Fifth Third Bancorp — 2013 Form 10-K
Business context and reporting period. This summary covers the fiscal year ended December 31, 2013, with fourth-quarter comparisons where provided. Fifth Third is a Cincinnati-based diversified financial services company operating primarily in the Midwest and Southeast. At year-end it had $130.4 billion in assets, 1,320 banking centers and four reportable segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors. It also held an approximately 25% equity-method interest in Vantiv Holding, LLC.
Financial results and key metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue (FTE) | $6.808 billion | $6.612 billion |
| Net interest income (FTE) | $3.581 billion | $3.613 billion |
| Noninterest income | $3.227 billion | $2.999 billion |
| Provision for loan and lease losses | $229 million | $303 million |
| Noninterest expense | $3.961 billion | $4.081 billion |
| Net income available to common shareholders | $1.799 billion | $1.541 billion |
| Diluted EPS | $2.02 | $1.66 |
| Net interest margin (FTE) | 3.32% | 3.55% |
| Efficiency ratio (FTE) | 58.2% | 61.7% |
- Profitability and drivers: Common earnings rose 17%, while revenue increased 3%. Lower credit costs and expenses supported results; a $305 million increase in other noninterest income was driven largely by Vantiv warrant valuation gains and Vantiv share-sale gains. Pre-provision net revenue, a non-GAAP measure, was $2.827 billion versus $2.513 billion.
- Interest income and margin: Net interest income was broadly flat, but margin contracted 23 basis points. Lower yields on earning assets (down 36 basis points) outweighed loan growth and lower funding costs. Average loans and leases increased $4.3 billion to $89.1 billion.
- Credit: Net charge-offs were $501 million, or 0.58% of average portfolio loans and leases, versus $704 million, or 0.85%, in 2012. The allowance for loan and lease losses (ALLL) fell to $1.582 billion from $1.854 billion; ALLL coverage was 1.79% of portfolio loans versus 2.16%. Nonperforming assets including loans held for sale were $986 million, down from $1.315 billion.
- Balance sheet and funding: Total assets were $130.443 billion, up from $121.894 billion. Total deposits were $99.275 billion, up from $89.517 billion; core deposits were $92.704 billion. Portfolio loans and leases were $88.614 billion, and investment securities totaled $19.1 billion.
- Debt and capital: Total borrowings declined to $11.297 billion from $14.266 billion, although long-term debt increased to $9.633 billion from $7.085 billion. Regulatory capital ratios remained above well-capitalized thresholds: Tier 1 risk-based 10.36%, total risk-based 14.08% and Tier 1 leverage 9.64%. Management estimated a fully phased-in Basel III Tier 1 common ratio of 8.99% under its opt-out assumptions; this is a non-GAAP estimate, and the rules were not yet effective.
- Cash flows: Cash provided by operating activities was $4.595 billion; investing activities used $10.184 billion; financing activities provided $6.326 billion. Cash and due from banks increased $737 million to $3.178 billion. These bank cash-flow categories should not be interpreted as conventional free cash flow.
Material changes and fourth-quarter review
- Full-year diluted EPS increased from $1.66 to $2.02. Net interest margin weakened, while credit indicators improved and operating expenses declined.
- Vantiv-related activity was material: Fifth Third recognized $242 million and $85 million gains on share sales in the second and third quarters, respectively, and held a roughly 25% stake at year-end. Other income also included $206 million of net warrant and put-option valuation gains, compared with $67 million in 2012.
- Mortgage banking net revenue declined 17% to $700 million. Origination fees and loan-sale gains fell as mortgage originations declined to $22.3 billion from $25.2 billion; MSR valuation and related hedging adjustments partly offset the decline.
- Fourth quarter: Common earnings were $383 million, or $0.43 per diluted share, versus $390 million, or $0.43, in fourth-quarter 2012. FTE net interest income was $905 million, provision was $53 million, noninterest income was $703 million and noninterest expense was $989 million. Results included a $91 million positive Vantiv warrant valuation adjustment, $69 million in litigation-reserve charges, an $18 million negative Visa swap valuation adjustment and $8 million of TruPS debt-extinguishment costs.
Outlook, risks and unusual items
- The filing does not provide a specific earnings or revenue forecast. Management noted that modest economic growth, subdued qualified loan demand and a low-rate environment constrained growth and profitability. It expected approximately $5 million of additional net interest income in 2014 from acquired-loan and deposit purchase-accounting accretion, excluding prepayments.
- Fifth Third announced in January 2014 that it would stop enrolling new deposit-advance customers and phase out service to existing customers by year-end 2014; the financial impact was still being evaluated.
- Key risks include changes in interest rates and net interest margin, credit deterioration, real-estate exposure—particularly in Florida and Michigan—deposit and wholesale-funding access, capital requirements, competition, litigation, regulatory change, mortgage servicing-right valuations, cybersecurity and operational or reputational events. The filing reported distributed denial-of-service attacks that impaired website access but did not compromise customer data.
- Litigation and contingencies remain important. Management estimated reasonably possible legal losses up to approximately $113 million above reserves, while noting that some matters could not be estimated. Mortgage representation-and-warranty reserves were $44 million, with reasonably possible losses estimated up to $47 million above reserves. An FHA-insured-loan investigation was ongoing, with no demand or claim reported. The SEC accounting investigation relating to 2008 commercial loans concluded in December 2013 with a $6.5 million Bancorp penalty and a separate $100,000 penalty and one-year SEC practice bar for the former interim CFO.
- The company redeemed $750 million of TruPS in December, issued Series H and Series I preferred stock for net proceeds of $593 million and $441 million, respectively, and repurchased $1.320 billion of treasury shares during 2013. Common dividends declared rose to $0.47 per share from $0.36.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective as of December 31, 2013.
Important facts for investors to verify
- How much of 2013 earnings growth depended on Vantiv gains and warrant remeasurement, and how sustainable are recurring revenues excluding those items?
- Whether margin pressure continues as rates, deposit mix, asset yields and funding costs change; review the filing’s interest-rate sensitivity assumptions.
- Whether lower provisions and reserve coverage remain appropriate as loan growth and portfolio mix change, especially in home equity, residential mortgage and commercial credit.
- The potential range, timing and resolution of litigation, mortgage repurchase claims and regulatory investigations, including losses beyond recorded reserves.
- How Basel III, liquidity rules, the Volcker Rule and debit interchange developments affect capital, funding, fees and permissible investments.
- Whether share repurchases and dividends remain supportable under regulatory capital plans, and how capital actions affect common-share dilution and per-share results.