ANNUAL REPORT
2012
STRAIGHTFORWARD
BANKING
CORPORATE
PROFILE
Fifth Third Bancorp is a diversified financial services company headquartered in
Cincinnati, Ohio. As of December 31, 2012, the Company had $122 billion in assets
and operated 15 affiliates with 1,325 full-service Banking Centers, including 106
Bank Mart® locations open seven days a week inside select grocery stores and
2,415 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 33% interest in Vantiv Holding,
LLC. Fifth Third is among the largest money managers in the Midwest and, as of
December 31, 2012, had $308 billion in assets under care, of which it managed
$27 billion for individuals, corporations and not-for-profit organizations. Investor
information and press releases can be viewed at www.53.com. Fifth Third’s
common stock is traded on
the NASDAQ® National Global
Select Market under the symbol
“FITB.” Member FDIC.
A Message
To Our Shareholders
Dear Fifth Third Shareholders,
2012 brought important clarity on a number of fronts and demon-
strated the strength and resilience of our business model. Fifth Third’s
overall financial results included the second highest net income in
our history, with returns that approached those associated with a
normalized environment. Although there is still more work to do, we
have significant momentum in the business.
The past several years have brought a transformation to the bank-
ing and financial services industries that has introduced uncertainty
and required a significant amount of adaptation on the part of banks.
However, many important regulatory and legislative requirements
have been finalized and adapted to, or have at least been proposed so
that business plans can be made with the rules in mind. The election was
another significant source of uncertainty for businesses and consumers and
it is now behind us.
The challenges for Fifth Third and the industry are also clearer. Most critically,
financial services firms, including banks, must address the effects of the financial
crisis on their reputations and regain the public’s trust. We also face an anemic
economic recovery. Interest rates will almost certainly remain historically low for
several more years – which is detrimental to bank earnings – and there are signifi-
cant federal and local budget issues that must be resolved.
At Fifth Third, we rise to these challenges each day. The environment demands new
ways of doing business; we develop innovative solutions that drive value for our
customers and sustainable revenue for our Company. It demands simplicity; we
offer products and services that are straightforward and fairly priced. It demands
agility; our unique affiliate model combines a responsive, local and customer-
oriented approach with the efficiencies of a centralized operating platform. Market
leaders and boards of directors in each of our 15 affiliates provide an intimate under-
standing of dynamics across our footprint. We leverage our size to provide efficient
functional support while maintaining a local focus. This approach, we believe, is
the source of our competitive advantage. We are able to build stronger custom-
er relationships while benefiting from economies of scale without the complexity
associated with being a mega-bank. We believe that these traits will be key to our
success in 2013 and beyond.
Kevin T. Kabat
Vice Chairman and
Chief Executive Officer
2012 ANNUAL REPORT | 1
Our efforts to meet the demands of the new land-
scape align with our belief that favorably differenti-
ated banks with consistent, focused execution will
be rewarded. The back-to-basics operating environ-
ment is well-suited for our culture, our business
model and our practices. We provide critically
important products and services to individuals and
businesses, including financial advice, safekeeping of
assets and funding for life’s key moments. Banks that
do the right things for their customers – listening
to them, focusing on building relationships rather
than transaction volume, and holding themselves
accountable – will be rewarded as they earn their
customers’ and the public’s trust.
Throughout the last five years or so, we have con-
tinued to invest in our businesses and to update our
sales processes. We believe that this attention to the
future was critical and the right course of action,
despite being difficult at times, particularly during
the crisis. The effects of this focus were evident in
our 2012 results. Net income available to common
shareholders increased 41 percent compared with
2011 and Fifth Third earned a return on assets of 1.3
percent. High-quality loan growth, solid fee income
production, expense discipline and credit improve-
ment contributed to our strong results – results
that enabled us to increase our return of capital to
shareholders through dividends and share buybacks.
Total capital returned to common shareholders
increased by more than 275 percent from 2011 to
nearly $1 billion while we continued to increase
lending activity and maintained strong capital levels.
Despite the demands faced by the industry, we
never lost sight of our goals to improve customer
satisfaction and employee engagement. Fifth Third
Bank ranked second in 2012 on the Ponemon
Institute’s list of the Most Trusted Retail Banks for
Privacy for 2011. Additionally, Fifth Third Bank’s
2012 Retail Banking Customer Satisfaction score, as
measured by J.D. Power and Associates, improved
10 points from last year, and remains strong among
our peers. These analyses and those of other third-
party research firms validate our work to improve the
customer experience, which corresponds with higher
customer loyalty and improved financial results.
Customer satisfaction extends past components
like problem resolution, loyalty and retention. It
reflects the whole experience, no matter how our
services are accessed. We continue to make invest-
ments in our distribution network through both
traditional and newer channels. We opened 15
banking centers in areas we have identified as growth
or underserved markets, relocated eight banking
centers and upgraded approximately 40 percent of
our ATMs with image capture capability. We are
constantly
technologies and
to new
methodologies to better serve our customers. We
have found that customers who use our mobile
products have lower attrition rates and add more
value to the Bank than non-users. To that end, we
made enhancements to our mobile apps, including
the ability to deposit checks by taking a picture using
an iPhone, and real-time alerts, such as transactional
updates for credit card, debit card and ATM usage.
looking
Banks that do the right things for their customers –
listening to them, focusing on building relationships
rather than transaction volume, and holding themselves
accountable – will be rewarded as they earn their
customers’ and the public’s trust.
2
Customer feedback has been positive and adoption
rates of these services continue to increase. We are
competitive with others in the industry with our
mobile offerings and we will continue to expand and
differentiate our distribution channels.
select
increasingly
Although consumers
self-
service transactions, our physical presence via bank-
ing centers and employees is a critical component of
our ability to deliver value-added services. When we
talk about building trust and relationships with our
customers, the responsibility starts with management
and ultimately rests with our employees, the face of
our Company. We have the right people at Fifth Third
to make it happen. Our workforce is energetic, smart,
curious and engaged. We demonstrated continued
improvement on our employee engagement scores
as measured by Gallup, which increased nearly 20
percent from 2005 when we started measuring en-
gagement, and are now in the top quartile of Gallup’s
employee engagement database. This is a significant
increase and indicates that our efforts are having a
strong impact with employees.
As with employee engagement, our efforts to
simplify our deposit products in 2012 support a
number of changes we have made to become a
more customer-centric organization. In simplifying
product offerings to better serve our Retail customers,
we reduced nearly 40 types of checking and savings
accounts – mostly legacy products accumulated over
time and through acquisitions – to five core check-
ing and three core savings products. We designed
relationship-based alternatives that fit the way
customers prefer to do business with us, and we
simplified our service charges, eliminating certain
daily overdraft and early account closure fees, among
others, to make our products even more attractive.
The products introduced and the policy chang-
es made as part of this reconfiguration were driven
by direct customer feedback. The new product set
streamlines work for our employees and simplifies
choices for customers. This approach squarely puts
our customers first, in concert with our aim to be
the first choice and trusted advisor for all of our
customers. Early feedback has validated our expec-
tations – that engaging in conversations with our
customers leads to opportunities for deeper bank-
ing relationships. The value of these relationships is
not simply derived from a single product or line of
business, but represents the total opportunity across
the Bank. We have successfully converted customers
in six of our markets and we expect to complete the
roll-out in the first half of 2013.
I look back on 2012 and see the benefits of our
investments, starting with our strategic plan before
the financial crisis and continuing through it. We
adopted new technologies. We developed strong
market positions and further invested in our broad
product offering. We are on a clear path forward, with
great momentum and the capacity and ability to
continue to improve market shares. We believe that
the differentiating factors of Fifth Third are now, and
in the future will be, recognized in the market. In
2012, Fifth Third’s total shareholder return (stock
price plus dividends) increased 23 percent, which
outperformed the S&P Banks index, up 21 percent,
and the broader S&P 500 index, up 16 percent.
SUMMARY OF 2012 RESULTS
Fifth Third’s 2012 financial results reflected our
strong competitive position and profitable business
model. We reported full year net income available
to common shareholders of $1.5 billion, the highest
since 2005, and pre-provision net revenue* of $2.5
billion. Although the low interest rate environment
and other environmental costs present near-term
challenges, return on assets of 1.3 percent was just
within our long-term target range for a more normal-
ized environment, and return on average common
equity was 11.6 percent, compared with 9.0 percent
for 2011. Our efficiency ratio (expenses as a percent-
* Non-GAAP measure. For further information, see the Non-GAAP Financial Measures section of MD&A.
2012 ANNUAL REPORT | 3
age of revenue) of 61.7 percent also remains higher
than our longer-term expectation for a more normal
operating environment. We will continue to carefully
manage expenses in the context of the business and
revenue environment.
Credit metrics continued to improve across the
board. Full year net charge-offs of $704 million
declined 40 percent to 85 bps of average portfolio
loans and leases, the lowest level in five years. Non-
performing assets, including those held-for-sale, of
$1.3 billion declined $639 million, or 33 percent. At
year-end, total delinquencies excluding nonaccrual
of $525 million were at their lowest level since the
second quarter of 2004. This improvement in credit
trends led to a reduction in our loan loss reserves of
$401 million during 2012, while at the same time
producing strong coverage ratios, at 2.16 percent of
portfolio loans and 180 percent of nonperforming
portfolio loans.
Net interest income remained stable despite the
challenging interest rate environment, up 1 percent
compared with 2011, and benefited from our focus
on growing interest earning assets while we manage
interest rate risk. Net interest margin was 3.55
percent and, although we expect additional margin
compression given the interest rate environment, we
expect it to remain manageable due to our relatively
neutral interest rate risk profile.
Total loan growth at year-end of 6 percent was
driven by higher origination volume particularly
in commercial and industrial (C&I), residential
mortgage and automobile loans. Average commercial
loans increased 6 percent from 2011, with average
C&I loan growth of $4 billion, up 15 percent. In 2012,
we expanded our Commercial capabilities by estab-
lishing a specialized energy industry lending group
and remained focused on the healthcare industry,
with our continued investment in new products to
help hospitals and medical practices streamline their
collection cycles and accelerate their cash flows.
Average consumer loans increased 5 percent from
2011, largely due to average residential mortgage
loan growth of 18 percent. Our mortgage business
benefited from increased refinancing due to low
rates and originations related to the government’s
HARP 2.0 program, which represented nearly 20
percent of total mortgage originations. We continue
to see opportunities in the mortgage business with
NET INCOME AVAILABLE
TO COMMON SHAREHOLDERS
NET CHARGE-OFF RATIO
TIER 1 COMMON EQUITY*
$1,800
$1,541
$1,200
$1,094
$600
$503
$0
3.02%
1.49%
0.85%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
9.4% 9.5%
7.5%
2010
2011
2012
2010
2011
2012
2010
2011
2012
4
* Non-GAAP measure. For further information, see the Non-GAAP Financial Measures section of MD&A.
the ongoing housing market recovery and across the
Bank as we deepen relationships with many of these
customers. Also within the consumer portfolio, av-
erage auto loans increased 4 percent from 2011, and
benefited from our continuous presence in the indi-
rect auto market and our expanding footprint, which
now reaches 45 states. Average credit card balances
increased 5 percent from 2011. Originations of our
DUO Card represent an important component of our
total card production and we continue to bring new
offerings to market. One example is Access 360°, our
differentiated prepaid, reloadable card that gives cus-
tomers the flexibility to bank on their terms. Both of
these cards are natural complements to our product
suite and represent another example of listening to
what our customers want and providing it to them in
an effective way.
Deposit growth in 2012 was also robust and benefited
from our focus on new customer acquisition and
household growth. Average transaction deposit
account balances (primarily demand, savings and
money market accounts) increased in 2012 by $6
billion, or 8 percent, and average core deposits in-
creased by $4 billion, or 5 percent.
Noninterest income represented about 45 percent of
the Company’s total revenue. Consistent with
strength in loan production, we have seen strong
fee income in mortgage banking net revenue and
corporate banking revenue. Mortgage banking net
revenue grew 41 percent from 2011. This outstanding
result is attributable to our ability to capture market
opportunities while interest rate movements and
government programs increased the demand for new
mortgages and refinancing. Corporate banking
revenue grew 18 percent from 2011. We know that
today’s businesses have needs that extend beyond
traditional commercial bank offerings. That is why
we have come to market with smart, new business
solutions that incorporate modern technology and
facilitate tailored solutions for our customers. For
example, our Remote Currency Manager, a treasury
management product that enables customers to
maximize cash flow while boosting cash manage-
ment, eclipsed 7,000 locations during the year and
generated annual revenue of about $13 million.
Our Investment Advisors business contributed about
12 percent of fee income. Total assets under care
increased to more than $300 billion as a result of
growth in the Private Bank, Institutional Services
and Fifth Third Securities. This business benefits
from a highly experienced sales force, a continued
focus on attracting top talent, and growth in the
number of profitable households. In the third quarter
of 2012, we completed the sale of our money market
mutual funds to Federated Investors and our retail
stock and bond funds to Touchstone. These transac-
tions enable Fifth Third Asset Management to focus
on institutional money management and reinforce
our commitment to an open architecture advisory
model. They provide another example of how we have
simplified and focused our operating model and are
increasing the value proposition to customers, which
ultimately benefits our shareholders.
Another significant transaction for Fifth Third in
2012 was Vantiv, Inc.’s initial public offering (IPO).
This IPO was part of a process that began four years
ago with our decision to sell an interest in Fifth Third
Processing Solutions. We believed then that the
growth of the business would be accelerated by
enabling it to operate independently, and that is
exactly what has happened. Vantiv nearly doubled its
revenue since 2008, which also included the benefit
of several acquisitions that would have been difficult
to accomplish had the processing business remained
a fully consolidated subsidiary of the Bank. In the
second half of 2012 we sold a portion of our Class A
shares of Vantiv common stock to further monetize
our ownership position in Vantiv. These transactions
have strengthened our Company by increasing our
focus and core strengths and have led to the creation
of a strong and well-positioned new public company
in Vantiv. We continue to own a 33 percent interest in
2012 ANNUAL REPORT | 5
Vantiv, whose market capitalization was $4.6 billion
at year-end. This is a valuable stake relative to
our market capitalization and we have significant
flexibility in our future actions and our options for
deploying that capital.
Our strong earnings results produce high rates of
internal capital generation, which have been supple-
mented by the Vantiv gains. Our capital levels
substantially exceed required regulatory well-capital-
ized minimums and proposed future standards.
These characteristics position Fifth Third with the
ability to distribute excess capital to shareholders
while maintaining already strong capital levels. In
2012, we increased our quarterly dividend to $0.10,
which moved us closer to levels consistent with the
Federal Reserve’s near-term dividend payout ratio
guidance of 30 percent. In addition, under our 2012
capital plan approved during the Federal Reserve’s
Comprehensive Capital Analysis and Review, we
repurchased $475 million of common shares and also
repurchased $175 million of common shares as a
result of gains on the sale of Vantiv shares. Despite
these repurchases, our Tier 1 common ratio* in-
creased 16 bps in 2012 to 9.5 percent, and our Tier 1
risk-based capital ratio was 10.7 percent at year-end
compared with the 6 percent regulatory well-capital-
ized minimum.
We believe we are well-positioned to continue the
momentum reflected in a profitable 2012, and
our business model has a demonstrated ability to
generate organic growth even in a challenging
environment. The economy is recovering, albeit
slowly, and we are well-suited to take advantage of
marketplace developments and opportunities. Our
employees are determined, ready and able to meet
the demands of the environment and I thank them
for their dedication to Fifth Third, our customers and
our shareholders. Our workforce is more engaged
than ever and is committed to providing a top-notch
customer experience that incorporates customers’
input and delivers innovative solutions. We share a
vision for Fifth Third to be the one bank that people
most value and trust. As we work to achieve this
vision, I am confident that through a thoughtful,
straightforward and balanced approach, our
Company will be an industry leader into the future.
Sincerely,
Kevin T. Kabat
Vice Chairman and Chief Executive Officer
February 2013
We believe we are well-positioned to continue the
momentum reflected in a profitable 2012, and our
business model has a demonstrated ability to generate
organic growth even in a challenging environment.
6
* Non-GAAP measure. For further information, see the Non-GAAP Financial Measures section of MD&A.
Financial Empowerment
Our Company desires to empower people financially and enhance our rep-
utation for doing so. While our bankers work tirelessly every day to provide
the quality service, products and knowledge that our clients need to be suc-
cessful, we realize that more needs to be done within the broader community.
We have invested significant financial and human resources into financial
empowerment programs. The effort took hold in 2004 but has solidified in
recent years as the need for financial education became apparent in the U.S.
Fifth Third Bank offers a full spectrum of financial empowerment programs
that start with children so they can develop sound, life-long habits.
The Young Bankers Club is a financial literacy program for elementary
students. Originally launched in 2004, it was completely revised and updated
in 2012 to meet new and evolving national academic standards. The program
teaches a foundation of responsibility, financial basics, and education that
carries students forward.
When students enter eighth grade, our partnership with the American
Bankers Association’s Teach Children to Save program supports good finan-
cial practices and understanding of the economic world. With an emphasis
on saving money and delaying gratification, this program helps pre-teens
appreciate the value of hard work and reaping due rewards.
In high school, our alliance with Dave Ramsey, arguably one of the country’s
most influential financial experts, educates teens who are embarking on
college and adulthood. We sponsor Ramsey’s financial education curriculum,
Foundations in Personal Finance, throughout our footprint. In 2012, we in-
vested $2.2 million to bring the program to more than 1,800 high schools. We
reached more than 270,000 students and count every one as a life potentially
changed for the better. Our alliance with The Lampo Group has educated
more than 400,000 students since 2010.
Many adults also need assistance. Partnering with local community organiza-
tions, our two 40-foot Financial Empowerment mobiles traveled into 88 un-
derserved communities in 2012. The 29,000 people who boarded our eBuses
received credit counseling, foreclosure avoidance training, or gained access to
quality banking services.
In 2012 we piloted an industry-first program with NextJob, a nationwide re-
employment company, that gave some of our distressed mortgage borrowers
job search assistance fully funded by the Bank. Knowing that nearly half of
mortgage delinquencies are due to job loss, we recognized an opportunity
to assist our customers in re-gaining financial stability. The pilot resulted in
40 percent of participants finding a full-time job, and we plan to expand the
program in 2013.
Young Bankers Club students
visited a Fifth Third Banking
Center in Central Ohio to learn
check-writing basics.
2012 ANNUAL REPORT | 7
Branch Banking
BUSINESS DESCRIPTION
Our Retail bank provides the ability to reach all customer segments and
produce the largest number of customer interactions for the Company.
Although our Branch Banking services now extend beyond a physical location
to an online and mobile presence, customers continue to turn to our banking
centers for checking and savings accounts, home equity loans and lines of
credit, credit cards, direct loans for automobiles, and other personal financing
needs, as well as products for small businesses, including cash management.
Our Retail channels introduce Fifth Third to customers and are often the first
step in building a valued and lasting relationship with Fifth Third Bank.
CUSTOMER FOCUS
The more we understand our customers’ needs, their families’ needs, and their
business needs, the better we can serve them. Our goal is to make comprehen-
sive offerings available, along a value continuum that customers want, and to
create deeper relationships as a result. In 2012, we introduced new solutions
that eliminate complexity and make banking a better experience and a better
value for everyone. This includes our simplified deposit products, a reloadable
prepaid card called Access 360°, and continued enhancements to our online
and mobile banking platforms.
For business customers, Fifth Third’s Branch Banking provides a robust
resource that in 2012 was ranked first by Ath Power Consulting for Small
Business Banking Advocacy. We get to know our customers. We assess their
changing needs in a changing environment, and we address those needs
with smart, specific financial solutions on everything from loans to treasury
management to employee savings plans and banking programs.
STRATEGY
Listening is the foundation of our Branch Banking strategy. We ask questions
to learn where customers are now, where they want to go, and how we can help
them get there.
Customers want simplicity, straight-forward products, good value and a
relationship.
At Fifth Third, our holistic approach to Retail banking puts the customer first
and solidifies our position as a trusted financial partner.
2012 BRANCH BANKING
HIGHLIGHTS
$2.2 Billion
TOTAL REVENUE
$19.5 Billion
AVERAGE LOANS
$46.3 Billion
AVERAGE CORE DEPOSITS
1,325
FULL-SERVICE
BANKING CENTERS
2,415
ATMs
1.7 Million
ONLINE BANKING
CUSTOMERS
8
Consumer Lending
BUSINESS DESCRIPTION
Our Consumer Lending solutions enable customers to achieve their goals.
Mortgages, home equity loans and lines, student loans, and auto loans that are
originated through a network of auto dealers positively impact not only our
customers, but also the communities in which they live.
CUSTOMER FOCUS
Buying a car or house, financing an education and building a future are
deeply personal events. Fifth Third’s loan products are designed to be just
as personal.
Each customer and situation is different. We consistently work with
borrowers to understand their finances and their goals. We provide expert
advice from an integrated team, dedicated service from resourceful employ-
ees, and smart solutions that are tailored to the customer. This may include
options that can help customers pay off a loan faster by refinancing to a
shorter term or lowering a rate to reduce the payment. We are committed to
working with customers to create beneficial outcomes.
STRATEGY
To evolve with the dynamic marketplace and meet our customers’
changing needs, we continue to adjust our offerings. For example, in response
to customer feedback, our mortgage company launched a state-of-the-art
notification system that automatically updates customers on the status of
their loans via email and online. And from the start, we provide ample
resources to make the process of obtaining a loan less daunting. We make
application checklists, loan calculators, and tools such as frequently asked
questions available online so that customers can access them at any time,
from anywhere.
It is important for us to be trusted and valued over the life of the loans we
make, and hopefully, for many years beyond. Our professional bankers are
committed to understanding our customers’ unique needs, providing
options, and choosing the best solution. In 2012, we maintained our mortgage
origination market share within the top 20, with originations of $25.2 billion,
up 35 percent from $18.6 billion in 2011, and we remained a top-five market
share leader within the non-captive prime auto lending space.
2012 CONSUMER LENDING
HIGHLIGHTS
$1.2 Billion
TOTAL REVENUE
$22.0 Billion
AVERAGE LOANS
$77.3 Billion
MORTGAGE SERVICING
PORTFOLIO
8,856
DEALER INDIRECT AUTO
LENDING NETWORK
2012 ANNUAL REPORT | 9
Commercial Banking
BUSINESS DESCRIPTION
Fifth Third’s Commercial line of business builds relationships with business,
government and professional customers with customized financial solutions. We
provide banking, working capital, and financial services to middle-market,
mid-corporate, and large organizations. With customers ranging in size from
those with $20 million in annual revenue to some of the world’s largest companies,
our bankers are valued partners in our customers’ financial success. We offer
traditional lending and depository products as well as global cash management,
foreign exchange and international trade finance, derivatives and capital markets
services, asset-based lending, real estate finance, public finance, commercial
leasing, and syndicated finance.
CUSTOMER FOCUS
Serving customers well requires understanding them. We know, for example,
that customers want more than products from their bank. They want ideas that
contribute to their success. They want results. Our Commercial team delivers with
innovations such as:
• Our Remote Currency Manager, which automates cash handling in the
marketplace and processed $6.5 billion in transactions in 2012.
• Our use of EMV chip technology, which is a compliant chip for commercial
cards that allows businesses to authorize transactions more efficiently while
traveling abroad and improves the security of international transactions.
• Our unique approach to the healthcare segment, with industry experts across
the country and specialized products like the RevLink Solutions platform.
• And now our energy-focused group that offers an experienced team to build
strong relationships and customized services for companies in petroleum
and natural gas production, processing and distribution industries.
STRATEGY
We have demonstrated commitment to our customers by increasing staffing for
the mid-corporate segment, which targets clients with $200 million to $2 billion
in revenue, working closely with our customer executives, and expanding our ex-
pertise in specific industry categories.
Expertise, experience, innovation and trust are valued in the marketplace. They
are assets customers value as they work to build their business. We will continue
to leverage these assets for the good of the Bank and the communities we serve.
2012 COMMERCIAL BANKING
HIGHLIGHTS
$2.2 Billion
TOTAL REVENUE
$41.4 Billion
AVERAGE LOANS
$26.6 Billion
AVERAGE CORE DEPOSITS
865
LARGE CORPORATE
CLIENT RELATIONSHIPS
2,245
LEAD MIDDLE MARKET
CLIENT RELATIONSHIPS
8,100
TREASURY MANAGEMENT
LEAD ACCOUNTS
10
Investment Advisors
BUSINESS DESCRIPTION
Our Investment Advisors segment is comprised of five distinct businesses,
each tailored to the unique needs of its customers. Fifth Third Private Bank,
Fifth Third Securities, Fifth Third Asset Management, Fifth Third Institutional
Services and Fifth Third Insurance put more than 100 years of experience to
work to help individual, business and institutional clients build and manage
their wealth.
CLIENT FOCUS
Better ideas – and better solutions – begin with better listening. We take
the time to listen, understand and collaborate. We are trusted advisors
whose specialized approach acknowledges the needs, goals and expectations
of our clients:
• Fifth Third Private Bank serves the complex financial needs of the Bank’s
most affluent clients, with teams of professionals dedicated to helping
clients achieve their financial goals.
• Fifth Third Securities helps individuals and families at every stage of their
lives, offering retirement, investment and education planning, managed
money, annuities and transactional brokerage services.
• Fifth Third Insurance helps clients minimize risk and protect wealth
through insurance products and services such as life insurance, long-term
care insurance, disability income protection and annuities.
• Fifth Third Asset Management provides asset management services to
institutional clients.
• 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
Listening to our clients is at the heart of our strategy. This helps us build deeper
relationships and fully understand their unique needs. These insights give us
the information we need to offer the best ideas, education and solutions to
help our clients achieve their financial goals.
Collaboration with our Retail, Commercial and Business Banking partners
adds even more value, providing comprehensive financial advice for our
clients and serving their wealth management needs. By leveraging our
internal company partnerships, Investment Advisors provides our clients
with complete, powerful financial solutions from one trusted advisor.
2012 INVESTMENT ADVISORS
HIGHLIGHTS
$513 Million
TOTAL REVENUE
$1.9 Billion
AVERAGE LOANS
$7.7 Billion
AVERAGE CORE DEPOSITS
$27 Billion
ASSETS UNDER MANAGEMENT
$308 Billion
ASSETS UNDER CARE
2012 ANNUAL REPORT | 11
Community Outreach
Supporting the community is integral to our business. We appreciate that
the stronger the community is, the stronger our Bank can be. Quite simply, our
employee family lives and works where our customers do, so we have a vested
interest in building vibrant communities.
PHILANTHROPY
We were the first financial institution in the United States to establish a
corporate foundation in 1948. The Fifth Third Foundation funds non-profit and
community organizations focused on education, community development, health
and human services, and the arts, including significant funding for United Way. In
2012, the Bank’s corporate and employee donations to United Way totaled more
than $9 million. The Foundation also provides annual college scholarships to our
employees’ children and matches employee gifts to institutes of higher learning.
Our Company also operates a separate Foundation Office, through which we
administer 70 private and family foundations.
VOLUNTEERISM
Our employees make the Bank’s greatest impact in the community. They
augment our financial community sponsorships by getting personally involved
in causes ranging from walks supporting physical and mental health to various
improvement and beautification projects. On May 3 of each year, our entire
employee family celebrates Fifth Third Day – or 5/3 on the calendar – by feeding
the hungry in our 12-state market. In 2012, employees provided more than
360,000 free meals to needy families.
SUSTAINABILITY
We respect our natural environment. We introduced recycling to an addition-
al 2,500 employees at 21 facilities in 2012, an effort that built upon a landmark
recycling and food scrap composting program launched a year prior at our
5,000-employee campus in Cincinnati, Ohio. We now have five LEED certified
banking centers and have incorporated LEED requirements into future branch
builds. Our greenhouse gas emissions have fallen 17 percent since 2007 while our
support for green power, in the form of Renewable Energy Certificates (RECs),
increased from 3 percent to 30 percent between 2011 and 2012.
INVESTMENTS
The Bank funded $391.9 million in affordable housing and community
redevelopment projects through the Fifth Third Community Development
Corporation, and funded economic growth through investments of $977,500
through our Enterprise Investment Fund.
The 2012 Corporate Social Responsibility Report will be available in May 2013.
Fifth Third Bank’s North Carolina
employees collected and sorted food
to support the 2012 BANK-TO-BANK
Food Drive benefiting the Second
Harvest Food Bank of Metrolina.
12
2012 ANNUAL REPORT
FINANCIAL CONTENTS
Glossary of Terms
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Selected Financial Data
Overview
Non-GAAP Financial Measures
Recent Accounting Standards
Critical Accounting Policies
Risk Factors
Statements of Income Analysis
Business Segment Review
Fourth Quarter Review
Balance Sheet Analysis
Risk Management
Off-Balance Sheet Arrangements
Contractual Obligations and Other Commitments
Management’s Assessment as to the Effectiveness of Internal Control over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Summary of Significant Accounting and Reporting Policies
Supplemental Cash Flow Information
Restrictions on Cash and Dividends
Securities
Loans and Leases
Credit Quality and the Allowance for Loan and Lease Losses
Bank Premises and Equipment
Goodwill
Intangible Assets
Variable Interest Entities
Sales of Residential Mortgage Receivables and MSRs
Derivative Financial Instruments
Other Assets
Short-Term Borrowings
Long-Term Debt
Legal and Regulatory Proceedings
Related Party Transactions
Income Taxes
Retirement and Benefit Plans
88 Commitments, Contingent Liabilities and Guarantees
95
95
96
98
99 Accumulated Other Comprehensive Income
108 Common, Preferred and Treasury Stock
108
109 Other Noninterest Income and Other Noninterest Expense
110 Earnings Per Share
113
115 Certain Regulatory Requirements and Capital Ratios
120
121
122
Parent Company Financial Statements
Business Segments
Subsequent Event
Stock-Based Compensation
Fair Value Measurements
14
15
16
20
22
22
26
35
42
49
51
56
79
80
81
82
83
84
85
86
87
125
129
131
132
134
138
139
140
144
145
146
155
156
158
162
Annual Report on Form 10-K
Consolidated Ten Year Comparison
Directors and Officers
Corporate Information
163
178
179
FORWARD-LOOKING STATEMENTS
This report contains statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section
21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder. These statements relate to our financial condition, results of operations, plans, objectives, future performance or
business. They usually can be identified by the use of forward-looking language such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “forecast,” “projected,” “intends to,” or may include
other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,”
“can,” or similar verbs. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we may make. Moreover, you should treat
these statements as speaking only as of the date they are made and based only on information then actually known to us. There are a number of important factors that could cause future results to differ materially
from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) general economic conditions and weakening in the economy,
specifically the real estate market, either nationally or in the states in which Fifth Third, one or more acquired entities and/or the combined company do business, are less favorable than expected; (2) deteriorating
credit quality; (3) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (4) changes in the interest rate environment reduce interest
margins; (5) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; (6) Fifth Third’s ability to maintain required capital levels and adequate sources of funding and liquidity; (7)
maintaining capital requirements may limit Fifth Third’s operations and potential growth; (8) changes and trends in capital markets; (9) problems encountered by larger or similar financial institutions may adversely
affect the banking industry and/or Fifth Third; (10) competitive pressures among depository institutions increase significantly; (11) effects of critical accounting policies and judgments; (12) changes in accounting
policies or procedures as may be required by the Financial Accounting Standards Board (FASB) or other regulatory agencies; (13) legislative or regulatory changes or actions, or significant litigation, adversely affect
Fifth Third, one or more acquired entities and/or the combined company or the businesses in which Fifth Third, one or more acquired entities and/or the combined company are engaged, including the Dodd-
Frank Wall Street Reform and Consumer Protection Act; (14) ability to maintain favorable ratings from rating agencies; (15) fluctuation of Fifth Third’s stock price; (16) ability to attract and retain key personnel; (17)
ability to receive dividends from its subsidiaries; (18) potentially dilutive effect of future acquisitions on current shareholders’ ownership of Fifth Third; (19) effects of accounting or financial results of one or more
acquired entities; (20) difficulties from the separation of or the results of operations of Vantiv, LLC from Fifth Third; (21) loss of income from any sale or potential sale of businesses that could have an adverse
effect on Fifth Third’s earnings and future growth; (22) ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks; and (23)
the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity.
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 and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and in the Notes to
Consolidated Financial Statements.
GLOSSARY OF TERMS
ALCO: Asset Liability Management Committee
ALLL: Allowance for Loan and Lease Losses
AOCI: Accumulated Other Comprehensive Income
ARM: Adjustable Rate Mortgage
ATM: Automated Teller Machine
BBA: British Bankers’ Association
BOLI: Bank Owned Life Insurance
bps: Basis points
BPO: Broker Price Opinion
CCAR: Comprehensive Capital Analysis and Review
CDC: Fifth Third Community Development Corporation
CFPB: United States Consumer Financial Protection Bureau
C&I: Commercial and Industrial
CPP: Capital Purchase Program
CRA: Community Reinvestment Act
DCF: Discounted Cash Flow
DIF: Deposit Insurance Fund
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
FSOC: Financial Stability Oversight Council
FTAM: Fifth Third Asset Management, Inc.
FTE: Fully Taxable Equivalent
FTP: Funds Transfer Pricing
FTPS: Fifth Third Processing Solutions, now Vantiv, LLC
FTS: Fifth Third Securities
GNMA: Government National Mortgage Association
GSE: Government Sponsored Enterprise
HAMP: Home Affordable Modification Program
HARP: Home Affordable Refinance Program
HFS: Held for Sale
IFRS: International Financial Reporting Standards
IPO: Initial Public Offering
IRC: Internal Revenue Code
IRLC: Interest Rate Lock Commitment
IRS: Internal Revenue Service
LIBOR: London InterBank Offered Rate
LLC: Limited Liability Company
LTV: Loan-to-Value
MD&A: Management’s Discussion and Analysis of Financial
Condition and Results of Operations
MSR: Mortgage Servicing Right
NII: Net Interest Income
NM: Not Meaningful
NPR: Notice of Proposed Rulemaking
OCC: Office of the Comptroller of the Currency
OCI: Other Comprehensive Income
OFR: Office of Financial Research
OREO: Other Real Estate Owned
OTTI: Other-Than-Temporary Impairment
PMI: Private Mortgage Insurance
RSAs: Restricted Stock Awards
SARs: Stock Appreciation Rights
SEC: United States Securities and Exchange Commission
SCAP: Supervisory Capital Assessment Program
TARP: Troubled Asset Relief Program
TBA: To Be Announced
TDR: Troubled Debt Restructuring
TruPS: Trust Preferred Securities
TSA: Transition Service Agreement
UK: United Kingdom
U.S.: United States of America
U.S. GAAP: Accounting principles generally accepted in the United
States of America
VaR: Value-at-Risk
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.
$
$
2012
2008
2009
2010
2011
1.69
1.66
0.36
15.10
15.20
(3.91)
(3.91)
0.75
13.57
8.26
0.63
0.63
0.04
13.06
14.68
1.20
1.18
0.28
13.92
12.72
0.73
0.67
0.04
12.44
9.75
3,622
2,729
6,351
1,538
3,855
753
503
3,575
2,455
6,030
423
3,758
1,297
1,094
3,613
2,999
6,612
303
4,081
1,576
1,541
3,373
4,782
8,155
3,543
3,826
737
511
3,536
2,946
6,482
4,560
4,564
(2,113)
(2,180)
TABLE 1: SELECTED FINANCIAL DATA
For the years ended December 31 ($ in millions, except for 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
Book value per share
Market value per share
Financial Ratios (%)
Return on assets
Return on average common equity
Dividend payout ratio
Average equity as a percent of average assets
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(d)
ALLL as a percent of portfolio loans and leases
Allowance for credit losses as a percent of portfolio loans and leases(c)
Nonperforming assets as a percent of portfolio loans, leases and other
assets, including other real estate owned(d) (e)
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 risk-based capital
Total risk-based capital
Tier I leverage
Tier I common equity(b)
(a) Amounts presented on an FTE basis. The FTE adjustment for years ended December 31, 2012, 2011, 2010, 2009, and 2008 were $18, $18, $18, $19 and $22, respectively.
(b) The tangible common equity and Tier I common equity ratios are non-GAAP measures. For further information, see the Non-GAAP Financial Measures section of the 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
83,391
18,135
114,856
55,235
69,338
28,539
13,053
85,835
14,045
114,296
52,680
63,815
36,261
10,038
80,214
17,468
112,666
72,392
78,652
16,939
12,851
79,232
19,699
112,434
65,662
76,188
18,917
13,737
84,822
16,814
117,614
78,116
82,422
16,978
13,701
1.34 %
11.6
21.3
11.65
8.83
3.55
61.7
0.64
5.6
5.5
11.36
6.45
3.32
46.9
1.15
9.0
23.3
11.41
8.68
3.66
62.3
(1.85)
(23.0)
NM
8.78
4.23
3.54
70.4
0.67
5.0
6.3
12.22
7.04
3.66
60.7
10.65 %
14.42
10.05
9.51
704
0.85 %
2.16
2.37
2,581
3.20
4.88
5.27
2,328
3.02
3.88
4.17
13.89
18.08
12.79
7.48
13.30
17.48
12.34
6.99
10.59
14.78
10.27
4.37
1,172
1.49
2.78
3.01
2,710
3.23
3.31
3.54
11.91
16.09
11.10
9.35
4.22
2.79
1.49
2.23
2.38
$
$
purposes, prior periods were adjusted to reflect this reclassification.
Includes demand, interest checking, savings, money market and foreign office deposits.
Includes transaction deposits plus other time deposits.
Includes certificates $100,000 and over, other deposits, federal funds purchased, other short-term borrowings and long-term debt.
(f)
(g)
(h)
15 Fifth Third Bancorp
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, 2012, the
Bancorp had $122 billion in assets, operated 15 affiliates with 1,325
full-service Banking Centers, including 106 Bank Mart® locations
open seven days a week inside select grocery stores, and 2,415
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 33%
interest in Vantiv Holding, 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. In addition, see the
Glossary of Terms in this report for a list of acronyms included as a
tool for the reader of this annual report on Form 10-K. The
acronyms identified therein are used throughout this MD&A, as
well as the Consolidated Financial Statements and Notes to
Consolidated Financial Statements.
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.
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 be
the preferred industry measurement of net interest income as it
provides a relevant comparison between taxable and non-taxable
amounts.
The Bancorp’s revenues are dependent on both net interest
income and noninterest income. For the year ended December 31,
2012, net interest income, on a FTE basis, and noninterest income
provided 55% and 45% of total revenue, respectively. The Bancorp
derives the majority of its revenues within the United States from
customers domiciled in the United States. Revenue from foreign
countries and external customers domiciled in foreign countries is
immaterial to the Bancorp’s Consolidated Financial Statements.
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.
incurred on
Net interest income is the difference between interest income
earned on assets such as loans, leases and securities, and interest
expense
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
16 Fifth Third Bancorp
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 borrower credit events, such as loan defaults and
inadequate collateral due to a weakened economy within the
Bancorp’s footprint.
Noninterest
is derived primarily from mortgage
banking net revenue, service charges on deposits, corporate banking
revenue, investment advisory revenue and card and processing
revenue. Noninterest expense is primarily driven by personnel costs,
net occupancy expenses, and technology and communication costs.
income
Senior Notes Offerings
On March 7, 2012, the Bancorp issued $500 million of senior notes
to third party investors, and entered into a Supplemental Indenture
with Wilmington Trust Company, as Trustee, which modified the
existing Indenture for Senior Debt Securities dated as of April 30,
2008. The Supplemental Indenture and the Indenture define the
rights of the senior notes, which senior notes are represented by a
Global Security dated as of March 7, 2012. The senior notes bear a
fixed rate of interest of 3.50% 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 March 15, 2022.
The notes will not be subject to redemption at the Bancorp’s option
at any time until 30 days prior to maturity. For additional
information regarding long-term debt, see Note 15 of the Notes to
the Consolidated Financial Statements.
CCAR Results
On March 13, 2012, the Bancorp announced the results of its capital
plan submitted to the FRB as part of the 2012 CCAR. The FRB
indicated to the Bancorp that it did not object to the following
capital actions: a continuation of its quarterly common dividend of
$0.08 per share; the redemption of up to $1.4 billion in certain
TruPS and the repurchase of common shares in an amount equal to
any after-tax gains realized by the Bancorp from the sale of Vantiv,
Inc. common shares by either the Bancorp or Vantiv, Inc. The FRB
indicated to the Bancorp that it did object to other elements of its
capital plan, including potential increases in its quarterly common
dividend and the initiation of other common share repurchases.
The Bancorp resubmitted its capital plan to the FRB in the
second quarter of 2012. The resubmitted plan included capital
actions and distributions for the covered period through March 31,
2013 that were substantially similar to those included in the original
submission, with adjustments primarily reflecting the change in the
expected timing of capital actions and distributions relative to the
timing assumed in the original submission. On August 21, 2012, the
Bancorp announced the FRB did not object to the Bancorp’s
resubmitted capital plan which included potential increases to the
quarterly common stock dividend and potential repurchases of
common shares of up to $600 million through the first quarter of
2013, in addition to any incremental repurchase of common shares
related to any after-tax gains realized by the Bancorp from the sale
of Vantiv, Inc. common shares by either the Bancorp or Vantiv,
Inc. As a result, the Board of Directors authorized the Bancorp to
repurchase up to 100 million common shares in the open market or
in privately negotiated transactions. In addition, in the third quarter
of 2012 the Bancorp declared a quarterly common dividend of $0.10
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
per share, an increase of $0.02 per share from the second quarter of
2012.
Vantiv, Inc. IPO
On June 30, 2009, the Bancorp completed the sale of a majority
interest in its processing business to Advent International. As part
of this transaction, the processing business was contributed into a
partnership now known as Vantiv Holding, LLC. Vantiv, Inc.,
formed by Advent International and owned by certain funds
managed by Advent International, acquired an approximate 51%
interest in Vantiv Holding, LLC for cash and warrants. The Bancorp
retained the remaining approximate 49% interest in Vantiv Holding,
LLC and accounted for it as an equity method investment in the
Bancorp’s Consolidated Financial Statements.
During the first quarter of 2012, Vantiv, Inc. priced an IPO of
its shares and contributed the net proceeds to Vantiv Holding, LLC
for additional ownership interests. As a result of this offering, the
Bancorp’s ownership of Vantiv Holding, LLC was reduced to
approximately 39% and the Bancorp’s investment continued to be
accounted for as an equity method investment in the Bancorp’s
Consolidated Financial Statements. The impact of the capital
contributions to Vantiv Holding, LLC and the resulting dilution in
the Bancorp’s interest resulted in the recognition of a pre-tax gain of
$115 million ($75 million after-tax) by the Bancorp in the first
quarter of 2012.
Vantiv, Inc. Share Sale
During the fourth quarter of 2012, Vantiv, Inc. priced a secondary
offering of 12,454,545 shares of Class A Common Stock of Vantiv,
Inc. sold on behalf of the Bancorp. As a result of this offering, the
Bancorp’s ownership of Vantiv Holding, LLC was reduced to
approximately 33% and the Bancorp’s investment continued to be
accounted for as an equity method investment in the Bancorp’s
Consolidated Financial Statements. The carrying value of the
Bancorp’s investment in Vantiv Holding, LLC was $563 million as
of December 31, 2012. The impact of the sale of the Bancorp’s
interest in Vantiv Holding, LLC resulted in the recognition of a pre-
tax gain of $157 million ($102 million after-tax) by the Bancorp in
the fourth quarter of 2012.
As of December 31, 2012, the Bancorp continued to hold
approximately 70 million units of Vantiv Holding, LLC and a
warrant to purchase approximately 20 million incremental Vantiv
Holding, LLC non-voting units, both of which may be exchanged
for common stock of Vantiv, Inc. on a one for one basis or at
Vantiv, Inc.’s option for cash. In addition, the Bancorp holds
approximately 70 million Class B common shares of Vantiv, Inc.
The Class B common shares give the Bancorp voting rights, but no
economic interest in Vantiv, Inc. The voting rights attributable to
the Class B common shares are limited to 18.5% of the voting
power in Vantiv, Inc. at any time other than in connection with a
stockholder vote with respect to a change in control in Vantiv, Inc.
These securities are subject to certain terms and restrictions.
Accelerated Share Repurchase Transactions
Following the Vantiv, Inc. IPO, the Bancorp entered into an
accelerated share repurchase transaction with a counterparty
pursuant to which the Bancorp purchased 4,838,710 shares, or
approximately $75 million, of its outstanding common stock on
April 26, 2012. As part of this transaction, and all subsequent
accelerated share repurchase transactions in 2012, the Bancorp
entered into a forward contract in which the final number of shares
to be delivered at settlement of the accelerated share repurchase
transaction was based on a discount to the average daily volume-
weighted average price of the Bancorp’s common stock during the
the Repurchase Agreement. The accelerated share
term of
repurchase was treated as two separate transactions (i) the
acquisition of treasury shares on the acquisition date and (ii) a
forward contract indexed to the Bancorp’s stock. At settlement of
the April 2012 forward contract on June 1, 2012, the Bancorp
received an additional 631,986 shares which were recorded as an
adjustment to the basis in the treasury shares purchased on the
acquisition date.
Consistent with the 2012 CCAR plan, on August 23, 2012, the
Bancorp entered into an accelerated share repurchase transaction
with a counterparty pursuant to which the Bancorp purchased
21,531,100 shares, or approximately $350 million, of its outstanding
common stock on August 28, 2012. At settlement of the forward
contract on October 24, 2012, the Bancorp received an additional
1,444,047 shares which were recorded as an adjustment to the basis
in the treasury shares purchased on the acquisition date.
Additionally, on November 6, 2012, the Bancorp entered into
an accelerated share repurchase transaction with a counterparty
pursuant to which the Bancorp purchased 7,710,761 shares, or
approximately $125 million, of its outstanding common stock on
November 9, 2012. At settlement of the forward contract on
February 12, 2013, the Bancorp received an additional 657,917
shares which were recorded as an adjustment to the basis in the
treasury shares purchased on the acquisition date.
Following the sale of a portion of the Bancorp’s shares of Class
A Vantiv, Inc. common stock, the Bancorp entered into an
accelerated share repurchase transaction on December 14, 2012
with a counterparty pursuant to which the Bancorp purchased
6,267,410 shares, or approximately $100 million, of its outstanding
common stock on December 19, 2012. The Bancorp expects the
settlement of the transaction to occur on March 14, 2013.
Redemption of TruPS
On August 8, 2012, consistent with the 2012 CCAR plan, the
Bancorp redeemed all $862.5 million of the outstanding TruPS
issued by Fifth Third Capital Trust VI. These securities had a
distribution rate of 7.25% and a scheduled maturity date
of November 15, 2067. Pursuant to the terms of the TruPS, the
securities of Fifth Third Capital Trust VI were redeemable within
ninety days of a Capital Treatment Event. The Bancorp determined
that a Capital Treatment Event occurred upon the authorization for
publication in the Federal Register of a Joint Notice of Proposed
Rulemaking by the Board of Governors of the Federal Reserve
System, the FDIC and the Office of the Comptroller of the
Currency addressing, among other matters, Section 171 of the
Dodd-Frank Act of 2010 and providing detailed information
regarding the cessation of Tier I risk-based capital treatment for
outstanding TruPS. The redemption price was $25 per security,
which reflected 100% of the liquidation amount, plus accrued and
unpaid distributions through the actual redemption date of
$0.422917 per security. The Bancorp recognized a $9 million loss on
extinguishment of these TruPS within other noninterest expense in
the Bancorp’s Consolidated Statements of Income.
Additionally, on August 15, 2012, the Bancorp redeemed all
$575 million of the outstanding TruPS issued by Fifth Third Capital
Trust V. The Fifth Third Capital Trust V securities had a
distribution rate of 7.25% and a scheduled maturity date of August
15, 2067, and were redeemable at any time on or after August 15,
2012. The redemption price was $25 per security, which reflected
liquidation amount, plus accrued and unpaid
100% of the
distributions through the actual redemption date of $0.453125 per
security. The Bancorp
loss on
extinguishment within other noninterest expense in the Bancorp’s
Consolidated Statements of Income.
recognized a $17 million
17 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Legislative Developments
On July 21, 2010, the Dodd-Frank Act was signed into federal law.
This act implements changes to 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 CFPB responsible for implementing and
enforcing compliance with consumer financial laws, changes the
methodology for determining deposit insurance assessments, gives
the FRB the ability to regulate and limit interchange rates charged to
merchants for the use of debit cards, enacts new limitations on
proprietary trading, broadens the scope of derivative instruments
subject to regulation, requires on-going stress tests and the
submission of annual capital plans for certain organizations and
requires changes to regulatory capital ratios. This act also calls for
federal regulatory agencies to conduct multiple studies over the next
several years in order to implement its provisions.
laws, writing new consumer
The Bancorp was impacted by a number of the components of
the Dodd-Frank Act which were implemented during 2011. The
CFPB began operations on July 21, 2011. The CFPB holds primary
responsibility for regulating consumer protection by enforcing
existing consumer
legislation,
conducting bank examinations, monitoring and reporting on
markets, as well as collecting and tracking consumer complaints.
The FRB final rule implementing the Dodd-Frank Act’s “Durbin
Amendment”, which limits debit card interchange fees, was issued
on July 21, 2011 for transactions occurring after September 30,
2011. The final rule establishes a cap on the fees banks with more
than $10 billion in assets can charge merchants for debit card
transactions. The fee was set at $.21 per transaction plus an
additional 5 bps of the transaction amount and $.01 to cover fraud
losses. The FRB repealed Regulation Q as mandated by the Dodd-
Frank Act on July 21, 2011. Regulation Q was implemented as part
of the Glass-Steagall Act in the 1930’s and provided a prohibition
against the payment of interest on commercial demand deposits.
While the total impact of the fully-implemented Dodd-Frank Act 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.
In December of 2010 and revised in June of 2011, the Basel
Committee on Banking Supervision issued Basel III, a global
regulatory framework, to enhance international capital standards. In
June of 2012, U.S. banking regulators proposed enhancements to
the regulatory capital requirements for U.S. banks, which implement
aspects of Basel III, such as re-defining the regulatory capital
elements and minimum capital ratios, introducing regulatory capital
buffers above those minimums, revising the agencies’ rules for
calculating risk-weighted assets and introducing a new Tier I
common equity ratio. The Bancorp continues to evaluate these
proposals and their potential impact. For more information on the
impact of the proposed regulatory capital enhancements, refer to
the Capital Management section of the MD&A.
On October 9, 2012, the FRB published final stress testing
rules that implement section 165(i)(1) and (i)(2) of the Dodd-Frank
Act. The 19 bank holding companies that participated in the 2009
SCAP and subsequent CCAR, which includes Fifth Third, are
subject to the final stress testing rules. The rules require both
supervisory and company-run stress tests, which provide forward-
looking
to help assess whether
institutions have sufficient capital to absorb losses and support
operations during adverse economic conditions.
to supervisors
information
18 Fifth Third Bancorp
The FRB launched the 2013 stress testing program and CCAR
on November 9, 2012. The CCAR requires bank holding companies
to submit a capital plan in addition to their stress testing results. The
mandatory elements of the capital plan are an assessment of the
expected use and sources of capital over the planning horizon, a
description of all planned capital actions over the planning horizon,
a discussion of any expected changes to the Bancorp’s business plan
that are likely to have a material impact on its capital adequacy or
liquidity, a detailed description of the Bancorp’s process for
assessing capital adequacy and the Bancorp’s capital policy. The
stress testing results and capital plan were submitted by the Bancorp
to the FRB on January 7, 2013.
The FRB’s review of the capital plan will assess the
comprehensiveness of the capital plan, the reasonableness of the
assumptions and
the capital plan.
the analysis underlying
Additionally, the FRB will review the robustness of the capital
adequacy process, the capital policy and the Bancorp’s ability to
maintain capital above the minimum regulatory capital ratios and
above a Tier 1 common ratio of 5 percent on a pro forma basis
under expected and stressful conditions throughout the planning
horizon. The FRB will also assess the Bancorp’s strategies for
addressing proposed revisions to the regulatory capital framework
agreed upon by the Basel Committee on Banking Supervision and
requirements arising from the Dodd-Frank Act.
The FRB has indicated that it expects to disclose on March 7,
2013 its estimates of participating institutions results under the FRB
supervisory stress scenario, including capital results, which assume
that all banks take certain consistently applied future capital actions.
The FRB has indicated that it expects to disclose on March 14, 2013
its estimates of participating institutions results under the FRB
supervisory severe stress scenarios including capital results based on
each company’s own base scenario capital actions. The FRB will
also issue an objection or non-objection to each participating
institution’s capital plan submitted under CCAR. Additionally, as a
CCAR institution, Fifth Third is required to disclose our own
estimates of results under the supervisory severely adverse scenario
using the same consistently applied capital actions noted above, and
to provide information related to risks included in its stress testing;
a summary description of the methodologies used; estimates of
aggregate pre-provision net revenue, losses, provisions, and pro
forma capital ratios at the end of the forward-looking planning
horizon of at least nine quarters; and an explanation of the most
significant causes of changes in regulatory capital ratios. These
disclosures are required by March 31, 2013 and are to be sent to the
FRB and publicly disclosed.
In January of 2013, the CFPB issued several final regulations
and changes to certain consumer protections under existing laws.
These regulations are intended to strengthen consumer protections
for high-cost mortgages, amend escrow requirements under the
Truth in Lending Act, require mortgage lenders to consider the
consumers’ ability to repay home loans before extending them
credit, implement mortgage servicing rules, amend the Equal Credit
Opportunity Act regarding appraisals and other written valuations
for first lien residential mortgage loans and revises the Truth in
Lending Act to strengthen loan originator qualification requirements
and regulate industry compensation practices. These regulations take
effect in 2014 except for the escrow requirements and certain
provisions of the compensation rules under the Truth in Lending
Act which takes effect on June 1, 2013. The Bancorp is currently
assessing the impact these new regulations will have on its
Consolidated Financial Statements.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 2: 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 (FTE)
Fully taxable equivalent adjustment
Applicable income tax expense (benefit)
Net income (loss)
Less: Net income attributable to noncontrolling interests
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
2012
4,125
512
3,613
303
3,310
2,999
4,081
2,228
18
636
1,574
(2)
1,576
35
1,541
1.69
1.66
0.36
$
$
$
$
2011
4,236
661
3,575
423
3,152
2,455
3,758
1,849
18
533
1,298
1
1,297
203
1,094
1.20
1.18
0.28
2010
4,507
885
3,622
1,538
2,084
2,729
3,855
958
18
187
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
226
511
0.73
0.67
0.04
2008
5,630
2,094
3,536
4,560
(1,024)
2,946
4,564
(2,642)
22
(551)
(2,113)
-
(2,113)
67
(2,180)
(3.91)
(3.91)
0.75
Earnings Summary
The Bancorp’s net income available to common shareholders for
the year ended December 31, 2012 was $1.5 billion, or $1.66 per
diluted share, which was net of $35 million in preferred stock
income available to common
dividends. The Bancorp’s net
shareholders for the year ended December 31, 2011 was $1.1 billion,
or $1.18 per diluted share, which was net of $203 million in
preferred stock dividends. The preferred stock dividends during
2011 included $153 million in discount accretion resulting from the
Bancorp’s repurchase of Series F preferred stock.
Net interest income was $3.6 billion for the years ended
December 31, 2012 and 2011. Net interest income was positively
impacted by an increase in average loans and leases of $4.6 billion as
well as a decrease in interest expense compared to the year ended
December 31, 2011. Average interest-earning assets increased $4.0
billion while average interest-bearing liabilities were relatively flat
compared to the prior year. In addition, net interest income in 2012
compared to the prior year was negatively impacted by a 28 bps
decrease in average yield on average interest-earning assets partially
offset by a 21 bps decrease in the average rate paid on interest-
bearing liabilities, coupled with a mix shift to lower cost deposits.
Net interest margin was 3.55% and 3.66% for the years ended
December 31, 2012 and 2011, respectively.
Noninterest income increased $544 million, or 22%, in 2012
compared to 2011. The increase from the prior year was primarily
due to an increase in mortgage banking net revenue, corporate
banking revenue and other noninterest income partially offset by a
decrease in card and processing revenue. Mortgage banking net
revenue increased $248 million, or 41%, primarily due to an increase
in origination fees and gains on loan sales partially offset by an
increase in losses on net valuation adjustments on servicing rights
and free-standing derivatives entered into to economically hedge the
MSR portfolio. Corporate banking revenue increased $63 million, or
18%, primarily due to increases in syndication fees, business lending
fees, lease remarketing fees and institutional sales. Other noninterest
income increased $324 million primarily due to a $115 million gain
from the Vantiv, Inc. IPO recognized in the first quarter of 2012
and a $157 million gain from the sale of Vantiv, Inc. shares in the
fourth quarter of 2012. Card and processing revenue decreased $55
million, or 18%, primarily as the result of the full year impact of the
implementation of the Dodd-Frank Act’s debit card interchange fee
cap in the fourth quarter of 2011.
Noninterest expense increased $323 million, or nine percent, in
2012 compared to 2011 primarily due to an increase of $170 million
in total personnel costs (salaries, wages and incentives plus
employee benefits); an increase of $53 million in the provision for
representation and warranty claims related to residential mortgage
loans sold to third parties; an increase of $177 million in debt
extinguishment costs; and a $44 million decrease in the benefit from
the provision for unfunded commitments and letters of credit. This
activity was partially offset by an $87 million decrease in FDIC
insurance and other taxes.
Credit Summary
The Bancorp does not originate subprime mortgage loans and does
not hold asset-backed securities backed by subprime mortgage loans
in its securities portfolio. However, the Bancorp has exposure to
disruptions
in the capital markets and weakened economic
conditions. Over the last few years, the Bancorp has continued to be
negatively affected by high unemployment rates, weakened housing
markets, particularly in Michigan and Florida, and a challenging
credit environment. Credit trends have improved, and as a result,
the provision for loan and lease losses decreased to $303 million in
2012 compared to $423 million in 2011. In addition, net charge-offs
as a percent of average portfolio loans and leases decreased to
0.85% during 2012 compared to 1.49% during 2011. At December
31, 2012, nonperforming assets as a percent of loans, leases and
other assets, including OREO (excluding nonaccrual loans held for
sale) decreased to 1.49%, compared to 2.23% at December 31,
2011. For further discussion on credit quality, see the Credit Risk
Management section in MD&A.
Capital Summary
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, 2012, the Tier I risk-based capital ratio
was 10.65%, the Tier I leverage ratio was 10.05% and the total risk-
based capital ratio was 14.42%.
19 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 banking regulators issued proposed capital rules (Basel III)
in June of 2012 that would substantially amend the existing risk-
based capital rules (Basel I) for banks. The Bancorp believes
providing an estimate of its capital position based upon its
interpretation of these proposed rules is important to complement
the existing capital ratios and for comparability to other financial
institutions. Since these rules are in proposal stage, they are
considered non-GAAP measures and therefore are included in the
following non-GAAP financial measures table.
Pre-provision net revenue
income plus
noninterest income minus noninterest expense. The Bancorp
believes this measure is important because it provides a ready view
of the Bancorp’s earnings before the impact of provision expense.
interest
is net
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. These ratios are not formally defined by U.S. GAAP or
codified in the federal banking regulations and, therefore, are
considered to be non-GAAP financial measures. 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.
these non-GAAP measures are
important because they reflect the level of capital available to
withstand unexpected market conditions. Additionally, presentation
of these measures allows readers to compare certain aspects of the
Bancorp’s capitalization to other organizations. However, because
The Bancorp believes
20 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table reconciles non-GAAP financial measures to U.S. GAAP as of and for the years ended December 31:
TABLE 3: NON-GAAP FINANCIAL MEASURES
($ in millions)
Income before income taxes (U.S. GAAP)
Add: Provision expense (U.S. GAAP)
Pre-provision net revenue
Net income available to common shareholders (U.S. GAAP)
Add: Intangible amortization, net of tax
Tangible net income available to common shareholders
Total Bancorp shareholders’ equity (U.S. GAAP)
Less: Preferred stock
Goodwill
Intangible assets
Tangible common equity, including unrealized gains / losses
Less: Accumulated other comprehensive income
Tangible common equity, excluding unrealized gains / losses (1)
Add: Preferred stock
Tangible 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)
Less: Goodwill and certain other intangibles
Accumulated other comprehensive income
Add: Qualifying TruPS
Other
Tier I risk-based capital
Less: Preferred stock
Qualifying TruPS
Qualified noncontrolling interests in consolidated subsidiaries
Tier I common equity (4)
Risk-weighted assets (5)(a)
Ratios:
Tangible equity (2) / (3)
Tangible common equity (1) / (3)
Tier I common equity (4) / (5)
$
$
$
$
$
$
$
2012
2,210
303
2,513
1,541
9
1,550
13,716
(398)
(2,416)
(27)
10,875
(375)
10,500
398
10,898
121,894
(2,416)
(27)
(577)
118,874
13,716
(2,499)
(375)
810
33
11,685
(398)
(810)
(48)
10,429
2011
1,831
423
2,254
1,094
15
1,109
13,201
(398)
(2,417)
(40)
10,346
(470)
9,876
398
10,274
116,967
(2,417)
(40)
(723)
113,787
13,201
(2,514)
(470)
2,248
38
12,503
(398)
(2,248)
(50)
9,807
109,699
104,945
9.17 %
8.83 %
9.51 %
9.03
8.68
9.35
Basel III - Estimated Tier I common equity ratio
Tier I common equity (Basel I)
Add: Adjustment related to AOCI for available-for-sale securities
Estimated Tier I common equity under Basel III rules(b)
Estimated risk-weighted assets under Basel III rules(c)
Estimated Tier I common equity ratio under Basel III rules
(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, along with the measure for market risk, resulting in the
Bancorp’s total risk-weighted assets.
10,429
429
10,858
123,725
8.78 %
$
(b) Tier I common equity under Basel III includes the unrealized gains and losses for available-for-sale securities. Other adjustments include mortgage servicing rights and deferred tax assets subject to
threshold limitations and deferred tax liabilities related to intangible assets.
(c) Key differences under Basel III in the calculation of risk-weighted assets compared to Basel I include: (1) risk weighting for commitments under 1 year; (2) higher risk weighting for exposures to
residential mortgage, home equity, past due loans, foreign banks and certain commercial real estate; (3) higher risk weighting for mortgage servicing rights and deferred tax assets that are under certain
thresholds as a percent of Tier I capital; (4) incremental capital requirements for stress VaR; and (5) derivatives are differentiated between exchange clearing and over-the-counter and the 50% risk-
weight cap is removed. The estimated Basel III risk-weighted assets are based upon the Bancorp’s interpretations of the three draft Federal Register notices proposing enhancements to the regulatory
capital requirements that were published in June of 2012. These amounts are preliminary and subject to change depending on the adoption of final Basel III capital rules by the Regulatory Agencies.
21 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT ACCOUNTING STANDARDS
Note 1 of the Notes to Consolidated Financial Statements provides
a discussion of the significant new accounting standards adopted by
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
Bancorp’s financial position, 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, 2012.
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 the commercial portfolio segment include commercial and
industrial, commercial mortgage owner-occupied, commercial
mortgage nonowner-occupied, commercial construction, and
commercial leasing. The residential mortgage portfolio segment is
also considered a class. Classes within the consumer portfolio
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 6 of the Notes to Consolidated Financial Statements.
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
collectability 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. The
Bancorp’s strategy
includes a
combination of conservative exposure limits significantly below
legal lending limits and conservative underwriting, documentation
and
emphasizes
diversification on a geographic, industry and customer level, regular
credit examinations and quarterly management reviews of large
credit exposures and loans experiencing deterioration of credit
quality.
risk management
standards. The
for credit
collections
strategy
also
The Bancorp’s 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
in estimating and
measuring losses when evaluating allowances for individual loans or
pools of loans.
to recognize
imprecision
the
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
22 Fifth Third Bancorp
the Bancorp during 2012 and the expected impact of significant
accounting standards issued, but not yet required to be adopted.
modified in a TDR, are subject to 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 and leverage of the
borrower, and
the borrower’s
the Bancorp’s evaluation of
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 and other
sources of cash flow, as well as an 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
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 trailing
twelve month net charge-off history by loan category. Historical loss
rates may be adjusted for certain prescriptive and qualitative 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 reviewers.
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 regional geographic concentrations and the closely associated
effect changing economic conditions have on the Bancorp’s
customers.
liabilities
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 the Consolidated Balance Sheets. The
in other
determination of the adequacy of the reserve is based upon an
evaluation of the unfunded credit facilities, including an assessment
of historical commitment utilization experience, credit risk grading
and historical loss rates based on credit grade migration. This
process takes into consideration the same risk elements that are
analyzed in the determination of the adequacy of the Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ALLL, as discussed above. Net adjustments to the reserve for
unfunded 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.
in
taxes,
respectively,
interest and expenses,
Deferred income tax assets and liabilities are determined using
the balance sheet method and are reported in other assets and
accrued
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 19 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
revenue. 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. For additional information on servicing rights, see
Note 11 of the Notes to Consolidated Financial Statements.
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. 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 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.
assumptions
Level 3 – Unobservable inputs for the asset or liability for
which there is little, if any, market activity at the
measurement date. Unobservable
the
inputs reflect
Bancorp’s own
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 and discounted cash flow methodologies,
the fair value
instruments for which
as well as
determination requires significant management judgment.
The Bancorp's fair value measurements
involve various
valuation techniques and models, which involve inputs that are
observable, when available. Valuation techniques and parameters
used for measuring assets and liabilities are reviewed and validated
by the Bancorp on a quarterly basis. Additionally, the Bancorp
monitors the fair values of significant assets and liabilities using a
variety of methods including the evaluation of pricing runs and
exception reports based on certain analytical criteria, comparison to
previous
for
reasonableness. 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.
review and assessments
trades and overall
23 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
securities with
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
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 discounted
incorporating
prepayment 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.
flows,
cash
anticipated portfolio
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
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
is based on
investment,
mortgage-backed securities prices, interest rate risk and an
internally developed credit component.. Therefore, these
loans are classified within Level 3 of the valuation
hierarchy.
the fair value estimation
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
24 Fifth Third Bancorp
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, 2012,
derivatives classified as Level 3, which are valued using an
option-pricing model containing unobservable inputs,
consisted primarily of warrants associated with the sale of
the processing business to Advent International 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.
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 26 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. In testing goodwill for
impairment, U.S. GAAP permits the Bancorp to first assess
qualitative factors to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying amount.
If, after assessing the totality of events and circumstances, the
Bancorp determines it is not more likely than not that the fair value
of a reporting unit is less than its carrying amount, then performing
the two-step impairment test would be unnecessary. However, if the
Bancorp concludes otherwise, it would then be required to perform
the first step (Step 1) of the goodwill impairment test, and continue
to the second step (Step 2), if necessary. 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, Step 2 of the goodwill impairment test is performed to
measure the amount of impairment loss, 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 compares this
market-based fair value measurement to the aggregate fair value of
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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
recognized. A recognized impairment loss cannot exceed the
carrying amount of that goodwill and cannot be reversed in future
periods 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 8 of the Notes to Consolidated Financial
the Bancorp’s
Statements for further
goodwill.
information regarding
25 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISK FACTORS
The risks listed below present risks that could have a material
impact on the Bancorp’s financial condition, the results of its
operations, or its business.
RISKS RELATING TO ECONOMIC AND MARKET
CONDITIONS
Weakness in the U.S. 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 or 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 portion of Fifth Third’s
residential mortgage and commercial real estate loan portfolios are
comprised of borrowers in Florida, whose 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 foreclosed real estate in future
periods, which could materially adversely affect Fifth Third’s
financial condition and results of operations.
The global financial markets continue to be strained as a
result of economic slowdowns and concerns, especially about
the creditworthiness of the European Union member states
and financial institutions in the European Union. These
factors could have international implications, which could
hinder the U.S. economic recovery and affect the stability of
global financial markets.
Certain European Union member states have fiscal obligations
greater than their fiscal revenue, which has caused investor concern
over such countries’ ability to continue to service their debt and
foster economic growth in their economies. During 2011, the
European debt crisis caused spreads to widen in the fixed income
debt markets and liquidity to be less abundant. The European debt
crisis and measures adopted to address it have significantly
weakened European economies. A weaker European economy may
cause investors to lose confidence in the safety and soundness of
European financial institutions and the stability of European
member economies. A failure to adequately address sovereign debt
concerns in Europe could hamper economic recovery or contribute
to recessionary economic conditions and severe stress in the
financial markets, including in the United States. Should the U.S.
economic recovery be adversely impacted by these factors, the
likelihood for loan and asset growth at U.S. financial institutions,
like Fifth Third, may deteriorate.
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
26 Fifth Third Bancorp
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.
Potential changes in determining LIBOR could affect Fifth
Third’s debt securities and other financial obligations.
Beginning in 2008, concerns have been raised about the accuracy of
the calculation of the daily LIBOR, which is currently overseen by
the BBA. Fifth Third was not and is not a LIBOR panelist surveyed
for LIBOR estimates. The BBA has taken steps to change the
process for determining LIBOR by increasing the number of banks
surveyed to set LIBOR and to strengthen the oversight of the
process. In addition a report published in September 2012, set forth
recommendations relating to the setting and administration of
LIBOR, and the United Kingdom government has announced that
it intends to incorporate these recommendations in the new
legislation.
in
the method
At the present time, it is uncertain what changes, if any, may be
required or made by the United Kingdom government or other
governmental or regulatory authorities
for
determining LIBOR. Accordingly, it is not apparent whether or to
what extent any such changes would have an adverse impact on the
value of any LIBOR-linked debt securities issued by Fifth Third or
any loans, derivatives and other financial obligations or extensions
of credit for which Fifth Third is an obligor, or whether or to what
extent any such changes would have an adverse effect on the value
of any LIBOR-linked securities, loans, derivatives and other
financial obligations or extensions of credit held by or due to Fifth
Third or on Fifth Third’s financial condition or results of
operations.
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.
Market changes and trends may result in 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. The expiration or rescission
of any of these programs and actions 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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;
News reports of trends, concerns and other issues related
to the financial services industry;
Natural disasters;
Geopolitical conditions such as acts or threats of terrorism
or military conflicts.
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.
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.
When Fifth Third lends money or commits to lend money the
Bancorp incurs credit risk or the risk of losses if borrowers do not
repay their loans. The credit performance of the loan portfolios
significantly affects the Bancorp’s financial results and condition. If
the current economic environment were to deteriorate, more
customers may have difficulty in repaying their loans or other
obligations which could result in a higher level of credit losses and
reserves for credit losses. Fifth Third reserves for credit losses by
establishing reserves through a charge to earnings. The amount of
these reserves is based on Fifth Third’s assessment of credit losses
inherent
(including unfunded credit
commitments). The process for determining the amount of the
allowance for loan and lease losses and the reserve for unfunded
commitments is critical to Fifth Third’s financial results and
condition. It requires difficult, subjective and complex judgments
about the environment, including analysis of economic or market
conditions that might impair the ability of borrowers to repay their
loans.
loan portfolio
the
in
Fifth Third might underestimate the credit losses inherent in its
loan portfolio and have credit losses in excess of the amount
reserved. Fifth Third might increase the reserve because of changing
economic conditions, including falling home prices or higher
unemployment, or other factors such as changes in borrower’s
behavior. As an example, borrowers may "strategically default," or
discontinue making payments on their real estate-secured loans if
the value of the real estate is less than what they owe, even if they
are still financially able to make the payments.
Fifth Third believes that both the allowance for loan and lease
losses and reserve for unfunded commitments are adequate to cover
inherent losses at December 31, 2012; however, there is no
assurance that they will be sufficient to cover future credit losses,
especially if housing and employment conditions worsen. In the
event of significant deterioration in economic conditions, Fifth
Third may be required to increase reserves in future periods, which
would reduce earnings.
For more information, refer to the "Risk Management - Credit
Risk Management," "Critical Accounting Policies - Allowance for
Loan and Leases,” and “Reserve for Unfunded Commitments” of
the MD&A.
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
primarily relies on bank deposits to be a low cost and stable source
of funding for the loans Fifth Third makes and the operations of
Fifth Third’s business. Core customer deposits, which include
transaction deposits and other time deposits, have historically
provided Fifth Third with a sizeable source of relatively stable and
low-cost funds (average core deposits funded 70% of average total
assets at December 31, 2012). In addition to customer deposits,
sources of liquidity include investments in the securities portfolio,
Fifth Third’s ability to sell or securitize loans in secondary markets
and to pledge loans to access secured borrowing facilities through
the FHLB and the FRB, and Fifth Third’s ability to raise funds in
domestic and international money and capital markets.
Fifth Third’s liquidity and ability to fund and run the business
could be materially adversely affected by a variety of conditions and
factors,
including financial and credit market disruptions and
volatility or a lack of market or customer confidence in financial
markets in general similar to what occurred during the financial
crisis in 2008 and early 2009, which may result in a loss of customer
deposits or outflows of cash or collateral and/or ability to access
capital markets on favorable terms.
Other conditions and factors that could materially adversely
affect Fifth Third’s liquidity and funding include a lack of market or
customer confidence in Fifth Third or negative news about Fifth
Third or the financial services industry generally which also may
result in a loss of deposits and/or negatively affect the ability to
access the capital markets; the loss of customer deposits to
alternative investments; inability to sell or securitize loans or other
assets, and reductions in one or more of Fifth Third’s credit ratings.
A reduced credit rating could adversely affect Fifth Third’s ability to
borrow funds and raise the cost of borrowings substantially and
could cause creditors and business counterparties to raise collateral
requirements or take other actions that could adversely affect Fifth
Third’s ability to raise capital. Many of the above conditions and
factors may be caused by events over which Fifth Third has little or
no control such as what occurred during the financial crisis. While
market conditions have stabilized and, in many cases, improved,
there can be no assurance that significant disruption and volatility in
the financial markets will not occur in the future.
27 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other material adverse effects could include a reduction in
Fifth Third’s credit ratings resulting from a further decrease in the
probability of government support for large financial institutions
such as Fifth Third assumed by the ratings agencies in their current
credit ratings.
If Fifth Third is unable to continue to fund assets through
customer bank deposits or access capital markets on favorable terms
or if Fifth Third suffers an increase in borrowing costs or otherwise
fails to manage liquidity effectively; liquidity, operating margins,
financial results and condition may be materially adversely affected.
As Fifth Third did during the financial crisis, it may also need to
raise additional capital through the issuance of stock, which could
dilute the ownership of existing stockholders, or reduce or even
eliminate common stock dividends to preserve capital.
Fifth Third may have more credit risk and higher credit losses
to the extent loans are concentrated by location of the
borrower or collateral.
Fifth Third’s credit risk and credit losses can increase if its loans are
concentrated to borrowers engaged in the same or similar activities
or
to borrowers who as a group may be uniquely or
disproportionately affected by economic or market conditions.
Deterioration in economic conditions, housing conditions and real
estate values in these states and generally across the country could
result in materially higher credit losses.
loans for
investment or private
Fifth Third may be required to repurchase residential
mortgage loans or reimburse investors and others as a result of
breaches in contractual representations and warranties.
Fifth Third sells residential mortgage loans to various parties,
including GSEs and other financial institutions that purchase
residential mortgage
label
securitization. Fifth Third may be required to repurchase residential
mortgage loans, indemnify the securitization trust, investor or
insurer, or reimburse the securitization trust, investor or insurer for
credit losses incurred on loans in the event of a breach of
contractual representations or warranties that is not remedied within
a period (usually 60 days or less) after Fifth Third receives notice of
the breach. Contracts for residential mortgage loan sales to the
GSEs include various types of specific remedies and penalties that
could be applied to inadequate responses to repurchase requests. If
economic conditions and the housing market do not recover or
future investor repurchase demand and success at appealing
repurchase requests differ from past experience, Fifth Third could
continue to have increased repurchase obligations and increased loss
severity on repurchases, requiring material additions to the
repurchase reserve.
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.
28 Fifth Third Bancorp
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. Fifth Third competes with
banks and other financial services companies for deposits. If
competitors raise the rates they pay on deposits, Fifth Third’s
funding costs may increase, either because Fifth Third raises rates to
avoid losing deposits or because Fifth Third loses deposits and must
rely on more expensive sources of funding. Higher funding costs
reduce our net interest margin and net interest income. Fifth Third’s
bank customers could take their money out of the bank and put it in
alternative investments, causing Fifth Third to lose a lower cost
source of funding. Checking and savings account balances and other
forms of customer deposits may decrease when customers perceive
alternative investments, such as the stock market, as providing a
better risk/return tradeoff.
The Bancorp’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 the Bancorp’s
banking subsidiary and certain nonbank subsidiaries may pay.
Regulatory scrutiny of capital levels at bank holding companies and
insured depository institution subsidiaries has increased since the
financial crisis and has resulted in increased regulatory focus on all
aspects of capital planning,
including dividends and other
distributions to shareholders of banks such as the parent bank
holding companies. 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 the Bancorp’s ability to receive dividends
from its subsidiaries could have a material adverse effect on its
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. 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 its 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.
Fifth Third could suffer if it fails to attract and retain skilled
personnel.
Fifth Third’s success depends, in large part, on its ability to attract
and retain key individuals. 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 its business strategies and may
suffer adverse consequences to its business, operations and financial
condition.
In June 2010, the federal banking agencies issued joint
guidance on executive compensation designed to help ensure that a
banking organization’s incentive compensation policies do not
encourage imprudent risk taking and are consistent with the safety
and soundness of the organization. In addition, the Dodd-Frank Act
requires those agencies, along with the SEC, to adopt rules to
require reporting of incentive compensation and to prohibit certain
compensation arrangements. The federal banking agencies and the
SEC proposed such rules in April 2011. In addition, in June 2012,
the SEC issued final rules to implement Dodd-Frank’s requirement
that the SEC direct the national securities exchanges to adopt
certain listing standards related to the compensation committee of a
company's board of directors as well as its compensation advisers. 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.
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 the origination of mortgage loans 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 be
successful. Hedging is a complex process, requiring sophisticated
models and constant monitoring. 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.
Fifth Third uses financial models for business planning
purposes that may not adequately predict future results.
Fifth Third uses financial models to aid in its planning for various
purposes including its capital and liquidity needs, potential charge-
offs, reserves, and other purposes. The models used may not
accurately account for all variables that could affect future results,
may fail to predict outcomes accurately and/or may overstate or
understate certain effects. As a result of these potential failures,
Fifth Third may not adequately prepare for future events and may
suffer losses or other setbacks due to these failures.
Changes in interest rates could also reduce the value of MSRs.
Fifth Third acquires MSRs when it keeps the servicing rights after
the sale or securitization of the loans that have been originated or
when it purchases the servicing rights to mortgage loans originated
by other lenders. Fifth Third initially measures all residential MSRs
at fair value and subsequently amortizes the MSRs in proportion to,
and over the period of, estimated net servicing income. Fair value is
the present value of estimated future net servicing income,
calculated based on a number of variables, including assumptions
about the likelihood of prepayment by borrowers. 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.
Changes in interest rates can affect prepayment assumptions
and thus fair value. When interest rates fall, borrowers are usually
more likely to prepay their mortgage loans by refinancing them at a
lower rate. As the likelihood of prepayment increases, the fair value
of MSRs can decrease. Each quarter Fifth Third evaluates the fair
value of MSRs, and decreases in fair value below amortized cost
reduce earnings in the period in which the decrease occurs.
The preparation of Fifth Third’s financial statements requires
the use of estimates that may vary from actual results.
The preparation of consolidated financial statements in conformity
with U.S. GAAP requires management to make significant estimates
that affect the financial statements. See the “Critical Accounting
Policies” section of the MD&A for more information regarding
management’s significant estimates. Additionally, Fifth Third’s
litigation reserve is a management estimate which is regularly
reviewed for accuracy.
Fifth Third regularly reviews its litigation reserve for adequacy
considering its 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
29 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
its
including
reserves are not adequate, Fifth Third’s business, financial
condition,
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.
regulatory agencies, periodically change
Changes in accounting standards or interpretations could
impact Fifth Third’s reported earnings and financial
condition.
The accounting standard setters, including the FASB, the SEC and
financial
other
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
records and reports its financial condition and results of operations.
In some cases, Fifth Third could be required to apply a new or
revised standard retroactively, which would result in the recasting of
Fifth Third’s prior period financial statements.
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
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
30 Fifth Third Bancorp
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.
Fifth Third relies on its systems and certain service providers,
and certain failures could materially adversely affect
operations.
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.
flaws or employee errors,
Fifth Third’s necessary dependence upon automated systems to
record and process its transaction volume poses the risk that
technical system
tampering or
manipulation of those systems will result in losses and may be
difficult to detect. Fifth Third may also be subject to disruptions of
its operating systems arising from events that are beyond its control
(for example, computer viruses or electrical or telecommunications
outages). Fifth Third is further exposed to the risk that its third
party service providers may be unable to fulfill their contractual
obligations (or will be subject to the same risk of fraud or
operational errors as Fifth Third). These disruptions may interfere
with service to Fifth Third’s customers and result in a financial loss
or liability.
Fifth Third is exposed to cyber-security risks, including denial
of service, hacking, and identity theft.
Recently, there has been a well-publicized series of apparently
related distributed denial of service attacks on large financial
services companies, including Fifth Third Bank. Distributed denial
of service attacks are designed to saturate the targeted online
network with excessive amounts of network traffic, resulting in slow
response times, or in some cases, causing the site to be temporarily
unavailable. To date these attacks hare not been intended to steal
financial data, but meant to interrupt or suspend a company’s
Internet service. These events did not result in a breach of Fifth
Third’s client data and account information remained secure;
however, the attacks did adversely affect the performance of Fifth
Third’s website and in some instances prevented customers from
accessing Fifth Third’s website. While the event was resolved in a
timely fashion and primarily resulted in inconvenience to our
customers, future cyber-attacks could be more disruptive and
damaging. Hacking and identity theft risks, in particular, could cause
serious reputational harm. Cyber threats are rapidly evolving and
Fifth Third may not be able to anticipate or prevent all such attacks.
Fifth Third may incur increasing costs in an effort to minimize these
risks and could be held liable for any security breach or loss.
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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. 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.
The results of Vantiv, LLC 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 its processing business, Vantiv, LLC (formerly Fifth
Third Processing Solutions). As a result of the Vantiv, Inc. IPO, the
Bancorp’s ownership of Vantiv Holding, LLC was reduced to
approximately 39% in the first quarter of 2012. In addition, Fifth
Third sold an approximate 6% interest during the fourth quarter of
2012. Based on Fifth Third’s current ownership share in Vantiv
Holding, LLC, of approximately 33%, Vantiv Holding, LLC is
accounted for under the equity method and is not consolidated.
Poor operating results of Vantiv, LLC could negatively affect the
operating results of Fifth Third. In addition, Fifth Third participates
in a multi lender credit facility to Vantiv Holding, LLC and
repayment of these loans is contingent on future cash flows from
Vantiv Holding, LLC.
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 borrowers’ ability to repay their loans.
RISKS RELATED TO THE LEGAL AND REGULATORY
ENVIRONMENT
As a regulated entity, the Bancorp is subject to certain capital
requirements that may limit its operations and potential
growth.
The Bancorp is a bank holding company and a financial holding
company. As such, it is subject to the comprehensive, consolidated
supervision and regulation of the FRB, including risk-based and
leverage capital requirements. The Bancorp 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 the Bancorp’s particular condition, risk profile and
growth plans. Compliance with the capital requirements, including
leverage ratios, may limit operations that require the intensive use of
capital and could adversely affect the Bancorp’s ability to expand or
maintain present business levels.
Comprehensive revisions to the regulatory capital framework
were proposed by the FRB, OCC, and FDIC in June 2012. Included
within those revisions is the Basel III NPR, which incorporates
changes made by the Basel Committee on Banking Supervision to
the Basel Capital framework in addition to implementing relevant
provisions of the Dodd-Frank Act. The Basel III NPR specifically
revises what qualifies as regulatory capital, raises minimum
requirements and introduces the concept of additional capital
buffers. The need to maintain more and higher quality capital as well
as greater liquidity going forward could limit our business activities,
including lending, and our ability to expand, either organically or
through acquisitions. In addition, the new liquidity standards could
require us to increase our holdings of highly liquid short-term
investments, thereby reducing our ability to invest in longer-term
assets even if more desirable from a balance sheet management
perspective. Moreover, although these new requirements are being
phased in over time, U.S. Federal banking agencies have been taking
into account expectations regarding the ability of banks to meet
these new requirements, including under stressed conditions, in
approving actions that represent uses of capital, such as dividend
increases and share repurchases.
The Bancorp’s banking subsidiary must remain well-capitalized,
well-managed and maintain at least a “Satisfactory” CRA rating for
the Bancorp to retain its status as a financial holding company.
Failure to meet these requirements could result in the FRB placing
limitations or conditions on the Bancorp’s activities (and the
commencement of new activities) and could ultimately result in the
loss of financial holding company status. In addition, failure by the
Bancorp’s banking subsidiary to meet applicable capital guidelines
could subject the bank to a variety of enforcement remedies
include
available to the federal regulatory authorities. These
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.
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, by
introducing various actions and passing legislations such as the
Dodd-Frank Act. Such programs and legislation subject Fifth Third
and other financial institutions to restrictions, oversight and/or
costs that may have an impact on Fifth Third’s business, financial
condition, results of operations or the price of its common stock.
New proposals for legislation and regulations continue to be
introduced that could further substantially increase regulation of the
financial services industry. Fifth Third cannot predict whether any
pending or future legislation will be adopted or the substance and
impact of any such new legislation on Fifth Third. Additional
regulation could affect Fifth Third in a substantial way and could
have an adverse effect on its business, financial condition and
results of operations.
During the third quarter of 2012, the OCC, a national bank
regulatory agency, issued interpretive guidance that requires Chapter
7 non-reaffirmed loans to be accounted for as nonperforming
TDRs and collateral dependent loans regardless of their payment
history and capacity to pay in the future. The Bancorp’s banking
subsidiary is a state chartered bank which therefore is not directly
subject to the guidance of the OCC. At December 31, 2012, the
Bancorp had
totaling
approximately $175 million that could potentially be impacted by
this guidance, of which approximately 87% are current with their
original contractual payments and approximately one third are
already classified as TDRs.
loans with unpaid principal balances
Fifth Third is subject to various regulatory requirements that
may 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
31 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
companies, the FRB, the CFPB, and the Ohio Division of Financial
Institutions have the authority to compel or restrict certain actions
by Fifth Third and its banking subsidiary. Fifth Third and its
banking subsidiary 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 banking subsidiary, entering into a merger or
acquisition transaction, acquiring or establishing new branches, and
entering into certain 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
their risk
that financial
management and prevent future crises.
take steps
institutions
improve
to
In some cases, regulatory agencies may take supervisory actions
that may not be publicly disclosed, which restrict or limit a financial
institution. Finally, as part of Fifth Third’s regular examination
process, Fifth Third’s and its banking subsidiary’s respective
regulators may advise it and its banking subsidiary 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 and may not be publicly disclosed.
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, and interviews of certain of our current and
former officers and employees and others, 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 increase 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. Future
deposit premiums paid by Fifth Third depend on the level of the
DIF and the magnitude and cost of future bank failures. Fifth Third
also may be required to pay significantly higher FDIC premiums
32 Fifth Third Bancorp
because market developments have significantly depleted the DIF
of the FDIC and reduced the ratio of reserves to insured deposits.
Legislative or regulatory compliance, changes or actions or
significant litigation, could adversely impact Fifth Third or the
businesses in which Fifth Third is engaged.
Fifth Third 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 Fifth Third 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 Fifth Third or its ability to increase
the value of its business. Additionally, actions by regulatory agencies
or significant litigation against Fifth Third could cause it to devote
significant time and resources to defending itself and may lead to
penalties that materially affect Fifth Third and its shareholders.
Future changes in the laws, including tax laws, or regulations or
their interpretations or enforcement may also be materially adverse
to Fifth Third and its shareholders or may require Fifth Third 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. Many parts of the Dodd-Frank Act are
now in effect, while others are in an implementation stage likely to
continue for several years. A number of reform provisions are likely
to significantly impact the ways in which banks and bank holding
companies, including Fifth Third and its bank subsidiary, conduct
their business:
The newly created regulatory bodies include the
CFPB and the FSOC. The CFPB has been given
authority to regulate consumer financial products and
services sold by banks and non-bank companies and
to supervise banks with assets of more than $10
billion and their affiliates for compliance with Federal
laws. Any new regulatory
consumer protection
requirements promulgated by
the CFPB could
require changes to our consumer businesses, result in
increased compliance costs and affect the streams of
revenue of such businesses. The FSOC has been
charged with identifying systemic risks, promoting
stronger financial regulation and identifying those
non-bank companies that are systemically important
and thus should be subject to regulation by the
Federal Reserve. In addition, in extraordinary cases
and together with the Federal Reserve, the FSOC
could break up financial firms that are deemed to
present a grave threat to the financial stability of the
United States.
The Dodd-Frank Act “Volcker Rule” provisions
prohibit banks and bank holding companies from
engaging in certain types of proprietary trading. The
scope of the proprietary trading prohibition, and its
impact on Fifth Third, will depend on the definitions
in the final rule, particularly those definitions related
to statutory exemptions for risk-mitigating hedging
customer-related
activities; market-making;
activities.
and
The Volcker Rule and the rulemakings promulgated
thereunder are also expected to restrict banks and
in or
their affiliated entities
investing
from
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
sponsoring certain private equity and hedge funds.
Fifth Third does not sponsor any private equity or
hedge funds that, under the proposed rule, it is
prohibited from sponsoring. As of December 31,
2012, the Bancorp had approximately $163 million in
interests and approximately $108 million binding
commitments to invest in private equity funds likely
to be affected by the Volcker rule. It is expected that
over time the Bancorp may need to eliminate these
investments although it is likely that these amounts
will be reduced over time in the ordinary course
before compliance is required. Under the proposed
rulemaking announced on October 11, 2011, Fifth
Third expects to be able to hold these investments
until July 2014 with no restriction, and be eligible to
obtain up to three one-year extension periods, subject
to regulatory approvals. A forced sale of some of
these
in Fifth Third
receiving less value than it would otherwise have
received. Depending on the provisions of the final
rule, it is possible that other structures through which
Fifth Third conduct business but that are not
typically referred to as private equity or hedge funds
could be restricted, with an impact that cannot be
evaluated.
investments could result
The FDIC and the Federal Reserve have adopted a
final rule that requires bank holding companies that
have $50 billion or more in assets, like Fifth Third, to
periodically submit to the Federal Reserve, the FDIC
and the FSOC a plan discussing how the company
could be resolved in a rapid and orderly fashion if the
company were to fail or experience material financial
distress. In a related rulemaking, the FDIC adopted a
final rule that requires insured depository institutions
with $50 billion or more in assets, like Fifth Third, to
prepare and submit a resolution plan to the FDIC.
The initial plans for Fifth Third and its bank
subsidiary are due December 31, 2013. Fifth Third
and its bank subsidiary will be required to submit
updated plans annually thereafter. The Federal
Reserve and
impose
the FDIC may
restrictions on Fifth Third or its bank subsidiary,
including
or
limitations on growth, if the agencies determine that
the institution’s plan is not credible or would not
facilitate a rapid and orderly resolution of Fifth Third
under the U.S. Bankruptcy Code, or Fifth Third Bank
under
the Federal Deposit Insurance Act, as
amended (the “FDIA”), and additionally could
require Fifth Third to divest assets or take other
actions if it did not submit an acceptable resolution
within two years after any such restrictions were
imposed.
requirements
additional
capital
jointly
Dodd-Frank imposes a new regulatory regime on the
U.S. derivatives markets. While some of
the
provisions related to derivatives markets went into
effect on July 16, 2011, most of the new requirements
await final regulations from the relevant regulatory
agencies for derivatives, the Commodities Futures
Trading Commission (“CFTC”) and the SEC. One
aspect of this new regulatory regime for derivatives is
that substantial oversight responsibility has been
conduct
business
registration with
provided to the CFTC, which, as a result, will for the
first time have a meaningful supervisory role with
respect to some of our businesses. Although the
ultimate impact will depend on the final regulations,
Fifth Third expects that its derivatives business will
likely be subject to new substantive requirements,
including
the CFTC, margin
requirements in excess of current market practice,
capital requirements specific to this business, real
time trade reporting and robust record keeping
requirements,
requirements
(including daily valuations, disclosure of material risks
associated with swaps and disclosure of material
incentives and conflicts of interest), and mandatory
clearing and exchange trading of all standardized
swaps designated by the relevant regulatory agencies
as required to be cleared. These requirements will
collectively
implementation and ongoing
compliance burdens on Fifth Third and will
introduce additional legal risk (including as a result of
newly applicable antifraud and anti-manipulation
provisions and private rights of action). Depending
on the final rules that relate to Fifth Third’s swaps
businesses, the nature and extent of those businesses
may change.
impose
Financial institutions may be required, regardless of
risk, to pay taxes or other fees to the U.S. Treasury.
Such taxes or other fees could be designed to
reimburse
the many
government programs and initiatives it has taken or
may undertake as part of its economic stimulus
efforts.
the U.S. Treasury
for
It is clear that the reforms, both under the Dodd-Frank Act
and otherwise, will have a significant effect on the entire financial
industry. Although it is difficult to predict the magnitude and extent
of these effects at this stage, Fifth Third believes compliance with
the Dodd-Frank Act and its implementing regulations and other
initiatives will likely negatively impact revenue and increase the cost
of doing business, both in terms of transition expenses and on an
ongoing basis, and may also limit Fifth Third’s ability to pursue
certain desirable business opportunities. Any new regulatory
requirements or changes to existing requirements could require
changes to Fifth Third’s businesses, result in increased compliance
costs and affect the profitability of such businesses. Additionally,
reform could affect the behaviors of third parties that we deal with
in the course of our business, such as rating agencies, insurance
companies and investors. The extent to which Fifth Third can
adjust its strategies to offset such adverse impacts also is not known
at this time.
Fifth Third and other financial institutions have been the
subject of 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
33 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
its
operations and/or cause significant reputational harm to
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. The FRB launched the 2013 stress testing program
and CCAR on November 9, 2012. The CCAR requires bank holding
companies to submit a capital plan in addition to their stress testing
results. The mandatory elements of the capital plan are an
assessment of the expected use and sources of capital over the
planning horizon, a description of all planned capital actions over
the planning horizon, a discussion of any expected changes to the
Bancorp’s business plan that are likely to have a material impact on
its capital adequacy or liquidity, a detailed description of the
Bancorp’s process for assessing capital adequacy and the Bancorp’s
capital policy. The stress testing results and capital plan were
submitted to the FRB on January 7, 2013.
The FRB’s review of the capital plan will assess the
comprehensiveness of the capital plan, the reasonableness of the
assumptions and
the capital plan.
the analysis underlying
Additionally, the FRB will review the robustness of the capital
adequacy process, the capital policy and the Bancorp’s ability to
maintain capital above the minimum regulatory capital ratios and
above a Tier 1 common ratio of 5 percent on a pro forma basis
under expected and stressful conditions throughout the planning
horizon. The FRB will also assess the Bancorp’s strategies for
addressing proposed revisions to the regulatory capital framework
agreed upon by the Basel Committee on Banking Supervision and
requirements arising from the Dodd-Frank Act.
34 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 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
of deposit $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 yield 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
noninterest-bearing liabilities, or free funding, such as demand
deposits or shareholders’ equity.
Table 4 presents the components of net interest income, net
interest margin and net interest rate spread for the years ended
December 31, 2012, 2011 and 2010. Nonaccrual loans and leases
and loans held for sale have been included in the average loan and
lease balances. Average outstanding securities balances are based on
amortized cost with any unrealized gains or losses on available-for-
sale securities included in other assets. Table 5 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 years ended
December 31, 2012 and 2011. Included within net interest income
are amounts related to the accretion of discounts on acquired loans
and deposits, primarily as a result of acquisitions in previous years,
which increased net interest income by $31 million during 2012 and
$40 million during 2011. The original purchase accounting discounts
reflected the high discount rates in the market at the time of the
acquisitions; 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 $9 million in additional net interest
income during 2013 as a result of the amortization and accretion of
premiums and discounts on acquired loans and deposits.
For the year ended December 31, 2012, net interest income
was positively impacted by an increase in average loans and leases of
$4.6 billion as well as a decrease in interest expense compared to the
year ended December 31, 2011. In addition, net interest income
benefited from the free funding provided by a $3.8 billion increase
in average demand deposits in 2012 compared to 2011. Average
interest-earning assets increased by $4.0 billion in 2012 while
average interest-bearing liabilities were flat compared to the prior
year. These benefits were offset by lower yields on the Bancorp’s
interest-earning assets. The increase in average loans and leases for
the year ended December 31, 2012 was driven primarily by an
increase of 15% in average commercial and industrial loans and an
increase of 18% in average residential mortgage loans. For more
information on the Bancorp’s loan and lease portfolio, see the
Loans and Leases section of the Balance Sheet analysis of MD&A.
The decrease in interest expense was primarily the result of
decreases in the rates paid on average interest-bearing liabilities of
21 bps, primarily due to lower rates offered on savings account
balances and other time deposits, compared to the year ended
December 31, 2011, coupled with a continued mix shift to lower
cost core deposits. For the year ended December 31, 2012, the net
interest rate spread decreased to 3.35% from 3.42% in 2011 as the
benefit from a decrease in rates on average interest-bearing liabilities
was more than offset by a 28 bps decrease in yield on average
interest-earnings assets.
Net interest margin was 3.55% for the year ended December
31, 2012 compared to 3.66% for the year ended December 31, 2011.
Net interest margin was impacted by the amortization and accretion
of premiums and discounts on acquired loans and deposits that
resulted in an increase in net interest margin of 3 bps during 2012
compared to 5 bps during 2011. Exclusive of these amounts, net
interest margin decreased 9 bps for the year ended December 31,
2012 compared to the prior year driven primarily by the previously
mentioned decline in the yield on average interest-earning assets and
higher average balances on interest-earning assets, partially offset by
a mix shift to lower cost core deposits, the decline in rates paid on
interest-bearing liabilities and an increase in free funding balances.
Interest income from loans and leases decreased $37 million, or
one percent, compared to the year ended December 31, 2011 driven
primarily by a 29 bps decrease in average loans and leases yields
attributable to loan repricing, mainly in the commercial and
industrial loan portfolio as well as in the automobile and residential
mortgage portfolios, partially offset by a six percent increase in
average loans and leases. Interest income from investment securities
and short-term investments decreased $74 million, or 12%, from the
prior year primarily as the result of a 44 bps decrease in the average
yield of taxable securities due to paydowns and the sale of higher
yielding agency mortgage-backed securities coupled with the
reinvestment into lower yielding securities.
Average core deposits increased $3.8 billion, or five percent,
compared to the year ended December 31, 2011 primarily due to an
increase in average interest checking deposits and average demand
deposits partially offset by a decrease in average foreign office
deposits and average other time deposits. The cost of average core
deposits decreased to 21 bps for the year ended December 31, 2012
compared to 36 bps from the prior year. This decrease was primarily
the result of a mix shift to lower cost core deposits as a result of
runoff of higher priced CDs combined with a 64 bps decrease in the
rates paid on average other time deposits and a 14 bps decrease in
the rate paid on average savings deposits compared to year ended
December 31, 2011.
Interest expense on average wholesale funding for the year
ended December 31, 2012 decreased $38 million, or 10%, compared
to the prior year, primarily as the result of a 49 bps decrease in the
rate paid on average certificates $100,000 and over and a $554
million decrease in average certificates $100,000 and over, coupled
with a $1.1 billion decrease in average long-term debt. These
impacts were partially offset by a 16 bps increase in the rate paid on
average long-term debt. Refer to the Borrowings section of MD&A
for additional information on the Bancorp’s changes in average
borrowings. During the year ended December 31, 2012, wholesale
funding represented 24% of interest-bearing liabilities compared to
23% during the prior year. For more information on the Bancorp’s
including estimated earnings
interest rate risk management,
sensitivity to changes in market interest rates, see the Market Risk
Management section of MD&A.
35 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 4: CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
For the years ended December 31
2011
2012
2010
Revenue/
Average
Yield/
Rate
Average Revenue/
Balance
Average
Yield/
Rate
Average
Balance
Revenue/
Cost
Average
Yield/
Rate
$
$
Cost
Cost
Volume
3.45
3.29
0.26
4.06
527
2
4
4,125
15,262
57
1,495
101,636
2,355
15,695
(2,072)
117,614
26,334
11,585
3,066
3,343
44,328
9,868
11,996
10,427
1,870
743
34,904
79,232
28,546
10,447
1,740
3,341
44,074
11,318
11,077
11,352
1,864
529
36,140
80,214
32,911
9,686
835
3,502
46,934
13,370
10,369
11,849
1,960
340
37,888
84,822
4.34 %
3.99
3.06
3.99
4.18
4.45
3.91
4.67
9.86
25.77
4.94
4.52
$ 1,238
476
93
147
1,954
478
479
608
201
116
1,882
3,836
$ 1,240
417
53
133
1,843
503
433
530
184
136
1,786
3,629
$ 1,349
369
25
127
1,870
543
393
439
192
155
1,722
3,592
4.10 % $
3.81
2.99
3.62
3.98
4.06
3.79
3.70
9.79
45.32
4.54
4.23
($ in millions)
Assets
Interest-earning assets:
Loans and leases:(a)
Commercial and industrial loans
Commercial mortgage
Commercial construction
Commercial leases
Subtotal – commercial
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans/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 checking
Savings
Money market
Foreign office deposits
Other time deposits
Certificates - $100,000 and over
Other deposits
Federal funds purchased
Other short-term borrowings
Long-term debt
Total interest-bearing liabilities
Demand deposits
Other liabilities
Total liabilities
Total 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 for the years ended December 31, 2012, 2011 and 2010. The federal statutory rate utilized was 35% for all periods presented.
18,218
19,612
4,808
3,355
10,526
6,083
6
291
1,635
10,902
75,436
19,669
3,580
98,685
13,749
$ 112,434
$
18,707
21,652
5,154
3,490
6,260
3,656
7
345
2,777
10,154
72,202
23,389
4,189
99,780
12,886
$ 112,666
23,096
21,393
4,903
1,528
4,306
3,102
27
560
4,246
9,043
72,204
27,196
4,462
103,862
13,752
117,614
0.22 % $
0.17
0.22
0.27
1.59
1.48
0.13
0.14
0.18
3.17
0.71
16,054
317
3,328
98,931
2,245
14,841
(3,583)
$ 112,434
15,334
103
2,031
97,682
2,352
15,335
(2,703)
$ 112,666
0.26 %
0.31
0.27
0.28
2.23
1.97
0.03
0.11
0.12
3.01
0.92
52
107
19
12
276
125
-
1
3
290
885
49
67
14
10
140
72
-
-
3
306
661
49
37
11
4
68
46
-
1
8
288
512
3.66 %
3.42
73.92
3.55 %
3.35
71.04
650
13
8
4,507
596
6
5
4,236
3.89
5.41
0.25
4.34
$ 3,613
$ 3,575
$ 3,622
$
$
$
$
$
$
$
4.70 %
4.11
3.01
4.40
4.41
4.84
4.00
5.83
10.73
15.58
5.39
4.84
4.05
3.92
0.25
4.56
0.29 %
0.55
0.40
0.35
2.62
2.06
0.13
0.17
0.21
2.65
1.17
3.66 %
3.39
76.25
36 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
$
Total
2012 Compared to 2011
Volume Yield/Rate
180
(30)
(27)
7
130
87
(27)
23
9
(59)
33
163
109
(48)
(28)
(6)
27
40
(40)
(91)
8
19
(64)
(37)
(71)
(18)
(1)
(13)
(103)
(47)
(13)
(114)
(1)
78
(97)
(200)
TABLE 5: CHANGES IN NET INTEREST INCOME ATRRIBUTABLE TO VOLUME AND YIELD/RATE(a)
For the years ended December 31
($ in millions)
Assets
Interest-earning assets:
Loans and leases:
Commercial and industrial loans
Commercial mortgage
Commercial construction
Commercial leases
Subtotal – commercial
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans/leases
Subtotal – consumer
Total loans and leases
Securities:
Taxable
Exempt from income taxes
Other short-term investments
Total interest-earning assets
Total change in interest income
Liabilities and Equity
Interest-bearing liabilities:
Interest checking
Savings
Money market
Foreign office deposits
Other time deposits
Certificates - $100,000 and over
Federal funds purchased
Other short-term borrowings
Long-term debt
Total interest-bearing liabilities
Total change in interest expense
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 dollar amount of change in volume and yield/rate.
-
(30)
(3)
(6)
(72)
(26)
1
5
(18)
(149)
(149)
38
(9)
(30)
(2)
-
(34)
(16)
-
2
16
(73)
(73)
(196)
9
-
(1)
(6)
(38)
(10)
1
3
(34)
(76)
(76)
234
(67)
(2)
-
(269)
(269)
(69)
(4)
(1)
(111)
(111)
(2)
(2)
(1)
158
158
$
$
$
$
$
2011 Compared to 2010
Volume
Yield/Rate
Total
(98)
(14)
2
(14)
(124)
(42)
(12)
(129)
(16)
61
(138)
(262)
(25)
3
-
(284)
(284)
(5)
(51)
(6)
(2)
(37)
(5)
-
(2)
37
(71)
(71)
(213)
2
(59)
(40)
(14)
(111)
25
(46)
(78)
(17)
20
(96)
(207)
(54)
(7)
(3)
(271)
(271)
(3)
(40)
(5)
(2)
(136)
(53)
(1)
-
16
(224)
(224)
(47)
100
(45)
(42)
-
13
67
(34)
51
(1)
(41)
42
55
(29)
(10)
(3)
13
13
2
11
1
-
(99)
(48)
(1)
2
(21)
(153)
(153)
166
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 $303
million in 2012 compared to $423 million in 2011. The decrease in
provision expense for 2012 compared to the prior year was due to
decreases in nonperforming loans and leases, improved delinquency
metrics in commercial and consumer loans and leases, and
improvement in underlying loss trends. The ALLL declined $401
million from $2.3 billion at December 31, 2011 to $1.9 billion at
December 31, 2012. As of December 31, 2012, the ALLL as a
percent of portfolio loans and leases decreased to 2.16%, compared
to 2.78% at December 31, 2011.
Refer to the Credit Risk Management section of the MD&A as
well as Note 6 of the Notes to Consolidated Financial Statements
for more detailed information on the provision for loan and lease
losses,
loan portfolio composition,
nonperforming assets, net charge-offs, and other factors considered
by the Bancorp in assessing the credit quality of the loan and lease
portfolio and the ALLL.
including an analysis of
37 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Income
Noninterest income increased $544 million, or 22%, for the year ended December 31, 2012 compared to the year ended December 31, 2011. The
components of noninterest income are as follows:
TABLE 6: NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Mortgage banking net revenue
Service charges on deposits
Corporate banking revenue
Investment advisory revenue
Card and processing revenue
Gain on sale of the processing business
Other noninterest income
Securities gains (losses), net
Securities gains, net, non-qualifying hedges on mortgage servicing rights
Total noninterest income
$
2012
845
522
413
374
253
-
574
15
3
2011
597
520
350
375
308
-
250
46
9
2010
647
574
364
361
316
-
406
47
14
$
2,999
2,455
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
Mortgage banking net revenue
Mortgage banking net revenue increased $248 million, or 41%, in 2012 compared to 2011. The components of mortgage banking net revenue are
as follows:
TABLE 7: COMPONENTS OF MORTGAGE BANKING NET REVENUE
For the years ended December 31 ($ in millions)
Origination fees and gains on loan sales
Net servicing revenue:
Gross servicing fees
Servicing rights amortization
Net valuation adjustments on servicing rights and free-standing derivatives
entered into to economically hedge MSR
Net servicing revenue
Mortgage banking net revenue
Origination fees and gains on loan sales increased $425 million in
2012 compared to 2011 primarily as the result of a 36% increase in
residential mortgage loan originations coupled with an increase in
profit margins on sold residential mortgage loans. Residential
mortgage loan originations increased to $25.2 billion during 2012
compared to $18.6 billion during 2011. The increase in originations
is primarily due to strong refinancing activity as mortgage rates
remain at historical lows coupled with an increase in refinancing
activity under the HARP 2.0 program.
Net servicing revenue is comprised of gross servicing fees and
related servicing rights amortization as well as valuation adjustments
on MSRs and mark-to-market adjustments on both settled and
outstanding free-standing derivative financial instruments used to
economically hedge the MSR portfolio. Net servicing revenue
decreased $177 million in 2012 compared to 2011 driven primarily
in net valuation adjustments.
by decreases of $142 million
Additionally, servicing rights amortization increased by $51 million
in 2012 compared to 2011 driven by higher prepayments due to
declining market interest rates and increased MSR volume.
The net valuation adjustment loss of $40 million during 2012
included $103 million of temporary impairment on the MSRs
partially offset by $63 million in gains from derivatives economically
hedging the MSRs. Mortgage rates decreased during 2012 compared
to 2011 causing modeled prepayments speeds to increase, which led
to the temporary impairment on the servicing rights for the year
ended 2012. In the second half of 2011 and continuing throughout
2012, the Bancorp utilized a macro hedging strategy for the MSR
portfolio whereby it reduced the amount of hedges and relied on
income from new production to offset declines in the net valuation
of MSRs and the related hedges of the MSR portfolio in the down
rate environment. The net valuation adjustment gain of $102 million
38 Fifth Third Bancorp
2012
821
250
(186)
(40)
24
845
$
$
2011
396
234
(135)
102
201
597
2010
490
221
(137)
73
157
647
during 2011 included $344 million in gains from derivatives
economically hedging the MSRs partially offset by $242 million in
temporary impairment on the MSR portfolio. The gain in the net
valuation adjustment in 2011 was reflective of refinancing activity in
recent years that contributed to prepayments being less sensitive to
lower mortgage rates due to customers taking advantage of lower
rates in earlier periods as well as the impact of tighter underwriting
standards. Additionally, the net MSR/hedge position benefited from
the positive carry of the hedge and the widening spread between
mortgage and swap rates. Gross servicing fees increased $16 million
in 2012 compared to 2011 as a result of an increase in the size of the
Bancorp’s servicing portfolio. The Bancorp’s total residential loans
serviced as of December 31, 2012 and 2011 was $77.3 billion and
$70.6 billion, respectively, with $62.5 billion and $57.1 billion,
respectively, of residential mortgage loans serviced for others.
Servicing rights are deemed impaired when a borrower’s loan
rate is distinctly higher than prevailing rates. Impairment on
servicing rights is reversed when the prevailing rates return to a level
commensurate with the borrower’s loan rate. Further detail on the
valuation of MSRs can be found in Note 11 of the Notes to
Consolidated Financial Statements. The Bancorp maintains a non-
qualifying hedging strategy to manage a portion of the risk
associated with changes in the valuation on the MSR portfolio. See
Note 12 of the Notes to Consolidated Financial Statements for
more
to
economically hedge the MSR portfolio.
the free-standing derivatives used
information on
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. Net gains on
sales of these securities were $3 million and $9 million in 2012 and
2011, respectively, and were recorded in securities gains, net, non-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
qualifying hedges on mortgage servicing rights in the Bancorp’s
Consolidated Statements of Income.
Service charges on deposits
Service charges on deposits increased $2 million in 2012 compared
to 2011. Commercial deposit revenue increased by $20 million in
2012 compared to 2011 due to new customer relationships offset by
an $18 million decrease in consumer deposit revenue primarily due
to the elimination of daily overdraft fees on continuing consumer
overdraft positions which took effect in the second quarter of 2012.
Corporate banking revenue
Corporate banking revenue increased $63 million in 2012 compared
to 2011. The increase from the prior year was primarily the result of
increases
lease
in syndication
remarketing fees and institutional sales.
fees, business
lending
fees,
Investment advisory revenue
Investment advisory revenue decreased $1 million
in 2012
compared to 2011. The decrease was primarily driven by a decline in
mutual fund fees due to the sale of certain FTAM funds during the
third quarter of 2012 which was partially offset by the positive
impact of an overall increase in equity and bond market values. As
of December 31, 2012, the Bancorp had approximately $308 billion
in total assets under care and managed $27 billion in assets for
individuals, corporations and not-for-profit organizations.
Card and processing revenue
Card and processing revenue decreased $55 million in 2012
compared to 2011. The decrease was primarily the result of the
impact of the implementation of the Dodd-Frank Act’s debit card
interchange fee cap in the fourth quarter of 2011 partially offset by
increased debit and credit card transaction volumes, higher levels of
consumer spending, and new products.
Other noninterest income
The major components of other noninterest income are as follows:
TABLE 8: COMPONENTS OF OTHER NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Gain on Vantiv, Inc. IPO and sale of Vantiv, Inc. shares
Net gain from warrant and put options associated with sale of the processing business
Equity method income from interest in Vantiv Holding, LLC
Operating lease income
Cardholder fees
BOLI income
Banking center income
Insurance income
Consumer loan and lease fees
Gain on loan sales
TSA revenue
Loss on swap associated with the sale of Visa, Inc. class B shares
Loss on sale of OREO
Other, net
Total other noninterest income
2012
272
67
61
60
46
35
32
28
27
20
1
(45)
(57)
27
574
$
$
2011
-
39
57
58
41
41
27
28
31
37
21
(83)
(71)
24
250
2010
-
5
26
62
36
194
22
38
32
51
49
(19)
(78)
(12)
406
Other noninterest income increased $324 million in 2012 compared
to 2011 primarily due to an $115 million gain from the Vantiv, Inc.
IPO recognized in the first quarter of 2012 and a $157 million gain
from the sale of Vantiv, Inc. shares in the fourth quarter of 2012.
losses from fair value adjustments on
Compared to 2011,
commercial loans designated as held for sale, recorded in the
“other” caption above, were reduced by $38 million. Additionally,
other noninterest income included a $38 million increase in income
related to the Visa total return swap which had a negative valuation
adjustment of $45 million in 2012 compared with a negative
valuation adjustment of $83 million in 2011. The $61 million in
equity method income from the Bancorp’s interest in Vantiv
Holding, LLC recorded in 2012 was reduced by $34 million in debt
termination charges incurred in connection with the refinancing of
Vantiv Holding, LLC debt which occurred in the first quarter of
2012. The net gain from warrant and put options associated with
the sale of the processing business increased by $28 million and the
loss on the sale of OREO decreased by $14 million in 2012
compared to 2011. These impacts were partially offset by $21
million in lower of cost or market adjustments associated with bank
premises incurred during 2012, recorded in the “other” caption,
along with a $20 million decrease in TSA revenue. As part of the
sale of the processing business, in 2009, the Bancorp entered into a
TSA with the processing business. For additional information on
the valuation of the swap associated with the sale of Visa, Inc. Class
B shares and the valuation of warrants and put options associated
with the sale of the processing business, see Note 26 of the Notes
to Consolidated Financial Statements.
39 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 9: NONINTEREST EXPENSE
For the years ended December 31 ($ in millions)
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Card and processing expense
Equipment expense
Goodwill impairment
Other noninterest expense
Total noninterest expense
Efficiency ratio
Noninterest Expense
Total noninterest expense increased $323 million, or nine percent, in
2012 compared to 2011 primarily due to an increase in total
personnel costs (salaries, wages and incentives plus employee
benefits) and other noninterest expense. Total personnel costs
increased $170 million, or nine percent, in 2012 compared to 2011
due to an increase in base and incentive compensation primarily
The major components of other noninterest expense are as follows:
TABLE 10: COMPONENTS OF OTHER NONINTEREST EXPENSE
For the years ended December 31 ($ in millions)
Losses and adjustments
Loan and lease
Loss (gain) on debt extinguishment
Marketing
FDIC insurance and other taxes
Impairment of affordable housing investments
Professional service fees
Travel
Postal and courier
Operating lease
Data processing
Recruitment and education
OREO expense
Insurance
Supplies
Intangible asset amortization
Provision (benefit) for unfunded commitments and letters of credit
Other, net
$
$
2012
1,607
371
302
196
121
110
-
1,374
4,081
61.7 %
2011
1,478
330
305
188
120
113
-
1,224
3,758
62.3
2010
1,430
314
298
189
108
122
-
1,394
3,855
60.7
2009
1,339
311
308
181
193
123
-
1,371
3,826
46.9
2008
1,337
278
300
191
274
130
965
1,089
4,564
70.4
driven by higher compensation costs as a result of improved
financial performance and production levels, as well as higher
employee benefits expense due to increases in medical costs under
the Bancorp’s self-insured medical plan and an increase in other
employee benefits. Full time equivalent employees totalled 20,798 at
December 31, 2012 compared to 21,334 at December 31, 2011.
$
2012
187
183
169
128
114
90
56
52
48
43
40
28
21
18
17
13
(2)
169
2011
129
195
(8)
115
201
85
58
52
49
41
29
31
34
25
18
22
(46)
194
2010
187
211
17
98
242
100
77
51
48
41
24
31
33
42
24
43
(24)
149
Total other noninterest expense
$
1,374
1,224
1,394
Total other noninterest expense increased $150 million, or 12%, in
2012 compared to 2011 primarily due to increases in the provision
for representation and warranty claims, recorded in losses and
adjustments, a decrease in the benefit from the reserve for unfunded
commitments and letters of credit and an increase in debt
extinguishment losses, partially offset by a decrease in FDIC
insurance and other taxes.
The provision for representation and warranty claims increased
$53 million in 2012 compared to 2011 primarily due to an increase
in the reserve as a result of additional information obtained from
FHLMC regarding future mortgage repurchase and file requests. As
such, the Bancorp was able to better estimate the losses that are
probable on loans sold to FHLMC with representation and warranty
provisions. Debt extinguishment costs increased by $177 million in
2012 compared to 2011. During the third quarter of 2012, the
Bancorp
incurred $26 million of debt extinguishment costs
associated with the redemption of the outstanding TruPS issued by
Fifth Third Capital Trust V and Fifth Third Capital Trust VI. In
addition, during the fourth quarter of 2012 the Bancorp incurred
40 Fifth Third Bancorp
$134 million of debt extinguishment costs associated with the
termination of $1 billion of FHLB debt. FDIC insurance and other
taxes decreased $87 million in 2012 compared to 2011. The decrease
in FDIC insurance and other taxes is primarily attributable to a
decrease in the assessment rate due to changes in the level and
measurement of higher risk assets and improved credit quality
metrics. In addition, the provision for unfunded commitments and
letters of credit was a benefit of $2 million in 2012 compared to a
benefit of $46 million in 2011. The decrease in the benefit recorded
in each period reflects an increase in unfunded commitments for
which the Bancorp holds a reserve partially offset by a decline in
estimated loss rates due to improved credit trends. For additional
redemptions and FHLB debt
information on
termination, see Note 15 of the Notes to Consolidated Financial
Statements.
the TruPS
The Bancorp continues to focus on efficiency initiatives as part
of its core emphasis on operating leverage and expense control. The
efficiency ratio (noninterest expense divided by the sum of net
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
interest income (FTE) and noninterest income) was 61.7% for 2012
Applicable Income Taxes
Applicable income tax expense for all periods includes the benefit
from tax-exempt income, tax-advantaged investments, certain gains
on sales of leveraged leases that are exempt from federal taxation
and tax credits, partially offset by the effect of certain nondeductible
expenses. The tax credits are associated with the Low-Income
Housing Tax Credit program established under Section 42 of the
IRC, the New Markets Tax Credit program established under
Section 45D of the IRC, the Rehabilitation Investment Tax Credit
program established under Section 47 of the IRC, and the Qualified
Zone Academy Bond program established under Section 1397E of
the IRC.
The effective tax rates for the years ended December 31, 2012
and 2011 were primarily impacted by $149 million and $135 million,
respectively, in tax credits and $19 million and $26 million,
respectively, of non-cash charges relating to previously recognized
tax benefits associated with stock-based compensation that will not
be realized.
As required under U.S. GAAP, the Bancorp established a
deferred tax asset for stock-based awards granted to its employees.
When the actual tax deduction for these stock-based awards is less
than the expense previously recognized for financial reporting or
when the awards expire unexercised, the Bancorp is required to
write-off the deferred tax asset previously established for these
stock-based awards. As a result of the expiration of certain stock
options and SARs and the lapse of restrictions on certain shares of
restricted stock during the year ended December 31, 2012, the
Bancorp recorded additional income tax expense of approximately
$19 million related to the write-off of a portion of the deferred tax
asset previously established. As a result of the Bancorp’s stock price
as of December 31, 2012, it is probable that the Bancorp will be
required to record an additional $13 million of income tax expense
during the next twelve months, primarily in the first quarter of 2013.
However, 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 total
compared to 62.3% in 2011.
impact to income tax expense will be greater than or less than this
amount.
the amount of
Deductibility of Executive Compensation
Certain sections of the IRC limit the deductibility of compensation
paid to or earned by certain executive officers of a public company.
This has historically limited the deductibility of certain executive
compensation to $1 million per executive officer, and the Bancorp’s
compensation philosophy has been to position pay to ensure
deductibility. However, both
the executive
compensation that is deductible for certain executive officers and
the allowable compensation vehicles changed as a result of the
Bancorp’s participation in TARP. In particular, the Bancorp was not
permitted to deduct compensation earned by certain executive
officers in excess of $500,000 per executive officer as a result of the
Bancorp’s participation in TARP. Therefore, a portion of the
compensation earned by certain executive officers was not
deductible by the Bancorp for the period in which the Bancorp
participated in TARP. Subsequent to ending its participation in
TARP, certain
limitations on the deductibility of executive
forms of
compensation will continue
compensation earned while under TARP. The Bancorp’s
Compensation Committee determined that the underlying executive
compensation programs are appropriate and necessary to attract,
retain and motivate senior executives, and that failing to meet these
objectives creates more risk for the Bancorp and its value than the
financial impact of losing the tax deduction. For the years ended
December 31, 2012 and 2011, the tax impact related to non-
deductible compensation expense, which is based on the grant date
fair values of the respective awards, was $1 million and $2 million,
respectively. In addition, the IRS limitation prevented the Bancorp
from recognizing a tax benefit of $3 million for the year ended
December 31, 2012 that otherwise would have resulted from the
vesting and/or exercise of certain stock based compensation awards
at fair values in excess of their respective grant date fair values.
to apply
to some
The Bancorp’s income before income taxes, applicable income tax expense and effective tax rate are as follows:
TABLE 11: APPLICABLE INCOME TAXES
For the years ended December 31 ($ in millions)
Income (loss) before income taxes
Applicable income tax expense (benefit)
Effective tax rate
$
2012
2,210
636
28.8 %
2011
1,831
533
29.1
2010
940
187
19.8
2009
767
30
3.9
2008
(2,664)
(551)
20.7
41 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS SEGMENT REVIEW
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 29 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’s
accounting practices are improved or businesses change.
The Bancorp manages interest rate risk centrally at the
corporate level and employs a FTP methodology at the business
segment level. This methodology insulates the business segments
from interest rate volatility, enabling them to focus on serving
customers through loan originations and deposit taking. The FTP
system assigns charge rates and credit rates to classes of assets and
liabilities, respectively, based on expected duration and the U.S.
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
Net income by business segment is summarized in the following table:
Banking and Investment Advisors, on a duration-adjusted basis. The
net impact of the FTP methodology is captured in General
Corporate and Other.
The Bancorp adjusts the FTP charge and credit rates as
dictated by changes in interest rates for various interest-earning
assets and interest-bearing liabilities. The credit rate provided for
demand deposit accounts is reviewed annually based upon the
account type, its estimated duration and the corresponding fed
funds, U.S. swap curve or swap rate. The credit rates for several
deposit products were reset January 1, 2012 to reflect the current
market rates and updated duration assumptions. These rates were
lower than those in place during 2011, thus net interest income for
deposit providing businesses was negatively impacted during 2012.
The business segments are charged provision expense based on
the actual net charge-offs experienced on the loans and leases
owned by each segment. Provision expense attributable to loan and
lease growth and changes in ALLL factors 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.
TABLE 12: BUSINESS SEGMENT NET INCOME 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 & Other
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to Bancorp
Dividends on preferred stock
Net income available to common shareholders
2012
2011
2010
$
$
694
186
223
43
428
1,574
(2)
1,576
35
1,541
441
190
56
24
587
1,298
1
1,297
203
1,094
178
185
(26)
29
387
753
-
753
250
503
42 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Commercial Banking
Commercial Banking offers credit intermediation, 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:
$
2012
2011
2010
1,449
223
1,374
490
TABLE 13: COMMERCIAL BANKING
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income (FTE)(a)
Provision for loan and lease losses
Noninterest income:
Corporate banking revenue
Service charges on deposits
Other noninterest income
Noninterest expense:
Salaries, incentives and benefits
Other noninterest expense
Income before taxes
Applicable income tax expense (benefit)(a)(b)
Net income
Average Balance Sheet Data
Commercial loans, including held for sale
Demand deposits
Interest checking
Savings and money market
Other time and certificates - $100,000 and over
Foreign office deposits and other deposits
(a)
(b) Applicable income tax expense for all periods includes the tax benefit from tax-exempt income and business tax credits, partially offset by the effect of certain nondeductible expenses. Refer to the
Includes FTE adjustments of $17 for the years ended December 31, 2012 and 2011, and, $14 for the year ended December 31, 2010.
38,384
13,130
7,901
2,776
1,778
1,581
38,304
10,872
8,432
2,823
3,014
2,017
41,364
15,046
7,613
2,669
1,793
1,282
214
757
50
(128)
178
268
838
857
163
694
240
833
452
11
441
346
199
90
332
207
102
395
225
117
1,545
1,159
$
$
Applicable Income Taxes section of the MD&A for additional information.
Comparison of 2012 with 2011
Net income was $694 million for the year ended December 31,
2012, compared to net income of $441 million for the year ended
December 31, 2011. The increase in net income was primarily
driven by a decrease in the provision for loan and lease losses and
increases in noninterest income and net interest income, partially
offset by higher noninterest expense.
Net interest income increased $75 million primarily due to an
increase in interest income related to an increase in average
commercial and industrial portfolio loans and a decrease in the FTP
charges on loans, partially offset by a decrease in yields of 12 bps on
average commercial loans. Provision for loan and lease losses
decreased $267 million from 2011 as a result of improved credit
trends. Net charge-offs as a percent of average portfolio loans and
leases decreased to 54 bps for 2012 compared to 128 bps for 2011.
Noninterest income increased $96 million from 2011 to 2012,
due to increases in corporate banking revenue, service charges on
deposits and other noninterest income. The increase in corporate
banking revenue was primarily driven by increases in syndication
fees, business lending fees, lease remarketing fees and institutional
sales. Service charges on deposits increased from 2011 primarily due
to new customer relationships. The increase in other noninterest
income was primarily due to a decrease in net losses and valuation
adjustments recognized on the sale of loans and OREO.
Noninterest expense increased $33 million from the prior year
as a result of increases in salaries, incentives and benefits and other
noninterest expense. The increase in salaries, incentives and benefits
of $28 million was primarily the result of increased base and
incentive compensation due to improved production levels. The
increase from 2011 to 2012 in other noninterest expense was due to
higher corporate overhead allocations as a result of strategic growth
initiatives, partially offset by a decrease in loan and lease expenses
and recognized derivative credit losses.
Average commercial loans increased $3.0 billion compared to
the prior year. Average commercial and industrial loans increased
$4.5 billion from 2011 as a result of an increase in new loan
in average
origination activity, partially offset by decreases
commercial mortgage and construction loans. Average commercial
mortgage loans decreased $827 million and average commercial
construction loans decreased $836 million due to continued run-off
as the level of new originations was below the level of repayments
on the current portfolio.
Average core deposits increased $1.2 billion compared to 2011.
The increase was primarily driven by strong growth in demand
deposit accounts, which increased $1.9 billion compared to the prior
year. The increase in demand deposit accounts was partially offset
by decreases in interest-bearing deposits of $698 million as
customers opted to maintain their balances in more liquid accounts
due to interest rates remaining near historical lows.
Comparison of 2011 with 2010
Net income was $441 million for the year ended December 31,
2011, compared to net income of $178 million for the year ended
December 31, 2010. The increase in net income was primarily
driven by a decrease in the provision for loan and lease losses
partially offset by lower net interest income and higher noninterest
expense.
Net interest income decreased $171 million primarily due to
declines in the FTP credits for demand deposit accounts and
decreases in interest income driven primarily by a decline in yields
of 17 bps on average loans. Provision for loan and lease losses
decreased $669 million. Net charge-offs as a percent of average
43 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
loans and leases decreased to 128 bps for 2011 compared to 302 bps
for 2010 largely due net charge-offs on commercial loans moved to
held for sale during the third quarter of 2010 and the improvement
in credit trends across all commercial loan types.
Noninterest income was relatively flat from 2010 to 2011, as
increases in other noninterest income and service charges on
deposits were offset by a decrease in corporate banking revenue.
Noninterest expense increased $102 million from the prior year
as a result of increases in salaries, incentives and benefits and other
noninterest expense. The increase in salaries, incentives and benefits
of $26 million was primarily the result of increased incentive
compensation due to improved production levels. FDIC insurance
expense, which is recorded in other noninterest expense, increased
Branch Banking
Branch Banking provides a full range of deposit and loan and lease
products to individuals and small businesses through 1,325 full-
service Banking Centers. Branch Banking offers depository and loan
products, such as checking and savings accounts, home equity loans
$14 million due to a change in the methodology in determining
FDIC insurance premiums. The remaining increase in other
noninterest expense was the result of higher corporate overhead
allocations in 2011 compared to 2010.
Average commercial loans were flat compared to the prior year.
Average commercial mortgage loans decreased $1.0 billion and
average commercial construction loans decreased $1.2 billion. The
decreases in average commercial mortgage and construction loans
were offset by growth in average commercial and industrial loans
due to new loan origination activity. Average core deposits increased
$1.2 billion compared to 2010. The increase was primarily driven by
strong growth in demand deposit accounts, partially offset by
decreases in interest-bearing deposits of $1.0 billion.
and lines of credit, credit cards and loans for automobiles and other
personal financing needs, as well as products designed to meet the
specific needs of small businesses, including cash management
services.
The following table contains selected financial data for the Branch Banking segment:
TABLE 14: BRANCH BANKING
For the years ended December 31 ($ in millions)
Income Statement Data
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, including held for sale
Commercial loans, including held for sale
Demand deposits
Interest checking
Savings and money market
Other time and certificates - $100,000 and over
2012
2011
2010
$
1,362
294
1,423
393
1,514
555
294
279
129
110
573
241
115
663
288
102
186
309
305
117
106
581
235
114
645
292
102
190
369
298
106
112
560
223
105
668
288
103
185
14,926
4,569
10,087
9,262
22,729
5,389
14,151
4,621
8,408
8,086
22,241
7,778
13,125
4,815
7,006
7,462
19,963
12,712
$
$
Comparison of 2012 with 2011
Net income decreased $4 million compared to 2011, driven by a
decrease in net interest income and noninterest income and an
increase in noninterest expense, partially offset by a decline in the
provision for loan and lease losses. Net interest income decreased
$61 million compared to the prior year primarily driven by decreases
in the FTP credits for checking and savings products and lower
yields on average commercial and consumer loans. These decreases
were partially offset by higher consumer loan balances and a decline
in interest expense on core deposits due to favorable shifts from
certificates of deposit to lower cost transaction and savings
products.
Provision for loan and lease losses for 2012 decreased $99
million compared to the prior year as a result of improved credit
trends. Net charge-offs as a percent of average portfolio loans and
leases decreased to 151 bps for 2012 compared to 210 bps for 2011.
The decrease is primarily due to decreases in home equity net
44 Fifth Third Bancorp
charge-offs as a result of improvements in several key markets. In
addition, net charge-offs were positively
lower
commercial net charge-offs due to improved delinquency trends,
aggressive line management, and stabilization in unemployment
levels.
impacted by
Noninterest income decreased $25 million compared to the
prior year. The decrease was primarily driven by lower card and
processing revenue, which declined $26 million from 2011 due to
the implementation of the Dodd-Frank Act’s debit card interchange
fee cap in the fourth quarter of 2011, partially offset by higher debit
and credit card transaction volumes and the impact of the Bancorp’s
initial mitigation activity, and allocated commission revenue
associated with merchant sales. Service charges on deposits declined
$15 million primarily due to the elimination of daily overdraft fees
on continuing customer overdraft positions in the second quarter of
2012. These decreases were partially offset by a $12 million increase
in investment advisory revenue due to increased amounts from
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
revenue sharing agreements between investment advisors and
branch banking.
Noninterest expense increased $17 million, primarily driven by
increases in other noninterest expense due to an increase in
allocated costs related to higher merchant sales and corporate
overhead allocations as a result of strategic growth initiatives,
partially offset by a decrease in FDIC insurance expense.
Average consumer loans increased $775 million in 2012
primarily due to increases in average residential mortgage portfolio
loans of $1.3 billion due to the retention of certain shorter-term
originated mortgage loans. The increases in average residential
mortgage portfolio loans was partially offset by decreases in average
home equity portfolio loans of $560 million as payoffs exceeded
new loan production. Average core deposits increased $1.4 billion
compared to the prior year as the growth in transaction accounts
due to excess customer liquidity and historically low interest rates
outpaced the runoff of higher priced other time deposits.
Comparison of 2011 with 2010
Net income increased $5 million compared to 2010, driven by a
decline in the provision for loan and lease losses partially offset by a
decrease in net interest income and noninterest income and an
increase in noninterest expense. Net interest income decreased $91
million compared to the prior year. The primary drivers of the
decline include decreases in the FTP credits for demand deposit
accounts, lower yields on average commercial and consumer loans,
and a decline in average commercial loans. These decreases were
partially offset by a favorable shift in the segment’s deposit mix
towards lower cost transaction deposits resulting in declines in
interest expense of $193 million compared to 2010, and an increase
in average consumer loans.
Provision for loan and lease losses for 2011 decreased $162
million compared to the prior year. Net charge-offs as a percent of
average loans and leases decreased to 210 bps for 2011 compared to
313 bps for 2010. In addition, the decrease is due to $24 million in
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 $48 million compared to the
prior year. The decrease was driven by lower service charges on
deposits primarily due to the implementation of Regulation E in the
third quarter of 2010. The decrease was partially offset by increased
card and processing revenue due to higher debit and credit card
transaction volumes, which was partially offset by the impact of the
implementation of the Dodd-Frank Act’s debit card interchange fee
cap in the fourth quarter of 2011. Investment advisory revenue also
increased due to improved market performance and sales force
expansion.
Noninterest expense increased $19 million, primarily driven by
increases in salaries, incentives and benefits expense and card and
processing expense partially offset by a decline in other noninterest
expense.
loans
Average consumer
increased $1.0 billion
in 2011
primarily due to increases in average residential mortgage portfolio
loans of $1.5 billion due to management’s decision in the third
quarter of 2010 to retain certain mortgage loans. The increases in
average residential mortgage portfolio loans was partially offset by
decreases in average home equity loans of $421 million due to
decreased customer demand and continued tighter underwriting
standards. Average commercial loans decreased $194 million due to
declines in commercial and industrial loans resulting from lower
customer demand for new originations and continued tighter
underwriting standards applied to both originations and renewals.
Average core deposits increased by $120 million compared to
the prior year as the growth in transaction accounts outpaced the
runoff of higher priced certificates of deposit.
Consumer Lending
Consumer Lending includes the Bancorp’s mortgage, home equity,
automobile and other indirect lending activities. Mortgage and home
equity lending activities include the origination, retention and
servicing of mortgage and home equity loans or lines of credit, sales
and securitizations of those loans, pools of loans or lines of credit,
and all associated hedging activities. Indirect lending activities
include
loans to consumers through mortgage brokers and
automobile dealers.
The following table contains selected financial data for the Consumer Lending segment:
TABLE 15: CONSUMER LENDING
For the years ended December 31 ($ 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
Other noninterest expense
Income (loss) before taxes
Applicable income tax expense (benefit)
Net income (loss)
Average Balance Sheet Data
Residential mortgage loans, including held for sale
Home equity
Automobile loans
Consumer leases
$
$
$
2012
2011
2010
314
176
830
46
231
439
344
121
223
343
261
585
45
183
443
86
30
56
405
569
619
51
194
352
(40)
(14)
(26)
10,143
643
11,191
35
9,348
730
10,665
158
9,384
851
9,713
384
45 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of 2012 with 2011
Net income was $223 million in 2012 compared to net income of
$56 million in 2011. The increase was driven by an increase in
noninterest income and a decline in the provision for loan and lease
losses, partially offset by an increase in noninterest expense and a
decrease in net interest income. Net interest income decreased $29
million due to lower yields on average residential mortgage and
automobile loans, partially offset by increases in average residential
mortgage and average automobile loans and favorable decreases in
the FTP charge applied to the segment.
Provision for loan and lease losses decreased $85 million
compared to the prior year as delinquency metrics and underlying
loss trends improved across all consumer loan types. Net charge-
offs as a percent of average loans and leases decreased to 88 bps for
2012 compared to 134 bps for 2011.
Noninterest income increased $246 million primarily due to
increases in mortgage banking net revenue of $245 million driven by
an increase in gains on residential mortgage loan sales of $424
million due to an increase in profit margins on sold loans coupled
with higher origination volumes. This increase was partially offset
by a decrease in net residential mortgage servicing revenue of $178
million, primarily driven by a decrease of $142 million in net
valuation adjustments on MSRs and free-standing derivatives
entered into to economically hedge the MSRs.
Noninterest expense increased $44 million driven by salaries,
incentives and benefits which increased $48 million primarily as a
result of higher mortgage loan originations.
Average consumer loans and leases increased $1.1 billion from
the prior year. Average automobile loans increased $526 million due
to a strategic focus to increase automobile lending throughout 2011
and 2012 through consistent and competitive pricing, disciplined
sales execution, and enhanced customer service with our dealership
network. Average residential mortgage loans increased $795 million
as a result of higher origination volumes. Average home equity loans
decreased $87 million due to continued runoff in the discontinued
brokered home equity product. Average consumer leases decreased
$123 million due to runoff as the Bancorp discontinued this product
in the fourth quarter of 2008.
Comparison of 2011 with 2010
Net income was $56 million in 2011 compared to a net loss of $26
million in 2010. The increase was driven by a decline in the
provision for loan and lease losses, partially offset by decreases in
noninterest income and net interest income and an increase in
noninterest expense. Net interest income decreased $62 million due
to a decline in average loan balances for residential mortgage, home
equity, and consumer leases as well as lower yields on average
residential mortgage and automobile loans, partially offset by
favorable decreases in the FTP charge applied to the segment.
Provision for loan and lease losses decreased $308 million
compared to the prior year, as delinquency metrics and underlying
loss trends improved across all consumer loan types. Additionally,
2010 included charge-offs of $123 million on the sale of $228
million of portfolio loans. Net charge-offs as a percent of average
loans and leases decreased to 134 bps for 2011 compared to 305 bps
for 2010.
Noninterest income decreased $40 million primarily due to
decreases in mortgage banking net revenue of $34 million. The
decrease from 2010 was driven by declines in origination fees and
gains on loan sales of $78 million due to decreased margins and
lower origination volumes, partially offset by an increase in net
servicing revenue of $44 million.
Noninterest expense increased $80 million driven in part by
increased FDIC insurance expense, as the methodology used to
determine FDIC insurance premiums changed in 2011 from one
based on domestic deposits to one based on total assets less tangible
equity. Additional changes were due to an increase of $41 million in
the provision for representation and warranty claims related to
residential mortgage loans sold to third parties and an increase of
$21 million in losses on escrow advances to borrowers relating to
bank owned residential mortgages.
Average consumer loans and leases increased $558 million
from the prior year. Average automobile loans increased $952
million due to a strategic focus to increase automobile lending
throughout 2010 and 2011. This increase was partially offset by
loans. Average
declines across all other types of consumer
residential mortgage loans decreased $36 million as a result of the
lower origination volumes. Average home equity loans decreased
$121 million due to continued runoff in the discontinued brokered
home equity product. Average consumer leases decreased $226
million due to runoff as the Bancorp discontinued this product in
the fourth quarter of 2008.
Investment Advisors
Investment Advisors provides a full range of investment alternatives
for
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. FTAM provides
asset management services and previously advised the Bancorp’s
proprietary family of mutual funds. Fifth Third Private Bank offers
holistic strategies to affluent clients in wealth planning, investing,
insurance and wealth protection. Fifth Third Institutional Services
provides advisory services for institutional clients including states
and municipalities.
As previously mentioned, the Bancorp announced that FTAM
entered into two agreements under which a third party would
acquire assets of 16 mutual funds from FTAM and another third
party would acquire certain assets relating to the management of
Fifth Third money market funds. Both transactions were completed
in the third quarter of 2012. Upon completion of the transactions,
the Bancorp recognized a $13 million gain on sale within other
noninterest income in the Bancorp’s Consolidated Statements of
Income.
46 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table contains selected financial data for the Investment Advisors segment:
TABLE 16: INVESTMENT ADVISORS
For the years ended December 31 ($ 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
Comparison of 2012 with 2011
Net income increased $19 million compared to 2011 primarily due
to an increase in noninterest income and a decrease in the provision
for loan and lease losses, partially offset by an increase in
noninterest expense. Net interest income increased $4 million from
2011 due to a decrease in interest expense on core deposits and
favorable decreases in the FTP charge applied to the segment,
partially offset by a decline in average loan and lease balances and
declines in yields of 27 bps on loans and leases.
Provision for loan and lease losses decreased $17 million from
the prior year. Net charge-offs as a percent of average loans and
leases decreased to 53 bps compared to 132 bps for the prior year
reflecting improved credit trends during 2012.
Noninterest income increased $23 million compared to 2011
primarily due to increases in other noninterest income. The increase
in other noninterest income was primarily driven by the $13 million
gain on the sale of certain funds previously mentioned and an
increase in gains on the sale of loans of $5 million.
Noninterest expense increased $16 million compared to 2011
due to increases in other noninterest expense primarily driven by an
increase in corporate allocations.
Average loans and leases decreased $160 million compared to
the prior year. The decrease was primarily driven by declines in
home equity loans of $55 million, commercial mortgage loans of
$45 million and commercial and industrial loans of $30 million.
Average core deposits increased $911 million compared to 2011 due
to growth in interest checking as customers have opted to maintain
excess funds in liquid transaction accounts as a result of interest
rates remaining near historic lows, partially offset by account
migration from foreign office deposits.
Comparison of 2011 with 2010
Net income decreased $5 million compared to 2010 primarily due to
a decline in net interest income and an increase in noninterest
expense partially offset by a decrease in the provision for loan and
lease losses and an increase in investment advisory revenue. Net
interest income decreased $25 million from 2010 due to a decline in
average loan and lease balances as well as declines in yields on loans
and leases.
Provision for loan and leases losses decreased $17 million from
the prior year. Net charge-offs as a percent of average loans and
leases decreased to 132 bps compared to 171 bps for the prior year
reflecting moderation of general economic conditions during 2011.
Noninterest income increased $17 million compared to 2010
primarily due to increases in investment advisory revenue related to
2012
2011
2010
117
10
366
30
161
276
66
23
43
113
27
364
9
164
257
38
14
24
138
44
346
10
156
249
45
16
29
1,877
7,709
2,037
6,798
2,574
5,897
$
$
$
an increase of $10 million in Private Bank income driven by market
performance and an increase of $7 million in securities and broker
income due to continued expansion of the sales force and market
performance.
Noninterest expense increased $16 million compared to 2010
due to increases in salaries, incentives and benefit expense resulting
from the expansion of the sales force and compensation related to
improved performance in investment advisory revenue related fees.
Average loans and leases decreased $537 million compared to
the prior year. The decrease was primarily driven by declines in
home equity loans of $373 million due to tighter underwriting
standards. Average core deposits increased $901 million compared
to 2010 due to growth in interest checking and foreign deposits.
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 a benefit from the reduction
of the ALLL, representation and warranty expense in excess of
actual losses or a benefit from the reduction of representation and
warranty reserves, the payment of preferred stock dividends and
certain support activities and other items not attributed to the
business segments.
Comparison of 2012 with 2011
Results for 2012 and 2011 were impacted by a benefit of $400
million and $748 million, respectively, due to reductions in the
ALLL. The decrease in provision expense was driven by general
improvements in credit quality and declines in net charge-offs. Net
interest income increased from $321 million in 2011 to $370 million
for 2012 due to a benefit in the FTP rate. The change in net income
compared to the prior year was impacted by a $157 million gain on
the sale of Vantiv, Inc. shares and $115 million in gains on the initial
public offering of Vantiv, Inc. In addition, the results for 2012 were
impacted by dividends on preferred stock of $35 million compared
to $203 million in the prior year.
Comparison of 2011 with 2010
Results for 2011 and 2010 were impacted by a benefit of $748
million and $789 million, respectively, due to reductions in the
ALLL. The decrease in provision expense for both years was due to
a decrease
in
delinquency metrics and underlying loss trends. Net interest income
in nonperforming assets and
improvement
47 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
increased from $16 million in 2010 to $321 million for 2011 due to a
benefit in the FTP rate. The change in net income compared to the
prior year was impacted by a $127 million benefit, net of expenses,
from the settlement of litigation associated with one of the
Bancorp’s BOLI policies that was recorded in the third quarter of
2010. The results for 2011 were impacted by dividends on preferred
stock of $203 million compared to $250 million in the prior year.
2011 results included $153 million in preferred stock dividends as a
result of the accelerated accretion of the remaining issuance
discount on the Series F Preferred Stock that was repaid in the first
quarter of 2011.
48 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOURTH QUARTER REVIEW
The Bancorp’s 2012 fourth quarter net income available to common
shareholders was $390 million, or $0.43 per diluted share, compared
to net income available to common shareholders of $354 million, or
$0.38 per diluted share, for the third quarter of 2012 and net income
available to common shareholders of $305 million, or $0.33 per
diluted share, for the fourth quarter of 2011. Fourth quarter 2012
earnings included a $157 million gain on the sale of Vantiv shares,
$134 million in debt extinguishment costs associated with the
termination of $1.0 billion of FHLB borrowings and $38 million of
mortgage representation and warranty provision expense primarily
due to additional information obtained from FHLMC regarding
future mortgage repurchase and file requests. Third quarter 2012
results included $26 million in debt extinguishment costs associated
with the redemption of certain TruPS, a $16 million negative
adjustment on the valuation of the warrant associated with the
processing business sale, $13 million in gains recognized on the sale
of certain FTAM funds, and charges of $34 million related to the
mortgage representation and warranty reserve. Fourth quarter 2011
earnings included a $54 million charge related to changes in the fair
value of a swap liability that the Bancorp entered into in conjunction
with its sale of Visa, Inc. Class B shares in 2009 and $10 million in
positive valuation adjustments on puts and warrants associated with
the sale of the processing business. The ALLL to loan and lease
ratio was 2.16% as of December 31, 2012, compared to 2.32% as of
September 30, 2012 and 2.78% as of December 31, 2011.
Fourth quarter 2012 net interest income of $903 million
decreased $4 million from the third quarter of 2012 and $17 million
from the same period a year ago. The decrease from the third
quarter of 2012 was driven by a decrease in interest income, partially
offset by a decline in interest expense. Interest income decreased $7
million from the third quarter of 2012 as the benefit of average
loans and leases growth was more than offset by a decline in interest
income attributable to loan repricing, primarily in the commercial
and industrial, auto, and residential mortgage portfolios, as well as
lower reinvestment rates on the securities portfolio. Interest expense
declined $3 million from the third quarter of 2012, driven by higher
demand deposit balances and continued runoff in consumer CD
balances due to the low interest rate environment and their
replacement into lower yielding products. The decline in net interest
income in comparison to the fourth quarter of 2011 was driven by
lower asset yields partially offset by higher average loan balances,
run-off in higher-priced CDs and a mix shift to lower cost deposit
products.
Fourth quarter 2012 noninterest income of $880 million
increased $209 million compared to the third quarter of 2012 and
$330 million compared to the fourth quarter of 2011. The sequential
and year-over-year increases were both driven by a $157 million gain
from the sale of Vantiv shares and higher mortgage banking and
corporate banking revenue. Fourth quarter 2012 noninterest income
included a $19 million negative valuation adjustment on the Vantiv
warrants, compared with a $16 million negative valuation
adjustment in the third quarter of 2012 and a $10 million positive
valuation adjustment on the Vantiv warrant and put instruments in
the fourth quarter of 2011. Fourth quarter 2012 results also included
a $15 million charge related to the valuation of the total return swap
entered into as part of the 2009 sale of Visa, Inc. Class B shares.
Negative valuation adjustments on this swap were $1 million in the
third quarter of 2012 and $54 million in the fourth quarter of 2011.
Third quarter 2012 results also included $13 million in gains
recognized on the sale of certain FTAM funds.
Mortgage banking net revenue was $258 million in the fourth
quarter of 2012, compared to $200 million in the third quarter of
2012 and $156 million in the fourth quarter of 2011. Fourth quarter
2012 originations were $7.0 billion, compared with $5.8 billion in
the previous quarter and $7.1 billion in the fourth quarter of 2011.
Fourth quarter 2012 originations resulted in gains of $239 million
on mortgages sold, reflecting higher mortgage sales revenue partially
offset by lower gain on sale margins. This compares with gains of
$226 million during the third quarter of 2012 and $152 million
during the fourth quarter of 2011. Mortgage servicing fees in the
fourth quarter of 2012 were $64 million, compared with $62 million
in the third quarter of 2012 and $58 million in the fourth quarter of
2011. Mortgage banking net revenue is also affected by net servicing
asset value adjustments, which include MSR amortization and MSR
valuation adjustments. These factors led to a net loss of $45 million
on the net valuation adjustments on MSRs in the fourth quarter of
2012 compared to a net loss of $88 million in the third quarter of
2012 and a net loss of $54 million in the fourth quarter of 2011. Net
losses on nonqualifying hedges on mortgage servicing rights were $2
million and $3 million in the fourth quarter of 2012 and 2011,
respectively, and net gains on nonqualifying hedges on mortgage
servicing rights were $5 million during the third quarter of 2012.
largely due to a seasonal
Service charges on deposits of $134 million increased $6
million sequentially and decreased $2 million compared to the
fourth quarter of 2011. Retail service charges grew 10 percent
sequentially
in consumer
overdrafts as well as the initial benefit of the transition to the
Bancorp’s new and simplified deposit product offerings. Compared
with the fourth quarter of 2011, retail service charges decreased 11
percent primarily due to changes in the Bancorp’s overdraft policies
during 2012. Commercial service charges increased two percent
sequentially and six percent from a year ago primarily as a result of
higher treasury management fees.
increase
Corporate banking revenue of $114 million increased $13
million from the previous quarter and $32 million from the fourth
quarter of 2011. The sequential increase was primarily driven by
higher syndication fees, business lending fees, and derivative fees,
which benefited from accelerated activity in anticipation of changes
to tax rules. The increase from the fourth quarter of 2011 was
primarily driven by increased syndication fees and business lending
fees as a result of the Bancorp’s investments in the capital markets
and treasury management capabilities, which are creating more
opportunities and increased production.
Investment advisory revenue of $93 million increased $1
million sequentially and $3 million from the fourth quarter of 2011.
Sequential and year-over-year increases were driven by higher
private client services and institutional trust fees, which benefited
from improvement in equity and bond market values, partially offset
by lower mutual fund fees largely due to the sale of certain Fifth
Third funds in the third quarter of 2012.
Card and processing revenue of $66 million increased $1
million compared to the third quarter of 2012 and $6 million from
the fourth quarter of 2011. Both increases were driven by higher
transaction volumes and higher levels of consumer spending.
The net gain on investment securities was $2 million in both
the fourth and third quarters of 2012 and a net gain of $5 million in
the fourth quarter of 2011.
Noninterest expense of $1.2 billion increased $157 million
sequentially and increased $170 million from the fourth quarter of
2011. Fourth quarter 2012 expenses included $134 million of debt
extinguishment costs associated with the termination of $1.0 billion
of FHLB debt; $38 million of expenses associated with the
mortgage representation and warranty reserve; and $13 million in
charges to increase litigation reserves. Third quarter 2012 expenses
included $26 million of debt extinguishment costs associated with
the redemption of TruPS and $34 million of expenses associated
with the mortgage representation and warranty reserve. Fourth
quarter 2011 expenses included $14 million in charges to increase
49 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
litigation reserves related to bankcard association membership and
$5 million in other litigation reserve additions.
Net charge-offs as a percent of average loans and leases
decreased to 1.49% during 2011 compared to 3.02% during 2010
largely due to decreases in nonperforming loans and leases,
improved delinquency metrics in commercial and consumer loans
and leases, and improvement in underlying loss trends.
TABLE 17: QUARTERLY INFORMATION (unaudited)
For the three months ended ($ in millions, except per share data)
Net interest income (FTE)
Provision for loan and lease losses
Noninterest income
Noninterest expense
Net income attributable to Bancorp
Net income available to common shareholders
Earnings per share, basic
Earnings per share, diluted
2012
2011
12/31
$903
76
880
1,163
399
390
0.44
0.43
9/30
907
65
671
1,006
363
354
0.39
0.38
6/30
899
71
678
937
385
376
0.41
0.40
3/31
903
91
769
973
430
421
0.46
0.45
12/31
920
55
550
993
314
305
0.33
0.33
9/30
902
87
665
946
381
373
0.41
0.40
6/30
869
113
656
901
337
328
0.36
0.35
3/31
884
168
584
918
265
88
0.10
0.10
largely due net charge-offs on commercial loans moved to held for
sale during the third quarter of 2010 coupled with improved credit
trends across all commercial loan types. In addition, residential
mortgage loan net charge-offs, which typically involve partial
charge-offs based upon appraised values of underlying collateral,
decreased $266 million from 2010 as a result of improvements in
delinquencies and a decrease in the average loss recorded per
charge-off.
The Bancorp took a number of actions that impacted its capital
position in 2011. On January 25, 2011, the Bancorp raised $1.7
billion in new common equity through the issuance of shares of
common stock in an underwritten offering. 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 offerings previously
discussed and a senior debt offering to redeem the Series F
Preferred Stock. On March 16, 2011, the Bancorp repurchased the
warrant issued to the U.S. Treasury under the CPP for $280 million,
which was recorded as a reduction to capital surplus in the
Bancorp’s Consolidated Financial Statements. On March 18, 2011,
the Bancorp announced that the FRB did not object to the
Bancorp’s capital plan submitted under the FRB 2011 CCAR.
Pursuant to this plan, in the second quarter of 2011, the Bancorp
redeemed $452 million of certain trust preferred securities, at par,
classified as long-term debt. As a result of these redemptions the
Bancorp recorded a $6 million gain on the extinguishment within
other noninterest expense in the Consolidated Statements of
Income.
COMPARISON OF THE YEAR ENDED 2011 WITH 2010
Net income available to common shareholders for the year ended
December 31, 2011 was $1.1 billion, or $1.18 per diluted share,
which was net of $203 million in preferred stock dividends. The
Bancorp’s net income available to common shareholders of $503
million, or $0.63 per diluted share, for 2010, was net of $250 million
in preferred stock dividends. The preferred stock dividends in 2011
included $153 million in discount accretion resulting from the
Bancorp’s repurchase of Series F preferred stock. Overall, credit
trends improved in 2011, and as a result, the provision for loan and
lease losses decreased to $423 million in 2011 compared to $1.5
billion in 2010. Noninterest income decreased from 2010, primarily
due to a $152 million litigation settlement related to one of the
Bancorp’s BOLI policies during the third quarter of 2010 and
reduced service charges on deposits and a decrease in mortgage
banking net revenue. Noninterest expense decreased in comparison
to 2010, primarily due to a decrease
in the provision for
representation and warranty claims and a decrease in FDIC expense
and other taxes.
Net interest income was $3.6 billion for the years ended
December 31, 2011 and 2010. Net interest income in 2011
compared to the prior year was impacted by a 22 bps decrease in
average yield on average interest-earning assets offset by a 25 bps
decrease in the average rate paid on interest-bearing liabilities and a
$3.2 billion decrease in average interest-bearing liabilities, coupled
with a mix shift to lower cost deposits.
Noninterest income decreased $274 million, or 10%, in 2011
compared to 2010 primarily as the result of a $152 million litigation
settlement related to one of the Bancorp’s BOLI policies during the
third quarter of 2010, a $54 million decrease in service charges on
deposits primarily due to the impact of Regulation E and a $50
million decrease in mortgage banking net revenue primarily as the
result of a decrease in origination fees and a decrease in gains on
loan sales partially offset by an increase in net servicing revenue.
Noninterest expense decreased $97 million, or three percent, in
2011 compared to 2010 primarily due to a decrease of $59 million in
the provision for representation and warranty claims related to
residential mortgage loans sold to third parties; a decrease of $41
million in FDIC insurance and other taxes, a $22 million decrease
from the change in the provision for unfunded commitments and
intangible asset
letters of credit, a $21 million decrease
amortization and a $19 million decrease in professional service fees.
This activity was partially offset by a $64 million increase in total
personnel costs (salaries, wages and incentives plus employee
benefits).
in
Net charge-offs as a percent of average loans and leases
decreased to 1.49% during 2011 compared to 3.02% during 2010
50 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BALANCE SHEET ANALYSIS
Loans and Leases
The Bancorp classifies its loans and leases based upon the primary
purpose of the loan. Table 18 summarizes end of period loans and
leases, including loans held for sale and Table 19 summarizes
average total loans and leases, including loans held for sale.
TABLE 18: COMPONENTS OF LOANS AND LEASES (INCLUDES HELD FOR SALE)
As of December 31 ($ in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
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 portfolio loans and leases (excludes loans held for sale)
Loans and leases, including loans held for sale, increased $4.7
billion, or six percent, from December 31, 2011. The increase in
loans and leases from December 31, 2011 was the result of a $3.8
billion, or eight percent, increase in commercial loans and a $910
million, or two percent, increase in consumer loans.
The increase in commercial loans and leases from December
31, 2011 was primarily due to an increase in commercial and
industrial loans partially offset by a decrease in commercial
mortgage and commercial construction loans. Commercial and
industrial loans increased $5.2 billion, or 17%, due to targeted
marketing efforts, an increase in new loan origination activity due to
a strengthening economy and strong growth in December from
uncertainty over tax increases and U.S. fiscal policy. Commercial
mortgage loans decreased $1.1 billion, or 11%, from December 31,
2011 and commercial construction loans decreased $330 million, or
32%, from December 31, 2011 due to continued runoff as the level
of new originations was less than the repayments of the current
portfolio.
2012
36,077
9,116
707
3,549
49,449
14,873
10,018
11,972
2,097
312
39,272
88,721
85,782
$
$
2011
2010
2009
2008
30,828
10,214
1,037
3,531
45,610
13,474
10,719
11,827
1,978
364
38,362
83,972
81,018
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
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
The increase in consumer loans and leases from December 31,
2011 was primarily due to an increase in residential mortgage loans,
automobile loans, and credit card loans partially offset by a decrease
in home equity loans. Residential mortgage loans increased $1.4
billion, or 10%, from December 31, 2011 due to management’s
decision to retain certain shorter term residential mortgage loans
originated through the Bancorp’s retail branches throughout 2011
and 2012 and strong originations due to continued refinancing
activity associated with historically low interest rates. Automobile
loans increased $145 million, or one percent, from December 31,
2011 due to strong origination volumes through consistent and
competitive pricing, enhanced customer service with our dealership
network, and disciplined sales execution. Credit card loans increased
$119 million, or six percent, from December 31, 2011 driven by
strong new account originations and modest attrition rates. Home
equity loans decreased $701 million, or seven percent, from
December 31, 2011 as payoffs exceeded new loan production.
TABLE 19: COMPONENTS OF AVERAGE LOANS AND LEASES (INCLUDES HELD FOR SALE)
As of December 31 ($ in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
2012
$
2011
28,546
10,447
1,740
3,341
44,074
32,911
9,686
835
3,502
46,934
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 loans held for sale)
13,370
10,369
11,849
1,960
340
37,888
84,822
82,733
$
$
11,318
11,077
11,352
1,864
529
36,140
80,214
78,533
2010
2009
2008
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
Average commercial loans and leases increased $2.9 billion, or six
percent, compared to December 31, 2011. The increase in average
commercial loans and leases was driven by an increase in average
commercial and industrial loans and commercial leases partially
offset by a decrease in average commercial mortgage loans and
average commercial construction loans. Average commercial and
51 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
industrial loans increased $4.4 billion, or 15%, average commercial
mortgage loans decreased $761 million, or seven percent, and
average commercial construction loans decreased $905 million, or
52%, from December 31, 2011 due to the reasons previously
discussed in the end of period discussion above.
Average consumer loans and leases increased $1.7 billion, or
five percent, compared to December 31, 2011. The increase in
average consumer loans and leases from December 31, 2011 was
driven by an increase in average residential mortgage loans, average
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, 2012, total investment
securities were $15.7 billion compared to $15.9 billion at December
31, 2011. 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, 2012, the Bancorp’s investment portfolio
consisted primarily of AAA-rated available-for-sale securities. The
Bancorp did not hold asset-backed securities backed by subprime
automobile loans, and average credit card loans partially offset by a
decrease in average home equity loans. Average residential mortgage
loans increased $2.1 billion, or 18%, average credit card balances
increased $96 million, or five percent, and average home equity
loans decreased $708 million, or six percent, from December 31,
2011 due to the reasons previously discussed in the end of period
discussion above. Average automobile loans increased $497 million,
or four percent, due to strong originations in the second half of
2011 and throughout 2012.
mortgage loans in its investment portfolio. Additionally, there was
approximately $100 million of securities classified as below
investment grade as of December 31, 2012, compared to $122
million as of December 31, 2011.
The Bancorp’s management has evaluated the securities in an
unrealized loss position in the available-for-sale and held-to-
maturity portfolios for OTTI. During the years ended December
31, 2012, 2011, and 2010, the Bancorp recognized $58 million, $19
million and $3 million of OTTI on its investment securities
portfolio, respectively. The Bancorp did not recognize any OTTI on
any of its held-to-maturity investment securities during the years
ended December 31, 2012, 2011 or 2010.
$
2012
2011
2009
2010
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(a)
Other securities(b)
Total available-for-sale and other securities
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
(a) 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 corporate
225
1,564
170
10,570
1,338
1,052
14,919
464
2,143
240
11,074
2,541
1,417
17,879
171
1,782
96
9,743
1,792
1,030
14,614
186
1,651
323
8,529
613
1,248
12,550
41
1,730
203
8,403
3,161
1,033
14,571
1,140
51
1,191
106
188
294
348
5
353
235
120
355
-
177
177
350
5
355
320
2
322
-
207
207
282
2
284
355
5
360
2008
$
$
$
$
bond securities.
(b) Other securities consist of FHLB and FRB restricted stock holdings that are carried at par, FHLMC and FNMA preferred stock holdings and certain mutual fund holdings and equity security
holdings.
As of December 31, 2012, available-for-sale securities on an
amortized cost basis decreased $43 million from December 31, 2011
due to a decrease in agency mortgage-backed securities and U.S.
Treasury and government agency securities partially offset by an
increase in obligations of states and political subdivision securities
and other bonds, notes, and debentures. Agency mortgage-backed
securities decreased $1.3 billion, or 14%, from December 31, 2011
primarily due to sales of collateralized mortgage obligations and
mortgage-backed securities totaling $2.2 billion which was partially
offset by reinvesting cash flows from securities paydown activity.
The decrease of $130 million, or 76%, in U.S. Treasury and
government agencies securities was due to maturities and the excess
cash was reinvested in obligations of states and political subdivisions
securities which increased $107 million, or 111%, from December
31, 2011. Other bonds, notes, and debentures increased $1.4 billion,
or 76%, due to purchases of commercial mortgage-backed
securities, asset-backed securities, and corporate bonds during the
year partially offset by sales, paydowns, and bonds called during the
year.
At December 31, 2012 and 2011, available-for-sale securities
were 14% of total interest-earning assets. The estimated weighted-
average life of the debt securities in the available-for-sale portfolio
was 3.8 years at December 31, 2012, compared to 3.6 years at
December 31, 2011. In addition, at December 31, 2012, the
available-for-sale securities portfolio had a weighted-average yield of
3.30%, compared to 3.66% at December 31, 2011.
information
Information presented in Table 21 is on a weighted-average life
basis, anticipating future prepayments. Yield
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. Total net unrealized gains on the available-for-sale
securities portfolio were $636 million at December 31, 2012,
compared to $748 million at December 31, 2011. The decrease in
net unrealized gains was driven by the sales of agency mortgage-
backed securities which generated a total realized gain of $67 million
recognized
in the Consolidated Statements of Income. The
remaining decrease in net unrealized gains was due to a decline in
interest rates. The fair value of investment securities is impacted by
52 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
interest rates, credit spreads, market volatility and
conditions. The fair value of
liquidity
investment securities generally
decreases when interest rates increase or when credit spreads widen.
TABLE 21: CHARACTERISTICS OF AVAILABLE-FOR-SALE AND OTHER SECURITIES
Weighted-Average Weighted-Average
$
Yield
Fair Value
40
1
41
40
1
41
Life (in years)
0.5
4.0
3.6
0.4
6.1
0.5
Amortized Cost
206
1,705
1,911
204
1,526
1,730
0.13 %
1.48
0.16
As of December 31, 2012 ($ in millions)
U.S. Treasury and government agencies:
Average life of one year or less
Average life 5 – 10 years
Total
U.S. Government sponsored agencies:
Average life of one year or less
Average life 1 – 5 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
Total
Other bonds, notes and debentures:
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
Total available-for-sale and other securities
(a) Taxable-equivalent yield adjustments included in the above table are 0.03%, 0.01%, 0.40%, 1.79% and 0.34% for securities with an average life of one year or less, 1-5 years, 5-10 years, greater
252
2,135
677
213
3,277
1,036
15,207
245
2,049
659
208
3,161
1,033
14,571
1.46
2.55
2.52
2.35
2.45
0.7
3.4
6.4
14.7
4.6
0.12
1.50
4.37
5.21
3.10
0.8
2.9
6.3
11.3
5.1
495
6,254
1,654
8,403
506
6,529
1,695
8,730
4.44
3.59
3.42
3.60
7
85
102
18
212
7
84
96
16
203
0.7
3.3
5.8
3.6
2.50
3.63
3.50
3.30 %
3.8
$
than 10 years and in total, respectively.
Deposits
The Bancorp’s 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 full relationships and
offering competitive rates. Core deposits represented 71% of the
Bancorp’s asset funding base at December 31, 2012 and 2011.
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
2012
30,023
24,477
19,879
6,875
885
82,139
4,015
86,154
3,284
79
89,517
$
$
2011
27,600
20,392
21,756
4,989
3,250
77,987
4,638
82,625
3,039
46
85,710
2010
21,413
18,560
20,903
5,035
3,721
69,632
7,728
77,360
4,287
1
81,648
2009
19,411
19,935
17,898
4,431
2,454
64,129
12,466
76,595
7,700
10
84,305
2008
15,287
14,222
16,063
4,689
2,144
52,405
14,350
66,755
11,851
7
78,613
Core deposits increased $3.5 billion, or four percent, compared to
December 31, 2011, driven by an increase of $4.2 billion, or five
percent, in transaction deposits, partially offset by a decrease of
$623 million, or 13%, in other time deposits. Transaction deposits
increased due to an increase in demand deposits, interest checking
deposits, and money market deposits partially offset by a decrease in
savings deposits and foreign office deposits. Demand deposits
increased $2.4 billion, or nine percent, from December 31, 2011 due
to an increase in the average balance per account, new product
offerings, and commercial customers opting to hold money in
demand deposit accounts at year-end due to uncertainty over tax
increases and U.S. fiscal policy. Interest checking deposits increased
$4.1 billion, or 20%, from December 31, 2011 due to account
migration from foreign office deposits which decreased $2.4 billion,
or 73%, from December 31, 2011. The remaining increase in
interest checking deposits was due to continued growth from the
preferred checking program which was introduced in early 2011 and
growth from maturing certificates of deposits. Money market
53 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
deposits increased $1.9 billion, or 38%, due to account migration
from savings deposits which decreased $1.9 billion, or nine percent,
from December 31, 2011. Other time deposits decreased primarily
as a result of continued run-off of certificates of deposits due to the
low interest rate environment, as customers have opted to maintain
balances in more liquid transaction accounts.
Included in core deposits are foreign office deposits, which are
the Bancorp’s
sweep accounts
primarily Eurodollar
commercial customers. These accounts bear interest rates at slightly
from
higher than money market accounts and unlike repurchase
agreements the Bancorp does not have to pledge collateral.
The Bancorp uses certificates of deposit $100,000 and over, as
a method to fund earning asset growth. At December 31, 2012,
certificates $100,000 and over increased $245 million, or eight
percent, compared to December 31, 2011 due to the diversification
of funding sources through the issuance of retail and institutional
certificates of deposits in the fourth quarter of 2012.
The following table presents average deposits for the twelve months ending December 31:
TABLE 23: AVERAGE DEPOSITS
As of December 31 ($ 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
2012
27,196
23,096
21,393
4,903
1,528
78,116
4,306
82,422
3,102
27
85,551
$
$
2011
23,389
18,707
21,652
5,154
3,490
72,392
6,260
78,652
3,656
7
82,315
2010
19,669
18,218
19,612
4,808
3,355
65,662
10,526
76,188
6,083
6
82,277
2009
16,862
15,070
16,875
4,320
2,108
55,235
14,103
69,338
10,367
157
79,862
2008
14,017
14,191
16,192
6,127
2,153
52,680
11,135
63,815
9,531
2,067
75,413
On an average basis, core deposits increased $3.8 billion, or five
percent, compared to December 31, 2011 due to an increase of $5.7
billion, or eight percent, in average transaction deposits partially
offset by a decrease of $2.0 billion, or 31%, in average other time
deposits. The increase in average transaction deposits was driven by
an increase in average demand deposits and average interest
checking deposits, partially offset by a decrease in average foreign
office deposits due to the reasons discussed in the end of period
section. The decrease in average other time deposits was due to the
reasons discussed in the end of period discussion.
On an end of period basis, other time deposits and certificates $100,000 and over totaled $7.3 billion and $7.7 billion at December 31, 2012 and
2011, respectively. All of these deposits were interest-bearing.
The contractual maturities of certificates $100,000 and over as of December 31, 2012 are summarized in the following table:
TABLE 24: CONTRACTUAL MATURITIES OF CERTIFICATES $100,000 AND OVER
As of December 31 ($ in millions)
Three months or less
After three months through six months
After six months through 12 months
After 12 months
Total
2012
1,444
230
639
971
3,284
$
$
The contractual maturities of other time deposits and certificates $100,000 and over as of December 31, 2012 are summarized in the following
table:
TABLE 25: CONTRACTUAL MATURITIES OF OTHER TIME DEPOSITS AND CERTIFICATES $100,000 AND OVER
As of December 31 ($ in millions)
Next 12 months
13-24 months
25-36 months
37-48 months
49-60 months
After 60 months
Total
2012
4,834
1,464
565
231
152
53
7,299
$
$
Borrowings
Total borrowings increased $1.0 billion, or eight percent, from
December 31, 2011 due to an increase in other short-term
borrowings and federal funds purchased, partially offset by a
decrease in long-term debt. Total borrowings as a percentage of
interest-bearing liabilities were 19% at both December 31, 2012 and
2011.
54 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 26: BORROWINGS
As of December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total borrowings
2012
901
6,280
7,085
14,266
2011
346
3,239
9,682
13,267
2010
279
1,574
9,558
11,411
2009
182
1,415
10,507
12,104
2008
287
9,959
13,585
23,831
$
$
Federal funds purchased increased by $555 million, or 160%, from
December 31, 2011 driven by an increase in 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
increased $3.0 billion, or 94%, from
December 31, 2011 driven by an increase of $3.2 billion in short-
term FHLB borrowings offset by a decrease of $132 million in
securities sold under repurchase agreements which are accounted
for as collateralized financing transactions. The level of these
borrowings can fluctuate significantly from period to period
depending on funding needs and which sources are used to satisfy
those needs. Long-term debt decreased $2.6 billion, or 27%, from
December 31, 2011 driven by the redemption of $1.4 billion of
TruPS during the third quarter of 2012 and the extinguishment of
$1.0 billion of long-term FHLB advances during the fourth quarter
of 2012.
2012
560
4,246
9,043
13,849
$
$
2011
345
2,777
10,154
13,276
2010
2009
2008
291
1,635
10,902
12,828
517
6,463
11,035
18,015
2,975
7,785
13,903
24,663
TABLE 27: AVERAGE BORROWINGS
As of December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total average borrowings
Average total borrowings increased $573 million, or four percent,
compared to December 31, 2011, primarily due to an increase in
average federal funds purchased and other short-term borrowings,
partially offset by a decrease in average long-term debt. Average
federal funds purchased increased $215 million, or 62%, primarily
due to an increase in excess balances in reserve accounts held at
Federal Reserve Banks that the Bancorp purchased from other
member banks on an overnight basis. Average other short-term
borrowings increased $1.5 billion, or 53%, primarily due to the
previously mentioned increase in short-term FHLB borrowings.
Average long-term debt decreased $1.1 billion, or 11%, primarily
due to the previously mentioned extinguishment of $1.0 billion in
long-term FHLB borrowings and the redemption of $1.4 billion of
certain TruPS during the year ended December 31, 2012.
Information on the average rates paid on borrowings is
discussed in the net interest income section of the MD&A. In
addition, refer to the Liquidity Risk Management section for a
discussion on the role of borrowings in the Bancorp’s liquidity
management.
55 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISK MANAGEMENT
Managing risk is an essential component of successfully operating a
financial services company. The Bancorp’s risk management
approach includes processes for identifying, assessing, managing,
monitoring and reporting risks. The ERM division, led by the
Bancorp’s Chief Risk Officer, and the Bancorp Credit division, led
by the Bancorp’s Chief Credit Officer, ensure 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.
an
that
comprise
integrated
The assumption of risk requires robust and active risk
management practices
and
comprehensive set of activities, measures and strategies that apply to
the entire organization. The Bancorp has established a Risk Appetite
Framework that provides the foundations of corporate risk capacity,
risk appetite and risk tolerances. The Bancorp’s risk capacity is
represented by its available financial resources. Risk capacity sets an
absolute limit on risk-assumption in the Bancorp’s annual and
strategic plans. The Bancorp understands that not all financial
resources may persist as viable loss buffers over time. Further,
consideration must be given to planned or foreseeable events that
would reduce risk capacity. Those factors take the form of capacity
adjustments to arrive at an Operating Risk Capacity which
represents the operating risk level the Bancorp can assume while
maintaining its solvency standard. The Bancorp’s policy currently
discounts its Operating Risk Capacity by a minimum of five percent
to provide a buffer; as a result, the Bancorp’s risk appetite is limited
by policy to, at most, 95% of its Operating Risk Capacity.
Economic capital is the amount of unencumbered financial
resources required 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 Operating Risk
Capacity less the aforementioned buffer exceed the calculated
economic capital required in its business.
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 which includes the following key
functions:
• 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 continual
fostering of a strong risk management culture and the
framework, policies and committees that support effective
risk governance, including the oversight of Sarbanes-Oxley
compliance;
• Commercial Credit Risk Management provides safety and
soundness within an independent portfolio management
56 Fifth Third Bancorp
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 rating methodology, ALLL methodology and analytics
needed to assess credit risk and develop mitigation
strategies related to that risk. The department also provides
oversight, reporting and monitoring of commercial
underwriting and credit administration processes. The Risk
Strategies and Reporting department is also responsible for
the economic capital program;
• Consumer Credit Risk Management provides safety and
soundness within an independent management framework
that supports the Bancorp’s consumer
loan growth
strategies, ensuring portfolio optimization, appropriate risk
controls and oversight, reporting, and monitoring of
underwriting and credit administration processes;
• 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;
• Bank Protection oversees and manages 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
and state banking regulations, including processes related
to fiduciary, community reinvestment act and fair lending
compliance. The function also has the responsibility for
maintenance of an enterprise-wide compliance framework;
and
• The ERM division creates and maintains other functions,
committees or processes as are necessary to effectively
manage risk throughout the Bancorp.
Risk management oversight and governance is provided by the
Risk and Compliance Committee of the Board of Directors and
through multiple management 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 Board of Directors has approved
the formation of key management governance committees that are
responsible for evaluating risks and controls. The primary
committee responsible for the oversight of risk management is the
ERMC. Committees accountable to the ERMC, which support the
core risk programs, are the Corporate Credit Committee, the
Operational Risk Committee,
the Management Compliance
Committee, the Asset/Liability 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
launching a new product or initiative. Significant risk policies
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
approved by the management governance committees are also
reviewed and approved by the Risk and Compliance Committee of
the Board of Directors.
Credit Risk Review is an independent function responsible for
evaluating the sufficiency of underwriting, documentation and
approval processes for consumer and commercial credits; the
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
include
conservative exposure and counterparty limits and conservative
standards. The
underwriting, documentation and collection
Bancorp's credit risk management strategy also emphasizes
diversification on a geographic, industry and customer level as well
as regular credit examinations and timely management reviews of
large credit exposures and credits experiencing deterioration of
credit quality. Credit officers with the authority to extend credit are
delegated specific authority amounts, the utilization of which is
closely monitored. Underwriting activities are centrally managed,
lending practices. These practices
accuracy of risk grades assigned to commercial credit exposure;
nonaccrual status; specific reserves and monitoring of charge-offs.
Credit Risk Review reports directly to the Risk and Compliance
Committee of the Board of Directors and administratively to the
Chief Auditor.
and ERM manages the policy and the authority delegation process
directly. The Credit Risk Review function 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. The Bancorp defines potential problem
loans as those rated substandard that do not meet the definition of a
nonperforming asset or a restructured loan. See Note 6 of the
Notes to the Consolidated Financial Statements for further
information on the Bancorp’s credit grade categories, which are
derived from standard regulatory rating definitions.
The following tables provide a summary of potential problem loans as of December 31:
TABLE 28: POTENTIAL PROBLEM LOANS
As of December 31, 2012 ($ in millions)
Commercial and industrial
Commercial mortgage
Commercial construction
Commercial leases
Total
TABLE 29: POTENTIAL PROBLEM LOANS
As of December 31, 2011 ($ in millions)
Commercial and industrial
Commercial mortgage
Commercial construction
Commercial leases
Total
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 for credit approval and pricing, portfolio
monitoring and capital allocation that includes a “through-the-cycle”
rating philosophy for modeling expected losses. The dual risk rating
system includes 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-category risk rating system.
The Bancorp has completed significant validation and testing of the
dual risk rating system as a commercial credit risk management tool.
The Bancorp is assessing the necessary modifications to the dual
risk rating system outputs to develop a GAAP compliant ALLL
Carrying
Value
1,015
848
87
9
1,959
Carrying
Value
1,376
1,215
239
33
2,863
$
$
$
$
Unpaid
Principal
Balance
1,017
849
87
9
1,962
Unpaid
Principal
Balance
1,376
1,216
240
33
2,865
Exposure
1,212
851
100
9
2,172
Exposure
1,744
1,223
258
33
3,258
model and will make a decision on the use of modified dual risk
ratings for purposes of determining the Bancorp’s ALLL once the
FASB has issued a final standard regarding proposed methodology
changes to the determination of credit impairment as outlined in the
FASB’s proposed Accounting
Standard Update—Financial
Instruments–Credit Losses (Subtopic 825-15) issued on December 20,
2012. 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.
57 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
General economic conditions showed only modest improvement in
2011 and 2012 as the economic recovery struggled to gain any
significant momentum. Uncertainty in terms of finding long term
solutions for federal government deficit spending continues to
weigh on the economy. 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
the state’s economic downturn. Among
manufacturing and
commercial portfolios, the homebuilder, residential developer and
portions of the remaining non-owner occupied commercial real
estate portfolios continue to remain under stress.
Among consumer portfolios,
residential mortgage and
brokered home equity portfolios exhibited the most stress.
Management suspended homebuilder and developer lending in 2007
and new commercial non-owner occupied real estate lending in
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.
With the stabilization of certain real estate markets, the Bank began
to selectively originate new homebuilder and developer lending and
non-owner occupied commercial lending real estate in the third
quarter of 2011. However, the level of new originations is below the
amortization and pay-off of the current portfolio. 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 2011 and 2012, 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. For commercial and consumer loans owned by the Bancorp,
loan modification strategies are developed that are workable for
both the borrower and the Bancorp when the borrower displays a
willingness to cooperate. These strategies typically involve either a
reduction of the stated interest rate of the loan, an extension of the
loan’s maturity date(s) with a stated rate lower than the current
market rate for a new loan with similar risk, or in limited
circumstances, a reduction of the principal balance of the loan or
the loan’s accrued interest. For residential mortgage loans serviced
for FHLMC and FNMA, the Bancorp participates in the HAMP
and HARP 2.0 programs. For loans refinanced under the HARP 2.0
program,
the underwriting
requirements of the program and promptly sells the refinanced loan
back to the agencies. Loan restructuring under the HAMP program
is performed on behalf of FHLMC or FNMA and the Bancorp does
not take possession of these loans during the modification process.
Therefore, participation in these programs does not significantly
impact the Bancorp’s credit quality statistics. The Bancorp
participates in trial modifications in conjunction with the HAMP
program for loans it services for FHLMC and FNMA. As these trial
modifications relate to loans serviced for others, they are not
included in the Bancorp’s troubled debt restructurings as they are
not assets of the Bancorp. In the event there is a representation and
warranty violation on loans sold through the programs, the Bancorp
may be required to repurchase the sold loan. As of December 31,
2012, repurchased loans restructured or refinanced under these
programs were immaterial to the Bancorp’s Consolidated Financial
Statements. Additionally, as of December 31, 2012, $475 million of
loans refinanced under HARP 2.0 were included in loans held for
the Bancorp strictly adheres
to
58 Fifth Third Bancorp
sale in the Bancorp’s Consolidated Balance Sheets. For the year
ended December 31, 2012 the Bancorp recognized $218 million of
fee income in mortgage banking net revenue in the Bancorp’s
Consolidated Statements of Income related to the sale of loans
restructured or refinanced under the HAMP and HARP 2.0
programs.
In the financial services industry, there has been heightened
focus on foreclosure activity and processes. The Bancorp actively
works with borrowers experiencing difficulties and has regularly
modified or provided forbearance to borrowers 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 is careful to ensure that customer and
loan data are accurate. Reviews of the Bancorp’s foreclosure process
and procedures conducted in 2010 did not reveal any material
deficiencies. These reviews were expanded and extended in 2011 to
improve the Bancorp’s processes as additional aspects of the
industry's foreclosure practices have come under intensified scrutiny
and criticism. These reviews are complete and the Bancorp has
enhanced some of its processes and procedures to address some
concerns that were raised and to comply with changes in state laws.
Commercial Portfolio
The Bancorp’s credit risk management strategy includes minimizing
concentrations of risk through diversification. The Bancorp has
commercial loan concentration limits based on industry, lines of
business within the commercial segment, geography and credit
product type.
loan
The risk within the commercial loan and lease portfolio is
managed and monitored through an underwriting process utilizing
level reviews,
detailed origination policies, continuous
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 and non-owner occupied and construction
lending. Included in the policies are maturity and amortization
terms, maximum LTVs, 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 a valuation of
real estate collateral, which may include third-party appraisals, be
performed at the time of origination and renewal in accordance with
regulatory requirements and on an as needed basis when market
conditions justify. Although the Bancorp does not back test these
collateral value assumptions, the Bancorp maintains an appraisal
review department to order and review third-party appraisals in
accordance with regulatory requirements. Collateral values on
criticized assets with relationships exceeding $1 million are reviewed
quarterly to assess the appropriateness of the value ascribed in the
assessment of charge-offs and specific reserves. In addition, the
Bancorp applies incremental valuation haircuts to older appraisals
that relate to collateral dependent loans, which can currently be up
to 25-40% of the appraised value based on the type of collateral.
These incremental valuation haircuts generally reflect the age of the
most recent appraisal as well as collateral type. Trends in collateral
values, such as home price indices and recent asset dispositions, are
monitored in order to determine whether adjustments to the
appraisal haircuts are warranted. Other factors such as local market
conditions or location may also be considered as necessary.
The Bancorp assesses all real estate and non-real estate
collateral securing a loan and considers all cross collateralized loans
in the calculation of the LTV ratio. The following table provides
detail on the most recent LTV ratios for commercial mortgage loans
greater than $1 million, excluding impaired commercial mortgage
loans individually evaluated. The Bancorp does not typically
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
aggregate the LTV ratios for commercial mortgage loans less than
$1 million.
TABLE 30: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION
As of December 31, 2012 ($ in millions)
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Total
LTV > 100% LTV 80-100% LTV ≤ 80%
2,325
1,955
4,280
390
450
840
302
605
907
$
$
TABLE 31: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION
As of December 31, 2011($ in millions)
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Total
LTV > 100% LTV 80-100% LTV ≤ 80%
2,353
2,164
4,517
528
684
1,212
419
734
1,153
$
$
The following table provides detail on commercial loan and leases by 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 32: COMMERCIAL LOAN AND LEASE PORTFOLIO (EXCLUDING LOANS HELD FOR SALE)
As of December 31 ($ in millions)
By industry:
Manufacturing
Real estate
Financial services and insurance
Business services
Healthcare
Wholesale trade
Transportation and warehousing
Retail trade
Construction
Mining
Communication and information
Accommodation and food
Other services
Entertainment and recreation
Utilities
Public administration
Agribusiness
Individuals
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
2012
Exposure
Nonaccrual
Outstanding
2011
Exposure
Nonaccrual
$
$
9,982
5,588
4,886
4,600
4,079
4,042
3,105
2,624
1,995
1,683
1,547
1,478
1,156
914
608
441
376
281
3
49,388
2 %
6
15
11
27
39
100 %
20 %
11
8
7
5
4
3
3
3
36
100 %
18,414
6,840
12,062
6,917
6,094
7,401
4,222
5,699
3,254
2,767
2,631
2,160
1,517
1,393
2,009
693
527
335
2
84,937
1
5
12
9
25
48
100
24
10
8
6
5
3
3
3
2
36
100
$
58
198
54
56
14
26
3
38
105
-
19
17
42
11
-
-
44
12
-
697 $
9
22
28
13
24
4
100
13
17
8
19
11
4
2
5
1
20
100
9,020
6,274
4,596
3,898
3,477
3,656
2,304
2,639
2,226
1,157
1,128
1,127
998
874
564
644
425
460
5
45,472
2 %
8
18
12
28
32
100 %
24 %
13
7
8
5
4
3
3
2
31
100 %
17,065
7,060
9,975
5,976
5,179
6,796
3,152
5,548
3,470
1,994
2,117
1,636
1,503
1,228
1,752
886
564
512
5
76,418
2
6
15
10
25
42
100
27
11
8
6
5
4
3
3
2
31
100
116
299
46
78
15
50
16
56
199
7
3
22
48
18
-
-
65
20
-
1,058
7
23
32
15
19
4
100
16
22
10
17
10
4
4
2
1
14
100
59 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Bancorp has identified certain categories of loans which it
believes represent a higher level of risk compared to the rest of the
Bancorp’s loan portfolio, due to economic or market conditions
within the Bancorp’s key lending areas.
The following table provides analysis of each of the categories of loans (excluding loans held for sale) by state as of December 31, 2012 and 2011:
TABLE 33: NON-OWNER OCCUPIED COMMERCIAL REAL ESTATE(a)
As of December 31, 2012 ($ in millions)
By State:
Ohio
Michigan
Florida
Illinois
Indiana
North Carolina
All other states
Total
(a)
By State:
Ohio
Michigan
Florida
Illinois
Indiana
North Carolina
All other states
Total
(a)
Included in commercial mortgage and commercial construction loans on the Consolidated Balance Sheets.
TABLE 34: NON-OWNER OCCUPIED COMMERCIAL REAL ESTATE(a)
As of December 31, 2011 ($ in millions)
Outstanding
1,236
1,098
596
430
283
205
972
4,820
$
$
Exposure
1,351
1,123
632
481
303
228
1,250
5,368
Outstanding
1,958
1,443
713
417
312
302
586
5,731
$
$
Exposure
2,125
1,476
740
499
316
332
650
6,138
90 Days
Past Due
-
-
-
-
-
-
-
-
90 Days
Past Due
1
1
-
1
-
-
-
3
For the Year Ended
December 31, 2012
Nonaccrual
Net Charge-offs
39
49
42
21
14
12
33
210
19
32
20
11
2
6
(3)
87
For the Year Ended
December 31, 2011
Nonaccrual
Net Charge-offs
88
77
72
44
13
33
35
362
64
39
44
31
6
13
14
211
For the Year Ended
December 31, 2012
Included in commercial mortgage and commercial construction loans on the Consolidated Balance Sheets.
TABLE 35: HOMEBUILDER AND DEVELOPER(a)
As of December 31, 2012 ($ in millions)
Outstanding
By State:
7
133
Ohio
7
52
Michigan
10
32
Florida
1
24
North Carolina
-
18
Indiana
3
28
Illinois
-
31
All other states
Total
28
318
(a) Homebuilder and Developer loans, exclusive of commercial and industrial loans with an outstanding balance of $73 and a total exposure of $132 are also included in Table 33: Non-Owner
Exposure
199
60
59
34
21
31
35
439
11
6
3
4
8
8
2
42
-
-
-
-
-
-
-
-
Net Charge-offs
Nonaccrual
$
$
90 Days
Past Due
Occupied Commercial Real Estate.
60 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 36: HOMEBUILDER AND DEVELOPER(a)
As of December 31, 2011 ($ in millions)
For the Year Ended
December 31, 2011
Outstanding
By State:
22
166
Ohio
7
108
Michigan
12
64
Florida
7
50
North Carolina
3
51
Indiana
4
16
Illinois
1
57
All other states
Total
56
512
(a) Homebuilder and Developer loans, exclusive of commercial and industrial loans with an outstanding balance of $136 and a total exposure of $222 are also included in Table 34: Non-Owner
234
128
73
56
56
27
69
643
15
8
27
13
10
9
14
96
-
-
-
-
-
-
-
-
Net Charge-offs
Nonaccrual
Exposure
$
$
90 Days
Past Due
Occupied Commercial Real Estate.
61 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consumer Portfolio
The Bancorp’s consumer portfolio is materially comprised of three
loans: residential mortgage, home equity, and
categories of
automobile. 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. The Bancorp does not update LTV
ratios for the consumer portfolio subsequent to origination except
as part of the charge-off process for real estate secured loans.
Residential Mortgage Portfolio
The Bancorp manages credit risk in the residential mortgage
portfolio through conservative underwriting and documentation
standards and geographic and product diversification. The Bancorp
may also package and sell loans in the portfolio.
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 $1.1 billion of adjustable rate residential mortgage
loans will have rate resets during the next twelve months, with less
than one percent of those resets expected to experience an increase
in monthly payments in comparison to the monthly payment at the
time of origination.
Certain residential mortgage products have contractual features
that may increase credit exposure to the Bancorp in the event of a
decline in housing values. These types of mortgage products offered
by the Bancorp include loans with high LTV ratios, multiple loans
on the same collateral that when combined result in an LTV greater
than 80% and interest-only loans. The Bancorp monitors residential
mortgage loans with greater than 80% LTV ratios and no mortgage
insurance as it believes these loans represent a higher level of risk.
The following table provides an analysis of the residential mortgage portfolio loans outstanding, excluding held for sale, by LTV at origination:
TABLE 37: RESIDENTIAL MORTGAGE PORTFOLIO LOANS BY LTV AT ORIGINATION
2012
2011
As of December 31 ($ in millions)
LTV ≤ 80%
LTV > 80%, with mortgage insurance
LTV > 80%, no mortgage insurance
Total
Outstanding
Weighted
Average LTV
Outstanding
Weighted
Average LTV
$
$
8,993
1,165
1,859
12,017
65.8 % $
93.6
95.6
73.1 % $
7,876
1,030
1,766
10,672
66.6 %
92.7
95.6
73.9 %
The following tables provide analysis of the residential mortgage portfolio loans outstanding, excluding held for sale, with a greater than 80% LTV
ratio and no mortgage insurance as of December 31, 2012 and 2011:
TABLE 38: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
As of December 31, 2012 ($ in millions)
By State:
Ohio
Michigan
Florida
North Carolina
Indiana
Illinois
Kentucky
All other states
Total
For the Year Ended
December 31, 2012
90 Days
Past Due Nonaccrual
Net Charge-offs
4
1
-
1
1
1
1
-
9
24
10
17
5
5
5
2
5
73
13
10
15
3
2
3
1
5
52
Outstanding
$
600
310
262
111
115
193
89
179
$
1,859
62 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 39: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
As of December 31, 2011 ($ in millions)
By State:
Ohio
Michigan
Florida
North Carolina
Indiana
Illinois
Kentucky
All other states
Total
Home Equity Portfolio
The Bancorp’s home equity portfolio is primarily comprised of
home equity lines of credit. The home equity line of credit offered
by the Bancorp is a revolving facility with a 20-year term, minimum
payments of interest only and a balloon payment of principal at
maturity.
The ALLL provides coverage for probable and estimable losses
in the home equity portfolio. The allowance attributable to the
portion of the home equity portfolio that has not been restructured
in a TDR is calculated on a pooled basis with first lien and junior-
lien categories segmented in the determination of the probable
credit losses in the home equity portfolio. The modeled loss factor
for the home equity portfolio is based on the trailing twelve month
historical loss rate for each category, as adjusted for certain
prescriptive loss rate factors and certain qualitative adjustment
factors to reflect risks associated with current conditions and trends.
The prescriptive
for
delinquency trends, LTV trends, refreshed FICO score trends and
product mix. The qualitative factors include adjustments for credit
administration and portfolio management, credit policy and
underwriting and the national and local economy. The Bancorp
considers home price index trends when determining the national
and local economy qualitative factor.
include adjustments
loss rate
factors
The home equity portfolio is managed in two primary groups:
loans outstanding with a LTV greater than 80% and those loans
with a LTV 80% or less based upon appraisals at origination. The
carrying value of the greater than 80% LTV home equity loans and
80% or less LTV home equity loans were $3.7 billion and $6.3
For the Year Ended
December 31, 2011
90 Days
Past Due Nonaccrual
Net Charge-offs
6
1
2
-
1
1
1
1
13
25
14
27
4
4
3
3
5
85
15
13
29
7
2
2
1
7
76
Outstanding
$
600
305
283
123
111
122
84
138
1,766
$
billion, respectively, as of December 31, 2012. Of the total $10.0
billion of outstanding home equity loans:
82% reside within the Bancorp’s Midwest footprint of
Ohio, Michigan, Kentucky, Indiana and Illinois;
32% are in first lien positions and 68% are in second lien
positions at December 31, 2012;
For approximately 1/3 of the home equity portfolio in a
second lien position, the first lien is either owned or
serviced by the Bancorp;
Over 80% of non-delinquent borrowers made at least one
payment greater than the minimum payment during the
year ended December 31, 2012; and
The portfolio had an average refreshed FICO score of 735
and 734 at December 31, 2012 and 2011, respectively.
The Bancorp actively manages lines of credit and makes
reductions in lending limits when it believes it is necessary based on
FICO score deterioration and property devaluation. The Bancorp
does not routinely obtain appraisals on performing loans to update
LTV ratios after origination. However, the Bancorp monitors the
local housing markets by reviewing various home price indices and
incorporates the impact of the changing market conditions in its on-
going credit monitoring processes. For second lien home equity
loans, the Bancorp is unable to track the performance of the first
lien loans if it does not service the first lien loan, but instead
monitors the refreshed FICO scores as part of its assessment of the
home equity portfolio.
The following table provides an analysis of home equity loans outstanding disaggregated based upon refreshed FICO score:
TABLE 40: HOME EQUITY LOANS OUTSTANDING BY REFRESHED FICO SCORE
($ in millions)
First Liens:
FICO < 620
FICO 621-719
FICO > 720
Total First Liens
Second Liens:
FICO < 620
FICO 621-719
FICO > 720
Total Second Liens
Total
December 31,
2012
% of
Total
December 31,
2011
% of
Total
$
$
224
653
2,374
3,251
661
1,817
4,289
6,767
10,018
2 %
6
24
32
7
18
43
68
100 %
214
643
2,466
3,323
750
1,929
4,717
7,396
10,719
2 %
6
23
31
7
18
44
69
100 %
63 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Bancorp believes that home equity loans with a greater than 80% combined LTV ratio present a higher level of risk. The following table
provides an analysis of the home equity loans outstanding in a first and second lien position by LTV at origination:
TABLE 41: HOME EQUITY LOANS OUTSTANDING BY LTV AT ORIGINATION
As of December 31 ($ in millions)
First Liens:
LTV ≤ 80%
LTV > 80%
Total First Liens
Second Liens:
LTV ≤ 80%
LTV > 80%
Total Second Liens
Total
2012
2011
Outstanding
Weighted
Average LTV
Outstanding
Weighted
Average LTV
$
$
2,763
488
3,251
3,602
3,165
6,767
10,018
54.9 % $
88.9
60.2
67.3
91.6
80.5
73.4 % $
2,800
523
3,323
3,882
3,514
7,396
10,719
54.9 %
89.2
60.4
67.3
91.8
81.0
74.0 %
The following tables provide analysis of home equity loans by state with LTV greater than 80% as of December 31, 2012 and 2011:
TABLE 42: HOME EQUITY LOANS OUTSTANDING WITH LTV GREATER THAN 80%
As of December 31, 2012 ($ in millions)
By State:
Ohio
Michigan
Illinois
Indiana
Kentucky
Florida
All other states
Total
By State:
Ohio
Michigan
Illinois
Indiana
Kentucky
Florida
All other states
Total
Outstanding
$
1,254
795
428
348
327
130
371
3,653
Exposure
1,927
1,108
611
521
499
175
491
5,332
$
$
Outstanding
$
1,393
884
448
391
366
146
409
4,037
Exposure
2,083
1,197
630
573
549
190
519
5,741
For the Year Ended
December 31, 2012
90 Days
Past Due Nonaccrual
Net Charge-offs
8
6
5
2
2
2
4
29
6
4
3
2
1
3
2
21
24
24
17
5
6
8
17
101
For the Year Ended
December 31, 2011
90 Days
Past Due Nonaccrual
Net Charge-offs
12
8
8
2
3
4
5
42
7
4
2
2
2
3
2
22
33
37
17
9
8
17
19
140
TABLE 43: HOME EQUITY LOANS OUTSTANDING WITH LTV GREATER THAN 80%
As of December 31, 2011 ($ in millions)
Automobile Portfolio
The automobile portfolio is characterized by direct and indirect
lending products to consumers. As of December 31, 2012, 50% of
the automobile loan portfolio is comprised of new automobiles. 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 loans.
The following table provides an analysis of automobile loans outstanding by LTV at origination:
TABLE 44: AUTOMOBILE LOANS OUTSTANDING WITH LTV AT ORIGINATION
As of December 31 ($ in millions)
LTV ≤ 100%
LTV > 100%
Total
64 Fifth Third Bancorp
2012
2011
Outstanding
8,123
3,849
11,972
$
$
Weighted
Average LTV
81.5 % $
110.8
91.2 % $
Outstanding
7,805
4,022
11,827
Weighted
Average LTV
81.7 %
111.5
92.1 %
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables provide analysis of the Bancorp’s automobile loans with a LTV at origination greater than 100% as of December 31, 2012
and 2011, respectively:
TABLE 45: AUTOMOBILE LOANS OUTSTANDING WITH LTV GREATER THAN 100%
As of December 31, 2012 ($ in millions)
By State:
Ohio
Illinois
Michigan
Indiana
Florida
Kentucky
All other states
Total
Outstanding
409
232
221
158
194
141
2,494
3,849
$
$
TABLE 46: AUTOMOBILE LOANS OUTSTANDING WITH LTV GREATER THAN 100%
As of December 31, 2011 ($ in millions)
By State:
Ohio
Illinois
Michigan
Indiana
Florida
Kentucky
All other states
Total
Outstanding
425
291
245
181
192
158
2,530
4,022
$
$
For the Year Ended
December 31, 2012
90 Days
Past Due
Nonaccrual
Net Charge-offs
-
-
-
-
-
-
4
4
-
-
-
-
-
-
2
2
2
2
2
1
1
1
15
24
For the Year Ended
December 31, 2011
90 Days
Past Due
Nonaccrual
Net Charge-offs
1
-
-
-
-
-
3
4
-
-
-
-
-
-
2
2
3
3
2
2
3
1
20
34
European Exposure
The Bancorp has no direct sovereign exposure to any European
nation as of December 31, 2012. In providing services to our
customers, the Bancorp routinely enters into financial transactions
with foreign domiciled and U.S. subsidiaries of foreign businesses as
well as foreign financial institutions. These financial transactions are
in the form of loans, loan commitments, letters of credit, derivatives
and securities. The Bancorp’s risk appetite for foreign country
exposure is managed by having established country exposure limits.
The Bancorp’s total exposure to European domiciled or owned
businesses and European financial institutions was $2.6 billion and
funded exposure was $1.5 billion as of December 31, 2012.
Additionally, the Bancorp was within its established country
exposure limits for all European countries.
Certain European countries have been experiencing increased
levels of stress throughout 2012 including Greece, Ireland, Italy,
Portugal and Spain. The Bancorp’s total exposure to businesses
domiciled or owned by companies and financial institutions in these
countries was approximately $210 million and funded exposure was
$115 million as of December 31, 2012.
The following table provides detail about the Bancorp’s exposure to all European domiciled and owned businesses and financial institutions as of
December 31, 2012:
TABLE 47: EUROPEAN EXPOSURE
Sovereigns
Financial Institutions
Non-Financial
Institutions
Total
Total
Total
($ in millions)
-
Peripheral Europe(b)
-
Other Eurozone(c)
-
Total Eurozone
-
Other Europe(d)
Total Europe
-
(a) Total exposure includes funded exposure and unfunded commitments, reported net of collateral.
(b) Peripheral Europe includes Greece, Ireland, Italy, Portugal and Spain.
(c) Eurozone includes countries participating in the European common currency (Euro).
(d) Other Europe includes European countries not part of the Euro (primarily the United Kingdom and Switzerland).
Funded
Exposure Exposure
-
$
-
-
-
-
26
50
76
62
138
$
Total
Total
Funded
Funded
Funded
Exposure Exposure Exposure Exposure Exposure(a) Exposure
115
892
1,007
517
1,524
115
846
961
485
1,446
184
1,463
1,647
821
2,468
210
1,513
1,723
883
2,606
-
46
46
32
78
Analysis of Nonperforming Assets
Nonperforming assets include nonaccrual loans and leases for
which ultimate collectability of the full amount of the principal
and/or interest is uncertain; restructured commercial and credit card
loans which have not yet met the requirements to be classified as a
performing asset; restructured consumer loans which are 90 days
past due based on the restructured terms unless the loan is both
well-secured and in the process of collection; and certain other
65 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Geography continues to be a large driver of nonaccrual activity as
Florida properties represent approximately 14% and 8% of
residential mortgage and home equity balances, respectively, but
represent 47% and 19% of nonaccrual loans for each category.
Refer to Table 49 for a rollforward of the nonperforming loans and
leases.
Consumer restructured loans on accrual status totaled $1.7
billion and $1.6 billion at December 31, 2012 and 2011, respectively.
As of December 31, 2012, the percentage of restructured residential
mortgage loans, home equity loans and credit card loans that are
past due 30 days or more are 25%, 13% and 14%, respectively.
OREO and other repossessed property was $257 million at
December 31, 2012, compared to $378 million at December 31,
2011. The decrease from December 31, 2011 was primarily due to a
decrease in new OREO properties reflecting the changes made to
the Bancorp’s underwriting of real estate loans in prior periods as
well as improvements in general economic conditions during 2011
and 2012. The Bancorp recognized $74 million and $171 million in
losses on the sale or write-down of OREO properties in 2012 and
2011, respectively. These losses are primarily reflective of the
continued stress
in the Michigan and Florida markets for
commercial real estate and residential mortgage loans as Michigan
and Florida represented 14% and 17%, respectively, of total OREO
losses in 2012 compared with 16% and 26%, respectively, in 2011.
Properties in Michigan and Florida accounted for 38% of OREO at
December 31, 2012, compared to 42% at December 31, 2011.
In 2012 and 2011, approximately $102 million and $125
million, respectively, of interest income would have been recorded if
the nonaccrual and renegotiated loans and leases on nonaccrual
status had been current in accordance with their original terms.
Although these values help demonstrate the costs of carrying
nonaccrual credits, the Bancorp does not expect to recover the full
amount of interest as nonaccrual loans and leases are generally
carried below their principal balance.
including OREO and other repossessed property. A
assets,
summary of nonperforming assets is included in Table 48.
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. Residential mortgage loans may stay on nonaccrual
status for an extended time as the foreclosure process typically lasts
longer than 180 days. Typically, home equity loans are reported on
nonaccrual status if principal or interest has been in default for 180
days or more unless the loan is both well secured and in the process
of collection. Residential mortgage, home equity, automobile and
other consumer loans and leases that have been modified in a TDR
and subsequently become past due 90 days are placed on nonaccrual
status unless the loan is both well secured and in the process of
collection. Commercial and credit card loans that have been
modified in a TDR are classified as nonaccrual unless such loans
have a sustained repayment performance of six months or greater
and the Bancorp is reasonably assured of repayment in accordance
with the restructured terms. 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. When a loan is placed on
nonaccrual status, the accrual of interest, amortization of loan
premiums, accretion of loan discounts and amortization or accretion
of deferred net loan fees or costs are discontinued and previously
accrued, but unpaid interest is reversed. Commercial loans on
nonaccrual status are reviewed for impairment at least quarterly. If
the principal or a portion of the principal is deemed a loss, the loss
amount is charged off to the ALLL.
Total nonperforming assets, including loans held for sale, were
$1.3 billion at December 31 2012 compared to $2.0 billion at
December 31, 2011. At December 31, 2012, $29 million of
nonaccrual loans, consisting primarily of real estate secured loans,
were held for sale, compared to $138 million at December 31, 2011.
Nonperforming assets as a percentage of total loans, leases and
other assets, including OREO and nonaccrual loans held for sale as
of December 31, 2012 were 1.48%, compared to 2.32% as of
December 31, 2011. Excluding nonaccrual loans held for sale,
nonperforming assets as a percentage of portfolio loans, leases and
other assets, including OREO was 1.49% as of December 31, 2012,
compared to 2.23% as of December 31, 2011. The composition of
nonaccrual loans and leases continues to be concentrated in real
estate as 67% of nonaccrual loans and leases were secured by real
estate as of December 31, 2012 compared to 69% as of December
31, 2011.
Commercial nonperforming loans and leases were $726 million
at December 31, 2012, a decrease of $470 million from December
31, 2011. Excluding commercial nonperforming loans and leases
held for sale, commercial nonperforming loans and leases at
December 2012 decreased $361 million compared to December 31,
2011. The decrease from December 31, 2011 was due to a
continued decrease in new nonaccruals and an increase in paydowns
and payoffs in 2012 due to improved delinquency metrics and an
improvement in underlying loss trends.
Consumer nonperforming loans and leases were $332 million
at December 31, 2012, a decrease of $48 million from December 31,
2011. The decrease is due to the continued moderation in general
economic conditions in 2012. Home equity nonaccrual levels remain
modest as the Bancorp continues to fully charge-off a high
proportion of the severely delinquent loans at 180 days past due.
66 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
2012
2011
2008
2010
2009
234
215
70
1
114
30
-
1
408
358
123
9
134
25
-
1
541
482
362
21
259
26
5
-
734
898
646
67
275
21
1
-
473
407
182
11
152
23
1
84
TABLE 48: SUMMARY OF NONPERFORMING ASSETS AND DELINQUENT LOANS
As of December 31 ($ in millions)
Nonaccrual loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Other consumer loans and leases
Restructured loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans(a)
Home equity(a)
Automobile loans(a)
Credit card
Total nonperforming loans and leases(e)
OREO and other repossessed property(d)
Total nonperforming assets
Nonaccrual loans held for sale
Total nonperforming assets including loans held for sale
Loans and leases 90 days past due and accruing:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans(c)
Home equity
Automobile loans
Credit card and other
Other consumer loans and leases
Total loans and leases 90 days past due and accruing(f)
Nonperforming assets as a percent of portfolio loans, leases and
other assets, including OREO(b)
Allowance for loan and lease losses as a percent of
nonperforming assets(a)(b)
(a) 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.
95
28
10
8
116
33
2
55
1,680
494
2,174
294
2,468
-
-
-
-
20
29
1
30
1,776
230
2,006
473
2,479
35
4
8
-
137
33
1
87
2,947
297
3,244
224
3,468
79
63
15
3
141
29
2
48
1,438
378
1,816
138
1,954
96
67
6
8
123
23
2
39
1,029
257
1,286
29
1,315
16
11
3
-
100
89
13
42
-
274
118
59
17
4
189
99
17
64
-
567
76
136
74
4
198
96
21
56
1
662
4
3
1
-
79
74
9
30
-
200
1
22
1
-
75
58
8
30
-
195
1.49 %
4.22
2.38
2.23
2.79
116
139
124
138
144
$
$
$
For comparability purposes, prior periods were adjusted to reflect this reclassification.
(b) Excludes nonaccrual loans held for sale.
(c)
Information for all periods presented excludes advances made pursuant to servicing agreements to GNMA mortgage loan pools whose repayments are insured by the Federal Housing Administration
or guaranteed by the Department of Veterans Affairs. As of December 31, 2012, 2011, 2010, 2009, and 2008 these advances were $414, $309, $279, $130 and $40 respectively. The
Bancorp recognized credit losses of $2 million for the year ended December 31, 2012 and immaterial credit losses for 2011 due to claim denials and curtailments associated with these advances.
(d) Excludes $72, $64, $38, $15 and $23 of OREO related to government insured loans at December 31, 2012, 2011, 2010, 2009, and 2008, respectively.
(e)
Includes $10, $17, $24, $32, and $29 of nonaccrual government insured commercial loans whose repayments are insured by the Small Business Administration at December 31, 2012, 2011,
2010, 2009, and 2008, respectively, and $1 and $2 of restructured nonaccrual government insured commercial loans at December 31, 2012 and 2011, respectively and zero for 2010, 2009 and
2008.
Includes an immaterial amount of government insured commercial loans 90 days past due and accruing whose repayments are insured by the Small Business Administration at December 31, 2012,
2011, 2010, 2009, and 2008.
(f)
67 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides a rollforward of portfolio nonperforming loans and leases, by portfolio segment:
TABLE 49: ROLLFORWARD OF PORTFOLIO NONPERFORMING LOANS AND LEASES
For the year ended December 31, 2012 ($ in millions)
Beginning Balance
Transfers to nonperforming
Transfers to performing
Transfers to performing (restructured)
Transfers to held for sale
Loans sold from portfolio
Loan paydowns/payoffs
Transfers to other real estate owned
Charge-offs
Draws/other extensions of credit
Ending Balance
For the year ended December 31, 2011 ($ in millions)
Beginning Balance
Transfers to nonperforming
Transfers to performing
Transfers to performing (restructured)
Transfers from held for sale
Transfers to held for sale
Loans sold from portfolio
Loan paydowns/payoffs
Transfers to other real estate owned
Charge-offs
Draws/other extensions of credit
Ending Balance
Commercial
1,058
560
(22)
(31)
(13)
(36)
(466)
(108)
(297)
52
697
1,214
1,075
(23)
(1)
4
(92)
(57)
(425)
(110)
(554)
27
1,058
$
$
$
$
Residential
Mortgage
275
318
(45)
(57)
-
(4)
(121)
(71)
(58)
-
237
268
396
(45)
(74)
-
-
(1)
(85)
(79)
(106)
1
275
Consumer
105
354
(73)
(90)
-
-
(12)
-
(194)
5
95
198
456
(85)
(95)
-
-
(21)
(13)
-
(342)
7
105
Total
1,438
1,232
(140)
(178)
(13)
(40)
(599)
(179)
(549)
57
1,029
1,680
1,927
(153)
(170)
4
(92)
(79)
(523)
(189)
(1,002)
35
1,438
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, provided
there is reasonable assurance of repayment and performance
according to the modified terms based upon a current, well-
documented credit evaluation. Commercial loans modified as part
of a TDR are maintained on accrual status provided there is a
sustained payment history of six months or greater prior to the
modification in accordance with the modified terms and all
remaining contractual payments under the modified terms are
reasonably assured of collection. TDRs of commercial loans and
credit card loans that do not have a sustained payment history of six
months or greater in accordance with the modified terms remain on
nonaccrual status until a six-month payment history is sustained.
During the third quarter of 2012, the OCC, a national bank
regulatory agency, issued interpretive guidance that requires Chapter
7 non-reaffirmed loans to be accounted for as nonperforming
TDRs and collateral dependent loans regardless of their payment
history and capacity to pay in the future. The Bancorp’s banking
subsidiary is a state chartered bank and therefore is not subject to
guidance of the OCC, however, the Bancorp is closely following
these developments and is in communication with its regulators to
evaluate their position on this new guidance. At December 31, 2012,
the Bancorp had loans with unpaid principal balances totaling
approximately $175 million that could potentially be impacted by
this guidance, of which approximately 87% are current with their
original contractual payments and approximately one third of which
are already classified as TDRs. This guidance, if fully adopted by the
Bancorp’s regulators, would result in additional charge-offs of
approximately $70 million as well as additional TDRs and possible
increases to nonperforming assets.
The following table summarizes TDRs by loan type and delinquency status:
TABLE 50: PERFORMING AND NONPERFORMING TDRs
Current
431
1,006
377
35
31
1,880
$
$
Performing
30-89 Days
Past Due
90 Days or
More Past Due
-
70
35
-
2
107
-
99
-
-
-
99
Nonaccrual
Total
177
123
23
39
2
364
$
$
608
1,298
435
74
35
2,450
Information includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the
Department of Veterans Affairs. As of December 31, 2012, these advances represented $107 of current loans, $26 of 30-89 days past due loans and $79 of 90 days or more past due loans.
As of December 31, 2012 ($ in millions)
Commercial
Residential mortgages(a)
Home equity
Credit card
Automobile and other consumer loans and leases
Total
(a)
68 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Analysis of Net Loan Charge-offs
Net charge-offs were 85 bps and 149 bps of average portfolio loans
and leases for the years ended December 31, 2012 and 2011,
respectively. Table 51 provides a summary of credit loss experience
and net charge-offs as a percentage of average portfolio loans and
leases outstanding by loan category.
The ratio of commercial loan and lease net charge-offs to
average portfolio commercial loans and leases decreased to 63 bps
during 2012 compared to 126 bps in 2011, as a result of decreases in
net charge-offs of $257 million coupled with an increase in average
portfolio commercial loan and lease balances of $3.0 billion.
Decreases in net charge-offs were realized across all commercial
loan types, excluding commercial leases, and were primarily due to
improvements in general economic conditions and previous actions
taken by the Bancorp to address problem loans. Among several
actions taken by the Bancorp were suspending homebuilder and
developer lending in 2007 and non-owner occupied commercial real
estate lending in 2008 and tightened underwriting standards across
all commercial loan product offerings. The Bancorp resumed
homebuilder and developer lending and non-owner occupied
commercial real estate lending in the third quarter of 2011. Net
charge-offs for 2012 related to non-owner occupied commercial real
estate were $87 million compared to $211 million in 2011. Net
charge-offs related to non-owner occupied commercial real estate
are recorded in the commercial mortgage loans and commercial
construction loans captions in Table 51. Net charge-offs on these
loans represented 29% of total commercial loan and lease net
charge-offs in 2012 and 38% in 2011.
The ratio of consumer loan and lease net charge-offs to
average consumer loans and leases decreased to 113 bps in 2012
compared to 179 bps in 2011. Residential mortgage loan net charge-
offs, which typically
involve partial charge-offs based upon
appraised values of underlying collateral, decreased $51 million from
the prior year as a result of improvements in delinquencies and a
decrease in the average loss recorded per charge-off. The Bancorp’s
combined Florida and Michigan markets accounted for 66% and
58% of net charge-offs on residential mortgage loans in the
portfolio in 2012 and 2011, respectively. Fifth Third expects the
composition of the residential mortgage portfolio to improve as it
continues to retain high quality, shorter duration residential
mortgage loans that are originated through its branch network as a
low-cost, refinance product of conforming residential mortgage
loans.
Home equity net charge-offs decreased $63 million compared
to the prior year, primarily due to decreases in net charge-offs in the
Michigan market. 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 or property
devaluation.
Automobile
loan net charge-offs decreased $22 million
compared to 2011, due to the origination of high credit quality loans
as a result of tighter underwriting standards and higher resale on
automobiles sold at auction.
Credit card net charge-offs decreased $24 million from 2011
line
reflecting
improving
management, and stabilization
levels. The
Bancorp utilizes a risk-adjusted pricing methodology to ensure
adequate compensation is received for those products that have
higher credit costs.
trends,
in unemployment
delinquency
aggressive
Other consumer loan net charge-offs decreased $51 million
compared to 2011 due to charge-offs of $56 million recognized in
2011 associated with certain consumer loans that were acquired
during the fourth quarter of 2010 when the Bancorp foreclosed on a
commercial loan that was collateralized by individual consumer
loans.
69 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
$
TABLE 51: 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
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
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total consumer loans and leases
Total net losses charged off
2012
2011
2010
2009
2008
(194)
(120)
(34)
(10)
(129)
(172)
(55)
(90)
(33)
(837)
29
21
9
2
7
15
24
16
10
133
(165)
(99)
(25)
(8)
(122)
(157)
(31)
(74)
(23)
(704)
0.50 %
1.02
3.08
0.22
0.63
1.07
1.51
0.26
3.79
7.02
1.13
0.85 %
(314)
(211)
(89)
(1)
(180)
(234)
(85)
(114)
(86)
(1,314)
38
16
4
3
7
14
32
16
12
142
(276)
(195)
(85)
2
(173)
(220)
(53)
(98)
(74)
(1,172)
0.97
1.89
4.96
(0.08)
1.26
1.75
1.97
0.47
5.19
15.29
1.79
1.49
(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)
2.23
4.58
8.48
0.05
3.10
5.49
2.20
0.85
8.28
2.58
2.92
3.02
(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
(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
(0.02)
3.99
2.47
1.67
1.56
5.51
2.10
2.08
3.23
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
and portfolio management practices,
national and local economic conditions that might impact the
portfolio. See the Critical Accounting Policies section for more
information.
In 2012, 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 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.
The ALLL attributable to the portion of the residential
mortgage and consumer loan and lease portfolio that has not been
70 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
restructured is determined on a pooled basis with the segmentation
being based on the similarity of credit risk characteristics. Loss
factors for real estate backed consumer loans are developed for each
pool based on the trailing twelve month historical loss rate, as
adjusted for certain prescriptive loss rate factors and certain
qualitative adjustment factors. The prescriptive loss rate factors and
qualitative adjustments are designed to reflect risks associated with
current conditions and trends which are not believed to be fully
reflected in the trailing twelve month historical loss rate. For real
estate backed consumer loans, the prescriptive loss rate factors
include adjustments for delinquency trends, LTV trends, refreshed
FICO score trends and product mix, and the qualitative factors
include adjustments for credit administration and portfolio
management practices, credit policy and underwriting practices and
the national and local economy. The Bancorp considers home price
index trends in its footprint when determining the national and local
economy qualitative factor. The Bancorp also considers the volatility
of collateral valuation trends when determining the unallocated
component of the ALLL.
TABLE 52: CHANGES IN ALLOWANCE FOR CREDIT LOSSES
For the years ended December 31 ($ in millions)
ALLL:
Balance, beginning of period
Impact of change in accounting principle
Losses charged off
Recoveries of losses previously charged off
Provision for loan and lease losses
Balance, end of period
Reserve for unfunded commitments:
Balance, beginning of period
Impact of change in accounting principle
Provision for unfunded commitments
Balance, end of period
The Bancorp’s determination of the ALLL 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 $154 million at
December 31, 2012. In addition, the Bancorp’s determination of the
allowance for residential and consumer loans is sensitive to changes
in estimated loss rates. In the event that estimated loss rates would
increase by 10%, the allowance for residential and consumer loans
would increase by approximately $51 million at December 31, 2012.
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.
2012
2011
2010
2009
2008
$
$
$
$
2,255
-
(837)
133
303
1,854
181
-
(2)
179
3,004
-
(1,314)
142
423
2,255
227
-
(46)
181
3,749
45
(2,485)
157
1,538
3,004
294
(43)
(24)
227
2,787
-
(2,719)
138
3,543
3,749
195
-
99
294
937
-
(2,791)
81
4,560
2,787
95
-
100
195
Certain inherent, but unconfirmed losses are probable within the
loan and lease portfolio. The Bancorp’s current methodology for
determining the level of losses is based on historical loss rates,
current credit grades, specific allocation on impaired commercial
credits above specified thresholds and restructured residential
mortgage and consumer loans and other qualitative adjustments.
Due to the heavy reliance on realized historical losses and the credit
grade rating process, the model-derived estimate of ALLL tends to
slightly lag behind the deterioration in the portfolio, in a stable or
deteriorating credit environment, and tend not to be as responsive
when improved conditions have presented themselves. Given these
model limitations, the qualitative adjustment factors may be
incremental or decremental to the quantitative model results.
An unallocated component to the ALLL is maintained to
recognize the imprecision in estimating and measuring loss. The
unallocated allowance as a percent of total portfolio loans and leases
at December 31, 2012 and 2011 was 0.13% and 0.17%, respectively.
The unallocated allowance was six percent of the total allowance as
of December 31, 2012 and 2011.
As shown in Table 53, the ALLL as a percent of portfolio loan
and leases was 2.16% at December 31, 2012, compared to 2.78% at
December 31, 2011. The ALLL was $1.9 billion as of December 31,
2012, compared to $2.3 billion at December 31, 2011. The decrease
is reflective of a number of factors including decreases in
nonperforming loans and leases, improved delinquency metrics in
commercial and consumer loans and leases and improvement in
underlying loss trends.
71 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2009
1,282
734
380
121
375
294
127
199
44
193
3,749
$
$
2012
2011
2010
1,123
597
158
111
310
265
73
158
59
150
3,004
802
333
33
68
229
143
28
87
20
111
1,854
929
441
77
80
227
195
43
106
21
136
2,255
TABLE 53: ATTRIBUTION OF ALLOWANCE FOR LOAN AND LEASE LOSSES TO PORTFOLIO LOANS AND LEASES
As of December 31 ($ in millions)
Allowance attributed to:
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
Unallocated
Total ALLL
Portfolio loans and leases:
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 portfolio loans and leases
Attributed allowance as a percent of respective portfolio loans and leases:
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
Unallocated (as a percent of total portfolio loans and leases)
Total portfolio loans and leases
36,038
9,103
698
3,549
12,017
10,018
11,972
2,097
290
85,782
30,783
10,138
1,020
3,531
10,672
10,719
11,827
1,978
350
81,018
27,191
10,845
2,048
3,378
8,956
11,513
10,983
1,896
681
77,491
2.23 %
3.66
4.73
1.92
1.91
1.43
0.23
4.15
6.90
0.13
2.16 %
4.13
5.50
7.71
3.29
3.46
2.30
0.66
8.33
8.66
0.19
3.88
3.02
4.35
7.55
2.27
2.13
1.82
0.36
5.36
6.00
0.17
2.78
$
$
25,683
11,803
3,784
3,535
8,035
12,174
8,995
1,990
780
76,779
4.99
6.22
10.04
3.42
4.67
2.41
1.41
10.00
5.64
0.25
4.88
2008
824
363
252
61
388
289
150
148
33
279
2,787
29,197
12,502
5,114
3,666
9,385
12,752
8,594
1,811
1,122
84,143
2.82
2.90
4.93
1.66
4.13
2.27
1.75
8.17
2.94
0.33
3.31
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.
72 Fifth Third Bancorp
Net Interest Income Simulation Model
The Bancorp utilizes 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’s 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 ERM
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. In 2012, the NII and EVE ALCO policy limits were
lowered to reflect the Bancorp’s current risk appetite and due to
significant uncertainty with respect to the economic environment,
market interest rates and balance sheet and deposit pricing
behaviors. The policy limits were updated in conjunction with the
Market Risk Management group and were approved by ALCO.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 bps and 200 bps
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 at December 31, 2012. In accordance with
the current policy, the rate movements are assumed to occur over
one year and are sustained thereafter.
The following table shows the Bancorp’s estimated net interest income sensitivity profile and ALCO policy limits as of December 31:
TABLE 54: ESTIMATED NII SENSITIVITY PROFILE
Change in Interest Rates (bps)
+200
+100
2012
2011
Percent Change in NII
(FTE)
12 Months
13 to 24
Months
1.78 %
0.90
7.75
3.78
ALCO Policy Limits
12 Months
(4.00)
-
13 to 24
Months
(6.00)
-
Percent Change in NII
(FTE)
12 Months
13 to 24
Months
0.35 %
-
5.61
2.64
ALCO Policy Limits
12 Months
(5.00)
-
13 to 24
Months
(7.00)
-
At December 31, 2012, the Bancorp’s interest rate risk profile
reflects moderate asset sensitivity in year one in contrast to a
relatively neutral profile at December 31, 2011 with year two asset
sensitivity increases from year one at both December 31, 2012 and
2011. The higher asset sensitivity at December 31, 2012 compared
to December 31, 2011 is the result of growth in core deposit
balances and lower market interest rates, partially offset by increases
in fixed rate loan balances.
Economic Value of Equity
The Bancorp also utilizes EVE as a measurement tool in managing
interest rate risk. Whereas the NII simulation model 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 net 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 NII simulation model. As with the
NII simulation model, assumptions about the timing and variability
of existing balance sheet cash flows are critical in the EVE analysis.
Particularly important are assumptions driving loan and security
prepayments and the expected balance attrition and pricing of
transaction deposit portfolios.
The following table shows the Bancorp’s EVE sensitivity profile as of December 31:
TABLE 55: ESTIMATED EVE SENSITIVITY PROFILE
Change in Interest Rates (bps)
+200
+100
+25
-25
2012
Change in EVE ALCO Policy Limit
(12.00)
2.16 %
1.50
0.43
(0.52)
2011
Change in EVE ALCO Policy Limit
(15.00)
1.37 %
1.22
0.32
(0.25)
The EVE at risk profile suggests a positive impact from market rate
increases of +25 bps through the +200 bps scenarios for 2012. The
EVE at risk reported at December 31, 2012 for the +200 basis
points scenario shows a change to a slightly more asset sensitive
position compared to December 31, 2011. The primary factors
contributing to the change are the decline in market interest rates
over this time period, growth in core deposits and changes in the
MSR risk profile, partially offset by the impact of an increase in
fixed rate loan balances.
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 or exacerbate the impact of changes in interest rates. The
NII simulations and EVE analyses do not necessarily include certain
actions that management may undertake to manage risk in response
to anticipated changes in interest rates.
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
interest rate risk
integral component of the Bancorp’s
An
management strategy is its use of derivative instruments to minimize
significant fluctuations in earnings caused by changes in market
interest rates. Examples of derivative instruments that the Bancorp
may use as part of its interest rate risk management strategy include
interest rate swaps, interest rate floors, interest rate caps, forward
contracts, options, swaptions and TBA securities.
As part of its overall risk management strategy relative to its
mortgage banking activity, the Bancorp enters
into forward
contracts accounted for as free-standing derivatives to economically
hedge interest rate lock commitments that are also considered free-
73 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
standing derivatives. Additionally, the Bancorp economically hedges
its exposure to mortgage loans held for sale through the use of
forward contracts and mortgage options.
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
through collateral
the Bancorp minimizes
arrangements, approvals, limits and monitoring procedures. For
further information including the notional amount and fair values of
these derivatives, see Note 12 of the Notes to Consolidated
Financial Statements.
Portfolio Loans and Leases and Interest Rate Risk
Although the Bancorp’s portfolio loans and leases contain both
fixed and floating/adjustable rate products, the rates of interest
earned by the Bancorp on the outstanding balances are generally
established for a period of time. The interest rate sensitivity of loans
and leases is directly related to the length of time the rate earned is
established. Table 56 summarizes the expected principal cash flows
of the Bancorp’s portfolio loans and leases as of December 31,
2012. Additionally, Table 57 displays a summary of expected
principal cash flows occurring after one year for both fixed and
floating/adjustable rate loans, as of December 31, 2012.
Less than 1 year
$
TABLE 56: PORTFOLIO LOAN AND LEASE CONTRACTUAL MATURITIES
As of December 31, 2012 ($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Subtotal - commercial loans and leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Subtotal - consumer loans and leases
Total
9,822
4,297
299
612
15,030
3,213
1,485
4,798
598
232
10,326
25,356
$
1-5 years
23,971
4,110
369
1,573
30,023
4,879
5,560
6,945
1,499
55
18,938
48,961
Over 5 years
2,245
696
30
1,364
4,335
3,925
2,973
229
-
3
7,130
11,465
Total
36,038
9,103
698
3,549
49,388
12,017
10,018
11,972
2,097
290
36,394
85,782
TABLE 57: PORTFOLIO LOAN AND LEASE PRINCIPAL CASH FLOWS OCCURING AFTER ONE YEAR
As of December 31, 2012 ($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Subtotal - commercial loans and leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Subtotal - consumer loans and leases
Total
Residential Mortgage Servicing Rights and Interest Rate Risk
The net carrying amount of the residential MSR portfolio was $697
million and $681 million as of December 31, 2012 and 2011,
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 decreased during both 2012 and 2011. This
caused modeled prepayments speeds to increase, which led to $103
million in temporary impairment on servicing rights during the year
ended 2012, compared to $242 million in temporary impairment on
servicing rights during the year ended 2011. Servicing rights are
deemed temporarily impaired when a borrower’s loan rate is
74 Fifth Third Bancorp
$
$
Fixed
3,385
1,319
27
2,937
7,668
6,394
1,058
7,128
627
38
15,245
22,913
Interest Rate
Floating or Adjustable
22,831
3,487
372
-
26,690
2,410
7,475
46
872
20
10,823
37,513
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. In addition to the
mortgage servicing rights valuation, the Bancorp recognized net
gains of $66 million and $354 million on its non-qualifying hedging
strategy for the years ended 2012 and 2011, respectively. The net
gains include net gains on the sale of securities related to the
Bancorp’s non-qualifying hedging strategy of $3 million and $9
million for 2012 and 2011, respectively. During the fourth quarter
of 2011, the Bancorp assessed the composition of its MSR
portfolio, the cost of hedging and the anticipated effectiveness of
the hedges given the economic environment. Based on this review,
the Bancorp adjusted its MSR hedging strategy to exclude the
hedging of MSRs related to certain mortgage loans originated in
2008 and prior, representing approximately 16% of the carrying
value of the MSR portfolio as of December 31, 2012. The
prepayment behavior of these loans is expected to be less sensitive
to changes in interest rates as tighter industry underwriting
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
standards, borrower credit characteristics and home price values
have had a greater impact on prepayment speeds. Thus, the
predictive power of traditional prepayment models that are based
solely on the historical dependency of prepayment speeds on market
interest rates may not be reliable for these loans. As a result, the
Bancorp has considered these additional factors as it models
prepayment speeds when valuing the MSRs. The Bancorp utilizes
valuation opinions from servicing brokers, peer surveys and its
historical prepayment experience
the modeled
prepayment speeds utilized in the fair value measurement of the
impact on
MSRs. As these additional factors have had an
traditional hedging
the effectiveness of
prepayment speeds,
strategies utilizing benchmark interest rate based derivatives has
been reduced. In addition to the market factors that impact
prepayment speeds, the Bancorp is exposed to prepayment risk on
these loans in the event borrowers refinance at higher than expected
levels due to government intervention or other factors. The
Bancorp continues to monitor the performance of these MSRs and
may decide to hedge this portion of the MSR portfolio in future
periods. See Note 11 of the Notes to Consolidated Financial
in validating
LIQUIDITY RISK MANAGEMENT
The goal of liquidity management is to provide adequate funds to
meet changes in loan and lease demand, unexpected levels of
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 16 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.
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.
from
loan and
Projected contractual maturities
included
lease
repayments are
in Table 56 of the Market Risk
Management section of MD&A. Of the $15.2 billion of securities in
the Bancorp’s available-for-sale portfolio at December 31, 2012,
$3.8 billion in principal and interest is expected to be received in the
next 12 months and an additional $2.2 billion is expected to be
received in the next 13 to 24 months. For further information on
the Bancorp’s securities portfolio, see the Securities section of
MD&A.
Asset-driven liquidity is provided by the Bancorp’s ability to
sell or securitize loan and lease assets. In order to reduce the
exposure to interest rate fluctuations and to manage liquidity, the
Bancorp has developed securitization and sale procedures for
several types of interest-sensitive assets. A majority of the long-
term,
loans
underwritten according to FHLMC or FNMA guidelines are sold
for cash upon origination. Additional assets such as residential
mortgages, certain commercial loans, home equity loans, automobile
residential mortgage
single-family
fixed-rate
Statements for further discussion on servicing rights and the
instruments used to hedge interest rate risk on MSRs.
Foreign Currency Risk
The Bancorp may enter 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, 2012 and
2011 was $549 million and $374 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.
loans and other consumer loans are also capable of being securitized
or sold. For the years ended December 31, 2012 and 2011, the
Bancorp sold
loans totaling $21.7 billion and $15.2 billion,
respectively. For further information on the transfer of financial
assets, see Note 11 of the Notes to Consolidated Financial
Statements.
Core deposits have historically provided the Bancorp with a
sizeable source of relatively stable and low cost funds. The
Bancorp’s average core deposits and shareholders’ equity funded
82% of its average total assets during 2012, compared to 81% in
2011. 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 funding tools
utilized to fund asset growth. Management does not rely on any one
source of liquidity and manages availability in response to changing
balance sheet needs.
The Bancorp has a shelf registration in place with the SEC
permitting ready access to the public debt markets and qualifies as a
“well-known seasoned issuer” under the SEC rules. As of 2012, $5.6
billion of debt or other securities were available for issuance 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 $33.7 billion of borrowing
capacity available through secured borrowing sources including the
FHLB and FRB. Additionally, from time to time the Bancorp may
change the terms of the bank note program, including by increasing
its size.
On March 7, 2012, the Bancorp issued $500 million in
aggregate principal amount of 3.50% Senior Notes due March 15,
2022. On August 8, 2012, the Bancorp redeemed all $862.5 million
of the outstanding TruPS issued by Fifth Third Capital Trust VI. In
addition, on August 15, 2012, the Bancorp redeemed all $575
million of the outstanding TruPS issued by Fifth Third Capital Trust
V. On December 7, 2012, the Bancorp terminated a $1.0 billion
FHLB advance with a fixed rate of 4.56% and a maturity date of
January 5, 2016. See Note 15 of the Notes to Consolidated Financial
Statements for additional information regarding the Senior Notes,
TruPS and FHLB advances.
75 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
credit quality, strong capital ratios and diverse funding sources, in
addition to disciplined liquidity monitoring procedures.
The Bancorp’s credit ratings are summarized in Table 58. The
ratings reflect the ratings agencies view on the Bancorp’s capacity to
meet financial commitments. *
* 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. Additional
information on the credit rating ranking within the overall classification system is
located on the website of each credit rating agency.
TABLE 58: AGENCY RATINGS
As of February 22, 2013
Fifth Third Bancorp:
Short-term
Senior debt
Subordinated debt
Fifth Third Bank:
Short-term
Long-term deposit
Senior debt
Subordinated debt
CAPITAL MANAGEMENT
Management regularly reviews the Bancorp’s capital levels to help
ensure it is appropriately positioned under various operating
environments. The Bancorp has established a Capital Committee,
which is responsible for all capital related decisions. The Capital
Committee makes recommendations to management involving
capital actions. These recommendations are reviewed and approved
by the ERM Committee.
Capital Ratios
The U.S banking agencies established quantitative measures that
assign risk weightings to assets and off-balance sheet items and also
define and set minimum regulatory capital requirements. The U.S.
banking agencies 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.
The Basel II advanced approach framework was finalized by
U.S. banking agencies in 2007. Core banks, defined as those with
consolidated total assets in excess of $250 billion or on balance
sheet foreign exposures of $10 billion were required to adopt the
advanced approach effective April 1, 2008. The Bancorp does not
meet these thresholds and, therefore, is not subject to the
requirements of Basel II.
The Dodd-Frank Act requires more stringent prudential
standards, including capital and liquidity requirements, for larger
institutions. It addresses the quality of capital components by
limiting the degree to which certain hybrid instruments can be
included. The Dodd-Frank Act will phase out the inclusion of
certain TruPS as a component of Tier I risk-based capital beginning
January 1, 2013. At December 31, 2012, the Bancorp’s Tier I risk-
included $810 million of TruPS representing
based capital
approximately 74 bps of risk-weighted assets.
In December of 2010 and revised in June of 2011, the Basel
Committee on Banking Supervision issued Basel III, a global
Moody's
Standard and Poor's
Fitch
DBRS
No rating
Baa1
Baa2
P-2
A3
A3
Baa1
A-2
BBB
BBB-
A-2
No rating
BBB+
BBB
F1
A-
BBB+
F1
A
A-
BBB+
R-1L
AL
BBBH
R-1L
A
A
A (low)
regulatory framework, to enhance international capital standards. In
June of 2012, U.S. banking regulators proposed enhancements to
the regulatory capital requirements for U.S. banks, which implement
aspects of Basel III, such as re-defining the regulatory capital
elements and minimum capital ratios, introducing regulatory capital
buffers above those minimums, revising the agencies’ rules for
calculating risk-weighted assets and introducing a new Tier I
common equity ratio. The Bancorp continues to evaluate these
proposals and their potential impact. Its current estimate of the pro-
forma fully phased in Tier I common equity ratio at December 31,
2012 under the proposed capital rules is approximately 8.78%*
compared with 9.51% as calculated under the existing Basel I capital
framework. The primary drivers of the change from the existing
Basel I capital framework to the Basel III proposal are an increase in
Tier I common equity of approximately 39 bps (primarily from
including AOCI) which would be more than offset by the impact of
increases in risk-weighted assets (primarily from 1-4 family senior
and junior lien residential mortgages and commitments with an
original maturity of one year or less). The pro-forma Tier I common
equity ratio exceeds the proposed minimum Tier I common equity
ratio of 7% comprised of a minimum of 4.5% plus a capital
conservation buffer of 2.5%. The pro-forma Tier I common equity
ratio does not include the effect of any mitigating actions the
Bancorp may undertake to offset the impact of the proposed capital
enhancements. For further discussion on the Basel I and Basel III
Tier I common equity ratios, see the Non-GAAP Financial
Measures section of MD&A.
* The pro forma Tier I common equity ratio is management’s estimate based upon
its current interpretation of the three draft Federal Register notices proposing
enhancements to regulatory capital requirements published in June of 2012. The
actual impact to the Bancorp’s Tier I common equity ratio may change significantly
due to further clarification of the agencies proposals or revisions to the agencies final
rules, which remain subject to public comment.
76 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 59: CAPITAL RATIOS
As of December 31 ($ in millions)
Average equity as a percent of average assets
Tangible equity as a percent of tangible assets(a)
Tangible common equity as a percent of tangible assets(a)
2012
11.65 %
9.17
8.83
Tier I capital
Total risk-based capital
Risk-weighted assets(b)
$
11,685
15,816
109,699
2011
11.41
9.03
8.68
12,503
16,885
104,945
2010
12.22
10.42
7.04
13,965
18,178
100,561
2009
11.36
9.71
6.45
13,428
17,648
100,933
2008
8.78
7.86
4.23
11,924
16,646
112,622
Regulatory capital ratios:
Tier I capital
Total risk-based capital
Tier I leverage
Tier I common equity(a)
(a) For further information on these ratios, see the Non-GAAP Financial Measures section of the MD&A.
(b) 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
10.65 %
14.42
10.05
9.51
10.59
14.78
10.27
4.37
13.89
18.08
12.79
7.48
13.30
17.48
12.34
6.99
11.91
16.09
11.10
9.35
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.
2012 Capital Actions
As part of the 2012 CCAR, on January 9, 2012, the Bancorp
submitted to the FRB a capital plan approved by its Board of
Directors covering the period from January 1, 2012 to March 31,
2013. The mandatory elements of the capital plan were an
assessment of the expected use and sources of capital over the
planning horizon, a description of all planned capital actions over
the planning horizon, a discussion of any expected changes to the
Bancorp’s business plan that are likely to have a material impact on
its capital adequacy or liquidity, a detailed description of the
Bancorp’s process for assessing capital adequacy and the Bancorp’s
capital policy.
The FRB assessed the comprehensiveness of the capital plan,
the reasonableness of the assumptions and the analysis underlying
the capital plan and reviewed the robustness of the capital adequacy
process, the capital policy and the Bancorp’s ability to maintain
capital above the minimum regulatory capital ratio and above a Tier
I common ratio of 5% on a pro-forma basis under expected and
stressful conditions throughout the planning horizon.
On March 13, 2012 the Bancorp announced the FRB’s
response to the capital plan it submitted as part of the 2012 CCAR.
The FRB indicated that it did not object to the following capital
actions: a continuation of its quarterly common dividend of $0.08
per share; the redemption of up to $1.4 billion in certain TruPS; and
the repurchase of common shares in an amount equal to any after-
tax gains realized by Fifth Third from the sale of Vantiv, Inc.
common shares by either Fifth Third or Vantiv, Inc.
The FRB indicated to the Bancorp that it did object to other
elements of its capital plan, including increases in its quarterly
common dividend and the initiation of common share repurchases
other than those described in the paragraph above. The Bancorp
resubmitted its capital plan to the FRB on June 8, 2012. The
resubmitted plan included capital actions and distributions for the
covered period through March 31, 2013 that were substantially
similar
the original submission, with
adjustments primarily reflecting the change in the expected timing
of capital actions and distributions relative to the timing assumed in
the original submission.
included
those
to
in
Consistent with the 2012 CCAR plan, the Bancorp redeemed
all $862.5 million of the outstanding TruPS issued by Fifth Third
Capital Trust VI and recognized a $9 million loss on extinguishment
in the Bancorp’s Consolidated Financial Statements. Additionally,
the Bancorp redeemed all $575 million of the outstanding TruPS
issued by Fifth Third Capital Trust V and recognized a $17 million
loss on extinguishment in the Bancorp’s Consolidated Financial
Statements.
On August 21, 2012, the Bancorp announced that the FRB did
not object to its capital plan resubmitted under the CCAR process,
which included potential increases to the quarterly common stock
dividend and the repurchases of common shares of up to $600
million through the first quarter of 2013, in addition to any
incremental repurchase of common shares related to any after-tax
gains realized by the Bancorp from the sale of Vantiv, Inc. common
shares by either the Bancorp or Vantiv, Inc.
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, the ability of its subsidiaries to
pay dividends, the need to comply with safe and sound banking
practices as well as meet regulatory requirements and expectations.
The Bancorp declared dividends per common share of $0.36 and
$0.28 during the years ended December 31, 2012 and 2011,
respectively.
Consistent with the 2012 CCAR plan, on April 23, 2012, the
Bancorp entered into an accelerated share repurchase transaction
with a counterparty pursuant to which the Bancorp purchased
4,838,710 shares, or approximately $75 million, of its outstanding
common stock on April 26, 2012. As part of this transaction, and all
subsequent accelerated share repurchase transactions in 2012, the
Bancorp entered into a forward contract in which the final number
of shares delivered at settlement of the accelerated share repurchase
transaction was based on a discount to the average daily volume-
weighted average price of the Bancorp’s common stock during the
term of
the Repurchase Agreement. The accelerated share
repurchase was treated as two separate transactions (i) the
acquisition of treasury shares on the acquisition date and (ii) a
forward contract indexed to the Bancorp’s stock. At settlement of
the April 2012 forward contract on June 1, 2012, the Bancorp
received an additional 631,986 shares which were recorded as an
adjustment to the basis in the treasury shares purchased on the
acquisition date.
As a result of the FRB’s non-objection to the Bancorp’s capital
plan resubmitted under the CCAR process, on August 21, 2012,
Fifth Third’s Board of Directors authorized the Bancorp to
repurchase up to 100 million shares of its outstanding common
stock in the open market or in privately negotiated transactions, and
to utilize any derivative or similar instrument to affect share
repurchase transactions.
Additionally, on August 23, 2012, the Bancorp entered into an
accelerated share repurchase transaction with a counterparty
pursuant to which the Bancorp purchased 21,531,100 shares or
77 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
approximately $350 million of its outstanding common stock on
August 28, 2012. At settlement of the forward contract on October
24, 2012, the Bancorp received an additional 1,444,047 shares which
were recorded as an adjustment to the basis in the treasury shares
purchased on the acquisition date.
On November 6, 2012, the Bancorp entered
into an
accelerated share repurchase transaction with a counterparty
pursuant to which the Bancorp purchased 7,710,761 shares, or
approximately $125 million, of its outstanding common stock on
November 9, 2012. At settlement of the forward contract on
February 12, 2013, the Bancorp received an additional 657,917
shares which were recorded as an adjustment to the basis in the
treasury shares purchased on the acquisition date.
Following the sale of a portion of the Bancorp’s shares of Class
A Vantiv, Inc. common stock, the Bancorp entered into an
accelerated share repurchase transaction on December 14, 2012
with a counterparty pursuant to which the Bancorp purchased
6,267,410 shares, or approximately $100 million, of its outstanding
common stock on December 19, 2012. The Bancorp expects the
settlement of the transaction to occur on March 14, 2013.
TABLE 60: SHARE REPURCHASES
For the years ended December 31
Shares authorized for repurchase at January 1
Additional authorizations(a)
Share repurchases(b)
Shares authorized for repurchase at December 31
Average price paid per share
(a)
2012
19,201,518
86,269,178
(42,424,014)
63,046,682
$ 14.82
2011
19,201,518
-
-
19,201,518
N/A
2010
19,201,518
-
-
19,201,518
N/A
In August 2012, the Bancorp announced that its Board of Directors had authorized management to purchase 100 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. This share repurchase authorization replaces the Board’s previous authorization pursuant to which
approximately 14 million shares remained available for repurchase by the Bancorp.
(b) Excludes 2,059,003, 1,164,254 and 333,808 shares repurchased during 2012, 2011, and 2010, respectively, in connection with various employee compensation plans. These repurchases are not
included in the calculation for average price paid and do not count against the maximum number of shares that may yet be repurchased under the Board of Directors’ authorization.
each company’s own base scenario capital actions. The FRB will
also issue an objection or non-objection to each participating
institution’s capital plan submitted under CCAR. Additionally, as a
CCAR institution, Fifth Third is required to disclose our own
estimates of results under the supervisory severely adverse scenario
using the same consistently applied capital actions noted above, and
to provide information related to risks included in its stress testing;
a summary description of the methodologies used; estimates of
aggregate pre-provision net revenue, losses, provisions, and pro
forma capital ratios at the end of the forward-looking planning
horizon of at least nine quarters; and an explanation of the most
significant causes of changes in regulatory capital ratios. These
disclosures are required by March 31, 2013 and are to be sent to the
FRB and publicly disclosed.
2013 Stress Tests and CCAR
On October 9, 2012, the FRB published final stress testing rules
that implement section 165(i)(1) and (i)(2) of the Dodd-Frank Act.
The 19 bank holding companies that participated in the 2009 SCAP
and subsequent CCAR, which includes Fifth Third, are subject to
the final stress testing rules. The rules require both supervisory and
forward-looking
company-run
information to supervisors to help assess whether institutions have
sufficient capital to absorb losses and support operations during
adverse economic conditions.
tests, which provide
stress
The FRB launched the 2013 stress testing program and CCAR
on November 9, 2012. The CCAR requires bank holding companies
to submit a capital plan in addition to their stress testing results. The
mandatory elements of the capital plan are an assessment of the
expected use and sources of capital over the planning horizon, a
description of all planned capital actions over the planning horizon,
a discussion of any expected changes to the Bancorp’s business plan
that are likely to have a material impact on its capital adequacy or
liquidity, a detailed description of the Bancorp’s process for
assessing capital adequacy and the Bancorp’s capital policy. The
stress testing results and capital plan were submitted by the Bancorp
to the FRB on January 7, 2013.
The FRB’s review of the capital plan will assess the
comprehensiveness of the capital plan, the reasonableness of the
assumptions and
the capital plan.
the analysis underlying
Additionally, the FRB will review the robustness of the capital
adequacy process, the capital policy and the Bancorp’s ability to
maintain capital above the minimum regulatory capital ratios and
above a Tier 1 common ratio of 5 percent on a pro forma basis
under expected and stressful conditions throughout the planning
horizon. The FRB will also assess the Bancorp’s strategies for
addressing proposed revisions to the regulatory capital framework
agreed upon by the Basel Committee on Banking Supervision and
requirements arising from the Dodd-Frank Act.
The FRB has indicated that it expects to disclose on March 7,
2013 its estimates of participating institutions results under the FRB
supervisory stress scenario, including capital results, which assume
that all banks take certain consistently applied future capital actions.
The FRB has indicated that it expects to disclose on March 14, 2013
its estimates of participating institutions results under the FRB
supervisory severe stress scenarios including capital results based on
78 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. Refer to Note 16 of the Notes to
Consolidated Financial Statements for additional information. A
discussion of these transactions is as follows:
Residential Mortgage Loan Sales
Conforming residential mortgage loans sold to unrelated third
parties are generally sold with representation and warranty recourse
provisions. Such provisions include the loan’s compliance with
applicable loan criteria, including certain documentation standards
per agreements with unrelated third parties. Additional reasons for
the Bancorp having to repurchase the loans include compliance with
collateral appraisal standards, 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, 2012 and
2011, the Bancorp maintained reserves related to these loans sold
with representation and warranty recourse provisions totaling $110
million and $55 million, respectively, included in other liabilities in
the Bancorp’s Consolidated Balance Sheets. During the third and
received additional
fourth quarters of 2012,
information from FHLMC regarding their file selection criteria. As
a result of these communications, the Bancorp was able to better
estimate the probable losses on certain loans sold to FHLMC which
was the primary driver in the increase in the representation and
warranty reserve from December 31, 2011 to December 31, 2012.
the Bancorp
During 2012 and 2011, the Bancorp paid $34 million and $63
million, respectively, in the form of make whole payments and
repurchased $114 million and $122 million, respectively,
in
outstanding principal of loans to satisfy investor demands. Total
repurchase demand requests during 2012 and 2011 were $340
million and $350 million, respectively. Total outstanding repurchase
demand inventory was $67 million at December 31, 2012 compared
to $66 million at December 31, 2011.
The Bancorp 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, 2012, the
outstanding balances on these loans sold with credit recourse was
$662 million compared to $772 million at December 31, 2011. The
Bancorp maintained an estimated credit loss reserve on these loans
sold with credit recourse of $20 million and $17 million at
December 31, 2012 and 2011, respectively, included 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.
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.
in
The Bancorp’s maximum exposure
the event of
nonperformance by the underlying borrowers is equivalent to the
Bancorp's total outstanding reinsurance coverage, which was $58
million at December 31, 2012 and $77 million at December 31,
2011. The Bancorp maintained a reserve, included in other liabilities
in the Bancorp’s Consolidated Balance Sheets, related to exposures
within the reinsurance portfolio of $18 million as of December 31,
2012 and $27 million as of December 31, 2011. In 2009, the
Bancorp suspended the practice of providing reinsurance of private
mortgage insurance for newly originated mortgage loans. In the
second quarter of 2011, 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 $5 million, and the insurer assuming the Bancorp’s obligations
under the reinsurance agreement, resulting in a decrease to the
Bancorp’s reserve liability of $11 million and decrease in the
Bancorp’s maximum exposure of $27 million. In the fourth quarter
of 2012, the Bancorp allowed one of its third-party insurers to
terminate its reinsurance agreement with the Bancorp, resulting in
the
the
reinsurance agreement, resulting in a decrease to the Bancorp’s
reserve liability of $2 million and decrease in the Bancorp’s
maximum exposure of $3 million.
the Bancorp’s obligations under
insurer assuming
79 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The Bancorp has certain obligations and commitments to make
future payments under contracts. The aggregate contractual
obligations and commitments at December 31, 2012 are shown in
Table 61. As of December 31, 2012, the Bancorp has unrecognized
tax benefits that, if recognized, would impact the effective tax rate
in future periods. Due to the uncertainty of the amounts to be
ultimately paid as well as the timing of such payments, all uncertain
tax liabilities that have not been paid have been excluded from the
Contractual Obligations and Other Commitments table. For further
detail on the impact of income taxes see Note 19 of the Notes to
Consolidated Financial Statements.
TABLE 61: CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
As of December 31, 2012 ($ in millions)
Contractually obligated payments due by period:
Deposits with a stated maturity of less than one year(a)
Time deposits(c)
Short-term borrowings(e)
Long-term debt(b)
Forward contracts to sell mortgage loans(d)
Noncancelable lease obligations(f)
Partnership investment commitments(g)
Pension obligations(i)
Purchase obligations and capital expenditures(h)
Capital lease obligations
Total contractually obligated payments due by period
Other commitments by expiration period
Commitments to extend credit(j)
Letters of credit(k)
Total other commitments by expiration period
(a)
(b)
Less than 1
year
1-3 years
3-5 years
Greater than
5 years
Total
$
$
$
$
82,218
4,834
7,181
1,277
5,322
89
219
19
49
7
101,215
30,715
1,831
32,546
-
2,029
-
597
-
166
134
35
42
13
3,016
7,497
2,088
9,585
-
383
-
1,928
-
141
10
31
25
3
2,521
15,191
319
15,510
-
53
-
3,283
-
373
31
67
-
1
3,808
121
43
164
82,218
7,299
7,181
7,085
5,322
769
394
152
116
24
110,560
53,524
4,281
57,805
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 MD&A.
In the banking industry, interest-bearing obligations are principally used to fund interest-earning assets. As such, interest charges on contractual obligations were excluded from reported amounts, as
the potential cash outflows would have corresponding cash inflows from interest-earning assets. See Note 15 of the Notes to Consolidated Financial Statements for additional information on these debt
instruments.
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.
See Note 11 of the Notes to Consolidated Financial Statements for additional information on forward contracts to sell residential mortgage loans.
Includes federal funds purchased and borrowings with an original maturity of less than one year. For additional information, see Note 14 of the Notes to Consolidated Financial Statements.
Includes rental commitments.
Includes low-income housing, historic tax investments and market tax credits.
(c)
(d)
(e)
(f)
(g)
(h) Represents agreements to purchase goods or services and includes commitments to various general contractors for work related to banking center construction.
(i)
(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 include capital commitments for private equity investments and do not necessarily represent future cash flow requirements. For
additional information, see Note 16 of the Notes to Consolidated Financial Statements.
See Note 20 of the Notes to Consolidated Financial Statements for additional information on pension obligations.
(k) Letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. For additional information, see Note 16 of the Notes to Consolidated Financial
Statements.
80 Fifth Third Bancorp
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, 2012. 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, 2012. Based on
this assessment, management believes that the Bancorp maintained effective internal control over financial reporting as of December 31, 2012.
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, 2012. This report appears on page 82 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
Vice Chairman and Chief Executive Officer Executive Vice President and Chief Financial Officer
February 22, 2013
February 22, 2013
Daniel T. Poston
81 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, 2012,
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, 2012,
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, 2012 of the Bancorp and our report dated February 22, 2013 expressed an
unqualified opinion on those consolidated financial statements.
Cincinnati, Ohio
February 22, 2013
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, 2012
and 2011, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the
period ended December 31, 2012. 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, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2012, 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, 2012, 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 22, 2013 expressed an unqualified
opinion on the Bancorp's internal control over financial reporting.
Cincinnati, Ohio
February 22, 2013
82 Fifth Third Bancorp
CONSOLIDATED BALANCE SHEETS
$
2012
2011
2,441
15,207
284
207
2,421
2,939
2,663
15,362
322
177
1,781
2,954
36,038
9,103
698
3,549
12,017
10,018
11,972
2,097
290
85,782
(1,854)
83,928
2,542
581
2,416
27
697
8,204
121,894
30,783
10,138
1,020
3,531
10,672
10,719
11,827
1,978
350
81,018
(2,255)
78,763
2,447
497
2,417
40
681
8,863
116,967
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
2,051
Common stock(f)
398
Preferred stock(g)
2,792
Capital surplus
7,554
Retained earnings
470
Accumulated other comprehensive income
(64)
Treasury stock
13,201
Total Bancorp shareholders’ equity
50
Noncontrolling interests
13,251
Total Equity
Total Liabilities and Equity
116,967
(a) At December 31, 2012 and 2011, includes $0 and $30 of cash, $0 and $7 of other short-term investments, $50 and $50 of commercial mortgage loans, $0 and $223 of home equity loans, $0
and $259 of automobile loans, ($5) and ($10) of ALLL, $3 and $4 of other assets, $0 and $4 of other liabilities, $0 and $191 of long-term debt from consolidated VIEs that are included in
their respective captions. See Note 10.
27,600
20,392
21,756
4,989
4,638
3,039
3,296
85,710
346
3,239
1,469
3,270
9,682
103,716
30,023
24,477
19,879
6,875
4,015
3,284
964
89,517
901
6,280
1,708
2,639
7,085
108,130
2,051
398
2,758
8,768
375
(634)
13,716
48
13,764
121,894
$
$
$
(b) Amortized cost of $14,571 and $14,614 at December 31, 2012 and 2011, respectively.
(c)
(d)
(e)
(f) Common shares: Stated value $2.22 per share; authorized 2,000,000,000; outstanding at December 31, 2012 – 882,152,057 (excludes 41,740,524 treasury shares) and December
Fair value of $284 and $322 at December 31, 2012 and 2011, respectively.
Includes $2,856 and $2,751 of residential mortgage loans held for sale measured at fair value at December 31, 2012, and 2011, respectively.
Includes $76 and $65 of residential mortgage loans measured at fair value at December 31, 2012 and 2011, respectively.
(g)
31, 2011 – 919,804,436 (excludes 4,088,145 treasury shares).
317,680 shares of undesignated no par value preferred stock are authorized of which none had been issued; 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, 16,450 issued and outstanding at December 31, 2012 and 2011.
See Notes to Consolidated Financial Statements.
83 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF INCOME
2012
3,574
529
4
4,107
216
8
288
512
3,595
303
3,292
845
522
413
374
253
574
15
3
2,999
2011
3,613
600
5
4,218
352
4
305
661
3,557
423
3,134
597
520
350
375
308
250
46
9
2,455
2010
3,823
658
8
4,489
591
4
290
885
3,604
1,538
2,066
647
574
364
361
316
406
47
14
2,729
1,607
371
302
196
121
110
1,374
4,081
2,210
636
1,574
(2)
1,576
35
1,541
1.69
1.66
904,425,226
945,554,102
0.36
1,478
330
305
188
120
113
1,224
3,758
1,831
533
1,298
1
1,297
203
1,094
1.20
1.18
906,460,550
949,545,420
0.28
1,430
314
298
189
108
122
1,394
3,855
940
187
753
-
753
250
503
0.63
0.63
790,852,185
799,381,153
0.04
$
$
$
$
$
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 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
Other noninterest income
Securities gains, net
Securities gains, net - non-qualifying hedges on mortgage servicing rights
Total noninterest income
Noninterest Expense
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Card and processing expense
Equipment expense
Other noninterest expense
Total noninterest expense
Income Before Income Taxes
Applicable income tax expense
Net Income
Less: Net income attributable to noncontrolling interests
Net Income Attributable to Bancorp
Dividends on preferred stock
Net Income Available to Common Shareholders
Earnings Per Share
Earnings Per Diluted Share
Average common shares - basic
Average common shares - diluted
Cash dividends declared per share
See Notes to Consolidated Financial Statements.
84 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31 ($ in millions)
Net income
Other comprehensive income (loss), net of tax:
Unrealized gains on available-for-sale securities:
Unrealized holding (losses) gains on available-for-sale securities arising during period
Reclassification adjustment for net gains included in net income
Unrealized gains on cash flow hedge derivatives:
Unrealized holding gains on cash flow hedge derivatives arising during period
Reclassification adjustment for net gains included in net income
Defined benefit pension plans:
Net actuarial loss (gain) arising during period
Other comprehensive (loss) income
Comprehensive income
Less: Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Bancorp
See Notes to Consolidated Financial Statements.
$
$
2012
1,574
(63)
(10)
24
(54)
8
(95)
1,479
(2)
1,481
2011
1,298
201
(37)
58
(45)
(21)
156
1,454
1
1,453
2010
753
143
(38)
1
(39)
6
73
826
-
826
85 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Bancorp Shareholders’ Equity
Accumulated
Other
Total
Bancorp
Non-
Common Preferred Capital Retained Comprehensive Treasury Shareholders’ Controlling
Interests
Surplus Earnings
Income
Equity
Stock
Stock
Stock
6,326
753
(32)
(205)
(45)
(1)
(77)
6,719
1,297
(257)
(50)
(153)
(2)
7,554
1,576
(325)
(35)
$
1,779
3,609
1,743
45
45
(10)
(62)
1,779
3,654
(1)
1,715
272
(3,408)
153
1,376
(280)
52
(15)
(58)
2,051
(1)
398
2
2,792
(23)
63
(27)
(47)
$
2,051
398
2,758
(2)
8,768
375
Total
Equity
13,497
753
73
(32)
(205)
-
44
(4)
-
(77)
29
2
14,080
1,298
156
(257)
(50)
1,648
(3,408)
(280)
-
52
(8)
-
21
(1)
13,251
1,574
(95)
(325)
(35)
(650)
63
(20)
-
1
13,764
13,497
753
73
(32)
(205)
-
44
(4)
-
(77)
-
2
14,051
1,297
156
(257)
(50)
1,648
(3,408)
(280)
-
52
(8)
-
-
-
13,201
1,576
(95)
(325)
(35)
(650)
63
(20)
-
1
13,716
29
29
1
21
(1)
50
(2)
48
241
(201)
73
314
156
470
(95)
6
62
3
(130)
7
58
1
(64)
(627)
7
47
3
(634)
($ in millions, except per share data)
Balance at December 31, 2009
Net income
Other comprehensive income
Cash dividends declared:
Common stock at $0.04 per share
Preferred stock
Accretion of preferred dividends, Series F
Stock-based compensation expense
Stock-based awards issued or exercised,
including treasury shares issued
Restricted stock grants
Impact of cumulative effect of change in
accounting principle
Noncontrolling interest
Other
Balance at December 31, 2010
Net income
Other comprehensive income
Cash dividends declared:
Common stock at $0.28 per share
Preferred stock
Issuance of common stock
Redemption of preferred shares, Series F
Redemption of stock warrant
Accretion of preferred dividends, Series F
Stock-based compensation expense
Stock-based awards issued or exercised,
including treasury shares issued
Restricted stock grants
Noncontrolling interests
Other
Balance at December 31, 2011
Net income
Other comprehensive loss
Cash dividends declared:
Common stock at $0.36 per share
Preferred stock
Shares acquired for treasury
Stock-based compensation expense
Stock-based awards issued or exercised,
including treasury shares issued
Restricted stock grants
Other
Balance at December 31, 2012
See Notes to Consolidated Financial Statements.
86 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 ($ in millions)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses
Depreciation, amortization and accretion
Stock-based compensation expense
Provision 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 (gains) losses on sales of loans and fair value adjustments on loans held for sale
Bank premises and equipment impairment
Capitalized mortgage servicing rights
Loss on extinguishment on TruPS
Loss on extinguishment on debt
Proceeds from sales of loans held for sale
Loans originated for sale, net of repayments
Dividends representing return on equity method investments
Gain on Vantiv, Inc. IPO and sale of Vantiv, Inc. shares
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
Proceeds from sale and dividends representing return of equity method investments
Net change in:
Other short-term investments
Loans and leases
Operating lease equipment
Net Cash (Used in) Provided by 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
Dividends paid on common shares
Dividends paid on preferred shares
Proceeds from issuance of long-term debt
Repayment of long-term debt
Repurchases of treasury shares and related forward contracts
Issuance of common shares
Redemption of preferred shares, Series F
Redemption of stock warrant
Capital contributions from noncontrolling interests
Other
Net Cash Provided By (Used In) Financing Activities
(Decrease) Increase in Cash and Due from Banks
Cash and Due from Banks at Beginning of Period
Cash and Due from Banks at End of Period
$
$
2012
1,574
303
531
69
271
(69)
(10)
54
7
103
(278)
21
(305)
26
143
22,044
(21,439)
45
(272)
(28)
4
1
(238)
2,557
2,521
275
13
4,100
36
(6,813)
-
(362)
-
393
(640)
(5,930)
(126)
(6,533)
3,529
279
555
3,041
(309)
(35)
523
(3,159)
(650)
-
-
-
-
(20)
3,754
(222)
2,663
2,441
2011
1,298
423
455
59
437
(58)
(24)
12
15
242
(145)
-
(236)
-
-
14,783
(15,199)
13
-
115
(67)
79
164
2,366
2,471
371
35
3,502
29
(5,689)
-
(319)
-
63
(267)
(5,422)
(59)
(5,285)
5,264
(1,202)
67
1,665
(192)
(50)
1,500
(1,607)
-
1,648
(3,408)
(280)
21
(3)
3,423
504
2,159
2,663
2010
753
1,538
457
64
176
(60)
(14)
13
-
36
114
-
(297)
-
-
18,634
(18,231)
31
-
67
9
(63)
78
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
(32)
(205)
14
(2,473)
-
-
-
-
30
4
(5,172)
(159)
2,318
2,159
See Notes to Consolidated Financial Statements. Note 2 contains cash payments related to interest and income taxes in addition to noncash investing and financing activities.
87 Fifth Third Bancorp
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
advisory activities through its banking and non-banking subsidiaries
from banking centers located throughout the Midwestern and
Southeastern regions of the United States.
occurred. However, even if the Bancorp does not intend to sell the
debt security and will not likely be required to sell the debt security
before recovery of its entire amortized cost basis, the Bancorp must
evaluate expected cash flows to be received and determine if a credit
loss has occurred. In the event of a credit loss, the credit component
of the impairment is 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.
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 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.
Purchased
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 into interest income (nonaccretable difference). The
remaining amount representing the difference in the expected cash
flows of acquired loans and the initial investment in the acquired
loans is accreted into interest income over the remaining life of the
loan or pool of loans (accretable yield). 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 resulting directly from a change in the
contractual interest rate are recognized prospectively as a reduction
of the accretable yield. The present value of any decreases in
expected cash flows after the purchase date as a result of credit
deterioration is recognized by recording an ALLL or a direct
chargeoff. Subsequent to the purchase date, the methods utilized to
estimate the required ALLL are 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.
Basis of Presentation
The Consolidated Financial Statements include the accounts of the
Bancorp and its majority-owned subsidiaries and VIEs in which the
Bancorp has been determined to be the primary beneficiary. Other
entities, including certain joint ventures, in which the Bancorp has
the ability to exercise significant influence over operating and
financial policies of the investee, but upon which the Bancorp does
not possess control, are accounted for by the equity method and not
consolidated. Those entities in which the Bancorp does not have the
ability to exercise significant influence are generally carried at the
lower of cost or fair value. 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.
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 are classified as available-for-sale when, 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 securities are reported at fair value
with unrealized gains and losses, net of related deferred income
taxes, included in other comprehensive income. Trading securities
are reported at fair value with unrealized gains and losses included
in noninterest income. 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
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
and held-to-maturity
88 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Nonaccrual Loans
When a loan is placed on nonaccrual status, the accrual of interest,
amortization of loan premium, accretion of loan discount, and
amortization/accretion of deferred net loan fees are discontinued
and all previously accrued and unpaid interest is charged against
income. Commercial loans are placed on nonaccrual status when
there is a clear indication that the borrower’s cash flows 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 90 days or more, unless the loan is both well secured and in the
process of collection. The Bancorp classifies residential mortgage
loans that have principal and interest payments that have become
past due 150 days as nonaccrual unless the loan is both well secured
and in the process of collection. Residential mortgage loans may
stay on nonperforming status for an extended time as the
foreclosure process typically lasts longer than 180 days. Typically
home equity loans are reported on nonaccrual status if principal or
interest has been in default for 180 days or more unless the loan is
both well secured and in the process of collection. Residential
mortgage, home equity, automobile and other consumer loans and
leases that have been modified in a TDR and subsequently become
past due 90 days are placed on nonaccrual status unless the loan is
both well secured and in the process of collection. Commercial and
credit card loans that have been modified in a TDR are classified as
nonaccrual unless
repayment
performance of six months or greater and are reasonably assured of
repayment in accordance with the restructured terms. 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.
loans have
sustained
such
Nonaccrual commercial loans, other than those modified in a
TDR and nonaccrual credit card loans, are generally accounted for
on the cost recovery method. The Bancorp believes the cost
recovery method is appropriate for nonaccrual commercial loans
and nonaccrual credit card loans because the assessment of
collectability of the remaining recorded investment of these loans
involves a high degree of subjectivity and uncertainty due to the
nature or absence of underlying collateral. Under the cost recovery
method, any payments received are applied to reduce principal.
Once the entire recorded
is collected, additional
payments received are treated as recoveries of amounts previously
charged-off until recovered in full, and any subsequent payments are
treated as interest income. Nonaccrual residential mortgage loans
and other nonaccrual consumer loans are generally accounted for on
the cash basis method. The Bancorp believes the cash basis method
is appropriate for nonaccrual residential mortgage and other
nonaccrual consumer loans because such loans have generally been
written down to estimated collateral values and the collectability of
the remaining investment involves only an assessment of the fair
value of the underlying collateral, which can be measured more
objectively with a lesser degree of uncertainty than assessments of
investment
Commercial
typical commercial loan collateral. Under the cash basis method,
interest income is recognized upon cash receipt to the extent to
which it would have been accrued on the loan's remaining balance at
the contractual rate. 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.
including those
loans on nonaccrual status,
modified in a troubled debt restructuring, as well as criticized
commercial loans with aggregate borrower relationships exceeding
$1 million, are subject to an individual review to identify charge-
offs. The Bancorp does not have an established delinquency
threshold for partially or fully charging off commercial loans.
Residential mortgage, home equity 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. Automobile and other
consumer loans and leases that have principal and interest payments
that have become past due 120 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 does not consider the bankruptcy court’s
discharge of the borrower’s debt a concession when the discharged
debt is not reaffirmed, and as such these loans are classified as
TDRs only if one or more of the previously mentioned concessions
are granted. 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. Residential mortgage loans,
home equity loans, automobile loans and other consumer loans
modified as part of a TDR are maintained 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. Commercial loans and credit
card loans modified as part of a TDR are maintained on accrual
status provided there is a sustained payment history of six-months
or greater prior to the modification in accordance with the modified
terms and all remaining contractual payments under the modified
terms are reasonably assured of collection. TDRs of commercial
loans and credit cards that do not have a sustained payment history
of six months or greater in accordance with their modified terms
remain on nonaccrual status until a six-month payment history is
sustained. During the nonaccrual period, TDRs of 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
89 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 primarily represent conforming fixed rate
residential mortgage loans originated or acquired with the intent to
sell in the secondary market and commercial loans and other
consumer 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.
The fair value of residential mortgage loans held for sale 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.
Management’s
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 mortgage class
of portfolio loans and leases. In such cases, the residential mortgage
loans will continue to be measured at fair value, which is based on
mortgage-backed securities prices, interest rate risk and an internally
developed credit component.
to sell residential mortgage
intent
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 for impairment and decreases in carrying
value are recognized as reductions in other noninterest income in
the Consolidated Statements of Income.
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 the commercial portfolio segment include commercial and
industrial, commercial mortgage owner-occupied, commercial
mortgage nonowner-occupied, commercial construction, and
commercial leasing. The residential mortgage portfolio segment is
also considered a class. Classes within the consumer portfolio
90 Fifth Third Bancorp
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 6.
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
collectability 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. The
Bancorp’s strategy
includes a
combination of conservative exposure limits significantly below
legal lending limits and conservative underwriting, documentation
and
emphasizes
diversification on a geographic, industry and customer level, regular
credit examinations and quarterly management reviews of large
credit exposures and loans experiencing deterioration of credit
quality.
risk management
standards. The
for credit
collections
strategy
also
The Bancorp’s 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
in estimating and
maintained
measuring losses when evaluating allowances for individual loans or
pools of loans.
to recognize
imprecision
the
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 in a TDR, are subject to 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 and leverage of the
borrower, and
the borrower’s
the Bancorp’s evaluation of
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 and other
sources of cash flow, as well as an 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
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on the expected net charge-offs. Loss rates are based on the trailing
twelve month net charge-off history by loan category. Historical loss
rates may be adjusted for certain prescriptive and qualitative 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 reviewers.
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 regional geographic concentrations and the closely associated
effect changing economic conditions have on the Bancorp’s
customers.
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.
liabilities
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
in the Consolidated Balance Sheets. The
determination of the adequacy of the reserve is based upon an
evaluation of the unfunded credit facilities, including an assessment
of historical commitment utilization experience, credit risk grading
and historical loss rates based on 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
The Bancorp periodically sells loans through either securitizations
or individual loan sales in accordance with its investment policies.
The Bancorp recognizes the sale of loans in accordance with the
sale accounting criteria under ASC Topic 860 – Accounting for
Transfers of Financial Assets. The sold loans are removed from the
balance sheet and a net gain or loss is recognized in the Bancorp’s
Consolidated Financial Statements at the time of sale. The Bancorp
typically isolates the loans through the use of a VIE and thus 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
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.
Effective with the adoption of amended VIE consolidation
guidance on January 1, 2010, the Bancorp was required to
consolidate these VIEs, and accordingly, the underlying loans and
other assets and liabilities of these VIEs were included in the
Bancorp’s Consolidated Balance Sheets. See Note 10 for further
information on these consolidated VIEs.
isolated trusts or conduits,
temporary
The Bancorp’s loan sales and securitizations are generally
structured with servicing retained. As a result, servicing rights
resulting from residential mortgage 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, in the Consolidated
Statements of Income. Servicing rights are assessed for impairment
impairment
monthly, based on fair value, with
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.
Reserve for 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 reflects
management’s estimate of losses based on a combination of factors.
The Bancorp’s estimation process requires management to
make subjective and complex judgments about matters that are
inherently uncertain, such as, future demand expectations, economic
factors and the specific characteristics of the loans subject to
repurchase. Such factors incorporate historical investor audit and
repurchase demand rates, appeals success rates, historical loss
severity, and any additional information obtained from the GSEs
regarding future mortgage repurchase and file request criteria. 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
sales 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.
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
tax purposes.
is used for
accelerated depreciation
Amortization of leasehold improvements is computed using the
income
91 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
and minor
circumstances
improvements are charged
the
in
Consolidated Statements of Income as incurred.
to noninterest expense
dictate. Maintenance,
repairs
Derivative Financial Instruments
The Bancorp accounts for its derivatives as either assets or liabilities
measured at fair value through adjustments to accumulated other
comprehensive income and/or current earnings, as appropriate. On
the date the Bancorp enters into a derivative contract, the Bancorp
designates 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
that it is effective, are recorded in accumulated other comprehensive
income and subsequently reclassified to net income in the same
period(s) that the hedged transaction impacts net income. For free-
standing derivative instruments, changes in fair values are reported
in current period net income.
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 the net deferred tax asset or liability is
reported in other assets and accrued taxes, interest and expenses 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
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.
judgment
Accrued taxes represent the net estimated amount due to
taxing jurisdictions and are reported in accrued taxes, interest and
in the Consolidated Balance Sheets. The Bancorp
expenses
evaluates and assesses the relative risks and appropriate tax
treatment of transactions and filing positions after considering
92 Fifth Third Bancorp
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. Any interest and penalties incurred
in connection with income taxes are recorded as a component of
income tax expense in the Consolidated Financial Statements. For
additional information on income taxes, see Note 19.
Earnings Per Share
Basic earnings per share is computed by dividing net income
available to common shareholders by the weighted-average number
of shares of common stock outstanding during the period. Earnings
per diluted share is computed by dividing adjusted net income
available to common shareholders by the weighted-average number
of shares of common stock and common stock equivalents
outstanding during the period. Dilutive common stock equivalents
represent the assumed conversion of dilutive convertible preferred
stock, the exercise of dilutive stock-based awards and warrants and
the dilutive effect of the settlement of outstanding forward
contracts.
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. In testing goodwill for
impairment, U.S. GAAP permits the Bancorp to first assess
qualitative factors to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying amount.
If, after assessing the totality of events and circumstances, the
Bancorp determines it is not more likely than not that the fair value
of a reporting unit is less than its carrying amount, then performing
the two-step impairment test would be unnecessary. However, if the
Bancorp concludes otherwise, it would then be required to perform
the first step (Step 1) of the goodwill impairment test, and continue
to the second step (Step 2), if necessary. Step 1 of the goodwill
impairment test 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, Step 2 of the goodwill
impairment test is performed to measure the amount of impairment
loss, if any.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 compares this
market-based fair value measurement to the aggregate fair value of
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. A recognized impairment loss cannot exceed the
carrying amount of that goodwill and cannot be reversed in future
periods even if the fair value of the reporting unit subsequently
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 8 for further information regarding the
Bancorp’s goodwill.
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. 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 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.
assumptions
Level 3 - Unobservable inputs for the asset or liability for
which there is little, if any, market activity at the
the
measurement date. Unobservable
inputs reflect
Bancorp’s own
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 and discounted cash flow methodologies,
as well as
the fair value
instruments for which
determination requires significant management judgment.
The Bancorp's fair value measurements involve various valuation
techniques and models, which involve inputs that are observable,
when available. Valuation techniques and parameters used for
measuring assets and liabilities are reviewed and validated by the
Bancorp on a quarterly basis. Additionally, the Bancorp monitors
the fair values of significant assets and liabilities using a variety of
methods including the evaluation of pricing runs and exception
reports based on certain analytical criteria, comparison to previous
trades and overall review and assessments for reasonableness. See
Note 26 for further information on fair value measurements.
retirement
the Bancorp
Stock-Based Compensation
In accordance with U.S. GAAP,
recognizes
compensation expense for the grant-date fair value of stock-based
awards that are expected to vest over the requisite service period.
All awards, both those with cliff vesting and graded vesting, are
expensed on a straight-line basis. Awards to employees that meet
eligible
immediately. As
are
compensation expense is recognized, a deferred tax asset is recorded
that represents an estimate of the future tax deduction from exercise
or release of restrictions. At the time awards are exercised,
cancelled, expire, or restrictions are released, the Bancorp may be
required to recognize an adjustment to income tax expense for the
difference between the previously estimated tax deduction and the
actual tax deduction realized. For further information on the
Bancorp’s stock-based compensation plans, see Note 23.
expensed
status
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,
93 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15, 2011. The amended guidance was adopted by the Bancorp on
January 1, 2012 and the required disclosures are included in Note 26.
Presentation of Comprehensive Income
In June 2011, the FASB
issued amended guidance on the
presentation requirements for comprehensive income. The amended
guidance requires the Bancorp to present total comprehensive
income, the components of net income and the components of
other comprehensive income on the face of the financial statements,
either in a single continuous statement of comprehensive income or
in two separate but consecutive statements. The amended guidance
does not change the items that must be reported in other
comprehensive income or when an item of other comprehensive
income must be reclassified to net income. The amended guidance
was effective for interim and annual periods beginning after
December 15, 2011. This amended guidance was adopted by the
Bancorp on January 1, 2012 and has been applied retrospectively.
The Bancorp presents comprehensive income in two separate but
consecutive statements, and has included the requirements of the
amended
Statements of
Comprehensive Income.
the Consolidated
guidance
in
Testing Goodwill for Impairment
In September 2011, the FASB issued amended guidance on testing
goodwill for impairment. The amended guidance simplifies how the
Bancorp is required to test goodwill for impairment and permits the
Bancorp to first assess qualitative factors to determine whether it is
more likely than not that the fair value of a reporting unit is less than
its carrying amount. If, after assessing the totality of events or
circumstances, the Bancorp determines it is not more likely than not
that the fair value of a reporting unit is less than its carrying amount,
then performing
test would be
unnecessary. However, if the Bancorp concludes otherwise, it would
then be required to perform Step 1 of the goodwill impairment test,
and continue to Step 2, if necessary. The amended guidance was
tests
effective for annual and
performed for fiscal years beginning after December 15, 2011 and
was adopted by the Bancorp on January 1, 2012. The results of the
Bancorp’s most recent annual impairment test are included in Note
8.
interim goodwill
impairment
impairment
two-step
the
information about
Disclosures about Offsetting Assets and Liabilities
In December 2011, the FASB issued amended guidance related to
disclosures about offsetting assets and liabilities. The amended
guidance requires the Bancorp to disclose both gross information
and net
including
derivatives, and transactions eligible for offset in the Consolidated
Balance Sheets as well as financial instruments and transactions
subject to agreements similar to a master netting arrangement. The
amended guidance will be applied retrospectively and is effective for
fiscal years, and interim periods within those years, beginning on or
after January 1, 2013.
instruments,
financial
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 these BOLI policies within other assets in the Consolidated
Balance Sheets at each policy’s respective cash surrender value, with
changes recorded in other noninterest income in the Consolidated
Statements of Income.
lists, non-compete
Other intangible assets consist of core deposit intangibles,
customer
cardholder
relationships. Other intangible assets are amortized on either a
straight-line or an accelerated basis over their estimated useful lives.
The Bancorp reviews other intangible assets for impairment
whenever events or changes in circumstances indicate that carrying
amounts may not be recoverable.
agreements
and
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
Reconsideration of Effective Control for Repurchase Agreements
In April 2011, the FASB issued amended guidance clarifying when
the Bancorp can recognize a sale upon the transfer of financial
assets subject to a repurchase agreement. That determination is
based, in part, on whether the Bancorp has maintained effective
control over the transferred financial assets. Under the amended
guidance, the FASB concluded that the assessment of effective
control should focus on a transferor’s contractual rights and
obligations with respect to transferred financial assets, not on
whether the transferor has the practical ability to perform in
accordance with those rights or obligations. The amended guidance
was effective for transactions that occur in interim and annual
periods beginning on or after December 15, 2011. The Bancorp
accounts for all of its existing repurchase agreements as secured
borrowings and therefore, the adoption of this amended guidance
on January 1, 2012 did not have a material impact on the Bancorp’s
Consolidated Financial Statements.
Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs
In May 2011, the FASB issued amended guidance that resulted in
common fair value measurement and disclosure requirements
between U.S. GAAP and IFRS. Under the amended guidance, the
Bancorp is required to expand its disclosure for fair value
instruments categorized within Level 3 of the fair value hierarchy to
include (1) the valuation processes used by the Bancorp; and (2) a
narrative description of the sensitivity of the fair value measurement
inputs for recurring fair value
to changes
measurements
those
unobservable inputs, if any. The Bancorp is also required to disclose
the categorization by level of the fair value hierarchy for items that
are not measured at fair value in the statement of financial position
but for which the fair value is required to be disclosed (e.g. portfolio
loans). The amended guidance is to be applied prospectively and was
effective for interim and annual periods beginning after December
in unobservable
interrelationships
between
and
the
94 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments related to interest and income taxes, in addition to noncash investing and financing activities, are presented in the following table
for the years ended December 31:
($ in millions)
Cash payments:
Interest
Income taxes
Transfers:
Portfolio loans to held for sale loans
Held for sale loans to portfolio loans
Portfolio loans to OREO
Held for sale loans to OREO
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
3. RESTRICTIONS ON CASH AND DIVIDENDS
The FRB, under Regulation D, requires that banks hold cash in
reserve against deposit liabilities, known as the reserve requirement.
The reserve requirement is calculated based on a two-week average
of daily net transaction account deposits as defined by the FRB and
may be satisfied with vault cash. When vault cash is not sufficient to
meet the reserve requirement, the remaining amount must be
satisfied with funds held at the FRB. At the years ended 2012 and
2011, the Bancorp’s banking subsidiary reserve requirement was
$1.5 billion and $1.1 billion, respectively. Vault cash was not
sufficient to meet the total reserve requirement; therefore, for the
years ended 2012 and 2011, the Bancorp’s banking subsidiary
satisfied the remaining reserve requirement with $1.1 billion and
$265 million, respectively, of the Bancorp’s total deposit at the FRB.
The Bancorp’s total deposit at the FRB is held in short-term
investments in the Consolidated Balance Sheets.
The dividends paid by the Bancorp’s banking subsidiary are
subject to regulations and limitations prescribed by state and federal
supervisory agencies. Due to the regulations and limitations, the
Bancorp’s banking subsidiary was prohibited from declaring
dividends without also obtaining prior approval from supervisory
agencies at December 31, 2012 and 2011. The Bancorp’s banking
subsidiary paid the Bancorp’s nonbank subsidiary holding company
$2.0 billion in dividends during both of the years ended December
31, 2012 and 2011. The Bancorp’s nonbank subsidiary holding
company paid the Bancorp $2.0 billion and $1.7 billion in dividends
during the years ended December 31, 2012 and 2011, respectively.
In 2008, the Bancorp sold $3.4 billion in Series F senior
preferred stock and related warrants to the U.S. Treasury under the
terms of the CPP. The terms included certain restrictions on
common stock dividends, which required 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 were
redeemed in whole or the U.S. Treasury transferred all of the
preferred shares to a third party. Also, no dividends could be
declared or paid on the Bancorp’s common stock unless all accrued
and unpaid dividends had been paid on the preferred shares and
certain other outstanding securities. Additionally, the Bancorp’s
ability to pay dividends on its common stock was limited by its need
to maintain adequate capital levels, comply with safe and sound
banking practices and meet regulatory expectations.
$
2012
524
383
62
77
272
23
-
-
-
-
-
2011
658
102
143
32
342
43
-
-
-
-
-
2010
920
79
650
160
662
68
941
2,217
18
122
1,344
On February 2, 2011, the Bancorp redeemed all 136,320 shares
of its Series F senior preferred stock held by the U.S. Treasury
under the CPP totaling $3.4 billion. As such, the Bancorp had no
restrictions on common stock dividends pursuant to the CPP as of
December 31, 2012 and 2011. See Note 22 for further information
on the redemption of the preferred shares.
In February 2009, the FRB advised bank holding companies
that safety and soundness considerations required that dividends be
substantially reduced or eliminated. Subsequently, the FRB indicated
that
increased capital distributions would generally not be
considered prudent in the absence of a well-developed capital plan
and a capital position that would remain strong even under adverse
conditions. In November 2010, the FRB issued guidelines to
provide a common, conservative approach to ensure bank holding
companies hold adequate capital to maintain ready access to
funding, continue operations and meet their obligations to creditors
and counterparties, and continue to serve as credit intermediaries,
even in adverse conditions. These guidelines required the nineteen
bank holding companies that participated in the 2009 SCAP to
participate in the CCAR process. The CCAR process required the
submission of a comprehensive capital plan that assumed a
minimum planning horizon of nine quarters under various
economic scenarios. The mandatory elements of the capital plan
among others are an assessment of the expected use and sources of
capital over the planning horizon, a description of all planned capital
actions over the planning horizon, a discussion of any expected
changes to the Bancorp’s business plan that are likely to have a
material impact on its capital adequacy or liquidity, a detailed
description of the Bancorp’s process for assessing capital adequacy
and the Bancorp’s capital policy.
In March 2012, the FRB announced it had completed the 2012
CCAR and for bank holding companies that proposed capital
distributions in their plan, the FRB either objected to the plan or
provided a non objection whereby the FRB concurred with the
proposed 2012 capital distributions. The FRB indicated to the
Bancorp that it did not object to the following capital actions: a
continuation of its quarterly common dividend, the redemption of
certain TruPS and the repurchase of common shares in an amount
equal to any after-tax gains realized by the Bancorp from the sale of
Vantiv, Inc. common shares by either the Bancorp or Vantiv, Inc.
The FRB indicated to the Bancorp that it did object to other
95 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
elements of its capital plan, including increases in its quarterly
common dividend and the initiation of common share repurchases.
The Bancorp resubmitted its capital plan to the FRB in the second
quarter of 2012. The resubmitted plan included capital actions and
distributions for the covered period through March 31, 2013 that
were substantially similar to those
in the original
submission, with adjustments primarily reflecting the change in the
expected timing of capital actions and distributions relative to the
timing assumed in the original submission. On August 21, 2012, the
Bancorp announced the FRB did not object to the Bancorp’s
resubmitted capital plan which included the potential increase of the
quarterly common stock dividend and the repurchases of common
shares of up to $600 million through the first quarter of 2013.
included
On October 9, 2012, the FRB published final stress testing
rules that implement section 165(i)(1) and (i)(2) of the Dodd-Frank
Act. The 19 bank holding companies that participated in the 2009
SCAP and subsequent CCAR, which includes Fifth Third, are
subject to the final stress testing rules. The rules require both
supervisory and company-run stress tests, which provide forward-
looking
to help assess whether
institutions have sufficient capital to absorb losses and support
operations during adverse economic conditions.
to supervisors
information
The FRB launched the 2013 stress testing program and CCAR
on November 9, 2012. The CCAR requires bank holding companies
to submit a capital plan in addition to their stress testing results. The
mandatory elements of the capital plan are an assessment of the
expected use and sources of capital over the planning horizon, a
description of all planned capital actions over the planning horizon,
a discussion of any expected changes to the Bancorp’s business plan
that are likely to have a material impact on its capital adequacy or
liquidity, a detailed description of the Bancorp’s process for
assessing capital adequacy and the Bancorp’s capital policy. The
stress testing results and capital plan were submitted by the Bancorp
to the FRB on January 7, 2013.
The FRB’s review of the capital plan will assess the
comprehensiveness of the capital plan, the reasonableness of the
the capital plan.
the analysis underlying
assumptions and
Additionally, the FRB will review the robustness of the capital
adequacy process, the capital policy and the Bancorp’s ability to
maintain capital above the minimum regulatory capital ratios and
above a Tier 1 common ratio of 5 percent on a pro forma basis
under expected and stressful conditions throughout the planning
horizon. The FRB will also assess the Bancorp’s strategies for
addressing proposed revisions to the regulatory capital framework
agreed upon by the Basel Committee on Banking Supervision and
requirements arising from the Dodd-Frank Act.
The FRB has indicated that it expects to disclose on March 7,
2013 its estimates of participating institutions results under the FRB
supervisory stress scenario, including capital results, which assume
that all banks take certain consistently applied future capital actions.
The FRB has indicated that it expects to disclose on March 14, 2013
its estimates of participating institutions results under the FRB
supervisory severe stress scenarios including capital results based on
each company’s own base scenario capital actions. The FRB will
also issue an objection or non-objection to each participating
institution’s capital plan submitted under CCAR. Additionally, as a
CCAR institution, Fifth Third is required to disclose our own
estimates of results under the supervisory severely adverse scenario
using the same consistently applied capital actions noted above, and
to provide information related to risks included in its stress testing;
a summary description of the methodologies used; estimates of
aggregate pre-provision net revenue, losses, provisions, and pro
forma capital ratios at the end of the forward-looking planning
horizon of at least nine quarters; and an explanation of the most
significant causes of changes in regulatory capital ratios. These
disclosures are required by March 31, 2013 and are to be sent to the
FRB and publicly disclosed.
4. 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 portfolios as of December 31:
2012
2011
Amortized Unrealized Unrealized
Gains
Fair
Value
Amortized Unrealized Unrealized
Gains
Fair
Value
$
Cost
Cost
Losses
($ 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(a)
Other bonds, notes and debentures
Other securities(b)
Total
Held-to-maturity:
Obligations of states and political subdivisions
Other debt securities
Total
(a) Includes interest-only mortgage backed securities of $408 and $110 as of December 31, 2012 and 2011, respectively, recorded at fair value with fair value changes recorded in securities gains, net
41
1,911
212
8,730
3,277
1,036
15,207
41
1,730
203
8,403
3,161
1,033
14,571
171
1,962
101
10,284
1,812
1,032
15,362
171
1,782
96
9,743
1,792
1,030
14,614
-
181
9
345
119
3
657
-
-
-
(18)
(3)
-
(21)
-
180
5
542
29
2
758
-
-
-
(1)
(9)
-
(10)
282
2
284
282
2
284
320
2
322
320
2
322
-
-
-
-
-
-
Losses
-
-
-
-
-
-
$
$
$
and securities gains, net – non-qualifying hedges on mortgage servicing rights in the Consolidated Statements of Income.
(b) Other securities consist of FHLB and FRB restricted stock holdings of $497 and $347, respectively, at December 31, 2012 and, $497 and $345, respectively, at December 31, 2011, that are
carried at cost, and certain mutual fund and equity security holdings.
96 Fifth Third Bancorp
The following table presents realized gains and losses that were recognized in income from available-for-sale securities for the years ended
December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Realized gains
Realized losses
OTTI
Net realized gains
2012
75
(2)
(58)
15
$
$
2011
75
-
(19)
56
2010
69
(10)
(3)
56
Trading securities totaled $207 million as of December 31, 2012,
compared to $177 million at December 31, 2011. Gross realized
gains on trading securities were $2 million for the year ended
December 31, 2012, and $1 million for the years ended 2011 and
2010. Gross realized losses on trading securities were immaterial to
the Bancorp for the year ended December 31, 2012 and $7 million
and $1 million for the years ended December 31, 2011 and 2010,
respectively. Net unrealized gains on trading securities were $1
million and $5 million at December 31, 2012 and 2011, respectively,
and immaterial to the Bancorp at December 31, 2010.
At December 31, 2012 and 2011 securities with a fair value of
$12.6 billion and $13.3 billion, respectively, were pledged to secure
borrowings, public deposits, trust funds, derivative contracts and for
other purposes as required or permitted by law.
The expected maturity distribution of the Bancorp’s agency mortgage-backed securities and the contractual maturity distribution of the Bancorp’s
available-for-sale and other and held-to-maturity securities as of December 31, 2012 are shown in the following table:
Available-for-Sale & Other
Held-to-Maturity
($ in millions)
Debt securities:(a)
Under 1 year
1-5 years
5-10 years
Over 10 years
Other securities
Total
(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.
555
8,865
2,223
1,895
1,033
14,571
566
9,356
2,280
1,969
1,036
15,207
Amortized Cost
Fair Value
$
$
73
185
20
6
-
284
Amortized Cost
Fair Value
73
185
20
6
-
284
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)
2012
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
2011
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
$
$
$
$
-
-
-
1,784
454
1
2,239
70
-
-
34
523
6
633
-
-
-
(18)
(3)
-
(21)
-
-
-
(1)
(4)
-
(5)
-
-
-
-
-
-
-
1
-
2
6
38
-
47
-
-
-
-
-
-
-
-
-
-
-
(5)
-
(5)
-
-
-
1,784
454
1
2,239
71
-
2
40
561
6
680
-
-
-
(18)
(3)
-
(21)
-
-
-
(1)
(9)
-
(10)
Other-Than-Temporary Impairments
The Bancorp recognized $58 million, $19 million, and $3 million of
OTTI, included in securities gains, net and securities gains, net –
the
non-qualifying hedges on mortgage servicing rights,
Bancorp’s Consolidated Statements of Income, on its available-for-
sale and other debt securities during the years ended December 31,
2012, 2011, and 2010, respectively, and no OTTI was recognized
on held-to-maturity debt securities for the years ended December
31, 2012, 2011, and 2010. Less than one percent of unrealized losses
in
in the available-for-sale securities portfolio were represented by
non-rated securities at December 31, 2012 and 2011.
During the years ended December 31, 2012 and 2011, the
Bancorp did not recognize OTTI on any of its available-for-sale
equity securities. In addition, for the year ended December 31, 2010,
OTTI recognized on available-for-sale equity securities was
immaterial to the Bancorp’s Consolidated Financial Statements.
97 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS AND LEASES
The Bancorp diversifies its loan and lease portfolio by offering a
variety of loan and lease products with various payment terms and
rate structures. Lending activities are concentrated within those
states in which the Bancorp has banking centers and are primarily
located in the Midwestern and Southeastern regions of the United
States. The Bancorp’s commercial loan portfolio consists of lending
to various industry types. Management periodically reviews the
performance of its loan and lease products to evaluate whether they
are performing within acceptable interest rate and credit risk levels
and changes are made to underwriting policies and procedures as
needed. The Bancorp maintains an allowance to absorb loan and
lease losses inherent in the portfolio. For further information on
credit quality and the ALLL, see Note 6.
The following table provides a summary of the total loans and leases classified by primary purpose as of December 31:
($ 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
2012
2011
$
$
$
$
39
13
9
2,856
22
2,939
36,038
9,103
698
3,549
49,388
12,017
10,018
11,972
2,097
290
36,394
85,782
45
76
17
2,802
14
2,954
30,783
10,138
1,020
3,531
45,472
10,672
10,719
11,827
1,978
350
35,546
81,018
Total portfolio loans and leases are recorded net of unearned
income, which totaled $758 million as of December 31, 2012 and
$942 million as of December 31, 2011. Additionally, portfolio loans
and
leases are recorded net of 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) which totaled a net premium of $73 million and
$45 million as of December 31, 2012 and 2011, respectively.
The Bancorp’s FHLB and FRB advances are generally secured by
loans. The Bancorp had loans of $12.7 billion and $11.2 billion at
December 31, 2012 and 2011, respectively, pledged at the FHLB,
and loans of $30.9 billion and $26.8 billion at December 31, 2012
and 2011, respectively, pledged at the FRB.
The following table presents a summary of the total loans and leases owned by the Bancorp as of and for the years ended December 31:
($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity loans
Automobile loans
Credit card
Other consumer loans and leases
Total loans and leases
Less: Loans held for sale
Total portfolio loans and leases
Balance
90 Days Past Due
and Still Accruing
Net
Charge-Offs
2012
36,077
9,116
707
3,549
14,873
10,018
11,972
2,097
312
88,721
2,939
85,782
$
$
$
$
2012
1
22
1
-
75
58
8
30
-
195
2011
30,828
10,214
1,037
3,531
13,474
10,719
11,827
1,978
364
83,972
2,954
81,018
$
$
2011
4
3
1
-
79
74
9
30
-
200
$
$
2012
165
99
25
8
122
157
31
74
23
704
2011
276
195
85
(2)
173
220
53
98
74
1,172
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 $1.3 billion of leveraged leases at December 31, 2012 compared
to $2.9 billion and $1.7 billion, respectively, at December 31, 2011.
Pre-tax income from leveraged leases for 2012 was $37 million
compared to pre-tax income in 2011 of $33 million. The tax effect
of this income was a benefit of $6 million in 2012 and an expense of
$10 million in 2011.
98 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the investment in lease financing at December 31:
($ 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 $67 million and $79 million at December 31, 2012 and 2011, respectively.
$
$
2012
3,543
760
16
4,319
(758)
3,561
2011
3,757
772
16
4,545
(942)
3,603
The Bancorp periodically reviews residual values associated with its
leasing portfolio. Declines in residual values that are deemed to be
other-than-temporary are recognized as a loss. The Bancorp
recognized $9 million and $4 million of residual value write-downs
related to commercial leases for the years ended December 31, 2012
and 2011, respectively. The residual value write-downs related to
commercial leases are recorded in corporate banking revenue in the
Consolidated Statements of Income. The Bancorp recognized no
residual value write-downs relating to consumer automobile leases
in 2012 and 2011. At December 31, 2012, the minimum future lease
payments receivable for each of the years 2013 through 2017 was
$612 million, $593 million, $472 million, $389 million and $312
million, respectively.
6. CREDIT QUALITY AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES
The Bancorp disaggregates ALLL balances and transactions in the ALLL by portfolio segment. Credit quality related disclosures for loans and
leases are further disaggregated by class.
Allowance for Loan and Lease Losses
The following tables summarize transactions in the ALLL by portfolio segment:
For the year ended December 31, 2012
($ in millions)
Transactions in the ALLL:
Balance at January 1
Losses charged off
Recoveries of losses previously charged off
Provision for loan and lease losses
Balance at December 31
For the year ended December 31, 2011
($ in millions)
Transactions in the ALLL:
Balance at January 1
Losses charged off
Recoveries of losses previously charged off
Provision for loan and lease losses
Balance at December 31
For the year ended December 31, 2010
($ in millions)
Transactions in the ALLL:
Balance at January 1
Losses charged off
Recoveries of losses previously charged off
Provision for loan and lease losses
Impact of change in accounting principle
Balance at December 31
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
$
$
$
$
$
$
1,527
(358)
61
6
1,236
227
(129)
7
124
229
365
(350)
65
198
278
136
-
-
(25)
111
2,255
(837)
133
303
1,854
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
1,989
(615)
61
92
1,527
310
(180)
7
90
227
555
(519)
74
255
365
150
-
-
(14)
136
3,004
(1,314)
142
423
2,255
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
2,517
(1,444)
80
836
-
1,989
375
(441)
2
374
-
310
664
(600)
75
371
45
555
193
-
-
(43)
-
150
3,749
(2,485)
157
1,538
45
3,004
99 Fifth Third Bancorp
The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2012 ($ in millions)
ALLL:(a)
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
Unallocated
Total ALLL
Loans and leases:(b)
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$
$
$
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
95
1,140
1
-
1,236
137
91
1
-
229
980
48,407
1
49,388
1,298
10,637
6
11,941
62
216
-
-
278
544
23,833
-
24,377
-
-
-
111
111
-
-
-
-
294
1,447
2
111
1,854
2,822
82,877
7
85,706
Total portfolio loans and leases
(a)
(b) Excludes $76 of residential mortgage loans measured at fair value, and includes $862 of leveraged leases, net of unearned income.
Includes $11 related to leveraged leases.
$
As of December 31, 2011 ($ in millions)
ALLL:(a)
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
Unallocated
Total ALLL
Loans and leases:(b)
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$
$
$
Residential
Commercial
Mortgage
Consumer
Unallocated
Total
155
1,371
1
-
1,527
130
96
1
-
227
1,170
44,299
3
45,472
1,258
9,341
8
10,607
65
300
-
-
365
574
24,300
-
24,874
-
-
-
136
136
-
-
-
-
350
1,767
2
136
2,255
3,002
77,940
11
80,953
Total portfolio loans and leases
(a)
(b) Excludes $65 of residential mortgage loans measured at fair value, and includes $1,022 of leveraged leases, net of unearned income.
Includes $14 related to leveraged leases.
$
100 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CREDIT RISK PROFILE
Commercial Portfolio Segment
risk
For purposes of monitoring
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.
the credit quality and
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.
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 leases classified as loss are considered uncollectible
and are charged off in the period in which they are determined to be
uncollectible. Because loans and leases in this category are fully
charged down, they are not included in the following tables.
The following table summarizes the credit risk profile of the Bancorp’s commercial portfolio segment, by class:
As of December 31, 2012 ($ in millions)
Commercial and industrial loans
Commercial mortgage loans owner-occupied
Commercial mortgage loans nonowner-occupied
Commercial construction loans
Commercial leases
Total
As of December 31, 2011 ($ in millions)
Commercial and industrial loans
Commercial mortgage loans owner-occupied
Commercial mortgage loans nonowner-occupied
Commercial construction loans
Commercial leases
Total
Pass
33,521
3,934
2,958
444
3,483
44,340
Pass
27,199
3,893
3,328
343
3,434
38,197
$
$
$
$
Special
Mention
1,113
338
449
59
48
2,007
Special
Mention
1,641
567
521
235
52
3,016
Substandard
1,379
603
815
195
18
3,010
Doubtful
25
1
5
-
-
31
Substandard
1,831
778
984
413
44
4,050
Doubtful
112
28
39
29
1
209
Total
36,038
4,876
4,227
698
3,549
49,388
Total
30,783
5,266
4,872
1,020
3,531
45,472
Consumer Portfolio Segment
risk
For purposes of monitoring
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 credit quality and
The Bancorp considers repayment performance as the best
indicator of credit quality for residential mortgage and consumer
loans, which includes both the delinquency status and performing
versus nonperforming status of the loans. The delinquency status
of all residential mortgage and consumer loans is presented by
class in the age analysis section below while the performing versus
nonperforming status is presented in the table below. Residential
mortgage loans that have principal and interest payments that have
become past due 150 days and home equity loans with principal
and interest payments that have become past due 180 days are
classified as nonperforming unless such loans are both well secured
and in the process of collection. Residential mortgage, home
equity, automobile and other consumer loans and leases that have
been modified in a TDR and subsequently become past due 90
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. 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
101 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
current or recover the entire outstanding principal and accrued
interest balance.
The following table presents a summary of the Bancorp’s residential mortgage and consumer portfolio segments disaggregated into performing
versus nonperforming status as of December 31:
($ in millions)
Performing
Residential mortgage loans(a)
11,704
Home equity
9,965
Automobile loans
11,970
Credit card
2,058
Other consumer loans and leases
289
35,986
Total
(a) Excludes $76 and $65 of loans measured at fair value at December 31, 2012 and 2011, respectively.
$
$
2012
2011
Nonperforming
237
53
2
39
1
332
Performing
10,332
10,665
11,825
1,930
349
35,101
Nonperforming
275
54
2
48
1
380
Age Analysis of Past Due Loans and Leases
The following tables summarize the Bancorp’s recorded investment in portfolio loans and leases by age and class:
Information for current residential mortgage loans includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the Federal Housing
Administration or guaranteed by the Department of Veterans Affairs. As of December 31, 2012, $80 of these loans were 30-89 days past due and $414 were 90 days or more past due. The
Bancorp recognized $2 million of losses for the year ended December 31, 2012 due to claim denials and curtailments associated with these advances.
Includes accrual and nonaccrual loans and leases.
Includes an immaterial amount of government insured commercial loans 30-89 days and 90 days past due and accruing whose repayments are insured by the Small Business Administration at
December 31, 2012.
(c)
(d)
Current
Loans and
Leases(c)
30-89
Days(c)
Past Due
90 Days
and
Greater(c)
Total
Past Due
Total Loans
and Leases
90 Days Past
Due and Still
Accruing
$
$
35,826
4,752
4,094
622
3,546
11,547
9,782
11,900
2,025
287
84,381
46
29
21
-
2
87
126
62
38
2
413
166
95
112
76
1
307
110
10
34
1
912
212
124
133
76
3
394
236
72
72
3
1,325
36,038
4,876
4,227
698
3,549
11,941
10,018
11,972
2,097
290
85,706
1
22
-
1
-
75
58
8
30
-
195
Current
Loans and
Leases(c)
30-89
Days(c)
Past Due
90 Days
and
Greater(c)
Total
Past Due
Total Loans
and Leases
90 Days Past
Due and Still
Accruing
$
$
30,493
5,088
4,649
887
3,521
10,149
10,455
11,744
1,873
348
79,207
49
62
41
12
4
110
136
71
33
1
519
241
116
182
121
6
348
128
12
72
1
1,227
290
178
223
133
10
458
264
83
105
2
1,746
30,783
5,266
4,872
1,020
3,531
10,607
10,719
11,827
1,978
350
80,953
4
1
2
1
-
79
74
9
30
-
200
As of December 31, 2012
($ in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Residential mortgage loans(a)(b)
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total portfolio loans and leases(a)(d)
(a) Excludes $76 of loans measured at fair value.
(b)
As of December 31, 2011
($ in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Residential mortgage loans(a)(b)
Consumer:
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total portfolio loans and leases(a)(d)
(a) Excludes $65 of loans measured at fair value.
(b)
102 Fifth Third Bancorp
Information for current residential mortgage loans includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the Federal Housing
Administration or guaranteed by the Department of Veterans Affairs. As of December 31, 2011, $45 of these loans were 30-89 days past due and $309 were 90 days or more past due. The
Bancorp recognized an immaterial amount of losses for the year ended December 31, 2011 due to claim denials and curtailments associated with these advances.
Includes accrual and nonaccrual loans and leases.
Includes an immaterial amount of government insured commercial loans 30-89 and 90 days past due and accruing whose repayments are insured by the Small Business Administration at December
31, 2011.
(c)
(d)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired Loans and Leases
Larger commercial loans included within aggregate borrower
relationship balances exceeding $1 million that exhibit probable or
observed credit weaknesses are subject to individual review for
impairment. The Bancorp also performs an individual review on
loans that are restructured in a troubled debt restructuring. The
Bancorp considers the current value of collateral, credit quality of
any guarantees, the loan structure, and other factors when
evaluating whether an individual loan is impaired. Other factors
may include the geography and industry of the borrower, size and
financial condition of the borrower, cash flow and leverage of the
borrower, and the Bancorp’s evaluation of the borrower’s
management. Smaller balance homogenous
that are
collectively evaluated for impairment are not included in the
following tables.
loans
The following table summarizes the Bancorp’s impaired loans and leases (by class) that were subject to individual review as of December 31, 2012:
As of December 31, 2012
($ in millions)
With a related allowance recorded:
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Restructured residential mortgage loans
Restructured consumer:
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total impaired loans with a related allowance
With no related allowance recorded:
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Restructured residential mortgage loans
Restructured consumer:
Home equity
Automobile loans
Total impaired loans with no related allowance
Total impaired loans
(a)
Includes $431, $1,175 and $480, respectively, of commercial, residential mortgage and consumer TDRs on accrual status; $177, $123 and $64, respectively, of commercial, residential mortgage and
consumer TDRs on nonaccrual status.
Unpaid
Principal
Balance
Recorded
Investment
Allowance
$
$
$
$
263
54
215
48
8
1,067
400
31
74
2
2,162
207
107
209
109
5
326
40
3
1,006
3,168
194
43
160
37
8
1,023
396
30
74
2
1,967
169
99
199
67
5
275
39
3
856
2,823 (a)
65
5
16
5
5
137
46
4
12
-
295
-
-
-
-
-
-
-
-
-
295
103 Fifth Third Bancorp
The following table summarizes the Bancorp’s impaired loans and leases (by class) that were subject to individual review as of December 31, 2011:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2011
($ in millions)
With a related allowance recorded:
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Restructured residential mortgage loans
Restructured consumer:
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total impaired loans with a related allowance
With no related allowance recorded:
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Restructured residential mortgage loans
Restructured consumer:
Home equity
Automobile loans
Total impaired loans with no related allowance
Total impaired loans
(a)
Unpaid
Principal
Balance
Recorded
Investment
Allowance
$
$
$
$
330
66
203
213
11
1,091
401
37
94
2
2,448
375
78
191
143
2
276
48
4
1,117
3,565
246
52
147
120
10
1,038
397
37
88
2
2,137
265
69
157
105
2
228
46
4
876
3,013 (a)
102
10
24
18
2
131
46
5
14
-
352
-
-
-
-
-
-
-
-
-
352
Includes $390, $1,117 and $495, respectively, of commercial, residential mortgage and consumer TDRs on accrual status; $160, $141 and $79, respectively, of commercial, residential mortgage and
consumer TDRs on nonaccrual status.
The following table summarizes the Bancorp’s average impaired loans and leases and interest income by class for the year ended December 31:
($ in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Restructured residential mortgage loans
Restructured consumer:
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total impaired loans
2012
2011
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
$
448
156
361
160
10
1,276
439
38
80
1
2,969
4
4
10
2
-
47
24
1
4
-
96
532
117
288
198
16
1,217
444
41
94
21
2,968
5
2
5
3
-
41
23
1
3
-
83
During the year ended December 31, 2010, interest income of $74 million was recognized on impaired loans that had an average balance of $3.2
billion.
104 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nonperforming Assets
The following table summarizes the Bancorp’s nonperforming loans and leases, by class, as of December 31:
($ in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
Residential mortgage loans
Consumer:
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total consumer loans and leases
Total nonperforming loans and leases(a)(c)
OREO and other repossessed property(b)
(a) Excludes $29 and $138 of nonaccrual loans held for sale at December 31, 2012 and 2011, respectively.
(b) Excludes $72 and $64 of OREO related to government insured loans at December 31, 2012 and 2011, respectively.
(c)
2012
2011
$
$
330
125
157
76
9
697
237
53
2
39
1
95
1,029
257
487
170
251
138
12
1,058
275
54
2
48
1
105
1,438
378
Includes $10 and $17 of nonaccrual government insured commercial loans whose repayments are insured by the Small Business Administration at December 31, 2012 and 2011, respectively,
and $1 and $2 of restructured nonaccrual government insured commercial loans at December 31, 2012 and 2011, 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. Within each of the
Bancorp’s loan classes, TDRs typically involve either a reduction of
the stated interest rate of the loan, an extension of the loan’s
maturity date(s) with a stated rate lower than the current market rate
for a new loan with similar risk, or in limited circumstances, a
reduction of the principal balance of the loan or the loan’s accrued
interest. Modifying the terms of loans may result in an increase or
decrease to the ALLL depending upon the terms modified, the
method used to measure the ALLL for a loan prior to modification,
and whether any charge-offs were recorded on the loan before or at
the time of modification. Refer to the ALLL section of Note 1 for
the Bancorp’s ALLL methodology. Upon
information on
modification of a
loan, the Bancorp measures the related
impairment as the difference between the estimated future cash
flows, discounted at the original effective yield of the loan, expected
to be collected on the modified loan and the carrying value of the
loan. The resulting measurement may result in the need for minimal
or no valuation allowance because it is probable that all cash flows
will be collected under the modified terms of the loan. In addition,
if the stated interest rate was increased in a TDR, the cash flows on
the modified loan, using the pre-modification interest rate as the
discount rate, often exceed the recorded investment of the loan.
Conversely, the Bancorp often recognizes an impairment loss as an
increase to ALLL upon a modification that reduces the stated
interest rate on a loan. If a TDR involves a reduction of the
principal balance of the loan or the loan’s accrued interest, that
amount is charged off to the ALLL. At December 31, 2012, the
Bancorp had $28 million in line of credit commitments and $25
million in letter of credit commitments to lend additional funds to
borrowers whose terms have been modified in a TDR compared to
$42 million and $1 million, respectively, at December 31, 2011.
105 Fifth Third Bancorp
The following table provides a summary of loans modified in a TDR by the Bancorp during the year ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2012 ($ in millions)(a)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Consumer:
Home equity
Automobile loans
Credit card
Total portfolio loans and leases
Number of loans
modified in a TDR
during the period(b)
Recorded investment
in loans modified
in a TDR
during the period
Increase
(Decrease)
to ALLL upon
modification
Charge-offs
recognized upon
modification
108
67
67
17
8
1,758
1,343
1,289
11,407
16,064
$
$
84
53
91
38
7
340
82
23
75
793
(7)
(8)
(7)
(4)
1
35
1
2
11
24
9
2
-
-
-
-
-
-
-
11
2011 ($ in millions)(a)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Consumer:
Home equity
Automobile loans
Credit card
Total portfolio loans and leases
(a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality.
(b) Represents number of loans post-modification.
Number of loans
modified in a TDR
during the period(b)
Recorded investment
in loans modified
in a TDR
during the period
Increase
(Decrease)
to ALLL upon
modification
Charge-offs
recognized upon
modification
52
32
39
26
2
1,728
1,317
1,482
12,234
16,912
$
$
83
55
90
59
-
338
80
26
79
810
(4)
(6)
(21)
(9)
-
34
1
3
11
9
3
2
3
1
-
-
-
-
-
9
The Bancorp considers TDRs that become 90 days or more past
due under the modified terms as subsequently defaulted. For
commercial loans not subject to individual review for impairment,
the historical loss rates that are applied to such commercial loans for
purposes of determining the allowance include historical losses
associated with subsequent defaults on loans previously modified in
a TDR. For consumer loans, the Bancorp performs a qualitative
assessment of the adequacy of the consumer ALLL by comparing
the consumer ALLL to forecasted consumer losses over the
projected loss emergence period (the forecasted losses include the
impact of subsequent defaults of consumer TDRs). When a
residential mortgage, home equity, auto or other consumer loan that
has been modified in a TDR subsequently defaults, the present
value of expected cash flows used in the measurement of the
potential impairment loss is generally limited to the expected net
proceeds from the sale of the loan’s underlying collateral and any
resulting impairment loss is reflected as a charge-off or an increase
in ALLL. When a credit card loan that has been modified in a TDR
subsequently defaults, the calculation of the impairment loss is
consistent with the Bancorp’s calculation for other credit card loans
that have become 90 days or more past due.
106 Fifth Third Bancorp
The following table provides a summary of subsequent defaults that occurred during the years ended December 31, 2012 and 2011 and within 12
months of the restructuring date:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 ($ in millions)(a)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Residential mortgage loans
Consumer:
Home equity
Automobile loans
Credit card
Total portfolio loans and leases
December 31, 2011 ($ in millions)(a)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Residential mortgage loans
Consumer:
Home equity
Automobile loans
Credit card
Total portfolio loans and leases
(a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality.
Number of
Contracts
Recorded
Investment
2
3
2
2
332
101
42
28
512
Number of
Contracts
8
4
4
3
337
206
28
67
657
$
$
$
$
3
2
1
3
57
7
-
-
73
Recorded
Investment
4
5
3
4
55
13
1
1
86
107 Fifth Third Bancorp
7. 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
Estimated Useful Life
5 to 50 yrs.
2 to 20 yrs.
3 to 40 yrs.
2012
841
1,692
1,460
386
141
(1,978)
2,542
2011
834
1,623
1,318
394
140
(1,862)
2,447
$
$
Depreciation and amortization expense related to bank premises
and equipment was $233 million in 2012, $224 million in 2011 and
$225 million in 2010.
During 2012, the Bancorp recorded charges of $21 million of
lower of cost or market adjustments associated with bank premises.
These adjustments were generally based on appraisals of the
underlying bank premises
less estimated selling costs. The
recognized impairment losses were recorded in other noninterest
income in the Consolidated Statements of Income.
Gross occupancy expense for cancelable and noncancelable
leases was $99 million in 2012 and 2011 and $98 million in 2010,
which was reduced by rental income from leased premises of $17
million in 2012 and $19 million in 2011 and 2010. The Bancorp’s
subsidiaries have entered into a number of noncancelable and
capital lease agreements with respect to bank premises and
equipment.
The following table provides the annual future minimum payments under capital leases and noncancelable operating leases at December 31, 2012:
($ in millions)
Year ended December 31,
2013
2014
2015
2016
2017
Thereafter
Total minimum lease payments
Less: Amounts representing interest
Present value of net minimum lease payments
Operating Leases
Capital Leases
$
$
89
85
81
74
66
374
769
-
-
7
7
6
3
-
1
24
3
21
8. 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 $965 million
goodwill impairment charge was recorded in the fourth quarter of
2008 and represents the total amount of accumulated impairment
losses as of December 31, 2012.
Changes in the net carrying amount of goodwill, by reporting unit, for the years ended December 31, 2012 and 2011 were as follows:
($ in millions)
Net carrying value as of December 31, 2010
Acquisition activity
Net carrying value as of December 31, 2011
Acquisition activity
Net carrying value as of December 31, 2012
Commercial
Banking
Branch
Banking
Consumer
Lending
Investment
Advisors
Total
$
$
$
613
-
613
-
613
1,656
-
1,656
(1)
1,655
-
-
-
-
-
148
-
148
-
148
2,417
-
2,417
(1)
2,416
The Bancorp completed its annual goodwill impairment test as of
September 30, 2012 and the estimated fair values of the Commercial
Banking, Branch Banking and Investment Advisors segments
substantially exceeded their carrying values, including goodwill.
108 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INTANGIBLE ASSETS
Intangible assets consist of mortgage 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
The details of the Bancorp’s intangible assets are shown in the following table:
estimated useful lives and have an estimated remaining weighted-
average life at December 31, 2012 of 3.9 years. For more
information on mortgage servicing rights, see Note 11.
($ in millions)
As of December 31, 2012
Mortgage servicing rights
Core deposit intangibles
Other
Total intangible assets
As of December 31, 2011
Mortgage servicing rights
Core deposit intangibles
Other
Total intangible assets
Gross Carrying
Amount
Accumulated
Amortization
Valuation
Allowance
Net Carrying
Amount
$
$
$
$
2,825
180
44
3,049
2,520
439
44
3,003
(1,467)
(160)
(37)
(1,664)
(1,281)
(407)
(36)
(1,724)
(661)
-
-
(661)
(558)
-
-
(558)
697
20
7
724
681
32
8
721
As of December 31, 2012, all of the Bancorp’s intangible assets
were being amortized. Amortization expense recognized on
intangible assets, including mortgage servicing rights, for the years
ending December 31, 2012, 2011 and 2010 was $199 million, $157
million and $181 million, respectively.
Estimated amortization expense for the years ending December 31, 2013 through 2017 is as follows:
($ in millions)
2013
2014
2015
2016
2017
$
Mortgage
Servicing Rights
284
220
173
137
109
Other
Intangible Assets
8
4
2
2
2
Total
292
224
175
139
111
109 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. 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. The primary beneficiary of a VIE is generally 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 receive benefits that could potentially be significant to the
VIE. For certain investment funds, the primary beneficiary is the
enterprise that will absorb a majority of the fund’s expected losses
or receive a majority of the fund’s expected residual returns. 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 at inception and when there is a
change in circumstances that requires 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 interests included in the
Bancorp’s Consolidated Balance Sheets as of:
December 31, 2012 ($ in millions)
Assets:
Cash and due from banks
Other short-term investments
Commercial mortgage loans
Home equity
Automobile loans
ALLL
Other assets
Total assets
Liabilities:
Other liabilities
Long-term debt
Total liabilities
Noncontrolling interests
December 31, 2011 ($ in millions)
Assets:
Cash and due from banks
Other short-term investments
Commercial mortgage loans
Home equity
Automobile loans
ALLL
Other assets
Total assets
Liabilities:
Other liabilities
Long-term debt
Total liabilities
Noncontrolling interest
Home Equity
Securitization
Automobile Loan
Securitizations
CDC
Investments
Total
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
50
-
-
(5)
3
48
-
-
-
48
Home Equity
Securitization
Automobile Loan
Securitizations
CDC
Investments
5
-
-
223
-
(5)
1
224
-
22
22
25
7
-
-
259
(3)
1
289
4
169
173
-
-
50
-
-
(2)
2
50
-
-
-
50
-
-
50
-
-
(5)
3
48
-
-
-
48
Total
30
7
50
223
259
(10)
4
563
4
191
195
50
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, had an obligation to absorb losses and a right to receive
benefits from the VIEs that could potentially be significant to the
110 Fifth Third Bancorp
VIEs. In addition, the Bancorp retained servicing rights for the
underlying loans and, therefore, held 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
was the primary beneficiary of these VIEs and, effective January 1,
2010, these VIEs were consolidated in the Bancorp’s Consolidated
Financial Statements. On February 8, 2012, the Bancorp exercised
cleanup call options on an automobile securitization conduit and an
isolated trust and acquired all remaining automobile loans, the
proceeds of which were used by the conduit and trust to repay
outstanding debt. On April 12, 2012, the Bancorp exercised its
cleanup call option on the home equity isolated trust and acquired
all remaining home equity loans, the proceeds of which were used
by the trust to repay outstanding debt. On September 17, 2012, the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bancorp exercised its cleanup call option on the remaining
automobile securitization conduit and acquired all remaining
automobile loans, the proceeds of which were used by the conduit
to repay outstanding debt.
The economic performance of the VIEs was most significantly
impacted by the performance of the underlying loans. The principal
risks to which the entities were exposed include credit risk and
interest rate risk. Credit risk was managed through credit
enhancement in the form of reserve accounts, overcollateralization,
excess interest on the loans, the subordination of certain classes of
asset-backed securities to other classes, and in the case of the home
third party
equity
guaranteeing payment of accrued and unpaid interest and principal
on the securities. Interest rate risk was managed by interest rate
swaps between the VIEs and third parties.
insurance policy with a
transaction, an
CDC Investments
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 managing member of certain
LLCs invested in business revitalization projects. The Bancorp has
provided an indemnification guarantee to the investor member of
these LLCs related to the qualification of tax credits generated by
the investor member’s investment. Accordingly, the Bancorp
concluded that it is the primary beneficiary and, therefore, has
consolidated these VIEs. As a result, the investor members’
interests in these VIEs are presented as noncontrolling interests in
the Bancorp’s Consolidated Financial Statements. This presentation
includes reporting separately
the
noncontrolling interests in the Consolidated Balance Sheets and
Consolidated Statements of Changes in Equity and reporting
separately
the
noncontrolling interests in the Consolidated Statements of Income
and Consolidated Statements of Comprehensive
Income.
Additionally, the net income attributable to the noncontrolling
interests is reported separately in the Consolidated Statements of
Income. The Bancorp’s maximum exposure related to these
indemnifications at December 31, 2012 and 2011 was $18 million
and $10 million, respectively, which is based on an amount required
to meet the investor member’s defined target rate of return.
the equity attributable
the comprehensive
attributable
income
to
to
Non-consolidated VIEs
The following tables provide a summary of assets and liabilities carried on the Bancorp’s Consolidated Balance Sheets related to non-consolidated
VIEs for which the Bancorp holds a variable interest, but is not the primary beneficiary of the VIE, as well as the Bancorp’s maximum exposure
to losses associated with its interests in the entities:
As of December 31, 2012 ($ in millions)
CDC investments
Private equity investments
Loans provided to VIEs
Restructured loans
As of December 31, 2011 ($ 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.
$
$
Total
Assets
1,442
189
1,622
2
Total
Assets
1,243
161
53
1,370
10
Total
Liabilities
394
-
-
-
Total
Liabilities
269
3
-
-
-
Maximum
Exposure
1,442
310
2,465
2
Maximum
Exposure
1,243
327
62
2,203
12
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. The
carrying amounts of these investments, which are included in other
assets in the Consolidated Balance Sheets, and the liabilities related
to the unfunded commitments, which are included in other liabilities
in the Consolidated Balance Sheets, are included in the previous
tables for all periods presented. The Bancorp has no other liquidity
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.
111 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Private Equity Investments
The Bancorp invests as a limited partner in private equity funds
which provide the Bancorp 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. Under the VIE
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.
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 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
these
unfunded commitments. The carrying
investments, which are included in other assets in the Consolidated
Balance Sheets, are included in the previous tables. Also, as of
December 31, 2012 and 2011, the unfunded commitment amounts
to the funds were $121 million and $166 million, respectively. The
Bancorp made capital contributions of $61 million and $48 million
to private equity funds during 2012 and 2011, respectively.
amounts of
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
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.
interest holders
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 applicable to these
funds to determine the primary beneficiary of each fund. In
analyzing these funds, the Bancorp determined that interest rate risk
and credit risk were the two main risks to which the funds were
exposed. After analyzing the interest rate risk variability and credit
risk variability associated with these funds, the Bancorp determined
that it was not the primary beneficiary of these funds because it did
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 were included as other
securities in the Bancorp’s Consolidated Balance Sheets. In the third
quarter of 2012, the Bancorp sold certain assets relating to the
management of Fifth Third money market funds. The remaining
maximum exposure as of December 31, 2012 is immaterial to the
Bancorp’s Consolidated Financial Statements.
Loans Provided to VIEs
112 Fifth Third Bancorp
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
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.
included
The principal 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. The Bancorp’s outstanding
loans to these VIEs,
in the
Consolidated Balance Sheets, are included in the previous tables for
all periods presented. Also, as of December 31, 2012 and 2011, the
Bancorp’s unfunded commitments to these entities were $843
million and $833 million, respectively. The loans and unfunded
commitments to these VIEs are included in the Bancorp’s overall
analysis of the ALLL and reserve for unfunded commitments,
respectively. The Bancorp does not provide any implicit or explicit
liquidity guarantees or principal value guarantees to these VIEs.
in commercial
loans
Restructured Loans
As part of loan restructuring efforts, 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 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.
investments was
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 initial fair value of its equity investments in these VIEs was zero.
As of December 31, 2012 and 2011, the Bancorp’s carrying value of
the Bancorp’s
these equity
Consolidated Balance Sheets. Additionally, the Bancorp had
outstanding loans to these VIEs, included in commercial loans in
the Consolidated Balance Sheets, which are included in the previous
tables for all periods presented. The Bancorp had no unfunded loan
commitments to these VIEs as of December 31, 2012 and $2
million at December 31, 2011. The
loans and unfunded
commitments to these VIEs are included in the Bancorp’s overall
analysis of the ALLL and reserve for unfunded commitments,
respectively. The Bancorp does not provide any implicit or explicit
liquidity guarantees or principal value guarantees to these VIEs.
immaterial
to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SALES OF RESIDENTIAL MORTGAGE RECEIVABLES AND MORTGAGE SERVICING RIGHTS
The Bancorp sold fixed and adjustable rate residential mortgage
loans during 2012, 2011, and 2010. In those sales, the Bancorp
obtained servicing responsibilities and the investors have no
recourse to the Bancorp’s other assets for failure of debtors to pay
when due. The Bancorp receives annual servicing fees based on a
percentage of the outstanding balance. The Bancorp identifies
classes of servicing assets based on financial asset type and interest
rates.
Information related to residential mortgage loan sales and the Bancorp’s mortgage banking activity, which is included in mortgage banking net
revenue in the Consolidated Statements of Income, for the years ended December 31 is as follows:
($ in millions)
Residential mortgage loan sales
Origination fees and gains on loan sales
Servicing fees
2012
21,574
$
821
250
2011
14,733
396
234
2010
17,861
490
221
Servicing Assets
The following table presents changes in the servicing assets related to residential mortgage loans for the years ended December 31:
($ in millions)
Carrying amount before valuation allowance as of the beginning of the period
Servicing obligations that result from the 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
Temporary impairment or impairment recovery, affected through a
change in the MSR valuation allowance, 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 the value
of the MSR portfolio. This strategy includes the purchase of free-
standing derivatives and various available-for-sale securities. The
2012
1,239
305
(186)
1,358
(558)
(103)
(661)
697
$
$
2011
1,138
236
(135)
1,239
(316)
(242)
(558)
681
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:
Beginning balance
Ending balance
Adjustable rate residential mortgage loans:
Beginning balance
Ending balance
2012
2011
$
649
664
32
33
791
649
31
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)
$
2012
3
63
(103)
2011
9
344
(242)
2010
14
109
(36)
113 Fifth Third Bancorp
As of December 31, 2012 and 2011, the key economic assumptions used in measuring the MSRs 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 were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2012
2011
Weighted-
Average Life
(in years)
Rate
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
Residential mortgage loans:
Servicing assets
Servicing assets
Fixed
Adjustable
6.9
3.8
9.6 %
22.0
10.4 %
11.4
N/A
N/A
7.2
3.7
8.8 %
22.8
10.5 %
11.4
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, 2012 and 2011, the Bancorp
serviced $62.5 billion and $57.1 billion, respectively, of residential
mortgage loans for other investors. The value of MSRs that
continue to be held by the Bancorp is subject to credit, prepayment
and interest rate risks on the sold financial assets.
At December 31, 2012, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in
prepayment speed assumptions and immediate 10% and 20% adverse changes in other assumptions are as follows:
Prepayment
Speed Assumption
Residual Servicing
Cash Flows
Weighted-
Average
Life (in
years)
Fair
Value
Impact of Adverse Change
on Fair Value
20%
10%
50%
Impact of Adverse
Change on Fair
Value
10%
20%
Discount
Rate
($ in millions)(a)
Residential mortgage loans:
Servicing assets
Servicing assets
(a) The impact of the weighted-average default rate on the current fair value of residual cash flows for all scenarios is immaterial.
Fixed
Adjustable
16.1 % $
26.9
664
33
4.8
3.1
Rate
Rate
$
(37)
(2)
(72)
(3)
(159)
(6)
10.5 % $
11.7
(22)
(1)
(42)
(2)
These sensitivities are hypothetical and should be used with caution.
As the figures indicate, changes in fair value based on these
variations in the assumptions typically cannot be extrapolated
because the relationship of the change in assumption to the change
in fair value may not be linear. The Bancorp believes variations of
these levels are reasonably possible; however there is the potential
that adverse changes in key assumptions could be even greater.
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
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), which might magnify or counteract these
sensitivities.
the Bancorp
114 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. DERIVATIVE FINANCIAL INSTRUMENTS
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 and for other business
purposes. The Bancorp does not enter into unhedged speculative
derivative positions.
the
The Bancorp’s interest rate risk management strategy involves
modifying
financial
repricing characteristics of certain
instruments so that changes in interest rates do not adversely affect
the Bancorp’s net interest margin and cash flows. Derivative
instruments that the Bancorp may use as part of its interest rate risk
management strategy include interest rate swaps, interest rate floors,
interest rate caps, forward contracts, options and swaptions. Interest
rate swap contracts are exchanges of interest payments, such as
fixed-rate payments for floating-rate payments, based on a stated
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.
interest
(principal-only swaps,
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
rate
free-standing derivatives
swaptions, interest rate floors, mortgage options, TBAs 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. TBAs are a forward
purchase agreement for a mortgage-backed securities trade whereby
the terms of the security are undefined at the time the trade is made.
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.
loans denominated
The Bancorp also enters into derivative contracts (including
foreign exchange contracts, commodity contracts and interest rate
contracts) for the benefit of commercial customers and other
business purposes. The Bancorp may economically hedge significant
exposures related to these free-standing derivatives by entering into
offsetting
reputable
contracts with
counterparties with substantially matching terms and currencies.
Credit risk arises from the possible inability of counterparties to
meet the terms of their contracts. The Bancorp’s exposure is limited
to the replacement value of the contracts rather than the notional,
third-party
approved,
principal or contract amounts. Credit risk is minimized through
credit approvals, limits, counterparty collateral and monitoring
procedures.
The Bancorp’s derivative assets contain certain 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, 2012 and 2011, the
balance of collateral held by the Bancorp for derivative assets was
$927 million and $1.2 billion, respectively. The credit component
negatively impacting the fair value of derivative assets associated
with customer accommodation contracts as of December 31, 2012
and 2011 was $18 million and $28 million, respectively.
In measuring the fair value of derivative liabilities, the Bancorp
considers its own credit risk, taking into consideration collateral
maintenance requirements of certain derivative counterparties and
the duration of instruments with counterparties that do not require
collateral maintenance. When necessary, the Bancorp primarily
posts collateral 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, 2012 and 2011, the
balance of collateral posted by the Bancorp for derivative liabilities
was $785 million and $788 million, respectively. Certain of the
Bancorp’s derivative liabilities contain credit-risk related contingent
features that could result in the requirement to post additional
collateral upon the occurrence of specified events. As of December
31, 2012 and 2011, the fair value of the additional collateral that
could be required to be posted as a result of the credit-risk related
contingent features being triggered was not material to the
Bancorp’s Consolidated Financial Statements. The posting of
collateral has been determined to remove the need for consideration
of credit risk. As a result, the Bancorp determined that the impact of
the Bancorp’s credit risk to the valuation of its derivative liabilities
was immaterial to the Bancorp’s Consolidated Financial Statements.
The Bancorp holds certain derivative instruments that qualify
for hedge accounting treatment and are designated as either fair
value hedges or cash flow hedges. Derivative instruments that do
not qualify for hedge accounting treatment, or for which hedge
accounting is not established, are held as free-standing derivatives.
All customer accommodation derivatives are held as free-standing
derivatives.
The fair value of derivative instruments is presented on a gross
basis, even when the derivative instruments are subject to master
netting arrangements. Derivative instruments with a positive fair
value are reported in other assets in the Consolidated Balance
Sheets while derivative instruments with a negative fair value are
reported in other liabilities in the Consolidated Balance Sheets. Cash
collateral payables and receivables associated with the derivative
instruments are not added to or netted against the fair value
amounts.
115 Fifth Third Bancorp
The following tables reflect the notional amounts and fair values for all derivative instruments included in the Consolidated Balance Sheets as of:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 ($ in millions)
Qualifying hedging instruments
Fair value hedges:
Interest rate swaps related to long-term debt
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
Stock warrants associated with sale of the processing business
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
Fair Value
Notional
Amount
Derivative
Assets
Derivative
Liabilities
$
2,880
1,500
1,000
500
250
10,177
5,322
416
644
27,354
4,894
3,084
17,297
5
$
558
558
22
60
-
-
82
640
219
2
177
-
398
586
60
87
201
-
934
1,332
1,972
-
-
-
-
-
1
1
1
-
14
-
33
47
602
-
82
183
-
867
914
915
116 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 ($ in millions)
Qualifying hedging instruments
Fair value hedges:
Interest rate swaps related to long-term debt
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
Put options associated with sale of the processing business
Stock warrants associated with sale of the processing business
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
Fair Value
Notional
Amount
Derivative
Assets
Derivative
Liabilities
$
4,080
1,500
1,500
500
250
3,077
5,705
311
978
223
436
30,000
3,835
2,074
17,909
34
$
662
662
91
59
-
-
150
812
187
8
1
-
111
-
307
774
33
134
294
2
1,237
1,544
2,356
-
-
-
-
-
5
5
5
-
54
3
1
-
78
136
795
1
130
275
2
1,203
1,339
1,344
117 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Hedges
The Bancorp may enter into interest rate swaps to convert its fixed-
rate funding to floating-rate. Decisions to convert fixed-rate funding
to floating are made primarily through consideration of the
asset/liability mix of the Bancorp, the desired asset/liability
sensitivity and interest rate levels. As of December 31, 2012 and
2011, 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 using regression analysis was
performed and such swaps were accounted for using the “long-
long-haul method requires a quarterly
haul” method. The
and measurement of
effectiveness
assessment of hedge
ineffectiveness. For interest rate swaps accounted for as a fair value
hedge using the 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 related hedged item attributable to the
risk being hedged. The ineffectiveness on interest rate swaps
hedging fixed-rate funding is reported within interest expense in the
Consolidated Statements of Income.
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 attributable to the risk being hedged, included in the Consolidated Statements of Income:
For the year ended December 31 ($ in millions)
Interest rate contracts:
Change in fair value of interest rate swaps hedging long-term debt
Interest on long-term debt
Change in fair value of hedged long-term debt attributable to the risk being hedged Interest on long-term debt
Change in fair value of interest rate swaps hedging time deposits
Change in fair value of hedged time deposits
Interest on deposits
Interest on deposits
$
(104)
107
-
-
220
(227)
-
-
167
(168)
6
(6)
Consolidated Statements of Income
Caption
2012
2011
2010
liabilities may be grouped
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
in
circumstances where they share the same risk exposure for which
the Bancorp desired to hedge. 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, 2012, 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 attributable to the
risk being hedged. Ineffectiveness
is reported within other
noninterest income in the Consolidated Statements of Income. The
effective portion of the cumulative gains or losses on cash flow
hedges are reported within accumulated other comprehensive
income and are reclassified from accumulated other comprehensive
income to current period earnings when the forecasted transaction
affects earnings. As of December 31, 2012, the maximum length of
time over which the Bancorp is hedging its exposure to the
variability in future cash flows is 38 months.
Reclassified gains and losses on interest rate contracts related
to commercial and industrial loans are recorded within interest
income while reclassified gains and losses on interest rate contracts
related to long-term debt are recorded within interest expense in the
Consolidated Statements of Income. As of December 31, 2012 and
2011, $50 million and $80 million, respectively, of deferred gains,
net of tax, on cash flow hedges were recorded in accumulated other
comprehensive income in the Consolidated Balance Sheets. As of
December 31, 2012, $20 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
primarily due to the benefit of interest rate floors that mature during
the second quarter of 2013. During 2012, there were no gains or
losses reclassified from accumulated other comprehensive income
into earnings associated with the discontinuance of cash flow
hedges because it was probable that the original forecasted
transaction would not occur. During 2011, $11 million of losses
were reclassified from accumulated other comprehensive income
into noninterest expense as it was determined that the original
forecasted transaction was no longer probable of occurring by the
end of the originally specified time period or within the additional
period of time as defined by U.S. GAAP.
The following table presents the net gains recorded in the Consolidated Statements of Income and the Consolidated Statements of
Comprehensive Income relating to derivative instruments designated as cash flow hedges:
For the year ended December 31 ($ in millions)
Amount of net gain recognized in OCI
Amount of net gain reclassified from OCI into net income
Amount of ineffectiveness recognized in other noninterest income
$
2012
37
83
-
2011
89
69
1
2010
2
60
6
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, interest rate swaptions,
interest rate floors, mortgage options, TBAs and interest rate swaps)
to economically hedge changes in fair value of its largely fixed-rate
MSR portfolio. Principal-only swaps hedge the mortgage-LIBOR
spread because these swaps appreciate in value as a result of
tightening spreads. Principal-only swaps also provide prepayment
protection by increasing in value when prepayment speeds increase,
as opposed to MSRs that lose value in a faster prepayment
environment. Receive fixed/pay floating interest rate swaps and
swaptions increase in value when interest rates do not increase as
quickly as expected.
The Bancorp enters into forward contracts and mortgage
options to economically hedge the change in fair value of certain
residential 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-
118 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
standing derivative instruments and the interest rate exposure on
these commitments is economically hedged primarily with forward
free-standing
contracts. Revaluation gains and
derivatives related to mortgage banking activity are recorded as a
component of mortgage banking net revenue in the Consolidated
Statements of Income.
losses
from
Additionally, as part of the Bancorp’s overall risk management
strategy with respect to minimizing significant fluctuations in
earnings and cash flows caused by interest rate and prepayment
volatility, the Bancorp may enter into free-standing derivative
instruments (options, swaptions and interest rate swaps). The gains
and losses on these derivative contracts are recorded within other
noninterest income in the Consolidated Statements of Income.
In conjunction with the sale of the processing business in 2009,
the Bancorp received warrants and issued put options, which are
accounted for as free-standing derivatives. The put options expired
as a result of the Vantiv, Inc. initial public offering in March of
2012. Refer to Note 26 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 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 26 for further discussion of significant inputs
and assumptions used in the valuation of this instrument.
The net gains (losses) recorded in the Consolidated Statements of Income relating to free-standing derivative instruments used for risk
management and other business purposes are summarized in the following table:
For the year ended December 31 ($ in millions)
Interest rate contracts:
Forward contracts related to mortgage loans held for sale
Interest rate contracts related to MSRs
Interest rate swaps related to long-term debt
Equity contracts:
Stock warrants associated with sale of the processing business
Put options associated with sale of the processing business
Swap associated with sale of Visa, Inc. Class B shares
Free-Standing Derivative Instruments – Customer
Accommodation
The majority of the free-standing derivative instruments the
Bancorp enters into are for the benefit of its commercial customers.
These derivative contracts are not designated against specific assets
or liabilities on the Bancorp’s Consolidated Balance Sheets or to
forecasted transactions and, therefore, do not qualify for hedge
accounting. These instruments include foreign exchange derivative
contracts entered into for the benefit of commercial customers
involved in international trade to hedge their exposure to foreign
currency fluctuations and commodity contracts to hedge such items
as natural gas and various other derivative contracts. The Bancorp
may economically hedge significant exposures related to these
derivative contracts entered into for the benefit of customers by
entering
into offsetting contracts with approved, reputable,
independent counterparties with substantially matching terms. The
Bancorp hedges its interest rate exposure on commercial customer
transactions by executing offsetting swap agreements with primary
dealers. Revaluation gains and losses on interest rate, foreign
exchange, commodity and other commercial customer derivative
contracts are recorded as a component of corporate banking
revenue in the Consolidated Statements of Income.
Consolidated Statements of Income
Caption
2012
2011
2010
Mortgage banking net revenue
Mortgage banking net revenue
Other noninterest income
$
Other noninterest income
Other noninterest income
Other noninterest income
28
63
2
66
1
(45)
(128)
345
7
32
7
(83)
40
109
2
4
1
(19)
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, 2012 and 2011, the total
notional amount of the risk participation agreements was $1.0
billion and $808 million, respectively, and the fair value was a
liability of $2 million at both December 31, 2012 and 2011, which is
included in interest rate contracts for customers. As of December
31, 2012, the risk participation agreements had an average life of 3.0
years.
The Bancorp’s maximum exposure in the risk participation
agreements is contingent on the fair value of the underlying interest
rate derivative contracts in an asset position at the time of default.
The Bancorp monitors the credit risk associated with the underlying
customers in the risk participation agreements through the same risk
grading system currently utilized for establishing loss reserves in its
loan and lease portfolio.
Risk ratings of the notional amount of risk participation agreements under this risk rating system are summarized in the following table:
At December 31 ($ in millions)
Pass
Special mention
Substandard
Doubtful
Total
2012
2011
$
$
993
-
13
-
1,006
772
14
18
4
808
119 Fifth Third Bancorp
28
(13)
13
206
8
-
47
1
2012
1,972
1,657
1,547
1,155
563
398
369
329
80
10
124
8,204
26
(22)
(1)
187
8
-
63
(1)
2011
2,356
1,413
1,742
955
576
726
382
442
84
5
182
8,863
The net gains (losses) recorded in the Consolidated Statements of Income relating to free-standing derivative instruments used for customer
accommodation are summarized in the following table:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31
($ in millions)
Interest rate contracts:
Interest rate contracts for customers (contract revenue)
Interest rate contracts for customers (credit losses)
Interest rate contracts for customers (credit portion of fair value adjustment)
Interest rate lock commitments
Commodity contracts:
Commodity contracts for customers (contract revenue)
Commodity contracts for customers (credit portion of fair value adjustment)
Foreign exchange contracts:
Foreign exchange contracts - customers (contract revenue)
Foreign exchange contracts - customers (credit portion of fair value adjustment)
Consolidated Statements of
Income Caption
2012
2011
2010
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
30
(2)
6
417
7
2
65
2
13. 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
Partnership investments
Bank owned life insurance
Accounts receivable and drafts-in-process
Investment in Vantiv Holding, LLC
Bankers' acceptances
Accrued interest receivable
OREO and other repossessed personal property
Prepaid expenses
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 12.
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, which are
included above in partnership investments. In addition, the Bancorp
invests as a limited partner in private equity funds. The Bancorp has
determined that these entities are VIEs and the Bancorp’s
investments represent variable interests. See Note 10 for further
information.
The Bancorp purchases life insurance policies on the lives of
certain directors, officers and employees and is the owner and
beneficiary of the policies. Certain BOLI policies have a stable value
agreement through either a large, well-rated bank or multi-national
limited cash surrender value
insurance carrier that provides
protection from declines in the value of each policy’s underlying
investments. See Note 1 for further information.
On June 30, 2009, the Bancorp sold an approximate 51%
interest in Vantiv Holding, LLC to Advent International. During
the first quarter of 2012, Vantiv, Inc. priced an IPO of its shares
and contributed the net proceeds to Vantiv Holding, LLC for
additional ownership interests. As a result of this offering, the
Bancorp’s ownership of Vantiv Holding, LLC was reduced to
approximately 39%. In addition, the Bancorp sold an approximate
6% interest during the fourth quarter of 2012. The Bancorp’s
remaining approximate 33% ownership in Vantiv Holding, LLC is
accounted for under the equity method of accounting. See Note 18
for further information.
A bankers’ acceptance is created when a time draft is drawn on
and accepted by a bank. By accepting the draft, the bank assumes
the credit risk of the underlying obligor, usually the buyer or the
seller of goods or their bank, and makes an unconditional promise
to pay the holder of the draft the amount of the draft at maturity,
which is generally less than one year from the date of the draft.
When the Bancorp is the accepting bank, it records the full amount
of the acceptance in both other assets and other liabilities on the
Consolidated Balance Sheets.
OREO represents property acquired through foreclosure or
other proceedings and is carried at the lower of cost or fair value,
less costs to sell. See Note 1 for further information.
120 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SHORT-TERM BORROWINGS
Borrowings with original maturities of one year or less are classified
as short term, and include federal funds purchased and other short-
term borrowings. Federal funds purchased are excess balances in
reserve accounts held at FRBs that the Bancorp purchased from
A summary of short-term borrowings and weighted-average rates follows:
other member banks on an overnight basis. Other short-term
borrowings include securities sold under repurchase agreements,
derivative collateral, FHLB advances and other borrowings with
original maturities of one year or less.
($ in millions)
As of December 31:
Federal funds purchased
Other short-term borrowings
Average for the years ended December 31:
Federal funds purchased
Other short-term borrowings
Maximum month-end balance for the years ended December 31:
Federal funds purchased
Other short-term borrowings
2012
2011
Amount
Rate
Amount
Rate
$
$
$
901
6,280
0.10%
0.15
560
4,246
0.14%
0.18
901
6,330
$
$
$
346
3,239
0.04%
0.09
345
2,777
0.11%
0.12
451
4,894
121 Fifth Third Bancorp
15. LONG-TERM DEBT
The following table is a summary of the Bancorp’s long-term borrowings at December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Parent Company
Senior:
Fixed-rate notes
Fixed-rate notes
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)
Structured repurchase agreements:
Floating-rate notes
Floating-rate notes
Subsidiaries
Senior:
Floating-rate bank notes
Subordinated:(b)
Fixed-rate bank notes
Junior subordinated:(a)
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
Maturity
Interest Rate
2012
2011
2013
2016
2022
2016
2017
2018
2038
$
6.25%
3.625%
3.50%
0.73%
5.45%
4.50%
8.25%
2067
6.50%
2013
0.42%
2015
4.75%
2035
1.73% - 2.00%
2014-2041 0.05% - 8.34%
2013-2039
Varies
758
999
497
250
583
584
1,330
750
-
-
-
-
500
546
50
53
-
-
-
185
779
1,000
-
250
589
581
1,348
750
594
894
250
125
500
561
62
1,055
2
169
22
151
Total
(a) Qualify as Tier I capital for regulatory capital purposes. See Note 27 for further information.
(b) Qualify as Tier II capital for regulatory capital purposes.
(c)
Future periods of debt are floating.
$
7,085
9,682
The Bancorp pays down long-term debt in accordance with contractual terms over maturity periods summarized in the above table. The aggregate
annual maturities of long-term debt obligations (based on final maturity dates) as of December 31, 2012, are presented in the following table:
($ in millions)
2013
2014
2015
2016
2017
Thereafter
Total
Parent
Subsidiaries
Total
758
-
-
1,249
583
3,161
5,751
519
38
560
10
86
121
1,334
1,277
38
560
1,259
669
3,282
7,085
$
$
At December 31, 2012, the Bancorp had outstanding principal
balances of $6.5 billion, net discounts of $20 million and additions
for mark-to-market adjustments on its hedged debt of $555 million.
At December 31, 2011, the Bancorp had outstanding principal
balances of $9.0 billion, net discounts of $18 million and additions
for mark-to-market adjustments on its hedged debt of $662 million.
The Bancorp was in compliance with all debt covenants at
December 31, 2012.
PARENT COMPANY LONG-TERM BORROWINGS
Senior Notes
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, 2012 and
2011, paid a rate of 2.72% and 2.84%, respectively. 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
122 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
option at any time prior to maturity.
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 amounts
of the notes is due upon maturity on January 25, 2016. The notes
are not subject to redemption at the Bancorp’s option at any time
prior to maturity.
On March 7, 2012, the Bancorp issued $500 million of senior
notes to third party investors, and entered into a Supplemental
Indenture dated March 7, 2012 with the Trustee, which modified
the existing Indenture for Senior Debt Securities dated April 30,
2008. The Supplemental Indenture and the Indenture define the
rights of the senior notes, which senior notes are represented by a
Global Security dated as of March 7, 2012. The senior notes bear a
fixed rate of interest of 3.50% per annum. The notes are unsecured,
senior obligations of the Bancorp. Payment of the full principal
amounts of the notes will be due upon maturity on March 15, 2022.
The notes are not subject to redemption at the Bancorp’s option at
any time until 30 days prior to maturity.
Subordinated Debt
The subordinated floating-rate notes due in 2016 pay interest at
three-month LIBOR plus 42 bps. 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 interest at three-month
LIBOR plus 42 bps and 25 bps, respectively, at December 31, 2012.
The rates paid on the swaps hedging the subordinated floating-rate
notes due in 2017 and 2018 were 0.76% and 0.56%, respectively, at
December 31, 2012. 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 3.36% at December 31, 2012.
Junior Subordinated Debt
The 6.50% junior subordinated notes due in 2067, with a carrying
and outstanding principal balance of $750 million at December 31,
2012 and 2011, pay a fixed rate of 6.50% until 2017, then convert to
a floating rate at three-month LIBOR plus 137 bps until 2047.
Thereafter, the notes pay a floating rate at one-month LIBOR plus
237 bps. The obligations were issued to Fifth Third Capital Trust
IV.
Consistent with the 2012 CCAR plan, the Bancorp redeemed
all $575 million of the outstanding TruPS issued by Fifth Third
Capital Trust V on August 15, 2012. The Fifth Third Capital Trust
V securities had a distribution rate of 7.25% and a scheduled
maturity date of August 15, 2067, and were redeemable at any time
on or after August 15, 2012. The redemption price was $25 per
security, which reflected 100% of the liquidation amount, plus
accrued and unpaid distributions through the actual redemption
date of $0.453125 per security. The Bancorp recognized a $17
million loss on extinguishment within other noninterest expense in
the Consolidated Statements of Income.
Additionally, the Bancorp redeemed all $862.5 million of the
outstanding TruPS issued by Fifth Third Capital Trust VI on
August 8, 2012. These securities had a distribution rate of 7.25%
and a scheduled maturity date of November 15, 2067. Pursuant to
the terms of the TruPS, the securities of Fifth Third Capital Trust
VI were redeemable within ninety days of a Capital Treatment
Event. The Bancorp determined that a Capital Treatment Event
occurred upon the authorization for publication in the Federal
Register of a Joint Notice of Proposed Rulemaking by the Board of
Governors of the Federal Reserve System, the FDIC and the Office
of the Comptroller of the Currency addressing, among other
matters, Section 171 of the Dodd-Frank Act of 2010 and providing
detailed information regarding the cessation of Tier I capital
treatment for outstanding TruPS. The redemption price was $25 per
security, which reflected 100% of the liquidation amount, plus
accrued and unpaid distributions through the actual redemption
date of $0.422917 per security. The Bancorp recognized a $9 million
loss on extinguishment within other noninterest expense in the
Consolidated Statements of Income.
The Bancorp
fully and unconditionally guaranteed all
obligations under the trust preferred securities issued by Fifth Third
Capital Trusts IV, V and VI. In addition, the Bancorp entered into
replacement capital covenants for the benefit of holders of long-
term debt senior to the junior subordinated notes that limits, subject
to certain restrictions, the Bancorp’s ability to redeem the junior
subordinated notes prior to their scheduled maturity. 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.
Structured Repurchase Agreements
In order to meet its funding obligations, the Bancorp enters into
repurchase agreements with customers, which are accounted for as
collateralized financing transactions, where excess customer funds
are borrowed overnight by the Bancorp, and later repurchased by
the customers.
On March 29, 2012, the Bancorp terminated $375 million of
structured repurchase agreements classified as long-term debt. As a
result of these terminations in the first quarter of 2012, the Bancorp
recorded a $9 million
loss on extinguishment within other
noninterest expense in the Consolidated Statements of Income.
SUBSIDIARY LONG-TERM BORROWINGS
Senior and Subordinated Debt
Medium-term senior notes and subordinated bank notes with
maturities ranging from one year to 30 years can be issued by the
Bancorp’s banking subsidiary, of which $1.0 billion was outstanding
at December 31, 2012 and 2011 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 bps. 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, 2012, the weighted-average rate paid
on the swaps was 0.41%.
Junior Subordinated Debt
The junior subordinated floating-rate bank notes due in 2035 were
assumed by the Bancorp’s banking subsidiary as part of the
acquisition of First Charter in May 2008. The obligation was 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 bps and 142 bps, 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.
FHLB Advances
At December 31, 2012, FHLB advances have rates ranging from
0.05% to 8.34%, with interest payable monthly. The advances are
secured by certain residential mortgage loans and securities totaling
$19.1 billion. On December 7, 2012 the Bancorp terminated a $1.0
billion FHLB advance with a fixed rate of 4.56% and a maturity date
of January 5, 2016. As a result, the Bancorp recognized a $134
million loss on extinguishment within other noninterest expense in
the Consolidated Statements of Income. The $53 million in
remaining advances mature as follows: $3 million in 2014, $4 million
in 2015, $4 million in 2016, and $42 million thereafter.
123 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes Associated with Consolidated VIEs
As previously discussed in Note 10, 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 were consolidated in the Bancorp’s
Consolidated Financial Statements.
On February 8, 2012, the Bancorp exercised cleanup call
options on an automobile securitization conduit and an isolated
trust and acquired all remaining automobile loans, the proceeds of
which were used by the conduit and trust to repay outstanding debt.
On April 12, 2012, the Bancorp exercised its cleanup call option on
the home equity isolated trust and acquired all remaining home
equity loans, the proceeds of which were used by the trust to repay
outstanding debt. On September 17, 2012, the Bancorp exercised its
cleanup call option on the remaining automobile securitization
conduit and acquired all remaining automobile loans, the proceeds
of which were used by the conduit to repay outstanding debt.
124 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES
The Bancorp, in the normal course of business, enters into financial
instruments and various agreements to meet the financing needs of
its customers. The Bancorp also enters into certain transactions and
agreements to manage its interest rate and prepayment risks, provide
funding, equipment and locations for its operations and invest in its
communities. These instruments and agreements involve, to varying
degrees, elements of credit risk, counterparty risk and market risk in
excess of the amounts recognized in the Bancorp’s Consolidated
Balance Sheets. The creditworthiness of counterparties for all
instruments and agreements is evaluated on a case-by-case basis in
accordance with the Bancorp’s credit policies. The Bancorp’s
significant commitments, contingent liabilities and guarantees in
excess of the amounts recognized in the Consolidated Balance
Sheets are discussed in further detail below:
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
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 event of
The Bancorp
nonperformance by the counterparty for the amount of the
contract. Fixed-rate commitments are also subject to market risk
to credit risk
is exposed
in
$
2012
53,403
5,322
4,281
769
121
87
29
24
2011
47,719
5,705
4,744
851
166
115
41
26
resulting from fluctuations in interest rates and the Bancorp’s
exposure is limited to the replacement value of those commitments.
As of December 31, 2012 and 2011, the Bancorp had a reserve for
unfunded commitments totaling $179 million and $181 million,
respectively, included in other liabilities in the Consolidated Balance
Sheets. The Bancorp monitors the credit risk associated with
commitments to extend credit using the same risk rating system
utilized within its loan and lease portfolio.
Risk ratings under this risk rating system are summarized in the following table as of December 31:
($ in millions)
Pass
Special mention
Substandard
Doubtful
Total
2012
2011
$
$
52,812
370
221
-
53,403
46,825
480
403
11
47,719
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 are included in the summary of
significant commitments table above for all periods presented.
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
expire as summarized in the following table as of December 31, 2012:
($ in millions)
Less than 1 year(a)
1 - 5 years(a)
Over 5 years
Total
(a)
1,831
2,407
43
4,281
Includes $60 and $4 issued on behalf of commercial customers to facilitate trade payments in U.S. dollars and foreign currencies which expire less than one year and between one and five years,
respectively.
$
$
Standby letters of credit accounted for 99% of total letters of credit
at December 31, 2012 compared to 98% at December 31, 2011 and
are considered guarantees
in accordance with U.S. GAAP.
Approximately 49% and 54% of the total standby letters of credit
were fully secured as of December 31, 2012 and 2011, 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, 2012 and 2011 the
reserve related to these standby letters of credit was $4 million and
in the
$5 million, respectively,
Consolidated Balance Sheets. The Bancorp monitors the credit risk
in other
liabilities
included
125 Fifth Third Bancorp
associated with letters of credit using the same risk rating system
utilized within its loan and lease portfolio.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Risk ratings under this risk rating system are summarized in the following table as of December 31:
($ in millions)
Pass
Special mention
Substandard
Doubtful
Loss
Total
At December 31, 2012 and 2011, 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,
2012 and 2011, FTS acted as the remarketing agent to issuers on
$2.5 billion and $2.9 billion, respectively, of VRDNs. As
remarketing agent, FTS is responsible for finding purchasers for
VRDNs that are put by investors. The Bancorp issues letters of
credit, as a credit enhancement, to the VRDNs remarketed by FTS,
in addition to $345 million and $440 million in VRDNs remarketed
by third parties at December 31, 2012 and 2011, respectively. These
letters of credit are included in the total letters of credit balance
provided in the previous table.
Noncancelable lease obligations and other commitments
into a number of
The Bancorp’s subsidiaries have entered
noncancelable lease agreements. The minimum rental commitments
under noncancelable lease agreements are shown in the summary of
significant commitments table. The Bancorp has also entered into a
limited number of agreements for work related to banking center
construction and to purchase goods or services.
Contingent Liabilities
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 to the
Bancorp’s total outstanding reinsurance coverage, which was $58
million at December 31, 2012 and $77 million at December 31,
2011. As of December 31, 2012 and 2011, the Bancorp maintained a
reserve of $18 million and $27 million, respectively, related to
exposures within the reinsurance portfolio which was included in
other liabilities in the Consolidated Balance Sheets. During 2009, the
Bancorp suspended the practice of providing reinsurance of private
mortgage insurance for newly originated mortgage loans. In the
second quarter of 2011, 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 $5 million, and the insurer assuming the Bancorp’s obligations
126 Fifth Third Bancorp
2012
2011
$
$
3,902
129
223
27
-
4,281
4,338
149
254
2
1
4,744
under the reinsurance agreement, resulting in a decrease to the
Bancorp’s reserve liability of $11 million and decrease in the
Bancorp’s maximum exposure of $27 million. In the fourth quarter
of 2012, the Bancorp allowed one of its third-party insurers to
terminate its reinsurance agreement with the Bancorp, resulting in
the
the
reinsurance agreement, resulting in a decrease to the Bancorp’s
reserve liability of $2 million and decrease in the Bancorp’s
maximum exposure of $3 million.
the Bancorp’s obligations under
insurer assuming
Legal claims
There are legal claims pending against the Bancorp and its
subsidiaries that have arisen in the normal course of business. See
Note 17 for additional information regarding these proceedings.
Guarantees
The Bancorp has performance obligations upon the occurrence of
certain events under financial guarantees provided in certain
contractual arrangements as discussed in the following sections.
Residential mortgage loans sold with 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 reflects
management’s estimate of losses based on a combination of factors.
The Bancorp’s estimation process requires management to make
subjective and complex judgments about matters that are inherently
uncertain, such as, future demand expectations, economic factors
and the specific characteristics of the loans subject to repurchase.
Such factors incorporate historical investor audit and repurchase
demand rates, appeals success rates, historical loss severity and any
additional information obtained from the GSEs regarding future
mortgage repurchase and file request criteria. 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 sales 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.
As of December 31, 2012 and 2011, the Bancorp maintained
reserves related to these loans sold with representation and warranty
provisions totaling $110 million and $55 million, respectively,
included in other liabilities in the Consolidated Balance Sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bancorp uses the best information available to it in
its mortgage representation and warranty reserve,
estimating
inherently uncertain and
however, the estimation process
imprecise and, accordingly, losses in excess of the amounts accrued
as of December 31, 2012, are reasonably possible. The Bancorp
currently estimates that it is reasonably possible that it could incur
losses related to mortgage representation and warranty provisions in
an amount up to approximately $83 million in excess of amounts
is
reserved. This estimate was derived by modifying the key
assumptions discussed above to reflect management's judgment
regarding reasonably possible adverse changes to those assumptions.
The actual repurchase losses could vary significantly from the
recorded mortgage representation and warranty reserve or this
estimate of reasonably possibly losses, depending on the outcome of
various factors, including those noted above.
The following table summarizes activity in the reserve for representation and warranty provisions:
($ in millions)
Balance, beginning of period
Net additions to the reserve
Losses charged against the reserve
Balance, end of period
2012
55
107
(52)
110
2011
85
52
(82)
55
$
$
The following table provides a rollforward of unresolved claims by claimant type for the year ended December 31, 2012:
($ in millions)
Balance, beginning of period
New demands
Loan paydowns/payoffs
Resolved demands
Balance, end of period
GSE
Private Label
Units
328
2,519
(42)
(2,511)
294
$
$
Dollars
47
333
(7)
(325)
48
Units
109
230
(2)
(213)
124
$
$
Dollars
19
7
-
(7)
19
The following table provides a rollforward of unresolved claims by claimant type for the year ended December 31, 2011:
($ in millions)
Balance, beginning of period
New demands
Loan paydowns/payoffs
Resolved demands
Balance, end of period
Residential mortgage loans sold with credit recourse
The Bancorp 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 $662 million and $772 million
at December 31, 2012 and 2011, respectively, and the delinquency
rates were 5.9% at December 31, 2012 and 6.7% at December 31,
2011. The Bancorp maintained an estimated credit loss reserve on
these loans sold with credit recourse of $20 million at December 31,
2012 and $17 million at December 31, 2011 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.
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
GSE
Private Label
Units
845
2,050
(21)
(2,546)
328
$
$
Dollars
150
328
(3)
(428)
47
Units
71
107
(2)
(67)
109
$
$
Dollars
11
22
-
(14)
19
margin or margin maintenance calls on all margin accounts. The
margin account balance held by the brokerage clearing agent was
$17 million at December 31, 2012 and $14 million at December 31,
2011. In the event of any customer default, FTS has rights to the
underlying collateral provided. Given the existence of the underlying
collateral provided and negligible historical credit losses, the
Bancorp does not maintain a loss reserve related to the margin
accounts.
Long-term borrowing obligations
The Bancorp had fully and unconditionally guaranteed certain long-
term borrowing obligations issued by wholly-owned issuing trust
entities of $800 million and $2.2 billion as of December 31, 2012
and 2011, respectively. See Note 15 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 IPO (the “IPO”) 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
127 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and fourth
quarters of 2010, Visa funded an additional $500 million and $800
million, respectively, 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 cash payments of $20
million and $35 million, respectively, (each of which reduced the
swap liability) to the swap counterparty in accordance with the
terms of the swap contract. In the second quarter of 2011, Visa
funded an additional $400 million into the litigation escrow account.
Upon Visa’s funding of the litigation escrow account in the second
quarter of 2011, along with additional terms of the total return
swap, the Bancorp made a $19 million cash payment (which reduced
the swap liability) to the swap counterparty. During the fourth
quarter of 2011, Visa announced it decided to fund an additional
$1.565 billion into the litigation escrow account which increased the
swap liability approximately $54 million. Upon Visa’s funding of the
litigation escrow account in the first quarter of 2012, along with
additional terms of the total return swap, the Bancorp made a $75
million cash payment (which reduced the swap liability) to the swap
counterparty. On July 24, 2012, Visa funded an additional $150
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 $6 million cash payment (which
reduced the swap liability) to the swap counterparty during the
quarter ended September 30, 2012. The fair value of the swap
liability was $33 million and $78 million as of December 31, 2012
and 2011, respectively. Refer to Note 17 for further information.
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 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 settled. The Bancorp
calculates the fair value of the swap based on its estimate of the
probability and timing of certain Covered Litigation settlement
scenarios and the resulting 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, 2012, the Bancorp has concluded that it is
not probable that the Visa 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
128 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. LEGAL AND REGULATORY PROCEEDINGS
During April 2006, the Bancorp was added as a defendant in a
consolidated antitrust class action lawsuit originally filed against
Visa®, MasterCard® and several other major financial institutions in
the United States District Court for the Eastern District of New
York. The plaintiffs, merchants operating commercial businesses
throughout the U.S. and trade associations, claim that the
interchange fees charged by card-issuing banks are unreasonable and
seek injunctive relief and unspecified damages. In addition to being
a named defendant, the Bancorp is also subject to a possible
indemnification obligation of Visa as discussed in Note 16 and has
also entered into judgment and loss sharing agreements with Visa,
MasterCard and certain other named defendants. On October 19,
2012, the parties to the litigation entered into a settlement
agreement. The court entered a Class Settlement Preliminary
Approval Order on November 27, 2012. Pursuant to the terms of
the settlement agreement, the Bancorp paid $46 million into a class
settlement escrow account. Previously, the Bancorp paid an
additional $4 million in another settlement escrow in connection
with the settlement of claims from plaintiffs not included in the
class action. The Bancorp had no remaining reserves related to this
litigation as of December 31, 2012 and reserves of $49 million as of
December 31, 2011. Refer to Note 16 for further information
regarding the Bancorp’s net litigation reserve and ownership interest
in Visa.
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
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.
lawsuit
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 under the caption Local 295/Local 851 IBT Employer
Group Pension Trust and Welfare Fund v. Fifth Third Bancorp. et
al., Case No. 1:08CV00421, and are currently pending in the United
States District Court for the Southern District of Ohio. On
December 18, 2012, the Bancorp entered into a settlement
agreement to resolve these cases. The settlement is subject to court
approval. Under the terms of the settlement, the Bancorp and its
insurer will pay a total of $16 million to a fund to settle all the claims
of the class members. In the settlement the Bancorp has denied any
liability and has agreed to the settlement in order to avoid potential
future litigation costs and uncertainty. The Bancorp does not
consider the impact of the settlement to be material to its financial
condition or results of operations. 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, but the Sixth Circuit Court of Appeals recently
reversed the trial court decision. The Bancorp intends to petition
the Supreme Court to review and reverse the Sixth Circuit decision
and seek a stay of proceedings in the trial court pending appeal. The
impact of the final disposition of these ERISA lawsuits cannot be
assessed at this time.
The Bancorp and its subsidiaries are not parties to any other
material litigation. However, there are other litigation matters that
arise in the normal course of business. While it is impossible to
ascertain the ultimate resolution or range of financial liability with
respect to these contingent matters, management believes any
resulting liability from these other actions would not have a material
effect upon the Bancorp’s consolidated financial position, results of
operations or cash flows.
The Bancorp and/or its affiliates are or may become involved
from time to time in information-gathering requests, reviews,
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, orders, injunctions or other
actions, amendments and/or restatements of the Bancorp’s SEC
filings and/or
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, and interviews of
certain of our current and former officers and employees and
others, concerning issues which the Bancorp understands relate to
its
accounting and
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
reporting matters
financial
The Bancorp is party to numerous claims and lawsuits
concerning matters arising from the conduct of its business
activities. The outcome of litigation and the timing of ultimate
resolution are inherently difficult to predict. The following factors,
among others, contribute to this lack of predictability: plaintiff
claims often include significant legal uncertainties, damages alleged
by plaintiffs are often unspecified or overstated, discovery may not
have started or may not be complete and material facts may be
disputed or unsubstantiated. As a result of these factors, the
Bancorp is not always able to provide an estimate of the range of
reasonably possible outcomes for each claim. A reserve for a
potential litigation loss is established when information related to
the loss contingency indicates both that a loss is probable and that
the amount of loss can be reasonably estimated. Any such reserve is
adjusted from time to time thereafter as appropriate to reflect
changes in circumstances. The Bancorp also determines, when
possible (due to the uncertainties described above), estimates of
reasonably possible losses or ranges of reasonably possible losses, in
excess of amounts reserved. Under U.S. GAAP, an event is
“reasonably possible” if “the chance of the future event or events
occurring is more than remote but less than likely” and an event is
“remote” if “the chance of the future event or events occurring is
slight.” Thus, references to the upper end of the range of reasonably
possible loss for cases in which the Bancorp is able to estimate a
range of reasonably possible loss mean the upper end of the range
of loss for cases for which the Bancorp believes the risk of loss is
more than slight. For matters where the Bancorp is able to estimate
such possible losses or ranges of possible losses, the Bancorp
currently estimates that it is reasonably possible that it could incur
losses related to legal proceedings including the matters discussed
above in an aggregate amount up to approximately $38 million in
excess of amounts reserved, with it also being reasonably possible
that no losses will be incurred in these matters. The estimates
included in this amount are based on the Bancorp’s analysis of
currently available information, and as new information is obtained
the Bancorp may change its estimates.
129 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For these matters and others where an unfavorable outcome is
reasonably possible but not probable, there may be a range of
possible losses in excess of the established reserve that cannot be
estimated. Based on information currently available, advice of
counsel, available insurance coverage and established reserves, the
Bancorp believes that the eventual outcome of the actions against
the Bancorp and/or its subsidiaries, including the matters described
above, will not, individually or in the aggregate, have a material
adverse effect on the Bancorp’s consolidated financial position.
However, in the event of unexpected future developments, it is
possible that the ultimate resolution of those matters, if unfavorable,
may be material to the Bancorp’s results of operations for any
particular period, depending, in part, upon the size of the loss or
liability imposed and the operating results for the applicable period.
130 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. 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 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, 2012 and 2011, 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 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
Outstanding balance on loans, net of participations and undrawn commitments
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 business, Vantiv Holding, LLC.
Advent International acquired an approximate 51% interest in
Vantiv Holding, LLC for cash and warrants. The Bancorp retained
the remaining approximate 49% interest in Vantiv Holding, LLC.
During the first quarter of 2012, Vantiv, Inc. priced an IPO of its
shares and contributed the net proceeds to Vantiv Holding, LLC for
additional ownership interests. As a result of this offering, the
Bancorp’s ownership of Vantiv Holding, LLC was reduced to
approximately 39%. The impact of the capital contributions to
Vantiv Holding, LLC and the resulting dilution in the Bancorp’s
interest resulted in a gain of $115 million recognized by the Bancorp
in the first quarter of 2012.
The Bancorp’s ownership share in Vantiv was further reduced
during the fourth quarter of 2012 when the Bancorp sold an
approximate 6% interest and recognized a $157 million gain. The
in Vantiv
Bancorp’s remaining approximate 33% ownership
Holding, LLC is accounted for under the equity method of
accounting and has a carrying value of $563 million as of December
31, 2012.
As of December 31, 2012, the Bancorp continued to hold
approximately 70 million units of Vantiv Holding, LLC and a
warrant to purchase approximately 20 million incremental Vantiv
Holding, LLC non-voting units, both of which may be exchanged
for common stock of Vantiv, Inc. on a one for one basis or at
Vantiv, Inc.’s option for cash. In addition, the Bancorp holds
approximately 70 million Class B common shares of Vantiv, Inc.
The Class B common shares give the Bancorp voting rights, but no
economic interest in Vantiv, Inc. The voting rights attributable to
the Class B common shares are limited to 18.5% of the voting
power in Vantiv, Inc. at any time other than in connection with a
stockholder vote with respect to a change in control in Vantiv, Inc.
These securities are subject to certain terms and restrictions
The Bancorp recognized $61 million and $57 million,
respectively, in noninterest income as part of its equity method
investment in Vantiv Holding, LLC for the years ended December
31, 2012 and 2011 and received distributions totaling $74 million
2012 2011
$
$
$
364
3
367
254
5
259
93
172
and $3 million, respectively, during 2012 and 2011.
The Bancorp and Vantiv Holding, LLC have various
agreements in place covering services relating to the operations of
Vantiv Holding, LLC. The services provided by the Bancorp to
Vantiv Holding, LLC were required to support Vantiv Holding,
LLC as a standalone entity during the deconversion period. These
services involve transition support, including product development,
risk management, legal, accounting and general business resources.
Vantiv Holding, LLC paid the Bancorp $1 million and $21 million,
respectively, for these services for the years ended December 31,
2012 and 2011. Other services provided to Vantiv Holding, LLC by
the Bancorp, which will continue beyond the deconversion period,
include treasury management, clearing, settlement, sponsorship, and
data center support. Vantiv Holding, LLC paid the Bancorp $34
million and $37 million, respectively, for these services for the years
ended December 31, 2012 and 2011. In addition to the previously
mentioned services, the Bancorp entered into an agreement under
which Vantiv Holding, LLC will provide processing services to the
Bancorp. The total amount of fees relating to the processing
services provided to the Bancorp by Vantiv Holding, LLC totaled
$83 million and $74 million, respectively, for the years ended
December 31, 2012 and 2011.
in syndication fees
As part of the sale, Vantiv Holding, LLC assumed loans
totaling $1.25 billion owed to the Bancorp. During the fourth
quarter of 2010, Vantiv Holding, LLC refinanced its debt into a
larger syndicated loan structure that included the Bancorp. The
Bancorp recognized $4 million
in 2010
associated with the refinanced loan to Vantiv Holding, LLC. The
outstanding balance of loans to Vantiv Holding, LLC was $325
million and $377 million at December 31, 2012 and 2011,
respectively. Interest income relating to the loans was $11 million,
$18 million and $102 million, respectively, for the years ended
December 31, 2012, 2011 and 2010 and is included in interest and
fees on loans and leases in the Consolidated Statements of Income.
Vantiv Holding, LLC’s line of credit was $50 million as of
December 31, 2012 and 2011. Vantiv Holding, LLC did not draw
upon its lines of credit during the years ended December 31, 2012
or 2011.
131 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. INCOME TAXES
The Bancorp and its subsidiaries file a consolidated federal income tax return. The following is a summary of applicable income taxes included in
the Consolidated Statements of Income for the years ended December 31:
($ in millions)
Current income tax expense (benefit):
U.S. Federal income taxes
State and local income taxes
Total current tax expense
Deferred income tax expense
U.S. Federal income taxes
State and local income taxes
Total deferred income tax expense
Applicable income tax expense
2012
2011
2010
327
38
365
252
19
271
636
82
14
96
411
26
437
533
(5)
16
11
165
11
176
187
$
$
The following is a reconciliation between the statutory U.S. Federal income tax rate and the Bancorp’s effective tax rate for the years ended
December 31:
($ in millions)
Statutory tax rate
Increase (decrease) resulting from:
State taxes, net of federal benefit
Tax-exempt income
Credits
Interest to taxing authority, net of tax
Other changes in unrecognized tax benefits
Unrealized stock-based compensation benefits
Other, net
Effective tax rate
Tax-exempt income in the rate reconciliation table includes interest
on municipal
lending,
interest
income/charges on life insurance policies held by the Bancorp, and
certain gains on sales of leases that are exempt from federal
taxation.
tax-exempt
bonds,
on
During 2010, the Bancorp settled its outstanding dispute with
2012
35.0 %
1.7
(2.1)
(6.7)
-
-
0.8
0.1
28.8 %
2011
35.0
1.4
(1.4)
(7.3)
-
-
1.3
0.1
29.1
2010
35.0
1.8
(3.6)
(14.1)
(0.8)
(1.8)
2.5
0.8
19.8
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 lease
transactions. This favorable settlement reduced income tax expense
(including interest) by $6 million for 2010.
The following table provides a summary of the Bancorp’s unrecognized tax benefits as of December 31:
($ 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
2012
2011
18
-
18
14
-
14
$
$
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
2012
2011
2010
14
6
(3)
2
-
(1)
18
16
1
(2)
-
-
(1)
14
82
4
(23)
2
(48)
(1)
16
$
$
The Bancorp’s unrecognized tax benefits as of December 31, 2012
and 2011 relate largely to 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 mentioned
previously.
While it is reasonably possible that the amount of the
unrecognized tax benefit with respect to certain of the Bancorp’s
uncertain tax positions could increase or decrease during the next 12
months, the Bancorp believes it is unlikely that its unrecognized tax
benefits will change by a material amount during the next 12
months.
132 Fifth Third Bancorp
Deferred income taxes are comprised of the following items at December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Deferred tax assets:
Allowance for loan and lease losses
Deferred compensation
Impairment reserves
Reserves
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
Other comprehensive income
MSRs
Bank premises and equipment
State deferred taxes
Other
Total deferred tax liabilities
Total net deferred tax liability
2012
2011
649
105
74
63
47
33
191
1,162
844
470
202
162
108
64
155
2,005
(843)
789
119
102
70
63
63
216
1,422
853
468
253
173
95
74
130
2,046
(624)
$
$
$
$
$
At December 31, 2012 and 2011, the Bancorp had recorded
deferred tax assets of $33 million and $63 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 $20 million and $34 million at December 31, 2012
and 2011, respectively. If these carryforwards are not utilized, they
will expire in varying amounts through 2030. Additionally, at
December 31, 2011, the Bancorp had federal general business tax
credit carryforwards of $5 million that were fully utilized in 2012.
The Bancorp has determined that a valuation allowance is not
needed against the remaining deferred tax assets as of December 31,
2012 or 2011. 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, 2012 and
2011 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
assets will be realized through the reversal of its existing taxable
temporary differences and its projected future taxable income.
The IRS concluded its audit for 2008 and 2009 during the first
quarter of 2012. As a result, all issues have been resolved with the
IRS through 2009. The IRS is currently examining the Bancorp’s
2010 and 2011 federal income tax returns. The statute of limitations
for the Bancorp’s federal income tax returns remains open for tax
years 2008-2012. 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.
During the years ended December 31, 2012 and 2011, the
Bancorp recognized an immaterial amount of interest expense in
connection with income taxes. At December 31, 2012 and 2011, the
Bancorp had accrued interest liabilities, net of the related tax
benefits of $3 million. No material liabilities were recorded for
penalties.
Retained earnings at December 31, 2012 and 2011 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.
133 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. RETIREMENT AND BENEFIT PLANS
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
recognizes the overfunded and underfunded status of its pension
plans as an asset and liability, respectively. The Bancorp’s other
defined benefit plans had an underfunded projected benefit
obligation at December 31, 2012 and 2011, respectively. The
underfunded amounts recognized
liabilities on the
Consolidated Balance Sheets were $71 million and $72 million as of
December 31, 2012 and 2011, respectively.
in other
The following table summarizes the defined benefit retirement plans as of and for the years ended December 31:
Plans with an Underfunded Status
($ in millions)
Fair value of plan assets at January 1
Actual return on assets
Contributions
Settlement
Benefits paid
Fair value of plan assets at December 31
Projected benefit obligation at January 1
Service cost
Interest cost
Settlement
Actuarial loss
Benefits paid
Projected benefit obligation at December 31
Unfunded projected benefit obligation at December 31
2012
181
21
4
(10)
(11)
185
253
-
10
(10)
14
(11)
256
(71)
2011
197
-
4
(10)
(10)
181
227
-
11
(10)
35
(10)
253
(72)
$
$
$
$
$
The estimated net actuarial loss for the defined benefit pension
plans that will be amortized from accumulated other comprehensive
income into net periodic benefit cost during 2013 is $13 million.
The estimated net prior service cost for the defined benefit pension
plan that will be amortized from accumulated other comprehensive
income into net periodic benefit cost during 2013 is immaterial to
the Consolidated Financial Statements.
The following table summarizes net periodic benefit cost and other changes in plan assets and benefit obligations recognized in other
comprehensive income for the years ended December 31:
($ 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
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Net actuarial loss
Net prior service cost
Amortization of net actuarial loss
Amortization of prior service cost
Settlement
Total recognized in other comprehensive income
Total recognized in net periodic benefit cost and
other comprehensive income
2012
2011
2010
$
$
-
10
(13)
14
-
6
17
7
-
(14)
-
(6)
(13)
$
4
-
11
(15)
11
1
6
14
50
-
(11)
(1)
(6)
32
46
-
12
(14)
12
1
-
11
2
-
(12)
(1)
-
(11)
-
134 Fifth Third Bancorp
Fair Value Measurements of Plan Assets
The following table summarizes plan assets measured at fair value on a recurring basis as of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2012 ($ in millions)
Equity securities:
Equity securities (Growth)(b)
Equity securities (Value)
Equity securities (Blended)
Total equity securities
Mutual and exchange traded funds:
Money market funds
International funds
Commodity funds
Total mutual and exchange traded funds
Debt securities:
U.S. Treasury obligations
Agency mortgage backed
Non-agency mortgage backed
Corporate bonds(c)
Total debt securities
Total plan assets
2011 ($ in millions)
Equity Securities:
Equity securities (Growth)(b)
Equity securities (Value)
Total equity securities
Mutual and exchange traded funds:
Money market funds
International funds
Commodity funds
Total mutual and exchange traded funds
Debt securities:
U.S. Treasury obligations
Agency mortgage backed
Non-agency mortgage backed
Corporate bonds(c)
Total debt securities
Total plan assets
(a) For further information on fair value hierarchy levels, see Note 1.
(b)
(c)
Includes holdings in Bancorp common stock.
Includes private label asset backed securities.
Fair Value Measurements Using(a)
Level 1
Level 2
Level 3
Total Fair Value
$
$
$
$
50
52
4
106
4
29
9
42
13
-
-
-
13
161
-
-
-
-
-
-
-
-
-
21
2
1
24
24
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Fair Value Measurements Using(a)
Level 1
Level 2
Level 3
53
52
105
5
25
9
39
10
-
-
-
10
154
-
-
-
-
-
-
-
-
25
1
1
27
27
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
50
52
4
106
4
29
9
42
13
21
2
1
37
185
Total Fair
Value
53
52
105
5
25
9
39
10
25
1
1
37
181
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 obligations and federal agency securities,
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.
135 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plan Assumptions
The plan assumptions are evaluated annually and are updated as
necessary. The discount rate assumption reflects the yield on a
portfolio of high quality fixed-income instruments that have a
similar duration to the plan’s liabilities. The expected long-term rate
of return assumption reflects the average return expected on the
assets invested to provide for the plan’s liabilities. In determining
the expected long-term rate of return, the Bancorp evaluated
actuarial and economic inputs, including long-term inflation rate
assumptions and broad equity and bond indices long-term return
projections, as well as actual long-term historical plan performance.
The following table summarizes the plan assumptions for the years ended December 31:
Weighted-Average Assumptions
For measuring benefit obligations at year end:
Discount rate
Rate of compensation increase
Expected return on plan assets
For measuring net periodic benefit cost:
Discount rate
Rate of compensation increase
Expected return on plan assets
2012
2011
2010
3.83 %
4.00
8.00
4.27
5.00
8.00
4.27
5.00
8.25
5.39
5.00
8.25
5.39
5.00
8.25
5.88
5.00
8.25
Lowering both the expected rate of return on the plan assets and
the discount rate by 0.25% would have increased the 2012 pension
expense by approximately $1 million. Lowering the rate of
compensation increase by 0.25% would have an immaterial impact
on the Bancorp’s Consolidated Financial Statements.
Based on the actuarial assumptions, the Bancorp does not
expect to contribute to the plan in 2013. Estimated pension benefit
payments, which reflect expected future service, are $19 million in
2013, $18 million in 2014, $17 million in 2015, $16 million in 2016
and $15 million in 2017. The total estimated payments for the years
2018 through 2022 is $67 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 the years ended December
31:
Weighted-average asset allocation
Equity securities
Bancorp common stock
Total equity securities(a)
Total fixed income securities
Cash(b)
Total
(a)
Includes mutual and exchange traded funds
(b) Cash held in a Fifth Third Money Market Fund.
Targeted range
2012
70-80 %
20-25
0-5
76 %
1
77
20
3
100 %
2011
74
2
76
21
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 plan at December 31, 2012
and 2011.
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
$256 million and $253 million at December 31, 2012 and 2011,
respectively. The Bancorp does not have any defined benefit plans
with assets exceeding benefit obligations at December 31, 2012 and
2011, respectively.
136 Fifth Third Bancorp
Amounts relating to the Bancorp’s defined benefit plans with benefit obligations exceeding assets were as follows at December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2012
2011
$
256
256
185
253
253
181
($ in millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
As of December 31, 2012 and 2011, $123 million and $159 million,
respectively, of plan assets were managed through a collective fund
and separately managed accounts by Fifth Third Bank, a subsidiary
of the Bancorp. Plan assets included $3 million and $5 million of
Bancorp common stock as of December 31, 2012 and 2011,
respectively. Plan assets are not expected to be returned to the
Bancorp during 2013.
The Bancorp’s profit sharing plan expense was $46 million for
2012, $35 million for 2011, and $31 million for 2010. Expenses
recognized for matching contributions to the Bancorp’s defined
contribution savings plans were $42 million, $40 million, and $36
million for the years ended December 31, 2012, 2011, and 2010,
respectively.
137 Fifth Third Bancorp
21. ACCUMULATED OTHER COMPREHENSIVE INCOME
The activity of the components of other comprehensive income and accumulated other comprehensive income for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total Other
Comprehensive Income
Total Accumulated Other
Comprehensive Income
Pretax
Activity
Tax
Effect
Net
Activity
Beginning
Balance
Net
Activity
Ending
Balance
$
$
$
$
$
$
(97)
(15)
(112)
37
(83)
(46)
13
13
(145)
309
(56)
253
89
(69)
20
(32)
(32)
241
216
(57)
159
2
(60)
(58)
1
10
11
112
34
5
39
(13)
29
16
(5)
(5)
50
(108)
19
(89)
(31)
24
(7)
11
11
(85)
(73)
19
(54)
(1)
21
20
(1)
(4)
(5)
(39)
(63)
(10)
(73)
24
(54)
(30)
8
8
(95)
201
(37)
164
58
(45)
13
(21)
(21)
156
143
(38)
105
1
(39)
(38)
-
6
6
73
485
(73)
412
80
(30)
50
(95)
470
8
(95)
(87)
375
321
164
485
67
13
80
(74)
314
(21)
156
(95)
470
216
105
321
105
(38)
67
(80)
241
6
73
(74)
314
($ in millions)
2012
Unrealized holding losses 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 actuarial loss
Defined benefit plans, net
Total
2011
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 actuarial gain
Defined benefit plans, net
Total
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
138 Fifth Third Bancorp
22. COMMON, PREFERRED AND TREASURY STOCK
The following is a summary of the share activity within common, preferred and treasury stock for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except share data)
Shares at December 31, 2009
Accretion from dividends on preferred shares, Series F
Stock-based awards issued or exercised, including treasury shares issued
Restricted stock grants
Other
Shares at December 31, 2010
Issuance of common shares
Exchange of preferred shares, Series G
Redemption of preferred shares, Series F
Accretion from dividends on preferred shares, Series F
Stock-based awards issued or exercised, including treasury shares issued
Restricted stock grants
Other
Shares at December 31, 2011
Shares acquired for treasury
Stock-based awards issued or exercised, including treasury shares issued
Restricted stock grants
Other
Shares at December 31, 2012
$
$
$
$
Common Stock
On January 25, 2011, the Bancorp raised $1.7 billion in new
common equity through the issuance of common stock in an
underwritten offering with an initial price of $14.00 per share.
121,428,572 shares were issued, which included 12,142,857 shares
issued to the underwriters, who exercised their option to purchase
additional shares at the offering price of $14.00 per share on January
24, 2011. 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.
Preferred Stock—Series G
In 2008, the Bancorp issued 8.5% non-cumulative Series G
convertible preferred stock. The depository shares represent shares
of its convertible preferred stock and have 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, 2012, Series G preferred stock had
4,112,750 depositary shares representing 16,450 shares outstanding
and 1,700 shares reserved for issuance.
Preferred Stock—Series F
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 warrant in the amount of 15% of the
preferred stock investment. The warrant gave the U.S Treasury the
right to purchase 43,617,747 shares of the Bancorp’s common stock
at $11.72 per share. 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 consisted 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 were
redeemed. The shares were callable by the Bancorp at par after three
years and could be repurchased at any time under certain
the
circumstances. The
repurchase of common stock and an increase in common stock
included restrictions on
terms also
Shares
801,504,188 $
-
-
-
-
801,504,188 $
122,388,393
-
-
-
-
-
-
923,892,581 $
Common Stock
Value
1,779
-
-
-
-
1,779
272
-
-
-
-
-
-
2,051
-
-
-
-
2,051
923,892,581 $
-
-
-
-
Shares
152,771 $
-
-
-
-
152,771 $
-
(1)
(136,320)
-
-
-
Preferred Stock
Value
3,609
45
-
-
-
3,654
-
-
(3,408)
153
-
-
(1)
398
-
-
-
-
398
16,450 $
-
-
-
-
16,450 $
Treasury Stock
Value
201
-
(6)
(62)
(3)
130
-
-
-
-
(7)
(58)
(1)
64
627
(7)
(47)
(3)
634
Shares
6,436,024
-
16,391
(1,334,967)
114,218
5,231,666
-
-
-
-
(336,735)
(756,381)
(50,405)
4,088,145
42,424,014
(1,776,508)
(2,877,657)
(117,470)
41,740,524
dividends, which required the U.S. Treasury’s consent, for a period
of three years from the date of investment unless the preferred
shares were redeemed in whole or the U.S. Treasury had 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 warrant 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 warrant.
The resulting discount to the preferred stock was 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.
On February 2, 2011, the Bancorp used proceeds from the
issuance of common shares along with proceeds from a senior debt
offering and other available resources to repurchase all 136,320
Series F preferred shares. 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 reduction in retained earnings and a corresponding
increase in preferred stock of $153 million in the Bancorp’s
Consolidated Balance Sheet. On March 16, 2011, the Bancorp
repurchased the warrant issued to the U.S. Treasury in connection
with the CPP preferred stock investment at an agreed upon price of
$280 million, which was recorded as a reduction to capital surplus in
the Bancorp’s Consolidated Financial Statements.
Treasury Stock
On March 13, 2012, the Bancorp announced the results of its capital
plan submitted to the FRB as part of the 2012 CCAR. The FRB
indicated to the Bancorp that it did not object to the repurchase of
common shares in an amount equal to any after-tax gains realized by
the Bancorp from the sale of Vantiv, Inc. common shares by either
the Bancorp or Vantiv, Inc. Following the Vantiv Inc. IPO, the
Bancorp entered into an accelerated share repurchase transaction
with a counterparty pursuant to which the Bancorp purchased
4,838,710 shares, or approximately $75 million, of its outstanding
common stock on April 26, 2012. As part of this transaction and all
subsequent accelerated share repurchase transactions in 2012, the
Bancorp entered into forward contracts in which the final number
139 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of shares to be delivered at settlement of the accelerated share
repurchase transaction was based on a discount to the average daily
volume-weighted average price of the Bancorp’s common stock
during the term of the Repurchase Agreements. Each of the
accelerated share repurchases was
two separate
transactions (i) the acquisition of treasury shares on the acquisition
date and (ii) a forward contract indexed to the Bancorp’s stock. At
settlement of the April 2012 forward contract on June 1, 2012, the
Bancorp received an additional 631,986 shares which were recorded
as an adjustment to the basis in the treasury shares purchased on the
acquisition date.
treated as
On August 21, 2012, the Bancorp announced that the FRB did
not object to its capital plan resubmitted under the CCAR process,
which included the repurchases of common shares of up to $600
million through the first quarter of 2013, in addition to any
incremental repurchase of common shares related to any after-tax
gains realized by the Bancorp from the sale of Vantiv, Inc. common
shares by either the Bancorp or Vantiv, Inc. As a result, on August
21, 2012, Fifth Third’s Board of Directors authorized the Bancorp
to repurchase up to 100 million shares of its outstanding common
stock in the open market or in privately negotiated transactions, and
to utilize any derivative or similar instrument to affect share
repurchase
transactions. This share repurchase authorization
replaces the Board’s previous authorization pursuant to which
approximately 14 million shares remained available for repurchase
by the Bancorp.
On August 23, 2012, the Bancorp entered into an accelerated
share repurchase transaction with a counterparty pursuant to which
23. STOCK-BASED COMPENSATION
stock
The Bancorp has historically emphasized employee
ownership. The following table provides detail of the number of
shares to be issued upon exercise of outstanding stock-based awards
the Bancorp purchased 21,531,100 shares, or approximately $350
million, of its outstanding common stock on August 28, 2012. At
settlement of the forward contract on October 24, 2012, the
Bancorp received an additional 1,444,047 shares which were
recorded as an adjustment to the basis in the treasury shares
purchased on the acquisition date.
On November 6, 2012, the Bancorp entered
into an
accelerated share repurchase transaction with a counterparty
pursuant to which the Bancorp purchased 7,710,761 shares, or
approximately $125 million, of its outstanding common stock on
November 9, 2012. At settlement of the forward contract on
February 12, 2013, the Bancorp received an additional 657,917
shares which were recorded as an adjustment to the basis in the
treasury shares purchased on the acquisition date.
Following the sale of a portion of the Bancorp’s shares of Class
A Vantiv, Inc. common stock, the Bancorp entered into an
accelerated share repurchase transaction on December 14, 2012
with a counterparty pursuant to which the Bancorp purchased
6,267,410 shares, or approximately $100 million, of its outstanding
common stock on December 19, 2012. The Bancorp expects the
settlement of the transaction to occur on or before March 14, 2013.
Additionally, on January 28, 2013, the Bancorp entered into an
accelerated share repurchase transaction. See Note 30 for additional
information.
During 2011 and 2010, the Bancorp repurchased an immaterial
amount of common stock.
and remaining shares available for future issuance under all of the
Bancorp’s equity compensation plans as of December 31, 2012:
Plan Category (shares in thousands)
Equity compensation plans approved by shareholders
SARs
Restricted stock
Stock options(c)
Phantom stock units
Performance units
Employee stock purchase plan
Number of Shares to be
Issued Upon Exercise
Weighted-Average
Exercise Price
(b)
6,379
3,108
(d)
(e)
(b)
N/A
$51.75
N/A
N/A
Shares Available for
Future Issuance
23,215 (a)
(a)
(a)
(a)
N/A
(a)
8,720 (f)
31,935
Total shares
(a) Under the 2011 Incentive Compensation Plan, 39 million shares plus up to 4.5 million shares from the 2008 Incentive Compensation Plan (the Predecessor Plan) of stock were authorized for
9,487
issuance as incentive and nonqualified stock options, SARs, restricted stock and restricted stock 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 0.8 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 $17.74 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 0.6 million shares.
(f) Represents remaining shares of Fifth Third common stock under the Bancorp’s 1993 Stock Purchase Plan, as amended and restated, including an additional 1.5 million shares approved by
shareholders on March 28, 2007 and an additional 12 million shares approved by shareholders on April 21, 2009.
Stock-based awards are eligible for issuance under the Bancorp’s
Incentive Compensation Plan to key employees and directors of the
Bancorp and its subsidiaries. The Incentive Compensation Plan was
approved by shareholders on April 19, 2011, and authorized the
issuance of up to 39 million shares plus up to 4.5 million shares
under the Predecessor Plan for Full Value Awards 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. Full
Value Awards are defined as awards with no cash outlay for the
140 Fifth Third Bancorp
employee to obtain the full value. Based on total stock-based awards
outstanding (including stock options, stock appreciation rights,
restricted stock and performance units) and shares remaining for
future grants under the 2011 Incentive Compensation Plan, the
potential dilution to which the Bancorp’s shareholders of common
stock are exposed due
that stock-based
compensation will be awarded to executives, directors or key
employees of the Bancorp is nine percent. SARs, restricted stock,
stock options and performance units outstanding represent six
percent of the Bancorp’s issued shares at December 31, 2012.
the potential
to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All of the Bancorp’s stock-based awards are to be settled with
stock with the exception of phantom stock 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
after four years, or ratably over three or four years or ratably after
three 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
The weighted-average assumptions were as follows for the years ended:
exercisable ratably over a three or four year period of continued
employment. Performance unit awards have three-year cliff vesting
terms with market conditions as defined by the plan.
Stock-based compensation expense was $69 million, $59
million and $64 million for the years ended December 31, 2012,
2011 and 2010, respectively, and is included in salaries, wages, and
incentives in the Consolidated Statements of Income. The total
related income tax benefit recognized was $24 million, $21 million
and $18 million for the years ended December 31, 2012, 2011 and
2010, respectively.
Stock Appreciation Rights
The Bancorp uses assumptions, which are evaluated and revised as
necessary, in estimating the grant-date fair value of each SAR grant.
Expected life (in years)
Expected volatility
Expected dividend yield
Risk-free interest rate
2012
6
37%
2.8%
1.2%
2011
6
35%
2.0%
2.6%
2010
6
38%
2.0%
3.1%
The expected life is derived from historical exercise patterns and
represents the amount of time that SARs 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 SARs is based on
the U.S. Treasury yield curve in effect at the time of grant.
The grant-date fair value of SARs is measured using the Black-
Scholes option-pricing model. The weighted-average grant-date fair
value of SARs granted was $4.23, $4.29 and $5.10 per share for the
years ended 2012, 2011 and 2010, respectively. The total grant-date
fair value of SARs that vested during 2012, 2011 and 2010 was $22
million, $20 million, and $25 million, respectively.
At December 31, 2012, there was $64 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 2.8 years.
SARs (shares in thousands)
Outstanding at January 1
Granted
Exercised
Forfeited or expired
Outstanding at December 31
Exercisable at December 31
2012
2011
2010
Weighted-
Average
Grant Price
22.20
14.36
6.29
23.33
20.41
26.76
Shares
36,502 $
12,179
(1,271)
(3,290)
44,120 $
23,248 $
Weighted-
Average
Grant Price
24.67
13.36
3.96
25.76
22.20
30.29
Shares
31,152
8,633
(521)
(2,762)
36,502
20,070
$
$
$
Weighted-
Average
Grant Price
26.82
14.74
3.96
30.87
24.67
34.94
Shares
28,571 $
5,310
(319)
(2,410)
31,152 $
16,347 $
The following table summarizes outstanding and exercisable SARs by grant price at December 31, 2012:
Grant price per share
Under $10.00
$10.01-$20.00
$20.01-$30.00
$30.01-$40.00
Over $40.00
All SARs
Outstanding SARs
Exercisable SARs
Number of
SARs at
Year End
(000s)
5,100 $
27,812
34
7,231
3,943
44,120 $
Weighted-
Average
Grant Price
4.06
14.98
22.88
38.69
46.37
20.41
Weighted-
Average
Remaining
Contractual
Life
(in years)
6.3
8.0
5.2
3.6
2.2
6.6
Number of
SARs at
Year End
(000s)
3,481 $
8,559
34
7,231
3,943
23,248 $
Weighted-
Average
Grant Price
3.96
16.94
22.88
38.69
46.37
26.76
Weighted-
Average
Remaining
Contractual
Life
(in years)
6.3
6.4
5.2
3.6
2.2
4.8
141 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock Awards
The total grant-date fair value of RSAs that vested during 2012,
2011 and 2010 was $32 million, $37 million and $30 million,
respectively. At December 31, 2012, there was $57 million of stock-
based compensation expense related to nonvested restricted stock
not yet recognized. The expense is expected to be recognized over a
remaining weighted-average period of approximately 2.7 years.
RSAs (shares in thousands)
Nonvested at January 1
Granted
Exercised
Forfeited
Nonvested at December 31
2012
2011
2010
Weighted-
Average
Grant -Date
Fair Value
15.95
14.33
18.37
15.35
14.32
Weighted-
Average
Grant -Date
Fair Value
18.89
13.19
22.52
15.34
15.95
Shares
5,158 $
1,702
(1,646)
(450)
4,764 $
Shares
4,764 $
3,863
(1,826)
(422)
6,379 $
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 $
The following table summarizes unvested RSAs by grant-date fair value at December 31, 2012:
Grant-Date Fair Value Per Share
Under $10.00
$10.01-$20.00
$20.01-$30.00
All RSAs
Nonvested RSAs
Number of
RSAs at Year End
(000s)
Weighted-Average
Remaining
Contractual Life
(in years)
254
6,123
2
6,379
0.9
1.4
0.3
1.4
Stock options
The grant-date fair value of stock options is measured using the
Black-Scholes option-pricing model. There were no stock options
granted during 2012, 2011 and 2010.
The total intrinsic value of options exercised during 2012 was
$1 million and was immaterial to the Bancorp’s Consolidated
Financial Statements in both 2011 and 2010. Cash received from
options exercised during 2012 and 2011 was $2 million and $1
million, respectively. Cash received from options exercised during
2010 was immaterial to the Bancorp’s Consolidated Financial
Statements. Tax benefits realized from exercised options were
immaterial to the Bancorp’s Consolidated Financial Statements
during 2012, 2011 and 2010. All stock options were vested as of
December 31, 2008, therefore, no stock options vested during 2012,
2011, or 2010. As of December 31, 2012, the aggregate intrinsic
value of both outstanding options and exercisable options was $1
million.
Stock Options (shares in thousands)
Outstanding at January 1
Exercised
Forfeited or expired
Outstanding at December 31
Exercisable at December 31
2012
2011
2010
Weighted-
Average
Exercise Price
53.88
10.32
66.25
45.00
45.00
Shares
7,584 $
(205)
(3,502)
3,877 $
3,877 $
Weighted-
Average
Exercise Price
52.01
9.25
49.61
53.88
53.88
$
$
$
Shares
11,859
(96)
(4,179)
7,584
7,584
Weighted-
Average
Grant Price
49.29
8.76
40.54
52.01
52.01
Shares
15,504 $
(58)
(3,587)
11,859 $
11,859 $
The following table summarizes outstanding and exercisable stock options by exercise price at December 31, 2012:
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
142 Fifth Third Bancorp
Outstanding and Exercisable Stock Options
Number of
Options at Year
End (000s)
Weighted-
Average
Exercise Price
5 $
590
33
136
3,113
3,877 $
9.65
12.86
23.38
36.31
51.77
45.00
Weighted-Average
Remaining
Contractual Life
(in years)
1.5
2.1
0.2
1.3
0.3
0.6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to
in reaction
Other stock-based compensation
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
the TARP
compensation rules. On February 22, 2011, the Bancorp redeemed
its Series F preferred stock held by the U.S. Treasury under the
CPP. As a result of this redemption, the last payment of phantom
stock occurred in April of 2011. The phantom stock units were
issued under the Bancorp’s 2008 Incentive Compensation Plan. The
number of phantom stock units was determined each pay period by
dividing the amount of salary to be paid in phantom stock units for
that pay period, by the reported closing price of the Bancorp’s
common stock on the pay date for such pay period. The phantom
stock units vested immediately on issuance. Phantom stock was
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 did not include any rights to receive dividends or
dividend equivalents. Phantom stock units issued on or before June
12, 2010 were 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% settled on June 15, 2012 and 50% to be settled on
June 15, 2013. The amount paid on settlement of the phantom
stock units is equal to the total amount of phantom stock units
settled at the reported closing price of the Bancorp’s common stock
on the settlement date. Under the phantom stock program, no
phantom stock units were granted during the year ended December
31, 2012, and phantom stock units of 132,649 and 488,703 were
granted with a weighted average grant price of $14.40 and $12.80
during the years ended December 31, 2011 and 2010, respectively.
During 2012 and 2011, 199,813 and 521,091, phantom stock units
were settled, respectively. No phantom stock units were settled
during 2010.
Performance units are payable contingent upon the Bancorp
achieving certain predefined performance targets over the three-year
measurement period. Awards granted during 2012, 2011 and 2010
will be entirely settled in stock. The performance targets are based
on the Bancorp’s performance relative to a defined peer group.
During 2012, 2011 and 2010, 344,741, 328,061, and 61,320
performance units, respectively, were granted by the Bancorp. These
awards were granted at a weighted-average grant-date fair value of
$14.36, $13.36 and $13.76 per unit during 2012, 2011 and 2010,
respectively.
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,
2012, 2011 and 2010, there were 827,709, 886,447 and 749,127
shares, respectively, purchased by participants and the Bancorp
recognized stock-based compensation expense of $1 million in each
of the respective years.
143 Fifth Third Bancorp
24. OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE
The following table presents the major components of other noninterest income and other noninterest expense for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Other noninterest income:
Gain on Vantiv, Inc. IPO and sale of Vantiv, Inc. shares
Net gain from warrant and put options associated with sale of the processing business
Equity method income from interest in Vantiv Holding, LLC
Operating lease income
Cardholder fees
BOLI income
Banking center income
Insurance income
Consumer loan and lease fees
Gain on loan sales
TSA revenue
Loss on swap associated with the sale of Visa, Inc. class B shares
Loss on sale of OREO
Other, net
Total
Other noninterest expense:
Losses and adjustments
Loan and lease
Loss (gain) on debt extinguishment
Marketing
FDIC insurance and other taxes
Impairment of affordable housing investments
Professional services fees
Travel
Postal and courier
Operating lease
Data processing
Recruitment and education
OREO expense
Insurance
Supplies
Intangible asset amortization
Provision (benefit) for unfunded commitments and letters of credit
Other, net
Total
2012
2011
2010
$
$
$
$
272
67
61
60
46
35
32
28
27
20
1
(45)
(57)
27
574
187
183
169
128
114
90
56
52
48
43
40
28
21
18
17
13
(2)
169
1,374
-
39
57
58
41
41
27
28
31
37
21
(83)
(71)
24
250
129
195
(8)
115
201
85
58
52
49
41
29
31
34
25
18
22
(46)
194
1,224
-
5
26
62
36
194
22
38
32
51
49
(19)
(78)
(12)
406
187
211
17
98
242
100
77
51
48
41
24
31
33
42
24
43
(24)
149
1,394
144 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. EARNINGS PER SHARE
The calculation of earnings per share and the reconciliation of earnings per share and earnings per diluted share for the years ended December 31:
(in millions, except per share data)
Earnings per share:
Net income attributable to Bancorp
Dividends on preferred stock
Net income available to common shareholders
Less: Income allocated to participating securities
Net income allocated to common shareholders
Earnings per diluted share:
Net income available to common shareholders
Effect of dilutive securities:
Stock-based awards
Series G convertible preferred stock
Warrants related to Series F preferred stock
Net income available to common shareholders
plus assumed conversions
Less: Income allocated to participating securities
Net income allocated to common shareholders
plus assumed conversions
2012
2011
2010
Income
Average Per Share
Shares Amount
Income
Average Per Share
Shares Amount
Income
Average Per Share
Shares Amount
$
$
$
1,576
35
1,541
10
1,531
1,541
-
35
-
1,576
10
904
1.69
6
36
-
-
(0.03)
-
1,297
203
1,094
6
1,088
1,094
-
35
-
1,129
6
906
1.20
6
36
2
-
(0.02)
-
753
250
503
3
500
503
-
-
-
503
3
791
0.63
5
-
3
-
-
-
$
1,566
946
1.66
1,123
950
1.18
500
799
0.63
Shares are excluded from the computation of net income per diluted
share when their inclusion has an anti-dilutive effect on earnings per
share. The diluted earnings per share computation for 2012, 2011,
and 2010 excludes 36 million, 29 million, and 23 million,
respectively, of stock appreciation rights, 5 million, 8 million, and 12
million, respectively, of stock options and 1 million, 1 million and 1
million shares, respectively, of unvested restricted stock that had not
yet been exercised. In 2010, 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 were
excluded from the computation of net income per diluted share
because their inclusion would have been anti-dilutive to earnings per
share.
The diluted earnings per share computation for the year ended
December 31, 2012 excludes the impact of the forward contracts
related to the November 6, 2012 and December 14, 2012
accelerated share repurchase transactions because, based upon the
average daily volume-weighted average price of the Bancorp’s
common stock during the fourth quarter of 2012, the counterparty
to deliver
to
approximately 1 million shares as of December 31, 2012, and thus
the impact of the two accelerated share repurchase transactions
would have been anti-dilutive to earnings per share.
transactions would have been required
the
145 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26. 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. For more information regarding the fair value
hierarchy and how the Bancorp measures fair value, see Note 1.
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 residential mortgage loans held for sale
for which the Bancorp has elected the fair value option as of:
Fair Value Measurements Using
Level 1(c)
Level 2(c)
Level 3
Total Fair Value
41
-
-
-
-
79
120
1
-
-
-
-
161
162
-
-
2
-
-
-
2
284
14
-
-
-
14
8
22
-
1,911
212
8,730
3,277
113
14,243
-
6
16
7
15
-
44
2,856
-
1,445
201
-
87
1,733
18,876
600
183
-
82
865
2
867
-
-
-
-
-
-
-
-
-
1
-
-
-
1
-
76
60
-
177
-
237
314
3
-
33
-
36
-
36
41
1,911
212
8,730
3,277
192
14,363
1
6
17
7
15
161
207
2,856
76
1,507
201
177
87
1,972
19,474
617
183
33
82
915
10
925
$
$
$
$
December 31, 2012 ($ 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
U.S. Government sponsored 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
146 Fifth Third Bancorp
December 31, 2011 ($ 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:
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using
Level 1(c)
Level 2(c)
Level 3
Total Fair Value
$
$
$
171
-
-
-
-
185
356
-
-
-
144
144
-
-
8
-
-
-
8
508
54
-
-
-
54
-
1,962
101
10,284
1,812
5
14,164
8
11
13
-
32
2,751
-
1,773
294
-
134
2,201
19,148
802
275
-
130
1,207
-
-
-
-
-
-
-
1
-
-
-
1
-
65
34
-
113
-
147
213
2
-
81
-
83
171
1,962
101
10,284
1,812
190
14,520
9
11
13
144
177
2,751
65
1,815
294
113
134
2,356
19,869
858
275
81
130
1,344
6
1,350
-
Short positions
Total liabilities
83
(a) Excludes FHLB and FRB restricted stock totaling $497 and $347, respectively, at December 31, 2012 and $497 and $345, respectively, at December 31, 2011.
(b)
(c) During the years ended December 31, 2012 and 2011, no assets or liabilities were transferred between Level 1 and Level 2.
Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.
4
1,211
2
56
$
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.
securities with
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
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. Corporate bonds are included in other bonds, notes and
debentures
table. 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.
the previous
in
Non-agency mortgage-backed securities and other asset-backed
securities, which are included in other bonds, notes and debentures,
are generally valued using an income approach based on discounted
cash flows, incorporating prepayment 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.
Residential mortgage loans held for sale
For residential mortgage loans held for sale, fair value is estimated
based upon mortgage-backed securities prices and spreads to those
prices or, for certain 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
147 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Residential mortgage loans
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. It is the Bancorp’s policy to value any transfers
between levels of the fair value hierarchy based on end of period
fair values.
interest rate risk and an
For residential mortgage loans reclassified from held for sale to
held for investment, the fair value estimation is based on mortgage-
backed securities prices,
internally
developed credit component. Therefore, these loans are classified
within Level 3 of the valuation hierarchy. An adverse change in the
loss rate or severity assumption would result in a decrease in fair
value of the related loan. The Secondary Marketing Department,
which reports to the Bancorp’s Chief Operating Officer, in
conjunction with the Consumer Credit Risk Department, which
reports to the Bancorp’s Chief Risk Officer, are responsible for
determining the valuation methodology for residential mortgage
loans held for investment. The Secondary Marketing Department
reviews
if
adjustments are necessary based on decreases in observable housing
market data. This group also reviews trades
in comparable
benchmark securities and adjusts the values of loans as necessary.
Consumer Credit Risk is responsible for the credit component of
the fair value which is based on internally developed loss rate
models that take into account historical loss rates and loss severities
based on underlying collateral values.
loss severity assumptions quarterly to determine
to
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
the derivative counterparties and other market
assigned
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, 2012 and 2011, derivatives classified as Level 3, which are valued
using models containing unobservable inputs, consisted primarily of
warrants associated with the sale of the processing business to
Advent International 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
generated
significant
unobservable input in the valuation process.
rate assumptions as a
loan closing
In connection with the sale of the processing business, the
Bancorp provided Advent International with certain put options
that were exercisable in the event of certain circumstances. The put
options expired as a result of the Vantiv, Inc. initial public offering
in March of 2012. In addition, the associated warrants allow the
incremental
Bancorp
nonvoting units in Vantiv Holding, LLC under certain defined
conditions involving change of control. The fair value of the
to purchase approximately 20 million
148 Fifth Third Bancorp
warrants is calculated in conjunction with a third party valuation
provider by applying Black-Scholes option valuation models using
probability weighted scenarios which contain the following inputs:
Vantiv, Inc. stock price, strike price per the Warrant Agreement and
several unobservable inputs, such as expected term, expected
volatility, and expected dividend rate.
For the warrants, an increase in the expected term (years), the
expected volatility and the risk free rate assumptions would result in
an increase in the fair value; correspondingly, a decrease in these
assumptions would result in a decrease in the fair value. The
Accounting and Treasury Departments, both of which report to the
Bancorp’s Chief Financial Officer, determined the valuation
methodology for the warrants and put option. Accounting and
Treasury review changes in fair value on a quarterly basis for
reasonableness based on changes
implied
volatilities, expected terms, probability weightings of the related
scenarios, and other assumptions.
in historical and
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, Inc. Class B shares into Class A shares.
The fair value of the total return swap was calculated using a
inputs
discounted cash flow model based on unobservable
consisting of management’s estimate of the probability of certain
litigation scenarios, the timing of the resolution of the Covered
Litigation and Visa litigation loss estimates in excess, or shortfall, of
the Bancorp’s proportional share of escrow funds.
An increase in the loss estimate or a delay in the resolution of
the Covered Litigation would result in an increase in fair value;
correspondingly, a decrease in the loss estimate or an acceleration of
the resolution of the Covered Litigation would result in a decrease
fair value. The Accounting and Treasury Departments
in
determined the valuation methodology for the total return swap.
Accounting and Treasury review the changes in fair value on a
quarterly basis for reasonableness based on Visa stock price
changes, litigation contingencies, and escrow funding.
The net fair value of the interest rate lock commitments at
December 31, 2012 was $60 million. Immediate decreases in current
interest rates of 25 bps and 50 bps would result in increases in the
fair value of the interest rate lock commitments of approximately
$24 million and $39 million, respectively. Immediate increases of
current interest rates of 25 bps and 50 bps would result in decreases
in the fair value of the interest rate lock commitments of
approximately $32 million and $69 million, respectively. The
decrease in fair value of interest rate lock commitments due to
immediate 10% and 20% adverse changes in the assumed loan
closing rates would be approximately $6 million and $12 million,
respectively, and the increase in fair value due to immediate 10%
and 20% favorable changes in the assumed loan closing rates would
be approximately $6 million and $12 million, respectively. These
sensitivities are hypothetical and should be used with caution, as
changes in fair value based on a variation in assumptions typically
cannot be extrapolated because the relationship of the change in
assumptions to the change in fair value may not be linear.
The Secondary Marketing Department and the Consumer Line
of Business Finance Department, which reports to the Bancorp’s
Chief Financial Officer, are responsible for determining the
valuation methodology for IRLCs. Secondary Marketing,
in
conjunction with a third party valuation provider, periodically
review loan closing rate assumptions and recent loan sales to
determine if adjustments are needed for current market conditions
not reflected in historical data.
The following tables are a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs
(Level 3):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives,
Net(a)
Residential
Mortgage
Loans
Trading
Securities
For the year ended December 31, 2012
($ in millions)
Beginning balance
Total gains or losses (realized/unrealized):
Included in earnings
Purchases
Settlements
Transfers into Level 3(b)
Ending balance
The amount of total gains or losses for the period
included in earnings attributable to the change in
unrealized gains or losses relating to assets
still held at December 31, 2012(c)
For the year ended December 31, 2011
($ in millions)
Beginning balance
Total gains or losses (realized/unrealized):
Included in earnings
Purchases
Sales
Settlements
Transfers into Level 3(b)
Ending balance
The amount of total gains or losses for the period
included in earnings attributable to the change in
unrealized gains or losses relating to assets
still held at December 31, 2011(c)
$
$
$
$
$
$
65
-
-
(15)
26
76
32
418
-
(393)
-
57
1
-
-
-
-
1
-
2
205
-
-
(175)
-
32
6
-
-
(5)
-
-
1
-
46
4
-
-
(9)
24
65
4
-
233
22 $
255
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives,
Net(a)
Residential
Mortgage
Loans
Trading
Securities
Total
Fair Value
130
32 $
22
-
90
-
144 $
440
-
(318)
26
278
Total
Fair Value
107
53 $
(43)
2
-
20
-
32 $
166
2
(5)
(164)
24
130
32
(43)$
(7)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Residual
Interests in
Securitizations
174
$
Residential
Mortgage
Loans
Interest Rate
Derivatives, Derivatives,
Equity
26
13
Net(a)
Trading
Securities
For the year ended December 31, 2010
($ in millions)
Beginning balance
Total gains or losses (realized/unrealized):
Included in earnings
Purchases, sales, issuances, and settlements, net
Transfers into Level 3(b)
Ending balance
The amount of total gains or losses for the period
included in earnings attributable to the change in
unrealized gains or losses relating to assets
still held at December 31, 2010(c)
46
(a) Net interest rate derivatives include derivative assets and liabilities of $60 and $3, respectively, as of December 31, 2012, $34 and $2, respectively as of December 31, 2011 and $13 and $11,
respectively, as of December 31, 2010. Net equity derivatives include derivative assets and liabilities of $177 and $33, respectively, as of December 31, 2012, $113 and $81, respectively, as of
December 31, 2011, and $81 and $28, respectively, as of December 31, 2010.
Includes residential mortgage loans held for sale that were transferred to held for investment.
Includes interest income and expense.
(b)
(c)
(d) 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.
Total
Fair Value
222
-
(174)(d)
-
-
(14)
56
-
53 $
187
(183)
-
2
176
(317)
26
107
3
(10)
-
6
-
(6)
26
46
Net(a)
(14)$
11 $
60
(2)
-
-
$
$
-
149 Fifth Third Bancorp
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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Mortgage banking net revenue
Corporate banking revenue
Other noninterest income
Securities gains, net
Total gains
2012
418
1
21
-
440
$
2011
210
2
(46)
-
166
2010
187
1
(15)
3
176
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 December 31, 2012, 2011 and 2010 were recorded in the Consolidated Statements of Income as follows:
($ in millions)
Mortgage banking net revenue
Corporate banking revenue
Other noninterest income
Total (losses) gains
2012
233
1
21
255
$
2011
37
1
(45)
(7)
2010
60
1
(15)
46
The following table presents information as of December 31, 2012 about significant unobservable inputs related to the Bancorp’s material
categories of Level 3 financial assets and liabilities measured on a recurring basis:
($ in millions)
Financial Instrument
Residential mortgage loans
Fair Value
$ 76
Valuation Technique
Loss rate model
IRLCs, net
Stock warrants associated with the sale
of the processing business
60
177
Discounted cash flow
Black-Scholes option
valuation model
Swap associated with the sale of Visa, Inc.
Class B shares
(a) Based on historical and implied volatilities of comparable companies assuming similar expected terms.
Discounted cash flow
(33)
Significant Unobservable
Inputs
Interest rate risk factor
Credit risk factor
Loan closing rates
Expected term (years)
Expected volatility(a)
Expected dividend rate
Timing of the resolution
of the Covered Litigation
Ranges of
Inputs
(91.2) - 17.0%
0 - 68.4%
9.9 - 95.0%
2.00 - 16.50
27.2 - 40.0%
-
12/31/2013 -
12/31/2016
Weighted-Average
5.8%
4.3%
58.3%
6.2
33.8%
-
NM
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 tables represent those assets that were subject to fair value adjustments during the years ended December 31, 2012 and 2011 and
still held as of the end of the period, and the related losses from fair value adjustments on assets sold during the period as well as assets still held as
of the end of the period:
$
Fair Value Measurements Using
Level 2
-
-
-
-
-
-
Level 3
9
83
46
4
697
165
Level 1
-
-
-
-
-
-
$
-
-
1,004
Total
9
83
46
4
697
165
1,004
Total Losses
2012
(13)
(122)
(50)
(22)
(103)
(74)
(384)
As of December 31, 2012 ($ in millions)
Commercial loans held for sale(a)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
MSRs
OREO property
Total
150 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2011 ($ in millions)
Commercial loans held for sale(a)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
MSRs
OREO property
Total
(a)
Includes commercial nonaccrual loans held for sale.
$
$
Fair Value Measurements Using
Level 2
-
-
-
-
-
-
-
Level 3
27
101
85
55
681
224
1,173
Level 1
-
-
-
-
-
-
-
Total
27
101
85
55
681
224
1,173
Total Losses
2011
(67)
(328)
(124)
(60)
(242)
(171)
(992)
The following table presents information as of December 31, 2012 about significant unobservable inputs related to the Bancorp’s material
categories of Level 3 financial assets and liabilities measured on a nonrecurring basis:
($ in millions)
Financial Instrument
Commercial loans held for sale
Fair Value Valuation Technique
$ 9
Appraised value
Commercial and industrial loans
83
Appraised value
Commercial mortgage loans
46
Appraised value
Commercial construction loans
4
Appraised value
Appraised value
Cost to sell
Default rates
Collateral value
Loss severities
Default rates
Collateral value
Loss severities
Default rates
Collateral value
Loss severities
MSRs
697
Discounted cash flow
Prepayment speed
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted-Average
NM
NM
100%
NM
0 - 100%
100%
NM
0 - 100%
100%
NM
0 - 21.5%
0 - 100%
NM
10.0%
NM
NM
8.9%
NM
NM
19.9%
NM
NM
8.9%
(Fixed) 16.1%
(Adjustable) 26.9%
(Fixed) 10.5%
(Adjustable) 11.7%
NM
Discount rates
Appraised value
9.4 - 18.0%
NM
investment. Larger commercial loans included within aggregate
borrower relationship balances exceeding $1 million that exhibit
probable or observed credit weaknesses are subject to 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. When the
loan is collateral dependent, the fair value of the loan is generally
based on the fair value of the underlying collateral supporting the
loan and therefore these loans were classified within Level 3 of the
valuation hierarchy. In cases where the carrying value exceeds the
fair value, an impairment loss is recognized.
An adverse change in the fair value of the underlying collateral
would result in a decrease in the fair value measurement. The fair
values and recognized impairment losses are reflected in the
previous table. Commercial Credit Risk, which reports to the Chief
Risk Officer, is responsible for preparing and reviewing the fair
value estimates for commercial loans held for investment.
MSRs
During 2012 and 2011, the Bancorp recognized temporary
impairments in certain classes of the MSR portfolio in which the
carrying value was adjusted to fair value. 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 internal discounted cash flow models with certain
unobservable inputs, primarily prepayment speed assumptions,
discount rates and weighted average lives, resulting in a classification
within Level 3 of the valuation hierarchy. Refer to Note 11 for
151 Fifth Third Bancorp
OREO property
165
Appraised value
Commercial loans held for sale
During 2012, the Bancorp transferred $16 million of commercial
loans from the portfolio to loans held for sale that upon transfer
were measured at fair value using significant unobservable inputs.
These loans had fair value adjustments totaling $1 million and were
generally based on appraisals of the underlying collateral and were
therefore, classified within Level 3 of the valuation hierarchy.
Additionally, during 2012 there were fair value adjustments on
existing commercial loans held for sale of $12 million. The fair value
adjustments are also based on appraisals of the underlying collateral
and were therefore classified within Level 3 of the valuation
hierarchy. An adverse change in the fair value of the underlying
collateral would result in a decrease in the fair value measurement.
The Accounting Department determines the procedures for
include a
valuation of commercial HFS
comparison to recently executed transactions of similar type loans.
A monthly review of the portfolio is performed for reasonableness.
Quarterly, appraisals approaching a year-old are updated and the
Real Estate Valuation group, which reports to the Chief Credit
Officer, in conjunction with the Commercial Line of Business
review the third party appraisals for reasonableness. Additionally,
the Commercial Line of Business Finance Department, which
reports to the Bancorp Chief Financial Officer, in conjunction with
Accounting review all loan appraisal values, carrying values and
vintages.
loans which may
Commercial loans held for investment
During 2012 and 2011, the Bancorp recorded nonrecurring
impairment adjustments to certain commercial and industrial,
commercial mortgage and commercial construction loans held for
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
further information on the assumptions used in the valuation of the
Bancorp’s MSRs. The Secondary Marketing Department and
Treasury Department are responsible for determining the valuation
methodology for MSRs. Representatives from Secondary Marketing,
Treasury, Accounting and Risk Management are responsible for
reviewing key assumptions used in the internal discounted cash flow
model. Two external valuations of the MSR portfolio are obtained
from third parties that use valuation models in order to assess the
reasonableness of the
internal discounted cash flow model.
Additionally, the Bancorp participates in peer surveys that provide
additional confirmation of the reasonableness of key assumptions
utilized in the MSR valuation process and the resulting MSR prices.
OREO
During 2012 and 2011, 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. These nonrecurring losses are
primarily due to declines in real estate values of the properties
recorded in OREO. For the years ended December 31, 2012 and
2011, these losses include $17 million and $100 million in losses,
respectively, recorded as charge-offs, on new OREO properties
transferred from loans during the periods and $57 million and $71
million, respectively, in losses, recorded in other noninterest
income, attributable to fair value adjustments on OREO properties
subsequent to their transfer from loans. As discussed in the
following paragraphs, the 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
fair value
is
measurements of the properties before deducting the estimated
costs to sell.
recognized. The previous
reflect
tables
the
The Real Estate Valuation department, which reports to the
Chief Credit Officer, is solely responsible for managing the appraisal
process and evaluating the appraisal for all commercial properties
transferred to OREO. All appraisals on commercial OREO
properties are updated on at least an annual basis.
The Real Estate Valuation department reviews the BPO data
and internal market information to determine the initial charge-off
on residential real estate loans transferred to OREO. Once the
foreclosure process is completed, the Bancorp performs an interior
inspection to update the initial fair value of the property. These
properties are reviewed at least every 30 days after the initial interior
inspections are completed. The Asset Manager receives a monthly
status report for each property which includes the number of
showings, recently sold properties, current comparable listings and
overall market conditions.
Fair Value Option
The Bancorp elected to measure certain residential mortgage loans
held for sale under the fair value option as allowed under U.S.
GAAP. Electing to measure residential mortgage loans held for sale
at fair value reduces certain timing differences and better matches
changes in the value of these assets with changes in the value of
derivatives used as economic hedges for these assets. 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.
Fair value changes recognized in earnings for instruments held
at December 31, 2012 and 2011 for which the fair value option was
elected as well as the changes in fair value of the underlying IRLCs,
included gains of $157 million and $123 million, respectively.
Additionally, fair value changes included in earnings for instruments
for which the fair value option was elected but are no longer held by
the Bancorp at December 31, 2012 and 2011 included gains of $849
million and $341 million during 2012 and 2011, respectively. These
gains are reported in 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 those loans by $3 million at December 31,
2012 and 2011. Interest on residential mortgage loans measured at
fair value is accrued as it is earned using the effective interest
method and is reported as interest income in the Consolidated
Statements of Income.
The following table summarizes the difference between the fair value and the principal balance for residential mortgage loans measured at fair
value as of:
($ in millions)
December 31, 2012
Residential mortgage loans measured at fair value
Past due loans of 90 days or more
Nonaccrual loans
December 31, 2011
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
$
$
2,932
3
-
2,816
4
-
2,775
4
1
2,693
5
-
157
(1)
(1)
123
(1)
-
152 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Certain Financial Instruments
The following tables summarize the carrying amounts and estimated fair values for certain financial instruments, excluding financial instruments
measured at fair value on a recurring basis:
Net Carrying
Fair Value Measurements Using
Total
$
As of December 31, 2012 ($ 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 $76 of residential mortgage loans measured at fair value on a recurring basis.
As of December 31, 2011 ($ 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 $65 of residential mortgage loans measured at fair value on a recurring basis.
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,
Amount
Level 1
Level 2
Level 3
Fair Value
2,441
844
284
2,421
83
35,236
8,770
665
3,481
11,712
9,875
11,944
2,010
270
(111)
83,852
89,517
901
6,280
7,085
2,441
-
-
2,421
-
-
-
-
-
-
-
-
-
-
-
-
-
844
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
901
-
6,925
89,592
-
6,280
884
-
-
284
-
83
36,496
8,020
505
3,310
11,532
9,798
12,076
2,139
288
-
84,164
-
-
-
2,441
844
284
2,421
83
36,496
8,020
505
3,310
11,532
9,798
12,076
2,139
288
-
84,164
89,592
901
6,280
7,809
Net Carrying
Amount
Fair Value
$
2,663
842
322
1,781
203
29,854
9,697
943
3,451
10,380
10,524
11,784
1,872
329
(136)
78,698
85,710
346
3,239
9,682
2,663
842
322
1,781
203
30,300
8,870
791
3,237
9,978
9,737
11,747
1,958
346
-
76,964
85,599
346
3,239
10,197
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.
153 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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
issuances with similar terms.
154 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27. 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 banking subsidiary are subject to regulations and
limitations prescribed by
the appropriate state and federal
supervisory authorities. 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 banking subsidiary 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 balances on deposit with the FRB. In 2012 and
2011, the banking subsidiary was required to maintain average cash
reserve balances of $1.5 billion and $744 million, respectively.
The Board of Governors of the Federal Reserve System issued
capital adequacy 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 Tier I capital (core capital) of at least four percent of risk-
weighted assets (Tier I capital ratio), total capital (Tier I plus Tier II
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 TruPS. It excludes unrealized gains and
losses on available-for-sale securities and unrecognized pension
actuarial gains and losses and prior service cost, goodwill, certain
intangibles and unrealized cash flow hedges. Current
other
provisions of the Dodd-Frank Act will phase out the inclusion of
certain TruPS as a component of Tier I capital beginning January 1,
2013. Under these provisions, these TruPS would qualify as a
component of Tier II capital. At December 31, 2012, the Bancorp’s
Tier I capital
approximately 74 bps of risk-weighted assets.
included $810 million of TruPS representing
Tier II capital consists principally of term subordinated debt,
redeemable preferred stock and, subject to limitations, allowances
for loan and lease losses.
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 Board of Governors of the Federal Reserve System issued
capital adequacy guidelines for banking subsidiaries substantially
similar to those adopted by the Board of Governors of the Federal
Reserve System 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.
The Bancorp and its banking subsidiary, Fifth Third Bank, had
Tier I capital, Total risk-based capital and Tier I leverage ratios
above the well-capitalized levels at December 31, 2012 and 2011. As
of December 31, 2012, the most recent notification from the FRB
categorized the Bancorp and its banking subsidiary 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
banking subsidiary 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 banking subsidiary at December 31:
2012
2011
($ in millions)
Tier I risk-based capital (to risk-weighted assets):(a)
Fifth Third Bancorp (Consolidated)
Fifth Third Bank
Total risk-based capital (to risk-weighted assets):(a)
Fifth Third Bancorp (Consolidated)
Fifth Third Bank
Tier I leverage (to average assets):
Fifth Third Bancorp (Consolidated)
Fifth Third Bank
(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
10.65% $
11.28
Amount Ratio
11.91%
12.02
12,503
12,373
12,503
12,373
16,885
14,013
11,685
12,145
11,685
12,145
15,816
13,721
16.09
13.61
11.10
11.20
10.05
10.65
14.42
12.74
Amount
Ratio
$
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.
155 Fifth Third Bancorp
28. PARENT COMPANY FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statements of Income (Parent Company Only)
For the years ended December 31 ($ in millions)
Income
Dividends from subsidiaries:
Consolidated bank subsidiaries(a)
Consolidated nonbank subsidiary
Interest on loans to subsidiaries
Total income
Expenses
Interest
Other
Total expenses
Income Before Income Taxes and Change in Undistributed
Earnings of Subsidiaries
Applicable income tax benefit
Income Before Change in Undistributed Earnings of Subsidiaries
Decrease in undistributed earnings
Net Income
(a)
2012
2011
2010
$
$
-
1,959
17
1,976
215
61
276
1,700
96
1,796
(220)
1,576
-
1,677
29
1,706
216
25
241
1,465
79
1,544
(247)
1,297
-
1,400
33
1,433
188
26
214
1,219
64
1,283
(530)
753
The Bancorp’s indirect banking subsidiary paid dividends, to the Bancorp’s direct nonbank subsidiary holding company of $2.0 billion, $2.0 billion, and $1.4 billion for the years ended 2012,
2011, and 2010, respectively.
Condensed Statements of Comprehensive Income (Parent Company Only)
For the years ended December 31 ($ in millions)
Net income
Other comprehensive income (loss), net of tax:
Unrealized gains on cash flow hedge derivatives
Other comprehensive income (loss)
Comprehensive income
Less: Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Bancorp
2012
1,576
3
3
1,579
(2)
1,581
$
$
2011
1,297
2
2
1,299
1
1,298
2010
753
(4)
(4)
749
-
749
156 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Balance Sheets (Parent Company Only)
As of December 31 ($ in millions)
Assets
Cash
Short-term investments
Loans to subsidiaries:
Bank subsidiaries
Nonbank subsidiaries
Total loans to subsidiaries
Investment in subsidiaries
Nonbank subsidiaries
Total investment in subsidiaries
Goodwill
Other assets
Total Assets
Liabilities
Other short-term borrowings
Accrued expenses and other liabilities
Long-term debt (external)
Total Liabilities
Parent Company Shareholders' Equity
Total Liabilities and Parent Company Shareholders' Equity
Condensed Statements of Cash Flows (Parent Company Only)
For the years ended December 31 ($ in millions)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (Benefit from) deferred income taxes
Decrease in undistributed earnings
Net change in:
Other assets
Accrued expenses and other liabilities
Other, net
Net Cash Provided by Operating Activities
Investing Activities
Net change in:
Short-term investments
Loans to subsidiaries
Net Cash Provided by (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 common shares
Repurchase of treasury shares and related forward contracts
Redemption of Series F preferred shares and related warrants
Other, net
Net Cash Used in Financing Activities
Net (Decrease) Increase in Cash
Cash at Beginning of Year
Cash at End of Year
2012
2011
$
$
$
-
3,481
-
1,021
1,021
15,376
15,376
80
579
20,537
566
456
5,751
6,773
13,764
20,537
50
3,588
-
1,032
1,032
15,631
15,631
80
731
21,112
655
422
6,784
7,861
13,251
21,112
2012
2011
2010
$
1,576
1,297
2
220
57
18
-
1,873
107
11
118
(89)
500
(1,440)
(309)
(35)
-
(650)
-
(18)
(2,041)
(50)
50
-
$
(3)
247
39
3
-
1,583
(635)
489
(146)
241
1,000
(400)
(192)
(50)
1,648
-
(3,688)
(6)
(1,447)
(10)
60
50
753
(2)
530
(6)
(339)
(11)
925
(603)
(161)
(764)
134
-
-
(32)
(205)
-
-
-
-
(103)
58
2
60
157 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bancorp adjusts the FTP charge and credit rates as
dictated by changes in interest rates for various interest-earning
assets and interest-bearing liabilities and by the review of the
estimated durations for the indeterminate-lived deposits. The credit
rate provided for demand deposit accounts is reviewed annually
based upon the account type, its estimated duration and the
corresponding fed funds, U.S. swap curve or swap rate. The credit
rates for several deposit products were reset January 1, 2012 to
reflect the current market rates and updated market assumptions.
These rates were lower than those in place during 2011, thus net
interest income for deposit providing businesses was negatively
impacted during 2012.
The business segments are charged provision expense based on
the actual net charge-offs experienced by the loans and leases
owned by each segment. Provision expense attributable to loan and
leases growth and changes in ALLL factors 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.
Results of operations and assets by segment for each of the
three years ended December 31 are:
29. 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
its
methodologies from time to time as management’s accounting
practices are improved and businesses change.
institutions. The Bancorp
financial
refines
The Bancorp manages interest rate risk centrally at the
corporate
level by employing a FTP methodology. This
methodology insulates the business segments from interest rate
volatility, enabling them to focus on serving customers through loan
originations and deposit taking. The FTP system assigns charge
rates and credit rates to classes of assets and liabilities, respectively,
based on expected duration and the U.S. 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.
158 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General
Consumer
Lending
Investment Corporate
Advisors
and Other Eliminations
-
-
370
(400)
Banking
Commercial Branch
Banking
1,362
294
1,432
223
$
138
1,068
1,209
314
176
-
225
395
6
46
65
-
830
-
-
-
-
42
1
14
294
15
129
279
81
-
2012 ($ in millions)
Net interest income
Provision for loan and lease losses
Net interest income 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
Other noninterest income
Securities gains, net
Securities gains, net - non-qualifying hedges on
mortgage servicing rights
Total noninterest income
Noninterest expense:
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Card and processing expense
Equipment expense
Other noninterest expense
Total noninterest expense
Income before income taxes
Applicable income tax expense
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to Bancorp
Dividends on preferred stock
Net income available to common shareholders
Total goodwill
Total assets
(a) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income
448
125
187
3
115
54
660
1,592
288
102
186
-
186
-
186
1,655
48,856
192
39
8
1
-
1
429
670
344
121
223
-
223
-
223
-
24,657
229
39
21
10
5
2
800
1,106
840
146
694
-
694
-
694
613
48,693
-
737
3
876
-
812
$
$
$
117
10
107
1
3
3
366
4
19
-
-
396
136
25
11
-
-
1
264
437
66
23
43
-
43
-
43
148
9,212
Total
3,595
303
3,292
845
522
413
374
253
574
15
3
2,999
1,607
371
302
196
121
110
1,374
4,081
2,210
636
1,574
(2)
1,576
35
1,541
2,416
121,894
770
-
-
-
-
(76)
367
14
-
305
602
143
75
182
1
52
(652)
403
672
244
428
(2)
430
35
395
-
(9,524)
-
-
-
(127)(a)
-
-
-
-
(127)
-
-
-
-
-
-
(127)
(127)
-
-
-
-
-
-
-
-
-
159 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General
Consumer
Lending
Investment Corporate
Advisors
and Other Eliminations
-
-
321
(748)
113
27
Total
3,557
423
Commercial Branch
Banking
1,423
393
1,357
490
$
82
867
1,030
Banking
343
261
11
309
14
117
305
81
-
-
207
332
12
38
52
-
585
-
-
-
-
36
-
2011 ($ in millions)
Net interest income
Provision for loan and lease losses
Net interest income 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
Other noninterest income
Securities gains, net
Securities gains, net - non-qualifying hedges on
mortgage servicing rights
Total noninterest income
Noninterest expense:
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Card and processing expense
Equipment expense
Other noninterest expense
Total noninterest expense
Income before income taxes
Applicable income tax (benefit) expense
Net income
Less: Net income attributable to noncontrolling interest
Net income attributable to Bancorp
Dividends on preferred stock
Net income available to common shareholders
Total goodwill
Total assets
(a) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income.
203
37
20
11
5
2
795
1,073
435
(6)
441
-
441
-
441
613
45,864
454
127
184
5
114
51
640
1,575
292
102
190
-
190
-
190
1,656
46,703
149
34
8
1
-
1
433
626
86
30
56
-
56
-
56
-
24,325
-
641
9
630
-
837
$
$
$
86
1,069
-
3,134
1
4
3
364
4
(3)
-
-
373
138
26
11
1
-
1
244
421
38
14
24
-
24
-
24
148
7,670
-
-
1
(1)
(39)
84
46
-
91
534
106
82
170
1
58
(771)
180
980
393
587
1
586
203
383
-
(7,595)
-
-
-
(117)(a)
-
-
-
-
(117)
-
-
-
-
-
-
(117)
(117)
-
-
-
-
-
-
-
-
-
597
520
350
375
308
250
46
9
2,455
1,478
330
305
188
120
113
1,224
3,758
1,831
533
1,298
1
1,297
203
1,094
2,417
116,967
160 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General
Commercial
Branch Consumer
Lending
Banking
Investment Corporate
Advisors
$
372
959
(164)
Banking
405
569
1,531
1,159
1,514
555
-
199
346
15
33
42
-
27
369
15
106
298
70
-
619
1
-
-
-
36
-
2010 ($ in millions)
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
Other noninterest income
Securities gains, net
Securities gains, net - non-qualifying hedges on
mortgage servicing rights
Total noninterest income
Noninterest expense:
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Card and processing expense
Equipment expense
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 available to common shareholders
Total goodwill
Total assets
(a) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income.
182
32
16
14
2
2
723
971
36
(142)
178
-
178
-
178
613
43,609
163
31
7
2
-
1
342
546
(40)
(14)
(26)
-
(26)
-
(26)
-
22,604
439
121
174
16
105
49
652
1,556
288
103
185
-
185
-
185
1,656
46,244
-
635
14
670
-
885
$
$
$
138
44
94
2
6
3
346
1
(2)
-
-
356
131
25
9
2
-
1
237
405
45
16
29
-
29
-
29
148
6,759
and Other Eliminations
-
-
16
(789)
Total
3,604
1,538
805
(1)
(1)
-
-
(16)
260
47
-
289
515
105
92
155
1
69
(454)
483
611
224
387
-
387
250
137
-
(8,209)
-
2,066
-
-
-
(106)(a)
-
-
-
-
(106)
-
-
-
-
-
-
(106)
(106)
-
-
-
-
-
-
-
-
-
647
574
364
361
316
406
47
14
2,729
1,430
314
298
189
108
122
1,394
3,855
940
187
753
-
753
250
503
2,417
111,007
161 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30. SUBSEQUENT EVENT
On January 28, 2013, the Bancorp entered into an accelerated share
repurchase transaction with a counterparty pursuant to which the
Bancorp will purchase approximately $125 million of its outstanding
common stock. The Bancorp is repurchasing the shares of its
common stock as part of its previously announced 100 million share
repurchase program. This repurchase transaction concludes the
$600 million of common share repurchases not objected to by the
FRB in the 2012 CCAR process. As part of this transaction, the
Bancorp entered into a forward contract in which the final number
of shares to be delivered at settlement of the accelerated share
repurchase transaction will be based generally on a discount to the
average daily volume-weighted average price of the Bancorp's
common stock during the term of the Repurchase Agreement. The
accelerated share repurchase will be treated as two separate
transactions (i) the acquisition of treasury shares on the acquisition
date and (ii) a forward contract indexed to the Bancorp's stock.
162 Fifth Third Bancorp
`
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
Commission file number 001-33653
Incorporated in the State of Ohio
I.R.S. Employer Identification No. 31-0854434
Address: 38 Fountain Square
Plaza Cincinnati, Ohio 45263
Telephone: (800) 972-3030
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common Stock, Without Par
Value
8.5% Non-Cumulative Series G
Convertible Perpetual Preferred
Stock
Name of each exchange
on which registered:
The NASDAQ Stock Market
LLC
The NASDAQ Stock Market
LLC
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes: No:
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes:
No:
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes: No:
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes:
No:
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of
registrant’s knowledge,
information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
in definitive proxy or
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated
filer (Do not check if a smaller reporting company) Smaller
reporting company
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes: No:
There were 875,281,580 shares of the Bancorp’s Common Stock,
without par value, outstanding as of January 31, 2013. The
Aggregate Market Value of the Voting Stock held by non-
affiliates of the Bancorp was $12,248,353,562 as of June 30,
2012.
DOCUMENTS INCORPORATED BY REFERENCE
This report incorporates into a single document the requirements
of the U.S. Securities and Exchange Commission (SEC) with
respect to annual reports on Form 10-K and annual reports to
shareholders. The Bancorp’s Proxy Statement for the 2013
Annual Meeting of Shareholders is incorporated by reference into
Part III of this report.
Only those sections of this 2012 Annual Report to Shareholders
that are specified in this Cross Reference Index constitute part of
the Registrant’s Form 10-K for the year ended December 31,
2012. No other information contained in this 2012 Annual Report
to Shareholders shall be deemed to constitute any part of this
Form 10-K nor shall any such information be incorporated into
the Form 10-K and shall not be deemed “filed” as part of the
Registrant’s Form 10-K.
10-K Cross Reference Index
PART I
Item 1.
Business
Employees
Segment Information
Average Balance Sheets
Analysis of Net Interest Income and Net Interest
Income Changes
Investment Securities Portfolio
Loan and Lease Portfolio
Risk Elements of Loan and Lease Portfolio
Deposits
Return on Equity and Assets
Short-term Borrowings
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of the Bancorp
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market
Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate
Governance
Item 11. Executive Compensation
Item 12.
Item 13.
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and
Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
SIGNATURES
16-19, 164-169
40
42-48, 158-161
36
35-48
52-53, 96-97
51-52, 98-99
57-72
53-54
15
54-55, 121
26-34
None
170
129-130
N/A
170
171
15
15-80
72-75
83-162
None
81
None
173
173
140-143, 173
173
173
173-176
177
163 Fifth Third Bancorp
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 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.
164 Fifth Third Bancorp
PART I
ITEM 1. BUSINESS
General Information
The 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 insurance provided
by the Federal Deposit Insurance Corporation (the “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, 2012.
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 regarding the Bancorp’s businesses is
included in Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Competition
The Bancorp competes for deposits, loans and other banking
services in its principal geographic markets as well as in selected
national markets as opportunities arise. In addition to the
challenge of attracting and retaining customers for traditional
banking services, the Bancorp’s competitors include securities
dealers, brokers, mortgage bankers, investment advisors and
insurance companies. These competitors, with focused products
targeted at highly profitable customer segments, compete across
geographic boundaries and provide customers increasing access
to meaningful alternatives to banking services in nearly all
significant products. The increasingly competitive environment is
a result primarily of changes in regulation, changes in technology,
the accelerating pace of
product delivery systems and
service providers. These
financial
among
consolidation
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.
Regulation and Supervision
In addition to the generally applicable state and federal laws
governing businesses and employers, the Bancorp and its banking
subsidiary are subject to extensive regulation by federal and state
laws and regulations applicable to financial institutions and their
parent companies. Virtually all aspects of the business of the
Bancorp and its banking subsidiary are subject to specific
requirements or restrictions and general regulatory oversight. The
principal objectives of state and federal banking laws and
`
regulations and the supervision, regulation and examination of
banks and their parent companies (such as the Bancorp) by bank
regulatory agencies are the maintenance of the safety and
soundness of financial institutions, maintenance of 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. 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.
Regulators
The Bancorp and/or its banking subsidiary are subject to
regulation and supervision primarily by the FRB, the Consumer
Financial Protection Bureau (the “CFPB”) and the Ohio Division
of Financial Institutions (the “Division”) and additionally by
self-regulatory
certain
organizations. The Bancorp is also subject to regulation by the
SEC by virtue of its status as a public company and due to the
nature of some of its businesses. The Bancorp’s banking
subsidiary is subject to regulation by the FDIC, which insures the
bank’s deposits as permitted by law.
functional
regulators
other
and
The federal and state laws and regulations that are applicable
to banks and to some extent bank holding companies regulate,
among other matters, the scope of their business, their activities,
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 services provided to consumers.
The Bancorp and/or its subsidiary are required to file various
reports with, and are subject to examination by regulators,
including the FRB and the Division. The FRB, Division and the
CFPB have the authority to issue orders to bank holding
companies and/or banks to cease and desist from certain banking
practices and violations of conditions imposed by, or violations of
agreements with, the FRB, Division and CFPB. Certain of the
Bancorp’s and/or its banking subsidiary regulators are also
empowered to assess civil money penalties against companies or
individuals in certain situations, such as when there is a violation
of a law or regulation. Applicable state and federal law also grant
certain regulators the authority to impose additional requirements
and restrictions on the activities of the Bancorp and or its banking
subsidiary and, in some situations, the imposition of such
additional requirements and restrictions will not be publicly
available information.
Acquisitions
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 BHCA 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
its banking
controlling banks or
furnishing services
to
subsidiaries, 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 unilaterally
Financial Holding Companies
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
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 banking subsidiaries 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 meet certain
requirements. The failure to meet such 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.
Dividends
The Bancorp depends in part upon dividends received from its
direct and indirect subsidiaries, including its indirect banking
subsidiary, to fund its activities, including the payment of
dividends. The Bancorp and its banking subsidiary are subject to
various federal and state restrictions on their ability to pay
dividends. 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 ability to pay dividends may be further limited by
provisions of the Dodd-Frank Act and implanting regulations (see
the “Regulatory Reform” section).
Source of Strength
Under long-standing FRB policy and now as codified in the
Dodd-Frank Act, a bank holding company is expected to act as a
source of financial and managerial strength to each of its banking
subsidiaries 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.
FDIC Assessments
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 Deposit Insurance Fund (the “DIF”). The final
165 Fifth Third Bancorp
rule implementing revisions to the assessment system was
released on February 7, 2011, and took effect for the quarter
beginning April 1, 2011.
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. The Dodd-Frank Act changed the
assessment base from a large IDI’s domestic deposit base to its
total assets less tangible equity. 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 are 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
Transactions with Affiliates
Sections 23A and 23B of the Federal Reserve Act, restrict
transactions between a bank and its affiliates (as defined in
Sections 23A and 23B of the Federal Reserve Act), including a
parent bank holding company. The Bancorp’s banking subsidiary
is subject to certain restrictions, including but not limited to
restrictions on loans to its affiliates, 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
terms of
such
comparable
the
Bancorp’s banking subsidiary is limited in its extension of credit
to any affiliate to 10% of the banking subsidiary’s capital stock
and surplus and its extension of credit to all affiliates to 20% of
the banking subsidiary’s capital stock and surplus.
transactions with non-affiliates. Generally,
transactions be substantially equivalent
to
Community Reinvestment Act
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
those communities. Furthermore, the CRA requires the FRB to
evaluate the performance of the Bancorp’s banking subsidiary in
helping to meet the credit needs of its communities. As a part of
the CRA program, the banking subsidiary is 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
the 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.
Capital
The FRB has established capital guidelines for bank holding
companies and FHCs. The FRB, the Division and the FDIC have
also issued regulations establishing capital requirements for
166 Fifth Third Bancorp
banks. Failure to meet capital requirements could subject the
Bancorp and its banking subsidiary to a variety of restrictions and
enforcement actions. In addition, as discussed previously, the
Bancorp and its banking subsidiary must remain well capitalized
and well managed for the Bancorp to retain its status as a FHC.
See the “Regulatory Reform” section for additional information
on capital requirements impacting the Bancorp.
Privacy
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
parties. In general, the statute requires explanations to consumers
on policies and procedures regarding the disclosure of such
nonpublic personal information, and, except as otherwise required
by law, prohibits disclosing such information except as provided
in
the banking subsidiary’s policies and procedures. The
Bancorp’s banking subsidiary has implemented a privacy policy.
Anti-Money Laundering
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
laundering,
compliance, suspicious activity and currency transaction reporting
and due diligence on customers. The Patriot Act and its
underlying regulations also permit information sharing for
counter-terrorist purposes between federal law enforcement
agencies and financial institutions, as well as among financial
institutions, subject to certain conditions, and require the FRB
(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.
to, among other matters, anti-money
Exempt Brokerage Activities
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 and certain
transactions, certain asset-backed
securities lending transactions. The Bancorp only conducts non-
exempt brokerage activities through its affiliated registered
broker-dealer.
Regulatory Reform
On July 21, 2010, President Obama signed into law the Dodd-
Frank Act, which is aimed, in part, at accountability and
transparency in the financial system and includes numerous
provisions that apply to and/or could impact the Bancorp and its
banking subsidiary. The Dodd-Frank Act implements changes
that, among other things, affect the oversight and supervision of
financial institutions, provide for a new resolution procedure for
large financial companies, create a new agency responsible for
implementing and enforcing compliance with consumer financial
laws, introduce more stringent regulatory capital requirements,
effect significant changes in the regulation of over-the-counter
derivatives, reform the regulation of credit rating agencies,
implement changes to corporate governance and executive
compensation practices, incorporate requirements on proprietary
trading and investing in certain funds by financial institutions
(known as the “Volcker Rule”), require registration of advisers to
certain private funds, and effect significant changes in the
securitization market.
In order to fully implement many
provisions of the Dodd-Frank Act, various government agencies,
in particular banking and other financial services agencies are
required to promulgate regulations. Set forth below is a
discussion of some of the major sections the Dodd-Frank Act and
implementing regulations that have or could have a substantial
impact on the Bancorp and its banking subsidiary. Due to the
volume of regulations required by the Dodd-Frank Act, not all
proposed or final regulations that may have an impact on the
Bancorp or its banking subsidiary are necessarily discussed.
Financial Stability Oversight Council
The Dodd-Frank Act creates the Financial Stability Oversight
Council (“FSOC”), which is chaired by the Secretary of the
Treasury and composed of expertise from various financial
services regulators. The FSOC has responsibility for identifying
risks and responding to emerging threats to financial stability. On
March 15, 2012, the Department of Treasury issued a final rule to
establish an assessment schedule for the collection of fees from
bank holding companies with at least $50 billion in assets and
foreign banks with at least $50 billion in assets in the U.S. to
cover the expenses of the Office of Financial Research and
FSOC. The fees would also cover certain expenses incurred by
the FDIC. The initial assessment period commenced July 21,
2012 and ends March 31, 2013. The Bancorp paid approximately
$1 million for the initial assessment period. The next scheduled
assessment is set to occur on September 16, 2013.
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.
Pursuant to the Dodd-Frank Act, in June 2012, the SEC
adopted a final rule directing the stock exchanges to prohibit
listing classes of equity securities if a company’s compensation
committee members are not independent. The rule also provides
that a company’s compensation committee may only select a
compensation consultant, legal counsel or other advisor 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.
that
is based on
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
financial
information required to be reported under the securities laws and
that, in the event the company is required to prepare an
accounting restatement due to the material 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-year 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.
The Dodd-Frank Act requires the SEC to adopt a 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. Although the SEC promulgated rules
to accomplish this, these rules were invalidated by a federal
appeals court decision. The SEC has said that they will not
challenge the ruling, but has not ruled out the possibility that new
rules could be proposed.
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.
Credit Ratings
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.
167 Fifth Third Bancorp
Consumer Issues
The Dodd-Frank Act created a new bureau, the CFPB, which has
the authority to implement regulations pursuant to numerous
laws and has supervisory authority,
consumer protection
including the power to conduct examination and take enforcement
actions, with respect to depository institutions with more than $10
billion in consolidated assets. The CFPB also has authority, with
respect to consumer financial services to, among other things,
restrict unfair, deceptive or abusive acts or practices, enforce laws
that prohibit discrimination and unfair treatment 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 was given authority to,
among other things, establish standards for assessing whether
interchange fees are reasonable and proportional. In June 2011,
the FRB issued a final rule establishing certain standards and
prohibitions pursuant
including
establishing standards for debit card interchange fees and
allowing for an upward adjustment if the issuer develops and
implements policies and procedures reasonably designed to
prevent fraud. The provisions regarding debit card interchange
fees and the fraud adjustment became effective October 1, 2011.
The rules impose requirements on the Bancorp and its banking
subsidiary and may negatively impact our revenues and results of
operations.
the Dodd-Frank Act,
to
FDIC Matters and Resolution Planning
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,
the Dodd-Frank Act also codifies many of the temporary changes
that had already been implemented, such as permanently
increasing the amount of deposit insurance to $250,000.
In September 2011, the FDIC approved an interim final rule
that requires an insured depository institution with $50 billion or
more in total assets to submit periodic contingency plans to the
FDIC for resolution in the event of the institution’s failure. The
rule became effective in January 2012, however, submission of
plans will be staggered over a period of time. The Bancorp’s
banking subsidiary is subject to this rule.
In October 2011, the FRB issued a final rule implementing
resolution planning requirements in the Dodd-Frank Act. The
final rule requires bank holding companies with assets of $50
billion or more and nonbank financial firms designated by FSOC
for supervision by the FRB to annually submit resolution plans to
the FDIC and FRB. Each plan shall describe the company’s
strategy for rapid and orderly resolution in bankruptcy during
times of financial distress. Under the final rule, companies will
submit their initial resolution plans on a staggered basis. The
Bancorp will be required to submit a resolution plan pursuant to
this rule.
Proprietary Trading and Investing in Certain Funds
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 “Volcker Rule”). The scope of the new restrictions will be
168 Fifth Third Bancorp
more clear upon adoption of final regulations promulgated under
the Volcker rule, however the Volcker Rule also generally
prohibits any banking entity from sponsoring or acquiring any
ownership interest in a private equity or hedge fund. The Volcker
rule, however, contains a number of exceptions, which exceptions
will be clarified upon promulgation of final rules adopted on an
interagency basis. The Volcker 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. De minimus
ownership of private equity or hedge funds will also be permitted
under final regulations as well. In addition to the general
prohibition on sponsorship and investment, the Volcker rule
contains additional 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. The
Bancorp will be required to demonstrate that it has a satisfactory
compliance program specifically to monitor compliance with the
Volcker rule. Under the final rule to implement the conformance
period, the Bancorp will have until July 21, 2014, to fully
conform its activities and investments. The rule also grants the
FRB the authority to grant up to three one-year extension periods
for any illiquid funds.
Derivatives
The Dodd-Frank Act includes measures to broaden the scope of
derivative instruments subject to regulation by requiring clearing
and exchange trading of certain derivatives, imposing new capital
and margin requirements for certain market participants and
imposing position limits on certain over-the-counter derivatives.
To the extent that the Bancorp acts in certain capacities in trading
derivatives or trades a certain amount of certain derivatives
instruments, then certain affiliates of the Bancorp may be
required to register with the Commodity Futures Trading
Commission or the SEC. As with the Volcker Rule, the Bancorp
will be required to demonstrate that it has a satisfactory
compliance program to monitor the activities of any swap dealer
or major swap participant registered under the new regulations.
Although final rules defining certain key terms were adopted in
June, 2012, the ultimate impact of these derivatives regulations,
and the time it will take to comply, continues to remain uncertain.
The final regulations will impose additional operational and
compliance costs on us and may require us to restructure certain
businesses and negatively impact our revenues and results of
operations.
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, a state bank chartered in that state would be permitted
to establish a branch.
Systemically Significant Companies and Capital
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
that the final rule would become effective on January 1, 2013, and
the changes set forth in the final rules would be phased in from
January 1, 2013 through January 1, 2019. However, in November
2012, the agencies announced that the effective date would be
delayed.
`
to, and (as necessary) limiting the size and activities of
systemically significant financial companies.
The Dodd-Frank Act instructs the FRB to impose enhanced
capital and risk-management standards on large financial firms
and mandates the FRB to conduct annual stress tests on all bank
holding companies with $50 billion or more in assets to determine
whether they have the capital needed to absorb losses in baseline,
adverse, and severely adverse economic conditions. In November
2011, the FRB adopted final rules requiring bank holding
companies with $50 billion or more in consolidated assets to
submit capital plans to the FRB on an annual basis. Under the
final rules, the FRB annually will evaluate an institutions capital
adequacy, internal capital adequacy, assessment processes and
plans to make capital distributions such as dividend payments and
stock repurchases.
In November 2012, the FRB provided instructions on the
2013 Comprehensive Capital Analysis and Review (“CCAR”).
The 2013 CCAR required bank holding companies with
consolidated assets of $50 billion or more to submit a capital plan
to the FRB by January 7, 2013. The mandatory elements of the
capital plan are an assessment of the expected use and sources of
capital over the planning horizon, a description of all planned
capital actions over the planning horizon, a discussion of any
expected changes to the Bancorp’s business plan that are likely to
have a material impact on its capital adequacy or liquidity, a
detailed description of the Bancorp’s process for assessing capital
adequacy and the Bancorp’s capital policy.
In December 2011, the FRB issued proposed rules to
strengthen regulation and supervision of large bank holding
companies and systemically important nonbank financial firms.
The proposed rules would generally apply to all U.S. bank
holding companies with consolidated assets of $50 billion or
more, such as the Bancorp, and any nonbank financial firms that
may be designated by the FSOC as systemically important
companies. The proposal, which is mandated by the Dodd-Frank
Act, includes a wide range of measures addressing such issues as
capital, liquidity, credit exposure, stress testing, risk management
and early remediation requirements. In particular, the proposal
includes proposed risk-based capital and leverage requirements
that would be implemented in two phases, the first phase would
be subject to the FRB’s capital plan rule issued in November
2011. The second phase would involve the FRB issuing a
proposal to implement a risk-based capital surcharge based on the
framework and methodology developed by the Basel Committee
on Banking Supervision (the “Basel Committee”), the current
version referred to as “Basel III.”
and
capital
introduces
conservation
Basel III is designed to materially improve the quality of
regulatory capital and introduces a new minimum common equity
requirement. Basel III also raises the numerical minimum capital
requirements
and
countercyclical buffers to induce banking organizations to hold
capital in excess of regulatory minimums. In addition, Basel III
establishes an international leverage standard for internationally
active banks. The FRB is working with other U.S. banking
regulators to implement the Basel III capital reforms in the United
States. On June 12, 2012, the federal banking agencies, including
the FRB, issued a joint release announcing three separate notices
of proposed rulemaking (“NPRs”) seeking comment on proposed
rules that would revise and replace their current capital rules in a
manner consistent both with relevant provisions of the Dodd-
Frank Act as well as the implementation of Basel III. Also on
June 12, 2012, these agencies announced the finalization of their
market risk capital rule proposed in 2011. The NPRs indicated
169 Fifth Third Bancorp
Daniel T. Poston, 54. Executive Vice President of the Bancorp
since June 2003, and Chief Financial Officer of the Bancorp since
September 2009. Previously, Mr. Poston was the Controller of the
Bancorp from July 2007 to May 2008 and from November 2008
to September 2009. Previously, Mr. Poston was the Chief
Financial Officer of the Bancorp from May 2008 to November
2008. Formerly, Mr. Poston was the Auditor of the Bancorp since
October 2001 and was Senior Vice President of the Bancorp and
Fifth Third Bank since January 2002.
Paul L. Reynolds, 51. Executive Vice President, Secretary and
Chief Risk Officer of
the Bancorp since October 2011.
Previously, Mr. Reynolds was 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, 44. Executive Vice President and Chief
Information Officer and Director of Information Technology and
Operations of the Bancorp since September 2009. 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.
Robert A. Sullivan, 58. Senior Executive Vice President of the
Bancorp since December 2002.
Teresa J. Tanner, 44. 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.
Tayfun Tuzun, 48. Senior Vice President and Treasurer of the
Bancorp since December of 2011. Previously, Mr. Tuzun was the
Assistant Treasurer and Balance Sheet Manager of Fifth Third
Bancorp since 2007. Previously, Mr. Tuzun was the Structured
Finance Manager since 2007.
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, 2012, the Bancorp, through its banking and
non-banking subsidiaries, operated 1,325 banking centers, of
which 940 were owned, 267 were leased and 118 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 immediately following the Annual Meeting
of Shareholders. The names, ages and positions of the Executive
Officers of the Bancorp as of February 22, are listed below along
with their business experience during the past 5 years:
Kevin T. Kabat, 56. Vice Charirman of the Bancorp since
September 2012 and Chief Executive Officer of the Bancorp
since April 2007. Previously, Mr. Kabat was President of the
Bancorp from June 2006 to September 2012 and Chairman from
June 2008 to June 2010. Prior to that, Mr. Kabat was Executive
Vice President of the Bancorp since December 2003.
Steven Alonso, 52. Executive Vice President of the Bancorp
since March 2012. Previously, Mr. Alonso was Executive Vice
President of Fifth Third Bank since November 2008. Prior to
that, Mr. Alonso served as founder, chairman and CEO of
OakStreet Mortgage, LLC.
Greg D. Carmichael, 51. President of the Bancorp since
September 2012 and Chief Operating Officer of the Bancorp
since June 2006. Previously, Mr. Carmichael was the Executive
Vice President and Chief Information Officer of the Bancorp
since June 2003.
Todd Clossin, 51.
Executive Vice President and Chief
Administrative Officer of the Bancorp since December 2011.
Previously, Mr. Clossin was the President and CEO of Fifth Third
Bank (Northeastern Ohio) since January 2005.
Mark D. Hazel, 47. Senior Vice President and Controller of the
Bancorp since February 2010. Prior to that, Mr. Hazel was the
Assistant Bancorp Controller since 2006 and was the Controller
of Nonbank entities since 2003.
James R. Hubbard, 54. 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, 53. 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.
170 Fifth Third Bancorp
`
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
2012
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2011
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
$16.16
$15.95
$14.67
$14.73
High
$13.08
$13.09
$14.15
$15.75
Low
$13.75
$13.07
$12.04
$12.78
Low
$9.60
$9.13
$11.88
$13.25
Dividends Paid
Per Share
$0.10
$0.10
$0.08
$0.08
Dividends Paid
Per Share
$0.08
$0.08
$0.06
$0.06
See a discussion of dividend limitations that the subsidiaries can pay to the Bancorp discussed in Note 3 of the Notes to the Consolidated
Financial Statements. Additionally, as of December 31, 2012, the Bancorp had 52,997 shareholders of record.
Issuer Purchases of Equity Securities
Period
October 2012
November 2012
December 2012
Total
(a) The Bancorp repurchased 87,515, 65,484 and 55,046 shares during October, November and December of 2012 in connection with various employee
Shares
Purchased(a)
1,444,047
7,710,761
6,267,410
15,422,218
Average Price
Paid Per
Share
Maximum
Shares
Shares that
Purchased as
May Be
Part of
Purchased
Publicly
Under the
Announced
Plans or
Plans or
Programs
Programs
1,444,047 77,024,853
$15.23
7,710,761 69,314,092
14.35
6,267,410 63,046,682
14.83
$14.63 15,422,218 63,046,682
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.
See further discussion of stock-based compensation
in Note 23 of
the Notes
to
the Consolidated Financial Statements.
171 Fifth Third Bancorp
The following performance graphs do not constitute soliciting material and should not be deemed filed or incorporated by reference into any
other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Bancorp specifically
incorporates the performance graphs by reference therein.
Total Return Analysis
The graphs below summarize the cumulative return experienced by the Bancorp's shareholders over the years 2007 through 2012, and 2002
through 2012, respectively, compared to the S&P 500 Stock and the S&P Banks indices.
FIFTH THIRD BANCORP VS. MARKET INDICES
172 Fifth Third Bancorp
`
III
ITEM 10. DIRECTORS, EXECUTIVE
PART
OFFICERS AND CORPORATE GOVERNANCE
The information required by this item relating to the Executive
Officers of the Registrant is included in PART I under
“EXECUTIVE OFFICERS OF THE BANCORP.”
The information required by this item concerning Directors
and the nomination process is incorporated herein by reference
under the caption “ELECTION OF DIRECTORS” of the
Bancorp’s Proxy Statement for the 2013 Annual Meeting of
Shareholders.
The information required by this item concerning the Audit
Committee and Code of Business Conduct and Ethics is
incorporated herein by
captions
“CORPORATE GOVERNANCE”
“BOARD OF
DIRECTORS,
ITS COMMITTEES, MEETINGS AND
FUNCTIONS” of the Bancorp’s Proxy Statement for the 2013
Annual Meeting of Shareholders.
reference under
and
the
The information required by this item concerning Section 16
(a) Beneficial Ownership Reporting Compliance is incorporated
herein by reference under the caption “SECTION 16 (a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” of
the Bancorp’s Proxy Statement for the 2013 Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference under the captions “COMPENSATION DISCUSSION
“COMPENSATION OF NAMED
AND ANALYSIS,”
DIRECTORS,”
EXECUTIVE
and
“COMPENSATION
“COMPENSATION COMMITTEE
INTERLOCKS AND
INSIDER PARTICIPATION” of the Bancorp’s Proxy Statement
for the 2013 Annual Meeting of Shareholders.
COMMITTEE
OFFICERS
REPORT”
AND
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Security ownership information of certain beneficial owners and
management is incorporated herein by reference under the
captions “CERTAIN BENEFICIAL OWNERS,” “ELECTION
OF DIRECTORS,” “COMPENSATION DISCUSSION AND
ANALYSIS”
“COMPENSATION OF NAMED
EXECUTIVE OFFICERS AND DIRECTORS” of the Bancorp’s
Proxy Statement for the 2013 Annual Meeting of Shareholders.
and
The information required by this item concerning Equity
Compensation Plan information is included in Note 23 of the
Notes to the Consolidated Financial Statements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by
reference under the captions “CERTAIN TRANSACTIONS”,
“CORPORATE
“ELECTION
ITS
GOVERNANCE” and “BOARD OF DIRECTORS,
COMMITTEES, MEETINGS AND FUNCTIONS” of
the
Bancorp’s Proxy Statement for the 2013 Annual Meeting of
Shareholders.
DIRECTORS”,
OF
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
The information required by this item is incorporated herein by
reference under the caption “PRINCIPAL INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM FEES” of the
Bancorp’s Proxy Statement for the 2013 Annual Meeting of
Shareholders.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
Public Accounting Firm
Fifth Third Bancorp and Subsidiaries Consolidated Financial
Statements
Notes to Consolidated Financial Statements
Pages
82
83-87
88-162
The schedules for the Bancorp and its subsidiaries are omitted
because of the absence of conditions under which they are
required, or because
the
Consolidated Financial Statements or the notes thereto.
is set forth
information
the
in
The following lists the Exhibits to the Annual Report on Form 10-K.
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
Master Investment Agreement (excluding exhibits and schedules)
dated as of March 27, 2009 and amended as of June 30, 2009, among
Fifth Third Bank, Fifth Third Financial Corporation, Advent-Kong
Blocker Corp., FTPS Holding, LLC and Fifth Third Processing
Solutions, LLC. Incorporated by reference to the Registrant’s Current
Report on Form 8-K filed with the Commission on July 2, 2009.
Amended Articles of Incorporation of Fifth Third Bancorp, as
amended. Incorporated by reference to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2012.
Code of Regulations of Fifth Third Bancorp, as Amended as of
September 18, 2012. Incorporated by reference to the Registrant’s
Current Report on Form 8-K filed with the Commission on
September 21, 2012.
Junior Subordinated Indenture, dated as of March 20, 1997 between
Fifth Third Bancorp and Wilmington Trust Company, as Debenture
Trustee. Incorporated by reference to Registrant’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on
March 26, 1997.
Amended and Restated Trust Agreement, dated as of March 20, 1997
of Fifth Third Capital Trust II, among Fifth Third Bancorp, as
Depositor, Wilmington Trust Company, as Property Trustee, and the
Administrative Trustees named therein. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on March 26, 1997.
Guarantee Agreement, dated as of March 20, 1997 between Fifth
Third Bancorp, as Guarantor, and Wilmington Trust Company, as
Guarantee Trustee. Incorporated by reference to Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on March 26, 1997.
Agreement as to Expense and Liabilities, dated as of March 20, 1997
between Fifth Third Bancorp, as the holder of the Common Securities
of Fifth Third Capital Trust I and Fifth Third Capital Trust II.
Incorporated by reference to Registrant’s Current Report on Form 8-
K filed with the Securities and Exchange Commission on March 26,
1997.
Indenture, dated as of May 23, 2003, between Fifth Third Bancorp
and Wilmington Trust Company, as Trustee. Incorporated by
reference to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 22, 2003.
Global security representing Fifth Third Bancorp’s $500,000,000
4.50% Subordinated Notes due 2018. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on May 22, 2003.
First Supplemental Indenture, dated as of December 20, 2006,
between Fifth Third Bancorp and Wilmington Trust Company, as
Trustee. Incorporated by reference to Registrant's Annual Report on
Form 10-K filed for the fiscal year ended December 31, 2006.
Global security representing Fifth Third Bancorp’s $500,000,000
5.45% Subordinated Notes due 2017. Incorporated by reference to
Registrant's Annual Report on Form 10-K filed for the fiscal year
ended December 31, 2006.
Global security representing Fifth Third Bancorp’s $250,000,000
Floating Rate Subordinated Notes due 2016. Incorporated by
reference to Registrant's Annual Report on Form 10-K filed for the
fiscal year ended December 31, 2006.
173 Fifth Third Bancorp
4.10
4.11
4.12
First Supplemental Indenture dated as of March 30, 2007 between
Fifth Third Bancorp and Wilmington Trust Company, as trustee, to
the Junior Subordinated Indenture dated as of May 20, 1997 between
Fifth Third and the Trustee. Incorporated by reference to Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 30, 2007.
Certificate Representing $500,000,000.00 of 6.50%
Junior
Subordinated Notes of Fifth Third Bancorp. Incorporated by
reference to Registrant's Quarterly Report on Form 10-Q filed for the
quarter ended March 31, 2007.
Certificate Representing $250,010,000.00 of 6.50%
Junior
Subordinated Notes of Fifth Third Bancorp. Incorporated by
reference to Registrant's Quarterly Report on Form 10-Q filed for the
quarter ended March 31, 2007.
4.14
4.13 Amended and Restated Declaration of Trust dated as of March 30,
2007 of Fifth Third Capital Trust IV among Fifth Third Bancorp, as
Sponsor, Wilmington Trust Company, as Property Trustee and
Delaware Trustee, and the Administrative Trustees named therein.
Incorporated by reference to Registrant's Quarterly Report on Form
10-Q filed for the quarter ended March 31, 2007.
Certificate Representing 500,000 6.50% Trust Preferred Securities of
Fifth Third Capital Trust IV (liquidation amount $1,000 per Trust
Preferred Security). Incorporated by reference
to Registrant's
Quarterly Report on Form 10-Q filed for the quarter ended March 31,
2007.
Certificate Representing 250,000 6.50% Trust Preferred Securities of
Fifth Third Capital Trust IV (liquidation amount $1,000 per Trust
Preferred Security). Incorporated by reference
to Registrant's
Quarterly Report on Form 10-Q filed for the quarter ended March 31,
2007.
Certificate Representing 10 6.50% Common Securities of Fifth Third
Capital Trust IV (liquidation amount $1,000 per Common Security).
Incorporated by reference to Registrant's Quarterly Report on Form
10-Q filed for the quarter ended March 31, 2007.
4.16
4.15
4.17 Guarantee Agreement, dated as of March 30, 2007 between Fifth
Third Bancorp, as Guarantor, and Wilmington Trust Company, as
to Registrant's
Guarantee Trustee.
Quarterly Report on Form 10-Q filed for the quarter ended March 31,
2007.
Incorporated by
reference
4.18 Agreement as to Expense and Liabilities, dated as of March 30, 2007
between Fifth Third Bancorp and Fifth Third Capital Trust IV.
Incorporated by reference to Registrant's Quarterly Report on Form
10-Q filed for the quarter ended March 31, 2007.
Replacement Capital Covenant of Fifth Third Bancorp dated as of
March 30, 2007. Incorporated by reference to Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on March 30, 2007.
4.19
4.20 Amendment No. 1 to Replacement Capital Covenant, dated as of
November 24, 2010 amending the Replacement Capital Covenant
dated as of March 30, 2007. Incorporated by reference to Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 26, 2010.
4.21 Global security dated as of March 4, 2008 representing Fifth Third
Bancorp’s $500,000,000 8.25% Subordinated Notes due 2038.
Incorporated by reference to Registrant's Quarterly Report on Form
10-Q filed for the quarter ended March 31, 2008. (1)
Indenture for Senior Debt Securities dated as of April 30, 2008
between Fifth Third Bancorp and Wilmington Trust Company, as
trustee. Incorporated by reference to Registrant’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on
May 6, 2008.
4.22
4.23 Global security dated as of April 30, 2008 representing Fifth Third
Bancorp’s $500,000,000 6.25% Senior Notes due 2013. Incorporated
by reference to Registrant’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on May 6, 2008. (2)
4.24 Deposit Agreement dated June 25, 2008, between Fifth Third
Bancorp, Wilmington Trust Company, as depositary and conversion
agent and American Stock Transfer and Trust Company, as transfer
agent, and the holders from time to time of the Receipts described
therein. Incorporated by reference to Exhibit 4.3 of the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 25, 2008.
Form of Certificate Representing
the 8.50% Non-Cumulative
Perpetual Convertible Preferred Stock, Series G, of Fifth Third
Bancorp. Incorporated by reference to Exhibit 4.2 of the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 25, 2008.
4.25
174 Fifth Third Bancorp
4.26
4.27
Form of Depositary Receipt for the 8.50% Non-Cumulative Perpetual
Convertible Preferred Stock, Series G, of Fifth Third Bancorp.
Incorporated by reference to Exhibit 4.4 of the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on June 25, 2008.
Supplemental Indenture dated as of January 25, 2011 between Fifth
Third Bancorp and Wilmington Trust Company, as Trustee, to the
Indenture for Senior Debt Securities dated as of April 30, 2008
between Fifth Third and the Trustee. Incorporated by reference to the
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 25, 2011.
4.28 Global Security dated as of January 25, 2011 representing Fifth Third
4.29
Bancorp’s $500,000,000 3.625% Senior Notes due 2016.
Incorporated by reference to the Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on January
25, 2011. (3)
Second Supplemental Indenture dated as of March 7, 2012 between
Fifth Third Bancorp and Wilmington Trust Company, as Trustee, to
the Indenture for Senior Debt Securities dated as of April 30, 2008
between Fifth Third and the Trustee. Incorporated by reference to the
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on March 7, 2012.
10.3
10.2
10.4
10.1
4.30 Global Security dated as of March 7, 2012 representing Fifth Third
Bancorp’s $500,000,000 3.500% Senior Notes due 2022.
Incorporated by reference to the Registrant’s Current Report on Form
8-K/A filed with the Securities and Exchange Commission on
March 7, 2012.
Fifth Third Bancorp Unfunded Deferred Compensation Plan for Non-
Employee Directors, as Amended and Restated. Incorporated by
reference to Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2011. *
Fifth Third Bancorp 1990 Stock Option Plan. Incorporated by
reference to Registrant’s filing with the Securities and Exchange
Commission as an exhibit to the Registrant’s Registration Statement
on Form S-8, Registration No. 33-34075. *
Fifth Third Bancorp 1987 Stock Option Plan. Incorporated by
reference to Registrant’s filing with the Securities and Exchange
Commission as an exhibit to the Registrant’s Registration Statement
on Form S-8, Registration No. 33-13252. *
Indenture effective November 19, 1992 between Fifth Third Bancorp,
Issuer and NBD Bank, N.A., Trustee. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on November 18, 1992 and as Exhibit 4.1 to
the Registrant’s Registration Statement on Form S-3, Registration
No. 33-54134.
Fifth Third Bancorp Master Profit Sharing Plan, as Amended and
Restated. Incorporated by reference to the Registrant’s Annual Report
on Form 10-K for the year ended December 31, 2011.*
First Amendment to Fifth Third Bancorp Master Profit Sharing Plan,
as Amended and Restated. Incorporated by reference to the
Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2011.*
Second Amended to Fifth Third Bancorp Master Profit Sharing Plan,
as Amended and Restated. *
Fifth Third Bancorp 2011 Incentive Compensation Plan. Incorporated
by reference to the Registrant’s Proxy Statement dated March 10,
2011.*
10.5
10.7
10.8
10.6
10.9 Amended and Restated Fifth Third Bancorp 1993 Stock Purchase
Plan. Incorporated by reference to Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2011.*
10.10 Fifth Third Bancorp 1998 Long-Term Incentive Stock Plan, as
Amended. Incorporated by reference to the Exhibits to Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.*
10.11 Fifth Third Bancorp Non-qualified Deferred Compensation Plan, as
Amended and Restated.
10.12 CNB Bancshares, Inc. 1999 Stock Incentive Plan, 1995 Stock
Incentive Plan, 1992 Stock Incentive Plan and Associate Stock
Option Plan; and Indiana Federal Corporation 1986 Stock Option and
Incentive Plan. Incorporated by reference to Registrant’s filing with
the Securities and Exchange Commission as an exhibit to a
Registration Statement on Form S-4, Registration No. 333-84955 and
by reference to CNB Bancshares Annual Report on Form 10-K, as
amended, for the fiscal year ended December 31, 1998. *
10.13 Fifth Third Bancorp Stock Option Gain Deferral Plan. Incorporated
by reference to Registrant’s Proxy Statement dated February 9,
2001.*
`
10.14 Amendment No. 1 to Fifth Third Bancorp Stock Option Gain Deferral
Plan. Incorporated by reference to Registrant’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on
May 26, 2006. * .
10.15 Old Kent Executive Stock Option Plan of 1986, as Amended.
Incorporated by reference to the following filings by Old Kent
Financial Corporation with the Securities and Exchange Commission:
Exhibit 10 to Form 10-Q for the quarter ended September 30, 1995;
Exhibit 10.19 to Form 8-K filed on March 5, 1997; Exhibit 10.3 to
Form 8-K filed on March 2, 2000. *
10.16 Old Kent Stock Option Incentive Plan of 1992, as Amended.
Incorporated by reference to the following filings by Old Kent
Financial Corporation with the Securities and Exchange Commission:
Exhibit 10(b) to Form 10-Q for the quarter ended June 30, 1995;
Exhibit 10.20 to Form 8-K filed on March 5, 1997; Exhibit 10(d) to
Form 10-Q for the quarter ended June 30, 1997; Exhibit 10.3 to Form
8-K filed on March 2, 2000. *
10.17 Old Kent Executive Stock Incentive Plan of 1997, as Amended.
Incorporated by reference to Old Kent Financial Corporation’s
Annual Meeting Proxy Statement dated March 1, 1997. *
10.18 Old Kent Stock Incentive Plan of 1999. Incorporated by reference to
Old Kent Financial Corporation’s Annual Meeting Proxy Statement
dated March 1, 1999. *
Notice of Grant of Performance Units and Award Agreement.
Incorporated by reference to Registrant’s Annual Report on Form 10-
K filed for the fiscal year ended December 31, 2004. *
10.19
10.20 Notice of Grant of Restricted Stock and Award Agreement (for
Executive Officers). Incorporated by reference to Registrant’s
Annual Report on Form 10-K filed for the fiscal year ended
December 31, 2004. *
10.21 Notice of Grant of Stock Appreciation Rights and Award Agreement.
Incorporated by reference to Registrant’s Annual Report on Form 10-
K filed for the fiscal year ended December 31, 2004. *
10.22 Notice of Grant of Restricted Stock and Award Agreement (for
Directors). Incorporated by reference to Registrant’s Annual Report
on Form 10-K filed for the fiscal year ended December 31, 2004. *
10.23 Franklin Financial Corporation 1990 Incentive Stock Option Plan.
Incorporated by reference to Franklin Financial Corporation’s Annual
Report on Form 10-K for the year ended December 31, 1989.*
10.24 Franklin Financial Corporation 2000 Incentive Stock Option Plan.
Incorporated by reference to Franklin Financial Corporation’s
Registration Statement on Form S-8, Registration No. 333-52928. *
10.25 Amended and Restated First National Bankshares of Florida, Inc.
2003 Incentive Plan. Incorporated by reference to First National
Bankshares of Florida, Inc.’s Annual Report on Form 10-K for the
year ended December 31, 2003. *
10.26 Southern Community Bancorp Equity Incentive Plan. Incorporated
to Southern Community Bancorp’s Registration
by reference
Statement on Form SB-2, Registration No. 333-35548. *
10.27 Southern Community Bancorp Director Statutory Stock Option Plan.
Incorporated by reference
to Southern Community Bancorp’s
Registration Statement on Form SB-2, Registration No. 333-35548. *
10.28 Peninsula Bank of Central Florida Key Employee Stock Option Plan.
Incorporated by reference to Southern Community Bancorp’s Annual
Report on Form 10-K for the year ended December 31, 2003. *
10.29 Peninsula Bank of Central Florida Director Stock Option Plan.
Incorporated by reference to Southern Community Bancorp’s Annual
Report on Form 10-K for the year ended December 31, 2003. *
10.30 First Bradenton Bank Amended and Restated Stock Option Plan.
Incorporated by reference to Registrant’s Annual Report on Form 10-
K for the fiscal year ended December 31, 2004. *
10.31 Stipulation and Agreement of Settlement dated March 29, 2005, as
Amended. Incorporated by reference to Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on
November 18, 2005.
10.32 Amendment to Stipulation dated May 10, 2005. Incorporated by
reference to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 18, 2005.
10.33 Second Amendment
to Stipulation dated August 12, 2005.
Incorporated by reference to Registrant’s Current Report on Form 8-
K filed with the Securities and Exchange Commission on November
18, 2005.
10.34 Order and Final Judgment of the United States District Court for the
Southern District of Ohio. Incorporated by reference to Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 18, 2005.
10.35 Form of Executive Agreements effective December 31, 2008,
between Fifth Third Bancorp and Kevin T. Kabat, Robert A. Sullivan,
Greg D. Carmichael, Ross Kari, Bruce K. Lee, Charles D. Drucker
and Terry Zink. Incorporated by reference to Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on December 31, 2008. *
10.36 Form of Executive Agreements effective December 31, 2008,
between Fifth Third Bancorp and Nancy Phillips, Daniel T. Poston,
Paul L. Reynolds and Mary E. Tuuk. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on December 31, 2008. *
10.37 Form of Executive Agreement effective December 31, 2008, between
Fifth Third Bancorp and Mahesh Sankaran. Incorporated by reference
to Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on December 31, 2008. *
10.38 Form of Executive Agreement effective January 17, 2012, between
Fifth Third Bancorp and Tayfun Tuzun. Incorporated by reference to
Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2011.*
10.39 Form of Amended Executive Agreements effective January 19, 2012,
between Fifth Third Bancorp and Daniel T. Poston and Paul L.
Reynolds. Incorporated by reference to Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on
January 24, 2012. *
10.40 Warrant dated June 30, 2009 issued by Vantiv Holding, LLC to Fifth
Third Bank. Incorporated by reference to the Registrant’s Schedule
13D filed with the Commission on April 2, 2012.
10.41 Second Amended & Restated Limited Liability Company Agreement
(excluding certain exhibits) dated as of March 21, 2012 by and among
Vantiv, Inc., Fifth Third Bank, FTPS Partners, LLC, Vantiv Holding,
LLC and each person who becomes a member after March 21, 2012.
Incorporated by reference to the Registrant’s Schedule 13D filed with
the Commission on April 2, 2012.
10.42 Amendment and Restatement Agreement and Reaffirmation
(excluding certain schedules) dated as of June 30, 2009 among Fifth
Third Processing Solutions, LLC, FTPS Holding, LLC, Card
Management Company, LLC, Fifth Third Holdings, LLC and Fifth
Third Bank. Incorporated by reference to the Registrant’s Current
Report on Form 8-K filed with the Commission on July 2, 2009.
10.43 Registration Rights Agreement dated as of March 21, 2012 by and
among Vantiv, Inc., Fifth Third Bank, FTPS Partners, LLC, JPDN
Enterprises, LLC and certain stockholders of Vantiv,
Inc.
Incorporated by reference to the Registrant’s Schedule 13D filed with
the Commission on April 2, 2012.
10.44 Exchange Agreement dated as of March 21, 2012 by and among
Vantiv, Inc., Vantiv Holding, LLC, Fifth Third Bank, FTPS Partners,
LLC and such other holders of Class B Units and Class C Non-Voting
Units that are from time to time parties of the Exchange Agreement.
Incorporated by reference to the Registrant’s Schedule 13D filed with
the Commission on April 2, 2012.
10.45 Recapitalization Agreement dated as of March 21, 2012 by and
among Vantiv, Inc., Vantiv Holding, LLC, Fifth Third Bank, FTPS
Partners, LLC, JPDN Enterprises, LLC and certain stockholders of
Vantiv, Inc. Incorporated by reference to the Registrant’s Schedule
13D filed with the Commission on April 2, 2012.
10.46 Form of Agreement Regarding Portion of Salary Payable in Phantom
Stock Units dated October 16, 2009 executed by Kevin Kabat, Greg
Carmichael, Greg Kosch, Bruce Lee, Dan Poston, Paul Reynolds,
Robert Sullivan, and Terry Zink. Incorporated by reference to the
Registrant’s Quarterly Report on 10-Q for the quarter ended
September 30, 2009. *
10.47 Form of Letter Agreement dated June 29, 2010 executed by each of
Kevin Kabat, Greg Carmichael, Greg Kosch, Bruce Lee, Dan Poston,
Paul Reynolds, Robert A. Sullivan and Mary Tuuk with the
Company. Incorporated by reference to the Registrant’s Quarterly
Report on 10-Q for the quarter ended June 30, 2010. *
10.48 Form of Addendum No.1 to Agreement Regarding Portion of Salary
Payable in Phantom Stock Units executed by each of Kevin Kabat,
Greg Carmichael, Greg Kosch, Bruce Lee, Dan Poston, Paul
Reynolds, Robert A. Sullivan and Mary Tuuk with the Company.
Incorporated by reference to the Registrant’s Quarterly Report on 10-
Q for the quarter ended June 30, 2010. *
175 Fifth Third Bancorp
10.49 Description of Vantiv, Inc. Director Compensation for Paul L.
Reynolds and Greg D. Carmichael. Incorporated by reference to
Exhibit 10.8 of the Registrant’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2012. On May 10, 2012, Daniel T.
Poston was elected as a Class B Director of Vantiv, Inc. to replace
Paul L. Reynolds. Mr. Poston will be subject to a substantially similar
compensation arrangement as described in Exhibit 10.8 of the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2012.*
10.50 Master Confirmation, as
supplemented by a Supplemental
Confirmation, for accelerated share repurchase transaction dated
November 6, 2012 between Fifth Third Bancorp and Credit Suisse
International***
10.51 Master Confirmation, as
supplemented by a Supplemental
Confirmation, for accelerated share repurchase transaction dated
December 14, 2012 between Fifth Third Bancorp and Credit Suisse
International***
Computations of Consolidated Ratios of Earnings to Fixed Charges.
Computations of Consolidated Ratios of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements.
Fifth Third Bancorp Subsidiaries, as of December 31, 2013.
Consent of Independent Registered Public Accounting Firm-Deloitte
& Touche LLP.
12.1
12.2
21
23
31(i) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by Chief Executive Officer.
31(ii) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by Chief Financial Officer.
32(i) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief
Executive Officer.
101
32(ii) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief
Financial Officer.
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the
Consolidated Balance Sheets, (ii) the Consolidated Statements of
Income, (iii) the Consolidated Statements of Comprehensive Income
(iv) the Consolidated Statements of Changes in Equity, (v) the
Consolidated Statements of Cash Flows, and (vi) the Notes to
Consolidated Financial Statements tagged as blocks of text and in
detail. **
(1) Fifth Third Bancorp also entered into an identical security on March 4,
2008 representing an additional $500,000,000 of its 8.25% Subordinated
Notes due 2038.
(2) Fifth Third Bancorp also entered into an identical security on April 30,
2008 representing an additional $250,000,000 of its 6.25% Senior Notes
due 2013.
(3) Fifth Third Bancorp also entered into an identical security on January 25,
2011 representing an additional $500,000,000 of its 3.625% Senior Notes
due 2016.
* Denotes management contract or compensatory plan or arrangement.
** As provided in Rule 406T of Regulation S-T, this information is furnished
and not filed for purposes of Sections 11 and 12 of the Securities Act of
1933 and Section 18 of the Securities Exchange Act of 1934.
*** An application for confidential treatment for selected portions of this
exhibit has been filed with the Securities and Exchange Commission.
176 Fifth Third Bancorp
`
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
FIFTH THIRD BANCORP
Registrant
/s/ Kevin T. Kabat
Kevin T. Kabat
Vice Chairman and CEO
Principal Executive Officer
February 22, 2013
Pursuant to requirements of the Securities Exchange Act of 1934,
this report has been signed on February 22, 2013 by the
following persons on behalf of the Registrant and in the
capacities indicated.
OFFICERS:
/s/ Kevin T. Kabat
Kevin T. Kabat
Vice Chairman and CEO
Principal Executive Officer
/s/ Daniel T. Poston
Daniel T. Poston
Executive Vice President and CFO
Principal Financial Officer
/s/ Mark D. Hazel
Mark D. Hazel
Senior Vice President and Controller
Principal Accounting Officer
DIRECTORS:
/s/ William M. Isaac
William M. Isaac
Chairman
/s/ James P. Hackett
James P. Hackett
Lead Director
/s/ Darryl F. Allen
Darryl F. Allen
/s/ B. Evan Bayh III
B. Evan Bayh III
/s/ Ulysses L. Bridgeman, Jr.
Ulysses L. Bridgeman, Jr.
/s/ Emerson L. Brumback
Emerson L. Brumback
/s/ Gary R. Heminger
Gary R. Heminger
/s/ Jewell D. Hoover
Jewell D. Hoover
/s/ Kevin T. Kabat
Kevin T. Kabat
/s/ Mitchel D. Livingston, Ph.D.
Mitchel D. Livingston, Ph.D.
/s/ Michael B. McCallister
Michael B. McCallister
/s/ Hendrik G. Meijer
Hendrik G. Meijer
/s/ John J. Schiff, Jr.
John J. Schiff, Jr.
/s/ Marsha C. Williams
Marsha C. Williams
177 Fifth Third Bancorp
AVERAGE ASSETS ($ IN MILLIONS)
CONSOLIDATED TEN YEAR COMPARISION
Year
2012 $
2011
2010
2009
2008
2007
2006
2005
2004
2003
Loans and
Leases
84,822
80,214
79,232
83,391
85,835
78,348
73,493
67,737
57,042
52,414
Federal
Funds Sold (a)
2
1
11
12
438
257
252
88
120
92
Interest-Earning Assets
Interest-
Bearing
Deposits in
Banks(a)
1,493
2,030
3,317
1,023
183
147
144
113
195
215
$
Securities
15,319
15,437
16,371
17,100
13,424
11,630
20,910
24,806
30,282
28,640
Total
101,636
97,682
98,931
101,526
99,880
90,382
94,799
92,744
87,639
81,361
Cash and Due
from Banks
2,355
2,352
2,245
2,329
2,490
2,275
2,477
2,750
2,216
1,600
Other
Assets
15,695 $
15,335
14,841
14,266
13,411
10,613
8,713
8,102
5,763
5,250
Total Average
Assets
117,614
112,666
112,434
114,856
114,296
102,477
105,238
102,876
94,896
87,481
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS ($ IN MILLIONS)
Year
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
Demand
27,196
$
23,389
19,669
16,862
14,017
13,261
13,741
13,868
12,327
10,482
Interest
Checking
23,096
18,707
18,218
15,070
14,191
14,820
16,650
18,884
19,434
18,679
Savings
21,393
21,652
19,612
16,875
16,192
14,836
12,189
10,007
7,941
8,020
Deposits
Money
Market
4,903
5,154
4,808
4,320
6,127
6,308
6,366
5,170
3,473
3,189
Other
Time
4,306
6,260
10,526
14,103
11,135
10,778
10,500
8,491
6,208
6,426
Certificates
$100,000 and
Over
3,102
3,656
6,083
10,367
9,531
6,466
5,795
4,001
2,403
3,832
Foreign
Office
1,555
3,497
3,361
2,265
4,220
3,155
3,711
3,967
4,449
3,862
$
Total
85,551
82,315
82,277
79,862
75,413
69,624
68,952
64,388
56,235
54,490
$
Short-Term
Borrowings
4,806
3,122
1,926
6,980
10,760
6,890
8,670
9,511
13,539
12,373
Total
90,357
85,437
84,203
86,842
86,173
76,514
77,622
73,899
69,774
66,863
INCOME ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Year
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
$
Interest
Income
4,107
4,218
4,489
4,668
5,608
6,027
5,955
4,995
4,114
3,991
Interest
Expense
512
661
885
1,314
2,094
3,018
3,082
2,030
1,102
1,086
Noninterest
Income
2,999
2,455
2,729
4,782
2,946
2,467
2,012
2,374
2,355
2,398
Noninterest
Expense
4,081
3,758
3,855
3,826
4,564
3,311
2,915
2,801
2,863
2,466
Net Income (Loss)
Available to
Common
Shareholders
1,541
1,094
503
511
(2,180)
1,075
1,188
1,548
1,524
1,664
Earnings
1.69
1.20
0.63
0.73
(3.91)
1.99
2.13
2.79
2.72
2.91
MISCELLANEOUS AT DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Bancorp Shareholders' Equity
Per Share(b)
Originally Reported
Diluted
Earnings
1.66
1.18
0.63
0.67
(3.91)
1.98
2.12
2.77
2.68
2.87
Dividends
Declared Earnings
0.36
0.28
0.04
0.04
0.75
1.70
1.58
1.46
1.31
1.13
1.69
1.20
0.63
0.73
(3.94)
2.00
2.14
2.79
2.72
2.91
$
Diluted
Earnings
1.66
1.18
0.63
0.67
(3.94)
1.99
2.13
2.77
2.68
2.87
Common
Shares
Outstanding
882,152,057 $
919,804,436
796,272,522
795,068,164
577,386,612
532,671,925
556,252,674
555,623,430
557,648,989
566,685,301
Capital
Surplus
2,758
2,792
1,715
1,743
848
1,779
1,812
1,827
1,934
1,964
(a) Federal funds sold and interest-bearing deposits in banks are combined in other short-term investments in the Consolidated Financial Statements.
(b) Adjusted for accounting guidance related to the calculation of earnings per share, which was adopted retroactively on January 1, 2009.
Common
Stock
2,051
2,051
1,779
1,779
1,295
1,295
1,295
1,295
1,295
1,295
Preferred
Stock
398
398
3,654
3,609
4,241
9
9
9
9
9
Retained
Earnings
8,768
7,554
6,719
6,326
5,824
8,413
8,317
8,007
7,269
6,481
Treasury
Stock
(634)
(64)
(130)
(201)
(229)
(2,209)
(1,232)
(1,279)
(1,414)
(962)
Accumulated
Other
Comprehensive
Income
375
470
314
241
98
(126)
(179)
(413)
(169)
(120)
Year
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
Total
13,716
13,201
14,051
13,497
12,077
9,161
10,022
9,446
8,924
8,667
$
$
Book Value
Per Share
15.10
13.92
13.06
12.44
13.57
17.18
18.00
16.98
15.99
15.29
Allowance for
Loan and
Leases Losses
1,854
2,255
3,004
3,749
2,787
937
771
744
713
697
178 Fifth Third Bancorp
FIFTH THIRD
BANCORP DIRECTORS
William M. Isaac, Chairman
Senior Managing Director-Global
Head of Financial Institutions
FTI Consulting
James P. Hackett, Lead
Director
President & CEO
Steelcase, Inc.
Darryl F. Allen
Retired Chairman
President & CEO
Aeroquip-Vickers, Inc.
B. Evan Bayh III
Partner
McGuireWoods LLP
Ulysses L. Bridgeman, Jr.
President
B.F. Companies
Emerson L. Brumback
Retired President & COO
M&T Bank
Gary R. Heminger
President & CEO
Marathon Petroleum Corporation
Jewell D. Hoover
Principal & Bank Consultant
Hoover and Associates, LLC
Kevin T. Kabat
Vice Chairman & CEO
Fifth Third Bancorp
Mitchel D. Livingston, Ph.D.
Retired Vice President for Student
Affairs
& Chief Diversity Officer
University of Cincinnati
Michael B. McCallister
Chairman
Humana Inc.
Hendrik G. Meijer
Co-Chairman & CEO
Meijer, Inc.
DIRECTORS AND OFFICERS
John J. Schiff, Jr.
Chairman of the Executive
Committee
Cincinnati Financial Corporation
Marsha C. Williams
Retired Senior Vice President &
Chief Financial Officer
Orbitz Worldwide, Inc.
DIRECTORS EMERITI
Philip G. Barach
John F. Barrett
J. Kenneth Blackwell
Milton C. Boesel, Jr.
Douglas G. Cowan
Thomas L. Dahl
Ronald A. Dauwe
Gerald V. Dirvin
Thomas B. Donnell
Nicholas M. Evans
Richard T. Farmer
Louis R. Fiore
John D. Geary
Ivan W. Gorr
Joseph H. Head, Jr.
Allen M. Hill
William G. Kagler
William J. Keating
Jerry L. Kirby
Robert L. Koch II
Kenneth W. Lowe
Robert B. Morgan
Michael H. Norris
David E. Reese
James E. Rogers
George A. Schaefer, Jr.
Donald B. Shackelford
David B. Sharrock
Stephen Stranahan
Dennis J. Sullivan, Jr.
Dudley S. Taft
Thomas W. Traylor
Alton C. Wendzel
FIFTH THIRD
BANCORP OFFICERS
Kevin T. Kabat
Vice Chairman & CEO
Greg D. Carmichael
President & Chief Operating
Officer
Steven Alonso
Executive Vice President
Todd F. Clossin
Executive Vice President &
Chief Administrative Officer
Mark D. Hazel
Senior Vice President &
Controller
James R. Hubbard
Senior Vice President &
Chief Legal Officer
Gregory L. Kosch
Executive Vice President
Daniel T. Poston
Executive Vice President &
Chief Financial Officer
Paul L. Reynolds
Executive Vice President,
Chief Risk Officer & Secretary
Joseph R. Robinson
Executive Vice President &
Chief Information Officer
Robert A. Sullivan
Senior Executive Vice President
Teresa J. Tanner
Executive Vice President &
Chief Human Resources Officer
Tayfun Tuzun
Senior Vice President & Treasurer
AFFILIATE AND
MARKET PRESIDENTS
Donald Abel, Jr.
David A. Call
John N. Daniel
Karen Dee
David Girodat
Thomas Heiks
Nancy H. Huber
Julie Hughes
Jerry Kelsheimer
Randolph Koporc
Robert W. LaClair
Brian Lamb
Ralph S. Michael III
Jordan A. Miller, Jr.
Thomas Partridge
Reagan Rick
Robert A. Sullivan
Mary E. Tuuk
Michelle L. VanDyke
Thomas G. Welch, Jr.
FIFTH THIRD
BANCORP BOARD
COMMITTEES
Finance Committee
William M. Isaac, Chair
Emerson L. Brumback
James P. Hackett
Gary R. Heminger
Kevin T. Kabat
Audit Committee
Darryl F. Allen, Chair
Emerson L. Brumback
Jewell D. Hoover
Michael B. McCallister
Marsha C. Williams
Human Capital and
Compensation Committee
Gary R. Heminger, Chair
Emerson L. Brumback
Mitchel D. Livingston, Ph. D.
Hendrik G. Meijer
Marsha C. Williams
Nominating and Corporate
Governance Committee
James P. Hackett, Chair
Darryl F. Allen
B. Evan Bayh III
Ulysses L. Bridgeman, Jr.
Risk and Compliance
Committee
Marsha C. Williams, Chair
B. Evan Bayh III
Ulysses L. Bridgeman, Jr.
Jewell D. Hoover
Hendrik G. Meijer
Trust Committee
Mitchel D. Livingston, Ph.D.,
Chair
Kevin T. Kabat
John J. Schiff, Jr.
179 Fifth Third Bancorp
2012 Financial Highlights
FOR THE YEARS ENDED DECEMBER 31
$ in millions, except per share data
EARNINGS AND DIVIDENDS
2012
2011
2010
Net income attributable to Bancorp
$
1,576
$
1,297
Common dividends declared
Preferred dividends declared
PER COMMON SHARE
Earnings
$
Diluted earnings
Cash dividends
Book value per share
AT YEAR-END
325
35
1.69
1.66
0.36
15.10
Assets
$
121,894
Total Loans and Leases (incl. held-for-sale)
Deposits
Bancorp Shareholder’s Equity
KEY RATIOS
Net Interest Margin (FTE)
Efficiency Ratio (FTE)
Tier 1 Common Ratio*
Tier 1 Ratio
Total Capital Ratio
ACTUALS
88,721
89,517
13,716
3.55%
61.7%
9.51%
10.65%
14.42%
$
257
50
1.20
1.18
0.28
13.92
$
116,967
83,972
85,710
13,201
3.66%
62.3%
9.35%
11.91%
16.09%
$
$
753
32
205
0.63
0.63
0.04
13.06
$
111,007
79,707
81,648
14,051
3.66%
60.7%
7.48%
13.88%
18.08%
Common Shares Outstanding (000’s)
882,152
919,804
796,273
Banking Centers
ATMs
Full-Time Equivalent Employees
1,325
2,415
20,798
1,316
2,425
21,334
1,312
2,445
20,838
2012
2011
STOCK PERFORMANCE
HIGH
LOW
DIVIDENDS
DECLARED
PER SHARE
HIGH
LOW
DIVIDENDS
DECLARED
PER SHARE
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$
16.16
$ 13.75
$ 0.10
$ 13.08
$ 9.60
$ 0.08
15.95
14.67
14.73
13.07
12.04
12.78
0.10
0.08
0.08
13.09
14.15
15.75
9.13
11.88
13.25
0.08
0.06
0.06
Fifth Third’s common stock is traded on the NASDAQ® National Global Select Market under the symbol “FITB.”
CORPORATE ADDRESS
TRANSFER AGENT
Fifth Third Bancorp
38 Fountain Square Plaza
Cincinnati, OH 45263
Website: www.53.com
Telephone: 1-800-972-3030
American Stock Transfer and Trust Company, LLC.
For Correspondence:
6201 15th Ave.
Brooklyn, NY 11219
Website: www.amstock.com
Telephone: 1-888-294-8285
For Dividend Reinvestment and Direct Stock Purchase Plan Transaction Processing:
P.O. Box 922
Wall Street Station
New York, NY 10269-0560
* Non-GAAP measure. For further information, see the Non-GAAP Financial Measures section of MD&A.
WWW.53.COM