Fifth Third Bancorp — 2010 Form 10-K
Business context and reporting period. Fifth Third is a Cincinnati-based diversified bank holding company operating primarily in the Midwest and Southeast. This filing covers the year ended December 31, 2010, with fourth-quarter results and comparisons to 2009. It reported four segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors; it also retained a 49% interest in Fifth Third Processing Solutions (FTPS).
Key financial metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total assets at year-end | $111.0 billion | $113.4 billion |
| Total revenue, FTE basis | $6.35 billion | $8.16 billion |
| Net interest income, FTE basis | $3.62 billion | $3.37 billion |
| Net interest margin | 3.66% | 3.32% |
| Provision for loan and lease losses | $1.54 billion | $3.54 billion |
| Net income attributable to Bancorp | $753 million | $737 million |
| Net income available to common shareholders | $503 million | $511 million |
| Diluted earnings per share | $0.63 | $0.67 |
| Net cash provided by operating activities | $3.31 billion | $3.79 billion |
| Year-end deposits | $81.65 billion | $84.31 billion |
| Year-end borrowings | $11.41 billion | $12.10 billion |
| Year-end Tier 1 capital ratio | 13.94% | 13.30% |
| Year-end total risk-based capital ratio | 18.14% | 17.48% |
Cash flow and liquidity. Investing activities provided $1.71 billion and financing activities used $5.17 billion; cash and due from banks declined $159 million to $2.16 billion. Average core deposits grew 10% to $76.2 billion, while wholesale funding declined. The Bancorp reported $25.3 billion of available secured borrowing capacity at year-end. Cash-flow figures are for the consolidated company; they do not represent a standalone measure of bank liquidity.
Credit quality and balance sheet. Year-end loans and leases, including held-for-sale loans, were $79.7 billion. Net charge-offs were $2.33 billion, or 3.02% of average loans and leases, versus $2.58 billion and 3.20% in 2009. Nonperforming assets were $2.47 billion including nonaccrual loans held for sale; the reported 2.79% ratio excludes those held-for-sale loans. The allowance for loan and lease losses was $3.00 billion, or 3.88% of portfolio loans and leases, down from $3.75 billion and 4.88% in 2009. OREO and other repossessed property rose to $494 million from $297 million.
Material changes versus 2009
- Net interest income rose 7%, and net interest margin increased 34 basis points, helped by lower deposit costs, a shift toward core deposits and improved commercial loan pricing.
- Noninterest income fell 43%, principally because 2009 included the $1.76 billion pre-tax gain on the FTPS sale and a $244 million Visa share-sale gain. The 2010 efficiency ratio was 60.7%; excluding the FTPS sale gain, the 2009 ratio was 60.0%.
- Provision expense dropped $2.01 billion as credit trends moderated. However, 2010 included significant portfolio clean-up charge-offs: $123 million on residential mortgage loans sold and $387 million on commercial loans transferred to held for sale.
- Common earnings declined to $503 million from $511 million despite higher reported net income, in part reflecting increased preferred dividends. Common dividends remained $0.04 per share for the year.
- Deposits declined to $81.65 billion, driven by runoff in time deposits, while core deposits were slightly higher. Borrowings also declined; long-term debt was $9.56 billion at year-end.
Fourth-quarter review
Fourth-quarter 2010 net income available to common shareholders was $270 million, or $0.33 per diluted share, compared with $175 million, or $0.22, in the third quarter and a $160 million loss, or $0.20 loss per share, in fourth-quarter 2009. Provision expense fell to $166 million from $457 million sequentially and $776 million a year earlier. Net charge-offs were $356 million; the third-quarter comparison included $510 million of charge-offs from loan sales and transfers. Fourth-quarter results included $21 million in net securities gains and a $17 million charge for early extinguishment of $1.0 billion in FHLB borrowings.
Outlook, commentary, risks and unusual items
- Management reported signs of moderation in credit trends but described unemployment, housing weakness—particularly in the upper Midwest and Florida—and the credit environment as ongoing concerns. It did not provide a clear full-year 2011 earnings or revenue forecast in the supplied filing text.
- Management anticipated about $41 million of additional 2011 net interest income from remaining acquisition-related purchase-accounting accretion, excluding prepayments, and expected FDIC insurance expense to decline in 2011.
- Significant 2010 items included $152 million of income from a BOLI-related litigation settlement and $25 million of related legal expense, $110 million of residential mortgage representation-and-warranty reserve charges, and $68 million of purchase-accounting accretion in net interest income.
- After year-end, Fifth Third raised $1.7 billion in common equity and issued $1.0 billion of five-year senior notes at 3.625%. On February 2, 2011, it redeemed $3.4 billion of Treasury Series F preferred stock. The redemption triggered a $153 million noncash reduction in retained earnings, to be reflected in first-quarter 2011 results; the company also said it intended to negotiate to buy the related Treasury warrants.
- The Dodd-Frank Act was expected to have a substantial, but then uncertain, impact on the company, including potential effects on capital, liquidity, fees, interchange revenue and business activities. The Act phases out certain trust preferred securities from Tier 1 capital beginning in 2013; $2.8 billion of such securities were included in Tier 1 capital at year-end.
- Key risks include further deterioration in real estate and other credit quality, interest-rate and funding changes, higher mortgage repurchase demands, volatile mortgage-servicing-right valuations, regulatory changes, and litigation. The SEC was investigating accounting and reporting matters involving certain commercial loans; the filing said this could lead to enforcement action. The company also disclosed ongoing Visa interchange, securities, patent and shareholder litigation.
- The independent auditor expressed an unqualified opinion on the consolidated financial statements and internal controls; management also concluded internal control over financial reporting was effective as of December 31, 2010.
Important facts for investors to verify
- Whether improving credit indicators persist, especially in commercial real estate, residential mortgages, Florida and Michigan, and whether the lower provision level proves sustainable.
- The adequacy of the $85 million mortgage representation-and-warranty reserve against rising repurchase demands: $365 million of demands during 2010 and $162 million outstanding at year-end.
- The company’s post-year-end capital position and dilution after the equity offering, preferred-stock redemption and related $153 million noncash retained-earnings charge.
- The eventual effects of Dodd-Frank, including interchange revenue limits, FDIC assessment changes and the planned phaseout of trust preferred capital treatment.
- The status and potential financial consequences of the SEC investigation and other legal contingencies; outcomes and exposure are not clearly quantifiable from the filing.
- Comparability of year-over-year revenue and efficiency measures given the 2009 FTPS and Visa gains, and of loan and balance-sheet trends given 2010 accounting changes that consolidated certain VIEs.