CINCINNATI--(BUSINESS WIRE)--Fifth Third Bancorp (Nasdaq: FITB) today reported second quarter 2012 net income of $385 million, compared with net income of $430 million in the first quarter of 2012 and net income of $337 million in the second quarter of 2011. After preferred dividends, second quarter 2012 net income available to common shareholders was $376 million or $0.40 per diluted share, compared with first quarter net income of $421 million or $0.45 per diluted share, and net income of $328 million or $0.35 per diluted share in the second quarter of 2011.
Second quarter 2012 noninterest income results included $56 million in positive valuation adjustments on the Vantiv warrant; $17 million in negative valuation adjustments associated with bank premises held-for-sale; and a $17 million reduction in other noninterest income related to the valuation of a total return swap entered into as part of the 2009 sale of Visa, Inc. Class B shares. Second quarter noninterest expense was reduced by $17 million related to affordable housing investments and FDIC insurance. Net gains on investment securities were $3 million. Second quarter net income taxes were seasonally higher by $19 million due to the seasonal expiration of employee stock options expense.
First quarter 2012 results included $115 million in pre-tax gains on the initial public offering of Vantiv, Inc., $46 million in positive valuation adjustments on the Vantiv warrant and put option, as well as $34 million of charges recorded in equity method earnings in other noninterest income related to Vantiv’s bank debt refinancing and debt termination charges. First quarter results also included $23 million in income from an agreement reached on certain outstanding disputes for non-income tax related assessments in noninterest expense; a $19 million charge to noninterest income related to the Visa total return swap, additions to litigation reserves of $13 million, debt termination charges of $9 million, and severance expense of $6 million. Net gains on investment securities were $9 million. Second quarter 2011 results included $29 million in positive valuation adjustments on the Vantiv warrant, debt extinguishment gains of $6 million and a $4 million charge related to the Visa total return swap. Net gains on investment securities were $6 million. Second quarter 2011 net income taxes were seasonally higher by $23 million due to the seasonal expiration of employee stock options expense.
Earnings Highlights
| For the Three Months Ended | % Change | ||||||||||||||||||||||
| June | March | December | September | June | |||||||||||||||||||
| 2012 | 2012 | 2011 | 2011 | 2011 | Seq | Yr/Yr | |||||||||||||||||
| Earnings ($ in millions) | |||||||||||||||||||||||
| Net income attributable to Bancorp | $385 |
$430 |
$314 | $381 | $337 | (10 | %) | 14 | % | ||||||||||||||
| Net income available to common shareholders | $376 |
$421 |
$305 | $373 | $328 | (11 | %) | 15 | % | ||||||||||||||
| Common Share Data | |||||||||||||||||||||||
| Earnings per share, basic | 0.41 | 0.46 | 0.33 | 0.41 | 0.36 | (11 | %) | 14 | % | ||||||||||||||
| Earnings per share, diluted | 0.40 | 0.45 | 0.33 | 0.40 | 0.35 | (11 | %) | 14 | % | ||||||||||||||
| Cash dividends per common share | 0.08 | 0.08 | 0.08 | 0.08 | 0.06 | - | 33 | % | |||||||||||||||
| Financial Ratios | |||||||||||||||||||||||
| Return on average assets | 1.32 | % | 1.49 | % | 1.08 | % | 1.34 | % | 1.22 | % | (11 | %) | 8 | % | |||||||||
| Return on average common equity | 11.4 | 13.1 | 9.5 | 11.9 | 11.0 | (13 | %) | 4 | % | ||||||||||||||
| Return on average tangible common equity | 14.1 | 16.2 | 11.9 | 14.9 | 14.0 | (13 | %) | 1 | % | ||||||||||||||
| Tier I capital | 12.31 | 12.20 | 11.91 | 11.96 | 11.93 | 1 | % | 3 | % | ||||||||||||||
| Tier I common equity | 9.77 | 9.64 | 9.35 | 9.33 | 9.20 | 1 | % | 6 | % | ||||||||||||||
| Net interest margin (a) | 3.56 | 3.61 | 3.67 | 3.65 | 3.62 | (1 | %) | (2 | %) | ||||||||||||||
| Efficiency (a) | 59.4 | 58.3 | 67.5 | 60.4 | 59.1 | 2 | % | 1 | % | ||||||||||||||
| Common shares outstanding (in thousands) | 918,913 | 920,056 | 919,804 | 919,779 | 919,818 | - | - | ||||||||||||||||
| Average common shares outstanding (in thousands): | |||||||||||||||||||||||
| Basic | 913,541 | 915,226 | 914,997 | 914,947 | 914,601 | - | - | ||||||||||||||||
| Diluted | 954,622 | 957,416 | 956,349 | 955,490 | 955,478 | - | - | ||||||||||||||||
| (a) Presented on a fully taxable equivalent basis | |||||||||||||||||||||||
| The percentages in all of the tables in this earning release are calculated on actual dollar amounts not the rounded dollar amounts. | |||||||||||||||||||||||
“Earnings trends remained positive in the second quarter of 2012. Results came in better than we had anticipated and followed a very strong first quarter,” said Kevin Kabat, President and CEO of Fifth Third Bancorp. “Mortgage results remained strong. Our capabilities and strength of market position has enabled us to capture significant business as we assist our customers in taking advantage of historically low interest rates. Card and processing revenue was up 9 percent sequentially, and corporate banking revenue increased 5 percent sequentially as loan production and ancillary business volume remained healthy during the quarter.
“Expenses were well managed and declined 4 percent in the quarter. We remain focused on expenses as we navigate through a relatively sluggish economic environment, even as we continue to develop new products and enhance services to customers. Charged-off loans dropped to 88 basis points of loans and leases, the lowest level since 2007 and we continue to expect further improvement in the second half of the year.
“Capital levels and capital generation remain very strong. Earnings per share increased 14 percent and tangible book value per share increased 13 percent from a year ago. Our tangible common equity ratio ended the quarter at 9.5 percent and the Tier 1 common ratio was 9.8 percent. We re-submitted our capital plan to the Federal Reserve on June 8 and look forward to their response to our plans to resume a prudent and more appropriate capital management strategy given our earnings generation and capital position.
“We believe our capabilities and business model continue to position Fifth Third well to compete in this environment and in the future.”
Income Statement Highlights
| For the Three Months Ended | % Change | |||||||||||||||||
| June | March | December | September | June | ||||||||||||||
| 2012 | 2012 | 2011 | 2011 | 2011 | Seq | Yr/Yr | ||||||||||||
| Condensed Statements of Income ($ in millions) | ||||||||||||||||||
| Net interest income (taxable equivalent) | $899 | $903 | $920 | $902 | $869 | - | 3 | % | ||||||||||
| Provision for loan and lease losses | 71 | 91 | 55 | 87 | 113 | (21 | %) | (37 | %) | |||||||||
| Total noninterest income | 678 | 769 | 550 | 665 | 656 | (12 | %) | 3 | % | |||||||||
| Total noninterest expense | 937 | 973 | 993 | 946 | 901 | (4 | %) | 4 | % | |||||||||
| Income before income taxes (taxable equivalent) | 569 | 608 | 422 | 534 | 511 | (6 | %) | 11 | % | |||||||||
| Taxable equivalent adjustment | 4 | 5 | 4 | 4 | 5 | (20 | %) | (20 | %) | |||||||||
| Applicable income taxes | 180 | 173 | 104 | 149 | 169 | 4 | % | 7 | % | |||||||||
| Net income | 385 | 430 | 314 | 381 | 337 | (11 | %) | 14 | % | |||||||||
| Less: Net income attributable to noncontrolling interest | - | - | - | - | - | - | - | |||||||||||
| Net income attributable to Bancorp | 385 | 430 | 314 | 381 | 337 | (10 | %) | 14 | % | |||||||||
| Dividends on preferred stock | 9 | 9 | 9 | 8 | 9 | - | - | |||||||||||
| Net income available to common shareholders | 376 | 421 | 305 | 373 | 328 | (11 | %) | 15 | % | |||||||||
| Earnings per share, diluted | $0.40 | $0.45 | $0.33 | $0.40 | $0.35 | (11 | %) | 14 | % | |||||||||
Net Interest Income
| For the Three Months Ended | % Change | |||||||||||||||||||||
| June | March | December | September | June | ||||||||||||||||||
| 2012 | 2012 | 2011 | 2011 | 2011 | Seq | Yr/Yr | ||||||||||||||||
| Interest Income ($ in millions) | ||||||||||||||||||||||
| Total interest income (taxable equivalent) | $1,031 | $1,045 | $1,061 | $1,059 | $1,050 | (1 | %) | (2 | %) | |||||||||||||
| Total interest expense | 132 | 142 | 141 | 157 | 181 | (7 | %) | (27 | %) | |||||||||||||
| Net interest income (taxable equivalent) | $899 | $903 | $920 | $902 | $869 | - | 3 | % | ||||||||||||||
| Average Yield | ||||||||||||||||||||||
| Yield on interest-earning assets (taxable equivalent) | 4.08 | % | 4.18 | % | 4.23 | % | 4.28 | % | 4.37 | % | (2 | %) | (7 | %) | ||||||||
| Yield on interest-bearing liabilities | 0.73 | % | 0.79 | % | 0.79 | % | 0.86 | % | 1.00 | % | (8 | %) | (27 | %) | ||||||||
| Net interest rate spread (taxable equivalent) | 3.35 | % | 3.39 | % | 3.44 | % | 3.42 | % | 3.37 | % | (1 | %) | (1 | %) | ||||||||
| Net interest margin (taxable equivalent) | 3.56 | % | 3.61 | % | 3.67 | % | 3.65 | % | 3.62 | % | (1 | %) | (2 | %) | ||||||||
| Average Balances ($ in millions) | ||||||||||||||||||||||
| Loans and leases, including held for sale | $84,508 | $83,757 | $82,278 | $80,013 | $79,153 | 1 | % | 7 | % | |||||||||||||
| Total securities and other short-term investments | 17,168 | 16,735 | 17,243 | 18,142 | 17,192 | 3 | % | - | ||||||||||||||
| Total interest-earning assets | 101,676 | 100,492 | 99,521 | 98,155 | 96,345 | 1 | % | 6 | % | |||||||||||||
| Total interest-bearing liabilities | 73,162 | 72,219 | 71,467 | 72,473 | 72,503 | 1 | % | 1 | % | |||||||||||||
| Bancorp shareholders' equity | 13,629 | 13,366 | 13,147 | 12,841 | 12,365 | 2 | % | 10 | % | |||||||||||||
Net interest income of $899 million on a fully taxable equivalent basis declined $4 million from the first quarter, with a $14 million decrease in interest income and a $10 million decrease in interest expense. The decline in interest income was primarily attributable to loan repricing, particularly in the C&I and auto portfolios; Vantiv’s debt refinancing in March; and lower reinvestment rates on the securities portfolio given the sharp reduction in intermediate and long-term interest rates. These effects were partially offset by the benefit of loan growth and higher purchase accounting accretion. Despite growth in interest-bearing liabilities, interest expense declined as a result of deposit mix shift into lower yielding products as well as the impact of hedge ineffectiveness in the first quarter of 2012 (positive benefit of $1 million this quarter compared with a negative impact of $8 million in the first quarter). The full quarter net impact of our first quarter senior debt issuance and debt terminations modestly increased interest expense.
The net interest margin was 3.56 percent, a decrease of 5 bps from 3.61 percent in the previous quarter. The decrease was primarily due to lower loan and lower securities yields, which reduced the margin by 7 bps and 3 bps, respectively. These effects were partially offset by the impact of hedge ineffectiveness and deposit mix shift, which respectively contributed 3 bps and 1 bp to the change in the margin.
Compared with the second quarter of 2011, net interest income increased $30 million, driven by higher average loan balances, run-off in higher-priced CDs and mix shift to lower cost deposit products, partially offset by lower asset yields. The net interest margin decreased 6 bps from a year ago.
Securities
Average securities and other short-term investments were $17.2 billion in the second quarter of 2012 compared with $16.7 billion in the previous quarter and $17.2 billion in the second quarter of 2011. The sequential increase in average balances was related to the pre-investment of a portion of portfolio cash flows during the quarter and higher cash balances held at the Fed reflected in short-term investments balances.
Loans
| For the Three Months Ended | % Change | ||||||||||||||||
| June | March | December | September | June | |||||||||||||
| 2012 | 2012 | 2011 | 2011 | 2011 | Seq | Yr/Yr | |||||||||||
| Average Portfolio Loans and Leases ($ in millions) | |||||||||||||||||
| Commercial: | |||||||||||||||||
| Commercial and industrial loans | $32,734 | $31,371 | $29,891 | $28,777 | $27,909 | 4 | % | 17 | % | ||||||||
| Commercial mortgage | 9,810 | 10,007 | 10,262 | 10,050 | 10,394 | (2 | %) | (6 | %) | ||||||||
| Commercial construction | 873 | 992 | 1,132 | 1,752 | 1,918 | (12 | %) | (54 | %) | ||||||||
| Commercial leases | 3,469 | 3,543 | 3,351 | 3,300 | 3,349 | (2 | %) | 4 | % | ||||||||
| Subtotal - commercial loans and leases | 46,886 | 45,913 | 44,636 | 43,879 | 43,570 | 2 | % | 8 | % | ||||||||
| Consumer: | |||||||||||||||||
| Residential mortgage loans | 11,274 | 10,828 | 10,464 | 10,006 | 9,654 | 4 | % | 17 | % | ||||||||
| Home equity | 10,430 | 10,606 | 10,810 | 10,985 | 11,144 | (2 | %) | (6 | %) | ||||||||
| Automobile loans | 11,755 | 11,882 | 11,696 | 11,445 | 11,188 | (1 | %) | 5 | % | ||||||||
| Credit card | 1,915 | 1,926 | 1,906 | 1,864 | 1,834 | (1 | %) | 4 | % | ||||||||
| Other consumer loans and leases | 326 | 345 | 402 | 441 | 547 | (6 | %) | (40 | %) | ||||||||
| Subtotal - consumer loans and leases | 35,700 | 35,587 | 35,278 | 34,741 | 34,367 | - | 4 | % | |||||||||
| Total average loans and leases (excluding held for sale) | $82,586 | $81,500 | $79,914 | $78,620 | $77,937 | 1 | % | 6 | % | ||||||||
| Average loans held for sale | 1,920 | 2,257 | 2,364 | 1,393 | 1,216 | (15 | %) | 58 | % | ||||||||
Average loan and lease balances (excluding loans held-for-sale) increased $1.1 billion, or 1 percent, sequentially and increased 6 percent from the second quarter of 2011. Period end loan and lease balances (excluding loans held-for-sale) increased $246 million sequentially and $4.4 billion, or 6 percent, from a year ago.
Average commercial portfolio loan and lease balances were up $973 million, or 2 percent, sequentially and increased $3.3 billion, or 8 percent, from the second quarter of 2011. Average C&I loans increased 4 percent sequentially and 17 percent compared with the second quarter of 2011. Average commercial mortgage and commercial construction loan balances declined by a combined 3 percent sequentially and 13 percent from the same period the previous year, reflecting continued low customer demand and business opportunities. Commercial line usage, on an end of period basis, was 31.9 percent of committed lines in the second quarter of 2012 compared with 32.1 percent in the first quarter of 2012 and 32.9 percent in the second quarter of 2011.
Average consumer portfolio loan and lease balances increased $113 million sequentially and $1.3 billion, or 4 percent, from the second quarter of 2011. Average residential mortgage loans increased 4 percent sequentially, reflecting continued strong refinancing activity associated with historically low interest rates as well as the continued retention of certain residential mortgages. Compared with the second quarter of 2011, average residential mortgage loans increased 17 percent and reflected the retention of these mortgages. Home equity loan balances declined 2 percent sequentially and 6 percent year-over-year due to lower demand and production. Average auto loans decreased 1 percent sequentially and increased 5 percent year-over-year.
Average loans held-for-sale of $1.9 billion decreased $337 million sequentially and increased $704 million compared with the second quarter of 2011 primarily driven by changes in balances of mortgages held for sale. Period end loans held-for-sale increased $279 million from the previous quarter and $678 million from the second quarter of 2011.
Deposits
| For the Three Months Ended | % Change | ||||||||||||||||
| June | March | December | September | June | |||||||||||||
| 2012 | 2012 | 2011 | 2011 | 2011 | Seq | Yr/Yr | |||||||||||
| Average Deposits ($ in millions) | |||||||||||||||||
| Demand deposits | $26,351 | $26,063 | $26,069 | $23,677 | $22,174 | 1 | % | 19 | % | ||||||||
| Interest checking | 23,548 | 22,308 | 19,263 | 18,322 | 18,701 | 6 | % | 26 | % | ||||||||
| Savings | 22,143 | 21,944 | 21,715 | 21,747 | 21,817 | 1 | % | 1 | % | ||||||||
| Money market | 4,258 | 4,543 | 5,255 | 5,213 | 5,009 | (6 | %) | (15 | %) | ||||||||
| Foreign office (a) | 1,321 | 2,277 | 3,325 | 3,255 | 3,805 | (42 | %) | (65 | %) | ||||||||
| Subtotal - Transaction deposits | 77,621 | 77,135 | 75,627 | 72,214 | 71,506 | 1 | % | 9 | % | ||||||||
| Other time | 4,359 | 4,551 | 4,960 | 6,008 | 6,738 | (4 | %) | (35 | %) | ||||||||
| Subtotal - Core deposits | 81,980 | 81,686 | 80,587 | 78,222 | 78,244 | - | 5 | % | |||||||||
| Certificates - $100,000 and over | 3,130 | 3,178 | 3,085 | 3,376 | 3,955 | (2 | %) | (21 | %) | ||||||||
| Other | 23 | 19 | 16 | 7 | 2 | 20 | % | NM | |||||||||
| Total deposits | $85,133 | $84,883 | $83,688 | $81,605 | $82,201 | - | 4 | % | |||||||||
| (a) Includes commercial customer Eurodollar sweep balances for which the Bancorp pays rates comparable to other commercial deposit accounts. | |||||||||||||||||
Average core deposits were relatively stable, increasing slightly sequentially, and increased 5 percent from the second quarter of 2011, as transaction deposit growth was offset by continued run-off of other time deposits. Average transaction deposits, excluding other time deposits, increased 1 percent from the first quarter of 2012 primarily driven by higher interest checking, demand deposits, and savings balances, reflecting account migration from foreign office deposits and money market accounts. Year-over-year growth of 9 percent was driven by higher interest checking, demand deposits, and savings balances, partially offset by lower foreign office and money market account balances.
Consumer average transaction deposits increased 1 percent sequentially and 6 percent from the second quarter of 2011. Transaction deposit growth reflected higher interest checking, demand deposit, and savings balances, which were partially offset by lower money market balances. Consumer CDs included in core deposits declined 4 percent sequentially, driven by customer reluctance to purchase CDs given the current low rate environment, and declined 35 percent year-over-year driven by maturities of higher-rate CDs.
Commercial average transaction deposits were flat sequentially and increased 12 percent from the previous year. Sequential performance reflected continued mix shift of foreign office deposits into domestic interest-bearing checking products. Year-over-year growth was primarily driven by higher inflows to DDAs and interest checking balances, partially offset by lower foreign office deposits. Average public funds balances were $5.7 billion compared with $6.2 billion in the first quarter of 2012 and $5.9 billion in the second quarter of 2011.
Noninterest Income
| For the Three Months Ended | % Change | |||||||||||||||||
| June | March | December | September | June | ||||||||||||||
| 2012 | 2012 | 2011 | 2011 | 2011 | Seq | Yr/Yr | ||||||||||||
| Noninterest Income ($ in millions) | ||||||||||||||||||
| Service charges on deposits | $130 | $129 | $136 | $134 | $126 | 1 | % | 4 | % | |||||||||
| Corporate banking revenue | 102 | 97 | 82 | 87 | 95 | 5 | % | 7 | % | |||||||||
| Mortgage banking net revenue | 183 | 204 | 156 | 178 | 162 | (10 | %) | 13 | % | |||||||||
| Investment advisory revenue | 93 | 96 | 90 | 92 | 95 | (4 | %) | (2 | %) | |||||||||
| Card and processing revenue | 64 | 59 | 60 | 78 | 89 | 9 | % | (28 | %) | |||||||||
| Other noninterest income | 103 | 175 | 24 | 64 | 83 | (41 | %) | 25 | % | |||||||||
| Securities gains, net | 3 | 9 | 5 | 26 | 6 | (67 | %) | (50 | %) | |||||||||
| Securities gains, net - non-qualifying hedges | ||||||||||||||||||
| on mortgage servicing rights | - | - | (3 | ) | 6 | - | NM | NM | ||||||||||
| Total noninterest income | $678 | $769 | $550 | $665 | $656 | (12 | %) | 3 | % | |||||||||
| NM: Not Meaningful | ||||||||||||||||||
Noninterest income of $678 million decreased $91 million sequentially, or 12 percent, and increased $22 million, or 3 percent, compared with year ago results. The sequential decline was primarily due to the first quarter benefit of Vantiv’s IPO and related debt refinancing as well as lower mortgage banking net revenue, while the increase from a year ago largely reflected second quarter 2012 warrant gains and higher mortgage banking income, which more than offset the impact of debit interchange legislation on card and processing revenue.
Second quarter 2012 noninterest income results included a $56 million positive valuation adjustment on the Vantiv warrant, compared with $46 million in positive valuation adjustments on Vantiv warrant and put instruments in the first quarter of 2012 and $29 million in positive valuation adjustments in the second quarter of 2011. This quarter’s results also included $17 million in lower of cost or market adjustments associated with bank premises held-for-sale, as well as a $17 million charge related to the valuation of the total return swap entered into as part of the 2009 sale of Visa, Inc. Class B shares. Valuation adjustments on this swap were $19 million in the first quarter of 2012 and $4 million in the second quarter of 2011. First quarter 2012 results included $115 million in gains from Vantiv’s IPO, as well as the $34 million charge recorded in equity method earnings related to Vantiv’s debt refinancing and related termination charges. Excluding these items, as well as investment securities gains in all periods, noninterest income of $653 million increased $1 million from the previous quarter and increased $28 million, or 4 percent, from the second quarter of 2011.
Service charges on deposits of $130 million increased 1 percent from the first quarter and 4 percent compared with the same quarter last year. Retail service charges declined 1 percent sequentially and 1 percent compared with the second quarter of 2011. Commercial service charges increased 2 percent sequentially and 7 percent compared with results a year ago.
Corporate banking revenue of $102 million increased 5 percent from the first quarter of 2012 and 7 percent from the same period last year. The sequential and year-over-year increases were driven by increased foreign exchange, institutional sales, and interest rate derivatives revenue. Additionally, increased business lending fees benefited the year-over-year comparison.
Mortgage banking net revenue was $183 million in the second quarter of 2012, a 10 percent decrease from the first quarter of 2012 and an increase of 13 percent from the second quarter of 2011. Second quarter 2012 originations were $5.9 billion, compared with $6.4 billion in the previous quarter and $3.1 billion in the second quarter of 2011. Second quarter 2012 originations resulted in gains of $183 million on mortgages sold reflecting higher gain on sale margins. This compares with gains of $174 million during the previous quarter and $64 million during the second quarter of 2011. Mortgage servicing fees this quarter were $63 million, compared with $61 million in the previous quarter and $58 million in the second quarter of 2011. Mortgage banking net revenue is also affected by net servicing asset value adjustments, which include mortgage servicing rights (MSR) amortization and MSR valuation adjustments (including mark-to-market adjustments on free-standing derivatives used to economically hedge the MSR portfolio). These net servicing asset valuation adjustments were negative $63 million in the second quarter of 2012 (reflecting MSR amortization of $41 million and MSR valuation adjustments of negative $22 million); negative $31 million in the first quarter of 2012 (MSR amortization of $46 million and MSR valuation adjustments of positive $15 million); and positive $40 million in the second quarter of 2011 (MSR amortization of $25 million and MSR valuation adjustments of positive $65 million). The mortgage servicing asset, net of the valuation reserve, was $736 million at quarter end on a servicing portfolio of $62 billion.
Investment advisory revenue of $93 million decreased 4 percent sequentially and 2 percent from the second quarter of 2011. The sequential decline was driven by lower tax-related private client services revenue which is seasonally strong in the first quarter, as well as lower mutual fund fees, partially offset by higher brokerage fees.
Card and processing revenue was $64 million in the second quarter of 2012, an increase of 9 percent sequentially and decline of 28 percent from the second quarter of 2011. The sequential increase reflected higher transaction volumes compared with the seasonally weak first quarter. The year-over-year decline was driven by the impact of debit interchange legislation, partially offset by higher transaction volumes. Other noninterest income totaled $103 million in the second quarter of 2012, compared with $175 million in the previous quarter and $83 million in the second quarter of 2011. Other noninterest income includes effects of the valuation of the Vantiv warrant and changes in income related to the valuation of the Visa total return swap. For periods ending June 30, 2012, March 31, 2012, and June 30, 2011, the impact of warrant and put option valuation adjustments were positive $56 million, positive $46 million, and positive $29 million, respectively, and reductions in income related to the Visa total return swap were $17 million, $19 million, and $4 million, respectively. Second quarter 2012 results also included $17 million in lower of cost or market adjustments associated with bank premises held-for-sale. First quarter 2012 results also included $115 million in gains from Vantiv’s IPO, as well as the $34 million charge recorded in equity method earnings related to Vantiv’s debt refinancing and related termination charges. Excluding the items detailed above, other noninterest income of $81 million increased approximately $14 million from the previous quarter and increased approximately $23 million from the second quarter of 2011.
Net credit-related costs recognized in other noninterest income were $17 million in the second quarter of 2012 versus $14 million last quarter and $28 million in the second quarter of 2011. Second quarter 2012 results included $8 million of net gains on sales of commercial loans held-for-sale and $5 million of fair value charges on commercial loans held-for-sale, as well as $19 million of losses on other real estate owned (OREO). First quarter 2012 results included $5 million of net gains on sales of commercial loans held-for-sale and $1 million of fair value charges on commercial loans held-for-sale, as well as $17 million of losses on OREO. Second quarter 2011 results included net gains of $8 million of net gains on sales of commercial loans held-for-sale, $9 million of fair value charges on commercial loans held-for-sale, and $26 million of losses on OREO.
Net gains on investment securities were $3 million in the second quarter of 2012, compared with investment securities gains of $9 million in the previous quarter and $6 million in the second quarter of 2011.
Noninterest Expense
| For the Three Months Ended | % Change | ||||||||||||||||
| June | March | December | September | June | |||||||||||||
| 2012 | 2012 | 2011 | 2011 | 2011 | Seq | Yr/Yr | |||||||||||
| Noninterest Expense ($ in millions) | |||||||||||||||||
| Salaries, wages and incentives | $393 | $399 | $393 | $369 | $365 | (2 | %) | 8 | % | ||||||||
| Employee benefits | 84 | 112 | 84 | 70 | 79 | (25 | %) | 6 | % | ||||||||
| Net occupancy expense | 74 | 77 | 79 | 75 | 75 | (4 | %) | (1 | %) | ||||||||
| Technology and communications | 48 | 47 | 48 | 48 | 48 | 3 | % | 1 | % | ||||||||
| Equipment expense | 27 | 27 | 27 | 28 | 28 | - | (2 | %) | |||||||||
| Card and processing expense | 30 | 30 | 28 | 34 | 29 | 2 | % | 4 | % | ||||||||
| Other noninterest expense | 281 | 281 | 334 | 322 | 277 | - | 1 | % | |||||||||
| Total noninterest expense | $937 | $973 | $993 | $946 | $901 | (4 | %) | 4 | % | ||||||||
Noninterest expense of $937 million decreased 4 percent from the first quarter of 2012 and increased 4 percent from the second quarter of 2011. Second quarter 2012 expenses included a $9 million reduction to FDIC insurance expense and an $8 million benefit from the sale of affordable housing investments. First quarter 2012 expenses included a $23 million benefit from an agreement reached on certain outstanding disputes for non-income tax related assessments, $13 million in additions to litigation reserves, $9 million in debt termination charges, and $6 million in severance expense. Second quarter 2011 expenses included debt extinguishment gains which reduced other noninterest expense by $6 million. Excluding these items, noninterest expense of $954 million decreased $14 million, or 1 percent, from the first quarter of 2012 largely due to lower employee benefits costs partially offset by increased marketing expense, and increased $47 million, or 5 percent, compared with the second quarter of 2011.
Credit costs related to problem assets recorded as noninterest expense totaled $41 million in the second quarter of 2012, compared with $34 million in the first quarter of 2012 and $36 million in the second quarter of 2011. Second quarter credit-related expenses included provisioning for mortgage repurchases of $18 million, compared with $15 million in the first quarter and $14 million a year ago. (Realized mortgage repurchase losses were $16 million in the second quarter of 2012, compared with $17 million last quarter and $22 million in the second quarter of 2011.) Provision for unfunded commitments was a benefit of $1 million in the current quarter, compared with a benefit of $2 million last quarter and $14 million a year ago. Derivative valuation adjustments related to customer credit risk were a net zero this quarter versus positive $4 million last quarter and $1 million in expense a year ago. OREO expense was $5 million this quarter, compared with $5 million last quarter and $6 million a year ago. Other problem asset-related expenses were $19 million in the second quarter, compared with $19 million the previous quarter and $29 million in the same period last year, with the reduction primarily driven by lower work-out related expenses.
Credit Quality
| For the Three Months Ended | ||||||||||||||||
| June | March | December | September | June | ||||||||||||
| 2012 | 2012 | 2011 | 2011 | 2011 | ||||||||||||
| Total net losses charged off ($ in millions) | ||||||||||||||||
| Commercial and industrial loans | ($46 | ) | ($54 | ) | ($62 | ) | ($55 | ) | ($76 | ) | ||||||
| Commercial mortgage loans | (25 | ) | (30 | ) | (47 | ) | (47 | ) | (47 | ) | ||||||
| Commercial construction loans | - | (18 | ) | (4 | ) | (35 | ) | (20 | ) | |||||||
| Commercial leases | (7 | ) | - | - | 1 | 2 | ||||||||||
| Residential mortgage loans | (36 | ) | (37 | ) | (36 | ) | (36 | ) | (36 | ) | ||||||
| Home equity | (39 | ) | (46 | ) | (50 | ) | (53 | ) | (54 | ) | ||||||
| Automobile loans | (7 | ) | (9 | ) | (13 | ) | (12 | ) | (8 | ) | ||||||
| Credit card | (18 | ) | (20 | ) | (21 | ) | (18 | ) | (28 | ) | ||||||
| Other consumer loans and leases | (3 | ) | (6 | ) | (6 | ) | (7 | ) | (37 | ) | ||||||
| Total net losses charged off | (181 | ) | (220 | ) | (239 | ) | (262 | ) | (304 | ) | ||||||
| Total losses | (219 | ) | (253 | ) | (280 | ) | (294 | ) | (343 | ) | ||||||
| Total recoveries | 38 | 33 | 41 | 32 | 39 | |||||||||||
| Total net losses charged off | ($181 | ) | ($220 | ) | ($239 | ) | ($262 | ) | ($304 | ) | ||||||
| Ratios (annualized) | ||||||||||||||||
| Net losses charged off as a percent of | ||||||||||||||||
| average loans and leases (excluding held for sale) | 0.88 | % | 1.08 | % | 1.19 | % | 1.32 | % | 1.56 | % | ||||||
| Commercial | 0.67 | % | 0.89 | % | 1.00 | % | 1.23 | % | 1.30 | % | ||||||
| Consumer | 1.15 | % | 1.34 | % | 1.43 | % | 1.43 | % | 1.89 | % | ||||||
Net charge-offs were $181 million in the second quarter of 2012, or 88 bps of average loans on an annualized basis, the lowest level since the fourth quarter of 2007. Net charge-offs declined 18 percent compared with first quarter 2012 net charge-offs of $220 million, and declined 40 percent versus second quarter 2011 net charge-offs of $304 million.
Commercial net charge-offs were $78 million, or 67 bps, down $24 million compared with $102 million, or 89 bps, in the first quarter. Commercial net charge-offs were at the lowest level since the fourth quarter of 2007. C&I net losses were $46 million compared with net losses of $54 million in the previous quarter. Commercial mortgage net losses totaled $25 million, compared with net losses of $30 in the previous quarter. There were no commercial construction net losses in the second quarter, compared with net losses of $18 million in the prior quarter. Net losses on residential builder and developer portfolio loans across the C&I and commercial real estate categories totaled $4 million. Originations of homebuilder / developer loans were suspended in 2007 and the remaining portfolio balance is $376 million, down from a peak of $3.3 billion in the second quarter of 2008.
Consumer net charge-offs were $103 million, or 115 bps, down $15 million sequentially. Net charge-offs on residential mortgage loans in the portfolio were $36 million, down $1 million from the previous quarter. Home equity net charge-offs were $39 million, down $7 million from the first quarter. Net losses on brokered home equity loans represented 35 percent of second quarter home equity losses; such loans are 14 percent of the total home equity portfolio. The home equity portfolio included $1.4 billion of brokered loans, down from a peak of $2.6 billion in 2007; originations of these loans were discontinued in 2007. Net charge-offs in the auto portfolio of $7 million decreased $2 million from the prior quarter. Net losses on consumer credit card loans were $18 million, down $2 million from the previous quarter. Net charge-offs in other consumer loans were $3 million, down $3 million from the previous quarter.
| For the Three Months Ended | ||||||||||||||||
| June | March | December | September | June | ||||||||||||
| 2012 | 2012 | 2011 | 2011 | 2011 | ||||||||||||
| Allowance for Credit Losses ($ in millions) | ||||||||||||||||
| Allowance for loan and lease losses, beginning | $2,126 | $2,255 | $2,439 | $2,614 | $2,805 | |||||||||||
| Total net losses charged off | (181 | ) | (220 | ) | (239 | ) | (262 | ) | (304 | ) | ||||||
| Provision for loan and lease losses | 71 | 91 | 55 | 87 | 113 | |||||||||||
| Allowance for loan and lease losses, ending | 2,016 | 2,126 | 2,255 | 2,439 | 2,614 | |||||||||||
| Reserve for unfunded commitments, beginning | 179 | 181 | 187 | 197 | 211 | |||||||||||
| Provision for unfunded commitments | (1 | ) | (2 | ) | (6 | ) | (10 | ) | (14 | ) | ||||||
| Reserve for unfunded commitments, ending | 178 | 179 | 181 | 187 | 197 | |||||||||||
| Components of allowance for credit losses: | ||||||||||||||||
| Allowance for loan and lease losses | 2,016 | 2,126 | 2,255 | 2,439 | 2,614 | |||||||||||
| Reserve for unfunded commitments | 178 | 179 | 181 | 187 | 197 | |||||||||||
| Total allowance for credit losses | $2,194 | $2,305 | $2,436 | $2,626 | $2,811 | |||||||||||
| Allowance for loan and lease losses ratio | ||||||||||||||||
| As a percent of loans and leases | 2.45 | % | 2.59 | % | 2.78 | % | 3.08 | % | 3.35 | % | ||||||
| As a percent of nonperforming loans and leases (a) | 150 | % | 157 | % | 157 | % | 158 | % | 160 | % | ||||||
| As a percent of nonperforming assets (a) | 125 | % | 127 | % | 124 | % | 125 | % | 125 | % | ||||||
| (a) Excludes non accrual loans and leases in loans held for sale | ||||||||||||||||
Provision for loan and lease losses totaled $71 million in the second quarter of 2012, down $20 million from the first quarter of 2012 and down $42 million from the second quarter of 2011. The allowance for loan and lease losses declined $110 million reflecting continued improvement in credit trends. This allowance represented 2.45 percent of total loans and leases outstanding as of quarter end, compared with 2.59 percent last quarter, and represented 150 percent of nonperforming loans and leases, 125 percent of nonperforming assets, and 277 percent of second quarter annualized net charge-offs.
| As of | |||||||||||||||
| June | March | December | September | June | |||||||||||
| Nonperforming Assets and Delinquent Loans ($ in millions) | 2012 | 2012 | 2011 | 2011 | 2011 | ||||||||||
| Nonaccrual portfolio loans and leases: | |||||||||||||||
| Commercial and industrial loans | $377 | $358 | $408 | $449 | $485 | ||||||||||
| Commercial mortgage loans | 357 | 347 | 358 | 353 | 417 | ||||||||||
| Commercial construction loans | 99 | 118 | 123 | 151 | 147 | ||||||||||
| Commercial leases | 3 | 8 | 9 | 13 | 16 | ||||||||||
| Residential mortgage loans | 135 | 135 | 134 | 142 | 145 | ||||||||||
| Home equity | 30 | 26 | 25 | 25 | 26 | ||||||||||
| Automobile loans | 1 | 1 | - | - | 1 | ||||||||||
| Other consumer loans and leases | - | 1 | 1 | 1 | 3 | ||||||||||
| Total nonaccrual loans and leases | $1,002 | $994 | $1,058 | $1,134 | $1,240 | ||||||||||
| Restructured loans and leases - commercial (nonaccrual) | 147 | 157 | 160 | 189 | 188 | ||||||||||
| Restructured loans and leases - consumer (nonaccrual) | 193 | 201 | 220 | 215 | 211 | ||||||||||
| Total nonperforming loans and leases | $1,342 | $1,352 | $1,438 | $1,538 | $1,639 | ||||||||||
| Repossessed personal property | 9 | 8 | 14 | 17 | 15 | ||||||||||
| Other real estate owned (a) | 268 | 313 | 364 | 389 | 434 | ||||||||||
| Total nonperforming assets (b) | $1,619 | $1,673 | $1,816 | $1,944 | $2,088 | ||||||||||
| Nonaccrual loans held for sale | 55 | 110 | 131 | 171 | 147 | ||||||||||
| Restructured loans - commercial (nonaccrual) held for sale | 5 | 7 | 7 | 26 | 29 | ||||||||||
| Total nonperforming assets including loans held for sale | $1,679 | $1,790 | $1,954 | $2,141 | $2,264 | ||||||||||
| Restructured Consumer loans and leases (accrual) |
$1,624 |
$1,624 | $1,612 | $1,601 | $1,593 | ||||||||||
| Restructured Commercial loans and leases (accrual) | $455 | $481 | $390 | $349 | $266 | ||||||||||
| Total loans and leases 90 days past due | $203 | $216 | $200 | $274 | $279 | ||||||||||
| Nonperforming loans and leases as a percent of portfolio loans, leases and other assets, including other real estate owned (b) | 1.62 | % | 1.64 | % | 1.76 | % | 1.93 | % | 2.09 | % | |||||
| Nonperforming assets as a percent of portfolio loans, leases and other assets, including other real estate owned (b) | 1.96 | % | 2.03 | % | 2.23 | % | 2.44 | % | 2.66 | % | |||||
| (a) Excludes government insured advances. | |||||||||||||||
| (b) Does not include nonaccrual loans held-for-sale. | |||||||||||||||
Total nonperforming assets, including loans held-for-sale, were $1.7 billion, a decline of $111 million, or 6 percent, from the previous quarter. Nonperforming assets held-for-investment (NPAs) were $1.6 billion or 1.96 percent of total loans, leases and OREO, and decreased $54 million, or 3 percent, from the previous quarter. Nonperforming loans held-for-investment (NPLs) at quarter end were $1.3 billion or 1.62 percent of total loans, leases and OREO, and decreased $10 million or 1 percent from the first quarter.
Commercial portfolio NPAs were $1.2 billion, or 2.53 percent of commercial loans, leases and OREO, and decreased $43 million, or 3 percent, from the first quarter. Commercial portfolio NPLs were $983 million, or 2.10 percent of commercial loans and leases, and decreased $5 million from last quarter. Commercial mortgage portfolio NPAs were $555 million, down $13 million from the prior quarter. Commercial construction portfolio NPAs were $141 million, a decline of $30 million from the previous quarter. Commercial real estate loans in Michigan and Florida represented 42 percent of commercial real estate NPAs and 37 percent of our total commercial real estate portfolio. C&I portfolio NPAs of $479 million increased $5 million from the previous quarter. Within the overall commercial loan portfolio, residential real estate builder and developer portfolio NPAs of $114 million declined $9 million from the first quarter, of which $45 million were commercial construction assets, $58 million were commercial mortgage assets and $10 million were C&I assets. Commercial portfolio NPAs included $147 million of nonaccrual troubled debt restructurings (TDRs), compared with $157 million last quarter.
Consumer portfolio NPAs of $437 million, or 1.22 percent of consumer loans, leases and OREO, decreased $12 million from the first quarter. Consumer portfolio NPLs were $359 million, or 1.00 percent of consumer loans and leases and decreased $5 million from last quarter. Of consumer NPAs, $385 million were in residential real estate portfolios. Residential mortgage NPAs were $322 million, $9 million lower than last quarter, with Florida representing 46 percent of residential mortgage NPAs and 15 percent of total residential mortgage loans. Home equity NPAs of $64 million were up $1 million compared with last quarter. Credit card NPAs decreased $3 million from the previous quarter to $42 million. Consumer nonaccrual TDRs were $193 million in the second quarter of 2012, compared with $201 million in the first quarter 2012.
Second quarter OREO balances included in portfolio NPA balances described above were $268 million, down $45 million from the first quarter, and included $196 million in commercial OREO and $71 million in consumer OREO. Repossessed personal property of $9 million consisted largely of autos.
Loans still accruing over 90 days past due were $203 million, down $13 million, or 6 percent, from the first quarter of 2012. Commercial balances 90 days past due of $24 million decreased $8 million sequentially. Consumer balances 90 days past due of $179 million were down $5 million from the previous quarter. Loans 30-89 days past due of $370 million increased $3 million, or 1 percent, from the previous quarter. Commercial balances 30-89 days past due of $61 million were down $11 million sequentially and consumer balances 30-89 days past due of $309 million increased $14 million from the first quarter, reflecting seasonality.
At quarter-end, we held $60 million of commercial nonaccrual loans for sale, compared with $117 million at the end of the first quarter. During the quarter we sold approximately $39 million of non-accrual held-for-sale loans; we transferred approximately $3 million of non-accrual commercial loans from the portfolio to loans held-for-sale, and we transferred approximately $4 million of loans from loans held-for-sale to OREO. We recorded negative valuation adjustments of $5 million on held-for-sale loans and recorded net gains of $8 million on loans that were sold or settled during the quarter.
Capital Position
| For the Three Months Ended | ||||||||||||||||
| June | March | December | September | June | ||||||||||||
| 2012 | 2012 | 2011 | 2011 | 2011 | ||||||||||||
| Capital Position | ||||||||||||||||
| Average shareholders' equity to average assets | 11.58 | % | 11.49 | % | 11.41 | % | 11.33 | % | 11.12 | % | ||||||
| Tangible equity (a) | 9.50 | % | 9.37 | % | 9.03 | % | 8.98 | % | 9.01 | % | ||||||
| Tangible common equity (excluding unrealized gains/losses) (a) | 9.15 | % | 9.02 | % | 8.68 | % | 8.63 | % | 8.64 | % | ||||||
| Tangible common equity (including unrealized gains/losses) (a) | 9.49 | % | 9.37 | % | 9.04 | % | 9.04 | % | 8.96 | % | ||||||
| Tangible common equity as a percent of risk-weighted assets (excluding unrealized gains/losses) (a) (b) | 9.84 | % | 9.80 | % | 9.41 | % | 9.39 | % | 9.28 | % | ||||||
|
Regulatory capital ratios: (c) |
||||||||||||||||
| Tier I capital | 12.31 | % | 12.20 | % | 11.91 | % | 11.96 | % | 11.93 | % | ||||||
| Total risk-based capital | 16.24 | % | 16.07 | % | 16.09 | % | 16.25 | % | 16.03 | % | ||||||
| Tier I leverage | 11.39 | % | 11.31 | % | 11.10 | % | 11.08 | % | 11.03 | % | ||||||
| Tier I common equity (a) | 9.77 | % | 9.64 | % | 9.35 | % | 9.33 | % | 9.20 | % | ||||||
| Book value per share | 14.56 | 14.30 | 13.92 | 13.73 | 13.23 | |||||||||||
| Tangible book value per share (a) | 11.89 | 11.64 | 11.25 | 11.05 | 10.55 | |||||||||||
| (a) The tangible equity, tangible common equity, tier I common equity and tangible book value per share ratios, while not required by accounting principles generally accepted in the United States of America (U.S. GAAP), are considered to be critical metrics with which to analyze banks. The ratios have been included herein to facilitate a greater understanding of the Bancorp's capital structure and financial condition. See the Regulation G Non-GAAP Reconciliation table for a reconciliation of these ratios to U.S. GAAP. | ||||||||||||||||
| (b) Under the banking agencies risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together resulting in the Bancorp's total risk weighted assets. | ||||||||||||||||
| (c) Current period regulatory capital data ratios are estimated. | ||||||||||||||||
Capital ratios remained strong during the quarter and reflected growth in retained earnings. Compared with the prior quarter, the Tier 1 common equity ratio* increased 13 bps to 9.77 percent. The tangible common equity to tangible assets ratio* was 9.15 percent (excluding unrealized gains/losses) and 9.49 percent (including unrealized gains/losses). The Tier 1 capital ratio increased 11 bps to 12.31 percent. The Total capital ratio increased 17 bps to 16.24 percent and the Leverage ratio increased 8 bps to 11.39 percent. Capital ratios were reduced during the quarter by approximately 7 bps due to the repurchase of $75 million in common shares.
Book value per share at June 30, 2012 was $14.56 and tangible book value per share* was $11.89, compared with March 31, 2012 book value per share of $14.30 and tangible book value per share of $11.64.
U.S. banking regulators have recently proposed new capital rules for U.S. banks as well as changes to risk-weightings for assets, which implement portions of rules proposed by international banking regulators known as Basel III and Basel II. Fifth Third would be subject to the proposed “standardized approach” for risk-weightings of assets and would be subject to the Market Risk Rule for trading assets and liabilities. These proposals have been presented for public comment. We are currently evaluating these proposals and their potential impact. We fully expect that our current capital ratios, as well as our capital ratios pro forma for changes as currently proposed and as if they were fully phased in today, would substantially exceed new well-capitalized minimums including fully phased-in minimums. Our current capital ratios also substantially exceed current U.S. well-capitalized minimums.
Fifth Third has previously made estimates of its pro forma Tier 1 common ratio, as if the new Basel III rules were implemented into U.S. banking regulations and fully phased in. The estimate of this ratio for the first quarter of 2012 was 10.0 percent. The new capital rules proposed by U.S. banking regulators include changes to both capital definitions and risk-weighted assets. The changes to capital definitions were largely consistent with previous expectations, although they remain subject to comment and final rule-making. The proposed changes to risk-weighted assets had not been previously proposed and do not derive directly from Basel proposed rules for non-“internationally active” banks, such as Fifth Third. As a result, our previous estimates for our pro forma Tier 1 common ratio did not include such changes to risk-weighted assets. While we continue to evaluate these proposals and their potential impact, we believe the proposed rules would increase our risk-weighted assets and would lower our estimated pro forma Tier 1 common ratio relative to our current Tier 1 common ratio of 9.8 percent. As noted, the proposed rules remain subject to public comment, interpretation, and change.
Under the Dodd-Frank Act financial reform legislation, trust preferred securities (“TruPS”) were to be phased out of Tier 1 capital over three years beginning in 2013. The new regulations proposed by U.S. banking regulators also propose to cease Tier 1 capital treatment for outstanding TruPS with a similar phasing period. Fifth Third’s Tier 1 and Total capital levels at June 30, 2012 included $2.2 billion of TruPS, or 2.1 percent of risk weighted assets. On July 9, 2012, Fifth Third announced that it would call the $862.5 million of Capital Trust VI TruPS on August 8, 2012 due to a determination of a Capital Treatment Event. On July 2, 2012, Fifth Third announced that it would call the $575 million of Capital Trust V TruPS on August 15, 2012. The pro forma regulatory capital ratios for Fifth Third as of June 30, 2012, including the impact of Fifth Third’s call of $1.4 billion in TruPS in July of 2012, were as follows: Tier 1 Capital ratio of 11.0%, Total capital ratio of 14.9% and leverage ratio of 10.1%. We will continue to evaluate the role of these types of securities in our capital structure, based on regulatory developments. To the extent these types of securities remain outstanding during and after the phase-in period they would be expected to continue to be included in Total capital, subject to final rule-making for U.S. capital standards.
Fifth Third is one of 31 large U.S. Bank Holding Companies (BHCs) subject to the Federal Reserve’s (FRB) Capital Plans Rule which was issued November 22, 2011, and is also subject to the FRB’s Comprehensive Capital Analysis & Review process for 19 large U.S. BHCs. Under this rule, we are required to submit an annual capital plan to the Federal Reserve, for its objection or non-objection. Fifth Third submitted its capital plan on January 9, 2012, as required. The submitted plan included an evaluation of results under four required macroeconomic scenarios: a baseline and stress scenario determined by the firms, and a baseline and stress scenario provided by the FRB. As required, the plan also included those capital actions Fifth Third intended to pursue or contemplate during the period covered by the FRB’s response, which was for 2012 and the first quarter of 2013. Our plan for the covered period included the possibility that we would increase our common dividend and would initiate common share repurchases, although any such actions would be based on the FRB’s non-objection, environmental conditions, earnings results, our capital position and other factors, as well as approval by the Fifth Third Board of Directors, at the time such actions were considered. On March 13, 2012, the FRB provided a response to Fifth Third that included no objection to Fifth Third’s current common dividend level, plans to repurchase common shares in an amount equal to any after-tax gains on the sale of Vantiv shares, and the potential to redeem $1.4 billion in TruPS, and included an objection to other plans to increase the common dividend and initiate additional common share repurchases. We do not believe that the FRB’s objection was based on our financial condition. In its analysis published on March 13, 2012 of stress scenario results for the 19 CCAR banks, the FRB indicated that Fifth Third’s stressed capital levels would exceed all minimum capital standards, including the assumption that Fifth Third pursued the capital actions it assumed under baseline scenario conditions during and after the covered period subject to Federal Reserve non-objection.
Fifth Third resubmitted its capital plan to the Federal Reserve on June 8, 2012, using updated macroeconomic scenarios as of March 31, 2012. The resubmitted plan included capital actions and distributions for the covered period through March 31, 2013 that were substantially similar to those included in our original submission, with adjustments primarily reflecting the change in the expected timing of capital actions and distributions relative to the timing assumed in our original submission. The Capital Plans Rule provides that the Fed will respond no later than 75 days after re-submission.
During the second quarter we repurchased $75 million of common shares as a result of our realized gains in Vantiv’s IPO and as part of our previously authorized 30 million share repurchase program. In total, 5,470,696 shares were repurchased at an average price of $13.7094. Upon completion of the transaction, Fifth Third has remaining authority to repurchase approximately 14 million shares under its existing share repurchase authorization.
* Non-GAAP measure; See Reg. G reconciliation on page 34 in Exhibit 99.1 of 8-k filing dated 7/19/12
Tax Rate
The effective tax rate was 31.8 percent this quarter compared with 28.6 percent in the first quarter. The higher rate was due to tax expense of $19 million associated with the expiration of employee stock options.
Other
Following Vantiv, LLC’s initial public offering, Fifth Third Bank owns 84 million units representing a 39 percent interest in Vantiv Holding, LLC, formerly Fifth Third Processing Solutions, LLC. This interest is recorded on Fifth Third’s balance sheet as an equity method investment with a book value of approximately $640 million. Based upon Vantiv’s closing price of $23.29 on June 29, 2012, our interest in Vantiv was valued at approximately $2.0 billion. The difference between the market value and our book value is not recognized in Fifth Third’s equity or capital. Additionally, Fifth Third has a warrant to purchase additional shares in Vantiv which is carried as a derivative asset at a fair value of $213 million.
Conference Call
Fifth Third will host a conference call to discuss these financial results at 9:00 a.m. (Eastern Time) today. This conference call will be webcast live by Thomson Financial and may be accessed through the Fifth Third Investor Relations website at www.53.com (click on “About Fifth Third” then “Investor Relations”). The webcast also is being distributed over Thomson Financial’s Investor Distribution Network to both institutional and individual investors. Individual investors can listen to the call through Thomson Financial’s individual investor center at www.earnings.com or by visiting any of the investor sites in Thomson Financial’s Individual Investor Network. Institutional investors can access the call via Thomson Financial’s password-protected event management site, StreetEvents (www.streetevents.com).
Those unable to listen to the live webcast may access a webcast replay through the Fifth Third Investor Relations website at the same web address. Additionally, a telephone replay of the conference call will be available beginning approximately two hours after the conference call until Thursday, August 2 by dialing 800-585-8367 for domestic access and 404-537-3406 for international access (passcode 93003209#).
Corporate Profile
Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. As of June 30, 2012, the Company had $118 billion in assets and operated 15 affiliates with 1,322 full-service Banking Centers, including 105 Bank Mart® locations open seven days a week inside select grocery stores and 2,409 ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, Missouri, Georgia and North Carolina. Fifth Third operates four main businesses: Commercial Banking, Branch Banking, Consumer Lending, and Investment Advisors. Fifth Third also has a 39% interest in Vantiv Holding, LLC, formerly Fifth Third Processing Solutions, LLC. Fifth Third is among the largest money managers in the Midwest and, as of June 30, 2012, had $291 billion in assets under care, of which it managed $25 billion for individuals, corporations and not-for-profit organizations. Investor information and press releases can be viewed at www.53.com. Fifth Third’s common stock is traded on the NASDAQ® National Global Select Market under the symbol “FITB.”
Forward-Looking Statements
This news release 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 Third’s ability to maintain required capital levels and adequate sources of funding and liquidity; (7) maintaining capital requirements may limit Fifth Third’s operations and potential growth; (8) changes and trends in capital markets; (9) problems encountered by larger or similar financial institutions may adversely affect the banking industry and/or Fifth Third; (10) competitive pressures among depository institutions increase significantly; (11) effects of critical accounting policies and judgments; (12) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (FASB) or other regulatory agencies; (13) legislative or regulatory changes or actions, or significant litigation, adversely affect Fifth Third, one or more acquired entities and/or the combined company or the businesses in which Fifth Third, one or more acquired entities and/or the combined company are engaged, including the Dodd-Frank Wall Street Reform and Consumer Protection Act; (14) ability to maintain favorable ratings from rating agencies; (15) fluctuation of Fifth Third’s stock price; (16) ability to attract and retain key personnel; (17) ability to receive dividends from its subsidiaries; (18) potentially dilutive effect of future acquisitions on current shareholders’ ownership of Fifth Third; (19) effects of accounting or financial results of one or more acquired entities; (20) difficulties from the separation of Vantiv, LLC, formerly Fifth Third Processing Solutions from Fifth Third; (21) loss of income from any sale or potential sale of businesses that could have an adverse effect on Fifth Third’s earnings and future growth; (22) ability to secure confidential information 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.
You should refer to our periodic and current reports filed with the Securities and Exchange Commission, or “SEC,” for further information on other factors, which could cause actual results to be significantly different from those expressed or implied by these forward-looking statements.