UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2013
Commission File Number 001-33653
(Exact name of Registrant as specified in its charter)
Ohio | 31-0854434 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
Fifth Third Center
Cincinnati, Ohio 45263
(Address of principal executive offices)
Registrants telephone number, including area code: (800) 972-3030
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 x 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | 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 Exchange Act). Yes ¨ No x
There were 874,644,725 shares of the Registrants common stock, without par value, outstanding as of March 31, 2013.
Part I. Financial Information |
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Managements Discussion and Analysis of Financial Condition and Results of Operations (Item 2) |
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53 | ||||
Quantitative and Qualitative Disclosures about Market Risk (Item 3) |
54 | |||
54 | ||||
Condensed Consolidated Financial Statements and Notes (Item 1) |
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56 | ||||
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59 | ||||
Notes to Condensed Consolidated Financial Statements (unaudited) |
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108 | ||||
108 | ||||
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2) |
108 | |||
108 | ||||
109 | ||||
Certifications |
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. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to the risk factors set forth in our most recent Annual Report on Form 10-K. 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 Thirds ability to maintain required capital levels and adequate sources of funding and liquidity; (7) maintaining capital requirements may limit Fifth Thirds 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 Thirds stock price; (16) ability to attract and retain key personnel; (17) ability to receive dividends from its subsidiaries; (18) potentially dilutive effect of future acquisitions on current shareholders ownership of Fifth Third; (19) effects of accounting or financial results of one or more acquired entities; (20) difficulties from the separation of or the results of operations of Vantiv, LLC; (21) loss of income from any sale or potential sale of businesses that could have an adverse effect on Fifth Thirds 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.
2
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 Managements Discussion and Analysis of Financial Condition and Results of Operations, the Condensed Consolidated Financial Statements and the Notes to Condensed 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 BOLI: Bank Owned Life Insurance bps: Basis points BPO: Broker Price Opinion CCAR: Comprehensive Capital Analysis and Review CDC: Fifth Third Community Development Corporation CFPB: United States Consumer Financial Protection Bureau C&I: Commercial and Industrial DCF: Discounted Cash Flow ERISA: Employee Retirement Income Security Act ERM: Enterprise Risk Management ERMC: Enterprise Risk Management Committee EVE: Economic Value of Equity FASB: Financial Accounting Standards Board FDIC: Federal Deposit Insurance Corporation FHLB: Federal Home Loan Bank FHLMC: Federal Home Loan Mortgage Corporation FICO: Fair Isaac Corporation (credit rating) FNMA: Federal National Mortgage Association FRB: Federal Reserve Bank FTAM: Fifth Third Asset Management, Inc. FTE: Fully Taxable Equivalent FTP: Funds Transfer Pricing 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 ISDA: International Swaps and Derivatives Association LIBOR: London InterBank Offered Rate LLC: Limited Liability Company LTV: Loan-to-Value MD&A: Managements Discussion and Analysis of Financial Condition and Results of Operations MSR: Mortgage Servicing Right N/A: Not Applicable NII: Net Interest Income NM: Not Meaningful NPR: Notice of Proposed Rulemaking OCC: Office of the Comptroller of the Currency OCI: Other Comprehensive Income OREO: Other Real Estate Owned OTTI: Other-Than-Temporary Impairment PMI: Private Mortgage Insurance SBA: Small Business Administration SEC: United States Securities and Exchange Commission TBA: To Be Announced TDR: Troubled Debt Restructuring TruPS: Trust Preferred Securities U.S.: United States of America U.S. GAAP: Accounting Principles Generally Accepted in the United States of America VaR: Value-at-Risk VIE: Variable Interest Entity VRDN: Variable Rate Demand Note |
3
Managements Discussion and Analysis of Financial Condition and Results of Operations (Item 2)
The following is MD&A of certain significant factors that have affected Fifth Third Bancorps (the Bancorp or Fifth Third) financial condition and results of operations during the periods included in the Condensed Consolidated Financial Statements, which are a part of this filing. Reference to the Bancorp incorporates the parent holding company and all consolidated subsidiaries.
TABLE 1: Selected Financial Data
For the three months ended March 31, |
% Change | |||||||||||
($ in millions, except for per share data) |
2013 | 2012 | ||||||||||
Income Statement Data |
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Net interest income(a) |
$ | 893 | 903 | (1 | ) | |||||||
Noninterest income |
743 | 769 | (3 | ) | ||||||||
Total revenue(a) |
1,636 | 1,672 | (2 | ) | ||||||||
Provision for loan and lease losses |
62 | 91 | (31 | ) | ||||||||
Noninterest expense |
978 | 973 | | |||||||||
Net income attributable to Bancorp |
422 | 430 | (2 | ) | ||||||||
Net income available to common shareholders |
413 | 421 | (2 | ) | ||||||||
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Common Share Data |
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Earnings per share, basic |
$ | 0.47 | 0.46 | 2 | ||||||||
Earnings per share, diluted |
0.46 | 0.45 | 2 | |||||||||
Cash dividends per common share |
0.11 | 0.08 | 38 | |||||||||
Book value per share |
15.42 | 14.30 | 8 | |||||||||
Market value per share |
16.31 | 14.04 | 16 | |||||||||
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Financial Ratios (%) |
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Return on assets |
1.41 | % | 1.49 | (5 | ) | |||||||
Return on average common equity |
12.5 | 13.1 | (4 | ) | ||||||||
Dividend payout ratio |
23.4 | 17.4 | 35 | |||||||||
Average equity as a percent of average assets |
11.38 | 11.49 | (1 | ) | ||||||||
Tangible common equity(b) |
9.03 | 9.02 | | |||||||||
Net interest margin(a) |
3.42 | 3.61 | (5 | ) | ||||||||
Efficiency(a) |
59.8 | 58.3 | 3 | |||||||||
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Credit Quality |
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Net losses charged off |
$ | 133 | 220 | (39 | ) | |||||||
Net losses charged off as a percent of average loans and leases |
0.63 | % | 1.08 | (42 | ) | |||||||
ALLL as a percent of portfolio loans and leases |
2.08 | 2.59 | (20 | ) | ||||||||
Allowance for credit losses as a percent of portfolio loans and leases(c) |
2.28 | 2.81 | (19 | ) | ||||||||
Nonperforming assets as a percent of portfolio loans, leases and other assets, including other real estate owned(d) |
1.41 | 2.03 | (31 | ) | ||||||||
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Average Balances |
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Loans and leases, including held for sale |
$ | 88,880 | 83,757 | 6 | ||||||||
Total securities and other short-term investments |
16,846 | 16,735 | 1 | |||||||||
Total assets |
121,117 | 116,325 | 4 | |||||||||
Transaction deposits(e) |
80,938 | 77,135 | 5 | |||||||||
Core deposits(f) |
84,920 | 81,686 | 4 | |||||||||
Wholesale funding(g) |
17,683 | 16,596 | 7 | |||||||||
Bancorp shareholders equity |
13,779 | 13,366 | 3 | |||||||||
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Regulatory Capital Ratios (%) |
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Tier I risk-based capital |
10.83 | % | 12.20 | (11 | ) | |||||||
Total risk-based capital |
14.35 | 16.07 | (11 | ) | ||||||||
Tier I leverage |
10.03 | 11.31 | (11 | ) | ||||||||
Tier I common equity(b) |
9.70 | 9.64 | 1 | |||||||||
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(a) | Amounts presented on an FTE basis. The FTE adjustment for the three months ended March 31, 2013 and 2012 was $5. |
(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) | Includes demand, interest checking, savings, money market and foreign office deposits. |
(f) | Includes transaction deposits plus other time deposits. |
(g) | Includes certificates $100,000 and over, other deposits, federal funds purchased, other short-term borrowings and long-term debt. |
4
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. At March 31, 2013, the Bancorp had $121.4 billion in assets, operated 18 affiliates with 1,320 full-service Banking Centers, including 104 Bank Mart® locations open seven days a week inside select grocery stores, and 2,426 ATMs in 12 states throughout the Midwestern and 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 33% interest in Vantiv Holding, LLC. The carrying value of the Bancorps investment in Vantiv Holding, LLC was $574 million as of March 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 understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting policies and estimates, you should carefully read this entire document as well as the 2012 Form 10-K. Each of these items could have an impact on the Bancorps financial condition, results of operations and cash flows. In addition, see the Glossary of Terms in this report for a list of abbreviations and acronyms included as a tool for the reader of this quarterly report on Form 10-Q. The abbreviations and acronyms identified therein are used throughout this MD&A, as well as the Condensed Consolidated Financial Statements and Notes to Condensed 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 Bancorps revenues are dependent on both net interest income and noninterest income. For the three months ended March 31, 2013, net interest income, on an FTE basis, and noninterest income provided 55% and 45% of total revenue, respectively. The Bancorp derives the majority of its revenues within the U.S. from customers domiciled in the U.S. Revenue from foreign countries and external customers domiciled in foreign countries is immaterial to the Bancorps Condensed 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.
Net interest income is the difference between interest income earned on assets such as loans, leases and securities, and interest expense incurred on liabilities such as deposits, short-term borrowings and long-term debt. Net interest income is affected by the general level of interest rates, the relative level of short-term and long-term interest rates, changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Generally, the rates of interest the Bancorp earns on its assets and pays on its liabilities are established for a period of time. The change in market interest rates over time exposes the Bancorp to interest rate risk through potential adverse changes to net interest income and financial position. The Bancorp manages this risk by continually analyzing and adjusting the composition of its assets and liabilities based on their payment streams and interest rates, the timing of their maturities and their sensitivity to changes in market interest rates. Additionally, in the ordinary course of business, the Bancorp enters into certain derivative transactions as part of its overall strategy to manage its interest rate and prepayment risks. The Bancorp is also exposed to the risk of losses on its loan and lease portfolio, as a result of changing expected cash flows caused by borrower credit events, such as, loan defaults and inadequate collateral due to a weakened economy within the Bancorps footprint.
Noninterest income 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.
CCAR Results
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 following 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 of the 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 and the potential issuance of an additional $500 million in preferred stock. In addition, the Bancorp intends to make incremental repurchases of common shares in the amount of any after-tax gains from the sale of Vantiv, Inc. common stock. For more information on the 2013 CCAR results, refer to the Capital Management section of MD&A.
5
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Accelerated Share Repurchase Transactions
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 of its common stock 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 Bancorps 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 Bancorps 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 Bancorps shares of Class A Vantiv, Inc. common stock in 2012, the Bancorp entered into an accelerated share purchase 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 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 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 Boards previous authorization from August of 2012.
Senior Notes Offering
On February 25, 2013, the Bancorps banking subsidiary updated and amended its existing global bank note program. The amended global bank note program increased the Banks 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, with a maturity of five years, due on February 28, 2018; $400 million of 0.90% senior fixed rate notes with a maturity of three years, 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, with a maturity of three years, 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.
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 Bancorps financial performance and growth opportunities.
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 bank holding companies 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 stress testing program and CCAR on November 9, 2012. The CCAR required bank holding companies to submit a capital plan in addition to their stress testing results. 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 Bancorps business plan that are likely to have a material impact on its capital adequacy or liquidity, a detailed description of the Bancorps process for assessing capital adequacy and the Bancorps 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 companys own base scenario capital actions. On March 14, 2013, the Bancorp announced the results of its capital plan and company run stress test submitted to the FRB as part of the 2013 CCAR.
6
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
The FRBs review of the capital plan assessed the comprehensiveness of the capital plan, the reasonableness of the assumptions and the analysis underlying the capital plan. Additionally, the FRB reviewed the robustness of the capital adequacy process, the capital policy and the Bancorps 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 Bancorps strategies for addressing proposed revisions to the regulatory capital framework agreed upon by the Basel Committee on Banking Supervision and requirements arising from the Dodd-Frank Act. For further discussion on the 2013 Stress Tests and CCAR, see the Capital Management section in MD&A.
In January of 2013, the CFPB issued several final regulations and changes to certain consumer protections under existing laws. These regulations are intended to strengthen consumer protections for high-cost mortgages, amend escrow requirements under the Truth in Lending Act, require mortgage lenders to consider the consumers ability to repay home loans before extending them credit, implement mortgage servicing rules, amend the Equal Credit Opportunity Act regarding appraisals and other written valuations for first lien residential mortgage loans and revises the Truth in Lending Act to strengthen loan originator qualification requirements and regulate industry compensation practices. These regulations take effect in 2014 except for the escrow requirements and certain provisions of the compensation rules under the Truth in Lending Act which take effect on June 1, 2013. The Bancorp is currently assessing the impact these new regulations will have on its Condensed Consolidated Financial Statements.
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. 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 Thirds deposit advance product was designed to fully comply with all applicable federal and state laws. 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 alternative for such needs. Fifth Third is currently evaluating the Federal Reserves statement, the proposed guidance by other regulators, and the CFPBs White Paper, to determine whether any changes need to be made to this offering and alternative methods, products and services to ensure that we are able to continue to meet our customers needs. As a result, we cannot at this time estimate the negative financial impact of any changes that may be required as a result of these or future developments. These advance balances are included in other consumer loans and leases on the Bancorps Condensed Consolidated Balance Sheets with revenue reported in interest and fees on loans and leases in the Bancorps Condensed Consolidated Statements of Income and in Table 3 in the Statements of Income Analysis section of MD&A.
In December of 2010 and revised in June of 2011, the Basel Committee on Banking Supervision issued Basel III, a global regulatory framework, to enhance international capital standards. In June of 2012, U.S. banking regulators proposed enhancements to the regulatory capital requirements for U.S. banks, which implement aspects of Basel III, such as re-defining the regulatory capital elements and minimum capital ratios, introducing regulatory capital buffers above those minimums, revising the agencies rules for calculating risk-weighted assets and introducing a new Tier I common equity ratio. The Bancorp continues to evaluate these proposals and their potential impact. The banking agencies have not implemented final rules for the new regulatory framework to date. For more information on the impact of the proposed regulatory capital enhancements, refer to the Capital Management section of MD&A.
In October of 2011, the banking agencies issued an NPR that would implement the provisions of the Volcker Rule. These provisions prohibit banks and bank holding companies from engaging in certain types of proprietary trading. The scope of the proprietary trading prohibition, and its impact on Fifth Third, will depend on the definitions in the final rule, particularly those definitions related to statutory exemptions for risk-mitigating hedging activities, market-making and customer-related activities. The Volcker Rule and the rulemakings promulgated thereunder are also expected to 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, under the proposed rule, it is prohibited from sponsoring. As of March 31, 2013, the Bancorp had approximately $164 million in interests and approximately $105 million binding commitments to invest in private equity funds likely to be affected by the Volcker Rule. It is expected that over time the Bancorp may need to eliminate these investments although it is likely that these amounts will be reduced over time in the ordinary course before compliance is required.
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 Account Guarantee Program. Beginning January 1, 2013, noninterest-bearing transaction accounts are no longer insured separately from depositors other accounts at the same insured depository institution.
Earnings Summary
The Bancorps net income available to common shareholders for the first quarter of 2013 was $413 million, or $0.46 per diluted share, which was net of $9 million in preferred stock dividends. The Bancorps net income available to common shareholders for the first quarter of 2012
7
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
was $421 million, or $0.45 per diluted share, which was net of $9 million in preferred stock dividends. Pre-provision net revenue was $653 million for the three months ended March 31, 2013 compared to $694 million in the same period in 2012. Pre-provision net revenue is a non-GAAP measure. For further information, see the Non-GAAP Financial Measures section in MD&A.
Net interest income was $893 million for the quarter ended March 31, 2013 compared to $903 million in the first quarter of 2012. Net interest income was negatively impacted by a 34 bps decrease in yields on the Bancorps interest-earning assets, partially offset by an increase in average loans and leases of $5.1 billion due primarily to increases in average commercial and industrial loans and average residential mortgage loans. In addition, a reduction in higher cost average long-term debt coupled with a 20 bps decrease in the rates paid on average interest-bearing liabilities resulted in a decrease in interest expense for the three months ended March 31, 2013 compared to the same period in 2012. Net interest margin was 3.42% and 3.61% for the three months ended March 31, 2013 and 2012, respectively.
Noninterest income decreased $26 million, or three percent, in the first quarter of 2013 compared to the same period in the prior year. The decrease from the first quarter of 2012 was primarily due to a decrease in other noninterest income partially offset by increases in mortgage banking net revenue, net securities gains and card and processing revenue. Other noninterest income decreased $66 million, or 37%, primarily due to the $115 million gain from the Vantiv, Inc. IPO in the first quarter of 2012. This impact was partially offset by a $41 million increase in equity method income recorded from the Bancorps ownership interest in Vantiv Holding, LLC. Mortgage banking net revenue increased $16 million, or seven percent, primarily due to an increase in positive net valuation adjustments on servicing rights and free-standing derivatives entered into to economically hedge the MSR portfolio partially offset by an increase in servicing rights amortization expense and a decrease in origination fees and gains on loan sales. Net securities gains were $17 million in the first quarter of 2013, an increase of $8 million, or 92%, compared to the same period in 2012. Card and processing revenue increased $6 million, or 11%, primarily as the result of higher transaction volumes, higher levels of consumer spending and new products.
Noninterest expense increased $5 million in the first quarter of 2013 compared to the same period in 2012.
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 2012 and the first quarter of 2013, the Bancorp has continued to be negatively affected by high unemployment rates, weakened housing markets, particularly in Michigan and Florida, and a challenging credit environment. Credit trends have improved and, as a result, the provision for loan and lease losses decreased to $62 million for the three months ended March 31, 2013 compared to $91 million for the same period in 2012. In addition, net charge-offs as a percent of average portfolio loans and leases decreased to 0.63% during the first quarter of 2013 compared to 1.08% during the first quarter of 2012. At March 31, 2013, nonperforming assets as a percent of portfolio loans, leases and other assets, including OREO (excluding nonaccrual loans held for sale) decreased to 1.41%, 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 Bancorps capital ratios exceed the well-capitalized guidelines as defined by the Board of Governors of the Federal Reserve System. As of March 31, 2013, the Tier I risk-based capital ratio was 10.83%, the Tier I leverage ratio was 10.03% and the total risk-based capital ratio was 14.35%.
8
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
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 Bancorps 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.
The Bancorp believes 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 Bancorps capitalization to other organizations. However, because there are no standardized definitions for these ratios, the Bancorps 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 Condensed Consolidated Financial Statements in their entirety and not to rely on any single financial measure.
The banking regulators issued proposed capital rules (Basel III) in June of 2012 that would substantially amend the existing risk-based capital rules (Basel I) for banks. The Bancorp believes providing an estimate of its capital position based upon its interpretation of these proposed rules is important to complement the existing capital ratios and for comparability to other financial institutions. Since these rules are in proposal stage, they are considered non-GAAP measures and therefore are included in the following non-GAAP financial measures table.
Pre-provision net revenue is net interest income plus noninterest income minus noninterest expense. The Bancorp believes this measure is important because it provides a ready view of the Bancorps earnings before the impact of provision expense.
9
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table reconciles non-GAAP financial measures to U.S. GAAP as of or for the three months ended:
TABLE 2: Non-GAAP Financial Measures
($ in millions) |
March 31, 2013 |
March 31, 2012 |
||||||
Income before income taxes (U.S. GAAP) |
$ | 591 | 603 | |||||
Add: Provision expense (U.S. GAAP) |
62 | 91 | ||||||
|
|
|
|
|||||
Pre-provision net revenue |
653 | 694 | ||||||
Net income available to common shareholders (U.S. GAAP) |
$ | 413 | 421 | |||||
Add: Intangible amortization, net of tax |
1 | 3 | ||||||
|
|
|
|
|||||
Tangible net income available to common shareholders |
414 | 424 | ||||||
|
|
|
|
|||||
March 31, 2013 |
December 31, 2012 |
|||||||
Total Bancorp shareholders equity (U.S. GAAP) |
$ | 13,882 | 13,716 | |||||
Less: Preferred stock |
(398 | ) | (398 | ) | ||||
Goodwill |
(2,416 | ) | (2,416 | ) | ||||
Intangible assets |
(25 | ) | (27 | ) | ||||
|
|
|
|
|||||
Tangible common equity, including unrealized gains / losses |
11,043 | 10,875 | ||||||
Less: Accumulated other comprehensive income |
(333 | ) | (375 | ) | ||||
|
|
|
|
|||||
Tangible common equity, excluding unrealized gains / losses (1) |
10,710 | 10,500 | ||||||
Add: Preferred stock |
398 | 398 | ||||||
|
|
|
|
|||||
Tangible equity (2) |
$ | 11,108 | 10,898 | |||||
|
|
|
|
|||||
Total assets (U.S. GAAP) |
$ | 121,382 | 121,894 | |||||
Less: Goodwill |
(2,416 | ) | (2,416 | ) | ||||
Intangible assets |
(25 | ) | (27 | ) | ||||
Accumulated other comprehensive income, before tax |
(512 | ) | (577 | ) | ||||
|
|
|
|
|||||
Tangible assets, excluding unrealized gains / losses (3) |
$ | 118,429 | 118,874 | |||||
|
|
|
|
|||||
Total Bancorp shareholders equity (U.S. GAAP) |
$ | 13,882 | 13,716 | |||||
Less: Goodwill and certain other intangibles |
(2,504 | ) | (2,499 | ) | ||||
Accumulated other comprehensive income |
(333 | ) | (375 | ) | ||||
Add: Qualifying TruPS |
810 | 810 | ||||||
Other |
23 | 33 | ||||||
|
|
|
|
|||||
Tier I risk-based capital |
11,878 | 11,685 | ||||||
Less: Preferred stock |
(398 | ) | (398 | ) | ||||
Qualifying TruPS |
(810 | ) | (810 | ) | ||||
Qualified noncontrolling interests in consolidated subsidiaries |
(38 | ) | (48 | ) | ||||
|
|
|
|
|||||
Tier I common equity (4) |
$ | 10,632 | 10,429 | |||||
|
|
|
|
|||||
Risk-weighted assets (5) (a) |
$ | 109,626 | 109,699 | |||||
Ratios: |
||||||||
Tangible equity (2) / (3) |
9.36 | % | 9.17 | |||||
Tangible common equity (1) / (3) |
9.03 | % | 8.83 | |||||
Tier I common equity (4) / (5) |
9.70 | % | 9.51 | |||||
|
|
|
|
|||||
Basel IIIEstimated Tier I common equity ratio |
||||||||
Tier I common equity (Basel I) |
$ | 10,632 | 10,429 | |||||
Add: Adjustment related to AOCI for available-for-sale securities |
397 | 429 | ||||||
|
|
|
|
|||||
Estimated Tier I common equity under Basel III rules(b) |
11,029 | 10,858 | ||||||
Estimated risk-weighted assets under Basel III rules(c) |
123,696 | 123,725 | ||||||
|
|
|
|
|||||
Estimated Tier I common equity ratio under Basel III rules |
8.91 | % | 8.78 |
(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 Bancorps total risk-weighted assets. |
(b) | Tier I common equity under Basel III includes the unrealized gains and losses for available-for-sale securities. |
(c) | Key differences under Basel III in the calculation of risk-weighted assets compared to Basel I include: (1) risk weighting for commitments under 1 year; (2) higher risk weighting for exposures to residential mortgage, home equity, past due loans, foreign banks and certain commercial real estate; (3) higher risk weighting for mortgage servicing rights and deferred tax assets that are under certain thresholds as a percent of Tier I capital; (4) incremental capital requirements for stress VaR; and (5) derivatives are differentiated between exchange clearing and over-the-counter and the 50% risk-weight cap is removed. The estimated Basel III risk-weighted assets are based upon the Bancorps interpretations of the three draft Federal Register notices proposing enhancements to the regulatory capital requirements that were published in June of 2012. These amounts are preliminary and subject to change depending on the adoption of final Basel III capital rules by the Regulatory Agencies. |
10
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Note 3 of the Notes to Condensed Consolidated Financial Statements provides a discussion of the significant new accounting standards applicable to the Bancorp and the expected impact of significant accounting standards issued, but not yet required to be adopted.
The Bancorps Condensed 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 Bancorps financial position, results of operations and cash flows. The Bancorps critical accounting policies include the accounting for the ALLL, reserve for unfunded commitments, income taxes, valuation of servicing rights, fair value measurements and goodwill. These accounting policies are discussed in detail in Managements Discussion and Analysis Critical Accounting Policies in the Bancorps Annual Report on Form 10-K for the year ended December 31, 2012. No material changes were made to the valuation techniques or models during the three months ended March 31, 2013.
11
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
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 3 presents the components of net interest income, net interest margin and net interest rate spread for the three months ended March 31, 2013 and 2012, as well as the relative impact of changes in the balance sheet and changes in interest rates on net interest income. 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.
Net interest income was $893 million for the first quarter of 2013, a decrease of $10 million compared to the first quarter of 2012. Included within net interest income are amounts related to the accretion of discounts on acquired loans and deposits, primarily as a result of acquisitions in previous years, which increased net interest income by $5 million during the three months ended March 31, 2013, compared to $8 million during the three months ended March 31, 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 remaining period to maturity, and excluding the impact of potential prepayments, the Bancorp anticipates recognizing approximately $6 million in additional net interest income during the remainder of 2013 as a result of the amortization and accretion of premiums and discounts on acquired loans and deposits.
For the three months ended March 31, 2013, net interest income was negatively impacted by a 34 bps decline in yields on the Bancorps interest-earning assets compared to the first quarter of 2012. The decrease in yields on interest-earning assets was partially offset by an increase in average loans and leases of $5.1 billion, as well as a decrease in interest expense compared to the same period in 2012. The decrease in interest expense was primarily the result of a $2.3 billion decrease in average long-term debt coupled with a 47 bps decrease in the rate paid on average long-term debt. The net interest rate spread decreased to 3.25% in the first quarter of 2013 from 3.39% in the same period in 2012, as the benefit of the decrease in rates on interest-bearing liabilities was more than offset by a 34 bps decrease in yield on average interest-earnings assets.
Net interest margin was 3.42% for the three months ended March 31, 2013 compared to 3.61% for the three months ended March 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 the three months ended March 31, 2013, compared to a 3 bps increase during the three months ended March 31, 2012. Exclusive of these amounts, net interest margin decreased 18 bps for the three months ended March 31, 2013 compared to the same period in the prior year. The decrease from the same period in 2012 was driven primarily by the previously mentioned decline in the yield on average interest-earning assets, partially offset by an increase in average loans and leases and a reduction in higher cost long-term debt.
Interest income from loans and leases decreased $17 million, or two percent, compared to the first quarter of 2012. The decrease from the three months ended March 31, 2012 was primarily the result of a decrease of 30 bps in average loans and leases yields partially offset by an increase of six percent in average loans and leases. The increase in average loans and leases for the three months ended March 31, 2013 was driven primarily by an increase of 16% in average commercial and industrial loans and an increase of 15% in average residential mortgage loans. For more information on the Bancorps loan and lease portfolio, see the Loans and Leases section of the Balance Sheet Analysis section of MD&A. In addition, interest income from investment securities and other short-term investments decreased $28 million, or 20%, compared to the three months ended March 31, 2012, primarily as the result of a 70 bps decrease in the average yield on taxable securities.
Average core deposits increased $3.2 billion, or four percent, compared to the first quarter of 2012. The increase was primarily due to an increase in average money market deposits, average demand deposits and average interest checking deposits partially offset by decreases in average savings deposits and average foreign office deposits. The cost of average core deposits decreased to 19 bps for the three months ended March 31, 2013 from 22 bps for the three months ended March 31, 2012. This decrease was primarily the result of an 8 bps decrease in the rate paid on average savings deposits compared to the three months ended March 31, 2012.
For the three months ended March 31, 2013, interest expense on average wholesale funding decreased $29 million, or 30%, compared to the three months ended March 31, 2012, primarily as a result of a $2.3 billion decrease in average long-term debt coupled with a 47 bps decrease in the rate paid on average long-term debt. The reduction in higher cost long-term debt was primarily the result of the redemption of outstanding TruPS and FHLB debt in 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 $1.0 billion of FHLB debt with a fixed rate of 4.56%. Refer to the Borrowings section of the Balance Sheet Analysis section of MD&A for additional information on the Bancorps borrowings. During the three months ended March 31, 2013, average wholesale funding represented 24% of average interest-bearing liabilities compared to 23% during the three months ended March 31, 2012. For more information on the Bancorps interest rate risk management, including estimated earnings sensitivity to changes in market interest rates, see the Market Risk Management section of MD&A.
12
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
TABLE 3: Condensed Average Balance Sheets and Analysis of Net Interest Income
For the three months ended |
March 31, 2013 | March 31, 2012 | Attribution of Change in Net Interest Income(a) |
|||||||||||||||||||||||||||||||||
($ in millions) |
Average Balance |
Revenue/ Cost |
Average Yield/ Rate |
Average Balance |
Revenue/ Cost |
Average Yield/ Rate |
Volume | Yield/Rate | Total | |||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||||||||||||||
Loans and leases:(b) |
||||||||||||||||||||||||||||||||||||
Commercial and industrial loans |
$ | 36,423 | $ | 350 | 3.90 | % | $ | 31,421 | $ | 328 | 4.20 | % | $ | 47 | (25 | ) | 22 | |||||||||||||||||||
Commercial mortgage |
8,978 | 80 | 3.63 | 10,077 | 99 | 3.95 | (11 | ) | (8 | ) | (19 | ) | ||||||||||||||||||||||||
Commercial construction |
700 | 6 | 3.21 | 1,008 | 8 | 3.04 | (2 | ) | | (2 | ) | |||||||||||||||||||||||||
Commercial leases |
3,557 | 30 | 3.38 | 3,543 | 33 | 3.79 | 1 | (4 | ) | (3 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Subtotal commercial |
49,658 | 466 | 3.80 | 46,049 | 468 | 4.09 | 35 | (37 | ) | (2 | ) | |||||||||||||||||||||||||
Residential mortgage loans |
14,866 | 146 | 3.98 | 12,928 | 134 | 4.17 | 18 | (6 | ) | 12 | ||||||||||||||||||||||||||
Home equity |
9,872 | 91 | 3.74 | 10,606 | 101 | 3.85 | (7 | ) | (3 | ) | (10 | ) | ||||||||||||||||||||||||
Automobile loans |
12,096 | 98 | 3.29 | 11,882 | 118 | 3.99 | 1 | (21 | ) | (20 | ) | |||||||||||||||||||||||||
Credit card |
2,069 | 49 | 9.67 | 1,926 | 45 | 9.43 | 3 | 1 | 4 | |||||||||||||||||||||||||||
Other consumer loans/leases |
319 | 36 | 46.77 | 366 | 37 | 40.13 | (7 | ) | 6 | (1 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Subtotal consumer |
39,222 | 420 | 4.35 | 37,708 | 435 | 4.64 | 8 | (23 | ) | (15 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total loans and leases |
88,880 | 886 | 4.04 | 83,757 | 903 | 4.34 | 43 | (60 | ) | (17 | ) | |||||||||||||||||||||||||
Securities: |
||||||||||||||||||||||||||||||||||||
Taxable |
15,224 | 112 | 2.98 | 15,313 | 140 | 3.68 | (2 | ) | (26 | ) | (28 | ) | ||||||||||||||||||||||||
Exempt from income taxes(b) |
51 | 1 | 5.44 | 59 | 1 | 5.60 | | | | |||||||||||||||||||||||||||
Other short-term investments |
1,571 | 1 | 0.26 | 1,363 | 1 | 0.26 | | | | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total interest-earning assets |
105,726 | 1,000 | 3.84 | 100,492 | 1,045 | 4.18 | 41 | (86 | ) | (45 | ) | |||||||||||||||||||||||||
Cash and due from banks |
2,225 | 2,345 | ||||||||||||||||||||||||||||||||||
Other assets |
15,016 | 15,734 | ||||||||||||||||||||||||||||||||||
Allowance for loan and lease losses |
(1,850 | ) | (2,246 | ) | ||||||||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||||||
Total assets |
$ | 121,117 | $ | 116,325 | ||||||||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||||||
Liabilities and Equity |
||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Interest checking |
$ | 23,763 | $ | 13 | 0.23 | % | $ | 22,308 | $ | 12 | 0.22 | % | $ | | 1 | 1 | ||||||||||||||||||||
Savings |
19,576 | 6 | 0.13 | 21,944 | 11 | 0.21 | (1 | ) | (4 | ) | (5 | ) | ||||||||||||||||||||||||
Money market |
7,932 | 5 | 0.24 | 4,543 | 3 | 0.22 | 2 | | 2 | |||||||||||||||||||||||||||
Foreign office deposits |
1,102 | 1 | 0.26 | 2,277 | 2 | 0.26 | (1 | ) | | (1 | ) | |||||||||||||||||||||||||
Other time deposits |
3,982 | 15 | 1.50 | 4,551 | 18 | 1.62 | (2 | ) | (1 | ) | (3 | ) | ||||||||||||||||||||||||
Certificates - $100,000 and over |
4,017 | 11 | 1.09 | 3,178 | 12 | 1.55 | 3 | (4 | ) | (1 | ) | |||||||||||||||||||||||||
Other deposits |
40 | | 0.13 | 19 | | 0.08 | | | | |||||||||||||||||||||||||||
Federal funds purchased |
691 | | 0.14 | 370 | | 0.10 | | | | |||||||||||||||||||||||||||
Other short-term borrowings |
5,429 | 2 | 0.18 | 3,261 | 1 | 0.12 | | 1 | 1 | |||||||||||||||||||||||||||
Long-term debt |
7,506 | 54 | 2.94 | 9,768 | 83 | 3.41 | (19 | ) | (10 | ) | (29 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total interest - bearing liabilities |
74,038 | 107 | 0.59 | 72,219 | 142 | 0.79 | (18 | ) | (17 | ) | (35 | ) | ||||||||||||||||||||||||
Demand deposits |
28,565 | 26,063 | ||||||||||||||||||||||||||||||||||
Other liabilities |
4,687 | 4,627 | ||||||||||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||||||
Total liabilities |
107,290 | 102,909 | ||||||||||||||||||||||||||||||||||
Total equity |
13,827 | 13,416 | ||||||||||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||||||
Total liabilities and equity |
$ | 121,117 | $ | 116,325 | ||||||||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||||||
Net interest income |
$ | 893 | $ | 903 | $ | 59 | (69 | ) | (10 | ) | ||||||||||||||||||||||||||
Net interest margin |
3.42 | % | 3.61 | % | ||||||||||||||||||||||||||||||||
Net interest rate spread |
3.25 | 3.39 | ||||||||||||||||||||||||||||||||||
Interest-bearing liabilities to interest-earning assets |
|
70.03 | 71.86 | |||||||||||||||||||||||||||||||||
|
|
|
|
(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. |
(b) | The FTE adjustments included in the above table were $5 for the three months ended March 31, 2013 and 2012. |
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 of the Bancorps Annual Report on Form 10-K for the year ended December 31, 2012. 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 Condensed 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 was $62 million for the three months ended March 31, 2013 compared to $91 million during the same period in 2012. The decrease in provision expense compared to the same period in 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
13
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
ALLL declined $71 million from $1.9 billion at December 31, 2012 to $1.8 billion at March 31, 2013. As of March 31, 2013, the ALLL as a percent of portfolio loans and leases decreased to 2.08%, 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 Condensed Consolidated Financial Statements for more detailed information on the provision for loan and lease losses, including an analysis of loan portfolio composition, nonperforming assets, net charge-offs, and other factors considered by the Bancorp in assessing the credit quality of the loan and lease portfolio and the ALLL.
Noninterest Income
Noninterest income decreased $26 million, or three percent, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.
The components of noninterest income are as follows:
TABLE 4: Noninterest Income
For the three months ended March 31, |
||||||||||||
($ in millions) |
2013 | 2012 | % Change | |||||||||
Mortgage banking net revenue |
$ | 220 | 204 | 7 | ||||||||
Service charges on deposits |
131 | 129 | 1 | |||||||||
Investment advisory revenue |
100 | 96 | 4 | |||||||||
Corporate banking revenue |
99 | 97 | 2 | |||||||||
Card and processing revenue |
65 | 59 | 11 | |||||||||
Other noninterest income |
109 | 175 | (37 | ) | ||||||||
Securities gains, net |
17 | 9 | 92 | |||||||||
Securities gains, net - non-qualifying hedges on mortgage servicing rights |
2 | | NM | |||||||||
|
|
|
|
|
|
|||||||
Total noninterest income |
$ | 743 | 769 | (3 | ) | |||||||
|
|
|
|
|
|
Mortgage banking net revenue
Mortgage banking net revenue increased $16 million, or seven percent, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.
The components of mortgage banking net revenue are as follows:
TABLE 5: Components of Mortgage Banking Net Revenue
For the three months ended March 31, |
||||||||
($ in millions) |
2013 | 2012 | ||||||
Origination fees and gains on loan sales |
$ | 169 | 174 | |||||
Net servicing revenue: |
||||||||
Gross servicing fees |
61 | 61 | ||||||
Servicing rights amortization |
(53 | ) | (46 | ) | ||||
Net valuation adjustments on servicing rights and free-standing derivatives entered into to economically hedge MSR |
43 | 15 | ||||||
|
|
|
|
|||||
Net servicing revenue |
51 | 30 | ||||||
|
|
|
|
|||||
Mortgage banking net revenue |
$ | 220 | 204 | |||||
|
|
|
|
Origination fees and gains on loan sales decreased $5 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012, as a 15% increase in residential mortgage loan originations was more than offset by a decrease in profit margins on sold residential mortgage loans. Residential mortgage loan originations increased to $7.4 billion during the first quarter of 2013 compared to $6.4 billion during the first quarter of 2012. The increase in originations is primarily due to strong refinancing activity, as mortgage rates remain near historical lows.
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 $21 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012, driven primarily by an increase of $28 million in net valuation adjustments. The increase in net valuation adjustments was partially offset by a $7 million increase in servicing rights amortization for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 due to an increase in MSR volumes.
The net valuation adjustment of $43 million during the first quarter of 2013 included a $49 million recovery on temporary impairment on the MSRs partially offset by $6 million in losses from derivatives economically hedging the MSRs. The net valuation adjustment of $15 million during the first quarter of 2012 included an $11 million recovery on temporary impairment on the MSR portfolio and $4 million in gains from derivatives economically hedging the MSRs. Mortgage rates increased during the three months ended March 31, 2013. This caused
14
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
modeled prepayments speeds to slow, which led to the recovery on temporary impairment on servicing rights during the quarter ended March 31, 2013. Gross servicing fees were flat in the first quarter of 2013 compared to the first quarter of 2012. The Bancorps total residential loans serviced as of March 31, 2013 and 2012 were $79.5 billion and $72.9 billion, respectively, with $64.8 billion and $60.4 billion, respectively, of residential mortgage loans serviced for others.
Servicing rights are deemed impaired when a borrowers 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 borrowers loan rate. Further detail on the valuation of MSRs can be found in Note 9 of the Notes to Condensed 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 10 of the Notes to Condensed 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. Unrealized gains of $2 million related to these securities for the three months ended March 31, 2013 were recorded in securities gains, net, non-qualifying hedges on mortgage servicing rights in the Bancorps Condensed Consolidated Statements of Income. There were no sales of securities related to the Bancorps non-qualifying hedging strategy during the first quarter of 2012.
Service charges on deposits
Service charges on deposits increased $2 million for the three months ended March 31, 2013 compared to the same period in the prior year. The increase for the three months ended March 31, 2013 was primarily driven by commercial deposit revenue which increased $4 million due to pricing changes implemented during 2012. The increase in commercial deposit revenue was partially offset by a $3 million decrease in consumer deposit revenue due to the elimination of daily overdraft fees on continuing consumer overdraft positions which took effect late in the second quarter of 2012, partially offset by an increase in consumer checking fees due to new deposit product offerings.
Investment advisory revenue
Investment advisory revenue increased $4 million for the three months ended March 31, 2013 compared to the same period in 2012, primarily driven by a $5 million increase in securities and brokerage fees due to an increase in equity market values and a $3 million increase in private client service fees partially offset by a $5 million decline in mutual fund fees due to the sale of certain FTAM advisory contracts in the third quarter of 2012. The Bancorp had approximately $318.0 billion and $295.8 billion in total assets under care as of March 31, 2013 and 2012, respectively, and managed $26.8 billion and $25.6 billion in assets, respectively, for individuals, corporations and not-for-profit organizations for the same comparative periods.
Corporate banking revenue
Corporate banking revenue increased $2 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The increase compared to the three months ended March 31, 2012 was primarily due to a $4 million increase in institutional sales revenue partially offset by a $2 million decrease in syndication fees.
Card and processing revenue
Card and processing revenue increased $6 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The increase was the result of higher transaction volumes, higher levels of consumer spending and new products.
Other noninterest income
The major components of other noninterest income are as follows:
TABLE 6: Components of Other Noninterest Income
For the three months ended March 31, |
||||||||
($ in millions) |
2013 | 2012 | ||||||
Equity method earnings (losses) from interest in Vantiv Holding, LLC |
$ | 17 | (24 | ) | ||||
Operating lease income |
16 | 14 | ||||||
Cardholder fees |
11 | 11 | ||||||
BOLI income |
10 | 9 | ||||||
Banking center income |
9 | 7 | ||||||
Insurance income |
8 | 7 | ||||||
Consumer loan and lease fees |
6 | 7 | ||||||
Gain on loan sales |
2 | 5 | ||||||
Gain on Vantiv, Inc. IPO |
| 115 | ||||||
Loss on sale of OREO |
(10 | ) | (17 | ) | ||||
Loss on swap associated with the sale of Visa, Inc. class B shares |
(7 | ) | (19 | ) | ||||
Other, net |
47 | 60 | ||||||
|
|
|
|
|||||
Total other noninterest income |
$ | 109 | 175 | |||||
|
|
|
|
Other noninterest income decreased $66 million, or 37%, in the first quarter of 2013 compared to the first quarter of 2012. The decrease was primarily due to the $115 million gain from the Vantiv, Inc. IPO in the first quarter of 2012. In addition, the other, net caption above
15
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
included a $34 million gain on valuation adjustments in the first quarter of 2013 on the warrants issued as part of the Bancorps sale of its processing business compared with a gain of $46 million on the warrants and put options in the first quarter of 2012. These impacts were partially offset by a $41 million increase in equity method income recorded from the Bancorps ownership interest in Vantiv Holding, LLC. The $24 million of equity method losses in the first quarter of 2012 was comprised of $34 million in debt termination charges incurred in connection with the refinancing of Vantiv Holding, LLC debt held by the Bancorp partially offset by $10 million in first quarter equity method earnings. Loss on sale of OREO decreased $7 million for the three months ended March 31, 2013 compared to the same period in 2012. In addition, the other, net caption above included a $7 million gain on the sale of certain FTAM funds in the first quarter of 2013. Finally, other noninterest income included a $12 million decrease in the loss related to the Visa total return swap which had a negative valuation adjustment of $7 million for the three months ended March 31, 2013 compared with a negative valuation adjustment of $19 million for the comparable prior year period. For additional information on the valuation of the swap associated with the sale of Visa, Inc. Class B shares and the valuation of warrants associated with the sale of the processing business, see Note 19 of the Notes to Condensed Consolidated Financial Statements.
Noninterest Expense
Total noninterest expense increased $5 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.
The major components of noninterest expense are as follows:
TABLE 7: Noninterest Expense
For the three months ended March 31, |
||||||||||||
($ in millions) |
2013 | 2012 | % Change | |||||||||
Salaries, wages and incentives |
$ | 399 | 399 | | ||||||||
Employee benefits |
114 | 112 | 2 | |||||||||
Net occupancy expense |
79 | 77 | 2 | |||||||||
Technology and communications |
49 | 47 | 6 | |||||||||
Card and processing expense |
31 | 30 | 5 | |||||||||
Equipment expense |
28 | 27 | 3 | |||||||||
Other noninterest expense |
278 | 281 | (2 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total noninterest expense |
$ | 978 | 973 | | ||||||||
|
|
|
|
|
|
|||||||
Efficiency ratio |
59.8 | % | 58.3 | % | ||||||||
|
|
|
|
Total personnel costs (salaries, wages and incentives plus employee benefits) were relatively flat for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Full time equivalent employees totaled 20,744 at March 31, 2013 compared to 21,206 at March 31, 2012.
TABLE 8: Components of Other Noninterest Expense
For the three months ended March 31, |
||||||||
($ in millions) |
2013 | 2012 | ||||||
Loan and lease |
$ | 40 | 45 | |||||
Losses and adjustments |
38 | 40 | ||||||
FDIC insurance and other taxes |
34 | 18 | ||||||
Marketing |
26 | 23 | ||||||
Affordable housing investments impairment |
20 | 27 | ||||||
Professional service fees |
14 | 11 | ||||||
Travel |
13 | 13 | ||||||
Postal and courier |
13 | 13 | ||||||
Operating lease |
12 | 10 | ||||||
Recruitment and education |
6 | 7 | ||||||
Insurance |
5 | 5 | ||||||
OREO expense |
4 | 5 | ||||||
Intangible asset amortization |
2 | 4 | ||||||
Provision (benefit) for unfunded commitments and letters of credit |
(11 | ) | (2 | ) | ||||
Other, net |
62 | 62 | ||||||
|
|
|
|
|||||
Total other noninterest expense |
$ | 278 | 281 | |||||
|
|
|
|
Total other noninterest expense decreased $3 million, or two percent, for the three months ended March 31, 2013 compared to the same period in 2012. The provision for unfunded commitments and letters of credit was a benefit of $11 million for the three months ended March 31, 2013 compared to a benefit of $2 million for the three months ended March 31, 2012. The increase in the benefit recorded 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. In addition, impairment on affordable housing investments decreased by $7 million for the three months ended March 31, 2013 compared to the same period in 2012 due to a $9 million benefit from the
16
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
sale of affordable housing investments in the first quarter of 2013. Loan and lease expense decreased $5 million in the first quarter of 2013 compared to the same period in the prior year due to lower credit-related costs. These impacts were partially offset by FDIC insurance and other taxes which increased $16 million for the three months ended March 31, 2013 compared to the same period in the prior year. The increase in FDIC expense and other taxes was due primarily to $23 million in expense reduction in the first quarter of 2012 from an agreement reached on certain outstanding disputes for non-income tax related assessments.
The Bancorp continues to focus on efficiency initiatives as part of its core emphasis on operating leverage and expense control. The efficiency ratio (noninterest expense divided by the sum of net interest income (FTE) and noninterest income) was 59.8% for the three months ended March 31, 2013 compared to 58.3% for the three months ended March 31, 2012.
Applicable Income Taxes
The Bancorps income before income taxes, applicable income tax expense and effective tax rate are as follows:
TABLE 9: Applicable Income Taxes
For the three months ended March 31, |
||||||||
($ in millions) |
2013 | 2012 | ||||||
Income before income taxes |
$ | 591 | 603 | |||||
Applicable income tax expense |
179 | 173 | ||||||
Effective tax rate |
30.4 | % | 28.6 | |||||
|
|
|
|
Applicable income tax expense for all periods includes the benefit from tax-exempt income, tax-advantaged investments, certain gains on sales of 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.
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. The stock-based awards granted to employees in March 2003 had an exercise period that expired in March 2013. As these stock-based awards were not exercised on or before their expiration date, the Bancorp was required to write-off the deferred tax asset established for these awards during the first quarter, which resulted in an additional $12 million of income tax expense during the three months ended March 31, 2013. The Bancorp recognized a similar non-cash charge during 2012; however, the non-cash charge was recognized during the second quarter of 2012. Based on the Bancorps stock price at March 31, 2013, the Bancorp anticipates that it will be required to recognize additional income tax expense related to stock-based compensation in future years. The Bancorp cannot predict its stock price or whether its employees will exercise other stock-based awards with lower exercise prices in the future. The Bancorp does not expect to record significant additional income tax expense for stock-based compensation in the next twelve months.
17
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Loans and Leases
The Bancorp classifies its loans and leases based upon the primary purpose of the loan. Table 10 summarizes end of period loans and leases, including loans held for sale and Table 11 summarizes average total loans and leases, including loans held for sale.
TABLE 10: Components of Total Loans and Leases (includes held for sale)
March 31, 2013 | December 31, 2012 | |||||||||||||||
($ in millions) |
Balance | % of Total | Balance | % of Total | ||||||||||||
Commercial: |
||||||||||||||||
Commercial and industrial loans |
$ | 36,782 | 42 | 36,077 | 42 | |||||||||||
Commercial mortgage loans |
8,777 | 10 | 9,116 | 10 | ||||||||||||
Commercial construction loans |
699 | 1 | 707 | 1 | ||||||||||||
Commercial leases |
3,568 | 4 | 3,549 | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal commercial |
49,826 | 57 | 49,449 | 57 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Consumer: |
||||||||||||||||
Residential mortgage loans |
14,713 | 17 | 14,873 | 17 | ||||||||||||
Home equity |
9,727 | 11 | 10,018 | 11 | ||||||||||||
Automobile loans |
11,741 | 13 | 11,972 | 13 | ||||||||||||
Credit card |
2,043 | 2 | 2,097 | 2 | ||||||||||||
Other consumer loans and leases |
317 | | 312 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal consumer |
38,541 | 43 | 39,272 | 43 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans and leases |
$ | 88,367 | 100 | 88,721 | 100 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total portfolio loans and leases (excludes loans held for sale) |
$ | 85,676 | 85,782 | |||||||||||||
|
|
|
|
Loans and leases, including loans held for sale, decreased $354 million from December 31, 2012. The decrease from December 31, 2012 was due to a decrease of $731 million, or two percent, in consumer loans and leases partially offset by an increase of $377 million, or one percent, in commercial loans and leases.
Commercial loans and leases increased from December 31, 2012 primarily due to an increase in commercial and industrial loans partially offset by a decrease in commercial mortgage loans. Commercial and industrial loans increased $705 million, or two percent, 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 $339 million, or four percent, from December 31, 2012 due to continued runoff as the level of new originations was less than the repayments of the existing portfolio.
Consumer loans and leases decreased from December 31, 2012 primarily due to a decrease in home equity, automobile loans, and residential mortgage loans. Home equity decreased $291 million, or three percent, from December 31, 2012 as payoffs exceeded new loan production. Automobile loans decreased $231 million, or two percent, due to the securitization and sale of certain automobile loans with a carrying amount of approximately $509 million partially offset by an increase in originations. Residential mortgage loans decreased $160 million, or one percent, due to sales of residential mortgage loans exceeding new loan originations.
TABLE 11: Components of Average Total Loans and Leases (includes held for sale)
March 31, 2013 | March 31, 2012 | |||||||||||||||
For the three months ended ($ in millions) |
Balance | % of Total | Balance | % of Total | ||||||||||||
Commercial: |
||||||||||||||||
Commercial and industrial loans |
$ | 36,423 | 41 | 31,421 | 38 | |||||||||||
Commercial mortgage loans |
8,978 | 10 | 10,077 | 12 | ||||||||||||
Commercial construction loans |
700 | 1 | 1,008 | 1 | ||||||||||||
Commercial leases |
3,557 | 4 | 3,543 | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal commercial |
49,658 | 56 | 46,049 | 55 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Consumer: |
||||||||||||||||
Residential mortgage loans |
14,866 | 17 | 12,928 | 16 | ||||||||||||
Home equity |
9,872 | 11 | 10,606 | 13 | ||||||||||||
Automobile loans |
12,096 | 14 | 11,882 | 14 | ||||||||||||
Credit card |
2,069 | 2 | 1,926 | 2 | ||||||||||||
Other consumer loans and leases |
319 | | 366 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal consumer |
39,222 | 44 | 37,708 | 45 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total average loans and leases |
$ | 88,880 | 100 | 83,757 | 100 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total average portfolio loans and leases (excludes loans held for sale) |
$ | 85,903 | 81,500 | |||||||||||||
|
|
|
|
Average loans and leases, including held for sale, increased $5.1 billion, or six percent, from March 31, 2012. The increase from March 31, 2012 was due to an increase of $3.6 billion, or eight percent, in average commercial loans and leases and an increase of $1.5 billion, or four percent, in average consumer loans and leases.
18
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Average commercial loans and leases increased from March 31, 2012 primarily due to an increase in average commercial and industrial loans partially offset by a decrease in average commercial mortgage and average commercial construction loans. Average commercial and industrial loans increased $5.0 billion, or 16%, from March 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 $1.1 billion, or 11%, from March 31, 2012 and average commercial construction loans decreased $308 million, or 31%, from March 31, 2012 due to continued runoff as the level of new originations was less than the repayments on the current portfolio.
Average consumer loans and leases increased from March 31, 2012 due to an increase in average residential mortgage loans and average automobile loans partially offset by a decrease in average home equity. Average residential mortgage loans increased $1.9 billion, or 15%, from March 31, 2012 due to an increase in originations due to a low interest rate environment. Average automobile loans increased $214 million, or two percent, from March 31, 2012 due to new loan originations exceeding pay downs. Average home equity decreased $734 million, or seven percent, from March 31, 2012 as payoffs exceeded new loan production.
Investment Securities
The Bancorp uses investment securities as a means of managing interest rate risk, providing liquidity support and providing collateral for pledging purposes. Total investment securities were $15.8 billion and $15.7 billion at March 31, 2013 and December 31, 2012, respectively.
Securities are classified as trading when bought and held principally for the purpose of selling them in the near term. Securities are classified as available-for-sale when, in managements judgment, they may be sold in response to, or in anticipation of, changes in market conditions. Securities that management has the intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost.
At March 31, 2013, the Bancorps investment portfolio consisted primarily of AAA-rated available-for-sale securities. The Bancorp did not hold asset-backed securities backed by subprime mortgage loans in its investment portfolio. Additionally, securities classified as below investment grade had a carrying value of $26 million as of March 31, 2013, compared to $31 million as of December 31, 2012. The Bancorps management has evaluated the securities in an unrealized loss position in the available-for-sale and held-to-maturity portfolios for OTTI. During the three months ended March 31, 2013 and 2012, the Bancorp did not recognize OTTI on any of its available-for-sale debt or equity securities or its held-to-maturity debt securities. See Note 4 of the Notes to Condensed Consolidated Financial Statements for further information on OTTI.
TABLE 12: Components of Investment Securities
($ in millions) |
March 31, 2013 |
December 31, 2012 |
||||||
Available-for-sale and other: (amortized cost basis) |
||||||||
U.S. Treasury and government agencies |
$ | 41 | 41 | |||||
U.S. Government sponsored agencies |
1,729 | 1,730 | ||||||
Obligations of states and political subdivisions |
202 | 203 | ||||||
Agency mortgage-backed securities |
8,534 | 8,403 | ||||||
Other bonds, notes and debentures(a) |
3,087 | 3,161 | ||||||
Other securities(b) |
1,059 | 1,033 | ||||||
|
|
|
|
|||||
Total available-for-sale and other securities |
$ | 14,652 | 14,571 | |||||
|
|
|
|
|||||
Held-to-maturity: (amortized cost basis) |
||||||||
Obligations of states and political subdivisions |
$ | 282 | 282 | |||||
Other bonds, notes and debentures |
1 | 2 | ||||||
|
|
|
|
|||||
Total held-to-maturity |
$ | 283 | 284 | |||||
|
|
|
|
|||||
Trading: (fair value) |
||||||||
U.S. Treasury and government agencies |
$ | | 1 | |||||
U.S. Government sponsored agencies |
11 | 6 | ||||||
Obligations of states and political subdivisions |
25 | 17 | ||||||
Agency mortgage-backed securities |
4 | 7 | ||||||
Other bonds, notes and debentures |
9 | 15 | ||||||
Other securities |
169 | 161 | ||||||
|
|
|
|
|||||
Total trading |
$ | 218 | 207 | |||||
|
|
|
|
(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 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. |
Available-for-sale securities on an amortized cost basis increased $81 million, or one percent, from December 31, 2012 primarily due to an increase in agency mortgage-backed securities partially offset by a decrease in other bonds, notes, and debentures. Agency mortgage-backed securities increased $131 million, or two percent, from December 31, 2012 due to $2.9 billion in purchases of agency mortgage-backed securities partially offset by $1.9 billion in sales and $785 million in paydowns on the portfolio. Other bonds, notes, and debentures decreased $74 million, or two percent, due to the sale of $261 million of asset-backed securities and corporate bonds partially offset by the purchase of asset backed securities and collateralized loan obligations.
19
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Available-for-sale securities on an amortized cost basis were 14% of total interest-earning assets at March 31, 2013 and December 31, 2012. The estimated weighted-average life of the debt securities in the available-for-sale portfolio was 4.1 years at March 31, 2013, compared to 3.8 years at December 31, 2012. In addition, at March 31, 2013, the available-for-sale securities portfolio had a weighted-average yield of 3.34%, compared to 3.30% at December 31, 2012.
Information presented in Table 13 is on a weighted-average life basis, anticipating future prepayments. Yield information is presented on an FTE basis and is computed using historical cost balances. Maturity and yield calculations for the total available-for-sale portfolio exclude equity securities that have no stated yield or maturity. Total net unrealized gains on the available-for-sale securities portfolio were $611 million at March 31, 2013, compared to $636 million at December 31, 2012. The decrease from December 31, 2012 was due to an increase in interest rates on agency mortgage-backed securities. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase or when credit spreads widen.
TABLE 13: Characteristics of Available-for-Sale and Other Securities
As of March 31, 2013 ($ in millions) |
Amortized Cost | Fair Value | Weighted-Average Life (in years) |
Weighted-Average Yield |
||||||||||||
U.S. Treasury and government agencies: |
||||||||||||||||
Average life of one year or less |
$ | 40 | 40 | 0.2 | 0.13 | % | ||||||||||
Average life 5 10 years |
1 | 1 | 5.9 | 1.48 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
41 | 41 | 0.3 | 0.16 | ||||||||||||
U.S. Government sponsored agencies: |
||||||||||||||||
Average life of one year or less |
204 | 205 | 0.3 | 2.50 | ||||||||||||
Average life 1 5 years |
1,525 | 1,694 | 3.8 | 3.64 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
1,729 | 1,899 | 3.4 | 3.50 | ||||||||||||
Obligations of states and political subdivisions:(a) |
||||||||||||||||
Average life of one year or less |
8 | 8 | 0.6 | 0.12 | ||||||||||||
Average life 1 5 years |
124 | 128 | 3.4 | 2.29 | ||||||||||||
Average life 5 10 years |
59 | 64 | 7.2 | 4.80 | ||||||||||||
Average life greater than 10 years |
11 | 12 | 11.6 | 5.00 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
202 | 212 | 4.9 | 3.10 | ||||||||||||
Agency mortgage-backed securities: |
||||||||||||||||
Average life of one year or less |
550 | 563 | 0.6 | 4.62 | ||||||||||||
Average life 1 5 years |
6,190 | 6,416 | 3.6 | 3.60 | ||||||||||||
Average life 5 10 years |
1,700 | 1,762 | 6.6 | 3.57 | ||||||||||||
Average life greater than 10 years |
94 | 103 | 10.7 | 3.74 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
8,534 | 8,844 | 4.1 | 3.66 | ||||||||||||
Other bonds, notes and debentures: |
||||||||||||||||
Average life of one year or less |
299 | 308 | 0.1 | 1.94 | ||||||||||||
Average life 1 5 years |
1,965 | 2,042 | 3.4 | 2.56 | ||||||||||||
Average life 5 10 years |
605 | 625 | 6.5 | 2.33 | ||||||||||||
Average life greater than 10 years |
218 | 226 | 14.0 | 2.21 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
3,087 | 3,201 | 4.5 | 2.43 | ||||||||||||
Other securities |
1,059 | 1,066 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale and other securities |
$ | 14,652 | 15,263 | 4.1 | 3.34 | % | ||||||||||
|
|
|
|
|
|
|
|
(a) | Taxable-equivalent yield adjustments included in the above table are 0.03%, 0.01%, 0.82%, 1.72% and 0.34% for securities with an average life of one year or less, 1-5 years, 5-10 years, greater than 10 years and in total, respectively. |
Deposits
The Bancorps 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 Bancorps asset funding base at March 31, 2013 and December 31, 2012.
20
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
TABLE 14: Deposits
March 31, 2013 | December 31, 2012 | |||||||||||||||
% of | % of | |||||||||||||||
($ in millions) |
Balance | Total | Balance | Total | ||||||||||||
Demand |
$ | 30,027 | 33 | 30,023 | 34 | |||||||||||
Interest checking |
23,175 | 25 | 24,477 | 27 | ||||||||||||
Savings |
19,339 | 21 | 19,879 | 22 | ||||||||||||
Money market |
8,613 | 10 | 6,875 | 8 | ||||||||||||
Foreign office |
1,089 | 1 | 885 | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Transaction deposits |
82,243 | 90 | 82,139 | 92 | ||||||||||||
Other time |
3,909 | 4 | 4,015 | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Core deposits |
86,152 | 94 | 86,154 | 96 | ||||||||||||
Certificates-$100,000 and over |
5,472 | 6 | 3,284 | 4 | ||||||||||||
Other |
| | 79 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total deposits |
$ | 91,624 | 100 | 89,517 | 100 | |||||||||||
|
|
|
|
|
|
|
|
Core deposits decreased $2 million from December 31, 2012 driven by a decrease of $106 million, or three percent, in other time deposits partially offset by an increase of $104 million in transaction deposits. 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. Total transaction deposits increased from December 31, 2012 due to an increase in money market deposits and foreign office deposits partially offset by a decrease in interest checking deposits and saving deposits. Money market deposits increased $1.7 billion, or 25%, from December 31, 2012 partially driven by account migration from savings deposits which decreased $540 million, or three percent. The remaining increase in money market deposits is due to an increase in consumer average balances per account due to seasonality. Interest checking deposits decreased $1.3 billion, or five percent, due to account migration to demand deposit accounts. Demand deposit accounts remained relatively flat increasing $4 million from December 31, 2012. The account migration from interest checking deposits to demand deposit accounts was offset by a decrease in commercial average balances per account due to seasonality and balance migration to foreign office deposits which increased $204 million, or 23%.
The Bancorp uses certificates $100,000 and over as a method to fund earning assets. At March 31, 2013, certificates $100,000 and over increased $2.2 billion, or 67%, compared to December 31, 2012 due to the diversification of funding sources through the issuance of retail and institutional certificates of deposits during the first quarter of 2013.
The following table presents average deposits for the three months ending:
TABLE 15: Average Deposits
March 31, 2013 | March 31, 2012 | |||||||||||||||
% of | % of | |||||||||||||||
($ in millions) |
Balance | Total | Balance | Total | ||||||||||||
Demand |
$ | 28,565 | 32 | 26,063 | 31 | |||||||||||
Interest checking |
23,763 | 27 | 22,308 | 26 | ||||||||||||
Savings |
19,576 | 22 | 21,944 | 26 | ||||||||||||
Money market |
7,932 | 9 | 4,543 | 5 | ||||||||||||
Foreign office |
1,102 | 1 | 2,277 | 3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Transaction deposits |
80,938 | 91 | 77,135 | 91 | ||||||||||||
Other time |
3,982 | 4 | 4,551 | 5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Core deposits |
84,920 | 95 | 81,686 | 96 | ||||||||||||
Certificates-$100,000 and over |
4,017 | 5 | 3,178 | 4 | ||||||||||||
Other |
40 | | 19 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total average deposits |
$ | 88,977 | 100 | 84,883 | 100 | |||||||||||
|
|
|
|
|
|
|
|
On an average basis, core deposits increased $3.2 billion, or four percent, from March 31, 2012 due to an increase of $3.8 billion, or five percent, in average transaction deposits partially offset by a decrease of $569 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 and average foreign office deposits. Average money market deposits increased $3.4 billion, or 75%, from March 31, 2012 primarily due to account migration from average savings deposits which decreased $2.4 billion, or 11%, from March 31, 2012. The remaining increase in average money market deposits was due to account migration from average interest checking deposits. Despite this migration, average interest checking deposits increased $1.5 billion, or seven percent, from March 31, 2012 due to account migration from average foreign office deposits which decreased $1.2 billion, or 52%. The remaining increase in average interest checking deposits is due to an increase in new commercial customers and balance migration from average demand deposits. Despite this account migration, average demand deposits increased $2.5 billion, or 10%, from March 31, 2012 due to an increase in average balances per account for consumer customers, new product offerings, and new commercial deposit growth. Average other time deposits decreased $569 million, or 13%, from March 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.
21
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Other time deposits and certificates $100,000 and over totaled $9.4 billion and $7.3 billion at March 31, 2013 and December 31, 2012, respectively. All of these deposits were interest-bearing.
The contractual maturities of certificates $100,000 and over as of March 31, 2013 are summarized in the following table:
TABLE 16: Contractual Maturities of Certificates - $100,000 and over
($ in millions) |
March 31, 2013 | |||
Three months or less |
$ | 1,641 | ||
After three months through six months |
955 | |||
After six months through 12 months |
1,823 | |||
After 12 months |
1,053 | |||
|
|
|||
Total |
$ | 5,472 | ||
|
|
The contractual maturities of other time deposits and certificates $100,000 and over as of March 31, 2013 are summarized in the following table:
TABLE 17: Contractual Maturities of Other Time Deposits and Certificates $100,000 and over
($ in millions) |
March 31, 2013 | |||
Next 12 months |
$ | 6,831 | ||
13-24 months |
1,632 | |||
25-36 months |
481 | |||
37-48 months |
217 | |||
49-60 months |
166 | |||
After 60 months |
54 | |||
|
|
|||
Total |
$ | 9,381 | ||
|
|
Borrowings
Total borrowings decreased $3.1 billion, or 22%, from December 31, 2012. Table 18 summarizes the end of period components of total borrowings. As of March 31, 2013, total borrowings as a percentage of interest-bearing liabilities were 15% compared to 19% at December 31, 2012.
TABLE 18: Borrowings
($ in millions) |
March 31, 2013 | December 31, 2012 | ||||||
Federal funds purchased |
$ | 386 | 901 | |||||
Other short-term borrowings |
2,439 | 6,280 | ||||||
Long-term debt |
8,320 | 7,085 | ||||||
|
|
|
|
|||||
Total borrowings |
$ | 11,145 | 14,266 | |||||
|
|
|
|
Federal funds purchased decreased by $515 million, or 57%, 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 $3.8 billion, or 61%, from December 31, 2012 driven by a decrease of $3.9 billion in short-term FHLB borrowings. The level of these borrowings can fluctuate significantly from period to period depending on funding needs and which sources are used to satisfy those needs. Long-term debt increased by $1.2 billion, or 17%, from December 31, 2012 driven by the issuance of $1.3 billion of unsecured senior bank notes in the first quarter of 2013. For additional information regarding long-term debt, see Note 12 of the Notes to Condensed Consolidated Financial Statements.
The following table presents average borrowings for the three months ending:
TABLE 19: Average Borrowings
($ in millions) |
March 31, 2013 | March 31, 2012 | ||||||
Federal funds purchased |
$ | 691 | 370 | |||||
Other short-term borrowings |
5,429 | 3,261 | ||||||
Long-term debt |
7,506 | 9,768 | ||||||
|
|
|
|
|||||
Total average borrowings |
$ | 13,626 | 13,399 | |||||
|
|
|
|
Average total borrowings increased $227 million, or two percent, compared to March 31, 2012, primarily due to increases in average federal funds purchased and average other short-term borrowings partially offset by a decrease in average long-term debt. The decrease in average long-term debt was driven by the redemption of certain TruPS and long-term FHLB borrowings in 2012. 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. 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 Bancorps liquidity management.
22
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
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 20 of the Notes to Condensed Consolidated Financial Statements. Results of the Bancorps 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 Bancorps business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as managements accounting practices or businesses change.
The Bancorp manages interest rate risk centrally at the corporate level and employs an 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 Bancorps 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 duration assumptions. These rates were generally higher than those in place during 2012, thus net interest income for deposit providing businesses was positively impacted for the three months ended March 31, 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.
Net income by business segment is summarized in the following table:
TABLE 20: Business Segment Net Income Available to Common Shareholders
For the three months ended March 31, |
||||||||
($ in millions) |
2013 | 2012 | ||||||
Income Statement Data |
||||||||
Commercial Banking |
$ | 185 | 142 | |||||
Branch Banking |
45 | 29 | ||||||
Consumer Lending |
70 | 48 | ||||||
Investment Advisors |
18 | 7 | ||||||
General Corporate & Other |
94 | 204 | ||||||
|
|
|
|
|||||
Net income |
412 | 430 | ||||||
Less: Net income attributable to noncontrolling interests |
(10 | ) | | |||||
|
|
|
|
|||||
Net income attributable to Bancorp |
422 | 430 | ||||||
Dividends on preferred stock |
9 | 9 | ||||||
|
|
|
|
|||||
Net income available to common shareholders |
$ | 413 | 421 | |||||
|
|
|
|
23
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
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:
TABLE 21: Commercial Banking
For the three months ended March 31, |
||||||||
($ in millions) |
2013 | 2012 | ||||||
Income Statement Data |
||||||||
Net interest income (FTE)(a) |
$ | 365 | 352 | |||||
Provision for loan and lease losses |
43 | 76 | ||||||
Noninterest income: |
||||||||
Corporate banking revenue |
95 | 93 | ||||||
Service charges on deposits |
59 | 54 | ||||||
Other noninterest income |
30 | 30 | ||||||
Noninterest expense: |
||||||||
Salaries, incentives and benefits |
80 | 74 | ||||||
Other noninterest expense |
197 | 214 | ||||||
|
|
|
|
|||||
Income before taxes |
229 | 165 | ||||||
Applicable income tax expense(a)(b) |
44 | 23 | ||||||
|
|
|
|
|||||
Net income |
$ | 185 | 142 | |||||
|
|
|
|
|||||
Average Balance Sheet Data |
||||||||
Commercial loans, including held for sale |
$ | 44,113 | 40,362 | |||||
Demand deposits |
14,666 | 14,843 | ||||||
Interest checking |
6,991 | 8,370 | ||||||
Savings and money market |
3,816 | 2,606 | ||||||
Certificates-$100,000 and over |
1,271 | 1,855 | ||||||
Foreign office deposits and other deposits |
1,074 | 1,379 |
(a) | Includes FTE adjustments of $5 and $4 for the three months ended March 31, 2013 and 2012, respectively. |
(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 Applicable Income Taxes section of MD&A for additional information. |
Net income was $185 million for the three months ended March 31, 2013 compared to net income of $142 million for the three months ended March 31, 2012. The increase in net income was driven by a decrease in the provision for loan and lease losses, higher net interest income and higher noninterest income, and lower noninterest expense.
Net interest income increased $13 million for the three months ended March 31, 2013 compared to the same period of the prior year. The increase was driven primarily by growth in average commercial and industrial portfolio loans and a decrease in the FTP charges on loans, partially offset by a decline in yields of 26 bps on average commercial loans and a decrease in the FTP credits due to a decline in average interest checking balances for the three months ended March 31, 2013 compared to the same period in 2012.
Provision for loan and lease losses decreased $33 million for the three months ended March 31, 2013 compared to the same period of the prior year as a result of improved credit trends. Net charge-offs as a percent of average portfolio loans and leases decreased to 40 bps for the three months ended March 31, 2013 compared to 75 bps for the same period of the prior year.
Noninterest income increased $7 million in the first quarter of 2013 compared to the first quarter of 2012, primarily due to an increase in service charges on deposits and corporate banking revenue. The increase in service charges on deposits was primarily driven by higher commercial deposit revenue due to pricing changes implemented during 2012. The increase in corporate banking revenue was primarily due to a $4 million increase in institutional sales, partially offset by a $2 million decrease in syndication fees.
Noninterest expense decreased $11 million for the three months ended March 31, 2013 compared to the same period of the prior year. The decrease for the three months ended March 31, 2013 was driven by a decrease in corporate overhead allocations and a decrease in impairment on affordable housing investments due to a benefit from the sale of affordable housing investments in the first quarter of 2013.
Average commercial loans increased $3.8 billion for the three months ended March 31, 2013 compared to the same period of the prior year primarily due to an increase in average commercial and industrial loans, partially offset by decreases in average commercial mortgage and construction loans. Average commercial and industrial portfolio loans increased $5.1 billion for the three months ended March 31, 2013 compared to the same period of the prior year 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 portfolio loans decreased $1.0 billion for the three months ended March 31, 2013 and average commercial construction portfolio loans decreased $290 million for the three months ended
24
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
March 31, 2013 compared to the same period of the prior year due to continued run-off as the level of new originations was below the level of repayments on the current portfolio.
Average core deposits decreased $652 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The decrease was primarily driven by a decrease in average interest checking balances, which decreased $1.4 billion for the three months ended March 31, 2013 compared to the same period of the prior year. The decrease in average interest checking accounts was partially offset by an increase in average savings and money market deposits of $1.2 billion for the three months ended March 31, 2013 compared to the same period of the prior year.
Branch Banking
Branch Banking provides a full range of deposit and loan and lease products to individuals and small businesses through 1,320 full-service Banking Centers. Branch Banking offers depository and loan products, such as checking and savings accounts, home equity loans and lines of credit, credit cards and loans for automobiles and other personal financing needs, as well as products designed to meet the specific needs of small businesses, including cash management services.
The following table contains selected financial data for the Branch Banking segment:
TABLE 22: Branch Banking
For the three months ended March 31, |
||||||||
($ in millions) |
2013 | 2012 | ||||||
Income Statement Data |
||||||||
Net interest income |
$ | 347 | 335 | |||||
Provision for loan and lease losses |
58 | 86 | ||||||
Noninterest income: |
||||||||
Service charges on deposits |
71 | 74 | ||||||
Card and processing revenue |
68 | 60 | ||||||
Investment advisory revenue |
37 | 31 | ||||||
Other noninterest income |
29 | 25 | ||||||
Noninterest expense: |
||||||||
Salaries, incentives and benefits |
155 | 149 | ||||||
Net occupancy and equipment expense |
60 | 60 | ||||||
Card and processing expense |
29 | 28 | ||||||
Other noninterest expense |
179 | 157 | ||||||
|
|
|
|
|||||
Income before taxes |
71 | 45 | ||||||
Applicable income tax expense |
26 | 16 | ||||||
|
|
|
|
|||||
Net income |
$ | 45 | 29 | |||||
|
|
|
|
|||||
Average Balance Sheet Data |
||||||||
Consumer loans, including held for sale |
$ | 15,124 | 14,815 | |||||
Commercial loans, including held for sale |
4,517 | 4,611 | ||||||
Demand deposits |
11,743 | 9,297 | ||||||
Interest checking |
9,159 | 9,087 | ||||||
Savings and money market |
22,855 | 22,654 | ||||||
Other time and certificates-$100,000 and over |
4,974 | 5,668 |
Net income was $45 million for the three months ended March 31, 2013 compared to net income of $29 million for the three months ended March 31, 2012. The increase was driven by an increase in noninterest income and net interest income and a decline in the provision for loan and lease losses, partially offset by an increase in noninterest expense.
Net interest income increased $12 million for the three months ended March 31, 2013 compared to the same period of the prior year. The primary drivers of the increase are increases in the FTP credit rates for savings products, a decrease in the FTP charge rates on loans and leases and a decline in interest expense on core deposits due to favorable shifts from certificates of deposit to lower cost transaction and savings products. These increases were partially offset by lower yields on average commercial and consumer loans.
Provision for loan and lease losses for the three months ended March 31, 2013 decreased $28 million compared to the first quarter of 2012. Net charge-offs as a percent of average loans and leases decreased to 120 bps for the three months ended March 31, 2013 compared to 179 bps for the same period of the prior year as a result of improved credit trends.
Noninterest income increased $15 million for the three months ended March 31, 2013 compared to the same period of the prior year. The increase was primarily driven by higher card and processing revenue and higher investment advisory revenue. Card and processing revenue increased $8 million for the three months ended March 31, 2013 compared to the same period in 2012 primarily due to higher transaction volumes, higher levels of consumer spending, and new products. Investment advisory fees increased $6 million due to continued market and customer growth trends.
25
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Noninterest expense increased $29 million from the three months ended March 31, 2012, primarily driven by increases in other noninterest expense, which increased $22 million, and an increase in salaries, incentives and benefits of $6 million. The increase in salaries, incentives and benefits was primarily driven by higher incentive compensation associated with improved investment advisory revenue. The increase in other noninterest expense for the three months ended March 31, 2013 was primarily driven by higher corporate overhead allocations.
Average consumer loans increased $309 million for the first quarter of 2013 compared to the same period in the prior year. This increase was primarily due to an increase in average residential mortgage portfolio loans of $966 million for the three months ended March 31, 2013 compared to the same period in the prior year due to the retention of certain shorter-term originated mortgage loans. The increase in average residential mortgage portfolio loans was partially offset by a decrease in average home equity portfolio loans of $684 million for the three months ended March 31, 2013 compared to the same period of the prior year as payoffs exceeded new loan production.
Average core deposits increased by $2.2 billion for the three months ended March 31, 2013 compared to the same period in the prior year as the growth in transaction accounts due to excess customer liquidity and historically low interest rates outpaced the run-off of higher priced other time deposits.
Consumer Lending
Consumer Lending includes the Bancorps mortgage, home equity, automobile and other indirect lending activities. Mortgage and home equity lending activities include the origination, retention and servicing of mortgage and home equity loans or lines of credit, sales and securitizations of those loans, pools of loans or lines of credit, and all associated hedging activities. Indirect lending activities include extending loans to consumers through mortgage brokers and automobile dealers.
The following table contains selected financial data for the Consumer Lending segment:
TABLE 23: Consumer Lending
For the three months ended March 31, |
||||||||
($ in millions) |
2013 | 2012 | ||||||
Income Statement Data |
||||||||
Net interest income |
$ | 85 | 80 | |||||
Provision for loan and lease losses |
29 | 54 | ||||||
Noninterest income: |
||||||||
Mortgage banking net revenue |
216 | 201 | ||||||
Other noninterest income |
13 | 10 | ||||||
Noninterest expense: |
||||||||
Salaries, incentives and benefits |
63 | 56 | ||||||
Other noninterest expense |
114 | 106 | ||||||
|
|
|
|
|||||
Income before taxes |
108 | 75 | ||||||
Applicable income tax expense |
38 | 27 | ||||||
|
|
|
|
|||||
Net income |
$ | 70 | 48 | |||||
|
|
|
|
|||||
Average Balance Sheet Data |
||||||||
Residential mortgage loans, including held for sale |
$ | 11,053 | 10,009 | |||||
Home equity |
595 | 672 | ||||||
Automobile loans, including held for sale |
11,467 | 11,211 | ||||||
Consumer leases |
9 | 61 |
Net income was $70 million for the three months ended March 31, 2013 compared to net income of $48 million for the same period in the prior year. The increase in net income was driven by an increase in noninterest income, an increase in net interest income and a decline in the provision for loan and lease losses, partially offset by an increase in noninterest expense.
Net interest income increased $5 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The increase was primarily driven by increases in average residential mortgage loans and average automobile loans, partially offset by lower yields on average residential mortgage loans and average automobile loans.
Provision for loan and lease losses decreased $25 million for the three months ended March 31, 2013 compared to the same period of 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 58 bps for the three months ended March 31, 2013 compared to 108 bps for the same period of the prior year.
Noninterest income increased $18 million for the three months ended March 31, 2013 compared to the same period of the prior year. The increase from the prior year was primarily due to increases in mortgage banking net revenue of $15 million for the three months ended March 31, 2013. The increase was driven by an increase in net residential mortgage servicing revenue of $21 million compared to the same period of the prior year, primarily driven by increases of $28 million in net valuation adjustments on MSRs and free-standing derivatives entered into to economically hedge the MSRs, partially offset by an increase of $7 million in MSR amortization expense. The increase in net residential mortgage servicing revenue was partially offset by a decrease in gains on loan sales of $6 million due to lower gain on sale margins on sold residential mortgage loans.
26
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Noninterest expense increased $15 million for the three months ended March 31, 2013 compared to the same period of the prior year. The increase was driven by salaries, incentives and benefits which increased primarily as a result of higher mortgage loan originations. Other noninterest expense increased $8 million primarily due to an increase in representation and warranty expense and an increase in corporate overhead allocations.
Average consumer loans and leases increased $1.2 billion for the three months ended March 31, 2013 compared to the same period of the prior year. Average automobile loans, including held for sale, increased $256 million compared to the three months ended March 31, 2012 due to an increase in originations, partially offset by the securitization and sale of certain automobile loans with a carrying amount of approximately $509 million. Average residential mortgage loans, including held for sale, increased $1.0 billion for the three months ended March 31, 2013 compared to the same period of the prior year, due to the low interest rate environment which resulted in increased origination volumes. The increase was partially offset by decreases in home equity and consumer leases. Average home equity portfolio loans decreased $77 million for the three months ended March 31, 2013 compared to the same period in the prior year due to continued run-off in the discontinued brokered home equity product. Average consumer portfolio leases decreased $52 million for the three months ended March 31, 2013 compared to the same period in the prior year due to run-off as the Bancorp discontinued auto leases in 2008.
Investment Advisors
Investment Advisors provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. Investment Advisors is made up of four main businesses: FTS, an indirect wholly-owned subsidiary of the Bancorp; FTAM, an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Private Bank; and Fifth Third Institutional Services. FTS offers full service retail brokerage services to individual clients and broker dealer services to the institutional marketplace. FTAM provides asset management services and previously advised the Bancorps proprietary family of mutual funds. Fifth Third Private Bank offers holistic strategies to affluent clients in wealth planning, investing, insurance and wealth protection. Fifth Third Institutional Services provides advisory services for institutional clients including states and municipalities.
The following table contains selected financial data for the Investment Advisors segment:
TABLE 24: Investment Advisors
For the three months ended March 31, |
||||||||
($ in millions) |
2013 | 2012 | ||||||
Income Statement Data |
||||||||
Net interest income |
$ | 36 | 27 | |||||
Provision for loan and lease losses |
1 | 3 | ||||||
Noninterest income: |
||||||||
Investment advisory revenue |
98 | 94 | ||||||
Other noninterest income |
10 | 3 | ||||||
Noninterest expense: |
||||||||
Salaries, incentives and benefits |
42 | 44 | ||||||
Other noninterest expense |
73 | 66 | ||||||
|
|
|
|
|||||
Income before taxes |
28 | 11 | ||||||
Applicable income tax expense |
10 | 4 | ||||||
|
|
|
|
|||||
Net income |
$ | 18 | 7 | |||||
|
|
|
|
|||||
Average Balance Sheet Data |
||||||||
Loans and leases |
$ | 1,925 | 1,911 | |||||
Core deposits |
8,746 | 7,370 |
Net income was $18 million for the three months ended March 31, 2013 compared to net income of $7 million for the same period in the prior year. The increase in net income was driven by an increase in noninterest income and net interest income and a decrease in the provision for loan and lease losses, partially offset by an increase in noninterest expense.
Provision for loan and leases losses decreased $2 million for the three months ended March 31, 2013 compared with the same period in the prior year as a result of improved credit trends. Net charge-offs as a percent of average loans and leases decreased to 14 bps for the three months ended March 31, 2013 compared to 73 bps for the same period of the prior year.
Noninterest income increased $11 million for the three months ended March 31, 2013, primarily driven by a $7 million gain on the sale of certain FTAM advisory contracts in the first quarter of 2013. The increase was also due to higher brokerage fees and private client services revenue partially offset by a reduction of mutual fund fees largely due to the previously mentioned sale of certain Fifth Third funds in the third quarter of 2012.
Noninterest expense increased $5 million for the three months ended March 31, 2013 compared to the same period of the prior year, primarily driven by an increase in other noninterest expense of $7 million due to an increase in corporate overhead allocations, partially offset by a decrease in salaries, incentives and benefits of $2 million for the three months ended March 31, 2013.
27
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Average loans and leases increased $14 million for the three months ended March 31, 2013 compared to the same period in 2012 primarily due to increases in home equity and other consumer loans. Average core deposits increased $1.4 billion, or 19% for the three months ended March 31, 2013 compared to the same period of the prior year primarily 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.
Results for the three months ended March 31, 2013 and 2012 were impacted by a benefit of $69 million and $128 million, respectively, due to reductions in the ALLL. The decrease in provision expense was due to a decrease in nonperforming loans and improvements in delinquency metrics and underlying loss trends. Net interest income for the three months ended March 31, 2013 was $60 million compared to $108 million to the same period in 2012 primarily due to a decrease in interest income on taxable securities and an increase in the FTP charge on loans, partially offset by a decrease in interest expense on long-term debt. First quarter of 2013 noninterest income results included a $34 million positive valuation adjustment on the Vantiv warrant and a $7 million charge related to the valuation of the Visa total return swap. First quarter of 2012 noninterest income results included a $46 million positive valuation adjustment on the Vantiv warrant and a $115 million benefit related to the initial public offering of Vantiv, Inc., partially offset by $24 million in losses related to the equity method income recorded from the Bancorps ownership interest in Vantiv Holding, LLC. The $24 million of losses is comprised of $34 million in charges related to Vantiv Holding, LLCs bank debt refinancing and debt termination charges partially offset by $10 million in the first quarter equity method income earnings for Vantiv Holding, LLC.
28
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Managing risk is an essential component of successfully operating a financial services company. The Bancorps risk management approach includes processes for identifying, assessing, managing, monitoring and reporting risks. The ERM division, led by the Bancorps Chief Risk Officer, and the Bancorp Credit division, led by the Bancorps Chief Credit Officer, ensure the consistency and adequacy of the Bancorps risk management approach within the structure of the Bancorps affiliate operating model. In addition, the Internal Audit division provides an independent assessment of the Bancorps internal control structure and related systems and processes.
The assumption of risk requires robust and active risk management practices that comprise an integrated and comprehensive set of activities, measures and strategies that apply to the entire organization. The Bancorp has established a Risk Appetite Framework that provides the foundations of corporate risk capacity, risk appetite and risk tolerances. The Bancorps risk capacity is represented by its available financial resources. Risk capacity sets an absolute limit on risk-assumption in the Bancorps 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 Bancorps policy currently discounts its Operating Risk Capacity by a minimum of five percent to provide a buffer; as a result, the Bancorps 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 Bancorps risks. The Bancorp measures economic capital under the assumption that it expects to maintain debt ratings at strong investment grade levels over time. The Bancorps 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 Bancorps 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 Bancorps 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 Bancorps 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 framework that supports the Bancorps 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 Bancorps 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 Bancorps overall aggregate risk profile. The Risk and Compliance
29
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
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, liquidity and community reinvestment act/fair lending functions. There are also new products and initiatives processes applicable to every line of business to ensure an appropriate standard readiness assessment is performed before launching a new product or initiative. Significant risk policies 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 of charge-offs. Credit Risk Review reports directly to the Risk and Compliance Committee of the Board of Directors and administratively to the Chief Auditor.
The objective of the Bancorps credit risk management strategy is to quantify and manage credit risk on an aggregate portfolio basis, as well as to limit the risk of loss resulting from an individual customer default. The Bancorps credit risk management strategy is based on three core principles: conservatism, diversification and monitoring. The Bancorp believes that effective credit risk management begins with conservative lending practices. These practices include conservative exposure and counterparty limits and conservative underwriting, documentation and collection standards. The Bancorps credit risk management strategy also emphasizes diversification on a geographic, industry and customer level as well as regular credit examinations and timely management reviews of large credit exposures and credits experiencing deterioration of credit quality. Credit officers with the authority to extend credit are delegated specific authority amounts, the utilization of which is closely monitored. Underwriting activities are centrally managed, 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 Bancorps credit review process and overall assessment of the adequacy of the allowance for credit losses is based on quarterly assessments of the probable estimated losses inherent in the loan and lease portfolio. The Bancorp uses these assessments to promptly identify potential problem loans or leases within the portfolio, maintain an adequate reserve and take any necessary charge-offs. The Bancorp defines potential problem loans as those rated substandard that do not meet the definition of a nonperforming asset or a restructured loan. See Note 6 of the Notes to the Condensed Consolidated Financial Statements for further information on the Bancorps credit grade categories, which are derived from standard regulatory rating definitions.
The following tables provide a summary of potential problem loans:
TABLE 25: Potential Problem Loans
As of March 31, 2013 ($ in millions) |
Carrying Value |
Unpaid Principal Balance |
Exposure | |||||||||
Commercial and industrial |
$ | 961 | 963 | 1,136 | ||||||||
Commercial mortgage |
761 | 762 | 765 | |||||||||
Commercial construction |
74 | 75 | 87 | |||||||||
Commercial leases |
38 | 38 | 38 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 1,834 | 1,838 | 2,026 | ||||||||
|
|
|
|
|
|
TABLE 26: Potential Problem Loans
As of December 31, 2012 ($ in millions) |
Carrying Value |
Unpaid Principal Balance |
Exposure | |||||||||
Commercial and industrial |
$ | 1,015 | 1,017 | 1,212 | ||||||||
Commercial mortgage |
848 | 849 | 851 | |||||||||
Commercial construction |
87 | 87 | 100 | |||||||||
Commercial leases |
9 | 9 | 9 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 1,959 | 1,962 | 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 Bancorps ALLL once the FASB has issued a final standard regarding
30
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
proposed methodology changes to the determination of credit impairment as outlined in the FASBs Accounting Standard Update-Financial Instruments-Credit Losses (Subtopic 825-15) issued on December 20, 2012. Scoring systems, various analytical tools and delinquency monitoring are used to assess the credit risk in the Bancorps homogenous consumer and small business loan portfolios.
Overview
General economic conditions showed only moderate improvement in 2012 and in the first quarter of 2013 as the economic recovery struggled to gain any significant momentum. Uncertainty in terms of finding long term solutions for federal government deficit spending continues to weigh on the economy. Geographically, the Bancorp continues to experience the most stress in Michigan and Florida due to 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 states economic downturn. Among commercial portfolios, the homebuilder, residential developer and portions of the remaining non-owner occupied commercial real estate portfolios continue to remain under stress.
Among consumer portfolios, residential mortgage and brokered home equity portfolios exhibited the most stress. Management suspended homebuilder and developer lending in 2007 and new commercial non-owner occupied real estate lending in 2008, discontinued the origination of brokered home equity products at the end of 2007 and tightened underwriting standards across both the commercial and consumer loan product offerings. With the stabilization of certain real estate markets, the Bank began to selectively originate new homebuilder and developer lending and non-owner occupied commercial lending real estate in the third quarter of 2011. However, the level of new originations is below the amortization and pay-off of the current portfolio. Since the fourth quarter of 2008, in an effort to reduce loan exposure to the real estate and construction industries, the Bancorp has sold certain consumer loans and sold or transferred to held for sale certain commercial loans. The Bancorp continues to aggressively engage in other loss mitigation strategies such as reducing credit commitments, restructuring certain commercial and consumer loans, tightening underwriting standards on commercial loans and across the consumer loan portfolio, as well as utilizing expanded commercial and consumer loan workout teams. For commercial and consumer loans owned by the Bancorp, loan modification strategies are developed that are workable for both the borrower and the Bancorp when the borrower displays a willingness to cooperate. These strategies typically involve either a reduction of the stated interest rate of the loan, an extension of the loans 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 loans 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 Bancorps 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 Bancorps troubled debt restructurings as they are not assets of the Bancorp. In the event there is a representation and warranty violation on loans sold through the programs, the Bancorp may be required to repurchase the sold loan. As of March 31, 2013, repurchased loans restructured or refinanced under these programs were immaterial to the Bancorps Condensed Consolidated Financial Statements. Additionally, as of March 31, 2013, $373 million of loans refinanced under HARP 2.0 were included in loans held for sale in the Bancorps Condensed Consolidated Balance Sheets. For the three months ended March 31, 2013, the Bancorp recognized $35 million of fee income in mortgage banking net revenue in the Bancorps Condensed Consolidated Statements of Income related to the sale of loans restructured or refinanced under the HAMP and HARP 2.0 programs.
In the financial services industry, there has been heightened focus on foreclosure activity and processes. The Bancorp actively works with borrowers experiencing difficulties and has regularly modified or provided forbearance to borrowers where a workable solution could be found. Foreclosure is a last resort, and the Bancorp undertakes foreclosures only when it believes they are necessary and appropriate and is careful to ensure that customer and loan data are accurate. Reviews of the Bancorps foreclosure process and procedures conducted in 2010 did not reveal any material deficiencies. These reviews were expanded and extended in 2011 to improve the Bancorps processes as additional aspects of the industrys foreclosure practices have come under intensified scrutiny and criticism. These reviews are complete and the Bancorp has enhanced some of its processes and procedures to address some concerns that were raised and to comply with changes in state laws.
Commercial Portfolio
The Bancorps 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.
The risk within the commercial loan and lease portfolio is managed and monitored through an underwriting process utilizing detailed origination policies, continuous loan level reviews, monitoring of industry concentration and product type limits and continuous portfolio risk management reporting. The origination policies for commercial real estate outline the risks and underwriting requirements for owner and non-owner occupied and construction lending. Included in the policies are maturity and amortization terms, maximum LTVs, minimum debt service coverage ratios, construction loan monitoring procedures, appraisal requirements, pre-leasing requirements (as applicable) and sensitivity and pro-forma analysis requirements. The Bancorp requires a valuation of real estate collateral, which may include third-party appraisals, be performed at the time of origination and renewal in accordance with regulatory requirements and on an as needed basis when market conditions justify. Although the Bancorp does not back test these collateral value assumptions, the Bancorp maintains an appraisal review department to order and review third-party appraisals in accordance with regulatory requirements. Collateral values on criticized assets with relationships exceeding $1 million are reviewed quarterly to assess the appropriateness of the value ascribed in the assessment of charge-offs and specific reserves. In addition, the Bancorp applies incremental valuation haircuts to older appraisals that relate to collateral
31
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
dependent loans, which can currently be up to 25-40% of the appraised value based on the type of collateral. These incremental valuation haircuts generally reflect the age of the most recent appraisal as well as collateral type. Trends in collateral values, such as home price indices and recent asset dispositions, are monitored in order to determine whether adjustments to the appraisal haircuts are warranted. Other factors such as local market conditions or location may also be considered as necessary.
The Bancorp assesses all real estate and non-real estate collateral securing a loan and considers all cross collateralized loans in the calculation of the LTV ratio. The following table provides detail on the most recent LTV ratios for commercial mortgage loans greater than $1 million, excluding impaired commercial mortgage loans individually evaluated. The Bancorp does not typically aggregate the LTV ratios for commercial mortgage loans less than $1 million.
TABLE 27: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million
As of March 31, 2013 ($ in millions) |
LTV > 100% | LTV 80-100% | LTV < 80% | |||||||||
Commercial mortgage owner occupied loans |
$ | 387 | 315 | 2,277 | ||||||||
Commercial mortgage non-owner occupied loans |
440 | 608 | 1,877 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 827 | 923 | 4,154 | ||||||||
|
|
|
|
|
|
TABLE 28: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million
As of December 31, 2012 ($ in millions) |
LTV > 100% | LTV 80-100% | LTV < 80% | |||||||||
Commercial mortgage owner occupied loans |
$ | 390 | 302 | 2,325 | ||||||||
Commercial mortgage non-owner occupied loans |
450 | 605 | 1,955 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 840 | 907 | 4,280 | ||||||||
|
|
|
|
|
|
32
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table provides detail on commercial loans 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 Bancorps commercial loans and leases:
TABLE 29: Commercial Loan and Lease Portfolio (excluding loans held for sale)
March 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
Outstanding | Exposure | Nonaccrual | Outstanding | Exposure | Nonaccrual | |||||||||||||||||||
By industry: |
||||||||||||||||||||||||
Manufacturing |
$ | 10,027 | 18,001 | 60 | $ | 9,982 | 18,414 | 58 | ||||||||||||||||
Real estate |
5,271 | 6,401 | 173 | 5,588 | 6,840 | 198 | ||||||||||||||||||
Financial services and insurance |
5,248 | 12,173 | 53 | 4,886 | 12,062 | 54 | ||||||||||||||||||
Business services |
4,648 | 6,666 | 47 | 4,600 | 6,917 | 56 | ||||||||||||||||||
Wholesale trade |
4,266 | 7,297 | 27 | 4,042 | 7,401 | 26 | ||||||||||||||||||
Healthcare |
4,074 | 5,649 | 14 | 4,079 | 6,094 | 14 | ||||||||||||||||||
Transportation and warehousing |
2,982 | 2,770 | 3 | 3,105 | 4,222 | 3 | ||||||||||||||||||
Retail trade |
2,722 | 5,833 | 28 | 2,624 | 5,699 | 38 | ||||||||||||||||||
Construction |
1,948 | 3,297 | 98 | 1,995 | 3,254 | 105 | ||||||||||||||||||
Mining |
1,696 | 2,655 | | 1,683 | 2,767 | | ||||||||||||||||||
Accommodation and food |
1,630 | 2,237 | 14 | 1,478 | 2,160 | 17 | ||||||||||||||||||
Communication and information |
1,628 | 2,638 | 19 | 1,547 | 2,631 | 19 | ||||||||||||||||||
Other services |
1,141 | 1,446 | 39 | 1,156 | 1,517 | 42 | ||||||||||||||||||
Entertainment and recreation |
852 | 1,388 | 11 | 914 | 1,393 | 11 | ||||||||||||||||||
Utilities |
625 | 1,900 | | 608 | 2,009 | | ||||||||||||||||||
Public administration |
462 | 557 | | 441 | 693 | | ||||||||||||||||||
Agribusiness |
348 | 462 | 40 | 376 | 527 | 44 | ||||||||||||||||||
Individuals |
213 | 269 | 12 | 281 | 335 | 12 | ||||||||||||||||||
Other |
4 | 3 | 1 | 3 | 2 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 49,785 | 81,642 | 639 | $ | 49,388 | 84,937 | 697 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
By loan size: |
||||||||||||||||||||||||
Less than $200,000 |
2 | % | 1 | 9 | 2 | % | 1 | 9 | ||||||||||||||||
$200,000 to $1 million |
6 | 5 | 22 | 6 | 5 | 22 | ||||||||||||||||||
$1 million to $5 million |
14 | 12 | 27 | 15 | 12 | 28 | ||||||||||||||||||
$5 million to $10 million |
11 | 9 | 13 | 11 | 9 | 13 | ||||||||||||||||||
$10 million to $25 million |
26 | 24 | 25 | 27 | 25 | 24 | ||||||||||||||||||
Greater than $25 million |
41 | 49 | 4 | 39 | 48 | 4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
100 | % | 100 | 100 | 100 | % | 100 | 100 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
By state: |
||||||||||||||||||||||||
Ohio |
20 | % | 23 | 13 | 20 | % | 24 | 13 | ||||||||||||||||
Michigan |
11 | 10 | 20 | 11 | 10 | 17 | ||||||||||||||||||
Illinois |
8 | 8 | 11 | 8 | 8 | 8 | ||||||||||||||||||
Florida |
7 | 6 | 17 | 7 | 6 | 19 | ||||||||||||||||||
Indiana |
5 | 5 | 11 | 5 | 5 | 11 | ||||||||||||||||||
Kentucky |
4 | 4 | 3 | 4 | 3 | 4 | ||||||||||||||||||
North Carolina |
3 | 3 | 2 | 3 | 3 | 2 | ||||||||||||||||||
Tennessee |
3 | 3 | 5 | 3 | 3 | 5 | ||||||||||||||||||
Pennsylvania |
3 | 2 | 1 | 3 | 2 | 1 | ||||||||||||||||||
All other states |
36 | 36 | 17 | 36 | 36 | 20 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
100 | % | 100 | 100 | 100 | % | 100 | 100 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
33
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
The Bancorp has identified certain categories of loans which it believes represent a higher level of risk compared to the rest of the Bancorps loan portfolio, due to economic or market conditions within the Bancorps key lending areas. The following tables provide analysis of each of the categories of loans (excluding loans held for sale) by state as of and for the three months ended March 31, 2013 and 2012:
TABLE 30: Non-Owner Occupied Commercial Real Estate (a)
As of March 31, 2013 ($ in millions) |
For the three months ended March 31, 2013 |
|||||||||||||||||||
By State: |
Outstanding | Exposure | 90 Days Past Due |
Nonaccrual | Net Charge-offs | |||||||||||||||
Ohio |
$ | 1,144 | 1,308 | | 25 | 12 | ||||||||||||||
Michigan |
1,018 | 1,082 | | 48 | | |||||||||||||||
Florida |
539 | 592 | | 32 | 4 | |||||||||||||||
Illinois |
417 | 487 | | 15 | | |||||||||||||||
Indiana |
238 | 255 | | 10 | | |||||||||||||||
North Carolina |
192 | 248 | | 7 | | |||||||||||||||
All other states |
1,020 | 1,326 | | 29 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 4,568 | 5,298 | | 166 | 16 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
(a) | Included in commercial mortgage and commercial construction loans on the Condensed Consolidated Balance Sheets. |
TABLE 31: Non-Owner Occupied Commercial Real Estate (a)
As of March 31, 2012 |
For the three months ended March 31, 2012 |
|||||||||||||||||||
By State: |
Outstanding | Exposure | 90 Days Past Due |
Nonaccrual | Net Charge-offs | |||||||||||||||
Ohio |
$ | 1,855 | 2,029 | 1 | 87 | 4 | ||||||||||||||
Michigan |
1,353 | 1,379 | | 76 | 13 | |||||||||||||||
Florida |
673 | 706 | | 56 | 11 | |||||||||||||||
Illinois |
405 | 445 | | 48 | 4 | |||||||||||||||
Indiana |
295 | 298 | | 13 | | |||||||||||||||
North Carolina |
278 | 311 | | 21 | 2 | |||||||||||||||
All other states |
594 | 624 | | 31 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 5,453 | 5,792 | 1 | 332 | 34 | ||||||||||||||
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|
|
|
|
|
|
|
|
|
(a) | Included in commercial mortgage and commercial construction loans on the Condensed Consolidated Balance Sheets. |
TABLE 32: Homebuilder and Developer (a)
As of March 31, 2013 ($ in millions) |
For the three months ended March 31, 2013 |
|||||||||||||||||||
By State: |
Outstanding | Exposure | 90 Days Past Due |
Nonaccrual | Net Charge-offs | |||||||||||||||
Ohio |
$ | 134 | 187 | | 11 | 1 | ||||||||||||||
Michigan |
47 | 54 | | 4 | | |||||||||||||||
Florida |
29 | 58 | | 3 | | |||||||||||||||
Illinois |
27 | 27 | | 7 | | |||||||||||||||
North Carolina |
26 | 34 | | | | |||||||||||||||
Indiana |
19 | 21 | | 7 | | |||||||||||||||
All other states |
27 | 32 | | 3 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 309 | 413 | | 35 | 1 | ||||||||||||||
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|
|
|
|
|
|
|
|
|
(a) | Homebuilder and Developer loans, exclusive of commercial and industrial loans with an outstanding balance of $72 and a total exposure of $119 are also included in Table 30: Non-Owner Occupied Commercial Real Estate. |
TABLE 33: Homebuilder and Developer (a)
As of March 31, 2012 ($ in millions) |
For the three months ended March 31, 2012 |
|||||||||||||||||||
By State: |
Outstanding | Exposure | 90 Days Past Due |
Nonaccrual | Net Charge-offs | |||||||||||||||
Ohio |
$ | 132 | 196 | 1 | 12 | 4 | ||||||||||||||
Michigan |
82 | 105 | | 5 | 5 | |||||||||||||||
Florida |
51 | 68 | | 16 | 9 | |||||||||||||||
Illinois |
13 | 23 | | 11 | 3 | |||||||||||||||
North Carolina |
43 | 47 | | 9 | | |||||||||||||||
Indiana |
50 | 54 | | 10 | | |||||||||||||||
All other states |
52 | 62 | | 11 | |