WHERE VALUE
MEETS TRUST
FIFTH THIRD BANCORP
2013 ANNUAL REPORT
Corporate Profile
Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati,
Ohio. As of December 31, 2013, the Company had $130 billion in assets and operated
17 affiliates with 1,320 full-service Banking Centers, including 104 Bank Mart® locations,
most open seven days a week, inside select grocery stores and 2,586 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 25% interest in Vantiv Holding, LLC. Fifth Third is among the largest money managers in
the Midwest and, as of December 31, 2013, had $302 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® Global Select Market under the symbol “FITB.”
Pictured on the cover (from left to right):
Fifth Third employees Adeyemi Sobowale, Lead Business Analyst,
Pamela Rincones, Vice President and Employer of Choice Director and
Gregory Love, Vice President and Director, Coaching and Development
Kevin T. Kabat
Vice Chairman and
Chief Executive Officer
A Message To Our Shareholders
DEAR FIFTH THIRD SHAREHOLDERS,
2013 marked our 155th anniversary and we capped it with the strongest results Fifth Third has ever
reported. Net income available to common shareholders of $1.8 billion marks the highest earnings in
our history, up 17 percent from 2012, driven by solid revenue growth and well-controlled expenses.
Earnings per diluted share of $2.02 increased 22 percent from the prior year and return on average
assets increased 14 basis points to 1.5 percent. Our record performance exemplifies our focus on
delivering steady, reliable growth and creating long-term value for our shareholders. Additionally,
Fifth Third’s stock price exceeded a five-year high and, on a full-year basis, outperformed both the
S&P Banks index and the broader S&P 500 index. Our one-year total shareholder return (stock price
plus dividends) was 42 percent in 2013, versus 23 percent in 2012. As we demonstrated in 2013,
consistency and improvement in our results depend on proactive leadership, strategic agility, and
distinctive execution.
It indeed was a strong and profitable year for the Bank — one which clearly showed our continued
growth and achievement as well as the solid foundation upon which that’s built. Our success is due
to the guidance of our Board of Directors and the hard work of our employees to execute every day
on our Vision to become the one bank that
people most value and trust. Our focus has
paid off with new products, partnerships,
and achievements. Along the way, we’ve
grown our talent, our business, our good
reputation, and our positive impact — all
while working to achieve the appropriate
balance between risk and reward.
$ IN MILLIONS
$2,000
$1,500
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
A strong, ongoing commitment to risk
management is central to our culture,
and in 2013 we took important steps
to strengthen the infrastructure of our
Company. We have never stopped investing
in our revenue-generating capabilities and
$1,000
$500
$0
2010
2011
2012
2013
AFTER TAX VANTIV GAINS NET INCOME EX-VANTIV
2013 ANNUAL REPORT | 1 have made significant investments to protect our Company through tighter or additional controls
and oversight functions. Asset quality performance is at the best levels in more than five years
and our reserve coverage levels are among the strongest in the industry. At the same time, we’ve
remained focused on disciplined expense management, as our efficiency ratio improved from
62 percent in 2012 to 58 percent in 2013. Ultimately, the combination of making sound investments
while controlling costs and managing risk has equipped us to remain a strong competitor in
today’s low-growth, low-interest rate, and tough regulatory environment. Our commitment to
continually reinvest in the business is reflected in total revenue of $6.8 billion, which is among the
highest levels we ever reported. We enter 2014 with strong local market positions; great businesses
where local leadership matters; and national businesses that have contributed to our growth.
We take pride in our ability to recognize change in the industry and to adapt quickly and judiciously.
In 2013, we showed the strategic agility of the model in our mortgage business, adjusting from
record-levels of originations in the second quarter through the sharp drop-off in the months that
followed. Over a number of years, we’ve invested to become bigger, better, and smarter in this
space. We’ve seen the results of those investments — increasing our national mortgage origination
market share from 16th in 2009 to 13th in 2013 while developing a flexible business model that
could be adjusted quickly in response to a change in the environment. We know mortgage is a
cyclical business and we’ve managed well through this cycle. We’re committed to the purchase
origination market and the servicing business, and we have strong relationships with builders and
real estate agents. This business remains extremely important to us, as home mortgages are a core
consumer product, which provides the opportunity to develop deeper relationships over the life
of the loan.
Our ability to cross sell is enhanced as we find ways to improve the capabilities and experiences
that our customers desire and are willing to pay for. We deliver products, services, and experiences
to efficiently address the challenges that our customers face such as cash handling for large retail
chains, new ways to make working capital available to small businesses, and simple and clear ways
for consumers to make and manage deposits.
Our commitment to offering a holistic customer experience has led us to create important
alliances with organizations like Stand Up To Cancer (SU2C) and NextJob. In 2013, we introduced
Fifth Third SU2C credit and debit cards directing donations toward cancer research with every
qualifying purchase made using these cards. And our relationship with NextJob provides an
industry-first program that gives unemployed mortgage borrowers job search assistance. This
partnership has been so successful that we voluntarily waived our exclusivity provision so that
2013 PERFORMANCE
Full year 2013 net income and net income available to
deposits in 2013, with average balances increasing 6% over
common shareholders of $1.8 billion increased 16% and 17%,
the prior year.
respectively from 2012. Earnings per diluted common share
of $2.02 increased 22%. Return on assets was 1.5%, up from
1.3% in 2012.
Despite a 23 basis point decline in the net interest margin,
we closed the year with two consecutive quarters of growth
in net interest income, which declined 1% in 2013 compared
Average loans and leases increased to $89.1 billion, with 15%
with 2012. We took advantage of higher rate opportunities
growth in commercial and industrial loans and 8% growth in
in the second half of the year to add to and change the
both residential mortgage loans and credit card balances.
composition of our securities portfolio in order to improve
We also continued to grow high-value, low-cost transaction
our liquidity position.
2 | other banks could adopt the program. Efforts like these make a real difference to our customers,
providing tangible value to them, and helping to create a lasting relationship with Fifth Third.
Our ability to be responsive to key customer segments while also creating shared value is one
of our greatest strengths. We have several initiatives underway to further improve the customer
experience and simultaneously increase the profitability of the Bank.
We start by listening to our customers and having in-depth, consultative discussions with them.
We work to really understand what they value most in their banking relationships, and what
they value most in their lives and financial futures. Customer feedback and the information we
gather through our consultative sales process has been an important component of our strategy.
It’s a practice that spans our entire franchise — from the Investment Advisors business, to our
Commercial Bank, and across the Retail Banking and Consumer Lending divisions. Consequently,
we are better equipped to provide complete solutions for our customers, no matter the point of
entry at the Bank. In short, we put the customer at the center of all that we do. This simple practice
has had a significant impact for us. It has given us insights needed to develop better products
and streamline existing processes to serve our customers better. It led to a shift in the customer
value proposition, away from fees perceived as punitive toward a more value-oriented model that
rewards the depth of the relationship. It has allowed us to focus on key customer segments that
understand the value exchange we offer and are willing to engage with us to gain access to our
quality products. We’re targeting the opportunities that are most available to us, given our position
and business model. Customers who recognize the value we offer do so in exchange, most often,
by bringing more and deeper relationships to the Bank, which enables us to optimally serve them
going forward.
This is certainly apparent in our Investment Advisors segment, where our business has developed
in large part from helping clients over their lifetimes and from becoming their trusted partner. We
know that our clients value integrated wealth planning, not just stock picking or total investment
returns. After experiencing significant declines in market value during the Great Recession, they
are facing a new era of financial complexity and behaving differently — taking fewer risks and
focusing on having greater liquidity. They have a strong appetite and need for holistic advice,
which we offer through our regional wealth management business. Our balanced and focused
approach considers the cyclicality and nuances of markets as well as major life events or business
needs to create the best wealth plans for our clients. We provide not only premium advice and
guidance, but also clear action steps to help clients follow through and achieve their goals.
Our highly experienced wealth managers provide quality service throughout the course of the
Credit trends were favorable with full year net charge-
processing revenue, service charges on deposits, and
offs down 29% and nonperforming assets down 25% from
investment advisory revenue. Total noninterest expense
the prior year. We reduced our loan loss reserves by $272
declined 3% from the prior year despite a 4% increase in
million; although our reserves remain among the highest
technology and communications expense as we continue
coverage levels in the industry, at 1.79% of loans and 211% of
nonperforming loans.
to invest in our businesses.
Overall, it was a strong year in which we posted solid
Noninterest income increased 8% from 2012, despite a
results and executed on our plans. We have good
significant decline in mortgage revenue, and benefited
momentum in many of our core businesses and believe
from our investment in Vantiv as well as strong card and
we are well-positioned for success in 2014.
2013 ANNUAL REPORT | 3 relationship and we’ve differentiated ourselves with a collaborative approach that connects our
internal specialists as well as our clients’ external advisors. We work together to ensure that we
fully understand their needs and deliver a comprehensive solution. Our focus on recruiting
and retaining top talent, serving the right clients in the right channel, and providing best-in-
class service has resonated, as segment revenue grew 9 percent and net asset flows increased
67 percent from 2012.
Consultative discussions in our Commercial Bank, too, have supported our efforts to build a
high-performing business banking segment as well as to establish new primary bank relationships
and inspired product innovations, such as our Currency Processing Solutions, that simplify cash
handling for our clients. This has resulted in overall Commercial Banking segment net revenue of
$2.3 billion, and an increase in treasury management fees of 6 percent from 2012. We’ve further
differentiated these solutions to support key industry focus areas, such as mid-corporate clients
with $500 million to $2 billion in revenue and select industry verticals. The healthcare vertical
has grown consistently since its launch in 2008, and in 2013 we had approximately $700 million
of originations to this industry. In a similar fashion, we established a specialized energy industry
lending group in 2012, which contributed approximately $400 million of originations in 2013.
We have always had a strong presence in commercial and industrial (C&I) lending, and these
industry verticals as well as our investments in talent and infrastructure led to 15 percent growth
in average C&I loans compared with 2012. Additionally, we have a centralized group for growing
commercial real estate loans primarily within the multi-family and industrial sectors. We believe
these opportunities and focus areas will continue to drive success for Fifth Third.
We’ve also seen the benefit of the relationship value orientation in our Consumer Bank following
changes we made to streamline our account offerings and simplify choices for our customers.
By the middle of 2013, we had already completely converted our 2.1 million primary consumer
households to a new account set, which includes five core
checking and three core savings products. The process was
transformational and, we believe, industry-leading. Our new
offerings encourage customers to hold higher average balances
in their accounts and to have multiple products with us. We are
already seeing positive outcomes. Today, the average Fifth Third
Bank checking customer uses just over five of our products and,
as we anticipated, we are seeing lower customer attrition rates
and growth in revenue per household.
Fifth Third is also proactively addressing changing consumer
preferences for banking interactions while increasing the
efficiency of our distribution network. New technology —
Internet banking, mobile apps, and image ATMs — has been
adopted at an astounding pace. Already, 26 percent of our
consumer deposit volume comes through self-service channels,
a portion of that through the remote deposit capture feature on
the mobile app, which we launched late in 2012. This shift has
led to a decline in teller transactions. That’s no surprise, since
the vast majority of transactions that do take place with a customer service representative today
— primarily deposits, withdrawals, and balance transfers — can be completed through a self-
service format. In line with our efforts to pair extraordinary self-service capabilities with new
ways of thinking about the distribution model and the strategic value we can, and should, provide
CONSUMER DEPOSITS BY CHANNEL
TRANSACTION VOLUME
74% BRANCH
18% ATM
8% MOBILE
74+
4 |18
+
8
+
G
in the branch, we’re accelerating the self-service transition where it makes sense. We’re working
to educate customers by using in-branch ATMs and a smaller, more cost-effective branch format
with about half the staffing of a traditional branch. Our banking centers remain the most visible
brand identifier in our communities and they also
will remain a key source of deposits and cross-selling.
Our customers have indicated that branch proximity
and convenience are still top factors in selecting a
bank, and a vast majority of our consumer checking
households, as well as Private Bank, small business,
and business banking customers have visited a
banking center in the past six months. Prudently
balancing the lower branch traffic with branch
presence and the consultative expertise we can offer there will be a key priority for Fifth Third and
the industry in coming years.
Fifth Third’s strong earnings generation
provides the ability to distribute excess
capital to shareholders while maintaining
already strong capital levels.
Our customers have told us how much they appreciate our employees and the way they listen
to them, get to know them, and respond to their needs. The friendly Fifth Third face, the spirit
behind our pin, and the commitment to improving lives are among the hallmarks of our brand.
They’re at the foundation of our relationships with customers, businesses, and communities, and
the strength of those relationships is paramount to our success. That’s why I believe that the people
who represent our Company are Fifth Third Bank’s most valuable asset. In 2013, for the second
time, we were recognized by the Gallup organization with a Gallup Great Workplace Award for
our engaged and productive workforce. It takes a team effort to differentiate our Company through
strong results. We can all be proud of what we accomplished in 2013, both in terms of engagement
and financial performance.
Our solid financial performance has produced high rates of internal capital generation, which
have been supplemented by gains on our position in the payment processing company, Vantiv,
Inc. This has proven to be a strategic advantage for Fifth Third and we’ve recognized about
$2.9 billion in total pre-tax gains from the sale of the processing business in 2009 to today,
including gains in 2013 of $327 million on the sale of a portion of our Class A shares of Vantiv
common stock and $206 million on the valuation of the warrant we hold in Vantiv. We continue
to own a 25 percent interest in Vantiv, whose market capitalization was $5.4 billion at year-end.
Fifth Third has benefited tremendously from its investment in Vantiv, and while we would expect
to manage our position downward over time in a disciplined way, it continues to give us significant
capital flexibility.
Fifth Third’s strong earnings generation provides the ability to distribute excess capital to
shareholders while maintaining already strong capital levels. In 2013, we increased our annual
dividend 31 percent from the prior year, to a level consistent with the Federal Reserve’s near-
term dividend payout ratio guidance of 30 percent. Including common stock repurchases, we
returned a net $1.3 billion to shareholders. We’ve reduced our share count by 7 percent from the
peak in 2012 while growing tangible book value per share by 12 percent over that same period.
Despite these returns, our capital levels remain very strong overall, with a Tier 1 common ratio* of
9.4 percent as well as a Tier 1 risk-based capital ratio of 10.4 percent at year-end compared with
the 6 percent regulatory well-capitalized minimum.
Our capital position also is well-aligned with new capital rules that were approved by U.S. banking
regulators in July, with a Basel III pro form Tier 1 common ratio estimate of 9.0 percent at year-end.
In light of the new rules, we took a number of important steps in 2013 to make the composition
* Non-GAAP measure. For further information, see the Non-GAAP Financial Measures section of MD&A.
2013 ANNUAL REPORT | 5 TOTAL SHAREHOLDER RETURN*
FIFTH THIRD BANCORP
S&P 500 INDEX
S&P BANKS INDEX
50%
40%
30%
20%
10%
0%
12-12
1-13
2-13
3-13
4-13
5-13
6-13
7-13
8-13
9-13
10-13
11-13
12-13
* For comparison purposes, see Total Return Analysis section in the Annual Report on Form 10-K for Fifth Third Bancorp’s 5-year and
10-year total return analysis on page 182.
of our capital as efficient as possible. We converted $398 million of 8.50% Series G Preferred Stock into shares of our
common stock and issued $1.05 billion of new preferred stock, Series H and Series I, with lower coupons. We also
issued $2.5 billion of long-term debt and redeemed $750 million of outstanding trust preferred securities. Our focus
on efficient capital management is consistent with our ongoing goal to maintain a strong balance sheet for a variety
of economic environments, while prudently managing capital.
As we turn to 2014, we continue to aim for excellence and outperformance. We are ready to build on our legacy and
to do that, we must execute on four key strategies:
• Focused segmentation — Identifying customer segments, understanding their unmet needs and delivering a
more targeted value proposition more efficiently.
• Distinctive execution — Providing a differentiated customer experience with clear value propositions and
delivering it with outstanding, consistent execution.
• Innovation — Listening to customers and creating solutions that drive differentiated value is what we mean by
innovation. Whether we’re optimizing products and services, improving the technology used to deliver them, or
shifting the way we sell them, we’re moving forward to create value in the industry. In 2013, we were awarded two
patents for a business that didn’t exist two years ago.
• Growth accelerators — Long-term investments to build our presence, our customer base, and our business.
These are strategies we’ve been working on, and they are the building blocks for our future. Over the next several
years, we’ll focus on leveraging this work and expanding on it in new and exciting ways, just as we continue to evolve
and strengthen the risk culture that ensures our ongoing success. I have confidence in the leadership and talent of our
Company to make the years ahead our best yet.
Sincerely,
Kevin T. Kabat
Vice Chairman and Chief Executive Officer
February 2014
6 | Corporate Governance
Fifth Third Bancorp has many important assets, but the most valuable
is our reputation for integrity. We are judged by our conduct, and we
must act in a manner that merits public trust and confidence.
Fifth Third Bancorp’s Corporate Governance Guidelines, along with
Fifth Third’s Articles of Incorporation, Code of Regulations, Code of
Business Conduct and Ethics, charters of the various committees of
the Board, and our other governance policies and procedures provide
the foundation for our governance and help ensure that we retain our
integrity and merit public trust and confidence.
For more on Fifth Third’s corporate governance policies and practices,
visit www.53.com.
FIFTH THIRD BANCORP
BOARD OF DIRECTORS
FROM LEFT TO RIGHT:
Front Row
Darryl F. Allen
Nicholas K. Akins
William M. Isaac
Kevin T. Kabat
Marsha C. Williams
James P. Hackett
Mitchel D. Livingston, Ph.D.
Second Row
Gary R. Heminger
John J. Schiff, Jr.
Third Row
Michael B. McCallister
Jewell D. Hoover
Fourth Row
B. Evan Bayh III
Fifth Row
Hendrik G. Meijer
Sixth Row
Ulysses L. Bridgeman, Jr.
Seventh Row
Emerson L. Brumback
2013 ANNUAL REPORT | 7 Consumer Bank
2013
BRANCH
BANKING
HIGHLIGHTS
$2.3
BILLION
TOTAL
REVENUE
$19.8
BILLION
AVERAGE
LOANS
$48.2
BILLION
AVERAGE
CORE
DEPOSITS
1,320
FULL-
SERVICE
BANKING
CENTERS
2,586
ATMs
1.6
MILLION
ONLINE
BANKING
CUSTOMERS
MORE THAN
700
THOUSAND
MOBILE
BANKING
CUSTOMERS
BUSINESS DESCRIPTION
The Consumer Bank comprises our branch banking and consumer lending businesses, which
introduce Fifth Third to customers and often provide the first step in making a valued and
lasting connection with us. With a focus on relationship building and having strong ties in
the community, our local teams have found innovative ways to create real and differentiated
value for our customers. Our affiliate model brings the power of the entire network to a local
level, and that is especially apparent in our Consumer Bank.
CUSTOMER FOCUS
We put the customer at the center of all that we do so that we are in the best position to
address their challenges, goals, and aspirations. The more we understand our customers,
the better we can serve them. We know that each person’s financial situation is unique and
we are committed to working with them to create beneficial outcomes. We provide expert
advice from an integrated team, dedicated service from resourceful employees, and smart
solutions that are tailored to the customer.
Our goal is to make comprehensive offerings available along a value continuum that
customers want, and we expect that to create deeper relationships as a result. Customers
have indicated that convenience and branch proximity are still top factors in selecting a bank,
and a vast majority of our checking account customers have utilized our banking centers
in the past six months. However, with our integrated channel strategy, our services extend
beyond the walls of our banking centers through mobile and online banking capabilities.
We believe that becoming a trusted financial partner is something that’s earned over time,
by being clear, transparent and direct with customers. We’ve worked diligently over the past
few years to improve our delivery on these aspects of trust. As a result, personal finance
website WalletHub recognized Fifth Third as one of only two banks in the top 25 with a
perfect score for transparency in an industry study of checking-fee disclosures. We’re very
proud of this recognition and feel it’s validation of our efforts.
STRATEGY
Over the past several years we’ve executed a multi-step effort to standardize and improve
our sales process, focus on key customer segments, invest in a new deposit product set, and
optimize our service capabilities. Work in many of these areas can never truly be considered
finished. We continue to look for ways to be better and we’re squarely focused on our service
capabilities, and providing a consistent, one bank experience across all business lines.
We will continue to re-shape our physical distribution network using a combination of
traditional branches, smaller branches, and next generation ATMs. Customer behavior
8 | 2013
CONSUMER
LENDING
HIGHLIGHTS
$1.1
BILLION
TOTAL
REVENUE
$22.2
BILLION
AVERAGE
LOANS
$82.7
BILLION
MORTGAGE
SERVICING
PORTFOLIO
9,356
DEALER
INDIRECT
AUTO LENDING
NETWORK
patterns are changing rapidly and at the end of 2013, more than a quarter of our retail
deposits were completed using ATMs or on our mobile app. Clearly customers are
becoming more comfortable with the use of self-service technologies, and frankly expect
the availability to become even more ubiquitous. To that end, we recently partnered with
RaceTrac, a convenience store operator in Florida and Georgia, where we installed Fifth
Third ATMs at 234 locations. ATMs provide a low-cost, convenient way to serve our
existing clients, and a marketing channel to build brand awareness with potential new
customers. It pairs the convenience of a network that customers desire with a lower cost
to serve. It’s a win-win scenario that ultimately flows to the bottom line.
We are also focused on executing a consistent sales process and making the full scope
of Fifth Third products and services available to our customers in order to acquire and
deepen primary banking relationships. In 2013, we maintained our mortgage origination
market share within the top 20, with originations of $22.3 billion. Over the years, we’ve
invested in the mortgage business to strengthen our position and more important, we’ve
built a highly adaptable business model. Additionally, we believe this product provides
significant cross-sell opportunity for us, which complements our overall consumer
banking strategy.
Our auto business has also been a source of strength as it tends to be a high-quality,
attractive asset class given the shorter duration. Our indirect auto lending footprint
covers 45 states and we partner with a wide network of auto dealers. We are the sixth-
largest bank originator of indirect auto loans in the country, with $12 billion of auto loan
balances at year-end, up 33 percent from 2009. This business requires a steady approach,
but the expertise that we’ve developed through many full cycles helps us to maintain
the discipline to achieve stable and profitable results. Our long-standing presence in this
market has allowed us to develop strong relationships with dealers. While we’ve seen
increased competition in this space, we remain committed to carefully managing pricing
and loan volumes to ensure that returns remain appropriate.
Our businesses and geographies give us scale without significant complexity, and we
believe that will continue to benefit us in the future. We’re committed to listening carefully
to our customers’ needs and working with them to deliver the optimal solutions. Overall,
our focus on the customer creates a differentiated experience, offering a unique value
proposition that takes a holistic approach to each relationship. We believe this approach
allows us to build deeper and more meaningful relationships with our customers that
should continue to drive outperformance in our results.
2013 ANNUAL REPORT | 9 Commercial Banking
2013
COMMERCIAL
BANKING
HIGHLIGHTS
$2.3
BILLION
TOTAL
REVENUE
$45.1
BILLION
AVERAGE
LOANS
$27.9
BILLION
AVERAGE CORE
DEPOSITS
963
LARGE
CORPORATE
CLIENT
RELATIONSHIPS
2,128
LEAD MIDDLE
MARKET
CLIENT
RELATIONSHIPS
11,900
TREASURY
MANAGEMENT
LEAD
ACCOUNTS
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 Currency Processing Solutions, which is a cash management solution that
simplifies cash handling for our customers and currently has 8,043 devices installed
across the country
Our Commercial team also serves customers through specialized industry segments,
such as healthcare — where we have industry experts across the country and specialized
products like the RevLink Solutions platform — and energy — which is made up of an
experienced team offering customized services for companies in petroleum and natural
gas production, processing, and distribution industries.
STRATEGY
We have demonstrated commitment to our customers by investing in the mid-corporate
segment, which targets clients with $500 million to $2 billion in revenue, and we have
the ability to deliver corporate banking, capital markets, and treasury management
products and services to these customers. We continue to work closely with our
customer executives and have more in-depth, strategic conversations. As a result, we
are better able to offer broader solutions to fit their individual needs. We are focused on
offering solutions only after we understand our customers’ needs overall and that takes
dedication across the entire Commercial team.
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.
10 | Investment Advisors
BUSINESS DESCRIPTION
Our Investment Advisors segment comprises five distinct businesses, each tailored to the
unique needs of its customers. Fifth Third Private Bank, Fifth Third Securities, ClearArc
Capital, Inc., 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. In September 2013, Barron’s listed Fifth Third Private Bank as one of the Top 40
Wealth-Management Firms in the United States.
• 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.
• ClearArc Capital, Inc., formerly Fifth Third Asset Management, Inc., 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
2013
INVESTMENT
ADVISORS
HIGHLIGHTS
$560
MILLION
TOTAL
REVENUE
$2
BILLION
AVERAGE
LOANS
$8.8
BILLION
AVERAGE
CORE
DEPOSITS
$27
BILLION
ASSETS
UNDER
MANAGEMENT
$302
BILLION
ASSETS
UNDER
CARE
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.
2013 ANNUAL REPORT | 11 Community Outreach
In all we do, we strive to be a good corporate citizen and to operate in a socially responsible manner.
Our efforts in 2013 were highlighted by an innovative new program to help people find jobs.
As the economic crisis left many Americans unemployed and upside down on their mortgages,
helping customers find jobs was a logical thing to do. We began working with NextJob, a
reemployment solutions company, to put our customers who were in danger of losing their homes
through NextJob’s job search and training program.
Featuring one-on-one job coaching, 39-week access to online job search and training modules and
a weekly coach-led webinar, the program helped our customers identify their transferable skills,
develop a marketable resume, conduct a job search and land their next job. It also enabled them to
stay in their homes and avoid foreclosure, which had a profound impact on their lives.
Pictured above:
Dayton-area
employees revitalize
a veteran’s home,
one of six rebuild
projects across the
Bank’s footprint
that saw nearly 400
employee volunteers
making critical
repairs, accessibility
modifications and
energy-efficient
upgrades at no cost
to veterans.
The homeowner program’s success spurred the additional roll-out of the online component, the
Job Seeker’s Toolkit, to all Fifth Third online customers. It also prompted another major financial
institution to adopt the program, helping to make a real
difference in people’s lives throughout the country.
Improving lives through financial empowerment is a key
initiative for us. We sponsor Dave Ramsey’s financial education
course for high school students. In 2013, we saw our goal of
educating 500,000 students near realization. We also offered
our Young Banker’s Club for elementary students and deployed
our Financial Empowerment Mobiles
in under-served
neighborhoods, programs which began nearly 10 years ago.
As the economic crisis left many
Americans unemployed and upside
down on their mortgages, helping
customers find jobs was a logical
thing to do.
In 2013 we began an innovative new collaboration with Stand
Up to Cancer (SU2C) by which a donation is made to the organization every time a customer
swipes a new Fifth Third SU2C debit or credit card. SU2C is committed to eradicating cancer by
accelerating innovative cancer research that will get new therapies to patients quickly.
The Bank also rebuilt the homes of six veterans in 2013 and hosted volunteer, fundraising and
commemorative events throughout our Company in November, resulting in donations to the Folds
of Honor Foundation in excess of $100,000. Our employees also provided 550,000 meals for the
hungry during our Fifth Third Day volunteer outreach on May 3. Finally, we made a company-wide
donation to United Way of more than $8 million in 2013.
More information will be published in the 2013 Corporate Social Responsibility Report in
April 2014.
12 | 2013 ANNUAL REPORT
FINANCIAL CONTENTS
Glossary of Abbreviations and Acronyms
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 Receivables and Servicing Rights
Derivative Financial Instruments
Offsetting Derivative Financial Instruments
Other Assets
Short-Term Borrowings
Long-Term Debt
Annual Report on Form 10-K
Consolidated Ten Year Comparison
Directors and Officers
Corporate Information
Stock-Based Compensation
Legal and Regulatory Proceedings
Related Party Transactions
Income Taxes
Retirement and Benefit Plans
93 Commitments, Contingent Liabilities and Guarantees
101
101
102
104
105 Accumulated Other Comprehensive Income
115 Common, Preferred and Treasury Stock
115
116 Other Noninterest Income and Other Noninterest Expense
117 Earnings Per Share
120
122 Certain Regulatory Requirements and Capital Ratios
127
127
128
129
Parent Company Financial Statements
Business Segments
Subsequent Events
Fair Value Measurements
172
187
188
14
15
16
21
23
23
27
36
43
50
53
58
84
85
86
87
88
89
90
91
92
131
135
137
138
139
145
147
149
153
154
155
165
166
168
171
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 Fifth Third’s investment in or the results of operations of Vantiv, LLC; (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.
GLOSSARY OF ABBREVIATIONS AND ACRONYMS
Fifth Third Bancorp provides the following list of abbreviations and acronyms as a tool for the reader that are used in Management’s Discussion
and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and the Notes to Consolidated Financial
Statements.
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
BCBS: Basel Committee on Banking Supervision
BHC: Bank Holding Company
BOLI: Bank Owned Life Insurance
bps: Basis points
BPO: Broker Price Opinion
CapPR: Capital Plan Review
CCAR: Comprehensive Capital Analysis and Review
CD: Certificate of Deposit
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
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
IPO: Initial Public Offering
IRC: Internal Revenue Code
IRLC: Interest Rate Lock Commitment
IRS: Internal Revenue Service
ISDA: International Swaps and Derivatives Association, Inc.
LCR: Liquidity Coverage Ratio
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
N/A: Not Applicable
NASDAQ: National Association of Securities Dealers Automated
Quotations
NII: Net Interest Income
NM: Not Meaningful
NPR: Notice of Proposed Rulemaking
NSFR: Net Stable Funding Ratio
OCC: Office of the Comptroller of the Currency
OCI: Other Comprehensive Income
OIS: Overnight Index Swap Rate
OREO: Other Real Estate Owned
OTTI: Other-Than-Temporary Impairment
PMI: Private Mortgage Insurance
RSAs: Restricted Stock Awards
SARs: Stock Appreciation Rights
SBA: Small Business Administration
SCAP: Supervisory Capital Assessment Program
SEC: United States Securities and Exchange Commission
TARP: Troubled Asset Relief Program
TBA: To Be Announced
TDR: Troubled Debt Restructuring
TruPS: Trust Preferred Securities
TSA: Transition Service Agreement
U.S.: United States of America
U.S. GAAP: United States Generally Accepted Accounting
Principles
UST: United States Treasury
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.
$
$
2013
2010
2011
2012
2.05
2.02
0.47
15.85
21.03
1.20
1.18
0.28
13.92
12.72
1.69
1.66
0.36
15.10
15.20
0.63
0.63
0.04
13.06
14.68
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
3,581
3,227
6,808
229
3,961
1,836
1,799
3,622
2,729
6,351
1,538
3,855
753
503
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 attributable to Bancorp
Net income 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 average assets
Return on average common equity
Dividend payout ratio
Average Bancorp shareholders' 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)
Average Balances
Loans and leases, including held for sale
Total securities and other short-term investments
Total assets
Transaction deposits(e)
Core deposits(f)
Wholesale funding(g)
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, 2013, 2012, 2011, 2010, and 2009 were $20, $18, $18, $18 and $19, 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)
(f)
(g)
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.
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
80,214
17,468
112,666
72,392
78,652
16,939
12,851
89,093
18,861
123,732
82,915
86,675
17,797
14,302
1.48 %
13.1
22.9
11.56
8.63
3.32
58.2
0.67
5.0
6.3
12.22
7.04
3.66
60.7
1.34
11.6
21.3
11.65
8.83
3.55
61.7
1.15
9.0
23.3
11.41
8.68
3.66
62.3
10.36 %
14.08
9.64
9.39
2,328
3.02
3.88
4.17
13.89
18.08
12.79
7.48
501
0.58 %
1.79
1.97
1,172
1.49
2.78
3.01
11.91
16.09
11.10
9.35
10.65
14.42
10.05
9.51
704
0.85
2.16
2.37
2.79
2.23
1.10
1.49
$
$
2009
3,373
4,782
8,155
3,543
3,826
737
511
0.73
0.67
0.04
12.44
9.75
0.64
5.6
5.5
11.36
6.45
3.32
46.9
2,581
3.20
4.88
5.27
4.22
83,391
18,135
114,856
55,235
69,338
28,539
13,053
13.30
17.48
12.34
6.99
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, 2013, the
Bancorp had $130.4 billion in assets, operated 17 affiliates with
1,320 full-service Banking Centers, including 104 Bank Mart®
locations open seven days a week inside select grocery stores, and
in 12 states throughout the Midwestern and
2,586 ATMs
Southeastern regions of the U.S. The Bancorp reports on four
business
segments: Commercial Banking, Branch Banking,
Consumer Lending and Investment Advisors. The Bancorp also has
a 25% interest in Vantiv Holding, LLC. The carrying value of the
Bancorp’s investment in Vantiv Holding, LLC was $423 million as
of December 31, 2013.
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
trends, events, commitments, uncertainties,
understanding of
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 Abbreviations and Acronyms in this report for a list of
terms included as a tool for the reader of this annual report on
Form 10-K. The abbreviations and 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,
2013, net interest income, on a FTE basis, and noninterest income
provided 53% and 47% of total revenue, respectively. The Bancorp
derives the majority of its revenues within the U.S. 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
liabilities such as deposits, short-term
expense
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
16 Fifth Third Bancorp
time. The change in market interest rates over time exposes the
Bancorp to interest rate risk through potential adverse changes to
net interest income and financial position. The Bancorp manages
this risk by continually analyzing and adjusting the composition of
its assets and liabilities based on their payment streams and interest
rates, the timing of their maturities and their sensitivity to changes
in market interest rates. Additionally, in the ordinary course of
business, the Bancorp enters into certain derivative transactions as
part of its overall strategy to manage its interest rate and prepayment
risks. The Bancorp is also exposed to the risk of losses on its loan
and lease portfolio as a result of changing expected cash flows
caused by 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, card and processing revenue
and other noninterest income. Noninterest expense is primarily
driven by personnel costs, net occupancy expenses, and technology
and communication costs.
income
Vantiv, Inc. Share Sales
The Bancorp’s ownership position in Vantiv Holding, LLC was
reduced in the second quarter of 2013 when the Bancorp sold an
approximate five percent interest and recognized a $242 million
gain. The Bancorp’s ownership position was further reduced in the
third quarter of 2013 when the Bancorp sold an approximate three
percent interest and recognized an $85 million gain. The Bancorp’s
remaining approximate 25% ownership in Vantiv Holding, LLC
continues to be accounted for as an equity method investment in
the Bancorp’s Consolidated Financial Statements and had a carrying
value of $423 million as of December, 31, 2013.
As of December 31, 2013, the Bancorp continued to hold
approximately 48.8 million Class B units of Vantiv Holding, LLC
and a warrant to purchase approximately 20.4 million Class C non-
voting units of Vantiv Holding, LLC, both of which may be
exchanged for Class A 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 48.8 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.
Redemption of TruPS
The Bancorp redeemed all $750 million of the outstanding TruPS
issued by Fifth Third Capital Trust IV on December 30, 2013. For
more information on the redemption of these instruments, see the
Capital Management section of MD&A.
Accelerated Share Repurchase Transactions
During 2013 and 2012, the Bancorp entered into a number of
accelerated share repurchase transactions. As part of these
transactions, the Bancorp entered into forward contracts in which
the final number of shares to be delivered at settlement was or 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. For more information on the
accounting for these instruments, see the Capital Management
section of MD&A. For a summary of all accelerated share
repurchase transactions during 2013 and 2012 refer to Table 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 2: SUMMARY OF ACCELERATED SHARE REPURCHASE TRANSACTIONS
Shares Repurchased
Shares Received from Forward
Contract Settlement
Settlement Date
$
Amount ($ in millions)
Repurchase Date
April 26, 2012
August 28, 2012
November 9, 2012
December 19, 2012
January 31, 2013
May 24, 2013
November 18, 2013
December 13, 2013
January 31, 2014
(a) The Bancorp expects the settlement of this transaction to occur on or before February 28, 2014.
(b) The Bancorp expects the settlement of these transactions to occur on or before March 26, 2014.
75
350
125
100
125
539
200
456
99
Preferred Stock Offerings and Conversion
During 2013, the Bancorp had two preferred stock offerings and
converted the outstanding Series G preferred stock into Fifth Third
common stock. A description of the preferred stock offerings and
conversion is below. For more information, see Note 23 in the
Notes to Consolidated Financial Statements.
As contemplated by the 2013 CCAR, on May 16, 2013 the
Bancorp issued in a registered public offering 600,000 depositary
shares, representing 24,000 shares of 5.10% fixed-to-floating rate
non-cumulative Series H perpetual preferred stock, for net proceeds
of $593 million. The Series H preferred shares are not convertible
into Bancorp common shares or any other securities. On June 11,
2013, the Bancorp’s Board of Directors authorized the conversion
into common stock, no par value, of all outstanding shares of the
Bancorp’s 8.50% non-cumulative convertible perpetual preferred
stock, Series G. On July 1, 2013, the Bancorp converted the
remaining 16,442 outstanding shares of Series G preferred stock,
which represented 4,110,500 depositary shares, into shares of Fifth
Third’s common stock. On December 9, 2013, the Bancorp issued,
in a registered public offering, 18,000,000 depositary shares,
representing 18,000 shares of 6.625% fixed-to-floating rate non-
cumulative Series I perpetual preferred stock, for net proceeds of
$441 million. The Series I preferred shares are not convertible into
Bancorp common shares or any other securities.
Senior Notes and Subordinated Notes Offering
On February 25, 2013, the Bancorp’s banking subsidiary updated
and amended its existing global bank note program. The amended
global bank note program increased the Bank’s capacity to issue its
senior and subordinated unsecured bank notes from $20 billion to
$25 billion. Additionally, on February 28, 2013, the Bank issued and
sold, under its amended bank notes program, $1.3 billion in
aggregate principal amount of unsecured senior bank notes. The
bank notes consisted of: $600 million of 1.45% senior fixed rate
notes due on February 28, 2018; $400 million of 0.90% senior fixed
rate notes due on February 26, 2016; and $300 million of senior
floating rate notes. Interest on the floating rate notes is 3-month
LIBOR plus 41 bps due on February 26, 2016. The bank notes will
be redeemable by the Bank, in whole or in part, on or after the date
that is 30 days prior to the maturity date at a redemption price equal
to 100% of the principal amount plus accrued and unpaid interest
through the redemption date.
On November 20, 2013, the Bancorp issued and sold $750
million of 4.30% unsecured subordinated fixed rate notes with a
maturity date of January 16, 2024. These fixed rate notes will be
redeemable by the Bancorp, in whole or in part, on or after the date
that is 30 days prior to the maturity date at a redemption price equal
to 100% of the principal amount plus accrued and unpaid interest
4,838,710
21,531,100
7,710,761
6,267,410
6,953,028
25,035,519
8,538,423
19,084,195
3,950,705
631,986
1,444,047
657,914
127,760
849,037
4,270,250
(a)
(b)
(b)
June 1, 2012
October 24, 2012
February 12, 2013
February 27, 2013
April 5, 2013
October 1, 2013
(a)
(b)
(b)
up to, but excluding, the redemption date.
Additionally, on November 20, 2013, the Bank issued and sold,
under its amended bank notes program, $1.8 billion in aggregate
principal amount of unsecured senior bank notes. The bank notes
consisted of: $1 billion of 1.15% senior fixed rate notes due on
November 18, 2016 and $750 million of senior floating rate notes
due on November 18, 2016. Interest on the floating rate notes is 3-
month LIBOR plus 51 bps. These bank notes will be redeemable by
the Bank, in whole or in part, on or after the date that is 30 days
prior to the maturity date at a redemption price equal to 100% of
the principal amount plus accrued and unpaid interest through the
redemption date.
Automobile Loan Securitizations
In March of 2013, the Bancorp recognized an immaterial loss on the
securitization and sale of certain automobile loans with a carrying
amount of approximately $509 million. As part of the sale, the
Bancorp obtained servicing responsibilities and recognized a
servicing asset with an initial fair value of $6 million.
In August of 2013, the Bancorp transferred approximately $1.3
billion in fixed-rate consumer automobile loans to a bankruptcy
remote trust which was deemed to be a VIE. The Bancorp
concluded that it is the primary beneficiary of the VIE and,
therefore, has consolidated this VIE. For additional information on
the automobile loan securitizations, refer to the Liquidity Risk
Management section of MD&A.
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. While the total
impact of the fully implemented Dodd-Frank Act on the Bancorp is
not currently known, the impact is expected to be substantial and
may have an adverse impact on the Bancorp’s financial performance
and growth opportunities.
17 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Bancorp was impacted by a number of components of the
Dodd-Frank Act which were implemented in 2012 and 2013. 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
BHC’s that participated in the 2009 SCAP and subsequent CCAR,
which includes the Bancorp, are subject to the final stress testing
rules. The rules require both supervisory and company-run stress
tests, which provide forward-looking information to supervisors to
help assess whether institutions have sufficient capital to absorb
losses and support operations during adverse economic conditions.
The FRB launched the 2013 capital planning and stress testing
program on November 9, 2012. The program includes the CCAR,
which included the 19 BHCs that participated in the 2009 SCAP, as
well as the CapPR which includes an additional 11 BHCs with $50
billion or more of total consolidated assets. 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 stress testing results
and capital plan were submitted by the Bancorp to the FRB on
January 7, 2013. In March of 2013, the FRB disclosed its estimates
of participating institutions’ results under the FRB supervisory stress
scenario, including capital results, which assume all banks take
certain consistently applied future capital actions. In addition, the
FRB disclosed 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
comprehensiveness of the capital plan, the reasonableness of the
assumptions and
the capital plan.
the analysis underlying
Additionally, the FRB reviewed 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 I common ratio of five percent on a pro forma basis
under expected and stressful conditions throughout the planning
horizon. The FRB assessed the Bancorp’s strategies for addressing
proposed revisions to the regulatory capital framework agreed upon
by the BCBS and requirements arising from the Dodd-Frank Act.
the capital plan assessed
The FRB’s
review of
In March 2013, the FRB announced it had completed the 2013
CCAR. For BHCs 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 2013 capital
distributions. The FRB indicated to the Bancorp that it did not
object to the following proposed capital actions for the period
beginning April 1, 2013 and ending March 31, 2014:
Increase in the quarterly common stock dividend to
$0.12 per share;
Repurchase of up to $750 million in TruPS subject to
the determination of a regulatory capital event and
replacement with the issuance of a similar amount of
Tier II-qualifying subordinated debt;
8.5%
preferred
convertible
Conversion of the $398 million in outstanding Series
G
into
approximately 35.5 million common shares issued to
the holders. The Bancorp would intend to repurchase
common shares equivalent to those issued in the
conversion up to $550 million in market value, and
issue $550 million in preferred stock;
stock
Repurchase of common shares in an amount up to
$984 million, including any shares issued in a Series G
preferred stock conversion;
18 Fifth Third Bancorp
Incremental repurchase of common shares in the
amount of any after-tax gains from the sale of Vantiv,
Inc. stock; and
Issuance of an additional $500 million in preferred
stock.
Beginning in 2013, the Bancorp and other large bank holding
companies were required to conduct a separate mid-year stress test
using financial data as of March 31st under three company-derived
macro-economic scenarios (base, adverse and severely adverse). The
Bancorp submitted the results of its mid-year stress test to the FRB
in July of 2013 and the Bancorp published a summary of the results
under the severely adverse scenario in September of 2013 which is
available on Fifth Third’s website at https://www.53.com. The FRB
launched the 2014 stress testing program and CCAR on November
1, 2013. The stress testing results and capital plan were submitted by
the Bancorp to the FRB on January 6, 2014. For further discussion
on the 2013 and 2014 Stress Tests and CCAR, see the Capital
Management section in MD&A.
Fifth Third offers qualified deposit customers a deposit
advance product if they choose to avail themselves of this service to
meet short term, small-dollar financial needs. In April of 2013, the
CFPB issued a “White Paper” which studied financial services
industry offerings and customer use of deposit advance products as
well as payday loans and is considering whether rules governing
these products are warranted. At the same time, the OCC and FDIC
each issued proposed supervisory guidance for public comment to
institutions they supervise which supplements existing OCC and
FDIC guidance, detailing the principles they expect financial
institutions to follow in connection with deposit advance products
and supervisory expectations for the use of deposit advance
products. The Federal Reserve also issued a statement in April to
state member banks like Fifth Third for whom the Federal Reserve
is the primary regulator. This statement encouraged state member
banks to respond to customers’ small-dollar credit needs in a
responsible manner; emphasized that they should take
into
consideration the risks associated with deposit advance products,
including potential consumer harm and potential elevated
compliance risk; and reminded them that these product offerings
must comply with applicable laws and regulations. Fifth Third’s
deposit advance product is designed to fully comply with the
applicable federal and state laws and use of this product is subject to
strict eligibility requirements and advance restriction guidelines to
limit dependency on this product as a borrowing source. Fifth Third
believes this product provides customers with a relatively low-cost
January 17, 2014, given
alternative
developments in industry practice, Fifth Third announced that it will
no longer enroll new customers in its deposit advance product and
will phase out the service to existing customers by the end of 2014.
These advance balances are included in other consumer loans and
leases in the Bancorp’s Consolidated Balance Sheets and represent
substantially all of the revenue reported in interest and fees on other
consumer
the Bancorp’s Consolidated
in
Statements of Income and in Table 5 in the Statements of Income
Analysis section of the MD&A. Fifth Third has been monitoring
industry developments and is working to develop and implement
alternative products and services in order to address the needs of its
customers. The Bancorp is currently in the process of evaluating the
impact to the Bancorp’s Consolidated Financial Statements of both
the phase out of our deposit advance product and our development
of alternative products and services.
for such needs. On
loans and
leases
In December of 2010 and revised in June of 2011, the BCBS
issued Basel III, a global regulatory framework, to enhance
international capital standards. In June of 2012, U.S. banking
the regulatory capital
regulators proposed enhancements
requirements for U.S. banks, which implement aspects of Basel III,
to
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. In July of
2013, U.S. banking regulators approved the final enhanced
regulatory capital rules (Basel III Final Rule), which included
modifications to the proposed rules. The Bancorp continues to
evaluate the Basel III Final Rule and its potential impact. For more
information on the impact of the regulatory capital enhancements,
refer to the Capital Management section of MD&A.
On December 10, 2013, the banking agencies finalized section
619 of the DFA known as the Volcker Rule, which becomes
effective April 1, 2014. Though the final rule is effective April 1,
2014, the Federal Reserve has granted the industry an extension of
time until July 21, 2015 to conform activities to be in compliance
with the Volcker Rule. It is possible that additional conformance
period extensions could be granted either to the entire industry, or,
upon request, to requesting banking organizations on a case-by-case
basis. The final rule prohibits banks and bank holding companies
from engaging in short-term proprietary trading of certain securities,
derivatives, commodity futures and options on these instruments
for their own account. The Volcker Rule also restricts banks and
their affiliated entities from owning, sponsoring or having certain
relationships with private equity and hedge funds. Exemptions are
provided for certain activities such as underwriting, market making,
hedging, trading in certain government obligations and organizing
and offering a hedge fund or private equity fund. Fifth Third does
not sponsor any private equity or hedge funds that, under the final
rule, it is prohibited from sponsoring. As of December 31, 2013, the
Bancorp had approximately $181 million
interests and
approximately $80 million in binding commitments to invest in
private equity funds that are affected by the Volcker Rule. It is
expected that over time the Bancorp may need to sell or redeem
these investments although it is likely that these investments will be
reduced over time in the ordinary course before compliance is
required.
in
In November 2010, the FDIC implemented a final rule
amending its deposit insurance regulations to implement section 343
of the Dodd-Frank Act providing for unlimited deposit insurance
for noninterest-bearing transaction accounts for two years starting
December 31, 2010. The FDIC did not charge a separate
assessment for the insurance unlike the previous Transaction
January 1, 2013,
Account Guarantee Program. Beginning
noninterest-bearing transaction accounts are no longer insured
separately from depositors’ other accounts at the same insured
depository institution.
On January 7, 2013, the BCBS issued a final international
standard for the LCR for large, internationally active banks, which
would phase in the LCR beginning in 2015 with full implementation
in 2019. In addition, the BCBS plans on introducing the NSFR final
standard in the next two years. On October 24, 2013, the U.S.
banking agencies issued an NPR that would implement a LCR
requirement for U.S. banks that is generally consistent with the
international LCR standards for large, internationally active banking
organizations, generally those with $250 billion or more in total
consolidated assets or $10 billion or more in on-balance sheet
foreign exposure, and a Modified LCR for BHCs with at least $50
billion in total consolidated assets that are not internationally active,
like Fifth Third. The NPR was open for public comment until
January 31, 2014. Refer to the Liquidity Risk Management section in
MD&A for further discussion on these ratios.
On July 31, 2013, the U.S. District Court for the District of
Columbia issued an order granting summary judgment to the
plaintiffs in a case challenging certain provisions of the FRB’s rule
concerning electronic debit card transaction fees and network
exclusivity arrangements (the “Current Rule”) that were adopted to
implement Section 1075 of the Dodd-Frank Act, known as the
Durbin Amendment. The Court held that, in adopting the Current
Rule, the FRB violated the Durbin Amendment’s provisions
concerning which costs are allowed to be taken into account for
purposes of setting fees that are reasonable and proportional to the
costs incurred by the issuer and therefore the Current Rule’s
maximum permissible fees were too high. In addition, the Court
held that the Current Rule’s network non-exclusivity provisions
concerning unaffiliated payment networks for debit cards also
violated the Durbin Amendment. The Court vacated the Current
Rule, but stayed its ruling to provide the FRB an opportunity to
replace the invalidated portions. The FRB has appealed this
decision. If this decision is ultimately upheld and/or the FRB re-
issues rules for purposes of implementing the Durbin Amendment
in a manner consistent with this decision, the amount of debit card
interchange fees the Bancorp would be permitted to charge likely
would be reduced. Refer to the Noninterest Income subsection of
the Statements of Income Analysis section of MD&A for further
information regarding the Bancorp’s debit card interchange revenue.
19 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 3: CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ 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 before income taxes (FTE)
Fully taxable equivalent adjustment
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
Cash dividends declared per common share
2013
3,993
412
3,581
229
3,352
3,227
3,961
2,618
20
772
1,826
(10)
1,836
37
1,799
2.05
2.02
0.47
$
$
$
$
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
costs and a decrease in the provision for representation and
warranty claims partially offset by an increase in litigation expense.
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. During 2013, credit trends have improved, and as a
result, the provision for loan and lease losses decreased to $229
million in 2013 compared to $303 million in 2012. In addition, net
charge-offs as a percent of average portfolio loans and leases
decreased to 0.58% during 2013 compared to 0.85% during 2012.
At December 31, 2013, nonperforming assets as a percent of loans,
leases and other assets, including OREO (excluding nonaccrual
loans held for sale) decreased to 1.10%, compared to 1.49% at
December 31, 2012. 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, 2013, the Tier I risk-based capital ratio
was 10.36%, the Tier I leverage ratio was 9.64% and the total risk-
based capital ratio was 14.08%.
Earnings Summary
The Bancorp’s net income available to common shareholders for
the year ended December 31, 2013 was $1.8 billion, or $2.02 per
diluted share, which was net of $37 million in preferred stock
income available to common
dividends. The Bancorp’s net
shareholders for the year ended December 31, 2012 was $1.5 billion,
or $1.66 per diluted share, which was net of $35 million in preferred
stock dividends. Pre-provision net revenue was $2.8 billion and $2.5
billion for the years ended 2013 and 2012, respectively. Pre-
provision net revenue is a non-GAAP measure. For further
information, see the Non-GAAP Financial Measures section in the
MD&A.
Net interest income was $3.6 billion for the years ended
December 31, 2013 and 2012. Net interest income was negatively
impacted by a decline of 36 bps in yields on the Bancorp’s interest-
earning assets, partially offset by a $4.3 billion increase in average
loans and leases due primarily to increases in average commercial
and industrial loans and average residential mortgage loans. In
addition, interest expense decreased primarily due to a decrease in
rates paid on average long-term debt and a reduction in higher cost
average long-term debt. Net interest margin was 3.32% and 3.55%
for the years ended December 31, 2013 and 2012, respectively.
Noninterest income increased $228 million, or eight percent, in
2013 compared to 2012. The increase from the prior year was
primarily due to increases in other noninterest income partially
offset by decreases in mortgage banking net revenue. Other
noninterest income increased $305 million compared to the prior
year, primarily due to positive valuation adjustments on the stock
warrant associated with Vantiv Holding, LLC. In addition, the
Bancorp recognized gains of $242 million and $85 million, on the
sale of Vantiv, Inc. shares in the second and third quarters of 2013,
respectively, compared to gains of $115 million related to the
Vantiv, Inc. IPO recorded in the first quarter of 2012 and a $157
million gain on the sale of Vantiv shares during the fourth quarter
of 2012. Mortgage banking net revenue decreased $145 million for
the year ended December 31, 2013 compared to the prior year
primarily due to a decrease in origination fees and gains on loan
sales partially offset by an increase in positive net valuation
adjustments on mortgage servicing rights and free-standing
derivatives entered into to economically hedge the MSR portfolio.
Noninterest expense decreased $120 million, or three percent,
in 2013 compared to 2012 primarily due to a decrease in other
noninterest expense driven by a decrease in debt extinguishment
20 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NON-GAAP FINANCIAL MEASURES
The Bancorp considers various measures when evaluating capital
utilization and adequacy, including the tangible equity ratio, tangible
common equity ratio and Tier I common equity ratio, in addition to
capital ratios defined by banking regulators. These calculations are
intended to complement the capital ratios defined by banking
regulators for both absolute and comparative purposes. Because
U.S. GAAP does not include capital ratio measures, the Bancorp
believes there are no comparable U.S. GAAP financial measures to
these ratios. 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
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.
U.S. banking regulators approved final capital rules (Basel III
Final Rule) in July of 2013 that substantially amend the existing risk-
based capital rules (Basel I) for banks. The Bancorp believes
providing an estimate of its capital position based upon the final
rules is important to complement the existing capital ratios and for
comparability to other financial institutions. Since these rules are
not effective for the Bancorp until January 1, 2015, 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
21 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 4: 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)
$
$
$
$
$
$
$
$
2013
2012
2,598
229
2,827
1,799
5
1,804
14,589
(1,034)
(2,416)
(19)
11,120
(82)
11,038
1,034
12,072
130,443
(2,416)
(19)
(126)
127,882
14,589
(2,492)
(82)
60
19
12,094
(1,034)
(60)
(37)
10,963
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
116,736
109,699
9.44 %
8.63 %
9.39 %
9.17
8.83
9.51
Basel III Final Rule - Estimated Tier I common equity ratio
Tier I common equity (Basel I)
Add: Adjustment related to capital components(b)
Estimated Tier I common equity under Basel III Final Rule without AOCI (opt out) (6)
Add: Adjustment related to AOCI(c)
Estimated Tier I common equity under Basel III Final Rule with AOCI (non opt out) (7)
Estimated risk-weighted assets under Basel III Final Rule (8)(d)
Estimated Tier I common equity ratio under Basel III Final Rule (opt out) (6) / (8)
Estimated Tier I common equity ratio under Basel III Final Rule (non opt out) (7) / (8)
(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.
10,963
82
11,045
82
11,127
122,851
8.99 %
9.06 %
$
(b) Adjustments related to capital components include MSRs and deferred tax assets subject to threshold limitations and deferred tax liabilities related to intangible assets, which were deductions to
capital under Basel I capital rules.
(c) Under final Basel III rules, non-advanced approach banks are permitted to make a one-time election to opt out of the requirement to include AOCI in Tier I common equity.
(d) 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
securitizations, past due loans, foreign banks and certain commercial real estate; (3) Higher risk weighting for MSRs and deferred tax assets that are under certain thresholds as a percent of Tier I
capital; and (4) Derivatives are differentiated between exchange clearing and over-the-counter and the 50% risk-weight cap is removed.
22 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, 2013.
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 non-owner 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
the Bancorp during 2013 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’s
23 Fifth Third 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.
adjustable rate) and interest rates. For additional information on
servicing rights, see Note 11 of the Notes to Consolidated Financial
Statements.
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, such as
the limitation on the use of any net operating losses, to determine
whether realization is more likely than not.
Accrued taxes represent the net estimated amount due to
taxing jurisdictions and are reported in accrued taxes, interest and
expenses
in the Consolidated Balance Sheets. The Bancorp
evaluates and assesses the relative risks and appropriate tax
treatment of transactions and filing positions after considering
statutes, regulations, judicial precedent and other information and
maintains tax accruals consistent with its evaluation of these relative
risks and merits. Changes to the estimate of accrued taxes occur
periodically due to changes in tax rates, interpretations of tax laws,
the status of examinations being conducted by taxing authorities
and changes to statutory, judicial and regulatory guidance that
impact the relative risks of tax positions. These changes, when they
occur, can affect deferred taxes and accrued taxes as well as the
current period’s income tax expense and can be significant to the
operating results of the Bancorp. For additional information on
income taxes, see Note 20 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 and the weighted-average coupon 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.
24 Fifth Third Bancorp
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
about what market
Bancorp’s own
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
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
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
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, 2013,
derivatives classified as Level 3, which are valued using an
option-pricing model containing unobservable inputs,
consisted primarily of the warrant associated with the
initial sale of the Bancorp’s 51% interest in Vantiv
Holding, LLC 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 27 of the Notes to Consolidated Financial Statements
for further information on fair value measurements.
Goodwill
Business combinations entered into by the Bancorp typically include
the acquisition of goodwill. U.S. GAAP requires goodwill to be
tested for impairment at the Bancorp’s reporting unit level on an
annual basis, which for the Bancorp is September 30, and more
frequently if events or circumstances indicate that there may be
impairment. The Bancorp has determined that its segments qualify
as reporting units under U.S. GAAP.
Impairment exists when a reporting unit’s carrying amount of
goodwill exceeds its implied fair value. 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.
In this qualitative assessment, the Bancorp evaluates events and
circumstances which may include, but are not limited to, the general
economic environment, banking industry and market conditions,
the overall financial performance of the Bancorp, the performance
of the Bancorp’s stock, the key financial performance metrics of the
reporting units, and events affecting the reporting units. 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
25 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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
Statements for further
the Bancorp’s
goodwill.
information regarding
26 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
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. 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
generation of deposits and the rates received on loans and
investment securities and paid on deposits or other sources of
funding. The impact of these changes may be magnified if Fifth
Third does not effectively manage the relative sensitivity of its assets
and liabilities to changes in market interest rates. Fluctuations in
these areas may adversely affect Fifth Third and its shareholders.
Changes and trends in the capital markets may affect Fifth
Third’s income and cash flows.
Fifth Third enters into and maintains trading and investment
positions in the capital markets on its own behalf and manages
investment positions on behalf of its customers. These investment
positions include derivative financial instruments. The revenues and
profits Fifth Third derives from managing proprietary and customer
trading and investment positions are dependent on market prices.
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.
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;
27 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2013; 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
28 Fifth Third Bancorp
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, 2013). 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, increased regulatory requirements, 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.
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
borrowers 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.
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
investment or private
loans for
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 deteriorate or future
investor repurchase demand and success at appealing repurchase
requests differ from past experience, Fifth Third could 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.
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 to meet
liquidity objectives, 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
including dividends and other
aspects of capital planning,
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
including capital, access to capital, revenue
several factors,
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.
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
29 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
30 Fifth Third Bancorp
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.
settlement
Fifth Third regularly reviews its litigation reserve for adequacy
considering its litigation and regulatory investigation risks and
probability of incurring losses related to litigation and regulatory
investigations. However, Fifth Third cannot be certain that its
current litigation reserves will be adequate over time to cover its
losses in litigation or regulatory proceedings due to higher than
anticipated
adverse
judgments, or other factors that are largely outside of Fifth Third’s
control. If Fifth Third’s litigation reserves are not adequate, Fifth
Third’s business, financial condition, including its liquidity and
capital, and results of operations could be materially adversely
affected. Additionally, in the future, Fifth Third may increase its
litigation reserves, which could have a material adverse effect on its
capital and results of operations. In addition, if a material change to
a reserve amount is made to reflect new information, such a change
could result in a change to previously announced financial results.
costs, prolonged
litigation,
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
other
financial
accounting and reporting standards that govern the preparation of
Fifth Third’s consolidated financial statements. These changes can
be hard to predict and can materially impact how Fifth Third
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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
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.
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 have 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.
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 Holding, LLC could have a negative
impact on Fifth Third’s operating results and financial
condition.
In 2009, Fifth Third sold an approximate 51% interest in its
processing business, Vantiv Holding, LLC (formerly Fifth Third
Processing Solutions). As a result of additional share sales
completed by Fifth Third in 2012 and 2013, the Bancorp’s current
ownership share in Vantiv Holding, LLC is approximately 25%.
Vantiv Holding, LLC is accounted for under the equity method and
is not consolidated based on Fifth Third’s remaining ownership
share in Vantiv Holding, LLC. Vantiv Holding, LLC’s operating
results could be poor or favorable and could disproportionately
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
31 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
In
2012, Federal banking
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 the FRB 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.
June
agencies proposed
enhancements to the regulatory capital requirements for U.S.
banking organizations, which implemented 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 1 common equity ratio. In July
2013, the Federal banking agencies issued final rules for the
enhanced
included
modifications to the proposed rules. The final rules provide the
option for certain banking organizations, including the Bancorp, to
opt out of including AOCI in Tier 1 capital and retain the treatment
of residential mortgage exposures consistent with the current Basel I
capital rules. The new capital rules are effective for the Bancorp on
January 1, 2015, subject to phase-in periods for certain components
and other provisions. 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.
requirements, which
regulatory
capital
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
available to the federal regulatory authorities. These
include
limitations on the ability to pay dividends, the issuance by the
regulatory authority of a capital directive to increase capital, and the
termination of deposit insurance by the FDIC.
32 Fifth Third Bancorp
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 legislation 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.
On November 21, 2013, the OCC and FDIC separately issued
guidance on deposit advance loans. The guidance establishes
numerous expectations for institutions that offer such products. It
covers matters such as consumer eligibility, capital adequacy, fees,
compliance, management oversight, and third-party relationships.
Fifth Third’s deposit advance product was designed to fully comply
with all applicable federal and state laws. However, given industry
developments, Fifth Third determined to cease enrolling customers
in its deposit advance product as of January 31, 2014 and will phase
out its service to existing deposit advance customers by December
31, 2014.
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
companies, the FRB, the FDIC, 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
that financial
their risk
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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
to
time
Fifth Third and/or its affiliates are or may become involved
from time to time in information-gathering requests,
investigations and proceedings by various governmental
regulatory agencies and law enforcement authorities, as well
as 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
governmental regulatory agencies and law enforcement authorities,
as well as self-regulatory agencies, including the SEC, regarding their
respective businesses. Such matters may result in material adverse
consequences, including without limitation, adverse judgments,
settlements,
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.
fines, penalties,
requests,
in
Deposit insurance premiums levied against Fifth Third Bank
may increase if the number of bank failures increase or the
cost of resolving failed banks increases.
The FDIC maintains a DIF to protect insured depositors in the
event of bank failures. The DIF is funded by fees assessed on
insured depository institutions including Fifth Third Bank. The
magnitude and cost of resolving an increased number of bank
failures have reduced the DIF. Future deposit premiums paid by
Fifth Third Bank depend on the level of the DIF and the magnitude
and cost of future bank failures. Fifth Third Bank also may be
required to pay significantly higher FDIC premiums 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 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 consumer
protection laws. Any new regulatory requirements
promulgated by the CFPB could require changes to
increased
our consumer businesses,
compliance costs and affect the streams of revenue of
such businesses. The FSOC has been charged with
identifying
stronger
financial regulation and identifying those non-bank
companies that are systemically important and thus
should be subject to regulation by the Federal
Reserve.
risks, promoting
systemic
result
in
interests
The Dodd-Frank Act “Volcker Rule” provisions and
final rule generally prohibit any
implementing
banking entity from (i) engaging
in short-term
proprietary trading for its own account and (ii)
in
sponsoring or acquiring ownership
private equity or hedge funds. The Volcker Rule,
however, contains a number of exceptions to these
prohibitions. For example, transactions on behalf of
customers or in connection with certain underwriting
and market making activities, as well as risk-
mitigating hedging activities and certain foreign
banking activities are permitted. The risk-mitigating
hedging exemption applies to hedging activities that
are designed to reduce or significantly mitigate
specific, identifiable risks of individual or aggregated
positions. Fifth Third is required to conduct an
analysis supporting its hedging strategy and the
effectiveness of hedges must be monitored and
recalibrated as necessary. Fifth Third will be required
to
the
transaction,
for certain
transactions that present heighted compliance risks.
Under the market-making exemption, a trading desk
is required to routinely stand ready to purchase and
sell one or more types of financial instruments. The
trading desk’s inventory in these types of financial
instruments has to be designed not to exceed, on an
ongoing basis, the reasonably expected near-term
demands of customers.
contemporaneously with
rationale
the hedging
document,
approximately
The Volcker Rule and the rulemakings promulgated
thereunder restrict banks and their affiliated entities
from investing in or sponsoring certain private equity
and hedge funds. Fifth Third does not sponsor any
private equity or hedge funds that it is prohibited
from sponsoring. As of December 31, 2013, the
Bancorp had approximately $181 million in interests
in binding
and
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
these
it
investments although
investments will be reduced over time in the ordinary
course before compliance is required. Fifth Third
expects to be able to hold these investments until July
2015 with no restriction, and be eligible to obtain up
to two one-year extension periods, subject to
regulatory approvals. A forced sale of some of these
$80 million
likely
that
is
33 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
investments could result in Fifth Third receiving less
value than it would otherwise have received.
The FDIC and the Federal Reserve 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
annually prepare and submit a resolution plan to the
FDIC, which would include, among other things, an
analysis of how the institution could be resolved
the Federal Deposit Insurance Act, as
under
amended (the “FDIA”) in a manner that protects
depositors and limits losses or costs to creditors of
the bank. Initial plans for Fifth Third and its bank
subsidiary have been submitted, in accordance with
the final regulatory rules, for review by the FDIC, the
Federal Reserve, and the FSOC. The Federal Reserve
and the FDIC may jointly impose restrictions on
Fifth Third or
including
additional capital requirements 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
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.
its bank subsidiary,
Title VII of 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 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 registration with the CFTC,
margin requirements in excess of current market
practice, capital
this
requirements
business, real time trade reporting and robust record
keeping requirements, business conduct 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
specific
impose
to
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.
for
the U.S. Treasury
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 Department of Treasury issued an
interim final rule in 2012 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. In August 2013, the FRB also
adopted a final rule to implement an assessment
provision under the Dodd-Frank Act equal to the
the FRB estimates are necessary or
expense
appropriate to supervise and regulate bank holding
companies with $50 billion or more in assets.
On July 31, 2013, the U.S. District Court for the
issued an order granting
District of Columbia
summary
in a case
judgment to the plaintiffs
challenging certain provisions of the FRB’s rule
concerning electronic debit card transaction fees and
network exclusivity arrangements that were adopted
to implement Section 1075 of the Dodd-Frank Act,
known as the Durbin Amendment. The Court held
that, in adopting the Current Rule, the FRB violated
the Durbin Amendment’s provisions concerning
which costs are allowed to be taken into account for
purposes of setting fees that are reasonable and
proportional to the costs incurred by the issuer and
therefore, the Current Rule’s maximum permissible
fees were too high. In addition, the Court held that
the Current Rule’s
non-exclusivity
provisions concerning unaffiliated payment networks
for debit cards also violated the Durbin Amendment.
The Court vacated the Current Rule, but stayed its
ruling to provide the FRB an opportunity to replace
invalidated portions. The FRB has appealed this
decision. If this decision is ultimately upheld and/or
the FRB re-issues rules for purposes of implementing
the Durbin Amendment in a manner consistent with
this decision, the amount of debit card interchange
fees the Bancorp would be permitted to charge
would likely be reduced, thereby negatively affecting
the Bancorp’s financial performance.
network
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
34 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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/or its affiliates are or may become the subject
of litigation which could result in legal liability and damage to
Fifth Third’s 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. These matters could result in
material adverse judgments, settlements, fines, penalties, injunctions
or other relief, 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. Like other large financial institutions and companies,
Fifth Third is also subject to risk from potential employee
misconduct, including non-compliance with policies and improper
use or disclosure of confidential information. Substantial legal
liability or significant regulatory action against Fifth Third could
materially adversely affect its business, financial condition or results
of operations and/or cause significant reputational harm to its
business.
Fifth Third’s ability to pay or increase dividends on its
common stock or to repurchase its capital stock is restricted.
Fifth Third’s ability to pay dividends or repurchase stock is subject
to regulatory requirements and the need to meet regulatory
expectations. Fifth Third is subject to an annual assessment by the
FRB as part of CCAR. 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 capital plan must reflect the revised capital
framework
the
implementation of the Basel III accord, including the framework’s
minimum regulatory capital ratios and transition arrangements. Fifth
Third’s stress testing results and 2014 capital plan were submitted to
the FRB on January 6, 2014.
in connection with
the FRB adopted
that
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 under baseline and
stressful conditions throughout a nine-quarter planning horizon.
35 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
offset by a decrease in interest expense primarily related to long-
term debt.
Interest income from loans and leases decreased $126 million,
or four percent, compared to the year ended December 31, 2012
primarily due to a decrease of 34 bps in yields on average loans and
leases partially offset by an increase of five percent in average loans
and leases for the year ended December 31, 2013 compared to 2012.
The increase in average loans and leases for the year ended
December 31, 2013 was driven primarily by an increase of 15% in
average commercial and industrial loans and an increase of eight
percent in average residential mortgage loans compared to the year
ended December 31, 2012. For more information on the Bancorp’s
loan and lease portfolio, see the Loans and Leases section of the
Balance Sheet Analysis of the MD&A. In addition, interest income
from
investments
decreased $6 million, or one percent, compared to the year ended
2012 primarily due to a 29 bps decrease in the average yield on
taxable securities partially offset by an increase of $1.1 billion in
average taxable securities.
investment securities and other short-term
Average core deposits increased $4.3 billion, or five percent,
compared to the year ended December 31, 2012 primarily due to an
increase in average money market deposits and average demand
deposits partially offset by a decrease in average savings deposits.
The cost of interest bearing core deposits decreased to 27 bps for
the year ended December 31, 2013 from 31 bps for the year ended
December 31, 2012. This decrease was primarily the result of a mix
shift to lower cost interest bearing core deposits as a result of run-
off of higher priced CDs combined with decreases of 5 bps in the
rate paid on average savings deposits and a decrease of 26 bps on
average other time deposits compared to the year ended December
31, 2012.
Interest expense on average wholesale funding for the year
ended December 31, 2013 decreased $83 million, or 24%, compared
to the prior year, primarily due to a decrease in the rates paid on
average long-term debt of 59 bps for the year ended December 31,
2013 compared to 2012 coupled with a decrease of $1.1 billion in
average long-term debt. The reduction in higher cost long-term debt
was primarily the result of the full year impact of the redemption of
outstanding TruPS and FHLB debt in the second half of 2012. In
the third quarter of 2012, the Bancorp redeemed $1.4 billion of
outstanding TruPS which had a 7.25% distribution
rate.
Additionally, in the fourth quarter of 2012, the Bancorp terminated
$1.0 billion of FHLB debt with a fixed rate of 4.56%. These
decreases were partially offset by the issuance of $1.3 billion of
unsecured senior bank notes in the first quarter of 2013. Refer to
the Borrowings section of MD&A for additional information on the
Bancorp’s changes in average borrowings. During the years ended
December 31, 2013 and 2012, wholesale funding represented 24%
information on the
liabilities. For more
of
Bancorp’s
including estimated
earnings sensitivity to changes in market interest rates, see the
Market Risk Management section of MD&A.
interest rate risk management,
interest-bearing
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 5 presents the components of net interest income, net
interest margin and net interest rate spread for the years ended
December 31, 2013, 2012 and 2011. 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 6 provides the relative
impact of changes in the balance sheet and changes in interest rates
on net interest income.
Net interest income was $3.6 billion for the years ended
December 31, 2013 and 2012. Included within net interest income
are amounts related to the amortization and accretion of premiums
and discounts on acquired loans and deposits, primarily as a result
of acquisitions in previous years, which increased net interest
income by $17 million during 2013 and $31 million during 2012.
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
impact of
remaining period to maturity, and excluding the
prepayments, the Bancorp anticipates recognizing approximately $5
million in additional net interest income during 2014 as a result of
the amortization and accretion of premiums and discounts on
acquired loans and deposits.
For the year ended December 31, 2013, net interest income
was negatively impacted by a 36 bps decline in yields on the
Bancorp’s interest-earning assets compared to the year ended
December 31, 2012. The decrease in yields on interest earning assets
was partially offset by an increase in average loans and leases of $4.3
billion as well as a decrease in interest expense compared to the
prior year. The decrease in interest expense was primarily the result
of a 59 bps decrease in the rate paid on average long-term debt
coupled with a $1.1 billion decrease in average long-term debt for
the year ended December 31, 2013 compared to the year ended
December 31, 2012. For the year ended December 31, 2013, the net
interest rate spread decreased to 3.15% from 3.35% in 2012 as the
benefit of the decreases in rates on interest-bearing liabilities was
more than offset by a decrease in yield on average interest-earning
assets.
Net interest margin was 3.32% for the year ended December
31, 2013 compared to 3.55% for the year ended December 31, 2012.
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 2 bps during 2013
compared to 3 bps during 2012. Exclusive of these amounts, net
interest margin decreased 22 bps for the year ended December 31,
2013 compared to the prior year driven primarily by the previously
mentioned decline in the yield on average interest-earning assets
coupled with an increase in average interest-earning assets, partially
36 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 5: CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
For the years ended December 31
2012
2013
2011
Average Revenue/
Balance
Average
Yield/
Rate
Average
Balance
Revenue/
Cost
Average
Yield/
Rate
Average Revenue/
Average
Yield/
Rate
$
Cost
Cost
Balance
3.16
5.29
0.26
3.70
518
3
6
3,993
16,395
49
2,417
107,954
2,482
15,053
(1,757)
123,732
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
37,770
8,481
793
3,565
50,609
14,428
9,554
12,021
2,121
360
38,484
89,093
4.34 %
3.99
3.06
3.99
4.18
4.45
3.91
4.67
9.86
25.77
4.94
4.52
$ 1,349
369
25
127
1,870
543
393
439
192
155
1,722
3,592
$ 1,240
417
53
133
1,843
503
433
530
184
136
1,786
3,629
$ 1,361
306
27
116
1,810
564
355
373
209
155
1,656
3,466
3.60 % $
3.60
3.45
3.26
3.58
3.91
3.71
3.10
9.87
42.93
4.30
3.89
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 $20 for the year ended December 31, 2013 and $18 for the years ended 2012 and 2011. The federal statutory rate utilized was 35% for
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
15,334
103
2,031
97,682
2,352
15,335
(2,703)
$ 112,666
23,582
18,440
9,467
1,501
3,760
6,339
17
503
3,024
7,914
74,547
29,925
4,917
109,389
14,343
123,732
0.22 % $
0.17
0.22
0.27
1.59
1.48
0.13
0.14
0.18
3.17
0.71
0.23 % $
0.12
0.25
0.28
1.33
0.78
0.11
0.12
0.18
2.58
0.55
15,262
57
1,495
101,636
2,355
15,695
(2,072)
$ 117,614
0.26 %
0.31
0.27
0.28
2.23
1.97
0.03
0.11
0.12
3.01
0.92
49
67
14
10
140
72
-
-
3
306
661
49
37
11
4
68
46
-
1
8
288
512
53
22
23
4
50
50
-
1
5
204
412
3.45
3.29
0.26
4.06
3.55 %
3.35
71.04
3.32 %
3.15
69.05
596
6
5
4,236
527
2
4
4,125
3.66 %
3.42
73.92
3.89
5.41
0.25
4.34
$ 3,581
$ 3,613
$ 3,575
$
$
$
$
$
$
all periods presented.
37 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
$
Total
2013 Compared to 2012
Volume Yield/Rate
187
(44)
(2)
2
143
42
(31)
6
15
8
40
183
12
(63)
2
(11)
(60)
21
(38)
(66)
17
-
(66)
(126)
(175)
(19)
4
(13)
(203)
(21)
(7)
(72)
2
(8)
(106)
(309)
TABLE 6: CHANGES IN NET INTEREST INCOME ATTRIBUTABLE 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 loans and leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans/leases
Subtotal – consumer loans and leases
Total loans and leases
Securities:
Taxable
Exempt from income taxes
Other short-term investments
Subtotal – securities and other short-term investments
Total change in interest income
Liabilities
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 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.
4
(15)
12
-
(18)
4
-
(3)
(84)
(100)
(32)
4
(11)
1
-
(10)
(29)
-
-
(50)
(95)
(261)
-
(4)
11
-
(8)
33
-
(3)
(34)
(5)
229
(47)
-
-
(47)
(356)
(9)
1
2
(6)
(132)
38
1
2
41
224
$
$
$
$
$
2012 Compared to 2011
Volume
Yield/Rate
Total
(71)
(18)
(1)
(13)
(103)
(47)
(13)
(114)
(1)
78
(97)
(200)
(67)
(2)
-
(69)
(269)
(9)
(30)
(2)
-
(34)
(16)
-
2
16
(73)
(196)
109
(48)
(28)
(6)
27
40
(40)
(91)
8
19
(64)
(37)
(69)
(4)
(1)
(74)
(111)
-
(30)
(3)
(6)
(72)
(26)
1
5
(18)
(149)
38
180
(30)
(27)
7
130
87
(27)
23
9
(59)
33
163
(2)
(2)
(1)
(5)
158
9
-
(1)
(6)
(38)
(10)
1
3
(34)
(76)
234
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 $229
million in 2013 compared to $303 million in 2012. The decrease in
provision expense for 2013 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 $272
million from $1.9 billion at December 31, 2012 to $1.6 billion at
December 31, 2013. As of December 31, 2013, the ALLL as a
percent of portfolio loans and leases decreased to 1.79%, compared
to 2.16% at December 31, 2012.
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
loan portfolio composition,
losses,
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
38 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Income
Noninterest income increased $228 million, or eight percent, for the year ended December 31, 2013 compared to the year ended December 31,
2012. The components of noninterest income are as follows:
TABLE 7: NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Mortgage banking net revenue
Service charges on deposits
Corporate banking revenue
Investment advisory revenue
Card and processing revenue
Gain on sale of the processing business
Other noninterest income
Securities gains (losses), net
Securities gains, net, non-qualifying hedges on mortgage servicing rights
Total noninterest income
$
2013
700
549
400
393
272
-
879
21
13
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
$
3,227
2,999
2,455
2,729
2009
553
632
372
326
615
1,758
479
(10)
57
4,782
Mortgage banking net revenue
Mortgage banking net revenue decreased $145 million, or 17%, in 2013 compared to 2012. The components of mortgage banking net revenue are
as follows:
TABLE 8: COMPONENTS OF MORTGAGE BANKING NET REVENUE
For the years ended December 31 ($ in millions)
Origination fees and gains on loan sales
Net mortgage servicing revenue:
Gross mortgage servicing fees
Mortgage servicing rights amortization
Net valuation adjustments on servicing rights and free-standing derivatives
entered into to economically hedge MSR
Net mortgage servicing revenue
Mortgage banking net revenue
Origination fees and gains on loan sales decreased $368 million in
2013 compared to 2012 primarily as the result of a decrease in profit
margins on sold residential mortgage loans coupled with an 11%
decrease in residential mortgage loan originations. Residential
mortgage loan originations decreased to $22.3 billion in 2013 from
$25.2 billion in 2012. The decrease in originations is primarily due to
a decrease in refinancing activity during the second half of 2013 as
mortgage rates continued to rise and fewer borrowers were able to
achieve savings by refinancing their mortgages.
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
increased $223 million in 2013 compared to 2012 driven primarily
in net valuation adjustments.
by
Additionally, servicing rights amortization decreased by $20 million
in 2013 compared to 2012 driven by lower prepayments due to an
increase in interest rates in 2013 compared to 2012.
increases of $202 million
The net valuation adjustment gain of $162 million during 2013
included a recovery of temporary impairment of $192 million on
MSRs partially offset by $30 million in losses from derivatives
economically hedging the MSRs. 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. 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. Mortgage rates increased during 2013 which
caused modeled prepayments speeds to slow, and led to the
2013
453
251
(166)
162
247
700
$
$
2012
821
250
(186)
(40)
24
845
2011
396
234
(135)
102
201
597
recovery of temporary impairment on servicing rights during the
year. Mortgage rates decreased in 2012 causing modeled prepayment
speeds to increase, which led to the temporary impairment on
servicing rights in 2012. 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 information on the
free-standing derivatives used to economically hedge the MSR
portfolio.
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. The Bancorp
recognized net gains of $13 million and $3 million during the years
ended 2013 and 2012, respectively, recorded in securities gains, net,
non-qualifying hedges on mortgage servicing rights in the Bancorp’s
Consolidated Statement of Income.
The Bancorp’s total residential loans serviced as of December
31, 2013 and 2012 was $82.7 billion and $77.3 billion, respectively,
with $69.2 billion and $62.5 billion, respectively, of residential
mortgage loans serviced for others.
Service charges on deposits
Service charges on deposits increased $27 million in 2013 compared
to 2012. Commercial deposit revenue increased $17 million in 2013
compared to 2012 primarily due to increased treasury management
fees as a result of pricing changes implemented in the third quarter
of 2012 and the third quarter of 2013 and the acquisition of new
customers. Consumer deposit revenue increased $10 million due to
an increase in consumer checking fees due to new deposit product
39 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
offerings partially offset by 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 decreased $13 million in 2013 compared
to 2012. The decrease from the prior year was primarily the result of
a decrease in lease remarketing fees partially offset by an increase in
syndication fees. The decline in lease remarketing fees was driven by
a $9 million write-down of equipment value on an operating lease
during the fourth quarter of 2013.
Investment advisory revenue
Investment advisory revenue
in 2013
compared to 2012. The increase was primarily due to an increase of
$17 million in securities and brokerage fees due to strong
production and an increase in equity and bond market values
increased $19 million
Other noninterest income
The major components of other noninterest income are as follows:
coupled with an increase of $15 million in private client service fees,
partially offset by a decrease in mutual fund fees. Due to the sale of
certain funds by ClearArc Capital, Inc., formerly Fifth Third Asset
Management, during the third quarter of 2012, mutual fund fees
decreased $13 million in 2013 compared to 2012. The Bancorp had
approximately $302 billion and $308 billion in total assets under care
as of December 31, 2013 and December 31, 2012, respectively, and
managed $27 billion in assets for individuals, corporations and not-
for-profit organizations as of December 31, 2013 and 2012.
Card and processing revenue
Card and processing revenue increased $19 million in 2013
compared to 2012. The increase was primarily the result of higher
transaction volumes. Debit card interchange revenue, included in
card and processing revenue, was $122 million and $119 million for
the years ended December 31, 2013 and 2012, respectively.
TABLE 9: COMPONENTS OF OTHER NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Gain on sale of Vantiv, Inc. shares and Vantiv, Inc. IPO
Valuation adjustments on the warrant and put options associated with Vantiv Holding, LLC
Equity method income from interest in Vantiv Holding, LLC
Operating lease income
BOLI income
Cardholder fees
Banking center income
Consumer loan and lease fees
Insurance income
Gain on loan sales
TSA revenue
Loss on OREO
Loss on swap associated with the sale of Visa, Inc. class B shares
Other, net
Total other noninterest income
2013
336
206
77
75
52
47
34
27
25
3
1
(26)
(31)
53
879
$
$
2012
272
67
61
60
35
46
32
27
28
20
1
(57)
(45)
27
574
2011
-
39
57
58
41
41
27
31
28
37
21
(71)
(83)
24
250
Other noninterest income increased $305 million in 2013 compared
to 2012. The positive valuation adjustments on the stock warrant
associated with Vantiv Holding, LLC increased $139 million in 2013
compared to 2012. In addition, gains of $242 million and $85
million on the sale of Vantiv, Inc. shares were recorded in the
second and third quarters of 2013, respectively, compared to gains
of $115 million related to the Vantiv, Inc. IPO recorded in the first
quarter of 2012 and a $157 million gain from the sale of Vantiv, Inc.
shares during the fourth quarter of 2012. The Bancorp recognized a
gain of $9 million associated with a tax receivable agreement with
Vantiv, Inc. in the fourth quarter of 2013. The equity method
earnings from the Bancorp’s interest in Vantiv Holding, LLC
increased $16 million from 2012.
BOLI income increased $17 million in 2013 compared to 2012
primarily due to a $10 million settlement in the second quarter of
2013 related to a previously surrendered BOLI policy. The loss on
OREO decreased $31 million from 2012 due to a decrease in
OREO balances year over year and a decrease in losses on
commercial real estate in 2013 relating to fair value adjustments on
OREO. Additionally, the Bancorp recognized $31 million and $45
million in negative valuation adjustments related to the Visa total
return swap for the years ended December 31, 2013 and 2012,
respectively. For additional information on the valuation of the
swap associated with the sale of Visa, Inc. Class B shares and the
valuation of the warrant and put options associated with the sale of
Vantiv Holding, LLC, see Note 27 of the Notes to Consolidated
Financial Statements.
The “other” caption increased $26 million for the year ended
2013 compared to 2012. The increase was primarily due to a
decrease in lower of cost or market adjustments associated with the
bank premises as the Bancorp recorded $6 million in lower of cost
or market adjustments in 2013 compared to $21 million in 2012.
Additionally, in response to the issuance of the Volcker Rule, the
Bancorp recognized $4 million of OTTI on certain investments in
private equity funds in 2013.
40 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 10: NONINTEREST EXPENSE
For the years ended December 31 ($ in millions)
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Card and processing expense
Equipment expense
Other noninterest expense
Total noninterest expense
Efficiency ratio
$
$
2013
1,581
357
307
204
134
114
1,264
3,961
58.2 %
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
Noninterest Expense
Total noninterest expense decreased $120 million, or three percent,
in 2013 compared to 2012 primarily due to a decrease in total
personnel costs (salaries, wages and incentives plus employee
benefits) and other noninterest expense. Total personnel costs
decreased $40 million, or two percent, in 2013 compared to 2012
primarily due to a decrease in incentive compensation driven by the
mortgage business due to lower production levels in 2013, a
decrease in base compensation, and a decrease in the number of full
time equivalent employees from 2012. Full time equivalent
employees totaled 19,446 at December 31, 2013 compared to 20,798
at December 31, 2012.
The major components of other noninterest expense are as follows:
TABLE 11: COMPONENTS OF OTHER NONINTEREST EXPENSE
For the years ended December 31 ($ in millions)
Losses and adjustments
Loan and lease
FDIC insurance and other taxes
Marketing
Impairment of affordable housing investments
Professional service fees
Operating lease
Travel
Postal and courier
Data processing
Recruitment and education
Insurance
OREO expense
Supplies
Intangible asset amortization
Loss (gain) on debt extinguishment
Benefit from the reserve for unfunded commitments and letters of credit
Other, net
Total other noninterest expense
Total other noninterest expense decreased $110 million, or eight
percent, in 2013 compared to 2012 primarily due to a decline in debt
extinguishment costs, decreases in loan and lease expenses and an
increase in the benefit from the reserve for unfunded commitments
and letters of credit, partially offset by increases in losses and
adjustments and FDIC insurance and other taxes.
Debt extinguishment costs decreased $161 million in 2013
compared to 2012. During the fourth quarter of 2013, the Bancorp
incurred $8 million of debt extinguishment costs associated with the
redemption of outstanding TruPS issued by Fifth Third Capital
Trust IV. 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 $134 million of debt
extinguishment costs associated with the termination of $1 billion of
FHLB debt. Loan and lease expenses decreased $25 million in 2013
compared to 2012 primarily due to a decrease in legal costs related
to OREO and a decrease in loan closing fees due to a decline in
mortgage originations. The benefit from the reserve for unfunded
commitments and letters of credit was $17 million and $2 million in
2013
221
158
127
114
108
76
57
54
48
42
26
17
16
16
8
8
(17)
185
1,264
$
$
2012
187
183
114
128
90
56
43
52
48
40
28
18
21
17
13
169
(2)
169
1,374
2011
129
195
201
115
85
58
41
52
49
29
31
25
34
18
22
(8)
(46)
194
1,224
2013 and 2012, respectively. The increase in the benefit recognized
reflects a decrease in estimated loss rates related to unfunded
commitments and letters of credit due to improved credit trends
partially offset by an increase in unfunded commitments for which
the Bancorp holds reserves.
increased $34 million
Losses and adjustments
in 2013
compared to 2012 primarily due to an increase in litigation expense
partially offset by a decrease in representation and warranty expense.
Litigation expense increased $127 million in 2013 compared to 2012
due to increased litigation and regulatory activity. The provision for
representation and warranty claims decreased $92 million in 2013
compared to 2012 due to the Bancorp recording significant
additions to the reserve in 2012 as the result of additional
information obtained from FHLMC regarding their file selection
criteria which enabled the Bancorp to better estimate the losses that
were probable on loans sold to FHLMC with representation and
warranty provisions. In addition, 2013 included a decrease in the
representation and warranty reserve due to improving underlying
repurchase metrics and the settlement with FHLMC.
Additionally, FDIC insurance and other taxes increased $13
million in 2013 compared to 2012 primarily due to a $23 million
41 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
reduction in other taxes in the first quarter of 2012 from an
agreement reached on certain disputes for non-income tax related
assessments.
The Bancorp continues to focus on efficiency initiatives as part
of its core emphasis on operating leverage and expense control. The
Applicable Income Taxes
income, tax-advantaged
Applicable income tax expense for all periods includes the
benefit from tax-exempt
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, 2013
and December 31, 2012 were primarily impacted by $155 million
and $149 million, respectively, in tax credits, $9 million and $19
million, respectively, of non-cash charges relating to previously
recognized tax benefits associated with stock-based compensation
that were not realized, and $27 million and $46 million, respectively,
of tax-exempt income, which includes net interest income on tax-
exempt investments, income on life insurance policies held by the
efficiency ratio (noninterest expense divided by the sum of net
interest income (FTE) and noninterest income) was 58.2% for 2013
compared to 61.7% in 2012.
Bancorp, and certain gains on the sale of leases that are exempt
from federal taxation.
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, 2013, the
Bancorp recorded additional income tax expense of approximately
$9 million related to the write-off of a portion of the deferred tax
asset previously established.
As a result of the Bancorp’s stock price at December 31, 2013,
the Bancorp does not believe it will need to recognize a material
non-cash charge to income tax expense over the next twelve
months related to stock-based awards. However, the Bancorp
cannot predict its stock price or whether its employees will exercise
other stock-based awards with lower exercise prices in the future.
Therefore, it is possible the Bancorp may need to recognize a non-
cash charge to income tax expense in the future.
The Bancorp’s income before income taxes, applicable income tax expense and effective tax rate are as follows:
TABLE 12: APPLICABLE INCOME TAXES
For the years ended December 31 ($ in millions)
Income before income taxes
Applicable income tax expense
Effective tax rate
$
2013
2,598
772
29.7 %
2012
2,210
636
28.8
2011
1,831
533
29.1
2010
940
187
19.8
2009
767
30
3.9
42 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 30 of the Notes to Consolidated
Financial Statements. Results of the Bancorp’s business segments
are presented based on its management structure and management
accounting practices. The structure and accounting practices are
specific to the Bancorp; therefore, the financial results of the
Bancorp’s business segments are not necessarily comparable with
similar information for other financial institutions. The Bancorp
refines its methodologies from time to time as management’s
accounting practices 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 and deposit products. 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 income by business segment is summarized in the following table:
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, 2013 to reflect the current
market rates and updated duration assumptions. These rates were
generally higher than those in place during 2012, thus net interest
income for deposit providing businesses was positively impacted
during 2013.
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 13: 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
2013
2012
2011
$
$
766
255
183
68
554
1,826
(10)
1,836
37
1,799
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
43 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:
$
2013
2012
2011
1,507
187
1,449
223
TABLE 14: COMMERCIAL BANKING
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income (FTE)(a)
Provision for loan and lease losses
Noninterest income:
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(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 $20 for the year ended December 31, 2013 and $17 for the years ended December 31, 2012 and 2011.
45,035
15,255
6,908
4,284
1,299
1,467
41,364
15,046
7,613
2,669
1,793
1,282
38,384
13,130
7,901
2,776
1,778
1,581
240
833
452
11
441
268
838
857
163
694
273
870
957
191
766
386
242
152
332
207
102
395
225
117
1,374
490
$
$
Applicable Income Taxes section of the MD&A for additional information.
Comparison of 2013 with 2012
Net income was $766 million for the year ended December 31,
2013, compared to net income of $694 million for the year ended
December 31, 2012. The increase in net income was primarily
driven by increases in net interest income and noninterest income
and a decrease in the provision for loan and lease losses, partially
offset by higher noninterest expense.
Net interest income increased $58 million primarily due to an
increase in interest income related to an increase in average
commercial and industrial portfolio loans, a decrease in the FTP
charges on loans and an increase in FTP credits due to an increase
in savings and money market deposits, partially offset by a decrease
in yields of 29 bps on average commercial loans and a decrease in
average commercial mortgage portfolio loans.
Provision for loan and lease losses decreased $36 million from
2012 as a result of improved credit trends. Net charge-offs as a
percent of average portfolio loans and leases decreased to 42 bps for
2013 compared to 54 bps for 2012.
Noninterest income increased $43 million from 2012 to 2013,
due to increases in service charges on deposits and other noninterest
income, partially offset by a decrease in corporate banking revenue.
Service charges on deposits increased $17 million from 2012
primarily driven by commercial deposit revenue which increased
due to fee repricing and the acquisition of new customers. The
increase in other noninterest income was primarily due to decreases
in negative valuation adjustments on OREO, increases in operating
lease income, and decreases in negative valuation adjustments on
loans held for sale, partially offset by decreases in gains on loan
sales. The decrease in corporate banking revenue was primarily
driven by a decrease in lease remarketing and letter of credit fees,
44 Fifth Third Bancorp
partially offset by increases in syndication, business lending and
foreign exchange fees.
Noninterest expense increased $37 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 $5 million was primarily the result of an increase in base
compensation primarily driven by improved production levels. The
increase from 2012 to 2013 in other noninterest expense was driven
by increases in both impairment on affordable housing investments
and operating lease expense. These increases were partially offset by
a decrease in loan and lease expense, primarily due to a decrease in
legal costs related to OREO, and a decrease in corporate overhead
allocations.
Average commercial loans increased $3.7 billion compared to
the prior year primarily due to an increase in average commercial
and industrial loans, partially offset by a decrease in average
commercial mortgage loans. Average commercial and industrial
portfolio loans increased $4.8 billion as a result of an increase in
new origination activity from an increase in demand due to a
strengthening economy and targeted marketing efforts. Average
commercial mortgage portfolio loans decreased $1.1 billion due to
continued run-off as the level of new originations was less than the
repayments of the existing portfolio.
Average core deposits increased $1.3 billion compared to 2012.
The increase was primarily driven by strong growth in savings and
money market deposits, which increased $1.6 billion, and demand
deposits, which increased $209 million, compared to the prior year,
partially offset by a decrease in interest checking deposits of $705
million.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Branch Banking
Branch Banking provides a full range of deposit and loan and lease
products to individuals and small businesses through 1,320 full-
service Banking Centers. Branch Banking offers depository and loan
products, such as checking and savings accounts, home equity loans
Noninterest expense increased $33 million from 2011 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
origination activity, partially offset by decreases
in average
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 $698 million as
customers opted to maintain their balances in more liquid accounts
due to interest rates remaining near historical lows.
and lines of credit, credit cards and loans for automobiles and other
personal financing needs, as well as products designed to meet the
specific needs of small businesses, including cash management
services.
The following table contains selected financial data for the Branch Banking segment:
TABLE 15: BRANCH BANKING
For the years ended December 31 ($ in millions)
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
2013
2012
2011
$
1,461
217
1,362
294
1,423
393
304
291
148
111
584
243
126
752
393
138
255
294
279
129
110
573
241
115
663
288
102
186
309
305
117
106
581
235
114
645
292
102
190
15,223
4,534
12,611
9,028
22,813
4,712
14,926
4,569
10,087
9,262
22,729
5,389
14,151
4,621
8,408
8,086
22,241
7,778
$
$
Comparison of 2013 with 2012
Net income was $255 million for the year ended December 31,
2013, compared to net income of $186 million for the year ended
December 31, 2012. The increase in net income of $69 million was
driven by an increase in net interest income and noninterest income
and a decline in the provision for loan and lease losses, partially
offset by an increase in noninterest expense.
45 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net interest income increased $99 million compared to the
prior year primarily driven by an increase in the FTP credits due to
an increase in savings and money market and interest checking
deposits, a decrease in the FTP charges on loans and leases, a
decline in interest expense on core deposits due to favorable shifts
from certificates of deposit to lower cost transaction deposits and
an increase in average consumer loans and leases. These increases to
net interest income were partially offset by lower yields on average
commercial loans.
Provision for loan and lease losses for 2013 decreased $77
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 110 bps for 2013 compared to 151 bps for 2012.
Noninterest income increased $42 million compared to the
prior year. The increase was primarily driven by increases in
investment advisory revenue, card and processing revenue and
service charges on deposits. Investment advisory revenue increased
$19 million from 2012 primarily due to increased securities and
brokerage fees due to an increase in equity and bond market values.
Card and processing revenue increased $12 million compared to the
prior year due to higher transaction volumes, higher levels of
consumer spending and the benefit of new products. Service
charges on deposits increased $10 million from 2012 primarily due
to an increase in account maintenance fees due to the full year
impact of new deposit product offerings.
Noninterest expense increased $113 million compared to the
prior year, primarily driven by increases in salaries, incentives and
benefits, card and processing expense and other noninterest
expense. Salaries, incentives and benefits increased compared to the
prior year primarily due to an increase in bonus and incentive
compensation associated with improved securities and brokerage
revenue. Card and processing expense increased from 2012 due
primarily to increases in debit and credit card transaction volumes,
consumer spending, fraud insurance costs and credit card rewards
expense. The increase in other noninterest expense was primarily
due to increases in corporate overhead allocations during 2013
compared to 2012.
Average consumer loans increased $297 million in 2013
primarily due to increases in average residential mortgage portfolio
loans of $942 million compared to the prior year as a result of
continued retention of certain shorter term residential mortgage
loans. In addition, average credit card loans increased due to
increases in average balances per account and the volume of new
customers. These increases were partially offset by decreases in
average home equity portfolio loans of $743 million from 2012 as
payoffs exceeded new loan production.
Average core deposits increased $1.8 billion compared to the
prior year as the growth in demand deposits due to excess customer
liquidity and a continued low interest rate environment was partially
offset by the run-off of higher priced other time deposits.
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 2011 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 2011 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 was primarily due to decreases in home equity net charge-
offs as a result of improvements in several key markets. In addition,
net charge-offs were positively impacted by lower commercial net
charge-offs due to improved delinquency trends, aggressive line
management, and stabilization in unemployment levels.
Noninterest income decreased $25 million compared to 2011.
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
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 $1.4 billion
compared to 2011 as the growth in transaction accounts due to
excess customer liquidity and historically low interest rates outpaced
the runoff of higher priced other time deposits.
Consumer Lending
Consumer Lending includes the Bancorp’s mortgage, home equity,
automobile and other indirect lending activities. Mortgage and home
equity lending activities include the origination, retention and
servicing of mortgage and home equity loans or lines of credit, sales
and securitizations of those loans, pools of loans or lines of credit,
and all associated hedging activities. Indirect lending activities
loans to consumers through mortgage brokers and
include
automobile dealers.
46 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table contains selected financial data for the Consumer Lending segment:
TABLE 16: CONSUMER LENDING
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Mortgage banking net revenue
Other noninterest income
Noninterest expense:
Salaries, incentives and benefits
Other noninterest expense
Income before taxes
Applicable income tax expense
Net income
Average Balance Sheet Data
Residential mortgage loans, including held for sale
Home equity
Automobile loans, including held for sale
Other consumer loans and leases
Comparison of 2013 with 2012
Net income was $183 million in 2013 compared to net income of
$223 million in 2012. The decrease was driven by a decrease in
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 $2 million from 2012 due
primarily to lower yields on average residential mortgage and
automobile loans, partially offset by a decrease in FTP charges on
loans and leases and increases in average residential mortgage and
average automobile loans.
The provision for loan and lease losses decreased $84 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 46 bps for
2013 compared to 88 bps for 2012.
Noninterest
income decreased $128 million from 2012
primarily due to a decrease in mortgage banking net revenue of $143
million, partially offset by an increase in other noninterest income of
$15 million. The decrease in mortgage banking net revenue was
primarily due to a decrease in gains on loan sales of $368 million as
a result of a decrease in profit margins on sold residential mortgage
loans coupled with a decrease
loan
originations, partially offset by a $223 million increase in net
residential mortgage servicing revenue. The
in net
residential mortgage servicing revenue was driven by an increase of
$202 million in net valuation adjustments on MSRs and free-
standing derivatives entered into to economically hedge the MSRs
and a decrease of $20 million in servicing rights amortization. The
increase in other noninterest income was primarily due to a $12
million increase in securities gains and a $7 million decline in losses
on the sale of OREO.
in residential mortgage
increase
Noninterest expense increased $15 million driven by an
increase of $31 million in other noninterest expense, partially offset
by a decrease of $16 million in salaries, incentives and benefits
compared to the prior year. The increase in other noninterest
expense was primarily due to higher litigation expense and an
increase in corporate overhead allocations, partially offset by a
decrease in loan and lease expense due to lower appraisal costs. The
decrease in salaries, incentives and benefits was due to a decline in
incentive compensation driven primarily by a decline in originations
during 2013 compared to 2012, partially offset by an increase in
deferred compensation for 2013 compared to 2012.
$
$
$
2013
2012
2011
312
92
687
61
215
470
283
100
183
314
176
830
46
231
439
344
121
223
343
261
585
45
183
443
86
30
56
10,222
560
11,409
16
10,143
643
11,191
30
9,348
730
10,665
156
Average consumer loans and leases increased $200 million
from the prior year. Average residential mortgage loans, including
held for sale, increased $79 million for 2013 compared to 2012 due
to strong refinancing activity that occurred in the first half of 2013.
Average automobile loans increased $218 million for the current
year compared to the prior year due to an increase in originations
primarily driven by modest improvement in general economic
conditions and a continued low interest rate environment. Average
home equity portfolio loans decreased $83 million for 2013
compared to 2012 as payoffs exceeded new loan production.
Average other consumer loans and leases decreased $14 million in
the current year resulting from a decrease in average consumer
leases due to run-off as the Bancorp discontinued automobile
leasing in 2008, partially offset by an increase in average other
consumer loans.
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 2011 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.
47 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
2011. 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
$126 million due to runoff as the Bancorp discontinued this product
in the fourth quarter of 2008.
Investment Advisors
Investment Advisors provides a full range of investment alternatives
individuals, companies and not-for-profit organizations.
for
Investment Advisors is made up of four main businesses: FTS, an
indirect wholly-owned subsidiary of the Bancorp; ClearArc Capital,
Inc. (formerly FTAM), an indirect wholly-owned subsidiary of the
Bancorp; Fifth Third Private Bank; and Fifth Third Institutional
Services. FTS offers full service retail brokerage services to
individual clients and broker dealer services to the institutional
marketplace. ClearArc Capital, Inc. provides asset management
services and previously advised the Bancorp’s proprietary family of
mutual funds. Fifth Third Private Bank offers holistic strategies to
affluent clients in wealth planning, investing, insurance and wealth
protection. Fifth Third Institutional Services provides advisory
services for institutional clients including states and municipalities.
The following table contains selected financial data for the Investment Advisors segment:
TABLE 17: INVESTMENT ADVISORS
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Investment advisory revenue
Other noninterest income
Noninterest expense:
Salaries, incentives and benefits
Other noninterest expense
Income before taxes
Applicable income tax expense
Net income
Average Balance Sheet Data
Loans and leases
Core deposits
Comparison of 2013 with 2012
Net income was $68 million in 2013 compared to net income of $43
million for 2012. The increase in net income was primarily due to
increases in net interest income and 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 $37 million from 2012 due to an
increase in FTP credits resulting from an increase in interest
checking deposits.
Provision for loan and lease losses decreased $8 million from
the prior year. Net charge-offs as a percent of average loans and
leases decreased to 9 bps compared to 53 bps for the prior year
reflecting improved credit trends during 2013.
Noninterest income increased $10 million compared to 2012
due to an increase in investment advisory revenue, partially offset a
decrease in other noninterest income. The increase in investment
advisory revenue was primarily driven by increases in securities and
brokerage fees and private client service fees due to strong
production and an increase in equity and bond market values. The
decrease in other noninterest income was due to a decrease in gains
on sales of held for sale loans and the impact of the gain on the sale
of certain FTAM funds in the third quarter of 2012.
Noninterest expense increased $16 million compared to 2012
due to an increase in other noninterest expense primarily driven by
increases in corporate allocations and fraud losses.
Average loans and leases increased $137 million compared to
the prior year primarily driven by increases in average residential
mortgage, average other consumer and average commercial and
48 Fifth Third Bancorp
2013
2012
2011
154
2
384
22
159
294
105
37
68
117
10
366
30
161
276
66
23
43
113
27
364
9
164
257
38
14
24
2,014
8,815
1,877
7,709
2,037
6,798
$
$
$
industrial loans, partially offset by a decrease in average commercial
mortgage loans. Average core deposits increased $1.1 billion
compared to 2012 due to growth in interest checking as customers
have opted to maintain excess funds in liquid transaction accounts
as a result of the low interest rate environment.
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
2011. Net charge-offs as a percent of average loans and leases
decreased to 53 bps compared to 132 bps for 2011 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Average loans and leases decreased $160 million compared to
2011. 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.
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 2013 with 2012
Results for 2013 and 2012 were impacted by a benefit of $269
million and $400 million, respectively, due to reductions in the
ALLL. The decrease in provision expense was primarily due to a
decrease in nonperforming loans and leases and improvements in
delinquency metrics and underlying loss trends. Net interest income
decreased from $370 million in 2012 to $147 million for 2013
primarily due to a decrease in FTP charges partially offset by a
decrease in interest expense on long-term debt. Noninterest income
increased $278 million compared to the prior year primarily due to
positive valuation adjustments on the stock warrant associated with
Vantiv Holding, LLC which increased $139 million in 2013
compared to 2012. In addition, gains of $242 million and $85
million were recognized on the sales of Vantiv, Inc. shares in the
second and third quarters of 2013, respectively, compared to gains
of $115 million related to the Vantiv, Inc. IPO and $157 million on
the sales of Vantiv, Inc. shares in 2012. The Bancorp also
recognized a gain of $9 million associated with a tax receivable
agreement with Vantiv, Inc. in the fourth quarter of 2013. The
equity method earnings from the Bancorp’s interest in Vantiv
Holding, LLC increased $16 million from 2012.
in
Noninterest expense decreased $284 million compared to 2012
due to decreases in other noninterest expense and total personnel
costs. Other noninterest expense decreased due to a decrease in
debt extinguishment costs, an increase in corporate overhead
allocations assigned to the segments, a decrease in loan and lease
expense and a decrease
losses and adjustments. Debt
extinguishment costs decreased $161 million during 2013 compared
to the prior year. During the fourth quarter of 2013, the Bancorp
incurred $8 million of debt extinguishment costs associated with the
redemption of outstanding TruPS issued by Fifth Third Capital
Trust IV. During 2012, the Bancorp incurred $160 million of debt
extinguishment costs associated with the redemption of certain
TruPS and the termination of certain FHLB debt. Loan and lease
expense decreased $72 million during 2013 compared to 2012
primarily due to a decrease in loan closing fees due to a decline in
mortgage originations. Losses and adjustments decreased $17
million compared to 2012 primarily driven by a decline in the
provision for representation and warranty claims partially offset by
an increase in litigation expense. The provision for representation
and warranty claims changed from a $49 million expense for the
year ended December 31, 2012 to a benefit of $39 million for the
year ended December 31, 2013 due to the Bancorp recording
significant additions to the reserve in 2012 as the result of additional
information obtained from FHLMC regarding their file selection
criteria which enabled the Bancorp to better estimate the losses that
were probable on loans sold to FHLMC with representation and
warranty provisions. In addition, 2013 included a decrease in the
representation and warranty reserve due to improving underlying
repurchase metrics and the settlement with FHLMC. The decrease
in representation and warranty expense was partially offset by a $54
litigation expense. Total personnel costs
million
decreased $38 million from 2012 due primarily to decreases in
incentive compensation and employee benefits.
increase
in
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
in 2012 due to a benefit in the FTP rate. The change in net income
for 2012 compared to 2011 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 2011.
49 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOURTH QUARTER REVIEW
The Bancorp’s 2013 fourth quarter net income available to common
shareholders was $383 million, or $0.43 per diluted share, compared
to net income available to common shareholders of $421 million, or
$0.47 per diluted share, for the third quarter of 2013 and net income
available to common shareholders of $390 million, or $0.43 per
diluted share, for the fourth quarter of 2012. Fourth quarter 2013
earnings included a $91 million positive adjustment on the valuation
of the warrant associated with the sale of Vantiv Holding, LLC, $69
million in net charges to increase litigation reserves, an $18 million
charge related to the valuation of the total return swap entered into
as part of the 2009 sale of Visa, Inc. Class B shares and $8 million of
debt extinguishment costs associated with the redemption of TruPS
issued by Fifth Third Capital Trust IV. Third quarter 2013 results
included an $85 million gain on the sale of Vantiv Inc. shares, $30
million in net charges to increase litigation reserves and a $6 million
positive adjustment on the valuation of the warrant associated with
the sale of Vantiv Holding, LLC. Fourth quarter 2012 earnings
included a $157 million gain on the sale of Vantiv Inc. 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 file requests. The ALLL as a percentage of
portfolio loans and leases was 1.79% as of December 31, 2013,
compared to 1.92% as of September 30, 2013 and 2.16% as of
December 31, 2012.
Fourth quarter 2013 net interest income of $905 million
increased $7 million from the third quarter of 2013 and $2 million
from the same period a year ago. Interest income increased $10
million from the third quarter of 2013 primarily driven by higher
balances and yields on investment securities. Interest expense
increased $3 million from the third quarter of 2013 primarily driven
by the issuance of $2.5 billion of long-term debt during the quarter,
partially offset by the benefit from high-priced CDs that matured
in
increase
during the quarter. The
comparison to the fourth quarter of 2012 was driven by higher
average loan balances, lower long-term debt expense due to a
reduction in higher cost average long-term debt and run-off of
higher priced CDs, partially offset by lower yields on interest-
earning assets.
interest
income
in net
Fourth quarter 2013 noninterest income of $703 million
decreased $18 million compared to the third quarter of 2013 and
$177 million compared to the fourth quarter of 2012. The decrease
from the third quarter of 2013 was primarily due to lower corporate
banking revenue and other noninterest income. The year-over year
decline was primarily the result of lower mortgage banking net
revenue, corporate banking revenue and other noninterest income.
Mortgage banking net revenue was $126 million in the fourth
quarter of 2013, compared to $121 million in the third quarter of
2013 and $258 million in the fourth quarter of 2012. Fourth quarter
2013 originations were $2.6 billion, compared with $4.8 billion in
the previous quarter and $7.0 billion in the fourth quarter of 2012.
Fourth quarter 2013 originations resulted in gains of $60 million on
mortgages sold, compared with gains of $74 million during the
previous quarter and $239 million during the fourth quarter of 2012.
The decrease from the prior quarter reflected the lower production
partially offset by increased gain on sale margins, while the decrease
from the prior year reflected lower production and lower gain on
sale margins. Mortgage servicing fees were $63 million in both the
fourth and third quarters of 2013 compared with $64 million in the
fourth quarter of 2012. Mortgage banking net revenue is also
affected by net servicing asset valuation adjustments, which include
MSR amortization and MSR valuation adjustments, including mark-
to
to-market adjustments on free-standing derivatives used
50 Fifth Third Bancorp
economically hedge the MSR portfolio. These net servicing asset
valuation adjustments were positive $2 million in the fourth quarter
of 2013, negative $16 million in the third quarter of 2013 and
negative $45 million in the fourth quarter of 2012. Net gains on
nonqualifying hedges on MSRs were zero in the fourth quarter of
2013, compared with net gains of $5 million in the third quarter of
2013 and net losses of $2 million in the fourth quarter of 2012.
Service charges on deposits of $142 million increased $2
million from the previous quarter and $8 million compared to the
fourth quarter of 2012. Retail service charges were flat compared to
the previous quarter and increased six percent from the fourth
quarter of 2012. The year over-year increase was primarily related to
the transition to the Bancorp’s new and simplified deposit product
offerings. Commercial service charges increased two percent from
the previous quarter and six percent from a year ago primarily as a
result of new customer accounts and higher treasury management
fees.
Corporate banking revenue of $94 million decreased $8 million
from the previous quarter and $20 million from the fourth quarter
of 2012. The decrease from the third quarter of 2013 was primarily
driven by lower lease remarketing fees and syndication fees, partially
offset by higher institutional sales revenue, foreign exchange fees
and business lending fees. The year-over-year decline was primarily
driven by lower lease remarketing fees, syndication fees, derivative
fees and letter of credit fees, which benefited the year-ago quarter
due to higher activity in anticipation of changes to tax rules. The
decline in lease remarketing fees was driven by a $9 million write-
down of equipment value on an operating lease during the fourth
quarter of 2013.
Investment advisory revenue of $98 million increased $1
million from the previous quarter and $5 million from the fourth
quarter of 2012. The increase from the third quarter of 2013 and
from the previous year was attributable to higher brokerage fees and
private client services revenue reflecting strong production and
market performance. These increases were partially offset by a
decrease in institutional trust fees.
Card and processing revenue of $71 million increased $2
million compared to the third quarter of 2013 and $5 million from
the fourth quarter of 2012. Both increases were driven by higher
transaction volumes.
Other noninterest income of $170 million decreased $15
million compared to the third quarter of 2013 and $45 million from
the fourth quarter of 2012. Fourth quarter 2013 results included a
$91 million positive valuation adjustment on the Vantiv Holding,
LLC warrant as well as $9 million in payments received pursuant to
Fifth Third’s tax receivable agreement with Vantiv Holding, LLC.
This compares with an $85 million gain on the sale of Vantiv Inc.
shares and a $6 million positive warrant valuation adjustment in the
third quarter of 2013, and a $157 million gain on the sale of Vantiv
Inc. shares and a $19 million negative warrant valuation adjustment
in the fourth quarter of 2012. Quarterly results also included charges
related to the valuation of the total return swap entered into as part
of the 2009 sale of Visa, Inc. Class B shares. Negative valuation
adjustments on this swap were $18 million, $2 million, and $15
million in the fourth quarter of 2013, the third quarter of 2013 and
the fourth quarter of 2012, respectively.
The net gain on investment securities was $2 million in the
fourth and third quarters of 2013 and the fourth quarter of 2012.
Noninterest expense of $989 million increased $30 million
from the previous quarter and decreased $174 million from the
fourth quarter of 2012. Fourth quarter 2013 expenses included $69
million in charges to increase litigation reserves, a $25 million
benefit associated with the mortgage representation and warranty
reserve, $8 million of debt extinguishment costs associated with the
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
redemption of Fifth Third Capital Trust IV TruPS, an $8 million
contribution to Fifth Third Foundation, and $8 million in severance
expense. Third quarter 2013 expenses included $30 million in
charges to increase litigation reserves, $5 million in severance
expense, $5 million in large bank assessment fees and a $3 million
benefit associated with the mortgage representation and warranty
reserve due to improving underlying purchase metrics. Fourth
quarter 2012 expenses included $134 million of debt extinguishment
costs associated with the termination of $1 billion of FHLB debt,
$38 million of expenses associated with the mortgage representation
and warranty reserve and $13 million in charges to increase litigation
reserves.
TABLE 18: QUARTERLY INFORMATION (unaudited)
Net charge-offs were $148 million in the fourth quarter of
2013, or 67 bps of average loans on an annualized basis, compared
with net charge-offs of $109 million in the third quarter 2013 and
$147 million in the fourth quarter 2012. During the fourth quarter
of 2013, the Bancorp restructured a single large credit resulting in a
charge-off of $43 million. Additionally, during the fourth quarter of
2013, the Bancorp modified its charge-off policy for home equity
loans and lines of credit to assess for a charge-off when such loans
have been past due 120 days if the senior lien is also 120 or more
days past due. This resulted in additional home equity net charge-
offs of $6 million.
For the three months ended ($ 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
2013
2012
12/31
$ 905
53
703
989
402
383
0.44
0.43
9/30
898
51
721
959
421
421
0.47
0.47
6/30
885
64
1,060
1,035
591
582
0.67
0.65
3/31
893
62
743
978
422
413
0.47
0.46
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
COMPARISON OF THE YEAR ENDED 2012 WITH 2011
The Bancorp’s net income available to common shareholders for
the year ended December 31, 2012 was $1.5 billion, or $1.66 per
diluted share, which was net of $35 million in preferred stock
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. Overall, credit
trends improved in 2012, and as a result, the provision for loan and
lease losses decreased to $303 million in 2012 compared to $423
million in 2011.
Net interest income was $3.6 billion for the years ended
December 31, 2012 and 2011. Net interest income was positively
impacted in 2012 by an increase in average loans and leases of $4.6
billion as well as a decrease in interest expense compared to the year
ended December 31, 2011. Average interest-earning assets increased
$4.0 billion in 2012 while average interest-bearing liabilities were
relatively flat compared to the prior year. In addition, net interest
income in 2012 compared to the prior year was negatively impacted
by a 28 bps decrease in average yield on average interest-earning
assets partially offset by a 21 bps decrease in the average rate paid
on interest bearing liabilities, coupled with a mix shift to lower cost
deposits.
Noninterest income increased $544 million, or 22%, in 2012
compared to 2011. The increase from the prior year was primarily
due to an increase in mortgage banking net revenue, corporate
banking revenue and other noninterest income partially offset by a
decrease in card and processing revenue. Mortgage banking net
revenue increased $248 million, or 41%, primarily due to an increase
in origination fees and gains on loan sales partially offset by an
increase in losses on net valuation adjustments on servicing rights
and free-standing derivatives entered into to economically hedge the
MSR portfolio. Corporate banking revenue increased $63 million, or
18%, primarily due to increases in syndication fees, business lending
fees, lease remarketing fees and institutional sales. Other noninterest
income increased $324 million primarily due to a $115 million gain
from the Vantiv, Inc. IPO recognized in the first quarter of 2012
and a $157 million gain from the sale of Vantiv, Inc. shares in the
fourth quarter of 2012. Card and processing revenue decreased $55
million, or 18%, primarily as the result of the full year impact of the
implementation of the Dodd-Frank Act’s debit card interchange fee
cap in the fourth quarter of 2011.
Noninterest expense increased $323 million, or nine percent, in
2012 compared to 2011 primarily due to an increase of $170 million
in total personnel costs (salaries, wages and incentives plus
employee benefits); an increase of $53 million in the provision for
representation and warranty claims related to residential mortgage
loans sold to third parties; an increase of $177 million in debt
extinguishment costs; and a $44 million decrease in the benefit from
the provision for unfunded commitments and letters of credit. This
activity was partially offset by an $87 million decrease in FDIC
insurance and other taxes.
Net charge-offs as a percent of average portfolio loans and
leases decreased to 0.85% during 2012 compared to 1.49% during
2011 largely due to improved credit trends across all commercial
and consumer loan types, excluding commercial leases.
The Bancorp took a number of actions that impacted its capital
position in 2012. On March 13, 2012, the Bancorp announced the
results of its capital plan submitted to the FRB as part of the 2012
CCAR. The FRB indicated to the Bancorp that it did not object to
the following capital actions: a continuation of its quarterly common
dividend of $0.08 per share; the redemption of up to $1.4 billion in
certain TruPS and the repurchase of common shares in an amount
equal to any after-tax gains realized by the Bancorp from the sale of
Vantiv, Inc. common shares by either the Bancorp or Vantiv, Inc.
The FRB indicated to the Bancorp that it did object to other
elements of its capital plan, including potential increases in its
quarterly common dividend and the initiation of other common
share repurchases.
The Bancorp resubmitted its capital plan to the FRB in the
second quarter of 2012. The resubmitted plan included capital
actions and distributions for the covered period through March 31,
2013 that were substantially similar to those included in the original
submission, with adjustments primarily reflecting the change in the
expected timing of capital actions and distributions relative to the
timing assumed in the original submission. On August 21, 2012, the
51 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
per share, an increase of $0.02 per share from the second quarter of
2012.
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. 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 Bancorp recognized a $17 million loss on
extinguishment within other noninterest expense in the Bancorp’s
Consolidated Statements of Income.
Additionally, the Bancorp entered into a number of accelerated
share repurchase transactions in 2012. See Note 23 of the Notes to
Consolidated Financial Statements for more information on the
accelerated share repurchase transactions.
52 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 19 summarizes end of period loans and
leases, including loans held for sale and Table 20 summarizes
average total loans and leases, including loans held for sale.
$
2013
TABLE 19: COMPONENTS OF TOTAL 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)
13,570
9,246
11,984
2,294
381
37,475
89,558
88,614
39,347
8,069
1,041
3,626
52,083
$
$
2012
2011
2010
2009
36,077
9,116
707
3,549
49,449
14,873
10,018
11,972
2,097
312
39,272
88,721
85,782
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
Loans and leases, including loans held for sale, increased $837
million, or one percent, from December 31, 2012. The increase in
loans and leases from December 31, 2012 was the result of a $2.6
billion, or five percent, increase in commercial loans and leases
partially offset by a $1.8 billion, or five percent, decrease in
consumer loans and leases.
The increase in commercial loans and leases from December
31, 2012 was primarily due to an increase in commercial and
industrial loans and commercial construction loans partially offset
by a decrease in commercial mortgage loans. Commercial and
industrial loans increased $3.3 billion, or nine percent, from
December 31, 2012 and commercial construction loans increased
$334 million, or 47%, from December 31, 2012 as a result of an
increase in new loan origination activity from an increase in demand
due to a strengthening economy and targeted marketing efforts.
Commercial mortgage loans decreased $1.0 billion, or 11%, from
December 31, 2012 due to continued runoff as the level of new
originations was less than the repayments on the current portfolio.
The decrease in consumer loans and leases from December 31,
2012 was primarily due to a decrease in residential mortgage and
home equity loans partially offset by an increase in credit card loans.
Residential mortgage loans decreased $1.3 billion, or nine percent,
from December 31, 2012 primarily due to a decline in loans held for
sale of $2.0 billion from reduced origination volumes driven by
higher mortgage rates. This decline was partially offset by an
increase in portfolio residential mortgage loans which increased
$663 million from December 31, 2012 due to the continued
retention of certain shorter term residential mortgage
loans
originated through the Bancorp’s retail branches. Home equity loans
decreased $772 million, or eight percent, from December 31, 2012
as payoffs exceeded new loan production. Credit card loans
increased $197 million, or nine percent, from December 31, 2012
due to an increase in average balances per account and the volume
of new customer accounts.
$
2013
2012
TABLE 20: COMPONENTS OF AVERAGE TOTAL LOANS AND LEASES (INCLUDES HELD FOR SALE)
For the years ended 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 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
14,428
9,554
12,021
2,121
360
38,484
89,093
86,950
32,911
9,686
835
3,502
46,934
37,770
8,481
793
3,565
50,609
$
$
2011
2010
2009
28,546
10,447
1,740
3,341
44,074
11,318
11,077
11,352
1,864
529
36,140
80,214
78,533
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
Average loans and leases, including held for sale, increased $4.3
billion, or five percent, from December 31, 2012. The increase from
December 31, 2012 was comprised of an increase of $3.7 billion, or
eight percent, in average commercial loans and leases and an
increase of $596 million, or two percent, in average consumer loans
and leases.
53 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The increase in average commercial loans and leases was
primarily driven by an increase in average commercial and industrial
loans partially offset by a decrease in average commercial mortgage
loans. Average commercial and industrial loans increased $4.9
billion, or 15%, from December 31, 2012 due to an increase in new
loan origination activity from an increase in demand due to a
strengthening economy and targeted marketing efforts. Average
commercial mortgage loans decreased $1.2 billion, or 12%, from
December 31, 2012 due to continued runoff as the level of new
originations was less than the repayments on the current portfolio.
The increase in average consumer loans and leases from
December 31, 2012 was driven by an increase in average residential
mortgage loans, average automobile loans, and average credit card
loans partially offset by a decrease in average home equity loans.
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, 2013, total investment
securities were $19.1 billion compared to $15.7 billion at December
31, 2012. 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, 2013, 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
Average residential mortgage loans increased $1.1 billion, or eight
percent, from December 31, 2012 due to strong refinancing activity
during the first half of 2013 and due to the continued retention of
certain shorter term residential mortgage loans originated through
the Bancorp’s retail branches. Average automobile loans increased
$172 million, or one percent, from December 31, 2012 due to loan
originations exceeding runoff, partially offset by the impact of the
securitization and sale of $509 million of automobile loans in the
first quarter of 2013. Average credit card loans increased $161
million, or eight percent, from December 31, 2012 due to an
increase in average balances per account and the volume of new
customer accounts. Average home equity loans decreased $815
million, or eight percent, from December 31, 2012 as payoffs
exceeded new loan production.
mortgage loans in its investment portfolio. Additionally, securities
immaterial as of
investment grade were
classified as below
December 31, 2013 and had a carrying value of $31 million as of
December 31, 2012.
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, 2013, 2012, and 2011, the Bancorp recognized $74 million, $58
million and $19 million of OTTI on its available-for-sale and other
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, 2013, 2012 or 2011.
$
2013
2012
2009
2010
2011
TABLE 21: 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)
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 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
171
1,782
96
9,743
1,792
1,030
14,614
41
1,730
203
8,403
3,161
1,033
14,571
225
1,564
170
10,570
1,338
1,052
14,919
464
2,143
240
11,074
2,541
1,417
17,879
26
1,523
187
12,294
3,514
865
18,409
-
-
9
11
13
144
177
1
6
17
7
15
161
207
-
-
57
24
205
69
355
1
-
21
8
120
144
294
1
4
13
3
7
315
343
320
2
322
282
2
284
348
5
353
207
1
208
350
5
355
$
$
$
$
$
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, 2013, available-for-sale securities on an
amortized cost basis increased $3.8 billion, or 26%, from December
31, 2012 due to a increase in agency mortgage-backed securities and
other bonds, notes and debentures partially offset by an decrease in
U.S. Government sponsored agencies. Agency mortgage-backed
securities increased $3.9 billion, or 46%, from December 31, 2012
due to $15.0 billion in purchases of agency mortgage-backed
securities partially offset by $8.4 billion in sales and $2.7 billion in
paydowns on the portfolio during the year ended December 31,
2013. Other bonds, notes, and debentures increased $353 million, or
11%, due to the purchase of $1.6 billion of asset backed securities,
collateralized loan obligations and collateralized mortgage backed
securities partially offset by the sale of $1.1 billion of asset backed
securities, collateralized loan obligations and corporate bonds and
$126 million of paydowns and TruPS that were called during the
year ended December 31, 2013. U.S. Government sponsored
agencies securities decreased $207 million, or 12%, primarily due to
approximately $204 million of agency debentures that were called in
2013.
At December 31, 2013 and 2012, available-for-sale securities
were 16% and 14% of total interest-earning assets. The estimated
weighted-average life of the debt securities in the available-for-sale
54 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
portfolio was 6.7 years at December 31, 2013, compared to 3.8 years
at December 31, 2012. In addition, at December 31, 2013, the
available-for-sale securities portfolio had a weighted-average yield of
3.39%, compared to 3.30% at December 31, 2012.
Information presented in Table 22 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
information
maturity. Total net unrealized gains on the available-for-sale
securities portfolio were $188 million at December 31, 2013,
compared to $636 million at December 31, 2012. The decrease from
December 31, 2012 was primarily due to an increase in interest rates
during 2013. The fair value of investment securities is impacted by
interest rates, credit spreads, market volatility and
liquidity
conditions. The fair value of
investment securities generally
decreases when interest rates increase or when credit spreads widen.
TABLE 22: CHARACTERISTICS OF AVAILABLE-FOR-SALE AND OTHER SECURITIES
Weighted-Average Weighted-Average
$
Yield
3.0
3.0
Fair Value
25
1
26
25
1
26
1,523
1,523
1,644
1,644
Life (in years)
2.7
5.4
2.7
Amortized Cost
0.82 %
1.50
0.83
As of December 31, 2013 ($ in millions)
U.S. Treasury and government agencies:
Average life 1 – 5 years
Average life 5 – 10 years
Total
U.S. Government sponsored agencies:
Average life 1 – 5 years
Total
Obligations of states and political subdivisions:(a)
Average life 1 – 5 years
Average life 5 – 10 years
Average life greater than 10 years
Total
Agency mortgage-backed securities:
Average life of one year or less
Average life 1 – 5 years
Average life 5 – 10 years
Average life greater than 10 years
Total
Other bonds, notes and debentures:
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 0.01%, 0.89%, 2.06% and 0.37% for securities with an average life of 1-5 years, 5-10 years, greater than 10 years and in
230
1,569
1,193
590
3,582
869
18,597
225
1,529
1,188
572
3,514
865
18,409
118
1,564
9,547
1,065
12,294
121
1,616
9,480
1,067
12,284
1.68
2.84
2.61
1.92
2.54
0.1
3.1
7.1
15.1
6.2
6.03
4.03
3.47
3.94
3.61
0.6
4.3
7.2
14.4
7.4
2.40
4.00
3.87
2.95
2.7
6.6
10.9
4.3
123
55
9
187
125
57
10
192
3.64
3.64
3.39 %
6.7
$
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 for both of the years ended December
31, 2013 and 2012.
TABLE 23: 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
2013
32,634
25,875
17,045
11,644
1,976
89,174
3,530
92,704
6,571
-
99,275
$
$
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
Core deposits increased $6.6 billion, or eight percent, compared to
December 31, 2012, driven by an increase of $7.0 billion, or nine
percent, in transaction deposits, partially offset by a decrease of
$485 million, or 12%, in other time deposits. Total transaction
deposits increased from December 31, 2012 due to increases in
money market deposits, demand deposits, interest checking deposits
55 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and foreign office deposits partially offset by a decrease in savings
deposits. Money market deposits increased $4.8 billion, or 69%,
from December 31, 2012 partially driven by account migration from
savings deposits which decreased $2.8 billion, or 14%. The
remaining increase in money market deposits was due to new
customer accounts, an increase in average balance per account, and
account migration from
interest checking deposits. Demand
deposits increased $2.6 billion, or nine percent, from December 31,
2012 due to an increase in the average balance per account for
consumer customers, new product offerings, and new commercial
deposit growth. Interest checking deposits increased $1.4 billion, or
six percent, from December 31, 2012 due to new commercial
customer growth, partially offset by the previously mentioned
account migration to money market deposits. Foreign office
deposits increased $1.1 billion from December 31, 2012 due to new
customer accounts. The foreign office deposits are primarily
Eurodollar sweep accounts from
the Bancorp’s commercial
customers. These accounts bear interest rates at slightly higher than
money market accounts and unlike repurchase agreements the
Bancorp does not have to pledge collateral. The decrease in other
time deposits from December 31, 2012 was primarily the 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.
The Bancorp uses certificates $100,000 and over as a method
to fund earning assets. At December 31, 2013, certificates $100,000
and over increased $3.3 billion compared to December 31, 2012 due
to the diversification of funding sources through the issuance of
retail and institutional certificates of deposits in 2013.
The following table presents average deposits for the years ended December 31:
TABLE 24: AVERAGE DEPOSITS
($ 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
2013
29,925
23,582
18,440
9,467
1,501
82,915
3,760
86,675
6,339
17
93,031
$
$
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
On an average basis, core deposits increased $4.3 billion, or five
percent, compared to December 31, 2012 due to an increase of $4.8
billion, or six percent, in average transaction deposits partially offset
by a decrease of $546 million, or 13%, in average other time
deposits. The increase in average transaction deposits was driven by
an increase in average money market deposits, average demand
deposits and average interest checking deposits, partially offset by a
decrease in average savings deposits. Average money market
deposits increased $4.6 billion, or 93%, from December 31, 2012
primarily due to account migration from savings deposits which
decreased $3.0 billion, or 14%. The remaining increase in average
money market deposits is due to new customer accounts, an
increase in average balances per account, and account migration
from interest checking deposits. Average demand deposits increased
$2.7 billion, or 10%, from December 31, 2012 due to an increase in
average balances per account for consumer customers, new product
offerings, and new commercial deposit growth. Average interest
checking deposits increased $486 million, or two percent from
December 31, 2012 due to new commercial customer growth,
partially offset by the previously mentioned account migration to
money market deposits. Average other time deposits decreased $546
million, or 13%, from December 31, 2012 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. Average certificates $100,000 and
over increased $3.2 billion from 2012 due to the diversification of
funding sources through the issuance of retail and institutional
certificates of deposits during 2013.
The contractual maturities of certificates $100,000 and over as of December 31, 2013 are summarized in the following table:
TABLE 25: CONTRACTUAL MATURITIES OF CERTIFICATES $100,000 AND OVER
($ in millions)
Three months or less
After three months through six months
After six months through 12 months
After 12 months
Total
2013
2,922
1,561
1,032
1,056
6,571
$
$
56 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The contractual maturities of other time deposits and certificates $100,000 and over as of December 31, 2013 are summarized in the following
table:
TABLE 26: CONTRACTUAL MATURITIES OF OTHER TIME DEPOSITS AND CERTIFICATES $100,000 AND OVER
($ in millions)
Next 12 months
13-24 months
25-36 months
37-48 months
49-60 months
After 60 months
Total
2013
7,424
1,200
702
488
232
55
10,101
$
$
Borrowings
Total borrowings decreased $3.0 billion, or 21%, from December
31, 2012 due to decreases in other short-term borrowings and
federal funds purchased, partially offset by an increase in long-term
debt. Total borrowings as a percentage of interest-bearing liabilities
were 14% and 19% at December 31, 2013 and 2012, respectively.
TABLE 27: BORROWINGS
As of December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total borrowings
2013
284
1,380
9,633
11,297
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
$
$
Federal funds purchased decreased by $617 million, or 68%, from
December 31, 2012 driven by a decrease 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 decreased $4.9 billion, or 78%, from
December 31, 2012 driven by a decrease of $4.7 billion in short-
term FHLB borrowings. The Bancorp decreased its reliance on
short-term funding in 2013 in anticipation of future regulatory
standards which require a greater dependency on long-term and
stable funding. Long-term debt increased by $2.5 billion, or 36%,
from December 31, 2012 primarily driven by the issuance of $3.1
billion of unsecured senior bank notes, $750 million of subordinated
notes and the issuance of asset-backed securities by a consolidated
VIE of $1.3 billion related to an automobile loan securitization
during 2013. These issuances were partially offset by the maturity of
$1.3 billion of senior notes, the redemption of $750 million of
outstanding TruPS and $277 million of declines due to fair value
adjustments on hedged debt. For additional information regarding
long-term debt, see Note 16 of the Notes to Consolidated Financial
Statements.
TABLE 28: AVERAGE BORROWINGS
As of December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total average borrowings
Average total borrowings decreased $2.4 billion, or 17%, compared
to December 31, 2012, due to decreases in average federal funds
purchased, average other short-term borrowings and average long-
term debt. Average federal funds purchased decreased $57 million,
or 10%, primarily due to a decrease 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 decreased $1.2 billion, or 29%, primarily due
to the previously mentioned decrease
in short-term FHLB
borrowings. The level of average federal funds purchased and
average other short-term borrowings can fluctuate significantly from
period to period depending on funding needs and which sources are
used to satisfy those needs. Additionally, The Bancorp decreased its
reliance on short-term funding in 2013 in anticipation of future
regulatory standards which require a greater dependency on long-
term and stable funding. Average long-term debt decreased $1.1
billion, or 12%, driven by the maturity of $1.3 billion of unsecured
senior bank notes in the second quarter of 2013, 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
2013
503
3,024
7,914
11,441
$
$
2012
560
4,246
9,043
13,849
2011
2010
2009
345
2,777
10,154
13,276
291
1,635
10,902
12,828
517
6,463
11,035
18,015
the fourth quarter of 2012 partially offset by the issuance of $1.3
billion of unsecured senior bank notes in the first quarter of 2013
and the issuance of $1.8 billion of unsecured senior bank notes and
$750 million of subordinated notes in the fourth quarter of 2013.
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.
57 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 and the Bancorp
Credit division, led by the Bancorp’s Chief Risk and 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
58 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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
launching a new product or initiative. Significant risk policies
approved by the management governance committees are also
reviewed and approved by the Risk and Compliance Committee of
the Board of Directors.
Credit Risk Review is an independent function responsible for
evaluating the sufficiency of underwriting, documentation and
approval processes for consumer and commercial credits, the
accuracy of risk grades assigned to commercial credit exposure,
nonaccrual status, specific reserves and monitoring for charge-offs.
Credit Risk Review reports directly to the Risk and Compliance
Committee of the Board of Directors and administratively to the
Chief Auditor.
is based on
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 the failure of a
borrower or counterparty to honor its financial or contractual
obligations to the Bancorp. The Bancorp's credit risk management
strategy
three core principles: conservatism,
diversification and monitoring. The Bancorp believes that effective
credit risk management begins with conservative lending practices.
These practices include conservative exposure and counterparty
limits and conservative underwriting, documentation and collection
standards. The Bancorp's credit risk management strategy also
emphasizes diversification on a geographic, industry and customer
level as well as ongoing portfolio monitoring and
timely
large credit exposures and credits
management reviews of
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, 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
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.
that do not meet
The following tables provide a summary of potential problem loans as of December 31:
TABLE 29: POTENTIAL PROBLEM LOANS
2013 ($ in millions)
Commercial and industrial
Commercial mortgage
Commercial construction
Commercial leases
Total
TABLE 30: POTENTIAL PROBLEM LOANS
2012 ($ in millions)
Commercial and industrial
Commercial mortgage
Commercial construction
Commercial leases
Total
Carrying
Value
1,032
517
44
18
1,611
Carrying
Value
1,015
848
87
9
1,959
$
$
$
$
Unpaid
Principal
Balance
1,034
520
44
18
1,616
Unpaid
Principal
Balance
1,017
849
87
9
1,962
Exposure
1,323
520
50
18
1,911
Exposure
1,212
851
100
9
2,172
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 U.S. GAAP compliant
ALLL 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
portfolio performance monitoring are used to assess the credit risk
in the Bancorp’s homogenous consumer and small business loan
portfolios.
59 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The economy grew slightly during 2013. Domestic economic risks
remain elevated as several weak economic factors persist (including
continued high unemployment, sluggish economic growth, weak job
creation), and could be further compounded by an extended
European recession. Other global issues include slower growth in
China and persistent fears regarding the Middle East. Housing
prices have largely stabilized and are increasing in many markets, but
overall current economic conditions are causing weaker than
desirable qualified loan demand and a relatively low interest rate
environment, which directly impacts the Bancorp’s growth and
profitability. Geographically, the Bancorp continues to experience
the most stress in Michigan and Florida due to previous declines in
real estate values. Real estate value deterioration, as measured by the
Home Price Index, was most prevalent in Florida due to past real
estate price appreciation and related over-development, and in
Michigan due in part to cutbacks in automobile manufacturing and
the state’s economic downturn.
Among 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.
As of December 31, 2013, consumer real estate loans originated
from 2005 through 2008 represent approximately 30% of the
consumer real estate portfolio and approximately 68% of total
losses in 2013. Loss rates continue to improve as newer vintages are
performing within expectations. With the stabilization of certain real
estate markets, the Bancorp 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 fundings are 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. The Bancorp
continues to aggressively engage in other loss mitigation strategies
such as reducing credit commitments, restructuring certain
commercial and consumer loans, as well as utilizing 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 Bancorp strictly adheres to 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
60 Fifth Third Bancorp
programs, the Bancorp may be required to repurchase the sold loan.
As of December 31, 2013, repurchased loans restructured or
refinanced under these programs were immaterial to the Bancorp’s
Consolidated Financial Statements. Additionally, as of December
31, 2013 and 2012, $111 million and $475 million, respectively, of
loans refinanced under HARP 2.0 were included in loans held for
sale in the Bancorp’s Consolidated Balance Sheets. For the years
ended December 31, 2013 and 2012, the Bancorp recognized $97
million and $218 million, respectively, of noninterest 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.
During the fourth quarter of 2013, the Bancorp settled certain
repurchase claims related to mortgage loans originated and sold to
FHLMC prior to January 1, 2009 for $25 million, after paid claim
credits and other adjustments. The settlement removes the
Bancorp’s responsibility to repurchase or indemnify FHLMC for
representation and warranty violations on any loan sold prior to
January 1, 2009 except in limited circumstances.
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
detailed origination policies, continuous
level reviews,
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
to older
appraisals that relate to collateral dependent loans, which can
currently be up to 20-30% of the appraised value based on the type
of collateral. These incremental valuation adjustments 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
changes to the appraisal adjustments are warranted. Other factors
incremental valuation adjustments
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
aggregate the LTV ratios for commercial mortgage loans less than
$1 million.
TABLE 31: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION
As of December 31, 2013 ($ in millions)
Commercial mortgage owner occupied loans
Commercial mortgage non-owner occupied loans
Total
LTV > 100% LTV 80-100% LTV ≤ 80%
2,152
1,798
3,950
240
274
514
345
353
698
$
$
TABLE 32: 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 non-owner occupied loans
Total
LTV > 100% LTV 80-100% LTV ≤ 80%
2,325
1,955
4,280
390
450
840
302
605
907
$
$
61 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 33: COMMERCIAL LOAN AND LEASE PORTFOLIO (EXCLUDING LOANS HELD FOR SALE)
As of December 31 ($ in millions)
By industry:
Manufacturing
Financial services and insurance
Real estate
Business services
Wholesale trade
Healthcare
Retail trade
Transportation and warehousing
Construction
Communication and information
Accommodation and food
Mining
Entertainment and recreation
Other services
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
2013
Exposure
Nonaccrual
Outstanding
2012
Exposure
Nonaccrual
$
$
10,299
5,998
5,027
4,910
4,407
4,038
3,301
3,134
1,865
1,801
1,668
1,580
1,149
1,013
773
541
356
174
12
52,046
1 %
5
13
10
27
44
100 %
19 %
10
7
7
5
3
3
3
3
40
100 %
19,955
14,010
7,302
7,411
8,406
6,220
6,673
4,416
3,196
3,295
2,556
3,206
1,955
1,362
2,332
734
504
218
12
93,763
1
4
10
8
23
54
100
22
8
7
6
5
3
3
3
3
40
100
$
55
25
70
55
35
26
18
1
36
2
12
55
12
24
-
-
26
6
-
458 $
8
18
23
10
34
7
100
16
11
8
19
9
2
1
1
7
26
100
9,982
4,886
5,588
4,600
4,042
4,079
2,624
3,105
1,995
1,547
1,478
1,683
914
1,156
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
12,062
6,840
6,917
7,401
6,094
5,699
4,222
3,254
2,631
2,160
2,767
1,393
1,517
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
54
198
56
26
14
38
3
105
19
17
-
11
42
-
-
44
12
-
697
9
22
28
13
24
4
100
13
17
8
19
11
4
2
5
1
20
100
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.
62 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides analysis of each of the categories of loans (excluding loans held for sale) by state as of December 31, 2013 and 2012:
TABLE 34: NON-OWNER OCCUPIED COMMERCIAL REAL ESTATE(a)
Included in commercial mortgage and commercial construction loans on the Consolidated Balance Sheets.
TABLE 35: NON-OWNER OCCUPIED COMMERCIAL REAL ESTATE(a)
($ in millions)
Outstanding
1,086
851
508
353
248
161
1,270
4,477
$
$
Exposure
1,377
925
629
593
428
253
2,173
6,378
90 Days
Past Due
-
-
-
-
-
-
-
-
Nonaccrual
14
17
7
6
2
4
7
57
For the Year Ended
December 31, 2013
Net Charge-offs
12
5
3
4
1
1
1
27
Outstanding
1,236
1,098
596
430
205
283
972
4,820
$
$
Exposure
1,351
1,123
632
481
228
303
1,250
5,368
90 Days
Past Due
Nonaccrual
For the Year Ended
December 31, 2012
Net Charge-offs
(Recoveries)
-
-
-
-
-
-
-
-
39
49
42
21
12
14
33
210
19
32
20
11
6
2
(3)
87
($ in millions)
By State:
Ohio
Michigan
Florida
Illinois
North Carolina
Indiana
All other states
Total
(a)
By State:
Ohio
Michigan
Florida
Illinois
North Carolina
Indiana
All other states
Total
(a)
Included in commercial mortgage and commercial construction loans on the Consolidated Balance Sheets.
TABLE 36: HOMEBUILDER AND DEVELOPER(a)
($ in millions)
90 Days
Past Due
For the Year Ended
December 31, 2013
Net Charge-offs
(Recoveries)
Outstanding
By State:
-
106
Ohio
(2)
33
Michigan
-
18
North Carolina
1
10
Indiana
4
5
Illinois
-
3
Florida
1
19
All other states
Total
4
194
(a) Homebuilder and Developer loans, exclusive of commercial and industrial loans with an outstanding balance of $51 and a total exposure of $135 are also included in Table 34: Non-Owner
Nonaccrual
7
4
-
2
2
-
1
16
Exposure
173
40
25
11
8
14
73
344
-
-
-
-
-
-
-
-
$
$
Occupied Commercial Real Estate.
TABLE 37: HOMEBUILDER AND DEVELOPER(a)
($ in millions)
For the Year Ended
December 31, 2012
Outstanding
By State:
7
133
Ohio
7
52
Michigan
1
24
North Carolina
-
18
Indiana
3
28
Illinois
10
32
Florida
-
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 35: Non-Owner
199
60
34
21
31
59
35
439
11
6
4
8
8
3
2
42
-
-
-
-
-
-
-
-
Net Charge-offs
Nonaccrual
Exposure
$
$
90 Days
Past Due
Occupied Commercial Real Estate.
63 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 $975 million of adjustable rate residential mortgage
loans will have rate resets during the next twelve months, with less
than one percent of those resets expected to experience an increase
in monthly payments in comparison to the monthly payment at the
time of origination.
Certain residential mortgage products have contractual features
that may increase credit exposure to the Bancorp in the event of a
decline in housing values. These types of mortgage products offered
by the Bancorp include loans with high LTV ratios, multiple loans
on the same collateral that when combined result in an LTV greater
than 80% and interest-only loans. The Bancorp monitors residential
mortgage loans with greater than 80% LTV ratios and no mortgage
insurance as it believes these loans represent a higher level of risk.
The following table provides an analysis of the residential mortgage portfolio loans outstanding by LTV at origination:
TABLE 38: RESIDENTIAL MORTGAGE PORTFOLIO LOANS BY LTV AT ORIGINATION
2013
2012
As of December 31 ($ in millions)
LTV ≤ 80%
LTV > 80%, with mortgage insurance
LTV > 80%, no mortgage insurance
Total
Outstanding
Weighted
Average LTV
Outstanding
Weighted
Average LTV
$
$
9,507
1,242
1,931
12,680
65.2 % $
93.7
95.9
72.7 % $
8,993
1,165
1,859
12,017
65.8 %
93.6
95.6
73.1 %
The following tables provide analysis of the residential mortgage portfolio loans outstanding with a greater than 80% LTV ratio and no mortgage
insurance:
TABLE 39: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
As of December 31, 2013 ($ in millions)
By State:
Ohio
Michigan
Florida
Illinois
Indiana
North Carolina
Kentucky
All other states
Total
For the Year Ended
December 31, 2013
90 Days
Past Due Nonaccrual
Net Charge-offs
3
2
1
-
1
-
-
1
8
20
7
11
5
4
2
3
2
54
10
5
3
2
1
-
2
1
24
Outstanding
$
583
305
260
236
120
94
83
250
$
1,931
64 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 40: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
As of December 31, 2012 ($ in millions)
By State:
Ohio
Michigan
Florida
Illinois
Indiana
North Carolina
Kentucky
All other states
Total
Home Equity Portfolio
The Bancorp’s home equity portfolio is primarily comprised of
home equity lines of credit. Beginning in the first quarter of 2013,
the Bancorp’s newly originated home equity lines of credit have a
10-year interest only draw period followed by a 20-year amortization
period. The home equity line of credit previously offered by the
Bancorp was 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 $3.2 billion and $6.0
billion, respectively, as of December 31, 2013. Of the total $9.2
billion of outstanding home equity loans:
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
193
115
111
89
179
1,859
$
82% reside within the Bancorp’s Midwest footprint of
Ohio, Michigan, Kentucky, Indiana and Illinois;
33% are in senior lien positions and 67% are in junior lien
positions at December 31, 2013;
Over 90% of non-delinquent borrowers made at least one
payment greater than the minimum payment during the
year ended December 31, 2013; and
The portfolio had an average refreshed FICO score of 736
and 735 at December 31, 2013 and 2012, 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 junior lien home equity loans
which become 60 days or more past due, the Bancorp tracks the
performance of the senior lien loans in which the Bancorp is the
servicer and utilizes consumer credit bureau attributes to monitor
the status of the senior lien loans that the Bancorp does not service.
If the senior lien loan is found to be 120 days or more past due, the
junior lien home equity loan is placed on nonaccrual status unless
both loans are well-secured and in the process of collection.
Additionally, if the junior lien home equity loan becomes 120 days
or more past due and the senior lien loan is also 120 days or more
past due, the junior lien home equity loan is assessed for charge-off,
unless it is well-secured and in the process of collection. Refer to the
Analysis of Nonperforming Assets section of the MD&A for more
information.
65 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides an analysis of home equity loans outstanding disaggregated based upon refreshed FICO score:
TABLE 41: HOME EQUITY LOANS OUTSTANDING BY REFRESHED FICO SCORE
($ in millions)
Senior Liens:
FICO < 620
FICO 621-719
FICO > 720
Total Senior Liens
Junior Liens:
FICO < 620
FICO 621-719
FICO > 720
Total Junior Liens
Total
December 31,
2013
% of
Total
December 31,
2012
% of
Total
$
$
201
638
2,253
3,092
565
1,662
3,927
6,154
9,246
2 % $
7
24
33
6
18
43
67
100 % $
224
653
2,374
3,251
661
1,817
4,289
6,767
10,018
2 %
6
24
32
7
18
43
68
100 %
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 42: HOME EQUITY LOANS OUTSTANDING BY LTV AT ORIGINATION
As of December 31 ($ in millions)
Senior Liens:
LTV ≤ 80%
LTV > 80%
Total Senior Liens
Junior Liens:
LTV ≤ 80%
LTV > 80%
Total Junior Liens
Total
2013
2012
Outstanding
Weighted
Average LTV
Outstanding
Weighted
Average LTV
$
$
2,645
447
3,092
3,353
2,801
6,154
9,246
54.9 % $
89.2
60.1
67.3
91.4
80.2
72.9 % $
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 %
The following tables provide analysis of home equity loans by state with LTV greater than 80%:
TABLE 43: HOME EQUITY LOANS OUTSTANDING WITH LTV GREATER THAN 80%
As of December 31, 2013 ($ in millions)
For the Year Ended
December 31, 2013
By State:
Ohio
Michigan
Illinois
Indiana
Kentucky
Florida
All other states
Total
(a) During the fourth quarter of 2013, the Bancorp modified its nonaccrual policy for home equity loans and lines of credit. For further information, refer to the Analysis of Nonperforming Assets section
Exposure
1,868
987
554
454
436
157
425
4,881
1,161
697
383
296
278
116
317
3,248
Outstanding
$
18
14
9
4
3
4
7
59
10
7
6
3
2
3
4
35
-
-
-
-
-
-
-
-
$
90 Days
Past Due Nonaccrual(a) Net Charge-offs(b)
of MD&A.
(b) During the fourth quarter of 2013, the Bancorp modified its charge-off policy for home equity loans and lines of credit. For further information, refer to the Analysis of Net Loan Charge-offs section
of MD&A.
66 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 44: 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
Outstanding
$
1,254
795
428
348
327
130
371
3,653
$
Exposure
1,927
1,108
611
521
499
175
491
5,332
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
Automobile Portfolio
The automobile portfolio is characterized by direct and indirect
lending products to consumers. As of December 31, 2013, 51% of
the automobile loan portfolio is comprised of loans collateralized by
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 45: AUTOMOBILE LOANS OUTSTANDING WITH LTV AT ORIGINATION
As of December 31 ($ in millions)
LTV ≤ 100%
LTV > 100%
Total
2013
2012
Outstanding
8,306
3,678
11,984
$
$
Weighted
Average LTV
Outstanding
Weighted
Average LTV
81.4 % $
110.7
90.7 % $
8,123
3,849
11,972
81.5 %
110.8
91.2 %
The following tables provide analysis of the Bancorp’s automobile loans with a LTV at origination greater than 100%:
TABLE 46: AUTOMOBILE LOANS OUTSTANDING WITH LTV GREATER THAN 100%
As of December 31, 2013 ($ in millions)
By State:
Ohio
Illinois
Michigan
Florida
Indiana
Kentucky
All other states
Total
Outstanding
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2013
$
$
371
201
185
185
147
119
2,470
3,678
1
-
-
-
-
-
4
5
-
-
-
-
-
-
1
1
1
1
1
1
-
-
10
14
TABLE 47: AUTOMOBILE LOANS OUTSTANDING WITH LTV GREATER THAN 100%
As of December 31, 2012 ($ in millions)
By State:
Ohio
Illinois
Michigan
Florida
Indiana
Kentucky
All other states
Total
Outstanding
409
232
221
194
158
141
2,494
3,849
$
$
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
European Exposure
The Bancorp has no direct sovereign exposure to any European
government as of December 31, 2013. 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
67 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $3.3 billion and
funded exposure was $1.8 billion as of December 31, 2013.
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 and 2013 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 $212 million and
funded exposure was $103 million as of December 31, 2013.
The following table provides detail about the Bancorp’s exposure to all European domiciled and owned businesses and financial institutions as of
December 31, 2013:
TABLE 48: EUROPEAN EXPOSURE
Sovereigns
Financial Institutions
Non-Financial
Institutions
Total
Total
($ 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
-
$
-
-
-
-
10
56
66
83
149
$
Total
Total
Total
Funded
Funded
Funded
Exposure Exposure Exposure Exposure Exposure(a) Exposure
103
1,175
1,278
523
1,801
103
1,161
1,264
500
1,764
212
2,087
2,299
972
3,271
202
2,031
2,233
889
3,122
-
14
14
23
37
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
assets,
including OREO and other repossessed property. A
summary of nonperforming assets is included in Table 49.
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. During the fourth quarter of 2013, the
Bancorp modified its nonaccrual policy for home equity loans and
lines of credit. Home equity loans and lines of credit are reported on
nonaccrual status if principal or interest has been in default for 90
days or more unless the loan is both well secured and in the process
of collection. Home equity loans and lines of credit that have been
in default for 60 days or more are also reported on nonaccrual status
if the senior lien has been in default 120 days or more, unless the
loan is both well secured and in the process of collection. As a result
of the modification of the nonaccrual policy for home equity loans
and lines of credit, $46 million of home equity loans and lines of
credit were reclassified from accrual to nonaccrual status during the
fourth quarter of 2013. 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.
68 Fifth Third Bancorp
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
$986 million at December 31 2013 compared to $1.3 billion at
December 31, 2012. At December 31, 2013, $6 million of
nonaccrual loans, consisting primarily of real estate secured loans,
were held for sale, compared to $29 million at December 31, 2012.
Total nonperforming assets, including loans held for sale, as a
percentage of total loans, leases and other assets, including OREO
as of December 31, 2013 were 1.10%, compared to 1.48% as of
December 31, 2012. Excluding nonaccrual loans held for sale,
nonperforming assets as a percentage of portfolio loans, leases and
other assets, including OREO were 1.10% as of December 31,
2013, compared to 1.49% as of December 31, 2012. The
composition of nonaccrual loans and leases continues to be
concentrated in real estate as 60% of nonaccrual loans and leases
were secured by real estate as of December 31, 2013 compared to
67% as of December 31, 2012.
Commercial nonperforming loans and leases were $464 million
at December 31, 2013, a decrease of $262 million from December
31, 2012 due primarily to the impact of loss mitigation actions and
modest improvement in general economic conditions. Excluding
commercial nonperforming
leases held for sale,
commercial nonperforming loans and leases at December 31, 2013
decreased $239 million compared to December 31, 2012.
loans and
Consumer nonperforming loans and leases were $293 million
at December 31, 2013, a decrease of $39 million from December 31,
2012. The decrease is primarily due to a decline in new nonaccrual
levels due to modest improvement in general economic conditions
in 2013. Home equity nonaccrual levels increased $39 million from
the prior year due to the aforementioned nonaccrual policy change
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
which occurred during the fourth quarter of 2013. Geographical
market conditions continue to be a large driver of nonaccrual
activity as Florida properties represent approximately 13% and 8%
of residential mortgage and home equity balances, respectively, but
represent 38% and 15% of nonaccrual loans for each category.
Refer to Table 50 for a rollforward of the nonperforming loans and
leases.
reflecting
OREO and other repossessed property, excluding OREO
related to government insured loans, was $229 million at December
31, 2013, compared to $257 million at December 31, 2012. The
decrease from December 31, 2012 was primarily due to the sale of
in new OREO
OREO properties coupled with a decrease
properties
the Bancorp’s
to
the changes made
underwriting of real estate loans in prior periods as well as modest
improvements in general economic conditions during 2013. The
Bancorp recognized $45 million and $74 million in losses on the sale
or write-down of OREO properties in 2013 and 2012, 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 15%
and 15%, respectively, of total OREO losses in 2013 compared with
14% and 17%, respectively, in 2012. Properties in Michigan and
Florida accounted for 36% of OREO at December 31, 2013,
compared to 38% at December 31, 2012.
In 2013 and 2012, approximately $71 million and $102 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.
69 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
2013
127
90
10
3
83
74
-
-
TABLE 49: 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(f)
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card and other
Total nonperforming loans and leases(d)
OREO and other repossessed property(c)
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(b)
Home equity
Automobile loans
Credit card and other
Total loans and leases 90 days past due and accruing(e)
Nonperforming assets as a percent of portfolio loans, leases and
other assets, including OREO(a)
Allowance for loan and lease losses as a percent of
nonperforming assets(a)
(a) Excludes nonaccrual loans held for sale.
(b)
154
53
19
2
83
19
1
33
751
229
980
6
986
-
-
-
-
66
-
8
29
103
1.10 %
161
$
$
$
2012
2011
2010
2009
234
215
70
1
114
30
-
1
96
67
6
8
123
23
2
39
1,029
257
1,286
29
1,315
1
22
1
-
75
58
8
30
195
408
358
123
9
134
25
-
1
79
63
15
3
141
29
2
48
1,438
378
1,816
138
1,954
4
3
1
-
79
74
9
30
200
473
407
182
11
152
23
1
84
95
28
10
8
116
33
2
55
1,680
494
2,174
294
2,468
16
11
3
-
100
89
13
42
274
734
898
646
67
275
21
1
-
35
4
8
-
137
33
1
87
2,947
297
3,244
224
3,468
118
59
17
4
189
99
17
64
567
1.49
2.23
2.79
4.22
144
124
138
116
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, 2013, 2012, 2011, 2010, and 2009 these advances were $378, $414, $309, $279 and $130, respectively. The
Bancorp recognized credit losses of $5 for the year ended December 31, 2013 and $2 for 2012 due to claim denials and curtailments associated with these advances.
(c) Excludes $77, $72, $64, $38 and $15 of OREO related to government insured loans at December 31, 2013, 2012, 2011, 2010, and 2009, respectively.
(d)
Includes $10, $10, $17, $24, and $32 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at December 31, 2013, 2012, 2011, 2010, and 2009,
respectively, and $2, $1, $2, $0, and $0 of restructured nonaccrual government insured commercial loans at December 31, 2013, 2012, 2011, 2010, and 2009, respectively.
Includes an immaterial amount of government insured commercial loans 90 days past due and accruing whose repayments are insured by the SBA at December 31, 2013, 2012, 2011, 2010,
and 2009.
(e)
(f) Excludes $21 of restructured nonaccrual loans at December 31, 2013 associated with a consolidated variable interest entity in which the Bancorp has no continuing credit risk due to the risk
being assumed by a third party.
70 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides a rollforward of portfolio nonperforming loans and leases, by portfolio segment:
TABLE 50: ROLLFORWARD OF PORTFOLIO NONPERFORMING LOANS AND LEASES
For the year ended December 31, 2013 ($ 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 (recoveries)
Draws/other extensions of credit
Ending Balance
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
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,
reduce the accrued interest 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
The following table summarizes TDRs by loan type and delinquency status:
TABLE 51: PERFORMING AND NONPERFORMING TDRs
Commercial
Residential
Mortgage
Consumer
$
$
$
$
697
409
(9)
(15)
(3)
(38)
(295)
(81)
(221)
14
458
1,058
560
(22)
(31)
(13)
(36)
(466)
(108)
(297)
52
697
237
204
(52)
(41)
-
-
(112)
(73)
3
-
166
275
318
(45)
(57)
-
(4)
(121)
(71)
(58)
-
237
95
297
(60)
(62)
-
-
(11)
(13)
(122)
3
127
105
354
(73)
(90)
-
-
(12)
-
(194)
5
95
Total
1,029
910
(121)
(118)
(3)
(38)
(418)
(167)
(340)
17
751
1,438
1,232
(140)
(178)
(13)
(40)
(599)
(179)
(549)
57
1,029
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.
Consumer restructured loans on accrual status totaled $1.7
billion at December 31, 2013 and December 31, 2012. As of
December 31, 2013, the percentage of restructured residential
mortgage loans, home equity loans, and credit card loans that are
past due 30 days or more were 17%, 11% and 16%, respectively.
As of December 31, 2013 ($ in millions)
Commercial(b)(c)
Residential mortgages(a)
Home equity
Credit card
Automobile and other consumer loans and leases
Total
Current
869
1,045
368
25
24
2,331
$
$
Performing
30-89 Days
Past Due
-
82
26
-
1
109
90 Days or
More Past Due
-
114
-
-
-
114
Nonaccrual
228
84
18
33
1
364
$
$
Total
1,097
1,325
412
58
26
2,918
(a)
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, 2013, these advances represented $155 of current loans, $31 of 30-89 days past due loans and $88 of 90 days or more past due loans.
(b) Excludes $8 of restructured accruing loans and $21 of restructured nonaccrual loans associated with a consolidated variable interest entity in which the Bancorp has no continuing credit risk
due to the risk being assumed by a third party.
(c) Excludes restructured nonaccrual loans held for sale.
71 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 58 bps and 85 bps of average portfolio loans
and leases for the years ended December 31, 2013 and 2012,
respectively. Table 52 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 44 bps
during 2013 compared to 63 bps in 2012, as a result of decreases in
net charge-offs of $77 million coupled with an increase in average
portfolio commercial loan and lease balances of $3.7 billion.
Decreases in net charge-offs were realized across all commercial
loan types, excluding commercial and industrial loans which
increased primarily due to a $43 million charge-off on a single large
credit during the fourth quarter of 2013, and were primarily due to
improvements in general economic conditions and previous actions
taken by the Bancorp to address problem loans. Actions taken by
the Bancorp included suspending homebuilder and developer
lending in 2007 and non-owner occupied commercial real estate
lending in 2008 and tightened underwriting standards across all
commercial
resumed
homebuilder and developer lending and non-owner occupied
commercial real estate lending in the third quarter of 2011. Net
charge-offs for 2013 related to non-owner occupied commercial real
estate were $27 million compared to $87 million in 2012. 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 52. Net charge-offs on these
loans represented 12% of total commercial loan and lease net
charge-offs in 2013 and 29% in 2012.
loan product offerings. The Bancorp
The ratio of consumer loan and lease net charge-offs to
average consumer loans and leases decreased to 77 bps in 2013
compared to 113 bps in 2012. Net charge-offs on residential
mortgage loans, which typically involve partial charge-offs based
upon appraised values of underlying collateral, decreased $62
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 Florida and Michigan markets, in
aggregate, accounted for 42% and 66% of net charge-offs on
residential mortgage loans in the portfolio in 2013 and 2012,
respectively. The Bancorp 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 $60 million compared
to the prior year, primarily due to improvements in loss severities
and delinquencies, partially offset by the impact of the change in the
home equity charge-off policy during the fourth quarter of 2013.
Home equity loans and lines of credit that have been in default 120
days or more are assessed for a charge-off if the senior lien has been
in default 120 days or more. In addition, management actively
manages lines of credit and makes reductions in lending limits when
it believes it is necessary based on FICO score deterioration and
property devaluation.
Automobile
loan net charge-offs decreased $9 million
compared to 2012, due to the origination of high credit quality loans
and higher resale on automobiles sold at auction.
Credit card and other consumer loans and leases net charge-
offs increased $5 million from 2012. Credit card net charge-offs
increased $4 million from the prior year. The Bancorp utilizes a risk-
adjusted pricing methodology to ensure adequate compensation is
received for those products that have higher credit costs. Other
consumer loan net charge-offs remained relatively flat compared to
the same period in the prior year.
72 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
$
TABLE 52: 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
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
relative to portfolio loans and leases. The Bancorp also considers
overall asset quality trends, credit administration and portfolio
management practices, risk identification practices, credit policy and
underwriting practices, overall portfolio growth, portfolio
2013
2012
2011
2010
2009
(207)
(66)
(9)
(2)
(70)
(114)
(44)
(92)
(33)
(637)
39
19
5
1
10
17
22
14
9
136
(168)
(47)
(4)
(1)
(60)
(97)
(22)
(78)
(24)
(501)
0.44 %
0.56
0.51
0.04
0.44
0.48
1.02
0.18
3.67
6.71
0.77
0.58 %
(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
concentrations and current national and local economic conditions
that might impact the portfolio. See the Critical Accounting Policies
section for more information.
In 2013, 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
73 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 53: 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 and letters of credit:
Balance, beginning of period
Impact of change in accounting principle
Provision (benefit) for unfunded commitments and letters of credit
Balance, end of period
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, consumer and commercial 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.
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 $152 million at
December 31, 2013. 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 $41 million at December 31, 2013.
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.
2013
2012
2011
2010
2009
$
$
$
$
1,854
-
(637)
136
229
1,582
179
-
(17)
162
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
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, 2013 and 2012 was 0.12% and 0.13%, respectively.
The unallocated allowance was seven percent of the total allowance
as of December 31, 2013 compared to six percent as of December
31, 2012.
As shown in Table 54, the ALLL as a percent of portfolio loan
and leases was 1.79% at December 31, 2013, compared to 2.16% at
December 31, 2012. The ALLL was $1.6 billion as of December 31,
2013, compared to $1.9 billion at December 31, 2012. 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.
74 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
$
2013
2012
2011
767
212
26
53
189
94
23
92
16
110
1,582
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 54: 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
30,783
10,138
1,020
3,531
10,672
10,719
11,827
1,978
350
81,018
36,038
9,103
698
3,549
12,017
10,018
11,972
2,097
290
85,782
39,316
8,066
1,039
3,625
12,680
9,246
11,984
2,294
364
88,614
1.95 %
2.63
2.50
1.46
1.49
1.02
0.19
4.01
4.40
0.12
1.79 %
3.02
4.35
7.55
2.27
2.13
1.82
0.36
5.36
6.00
0.17
2.78
2.23
3.66
4.73
1.92
1.91
1.43
0.23
4.15
6.90
0.13
2.16
$
$
2010
1,123
597
158
111
310
265
73
158
59
150
3,004
27,191
10,845
2,048
3,378
8,956
11,513
10,983
1,896
681
77,491
4.13
5.50
7.71
3.29
3.46
2.30
0.66
8.33
8.66
0.19
3.88
2009
1,282
734
380
121
375
294
127
199
44
193
3,749
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
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.
includes
Interest Rate Risk Management Oversight
senior
The Bancorp’s Executive ALCO, which
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.
Net Interest Income Sensitivity
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 assets, liabilities and off-balance sheet exposures and
incorporates market-based assumptions regarding the effect of
changing interest rates on the prepayment rates of certain assets and
attrition rates for certain 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
75 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 interest rate risk exposure is currently evaluated
by measuring the anticipated change in net interest income over 12-
month and 24-month horizons assuming 100 bps and 200 bps
parallel ramped increases in interest rates. The analysis would
typically include 100 bps and 200 bps parallel ramped decreases in
interest rates; however, this analysis is currently omitted due to the
current low levels of short-term interest rates. Applying the ramps
would result in certain short-term interest rates becoming negative
in the parallel ramped decrease scenarios. 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 55: ESTIMATED NII SENSITIVITY PROFILE
2013
2012
Change in Interest Rates (bps)
+200
+100
Percent Change in NII
(FTE)
12 Months
13 to 24
Months
ALCO Policy Limits
13 to 24
Months
12 Months
Percent Change in NII
(FTE)
12 Months
13 to 24
Months
1.73 %
0.77
6.89
3.37
(4.00)
-
(6.00)
-
1.78 %
0.90
7.75
3.78
ALCO Policy Limits
13 to 24
Months
12 Months
(4.00)
-
(6.00)
-
At December 31, 2013, the Bancorp’s net interest income would
benefit modestly in year one and year two due to these parallel ramp
increases. The benefit is attributable to the combination of floating-
rate assets, including our predominantly floating-rate commercial
loan portfolio, and certain intermediate-term fixed rate liabilities.
The benefit is down modestly when compared to December 31,
2012. The lower net interest income benefit is attributable to an
increase in fixed-rate securities balances and the realization of
slower prepayments on the available-for-sale security portfolio in
2013. At December 31, 2012, prepayments speeds on certain
available-for-sale securities were projected to slow in a rising rate
environment, which provided a benefit to net interest income
sensitivity at that time. During 2013, these slowing prepayments
were realized as a result of an increase in the level of market interest
rates and mortgage rates. Further increases in interest rates will not
have the same impact on net interest income, which results in a
modest reduction in the benefit. The impacts of the slowing
prepayments and the increase in the fixed-rate securities portfolio
were partly offset by an increase in core deposit balances and an
increase in actual and projected fixed-rate borrowings and
shareholder’s equity.
Economic Value of Equity Sensitivity
The Bancorp also utilizes EVE as a measurement tool in managing
interest rate risk. Whereas the net interest income sensitivity analysis
highlights the impact on forecasted NII over 1- and 2-year time
horizons, the EVE analysis is a point in time analysis of the current
positions and incorporates all cash flows over their estimated
remaining lives. The EVE of the balance sheet is defined as the
discounted present value of all remaining asset and net derivative
cash flows less the discounted value of all remaining liability cash
flows. Due to this longer horizon, 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 sensitivity
analysis. 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 deposits.
The following table shows the Bancorp’s EVE sensitivity profile as of December 31:
TABLE 56: ESTIMATED EVE SENSITIVITY PROFILE
Change in Interest Rates (bps)
+200
+100
+25
-25
2013
Change in EVE ALCO Policy Limit
(12.00)
(5.78)%
(2.91)
(0.70)
0.63
2012
Change in EVE ALCO Policy Limit
(12.00)
2.16 %
1.50
0.43
(0.52)
At December 31, 2013, the EVE sensitivity was modestly negative,
compared to a small benefit at December 31, 2012. The primary
factors contributing to the change are an increase in the average life
of mortgage loan and securities positions as a result of slowing
prepayments due to increases in the levels of market interest rates
and mortgage rates, growth in fixed-rate securities balances, and a
decreased benefit related to MSRs. At December 31, 2012, the MSR
valuation was projected to benefit from slowing prepayments that
would occur with rising interest rates. Slowing prepayments were
realized during 2013 due
increased market rates, and
to
consequently, future increases in interest rates will have a smaller
benefit to the MSR valuation.
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
76 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 more
extreme changes in interest rates is modeled, wherein the Bancorp
employs the use of yield curve shocks and environment-specific
scenarios.
Use of Derivatives to Manage Interest Rate Risk
An
interest rate risk
integral component of the Bancorp’s
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-
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. The following table summarizes the expected principal
cash flows of the Bancorp’s portfolio loans and leases as of
December 31, 2013.
Less than 1 year
$
TABLE 57: PORTFOLIO LOAN AND LEASE EXPECTED MATURITIES
($ 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
$
18,523
3,569
457
669
23,218
2,160
1,352
4,684
661
312
9,169
32,387
1-5 years
19,785
4,054
557
1,608
26,004
4,298
5,088
7,104
1,633
51
18,174
44,178
Over 5 years
1,008
443
25
1,348
2,824
6,222
2,806
196
-
1
9,225
12,049
Total
39,316
8,066
1,039
3,625
52,046
12,680
9,246
11,984
2,294
364
36,568
88,614
Additionally, the following table displays a summary of expected principal cash flows occurring after one year for both fixed and floating or
adjustable rate loans, as of December 31, 2013:
TABLE 58: PORTFOLIO LOAN AND LEASE PRINCIPAL CASH FLOWS OCCURING AFTER ONE YEAR
($ 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
$
$
Fixed
2,839
1,167
27
2,956
6,989
7,682
951
7,252
694
35
16,614
23,603
Interest Rate
Floating or Adjustable
17,954
3,330
555
-
21,839
2,838
6,943
48
939
17
10,785
32,624
Residential Mortgage Servicing Rights and Interest Rate Risk
The net carrying amount of the residential MSR portfolio was $967
million and $697 million as of December 31, 2013 and 2012,
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
77 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
associated with changes in the value of its MSR portfolio as a result
of changing interest rates.
Mortgage rates increased during 2013 and decreased during
2012. The increase in interest rates during 2013 caused modeled
prepayment speeds to slow, which led to a recovery of $192 million
in temporary impairment on servicing rights during the year ended
December 31, 2013. The decrease in interest rates during 2012
caused modeled prepayment speeds to increase, which led to $103
million in temporary impairment on servicing rights during the year
ended December 31, 2012. Servicing rights are deemed temporarily
impaired when a borrower’s loan rate is distinctly higher than
prevailing rates. Temporary impairment on servicing rights is
reversed when the prevailing rates return to a level commensurate
with the borrower’s loan rate. In addition to the mortgage servicing
rights valuation, the Bancorp recognized net losses of $17 million
and net gains of $66 million on its non-qualifying hedging strategy
for the years ended 2013 and 2012, respectively. These amounts
include net gains on securities related to the Bancorp’s non-
qualifying hedging strategy of $13 million and $3 million for 2013
and 2012, respectively. The Bancorp may adjust its hedging strategy
to reflect its assessment of the composition of its MSR portfolio,
the cost of hedging and the anticipated effectiveness of the hedges
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 17 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 57 of the Market Risk
Management section of MD&A. Of the $18.6 billion of securities in
the Bancorp’s available-for-sale and other portfolio at December 31,
2013, $3.7 billion in principal and interest is expected to be received
in the next 12 months and an additional $2.0 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 loans and leases. In order to reduce the exposure to
interest rate fluctuations and to manage liquidity, the Bancorp has
developed securitization and sale procedures for several types of
interest-sensitive assets. A majority of the long-term, fixed-rate
single-family residential mortgage loans underwritten according to
FHLMC or FNMA guidelines are sold for cash upon origination.
78 Fifth Third Bancorp
given the economic environment. See Note 11 of the Notes to
Consolidated Financial Statements for further discussion on
servicing rights and the instruments used to hedge interest rate risk
on MSRs.
Foreign Currency Risk
The Bancorp 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, 2013 and
2012 was $581 million and $549 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.
Additional assets such as certain other residential mortgages, certain
commercial loans, home equity loans, automobile loans and other
consumer loans are also capable of being securitized or sold. For the
years ended December 31, 2013 and 2012, the Bancorp sold or
securitized loans totaling $23.4 billion and $21.7 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 both 2013 and 2012. 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.
As of December 31, 2013, $3.8 billion of debt or other
securities were available for issuance under the current Bancorp’s
Board of Directors’ authorizations and the Bancorp is authorized to
file any necessary registration statements with the SEC to permit
ready access to the public securities markets; however, access to
these markets may depend on market conditions. Additionally, the
Bancorp has approximately $40.8 billion of borrowing capacity
available through secured borrowing sources including the FHLB
and FRB.
In February of 2013, the Bancorp’s banking subsidiary updated
and amended its existing global bank note program to increase the
capacity from $20 billion to $25 billion. On February 28, 2013, the
Bank issued and sold, under its amended bank notes program, $1.3
billion in aggregate principal amount of bank notes. On November
20, 2013, the Bank issued and sold, under its amended bank notes
program, $1.8 billion in aggregate principal amount of bank notes.
The Bancorp has $21.5 billion of funding available for issuance
under the global bank note program as of December 31, 2013.
In March of 2013, the Bancorp recognized an immaterial loss
on the securitization and sale of certain automobile loans with a
carrying amount of approximately $509 million. The Bancorp
utilized a securitization trust to facilitate the securitization process.
The trust issued asset-backed securities in the form of notes and
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
equity certificates, with varying levels of credit subordination and
payment priority. The Bancorp does not hold any of the notes or
equity certificates issued by the trust, and the investors in these
securities have no credit recourse to the Bancorp’s assets for failure
of debtors to pay when due.
In August of 2013, the Bancorp transferred approximately $1.3
billion in fixed-rate consumer automobile loans to a bankruptcy
remote trust which was deemed to be a VIE. The Bancorp
concluded that it is the primary beneficiary of the VIE and,
therefore, has consolidated this VIE. The primary purposes for
which the VIE was created were to issue asset backed securities with
varying levels of credit subordination and payment priority and to
provide the Bancorp with access to liquidity for its originated loans.
The assets of the VIE are restricted to the settlement of the notes
and other obligations of the VIE. Third-party holders of the notes
do not have recourse to the general assets of the Bancorp.
Liquidity Coverage Ratio and Net Stable Funding Ratio
The BCBS’ key reform within the Basel III framework to strengthen
international liquidity standards was the introduction of the LCR
and NSFR. On January 7, 2013, the BCBS issued a final standard
for the LCR applicable to large internationally active banking
organizations, which would phase in the LCR beginning in 2015
with full implementation in 2019. The BCBS plans on introducing
the NSFR final standard in the next two years.
liquidity profile by ensuring an adequate
The BCBS’ LCR would promote the short-term resilience of a
bank's
level of
unencumbered high-quality liquid assets that can be converted into
cash easily and immediately in private markets to meet its liquidity
needs within 30 calendar days. Financial institutions subject to the
LCR generally would be expected to hold unencumbered high-
quality assets of at least 100% of net cash flows over the next 30
calendar days upon full implementation in 2019.
The BCBS’ NSFR is intended to promote medium and long-
term funding of the assets and activities of financial institutions.
This ratio would establish a minimum acceptable amount of stable
funding based on the
liquidity characteristics of a financial
institution’s assets and activities over a one year horizon.
Management is currently monitoring the progress of the BCBS’
work on the NSFR.
Section 165 of the Dodd-Frank Act requires the FRB to
establish enhanced liquidity standards for BHCs with total assets of
TABLE 59: AGENCY RATINGS
As of February 24, 2014
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 making capital plan recommendations to
management. These recommendations are reviewed by the ERM
Committee and the capital plan is approved by the board. The
Capital Committee is responsible for execution oversight of the
capital actions of the capital plan.
$50 billion or greater. On October 24, 2013, the U.S. Banking
Agencies issued an NPR that would implement a LCR requirement
that is generally consistent with the international LCR standards
published by the BCBS for large internationally active banking
organizations, generally those with $250 billion or more in total
consolidated assets or $10 billion or more in on-balance sheet
foreign exposure. Additionally, a Modified LCR requirement was
proposed for BHC’s with total consolidated assets of at least $50
billion that are not large internationally active banking organizations,
like Fifth Third. The Modified LCR requirement incorporates a
shorter (21-calendar days) stress scenario for calculating total net
cash outflows than the LCR’s 30 calendar day requirement.
Therefore, the estimated net cash outflows for the Modified LCR
generally would be 70% of the LCR’s estimated net cash outflows.
The NPR’s transition period will begin on January 1, 2015 whereby
LCR and Modified LCR entities must comply with a minimum ratio
of 80%. On January 1, 2016 and 2017, the minimum ratio would
increase to 90% and 100%, respectively. The NPR was open for
public comment until January 31, 2014. Management is currently
reviewing the NPR and evaluating its impact upon the Bancorp’s
Consolidated Financial Statements.
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 59. 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.
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
A-
BBB+
F1
A
A-
F1
A+
A
A-
R-1L
AL
BBBH
R-1L
A
A
AL
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
79 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 when the
Bancorp implements the revised regulatory capital rules known as
Basel III.
to
In December of 2010 and revised in June of 2011, the BCBS
issued Basel III, a global regulatory framework, to enhance
international capital standards. In June of 2012, U.S. banking
regulators proposed enhancements
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. In July of
2013, U.S. banking regulators approved final enhanced regulatory
capital requirements (Basel III Final Rule), which
included
modifications to the proposed rules. The Basel III Final Rule
provides for certain banks, including the Bancorp, to opt out of
including AOCI in Tier 1 capital and retain the treatment of
residential mortgage exposures consistent with the current Basel I
capital rules. The Basel III Final Rule will phase out the inclusion of
certain TruPS as a component of Tier I capital. Under these
provisions, these TruPS would qualify as a component of Tier II
capital. At December 31, 2013 the Bancorp’s Tier I capital included
$60 million of TruPS representing approximately 5 bps of risk
weighted assets. The Basel III Final Rule is effective for the
Bancorp on January 1, 2015, subject to phase-in periods for certain
of its components and other provisions. The Bancorp is in the
process of evaluating the Basel III Final Rule and its potential
impact. The Bancorp’s current estimate of the pro-forma fully
phased in Tier I common equity ratio at December 31, 2013 under
the Basel III Final Rule is approximately 8.99% compared with
9.39% 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 Final Rule are an increase in Tier I
common equity of approximately 75 bps (primarily from the
elimination of the current 10% deduction of mortgage servicing
rights from capital), which would be more than offset by the impact
of increases in risk-weighted assets (primarily from the treatment of
securitizations, mortgage servicing rights and commitments with an
original maturity of one year or less). If the Bancorp elects to
include AOCI components in capital, the December 31, 2013 pro
forma Basel III Final Rule Tier 1 common ratio would be increased
by approximately 7 bps. 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
the proposed capital
enhancements. Additionally, pursuant to the Basel III Final Rule,
the minimum capital ratios as of January 1, 2015 will be 6% for the
Tier I capital ratio, 8% for the total risk-based capital ratio and 4%
for the Tier I capital to average consolidated assets (leverage ratio).
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.
impact of
to offset
the
Market Risk Rule
On June 7, 2012, banking agencies approved a final rule effective
January 1, 2013, titled as “Risk-Based Capital Guidelines: Market
Risk,” to implement enhancements to the market risk framework
adopted by the BCBS. The final rule, to which the Bancorp is
subject, requires banking organizations with significant trading
activities to adjust their capital requirements to better account for
the market risks of those activities. The rule introduces new
measures of market risk, establishes a charge related to stressed VaR
for covered trading positions and replaces references to credit
ratings in the market risk rules with alternative methodologies for
assessing risk. The intention of the rule is to better capture positions
for which the market risk capital rule is appropriate, reduce
procyclicality in market risk capital requirements, enhance sensitivity
to risks that are not adequately captured by the current regulatory
methodologies and
through enhanced
disclosures. Upon the adoption of the market risk final rule in the
first quarter of 2013, the Bancorp’s Tier I and total risk-based
capital ratios decreased 1 bp and adoption had an immaterial impact
to the Tier I common equity ratio.
transparency
increase
TABLE 60: 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)
Tier I capital
Total risk-based capital
Risk-weighted assets(b)
2013
11.56 %
9.44
8.63
$
12,094
16,440
116,736
2012
11.65
9.17
8.83
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
Regulatory capital ratios:
Tier I risk-based 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 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
10.36 %
14.08
9.64
9.39
13.30
17.48
12.34
6.99
11.91
16.09
11.10
9.35
13.89
18.08
12.79
7.48
10.65
14.42
10.05
9.51
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.
80 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Preferred Stock Offering and Conversion
As contemplated by the 2013 CCAR, on May 16, 2013 the Bancorp
issued in a registered public offering 600,000 depositary shares,
representing 24,000 shares of 5.10% fixed-to-floating rate non-
cumulative Series H perpetual preferred stock, for net proceeds of
$593 million. Each preferred share has a $25,000 liquidation
preference. The preferred stock accrues dividends, on a non-
cumulative semi-annual basis, at an annual rate of 5.10% through
but excluding June 30, 2023, at which time it converts to a quarterly
floating rate dividend of three-month LIBOR plus 3.033%. Subject
to any required regulatory approval, the Bancorp may redeem the
Series H preferred shares at its option in whole or in part, at any
time on or after June 30, 2023 and may redeem in whole, but not in
part, following a regulatory capital event at any time prior to June
30, 2023. The Series H preferred shares are not convertible into
Bancorp common shares or any other securities.
On June 11, 2013, the Bancorp’s Board of Directors authorized
the conversion into common stock, no par value, of all outstanding
shares of the Bancorp’s 8.50% non-cumulative convertible perpetual
preferred stock, Series G, which shares are represented by
depositary shares each representing 1/250th of a share of Series G
preferred stock, pursuant to the Amended Articles of Incorporation.
The Articles grant the Bancorp the right, at its option, to convert all
outstanding shares of Series G preferred stock if the closing price of
common stock exceeded 130% of the applicable conversion price
for 20 trading days within any period of 30 consecutive trading days.
The closing price of shares of common stock satisfied such
threshold for the 30 trading days ended June 10, 2013, and the
Bancorp gave the required notice of its exercise of its conversion
right.
On July 1, 2013, the Bancorp converted the remaining 16,442
outstanding shares of Series G preferred stock, which represented
4,110,500 depositary shares, into shares of Fifth Third’s common
stock. Each share of Series G preferred stock was converted into
2,159.8272 shares of common stock, representing a total of
35,511,740 issued shares. The common shares issued in the
conversion are exempt securities pursuant to Section 3(a)(9) of the
Securities Act of 1933, as amended, as the securities exchanged were
exclusively with Bancorp’s existing security holders where no
commission or other remuneration was paid. Upon conversion, the
depositary shares were delisted from the NASDAQ Global Select
Market and withdrawn from the Exchange.
On December 9, 2013, the Bancorp issued, in a registered
public offering, 18,000,000 depositary shares, representing 18,000
shares of 6.625% fixed-to-floating rate non-cumulative Series I
perpetual preferred stock, for net proceeds of $441 million. Each
preferred share has a $25,000 liquidation preference. The preferred
stock accrues dividends, on a non-cumulative quarterly basis, at an
annual rate of 6.625% through but excluding December 31, 2023, at
which time it converts to a quarterly floating rate dividend of three-
month LIBOR plus 3.71%. Subject to any required regulatory
approval, the Bancorp may redeem the Series I preferred shares at
its option in whole or in part, at any time on or after December 31,
2023 and may redeem in whole, but not in part, following a
regulatory capital event at any time prior to December 31, 2023. The
Series I preferred shares are not convertible into Bancorp common
shares or any other securities.
Redemption of TruPS
The Bancorp redeemed all $750 million of the outstanding TruPS
issued by Fifth Third Capital Trust IV on December 30, 2013.
These securities had a distribution rate of 6.50% and a scheduled
maturity date of April 1, 2067. Pursuant to the terms of the TruPS,
the securities of Fifth Third Capital Trust IV were redeemable
within ninety days of a Capital Treatment Event. The Bancorp
determined that a Capital Treatment Event occurred upon the
publication of a Final Rule regarding Regulatory Capital Rules
jointly by the Federal Reserve System and the Office of the
Comptroller of the Currency. The redemption price was $1,000 per
security, which reflected 100% of the liquidation amount, plus
accrued and unpaid distributions to the actual redemption date of
$10 million. The Bancorp recognized an $8 million loss on the
extinguishment of this debt within other noninterest expense in the
Consolidated Statements of Income.
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 $0.47 and
$0.36 during the years ended December 31, 2013 and 2012,
respectively.
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. The Bancorp repurchased the shares as part of
its 100 million share repurchase program announced in August of
2012. As part of this transaction and all subsequent accelerated
share repurchases, 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 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 forward contract on February 12, 2013,
the Bancorp received an additional 657,914 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 in 2012, 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 repurchased
the shares of its common stock as part of its previously announced
100 million share repurchase program in August of 2012. At
settlement of the forward contract on February 27, 2013, the
Bancorp received an additional 127,760 shares which were recorded
as an adjustment to the basis in the treasury shares purchased on the
acquisition date.
On January 28, 2013, the Bancorp entered into an accelerated
share repurchase transaction with a counterparty pursuant to which
the Bancorp purchased 6,953,028 shares, or approximately $125
million of its outstanding common stock on January 31, 2013. The
Bancorp repurchased the shares of its common stock as part of its
August of 2012 Board approved 100 million share repurchase
program. This repurchase transaction concluded the $600 million of
common share repurchases not objected to by the FRB in the 2012
CCAR process. At settlement of the forward contract on April 5,
2013, the Bancorp received an additional 849,037 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 under the 2013 CCAR process, on March 19, 2013, Fifth
Third’s Board of Directors authorized the Bancorp to repurchase up
81 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
to 100 million shares of its outstanding common stock in the open
market or in privately negotiated transactions, and to utilize any
to affect share repurchase
derivative or similar
transactions. This share repurchase authorization replaced the
Board’s previous authorization.
instrument
On May 21, 2013, the Bancorp entered into an accelerated
share repurchase transaction with a counterparty pursuant to which
the Bancorp purchased 25,035,519 shares, or approximately $539
million, of its outstanding common stock on May 24, 2013. The
Bancorp repurchased the shares of its common stock as part of its
100 million share repurchase program previously announced on
March 19, 2013. At settlement of the forward contract on October
1, 2013, the Bancorp received an additional 4,270,250 shares which
were recorded as an adjustment to the basis in the treasury shares
purchased on the acquisition date.
On November 13, 2013, the Bancorp entered
into an
accelerated share repurchase transaction with a counterparty
pursuant to which the Bancorp purchased 8,538,423 shares, or
approximately $200 million, of its outstanding common stock on
November 18, 2013. The Bancorp repurchased the shares of its
common stock as part of its Board approved 100 million share
repurchase program previously announced on March 19, 2013. The
Bancorp expects the settlement of the transaction to occur on or
before February 28, 2014.
On December 10, 2013, the Bancorp entered
into an
accelerated share repurchase transaction with a counterparty
pursuant to which the Bancorp purchased 19,084,195 shares, or
approximately $456 million, of its outstanding common stock on
December 13, 2013. The Bancorp repurchased the shares of its
common stock as part of its Board approved 100 million share
repurchase program previously announced on March 19, 2013. The
Bancorp expects the settlement of the transaction to occur on or
before March 26, 2014.
On January 28, 2014, the Bancorp entered into an accelerated
share repurchase transaction with a counterparty pursuant to which
the Bancorp purchased 3,950,705 shares, or approximately $99
million, of its outstanding common stock on January 31, 2014. The
Bancorp repurchased the shares of its common stock as part of its
Board approved 100 million share repurchase program previously
announced on March 19, 2013. The Bancorp expects the settlement
of the transaction to occur on or before March 26, 2014.
TABLE 61: 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)
2013
63,046,682
45,541,057
(65,516,126)
43,071,613
$ 18.80
2012
19,201,518
86,269,178
(42,424,014)
63,046,682
$ 14.82
2011
19,201,518
-
-
19,201,518
N/A
In March 2013, 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 54 million shares remained available for repurchase by the Bancorp.
(b) Excludes 1,863,097, 2,059,003 and 1,164,254 shares repurchased during 2013, 2012, and 2011, 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.
Stress Tests and CCAR
The FRB issued guidelines known as CCAR, which provide a
common, conservative approach to ensure BHCs, including the
Bancorp, 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. The CCAR process requires the submission
of a comprehensive capital plan that assumes a minimum planning
horizon of nine quarters under various economic scenarios.
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 capital plan must reflect the revised capital
framework
the
implementation of the Basel III accord, including the framework’s
minimum regulatory capital ratios and transition arrangements.
in connection with
the FRB adopted
that
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 reviews the robustness of the capital
adequacy process, the capital policy and the Bancorp’s ability to
maintain capital above the minimum regulatory capital ratios as they
transition to Basel III and above a Basel I Tier 1 common ratio of 5
percent under baseline and stressful conditions throughout a nine-
quarter planning horizon.
82 Fifth Third Bancorp
The FRB issued stress testing rules that implement section
165(i)(1) and (i)(2) of the DFA. Large BHCs, including the Bancorp,
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
In March of 2013, the FRB announced it had completed the
2013 CCAR. For BHCs 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 2013
capital distributions. The FRB indicated to the Bancorp that it did
not object to the following proposed capital actions for the period
beginning April 1, 2013 and ending March 31, 2014:
Increase in the quarterly common stock dividend to $0.12
per share;
Repurchase of up to $750 million in TruPS subject to the
determination of a
regulatory capital event and
replacement with the issuance of a similar amount of Tier
II-qualifying subordinated debt;
Conversion of the $398 million in outstanding Series G
8.5% convertible preferred stock into approximately 35.5
million common shares issued to the holders. If this
conversion were to occur, the Bancorp would intend to
repurchase common shares equivalent to those issued in
the conversion up to $550 million in market value, and
issue $550 million in preferred stock;
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Repurchase of common shares in an amount up to $984
million, including any shares issued in a Series G preferred
stock conversion;
Incremental repurchase of common shares in the amount
of any after-tax gains from the sale of Vantiv, Inc stock;
and
Issuance of an additional $500 million in preferred stock.
The capital plan also included the assumption that the Bancorp
would issue approximately 3.5 million shares in restricted stock
under employee compensation plans in 2013. The above potential
capital actions are subject to Board approval and other factors
including regulatory developments and market conditions. Actions
consistent with
the above proposed capital actions were
substantially completed in 2013.
The DFA requires that BHCs with over $50 billion in
consolidated assets that participated in the 2009 Supervisory Capital
Assessment Program, including the Bancorp, conduct two stress
tests each year. On May 13, 2013, the FRB launched the 2013 Mid-
Cycle Stress Tests, which was submitted to the FRB in July of 2013.
The stress tests required the BHCs to develop their own baseline,
adverse and severely adverse scenarios to reflect its individual
operations and risks. Each BHC was required to release its results
under the severely adverse scenario, which the Bancorp disclosed on
its website on September 24, 2013.
The FRB launched the 2014 stress testing program and CCAR
on November 1, 2013. The stress testing results and capital plan
were submitted by the Bancorp to the FRB on January 6, 2014.
The FRB expects to release summary results of the 2014 stress
testing program and CCAR in March of 2014. The results will
include supervisory projections of capital ratios, losses and revenues
under the supervisory adverse and supervisory severely adverse
scenarios. 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 its 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 to be sent to the FRB and publicly disclosed
by March 31, 2014.
83 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $37
million at December 31, 2013 and $58 million at December 31,
2012. The Bancorp maintained a reserve, included in other liabilities
in the Bancorp’s Consolidated Balance Sheets, related to exposures
within the reinsurance portfolio of $10 million as of December 31,
2013 and $18 million as of December 31, 2012. 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
Automobile Loan Securitization
In March of 2013, the Bancorp recognized an immaterial loss on the
securitization and sale of certain automobile loans with a carrying
amount of approximately $509 million. The Bancorp utilized a
securitization trust to facilitate the securitization process. The trust
issued asset-backed securities in the form of notes and equity
certificates, with varying levels of credit subordination and payment
priority. The Bancorp does not hold any of the notes or equity
certificates issued by the trust, and the investors in these securities
have no credit recourse to the Bancorp’s assets for failure of debtors
to pay when due. As part of the sale, the Bancorp obtained servicing
responsibilities and recognized a servicing asset with an initial fair
value of $6 million. For further information on this automobile
securitization, see Notes 10 and 11 of the Notes to Consolidated
Financial Statements.
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 17 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.
During the fourth quarter of 2013, the Bancorp settled certain
repurchase claims related to mortgage loans originated and sold to
FHLMC prior to January 1, 2009 for $25 million after paid claim
credits and other adjustments. The settlement removes the
Bancorp’s responsibility to repurchase or indemnify FHLMC for
representation and warranty violations on any loan sold prior to
January 1, 2009 except in limited circumstances.
As of December 31, 2013 and 2012, the Bancorp maintained
reserves related to loans sold with representation and warranty
totaling $44 million and $110 million,
recourse provisions
respectively,
the Bancorp’s
Consolidated Balance Sheets.
in other
liabilities
included
in
During 2013 and 2012, the Bancorp paid $64 million and $34
million, respectively, in the form of make whole payments and
in
repurchased $89 million and $114 million, respectively,
outstanding principal of loans to satisfy investor demands. Total
repurchase demand requests during 2013 and 2012 were $263
million and $340 million, respectively. Total outstanding repurchase
demand inventory was $46 million at December 31, 2013 compared
to $67 million at December 31, 2012.
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, 2013, the
outstanding balances on these loans sold with credit recourse was
$579 million compared to $662 million at December 31, 2012. The
Bancorp maintained an estimated credit loss reserve on these loans
sold with credit recourse of $16 million and $20 million at
December 31, 2013 and 2012, respectively, included in other
liabilities in the Consolidated Balance Sheets. To determine the
credit loss reserve, the Bancorp used an approach that is consistent
with its overall approach in estimating credit losses for various
categories of residential mortgage loans held in its loan portfolio.
Private Mortgage Insurance
For certain mortgage loans originated by the Bancorp, borrowers
may be required to obtain PMI provided by third-party insurers. In
some instances, these insurers cede a portion of the PMI premiums
to the Bancorp, and the Bancorp provides reinsurance coverage
within a specified range of the total PMI coverage. The Bancorp’s
84 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The Bancorp has certain obligations and commitments to make
future payments under contracts. The aggregate contractual
obligations and commitments at December 31, 2013 are shown in
Table 62. As of December 31, 2013, the Bancorp has unrecognized
tax benefits that, if recognized, would impact the effective tax rate
in future periods. Due to the uncertainty of the amounts to be
ultimately paid as well as the timing of such payments, all uncertain
tax liabilities that have not been paid have been excluded from the
Contractual Obligations and Other Commitments table. For further
detail on the impact of income taxes see Note 20 of the Notes to
Consolidated Financial Statements.
TABLE 62: CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
As of December 31, 2013 ($ 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 related to held for sale mortgage loans(d)
Noncancelable lease obligations(f)
Partnership investment commitments(g)
Pension benefit payments(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
$
$
$
$
89,174
7,424
1,664
157
1,448
91
261
18
52
8
100,297
33,180
1,899
35,079
-
1,902
-
4,617
-
170
103
34
30
11
6,867
10,884
1,969
12,853
-
720
-
2,095
-
146
22
29
24
-
3,036
17,937
204
18,141
-
55
-
2,764
-
339
21
63
11
-
3,253
139
57
196
89,174
10,101
1,664
9,633
1,448
746
407
144
117
19
113,453
62,140
4,129
66,269
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 16 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 12 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 15 of the Notes to Consolidated Financial Statements.
Includes rental commitments.
Includes low-income housing, historic tax investments and market tax credits. For additional information, see Note 10 of the Notes to Consolidated Financial Statements.
(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 17 of the Notes to Consolidated Financial Statements.
See Note 21 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 17 of the Notes to Consolidated Financial
Statements.
85 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, 2013. Management’s assessment is based on the criteria established in the
1992 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, 2013. Based on
this assessment, management believes that the Bancorp maintained effective internal control over financial reporting as of December 31, 2013.
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, 2013. This report appears on page 87 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 24, 2014
February 24, 2014
Tayfun Tuzun
86 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, 2013,
based on criteria established in Internal Control — Integrated Framework (1992) 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, 2013,
based on the criteria established in Internal Control — Integrated Framework (1992) 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, 2013 of the Bancorp and our report dated February 24, 2014 expressed an
unqualified opinion on those consolidated financial statements.
Cincinnati, Ohio
February 24, 2014
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, 2013
and 2012, 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, 2013. 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, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2013, 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, 2013, based on the criteria established in Internal Control—Integrated Framework (1992)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2014 expressed an
unqualified opinion on the Bancorp's internal control over financial reporting.
Cincinnati, Ohio
February 24, 2014
87 Fifth Third Bancorp
CONSOLIDATED BALANCE SHEETS
$
2013
2012
3,178
18,597
208
343
5,116
944
2,441
15,207
284
207
2,421
2,939
39,316
8,066
1,039
3,625
12,680
9,246
11,984
2,294
364
88,614
(1,582)
87,032
2,531
730
2,416
19
971
8,358
130,443
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
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
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
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)
2,758
Capital surplus
8,768
Retained earnings
375
Accumulated other comprehensive income
(634)
Treasury stock(f)
13,716
Total Bancorp shareholders’ equity
48
Noncontrolling interests
13,764
Total Equity
Total Liabilities and Equity
121,894
(a) At December 31, 2013 and 2012, includes $49 and $0 of cash and due from banks, $48 and $50 of commercial mortgage loans, $ 1,010 and $0 of automobile loans, $(15) and $(5) of
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
32,634
25,875
17,045
11,644
3,530
6,571
1,976
99,275
284
1,380
1,758
3,487
9,633
115,817
2,051
1,034
2,561
10,156
82
(1,295)
14,589
37
14,626
130,443
$
$
$
ALLL, $13 and $3 of other assets, $1 and $0 of other liabilities, $ 1,048 and $0 of long-term debt from consolidated VIEs that are included in their respective captions. See Note 10.
(b) Amortized cost of $18,409 and $ 14,571 at December 31, 2013 and 2012, respectively.
(c)
(d)
(e)
(f) Common shares: Stated value $2.22 per share; authorized 2,000,000,000; outstanding at December 31, 2013 – 855,305,745 (excludes 68,586,836 treasury shares) and December
Fair value of $208 and $284 at December 31, 2013 and 2012, respectively.
Includes $890 and $2,856 of residential mortgage loans held for sale measured at fair value at December 31, 2013, and 2012, respectively.
Includes $92 and $76 of residential mortgage loans measured at fair value at December 31, 2013 and 2012, respectively.
(g)
31, 2012 – 882,152,057 (excludes 41,740,524 treasury shares).
458,000 shares of undesignated no par value preferred stock are authorized and unissued at December 31, 2013; fixed-to-floating rate non-cumulative Series H perpetual preferred stock with a
$25,000 liquidation preference: 24,000 authorized, issued and outstanding at December 31, 2013; fixed-to-floating rate non-cumulative Series I perpetual preferred stock with a $25,000
liquidation preference: 18,000 authorized, issued and outstanding at December 31, 2013 and 8.5% non-cumulative Series G convertible (into 2,159.8272 common shares) perpetual preferred
stock with a $25,000 liquidation preference: 46,000 authorized and 16,450 issued and outstanding at December 31, 2012.
See Notes to Consolidated Financial Statements.
88 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ in millions, except per share data)
Interest Income
Interest and fees on loans and leases
Interest on securities
Interest on other short-term investments
Total interest income
Interest Expense
Interest on deposits
Interest on other short-term borrowings
Interest on long-term debt
Total interest expense
Net Interest Income
Provision for loan and lease losses
Net Interest Income 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 common share
See Notes to Consolidated Financial Statements.
2013
3,447
520
6
3,973
202
6
204
412
3,561
229
3,332
700
549
400
393
272
879
21
13
3,227
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
1,581
357
307
204
134
114
1,264
3,961
2,598
772
1,826
(10)
1,836
37
1,799
2.05
2.02
869,462,977
894,736,445
0.47
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
$
$
$
$
$
89 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31 ($ in millions)
Net income
Other comprehensive (loss) income, net of tax:
Unrealized gains on available-for-sale securities:
Unrealized holding (losses) gains on available-for-sale securities arising during the year
Reclassification adjustment for net losses (gains) included in net income
Unrealized gains on cash flow hedge derivatives:
Unrealized holding (losses) gains on cash flow hedge derivatives arising during the year
Reclassification adjustment for net gains included in net income
Defined benefit pension plans:
Net actuarial gain (loss) arising during the year
Reclassification of amounts to net periodic benefit costs
Other comprehensive (loss) income
Comprehensive income
Less: Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Bancorp
See Notes to Consolidated Financial Statements.
$
$
2013
1,826
(295)
4
(8)
(29)
25
10
(293)
1,533
(10)
1,543
2012
1,574
2011
1,298
(63)
(10)
24
(54)
(5)
13
(95)
1,479
(2)
1,481
201
(37)
58
(45)
(33)
12
156
1,454
1
1,453
90 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
Income
Equity
Stock
Stock
Stock
$
1,779
3,654
Surplus Earnings
6,719
1,297
1,715
314
(130)
156
($ in millions, except per share data)
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
Impact of stock transactions under
stock compensation plans, net
Noncontrolling interest
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
Impact of stock transactions under
stock compensation plans, net
Other
Balance at December 31, 2012
Net income
Other comprehensive loss
Cash dividends declared:
Common stock at $0.47 per share
Preferred stock
Shares acquired for treasury
Issuance of preferred stock
Redemption of preferred stock, Series G
Impact of stock transactions under
stock compensation plans, net
Other
Balance at December 31, 2013
See Notes to Consolidated Financial Statements.
272
(3,408)
153
1,376
(280)
(21)
2,051
(1)
398
2
2,792
(23)
(11)
2,051
398
2,758
(257)
(50)
(153)
(2)
7,554
1,576
(325)
(35)
(2)
8,768
1,836
(407)
(37)
470
(95)
375
(293)
1,034
(398)
$
2,051
1,034
(78)
(142)
22
1
2,561
(4)
10,156
82
65
1
(64)
(627)
54
3
(634)
(1,242)
540
38
3
(1,295)
14,051
1,297
156
(257)
(50)
1,648
(3,408)
(280)
-
44
-
-
13,201
1,576
(95)
(325)
(35)
(650)
43
1
13,716
1,836
(293)
(407)
(37)
(1,320)
1,034
-
60
-
14,589
29
1
21
(1)
50
(2)
48
(10)
(1)
37
Total
Equity
14,080
1,298
156
(257)
(50)
1,648
(3,408)
(280)
-
44
21
(1)
13,251
1,574
(95)
(325)
(35)
(650)
43
1
13,764
1,826
(293)
(407)
(37)
(1,320)
1,034
-
60
(1)
14,626
91 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
Securities gains
Securities gains – non-qualifying hedges on mortgage servicing rights
Securities losses
Securities losses – non-qualifying hedges on mortgage servicing rights
(Recovery of) provision for MSR impairment
Net gains on sales of loans and fair value adjustments on loans held for sale
Bank premises and equipment impairment
Capitalized servicing rights
Loss on extinguishment of 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 sales of Vantiv, Inc. shares and Vantiv, Inc. IPO
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
Bank premises and equipment
Proceeds from sales 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 Investing Activities
Financing Activities
Net change in:
Core deposits
Certificates - $100,000 and over, including foreign office and other
Federal funds purchased
Other short-term borrowings
Dividends paid on common stock
Dividends paid on preferred stock
Proceeds from issuance of long-term debt
Repayment of long-term debt
Repurchases of treasury shares and related forward contracts
Issuance of common stock
Issuance of preferred stock
Redemption of preferred stock, Series F
Redemption of stock warrant
Capital contributions from noncontrolling interests
Other
Net Cash Provided By Financing Activities
Increase (Decrease) in Cash and Due from Banks
Cash and Due from Banks at Beginning of Period
Cash and Due from Banks at End of Period
2013
1,826
229
507
78
253
(199)
(13)
178
-
(192)
(372)
6
(250)
8
22,047
(19,003)
54
(336)
(131)
(672)
8
569
4,595
9,328
657
33
3,191
74
(16,216)
(274)
674
(2,695)
(4,750)
(206)
(10,184)
6,550
3,208
(618)
(4,900)
(393)
(37)
5,044
(2,225)
(1,320)
-
1,034
-
-
-
(17)
6,326
737
2,441
3,178
2012
1,574
303
531
69
271
(69)
(10)
54
7
103
(278)
21
(305)
169
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
$
$
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.
92 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.
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. The investments in 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.
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
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 charge-
off. 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.
93 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. During the
fourth quarter of 2013, the Bancorp modified its nonaccrual policy
for home equity loans and lines of credit. Home equity loans and
lines of credit are reported on nonaccrual status if principal or
interest has been in default for 90 days or more unless the loan is
both well secured and in the process of collection. Home equity
loans and lines of credit that have been in default for 60 days or
more are also reported on nonaccrual status if the senior lien has
been in default 120 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 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 current or
recover the entire outstanding principal and accrued interest
balance.
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.
is collected, additional
Once the entire recorded
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
investment
94 Fifth Third Bancorp
Commercial
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
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 loans and credit card loans that have principal
and interest payments that have become past due 180 days are
assessed for a charge-off to the ALLL, unless such loans are both
well-secured and in the process of collection. The Bancorp modified
its charge-off policy for home equity loans and lines of credit in the
fourth quarter of 2013 to assess for a charge-off to the ALLL when
such loans or lines of credit have become past due 120 days if the
senior lien is also 120 days past due, 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 assessed for a charge-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. During the third quarter of 2012, the OCC, a national
bank regulatory agency, issued interpretive guidance that requires
non-reaffirmed loans included in Chapter 7 bankruptcy filings 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 subject to guidance of the OCC. 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Impaired loans generally consist of nonaccrual loans and leases,
loans modified in a TDR and loans over $1 million that are
currently on accrual status and not yet modified in a TDR, but for
which the Bancorp has determined that it is probable that it will
grant a payment concession in the near term due to the borrower’s
financial difficulties. 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
if the
restructuring agreement specifies a rate equal to or greater than the
rate the Bancorp was willing to accept at the time of the
restructuring for a new loan with comparable risk and the loan is
not impaired based on the terms specified by the restructuring
agreement. Refer to the ALLL section for discussion regarding the
Bancorp’s methodology
loans and
identifying
determination of the need for a loss accrual.
in years after the restructuring
impaired
impaired
for
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 jumbo residential mortgage loans,
commercial loans and other consumer loans that management has
the intent 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
to sell residential mortgage
intent
mortgage-backed securities prices, interest rate risk and an internally
developed credit component.
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 non-owner 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.
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
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
95 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the industry and geographic region of the borrower, size and
financial condition of the borrower, cash flow and leverage of the
the borrower’s
the Bancorp’s evaluation of
borrower, and
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 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
96 Fifth Third Bancorp
is recognized
or individual loan sales in accordance with its investment policies.
The sold loans are removed from the balance sheet and a net gain or
in the Bancorp’s Consolidated Financial
loss
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. 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. See Note 10 for further
information on consolidated and non-consolidated VIEs.
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
monthly, based on fair value, with
impairment
through a valuation allowance and permanent
recognized
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, and the weighted-average coupon, 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
income
Bank Premises and Equipment
Bank premises and equipment, including leasehold improvements,
are carried at cost less accumulated depreciation and amortization.
Depreciation is calculated using the straight-line method based on
estimated useful lives of the assets for book purposes, while
accelerated depreciation
tax purposes.
is used for
Amortization of leasehold improvements is computed using the
straight-line method over the lives of the related leases or useful
lives of the related assets, whichever is shorter. Whenever events or
changes in circumstances dictate, the Bancorp tests its long-lived
assets for impairment by determining whether the sum of the
estimated undiscounted future cash flows attributable to a long-lived
asset or asset group is less than the carrying amount of the long-
lived asset or asset group
through a probability-weighted
approach. In the event the carrying amount of the long-lived asset
or asset group is not recoverable, an impairment loss is measured as
the amount by which the carrying amount of the long-lived asset or
asset group exceeds its fair value. Maintenance, repairs and minor
improvements are charged
the
Consolidated Statements of Income as incurred.
to noninterest expense
in
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 or 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, such as the limitation on the use of any net
operating losses, 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
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. 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 20.
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
is
compensation expense during the period when forfeiture
expected.
97 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Business combinations entered into by the Bancorp typically include
the acquisition of goodwill. Goodwill is required 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
(Step 0). In this qualitative assessment, the Bancorp evaluates events
and circumstances which may include, but are not limited to, the
general economic environment, banking industry and market
conditions, the overall financial performance of the Bancorp, the
performance of the Bancorp’s stock, the key financial performance
metrics of the reporting units, and events affecting the reporting
units. 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.
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
98 Fifth Third Bancorp
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.
Level 3 – Unobservable inputs for the asset or liability for which
there is little, if any, market activity at the measurement date.
Unobservable inputs reflect the Bancorp’s own assumptions
about what market participants would use to price the asset or
inputs are developed based on the best
liability. The
in the circumstances, which might
information available
include the Bancorp’s own financial data such as internally
developed pricing models and discounted cash
flow
methodologies, as well as instruments for which the fair value
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 27 for further information on fair value measurements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
The Bancorp 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 retirement status are expensed
immediately. As 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 24.
Pension Plans
The Bancorp uses an expected long-term rate of return applied to
the fair market value of assets as of the beginning of the year and
the expected cash flow during the year for calculating the expected
investment return on all pension plan assets. Amortization of the
net gain or loss resulting from experience different from that
assumed and from changes in assumptions (excluding asset gains
and losses not yet reflected in market-related value) is included as a
component of net periodic benefit cost. If, as of the beginning of
the year, that net gain or loss exceeds 10% of the greater of the
projected benefit obligation and the market-related value of plan
assets, the amortization is that excess divided by the average
remaining service period of participating employees expected to
receive benefits under the plan. The Bancorp uses a third-party
actuary to compute the remaining service period of participating
employees. This period reflects expected turnover, pre-retirement
mortality, and other applicable employee demographics.
Other
Securities and other property held by Fifth Third Investment
Advisors, a division of the Bancorp’s banking subsidiary, in a
fiduciary or agency capacity are not included in the Consolidated
Balance Sheets because such items are not assets of the subsidiaries.
Investment advisory revenue in the Consolidated Statements of
Income is recognized on the accrual basis. Investment advisory
service revenues are recognized monthly based on a fee charged per
transaction processed and/or a fee charged on the market value of
average account balances associated with individual contracts.
The Bancorp recognizes revenue from its card and processing
services on an accrual basis as such services are performed,
recording revenues net of certain costs (primarily interchange fees
charged by credit card associations) not controlled by the Bancorp.
The Bancorp purchases life insurance policies on the lives of
certain directors, officers and employees and is the owner and
beneficiary of the policies. The Bancorp invests in these policies,
known as BOLI, to provide an efficient form of funding for long-
term retirement and other employee benefits costs. The Bancorp
records 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.
information and net
Accounting and Reporting Developments
Disclosures about Offsetting Assets and Liabilities
In December 2011, and clarified in January 2013, the FASB issued
amended guidance related to disclosures about offsetting assets and
liabilities. The amended guidance requires the Bancorp to disclose
both gross
information about financial
instruments, 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 was required to be applied
retrospectively and was effective for fiscal years, and interim periods
within those years, beginning on or after January 1, 2013. The
amended guidance was adopted by the Bancorp on January 1, 2013
and the required disclosures are included in Note 13.
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income
In February 2013, the FASB issued amended guidance related to
amounts reclassified out of AOCI. The amended guidance requires
the Bancorp to present, either on the face of the Consolidated
Statements of Income or in the Notes to Consolidated Financial
Statements, significant amounts reclassified out of AOCI by the
respective line items of net income but only if the amount
reclassified is required under U.S. GAAP to be reclassified to net
income in its entirety in the same reporting period. For other
amounts that are not required to be reclassified in their entirety, the
Bancorp is required to cross-reference to other disclosures required
under U.S. GAAP that provide additional detail about those
amounts. The amended guidance was effective prospectively for
reporting periods beginning after December 15, 2012 and was
adopted by the Bancorp on January 1, 2013. The required
disclosures are included in Note 22.
Obligations Resulting from Joint and Several Liability Arrangements for Which
the Total Amount of the Obligation is Fixed at the Reporting Date
In February 2013, the FASB issued amended guidance relating to
the measurement of obligations resulting from joint and several
liability arrangements for which the total amount under the
arrangement is fixed at the reporting date. For the total amount of
an obligation under an arrangement to be considered fixed at the
reporting date, there can be no measurement uncertainty relating to
the total amount of the obligation. The obligation resulting from
joint and several liability arrangements would be measured initially as
the sum of 1) the amount the Bancorp has agreed to pay on the
basis of its arrangement among its co-obligors and 2) any additional
amount the Bancorp expects to pay on behalf of its co-obligors. The
amended guidance also would require the Bancorp to disclose the
nature and amount of the obligation as well as information about
the risks that such obligations pose to future cash flows. The
amended guidance is effective for reporting periods beginning after
December 15, 2013 and will be applied retrospectively to all prior
periods presented for those obligations resulting from joint and
several liability arrangements that exist at the beginning of the fiscal
year of adoption. The Bancorp adopted the amended guidance on
99 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassification of Residential Real Estate Collateralized Consumer Mortgage
Loans upon Foreclosure
In January 2014, the FASB issued amended guidance that clarifies
when a creditor should be considered to have received physical
possession of residential real estate property collateralizing a
consumer mortgage loan such that the loan receivable should be
derecognized and the real estate property recognized. The amended
guidance clarifies that an in substance repossession or foreclosure
occurs, and a creditor is considered to have received physical
possession of residential real estate property collateralizing a
consumer mortgage loan, upon either (1) the creditor obtaining legal
title to the residential real estate property upon completion of a
foreclosure or (2) the borrower conveying all interest in the
residential real estate property to the creditor to satisfy that loan
through completion of a deed in lieu of foreclosure or through a
similar legal agreement. In addition, the amended guidance requires
interim and annual disclosures of both (1) the amount of foreclosed
residential real estate property held by the creditor and (2) the
recorded investment in consumer mortgage loans collateralized by
residential real estate property that are in the process of foreclosure
according to local requirements of the applicable jurisdiction. The
amended guidance may be applied prospectively or through a
modified retrospective approach and is effective for fiscal years, and
interim periods within those years, beginning after December 15,
2014, with early adoption permitted. The adoption of the amended
guidance is not expected to have a material impact on the Bancorp’s
Consolidated Financial Statements.
January 1, 2014 and the adoption did not have a material impact on
the Bancorp’s Consolidated Financial Statements.
Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap
Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes
In July 2013, the FASB issued amended guidance which permits the
OIS to be used as a U.S. benchmark interest rate for hedge
accounting purposes, in addition to UST and LIBOR. The amended
guidance also removed a previous scope reference that required the
same benchmark interest rate be used for similar hedges and that
using different rates be rare and justified. The amended guidance
was effective prospectively for qualifying new or redesignated
hedging relationships entered into on or after July 17, 2013 (i.e., the
issuance date). The Bancorp’s adoption of the amended guidance
did not have a material impact on the Bancorp’s Consolidated
Financial Statements.
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
In July 2013, the FASB issued amended guidance to clarify that an
unrecognized tax benefit, or a portion of an unrecognized tax
benefit, should be presented in the financial statements as a
reduction to a deferred tax asset for a net operating
loss
carryforward, a similar tax loss, or a tax credit carryforward, except
as follows. To the extent a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward is not available at the reporting
date under the tax law of the applicable jurisdiction to settle any
income taxes that would result from the disallowance of a tax
position or the tax law of the applicable jurisdiction does not require
the entity to use, and the entity does not intend to use, the deferred
tax asset for such purpose, the unrecognized tax benefit should be
presented in the financial statements as a liability and should not be
combined with deferred tax assets. The assessment of whether a
deferred tax asset is available is based on the unrecognized tax
benefit and deferred tax asset that exist at the reporting date and
should be made presuming disallowance of the tax position at the
reporting date. The amended guidance is effective for fiscal years,
and interim periods within those years, beginning after December
15, 2013, with early adoption permitted. The Bancorp adopted the
amended guidance on January 1, 2014 and the adoption of the
amended guidance did not have a material impact on the Bancorp’s
Consolidated Financial Statements.
Accounting for Investments in Qualified Affordable Housing Projects
In January 2014, the FASB issued amended guidance which would
permit the Bancorp to make an accounting policy election to
account for its investments in qualified affordable housing projects
using a proportional amortization method if certain conditions are
met. Under the proportional amortization method, the Bancorp
would amortize the initial cost of the investment in proportion to
the tax credits and other tax benefits received and recognize the net
investment performance in the income statement as a component of
income tax expense (benefit). The amended guidance would require
disclosure of the nature of the Bancorp’s investments in qualified
affordable housing projects, and the effect of the measurement of
the investments in qualified affordable housing projects and the
related tax credits on the Bancorp’s financial position and results of
operation. The amended guidance would be applied retrospectively
to all periods presented and is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2014, with
early adoption permitted. The Bancorp is currently in the process of
evaluating the impact of adopting the amended guidance on the
Bancorp’s Consolidated Financial Statements.
100 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
Noncash Investing and Financing Activities:
Portfolio loans to loans held for sale
Loans held for sale to portfolio loans
Portfolio loans to OREO
Loans held for sale to OREO
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 December 31, 2013 and
2012, the Bancorp’s banking subsidiary reserve requirement was
$1.6 billion and $1.5 billion, respectively. Vault cash was not
sufficient to meet the total reserve requirement; therefore, as of
December 31, 2013 and 2012, the Bancorp’s banking subsidiary
satisfied the remaining reserve requirement with $942 million and
$1.1 billion, respectively, of the Bancorp’s total deposit at the FRB.
The Bancorp’s total deposit at the FRB is held in other 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, 2013 and 2012. The Bancorp’s banking
subsidiary paid the Bancorp’s nonbank subsidiary holding company,
which in turn paid the Bancorp $859 million and $2.0 billion in
dividends during the years ended December 31, 2013 and 2012,
respectively.
The FRB issued guidelines known as CCAR, which provide a
common, conservative approach to ensure BHCs, including the
Bancorp, 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. The CCAR process requires the submission
of a comprehensive capital plan that assumes a minimum planning
horizon of nine quarters under various economic scenarios.
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 capital plan must reflect the revised capital
the
framework
implementation of the Basel III accord, including the framework’s
minimum regulatory capital ratios and transition arrangements.
in connection with
the FRB adopted
that
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
$
2013
406
535
641
44
204
4
2012
524
383
62
77
272
23
2011
658
102
143
32
342
43
Additionally, the FRB reviews the robustness of the capital
adequacy process, the capital policy and the Bancorp’s ability to
maintain capital above the minimum regulatory capital ratios as they
transition to Basel III and above a Basel I Tier 1 common ratio of
five percent under baseline and stressful conditions throughout a
nine-quarter planning horizon.
The FRB issued stress testing rules that implement section
165(i)(1) and (i)(2) of the DFA. Large BHCs, including the Bancorp,
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
In March 2013, the FRB announced it had completed the 2013
CCAR. For BHCs 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 2013 capital
distributions. The FRB indicated to the Bancorp that it did not
object to the following proposed capital actions for the period
beginning April 1, 2013 and ending March 31, 2014: the potential
increase in its quarterly common stock dividend to $0.12 per share;
the potential repurchase of up to $750 million in TruPS, subject to
the determination of a regulatory capital event and replacement with
the issuance of a similar amount of Tier II-qualifying subordinated
debt; the potential conversion of the $398 million in outstanding
Series G 8.5% convertible preferred stock into approximately 35.5
million common shares issued to the holders and the repurchase an
equivalent amount of common shares issued in the conversion up
to $550 million in market value, and the issuance of $550 million in
preferred shares; the potential repurchase of common shares in an
amount up to $984 million, including any shares issued in a Series G
preferred stock conversion; incremental repurchase of common
shares in the amount of any after-tax gains from the sale of Vantiv,
Inc stock and the potential issuance of an additional $500 million in
preferred stock. Actions consistent with these proposed capital
actions were substantially completed in 2013.
The DFA requires that BHCs with over $50 billion in
consolidated assets that participated in the 2009 Supervisory Capital
Assessment Program, including the Bancorp, conduct two stress
tests each year. On May 13, 2013, the FRB launched the 2013 Mid-
Cycle Stress Tests, which was submitted to the FRB in July 2013.
The stress tests required the BHCs to develop their own baseline,
adverse and severely adverse scenarios to reflect its individual
operations and risks. Each BHC was required to release its results
under the severely adverse scenario, which the Bancorp disclosed on
its website on September 24, 2013.
101 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The FRB launched the 2014 stress testing program and CCAR
on November 1, 2013. The stress testing results and capital plan
were submitted by the Bancorp to the FRB on January 6, 2014.
The FRB expects to release summary results of the 2014 stress
testing program and CCAR in March 2014. The results will include
supervisory projections of capital ratios, losses and revenues under
the supervisory adverse and supervisory severely adverse scenarios.
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 its 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, 2014 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
other and held-to-maturity securities portfolios as of December 31:
2013
2012
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 $262 and $408 as of December 31, 2013 and 2012, respectively, recorded at fair value with fair value changes recorded in securities gains, net
26
1,644
192
12,284
3,582
869
18,597
26
1,523
187
12,294
3,514
865
18,409
41
1,730
203
8,403
3,161
1,033
14,571
41
1,911
212
8,730
3,277
1,036
15,207
-
-
-
(150)
(8)
(1)
(159)
-
121
5
140
76
5
347
-
181
9
345
119
3
657
-
-
-
(18)
(3)
-
(21)
207
1
208
207
1
208
282
2
284
282
2
284
-
-
-
-
-
-
-
-
-
-
-
-
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 $402 and $349, respectively, at December 31, 2013 and, $497 and $347, respectively, at December 31, 2012, that are
carried at cost, and certain mutual fund and equity security holdings.
The following table presents realized gains and losses that were recognized in income from available-for-sale securities for the years ended
December 31:
($ in millions)
Realized gains
Realized losses
OTTI
Net realized (losses) gains(a)
(a) Excludes net gains on interest-only mortgage-backed securities of $129 for the year ended December 31, 2013.
2013
2012
2011
$
$
77
(102)
(74)
(99)
75
(2)
(58)
15
75
-
(19)
56
Trading securities totaled $343 million as of December 31, 2013,
compared to $207 million at December 31, 2012. Gross realized
gains on trading securities were $1 million, $2 million and $1 million
for the years ended December 31, 2013, 2012 and 2011,
respectively. Gross realized losses on trading securities were
immaterial to the Bancorp for the years ended December 31, 2013
and 2012 and $7 million for the year ended December 31, 2011. Net
unrealized gains on trading securities were $3 million, $1 million and
$5 million at December 31, 2013, 2012 and 2011, respectively.
At December 31, 2013 and 2012 securities with a fair value of
$11.6 billion and $12.6 billion, respectively, were pledged to secure
borrowings, public deposits, trust funds, derivative contracts and for
other purposes as required or permitted by law.
102 Fifth Third Bancorp
The expected maturity distribution of the Bancorp’s agency mortgage-backed securities and the contractual maturity distribution of the Bancorp’s
available-for-sale and other and held-to-maturity securities as of December 31, 2013 are shown in the following table:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Available-for-Sale and Other
Fair Value
Held-to-Maturity
Amortized Cost
($ 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.
120
3,703
9,765
3,956
865
18,409
123
3,893
9,701
4,011
869
18,597
Amortized Cost
$
$
19
170
17
2
-
208
Fair Value
19
170
17
2
-
208
The following table provides the fair value and gross unrealized losses on available-for-sale and other 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)
2013
Agency mortgage-backed securities
Other bonds, notes and debentures
Other securities
Total
2012
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
$
$
$
$
7,221
595
33
7,849
1,784
454
1
2,239
(150)
(5)
(1)
(156)
(18)
(3)
-
(21)
1
132
4
137
-
-
-
-
-
(3)
-
(3)
-
-
-
-
7,222
727
37
7,986
1,784
454
1
2,239
(150)
(8)
(1)
(159)
(18)
(3)
-
(21)
Other-Than-Temporary Impairments
The Bancorp recognized $74 million, $58 million, and $19 million of
OTTI on its available-for-sale and other debt securities, included in
securities gains, net and securities gains, net – non-qualifying hedges
on mortgage servicing rights, in the Bancorp’s Consolidated
Statements of Income during the years ended December 31, 2013,
2012, and 2011, respectively. The Bancorp did not recognize OTTI
on its held-to-maturity debt securities for the years ended December
31, 2013, 2012, and 2011. Less than one percent of unrealized losses
in the available-for-sale securities portfolio were represented by
non-rated securities at December 31, 2013 and 2012.
During the years ended December 31, 2013, 2012 and 2011,
the Bancorp did not recognize OTTI on any of its available-for-sale
equity securities.
103 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS AND LEASES
The Bancorp diversifies its loan and lease portfolio by offering a
variety of loan and lease products with various payment terms and
rate structures. Lending activities are concentrated within those
states in which the Bancorp has banking centers and are primarily
located in the Midwestern and Southeastern regions of the United
States. The Bancorp’s commercial loan portfolio consists of lending
to various industry types. Management periodically reviews the
performance of its loan and lease products to evaluate whether they
are performing within acceptable interest rate and credit risk levels
and changes are made to underwriting policies and procedures as
needed. The Bancorp maintains an allowance to absorb loan and
lease losses inherent in the portfolio. For further information on
credit quality and the ALLL, see Note 6.
The following table provides a summary of the total loans and leases classified by primary purpose as of December 31:
($ in millions)
Loans and leases held for sale:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
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
2013
2012
$
$
$
$
31
3
2
1
890
17
944
39,316
8,066
1,039
3,625
52,046
12,680
9,246
11,984
2,294
364
36,568
88,614
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
Total portfolio loans and leases are recorded net of unearned
income, which totaled $700 million as of December 31, 2013 and
$758 million as of December 31, 2012. 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 $111 million and
$73 million as of December 31, 2013 and 2012, respectively.
The Bancorp’s FHLB and FRB advances are generally secured by
loans. The Bancorp had loans of $10.9 billion and $12.7 billion at
December 31, 2013 and 2012, respectively, pledged at the FHLB,
and loans of $33.5 billion and $30.9 billion at December 31, 2013
and 2012, respectively, pledged at the FRB.
The following table presents a summary of the total loans and leases owned by the Bancorp as of and for the years ended December 31:
($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
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
2013
39,347
8,069
1,041
3,626
13,570
9,246
11,984
2,294
381
89,558
944
88,614
$
$
$
$
2013
-
-
-
-
66
-
8
29
-
103
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
$
$
2013
168
47
4
1
60
97
22
78
24
501
2012
165
99
25
8
122
157
31
74
23
704
The Bancorp engages in commercial lease products primarily related
to the financing of commercial equipment. The Bancorp had $3.0
billion of direct financing leases and $1.3 billion of leveraged leases
at both of the years ended December 31, 2013 and 2012.
Pre-tax income from leveraged leases for 2013 was $25 million
compared to pre-tax income in 2012 of $37 million. The tax effect
of this income was an expense of $9 million in 2013 and a benefit of
$6 million in 2012.
104 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the investment in lease financing at December 31:
($ 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 $53 million and $67 million at December 31, 2013 and 2012, respectively.
$
$
2013
3,556
754
15
4,325
(700)
3,625
2012
3,543
760
16
4,319
(758)
3,561
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 $13 million and $9 million of residual value write-downs
related to commercial leases for the years ended December 31, 2013
and 2012, respectively. The residual value write-downs related to
commercial leases are recorded in corporate banking revenue in the
Consolidated Statements of Income. At December 31, 2013, the
minimum future lease payments receivable for each of the years
2014 through 2018 was $664 million, $591 million, $505 million,
$389 million and $289 million, respectively.
6. CREDIT QUALITY AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES
The Bancorp disaggregates ALLL balances and transactions in the ALLL by portfolio segment. Credit quality related disclosures for loans and
leases are further disaggregated by class.
Allowance for Loan and Lease Losses
The following tables summarize transactions in the ALLL by portfolio segment:
For the year ended December 31, 2013
($ 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, 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
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
$
$
$
$
$
$
1,236
(284)
64
42
1,058
229
(70)
10
20
189
278
(283)
62
168
225
111
-
-
(1)
110
1,854
(637)
136
229
1,582
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
105 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, 2013 ($ in millions)
ALLL:(a)
Individually evaluated for impairment
Collectively evaluated for impairment
Unallocated
Total ALLL
Loans and leases:(b)
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
$
$
(c)
186 a
872
-
1,058
139
50
-
189
53
172
-
225
496
23,392
-
23,888
-
-
110
110
-
-
-
-
378
1,094
110
1,582
3,381
85,137
4
88,522
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
Total portfolio loans and leases
(a)
(b) Excludes $92 of residential mortgage loans measured at fair value, and includes $881 of leveraged leases, net of unearned income.
(c)
1,325
11,259
4
12,588
(c)
1,560 a
50,486
-
52,046
Includes $9 related to leveraged leases.
$
$
Includes five restructured nonaccrual loans at December 31, 2013 associated with a consolidated variable interest entity, in which the Bancorp has no continuing credit risk due to the risk being
assumed by a third party, with a recorded investment of $28 and an allowance of $11.
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
$
$
95
1,140
1
-
1,236
137
91
1
-
229
62
216
-
-
278
544
23,833
-
24,377
-
-
-
111
111
-
-
-
-
294
1,447
2
111
1,854
2,822
82,877
7
85,706
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
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.
1,298
10,637
6
11,941
980
48,407
1
49,388
Includes $11 related to leveraged leases.
$
$
106 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 non-owner 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, 2013 ($ in millions)
Commercial and industrial loans
Commercial mortgage owner occupied loans
Commercial mortgage non-owner occupied loans
Commercial construction loans
Commercial leases
Total
As of December 31, 2012 ($ in millions)
Commercial and industrial loans
Commercial mortgage owner occupied loans
Commercial mortgage non-owner occupied loans
Commercial construction loans
Commercial leases
Total
Pass
36,776
3,866
2,879
855
3,546
47,922
Pass
33,521
3,934
2,958
444
3,483
44,340
$
$
$
$
Special
Mention
1,118
209
248
32
56
1,663
Special
Mention
1,113
338
449
59
48
2,007
Substandard
1,419
415
431
152
23
2,440
Substandard
1,379
603
815
195
18
3,010
Doubtful
3
17
1
-
-
21
Doubtful
25
1
5
-
-
31
Total
39,316
4,507
3,559
1,039
3,625
52,046
Total
36,038
4,876
4,227
698
3,549
49,388
the credit quality and
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 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 are classified as
nonperforming unless such loans are both well secured and in the
process of collection. During the fourth quarter of 2013, the
Bancorp modified its nonaccrual policy for home equity loans and
lines of credit. Home equity loans and lines of credit are reported as
nonperforming if principal or interest has been in default for 90
days or more unless the loan is both well secured and in the process
of collection. Home equity loans and lines of credit that have been
in default for 60 days or more are also reported as nonperforming if
the senior lien has been in default 120 days or more, unless the loan
is both well secured and in the process of collection. As a result of
the modification of the nonaccrual policy for home equity loans and
lines of credit, $46 million of home equity loans and lines of credit
were reclassified from performing to nonperforming status during
the fourth quarter of 2013. In addition, the Bancorp modified its
charge-off policy during the fourth quarter of 2013. Home equity
loans and lines of credit that have been in default 120 days or more
are assessed for a charge-off if the senior lien has been in default
120 days or more. Residential mortgage, home equity, automobile
and other consumer loans and leases that have been modified in a
107 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TDR and subsequently become past due 90 days are classified as
nonperforming, unless the loan is both well secured and in the
process of collection. Credit card loans that have been modified in a
TDR are classified as nonperforming unless such loans have a
sustained repayment performance of six months or greater and are
reasonably assured of
the
restructured terms. Well secured
loans are collateralized by
perfected security interests in real and/or personal property for
in accordance with
repayment
which the Bancorp estimates proceeds from sale would be sufficient
to recover the outstanding principal and accrued interest balance of
the loan and pay all costs to sell the collateral. The Bancorp
considers a loan in the process of collection if collection efforts or
legal action is proceeding and the Bancorp expects to collect funds
sufficient to bring the loan current or recover the entire outstanding
principal and accrued interest balance.
The following table presents a summary of the Bancorp’s residential mortgage and consumer portfolio segments disaggregated into performing
versus nonperforming status as of December 31:
Performing
($ in millions)
12,423
Residential mortgage loans(a)
9,153
Home equity
11,982
Automobile loans
2,261
Credit card
364
Other consumer loans and leases
Total
36,183
(a) Excludes $92 and $76 of loans measured at fair value at December 31, 2013 and 2012, respectively.
$
$
2013
Nonperforming
165
93
2
33
-
293
Performing
11,704
9,965
11,970
2,058
289
35,986
2012
Nonperforming
237
53
2
39
1
332
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:
As of December 31, 2013
($ in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage owner occupied loans
Commercial mortgage non-owner 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)
(a) Excludes $92 of loans measured at fair value.
(b)
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
$
$
39,118
4,423
3,515
1,010
3,620
12,284
9,058
11,919
2,225
362
87,534
53
15
9
-
-
73
102
55
36
2
345
145
69
35
29
5
231
86
10
33
-
643
198
84
44
29
5
304
188
65
69
2
988
39,316
4,507
3,559
1,039
3,625
12,588
9,246
11,984
2,294
364
88,522
-
-
-
-
-
66
-
8
29
-
103
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, 2013, $81 of these loans were 30-89 days past due and $378 were 90 days or more past due. The
Bancorp recognized $5 million of losses for the year ended December 31, 2013 due to claim denials and curtailments associated with these advances.
Includes accrual and nonaccrual loans and leases.
(c)
108 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
As of December 31, 2012
($ in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage owner occupied loans
Commercial mortgage non-owner 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)
(a) Excludes $76 of loans measured at fair value.
(b)
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.
(c)
109 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired Loans and Leases
Larger commercial loans and leases included within aggregate
borrower relationship balances exceeding $1 million that exhibit
probable or observed credit weaknesses are subject to individual
review for impairment. The Bancorp also performs an individual
review on loans and leases that are restructured in a troubled debt
restructuring. The Bancorp considers the current value of
collateral, credit quality of any guarantees, the loan structure, and
other factors when evaluating whether an individual loan or lease
is impaired. Other factors may include the geography and industry
of the borrower, size and financial condition of the borrower,
cash flow and leverage of the borrower, and the Bancorp’s
evaluation of the borrower’s management. Smaller balance
homogenous loans or leases that are collectively evaluated for
impairment are not included in the following tables.
The following table summarizes the Bancorp’s impaired loans and leases (by class) that were subject to individual review, which includes all loans
and leases restructured in a troubled debt restructuring as December 31:
2013
($ in millions)
With a related allowance recorded:
Commercial:
Commercial and industrial loans
Commercial mortgage owner occupied loans(b)
Commercial mortgage non-owner occupied loans
Commercial construction loans
Commercial leases
Restructured residential mortgage loans
Restructured consumer:
Home equity
Automobile loans
Credit card
Total impaired loans and leases with a related allowance
With no related allowance recorded:
Commercial:
Commercial and industrial loans
Commercial mortgage owner occupied loans
Commercial mortgage non-owner occupied loans
Commercial construction loans
Commercial leases
Restructured residential mortgage loans
Restructured consumer:
Home equity
Automobile loans
Total impaired loans and leases with no related allowance
Total impaired loans and leases
(a)
Unpaid
Principal
Balance
Recorded
Investment
Allowance
$
$
$
$
870
85
154
68
12
1,081
377
23
59
2,729
181
106
154
77
14
313
43
3
891
3,620
759
74
134
54
12
1,052
373
23
58
2,539
177
98
147
63
14
273
39
3
814
3,353 a
(a)
145
11
14
5
-
139
39
3
11
367
-
-
-
-
-
-
-
-
-
367
Includes $869, $1,241 and $444, respectively, of commercial, residential mortgage and consumer TDRs on accrual status; $228, $84 and $52, respectively, of commercial, residential mortgage and
consumer TDRs on nonaccrual status.
(b) Excludes five restructured nonaccrual loans at December 31, 2013 associated with a consolidated variable interest entity, in which the Bancorp has no continuing credit risk due to the risk being
assumed by a third party, with an unpaid principal balance of $28, a recorded investment of $28, and an allowance of $11.
110 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2012
($ in millions)
With a related allowance recorded:
Commercial:
Commercial and industrial loans
Commercial mortgage owner occupied loans
Commercial mortgage non-owner 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 and leases with a related allowance
With no related allowance recorded:
Commercial:
Commercial and industrial loans
Commercial mortgage owner occupied loans
Commercial mortgage non-owner occupied loans
Commercial construction loans
Commercial leases
Restructured residential mortgage loans
Restructured consumer:
Home equity
Automobile loans
Total impaired loans and leases with no related allowance
Total impaired loans and leases
(a)
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
(a)
2,823 a
65
5
16
5
5
137
46
4
12
-
295
-
-
-
-
-
-
-
-
-
295
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.
The following table summarizes the Bancorp’s average impaired loans and leases and interest income by class for the year ended December 31:
2013
2012
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
($ in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage owner occupied loans(a)
Commercial mortgage non-owner 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 and leases
$
(a) Excludes five restructured nonaccrual loans at December 31, 2013 associated with a consolidated variable interest entity, in which the Bancorp has no continuing credit risk due to the risk being
448
156
361
160
10
1,276
517
146
321
108
11
1,311
429
29
68
2
2,942
439
38
80
1
2,969
23
1
4
-
113
16
4
8
4
-
53
4
4
10
2
-
47
24
1
4
-
96
assumed by a third party, with an unpaid principal balance of $28, an average recorded investment of $29, and an allowance of $11.
111 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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; commercial and credit card TDRs which have not yet met the requirements to be classified as a performing asset; consumer TDRs
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
assets, including OREO and other repossessed property. The following table summarizes the Bancorp’s nonperforming loans and leases, by class,
as of December 31:
$
2013
2012
($ in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage owner occupied loans(a)
Commercial mortgage non-owner 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(b)(c)
OREO and other repossessed property(d)
(a) Excludes $21 of restructured nonaccrual loans at December 31, 2013 associated with a consolidated variable interest entity in which the Bancorp has no continuing credit risk due the risk being
53
2
39
1
95
1,029
257
93
1
33
-
127
751
229
330
125
157
76
9
697
237
281
95
48
29
5
458
166
$
assumed by a third party.
(b) Excludes $6 and $29 of nonaccrual loans held for sale at December 31, 2013 and 2012, respectively.
(c)
Includes $10 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at both December 31, 2013 and 2012, and $2 and $1 of restructured nonaccrual
government insured commercial loans at December 31, 2013 and 2012, respectively.
(d) Excludes $77 and $72 of OREO related to government insured loans at December 31, 2013 and 2012, 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, 2013, the
Bancorp had $46 million in line of credit commitments and $40
million in letter of credit commitments to lend additional funds to
borrowers whose terms have been modified in a TDR compared to
$28 million and $25 million, respectively, at December 31, 2012.
112 Fifth Third Bancorp
The following table provides a summary of loans modified in a TDR by the Bancorp during the year ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2013 ($ in millions)(a)
Commercial:
Commercial and industrial loans
Commercial mortgage owner occupied loans(c)
Commercial mortgage non-owner 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 year(b)
Recorded investment
in loans modified
in a TDR
during the year
Increase
(Decrease)
to ALLL upon
modification
Charge-offs
recognized upon
modification
146
65
59
4
1
1,620
695
499
8,202
11,291
$
$
604
19
72
34
2
249
37
14
50
1,081
39
(2)
(7)
(2)
(5)
28
(1)
1
7
58
44
-
-
-
-
-
-
-
-
44
Number of loans
modified in a TDR
during the year(b)
Recorded investment
in loans modified
in a TDR
during the year
Increase
(Decrease)
to ALLL upon
modification
Charge-offs
recognized upon
modification
2012 ($ in millions)(a)
Commercial:
Commercial and industrial loans
Commercial mortgage owner occupied loans
Commercial mortgage non-owner 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.
(c) Excludes five loans modified in a TDR during the year ended December 31, 2013 associated with a consolidated variable interest entity in which the Bancorp has no continuing credit risk due to
108
67
67
17
8
1,758
1,343
1,289
11,407
16,064
84
53
91
38
7
340
(7)
(8)
(7)
(4)
1
35
82
23
75
793
9
2
-
-
-
-
1
2
11
24
-
-
-
11
$
$
the risk being assumed by a third party. The TDR resulted in a $7 increase to the ALLL and a $2 charge-off at modification and has a recorded investment of $28.
The Bancorp considers TDRs that become 90 days or more past
due under the modified terms as subsequently defaulted. For
commercial loans not subject to individual review for impairment,
the historical loss rates that are applied to such commercial loans for
purposes of determining the allowance include historical losses
associated with subsequent defaults on loans previously modified in
a TDR. For consumer loans, the Bancorp performs a qualitative
assessment of the adequacy of the consumer ALLL by comparing
the consumer ALLL to forecasted consumer losses over the
projected loss emergence period (the forecasted losses include the
impact of subsequent defaults of consumer TDRs). When a
residential mortgage, home equity, auto or other consumer loan that
has been modified in a TDR subsequently defaults, the present
value of expected cash flows used in the measurement of the
potential impairment loss is generally limited to the expected net
proceeds from the sale of the loan’s underlying collateral and any
resulting impairment loss is reflected as a charge-off or an increase
in ALLL. When a credit card loan that has been modified in a TDR
subsequently defaults, the calculation of the impairment loss is
consistent with the Bancorp’s calculation for other credit card loans
that have become 90 days or more past due.
113 Fifth Third Bancorp
The following table provides a summary of subsequent defaults that occurred during the years ended December 31, 2013 and 2012 and within 12
months of the restructuring date:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 ($ in millions)(a)
Commercial:
Commercial and industrial loans
Commercial mortgage owner occupied loans
Residential mortgage loans
Consumer:
Home equity
Automobile loans
Credit card
Total portfolio loans and leases
December 31, 2012 ($ in millions)(a)
Commercial:
Commercial and industrial loans
Commercial mortgage owner occupied loans
Commercial mortgage non-owner occupied loans
Commercial construction loans
Residential mortgage loans
Consumer:
Home equity
Automobile loans
Credit card (revised)
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
6
7
375
65
4
1,768
2,225
Number of
Contracts
2
3
2
2
332
101
42
1,832
2,316
$
$
$
$
11
1
58
4
-
11
85
Recorded
Investment
3
2
1
3
57
7
-
13
86
114 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. BANK PREMISES AND EQUIPMENT
The following is a summary of bank premises and equipment at December 31:
($ in millions)
Land and improvements
Buildings
Equipment
Leasehold improvements
Construction in progress
Accumulated depreciation and amortization
Total
Estimated Useful Life
2 to 30 yrs.
1 to 30 yrs.
5 to 30 yrs.
2013
838
1,763
1,581
397
118
(2,166)
2,531
2012
841
1,692
1,460
386
141
(1,978)
2,542
$
$
Depreciation and amortization expense related to bank premises
and equipment was $245 million in 2013, $233 million in 2012 and
$224 million in 2011.
For the years ended 2013 and 2012, the Bancorp recorded
charges of $6 million and $21 million, respectively, of lower of cost
or market adjustments associated with bank premises. These
adjustments were generally based on appraisals of the underlying
less estimated selling costs. The recognized
bank premises
impairment losses were recorded in other noninterest income in the
Consolidated Statements of Income.
Gross occupancy expense for cancelable and noncancelable
leases was $98 million in 2013 and $99 million in 2012 and 2011,
which was reduced by rental income from leased premises of $16
million in 2013, $17 million in 2012 and $19 million in 2011. The
Bancorp’s subsidiaries have entered into a number of noncancelable
and capital lease agreements with respect to bank premises and
equipment.
The following table provides the annual future minimum payments under capital leases and noncancelable operating leases at December 31, 2013:
($ in millions)
Year ending December 31,
2014
2015
2016
2017
2018
Thereafter
Total minimum lease payments
Less: Amounts representing interest
Present value of net minimum lease payments
Operating Leases
Capital Leases
$
$
91
88
82
75
71
339
746
-
-
8
7
4
-
-
-
19
1
18
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 $965 million
goodwill impairment charge was recorded in the fourth quarter of
2008 and represents the total amount of accumulated impairment
losses as of December 31, 2013.
Changes in the net carrying amount of goodwill, by reporting unit, for the years ended December 31, 2013 and 2012 were as follows:
($ in millions)
Net carrying value as of December 31, 2011
Acquisition activity
Net carrying value as of December 31, 2012
Acquisition activity
Net carrying value as of December 31, 2013
Commercial
Banking
Branch
Banking
Consumer
Lending
Investment
Advisors
Total
$
$
$
613
-
613
-
613
1,656
(1)
1,655
-
1,655
-
-
-
-
-
148
-
148
-
148
2,417
(1)
2,416
-
2,416
The Bancorp completed its annual goodwill impairment test as of
September 30, 2013 by performing a qualitative assessment of
goodwill at the reporting unit level to determine whether any
indicators of impairment existed. In performing this qualitative
assessment, the Bancorp evaluated events and circumstances since
the date of the last quantitative impairment test including the results
of that test, macroeconomic conditions, banking industry and
market conditions, and key financial metrics of the Bancorp as well
as segment and overall Bancorp financial performance. After
assessing the totality of the events and circumstances, the Bancorp
determined that it was not more likely than not that the fair value of
each of its reporting units was less than their carrying amounts and,
therefore, the first and second steps of the quantitative goodwill
impairment test were deemed unnecessary.
115 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INTANGIBLE ASSETS
Intangible assets consist of core deposit intangibles, customer lists,
non-compete agreements and cardholder relationships. Intangible
assets are amortized on either a straight-line or an accelerated basis
The details of the Bancorp’s intangible assets are shown in the following table:
over their estimated useful lives. Intangible assets have an estimated
remaining weighted-average life at December 31, 2013 of 4.1 years.
($ in millions)
As of December 31, 2013
Core deposit intangibles
Other
Total intangible assets
As of December 31, 2012
Core deposit intangibles
Other
Total intangible assets
Gross Carrying
Amount
Accumulated
Amortization
Valuation
Allowance
Net Carrying
Amount
$
$
$
$
154
45
199
180
44
224
(141)
(39)
(180)
(160)
(37)
(197)
-
-
-
-
-
-
13
6
19
20
7
27
As of December 31, 2013, all of the Bancorp’s intangible assets
were being amortized. Amortization expense recognized on
intangible assets for the years ended December 31, 2013, 2012 and
2011 was $8 million, $13 million and $22 million, respectively.
The Bancorp's projections of amortization expense shown below are based on existing asset balances as of December 31, 2013. Future
amortization expense may vary from these projections. Estimated amortization expense for the years ending December 31, 2014 through 2018 is
as follows:
($ in millions)
2014
2015
2016
2017
2018
$
Total
5
2
2
2
2
116 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, 2013 ($ in millions)
Assets:
Cash and due from banks
Commercial mortgage loans
Automobile loans(a)
ALLL
Other assets
Total assets
Liabilities:
Other liabilities
Long-term debt
Total liabilities
Noncontrolling interests
(a) Net of $52 of unamortized fees and discounts.
December 31, 2012 ($ in millions)
Assets:
Commercial mortgage loans
ALLL
Other assets
Total assets
Noncontrolling interests
Automobile Loan Securitization
In August of 2013, the Bancorp transferred approximately $1.3
billion in fixed-rate consumer automobile loans to a bankruptcy
remote trust which was deemed to be a VIE. The primary purposes
for which the VIE was created were to issue asset-backed securities
with varying levels of credit subordination and payment priority, as
well as residual interests, and to provide the Bancorp with access to
liquidity for its originated loans. The Bancorp retained residual
interests in the VIE and, therefore, has an obligation to absorb
losses and a right to receive benefits from the VIE that could
potentially be significant to the VIE. In addition, the Bancorp
retained servicing rights for the underlying loans and, therefore,
holds the power to direct the activities of the VIE that most
significantly impact the economic performance of the VIE. As a
result, the Bancorp concluded that it is the primary beneficiary of
the VIE and, therefore, has consolidated this VIE. The assets of the
VIE are restricted to the settlement of the notes and other
obligations of the VIE. Third-party holders of the notes do not
have recourse to the general assets of the Bancorp.
The economic performance of the VIE is most significantly
impacted by the performance of the underlying loans. The principal
Automobile Loan
Securitization
CDC
Investments
$
$
$
$
49
-
1,010
(2)
11
1,068
1
1,048
1,049
-
-
48
-
(13)
2
37
-
-
-
37
CDC
Investments
50
(5)
3
48
48
$
$
Total
49
48
1,010
(15)
13
1,105
1
1,048
1,049
37
Total
50
(5)
3
48
48
risks to which the VIE are exposed include credit risk and
prepayment risk. The credit and prepayment risks are managed
through credit enhancements in the form of reserve accounts,
overcollateralization, excess
the
subordination of certain classes of asset-backed securities to other
classes.
interest on
loans and
the
CDC Investments
CDC, a wholly owned indirect 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
117 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
member will be the party that has the right to make decisions that
will most significantly impact the economic performance of the
entity. CDC 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
to
interests
the comprehensive
the equity attributable
includes reporting separately
the
noncontrolling interests in the Consolidated Balance Sheets and
Consolidated Statements of Changes in Equity and reporting
separately
the
noncontrolling
the Consolidated Statements of
Comprehensive Income and the net income attributable to the
noncontrolling interests in the Consolidated Statements of Income.
The Bancorp’s maximum exposure related to these indemnifications
at December 31, 2013 and 2012 was $21 million and $18 million,
respectively, which is based on an amount required to meet the
investor members’ defined target rate of return.
attributable
income
to
in
Non-consolidated VIEs
The following tables provide a summary of assets and liabilities carried on the Bancorp’s Consolidated Balance Sheets related to non-consolidated
VIEs for which the Bancorp holds an interest, but is not the primary beneficiary of the VIE, as well as the Bancorp’s maximum exposure to losses
associated with its interests in the entities:
As of December 31, 2013 ($ in millions)
CDC investments
Private equity investments
Loans provided to VIEs
Automobile loan securitization
Restructured loans
As of December 31, 2012 ($ in millions)
CDC investments
Private equity investments
Loans provided to VIEs
Restructured loans
CDC Investments
As noted previously, CDC typically invests in VIEs as a limited
partner or investor member in the form of equity contributions. The
Bancorp has determined that it is not the primary beneficiary of
these VIEs because it lacks the power to direct the activities that
most significantly
impact the economic performance of the
underlying project or the VIEs’ ability to operate in compliance with
the rules and regulations necessary for the qualification of tax
credits generated by equity investments. This power is held by the
general partners/managing members who exercise full and exclusive
control of the operations of the VIEs. Accordingly, the Bancorp
accounts for these investments under the equity method of
accounting.
The Bancorp’s funding requirements are limited to its invested
capital and any additional unfunded commitments for future equity
contributions. The Bancorp’s maximum exposure to loss as a result
of its involvement with the VIEs is limited to the carrying amounts
of the investments, including the unfunded commitments. 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.
118 Fifth Third Bancorp
$
$
Total
Assets
1,436
204
1,830
4
1
Total
Assets
1,442
189
1,622
2
Total
Liabilities
407
-
-
-
-
Total
Liabilities
394
-
-
-
Maximum
Exposure
1,436
294
2,792
4
1
Maximum
Exposure
1,442
310
2,465
2
Private Equity Investments
The Bancorp, through a wholly owned subsidiary, 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.
amounts of
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
unfunded commitments. The carrying
these
investments, which are included in other assets in the Consolidated
Balance Sheets, are included in the previous tables. Also, as of
December 31, 2013 and 2012, the unfunded commitment amounts
to the funds were $90 million and $121 million, respectively. The
Bancorp made capital contributions of $31 million and $61 million
to private equity funds during 2013 and 2012, respectively.
Additionally, in response to the issuance of the Volcker Rule in the
fourth quarter of 2013, the Bancorp recognized $4 million of OTTI
on its investments in private equity funds. See Note 27 for further
information.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2013 and 2012, 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, 2013 and 2012.
The loans to these VIEs are included in the Bancorp’s overall
analysis of the ALLL. The Bancorp does not provide any implicit or
explicit liquidity guarantees or principal value guarantees to these
VIEs.
immaterial
to
Loans Provided to VIEs
The Bancorp has provided funding to certain unconsolidated VIEs
sponsored by third parties. These VIEs are generally established to
finance certain consumer and small business loans originated by
third parties. The entities are primarily funded through the issuance
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, 2013 and 2012, the
Bancorp’s unfunded commitments to these entities were $962
million and $843 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
Automobile Loan Securitization
In March of 2013, the Bancorp recognized an immaterial loss on the
securitization and sale of certain automobile loans with a carrying
amount of approximately $509 million. The securitization and the
resulting sale of all underlying securities qualified for sale
accounting. The Bancorp has concluded that it is not the primary
beneficiary of the trust because it has neither the obligation to
absorb losses of the entity that could potentially be significant to the
VIE nor the right to receive benefits from the entity that could
potentially be significant to the VIE. The Bancorp is not required
and does not currently intend to provide any additional financial
support to the trust. Investors and creditors only have recourse to
the assets held by the trust. The interest the Bancorp holds in the
VIE relates to servicing rights that are included in the Bancorp’s
Consolidated Balance Sheets. The maximum exposure to loss is
equal to the carrying value of the servicing asset.
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.
119 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SALES OF RECEIVABLES AND SERVICING RIGHTS
Automobile Loan Securitization
In March of 2013, the Bancorp recognized an immaterial loss on the
securitization and sale of certain automobile loans with a carrying
amount of approximately $509 million. The Bancorp utilized a
securitization trust to facilitate the securitization process. The trust
issued asset-backed securities in the form of notes and equity
certificates, with varying levels of credit subordination and payment
priority. The Bancorp does not hold any of the notes or equity
certificates issued by the trust, and the investors in these securities
have no credit recourse to the Bancorp’s assets for failure of debtors
to pay when due. As part of the sale, the Bancorp obtained servicing
responsibilities and recognized a servicing asset with an initial fair
value of $6 million.
Residential Mortgage Loan Sales
The Bancorp sold fixed and adjustable rate residential mortgage
loans during 2013, 2012, and 2011. In those sales, the Bancorp
obtained servicing responsibilities and the investors have no
recourse to the Bancorp’s other assets for failure of debtors to pay
when due. The Bancorp receives annual servicing fees based on a
percentage of the outstanding balance. The Bancorp identifies
classes of servicing assets based on financial asset type and interest
rates.
Information related to residential mortgage loan sales and the Bancorp’s mortgage banking activity, which is included in mortgage banking net
revenue in the Consolidated Statements of Income, for the years ended December 31 is as follows:
($ in millions)
Residential mortgage loan sales
Origination fees and gains on loan sales
Servicing fees
2013
21,529
$
453
251
2012
21,574
821
250
2011
14,733
396
234
Servicing Assets
The following table presents changes in the servicing assets related to residential mortgage and automobile 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
Servicing obligations that result from the transfer of automobile loans
Amortization
Carrying amount before valuation allowance
Valuation allowance for servicing assets:
Beginning balance
Recovery of (provision for) MSR impairment
Ending balance
Carrying amount as of the end of the period
2013
1,358
244
6
(168)
1,440
(661)
192
(469)
971
$
$
2012
1,239
305
-
(186)
1,358
(558)
(103)
(661)
697
Amortization expense recognized on servicing rights for the years
ended December 31, 2013, 2012 and 2011 was $168 million, $186
million and $135 million, respectively. The Bancorp's projections of
amortization expense shown below are based on existing asset
balances as of December 31, 2013. Future amortization expense
may vary from these projections.
Estimated amortization expense for the years ending December 31, 2014 through 2018 is as follows:
($ in millions)
2014
2015
2016
2017
2018
$
Total
95
88
81
76
71
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
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.
120 Fifth Third Bancorp
The following table displays the beginning and ending fair value of the servicing assets for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Fixed rate residential mortgage loans:
Beginning balance
Ending balance
Adjustable rate residential mortgage loans:
Beginning balance
Ending balance
Fixed rate automobile loans:
Beginning balance
Ending balance
2013
2012
$
664
929
33
38
-
4
649
664
32
33
-
-
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)
Recovery of (provision for) MSR impairment (Mortgage banking net revenue)
$
2013
13
(30)
192
2012
3
63
(103)
2011
9
344
(242)
As of December 31, 2013 and 2012, the key economic assumptions used in measuring the interests in residential mortgage loans 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:
2013
2012
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
7.3
3.6
9.1 %
22.8
10.2 %
11.5
N/A
N/A
6.9
3.8
9.6 %
22.0
10.4 %
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, 2013 and 2012, the Bancorp
serviced $69.2 billion and $62.5 billion, respectively, of residential
mortgage loans for other investors. The value of MSRs that
continue to be held by the Bancorp is subject to credit, prepayment
and interest rate risks on the sold financial assets.
At December 31, 2013, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in
prepayment speed assumptions and immediate 10% and 20% adverse changes in other assumptions are as follows:
Prepayment
Speed Assumption
Residual Servicing
Cash Flows
Weighted-
Average
Life (in
years)
Fair
Value
Impact of Adverse Change
on Fair Value
20%
50%
10%
Impact of Adverse
Change on Fair
Value
10%
20%
Discount
Rate
($ 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
10.3 % $
25.6
929
38
6.8
3.2
Rate
Rate
$
(36)
(2)
(69)
(3)
(157)
(7)
10.4 % $
11.6
(37)
(1)
(72)
(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
the Bancorp
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.
121 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,
principal or contract amounts. Credit risk is minimized through
third-party
approved,
credit approvals, limits, counterparty collateral and monitoring
procedures.
The Bancorp’s derivative assets include certain contractual
features 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, 2013 and
2012, the balance of collateral held by the Bancorp for derivative
assets was $514 million and $927 million, respectively. The credit
component negatively impacting the fair value of derivative assets
associated with customer accommodation contracts as of December
31, 2013 and 2012 was $12 million and $18 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 posts
collateral primarily 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, 2013 and
2012, the balance of collateral posted by the Bancorp for derivative
liabilities was $559 million and $785 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, 2013 and 2012, 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
further 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. For further information on offsetting derivatives, see
Note 13 of the Notes to Consolidated Financial Statements.
122 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, 2013 ($ 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 swaps related to C&I loans
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 warrant associated with Vantiv Holding, LLC
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
Total free-standing derivatives - customer accommodation
Total derivatives not designated as qualifying hedging instruments
Total
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 warrant associated with Vantiv Holding, LLC
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
$
3,205
2,200
4,092
1,448
664
947
28,112
924
3,300
19,688
$
292
292
40
40
332
141
13
384
-
538
329
12
66
276
683
1,221
1,553
13
13
21
21
34
14
1
-
48
63
339
1
65
252
657
720
754
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
123 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, 2013 and
2012, 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
$
(279)
276
(104)
107
220
(227)
Consolidated Statements of Income
Caption
2013
2012
2011
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 that the
Bancorp desires 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, 2013, all hedges designated
as cash flow hedges were 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, 2013, the maximum length of time
over which the Bancorp is hedging its exposure to the variability in
future cash flows is 71 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, 2013 and
2012, $13 million and $50 million, respectively, of net 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, 2013, $25 million in net deferred gains, net of
tax, recorded in accumulated other comprehensive income are
expected to be reclassified into earnings during the next twelve
months. This amount could differ from amounts actually recognized
due to changes in interest rates, hedge de-designations, and the
addition of other hedges subsequent to December 31, 2013.
During 2013, there were no gains or losses reclassified from
accumulated other comprehensive income into earnings associated
with the discontinuance of cash flow hedges because it was
probable that the original forecasted transaction would not occur by
the end of the originally specified time period or within the
additional period of time as defined by U.S. GAAP.
The following table presents the net gains (losses) recorded in the Consolidated Statements of Income and the Consolidated Statements of
Comprehensive Income relating to derivative instruments designated as cash flow hedges:
For the year ended December 31 ($ in millions)
Amount of net (losses) gains recognized in OCI
Amount of net gains reclassified from OCI into net income
Amount of ineffectiveness recognized in other noninterest income
Free-Standing Derivative Instruments – Risk Management
and Other Business Purposes
As part of its overall risk management strategy relative to its
mortgage banking activity, the Bancorp may enter into various free-
standing derivatives (principal-only swaps, 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
124 Fifth Third Bancorp
$
2013
(13)
44
-
2012
37
83
-
2011
89
69
1
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-
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
losses
from
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
component of mortgage banking net revenue in the Consolidated
Statements of Income.
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 initial sale of the Bancorp’s 51%
interest in Vantiv Holding, LLC, the Bancorp received a warrant
and issued a put option, which are accounted for as free-standing
derivatives. The put option expired as a result of the Vantiv, Inc.
initial public offering in March of 2012. Refer to Note 27 for further
discussion of significant inputs and assumptions used in the
valuation of the warrant.
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 27 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 MSR portfolio
Interest rate swaps related to long-term debt
Foreign exchange contracts:
Foreign exchange contracts for risk management purposes
Equity contracts:
Stock warrant associated with Vantiv Holding, LLC
Put option associated with Vantiv Holding, LLC
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
2013
2012
2011
Mortgage banking net revenue
Mortgage banking net revenue
Other noninterest income
$
Other noninterest income
Other noninterest income
Other noninterest income
Other noninterest income
24
(30)
-
5
206
-
(31)
28
63
2
-
66
1
(45)
(128)
345
7
-
32
7
(83)
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, 2013 and 2012, the total
notional amount of the risk participation agreements was $1.2
billion and $1.0 billion, respectively, and the fair value was a liability
of $3 million at December 31, 2013 and $2 million at December 31,
2012, which is included in interest rate contracts for customers. As
of December 31, 2013, the risk participation agreements had an
average remaining life of 3.0 years.
The Bancorp’s maximum exposure in the risk participation
agreements is contingent on the fair value of the underlying interest
rate derivative contracts in an asset position at the time of default.
The Bancorp monitors the credit risk associated with the underlying
customers in the risk participation agreements through the same risk
grading system currently utilized for establishing loss reserves in its
loan and lease portfolio.
Risk ratings of the notional amount of risk participation agreements under this risk rating system are summarized in the following table:
At December 31 ($ in millions)
Pass
Special mention
Substandard
Total
2013
2012
$
$
1,153
38
12
1,203
993
-
13
1,006
125 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net gains (losses) recorded in the Consolidated Statements of Income relating to free-standing derivative instruments used for customer
accommodation are summarized in the following table:
For the year ended December 31
($ in millions)
Interest rate contracts:
Interest rate contracts for customers (contract revenue)
Interest rate contracts for customers (credit losses)
Interest rate contracts for customers (credit 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
2013
2012
2011
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
29
(3)
7
58
7
-
69
(2)
30
(2)
6
417
7
2
65
2
28
(13)
13
206
8
-
47
1
126 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. OFFSETTING DERIVATIVE FINANCIAL INSTRUMENTS
The Bancorp’s derivative transactions are generally governed by
ISDA Master Agreements and similar arrangements, which include
provisions governing the setoff of assets and liabilities between the
parties. When the Bancorp has more than one outstanding
derivative transaction with a single counterparty, the setoff
provisions contained within these agreements generally allow the
non-defaulting party the right to reduce its liability to the defaulting
party by amounts eligible for setoff, including the collateral received
as well as eligible offsetting transactions with that counterparty,
irrespective of the currency, place of payment, or booking office.
The Bancorp’s policy is to present its derivative assets and derivative
liabilities on the Consolidated Balance Sheets on a gross basis, even
when provisions allowing for setoff are in place.
Collateral amounts included in the table below consist primarily
of cash and highly-rated government-backed securities.
December 31, 2013 ($ in millions)
Gross Amount
Recognized in the
Consolidated Balance Sheet(a)
Gross Amounts Not Offset in the
Consolidated Balance Sheet
Derivatives
Collateral(b)
Net Amount
Assets
Derivatives
Total assets
Liabilities
Derivatives
Total liabilities
December 31, 2012 ($ in millions)
Assets
Derivatives
Total assets
$
$
1,157
1,157
753
753
(321)
(321)
(321)
(321)
$
(390)
(390)
(302)
(302)
$
446
446
130
130
Gross Amount
Recognized in the
Consolidated Balance Sheet(a)
Gross Amounts Not Offset in the
Consolidated Balance Sheet
Derivatives
Collateral(b)
Net Amount
$
1,735
1,735
(291)
(291)
$
(794)
(794)
650
650
Liabilities
Derivatives
119
119
Total liabilities
(a) Amount does not include the stock warrant associated with Vantiv Holding, LLC and interest rate lock commitments because these instruments are not subject to master netting or similar
(291)
(291)
(505)
(505)
915
915
$
$
arrangement.
(b) Amount of collateral received as an offset to asset positions or pledged as an offset to liability positions. Collateral values in excess of related derivative amounts recognized in the Consolidated Balance
Sheets were excluded from this table.
14. OTHER ASSETS
The following table provides the components of other assets included in the Consolidated Balance Sheets as of December 31:
($ in millions)
Partnership investments
Bank owned life insurance
Derivative instruments
Accounts receivable and drafts-in-process
Bankers' acceptances
Investment in Vantiv Holding, LLC
Accrued interest receivable
OREO and other repossessed personal property
Prepaid expenses
Income tax receivable
Other
Total
2013
1,687
1,587
1,553
1,433
763
423
361
306
94
12
139
8,358
2012
1,657
1,547
1,972
1,155
398
563
369
329
80
10
124
8,204
$
$
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, Fifth Third
Capital Holdings, a wholly owned subsidiary of the Bancorp, invests
as a direct private equity investor and as a limited partner in private
equity funds, which are included above as partnership investments.
The Bancorp has determined that these partnership investments are
VIEs and the Bancorp’s investments represent variable interests.
See Note 10 for further information. Additionally, in response to
the issuance of the Volcker Rule in the fourth quarter of 2013, the
127 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bancorp recognized $4 million of OTTI on its investments in
private equity funds. See Note 27 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
insurance carrier that provides
limited cash surrender value
protection from declines in the value of each policy’s underlying
investments. See Note 1 for further information.
The Bancorp utilizes 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 and for other business purposes. For further information
on derivative instruments, see Note 12.
A bankers’ acceptance is created when a time draft is drawn on
and accepted by a bank. By accepting the draft, the bank assumes
15. 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:
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 in the
Consolidated Balance Sheets.
In 2009, the Bancorp sold an approximate 51% interest in its
processing business, Vantiv Holding, LLC. As a result of additional
share sales completed by the Bancorp in 2012 and 2013, the
Bancorp’s current ownership share in Vantiv Holding, LLC is
approximately 25%. The Bancorp’s ownership in Vantiv Holding,
LLC is accounted for under the equity method of accounting. See
Note 19 for further information.
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.
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
2013
2012
Amount
Rate
Amount
Rate
$
$
$
284
1,380
0.03%
0.09
503
3,024
0.12%
0.18
925
8,001
$
$
$
901
6,280
0.10%
0.15
560
4,246
0.14%
0.18
901
6,330
128 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. LONG-TERM DEBT
The following table is a summary of the Bancorp’s long-term borrowings at December 31:
($ 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
Fixed-rate notes
Junior subordinated:(a)
Fixed-rate notes
Subsidiaries
Senior:
Floating-rate bank notes
Fixed-rate notes
Fixed-rate notes
Floating-rate notes
Floating-rate notes
Fixed-rate notes
Subordinated:(b)
Fixed-rate bank notes
Junior subordinated:(a)
Floating-rate debentures
FHLB advances
Notes associated with consolidated VIE:
Automobile loan securitization:
Fixed-rate notes
Other
Total
(a) Qualify as Tier I capital for regulatory capital purposes. See Note 28 for further information.
(b) Qualify as Tier II capital for regulatory capital purposes. .
Maturity
Interest Rate
2013
2012
2016
2022
2016
2017
2018
2024
2038
2016
2016
2016
2016
2018
3.625%
3.50%
0.67%
5.45%
4.50%
4.30%
8.25%
1.15%
0.90%
0.75%
0.67%
1.45%
2015
4.75%
2035
1.67% - 1.94%
2015-2041 0.05% - 6.87%
2014-2020 0.25% - 1.30%
2014-2039
Varies
$
$
-
999
497
250
558
555
748
1,150
758
999
497
250
583
584
-
1,330
-
750
-
1,000
400
750
300
587
524
51
44
1,048
172
9,633
500
-
-
-
-
-
546
50
53
-
185
7,085
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, 2013, are presented in the following table:
($ in millions)
2014
2015
2016
2017
2018
Thereafter
Total
Parent
Subsidiaries
Total
-
-
1,249
558
555
2,395
4,757
157
526
2,842
390
592
369
4,876
157
526
4,091
948
1,147
2,764
9,633
$
$
At December 31, 2013, the Bancorp had outstanding principal
balances of $9.4 billion, net discounts of $21 million and additions
for mark-to-market adjustments on its hedged debt of $278 million.
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.
The Bancorp was in compliance with all debt covenants at
December 31, 2013.
PARENT COMPANY LONG-TERM BORROWINGS
Senior Notes
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
129 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to 100% of the principal amount plus accrued and unpaid interest
through the redemption date. The Bank has entered into interest
rate swaps to convert its fixed-rate senior notes due in 2016 and
2018 to floating-rate, which pay interest at one-month LIBOR. The
rates paid on the swaps hedging the fixed-rate notes due in 2016 and
2018 were 0.65% and 0.77%, respectively, at December 31, 2013.
On November 20, 2013, the Bank issued and sold, under its
amended bank notes program, $1.8 billion in aggregate principal
amount of unsecured senior bank notes. The bank notes consisted
of $1.0 billion of 1.15% senior fixed rate notes due on
November 18, 2016 and $750 million of senior floating rate notes
due on November 18, 2016. Interest on the floating rate notes is 3-
month LIBOR plus 51 bps. These bank notes will be redeemable by
the Bank, in whole or in part, on or after the date that is 30 days
prior to the maturity date at a redemption price equal to 100% of
the principal amount plus accrued and unpaid interest up to, but
excluding, the redemption date.
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 a floating rate at three-
month LIBOR plus 169 bps and 142 bps, respectively. The Bank
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, 2013, FHLB advances have rates ranging from
0.05% to 6.87%, with interest payable monthly. The advances are
secured by certain residential mortgage loans and securities totaling
$17.2 billion. The $44 million in remaining advances mature as
follows: $2 million in 2015, $3 million in 2016, $1 million in 2017,
$5 million in 2018 and $33 million thereafter.
Notes Associated with Consolidated VIE
As previously discussed in Note 10, the Bancorp was determined to
be the primary beneficiary of a VIE associated with an automobile
loan securitization completed in the third quarter of 2013. As such,
$1.0 billion of long-term debt related to this VIE was consolidated
in the Bancorp’s Consolidated Financial Statements as of December
31, 2013. Third-party holders of this debt do not have recourse to
the general assets of the Bancorp.
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, 2013.
The rates paid on the swaps hedging the subordinated floating-rate
notes due in 2017 and 2018 were 0.66% and 0.49%, respectively, at
December 31, 2013. 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 3.29% at December 31, 2013.
On November 20, 2013, the Bancorp issued and sold $750
million of 4.30% unsecured subordinated fixed rate notes with a
maturity date of January 16, 2024. These fixed rate notes will be
redeemable by the Bancorp, in whole or in part, on or after the date
that is 30 days prior to the maturity date at a redemption price equal
to 100% of the principal amount plus accrued and unpaid interest
up to, but excluding, the redemption date.
Junior Subordinated Debt
The Bancorp redeemed all $750 million of the outstanding TruPS
issued by Fifth Third Capital Trust IV on December 30, 2013.
These securities had a distribution rate of 6.50% and a scheduled
maturity date of April 1, 2067. Pursuant to the terms of the TruPS,
the securities of Fifth Third Capital Trust IV were redeemable
within ninety days of a Capital Treatment Event. The Bancorp
determined that a Capital Treatment Event occurred upon the
publication of a Final Rule regarding Regulatory Capital Rules
jointly by the Federal Reserve System and the Office of the
Comptroller of the Currency. The redemption price was $1,000 per
security, which reflected 100% of the liquidation amount, plus
accrued and unpaid distributions to the actual redemption date of
$10 million. The Bancorp recognized an $8 million loss on the
extinguishment of this debt 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. On February 25, 2013, the Bancorp’s
banking subsidiary updated and amended its existing global bank
note program. The amended global bank note program increased
the Bank’s capacity to issue its senior and subordinated unsecured
bank notes from $20 billion to $25 billion. As of December 31,
2013, $21.5 billion was available for future issuance under the global
bank note program. 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, 2013, the
weighted-average rate paid on the swaps was 0.34%.
On February 28, 2013, the Bank issued and sold, under its
amended bank notes program, $1.3 billion in aggregate principal
amount of unsecured senior bank notes. The bank notes consisted
of: $600 million of 1.45% senior fixed rate notes due on
February 28, 2018; $400 million of 0.90% senior fixed rate notes
due on February 26, 2016; and $300 million of senior floating rate
notes due on February 26, 2016. Interest on the floating rate notes
is 3-month LIBOR plus 41 bps. These bank notes will be
redeemable by the Bank, in whole or in part, on or after the date
that is 30 days prior to the maturity date at a redemption price equal
130 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES
The Bancorp, in the normal course of business, enters into financial
instruments and various agreements to meet the financing needs of
its customers. The Bancorp also enters into certain transactions and
agreements to manage its interest rate and prepayment risks, provide
funding, equipment and locations for its operations and invest in its
communities. These instruments and agreements involve, to varying
degrees, elements of credit risk, counterparty risk and market risk in
excess of the amounts recognized in the Bancorp’s Consolidated
Balance Sheets. The creditworthiness of counterparties for all
instruments and agreements is evaluated on a case-by-case basis in
accordance with the Bancorp’s credit policies. The Bancorp’s
significant commitments, contingent liabilities and guarantees in
excess of the amounts recognized in the Consolidated Balance
Sheets are discussed in further detail below:
Commitments
The Bancorp has certain commitments to make future payments under contracts. The following table reflects a summary of significant
commitments as of December 31:
($ in millions)
Commitments to extend credit
Letters of credit
Forward contracts related to held for sale mortgage loans
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
$
2013
62,050
4,129
1,448
746
90
84
33
19
2012
53,403
4,281
5,322
769
121
87
29
24
resulting from fluctuations in interest rates and the Bancorp’s
exposure is limited to the replacement value of those commitments.
As of December 31, 2013 and 2012, the Bancorp had a reserve for
unfunded commitments, including letters of credit, totaling $162
million and $179 million, respectively, included in other liabilities in
the Consolidated Balance Sheets. The Bancorp monitors the credit
risk associated with commitments to extend credit using the same
risk rating system utilized within its loan and lease portfolio.
Risk ratings under this risk rating system are summarized in the following table as of December 31:
($ in millions)
Pass
Special mention
Substandard
Doubtful
Total
2013
2012
$
$
61,364
369
316
1
62,050
52,812
370
221
-
53,403
Letters of credit
Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party and as
summarized in the following table expire as of December 31, 2013:
($ in millions)
Less than 1 year(a)
1 - 5 years(a)
Over 5 years
Total
(a)
1,899
2,173
57
4,129
Includes $121 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 97% of total letters of credit
at December 31, 2013 compared to 99% at December 31, 2012 and
are considered guarantees
in accordance with U.S. GAAP.
Approximately 48% and 49% of the total standby letters of credit
were fully secured as of December 31, 2013 and 2012, 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, 2013 and 2012 the
reserve related to these standby letters of credit was $2 million and
$4 million, respectively, and is included in the total reserve for
unfunded commitments. The Bancorp monitors the credit risk
associated with letters of credit using the same risk rating system
utilized within its loan and lease portfolio.
131 Fifth Third Bancorp
Risk ratings under this risk rating system are summarized in the following table as of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Pass
Special mention
Substandard
Doubtful
Total
At December 31, 2013 and 2012, 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,
2013 and 2012, total VRDNs in which the Bancorp was the
remarketing agent or were supported by a Bancorp letter of credit
were $2.1 billion and $2.8 billion of which FTS acted as the
remarketing agent to issuers on $1.8 billion and $2.5 billion,
respectively. As remarketing agent, FTS is responsible for finding
purchasers for VRDNs that are put by investors. The Bancorp
issued letters of credit, as a credit enhancement, on $1.5 billion and
$2.0 billion to the VRDNs remarketed by FTS, in addition to $300
million and $345 million in VRDNs remarketed by third parties at
December 31, 2013 and 2012, respectively. These letters of credit
are included in the total letters of credit balance provided in the
previous table.
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.
Noncancelable lease obligations and other commitments
The Bancorp’s subsidiaries have entered
into a number of
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 $37
million at December 31, 2013 and $58 million at December 31,
2012. As of December 31, 2013 and 2012, the Bancorp maintained a
reserve of $10 million and $18 million, respectively, related to
exposures within the reinsurance portfolio which was included in
other liabilities in the Consolidated Balance Sheets. During 2009, the
132 Fifth Third Bancorp
2013
2012
$
$
3,651
99
355
24
4,129
3,902
129
223
27
4,281
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 a 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 a 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 18 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the fourth quarter of 2013, the Bancorp settled certain
repurchase claims related to mortgage loans originated and sold to
FHLMC prior to January 1, 2009 for $25 million, after paid claim
credits and other adjustments. The settlement removes the
Bancorp’s responsibility to repurchase or indemnify FHLMC for
representation and warranty violations on any loan sold prior to
January 1, 2009 except in limited circumstances.
As of December 31, 2013 and 2012, the Bancorp maintained
reserves related to loans sold with representation and warranty
provisions totaling $44 million and $110 million, respectively,
included in other liabilities in the Consolidated Balance Sheets.
The Bancorp uses the best information available to it in
its mortgage representation and warranty reserve,
estimating
is
however, the estimation process
inherently uncertain and
imprecise and, accordingly, losses in excess of the amounts accrued
as of December 31, 2013, 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 $47 million in excess of amounts
reserved. This estimate was derived by modifying the key
assumptions discussed above to reflect management's judgment
regarding reasonably possible adverse changes to those assumptions.
The actual repurchase losses could vary significantly from the
recorded mortgage representation and warranty reserve or this
estimate of reasonably possibly losses, depending on the outcome of
various factors, including those noted above.
The following table summarizes activity in the reserve for representation and warranty provisions:
($ in millions)
Balance, beginning of period
Net additions to the reserve
Losses charged against the reserve
Balance, end of period
2013
110
7
(73)
44
2012
55
107
(52)
110
$
$
The following table provides a rollforward of unresolved claims by claimant type for the year ended December 31, 2013:
($ in millions)
Balance, beginning of period
New demands
Loan paydowns/payoffs
Resolved demands
Balance, end of period
GSE
Private Label
Units
294
1,962
(20)
(1,972)
264
$
$
Dollars
48
259
(3)
(263)
41
Units
124
237
(6)
(322)
33
$
$
Dollars
19
4
(1)
(17)
5
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
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 $579 million and $662 million
at December 31, 2013 and 2012, respectively, and the delinquency
rates were 4.4% at December 31, 2013 and 5.9% at December 31,
2012. The Bancorp maintained an estimated credit loss reserve on
these loans sold with credit recourse of $16 million at December 31,
2013 and $20 million at December 31, 2012 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.
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
Margin accounts
FTS, a subsidiary of the Bancorp, guarantees the collection of all
margin account balances held by its brokerage clearing agent for the
benefit of its customers. FTS is responsible for payment to its
brokerage clearing agent for any loss, liability, damage, cost or
expense incurred as a result of customers failing to comply with
margin or margin maintenance calls on all margin accounts. The
margin account balance held by the brokerage clearing agent was
$12 million at December 31, 2013 and $17 million at December 31,
2012. 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 certain fully and unconditionally guaranteed long-
term borrowing obligations issued by wholly-owned issuing trust
entities of $50 million and $800 million as of December 31, 2013
and 2012, respectively. See Note 16 for further information on
these long-term borrowing obligations.
133 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2013, 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
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 $48 million and $33 million as of December 31, 2013
and 2012, respectively. Refer to Note 18 for further information.
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
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
134 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. 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 17 and has
also entered into judgment and loss sharing agreements with Visa,
MasterCard and certain other named defendants. In October 2012,
the parties to the litigation entered into a settlement agreement. The
court entered a Class Settlement Preliminary Approval Order in
November 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. More than 7,900
merchants have requested exclusion from the class settlement.
Pursuant to the terms of the settlement agreement, 25% of the
funds paid into the class settlement escrow account will be returned
to the control of the defendants through Class Exclusion Takedown
Payments. Approximately 460 of the merchants who requested
exclusion from the class have filed separate federal lawsuits against
Visa, MasterCard and certain other defendants alleging similar
antitrust violations. The federal lawsuits have been tentatively
transferred to the United States District Court for the Eastern
District of New York. The Bancorp was not named as a defendant
in any of the federal lawsuits, but may have obligations pursuant to
indemnification arrangements and/or the judgment or loss sharing
agreements noted above. In addition, one merchant filed a separate
state court lawsuit against Visa, MasterCard and certain other
the Bancorp, alleging similar antitrust
defendants,
violations. On January 14, 2014, the court entered a final order
approving the class settlement. A number of merchants have filed
appeals from that approval. Refer to Note 17 for further
information.
including
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 alleged that the Bancorp and its Ohio
bank infringed on Katz’s patents for interactive call processing
technology by offering certain automated telephone banking and
other services. On December 23, 2013 the parties to the litigation
entered into a settlement agreement. The settlement amount was
immaterial to the Bancorp’s Consolidated Financial Statements.
Pursuant to the settlement agreement, the Bank paid the agreed
upon settlement proceeds to Katz resulting in the dismissal of the
lawsuit with prejudice on January 8, 2014.
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. Under the terms of the settlement,
the Bancorp and its insurer paid 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. On
November 20, 2013, the Court entered a Final Judgment and Order
of Dismissal approving the settlement. No appeal was filed and the
matter now is concluded.
In addition to the foregoing, in 2008 two similar cases were
filed in the United States District Court for the Southern District of
Ohio against the Bancorp and certain officers styled Dudenhoeffer v
Fifth Third Bancorp et al. Case No. 1:08-cv-538. The complaints alleged
violations of ERISA based on allegations similar to those set forth
in the securities class action cases. The ERISA actions were
dismissed by the trial court, but the Sixth Circuit Court of Appeals
reversed the trial court decision. The Bancorp petitioned the United
States Supreme Court to review and reverse the Sixth Circuit
decision and sought a stay of proceedings in the trial court pending
appeal. On March 25, 2013 the Supreme Court issued an order
directing the Solicitor General to file a brief stating the views of the
United States on the issues raised in the Bancorp petition and this
brief was filed on November 12, 2013. On December 13, 2013 the
Supreme Court granted certiorari and agreed to hear the appeal.
Oral argument is set for April 2, 2014.
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 involved in information-
gathering requests, reviews, investigations and proceedings (both
formal and informal) by various governmental regulatory agencies
and law enforcement authorities, as well as self-regulatory bodies
regarding their respective businesses. Additional matters will likely
arise from time to time. Any of these matters may result in material
adverse consequences to the Bancorp, its affiliates and/or their
respective directors, officers and other personnel, including adverse
judgments, findings, settlements, fines, penalties, orders, injunctions
or other actions, amendments and/or restatements of the Bancorp’s
SEC filings and/or financial statements, as applicable, and/or
determinations of material weaknesses in our disclosure controls
and procedures. Investigations by regulatory authorities may from
time to time result in civil or criminal referrals to law enforcement
authorities such as the Department of Justice or a United States
Attorney. Among other matters, the Bancorp has been cooperating
with the Department of Justice and the Office of the Inspector
General for the Department of Housing and Urban Development in
a civil investigation regarding compliance with requirements relating
to certain Federal Housing Agency-insured loans originated by
affiliates of the Bancorp. The investigation is ongoing, and no
demand or claim has been made of the Bancorp. The investigation
could lead to a demand under the federal False Claims Act and the
federal Financial Institutions Reform, Recovery and Enforcement
Act of 1989, which allow up to treble and other special damages
substantially in excess of actual losses.
As previously disclosed the SEC had been investigating the
Bancorp’s historical accounting and reporting with respect to certain
commercial loans that were sold or reclassified as held-for-sale in
the fourth quarter of 2008. At dispute in the matter was whether
certain of those loans should have been moved to held for sale in
the third quarter rather than the fourth quarter of that year. The
Bancorp and the SEC staff agreed to a settlement of that
investigation, pursuant to which the Bancorp, without admitting or
135 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
denying any factual allegations, consented to the SEC’s issuance of
an administrative order containing findings that the Bancorp did not
properly account for a portion of its commercial real estate loan
portfolio in its Form 10-Q for the third quarter of 2008 in violation
of certain provisions of the securities laws, including Sections
17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Sections
13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of
1934. The settlement also ordered the Bancorp to cease and desist
from committing or causing any such violations in the future and to
pay a civil penalty of $6.5 million. Daniel T. Poston, the Bancorp’s
interim chief financial officer during the relevant time, agreed to a
separate settlement with the SEC staff pursuant to which Mr.
Poston, without admitting or denying any factual allegations,
consented to an administrative order containing similar findings and
charges against him, a cease and desist order, a separate civil money
penalty of $100,000, and a one-year ban from practicing before the
SEC. The SEC approved the settlement on December 4, 2013 and
this matter is now concluded.
The Bancorp is party to numerous claims and lawsuits as well
as threatened or potential actions or claims concerning matters
arising from the conduct of its business activities. The outcome of
claims or 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
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 $113 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.
(due
to
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
136 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. RELATED PARTY TRANSACTIONS
The Bancorp maintains written policies and procedures covering
related party transactions to principal shareholders, directors and
executives of the Bancorp. These procedures cover transactions
such as employee-stock purchase loans, personal lines of credit,
residential secured loans, overdrafts, letters of credit and increases in
indebtedness. Such transactions are subject to the Bancorp’s 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, 2013 and 2012, 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 a warrant. 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 Holding, LLC was further reduced during the fourth quarter
of 2012 when the Bancorp sold an approximate six percent interest
and recognized a $157 million gain. The Bancorp’s ownership of
Vantiv Holding, LLC was reduced to 33% as a result of this sale and
had a carrying value of $563 million as of December 31, 2012.
The Bancorp’s ownership position in Vantiv Holding, LLC was
reduced in the second quarter of 2013 when the Bancorp sold an
approximate five percent interest and recognized a $242 million
gain. The Bancorp’s ownership percentage was further reduced in
the third quarter of 2013 when the Bancorp sold an approximate
three percent interest and recognized an $85 million gain. The
Bancorp’s remaining approximate 25% ownership
in Vantiv
Holding, LLC was accounted for as an equity method investment in
the Bancorp’s Consolidated Financial Statements and had a carrying
value of $423 million as of December 31, 2013.
As of December 31, 2013, the Bancorp continued to hold
approximately 48.8 million Class B units of Vantiv Holding, LLC
and a warrant to purchase approximately 20.4 million Class C non-
voting units of Vantiv Holding, LLC, both of which may be
exchanged for Class A 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 48.8 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
2013
2012
586
2
588
86
364
3
367
93
$
$
$
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 $77 million, $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, 2013, 2012 and 2011 and received cash distributions
totaling $40 million and $30 million during 2013 and 2012,
respectively.
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 initially required to support Vantiv
Holding, LLC as a standalone entity during the deconversion
period. The majority of services previously provided by the Bancorp
to support Vantiv Holding, Inc. as a standalone entity are no longer
necessary and are now limited to certain general business resources.
Vantiv Holding, LLC paid the Bancorp $1 million for these services
for the years ended December 31, 2013 and 2012 and $21 million
for the year ended December 31, 2011. Other services provided to
Vantiv Holding, LLC by the Bancorp, have continued beyond the
deconversion period, include clearing, settlement and sponsorship.
Vantiv Holding, LLC paid the Bancorp $34 million for these
services for the years ended December 31, 2013 and 2012 and $37
million for the year ended December 31, 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 $88 million, $83 million and $74
million for the years ended December 31, 2013, 2012 and 2011,
respectively.
As part of the sale, Vantiv Holding, LLC assumed loans
totaling $1.25 billion owed to the Bancorp, which were refinanced
in 2010 into a larger syndicated loan structure that included the
Bancorp. The outstanding balance of loans to Vantiv Holding, LLC
was $348 million and $325 million at December 31, 2013 and 2012,
respectively. Interest income relating to the loans was $7 million,
$11 million and $18 million, respectively, for the years ended
December 31, 2013, 2012 and 2011 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 $50 million as of
137 Fifth Third Bancorp
December 31, 2013 and 2012. Vantiv Holding, LLC did not draw
upon its lines of credit during the years ended December 31, 2013
or 2012.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. INCOME TAXES
The Bancorp and its subsidiaries file a consolidated federal income tax return. The following is a summary of applicable income taxes included in
the Consolidated Statements of Income for the years ended December 31:
($ in millions)
Current income tax expense (benefit):
U.S. Federal income taxes
State and local income taxes
Foreign income taxes
Total current tax expense
Deferred income tax expense
U.S. Federal income taxes
State and local income taxes
Foreign income taxes
Total deferred income tax expense
Applicable income tax expense
2013
2012
2011
494
23
2
519
232
23
(2)
253
772
327
38
-
365
252
19
-
271
636
82
14
-
96
411
26
-
437
533
$
$
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
Unrealized stock-based compensation benefits
Other, net
Effective tax rate
Tax-exempt income in the rate reconciliation table includes interest
lending,
interest
on municipal
income/charges on life insurance policies held by the Bancorp, and
tax-exempt
bonds,
on
2013
35.0 %
1.2
(1.1)
(6.0)
0.3
0.3
29.7 %
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
certain gains on sales of leases that are exempt from federal
taxation.
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
2013
2012
7
-
7
18
-
18
$
$
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
2013
2012
2011
$
$
18
1
(7)
1
(5)
(1)
7
14
6
(3)
2
-
(1)
18
16
1
(2)
-
-
(1)
14
The Bancorp’s unrecognized tax benefits as of December 31, 2013,
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.
While it is reasonably possible that the amount of the
unrecognized tax benefits 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.
138 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
Reserves
Reserve for unfunded commitments
Impairment reserves
State net operating losses
Other
Total deferred tax assets
Deferred tax liabilities:
Lease financing
Investments in joint ventures and partnership interests
MSRs
Bank premises and equipment
Qualifying hedges and free-standing derivatives
State deferred taxes
Other comprehensive income
Other
Total deferred tax liabilities
Total net deferred tax liability
2013
2012
554
109
101
57
31
22
149
1,023
865
381
254
114
97
76
44
130
1,961
(938)
649
105
63
47
74
33
191
1,162
844
470
162
108
31
64
202
124
2,005
(843)
$
$
$
$
$
At December 31, 2013 and 2012, the Bancorp had recorded
deferred tax assets of $22 million and $33 million, respectively,
related to state net operating loss carryforwards. The deferred tax
assets relating to state net operating losses (primarily resulting from
leasing operations) are presented net of specific valuation
allowances of $19 million and $20 million at December 31, 2013
and 2012, respectively. If these carryforwards are not utilized, they
will expire in varying amounts through 2030.
The Bancorp has determined that a valuation allowance is not
needed against the remaining deferred tax assets as of December 31,
2013 or 2012. 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, 2013 and
2012 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
21. 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
for the Bancorp’s federal income tax returns remains open for tax
years 2010-2013. On occasion, as various state and local taxing
jurisdictions examine the returns of the Bancorp and its subsidiaries,
the Bancorp may agree to extend the statute of limitations for a
short period of time. Otherwise, with the exception of a few states
with insignificant uncertain tax positions, the statutes of limitations
for state income tax returns remain open only for tax years in
accordance with each state’s statutes.
Any interest and penalties incurred in connection with income
taxes are recorded as a component of income tax expense in the
the years ended
Consolidated Financial Statements. During
December 31, 2013, 2012 and 2011, the Bancorp recognized an
immaterial amount of interest expense in connection with income
taxes. At December 31, 2013 and 2012, the Bancorp had accrued
interest liabilities, net of the related tax benefits, of $1 million and $3
million, respectively. No material liabilities were recorded for
penalties.
Retained earnings at December 31, 2013 and 2012 included
$157 million in allocations of earnings for bad debt deductions of
former thrift subsidiaries for which no income tax has been
provided. Under current tax law, if certain of the Bancorp’s
subsidiaries use these bad debt reserves for purposes other than to
absorb bad debt losses, they will be subject to federal income tax at
the current corporate tax rate.
plans were obtained in acquisitions from prior years. The Bancorp
recognizes the overfunded and underfunded status of its pension
plans as an asset and liability in the Consolidated Balance Sheets.
The overfunded and underfunded amounts recognized in other assets and other liabilities, respectively, on the Consolidated Balance Sheets were
as follows as of December 31:
($ in millions)
Prepaid benefit cost
Accrued benefit liability
Net underfunded status
$
$
2013
6
(27)
(21)
2012
-
(71)
(71)
139 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize the defined benefit retirement plans as of and for the years ended December 31:
Plans with an Overfunded Status(a)
($ in millions)
Fair value of plan assets at January 1
Actual return on assets
Contributions
Settlement
Benefits paid
Fair value of plan assets at December 31
Projected benefit obligation at January 1
Service cost
Interest cost
Settlement
Actuarial gain
Benefits paid
Projected benefit obligation at December 31
Overfunded projected benefit obligation at December 31
(a) The Bancorp’s defined benefit plan had an Overfunded status at December 31, 2013. The plan was Underfunded at December 31, 2012 and is reflected in the Underfunded Status table.
2013
185
30
5
(13)
(7)
200
224
-
10
(13)
(20)
(7)
194
6
$
$
$
$
$
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 (gain)/loss
Benefits paid
Projected benefit obligation at December 31
Unfunded projected benefit obligation at December 31
$
$
$
$
$
2013
-
-
4
-
(4)
-
32
-
1
-
(2)
(4)
27
(27)
2012
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2012
181
21
4
(10)
(11)
185
253
-
10
(10)
14
(11)
256
(71)
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 2014 is $7 million. The
estimated net prior service cost for the defined benefit pension plan
that will be amortized from accumulated other comprehensive
income into net periodic benefit cost during 2014 is immaterial to
the Consolidated Financial Statements.
140 Fifth Third Bancorp
The following table summarizes net periodic benefit cost and other changes in plan assets and benefit obligations recognized in other
comprehensive income for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ 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 (gain)/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
$
$
$
2013
2012
2011
-
10
(13)
11
-
5
13
(38)
-
(11)
-
(5)
(54)
-
10
(13)
14
-
6
17
7
-
(14)
-
(6)
(13)
-
11
(15)
11
1
6
14
50
-
(11)
(1)
(6)
32
$
(41)
4
46
141 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
2013 ($ in millions)
Equity securities:
Equity securities (Value)
Equity securities (Blended)(b)
Total equity securities
Mutual and exchange traded funds:
Money market funds
International funds
Domestic funds
Debt funds
Alternative strategies
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
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
(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.
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.
142 Fifth Third Bancorp
Fair Value Measurements Using(a)
Level 1
Level 2
Level 3
Total Fair Value
$
$
$
$
8
40
48
7
-
-
-
-
6
13
3
-
-
-
3
64
-
-
-
-
43
41
20
17
-
121
-
13
2
-
15
136
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Level 1
Fair Value Measurements Using(a)
Level 2
Level 3
50
52
4
106
4
29
9
42
13
-
-
-
13
161
-
-
-
-
-
-
-
-
-
21
2
1
24
24
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
8
40
48
7
43
41
20
17
6
134
3
13
2
-
18
200
Total Fair Value
50
52
4
106
4
29
9
42
13
21
2
1
37
185
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. Where quotes prices are not available, the plan measures
the fair value of these investments based on the redemption price of
units held, which is based on the current fair value of the fund’s
underlying assets. Unit values are determined by dividing the fund’s
net assets at fair value by its units outstanding at the valuation dates
to obtain the investment’s net asset value. Therefore, these
investments are classified within Level 2 of the valuation hierarchy.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
Lowering both the expected rate of return on the plan assets and
the discount rate by 0.25% would have increased the 2013 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 expects to
contribute $4 million to the plan in 2014. Estimated pension benefit
payments, which reflect expected future service, are $18 million in
2014, $18 million in 2015, $16 million in 2016, $15 million in 2017
and $14 million in 2018. The total estimated payments for the years
2013
2012
2011
4.72 %
4.00
7.50
3.83
4.00
7.50
3.83
4.00
8.00
4.27
5.00
8.00
4.27
5.00
8.25
5.39
5.00
8.25
2019 through 2023 is $63 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), alternative strategies
(including
and
commodities) and cash.
funds, precious metals
traditional mutual
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
Alternative strategies
Cash(b)
Total
(a)
(b) Cash was held in a Federated Prime Cash Obligation Fund in 2013 and in a Fifth Third Money Market Fund in 2012.
Includes mutual and exchange traded funds
Targeted range
2013
39-78 %
11-41
0-18
0-10
65 %
2
67
22
7
4
100 %
2012
76
1
77
20
-
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, 2013
and 2012.
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. 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.
143 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Information on Retirement and Benefit Plans
The accumulated benefit obligation for all defined benefit plans was
$221 million and $256 million at December 31, 2013 and 2012,
respectively.
.
Amounts relating to the Bancorp’s defined benefit plans with assets exceeding benefit obligations were as follows at December 31:
($ in millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2013
2012
$
194
194
200
-
-
-
Amounts relating to the Bancorp’s defined benefit plans with benefit obligations exceeding assets were as follows at December 31:
2013
2012
$
27
27
-
256
256
185
($ in millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
As of December 31, 2013 and 2012, $200 million and $123 million,
respectively, of plan assets were managed by Fifth Third Bank, a
subsidiary of the Bancorp. Plan assets included $4 million and $3
million of Bancorp common stock as of December 31, 2013 and
2012, respectively. Plan assets are not expected to be returned to the
Bancorp during 2014.
The Bancorp’s profit sharing plan expense was $32 million, $46
million and $35 million for the years ended December 31, 2013,
2012, and 2011, respectively. Expenses recognized for matching
contributions to the Bancorp’s defined contribution savings plans
were $43 million, $42 million and $40 million for the years ended
December 31, 2013, 2012, and 2011, respectively.
144 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. ACCUMULATED OTHER COMPREHENSIVE INCOME
The activity of the components of other comprehensive income and accumulated other comprehensive income for the years ended December 31:
($ in millions)
2013
Unrealized holding losses on available-for-sale securities arising
during period
Reclassification adjustment for net losses included in net income
Net unrealized gains (losses) on available-for-sale securities
Unrealized holding losses 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 (losses) on cash flow hedge derivatives
Net actuarial gain arising during the period
Reclassification of amounts to net periodic benefit costs
Defined benefit plans, net
Total
2012
Unrealized holding losses on available-for-sale securities arising
during period
Reclassification adjustment for net gains included in net income
Net unrealized gains (losses) on available-for-sale securities
Unrealized holding gains on cash flow hedge derivatives arising
during period
Reclassification adjustment for net gains on cash flow
hedge derivatives included in net income
Net unrealized gains (losses) on cash flow hedge derivatives
Net actuarial loss arising during the period
Reclassification of amounts to net periodic benefit costs
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 (losses) on available-for-sale securities
Unrealized holding gains on cash flow hedge derivatives arising
during period
Reclassification adjustment for net gains on cash flow
hedge derivatives included in net income
Net unrealized gains (losses) on cash flow hedge derivatives
Net actuarial loss arising during the period
Reclassification of amounts to net periodic benefit costs
Defined benefit plans, net
Total
Total Other
Comprehensive Income
Total Accumulated Other
Comprehensive Income
Pretax
Activity
Tax
Effect
Net
Activity
Beginning
Balance
Net
Activity
Ending
Balance
$
$
$
$
$
$
(454)
6
(448)
(13)
(44)
(57)
38
16
54
(451)
(97)
(15)
(112)
37
(83)
(46)
(7)
20
13
(145)
309
(56)
253
89
(69)
20
(50)
18
(32)
241
159
(2)
157
5
15
20
(13)
(6)
(19)
158
34
5
39
(13)
29
16
2
(7)
(5)
50
(108)
19
(89)
(31)
24
(7)
17
(6)
11
(85)
(295)
4
(291)
(8)
(29)
(37)
25
10
35
(293)
(63)
(10)
(73)
24
(54)
(30)
(5)
13
8
(95)
201
(37)
164
58
(45)
13
(33)
12
(21)
156
412
(291)
121
50
(37)
13
(87)
375
35
(293)
(52)
82
485
(73)
412
80
(30)
50
(95)
470
8
(95)
(87)
375
321
164
485
67
13
80
(74)
314
(21)
156
(95)
470
145 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below presents reclassifications out of accumulated other comprehensive income for the year ended December 31, 2013:
Components of AOCI: ($ in millions)
Amount Reclassified
from AOCI(b)
Affected Line Item in the
Consolidated Statements of Income
Net unrealized gains on available-for-sale securities
Net losses included in net income
$
Net unrealized gains on cash flow hedge derivatives
Interest rate contracts related to C&I loans
Interest rate contracts related to long-term debt
Net periodic benefit costs
Amortization of net actuarial loss
Settlements
(6)
(6)
2
(4)
45
(1)
44
(15)
29
(11)
(5)
(16)
6
(10)
Securities gains, net
Income before income taxes
Applicable income tax expense
Net income
Interest and fees on loans and leases
Interest on long-term debt
Income before income taxes
Applicable income tax expense
Net income
Employee benefits expense (a)
Employee benefits expense (a)
Income before income taxes
Applicable income tax expense
Net income
Total reclassifications for the period
$
(a) This AOCI component is included in the computation of net periodic benefit cost. Refer to Note 21 for information on the computation of net periodic benefit cost.
(b) Amounts in parentheses indicate reductions to net income.
Net income
15
146 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. COMMON, PREFERRED AND TREASURY STOCK
The following is a summary of the share activity within common, preferred and treasury stock for the years ended:
($ in millions, except share data)
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
Impact of stock transactions under stock compensation plans, net
Other
December 31, 2011
Shares acquired for treasury
Impact of stock transactions under stock compensation plans, net
Other
December 31, 2012
Shares acquired for treasury
Issuance of preferred shares, Series I
Issuance of preferred shares, Series H
Redemption of preferred shares, Series G
Impact of stock transactions under stock compensation plans, net
Other
December 31, 2013
$
$
$
$
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 I
On December 9, 2013, the Bancorp issued, in a registered public
offering, 18,000,000 depositary shares, representing 18,000 shares of
6.625% fixed-to-floating rate non-cumulative Series I perpetual
preferred stock, for net proceeds of $441 million. Each preferred
share has a $25,000 liquidation preference. The preferred stock
accrues dividends, on a non-cumulative quarterly basis, at an annual
rate of 6.625% through but excluding December 31, 2023, at which
time it converts to a quarterly floating rate dividend of three-month
LIBOR plus 3.71%. Subject to any required regulatory approval, the
Bancorp may redeem the Series I preferred shares at its option in
whole or in part, at any time on or after December 31, 2023 and
may redeem in whole but not in part, following a regulatory capital
event at any time prior to December 31, 2023. The Series I
preferred shares are not convertible into Bancorp common shares
or any other securities.
Preferred Stock—Series H
On May 16, 2013, the Bancorp issued, in a registered public
offering, 600,000 depositary shares, representing 24,000 shares of
5.10% fixed-to-floating rate non-cumulative Series H perpetual
preferred stock, for net proceeds of $593 million. Each preferred
share has a $25,000 liquidation preference. The preferred stock
accrues dividends, on a non-cumulative semi-annual basis, at an
annual rate of 5.10% through but excluding June 30, 2023, at which
time it converts to a quarterly floating rate dividend of three-month
LIBOR plus 3.033%. Subject to any required regulatory approval,
the Bancorp may redeem the Series H preferred shares at its option
Shares
801,504,188 $
122,388,393
-
-
-
-
-
923,892,581 $
Common Stock
Value
1,779
272
-
-
-
-
-
2,051
-
-
-
2,051
-
-
-
-
-
-
2,051
-
-
-
-
-
-
-
-
-
923,892,581 $
923,892,581 $
Shares
152,771 $
-
(1)
(136,320)
-
-
Preferred Stock
Value
3,654
-
-
(3,408)
153
-
(1)
398
-
-
-
398
-
441
593
(398)
-
-
1,034
16,450 $
-
-
-
16,450 $
-
18,000
24,000
(16,450)
-
-
42,000 $
Treasury Stock
Value
130
-
-
-
-
(65)
(1)
64
627
(54)
(3)
634
1,242
-
-
(540)
(38)
(3)
1,295
Shares
5,231,666
-
-
-
-
(1,093,116)
(50,405)
4,088,145
42,424,014
(4,654,165)
(117,470)
41,740,524
65,516,126
-
-
(35,529,018)
(3,697,042)
556,246
68,586,836
in whole or in part, at any time on or after June 30, 2023 and may
redeem in whole but not in part, following a regulatory capital event
at any time prior to June 30, 2023. The Series H preferred shares are
not convertible into Bancorp common shares or any other
securities.
Preferred Stock—Series G
In 2008, the Bancorp issued 8.50% non-cumulative Series G
convertible preferred stock. The depositary shares represented
1/250th of a share of Series G convertible preferred stock and had a
liquidation preference of $25,000 per preferred share of Series G
stock. The preferred stock was 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.
On June 11, 2013, pursuant to the Amended Articles of
Incorporation, the Bancorp’s Board of Directors authorized the
conversion into common stock, no par value, of all outstanding
shares of the Bancorp’s Series G perpetual preferred stock. The
Articles grant the Bancorp the right, at its option, to convert all
outstanding shares of Series G preferred stock if the closing price of
common stock exceeded 130% of the applicable conversion price
for 20 trading days within any period of 30 consecutive trading days.
The closing price of shares of common stock satisfied such
threshold for the 30 trading days ended June 10, 2013, and the
Bancorp gave the required notice of its exercise of its conversion
right.
On July 1, 2013, the Bancorp converted the remaining 16,442
outstanding shares of Series G preferred stock, which represented
4,110,500 depositary shares, into shares of Fifth Third’s common
stock. Each share of Series G preferred stock was converted into
2,159.8272 shares of common stock, representing a total of
35,511,740 issued shares. The common shares issued in the
conversion are exempt securities pursuant to Section 3(a)(9) of the
Securities Act of 1933, as amended, as the securities exchanged were
exclusively with the Bancorp’s existing security holders where no
commission or other remuneration was paid. Upon conversion, the
depositary shares were delisted from the NASDAQ Global Select
Market and withdrawn from the Exchange.
147 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
circumstances. The
the
repurchase of common stock and increases in common stock
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.
included restrictions on
terms also
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 and
2013, the Bancorp entered into forward contracts 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 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
treated as
148 Fifth Third Bancorp
as an adjustment to the basis in the treasury shares purchased on the
acquisition date.
On August 21, 2012, the Bancorp announced that the FRB did
not object to its capital plan resubmitted under the 2012 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
replaced 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
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 657,914
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 repurchased
the shares of its common stock as part of its previously announced
100 million share repurchase program. At settlement of the
transaction on February 27, 2013, the Bancorp received an
additional 127,760 shares which were recorded as an adjustment to
the basis in the treasury shares purchased on the acquisition date.
On January 28, 2013, the Bancorp entered into an accelerated
share repurchase transaction with a counterparty pursuant to which
the Bancorp purchased 6,953,028 shares, or approximately $125
million, of its outstanding common stock on January 31, 2013. The
Bancorp repurchased the shares of its common stock as part of its
previously announced Board approved 100 million share repurchase
program. This repurchase transaction concluded the $600 million of
common share repurchases not objected to by the FRB in the 2012
CCAR process. At settlement of the forward contract on April 5,
2013, the Bancorp received an additional 849,037 shares which were
recorded as an adjustment to the basis in the treasury shares
purchased on the acquisition date.
On March 14, 2013, the Bancorp announced the results of its
capital plan submitted to the FRB as part of the 2013 CCAR. The
FRB indicated to the Bancorp that it did not object to the
repurchase of common shares in an amount up to $984 million,
including any shares issued in a Series G preferred stock conversion,
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 stock, which totaled $157 million and $55 million in after-
tax gains during the second and third quarters of 2013, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 19, 2013, the Board of Directors authorized the
Bancorp to repurchase up to 100 million common shares in the
open market or in privately negotiated transactions, and to utilize
any derivative or similar instrument to effect share repurchase
transactions. This share repurchase authorization replaced the
Board’s previous authorization from August of 2012.
On May 21, 2013, the Bancorp entered into an accelerated
share repurchase transaction with a counterparty pursuant to which
the Bancorp purchased 25,035,519 shares, or approximately $539
million, of its outstanding common stock on May 24, 2013. The
Bancorp repurchased the shares of its common stock as part of its
100 million share repurchase program previously announced on
March 19, 2013. At settlement of the forward contract on October
1, 2013, the Bancorp received an additional 4,270,250 shares which
were recorded as an adjustment to the basis in the treasury shares
purchased on the acquisition date.
On November 13, 2013, the Bancorp entered
into an
accelerated share repurchase transaction with a counterparty
pursuant to which the Bancorp purchased 8,538,423 shares, or
approximately $200 million, of its outstanding common stock on
November 18, 2013. The Bancorp repurchased the shares of its
common stock as part of its Board approved 100 million share
24. STOCK-BASED COMPENSATION
The Bancorp has historically emphasized employee
stock
ownership. The following table provides detail of the number of
shares to be issued upon exercise of outstanding stock-based awards
repurchase program previously announced on March 19, 2013. The
Bancorp expects the settlement of the transaction to occur on or
before February 28, 2014.
On December 10, 2013, the Bancorp entered
into an
accelerated share repurchase transaction with a counterparty
pursuant to which the Bancorp purchased 19,084,195 shares, or
approximately $456 million, of its outstanding common stock on
December 13, 2013. The Bancorp repurchased the shares of its
common stock as part of its Board approved 100 million share
repurchase program previously announced on March 19, 2013. The
Bancorp expects the settlement of the transaction to occur on or
before March 26, 2014.
On January 28, 2014, the Bancorp entered into an accelerated
share repurchase transaction with a counterparty pursuant to which
the Bancorp purchased 3,950,705 shares, or approximately $99
million, of its outstanding common stock on January 31, 2014. The
Bancorp repurchased the shares of its common stock as part of its
Board approved 100 million share repurchase program previously
announced on March 19, 2013. The Bancorp expects the settlement
of the transaction to occur on or before March 26, 2014.
During 2011, 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, 2013:
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)
6,710
22
(d)
(e)
(b)
N/A
$45.82
N/A
N/A
Shares Available for
Future Issuance
5,393 (a)
(a)
(a)
(a)
N/A
(a)
8,030 (f)
13,423
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
6,732
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 0.5 million outstanding options awarded under plans assumed by the Bancorp in connection with certain mergers and acquisitions. The Bancorp has not made any awards under these plans
and will make no additional awards under these plans. The weighted-average exercise price of the outstanding options is $19.69 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 2 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 awards and
restricted stock units, and performance shares. Full Value Awards
are defined as awards with no cash outlay for the 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 to the potential that stock-based compensation will be awarded
to executives, directors or key employees of the Bancorp is seven
percent. SARs, restricted stock, stock options and performance
units outstanding represent seven percent of the Bancorp’s issued
shares at December 31, 2013.
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
149 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, have up to ten-year terms and vested and became fully
exercisable ratably over a three or four year period of continued
employment. Performance unit awards have three-year cliff vesting
terms with market conditions as defined by the plan. All of the
Bancorp’s executive stock-based awards contain a performance
hurdle of two percent return on tangible common equity. If this
threshold is not met all awards that would vest in the next year are
forfeited. The Bancorp met this threshold as of December 31, 2013.
Stock-based compensation expense was $78 million, $69
million and $59 million for the years ended December 31, 2013,
2012 and 2011, respectively, and is included in salaries, wages, and
incentives in the Consolidated Statements of Income. The total
related income tax benefit recognized was $28 million, $24 million
and $21 million for the years ended December 31, 2013, 2012 and
2011, 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.
The weighted-average assumptions were as follows for the years ended December 31:
Expected life (in years)
Expected volatility
Expected dividend yield
Risk-free interest rate
2013
6
36%
3.0%
1.0%
2012
6
37%
2.8%
1.2%
2011
6
35%
2.0%
2.6%
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 $4.56, $4.23 and $4.29 per share for the
years ended 2013, 2012 and 2011, respectively. The total grant-date
fair value of SARs that vested during 2013, 2012 and 2011 was $29
million, $22 million, and $20 million, respectively.
At December 31, 2013, there was $68 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 2.6 years.
SARs (Number of SARs in thousands)
Outstanding at January 1
Granted
Exercised
Forfeited or expired
Outstanding at December 31
Exercisable at December 31
2013
Weighted-
Average
Grant Price
20.41
16.16
11.18
21.78
19.98
24.14
Number of
SARs
44,120 $
10,267
(2,904)
(2,884)
48,599 $
26,462 $
2012
Number of
SARs
36,502
12,179
(1,271)
(3,290)
44,120
23,248
$
$
$
Weighted-
Average
Grant Price
22.20
14.36
6.29
23.33
20.41
26.76
2011
Weighted-
Average
Grant Price
24.67
13.36
3.96
25.76
22.20
30.29
Number of
SARs
31,152 $
8,633
(521)
(2,762)
36,502 $
20,070 $
The following table summarizes outstanding and exercisable SARs by grant price at December 31, 2013:
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)
4,096 $
34,077
33
6,713
3,680
48,599 $
Weighted-
Average
Grant Price
4.08
15.36
22.85
38.68
46.32
19.98
Weighted-
Average
Remaining
Contractual
Life
(in years)
5.3
7.6
4.0
2.7
1.2
6.2
Number of
SARs at
Year End
(000s)
4,096 $
11,940
33
6,713
3,680
26,462 $
Weighted-
Average
Grant Price
4.08
16.00
22.85
38.68
46.32
24.14
Weighted-
Average
Remaining
Contractual
Life
(in years)
5.3
6.2
4.0
2.7
1.2
4.5
Restricted Stock Awards
The total grant-date fair value of RSAs that vested during 2013,
2012 and 2011 was $40 million, $32 million and $37 million,
respectively. At December 31, 2013, there was $69 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 2.6 years.
150 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2013
Weighted-
Average
Shares
6,379 $
3,583
(2,720)
(532)
6,710 $
Grant -Date
Fair Value
14.32
16.21
14.71
14.97
15.11
2012
Weighted-
Average
Grant -Date
Fair Value
15.95
14.33
18.37
15.35
14.32
Shares
4,764 $
3,863
(1,826)
(422)
6,379 $
RSAs (shares in thousands)
Nonvested at January 1
Granted
Exercised
Forfeited
Nonvested at December 31
2011
Weighted-
Average
Shares
Grant -Date
Fair Value
18.89
13.19
22.52
15.34
15.95
5,158 $
1,702
(1,646)
(450)
4,764 $
The following table summarizes unvested RSAs by grant-date fair value at December 31, 2013:
Grant-Date Fair Value Per Share
$5.01-$10.00
$10.01-$15.00
$15.01-$20.00
All RSAs
Nonvested RSAs
Number of
RSAs at Year End
(000s)
Weighted-Average
Remaining
Contractual Life
(in years)
62
3,363
3,285
6,710
1.7
1.1
1.8
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 2013, 2012 and 2011.
The total intrinsic value of options exercised was $1 million in
2013 and 2012 and was immaterial to the Bancorp’s Consolidated
Financial Statements in 2011. Cash received from options exercised
was $2 million in 2013 and 2012 and $1 million in 2011. The tax
benefit realized from exercised options was immaterial to the
Bancorp’s Consolidated Financial Statements during 2013, 2012,
and 2011. All stock options were vested as of December 31, 2008,
therefore, no stock options vested during 2013, 2012, or 2011. As of
December 31, 2013, the aggregate
intrinsic value of both
outstanding options and exercisable options was $3 million.
Stock Options (Number of Options in thousands)
Outstanding at January 1
Exercised
Forfeited or expired
Outstanding at December 31
Exercisable at December 31
2013
Weighted-
Average
Exercise Price
Number of
Options
3,877 $
(190)
(3,141)
546 $
546 $
45.00
11.88
51.23
20.72
20.72
2012
Number of
Options
7,584
(205)
(3,502)
3,877
3,877
$
$
$
Weighted-
Average
Exercise Price
53.88
10.32
66.25
45.00
45.00
The following table summarizes outstanding and exercisable stock options by exercise price at December 31, 2013:
2011
Weighted-
Average
Grant Price
52.01
9.25
49.61
53.88
53.88
Number of
Options
11,859 $
(96)
(4,179)
7,584 $
7,584 $
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
Other stock-based compensation
The Bancorp’s Board of Directors previously 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
in reaction
to
Outstanding and Exercisable Stock Options
Number of
Options at Year
End (000s)
Weighted-
Average
Exercise Price
1 $
385
1
133
26
546 $
8.59
13.42
24.41
36.38
49.46
20.72
Weighted-Average
Remaining
Contractual Life
(in years)
5.0
1.6
4.0
0.3
1.1
1.3
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
151 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 were settled in
cash with 50% settled on June 15, 2012 and 50% settled on June 15,
2013. The amount paid on settlement of the phantom stock units
was 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 years ended December 31, 2013
and 2012, and phantom stock units of 132,649 were granted with a
weighted average grant price of $14.40 during the year ended
December 31, 2011. During 2013, 2012 and 2011, 200,130, 199,813,
and 521,091 phantom stock units were settled, respectively.
Performance units are payable contingent upon the Bancorp
achieving certain predefined performance targets over the three-year
measurement period. Awards granted during 2013, 2012 and 2011
will be entirely settled in stock. The performance targets are based
on the Bancorp’s performance relative to a defined peer group.
During 2013, 2012 and 2011, 348,595, 344,741, and 328,061
performance units, respectively, were granted by the Bancorp. These
awards were granted at a weighted-average grant-date fair value of
$16.15, $14.36 and $13.36 per unit during 2013, 2012 and 2011,
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,
2013, 2012 and 2011, there were 690,039, 827,709 and 886,447
shares, respectively, purchased by participants and the Bancorp
recognized stock-based compensation expense of $1 million in each
of the respective years.
152 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE
The following table presents the major components of other noninterest income and other noninterest expense for the years ended December 31:
($ in millions)
Other noninterest income:
Gain on Vantiv, Inc. IPO and sale of Vantiv, Inc. shares
Net gain from warrant and put option associated with sale of the processing business
Equity method income from interest in Vantiv Holding, LLC
Operating lease income
BOLI income
Cardholder fees
Banking center income
Consumer loan and lease fees
Insurance income
Gain on loan sales
TSA revenue
Loss on OREO
Loss on swap associated with the sale of Visa, Inc. class B shares
Other, net
Total
Other noninterest expense:
Losses and adjustments
Loan and lease
FDIC insurance and other taxes
Marketing
Impairment of affordable housing investments
Professional services fees
Operating lease
Travel
Postal and courier
Data processing
Recruitment and education
Insurance
OREO expense
Supplies
Intangible asset amortization
Loss (gain) on debt extinguishment
Benefit from the reserve for unfunded commitments and letters of credit
Other, net
Total
2013
2012
2011
$
$
$
$
336
206
77
75
52
47
34
27
25
3
1
(26)
(31)
53
879
221
158
127
114
108
76
57
54
48
42
26
17
16
16
8
8
(17)
185
1,264
272
67
61
60
35
46
32
27
28
20
1
(57)
(45)
27
574
187
183
114
128
90
56
43
52
48
40
28
18
21
17
13
169
(2)
169
1,374
-
39
57
58
41
41
27
31
28
37
21
(71)
(83)
24
250
129
195
201
115
85
58
41
52
49
29
31
25
34
18
22
(8)
(46)
194
1,224
153 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26. 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
2013
2012
2011
Income
Average Per Share
Shares Amount
Income
Average Per Share
Shares Amount
Income
Average Per Share
Shares Amount
$
$
$
1,836
37
1,799
14
1,785
1,799
-
18
-
1,817
14
869
2.05
8
18
-
1,576
35
1,541
10
1,531
1,541
-
35
-
1,576
10
904
1.69
6
36
-
1,297
203
1,094
6
1,088
1,094
-
35
-
1,129
6
906
1.20
6
36
2
$
1,803
895
2.02
1,566
946
1.66
1,123
950
1.18
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 2013, 2012,
and 2011 excludes 24 million, 36 million, and 29 million,
respectively, of stock appreciation rights and 1 million, 5 million,
and 8 million, respectively, of stock options because their inclusion
would have been anti-dilutive.
The diluted earnings per share computation for the year ended
December 31, 2013 excludes the impact of the forward contracts
related to the November 18, 2013 and December 13, 2013
accelerated share repurchase transactions. Based on the average
daily volume-weighted average price of the Bancorp’s common
stock during the fourth quarter of 2013, the counterparty to the
transactions would have been required to deliver approximately 5
million shares as of December 31, 2013, and thus the impact of the
two accelerated share repurchase transactions 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 the transactions would have been required
to deliver 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.
154 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27. FAIR VALUE MEASUREMENTS
The Bancorp measures certain financial assets and liabilities at fair
value in accordance with U.S. GAAP, which defines fair value as the
price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. U.S. GAAP also establishes a fair value
hierarchy, which prioritizes the inputs to valuation techniques used
to measure fair value into three broad levels. The fair value
hierarchy gives the highest priority to quoted prices in active
markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). A financial instrument’s
categorization within the fair value hierarchy is based upon the
lowest level of input that is significant to the instrument’s fair value
measurement. 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:
December 31, 2013 ($ 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
Fair Value Measurements Using
Level 1(c)
Level 2(c)
Level 3
Total Fair Value
$
$
$
$
26
-
-
-
-
89
115
1
-
-
-
-
315
316
-
-
13
-
-
18
31
462
1
-
-
9
10
4
14
-
1,644
192
12,284
3,582
29
17,731
-
4
12
3
7
-
26
890
-
802
276
-
48
1,126
19,773
384
252
-
56
692
4
696
-
-
-
-
-
-
-
-
-
1
-
-
-
1
-
92
12
-
384
-
396
489
4
-
48
-
52
-
52
26
1,644
192
12,284
3,582
118
17,846
1
4
13
3
7
315
343
890
92
827
276
384
66
1,553
20,724
389
252
48
65
754
8
762
155 Fifth Third Bancorp
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
-
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
-
-
-
-
-
-
-
-
-
1
-
-
-
1
-
76
60
-
177
-
237
314
3
-
33
-
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
-
Short positions
Total liabilities
36
(a) Excludes FHLB and FRB restricted stock totaling $402 and $349, respectively, at December 31, 2013 and $497 and $347, respectively, at December 31, 2012.
(b)
(c) During the years ended December 31, 2013 and 2012, 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.
2
867
8
22
$
The following is a description of the valuation methodologies used
for significant instruments measured at fair value, as well as the
general classification of such instruments pursuant to the valuation
hierarchy.
Available-for-sale and trading securities
Where quoted prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy. Level 1 securities
include government bonds and exchange traded equities. If quoted
market prices are not available, then fair values are estimated using
quoted prices of securities with similar characteristics, or pricing
models, such as discounted cash flows. Examples of such
instruments, which are classified within Level 2 of the valuation
include agency and non-agency mortgage-backed
hierarchy,
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
the previous
in
156 Fifth Third Bancorp
approach based on observable prices of securities with similar
characteristics.
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
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-
internally
backed securities prices,
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 and Credit Officer, are
responsible for determining
the valuation methodology for
residential mortgage loans held for investment. The Secondary
Marketing Department reviews loss severity assumptions quarterly
to determine 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.
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
assigned
the derivative counterparties and other market
parameters and, therefore, are classified within Level 2 of the
valuation hierarchy. Such derivatives include basic and structured
interest rate swaps and options. Derivatives that are valued based
upon models with significant unobservable market parameters are
classified within Level 3 of the valuation hierarchy. At December
31, 2013 and 2012, derivatives classified as Level 3, which are valued
using models containing unobservable inputs, consisted primarily of
a warrant associated with the initial sale of the Bancorp’s 51%
interest in Vantiv Holding, LLC to Advent International and a total
return swap associated with the Bancorp’s sale of Visa, Inc. Class B
shares. Level 3 derivatives also
lock
commitments, which utilize internally generated loan closing rate
assumptions as a significant unobservable input in the valuation
process.
interest rate
include
The warrant allows the Bancorp to purchase approximately 20
million incremental nonvoting units in Vantiv Holding, LLC under
certain defined conditions involving change of control. The fair
value of the warrant 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 warrant, an increase in the expected term (years) and
the expected volatility 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 warrant.
Accounting and Treasury review changes in fair value on a quarterly
basis for reasonableness based on changes in historical and implied
volatilities, expected terms, probability weightings of the related
scenarios, and other assumptions.
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.
Additionally, the Bancorp will make a quarterly payment based on
Visa’s stock price and the conversion rate of the Visa, Inc. Class B
shares into Class A shares until the date on which the Covered
Litigation is settled. The fair value of the total return swap was
calculated using a discounted cash flow model based on
unobservable inputs consisting of management’s estimate of the
probability of certain
litigation scenarios, 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
in
fair value. The Accounting and Treasury Departments
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 asset of the interest rate lock commitments
at December 31, 2013 was $11 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 $8 million and $15 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 $9 million and $18 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 $1 million and $2 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 $1 million and $2 million, respectively. These
sensitivities are hypothetical and should be used with caution, as
changes in fair value based on a variation in assumptions typically
cannot be extrapolated because the relationship of the change in
assumptions to the change in fair value may not be linear.
The Secondary Marketing Department and the Consumer Line
of Business Finance Department, which reports to the Bancorp’s
Chief Financial Officer, are responsible for determining the
in
valuation methodology for IRLCs. Secondary Marketing,
conjunction with a third party valuation provider, periodically
review loan closing rate assumptions and recent loan sales to
determine if adjustments are needed for current market conditions
not reflected in historical data.
157 Fifth Third Bancorp
The following tables are a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs
(Level 3):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
For the year ended December 31, 2013
($ 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 (losses) for the period
included in earnings attributable to the change in
unrealized gains or losses relating to assets
still held at December 31, 2013(c)
For the year ended December 31, 2012
($ in millions)
Beginning balance
Total gains or losses (realized/unrealized):
Included in earnings
Settlements
Transfers into Level 3(b)
Ending balance
The amount of total gains (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)
$
$
$
$
$
$
Trading
Securities
Residential
Mortgage
Loans
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives,
Net(a)
76
(1)
-
(17)
34
92
57
59
(2)
(106)
-
8
144
175
-
17
-
336
Total
Fair Value
278
$
233
(2)
(106)
34
437
$
(1)
11
175
$
185
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Trading
Securities
Residential
Mortgage
Loans
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives,
Net(a)
65
-
(15)
26
76
32
418
(393)
-
57
32
22
90
-
144
Total
Fair Value
130
$
440
(318)
26
278
$
1
-
-
-
-
1
-
1
-
-
-
1
-
-
233
22
$
255
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Residential
Mortgage
Loans
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives,
Net(a)
2
46
Trading
Securities
6
$
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 (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)
(7)
(a) Net interest rate derivatives include derivative assets and liabilities of $12 and $4, respectively, as of December 31, 2013, $60 and $3, respectively as of December 31, 2012 and $34 and $2,
respectively, as of December 31, 2011. Net equity derivatives include derivative assets and liabilities of $384 and $48, respectively, as of December 31, 2013, $177 and $33, respectively, as of
December 31, 2012, and $113 and $81, respectively, as of December 31, 2011.
Includes residential mortgage loans held for sale that were transferred to held for investment.
Includes interest income and expense.
Total
Fair Value
107
$
205
-
-
(175)
-
32
166
2
(5)
(164)
24
130
(43)
2
-
20
-
32
4
-
-
(9)
24
65
-
-
(5)
-
-
1
(b)
(c)
(43)
53
32
4
-
$
$
$
$
158 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
Total gains
2013
57
1
175
233
$
2012
418
1
21
440
2011
210
2
(46)
166
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, 2013, 2012 and 2011 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
2013
10
-
175
185
$
2012
233
1
21
255
2011
37
1
(45)
(7)
The following table presents information as of December 31, 2013 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
$ 92
Valuation Technique
Loss rate model
IRLCs, net
Stock warrant associated with Vantiv Holding, LLC 384
11
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
(48)
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
(23.7) - 16.5%
0 - 63.4%
14.9 - 98.7%
2.00 - 15.50
18.5 - 33.2%
-
12/31/2014 -
12/31/2019
Weighted-Average
2.3%
2.6%
68.5%
5.1
25.4%
-
NM
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
60
IRLCs, net
Stock warrant associated with Vantiv Holding, LLC 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
159 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets and Liabilities Measured at Fair Value on a
Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a
nonrecurring basis. These assets and liabilities are not measured at
fair value on an ongoing basis; however, they are subject to fair
value adjustments in certain circumstances, such as when there is
evidence of impairment.
The following tables represent those assets that were subject to fair value adjustments during the years ended December 31, 2013 and 2012 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:
As of December 31, 2013 ($ in millions)
Commercial loans held for sale(a)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
MSRs
OREO
Private equity investment funds
Total
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
Total
(a)
Includes commercial nonaccrual loans held for sale.
$
Fair Value Measurements Using
Level 2
-
-
-
-
-
-
-
Level 3
3
443
61
16
967
87
181
Level 1
-
-
-
-
-
-
-
$
-
-
1,758
Fair Value Measurements Using
Level 2
-
-
-
-
-
-
-
Level 3
9
83
46
4
697
165
1,004
Level 1
-
-
-
-
-
-
-
$
$
Total
3
443
61
16
967
87
181
1,758
Total
9
83
46
4
697
165
1,004
Total Losses
2013
(7)
(281)
(41)
(10)
192
(45)
(4)
(196)
Total Losses
2012
(13)
(122)
(50)
(22)
(103)
(74)
(384)
The following tables present information as of December 31, 2013 and 2012 about significant unobservable inputs related to the Bancorp’s
material categories of Level 3 financial assets and liabilities measured on a nonrecurring basis:
As of December 31, 2013 ($ in millions)
Financial Instrument
Commercial loans held for sale
Fair Value Valuation Technique
$ 3
Appraised value
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
443
61
16
Appraised value
Appraised value
Appraised value
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted-Average
Appraised value
Cost to sell
Collateral value
Collateral value
Collateral value
NM
NM
NM
NM
NM
MSRs
OREO
967
Discounted cash flow
Prepayment speed
0 - 100%
87
44(a)
Appraised value
Liquidity discount applied
to fund's net asset value
Discount rates
Appraised value
Liquidity discount
9.4 - 18.0%
NM
0 - 18%
Private equity investment funds
(a)
Includes funds the Bancorp will be prohibited from retaining after the July 21, 2015 end of the conformance period for the final rules, adopted under the Bank Holding Company Act, that
implemented the provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as the Volcker Rule.
NM
10.0%
NM
NM
NM
(Fixed) 10.3%
(Adjustable) 25.6%
(Fixed) 10.4%
(Adjustable) 11.6%
NM
3.0%
160 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NM
10.0%
NM
NM
NM
NM
NM
NM
(Fixed) 16.1%
(Adjustable) 26.9%
(Fixed) 10.5%
(Adjustable) 11.7%
NM
As of December 31, 2012 ($ 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
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted-Average
Appraised value
Cost to sell
Default rates
Collateral value
Default rates
Collateral value
Default rates
Collateral value
NM
NM
100%
NM
100%
NM
100%
NM
MSRs
OREO
697
Discounted cash flow
Prepayment speed
0 - 100%
165
Appraised value
Discount rates
Appraised value
9.4 - 18.0%
NM
Commercial loans held for sale
During 2013 and 2012, the Bancorp transferred $5 million and $16
million, respectively, 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 in 2013 and 2012 totaling $4 million and $1 million,
respectively, and were generally based on appraisals of the
underlying collateral and were therefore, classified within Level 3 of
the valuation hierarchy. Additionally, during 2013 and 2012 there
were fair value adjustments on existing commercial loans held for
sale of $3 million and $12 million, respectively. The fair value
adjustments were 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 valuation of commercial HFS loans which may
include a 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 Risk and Credit Officer, in conjunction with the Commercial
Line of Business
for
the
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.
third party appraisals
review
Commercial loans held for investment
During 2013 and 2012, the Bancorp recorded nonrecurring
impairment adjustments to certain commercial and industrial,
commercial mortgage and commercial construction loans held for
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 and Credit Officer, is responsible for preparing and reviewing
the fair value estimates for commercial loans held for investment.
MSRs
Mortgage interest rates increased during the year ended December
31, 2013 and the Bancorp recognized a recovery of temporary
impairment on servicing rights. The Bancorp recognized temporary
impairments in certain classes of the MSR portfolio during the year
ended December 31, 2012 and the carrying value was adjusted to
the 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 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
reviewing key
assumptions used in the internal discounted cash flow model. Two
external valuations of the MSR portfolio are obtained from third
parties
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.
that use valuation models
responsible
to assess
in order
for
OREO
During 2013 and 2012, 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, 2013 and
2012, these losses include $19 million and $17 million, respectively,
recorded as charge-offs, on new OREO properties transferred from
loans during the respective periods and $26 million and $57 million,
respectively, recorded as negative fair value adjustments on OREO
in other noninterest income 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
161 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
classification within Level 3 of the valuation hierarchy. In cases
where the carrying amount exceeds the fair value, less costs to sell,
an impairment loss is recognized. The previous tables reflect the fair
value measurements of the properties before deducting the
estimated costs to sell.
The Real Estate Valuation department, which reports to the
Chief Risk and 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.
Private equity investment funds
The Volcker Rule, which was approved by the respective federal
agencies on December 10, 2013 and becomes effective July 21,
2015, prohibits the Bancorp from retaining an interest in certain of
its private equity fund investments. Therefore, while the Bancorp
has not approved a formal plan to sell any of the private equity
funds, the Bancorp has determined that it may be forced to sell
certain of these funds prior to their scheduled redemption dates. As
a result, the Bancorp has performed nonrecurring fair value
measurements on a fund by fund basis to determine whether OTTI
exists. The Bancorp estimated the fair value of a fund by using the
net asset value reported by the fund manager, and in some cases,
applying an estimated market discount to the reported net asset
value of the fund. Because the length of time until the investment
will become redeemable is generally not certain, these funds were
classified within Level 3 of the valuation hierarchy. An adverse
change in the reported net asset values or estimated market
discounts where applicable, would result in a decrease in the fair
value estimate. In cases where the carrying value exceeds the fair
value, an impairment loss is recognized. The Bancorp’s private
equity department, which reports to the Chief Operating Officer, in
conjunction with Accounting, is responsible for preparing and
reviewing the fair value estimates.
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, 2013 and 2012 for which the fair value option was
elected as well as the changes in fair value of the underlying IRLCs,
included gains of $20 million and $157 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, 2013 and 2012 included gains of $451
million and $849 million during 2013 and 2012, 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 $2 million and $3 million
at December 31, 2013 and 2012, respectively. Interest on residential
mortgage loans measured at fair value is accrued as it is earned using
the effective interest method and is reported as interest income in
the Consolidated Statements of Income.
The following table summarizes the difference between the fair value and the principal balance for residential mortgage loans measured at fair
value as of:
($ in millions)
December 31, 2013
Residential mortgage loans measured at fair value
Past due loans of 90 days or more
Nonaccrual loans
December 31, 2012
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
$
$
982
1
2
2,932
3
-
962
2
2
2,775
4
1
20
(1)
-
157
(1)
(1)
162 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
Amount
Level 1
Level 2
Level 3
Fair Value
$
As of December 31, 2013 ($ 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 $92 of residential mortgage loans measured at fair value on a recurring basis.
3,178
751
208
5,116
54
38,549
7,854
1,013
3,572
12,399
9,152
11,961
2,202
348
(110)
86,940
99,275
284
1,380
9,633
3,178
-
-
5,116
-
-
-
-
-
-
-
-
-
-
-
-
-
751
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
284
-
9,645
99,288
-
1,380
577
-
-
208
-
54
39,804
7,430
856
3,261
11,541
9,181
11,748
2,380
361
-
86,562
-
-
-
-
Net Carrying
$
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.
Amount
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
Fair Value Measurements Using
Level 2
Level 3
Level 1
2,441
-
-
2,421
-
-
-
-
-
-
-
-
-
-
-
-
-
844
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
901
-
6,925
85,592
-
6,280
884
-
-
284
-
83
36,496
8,020
505
3,310
11,532
9,798
12,076
2,139
288
-
84,164
-
-
-
-
3,178
751
208
5,116
54
39,804
7,430
856
3,261
11,541
9,181
11,748
2,380
361
-
86,562
99,288
284
1,380
10,222
Total
Fair Value
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
85,592
901
6,280
7,809
Cash and due from banks, other securities, other short-term investments,
deposits, federal funds purchased and other short-term borrowings
For financial instruments with a short-term or no stated maturity,
prevailing market rates and limited credit risk, carrying amounts
approximate fair value. Those financial instruments include cash and
due from banks, FHLB and FRB restricted stock, other short-term
investments, certain deposits (demand, interest checking, savings,
money market and foreign office deposits), and federal funds
purchased. Fair values for other time deposits, certificates of deposit
$100,000 and over and other short-term borrowings were estimated
using a discounted cash flow calculation that applied prevailing
LIBOR/swap interest rates for the same maturities.
163 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 values for long-term debt were 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.
164 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28. CERTAIN REGULATORY REQUIREMENTS AND CAPITAL RATIOS
The principal source of income and funds for the Bancorp (parent
company) are dividends from its subsidiaries. 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 2013 and
2012, the banking subsidiary was required to maintain average cash
reserve balances of $1.6 billion and $1.5 billion, 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
other intangibles and unrealized gains and losses on cash flow
hedges. The revised regulatory capital rules known as Basel III will
phase out the inclusion of certain TruPS as a component of Tier I
capital when the rules become effective for the Bancorp beginning
January 1, 2015. Under these provisions, these TruPS would qualify
as a component of Tier II capital. At December 31, 2013, the
Bancorp’s Tier I capital included $60 million of TruPS representing
approximately 5 bps of risk-weighted assets.
Tier II capital consists principally of term subordinated debt,
redeemable preferred stock and, subject to limitations, allowances
for credit 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 for 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, 2013 and 2012. As
of December 31, 2013, 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:
($ in millions)
Tier I risk-based capital (to risk-weighted assets):
Fifth Third Bancorp (Consolidated)
Fifth Third Bank
Total risk-based capital (to risk-weighted assets):
Fifth Third Bancorp (Consolidated)
Fifth Third Bank
Tier I leverage (to average assets):
Fifth Third Bancorp (Consolidated)
Fifth Third Bank
2013
2012
Amount Ratio
Amount
Ratio
$
12,094
13,245
10.36% $
11.52
11,685
12,145
10.65%
11.28
16,441
14,795
14.08
12.86
15,816
13,721
14.42
12.74
12,094
13,245
9.64
10.73
11,685
12,145
10.05
10.65
165 Fifth Third Bancorp
29. 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
Change in undistributed earnings
Net Income
(a)
2013
2012
2011
$
$
-
859
14
873
178
36
214
659
74
733
1,103
1,836
-
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
The Bancorp’s indirect banking subsidiary paid dividends to the Bancorp’s direct nonbank subsidiary holding company of $859 million, $2.0 billion and $2.0 billion for the years ended 2013,
2012, and 2011, respectively.
Condensed Statements of Comprehensive Income (Parent Company Only)
For the years ended December 31 ($ in millions)
Net income
Other comprehensive income, net of tax:
Unrealized gains on cash flow hedge derivatives
Other comprehensive income
Comprehensive income attributable to Parent
2013
1,836
-
-
1,836
$
$
2012
1,576
3
3
1,579
2011
1,297
2
2
1,299
166 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:
(Benefit from) provision for deferred income taxes
Net change in undistributed earnings
Net change in:
Other assets
Accrued expenses and other liabilities
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
Issuance of preferred stock
Repurchases 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
2013
2012
$
$
$
-
2,505
-
974
974
16,254
16,254
80
323
20,136
311
442
4,757
5,510
14,626
20,136
-
3,481
-
1,021
1,021
15,376
15,376
80
579
20,537
566
456
5,751
6,773
13,764
20,537
2013
2012
2011
$
1,836
1,576
1,297
(1)
(1,103)
13
(28)
717
976
47
1,023
(255)
750
(1,500)
(393)
(37)
-
1,034
(1,320)
-
(19)
(1,740)
-
-
-
$
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
167 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30. BUSINESS SEGMENTS
The Bancorp reports on four business segments: Commercial
Banking, Branch Banking, Consumer Lending and Investment
Advisors. Results of the Bancorp’s business segments are presented
based on its management structure and management accounting
practices. The structure and accounting practices are specific to the
Bancorp; therefore, the financial results of the Bancorp’s business
segments are not necessarily comparable with similar information
for other
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 an FTP methodology. This
methodology insulates the business segments from interest rate
volatility, enabling them to focus on serving customers through loan
originations and deposit taking. The FTP system assigns charge
rates and credit rates to classes of assets and liabilities, respectively,
based on expected duration and the 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.
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, 2013 to
reflect the current market rates and updated market assumptions.
These rates were generally higher than those in place during 2012,
thus net interest income for deposit providing businesses was
positively impacted during 2013
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.
168 Fifth Third Bancorp
Consumer
Lending
General
Investment Corporate
Advisors
and Other Eliminations
-
-
147
(269)
Total
3,561
229
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Results of operations and assets by segment for each of the three years ended December 31 are:
Commercial
Branch
Banking
1,461
217
$
220
1,244
1,300
Banking
312
92
1,487
187
-
242
386
5
52
95
-
687
-
-
-
-
45
3
12
304
13
148
291
86
-
2013 ($ 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.
457
127
185
4
126
58
748
1,705
393
138
255
-
255
-
255
1,655
50,038
233
40
23
11
7
4
825
1,143
937
171
766
-
766
-
766
613
52,287
175
40
8
1
-
1
460
685
283
100
183
-
183
-
183
-
22,610
-
854
-
780
13
748
$
$
$
154
2
152
1
3
3
384
5
10
-
-
406
134
25
10
-
-
-
284
453
105
37
68
-
68
-
68
148
10,711
416
-
-
(2)
-
(76)
643
18
-
583
582
125
81
188
1
51
(909)
119
880
326
554
(10)
564
37
527
-
(5,203)
-
3,332
-
-
-
(144)(a)
-
-
-
-
(144)
-
-
-
-
-
-
(144)
(144)
-
-
-
-
-
-
-
-
-
700
549
400
393
272
879
21
13
3,227
1,581
357
307
204
134
114
1,264
3,961
2,598
772
1,826
(10)
1,836
37
1,799
2,416
130,443
169 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consumer
Lending
General
Investment Corporate
Advisors
and Other Eliminations
-
-
370
(400)
Total
3,595
303
Commercial
Branch
Banking
1,362
294
$
138
1,068
1,209
Banking
314
176
1,432
223
14
294
15
129
279
81
-
-
225
395
6
46
65
-
830
-
-
-
-
42
1
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
229
39
21
10
5
2
800
1,106
840
146
694
-
694
-
694
613
48,693
192
39
8
1
-
1
429
670
344
121
223
-
223
-
223
-
24,657
-
812
3
876
-
737
$
$
$
117
10
107
1
3
3
366
4
19
-
-
396
136
25
11
-
-
1
264
437
66
23
43
-
43
-
43
148
9,212
770
-
-
-
-
(76)
367
14
-
305
602
143
75
182
1
52
(652)
403
672
244
428
(2)
430
35
395
-
(9,524)
-
3,292
-
-
-
(127)(a)
-
-
-
-
(127)
-
-
-
-
-
-
(127)
(127)
-
-
-
-
-
-
-
-
-
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
170 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial
Branch Consumer
Lending
Banking
$
82
867
1,030
Banking
343
261
1,357
490
1,423
393
-
207
332
12
38
52
-
11
309
14
117
305
81
-
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 expense (benefit)
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.
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
-
837
9
630
$
$
$
General
Investment Corporate
Advisors
and Other Eliminations
-
-
321
(748)
113
27
Total
3,557
423
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
On January 28, 2014, the Bancorp entered into an accelerated
share repurchase transaction with a counterparty pursuant to which
the Bancorp purchased 3,950,705 shares, or approximately $99
million, of its outstanding common stock on January 31, 2014. The
Bancorp repurchased the shares of its common stock as part of its
Board approved 100 million share repurchase program previously
announced on March 19, 2013. The Bancorp expects the settlement
of the transaction to occur on or before March 26, 2014.
31. SUBSEQUENT EVENTS
On February 20, 2014, the Bancorp transferred approximately $1.3
billion in fixed-rate consumer automobile loans to a bankruptcy
remote trust which was deemed to be a VIE. The primary purposes
for which the VIE was created were to issue asset-backed securities
with varying levels of credit subordination and payment priority, as
well as residual interests, and to provide the Bancorp with access to
liquidity for its originated loans. The Bancorp retained residual
interests in the VIE and, therefore, has an obligation to absorb
losses and a right to receive benefits from the VIE that could
potentially be significant to the VIE. In addition, the Bancorp
retained servicing rights for the underlying loans and, therefore,
holds the power to direct the activities of the VIE that most
significantly impact the economic performance of the VIE. As a
result, the Bancorp concluded that it is the primary beneficiary of
the VIE and, therefore, will consolidate this VIE in the Bancorp’s
first quarter of 2014 Form 10-Q. The assets of the VIE are
restricted to the settlement of the notes and other obligations of the
VIE. Third-party holders of the notes do not have recourse to the
general assets of the Bancorp.
171 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, 2013
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:
Name of each exchange
on which registered:
The NASDAQ Stock Market
LLC
The NASDAQ Stock Market
LLC
Title of each class:
Common Stock, Without Par
Value
Depositary Shares Representing a
1/1000th Ownership Interest in a
Share of 6.625% Fixed-to-
Floating Rate Non-Cumulative
Perpetual Preferred Stock, Series
I
Indicate by checkmark 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
information
registrant’s knowledge,
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
172 Fifth Third Bancorp
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 851,455,370 shares of the Bancorp’s Common Stock,
without par value, outstanding as of January 31, 2014. The
Aggregate Market Value of the Voting Stock held by non-
affiliates of the Bancorp was $15,298,734,875 as of June 30,
2013.
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 2014
Annual Meeting of Shareholders is incorporated by reference into
Part III of this report.
Only those sections of this 2013 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,
2013. No other information contained in this 2013 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
16-20, 173-179
41
43-49, 168-171
37
36-49
54-55, 102-103
53-54, 104-105
58-75
55-57
15
57, 128
27-35
None
180
135-136
N/A
180
181
15
15-85
75-78
88-171
None
86
None
183
183
149-152, 183
183
183
PART IV
Item 15. Exhibits, Financial Statement Schedules
SIGNATURES
183-185
186
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.
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, 2013.
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
consolidation
service providers. These
financial
among
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
173 Fifth Third Bancorp
`
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
certain
self-regulatory
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 is 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 laws 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
174 Fifth Third Bancorp
furnishing services
controlling banks or
its banking
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.
to
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”). The Dodd-Frank Wall
Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”) 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
rule implementing revisions to the assessment system 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
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 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
laundering,
respect
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
175 Fifth Third Bancorp
`
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, certain asset-backed
transactions and certain
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 created 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 an interim
final rule to establish an assessment schedule for the collection of
fees from bank holding companies and foreign banks with at least
$50 billion in assets to cover the expenses of the Office of
Financial Research and FSOC. The fees would also cover certain
expenses incurred by the FDIC. The Bancorp paid approximately
$1 million for the initial assessment period which commenced
July 21, 2012 and ended March 31, 2013 and was not assessed a
fee in the first semiannual assessment which ended September 30,
2013.
176 Fifth Third Bancorp
On August 16, 2013, the FRB also adopted a final rule to
implement an assessment provision under the Dodd-Frank Act
equal to the expense and the FRB estimates are necessary or
appropriate to supervise and regulate bank holding companies
with $50 billion or more
in assets. The Bancorp paid
approximately $3 million for the first annual assessment under the
FRB’s rule.
Executive Compensation
The Dodd-Frank Act provides for a say on pay for shareholders of
all public companies. Under the Dodd-Frank Act, each company
must give its shareholders the opportunity to vote on the
compensation of its executives at least once every three years.
The Dodd-Frank Act also adds disclosure and voting
requirements for golden parachute compensation that is payable
to named executive officers in connection with sale transactions.
The SEC adopted rules finalizing these say on pay provisions in
January 2011.
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. The Dodd-Frank Act also
requires the SEC to propose rules requiring companies to disclose
the ratio of the compensation of its chief executive officer to the
median compensation of its employees. The SEC proposed rules
implementing the pay ratio provisions in September 2013.
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.
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.
to
the Dodd-Frank Act,
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. On July 31, 2013 a United States District Court found
that portions of the final interchange rules were contrary to the
language of the Dodd-Frank Act. The Court held that, in adopting
the final rules, the FRB violated the Durbin Amendment’s
provisions concerning which costs are allowed to be taken into
account for purposes of setting fees that are reasonable and
proportional to the costs incurred by the issuer and therefore the
rule’s maximum permissible fees were too high. In addition, the
Court held that the final rules’ network non-exclusivity provisions
concerning unaffiliated payment networks for debit cards also
violated the Durbin Amendment. The Court vacated the final rule,
but stayed its ruling to provide the FRB an opportunity to replace
the invalidated portions. The FRB has appealed this decision. If
this decision is ultimately upheld and/or the FRB re-issues rules
for purposes of implementing the Durbin Amendment in a
manner consistent with this decision, the amount of debit card
interchange fees the Bancorp would be permitted to charge likely
would be reduced.
FDIC Matters and Resolution Planning
Title II of the Dodd-Frank Act creates an orderly liquidation
process that the FDIC can employ for failing systemically
important financial companies. 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 January 2012, the FDIC issued a 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 and submitted its first resolution
plan pursuant to this rule as of December 31, 2013.
the
In October 2011, the FRB and FDIC issued a final rule
requirements of
resolution planning
implementing
Section165(d) of 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 submitted its
first resolution plan pursuant to this rule as of December 31,
2013.
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
sponsors of or invest in private equity and hedge funds (the
“Volcker Rule”). The final regulations implementing the Volcker
Rule (“Final Rules”) were adopted on December 10, 2013. The
Volcker Rule generally prohibits any banking entity from (i)
engaging in short-term proprietary trading for its own account and
(ii) sponsoring or acquiring any ownership interest in a private
equity or hedge fund. The Volcker Rule and Final Rules contain a
number of exceptions. 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. The Final Rules
exclude certain funds from the prohibition on fund ownership and
sponsorship including wholly-owned subsidiaries, joint ventures,
and acquisitions vehicles, as well as SEC registered investment
companies. De minimis ownership of private equity or hedge
funds is also permitted under the Final Rules. 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 under the Final Rules to
demonstrate that it has a Volcker Rule compliance program. In
connection with the issuance of the Final Rules, the Federal
Reserve extended the conformance period generally until July 21,
2015. The Final Rules become effective April 2014, but because
177 Fifth Third Bancorp
`
of the FRB general extension, the Bancorp will have until July 21,
2015 to fully conform its activities and investments to the Final
Rules. The FRB may extend the conformance period for two
additional one-year periods. Further, with respect to covered
funds that are “illiquid funds”, the FRB has the authority to grant
up to five more years for the Bancorp to conform to the final
Volcker Rule with respect to such illiquid funds. The Bancorp
does not know whether it will be granted any extension of time to
conform its activities to the final Volcker Rule.
Derivatives
Title VII of 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. Certain affiliates of the Bancorp that engage
in significant swaps activities may be required to register with the
Commodity Futures Trading Commission or the SEC as a swap
dealer, security0based swap dealer, major swap participant or
major security-based swap participant. 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
such entity registered under the new regulations. 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
Title I of the Dodd-Frank Act creates a new regulatory regime for
large bank holding companies. U.S. bank holding companies with
$50 billion or more in total consolidated assets, including Fifth
Third, are subject to enhanced prudential standards and early
remediation requirements under Title I. Title I of Dodd-Frank
establishes a broad
identifying, applying
heightened supervision and regulation to, and (as necessary)
limiting the size and activities of systemically significant
financial companies.
framework
for
The Dodd-Frank Act requires the FRB to impose enhanced
capital and risk-management standards on these 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 2013, the FRB provided instructions on the
2014 Comprehensive Capital Analysis and Review (“CCAR”).
The 2014 CCAR required bank holding companies with
consolidated assets of $50 billion or more to submit a capital plan
178 Fifth Third Bancorp
to the FRB by January 6, 2014. 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 December of 2010 and revised in June of 2011, the Basel
Committee on Banking Supervision (the “Basel Committee”)
issued Basel III, a global regulatory framework, to enhance
international capital standards. 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 introduces capital
conservation 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.
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. In July of
2013, U.S. banking regulators approved the final enhanced
regulatory capital rules (“Final Capital Rules”), which included
modifications to the proposed rules.
The Final Capital Rules, among other things, (i) introduce a
new capital measure “Common Equity Tier 1” (“CET1”), (ii)
specify that Tier 1 capital consists of CET1 and “Additional Tier
1 capital” instruments meeting specified requirements, (iii) define
CET1 narrowly by requiring that most adjustments to regulatory
capital measures be made to CET1 and not to the other
components of capital and (iv) expand the scope of the
adjustments as compared to existing regulations. CET1 capital
consists of common stock instruments that meet the eligibility
criteria in the final rules, retained earnings, accumulated other
comprehensive income and common equity Tier 1 minority
interest.
When fully phased-in on January 1, 2019, the Final Capital
Rules require banking organizations to maintain (i) a minimum
ratio of CET1 to risk-weighted assets of at least 4.5%, plus a
2.5% “capital conservation buffer” (which is added to the 4.5%
CET1 ratio as that buffer is phased-in, effectively resulting in a
minimum ratio of CET1 to risk-weighted assets of at least 7.0%
upon full implementation), (ii) a minimum ratio of Tier 1 capital
to risk-weighted assets of at least 6.0%, plus the capital
conservation buffer (which is added to the 6.0% Tier 1 capital
ratio as that buffer is phased-in, effectively resulting in a
minimum Tier 1 capital ratio of 8.5% upon full implementation),
(iii) a minimum ratio of total capital (that is, Tier 1 plus Tier 2
capital) to risk-weighted assets of at least 8.0%, plus the capital
conservation buffer (which is added to the 8.0% total capital ratio
as that buffer is phased-in, effectively resulting in a minimum
total capital ratio of 10.5% upon full implementation) and (iv) as
a newly adopted international standard, a minimum leverage ratio
of 4.0%, calculated as the ratio of Tier 1 capital to adjusted
average consolidated assets for large internationally active banks.
The Final Capital Rules also provide for a “countercyclical
capital buffer” designed to absorb losses during periods of
economic stress. Banking institutions with a ratio of CET1 to
risk-weighted assets above
the
conservation buffer will face limitations on the payment of
dividends, common stock repurchases and discretionary cash
payments to executive officers based on the amount of the
shortfall.
the minimum but below
The Final Capital Rules provide for a number of deductions
from and adjustments to CET1. These include, for example, the
requirement that mortgage servicing rights, deferred tax assets
dependent upon future taxable income and significant investments
in non-consolidated financial entities be deducted from CET1 to
the extent that any one such category exceeds 10% of CET1 or all
such categories in the aggregate exceed 15% of CET1. Under
current capital standards, the effects of accumulated other
comprehensive income items included in capital are excluded for
the purposes of determining regulatory capital ratios. Under the
Final Capital Rules, Bancorp has a one-time election (the “Opt-
out Election”) to filter certain accumulated other comprehensive
income (“AOCI”) components, comparable to the treatment under
the current general risk-based capital rule.
The new capital rules are effective for the Bancorp on
January 1, 2015, subject to phase-in periods for certain of their
components and other provisions. The Bancorp is in the process
of evaluating the final rules and their potential impact.
179 Fifth Third Bancorp
`
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, 2013, the Bancorp, through its banking and non-
banking subsidiaries, operated 1,320 banking centers, of which 941
were owned, 264 were leased and 115 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 24, are listed below along
with their business experience during the past 5 years:
Kevin T. Kabat, 57. Vice Chairman 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, 53. 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, 52. 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.
Frank R. Forrest, 59. Executive Vice President and Chief Risk and
Credit Officer of the Bancorp since September 2013. Previously, Mr.
Forrest served with Bank of America Merrill Lynch. From March
2012 until June 2013, Mr. Forrest served as Managing Director and
Quality Control Executive for Legacy Asset Services, a division of
Bank of America. From September 2008 until March 2012, Mr.
Forrest was Managing Director and Global Debt Products Executive
for Global Corporate and Investment Banking. Formerly from
January 2007 to September 2008, Mr. Forrest was Risk Management
Executive for Commercial Banking.
Mark D. Hazel, 48. 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, 55. 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.
180 Fifth Third Bancorp
James C. Leonard, 44. Senior Vice President and Treasurer of the
Bancorp since October 2013. Previously, Mr. Leonard was the
Director of Business Planning and Analysis since 2006 and was the
Chief Financial Officer of the Commercial Banking Division since
2001.
Gregory L. Kosch, 54. 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.
Daniel T. Poston, 55. Executive Vice President of the Bancorp since
June 2003, and Chief Strategy and Administrative Officer of the
Bancorp since October 2013. Previously, Mr. Poston was the Chief
Financial Officer of the Bancorp from September 2009 to October
2013. 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.
Joseph R. Robinson, 46. 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, 59. Senior Executive Vice President of the
Bancorp since December 2002.
Teresa J. Tanner, 45. Executive Vice President and Chief Human
Resources Officer of the Bancorp since February 2010. Previously,
Ms. Tanner was Senior Vice President and Director of Enterprise
Learning since September 2008. Prior to that, she was Human
Resources Senior Vice President and Senior Business Partner for the
Information Technology and Central Operations divisions since July
2006. Previously, she was Vice President and Senior Business
Partner for Operations since September 2004.
Mary E. Tuuk, 49. Executive Vice President of Corporate Services
& Board Secretary of the Bancorp since July 2013. Previously, Ms.
Tuuk served as Affiliate President of Fifth Third Bank (Western
Michigan) from November 2011 to June 2013. Prior to that, Ms.
Tuuk was the Executive Vice President and Chief Risk Officer of the
Bancorp from June 2007 to October 2011 and from July 2013
through September 2013. Ms. Tuuk was Senior Vice President of
Fifth Third Bancorp since 2003.
Tayfun Tuzun, 49. Executive Vice President and Chief Financial
Officer of the Bancorp since October 2013. Previously, Mr. Tuzun
was the Senior Vice President and Treasurer of the Bancorp from
December 2011 to October 2013. Prior to that, Mr. Tuzun was the
Assistant Treasurer and Balance Sheet Manager of Fifth Third
Bancorp. Previously, Mr. Tuzun was the Structured Finance Manager
since 2007.
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
2013
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2012
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
$21.14
$19.79
$18.74
$16.77
High
$16.16
$15.95
$14.67
$14.73
Low
$17.49
$17.80
$15.62
$15.19
Low
$13.75
$13.07
$12.04
$12.78
Dividends Paid
Per Share
$0.12
$0.12
$0.12
$0.11
Dividends Paid
Per Share
$0.10
$0.10
$0.08
$0.08
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, 2013, the Bancorp had 49,524 shareholders of record.
Issuer Purchases of Equity Securities
Period
October 2013
November 2013
December 2013
Total
(a) The Bancorp repurchased 66,283, 93,841 and 63,573 shares during October, November and December of 2013 in connection with various employee
$18.39
19.68
20.33
$19.90
Shares
Purchased(a)
4,270,250
8,538,423
19,084,195
31,892,868
Average Price
Paid Per
Share
Shares
Maximum
Purchased as
Shares that
Part of
May Be
Publicly
Purchased
Announced
Under the
Plans or
Plans or
Programs
Programs
4,270,250 70,694,231
8,538,423 62,155,808
19,084,195 43,071,613
31,892,868 43,071,613
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 24 of
the Notes
to
the Consolidated Financial Statements.
181 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 2008 through 2013, and 2003
through 2013, respectively, compared to the S&P 500 Stock and the S&P Banks indices.
FIFTH THIRD BANCORP VS. MARKET INDICES
182 Fifth Third Bancorp
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
The information required by this item relating to the Executive
Officers of the Registrant is included in PART I under
“EXECUTIVE OFFICERS OF THE BANCORP.”
The information required by this item concerning Directors
and the nomination process is incorporated herein by reference
under the caption “ELECTION OF DIRECTORS” of the
Bancorp’s Proxy Statement for the 2014 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
87
88-92
93-
171
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 2014
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 2014 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
“COMPENSATION
and
INTERLOCKS AND
“COMPENSATION COMMITTEE
INSIDER PARTICIPATION” of the Bancorp’s Proxy Statement
for the 2014 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 2014 Annual Meeting of Shareholders.
and
The information required by this item concerning Equity
Compensation Plan information is included in Note 24 of the
Notes to the Consolidated Financial Statements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by
reference under the captions “CERTAIN TRANSACTIONS”,
“CORPORATE
“ELECTION
GOVERNANCE” and “BOARD OF DIRECTORS,
ITS
the
COMMITTEES, MEETINGS AND FUNCTIONS” of
Bancorp’s Proxy Statement for the 2014 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
EXTERNAL AUDIT FIRM FEES” of the Bancorp’s Proxy
Statement for the 2014 Annual Meeting of Shareholders.
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.
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.
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.
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.
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.
183 Fifth Third Bancorp
`
4.10
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.
4.11 Global Security dated as of January 25, 2011 representing Fifth Third
4.12
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. (2)
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.
4.13 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.
to
4.15
issued
receipts
time of
the depositary
4.14 Deposit Agreement dated May 16, 2013, between Fifth Third
Bancorp, as issuer, Wilmington Trust, National Association, as
depositary and calculation agent, American Stock Transfer & Trust
Company, LLC, as transfer agent and registrar, and the holders from
time
thereunder.
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 May 16, 2013.
Form of Certificate Representing the 5.10% Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, Series H, 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 May 16, 2013.
Form of Depositary Receipt for the 5.10% Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, Series H, 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 May 16, 2013.
4.16
4.17 Global Security dated as of November 20, 2013 representing Fifth
Third Bancorp’s $500,000,000 4.30% Subordinated Notes due 2024.
Incorporated by reference to Exhibit 4.1 of the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on November 20, 2013.
to
4.19
4.20
issued
receipts
time of
the depositary
4.18 Deposit Agreement dated December 9, 2013, between Fifth Third
Bancorp, as issuer, Wilmington Trust, National Association, as
depositary and calculation agent, American Stock Transfer & Trust
Company, LLC as transfer agent and registrar, and the holders from
time
thereunder.
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 December 9, 2013.
Form of Certificate Representing the 6.625% Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, Series I, 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 December 9, 2013.
Form of Depositary Receipt for the 6.625% Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, Series I, 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 December 9, 2013.
Fifth Third Bancorp Unfunded Deferred Compensation Plan for Non-
Employee Directors, as Amended and Restated. Incorporated by
reference to Exhibit 10.1 of the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2013. *
Indenture effective November 19, 1992 between Fifth Third Bancorp,
Issuer and NBD Bank, N.A., Trustee. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on November 18, 1992 and as Exhibit 4.1 to
the Registrant’s Registration Statement on Form S-3, Registration
No. 33-54134.
10.1
10.2
184 Fifth Third Bancorp
10.3
10.4
10.5
10.6
10.7
10.8
10.9
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 Amendment to Fifth Third Bancorp Master Profit Sharing
Plan, as Amended and Restated. Incorporated by reference to Exhibit
10.7 of the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2012.*
Third Amendment to Fifth Third Bancorp Master Profit Sharing Plan,
as Amended and Restated. Incorporated by reference to Exhibit 10.8
of the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2013.*
Fourth Amendment to Fifth Third Bancorp Master Profit Sharing
Plan, as Amended and Restated.*
Fifth Third Bancorp Incentive Compensation Plan. Incorporated by
reference to Registrant’s Proxy Statement dated February 19, 2004.*
Fifth Third Bancorp 2008 Incentive Compensation Plan. Incorporated
by reference to the Registrant’s Proxy Statement dated March 6,
2008.*
10.10 Fifth Third Bancorp 2011 Incentive Compensation Plan. Incorporated
by reference to the Registrant’s Proxy Statement dated March 10,
2011.*
10.11 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.*
10.12 Fifth Third Bancorp Non-qualified Deferred Compensation Plan, as
Amended and Restated.
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 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. *
10.16 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. *
10.17 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. *
10.18 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. *
10.19 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. *
10.20 Form of Executive Agreement effective December 31, 2008, between
Fifth Third Bancorp and Kevin T. Kabat, Robert A. Sullivan and
Greg D. Carmichael. Incorporated by reference to Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 31, 2008. *
10.21 Form of Executive Agreement effective December 31, 2008, between
Fifth Third Bancorp 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. *
10.22 Form of Executive Agreement effective February 3, 2014, between
Fifth Third Bancorp and Tayfun Tuzun. Incorporated by reference to
Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on February 7, 2014.*
10.23 Form of Executive Agreement effective February 3, 2014, between
Fifth Third Bancorp and Frank R. Forrest. Incorporated by reference
to Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on February 7, 2014.*
10.24 Form of Amended Executive Agreement effective January 19, 2012,
between Fifth Third Bancorp and Daniel T. Poston. Incorporated by
reference to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 24, 2012. *
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 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.
** An application for confidential treatment for selected portions of this
exhibit has been filed with the Securities and Exchange Commission.
10.25 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.
10.26 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.
10.27 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.
10.28 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.
10.29 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.
10.30 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.
10.31 Description of Vantiv, Inc. Director Compensation for 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. Mr. Poston is 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.*
10.32 Stock Appreciation Right Award Agreement. Incorporated by
reference to Exhibit 10.2 of the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2013.*
10.33 Performance Share Award Agreement. Incorporated by reference to
Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2013.*
10.34 Restricted Stock Award Agreement (for Directors). Incorporated by
reference to Exhibit 10.4 of the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2013.*
10.35 Restricted Stock Award Agreement (for Executive Officers).
Incorporated by reference to Exhibit 10.5 of the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.*
10.36 Separation Agreement dated July 25, 2013 between Paul Reynolds
Incorporated by reference to the
and Fifth Third Bancorp.
Registrant’s Current Report on Form 8-K filed with the Commission
on July 30, 2013.*
10.37 Master Confirmation, as
supplemented by a Supplemental
Confirmation, for accelerated share repurchase transaction dated
November 13, 2013 between Fifth Third Bancorp and Deutsche Bank
AG, London Branch**
10.38 Master Confirmation, as
supplemented by a Supplemental
Confirmation, for accelerated share repurchase transaction dated
December 10, 2013 between Fifth Third Bancorp and Deutsche Bank
AG, London Branch**
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, 2014.
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.
185 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 24, 2014
Pursuant to requirements of the Securities Exchange Act of 1934,
this report has been signed on February 24, 2014 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/ Tayfun Tuzun
Tayfun Tuzun
Executive Vice President and CFO
Principal Financial Officer
/s/ Mark D. Hazel
Mark D. Hazel
Senior Vice President and Controller
Principal Accounting Officer
186 Fifth Third Bancorp
DIRECTORS:
/s/ William M. Isaac
William M. Isaac
Chairman
/s/ James P. Hackett
James P. Hackett
Lead Director
/s/ Nicholas K. Akins
Nicholas K. Akins
/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
CONSOLIDATED TEN YEAR COMPARISON
AVERAGE ASSETS ($ IN MILLIONS)
$
Year
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
Loans and
Leases
89,093
84,822
80,214
79,232
83,391
85,835
78,348
73,493
67,737
57,042
Interest-Earning Assets
Interest-
Bearing
Deposits in
Banks(a)
Federal
Funds Sold
(a)
1
2
1
11
12
438
257
252
88
120
2,416
1,493
2,030
3,317
1,023
183
147
144
113
195
Securities
16,444 $
15,319
15,437
16,371
17,100
13,424
11,630
20,910
24,806
30,282
Total
107,954
101,636
97,682
98,931
101,526
99,880
90,382
94,799
92,744
87,639
Cash and Due
from Banks
2,482
2,355
2,352
2,245
2,329
2,490
2,275
2,477
2,750
2,216
Other
Assets
15,053 $
15,695
15,335
14,841
14,266
13,411
10,613
8,713
8,102
5,763
Total Average
Assets
123,732
117,614
112,666
112,434
114,856
114,296
102,477
105,238
102,876
94,896
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS ($ IN MILLIONS)
Year
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
Demand
29,925
$
27,196
23,389
19,669
16,862
14,017
13,261
13,741
13,868
12,327
Interest
Checking
23,582
23,096
18,707
18,218
15,070
14,191
14,820
16,650
18,884
19,434
Savings
18,440
21,393
21,652
19,612
16,875
16,192
14,836
12,189
10,007
7,941
Deposits
Money
Market
9,467
4,903
5,154
4,808
4,320
6,127
6,308
6,366
5,170
3,473
$
Other
Time
3,760
4,306
6,260
10,526
14,103
11,135
10,778
10,500
8,491
6,208
Certificates
$100,000 and
Over
6,339
3,102
3,656
6,083
10,367
9,531
6,466
5,795
4,001
2,403
Foreign
Office
1,518
1,555
3,497
3,361
2,265
4,220
3,155
3,711
3,967
4,449
Total
93,031
85,551
82,315
82,277
79,862
75,413
69,624
68,952
64,388
56,235
$
Short-Term
Borrowings
3,527
4,806
3,122
1,926
6,980
10,760
6,890
8,670
9,511
13,539
Total
96,558
90,357
85,437
84,203
86,842
86,173
76,514
77,622
73,899
69,774
INCOME ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Year
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
$
Interest
Income
3,973
4,107
4,218
4,489
4,668
5,608
6,027
5,955
4,995
4,114
Interest
Expense
412
512
661
885
1,314
2,094
3,018
3,082
2,030
1,102
Noninterest
Income
3,227
2,999
2,455
2,729
4,782
2,946
2,467
2,012
2,374
2,355
Noninterest
Expense
3,961
4,081
3,758
3,855
3,826
4,564
3,311
2,915
2,801
2,863
Net Income (Loss)
Available to
Common
Shareholders
1,799
1,541
1,094
503
511
(2,180)
1,075
1,188
1,548
1,524
Earnings
2.05
1.69
1.20
0.63
0.73
(3.91)
1.99
2.13
2.79
2.72
MISCELLANEOUS AT DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Bancorp Shareholders' Equity
Per Share(b)
Originally Reported
Diluted
Earnings
2.02
1.66
1.18
0.63
0.67
(3.91)
1.98
2.12
2.77
2.68
Dividends
Declared Earnings
2.05
1.69
1.20
0.63
0.73
(3.94)
2.00
2.14
2.79
2.72
0.47
0.36
0.28
0.04
0.04
0.75
1.70
1.58
1.46
1.31
$
Diluted
Earnings
2.02
1.66
1.18
0.63
0.67
(3.94)
1.99
2.13
2.77
2.68
Common
Shares
Year
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
Capital
Surplus
2,561
2,758
2,792
1,715
1,743
848
1,779
1,812
1,827
1,934
(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.
Outstanding
855,305,745 $
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
Common
Stock
2,051
2,051
2,051
1,779
1,779
1,295
1,295
1,295
1,295
1,295
Retained
Earnings
10,156
8,768
7,554
6,719
6,326
5,824
8,413
8,317
8,007
7,269
Preferred
Stock
1,034
398
398
3,654
3,609
4,241
9
9
9
9
Treasury
Stock
(1,295)
(634)
(64)
(130)
(201)
(229)
(2,209)
(1,232)
(1,279)
(1,414)
Total
14,589
13,716
13,201
14,051
13,497
12,077
9,161
10,022
9,446
8,924
Accumulated
Other
Comprehensive
Income
82
375
470
314
241
98
(126)
(179)
(413)
(169)
$
$
Book Value
Per Share
15.85
15.10
13.92
13.06
12.44
13.57
17.18
18.00
16.98
15.99
Allowance for
Loan and
Leases Losses
1,582
1,854
2,255
3,004
3,749
2,787
937
771
744
713
187 Fifth Third Bancorp
DIRECTORS AND OFFICERS
John J. Schiff, Jr.
Chairman of the Executive
Committee & Director
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 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
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
Frank R. Forrest
Executive Vice President,
Chief Risk and Credit Officer
Mark D. Hazel
Senior Vice President &
Controller
James R. Hubbard
Senior Vice President &
Chief Legal Officer
Gregory L. Kosch
Executive Vice President
James C. Leonard
Senior Vice President & Treasurer
Daniel T. Poston
Executive Vice President &
Chief Strategy and Administrative
Officer
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
Mary E. Tuuk
Executive Vice President of
Corporate Services and Board
Secretary
Tayfun Tuzun
Executive Vice President &
Chief Financial Officer
AFFILIATE AND
MARKET PRESIDENTS
Donald Abel, Jr.
David A. Call
John N. Daniel
Karen Dee
David Girodat
Shawn Hagan
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
Robert A. Sullivan
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.
FIFTH THIRD
BANCORP DIRECTORS
William M. Isaac, Chairman
Senior Managing Director-Global
Head of Financial Institutions
FTI Consulting
James P. Hackett, Lead
Director
CEO & Director
Steelcase, Inc.
Nicholas K. Akins
President & CEO
American Electric Power Company
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 & Director
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
Retired Chairman & CEO
Humana Inc.
Hendrik G. Meijer
Co-Chairman, Director
& Co-CEO
Meijer, Inc.
188 Fifth Third Bancorp
2013 Financial Highlights
FOR THE YEARS ENDED DECEMBER 31
$ IN MILLIONS, EXCEPT PER SHARE DATA
2013
2012
2011
EARNINGS AND DIVIDENDS
Net income attributable to Bancorp
$
1,836
$
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
Total Assets
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
407
37
2.05
2.02
0.47
15.85
$
325
35
1.69
1.66
0.36
15.10
$ 130,443
$
121,894
89,558
99,275
14,589
3.32%
58.2%
9.39%
10.36%
14.08%
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%
Common Shares Outstanding (000’s)
855,306
882,152
919,804
Banking Centers
ATMs
Full-Time Equivalent Employees
1,320
2,586
19,446
1,325
2,415
20,798
1,316
2,425
21,334
STOCK PERFORMANCE
HIGH
2013
DIVIDENDS
DECLARED
PER SHARE
LOW
2012
DIVIDENDS
DECLARED
LOW PER SHARE
HIGH
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$
21.14
$
17.49
$ 0.12
$
16.16
$
13.75
$ 0.10
19.79
18.74
16.77
17.80
15.62
15.19
0.12
0.12
0.11
15.95
14.67
14.73
13.07
12.04
0.10
0.08
12.78
0.08
Fifth Third’s common stock is traded on the NASDAQ® Global Select Market under the symbol “FITB.”
* Non-GAAP measure. For further information, see the Non-GAAP Financial Measures section of MD&A.
CORPORATE ADDRESS
INVESTOR RELATIONS
TRANSFER AGENT American Stock Transfer and Trust Company, LLC.
Fifth Third Bancorp
38 Fountain Square Plaza
Cincinnati, OH 45263
Website: www.53.com
Telephone: 1-800-972-3030
(For Inquiries of
Shareholders Only)
38 Fountain Square Plaza,
MD 1090QC
Cincinnati, OH 45263
Email: ir@53.com
Telephone: 513-534-4546
For Correspondence:
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Telephone: 1-888-294-8285
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Brooklyn, NY 11219
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