01—Abstract
Summary
Summary of the 10-K filed February 28, 2011. Cited figures are marked; the original filing is the authoritative source.
Fifth Third Bancorp (FITB) closed 2010 with net income of $753 milliona, or $503 million ($0.63 per diluted share) available to common shareholders after $250 million of preferred dividends, compared with $737 million in 2009.
Results were shaped by large one-time items: the 2009 year included a $1.8 billionb pre-tax gain from the sale of a majority stake in its processing business, while 2010 benefited from a $152 million BOLI litigation settlement. Credit trends improved meaningfully: the provision for loan and lease losses fell to $1.5 billion from $3.5 billion, net charge-offs were 3.02% of average loans, and nonperforming assets fell to 2.79% of loans, leases and other assets (excluding held-for-sale nonaccruals) from 4.22%. Net interest margin widened to 3.66% from 3.32%, and the efficiency ratio rose to 60.7% from 46.9%, largely because 2009 was flattered by the gain.
The filing's most important forward-looking element is capital. Tier I common equity was 7.50% at year-end 2010, and in January 2011 Fifth Third raised $1.7 billionc in common equity at $14.00 per share and issued $1.0 billion of 3.625% senior notes due 2016. On February 2, 2011, it redeemed all $3.4 billion of its TARP Series F preferred stock, which will produce a one-time, noncash reduction of $153 million to net income available to common shareholders in the first quarter of 2011.
Management also flagged that the Dodd-Frank Act is expected to have a substantial and likely adverse impact on earnings, that trust preferred securities will be phased out of Tier I capital starting in 2013, and that Moody's downgraded Fifth Third Bank's ratings in November 2010. For investors, the story is a recovering credit cycle and a rebuilt capital base, offset by revenue pressure from regulation (overdraft rules under Regulation E, debit interchange limits, and the new CFPB) and by a noninterest income base that fell 43% in 2010 as the processing business was sold. The dividend remained at $0.04d per share for both years, and the $0.15 quarterly common dividend cap tied to TARP was in effect until the Series F redemption.
02—Key points
Key Highlights
- Net income attributable to Bancorp of $753 million in 2010, up slightly from $737 million in 2009; EPS of $0.63 diluted vs. $0.67 in 2009 (2009 included a $1.8 billion pre-tax gain on the Processing Business Sale).
- Provision for loan and lease losses fell 57% to $1.5 billion from $3.5 billion; net charge-offs were 3.02% of average loans vs. 3.20% in 2009, and the ALLL was 3.88% of loans vs. 4.88%.
- Net interest margin expanded 34 bp to 3.66%, driven by lower-cost deposit mix and improved commercial loan pricing; net interest income rose 7% to $3.6 billion.
- Noninterest income fell 43% to $2.7 billion, reflecting the 2009 processing sale; mortgage banking net revenue rose to $647 million and investment advisory revenue increased 11%.
- Capital strengthened: Tier I common equity ratio of 7.50% at year-end 2010, and a $1.7 billion common stock offering plus $1.0 billion senior notes in January 2011 funded the $3.4 billion TARP Series F preferred redemption on February 2, 2011.
- Management expects Dodd-Frank Act implementation to have a substantial impact, with possible adverse effects on financial performance; Moody's downgraded Fifth Third Bank's senior debt to A3 in November 2010.
- Quarterly earnings improved through 2010, with Q4 2010 net income available to common shareholders of $270 million ($0.33 diluted) vs. a $160 million loss in Q4 2009.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 28, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Interest Expense | $885.00M$1.31B | −32.6% |
| Net Income | $753.00M$737.00M | +2.2% |
| EPS (Basic) | $0.63$0.73 | −13.7% |
| EPS (Diluted) | $0.63$0.67 | −6.0% |
| Shares Outstanding (Basic) | 790.85M696 | +113628087.5% |
| Shares Outstanding (Diluted) | 799.38M726 | +110107496.8% |
05—Questions
Frequently Asked Questions
Why did Fifth Third's 2010 earnings per share look flat when net income was roughly unchanged from 2009?
Preferred dividends rose to $250 million from $226 million, and the 2009 result was dominated by a $1.8 billion pre-tax gain on the sale of a majority interest in its processing business. Net income available to common shareholders was $503 million, or $0.63 per diluted share, versus $511 million, or $0.67, in 2009. Excluding one-time items, underlying core earnings improved considerably, driven by lower provision expense and a wider margin.
How much has credit quality improved, and what is the remaining exposure?
Nonperforming assets fell to 2.79% of loans, leases and other assets from 4.22% (excluding held-for-sale nonaccrual loans), and total nonperforming assets were $2.5 billion versus $3.5 billion. Net charge-offs were $2.3 billion for 2010. Commercial real estate, homebuilder and non-owner occupied CRE loans, along with residential mortgage and home equity exposures in Michigan and Florida, remain the main pressure points, with redefault rates on restructured residential mortgages at 27%.
What does the redemption of the TARP preferred stock mean for shareholders?
Fifth Third redeemed all $3.4 billion of Series F preferred stock held by the U.S. Treasury on February 2, 2011, funded by common equity and senior notes. This removes the TARP restrictions on common dividends and buybacks, which had limited common dividends to $0.15 per quarter and required Treasury consent for increases. The company will record a one-time, noncash $153 million reduction to net income available to common shareholders in Q1 2011 from accelerating the preferred discount accretion, and it has notified Treasury of its intent to negotiate the purchase of the warrants.
What are the main regulatory risks highlighted in the filing?
The Dodd-Frank Act is expected to have a substantial impact, including enhanced oversight for banks with $50 billion or more in assets, phase-out of trust preferred securities as Tier I capital starting in 2013, restrictions on debit card interchange revenue, new consumer protection rules through the Bureau of Consumer Financial Protection, and higher FDIC assessments. Overdraft regulation (Regulation E) already reduced service charges on deposits by $58 million in 2010. The SEC is also investigating accounting and reporting matters involving certain commercial loans, which could lead to an enforcement proceeding.
What is the outlook for net interest income and FDIC costs in 2011?
Management expects approximately $41 million of additional net interest income in 2011 from accretion of purchase accounting adjustments on loans and deposits acquired in 2008, down from $68 million in 2010. It also anticipates a decline in FDIC insurance expense for 2011 compared with 2010, following the FDIC's final assessment rule adopted February 7, 2011, which changes the assessment base to total assets for large institutions effective April 1, 2011.
06—Continue