Fifth Third Bancorp — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Fifth Third is a diversified regional financial services company headquartered in Cincinnati, Ohio; it reported four business segments and held a 28% equity-method interest in Vantiv Holding, LLC at quarter-end.
Financial results and condition
| Metric | Q2 2013 | Comparison / context |
|---|---|---|
| Revenue | $1.945 billion on an FTE basis | Up 23% year over year; includes a $242 million Vantiv share-sale gain. GAAP net interest income was $880 million; FTE net interest income was $885 million. |
| Net income available to common shareholders | $582 million; diluted EPS $0.65 | Up from $376 million and $0.40 in Q2 2012. |
| Net interest margin | 3.33% | Down from 3.56%; lower asset yields more than offset loan growth and lower funding costs. |
| Provision and credit losses | Provision $64 million; net charge-offs $112 million | Provision was $71 million and charge-offs $181 million a year earlier. Charge-offs were 0.51% of average loans, versus 0.88%. |
| Noninterest expense | $1.035 billion | Up 10%, primarily from litigation-related expense and a $10 million fraud loss. Efficiency ratio improved to 53.2% from 59.4%. |
| Six-month cash flows | Operating +$2.591 billion; investing −$1.907 billion; financing −$735 million | Cash and due from banks declined $51 million to $2.390 billion. |
At June 30, total assets were $123.360 billion, portfolio loans and leases were $87.032 billion, and deposits were $93.454 billion. Average loans were up 6% year over year, led by commercial and industrial and residential mortgage lending. Total borrowings were $9.688 billion, down $4.578 billion from year-end 2012, mainly due to lower short-term FHLB borrowings. Regulatory capital ratios included Tier 1 risk-based capital of 11.07%, total risk-based capital of 14.34%, and Tier 1 leverage of 10.40%. The filing says these exceeded the applicable well-capitalized guidelines. Secured borrowing capacity was approximately $39.7 billion.
Material changes versus comparable periods
- Common earnings increased substantially, but the gain on Vantiv shares and improved mortgage servicing-rights valuations were significant contributors. Mortgage banking net revenue rose to $233 million from $183 million; origination fees and loan-sale gains declined.
- Net interest income fell 2% on an FTE basis in Q2 as yields on interest-earning assets declined 35 basis points. Average loans increased $5.0 billion, while interest expense fell, including from lower average long-term debt.
- Credit indicators improved: nonperforming assets were 1.32% of portfolio loans, leases and other assets, versus 1.49% at December 31, 2012; the allowance for loan and lease losses fell to $1.735 billion from $1.854 billion.
- Common dividends rose to $0.12 per share from $0.08. The Bancorp repurchased approximately $539 million of shares through an accelerated repurchase in May; settlement was expected by October 21, 2013.
- The Bancorp issued $593 million net proceeds of Series H preferred stock and issued $1.3 billion of senior bank notes in February. On July 1, after quarter-end, it converted Series G preferred stock into approximately 35.5 million common shares.
Outlook, risks and unusual items
- Management described the economy as modestly improving and anticipated moderate growth in the second half of 2013, while citing risks including high unemployment, business uncertainty, European sovereign-debt concerns, slower growth in China and Middle East tensions. No specific earnings or revenue guidance was provided.
- Interest-rate sensitivity, mortgage prepayments and mortgage servicing-rights valuations remain important earnings variables. Q2 included a $102 million recovery of temporary MSR impairment, partly offset by $30 million of losses on derivatives used to hedge MSRs.
- Litigation expense increased; the company estimated reasonably possible legal losses of up to approximately $88 million beyond recorded reserves. Mortgage representation-and-warranty reserves were $117 million, with possible losses estimated up to approximately $78 million beyond reserves.
- The filing identifies potential regulatory and legal exposures, including possible debit interchange fee reductions, evolving deposit-advance oversight, and new capital and liquidity rules. The Bancorp also disclosed an SEC investigation concerning historical accounting and reporting for certain commercial loans sold or reclassified as held for sale in 2008.
- Management noted that adoption by regulators of guidance concerning certain non-reaffirmed Chapter 7 bankruptcy loans could result in approximately $70 million of additional charge-offs. The Bancorp said the guidance’s applicability was under evaluation.
- Subsequent to quarter-end, a Vantiv share sale was expected to produce an approximately $85 million pretax gain in Q3 2013 and reduce Fifth Third’s ownership to approximately 25%.
Important facts for investors to verify
- How much of earnings growth is repeatable after excluding the Vantiv gain, MSR valuation effects and other unusual items?
- Whether net interest margin stabilizes as asset yields, loan growth and funding costs change.
- Whether improving credit trends continue, particularly in commercial real estate and stressed Florida and Michigan markets, and whether the reduced allowance remains adequate.
- The ultimate costs and timing of litigation, mortgage repurchase claims and the SEC investigation; also monitor the disclosed possible losses beyond reserves.
- The effects of share repurchases, preferred-stock actions and the Series G conversion on capital ratios, common-share count and per-share earnings.
- Whether the post-quarter Vantiv sale and anticipated gain were completed on the terms described; the filing reports the sale settled August 7, 2013.