect to contribute to the plan in 2011. Estimated pension
benefit payments, which reflect expected future service, are $19
million in 2011, $20 million in 2012, $17 million in 2013, $17
million in 2014 and $16 million in 2015. The total estimated
payments for the years 2016 through 2020 is $70 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
years ended December 31:
Targeted
range
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.
70 – 80%
20 – 25
0 - 5
2010
72%
2
74
23
3
100%
2009
71
2
73
24
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, 2010 and 2009.
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
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 $227 million and $217 million at December 31, 2010 and
2009, respectively. Amounts relating to the Bancorp’s defined
benefit plans with assets exceeding benefit obligations were as
follows at December 31:
($ in millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2010
$193
193
197
2009
-
-
-
Amounts relating to the Bancorp’s defined benefit plans with
benefit obligations exceeding assets were as follows at December
31:
($ in millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2010
$34
34
-
2009
217
217
182
As of December 31, 2010 and 2009, $172 million and $160
million, respectively, of plan assets were managed through mutual
funds by Fifth Third Bank, a subsidiary of the Bancorp. Plan
assets included $5 million and $3 million of Bancorp common
stock as of December 31, 2010 and 2009, respectively. Plan assets
are not expected to be returned to the Bancorp during 2011.
Fifth Third Bancorp 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $31 million
for 2010, $17 million for 2009 and $18 million for 2008. Expenses
recognized during the years ended December 31, 2010, 2009 and
2008 for matching contributions to the Bancorp’s defined
contribution savings plans were $36 million, $36 million and $37
million, respectively.
23. ACCUMULATED OTHER COMPREHENSIVE INCOME
The activity of the components of other comprehensive income and accumulated other comprehensive income was as follows for the years
ended December 31:
($ in millions)
2010
Unrealized holding gains on available-for-sale securities arising during
period
Reclassification adjustment for net gains included in net income
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
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 income
Net unrealized gains (losses) 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 gain
Defined benefit plans, net
Total
110 Fifth Third Bancorp
Total Other
Comprehensive Income
Pretax
Activity
Tax
Effect
Net
Activity
$216
(57)
159
2
(60)
(58)
1
10
11
$112
$248
(57)
(37)
154
75
(49)
26
-
39
39
$219
$353
(31)
322
100
(3)
97
-
(74)
(74)
$345
(73)
19
(54)
(1)
21
20
(1)
(4)
(5)
(39)
(86)
20
13
(53)
(26)
17
(9)
-
(14)
(14)
(76)
(123)
10
(113)
(35)
1
(34)
-
26
26
(121)
143
(38)
105
1
(39)
(38)
-
6
6
73
162
(37)
(24)
101
49
(32)
17
-
25
25
143
230
(21)
209
65
(2)
63
-
(48)
(48)
224
Total Accumulated Other
Comprehensive Income
Beginning
Balance
Net
Activity
Ending
Balance
216
105
321
105
(38)
67
(80)
241
6
73
(74)
314
115
101
216
88
17
105
(105)
98
25
143
(80)
241
(94)
209
115
25
63
88
(57)
(126)
(48)
224
(105)
98
24. COMMON, PREFERRED AND TREASURY STOCK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the share activity within common, preferred and treasury stock for the years ended December 31:
($ in millions, except share data)
Shares at December 31, 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
Accretion from dividends on preferred shares, Series F
Stock-based awards exercised, including treasury shares issued
Restricted stock grants and forfeitures, net
Employee stock ownership through benefit plans
Shares at December 31, 2010
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, 2010, Series G preferred stock had 16,451 shares
outstanding and 1,700 shares reserved for issuance.
On December 31, 2008, the U.S. Treasury purchased $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
Common Stock
Value
$1,295
-
-
-
-
-
-
-
$1,295
351
133
-
-
-
-
$1,779
-
-
-
-
$1,779
Shares
583,427,104
-
-
-
-
-
-
-
583,427,104
157,955,960
60,121,124
-
-
-
-
801,504,188
-
-
-
-
801,504,188
Preferred Stock
Shares
9,250
44,300
136,320
(9,250)
-
-
-
-
180,620
-
(27,849)
-
-
-
-
152,771
-
-
-
-
152,771
Value
$9
1,072
3,169
(9)
-
-
-
-
$4,241
-
(674)
41
-
-
1
$3,609
45
-
-
-
$3,654
Treasury Stock
Value
$2,209
-
-
-
(2)
(136)
(1,841)
(1)
$229
-
-
-
5
(32)
(1)
$201
-
(8)
(62)
(1)
$130
Shares
51,482,500
-
-
-
-
(2,551,432)
(42,890,576)
-
6,040,492
-
-
-
819,796
(751,464)
327,200
6,436,024
-
16,391
(1,334,967)
114,218
5,231,666
fourth quarter of 2008, the Bancorp repurchased its Series D and
Series E preferred stock. The preferred stock was repurchased for
aggregate consideration in cash of $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, 2010, 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 2010, 2009 and 2008, the Bancorp repurchased an
immaterial amount of common stock.
On January 20, 2011, the Bancorp announced it had priced a
public offering of 121,428,572 shares of its common stock at a
price of $14.00 per share, or $1.7 billion in aggregate gross
Fifth Third Bancorp 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
proceeds. On January 24, 2011, the underwriters exercised their
option to purchase an additional 12,142,857 shares at the offering
price of $14.00 per share. In connection with this exercise, the
Bancorp entered into a forward sale agreement which resulted in a
final net payment of 959,821 shares on February 4, 2011. On
25. 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
February 2, 2011, the Bancorp used these proceeds along with
proceeds from a senior debt offering and other available resources
to repurchase all 136,320 Series F preferred shares. See Note 32
for further information.
awards and remaining shares available for future issuance under all
of the Bancorp’s equity compensation plans as of December 31,
2010:
Number of Shares to Be
Issued Upon Exercise
Weighted-
Average Exercise
Price
Shares Available
for Future
Issuance
9,601(a)
(a)
(a)
(a)
N/A
(a)
(a)
10,434(f)
20,035
Plan Category (shares in thousands)
Equity compensation plans approved by shareholders:
SARs
Restricted stock
Stock options (c)
Phantom stock units
Performance units
Performance-based restricted stock
Employee stock purchase plan
Total shares
(a) 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
(b)
5,158
10,333
(d)
(e)
-
(b)
N/A
$57.02
N/A
N/A
N/A
15,491
units, performance units and performance restricted stock awards.
(b) 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.
(c) Excludes 1.5 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
plans and will make no additional awards under these plans. The weighted-average exercise price of the outstanding options is $18.09 per share.
(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 400 thousand 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.
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.
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 units that are to be settled in cash.
The Bancorp has historically used treasury stock to settle stock-
based awards, when available. SARs, 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 exercisable
either ratably or fully over a four year period of continued
employment. The Bancorp does not grant discounted SARs or
stock options, re-price previously granted SARs or stock options,
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.
Stock options were previously issued at fair value based on the
closing price of the Bancorp’s common stock on the date of grant,
had up to ten-year terms and vested and became fully exercisable
ratably over a three or four year period of continued employment.
Performance unit awards have three-year cliff vesting terms with
performance or market conditions as defined by the plan.
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
SARs and stock options is measured using the Black-Scholes
option-pricing model. Awards with a graded vesting are expensed
on a straight-line basis.
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 seven 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. SARs, restricted stock, stock options
and performance units outstanding represent six percent of the
Bancorp’s issued shares at December 31, 2010.
stock appreciation
restricted
rights,
During 2009, the Bancorp’s Board of Directors approved the
use of phantom stock units as part of its compensation for
executives in connection with changes made in reaction to the
TARP compensation rules. The phantom stock units were issued
under the Bancorp’s 2008 Incentive Compensation Plan. The
number of phantom 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. Phantom
stock is expensed based on the number of outstanding units
multiplied by the closing price of the Bancorp’s stock at period
end. The phantom stock units do not include any rights to receive
dividends or dividend equivalents. Phantom stock units issued on
or before June 12, 2010 will be settled in cash upon the earlier to
occur of June 15, 2011 or the executive’s death. Units issued
thereafter will be settled in cash with 50% being settled on June
15, 2012 and 50% being settled on June 15, 2013. The amount to
112 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
Expected life (in years)
Expected volatility
Expected dividend yield
Risk-free interest rate
2010
6
38%
2.0%
3.1%
2009
6
73%
1.3%
2.2%
2008
6
30%
8.7%
3.3%
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. Annual
dividends are based on projected dividends, estimated using a
historical long-term dividend payout ratio, over the estimated life
of the awards. 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 $64 million, $51
million and $56 million for the years ended December 31, 2010,
2009 and 2008, respectively, and is included as compensation
expense in the Consolidated Statements of Income. The total
related income tax benefit recognized was $18 million, $18 million
and $20 million for the years ended December 31, 2010, 2009 and
2008, respectively.
Stock Appreciation Rights (SARs)
The weighted-average grant-date fair value of SARs granted was
$5.10, $2.41 and $2.09 per share for the years ended 2010, 2009
and 2008, respectively. The total grant-date fair value of SARs that
vested during 2010, 2009 and 2008 was $25 million, $26 million
and $61 million, respectively.
At December 31, 2010, there was $37 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 2.7 years.
2010
2009
2008
SARs (shares in thousands)
Outstanding at January 1
Granted
Exercised
Forfeited or expired
Outstanding at December 31
Exercisable at December 31
Weighted-
Average
Grant Price
$26.82
14.74
3.96
30.87
$24.67
$34.94
Shares
22,508
8,398
-
(2,335)
28,571
12,254
Weighted-
Average
Grant Price
$35.43
4.05
-
27.93
$26.82
$40.38
Shares
28,571
5,310
(319)
(2,410)
31,152
16,347
Shares
17,526
6,836
-
(1,854)
22,508
8,352
The following table summarizes outstanding and exercisable SARs by grant price at December 31, 2010:
Outstanding SARs
Exercisable SARs
Number of
SARs at
Year End
(000’s)
7,136
10,412
59
8,580
4,965
31,152
Weighted-
Average
Grant Price
$4.03
17.04
23.38
38.74
46.07
$24.67
Weighted-
Average
Remaining
Contractual
Life
(in years)
8.3
8.3
7.2
5.4
3.7
6.8
Number of
SARs at
Year End
(000’s)
1,300
2,718
23
7,569
4,737
16,347
Weighted-
Average
Grant Price
$3.96
19.21
23.68
38.80
46.35
$34.94
Grant Price Per Share
Under $10.00
$10.01-$20.00
$20.01-$30.00
$30.01-$40.00
Over $40.00
All SARs
Weighted-
Average
Grant Price
$41.81
19.25
-
36.03
$35.43
$44.46
Weighted-
Average
Remaining
Contractual
Life
(in years)
8.3
7.3
7.1
5.3
3.5
5.4
Restricted Stock Awards (RSAs)
The total grant-date fair value of RSAs that vested during 2010,
2009 and 2008 was $30 million, $36 million and $24 million,
respectively. At December 31, 2010, there was $50 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 2.4 years.
RSAs (shares in thousands)
Nonvested at January 1
Granted
Vested
Forfeited
Nonvested at December 31
2010
2009
2008
Weighted-
Average
Grant-Date
Fair Value
$23.85
14.69
36.96
22.39
$18.89
Shares
4,645
1,677
(817)
(347)
5,158
Shares
5,584
751
(870)
(820)
4,645
Weighted-
Average
Grant-Date
Fair Value
$29.04
4.72
40.84
23.86
$23.85
Weighted-
Average
Grant-Date
Fair Value
$40.80
19.27
48.62
30.72
$29.04
Shares
3,519
3,157
(486)
(606)
5,584
Fifth Third Bancorp 113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes unvested RSAs by grant-date fair value at December 31, 2010:
Grant-Date Fair Value Per Share
Under $10.00
$10.01-$20.00
$20.01-$30.00
$30.01-$40.00
Over $40.00
All RSAs
Nonvested RSAs
Number of
RSAs at Year
End (000’s)
604
3,641
151
728
34
5,158
Weighted-
Average
Remaining
Contractual Life
(in years)
1.2
1.6
1.2
0.6
0.3
1.4
Stock options
There were no stock options granted during 2010. Stock options
granted during 2009 were
the Bancorp’s
Consolidated Financial Statements. The weighted-average grant-
date fair value of stock options granted for the year ended 2008
was $2.87 per share.
immaterial
to
The total intrinsic value of options exercised was immaterial
to the Bancorp’s Consolidated Financial Statements in 2010, 2009
and 2008. Cash received from options exercised during 2010 and
2009 was immaterial to the Bancorp’s Consolidated Financial
Statements in 2009. Cash received from options exercised was $3
million 2008. Tax benefits realized from exercised options were
immaterial to the Consolidated Financial Statements during 2010,
2009 and 2008. All stock options were vested at December 31,
2008, therefore, no stock options vested during 2010 or 2009. The
total grant-date fair value of stock options that vested during 2008
was
the Bancorp’s Consolidated Financial
Statements. As of December 31, 2010, the aggregate intrinsic
value of both outstanding options and exercisable options was
immaterial to the Consolidated Financial Statements.
immaterial
to
2010
2009
2008
Weighted-
Average
Exercise Price
$48.97
8.59
8.33
48.06
$49.29
$49.29
Weighted-
Average
Exercise Price
$49.07
11.57
15.32
40.73
$48.97
$48.97
Weighted-
Average
Exercise Price
$49.29
-
8.76
40.54
$52.01
$52.01
Stock Options (shares in thousands)
Outstanding at January 1
Granted (a)
Exercised
Forfeited or expired
Outstanding at December 31
Exercisable at December 31
(a) 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
Shares
23,645
1,133
(202)
(4,012)
20,564
20,564
Shares
20,564
1
(11)
(5,050)
15,504
15,504
Shares
15,504
-
(58)
(3,587)
11,859
11,859
Charter Corporation Plan assumed by the Bancorp.
The following table summarizes outstanding and exercisable stock options by exercise price at December 31, 2010:
Exercise Price per Share
Under $10.00
$10.01-$20.00
$20.01-$30.00
$30.01-$40.00
Over $40.00
All stock options
Outstanding and Exercisable Stock Options
Number of
Options at
Year End
(000’s)
237
894
201
140
10,387
11,859
Weighted-
Average
Exercise
Price
$9.43
13.64
25.38
36.23
57.02
$52.01
Weighted-
Average
Remaining
Contractual
Life
(in years)
0.8
3.0
1.2
3.3
1.2
1.4
Other stock-based compensation
Under the phantom stock program, 488,703 and 299,681
respective phantom stock units were granted with a weighted
average grant price of $12.80 and $9.88, during the years ended
December 31, 2010 and 2009, respectively. The phantom stock
units vest immediately, however, none were settled during 2010 or
2009.
Performance units are payable contingent upon the Bancorp
achieving certain predefined performance targets over the three-
year measurement period. Awards granted during 2010 will be
entirely settled in stock. During 2009 and 2008, the awards
granted are payable 50% in stock and 50% in cash. The
performance targets are based on the Bancorp’s performance
relative to a defined peer group. During 2010, 2009 and 2008,
61,320, 1,118,958 and 186,044 performance units, respectively,
were granted by the Bancorp. These awards were granted at a
weighted-average grant-date fair value of $13.76, $3.96 and $19.18
per unit during 2010, 2009 and 2008, respectively.
Performance-based restricted shares were previously issued
by the Bancorp and were payable in stock and contingent upon
the Bancorp achieving certain predefined performance targets
over the one-year measurement period. These performance targets
were based on the Bancorp’s performance relative to a defined
peer group. If performance targets were met, the shares were
vested over a three-year period. The Bancorp granted 179,604
performance-based restricted shares during 2008 with a weighted-
114 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
average grant-date fair value of $23.39. The performance
condition related to the performance-based restricted shares was
not achieved in 2008. There are no outstanding performance-
based restricted shares at December 31, 2010 and 2009.
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, 2010, 2009 and 2008, there were 749,127, 1,343,632
and 712,338 shares, respectively, purchased by participants and
the Bancorp recognized stock-based compensation expense of $1
million, $1 million and $2 million, respectively.
26. OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE
The following presents the major components of other noninterest income and other noninterest expense for the years ended December 31:
($ in millions)
Other noninterest income:
BOLI income (loss)
Operating lease income
Gain (loss) on loan sales
TSA revenue
Insurance income
Cardholder fees
Consumer loan and lease fees
Banking center income
Loss on sale of OREO
Gain on sale/redemption of Visa, Inc. ownership interests
Litigation settlement
Other, net
Total
Other noninterest expense:
FDIC insurance and other taxes
Loan and lease
Losses and adjustments
Affordable housing investments impairment
Marketing
Professional services fees
Travel
Postal and courier
Intangible asset amortization
Insurance
Operating lease
OREO expense
Recruitment and education
Supplies
Data processing
Visa litigation reserve
Provision for unfunded commitments and letters of credit
Other
Total
2010
2009
2008
$194
62
51
49
38
36
32
22
(78)
-
-
-
$406
$242
211
187
100
98
77
51
48
43
42
41
33
31
24
24
-
(24)
166
$1,394
(2)
59
38
76
47
48
43
22
(70)
244
-
(26)
479
269
234
110
83
79
63
41
53
57
50
39
24
30
25
21
(73)
99
167
1,371
(156)
47
(11)
-
36
58
51
31
(60)
273
76
18
363
73
188
95
67
102
102
54
54
56
30
32
11
33
31
14
(99)
98
148
1,089
Fifth Third Bancorp 115
27. 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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Earnings per share:
Net income (loss) attributable to
Income
2010
Average
Shares
Per
Share
Amount
2009
2008
Income
Average
Shares
Per Share
Amount
Income
Average
Shares
Per Share
Amount
Bancorp
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
Warrants related to Series F
preferred stock
Series G convertible preferred
stock (a)
Net income (loss) available to
common shareholders plus
assumed conversions
Income (loss) allocated to
participating securities
Net income (loss) allocated to
common shareholders
$753
250
503
3
$737
226
511
4
($2,113)
67
(2,180)
(21)
$500
791
$0.63
$507
696
$0.73
($2,159)
553
($3.91)
$503
$511
($2,180)
5
3
-
-
-
-
(21)
490
4
-
503
3
2
-
28
-
-
(0.06)
-
-
-
-
-
-
-
(2,180)
(21)
$500
799
$0.63
$486
726
$0.67
($2,159)
553
($3.91)
(a) The additive effect to income from dividends on convertible preferred stock for the year ended December 31, 2009 included preferred dividends of $14 for Series G preferred shares,
offset by a $35 reduction to preferred dividends due to the conversion of a portion of Series G preferred shares during the second quarter of 2009.
The diluted earnings per share computation for the years ended
December 31, 2010 and 2009 excludes 23 million stock
appreciation rights, 12 million and 17 million stock options,
respectively, that had not yet been exercised, 1 million and 4
million shares, respectively, 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.
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 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.
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.
116 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28. 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
the
inputs
measurement date. Unobservable
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, 2010 ($ 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
Other bonds, notes and debentures
Other securities (a)
Available-for-sale securities (a)
Trading securities:
U.S. Treasury and Government agencies
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 assets:
Interest rate contracts
Foreign exchange contracts
Equity contracts
Commodity contracts
Derivative assets
Total assets
Liabilities:
Derivative liabilities
Interest rate contracts
Foreign exchange contracts
Equity contracts
Commodity contracts
Derivative liabilities
Short positions
Total liabilities
Fair Value Measurements Using
Level 1
Level 2
Level 3
Total Fair Value
$230
-
-
-
-
180
410
1
-
-
-
47
48
-
-
90
-
-
-
90
$548
14
-
-
-
14
1
$15
-
1,645
172
10,973
1,342
4
14,136
-
20
8
115
97
240
1,892
-
1,448
343
-
99
1,890
18,158
846
323
-
92
1,261
1
1,262
-
-
-
-
-
-
-
-
1
-
5
-
6
-
46
13
-
81
-
94
146
11
-
28
-
39
-
39
$230
1,645
172
10,973
1,342
184
14,546
1
21
8
120
144
294
1,892
46
1,551
343
81
99
2,074
$18,852
871
323
28
92
1,314
2
$1,316
Fifth Third Bancorp 117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2009 ($ 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
Fair Value Measurements Using
Level 1
Level 2
Level 3
$458
-
-
-
-
-
517
975
-
-
-
61
61
-
2,142
243
11,382
2,395
9
16,171
-
-
-
-
- 174
-
-
174
56
24
201
-
281
1
-
4
8
13
Total Fair Value
$458
2,142
243
11,382
174
2,395
526
17,320
57
24
205
69
355
Residential mortgage loans held for sale
Residential mortgage loans (b)
Derivative instruments
Total assets
Liabilities:
$1,094
Other liabilities (c)
$1,094
Total liabilities
(a) Excludes FHLB and FRB restricted stock totaling $524 and $344, respectively, at December 31, 2010, and $551 and $342, respectively, at December 31, 2009.
(b) Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.
(c) Includes derivative liabilities with a negative fair value and short positions.
1,470
26
1,733
$20,904
-
-
33
$1,069
1,470
-
1,616
19,538
-
26
84
297
1,013
1,013
$6
$6
75
75
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. There were no financial assets or liabilities transferred
between Level 1 and Level 2 of the fair value hierarchy for any of
the periods presented. Residential mortgage loans held for sale that
are reclassified to held for investment are transferred from Level 2
to Level 3 of the fair value hierarchy as described below. It is the
Bancorp’s policy to value any transfers between levels of the fair
value hierarchy based on end of period fair values.
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 are classified within Level 2 of the valuation
hierarchy,
include agency and non-agency mortgage-backed
securities, other asset-backed securities, obligations of U.S.
Government sponsored agencies, and corporate and municipal
bonds. Agency mortgage-backed securities, obligations of U.S.
Government sponsored agencies, and corporate and municipal
bonds are generally valued using a market approach based on
observable prices of securities with similar characteristics. Non-
agency mortgage-backed securities and other asset-backed
securities are generally valued using an income approach based on
speeds,
discounted cash
performance of underlying collateral and specific tranche-level
attributes. 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. Trading
securities classified as Level 3 consist of auction rate securities.
Due to the illiquidity in the market for these types of securities at
incorporating prepayment
flows,
118 Fifth Third Bancorp
December 31, 2010 and 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 ARM loans, DCF models that may
incorporate the anticipated portfolio composition, credit spreads
of asset-backed securities with similar collateral, and market
conditions. The anticipated portfolio composition includes the
effect of interest rate spreads and discount rates due to loan
characteristics such as the state in which the loan was originated,
the loan amount and the ARM margin. Residential mortgage loans
held for sale that are valued based on mortgage backed securities
prices are classified within Level 2 of the valuation hierarchy as the
valuation is based on external pricing for similar instruments.
ARM loans classified as held for sale are also classified within
Level 2 of the valuation hierarchy due to the use of observable
inputs in the DCF model. These observable inputs include interest
rate spreads from agency mortgage-backed securities market rates
and observable discount rates. 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 and
certain over-the-counter derivatives valued using active bids 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2010, 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 Visa, Inc. Class B shares. Level 3 derivatives also
include interest rate lock commitments, which utilize internally
rate assumptions as a significant
generated
loan closing
unobservable input in the valuation process.
In connection with the Processing Business Sale, the Bancorp
provided Advent International with certain put options that are
exercisable in the event of certain circumstances. In addition, 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 values of the warrants and put options are
calculated applying Black-Scholes option valuation models using
probability weighted scenarios.
The assumptions utilized in the models are summarized in the following table as of December 31:
Expected term
Expected volatility (a)
Risk free rate
Expected dividend rate
(a) Based on historical and implied volatilities of comparable companies assuming similar expected terms.
Warrants
8.5 - 18.5 years
36.0 - 37.0%
3.06 - 4.18%
0%
Put Options
.5 - 3.0 years
25.6 - 44.6%
0.23 - 1.05%
0%
2010
2009
Warrants
9.5 - 19.5 years
36.7 - 41.1%
3.96 - 4.68%
0%
Put Options
.5 - 4.0 years
31.3 - 50.2%
0.27 - 2.23%
0%
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 DCF
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, 2010 was immaterial to the Bancorp. At December
31, 2010, immediate decreases in current interest rates of 25 bp
and 50 bp would result in increases in the fair value of the interest
lock commitments of $14 million and $27 million,
rate
respectively. Immediate increases of current interest rates of 25 bp
and 50 bp would result in decreases in the fair value of the interest
rate
lock commitments of $16 million and $33 million,
respectively, at December 31, 2010. The change in fair value of
interest rate lock commitments at December 31, 2010 due to
immediate 10% and 20% favorable and adverse changes in the
assumed loan closing rates would be immaterial to the Bancorp.
These sensitivities are hypothetical and should be used with
caution, as changes in fair value based on a variation in
assumptions
the
relationship of the change in assumptions to the change in fair
value may not be linear.
typically cannot be extrapolated because
The following tables are a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable
inputs (Level 3):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
For the year ended December 31, 2010
($ 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 (c)
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, 2010 (d)
Residual
Interests in
Securitizations
$174
Trading
Securities
13
-
-
(174)(b)
-
$ -
$ -
3
-
(10)
6
-
Residential
Mortgage
Loans
Interest Rate
Derivatives,
Net (a)
26
-
-
(6)
26
46
(2)
187
-
(183)
-
2
Equity
Derivatives,
Net (a)
11
Total
Fair Value
$222
(14)
-
56
-
53
176
-
(317)
26
$107
-
60
(14)
$46
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
For the year ended December 31, 2009 ($ 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 (c)
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 (d)
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 (e)
24
Total
Fair Value
$177
145
-
(160)
-
9
149
3
(136)
29
$222
(2)
16
$16
Fifth Third Bancorp 119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Residual
Interests in
Securitizations
$10
Residential
Mortgage
Loans
Derivatives,
Net (e)
(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 (c)
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 (d)
(a) Net interest rate derivatives include derivative assets and liabilities of $13 and $11, respectively. Net equity derivatives include derivative assets and liabilities of $81 and $28,
38
1
124
8
$177
(15)
1
150
-
$146
54
-
(26)
-
24
(1)
-
-
8
7
($15)
$11
(1)
27
-
respectively.
(b) Due to a change in U.S. GAAP adopted by the Bancorp on January 1, 2010, all residual interests in securitizations were eliminated concurrent with the consolidation of the
related VIEs. See Note 1 for further discussion.
Includes residential mortgage loans held for sale that were transferred to held for investment.
Includes interest income and expense.
(c)
(d)
(e) Net derivatives include derivative assets and liabilities of $84 and $75, respectively, at December 31, 2009, and derivative assets and liabilities of $30 and $6, respectively, at
December 31, 2008.
The total gains and losses included in earnings for assets and liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) were recorded in the Consolidated Statements of Income as follows:
($ in millions)
Interest income
Mortgage banking net revenue
Corporate banking revenue
Other noninterest income
Securities gains (losses), net
Other noninterest expense
Total gains
2010 2009
15
127
1
15
(5)
(4)
149
$ -
187
1
(15)
3
-
$176
2008
7
53
(4)
5
(23)
-
38
The total gains and losses included in earnings attributable to changes in unrealized gains and losses related to Level 3 assets and liabilities still
held at year end were recorded in the Consolidated Statements of Income as follows:
($ in millions)
Interest income
Mortgage banking net revenue
Corporate banking revenue
Other noninterest income
Securities losses, net
Other noninterest expense
Total gains
2010
$ -
60
1
(15)
-
-
$46
2009
11
(7)
1
20
(5)
(4)
16
2008
7
21
1
5
(23)
-
11
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an
ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The
following table represents those assets and liabilities that were subject to fair value adjustments during the years ended December 31, 2010
and 2009 and the related losses from such fair value adjustments.
Fair Value Measurements Using
($ in millions)
Commercial nonaccrual loans held for sale
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Residential mortgage loans
Other consumer loans
MSRs
OREO property
Total
Level 1
$120
-
-
-
-
-
-
-
$120
Level 2
-
-
-
-
-
71
-
-
71
Level 3
770
272
234
109
3
10
822
527
2,747
Total
$890
272
234
109
3
81
822
527
$2,938
Total Losses
Year Ended
December 31, 2010
($448)
(470)
(207)
(159)
(6)
(12)
(36)
(264)
($1,602)
120 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using
($ in millions)
Commercial nonaccrual loans held for sale
Residential mortgage loans held for sale
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
MSRs
OREO property
Investment in FTPS Holding, LLC
Total
Level 1
$60
-
64
37
40
-
-
-
-
$201
Level 2
-
-
-
-
-
-
-
-
524
524
Level 3
163
55
243
303
199
1
699
461
-
2,124
Total
$223
55
307
340
239
1
699
461
524
$2,849
Total Losses
Year Ended
December 31, 2009
($56)
(2)
(217)
(136)
(150)
(2)
(24)
(131)
-
($718)
During 2010, the Bancorp transferred $650 million of commercial
loans from the portfolio to loans held for sale. Of the loans that
were transferred to held for sale, $112 million were fair valued
based on executable bids and, therefore, classified within Level 1
of the valuation hierarchy. The remaining $538 million were fair
valued based on discounted cash flow models incorporating
appraisals of the underlying collateral, as well as assumptions
about investor return requirements and amounts and timing of
expected cash flows and, therefore, classified within Level 3 of
the valuation hierarchy. In addition, existing loans held for sale of
$240 million were further adjusted, $8 million of which were
based on executable bids and therefore classified within Level 1
of the valuation hierarchy, and the remaining $232 million based
on appraisals of the underlying collateral value and, therefore,
classified within Level 3 of the valuation hierarchy.
During 2010, and 2009, the Bancorp recorded nonrecurring
impairment adjustments to certain commercial and industrial,
commercial mortgage and commercial construction loans 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. During 2009, certain
amounts were based on bids for the loans in active markets and,
therefore, classified within Level 1 of the valuation hierarchy. In
cases where the carrying value exceeds the fair value, an
impairment loss is recognized.
the Bancorp
During 2010,
During 2010,
recorded nonrecurring
adjustments to certain residential mortgage loans. The fair value
of these loans was based on the underlying collateral values and,
therefore, classified within Level 3 of the valuation hierarchy.
the Bancorp
recorded nonrecurring
adjustments to certain other consumer loans. As indicated in
Note 12, the Bancorp provides funding to certain entities
sponsored by third parties to finance consumer loans originated
by third parties. During 2010, one of these entities agreed to
transfer ownership of its underlying consumer loans to the
Bancorp, and these loans are now classified as held for
investment. Upon transfer, the Bancorp was required to measure
and record the loans at fair value, which was determined using a
DCF model, which are classified within Level 2 of the valuation
hierarchy, and in some cases, the value of the underlying
collateral, which are classified within Level 3 of the valuation
hierarchy.
During 2010 and 2009, the Bancorp recognized temporary
impairments in certain classes of the MSR portfolio in which the
carrying value was adjusted to fair value as of December 31, 2010
and 2009. MSRs do not 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,
in a
classification within Level 3 of the valuation hierarchy. Refer to
Note 13 for further information on the Bancorp’s MSRs.
resulting
During 2010 and 2009, the Bancorp recorded nonrecurring
adjustments to certain commercial and residential real estate
properties classified as 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 table reflects the fair value measurements of the
properties before deducting the estimated costs to sell.
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, classified within Level 3 of the valuation hierarchy.
On June 30, 2009, the Bancorp recorded an investment in
FTPS Holdings, LLC related to its retained noncontrolling
interest from the Processing Business Sale. The investment’s fair
value was based on the Bancorp’s proportional share of the
LLC’s equity capital and was measured using observable data
directly from the sales transaction with Advent International.
Therefore, this investment was classified within Level 2 of the
valuation hierarchy. In subsequent periods, the investment in
FTPS Holdings, LLC has been recorded under the equity method
of accounting.
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 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. Residential loans with fair values of $26
million and $29 million, respectively, were transferred to the
Bancorp’s portfolio during 2010 and 2009. Losses related to fair
value adjustments on these loans were immaterial to the Bancorp for
the year ended December 31, 2010, compared to $2 million of losses
during 2009.
Fair value changes included in earnings for instruments for
which the fair value option was elected included losses of $191
million and $162 million, respectively during 2010 and 2009. These
losses are reported as mortgage banking net revenue in the
Consolidated Statements of Income.
Valuation adjustments related to instrument-specific credit risk
for residential mortgage loans measured at fair value negatively
impacted the fair value of these loans by $5 million and $3 million,
respectively, during 2010 and 2009. Interest on residential mortgage
loans measured at fair value is accrued as it is earned using the
effective interest method and is reported as interest income in the
Consolidated Statements of Income.
Fifth Third Bancorp 121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize the difference between the aggregate fair value and the aggregate unpaid principal balance for residential
mortgage loans measured at fair value.
($ in millions)
As of December 31, 2010
Residential mortgage loans measured at fair value
Past due loans of 90 days or more
Nonaccrual loans
As of December 31, 2009
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
$1,938
5
1
$1,496
3
1
1,913
6
1
1,463
4
1
$25
(1)
-
$33
(1)
-
Fair Value of Certain Financial Instruments
The following table summarizes carrying amounts and estimated fair values for certain financial instruments, excluding financial instruments
measured at fair value on a recurring basis at:
December 31, 2010 ($ 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:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans (a)
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Unallocated allowance for loan and lease losses
Total portfolio loans and leases, net (a)
Financial liabilities:
Deposits
Federal funds purchased
Other short-term borrowings
Long-term debt
(a) Excludes $46 of residential mortgage loans measured at fair value on a recurring basis.
December 31, 2009 ($ 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 (a)
Financial liabilities:
Deposits
Federal funds purchased
Other short-term borrowings
Long-term debt
(a) Excludes $26 of residential mortgage loans measured at fair value on a recurring basis.
122 Fifth Third Bancorp
Carrying
Amount
Fair Value
$2,159
868
353
1,515
324
26,068
10,248
1,890
3,267
8,600
11,248
10,910
1,738
622
(150)
74,441
81,648
279
1,574
9,558
2,159
868
353
1,515
324
27,322
9,513
1,471
2,934
7,577
9,366
10,975
1,786
682
-
71,626
81,860
279
1,574
9,921
Carrying
Amount
Fair Value
$2,318
893
355
3,369
543
73,004
84,305
182
1,415
10,507
2,318
893
355
3,369
543
68,748
84,544
182
1,415
9,899
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Loans held for sale
Fair values for commercial loans held for sale were valued based
on executable bids when available, or on discounted cash flow
models incorporating appraisals of the underlying collateral, as
well as assumptions about investor return requirements and
amounts and timing of expected cash flows. 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 of loans to borrowers with similar credit
characteristics and similar remaining 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.
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.
Fifth Third Bancorp 123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
29. CERTAIN REGULATORY REQUIREMENTS AND CAPITAL RATIOS
The principal source of income and funds for the Bancorp (parent
company) are dividends from its subsidiaries. The dividends paid
by the Bancorp’s state chartered bank are subject to regulations
and limitations prescribed by the appropriate state authority. 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.
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
deposit with the FRB. In 2010 and 2009, the subsidiary banks were
required to maintain average cash reserve balances of $547 million
and $439 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 (Tier I capital ratio), total capital of at least
eight percent of risk-weighted assets. (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. 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. Current provisions of
the recently enacted Dodd-Frank Act will phase out the inclusion
of certain trust preferred securities as a component of Tier I
capital beginning January 1, 2013. Under these provisions, these
trust preferred securities would qualify as a component of Tier II
capital. At December 31, 2010, the Bancorp’s Tier I capital
included $2.8 billion of trust preferred securities.
Tier II capital consists principally of perpetual and trust
preferred stock that is not eligible to be included as Tier I capital,
term subordinated debt, intermediate-term preferred stock and,
subject to limitations, allowances for loan and lease losses.
($ in millions)
Total risk-based capital (to risk-weighted assets): (a)
Fifth Third Bancorp (Consolidated)
Fifth Third Bank
Tier I capital (to risk-weighted assets):
Fifth Third Bancorp (Consolidated)
Fifth Third Bank
Tier I leverage (to average assets):
Fifth Third Bancorp (Consolidated)
Fifth Third Bank
Assets and credit equivalent amounts of off-balance-sheet
items are assigned to one of several broad risk categories,
according to the obligor, guarantor or nature of collateral. The
aggregate dollar value of the amount of each category is multiplied
by the associated risk weighting of that category. The resulting
weighted values from each of the risk categories in sum is the total
risk-weighted assets. Quarterly average assets for this purpose do
not include goodwill and any other intangible assets and other
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, 2010 and 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, 2010 and 2009. As of December 31, 2010, the most
recent notification from the FRB categorized the Bancorp and 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.
The following table presents capital and risk-based capital and
leverage ratios for the Bancorp and its subsidiary bank at
December 31:
2010
2009
Amount
Ratio
Amount
Ratio
$18,173
14,931
18.14 %
15.17
$17,648
15,663
17.48 %
15.56
13,965
12,976
13,965
12,976
13.94
13.18
12.79
12.08
13,428
13,574
13,428
13,574
13.30
13.49
12.34
12.69
(a) Under the banking agencies risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The
aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together resulting in the Bancorp’s total
risk-weighted assets.
124 Fifth Third Bancorp
30. PARENT COMPANY FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2010
($ in millions)
Condensed Statements of Income (Parent Company Only)
For the years ended December 31
Income
Interest on loans to subsidiaries
Expenses
Interest
Goodwill impairment
Other
Total expenses
Loss Before Income Taxes and Change in
Undistributed Earnings of Subsidiaries
188
-
26
214
$33
2009
39
222
-
20
242
(181)
64
(203)
71
Applicable income tax benefit
Loss Before Change in Undistributed
Earnings of Subsidiaries
Undistributed earnings (loss) of subsidiaries
Net Income (Loss)
2008
80
293
57
24
374
(294)
84
(117)
870
$753
(132)
869
737
(210)
(1,903)
(2,113)
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
Other short-term borrowings
Accrued expenses and other liabilities
Long-term debt
Total Liabilities
Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
2010
2009
$60
2,953
1,521
15,622
80
545
$20,781
$414
356
5,960
6,730
14,051
$20,781
2
2,350
1,360
16,105
80
381
20,278
280
695
5,806
6,781
13,497
20,278
($ in millions)
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)
$753
2010
2009
737
to net cash provided by operating
activities:
Provision (benefit) for deferred income
taxes
Goodwill impairment
Dividend from subsidiary
Undistributed earnings of subsidiaries
Net change in:
Other assets
Accrued expenses and other liabilities
Other, net
Net Cash Provided by (Used in)
Operating Activities
Investing Activities
Capital contribution to subsidiaries
Net cash paid in business combinations
Net change in:
Other short-term investments
Loans to subsidiaries
Net Cash Used in Investing Activities
Financing Activities
Net change in other short-term borrowings
Proceeds from issuance of long-term debt
Repayment of long-term debt
Dividends paid on common shares
Dividends paid on preferred shares
Issuance of preferred shares, series F, G
Issuance of common shares
Exercise of stock-based awards
Exchange of preferred shares, Series G
Dividends on exchange of preferred shares,
Series G
Retirement of preferred shares, series D, E
Dividends on redemption of preferred
shares, series D, E
Other, net
Net Cash (Used in) Provided by
Financing Activities
Net Increase (Decrease) in Cash
Cash at Beginning of Year
Cash at End of Year
2008
(2,113)
11
57
-
1,903
(85)
40
(5)
(192)
(2)
-
1,400
(870)
(6)
(339)
(11)
925
2
-
-
(869)
83
591
(6)
538
-
-
(1,600)
-
(2,000)
(328)
(603)
(161)
(764)
134
-
-
(32)
(205)
-
-
-
-
-
-
-
-
(103)
58
2
$60
1,158
(117)
(559)
(503)
-
(31)
(27)
(220)
-
987
-
(269)
35
-
-
(10)
(38)
(59)
61
2
(2,423)
(42)
(4,793)
763
2,126
(1,714)
(639)
(48)
4,480
-
4
-
-
(9)
(19)
(13)
4,931
(54)
115
61
Fifth Third Bancorp 125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31. 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 and 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 Business is
recorded in General Corporate and Other as noninterest income.
The Bancorp manages interest rate risk centrally at the
level by employing a FTP methodology. This
corporate
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.
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.
126 Fifth Third Bancorp
Results of operations and average assets by segment for each of the three years ended December 31 are:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2010 ($ in millions)
Net interest income (a)
Provision for loan and lease losses
Net interest income (loss) after provision for loan
Commercial
Banking
Branch
Banking
1,501
542
Consumer
Lending
418
582
Investment
Advisors
138
44
General
Corporate
20
(789)
Eliminations
-
-
Total
3,622
1,538
and lease losses
Noninterest income:
Mortgage banking net revenue
Service charges on deposits
Corporate banking revenue
Investment advisory revenue
Card and processing revenue
Other noninterest income
Securities gains (losses), net
Total noninterest income
Noninterest expense:
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Equipment expense
Card and processing expense
Other noninterest expense
$1,545
1,159
386
-
199
346
15
33
42
-
635
215
39
16
14
2
2
702
990
31
(134)
165
959
27
369
15
106
303
73
-
893
(164)
619
1
-
-
(5)
33
14
662
94
2
6
3
346
1
(2)
-
356
433
119
174
16
49
102
648
1,541
311
110
201
168
32
7
2
1
4
345
559
(61)
(21)
(40)
131
25
9
2
1
-
237
405
45
16
29
809
(1)
(1)
-
-
(16)
260
47
289
483
99
92
155
69
-
(432)
466
632
234
398
-
398
250
148
(8,669)
-
-
-
-
(106)(b)
-
-
-
(106)
-
-
-
-
-
-
(106)
(106)
-
-
-
-
-
-
-
-
2,084
647
574
364
361
316
406
61
2,729
1,430
314
298
189
122
108
1,394
3,855
958
205
753
-
753
250
503
112,434
Total noninterest expense
Income before income taxes
Applicable income tax (benefit) expense (a)
Net income (loss)
Less: Net income (loss) attributable to
noncontrolling interest
Net income (loss) attributable to Bancorp
Dividends on preferred stock
Net income (loss) available to common shareholders
Average assets
(a) Includes FTE adjustments of $18.
(b) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income
-
165
-
165
$43,316
-
(40)
-
(40)
22,260
-
201
-
201
49,066
-
29
-
29
6,461
2009 ($ 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
and lease losses
Noninterest income:
Mortgage banking net revenue
Service charges on deposits
Corporate banking revenue
Investment advisory revenue
Card and processing 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
Technology and communications
Equipment expense
Card and processing expense
Other noninterest expense
Total noninterest expense
Income (loss) before income taxes
Applicable income tax (benefit) expense (a)
Net income (loss)
Dividends on preferred stock
Net income (loss) available to common
23
-
196
353
11
28
-
20
1
609
186
35
17
6
3
1
741
989
(357)
(237)
(120)
-
974
26
428
10
84
264
-
86
-
898
396
106
169
16
48
68
569
1,372
500
176
324
-
(80)
526
-
-
-
4
-
40
57
627
160
27
7
2
1
2
312
511
36
13
23
-
100
1
8
11
315
1
-
-
-
336
117
23
10
2
1
-
201
354
82
29
53
-
General
Corporate
(220)
967
(1,187)
-
-
(2)
(1)
357
1,758
333
(11)
2,434
480
120
105
155
70
122
(330)
722
525
68
457
226
shareholders
Average assets
(a) Includes FTE adjustments of $19.
(b) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income
(c) Card and processing revenues provided to the banking segments are eliminated in the Consolidated Statements of Income.
(120)
$46,082
23
22,623
324
50,019
53
5,679
231
(9,547)
Eliminations
-
-
Total
3,373
3,543
-
-
-
-
(83)(b)
(39)(c)
-
-
-
(122)
-
-
-
-
-
-
(122)
(122)
-
-
-
-
-
-
(170)
553
632
372
326
615
1,758
479
47
4,782
1,339
311
308
181
123
193
1,371
3,826
786
49
737
226
511
114,856
Fifth Third Bancorp 127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2008 ($ 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:
Mortgage banking net revenue
Service charges on deposits
Corporate banking revenue
Investment advisory revenue
Card and processing revenue
Other noninterest income
Securities gains (losses), net
Total noninterest income
Noninterest expense:
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Equipment expense
Card and processing 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
401
18
26
47
-
678
208
35
17
7
4
1
750
646
1,668
(1,287)
(554)
(733)
-
13
447
12
84
246
105
-
907
409
108
159
16
44
45
-
512
1,293
976
344
632
-
40
184
-
-
-
3
40
124
351
111
26
8
2
1
6
215
251
620
(229)
(81)
(148)
-
142
1
9
18
354
2
2
-
386
133
26
10
2
1
-
-
204
376
152
54
98
-
shareholders
Average assets
(a) Includes FTE adjustments of $22.
(b) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income.
(c) Card and processing revenues provided to the banking segments 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
(1)
-
(6)
701
169
(90)
774
476
83
106
164
80
222
-
(374)
757
(2,254)
(292)
(1,962)
67
(2,029)
(8,510)
-
-
-
(84)(b)
(66)(c)
-
-
(150)
-
-
-
-
-
-
-
(150)
(150)
-
-
-
-
-
-
199
641
431
366
912
363
34
2,946
1,337
278
300
191
130
274
965
1,089
4,564
(2,642)
(529)
(2,113)
67
(2,180)
114,296
32. SUBSEQUENT EVENTS
Common stock and senior notes offerings
On January 25, 2011, the Bancorp raised $1.7 billion in new
common equity through the issuance of 121,428,572 shares of
common stock in an underwriting offering with an initial price of
$14.00 per share. On January 24, 2011, the underwriters exercised
their option to purchase an additional 12,142,857 shares at the
offering price of $14.00 per share. In connection with this
exercise, the Bancorp entered into a forward sale agreement which
resulted in a final net payment of 959,821 shares on February 4,
2011.
On January 25, 2011, the Bancorp issued $1.0 billion of
senior notes to third party investors, and entered into a
Supplemental Indenture dated January 25, 2011 with Wilmington
Trust Company, as Trustee, which modifies the existing Indenture
for Senior Debt Securities dated April 30, 2008 between the
Bancorp and the Trustee. The Supplemental Indenture and the
Indenture define the rights of the Senior Notes, which Senior
Notes are represented by Global Securities dated as of January 25,
2011. The senior notes bear a fixed rate of interest of 3.625% per
annum. The notes are unsecured, senior obligations of the
Bancorp. Payment of the full principal amount of the notes will be
due upon maturity on January 25, 2016. The notes will not be
subject to the redemption at the Bancorp’s option at any time
prior to maturity.
Repurchase of outstanding TARP preferred stock
As further discussed in Note 24, on December 31, 2008, the
Bancorp issued $3.4 billion of Fixed Rate Cumulative Perpetual
Preferred Stock, Series F, and related warrants to the U.S.
Treasury under the U.S. Treasury’s CPP.
On February 2, 2011, the Bancorp redeemed all 136,320
shares of its Series F Preferred Stock held by the U.S. Treasury.
The net proceeds from the Bancorp’s previously discussed
common stock and senior notes offerings and other funds were
used to redeem the $3.4 billion of Series F Preferred Stock.
In connection with the redemption of the Series F Preferred
Stock, the Bancorp accelerated the accretion of the remaining
issuance discount on the Series F Preferred Stock and recorded a
corresponding reduction in retained earnings of $153 million. This
resulted in a one-time, noncash reduction in net income available
to common shareholders and related basic and diluted earnings
per share. This transaction will be reflected in the Bancorp’s
Consolidated Financial Statements for the quarter ended March
31, 2011.
Dividends of $15 million were paid on February 2, 2011
when the Series F Preferred Stock was redeemed. The Bancorp
notified the U.S. Treasury on February 17, 2011, of its intention to
negotiate for the purchase of the warrants issued to the U.S.
Treasury in connection with the CPP preferred stock investment.
128 Fifth Third Bancorp
SECURITI
UNITED
IES AND EXC
Washington
STATES
CHANGE COM
n, D.C. 20549
MMISSION
FORM
M 10-K
ANNUAL RE
15(d) OF THE
1
For the
EPORT PURSU
SECURITIES
fiscal year end
UANT TO SEC
S EXCHANGE
ded December 3
R
CTION 13 OR
E ACT OF 193
4
31, 2010
Co
ommission file n
number 001-336
653
In
ncorporated in t
mployer Identif
I.R.S. Em
ddress: 38 Foun
Ad
Cincinnati,
Telephone: (8
the State of Ohi
fication No. 31-
ntain Square Pla
Ohio 45263
800) 972-3030
io
-0854434
aza
Securities reg
gistered pursuan
nt to Section 12(
(b) of the Act:
Ti
Co
Pa
itle of each clas
ommon Stock, W
ar Value
ss:
Without
8.
Co
St
5% Non-Cumul
onvertible Perpe
tock
ative Series G
etual Preferred
7.
25% Trust Prefe
of
f Fifth Third Cap
erred Securities
pital Trust V
7.
25% Trust Prefe
of
f Fifth Third Cap
erred Securities
pital Trust VI
8.
875% Trust Pref
of
f Fifth Third Cap
s
ferred Securities
pital Trust VII
each exchange
Name of
on which
The NAS
Market LL
h registered:
DAQ Stock
LC
The NAS
Market LL
DAQ Stock
LC
New York
k Stock Exchang
ge
New York
k Stock Exchang
ge
New York
k Stock Exchang
ge
In
ndicate by che
easoned issuer,
se
es: ⌧ No: (cid:133)
Ye
eckmark if th
as defined in
he registrant i
Rule 405 of th
s a well-know
he Securities A
wn
Act.
In
ndicate by chec
eports pursuant
re
es: (cid:133) No: ⌧
Ye
ckmark if the r
to Section 13 o
registrant is no
r Section 15(d)
t required to f
of the Act.
file
ndicate by chec
In
eports required
re
Se
ecurities Excha
m
months (or for
equired to file s
re
ling requiremen
fil
ck mark whethe
to be filed b
ange Act of 1
such shorter
such reports), a
nts for the past 9
er the registrant
by Section 13
1934 during th
period that th
and (2) has bee
90 days. Yes: ⌧
t (1) has filed
or 15(d) of t
he preceding
he registrant w
n subject to su
⌧ No: (cid:133)
all
the
12
was
uch
ndicate by chec
In
el
ectronically and
In
nteractive Data
pu
ursuant to Rul
ch
hapter) during
eriod that the re
pe
les). Yes: ⌧ No
fil
ck mark wheth
d posted on its c
a File required
le 405 of Reg
the preceding
egistrant was re
o: (cid:133)
er the Registra
corporate Web
d to be submi
gulation S-T (§
12 months (or
equired to subm
ant has submitt
site, if any, eve
itted and post
§232.405 of th
for such short
mit and post su
ted
ery
ted
his
ter
uch
In
ndicate by che
pu
ursuant to Item
ch
hapter) is not c
he best of reg
th
nformation state
in
his Form 10-K o
th
eck mark if d
m 405 of Reg
contained herein
gistrant’s know
ements incorpor
or any amendme
disclosure of
gulation S-K (§
n, and will not
wledge, in def
rated by referen
ent to this Form
delinquent file
§229.405 of th
t be contained,
finitive proxy
nce in Part III
m 10-K. (cid:133)
ers
his
to
or
of
Ind
file
repo
“ac
of t
dicate by check m
r, an accelerate
orting company
celerated filer”
the Exchange Ac
mark whether th
ed filer, a non
y. See definitio
and “smaller rep
ct.
e registrant is a
-accelerated file
ns of “large ac
porting company
large accelerated
d
er
er, or a smalle
”
ccelerated filer,
2
y” in Rule 12b-2
Lar
Non
Sm
rge accelerated f
n-accelerated fil
maller reporting c
filer ⌧ Acce
ler (cid:133) (Do no
company (cid:133)
(cid:133)
elerated filer (cid:133)
ot check if a smaller
r reporting company
y)
Ind
(as
dicate by check
defined in Rule
mark whether th
12b-2 of the Ac
he registrant is
ct). Yes: (cid:133) No:
y
a shell company
⌧
The
with
Agg
of t
ere were 917,75
hout par value
gregate Market V
the Bancorp was
59,578 shares of
e, outstanding
Value of the Vo
s $8,520,556,333
f the Bancorp’s
as of January
oting Stock held
3 as of June 30, 2
Common Stock
31, 2011. Th
by non-affiliate
2010.
k,
he
es
DO
Thi
the
to a
The
Sha
repo
OCUMENTS IN
is report incorpo
U.S. Securities
annual reports on
e Bancorp’s Pro
areholders is in
ort.
NCORPORATE
orates into a sing
and Exchange
n Form 10-K an
oxy Statement f
ncorporated by
ED BY REFERE
gle document the
Commission (SE
nd annual reports
for the 2011 An
reference into
ENCE
e requirements o
EC) with respec
s to shareholders
nnual Meeting o
Part III of thi
of
ct
s.
of
is
Only
those
areholders that
nstitute part of t
cember 31, 2010
nual Report to S
t of this Form
orporated into th
t of the Registra
his 2010 Ann
t
sections of
are specified i
in this Cross R
Form 10-K for
the Registrant’s
formation contai
0. No other info
hall be deemed t
Shareholders sh
hall any such
m 10-K nor sh
he Form 10-K an
nd shall not be d
.
ant’s Form 10-K.
Sha
con
Dec
Ann
part
inco
part
o
t
nual Report
Reference Index
x
r the year ended
d
0
ned in this 201
to constitute any
y
e
information b
as
deemed “filed” a
10-
PAR
Item
-K Cross Refer
RT I
m 1.
rence Index
formation
lance Sheets
Net Interest Income
Business
Employees
Segment Inf
Average Bal
Analysis of
Changes
Investment S
Loan and Le
Risk Elemen
Deposits
quity and Assets
Return on E
Borrowings
Short-term B
s
1A. Risk Factors
Staff Comments
1B. Unresolved
2.
3.
4.
Securities Portfolio
ease Portfolio
nts of Loan and Lea
edings
and Reserved)
Officers of the Banco
Properties
Legal Proce
(Removed a
Executive O
orp
Item
Item
Item
Item
Item
PAR
Item
e and Net Interest In
ncome
ase Portfolio
Item
Item
Item
Item
Item
Item
Item
PAR
Item
Item
Item
Item
8.
9.
T II
5. Market for R
Stockholder
Securities
Selected Fin
6.
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Fifth Thir
ird Bancorp 129
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 (the “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
has deposit
the Federal 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 subsidiaries of the Bancorp as
of December 31, 2010.
insurance provided by
The Bancorp derives the majority of its revenues from the
U.S. Revenue from foreign countries and external customers
domiciled in foreign countries is immaterial to the Bancorp’s
Consolidated Financial Statements.
Additional
information
businesses
Analysis of Financial Condition and Results of Operations.
included
is
regarding
the Bancorp’s
in Management’s Discussion and
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
targeted at highly profitable customer
focused products
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 Note 3 of the Notes to Consolidated Financial Statements.
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
to financial
and state
laws and regulations applicable
130 Fifth Third Bancorp
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 there under, 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. Applicable state and
federal law also grant the FRB and the Division the authority to
impose additional requirements and restrictions on the activities
of the Bancorp and its subsidiary bank and, in some situations,
the imposition of such additional requirements and restrictions
will not be publicly available information.
The BHCA requires the prior approval of the FRB, for a
bank holding company to acquire substantially all the assets of
a bank or to acquire 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 to increase
any such non-majority ownership or control of any bank, bank
holding company or savings association, or to merge or
consolidate 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 those permitted
for a bank holding company under the BHCA. Permitted
activities for a FHC 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 Community Reinvestment Act (“CRA”). Dodd-
Frank also extended the well capitalized and well managed
requirement to the bank holding company. In 2000, the
Bancorp elected and qualified for FHC status under the GLBA.
To maintain FHC status, a holding company must continue to
to meet such
meet certain
requirements could result in restrictions on the activities of the
FHC or loss of FHC status. If restrictions are imposed on the
activities of an FHC, such information may not necessarily be
available to the public.
requirements. The
failure
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.
The Bancorp’s subsidiary bank is subject to extensive
federal and state regulation and examination by the Division,
the FRB, and the FDIC, which insures the deposits of the
Bancorp’s subsidiary bank 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 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 federal and state
consumer laws and regulations also affect the operations of
banks.
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.
As contemplated by the Dodd-Frank Act the FDIC has
revised the framework by which insured depository institutions
with more than $10 billion in assets (“large IDIs”) are assessed
for purposes of payments to the DIF.
The final rule
implementing revisions to the assessment system was released
on February 7, 2011, and will take effect for the quarter
beginning April 1, 2011.
Fifth Third Bancorp 131
Prior to the passage of the Dodd-Frank Act, a large IDI’s
DIF premiums principally were based on the size of an IDI’s
domestic deposit base. Section 331(b) of Dodd-Frank changed
the assessment base from an IDI’s domestic deposit base to its
total assets. In addition to potentially greatly increasing the size
of a large IDI’s assessment base, the expansion of the
assessment base affords the FDIC much greater flexibility to
vary its assessment system based upon the different asset
classes that large IDIs normally hold on their balance sheets.
this provision,
the FDIC created an
assessment scheme vastly different from the deposit-based
system. Under the new system, large IDIs will be assessed
under a complex “scorecard” methodology that seeks to capture
both the probability that an individual large IDI will fail and the
magnitude of the impact on the DIF if such a failure occurs.
implement
To
Sections 23A and 23B of the Federal Reserve Act, restrict
transactions between a bank and an affiliated company,
including a parent bank holding company. The Bancorp’s
subsidiary bank is 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. Generally, the
Bancorp’s subsidiary bank is limited in its extension 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 acquiring other
financial institutions. The FRB must take into account the
record of performance of banks in meeting the credit needs of
the entire community served, including low- and moderate-
income neighborhoods. Fifth Third Bank
received a
“Satisfactory” CRA rating in its most recent CRA examination.
The FRB has established capital guidelines for bank
holding companies and FHCs. The FRB, the Division and the
FDIC have also
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 and well managed for the Bancorp to retain its status
as a FHC. In addition, as of the Dodd-Frank Act “transfer date”
(currently anticipated to be July 21, 2011), the Bancorp also
must be well capitalized and well managed to retain its financial
holding company status.
issued
132 Fifth Third Bancorp
Historically, the minimum risk-based capital requirements
adopted by the federal banking agencies typically followed the
Capital Accord of
the Basel Committee on Banking
Supervision. On December 16, 2010, the Basel Committee on
Banking Supervision (the “Basel Committee”) issued the final
text of a comprehensive update of the 2004 Basel II Accord
(“Basel III”). On January 13, 2011, the Basel Committee issued
an Annex to Basel III containing the final elements of reform to
the definition of regulatory capital. Basel III aims to reform the
international financial system by instituting significantly higher
global capital requirements and new liquidity and leverage
standards. Basel III is not itself binding, but rather must be
adopted into United States law or regulation before affecting
banks supervised in the United States. Moreover, if adopted in
the United States Basil III likely would not become effective
until 2013, and its provision would be subject to a multi-year
transition period.
Basel III significantly revises the definitions of regulatory
capital, establishing separate capital requirements for common
equity Tier 1 Capital (a new regulatory metric), Tier 1 Capital,
consisting of the sum of Tier 1 Common Equity and Additional
Tier 1 Capital, and Total Capital, consisting of the sum of Tier
1 Common Equity, Additional Tier 1 and Tier 2 Capital. Basel
III, if implemented, ultimately would require banks to maintain
a minimum Tier 1 Common Equity Capital ratio of 4.5%, a
minimum Tier 1 Capital ratio of 6%, and a minimum Total
Capital ratio of 8%. Among other significant reforms to the
definition of regulatory capital, Basel III disqualifies certain
structured capital instruments, such as trust preferred securities,
from Tier 1 capital status. (Dodd-Frank also disqualifies trust-
preferred and similar instruments over a three year period
beginning in 2013.) In addition to higher minimum capital
standards, Basel III also institutes new capital conservation and
countercyclical buffers that could, if fully implemented, create
significant incentive for banks to maintain up to an additional
5% above the minimum capital requirements.
Basel III also introduces two measures of liquidity based
on risk exposure, one based on a 30-day time horizon under an
acute liquidity stress scenario and one designed to promote
more medium and long-term funding of the assets and activities
of banks over a one-year time horizon.
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 GLBA requires financial institutions to implement
policies and procedures regarding the disclosure of nonpublic
personal information about consumers to non-affiliated third
to
parties. In general,
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 bank’s policies
subsidiary bank has
and procedures. The Bancorp’s
the statute requires explanations
law, prohibits disclosing
required by
implemented a privacy policy. 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 respect to, among
other matters, anti-money laundering, compliance, suspicious
activity and currency transaction reporting and due diligence on
customers. The Patriot Act and its underlying regulations also
information sharing for counter-terrorist purposes
permit
between federal
law enforcement agencies and financial
institutions, as well as among financial institutions, subject to
certain conditions, and require the FRB (and other federal
banking agencies) to evaluate the 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.
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 there under 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 Bancorp’s subsidiary bank, and also require the Bancorp to
manage and retain certain
investment
company clients pursuant to specific ICA requirements that are
in addition to the Bancorp’s management and retention
responsibilities under other applicable federal and state laws.
Additionally, our arrangements with clearing agencies or other
securities depositories must meet ICA requirements for
segregation of assets, identification of assets and client
approval. New legislation or regulatory requirements could
information reporting
have a significant
requirements applicable to the Bancorp and may in the short
term adversely affect
to service
investment company clients at a reasonable cost.
the Bancorp’s ability
information about
impact on
the
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
activities. Various exemptions permit banks
to conduct
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.
Emergency Economic Stabilization
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.
Capital Purchase Program
Pursuant to its authority under EESA, Treasury created the
TARP Capital Purchase Program (“CPP”) under which the
Treasury Department was authorized to invest up to $250
billion in senior preferred stock of U.S. banks and savings
associations or their holding companies. Qualifying financial
institutions could 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.
In connection with the issuance of the senior preferred,
participating institutions were required to 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.
therein,
reference
incorporated by
On December 31, 2008, the Bancorp entered into a Letter
Agreement (including the Securities Purchase Agreement—
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 would 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 had been
issued and was in effect as of the date of issuance of the Series
F Preferred Stock and the Warrant, and agreed to not adopt any
benefit plans with respect to, or which covers, its senior
executive officers that do not comply with the EESA.
On February 2, 2011 the Bancorp repurchased the Series F
Preferred Stock issued to the Treasury pursuant to TARP. The
Bancorp notified the U.S. Treasury on February 17, 2011, of its
intention to negotiate for the purchase of the warrants issued to
the U.S. Treasury.
Supervisory Capital Assessment Program
On February 10, 2009, the U.S. Treasury announced a new
financial stability plan (the “Financial Stability Plan”), which
built upon existing programs and earmarked 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
Fifth Third Bancorp 133
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
On July 21, 2010 President Obama signed into law the Dodd-
Frank Act. The Dodd-Frank Act is aimed, in part, at
accountability and transparency in the financial system and
includes a numerous provisions that apply to and/or could
impact the Bancorp and its subsidiary bank. Some of the
provisions of the Dodd-Frank Act are set forth below.
Financial Stability Oversight Council
The Dodd-Frank Act creates the Financial Stability Oversight
Council, which is chaired by the Secretary of the Treasury and
composed of expertise
financial services
regulators. The Financial Stability Oversight Council has
responsibility for identifying risks and responding to emerging
threats to financial stability.
from various
Executive Compensation
The Dodd-Frank Act provides for a say on pay for shareholders
of all public companies. Under the Dodd-Frank Act, each
company must give its shareholders the opportunity to vote on
the compensation of its executives at least once every three
years. The Dodd-Frank Act also adds disclosure and voting
requirements for golden parachute compensation that is payable
to named executive officers
in connection with sale
transactions.
The Dodd-Frank Act requires the SEC to issue rules
directing the stock exchanges to prohibit listing classes of
equity securities if a company’s compensation committee
members are not independent. The Dodd-Frank Act also
provides that a company’s compensation committee may only
select a compensation consultant, legal counsel or other advisor
134 Fifth Third Bancorp
after taking into consideration factors to be identified by the
SEC that affect the independence of a compensation consultant,
legal counsel or other advisor.
The SEC is required under the Dodd-Frank Act to issue
rules obligating companies to disclose in proxy materials for
annual meetings of shareholders information that shows the
relationship between executive compensation actually paid to
their named executive officers and their financial performance,
taking into account any change in the value of the shares of a
company’s stock and dividends or distributions.
information required
to be reported under
The Dodd-Frank Act provides that the SEC must issue
rules directing the stock exchanges to prohibit listing any
security of a company unless the company develops and
implements a policy providing for disclosure of the policy of
the company on incentive-based compensation that is based on
financial
the
securities laws and that, in the event the company is required to
the material
prepare an accounting restatement due
noncompliance of the company with any financial reporting
requirement under the securities laws, the company will recover
from any current or former executive officer of the company
who received incentive-based compensation during the three-
years period preceding the date on which the company is
required to prepare the restatement based on the erroneous data,
any exceptional compensation above what would have been
paid under the restatement.
to
The Dodd-Frank Act requires the SEC, by rule, to require
that each company disclose in the proxy materials for its annual
meetings whether an employee or board member is permitted to
purchase financial instruments designed to hedge or offset
decreases in the market value of equity securities granted as
compensation or otherwise held by the employee or board
member.
Corporate Governance
The Dodd-Frank Act clarifies that the SEC may, but is not
required to promulgate rules that would require that a
company’s proxy materials include a nominee for the board of
directors submitted by a shareholder.
The Dodd-Frank Act requires stock exchanges to have
rules prohibiting their members from voting securities that they
do not beneficially own (unless they have received voting
instructions from the beneficial owner) with respect to the
election of a member of the board of directors (other than an
uncontested election of directors of an investment company
registered under the Investment Company Act of 1940),
executive compensation or any other significant matter, as
determined by the SEC by rule.
Additionally, the Dodd-Frank Act includes a number of
provisions that are targeted at improving the reliability of credit
ratings. The SEC has been charged with adopting various rules
in this regard.
Consumer Issues
The Dodd-Frank Act creates a new Bureau of Consumer
Financial Protection, which will be housed within the Federal
Reserve System but which will be independent. The Bureau of
Consumer Financial Protection will have the authority to
implement
to numerous consumer
protection laws and will have supervisory authority, including
the power to conduct examination and take enforcement
actions, with respect to depository institutions with more than
$10 billion in consolidated assets. The Bureau of Consumer
Financial Protection will also have new authority, among other
regulations pursuant
things, to declare acts “unfair, deceptive or abusive” and to
require certain consumer disclosures.
Debit Card Interchange Fees
The Dodd-Frank Act provides for a set of new rules requiring
that interchange transaction fees for electric debit transactions
be “reasonable” and proportional to certain costs associated
with processing the transactions. The FRB is given authority to
establish standards for assessing whether interchange fees are
reasonable and proportional.
FDIC Matters
The Dodd-Frank Act creates an orderly liquidation process that
the FDIC can employ for failing financial companies that are
not insured depository institutions. The Dodd-Frank Act gives
the FDIC new authority to create a widely available emergency
financial stabilization program to guarantee the obligations of
solvent depository institutions and their holding companies and
affiliates during times of severe economic stress. Additionally
Dodd-Frank also codifies many of the temporary changes that
had already been implemented, such as permanently increasing
the amount of deposit insurance to $250,000.
Volker Rule
In the “Volker Rule,” the Dodd-Frank Act sets forth new
restrictions on banking organizations’ ability to engage in
proprietary trading and sponsorship of or investment in private
equity and hedge funds. The Volker Rule also generally
prohibits any banking entity from sponsoring or acquiring any
ownership interest in a private equity or hedge fund. The
Volker Rule, however, contains a number of exceptions. The
Volker Rule permits transactions in the securities of the U.S.
government and its agencies, certain government-sponsored
enterprises and states and their political subdivisions, as well as
certain investments in small business investment companies.
Transactions on behalf of customers and in connection with
certain underwriting and market making activities, as well as
risk-mitigating hedging activities and certain foreign banking
activities are also permitted. Dodd-Frank also defines certain
parameters with respect to a permissible de minimis investment
in a private equity or hedge fund that the banking entity
organizes and offers. In addition to the general prohibition on
sponsorship and investment, the Volker Rule contains a second
set of requirements applicable to any private equity or hedge
fund that is sponsored by the banking entity or for which it
serves as investment manager or investment advisor.
Derivatives
The Dodd-Frank Act sets forth a new regulatory system for the
U.S. market for swaps and other over-the-counter derivatives.
Under this new regime, all derivatives transactions and all
entities that enter into them could be subject to potential
regulations, and the goal of the regulatory framework is to
promote the stability of the entire financial system and further
transparency and competition in the derivatives market.
Interstate Bank Branching
The Dodd-Frank Act includes provisions permitting national
and insured state banks to engage in de novo interstate
branching if, under the laws of the state where the new branch
is to be established, as state bank chartered in that state would
be permitted to establish a branch.
Capital
The Dodd-Frank Act instructs the FRB to seek to make capital
requirements
companies
countercyclical, with a higher level required in times of
economic expansion and lower level needed in times of
economic contraction.
applicable
holding
bank
to
Systemically Significant Companies
The Dodd-Frank Act creates a new regulatory regime for
entities that are deemed to be “systemically significant financial
companies.” The Dodd-Frank Act sets a $50 billion
consolidated asset floor for a bank holding company to be
subject to the heightened oversight and regulation, although the
FRB can adjust those amounts upward for some of the
heightened standards under certain circumstances. Dodd-Frank
establishes a broad framework for
identifying, applying
heightened supervision and regulation to, and (as necessary)
limiting the size and activities of systemically significant
financial companies. Under the Dodd-Frank Act, a new regime
for the orderly liquidation of financial companies whose failure
would pose systemic risk is also created.
Fifth Third Bancorp 135
Paul L. Reynolds, 49. Executive Vice President, Secretary and
Chief Administrative Officer of the Bancorp since September
2009. Previously, Mr. Reynolds was Executive Vice President,
Secretary and General Counsel since 2002. Prior to that he was
Executive Vice President, General Counsel and Assistant
Secretary since 1999.
Joseph R. Robinson, 43. Executive Vice President and Chief
Information Officer and Director of Information Technology
the Bancorp since September 2009.
and Operations of
Previously, Mr. Robinson was Executive Vice President and
Chief Information Officer of the Bancorp since April 2008.
Prior to that, he was Senior Vice President and Director of
Central Operations since November 2006 and Senior Vice
President of IT Enterprise Solutions since March 2004.
Mahesh Sankaran, 48. Senior Vice President and Treasurer of
the Bancorp since June 2006. Previously, Mr. Sankaran was
Treasurer for Huntington Bancshares Incorporated since
February 2005.
Robert A. Sullivan, 55. Senior Executive Vice President of the
Bancorp since December 2002.
Teresa J. Tanner, 42. Executive Vice President and Chief
Human Resources Officer of the Bancorp since February 2010.
Previously, Ms. Tanner was Senior Vice President and Director
of Enterprise Learning since September 2008. Prior to that, she
was Human Resources Senior Vice President and Senior
Business Partner for the Information Technology and Central
Operations divisions since July 2006. Previously, she was Vice
President and Senior Business Partner for Operations since
September 2004.
Mary E. Tuuk, 46. 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.
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. The Bank owns
100% of these buildings.
At December 31, 2010, the Bancorp, through its banking
and non-banking subsidiaries, operated 1,312 banking centers,
of which 904 were owned, 277 were leased and 131 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.
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 28, 2011 are
listed below along with their business experience during the
past 5 years:
immediately following
Kevin T. Kabat, 54. President and Chief Executive Officer of
the Bancorp since June 2006 and April 2007, respectively.
Previously, Mr. Kabat was Chairman from June 2008 to June
2010. Previously, Mr. Kabat was Executive Vice President of
the Bancorp since December 2003.
Greg D. Carmichael, 49. Executive Vice President and Chief
Operating Officer of the Bancorp since June 2006. Prior to that,
Mr. Carmichael was the Executive Vice President and Chief
Information Officer of the Bancorp since June 2003
Mark D. Hazel, 45. Senior Vice President and Controller of the
Bancorp since February 2010. Prior to that, Mr. Hazel was the
Assistant Controller of the Bancorp since 2006 and was the
Controller of Nonbank entities since 2003.
James R. Hubbard, 52. Senior Vice President and Chief Legal
Officer of the Bancorp since February 2010. Prior to that, Mr.
Hubbard was the Senior Vice President and Director of Legal
Services since June 2001.
Gregory L. Kosch, 51. 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, 50. 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, 52. 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.
136 Fifth Third Bancorp
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 2010
19,201,518
November 2010
19,201,518
December 2010
Total
19,201,518
(a) The Bancorp repurchased 6,337, 10,690, and 8,191 shares during
October, November and December of 2010 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
-
-
-
-
$ -
-
-
$ -
-
-
-
-
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Bancorp’s common stock is traded in the over-the-counter
market and is listed under the symbol “FITB” on the
NASDAQ® Global Select Market System.
High and Low Stock Prices and Dividends Paid Per Share
2010
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2009
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
$15.11
$13.81
$15.95
$14.05
High
$10.92
$11.20
$9.15
$8.65
Low
$11.71
$10.64
$12.00
$9.81
Low
$8.76
$6.33
$2.50
$1.01
Dividends Paid
Per Share
$0.01
$0.01
$0.01
$0.01
Dividends Paid
Per Share
$0.01
$0.01
$0.01
$0.01
See a discussion of dividend limitations that the subsidiaries can
pay to the Bancorp discussed in Note 4 of the Notes to the
Consolidated Financial Statements. Additionally, as of
December 31, 2010, the Bancorp had 57,161 shareholders of
record.
Fifth Third Bancorp 137
The f
refere
exten
following perf
ence into any
t the Bancorp s
formance grap
other Compan
specifically inc
phs do not con
ny filing under
corporates the
nstitute solicit
the Securities
performance g
ting material a
s Act of 1933 o
graphs by refer
and should no
or the Securiti
rence therein.
ot be deemed
ies Exchange A
filed or incor
Act of 1934, ex
rporated by
xcept to the
Total
l Return Analy
ysis
The g
2001
graphs below su
through 2010, r
ummarize the c
respectively, co
cumulative retu
ompared to the S
urn experienced
S&P 500 Stock
d by the Bancor
and the S&P B
rp's shareholder
Banks indices.
rs over the yea
ars 2006 throug
gh 2010, and
FIFTH THI
IRD BANCO
ORP VS. MA
ARKET INDI
ICES
138
8 Fifth Third Ba
ancorp
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