2011 ANNUAL REPORT
FINANCIAL CONTENTS
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Managements Assessment as to the Effectiveness of Internal Control over Financial Reporting |
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Financial Statements |
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Notes to Consolidated Financial Statements |
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Loans with Deteriorated Credit Quality Acquired in a Transfer |
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Sales of Residential Mortgage Receivables and Mortgage Servicing Rights |
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FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements about Fifth Third Bancorp and/or the company as combined acquired entities 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, that involve inherent risks and uncertainties. This report may contain certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Fifth Third Bancorp and/or the combined company including statements preceded by, followed by or that include the words or phrases 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. 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 Thirds ability to maintain required capital levels and adequate sources of funding and liquidity; (7) maintaining capital requirements may limit Fifth Thirds 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 (Dodd-Frank Act); (14) ability to maintain favorable ratings from rating agencies; (15) fluctuation of Fifth Thirds 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 Holding, LLC from Fifth Third; (21) loss of income from any sale or potential sale of businesses that could have an adverse effect on Fifth Thirds 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.
Fifth Third Bancorp provides the following list of acronyms as a tool for the reader. The acronyms identified below are used in Managements Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and in the Notes to Consolidated Financial Statements.
ALCO: Asset Liability Management Committee ALLL: Allowance for Loan and Lease Losses ARM: Adjustable Rate Mortgage ATM: Automated Teller Machine BOLI: Bank Owned Life Insurance bps: Basis points CCAR: Comprehensive Capital Analysis and Review CDC: Fifth Third Community Development Corporation CFPB: United States Consumer Financial Protection Bureau C&I: Commercial and Industrial CPP: Capital Purchase Program CRA: Community Reinvestment Act DCF: Discounted Cash Flow DDAs: Demand Deposit Accounts DIF: Deposit Insurance Fund ERISA: Employee Retirement Income Security Act ERM: Enterprise Risk Management ERMC: Enterprise Risk Management Committee EVE: Economic Value of Equity FASB: Financial Accounting Standards Board FDIC: Federal Deposit Insurance Corporation FHLB: Federal Home Loan Bank FHLMC: Federal Home Loan Mortgage Corporation FICO: Fair Isaac Corporation (credit rating) FNMA: Federal National Mortgage Association FRB: Federal Reserve Bank FTAM: Fifth Third Asset Management, Inc. FTE: Fully Taxable Equivalent FTP: Funds Transfer Pricing FTPS: Fifth Third Processing Solutions, now Vantiv Holding, LLC FTS: Fifth Third Securities GNMA: Government National Mortgage Association |
GSE: Government Sponsored Enterprise IFRS: International Financial Reporting Standards IPO: Initial Public Offering IRC: Internal Revenue Code IRS: Internal Revenue Service LIBOR: London InterBank Offered Rate LLC: Limited Liability Company LTV: Loan-to-Value MD&A: Managements Discussion and Analysis of Financial Condition and Results of Operations MSR: Mortgage Servicing Right NII: Net Interest Income NM: Not Meaningful NYSE: New York Stock Exchange OCI: Other Comprehensive Income OREO: Other Real Estate Owned OTTI: Other-Than-Temporary Impairment PMI: Private Mortgage Insurance RSAs: Restricted Stock Awards SARs: Stock Appreciation Rights SEC: United States Securities and Exchange Commission SCAP: Supervisory Capital Assessment Program TARP: Troubled Asset Relief Program TBA: To Be Announced TDR: Troubled Debt Restructuring TLGP: Temporary Liquidity Guarantee Program TSA: Transition Service Agreement U.S. GAAP: Accounting principles generally accepted in the United States of America VIE: Variable Interest Entity VRDN: Variable Rate Demand Note |
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Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is MD&A of certain significant factors that have affected Fifth Third Bancorps (the Bancorp or Fifth Third) financial condition and results of operations during the periods included in the Consolidated Financial Statements, which are a part of this filing. Reference to the Bancorp incorporates the parent holding company and all consolidated subsidiaries.
TABLE 1: SELECTED FINANCIAL DATA
For the years ended December 31 ($ in millions, except for per share data) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Income Statement Data |
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Net interest income (a) |
$ | 3,575 | 3,622 | 3,373 | 3,536 | 3,033 | ||||||||||||||
Noninterest income |
2,455 | 2,729 | 4,782 | 2,946 | 2,467 | |||||||||||||||
Total revenue (a) |
6,030 | 6,351 | 8,155 | 6,482 | 5,500 | |||||||||||||||
Provision for loan and lease losses |
423 | 1,538 | 3,543 | 4,560 | 628 | |||||||||||||||
Noninterest expense |
3,758 | 3,855 | 3,826 | 4,564 | 3,311 | |||||||||||||||
Net income (loss) attributable to Bancorp |
1,297 | 753 | 737 | (2,113 | ) | 1,076 | ||||||||||||||
Net income (loss) available to common shareholders |
1,094 | 503 | 511 | (2,180 | ) | 1,075 | ||||||||||||||
Common Share Data |
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Earnings per share, basic |
$ | 1.20 | 0.63 | 0.73 | (3.91 | ) | 1.99 | |||||||||||||
Earnings per share, diluted |
1.18 | 0.63 | 0.67 | (3.91 | ) | 1.98 | ||||||||||||||
Cash dividends per common share |
0.28 | 0.04 | 0.04 | 0.75 | 1.70 | |||||||||||||||
Book value per share |
13.92 | 13.06 | 12.44 | 13.57 | 17.18 | |||||||||||||||
Market value per share |
12.72 | 14.68 | 9.75 | 8.26 | 25.13 | |||||||||||||||
Financial Ratios (%) |
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Return on assets |
1.15 | % | 0.67 | 0.64 | (1.85 | ) | 1.05 | |||||||||||||
Return on average common equity |
9.0 | 5.0 | 5.6 | (23.0 | ) | 11.2 | ||||||||||||||
Dividend payout ratio |
23.3 | 6.3 | 5.5 | NM | 85.4 | |||||||||||||||
Average equity as a percent of average assets |
11.41 | 12.22 | 11.36 | 8.78 | 9.35 | |||||||||||||||
Tangible common equity (b) |
8.68 | 7.04 | 6.45 | 4.23 | 6.14 | |||||||||||||||
Net interest margin (a) |
3.66 | 3.66 | 3.32 | 3.54 | 3.36 | |||||||||||||||
Efficiency (a) |
62.3 | 60.7 | 46.9 | 70.4 | 60.2 | |||||||||||||||
Credit Quality |
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Net losses charged off |
$ | 1,172 | 2,328 | 2,581 | 2,710 | 462 | ||||||||||||||
Net losses charged off as a percent of average loans and leases |
1.49 | % | 3.02 | 3.20 | 3.23 | 0.61 | ||||||||||||||
ALLL as a percent of loans and leases |
2.78 | 3.88 | 4.88 | 3.31 | 1.17 | |||||||||||||||
Allowance for credit losses as a percent of loans and leases (c) |
3.01 | 4.17 | 5.27 | 3.54 | 1.29 | |||||||||||||||
Nonperforming assets as a percent of loans, leases and other assets, including other real estate owned (d) (e) |
2.23 | 2.79 | 4.22 | 2.38 | 1.25 | |||||||||||||||
Average Balances |
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Loans and leases, including held for sale |
$ | 80,214 | 79,232 | 83,391 | 85,835 | 78,348 | ||||||||||||||
Total securities and other short-term investments |
17,468 | 19,699 | 18,135 | 14,045 | 12,034 | |||||||||||||||
Total assets |
112,666 | 112,434 | 114,856 | 114,296 | 102,477 | |||||||||||||||
Transaction deposits (f) |
72,392 | 65,662 | 55,235 | 52,680 | 50,987 | |||||||||||||||
Core deposits (g) |
78,652 | 76,188 | 69,338 | 63,815 | 61,765 | |||||||||||||||
Wholesale funding (h) |
16,939 | 18,917 | 28,539 | 36,261 | 27,254 | |||||||||||||||
Bancorp shareholders equity |
12,851 | 13,737 | 13,053 | 10,038 | 9,583 | |||||||||||||||
Regulatory Capital Ratios (%) |
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Tier I capital |
11.91 | % | 13.89 | 13.30 | 10.59 | 7.72 | ||||||||||||||
Total risk-based capital |
16.09 | 18.08 | 17.48 | 14.78 | 10.16 | |||||||||||||||
Tier I leverage |
11.10 | 12.79 | 12.34 | 10.27 | 8.50 | |||||||||||||||
Tier I common equity (b) |
9.35 | 7.48 | 6.99 | 4.37 | 5.72 |
(a) | Amounts presented on an FTE basis. The FTE adjustment for years ended December 31, 2011, 2010, 2009, 2008, and 2007 were $18, $18, $19, $22 and $24, respectively. |
(b) | The return on average tangible common equity, tangible common equity and Tier I common equity ratios are non-GAAP measures. For further information, see the Non-GAAP Financial Measures section of the MD&A. |
(c) | The allowance for credit losses is the sum of the ALLL and the reserve for unfunded commitments. |
(d) | Excludes nonaccrual loans held for sale. |
(e) | The Bancorp modified its nonaccrual policy in 2009 to exclude consumer TDR loans less than 90 days past due as they were performing in accordance with restructuring terms. For comparability purposes, prior periods were adjusted to reflect this reclassification. |
(f) | Includes demand, interest checking, savings, money market and foreign office deposits. |
(g) | Includes transaction deposits plus other time deposits. |
(h) | Includes certificates $100,000 and over, other deposits, federal funds purchased, short-term borrowings and long-term debt. |
Fifth Third Bancorp |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 2: QUARTERLY INFORMATION (unaudited)
2011 | 2010 | |||||||||||||||||||||||||||||||
For the three months ended ($ in millions, except per share data) | 12/31 | 9/30 | 6/30 | 3/31 | 12/31 | 9/30 | 6/30 | 3/31 | ||||||||||||||||||||||||
Net interest income (FTE) |
$ | 920 | 902 | 869 | 884 | 919 | 916 | 887 | 901 | |||||||||||||||||||||||
Provision for loan and lease losses |
55 | 87 | 113 | 168 | 166 | 457 | 325 | 590 | ||||||||||||||||||||||||
Noninterest income |
550 | 665 | 656 | 584 | 656 | 827 | 620 | 627 | ||||||||||||||||||||||||
Noninterest expense |
993 | 946 | 901 | 918 | 987 | 979 | 935 | 956 | ||||||||||||||||||||||||
Net income (loss) attributable to Bancorp |
314 | 381 | 337 | 265 | 333 | 238 | 192 | (10 | ) | |||||||||||||||||||||||
Net income (loss) available to common shareholders |
305 | 373 | 328 | 88 | 270 | 175 | 130 | (72 | ) | |||||||||||||||||||||||
Earnings per share, basic |
0.33 | 0.41 | 0.36 | 0.10 | 0.34 | 0.22 | 0.16 | (0.09 | ) | |||||||||||||||||||||||
Earnings per share, diluted |
0.33 | 0.40 | 0.35 | 0.10 | 0.33 | 0.22 | 0.16 | (0.09 | ) |
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Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. At December 31, 2011, the Bancorp had $117 billion in assets, operated 15 affiliates with 1,316 full-service Banking Centers, including 104 Bank Mart ® locations open seven days a week inside select grocery stores, and 2,425 ATMs in 12 states throughout the Midwestern and Southeastern regions of the United States. The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors. The Bancorp also has a 49% interest in Vantiv Holding, LLC, formerly Fifth Third Processing Solutions, LLC.
This overview of MD&A highlights selected information in the financial results of the Bancorp and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting policies and estimates, you should carefully read this entire document. Each of these items could have an impact on the Bancorps financial condition, results of operations and cash flows. In addition, see the Glossary of Terms in this report for a list of acronyms included as a tool for the reader of this annual report on Form 10-K. The acronyms identified therein are used throughout this MD&A, as well as the Consolidated Financial Statements and Notes to Consolidated Financial Statements.
The Bancorp believes that banking is first and foremost a relationship business where the strength of the competition and challenges for growth can vary in every market. The Bancorp believes its affiliate operating model provides a competitive advantage by emphasizing individual relationships. Through its affiliate operating model, individual managers at all levels within the affiliates are given the opportunity to tailor financial solutions for their customers.
The Bancorps revenues are dependent on both net interest income and noninterest income. For the year ended December 31, 2011, net interest income, on a FTE basis, and noninterest income provided 59% and 41% of total revenue, respectively. The Bancorp derives the majority of its revenues within the United States from customers domiciled in the United States. Revenue from foreign countries and external customers domiciled in foreign countries is immaterial to the Bancorps Consolidated Financial Statements. Changes in interest rates, credit quality, economic trends and the capital markets are primary factors that drive the performance of the Bancorp. As discussed later in the Risk Management section, risk identification, measurement, monitoring, control and reporting are important to the management of risk and to the financial performance and capital strength of the Bancorp.
Net interest income is the difference between interest income earned on assets such as loans, leases and securities, and interest expense incurred on liabilities such as deposits, short-term borrowings and long-term debt. Net interest income is affected by the general level of interest rates, the relative level of short-term and long-term interest rates, changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Generally, the rates of interest the Bancorp earns on its assets and pays on its liabilities are established for a period of time. The change in market interest rates over time exposes the Bancorp to interest rate risk through potential adverse changes to net interest income and financial position. The Bancorp manages this risk by continually analyzing and adjusting the composition of its assets and liabilities based on their payment streams and interest rates, the timing of their maturities and their sensitivity to changes in market interest rates. Additionally, in the ordinary course of business, the Bancorp enters into certain derivative transactions as part of its overall strategy to manage its interest rate and prepayment risks. The Bancorp is also exposed to the risk of losses on its loan and lease portfolio, as a result of changing expected cash flows caused by loan defaults and inadequate collateral due to a weakened economy within the Bancorps footprint.
Net interest income, net interest margin and the efficiency ratio are presented in MD&A on a FTE basis. The FTE basis adjusts for the tax-favored status of income from certain loans and securities held by the Bancorp that are not taxable for federal income tax purposes. The Bancorp believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison between taxable and non-taxable amounts.
Noninterest income is derived primarily from mortgage banking net revenue, service charges on deposits, corporate banking revenue, investment advisory revenue and card and processing revenue. Noninterest expense is primarily driven by personnel costs, occupancy expenses, costs incurred in the origination of loans and leases and insurance premiums paid to the FDIC.
Common Stock and Senior Notes Offerings
On January 25, 2011, the Bancorp raised $1.7 billion in new common equity through the issuance of 121,428,572 shares of common stock in an underwritten offering at an initial price of $14.00 per share. On January 24, 2011, the underwriters exercised their option to purchase an additional 12,142,857 shares at the offering price of $14.00 per share. In connection with this exercise, the Bancorp entered into a forward sale agreement which resulted in a final net payment of 959,821 shares on February 4, 2011.
On January 25, 2011, the Bancorp issued $1.0 billion of Senior notes to third party investors, and entered into a Supplemental Indenture dated January 25, 2011 with Wilmington Trust Company, as Trustee, which modifies the existing Indenture for Senior Debt Securities dated April 30, 2008 between the Bancorp and the Trustee. The Supplemental Indenture and the Indenture define the rights of the Senior notes, which Senior notes are represented by Global Securities dated as of January 25, 2011. The Senior notes bear a fixed rate of interest of 3.625% per annum. The notes are unsecured, senior obligations of the Bancorp. Payment of the full principal amount of the notes will be due upon maturity on January 25, 2016. The notes will not be subject to the redemption at the Bancorps option at any time prior to maturity.
Repurchase of Outstanding TARP Preferred Stock
As further discussed in Note 23 of the Notes to Consolidated Financial Statements, on December 31, 2008, the Bancorp issued $3.4 billion of Fixed Rate Cumulative Perpetual Preferred Stock, Series F, and related warrants to the U.S. Treasury under the U.S. Treasurys CPP.
On February 2, 2011, the Bancorp redeemed all 136,320 shares of its Series F Preferred Stock held by the U.S. Treasury. As discussed above, the net proceeds from the Bancorps January 2011 common stock and senior notes offerings and other funds were used to redeem the $3.4 billion of Series F Preferred Stock.
In connection with the redemption of the Series F preferred Stock, the Bancorp accelerated the accretion of the remaining issuance discount on the Series F Preferred Stock and recorded a corresponding reduction in retained earnings of $153 million. This resulted in a one-time, noncash reduction in net income available to common shareholders and related basic and diluted earnings per share. Dividends of $15 million were paid on February 2, 2011 when the Series F Preferred Stock was redeemed. The Bancorp paid total dividends of $356 million to the U.S. Treasury while the Series F Preferred Stock was outstanding.
On March 16, 2011, the Bancorp repurchased the warrant issued to the U.S. Treasury in connection with the CPP preferred stock investment at an agreed upon price of $280 million, which was recorded as a reduction to capital surplus in the Bancorps Consolidated Financial Statements. The warrant gave the U.S. Treasury the right to purchase 43,617,747 shares of the Bancorps common stock at $11.72 per share.
Fifth Third Bancorp |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Redemption of Trust Preferred Securities
On March 18, 2011, the Bancorp announced that the FRB did not object to the Bancorps capital plan submitted under the FRBs 2011 CCAR. Pursuant to this plan, during the second quarter of 2011 the Bancorp redeemed certain trust preferred securities, totalling $452 million, which related to the Fifth Third Capital Trust VII, First National Bankshares Statutory Trust I and R&G Capital Trust II, LLT. During the third quarter of 2011, pursuant to the previously mentioned plan, the Bancorp redeemed certain trust preferred securities, totalling $40 million, which related to the R&G Crown Cap Trust IV and First National Bankshares Statutory Trust II. During the fourth quarter of 2011, pursuant to the previously mentioned plan, the Bancorp redeemed certain trust preferred securities, totalling $25 million, which related to the RG Crown Cap Trust I. As a result of these redemptions, the Bancorp recorded a $7 million gain on the extinguishment of this debt within other noninterest expense in the Bancorps Consolidated Statements of Income.
Legislative Developments
On July 21, 2010, the Dodd-Frank Act was signed into law. This act implements changes to the financial services industry and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The legislation establishes a CFPB responsible for implementing and enforcing compliance with consumer financial laws, changes the methodology for determining deposit insurance assessments, gives the FRB the ability to regulate and limit interchange rates charged to merchants for
the use of debit cards, enacts new limitations on proprietary trading, broadens the scope of derivative instruments subject to regulation, requires on-going stress tests and the submission of annual capital plans for certain organizations and requires changes to regulatory capital ratios. This act also calls for federal regulatory agencies to conduct multiple studies over the next several years in order to implement its provisions.
The Bancorp was impacted by a number of the components of the Dodd-Frank Act which were implemented during 2011. The CFPB began operations on July 21, 2011. The CFPB holds primary responsibility for regulating consumer protection by enforcing existing consumer laws, writing new consumer legislation, conducting bank examinations, monitoring and reporting on markets, as well as collecting and tracking consumer complaints. The FRB final rule implementing the Dodd-Frank Acts Durbin Amendment, which limits debit card interchange fees, was issued on July 21, 2011 for transactions occurring after September 30, 2011. The final rule establishes a cap on the fees banks with more than $10 billion in assets can charge merchants for debit card transactions. The fee was set at $.21 per transaction plus an additional 5 bps of the transaction amount and $.01 to cover fraud losses. The FRB repealed Regulation Q as mandated by the Dodd-Frank Act on July 21, 2011. Regulation Q was implemented as part of the Glass-Steagall Act in the 1930s and provided a prohibition against the payment of interest on demand deposits. While the total impact of the Dodd-Frank Act on Fifth Third is not currently known, the impact is expected to be substantial and may have an adverse impact on Fifth Thirds financial performance and growth opportunities.
TABLE 3: CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ in millions, except per share data) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Interest income (FTE) |
$ | 4,236 | 4,507 | 4,687 | 5,630 | 6,051 | ||||||||||||||
Interest expense |
661 | 885 | 1,314 | 2,094 | 3,018 | |||||||||||||||
Net interest income (FTE) |
3,575 | 3,622 | 3,373 | 3,536 | 3,033 | |||||||||||||||
Provision for loan and lease losses |
423 | 1,538 | 3,543 | 4,560 | 628 | |||||||||||||||
Net interest income (loss) after provision for loan and lease losses (FTE) |
3,152 | 2,084 | (170 | ) | (1,024 | ) | 2,405 | |||||||||||||
Noninterest income |
2,455 | 2,729 | 4,782 | 2,946 | 2,467 | |||||||||||||||
Noninterest expense |
3,758 | 3,855 | 3,826 | 4,564 | 3,311 | |||||||||||||||
Income (loss) before income taxes (FTE) |
1,849 | 958 | 786 | (2,642 | ) | 1,561 | ||||||||||||||
Fully taxable equivalent adjustment |
18 | 18 | 19 | 22 | 24 | |||||||||||||||
Applicable income tax expense (benefit) |
533 | 187 | 30 | (551 | ) | 461 | ||||||||||||||
Net income (loss) |
1,298 | 753 | 737 | (2,113 | ) | 1,076 | ||||||||||||||
Less: Net income attributable to noncontrolling interests |
1 | | | | | |||||||||||||||
Net income (loss) attributable to Bancorp |
1,297 | 753 | 737 | (2,113 | ) | 1,076 | ||||||||||||||
Dividends on preferred stock |
203 | 250 | 226 | 67 | 1 | |||||||||||||||
Net income (loss) available to common shareholders |
$ | 1,094 | 503 | 511 | (2,180 | ) | 1,075 | |||||||||||||
Earnings per share |
$ | 1.20 | 0.63 | 0.73 | (3.91 | ) | 1.99 | |||||||||||||
Earnings per diluted share |
1.18 | 0.63 | 0.67 | (3.91 | ) | 1.98 | ||||||||||||||
Cash dividends declared per common share |
$ | 0.28 | 0.04 | 0.04 | 0.75 | 1.70 |
Earnings Summary
The Bancorps net income available to common shareholders for the year ended December 31, 2011 was $1.1 billion, or $1.18 per diluted share, which was net of $203 million in preferred stock dividends. The Bancorps net income available to common shareholders for the year ended December 31, 2010 was $503 million, or $0.63 per diluted share, which was net of $250 million in preferred stock dividends. The preferred stock dividends during 2011 included $153 million in discount accretion resulting from the Bancorps repurchase of Series F preferred stock.
Net interest income was $3.6 billion for the years ended December 31, 2011 and 2010. Net interest income in 2011 compared to the prior year was impacted by a 22 bps decrease in average yield on average interest earning assets offset by a 25 bps decrease in the average rate paid on interest bearing liabilities and a $3.2 billion decrease in average interest bearing liabilities, coupled with a mix shift to lower cost deposits. Net interest margin was 3.66% for the years ended December 31, 2011 and 2010.
Noninterest income decreased $274 million, or 10%, in 2011 compared to 2010 primarily as the result of $152 million litigation settlement related to one of the Bancorps BOLI policies during the third quarter of 2010, a $54 million decrease in service charges on deposits primarily due to the impact of Regulation E and a $50 million decrease in mortgage banking net revenue primarily as the result of a decrease in origination fees and a decrease in gains on loan sales partially offset by an increase in net servicing revenue.
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Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest expense decreased $97 million, or three percent, in 2011 compared to 2010 primarily due to a decrease of $59 million in the provision for representation and warranty claims related to residential mortgage loans sold to third parties; a decrease of $41 million in FDIC insurance and other taxes, a $22 million decrease from the change in the provision for unfunded commitments and letters of credit, a $21 million decrease in intangible asset amortization and a $19 million decrease in professional service fees. This activity was partially offset by a $64 million increase in total personnel costs (salaries, wages and incentives plus employee benefits).
Credit Summary
The Bancorp does not originate subprime mortgage loans and does not hold asset-backed securities backed by subprime mortgage loans in its securities portfolio. However, the Bancorp has exposure to disruptions in the capital markets and weakened economic conditions. Throughout 2010 and 2011, the Bancorp continued to be affected by high unemployment rates,
weakened housing markets, particularly in the upper Midwest and Florida, and a challenging credit environment. Credit trends have improved, and as a result, the provision for loan and lease losses decreased to $423 million in 2011 compared to $1.5 billion in 2010. In addition, net charge-offs as a percent of average loans and leases decreased to 1.49% during 2011 compared to 3.02% during 2010. At December 31, 2011, nonperforming assets as a percent of loans, leases and other assets, including OREO (excluding nonaccrual loans held for sale) decreased to 2.23%, compared to 2.79% at December 31, 2010. For further discussion on credit quality, see the Credit Risk Management section in MD&A.
Capital Summary
The Bancorps capital ratios exceed the well-capitalized guidelines as defined by the Board of Governors of the Federal Reserve System. As of December 31, 2011, the Tier I capital ratio was 11.91%, the Tier I leverage ratio was 11.10% and the total risk-based capital ratio was 16.09%.
Fifth Third Bancorp |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Bancorp considers various measures when evaluating capital utilization and adequacy, including the tangible equity ratio, tangible common equity ratio and Tier I common equity ratio, in addition to capital ratios defined by banking regulators. These calculations are intended to complement the capital ratios defined by banking regulators for both absolute and comparative purposes. Because U.S. GAAP does not include capital ratio measures, the Bancorp believes there are no comparable U.S. GAAP financial measures to these ratios. These ratios are not formally defined by U.S. GAAP or codified in the federal banking regulations and, therefore, are considered to be non-GAAP financial measures. Since analysts and banking regulators may assess the Bancorps capital adequacy using these ratios, the Bancorp believes they are useful to provide investors the ability to assess its capital adequacy on the same basis.
The Bancorp believes these non-GAAP measures are important because they reflect the level of capital available to
withstand unexpected market conditions. Additionally, presentation of these measures allows readers to compare certain aspects of the Bancorps capitalization to other organizations. However, because there are no standardized definitions for these ratios, the Bancorps calculations may not be comparable with other organizations, and the usefulness of these measures to investors may be limited. As a result, the Bancorp encourages readers to consider its Consolidated Financial Statements in their entirety and not to rely on any single financial measure.
Pre-provision net revenue is net interest income plus noninterest income minus noninterest expense and taxable equivalent adjustment. The Bancorp believes this measure is important because it provides a ready view of the Bancorps earnings before the impact of provision expense.
The following table reconciles non-GAAP financial measures to U.S. GAAP as of December 31:
TABLE 4: NON-GAAP FINANCIAL MEASURES
($ in millions) | 2011 | 2010 | ||||||
Income before income taxes (U.S. GAAP) |
$ | 1,831 | 940 | |||||
Add: Provision expense (U.S. GAAP) |
423 | 1,538 | ||||||
Pre-provision net revenue |
2,254 | 2,478 | ||||||
Net income available to common shareholders (U.S. GAAP) |
$ | 1,094 | 503 | |||||
Add: Intangible amortization, net of tax |
15 | 29 | ||||||
Tangible net income available to common shareholders |
1,109 | 532 | ||||||
Total Bancorp shareholders equity (U.S. GAAP) |
$ | 13,201 | 14,051 | |||||
Less: Preferred stock |
(398 | ) | (3,654 | ) | ||||
Goodwill |
(2,417 | ) | (2,417 | ) | ||||
Intangible assets |
(40 | ) | (62 | ) | ||||
Tangible common equity, including unrealized gains / losses |
10,346 | 7,918 | ||||||
Less: Accumulated other comprehensive income |
(470 | ) | (314 | ) | ||||
Tangible common equity, excluding unrealized gains / losses (1) |
9,876 | 7,604 | ||||||
Add: Preferred stock |
398 | 3,654 | ||||||
Tangible equity (2) |
10,274 | 11,258 | ||||||
Total assets (U.S. GAAP) |
$ | 116,967 | 111,007 | |||||
Less: Goodwill |
(2,417 | ) | (2,417 | ) | ||||
Intangible assets |
(40 | ) | (62 | ) | ||||
Accumulated other comprehensive income, before tax |
(723 | ) | (483 | ) | ||||
Tangible assets, excluding unrealized gains / losses (3) |
$ | 113,787 | 108,045 | |||||
Total Bancorp shareholders equity (U.S. GAAP) |
$ | 13,201 | 14,051 | |||||
Less: Goodwill and certain other intangibles |
(2,514 | ) | (2,546 | ) | ||||
Accumulated other comprehensive income |
(470 | ) | (314 | ) | ||||
Add: Qualifying trust preferred securities |
2,248 | 2,763 | ||||||
Other |
38 | 11 | ||||||
Tier I capital |
12,503 | 13,965 | ||||||
Less: Preferred stock |
(398 | ) | (3,654 | ) | ||||
Qualifying trust preferred securities |
(2,248 | ) | (2,763 | ) | ||||
Qualified noncontrolling interest in consolidated subsidiaries |
(50 | ) | (30 | ) | ||||
Tier I common equity (4) |
$ | 9,807 | 7,518 | |||||
Risk-weighted assets (5) (a) |
$ | 104,945 | 100,561 | |||||
Ratios: |
||||||||
Tangible equity (2) / (3) |
9.03 | % | 10.42 | |||||
Tangible common equity (1) / (3) |
8.68 | % | 7.04 | |||||
Tier I common equity (4) / (5) |
9.35 | % | 7.48 |
(a) | 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, along with the measure for market risk, resulting in the Bancorps total risk-weighted assets. |
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Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note 1 of the Notes to Consolidated Financial Statements provides a discussion of the significant new accounting standards adopted by the Bancorp during 2011 and the expected impact of significant accounting standards issued, but not yet required to be adopted.
The Bancorps Consolidated Financial Statements are prepared in accordance with U.S. GAAP. Certain accounting policies require management to exercise judgment in determining methodologies, economic assumptions and estimates that may materially affect the value of the Bancorps assets or liabilities and results of operations and cash flows. The Bancorps critical accounting policies include the accounting for the ALLL, reserve for unfunded commitments, income taxes, valuation of servicing rights, fair value measurements and goodwill. No material changes were made to the valuation techniques or models described below during the year ended December 31, 2011.
ALLL
The Bancorp disaggregates its portfolio loans and leases into portfolio segments for purposes of determining the ALLL. The Bancorps portfolio segments include commercial, residential mortgage, and consumer. The Bancorp further disaggregates its portfolio segments into classes for purposes of monitoring and assessing credit quality based on certain risk characteristics. Classes within the commercial portfolio segment include commercial and industrial, commercial mortgage owner-occupied, commercial mortgage nonowner-occupied, commercial construction, and commercial leasing. The residential mortgage portfolio segment is also considered a class. Classes within the consumer segment include home equity, automobile, credit card, and other consumer loans and leases. For an analysis of the Bancorps ALLL by portfolio segment and credit quality information by class, see Note 6 of the Notes to Consolidated Financial Statements.
The Bancorp maintains the ALLL to absorb probable loan and lease losses inherent in its portfolio segments. The ALLL is maintained at a level the Bancorp considers to be adequate and is based on ongoing quarterly assessments and evaluations of the collectability and historical loss experience of loans and leases. Credit losses are charged and recoveries are credited to the ALLL. Provisions for loan and lease losses are based on the Bancorps review of the historical credit loss experience and such factors that, in managements judgment, deserve consideration under existing economic conditions in estimating probable credit losses. In determining the appropriate level of the ALLL, the Bancorp estimates losses using a range derived from base and conservative estimates. The Bancorps strategy for credit risk management includes a combination of conservative exposure limits significantly below legal lending limits and conservative underwriting, documentation and collections standards. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and quarterly management reviews of large credit exposures and loans experiencing deterioration of credit quality.
The Bancorps methodology for determining the ALLL is based on historical loss rates, current credit grades, specific allocation on loans modified in a TDR and impaired commercial credits above specified thresholds and other qualitative adjustments. Allowances on individual commercial loans, TDRs and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience. An unallocated allowance is maintained to recognize the imprecision in estimating and measuring losses when evaluating allowances for individual loans or pools of loans.
Larger commercial loans included within aggregate borrower relationship balances exceeding $1 million that exhibit probable or observed credit weaknesses, as well as loans that have been modified in a TDR, are subject to individual review for impairment. The Bancorp considers the current value of collateral, credit quality of any guarantees, the guarantors liquidity and willingness to cooperate, the loan structure, and other factors when evaluating whether an individual loan is impaired. Other factors may include the industry and geographic region of the borrower, size and financial condition of the borrower, cash flow and leverage of the borrower, and the Bancorps evaluation of the borrowers management. When individual loans are impaired, allowances are determined based on managements estimate of the borrowers ability to repay the loan given the availability of collateral and other sources of cash flow, as well as an evaluation of legal options available to the Bancorp. Allowances for impaired loans are measured based on the present value of expected future cash flows discounted at the loans effective interest rate, fair value of the underlying collateral or readily observable secondary market values. The Bancorp evaluates the collectability of both principal and interest when assessing the need for a loss accrual.
Historical credit loss rates are applied to commercial loans that are not impaired or are impaired, but smaller than the established threshold of $1 million and thus not subject to specific allowance allocations. The loss rates are derived from a migration analysis, which tracks the historical net charge-off experience sustained on loans according to their internal risk grade. The risk grading system utilized for allowance analysis purposes encompasses ten categories.
Homogenous loans and leases in the residential mortgage and consumer portfolio segments are not individually risk graded. Rather, standard credit scoring systems and delinquency monitoring are used to assess credit risks, and allowances are established based on the expected net charge-offs. Loss rates are based on the trailing twelve month net charge-off history by loan category. Historical loss rates may be adjusted for certain prescriptive and qualitative factors that, in managements judgment, are necessary to reflect losses inherent in the portfolio. Factors that management considers in the analysis include the effects of the national and local economies; trends in the nature and volume of delinquencies, charge-offs and nonaccrual loans; changes in loan mix; credit score migration comparisons; asset quality trends; risk management and loan administration; changes in the internal lending policies and credit standards; collection practices; and examination results from bank regulatory agencies and the Bancorps internal credit reviewers.
Loans acquired by the Bancorp through a purchase business combination are recorded at fair value as of the acquisition date. The Bancorp does not carry over the acquired companys ALLL, nor does the Bancorp add to its existing ALLL as part of purchase accounting.
The Bancorps primary market areas for lending are the Midwestern and Southeastern regions of the United States. When evaluating the adequacy of allowances, consideration is given to these regional geographic concentrations and the closely associated effect changing economic conditions have on the Bancorps customers.
Reserve for Unfunded Commitments
The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
probable losses related to unfunded credit facilities and is included in other liabilities in the Consolidated Balance Sheets. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience, credit risk grading and historical loss rates based on credit grade migration. This process takes into consideration the same risk elements that are analyzed in the determination of the adequacy of the Bancorp ALLL, as discussed above. Net adjustments to the reserve for unfunded commitments are included in other noninterest expense in the Consolidated Statements of Income.
Income Taxes
The Bancorp estimates income tax expense based on amounts expected to be owed to the various tax jurisdictions in which the Bancorp conducts business. On a quarterly basis, management assesses the reasonableness of its effective tax rate based upon its current estimate of the amount and components of net income, tax credits and the applicable statutory tax rates expected for the full year. The estimated income tax expense is recorded in the Consolidated Statements of Income.
Deferred income tax assets and liabilities are determined using the balance sheet method and are reported in other assets and accrued taxes, interest and expenses, respectively in the Consolidated Balance Sheets. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities, and reflects enacted changes in tax rates and laws. Deferred tax assets are recognized to the extent they exist and are subject to a valuation allowance based on managements judgment that realization is more-likely-than-not. This analysis is performed on a quarterly basis and includes an evaluation of all positive and negative evidence to determine whether realization is more-likely-than-not.
Accrued taxes represent the net estimated amount due to taxing jurisdictions and are reported in accrued taxes, interest and expenses in the Consolidated Balance Sheets. The Bancorp evaluates and assesses the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other information and maintains tax accruals consistent with its evaluation of these relative risks and merits. Changes to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and changes to statutory, judicial and regulatory guidance that impact the relative risks of tax positions. These changes, when they occur, can affect deferred taxes and accrued taxes as well as the current periods income tax expense and can be significant to the operating results of the Bancorp. For additional information on income taxes, see Note 20 of the Notes to Consolidated Financial Statements.
Valuation of Servicing Rights
When the Bancorp sells loans through either securitizations or individual loan sales in accordance with its investment policies, it often obtains servicing rights. Servicing rights resulting from loan sales are initially recorded at fair value and subsequently amortized in proportion to, and over the period of, estimated net servicing income. Servicing rights are assessed for impairment monthly, based on fair value, with temporary impairment recognized through a valuation allowance and permanent impairment recognized through a write-off of the servicing asset and related valuation allowance. Key economic assumptions used in measuring any potential impairment of the servicing rights include the prepayment speeds of the underlying loans, the weighted-average life, the discount rate, the weighted-average coupon and the weighted-average default rate, as applicable. The primary risk of material changes to the value of the servicing rights resides in the potential volatility in the economic assumptions used, particularly the prepayment speeds. The Bancorp monitors risk and adjusts its valuation allowance as necessary to adequately reserve for impairment in the servicing portfolio. For purposes of measuring impairment, the mortgage servicing rights are stratified into classes based on the financial asset type (fixed-rate vs. adjustable-rate) and interest rates. For additional information on servicing rights, see Note 12 of the Notes to Consolidated Financial Statements.
Fair Value Measurements
The Bancorp measures certain financial assets and liabilities at fair value in accordance with U.S. GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques the Bancorp uses to measure fair value include the market approach, income approach and cost approach. The market approach uses prices or relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach involves discounting future amounts to a single present amount and is based on current market expectations about those future amounts. The cost approach is based on the amount that currently would be required to replace the service capacity of the asset.
U.S. GAAP establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instruments fair value measurement. The three levels within the fair value hierarchy are described as follows:
Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Bancorp has the ability to access at the measurement date.
Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Bancorps own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include the Bancorps own financial data such as internally developed pricing models and discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.
The Bancorps fair value measurements involve various valuation techniques and models, which involve inputs that are observable, when available. Valuation techniques and parameters used for measuring assets and liabilities are reviewed and validated by the Bancorp on a quarterly basis. Additionally, the Bancorp monitors the fair values of significant assets and liabilities using a variety of methods including the evaluation of pricing runs and exception reports based on certain analytical criteria, comparison to previous trades and overall review and assessments for
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Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
reasonableness. The following is a summary of valuation techniques utilized by the Bancorp for its significant assets and liabilities measured at fair value on a recurring basis.
Available-for-sale and trading securities
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include government bonds and exchange traded equities. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which are classified within Level 2 of the valuation hierarchy, include agency and non-agency mortgage-backed securities, other asset-backed securities, obligations of U.S. Government sponsored agencies, and corporate and municipal bonds. Agency mortgage-backed securities, obligations of U.S. Government sponsored agencies, and corporate and municipal bonds are generally valued using a market approach based on observable prices of securities with similar characteristics. Non-agency mortgage-backed securities and other asset-backed securities are generally valued using an income approach based on discounted cash flows, incorporating prepayment speeds, performance of underlying collateral and specific tranche-level attributes. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Trading securities classified as Level 3 consist of auction rate securities. Due to the illiquidity in the market for these types of securities, the Bancorp measures fair value using a discount rate based on the assumed holding period.
Residential mortgage loans held for sale and held for investment
For residential mortgage loans held for sale, fair value is estimated based upon mortgage-backed securities prices and spreads to those prices or, for certain ARM loans, discounted cash flow models that may incorporate the anticipated portfolio composition, credit spreads of asset-backed securities with similar collateral, and market conditions. The anticipated portfolio composition includes the effect of interest rate spreads and discount rates due to loan characteristics such as the state in which the loan was originated, the loan amount and the ARM margin. Residential mortgage loans held for sale that are valued based on mortgage-backed securities prices are classified within Level 2 of the valuation hierarchy as the valuation is based on external pricing for similar instruments. ARM loans classified as held for sale are also classified within Level 2 of the valuation hierarchy due to the use of observable inputs in the discounted cash flow model. These observable inputs include interest rate spreads from agency mortgage-backed securities market rates and observable discount rates. For residential mortgage loans reclassified from held for sale to held for investment, the fair value estimation is based primarily on the underlying collateral values. Therefore, these loans are classified within Level 3 of the valuation hierarchy.
Derivatives
Exchange-traded derivatives valued using quoted prices and certain over-the-counter derivatives valued using active bids are classified within Level 1 of the valuation hierarchy. Most of the Bancorps derivative contracts are valued using discounted cash flow or other models that incorporate current market interest rates, credit spreads assigned to the derivative counterparties, and other market parameters and, therefore, are classified within Level 2 of the valuation hierarchy. Such derivatives include basic and structured interest rate swaps and options. Derivatives that are valued based upon models with significant unobservable market parameters are classified within Level 3 of the valuation hierarchy. At December 31, 2011, derivatives classified as Level 3, which are valued using an option-pricing model containing unobservable inputs, consisted primarily of warrants and put rights associated with the sale of Vantiv Holding, LLC and a total return swap associated with the Bancorps sale of its Visa, Inc. Class B shares. Level 3 derivatives also include interest rate lock commitments, which utilize internally generated loan closing rate assumptions as a significant unobservable input in the valuation process.
In addition to the assets and liabilities measured at fair value on a recurring basis, the Bancorp measures servicing rights, certain loans and long-lived assets at fair value on a nonrecurring basis. Refer to Note 27 of the Notes to Consolidated Financial Statements for further information on fair value measurements.
Goodwill
Business combinations entered into by the Bancorp typically include the acquisition of goodwill. U.S. GAAP requires goodwill to be tested for impairment at the Bancorps reporting unit level on an annual basis, which for the Bancorp is September 30, and more frequently if events or circumstances indicate that there may be impairment. The Bancorp has determined that its segments qualify as reporting units under U.S. GAAP. Impairment exists when a reporting units carrying amount of goodwill exceeds its implied fair value, which is determined through a two-step impairment test. The first step (Step 1) compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step (Step 2) of the goodwill impairment test is performed to measure the impairment loss amount, if any.
The fair value of a reporting unit is the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. Since none of the Bancorps reporting units are publicly traded, individual reporting unit fair value determinations cannot be directly correlated to the Bancorps stock price. To determine the fair value of a reporting unit, the Bancorp employs an income-based approach, utilizing the reporting units forecasted cash flows (including a terminal value approach to estimate cash flows beyond the final year of the forecast) and the reporting units estimated cost of equity as the discount rate. Additionally, the Bancorp determines its market capitalization based on the average of the closing price of the Bancorps stock during the month including the measurement date, incorporating an additional control premium, and compares this market-based fair value measurement to the aggregate fair value of the Bancorps reporting units in order to corroborate the results of the income approach.
When required to perform Step 2, the Bancorp compares the implied fair value of a reporting units goodwill with the carrying amount of that goodwill. If the carrying amount exceeds the implied fair value, an impairment loss equal to that excess amount is recognized. An impairment loss recognized cannot exceed the carrying amount of that goodwill and cannot be reversed even if the fair value of the reporting unit recovers.
During Step 2, the Bancorp determines the implied fair value of goodwill for a reporting unit by assigning the fair value of the reporting unit to all of the assets and liabilities of that unit (including
Fifth Third Bancorp |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. This assignment process is only performed for purposes of testing goodwill for impairment. The Bancorp does not adjust the carrying values of recognized assets or liabilities (other than goodwill, if appropriate), nor recognize previously unrecognized intangible assets in the Consolidated Financial Statements as a result of this assignment process. Refer to Note 9 of the Notes to Consolidated Financial Statements for further information regarding the Bancorps goodwill.
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Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The risks listed below present risks that could have a material impact on the Bancorps financial condition, the results of its operations, or its business.
RISKS RELATING TO ECONOMIC AND MARKET CONDITIONS
Weakness in the economy and in the real estate market, including specific weakness within Fifth Thirds geographic footprint, has adversely affected Fifth Third and may continue to adversely affect Fifth Third.
If the strength of the U.S. economy in general or the strength of the local economies in which Fifth Third conducts operations declines or does not improve in a reasonable time frame, this could result in, among other things, a deterioration in credit quality or a reduced demand for credit, including a resultant effect on Fifth Thirds loan portfolio and ALLL and in the receipt of lower proceeds from the sale of loans and foreclosed properties. A significant portion of Fifth Thirds residential mortgage and commercial real estate loan portfolios are comprised of borrowers in Michigan, Northern Ohio and Florida, which markets have been particularly adversely affected by job losses, declines in real estate value, declines in home sale volumes, and declines in new home building. These factors could result in higher delinquencies, greater charge-offs and increased losses on the sale of foreclosed real estate in future periods, which could materially adversely affect Fifth Thirds financial condition and results of operations.
Changes in interest rates could affect Fifth Thirds income and cash flows.
Fifth Thirds income and cash flows depend to a great extent on the difference between the interest rates earned on interest-earning assets such as loans and investment securities, and the interest rates paid on interest-bearing liabilities such as deposits and borrowings. These rates are highly sensitive to many factors that are beyond Fifth Thirds control, including general economic conditions and the policies of various governmental and regulatory agencies (in particular, the FRB). Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the prepayment speed of loans, the purchase of investments, the generation of deposits and the rates received on loans and investment securities and paid on deposits or other sources of funding. The impact of these changes may be magnified if Fifth Third does not effectively manage the relative sensitivity of its assets and liabilities to changes in market interest rates. Fluctuations in these areas may adversely affect Fifth Third and its shareholders.
Changes and trends in the capital markets may affect Fifth Thirds income and cash flows.
Fifth Third enters into and maintains trading and investment positions in the capital markets on its own behalf and manages investment positions on behalf of its customers. These investment positions include derivative financial instruments. The revenues and profits Fifth Third derives from managing proprietary and customer trading and investment positions are dependent on market prices. Market changes and trends may result in a decline in investment advisory revenue or investment or trading losses that may materially affect Fifth Third. Losses on behalf of its customers could expose Fifth Third to litigation, credit risks or loss of revenue from those customers. Additionally, substantial losses in Fifth Thirds trading and investment positions could lead to a loss with respect to those investments and may adversely affect cash flows and funding costs.
The removal or reduction in stimulus activities sponsored by the Federal Government and its agents may have a negative impact on Fifth Thirds results and operations.
The Federal Government has intervened in an unprecedented manner to stimulate economic growth. The expiration or rescission of any of these programs may have an adverse impact on Fifth Thirds operating results by increasing interest rates, increasing the cost of funding, and reducing the demand for loan products, including mortgage loans.
Problems encountered by financial institutions larger than or similar to Fifth Third could adversely affect financial markets generally and have indirect adverse effects on Fifth Third.
The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading, clearing or other relationships between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This is sometimes referred to as systemic risk and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Bancorp interacts on a daily basis, and therefore could adversely affect Fifth Third.
Fifth Thirds stock price is volatile.
Fifth Thirds stock price has been volatile in the past and several factors could cause the price to fluctuate substantially in the future. These factors include:
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Actual or anticipated variations in earnings; |
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Changes in analysts recommendations or projections; |
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Fifth Thirds announcements of developments related to its businesses; |
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Operating and stock performance of other companies deemed to be peers; |
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Actions by government regulators; |
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New technology used or services offered by traditional and non-traditional competitors |
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News reports of trends, concerns and other issues related to the financial services industry |
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Natural disasters |
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Geopolitical conditions such as acts or threats of terrorism or military conflicts. |
The price for shares of Fifth Thirds common stock may fluctuate significantly in the future, and these fluctuations may be unrelated to Fifth Thirds performance. General market price declines or market volatility in the future could adversely affect the price for shares of Fifth Thirds common stock, and the current market price of such shares may not be indicative of future market prices.
RISKS RELATING TO FIFTH THIRDS GENERAL BUSINESS
Deteriorating credit quality, particularly in real estate loans, has adversely impacted Fifth Third and may continue to adversely impact Fifth Third.
When Fifth Third lends money or commits to lend money the Bancorp incurs credit risk or the risk of losses if borrowers do not repay their loans. The credit performance of the loan portfolios significantly affects the Bancorps financial results and condition. If the current economic environment were to deteriorate, more customers may have difficulty in repaying their loans or other obligations which could result in a higher level of credit losses and reserves for credit losses. Fifth Third reserves for credit losses by
Fifth Third Bancorp |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
establishing reserves through a charge to earnings. The amount of these reserves is based on Fifth Thirds assessment of credit losses inherent in the loan portfolio (including unfunded credit commitments). The process for determining the amount of the allowance for loan and lease losses and the reserve for unfunded commitments is critical to Fifth Thirds financial results and condition. It requires difficult, subjective and complex judgments about the environment, including analysis of economic or market conditions that might impair the ability of borrowers to repay their loans.
Fifth Third might underestimate the credit losses inherent in its loan portfolio and have credit losses in excess of the amount reserved. Fifth Third might increase the reserve because of changing economic conditions, including falling home prices or higher unemployment, or other factors such as changes in borrowers behavior. As an example, borrowers may strategically default, or discontinue making payments on their real estate-secured loans if the value of the real estate is less than what they owe, even if they are still financially able to make the payments.
Fifth Third believes that both the allowance for loan and lease losses and reserve for unfunded commitments are adequate to cover inherent losses at December 31, 2011; however, there is no assurance that they will be sufficient to cover future credit losses, especially if housing and employment conditions worsen. In the event of significant deterioration in economic conditions, Fifth Third may be required to build reserves in future periods, which would reduce earnings.
For more information, refer to the Risk ManagementCredit Risk Management, Critical Accounting PoliciesAllowance for Loan and Leases, and Reserve for Unfunded Commitments of the MD&A.
Fifth Third must maintain adequate sources of funding and liquidity.
Fifth Third must maintain adequate funding sources in the normal course of business to support its operations and fund outstanding liabilities, as well as meet regulatory expectations. Fifth Third primarily relies on bank deposits to be a low cost and stable source of funding for the loans Fifth Third makes and the operations of Fifth Thirds business. Core customer deposits, which include transaction deposits and other time deposits, have historically provided Fifth Third with a sizeable source of relatively stable and low-cost funds (average core deposits funded 71% of average total assets at December 31, 2011). In addition to customer deposits, sources of liquidity include investments in the securities portfolio, Fifth Thirds ability to sell or securitize loans in secondary markets and to pledge loans to access secured borrowing facilities through the FHLB and the FRB, and Fifth Thirds ability to raise funds in domestic and international money and capital markets.
Fifth Thirds liquidity and ability to fund and run the business could be materially adversely affected by a variety of conditions and factors, including financial and credit market disruptions and volatility or a lack of market or customer confidence in financial markets in general similar to what occurred during the financial crisis in 2008 and early 2009, which may result in a loss of customer deposits or outflows of cash or collateral and/or ability to access capital markets on favorable terms.
Other conditions and factors that could materially adversely affect Fifth Thirds liquidity and funding include a lack of market or customer confidence in Fifth Third or negative news about Fifth Third or the financial services industry generally which also may result in a loss of deposits and/or negatively affect the ability to access the capital markets; the loss of customer deposits to alternative investments; inability to sell or securitize loans or other assets, and reductions in one or more of Fifth Thirds credit ratings. A reduced credit rating could adversely affect Fifth Thirds ability to borrow funds and raise the cost of borrowings substantially and
could cause creditors and business counterparties to raise collateral requirements or take other actions that could adversely affect Fifth Thirds ability to raise capital. Many of the above conditions and factors may be caused by events over which Fifth Third has little or no control such as what occurred during the financial crisis. While market conditions have stabilized and, in many cases, improved, there can be no assurance that significant disruption and volatility in the financial markets will not occur in the future.
Other material adverse effects could include a reduction in Fifth Thirds credit ratings resulting from a further decrease in the probability of government support for large financial institutions such as Fifth Third assumed by the ratings agencies in their current credit ratings.
If Fifth Third is unable to continue to fund assets through customer bank deposits or access capital markets on favorable terms or if Fifth Third suffers an increase in borrowing costs or otherwise fails to manage liquidity effectively, liquidity, operating margins, financial results and condition may be materially adversely affected. As Fifth Third did during the financial crisis, it may also need to raise additional capital through the issuance of stock, which could dilute the ownership of existing stockholders, or reduce or even eliminate common stock dividends to preserve capital.
Fifth Third may have more credit risk and higher credit losses to the extent loans are concentrated by location of the borrower or collateral.
Fifth Thirds credit risk and credit losses can increase if its loans are concentrated to borrowers engaged in the same or similar activities or to borrowers who as a group may be uniquely or disproportionately affected by economic or market conditions. Deterioration in economic conditions, housing conditions and real estate values in these states and generally across the country could result in materially higher credit losses.
Bankruptcy laws may be changed to allow mortgage cram-downs, or court-ordered modifications to mortgage loans including the reduction of principal balances.
Under current bankruptcy laws, courts cannot force a modification of mortgage and home equity loans secured by primary residences. In response to the financial crises, legislation has been proposed to allow mortgage loan cram-downs, which would empower courts to modify the terms of mortgage and home equity loans including a reduction in the principal amount to reflect lower underlying property values. This could result in writing down the balance of mortgage and home equity loans to reflect their lower loan values. There is also risk that home equity loans in a second lien position (i.e. behind a mortgage) could experience significantly higher losses to the extent they became unsecured as a result of a cram-down. The availability of principal reductions or other modifications to mortgage loan terms could make bankruptcy a more attractive option for troubled borrowers, leading to increased bankruptcy filings and accelerated defaults.
Fifth Third may be required to repurchase mortgage loans or reimburse investors and others as a result of breaches in contractual representations and warranties.
Fifth Third sells residential mortgage loans to various parties, including GSEs and other financial institutions that purchase mortgage loans for investment or private label securitization. Fifth Third may be required to repurchase mortgage loans, indemnify the securitization trust, investor or insurer, or reimburse the securitization trust, investor or insurer for credit losses incurred on loans in the event of a breach of contractual representations or warranties that is not remedied within a period (usually 90 days or less) after Fifth Third receives notice of the breach. Contracts for mortgage loan sales to the GSEs include various types of specific remedies and penalties that could be applied to inadequate
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
responses to repurchase requests. If economic conditions and the housing market do not recover or future investor repurchase demand and success at appealing repurchase requests differ from past experience, Fifth Third could continue to have increased repurchase obligations and increased loss severity on repurchases, requiring material additions to the repurchase reserve.
If Fifth Third does not adjust to rapid changes in the financial services industry, its financial performance may suffer.
Fifth Thirds ability to deliver strong financial performance and returns on investment to shareholders will depend in part on its ability to expand the scope of available financial services to meet the needs and demands of its customers. In addition to the challenge of competing against other banks in attracting and retaining customers for traditional banking services, Fifth Thirds competitors also include securities dealers, brokers, mortgage bankers, investment advisors, specialty finance and insurance companies who seek to offer one-stop financial services that may include services that banks have not been able or allowed to offer to their customers in the past or may not be currently able or allowed to offer. This increasingly competitive environment is primarily a result of changes in regulation, changes in technology and product delivery systems, as well as the accelerating pace of consolidation among financial service providers.
If Fifth Third is unable to grow its deposits, it may be subject to paying higher funding costs.
The total amount that Fifth Third pays for funding costs is dependent, in part, on Fifth Thirds ability to grow its deposits. If Fifth Third is unable to sufficiently grow its deposits, it may be subject to paying higher funding costs. Fifth Third competes with banks and other financial services companies for deposits. If competitors raise the rates they pay on deposits, Fifth Thirds funding costs may increase, either because Fifth Third raises rates to avoid losing deposits or because Fifth Third loses deposits and must rely on more expensive sources of funding. Higher funding costs reduce our net interest margin and net interest income. Fifth Thirds bank customers could take their money out of the bank and put it in alternative investments, causing Fifth Third to lose a lower cost source of funding. Checking and savings account balances and other forms of customer deposits may decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff.
The Bancorps ability to receive dividends from its subsidiaries accounts for most of its revenue and could affect its liquidity and ability to pay dividends.
Fifth Third Bancorp is a separate and distinct legal entity from its subsidiaries. Fifth Third Bancorp typically receives substantially all of its revenue from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on Fifth Third Bancorps stock and interest and principal on its debt. Various federal and/or state laws and regulations, as well as regulatory expectations, limit the amount of dividends that the Bancorps banking subsidiary and certain nonbank subsidiaries may pay. Also, Fifth Third Bancorps right to participate in a distribution of assets upon a subsidiarys liquidation or reorganization is subject to the prior claims of that subsidiarys creditors. Limitations on the Bancorps ability to receive dividends from its subsidiaries could have a material adverse effect on its liquidity and ability to pay dividends on stock or interest and principal on its debt.
The financial services industry is highly competitive and creates competitive pressures that could adversely affect Fifth Thirds revenue and profitability.
The financial services industry in which Fifth Third operates is highly competitive. Fifth Third competes not only with commercial
banks, but also with insurance companies, mutual funds, hedge funds, and other companies offering financial services in the U.S., globally and over the internet. Fifth Third competes on the basis of several factors, including capital, access to capital, revenue generation, products, services, transaction execution, innovation, reputation and price. Over time, certain sectors of the financial services industry have become more concentrated, as institutions involved in a broad range of financial services have been acquired by or merged into other firms. These developments could result in Fifth Thirds competitors gaining greater capital and other resources, such as a broader range of products and services and geographic diversity. Fifth Third may experience pricing pressures as a result of these factors and as some of its competitors seek to increase market share by reducing prices.
Fifth Third and/or the holders of its securities could be adversely affected by unfavorable ratings from rating agencies.
Fifth Thirds ability to access the capital markets is important to its overall funding profile. This access is affected by the ratings assigned by rating agencies to Fifth Third, certain of its subsidiaries and particular classes of securities they issue. The interest rates that Fifth Third pays on its securities are also influenced by, among other things, the credit ratings that it, its subsidiaries and/or its securities receive from recognized rating agencies. A downgrade to Fifth Third or its subsidiaries credit rating could affect its ability to access the capital markets, increase its borrowing costs and negatively impact its profitability. A ratings downgrade to Fifth Third, its subsidiaries or their securities could also create obligations or liabilities to Fifth Third under the terms of its outstanding securities that could increase Fifth Thirds costs or otherwise have a negative effect on its results of operations or financial condition. Additionally, a downgrade of the credit rating of any particular security issued by Fifth Third or its subsidiaries could negatively affect the ability of the holders of that security to sell the securities and the prices at which any such securities may be sold.
Fifth Third could suffer if it fails to attract and retain skilled personnel.
Fifth Thirds success depends, in large part, on its ability to attract and retain key individuals. Competition for qualified candidates in the activities and markets that Fifth Third serves is great and Fifth Third may not be able to hire these candidates and retain them. If Fifth Third is not able to hire or retain these key individuals, Fifth Third may be unable to execute its business strategies and may suffer adverse consequences to its business, operations and financial condition.
In June 2010, the federal banking agencies issued joint guidance on executive compensation designed to help ensure that a banking organizations incentive compensation policies do not encourage imprudent risk taking and are consistent with the safety and soundness of the organization. In addition, the Dodd-Frank Act requires those agencies, along with the SEC, to adopt rules to require reporting of incentive compensation and to prohibit certain compensation arrangements. The federal banking agencies and SEC proposed such rules in April 2011. If Fifth Third is unable to attract and retain qualified employees, or do so at rates necessary to maintain its competitive position, or if compensation costs required to attract and retain employees become more expensive, Fifth Thirds performance, including its competitive position, could be materially adversely affected.
Fifth Thirds mortgage banking revenue can be volatile from quarter to quarter.
Fifth Third earns revenue from the fees it receives for originating mortgage loans and for servicing mortgage loans. When rates rise, the demand for mortgage loans tends to fall, reducing the revenue Fifth Third receives from loan originations. At the same time,
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
revenue from MSRs can increase through increases in fair value. When rates fall, mortgage originations tend to increase and the value of MSRs tends to decline, also with some offsetting revenue effect. Even though the origination of mortgage loans can act as a natural hedge, the hedge is not perfect, either in amount or timing. For example, the negative effect on revenue from a decrease in the fair value of residential MSRs is immediate, but any offsetting revenue benefit from more originations and the MSRs relating to the new loans would accrue over time. It is also possible that, because of the recession and deteriorating housing market, even if interest rates were to fall, mortgage originations may also fall or any increase in mortgage originations may not be enough to offset the decrease in the MSRs value caused by the lower rates.
Fifth Third typically uses derivatives and other instruments to hedge its mortgage banking interest rate risk. Fifth Third generally does not hedge all of its risks, and the fact that Fifth Third attempts to hedge any of the risks does not mean Fifth Third will be successful. Hedging is a complex process, requiring sophisticated models and constant monitoring. Fifth Third may use hedging instruments tied to U.S. Treasury rates, LIBOR or Eurodollars that may not perfectly correlate with the value or income being hedged. Fifth Third could incur significant losses from its hedging activities. There may be periods where Fifth Third elects not to use derivatives and other instruments to hedge mortgage banking interest rate risk.
Changes in interest rates could also reduce the value of MSRs.
Fifth Third acquires MSRs when it keeps the servicing rights after the sale or securitization of the loans that have been originated or when it purchases the servicing rights to mortgage loans originated by other lenders. Fifth Third initially measures all residential MSRs at fair value and subsequently amortizes the MSRs in proportion to, and over the period of, estimated net servicing income. Fair value is the present value of estimated future net servicing income, calculated based on a number of variables, including assumptions about the likelihood of prepayment by borrowers. Servicing rights are assessed for impairment monthly, based on fair value, with temporary impairment recognized through a valuation allowance and permanent impairment recognized through a write-off of the servicing asset and related valuation allowance.
Changes in interest rates can affect prepayment assumptions and thus fair value. When interest rates fall, borrowers are usually more likely to prepay their mortgage loans by refinancing them at a lower rate. As the likelihood of
prepayment increases, the fair value of MSRs can decrease. Each quarter Fifth Third evaluates the fair value of MSRs, and decreases in fair value below amortized cost reduce earnings in the period in which the decrease occurs.
The preparation of Fifth Thirds financial statements requires the use of estimates that may vary from actual results.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make significant estimates that affect the financial statements. Two of Fifth Thirds most critical estimates are the level of the ALLL and the valuation of MSRs. Due to the uncertainty of estimates involved, Fifth Third may have to significantly increase the ALLL and/or sustain credit losses that are significantly higher than the provided allowance and could recognize a significant provision for impairment of its MSRs. If Fifth Thirds ALLL is not adequate, Fifth Thirds business, financial condition, including its liquidity and capital, and results of operations could be materially adversely affected.
Fifth Third regularly reviews its litigation reserves for adequacy considering its litigation risks and probability of incurring losses related to litigation. However, Fifth Third cannot be certain that its current litigation reserves will be adequate over time to cover its losses in litigation due to higher than anticipated settlement costs, prolonged litigation, adverse judgments, or other factors that are largely outside of Fifth Thirds control. If Fifth Thirds litigation
reserves are not adequate, Fifth Thirds business, financial condition, including its liquidity and capital, and results of operations could be materially adversely affected. Additionally, in the future, Fifth Third may increase its litigation reserves, which could have a material adverse effect on its capital and results of operations.
Changes in accounting standards could impact Fifth Thirds reported earnings and financial condition.
The accounting standard setters, including the FASB, the SEC and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of Fifth Thirds consolidated financial statements. These changes can be hard to predict and can materially impact how Fifth Third records and reports its financial condition and results of operations. In some cases, Fifth Third could be required to apply a new or revised standard retroactively, which would result in the recasting of Fifth Thirds prior period financial statements.
Future acquisitions may dilute current shareholders ownership of Fifth Third and may cause Fifth Third to become more susceptible to adverse economic events.
Future business acquisitions could be material to Fifth Third and it may issue additional shares of stock to pay for those acquisitions, which would dilute current shareholders ownership interests. Acquisitions also could require Fifth Third to use substantial cash or other liquid assets or to incur debt. In those events, Fifth Third could become more susceptible to economic downturns and competitive pressures.
Difficulties in combining the operations of acquired entities with Fifth Thirds own operations may prevent Fifth Third from achieving the expected benefits from its acquisitions.
Inherent uncertainties exist when integrating the operations of an acquired entity. Fifth Third may not be able to fully achieve its strategic objectives and planned operating efficiencies in an acquisition. In addition, the markets and industries in which Fifth Third and its potential acquisition targets operate are highly competitive. Fifth Third may lose customers or the customers of acquired entities as a result of an acquisition. Future acquisition and integration activities may require Fifth Third to devote substantial time and resources and as a result Fifth Third may not be able to pursue other business opportunities.
After completing an acquisition, Fifth Third may find certain items are not accounted for properly in accordance with financial accounting and reporting standards. Fifth Third may also not realize the expected benefits of the acquisition due to lower financial results pertaining to the acquired entity. For example, Fifth Third could experience higher charge offs than originally anticipated related to the acquired loan portfolio.
Fifth Third may sell or consider selling one or more of its businesses. Should it determine to sell such a business, it may not be able to generate gains on sale or related increase in shareholders equity commensurate with desirable levels. Moreover, if Fifth Third sold such businesses, the loss of income could have an adverse effect on its earnings and future growth.
Fifth Third owns several non-strategic businesses that are not significantly synergistic with its core financial services businesses. Fifth Third has, from time to time, considered the sale of such businesses. If it were to determine to sell such businesses, Fifth Third would be subject to market forces that may make completion of a sale unsuccessful or may not be able to do so within a desirable time frame. If Fifth Third were to complete the sale of non-core businesses, it would suffer the loss of income from the sold
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
businesses, and such loss of income could have an adverse effect on its future earnings and growth.
Fifth Third relies on its systems and certain service providers, and certain failures could materially adversely affect operations.
Fifth Third collects, processes and stores sensitive consumer data by utilizing computer systems and telecommunications networks operated by both Fifth Third and third party service providers. Fifth Third has security, backup and recovery systems in place, as well as a business continuity plan to ensure the system will not be inoperable. Fifth Third also has security to prevent unauthorized access to the system. In addition, Fifth Third requires its third party service providers to maintain similar controls. However, Fifth Third cannot be certain that the measures will be successful. A security breach in the system and loss of confidential information such as credit card numbers and related information could result in losing the customers confidence and thus the loss of their business as well as additional significant costs for privacy monitoring activities.
Fifth Thirds necessary dependence upon automated systems to record and process its transaction volume poses the risk that technical system flaws or employee errors, tampering or manipulation of those systems will result in losses and may be difficult to detect. Fifth Third may also be subject to disruptions of its operating systems arising from events that are beyond its control (for example, computer viruses or electrical or telecommunications outages). Fifth Third is further exposed to the risk that its third party service providers may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors as Fifth Third). These disruptions may interfere with service to Fifth Thirds customers and result in a financial loss or liability.
Fifth Third is exposed to operational and reputational risk.
Fifth Third is exposed to many types of operational risk, including reputational risk, legal and compliance risk, environmental risks from its properties, the risk of fraud or theft by employees, customers or outsiders, unauthorized transactions by employees, operating system disruptions or operational errors.
Negative public opinion can result from Fifth Thirds actual or alleged conduct in activities, such as lending practices, data security, corporate governance and acquisitions, and may damage Fifth Thirds reputation. Negative public opinion has been observed through the media coverage of public protests and in relation to banks participating in the U.S. Treasurys TARP program, in which Fifth Third was a participant. Additionally, actions taken by government regulators and community organizations may also damage Fifth Thirds reputation. This negative public opinion can adversely affect Fifth Thirds ability to attract and keep customers and can expose it to litigation and regulatory action.
The results of Vantiv Holding, LLC could have a negative impact on Fifth Thirds operating results and financial condition.
During the second quarter of 2009, Fifth Third sold an approximate 51% interest in its processing business, Vantiv Holding, LLC (formerly Fifth Third Processing Solutions) to Advent International. Based on Fifth Thirds current ownership share in Vantiv Holding, LLC, of approximately 49%, Vantiv Holding, LLC is accounted for under the equity method and is not consolidated. Poor operating results of Vantiv Holding, LLC could negatively affect the operating results of Fifth Third. In connection with the sale, Fifth Third provided Advent International with certain put rights that are exercisable in the event of three unlikely circumstances. The exercise of the put rights would result in Vantiv Holding, LLC becoming a wholly owned subsidiary of Fifth Third. As a result, Vantiv Holding, LLC would be consolidated and would subject
Fifth Third to the risks inherent in integrating a business. Additionally, such a change in the accounting treatment for Vantiv Holding, LLC may adversely impact Fifth Thirds capital. Fifth Third participates in a multi lender credit facility to Vantiv Holding, LLC and repayment of these loans is contingent on future cash flows to Vantiv Holding, LLC.
Fifth Thirds interests in Vantiv Holding, LLC may change and the potential effects of those changes are uncertain.
In November 2011, Vantiv Holding, LLC, through its affiliated entity, Vantiv Inc., filed a registration statement with the SEC which contemplates an IPO of shares of Class A Common Stock of Vantiv Inc. The IPO contemplates a corporate reorganization of Vantiv Inc., which reorganization could substantially change Fifth Thirds interests in Vantiv Holding, LLC. The potential effects on Fifth Third may include, without limitation, changes in (i) the Vantiv entities in which Fifth Third holds equity ownership, (ii) the type of equity interests owned by Fifth Third in those entities, (iii) Fifth Thirds overall ownership percentage interests in those entities, due to any sale by Fifth Third of any of its existing equity interests in Vantiv Holding, LLC or its ownership percentage is diluted through any sale of additional equity by Vantiv Holding, LLC in or in connection with the IPO, and (iv) Fifth Thirds voting and corporate governance rights. If Fifth Third sells any of its ownership interests in Vantiv Holding, LLC in connection with the Vantiv Inc. IPO, the amount of such sales have not yet been determined and the price at which such sales would be effected cannot be determined unless and until the IPO is completed. Fifth Third cannot predict whether the Vantiv Inc. IPO will be completed and/or the final terms and conditions thereof. Accordingly, the potential impacts on Fifth Third of a Vantiv Inc. IPO are uncertain.
Weather related events or other natural disasters may have an effect on the performance of Fifth Thirds loan portfolios, especially in its coastal markets, thereby adversely impacting its results of operations.
Fifth Thirds footprint stretches from the upper Midwestern to lower Southeastern regions of the United States. This area has experienced weather events including hurricanes and other natural disasters. The nature and level of these events and the impact of global climate change upon their frequency and severity cannot be predicted. If large scale events occur, they may significantly impact its loan portfolios by damaging properties pledged as collateral as well as impairing its borrowers ability to repay their loans.
RISKS RELATED TO THE LEGAL AND REGULATORY ENVIRONMENT
As a regulated entity, the Bancorp is subject to certain capital requirements that may limit its operations and potential growth.
The Bancorp is a bank holding company and a financial holding company. As such, it is subject to the comprehensive, consolidated supervision and regulation of the FRB, including risk-based and leverage capital requirements. The Bancorp must maintain certain risk-based and leverage capital ratios as required by its banking regulators and which can change depending upon general economic conditions and the Bancorps particular condition, risk profile and growth plans. Compliance with the capital requirements, including leverage ratios, may limit operations that require the intensive use of capital and could adversely affect the Bancorps ability to expand or maintain present business levels.
The Bancorps banking subsidiary must remain well-capitalized, well-managed and maintain at least a Satisfactory CRA rating for the Bancorp to retain its status as a financial holding company. Failure to meet these requirements could result in the FRB placing
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
limitations or conditions on the Bancorps activities (and the commencement of new activities) and could ultimately result in the loss of financial holding company status. In addition, failure by the Bancorps banking subsidiary to meet applicable capital guidelines could subject the bank to a variety of enforcement remedies available to the federal regulatory authorities. These include limitations on the ability to pay dividends, the issuance by the regulatory authority of a capital directive to increase capital, and the termination of deposit insurance by the FDIC.
Fifth Thirds business, financial condition and results of operations could be adversely affected by new or changed regulations and by the manner in which such regulations are applied by regulatory authorities.
Current economic conditions, particularly in the financial markets, have resulted in government regulatory agencies placing increased focus on and scrutiny of the financial services industry. The U.S. government has intervened on an unprecedented scale, responding to what has been commonly referred to as the financial crisis, by introducing various actions and passing legislations such as the Dodd Frank Act. Such programs and legislation subject Fifth Third and other financial institutions to restrictions, oversight and/or costs that may have an impact on Fifth Thirds business, financial condition, results of operations or the price of its common stock.
New proposals for legislation and regulations continue to be introduced that could further substantially increase regulation of the financial services industry. Fifth Third cannot predict whether any pending or future legislation will be adopted or the substance and impact of any such new legislation on Fifth Third. Additional regulation could affect Fifth Third in a substantial way and could have an adverse effect on its business, financial condition and results of operations.
Fifth Third is subject to various regulatory requirements that limit its operations and potential growth.
Under federal and state laws and regulations pertaining to the safety and soundness of insured depository institutions and their holding companies, the FRB, the CFPB, and the Ohio Division of Financial Institutions have the authority to compel or restrict certain actions by Fifth Third and its banking subsidiary. Fifth Third and its banking subsidiary are subject to such supervisory authority and, more generally, must, in certain instances, obtain prior regulatory approval before engaging in certain activities or corporate decisions. There can be no assurance that such approvals, if required, would be forthcoming or that such approvals would be granted in a timely manner. Failure to receive any such approval, if required, could limit or impair Fifth Thirds operations, restrict its growth and/or affect its dividend policy. Such actions and activities subject to prior approval include, but are not limited to, increasing dividends paid by Fifth Third or its banking subsidiary, entering into a merger or acquisition transaction, acquiring or establishing new branches, and entering into certain new businesses.
In addition, Fifth Third, as well as other financial institutions more generally, have recently been subjected to increased scrutiny from regulatory authorities stemming from broader systemic regulatory concerns, including with respect to stress testing, capital levels, asset quality, provisioning and other prudential matters, arising as a result of the recent financial crisis and efforts to ensure that financial institutions take steps to improve their risk management and prevent future crises.
In some cases, regulatory agencies may take supervisory actions that may not be publicly disclosed, which restrict or limit a financial institution. Finally, as part of Fifth Thirds regular examination process, Fifth Thirds and its banking subsidiarys respective regulators may advise it and its banking subsidiary to operate under various restrictions as a prudential matter. Such supervisory actions or restrictions, if and in whatever manner imposed, could have a
material adverse effect on Fifth Thirds business and results of operations and may not be publicly disclosed.
Fifth Third and/or its affiliates are or may become involved from time to time in information-gathering requests, investigations and proceedings by government and self-regulatory agencies which may lead to adverse consequences.
Fifth Third and/or its affiliates are or may become involved from time to time in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by government and self-regulatory agencies, including the SEC, regarding their respective businesses. Such matters may result in material adverse consequences, including without limitation, adverse judgments, settlements, fines, penalties, injunctions or other actions, amendments and/or restatements of Fifth Thirds SEC filings and/or financial statements, as applicable, and/or determinations of material weaknesses in its disclosure controls and procedures. The SEC is investigating and has made several requests for information, including by subpoena, concerning issues which Fifth Third understands relate to accounting and reporting matters involving certain of its commercial loans. This could lead to an enforcement proceeding by the SEC which, in turn, may result in one or more such material adverse consequences.
Deposit insurance premiums levied against Fifth Third may increase if the number of bank failures increase or the cost of resolving failed banks increases.
The FDIC maintains a DIF to resolve the cost of bank failures. The DIF is funded by fees assessed on insured depository institutions including Fifth Third. The magnitude and cost of resolving an increased number of bank failures have reduced the DIF. Future deposit premiums paid by Fifth Third depend on the level of the DIF and the magnitude and cost of future bank failures. Fifth Third also may be required to pay significantly higher FDIC premiums because market developments have significantly depleted the DIF of the FDIC and reduced the ratio of reserves to insured deposits.
Legislative or regulatory compliance, changes or actions or significant litigation, could adversely impact Fifth Third or the businesses in which Fifth Third is engaged.
Fifth Third is subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of its operations and limit the businesses in which Fifth Third may engage. These laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact Fifth Third or its ability to increase the value of its business. Additionally, actions by regulatory agencies or significant litigation against Fifth Third could cause it to devote significant time and resources to defending itself and may lead to penalties that materially affect Fifth Third and its shareholders. Future changes in the laws, including tax laws, or regulations or their interpretations or enforcement may also be materially adverse to Fifth Third and its shareholders or may require Fifth Third to expend significant time and resources to comply with such requirements.
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On July 21, 2010 the President of the United States signed into law the Dodd-Frank Act. The Dodd-Frank Act will have material implications for Fifth Third and the entire financial services industry. Among other things it will or potentially could:
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Result in Fifth Third being subject to enhanced oversight and scrutiny as a result of being a bank holding company with $50 billion or more in consolidated assets; |
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Result in the appointment of the FDIC as receiver of Fifth Third in an orderly liquidation proceeding, if the Secretary of the U.S. Treasury, upon recommendation of two-thirds of |
the FRB and the FDIC and in consultation with the President of the United States, finds Fifth Third to be in default or danger of default; |
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Affect the levels of capital and liquidity with which Fifth Third must operate and how it plans capital and liquidity levels (including a phased-in elimination of Fifth Thirds existing trust preferred securities as Tier 1 capital); |
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Subject Fifth Third to new and/or higher fees paid to various regulatory entities, including but not limited to deposit insurance fees to the FDIC; |
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Impact Fifth Thirds ability to invest in certain types of entities or engage in certain activities; |
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Impact a number of Fifth Thirds business and risk management strategies; |
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Restrict the revenue that Fifth Third generates from certain businesses, including interchange fee revenue generated by Fifth Thirds debit and credit card businesses; |
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Subject Fifth Third to a new CFPB, which will have broad rule-making and enforcement authorities; and |
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Subject Fifth Third to oversight and regulation by a new and different litigation and regulatory regime. |
As the Dodd-Frank Act requires that many studies be conducted and that hundreds of regulations be written in order to fully implement it, the full impact of this legislation on Fifth Third, its business strategies and financial performance cannot be known at this time, and may not be known for a number of years. However, these impacts are expected to be substantial and some of them are likely to adversely affect Fifth Third and its financial performance. The extent to which Fifth Third can adjust its strategies to offset such adverse impacts also is not known at this time.
Fifth Third and other financial institutions have been the subject of increased litigation which could result in legal liability and damage to its reputation.
Fifth Third and certain of its directors and officers have been named from time to time as defendants in various class actions and other litigation relating to Fifth Thirds business and activities. Past, present and future litigation have included or could include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Fifth Third is also involved from time to time in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding its business. These matters also could result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Like other large financial institutions and companies, Fifth Third is also subject to risk from potential employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information. Substantial legal liability or significant regulatory action against Fifth Third could materially adversely affect its business, financial condition or results of operations and/or cause significant reputational harm to its business.
Fifth Thirds ability to pay or increase dividends on its common stock or to repurchase its capital stock is restricted.
Fifth Thirds ability to pay dividends or repurchase stock is subject to regulatory requirements and the need to meet regulatory expectations.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the interest earned on securities, loans and leases (including yield-related fees) and other interest-earning assets less the interest paid for core deposits (includes transaction deposits and other time deposits) and wholesale funding (includes certificates of deposit $100,000 and over, other deposits, federal funds purchased, short-term borrowings and long-term debt). The net interest margin is calculated by dividing net interest income by average interest-earning assets. Net interest rate spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin is typically greater than net interest rate spread due to the interest income earned on those assets that are funded by noninterest-bearing liabilities, or free funding, such as demand deposits or shareholders equity.
Table 5 presents the components of net interest income, net interest margin and net interest rate spread for the years ended December 31, 2011, 2010 and 2009. Nonaccrual loans and leases and loans held for sale have been included in the average loan and lease balances. Average outstanding securities balances are based on amortized cost with any unrealized gains or losses on available-for-sale securities included in other assets. Table 6 provides the relative impact of changes in the balance sheet and changes in interest rates on net interest income.
Net interest income was $3.6 billion for each of the years ended December 31, 2011 and 2010. Included within net interest income are amounts related to the accretion of discounts on acquired loans and deposits, primarily as a result of acquisitions in previous years, which increased net interest income by $40 million during 2011 and $68 million during 2010. The original purchase accounting discounts reflected the high discount rates in the market at the time of the acquisitions; the total loan discounts are being accreted into net interest income over the remaining period to maturity of the loans acquired. Based upon the remaining period to maturity, and excluding the impact of prepayments, the Bancorp anticipates recognizing approximately $15 million in additional net interest income during 2012 as a result of the amortization and accretion of premiums and discounts on acquired loans and deposits.
For the year ended December 31, 2011, net interest income was adversely impacted by lower yields on both the commercial and consumer loan portfolios partially offset by an increase in average consumer loans and a decrease in interest expense compared to the year ended December 31, 2010. Yields on the commercial and consumer loan portfolio decreased throughout 2011 as the result of low interest rates during the year. Average consumer loans increased primarily as the result of increases in average residential mortgage loans and automobile loans partially offset by a decrease in home equity loans compared to the year ended December 31, 2010. The decrease in interest expense was primarily the result of a $3.2 billion decrease in average interest bearing liabilities from the year ended
December 31, 2010, coupled with a continued mix shift to lower cost core deposits as well as the benefit of lower rates offered on savings account balances and other time deposits. The decrease in average interest bearing liabilities was the result of migration from certificates of deposit into demand deposit accounts due to low interest rates during 2011. For the year ended December 31, 2011, the net interest rate spread increased to 3.42% from 3.39% in 2010 as the benefit of a 25 bps decrease in rates on interest bearing liabilities was partially offset by a 22 bps decrease in yield on average interest earnings assets.
Net interest margin was 3.66% for the years ended December 31, 2011 and 2010. Net interest margin was impacted by the amortization and accretion of premiums and discounts on acquired loans and deposits that resulted in an increase of 5 bps during 2011 compared to 7 bps during 2010. Exclusive of these amounts, net interest margin increased 2 bps for the year ended December 31, 2011 compared to the prior year primarily as the result of the previously mentioned mix shift to lower cost core deposits during 2011, an increase in free funding balances and a decrease in average interest earnings assets partially offset by the previously mentioned decrease on the yield of average loans and leases.
Total average interest-earning assets decreased one percent for the year ended December 31, 2011 compared to the prior year primarily as the result of an 11% decrease in the average investment portfolio and a one percent decrease in average commercial loans; partially offset by a four percent increase in average consumer loans. For more information on the Bancorps investment securities portfolio and loan and lease portfolio, see the Investment Securities and Loan and Lease sections of MD&A.
Interest income from loans and leases decreased $207 million, or five percent, compared to the year ended December 31, 2010 driven primarily by a 32 bps decrease in average loan yields partially offset by a four percent increase in average consumer loans. Yields across much of the loan and lease portfolio decreased as the result of lower interest rates on newly originated loans and a decline in interest rates on automobile loans due to increased competition. Exclusive of the amortization and accretion of premiums and discounts on acquired loans, interest income from loans and leases decreased $179 million compared to the year ended December 31, 2010. Interest income from investment securities and short-term investments decreased $64 million, or 10%, from the prior year primarily as the result of a $2.2 billion decrease in the average balance and a 16 bps decrease in the average yield of taxable securities.
Average core deposits increased $2.5 billion, or three percent, compared to the year ended December 31, 2010 primarily due to an increase in average demand deposits and average savings deposits partially offset by a decrease in average time deposits. The cost of average core deposits decreased to 36 bps for the year ended December 31, 2011 compared to 61 bps from the prior year. This decrease was primarily the result of a mix shift to lower cost core deposits as a result of runoff of higher priced CDs combined with a 24 bps decrease in rates on average savings deposits and a 39 bps decrease in rates on average time deposits compared to year ended December 31, 2010.
Interest expense on wholesale funding for the year ended December 31, 2011 decreased $38 million, or nine percent, compared to the prior year, primarily as a result of a $2.0 billion decrease in the average balance partially offset by a 4 bps increase in the rate. Refer to the Borrowings section of MD&A for additional information on the Bancorps changes in average borrowings. During the year ended December 31, 2011, wholesale funding represented 23% of interest bearing liabilities compared to 25% during the prior year. For more information on the Bancorps interest rate risk management, including estimated earnings sensitivity to changes in market interest rates, see the Market Risk Management section of MD&A.
32 |
Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 5: CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
For the years ended December 31 |
2011 | 2010 | 2009 | |||||||||||||||||||||||||||||||||
($ in millions) |
|
Average
Balance |
|
|
Revenue/
Cost |
|
|
Average
Yield/Rate |
|
|
Average
Balance |
|
|
Revenue/
Cost |
|
|
Average
Yield/ Rate |
|
Volume |
|
Revenue/
Cost |
|
|
Average
Yield/Rate |
|
|||||||||||
Assets |
||||||||||||||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||||||||||||||
Loans and leases: (a) |
||||||||||||||||||||||||||||||||||||
Commercial and industrial loans |
$ | 28,546 | $ | 1,240 | 4.34 | % | $ | 26,334 | $ | 1,238 | 4.70 | % | $ | 27,556 | $ | 1,162 | 4.22 | % | ||||||||||||||||||
Commercial mortgage |
10,447 | 417 | 3.99 | 11,585 | 476 | 4.11 | 12,511 | 545 | 4.35 | |||||||||||||||||||||||||||
Commercial construction |
1,740 | 53 | 3.06 | 3,066 | 93 | 3.01 | 4,638 | 134 | 2.90 | |||||||||||||||||||||||||||
Commercial leases |
3,341 | 133 | 3.99 | 3,343 | 147 | 4.40 | 3,543 | 150 | 4.24 | |||||||||||||||||||||||||||
Subtotal commercial |
44,074 | 1,843 | 4.18 | 44,328 | 1,954 | 4.41 | 48,248 | 1,991 | 4.13 | |||||||||||||||||||||||||||
Residential mortgage loans |
11,318 | 503 | 4.45 | 9,868 | 478 | 4.84 | 10,886 | 602 | 5.53 | |||||||||||||||||||||||||||
Home equity |
11,077 | 433 | 3.91 | 11,996 | 479 | 4.00 | 12,534 | 520 | 4.15 | |||||||||||||||||||||||||||
Automobile loans |
11,352 | 530 | 4.67 | 10,427 | 608 | 5.83 | 8,807 | 556 | 6.31 | |||||||||||||||||||||||||||
Credit card |
1,864 | 184 | 9.86 | 1,870 | 201 | 10.73 | 1,907 | 193 | 10.10 | |||||||||||||||||||||||||||
Other consumer loans/leases |
529 | 136 | 25.77 | 743 | 116 | 15.58 | 1,009 | 86 | 8.49 | |||||||||||||||||||||||||||
Subtotal consumer |
36,140 | 1,786 | 4.94 | 34,904 | 1,882 | 5.39 | 35,143 | 1,957 | 5.57 | |||||||||||||||||||||||||||
Total loans and leases |
80,214 | 3,629 | 4.52 | 79,232 | 3,836 | 4.84 | 83,391 | 3,948 | 4.73 | |||||||||||||||||||||||||||
Securities: |
||||||||||||||||||||||||||||||||||||
Taxable |
15,334 | 596 | 3.89 | 16,054 | 650 | 4.05 | 16,861 | 721 | 4.28 | |||||||||||||||||||||||||||
Exempt from income taxes (a) |
103 | 6 | 5.41 | 317 | 13 | 3.92 | 239 | 17 | 7.19 | |||||||||||||||||||||||||||
Other short-term investments |
2,031 | 5 | 0.25 | 3,328 | 8 | 0.25 | 1,035 | 1 | 0.14 | |||||||||||||||||||||||||||
Total interest-earning assets |
97,682 | 4,236 | 4.34 | 98,931 | 4,507 | 4.56 | 101,526 | 4,687 | 4.62 | |||||||||||||||||||||||||||
Cash and due from banks |
2,352 | 2,245 | 2,329 | |||||||||||||||||||||||||||||||||
Other assets |
15,335 | 14,841 | 14,266 | |||||||||||||||||||||||||||||||||
Allowance for loan and lease losses |
(2,703 | ) | (3,583 | ) | (3,265 | ) | ||||||||||||||||||||||||||||||
Total assets |
$ | 112,666 | $ | 112,434 | $ | 114,856 | ||||||||||||||||||||||||||||||
Liabilities and Equity |
||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Interest checking |
$ | 18,707 | $ | 49 | 0.26 | % | $ | 18,218 | $ | 52 | 0.29 | % | $ | 15,070 | $ | 40 | 0.26 | % | ||||||||||||||||||
Savings |
21,652 | 67 | 0.31 | 19,612 | 107 | 0.55 | 16,875 | 127 | 0.75 | |||||||||||||||||||||||||||
Money market |
5,154 | 14 | 0.27 | 4,808 | 19 | 0.40 | 4,320 | 26 | 0.60 | |||||||||||||||||||||||||||
Foreign office deposits |
3,490 | 10 | 0.28 | 3,355 | 12 | 0.35 | 2,108 | 10 | 0.45 | |||||||||||||||||||||||||||
Other time deposits |
6,260 | 140 | 2.23 | 10,526 | 276 | 2.62 | 14,103 | 470 | 3.33 | |||||||||||||||||||||||||||
Certificates$100,000 and over |
3,656 | 72 | 1.97 | 6,083 | 125 | 2.06 | 10,367 | 280 | 2.70 | |||||||||||||||||||||||||||
Other deposits |
7 | | 0.03 | 6 | | 0.13 | 157 | | 0.20 | |||||||||||||||||||||||||||
Federal funds purchased |
345 | | 0.11 | 291 | 1 | 0.17 | 517 | 1 | 0.20 | |||||||||||||||||||||||||||
Other short-term borrowings |
2,777 | 3 | 0.12 | 1,635 | 3 | 0.21 | 6,463 | 42 | 0.64 | |||||||||||||||||||||||||||
Long-term debt |
10,154 | 306 | 3.01 | 10,902 | 290 | 2.65 | 11,035 | 318 | 2.89 | |||||||||||||||||||||||||||
Total interest-bearing liabilities |
72,202 | 661 | 0.92 | 75,436 | 885 | 1.17 | 81,015 | 1,314 | 1.62 | |||||||||||||||||||||||||||
Demand deposits |
23,389 | 19,669 | 16,862 | |||||||||||||||||||||||||||||||||
Other liabilities |
4,189 | 3,580 | 3,926 | |||||||||||||||||||||||||||||||||
Total liabilities |
99,780 | 98,685 | 101,803 | |||||||||||||||||||||||||||||||||
Total equity |
12,886 | 13,749 | 13,053 | |||||||||||||||||||||||||||||||||
Total liabilities and equity |
$ | 112,666 | $ | 112,434 | $ | 114,856 | ||||||||||||||||||||||||||||||
Net interest income |
$ | 3,575 | $ | 3,622 | $ | $ | 3,373 | |||||||||||||||||||||||||||||
Net interest margin |
3.66 | % | 3.66 | % | 3.32 | % | ||||||||||||||||||||||||||||||
Net interest rate spread |
3.42 | 3.39 | 3.00 | |||||||||||||||||||||||||||||||||
Interest-bearing liabilities to interest-earning assets |
73.92 | 76.25 | 79.80 |
(a) The FTE adjustments included in the above table are $18 for the years ended December 31, 2011 and 2010 and $19 for the year ended December 31, 2009. The federal statutory tax rate utilized was 35% for all periods presented.
Fifth Third Bancorp |
33 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 6: CHANGES IN NET INTEREST INCOME ATTRIBUTABLE TO VOLUME AND YIELD/RATE (a)
For the years ended December 31 |
2011 Compared to 2010 | 2010 Compared to 2009 | ||||||||||||||||||||||
($ in millions) |
Volume | Yield/Rate | Total | Volume | Yield/Rate | Total | ||||||||||||||||||
Assets |
||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans and leases: |
||||||||||||||||||||||||
Commercial and industrial loans |
$ | 100 | (98) | 2 | $ | (53) | 129 | 76 | ||||||||||||||||
Commercial mortgage |
(45) | (14) | (59) | (39) | (30) | (69) | ||||||||||||||||||
Commercial construction |
(42) | 2 | (40) | (46) | 5 | (41) | ||||||||||||||||||
Commercial leases |
| (14) | (14) | (8) | 5 | (3) | ||||||||||||||||||
Subtotal commercial |
13 | (124) | (111) | (146) | 109 | (37) | ||||||||||||||||||
Residential mortgage loans |
67 | (42) | 25 | (53) | (71) | (124) | ||||||||||||||||||
Home equity |
(34) | (12) | (46) | (22) | (19) | (41) | ||||||||||||||||||
Automobile loans |
51 | (129) | (78) | 97 | (45) | 52 | ||||||||||||||||||
Credit card |
(1) | (16) | (17) | (4) | 12 | 8 | ||||||||||||||||||
Other consumer loans/leases |
(41) | 61 | 20 | (27) | 57 | 30 | ||||||||||||||||||
Subtotal consumer |
42 | (138) | (96) | (9) | (66) | (75) | ||||||||||||||||||
Total loans and leases |
55 | (262) | (207) | (155) | 43 | (112) | ||||||||||||||||||
Securities: |
||||||||||||||||||||||||
Taxable |
(29) | (25) | (54) | (34) | (37) | (71) | ||||||||||||||||||
Exempt from income taxes |
(10) | 3 | (7) | 6 | (10) | (4) | ||||||||||||||||||
Other short-term investments |
(3) | | (3) | 5 | 2 | 7 | ||||||||||||||||||
Total interest-earning assets |
13 | (284) | (271) | (178) | (2) | (180) | ||||||||||||||||||
Total change in interest income |
$ | 13 | (284) | (271) | $ | (178) | (2) | (180) | ||||||||||||||||
Liabilities and Equity |
||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Interest checking |
$ | 2 | (5) | (3) | $ | 8 | 4 | 12 | ||||||||||||||||
Savings |
11 | (51) | (40) | 18 | (38) | (20) | ||||||||||||||||||
Money market |
1 | (6) | (5) | 2 | (9) | (7) | ||||||||||||||||||
Foreign office deposits |
| (2) | (2) | 4 | (2) | 2 | ||||||||||||||||||
Other time deposits |
(99) | (37) | (136) | (105) | (89) | (194) | ||||||||||||||||||
Certificates$100,000 and over |
(48) | (5) | (53) | (98) | (57) | (155) | ||||||||||||||||||
Federal funds purchased |
(1) | | (1) | | | | ||||||||||||||||||
Other short-term borrowings |
2 | (2) | | (21) | (18) | (39) | ||||||||||||||||||
Long-term debt |
(21) | 37 | 16 | (3) | (25) | (28) | ||||||||||||||||||
Total interest-bearing liabilities |
(153) | (71) | (224) | (195) | (234) | (429) | ||||||||||||||||||
Total change in interest expense |
(153) | (71) | (224) | (195) | (234) | (429) | ||||||||||||||||||
Total change in net interest income |
$ | 166 | (213) | (47) | $ | 17 | 232 | 249 |
(a) Changes in interest not solely due to volume or yield/rate are allocated in proportion to the absolute dollar amount of change in volume and yield/rate.
Provision for Loan and Lease Losses
The Bancorp provides as an expense an amount for probable loan and lease losses within the loan and lease portfolio that is based on factors previously discussed in the Critical Accounting Policies section. The provision is recorded to bring the ALLL to a level deemed appropriate by the Bancorp to cover losses inherent in the portfolio. Actual credit losses on loans and leases are charged against the ALLL. The amount of loans actually removed from the Consolidated Balance Sheets is referred to as charge-offs. Net charge-offs include current period charge-offs less recoveries on previously charged-off loans and leases.
The provision for loan and lease losses decreased to $423 million in 2011 compared to $1.5 billion in 2010. The decrease in provision expense for 2011 compared to the prior year was due to decreases in nonperforming loans and leases, improved delinquency metrics in commercial and consumer loans and leases, and improvement in underlying loss trends. The ALLL declined $749 million from $3.0 billion at December 31, 2010 to $2.3 billion at December 31, 2011. As of December 31, 2011, the ALLL as a percent of loans and leases decreased to 2.78%, compared to 3.88% at December 31, 2010.
Refer to the Credit Risk Management section of the MD&A as well as Note 6 of the Notes to Consolidated Financial Statements for more detailed information on the provision for loan and lease losses, including an analysis of loan portfolio composition, nonperforming assets, net charge-offs, and other factors considered by the Bancorp in assessing the credit quality of the loan and lease portfolio and the ALLL.
34 |
Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Income
Noninterest income decreased $274 million, or 10%, for the year ended December 31, 2011 compared to the year ended December 31, 2010. The components of noninterest income are as follows:
TABLE 7: NONINTEREST INCOME
For the years ended December 31 ($ in millions) |
2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Mortgage banking net revenue |
$ | 597 | 647 | 553 | 199 | 133 | ||||||||||||||
Service charges on deposits |
520 | 574 | 632 | 641 | 579 | |||||||||||||||
Investment advisory revenue |
375 | 361 | 326 | 366 | 382 | |||||||||||||||
Corporate banking revenue |
350 | 364 | 372 | 431 | 367 | |||||||||||||||
Card and processing revenue |
308 | 316 | 615 | 912 | 826 | |||||||||||||||
Gain on sale of the processing business |
- | - | 1,758 | - | - | |||||||||||||||
Other noninterest income |
250 | 406 | 479 | 363 | 153 | |||||||||||||||
Securities gains (losses), net |
46 | 47 | (10 | ) | (86 | ) | 21 | |||||||||||||
Securities gains, net, non-qualifying hedges on mortgage servicing rights |
9 | 14 | 57 | 120 | 6 | |||||||||||||||
Total noninterest income |
$ | 2,455 | 2,729 | 4,782 | 2,946 | 2,467 |
Mortgage banking net revenue
Mortgage banking net revenue decreased $50 million in 2011 compared to 2010. The components of mortgage banking net revenue are as follows:
TABLE 8: COMPONENTS OF MORTGAGE BANKING NET REVENUE
For the years ended December 31 ($ in millions) | 2011 | 2010 | 2009 | |||||||||
Origination fees and gains on loan sales |
$ | 396 | 490 | 485 | ||||||||
Net servicing revenue: |
||||||||||||
Gross servicing fees |
234 | 221 | 197 | |||||||||
Servicing rights amortization |
(135 | ) | (137 | ) | (146 | ) | ||||||
Net valuation adjustments on servicing rights and free-standing derivatives entered into to economically hedge MSR |
102 | 73 | 17 | |||||||||
Net servicing revenue |
201 | 157 | 68 | |||||||||
Mortgage banking net revenue |
$ | 597 | 647 | 553 |
Origination fees and gains on loan sales decreased $94 million in 2011 compared to 2010 primarily as the result of a 26% decrease in the profit margin on sold residential mortgage loans due to a decrease in interest rates and an eight percent decrease in residential mortgage loan originations compared to 2010. Residential mortgage loan originations decreased to $18.6 billion during 2011 compared to $20.3 billion during 2010. The decrease in originations is primarily due to a decrease in refinancing activity as many customers have taken advantage of the low interest rate environment in prior years.
Net servicing revenue is comprised of gross servicing fees and related servicing rights amortization as well as valuation adjustments on MSRs and mark-to-market adjustments on both settled and outstanding free-standing derivative financial instruments used to economically hedge the MSR portfolio. Net servicing revenue increased $44 million in 2011 compared to 2010 driven primarily by an increase in valuation adjustments and gross servicing fees. The net valuation adjustment of $102 million during 2011 included $344 million in gains from derivatives economically hedging the MSRs partially offset by $242 million in temporary impairment on the MSR portfolio. The gain in the net valuation adjustment is reflective of refinancing activity in recent years that has contributed to prepayments being less sensitive to lower mortgage rates due to customers taking advantage of lower rates in earlier periods as well as the impact of tighter underwriting standards.
Additionally, the net MSR/hedge position has benefited from the positive carry of the hedge and the widening spread between mortgage and swap rates. Gross servicing fees increased $13 million in 2011 compared to 2010 as a result of an increase in the size of the Bancorps servicing portfolio. The Bancorps total residential loans serviced as of December 31, 2011 and 2010 was $70.6 billion and $63.2 billion, respectively, with $57.1 billion and $54.2 billion, respectively, of residential mortgage loans serviced for others.
Servicing rights are deemed impaired when a borrowers loan rate is distinctly higher than prevailing rates. Impairment
on servicing rights is reversed when the prevailing rates return to a level commensurate with the borrowers loan rate. Further detail on the valuation of MSRs can be found in Note 12 of the Notes to Consolidated Financial Statements. The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in the valuation on the MSR portfolio. See Note 13 of the Notes to Consolidated Financial Statements for more information on the free-standing derivatives used to economically hedge the MSR portfolio.
In addition to the derivative positions used to economically hedge the MSR portfolio, the Bancorp acquires various securities as a component of its non-qualifying hedging strategy. Net gains on sales of these securities were $9 million and $14 million in 2011 and 2010, respectively, and were recorded in securities gains, net, non-qualifying hedges on mortgage servicing rights in the Bancorps Consolidated Statements of Income.
Service charges on deposits
Service charges on deposits decreased $54 million in 2011 compared to 2010. Consumer deposit revenue decreased $59 million in 2011 compared to 2010 primarily due to the impact of Regulation E and new overdraft policies that resulted in a decrease in overdraft occurrences. Regulation E became effective on July 1, 2010 for new accounts and August 15, 2010 for existing accounts. Regulation E is a FRB rule that prohibits financial institutions from charging consumers fees for paying overdrafts on ATMs and one-time debit card transactions unless a consumer consents, or opts in, to the overdraft service for those types of transactions.
Commercial deposit revenue increased $5 million in 2011 compared to 2010 primarily due to an increase in commercial account relationships and a decrease in earnings credits paid on customer balances as the result of a decrease in the crediting rate applied to balances. Commercial customers receive earnings credits to offset the fees charged for banking services on their deposit accounts such as account maintenance, lockbox, ACH transactions,
Fifth Third Bancorp |
35 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
wire transfers and other ancillary corporate treasury management services. Earnings credits are based on the customers average balance in qualifying deposits multiplied by the crediting rate. Qualifying deposits include demand deposits and interest-bearing checking accounts. The Bancorp has a standard crediting rate that is adjusted as necessary based on the competitive market conditions and changes in short-term interest rates.
Investment advisory revenue
Investment advisory revenue increased $14 million in 2011 compared to 2010 primarily due to improved market performance and sales force expansion that resulted in increased brokerage activity. As of December 31, 2011, the Bancorp had approximately $282 billion in total assets under care and managed $24 billion in assets for individuals, corporations and not-for-profit organizations.
Corporate banking revenue
Corporate banking revenue decreased $14 million in 2011 compared to 2010. The decrease from the prior year was primarily the result of decreases in institutional sales, syndication fees, lease remarketing fees and international income partially offset by an increase in business lending fees.
Card and processing revenue
Card and processing revenue decreased $8 million in 2011 compared to 2010. The decrease was the result of an increase in costs associated with redemption of cash based reward points and the impact of the implementation of the Dodd-Frank Acts debit card interchange fee cap in the fourth quarter of 2011 partially offset by increased debit and credit card transaction volumes.
Other noninterest income
The major components of other noninterest income are as follows:
TABLE 9: COMPONENTS OF OTHER NONINTEREST INCOME
For the years ended December 31 ($ in millions) |
2011 | 2010 | 2009 | |||||||||
Operating lease income |
$ | 58 | 62 | 59 | ||||||||
Equity method income from interest in Vantiv Holding, LLC |
57 | 26 | 15 | |||||||||
BOLI income (loss) |
41 | 194 | (2 | ) | ||||||||
Cardholder fees |
41 | 36 | 48 | |||||||||
Net gain from warrant and put options associated with the processing business sale |
39 | 5 | 18 | |||||||||
Gain on loan sales |
37 | 51 | 38 | |||||||||
Consumer loan and lease fees |
31 | 32 | 43 | |||||||||
Insurance income |
28 | 38 | 47 | |||||||||
Banking center income |
27 | 22 | 22 | |||||||||
TSA revenue |
21 | 49 | 76 | |||||||||
Loss on sale of OREO |
(71 | ) | (78 | ) | (70 | ) | ||||||
Loss on swap associated with the sale of Visa, Inc. class B shares |
(83 | ) | (19 | ) | (2 | ) | ||||||
Gain on sale/redemption of Visa, Inc. ownership interests |
- | - | 244 | |||||||||
Other, net |
24 | (12 | ) | (57 | ) | |||||||
Total other noninterest income |
$ | 250 | 406 | 479 |
Other noninterest income decreased $156 million in 2011 compared to 2010 primarily due to a $152 million litigation settlement related to one of the Bancorps BOLI policies in 2010. Excluding the impact of the litigation settlement, other noninterest income was relatively flat compared to 2010 as an increase of $64 million in losses on the swap associated with the sale of Visa, Inc. Class B shares, a decrease of $28 million in TSA revenue and a decrease of $14 million in the gains on loan sales were offset by increases of $34 million in gains on the valuation of warrants and put options issued as part of the sale of the processing business, $31 million in equity method income from the Bancorps ownership interest in Vantiv Holding, LLC, $15 million in gains from private equity investments (recorded in the other caption) and a $12 million reduction in losses from fair value adjustments on commercial loans designated as held for sale (recorded in the other caption). For additional information on the valuation of the swap associated with the sale of Visa, Inc. Class B shares and the valuation of warrants and put options associated with the sale of the processing business, see Note 27 of the Notes to Consolidated Financial Statements.
As part of the sale of the processing business, in 2009, the Bancorp entered into a TSA with The processing business that resulted in the Bancorp recognizing approximately $21 million and $49 million in revenue during 2011 and 2010, respectively, which were offset with expense from the servicing agreements recorded in noninterest expense.
TABLE 10: NONINTEREST EXPENSE
For the years ended December 31 ($ in millions) |
2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Salaries, wages and incentives |
$ | 1,478 | 1,430 | 1,339 | 1,337 | 1,239 | ||||||||||||||
Employee benefits |
330 | 314 | 311 | 278 | 278 | |||||||||||||||
Net occupancy expense |
305 | 298 | 308 | 300 | 269 | |||||||||||||||
Technology and communications |
188 | 189 | 181 | 191 | 169 | |||||||||||||||
Card and processing expense |
120 | 108 | 193 | 274 | 244 | |||||||||||||||
Equipment expense |
113 | 122 | 123 | 130 | 123 | |||||||||||||||
Goodwill impairment |
- | - | - | 965 | - | |||||||||||||||
Other noninterest expense |
1,224 | 1,394 | 1,371 | 1,089 | 989 | |||||||||||||||
Total noninterest expense |
$ | 3,758 | 3,855 | 3,826 | 4,564 | 3,311 | ||||||||||||||
Efficiency ratio |
62.3 | % | 60.7 | 46.9 | 70.4 | 60.2 |
36 |
Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Expense
Total noninterest expense decreased $97 million, or three percent, in 2011 compared to 2010 primarily due to a decrease in other noninterest expense, as discussed below, partially offset by an increase in total personnel costs (salaries, wages and incentives plus employee benefits) and card and processing expense. Total personnel costs increased $64 million, or four percent, in 2011 compared to 2010 due to an increase in base and incentive compensation driven by investments in the sales force beginning in mid-2010 and an overall increase in the number of employees. Full time equivalent employees totalled 21,334 at December 31, 2011 compared to 20,838 at December 31, 2010.
Card and processing expense increased $12 million, or 11%, in 2011 compared to 2010 primarily as the result of growth in debit and credit card transactions. The major components of other noninterest expense are as follows:
TABLE 11: COMPONENTS OF OTHER NONINTEREST EXPENSE
For the years ended December 31 ($ in millions) |
2011 | 2010 | 2009 | |||||||||
FDIC insurance and other taxes |
$ | 201 | 242 | 269 | ||||||||
Loan and lease |
195 | 211 | 234 | |||||||||
Losses and adjustments |
129 | 187 | 110 | |||||||||
Marketing |
115 | 98 | 79 | |||||||||
Affordable housing investments impairment |
85 | 100 | 83 | |||||||||
Professional service fees |
58 | 77 | 63 | |||||||||
Travel |
52 | 51 | 41 | |||||||||
Postal and courier |
49 | 48 | 53 | |||||||||
Operating lease |
41 | 41 | 39 | |||||||||
OREO expense |
34 | 33 | 24 | |||||||||
Recruitment and education |
31 | 31 | 30 | |||||||||
Data processing |
29 | 24 | 21 | |||||||||
Insurance |
25 | 42 | 50 | |||||||||
Intangible asset amortization |
22 | 43 | 57 | |||||||||
Supplies |
18 | 24 | 25 | |||||||||
Visa litigation reserve |
- | - | (73 | ) | ||||||||
Provision for unfunded commitments and letters of credit |
(46 | ) | (24 | ) | 99 | |||||||
Other, net |
186 | 166 | 167 | |||||||||
Total other noninterest expense |
$ | 1,224 | 1,394 | 1,371 |
Total other noninterest expense decreased $170 million, or 12%, in 2011 compared to 2010 primarily due to decreases in the provision for representation and warranty claims, recorded in losses and adjustments; FDIC insurance and other taxes, intangible asset amortization, professional service fees and an increase in the benefit from a decrease in the reserve for unfunded commitments and letters of credit partially offset by losses in 2011 related to the termination of two cash flow hedges and an increase in litigation reserves associated with bankcard association membership, both of which were recorded in the other caption.
The provision for representation and warranty claims decreased $59 million in 2011 compared to 2010 primarily due to a decrease in demand requests during 2011 and a decrease in losses on repurchased loans compared to 2010. FDIC insurance and other taxes decreased $41 million in 2011 compared to 2010 due primarily to the FDICs implementation of amended regulations that revised the Federal Deposit Insurance Act effective April 1, 2011. The amended regulations modified the definition of an institutions deposit insurance assessment base from domestic deposits to quarterly average total assets less quarterly average tangible equity as well as the assessment rate calculation; additionally 2010 included expenses due to the Bancorps participation in the FDICs TLGP transaction account guarantee program, which was exited during the second quarter of 2010. The $21 million decrease in intangible asset amortization was primarily the result of the full amortization of certain intangible assets in 2010 and 2011. The decrease in
professional service fees of $19 million in 2011 compared to 2010 was primarily the result of legal expenses incurred from the litigation settlement related to one of the Bancorps BOLI policies during the third quarter of 2010. The provision for unfunded commitments and letters of credit was a benefit of $46 million in 2011 compared to a benefit of $24 million during 2010. The benefit recorded in each period reflects lower estimates of inherent losses resulting from a decrease in delinquent loans as credit trends improved during 2011. The $20 million increase in the other caption was primarily the result of $27 million in expenses on two cash flow hedge transactions that were terminated during the third quarter of 2011 and $14 million of expenses related to an increase in litigation reserves associated with bankcard association membership during the fourth quarter of 2011 partially offset by an $8 million gain on the extinguishment of long term debt during 2011 compared to $17 million of losses on the extinguishment of long term debt during 2010.
TSA related expenses decreased to approximately $21 million in 2011 from $49 million in 2010 due to Vantiv Holdings transition to their own supporting systems.
The Bancorp continues to focus on efficiency initiatives as part of its core emphasis on operating leverage and expense control. The efficiency ratio (noninterest expense divided by the sum of net interest income (FTE) and noninterest income) was 62.3% for 2011 compared to 60.7% in 2010.
Fifth Third Bancorp |
37 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Applicable Income Taxes
The Bancorps income (loss) before income taxes, applicable income tax expense (benefit) and effective tax rate for each of the periods indicated are shown in Table 12. Applicable income tax expense for all periods includes the benefit from tax-exempt income, tax-advantaged investments, certain gains on sales of leases that are exempt from federal taxation and tax credits, partially offset by the effect of nondeductible expenses. The tax credits are associated with the Low-Income Housing Tax Credit program established under Section 42 of the IRC, the New Markets Tax Credit program established under Section 45D of the IRC, the Rehabilitation Investment Tax Credit program established under Section 47 of the IRC, and the Qualified Zone Academy Bond program established under Section 1397E of the IRC. The effective tax rate for the year ended December 31, 2011 was primarily impacted by $135 million in tax credits and $26 million of non-cash charges relating to previously recognized tax benefits associated with stock-based compensation that will not be realized. The effective tax rate for the year ended December 31, 2010 was primarily impacted by $133 million in tax credits, a $26 million reduction in income tax expense resulting from the settlement of certain uncertain tax positions with the IRS and $25 million of non-cash charges relating to previously recognized tax benefits associated with stock-based compensation that will not be realized. See Note 20 of the Notes to Consolidated Financial Statements for further information on income taxes.
Deductibility of Executive Compensation
Certain sections of the IRC limit the deductibility of compensation paid to or earned by certain executive officers of a public company. This has historically limited the deductibility of certain executive compensation to $1 million per executive
officer, and the Bancorps compensation philosophy has been to position pay to ensure deductibility. However, both the amount of the executive compensation that is deductible for certain executive officers and the allowable compensation vehicles changed as a result of the Bancorps participation in TARP. In particular, the Bancorp was not permitted to deduct compensation earned by certain executive officers in excess of $500,000 per executive officer as a result of the Bancorps participation in TARP. Therefore, a portion of the compensation earned by certain executive officers was not deductible by the Bancorp for the period in which the Bancorp participated in TARP. Subsequent to ending its participation in TARP, certain limitations on the deductibility of executive compensation will continue to apply to some forms of compensation earned while under TARP. The Bancorps Compensation Committee determined that the underlying executive compensation programs are appropriate and necessary to attract, retain and motivate senior executives, and that failing to meet these objectives creates more risk for the Bancorp and its value than the financial impact of losing the tax deduction. For the years ended December 31, 2011 and 2010, the total tax impact for non-deductible compensation was $2 million and $6 million, respectively.
The Bancorps income before income taxes, applicable income tax expense and effective tax rate are as follows:
TABLE 12: APPLICABLE INCOME TAXES | ||||||||||||||||||||
For the years ended December 31 ($ in millions) |
2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Income (loss) before income taxes |
$ | 1,831 | 940 | 767 | (2,664 | ) | 1,537 | |||||||||||||
Applicable income tax expense (benefit) |
533 | 187 | 30 | (551 | ) | 461 | ||||||||||||||
Effective tax rate |
29.1 | % | 19.8 | 3.9 | 20.7 | 30.0 |
38 |
Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors. Additional detailed financial information on each business segment is included in Note 30 of the Notes to Consolidated Financial Statements. Results of the Bancorps business segments are presented based on its management structure and management accounting practices. The structure and accounting practices are specific to the Bancorp; therefore, the financial results of the Bancorps business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as managements accounting practices are improved or businesses change.
On June 30, 2009, the Bancorp completed the sale of the processing business, which represented the sale of a majority interest in the Bancorps merchant acquiring and financial institutions processing businesses. Financial data for the merchant acquiring and financial institutions processing businesses was originally reported in the former Processing Solutions segment through June 30, 2009. As a result of the sale, the Bancorp no longer presents Processing Solutions as a segment and therefore, historical financial information for the merchant acquiring and financial institutions processing businesses has been reclassified under General Corporate and Other for all periods presented. Interchange revenue previously recorded in the Processing Solutions segment and associated with cards currently included in Branch Banking is now included in the Branch Banking segment for all periods presented. Additionally, the Bancorp retained its retail credit card and commercial multi-card service businesses, which were also originally reported in the former Processing Solutions segment through June 30, 2009, and are included in the Branch Banking and Commercial Banking segments, respectively, for all periods presented. Revenue from the remaining ownership interest in the Processing Business is recorded in General Corporate and Other as noninterest income.
The Bancorp manages interest rate risk centrally at the corporate level and employs a FTP methodology at the business segment level. This methodology insulates the business segments from interest rate volatility, enabling them to focus on serving customers through loan originations and deposit taking. The FTP system assigns charge rates and credit rates to classes of assets and liabilities, respectively, based on expected duration and the LIBOR swap curve. Matching duration allocates interest income and interest expense to each segment
so its resulting net interest income is insulated from interest rate risk. In a rising rate environment, the Bancorp benefits from the widening spread between deposit costs and wholesale funding costs. However, the Bancorps FTP system credits this benefit to deposit-providing businesses, such as Branch Banking and Investment Advisors, on a duration-adjusted basis. The net impact of the FTP methodology is captured in General Corporate and Other.
The Bancorp adjusts the FTP charge and credit rates as dictated by changes in interest rates for various interest-earning assets and liabilities. The credit rate provided for DDAs is reviewed annually based upon the account type, its estimated duration and the corresponding fed funds, LIBOR or swap rate. The credit rates for DDAs were reset January 1, 2011 to reflect the current market rates. These rates were significantly lower than those in place during 2010, thus net interest income for deposit providing businesses was negatively impacted during 2011.
The business segments are charged provision expense based on the actual net charge-offs experienced by the loans owned by each segment. Provision expense attributable to loan growth and changes in factors in the ALLL are captured in General Corporate and Other. The financial results of the business segments include allocations for shared services and headquarters expenses. Even with these allocations, the financial results are not necessarily indicative of the business segments financial condition and results of operations as if they existed as independent entities. Additionally, the business segments form synergies by taking advantage of cross-sell opportunities and when funding operations, by accessing the capital markets as a collective unit. Net income by business segment is summarized in the following table.
TABLE 13: BUSINESS SEGMENT NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
For the years ended December 31 ($ in millions) |
2011 | 2010 | 2009 | |||||||||
Income Statement Data |
||||||||||||
Commercial Banking |
$ | 441 | 178 | (101 | ) | |||||||
Branch Banking |
186 | 185 | 327 | |||||||||
Consumer Lending |
56 | (26 | ) | 21 | ||||||||
Investment Advisors |
24 | 29 | 53 | |||||||||
General Corporate & Other |
591 | 387 | 437 | |||||||||
Net income |
1,298 | 753 | 737 | |||||||||
Less: Net income attributable to noncontrolling interest |
1 | - | - | |||||||||
Net income attributable to Bancorp |
1,297 | 753 | 737 | |||||||||
Dividends on preferred stock |
203 | 250 | 226 | |||||||||
Net income available to common shareholders |
$ | 1,094 | 503 | 511 |
Fifth Third Bancorp |
39 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Commercial Banking
Commercial Banking offers credit intermediation, cash management and financial services to large and middle-market businesses and government and professional customers. In addition to the traditional lending and depository offerings, Commercial Banking products and services include global cash management, foreign exchange and international trade finance, derivatives and capital markets services, asset-based lending, real estate finance, public finance, commercial leasing and syndicated finance. The following table contains selected financial data for the Commercial Banking segment.
TABLE 14: COMMERCIAL BANKING | ||||||||||||
For the years ended December 31 ($ in millions) |
2011 | 2010 | 2009 | |||||||||
Income Statement Data |
||||||||||||
Net interest income (FTE) (a) |
$ | 1,374 | 1,545 | 1,383 | ||||||||
Provision for loan and lease losses |
490 | 1,159 | 1,360 | |||||||||
Noninterest income: |
||||||||||||
Corporate banking revenue |
332 | 346 | 353 | |||||||||
Service charges on deposits |
207 | 199 | 196 | |||||||||
Other noninterest income |
102 | 90 | 60 | |||||||||
Noninterest expense: |
||||||||||||
Salaries, incentives and benefits |
240 | 214 | 192 | |||||||||
Other noninterest expense |
833 | 757 | 768 | |||||||||
Income (loss) before taxes |
452 | 50 | (328 | ) | ||||||||
Applicable income tax expense (benefit) (b) |
11 | (128 | ) | (227 | ) | |||||||
Net income (loss) |
$ | 441 | 178 | (101 | ) | |||||||
Average Balance Sheet Data |
||||||||||||
Commercial loans |
$ | 38,384 | 38,304 | 41,341 | ||||||||
Demand deposits |
13,130 | 10,872 | 8,581 | |||||||||
Interest checking |
7,901 | 8,432 | 6,018 | |||||||||
Savings and money market |
2,776 | 2,823 | 2,457 | |||||||||
Certificates over $100,000 |
1,778 | 3,014 | 4,376 | |||||||||
Foreign office deposits |
1,581 | 2,017 | 1,275 |
(a) | Includes FTE adjustments of $17 , $14, and $13 for the years ended December 31, 2011, 2010, and 2009, respectively. |
(b) | Applicable income tax benefit for all periods includes the tax benefit from tax-exempt income and business tax credits, partially offset by the effect of certain nondeductible expenses. Refer to the Applicable Income Taxes section of MD&A for additional information. |
Comparison of 2011 with 2010
Net income was $441 million for the year ended December 31, 2011, compared to net income of $178 million for the year ended December 31, 2010. The increase in net income was primarily driven by a decrease in the provision for loan and lease losses partially offset by lower net interest income and higher noninterest expense.
Net interest income decreased $171 million primarily due to declines in the FTP credits for DDAs and decreases in interest income. The decrease in interest income was driven primarily by a decline in yields of 17 bps on average loans. Provision for loan and lease losses decreased $669 million. Net charge-offs as a percent of average loans and leases decreased to 128 bps for 2011 compared to 302 bps for 2010 largely due net charge-offs on commercial loans moved to held for sale during the third quarter of 2010 and as a result of improved credit trends across all commercial loan types.
Noninterest income was relatively flat from 2010 to 2011, as increases in other noninterest income and service charges on deposits were offset by a decrease in corporate banking revenue. The increase in other noninterest income is primarily due to a $15 million increase in income on private equity investments. Service charges on deposits increased from 2010 primarily due to a decrease in earnings credits paid on customer balances. The decrease in corporate banking revenue was primarily driven by decreases in international income, institutional sales, and syndication fees partially offset by an increase in business lending fees.
Noninterest expense increased $102 million from the prior year as a result of increases in salaries, incentives and benefits and other noninterest expense. The increase in salaries, incentives and benefits of $26 million was primarily the result of increased incentive compensation due to improved production levels. FDIC insurance expense, which is recorded in other noninterest expense, increased
$14 million due to a change in the methodology in determining FDIC insurance premiums to one based on total assets less tangible equity as opposed to the previous method that was based on domestic deposits. The remaining increase in other noninterest expense was the result of higher corporate overhead allocations in 2011 compared to 2010.
Average commercial loans were flat compared to the prior year. Average commercial mortgage loans decreased $1.0 billion as a result of tighter underwriting standards implemented in prior quarters in an effort to limit exposure to commercial real estate. Average commercial construction loans decreased $1.2 billion due to runoff as management suspended new lending on non-owner occupied real estate in 2008. The decreases in average commercial mortgage and construction loans were offset by growth in average commercial and industrial loans, which increased $2.5 billion as a result of an increase in new loan origination activity.
Average core deposits increased $1.2 billion compared to 2010. The increase was primarily driven by strong growth in DDAs, which increased $2.3 billion compared to the prior year. The increase in DDAs was partially offset by decreases in interest bearing deposits of $1.0 billion as customers opted to maintain their balances in more liquid accounts due to interest rates remaining near historical lows.
Comparison of 2010 with 2009
Commercial Banking realized net income of $178 million in 2010 compared to a net loss of $101 million in 2009. This improvement was primarily due to an increase in net interest income and a decrease in provision for loan and lease losses. Net interest income increased $162 million primarily due to a mix shift from higher cost term deposits to lower cost deposit products. This improvement was partially offset by the negative impact to net interest income of a decrease in average commercial loans during 2010 and a decrease
40 |
Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of $35 million in the accretion of discounts on loans associated with a previous acquisition.
Provision for loan and lease losses decreased $201 million from 2009. Net charge-offs as a percent of average loans and leases decreased from 329 bps in 2009 to 302 bps in 2010 due to actions taken by the Bancorp to address problem loans which resulted in significant net charge-offs recorded in 2009.
Noninterest income increased $26 million from 2009 primarily as a result of $24 million increase in gains on private equity investments, included in other noninterest income, and a $5 million increase in card and processing revenue partially offset by a $7 million decrease in corporate banking revenue.
Noninterest expense increased $11 million compared to 2009 as the increase in salaries, incentives and benefits was partially offset by the decrease in other noninterest expense. The decrease in other noninterest expense is due to a decrease in loan and lease expense as a result of lower loan demand during 2010, a decrease in collection related expenses and a decrease in FDIC expenses due to a special assessment in the second quarter of 2009.
Average commercial loans and leases decreased $3.0 billion compared to the prior year due to lower customer demand for new originations, lower utilization rates on corporate lines and tighter underwriting standards. These impacts were partially offset by the consolidation of $724 million of commercial and industrial loans on January 1, 2010, which had a remaining balance of $372 million at December 31, 2010.
Average core deposits increased $5.8 billion, or 32%, compared to 2009 due to the migration of higher priced certificates of deposit into transaction accounts, as well as the impact of historically low interest rates and excess customer liquidity.
Branch Banking
Branch Banking provides a full range of deposit and loan and lease products to individuals and small businesses through 1,316 full-service Banking Centers. Branch Banking offers depository and loan products, such as checking and savings accounts, home equity loans and lines of credit, credit cards and loans for automobiles and other personal financing needs, as well as products designed to meet the specific needs of small businesses, including cash management services. The following table contains selected financial data for the Branch Banking segment.
TABLE 15: BRANCH BANKING | ||||||||||||
For the years ended December 31 ($ in millions) |
2011 | 2010 | 2009 | |||||||||
Income Statement Data |
||||||||||||
Net interest income |
$ | 1,423 | 1,514 | 1,577 | ||||||||
Provision for loan and lease losses |
393 | 555 | 601 | |||||||||
Noninterest income: |
||||||||||||
Service charges on deposits |
309 | 369 | 428 | |||||||||
Card and processing revenue |
305 | 298 | 268 | |||||||||
Investment advisory revenue |
117 | 106 | 84 | |||||||||
Other noninterest income |
106 | 112 | 122 | |||||||||
Noninterest expense: |
||||||||||||
Salaries, incentives and benefits |
583 | 560 | 507 | |||||||||
Net occupancy and equipment expense |
235 | 223 | 217 | |||||||||
Card and processing expense |
114 | 105 | 70 | |||||||||
Other noninterest expense |
647 | 668 | 579 | |||||||||
Income before taxes |
288 | 288 | 505 | |||||||||
Applicable income tax expense |
102 | 103 | 178 | |||||||||
Net income |
$ | 186 | 185 | 327 | ||||||||
Average Balance Sheet Data |
||||||||||||
Consumer loans |
$ | 14,151 | 13,125 | 13,278 | ||||||||
Commercial loans |
4,621 | 4,815 | 5,337 | |||||||||
Demand deposits |
8,408 | 7,006 | 6,363 | |||||||||
Interest checking |
8,086 | 7,462 | 7,469 | |||||||||
Savings and money market |
22,241 | 19,963 | 17,010 | |||||||||
Other time and certificates$100,000 and over |
7,778 | 12,712 | 16,995 |
Comparison of 2011 with 2010
Net income increased $1 million compared to 2010, driven by a decline in the provision for loan and lease losses offset by a decrease in net interest income and noninterest income and an increase in noninterest expense. Net interest income decreased $91 million compared to the prior year. The primary drivers of the decline include decreases in the FTP credits for DDAs, lower yields on average commercial and consumer loans, and a decline in average commercial loans. These decreases were partially offset by a favorable shift in the segments deposit mix towards lower cost transaction deposits resulting in declines in interest expense of $193 million compared to 2010, and an increase in average consumer loans.
Provision for loan and lease losses for 2011 decreased $162 million compared to the prior year. The decline in the provision was the result of improved credit trends across all consumer and commercial loan types. Net charge-offs as a percent of average loans and leases decreased to 210 bps for 2011 compared to 313 bps for 2010. The decrease is the result of improved credit trends and tighter underwriting standards. In addition, the decrease is due to $24 million in charge-offs taken on $60 million of commercial loans which were sold or moved to held for sale during the third quarter of 2010.
Noninterest income decreased $48 million compared to the prior year. The decrease was primarily driven by lower service charges on deposits, which declined $60 million, primarily due to the implementation of Regulation E in the third quarter of 2010. The decrease was partially offset by increased card and processing revenue caused by higher debit and credit card transaction volumes. Growth in processing revenue was partially offset by the impact of the implementation of the Dodd-Frank Acts debit card interchange fee cap in the fourth quarter of 2011. Investment advisory revenue also increased due to improved market performance and sales force expansion.
Fifth Third Bancorp |
41 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest expense increased $23 million, primarily driven by increases in salaries, incentives and benefits expense and card and processing expense partially offset by a decline in other noninterest expense. Salaries, incentives and benefits expenses increased $23 million due to an increase in base and incentive compensation driven by investments in the sales force, as well as additional branch personnel. Card and processing expense increased $9 million due to increased costs associated with an increase in the redemption of points for debit and credit card rewards. Other noninterest expense declined $21 million primarily due to a decrease in FDIC insurance expense.
Average consumer loans increased $1.0 billion in 2011 primarily due to increases in average residential mortgage loans of $1.5 billion due to managements decision in the third quarter of 2010 to retain certain mortgage loans. The increases in average residential mortgage loans was partially offset by decreases in average home equity loans of $421 million due to decreased customer demand and continued tighter underwriting standards. Average commercial loans decreased $194 million due to declines in commercial and industrial loans resulting from lower customer demand for new originations and continued tighter underwriting standards applied to both originations and renewals.
Average core deposits increased by $120 million compared to the prior year as the growth in transaction accounts due to excess customer liquidity and historically low interest rates outpaced runoff of higher priced certificates of deposit.
Comparison of 2010 with 2009
Net income decreased $142 million compared to 2009 driven by an increase in noninterest expense and a decrease in net interest income partially offset by a decrease in provision for loan and lease losses. Net interest income decreased $63 million compared to 2009 as the impact of lower loan balances more than offset a favorable shift in the segments deposit mix towards lower cost transaction deposits.
Provision for loan and lease losses decreased $46 million from 2009. Net charge-offs as a percent of average loans and leases decreased from 326 bps in 2009 to 313 bps in 2010 primarily due to improved credit trends and tighter underwriting standards.
Noninterest income decreased $17 million from 2009 primarily due to decreases in service charges on deposits, partially offset by increases in card and processing revenue and investment advisory revenue.
Noninterest expense increased $183 million from 2009 due to additional personnel expenses, net occupancy and equipment expense, card and processing expense and other noninterest expense.
Average consumer loans decreased $153 million primarily due to a decrease in home equity loans due to decreased demand and tighter underwriting standards. Average commercial loans decreased $522 million due to lower customer demand for new originations, lower utilization rates on corporate lines and tighter underwriting standards.
Average core deposits were relatively flat compared to 2009 as runoff of higher priced consumer certificates of deposit, included in other time deposits, was replaced with growth in transaction accounts due to excess customer liquidity and low interest rates.
Consumer Lending
Consumer Lending includes the Bancorps mortgage, home equity, automobile and other indirect lending activities. Mortgage and home equity lending activities include the origination, retention and servicing of mortgage and home equity loans or lines of credit, sales and securitizations of those loans, pools of loans or lines of credit, and all associated hedging activities. Indirect lending activities include loans to consumers through mortgage brokers and automobile dealers. The following table contains selected financial data for the Consumer Lending segment.
TABLE 16: CONSUMER LENDING | ||||||||||||
For the years ended December 31 ($ in millions) |
2011 | 2010 | 2009 | |||||||||
Income Statement Data |
||||||||||||
Net interest income |
$ | 343 | 405 | 476 | ||||||||
Provision for loan and lease losses |
261 | 569 | 558 | |||||||||
Noninterest income: |
||||||||||||
Mortgage banking net revenue |
585 | 619 | 526 | |||||||||
Other noninterest income |
45 | 51 | 97 | |||||||||
Noninterest expense: |
||||||||||||
Salaries, incentives and benefits |
183 | 194 | 181 | |||||||||
Other noninterest expense |
443 | 352 | 328 | |||||||||
Income (loss) before taxes |
86 | (40 | ) | 32 | ||||||||
Applicable income tax expense (benefit) |
30 | (14 | ) | 11 | ||||||||
Net income (loss) |
$ | 56 | (26 | ) | 21 | |||||||
Average Balance Sheet Data |
||||||||||||
Residential mortgage loans |
$ | 9,348 | 9,384 | 10,650 | ||||||||
Home equity |
730 | 851 | 995 | |||||||||
Automobile loans |
10,665 | 9,713 | 8,024 | |||||||||
Consumer leases |
158 | 384 | 629 |
Comparison of 2011 with 2010
Net income was $56 million in 2011 compared to a net loss of $26 million in 2010. The increase was driven by a decline in the provision for loan and lease losses, partially offset by decreases in noninterest income and net interest income and an increase in noninterest expense. Net interest income decreased $62 million due to a decline in average loan balances for residential mortgage, home equity, and consumer leases as well as lower yields on average residential mortgage and automobile loans, partially offset by favorable decreases in the FTP charge applied to the segment.
Provision for loan and lease losses decreased $308 million compared to the prior year, as delinquency metrics and underlying loss trends improved across all consumer loan types. Additionally, 2010 included charge-offs of $123 million on the sale of $228 million of portfolio loans. Net charge-offs as a percent of average loans and leases decreased to 134 bps for 2011 compared to 305 bps for 2010.
Noninterest income decreased $40 million primarily due to decreases in mortgage banking net revenue of $34 million driven by decreases in revenue associated with residential mortgage
42 |
Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
origination activity. The decrease from 2010 was driven by declines in origination fees and gains on loan sales of $78 million due to decreased margins and lower origination volumes, partially offset by an increase in net servicing revenue of $44 million. Net servicing revenue increased due to positive net valuation adjustments on MSRs and free-standing derivatives used to economically hedge MSRs and an increase in servicing fees as a result of an increase in the size of the Bancorps servicing portfolio.
Noninterest expense increased $80 million driven in part by increased FDIC insurance expense, as the methodology used to determine FDIC insurance premiums changed in 2011 from one based on domestic deposits to one based on total assets less tangible equity. Additional changes were due to an increase of $41 million in the provision for representation and warranty claims related to residential mortgage loans sold to third parties and an increase of $21 million in losses on escrow advances to borrowers relating to bank owned residential mortgages. The increase in the provision for representation and warranty claims was due to an increase in resolved claims in 2011 compared to 2010.
Average consumer loans and leases increased $558 million from the prior year. Average automobile loans increased $952 million due to a strategic focus to increase automobile lending throughout 2010 and 2011 through consistent and competitive pricing, disciplined sales execution, and enhanced customer service with our dealership network. This increase was partially offset by declines across all other types of consumer loans. Average residential mortgage loans decreased $36 million as a result of the lower origination volumes discussed previously. Average home equity loans decreased $121 million due to continued runoff in the discontinued brokered home equity product. Average consumer leases decreased $226 million due to runoff as the Bancorp discontinued this product in the fourth quarter of 2008.
Comparison of 2010 with 2009
Consumer Lending reported a net loss of $26 million in 2010 compared to net income of $21 million in 2009 due to a decrease in net interest income and an increase in noninterest expense partially offset by an increase in noninterest income. Net interest income decreased $71 million from 2009 primarily due to a decrease in yields on average interest earning assets, which included the impact of a $23 million decrease in the accretion of discounts on loans associated with a previous acquisition partially offset by a decrease in funding costs during 2010.
Provision for loan and lease losses increased $11 million from 2009 as an increase in net charge-offs on residential mortgage loans was partially offset by decreased automobile loan and home equity net charge-offs. Net charge-offs as a percent of average loans and leases decreased from 307 bps in 2009 to 305 bps in 2010.
Noninterest income increased $47 million, as the result of an increase in mortgage banking net revenue partially offset by a decrease in other noninterest income. The increase in mortgage banking net revenue was driven by increases in net valuation adjustments on MSRs and MSR derivatives and increases in servicing fees due to an increase in loans serviced for others. The decrease in other noninterest income was primarily due to decreases in securities gains related to mortgage servicing rights hedging activities.
Noninterest expense increased $37 million due to increases in salaries, incentives and benefits due to the continued high levels of mortgage loan originations in 2010 and an increase in other noninterest expense as a result of an increase in the representation and warranty reserve partially offset by a decrease in loan and lease expense.
Average consumer loans were flat compared to 2009 as the increase in automobile loans was offset by decreases in all other consumer loan and lease products.
Investment Advisors
Investment Advisors provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. Investment Advisors is made up of four main businesses: FTS, an indirect wholly-owned subsidiary of the Bancorp; FTAM, an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Private Bank; and Fifth Third Institutional Services. FTS offers full service retail brokerage services to individual clients and broker dealer services to the institutional marketplace. FTAM provides asset management services and also advises the Bancorps proprietary family of mutual funds. Fifth Third Private Bank offers holistic strategies to affluent clients in wealth planning, investing, insurance and wealth protection. Fifth Third Institutional Services provide advisory services for institutional clients including states and municipalities. The following table contains selected financial data for the Investment Advisors segment.
TABLE 17: INVESTMENT ADVISORS | ||||||||||||
For the years ended December 31 ($ in millions) |
2011 | 2010 | 2009 | |||||||||
Income Statement Data |
||||||||||||
Net interest income |
$ | 113 | 138 | 157 | ||||||||
Provision for loan and lease losses |
27 | 44 | 57 | |||||||||
Noninterest income: |
||||||||||||
Investment advisory revenue |
364 | 346 | 315 | |||||||||
Other noninterest income |
9 | 10 | 21 | |||||||||
Noninterest expense: |
||||||||||||
Salaries, incentives and benefits |
164 | 156 | 140 | |||||||||
Other noninterest expense |
257 | 249 | 214 | |||||||||
Income before taxes |
38 | 45 | 82 | |||||||||
Applicable income tax expense |
14 | 16 | 29 | |||||||||
Net income |
$ | 24 | 29 | 53 | ||||||||
Average Balance Sheet Data |
||||||||||||
Loans and leases |
$ | 2,037 | 2,574 | 3,112 | ||||||||
Core deposits |
6,798 | 5,897 | 4,939 |
Comparison of 2011 with 2010
Net income decreased $5 million compared to 2010 primarily due to a decline in net interest income and an increase in noninterest expense partially offset by a decrease in the provision for loan and lease losses and an increase in investment advisory revenue. Net interest income decreased $25 million from 2010 due to a decline in average loan and lease balances as well as declines in yields of 29 bps on loans and leases.
Provision for loan and leases losses decreased $17 million from the prior year. Net charge-offs as a percent of average loans and
Fifth Third Bancorp |
43 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
leases decreased to 132 bps compared to 171 bps for the prior year reflecting moderation of general economic conditions during 2011.
Noninterest income increased $17 million compared to 2010 primarily due to increases in investment advisory revenue. The increase in investment advisory revenue was driven by an increase of $10 million in Private Bank income due to market performance and an increase of $7 million in securities and broker income due to continued expansion of the sales force and market performance.
Noninterest expense increased $16 million compared to 2010 due to increases in salaries, incentives and benefit expense resulting from the expansion of the sales force and compensation related to improved performance in investment advisory revenue related fees.
Average loans and leases decreased $537 million compared to the prior year. The decrease was primarily driven by declines in home equity loans of $373 million due to tighter underwriting standards. Average core deposits increased $901 million compared to 2010 due to growth in interest checking and foreign deposits as customers have opted to maintain excess funds in liquid transaction accounts as a result of interest rates remaining near historic lows.
Comparison of 2010 with 2009
Net income decreased $24 million compared to 2009 as a decrease in net interest income and an increase in noninterest expense were partially offset by a decrease in provision for loan and lease losses and an increase in investment advisory revenue. Net interest income decreased $19 million from 2009 due to a decrease in average loans and leases partially offset by an increase in the yield on interest earning assets.
Provision for loan and lease losses decreased $13 million from 2009. Net charge-offs as a percent of average loans and leases decreased from 183 bps in 2009 to 171 bps in 2010 reflecting moderation of general economic conditions during 2010.
Noninterest income increased $20 million compared to 2009 due to an increase in investment advisory revenue partially offset by a decrease in other noninterest income. Investment advisory revenue increased $31 million compared to 2009 due to increases in securities and broker income, private client service income and institutional income.
Noninterest expense increased $51 million compared to 2009 due to higher personnel expenses as a result of the expansion of the sales force and compensation related to improved performance in investment advisory revenue related fees and due to an increase in expenses associated with the revenue sharing agreement between Investment Advisors and Branch Banking.
Average loans and leases decreased $538 million from 2009 primarily due to a decrease in commercial loans as a result of a decrease in demand and a decrease in line utilization rates among the Bancorps high net worth customers due to excess liquidity. Average core deposits increased $958 million compared to 2009 primarily due to growth in interest checking and foreign deposits.
General Corporate and Other
General Corporate and Other includes the unallocated portion of the investment securities portfolio, securities gains and losses, certain non-core deposit funding, unassigned equity, provision expense in excess of net charge-offs or a benefit from the reduction of the ALLL, representation and warranty expense in excess of actual losses or a benefit from the reduction of representation and warranty reserves, the payment of preferred stock dividends and certain support activities and other items not attributed to the business segments.
Comparison of 2011 with 2010
Results for 2011 and 2010 were impacted by a benefit of $748 million and $789 million, respectively, due to reductions in the ALLL. The decrease in provision expense for both years was due to a decrease in nonperforming assets and improvement in delinquency metrics and underlying loss trends. Net interest income increased from $16 million in 2010 to $321 million for 2011 due to a benefit in the FTP rate. The change in net income compared to the prior year was impacted by a $127 million benefit, net of expenses, from the settlement of litigation associated with one of the Bancorps BOLI policies that was recorded in the third quarter of 2010. The results for 2011 were impacted by dividends on preferred stock of $203 million compared to $250 million in the prior year. 2011 results included $153 million in preferred stock dividends as a result of the accelerated accretion of the remaining issuance discount on the Series F Preferred Stock that was repaid in the first quarter of 2011.
Comparison of 2010 with 2009
The results for 2010 were impacted by $789 million in income due to a reduction in the ALLL during 2010 compared to $967 million of provision expense recorded in excess of net charge-offs during 2009. The decrease in provision expense was due to a decrease in nonperforming assets and improvement in credit trends as general economic conditions began to show signs of moderation. The 2010 results were also impacted by $152 million of noninterest income recognized from the settlement of litigation associated with one of the Bancorps BOLI policies and $25 million of noninterest expense from related legal fees associated with the settlement. The results for 2009 were primarily impacted by a $1.8 billion gain resulting from the sale of the processing business. Results for 2009 also included a $244 million gain on the sale of the Bancorps Visa, Inc. Class B shares, a $73 million benefit from the reversal of the Visa litigation reserve, an $18 million benefit in noninterest income due to mark-to-market adjustments on warrants and put options related to the sale of the processing business and a $106 million tax benefit as a result of the Bancorps decision to surrender one of its BOLI policies. These benefits were partially offset by a $54 million BOLI charge reflecting reserves recorded in the connection with the intent to surrender the policy. Additionally, the Bancorp recorded dividends on preferred stock of $226 million during 2009 compared to $250 million during 2010.
44 |
Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Bancorps 2011 fourth quarter net income available to common shareholders was $305 million, or $0.33 per diluted share, compared to net income available to common shareholders of $373 million, or $0.40 per diluted share, for the third quarter of 2011 and net income available to common shareholders of $270 million, or $0.33 per diluted share, for the fourth quarter of 2010. Fourth quarter 2011 earnings included a $54 million charge to noninterest income related to changes in the fair value of a swap liability that the Bancorp entered into in conjunction with its sale of Visa, Inc Class B shares in 2009, a $30 million decrease in debit interchange revenue due to changes in debit interchange regulations and $10 million in positive valuation adjustments on puts and warrants associated with the sale of the processing business. Third quarter 2011 results included $28 million of costs related to the termination of certain FHLB borrowings and hedging transactions and a $17 million reduction in other noninterest income related to the valuation of a total return swap entered into as part of the sale of Visa, Inc. Class B shares. Fourth quarter 2010 earnings included the impact of a $17 million charge related to the early extinguishment of $1.0 billion in FHLB borrowings as well as $21 million in net investment securities gains. Provision expense was $55 million in the fourth quarter of 2011, down from $87 million in the third quarter of 2011 and $166 million in the fourth quarter of 2010. Both the sequential decrease and the decline from the fourth quarter of 2010 reflect improved credit trends, as evidenced by a decrease in net charge-offs and improvements in nonperforming assets and delinquent loans. The ALLL to loan and lease ratio was 2.78% as of December 31, 2011, compared to 3.08% as of September 30, 2011 and 3.88% as of December 31, 2010.
Fourth quarter 2011 net interest income of $920 million increased $18 million from the third quarter of 2011 and $1 million from the same period a year ago. The increase from the third quarter of 2011 was driven by both a decline in interest expense and an increase in interest income. Interest expense declined $16 million from the third quarter of 2011, driven by lower deposit costs, including the $16 million impact of continued run-off of high-rate CDs and their replacement into lower yielding products. Interest income increased $2 million from the third quarter of 2011 as an increase in average loans was partially offset by a decline in average securities and lower yields on average interest earning assets. Net interest income was flat in comparison to the fourth quarter of 2010, largely due to lower loan and investment securities yields partially offset by higher average loan balances, run-off in higher-priced CDs, and mix shift to lower cost deposit products.
Fourth quarter 2011 noninterest income of $550 million decreased $115 million compared to the third quarter of 2011 and $106 million compared to the fourth quarter of 2010. The sequential decline was driven by a $54 million reduction in income due to the increase in fair value of the liability related to the total return swap entered into as part of the 2009 sale of Visa, Inc. Class B shares, as well as a $22 million decrease in mortgage banking net revenue. Compared to the fourth quarter of 2010, the decline was driven by decreases of $31 million in other noninterest income, $21 million in card and processing fees and $16 million in securities gains, net. The fourth quarter of 2011 included a benefit of $10 million in mark-to-market adjustments on warrants and put options related to the sale of the processing business, compared to a benefit of $3 million in the third quarter of 2011 and the fourth quarter of 2010.
Mortgage banking net revenue was $156 million in the fourth quarter of 2011, compared to $178 million in the third quarter of 2011 and $149 million in the fourth quarter of 2010. Fourth quarter originations were $7.1 billion, compared to $4.5 billion in the previous quarter and $7.4 billion in the same quarter last year. These originations resulted in gains on mortgage loan sales of $152 million in the fourth quarter of 2011, compared to $119 million in the third quarter of 2011 and $158 million in the fourth quarter of 2010. Gain
on sale margins declined from third quarter of 2011 and fourth quarter of 2010 levels, due to increased competition for originations as volumes slowed during the quarter. Also impacting mortgage banking net revenue was net valuation adjustments on MSRs and MSR derivatives. In the fourth quarter of 2011 and 2010, losses on the Bancorps free-standing MSR derivatives exceeded impairment reversal recorded against the hedged MSRs. These factors led to a net loss of $54 million on the net valuation adjustments on MSRs in the fourth quarter of 2011, compared to a net zero and a net loss of $67 million in the third quarter of 2011 and the fourth quarter of 2010, respectively. A net loss on non-qualifying hedges on MSR of $3 million in the fourth quarter of 2011 was included in noninterest income within the Consolidated Statements of Income, but shown separate from mortgage banking net revenue. Net gains on non-qualifying hedges on mortgage servicing rights were $6 million and $14 million in the third quarter of 2011 and the fourth quarter of 2010, respectively.
Service charges on deposits of $136 million increased one percent sequentially and decreased three percent compared to the fourth quarter of 2010. Retail service charges were flat sequentially and declined by seven percent from a year ago, largely driven by the impact of Regulation E. Commercial service charges increased two percent sequentially due to reductions in earnings credit rates and account growth and were flat when compared to the same quarter last year.
Corporate banking revenue of $82 million decreased $5 million from the previous quarter and decreased $21 million from the fourth quarter of 2010. The sequential decline was primarily driven by lower foreign exchange, interest rate derivative, and lease remarketing fees. The year-over-year decline was driven by these factors as well as lower syndication fees and institutional sales revenue.
Investment advisory revenue of $90 million decreased two percent sequentially and three percent from the fourth quarter of 2010. Sequential and year-over-year declines were driven by lower securities and brokerage revenue, institutional trust fees, and mutual fund fees partially offset by higher private client service revenue.
Card and processing revenue of $60 million decreased $18 million compared to the third quarter of 2011 and $20 million from the fourth quarter of 2010. Both decreases were driven by the impact of the recently enacted debit interchange legislation partially offset by increased transaction volumes and mitigation activity in response to the debit interchange legislation.
The net gain on investment securities was $5 million in the fourth quarter of 2011 compared to a net gain of $26 million in the third quarter of 2011 and a net gain of $21 million in the fourth quarter of 2010.
Noninterest expense of $993 million increased $47 million sequentially and increased $6 million from the fourth quarter of 2010. Fourth quarter 2011 expenses included $14 million of reserve related costs associated with bankcard association membership litigation and $5 million in other litigation reserve additions. Third quarter 2011 expenses included $28 million of costs related to the termination of certain FHLB borrowings and hedging transactions, while fourth quarter 2010 results included $17 million of expenses related to the early termination of $1.0 billion in FHLB borrowings. Excluding these items, noninterest expense increased six percent from the third quarter of 2011 and was flat compared with the fourth quarter of 2010, driven by increased mortgage fulfillment costs and $6 million of pension settlements.
Net charge-offs totaled $239 million in the fourth quarter of 2011, compared to $262 million in the third quarter of 2011 and $356 million in the fourth quarter of 2010. The decreases in net charge-offs from both periods reflects continued improvement in the credit quality of portfolio loans. Commercial net charge-offs were $113 million in the fourth quarter of 2011, compared to $136
Fifth Third Bancorp |
45 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
million in the third quarter of 2011 and $173 million in the fourth quarter of 2010. Consumer net charge-offs were $126 million in the fourth quarter and third quarter of 2011 and $183 million in the fourth quarter of 2010.
COMPARISON OF THE YEAR ENDED 2010 WITH 2009
Net income available to common shareholders for the year ended December 31, 2010 was $503 million, or $0.63 per diluted share, compared to net income available to common shareholders of $511 million, or $0.67 per diluted share, in 2009. Overall, $152 million of noninterest income from the settlement of litigation associated with one of the Bancorps BOLI policies as well as an increase in mortgage banking net revenue and a decrease in the provision for loan and lease losses of $2.0 billion compared to 2009, were partially offset by decreases in noninterest income and card and processing revenue as well as $110 million of noninterest expense from charges to representation and warranty reserves related to residential mortgage loans sold to third parties. Results for 2009 also included a $106 million tax benefit as a result of the Bancorps decision to surrender one of its BOLI policies and a $55 million income tax benefit from an agreement with the IRS to settle all of the Bancorps disputed leverage leases for all open years. These benefits were partially offset by a $54 million BOLI charge reflecting reserves recorded in the connection with the intent to surrender the policy. While the Bancorp continued to be affected by rising unemployment rates, weakened housing markets, particularly in the upper Midwest and Florida, and a challenging credit environment, credit trends began to show signs of stabilization in late 2009, which led to the decrease in provision expense from $3.5 billion at December 31, 2009 to $1.5 billion at December 31, 2010.
Net interest income increased to $3.6 billion, from $3.4 billion in 2009. The primary reason for the seven percent increase in net interest income was a 39 bps increase in the net interest rate spread due to the runoff of higher priced term deposits in 2010 and the benefit of lower rates offered on new term deposits, as well as improved pricing on commercial loans. These benefits were partially offset by a decrease in the accretion of purchase accounting adjustments related to the 2008 acquisition of First Charter, which were $68 million in 2010, compared to $136 million in 2009. Net interest margin was 3.66% in 2010, an increase of 34 bps from 2009.
Noninterest income decreased 43% to $2.7 billion in 2010 compared to $4.8 billion in 2009, driven primarily by the sale of the processing business in the second quarter of 2009, which resulted in a gain of $1.8 billion, as well as a $244 million gain related to the sale of the Bancorps Visa, Inc. Class B shares in 2009. Mortgage banking net revenue increased $94 million as a result of strong net servicing revenue and higher margins on sold loans, partially offset by a decline in mortgage originations. Card and processing revenue decreased 49% due to the sale of the processing business in the second quarter of 2009. Service charges on deposits decreased $58 million primarily due to the impact of new overdraft regulation and policies which resulted in a decrease in overdraft occurrences. Investment advisory revenue increased $35 million as the result of improved market performance and sales production that drove an increase in brokerage activity and assets under care. Corporate banking revenue decreased two percent largely due to decreases in international income and lease remarketing fees, partially offset by growth in syndication and business lending fees.
Noninterest expense increased $29 million, or one percent, compared to 2009. Noninterest expense in 2010 included $25 million in legal fees associated with the settlement of claims with the insurance carrier on one of the Bancorps BOLI policies while noninterest expense in 2009 included a $73 million reduction in the Visa litigation reserve as well as a $55 million FDIC special assessment charge. Total personnel costs increased $94 million, or six percent in 2010 compared to 2009, due primarily to investments in the sales force in 2010. In addition, charges to representation and
warranty reserves related to residential mortgage loans sold to third-parties totaled $110 million in 2010, compared to $31 million in 2009 due to a higher volume of repurchase demands. Partially offsetting these negative impacts was a $123 million decrease in the provision for unfunded commitments and letters of credit due to lower estimates of inherent losses as the result of a decrease in delinquent loans driven by moderation in economic conditions during 2010. In addition, card and processing expense decreased $85 million compared to 2009 due to the sale of the processing business in the second quarter of 2009. Noninterest expense in 2010 and 2009 included $242 million and $269 million, respectively, of FDIC insurance and other taxes.
Net charge-offs as a percent of average loans and leases decreased to 3.02% in 2010 compared to 3.20% in 2009. In the third quarter of 2010, the Bancorp took significant actions to reduce credit risk. Residential mortgage loans in the Bancorps portfolio with a carrying value of $228 million were sold for $105 million, generating $123 million in net charge-offs. Additionally, commercial loans with a carrying value prior to transfer of $961 million were transferred to held-for-sale, generating $387 million in net charge-offs. Including the impact of these actions, nonperforming assets as a percent of loans, leases and other assets, including other real estate owned (excluding nonaccrual loans held for sale) decreased to 2.79% at December 31, 2010, from 4.22% at December 31, 2009.
The Bancorp took a number of actions to strengthen its capital position in 2009. On June 4, 2009, the Bancorp completed an at-the-market offering resulting in the sale of $1 billion of its common shares at an average share price of $6.33. In addition, on June 17, 2009, the Bancorp completed its offer to exchange shares of its common stock and cash for shares of its Series G convertible preferred stock. As a result, the Bancorp recognized an increase in net income available to common shareholders of $35 million based upon the difference in carrying value of the Series G preferred shares and the fair value of the common shares and cash issued.
46 |
Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Loans and Leases
The Bancorp classifies its loans and leases based upon the primary purpose of the loan. Table 18 summarizes end of period loans and
leases, including loans held for sale and Table 19 summarizes average total loans and leases, including loans held for sale.
TABLE 18: COMPONENTS OF TOTAL LOANS AND LEASES (INCLUDES HELD FOR SALE) | ||||||||||||||||||||
As of December 31 ($ in millions) |
2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Commercial: |
||||||||||||||||||||
Commercial and industrial loans |
$ | 30,828 | 27,275 | 25,687 | 29,220 | 26,079 | ||||||||||||||
Commercial mortgage loans |
10,214 | 10,992 | 11,936 | 12,731 | 11,967 | |||||||||||||||
Commercial construction loans |
1,037 | 2,111 | 3,871 | 5,335 | 5,561 | |||||||||||||||
Commercial leases |
3,531 | 3,378 | 3,535 | 3,666 | 3,737 | |||||||||||||||
Subtotal commercial |
45,610 | 43,756 | 45,029 | 50,952 | 47,344 | |||||||||||||||
Consumer: |
||||||||||||||||||||
Residential mortgage loans |
13,474 | 10,857 | 9,846 | 10,292 | 11,433 | |||||||||||||||
Home equity |
10,719 | 11,513 | 12,174 | 12,752 | 11,874 | |||||||||||||||
Automobile loans |
11,827 | 10,983 | 8,995 | 8,594 | 11,183 | |||||||||||||||
Credit card |
1,978 | 1,896 | 1,990 | 1,811 | 1,591 | |||||||||||||||
Other consumer loans and leases |
364 | 702 | 812 | 1,194 | 1,157 | |||||||||||||||
Subtotal consumer |
38,362 | 35,951 | 33,817 | 34,643 | 37,238 | |||||||||||||||
Total loans and leases |
$ | 83,972 | 79,707 | 78,846 | 85,595 | 84,582 | ||||||||||||||
Total portfolio loans and leases (excludes loans held for sale) |
$ | 81,018 | 77,491 | 76,779 | 84,143 | 80,253 |
Total loans and leases, including loans held for sale, increased $4.3 billion, or five percent, from December 31, 2010. The increase in total loans and leases from December 31, 2010 was the result of a $1.9 billion, or four percent, increase in commercial loans and a $2.4 billion, or seven percent, increase in consumer loans.
The increase of $1.9 billion in commercial loans and leases from 2010 was primarily due to an increase in commercial and industrial loans partially offset by a decrease in commercial mortgage and commercial construction loans. Commercial and industrial loans increased $3.6 billion, or 13%, due to an increase in new loan origination activity. Commercial mortgage loans decreased $778 million, or seven percent, and commercial construction loans decreased $1.1 billion, or 51%, from December 31, 2010 as the Bancorp experienced continued run-off in these loan categories. The run-off activity was the result of managements decision to suspend new homebuilder and developer lending in 2007 and non-owner occupied real estate lending in 2008 combined with weak customer demand for owner-occupied commercial mortgage loans and tighter underwriting standards.
Total consumer loans and leases increased $2.4 billion from 2010 primarily due to an increase in residential mortgage loans and automobile loans partially offset by a decrease in home equity loans
and other consumer loans and leases. The increase of $2.6 billion, or 24%, in residential mortgage loans from December 31, 2010, was driven by a $1.7 billion increase in portfolio loans due to managements decision in the third quarter of 2010 and throughout 2011 to retain certain shorter term residential mortgage loans originated through the Bancorps retail branches. Additionally, residential mortgage loans held for sale increased $901 million from December 31, 2010 due to an increase in refinancing activity in the fourth quarter of 2011 and the timing of delivery of loans. Automobile loans increased $844 million, or eight percent, compared to December 31, 2010, due to strong origination volumes through consistent and competitive pricing, enhanced customer service with our dealership network and disciplined sales execution. Home equity loans decreased $794 million, or seven percent, due to tighter underwriting standards implemented in 2010 and 2011 and decreased customer demand. Other consumer loans and leases, primarily made up of automobile leases as well as student loans designated as held for sale, decreased $338 million, or 48%, compared to December 31, 2010 due to a decline in new originations driven by tighter underwriting standards implemented in 2010 and 2011 and runoff due to the Bancorps decision to discontinue auto lease originations.
TABLE 19: COMPONENTS OF AVERAGE TOTAL LOANS AND LEASES (INCLUDES HELD FOR SALE) | ||||||||||||||||||||
As of December 31 ($ in millions) |
2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Commercial: |
||||||||||||||||||||
Commercial and industrial loans |
$ | 28,546 | 26,334 | 27,556 | 28,426 | 22,351 | ||||||||||||||
Commercial mortgage loans |
10,447 | 11,585 | 12,511 | 12,776 | 11,078 | |||||||||||||||
Commercial construction loans |
1,740 | 3,066 | 4,638 | 5,846 | 5,661 | |||||||||||||||
Commercial leases |
3,341 | 3,343 | 3,543 | 3,680 | 3,683 | |||||||||||||||
Subtotal commercial |
44,074 | 44,328 | 48,248 | 50,728 | 42,773 | |||||||||||||||
Consumer: |
||||||||||||||||||||
Residential mortgage loans |
11,318 | 9,868 | 10,886 | 10,993 | 10,489 | |||||||||||||||
Home equity |
11,077 | 11,996 | 12,534 | 12,269 | 11,887 | |||||||||||||||
Automobile loans |
11,352 | 10,427 | 8,807 | 8,925 | 10,704 | |||||||||||||||
Credit card |
1,864 | 1,870 | 1,907 | 1,708 | 1,276 | |||||||||||||||
Other consumer loans and leases |
529 | 743 | 1,009 | 1,212 | 1,219 | |||||||||||||||
Subtotal consumer |
36,140 | 34,904 | 35,143 | 35,107 | 35,575 | |||||||||||||||
Total average loans and leases |
$ | 80,214 | 79,232 | 83,391 | 85,835 | 78,348 | ||||||||||||||
Total portfolio loans and leases (excludes loans held for sale) |
$ | 78,533 | 77,045 | 80,681 | 83,895 | 76,033 |
Fifth Third Bancorp |
47 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Average total commercial loans and leases decreased $254 million, or one percent, compared to December 31, 2010. The decrease in average total commercial loans and leases was driven by a decrease in average commercial mortgage loans and average commercial construction loans, partially offset by an increase in average commercial and industrial loans. Average commercial mortgage loans decreased $1.1 billion, or 10%, average commercial construction loans decreased $1.3 billion, or 43%, and average commercial and industrial loans increased $2.2 billion, or eight percent due to the reasons previously discussed.
Average total consumer loans and leases increased $1.2 billion, or four percent, compared to December 31, 2010. The increase in average total consumer loans and leases from December 2010 was driven by an increase in average residential mortgage loans and average automobile loans, partially offset by a decrease in home equity loans and other consumer loans and leases. Average residential mortgage loans increased $1.5 billion, or 15%, average automobile loan balances increased $925 million, or nine percent, average home equity loans decreased $919 million, or eight percent, and average other consumer loans and leases decreased $214 million, or 29%, from December 31, 2010 due to the reasons previously discussed.
Investment Securities
The Bancorp uses investment securities as a means of managing interest rate risk, providing liquidity support and providing collateral for pledging purposes. As of December 31, 2011, total investment securities were $15.9 billion compared to $16.1 billion at December 31, 2010. See Note 1 of the Notes to Consolidated Financial Statements for the Bancorps methodology for both classifying investment securities and managements evaluation of securities in an unrealized loss position for OTTI.
At December 31, 2011, the Bancorps investment portfolio consisted primarily of AAA-rated available-for-sale securities. During the years ended December 31, 2011 and 2010, the Bancorp recognized $19 million and $3 million of OTTI on its investments securities portfolio, respectively. During the year ended December 31, 2009, OTTI was immaterial to the Consolidated Financial Statements.
The Bancorp did not hold asset-backed securities backed by subprime mortgage loans in its investment portfolio. Additionally, there was approximately $122 million of securities classified as below investment grade as of December 31, 2011, compared to $137 million as of December 31, 2010.
TABLE 20: COMPONENTS OF INVESTMENT SECURITIES |
||||||||||||||||||||
As of December 31 ($ in millions) |
2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Available-for-sale and other: (amortized cost basis) |
||||||||||||||||||||
U.S. Treasury and Government agencies |
$ | 171 | 225 | 464 | 186 | 3 | ||||||||||||||
U.S. Government sponsored agencies |
1,782 | 1,564 | 2,143 | 1,651 | 160 | |||||||||||||||
Obligations of states and political subdivisions |
96 | 170 | 240 | 323 | 490 | |||||||||||||||
Agency mortgage-backed securities |
9,743 | 10,570 | 11,074 | 8,529 | 8,738 | |||||||||||||||
Other bonds, notes and debentures (a) |
1,792 | 1,338 | 2,541 | 613 | 385 | |||||||||||||||
Other securities (b) |
1,030 | 1,052 | 1,417 | 1,248 | 1,045 | |||||||||||||||
Total available-for-sale and other securities |
$ | 14,614 | 14,919 | 17,879 | 12,550 | 10,821 | ||||||||||||||
Held-to-maturity: (amortized cost basis) |
||||||||||||||||||||
Obligations of states and political subdivisions |
$ | 320 | 348 | 350 | 355 | 351 | ||||||||||||||
Other bonds, notes and debentures |
2 | 5 | 5 | 5 | 4 | |||||||||||||||
Total held-to-maturity |
$ | 322 | 353 | 355 | 360 | 355 | ||||||||||||||
Trading: (fair value) |
||||||||||||||||||||
Variable rate demand notes |
$ | | 106 | 235 | 1,140 | | ||||||||||||||
Other securities |
177 | 188 | 120 | 51 | 171 | |||||||||||||||
Total trading |
$ | 177 | 294 | 355 | 1,191 | 171 |
(a) | Other bonds, notes, and debentures consist of non-agency mortgage backed securities, certain other asset backed securities (primarily automobile and commercial loan backed securities) and corporate bond securities. |
(b) | Other securities consist of FHLB and FRB restricted stock holdings that are carried at par, FHLMC and FNMA preferred stock holdings and certain mutual fund holdings and equity security holdings. |
As of December 31, 2011, available-for-sale securities on an amortized cost basis decreased $305 million, or two percent, from December 31, 2010 due to a decrease in agency mortgage-backed securities, partially offset by an increase in U.S. government sponsored agencies securities and an increase in other bonds, notes and debentures. Agency mortgage-backed securities decreased from 2010 as excess cash was invested in other short-term investments. The increase in both U.S. government sponsored agencies securities and other bonds, notes and debentures was primarily driven by increased purchases of these instruments.
At December 31, 2011 and 2010, available-for-sale securities were 14% of total interest-earning assets compared to 15% at December 31, 2010. The estimated weighted-average life of the debt securities in the available-for-sale portfolio was 3.6 years at December 31, 2011, compared to 4.4 years at December 31, 2010.
In addition, at December 31, 2011, the available-for-sale securities portfolio had a weighted-average yield of 3.66%, compared to 4.24% at December 31, 2010.
Information presented in Table 21 is on a weighted-average life basis, anticipating future prepayments. Yield information is presented on an FTE basis and is computed using historical cost balances. Maturity and yield calculations for the total available-for-sale portfolio exclude equity securities that have no stated yield or maturity. Total net unrealized gains on the available-for-sale securities portfolio were $748 million at December 31, 2011, compared to $495 million at December 31, 2010. The increase in net unrealized gains was due to the Federal Reserves low interest rates causing an increase in investor demand for higher-coupon securities that offer a higher yield.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 21: CHARACTERISTICS OF AVAILABLE-FOR-SALE AND OTHER SECURITIES
As of December 31, 2011 ($ in millions) |
Amortized Cost | Fair Value |
|
Weighted-Average
Life (in years) |
|
|
Weighted-Average
Yield |
|
||||||||
U.S. Treasury and Government agencies: |
||||||||||||||||
Average life of one year or less |
$170 | 170 | 0.3 | 0.71 | % | |||||||||||
Average life 5 10 years |
1 | 1 | 7.1 | 1.48 | ||||||||||||
Total |
171 | 171 | 0.4 | 0.71 | ||||||||||||
U.S. Government sponsored agencies: |
||||||||||||||||
Average life of one year or less |
50 | 51 | 0.7 | 1.54 | ||||||||||||
Average life 1 5 years |
1,107 | 1,208 | 4.2 | 3.35 | ||||||||||||
Average life 5 10 years |
625 | 703 | 5.5 | 3.90 | ||||||||||||
Total |
1,782 | 1,962 | 4.6 | 3.49 | ||||||||||||
Obligations of states and political subdivisions: (a) |
||||||||||||||||
Average life of one year or less |
6 | 8 | 0.2 | 8.26 | ||||||||||||
Average life 1 5 years |
53 | 53 | 3.2 | 0.13 | ||||||||||||
Average life 5 10 years |
30 | 33 | 8.5 | 6.04 | ||||||||||||
Average life greater than 10 years |
7 | 7 | 10.7 | 4.39 | ||||||||||||
Total |
96 | 101 | 5.2 | 2.82 | ||||||||||||
Agency mortgage-backed securities: |
||||||||||||||||
Average life of one year or less |
645 | 665 | 0.7 | 4.59 | ||||||||||||
Average life 1 5 years |
8,759 | 9,254 | 3.3 | 3.91 | ||||||||||||
Average life 5 10 years |
339 | 365 | 7.1 | 3.97 | ||||||||||||
Total |
9,743 | 10,284 | 3.3 | 3.96 | ||||||||||||
Other bonds, notes and debentures: |
||||||||||||||||
Average life of one year or less |
164 | 167 | 0.5 | 2.46 | ||||||||||||
Average life 1 5 years |
1,241 | 1,251 | 3.4 | 2.22 | ||||||||||||
Average life 5 10 years |
297 | 304 | 6.1 | 2.61 | ||||||||||||
Average life greater than 10 years |
90 | 90 | 28.9 | 6.50 | ||||||||||||
Total |
1,792 | 1,812 | 4.8 | 2.52 | ||||||||||||
Other securities |
1,030 | 1,032 | ||||||||||||||
Total available-for-sale and other securities |
$14,614 | 15,362 | 3.6 | 3.66 | % |
(a) | Taxable-equivalent yield adjustments included in the above table are 2.86%, 0.04%, 2.09%, 1.52% and 0.97% for securities with an average life of one year or less, 1-5 years, 5-10 years, greater than 10 years and in total, respectively. |
Trading securities decreased $117 million, or 40%, compared to December 31, 2010. The decrease from December 31, 2010 was driven primarily by the sale of VRDNs during the first quarter of 2011, which were held by the Bancorp in its trading securities portfolio. These securities were purchased from the market through FTS who was also the remarketing agent. Rates on these securities declined in 2010 and into 2011 and, as a result, the Bancorp continued to sell the VRDNs, replacing them with higher-yielding agency mortgage-backed securities classified as available-for-sale. For more information on VRDNs, see Note 17 of the Notes to Consolidated Financial Statements.
Deposits
The Bancorps deposit balances represent an important source of funding and revenue growth opportunity. The Bancorp continues to focus on core deposit growth in its retail and commercial franchises by improving customer satisfaction, building full relationships and offering competitive rates. Core deposits represented 71% and 70% of the Bancorps asset funding base at December 31, 2011 and 2010, respectively.
TABLE 22: DEPOSITS
As of December 31 ($ in millions) |
2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Demand |
$ | 27,600 | 21,413 | 19,411 | 15,287 | 14,404 | ||||||||||||||
Interest checking |
20,392 | 18,560 | 19,935 | 14,222 | 15,254 | |||||||||||||||
Savings |
21,756 | 20,903 | 17,898 | 16,063 | 15,635 | |||||||||||||||
Money market |
4,989 | 5,035 | 4,431 | 4,689 | 6,521 | |||||||||||||||
Foreign office |
3,250 | 3,721 | 2,454 | 2,144 | 2,572 | |||||||||||||||
Transaction deposits |
77,987 | 69,632 | 64,129 | 52,405 | 54,386 | |||||||||||||||
Other time |
4,638 | 7,728 | 12,466 | 14,350 | 11,440 | |||||||||||||||
Core deposits |
82,625 | 77,360 | 76,595 | 66,755 | 65,826 | |||||||||||||||
Certificates$100,000 and over |
3,039 | 4,287 | 7,700 | 11,851 | 6,738 | |||||||||||||||
Other |
46 | 1 | 10 | 7 | 2,881 | |||||||||||||||
Total deposits |
$ | 85,710 | 81,648 | 84,305 | 78,613 | 75,445 |
Core deposits increased $5.3 billion, or seven percent, compared to December 31, 2010, driven by an increase of $8.4 billion, or 12%, in transaction deposits, partially offset by a decrease of $3.1 billion, or 40%, in other time deposits. Transaction deposits increased due to an increase in demand deposits, interest checking deposits, and savings deposits,
partially offset by a decrease in foreign office deposits. Demand deposits increased $6.2 billion, or 29%, due to an increase in new accounts, growth from maturing certificates of deposits, and commercial customers opting to hold money in demand deposit accounts rather than investing excess cash given
Fifth Third Bancorp |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
current market conditions. Interest checking deposits increased $1.8 billion, or 10%, primarily due to an increase in new accounts from the Preferred Checking Program introduced in February 2011 and growth from maturing certificates of deposits. Savings deposits increased $853 million, or four percent, primarily due to growth from maturing certificates of deposits and the impact of the relationship savings program. Other time deposits decreased $3.1 billion, or 40%, compared to December 31, 2010, primarily as a result of continued runoff of certificates of deposits due to the low interest rate environment, as customers have opted to maintain balances in more liquid transaction accounts.
Included in core deposits are foreign office deposits, which are primarily Eurodollar sweep accounts from the
Bancorps commercial customers. These accounts bear interest rates at slightly higher than money market accounts and unlike repurchase agreements the Bancorp does not have to pledge collateral. Foreign office deposits decreased $471 million, or 13%, from December 31, 2010 due to a reduction in sweep activity from commercial demand deposits.
The Bancorp uses certificates of deposit $100,000 and over, as a method to fund earning asset growth. At December 31, 2011, certificates $100,000 and over decreased $1.2 billion, or 29%, compared to December 31, 2010 due to continued runoff from the low rate environment.
The following table presents average deposits for the twelve months ending December 31:
TABLE 23: AVERAGE DEPOSITS
As of December 31 ($ in millions) |
2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Demand |
$ | 23,389 | 19,669 | 16,862 | 14,017 | 13,261 | ||||||||||||||
Interest checking |
18,707 | 18,218 | 15,070 | 14,191 | 14,820 | |||||||||||||||
Savings |
21,652 | 19,612 | 16,875 | 16,192 | 14,836 | |||||||||||||||
Money market |
5,154 | 4,808 | 4,320 | 6,127 | 6,308 | |||||||||||||||
Foreign office |
3,490 | 3,355 | 2,108 | 2,153 | 1,762 | |||||||||||||||
Transaction deposits |
72,392 | 65,662 | 55,235 | 52,680 | 50,987 | |||||||||||||||
Other time |
6,260 | 10,526 | 14,103 | 11,135 | 10,778 | |||||||||||||||
Core deposits |
78,652 | 76,188 | 69,338 | 63,815 | 61,765 | |||||||||||||||
Certificates$100,000 and over |
3,656 | 6,083 | 10,367 | 9,531 | 6,466 | |||||||||||||||
Other |
7 | 6 | 157 | 2,067 | 1,393 | |||||||||||||||
Total average deposits |
$ | 82,315 | 82,277 | 79,862 | 75,413 | 69,624 |
On an average basis, core deposits increased $2.5 billion, or three percent, compared to December 31, 2010 due to increases in demand deposits of $3.7 billion, interest checking of $489 million and savings deposits of $2.0 billion, partially offset by a decrease in other time deposits of $4.3 billion.
This activity was the result of the migration of other time deposits and certificates of deposits greater than $100,000 into transaction accounts, due to the impact of historically low rates and excess customer liquidity and the reasons discussed above.
Borrowings
Total borrowings increased $1.9 billion, or 16%, from December 31, 2010 due primarily to an increase in other
short-term borrowings. As of December 31, 2011, total borrowings as a percentage of interest-bearing liabilities was 19% compared to 16% at December 31, 2010.
TABLE 24: BORROWINGS | ||||||||||||||||||||
As of December 31 ($ in millions) |
2011 | 2010 | 2009 | 2008 | 2009 | |||||||||||||||
Federal funds purchased |
$ | 346 | 279 | 182 | 287 | 4,427 | ||||||||||||||
Other short-term borrowings |
3,239 | 1,574 | 1,415 | 9,959 | 4,747 | |||||||||||||||
Long-term debt |
9,682 | 9,558 | 10,507 | 13,585 | 12,857 | |||||||||||||||
Total borrowings |
$ | 13,267 | 11,411 | 12,104 | 23,831 | 22,031 |
Other short-term borrowings increased $1.7 billion, or 106%, from December 31, 2010 driven by an increase of $1.5 billion in short-term FHLB borrowings due to the runoff of certificates of deposits greater than $100,000. Long-term debt increased $124 million, or one percent, from December 31, 2010 due to the issuance of $1.0 billion in senior notes during the first quarter of 2011 and a $375 million increase in structured repurchase agreements. The increase in long-term debt was partially offset by the redemption of $519 million of certain trust preferred securities during 2011, the redemption of a $500 million long-term FHLB advance during the third quarter
of 2011, and pay-downs related to previously consummated home equity and auto loan securitizations. In addition the Bancorp purchased $85 million of outstanding home equity securitization debt from the market in 2011 which was accounted for as an extinguishment of debt. For further information on the Bancorps previous securitization activity refer to Note 11 of the Notes to the Consolidated Financial Statements. During 2011, the Bancorp recorded an $8 million gain on extinguishment of long-term debt within other noninterest expense in the Consolidated Statements of Income.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 25: AVERAGE BORROWINGS | ||||||||||||||||||||
As of December 31 ($ in millions) |
2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Federal funds purchased |
$ | 345 | 291 | 517 | 2,975 | 3,646 | ||||||||||||||
Other short-term borrowings |
2,777 | 1,635 | 6,463 | 7,785 | 3,244 | |||||||||||||||
Long-term debt |
10,154 | 10,902 | 11,035 | 13,903 | 12,505 | |||||||||||||||
Total average borrowings |
$ | 13,276 | 12,828 | 18,015 | 24,663 | 19,395 |
Average total borrowings increased $448 million, or three percent, compared to December 31, 2010, primarily due to an increase in average other short-term borrowings, partially offset by a decrease in average long-term debt. Average other short-term borrowings increased $1.1 billion, or 70%, due to the previously mentioned increase in short-term FHLB borrowings. Average long-term debt decreased $748 million, or seven percent, due to a decrease of $1.0 billion in average long-term FHLB borrowings.
Information on the average rates paid on borrowings is discussed in the net interest income section of the MD&A. In addition, refer to the Liquidity Risk Management section for a discussion on the role of borrowings in the Bancorps liquidity management.
Fifth Third Bancorp |
51 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Managing risk is an essential component of successfully operating a financial services company. The Bancorps risk management approach includes processes for identifying, assessing, managing, monitoring and reporting risks. The ERM division, led by the Bancorps Chief Risk Officer, and the Bancorp Credit division, led by the Bancorps Chief Credit Officer, ensure the consistency and adequacy of the Bancorps risk management approach within the structure of the Bancorps affiliate operating model. In addition, the Internal Audit division provides an independent assessment of the Bancorps internal control structure and related systems and processes.
The assumption of risk requires robust and active risk management practices that comprise an integrated and comprehensive set of activities, measures and strategies that apply to the entire organization. The Bancorp has established a Risk Appetite Framework that provides the foundations of corporate risk capacity, risk appetite and risk tolerances. The Bancorps risk capacity is represented by its available financial resources. Risk capacity sets an absolute limit on risk-assumption in the Bancorps annual and strategic plans. The Bancorp understands that not all financial resources may persist as viable loss buffers over time. Further, consideration must be given to planned or foreseeable events that would reduce risk capacity. Those factors take the form of capacity adjustments to arrive at an Operating Risk Capacity. Operating Risk Capacity represents the operating risk level the Bancorp can assume while maintaining its solvency standard. The Bancorps policy currently discounts its Operating Risk Capacity by a minimum of five percent to provide a buffer; as a result, the Bancorps risk appetite is limited by policy to, at most, 95% of its Operating Risk Capacity.
Economic capital is the amount of unencumbered financial resources required to support the Bancorps risks. The Bancorp measures economic capital under the assumption that it expects to maintain debt ratings at strong investment grade levels over time. The Bancorps capital policies require that the Operating Risk Capacity less the aforementioned buffer exceed the calculated economic capital required in its business.
Risk appetite is the aggregate amount of risk the Bancorp is willing to accept in pursuit of its strategic and financial objectives. By establishing boundaries around risk taking and business decisions, and by incorporating the needs and goals of its shareholders, regulators, rating agencies and customers, the Bancorps risk appetite is aligned with its priorities and goals. Risk tolerance is the maximum amount of risk applicable to each of the eight specific risk categories included in its Enterprise Risk Management Framework. This is expressed primarily in qualitative terms. The Bancorps risk appetite and risk tolerances are supported by risk targets and risk limits. Those limits are used to monitor the amount of risk assumed at a granular level.
The risks faced by the Bancorp include, but are not limited to, credit, market, liquidity, operational, regulatory compliance, legal, reputational and strategic. Each of these risks is managed through the Bancorps risk program which includes the following key functions:
|
Enterprise Risk Management Programs is responsible for developing and overseeing the implementation of risk programs and reporting that facilitate a broad integrated view of risk. The department also leads the continual fostering of a strong risk management culture and the framework, policies and committees that support effective risk governance, including the oversight of Sarbanes-Oxley compliance; |
|
Commercial Credit Risk Management provides safety and soundness within an independent portfolio management |
framework that supports the Bancorps commercial loan growth strategies and underwriting practices, ensuring portfolio optimization and appropriate risk controls; |
|
Risk Strategies and Reporting is responsible for quantitative analysis needed to support the commercial dual rating methodology, ALLL methodology and analytics needed to assess credit risk and develop mitigation strategies related to that risk. The department also provides oversight, reporting and monitoring of commercial underwriting and credit administration processes. The Risk Strategies and Reporting department is also responsible for the economic capital program; |
|
Consumer Credit Risk Management provides safety and soundness within an independent management framework that supports the Bancorps consumer loan growth strategies, ensuring portfolio optimization, appropriate risk controls and oversight, reporting, and monitoring of underwriting and credit administration processes; |
|
Operational Risk Management works with affiliates and lines of business to maintain processes to monitor and manage all aspects of operational risk, including ensuring consistency in application of operational risk programs; |
|
Bank Protection oversees and manages fraud prevention and detection and provides investigative and recovery services for the Bancorp; |
|
Capital Markets Risk Management is responsible for instituting, monitoring, and reporting appropriate trading limits, monitoring liquidity, interest rate risk and risk tolerances within Treasury, Mortgage, and Capital Markets groups and utilizing a value at risk model for Bancorp market risk exposure; |
|
Regulatory Compliance Risk Management ensures that processes are in place to monitor and comply with federal and state banking regulations, including fiduciary compliance processes. The function also has the responsibility for maintenance of an enterprise-wide compliance framework; and |
|
The ERM division creates and maintains other functions, committees or processes as are necessary to effectively manage risk throughout the Bancorp. |
Risk management oversight and governance is provided by the Risk and Compliance Committee of the Board of Directors and through multiple management committees whose membership includes a broad cross-section of line-of-business, affiliate and support representatives. The Risk and Compliance Committee of the Board of Directors consists of five outside directors and has the responsibility for the oversight of risk management for the Bancorp, as well as for the Bancorps overall aggregate risk profile. The Risk and Compliance Committee of the Board of Directors has approved the formation of key management governance committees that are responsible for evaluating risks and controls. The primary committee responsible for the oversight of risk management is the ERMC. Committees accountable to the ERMC, which support the core risk programs, are the Corporate Credit Committee, the Operational Risk Committee, the Management Compliance Committee, the Asset/Liability Committee and the Enterprise Marketing Committee. Other committees accountable to the ERMC oversee the ALLL, capital and community reinvestment act/fair lending functions. There are also new products and initiatives processes applicable to every line of business to ensure an appropriate standard readiness assessment is performed before launching a new product or initiative. Significant risk policies approved by the management governance committees are also reviewed and
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
approved by the Risk and Compliance Committee of the Board of Directors.
Finally, Credit Risk Review is an independent function responsible for evaluating the sufficiency of underwriting, documentation and approval processes for consumer and commercial credits, the accuracy of risk grades assigned to commercial credit exposure, appropriate accounting for charge-offs, and nonaccrual status and specific reserves. Credit Risk Review reports directly to the Risk and Compliance Committee of the Board of Directors and administratively to the Director of Internal Audit.
CREDIT RISK MANAGEMENT
The objective of the Bancorps credit risk management strategy is to quantify and manage credit risk on an aggregate portfolio basis, as well as to limit the risk of loss resulting from an individual
customer default. The Bancorps credit risk management strategy is based on three core principles: conservatism, diversification and monitoring. The Bancorp believes that effective credit risk management begins with conservative lending practices. These practices include conservative exposure and counterparty limits and conservative underwriting, documentation and collection standards. The Bancorps credit risk management strategy also emphasizes diversification on a geographic, industry and customer level as well as regular credit examinations and timely management reviews of large credit exposures and credits experiencing deterioration of credit quality. Credit officers with the authority to extend credit are delegated specific authority amounts, the utilization of which is closely monitored. Underwriting activities are centrally managed, and ERM manages the policy and the authority delegation process directly. The Credit Risk Review function provides objective assessments of the quality of underwriting and documentation, the accuracy of risk grades and the charge-off, nonaccrual and reserve analysis
process. The Bancorps credit review process and overall assessment of the adequacy of the allowance for credit losses is based on quarterly assessments of the probable estimated losses inherent in the loan and lease portfolio. The Bancorp uses these assessments to promptly identify potential problem loans or leases within the portfolio, maintain an adequate reserve and take any necessary charge-offs. Fifth Third defines potential problem loans as those rated substandard that do not meet the definition of a nonperforming asset or a restructured loan. See Note 6 of the Notes to the Consolidated Financial Statements for further information on the Bancorps credit grade categories, which are derived from standard regulatory rating definitions. The following tables provide a summary of potential problem loans as of December 31:
TABLE 26: POTENTIAL PROBLEM LOANS
As of December 31, 2011 ($ in millions) |
Carrying
Value |
Unpaid
Principal Balance |
Exposure | |||||||||
Commercial and industrial |
$ | 1,376 | 1,376 | 1,744 | ||||||||
Commercial mortgage |
1,215 | 1,216 | 1,223 | |||||||||
Commercial construction |
239 | 240 | 258 | |||||||||
Commercial leases |
33 | 33 | 33 | |||||||||
Total |
$ | 2,863 | 2,865 | 3,258 |
TABLE 27: POTENTIAL PROBLEM LOANS
As of December 31, 2010 ($ in millions) |
Carrying
Value |
Unpaid
Principal Balance |
Exposure | |||||||||
|
|
|
|
|
|
|||||||
Commercial and industrial |
$ | 1,984 | 1,985 | 2,687 | ||||||||
Commercial mortgage |
1,557 | 1,559 | 1,570 | |||||||||
Commercial construction |
372 | 372 | 442 | |||||||||
Commercial leases |
30 | 30 | 30 | |||||||||
Total |
$ | 3,943 | 3,946 | 4,729 |
In addition to the individual review of larger commercial loans that exhibit probable or observed credit weaknesses, the commercial credit review process includes the use of two risk grading systems. The risk grading system currently utilized for reserve analysis purposes encompasses ten categories. The Bancorp also maintains a dual risk rating system that provides for thirteen probabilities of default grade categories and an additional six grade categories for estimating losses given an event of default. The probability of default and loss given default evaluations are not separated in the ten-grade risk rating system. The Bancorp has completed significant validation and testing of the dual risk rating system and will make a decision on the implementation of the dual risk rating model for purposes of determining the Bancorps ALLL once the FASB has issued a final standard regarding previously proposed methodology changes to the determination of credit impairment as outlined in the Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities Exposure Draft and Supplementary Document dated May 2010 and January 2011, respectively. Scoring systems, various analytical tools
and delinquency monitoring are used to assess the credit risk in the Bancorps homogenous consumer and small business loan portfolios.
Overview
General economic conditions started to improve during 2010 and were mixed in 2011. Geographically, the Bancorp continues to experience the most stress in Michigan and Florida due to the decline in real estate values. Real estate value deterioration, as measured by the Home Price Index, was most prevalent in Florida due to past real estate price appreciation and related over-development, and in Michigan due in part to cutbacks in automobile manufacturing and the states economic downturn. Among commercial portfolios, the homebuilder, residential developer and portions of the remaining non-owner occupied commercial real estate portfolios continue to remain under stress.
Among consumer portfolios, residential mortgage and brokered home equity portfolios exhibited the most stress. Management suspended homebuilder and developer lending in the fourth quarter of 2007 and new commercial non-owner occupied real estate lending in the
Fifth Third Bancorp |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
second quarter of 2008, discontinued the origination of brokered home equity products at the end of 2007 and tightened underwriting standards across both the commercial and consumer loan product offerings. Since the fourth quarter of 2008, in an effort to reduce loan exposure to the real estate and construction industries, the Bancorp has sold certain consumer loans and sold or transferred to held for sale certain commercial loans. Throughout 2010 and 2011, the Bancorp continued to aggressively engage in other loss mitigation strategies such as reducing credit commitments, restructuring certain commercial and consumer loans, tightening underwriting standards on commercial loans and across the consumer loan portfolio, as well as utilizing expanded commercial and consumer loan workout teams. In the financial services industry, there has been heightened focus on foreclosure activity and processes. Fifth Third actively works with borrowers experiencing difficulties and has regularly modified or provided forbearance to borrowers where a workable solution could be found. Foreclosure is a last resort, and the Bancorp undertakes foreclosures only when it believes they are necessary and appropriate and are careful to ensure that customer and loan data are accurate. Reviews of the Bancorps foreclosure process and procedures conducted last year did not reveal any material deficiencies. These reviews were expanded and extended in 2011 to improve our processes as additional aspects of the industrys foreclosure practices have come under intensified scrutiny and criticism. These reviews are completed and the Bancorp may determine to amend its processes and procedures as a result of these reviews. While any impact to the Bancorp that ultimately results from continued reviews cannot yet be determined, management currently believes that such impact will not materially adversely affect the Bancorps results of operations, liquidity or capital resources. Additionally, banking regulatory agencies and other federal and state governmental authorities have continued to review the foreclosure process of mortgage servicers such as Fifth Third beyond the initial examinations of the largest mortgage servicers they conducted last year and earlier this year. These ongoing reviews could subject Fifth Third and other mortgage servicers to sanctions, civil money penalties and/or requirements to undertake remedial measures.
Commercial Portfolio
The Bancorps credit risk management strategy includes minimizing concentrations of risk through diversification. The Bancorp has commercial loan concentration limits based on industry, lines of business within the commercial segment, geography and credit product type.
The risk within the commercial loan and lease portfolio is managed and monitored through an underwriting process utilizing detailed origination policies, continuous loan level reviews, monitoring of industry concentration and product type limits and continuous portfolio risk management reporting. The origination policies for commercial real estate outline the risks and underwriting requirements for owner and non-owner occupied and construction lending. Included in the policies are maturity and amortization terms, maximum LTVs, minimum debt service coverage ratios, construction loan monitoring procedures, appraisal requirements, pre-leasing requirements (as applicable) and sensitivity and pro-forma analysis requirements. The Bancorp requires a valuation of real estate collateral, which may include third-party appraisals, be performed at the time of origination and renewal in accordance with regulatory requirements and on an as needed basis when market conditions justify. Although the Bancorp does not back test these collateral value assumptions, the Bancorp maintains an appraisal review department to order and review third-party appraisals in accordance with regulatory requirements. Collateral values on criticized assets with relationships exceeding $1 million are reviewed quarterly to assess the appropriateness of the value ascribed in the assessment of charge-offs and specific reserves. In addition, the Bancorp applies incremental valuation haircuts to older appraisals that relate to collateral dependent loans, which can currently be up to 25-40% of the appraised value based on the type of collateral. These incremental valuation haircuts generally reflect the age of the most recent appraisal as well as collateral type. Trends in collateral values, such as home price indices and recent asset dispositions, are monitored in order to determine whether adjustments to the appraisal haircuts are warranted. Other factors such as local market conditions or location may also be considered as necessary.
The Bancorp assesses all real estate and non-real estate collateral securing a loan and considers all cross collateralized loans in the calculation of the LTV ratio. The following table provides detail on the most recent LTV ratios for commercial mortgage loans greater than $1 million, excluding impaired commercial mortgage loans individually evaluated. The Bancorp does not typically aggregate the LTV ratios for commercial mortgage loans less than $1 million.
TABLE 28: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION
As of December 31, 2011 ($ in millions) | LTV > 100% | LTV 80-100% | LTV £ 80% | |||||||||
Commercial mortgage owner-occupied loans |
$ | 528 | 419 | 2,353 | ||||||||
Commercial mortgage nonowner-occupied loans |
684 | 734 | 2,164 | |||||||||
Total |
$ | 1,212 | 1,153 | 4,517 |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides detail on commercial loan and leases by industry classification (as defined by the North American Industry Classification System), by loan size and by state, illustrating the diversity and granularity of the Bancorps commercial loans and leases.
TABLE 29: COMMERCIAL LOAN AND LEASE PORTFOLIO (EXCLUDING LOANS HELD FOR SALE)
2011 | 2010 | |||||||||||||||||||||||
As of December 31 ($ in millions) | Outstanding | Exposure | Nonaccrual | Outstanding | Exposure | Nonaccrual | ||||||||||||||||||
By industry: |
||||||||||||||||||||||||
Manufacturing |
$ | 9,020 | 17,065 | 116 | $ | 7,202 | 14,979 | 149 | ||||||||||||||||
Real estate |
6,274 | 7,060 | 299 | 8,295 | 9,532 | 378 | ||||||||||||||||||
Financial services and insurance |
4,596 | 9,975 | 46 | 3,830 | 8,184 | 78 | ||||||||||||||||||
Business services |
3,898 | 5,976 | 78 | 3,314 | 5,379 | 50 | ||||||||||||||||||
Wholesale trade |
3,656 | 6,796 | 50 | 2,926 | 5,689 | 18 | ||||||||||||||||||
Healthcare |
3,477 | 5,179 | 15 | 3,402 | 5,421 | 35 | ||||||||||||||||||
Retail trade |
2,639 | 5,548 | 56 | 2,548 | 5,377 | 48 | ||||||||||||||||||
Transportation and warehousing |
2,304 | 3,152 | 16 | 2,074 | 2,566 | 15 | ||||||||||||||||||
Construction |
2,226 | 3,470 | 199 | 2,789 | 4,124 | 242 | ||||||||||||||||||
Mining |
1,157 | 1,994 | 7 | 851 | 1,443 | 19 | ||||||||||||||||||
Communication and information |
1,128 | 2,117 | 3 | 1,004 | 1,668 | 7 | ||||||||||||||||||
Accommodation and food |
1,127 | 1,636 | 22 | 953 | 1,476 | 26 | ||||||||||||||||||
Other services |
998 | 1,503 | 48 | 1,062 | 1,473 | 35 | ||||||||||||||||||
Entertainment and recreation |
874 | 1,228 | 18 | 788 | 1,012 | 7 | ||||||||||||||||||
Public administration |
644 | 886 | | 616 | 848 | 9 | ||||||||||||||||||
Utilities |
564 | 1,752 | | 595 | 1,600 | | ||||||||||||||||||
Individuals |
460 | 512 | 20 | 690 | 830 | 10 | ||||||||||||||||||
Agribusiness |
425 | 564 | 65 | 483 | 621 | 85 | ||||||||||||||||||
Other |
5 | 5 | | 40 | 119 | 3 | ||||||||||||||||||
Total |
$ | 45,472 | 76,418 | 1,058 | $ | 43,462 | 72,341 | 1,214 | ||||||||||||||||
By loan size: |
||||||||||||||||||||||||
Less than $200,000 |
2 | % | 2 | 7 | 3 | % | 2 | 8 | ||||||||||||||||
$200,000 to $1 million |
8 | 6 | 23 | 10 | 8 | 25 | ||||||||||||||||||
$1 million to $5 million |
18 | 15 | 32 | 21 | 17 | 34 | ||||||||||||||||||
$5 million to $10 million |
12 | 10 | 15 | 13 | 11 | 8 | ||||||||||||||||||
$10 million to $25 million |
28 | 25 | 19 | 25 | 25 | 19 | ||||||||||||||||||
Greater than $25 million |
32 | 42 | 4 | 28 | 37 | 6 | ||||||||||||||||||
Total |
100 | % | 100 | 100 | 100 | % | 100 | 100 | ||||||||||||||||
By state: |
||||||||||||||||||||||||
Ohio |
24 | % | 27 | 16 | 25 | % | 29 | 17 | ||||||||||||||||
Michigan |
13 | 11 | 22 | 15 | 13 | 22 | ||||||||||||||||||
Florida |
8 | 6 | 17 | 8 | 7 | 17 | ||||||||||||||||||
Illinois |
7 | 8 | 10 | 8 | 8 | 8 | ||||||||||||||||||
Indiana |
5 | 5 | 10 | 6 | 6 | 7 | ||||||||||||||||||
Kentucky |
4 | 4 | 4 | 5 | 4 | 5 | ||||||||||||||||||
North Carolina |
3 | 3 | 4 | 3 | 3 | 4 | ||||||||||||||||||
Tennessee |
3 | 3 | 2 | 3 | 3 | 1 | ||||||||||||||||||
Pennsylvania |
2 | 2 | 1 | 2 | 2 | 1 | ||||||||||||||||||
All other states |
31 | 31 | 14 | 25 | 25 | 18 | ||||||||||||||||||
Total |
100 | % | 100 | 100 | 100 | % | 100 | 100 |
Fifth Third Bancorp |
55 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Bancorp has identified certain categories of loans which it believes represent a higher level of risk compared to the rest
of the Bancorps loan portfolio, due to economic or market conditions within the Bancorps key lending areas.
The following table provides analysis of each of the categories of loans (excluding loans held for sale) by state as of December 31, 2011 and 2010.
TABLE 30: NON-OWNER OCCUPIED COMMERCIAL REAL ESTATE
As of December 31, 2011 ($ in millions) |
|
For the Year Ended
December 31, 2011 |
|
|||||||||||||||||
By State: | Outstanding | Exposure |
90 Days
Past Due |
Nonaccrual | Net Charge-offs | |||||||||||||||
Ohio |
$ | 1,958 | 2,125 | 1 | 88 | 64 | ||||||||||||||
Michigan |
1,443 | 1,476 | 1 | 77 | 39 | |||||||||||||||
Florida |
713 | 740 | | 72 | 44 | |||||||||||||||
Illinois |
417 | 499 | 1 | 44 | 31 | |||||||||||||||
Indiana |
312 | 316 | | 13 | 6 | |||||||||||||||
North Carolina |
302 | 332 | | 33 | 13 | |||||||||||||||
All other states |
586 | 650 | | 35 | 14 | |||||||||||||||
Total |
$ | 5,731 | 6,138 | 3 | 362 | 211 |
TABLE 31: NON-OWNER OCCUPIED COMMERCIAL REAL ESTATE
As of December 31, 2010 ($ in millions) |
For the Year Ended
December 31, 2010 |
|||||||||||||||||||
By State: | Outstanding | Exposure |
90 Days
Past Due |
Nonaccrual | Net Charge-offs | |||||||||||||||
Ohio |
$ | 2,332 | 2,565 | 2 | 90 | 119 | ||||||||||||||
Michigan |
1,695 | 1,809 | 2 | 85 | 123 | |||||||||||||||
Florida |
935 | 1,022 | 1 | 120 | 180 | |||||||||||||||
Illinois |
568 | 654 | | 39 | 65 | |||||||||||||||
Indiana |
387 | 419 | | 19 | 32 | |||||||||||||||
North Carolina |
392 | 438 | | 37 | 58 | |||||||||||||||
All other states |
751 | 823 | | 39 | 48 | |||||||||||||||
Total |
$ | 7,060 | 7,730 | 5 | 429 | 625 |
TABLE 32: HOME BUILDER AND DEVELOPER (a)
As of December 31, 2011 ($ in millions) |
For the Year Ended
December 31, 2011 |
|||||||||||||||||||
By State: | Outstanding | Exposure |
90 Days
Past Due |
Nonaccrual | Net Charge-offs | |||||||||||||||
Ohio |
$ | 166 | 234 | | 15 | 22 | ||||||||||||||
Michigan |
108 | 128 | | 8 | 7 | |||||||||||||||
Florida |
64 | 73 | | 27 | 12 | |||||||||||||||
North Carolina |
50 | 56 | | 13 | 7 | |||||||||||||||
Indiana |
51 | 56 | | 10 | 3 | |||||||||||||||
Illinois |
16 | 27 | | 9 | 4 | |||||||||||||||
All other states |
57 | 69 | | 14 | 1 | |||||||||||||||
Total |
$ | 512 | 643 | | 96 | 56 |
(a) | Home Builder and Developer loans, exclusive of commercial and industrial loans with an outstanding balance of $136 and a total exposure of $222 are also included in Table 30: Non-Owner Occupied Commercial Real Estate. |
TABLE 33: HOME BUILDER AND DEVELOPER (a)
As of December 31, 2010 ($ in millions) |
For the Year Ended
December 31, 2010 |
|||||||||||||||||||
By State: | Outstanding | Exposure |
90 Days
Past Due |
Nonaccrual | Net Charge-offs | |||||||||||||||
Ohio |
$ | 202 | 331 | | 35 | 39 | ||||||||||||||
Michigan |
151 | 212 | 1 | 23 | 65 | |||||||||||||||
Florida |
103 | 117 | | 44 | 81 | |||||||||||||||
North Carolina |
68 | 80 | | 10 | 33 | |||||||||||||||
Indiana |
67 | 85 | | 8 | 13 | |||||||||||||||
All other states |
108 | 159 | | 20 | 43 | |||||||||||||||
Total |
$ | 699 | 984 | 1 | 140 | 274 |
(a) | Home Builder and Developer loans, exclusive of commercial and industrial loans with an outstanding balance of $134 and a total exposure of $319 are also included in Table 31: Non-Owner Occupied Commercial Real Estate. |
56 |
Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consumer Portfolio
The Bancorps consumer portfolio is materially comprised of three categories of loans: residential mortgage, home equity, and automobile. The Bancorp has identified certain categories within these loan types which it believes represent a higher level of risk compared to the rest of the consumer loan portfolio due to high loan amount to collateral value. The Bancorp does not update LTV ratios for the consumer portfolio subsequent to origination except as part of the charge-off process for real estate secured loans.
Residential Mortgage Portfolio
The Bancorp manages credit risk in the mortgage portfolio through conservative underwriting and documentation standards and geographic and product diversification. The Bancorp may also package and sell loans in the portfolio or may purchase mortgage insurance for the loans sold in order to mitigate credit risk.
The Bancorp does not originate mortgage loans that permit customers to defer principal payments or make payments that are less than the accruing interest. The Bancorp originates both
fixed and adjustable rate residential mortgage loans. Resets of rates on adjustable rate mortgages are not expected to have a material impact on credit costs in the current interest rate environment, as approximately $1.2 billion of adjustable rate residential mortgage loans will have rate resets during the next twelve months, with approximately three percent of those resets expected to experience an increase in monthly payments in comparison to the monthly payment at the time of origination.
Certain residential mortgage products have contractual features that may increase credit exposure to the Bancorp in the event of a decline in housing values. These types of mortgage products offered by the Bancorp include loans with high LTV ratios, multiple loans on the same collateral that when combined result in an LTV greater than 80% and interest-only loans. The Bancorp monitors residential mortgage loans with greater than 80% LTV ratio and no mortgage insurance as it believes these loans represent a higher level of risk. The following table provides an analysis of the residential mortgage portfolio loans outstanding, excluding held for sale, by LTV at origination:
TABLE 34: RESIDENTIAL MORTGAGE PORTFOLIO LOANS BY LTV AT ORIGINATION
2011 | 2010 | |||||||||||||||
As of December 31 ($ in millions) | Outstanding |
Weighted
Average LTVs |
Outstanding |
Weighted
Average LTVs |
||||||||||||
LTV £ 80 % |
$ | 7,876 | 66.6 | % | 6,419 | 68.0 | % | |||||||||
LTV > 80%, with mortgage insurance |
1,030 | 92.7 | 871 | 93.0 | ||||||||||||
LTV > 80%, no mortgage insurance |
1,766 | 95.6 | 1,666 | 95.4 | ||||||||||||
Total |
$ | 10,672 | 73.9 | % | 8,956 | 75.5 | % |
The following tables provide analysis of the residential mortgage portfolio loans outstanding, excluding held for sale, with a greater than 80% LTV ratio and no mortgage insurance as of December 31, 2011 and 2010:
TABLE 35: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
TABLE 36: RESIDENTIAL MORTGAGE LOANS OUTSTANDING, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
As of December 31, 2010 ($ in millions) |
For the Year Ended
December 31, 2010 |
|||||||||||||||
By State: | Outstanding |
90 Days
Past Due |
Nonaccrual | Net Charge-offs | ||||||||||||
Ohio |
$ | 569 | 3 | 24 | 22 | |||||||||||
Michigan |
294 | 2 | 20 | 21 | ||||||||||||
Florida |
294 | 4 | 31 | 56 | ||||||||||||
North Carolina |
131 | 1 | 7 | 12 | ||||||||||||
Indiana |
111 | 1 | 4 | 6 | ||||||||||||
Kentucky |
78 | 1 | 3 | 2 | ||||||||||||
Illinois |
67 | | 1 | 4 | ||||||||||||
All other states |
122 | 3 | 5 | 8 | ||||||||||||
Total |
$ | 1,666 | 15 | 95 | 131 |
Fifth Third Bancorp |
57 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Home Equity Portfolio
The Bancorps home equity portfolio is primarily comprised of home equity lines of credit. The home equity line of credit offered by the Bancorp is a revolving facility with a 20-year term, minimum payments of interest only and a balloon payment of principal at maturity.
The ALLL provides coverage for probable and estimable losses in the home equity portfolio. The allowance attributable to the portion of the home equity portfolio that has not been restructured in a TDR is determined on a single homogenous pool basis reflecting the Bancorps belief that the credit risk characteristics of this portfolio are of sufficient similarity such that additional portfolio segmentation is not necessary for determining the probable credit losses in the home equity portfolio. The modeled loss factor for the home equity portfolio is based on the trailing twelve month historical loss rate, as adjusted for certain prescriptive loss rate factors and certain qualitative adjustment factors to reflect risks associated with current conditions and trends. The prescriptive loss rate factors include adjustments for delinquency trends, LTV trends, refreshed FICO score trends and product mix. The qualitative factors include adjustments for credit administration and portfolio management, credit policy and underwriting and the national and local economy. The Bancorp considers home price index trends when determining the national and local economy qualitative factor.
The home equity portfolio is managed in two primary categories: loans outstanding with a LTV greater than 80% and those loans with a LTV 80% or less based upon appraisals at origination. The carrying value of the greater than 80% LTV home equity loans and 80% or less LTV home equity loans were $4.0 billion and $6.7 billion, respectively, as of December 31, 2011. Of the total $10.7 billion of outstanding home equity loans:
|
82% reside within the Bancorps Midwest footprint of Ohio, Michigan, Kentucky, Indiana and Illinois |
|
31% are in first lien positions and 69% are in second lien positions at December 31, 2011 |
|
For approximately 1/3 of the home equity portfolio in a second lien position, the first lien is either owned or serviced by the Bancorp |
|
Over 90% of non-delinquent borrowers made at least one payment greater than the minimum payment during the year ended December 31, 2011 |
|
The portfolio had an average refreshed FICO score of 734 at December 31, 2011 and 2010. |
The Bancorp actively manages lines of credit and makes reductions in lending limits when it believes it is necessary based on FICO score deterioration and property devaluation. The Bancorp does not routinely obtain appraisals on performing loans to update LTV ratios after origination. However, the Bancorp monitors the local housing markets by reviewing various home price indices and incorporates the impact of the changing market conditions in its on-going credit monitoring processes. For second lien home equity loans, the Bancorp is unable to track the performance of the first lien loans if it does not service the first lien loan, but instead monitors the refreshed FICO scores as part of its assessment of the home equity portfolio. The following table provides an analysis of home equity loans outstanding disaggregated based upon refreshed FICO score:
TABLE 37: HOME EQUITY LOANS OUTSTANDING BY REFRESHED FICO SCORE
($ in millions) |
December 31,
2011 |
% of
Total |
December 31,
2010 |
% of
Total |
||||||||||||
First Liens: |
||||||||||||||||
FICO < 620 |
$ | 214 | 2 | % | 230 | 2 | % | |||||||||
FICO 621-719 |
643 | 6 | 690 | 6 | ||||||||||||
FICO > 720 |
2,466 | 23 | 2,533 | 22 | ||||||||||||
Total First Liens |
3,323 | 31 | 3,453 | 30 | ||||||||||||
Second Liens: |
||||||||||||||||
FICO < 620 |
750 | 7 | % | 921 | 8 | % | ||||||||||
FICO 621-719 |
1,929 | 18 | 1,957 | 17 | ||||||||||||
FICO > 720 |
4,717 | 44 | 5,182 | 45 | ||||||||||||
Total Second Liens |
7,396 | 69 | 8,060 | 70 | ||||||||||||
Total |
$ | 10,719 | 100 | % | 11,513 | 100 | % |
The Bancorp believes that home equity loans with a greater than 80% combined LTV ratio present a higher level of risk. The following table provides an analysis of the home equity loans outstanding in a first and second lien position by LTV at origination:
TABLE 38: HOME EQUITY LOANS OUTSTANDING BY LTV AT ORIGINATION
2011 |
|
2010 | ||||||||||||||
As of December 31 ($ in millions) | Outstanding |
Weighted
Average LTVs |
Outstanding |
Weighted
Average LTVs |
||||||||||||
First Liens: |
||||||||||||||||
LTV £ 80 % |
$ | 2,800 | 54.9 | % | 2,903 | 55.1 | % | |||||||||
LTV > 80% |
523 | 89.2 | 550 | 89.4 | ||||||||||||
Total First Liens |
3,323 | 60.4 | 3,453 | 60.6 | ||||||||||||
Second Liens; |
||||||||||||||||
LTV £ 80 % |
3,882 | 67.3 | 4,044 | 67.3 | ||||||||||||
LTV > 80% |
3,514 | 91.8 | 4,016 | 92.0 | ||||||||||||
Total Second Liens |
7,396 | 81.0 | 8,060 | 81.4 | ||||||||||||
Total |
$ | 10,719 | 74.0 | % | 11,513 | 74.6 | % |
58 |
Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables provide analysis of home equity loans by state with LTV greater than 80% as of December 31, 2011 and 2010.
TABLE 39: HOME EQUITY LOANS OUTSTANDING WITH LTV GREATER THAN 80%
As of December 31, 2011 ($ in millions) |
For the Year Ended
December 31, 2011 |
|||||||||||||||||||
By State: | Outstanding | Exposure |
90 Days
Past Due |
Nonaccrual | Net Charge-offs | |||||||||||||||
Ohio |
$ | 1,393 | 2,083 | 12 | 7 | 33 | ||||||||||||||
Michigan |
884 | 1,197 | 8 | 4 | 37 | |||||||||||||||
Illinois |
448 | 630 | 8 | 2 | 17 | |||||||||||||||
Indiana |
391 | 573 | 2 | 2 | 9 | |||||||||||||||
Kentucky |
366 | 549 | 3 | 2 | 8 | |||||||||||||||
Florida |
146 | 190 | 4 | 3 | 17 | |||||||||||||||
All other states |
409 | 519 | 5 | 2 | 19 | |||||||||||||||
Total |
$ | 4,037 | 5,741 | 42 | 22 | 140 |
TABLE 40: HOME EQUITY LOANS OUTSTANDING WITH LTV GREATER THAN 80%
As of December 31, 2010 ($ in millions) |
For the Year Ended
December 31, 2010 |
|||||||||||||||||||
By State: | Outstanding | Exposure |
90 Days
Past Due |
Nonaccrual | Net Charge-offs | |||||||||||||||
Ohio |
$ | 1,576 | 2,288 | 9 | 7 | 35 | ||||||||||||||
Michigan |
998 | 1,317 | 9 | 5 | 50 | |||||||||||||||
Illinois |
482 | 662 | 5 | 3 | 22 | |||||||||||||||
Indiana |
451 | 638 | 4 | 2 | 10 | |||||||||||||||
Kentucky |
421 | 614 | 3 | 2 | 9 | |||||||||||||||
Florida |
172 | 218 | 8 | 4 | 21 | |||||||||||||||
All other states |
466 | 568 | 7 | 4 | 28 | |||||||||||||||
Total |
$ | 4,566 | 6,305 | 45 | 27 | 175 |
Automobile Portfolio
The automobile portfolio is characterized by direct and indirect lending products to consumers. As of December 31, 2011, 49% of the automobile loan portfolio is comprised of new automobiles. It is a common practice to advance on automobile loans an amount in excess of the automobile value
due to the inclusion of taxes, title, and other fees paid at closing. The Bancorp monitors its exposure to these higher risk loans. The following table provides an analysis of automobile loans outstanding by LTV at origination:
TABLE 41: AUTOMOBILE LOANS OUTSTANDING WITH LTV AT ORIGINATION
2011 | 2010 | |||||||||||||||
As of December 31 ($ in millions) | Outstanding |
Weighted
Average LTVs |
Outstanding |
Weighted
Average LTVs |
||||||||||||
LTV £ 100 % |
$ | 7,805 | 81.7 | % | 6,853 | 81.8 | % | |||||||||
LTV > 100% |
4,022 | 111.5 | 4,130 | 112.8 | ||||||||||||
Total |
$ | 11,827 | 92.1 | % | 10,983 | 93.8 | % |
The following tables provide analysis of the Bancorps automobile loans with a LTV at origination greater than 100% as of December 31, 2011 and 2010, respectively.
TABLE 42: AUTOMOBILE LOANS OUTSTANDING WITH LTV GREATER THAN 100%
As of December 31, 2011 ($ in millions) |
For the Year Ended
December 31, 2011 |
|||||||||||||||
By State: | Outstanding |
90 Days
Past Due |
Nonaccrual | Net Charge-offs | ||||||||||||
Ohio |
$ | 425 | 1 | | 3 | |||||||||||
Illinois |
291 | | | 3 | ||||||||||||
Michigan |
245 | | | 2 | ||||||||||||
Indiana |
181 | | | 2 | ||||||||||||
Florida |
192 | | | 3 | ||||||||||||
Kentucky |
158 | | | 1 | ||||||||||||
All other states |
2,530 | 3 | 2 | 20 | ||||||||||||
Total |
$ | 4,022 | 4 | 2 | 34 |
Fifth Third Bancorp |
59 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 43: AUTOMOBILE LOANS OUTSTANDING WITH LTV GREATER THAN 100% | ||||||||||||||||
As of December 31, 2010 ($ in millions) |
For the Year Ended
December 31, 2010 |
|||||||||||||||
By State: | Outstanding |
90 Days
Past Due |
Nonaccrual | Net Charge-offs | ||||||||||||
Ohio |
$ | 447 | 1 | | 5 | |||||||||||
Illinois |
375 | 1 | | 5 | ||||||||||||
Michigan |
269 | | | 4 | ||||||||||||
Indiana |
208 | 1 | | 3 | ||||||||||||
Florida |
199 | | | 5 | ||||||||||||
Kentucky |
181 | | | 3 | ||||||||||||
All other states |
2,451 | 4 | 2 | 33 | ||||||||||||
Total |
$ | 4,130 | 7 | 2 | 58 |
European Exposure
The Bancorp has no direct sovereign exposure to any European nation as of December 31, 2011. In providing services to our customers, the Bancorp routinely enters into financial transactions with foreign domiciled and U.S. subsidiaries of foreign businesses as well as foreign financial institutions. These financial transactions are in the form of loans, loan commitments, letters of credit, derivatives and securities. The Bancorps risk appetite for foreign country exposure is managed by having established country exposure limits. The Bancorps total exposure to European domiciled or owned businesses and European financial institutions was $2.2 billion and funded exposure was $1.4 billion as of December 31, 2011.
Additionally, the Bancorp was within its established country exposure limits for all European countries.
Certain European countries have been experiencing increased levels of stress throughout 2011 including Portugal, Ireland, Italy, Greece and Spain. The Bancorps total exposure to businesses domiciled or owned by companies and financial institutions in these countries was approximately $138 million and funded exposure was $72 million as of December 31, 2011. The following table provides detail about the Bancorps exposure to all European domiciled and owned businesses and financial institutions as of December 31, 2011:
TABLE 44: EUROPEAN EXPOSURE
Sovereigns | Financial Institutions |
Non-Financial
Institutions |
Total | |||||||||||||||||||||||||||||
Total | Funded | Total | Funded | Total | Funded | Total | Funded | |||||||||||||||||||||||||
($ in millions) | Exposure | Exposure | Exposure | Exposure | Exposure | Exposure | Exposure (a) | Exposure | ||||||||||||||||||||||||
Peripheral Europe (b) |
$ | | | 2 | | 136 | 72 | 138 | 72 | |||||||||||||||||||||||
Other Eurozone (c) |
| | 111 | 53 | 1,106 | 751 | 1,217 | 804 | ||||||||||||||||||||||||
Total Eurozone |
| | 113 | 53 | 1,242 | 823 | 1,355 | 876 | ||||||||||||||||||||||||
Other Europe (d) |
| | 60 | 31 | 801 | 501 | 861 | 532 | ||||||||||||||||||||||||
Total Europe |
$ | | | 173 | 84 | 2,043 | 1,324 | 2,216 | 1,408 |
(a) | Total exposure includes funded and unfunded commitments, net of collateral; funded exposure excludes unfunded exposure. |
(b) | Peripheral Europe includes Portugal, Ireland, Italy, Greece and Spain. |
(c) | Eurozone includes countries participating in the European common currency (Euro). |
(d) | Other Europe includes European countries not part of the Euro (primarily the United Kingdom and Switzerland). |
Analysis of Nonperforming Assets
Nonperforming assets include nonaccrual loans and leases for which ultimate collectability of the full amount of the principal and/or interest is uncertain; restructured commercial and credit card loans which have not yet met the requirements to be classified as a performing asset; restructured consumer loans which are 90 days past due based on the restructured terms unless the loan is both well-secured and in the process of collection; and certain other assets, including OREO and other repossessed property. A summary of nonperforming assets is included in Table 45. Residential mortgage loans are typically placed on nonaccrual status when principal and interest payments have become past due 150 days unless such loans are both well secured and in the process of collection. Residential mortgage loans may stay on nonperforming status for an extended time as the foreclosure process typically lasts longer than 180 days. Typically, home equity loans and leases are reported on nonaccrual status if principal or interest has been in default for 180 days or more unless the loan is both well secured and in the process of collection. Automobile and other consumer loans and leases that have been modified in a TDR and subsequently become past due 90 days are placed on nonaccrual status. Credit card loans that have been modified in a TDR are classified as nonaccrual unless such loans have a sustained repayment performance of six months or greater and the Bancorp is reasonably assured of repayment in accordance with the restructured terms. Well secured loans are collateralized by perfected security interests in real and/or personal property for which the Bancorp estimates proceeds from sale would be sufficient to recover the outstanding principal and accrued interest balance of the loan and pay all costs to sell the collateral. The Bancorp considers a loan in the process of collection if collection efforts or legal action is proceeding and the Bancorp expects to collect funds sufficient to bring the loan current or recover the entire outstanding principal and accrued interest balance. When a loan is placed on nonaccrual status, the accrual of interest, amortization of loan premiums, accretion of loan discounts and amortization or accretion of deferred net loan fees or costs are discontinued and previously accrued, but unpaid interest is reversed. Commercial loans on nonaccrual status are reviewed for impairment at least quarterly. If the principal or a portion of the principal is deemed a loss, the loss amount is charged off to the ALLL.
Total nonperforming assets, including loans held for sale, were $2.0 billion at December 31 2011 compared to $2.5 billion at December 31, 2010. At December 31, 2011, $138 million of nonaccrual loans, consisting primarily of real estate secured loans, were held for sale, compared to $294 million at December 31, 2010.
60 |
Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nonperforming assets as a percentage of total loans, leases and other assets, including OREO and nonaccrual loans held for sale as of December 31, 2011 were 2.32%, compared to 3.08% as of December 31, 2010. Excluding nonaccrual loans held for sale, nonperforming assets as a percentage of total loans, leases and other assets, including OREO was 2.23% as of December 31, 2011, compared to 2.79% as of December 31, 2010. The composition of nonaccrual loans and leases continues to be concentrated in real estate as 69% of nonaccrual loans and leases were secured by real estate as of December 31, 2011 compared to 66% as of December 31, 2010.
Commercial nonperforming loans and leases were $1.2 billion at December 31, 2011, a decrease of $312 million from December 31, 2010, due to the impact of loss mitigation actions and moderation in general economic conditions. Excluding commercial nonperforming loans and leases held for sale, commercial nonperforming loans and leases at December 2011 decreased $156 million compared to December 31, 2010. The decrease from December 31, 2010 was due to a continued decrease in new nonaccruals and an increase in paydowns and payoffs in 2011 due to improved delinquency metrics and an improvement in underlying loss trends. The Bancorp transferred commercial loans with a carrying balance of $961 million, prior to transfer, to held for sale during the third quarter of 2010, of which $694 million were nonperforming. At December 31, 2011, the remaining carrying balance of these loans was $67 million.
Consumer nonperforming loans and leases were $380 million at December 31, 2011, a decrease of $86 million from December 31, 2010. The decrease was mainly due to a $83 million decrease in other consumer loans and leases due primarily to charge-offs taken on certain consumer loans acquired during the fourth quarter of 2010 as the result of a foreclosure on a commercial loan collateralized by individual consumer loans. These loans were fully charged off as of December 31, 2011. Home equity nonaccrual levels remain modest as the Bancorp continues to fully charge-off a high proportion of the severely delinquent loans at 180 days past due. Geography continues to be a large driver of nonaccrual activity as Florida properties represent approximately 16% and 8% of residential mortgage and home equity balances, respectively, but represent 45% and 16% of nonaccrual loans for each category. Consumer restructured loans on accrual status totaled $1.6 billion at December 31, 2011 and 2010. As of December 31, 2011, redefault rates, defined as 30 days delinquent, on restructured residential mortgage were 29% and home equity loans and credit card loans were each 16%.
OREO and other repossessed property was $378 million at December 31, 2011, compared to $494 million at December 31, 2010. The decrease from December 31, 2010 was due to the sale of large OREO properties and improvements in general economic conditions during 2011. The Bancorp recognized $171 million and $264 million in losses on the sale or write-down of OREO properties in 2011 and 2010, respectively. These losses are primarily reflective of the continued stress in the Michigan and Florida markets for commercial real estate and residential mortgage loans as Michigan and Florida represented 16% and 26%, respectively, of total OREO losses in 2011 compared with 12% and 14%, respectively, in 2010. Properties in Michigan and Florida accounted for 42% of foreclosed real estate at December 31, 2011, compared to 49% at December 31, 2010.
In 2011 and 2010, approximately $125 million and $206 million, respectively, of interest income would have been recorded if the nonaccrual and renegotiated loans and leases on nonaccrual status had been current in accordance with their original terms. Although these values help demonstrate the costs of carrying nonaccrual credits, the Bancorp does not expect to recover the full amount of interest as nonaccrual loans and leases are generally carried below their principal balance.
Fifth Third Bancorp |
61 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 45: SUMMARY OF NONPERFORMING ASSETS AND DELINQUENT LOANS
As of December 31 ($ in millions) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Nonaccrual loans and leases: |
||||||||||||||||||||
Commercial and industrial loans (a) |
$ | 408 | 473 | 734 | 541 | 175 | ||||||||||||||
Commercial mortgage loans |
358 | 407 | 898 | 482 | 243 | |||||||||||||||
Commercial construction loans |
123 | 182 | 646 | 362 | 249 | |||||||||||||||
Commercial leases |
9 | 11 | 67 | 21 | 5 | |||||||||||||||
Residential mortgage loans |
134 | 152 | 275 | 259 | 92 | |||||||||||||||
Home equity |
25 | 23 | 21 | 26 | 45 | |||||||||||||||
Automobile loans |
| 1 | 1 | 5 | 3 | |||||||||||||||
Other consumer loans and leases (a) |
1 | 84 | | | 1 | |||||||||||||||
Restructured loans and leases: |
||||||||||||||||||||
Commercial and industrial loans |
79 | 95 | 35 | | | |||||||||||||||
Commercial mortgage loans |
63 | 28 | 4 | | | |||||||||||||||
Commercial construction loans |
15 | 10 | 8 | | | |||||||||||||||
Commercial leases |
3 | 8 | | | | |||||||||||||||
Residential mortgage loans (b) |
141 | 116 | 137 | 20 | 27 | |||||||||||||||
Home equity (b) |
29 | 33 | 33 | 29 | 11 | |||||||||||||||
Automobile loans (b) |
2 | 2 | 1 | 1 | | |||||||||||||||
Credit card |
48 | 55 | 87 | 30 | 5 | |||||||||||||||
Total nonperforming loans and leases |
1,438 | 1,680 | 2,947 | 1,776 | 856 | |||||||||||||||
OREO and other repossessed property |
378 | 494 | 297 | 230 | 171 | |||||||||||||||
Total nonperforming assets |
1,816 | 2,174 | 3,244 | 2,006 | 1,027 | |||||||||||||||
Nonaccrual loans held for sale |
138 | 294 | 224 | 473 | | |||||||||||||||
Total nonperforming assets including loans held for sale |
$ | 1,954 | 2,468 | 3,468 | 2,479 | 1,027 | ||||||||||||||
Loans and leases 90 days past due and accruing |
||||||||||||||||||||
Commercial and industrial loans |
$ | 4 | 16 | 118 | 76 | 44 | ||||||||||||||
Commercial mortgage loans |
3 | 11 | 59 | 136 | 73 | |||||||||||||||
Commercial construction loans |
1 | 3 | 17 | 74 | 67 | |||||||||||||||
Commercial leases |
| | 4 | 4 | 4 | |||||||||||||||
Residential mortgage loans (d) |
79 | 100 | 189 | 198 | 186 | |||||||||||||||
Home equity |
74 | 89 | 99 | 96 | 72 | |||||||||||||||
Automobile loans |
9 | 13 | 17 | 21 | 13 | |||||||||||||||
Credit card and other |
30 | 42 | 64 | 56 | 31 | |||||||||||||||
Other consumer loans and leases |
| | | 1 | 1 | |||||||||||||||
Total loans and leases 90 days past due and accruing |
$ | 200 | 274 | 567 | 662 | 491 | ||||||||||||||
Nonperforming assets as a percent of portfolio loans, leases and other assets, including OREO (c) |
2.23 | % | 2.79 | 4.22 | 2.38 | 1.25 | ||||||||||||||
Allowance for loan and lease losses as a percent of nonperforming assets (b) |
124 | 138 | 116 | 139 | 93 |
(a) | For 2010, nonaccrual loans and leases reflect a reclassification of $84 million in nonperforming loans from commercial and industrial loans to other consumer loans and leases which occurred after the Bancorps Form 8-K was filed on January 19, 2011. This reclassification was primarily a result of the determination that consumer loans obtained in the foreclosure of a commercial loan were more appropriately categorized as other consumer loans and leases in accordance with regulatory guidance. |
(b) | During 2009, the Bancorp modified its consumer nonaccrual policy to exclude TDR loans that were less than 90 days past due because they were performing in accordance with the restructured terms. For comparability purposes, prior periods were adjusted to reflect this reclassification. |
(c) | Excludes nonaccrual loans held for sale. |
(d) | Information for all periods presented excludes advances made pursuant to servicing agreements to GNMA mortgage loan pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. As of December 31, 2011 , 2010, 2009, 2008, and 2007 these advances were $309 , $279, $130, $40, and $25, respectively. The Bancorp recognized immaterial credit losses for the year ended December 31, 2011 and $2 million for 2010 due to claim denials and curtailments associated with these advances. |
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Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides a rollforward of portfolio nonperforming loans and leases, by portfolio segment:
TABLE 46: ROLLFORWARD OF PORTFOLIO NONPERFORMING LOANS AND LEASES
For the year ended December 31, 2011 ($ in millions) | Commercial |
Residential
Mortgage |
Consumer | Total | ||||||||||||
Beginning Balance |
$ | 1,214 | 268 | 198 | 1,680 | |||||||||||
Transfers to nonperforming |
1,075 | 396 | 456 | 1,927 | ||||||||||||
Transfers to performing |
(23 | ) | (45 | ) | (85 | ) | (153 | ) | ||||||||
Transfers to performing (restructured) |
(1 | ) | (74 | ) | (95 | ) | (170 | ) | ||||||||
Transfers from held for sale |
4 | | | 4 | ||||||||||||
Transfers to held for sale |
(92 | ) | | | (92 | ) | ||||||||||
Loans sold from portfolio |
(57 | ) | (1 | ) | (21 | ) | (79 | ) | ||||||||
Loan paydowns/payoffs |
(425 | ) | (85 | ) | (13 | ) | (523 | ) | ||||||||
Transfers to other real estate owned |
(110 | ) | (79 | ) | | (189 | ) | |||||||||
Charge-offs |
(554 | ) | (106 | ) | (342 | ) | (1,002 | ) | ||||||||
Draws/other extensions of credit |
27 | 1 | 7 | 35 | ||||||||||||
Ending Balance |
$ | 1,058 | 275 | 105 | 1,438 | |||||||||||
For the year ended December 31, 2010 |
||||||||||||||||
Beginning Balance |
$ | 2,392 | 412 | 143 | 2,947 | |||||||||||
Transfers to nonperforming |
1,666 | 624 | 551 | 2,841 | ||||||||||||
Transfers to performing |
(32 | ) | (67 | ) | (46 | ) | (145 | ) | ||||||||
Transfers to performing (restructured) |
(10 | ) | (69 | ) | (61 | ) | (140 | ) | ||||||||
Transfers to held for sale |
(386 | ) | (205 | ) | | (591 | ) | |||||||||
Loans sold from portfolio |
(48 | ) | | | (48 | ) | ||||||||||
Loan paydowns/payoffs |
(773 | ) | (88 | ) | (42 | ) | (903 | ) | ||||||||
Transfers to other real estate owned |
(290 | ) | (163 | ) | (1 | ) | (454 | ) | ||||||||
Charge-offs |
(1,364 | ) | (176 | ) | (358 | ) | (1,898 | ) | ||||||||
Draws/other extensions of credit |
59 | | 12 | 71 | ||||||||||||
Ending Balance |
$ | 1,214 | 268 | 198 | 1,680 |
Troubled Debt Restructurings
If a borrower is experiencing financial difficulty, the Bancorp may consider, in certain circumstances, modifying the terms of their loan to maximize collection of amounts due. Typically, these modifications reduce the loan interest rate, extend the loan term, or in limited circumstances, reduce the principal balance of the loan. These modifications are classified as TDRs.
At the time of modification, the Bancorp maintains certain consumer loan TDRs (including residential mortgage
loans, home equity loans, and other consumer loans) on accrual status, provided there is reasonable assurance of repayment and performance according to the modified terms based upon a current, well-documented credit evaluation. Commercial loan TDRs and credit card TDRs are classified as nonaccrual loans and are typically returned to accrual status upon a six month period of sustained performance under the restructured terms. The following table summarizes TDRs by loan type and delinquency status.
TABLE 47: PERFORMING AND NONPERFORMING TDRs
Performing | ||||||||||||||||||||
As of December 31, 2011 ($ in millions) | Current |
30-89 Days
Past Due |
90 Days or
More Past Due |
Nonaccrual | Total | |||||||||||||||
Commercial |
$ | 388 | 2 | | 160 | $ | 550 | |||||||||||||
Residential mortgages (a) |
978 | 72 | 67 | 141 | 1,258 | |||||||||||||||
Home equity |
372 | 39 | | 29 | 440 | |||||||||||||||
Credit card |
44 | | | 48 | 92 | |||||||||||||||
Other consumer |
38 | 2 | | 2 | 42 | |||||||||||||||
Total |
$ | 1,820 | 115 | 67 | 380 | $ | 2,382 |
(a) | Information includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. As of December 31, 2011, these advances represented $64 of current loans, $16 of 30-89 days past due loans and $46 of 90 days or more past due loans. |
Analysis of Net Loan Charge-offs
Net charge-offs were 149 bps and 302 bps of average loans and leases for the years ended December 31, 2011 and 2010, respectively. Table 48 provides a summary of credit loss experience and net charge-offs as a percentage of average loans and leases outstanding by loan category.
The ratio of commercial loan and lease net charge-offs to average commercial loans and leases decreased to 126 bps during 2011 compared to 310 bps in 2010, as a result of decreases in net charge-offs of $810 million. Decreases in net charge-offs were realized across all commercial loan types and were primarily due to improvements in general economic conditions and previous actions taken by the Bancorp to address problem loans. Actions taken by the Bancorp include suspending homebuilder and developer lending in 2007 and non-owner occupied commercial real estate lending in 2008 and tightened underwriting standards across all commercial loan product offerings. In addition, the Bancorp implemented other loss mitigation strategies that included the previously mentioned sale of troubled loans during the third quarter of 2010. Net charge-offs for 2011 related to non-owner occupied commercial real estate were $211 million compared to $625 million in 2010. Net charge-offs related to non-owner occupied commercial real estate are recorded in the commercial mortgage loans and commercial construction loans captions in Table 48. Net charge-offs on these loans represented 38% of total commercial loan and lease net charge-offs in 2011 and 46% in 2010.
Fifth Third Bancorp |
63 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The ratio of consumer loan and lease net charge-offs to average consumer loans and leases decreased to 179 bps in 2011 compared to 292 bps in 2010. Residential mortgage loan net charge-offs, which typically involve partial charge-offs based upon appraised values of underlying collateral, decreased $266 million from the prior year as a result of improvements in delinquencies and a decrease in the average loss recorded per charge-off. Additionally, the prior year included $123 million in net charge-offs that were recorded on residential mortgage portfolio loans sold during the third quarter of 2010. The Bancorps Florida and Michigan markets accounted for 58% and 72% of net charge-offs on residential mortgage loans in the portfolio in 2011 and 2010, respectively. Fifth Third expects the composition of the residential mortgage portfolio to improve as it continues to retain high quality, shorter duration residential mortgage loans that are originated through its branch network as a low-cost, refinance product of conforming residential mortgage loans.
Home equity net charge-offs decreased $44 million compared to the prior year, primarily due to decreases in net charge-offs in the Michigan market and reduced net charge-offs of brokered home equity products. Management responded to the performance of the brokered home equity portfolio by eliminating this channel of origination in 2007. In addition, management actively manages lines of credit and makes reductions in lending limits when it believes it is necessary based on FICO score deterioration and property devaluation.
Automobile loan net charge-offs decreased $35 million compared to 2010, due to the origination of high credit quality loans as a result of tighter underwriting standards and higher resale on automobiles sold at auction.
Credit card net charge-offs decreased $57 million from 2010 reflecting improving delinquency trends, aggressive line management, and stabilization in unemployment levels. The Bancorp utilizes a risk-adjusted pricing methodology to ensure adequate compensation is received for those products that have higher credit costs.
Other consumer loan net charge-offs increased $56 million compared to 2010 due to charge-offs associated with certain consumer loans that were acquired during the fourth quarter of 2010 when the Bancorp foreclosed on a commercial loan that was collateralized by individual consumer loans. These loans were fully charged off as of December 31, 2011.
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Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 48: SUMMARY OF CREDIT LOSS EXPERIENCE
For the years ended December 31 ($ in millions) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Losses charged off: |
||||||||||||||||||||
Commercial and industrial loans |
$ | (314 | ) | (631 | ) | (768 | ) | (667 | ) | (121 | ) | |||||||||
Commercial mortgage loans |
(211 | ) | (541 | ) | (436 | ) | (618 | ) | (46 | ) | ||||||||||
Commercial construction loans |
(89 | ) | (265 | ) | (420 | ) | (750 | ) | (29 | ) | ||||||||||
Commercial leases |
(1 | ) | (7 | ) | (11 | ) | | (1 | ) | |||||||||||
Residential mortgage loans |
(180 | ) | (441 | ) | (359 | ) | (243 | ) | (43 | ) | ||||||||||
Home equity |
(234 | ) | (276 | ) | (330 | ) | (212 | ) | (106 | ) | ||||||||||
Automobile loans |
(85 | ) | (132 | ) | (189 | ) | (168 | ) | (117 | ) | ||||||||||
Credit card |
(114 | ) | (164 | ) | (178 | ) | (101 | ) | (54 | ) | ||||||||||
Other consumer loans and leases |
(86 | ) | (28 | ) | (28 | ) | (32 | ) | (27 | ) | ||||||||||
Total losses |
(1,314 | ) | (2,485 | ) | (2,719 | ) | (2,791 | ) | (544 | ) | ||||||||||
Recoveries of losses previously charged off: |
||||||||||||||||||||
Commercial and industrial loans |
38 | 45 | 50 | 18 | 12 | |||||||||||||||
Commercial mortgage loans |
16 | 17 | 14 | 5 | 2 | |||||||||||||||
Commercial construction loans |
4 | 13 | 4 | 2 | | |||||||||||||||
Commercial leases |
3 | 5 | 4 | 1 | 1 | |||||||||||||||
Residential mortgage loans |
7 | 2 | 2 | | | |||||||||||||||
Home equity |
14 | 12 | 8 | 7 | 9 | |||||||||||||||
Automobile loans |
32 | 44 | 41 | 34 | 32 | |||||||||||||||
Credit card |
16 | 9 | 8 | 7 | 8 | |||||||||||||||
Other consumer loans and leases |
12 | 10 | 7 | 7 | 18 | |||||||||||||||
Total recoveries |
142 | 157 | 138 | 81 | 82 | |||||||||||||||
Net losses charged off: |
||||||||||||||||||||
Commercial and industrial loans |
(276 | ) | (586 | ) | (718 | ) | (649 | ) | (109 | ) | ||||||||||
Commercial mortgage loans |
(195 | ) | (524 | ) | (422 | ) | (613 | ) | (44 | ) | ||||||||||
Commercial construction loans |
(85 | ) | (252 | ) | (416 | ) | (748 | ) | (29 | ) | ||||||||||
Commercial leases |
2 | (2 | ) | (7 | ) | 1 | | |||||||||||||
Residential mortgage loans |
(173 | ) | (439 | ) | (357 | ) | (243 | ) | (43 | ) | ||||||||||
Home equity |
(220 | ) | (264 | ) | (322 | ) | (205 | ) | (97 | ) | ||||||||||
Automobile loans |
(53 | ) | (88 | ) | (148 | ) | (134 | ) | (85 | ) | ||||||||||
Credit card |
(98 | ) | (155 | ) | (170 | ) | (94 | ) | (46 | ) | ||||||||||
Other consumer loans and leases |
(74 | ) | (18 | ) | (21 | ) | (25 | ) | (9 | ) | ||||||||||
Total net losses charged off |
$ | (1,172 | ) | (2,328 | ) | (2,581 | ) | (2,710 | ) | (462 | ) | |||||||||
Net charge-offs as a percent of average loans and leases (excluding held for sale): |
||||||||||||||||||||
Commercial and industrial loans |
0.97 | % | 2.23 | 2.61 | 2.31 | 0.49 | ||||||||||||||
Commercial mortgage loans |
1.89 | 4.58 | 3.43 | 4.80 | 0.40 | |||||||||||||||
Commercial construction loans |
4.96 | 8.48 | 9.24 | 12.80 | 0.51 | |||||||||||||||
Commercial leases |
(0.08 | ) | 0.05 | 0.22 | (0.02 | ) | 0.01 | |||||||||||||
Total commercial loans |
1.26 | 3.10 | 3.27 | 3.99 | 0.43 | |||||||||||||||
Residential mortgage loans |
1.75 | 5.49 | 4.15 | 2.47 | 0.48 | |||||||||||||||
Home equity |
1.97 | 2.20 | 2.57 | 1.67 | 0.82 | |||||||||||||||
Automobile loans |
0.47 | 0.85 | 1.68 | 1.56 | 0.83 | |||||||||||||||
Credit card |
5.19 | 8.28 | 8.87 | 5.51 | 3.55 | |||||||||||||||
Other consumer loans and leases |
15.29 | 2.58 | 2.14 | 2.10 | 0.83 | |||||||||||||||
Total consumer loans and leases |
1.79 | 2.92 | 3.10 | 2.08 | 0.84 | |||||||||||||||
Total net losses charged off |
1.49 | % | 3.02 | 3.20 | 3.23 | 0.61 |
Allowance for Credit Losses
The allowance for credit losses is comprised of the ALLL and the reserve for unfunded commitments. The ALLL provides coverage for probable and estimable losses in the loan and lease portfolio. The Bancorp evaluates the ALLL each quarter to determine its adequacy to cover inherent losses. Several factors are taken into consideration in the determination of the overall ALLL, including an unallocated component. These factors include, but are not limited to, the overall risk profile of the loan and lease portfolios, net charge-off experience, the extent of impaired loans and leases, the level of nonaccrual loans and leases, the level of 90 days past due loans and leases and the overall percentage level of the ALLL. The Bancorp also considers overall asset quality trends, credit administration and portfolio management practices, risk identification practices, credit policy and underwriting practices, overall portfolio growth, portfolio concentrations and current national and local economic conditions that might impact the
portfolio. See the Critical Accounting Policies section for more information.
The ALLL attributable to the portion of the residential and consumer loan and lease portfolio that has not been restructured is determined on a pooled basis with the segmentation being based on the similarity of credit risk characteristics. Loss factors for real estate backed consumer loans are developed for each pool based on the trailing twelve month historical loss rate, as adjusted for certain prescriptive loss rate factors and certain qualitative adjustment factors. The prescriptive loss rate factors and qualitative adjustments are designed to reflect risks associated with current conditions and trends which are not believed to be fully reflected in the trailing twelve month historical loss rate. For real estate backed consumer loans, the prescriptive loss rate factors include adjustments for delinquency trends, LTV trends, refreshed FICO score trends and product mix, and the qualitative factors include adjustments for credit administration and portfolio management practices, credit policy and underwriting practices and the national and local
Fifth Third Bancorp |
65 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
economy. The Bancorp considers home price index trends in its footprint when determining the national and local economy qualitative factor. The Bancorp also considers the volatility of collateral valuation trends when determining the unallocated component of the ALLL.
TABLE 49: CHANGES IN ALLOWANCE FOR CREDIT LOSSES
For the years ended December 31 ($ in millions) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
ALLL: |
||||||||||||||||||||
Balance, beginning of period |
$ | 3,004 | 3,749 | 2,787 | 937 | 771 | ||||||||||||||
Impact of change in accounting principle |
| 45 | | | | |||||||||||||||
Losses charged off |
(1,314 | ) | (2,485 | ) | (2,719 | ) | (2,791 | ) | (544 | ) | ||||||||||
Recoveries of losses previously charged off |
142 | 157 | 138 | 81 | 82 | |||||||||||||||
Provision for loan and lease losses |
423 | 1,538 | 3,543 | 4,560 | 628 | |||||||||||||||
Balance, end of period |
$ | 2,255 | 3,004 | 3,749 | 2,787 | 937 | ||||||||||||||
Reserve for unfunded commitments: |
||||||||||||||||||||
Balance, beginning of period |
$ | 227 | 294 | 195 | 95 | 76 | ||||||||||||||
Impact of change in accounting principle |
| (43 | ) | | | | ||||||||||||||
Provision for loan and lease losses |
(46 | ) | (24 | ) | 99 | 100 | 19 | |||||||||||||
Balance, end of period |
$ | 181 | 227 | 294 | 195 | 95 |
In 2011, the Bancorp did not substantively change any material aspect of its overall approach in the determination of the ALLL and there have been no material changes in assumptions or estimation techniques as compared to prior periods that impacted the determination of the current period allowance. In addition to the ALLL, the Bancorp maintains a reserve for unfunded commitments recorded in other liabilities in the Consolidated Balance Sheets. The methodology used to determine the adequacy of this reserve is similar to the Bancorps methodology for determining the ALLL. The provision for unfunded commitments is included in other noninterest expense in the Consolidated Statements of Income.
Certain inherent, but unconfirmed losses are probable within the loan and lease portfolio. The Bancorps current methodology for determining the level of losses is based on historical loss rates, current credit grades, specific allocation on impaired commercial credits above specified thresholds and other qualitative adjustments. Due to the heavy reliance on realized historical losses and the credit grade rating process, the model-derived required reserves tend to slightly lag behind the deterioration in the portfolio, in a stable or deteriorating credit environment, and tend not to be as responsive when improved conditions have presented themselves. Given these model limitations, the qualitative adjustment factors may be incremental or decremental to the quantitative model results.
An unallocated component to the ALLL is maintained to recognize the imprecision in estimating and measuring loss. The unallocated allowance as a percent of total portfolio loans and leases at December 31, 2011 and 2010 was 0.17% and 0.19%, respectively. The unallocated allowance increased from five percent at December 31, 2010 to six percent of the total allowance for December 31, 2011. The increase in the unallocated allowance as a percentage of the total allowance was driven by additional sustained market volatility in the U.S. markets that has provided indications that loss events may be occurring at a rate greater than the rate captured within the Bancorps model.
As shown in Table 50, the ALLL as a percent of the total loan and lease portfolio was 2.78% at December 31, 2011, compared to 3.88% at December 31, 2010. The ALLL was $2.3 billion as of December 31, 2011, compared to $3.0 billion at December 31, 2010. The decrease is reflective of a number of factors including decreases in nonperforming loans and leases, improved delinquency metrics in commercial and consumer loans and leases and improvement in underlying loss trends.
The Bancorps determination of the ALLL for commercial loans is sensitive to the risk grades it assigns to these loans. In the event that 10% of commercial loans in each risk category would experience a downgrade of one risk category, the allowance for commercial loans would increase by approximately $132 million at December 31, 2011. In addition, the Bancorps determination of the allowance for residential and consumer loans is sensitive to changes in estimated loss rates. In the event that estimated loss rates would increase by 10%, the allowance for residential and consumer loans would increase by approximately $59 million at December 31, 2011. As several qualitative and quantitative factors are considered in determining the ALLL, these sensitivity analyses do not necessarily reflect the nature and extent of future changes in the ALLL. They are intended to provide insights into the impact of adverse changes to risk grades and estimated loss rates and do not imply any expectation of future deterioration in the risk ratings or loss rates. Given current processes employed by the Bancorp, management believes the risk grades and estimated loss rates currently assigned are appropriate.
The Bancorp continually reviews its credit administration and loan and lease portfolio and makes changes based on the performance of its products. As previously discussed, management discontinued the origination of brokered home equity products at the end of 2007, suspended homebuilder lending in 2007 and new commercial non-owner occupied real estate lending in 2008, and tightened underwriting standards across both the commercial and consumer loan product offerings.
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Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 50: ATTRIBUTION OF ALLOWANCE FOR LOAN AND LEASE LOSSES TO PORTFOLIO LOANS AND LEASES
As of December 31 ($ in millions) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Allowance attributed to: |
||||||||||||||||||||
Commercial and industrial loans |
$ | 929 | 1,123 | 1,282 | 824 | 271 | ||||||||||||||
Commercial mortgage loans |
441 | 597 | 734 | 363 | 135 | |||||||||||||||
Commercial construction loans |
77 | 158 | 380 | 252 | 98 | |||||||||||||||
Commercial leases |
80 | 111 | 121 | 61 | 27 | |||||||||||||||
Residential mortgage loans |
227 | 310 | 375 | 388 | 67 | |||||||||||||||
Home equity |
195 | 265 | 294 | 289 | 124 | |||||||||||||||
Automobile loans |
43 | 73 | 127 | 150 | 79 | |||||||||||||||
Credit card |
106 | 158 | 199 | 148 | 69 | |||||||||||||||
Other consumer loans and leases |
21 | 59 | 44 | 33 | 20 | |||||||||||||||
Unallocated |
136 | 150 | 193 | 279 | 47 | |||||||||||||||
Total ALLL |
$ | 2,255 | 3,004 | 3,749 | 2,787 | 937 | ||||||||||||||
Portfolio loans and leases: |
||||||||||||||||||||
Commercial and industrial loans |
$ | 30,783 | 27,191 | 25,683 | 29,197 | 24,813 | ||||||||||||||
Commercial mortgage loans |
10,138 | 10,845 | 11,803 | 12,502 | 11,862 | |||||||||||||||
Commercial construction loans |
1,020 | 2,048 | 3,784 | 5,114 | 5,561 | |||||||||||||||
Commercial leases |
3,531 | 3,378 | 3,535 | 3,666 | 3,737 | |||||||||||||||
Residential mortgage loans |
10,672 | 8,956 | 8,035 | 9,385 | 10,540 | |||||||||||||||
Home equity |
10,719 | 11,513 | 12,174 | 12,752 | 11,874 | |||||||||||||||
Automobile loans |
11,827 | 10,983 | 8,995 | 8,594 | 9,201 | |||||||||||||||
Credit card |
1,978 | 1,896 | 1,990 | 1,811 | 1,591 | |||||||||||||||
Other consumer loans and leases |
350 | 681 | 780 | 1,122 | 1,074 | |||||||||||||||
Total portfolio loans and leases |
$ | 81,018 | 77,491 | 76,779 | 84,143 | 80,253 | ||||||||||||||
Attributed allowance as a percent of respective portfolio loans and leases: |
||||||||||||||||||||
Commercial and industrial loans |
3.02 | % | 4.13 | 4.99 | 2.82 | 1.09 | ||||||||||||||
Commercial mortgage loans |
4.35 | 5.50 | 6.22 | 2.90 | 1.14 | |||||||||||||||
Commercial construction loans |
7.55 | 7.71 | 10.04 | 4.93 | 1.77 | |||||||||||||||
Commercial leases |
2.27 | 3.29 | 3.42 | 1.66 | 0.72 | |||||||||||||||
Residential mortgage loans |
2.13 | 3.46 | 4.67 | 4.13 | 0.63 | |||||||||||||||
Home equity |
1.82 | 2.30 | 2.41 | 2.27 | 1.04 | |||||||||||||||
Automobile loans |
0.36 | 0.66 | 1.41 | 1.75 | 0.86 | |||||||||||||||
Credit card |
5.36 | 8.33 | 10.00 | 8.17 | 4.34 | |||||||||||||||
Other consumer loans and leases |
6.00 | 8.66 | 5.64 | 2.94 | 1.86 | |||||||||||||||
Unallocated (as a percent of total portfolio loans and leases) |
0.17 | 0.19 | 0.25 | 0.33 | 0.06 | |||||||||||||||
Total portfolio loans and leases |
2.78 | % | 3.88 | 4.88 | 3.31 | 1.17 |
MARKET RISK MANAGEMENT
Market risk arises from the potential for market fluctuations in interest rates, foreign exchange rates and equity prices that may result in potential reductions in net income. Interest rate risk, a component of market risk, is the exposure to adverse changes in net interest income or financial position due to changes in interest rates. Management considers interest rate risk a prominent market risk in terms of its potential impact on earnings. Interest rate risk can occur for any one or more of the following reasons:
|
Assets and liabilities may mature or reprice at different times; |
|
Short-term and long-term market interest rates may change by different amounts; or |
|
The expected maturity of various assets or liabilities may shorten or lengthen as interest rates change. |
In addition to the direct impact of interest rate changes on net interest income, interest rates can indirectly impact earnings through their effect on loan demand, credit losses, mortgage originations, the value of servicing rights and other sources of the Bancorps earnings. Stability of the Bancorps net income is largely dependent upon the effective management of interest rate risk. Management continually reviews the Bancorps balance sheet composition and earnings flows and models the interest rate risk, and possible actions to reduce this risk, given numerous possible future interest rate scenarios.
Net Interest Income Simulation Model
The Bancorp utilizes a variety of measurement techniques to identify and manage its interest rate risk, including the use of an NII simulation model to analyze the sensitivity of net interest income to changing interest rates. The model is based on contractual and assumed cash flows and repricing characteristics for all of the Bancorps financial instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes senior managements projections of the future volume and pricing of each of the product lines offered by the Bancorp as well as other pertinent assumptions. Actual results may differ from these simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.
The Bancorps Executive ALCO, which includes senior management representatives and is accountable to the Enterprise Risk Management Committee, monitors and manages interest rate risk within Board approved policy limits. In addition to the risk management activities of ALCO, the Bancorp has a Market Risk Management function as part of ERM that provides independent oversight of market risk activities. The Bancorps interest rate risk exposure is currently evaluated by measuring the anticipated change in net interest income over 12-month and 24-month horizons assuming a 100 bps parallel ramped increase and a 200 bps parallel ramped increase in interest rates. The Fed Funds interest rate, targeted by the Federal Reserve at a range of 0% to 0.25%, is currently set at a level that would be negative in parallel ramped
Fifth Third Bancorp |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
decrease scenarios; therefore, those scenarios were omitted from the interest rate risk analyses at December 31, 2011. In accordance with the current policy, the rate movements are assumed to occur over one year and are sustained thereafter.
At December 31, 2011, the Bancorps interest rate risk profile reflects a neutral position in year one and slight asset sensitivity in year two. The following table shows the Bancorps estimated net interest income sensitivity profile and ALCO policy limits as of December 31:
TABLE 51: ESTIMATED NII SENSITIVITY PROFILE
2011 | 2010 | |||||||||||||||||||||||
Percent Change in NII (FTE) | Percent Change in NII (FTE) | ALCO Policy Limits | ||||||||||||||||||||||
Change in Interest Rates (bps) | 12 Months |
13 to 24
Months |
12 Months |
13 to 24
Months |
12 Months |
13 to 24
Months |
||||||||||||||||||
+ 200 |
0.35 | % | 5.61 | 1.02 | % | 4.99 | (5.00 | ) | (7.00 | ) | ||||||||||||||
+ 100 |
| 2.64 | 0.49 | 2.73 | | |
The 12 months net interest income at risk reported as of December 31, 2011 for the +200 and +100 basis point scenarios shows a modest decline in asset sensitivity compared with December 31, 2010. The primary factors contributing to this change are an increase in fixed-rate loans partially offset by growth in deposits.
Economic Value of Equity
The Bancorp also utilizes EVE as a measurement tool in managing interest rate risk. Whereas the net interest income simulation model highlights exposures over a relatively short time horizon, the EVE analysis incorporates all cash flows over the estimated remaining life of all balance sheet and derivative positions. The EVE of the balance sheet, at a point in time, is
defined as the discounted present value of asset and net derivative cash flows less the discounted value of liability cash flows. The sensitivity of EVE to changes in the level of interest rates is a measure of longer-term interest rate risk. EVE values only the current balance sheet and does not incorporate the growth assumptions used in the earnings simulation model. As with the earnings simulation model, assumptions about the timing and variability of existing balance sheet cash flows are critical in the EVE analysis. Particularly important are assumptions driving prepayments and the expected changes in balances and pricing of transaction deposit portfolios. The following table shows the Bancorps EVE sensitivity profile as of December 31:
TABLE 52: ESTIMATED EVE SENSITIVITY PROFILE
2011 | 2010 | |||||||||||
Change in Interest Rates (bps) | Change in EVE | Change in EVE | ALCO Policy Limits | |||||||||
+ 200 |
1.37 | % | (1.62 | )% | (15.00 | )% | ||||||
+ 100 |
1.22 | (0.50 | ) | |||||||||
+ 25 |
0.32 | (0.09 | ) | |||||||||
- 25 |
(0.25 | ) | (0.13 | ) |
The EVE at risk profile suggests slight asset sensitivity from market rate increases through the +200 bps scenario. The EVE at risk reported at December 31, 2011 for the +200 basis points scenario shows a change to a modest asset sensitive position compared to December 31, 2010. The primary factors contributing to the change are the decline in market interest rates over the course of 2011 and growth in core deposits, partially offset by the impact of the increase in fixed-rate loans.
While an instantaneous shift in interest rates is used in this analysis to provide an estimate of exposure, the Bancorp believes that a gradual shift in interest rates would have a much more modest impact. Since EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (e.g., the current fiscal year). Further, EVE does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships and changing product spreads that could mitigate the adverse impact of changes in interest rates. The NII simulation and EVE analyses do not necessarily include certain actions that management may undertake to manage this risk in response to anticipated changes in interest rates.
The Bancorp regularly evaluates its exposures to LIBOR and Prime basis risks, nonparallel shifts in the yield curve and embedded options risk. In addition, the impact on NII and EVE of extreme changes in interest rates is modeled, wherein the Bancorp employs the use of yield curve shocks and environment-specific scenarios.
Use of Derivatives to Manage Interest Rate Risk
An integral component of the Bancorps interest rate risk management strategy is its use of derivative instruments to minimize significant fluctuations in earnings caused by changes in market interest rates. Examples of derivative instruments that the Bancorp may use as part of its interest rate risk management strategy include interest rate swaps, interest rate floors, interest rate caps, forward contracts, principal only swaps, options, swaptions and TBAs.
As part of its overall risk management strategy relative to its mortgage banking activity, the Bancorp enters into forward contracts accounted for as free-standing derivatives to economically hedge interest rate lock commitments that are also considered free-standing derivatives. Additionally, the Bancorp economically hedges its exposure to mortgage loans held for sale through the use of forward contracts and mortgage options.
The Bancorp also establishes derivative contracts with major financial institutions to economically hedge significant exposures assumed in commercial customer accommodation derivative contracts. Generally, these contracts have similar terms in order to protect the Bancorp from market volatility. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts, which the Bancorp minimizes through collateral arrangements, approvals, limits and monitoring procedures. For further information including the notional amount and fair values of these derivatives, see Note 13 of the Notes to Consolidated Financial Statements.
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Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Portfolio Loans and Leases and Interest Rate Risk
Although the Bancorps portfolio loans and leases contain both fixed and floating/adjustable rate products, the rates of interest earned by the Bancorp on the outstanding balances are generally established for a period of time. The interest rate sensitivity of loans and leases is directly related to the length of
time the rate earned is established. Table 53 summarizes the expected principal cash flows of the Bancorps portfolio loans and leases as of December 31, 2011. Additionally, Table 54 displays a summary of expected principal cash flows occurring after one year for both fixed and floating/adjustable rate loans, as of December 31, 2011.
TABLE 53: PORTFOLIO LOAN AND LEASE CONTRACTUAL MATURITIES
As of December 31, 2011 ($ in millions) | Less than 1 year | 1-5 years | Over 5 years | Total | ||||||||||||
Commercial and industrial loans |
$ | 9,439 | 19,199 | 2,145 | 30,783 | |||||||||||
Commercial mortgage loans |
4,412 | 4,652 | 1,074 | 10,138 | ||||||||||||
Commercial construction loans |
534 | 290 | 196 | 1,020 | ||||||||||||
Commercial leases |
575 | 1,498 | 1,458 | 3,531 | ||||||||||||
Subtotalcommercial loans and leases |
14,960 | 25,639 | 4,873 | 45,472 | ||||||||||||
Residential mortgage loans |
4,787 | 4,385 | 1,500 | 10,672 | ||||||||||||
Home equity |
1,494 | 3,171 | 6,054 | 10,719 | ||||||||||||
Automobile loans |
4,908 | 6,700 | 219 | 11,827 | ||||||||||||
Credit card |
556 | 1,422 | | 1,978 | ||||||||||||
Other consumer loans and leases |
270 | 71 | 9 | 350 | ||||||||||||
Subtotalconsumer loans and leases |
12,015 | 15,749 | 7,782 | 35,546 | ||||||||||||
Total |
$ | 26,975 | 41,388 | 12,655 | 81,018 |
TABLE 54: PORTFOLIO LOAN AND LEASE PRINCIPAL CASH FLOWS OCCURING AFTER ONE YEAR
Interest Rate | ||||||||
As of December 31, 2011 ($ in millions) | Fixed | Floating or Adjustable | ||||||
Commercial and industrial loans |
$ | 3,683 | 17,661 | |||||
Commercial mortgage loans |
1,823 | 3,903 | ||||||
Commercial construction loans |
181 | 305 | ||||||
Commercial leases |
2,956 | | ||||||
Subtotalcommercial loans and leases |
8,643 | 21,869 | ||||||
Residential mortgage loans |
3,835 | 2,050 | ||||||
Home equity |
1,067 | 8,158 | ||||||
Automobile loans |
6,868 | 51 | ||||||
Credit card |
640 | 782 | ||||||
Other consumer loans and leases |
31 | 49 | ||||||
Subtotalconsumer loans and leases |
12,441 | 11,090 | ||||||
Total |
$ | 21,084 | 32,959 |
Residential Mortgage Servicing Rights and Interest Rate Risk
The net carrying amount of the residential MSR portfolio was $681 million and $822 million as of December 31, 2011 and 2010, respectively. The value of servicing rights can fluctuate sharply depending on changes in interest rates and other factors. Generally, as interest rates decline and loans are prepaid to take advantage of refinancing, the total value of existing servicing rights declines because no further servicing fees are collected on repaid loans. The Bancorp maintains a non-qualifying hedging strategy relative to its mortgage banking activity in order to manage a portion of the risk associated with changes in the value of its MSR portfolio as a result of changing interest rates.
Mortgage rates decreased during both 2011 and 2010. These decreases caused modeled prepayment speeds to increase, which led to $242 million in temporary impairment on servicing rights during the year ended 2011, compared to $36 million in temporary impairment in 2010. Servicing rights are deemed temporarily impaired when a borrowers loan rate is distinctly higher than prevailing rates. Temporary impairment on servicing rights is reversed when the prevailing rates return to a level commensurate with the borrowers loan rate. Offsetting the mortgage servicing rights valuation, the Bancorp recognized net gains of $354 million and $123 million on its non-qualifying hedging strategy for the years ended 2011 and 2010, respectively. The net gains include net gains from the sale of securities related to the Bancorps non-qualifying hedging strategy of $9 million and $14 million for 2011 and 2010, respectively. During the fourth quarter of 2011, the Bancorp assessed the composition of its MSR portfolio, the cost of hedging and the anticipated effectiveness of the hedges given the economic environment. Based on this review, the Bancorp adjusted its MSR hedging strategy to exclude the hedging of MSRs related to certain mortgage loans originated in 2008 and prior, representing approximately 25% of the carrying value of the MSR portfolio as of December 31, 2011. The prepayment behavior of these loans is expected to be less sensitive to changes in interest rates as borrower credit characteristics and home price values have a greater impact based on changes in the market and underwriting environment. Thus, the predictive power of traditional prepayment models on these loans may not be reliable, which reduces the effectiveness of interest rate based hedge strategies. The Bancorp is exposed to prepayment risk on these loans in the event borrowers refinance at higher than expected levels due to government intervention or other factors. The Bancorp continues to monitor the performance of these MSRs and may decide to hedge this portion of the MSR portfolio in future periods. See Note 12 of the Notes to Consolidated Financial Statements for further discussion on servicing rights and the instruments used to hedge interest rate risk on MSRs.
Foreign Currency Risk
The Bancorp may enter into foreign exchange derivative contracts to economically hedge certain foreign denominated loans. The derivatives are classified as free-standing instruments with the revaluation gain or loss being recorded in other noninterest income in the Consolidated Statements of Income. The balance of the Bancorps foreign denominated loans at December 31, 2011 and
Fifth Third Bancorp |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2010 was approximately $374 million and $283 million, respectively. The Bancorp also enters into foreign exchange contracts for the benefit of commercial customers involved in international trade to hedge their exposure to foreign currency fluctuations. The Bancorp has internal controls in place to help ensure excessive risk is not being taken in providing this service to customers. These controls include an independent determination of currency volatility and credit equivalent exposure on these contracts, counterparty credit approvals and country limits.
LIQUIDITY RISK MANAGEMENT
The goal of liquidity management is to provide adequate funds to meet changes in loan and lease demand, unexpected levels of deposit withdrawals and other contractual obligations. Mitigating liquidity risk is accomplished by maintaining liquid assets in the form of investment securities, maintaining sufficient unused borrowing capacity in the debt markets and delivering consistent growth in core deposits. A summary of certain obligations and commitments to make future payments under contracts is included in Note 17 of the Notes to Consolidated Financial Statements.
The Bancorp maintains a contingency funding plan that assesses the liquidity needs under various scenarios of market conditions, asset growth and credit rating downgrades. The plan includes liquidity stress testing which measures various sources and uses of funds under the different scenarios. The contingency plan provides for ongoing monitoring of unused borrowing capacity and available sources of contingent liquidity to prepare for unexpected liquidity needs and to cover unanticipated events that could affect liquidity.
Sources of Funds
The Bancorps primary sources of funds relate to cash flows from loan and lease repayments, payments from securities related to sales and maturities, the sale or securitization of loans and leases and funds generated by core deposits, in addition to the use of public and private debt offerings.
Projected contractual maturities from loan and lease repayments are included in Table 53 of the Market Risk Management section of MD&A. Of the $15.4 billion of securities in the Bancorps available-for-sale portfolio at December 31, 2011, $4.4 billion in principal and interest is expected to be received in the next 12 months and an additional $3.0 billion is expected to be received in the next 13 to 24 months. For further information on the Bancorps securities portfolio, see the Securities section of MD&A.
Asset-driven liquidity is provided by the Bancorps ability to sell or securitize loan and lease assets. In order to reduce the exposure to interest rate fluctuations and to manage liquidity, the Bancorp has developed securitization and sale procedures for several types of interest-sensitive assets. A majority of the long-term, fixed-rate single-family residential mortgage loans underwritten according to FHLMC or FNMA guidelines are sold for cash upon origination. Additional assets such as residential mortgages, certain commercial loans, home equity loans, automobile loans and other consumer loans are also
capable of being securitized or sold. For the years ended December 31, 2011 and 2010, the Bancorp sold loans totaling $15.2 billion and $18.2 billion, respectively. For further information on the transfer of financial assets, see Note 12 of the Notes to Consolidated Financial Statements.
Core deposits have historically provided the Bancorp with a sizeable source of relatively stable and low cost funds. The Bancorps average core deposits and shareholders equity funded 81% of its average total assets during 2011, compared to 80% in 2010. In addition to core deposit funding, the Bancorp also accesses a variety of other short-term and long-term funding sources, which include the use of the FHLB system.
Certificates of deposit carrying a balance of $100,000 or more and deposits in the Bancorps foreign branch located in the Cayman Islands are wholesale funding tools utilized to fund asset growth. Management does not rely on any one source of liquidity and manages availability in response to changing balance sheet needs.
The Bancorp has approximately $7.2 billion of unsecured long-term debt outstanding as of December 31, 2011. Long-term debt with a principal balance of $8 million will mature during 2012. As of December 31, 2011, $6.1 billion of debt or other securities were available for issuance under the current Bancorps Board of Directors authorizations and the Bancorp is authorized to file any necessary registration statements with the SEC to permit ready access to the public securities markets; however, access to these markets may depend on market conditions. The Bancorp also has $19.0 billion of funding available for issuance through private offerings of debt securities pursuant to its bank note program and currently has approximately $31.0 billion of borrowing capacity available through secured borrowing sources including the FHLB and FRB.
On January 25, 2011, the Bancorp raised $1.7 billion in new common equity through the issuance of 121,428,572 shares of common stock in an underwritten offering at an initial price of $14.00 per share. Additionally, on January 25, 2011, the Bancorp sold $1.0 billion in aggregate principal amount of 3.625% Senior Notes due January 25, 2016. Notes 16 and 23 of the Notes to Consolidated Financial Statements provide additional information regarding the Senior Notes and common equity offerings, respectively.
Credit Ratings
The cost and availability of financing to the Bancorp are impacted by its credit ratings. A downgrade to the Bancorps credit ratings could affect its ability to access the credit markets and increase its borrowing costs, thereby adversely impacting the Bancorps financial condition and liquidity. Key factors in maintaining high credit ratings include a stable and diverse earnings stream, strong credit quality, strong capital ratios and diverse funding sources, in addition to disciplined liquidity monitoring procedures.
The Bancorps senior debt credit ratings are summarized in Table 55. The ratings reflect the ratings agencies view on the Bancorps capacity to meet financial commitments. * Additional information on senior debt credit ratings is as follows:
|
Moodys Baa1 rating is considered a medium-grade obligation and is the fourth highest ranking within its overall classification system; |
|
Standard & Poors BBB rating indicates the obligors capacity to meet its financial commitment is adequate and is the fourth highest ranking within its overall classification system; |
|
Fitch Ratings A- rating is considered high credit quality and is the third highest ranking within its overall classification system; and |
|
DBRS Ltd.s A (low) rating is considered satisfactory credit quality and is the third highest ranking within its overall classification system. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 55: AGENCY RATINGS
As of February 29, 2012 | Moodys | Standard and Poors | Fitch | DBRS | ||||
Fifth Third Bancorp: |
||||||||
Short-term |
No rating | A-2 | F1 | R-1L | ||||
Senior debt |
Baa1 | BBB | A | AL | ||||
Subordinated debt |
Baa2 | BBB- | BBB+ | BBBH | ||||
Fifth Third Bank: |
||||||||
Short-term |
P-2 | A-2 | F1 | R-1L | ||||
Long-term deposit |
A3 | No rating | A | A | ||||
Senior debt |
A3 | BBB+ | A | A | ||||
Subordinated debt |
Baa1 | BBB | BBB+ | A (low) |
* As an investor, you should be aware that a security rating is not a recommendation to buy, sell or hold securities, that it may be subject to revision or withdrawal at any time by the assigning rating organization and that each rating should be evaluated independently of any other rating.
CAPITAL MANAGEMENT
Management regularly reviews the Bancorps capital position to help ensure it is appropriately positioned under various operating environments. The Bancorp has established a Capital Committee, which is responsible for all capital related decisions. The Capital Committee makes recommendations to management involving capital actions. These recommendations are reviewed and approved by the Enterprise Risk Management Committee.
2011 Capital Actions
On January 25, 2011, the Bancorp raised $1.7 billion in new common equity through the issuance of 121,428,572 shares of common stock in an underwritten offering at an initial price of $14.00 per share. On January 24, 2011, the underwriters exercised their option to purchase an additional 12,142,857 shares at the offering price of $14.00 per share. In connection with this exercise, the Bancorp elected that all such additional shares be sold and the Bancorp entered into a forward sale agreement which resulted in a final net payment of 959,821 shares on February 4, 2011.
On February 2, 2011, the Bancorp redeemed all 136,320 shares of its Series F Preferred Stock held by the U.S. Treasury totaling $3.4 billion. The Bancorp used the net proceeds from the common stock and senior notes offerings previously discussed and other funds to redeem the Series F Preferred Stock. In connection with the redemption of the Series F Preferred Stock, the Bancorp accelerated the accretion of the
remaining issuance discount on the Series F Preferred Stock and recorded a corresponding reduction in retained earnings of $153 million. In addition, dividends of $15 million were paid on February 2, 2011 when the Series F Preferred Stock was redeemed.
On March 16, 2011, the Bancorp repurchased the warrant issued to the U.S. Treasury under the CPP for $280 million, which was recorded as a reduction to capital surplus in the Bancorps Consolidated Financial Statements.
On March 18, 2011, the Bancorp announced that the FRB did not object to the Bancorps capital plan submitted under the FRB 2011 CCAR. Pursuant to this plan, in the second quarter of 2011, the Bancorp redeemed $452 million of certain trust preferred securities, at par, classified as long-term debt. The trust preferred securities redeemed related to the Fifth Third Capital Trust VII, First National Bankshares Statutory Trust I and R&G Capital Trust II, LLT. As a result of these redemptions the Bancorp recorded a $6 million gain on the extinguishment within other noninterest expense in the Consolidated Statements of Income. The trust preferred securities were a component of Tier I capital: however, these securities are being phased out of Tier I capital by the Dodd-Frank Act as discussed below.
Pursuant to the Bancorps capital plan discussed above, the Bancorp redeemed certain trust preferred securities on September 19, 2011, totaling $40 million, which related to the R&G Crown Cap Trust IV and First National Bankshares Statutory Trust II. As a result of the redemption the Bancorp recorded a $1 million gain on the extinguishment within other noninterest expense in the Consolidated Statements of Income. In addition, on October 24, 2011 the Bancorp redeemed certain trust preferred securities totaling $25 million, which related to the R&G Crown Cap Trust I.
TABLE 56: CAPITAL RATIOS
As of December 31 ($ in millions) |
2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Average equity as a percent of average assets |
11.41 | % | 12.22 | 11.36 | 8.78 | 9.35 | ||||||||||||||
Tangible equity as a percent of tangible assets (a) |
9.03 | 10.42 | 9.71 | 7.86 | 6.14 | |||||||||||||||
Tangible common equity as a percent of tangible assets (a) |
8.68 | 7.04 | 6.45 | 4.23 | 6.14 | |||||||||||||||
Tier I capital |
$ | 12,503 | 13,965 | 13,428 | 11,924 | 8,924 | ||||||||||||||
Total risk-based capital |
16,885 | 18,178 | 17,648 | 16,646 | 11,733 | |||||||||||||||
Risk-weighted assets (b) |
104,945 | 100,561 | 100,933 | 112,622 | 115,529 | |||||||||||||||
Regulatory capital ratios: |
||||||||||||||||||||
Tier I capital |
11.91 | % | 13.89 | 13.30 | 10.59 | 7.72 | ||||||||||||||
Total risk-based capital |
16.09 | 18.08 | 17.48 | 14.78 | 10.16 | |||||||||||||||
Tier I leverage |
11.10 | 12.79 | 12.34 | 10.27 | 8.50 | |||||||||||||||
Tier I common equity (a) |
9.35 | 7.48 | 6.99 | 4.37 | 5.72 |
a) | For further information on these ratios, see the Non-GAAP Financial Measures section of the MD&A. |
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 Bancorps total risk-weighted assets. |
Fifth Third Bancorp |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Ratios
The U.S banking agencies established quantitative measures that assign risk weightings to assets and off-balance sheet items and also define and set minimum regulatory capital requirements. The U.S. banking agencies define well capitalized ratios for Tier I and total risk-based capital as 6% and 10%, respectively. The Bancorp exceeded these well-capitalized ratios for all periods presented.
The Basel II advanced approach framework was finalized by U.S. banking agencies in 2007. Core banks, defined as those with consolidated total assets in excess of $250 billion or on balance sheet foreign exposures of $10 billion were required to adopt the advanced approach effective April 1, 2008. The Bancorp is not subject to the requirements of Basel II.
The 19 large bank holding companies assessed under SCAP were required to demonstrate that they met the 4% Tier I common equity ratio threshold for the period evaluated in the SCAP. The Bancorp exceeded this threshold for all periods presented. The Bancorps Tier I common equity ratio was 9.35% as of December 31, 2011, compared to 7.48% as of December 31, 2010. The Bancorp manages the adequacy of its capital, including Tier I common equity, by conducting ongoing internal stress tests and ensuring the results are properly considered in capital planning. It is the intent of the Bancorps capital planning process to ensure that the Bancorps capital positions remain in excess of well-capitalized standards and any other regulatory requirements.
The Dodd-Frank Act requires more stringent prudential standards, including capital and liquidity requirements, for larger institutions. It addresses the quality of capital components by limiting the degree to which certain hybrid instruments can be included. The Dodd-Frank Act will phase out the inclusion of certain trust preferred securities as a component of Tier I capital beginning January 1, 2013. At December 31, 2011, the Bancorps Tier I capital included $2.2 billion of trust preferred securities representing approximately 214 bps of risk-weighted assets.
In December of 2010 and revised in June of 2011, the Basel Committee on Banking Supervision issued Basel III, a global regulatory framework, to enhance the international capital standards. It imposes a stricter definition of capital, with greater reliance on common equity and sets higher minimum capital requirements. It creates a new capital measure, Tier I common equity, which proposes changes to the current calculation of the Tier I common equity ratio by the Bancorp and several other financial institutions. The U.S. banking agencies are in the process of developing rules to implement the new capital standards as part of the Collins Amendment within the Dodd-Frank Act. Management believes that the Bancorps capital levels will continue to exceed U.S. well-capitalized standards, including the adoption of U.S. rules that incorporate changes under Basel III, to the extent applicable.
The FRB provided final rules of the 2012 CCAR on November 22, 2011. The CCAR requires the 19 largest Bank Holding Companies submit a capital plan to the FRB by January 9, 2012. The mandatory elements of the capital plan are an assessment of the expected use and sources of capital over the planning horizon, a description of all planned capital actions over the planning horizon, a discussion of any expected changes to the Bancorps business plan that are likely to have a material impact on its capital adequacy or liquidity, a detailed description of the Bancorps process for assessing capital adequacy and the Bancorps capital policy.
The FRBs review of the capital plan will assess the comprehensiveness of the capital plan, the reasonableness of the assumptions and the analysis underlying the capital plan and a review of the robustness of the capital adequacy process, the capital policy and the Bancorps ability to maintain capital above the minimum regulatory capital ratio and above a tier 1 common ratio of 5 percent on a pro forma basis under expected and stressful conditions throughout the planning horizon. Following the FRBs assessment of the capital plan, it will either object or provide a notice of non-objection to the submitted capital plan by March 15, 2012.
Dividend Policy and Stock Repurchase Program
The Bancorps common stock dividend policy and stock repurchase program reflect its earnings outlook, desired payout ratios, the need to maintain adequate capital levels, the ability of its subsidiaries to pay dividends, the need to comply with safe and sound banking practices as well as meet regulatory requirements and expectations. The Bancorp received a notice of non-objection to its dividend distribution proposal within its capital plan submitted to the FRB pursuant to the 2011 CCAR. The Bancorp declared dividends per common share of $0.28 and $0.04 during the years ended December 31, 2011 and 2010, respectively.
The Bancorp submitted a capital plan to the FRB on January 9, 2012 in accordance with the requirements of the 2012 CCAR. Following the FRBs assessment of the capital plan, it will object or provide notice of non-objection to the submitted capital plan by March 15, 2012.
The Bancorps repurchase of common stock for the years ended December 31, 2011, 2010, and 2009 is shown in the table below. The Bancorps Board of Directors had previously authorized management to purchase 30 million shares of the Bancorps common stock through the open market or in any private transaction. The amounts below reflect the remaining shares from the Boards authorized program as of the dates presented.
TABLE 57: SHARE REPURCHASES
For the years ended December 31 |
2011 | 2010 | 2009 | |||||||||
Shares authorized for repurchase at January 1 |
19,201,518 | 19,201,518 | 19,201,518 | |||||||||
Additional authorizations |
| | | |||||||||
Share repurchases |
| | | |||||||||
Shares authorized for repurchase at December 31 |
19,201,518 | 19,201,518 | 19,201,518 | |||||||||
Average price paid per share |
N/A | N/A | N/A |
(a) | Excludes 1,164,254 , 333,808 and 265,802 shares repurchased during 2011, 2010, and 2009, respectively, in connection with various employee compensation plans. These repurchases are not included in the calculation for average price paid and do not count against the maximum number of shares that may yet be repurchased under the Board of Directors authorization. |
72 |
Fifth Third Bancorp |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, the Bancorp enters into financial transactions to extend credit and various forms of commitments and guarantees that may be considered off-balance sheet arrangements. These transactions involve varying elements of market, credit and liquidity risk. Refer to Note 17 of the Notes to Consolidated Financial Statements for additional information. A discussion of these transactions is as follows:
Residential Mortgage Loan Sales
Conforming residential mortgage loans sold to unrelated third parties are generally sold with representation and warranty recourse provisions. Such provisions include the loans compliance with applicable loan criteria, including certain documentation standards per agreements with unrelated third parties. Additional reasons for the Bancorp having to repurchase the loans include appraisal standards with the collateral, fraud related to the loan application and the rescission of mortgage insurance. Under these provisions, the Bancorp is required to repurchase any previously sold loan for which the representation or warranty of the Bancorp proves to be inaccurate, incomplete or misleading. As of December 31, 2011 and 2010, the Bancorp maintained reserves related to these loans sold with the representation and warranty recourse provisions totalling $55 million and $85 million, respectively, included in other liabilities in the Bancorps Consolidated Balance Sheets. For further information on residential mortgage loans sold with representation and warranty recourse provisions, see Note 17 of the Notes to Consolidated Financial Statements.
During 2011 and 2010, the Bancorp paid $63 million and $47 million, respectively, in the form of make whole payments and repurchased $122 million and $83 million, respectively, in outstanding principal of loans to satisfy investor demands. Total repurchase demand requests during 2011 and 2010 were $350 million and $365 million, respectively. Total outstanding repurchase demand inventory was $66 million at December 31, 2011 compared to $162 million at December 31, 2010.
The Bancorp sold certain residential mortgage loans in the secondary market with credit recourse. In the event of any customer default, pursuant to the credit recourse provided, the Bancorp is required to reimburse the third party. The maximum amount of credit risk in the event of non-performance by the underlying borrowers is equivalent to the total outstanding balance. In the event of non-performance, the Bancorp has rights to the underlying collateral value securing the loan. At December 31, 2011 the outstanding balances on these loans sold with credit recourse was $772 million compared to $916 million at December 31, 2010. The Bancorp maintained an estimated credit loss reserve on these loans sold with credit recourse of $17 million at December 31, 2011 and $16 million at December 31, 2010; recorded in other liabilities in the Consolidated Balance Sheets. To determine the credit loss reserve, the Bancorp used an approach that is consistent with its overall approach in estimating credit losses for various categories of residential mortgage loans held in its loan portfolio. For further information on residential mortgage loans sold with credit recourse, see Note 17 of the Notes to Consolidated Financial Statements.
Private Mortgage Insurance
For certain mortgage loans originated by the Bancorp, borrowers may be required to obtain PMI provided by third-party insurers. In some instances, these insurers cede a portion of the PMI premiums to the Bancorp, and the Bancorp provides reinsurance coverage within a specified range of the total PMI coverage. The Bancorps reinsurance coverage typically ranges from 5% to 10% of the total PMI coverage.
The Bancorps maximum exposure in the event of nonperformance by the underlying borrowers is equivalent to the Bancorps total outstanding reinsurance coverage, which was $77 million at December 31, 2011 and $115 million at December 31, 2010. The Bancorp maintained a reserve, included in other liabilities in the Bancorps Consolidated Balance Sheets, related to exposures within the reinsurance portfolio of $27 million as of December 31, 2011 and $42 million as of December 31, 2010. During the second quarter of 2009, the Bancorp suspended the practice of providing reinsurance of private mortgage insurance for newly originated mortgage loans. In the third quarter of 2010, the Bancorp allowed one of its third-party insurers to terminate its reinsurance agreement with the Bancorp, resulting in the Bancorp releasing collateral to the insurer in the form of investment securities and other assets with a carrying value of $19 million, and the insurer assuming the Bancorps obligations under the reinsurance agreement, resulting in a decrease to the Bancorps reserve liability of $20 million and decrease in the Bancorps maximum exposure of $53 million. In the second quarter of 2011, the Bancorp allowed one of its third-party insurers to terminate its reinsurance agreement with the Bancorp, resulting in the Bancorp releasing collateral to the insurer in the form of investment securities and other assets with a carrying value of $5 million, and the insurer assuming the Bancorps obligations under the reinsurance agreement, resulting in a decrease to the Bancorps reserve liability of $11 million and decrease in the Bancorps maximum exposure of $27 million.
Fifth Third Bancorp |
73 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The Bancorp has certain obligations and commitments to make future payments under contracts. The aggregate contractual obligations and commitments at December 31, 2011 are shown in Table 58. As of December 31, 2011, the Bancorp has unrecognized tax benefits that, if recognized, would impact the effective tax rate in future periods. Due to the uncertainty of the
amounts to be ultimately paid as well as the timing of such payments, all uncertain tax liabilities that have not been paid have been excluded from the Contractual Obligations and Other Commitments table. For further detail on the impact of income taxes see Note 20 of the Notes to Consolidated Financial Statements.
TABLE 58: CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
As of December 31, 2011 ($ in millions) |
|
Less than 1
year |
|
1-3 years | 3-5 years |
|
Greater than
5 years |
|
Total | |||||||||||
Contractually obligated payments due by period: |
||||||||||||||||||||
Deposits without a stated maturity (a) |
$ | 78,033 | | | | 78,033 | ||||||||||||||
Long-term debt (b) |
8 | 1,692 | 2,995 | 4,987 | 9,682 | |||||||||||||||
Time deposits (c) |
3,821 | 350 | 74 | 3,432 | 7,677 | |||||||||||||||
Forward contracts to sell mortgage loans (d) |
5,705 | | | | 5,705 | |||||||||||||||
Short-term borrowings (e) |
3,585 | | | | 3,585 | |||||||||||||||
Noncancelable lease obligations (f) |
92 | 170 | 149 | 440 | 851 | |||||||||||||||
Partnership investment commitments (g) |
164 | 65 | 10 | 30 | 269 | |||||||||||||||
Purchase obligations (h) |
66 | 50 | 40 | | 156 | |||||||||||||||
Pension obligations ( i ) |
20 | 33 | 31 | 66 | 150 | |||||||||||||||
Capital lease obligations |
12 | 9 | 4 | 1 | 26 | |||||||||||||||
Total contractually obligated payments due by period |
$ | 91,506 | 2,369 | 3,303 | 8,956 | 106,134 | ||||||||||||||
Other commitments by expiration period |
||||||||||||||||||||
Commitments to extend credit (j) |
$ | 28,980 | 7,150 | 11,393 | 362 | 47,885 | ||||||||||||||
Letters of credit (k) |
1,940 | 2,409 | 256 | 139 | 4,744 | |||||||||||||||
Total other commitments by expiration period |
$ | 30,920 | 9,559 | 11,649 | 501 | 52,629 |
(a) | Includes demand, interest checking, savings, money market and foreign office deposits. For additional information, see the Deposits discussion in the Balance Sheet Analysis section of MD&A. |
(b) | In the banking industry, interest-bearing obligations are principally used to fund interest-earning assets. As such, interest charges on contractual obligations were excluded from reported amounts, as the potential cash outflows would have corresponding cash inflows from interest-earning assets. See Note 16 of the Notes to Consolidated Financial Statements for additional information on these debt instruments. |
(c) | Includes other time and certificates $100,000 and over. For additional information, see the Deposits discussion in the Balance Sheet Analysis section of MD&A. |
(d) | See Note 12 of the Notes to Consolidated Financial Statements for additional information on forward contracts to sell residential mortgage loans. |
(e) | Includes federal funds purchased and borrowings with an original maturity of less than one year. For additional information, see Note 15 of the Notes to Consolidated Financial Statements. |
(f) | Includes rental commitments. |
(g) | Includes low-income housing, historic tax investments and market tax credits. |
(h) | Represents agreements to purchase goods or services and includes commitments to various general contractors for work related to banking center construction. |
(i) | See Note 21 of the Notes to Consolidated Financial Statements for additional information on pension obligations. |
(j) | Commitments to extend credit are agreements to lend, typically having fixed expiration dates or other termination clauses that may require payment of a fee. Many of the commitments to extend credit may expire without being drawn upon. The total commitment amounts do not necessarily represent future cash flow requirements. For additional information, see Note 17 of the Notes to Consolidated Financial Statements. |
(k) | Letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. For additional information, see Note 17 of the Notes to Consolidated Financial Statements. |
74 |
Fifth Third Bancorp |
MANAGEMENTS ASSESSMENT AS TO THE EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING
The Bancorp conducted an evaluation, under the supervision and with the participation of the Bancorps management, including the Bancorps Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Bancorps disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act). Based on the foregoing, as of the end of the period covered by this report, the Bancorps Chief Executive Officer and Chief Financial Officer concluded that the Bancorps disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Bancorp files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required and information is accumulated and communicated to management on a timely basis.
The management of Fifth Third Bancorp is responsible for establishing and maintaining adequate internal control, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Bancorps management assessed the effectiveness of the Bancorps internal control over financial reporting as of December 31, 2011. Managements assessment is based on the criteria established in the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and was designed to provide reasonable assurance that the Bancorp maintained effective internal control over financial reporting as of December 31, 2011. Based on this assessment, management believes that the Bancorp maintained effective internal control over financial reporting as of December 31, 2011. The Bancorps independent registered public accounting firm, that audited the Bancorps consolidated financial statements included in this annual report, has issued an audit report on our internal control over financial reporting as of December 31, 2011. This report appears on page 76 of the annual report.
The Bancorps management also conducted an evaluation of internal control over financial reporting to determine whether any changes occurred during the year covered by this report that have materially affected, or are reasonably likely to materially affect, the Bancorps internal control over financial reporting. Based on this evaluation, there has been no such change during the year covered by this report.
|
|
|
Kevin T. Kabat |
Daniel T. Poston |
|
President and Chief Executive Officer |
Executive Vice President and Chief Financial Officer |
|
February 29, 2012 | February 29, 2012 |
75
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Fifth Third Bancorp:
We have audited the internal control over financial reporting of Fifth Third Bancorp and subsidiaries (the Bancorp) as of December 31, 2011, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Bancorps management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Assessment as to the Effectiveness of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Bancorps internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2011 of the Bancorp and our report dated February 29, 2012 expressed an unqualified opinion on those consolidated financial statements.
Cincinnati, Ohio
February 29, 2012
To the Shareholders and Board of Directors of Fifth Third Bancorp:
We have audited the accompanying consolidated balance sheets of Fifth Third Bancorp and subsidiaries (the Bancorp) as of December 31, 2011 and 2010, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended December 31, 2011. These consolidated financial statements are the responsibility of the Bancorps management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fifth Third Bancorp and subsidiaries at December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Bancorps internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2012 expressed an unqualified opinion on the Bancorps internal control over financial reporting.
Cincinnati, Ohio
February 29, 2012
76 |
Fifth Third Bancorp |
As of December 31 ($ in millions, except share data) | 2011 | 2010 | ||||||
Assets |
||||||||
Cash and due from banks (a) |
$ | 2,663 | 2,159 | |||||
Available-for-sale and other securities (b) |
15,362 | 15,414 | ||||||
Held-to-maturity securities (c) |
322 | 353 | ||||||
Trading securities |
177 | 294 | ||||||
Other short-term investments (a) |
1,781 | 1,515 | ||||||
Loans held for sale (d) |
2,954 | 2,216 | ||||||
Portfolio loans and leases: |
||||||||
Commercial and industrial loans |
30,783 | 27,191 | ||||||
Commercial mortgage loans (a) |
10,138 | 10,845 | ||||||
Commercial construction loans |
1,020 | 2,048 | ||||||
Commercial leases |
3,531 | 3,378 | ||||||
Residential mortgage loans (e) |
10,672 | 8,956 | ||||||
Home equity (a) |
10,719 | 11,513 | ||||||
Automobile loans (a) |
11,827 | 10,983 | ||||||
Credit card |
1,978 | 1,896 | ||||||
Other consumer loans and leases |
350 | 681 | ||||||
Portfolio loans and leases |
81,018 | 77,491 | ||||||
Allowance for loan and lease losses (a) |
(2,255 | ) | (3,004 | ) | ||||
Portfolio loans and leases, net |
78,763 | 74,487 | ||||||
Bank premises and equipment |
2,447 | 2,389 | ||||||
Operating lease equipment |
497 | 479 | ||||||
Goodwill |
2,417 | 2,417 | ||||||
Intangible assets |
40 | 62 | ||||||
Servicing rights |
681 | 822 | ||||||
Other assets (a) |
8,863 | 8,400 | ||||||
Total Assets |
$ | 116,967 | 111,007 | |||||
Liabilities |
||||||||
Deposits: |
||||||||
Demand |
$ | 27,600 | 21,413 | |||||
Interest checking |
20,392 | 18,560 | ||||||
Savings |
21,756 | 20,903 | ||||||
Money market |
4,989 | 5,035 | ||||||
Other time |
4,638 | 7,728 | ||||||
Certificates$100,000 and over |
3,039 | 4,287 | ||||||
Foreign office and other |
3,296 | 3,722 | ||||||
Total deposits |
85,710 | 81,648 | ||||||
Federal funds purchased |
346 | 279 | ||||||
Other short-term borrowings |
3,239 | 1,574 | ||||||
Accrued taxes, interest and expenses |
1,469 | 889 | ||||||
Other liabilities (a) |
3,270 | 2,979 | ||||||
Long-term debt (a) |
9,682 | 9,558 | ||||||
Total Liabilities |
103,716 | 96,927 | ||||||
Equity |
||||||||
Common stock (f) |
2,051 | 1,779 | ||||||
Preferred stock (g) |
398 | 3,654 | ||||||
Capital surplus (h) |
2,792 | 1,715 | ||||||
Retained earnings |
7,554 | 6,719 | ||||||
Accumulated other comprehensive income |
470 | 314 | ||||||
Treasury stock |
(64 | ) | (130 | ) | ||||
Total Bancorp shareholders equity |
13,201 | 14,051 | ||||||
Noncontrolling interests |
50 | 29 | ||||||
Total Equity |
13,251 | 14,080 | ||||||
Total Liabilities and Equity |
$ | 116,967 | 111,007 |
(a) |
At December 31, 2011 and 2010, includes $30 and $52 of cash, $7 of other short-term investments, $50 and $29 of commercial mortgage loans, $223 and $241 of home equity loans, $259 and $648 of automobile loans, ($10) and ($14) of ALLL, $4 and $7 of other assets, $4 and $12 of other liabilities, $191 and $692 of long-term debt from consolidated VIEs that are included in their respective captions. See Note 11. |
(b) |
Amortized cost of $14,614 and $14,919 at December 31, 2011 and 2010 respectively. |
(c) |
Fair value of $322 and $353 at December 31, 2011 and 2010, respectively. |
(d) |
Includes $2,751 and $1,892 of residential mortgage loans held for sale measured at fair value at December 31, 2011 , and 2010, respectively. |
(e) |
Includes $65 and $46 of residential mortgage loans measured at fair value at December 31, 2011 and 2010, respectively. |
(f) |
Common shares: Stated value $2.22 per share; authorized 2,000,000,000; outstanding at December 31, 2011 919,804,436 (excludes 4,088,145 treasury shares) and December 31, 2010 796,272,522 (excludes 5,231,666 treasury shares). |
(g) |
317,680 shares of undesignated no par value preferred stock are authorized of which none had been issued; 5.0% cumulative Series F perpetual preferred stock with a $25,000 liquidation preference: 136,320 issued and outstanding at December 31, 2010, which were redeemed on February 2, 2011; 8.5% non-cumulative Series G convertible (into 2,159.8272 common shares) perpetual preferred stock with a $25,000 liquidation preference: 46,000 authorized, 16,450 issued and outstanding at December 31, 2011 , 16,451 issued and outstanding at December 31, 2010. |
(h) |
Includes a ten-year warrant initially valued at $239 to purchase up to 43,617,747 shares of common stock, no par value, related to Series F preferred stock, at an initial exercise price of $11.72 per share at December 31, 2010, which was repurchased for $280 on March 16, 2011. |
See Notes to Consolidated Financial Statements.
Fifth Third Bancorp |
77 |
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ in millions, except per share data) | 2011 | 2010 | 2009 | |||||||||
Interest Income | ||||||||||||
Interest and fees on loans and leases |
$ | 3,613 | 3,823 | 3,934 | ||||||||
Interest on securities |
600 | 658 | 733 | |||||||||
Interest on other short-term investments |
5 | 8 | 1 | |||||||||
Total interest income |
4,218 | 4,489 | 4,668 | |||||||||
Interest Expense |
||||||||||||
Interest on deposits |
352 | 591 | 953 | |||||||||
Interest on other short-term borrowings |
4 | 4 | 43 | |||||||||
Interest on long-term debt |
305 | 290 | 318 | |||||||||
Total interest expense |
661 | 885 | 1,314 | |||||||||
Net Interest Income |
3,557 | 3,604 | 3,354 | |||||||||
Provision for loan and lease losses |
423 | 1,538 | 3,543 | |||||||||
Net Interest Income (Loss) After Provision for Loan and Lease Losses |
3,134 | 2,066 | (189 | ) | ||||||||
Noninterest Income |
||||||||||||
Mortgage banking net revenue |
597 | 647 | 553 | |||||||||
Service charges on deposits |
520 | 574 | 632 | |||||||||
Investment advisory revenue |
375 | 361 | 326 | |||||||||
Corporate banking revenue |
350 | 364 | 372 | |||||||||
Card and processing revenue |
308 | 316 | 615 | |||||||||
Gain on sale of processing business |
- | - | 1,758 | |||||||||
Other noninterest income |
250 | 406 | 479 | |||||||||
Securities gains (losses), net |
46 | 47 | (10 | ) | ||||||||
Securities gains, netnon-qualifying hedges on mortgage servicing rights |
9 | 14 | 57 | |||||||||
Total noninterest income |
2,455 | 2,729 | 4,782 | |||||||||
Noninterest Expense |
||||||||||||
Salaries, wages and incentives |
1,478 | 1,430 | 1,339 | |||||||||
Employee benefits |
330 | 314 | 311 | |||||||||
Net occupancy expense |
305 | 298 | 308 | |||||||||
Technology and communications |
188 | 189 | 181 | |||||||||
Card and processing expense |
120 | 108 | 193 | |||||||||
Equipment expense |
113 | 122 | 123 | |||||||||
Other noninterest expense |
1,224 | 1,394 | 1,371 | |||||||||
Total noninterest expense |
3,758 | 3,855 | 3,826 | |||||||||
Income Before Income Taxes |
1,831 | 940 | 767 | |||||||||
Applicable income tax expense |
533 | 187 | 30 | |||||||||
Net Income |
1,298 | 753 | 737 | |||||||||
Less: Net income attributable to noncontrolling interests |
1 | - | - | |||||||||
Net Income attributable to Bancorp |
1,297 | 753 | 737 | |||||||||
Dividends on preferred stock |
203 | 250 | 226 | |||||||||
Net Income Available to Common Shareholders |
$ | 1,094 | 503 | 511 | ||||||||
Earnings Per Share |
$ | 1.20 | 0.63 | 0.73 | ||||||||
Earnings Per Diluted Share |
$ | 1.18 | 0.63 | 0.67 |
See Notes to Consolidated Financial Statements.
78
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Bancorp Shareholders Equity | ||||||||||||||||||||||||||||||||||||
Accumulated | Total | |||||||||||||||||||||||||||||||||||
Other | Bancorp | Non- | ||||||||||||||||||||||||||||||||||
Common | Preferred | Capital | Retained | Comprehensive | Treasury | Shareholders | Controlling | Total | ||||||||||||||||||||||||||||
($ in millions, except per share data) | Stock | Stock | Surplus | Earnings | Income | Stock | Equity | Interests | Equity | |||||||||||||||||||||||||||
Balance at December 31, 2008 |
$ | 1,295 | 4,241 | 848 | 5,824 | 98 | (229 | ) | 12,077 | 12,077 | ||||||||||||||||||||||||||
Net income |
737 | 737 | 737 | |||||||||||||||||||||||||||||||||
Other comprehensive income |
143 | 143 | 143 | |||||||||||||||||||||||||||||||||
Comprehensive income |
880 | 880 | ||||||||||||||||||||||||||||||||||
Cash dividends declared: |
||||||||||||||||||||||||||||||||||||
Common stock at $0.04 per share |
(29 | ) | (29 | ) | (29 | ) | ||||||||||||||||||||||||||||||
Preferred stock |
(220 | ) | (220 | ) | (220 | ) | ||||||||||||||||||||||||||||||
Accretion of preferred dividends, Series F |
41 | (41 | ) | - | - | |||||||||||||||||||||||||||||||
Issuance of common stock |
351 | 635 | 986 | 986 | ||||||||||||||||||||||||||||||||
Dividends on exchange of preferred shares, Series G |
35 | 35 | 35 | |||||||||||||||||||||||||||||||||
Exchange of preferred shares, Series G |
133 | (674 | ) | 272 | (269 | ) | (269 | ) | ||||||||||||||||||||||||||||
Stock-based compensation expense |
46 | (1 | ) | 45 | 45 | |||||||||||||||||||||||||||||||
Stock-based awards issued or exercised, including treasury shares issued |
1 | (1 | ) | - | - | |||||||||||||||||||||||||||||||
Restricted stock grants |
(27 | ) | 27 | - | - | |||||||||||||||||||||||||||||||
Change in corporate tax benefit related to stock-based compensation |
(29 | ) | (29 | ) | (29 | ) | ||||||||||||||||||||||||||||||
Reversal of OTTI |
24 | 24 | 24 | |||||||||||||||||||||||||||||||||
Other |
1 | (3 | ) | (3 | ) | 2 | (3 | ) | (3 | ) | ||||||||||||||||||||||||||
Balance at December 31, 2009 |
1,779 | 3,609 | 1,743 | 6,326 | 241 | (201 | ) | 13,497 | 13,497 | |||||||||||||||||||||||||||
Net income |
753 | 753 | - | 753 | ||||||||||||||||||||||||||||||||
Other comprehensive income |
73 | 73 | 73 | |||||||||||||||||||||||||||||||||
Comprehensive income |
826 | - | 826 | |||||||||||||||||||||||||||||||||
Cash dividends declared: |
||||||||||||||||||||||||||||||||||||
Common stock at $0.04 per share |
(32 | ) | (32 | ) | (32 | ) | ||||||||||||||||||||||||||||||
Preferred stock |
(205 | ) | (205 | ) | (205 | ) | ||||||||||||||||||||||||||||||
Accretion of preferred dividends, Series F |
45 | (45 | ) | - | - | |||||||||||||||||||||||||||||||
Stock-based compensation expense |
45 | (1 | ) | 44 | 44 | |||||||||||||||||||||||||||||||
Stock-based awards issued or exercised, including treasury shares issued |
(10 | ) | 6 | (4 | ) | (4 | ) | |||||||||||||||||||||||||||||
Restricted stock grants |
(62 | ) | 62 | - | - | |||||||||||||||||||||||||||||||
Impact of cumulative effect of change in accounting principle |
(77 | ) | (77 | ) | (77 | ) | ||||||||||||||||||||||||||||||
Noncontrolling interest |
- | 29 | 29 | |||||||||||||||||||||||||||||||||
Other |
(1 | ) | 3 | 2 | 2 | |||||||||||||||||||||||||||||||
Balance at December 31, 2010 |
1,779 | 3,654 | 1,715 | 6,719 | 314 | (130 | ) | 14,051 | 29 | 14,080 | ||||||||||||||||||||||||||
Net income |
1,297 | 1,297 | 1 | 1,298 | ||||||||||||||||||||||||||||||||
Other comprehensive income |
156 | 156 | 156 | |||||||||||||||||||||||||||||||||
Comprehensive income |
1,453 | 1 | 1,454 | |||||||||||||||||||||||||||||||||
Cash dividends declared: |
||||||||||||||||||||||||||||||||||||
Common stock at $0.28 per share |
(257 | ) | (257 | ) | (257 | ) | ||||||||||||||||||||||||||||||
Preferred stock |
(50 | ) | (50 | ) | (50 | ) | ||||||||||||||||||||||||||||||
Issuance of common stock |
272 | 1,376 | 1,648 | 1,648 | ||||||||||||||||||||||||||||||||
Redemption of preferred shares, Series F |
(3,408 | ) | (3,408 | ) | (3,408 | ) | ||||||||||||||||||||||||||||||
Redemption of stock warrant |
(280 | ) | (280 | ) | (280 | ) | ||||||||||||||||||||||||||||||
Accretion of preferred dividends, Series F |
153 | (153 | ) | - | - | |||||||||||||||||||||||||||||||
Stock-based compensation expense |
52 | 52 | 52 | |||||||||||||||||||||||||||||||||
Stock-based awards issued or exercised, including treasury shares issued |
(15 | ) | 7 | (8 | ) | (8 | ) | |||||||||||||||||||||||||||||
Restricted stock grants |
(58 | ) | 58 | - | - | |||||||||||||||||||||||||||||||
Noncontrolling interests |
- | 21 | 21 | |||||||||||||||||||||||||||||||||
Other |
(1 | ) | 2 | (2 | ) | 1 | - | (1 | ) | (1 | ) | |||||||||||||||||||||||||
Balance at December 31, 2011 |
$ | 2,051 | 398 | 2,792 | 7,554 | 470 | (64 | ) | 13,201 | 50 | 13,251 |
See Notes to Consolidated Financial Statements.
Fifth Third Bancorp |
79 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 ($ in millions) | 2011 | 2010 | 2009 | |||||||||
Operating Activities | ||||||||||||
Net income |
$ | 1,298 | 753 | 737 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Provision for loan and lease losses |
423 | 1,538 | 3,543 | |||||||||
Depreciation, amortization and accretion |
455 | 457 | 341 | |||||||||
Stock-based compensation expense |
59 | 64 | 45 | |||||||||
Provision for deferred income taxes |
437 | 176 | 184 | |||||||||
Realized securities gains |
(58 | ) | (60 | ) | (27 | ) | ||||||
Realized securities gains non-qualifying hedges on mortgage servicing rights |
(24 | ) | (14 | ) | (64 | ) | ||||||
Realized securities losses |
12 | 13 | 37 | |||||||||
Realized securities losses non-qualifying hedges on mortgage servicing rights |
15 | - | 7 | |||||||||
Provision for mortgage servicing rights |
242 | 36 | 24 | |||||||||
Net (gains) losses on sales of loans and fair value adjustments on loans held for sale |
(145 | ) | 114 | 116 | ||||||||
Capitalized mortgage servicing rights |
(236 | ) | (297 | ) | (373 | ) | ||||||
Excess tax benefit related to stock-based compensation |
(2 | ) | (4 | ) | - | |||||||
Proceeds from sales of loans held for sale |
14,783 | 18,634 | 21,504 | |||||||||
Loans originated for sale, net of repayments |
(15,199 | ) | (18,231 | ) | (22,252 | ) | ||||||
Dividends representing return on equity method investments |
13 | 31 | 22 | |||||||||
Gain on sale of processing business, net of tax |
- | - | (1,052 | ) | ||||||||
Net change in: |
||||||||||||
Trading securities |
115 | 67 | 1,000 | |||||||||
Other assets |
(67 | ) | 9 | 826 | ||||||||
Accrued taxes, interest and expenses |
79 | (63 | ) | (1,200 | ) | |||||||
Other liabilities |
166 | 82 | 376 | |||||||||
Net Cash Provided by Operating Activities |
2,366 | 3,305 | 3,794 | |||||||||
Investing Activities |
||||||||||||
Sales: |
||||||||||||
Available-for-sale securities |
2,471 | 2,578 | 3,750 | |||||||||
Loans |
371 | 538 | 331 | |||||||||
Disposal of bank premises and equipment |
35 | 10 | 20 | |||||||||
Repayments / maturities: |
||||||||||||
Available-for-sale securities |
3,502 | 4,620 | 117,901 | |||||||||
Held-to-maturity securities |
29 | 1 | 3 | |||||||||
Purchases: |
||||||||||||
Available-for-sale securities |
(5,689 | ) | (5,218 | ) | (126,942 | ) | ||||||
Held-to-maturity securities |
- | (1 | ) | - | ||||||||
Bank premises and equipment |
(319 | ) | (224 | ) | (173 | ) | ||||||
Restricted cash from the initial consolidation of variable interest entities |
- | 63 | - | |||||||||
Proceeds from sale and dividends representing return of equity method investments |
63 | 8 | 9 | |||||||||
Proceeds from sale of processing business |
- | - | 562 | |||||||||
Net cash paid in business combination |
- | - | (16 | ) | ||||||||
Net change in: |
||||||||||||
Other short-term investments |
(267 | ) | 1,861 | 209 | ||||||||
Loans and leases |
(5,422 | ) | (2,507 | ) | 5,497 | |||||||
Operating lease equipment |
(59 | ) | (21 | ) | (75 | ) | ||||||
Net Cash (Used in) Provided by Investing Activities |
(5,285 | ) | 1,708 | 1,076 | ||||||||
Financing Activities |
||||||||||||
Net change in: |
||||||||||||
Core deposits |
5,264 | 784 | 9,550 | |||||||||
Certificates - $100,000 and over, including other foreign office |
(1,202 | ) | (3,429 | ) | (4,159 | ) | ||||||
Federal funds purchased |
67 | 97 | (104 | ) | ||||||||
Other short-term borrowings |
1,665 | 38 | (8,544 | ) | ||||||||
Dividends paid on common shares |
(192 | ) | (32 | ) | (27 | ) | ||||||
Dividends paid on preferred shares |
(50 | ) | (205 | ) | (220 | ) | ||||||
Proceeds from issuance of long-term debt |
1,500 | 14 | 527 | |||||||||
Repayment of long-term debt |
(1,607 | ) | (2,473 | ) | (3,065 | ) | ||||||
Issuance of common shares |
1,648 | - | 986 | |||||||||
Redemption of preferred shares, Series F |
(3,408 | ) | - | - | ||||||||
Exchange of preferred shares, Series G |
- | - | (269 | ) | ||||||||
Dividends on exchange of preferred shares, Series G |
- | - | 35 | |||||||||
Redemption of stock warrant |
(280 | ) | - | - | ||||||||
Excess tax benefit related to stock-based compensation |
2 | 4 | - | |||||||||
Capital contributions from noncontrolling interests |
21 | 30 | - | |||||||||
Other |
(5 | ) | - | (1 | ) | |||||||
Net Cash Provided By (Used In) Financing Activities |
3,423 | (5,172 | ) | (5,291 | ) | |||||||
Increase (Decrease) in Cash and Due from Banks |
504 | (159 | ) | (421 | ) | |||||||
Cash and Due from Banks at Beginning of Period |
2,159 | 2,318 | 2,739 | |||||||||
Cash and Due from Banks at End of Period |
$ | 2,663 | 2,159 | 2,318 |
See Notes to Consolidated Financial Statements. Note 2 contains cash payments related to interest and income taxes in addition to noncash investing and financing activities.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Nature of Operations
Fifth Third Bancorp, an Ohio corporation, conducts its principal lending, deposit gathering, transaction processing and service advisory activities through its banking and non-banking subsidiaries from banking centers located throughout the Midwestern and Southeastern regions of the United States.
Basis of Presentation
The Consolidated Financial Statements include the accounts of the Bancorp and its majority-owned subsidiaries and VIEs in which the Bancorp has been determined to be the primary beneficiary. Other entities, including certain joint ventures, in which the Bancorp has the ability to exercise significant influence over operating and financial policies of the investee, but upon which the Bancorp does not possess control, are accounted for by the equity method and not consolidated. Those entities in which the Bancorp does not have the ability to exercise significant influence are generally carried at the lower of cost or fair value. Intercompany transactions and balances have been eliminated. Certain prior period data has been reclassified to conform to current period presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Due From Banks
Cash and due from banks consist of currency and coin, cash items in the process of collection and due from banks. Currency and coin includes both U.S. and foreign currency owned and held at Fifth Third offices and that is in-transit to the FRB. Cash items in the process of collection include checks and drafts that are drawn on another depository institution or the FRB that are payable immediately upon presentation in the U.S. Balances due from banks include non-interest bearing balances that are funds on deposit at other depository institutions or the FRB.
Securities
Securities are classified as held-to-maturity, available-for-sale or trading on the date of purchase. Only those securities which management has the intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. Securities are classified as available-for-sale when, in managements judgment, they may be sold in response to, or in anticipation of, changes in market conditions. Securities are classified as trading when bought and held principally for the purpose of selling them in the near term. Available-for-sale securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes included in other comprehensive income. Trading securities are reported at fair value with unrealized gains and losses included in noninterest income. The fair value of a security is determined based on quoted market prices. If quoted market prices are not available, fair value is determined based on quoted prices of similar instruments or discounted cash flow models that incorporate market inputs and assumptions including discount rates, prepayment speeds, and loss rates. Realized securities gains or losses are reported within noninterest income in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method.
Available-for-sale and held-to-maturity securities with unrealized losses are reviewed quarterly for possible OTTI. For debt securities, if the Bancorp intends to sell the debt security or will more likely than not be required to sell the debt security before recovery of the entire amortized cost basis, then an OTTI has occurred. However, even if the Bancorp does not intend to sell the debt security and will not likely be required to sell the debt security
before recovery of its entire amortized cost basis, the Bancorp must evaluate expected cash flows to be received and determine if a credit loss has occurred. In the event of a credit loss, the credit component of the impairment is recognized within noninterest income and the non-credit component is recognized through other comprehensive income. For equity securities, the Bancorps management evaluates the securities in an unrealized loss position in the available-for-sale portfolio for OTTI on the basis of the duration of the decline in value of the security and severity of that decline as well as the Bancorps intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in the market value. If it is determined that the impairment on an equity security is other than temporary, an impairment loss equal to the difference between the carrying value of the security and its fair value is recognized within noninterest income.
Portfolio Loans and Leases
Basis of Accounting
Portfolio loans and leases are generally reported at the principal amount outstanding, net of unearned income, deferred loan fees and costs, and any direct principal charge-offs. Direct loan origination fees and costs are deferred and the net amount is amortized over the estimated life of the related loans as a yield adjustment. Interest income is recognized based on the principal balance outstanding computed using the effective interest method.
Purchased loans are evaluated for evidence of credit deterioration at acquisition and recorded at their initial fair value. For loans acquired with no evidence of credit deterioration, the fair value discount or premium is amortized over the contractual life of the loan as an adjustment to yield. For loans acquired with evidence of credit deterioration, the Bancorp determines at the acquisition date the excess of the loans contractually required payments over all cash flows expected to be collected as an amount that should not be accreted into interest income (nonaccretable difference). The remaining amount representing the difference in the expected cash flows of acquired loans and the initial investment in the acquired loans is accreted into interest income over the remaining life of the loan or pool of loans (accretable yield). Subsequent to the purchase date, increases in expected cash flows over those expected at the purchase date are recognized prospectively as interest income over the remaining life of the loan. The present value of any decreases in expected cash flows after the purchase date is recognized by recording an ALLL or a direct charge-off. Subsequent to the purchase date, the methods utilized to estimate the required ALLL are similar to originated loans. Loans carried at fair value, mortgage loans held for sale and loans under revolving credit agreements are excluded from the scope of this guidance on loans acquired with deteriorated credit quality.
The Bancorps lease portfolio consists of both direct financing and leveraged leases. Direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property, less unearned income. Interest income on direct financing leases is recognized over the term of the lease to achieve a constant periodic rate of return on the outstanding investment. Leveraged leases are carried at the aggregate of lease payments (less nonrecourse debt payments) plus estimated residual value of the leased property, less unearned income. Interest income on leveraged leases is recognized over the term of the lease to achieve a constant rate of return on the outstanding investment in the lease, net of the related deferred income tax liability, in the years in which the net investment is positive.
Nonaccrual Loans
When a loan is placed on nonaccrual status, the accrual of interest is discontinued and all previously accrued and unpaid interest is charged against income. Commercial loans are placed on nonaccrual status when there is a clear indication that the borrowers cash flow
Fifth Third Bancorp |
81 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
may not be sufficient to meet payments as they become due. Such loans are also placed on nonaccrual status when the principal or interest is past due ninety days or more, unless the loan is both well secured and in the process of collection. The Bancorp classifies residential mortgage loans that have principal and interest payments that have become past due 150 days and home equity loans with principal and interest payments that have become past due 180 days as nonaccrual unless the loan is both well secured and in the process of collection. Automobile and other consumer loans and leases that have been modified in a TDR and subsequently become past due 90 days are placed on nonaccrual status. Credit card loans that have been modified in a TDR are classified as nonaccrual unless such loans have sustained repayment performance of six months or greater and are reasonably assured of repayment in accordance with the restructured terms. Well secured loans are collateralized by perfected security interests in real and/or personal property for which the Bancorp estimates proceeds from sale would be sufficient to recover the outstanding principal and accrued interest balance of the loan and pay all costs to sell the collateral. The Bancorp considers a loan in the process of collection if collection efforts or legal action is proceeding and the Bancorp expects to collect funds sufficient to bring the loan current or recover the entire outstanding principal and accrued interest balance.
Nonaccrual commercial loans, other than loans modified in a TDR and nonaccrual credit card loans, are generally accounted for on the cost recovery method. The Bancorp believes the cost recovery method is appropriate for nonaccrual commercial loans and nonaccrual credit card loans because the assessment of collectability of the remaining recorded investment of these loans involves a high degree of subjectivity and uncertainty due to the nature or absence of underlying collateral. Under the cost recovery method, any payments received are applied to reduce principal. Once the entire recorded investment is collected, additional payments received are treated as recoveries of amounts previously charged-off until recovered in full, and any subsequent payments are treated as interest income. Nonaccrual residential mortgage loans and other nonaccrual consumer loans are generally accounted for on the cash basis method. The Bancorp believes the cash basis method is appropriate for nonaccrual residential mortgage and other nonaccrual consumer loans because such loans have generally been written down to estimated collateral values and the collectability of the remaining investment involves only an assessment of the fair value of the underlying collateral, which can be measured more objectively with a lesser degree of uncertainty than assessments of typical commercial loan collateral. Under the cash basis method, interest income is recognized upon cash receipt to the extent to which it would have been accrued on the loans remaining balance at the contractual rate. Nonaccrual loans may be returned to accrual status when all delinquent interest and principal payments become current in accordance with the loan agreement or when the loan is both well-secured and in the process of collection.
Commercial loans on nonaccrual status, as well as criticized commercial loans with aggregate borrower relationships exceeding $1 million are subject to an individual review to identify charge-offs. The Bancorp does not have an established delinquency threshold for partially or fully charging off commercial loans. Residential mortgage, home equity and credit card loans that have principal and interest payments that have become past due 180 days are charged off to the ALLL, unless such loans are both well-secured and in the process of collection. Automobile and other consumer loans and leases that have principal and interest payments that have become past due 120 days are charged off to the ALLL, unless such loans are both well-secured and in the process of collection.
Restructured Loans
A loan is accounted for as a TDR if the Bancorp, for economic or legal reasons related to the borrowers financial difficulties, grants a
concession to the borrower that it would not otherwise consider. A TDR typically involves a modification of terms such as a reduction of the stated interest rate or face amount of the loan, a reduction of accrued interest, or an extension of the maturity date(s) at a stated interest rate lower than the current market rate for a new loan with similar risk. The Bancorp measures the impairment loss of a TDR based on the difference between the original loans carrying amount and the present value of expected future cash flows discounted at the original, effective yield of the loan. Residential mortgage loans, home equity loans, automobile loans and other consumer loans modified as part of a TDR are maintained on accrual status, provided there is reasonable assurance of repayment and of performance according to the modified terms based upon a current, well-documented credit evaluation. TDRs of commercial loans and credit cards remain on nonaccrual status until a six-month payment history is sustained. During the nonaccrual period, TDRs of commercial loans are accounted for using the cash basis method for income recognition, provided that full repayment of principal under the modified terms of the loan is reasonably assured.
Impaired Loans
A loan is considered to be impaired when, based on current information and events, it is probable that the Bancorp will be unable to collect all amounts due (including both principal and interest) according to the contractual terms of the loan agreement. For loans modified in a TDR, the contractual terms of the loan agreement refer to the terms specified in the original loan agreement. A loan restructured in a TDR is no longer considered impaired in years after the restructuring if the restructuring agreement specifies a rate equal to or greater than the rate the Bancorp was willing to accept at the time of the restructuring for a new loan with comparable risk and the loan is not impaired based on the terms specified by the restructuring agreement. Refer to the ALLL section for discussion regarding the Bancorps methodology for identifying impaired loans and determination of the need for a loss accrual.
Loans Held for Sale
Loans held for sale represent conforming fixed rate residential mortgage loans originated or acquired with the intent to sell in the secondary market and commercial loans and other loans that management has an active plan to sell. Loans held for sale may be carried at the lower of cost or fair value, or carried at fair value where the Bancorp has elected the fair value option of accounting under U.S. GAAP. The Bancorp has elected to measure residential mortgage loans originated as held for sale under the fair value option. For loans in which the Bancorp has not elected the fair value option, the lower of cost or fair value is determined at the individual loan level.
The fair value of residential mortgage loans held for sale is estimated based upon mortgage-backed securities prices and spreads to those prices or, for certain ARM loans, discounted cash flow models that may incorporate the anticipated portfolio composition, credit spreads of asset-backed securities with similar collateral, and market conditions. The anticipated portfolio composition includes the effects of interest rate spreads and discount rates due to loan characteristics such as the state in which the loan was originated, the loan amount and the ARM margin. These fair value marks are recorded as a component of noninterest income in mortgage banking net revenue. The Bancorp generally has commitments to sell residential mortgage loans held for sale in the secondary market. Gains or losses on sales are recognized in mortgage banking net revenue upon delivery.
Managements intent to sell residential mortgage loans classified as held for sale may change over time due to such factors as changes in the overall liquidity in markets or changes in characteristics specific to certain loans held for sale. Consequently,
82 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
these loans may be reclassified to loans held for investment and, thereafter, reported within the Bancorps residential mortgages class of portfolio loans and leases. In such cases, the residential mortgage loans will continue to be measured at fair value, which is based on mortgage-backed securities prices and a credit component that is based on internally developed loss rate models.
Loans held for sale are placed on nonaccrual status consistent with the Bancorps nonaccrual policy for portfolio loans and leases.
Other Real Estate Owned
OREO, which is included in other assets, represents property acquired through foreclosure or other proceedings and is carried at the lower of cost or fair value, less costs to sell. All OREO property is periodically evaluated and decreases in carrying value are recognized as reductions in other noninterest income in the Consolidated Statements of Income.
ALLL
The Bancorp disaggregates its portfolio loans and leases into portfolio segments for purposes of determining the ALLL. The Bancorps portfolio segments include commercial, residential mortgage, and consumer. The Bancorp further disaggregates its portfolio segments into classes for purposes of monitoring and assessing credit quality based on certain risk characteristics. Classes within the commercial portfolio segment include commercial and industrial, commercial mortgage owner-occupied, commercial mortgage nonowner-occupied, commercial construction, and commercial leasing. The residential mortgage portfolio segment is also considered a class. Classes within the consumer segment include home equity, automobile, credit card, and other consumer loans and leases. For an analysis of the Bancorps ALLL by portfolio segment and credit quality information by class, see Note 6.
The Bancorp maintains the ALLL to absorb probable loan and lease losses inherent in its portfolio segments. The ALLL is maintained at a level the Bancorp considers to be adequate and is based on ongoing quarterly assessments and evaluations of the collectability and historical loss experience of loans and leases. Credit losses are charged and recoveries are credited to the ALLL. Provisions for loan and lease losses are based on the Bancorps review of the historical credit loss experience and such factors that, in managements judgment, deserve consideration under existing economic conditions in estimating probable credit losses. In determining the appropriate level of the ALLL, the Bancorp estimates losses using a range derived from base and conservative estimates. The Bancorps strategy for credit risk management includes a combination of conservative exposure limits significantly below legal lending limits and conservative underwriting, documentation and collections standards. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and quarterly management reviews of large credit exposures and loans experiencing deterioration of credit quality.
The Bancorps methodology for determining the ALLL is based on historical loss rates, current credit grades, specific allocation on loans modified in a TDR and impaired commercial credits above specified thresholds and other qualitative adjustments. Allowances on individual commercial loans, TDRs and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience. An unallocated allowance is maintained to recognize the imprecision in estimating and measuring losses when evaluating allowances for individual loans or pools of loans.
Larger commercial loans included within aggregate borrower relationship balances exceeding $1 million that exhibit probable or observed credit weaknesses, as well as loans that have been modified in a TDR, are subject to individual review for impairment.
The Bancorp considers the current value of collateral, credit quality of any guarantees, the guarantors liquidity and willingness to cooperate, the loan structure, and other factors when evaluating whether an individual loan is impaired. Other factors may include the industry and geographic region of the borrower, size and financial condition of the borrower, cash flow and leverage of the borrower, and the Bancorps evaluation of the borrowers management. When individual loans are impaired, allowances are determined based on managements estimate of the borrowers ability to repay the loan given the availability of collateral and other sources of cash flow, as well as an evaluation of legal options available to the Bancorp. Allowances for impaired loans are measured based on the present value of expected future cash flows discounted at the loans effective interest rate, fair value of the underlying collateral or readily observable secondary market values. The Bancorp evaluates the collectability of both principal and interest when assessing the need for a loss accrual.
Historical credit loss rates are applied to commercial loans that are not impaired or are impaired, but smaller than the established threshold of $1 million and thus not subject to specific allowance allocations. The loss rates are derived from a migration analysis, which tracks the historical net charge-off experience sustained on loans according to their internal risk grade. The risk grading system utilized for allowance analysis purposes encompasses ten categories.
Homogenous loans and leases in the residential mortgage and consumer portfolio segments are not individually risk graded. Rather, standard credit scoring systems and delinquency monitoring are used to assess credit risks, and allowances are established based on the expected net charge-offs. Loss rates are based on the trailing twelve month net charge-off history by loan category. Historical loss rates may be adjusted for certain prescriptive and qualitative factors that, in managements judgment, are necessary to reflect losses inherent in the portfolio. Factors that management considers in the analysis include the effects of the national and local economies; trends in the nature and volume of delinquencies, charge-offs and nonaccrual loans; changes in loan mix; credit score migration comparisons; asset quality trends; risk management and loan administration; changes in the internal lending policies and credit standards; collection practices; and examination results from bank regulatory agencies and the Bancorps internal credit reviewers.
The Bancorps primary market areas for lending are the Midwestern and Southeastern regions of the Unites States. When evaluating the adequacy of allowances, consideration is given to these regional geographic concentrations and the closely associated effect changing economic conditions have on the Bancorps customers.
In the current year, the Bancorp has not substantively changed any material aspect to its overall approach to determining its ALLL for any of its portfolio segments. There have been no material changes in criteria or estimation techniques as compared to prior periods that impacted the determination of the current period ALLL for any of the Bancorps portfolio segments.
Reserve for Unfunded Commitments
The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities and is included in other liabilities in the Consolidated Balance Sheets. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience, credit risk grading and historical loss rates based on credit grade migration. This process takes into consideration the same risk elements that are analyzed in the determination of the adequacy of the Bancorps ALLL, as discussed above. Net adjustments to the reserve for unfunded commitments are included in other noninterest expense in the Consolidated Statements of Income.
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Loan Sales and Securitizations
When the Bancorp sells loans through either securitizations or individual loan sales in accordance with its investment policies, it is required to assess whether the entity holding the sold or securitized loans is a VIE and whether the Bancorp is the primary beneficiary and therefore consolidator of that VIE. If the Bancorp holds the power to direct activities most significant to the economic performance of the VIE and has the obligation to absorb losses or right to receive benefits that could potentially be significant to the VIE, then the Bancorp will generally be deemed the primary beneficiary of the VIE. When the Bancorp previously sold loans into isolated trusts or conduits, it obtained one or more subordinated tranches or other residual interests in these trusts or conduits, as well as the servicing rights to the underlying loans. Effective with the adoption of amended VIE consolidation guidance on January 1, 2010, the Bancorp was required to consolidate these VIEs, and accordingly, the underlying loans and other assets and liabilities of these VIEs are included in the Bancorps Consolidated Balance Sheets as of December 31, 2011 and 2010.
Prior to the January 1, 2010 adoption of the VIE consolidation guidance referenced above, gains or losses recognized on the sale or securitization of such loans were reported as a component of noninterest income in the Consolidated Statements of Income and were based on the previous carrying amount of the loans sold or securitized, as well as the fair value of the servicing rights and other interests obtained by the Bancorp at the date of sale or securitization. Adjustments to the fair value of these other interests prior to January 1, 2010 were included in accumulated other comprehensive income in the Consolidated Balance Sheets or in noninterest income in the Consolidated Statements of Income if the fair value had declined below the carrying amount and such decline was determined to be other-than-temporary.
Servicing rights resulting from residential mortgage and commercial loan sales are initially recorded at fair value and subsequently amortized in proportion to and over the period of estimated net servicing revenues and are reported as a component of mortgage banking net revenue and corporate banking revenue, respectively, in the Consolidated Statements of Income. Servicing rights are assessed for impairment monthly, based on fair value, with temporary impairment recognized through a valuation allowance and permanent impairment recognized through a write-off of the servicing asset and related valuation allowance. Key economic assumptions used in measuring any potential impairment of the servicing rights include the prepayment speeds of the underlying loans, the weighted-average life, the discount rate, the weighted-average coupon and the weighted-average default rate, as applicable. The primary risk of material changes to the value of the servicing rights resides in the potential volatility in the economic assumptions used, particularly the prepayment speeds. The Bancorp monitors risk and adjusts its valuation allowance as necessary to adequately reserve for impairment in the servicing portfolio. For purposes of measuring impairment, the mortgage servicing rights are stratified into classes based on the financial asset type (fixed-rate vs. adjustable-rate) and interest rates. Fees received for servicing loans owned by investors are based on a percentage of the outstanding monthly principal balance of such loans and are included in noninterest income in the Consolidated Statements of Income as loan payments are received. Costs of servicing loans are charged to expense as incurred.
Bank Premises and Equipment
Bank premises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method based on estimated useful lives of the assets for book purposes, while accelerated depreciation is used for income tax purposes.
Amortization of leasehold improvements is computed using the straight-line method over the lives of the related leases or useful lives of the related assets, whichever is shorter. The Bancorp tests its long-lived assets for impairment through both a probability-weighted and primary-asset approach whenever events or changes in circumstances dictate. Maintenance, repairs and minor improvements are charged to noninterest expense in the Consolidated Statements of Income as incurred.
Derivative Financial Instruments
The Bancorp accounts for its derivatives as either assets or liabilities measured at fair value through adjustments to accumulated other comprehensive income and/or current earnings, as appropriate. On the date the Bancorp enters into a derivative contract, the Bancorp designates the derivative instrument as either a fair value hedge, cash flow hedge or as a free-standing derivative instrument. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability or of an unrecognized firm commitment attributable to the hedged risk are recorded in current period net income. For a cash flow hedge, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded in accumulated other comprehensive income and subsequently reclassified to net income in the same period(s) that the hedged transaction impacts net income. For free-standing derivative instruments, changes in fair values are reported in current period net income.
Prior to entering into a hedge transaction, the Bancorp formally documents the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivative instruments that are designated as fair value or cash flow hedges to specific assets or liabilities on the balance sheet or to specific forecasted transactions, along with a formal assessment at both inception of the hedge and on an ongoing basis as to the effectiveness of the derivative instrument in offsetting changes in fair values or cash flows of the hedged item. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued and the adjustment to fair value of the derivative instrument is recorded in net income.
Income Taxes
The Bancorp estimates income tax expense based on amounts expected to be owed to the various tax jurisdictions in which the Bancorp conducts business. On a quarterly basis, management assesses the reasonableness of its effective tax rate based upon its current estimate of the amount and components of net income, tax credits and the applicable statutory tax rates expected for the full year. The estimated income tax expense is recorded in the Consolidated Statements of Income.
Deferred income tax assets and liabilities are determined using the balance sheet method and are reported in other assets and accrued taxes, interest and expenses, respectively, in the Consolidated Balance Sheets. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities, and reflects enacted changes in tax rates and laws. Deferred tax assets are recognized to the extent they exist and are subject to a valuation allowance based on managements judgment that realization is more-likely-than-not. This analysis is performed on a quarterly basis and includes an evaluation of all positive and negative evidence to determine whether realization is more-likely-than-not.
Accrued taxes represent the net estimated amount due to taxing jurisdictions and are reported in accrued taxes, interest and expenses in the Consolidated Balance Sheets. The Bancorp evaluates and assesses the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other information and maintains tax accruals consistent with its evaluation of these relative
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risks and merits. Changes to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and changes to statutory, judicial and regulatory guidance that impact the relative risks of tax positions. These changes, when they occur, can affect deferred taxes and accrued taxes as well as the current periods income tax expense and can be significant to the operating results of the Bancorp. For additional information on income taxes, see Note 20.
Earnings Per Share
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Earnings per diluted share is computed by dividing adjusted net income available to common shareholders by the weighted-average number of shares of common stock and common stock equivalents outstanding during the period. Dilutive common stock equivalents represent the assumed conversion of dilutive convertible preferred stock and the exercise of dilutive stock-based awards and warrants.
The Bancorp calculates earnings per share pursuant to the two-class method. The two-class method is an earnings allocation formula that determines earnings per share separately for common stock and participating securities according to dividends declared and participation rights in undistributed earnings. For purposes of calculating earnings per share under the two-class method, restricted shares that contain nonforfeitable rights to dividends are considered participating securities until vested. While the dividends declared per share on such restricted shares are the same as dividends declared per common share outstanding, the dividends recognized on such restricted shares may be less because dividends paid on restricted shares that are expected to be forfeited are reclassified to compensation expense during the period when forfeiture is expected.
Goodwill
Business combinations entered into by the Bancorp typically include the acquisition of goodwill. U.S. GAAP requires goodwill to be tested for impairment at the Bancorps reporting unit level on an annual basis, which for the Bancorp is September 30, and more frequently if events or circumstances indicate that there may be impairment. The Bancorp has determined that its segments qualify as reporting units under U.S. GAAP. Impairment exists when a reporting units carrying amount of goodwill exceeds its implied fair value, which is determined through a two-step impairment test. The first step (Step 1) compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step (Step 2) of the goodwill impairment test is performed to measure the impairment loss amount, if any.
The fair value of a reporting unit is the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. Since none of the Bancorps reporting units are publicly traded, individual reporting unit fair value determinations cannot be directly correlated to the Bancorps stock price. To determine the fair value of a reporting unit, the Bancorp employs an income-based approach, utilizing the reporting units forecasted cash flows (including a terminal value approach to estimate cash flows beyond the final year of the forecast) and the reporting units estimated cost of equity as the discount rate. Additionally, the Bancorp determines its market capitalization based on the average of the closing price of the Bancorps stock during the month including the measurement date, incorporating an additional control premium, and compares this market-based fair value measurement to the aggregate fair value of the Bancorps reporting units in order to corroborate the results of the income approach.
When required to perform Step 2, the Bancorp compares the implied fair value of a reporting units goodwill with the carrying amount of that goodwill. If the carrying amount exceeds the implied fair value, an impairment loss equal to that excess amount is recognized. An impairment loss recognized cannot exceed the carrying amount of that goodwill and cannot be reversed even if the fair value of the reporting unit recovers.
During Step 2, the Bancorp determines the implied fair value of goodwill for a reporting unit by assigning the fair value of the reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. This assignment process is only performed for purposes of testing goodwill for impairment. The Bancorp does not adjust the carrying values of recognized assets or liabilities (other than goodwill, if appropriate), nor recognize previously unrecognized intangible assets in the Consolidated Financial Statements as a result of this assignment process. Refer to Note 9 for further information regarding the Bancorps goodwill.
Fair Value Measurements
The Bancorp measures certain financial assets and liabilities at fair value in accordance with U.S. GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques the Bancorp uses to measure fair value include the market approach, income approach and cost approach. The market approach uses prices or relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach involves discounting future amounts to a single present amount and is based on current market expectations about those future amounts. The cost approach is based on the amount that currently would be required to replace the service capacity of the asset.
U.S. GAAP establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instruments fair value measurement. The three levels within the fair value hierarchy are described as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Bancorp has the ability to access at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 - Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Bancorps own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include the Bancorps own financial data such as internally developed
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pricing models and discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.
The Bancorps fair value measurements involve various valuation techniques and models, which involve inputs that are observable, when available. Valuation techniques and parameters used for measuring assets and liabilities are reviewed and validated by the Bancorp on a quarterly basis. Additionally, the Bancorp monitors the fair values of significant assets and liabilities using a variety of methods including the evaluation of pricing runs and exception reports based on certain analytical criteria, comparison to previous trades and overall review and assessments for reasonableness. See Note 27 for further information on fair value measurements.
Stock-Based Compensation
In accordance with U.S. GAAP, the Bancorp recognizes compensation expense for the grant-date fair value of stock-based awards that are expected to vest over the requisite service period. Awards with a graded vesting are expensed on a straight-line basis. Awards to employees that meet eligible retirement status are expensed immediately. As compensation expense is recognized, a deferred tax asset is recorded that represents an estimate of future tax deduction from exercise or release of restrictions. At the time awards are exercised, cancelled, expire, or restrictions are released, the Bancorp may be required to recognize an adjustment to income tax expense for the difference between the previously estimated tax deduction and the actual tax deduction realized. For further information on the Bancorps stock-based compensation plans, see Note 24.
Other
Securities and other property held by Fifth Third Investment Advisors, a division of the Bancorps banking subsidiary, in a fiduciary or agency capacity are not included in the Consolidated Balance Sheets because such items are not assets of the subsidiaries. Investment advisory revenue in the Consolidated Statements of Income is recognized on the accrual basis. Investment advisory service revenues are recognized monthly based on a fee charged per transaction processed and/or a fee charged on the market value of average account balances associated with individual contracts.
The Bancorp recognizes revenue from its card and processing services on an accrual basis as such services are performed, recording revenues net of certain costs (primarily interchange fees charged by credit card associations) not controlled by the Bancorp.
The Bancorp purchases life insurance policies on the lives of certain directors, officers and employees and is the owner and beneficiary of the policies. The Bancorp invests in these policies, known as BOLI, to provide an efficient form of funding for long-term retirement and other employee benefits costs. The Bancorp records these BOLI policies within other assets in the Consolidated Balance Sheets at each policys respective cash surrender value, with changes recorded in other noninterest income in the Consolidated Statements of Income.
Other intangible assets consist of core deposit intangibles, customer lists, non-competition agreements and cardholder relationships. Other intangibles are amortized on either a straight-line or an accelerated basis over their useful lives. The Bancorp reviews other intangible assets for impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.
Securities sold under repurchase agreements are accounted for as collateralized financing transactions and included in other short-term borrowings in the Consolidated Balance Sheets at the amounts which the securities were sold plus accrued interest.
Acquisitions of treasury stock are carried at cost. Reissuance of shares in treasury for acquisitions, exercises of stock-based awards or other corporate purposes is recorded based on the specific identification method.
Advertising costs are generally expensed as incurred.
Accounting and Reporting Developments
Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses
In July 2010, the FASB issued guidance that requires the Bancorp to disclose a greater level of disaggregated information about the credit quality of its loans and leases and the ALLL. The new guidance defines two levels of disaggregation portfolio segment and class. A portfolio segment is defined as the level at which the Bancorp develops and documents a systematic method for determining its ALLL. Classes generally represent a further disaggregation of a portfolio segment based on certain risk characteristics. The disclosures relating to information as of the end of a reporting period were effective for interim and annual reporting periods ending on or after December 15, 2010 and these disclosure requirements were adopted by the Bancorp as of December 31, 2010. The disclosures regarding activity that occurs during a reporting period were effective for interim and annual reporting periods beginning on or after December 15, 2010 and these disclosure requirements were adopted by the Bancorp as of January 1, 2011. These disclosures are included in Note 6.
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts
In December 2010, the FASB issued amended guidance to address questions about entities with reporting units with zero or negative carrying amounts. For those reporting units, the amended guidance requires the entity to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The Bancorp does not currently have any reporting units with zero or negative carrying amounts, and therefore the adoption of this guidance on January 1, 2011 did not have a material impact on the Bancorps Consolidated Financial Statements.
Disclosure of Supplementary Pro Forma Information for Business Combinations
In December 2010, the FASB issued amended guidance to address the diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amended guidance clarifies that for business combination(s) that occur during the year, the Bancorp is required to disclose revenue and earnings of the combined entity as though the business combination(s) occurred as of the beginning of the comparable prior annual reporting period. The amended guidance is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010 and is effective for business combinations consummated by the Bancorp on or after January 1, 2011. The Bancorp has not consummated a business combination since such guidance became effective.
A Creditors Determination of Whether a Restructuring is a Troubled Debt Restructuring
In April 2011, the FASB issued amended guidance clarifying whether a creditor has granted a concession, and whether a debtor is experiencing financial difficulties, for purposes of determining whether a restructuring constitutes a TDR. The amended guidance also requires the Bancorp to disclose new information about TDRs, including qualitative and quantitative information by portfolio segment and class. The amended guidance was effective for the first
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interim or annual reporting period beginning on or after June 15, 2011, and was adopted by the Bancorp as of July 1, 2011. The amended guidance for identifying TDRs has been applied retrospectively to January 1, 2011 and did not have a material impact on the Bancorps Consolidated Financial Statements. The disclosures required under the amended guidance are included in Note 6.
Reconsideration of Effective Control for Repurchase Agreements
In April 2011, the FASB issued amended guidance clarifying when the Bancorp can recognize a sale upon the transfer of financial assets subject to a repurchase agreement. That determination is based, in part, on whether the Bancorp has maintained effective control over the transferred financial assets. Under the amended guidance, the FASB concluded that the assessment of effective control should focus on a transferors contractual rights and obligations with respect to transferred financial assets, not on whether the transferor has the practical ability to perform in accordance with those rights or obligations. The amended guidance is effective for transactions that occur in interim and annual periods beginning on or after December 15, 2011. The Bancorp accounts for all of its existing repurchase agreements as secured borrowings. Therefore, this amended guidance is not expected to have a material impact on the Bancorps accounting for repurchase agreements upon adoption on January 1, 2012.
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
In May 2011, the FASB issued amended guidance that will result in common fair value measurement and disclosure requirements between U.S. GAAP and IFRS. Under the amended guidance, the Bancorp will be required to expand its disclosure for fair value instruments categorized within Level 3 of the fair value hierarchy to include (1) the valuation processes used by the Bancorp; and (2) a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs for recurring fair value measurements and the interrelationships between those unobservable inputs, if any. The Bancorp will also be required to disclose the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position but for which the fair value is required to be disclosed (e.g. portfolio loans). The amended guidance is to be applied
prospectively and is effective for interim and annual periods beginning after December 15, 2011.
Presentation of Comprehensive Income
In June 2011, the FASB issued amended guidance on the presentation requirements for comprehensive income. The amended guidance requires the Bancorp to present total comprehensive income, the components of net income and the components of other comprehensive income on the face of the financial statements, either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amended guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This amended guidance will be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.
Testing Goodwill for Impairment
In September 2011, the FASB issued amended guidance on testing goodwill for impairment. The amended guidance simplifies how the Bancorp is required to test goodwill for impairment and permits the Bancorp to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Bancorp determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test would be unnecessary. However, if the Bancorp concludes otherwise, it would then be required to perform Step 1 of the goodwill impairment test, and continue to Step 2, if necessary. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.
Disclosures about Offsetting Assets and Liabilities
In December 2011, the FASB issued amended guidance related to disclosures about offsetting assets and liabilities. The amended guidance requires the Bancorp to disclose both gross information and net information about financial instruments, including derivatives, and transactions eligible for offset in the Consolidated Balance Sheets as well as financial instruments and transactions subject to agreements similar to a master netting arrangement. The amended guidance will be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013.
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2. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments related to interest and income taxes in addition to noncash investing and financing activities are presented in the following table for the years ended December 31:
($ in millions) | 2011 | 2010 | 2009 | |||||||||
Cash payments: |
||||||||||||
Interest |
$ | 658 | 920 | 1,416 | ||||||||
Income taxes |
102 | 79 | 109 | |||||||||
Transfers: |
||||||||||||
Portfolio loans to held for sale loans |
143 | 650 | 45 | |||||||||
Held for sale loans to portfolio loans |
32 | 160 | 47 | |||||||||
Portfolio loans to OREO |
342 | 662 | 377 | |||||||||
Held for sale loans to OREO |
43 | 68 | 36 | |||||||||
Held for sale loans to trading securities |
| | 136 | |||||||||
Acquisitions: |
||||||||||||
Fair value of tangible assets acquired |
| | 7 | |||||||||
Goodwill and identifiable intangible assets |
| | 13 | |||||||||
Contingent consideration |
| | (4 | ) | ||||||||
Impact of change in accounting principle: |
||||||||||||
Decrease in available-for-sale securities, net |
| 941 | | |||||||||
Increase in portfolio loans |
| 2,217 | | |||||||||
Decrease in demand deposits |
| 18 | | |||||||||
Increase in other short-term borrowings |
| 122 | | |||||||||
Increase in long-term debt |
| 1,344 | |
3. RESTRICTIONS ON CASH AND DIVIDENDS
The FRB, under Regulation D, requires that banks hold cash in reserve against deposit liabilities, known as the reserve requirement. The amount of the reserve requirement is calculated based on net transaction account deposits as defined by the FRB and may be satisfied with vault cash. When vault cash is not sufficient to meet the reserve requirement, the remaining amount must be satisfied with funds held at the FRB. At December 31, 2011, the Bancorps banking subsidiary reserve requirement was $1.1 billion. Vault cash was not sufficient to meet the total reserve requirement; therefore, the Bancorps banking subsidiary satisfied the reserve requirement with its $1.5 billion deposit at the FRB. At December 31, 2010, the Bancorps banking subsidiary reserve requirement of $575 million was fully satisfied with vault cash.
The dividends paid by the Bancorps banking subsidiary are subject to regulations and limitations prescribed by state and federal supervisory agencies. The Bancorps banking subsidiary paid the Bancorps nonbank subsidiary holding company $2.0 billion and $1.4 billion in dividends during the years ended December 31, 2011 and 2010, respectively. The Bancorps nonbank subsidiary holding company paid the Bancorp $1.7 billion and $1.4 billion in dividends during the years ended December 31, 2011 and 2010, respectively. At December 31, 2011 and 2010, the Bancorps banking subsidiary, under these provisions, was prohibited from declaring additional dividends without obtaining prior approval from supervisory agencies.
In 2008, the Bancorp sold $3.4 billion in Series F senior preferred stock and related warrants to the U.S. Treasury under the terms of the CPP. The terms included certain restrictions on common stock dividends, which required the U.S. Treasurys consent to increase common stock dividends for a period of three years from the date of investment unless the preferred shares were redeemed in whole or the U.S. Treasury transferred all of the preferred shares to a third party. For the Bancorp, approval from the U.S. Treasury was required for common stock dividends in excess of $0.15 per share of common stock. Also, no dividends could be declared or paid on the Bancorps common stock unless all accrued and unpaid dividends had been paid on the preferred shares and certain other outstanding securities. Additionally, the Bancorps
ability to pay dividends on its common stock was limited by its need to maintain adequate capital levels, comply with safe and sound banking practices and meet regulatory expectations.
On February 2, 2011, the Bancorp redeemed all 136,320 shares of its Series F preferred stock held by the U.S. Treasury under the CPP totaling $3.4 billion. As such, the Bancorp has no restrictions on common stock dividends pursuant to the CPP as of December 31, 2011. See Note 23 for further information on the redemption of the preferred shares.
In February 2009, the FRB advised bank holding companies that safety and soundness considerations required that dividends be substantially reduced or eliminated. Subsequently, the FRB indicated that increased capital distributions would generally not be considered prudent in the absence of a well-developed capital plan and a capital position that would remain strong even under adverse conditions. In November 2010, the FRB issued guidelines to provide a common, conservative approach to ensure bank holding companies hold adequate capital to maintain ready access to funding, continue operations and meet their obligations to creditors and counterparties, and continue to serve as credit intermediaries, even in adverse conditions. These guidelines required the nineteen bank holding companies that participated in the 2009 SCAP to participate in the 2011 CCAR. The 2011 CCAR required the submission of a comprehensive capital plan that assumed a minimum planning horizon of 24 months under various economic scenarios. The plan required bank holding companies to provide dividend, stock redemption and stock repurchase plans as well as plans for complying with the proposed revisions to the regulatory capital framework approved by the Basel Committee on Banking Supervision (Basel III). In March 2011, the FRB announced it had completed the 2011 CCAR and for bank holding companies that proposed capital distributions in their plan, the FRB either objected to the plan or provided a non objection whereby the FRB concurred with the proposed 2011 capital distributions. The Bancorp received a non objection to its 2011 CCAR capital plan.
The FRB provided final rules of the 2012 CCAR on November 22, 2011. The CCAR requires the nineteen SCAP participating bank holding companies to submit a capital plan to the FRB by January 9,
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2012 and the Bancorp complied with this requirement. The mandatory elements of the capital plan are an assessment of the expected uses and sources of capital over the planning horizon, a description of all planned capital actions over the planning horizon, a discussion of any expected changes to the Bancorps business plan that are likely to have a material impact on its capital adequacy or liquidity, a detailed description of the Bancorps process for assessing capital adequacy and the Bancorps capital policy.
The FRBs review of the Bancorps capital plan will assess the comprehensiveness of its capital plan, the reasonableness of
the assumptions and analysis underlying the capital plan and a review of the robustness of the capital adequacy process, the capital policy and the Bancorps ability to maintain capital above the minimum regulatory capital ratio and above a Tier 1 common ratio of five percent on a pro forma basis under expected and stressful conditions throughout the planning horizon. Following the FRBs assessment of the capital plan, it will object or provide a notice of non-objection to the submitted capital plan by March 15, 2012.
The following table provides the amortized cost, fair value and unrealized gains and losses for the major categories of the available-for-sale and held-to-maturity securities portfolios as of December 31:
2011 | 2010 | |||||||||||||||||||||||||||||||
($ in millions) |
Amortized
Cost |
Unrealized
Gains |
Unrealized
Losses |
Fair
Value |
Amortized
Cost |
Unrealized
Gains |
Unrealized
Losses |
Fair
Value |
||||||||||||||||||||||||
Available-for-sale and other: |
||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies |
$ | 171 | | | 171 | 225 | 5 | | 230 | |||||||||||||||||||||||
U.S. Government sponsored agencies |
1,782 | 180 | | 1,962 | 1,564 | 81 | | 1,645 | ||||||||||||||||||||||||
Obligations of states and political subdivisions |
96 | 5 | | 101 | 170 | 2 | | 172 | ||||||||||||||||||||||||
Agency mortgage-backed securities |
9,743 | 542 | (1 | ) | 10,284 | 10,570 | 435 | (32 | ) | 10,973 | ||||||||||||||||||||||
Other bonds, notes and debentures |
1,792 | 29 | (9 | ) | 1,812 | 1,338 | 19 | (15 | ) | 1,342 | ||||||||||||||||||||||
Other securities (a) |
1,030 | 2 | | 1,032 | 1,052 | | | 1,052 | ||||||||||||||||||||||||
Total |
$ | 14,614 | 758 | (10 | ) | 15,362 | 14,919 | 542 | (47 | ) | 15,414 | |||||||||||||||||||||
Held-to-maturity: |
||||||||||||||||||||||||||||||||
Obligations of states and political subdivisions |
$ | 320 | | | 320 | 348 | | | 348 | |||||||||||||||||||||||
Other debt securities |
2 | | | 2 | 5 | | | 5 | ||||||||||||||||||||||||
Total |
$ | 322 | | | 322 | 353 | | | 353 |
(a) | Other securities consist of FHLB and FRB restricted stock holdings of $497 and $345, respectively, at December 31, 2011 and, $524 and $344, respectively, at December 31, 2010, that are carried at cost, and certain mutual fund and equity security holdings. |
The following table presents realized gains and losses that were recognized in income from available-for-sale securities for the years ended December 31:
($ in millions) | 2011 | 2010 | 2009 | |||||||||
Realized gains |
$ | 75 | 69 | 91 | ||||||||
Realized losses |
| (13 | ) | (34 | ) | |||||||
Net realized gains |
$ | 75 | 56 | 57 |
Trading securities totaled $177 million as of December 31, 2011, compared to $294 million at December 31, 2010. Gross realized gains on trading securities were $1 million for the years ended December 31, 2011, 2010, and 2009. Gross realized losses on trading securities were $7 million, $1 million, and $2 million for the years ended December 31, 2011, 2010, and 2009 respectively. Net unrealized gains on trading securities were $5 million at December 31, 2011 and net unrealized losses were $8
million for the year ended December 31, 2009 and immaterial to the Bancorp for the year ended December 31, 2010.
At December 31, 2011 and 2010 securities with a fair value of $13.3 billion and $11.3 billion, respectively, were pledged to secure borrowings, public deposits, trust funds, derivative contracts and for other purposes as required or permitted by law.
The expected maturity distribution of the Bancorps agency mortgage-backed securities and the contractual maturity distribution of the Bancorps other available-for-sale and held-to-maturity securities as of December 31, 2011 are shown in the following table:
Available-for-Sale &
Other |
Held-to-Maturity | |||||||||||||||
($ in millions) |
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
||||||||||||
Debt securities: (a) |
||||||||||||||||
Under 1 year |
$ | 884 | 906 | 36 | 36 | |||||||||||
1-5 years |
10,599 | 11,197 | 255 | 255 | ||||||||||||
5-10 years |
1,351 | 1,462 | 16 | 16 | ||||||||||||
Over 10 years |
750 | 765 | 15 | 15 | ||||||||||||
Other securities |
1,030 | 1,032 | | | ||||||||||||
Total |
$ | 14,614 | 15,362 | 322 | 322 |
( a) | Actual maturities may differ from contractual maturities when there exists a right to call or prepay obligations with or without call or prepayment penalties. |
Fifth Third Bancorp |
89 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides the fair value and gross unrealized losses on available-for-sale securities in an unrealized loss position, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of December 31:
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
($ in millions) |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
||||||||||||||||||
2011 |
||||||||||||||||||||||||
U.S. Treasury and government agencies |
$ | 70 | | 1 | | 71 | | |||||||||||||||||
U.S. Government sponsored agencies |
| | | | | | ||||||||||||||||||
Obligations of states and political subdivisions |
| | 2 | | 2 | | ||||||||||||||||||
Agency mortgage-backed securities |
34 | (1 | ) | 6 | | 40 | (1 | ) | ||||||||||||||||
Other bonds, notes and debentures |
523 | (4 | ) | 38 | (5 | ) | 561 | (9 | ) | |||||||||||||||
Other securities |
6 | | | | 6 | | ||||||||||||||||||
Total |
$ | 633 | (5 | ) | 47 | (5 | ) | 680 | (10 | ) | ||||||||||||||
2010 |
||||||||||||||||||||||||
U.S. Treasury and government agencies |
$ | | | 1 | | 1 | | |||||||||||||||||
U.S. Government sponsored agencies |
| | | | | | ||||||||||||||||||
Obligations of states and political subdivisions |
11 | | 4 | | 15 | | ||||||||||||||||||
Agency mortgage-backed securities |
1,555 | (32 | ) | | | 1,555 | (32 | ) | ||||||||||||||||
Other bonds, notes and debentures |
563 | (10 | ) | 47 | (5 | ) | 610 | (15 | ) | |||||||||||||||
Other securities |
| | | | | | ||||||||||||||||||
Total |
$ | 2,129 | (42 | ) | 52 | (5 | ) | 2,181 | (47 | ) |
Other-Than-Temporary Impairments
The Bancorp recognized $19 million and $3 million of OTTI, included in securities gains (losses), net, in the Bancorps Consolidated Statements of Income, on its available-for-sale debt securities during the years ended December 31, 2011 and 2010, respectively, and no OTTI was recognized on held-to-maturity debt securities for the years ended December 31, 2011 and 2010. During the year ended December 31, 2009, OTTI recognized on available-for-sale and held-to-maturity debt securities was immaterial to the Bancorps consolidated financial statements. Additionally, at December 31, 2011 an immaterial percent of unrealized losses in the available-for-sale securities portfolio were represented by non-rated securities, compared to approximately one percent at December 31, 2010.
During the year ended December 31, 2011, the Bancorp did not recognize OTTI on any of its available-for-sale equity securities. In addition, for the years ended December 31, 2010 and 2009, OTTI recognized on available-for-sale equity securities was immaterial to the Bancorps consolidated financial statements.
90 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bancorp diversifies its loan and lease portfolio by offering a variety of loan and lease products with various payment terms and rate structures. Lending activities are concentrated within those states in which the Bancorp has banking centers and are primarily located in the Midwestern and Southeastern regions of the United States. The Bancorps commercial loan portfolio consists of lending to various industry types. Management periodically reviews the
performance of its loan and lease products to evaluate whether they are performing within acceptable interest rate and credit risk levels and changes are made to underwriting policies and procedures as needed. The Bancorp maintains an allowance to absorb loan and lease losses inherent in the portfolio. For further information on credit quality and the ALLL, see Note 6.
The following table provides a summary of the total loans and leases classified by primary purpose as of December 31:
($ in millions) | 2011 | 2010 | ||||||
Loans and leases held for sale: |
||||||||
Commercial and industrial loans |
$ | 45 | 83 | |||||
Commercial mortgage loans |
76 | 147 | ||||||
Commercial construction loans |
17 | 63 | ||||||
Residential mortgage loans |
2,802 | 1,901 | ||||||
Other consumer loans and leases |
14 | 22 | ||||||
Total loans and leases held for sale |
$ | 2,954 | 2,216 | |||||
Portfolio loans and leases: |
||||||||
Commercial and industrial loans |
$ | 30,783 | 27,191 | |||||
Commercial mortgage loans |
10,138 | 10,845 | ||||||
Commercial construction loans |
1,020 | 2,048 | ||||||
Commercial leases |
3,531 | 3,378 | ||||||
Total commercial loans and leases |
45,472 | 43,462 | ||||||
Residential mortgage loans |
10,672 | 8,956 | ||||||
Home equity |
10,719 | 11,513 | ||||||
Automobile loans |
11,827 | 10,983 | ||||||
Credit card |
1,978 | 1,896 | ||||||
Other consumer loans and leases |
350 | 681 | ||||||
Total consumer loans and leases |
35,546 | 34,029 | ||||||
Total portfolio loans and leases |
$ | 81,018 | 77,491 |
Total portfolio loans and leases are recorded net of unearned income, which totaled $942 million as of December 31, 2011 and $1.0 billion as of December 31, 2010. Additionally, portfolio loans and leases are recorded net of unamortized premiums and discounts, deferred loan fees and costs, and fair
value adjustments (associated with acquired loans or loans designated as fair value upon origination) which totaled a net premium of $45 million as of December 31, 2011 and a net discount of $19 million as of December 31, 2010.
The following table presents a summary of the total loans and leases owned by the Bancorp as of and for the years ended December 31:
Balance |
Balance of Loans 90
Days or More Past Due |
Net
Charge-Offs |
||||||||||||||||||||||
($ in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Commercial and industrial loans |
$ | 30,828 | 27,275 | $ | 4 | 16 | $ | 276 | 586 | |||||||||||||||
Commercial mortgage loans |
10,214 | 10,992 | 3 | 11 | 195 | 524 | ||||||||||||||||||
Commercial construction loans |
1,037 | 2,111 | 1 | 3 | 85 | 252 | ||||||||||||||||||
Commercial leases |
3,531 | 3,378 | | | (2 | ) | 2 | |||||||||||||||||
Residential mortgage loans |
13,474 | 10,857 | 79 | 100 | 173 | 439 | ||||||||||||||||||
Home equity loans |
10,719 | 11,513 | 74 | 89 | 220 | 264 | ||||||||||||||||||
Automobile loans |
11,827 | 10,983 | 9 | 13 | 53 | 88 | ||||||||||||||||||
Credit Card |
1,978 | 1,896 | 30 | 42 | 98 | 155 | ||||||||||||||||||
Other consumer loans and leases |
364 | 702 | | | 74 | 18 | ||||||||||||||||||
Total loans and leases |
$ | 83,972 | 79,707 | $ | 200 | 274 | $ | 1,172 | 2,328 | |||||||||||||||
Less: Loans held for sale |
$ | 2,954 | 2,216 | |||||||||||||||||||||
Total portfolio loans and leases |
$ | 81,018 | 77,491 |
The Bancorp engages in commercial and consumer lease products primarily related to the financing of commercial equipment and automobiles. The Bancorp had $2.9 billion of direct financing leases and $1.7 billion of leveraged leases at December 31, 2011 compared to $3.0 billion and $1.7 billion, respectively, at December 31, 2010.
Pre-tax income from leveraged leases for 2011 was $33 million compared to pre-tax income in 2010 of $49 million. The tax effect of this income was an expense of $10 million in 2011 and 2010.
Fifth Third Bancorp |
91 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the investment in lease financing at December 31:
($ in millions) | 2011 | 2010 | ||||||
Rentals receivable, net of principal and interest on nonrecourse debt |
$ | 3,757 | 3,775 | |||||
Estimated residual value of leased assets |
772 | 900 | ||||||
Initial direct cost, net of amortization |
16 | 16 | ||||||
Gross investment in lease financing |
4,545 | 4,691 | ||||||
Unearned income |
(942 | ) | (1,040 | ) | ||||
Net investment in lease financing (a) |
$ | 3,603 | 3,651 |
(a) | The accumulated allowance for uncollectible minimum lease payments was $79 million and $112 million at December 31, 2011 and 2010, respectively. |
The Bancorp periodically reviews residual values associated with its leasing portfolio. Declines in residual values that are deemed to be other-than-temporary are recognized as a loss. The Bancorp recognized $4 million of residual value write-downs related to commercial leases for the year ended December 31, 2011 and an immaterial amount of residual value write-downs related to commercial leases was
recognized for the year ending December 31, 2010. The Bancorp recognized no residual value write-downs relating to consumer automobile leases in 2011 and 2010. At December 31, 2011, the minimum future lease payments receivable for each of the years 2012 through 2016 was $662 million, $561 million, $553 million, $360 million and $76 million, respectively.
6. CREDIT QUALITY AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES
The Bancorp disaggregates ALLL balances and transactions in the ALLL by portfolio segment. Credit quality related disclosures for loans and leases are further disaggregated by
class. The disaggregated disclosure requirements relating to activity that occurs during a reporting period do not apply to periods beginning before December 15, 2010.
Allowance for Loan and Lease Losses
The following table summarizes transactions in the ALLL for the years ended December 31:
($ in millions) | 2011 | 2010 | 2009 | |||||||||
Balance at January 1 |
$ | 3,004 | 3,749 | 2,787 | ||||||||
Impact of change in accounting principle |
| 45 | | |||||||||
Losses charged off |
(1,314 | ) | (2,485 | ) | (2,719 | ) | ||||||
Recoveries of losses previously charged off |
142 | 157 | 138 | |||||||||
Provision for loan and lease losses |
423 | 1,538 | 3,543 | |||||||||
Balance at December 31 |
$ | 2,255 | 3,004 | 3,749 |
The following tables summarize transactions in the ALLL by portfolio segment:
For the year ended December 31, 2011 ($ in millions) |
Commercial |
Residential
Mortgage |
Consumer | Unallocated | Total | |||||||||||||||
Transactions in the ALLL: |
||||||||||||||||||||
Balance at January 1 |
$ | 1,989 | 310 | 555 | 150 | 3,004 | ||||||||||||||
Losses charged off |
(615 | ) | (180 | ) | (519 | ) | | (1,314 | ) | |||||||||||
Recoveries of losses previously charged off |
61 | 7 | 74 | | 142 | |||||||||||||||
Provision for loan and lease losses |
92 | 90 | 255 | (14 | ) | 423 | ||||||||||||||
Balance at December 31 |
$ | 1,527 | 227 | 365 | 136 | 2,255 |
For the year ended December 31, 2010 ($ in millions) |
Commercial |
Residential
Mortgage |
Consumer | Unallocated | Total | |||||||||||||||
Transactions in the ALLL: |
||||||||||||||||||||
Balance at January 1 |
$ | 2,517 | 375 | 664 | 193 | 3,749 | ||||||||||||||
Losses charged off |
(1,444 | ) | (441 | ) | (600 | ) | | (2,485 | ) | |||||||||||
Recoveries of losses previously charged off |
80 | 2 | 75 | | 157 | |||||||||||||||
Provision for loan and lease losses |
836 | 374 | 371 | (43 | ) | 1,538 | ||||||||||||||
Impact of change in accounting principal |
| | 45 | | 45 | |||||||||||||||
Balance at December 31 |
$ | 1,989 | 310 | 555 | 150 | 3,004 |
92 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment:
As of December 31, 2011 ($ in millions) | Commercial |
Residential
Mortgage |
Consumer | Unallocated | Total | |||||||||||||||
ALLL: (a) |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 155 | 130 | 65 | | 350 | ||||||||||||||
Collectively evaluated for impairment |
1,371 | 96 | 300 | | 1,767 | |||||||||||||||
Loans acquired with deteriorated credit quality |
1 | 1 | | | 2 | |||||||||||||||
Unallocated |
| | | 136 | 136 | |||||||||||||||
Total ALLL |
$ | 1,527 | 227 | 365 | 136 | 2,255 | ||||||||||||||
Loans and leases: (b) |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 1,170 | 1,258 | 574 | | 3,002 | ||||||||||||||
Collectively evaluated for impairment |
44,299 | 9,341 | 24,300 | | 77,940 | |||||||||||||||
Loans acquired with deteriorated credit quality |
3 | 8 | | | 11 | |||||||||||||||
Total portfolio loans and leases |
$ | 45,472 | 10,607 | 24,874 | | 80,953 |
(a) | Includes $14 related to leveraged leases. |
(b) | Excludes $65 of residential mortgage loans measured at fair value, and includes $1,022 of leveraged leases, net of unearned income. |
As of December 31, 2010 ($ in millions) | Commercial |
Residential
Mortgage |
Consumer | Unallocated | Total | |||||||||||||||
ALLL: (a) |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 209 | 119 | 107 | | 435 | ||||||||||||||
Collectively evaluated for impairment |
1,779 | 189 | 448 | | 2,416 | |||||||||||||||
Loans acquired with deteriorated credit quality |
1 | 2 | | | 3 | |||||||||||||||
Unallocated |
| | | 150 | 150 | |||||||||||||||
Total ALLL |
$ | 1,989 | 310 | 555 | 150 | 3,004 | ||||||||||||||
Loans and leases: (b) |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 1,076 | 1,180 | 651 | | 2,907 | ||||||||||||||
Collectively evaluated for impairment |
42,382 | 7,718 | 24,414 | | 74,514 | |||||||||||||||
Loans acquired with deteriorated credit quality |
4 | 12 | 8 | | 24 | |||||||||||||||
Total portfolio loans and leases |
$ | 43,462 | 8,910 | 25,073 | | 77,445 |
(a) | Includes $15 related to leveraged leases. |
(b) | Excludes $46 of residential mortgage loans measured at fair value, and includes $1,039 of leveraged leases, net of unearned income. |
Fifth Third Bancorp |
93 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CREDIT RISK PROFILE
Commercial Portfolio Segment
For purposes of monitoring the credit quality and risk characteristics of its commercial portfolio segment, the Bancorp disaggregates the segment into the following classes: commercial and industrial, commercial mortgage owner-occupied, commercial mortgage nonowner-occupied, commercial construction and commercial leasing.
To facilitate the monitoring of credit quality within the commercial portfolio segment, and for purposes of analyzing historical loss rates used in the determination of the ALLL for the commercial portfolio segment, the Bancorp utilizes the following categories of credit grades: pass, special mention, substandard, doubtful or loss. The five categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass ratings, which are assigned to those borrowers that do not have identified potential or well defined weaknesses and for which there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter.
The Bancorp assigns a special mention rating to loans and leases that have potential weaknesses that deserve managements close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or lease or the Bancorps credit position.
The Bancorp assigns a substandard rating to loans and leases that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans and leases have well defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans and leases in this grade also are characterized by the distinct possibility that the Bancorp will sustain some loss if the deficiencies noted are not addressed and corrected.
The Bancorp assigns a doubtful rating to loans and leases that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.
Loans and leases classified as loss are considered uncollectible and are charged off in the period in which they are determined to be uncollectible. Because loans and leases in this category are fully charged down, they are not included in the following tables.
The following table summarizes the credit risk profile of the Bancorps commercial portfolio segment, by class:
As of December 31, 2011 ($ in millions) |
Pass |
Special
Mention |
Substandard | Doubtful | Total | |||||||||||||||
Commercial and industrial loans |
$ | 27,199 | 1,641 | 1,831 | 112 | 30,783 | ||||||||||||||
Commercial mortgage loans owner-occupied |
3,893 | 567 | 778 | 28 | 5,266 | |||||||||||||||
Commercial mortgage loans nonowner-occupied |
3,328 | 521 | 984 | 39 | 4,872 | |||||||||||||||
Commercial construction loans |
343 | 235 | 413 | 29 | 1,020 | |||||||||||||||
Commercial leases |
3,434 | 52 | 44 | 1 | 3,531 | |||||||||||||||
Total |
$ | 38,197 | 3,016 | 4,050 | 209 | 45,472 |
December 31, 2010 ($ in millions) |
Pass |
Special
Mention |
Substandard | Doubtful | Total | |||||||||||||||
Commercial and industrial loans |
$ | 23,147 | 1,406 | 2,541 | 97 | 27,191 | ||||||||||||||
Commercial mortgage loans owner-occupied |
4,034 | 430 | 854 | 22 | 5,340 | |||||||||||||||
Commercial mortgage loans nonowner-occupied |
3,620 | 647 | 1,174 | 64 | 5,505 | |||||||||||||||
Commercial construction loans |
1,034 | 416 | 540 | 58 | 2,048 | |||||||||||||||
Commercial leases |
3,269 | 60 | 48 | 1 | 3,378 | |||||||||||||||
Total |
$ | 35,104 | 2,959 | 5,157 | 242 | 43,462 |
Consumer Portfolio Segment
For purposes of monitoring the credit quality and risk characteristics of its consumer portfolio segment, the Bancorp disaggregates the segment into the following classes: home equity, automobile loans, credit card, and other consumer loans and leases. The Bancorps residential mortgage portfolio segment is also a separate class.
The Bancorp considers repayment performance as the best indicator of credit quality for residential mortgage and consumer loans, which includes both the delinquency status and performing versus nonperforming status of the loans. The delinquency status of all residential mortgage and consumer loans is presented by class in the age analysis section below while the performing versus nonperforming status is presented in the table below. Residential mortgage loans that have principal and interest payments that have become past due 150 days and home equity loans with principal and interest payments that have become past due 180 days are
classified as nonperforming unless such loans are both well secured and in the process of collection. Automobile and other consumer loans and leases that have been modified in a TDR and subsequently become past due 90 days are classified as nonperforming. Credit card loans that have been modified in a TDR are classified as nonperforming unless such loans have a sustained repayment performance of six months or greater and are reasonably assured of repayment in accordance with the restructured terms. Well secured loans are collateralized by perfected security interests in real and/or personal property for which the Bancorp estimates proceeds from sale would be sufficient to recover the outstanding principal and accrued interest balance of the loan and pay all costs to sell the collateral. The Bancorp considers a loan in the process of collection if collection efforts or legal action is proceeding and the Bancorp expects to collect funds sufficient to bring the loan current or recover the entire outstanding principal and accrued interest balance.
94 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a summary of the Bancorps residential mortgage and consumer portfolio segments disaggregated into performing versus nonperforming status as of December 31:
2011 | 2010 | |||||||||||||||
($ in millions) | Performing | Nonperforming | Performing | Nonperforming | ||||||||||||
Residential mortgage loans (a) |
$ | 10,332 | 275 | 8,642 | 268 | |||||||||||
Home equity |
10,665 | 54 | 11,457 | 56 | ||||||||||||
Automobile loans |
11,825 | 2 | 10,980 | 3 | ||||||||||||
Credit card |
1,930 | 48 | 1,841 | 55 | ||||||||||||
Other consumer loans and leases |
349 | 1 | 597 | 84 | ||||||||||||
Total |
$ | 35,101 | 380 | 33,517 | 466 |
(a) | Excludes $65 and $46 of loans measured at fair value at December 31, 2011 and 2010, respectively. |
Age Analysis of Past Due Loans and Leases
The following tables summarize the Bancorps recorded investment in portfolio loans and leases by age and class:
Past Due | ||||||||||||||||||||||||
As of December 31, 2011 ($ in millions) |
Current
Loans and Leases |
30-89
Days |
90
Days
and Greater (c) |
Total
Past Due |
Total
Loans and Leases |
90 Days Past
Due and Still Accruing |
||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial and industrial loans |
$ | 30,493 | 49 | 241 | 290 | 30,783 | 4 | |||||||||||||||||
Commercial mortgage owner-occupied loans |
5,088 | 62 | 116 | 178 | 5,266 | 1 | ||||||||||||||||||
Commercial mortgage nonowner-occupied loans |
4,649 | 41 | 182 | 223 | 4,872 | 2 | ||||||||||||||||||
Commercial construction loans |
887 | 12 | 121 | 133 | 1,020 | 1 | ||||||||||||||||||
Commercial leases |
3,521 | 4 | 6 | 10 | 3,531 | - | ||||||||||||||||||
Residential mortgage loans (a) (b) |
10,149 | 110 | 348 | 458 | 10,607 | 79 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Home equity |
10,455 | 136 | 128 | 264 | 10,719 | 74 | ||||||||||||||||||
Automobile loans |
11,744 | 71 | 12 | 83 | 11,827 | 9 | ||||||||||||||||||
Credit card |
1,873 | 33 | 72 | 105 | 1,978 | 30 | ||||||||||||||||||
Other consumer loans and leases |
348 | 1 | 1 | 2 | 350 | - | ||||||||||||||||||
Total portfolio loans and leases (a) |
$ | 79,207 | 519 | 1,227 | 1,746 | 80,953 | 200 |
(a) | Excludes $65 of loans measured at fair value. |
(b) | Information for current residential mortgage loans includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. As of December 31, 2011, $45 of these loans were 30-89 days past due and $309 were 90 days or more past due. The Bancorp recognized an immaterial amount of losses for the year ended December 31, 2011 due to claim denials and curtailments associated with these advances. |
(c) | Includes accrual and nonaccrual loans and leases. |
Past Due | ||||||||||||||||||||||||
As of December 31, 2010 ($ in millions) |
Current
Loans and Leases |
30-89
Days |
90
Days
and Greater (c) |
Total
Past Due |
Total Loans
and Leases |
90 Days Past
Due and Still Accruing |
||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial and industrial loans |
$ | 26,687 | 201 | 303 | 504 | 27,191 | 16 | |||||||||||||||||
Commercial mortgage owner-occupied loans |
5,151 | 50 | 139 | 189 | 5,340 | 8 | ||||||||||||||||||
Commercial mortgage nonowner-occupied loans |
5,252 | 38 | 215 | 253 | 5,505 | 3 | ||||||||||||||||||
Commercial construction loans |
1,831 | 72 | 145 | 217 | 2,048 | 3 | ||||||||||||||||||
Commercial leases |
3,361 | 10 | 7 | 17 | 3,378 | - | ||||||||||||||||||
Residential mortgage loans (a) (b) |
8,404 | 138 | 368 | 506 | 8,910 | 100 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Home equity |
11,220 | 148 | 145 | 293 | 11,513 | 89 | ||||||||||||||||||
Automobile loans |
10,872 | 96 | 15 | 111 | 10,983 | 13 | ||||||||||||||||||
Credit card |
1,771 | 35 | 90 | 125 | 1,896 | 42 | ||||||||||||||||||
Other consumer loans and leases |
672 | 3 | 6 | 9 | 681 | - | ||||||||||||||||||
Total portfolio loans and leases (a) |
$ | 75,221 | 791 | 1,433 | 2,224 | 77,445 | 274 |
(a) | Excludes $46 of loans measured at fair value. |
(b) | Information for current residential mortgage loans includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. As of December 31, 2010, $55 of these loans were 30-89 days past due and $284 were 90 days or more past due. The Bancorp recognized $2 million in losses for the year ended December 31, 2010 due to claim denials and curtailments associated with these advances. |
(c) | Includes accrual and nonaccrual loans and leases. |
Fifth Third Bancorp |
95 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired Loans and Leases
Larger commercial loans included within aggregate borrower relationship balances exceeding $1 million that exhibit probable or observed credit weaknesses are subject to individual review for impairment. The Bancorp also performs an individual review on loans that are restructured in a troubled debt restructuring. The Bancorp considers the current value of collateral, credit quality of any guarantees, the loan
structure, and other factors when evaluating whether an individual loan is impaired. Other factors may include the geography and industry of the borrower, size and financial condition of the borrower, cash flow and leverage of the borrower, and the Bancorps evaluation of the borrowers management. Smaller-balance homogenous loans that are collectively evaluated for impairment are not included in the following tables.
The following table summarizes the Bancorps impaired loans and leases (by class) that were subject to individual review as of December 31, 2011:
As of December 31, 2011 ($ in millions) |
Unpaid
Principal Balance |
Recorded
Investment |
Allowance | |||||||||
With a related allowance recorded: |
||||||||||||
Commercial: |
||||||||||||
Commercial and industrial loans |
$ | 330 | 246 | 102 | ||||||||
Commercial mortgage owner-occupied loans |
66 | 52 | 10 | |||||||||
Commercial mortgage nonowner-occupied loans |
203 | 147 | 24 | |||||||||
Commercial construction loans |
213 | 120 | 18 | |||||||||
Commercial leases |
11 | 10 |
|
2
|
|
|||||||
Restructured residential mortgage loans |
1,091 | 1,038 | 131 | |||||||||
Restructured consumer: |
||||||||||||
Home equity |
401 | 397 | 46 | |||||||||
Automobile loans |
37 | 37 | 5 | |||||||||
Credit card |
94 | 88 | 14 | |||||||||
Other consumer loans and leases |
2 | 2 | - | |||||||||
Total impaired loans with a related allowance |
$ | 2,448 | 2,137 | 352 | ||||||||
With no related allowance recorded: |
||||||||||||
Commercial: |
||||||||||||
Commercial and industrial loans |
$ | 375 | 265 | - | ||||||||
Commercial mortgage owner-occupied loans |
78 | 69 | - | |||||||||
Commercial mortgage nonowner-occupied loans |
191 | 157 | - | |||||||||
Commercial construction loans |
143 | 105 | - | |||||||||
Commercial leases |
2 | 2 | - | |||||||||
Restructured residential mortgage loans |
276 | 228 | - | |||||||||
Restructured consumer: |
||||||||||||
Home equity |
48 | 46 | - | |||||||||
Automobile loans |
4 | 4 | - | |||||||||
Total impaired loans with no related allowance |
1,117 | 876 | - | |||||||||
Total impaired loans |
$ | 3,565 | 3,013 | (a) | 352 |
(a) | Includes $390 , $1,117 and $495 , respectively, of commercial, residential mortgage and consumer TDRs on accrual status; $160 , $141 and $79 , respectively, of commercial, residential mortgage and consumer TDRs on nonaccrual status. |
96 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the Bancorps average impaired loans and leases and interest income by class for the year ended December 31, 2011:
For the year ended
December 31, 2011 |
||||||||
($ in millions) |
Average
Recorded Investment |
Interest
Income Recognized |
||||||
Commercial: |
||||||||
Commercial and industrial loans |
$ | 532 | 5 | |||||
Commercial mortgage owner-occupied loans |
117 | 2 | ||||||
Commercial mortgage nonowner-occupied loans |
288 | 5 | ||||||
Commercial construction loans |
198 | 3 | ||||||
Commercial leases |
16 | - | ||||||
Restructured residential mortgage loans |
1,217 | 41 | ||||||
Restructured consumer: |
||||||||
Home equity |
444 | 23 | ||||||
Automobile loans |
41 | 1 | ||||||
Credit card |
94 | 3 | ||||||
Other consumer loans and leases |
21 | - | ||||||
Total impaired loans |
$ | 2,968 | 83 |
The following table summarizes the Bancorps impaired loans and leases (by class) that were subject to individual review as of December 31, 2010:
($ in millions) |
Unpaid
Principal Balance |
Recorded
Investment |
Allowance | |||||||||
With a related allowance recorded: |
||||||||||||
Commercial: |
||||||||||||
Commercial and industrial loans |
$ | 404 | 291 | 128 | ||||||||
Commercial mortgage owner-occupied loans |
49 | 37 | 4 | |||||||||
Commercial mortgage nonowner-occupied loans |
386 | 202 | 40 | |||||||||
Commercial construction loans |
240 | 150 | 31 | |||||||||
Commercial leases |
15 | 15 | 7 | |||||||||
Restructured residential mortgage loans |
1,126 | 1,071 | 121 | |||||||||
Restructured consumer: |
||||||||||||
Home equity |
400 | 397 | 53 | |||||||||
Automobile loans |
33 | 32 | 5 | |||||||||
Credit card |
100 | 100 | 18 | |||||||||
Other consumer loans and leases |
78 | 78 | 31 | |||||||||
Total impaired loans with a related allowance |
$ | 2,831 | 2,373 | 438 | ||||||||
With no related allowance recorded: |
||||||||||||
Commercial: |
||||||||||||
Commercial and industrial loans |
$ | 194 | 153 | - | ||||||||
Commercial mortgage owner-occupied loans |
113 | 99 | - | |||||||||
Commercial mortgage nonowner-occupied loans |
126 | 108 | - | |||||||||
Commercial construction loans |
24 | 8 | - | |||||||||
Commercial leases |
17 | 17 | - | |||||||||
Restructured residential mortgage loans |
146 | 121 | - | |||||||||
Restructured consumer: |
||||||||||||
Home equity |
48 | 46 | - | |||||||||
Automobile loans |
6 | 6 | - | |||||||||
Total impaired loans with no related allowance |
674 | 558 | - | |||||||||
Total impaired loans |
$ | 3,505 | 2,931 | (a) | 438 |
(a) | Includes $228, $1,066 and $492, respectively, of commercial, residential mortgage and consumer TDRs on accrual status; $141, $116 and $90, respectively, of commercial, residential mortgage and consumer TDRs on nonaccrual status. |
During the year ended December 31, 2010 and 2009, interest income of $74 million and $54 million, was recognized on impaired loans that had an average balance of $3.2 billion and $2.9 billion, respectively.
Fifth Third Bancorp |
97 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nonperforming Assets :
The following table summarizes the Bancorps nonperforming loans and leases, by class, as of December 31:
($ in millions) | 2011 | 2010 | ||||||
Commercial: |
||||||||
Commercial and industrial loans |
$ | 487 | 568 | |||||
Commercial mortgage owner-occupied loans |
170 | 168 | ||||||
Commercial mortgage nonowner-occupied loans |
251 | 267 | ||||||
Commercial construction loans |
138 | 192 | ||||||
Commercial leases |
12 | 19 | ||||||
Total commercial loans and leases |
1,058 | 1,214 | ||||||
Residential mortgage loans |
275 | 268 | ||||||
Consumer: |
||||||||
Home equity |
54 | 56 | ||||||
Automobile loans |
2 | 3 | ||||||
Credit card |
48 | 55 | ||||||
Other consumer loans and leases |
1 | 84 | ||||||
Total consumer loans and leases |
105 | 198 | ||||||
Total nonperforming loans and leases (a) |
$ | 1,438 | 1,680 | |||||
OREO and other repossessed property (b) |
378 | 494 |
(a) | Excludes $138 and $294 of nonaccrual loans held for sale at December 31, 2011 and 2010, respectively. |
(b) | Excludes $64 and $38 of OREO related to government insured loans at December 31, 2011 and 2010, respectively. |
Troubled Debt Restructurings
If a borrower is experiencing financial difficulty, the Bancorp may consider, in certain circumstances, modifying the terms of their loan to maximize collection of amounts due. Within each of the Bancorps loan classes, TDRs typically involve either a reduction of the stated interest rate of the loan, an extension of the loans maturity date(s) at a stated rate lower than the current market rate for a new loan with similar risk, or in limited circumstances, a reduction of the principal balance of the loan or the loans accrued interest. Upon modification, an impairment loss is recognized as an increase to the ALLL and is measured as the difference between the original loans carrying amount and the present value of expected future cash flows
discounted at the original, effective yield of the loan. If a portion of the original loans principal balance is determined to be uncollectible at the time of modification, or if the TDR involves a reduction of the principal balance of the loan or the loans accrued interest, that amount is charged off to the ALLL. At December 31, 2011, the Bancorp had $42 million in line of credit commitments and $1 million in letter of credit commitments to lend additional funds to borrowers whose terms have been modified in a troubled debt restructuring compared to $47 million and $1 million, respectively, at December 31, 2010.
The following table provides a summary of loans modified in a TDR by the Bancorp during the year ended December 31, 2011:
($ in millions) (a) |
Number of loans
modified in a TDR during the period (b) |
Recorded investment
in a TDR during the period |
Increase
(Decrease) to ALLL upon modification |
Charge-offs
recognized upon modification |
||||||||||||
Commercial: |
||||||||||||||||
Commercial and industrial loans |
52 | $ | 83 | (4 | ) | 3 | ||||||||||
Commercial mortgage owner-occupied loans |
32 | 55 | (6 | ) | 2 | |||||||||||
Commercial mortgage nonowner-occupied loans |
39 | 90 | (21 | ) | 3 | |||||||||||
Commercial construction loans |
26 | 59 | (9 | ) | 1 | |||||||||||
Commercial leases |
2 | - | - | - | ||||||||||||
Residential mortgage loans |
1,728 | 338 | 34 | - | ||||||||||||
Consumer: |
||||||||||||||||
Home equity |
1,317 | 80 | 1 | - | ||||||||||||
Automobile loans |
1,482 | 26 | 3 | - | ||||||||||||
Credit card |
12,234 | 79 | 11 | - | ||||||||||||
Total portfolio loans and leases |
16,912 | $ | 810 | 9 | 9 |
(a) | Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality. |
(b) | Represents number of loans post-modification. |
The Bancorp considers TDRs that become 90 days or more past due under the modified terms as subsequently defaulted. For commercial loans not subject to individual review for impairment, the historical loss rates that are applied to such commercial loans for purposes of determining the allowance include historical losses associated with subsequent defaults on loans previously modified in a TDR. For consumer loans, the Bancorp performs a qualitative assessment of the adequacy of the consumer ALLL by comparing the consumer ALLL to forecasted consumer losses over the projected loss emergence period (the forecasted losses include the
impact of subsequent defaults of consumer TDRs). When a residential mortgage, home equity, auto or other consumer loan that has been modified in a TDR subsequently defaults, the present value of expected cash flows used in the measurement of the potential impairment loss is generally limited to the expected net proceeds from the sale of the loans underlying collateral and any resulting impairment loss is reflected as a charge-off or an increase in ALLL. When a credit card loan that has been modified in a TDR subsequently defaults, the calculation of the impairment loss is consistent with the Bancorps calculation for other credit card loans that have become 90 days or more past due.
Fifth Third Bancorp |
98 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a summary of subsequent defaults that occurred during the year ended December 31, 2011 and within 12 months of the restructuring date:
($ in millions) (a) |
Number of
Contracts |
Recorded
Investment |
||||||
Commercial: |
||||||||
Commercial and industrial loans |
8 | $ | 4 | |||||
Commercial mortgage owner-occupied loans |
4 | 5 | ||||||
Commercial mortgage nonowner-occupied loans |
4 | 3 | ||||||
Commercial construction loans |
3 | 4 | ||||||
Residential mortgage loans |
337 | 55 | ||||||
Consumer: |
||||||||
Home equity |
206 | 13 | ||||||
Automobile loans |
28 | 1 | ||||||
Credit card |
67 | 1 | ||||||
Total portfolio loans and leases |
657 | $ | 86 |
(a) | Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality. |
Fifth Third Bancorp |
99 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LOANS WITH DETERIORATED CREDIT QUALITY ACQUIRED IN A TRANSFER
The Bancorp has acquired in prior years certain loans for which there was evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected. During the years ended December 31, 2011, 2010 and 2009, the Bancorp recorded provision expense for loans acquired with deteriorated credit quality of $7 million, $6 million and $21 million, respectively, in the Consolidated Statements of Income. In addition, as of December 31, 2011 and 2010, the Bancorp maintained an allowance for loan and lease losses of $2 million and $3 million, respectively, on these loans.
The following table reflects the outstanding balance of all contractually required payments and carrying amounts of loans acquired with deteriorated credit quality at December 31:
($ in millions) | 2011 | 2010 | ||||||
Commercial |
$ | 9 | 15 | |||||
Consumer |
28 | 58 | ||||||
Outstanding balance |
$ | 37 | 73 | |||||
Carrying Amount |
$ | 11 | 24 |
A summary of activity in the accretable yield is provided.
($ in millions) |
Accretable
Yield |
|||
Balance as of December 31, 2008 |
$ | 28 | ||
Additions |
- | |||
Accretion |
(6 | ) | ||
Disposals |
- | |||
Reclassifications from (to) nonaccretable differences, net |
(13 | ) | ||
Balance as of December 31, 2009 |
$ | 9 | ||
Additions |
- | |||
Accretion |
(2 | ) | ||
Disposals |
(2 | ) | ||
Reclassifications from (to) nonaccretable differences, net |
(3 | ) | ||
Balance as of December 31, 2010 |
$ | 2 | ||
Additions |
- | |||
Accretion |
(2 | ) | ||
Disposals |
- | |||
Reclassifications from (to) nonaccretable differences, net |
- | |||
Balance as of December 31, 2011 |
$ | - |
The following table reflects loans that were acquired with deteriorated credit quality during the years ended December 31:
($ in millions) | 2011 | 2010 | 2009 | |||||||||
Contractually required payments receivable at acquisition: |
||||||||||||
Commercial |
$ | - | - | - | ||||||||
Consumer |
- | 23 | - | |||||||||
Total |
$ | - | 23 | - | ||||||||
Cash flows expected to be collected at acquisition |
$ | - | 8 | - | ||||||||
Fair value of acquired loans at acquisition |
- | 8 | - |
Fifth Third Bancorp |
100 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. BANK PREMISES AND EQUIPMENT
The following is a summary of bank premises and equipment at December 31:
($ in millions) |
Estimated
Useful Life |
2011 | 2010 | |||||||||
Land and improvements |
$ | 834 | 797 | |||||||||
Buildings |
5 to 50 yrs. | 1,623 | 1,593 | |||||||||
Equipment |
3 to 20 yrs. | 1,318 | 1,296 | |||||||||
Leasehold improvements |
3 to 40 yrs. | 394 | 393 | |||||||||
Construction in progress |
140 | 92 | ||||||||||
Accumulated depreciation and amortization |
(1,862 | ) | (1,782 | ) | ||||||||
Total |
$ | 2,447 | 2,389 |
Depreciation and amortization expense related to bank premises and equipment was $224 million in 2011, $225 million in 2010 and $227 million in 2009.
Gross occupancy expense for cancelable and noncancelable leases was $99 million in 2011, $98 million in 2010 and $102 million in 2009, which was reduced by rental income from leased premises of $19 million in 2011 and 2010 and $16 million in 2009.
The Bancorps subsidiaries have entered into a number of noncancelable and capital lease agreements with respect to bank premises and equipment. The following table provides the annual future minimum payments under capital leases and noncancelable operating leases at December 31, 2011:
($ in millions) |
Operating
Leases |
Capital
Leases |
||||||
Year ended December 31, |
||||||||
2012 |
$ | 92 | 12 | |||||
2013 |
87 | 5 | ||||||
2014 |
82 | 4 | ||||||
2015 |
78 | 3 | ||||||
2016 |
71 | 1 | ||||||
Thereafter |
441 | 1 | ||||||
Total minimum lease payments |
$ | 851 | 26 | |||||
Less: Amounts representing interest |
- | 3 | ||||||
Present value of net minimum lease payments |
- | 23 |
Business combinations entered into by the Bancorp typically include the acquisition of
goodwill. Acquisition activity includes acquisitions in the respective period, in addition to purchase accounting adjustments related to previous acquisitions. The Commercial Banking and Consumer Lending segments goodwill carrying amounts
include
cumulative impairment charges of $750 million and $215 million, respectively, that were recognized in the fourth quarter of 2008. Changes in the net carrying amount of goodwill, by reporting unit, for the years ended December 31, 2011 and 2010 were as follows:
($ in millions) |
Commercial
Banking |
Branch
Banking |
Consumer
Lending |
Investment
Advisors |
Total | |||||||||||||||
Net carrying value as of December 31, 2009 |
$ | 613 | 1,656 | - | 148 | 2,417 | ||||||||||||||
Acquisition activity |
- | - | - | - | - | |||||||||||||||
Net carrying value as of December 31, 2010 |
$ | 613 | 1,656 | - | 148 | 2,417 | ||||||||||||||
Acquisition activity |
- | - | - | - | - | |||||||||||||||
Net carrying value as of December 31, 2011 |
$ | 613 | 1,656 | - | 148 | 2,417 |
The Bancorp completed its annual goodwill impairment test as of September 30, 2011 and determined that no impairment existed. In Step 1 of the goodwill impairment test, the Bancorp compared the fair value of each reporting unit to its carrying amount, including goodwill. To determine the fair value of a reporting unit, the Bancorp employed an income-based approach utilizing the reporting units forecasted cash flows (including a terminal value approach to estimate cash flows beyond the final year of the forecast) and the reporting units estimated cost of equity as the discount rate. The Bancorp believes that this DCF method, using management projections for the respective reporting units and an appropriate risk adjusted discount rate, is most reflective of a market participants view of fair values given current market conditions. Under the DCF method, the forecasted cash flows were developed for each reporting unit by considering several key business drivers such as new business initiatives, client retention standards, market share changes, anticipated loan and deposit growth, forward interest rates, historical performance, and industry and economic trends, among other considerations.
The long-term growth rate used in determining the terminal value of each reporting unit was estimated at three percent based on the Bancorps assessment of the minimum expected terminal growth rate of each reporting unit, as well as broader economic considerations such as gross domestic product and inflation. Discount rates were estimated based on a Capital Asset Pricing Model, which considers the risk-free interest rate, market risk premium, beta, and in some cases, unsystematic risk and size premium adjustments specific to a particular reporting unit. The discount rates used to develop the estimated fair value of the reporting units were 16.9% for Commercial Banking, 15.9% for Branch Banking and 18.7% for Investment Advisors.
Fifth Third Bancorp |
101 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on the results of the Step 1 test, the Bancorp determined that the fair value of the Commercial Banking, Branch Banking, and Investment Advisors segments exceeded their respective carrying values, and consequently, no further testing was required.
The Step 1 analysis prepared for the Bancorps segments resulted in the fair values of the Commercial Banking and Branch Banking segments exceeding their carrying values, including goodwill, by 9% and 4% respectively, while the fair value of the Investment Advisors segment substantially exceeded its carrying value, including goodwill.
The long-term growth rate required to avoid failing Step 1 for the Commercial Banking reporting unit, with all other assumptions held constant, was 0.3%. Other key assumptions used in forecasting cash flows for the Commercial Banking reporting unit include commercial loan portfolio growth as well as long-term credit loss rates, which are based on long-term historical loss rates and managements expectation of long-term credit quality within the portfolio.
The long-term growth rate required to avoid failing Step 1 for the Branch Banking reporting unit, with all other
assumptions held constant, was 1.4%. Other key assumptions used in forecasting cash flows for the Branch Banking reporting unit include deposit growth assumptions, forecasted spreads earned on the units deposits, and the impact of recent and anticipated regulatory changes affecting retail banking.
The Bancorp forecasts its deposit growth based on expected growth in loan demand as well as availability and expected use of alternative funding sources over that period. The earnings spread assumption on deposits is based on forward LIBOR rates and the sensitivity of the Bancorps deposit rates to changes in LIBOR. The Bancorp considered the impact of recent and anticipated regulatory changes that impacted overdraft revenue, debit interchange revenue and credit card revenue in 2011 and will continue to evaluate the potential impact of these changes in 2012 and beyond. Changes in these key assumptions and inputs to these key assumptions could negatively impact the fair value of the Commercial Banking and Branch Banking reporting units in future periods. These changes would include unanticipated regulatory changes, movement in interest rates and economic trends affecting the segments profitability.
Intangible assets consist of servicing rights, core deposit intangibles, customer lists, non-compete agreements and cardholder relationships. Intangible assets, excluding servicing rights, are amortized on either a straight-line or an accelerated basis over their estimated useful lives and have an estimated weighted-average life at December 31, 2011 of 3.9 years. The
Bancorp reviews intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. For more information on servicing rights, see Note 12. The details of the Bancorps intangible assets are shown in the following table.
($ in millions) |
Gross
Carrying Amount |
Accumulated
Amortization |
Valuation
Allowance |
Net
Carrying Amount |
||||||||||||
As of December 31, 2011 |
||||||||||||||||
Mortgage servicing rights |
$ | 2,520 | (1,281 | ) | (558 | ) | 681 | |||||||||
Core deposit intangibles |
439 | (407 | ) | - | 32 | |||||||||||
Other |
44 | (36 | ) | - | 8 | |||||||||||
Total intangible assets |
$ | 3,003 | (1,724 | ) | (558 | ) | 721 | |||||||||
As of December 31, 2010 |
||||||||||||||||
Mortgage servicing rights |
$ | 2,284 | (1,146 | ) | (316 | ) | 822 | |||||||||
Core deposit intangibles |
439 | (389 | ) | - | 50 | |||||||||||
Other |
44 | (32 | ) | - | 12 | |||||||||||
Total intangible assets |
$ | 2,767 | (1,567 | ) | (316 | ) | 884 |
As of December 31, 2011, all of the Bancorps intangible assets were being
amortized. Amortization expense recognized on intangible assets, including servicing rights, for the years ending December 31, 2011, 2010 and 2009 was $157 million,
$181 million and $204 million, respectively. Estimated amortization expense for the years ending December 31, 2012 through 2016 is as follows:
($ in millions) |
Mortgage
Servicing Rights |
Other Intangible
Assets |
Total | |||||||||
2012 |
$ | 252 | 13 | 265 | ||||||||
2013 |
193 | 8 | 201 | |||||||||
2014 |
153 | 4 | 157 | |||||||||
2015 |
121 | 2 | 123 | |||||||||
2016 |
97 | 2 | 99 |
102 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. VARIABLE INTEREST ENTITIES
The Bancorp, in the normal course of business, engages in a variety of activities that involve VIEs, which are legal entities that lack sufficient equity to finance their activities, or the equity investors of the entities as a group lack any of the characteristics of a controlling interest. The primary beneficiary of a VIE is generally the enterprise that has both the power to direct the activities most significant to the economic performance of the VIE and the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. For certain investment funds, the primary beneficiary is the enterprise that will absorb a majority of the funds expected losses or receive a majority of the funds expected residual returns. The Bancorp evaluates its interest in certain entities to determine if these entities meet the definition of a VIE and whether the Bancorp is the primary beneficiary and should
consolidate the entity based on the variable interests it held both at inception and when there is a change in circumstances that require a reconsideration. If the Bancorp is determined to be the primary beneficiary of a VIE, it must account for the VIE as a consolidated subsidiary. If the Bancorp is determined not to be the primary beneficiary of a VIE but holds a variable interest in the entity, such variable interests are accounted for under the equity method of accounting or other accounting standards as appropriate.
Consolidated VIEs
The following table provides a summary of the classifications of consolidated VIE assets, liabilities and noncontrolling interests included in the Bancorps Consolidated Balance Sheets as of:
December 31, 2011 ($ in millions) |
Home Equity
Securitization |
Automobile
Loan Securitizations |
CDC
Investments |
Total | ||||||||||||
Assets: |
||||||||||||||||
Cash and due from banks |
$ | 5 | 25 | - | 30 | |||||||||||
Other short-term investments |
- | 7 | - | 7 | ||||||||||||
Commercial mortgage loans |
- | - | 50 | 50 | ||||||||||||
Home equity |
223 | - | - | 223 | ||||||||||||
Automobile loans |
- | 259 | - | 259 | ||||||||||||
ALLL |
(5 | ) | (3 | ) | (2 | ) | (10 | ) | ||||||||
Other assets |
1 | 1 | 2 | 4 | ||||||||||||
Total assets |
224 | 289 | 50 | 563 | ||||||||||||
Liabilities: |
||||||||||||||||
Other liabilities |
$ | - | 4 | - | 4 | |||||||||||
Long-term debt |
22 | 169 | - | 191 | ||||||||||||
Total liabilities |
$ | 22 | 173 | - | 195 | |||||||||||
Noncontrolling interests |
50 | 50 |
December 31, 2010 ($ in millions) |
Home Equity
Securitization |
Automobile
Loan Securitizations |
CDC
Investments |
Total | ||||||||||||
Assets: |
||||||||||||||||
Cash and due from banks |
$ | 7 | 45 | - | 52 | |||||||||||
Other short-term investments |
- | 7 | - | 7 | ||||||||||||
Commercial mortgage loans |
- | - | 29 | 29 | ||||||||||||
Home equity |
241 | - | - | 241 | ||||||||||||
Automobile loans |
- | 648 | - | 648 | ||||||||||||
ALLL |
(5 | ) | (8 | ) | (1 | ) | (14 | ) | ||||||||
Other assets |
1 | 5 | 1 | 7 | ||||||||||||
Total assets |
244 | 697 | 29 | 970 | ||||||||||||
Liabilities: |
||||||||||||||||
Other liabilities |
$ | - | 12 | - | 12 | |||||||||||
Long-term debt |
133 | 559 | - | 692 | ||||||||||||
Total liabilities |
$ | 133 | 571 | - | 704 | |||||||||||
Noncontrolling interest |
29 | 29 |
Home Equity and Automobile Loan Securitizations
The Bancorp previously sold $903 million of home equity lines of credit to an isolated trust. Additionally, the Bancorp previously sold $2.7 billion of automobile loans to an isolated trust and conduits in three separate transactions. Each of these transactions isolated the related loans through the use of a VIE that, under accounting guidance effective prior to January 1, 2010, was not consolidated by the Bancorp. The VIEs were funded through loans from large multi-seller asset-backed commercial paper conduits sponsored by third party agents, asset-backed securities issued with varying levels of credit subordination and payment priority, and residual interests. The Bancorp retained residual interests in these entities and, therefore, has an obligation to absorb losses and a right to receive benefits from the VIEs that could potentially be significant to the VIEs. In addition, the Bancorp retained servicing rights for the
underlying loans and, therefore, holds the power to direct the activities of the VIEs that most significantly impact the economic performance of the VIEs. As a result, the Bancorp determined it is the primary beneficiary of these VIEs and, effective January 1, 2010, these VIEs have been consolidated in the Bancorps Consolidated Financial Statements. The assets of each VIE are restricted to the settlement of the long-term debt and other liabilities of the respective entity. Third-party holders of this debt do not have recourse to the general assets of the Bancorp.
The economic performance of the VIEs is most significantly impacted by the performance of the underlying loans. The principal risks to which the entities are exposed include credit risk and interest rate risk. Credit risk is managed through credit enhancement in the form of reserve accounts, overcollateralization, excess interest on the loans, the subordination of certain classes of asset-backed
Fifth Third Bancorp |
103 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
securities to other classes, and in the case of the home equity transaction, an insurance policy with a third party guaranteeing payment of accrued and unpaid interest and principal on the securities. Interest rate risk is managed by interest rate swaps between the VIEs and third parties.
CDC Investments
CDC, a wholly owned subsidiary of the Bancorp, was created to invest in projects to create affordable housing, revitalize business and residential areas, and preserve historic landmarks. CDC generally co-invests with other unrelated companies and/or individuals and typically makes investments in a separate legal entity that owns the property under development. The entities are usually formed as limited partnerships and LLCs, and CDC typically invests as a limited partner/investor member in the form of equity contributions. The economic performance of the VIEs is driven by the performance of their underlying investment projects as well as the VIEs ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. Typically, the general partner or managing member will be the party that has the right to make decisions that will most significantly impact the economic performance of the entity. The Bancorp serves as the managing member of certain LLCs invested in business revitalization projects. The Bancorp has
provided an indemnification guarantee to the investor member of these LLCs related to the qualification of tax credits generated by the investor members investment. Accordingly, the Bancorp concluded that it is the primary beneficiary and, therefore, has consolidated these VIEs. As a result, the VIEs are presented as noncontrolling interests in the Bancorps Consolidated Financial Statements. This presentation includes reporting separately the equity attributable to the noncontrolling interests in the Consolidated Balance Sheets and Consolidated Statements of Changes in Equity. Additionally, the net income attributable to the noncontrolling interests is reported separately in the Consolidated Statements of Income. The Bancorps maximum exposure related to the indemnification at December 31, 2011 and 2010 was $10 million and $9 million, respectively, which is based on an amount required to meet the investor members defined target rate of return.
Non-consolidated VIEs
The following tables provide a summary of assets and liabilities carried on the Bancorps Consolidated Balance Sheets related to non-consolidated VIEs for which the Bancorp holds a variable interest, but is not the primary beneficiary to the VIE, as well as the Bancorps maximum exposure to losses associated with its interests in the entities:
As of December 31, 2011 ($ in millions) |
Total
Assets |
Total
Liabilities |
Maximum
Exposure |
|||||||||
CDC investments |
$ | 1,243 | 269 | 1,243 | ||||||||
Private equity investments |
161 | 3 | 327 | |||||||||
Money market funds |
53 | - | 62 | |||||||||
Loans provided to VIEs |
1,370 | - | 2,203 | |||||||||
Restructured loans |
10 | - | 12 |
As of December 31, 2010 ($ in millions) |
Total
Assets |
Total
Liabilities |
Maximum
Exposure |
|||||||||
CDC investments |
$ | 1,241 | 286 | 1,241 | ||||||||
Private equity investments |
129 | 3 | 322 | |||||||||
Money market funds |
148 | - | 158 | |||||||||
Loans provided to VIEs |
1,175 | - | 1,908 | |||||||||
Restructured loans |
12 | - | 13 |
CDC Investments
As noted previously, CDC typically invests in VIEs as a limited partner or investor member in the form of equity contributions. The Bancorp has determined that it is not the primary beneficiary of these VIEs because it lacks the power to direct the activities that most significantly impact the economic performance of the underlying project or the VIEs ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. This power is held by the general partners/managing members who exercise full and exclusive control of the operations of the VIEs. Accordingly, the Bancorp accounts for these investments under the equity method of accounting.
The Bancorps funding requirements are limited to its invested capital and any additional unfunded commitments for future equity contributions. The Bancorps maximum exposure to loss as a result of its involvement with the VIEs is limited to the carrying amounts of the investments, including the unfunded commitments. The carrying amounts of these investments, which are included in other assets in the Consolidated Balance Sheets, and the liabilities related to the unfunded commitments, which are included in other liabilities in the Consolidated Balance Sheets, are included in the previous tables for all periods presented. The Bancorp has no other liquidity arrangements or obligations to purchase assets of the VIEs that
would expose the Bancorp to a loss. In certain arrangements, the general partner/managing member of the VIE has guaranteed a level of projected tax credits to be received by the limited partners/investor members, thereby minimizing a portion of the Bancorps risk.
Private Equity Investments
The Bancorp invests as a limited partner in private equity funds which provide the Bancorp an opportunity to obtain higher rates of return on invested capital, while also creating cross-selling opportunities for the Bancorps commercial products. Each of the limited partnerships has an unrelated third-party general partner responsible for appointing the fund manager. The Bancorp has not been appointed fund manager for any of these private equity funds. The funds finance primarily all of their activities from the partners capital contributions and investment returns. Under the VIE consolidation guidance still applicable to the funds, the Bancorp has determined that it is not the primary beneficiary of the funds because it does not absorb a majority of the funds expected losses or receive a majority of the funds expected residual returns. Therefore, the Bancorp accounts for its investments in these limited partnerships under the equity method of accounting.
The Bancorp is exposed to losses arising from negative performance of the underlying investments in the private equity
104 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
funds. As a limited partner, the Bancorps maximum exposure to loss is limited to the carrying amounts of the investments plus unfunded commitments. The carrying amounts of these investments, which are included in other assets in the Consolidated Balance Sheets, are included in the above tables. Also, as of December 31, 2011 and 2010 the unfunded commitment amounts to the funds were $166 million and $193 million, respectively. The Bancorp made capital contributions of $48 million and $34 million, respectively, to private equity funds during 2011 and 2010.
Money Market Funds
Under U.S. GAAP, money market funds are generally not considered VIEs because they are generally deemed to have sufficient equity at risk to finance their activities without additional subordinated financial support, and the fund shareholders do not lack the characteristics of a controlling interest. However, when a situation arises where an investment manager provides credit support to a fund, even when not contractually required to do so, the investment manager is deemed under U.S. GAAP to have provided an implicit guarantee of the funds performance to the funds shareholders. Such an implicit guarantee would require the investment manager and other variable interest holders to reconsider the VIE status of the fund, as well as all other similar funds where such an implicit guarantee is now deemed to exist.
In the fourth quarter of 2010, the Bancorp voluntarily provided credit support of less than $1 million to a money market fund managed by FTAM. Accordingly, the Bancorp was required to analyze the money market funds and similar funds managed by FTAM under the VIE consolidation guidance still applicable to these funds to determine the primary beneficiary of each fund. In analyzing these funds, the Bancorp determined that interest rate risk and credit risk are the two main risks to which the funds are exposed. After analyzing the interest rate risk variability and credit risk variability associated with these funds, the Bancorp determined that it is not the primary beneficiary of these funds because it does not absorb a majority of the funds expected losses or receive a majority of the funds expected residual returns. Therefore, the Bancorps investments in these funds are included as other securities in the Bancorps Consolidated Balance Sheets.
Loans Provided to VIEs
The Bancorp has provided funding to certain unconsolidated VIEs sponsored by third parties. These VIEs are generally established to finance certain consumer and small business loans originated by third parties. The entities are primarily funded through the issuance of a loan from the Bancorp or syndication through which the Bancorp is involved. The sponsor/administrator of the entities is responsible for servicing the underlying assets in the VIEs. Because the sponsor/administrator, not the Bancorp, holds the servicing responsibilities, which include the establishment and employment of default mitigation policies and procedures, the Bancorp does not hold the power to direct the activities most significant to the economic performance of the entity and, therefore, is not the primary beneficiary.
The principal risk to which these entities are exposed is credit risk related to the underlying assets. The Bancorps maximum exposure to loss is equal to the carrying amounts of the loans and unfunded commitments to the VIEs. The Bancorps outstanding loans to these VIEs, included in commercial loans in the Consolidated Balance Sheets, are included in the previous tables for all periods presented. Also, as of December 31, 2011 and 2010, the Bancorps unfunded commitments to these entities were $833 million and $733 million, respectively. The loans and unfunded commitments to these VIEs are included in the Bancorps overall analysis of the ALLL and reserve for unfunded commitments,
respectively. The Bancorp does not provide any implicit or explicit liquidity guarantees or principal value guarantees to these VIEs.
Restructured Loans
As part of loan restructuring efforts, the Bancorp received equity capital from certain borrowers to facilitate the restructuring of the borrowers debt. These borrowers meet the definition of a VIE because the Bancorp was involved in their refinancing and because their equity capital is insufficient to fund ongoing operations. These restructurings were intended to provide the VIEs with serviceable debt levels while providing the Bancorp an opportunity to maximize the recovery of the loans. The VIEs finance their operations from earned income, capital contributions, and through restructured debt agreements. Assets of the VIEs are used to settle their specific obligations, including loan payments due to the Bancorp. The Bancorp continues to maintain its relationship with these VIEs as a lender and minority shareholder, however, it is not involved in management decisions and does not have sufficient voting rights to control the membership of the respective boards. Therefore, the Bancorp accounts for its equity investments in these VIEs under the equity method or cost method based on its percentage of ownership and ability to exercise significant influence.
The Bancorps maximum exposure to loss as a result of its involvement with these VIEs is limited to the equity investments, the principal and accrued interest on the outstanding loans, and any unfunded commitments. Due to the VIEs short-term cash deficit projections at the restructuring dates, the Bancorp determined that the initial fair value of its equity investments in these VIEs was zero. As of December 31, 2011 and 2010, the Bancorps carrying value of these equity investments was immaterial. Additionally, the Bancorp had outstanding loans to these VIEs, included in commercial loans in the Consolidated Balance Sheets, which are included in the above tables for all periods presented. The Bancorps unfunded loan commitments to these VIEs were $2 million and $1 million at December 31, 2011 and 2010, respectively. The loans and unfunded commitments to these VIEs are included in the Bancorps overall analysis of the ALLL and reserve for unfunded commitments, respectively. The Bancorp does not provide any implicit or explicit liquidity guarantees or principal value guarantees to these VIEs.
Fifth Third Bancorp |
105 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SALES OF RESIDENTIAL MORTGAGE RECEIVABLES AND MORTGAGE SERVICING RIGHTS
The Bancorp sold fixed and adjustable rate residential mortgage loans during 2011, 2010, and 2009. In those sales, the Bancorp obtained servicing responsibilities and the investors have no recourse to the Bancorps other assets for failure of debtors to
pay when due. The Bancorp receives annual servicing fees based on a percentage of the outstanding balance. The Bancorp identifies classes of servicing assets based on financial asset type and interest rates.
Information related to residential mortgage loan sales and the Bancorps mortgage banking activity, which is included in mortgage banking net revenue in the Consolidated Statements of Income, for the years ended December 31 is as follows:
($ in millions) | 2011 | 2010 | 2009 | |||||||||
Residential mortgage loan sales |
$ | 14,733 | 17,861 | 20,605 | ||||||||
Origination fees and gains on loan sales |
396 | 490 | 485 | |||||||||
Servicing fees |
234 | 221 | 197 |
Servicing Assets
The following table presents changes in the servicing assets related to residential mortgage loans for the years ended December 31:
($ in millions) | 2011 | 2010 | ||||||
Carrying amount as of the beginning of the period |
$ | 1,138 | 979 | |||||
Servicing obligations that result from the transfer of residential mortgage loans |
236 | 297 | ||||||
Amortization |
(135 | ) | (138 | ) | ||||
Carrying amount before valuation allowance |
1,239 | 1,138 | ||||||
Valuation allowance for servicing assets: |
||||||||
Beginning balance |
(316 | ) | (280 | ) | ||||
Servicing impairment |
(242 | ) | (36 | ) | ||||
Ending balance |
(558 | ) | (316 | ) | ||||
Carrying amount as of the end of the period |
$ | 681 | 822 |
Temporary impairment or impairment recovery, affected through a change in the MSR valuation allowance, is captured as a component of mortgage banking net revenue in the Consolidated Statements of Income. The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in the value of the MSR portfolio. This strategy includes the purchase of free-standing derivatives and
various available-for-sale securities. The interest income, mark-to-market adjustments and gain or loss from sale activities associated with these portfolios are expected to economically hedge a portion of the change in value of the MSR portfolio caused by fluctuating discount rates, earnings rates and prepayment speeds.
The fair value of the servicing asset is based on the present value of expected future cash flows. The following table displays the beginning and ending fair value for the years ended December 31:
($ in millions) | 2011 | 2010 | ||||||
Fixed rate residential mortgage loans: |
||||||||
Beginning balance |
$ | 791 | 667 | |||||
Ending balance |
649 | 791 | ||||||
Adjustable rate residential mortgage loans: |
||||||||
Beginning balance |
31 | 32 | ||||||
Ending balance |
32 | 31 |
The following table presents activity related to valuations of the MSR portfolio and the impact of the non-qualifying hedging strategy, which is included in the Consolidated Statements of Income for the years ended December 31:
($ in millions) | 2011 | 2010 | 2009 | |||||||||
Securities gains, netnon-qualifying hedges on MSRs |
$ | 9 | 14 | 57 | ||||||||
Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio (Mortgage banking net revenue) |
344 | 109 | 41 | |||||||||
Provision for MSR impairment (Mortgage banking net revenue) |
(242 | ) | (36 | ) | (24 | ) |
106 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2011 and 2010, the key economic assumptions used in measuring the interests that continued to be held by the Bancorp at the date of sale or securitization resulting from transactions completed during the years ended December 31 were as follows:
2011 | 2010 | |||||||||||||||||||||||||||||||||
Rate |
Weighted-
Average Life (in years) |
Prepayment
Speed (annual) |
Discount
Rate (annual) |
Weighted-
Average Default rate |
Weighted-
Average Life (in years) |
Prepayment
Speed (annual) |
Discount
Rate (annual) |
Weighted-
Average Default rate |
||||||||||||||||||||||||||
Residential mortgage loans: |
||||||||||||||||||||||||||||||||||
Servicing assets |
Fixed | 7.2 | 8.8 | % | 10.5 | % | N/A | 6.7 | 10.7 | % | 10.3 | % | N/A | |||||||||||||||||||||
Servicing assets |
Adjustable | 3.7 | 22.8 | 11.4 | N/A | 3.6 | 23.3 | 11.3 | N/A |
Based on historical credit experience, expected credit losses for residential mortgage loan servicing assets have been deemed immaterial, as the Bancorp sold the majority of the underlying loans without recourse. At December 31, 2011 and 2010, the Bancorp serviced $57.1 billion and $54.2 billion, respectively, of residential mortgage loans for other investors. The value of
interests that continue to be held by the Bancorp is subject to credit, prepayment and interest rate risks on the sold financial assets. At December 31, 2011, the sensitivity of the current fair value of residual cash flows to immediate 10% and 20% adverse changes in those assumptions are as follows:
Fair |
Weighted-
|
Prepayment Speed Assumption |
Residual Servicing Cash Flows |
Weighted-Average Default |
||||||||||||||||||||||||||||||||||||||||||||
Impact of Adverse
Change on Fair Value |
Discount |
Impact of Adverse
Change on Fair Value |
Impact of Adverse
Change on Fair Value |
|||||||||||||||||||||||||||||||||||||||||||||
($ in millions) | Rate | Value | years) | Rate | 10% | 20% | Rate | 10% | 20% | Rate | 10% | 20% | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||||
Residential mortgage loans: |
||||||||||||||||||||||||||||||||||||||||||||||||
Servicing assets |
Fixed | $ | 649 | 5.0 | 17.9 | % | $ | (36 | ) | (68 | ) | 10.6 | % | $ | (23 | ) | (43 | ) | - | % | - | - | ||||||||||||||||||||||||||
Servicing assets |
Adjustable | 32 | 3.0 | 28.7 | (2 | ) | (3 | ) | 11.8 | (1 | ) | (2 | ) | - | - | - |
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% and 20% variation in the assumptions typically cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the previous table, the effect of a variation in a particular
assumption on the fair value of the interests that continue to be held by the Bancorp is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract these sensitivities.
Fifth Third Bancorp |
107 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE FINANCIAL INSTRUMENTS
The Bancorp maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce certain risks related to interest rate, prepayment and foreign currency volatility. Additionally, the Bancorp holds derivative instruments for the benefit of its commercial customers and for other business purposes. The Bancorp does not enter into unhedged speculative derivative positions.
The Bancorps interest rate risk management strategy involves modifying the repricing characteristics of certain financial instruments so that changes in interest rates do not adversely affect the Bancorps net interest margin and cash flows. Derivative instruments that the Bancorp may use as part of its interest rate risk management strategy include interest rate swaps, interest rate floors, interest rate caps, forward contracts, options and swaptions. Interest rate swap contracts are exchanges of interest payments, such as fixed-rate payments for floating-rate payments, based on a stated notional amount and maturity date. Interest rate floors protect against declining rates, while interest rate caps protect against rising interest rates. Forward contracts are contracts in which the buyer agrees to purchase, and the seller agrees to make delivery of, a specific financial instrument at a predetermined price or yield. Options provide the purchaser with the right, but not the obligation, to purchase or sell a contracted item during a specified period at an agreed upon price. Swaptions are financial instruments granting the owner the right, but not the obligation, to enter into or cancel a swap.
Prepayment volatility arises mostly from changes in fair value of the largely fixed-rate MSR portfolio, mortgage loans and mortgage-backed securities. The Bancorp may enter into various free-standing derivatives (principal-only swaps, interest rate swaptions, interest rate floors, mortgage options, TBAs and interest rate swaps) to economically hedge prepayment volatility. Principal-only swaps are total return swaps based on changes in the value of the underlying mortgage principal-only trust. TBAs are a forward purchase agreement for a mortgage-backed securities trade whereby the terms of the security are undefined at the time the trade is made.
Foreign currency volatility occurs as the Bancorp enters into certain loans denominated in foreign currencies. Derivative instruments that the Bancorp may use to economically hedge these foreign denominated loans include foreign exchange swaps and forward contracts.
The Bancorp also enters into derivative contracts (including foreign exchange contracts, commodity contracts and interest rate contracts) for the benefit of commercial customers and other business purposes. The Bancorp may economically hedge significant exposures related to these free-standing derivatives by entering into offsetting third-party contracts with approved, reputable counterparties with substantially matching terms and currencies. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Bancorps exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. Credit risk is minimized through credit approvals, limits, counterparty collateral and monitoring procedures.
The Bancorps derivative assets contain certain contracts in which the Bancorp requires the counterparties to provide collateral in the form of cash and securities to offset changes in the fair value of the derivatives, including changes in the fair value due to credit risk of the counterparty. As of December 31, 2011 and 2010, the balance of collateral held by the Bancorp for derivative assets was $1.2 billion and $903 million, respectively. The credit component negatively impacting the fair value of derivative assets associated with customer accommodation contracts as of December 31, 2011 and 2010 was $28 million and $41 million, respectively.
In measuring the fair value of derivative liabilities, the Bancorp considers its own credit risk, taking into consideration collateral
maintenance requirements of certain derivative counterparties and the duration of instruments with counterparties that do not require collateral maintenance. When necessary, the Bancorp primarily posts collateral in the form of cash and securities to offset changes in fair value of the derivatives, including changes in fair value due to the Bancorps credit risk. As of December 31, 2011 and 2010, the balance of collateral posted by the Bancorp for derivative liabilities was $788 million and $680 million, respectively. Certain of the Bancorps derivative liabilities contain credit-risk related contingent features that could result in the requirement to post additional collateral upon the occurrence of specified events. As of December 31, 2011, the fair value of the additional collateral that could be required to be posted as a result of the credit-risk related contingent features being triggered was not material to the Bancorps Consolidated Financial Statements. The posting of collateral has been determined to remove the need for consideration of credit risk. As a result, the Bancorp determined that the impact of the Bancorps credit risk to the valuation of its derivative liabilities was immaterial to the Bancorps Consolidated Financial Statements.
The Bancorp holds certain derivative instruments that qualify for hedge accounting treatment and are designated as either fair value hedges or cash flow hedges. Derivative instruments that do not qualify for hedge accounting treatment, or for which hedge accounting is not established, are held as free-standing derivatives. All customer accommodation derivatives are held as free-standing derivatives.
The fair value of derivative instruments is presented on a gross basis, even when the derivative instruments are subject to master netting arrangements. Derivative instruments with a positive fair value are reported in other assets in the Consolidated Balance Sheets while derivative instruments with a negative fair value are reported in other liabilities in the Consolidated Balance Sheets. Cash collateral payables and receivables associated with the derivative instruments are not added to or netted against the fair value amounts.
108 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables reflect the notional amounts and fair values for all derivative instruments included in the Consolidated Balance Sheets as of:
Fair Value | ||||||||||||
Notional | Derivative | Derivative | ||||||||||
December 31, 2011 ($ in millions) | Amount | Assets | Liabilities | |||||||||
Qualifying hedging instruments |
||||||||||||
Fair value hedges: |
||||||||||||
Interest rate swaps related to long-term debt |
$ | 4,080 | 662 | - | ||||||||
Total fair value hedges |
662 | - | ||||||||||
Cash flow hedges: |
||||||||||||
Interest rate floors related to C&I loans |
1,500 | 91 | - | |||||||||
Interest rate swaps related to C&I loans |
1,500 | 59 | - | |||||||||
Interest rate caps related to long-term debt |
500 | - | - | |||||||||
Interest rate swaps related to long-term debt |
250 | - | 5 | |||||||||
Total cash flow hedges |
150 | 5 | ||||||||||
Total derivatives designated as qualifying hedging instruments |
812 | 5 | ||||||||||
Derivatives not designated as qualifying hedging instruments |
||||||||||||
Free-standing derivativesrisk management and other business purposes |
||||||||||||
Interest rate contracts related to MSRs |
3,077 | 187 | - | |||||||||
Forward contracts related to held for sale mortgage loans |
5,705 | 8 | 54 | |||||||||
Interest rate swaps related to long-term debt |
311 | 1 | 3 | |||||||||
Put options associated with sale of the processing business |
978 | - | 1 | |||||||||
Stock warrants associated with sale of the processing business |
223 | 111 | - | |||||||||
Swap associated with the sale of Visa, Inc. Class B shares |
436 | - | 78 | |||||||||
Total free-standing derivativesrisk management and other business purposes |
307 | 136 | ||||||||||
Free-standing derivativescustomer accommodation: |
||||||||||||
Interest rate contracts for customers |
30,000 | 774 | 795 | |||||||||
Interest rate lock commitments |
3,835 | 33 | 1 | |||||||||
Commodity contracts |
2,074 | 134 | 130 | |||||||||
Foreign exchange contracts |
17,909 | 294 | 275 | |||||||||
Derivative instruments related to equity linked CDs |
34 | 2 | 2 | |||||||||
Total free-standing derivativescustomer accommodation |
1,237 | 1,203 | ||||||||||
Total derivatives not designated as qualifying hedging instruments |
1,544 | 1,339 | ||||||||||
Total |
$ | 2,356 | 1,344 |
Fifth Third Bancorp |
109 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value | ||||||||||||
Notional | Derivative | Derivative | ||||||||||
December 31, 2010 ($ in millions) | Amount | Assets | Liabilities | |||||||||
Qualifying hedging instruments |
||||||||||||
Fair value hedges: |
||||||||||||
Interest rate swaps related to long-term debt |
$ | 4,355 | 442 | - | ||||||||
Total fair value hedges |
442 | - | ||||||||||
Cash flow hedges: |
||||||||||||
Interest rate floors related to C&I loans |
1,500 | 153 | - | |||||||||
Interest rate swaps related to C&I loans |
3,000 | 8 | - | |||||||||
Interest rate caps related to long-term debt |
1,500 | 4 | - | |||||||||
Interest rate swaps related to long-term debt |
1,190 | - | 31 | |||||||||
Total cash flow hedges |
165 | 31 | ||||||||||
Total derivatives designated as qualifying hedging instruments |
607 | 31 | ||||||||||
Derivatives not designated as qualifying hedging instruments |
||||||||||||
Free-standing derivativesrisk management and other business purposes |
||||||||||||
Interest rate contracts related to MSRs |
12,477 | 141 | 81 | |||||||||
Forward contracts related to held for sale mortgage loans |
6,389 | 90 | 14 | |||||||||
Interest rate swaps related to long-term debt |
173 | 3 | 1 | |||||||||
Foreign exchange contracts for trading purposes |
2,494 | 4 | 4 | |||||||||
Put options associated with sale of the processing business |
769 | - | 8 | |||||||||
Stock warrants associated with sale of the processing business |
175 | 79 | - | |||||||||
Swap associated with the sale of Visa, Inc. Class B shares |
363 | - | 18 | |||||||||
Total free-standing derivativesrisk management and other business purposes |
317 | 126 | ||||||||||
Free-standing derivativescustomer accommodation: |
||||||||||||
Interest rate contracts for customers |
26,817 | 701 | 735 | |||||||||
Interest rate lock commitments |
1,772 | 9 | 9 | |||||||||
Commodity contracts |
1,878 | 99 | 92 | |||||||||
Foreign exchange contracts |
17,998 | 339 | 319 | |||||||||
Derivative instruments related to equity linked CDs |
70 | 2 | 2 | |||||||||
Total free-standing derivativescustomer accommodation |
1,150 | 1,157 | ||||||||||
Total derivatives not designated as qualifying hedging instruments |
1,467 | 1,283 | ||||||||||
Total |
$ | 2,074 | 1,314 |
110 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Hedges
The Bancorp may enter into interest rate swaps to convert its fixed-rate funding to floating-rate. Decisions to convert fixed-rate funding to floating are made primarily through consideration of the asset/liability mix of the Bancorp, the desired asset/liability sensitivity and interest rate levels. As of December 31, 2011 and 2010 certain interest rate swaps met the criteria required to qualify for the shortcut method of accounting. Based on this shortcut method of accounting treatment, no ineffectiveness is assumed. For interest rate swaps that do not meet the shortcut requirements, an assessment of hedge effectiveness using regression analysis was performed and such swaps were accounted for using the long-haul
method. The long-haul method requires a quarterly assessment of hedge effectiveness and measurement of ineffectiveness. For interest rate swaps accounted for as a fair value hedge using the long-haul method, ineffectiveness is the difference between the changes in the fair value of the interest rate swap and changes in fair value of the related hedged item attributable to the risk being hedged. The ineffectiveness on interest rate swaps hedging fixed-rate funding is reported within interest expense in the Consolidated Statements of Income. The following table reflects the change in fair value of interest rate contracts, designated as fair value hedges, as well as the change in fair value of the related hedged items attributable to the risk being hedged, included in the Consolidated Statements of Income:
For the year ended December 31 ($ in millions) |
Consolidated Statements
of Income Caption |
2011 | 2010 | 2009 | ||||||||||
Interest rate contracts: |
||||||||||||||
Change in fair value of interest rate swaps hedging long-term debt |
Interest on long-term debt | $ | 220 | 167 | (548 | ) | ||||||||
Change in fair value of hedged long-term debt |
Interest on long-term debt | (227 | ) | (168 | ) | 538 | ||||||||
Change in fair value of interest rate swaps hedging time deposits |
Interest on deposits | - | 6 | 4 | ||||||||||
Change in fair value of hedged time deposits |
Interest on deposits | - | (6 | ) | (3 | ) |
Cash Flow Hedges
The Bancorp may enter into interest rate swaps to convert floating-rate assets and liabilities to fixed rates or to hedge certain forecasted transactions. The assets or liabilities may be grouped in circumstances where they share the same risk exposure for which the Bancorp desired to hedge. The Bancorp may also enter into interest rate caps and floors to limit cash flow variability of floating rate assets and liabilities. As of December 31, 2011, all hedges designated as cash flow hedges are assessed for effectiveness using regression analysis. Ineffectiveness is generally measured as the amount by which the cumulative change in the fair value of the hedging instrument exceeds the present value of the cumulative change in the hedged items expected cash flows attributable to the risk being hedged. Ineffectiveness is reported within other noninterest income in the Consolidated Statements of Income. The effective portion of the cumulative gains or losses on cash flow hedges are reported within accumulated other comprehensive income and are reclassified from accumulated other comprehensive income to current period earnings when the forecasted transaction affects earnings.
Reclassified gains and losses on interest rate contracts related to commercial and industrial loans are recorded within interest
income while reclassified gains and losses on interest rate contracts related to debt are recorded within interest expense in the Consolidated Statements of Income. As of December 31, 2011 and 2010, $80 million and $67 million, respectively, of deferred gains, net of tax, on cash flow hedges were recorded in accumulated other comprehensive income in the Consolidated Balance Sheets. As of December 31, 2011, $70 million in net deferred gains, net of tax, recorded in accumulated other comprehensive income are expected to be reclassified into earnings during the next twelve months. During 2011, $11 million of losses were reclassified from accumulated other comprehensive income into noninterest expense as it was determined that the original forecasted transaction was no longer probable of occurring by the end of the originally specified time period or within the additional period of time as defined by U.S. GAAP. During 2010, there were no gains or losses reclassified into earnings associated with the discontinuance of cash flow hedges because it was probable that the original forecasted transaction would not occur.
The following table presents the net gains (losses) recorded in the Consolidated Statements of Income and accumulated other comprehensive income in the Consolidated Statements of Changes in Equity relating to derivative instruments designated as cash flow hedges.
For the year ended December 31 ($ in millions) | 2011 | 2010 | 2009 | |||||||||
Amount of net gain recognized in OCI |
$ | 89 | 2 | 75 | ||||||||
Amount of net gain reclassified from OCI into net income |
69 | 60 | 49 | |||||||||
Amount of ineffectiveness recognized in other noninterest income |
1 | 6 | (1 | ) |
Free-Standing Derivative Instruments Risk Management and Other Business Purposes
As part of its overall risk management strategy relative to its mortgage banking activity, the Bancorp may enter into various free-standing derivatives (principal-only swaps, interest rate swaptions, interest rate floors, mortgage options, TBAs and interest rate swaps) to economically hedge changes in fair value of its largely fixed-rate MSR portfolio. Principal-only swaps hedge the mortgage-LIBOR spread because these swaps appreciate in value as a result of tightening spreads. Principal-only swaps also provide prepayment protection by increasing in value when prepayment speeds increase, as opposed to MSRs that lose value in a faster prepayment environment. Receive fixed/pay floating interest rate swaps and swaptions increase in value when interest rates do not increase as quickly as expected.
The Bancorp enters into forward contracts and mortgage options to economically hedge the change in fair value of certain residential mortgage loans held for sale due to changes in interest rates. The Bancorp may also enter into forward swaps to economically hedge the change in fair value of certain commercial mortgage loans held for sale due to changes in interest rates. Interest rate lock commitments issued on residential mortgage loan commitments that will be held for sale are also considered free-standing derivative instruments and the interest rate exposure on these commitments is economically hedged primarily with forward contracts. Revaluation gains and losses from free-standing derivatives related to mortgage banking activity are recorded as a component of mortgage banking net revenue in the Consolidated Statements of Income.
Fifth Third Bancorp |
111 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additionally, the Bancorp may enter into free-standing derivative instruments (options, swaptions and interest rate swaps) in order to minimize significant fluctuations in earnings and cash flows caused by interest rate and prepayment volatility. The gains and losses on these derivative contracts are recorded within other noninterest income in the Consolidated Statements of Income.
In conjunction with the sale of the processing business in 2009, the Bancorp received warrants and issued put options, which are accounted for as free-standing derivatives. Refer to Note 27 for further discussion of significant inputs and assumptions used in the valuation of these instruments.
In conjunction with the sale of Visa, Inc. Class B shares in 2009, the Bancorp entered into a total return swap in which the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Class B shares into Class A shares. This total return swap is accounted for as a free-standing derivative. See Note 27 for further discussion of
significant inputs and assumptions used in the valuation of this instrument.
The Bancorp entered into certain derivatives (forwards, futures and options) related to its foreign exchange business. These derivative contracts were not designated against specific assets or liabilities or to forecasted transactions. Therefore, these instruments did not qualify for hedge accounting. The Bancorp economically hedged the exposures related to these derivative contracts by entering into offsetting contracts with approved, reputable, independent counterparties with substantially similar terms. Revaluation gains and losses on these foreign currency derivative contracts were recorded within other noninterest income in the Consolidated Statements of Income. The net gains (losses) recorded in the Consolidated Statements of Income relating to free-standing derivative instruments used for risk management and other business purposes are summarized in the following table:
For the year ended December 31 ($ in millions) |
Consolidated Statements of
Income Caption |
2011 | 2010 | 2009 | ||||||||||||
Interest rate contracts: |
||||||||||||||||
Forward contracts related to residential mortgage loans held for sale |
Mortgage banking net revenue | $ | (128 | ) | 40 | 55 | ||||||||||
Interest rate swaps and swaptions related to MSR portfolio |
Mortgage banking net revenue | 345 | 109 | 41 | ||||||||||||
Interest rate swaps related to long-term debt |
Other noninterest income | 7 | 2 | 3 | ||||||||||||
Foreign exchange contracts: |
||||||||||||||||
Foreign exchange contracts for trading purposes |
Other noninterest income | - | - | (10 | ) | |||||||||||
Equity contracts: |
||||||||||||||||
Warrants associated with sale of the processing business |
Other noninterest income | 32 | 4 | 13 | ||||||||||||
Put options associated with sale of the processing business |
Other noninterest income | 7 | 1 | 5 | ||||||||||||
Swap associated with sale of Visa, Inc. Class B shares |
Other noninterest income | (83 | ) | (19 | ) | (2 | ) |
Free-Standing Derivative Instruments Customer Accommodation
The majority of the free-standing derivative instruments the Bancorp enters into are for the benefit of its commercial customers. These derivative contracts are not designated against specific assets or liabilities on the Bancorps Consolidated Balance Sheets or to forecasted transactions and, therefore, do not qualify for hedge accounting. These instruments include foreign exchange derivative contracts entered into for the benefit of commercial customers involved in international trade to hedge their exposure to foreign currency fluctuations and commodity contracts to hedge such items as natural gas and various other derivative contracts. The Bancorp may economically hedge significant exposures related to these derivative contracts entered into for the benefit of customers by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms. The Bancorp hedges its interest rate exposure on commercial customer transactions by executing offsetting swap agreements with primary dealers. Revaluation gains and losses on interest rate, foreign exchange, commodity and other commercial customer derivative contracts are recorded as a component of corporate banking revenue in the Consolidated Statements of Income.
The Bancorp previously offered its customers an equity-linked certificate of deposit that had a return linked to equity indices. Under U.S. GAAP, a certificate of deposit that pays
interest based on changes on an equity index is a hybrid instrument that requires separation into a host contract (the certificate of deposit) and an embedded derivative contract (written equity call option). The Bancorp entered into offsetting derivative contracts to economically hedge the exposure taken through the issuance of equity-linked certificates of deposit. Both the embedded derivative and the derivative contract entered into by the Bancorp are recorded as free-standing derivatives and recorded at fair value with offsetting gains and losses recognized within noninterest income in the Consolidated Statements of Income. The Bancorp enters into risk participation agreements, under which the Bancorp assumes credit exposure relating to certain underlying interest rate derivative contracts. The Bancorp only enters into these risk participation agreements in instances in which the Bancorp has participated in the loan that the underlying interest rate derivative contract was designed to hedge. The Bancorp will make payments under these agreements if a customer defaults on its obligation to perform under the terms of the underlying interest rate derivative contract. As of December 31, 2011 and 2010 the total notional amount of the risk participation agreements was $808 million and $851 million, respectively, and the fair value was a liability of $2 million at December 31, 2011 and $1 million at December 31, 2010, which is included in interest rate contracts for customers. As of December 31, 2011, the risk participation agreements had an average life of 2.5 years.
The Bancorps maximum exposure in the risk participation agreements is contingent on the fair value of the underlying interest rate derivative contracts in an asset position at the time of default. The Bancorp monitors the credit risk associated with the underlying customers in the risk participation agreements through the same risk grading system currently utilized for establishing loss reserves in its loan and lease portfolio.
112 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Risk ratings of the notional amount of risk participation agreements under this risk rating system are summarized in the following table:
At December 31 ($ in millions) | 2011 | 2010 | ||||||
Pass |
$ | 772 | 744 | |||||
Special mention |
14 | 37 | ||||||
Substandard |
18 | 69 | ||||||
Doubtful |
4 | 1 | ||||||
Total |
$ | 808 | 851 |
The net gains (losses) recorded in the Consolidated Statements of Income relating to free-standing derivative instruments used for customer accommodation are summarized in the following table:
For the year ended December 31 ($ in millions) |
Consolidated Statements of
Income Caption |
2011 | 2010 | 2009 | ||||||||||
Interest rate contracts: |
||||||||||||||
Interest rate contracts for customers (contract revenue) |
Corporate banking revenue | $ | 28 | 26 | 21 | |||||||||
Interest rate contracts for customers (credit losses) |
Other noninterest expense | (13 | ) | (22 | ) | (33 | ) | |||||||
Interest rate contracts for customers (credit portion of fair value adjustment) |
Other noninterest expense | 13 | (1 | ) | (7 | ) | ||||||||
Interest rate lock commitments |
Mortgage banking net revenue | 206 | 187 | 129 | ||||||||||
Commodity contracts: |
||||||||||||||
Commodity contracts for customers (contract revenue) |
Corporate banking revenue | 8 | 8 | 6 | ||||||||||
Commodity contracts for customers (credit portion of fair value adjustment) |
Other noninterest expense | - | - | 2 | ||||||||||
Foreign exchange contracts: |
||||||||||||||
Foreign exchange contractscustomers (contract revenue) |
Corporate banking revenue | 47 | 63 | 76 | ||||||||||
Foreign exchange contractscustomers (credit portion of fair value adjustment) |
Other noninterest expense | 1 | (1 | ) | 2 |
The following table provides the components of other assets included in the Consolidated Balance Sheets as of December 31:
($ in millions) | 2011 | 2010 | ||||||
Derivative instruments |
$ | 2,356 | 2,074 | |||||
Bank owned life insurance |
1,742 | 1,715 | ||||||
Partnership investments |
1,413 | 1,367 | ||||||
Accounts receivable and drafts-in-process |
955 | 1,023 | ||||||
Bankers acceptances |
726 | 369 | ||||||
Investment in Vantiv Holding, LLC |
576 | 522 | ||||||
OREO and other repossessed personal property |
442 | 532 | ||||||
Accrued interest receivable |
382 | 413 | ||||||
Prepaid expenses |
84 | 133 | ||||||
Income tax receivable |
5 | 1 | ||||||
Deferred tax asset |
- | 13 | ||||||
Other |
182 | 238 | ||||||
Total |
$ | 8,863 | 8,400 |
The Bancorp incorporates the utilization of derivative instruments as part of its overall risk management strategy to reduce certain risks related to interest rate, prepayment and foreign currency volatility. The Bancorp also holds derivatives instruments for the benefit of its commercial customers. For further information on derivative instruments, see Note 13.
The Bancorp purchases life insurance policies on the lives of certain directors, officers and employees and is the owner and beneficiary of the policies. See Note 1 for further information. Certain BOLI policies have a stable value agreement through either a large, well-rated bank or multi-national insurance carrier that provides limited cash surrender value protection from declines in the value of each policys underlying investments. During 2009, the value of the investments underlying one of the Bancorps BOLI policies continued to decline due to disruptions in the credit markets, widening of credit spreads between U.S. treasuries/swaps versus municipal bonds and bank trust preferred securities, and illiquidity in the asset-backed securities market. These factors caused the cash surrender value to decline further beyond the protection provided by the stable value agreement. As a result of exceeding the cash surrender value protection, the Bancorp recorded charges of $10 million during 2009 to reflect declines
in the policys cash surrender value. The cash surrender value of this BOLI policy was $237 million at December 31, 2009.
During 2009, the Bancorp notified the related insurance carrier of its intent to surrender this BOLI policy. Due to the fact the Bancorp had not yet decided the manner in which it would surrender the policy, which may have impacted the cash surrender value protection, and because of ongoing developments in litigation with the insurance carrier, the Bancorp recognized charges of $43 million in 2009 to fully reserve for the potential loss of the cash surrender value protection associated with the policy. In addition, the Bancorp recognized tax benefits of $106 million in 2009 related to losses recorded in prior periods on this policy that are now expected to be tax deductible.
During 2010, an agreement to settle the claims with the insurance carrier was reached among the parties to the litigation. As a result of this settlement and the corresponding receipt of settlement proceeds from the insurance carrier in the third quarter of 2010, the Bancorp recorded $152 million in other noninterest income and $25 million associated with legal fees related to the settlement in other noninterest expense in the Bancorps Consolidated Statements of Income.
Fifth Third Bancorp |
113 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CDC, a wholly owned subsidiary of the Bancorp, was created to invest in projects to create affordable housing, revitalize business and residential areas, and preserve historic landmarks, which are included above in partnership investments. The Bancorp has determined that these entities are VIEs and the Bancorps investments represent variable interests. See Note 11 for further information.
A bankers acceptance is created when a time draft is drawn on and accepted by a bank. By accepting the draft, the bank assumes the credit risk of the underlying obligor, usually the buyer or the seller of goods or their bank, and makes an unconditional promise to pay the holder of the draft the amount
of the draft at maturity, which is generally less than one year from the date of the draft. When the Bancorp is the accepting bank, it records the full amount of the acceptance in both other assets and other liabilities on the Consolidated Balance Sheets.
On June 30, 2009, the Bancorp sold an approximate 51% interest in Vantiv Holding, LLC (formerly FTPS) to Advent International. The Bancorps remaining approximate 49% ownership in Vantiv Holding, LLC is accounted for under the equity method of accounting.
OREO represents property acquired through foreclosure or other proceedings and is carried at the lower of cost or fair value, less costs to sell. See Note 1 for further information.
Borrowings with original maturities of one year or less are classified as short term, and include federal funds purchased and other short-term borrowings. Federal funds purchased are excess balances in reserve accounts held at Federal Reserve Banks that the Bancorp purchased from other member banks on an overnight basis. Other short-term borrowings include
securities sold under repurchase agreements, derivative collateral, FHLB advances and other borrowings with original maturities of one year or less.
A summary of short-term borrowings and weighted-average rates follows:
2011 | 2010 | |||||||||||||||
($ in millions) | Amount | Rate | Amount | Rate | ||||||||||||
As of December 31: |
||||||||||||||||
Federal funds purchased |
$ | 346 | 0.04 | % | $ | 279 | 0.18 | % | ||||||||
Other short-term borrowings |
3,239 | 0.09 | 1,574 | 0.14 | ||||||||||||
Average for the years ended December 31: |
||||||||||||||||
Federal funds purchased |
$ | 345 | 0.11 | % | $ | 291 | 0.17 | % | ||||||||
Other short-term borrowings |
2,777 | 0.12 | 1,635 | 0.21 | ||||||||||||
Maximum month-end balance for the years ended December 31: |
||||||||||||||||
Federal funds purchased |
$ | 451 | $ | 422 | ||||||||||||
Other short-term borrowings |
4,894 | 1,975 |
114 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table is a summary of the Bancorps long-term borrowings at December 31:
($ in millions) | Maturity | Interest Rate | 2011 | 2010 | ||||||||||||
Parent Company |
||||||||||||||||
Senior: |
||||||||||||||||
Fixed-rate notes |
2013 | 6.25% | $779 | 797 | ||||||||||||
Fixed-rate notes |
2016 | 3.625% | 1,000 | - | ||||||||||||
Subordinated: (b) |
||||||||||||||||
Floating-rate notes |
2016 | 0.98% | 250 | 250 | ||||||||||||
Fixed-rate notes |
2017 | 5.45% | 589 | 613 | ||||||||||||
Fixed-rate notes |
2018 | 4.50% | 581 | 584 | ||||||||||||
Fixed-rate notes |
2038 | 8.25% | 1,348 | 1,034 | ||||||||||||
Junior subordinated: (a) |
||||||||||||||||
Fixed-rate notes (c) |
2067 | 6.50% | 750 | 750 | ||||||||||||
Fixed-rate notes (c) |
2067 | 7.25% | 594 | 613 | ||||||||||||
Fixed-rate notes (c) |
2067 | 7.25% | 894 | 907 | ||||||||||||
Fixed-rate notes (c) |
- | 400 | ||||||||||||||
Structured repurchase agreements: |
||||||||||||||||
Floating-rate notes |
2013 | 2.49% | 250 | - | ||||||||||||
Floating-rate notes |
2013 | 2.54% | 125 | - | ||||||||||||
Subsidiaries |
||||||||||||||||
Senior: |
||||||||||||||||
Floating-rate bank notes |
2013 | 0.58% | 500 | 499 | ||||||||||||
Subordinated: (b) |
||||||||||||||||
Fixed-rate bank notes |
2015 | 4.75% | 561 | 561 | ||||||||||||
Junior subordinated: (a) |
||||||||||||||||
Floating-rate bank notes |
- | 51 | ||||||||||||||
Floating-rate debentures |
- | 67 | ||||||||||||||
Floating-rate debentures |
2035 | 1.97% -2.24% | 62 | 62 | ||||||||||||
FHLB advances |
2012-2041 | 0.05% -8.34% | 1,055 | 1,561 | ||||||||||||
Notes associated with consolidated VIEs: |
||||||||||||||||
Automobile loan securitizations: |
||||||||||||||||
Fixed-rate notes |
2013 | 4.81% | 2 | 99 | ||||||||||||
Floating-rate notes |
2013-2015 | 0.81% -2.25% | 169 | 460 | ||||||||||||
Home equity securitization: |
||||||||||||||||
Floating-rate notes |
2023 | 0.50% | 22 | 133 | ||||||||||||
Other |
2012-2039 | Varies | 151 | 117 | ||||||||||||
Total |
$9,682 | 9,558 |
(a) | Qualify as Tier I capital for regulatory capital purposes. See Note 28 for further information. |
(b) | Qualify as Tier II capital for regulatory capital purposes. |
(c) | Future periods of debt are floating. |
The Bancorp pays down long-term debt in accordance with contractual terms over maturity periods summarized in the above table. Contractually obligated payments for long-term debt as of December 31, 2011 are due over the following periods: $8 million in 2012; $1.7 billion in 2013, $18 million in 2014, $738 million in 2015, $2.3 billion in 2016 and $5.0 billion after 2016.
At December 31, 2011, the Bancorp had outstanding principal balances of $9.0 billion, net discounts of $18 million and additions for mark-to-market adjustments on its hedged debt of $662 million. At December 31, 2010, the Bancorp had outstanding principal balances of $9.1 billion, net discounts of $15 million and additions for mark-to-market adjustments on its hedged debt of $439 million. The Bancorp was in compliance with all debt covenants at December 31, 2011.
PARENT COMPANY LONG-TERM BORROWINGS
Senior Notes
In April 2008, the Bancorp issued $750 million of senior notes to third party investors. The senior notes bear a fixed rate of interest of 6.25% per annum. The Bancorp entered into interest rate swaps to convert $675 million to floating rate and, at December 31, 2011 and 2010,
paid a rate of 2.84% and 2.70%, respectively. The notes are unsecured, senior obligations of the Bancorp. Payment of the full principal amount of the notes will be due upon maturity on May 1, 2013. The notes are not subject to redemption at the Bancorps option at any time prior to maturity.
On January 25, 2011, the Bancorp issued $1.0 billion of senior notes to third party investors. The Senior Notes bear a fixed rate of interest of 3.625% per annum. The Bancorp entered into interest rate swaps to convert $500 million to floating rate and, at December 31, 2011, paid a rate of 0.26%. The notes are unsecured, senior obligations of the Bancorp. Payment of the full principal amounts of the notes is due upon maturity on January 25, 2016. The notes are not subject to redemption at the Bancorps option at any time prior to maturity
Subordinated Debt
The subordinated floating-rate notes due in 2016 pay interest at three-month LIBOR plus 42 bps. The Bancorp has entered into interest rate swaps to convert its subordinated fixed-rate notes due in 2017 and 2018 to floating-rate, which pay interest at three-month LIBOR plus 42 bps and 25 bps, respectively, at December 31, 2011. The rates paid on the swaps hedging the subordinated floating-rate
Fifth Third Bancorp |
115 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
notes due in 2017 and 2018 were 0.82% and 0.78%, respectively, at December 31, 2011. Of the $1.0 billion in 8.25% subordinated fixed rate notes due in 2038, $705 million were subsequently hedged to floating and paid a rate of 3.58% at December 31, 2011.
Junior Subordinated Debt
The 6.50% junior subordinated notes due in 2067, with a carrying and outstanding principal balance of $750 million at December 31, 2011, pay a fixed rate of 6.50% until 2017, then convert to a floating rate at three-month LIBOR plus 137 bps until 2047. Thereafter, the notes pay a floating rate at one-month LIBOR plus 237 bps. Junior subordinated notes due in 2067, with a carrying amount of $594 million and an outstanding principal balance of $575 million at December 31, 2011, pay a fixed rate of 7.25% until 2057, then convert to a floating rate at three-month LIBOR plus 257 bps. The Bancorp entered into interest rate swaps to convert $500 million of the fixed-rate debt into a floating rate. At December 31, 2011, the weighted-average rate paid on these swaps was 1.18%. Junior subordinated notes due in 2067, with a carrying amount of $894 million and an outstanding principal balance of $863 million at December 31, 2011, pay a fixed rate of 7.25% until 2057, then convert to a floating rate at three-month LIBOR plus 303 bps thereafter. The Bancorp entered into interest rate swaps to convert $700 million of the fixed-rate debt into a floating rate. At December 31, 2011, the weighted-average rate paid on the swaps was 1.61%. The obligations were issued to Fifth Third Capital Trusts IV, V and VI, respectively. The Bancorp has fully and unconditionally guaranteed all obligations under the trust preferred securities issued by Fifth Third Capital Trusts IV, V and VI. In addition, the Bancorp entered into replacement capital covenants for the benefit of holders of long-term debt senior to the junior subordinated notes that limits, subject to certain restrictions, the Bancorps ability to redeem the junior subordinated notes prior to their scheduled maturity. In November 2010, the Bancorp amended the debt covenants to remove a requirement to issue replacement capital securities at least 180 days prior to calling the trust preferred securities.
Under recent regulatory developments, certain of the Bancorps trust preferred securities are callable at par as of certain dates, or may become callable at par under certain circumstances. On March 18, 2011, the Bancorp announced that the Federal Reserve Board did not object to the Bancorps capital plan submitted under the Federal Reserves 2011 CCAR. Pursuant to this plan, the Bancorp redeemed $452 million of certain trust preferred securities, at par, classified as long-term debt during 2011. The trust preferred securities redeemed related to the Fifth Third Capital Trust VII, First National Bankshares Statutory Trust I and R&G Capital Trust II, LLT. As a result of these redemptions the Bancorp recorded a $6 million gain on the extinguishment within other noninterest expense in the Consolidated Statements of Income. All redemptions are subject to certain conditions and generally require approval by the FRB.
Structured Repurchase Agreements
In order to meet its funding obligations, the Bancorp enters into repurchase agreements with customers, which are accounted for as collateralized financing transactions, where excess customer funds are borrowed overnight by the Bancorp, and later repurchased by the customers. At December 31, 2011, the total amount of repurchase agreements outstanding was $375 million.
SUBSIDIARY LONG-TERM BORROWINGS
Senior and Subordinated Debt
Medium-term senior notes and subordinated bank notes with maturities ranging from one year to 30 years can be issued by the Bancorps banking subsidiary, of which $1.0 billion was outstanding at December 31, 2011 and 2010 with $19.0 billion available for future issuance. The senior floating-rate bank notes due in 2013 pay a floating rate at three-month LIBOR plus 11 bps. For the subordinated fixed-rate bank notes due in 2015, the Bancorp entered into interest rate swaps to convert the fixed-rate debt into floating rate. At December 31, 2011, the weighted-average rate paid on the swaps was 0.53%. In addition to the aforementioned redemption of trust preferred securities, the Bancorp redeemed certain trust preferred securities of $65 million through the remainder of 2011, which related to the R&G Crown Cap Trust IV, the R&G Crown Cap Trust I and First National Bankshares Statutory Trust II. As a result of these redemptions, the Bancorp recorded a $1 million gain on the extinguishment within other noninterest expense in the Consolidated Statements of Income.
Junior Subordinated Debt
The junior subordinated floating-rate bank notes due in 2035 were assumed by a subsidiary of the Bancorp as part of the acquisition of First Charter in May 2008. The obligation was issued to First Charter Capital Trust I and II, respectively. The notes of First Charter Capital Trust I and II pay floating at three-month LIBOR plus 169 bps and 142 bps, respectively. The Bancorp has fully and unconditionally guaranteed all obligations under the acquired trust preferred securities issued by First Charter Capital Trust I and II. As previously mentioned, in the junior subordinated debt section of the parent company long-term borrowings, the FRB did not object to the Bancorps capital plan under the Federal Reserves 2011 CCAR and therefore the Bancorp redeemed $65 million of trust preferred securities previously acquired by a Bancorp subsidiary, at par, during 2011.
FHLB Advances
At December 31, 2011, FHLB advances have rates ranging from 0.05% to 8.34%, with interest payable monthly. The advances are secured by certain residential mortgage loans and securities totaling $17.5 billion. At December 31, 2010, $500 million of FHLB advances were floating-rate. The Bancorp entered into an interest rate swap with a notional value of $500 million to convert the floating-rate advances to a fixed rate of 2.63%. During the third quarter of 2011, the Bancorp terminated a $500 million FHLB advance and incurred a termination fee of $2 million within other noninterest expense in the Consolidated Statements of Income. In November 2010, the Bancorp repaid a floating-rate advance of $1.0 billion due in 2012 and terminated the interest rate cap associated with this advance. The Bancorp recognized a gain on this extinguishment of debt of $1 million. The $1.1 billion in remaining advances mature as follows: $3 million in 2014, $5 million in 2015, $1 billion in 2016, and $43 million thereafter.
Notes Associated with Consolidated VIEs
As previously discussed in Note 11, the Bancorp was determined to be the primary beneficiary of VIEs associated with certain automobile loan and home equity securitizations and, effective January 1, 2010, these VIEs have been consolidated in the Bancorps Consolidated Financial Statements. As of December 31, 2011, the outstanding long-term debt associated with the automobile loan securitizations and home equity securitization was $171 million and $22 million, respectively. Third-party holders of this debt do not have recourse to the general assets of the Bancorp.
116 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES
The Bancorp, in the normal course of business, enters into financial instruments and various agreements to meet the financing needs of its customers. The Bancorp also enters into certain transactions and agreements to manage its interest rate and prepayment risks, provide funding, equipment and locations for its operations and invest in its communities. These instruments and agreements involve, to varying degrees, elements of credit risk, counterparty risk and market risk in excess of the amounts recognized in the Bancorps Consolidated Balance Sheets. The creditworthiness of counterparties for all instruments and agreements is evaluated on a case-by-case basis in accordance with the Bancorps credit policies. The Bancorps significant commitments, contingent liabilities and guarantees in excess of the amounts recognized in the Consolidated Balance Sheets are discussed in further detail below:
Commitments
The Bancorp has certain commitments to make future payments under contracts. The following table reflects a summary of significant commitments as of December 31:
($ in millions) | 2011 | 2010 | ||||||
Commitments to extend credit |
$ | 47,719 | 43,677 | |||||
Forward contracts to sell mortgage loans |
5,705 | 6,389 | ||||||
Letters of credit |
4,744 | 5,516 | ||||||
Noncancelable lease obligations |
851 | 869 | ||||||
Capital commitments for private equity investments |
166 | 193 | ||||||
Purchase obligations |
115 | 64 | ||||||
Capital expenditures |
41 | 48 | ||||||
Capital lease obligations |
26 | 32 |
Commitments to extend credit
Commitments to extend credit are agreements to lend, typically having fixed expiration dates or other termination clauses that may require payment of a fee. Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. The Bancorp is exposed to credit risk in the event of nonperformance by the counterparty for the amount of the contract. Fixed-rate commitments are also subject to market risk resulting from fluctuations in interest rates and the Bancorps exposure is limited to the replacement value of those commitments. As of December 31, 2011 and 2010, the Bancorp
had a reserve for unfunded commitments totaling $181 million and $227 million, respectively, included in other liabilities in the Consolidated Balance Sheets. The Bancorp monitors the credit risk associated with commitments to extend credit using the same risk rating system utilized within its loan and lease portfolio. Risk ratings under this risk rating system are summarized in the following table as of December 31:
($ in millions) | 2011 | 2010 | ||||||
Pass |
$ | 46,825 | 42,326 | |||||
Special mention |
480 | 556 | ||||||
Substandard |
403 | 758 | ||||||
Doubtful |
11 | 37 | ||||||
Total |
$ | 47,719 | 43,677 |
Letters of credit
Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party and expire as summarized in the following table as of December 31, 2011:
($ in millions) | ||||
Less than 1 year (a) |
$ | 1,940 | ||
1 - 5 years (a) |
2,665 | |||
Over 5 years |
139 | |||
Total |
$ | 4,744 |
(a) | Includes $75 and $3 issued on behalf of commercial customers to facilitate trade payments in U.S. dollars and foreign currencies which expire less than one year and between one and five years, respectively. |
Standby letters of credit accounted for 98% of total letters of credit at December 31, 2011 compared to 99% at December 31, 2010 and are considered guarantees in accordance with U.S. GAAP. Approximately 54% of the total standby letters of credit were fully secured as of December 31, 2011 and 2010. In the event of nonperformance by the customers, the Bancorp has rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. At December 31, 2011 and 2010 the reserve related to these standby letters of credit was $5 million and $10 million, respectively, included in other liabilities in the Consolidated Balance Sheets. The Bancorp monitors the credit risk associated with letters of credit using the same risk rating system utilized within its loan and lease portfolio.
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Risk ratings under this risk rating system are summarized in the following table as of December 31:
($ in millions) | 2011 | 2010 | ||||||
Pass |
$ | 4,338 | 4,944 | |||||
Special mention |
149 | 193 | ||||||
Substandard |
254 | 360 | ||||||
Doubtful |
2 | 17 | ||||||
Loss |
1 | 2 | ||||||
Total |
$ | 4,744 | 5,516 |
At December 31, 2011 and 2010, the Bancorp had outstanding letters of credit that were supporting certain securities issued as VRDNs. The Bancorp facilitates financing for its commercial customers, which consist of companies and municipalities, by marketing the VRDNs to investors. The VRDNs pay interest to holders at a rate of interest that fluctuates based upon market demand. The VRDNs generally have long-term maturity dates, but can be tendered by the holder for purchase at par value upon proper advance notice. When the VRDNs are tendered, a remarketing agent generally finds another investor to purchase the VRDNs to keep the securities outstanding in the market. As of December 31, 2011 and 2010, FTS acted as the remarketing agent to issuers on $2.9 billion and $3.4 billion, respectively, of VRDNs. As remarketing agent, FTS is responsible for finding purchasers for VRDNs that are put by investors. The Bancorp issues letters of credit, as a credit enhancement, to the VRDNs remarketed by FTS, in addition to $440 million and $563 million in VRDNs remarketed by third parties at December 31, 2011 and 2010, respectively. These letters of credit are included in the total letters of credit balance provided in the previous table. At December 31, 2011, FTS held an immaterial amount of these VRDNs in its portfolio and classified them as trading securities, compared to $1 million at December 31, 2010. In addition, at December 31, 2011, the Bancorp held an immaterial amount of VRDNs which were purchased from the market, through FTS and held in its trading securities portfolio, compared to $105 million at December 31, 2010. For the VRDNs remarketed by third parties, in some cases the remarketing agent has failed to remarket the securities and has instructed the indenture trustee to draw upon $11 million of letters of credit issued by the Bancorp at December 31, 2010. The amount of failed remarketing draws on letters of credit issued by the Bancorp was immaterial at December 31, 2011. The Bancorp recorded these draws as commercial loans in its Consolidated Balance Sheets.
Forward contracts to sell mortgage loans
The Bancorp enters into forward contracts to economically hedge the change in fair value of certain residential mortgage loans held for sale due to changes in interest rates. The outstanding notional amounts of these forward contracts are included in the summary of significant commitments table above for all periods presented.
Noncancelable lease obligations and other commitments
The Bancorps subsidiaries have entered into a number of noncancelable lease agreements. The minimum rental commitments under noncancelable lease agreements are shown in the summary of significant commitments table. The Bancorp has also entered into a limited number of agreements for work related to banking center construction and to purchase goods or services.
Contingent Liabilities
Private mortgage reinsurance
For certain mortgage loans originated by the Bancorp, borrowers may be required to obtain PMI provided by third-party insurers. In some instances, these insurers cede a portion of the PMI premiums to the Bancorp, and the Bancorp provides reinsurance coverage within
a specified range of the total PMI coverage. The Bancorps reinsurance coverage typically ranges from 5% to 10% of the total PMI coverage. The Bancorps maximum exposure in the event of nonperformance by the underlying borrowers is equivalent to the Bancorps total outstanding reinsurance coverage, which was $77 million at December 31, 2011 and $115 million at December 31, 2010. As of December 31, 2011 and 2010, the Bancorp maintained a reserve of $27 million and $42 million, respectively, related to exposures within the reinsurance portfolio which was included in other liabilities in the Consolidated Balance Sheets. During the second quarter of 2009, the Bancorp suspended the practice of providing reinsurance of private mortgage insurance for newly originated mortgage loans. In the third quarter of 2010, the Bancorp allowed one of its third-party insurers to terminate its reinsurance agreement with the Bancorp, resulting in the Bancorp releasing collateral to the insurer in the form of investment securities and other assets with a carrying value of $19 million, and the insurer assuming the Bancorps obligations under the reinsurance agreement, resulting in a decrease to the Bancorps reserve liability of $20 million and decrease in the Bancorps maximum exposure of $53 million. In the second quarter of 2011, the Bancorp allowed one of its third-party insurers to terminate its reinsurance agreement with the Bancorp, resulting in the Bancorp releasing collateral to the insurer in the form of investment securities and other assets with a carrying value of $5 million, and the insurer assuming the Bancorps obligations under the reinsurance agreement, resulting in a decrease to the Bancorps reserve liability of $11 million and decrease in the Bancorps maximum exposure of $27 million.
Legal claims
There are legal claims pending against the Bancorp and its subsidiaries that have arisen in the normal course of business. See Note 18 for additional information regarding these proceedings.
Guarantees
The Bancorp has performance obligations upon the occurrence of certain events under financial guarantees provided in certain contractual arrangements as discussed in the following sections.
Residential mortgage loans sold with representation and warranty provisions
Conforming residential mortgage loans sold to unrelated third parties are generally sold with representation and warranty provisions. A contractual liability arises only in the event of a breach of these representations and warranties and, in general, only when a loss results from the breach. The Bancorp may be required to repurchase any previously sold loan or indemnify (make whole) the investor or insurer for which the representation or warranty of the Bancorp proves to be inaccurate, incomplete or misleading.
The Bancorp establishes a residential mortgage repurchase reserve related to various representations and warranties that reflects managements estimate of losses based on a combination of factors. Such factors incorporate historical investor audit and repurchase demand rates, appeals success rates and historical loss severity. At the time of a loan sale, the Bancorp records a representation and warranty reserve at the estimated fair value of the Bancorps guarantee and continually updates the reserve during the life of the
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loan as losses in excess of the reserve become probable and reasonably estimable. The provision for the estimated fair value of the representation and warranty guarantee arising from the loan sales is recorded as an adjustment to the gain on sale, which is included in other noninterest income at the time of sale. Updates to the reserve are recorded in other noninterest expense. The majority of repurchase demands occur within the first 36 months following origination.
As of December 31, 2011 and 2010, the Bancorp maintained reserves related to these loans sold with representation and warranty provisions totaling $55 million and $85 million, respectively, included in other liabilities on the Consolidated Balance Sheets. The following table summarizes activity in the reserve for representation and warranty provisions:
($ in millions) | 2011 | 2010 | ||||||
Balance, beginning of period |
$ | 85 | 37 | |||||
Net additions to the reserve |
52 | 115 | ||||||
Losses charged against the reserve |
(82 | ) | (67 | ) | ||||
Balance, end of period |
$ | 55 | 85 |
The following table provides a rollforward of unresolved claims by claimant type for the year ended December 31, 2011:
GSE | Private Label | |||||||||||||||
($ in millions) | Units | Dollars | Units | Dollars | ||||||||||||
Balance, beginning of period |
845 | $ | 150 | 71 | $ | 11 | ||||||||||
New demands |
2,050 | 328 | 107 | 22 | ||||||||||||
Loan paydowns/payoffs |
(21 | ) | (3 | ) | (2 | ) | | |||||||||
Resolved claims |
(2,546 | ) | (428 | ) | (67 | ) | (14 | ) | ||||||||
Balance, end of period |
328 | $ | 47 | 109 | $ | 19 |
Residential mortgage loans sold with credit recourse
The Bancorp sold certain residential mortgage loans in the secondary market with credit recourse. In the event of any customer default, pursuant to the credit recourse provided, the Bancorp is required to reimburse the third party. The maximum amount of credit risk in the event of nonperformance by the underlying borrowers is equivalent to the total outstanding balance. In the event of nonperformance, the Bancorp has rights to the underlying collateral value securing the loan. The outstanding balances on these loans sold with credit recourse were $772 million and $916 million at December 31, 2011 and 2010, respectively, and the delinquency rates were 6.7% at December 31, 2011 and 8.7% at December 31, 2010. The Bancorp maintained an estimated credit loss reserve on these loans sold with credit recourse of $17 million at December 31, 2011 and $16 million at December 31, 2010 recorded in other liabilities in the Consolidated Balance Sheets. To determine the credit loss reserve, the Bancorp used an approach that is consistent with its overall approach in estimating credit losses for various categories of residential mortgage loans held in its loan portfolio.
Margin accounts
FTS, a subsidiary of the Bancorp, guarantees the collection of all margin account balances held by its brokerage clearing agent for the benefit of its customers. FTS is responsible for payment to its brokerage clearing agent for any loss, liability, damage, cost or expense incurred as a result of customers failing to comply with margin or margin maintenance calls on all margin accounts. The margin account balance held by the brokerage clearing agent was $14 million at December 31, 2011 and $10 million at December 31, 2010. In the event of any customer default, FTS has rights to the underlying collateral provided. Given the existence of the underlying collateral provided and negligible historical credit losses, the Bancorp does not maintain a loss reserve related to the margin accounts.
Long-term borrowing obligations
The Bancorp had fully and unconditionally guaranteed certain long-term borrowing obligations issued by wholly-owned issuing trust entities of $2.2 billion and $2.9 billion as of December 31, 2011 and 2010. See Note 16 for further information on these long-term borrowing obligations.
Visa litigation
The Bancorp, as a member bank of Visa prior to Visas reorganization and IPO (the IPO) of its Class A common shares in 2008, had certain indemnification obligations pursuant to Visas certificate of incorporation and by-laws and in accordance with their membership agreements. In accordance with Visas by-laws prior to the IPO, the Bancorp could have been required to indemnify Visa for the Bancorps proportional share of losses based on the pre-IPO membership interests. As part of its reorganization and IPO, the Bancorps indemnification obligation was modified to include only certain known litigation (the Covered Litigation) as of the date of the restructuring. This modification triggered a requirement to recognize a $3 million liability for the year ended December 31, 2007 equal to the fair value of the indemnification obligation. Additionally during 2007, the Bancorp recorded $169 million for its share of litigation formally settled by Visa and for probable future litigation settlements. In conjunction with the IPO, the Bancorp received 10.1 million of Visas Class B shares based on the Bancorps membership percentage in Visa prior to the IPO. The Class B shares are not transferable (other than to another member bank) until the later of the third anniversary of the IPO closing or the date which the Covered Litigation has been resolved; therefore, the Bancorps Class B shares were classified in other assets and accounted for at their carryover basis of $0. Visa deposited $3 billion of the proceeds from the IPO into a litigation escrow account, established for the purpose of funding judgments in, or settlements of, the Covered Litigation. If Visas litigation committee determines that the escrow account is insufficient, then Visa will issue additional Class A shares and deposit the proceeds from the sale of the shares into the litigation escrow account. When Visa funds the litigation escrow account, the Class B shares are subject to dilution through an adjustment in the conversion rate of Class B shares into Class A shares. During 2008, the Bancorp recorded additional reserves of $71 million for probable future settlements related to the Covered Litigation and recorded its proportional share of $169 million of the Visa escrow account net against the Bancorps litigation reserve.
During 2009, Visa announced it had deposited an additional $700 million into the litigation escrow account. As a result of this funding, the Bancorp recorded its proportional share of $29 million
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of these additional funds as a reduction to its net Visa litigation reserve liability and a reduction to noninterest expense. Later in 2009, the Bancorp completed the sale of Visa, Inc. Class B shares for proceeds of $300 million. As part of this transaction the Bancorp entered into a total return swap in which the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Class B shares into Class A shares. The swap terminates on the later of the third anniversary of Visas IPO or the date on which the Covered Litigation is settled. The Bancorp calculates the fair value of the swap based on its estimate of the probability and timing of certain Covered Litigation settlement scenarios and the resulting payments related to the swap. The counterparty to the swap as a result of its ownership of the Class B shares will be impacted by dilutive adjustments to the conversion rate of the Class B shares into Class A shares caused by any Covered Litigation losses in excess of the litigation escrow account. If actual judgments in, or settlements of, the Covered Litigation significantly exceed current expectations, then additional funding by Visa of the litigation escrow account and the resulting dilution of the Class B shares could result in a scenario where the Bancorps ultimate exposure associated with the Covered Litigation (the Visa Litigation Exposure) exceeds the value of the Class B shares owned by the swap counterparty (the Class B Value). In the event the Bancorp concludes that it is probable that the Visa Litigation Exposure exceeds the Class B Value, the Bancorp would record a litigation reserve liability and a corresponding amount of other noninterest expense for the amount of the excess. Any such litigation reserve liability would be separate and distinct from the fair value derivative liability associated with the total return swap.
As of the date of the Bancorps sale of Visa Class B shares and through December 31, 2011, the Bancorp has concluded that it is not probable that the Visa Litigation Exposure will exceed the Class B Value. Based on this determination, upon the sale of Class B shares, the Bancorp reversed its net Visa litigation reserve liability and recognized a free-standing derivative liability associated with the total return swap with an initial fair value of $55 million. The sale of the Class B shares, recognition of the derivative liability and reversal of the net litigation reserve liability resulted in a pre-tax benefit of $288 million ($187 million after-tax) recognized by the Bancorp for the year ended December 31, 2009. In the second quarter of 2010, Visa funded an additional $500 million into the escrow account which resulted in further dilution in the conversion of Class B shares into Class A shares and required the Bancorp to make a $20 million cash payment (which reduced the swap liability) to the swap counterparty in accordance with the terms of the swap contract. In the fourth quarter of 2010, Visa funded an additional $800 million into the litigation escrow account which resulted in further dilution in the conversion of Class B shares into Class A shares and required the Bancorp to make a $35 million cash payment (which reduced the swap liability) to the swap counterparty in accordance with the terms of the swap contract. In the second quarter of 2011, Visa funded an additional $400 million into the litigation escrow account. Upon Visas funding of the litigation escrow account in the second quarter of 2011, along with additional terms of the total return swap, the Bancorp made a $19 million cash payment (which reduced the swap liability) to the swap counterparty. During the fourth quarter of 2011, Visa announced it decided to fund an additional $1.565 billion into the litigation escrow account which increased the swap liability approximately $54 million. The fair value of the swap liability was $78 million as of December 31, 2011, compared to $18 million at December 31, 2010.
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18. LEGAL AND REGULATORY PROCEEDINGS
During April 2006, the Bancorp was added as a defendant in a consolidated antitrust class action lawsuit originally filed against Visa ® , MasterCard ® and several other major financial institutions in the United States District Court for the Eastern District of New York. The plaintiffs, merchants operating commercial businesses throughout the U.S. and trade associations, claim that the interchange fees charged by card-issuing banks are unreasonable and seek injunctive relief and unspecified damages. In addition to being a named defendant, the Bancorp is also subject to a possible indemnification obligation of Visa as discussed in Note 17 and has also entered into with Visa, MasterCard and certain other named defendants judgment and loss sharing agreements that attempt to allocate financial responsibility to the parties thereto in the event certain settlements or judgments occur. Accordingly, prior to the sale of Class B shares during 2009, the Bancorp had recorded a litigation reserve of $243 million to account for its potential exposure in this and related litigation. Additionally, the Bancorp had also recorded its proportional share of $199 million of the Visa escrow account funded with proceeds from the Visa IPO along with several subsequent fundings. Upon the Bancorps sale of Visa, Inc. Class B shares during 2009, and the recognition of the total return swap that transfers conversion risk of the Class B shares back to the Bancorp, the Bancorp reversed the remaining net litigation reserve related to the Bancorps exposure through Visa. Additionally, the Bancorp has remaining reserves related to this litigation of $49 million and $30 million as of December 31, 2011, and 2010, respectively. Refer to Note 17 for further information regarding the Bancorps net litigation reserve and ownership interest in Visa. Fact and expert discovery in the litigation has been essentially completed. A motion for class action certification, certain defense motions to dismiss, and cross-motions for summary judgments are pending. A tentative date has been set for the third quarter of 2012.
In September 2007, Ronald A. Katz Technology Licensing, L.P. (Katz) filed a suit in the United States District Court for the Southern District of Ohio against the Bancorp and its Ohio banking subsidiary. In the suit, Katz alleges that the Bancorp and its Ohio bank are infringing on Katzs patents for interactive call processing technology by offering certain automated telephone banking and other services. This lawsuit is one of many related patent infringement suits brought by Katz in various courts against numerous other defendants. Katz is seeking unspecified monetary damages and penalties as well as injunctive relief in the suit. Management believes there are substantial defenses to these claims and intends to defend them vigorously. The impact of the final disposition of this lawsuit cannot be assessed at this time.
For the year ended December 31, 2008, five putative securities class action complaints were filed against the Bancorp and its Chief Executive Officer, among other parties. The five cases have been consolidated under the caption Local 295/Local 851 IBT Employer Group Pension Trust and Welfare Fund v. Fifth Third Bancorp. et al., Case No. 1:08CV00421, and are currently pending in the United States District Court for the Southern District of Ohio. The lawsuits allege violations of federal securities laws related to disclosures made by the Bancorp in press releases and filings with the SEC regarding its quality and sufficiency of capital, credit losses and related matters, and seeking unquantified damages on behalf of putative classes of persons who either purchased the Bancorps securities or trust preferred securities, or acquired the Bancorps securities pursuant to the acquisition of First Charter Corporation. These cases remain in the discovery stages of litigation. The impact of the final disposition of these lawsuits cannot be assessed at this time. In addition to the foregoing, two cases were filed in the United States District Court for the Southern District of Ohio against the Bancorp and certain officers alleging violations of ERISA based on allegations similar to those set forth in the securities class action cases filed during the same period of time. The two cases alleging violations of ERISA were dismissed by the trial court, and are being appealed to the United States Sixth Circuit Court of Appeals.
On September 16, 2010, Edward P. Zemprelli (Zemprelli) filed a lawsuit in the Hamilton County, Ohio Court of Common Pleas. The lawsuit was a purported derivative action brought by a shareholder of the Bancorp against certain of the Bancorps officers and directors, and which named the Bancorp as a nominal defendant. In the lawsuit, Zemprelli brought claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment against the defendant officers and directors. The alleged basis for these claims was that the defendant officers and directors attempted to disguise from the public the truth about the credit quality of the Bancorps loan portfolio, its capital position, and its need to raise capital. Zemprelli, on behalf of the Bancorp, brought unspecified money damages allegedly sustained by the Bancorp as a result of the defendants conduct, as well as injunctive relief. On August 15, 2011, the Court granted defendants motion to dismiss and motion for summary judgment. Zemprelli has filed a notice of appeal but later dismissed the appeal, as a result the trial court dismissal is final.
In September 2011, DataTreasury Corporation filed a suit in the United States District Court for the Eastern District of Texas against the Bancorp and its banking subsidiary. In the suit, DataTreasury alleges that the Bancorp and its banking subsidiary are infringing on DataTreasurys patents for imaged-based check processing. This lawsuit is one of many related patent infringement suits brought by DataTreasury against numerous other defendants. DataTreasury is seeking unspecified monetary damages and penalties. Due to the recent filing of the lawsuit, management is in the process of reviewing the claims against the Bancorp and its banking subsidiary.
The Bancorp and its subsidiaries are not parties to any other material litigation. However, there are other litigation matters that arise in the normal course of business. While it is impossible to ascertain the ultimate resolution or range of financial liability with respect to these contingent matters, management believes any resulting liability from these other actions would not have a material effect upon the Bancorps consolidated financial position, results of operations or cash flows.
The Bancorp and/or its affiliates are or may become involved from time to time in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by government and self-regulatory agencies, including the SEC, regarding their respective businesses. Such matters may result in material adverse consequences, including without limitation, adverse judgments, settlements, fines, penalties, orders, injunctions or other actions, amendments and/or restatements of the Bancorps SEC filings and/or financial statements, as applicable, and/or determinations of material weaknesses in our disclosure controls and procedures. The SEC is investigating and has made several requests for information, including by subpoena, concerning issues which the Bancorp understands relate to accounting and reporting matters involving certain of its commercial loans. This could lead to an enforcement proceeding by the SEC which, in turn, may result in one or more such material adverse consequences.
On May 16, 2011, the Bancorp caused a notice to be delivered to the trustee of Fifth Third Capital Trust VII (the Trust) to mandatorily redeem the 8.875% trust preferred securities of the Trust (the Trust Preferred Securities) at an aggregate cash redemption price of $25.18 per Trust Preferred Security. The Trust Preferred Securities were listed on the NYSE. The NYSE was notified of the redemption on May 17, 2011 and a Current Report on Form 8-K describing the redemption notice was filed by the Company with the SEC on May 18, 2011. Trading in this security was halted by the NYSE shortly after this Form 8-K was filed and did not resume until May 19, 2011. The Trust Preferred Securities traded at prices above the redemption amount during the period
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between the time the trustee was notified and before the Form 8-K describing the redemption was filed. The Bancorp was neither a party to nor a participant in any trading of the Trust Preferred Securities during such period or thereafter. On May 25, 2011, the Bancorp announced it would voluntarily compensate persons who purchased these Trust Preferred Securities after the redemption notice was delivered on May 16, 2011 and before trading was halted in the security on May 18, 2011. The compensation process was substantially completed by December 31, 2011 and Fifth Third paid out less than $1 million to affected security holders who submitted claims. The SEC investigated and made requests for information, including by subpoena, concerning the circumstances and related issues surrounding the notification and disclosure process and timing thereof in connection with such redemption of the Trust Preferred Securities. The Bancorp cooperated with those requests. On August 1, 2011, the Bancorp received a Wells notice from the staff of the SEC advising the Bancorp that the staff has reached a preliminary conclusion to recommend that the Commission authorize the staff to file an enforcement action against the Bancorp relating to such matter for violation of Section 13(a) of the Securities Exchange Act of 1934 and Regulation FD. On November 22, 2011 the Bancorp entered into a settlement with the SEC in connection with the alleged violation of Section 13(a) of the Securities Exchange Act of 1934 and Regulation FD. Under the terms of the settlement, Fifth Third neither admitted nor denied such allegations and agreed to cease and desist from committing any violations and any future violations of Section 13(a) of the Exchange Act and Regulation FD. As noted in the order instituting the proceeding, in agreeing to this settlement, the SEC considered the remedial acts promptly and voluntarily undertaken by Fifth Thirdincluding its compensation of investors harmed by the timing of its disclosure and its adoption and implementation of additional policies and procedures relating to the redemption of securitiesand the cooperation it afforded the SEC staff.
The Bancorp is party to numerous claims and lawsuits concerning matters arising from the conduct of its business activities. The outcome of litigation and the timing of ultimate resolution are inherently difficult to predict. The following factors, among others, contribute to this lack of predictability: plaintiff claims often include significant legal uncertainties, damages alleged by plaintiffs are often unspecified or overstated, discovery may not have started or may not be complete and material facts may be disputed or
unsubstantiated. As a result of these factors, the Bancorp is not always able to provide an estimate of the range of reasonably possible outcomes for each claim. A reserve for a potential litigation loss is established when information related to the loss contingency indicates both that a loss is probable and that the amount of loss can be reasonably estimated. Any such reserve is adjusted from time to time thereafter as appropriate to reflect changes in circumstances. The Bancorp also determines, when possible (due to the uncertainties described above), estimates of reasonably possible losses or ranges of reasonably possible losses, in excess of amounts reserved. Under U.S. GAAP, an event is reasonably possible if the chance of the future event or events occurring is more than remote but less than likely and an event is remote if the chance of the future event or events occurring is slight. Thus, references to the upper end of the range of reasonably possible loss for cases in which the Bancorp is able to estimate a range of reasonably possible loss mean the upper end of the range of loss for cases for which the Bancorp believes the risk of loss is more than slight. For matters where the Bancorp is able to estimate such possible losses or ranges of possible losses, the Bancorp currently estimates that it is reasonably possible that it could incur losses related to legal proceedings including the matters discussed above in an aggregate amount up to approximately $68 million in excess of amounts reserved, with it also being reasonably possible that no losses will be incurred in these matters. The estimates included in this amount are based on the Bancorps analysis of currently available information, and as new information is obtained the Bancorp may change its estimates.
For these matters and others where an unfavorable outcome is reasonably possible but not probable, there may be a range of possible losses in excess of the established reserve that cannot be estimated. Based on information currently available, advice of counsel, available insurance coverage and established reserves, the Bancorp believes that the eventual outcome of the actions against the Bancorp and/or its subsidiaries, including the matters described above, will not, individually or in the aggregate, have a material adverse effect on the Bancorps consolidated financial position. However, in the event of unexpected future developments, it is possible that the ultimate resolution of those matters, if unfavorable, may be material to Bancorps results of operations for any particular period, depending, in part, upon the size of the loss or liability imposed and the operating results for the applicable period.
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19. RELATED PARTY TRANSACTIONS
The Bancorp maintains written policies and procedures covering related party transactions to principal shareholders, directors and executives of the Bancorp. These procedures cover transactions such as employee-stock purchase loans, personal lines of credit, residential secured loans, overdrafts, letters of credit and increases in indebtedness. Such transactions are subject to the Bancorps normal underwriting and approval procedures. Prior to the closing of a loan to a related party, Compliance Risk Management must approve and determine whether the transaction requires approval from or a post notification be sent to the Bancorps Board of Directors. At December 31, 2011 and 2010, certain directors, executive officers, principal holders of Bancorp common stock, associates of such persons, and affiliated companies of such persons were indebted, including undrawn commitments to lend, to the Bancorps banking subsidiary.
The following table summarizes the Bancorps activities with its principal shareholders, directors and executives at December 31:
($ in millions) | 2011 | 2010 | ||||||
|
||||||||
Commitments to lend, net of participations: |
||||||||
Directors and their affiliated companies |
$ | 254 | 157 | |||||
Executive officers |
5 | 3 | ||||||
|
||||||||
Total |
$ | 259 | 160 | |||||
Outstanding balance on loans, net of participations and undrawn commitments |
$ | 172 | 74 | |||||
|
The commitments to lend are in the form of loans and guarantees for various business and personal interests. This indebtedness was incurred in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties. This indebtedness does not involve more than the normal risk of repayment or present other features unfavorable to the Bancorp.
On June 30, 2009, the Bancorp completed the sale of a majority interest in its processing business, Vantiv Holding, LLC. Advent International acquired an approximate 51% interest in Vantiv Holding, LLC for cash and warrants. The Bancorp retained the remaining approximate 49% interest in Vantiv Holding, LLC and, as part of the sale, Vantiv Holding, LLC assumed loans totaling $1.25 billion owed to the Bancorp. The Bancorp recognized $57 million and $26 million,
respectively, in noninterest income as part of its equity method investment in Vantiv Holding, LLC for the years ended December 31, 2011 and 2010 and received distributions totaling $3 million and $25 million, respectively, during 2011 and 2010.
The Bancorp and Vantiv Holding, LLC have various agreements in place covering services relating to the operations of Vantiv Holding, LLC. The services provided by the Bancorp to Vantiv Holding, LLC were required to support Vantiv Holding, LLC as a standalone entity during the deconversion period. These services involve transition support, including product development, risk management, legal, accounting and general business resources. Vantiv Holding, LLC paid the Bancorp $21 million and $49 million, respectively, for these services for the years ended December 31, 2011 and 2010. Other services provided to Vantiv Holding, LLC by the Bancorp, which will continue beyond the deconversion period, include treasury management, clearing, settlement, sponsorship, and data center support. Vantiv Holding, LLC paid the Bancorp $37 million and $34 million, respectively, for these services for the years ended December 31, 2011 and 2010. In addition to the previously mentioned services, the Bancorp entered into an agreement under which Vantiv Holding, LLC will provide processing services to the Bancorp. The total amount of fees relating to the processing services provided to the Bancorp by Vantiv Holding, LLC totaled $74 million and $64 million, respectively, for the years ended December 31, 2011 and 2010.
During the fourth quarter of 2010, Vantiv Holding, LLC refinanced its debt into a larger syndicated loan structure that included the Bancorp. The Bancorp recognized $4 million in syndication fees in 2010 associated with the refinanced loan to Vantiv Holding, LLC. The outstanding balance of loans to Vantiv Holding, LLC was $377 million and $381 million at December 31, 2011 and 2010, respectively. Interest income relating to the loans was $18 million, $102 million and $60 million, respectively, for the years ended December 31, 2011, 2010 and 2009 and is included in interest and fees on loans and leases in the Consolidated Statements of Income. Vantiv Holding, LLCs line of credit was $50 million as of December 31, 2011 and 2010. Vantiv Holding, LLC did not draw upon its lines of credit during the years ended December 31, 2011 or 2010.
Fifth Third Bancorp |
123 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bancorp and its subsidiaries file a consolidated federal income tax return. The following is a summary of applicable income taxes included in the Consolidated Statements of Income for the years ended December 31:
($ in millions) | 2011 | 2010 | 2009 | |||||||||
Current income tax expense (benefit): |
||||||||||||
U.S. Federal income taxes |
$ | 82 | (5 | ) | (157 | ) | ||||||
State and local income taxes |
14 | 16 | 6 | |||||||||
Foreign income taxes |
- | - | (3 | ) | ||||||||
Total current tax expense (benefit) |
96 | 11 | (154 | ) | ||||||||
Deferred income tax expense (benefit): |
||||||||||||
U.S. Federal income taxes |
411 | 165 | 190 | |||||||||
State and local income taxes |
26 | 11 | (8 | ) | ||||||||
Foreign income taxes |
- | - | 2 | |||||||||
Total deferred income tax expense |
437 | 176 | 184 | |||||||||
Applicable income tax expense |
$ | 533 | 187 | 30 | ||||||||
The following is a reconciliation between the statutory U.S. Federal income tax rate and the Bancorps effective tax rate for the years ended December 31:
($ in millions) | 2011 | 2010 | 2009 | |||||||||
Statutory tax rate |
35.0 | % | 35.0 | 35.0 | ||||||||
Increase (decrease) resulting from: |
||||||||||||
State taxes, net of federal benefit |
1.4 | 1.8 | (0.1 | ) | ||||||||
Tax-exempt income |
(1.4 | ) | (3.6 | ) | (18.7 | ) | ||||||
Credits |
(7.3 | ) | (14.1 | ) | (14.6 | ) | ||||||
Goodwill |
- | - | 8.7 | |||||||||
Interest to taxing authority, net of tax |
- | (0.8 | ) | (7.6 | ) | |||||||
Other changes in unrecognized tax benefits |
- | (1.8 | ) | - | ||||||||
Unrealized stock-based compensation benefits |
1.3 | 2.5 | 0.6 | |||||||||
Other, net |
0.1 | 0.8 | 0.6 | |||||||||
Effective tax rate |
29.1 | % | 19.8 | 3.9 | ||||||||
Tax-exempt income in the rate reconciliation table includes interest on municipal bonds, interest on tax-exempt lending, income/charges on life insurance policies held by the Bancorp, and certain gains on sales of leases that are exempt from federal taxation.
During 2010, the Bancorp settled its outstanding dispute with the IRS relating to a specific capital raising transaction. This favorable settlement reduced income tax expense (including interest) by $19 million. During 2009, the Bancorp settled its outstanding dispute with the IRS relating to certain
leveraged lease transactions. This favorable settlement reduced income tax expense (including interest) by $6 million and $55 million for 2010 and 2009, respectively.
During 2009, the Bancorp notified the carrier of one of the Bancorps policies of its intent to surrender a certain BOLI policy and was therefore required to establish a deferred tax asset relating to the difference between its financial reporting and tax basis of its investment. As a result, income tax expense for 2009 was favorably impacted by $106 million.
The following table provides a summary of the Bancorps unrecognized tax benefits as of December 31:
($ in millions) | 2011 | 2010 | ||||||
Tax positions that would impact the effective tax rate, if recognized |
$ | 14 | 15 | |||||
Tax positions where the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of the deduction |
- | 1 | ||||||
Unrecognized tax benefits |
$ | 14 | 16 | |||||
The following table provides a reconciliation of the beginning and ending amounts of the Bancorps unrecognized tax benefits:
($ in millions) | 2011 | 2010 | 2009 | |||||||||
Unrecognized tax benefits at January 1 |
$ | 16 | 82 | 959 | ||||||||
Gross increases for tax positions taken during prior period |
1 | 4 | 16 | |||||||||
Gross decreases for tax positions taken during prior period |
(2 | ) | (23 | ) | (329 | ) | ||||||
Gross increases for tax positions taken during current period |
- | 2 | 1 | |||||||||
Settlements with taxing authorities |
- | (48 | ) | (563 | ) | |||||||
Lapse of applicable statute of limitations |
(1 | ) | (1 | ) | (2 | ) | ||||||
Unrecognized tax benefits at December 31 |
$ | 14 | 16 | 82 | ||||||||
The Bancorps unrecognized tax benefits as of December 31, 2011 and 2010 relate largely to state income tax exposures from taking tax positions where the Bancorp believes it is likely that, upon examination, a state will take a position contrary to the position taken by the Bancorp.
Substantially all of the reduction of unrecognized tax benefits during 2010 related to the settlement of the Bancorps dispute with the IRS relating to the specific capital raising transaction mentioned previously. Similarly, substantially all of the reduction of unrecognized tax benefits during 2009 related to the settlement of certain leveraged lease transactions with the IRS.
While it is reasonably possible that the amount of the
124 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
unrecognized tax benefit with respect to certain of the Bancorps uncertain tax positions could increase or decrease during the next 12 months, the Bancorp believes it is unlikely
that its unrecognized tax benefits will change by a material amount during the next 12 months. Deferred income taxes are comprised of the following items at December 31:
($ in millions) | 2011 | 2010 | ||||||
Deferred tax assets: |
||||||||
Allowance for loan and lease losses |
$ | 789 | 1,051 | |||||
Deferred compensation |
119 | 136 | ||||||
Impairment reserves |
102 | 144 | ||||||
Reserves |
70 | 52 | ||||||
Reserve for unfunded commitments |
63 | 79 | ||||||
State net operating losses |
63 | 66 | ||||||
Other |
216 | 221 | ||||||
Total deferred tax assets |
$ | 1,422 | 1,749 | |||||
Deferred tax liabilities: |
||||||||
Lease financing |
$ | 853 | 801 | |||||
Investments in joint ventures and partnership interests |
468 | 481 | ||||||
Other comprehensive income |
253 | 169 | ||||||
MSRs |
173 | 190 | ||||||
Bank premises and equipment |
95 | 69 | ||||||
State deferred taxes |
74 | 53 | ||||||
Other |
130 | 130 | ||||||
Total deferred tax liabilities |
$ | 2,046 | 1,893 | |||||
Total net deferred tax liability |
$ | (624 | ) | (144 | ) | |||
Deferred tax assets are included as a component of other assets in the Consolidated Balance Sheets and deferred tax liabilities are included as a component of accrued taxes, interest and expenses in the Consolidated Balance Sheets.
At December 31, 2011 and 2010, the Bancorp had recorded deferred tax assets of $63 million and $66 million, respectively, related to state net operating loss carryforwards. The deferred tax assets relating to state net operating losses are presented net of specific valuation allowances, primarily resulting from leasing operations, of $34 million and $25 million at December 31, 2011 and 2010, respectively. If these carry forwards are not utilized, they will expire in varying amounts through 2030. Additionally, at December 31, 2011 and 2010, the Bancorp had federal general business tax credit carryforwards of $5 million and $45 million, respectively. If unused, these credit carryforwards will expire in 2031.
The Bancorp has determined that a valuation allowance is not needed against the remaining deferred tax assets as of December 31, 2011 or 2010. The Bancorp considered all of the positive and negative evidence available to determine whether it is more likely than not that the deferred tax assets will ultimately be realized and, based upon that evidence, the Bancorp believes it is more likely than not that the deferred tax assets recorded at December 31, 2011 and 2010 will ultimately be realized. The Bancorp reached this conclusion as the Bancorp has taxable income in the carryback period and it is expected that the Bancorps remaining deferred tax assets will be realized through the reversal of its existing taxable temporary differences and its projected future taxable income.
As required under U.S. GAAP, the Bancorp established a deferred tax asset for stock-based awards granted to its employees. When the actual tax deduction for these stock-based awards is less than the expense previously recognized for financial reporting or when the awards expire unexercised, the Bancorp is required to write-off the deferred tax asset previously established for these stock-based awards. As a result of the expiration of certain stock options and SARs and the lapse of restrictions on certain shares of restricted stock during the year ended December 31, 2011, the Bancorp recorded additional income tax expense of approximately $26 million related to the write-off of a portion of the deferred tax asset previously established. As a result of the Bancorps stock price as of December 31, 2011, it is reasonably possible that the Bancorp will be required to record an additional $21 million of income tax expense over the next twelve months, primarily in the second quarter of 2012. The Bancorp cannot predict its stock price or whether its employees will exercise other stock-based awards with lower exercise prices in the future; therefore, it is possible that the impact to income tax expense will be greater than or less than $21 million over the next twelve months.
The IRS concluded its audit for 2006 and 2007 during the third quarter of 2010. As a result, all issues have been resolved with the IRS through 2007. Further, the IRS has concluded its fieldwork on the Bancorps 2008 and 2009 federal income tax returns. No material issues were identified as a result of the IRS audit and all significant issues have been resolved. The Bancorp anticipates that the IRS audit of the 2008 and 2009 federal income tax returns will be completed during 2012. The statute of limitations for the Bancorps federal income tax returns remains open for tax years 2008-2011. On occasion, as various state and local taxing jurisdictions examine the returns of the Bancorp and its subsidiaries, the Bancorp may agree to extend the statute of limitations for a short period of time. Otherwise, with the exception of a few states with insignificant uncertain tax positions, the statutes of limitations for state income tax returns remain open only for tax years in accordance with each states statutes.
Any interest and penalties incurred in connection with income taxes are recorded as a component of income tax expense in the Consolidated Financial Statements. During the year ended December 31, 2011, the Bancorp recognized interest expense of $1 million, net of the related tax impact related to interest and penalties. During the year ended December 31, 2010, the Bancorp recognized an interest benefit incurred in connection with income taxes of $8 million, net of the related tax impact. At December 31, 2011 and 2010, the Bancorp had accrued interest liabilities, net of the related tax benefits, of $3 million and $1 million, respectively. No material liabilities were recorded for penalties.
Retained earnings at December 31, 2011 and 2010 included $157 million in allocations of earnings for bad debt deductions of former thrift subsidiaries for which no income tax has been provided. Under current tax law, if certain of the Bancorps subsidiaries use these bad debt reserves for purposes other than to absorb bad debt losses, they will be subject to federal income tax at the current corporate tax rate.
Fifth Third Bancorp |
125 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. RETIREMENT AND BENEFIT PLANS
The Bancorps qualified defined benefit plans benefits were frozen in 1998, except for grandfathered employees. The Bancorps other retirement plans consist of nonqualified, supplemental retirement plans, which are funded on an as needed basis. A majority of these plans were obtained in acquisitions from prior years. The Bancorp recognizes the
overfunded and underfunded status of its pension plans as an asset and liability, respectively. The overfunded and underfunded amounts recognized in other assets and other liabilities, respectively, in the Consolidated Balance Sheets were as follows as of December 31:
($ in millions) | 2011 | 2010 | ||||||
Prepaid benefit cost |
$ | - | 4 | |||||
Accrued benefit liability |
(72 | ) | (34 | ) | ||||
Net underfunded status |
$ | (72 | ) | (30 | ) | |||
The following tables summarize the defined benefit retirement plans as of and for the years ended December 31:
Plans with an Overfunded Status (a) | ||||||||
($ in millions) |
2011 | 2010 | ||||||
Fair value of plan assets at January 1 |
$ | - | 182 | |||||
Actual return on assets |
- | 31 | ||||||
Contributions |
- | - | ||||||
Settlement |
- | - | ||||||
Benefits paid |
- | (16 | ) | |||||
Fair value of plan assets at December 31 |
$ | - | 197 | |||||
Projected benefit obligation at January 1 |
$ | - | 183 | |||||
Service cost |
- | - | ||||||
Interest cost |
- | 10 | ||||||
Settlement |
- | - | ||||||
Actuarial loss |
- | 16 | ||||||
Benefits paid |
- | (16 | ) | |||||
Projected benefit obligation at December 31 |
$ | - | 193 | |||||
Overfunded projected benefit obligation recognized in the Consolidated Balance Sheets as an asset |
$ | - | 4 | |||||
(a) The Bancorps defined benefit plan had an Overfunded Status at December 31, 2010. The plan was Underfunded at December 31, 2011 and is reflected in the Underfunded Status table.
Plans with an Underfunded Status | ||||||||
($ in millions) |
2011 | 2010 | ||||||
Fair value of plan assets at January 1 |
$ | 197 | - | |||||
Actual return on assets |
- | - | ||||||
Contributions |
4 | 4 | ||||||
Settlement |
(10 | ) | - | |||||
Benefits paid |
(10 | ) | (4 | ) | ||||
Fair value of plan assets at December 31 |
$ | 181 | - | |||||
Projected benefit obligation at January 1 |
$ | 227 | 34 | |||||
Service cost |
- | - | ||||||
Interest cost |
11 | 2 | ||||||
Settlement |
(10 | ) | - | |||||
Actuarial gain |
35 | 2 | ||||||
Benefits paid |
(10 | ) | (4 | ) | ||||
Projected benefit obligation at December 31 |
$ | 253 | 34 | |||||
Unfunded projected benefit obligation recognized in the Consolidated Balance Sheet as a liability |
$ | (72 | ) | (34 | ) | |||
The estimated net actuarial loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost during 2012 is $14 million. The estimated net prior service cost for the defined benefit pension plan that will be amortized from
accumulated other comprehensive income into net periodic benefit cost during 2012 is immaterial to the Consolidated Financial Statements.
126 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes net periodic benefit cost and other changes in plan assets and benefit obligations recognized in other comprehensive income for the years ended December 31:
($ in millions) | 2011 | 2010 | 2009 | |||||||||
Components of net periodic benefit cost: |
||||||||||||
Service cost |
$ | - | - | - | ||||||||
Interest cost |
11 | 12 | 12 | |||||||||
Expected return on assets |
(15 | ) | (14 | ) | (12 | ) | ||||||
Amortization of net actuarial loss |
11 | 12 | 15 | |||||||||
Amortization of net prior service cost |
1 | 1 | 1 | |||||||||
Settlement |
6 | - | 13 | |||||||||
Net periodic benefit cost |
$ | 14 | 11 | 29 | ||||||||
Other changes in plan assets and benefit obligations recognized in other comprehensive income: |
||||||||||||
Net actuarial loss (gain) |
50 | 2 | (10 | ) | ||||||||
Net prior service cost |
- | - | - | |||||||||
Amortization of net actuarial loss |
(11 | ) | (12 | ) | (15 | ) | ||||||
Amortization of prior service cost |
(1 | ) | (1 | ) | (1 | ) | ||||||
Settlement |
(6 | ) | - | (13 | ) | |||||||
Total recognized in other comprehensive income |
32 | (11 | ) | (39 | ) | |||||||
Total recognized in net periodic benefit cost and other comprehensive income |
$ | 46 | - | (10 | ) | |||||||
Fair Value Measurements of Plan Assets
The following table summarizes plan assets measured at fair value on a recurring basis as of December 31:
Fair Value Measurements Using (a) | ||||||||||||||||
2011 ($ in millions) | Level 1 | Level 2 | Level 3 |
Total
Fair Value |
||||||||||||
Equity Securities: |
||||||||||||||||
Equity securities (Growth) (b) |
$ | 53 | - | - | $ | 53 | ||||||||||
Equity securities (Value) |
52 | - | - | 52 | ||||||||||||
Total equity securities |
105 | - | - | 105 | ||||||||||||
Mutual and exchange traded funds: |
||||||||||||||||
Money market funds |
5 | - | - | 5 | ||||||||||||
International funds |
25 | - | - | 25 | ||||||||||||
Commodity funds |
9 | - | - | 9 | ||||||||||||
Total mutual and exchange traded funds |
39 | - | - | 39 | ||||||||||||
Debt securities: |
||||||||||||||||
U.S. Treasury obligations |
10 | - | - | 10 | ||||||||||||
Agency mortgage backed |
- | 25 | - | 25 | ||||||||||||
Non-agency mortgage backed |
- | 1 | - | 1 | ||||||||||||
Corporate bonds (d) |
- | 1 | - | 1 | ||||||||||||
Total debt securities |
10 | 27 | - | 37 | ||||||||||||
Total plan assets |
$ | 154 | 27 | - | $ | 181 | ||||||||||
Fifth Third Bancorp |
127 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using (a) | ||||||||||||||||
2010 ($ in millions) | Level 1 | Level 2 | Level 3 |
Total
Fair Value |
||||||||||||
Equity Securities: |
||||||||||||||||
Equity securities (Growth) (b) |
$ | 58 | - | - | $ | 58 | ||||||||||
Equity securities (Value) |
53 | - | - | 53 | ||||||||||||
Total equity securities |
111 | - | - | 111 | ||||||||||||
Mutual and exchange traded funds: |
||||||||||||||||
Money market funds |
6 | - | - | 6 | ||||||||||||
International funds |
30 | - | - | 30 | ||||||||||||
Commodity funds |
11 | - | - | 11 | ||||||||||||
Total mutual and exchange traded funds |
47 | - | - | 47 | ||||||||||||
Debt securities: |
||||||||||||||||
U.S. Treasury obligations |
7 | - | - | 7 | ||||||||||||
U.S. Government agencies (c) |
- | 1 | - | 1 | ||||||||||||
Agency mortgage backed |
- | 24 | - | 24 | ||||||||||||
Non-agency mortgage backed |
- | 6 | - | 6 | ||||||||||||
Corporate bonds (d) |
- | 1 | - | 1 | ||||||||||||
Total debt securities |
7 | 32 | - | 39 | ||||||||||||
Total plan assets |
$ | 165 | 32 | - | $ | 197 | ||||||||||
a) | For further information on fair value hierarchy levels, see Note 27. |
b) | Includes holdings in Bancorp common stock. |
c) | Includes debt securities issued by U.S. Government sponsored agencies. |
d) | Includes private label asset backed securities. |
The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Equity securities
The plan measures common stock using quoted prices which are available in an active market and classifies these investments within Level 1 of the valuation hierarchy.
Mutual and exchange traded funds
All of the plans mutual and exchange traded funds are publicly traded. The plan measures the value of these investments using the funds quoted prices that are available in an active market and classifies these investments within Level 1 of the valuation hierarchy.
Debt securities
For certain U.S. Treasury obligations and federal agency securities, the plan measures the fair value based on quoted prices, which are available in an active market and classifies
these investments within Level 1 of the valuation hierarchy. Where quoted prices are not available, the plan measures the fair value of these investments based on matrix pricing models that include the bid price, which factors in the yield curve and other characteristics of the security including the interest rate, prepayment speeds and length of maturity. Therefore, these investments are classified within Level 2 of the valuation hierarchy.
Plan Assumptions
The plan assumptions are evaluated annually and are updated as necessary. The discount rate assumption reflects the yield on a portfolio of high quality fixed-income instruments that have a similar duration to the plans liabilities. The expected long-term rate of return assumption reflects the average return expected on the assets invested to provide for the plans liabilities. In determining the expected long-term rate of return, the Bancorp evaluated actuarial and economic inputs, including long-term inflation rate assumptions and broad equity and bond indices long-term return projections, as well as actual long-term historical plan performance.
The following table summarizes the plan assumptions for the years ended December 31:
Weighted Average Assumptions | 2011 | 2010 | 2009 | |||||||||
For measuring benefit obligations at year end: |
||||||||||||
Discount rate |
4.27 | % | 5.39 | 5.88 | ||||||||
Rate of compensation increase |
5.00 | 5.00 | 5.00 | |||||||||
Expected return on plan assets |
8.25 | 8.25 | 8.50 | |||||||||
For measuring net periodic benefit cost: |
||||||||||||
Discount rate |
5.39 | 5.88 | 6.11 | |||||||||
Rate of compensation increase |
5.00 | 5.00 | 5.00 | |||||||||
Expected return on plan assets |
8.25 | 8.25 | 8.50 | |||||||||
128 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lowering both the expected rate of return on the plan and the discount rate by 0.25% would have increased the 2011 pension expense by approximately $1 million.
Based on the actuarial assumptions, the Bancorp does not expect to contribute to the plan in 2012. Estimated pension benefit payments, which reflect expected future service, are $20 million in 2012, $17 million in 2013, $16 million in 2014, $16 million in 2015 and $15 million in 2016. The total estimated payments for the years 2017 through 2021 is $66 million.
Investment Policies and Strategies
The Bancorps policy for the investment of plan assets is to employ investment strategies that achieve a range of weighted-average target asset allocations relating to equity securities (including the Bancorps common stock), fixed income securities (including federal agency obligations, corporate bonds and notes) and cash.
The following table provides the Bancorps targeted and actual weighted-average asset allocations by asset category for the years ended December 31:
Weighted-average asset allocation |
Targeted
range |
2011 | 2010 | |||||||||||||
Equity securities |
74 | % | 72 | |||||||||||||
Bancorp common stock |
2 | 2 | ||||||||||||||
Total equity securities (a) |
70-80 | % | 76 | 74 | ||||||||||||
Total fixed income securities |
20-25 | 21 | 23 | |||||||||||||
Cash |
0-5 | 3 | 3 | |||||||||||||
Total |
100 | % | 100 | |||||||||||||
(a) | Includes mutual and exchange traded funds. |
The risk tolerance for the plan is determined by management to be moderate to aggressive, recognizing that higher returns involve some volatility and that periodic declines in the portfolios value are tolerated in an effort to achieve real capital growth. There were no significant concentrations of risk associated with the investments of the Bancorps benefit and retirement plan at December 31, 2011 and 2010.
Permitted asset classes of the plan include cash and cash equivalents, fixed income (domestic and non-U.S. bonds), equities (U.S., non-U.S., emerging markets and REITS), equipment leasing precious metals, commodity transactions and mortgages. The plan utilizes derivative instruments including puts, calls, straddles or other option strategies, as approved by management.
Prohibited asset classes of the plan include venture capital, short sales, limited partnerships and leveraged transactions. Per ERISA, the Bancorps common stock cannot exceed ten percent of the fair value of plan assets.
Fifth Third Bank, as Trustee, is expected to manage the plan assets in a manner consistent with the plan agreement and other regulatory, federal and state laws. The Fifth Third Bank Pension, Profit Sharing and Medical Plan Committee (the Committee) is the plan administrator. The Trustee is required to provide to the Committee monthly and quarterly reports covering a list of plan assets, portfolio performance, transactions and asset allocation. The Trustee is also required to keep the Committee apprised of any material changes in the Trustees outlook and recommended investment policy.
Other Information on Retirement and Benefit Plans
The accumulated benefit obligation for all defined benefit plans was $253 million and $227 million at December 31, 2011 and 2010, respectively. Amounts relating to the Bancorps defined benefit plans with assets exceeding benefit obligations were as follows at December 31:
($ in millions) | 2011 | 2010 | ||||||
Projected benefit obligation |
$ | - | 193 | |||||
Accumulated benefit obligation |
- | 193 | ||||||
Fair value of plan assets |
- | 197 | ||||||
Amounts relating to the Bancorps defined benefit plans with benefit obligations exceeding assets were as follows at December 31:
($ in millions) | 2011 | 2010 | ||||||
Projected benefit obligation |
$ | 253 | 34 | |||||
Accumulated benefit obligation |
253 | 34 | ||||||
Fair value of plan assets |
181 | - | ||||||
As of December 31, 2011 and 2010, $159 million and $172 million, respectively, of plan assets were managed through mutual funds by Fifth Third Bank, a subsidiary of the Bancorp. Plan assets included $5 million of Bancorp common stock as of December 31, 2011 and 2010. Plan assets are not expected to be returned to the Bancorp during 2012.
The Bancorps profit sharing plan expense was $35 million for 2011, $31 million for 2010, and $17 million for 2009. Expenses recognized for matching contributions to the Bancorps defined contribution savings plans were $40 million for the year ended December 31, 2011, and $36 million for the years ended December 31, 2010 and 2009, respectively.
Fifth Third Bancorp |
129 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. ACCUMULATED OTHER COMPREHENSIVE INCOME
The activity of the components of other comprehensive income and accumulated other comprehensive income for the years ended December 31:
Total Other Comprehensive
Income |
Total Accumulated Other
Comprehensive Income |
|||||||||||||||||||||||
($ in millions) |
Pretax
Activity |
Tax
Effect |
Net
Activity |
Beginning
Balance |
Net
Activity |
Ending
Balance |
||||||||||||||||||
2011 |
||||||||||||||||||||||||
Unrealized holding gains on available-for-sale securities arising during period |
$309 | (108) | 201 | |||||||||||||||||||||
Reclassification adjustment for net gains included in net income |
(56) | 19 | (37) | |||||||||||||||||||||
Net unrealized gains on available-for-sale securities |
253 | (89) | 164 | 321 | 164 | 485 | ||||||||||||||||||
Unrealized holding gains on cash flow hedge derivatives arising during period |
89 | (31) | 58 | |||||||||||||||||||||
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income |
(69) | 24 | (45) | |||||||||||||||||||||
Net unrealized gains on cash flow hedge derivatives |
20 | (7) | 13 | 67 | 13 | 80 | ||||||||||||||||||
Defined benefit plans: |
||||||||||||||||||||||||
Net prior service cost |
- | - | - | |||||||||||||||||||||
Net actuarial gain |
(32) | 11 | (21) | |||||||||||||||||||||
Defined benefit plans, net |
(32) | 11 | (21) | (74 | ) | (21 | ) | (95 | ) | |||||||||||||||
Total |
$241 | (85) | 156 | 314 | 156 | 470 | ||||||||||||||||||
2010 |
||||||||||||||||||||||||
Unrealized holding gains on available-for-sale securities arising during period |
$216 | (73) | 143 | |||||||||||||||||||||
Reclassification adjustment for net gains included in net income |
(57) | 19 | (38) | |||||||||||||||||||||
Net unrealized gains on available-for-sale securities |
159 | (54) | 105 | 216 | 105 | 321 | ||||||||||||||||||
Unrealized holding gains on cash flow hedge derivatives arising during period |
2 | (1) | 1 | |||||||||||||||||||||
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income |
(60) | 21 | (39) | |||||||||||||||||||||
Net unrealized gains on cash flow hedge derivatives |
(58) | 20 | (38) | 105 | (38 | ) | 67 | |||||||||||||||||
Defined benefit plans: |
||||||||||||||||||||||||
Net prior service cost |
1 | (1) | - | |||||||||||||||||||||
Net actuarial loss |
10 | (4) | 6 | |||||||||||||||||||||
Defined benefit plans, net |
11 | (5) | 6 | (80 | ) | 6 | (74 | ) | ||||||||||||||||
Total |
$112 | (39) | 73 | 241 | 73 | 314 | ||||||||||||||||||
2009 |
||||||||||||||||||||||||
Unrealized holding gains on available-for-sale securities arising during period |
$248 | (86) | 162 | |||||||||||||||||||||
Reclassification adjustment for net gains included in net income |
(57) | 20 | (37) | |||||||||||||||||||||
Reclassification adjustment related to prior OTTI charges |
(37) | 13 | (24) | |||||||||||||||||||||
Net unrealized gains on available-for-sale securities |
154 | (53) | 101 | 115 | 101 | 216 | ||||||||||||||||||
Unrealized holding gains on cash flow hedge derivatives arising during period |
75 | (26) | 49 | |||||||||||||||||||||
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income |
(49) | 17 | (32) | |||||||||||||||||||||
Net unrealized gains on cash flow hedge derivatives |
26 | (9) | 17 | 88 | 17 | 105 | ||||||||||||||||||
Defined benefit plans: |
||||||||||||||||||||||||
Net prior service cost |
- | - | - | |||||||||||||||||||||
Net actuarial loss |
39 | (14) | 25 | |||||||||||||||||||||
Defined benefit plans, net |
39 | (14) | 25 | (105 | ) | 25 | (80 | ) | ||||||||||||||||
Total |
$219 | (76) | 143 | 98 | 143 | 241 |
130 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. COMMON, PREFERRED AND TREASURY STOCK
The following is a summary of the share activity within common, preferred and treasury stock for the years ended December 31:
Common Stock | Preferred Stock | Treasury Stock | ||||||||||||||||||||||
($ in millions, except share data) | Value | Shares | Value | Shares | Value | Shares | ||||||||||||||||||
Shares at December 31, 2008 |
$ | 1,295 | 583,427,104 | $ | 4,241 | 180,620 | $ | 229 | 6,040,492 | |||||||||||||||
Issuance of common shares |
351 | 157,955,960 | - | - | - | - | ||||||||||||||||||
Exchange of preferred shares, Series G |
133 | 60,121,124 | (674) | (27,849) | - | - | ||||||||||||||||||
Accretion from dividends on preferred shares, Series F |
- | - | 41 | - | - | - | ||||||||||||||||||
Stock-based awards exercised, including treasury shares issued |
- | - | - | - | 1 | 819,796 | ||||||||||||||||||
Restricted stock grants |
- | - | - | - | (27 | ) | (751,464 | ) | ||||||||||||||||
Other |
- | - | 1 | - | (2 | ) | 327,200 | |||||||||||||||||
Shares at December 31, 2009 |
$1,779 | 801,504,188 | $3,609 | 152,771 | $ | 201 | 6,436,024 | |||||||||||||||||
Accretion from dividends on preferred shares, Series F |
- | - | 45 | - | - | - | ||||||||||||||||||
Stock-based awards exercised, including treasury shares issued |
- | - | - | - | (6 | ) | 16,391 | |||||||||||||||||
Restricted stock grants and forfeitures, net |
- | - | - | - | (62) | (1,334,967) | ||||||||||||||||||
Employee stock ownership through benefit plans |
- | - | - | - | (3) | 114,218 | ||||||||||||||||||
Shares at December 31, 2010 |
$1,779 | 801,504,188 | $3,654 | 152,771 | $ | 130 | 5,231,666 | |||||||||||||||||
Issuance of common shares |
272 | 122,388,393 | - | - | - | - | ||||||||||||||||||
Exchange of preferred shares, Series G |
- | - | - | (1) | - | - | ||||||||||||||||||
Redemption of preferred shares, Series F |
- | - | (3,408) | (136,320) | - | - | ||||||||||||||||||
Accretion from dividends on preferred shares, Series F |
- | - | 153 | - | - | - | ||||||||||||||||||
Stock-based awards exercised, including treasury shares issued |
- | - | - | - | (7 | ) | (336,735 | ) | ||||||||||||||||
Restricted stock grants |
- | - | - | - | (58 | ) | (756,381 | ) | ||||||||||||||||
Other |
- | - | (1) | (1 | ) | (50,405) | ||||||||||||||||||
Shares at December 31, 2011 |
$2,051 | 923,892,581 | $398 | 16,450 | $ | 64 | 4,088,145 |
In 2008, the Bancorp issued 8.5% non-cumulative Series G convertible preferred stock. The depository shares represent shares of its convertible preferred stock and has a liquidation preference of $25,000 per share. The preferred stock is convertible at any time, at the option of the shareholder, into 2,159.8272 shares of common stock, representing a conversion price of approximately $11.575 per share of common stock.
On December 31, 2008, the U.S. Treasury purchased $3.4 billion, or 136,320 shares, of the Bancorps Fixed Rate Cumulative Perpetual Preferred Stock, Series F, with a liquidation preference of $25,000 per share and related 10-year warrant in the amount of 15% of the preferred stock investment. The warrant gave the U.S Treasury the right to purchase 43,617,747 shares of the Bancorps common stock at $11.72 per share. The Series F senior preferred stock was issued complying with the terms established by the CPP. Per the program terms, the U.S. Treasurys investment consisted of senior preferred stock with a five percent dividend for each of the first five years of investment and nine percent thereafter, unless the shares were redeemed. The shares were callable by the Bancorp at par after three years and could be repurchased at any time under certain circumstances. The terms also included restrictions on the repurchase of common stock and an increase in common stock dividends, which required the U.S. Treasurys consent, for a period of three years from the date of investment unless the preferred shares were redeemed in whole or the U.S. Treasury had transferred all of the preferred shares to a third party.
The proceeds from issuance of the Series F preferred stock were allocated to the preferred stock and to the warrant based on their relative fair values, which resulted in an initial book value of $3.2 billion for the preferred stock and $239 million for the warrant. The resulting discount to the preferred stock was being accreted over five years through retained earnings as a preferred stock dividend, resulting in an effective yield of 6.7% for the Series F preferred stock for the first five years.
On May 7, 2009, the Bancorp announced the SCAP results. While not required to raise additional overall capital, the Bancorp was required to augment its existing capital base to maintain a capital buffer above the newly required four percent threshold of the Tier I common equity ratio. As a result, the Bancorp initiated a number of capital actions including the offer to exchange Series G preferred shares and a common stock offering.
On June 4, 2009, the Bancorp announced the successful completion of a $1.0 billion at-the-market offering of its common shares. Through this offering, the Bancorp issued approximately 158 million shares at an average price of $6.33.
On June 17, 2009, the Bancorp completed its offer to exchange 2,158.8272 shares of its common stock, no par value, and $8,250 in cash, for each set of 250 validly tendered and accepted depositary shares. The Bancorp issued approximately 60 million shares of common stock and paid $230 million in cash in exchange for 7 million depositary shares. Overall, $696 million in liquidation amount of the Bancorps depositary shares were validly tendered, not withdrawn and exchanged, which represented 63% of the aggregate liquidation amount of its depositary shares. An aggregate of 7 million depositary shares representing 27,849 shares of Series G preferred stock were retired upon receipt. At the time of exchange, the Bancorp recognized an increase to retained earnings and net income available to common shareholders of $35 million, calculated as the difference between the carrying amount of the Series G preferred stock exchanged and the sum of the fair value of the common stock plus cash delivered. As a result of this exchange, the Bancorp increased its common equity by $441 million. As of December 31, 2011, Series G preferred stock had 4,112,750 depositary shares representing 16,450 shares outstanding and 1,700 shares reserved for issuance.
On January 25, 2011, the Bancorp raised $1.7 billion in new common equity through the issuance of 121,428,572 shares of common stock in an underwritten offering with an initial price of $14.00 per share. On January 24, 2011, the underwriters exercised their option to purchase an additional 12,142,857 shares at the offering price of $14.00 per share. In connection with this exercise, the Bancorp entered into a forward sale agreement which resulted in a final net payment of 959,821 shares on February 4, 2011. On February 2, 2011, the Bancorp used these proceeds along with proceeds from a senior debt offering and other available resources to repurchase all 136,320 Series F preferred shares. In connection with the redemption of the Series F Preferred Stock, the Bancorp accelerated the accretion of the remaining issuance discount on the
Fifth Third Bancorp |
131 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series F Preferred Stock and recorded a reduction in retained earnings and a corresponding increase in preferred stock of $153 million in the Bancorps Consolidated Balance Sheet. On March 16, 2011, the Bancorp repurchased the warrant issued to the U.S. Treasury in connection with the CPP preferred stock
investment at an agreed upon price of $280 million, which was recorded as a reduction to capital surplus in the Bancorps Consolidated Financial Statements.
During 2011, 2010 and 2009, the Bancorp repurchased an immaterial amount of common stock.
The Bancorp has historically emphasized employee stock ownership. The following table provides detail of the number of shares to be issued upon exercise of outstanding stock-based
awards and remaining shares available for future issuance under all of the Bancorps equity compensation plans as of December 31, 2011:
Plan Category (shares in thousands) |
Number of Shares to be Issued Upon Exercise |
Weighted-
Average Exercise Price |
Shares Available
Issuance |
|||||||||
Equity compensation plans approved by shareholders |
34,283 | (a) | ||||||||||
SARs |
(b | ) | (b | ) | (a | ) | ||||||
Restricted stock |
4,764 | N/A | (a | ) | ||||||||
Stock options ( c ) |
6,562 | $ | 59.73 | (a | ) | |||||||
Phantom stock units |
(d | ) | N/A | N/A | ||||||||
Performance units |
(e | ) | N/A | (a | ) | |||||||
Employee stock purchase plan |
9,548 | (f) | ||||||||||
Total Shares |
11,326 | 43,831 |
(a) | Under the 2011 Incentive Compensation Plan, 39 million shares plus up to 4.5 million shares from the 2008 Incentive Compensation Plan (the Predecessor Plan) of stock were authorized for issuance as incentive and nonqualified stock options, SARs, restricted stock and restricted stock units, performance units and performance restricted stock awards. |
(b) | The number of shares to be issued upon exercise will be determined at vesting based on the difference between the grant price and the market price at the date of exercise. |
(c) | Excludes 1 million outstanding options awarded under plans assumed by the Bancorp in connection with certain mergers and acquisitions. The Bancorp has not made any awards under these plans and will make no additional awards under these plans. The weighted-average exercise price of the outstanding options is $16.31 per share. |
(d) | Phantom stock units are settled in cash. |
(e) | The number of shares to be issued is dependent upon the Bancorp achieving certain predefined performance targets and ranges from zero shares to approximately 1.5 million shares. |
(f) | Represents remaining shares of Fifth Third common stock under the Bancorps 1993 Stock Purchase Plan, as amended and restated, including an additional 1.5 million shares approved by shareholders on March 28, 2007 and an additional 12 million shares approved by shareholders on April 21, 2009. |
Stock-based awards are eligible for issuance under the Bancorps Incentive Compensation Plan to key employees and directors of the Bancorp and its subsidiaries. The Incentive Compensation Plan was approved by shareholders on April 19, 2011, which authorizes the issuance of up to 39 million shares plus up to 4.5 million shares under the Predecessor Plan for Full Value Awards as equity compensation and provides for incentive and nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units, and performance share and restricted stock awards. Full Value Awards are defined as awards with no cash outlay for the employee to obtain the full value. Based on total stock-based awards outstanding (including stock options, stock appreciation rights, restricted stock and performance units) and shares remaining for future grants under the 2011 Incentive Compensation Plan, the Bancorps total overhang is nine percent. The overhang measurement represents the potential dilution to which the Bancorps shareholders of common stock are exposed due to the potential that stock-based compensation will be awarded to executives, directors or key employees of the Bancorp. SARs, restricted stock, stock options and performance units outstanding represent six percent of the Bancorps issued shares at December 31, 2011.
All of the Bancorps stock-based awards are to be settled with stock with the exception of phantom stock units and a portion of the performance units that are to be settled in cash. The Bancorp has historically used treasury stock to settle stock-based awards, when available. SARs, issued at fair value based on the closing price of the Bancorps common stock on the date of grant, have up to ten-year terms and vest and become exercisable either ratably or fully over a four year period of continued employment. The Bancorp does not grant discounted
SARs or stock options, re-price previously granted SARs or stock options, or grant reload stock options. Restricted stock grants vest after four years, or ratably over three or four years or ratably after three years of continued employment and include dividend and voting rights. Stock options were previously issued at fair value based on the closing price of the Bancorps common stock on the date of grant, had up to ten-year terms and vested and became fully exercisable ratably over a three or four year period of continued employment. Performance unit awards have three-year cliff vesting terms with performance or market conditions as defined by the plan.
Stock-based compensation expense was $59 million, $64 million and $51 million for the years ended December 31, 2011, 2010 and 2009, respectively, and is included in salaries, wages, and incentives in the Consolidated Statements of Income. The total related income tax benefit recognized was $21 million for 2011 and $18 million for the years ended December 31, 2010 and 2009, respectively.
Stock Appreciation Rights
The Bancorp uses assumptions, which are evaluated and revised as necessary, in estimating the grant-date fair value of each SAR grant. The weighted-average assumptions were as follows for the years ended:
2011 | 2010 | 2009 | ||||
Expected life (in years) |
6 | 6 | 6 | |||
Expected volatility |
35% | 38% | 73% | |||
Expected dividend yield |
2.0% | 2.0% | 1.3% | |||
Risk-free interest rate |
2.6% | 3.1% | 2.2% |
132 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The expected life is derived from historical exercise patterns and represents the amount of time that options granted are expected to be outstanding. The expected volatility is based on a combination of historical and implied volatilities of the Bancorps common stock. The expected dividend yield is based on annual dividends divided by the Bancorps stock price. Annual dividends are based on projected dividends, estimated using a historical long-term dividend payout ratio, over the estimated life of the awards. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
The grant-date fair value of SARs is measured using the Black-Scholes option-pricing model. The weighted-average grant-date fair value of SARs granted was $4.29, $5.10 and $2.41 per share for the years ended 2011, 2010 and 2009, respectively. The total grant-date fair value of SARs that vested during 2011, 2010 and 2009 was $20 million, $25 million, and $26 million, respectively.
At December 31, 2011, there was $47 million of stock-based compensation expense related to nonvested SARs not yet recognized. The expense is expected to be recognized over a remaining weighted-average period of approximately 2.7 years.
2011 | 2010 | 2009 | ||||||||||||||||||||||
SARs (shares in thousands) | Shares |
Weighted-
Average Grant Price |
Shares |
Weighted-
Average Grant Price |
Shares |
Weighted-
Average Grant Price |
||||||||||||||||||
Outstanding at January 1 |
31,152 | $ | 24.67 | 28,571 | $ | 26.82 | 22,508 | $ | 35.43 | |||||||||||||||
Granted |
8,633 | 13.36 | 5,310 | 14.74 | 8,398 | 4.05 | ||||||||||||||||||
Exercised |
(521 | ) | 3.96 | (319 | ) | 3.96 | - | - | ||||||||||||||||
Forfeited or expired |
(2,762 | ) | 25.76 | (2,410 | ) | 30.87 | (2,335 | ) | 27.93 | |||||||||||||||
Outstanding at December 31 |
36,502 | $ | 22.20 | 31,152 | $ | 24.67 | 28,571 | $ | 26.82 | |||||||||||||||
Exercisable at December 31 |
20,070 | $ | 30.29 | 16,347 | $ | 34.94 | 12,254 | $ | 40.38 |
The following table summarizes outstanding and exercisable SARs by grant price at December 31, 2011:
Outstanding SARs | Exercisable SARs | |||||||||||||||||||||||
Grant price per share |
Number of
SARs at Year End (000s) |
Weighted-
Average Grant Price |
Weighted-
Average Remaining Contractual Life (in years) |
Number of
SARs at Year End (000s) |
Weighted-
Average Grant Price |
Weighted-
Average Remaining Contractual Life (in years) |
||||||||||||||||||
Under $10.00 |
6,293 | $4.04 | 7.3 | 2,845 | $ | 3.96 | 7.3 | |||||||||||||||||
$10.01-$20.00 |
17,845 | 15.37 | 8.2 | 4,978 | 18.18 | 6.8 | ||||||||||||||||||
$20.01-$30.00 |
39 | 22.85 | 6.3 | 22 | 22.42 | 6.3 | ||||||||||||||||||
$30.01-$40.00 |
8,118 | 38.73 | 4.4 | 8,118 | 38.73 | 4.4 | ||||||||||||||||||
Over $40.00 |
4,207 | 46.41 | 3.1 | 4,107 | 46.57 | 3.1 | ||||||||||||||||||
All SARs |
36,502 | $22.20 | 6.6 | 20,070 | $ | 30.29 | 5.1 |
Restricted Stock Awards
The total grant-date fair value of RSAs that vested during 2011, 2010 and 2009 was $37 million, $30 million and $36 million, respectively. At December 31, 2011, there was $40 million of
stock-based compensation expense related to nonvested restricted stock not yet recognized. The expense is expected to be recognized over a remaining weighted-average period of approximately 2.2 years.
2011 | 2010 | 2009 | ||||||||||||||||||||||
RSAs (shares in thousands) | Shares |
Weighted-
Average Grant -Date Fair Value |
Shares |
Weighted-
Average Grant -Date Fair Value |
Shares |
Weighted-
Average Grant -Date Fair Value |
||||||||||||||||||
Nonvested at January 1 |
5,158 | $ | 18.89 | 4,645 | $ | 23.85 | 5,584 | $ | 29.04 | |||||||||||||||
Granted |
1,702 | 13.19 | 1,677 | 14.69 | 751 | 4.72 | ||||||||||||||||||
Exercised |
(1,646 | ) | 22.52 | (817 | ) | 36.96 | (870 | ) | 40.84 | |||||||||||||||
Forfeited |
(450 | ) | 15.34 | (347 | ) | 22.39 | (820 | ) | 23.86 | |||||||||||||||
Nonvested at December 31 |
4,764 | $ | 15.95 | 5,158 | $ | 18.89 | 4,645 | $ | 23.85 |
Fifth Third Bancorp |
133 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes unvested RSAs by grant-date fair value at December 31, 2011:
Nonvested RSAs | ||||||||
Grant-Date Fair Value Per Share |
Number of
RSAs at Year End (000s) |
Weighted-
Average Remaining Contractual Life (in years) |
||||||
Under $10.00 |
409 | 1.3 | ||||||
$10.01-$20.00 |
3,982 | 1.4 | ||||||
$20.01-$30.00 |
134 | 0.3 | ||||||
$30.01-$40.00 |
239 | 0.3 | ||||||
All RSAs |
4,764 | 1.3 |
Stock options
The grant-date fair value of stock options is measured using the Black-Scholes option-pricing model. There were no stock options granted during 2011 and 2010. Stock options granted during 2009 were immaterial to the Bancorps Consolidated Financial Statements.
The total intrinsic value of options exercised was immaterial to the Bancorps Consolidated Financial Statements in 2011, 2010 and 2009. Cash received from options exercised during
2011 was $1 million and was immaterial to the Bancorps Consolidated Financial Statements in 2010 and 2009. Tax benefits realized from exercised options were immaterial to the Consolidated Financial Statements during 2011, 2010 and 2009. All stock options were vested at December 31, 2008, therefore, no stock options vested during 2011, 2010, or 2009. As of December 31, 2011, the aggregate intrinsic value of both outstanding options and exercisable options was immaterial to the Consolidated Financial Statements.
2011 | 2010 | 2009 | ||||||||||||||||||||||
Stock Options (shares in thousands) | Shares |
Weighted-
Average Exercise Price |
Shares |
Weighted-
Average Exercise Price |
Shares |
Weighted-
Average Grant Price |
||||||||||||||||||
Outstanding at January 1 |
11,859 | $ | 52.01 | 15,504 | $ | 49.29 | 20,564 | $ | 48.97 | |||||||||||||||
Granted |
- | - | - | - | 1 | 8.59 | ||||||||||||||||||
Exercised |
(96 | ) | 9.25 | (58 | ) | 8.76 | (11 | ) | 8.33 | |||||||||||||||
Forfeited or expired |
(4,179 | ) | 49.61 | (3,587 | ) | 40.54 | (5,050 | ) | 48.06 | |||||||||||||||
Outstanding at December 31 |
7,584 | $ | 53.88 | 11,859 | $ | 52.01 | 15,504 | $ | 49.29 | |||||||||||||||
Exercisable at December 31 |
7,584 | $ | 53.88 | 11,859 | $ | 52.01 | 15,504 | $ | 49.29 |
The following table summarizes outstanding and exercisable stock options by exercise price at December 31, 2011:
Outstanding and Exercisable Stock Options | ||||||||||||
Exercise price per share |
Number of
Options at Year End (000s) |
Weighted-
Average Exercise Price |
Weighted-
Average Remaining Contractual Life (in years) |
|||||||||
Under $10.00 |
125 | $9.62 | 0.3 | |||||||||
$10.01-$20.00 |
694 | 12.59 | 2.8 | |||||||||
$20.01-$30.00 |
60 | 23.63 | 0.7 | |||||||||
$30.01-$40.00 |
139 | 36.25 | 2.3 | |||||||||
Over $40.00 |
6,566 | 59.74 | 0.8 | |||||||||
All stock options |
7,584 | $53.88 | 1.0 |
Other stock-based compensation
During 2009, the Bancorps Board of Directors approved the use of phantom stock units as part of its compensation for executives in connection with changes made in reaction to the TARP compensation rules. On February 22, 2011, the Bancorp redeemed its Series F preferred stock held by the U.S. Treasury under the CPP. As a result of this redemption, the last payment of phantom stock occurred in April of 2011. The phantom stock units were issued under the Bancorps 2008 Incentive Compensation Plan. The number of phantom stock units was determined each pay period by dividing the amount of salary to be paid in phantom stock units for that pay period, by the reported closing price of the Bancorps common stock on the
pay date for such pay period. The phantom stock units vest immediately. Phantom stock was expensed based on the number of outstanding units multiplied by the closing price of the Bancorps stock at period end. The phantom stock units did not include any rights to receive dividends or dividend equivalents. Phantom stock units issued on or before June 12, 2010 were settled in cash upon the earlier to occur of June 15, 2011 or the executives death. Units issued thereafter will be settled in cash with 50% to be settled on June 15, 2012 and 50% to be settled on June 15, 2013. The amount paid on settlement of the phantom stock units is equal to the total amount of phantom stock units settled at the reported closing price of the Bancorps common stock on the settlement
134 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
date. Under the phantom stock program, 132,649 and 488,703 respective phantom stock units were granted with a weighted average grant price of $14.40 and $12.80, during the years ended December 31, 2011 and 2010, respectively. During 2011, 521,091 phantom stock units were settled. No phantom stock units were settled during 2010.
Performance units are payable contingent upon the Bancorp achieving certain predefined performance targets over the three-year measurement period. Awards granted during 2011 and 2010 will be entirely settled in stock. During 2009, the awards granted are payable 50% in stock and 50% in cash. The performance targets are based on the Bancorps performance relative to a defined peer group. During 2011, 2010 and 2009,
328,061, 61,320, and 1,118,958 performance units, respectively, were granted by the Bancorp. These awards were granted at a weighted-average grant-date fair value of $13.36, $13.76 and $3.96 per unit during 2011, 2010 and 2009, respectively.
The Bancorp sponsors a stock purchase plan that allows qualifying employees to purchase shares of the Bancorps common stock with a 15% match. During the years ended December 31, 2011, 2010 and 2009, there were 886,447, 749,127 and 1,343,632 shares, respectively, purchased by participants and the Bancorp recognized stock-based compensation expense of $1 million each year.
25. OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE
The following table presents the major components of other noninterest income and other noninterest expense for the years ended December 31:
($ in millions) | 2011 | 2010 | 2009 | |||||||||
Other noninterest income: |
||||||||||||
Operating lease income |
$ | 58 | 62 | 59 | ||||||||
Equity method income from interest in Vantiv Holding, LLC |
57 | 26 | 15 | |||||||||
BOLI income (loss) |
41 | 194 | (2) | |||||||||
Cardholder fees |
41 | 36 | 48 | |||||||||
Net gain from warrant and put options associated with sale of the processing business |
39 | 5 | 18 | |||||||||
Gain on loan sales |
37 | 51 | 38 | |||||||||
Consumer loan and lease fees |
31 | 32 | 43 | |||||||||
Insurance income |
28 | 38 | 47 | |||||||||
Banking center income |
27 | 22 | 22 | |||||||||
TSA revenue |
21 | 49 | 76 | |||||||||
Loss on sale of OREO |
(71 | ) | (78) | (70) | ||||||||
Loss on swap associated with the sale of Visa, Inc. class B shares |
(83 | ) | (19) | (2) | ||||||||
Gain on sale/redemption of Visa, Inc. ownership interests |
- | - | 244 | |||||||||
Other, net |
24 | (12 | ) | (57 | ) | |||||||
Total |
$ | 250 | 406 | 479 | ||||||||
Other noninterest expense: |
||||||||||||
FDIC insurance and other taxes |
$ | 201 | 242 | 269 | ||||||||
Loan and lease |
195 | 211 | 234 | |||||||||
Losses and adjustments |
129 | 187 | 110 | |||||||||
Marketing |
115 | 98 | 79 | |||||||||
Affordable housing investments impairment |
85 | 100 | 83 | |||||||||
Professional services fees |
58 | 77 | 63 | |||||||||
Travel |
52 | 51 | 41 | |||||||||
Postal and courier |
49 | 48 | 53 | |||||||||
Operating lease |
41 | 41 | 39 | |||||||||
OREO expense |
34 | 33 | 24 | |||||||||
Recruitment and education |
31 | 31 | 30 | |||||||||
Data processing |
29 | 24 | 21 | |||||||||
Insurance |
25 | 42 | 50 | |||||||||
Intangible asset amortization |
22 | 43 | 57 | |||||||||
Supplies |
18 | 24 | 25 | |||||||||
Visa litigation reserve |
- | - | (73) | |||||||||
Provision for unfunded commitments and letters of credit |
(46 | ) | (24) | 99 | ||||||||
Other, net |
186 | 166 | 167 | |||||||||
Total |
$ | 1,224 | 1,394 | 1,371 |
Fifth Third Bancorp |
135 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The calculation of earnings per share and the reconciliation of earnings per share and earnings per diluted share for the years ended December 31:
2011 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||
(in millions, except per share data) | Income |
Average
Shares |
Per
Share Amount |
Income |
Average
Shares |
Per
Share Amount |
Income |
Average
Shares |
Per
Share Amount |
|||||||||||||||||||||||||||
Earnings per share: |
||||||||||||||||||||||||||||||||||||
Net income attributable to Bancorp |
$ | 1,297 | 753 | 737 | ||||||||||||||||||||||||||||||||
Dividends on preferred stock |
203 | 250 | 226 | |||||||||||||||||||||||||||||||||
Net income available to common shareholders |
1,094 | 503 | 511 | |||||||||||||||||||||||||||||||||
Less: Income allocated to participating securities |
6 | 3 | 4 | |||||||||||||||||||||||||||||||||
Net income allocated to common shareholders |
$ | 1,088 | 906 | 1.20 | 500 | 791 | 0.63 | 507 | 696 | 0.73 | ||||||||||||||||||||||||||
Earnings per diluted share: |
||||||||||||||||||||||||||||||||||||
Net income available to common shareholders |
$ | 1,094 | 503 | 511 | ||||||||||||||||||||||||||||||||
Effect of dilutive securities: |
||||||||||||||||||||||||||||||||||||
Stock-based awards |
- | 6 | - | - | 5 | - | - | 2 | - | |||||||||||||||||||||||||||
Series G convertible preferred stock (a) |
35 | 36 | (0.02) | - | - | - | (21) | 28 | (0.06) | |||||||||||||||||||||||||||
Warrants related to Series F preferred stock |
- | 2 | - | - | 3 | - | - | - | - | |||||||||||||||||||||||||||
Net income available to common shareholders plus assumed conversions |
1,129 | 503 | 490 | |||||||||||||||||||||||||||||||||
Less: Income allocated to participating securities |
6 | 3 | 4 | |||||||||||||||||||||||||||||||||
Net income allocated to common shareholders plus assumed conversions |
$ | 1,123 | 950 | 1.18 | 500 | 799 | 0.63 | 486 | 726 | 0.67 |
(a) | The additive effect to income from dividends on convertible preferred stock for the year ended December 31, 2009 included preferred dividends of $14 for Series G preferred shares, offset by a $35 reduction to preferred dividends due to the conversion of a portion of Series G preferred shares during the second quarter of 2009. |
Shares are excluded from the computation of net income per diluted share when their inclusion has an anti-dilutive effect on earnings per share. The diluted earnings per share computation for the years 2011, 2010, and 2009 excludes 29 million, 23 million, and 23 million, respectively, of stock appreciation rights, 8 million, 12 million, and 17 million, respectively, of stock options and 1 million, 1 million and 4 million shares, respectively, of unvested restricted stock that had not yet been exercised. In 2010, 36 million shares related to the Bancorps Series G preferred stock that were not part of the conversion of preferred shares in the second quarter of 2009 were excluded from the computation of net income per diluted share because their inclusion would have been anti-dilutive to earnings per share.
For the year ended December 31, 2009, there were 44 million shares under warrants related to the Bancorps Series F preferred stock from the CPP that were excluded from the computation of net income per diluted share, as their inclusion would have been anti-dilutive to earnings per share due to the exercise price of the shares being greater than the average market price of the common shares. The warrants had an initial exercise price of $11.72 per share.
136 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bancorp measures certain financial assets and liabilities at fair value in accordance with U.S. GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instruments categorization within the fair value
hierarchy is based upon the lowest level of input that is significant to the instruments fair value measurement. For more information regarding the fair value hierarchy and how the Bancorp measures fair value, see Note 1.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables summarize assets and liabilities measured at fair value on a recurring basis, including residential mortgage loans held for sale for which the Bancorp has elected the fair value option as of:
Fair Value Measurements Using | ||||||||||||||||
December 31, 2011 ($ in millions) | Level 1 | Level 2 | Level 3 |
Total
Fair Value |
||||||||||||
Assets: |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
U.S. Treasury and Government agencies |
$171 | - | - | 171 | ||||||||||||
U.S. Government sponsored agencies |
- | 1,962 | - | 1,962 | ||||||||||||
Obligations of states and political subdivisions |
- | 101 | - | 101 | ||||||||||||
Agency mortgage-backed securities |
- | 10,284 | - | 10,284 | ||||||||||||
Other bonds, notes and debentures |
- | 1,812 | - | 1,812 | ||||||||||||
Other securities (a) |
185 | 5 | - | 190 | ||||||||||||
Available-for-sale securities (a) |
356 | 14,164 | - | 14,520 | ||||||||||||
Trading securities: |
||||||||||||||||
Obligations of states and political subdivisions |
- | 8 | 1 | 9 | ||||||||||||
Agency mortgage-backed securities |
- | 11 | - | 11 | ||||||||||||
Other bonds, notes and debentures |
- | 13 | - | 13 | ||||||||||||
Other securities |
144 | - | - | 144 | ||||||||||||
Trading securities |
144 | 32 | 1 | 177 | ||||||||||||
Residential mortgage loans held for sale |
- | 2,751 | - | 2,751 | ||||||||||||
Residential mortgage loans (b) |
- | - | 65 | 65 | ||||||||||||
Derivative assets: |
||||||||||||||||
Interest rate contracts |
8 | 1,773 | 34 | 1,815 | ||||||||||||
Foreign exchange contracts |
- | 294 | - | 294 | ||||||||||||
Equity contracts |
- | - | 113 | 113 | ||||||||||||
Commodity contracts |
- | 134 | - | 134 | ||||||||||||
Derivative assets |
8 | 2,201 | 147 | 2,356 | ||||||||||||
Total assets |
$508 | 19,148 | 213 | 19,869 | ||||||||||||
Liabilities: |
||||||||||||||||
Derivative liabilities |
||||||||||||||||
Interest rate contracts |
$ | 54 | 802 | 2 | 858 | |||||||||||
Foreign exchange contracts |
- | 275 | - | 275 | ||||||||||||
Equity contracts |
- | - | 81 | 81 | ||||||||||||
Commodity contracts |
- | 130 | - | 130 | ||||||||||||
Derivative liabilities |
54 | 1,207 | 83 | 1,344 | ||||||||||||
Short positions |
2 | 4 | - | 6 | ||||||||||||
Total liabilities |
$56 | 1,211 | 83 | 1,350 |
Fifth Third Bancorp |
137 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using | ||||||||||||||||
December 31, 2010 ($ in millions) | Level 1 | Level 2 | Level 3 |
Total
Fair Value |
||||||||||||
Assets: |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
U.S. Treasury and Government agencies |
$230 | - | - | 230 | ||||||||||||
U.S. Government sponsored agencies |
- | 1,645 | - | 1,645 | ||||||||||||
Obligations of states and political subdivisions |
- | 172 | - | 172 | ||||||||||||
Agency mortgage-backed securities |
- | 10,973 | - | 10,973 | ||||||||||||
Other bonds, notes and debentures |
- | 1,342 | - | 1,342 | ||||||||||||
Other securities (a) |
180 | 4 | - | 184 | ||||||||||||
Available-for-sale securities (a) |
410 | 14,136 | - | 14,546 | ||||||||||||
Trading securities: |
||||||||||||||||
U.S. Treasury and Government agencies |
1 | - | - | 1 | ||||||||||||
Obligations of states and political subdivisions |
- | 20 | 1 | 21 | ||||||||||||
Agency mortgage-backed securities |
- | 8 | - | 8 | ||||||||||||
Other bonds, notes and debentures |
- | 115 | 5 | 120 | ||||||||||||
Other securities |
47 | 97 | - | 144 | ||||||||||||
Trading securities |
48 | 240 | 6 | 294 | ||||||||||||
Residential mortgage loans held for sale |
- | 1,892 | - | 1,892 | ||||||||||||
Residential mortgage loans (b) |
- | - | 46 | 46 | ||||||||||||
Derivative assets: |
||||||||||||||||
Interest rate contracts |
90 | 1,448 | 13 | 1,551 | ||||||||||||
Foreign exchange contracts |
- | 343 | - | 343 | ||||||||||||
Equity contracts |
- | - | 81 | 81 | ||||||||||||
Commodity contracts |
- | 99 | - | 99 | ||||||||||||
Derivative assets |
90 | 1,890 | 94 | 2,074 | ||||||||||||
Total assets |
$548 | 18,158 | 146 | 18,852 | ||||||||||||
Liabilities: |
||||||||||||||||
Derivative liabilities |
||||||||||||||||
Interest rate contracts |
$ | 14 | 846 | 11 | 871 | |||||||||||
Foreign exchange contracts |
- | 323 | - | 323 | ||||||||||||
Equity contracts |
- | - | 28 | 28 | ||||||||||||
Commodity contracts |
- | 92 | - | 92 | ||||||||||||
Derivative liabilities |
14 | 1,261 | 39 | 1,314 | ||||||||||||
Short positions |
1 | 1 | - | 2 | ||||||||||||
Total liabilities |
$15 | 1,262 | 39 | 1,316 |
(a) | Excludes FHLB and FRB restricted stock totaling $497 and $345 , respectively, at December 31, 2011 , $524 and $344, respectively, at December 31, 2010. |
(b) | Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment. |
The following is a description of the valuation methodologies used for significant instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy. Residential mortgage loans held for sale that are reclassified to held for investment are transferred from Level 2 to Level 3 of the fair value hierarchy as described below. It is the Bancorps policy to value any transfers between levels of the fair value hierarchy based on end of period fair values.
Available-for-sale and trading securities
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include government bonds and exchange traded equities. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which are classified within Level 2 of the valuation hierarchy, include agency and non-agency mortgage-backed securities, other asset-backed securities, obligations of U.S. Government sponsored agencies, and corporate and municipal bonds. Agency mortgage-backed securities, obligations of U.S. Government sponsored agencies, and corporate and municipal bonds are generally valued using a market approach based on observable prices of securities with similar characteristics.
Non-agency mortgage-backed securities and other asset- backed securities are generally valued using an income approach based on discounted cash flows, incorporating prepayment speeds, performance of underlying collateral and specific tranche-level attributes. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Trading securities classified as Level 3 consist of auction rate securities. Due to the illiquidity in the market for these types of securities at December 31, 2011 and 2010, the Bancorp measured fair value using a discount rate based on the assumed holding period.
Residential mortgage loans held for sale and held for investment
For residential mortgage loans held for sale, fair value is estimated based upon mortgage-backed securities prices and spreads to those prices or, for certain ARM loans, DCF models that may incorporate the anticipated portfolio composition, credit spreads of asset-backed securities with similar collateral and market conditions. The anticipated portfolio composition includes the effect of interest rate spreads and discount rates due to loan characteristics such as the state in which the loan was originated, the loan amount and the ARM margin. Residential mortgage loans held for sale that are valued based on mortgage backed securities prices are classified within Level 2 of the valuation hierarchy as the valuation is based on
138 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
external pricing for similar instruments. ARM loans classified as held for sale are also classified within Level 2 of the valuation hierarchy due to the use of observable inputs in the DCF model. These observable inputs include interest rate spreads from agency mortgage-backed securities market rates and observable discount rates. For residential mortgage loans reclassified from held for sale to held for investment, the fair value estimation is based on mortgage-backed securities prices and a credit component that is based on internally developed loss rate models. Therefore, these loans are classified within Level 3 of the valuation hierarchy.
Derivatives
Exchange-traded derivatives valued using quoted prices and certain over-the-counter derivatives valued using active bids are classified within Level 1 of the valuation hierarchy. Most derivative contracts are valued using discounted cash flow or other models that incorporate current market interest rates, credit spreads assigned to the derivative counterparties and other market parameters and, therefore, are classified within Level 2 of the valuation hierarchy. Such derivatives include basic and structured interest rate swaps and options. Derivatives that are valued based upon models with significant
unobservable market parameters are classified within Level 3 of the valuation hierarchy. At December 31, 2011 and 2010, derivatives classified as Level 3, which are valued using an option-pricing model containing unobservable inputs, consisted primarily of warrants and put rights associated with the sale of the processing business to Advent International and a total return swap associated with the Bancorps sale of Visa, Inc. Class B shares. Level 3 derivatives also include interest rate lock commitments, which utilize internally generated loan closing rate assumptions as a significant unobservable input in the valuation process.
In connection with the sale of the processing business, the Bancorp provided Advent International with certain put options that are exercisable in the event of certain circumstances. In addition, the associated warrants allow the Bancorp to purchase an incremental 10% nonvoting interest in Vantiv Holding, LLC under certain defined conditions involving change of control. The fair values of the warrants and put options are calculated applying Black-Scholes option valuation models using probability weighted scenarios. The assumptions utilized in the models are summarized in the following table as of December 31:
2011 | 2010 | |||||||||||||||
Warrants | Put Options (b) | Warrants | Put Options | |||||||||||||
Expected term (years) |
7.5 17.5 | 2.0 | 8.5 18.5 | 0.5 3.0 | ||||||||||||
Expected volatility (a) |
35.4 35.5 | % | 31.5 | % | 36.0 37.0 | % | 25.6 44.6 | % | ||||||||
Risk free rate |
1.57 2.88 | % | 0.31 | % | 3.06 4.18 | % | 0.23 1.05 | % | ||||||||
Expected dividend rate |
| % | | % | | % | | % |
(a) | Based on historical and implied volatilities of comparable companies assuming similar expected terms. |
(b) | Historically, three scenarios have been used to estimate the fair value of the put options. Two of the scenarios terms expired prior to December 31, 2011. Therefore, the assumptions at December 31, 2011 only include one scenario. |
Under the terms of the total return swap, the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Visa, Inc. Class B shares into Class A shares. The fair value of the total return swap was calculated using a discounted cash flow model based on unobservable inputs consisting of managements estimate of the probability of certain litigation scenarios, timing of litigation settlements and payments related to the swap.
The net fair value of the interest rate lock commitments at December 31, 2011 was $33 million. Immediate decreases in current interest rates of 25 bps and 50 bps would result in increases in the fair value of the interest rate lock commitments of approximately $16 million and $28 million, respectively. Immediate increases of current interest rates of 25 bps and 50 bps
would result in decreases in the fair value of the interest rate lock commitments of approximately $20 million and $45 million, respectively. The decrease in fair value of interest rate lock commitments due to immediate 10% and 20% adverse changes in the assumed loan closing rates would be approximately $4 million and $7 million, respectively, and the increase in fair value due to immediate 10% and 20% favorable changes in the assumed loan closing rates would be approximately $3 million and $6 million, respectively. These sensitivities are hypothetical and should be used with caution, as changes in fair value based on a variation in assumptions typically cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear.
Fifth Third Bancorp |
139 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables are a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
||||||||||||||||||||
For the year ended December 31, 2011 ($ in millions) |
Trading
Securities |
Residential
Mortgage Loans |
Interest
Rate
Derivatives, Net (a) |
Equity
Derivatives, Net (a) |
Total
Fair Value |
|||||||||||||||
Beginning balance |
$ | 6 | 46 | 2 | 53 | $ | 107 | |||||||||||||
Total gains or losses (realized/unrealized): |
||||||||||||||||||||
Included in earnings |
- | 4 | 205 | (43) | 166 | |||||||||||||||
Purchases |
- | - | - | 2 | 2 | |||||||||||||||
Sales |
(5) | - | - | - | (5) | |||||||||||||||
Settlements |
- | (9) | (175) | 20 | (164) | |||||||||||||||
Transfers into Level 3 (b) |
- | 24 | - | - | 24 | |||||||||||||||
Ending balance |
$ | 1 | 65 | 32 | 32 | $ | 130 | |||||||||||||
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2011 (c) |
$ | - | 4 | 32 | (43) | $ | (7) |
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
||||||||||||||||||||||||
For the year ended December 31, 2010 ($ in millions) |
Residual
Interests in Securitizations |
Trading
Securities |
Residential
Mortgage Loans |
Interest
Rate Derivatives, Net (a) |
Equity
Derivatives, Net (a) |
Total
Fair Value |
||||||||||||||||||
Beginning balance |
$ | 174 | 13 | 26 | (2) | 11 | $ | 222 | ||||||||||||||||
Total gains or losses (realized/unrealized): |
||||||||||||||||||||||||
Included in earnings |
- | 3 | - | 187 | (14) | 176 | ||||||||||||||||||
Purchases, sales, issuances, and settlements, net |
(174) (d) | (10) | (6) | (183) | 56 | (317) | ||||||||||||||||||
Transfers into Level 3 (b) |
- | - | 26 | - | - | 26 | ||||||||||||||||||
Ending balance |
$ | - | 6 | 46 | 2 | 53 | $ | 107 | ||||||||||||||||
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2010 (c) |
$ | - | - | - | 60 | (14) | $ | 46 |
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
||||||||||||||||||||
For the year ended December 31, 2009 ($ in millions) |
Residual
Interests in Securitizations |
Trading
Securities |
Residential
Mortgage Loans |
Derivatives,
Net (e) |
Total
Fair Value |
|||||||||||||||
Beginning balance |
$ | 146 | - | 7 | 24 | $ | 177 | |||||||||||||
Total gains or losses (realized/unrealized): |
||||||||||||||||||||
Included in earnings |
10 | (4) | (2) | 145 | 149 | |||||||||||||||
Included in other comprehensive income |
3 | - | - | - | 3 | |||||||||||||||
Purchases, sales, issuances, and settlements, net |
15 | 17 | (8) | (160) | (136) | |||||||||||||||
Transfers into Level 3 (b) |
- | - | 29 | - | 29 | |||||||||||||||
Ending balance |
$ | 174 | 13 | 26 | 9 | $ | 222 | |||||||||||||
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2009 (c) |
$ | 6 | (4) | (2) | 16 | $ | 16 |
(a) | Net interest rate derivatives include derivative assets and liabilities of $34 and $2 , respectively, as of December 31, 2011 and $13 and $11, respectively, as of December 31, 2010. Net equity derivatives include derivative assets and liabilities of $113 and $81 , respectively, as of December 31, 2011 , and $81 and $28, respectively, as of December 31, 2010. |
(b) | Includes residential mortgage loans held for sale that were transferred to held for investment. |
(c) | Includes interest income and expense. |
(d) | Due to a change in U.S. GAAP adopted by the Bancorp on January 1, 2010, all residual interests in securitizations were eliminated concurrent with the consolidation of the related VIEs. |
(e) | Net derivatives include derivative assets and liabilities of $84 and $75, respectively, at December 31, 2009. |
140 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total gains and losses included in earnings for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) were recorded in the Consolidated Statements of Income as follows:
($ in millions) | 2011 | 2010 | 2009 | |||||||||
Interest income |
$- | - | 15 | |||||||||
Mortgage banking net revenue |
210 | 187 | 127 | |||||||||
Corporate banking revenue |
2 | 1 | 1 | |||||||||
Other noninterest income |
(46) | (15) | 15 | |||||||||
Securities gains (losses), net |
- | 3 | (5) | |||||||||
Other noninterest expense |
- | - | (4) | |||||||||
Total gains |
$166 | 176 | 149 |
The total gains and losses included in earnings attributable to changes in unrealized gains and losses related to Level 3 assets and liabilities still held at December 31, 2011, 2010 and 2009 were recorded in the Consolidated Statements of Income as follows:
($ in millions) | 2011 | 2010 | 2009 | |||||||||
Interest income |
$- | - | 11 | |||||||||
Mortgage banking net revenue |
37 | 60 | (7) | |||||||||
Corporate banking revenue |
1 | 1 | 1 | |||||||||
Other noninterest income |
(45) | (15) | 20 | |||||||||
Securities losses, net |
- | - | (5) | |||||||||
Other noninterest expense |
- | - | (4) | |||||||||
Total (losses) gains |
$(7) | 46 | 16 |
Fifth Third Bancorp |
141 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when
there is evidence of impairment. The following tables represent those assets that were subject to fair value adjustments during the years ended December 31, 2011 and 2010 and still held as of the end of the period, and the related losses from fair value adjustments on assets sold during the period as well as assets still held as of the end of the period.
Fair Value Measurements Using |
Total Losses |
|||||||||||||||||||
($ in millions) | Level 1 | Level 2 | Level 3 | Total | 2011 | |||||||||||||||
Commercial loans held for sale (a) |
$ | - | - | 27 | 27 | (67 | ) | |||||||||||||
Commercial and industrial loans |
- | - | 101 | 101 | (328 | ) | ||||||||||||||
Commercial mortgage loans |
- | - | 85 | 85 | (124 | ) | ||||||||||||||
Commercial construction loans |
- | - | 55 | 55 | (60 | ) | ||||||||||||||
MSRs |
- | - | 681 | 681 | (242 | ) | ||||||||||||||
OREO property |
- | - | 224 | 224 | (171 | ) | ||||||||||||||
Total |
$ | - | - | 1,173 | 1,173 | (992 | ) |
Fair Value Measurements Using |
Total Losses |
|||||||||||||||||||
($ in millions) | Level 1 | Level 2 | Level 3 | Total | 2010 | |||||||||||||||
Commercial loans held for sale (a) |
$ | 120 | - | 770 | 890 | (448 | ) | |||||||||||||
Commercial and industrial loans |
- | - | 272 | 272 | (470 | ) | ||||||||||||||
Commercial mortgage loans |
- | - | 234 | 234 | (207 | ) | ||||||||||||||
Commercial construction loans |
- | - | 109 | 109 | (159 | ) | ||||||||||||||
Residential mortgage loans |
- | - | 3 | 3 | (6 | ) | ||||||||||||||
Other consumer loans |
- | 71 | 10 | 81 | (12 | ) | ||||||||||||||
MSRs |
- | - | 822 | 822 | (36 | ) | ||||||||||||||
OREO property |
- | - | 527 | 527 | (264 | ) | ||||||||||||||
Total |
$ | 120 | 71 | 2,747 | 2,938 | (1,602 | ) |
(a) | Includes commercial nonaccrual loans held for sale. |
During 2011, the Bancorp transferred $143 million of commercial loans from the portfolio to loans held for sale that upon transfer were measured at fair value. These loans had fair value adjustments totaling $31 million and were based on discounted cash flow models incorporating appraisals of the underlying collateral, as well as assumptions about investor return requirements and amounts and timing of expected cash flows, and were therefore, classified within Level 3 of the valuation hierarchy. Additionally, during 2011, existing commercial loans held for sale with a fair value of $48 million were further adjusted using the same methodology as loans transferred to held for sale. Therefore, these loans were classified within Level 3 of the valuation hierarchy.
During 2011 and 2010, the Bancorp recorded nonrecurring impairment adjustments to certain commercial and industrial, commercial mortgage and commercial construction loans held for investment. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and were classified within Level 3 of the valuation hierarchy. In cases where the carrying value exceeds the fair value, an impairment loss is recognized. The fair values and recognized impairment losses are reflected in the previous table.
During 2011, the Bancorp recognized temporary impairments in certain classes of the MSR portfolio in which the carrying value was adjusted to fair value as of December 31, 2011. MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs do occur, the precise terms and conditions typically are not readily available. Accordingly, the Bancorp estimates the fair value of MSRs using discounted cash flow models with certain unobservable inputs, primarily prepayment speed assumptions, resulting in a classification within Level 3 of the valuation hierarchy. Refer to Note 12 for further information on the Bancorps MSRs.
During the 2011 and 2010, the Bancorp recorded nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO and measured at the lower of carrying amount or fair value, less costs to sell. Nonrecurring losses included in the above table are primarily due to declines in real estate values of the OREO properties. These losses include $100 million in losses, recorded as charge-offs, on new OREO properties transferred from loans during the period and $71 million in losses, recorded in other noninterest income, attributable to fair value adjustments on OREO
properties subsequent to their transfer from loans. Such fair value amounts are generally based on appraisals of the property values, resulting in a classification within Level 3 of the valuation hierarchy. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. The previous tables reflect the fair value measurements of the properties before deducting the estimated costs to sell.
Fair Value Option
The Bancorp elected to measure certain residential mortgage loans held for sale under the fair value option as allowed under U.S. GAAP. Managements intent to sell residential mortgage loans classified as held for sale may change over time due to such factors as changes in the overall liquidity in markets or changes in characteristics specific to certain loans held for sale. Consequently, these loans may be reclassified to loans held for investment and maintained in the Bancorps loan portfolio. In such cases, the loans will continue to be measured at fair value. Residential loans with fair values of $24 million and $26 million were transferred to the Bancorps portfolio during 2011 and 2010, respectively. The net impact related to fair value adjustments on these loans was a gain of $4 million during 2011. Fair value adjustments on residential mortgage loans transferred to the Bancorps portfolio during 2010 were immaterial.
Fair value changes included in earnings for instruments held at December 31, 2011 and 2010 for which the fair value option was elected included gains of $123 million and $25 million, respectively. Additionally, fair value changes included in earnings for instruments for which the fair value option was elected but are no longer held by the Bancorp at December 31, 2011 and 2010 included gains of $168 million and $171 million during 2011 and 2010, respectively. These
142 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
gains are reported in mortgage banking net revenue in the Consolidated Statements of Income.
Valuation adjustments related to instrument-specific credit risk for residential mortgage loans measured at fair value negatively impacted the fair value of those loans by $3 million at December 31, 2011 and $5 million at December 31, 2010. Interest on residential mortgage loans measured at fair value is
accrued as it is earned using the effective interest method and is reported as interest income in the Consolidated Statements of Income.
The following table summarizes the difference between the fair value and the principal balance for residential mortgage loans measured at fair value as of:
($ in millions) |
Fair
Value |
Principal
Balance |
Difference | |||||||||
December 31, 2011 |
||||||||||||
Residential mortgage loans measured at fair value |
$2,816 | 2,693 | 123 | |||||||||
Past due loans of 90 days or more |
4 | 5 | (1) | |||||||||
Nonaccrual loans |
- | - | - | |||||||||
December 31, 2010 |
||||||||||||
Residential mortgage loans measured at fair value |
$1,938 | 1,913 | 25 | |||||||||
Past due loans of 90 days or more |
5 | 6 | (1) | |||||||||
Nonaccrual loans |
1 | 1 | - |
Fair Value of Certain Financial Instruments
The following tables summarize the carrying amounts and estimated fair values for certain financial instruments, excluding financial instruments measured at fair value on a recurring basis.
As of December 31, 2011 ($ in millions) |
Net Carrying
Amount |
Fair Value | ||||||
Financial assets: |
||||||||
Cash and due from banks |
$ | 2,663 | 2,663 | |||||
Other securities |
842 | 842 | ||||||
Held-to-maturity securities |
322 | 322 | ||||||
Other short-term investments |
1,781 | 1,781 | ||||||
Loans held for sale |
203 | 203 | ||||||
Portfolio loans and leases: |
||||||||
Commercial and industrial loans |
29,854 | 30,300 | ||||||
Commercial mortgage loans |
9,697 | 8,870 | ||||||
Commercial construction loans |
943 | 791 | ||||||
Commercial leases |
3,451 | 3,237 | ||||||
Residential mortgage loans (a) |
10,380 | 9,978 | ||||||
Home equity |
10,524 | 9,737 | ||||||
Automobile loans |
11,784 | 11,747 | ||||||
Credit card |
1,872 | 1,958 | ||||||
Other consumer loans and leases |
329 | 346 | ||||||
Unallocated allowance for loan and lease losses |
(136 | ) | - | |||||
Total portfolio loans and leases, net (a) |
$ | 78,698 | 76,964 | |||||
Financial liabilities: |
||||||||
Deposits |
85,710 | 85,599 | ||||||
Federal funds purchased |
346 | 346 | ||||||
Other short-term borrowings |
3,239 | 3,239 | ||||||
Long-term debt |
9,682 | 10,197 |
(a) | Excludes $65 of residential mortgage loans measured at fair value on a recurring basis. |
Fifth Third Bancorp |
143 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2010 ($ in millions) |
Net Carrying
Amount |
Fair
Value |
||||||
Financial assets: |
||||||||
Cash and due from banks |
$ | 2,159 | 2,159 | |||||
Other securities |
868 | 868 | ||||||
Held-to-maturity securities |
353 | 353 | ||||||
Other short-term investments |
1,515 | 1,515 | ||||||
Loans held for sale |
324 | 324 | ||||||
Portfolio loans and leases: |
||||||||
Commercial and industrial loans |
26,068 | 27,322 | ||||||
Commercial mortgage loans |
10,248 | 9,513 | ||||||
Commercial construction loans |
1,890 | 1,471 | ||||||
Commercial leases |
3,267 | 2,934 | ||||||
Residential mortgage loans (a) |
8,600 | 7,577 | ||||||
Home equity |
11,248 | 9,366 | ||||||
Automobile loans |
10,910 | 10,975 | ||||||
Credit card |
1,738 | 1,786 | ||||||
Other consumer loans and leases |
622 | 682 | ||||||
Unallocated allowance for loan and lease losses |
(150 | ) | - | |||||
Total portfolio loans and leases, net (a) |
$ | 74,441 | 71,626 | |||||
Financial liabilities: |
||||||||
Deposits |
81,648 | 81,860 | ||||||
Federal funds purchased |
279 | 279 | ||||||
Other short-term borrowings |
1,574 | 1,574 | ||||||
Long-term debt |
9,558 | 9,921 |
(a) | Excludes $46 of residential mortgage loans measured at fair value on a recurring basis. |
Cash and due from banks, other securities, other short-term investments, deposits, federal funds purchased and other short-term borrowings
For financial instruments with a short-term or no stated maturity, prevailing market rates and limited credit risk, carrying amounts approximate fair value. Those financial instruments include cash and due from banks, FHLB and FRB restricted stock, other short-term investments, certain deposits (demand, interest checking, savings, money market and foreign office deposits), and federal funds purchased. Fair values for other time deposits, certificates of deposit $100,000 and over and other short-term borrowings were estimated using a discounted cash flow calculation that applied prevailing LIBOR/swap interest rates for the same maturities.
Held-to-maturity securities
The Bancorps held-to-maturity securities are primarily composed of instruments that provide income tax credits as the economic return on the investment. The fair value of these instruments is estimated based on current U.S. Treasury tax credit rates.
Loans held for sale
Fair values for commercial loans held for sale were valued based on executable bids when available, or on discounted cash flow models incorporating appraisals of the underlying collateral, as well as assumptions about investor return requirements and amounts and timing of expected cash flows. Fair values for other consumer loans held for sale are based on contractual values upon which the loans may be sold to a third party, and approximate their carrying value.
Portfolio loans and leases, net
Fair values were estimated by discounting future cash flows using the current market rates of loans to borrowers with similar credit characteristics and similar remaining maturities.
Long-term debt
Fair value of long-term debt was based on quoted market prices, when available, or a discounted cash flow calculation using LIBOR/swap interest rates and, in some cases, a spread for new issues for borrowings of similar terms.
144 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2 8. CERTAIN REGULATORY REQUIREMENTS AND CAPITAL RATIOS
The principal source of income and funds for the Bancorp (parent company) are dividends from its subsidiaries. The dividends paid by the Bancorps banking subsidiary are subject to regulations and limitations prescribed by the appropriate state and federal supervisory authorities. The Bancorps nonbank subsidiaries are also limited by certain federal and state statutory provisions and regulations covering the amount of dividends that may be paid in any given year.
The Bancorps banking subsidiary must maintain cash reserve balances when total reservable deposit liabilities are greater than the regulatory exemption. These reserve requirements may be satisfied with vault cash and noninterest-bearing cash balances on deposit with the FRB. In 2011 and 2010, the banking subsidiary was required to maintain average cash reserve balances of $744 million and $547 million, respectively.
The FRB adopted guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act of 1956, as amended. These guidelines include quantitative measures that assign risk weightings to assets and off-balance sheet items, as well as define and set minimum regulatory capital requirements. All bank holding companies are required to maintain Tier I capital (core capital) of at least four percent of risk-weighted assets (Tier I capital ratio), total capital (Tier I plus Tier II capital) of at least eight percent of risk-weighted assets (Total risk-based capital ratio), and Tier I capital of at least three percent of adjusted quarterly average assets (Tier I leverage ratio). Failure to meet the minimum capital requirements can initiate certain actions by regulators that could have a direct material effect on the Consolidated Financial Statements of the Bancorp.
Tier I capital consists principally of shareholders equity including Tier I qualifying trust preferred securities. It excludes unrealized gains and losses on available-for-sale securities and unrecognized pension actuarial gains and losses and prior service cost, goodwill, certain other intangibles and unrealized cash flow hedges. Current provisions of the Dodd-Frank Act will phase out the inclusion of certain trust preferred securities as a component of Tier I capital beginning January 1, 2013. Under these provisions, these trust preferred securities would qualify as a component of Tier II capital. At December 31, 2011, the Bancorps Tier I capital included $2.2 billion of trust preferred securities.
Tier II capital consists principally of term subordinated debt, redeemable preferred stock and, subject to limitations, allowances for loan and lease losses.
Assets and credit equivalent amounts of off-balance-sheet items are assigned to one of several broad risk categories, according to the obligor, guarantor or nature of collateral. The aggregate dollar value of the amount of each category is multiplied by the associated risk weighting of that category. The resulting weighted values from each of the risk categories in sum is the total risk-weighted assets. Quarterly average assets for this purpose do not include goodwill and any other intangible assets and other investments that the FRB determines should be deducted from Tier I capital.
The supervisory agencies, including the Bancorps primary regulator, the Federal Reserve Bank of Cleveland, have issued regulations regarding the capital adequacy of banking subsidiaries. These requirements are substantially similar to those adopted by the FRB regarding bank holding companies, as described previously. In addition, the federal banking agencies have issued substantially similar regulations to implement the system of prompt corrective action established by Section 38 of the Federal Deposit Insurance Act. Under the regulations, a bank generally shall be deemed to be well-capitalized if it has a Total risk-based capital ratio of 10% or more, a Tier I capital ratio of six percent or more, a Tier I leverage ratio of five percent or more and is not subject to any written capital order or directive. If an institution becomes undercapitalized, it would become subject to significant additional oversight, regulations and requirements as mandated by the Federal Deposit Insurance Act.
The Bancorp and its banking subsidiary, Fifth Third Bank (Ohio), had Tier I, Total risk-based capital and Tier I leverage ratios above the well-capitalized levels at December 31, 2011 and 2010. As of December 31, 2011, the most recent notification from the FRB categorized the Bancorp and its banking subsidiary as well-capitalized under the regulatory framework for prompt corrective action. To continue to qualify for financial holding company status pursuant to the Gramm-Leach-Bliley Act of 1999, the Bancorps banking subsidiary must, among other things, maintain well-capitalized capital ratios.
The following table presents capital and risk-based capital and leverage ratios for the Bancorp and its banking subsidiary at December 31:
2011 | 2010 | |||||||||||||||
($ in millions) | Amount | Ratio | Amount | Ratio | ||||||||||||
Tier I capital (to risk-weighted assets): (a) |
||||||||||||||||
Fifth Third Bancorp (Consolidated) |
$ | 12,503 | 11.91 | % | $ | 13,965 | 13.89 | % | ||||||||
Fifth Third Bank |
12,373 | 12.02 | 12,976 | 13.13 | ||||||||||||
Total risk-based capital (to risk-weighted assets): (a) |
||||||||||||||||
Fifth Third Bancorp (Consolidated) |
16,885 | 16.09 | 18,178 | 18.08 | ||||||||||||
Fifth Third Bank |
14,013 | 13.61 | 14,936 | 15.12 | ||||||||||||
Tier I leverage (to average assets): |
||||||||||||||||
Fifth Third Bancorp (Consolidated) |
12,503 | 11.10 | 13,965 | 12.79 | ||||||||||||
Fifth Third Bank |
12,373 | 11.20 | 12,976 | 12.08 | ||||||||||||
( a) |
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 Bancorps total risk-weighted assets. |
Fifth Third Bancorp |
145 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
29. PARENT COMPANY FINANCIAL STATEMENTS
($ in millions) | ||||||||||||
Condensed Statements of Income (Parent Company Only) | ||||||||||||
For the years ended December 31, | 2011 | 2010 | 2009 | |||||||||
Income |
||||||||||||
Dividends from subsidiaries: |
||||||||||||
Bank subsidiaries (a) |
$ | | | | ||||||||
Nonbank subsidiaries |
1,677 | 1,400 | | |||||||||
Interest on loans to subsidiaries |
29 | 33 | 39 | |||||||||
Total income |
1,706 | 1,433 | 39 | |||||||||
Expenses |
||||||||||||
Interest |
216 | 188 | 222 | |||||||||
Other |
25 | 26 | 20 | |||||||||
Total expenses |
241 | 214 | 242 | |||||||||
Income (Loss) Before Income Taxes and Change in Undistributed Earnings of Subsidiaries |
1,465 | 1,219 | (203 | ) | ||||||||
Applicable income tax benefit |
79 | 64 | 71 | |||||||||
Income (Loss) Before Change in Undistributed Earnings of Subsidiaries |
1,544 | 1,283 | (132 | ) | ||||||||
(Decrease) Increase in undistributed earnings |
(247 | ) | (530 | ) | 869 | |||||||
Net Income |
$ | 1,297 | 753 | 737 |
( a) The Bancorps indirect banking subsidiary paid dividends, to the Bancorps direct non-bank subsidiary holding company of $2.0 billion , $1.4 billion, and $0 for the years ended 2011 , 2010, 2009, respectively.
146 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions) | ||||||||||||
Condensed Statements of Cash Flows (Parent Company Only) |
||||||||||||
For the years ended December 31 |
2011 | 2010 | 2009 | |||||||||
Operating Activities |
||||||||||||
Net income |
$ | 1,297 | 753 | 737 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Provision for deferred income taxes |
(3 | ) | (2 | ) | 2 | |||||||
Decrease (Increase) in undistributed earnings |
247 | 530 | (869 | ) | ||||||||
Net change in: |
||||||||||||
Other assets |
39 | (6 | ) | 83 | ||||||||
Accrued expenses and other liabilities |
3 | (339 | ) | 591 | ||||||||
Other, net |
| (11 | ) | (6 | ) | |||||||
Net Cash Provided by Operating Activities |
1,583 | 925 | 538 | |||||||||
Investing Activities |
||||||||||||
Capital contributions to subsidiaries |
||||||||||||
Bank subsidiaries |
| | (1,600 | ) | ||||||||
Net change in: |
||||||||||||
Short-term investments |
(635 | ) | (603 | ) | 1,158 | |||||||
Loans to subsidiaries |
489 | (161 | ) | (117 | ) | |||||||
Net Cash Used in Investing Activities |
(146 | ) | (764 | ) | (559 | ) | ||||||
Financing Activities |
||||||||||||
Net change in other short-term borrowings |
241 | 134 | (503 | ) | ||||||||
Proceeds from issuance of long-term debt |
1,000 | | | |||||||||
Repayment of long-term debt |
(400 | ) | | (31 | ) | |||||||
Dividends paid on common shares |
(192 | ) | (32 | ) | (27 | ) | ||||||
Dividends paid on preferred shares |
(50 | ) | (205 | ) | (220 | ) | ||||||
Issuance of common shares |
1,648 | | 987 | |||||||||
Redemption of Series F preferred shares and related warrants |
(3,688 | ) | | (269 | ) | |||||||
Dividends on exchange of preferred shares, Series G |
| | 35 | |||||||||
Other, net |
(6 | ) | | (10 | ) | |||||||
Net Cash Used in Financing Activities |
(1,477 | ) | (103 | ) | (38 | ) | ||||||
Net (Decrease) Increase in Cash |
(10 | ) | 58 | (59 | ) | |||||||
Cash at Beginning of Year |
60 | 2 | 61 | |||||||||
Cash at End of Year |
$ | 50 | 60 | 2 |
Fifth Third Bancorp |
147 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors. Results of the Bancorps business segments are presented based on its management structure and management accounting practices. The structure and accounting practices are specific to the Bancorp; therefore, the financial results of the Bancorps business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as managements accounting practices are improved and businesses change.
On June 30, 2009, the Bancorp completed the sale of the processing business, which represented the sale of a majority interest in the Bancorps merchant acquiring and financial institutions processing businesses. Financial data for the merchant acquiring and financial institutions processing businesses was originally reported in the former Processing Solutions segment through June 30, 2009. As a result of the sale, the Bancorp no longer presents Processing Solutions as a segment and therefore, historical financial information for the merchant acquiring and financial institutions processing businesses has been reclassified under General Corporate and Other for all periods presented. Interchange revenue previously recorded in the Processing Solutions segment and associated with cards currently included in Branch Banking is now included in the Branch Banking segment for all periods presented. Additionally, the Bancorp retained its retail credit card and commercial multi-card service businesses, which were also originally reported in the former Processing Solutions segment through June 30, 2009, and are included in the Branch Banking and Commercial Banking segments, respectively, for all periods presented. Revenue from the remaining ownership interest in the Processing Business is recorded in General Corporate and Other as noninterest income.
The Bancorp manages interest rate risk centrally at the corporate level by employing a FTP methodology. This methodology insulates the business segments from interest rate volatility, enabling them to focus on serving customers through loan originations and deposit taking. The FTP system assigns charge rates and credit rates to classes of assets and liabilities, respectively, based on expected duration and the LIBOR swap curve. Matching duration allocates interest income and interest expense to each segment so its resulting net interest income is insulated from interest rate risk. In a rising rate environment, the Bancorp benefits from the widening spread between deposit costs and wholesale funding costs. However, the Bancorps FTP system credits this benefit to deposit-providing businesses, such as Branch Banking and Investment Advisors, on a duration-adjusted basis. The net impact of the FTP methodology is captured in General Corporate and Other.
The business segments are charged provision expense based on the actual net charge-offs experienced by the loans owned by each segment. Provision expense attributable to loan growth and changes in factors in the ALLL are captured in General Corporate and Other. The financial results of the business segments include allocations for shared services and headquarters expenses. Even with these allocations, the financial results are not necessarily indicative of the business segments financial condition and results of operations as if they existed as independent entities. Additionally, the business segments form synergies by taking advantage of cross-sell opportunities and when funding operations, by accessing the capital markets as a collective unit.
Results of operations and assets by segment for each of the three years ended December 31 are:
148 |
Fifth Third Bancorp |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2011 ($ in millions) |
Commercial
Banking |
Branch
Banking |
Consumer
Lending |
Investment
Advisors |
General
Corporate |
Eliminations
|
Total | |||||||||||||||||||||
Net interest income |
$ | 1,357 | 1,423 | 343 | 113 | 321 | | 3,557 | ||||||||||||||||||||
Provision for loan and lease losses |
490 | 393 | 261 | 27 | (748 | ) | | 423 | ||||||||||||||||||||
Net interest income after provision for loan |
||||||||||||||||||||||||||||
and lease losses |
867 | 1,030 | 82 | 86 | 1,069 | | 3,134 | |||||||||||||||||||||
Noninterest income: |
||||||||||||||||||||||||||||
Mortgage banking net revenue |
| 11 | 585 | 1 | | | 597 | |||||||||||||||||||||
Service charges on deposits |
207 | 309 | | 4 | | | 520 | |||||||||||||||||||||
Investment advisory revenue |
12 | 117 | | 364 | (1 | ) | (117 | ) (a) | 375 | |||||||||||||||||||
Corporate banking revenue |
332 | 14 | | 3 | 1 | 350 | ||||||||||||||||||||||
Card and processing revenue |
38 | 305 | | 4 | (39 | ) | | 308 | ||||||||||||||||||||
Other noninterest income |
52 | 81 | 36 | (3 | ) | 84 | | 250 | ||||||||||||||||||||
Securities gains, net |
| | | | 46 | | 46 | |||||||||||||||||||||
Securities gains, netnon-qualifying hedges on mortgage servicing rights |
| | 9 | | | | 9 | |||||||||||||||||||||
Total noninterest income |
641 | 837 | 630 | 373 | 91 | (117 | ) | 2,455 | ||||||||||||||||||||
Noninterest expense: |
||||||||||||||||||||||||||||
Salaries, wages and incentives |
203 | 456 | 149 | 138 | 532 | | 1,478 | |||||||||||||||||||||
Employee benefits |
37 | 127 | 34 | 26 | 106 | | 330 | |||||||||||||||||||||
Net occupancy expense |
20 | 184 | 8 | 11 | 82 | | 305 | |||||||||||||||||||||
Technology and communications |
11 | 5 | 1 | 1 | 170 | | 188 | |||||||||||||||||||||
Card and processing expense |
5 | 114 | | | 1 | | 120 | |||||||||||||||||||||
Equipment expense |
2 | 51 | 1 | 1 | 58 | | 113 | |||||||||||||||||||||
Other noninterest expense |
795 | 642 | 433 | 244 | (773 | ) | (117 | ) | 1,224 | |||||||||||||||||||
Total noninterest expense |
1,073 | 1,579 | 626 | 421 | 176 | (117 | ) | 3,758 | ||||||||||||||||||||
Income before income taxes |
435 | 288 | 86 | 38 | 984 | | 1,831 | |||||||||||||||||||||
Applicable income tax expense |
(6 | ) | 102 | 30 | 14 | 393 | | 533 | ||||||||||||||||||||
Net income |
441 | 186 | 56 | 24 | 591 | | 1,298 | |||||||||||||||||||||
Less: Net income attributable to noncontrolling interests |
| | | | 1 | | 1 | |||||||||||||||||||||
Net income attributable to Bancorp |
441 | 186 | 56 | 24 | 590 | | 1,297 | |||||||||||||||||||||
Dividends on preferred stock |
| | | | 203 | | 203 | |||||||||||||||||||||
Net income available to common shareholders |
$ | 441 | 186 | 56 | 24 | 387 | | 1,094 | ||||||||||||||||||||
Total goodwill |
$ | 613 | 1,656 | | 148 | | | 2,417 | ||||||||||||||||||||
Total assets |
$ | 45,864 | 46,703 | 24,325 | 7,670 | (7,595 | ) | | 116,967 |
(a) | Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income. |
Fifth Third Bancorp |
149 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2010 ($ in millions) |
Commercial
Banking |
Branch
Banking |
Consumer
Lending |
Investment
Advisors |
General
Corporate |
Eliminations
|
Total | |||||||||||||||||||||
Net interest income |
$ | 1,531 | 1,514 | 405 | 138 | 16 | | 3,604 | ||||||||||||||||||||
Provision for loan and lease losses |
1,159 | 555 | 569 | 44 | (789 | ) | | 1,538 | ||||||||||||||||||||
Net interest income (loss) after provision for loan and lease losses |
372 | 959 | (164 | ) | 94 | 805 | | 2,066 | ||||||||||||||||||||
Noninterest income: |
||||||||||||||||||||||||||||
Mortgage banking net revenue |
| 27 | 619 | 2 | (1 | ) | | 647 | ||||||||||||||||||||
Service charges on deposits |
199 | 369 | 1 | 6 | (1 | ) | | 574 | ||||||||||||||||||||
Corporate banking revenue |
346 | 15 | | 3 | | | 364 | |||||||||||||||||||||
Investment advisory revenue |
15 | 106 | | 346 | | (106 | ) (a) | 361 | ||||||||||||||||||||
Card and processing revenue |
33 | 298 | | 1 | (16 | ) | | 316 | ||||||||||||||||||||
Other noninterest income |
42 | 70 | 36 | (2 | ) | 260 | | 406 | ||||||||||||||||||||
Securities gains, net |
| | | | 47 | | 47 | |||||||||||||||||||||
Securities gains, netnon-qualifying hedges on mortgage servicing rights |
| | 14 | | | | 14 | |||||||||||||||||||||
Total noninterest income |
635 | 885 | 670 | 356 | 289 | (106 | ) | 2,729 | ||||||||||||||||||||
Noninterest expense: |
||||||||||||||||||||||||||||
Salaries, wages and incentives |
182 | 439 | 163 | 131 | 515 | | 1,430 | |||||||||||||||||||||
Employee benefits |
32 | 121 | 31 | 25 | 105 | | 314 | |||||||||||||||||||||
Net occupancy expense |
16 | 174 | 7 | 9 | 92 | | 298 | |||||||||||||||||||||
Technology and communications |
14 | 16 | 2 | 2 | 155 | | 189 | |||||||||||||||||||||
Card and processing expense |
2 | 105 | | | 1 | | 108 | |||||||||||||||||||||
Equipment expense |
2 | 49 | 1 | 1 | 175 | (106 | ) | 122 | ||||||||||||||||||||
Other noninterest expense |
723 | 652 | 342 | 237 | (560 | ) | 1,394 | |||||||||||||||||||||
Total noninterest expense |
971 | 1,556 | 546 | 405 | 483 | (106 | ) | 3,855 | ||||||||||||||||||||
Income (loss) before income taxes |
36 | 288 | (40 | ) | 45 | 611 | | 940 | ||||||||||||||||||||
Applicable income tax (benefit) expense |
(142 | ) | 103 | (14 | ) | 16 | 224 | | 187 | |||||||||||||||||||
Net income (loss) |
178 | 185 | (26 | ) | 29 | 387 | | 753 | ||||||||||||||||||||
Less: Net income attributable to noncontrolling interest |
| | | | | | | |||||||||||||||||||||
Net income (loss) attributable to Bancorp |
178 | 185 | (26 | ) | 29 | 387 | | 753 | ||||||||||||||||||||
Dividends on preferred stock |
| | | | 250 | | 250 | |||||||||||||||||||||
Net income (loss) available to common shareholders |
$ | 178 | 185 | (26 | ) | 29 | 137 | | 503 | |||||||||||||||||||
Total goodwill |
$ | 613 | 1,656 | | 148 | | | 2,417 | ||||||||||||||||||||
Total assets |
$ | 43,609 | 46,244 | 22,604 | 6,759 | (8,209 | ) | | 111,007 |
(a) | Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2009 ($ in millions) |
Commercial
Banking |
Branch
Banking |
Consumer
Lending |
Investment
Advisors |
General
Corporate |
Eliminations
|
Total | |||||||||||||||||||||
Net interest income |
$ | 1,370 | 1,577 | 476 | 157 | (226 | ) | | 3,354 | |||||||||||||||||||
Provision for loan and lease losses |
1,360 | 601 | 558 | 57 | 967 | | 3,543 | |||||||||||||||||||||
Net interest income (loss) after provision for loan and lease losses |
10 | 976 | (82 | ) | 100 | (1,193 | ) | | (189 | ) | ||||||||||||||||||
Noninterest income: |
||||||||||||||||||||||||||||
Mortgage banking net revenue |
| 26 | 526 | 1 | | | 553 | |||||||||||||||||||||
Service charges on deposits |
196 | 428 | | 8 | | | 632 | |||||||||||||||||||||
Investment advisory revenue |
11 | 84 | | 315 | (1 | ) | (83 | ) (a) | 326 | |||||||||||||||||||
Corporate banking revenue |
353 | 10 | | 11 | (2 | ) | | 372 | ||||||||||||||||||||
Card and processing revenue |
28 | 268 | | 1 | 357 | (39 | ) (b) | 615 | ||||||||||||||||||||
Gain on sale of Vantiv Holding, LLC |
| | | | 1,758 | | 1,758 | |||||||||||||||||||||
Other noninterest income |
20 | 86 | 40 | | 333 | | 479 | |||||||||||||||||||||
Securities gains (losses), net |
1 | | | | (11 | ) | | (10 | ) | |||||||||||||||||||
Securities gains, netnon-qualifying hedges on mortgage servicing rights |
| | 57 | | | | 57 | |||||||||||||||||||||
Total noninterest income |
609 | 902 | 623 | 336 | 2,434 | (122 | ) | 4,782 | ||||||||||||||||||||
Noninterest expense: |
||||||||||||||||||||||||||||
Salaries, wages and incentives |
161 | 401 | 154 | 117 | 506 | | 1,339 | |||||||||||||||||||||
Employee benefits |
31 | 106 | 27 | 23 | 124 | | 311 | |||||||||||||||||||||
Net occupancy expense |
17 | 169 | 7 | 10 | 105 | | 308 | |||||||||||||||||||||
Technology and communications |
6 | 16 | 2 | 2 | 155 | | 181 | |||||||||||||||||||||
Card and processing expense |
1 | 70 | | | 122 | | 193 | |||||||||||||||||||||
Equipment expense |
3 | 48 | 1 | 1 | 70 | | 123 | |||||||||||||||||||||
Other noninterest expense |
741 | 563 | 318 | 201 | (330 | ) | (122 | ) | 1,371 | |||||||||||||||||||
Total noninterest expense |
960 | 1,373 | 509 | 354 | 752 | (122 | ) | 3,826 | ||||||||||||||||||||
Income before income taxes |
(341 | ) | 505 | 32 | 82 | 489 | | 767 | ||||||||||||||||||||
Applicable income tax expense (benefit) |
(240 | ) | 178 | 11 | 29 | 52 | | 30 | ||||||||||||||||||||
Net income |
(101 | ) | 327 | 21 | 53 | 437 | | 737 | ||||||||||||||||||||
Less: Net income attributable to noncontrolling interest |
| | | | | | | |||||||||||||||||||||
Net income attributable to Bancorp |
(101 | ) | 327 | 21 | 53 | 437 | | 737 | ||||||||||||||||||||
Dividends on preferred stock |
| | | | 226 | | 226 | |||||||||||||||||||||
Net income available to common shareholders |
$ | (101 | ) | 327 | 21 | 53 | 211 | | 511 | |||||||||||||||||||
Total goodwill |
$ | 613 | 1,656 | | 148 | | | 2,417 | ||||||||||||||||||||
Total assets |
$ | 43,312 | 47,839 | 20,923 | 6,057 | (4,751 | ) | | 113,380 |
(a) | Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income. |
(b) | Card and processing revenues provided to the banking segments are eliminated in the Consolidated Statements of Income. |
Fifth Third Bancorp |
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
Commission file number 001-33653
Incorporated in the State of Ohio
I.R.S. Employer Identification No. 31-0854434
Address: 38 Fountain Square
Plaza Cincinnati, Ohio 45263
Telephone: (800) 972-3030
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: |
Name of each exchange on
which
|
|
Common Stock, Without Par Value |
The NASDAQ Stock Market LLC |
|
8.5% Non-Cumulative Series G Convertible Perpetual Preferred Stock |
The NASDAQ Stock Market LLC |
|
7.25% Trust Preferred Securities of Fifth Third Capital Trust V |
New York Stock Exchange |
|
7.25% Trust Preferred Securities of Fifth Third Capital Trust VI |
New York Stock Exchange |
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes: ¨ No: x
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes: ¨ No: x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: x No: ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes: x No: ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes: ¨ No: x
There were 919,882,874 shares of the Bancorps Common Stock, without par value, outstanding as of January 31, 2012. The Aggregate Market Value of the Voting Stock held by non-affiliates of the Bancorp was $11,457,012,955 as of June 30, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
This report incorporates into a single document the requirements of the U.S. Securities and Exchange Commission (SEC) with respect to annual reports on Form 10-K and annual reports to shareholders. The Bancorps Proxy Statement for the 2012 Annual Meeting of Shareholders is incorporated by reference into Part III of this report.
Only those sections of this 2011 Annual Report to Shareholders that are specified in this Cross Reference Index constitute part of the Registrants Form 10-K for the year ended December 31, 2011. No other information contained in this 2011 Annual Report to Shareholders shall be deemed to constitute any part of this Form 10-K nor shall any such information be incorporated into the Form 10-K and shall not be deemed filed as part of the Registrants Form 10-K.
10-K Cross Reference Index
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AVAILABILITY OF FINANCIAL INFORMATION
Fifth Third Bancorp (the Bancorp) files reports with the SEC. Those reports include the annual report on Form 10-K, quarterly reports on Form 10-Q, current event reports on Form 8-K and proxy statements, as well as any amendments to those reports. The public may read and copy any materials the Bancorp files with the SEC at the SECs Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Bancorps annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are accessible at no cost on the Bancorps web site at www.53.com on a same day basis after they are electronically filed with or furnished to the SEC.
PART I
ITEM 1. | BUSINESS |
General Information
The Bancorp, an Ohio corporation organized in 1975, is a bank holding company as defined by the Bank Holding Company Act of 1956, as amended (the BHCA), and is registered as such with the Board of Governors of the Federal Reserve System (the FRB). The Bancorps principal office is located in Cincinnati, Ohio.
The Bancorps subsidiaries provide a wide range of financial products and services to the retail, commercial, financial, governmental, educational and medical sectors, including a wide variety of checking, savings and money market accounts, and credit products such as credit cards, installment loans, mortgage loans and leases. Fifth Third Bank has deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC) through the Deposit Insurance Fund. Refer to Exhibit 21 filed as an attachment to this Annual Report on Form 10-K for a list of subsidiaries of the Bancorp as of December 31, 2011.
The Bancorp derives the majority of its revenues from the U.S. Revenue from foreign countries and external customers domiciled in foreign countries is immaterial to the Bancorps Consolidated Financial Statements.
Additional information regarding the Bancorps businesses is included in Managements Discussion and Analysis of Financial Condition and Results of Operations.
Competition
The Bancorp competes for deposits, loans and other banking services in its principal geographic markets as well as in selected national markets as opportunities arise. In addition to the challenge of attracting and retaining customers for traditional banking services, the Bancorps competitors include securities dealers, brokers, mortgage bankers, investment advisors and insurance companies. These competitors, with focused products targeted at highly profitable customer segments, compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services in nearly all significant products. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology, product delivery systems and the accelerating pace of consolidation among financial service providers. These competitive trends are likely to continue.
Acquisitions
The Bancorps strategy for growth includes strengthening its presence in core markets, expanding into contiguous markets and broadening its product offerings while taking into account the integration and other risks of growth. The Bancorp evaluates strategic acquisition opportunities and conducts due diligence activities in connection with possible transactions. As a result, discussions, and in some cases, negotiations may take place and future acquisitions involving cash, debt or equity securities may occur. These typically involve the payment of a premium over book value and current market price, and therefore, some dilution of book value and net income per share may occur with any future transactions.
Regulation and Supervision
In addition to the generally applicable state and federal laws governing businesses and employers, the Bancorp and its banking subsidiary are subject to extensive regulation by federal and state laws and regulations applicable to financial institutions and their parent companies. Virtually all aspects of the business of the Bancorp and its banking subsidiary are subject to specific
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requirements or restrictions and general regulatory oversight. The principal objectives of state and federal banking laws and regulations and the supervision, regulation and examination of banks and their parent companies (such as the Bancorp) by bank regulatory agencies are the maintenance of the safety and soundness of financial institutions, maintenance of the federal deposit insurance system and the protection of consumers or classes of consumers, rather than the specific protection of shareholders of a bank or the parent company of a bank. To the extent the following material describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation.
Regulators
The Bancorp and/or its banking subsidiary are subject to regulation and supervision primarily by the FRB, the Consumer Financial Protection Bureau (the CFPB) and the Ohio Division of Financial Institutions (the Division) and additionally by certain other functional regulators and self-regulatory organizations. The Bancorp is also subject to regulation by the SEC by virtue of its status as a public company and due to the nature of some of its businesses. The Bancorps banking subsidiary is subject to regulation by the FDIC, which insures the banks deposits as permitted by law.
The federal and state laws and regulations that are applicable to banks and to some extent bank holding companies regulate, among other matters, the scope of their business, their activities, their investments, their reserves against deposits, the timing of the availability of deposited funds, the amount of loans to individual and related borrowers and the nature, amount of and collateral for certain loans, and the amount of interest that may be charged on loans. Various federal and state consumer laws and regulations also affect the services provided to consumers.
The Bancorp and/or its subsidiary are required to file various reports with, and is subject to examination by regulators, including the FRB and the Division. The FRB, Division and the CFPB have the authority to issue orders to bank holding companies and/or banks to cease and desist from certain banking practices and violations of conditions imposed by, or violations of agreements with, the FRB, Division and CFPB. Certain of the Bancorps and/or its banking subsidiary regulators are also empowered to assess civil money penalties against companies or individuals in certain situations, such as when there is a violation of a law or regulation. Applicable state and federal law also grant certain regulators the authority to impose additional requirements and restrictions on the activities of the Bancorp and or its banking subsidiary and, in some situations, the imposition of such additional requirements and restrictions will not be publicly available information.
Acquisitions
The BHCA requires the prior approval of the FRB, for a bank holding company to acquire substantially all the assets of a bank or to acquire direct or indirect ownership or control of more than 5% of any class of the voting shares of any bank, bank holding company or savings association, or to increase any such non-majority ownership or control of any bank, bank holding company or savings association, or to merge or consolidate with any bank holding company.
The BHCA prohibits a bank holding company from acquiring a direct or indirect interest in or control of more than 5% of any class of the voting shares of a company that is not a bank or a bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its banking
subsidiaries, except that it may engage in and may own shares of companies engaged in certain activities the FRB has determined to be so closely related to banking or managing or controlling banks as to be proper incident thereto.
Financial Holding Companies
The Gramm-Leach-Bliley Act of 1999 (GLBA) permits a qualifying bank holding company to become a financial holding company (FHC) and thereby to engage directly or indirectly in a broader range of activities than those permitted for a bank holding company under the BHCA. Permitted activities for a FHC include securities underwriting and dealing, insurance underwriting and brokerage, merchant banking and other activities that are declared by the FRB, in cooperation with the Treasury Department, to be financial in nature or incidental thereto or are declared by the FRB unilaterally to be complementary to financial activities. In addition, a FHC is allowed to conduct permissible new financial activities or acquire permissible non-bank financial companies with after-the-fact notice to the FRB. A bank holding company may elect to become a FHC if each of its banking subsidiaries is well capitalized, is well managed and has at least a Satisfactory rating under the Community Reinvestment Act (CRA). Dodd-Frank also extended the well capitalized and well managed requirement to the bank holding company. In 2000, the Bancorp elected and qualified for FHC status under the GLBA. To maintain FHC status, a holding company must continue to meet certain requirements. The failure to meet such requirements could result in restrictions on the activities of the FHC or loss of FHC status. If restrictions are imposed on the activities of an FHC, such information may not necessarily be available to the public.
Dividends
The Bancorp depends in part upon dividends received from its direct and indirect subsidiaries, including its indirect banking subsidiary, to fund its activities, including the payment of dividends. The Bancorp and its banking subsidiary are subject to various federal and state restrictions on their ability to pay dividends. The FRB has authority to prohibit bank holding companies from paying dividends if such payment is deemed to be an unsafe or unsound practice. The FRB has indicated generally that it may be an unsafe or unsound practice for bank holding companies to pay dividends unless a bank holding companys net income is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organizations capital needs, asset quality and overall financial condition. The ability to pay dividends may be further limited by provisions of the Dodd-Frank Act and implanting regulations (see the Regulatory Reform section.
Source of Strength
Under long-standing FRB policy and now as codified in the Dodd-Frank Act, a bank holding company is expected to act as a source of financial and managerial strength to each of its banking subsidiaries and to commit resources to their support. This support may be required at times when the bank holding company may not have the resources to provide it.
FDIC Assessments
As contemplated by the Dodd-Frank Act the FDIC has revised the framework by which insured depository institutions with more than $10 billion in assets (large IDIs) are assessed for purposes of payments to the Deposit Insurance Fund (the DIF). The final rule implementing revisions to the assessment system was
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released on February 7, 2011, and took effect for the quarter beginning April 1, 2011.
Prior to the passage of the Dodd-Frank Act, a large IDIs DIF premiums principally were based on the size of an IDIs domestic deposit base. The Dodd-Frank Act changed the assessment base from a large IDIs domestic deposit base to its total assets less tangible equity. In addition to potentially greatly increasing the size of a large IDIs assessment base, the expansion of the assessment base affords the FDIC much greater flexibility to vary its assessment system based upon the different asset classes that large IDIs normally hold on their balance sheets.
To implement this provision, the FDIC created an assessment scheme vastly different from the deposit-based system. Under the new system, large IDIs are assessed under a complex scorecard methodology that seeks to capture both the probability that an individual large IDI will fail and the magnitude of the impact on the DIF if such a failure occurs.
Transactions with Affiliates
Sections 23A and 23B of the Federal Reserve Act, restrict transactions between a bank and its affiliates (as defined in Sections 23A and 23B of the Federal Reserve Act), including a parent bank holding company. The Bancorps banking subsidiary is subject to certain restrictions, including but not limited to restrictions on loans to its affiliates, on investments in the stock or securities thereof, on the taking of such stock or securities as collateral for loans to any borrower, and on the issuance of a guarantee or letter of credit on their behalf. Among other things, these restrictions limit the amount of such transactions, require collateral in prescribed amounts for extensions of credit, prohibit the purchase of low quality assets and require that the terms of such transactions be substantially equivalent to terms of comparable transactions with non-affiliates. Generally, the Bancorps banking subsidiary is limited in its extension of credit to any affiliate to 10% of the banking subsidiarys capital stock and surplus and its extension of credit to all affiliates to 20% of the banking subsidiarys capital stock and surplus.
Community Reinvestment Act
The CRA generally requires insured depository institutions to identify the communities they serve and to make loans and investments and provide services that meet the credit needs of those communities. Furthermore, the CRA requires the FRB to evaluate the performance of the Bancorps banking subsidiary in helping to meet the credit needs of its communities. As a part of the CRA program, the banking subsidiary is subject to periodic examinations by the FRB, and must maintain comprehensive records of their CRA activities for this purpose. During these examinations, the FRB rates such institutions compliance with CRA as Outstanding, Satisfactory, Needs to Improve or Substantial Noncompliance. Failure of an institution to receive at least a Satisfactory rating could inhibit such institution or its holding company from undertaking certain activities, including engaging in activities permitted as a financial holding company under the GLBA and acquiring other financial institutions. The FRB must take into account the record of performance of banks in meeting the credit needs of the entire community served, including low- and moderate-income neighborhoods. Fifth Third Bank received a Satisfactory CRA rating in its most recent CRA examination.
Capital
The FRB has established capital guidelines for bank holding companies and FHCs. The FRB, the Division and the FDIC have also issued regulations establishing capital requirements for
banks. Failure to meet capital requirements could subject the Bancorp and its banking subsidiary to a variety of restrictions and enforcement actions. In addition, as discussed previously, the Bancorp and its banking subsidiary must remain well capitalized and well managed for the Bancorp to retain its status as a FHC. See the Regulatory Reform section for additional information on capital requirements impacting the Bancorp.
Privacy
The FRB, FDIC and other bank regulatory agencies have adopted final guidelines (the Guidelines) for safeguarding confidential, personal customer information. The Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The Bancorp has adopted a customer information security program that has been approved by the Bancorps Board of Directors (the Board).
The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, the statute requires explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, prohibits disclosing such information except as provided in the banking subsidiarys policies and procedures. The Bancorps banking subsidiary has implemented a privacy policy.
Anti-Money Laundering
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the Patriot Act), designed to deny terrorists and others the ability to obtain access to the United States financial system, has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act, as implemented by various federal regulatory agencies, requires financial institutions, including the Bancorp and its subsidiaries, to implement new policies and procedures or amend existing policies and procedures with respect to, among other matters, anti-money laundering, compliance, suspicious activity and currency transaction reporting and due diligence on customers. The Patriot Act and its underlying regulations also permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the FRB (and other federal banking agencies) to evaluate the effectiveness of an applicant in combating money laundering activities when considering applications filed under Section 3 of the BHCA or the Bank Merger Act. The Bancorps Board has approved policies and procedures that are believed to be compliant with the Patriot Act.
Exempt Brokerage Activities
The GLBA amended the federal securities laws to eliminate the blanket exceptions that banks traditionally have had from the definition of broker and dealer. The GLBA also required that there be certain transactional activities that would not be brokerage activities, which banks could effect without having to register as a broker. In September 2007, the FRB and SEC
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approved Regulation R to govern bank securities activities. Various exemptions permit banks to conduct activities that would otherwise constitute brokerage activities under the securities laws. Those exemptions include conducting brokerage activities related to trust, fiduciary and similar services, certain services and also conducting a de minimis number of riskless principal transactions, certain asset-backed transactions and certain securities lending transactions. The Bancorp only conducts non-exempt brokerage activities through its affiliated registered broker-dealer.
Emergency Economic Stabilization
On October 3, 2008, in response to the stresses experienced in the financial markets, the Emergency Economic Stabilization Act (EESA) was enacted. EESA authorizes the Secretary of the Treasury to purchase up to $700 billion in troubled assets from financial institutions under the Troubled Asset Relief Program or TARP. Troubled assets include residential or commercial mortgages and related instruments originated prior to March 14, 2008 and any other financial instrument that the Secretary determines, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, the purchase of which is necessary to promote financial stability.
Capital Purchase Program
Pursuant to its authority under EESA, Treasury created the TARP Capital Purchase Program (CPP) under which the Treasury Department was authorized to invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies. Qualifying financial institutions could issue senior preferred stock with a value equal to not less than 1% of risk-weighted assets and not more than the lesser of $25 billion or 3% of risk-weighted assets.
In connection with the issuance of the senior preferred, participating institutions were required to issue to Treasury immediately exercisable 10-year warrants to purchase common stock with an aggregate market price equal to 15% of the amount of senior preferred.
On December 31, 2008, the Bancorp entered into a Letter Agreement (including the Securities Purchase AgreementStandard Terms incorporated by reference therein, the Purchase Agreement) with Treasury pursuant to which the Company issued and sold to Treasury for an aggregate purchase price of approximately $3.4 billion in cash: (i) 136,320 shares of the Bancorps Fixed Rate Cumulative Perpetual Preferred Stock, Series F, having a liquidation preference of $25,000 per share (the Series F Preferred Stock), and (ii) a ten-year warrant to purchase up to 43,617,747 shares of the Bancorps common stock, no par value per share, at an initial exercise price of $11.72 per share.
In the Purchase Agreement, the Bancorp agreed that, until such time as Treasury ceases to own any debt or equity securities of the Bancorp acquired pursuant to the Purchase Agreement, the Bancorp would take all necessary action to ensure that its benefit plans with respect to its senior executive officers comply with Section 111(b) of EESA as implemented by any guidance or regulation under the EESA that had been issued and was in effect as of the date of issuance of the Series F Preferred Stock and the Warrant, and agreed to not adopt any benefit plans with respect to, or which covers, its senior executive officers that do not comply with the EESA.
On February 2, 2011 the Bancorp repurchased the Series F Preferred Stock issued to the U.S. Treasury pursuant to TARP. On March 16, 2011, the Bancorp repurchased the warrant issued to the U.S. Treasury.
Regulatory Reform
On July 21, 2010, President Obama signed into law the Dodd-Frank Act, which is aimed, in part, at accountability and transparency in the financial system and includes numerous provisions that apply to and/or could impact the Bancorp and its banking subsidiary. The Dodd-Frank Act implements changes that, among other things, affect the oversight and supervision of financial institutions, provide for a new resolution procedure for large financial companies, create a new agency responsible for implementing and enforcing compliance with consumer financial laws, introduce more stringent regulatory capital requirements, effect significant changes in the regulation of over the counter derivatives, reform the regulation of credit rating agencies, implement changes to corporate governance and executive compensation practices, incorporate requirements on proprietary trading and investing in certain funds by financial institutions (known as the Volcker Rule), require registration of advisers to certain private funds, and effect significant changes in the securitization market. In order to fully implement many provisions of the Dodd-Frank Act, various government agencies, in particular banking and other financial services agencies are required to promulgate regulations. Set forth below is a discussion of some of the major sections the Dodd-Frank Act and implementing regulations that have or could have a substantial impact on the Bancorp and its banking subsidiary. Due to the volume of regulations required by the Dodd-Frank Act, not all proposed or final regulations that may have an impact on the Bancorp or its banking subsidiary are necessarily discussed.
Financial Stability Oversight Council
The Dodd-Frank Act creates the Financial Stability Oversight Council (FSOC), which is chaired by the Secretary of the Treasury and composed of expertise from various financial services regulators. The FSOC has responsibility for identifying risks and responding to emerging threats to financial stability. On December 29, 2011, a rule was proposed (with a sixty-day comment period) to assess a fee on large banks and financial institutions to cover the expenses of the Office of Financial Research and FSOC. The fees would also cover certain expenses incurred by the FDIC. Under the proposal, bank holding companies with at least $50 billion in assets and foreign banks with at least $50 billion in assets in the U.S. would be assessed a semiannual fee, the size of which has yet to be determined.
Executive Compensation
The Dodd-Frank Act provides for a say on pay for shareholders of all public companies. Under the Dodd-Frank Act, each company must give its shareholders the opportunity to vote on the compensation of its executives at least once every three years. The Dodd-Frank Act also adds disclosure and voting requirements for golden parachute compensation that is payable to named executive officers in connection with sale transactions.
The Dodd-Frank Act requires the SEC to issue rules directing the stock exchanges to prohibit listing classes of equity securities if a companys compensation committee members are not independent. The Dodd-Frank Act also provides that a companys compensation committee may only select a compensation consultant, legal counsel or other advisor after taking into consideration factors to be identified by the SEC that affect the independence of a compensation consultant, legal counsel or other advisor.
The SEC is required under the Dodd-Frank Act to issue rules obligating companies to disclose in proxy materials for annual
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meetings of shareholders information that shows the relationship between executive compensation actually paid to their named executive officers and their financial performance, taking into account any change in the value of the shares of a companys stock and dividends or distributions.
The Dodd-Frank Act provides that the SEC must issue rules directing the stock exchanges to prohibit listing any security of a company unless the company develops and implements a policy providing for disclosure of the policy of the company on incentive-based compensation that is based on financial information required to be reported under the securities laws and that, in the event the company is required to prepare an accounting restatement due to the material noncompliance of the company with any financial reporting requirement under the securities laws, the company will recover from any current or former executive officer of the company who received incentive-based compensation during the three-year period preceding the date on which the company is required to prepare the restatement based on the erroneous data, any exceptional compensation above what would have been paid under the restatement.
The Dodd-Frank Act requires the SEC, by rule, to require that each company disclose in the proxy materials for its annual meetings whether an employee or board member is permitted to purchase financial instruments designed to hedge or offset decreases in the market value of equity securities granted as compensation or otherwise held by the employee or board member.
Corporate Governance
The Dodd-Frank Act clarifies that the SEC may, but is not required to promulgate rules that would require that a companys proxy materials include a nominee for the board of directors submitted by a shareholder. Although the SEC promulgated rules to accomplish this, these rules were invalidated by a federal appeals court decision. The SEC has said that they will not challenge the ruling, but has not ruled out the possibility that new rules could be proposed.
The Dodd-Frank Act requires stock exchanges to have rules prohibiting their members from voting securities that they do not beneficially own (unless they have received voting instructions from the beneficial owner) with respect to the election of a member of the board of directors (other than an uncontested election of directors of an investment company registered under the Investment Company Act of 1940), executive compensation or any other significant matter, as determined by the SEC by rule.
Credit Ratings
The Dodd-Frank Act includes a number of provisions that are targeted at improving the reliability of credit ratings. The SEC has been charged with adopting various rules in this regard.
Consumer Issues
The Dodd-Frank Act creates a new bureau, the CFPB, which has the authority to implement regulations pursuant to numerous consumer protection laws and has supervisory authority, including the power to conduct examination and take enforcement actions, with respect to depository institutions with more than $10 billion in consolidated assets. The CFPB also has authority, with respect to consumer financial services to, among other things, restrict unfair, deceptive or abusive acts or practices, enforce laws that prohibit discrimination and unfair treatment and to require certain consumer disclosures.
Debit Card Interchange Fees
The Dodd-Frank Act provides for a set of new rules requiring that interchange transaction fees for electric debit transactions be reasonable and proportional to certain costs associated with
processing the transactions. The FRB was given authority to, among other things, establish standards for assessing whether interchange fees are reasonable and proportional. In June 2011, the FRB issued a final rule establishing certain standards and prohibitions pursuant to the Dodd-Frank Act, including establishing standards for debit card interchange fees and allowing for an upward adjustment if the issuer develops and implements policies and procedures reasonably designed to prevent fraud. The provisions regarding debit card interchange fees and the fraud adjustment became effective October 1, 2011. The rules impose requirements on the Bancorp and its banking subsidiary and may negatively impact our revenues and results of operations.
FDIC Matters and Resolution Planning
The Dodd-Frank Act creates an orderly liquidation process that the FDIC can employ for failing financial companies that are not insured depository institutions. The Dodd-Frank Act gives the FDIC new authority to create a widely available emergency financial stabilization program to guarantee the obligations of solvent depository institutions and their holding companies and affiliates during times of severe economic stress. Additionally, Dodd-Frank also codifies many of the temporary changes that had already been implemented, such as permanently increasing the amount of deposit insurance to $250,000.
In September 2011, the FDIC approved an interim final rule that requires an insured depository institution with $50 billion or more in total assets to submit periodic contingency plans to the FDIC for resolution in the event of the institutions failure. The rule became effective in January 2012, however, submission of plans will be staggered over a period of time. The Bancorps banking subsidiary is subject to this rule.
In October 2011, the FRB issued a final rule implementing resolution planning requirements in the Dodd-Frank Act. The final rule requires bank holding companies with assets of $50 billion or more and nonbank financial firms designated by FSOC for supervision by the FRB to annually submit resolution plans to the FDIC and FRB. Each plan shall describe the companys strategy for rapid and orderly resolution in bankruptcy during times of financial distress. Under the final rule, companies will submit their initial resolution plans on a staggered basis. The Bancorp will be required to submit a resolution plan pursuant to this rule.
Proprietary Trading and Investing in Certain Funds
The Dodd-Frank Act sets forth new restrictions on banking organizations ability to engage in proprietary trading and sponsorship of or investment in private equity and hedge funds (the Volcker rule). The scope of the new restrictions will be more clear upon adoption of final regulations promulgated under the Volcker rule, however the Volker Rule also generally prohibits any banking entity from sponsoring or acquiring any ownership interest in a private equity or hedge fund. The Volker rule, however, contains a number of exceptions, which exceptions will be clarified upon promulgation of final rules adopted on an interagency basis. The Volker rule permits transactions in the securities of the U.S. government and its agencies, certain government-sponsored enterprises and states and their political subdivisions, as well as certain investments in small business investment companies. Transactions on behalf of customers and in connection with certain underwriting and market making activities, as well as risk-mitigating hedging activities and certain foreign banking activities are also permitted. De minimus ownership of private equity or hedge funds will also be permitted under final regulations as well. In addition to the general
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prohibition on sponsorship and investment, the Volker rule contains additional requirements applicable to any private equity or hedge fund that is sponsored by the banking entity or for which it serves as investment manager or investment advisor. The Bancorp will be required to demonstrate that it has a satisfactory compliance programs specifically to monitor compliance with the Volcker rule.
Derivatives
The Dodd-Frank Act includes measures to broaden the scope of derivative instruments subject to regulation by requiring clearing and exchange trading of certain derivatives, imposing new capital and margin requirements for certain market participants and imposing position limits on certain over-the-counter derivatives. To the extent that the Bancorp acts in certain capacities in trading derivatives or trades a certain amount of certain derivatives instruments, then certain affiliates of the Bancorp may be required to register with the Commodity Futures Trading Commission or the SEC. As with the Volcker Rule, the Bancorp will be required to demonstrate that it has a satisfactory compliance program to monitor the activities of any swap dealer or major swap participant registered under the new regulations. The ultimate impact of these derivatives regulations, and the time it will take to comply, continues to remain uncertain. The final regulations will impose additional operational and compliance costs on us and may require us to restructure certain businesses and negatively impact our revenues and results of operations.
Interstate Bank Branching
The Dodd-Frank Act includes provisions permitting national and insured state banks to engage in de novo interstate branching if, under the laws of the state where the new branch is to be established, as state bank chartered in that state would be permitted to establish a branch.
Systemically Significant Companies and Capital
The Dodd-Frank Act creates a new regulatory regime for entities that are deemed to be systemically significant financial companies. The Dodd-Frank Act sets a $50 billion consolidated asset floor for a bank holding company to be subject to the heightened oversight and regulation, although the FRB can adjust those amounts upward for some of the heightened standards under certain circumstances. Dodd-Frank establishes a broad framework for identifying, applying heightened supervision and regulation to, and (as necessary) limiting the size and activities of systemically significant financial companies.
The Dodd-Frank Act instructs the FRB to impose enhanced capital and risk-management standards on large financial firms and mandates the Federal Reserve to conduct annual stress tests on all bank holding companies with $50 billion or more in assets to determine whether they have the capital needed to absorb losses in baseline, adverse, and severely adverse economic conditions. In November 2011, the FRB adopted final rules requiring bank holding companies with $50 billion or more in consolidated assets to submit capital plans to the FRB on an annual basis. Under the final rules, the FRB annually will evaluate an institutions capital adequacy, internal capital adequacy, assessment processes and plans to make capital distributions such as dividend payments and stock repurchases.
Also in November 2011, the FRB launched the 2012 Comprehensive Capital Analysis and Review (CCAR), which required certain large organizations, such as the Bancorp, to submit capital plans by January 9, 2012. As part of the CCAR, the FRB will also carry out a supervisory stress test. An organizations capital adequacy and its plans to make capital
distributions will be assessed against a number of criteria, including projected performance under stress scenarios.
In December 2011, the FRB issued proposed rules to strengthen regulation and supervision of large bank holding companies and systemically important nonbank financial firms. The proposed rules would generally apply to all US bank holding companies with consolidated assets of $50 billion or more, such as the Bancorp, and any nonbank financial firms that may be designated by the FSOC as systemically important companies. The proposal, which is mandated by the Dodd-Frank Act, includes a wide range of measures addressing such issues as capital, liquidity, credit exposure, stress testing, risk management and early remediation requirements. In particular, the proposal includes proposed risk-based capital and leverage requirements that would be implemented in two phases, the first phase would be subject to the FRBs capital plan rule issued in November 2011. The second phase would involve the FRB issuing a proposal to implement a risk-based capital surcharge based on the framework and methodology developed by the Basel Committee on Banking Supervision (the Basel Committee), the current version referred to as Basel III.
Basel III is designed to materially improve the quality of regulatory capital and introduces a new minimum common equity requirement. Basel III also raises the numerical minimum capital requirements and introduces capital conservation and countercyclical buffers to induce banking organizations to hold capital in excess of regulatory minimums. In addition, Basel III establishes an international leverage standard for internationally active banks. The FRB is working with other U.S. banking regulators to implement the Basel III capital reforms in the United States. It is not anticipated that such implementing rules would be issued until 2013 or 2014 and there would most likely be a phase-in period.
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ITEM 2. | PROPERTIES |
The Bancorps executive offices and the main office of Fifth Third Bank are located on Fountain Square Plaza in downtown Cincinnati, Ohio in a 32-story office tower, a five-story office building with an attached parking garage and a separate ten-story office building known as the Fifth Third Center, the William S. Rowe Building and the 530 Building, respectively. The Bancorps main operations center is located in Cincinnati, Ohio, in a three-story building with an attached parking garage known as the Madisonville Operations Center. The Bank owns 100% of these buildings.
At December 31, 2011, the Bancorp, through its banking and non-banking subsidiaries, operated 1,316 banking centers, of which 911 were owned, 274 were leased and 131 for which the buildings are owned but the land is leased. The banking centers are located in the states of Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, North Carolina, West Virginia, Pennsylvania, Missouri, and Georgia. The Bancorps significant owned properties are owned free from mortgages and major encumbrances.
EXECUTIVE OFFICERS OF THE BANCORP
Officers are appointed annually by the Board of Directors at the meeting of Directors immediately following the Annual Meeting of Shareholders. The names, ages and positions of the Executive Officers of the Bancorp as of February 29, 2012 are listed below along with their business experience during the past 5 years:
Kevin T. Kabat , 55. President and Chief Executive Officer of the Bancorp since June 2006 and April 2007, respectively. Previously, Mr. Kabat was Chairman from June 2008 to June 2010. Previously, Mr. Kabat was Executive Vice President of the Bancorp since December 2003.
Greg D. Carmichael , 50. Executive Vice President and Chief Operating Officer of the Bancorp since June 2006. Prior to that, Mr. Carmichael was the Executive Vice President and Chief Information Officer of the Bancorp since June 2003.
Todd Clossin , 50. Executive Vice President and Chief Administrative Officer of the Bancorp since December 2011. Previously, Mr. Clossin was the President and CEO of Fifth Third Bank (Northeastern Ohio) since January 2005.
Mark D. Hazel , 46. Senior Vice President and Controller of the Bancorp since February 2010. Prior to that, Mr. Hazel was the Assistant Controller of the Bancorp since 2006 and was the Controller of Nonbank entities since 2003.
James R. Hubbard , 53. Senior Vice President and Chief Legal Officer of the Bancorp since February 2010. Prior to that, Mr. Hubbard was the Senior Vice President and Director of Legal Services since June 2001.
Gregory L. Kosch , 52. Executive Vice President of the Bancorp since June 2005. Previously, Mr. Kosch was Senior Vice President and head of the Bancorps Commercial Division in the Chicago affiliate since June 2002.
Bruce K. Lee , 51. Executive Vice President and Chief Credit Officer of the Bancorp since October 2011. Previously, Mr. Lee was Executive Vice President of the Bancorp since June 2005. Previously Mr. Lee was President and CEO of Fifth Third Bank (Northwestern Ohio) since July 2002.
Daniel T. Poston , 53. Executive Vice President of the Bancorp since June 2003, and Chief Financial Officer of the Bancorp since September 2009. Previously, Mr. Poston was the Controller of the Bancorp from July 2007 to May 2008 and from November 2008 to September 2009. Previously, Mr. Poston was the Chief Financial Officer of the Bancorp from May 2008 to November 2008. Formerly, Mr. Poston was the Auditor of the Bancorp since October 2001 and was Senior Vice President of the Bancorp and Fifth Third Bank since January 2002.
Paul L. Reynolds , 50. Executive Vice President, Secretary and Chief Risk Officer of the Bancorp since October 2011. Previously, Mr. Reynolds was Executive Vice President, Secretary and Chief Administrative Officer of the Bancorp since September 2009. Previously, Mr. Reynolds was Executive Vice President, Secretary and General Counsel since 2002. Prior to that he was Executive Vice President, General Counsel and Assistant Secretary since 1999.
Joseph R. Robinson , 43. Executive Vice President and Chief Information Officer and Director of Information Technology and Operations of the Bancorp since September 2009. Previously, Mr. Robinson was Executive Vice President and Chief Information Officer of the Bancorp since April 2008. Prior to that, he was Senior Vice President and Director of Central Operations since November 2006 and Senior Vice President of IT Enterprise Solutions since March 2004.
Robert A. Sullivan , 57. Senior Executive Vice President of the Bancorp since December 2002.
Teresa J. Tanner , 43. Executive Vice President and Chief Human Resources Officer of the Bancorp since February 2010. Previously, Ms. Tanner was Senior Vice President and Director of Enterprise Learning since September 2008. Prior to that, she was Human Resources Senior Vice President and Senior Business Partner for the Information Technology and Central Operations divisions since July 2006. Previously, she was Vice President and Senior Business Partner for Operations since September 2004.
Tayfun Tuzun , 47. Senior Vice President and Treasurer of the Bancorp since December of 2011. Previously, Mr. Tuzun was the Assistant Treasurer and Balance Sheet Manager of Fifth Third Bancorp since 2007. Previously, Mr. Tuzun was the Structured Finance Manager since 2007. Prior to that, Mr. Tuzun was the Director of Research and Risk Management at FSI Group since 2004.
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Bancorps common stock is traded in the over-the-counter market and is listed under the symbol FITB on the NASDAQ ® Global Select Market System.
High and Low Stock Prices and Dividends Paid Per Share
2011 | High | Low |
Dividends Paid Per Share |
|||||||
Fourth Quarter |
$ | 13.08 | $ | 9.60 | $0.08 | |||||
Third Quarter |
$ | 13.09 | $ | 9.13 | $0.08 | |||||
Second Quarter |
$ | 14.15 | $ | 11.88 | $0.06 | |||||
First Quarter |
$ | 15.75 | $ | 13.25 |
$0.06
|
|||||
2010 | High | Low |
Dividends Paid Per Share |
|||||||
Fourth Quarter |
$ | 15.11 | $ | 11.71 | $0.01 | |||||
Third Quarter |
$ | 13.81 | $ | 10.64 | $0.01 | |||||
Second Quarter |
$ | 15.95 | $ | 12.00 | $0.01 | |||||
First Quarter |
$ | 14.05 | $ | 9.81 | $0.01 |
See a discussion of dividend limitations that the subsidiaries can pay to the Bancorp discussed in Note 3 of the Notes to the Consolidated Financial Statements. Additionally, as of December 31, 2011, the Bancorp had 55,237 shareholders of record.
Issuer Purchases of Equity Securities
Period |
Shares Purchased (a) |
Average Price Paid Per Share |
Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Shares that May Be Purchased Under the Plans or Programs |
||||||||||||
October 2011 |
- | $- | - | 19,201,518 | ||||||||||||
November 2011 |
- | - | - | 19,201,518 | ||||||||||||
December 2011 |
- | - | - | 19,201,518 | ||||||||||||
Total |
$- | - | 19,201,518 |
(a) | The Bancorp repurchased 48,372, 36,961 and 62,618 shares during October, November and December of 2011 in connection with various employee compensation plans of the Bancorp. These purchases are not included against the maximum number of shares that may yet be purchased under the Board of Directors authorization. |
See further discussion of stock-based compensation in Note 24 of the Notes to the Consolidated Financial Statements.
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The following performance graphs do not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Bancorp specifically incorporates the performance graphs by reference therein.
Total Return Analysis
The graphs below summarize the cumulative return experienced by the Bancorps shareholders over the years 2007 through 2011, and 2002 through 2011, respectively, compared to the S&P 500 Stock and the S&P Banks indices.
FIFTH THIRD BANCORP VS. MARKET INDICES
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item relating to the Executive Officers of the Registrant is included in PART I under EXECUTIVE OFFICERS OF THE BANCORP.
The information required by this item concerning Directors and the nomination process is incorporated herein by reference under the caption ELECTION OF DIRECTORS of the Bancorps Proxy Statement for the 2012 Annual Meeting of Shareholders.
The information required by this item concerning the Audit Committee and Code of Business Conduct and Ethics is incorporated herein by reference under the captions CORPORATE GOVERNANCE and BOARD OF DIRECTORS, ITS COMMITTEES, MEETINGS AND FUNCTIONS of the Bancorps Proxy Statement for the 2012 Annual Meeting of Shareholders.
The information required by this item concerning Section 16 (a) Beneficial Ownership Reporting Compliance is incorporated herein by reference under the caption SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE of the Bancorps Proxy Statement for the 2012 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference under the captions COMPENSATION DISCUSSION AND ANALYSIS, COMPENSATION OF NAMED EXECUTIVE OFFICERS AND DIRECTORS, COMPENSATION COMMITTEE REPORT and COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION of the Bancorps Proxy Statement for the 2012 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security ownership information of certain beneficial owners and management is incorporated herein by reference under the captions CERTAIN BENEFICIAL OWNERS, ELECTION OF DIRECTORS, COMPENSATION DISCUSSION AND ANALYSIS and COMPENSATION OF NAMED EXECUTIVE OFFICERS AND DIRECTORS of the Bancorps Proxy Statement for the 2012 Annual Meeting of Shareholders.
The information required by this item concerning Equity Compensation Plan information is included in Note 24 of the Notes to the Consolidated Financial Statements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference under the captions CERTAIN TRANSACTIONS, ELECTION OF DIRECTORS, CORPORATE GOVERNANCE and BOARD OF DIRECTORS, ITS COMMITTEES, MEETINGS AND FUNCTIONS of the Bancorps Proxy Statement for the 2012 Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference under the caption PRINCIPAL INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES of the Bancorps Proxy Statement for the 2012 Annual Meeting of Shareholders.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Financial Statements Filed | Pages | |||
Report of Independent Registered Public Accounting Firm |
76 | |||
Fifth Third Bancorp and Subsidiaries Consolidated Financial Statements |
77-80 | |||
Notes to Consolidated Financial Statements |
81-151 |
The schedules for the Bancorp and its subsidiaries are omitted because of the absence of conditions under which they are required, or because the information is set forth in the Consolidated Financial Statements or the notes thereto.
The following lists the Exhibits to the Annual Report on Form 10-K.
2.1 |
Master Investment Agreement (excluding exhibits and schedules) dated as of March 27, 2009 and amended as of June 30, 2009, among Fifth Third Bank, Fifth Third Financial Corporation, Advent-Kong Blocker Corp., FTPS Holding, LLC and Fifth Third Processing Solutions, LLC. Incorporated by reference to the Registrants Current Report on Form 8-K filed with the Commission on July 2, 2009. |
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3.1 |
Second Amended Articles of Incorporation of Fifth Third Bancorp, as amended. Incorporated by reference to the Registrants Annual Report on Form 10-K for the year ended December 31, 2008. |
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3.2 |
Code of Regulations of Fifth Third Bancorp, as amended. Incorporated by reference to the Registrants Current Report on Form 8-K filed with the Commission on June 21, 2010. |
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4.1 |
Junior Subordinated Indenture, dated as of March 20, 1997 between Fifth Third Bancorp and Wilmington Trust Company, as Debenture Trustee. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on March 26, 1997. |
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4.2 |
Amended and Restated Trust Agreement, dated as of March 20, 1997 of Fifth Third Capital Trust II, among Fifth Third Bancorp, as Depositor, Wilmington Trust Company, as Property Trustee, and the Administrative Trustees named therein. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on March 26, 1997. |
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4.3 |
Guarantee Agreement, dated as of March 20, 1997 between Fifth Third Bancorp, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on March 26, 1997. |
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4.4 |
Agreement as to Expense and Liabilities, dated as of March 20, 1997 between Fifth Third Bancorp, as the holder of the Common Securities of Fifth Third Capital Trust I and Fifth Third Capital Trust II. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on March 26, 1997. |
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4.5 |
Indenture, dated as of May 23, 2003, between Fifth Third Bancorp and Wilmington Trust Company, as Trustee. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on May 22, 2003. |
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4.6 |
Global security representing Fifth Third Bancorps $500,000,000 4.50% Subordinated Notes due 2018. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on May 22, 2003. |
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4.7 |
First Supplemental Indenture, dated as of December 20, 2006, between Fifth Third Bancorp and Wilmington Trust Company, as Trustee. Incorporated by reference to Registrants Annual Report on Form 10-K filed for the fiscal year ended December 31, 2006. |
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4.8 |
Global security representing Fifth Third Bancorps $500,000,000 5.45% Subordinated Notes due 2017. Incorporated by reference to Registrants Annual Report on Form 10-K filed for the fiscal year ended December 31, 2006. |
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4.9 |
Global security representing Fifth Third Bancorps $250,000,000 Floating Rate Subordinated Notes due 2016. Incorporated by reference to Registrants Annual Report on Form 10-K filed for the fiscal year ended December 31, 2006. |
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4.10 |
First Supplemental Indenture dated as of March 30, 2007 between Fifth Third Bancorp and Wilmington Trust Company, as trustee, to the Junior Subordinated Indenture dated as of May 20, 1997 between Fifth Third and the Trustee. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on March 30, 2007. |
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4.11 |
Certificate Representing $500,000,000.00 of 6.50% Junior Subordinated Notes of Fifth Third Bancorp. Incorporated by reference to Registrants Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2007. |
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4.12 |
Certificate Representing $250,010,000.00 of 6.50% Junior Subordinated Notes of Fifth Third Bancorp. Incorporated by reference to Registrants Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2007. |
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4.13 |
Amended and Restated Declaration of Trust dated as of March 30, 2007 of Fifth Third Capital Trust IV among Fifth Third Bancorp, as Sponsor, Wilmington Trust Company, as Property Trustee and Delaware Trustee, and the Administrative Trustees named therein. Incorporated by reference to Registrants Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2007. |
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4.14 |
Certificate Representing 500,000 6.50% Trust Preferred Securities of Fifth Third Capital Trust IV (liquidation amount $1,000 per Trust Preferred Security). Incorporated by reference to Registrants Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2007. |
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4.15 |
Certificate Representing 250,000 6.50% Trust Preferred Securities of Fifth Third Capital Trust IV (liquidation amount $1,000 per Trust Preferred Security). Incorporated by reference to Registrants Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2007. |
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4.16 |
Certificate Representing 10 6.50% Common Securities of Fifth Third Capital Trust IV (liquidation amount $1,000 per Common Security). Incorporated by reference to Registrants Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2007. |
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4.17 |
Guarantee Agreement, dated as of March 30, 2007 between Fifth Third Bancorp, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee. Incorporated by reference to Registrants Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2007. |
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4.18 |
Agreement as to Expense and Liabilities, dated as of March 30, 2007 between Fifth Third Bancorp and Fifth Third Capital Trust IV. Incorporated by reference to Registrants Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2007. |
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4.19 |
Replacement Capital Covenant of Fifth Third Bancorp dated as of March 30, 2007. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on March 30, 2007. |
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4.20 |
Amendment No. 1 to Replacement Capital Covenant, dated as of November 24, 2010 amending the Replacement Capital Covenant dated as of March 30, 2007. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on November 26, 2010. |
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4.21 |
Second Supplemental Indenture dated as of August 8, 2007 between Fifth Third Bancorp and Wilmington Trust Company, as trustee, to the Junior Subordinated Indenture dated as of May 20, 1997 between Fifth Third and the Trustee. Incorporated by reference to Registrants Registration Statement on Form 8-A filed with the Securities and Exchange Commission on August 8, 2007. |
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4.22 |
Certificate Representing $500,010,000 of 7.25% Junior Subordinated Notes of Fifth Third Bancorp. Incorporated by reference to Registrants Registration Statement on Form 8-A filed with the Securities and Exchange Commission on August 8, 2007. |
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4.23 |
Amended and Restated Declaration of Trust dated as of August 8, 2007 of Fifth Third Capital Trust V among Fifth Third Bancorp, as Sponsor, Wilmington Trust Company, as Property Trustee and Delaware Trustee, and the Administrative Trustees named therein. Incorporated by reference to Registrants Registration Statement on Form 8-A filed with the Securities and Exchange Commission on August 8, 2007. |
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4.24 |
Certificate Representing 20,000,000 7.25% Trust Preferred Securities of Fifth Third Capital Trust V (liquidation amount $25 per Trust Preferred Security). Incorporated by reference to Registrants Registration Statement on Form 8-A filed with the Securities and Exchange Commission on August 8, 2007. |
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4.25 |
Certificate Representing 400 7.25% Trust Preferred Securities of Fifth Third Capital Trust V (liquidation amount $25 per Trust Preferred Security). Incorporated by reference to Registrants Quarterly Report on Form 10-Q filed for the quarter ended June 30, 2007. |
4.26 |
Guarantee Agreement, dated as of August 8, 2007 between Fifth Third Bancorp, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee. Incorporated by reference to Registrants Registration Statement on Form 8-A filed with the Securities and Exchange Commission on August 8, 2007. |
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4.27 |
Agreement as to Expense and Liabilities, dated as of August 8, 2007 between Fifth Third Bancorp and Fifth Third Capital Trust V. Incorporated by reference to Registrants Quarterly Report on Form 10-Q filed for the quarter ended June 30, 2007. |
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4.28 |
Replacement Capital Covenant of Fifth Third Bancorp dated as of August 8, 2007. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on August 8, 2007. |
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4.29 |
Amendment No. 1 to Replacement Capital Covenant, dated as of November 24, 2010 amending the Replacement Capital Covenant dated as of August 8, 2007. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on November 26, 2010. |
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4.30 |
Third Supplemental Indenture dated as of October 30, 2007 between Fifth Third Bancorp and Wilmington Trust Company, as trustee, to the Junior Subordinated Indenture dated as of May 20, 1997 between Fifth Third and the trustee. Incorporated by reference to Registrants Registration Statement on Form 8-A filed with the Securities and Exchange Commission on October 31, 2007. |
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4.31 |
Certificate Representing $862,510,000 of 7.25% Junior Subordinated Notes of Fifth Third Bancorp. Incorporated by reference to Registrants Registration Statement on Form 8-A filed with the Securities and Exchange Commission on October 31, 2007. |
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4.32 |
Amended and Restated Declaration of Trust dated as of October 30, 2007 of Fifth Third Capital Trust VI among Fifth Third Bancorp, as Sponsor, Wilmington Trust Company, as Property Trustee and Delaware Trustee, and the Administrative Trustees named therein. Incorporated by reference to Registrants Registration Statement on Form 8-A filed with the Securities and Exchange Commission on October 31, 2007. |
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4.33 |
Certificate Representing 20,000,000 7.25% Trust Preferred Securities of Fifth Third Capital Trust VI (liquidation amount $25 per Trust Preferred Security). Incorporated by reference to Registrants Registration Statement on Form 8-A filed with the Securities and Exchange Commission on October 31, 2007. (Issuer also entered into an identical certificate on October 30, 2007 representing $362,500,000 in aggregate liquidation amount of 7.25% Trust Preferred Securities of Fifth Third Capital Trust VI.) |
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4.34 |
Certificate Representing 400 7.25% Common Securities of Fifth Third Capital Trust VI (liquidation amount $25 per Trust Preferred Security). Incorporated by reference to Registrants Quarterly Report on Form 10-Q filed for the quarter ended September 30, 2007. |
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4.35 |
Guarantee Agreement, dated as of October 30, 2007 between Fifth Third Bancorp, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee. Incorporated by reference to Registrants Registration Statement on Form 8-A filed with the Securities and Exchange Commission on October 31, 2007. |
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4.36 |
Agreement as to Expense and Liabilities, dated as of October 30, 2007 between Fifth Third Bancorp and Fifth Third Capital Trust VI. Incorporated by reference to Registrants Quarterly Report on Form 10-Q filed for the quarter ended September 30, 2007. |
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4.37 |
Replacement Capital Covenant of Fifth Third Bancorp dated as of October 30, 2007. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on October 31, 2007. |
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4.38 |
Amendment No. 1 to Replacement Capital Covenant, dated as of November 24, 2010 amending the Replacement Capital Covenant dated as of October 30, 2007. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on November 26, 2010. |
|
4.39 |
Global security dated as of March 4, 2008 representing Fifth Third Bancorps $500,000,000 8.25% Subordinated Notes due 2038. Incorporated by reference to Registrants Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2008. (1) |
|
4.40 |
Indenture for Senior Debt Securities dated as of April 30, 2008 between Fifth Third Bancorp and Wilmington Trust Company, as trustee. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on May 6, 2008. |
|
4.41 |
Global security dated as of April 30, 2008 representing Fifth Third Bancorps $500,000,000 6.25% Senior Notes due 2013. Incorporated |
Fifth Third Bancorp |
163 |
by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on May 6, 2008. (2) |
||
4.42 |
Deposit Agreement dated June 25, 2008, between Fifth Third Bancorp, Wilmington Trust Company, as depositary and conversion agent and American Stock Transfer and Trust Company, as transfer agent, and the holders from time to time of the Receipts described therein. Incorporated by reference to Exhibit 4.3 of the Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on June 25, 2008. |
|
4.43 |
Form of Certificate Representing the 8.50 % Non-Cumulative Perpetual Convertible Preferred Stock, Series G, of Fifth Third Bancorp. Incorporated by reference to Exhibit 4.2 of the Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on June 25, 2008. |
|
4.44 |
Form of Depositary Receipt for the 8.50 % Non-Cumulative Perpetual Convertible Preferred Stock, Series G, of Fifth Third Bancorp. Incorporated by reference to Exhibit 4.4 of the Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on June 25, 2008. |
|
4.45 |
Supplemental Indenture dated as of January 25, 2011 between Fifth Third Bancorp and Wilmington Trust Company, as Trustee, to the Indenture for Senior Debt Securities dated as of April 30, 2008 between Fifth Third and the Trustee. Incorporated by reference to the Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on January 25, 2011. |
|
4.46 |
Global Security dated as of January 25, 2011 representing Fifth Third Bancorps $500,000,000 3.625% Senior Notes due 2016. Incorporated by reference to the Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on January 25, 2011. (3) |
|
10.1 |
Fifth Third Bancorp Unfunded Deferred Compensation Plan for Non-Employee Directors, as Amended and Restated. * |
|
10.2 |
Fifth Third Bancorp 1990 Stock Option Plan. Incorporated by reference to Registrants filing with the Securities and Exchange Commission as an exhibit to the Registrants Registration Statement on Form S-8, Registration No. 33-34075. * |
|
10.3 |
Fifth Third Bancorp 1987 Stock Option Plan. Incorporated by reference to Registrants filing with the Securities and Exchange Commission as an exhibit to the Registrants Registration Statement on Form S-8, Registration No. 33-13252. * |
|
10.4 |
Indenture effective November 19, 1992 between Fifth Third Bancorp, Issuer and NBD Bank, N.A., Trustee. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on November 18, 1992 and as Exhibit 4.1 to the Registrants Registration Statement on Form S-3, Registration No. 33-54134. |
|
10.5 |
Fifth Third Bancorp Master Profit Sharing Plan, as Amended and Restated. * |
|
10.6 |
First Amendment to Fifth Third Bancorp Master Profit Sharing Plan, as Amended and Restated.* |
|
10.7 |
Fifth Third Bancorp 2011 Incentive Compensation Plan. Incorporated by reference to the Registrants Proxy Statement dated March 10, 2011.* |
|
10.8 |
Amended and Restated Fifth Third Bancorp 1993 Stock Purchase Plan.* |
|
10.9 |
Fifth Third Bancorp 1998 Long-Term Incentive Stock Plan, as Amended. Incorporated by reference to the Exhibits to Registrants Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.* |
|
10.10 |
Fifth Third Bancorp Non-qualified Deferred Compensation Plan, as Amended and Restated. |
|
10.11 |
First Amendment to Fifth Third Bancorp Non-qualified Deferred Compensation Plan, as Amended and Restated.* |
|
10.12 |
Second Amendment to Fifth Third Bancorp Non-qualified Deferred Compensation Plan, as Amended and Restated.* |
|
10.13 |
CNB Bancshares, Inc. 1999 Stock Incentive Plan, 1995 Stock Incentive Plan, 1992 Stock Incentive Plan and Associate Stock Option Plan; and Indiana Federal Corporation 1986 Stock Option and Incentive Plan. Incorporated by reference to Registrants filing with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form S-4, Registration No. 333-84955 and by reference to CNB Bancshares Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 1998. * |
|
10.14 |
Fifth Third Bancorp Stock Option Gain Deferral Plan. Incorporated by reference to Registrants Proxy Statement dated February 9, 2001.* |
|
10.15 |
Amendment No. 1 to Fifth Third Bancorp Stock Option Gain Deferral Plan. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on May 26, 2006. * . |
10.16 |
Old Kent Executive Stock Option Plan of 1986, as Amended. Incorporated by reference to the following filings by Old Kent Financial Corporation with the Securities and Exchange Commission: Exhibit 10 to Form 10-Q for the quarter ended September 30, 1995; Exhibit 10.19 to Form 8-K filed on March 5, 1997; Exhibit 10.3 to Form 8-K filed on March 2, 2000. * |
|
10.17 |
Old Kent Stock Option Incentive Plan of 1992, as Amended. Incorporated by reference to the following filings by Old Kent Financial Corporation with the Securities and Exchange Commission: Exhibit 10(b) to Form 10-Q for the quarter ended June 30, 1995; Exhibit 10.20 to Form 8-K filed on March 5, 1997; Exhibit 10(d) to Form 10-Q for the quarter ended June 30, 1997; Exhibit 10.3 to Form 8-K filed on March 2, 2000. * |
|
10.18 |
Old Kent Executive Stock Incentive Plan of 1997, as Amended. Incorporated by reference to Old Kent Financial Corporations Annual Meeting Proxy Statement dated March 1, 1997. * |
|
10.19 |
Old Kent Stock Incentive Plan of 1999. Incorporated by reference to Old Kent Financial Corporations Annual Meeting Proxy Statement dated March 1, 1999. * |
|
10.20 |
Notice of Grant of Performance Units and Award Agreement. Incorporated by reference to Registrants Annual Report on Form 10-K filed for the fiscal year ended December 31, 2004. * |
|
10.21 |
Notice of Grant of Restricted Stock and Award Agreement (for Executive Officers). Incorporated by reference to Registrants Annual Report on Form 10-K filed for the fiscal year ended December 31, 2004. * |
|
10.22 |
Notice of Grant of Stock Appreciation Rights and Award Agreement. Incorporated by reference to Registrants Annual Report on Form 10-K filed for the fiscal year ended December 31, 2004. * |
|
10.23 |
Notice of Grant of Restricted Stock and Award Agreement (for Directors). Incorporated by reference to Registrants Annual Report on Form 10-K filed for the fiscal year ended December 31, 2004. * |
|
10.24 |
Franklin Financial Corporation 1990 Incentive Stock Option Plan. Incorporated by reference to Franklin Financial Corporations Annual Report on Form 10-K for the year ended December 31, 1989.* |
|
10.25 |
Franklin Financial Corporation 2000 Incentive Stock Option Plan. Incorporated by reference to Franklin Financial Corporations Registration Statement on Form S-8, Registration No. 333-52928. * |
|
10.26 |
Amended and Restated First National Bankshares of Florida, Inc. 2003 Incentive Plan. Incorporated by reference to First National Bankshares of Florida, Inc.s Annual Report on Form 10-K for the year ended December 31, 2003. * |
|
10.27 |
Southern Community Bancorp Equity Incentive Plan. Incorporated by reference to Southern Community Bancorps Registration Statement on Form SB-2, Registration No. 333-35548. * |
|
10.28 |
Southern Community Bancorp Director Statutory Stock Option Plan. Incorporated by reference to Southern Community Bancorps Registration Statement on Form SB-2, Registration No. 333-35548. * |
|
10.29 |
Peninsula Bank of Central Florida Key Employee Stock Option Plan. Incorporated by reference to Southern Community Bancorps Annual Report on Form 10-K for the year ended December 31, 2003. * |
|
10.30 |
Peninsula Bank of Central Florida Director Stock Option Plan. Incorporated by reference to Southern Community Bancorps Annual Report on Form 10-K for the year ended December 31, 2003. * |
|
10.31 |
First Bradenton Bank Amended and Restated Stock Option Plan. Incorporated by reference to Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 2004. * |
|
10.32 |
Stipulation and Agreement of Settlement dated March 29, 2005, as Amended. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on November 18, 2005. |
|
10.33 |
Amendment to Stipulation dated May 10, 2005. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on November 18, 2005. |
|
10.34 |
Second Amendment to Stipulation dated August 12, 2005. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on November 18, 2005. |
|
10.35 |
Order and Final Judgment of the United States District Court for the Southern District of Ohio. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on November 18, 2005. |
|
10.36 |
Letter Agreement, dated December 31, 2008, including Securities Purchase Agreement Standard Terms incorporated by reference therein, between the Company and the United States Department of |
164 |
Fifth Third Bancorp |
the Treasury. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on December 31, 2008. |
||
10.37 |
Form of Waiver, executed by each of Messrs. Kevin Kabat, Ross Kari, Greg Carmichael, Charles Drucker, Bruce Lee, Dan Poston, Robert A. Sullivan and Terry Zink. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on December 31, 2008. * |
|
10.38 |
Form of Letter Agreement, executed by each of Messrs. Kevin Kabat, Ross Kari, Greg Carmichael, Charles Drucker, Bruce Lee, Dan Poston, Robert A. Sullivan and Terry Zink with the Company. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on December 31, 2008. * |
|
10.39 |
Form of Executive Agreements effective December 31, 2008, between Fifth Third Bancorp and Kevin T. Kabat, Robert A. Sullivan, Greg D. Carmichael, Ross Kari, Bruce K. Lee, Charles D. Drucker and Terry Zink. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on December 31, 2008. * |
|
10.40 |
Form of Executive Agreements effective December 31, 2008, between Fifth Third Bancorp and Nancy Phillips, Daniel T. Poston, Paul L. Reynolds and Mary E. Tuuk. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on December 31, 2008. * |
|
10.41 |
Form of Executive Agreement effective December 31, 2008, between Fifth Third Bancorp and Mahesh Sankaran. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on December 31, 2008. * |
|
10.42 |
Form of Executive Agreement effective January 17, 2012, between Fifth Third Bancorp and Tayfun Tuzun.* |
|
10.43 |
Form of Amended Executive Agreements effective January 19, 2012, between Fifth Third Bancorp and Daniel T. Poston and Paul L. Reynolds. Incorporated by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on January 24, 2012. * |
|
10.44 |
Warrant dated June 30, 2009 issued by FTPS Holding, LLC to Fifth Third Bank. Incorporated by reference to the Registrants Current Report on Form 8-K filed with the Commission on July 2, 2009. |
|
10.45 |
Amended & Restated Limited Liability Company Agreement (excluding certain exhibits) dated as of June 30, 2009 among Advent-Kong Blocker Corp., Fifth Third Bank, FTPS Partners, LLC, JPDN Enterprises, LLC and FTPS Holding, LLC. Incorporated by reference to the Registrants Current Report on Form 8-K filed with the Commission on July 2, 2009. |
|
10.46 |
Amendment and Restatement Agreement and Reaffirmation (excluding certain schedules) dated as of June 30, 2009 among Fifth Third Processing Solutions, LLC, FTPS Holding, LLC, Card Management Company, LLC, Fifth Third Holdings, LLC and Fifth Third Bank. Incorporated by reference to the Registrants Current Report on Form 8-K filed with the Commission on July 2, 2009. |
|
10.47 |
Registration Rights Agreement dated as of June 30, 2009 among Advent-Kong Blocker Corp., Fifth Third Bank, FTPS Partners, LLC, JPDN Enterprises, LLC and FTPS Holding, LLC. Incorporated by reference to the Registrants Current Report on Form 8-K filed with the Commission on July 2, 2009. |
|
10.48 |
Form of Agreement Regarding Portion of Salary Payable in Phantom Stock Units dated October 16, 2009 executed by Kevin Kabat, Greg Carmichael, Greg Kosch, Bruce Lee, Dan Poston, Paul Reynolds, Robert Sullivan, and Terry Zink. Incorporated by reference to the Registrants Quarterly Report on 10-Q for the quarter ended September 30, 2009. * |
|
10.49 |
Form of Agreement Regarding Portion of Salary Payable in Phantom Stock Units dated March 26, 2010 executed by Mary Tuuk. Incorporated by reference to the Registrants Quarterly Report on 10-Q for the quarter ended September 30, 2009. * |
|
10.50 |
Form of Letter Agreement dated June 29, 2010 executed by each of Kevin Kabat, Greg Carmichael, Greg Kosch, Bruce Lee, Dan Poston, Paul Reynolds, Robert A. Sullivan and Mary Tuuk with the Company. Incorporated by reference to the Registrants Quarterly Report on 10-Q for the quarter ended June 30, 2010. * |
|
10.51 |
Form of Addendum No.1 to Agreement Regarding Portion of Salary Payable in Phantom Stock Units executed by each of Kevin Kabat, Greg Carmichael, Greg Kosch, Bruce Lee, Dan Poston, Paul Reynolds, Robert A. Sullivan and Mary Tuuk with the Company. Incorporated by reference to the Registrants Quarterly Report on 10-Q for the quarter ended June 30, 2010. * |
|
12.1 |
Computations of Consolidated Ratios of Earnings to Fixed Charges. |
12.2 |
Computations of Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements. |
|
21 |
Fifth Third Bancorp Subsidiaries, as of December 31, 2011. |
|
23 |
Consent of Independent Registered Public Accounting Firm-Deloitte & Touche LLP. |
|
31(i) |
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer. |
|
31(ii) |
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer. |
|
32(i) |
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer. |
|
32(ii) |
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer. |
|
99.1 |
Certification Pursuant to Section 111 (b)(4) of the Emergency Economic Stabilization Act of 2008 by Chief Executive Officer |
|
99.2 |
Certification Pursuant to Section 111 (b)(4) of the Emergency Economic Stabilization Act of 2008 by Chief Financial Officer |
|
101 |
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements tagged as blocks of text and in detail. ** |
(1) | Fifth Third Bancorp also entered into an identical security on March 4, 2008 representing an additional $500,000,000 of its 8.25% Subordinated Notes due 2038. |
(2) | Fifth Third Bancorp also entered into an identical security on April 30, 2008 representing an additional $250,000,000 of its 6.25% Senior Notes due 2013. |
(3) | Fifth Third Bancorp also entered into an identical security on January 25, 2011 representing an additional $500,000,000 of its 3.625% Senior Notes due 2016. |
* | Denotes management contract or compensatory plan or arrangement. |
** | As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
Fifth Third Bancorp |
165 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIFTH THIRD BANCORP |
Registrant |
/s/ Kevin T. Kabat |
Kevin T. Kabat |
President and CEO |
Principal Executive Officer |
February 29, 2012 |
Pursuant to requirements of the Securities Exchange Act of 1934, this report has been signed on February 29, 2012 by the following persons on behalf of the Registrant and in the capacities indicated.
OFFICERS: |
/s/ Kevin T. Kabat |
Kevin T. Kabat |
President and CEO |
Principal Executive Officer |
/s/ Daniel T. Poston |
Daniel T. Poston |
Executive Vice President and CFO |
Principal Financial Officer |
/s/ Mark D. Hazel |
Mark D. Hazel |
Senior Vice President and Controller |
Principal Accounting Officer |
DIRECTORS: |
/s/ William M. Isaac |
William M. Isaac |
Chairman |
/s/ James P. Hackett |
James P. Hackett |
Lead Director |
/s/ Darryl F. Allen |
Darryl F. Allen |
/s/ B. Evan Bayh III |
B. Evan Bayh III |
/s/ Ulysses L. Bridgeman, Jr. |
Ulysses L. Bridgeman, Jr. |
/s/ Emerson L. Brumback |
Emerson L. Brumback |
/s/ Gary R. Heminger |
Gary R. Heminger |
/s/ Jewell D. Hoover |
Jewell D. Hoover |
/s/ Kevin T. Kabat |
Kevin T. Kabat |
/s/ Mitchel D. Livingston, Ph.D. |
Mitchel D. Livingston, Ph.D. |
/s/ Michael B. McCallister |
Michael B. McCallister |
/s/ Hendrik G. Meijer |
Hendrik G. Meijer |
/s/ John J. Schiff, Jr. |
John J. Schiff, Jr. |
/s/ Marsha C. Williams |
Marsha C. Williams |
166 |
Fifth Third Bancorp |
CONSOLIDATED TEN YEAR COMPARISON
AVERAGE ASSETS ($ IN MILLIONS) | ||||||||||||||||||||||||||||||||
Interest-Earning Assets | ||||||||||||||||||||||||||||||||
Year
|
Loans and Leases |
Federal Funds Sold (a) |
Interest-Bearing Deposits in Banks (a) |
Securities |
Total |
Cash and Due from Banks |
Other
Assets
|
Total Average Assets |
||||||||||||||||||||||||
2011 |
$ | 80,214 | 1 | 2,030 | 15,437 | $ | 97,682 | 2,352 | 15,335 | $ | 112,666 | |||||||||||||||||||||
2010 |
79,232 | 11 | 3,317 | 16,371 | 98,931 | 2,245 | 14,841 | 112,434 | ||||||||||||||||||||||||
2009 |
83,391 | 12 | 1,023 | 17,100 | 101,526 | 2,329 | 14,266 | 114,856 | ||||||||||||||||||||||||
2008 |
85,835 | 438 | 183 | 13,424 | 99,880 | 2,490 | 13,411 | 114,296 | ||||||||||||||||||||||||
2007 |
78,348 | 257 | 147 | 11,630 | 90,382 | 2,275 | 10,613 | 102,477 | ||||||||||||||||||||||||
2006 |
73,493 | 252 | 144 | 20,910 | 94,799 | 2,477 | 8,713 | 105,238 | ||||||||||||||||||||||||
2005 |
67,737 | 88 | 113 | 24,806 | 92,744 | 2,750 | 8,102 | 102,876 | ||||||||||||||||||||||||
2004 |
57,042 | 120 | 195 | 30,282 | 87,639 | 2,216 | 5,763 | 94,896 | ||||||||||||||||||||||||
2003 |
52,414 | 92 | 215 | 28,640 | 81,361 | 1,600 | 5,250 | 87,481 | ||||||||||||||||||||||||
2002 |
45,539 | 155 | 184 | 23,246 | 69,124 | 1,551 | 5,007 | 75,037 |
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS ($ IN MILLIONS) | ||||||||||||||||||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||||||||||||||||||
Year | Demand |
Interest Checking |
Savings |
Money Market |
Other
Time |
Certificates $100,000 and Over |
Foreign Office |
Total |
Short-Term Borrowings |
Total | ||||||||||||||||||||||||||||||
2011 |
$ | 23,389 | 18,707 | 21,652 | 5,154 | 6,260 | 3,656 | 3,497 | $ | 82,315 | 3,122 | $ | 85,437 | |||||||||||||||||||||||||||
2010 |
19,669 | 18,218 | 19,612 | 4,808 | 10,526 | 6,083 | 3,361 | 82,277 | 1,926 | 84,203 | ||||||||||||||||||||||||||||||
2009 |
16,862 | 15,070 | 16,875 | 4,320 | 14,103 | 10,367 | 2,265 | 79,862 | 6,980 | 86,842 | ||||||||||||||||||||||||||||||
2008 |
14,017 | 14,191 | 16,192 | 6,127 | 11,135 | 9,531 | 4,220 | 75,413 | 10,760 | 86,173 | ||||||||||||||||||||||||||||||
2007 |
13,261 | 14,820 | 14,836 | 6,308 | 10,778 | 6,466 | 3,155 | 69,624 | 6,890 | 76,514 | ||||||||||||||||||||||||||||||
2006 |
13,741 | 16,650 | 12,189 | 6,366 | 10,500 | 5,795 | 3,711 | 68,952 | 8,670 | 77,622 | ||||||||||||||||||||||||||||||
2005 |
13,868 | 18,884 | 10,007 | 5,170 | 8,491 | 4,001 | 3,967 | 64,388 | 9,511 | 73,899 | ||||||||||||||||||||||||||||||
2004 |
12,327 | 19,434 | 7,941 | 3,473 | 6,208 | 2,403 | 4,449 | 56,235 | 13,539 | 69,774 | ||||||||||||||||||||||||||||||
2003 |
10,482 | 18,679 | 8,020 | 3,189 | 6,426 | 3,832 | 3,862 | 54,490 | 12,373 | 66,863 | ||||||||||||||||||||||||||||||
2002 |
8,952 | 16,239 | 9,465 | 1,162 | 8,855 | 2,237 | 2,018 | 48,928 | 7,191 | 56,119 |
INCOME ($ IN MILLIONS, EXCEPT PER SHARE DATA) | ||||||||||||||||||||||||||||||||||||||||
Per Share (b) | ||||||||||||||||||||||||||||||||||||||||
Originally Reported | ||||||||||||||||||||||||||||||||||||||||
Year |
Interest Income |
Interest Expense |
Noninterest Income |
Noninterest Expense |
Net Income (Loss) Available to Common Shareholders |
Earnings |
Diluted Earnings |
Dividends Declared |
Earnings |
Diluted Earnings |
||||||||||||||||||||||||||||||
2011 |
$ | 4,218 | 661 | 2,455 | 3,758 | 1,094 | 1.20 | 1.18 | 0.28 | 1.20 | $ | 1.18 | ||||||||||||||||||||||||||||
2010 |
4,489 | 885 | 2,729 | 3,855 | 503 | 0.63 | 0.63 | 0.04 | 0.63 | 0.63 | ||||||||||||||||||||||||||||||
2009 |
4,668 | 1,314 | 4,782 | 3,826 | 511 | 0.73 | 0.67 | 0.04 | 0.73 | 0.67 | ||||||||||||||||||||||||||||||
2008 |
5,608 | 2,094 | 2,946 | 4,564 | (2,180 | ) | (3.91 | ) | (3.91 | ) | 0.75 | (3.94 | ) | (3.94 | ) | |||||||||||||||||||||||||
2007 |
6,027 | 3,018 | 2,467 | 3,311 | 1,075 | 1.99 | 1.98 | 1.70 | 2.00 | 1.99 | ||||||||||||||||||||||||||||||
2006 |
5,955 | 3,082 | 2,012 | 2,915 | 1,188 | 2.13 | 2.12 | 1.58 | 2.14 | 2.13 | ||||||||||||||||||||||||||||||
2005 |
4,995 | 2,030 | 2,374 | 2,801 | 1,548 | 2.79 | 2.77 | 1.46 | 2.79 | 2.77 | ||||||||||||||||||||||||||||||
2004 |
4,114 | 1,102 | 2,355 | 2,863 | 1,524 | 2.72 | 2.68 | 1.31 | 2.72 | 2.68 | ||||||||||||||||||||||||||||||
2003 |
3,991 | 1,086 | 2,398 | 2,466 | 1,664 | 2.91 | 2.87 | 1.13 | 2.91 | 2.87 | ||||||||||||||||||||||||||||||
2002 |
4,129 | 1,430 | 2,111 | 2,265 | 1,530 | 2.64 | 2.59 | 0.98 | 2.64 | 2.59 |
MISCELLANEOUS AT DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA) | ||||||||||||||||||||||||||||||||||||||||
Bancorp Shareholders Equity | ||||||||||||||||||||||||||||||||||||||||
Year |
Common Shares Outstanding |
Common Stock |
Preferred Stock |
Capital Surplus |
Retained
Earnings |
Accumulated Other Comprehensive Income |
Treasury Stock |
Total |
Book Value Per Share |
Allowance
Losses |
||||||||||||||||||||||||||||||
2011 |
919,804,436 | $ | 2,051 | 398 | 2,792 | 7,554 | 470 | (64 | ) | $ | 13,201 | 13.92 | $ | 2,255 | ||||||||||||||||||||||||||
2010 |
796,272,522 | 1,779 | 3,654 | 1,715 | 6,719 | 314 | (130 | ) | 14,051 | 13.06 | 3,004 | |||||||||||||||||||||||||||||
2009 |
795,068,164 | 1,779 | 3,609 | 1,743 | 6,326 | 241 | (201 | ) | 13,497 | 12.44 | 3,749 | |||||||||||||||||||||||||||||
2008 |
577,386,612 | 1,295 | 4,241 | 848 | 5,824 | 98 | (229 | ) | 12,077 | 13.57 | 2,787 | |||||||||||||||||||||||||||||
2007 |
532,671,925 | 1,295 | 9 | 1,779 | 8,413 | (126 | ) | (2,209 | ) | 9,161 | 17.18 | 937 | ||||||||||||||||||||||||||||
2006 |
556,252,674 | 1,295 | 9 | 1,812 | 8,317 | (179 | ) | (1,232 | ) | 10,022 | 18.00 | 771 | ||||||||||||||||||||||||||||
2005 |
555,623,430 | 1,295 | 9 | 1,827 | 8,007 | (413 | ) | (1,279 | ) | 9,446 | 16.98 | 744 | ||||||||||||||||||||||||||||
2004 |
557,648,989 | 1,295 | 9 | 1,934 | 7,269 | (169 | ) | (1,414 | ) | 8,924 | 15.99 | 713 | ||||||||||||||||||||||||||||
2003 |
566,685,301 | 1,295 | 9 | 1,964 | 6,481 | (120 | ) | (962 | ) | 8,667 | 15.29 | 697 | ||||||||||||||||||||||||||||
2002 |
574,355,247 | 1,295 | 9 | 2,010 | 5,465 | 369 | (544 | ) | 8,604 | 14.98 | 683 |
(a) | Federal funds sold and interest-bearing deposits in banks are combined in other short-term investments in the Consolidated Financial Statements. |
(b) | Adjusted for accounting guidance related to the calculation of earnings per share, which was adopted retroactively on January 1, 2009. |
Fifth Third Bancorp |
167 |
FIFTH THIRD BANCORP DIRECTORS
William M. Isaac, Chairman
Senior Managing Director-Global Head of Financial Institutions
FTI Consulting
James P. Hackett, Lead Director
President & CEO
Steelcase, Inc.
Darryl F. Allen
Retired Chairman
President & CEO
Aeroquip-Vickers, Inc.
B. Evan Bayh III
Partner
McGuireWoods LLP
Ulysses L. Bridgeman, Jr.
President
B.F. Companies
Emerson L. Brumback
Retired President & COO
M&T Bank
Gary R. Heminger
President & CEO
Marathon Petroleum Corporation
Jewell D. Hoover
Principal
Hoover and Associates, LLC
Kevin T. Kabat
President & CEO
Fifth Third Bancorp
Mitchel D. Livingston, Ph.D.
Vice President for Student Affairs
& Chief Diversity Officer
University of Cincinnati
Michael B. McCallister
Chairman & CEO
Humana, Inc.
Hendrik G. Meijer
Co-Chairman & CEO
Meijer, Inc.
John J. Schiff, Jr.
Chairman of the Executive Committee
Cincinnati Financial Corporation
Marsha C. Williams
Retired Senior Vice President & Chief Financial Officer
Orbitz Worldwide, Inc.
DIRECTORS EMERITI
Neil A. Armstrong
Philip G. Barach
John F. Barrett
J. Kenneth Blackwell
Milton C. Boesel, Jr.
Douglas G. Cowan
Thomas L. Dahl
Ronald A. Dauwe
Gerald V. Dirvin
Thomas B. Donnell
Nicholas M. Evans
Richard T. Farmer
Louis R. Fiore
John D. Geary
Ivan W. Gorr
Joseph H. Head, Jr.
Allen M. Hill
William G. Kagler
William J. Keating
Jerry L. Kirby
Robert L. Koch II
Kenneth W. Lowe
Robert B. Morgan
Michael H. Norris
David E. Reese
James E. Rogers
C. Wesley Rowles
George A. Schaefer, Jr.
Donald B. Shackelford
David B. Sharrock
Stephen Stranahan
Dennis J. Sullivan, Jr.
Dudley S. Taft
Thomas W. Traylor
Alton C. Wendzel
FIFTH THIRD BANCORP OFFICERS
Kevin T. Kabat
President & CEO
Greg D. Carmichael
Executive Vice President &
Chief Operating Officer
Todd F. Clossin
Executive Vice President &
Chief Administrative Officer
Mark D. Hazel
Senior Vice President &
Controller
James R. Hubbard
Senior Vice President &
Chief Legal Officer
Gregory L. Kosch
Executive Vice President
Bruce K. Lee
Executive Vice President &
Chief Credit Officer
Daniel T. Poston
Executive Vice President &
Chief Financial Officer
Paul L. Reynolds
Executive Vice President,
Chief Risk Officer & Secretary
Joseph R. Robinson
Executive Vice President &
Chief Information Officer
Robert A. Sullivan
Senior Executive Vice President
Teresa J. Tanner
Executive Vice President &
Chief Human Resources Officer
Tayfun Tuzun
Senior Vice President & Treasurer
AFFILIATE AND MARKET PRESIDENTS
Donald Abel, Jr.
David A. Call
Greg D. Carmichael
John N. Daniel
Karen Dee
David Girodat
Thomas Heiks
Nancy H. Huber
Julie Hughes
Jerry Kelsheimer
Randolph Koporc
Robert W. LaClair
Brian Lamb
Ralph S. Michael III
Jordan A. Miller, Jr.
Thomas Partridge
Reagan Rick
Robert A. Sullivan
Mary E. Tuuk
Michelle L. VanDyke
Thomas G. Welch, Jr.
FIFTH THIRD BANCORP BOARD COMMITTEES
Finance Committee
William M. Isaac, Chair
Emerson L. Brumback
James P. Hackett
Gary R. Heminger
Kevin T. Kabat
Audit Committee
Darryl F. Allen, Chair
Emerson L. Brumback
Jewell D. Hoover
Marsha C. Williams
Human Capital and Compensation Committee
Gary R. Heminger, Chair
Emerson L. Brumback
Mitchel D. Livingston, Ph. D.
Hendrik G. Meijer
Nominating and Corporate Governance Committee
James P. Hackett, Chair
Darryl F. Allen
Ulysses L. Bridgeman, Jr.
Marsha C. Williams
Risk and Compliance Committee
Marsha C. Williams, Chair
B. Evan Bayh III
Ulysses L. Bridgeman, Jr.
Jewell D. Hoover
Hendrik G. Meijer
Trust Committee
Mitchel D. Livingston, Ph.D., Chair
Kevin T. Kabat
John J. Schiff, Jr.
168 |
Fifth Third Bancorp |
Exhibit 10.1
FIFTH THIRD BANCORP
UNFUNDED DEFERRED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS
(as amended and restated effective as of January 1, 2009)
FIFTH THIRD BANCORP
UNFUNDED DEFERRED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS
(as amended and restated effective as of January 1, 2009)
ARTICLE I - INTRODUCTION AND SECTION 409A COMPLIANCE
1.1 | Amendment and Restatement . Fifth Third Bancorp most recently amended and restated the Fifth Third Bancorp Unfunded Deferred Compensation Plan for Non-Employee Directors effective January 1, 2005, by an amendment executed on December 18, 2007. Fifth Third Bancorp hereby again amends and restates the Plan effective January 1, 2009. |
1.2 | Transition Rules under Section 409A . |
(a) | Election to Terminate Participation . The Committee, in its sole and absolute discretion, may offer to any Participant the option to terminate participation in the Plan and to receive in 2005 a complete payout of his Account. Any such election shall be administered by the Committee in compliance with Internal Revenue Service Notice 2005-1 and any other applicable legal authority. The amount and other aspects of the payment shall be determined by the Committee generally in accordance with the Plan, but the Committee shall have the authority to vary from the Plan, as it deems necessary or appropriate, to complete the payout. Any such election shall terminate past participation but shall not affect future participation by the Participant. |
(b) | New Payment Elections . In accordance with Paragraph 7.3, the Committee shall administer new payment elections under Article VII in 2005 which, for purposes of, Article VII shall be treated as a Participants timely initial election under Paragraph 7.2(a) and not as a change in election under Paragraph 7.2(c). Any such election shall be administered by the Committee in its sole and absolute discretion and in compliance with Internal Revenue Service Notice 2005-1 and any other applicable legal authority. |
ARTICLE II - DEFINITIONS
2.1 | Account shall mean the account established by a Company as a book reserve to reflect the amounts credited to a Participant under this Plan. A Participants Account under the Plan may include one or more of the following subaccounts: |
(a) | Deferred Compensation Account. |
(b) | Predecessor Plan Account. |
2.2 | Beneficiary shall mean the person or persons entitled to receive the distributions, if any, payable under the Plan upon or after a Participants death, to such person or persons as such Participants Beneficiary. Each Participant may designate a Beneficiary by filing the proper form with the Committee. A Participant may designate one or more contingent Beneficiaries to receive any distributions after the death of a prior Beneficiary. A designation shall be effective upon said filing, provided that it is so filed during such Participants lifetime, and may be changed from time to time by the Participant. If there is no designated Beneficiary to receive any amount that becomes payable to a Beneficiary, then the Participants Beneficiary shall be the estate of the last to die of the Participant and any properly designated Beneficiaries. |
2.3 | Claims Review Committee shall mean the committee established by the Committee for purposes of administering the claims and claim review procedures under the Plan. |
2.4 | Code shall mean the Internal Revenue Code of 1986, as amended at the particular time applicable. A reference to a section of the Code shall include said section and any comparable section or sections of any future legislation that amends, supplements or supersedes said section. |
2.5 | Committee shall mean The Fifth Third Bank Pension, Profit Sharing and Medical Plan Committee which is responsible for the administration of this Plan in accordance with the provisions of the Plan as set forth in this document. A reference to the Committee includes its delegate. |
2.6 | Company shall mean Fifth Third Bancorp and any subsidiary of Fifth Third Bancorp or any successor or assignee of any of them. |
2.7 | Compensation shall mean the amount which shall be payable to a Director for his or her services as a Director or as a member of a Committee of the Board of Directors, including fees for attending meetings. |
2.8 | Deferred Compensation Account shall mean the account established by a Company as a book reserve to reflect the amounts deferred by a Participant under Paragraph 4.1, as adjusted by earnings (and losses) under Article VI and as reduced by distributions under Article VII and Article VIII. |
2.9 | Director shall mean an individual who is not an employee of a Company, and who is either a member of the Board of Directors of Fifth Third Bancorp or a member of a Fifth Third Bank Charter Board or Affiliate Board. |
2.10 | Effective Date shall mean January 1, 2009. |
2.11 | Open Enrollment Period shall mean such period no more than thirty (30) days in length prescribed by the Committee, closing no later than the last day of the Plan Year immediately preceding the Plan Year for which elections to defer Compensation under Article IV are permitted. |
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2.12 | Participant shall mean any of the following: |
(a) | any Director who satisfies the eligibility requirements of Article III and who receives an allocation to his Deferred Compensation Account under Article IV, as well as any former Director who has a Deferred Compensation Account under the Plan; or |
(b) | any person who has a Predecessor Plan Account attributable to his services as a non-employee member of a board of directors covered by a Predecessor Plan. |
2.13 | Plan shall mean the Fifth Third Bancorp Unfunded Deferred Compensation Plan for Non-Employee Directors, as described in this instrument, and as may be amended, thereafter. |
2.14 | Plan Year shall mean the calendar year. |
2.15 | Predecessor Plan shall mean any other nonqualified deferred compensation plan designated by the Committee. Each Predecessor Plan was completely amended and restated into this Plan. |
2.16 | Predecessor Plan Account shall mean an account established by the Company as a book reserve to reflect amounts credited hereunder with respect to a Predecessor Plan, as adjusted by earnings (and losses) under Article VI and as reduced by distributions under Article VII and Article VIII. |
2.17 | Separation from Service shall mean the termination of employment with all Companies and ceasing to serve as a Director of all Companies. Whether a termination of employment and cessation of serving as a Director has occurred shall be determined based on whether the facts and circumstances indicate that the Company and Director reasonably anticipate that no further services would be performed after a certain date or that the level of bona fide services would permanently decrease to no more than 20 percent of the average level of bona fide services performed over the immediately preceding 36-month period (or the full period of service if the Director has been a Director of a Company less than 36 months). A Director is not treated as having terminated employment or ceasing to serve as a Director while he is on military leave, sick leave or other bona fide leave of absence if the period of such leave does not exceed six months, or if longer, so long as the individual retains a right to reemployment under an applicable statute or by contract. The determination of whether a Separation of Service has occurred shall be based on applicable regulations and other applicable legal authority under section 409A of the Code. |
2.18 |
Valuation Date shall mean each June 30 th and December 31st. |
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ARTICLE III - ELIGIBILITY AND PARTICIPATION
3.1 | Each individual who is a Director on the first day of an Open Enrollment Period may elect to defer Compensation for services performed during the ensuing Plan Year to which the Open Enrollment Period relates, in accordance with Article IV. |
An individual who is not a Director on the first day of an Open Enrollment Period but who later becomes a Director shall not be eligible to elect to defer Compensation until the first day of the next Open Enrollment Period with respect to which he is still a Director (for the Plan Year to which such next Open Enrollment Period relates).
3.2 | Notwithstanding Paragraph 3.1 or 4.2, an individual who first becomes a Director in 2005 may elect to defer Compensation with respect to services subsequent to the election within 30 days after becoming a Director, in accordance with Article IV. |
ARTICLE IV- ELECTION TO DEFER COMPENSATION
4.1 | Each Director eligible under Article III may elect to have fifty percent (50%) or more of his Compensation for services performed during a Plan Year deferred and credited with earnings in accordance with the terms and conditions of the Plan. |
4.2 | An eligible Director desiring to exercise an election under Paragraph 4.1 for a Plan Year shall notify the Committee each Plan Year of his deferral election during the Open Enrollment Period established by the Committee for such Plan Year. Such notice must be in writing, on a form provided by the Committee, and delivered to the Committee during the Open Enrollment Period. |
4.3 | A deferral election shall be effective for the entire Plan Year (but not for any future Plan Year) to which it relates and may not be modified or terminated for that Plan Year. |
4.4 | The Compensation otherwise payable to the Participant during the Plan Year shall be reduced by the amount of the Participants election under Paragraph 4.1. Such amounts shall be credited to the Participants Deferred Compensation Account at the time his Compensation is so reduced. |
ARTICLE V- PARTICIPANTS INTEREST
5.1 | Unsecured Creditor . No Participant or his designated Beneficiary shall acquire any property interest in his Account or any other assets of any Company, their rights being limited to receiving from the Company deferred payments as set forth in this Plan and these rights are conditioned upon continued compliance with the terms and conditions of this Plan. To the extent that any Participant or Beneficiary acquires a right to receive benefits under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. |
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ARTICLE VI - CREDITING OF EARNINGS
6.1 | General . As of each Valuation Date, there shall be credited to the Account of each Participant an additional amount of earnings (or losses) determined under this Article VI. |
6.2 | Available Investment Elections . |
(a) | Investment Elections . Each Participant shall elect to have earnings (or losses) credited to his Account under the Treasury Bill investment election and/or the Fifth Third Stock investment election. |
Such an election shall be made in such manner as the Committee shall direct.
The Committee may prescribe rules including rules which limit the frequency of changes to elections, prescribe times for making elections, regulate the amount or increment a Participant may allocate to a particular investment benchmark, require or allow an election (or election change) to relate only to future allocations, require an election to apply consistently to all subaccounts and provide for the investment of an Account of a Participant who fails to make an election.
(b) | Treasury Bill Investment Election . Under the Treasury Bill investment election, a Participants Account shall be credited with interest at a rate equal to the rate on one-year United States Treasury Bills, determined as of the preceding December 31, increased by 100 basis points. |
(c) | Fifth Third Stock Investment Election . Under the Fifth Third Stock investment election, a Participants Account shall be credited with earnings or losses (including unrealized gains or losses, dividends and stock splits) determined as if the Account were invested in common stock of Fifth Third Bancorp. |
(d) | Rate of Return Benchmarks . The Committee shall determine the rate of return for the Treasury Bill investment election and the Fifth Third Stock investment election. |
(e) | Crediting . As of each Valuation Date, the Participants Account shall be increased or decreased as if it had earned the rate of return corresponding to the Participants investment election. The Committees determination of the rates of return and the adjustment to a Participants Account shall be binding on all parties. |
ARTICLE VII - PLAN BENEFITS
7.1 | Distributions. |
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(a) | Amount of Payment . The amount of a distribution attributable to a Participants Account shall be based upon the value of such Account as of the Valuation Date last preceding the payment, increased by any deferrals of Compensation credited to the Participants Account after such Valuation Date, and reduced by any payments from the Participants Account after such Valuation Date. |
(b) | Time and Form of Payment . In accordance with the election procedures in Paragraph 7.2, a Participant may elect to have the amounts represented by the Participants Account paid (or commence to be paid) as of the first business day of August of the Plan Year immediately following the Plan Year in which the Participant ceases to be a Director and has a Separation from Service, or the first business day of August of any subsequent year, but not later than the first business day of August of the tenth Plan Year following the Plan Year in which the Participant ceases to be a Director and has a Separation from Service. In accordance with the election procedures in Paragraph 7.2, a Participant may elect to have such amounts paid in one of the following forms: |
(i) | single lump sum cash distribution; or |
(ii) | annual cash installments, the last payment of which is no later than the first business day of August of the tenth Plan Year following the Plan Year in which the Participant ceases to be a Director and has a Separation from Service. |
If installment payments are in effect, the Participants Account shall continue to be credited with earnings (or losses) under Article VI until fully paid.
Notwithstanding the foregoing or Paragraph 7.3 (a), (b) or (c), effective December 31, 2005, in the event the Participants Account does not exceed $25,000 as of any December 31 st after the Participant has ceased to be a Director and has a Separation from Service, then any payment election by a Participant shall be disregarded. In such a case, the Account (or remaining balance thereof) shall be paid in a single lump sum cash distribution as of the first business day of August following such December 31 st (even if the payment would exceed $25,000 at that time).
7.2 | Election Procedures . |
(a) | A Participant who wishes to make an initial election referred to in Paragraph 7.1 must do so within the first Open Enrollment Period applicable to him under Article III. |
Any such election shall be effective immediately.
As provided in Paragraph 1.2(b), a payment election in 2005 under Internal Revenue Service Notice 2005-1 shall be considered a timely initial election.
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(b) | If a Participant does not make a timely initial election concerning the commencement date and payment schedule of benefits under Paragraph 7.2(a), then, except as provided in (c) below, payment shall be made as of the first business day of August of the Plan Year immediately following the Plan Year in which he cases to be a Director and has a Separation from Service, in a single lump sum cash distribution. |
(c) | A Participant may make or change an election after the deadline established in (a) above at any time in order to defer payment for a period of not less than five years from the date payment would otherwise begin (but not to accelerate any payment). Payment shall be made in accordance with any such election only if the Participant ceases to be a Director and has a Separation from Service at least one year following the date of the election. Otherwise, the payment shall be made in accordance with the election (if any) in effect immediately prior to the changed election, or in accordance with (b) above if no such election is in effect. |
(d) | Elections shall be made in writing on a form provided by the Committee and shall be made in accordance with the rules established by the Committee. |
7.3 | Transition Rules . |
(a) |
Participants in Pay Status in 2005 . Subject to Paragraph 1.2(a), a Participant who has commenced receiving installment payments in 2005 or earlier, shall continue to receive such payments in accordance with the payment provisions under the Plan or election (whichever is controlling) in effect prior to the Effective Date provided that the value of his Account as of the June 30, 2005 Valuation Date is greater than $10,000. If the value of such a Participants Account as of such date is not greater than $10,000, then he shall receive a single lump sum cash distribution of his entire Account in 2005. Effective December 31, 2005, in the event the Participants Account does not exceed $25,000 as of any December 31 st , then any payment election by a Participant shall be disregarded. In such a case, the Account (or remaining balance thereof) shall be paid in a single lump sum cash distribution as of the first business day of August following such December 31 st (even if such Account exceeds $25,000 as of the Valuation Date immediately preceding payment). |
(b) |
Terminated Participants Not in Pay Status . Subject to Paragraph 1.2(a), a Participant who has ceased being a Director in 2005 or earlier, but who, as of a date in 2005 determined by the Committee, has not received or commenced receiving payments of his Account, shall be subject to the payment provisions of Paragraph 7.1, and any prior payment elections shall be of no force or effect. As provided in Paragraph 1.2(b), such a Participant shall have the opportunity to complete a new election by a date in 2005 determined by the Committee. Such a Participant who does not properly complete and return such an election by such date shall receive a single lump sum distribution of his entire Account as of August 1, 2006. Notwithstanding the foregoing, if such a Participants Account as |
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of a date in 2005 determined by the Committee is not greater than $10,000, then he shall receive a single lump sum distribution of his entire Account in 2005. Effective December 31, 2005, in the event the Participants Account does not exceed $25,000 as of any December 31 st , then any payment election shall be disregarded. In such a case, the Account (or remaining balance thereof) shall be paid in a single lump sum distribution as of the first business day of August following such December 31 st (even if such Account exceeds $25,000 at that time). |
(c) | Current Directors . Subject to Paragraph 1.2(a), a Participant who remains a Director as of a date in 2005 determined by the Committee shall be subject to the payment provisions of Paragraph 7.1 and any prior elections shall be of no force or effect. As provided in Paragraph 1.2(b), such a Participant shall have the opportunity to complete a new election by a date in 2005 determined by the Committee. Any such election shall be treated as an initial election under Paragraph 7.2(a). Such a Participant who does not make a timely election shall be treated the same as provided for in Paragraph 7.2(b) and 7.2(c) for Participants who do not make timely initial elections. |
7.4 | Facility of Payment . A payment required to be made hereunder on or as of a specified date may be made in a reasonable period after such date for administrative convenience, provided the payment is made in the same taxable year as the specified date. |
ARTICLE VIII - DEATH
8.1 | If a Participant dies before commencing payment of the amounts represented by the Participants Account, then the Participants Account, as determined under Paragraph 7.1(a), shall be paid to the Participants Beneficiary in a single lump sum cash distribution, as soon as reasonably possible after the Committee is notified of the Participants death and in all events not more than ninety (90) days following the Participants death. If the Participant has already commenced receiving the amounts represented by the Participants Account in the installment payment form, the installment payments shall continue to be paid to the Participants Beneficiary. |
ARTICLE IX - NON-ASSIGNABLE/NON-ATTACHMENT
9.1 | Except as required by law, no right of the Participant or designated Beneficiary to receive payments under this Plan shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law and any attempt, voluntary or involuntary, to effect any such action shall be null and void and of no effect. |
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ARTICLE X - ADMINISTRATION
10.1 | Administration . In addition to the powers which are expressly provided in the Plan, the Committee shall have the power and authority in its sole, absolute and uncontrolled discretion to control and manage the operation and administration of the Plan and shall have all powers necessary to accomplish these purposes including, but not limited to the following: |
(a) | the power to determine who is a Participant; |
(b) | the power to determine allocations, balances, and nonforfeitable percentages with respect to Participants Accounts; |
(c) | the power to determine when, to whom, in what amount, and in what form distributions are to be made; and |
(d) | such powers as are necessary, appropriate or desirable to enable it to perform its responsibilities, including the power to interpret the Plan, establish rules, regulations and forms with respect thereto. |
Benefits | under this Plan will be paid only if the Committee decides in its discretion that the applicant is entitled to them. |
10.2 | 409A of the Code . This Plan is intended to satisfy the applicable requirements of section 409A of the Code and shall be interpreted accordingly. |
ARTICLE XI - CONSOLIDATION OR MERGER
11.1 | In the event that Fifth Third Bancorp or any entity (resulting from any merger or consolidation or which shall be a purchaser or transferee so referred to), shall at any time be merged or consolidated into or with any other entity or entities, or in the event that substantially all of the assets of Fifth Third Bancorp or any such entity shall be sold or otherwise transferred to another entity, the provisions of this Plan shall be binding upon and shall inure to the benefit of the continuing entity or the entity resulting from such merger or consolidation or the entity to which such assets shall be sold or transferred. Except as provided in the preceding sentence, this Plan shall not be assignable by Fifth Third Bancorp or by any entity referred to in such preceding sentence. |
ARTICLE XII - AMENDMENT OR TERMINATION
12.1 |
Amendment . Fifth Third Bancorp reserves the right to amend the Plan. Any amendment of the Plan shall be by action of the Committee or by the Chairman of the Committee. If an amendment is being made by said Committee, it must be approved by a majority of the members of the Committee as constituted at the time of adoption of the amendment. Any amendment may be given retroactive effect as determined by said Committee or Chairman. Any amendment may, without limitation, (a) affect a Participant whether or |
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not currently serving as a Director or in pay status, and (b) affect or modify Participant elections and payment methods. An amendment may be evidenced in such manner as said Committee or Chairman shall determine. If the amendment is approved by said Committee, such evidence may include (but shall not be limited to) a written resolution signed by a majority of the members of the Committee or minutes of a meeting of the Committee reflecting approval by a majority of the members. |
12.2 | Termination . Fifth Third Bancorp reserves the right to terminate the Plan. Any termination of the Plan shall be by action of the Committee. Any termination must be approved by a majority of the members of said Committee as constituted at the time of adoption of the termination; and any such termination may be given retroactive effect as determined by said Committee. Any termination may, without limitation, (a) affect a Participant whether or not currently serving as a Director or in pay status, and (b) affect or modify Participant elections and payment methods. A termination may be evidenced in such manner as said Committee shall determine, and such evidence may include (but shall not be limited to) a written resolution signed by a majority of the members of the Committee or minutes of a meeting of the Committee reflecting approval by a majority of the members. |
ARTICLE XIII - CLAIMS
13.1 | Initial Claims Procedure . |
(a) | Claim . In order to present a complaint regarding the nonpayment of a Plan benefit or a portion thereof (a Claim), a Participant or Beneficiary under the Plan (a Claimant) or his duly authorized representative must file such Claim by mailing or delivering a writing stating such Claim to the department, officer, or employee responsible for employee benefit matters of the Company. Upon such receipt of a Claim, the Claims Review Committee shall furnish to the Claimant a written acknowledgment which shall inform such Claimant of the time limit set forth in (b)(i) below and of the effect, pursuant to (b)(iii) below, of failure to decide the Claim within such time limit. |
(b) | Initial Decision . |
(i) | Time Limit . The Claims Review Committee shall decide upon a Claim within a reasonable period of time after receipt of such Claim; provided, however, that such period shall in no event exceed 90 days, unless special circumstances require an extension of time for processing. If such an extension of time for processing is required, then the Claimant shall, prior to the termination of the initial 90-day period, be furnished a written notice indicating such special circumstances and the date by which the Claims Review Committee expects to render a decision. In no event shall an extension exceed a period of 90 days from the end of the initial period. |
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(ii) | Notice of Denial . If the Claim is wholly or partially denied, then the Claims Review Committee shall furnish to the Claimant, within the time limit applicable under (i) above, a written notice setting forth in a manner calculated to be understood by the Claimant: |
(A) | the specific reason or reasons for such denial; |
(B) | specific reference to the pertinent Plan provisions on which such denial is based; |
(C) | a description of any additional material or information necessary for such Claimant to perfect his Claim and an explanation of why such material or information is necessary; and |
(D) | appropriate information as to the steps to be taken if such Claimant wishes to submit his Claim for review pursuant to Paragraph 13.2, including notice of the time limits set forth in subsection 13.2(b)(ii). |
(iii) | Deemed Denial for Purposes of Review . If a Claim is not granted and if, despite the provisions of (i) and (ii) above, notice of the denial of a Claim is not furnished within the time limit applicable under (i) above, then the Claimant may deem such Claim denied and may request a review of such deemed denial pursuant to the provisions of Paragraph 13.2. |
13.2 | Claim Review Procedure . |
(a) | Claimants Rights . If a Claim is wholly or partially denied under Paragraph 13.1, then the Claimant or his duly authorized representative shall have the following rights: |
(i) | to obtain, subject to (b) below, a full and fair review by the Claims Review Committee; |
(ii) | to review pertinent documents; and |
(iii) | to submit issues and comments in writing. |
(b) | Request for Review . |
(i) | Filing . To obtain a review pursuant to (a) above, a Claimant entitled to such a review or his duly authorized representative shall, subject to (ii) below, mail or deliver a written request for such a review (a Request for Review) to the department, officer, or employee responsible for employee benefit matters of the Company. |
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(ii) | Time Limits for Requesting a Review . A Request for Review must be mailed or delivered within 60 days after receipt by the Claimant of written notice of the denial of the Claim. |
(iii) | Acknowledgment . Upon such receipt of a Request for Review, the Claims Review Committee shall furnish to the Claimant a written acknowledgment which shall inform such Claimant of the time limit set forth in (c)(i) below and of the effect, pursuant to (c)(iii) below, of failure to furnish a decision on review within such time limit. |
(c) | Decision on Review . |
(i) | Time Limit . |
(A) | General . If, pursuant to (b) above, a review is requested, then, except as otherwise provided in (B) below, the Claims Review Committee or its delegate (but only if such delegate has been given the authority to make a final decision on the Claim) shall make a decision promptly and no later than 60 days after receipt of the Request for Review; except that, if special circumstances require an extension of time for processing, then the decision shall be made as soon as possible but not later than 120 days after receipt of the Request for Review. The Claims Review Committee must furnish the Claimant written notice of any extension prior to its commencement. |
(B) | Regularly Scheduled Meetings . Anything to the contrary in (A) above notwithstanding, if the Claims Review Committee holds regularly scheduled meetings at least quarterly, then its decision on review shall be made no later than the date of the meeting which immediately follows the receipt of the Request for Review; provided, however, if such Request for Review is received within 30 days preceding the date of such meeting, then such decision on review shall be made no later than the date of the second meeting which follows such receipt; and provided further that, if special circumstances require a further extension of time for processing, and if the Claimant is furnished written notice of such extension prior to its commencement, then such decision on review shall be rendered no later than the third meeting which follows such receipt. |
(ii) | Notice of Decision . The Claims Review Committee or its delegate shall furnish to the Claimant, within the time limit applicable under (i) above, a written notice setting forth in a manner calculated to be understood by the Claimant: |
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(A) | the specific reason or reasons for the decision on review; |
(B) | specific reference to the pertinent Plan provisions on which the decision on review is based; and |
(C) | a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the Claimants claim for benefits. |
(iii) | Deemed Denial . If, despite the provisions of (i) and (ii) above, the decision on review is not furnished within the time limit applicable under (i) above, then the Claimant shall be deemed to have exhausted his remedies under the Plan and he may deem the Claim to have been denied on review. |
The Claims Review Committee shall have the sole, absolute and uncontrolled discretion to decide all claims under the initial claims procedure and under the claims review procedure, and its decisions shall be binding on all parties.
13.3 | Required Exhaustion of Administrative Remedies . Before a Participant may file a lawsuit regarding the Plan or benefits under the Plan, the Participant must first use the Initial Claims Procedure and the Claim Review Procedure (including the requirement of a timely request for review) described above. |
ARTICLE XIV - MISCELLANEOUS
14.1 | No Enlargement of Employment Rights . Neither this Plan, nor any action of Fifth Third Bancorp, a Company or the Committee, nor any election to defer Compensation hereunder shall be held or construed to confer on any person any legal right to be continued as a Director of Fifth Third Bancorp, or any Company. |
14.2 | Withholdings . Fifth Third Bancorp shall have the right to deduct from a Participants Account and/or any payments due a Participant or Beneficiary under the Plan any and all taxes determined by the Committee to be applicable with respect to such benefits. In the discretion of the Committee, Fifth Third Bancorp may accept payment by the Participant (or Beneficiary) of the amount of any applicable taxes in lieu of deducting such amount from the Participants Account or payments due under the Plan. |
14.3 |
Entire Agreement . This Plan document constitutes the entire agreement between the Company and any Participant (or Beneficiary), and supersedes all other prior agreements, undertakings, both written and oral, with respect to the subject matter hereof. This Plan document may not be amended orally or by any course or purported course of dealing, but only by an amendment in accordance with Paragraph 12.1 specifically identified within its text as a Plan amendment. Written communications and descriptions not specifically identified within their text as amendments, shall not constitute amendments |
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and shall have no interpretive or controlling effect on the interpretation of this Plan. Oral communications shall not constitute amendments and shall have no interpretation or controlling effect on the interpretation of this Plan. |
14.4 | No Guarantee of Tax Consequences . The Participant (or Beneficiary) shall be responsible for all taxes with respect to his benefit hereunder. Neither Fifth Third Bancorp nor any Company guarantees any particular tax consequences. This includes, without limitation, any taxes, interest or penalties imposed by, or with respect to, section 409A of the Code. |
14.5 | Governing Law . The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Ohio, except its conflict of law rules. |
IN WITNESS WHEREOF, Fifth Third Bancorp has caused this Plan to be executed this 18 th day of December, 2008.
FIFTH THIRD BANCORP | ||
By: | /s/ Nancy Phillips | |
Nancy Phillips, Chairman of The Fifth Third Bank Pension, Profit Sharing and Medical Plan Committee |
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Exhibit 10.5
THE FIFTH THIRD BANCORP
MASTER PROFIT SHARING PLAN
as amended and restated effective as of September 20, 2010
THE FIFTH THIRD BANCORP
MASTER PROFIT SHARING PLAN
as amended and restated effective
as of September 20, 2010
Table of Contents
Articles
1. Introduction and Purpose |
2. Definitions |
3. Eligibility and Participation |
4. Contributions and Their Allocation |
5. Limitations on Annual Additions |
6. Vesting and Forfeitures |
7. Investment of Accounts |
8. Withdrawals and Distributions |
9. Form of Payment to Participants |
10. Death Benefits |
11. Administration |
12. Amendment and Termination |
13. Top-Heavy Rules |
14. Miscellaneous |
ARTICLE 1
INTRODUCTION AND PURPOSE
1.1 Amendment and Restatement . Fifth Third Bank hereby amends and restates The Fifth Third Bancorp Master Profit Sharing Plan in its entirety, effective as of September 20, 2010; provided however, such other effective dates as are specified in the Plan for other particular provisions shall be applicable.
1.2 Purposes of the Plan . The purposes of the Plan are to provide retirement and other benefits for Participants and their respective beneficiaries. Except as otherwise provided by Section 4.8, the assets of the Plan shall be held for the exclusive purpose of providing benefits to Participants and their beneficiaries and defraying reasonable expenses of administering the Plan, and it shall be impossible for any part of the assets or income of the Plan to be used for, or diverted to, purposes other than such exclusive purposes. In accordance with section 401(a)(27) of the Code, the Plan is hereby designated as a profit sharing plan except with respect to the Fifth Third Stock Fund (as described in Section 7.3), which shall constitute a stock bonus plan and an employee stock ownership plan as defined in section 4975(e)(7) of the Code, designed to invest primarily in qualifying employer securities.
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ARTICLE 2
DEFINITIONS
As used in the Plan, the following terms, when capitalized, shall have the following meanings, except when otherwise indicated by the context:
2.1 Account means, with respect to a Participant, his allocable share of the Plan Assets. A Participants Account under the Plan may include one or more of the following subaccounts:
(a) After-Tax Account;
(b) Employer Matching Account;
(c) First Charter Employer Contribution Account;
(d) FNB Employer Contribution Account;
(e) Ohio Company SIP Matching Contribution Account;
(f) Old Kent After-Tax Account;
(g) Old Kent Matching Account;
(h) Old Kent Pre-Tax Account;
(i) Old Kent Rollover/Transfer Account;
(j) Post-2006 Profit Sharing Account;
(k) Pre-2004 Employer Contribution Account;
(1) Prior Plan Employer Contribution Account;
(m) Qualified Non-Elective Contribution Account;
(n) Rollover Account which, effective January 1, 2011, may include one or both of the following subaccounts:
(1) Traditional Rollover Account; and
(2) Roth Rollover Account.
(o) Section 401(k) Salary Deferral Account which, effective January 1, 2011, may include one or both of the following subaccounts:
(1) Pre-Tax 401(k) Account; and
(2) Roth 401(k) Account.
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(p) 2004-2006 Profit Sharing Account.
A Participants Account also may include applicable subaccounts as specified under an Appendix to the Plan. A Participants account, if any, under a Predecessor Plan which merges into, or makes transfers to, this Plan, shall be allocated to the appropriate subaccounts as determined by the Administrator. The establishment and maintenance of separate Accounts under the Plan is for accounting purposes, and a segregation and separate investment of each Account shall not be required.
2.2 Accounting Date means the last day of each June, September, December and March; provided, however, if such last day falls on a Saturday, Sunday, or holiday, then the preceding business day shall be the Accounting Date.
2.3 (a) Actual Contribution Percentage for a group of Participants for a Plan Year is the average of the ratios, calculated separately for each such Employee in such group, of:
(1) the amount of the Employer match contributed to the Plan for such Plan Year under Section 4.4 on behalf of each such Employee, plus the Employees voluntary after-tax Participant contributions actually contributed under Section 4.5 during the Plan Year, to
(2) the Employees Annual Compensation for such Plan Year.
(b) For purposes of computing the separate ratio under (a) above for any Highly Compensated Employee, all plans described in section 401(a) of the Code or arrangements described in section 401(k) of the Code of the Employer (and other employers taken into account under section 414 of the Code) in which such Highly Compensated Employee is a participant, shall be treated as one such plan or arrangement and all matching contributions and employee contributions for any such Highly Compensated Employee under such arrangements for the Plan Year being tested shall be aggregated.
(c) If the Plan satisfies the requirements of section 401(m), 401(a)(4) or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy such requirements only if aggregated with this Plan, then such other plans shall be aggregated with this Plan for purposes of computing the Actual Contribution Percentages and for determining whether the nondiscrimination rules of Section 4.6 are satisfied. If such aggregation applies, the other plans must use a testing method consistent with this Plan.
2.4 (a) Actual Deferral Percentage for a group of Participants for a Plan Year is the average of the ratios, calculated separately for each such Employee in such group, of:
(1) the compensation reduction contributions on behalf of each such Employee for such Plan Year under Section 4.1(a), to
(2) the Employees Annual Compensation for such Plan Year.
(b) For purposes of computing the separate ratio under (a) above for any Highly Compensated Employee, all cash or deferred arrangements under section 401(k) of the Code of the Employer (and other employers taken into account under section 414 of the Code) in which
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such Highly Compensated Employee is a participant, shall be treated as one cash or deferred arrangement under section 401(k) of the Code and all elective contributions for any such Highly Compensated Employees under such arrangements for the Plan Year being tested shall be aggregated.
(c) If the Plan satisfies the requirements of section 401(k), 401(a)(4) or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy such requirements only if aggregated with this Plan, then such other plans shall be aggregated with this Plan for purposes of computing the Actual Deferral Percentages and for determining whether the nondiscrimination rules of Section 4.3(b) are satisfied. If such aggregation applies, the other plans must use a testing method consistent with this Plan.
2.5 Administrator or Plan Administrator means the Fifth Third Bank Pension and Profit Sharing Committee. Members of said Committee shall be appointed by, and serve at the pleasure of, the President and Chief Executive Officer of Fifth Third Bank. A reference to the Plan Administrator includes, where applicable, its delegate.
2.6 Affiliate means each of the following for such period of time as is applicable under section 414 of the Code:
(a) a corporation which, together with the Employer, is a member of a controlled group of corporations within the meaning of section 414(b) of the Code (as modified by section 415(h) thereof for the purposes of Article 5) and the applicable regulations thereunder;
(b) a trade or business (whether or not incorporated) with which the Employer is under common control within the meaning of section 414(c) of the Code (as modified by section 415(h) thereof for the purposes of Article 5) and the applicable regulations thereunder;
(c) an organization which, together with the Employer, is a member of an affiliated service group (as defined in section 414(m) of the Code); and
(d) any other entity required to be aggregated with the Employer under section 414(o) of the Code.
2.7 After-Tax Account means the separate portion of a Participants Account which reflects the Participants nondeductible voluntary contributions under Section 4.5 or transferred or merged into this Plan from a Predecessor Plan (other than the Old Kent Thrift Plan), as adjusted in accordance with Article 7.
2.8 Annual Compensation means the remuneration (before reduction for withheld amounts) an Employee receives, or would have received but for compensation reduction pursuant to Section 4.1, pursuant to The Fifth Third Bank 125 Plan or pursuant to a Code section 132(f)(4) qualified transportation arrangement, from an Employer during a Plan Year, from and after becoming a Participant, in the form of base wages or salary, overtime, variable compensation, and similar compensation, but excluding payments made pursuant to product-focused incentive plans, Jeanie maintenance payments, tuition refund reimbursements, Benefit Choice Dollars and similar payments and benefits. Other performance-based additional cash compensation incentives associated with the primary duties of the Employees position shall be included in
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Annual Compensation. Performance-based additional cash compensation incentives not associated with the primary duties of the Employees position shall not be included in Annual Compensation.
Solely for purposes of determining the Actual Deferral Percentage and the Actual Contribution Percentage, the Administrator, in its discretion, may use the definition of Annual Compensation set forth in the above paragraph, or the following definition. If the Administrator so determines, Annual Compensation for purposes of determining the Actual Deferral Percentage and the Actual Contribution Percentage shall mean the total wages as defined in section 3401 of the Code and all other payments of compensation by the Employer (in the course of its trade or business) for which the Employer is required to furnish the Employee a written statement under sections 6041(d), 6051(a)(3) and 6052 of the Code determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a)(2) of the Code) which is paid by the Employer to an Employee during a Plan Year including amounts that otherwise would have been included within this definition but for section 402(a)(8) of the Code (relating to a salary reduction election under section 401(k) of the Code), section 125 of the Code (relating to the cafeteria or flexible benefit plans), section 132(f)(4), section 402(h) of the Code (relating to SEPs), section 403(b) of the Code (relating to certain tax deferred annuities), section 457(b) of the Code (relating to deferred compensation plans of state and local governments and tax-exempt organizations), section 414(h)(2) of the Code (relating to certain picked-up employee contributions).
For any Plan Year, only the first $245,000 (as adjusted by the Secretary of Treasury in accordance with section 401(a)(17) of the Code) of a Participants Annual Compensation shall be taken into account.
2.9 Beneficiary means the person or persons entitled to receive the distributions, if any, payable under the Plan upon or after a Participants death, as such Participants Beneficiary. Each Participant may designate a Beneficiary by filing the proper form with the Administrator. A Participant may designate one or more contingent Beneficiaries to receive any distributions after the death of a prior Beneficiary. A designation shall be effective upon said filing, provided that it is so filed during such Participants lifetime, and may be changed from time to time by the Participant; provided however, if a Participant has at least one Hour of Service or at least one hour of paid leave from the Employer (or any other employer for whom service is treated as service for the Employer) on or after August 23, 1984 and is survived by a Surviving Spouse, then such spouse shall be his Beneficiary unless the designation of another Beneficiary is consented to by such spouse in a written consent which acknowledges the effect of such designation, acknowledges the specific Beneficiary or Beneficiaries, and is witnessed by a Plan representative or a notary public.
If there is no designated Beneficiary to receive any amount that becomes payable to a Beneficiary, then such amount shall be paid to the person or persons in the first surviving class of the following classes of successive preference beneficiaries, and the members thereof shall receive equal shares of any distribution payable:
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Class 1. the Participants Surviving Spouse;
Class 2. the Participants surviving children or issue of deceased children, per stirpes ;
Class 3. the Participants surviving parents;
Class 4. the Participants surviving brothers and sisters; and
Class 5. the Participants executor or administrator.
2.10 Break in Service means:
(a) before January 1, 1985, a Severance of at least 12 consecutive months; and
(b) after December 31, 1984, a Severance of at least 72 consecutive months; provided however, if as December 31, 1984, service was not required to be taken into account under the provisions of section 410(a) or 411(a) of the Code, then this Subsection (b) shall not cause such service to be taken into account.
2.11 Code means the Internal Revenue Code of 1986, as amended at the particular time applicable. A reference to a section of the Code shall include said section and any comparable section or sections of any future legislation that amends, supplements or supersedes said section.
2.12 Deferrable Compensation means Annual Compensation other than variable compensation.
For any Plan Year, only the first $245,000 as adjusted by the Secretary of Treasury in accordance with section 401(a)(17) of the Code) of a Participants Deferrable Compensation shall be taken into account. This $245,000 (as adjusted) limit may be applied in any reasonable manner determined by the Administrator or its delegate in its sole and absolute discretion.
2.13 Disability means an incapacity caused by bodily injury or disease which prevents an Employee from performing his regular duties, based upon medical evidence satisfactory to the Administrator.
2.14 Early Retirement Age means age 55 and at least 5 Vesting Years.
2.15 Effective Date means September 20, 2010.
2.16 Eligible Participant means a Participant, described in Section 4.2(c), who is qualified to receive an allocation of the Employer contribution under Section 4.2 for a Plan Year. As provided in an applicable Appendix, certain individuals may be excluded from the term Eligible Participant.
2.17 (a) Eligibility Service means, subject to (b) below, an individuals Service.
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(b) A reemployed persons prior Service shall be disregarded and he shall be treated as a new employee for purposes of determining Eligibility Service if he has incurred a Break in Service and if he did not have any nonforfeitable right to any part of his Account attributable to employer contributions and if such Break in Service equals or exceeds his Eligibility Service before such Break in Service, provided that such Eligibility Service before such Break in Service shall be deemed not to include any of such individuals Eligibility Service not taken into account by reason of any prior Breaks in Service incurred by him.
2.18 Eligibility Year means 365 days of Eligibility Service (whether or not continuous).
2.19 Employee means an individual who is employed by an Employer and who is considered by the Employer in its sole and absolute discretion to be an Employee for purposes of the Plan. An individual who performs services for the Employer as an independent contractor, leased employee, employee of a temporary agency or in any other capacity other than as an employee of an Employer shall not be considered an Employee for purposes of the Plan. A determination that an individual is an employee of the Employer for other purposes such as employment tax purposes, shall have no bearing whatsoever on the determination of whether the individual is an Employee under the Plan if the Employer does not consider the individual to be its Employee for purposes of the Plan. As provided in an applicable Appendix, certain individuals may be excluded from the term Employee.
2.20 Employer means Fifth Third Bank and each other subsidiary (direct or indirect) of Fifth Third Bancorp except for any such subsidiary excluded under the terms of the Plan (including an Appendix). An entity shall not be considered an Employer either before or after the time it is a subsidiary (direct or indirect) of Fifth Third Bancorp.
2.21 Employer Matching Account means the separate portion of each Participants Account which reflects the Employers contributions under Section 4.4 for Plan Years beginning after December 31, 2003, as adjusted in accordance with Article 7.
2.22 Employment Commencement Date means, with respect to an individual, the date on which he first performs an Hour of Service.
2.23 ERISA means the Employee Retirement Income Security Act of 1974, as amended, at the particular time applicable. A reference to a section of ERISA shall include said section and any comparable section or sections of any future legislation that amends, supplements or supersedes said section.
2.24 First Charter Employer Contribution Account means the separate portion of the Account of a Participant who was a participant in the First Charter Corporation Retirement Savings Plan which is attributable to his First Charter Matching Account and his First Charter Discretionary Contribution Account under that plan, which merged into this Plan, as adjusted in accordance with Article 7.
2.25 Five-Percent Owner means any person who owns (or is considered as owning within the meaning of sections 318 and 416 of the Code) more than 5 percent of the outstanding stock of the Employer or stock possessing more than 5 percent of the total combined voting power of all stock of the Employer.
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2.26 FNB Employer Contribution Account means the separate portion of the Account of a Participant who was a participant in the First National Bankshares of Florida, Inc. Salary Savings Plan which is attributable to Additional Contributions under that plan and Matching Contributions made before January 1, 2004 under that plan, which merged into this Plan, all as adjusted in accordance with Article 7.
2.27 (a) Highly Compensated Employee with respect to a Plan Year means, as determined under section 414(q) of the Code and the Treasury Regulations thereunder, an individual who, at any time during the Plan Year is an Employee, and who:
(1) during the Plan Year or the preceding twelve month period, was at any time a Five-Percent Owner; or
(2) received Section 415 Compensation from the Employer in excess of $110,000 (as adjusted pursuant to section 414(q)(l) of the Code) during the twelve month period preceding the Plan Year, and, if the Employer so elects, was in the group consisting of the top 20 percent of Employees when ranked on the basis of Section 415 Compensation paid during such preceding twelve month period.
(b) The determination of Highly Compensated Employees shall be made in accordance with the following:
(1) For purposes of determining the number of Employees under (a)(2), the Employees described in section 414(q)(5) of the Code shall be disregarded.
(2) The Employer shall be treated as including any other entities required to be aggregated under section 414 of the Code.
2.28 Hour of Service means an hour for which an individual is paid, or entitled to payment, for work for the Employer or an Affiliate.
2.29 Military Service means, with respect to a person employed immediately prior thereto by the Employer, the period of time that he spends in the Armed Forces of the United States, or its equivalent recognized pursuant to federal law, provided he returns to the service of the Employer within such period, if any, as is then provided by law for the protection of his reemployment rights, and provided he has not been employed elsewhere before returning to work for the Employer.
2.30 Non-highly Compensated Employee means an individual who is not a Highly Compensated Employee and who, at any time during the Plan Year, is an Employee.
2.31 Normal Retirement Age means the date on which a Participant has both reached age 65 and completed 5 Vesting Years; provided, however, a Participants Normal Retirement Age shall in no event be later than the later of the time a Participant attains age 65 or the 5 th anniversary of the time the Participant commenced participation in the Plan (or any Predecessor Plan).
2.32 Ohio Company SIP Matching Contribution Account means the separate portion of the Account of a Participant who was a participant in the Ohio Company Salary Investment Plan
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which is attributable to Matching Contributions under that Plan, which merged into this Plan, as adjusted in accordance with Article 7.
2.33 Old Kent After-Tax Account means the separate portion of the Account of a Participant who was a participant in the Old Kent Thrift Plan which is attributable to his Regular Account under the Old Kent Thrift Plan, which merged into this Plan, as adjusted in accordance with Article 7.
2.34 Old Kent Matching Account means the separate portion of the Account of a Participant who was a participant in the Old Kent Thrift Plan which is attributable to his Matching Account under the Old Kent Thrift Plan, which merged into this Plan, as adjusted in accordance with Article 7.
2.35 Old Kent Pre-Tax Account means the separate portion of the Account of a Participant who was a participant in the Old Kent Thrift Plan which is attributable to his Thrift Plus Account under the Old Kent Thrift Plan, which merged into this Plan, as adjusted in accordance with Article 7.
2.36 Old Kent Rollover/Transfer Account means the separate portion of the Account of a Participant who was a participant in the Old Kent Thrift Plan which is attributable to his Rollover/Transfer Account under the Old Kent Thrift Plan, which merged into this Plan, as adjusted in accordance with Article 7.
2.37 Old Plan means The Fifth Third Bancorp Master Profit Sharing Plan as it existed prior to the Effective Date.
2.38 Participant means an Employee who satisfies the eligibility requirements of Article 3 and also means a former Employee who has an Account under the Plan. To the extent provided in an applicable Appendix, the term also includes an individual with an Account under the Plan by reason of a plan merger or transfer identified in such Appendix. As provided in an applicable Appendix, certain individuals may be excluded from the term Participant.
2.39 Plan means The Fifth Third Bancorp Master Profit Sharing Plan as set forth in this document, including all Appendices, and, if amended at any time, then as so amended.
2.40 Plan Assets means the assets of the Plan at the particular time applicable.
2.41 Plan Year means the calendar year.
2.42 Post-2006 Profit Sharing Account means the separate portion of a Participants Account which reflects the Employers contributions under Section 4.2 (and forfeitures allocated thereto) for Plan Years beginning after December 31, 2006, as adjusted in accordance with Article 7.
2.43 Predecessor Plan means a plan identified as such in an Appendix to this Plan.
2.44 Pre-Tax 401(k) Account means the separate portion of a Participants Section 401(k) Salary Deferral Account which reflects all amounts credited thereto except for designated Roth
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contributions under Section 4.1(a)(3) (and earnings on such designated Roth contributions), as adjusted in accordance with Article 7.
2.45 Pre-2004 Employer Contribution Account means the separate portion of a Participants Account which reflects the Employers contributions of Profit Sharing Allocations for Plan Years after 1996 and before 2004 under the Old Plan, and the Employers matching contributions under Section 4.4 for Plan Years beginning before January 1, 2004, as adjusted in accordance with Article 7.
2.46 Prior Plan Employer Contribution Account means the separate portion of a Participants Account which reflects: (a) the Employers contributions for Plan Years before 1997 of that portion of each Participants Profit Sharing Allocation which exceeded his Elective Percentage (as those terms were defined in the Old Plan) and forfeitures allocated thereto; and (b) for a Participant who was a participant in a Predecessor Plan, amounts which transferred or merged into this subaccount from a Predecessor Plan; all as adjusted in accordance with Article 7.
2.47 Qualified Non-Elective Contribution Account means the separate portion of a Participants Account which reflects: (a) qualified nonelective contributions made under the applicable terms of the Old Plan (which were taken into account in actual deferral percentage or actual contribution percentage testing under the Old Plan); and (b) for a Participant who was a participant in the First Charter Corporation Retirement Savings Plan, amounts attributable to his Bank Savings Subaccount under that plan, which merged into this Plan; all as adjusted in accordance with Article 7.
2.48 Reemployment Commencement Date means the first day, after a Severance, on which an individual performs an Hour of Service.
2.49 Rollover Account means the separate portion of a Participants Account which reflects his rollover contributions under Section 4.9, and any rollover contributions transferred or merged into this Plan from a Predecessor Plan (other than the Old Kent Thrift Plan), as adjusted in accordance with Article 7. Effective January 1, 2011, in order to separately account for any designated Roth contributions (including any earnings on such contributions) accepted in a rollover contribution, a Participants Rollover Account may include the following subaccounts:
(a) Traditional Rollover Account; and
(b) Roth Rollover Account.
2.50 Roth 401(k) Account means the separate portion of a Participants Section 401(k) Salary Deferral Account which reflects designated Roth contributions credited thereto under Section 4.1(a)(3), as adjusted in accordance with Article 7.
2.51 Roth Rollover Account means the separate portion of a Participants Rollover Account which reflects designated Roth contributions (including earnings on such contributions) accepted in a rollover contribution under Section 4.9(b), as adjusted in accordance with Article 7.
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2.52 Section 401(k) Salary Deferral Account means the separate portion of a Participants Account which reflects: (a) contributions on behalf of such Participant under Section 4.1; (b) contributions of the Elective Percentage of his Profit Sharing Allocation (as those terms were defined in the Old Plan) for Plan Years before 1997; and (c) any section 401(k) elective deferrals transferred or merged into this Plan from a Predecessor Plan (other than the Old Kent Thrift Plan); all as adjusted in accordance with Article 7. Effective January 1, 2011, in order to separately account for any designated Roth contributions under Section 4.1(a)(3), a Participants Section 401(k) Salary Deferral Account may include the following subaccounts:
(a) Pre-Tax 401(k) Account; and
(b) Roth 401(k) Account.
2.53 (a) Service means the sum of the following periods (whether or not continuous), provided that no period of time shall be counted more than once:
(1) each period beginning on an individuals Employment Commencement Date or Reemployment Commencement Date and ending with his next Severance;
(2) any separation from the service of the Employer of 12 months or less;
(3) Military Service;
(4) service taken into account for a particular Participant under a Predecessor Plan. Except as otherwise provided in an Appendix, the following transition rules shall apply with respect to any Participant who has been covered under a Predecessor Plan under which service has been computed on the basis of hours of service during 12-month computation periods. Such an individual shall receive credit for a period of service consisting of:
(A) the number of years of service credited to him before the computation period (determined under the Predecessor Plan) in which the Plan is adopted, plus
(B) the greater of
(i) the period of service that would be credited to him under the elapsed time method under (a) above for his service during the entire computation period in which the adoption occurs or
(ii) service taken into account under the computation periods method as of the date of the adoption.
In addition, the individual shall receive credit for service subsequent to the adoption commencing on the day after the last day of the vesting computation period in which the adoption occurs.
(5) as provided in an applicable Appendix, service (not otherwise taken into account under a Predecessor Plan) for a predecessor employer named in such Appendix, taken into account as provided in such Appendix.
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(b) Anything in the Plan to the contrary notwithstanding, in determining an Employees Service, he shall be entitled to such credit, if any, as is required by federal law.
2.54 Severance means, an absence from the employment of the Employer and all Affiliates, beginning on the earliest of death, quit, discharge, retirement or the first anniversary of any other absence (with or without pay).
2.55 Surviving Spouse means a Participants surviving spouse except to the extent that a former spouse is treated as such, for purposes of the Plan, under a qualified domestic relations order as described in section 414(p) of the Code.
2.56 2004-2006 Profit Sharing Account means the separate portion of a Participants Account which reflects the Employers contributions under Section 4.2 (and forfeitures allocated thereto) for Plan Years beginning after December 31, 2003 and before January 1, 2007, as adjusted in accordance with Article 7.
2.57 Traditional Rollover Account means the separate portion of a Participants Rollover Account which reflects amounts accepted in a rollover contribution under Section 4.9(a) (and which are not attributable to designated Roth contributions), as adjusted in accordance with Article 7.
2.58 Trustee means JPMorgan Chase Bank, National Association (effective September 13, 2010) and its successors and assigns in trust.
2.59 (a) Vesting Service means, subject to (b) below, an individuals Service.
(b) To the extent included in (a) above, the following periods shall be disregarded for purposes of determining Vesting Service:
(1) each period, with respect to Fifth Third Bank, prior to January 1, 1982 or, with respect to any other Employer, prior to such Employers adoption of the Plan, if such service would have been disregarded under the rules of The Fifth Third Bank Profit Sharing Plan or of such other Employers Predecessor Plan, as the case may be, relating to breaks in service or failure to complete a required period of service within a specified period of time, as such rules were in effect on the applicable date; and
(2) each period prior to a Break in Service if, at the time of incurring such Break in Service, the individual did not have any nonforfeitable right to any part of his Account attributable to employer contributions and if the Break in Service equals or exceeds his Vesting Service before such Break in Service, provided that such Vesting Service before such Break in Service shall be deemed not to include any of such individuals Vesting Service not taken into account hereunder by reason of any prior Breaks in Service.
2.60 Vesting Years mean the number of whole years of a Participants Vesting Service, whether or not such Vesting Service was completed continuously. Nonsuccessive periods of Vesting Service (whether or not consecutive) shall be aggregated on the basis that 365 days of Vesting Service equal a whole Vesting Year.
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ARTICLE 3
ELIGIBILITY AND PARTICIPATION
3.1 Eligibility and Participation .
(a) For Profit Sharing Contributions and Rollovers. Each Employee shall become a Participant as of the date on which he has credit for at least one Hour of Service.
(b) For 401(k) Contributions, Matching Contributions and After-Tax Contributions. Notwithstanding (a) above, an Employee shall be eligible to make 401(k) Contributions under Section 4.1, to receive matching contributions under Section 4.4 and (for Plan Years before 2011) to make after-tax contributions under Section 4.5 only on and after the first pay date following his completion of 30 days of Eligibility Service. If an Employee terminates employment after completing 30 days of Eligibility Service and is later re-employed as an Employee, he shall be eligible for such contributions beginning with the first pay date after such re-employment provided he still has credit for 30 days of Eligibility Service.
3.2 Participants Prior to Effective Date . Anything in Section 3.1 to the contrary notwithstanding, a person who was a participant in the Old Plan immediately prior to the Effective Date shall be a Participant in the Plan on the Effective Date.
3.3 Reemployment of Former Participant . If a former Participant is reemployed by the Employer, then, provided that he meets the requirements of Section 3.1, he shall become a Participant again as of the date of such reemployment.
3.4 Ineligible Employees .
(a) Ineligible Class of Employees . Notwithstanding anything to the contrary in this Article 3 or in Article 4, during the time that an Employee falls within one or more of the following classes of Employees, he shall not be eligible to participate in the Plan, or to make or receive allocations of contributions or forfeitures under the Plan:
(1) a nonresident alien who receives no earned income from the Employer which constitutes United States source income, or who does receive such income if all of such income is exempt from United States income tax under an applicable income tax convention; or
(2) an Employee whose position is located primarily (as determined by the Employer) outside the United States.
(b) Change of Employee Classification . In the event an Employee who is a member of an ineligible class, as described in (a) above has a change in employment status so that he is no longer a member of such an ineligible class, he shall be eligible to participate in the Plan and to make or receive allocations, contributions or forfeitures under the Plan immediately provided he meets the requirements of Section 3.1.
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ARTICLE 4
CONTRIBUTIONS AND THEIR ALLOCATION
4.1 Compensation Reduction Contributions.
(a) Compensation Reduction .
(1) 401(k) Contributions . Each Participant who has met the eligibility requirements of Section 3.1(b) may make Section 401(k) contributions by entering into a compensation reduction agreement with his Employer whereby he authorizes his Employer to reduce his Deferrable Compensation or any part thereof, by such percentage or dollar amount prospectively as he shall specify. Such an agreement shall remain in effect until the Participant revokes it or changes it. The Administrator may from time to time establish rules with respect to compensation reduction contributions hereunder, including but not limited to, rules restricting the amount by which compensation may be reduced, rules restricting such contributions to Participants whose pay is paid through the Fifth Third payroll system, and rules respecting the time for filing forms. In accordance with such rules and procedures as the Administrator deems appropriate, the Employer may treat a Participant as having made a compensation reduction election unless and until a Participant affirmatively elects to revoke or revise such deemed compensation reduction election. A compensation reduction agreement can be made only with respect to Deferrable Compensation which also constitutes compensation within the meaning of section 415(c)(3) of the Code and section 1.415(c)-2 of the Treasury Regulations.
(2) Catch-Up Contributions . Each Catch-Up Eligible Participant, as defined below, shall be eligible to make catch-up contributions in accordance with, and subject to the limitations of, section 414(v) of the Code. Such catch-up contributions shall not be taken into account for purposes of the provisions of the Plan implementing the required limitations of sections 402(g) and 415 of the Code. The Plan shall not be treated as failing to satisfy the provisions of the Plan implementing the requirements of section 401(k)(3), 401(k)(ll), 401(k)(12), 410(b), or 416 of the Code, as applicable, by reason of the making of such catch-up contributions. Catch-Up Eligible Participant means a Participant who is age 50 or older and for this purpose a Participant who is projected to attain age 50 before the end of a calendar year is deemed to be age 50 as of January 1 of such year.
For Plan Years before 2011, catch-up contributions (including catch-up contributions later re-characterized as regular section 401(k) contributions) shall not be eligible for matching contributions under Section 4.4.
(3) Designated Roth Contributions . Effective January 1, 2011, a Participant may irrevocably designate at the time of his Section 401(k) compensation reduction election, part or all of his Section 401(k) contributions hereunder (including catch-up contributions under (2) above) as designated Roth contributions. Any amounts so designated shall be includible in the Participants income at the time the Employee would have received the amount in cash if he had not made the deferral election (instead of being excluded from income as is the case with Section
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401(k) contributions not so designated). In the absence of such a designation, the default rule shall be that such contributions shall be treated as pre-tax (non-Roth) elective contributions.
The Administrator shall provide separate sub-accounting within a Participants Section 401(k) Salary Deferral Account so as to track designated Roth contributions (and investment earnings and losses thereon) separately from Section 401(k) contributions not so designated. Designated Roth contributions shall be credited to the Participants Roth 401(k) Account (a subaccount of the Section 401(k) Salary Deferral Account) and Section 401(k) contributions which are not designated Roth contributions shall be credited to the Participants Pre-Tax 401(k) Account. For all purposes of the Plan, designated Roth contributions shall be treated the same as Section 401(k) contributions not so designated.
In any withdrawal, distribution (including corrective distributions), plan loans or other relevant circumstances where a Participant has amounts in both his Roth 401(k) Account and Pre-Tax 401(k) Account, the Administrator in its discretion shall determine which amounts are affected.
The Administrator shall have all power necessary or appropriate to administer the Roth contribution feature of this Plan as the Administrator deems appropriate, provided that a Participant who is an eligible Employee must be given an effective opportunity to make (or change) an election to make designated Roth contributions at least once during each Plan Year.
(b) Contribution to the Plan . Subject to the limitations under Article 5 and Section 4.3, the Employer shall so reduce the Participants Deferrable Compensation and shall contribute to the Plan on behalf of each such Participant an amount equal to the reduction in the Participants Deferrable Compensation. Such contribution shall be credited to the Participants Section 401(k) Salary Deferral Account (the Roth 401(k) Account in the case of designated Roth contributions and the Pre-Tax 401(k) Account otherwise). Such contributions for a Plan Year shall be made as soon as the Employer can reasonably segregate such amounts, but not later than the 15 !h business day of the month following the month in which such amounts would have otherwise been payable to the Participant.
4.2 Profit Sharing Contributions.
(a) General. The Board of Directors of Fifth Third Bancorp shall determine the amount to be contributed to the Plan for allocation under this Section 4.2, subject to Article 5 and this Article 4.
(b) Allocation Among Employers. Each Employer shall contribute under the Plan the total contribution allocable to its Eligible Participants.
(c) Participants Entitled to Receive an Allocation of Employer Contribution. A Participant shall be an Eligible Participant and shall be entitled to receive an allocation of the Employer contribution to the Plan under (a) above for a Plan Year if he:
(1) is in the employment of an Employer on the last day of such Plan Year;
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(2) died during such Plan Year and prior to the termination of his employment;
(3) retired on or after his reaching Normal Retirement Age during such Plan Year;
(4) retired on or after his reaching Early Retirement Age during such Plan Year;
(5) incurred a Disability and retired as a result thereof during such Plan Year; or
(6) is on leave of absence at the close of such Plan Year, if he received compensation from an Employer during such Plan Year.
(d) Allocation Formula. Subject to the limitations of Article 5, as of the last day of a Plan Year, there shall be allocated to the Post-2006 Profit Sharing Account of each Participant qualified under (c) above to receive such an allocation, that portion of the Employers contribution under (a) above for such Plan Year that bears the same ratio to the total amount of such contribution as the Annual Compensation of such Participant for such Plan Year bears to the total amount of the Annual Compensation for all such Participants for such Plan Year. Contributions under this Section for Plan Years beginning after December 31, 2003 and before January 1, 2007 were allocated to Participants 2004-2006 Profit Sharing Accounts.
4.3 Limitation on Compensation Reduction .
(a) General . To the extent the Administrator determines necessary to satisfy the limitations under (b) or (c) below, or Article 5, the Administrator may reduce the percentage of a Participants Deferrable Compensation available for compensation reduction pursuant to Section 4.1.
(b) Limitation on Section 401(k) Contributions .
(1) Current Year Testing . The Actual Deferral Percentage for any Plan Year for Participants who are Highly Compensated Employees shall not exceed the greater of:
(A) 1.25 times the Actual Deferral Percentage for the current Plan Year for all the Participants who are Non-highly Compensated Employees or
(B) 2 times the Actual Deferral Percentage for the current Plan Year for the Participants who are Non-highly Compensated Employees, provided that the Actual Deferral Percentage for the Participants who are Highly Compensated Employees shall not exceed the Actual Deferral Percentage for the current Plan Year for Participants who are Non-highly Compensated Employees by more than 2 percentage points.
(2) Special Rules for Early Participation . If the Employer elects to apply the special rule of section 410(b)(4)(B) of the Code in determining that the Section 401(k) feature satisfies the coverage rules of section 410(b)(1) of the Code, then the following special rules
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apply. In such a case, for testing purposes, the Plan shall be treated as two separate plans: one benefitting the Employees who have satisfied the lower minimum age and service conditions of the Plan but not the greatest such conditions permitted under section 410(a) of the Code (hereinafter Component Plan A); and one benefitting Employees who have satisfied the greatest such conditions permitted under section 410(a) of the Code (hereinafter Component Plan B). The testing in this Section 4.3(b) shall be applied as follows:
(A) At the election of the Employer, the testing shall be applied separately to Component Plan A and Component Plan B. In this regard, the Actual Deferral Percentages and Actual Contribution Percentages shall be determined separately for each such Component Plan.
(B) At the election of the Employer, in lieu of the testing provided in (A) above, the testing shall be applied solely to Component Plan B (and not Component Plan A); provided however any Highly Compensated Employees in Component Plan A must be included in the Actual Deferral Percentage and testing of Component Plan B.
This provision shall be administered in accordance with rules and regulations promulgated by the Secretary of Treasury or its delegate.
(c) Adjusted $16,500 Annual Limit . In no event shall the amount of a Participants compensation reduction under Section 4.1(a) (and under all other plans, contracts or arrangements of the Employer which allow elective deferrals within the meaning of section 402(g)(3) of the Code) during a calendar year exceed the dollar limitation contained in section 402(g) of the Code in effect for the taxable year, except to the extent permitted in section 414(v) of the Code.
4.4 Employer Matching Contributions to Employer Matching Accounts .
(a) Pay Period Match . The Employer shall make matching contributions to the Employer Matching Accounts of each Participant who has compensation reduction contributions made on his behalf under Section 4.1 for any pay period. The amount of such matching contributions shall be calculated by reference to so much of the Participants compensation reduction contributions under Section 4.1 for such pay period as do not exceed four percent (4%) of the Participants Deferrable Compensation otherwise payable in such pay period.
The Employer matching contribution shall equal one hundred percent (100%) of so much of the Participants compensation reduction contributions under Section 4.1 for such pay period as do not exceed four percent (4%) of the Participants Deferrable Compensation otherwise payable in such pay period.
In the event the rate of matching contribution (determined after corrective distribution of elective deferrals under sections 401(k) or (m) or 402(g) of the Code) is determined by the Administrator to be discriminatory in favor of one or more Highly Compensated Employees, the Administrator shall forfeit that part of such matching contribution (as adjusted in accordance with Article 7) as is necessary to make such rate nondiscriminatory (and in such a case the contributions shall be
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disregarded under the Plans provisions relative to sections 401(k)(3) and 401(m)(2) of the Code).
For Plan Years before 2011, a Participant who is otherwise eligible for the pay period match as described above but who is required to stop his compensation reduction contribution by reason of having reached the adjusted $16,500 limit under Section 4.3(c) above (and section 402(g) of the Code) nevertheless may qualify for the subsequent pay period matches in the Plan Year by making voluntary after-tax contributions out of his Deferrable Compensation. When a Participant reaches such limit for a Plan Year before 2011, the Administrator may treat his 401(k) compensation reduction election as an election to make voluntary after-tax contributions unless and until the Participant revokes or revises such deemed election. Such match shall be calculated and administered under this Section 4.4(a) by treating the Participants voluntary after-tax contributions made from his Deferrable Compensation after having reached such limit as if they were compensation reduction contributions under Section 4.1.
(b) Plan Year Match .
(1) General . For Plan Years beginning on or after January 1, 2011, the Employer shall make matching contributions to the Employer Matching Accounts of Participants eligible under (2) below to receive such match in the amount (if any) determined under (3) below.
(2) Participants Eligible for Plan Year Match . A Participant shall be eligible for the Plan Year match if he meets all of the following:
(A) he is an Eligible Participant (as defined in Section 4.2(c)) for the Plan Year;
(B) he made Section 401(k) contributions during the Plan Year equal to the limit in section 402(g) of the Code (and Section 4.3(c) of the Plan) (or greater, in the case of a Catch-Up Eligible Participant under Section 4.1(a)(2)); and
(C) he made Section 401(k) contributions in the aggregate for the Plan Year of at least four percent (4%) of his Deferrable Compensation payable during the Plan Year (excluding Deferrable Compensation paid prior to the time the Participant was eligible under Section 3.1(b)) but received pay period matching contributions under (a) above in the aggregate for the Plan Year of less than four percent (4%) of the Deferrable Compensation payable during the Plan Year (excluding Deferrable Compensation paid prior to the time the Participant was eligible under Section 3.1(b)).
(3) Amount of Plan Year Match . The amount of such matching contributions shall be calculated by reference to so much of the Participants Section 401(k) contributions for the Plan Year as do not exceed four percent (4%) of the Participants Deferrable Compensation otherwise payable during the Plan Year (excluding Deferrable Compensation paid prior to the time the Participant was eligible under Section 3.1(b)).
The Plan Year match (if any) shall equal one hundred percent (100%) of so much of the Participants Section 401(k) contributions for the Plan Year as do not exceed four percent (4%) of the Participants Deferrable Compensation otherwise payable during the Plan Year from and
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after the time he became eligible under Section 3.1(b), reduced by the aggregate amount of the pay period matching contributions allocable to the Participant for pay periods in the Plan Year under Section 4.4(a) above.
In the event the rate of matching contribution (determined after corrective distribution of elective deferrals under section 401(k) or (m) or 402(g) of the Code) is determined by the Administrator to be discriminatory in favor of one or more Highly Compensated Employees, the Administrator shall forfeit that part of such matching contribution (as adjusted in accordance with Article 7) as is necessary to make such rate nondiscriminatory.
(c) Time for Matches . Contributions under this Section 4.4 for a Plan Year shall be made no later than the end of the Plan Year following the Plan Year to which the contributions relate (or such later time as may be permitted by Treasury Regulations).
4.5 Voluntary After-Tax Participant Contributions Before 2011 . For Plan Years before 2011, each Participant who has met the eligibility requirements of Section 3.1(b) may make voluntary after-tax contributions in cash to the Plan. A Participants voluntary contributions to the Plan shall be subject to the limitations of Article 5, Section 4.6 and such other limitations as the Administrator may establish from time to time. Such contributions shall be made in accordance with such rules and limitations as are prescribed by the Administrator. Subject to such rules, a Participant may discontinue or resume such contributions or change the rate, if any, thereof. Voluntary contributions by Participants shall not be treated as qualified voluntary employee contributions under section 219 of the Code. A Participants voluntary after-tax contributions shall be credited to his After-Tax Account as soon as administratively feasible following the Trustees receipt thereof.
Effective for Plan Years beginning on or after January 1, 2011, no further contributions of this type shall be permitted under the Plan.
4.6 Limitation on Employer Matching Contributions and Voluntary After-Tax Participant Contributions .
(a) Current Year Testing . The Actual Contribution Percentage for any Plan Year for Participants who are Highly Compensated Employees shall not exceed the greater of:
(1) 1.25 times the Actual Contribution Percentage for the current Plan Year for Participants who are Non-highly Compensated Employees; or
(2) 2 times the Actual Contribution Percentage for the current Plan Year for Participants who are Non-highly Compensated Employees provided that the Actual Contribution Percentage for the Participants who are Highly Compensated Employees shall not exceed the Actual Contribution Percentage for the current Plan Year for Participants who are Non-highly Compensated Employees by more than 2 percentage points.
(b) Special Rules for Early Participation . If the Employer elects to apply the special rule of section 410(b)(4)(B) of the Code in determining that the Employer matching and voluntary after-tax contribution features satisfy the coverage rules of section 410(b)(1) of the Code, then the following special rules apply. In such a case, for testing purposes, the Plan shall
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be treated as two separate plans: one benefitting the Employees who have satisfied the lower minimum age and service conditions of the Plan but not the greatest such conditions permitted under section 410(a) of the Code (hereinafter Component Plan A); and one benefitting Employees who have satisfied the greatest such conditions permitted under section 410(a) of the Code (hereinafter Component Plan B). The testing in this Section 4.6 shall be applied as follows:
(1) At the election of the Employer, the testing shall be applied separately to Component Plan A and Component Plan B. In this regard, the Actual Deferral Percentages and Actual Contribution Percentages shall be determined separately for each such Component Plan.
(2) At the election of the Employer, in lieu of the testing as provided in (A) above, the testing shall be applied solely to Component Plan B (and not Component Plan A); provided however any Highly Compensated Employees in Component Plan A must be included in the Actual Deferral Percentage and testing of Component Plan B.
This provision shall be administered in accordance with rules and regulations promulgated by the Secretary of Treasury or its delegate.
4.7 Treatment of Excess Contributions .
(a) Excess Elective Deferrals .
(1) Participant Election . If amounts are includible in a Participants gross income under section 402(g) of the Code for a taxable year of the Participant, the Participant may elect to receive a distribution from his Section 401(k) Salary Deferral Account in an amount up to the sum (or difference) of:
(A) the lesser of:
(i) the amount includible in his gross income under section 402(g) of the Code for the taxable year; or
(ii) the sum of his compensation reduction under Section 4.1(a) for the taxable year plus; (or minus)
(B) for Plan Years beginning on or after January 1, 2008, the income (or loss) allocable to the amount determined under (A) through the end of such taxable year (i.e., excluding so-called gap period earnings) determined in accordance with Treasury Regulations.
(2) Procedure . An election under (1) above shall be made in writing, signed by the Participant, on such form as the Administrator shall direct and shall be effective only if received by the Administrator no later than the first April 1st following the close of the Participants taxable year to which the election relates. A Participant who has exceeded the limits of Section 4.3(c) shall be deemed to have made an election hereunder to the extent of such excess.
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(3) Distribution . Any other provisions of the Plan to the contrary notwithstanding, the amount determined under (1) if properly elected under (2) shall be paid to the Participant as a lump sum no later than the first April 15th following the close of the Participants taxable year to which the election relates.
(4) Effect on Other Provisions . Except to the extent provided by the Secretary of the Treasury or his delegate, distributions hereunder shall be taken into account under Sections 4.3(b) and 4.6.
(b) Excess Section 401(k) Deferrals .
(1) Excess Actual Deferral Percentage . If the Actual Deferral Percentage for a Plan Year for the Participants who are Highly Compensated Employees exceeds the maximum amount allowable under Section 4.3(b), then the Administrator shall determine the amount to be distributed, and the Highly Compensated Employees subject to receiving a distribution, in accordance with the Code and applicable Treasury Regulations.
(2) Distribution . Any other provisions of the Plan to the contrary notwithstanding, the Administrator shall distribute the amount determined under (1) above to each Highly Compensated Employee determined under (1) above as a lump sum cash distribution no later than the last day of the following Plan Year. Effective for Plan Years beginning on or after January 1, 2008, the income (or loss) allocable to the amount determined under (1) above through the end of the Plan Year of the excess contributions (i.e., excluding so-called gap period earnings) determined by the Administrator in accordance with applicable Treasury Regulation, shall also be distributed.
(3) Effect on Other Provisions . If distributions are made in accordance with this Section 4.7(b) with respect to a Plan Year, then the limitations of Section 4.3(b) shall be deemed satisfied for the Plan Year. Except to the extent provided by the Secretary of Treasury, distributions hereunder shall be taken into account under Article 5.
(c) Excess Actual Contribution Percentage .
(1) Excess Actual Contribution Percentage . If the Actual Contribution Percentage for a Plan Year for the Participants who are Highly Compensated Employees exceeds the maximum amount allowable under Section 4.6 (after application of (a) and (b) above), then the Administrator shall determine the amount to be distributed (or, if forfeitable, forfeited) (Excess Aggregate Contributions) in accordance with the Code and applicable Treasury Regulations and the following. Excess Aggregate Contributions shall mean, with respect to any Plan Year, the excess of:
(A) The aggregate amount of contributions actually taken into account in computing the Actual Contribution Percentage of Highly Compensated Employees for such Plan Year, over
(B) The maximum amount of such contributions permitted by the Actual Contribution Percentage test (determined by hypothetically reducing contributions made
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on behalf of Highly Compensated Employees in order of the ratios calculated separately for each such Participant (under Section 2.3) beginning with the highest of such percentages).
(2) Required Distributees and Forfeitures . Excess Aggregate Contributions are allocated to the Highly Compensated Employees with the largest amounts of contributions taken into account in calculating the Actual Contribution Percentage test for the year in which the excess arose, beginning with the Highly Compensated Employee with the largest amount of such contributions and continuing in descending order until all the Excess Aggregate Contributions have been allocated. For purposes of the preceding sentence, the largest amount is determined after distribution (or forfeiture) of any Excess Aggregate Contributions.
(3) Distribution and Forfeiture . The Administrator shall distribute to (or forfeit from in the case of a forfeitable amount) each Highly Compensated Employee specified in (2) above from his Account the sum (or difference) of:
(A) the amount (if any) determined under (2) above; plus (or minus)
(B) for Plan Years beginning on or after January 1, 2008, the income (or loss) allocable to the amount determined under (A) through the end of the Plan Year of the Excess Aggregate Contributions (i.e., excluding so-called gap period earnings) determined by the Administrator in accordance with applicable Treasury Regulations earnings).
Any other provisions of the Plan to the contrary notwithstanding, the Administrator shall distribute (or forfeit, as applicable) the amount so determined as a lump sum no later than the last day of the following Plan Year; provided, however, the Employer shall be subject to a 10% excise tax under section 4979 of the Code if the distributions (or forfeitures) are not made before the close of the first 2 1 / 2 months of such following Plan Year. Any forfeitures in this Section 4.7(c) may not be allocated to Participants who receive a distribution or incur a forfeiture under this Section 4.7.
(4) Allocation of Excess . The amount determined above shall be distributed from the Participants After-Tax Account to the extent of the contributions thereto for the Plan Year that were not matched plus the income allocable to such contributions. Any remaining amount shall be distributed (or, in the case of the Employer Matching Account, distributed or forfeited based on the Participants vested percentage) first from the Participants After-Tax Account and then, the Participants Employer Matching Account plus the income allocable to such contributions.
(5) Effect on Other Provisions . If distributions are made in accordance with this Section 4.7 with respect to a Plan Year, then the limitations of Section 4.6 shall be deemed satisfied for the Plan Year. Except to the extent provided by the Secretary of the Treasury, distributions hereunder shall be taken into account under Article 5.
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4.8 Return of Employer Contributions .
(a) Mistake of Fact. If a contribution by an Employer to the Plan is made by reason of a mistake of fact, then, subject to (c) below, such contribution may be returned to the contributing Employer within 1 year after the payment of such contribution.
(b) Deductibility. Employer contributions to the Plan are conditioned upon the deductibility of such contributions under section 404 of the Code, and, subject to (c) below, such contributions (to the extent disallowed) may be returned to the contributing Employer within 1 year after the disallowance of the deduction.
(c) Limitation on Return . The amount of the contribution which may be returned to an Employer under paragraph (a) or (b) above shall be limited to the excess of the amount contributed over the amount that would have been contributed had there not occurred a mistake of fact or a mistake in determining the deduction. Earnings attributable to such excess may not be returned to an Employer, but losses attributable thereto must reduce the amount to be so returned. Furthermore, the amount of the contribution which may be returned shall be limited so as not to cause the balance to the credit of a Participants Account to be reduced to less than the balance which would have been credited to his Account had such contribution not been made.
4.9 Rollover Contributions .
(a) Traditional Rollovers . A Participant, while in the employ of the Employer, may contribute to the Plan money and/or other property acceptable to the Trustee that qualifies for such a rollover under the provisions of section 402(c) or 403(a)(4) of the Code or that qualifies as a rollover contribution under section 408(d)(3) of the Code; provided however, no amounts constituting accumulated deductible employee contributions, as defined in section 72(o)(5) of the Code, after-tax employee contributions or traditional Individual Retirement Account (IRA) contributions may be so contributed. Any rollover contribution shall be credited to such Participants Traditional Rollover Account as soon as administratively feasible following the Trustees receipt thereof. If any amount received as a rollover contribution is determined not to qualify for a rollover, then such amount (adjusted for any gain or loss) shall be returned to the Participant as soon as practical.
(b) Roth Rollover . Effective January 1, 2011, the Administrator may accept a direct rollover from a Roth elective deferral account under an applicable retirement plan described in section 402A(e)(l) of the Code, but only if such rollover meets the applicable requirements of (a) above and section 402(c) of the Code. The Administrator shall provide separate sub-accounting within a Participants Rollover Account so as to track designated Roth contributions (and investment earnings and losses thereon) separately from non-Roth rollover contributions. Rollovers of designated Roth contributions (and earnings on such contributions) shall be credited to the Participants Roth Rollover Account, as soon as administratively feasible following the Trustees receipt thereof.
(c) Administration . In any withdrawal, distribution, plan loans or other relevant circumstances where a Participant has amounts in both a Traditional Rollover Account and a Roth Rollover Account, the Administrator in its discretion shall determine which amounts are affected.
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ARTICLE 5
LIMITATIONS ON ANNUAL ADDITIONS
5.1 Definitions . For purposes of this Article 5, the following terms shall have the following meanings:
(a) Annual Addition means, with respect to the Plan, any other Defined Contribution Plan in which a Participant participates or has participated, and any account described in (4) or (5) below, the sum, for the Limitation Year, of:
(1) all employer contributions (other than amounts restored in accordance with section 411(a)(3)(D) or 411(a)(7)(C) of the Code and excluding restorative payments resulting from a fiduciarys actions for which there is a reasonable risk of liability) allocated to his account;
(2) all forfeitures allocated to his account;
(3) 100% of his own contributions (other than rollover contributions, repayments of loans or of amounts described in section 411(a)(7)(B) of the Code in accordance with the provisions of section 411(a)(7)(C) of the Code and repayments of amounts described in section 411(a)(3)(D) of the Code, direct transfers between qualified plans);
(4) amounts allocated to an individual medical benefit account, as defined in section 415(1)(2) of the Code, which is part of a pension or annuity plan maintained by the Employer or an Affiliate; and
(5) amounts derived from contributions paid or accrued in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a key employee, as defined in section 419A(d)(3) of the Code, under a welfare benefits fund, as defined in section 419(e) of the Code, maintained by the Employer or an Affiliate.
A Participants Annual Addition shall include such other amounts as the Commissioner of Internal Revenue properly determines. An Annual Addition shall be deemed credited to a Participants account with respect to an applicable Limitation Year if it is allocated to his account under the terms of such plan as of any date within such applicable Limitation Year; provided however, such amount must be actually contributed within the time limit prescribed by applicable Treasury Regulations.
(b) (1) Defined Contribution Plan means each of the following (whether or not terminated) maintained by the Employer or an Affiliate:
(A) a plan that is qualified under section 401 of the Code and that provides for an individual account for each participant and for benefits based solely on the amount contributed to the participants account, and any income, expenses, gains and losses, and
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any forfeitures of accounts of other participants which may be allocated to such participants account;
(B) a Participants contributions to a Defined Benefit Plan; and
(C) contributions by the Employer or an Affiliate to a simplified employee pension (as defined in section 408(k) of the Code).
(2) With respect to any Participant who is in control of the Employer within the meaning of section 414(b) or (c) of the Code, as modified by section 415(h) of the Code, the term Defined Contribution Plan includes an annuity contract described in section 403(b) of the Code.
(c) Limitation Year means the calendar year or any other 12-consecutive-month period adopted pursuant to written resolution.
(d) Section 415 Compensation means the total wages as defined in section 3401 of the Code and all other payments of compensation by the Employer (in the course of its trade or business) for which the Employer is required to furnish the Employee a written statement under sections 6041(d), 6051(a)(3) and 6052 of the Code determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a)(2) of the Code). Effective for Limitations Years beginning after December 31, 1997, the term includes any elective deferrals (as defined in section 402(g)(3) of the Code) and any amount which is contributed or deferred at the election of the Employee and which is not includible in the Employees gross income by reason of section 125 or 457 of the Code. Effective for Limitation Years beginning after December 31, 2000, the term also includes elective amounts that are not includible in the gross income of the Employee by reason of section 132(f)(4) of the Code. Section 415 Compensation actually paid or made available to a Participant within a Limitation Year (including, at the election of the Employer, amounts earned but not paid in a Limitation Year because of the timing of pay periods and pay days if these amounts are paid during the first few weeks of the next Limitation Year, the amounts are included on a uniform and consistent basis with respect to all similarly situated Employees and no amount is included in more than one Limitation Year) shall be used.
Except as follows, in order to be taken into account for a Limitation Year, Section 415 Compensation must be paid or treated as paid to an Employee prior to the Employees severance from employment with the Employer. Compensation described below does not fail to constitute Section 415 Compensation merely because it is paid after the Employees severance from employment with the Employer provided it is paid by the later of 2 1 / 2 months after the severance or the end of the Limitation Year that includes the date of the severance. Compensation is subject to this rule if (A) it is regular compensation for services during the Employees regular work hours or for services outside the Employees regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar payments, and (B) the payment would have been paid to the Employee prior to a severance from employment if the Employee had continued in employment with the Employer.
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In addition, Section 415 Compensation shall include:
(A) |
Payments after severance from employment for the following, provided (i) the amounts are paid by the later of 2 1 / 2 months after severance from employment or the end of the Limitation Year that includes the date of severance, and (ii) those amounts would have been included in the definition of Section 415 Compensation if they were paid prior to the Employees severance from employment with the Employer: unused accrued bona fide sick pay, vacation, or other leave if the Employee would have been able to use the leave if employment had continued or payments of nonqualified deferred compensation that are includible in gross income and that would have been paid to the Employee at the same time had his employment continued. |
(B) | Post-severance pay to an individual who does not currently perform services for the Employer by reason of qualified military service (as that term is defined in section 414(u)(l) of the Code) to the extent those payments do not exceed the amounts the individual would have received had he continued to perform services for the Employer rather than entering qualified military service. |
(C) | Post-severance pay to a Participant who is permanently and totally disabled, to the extent provided in applicable Treasury Regulations. |
For any Limitation Year, only the first $245,000 (as adjusted by the Secretary of Treasury in accordance with section 401(a)(17) of the Code) of Section 415 Compensation shall be taken into account.
5.2 Limitation on Annual Addition .
(a) Limitation . Subject to Section 5.3, and subject to Treasury Regulations covering the aggregation during a Limitation Year of previously unaggregated plans, the Annual Addition with respect to a Participant for any Limitation Year to which section 415 of the Code applies shall not exceed the lesser of:
(1) $49,000 (as adjusted under section 415(d) of the Code), or
(2) 100 percent of such Participants Section 415 Compensation for such Limitation Year.
The limitation in (2) above shall not apply with respect to any contributions for medical benefits (within the meaning of section 401(h) or 419A(f)(2) of the Code) which are otherwise treated as an Annual Addition under section 415(1) or 419A(d)(2) of the Code. In addition, the limitations shall not apply to contributions under section 414(v) of the Code.
(b) Treatment of Excess Annual Additions . Effective as of January 1, 2008, the correction methods for handling excess Annual Additions specified in the Old Plan no longer apply. However, similar correction methods may be available under the IRS Employee Plans Compliance Resolution System.
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ARTICLE 6
VESTING AND FORFEITURES
6.1 Vesting Provisions .
(a) Fully Vested Accounts . A Participants rights to the following subaccounts shall be nonforfeitable at all times:
(1) After-Tax Account;
(2) Ohio Company SIP Matching Contribution Account;
(3) Old Kent After-Tax Account;
(4) Old Kent Matching Account (effective September 10, 2010 with respect to such Accounts not previously forfeited);
(5) Old Kent Pre-Tax Account;
(6) Old Kent Rollover/Transfer Account;
(7) Pre-2004 Employer Contribution Account;
(8) Prior Plan Employer Contribution Account;
(9) Qualified Non-Elective Contribution Account;
(10) Rollover Account (including the Traditional Rollover Account and the Roth Rollover Account); and
(11) Section 401(k) Salary Deferral Account (including the Pre-Tax 401(k) Account of the Roth 401(k) Account).
(b) Other Subaccounts .
(1) At Normal Retirement Age . Upon and after a Participants attainment of Normal Retirement Age, if he is then in the service of the Employer or an Affiliate, he shall have a nonforfeitable right to his entire Account (including each of its subaccounts).
(2) Prior to Normal Retirement Age .
(A) Vesting Schedule .
(i) 2004-2006 Profit Sharing Account. A Participant shall have a nonforfeitable right to a percentage of his 2004-2006 Profit Sharing Account (attributable to contributions for Plan Years beginning after December 31, 2003 and before January 1, 2007) on the basis of the number of Vesting Years with which he is credited, pursuant to the following schedule:
Vesting Years |
Nonforfeitable Percentage | |||
Less than 5 |
0% | |||
5 or more |
100% |
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(ii) Employer Matching Account. A Participant shall have a nonforfeitable right to a percentage of his Employer Matching Account on the basis of the number of Vesting Years with which he is credited, pursuant to the following vesting schedule:
Vesting Years |
Nonforfeitable Percentage | |||
Less than 3 |
0% | |||
3 or more |
100% |
(iii) First Charter Employer Contribution Account . A Participant shall have a nonforfeitable right to a percentage of his First Charter Employer Contribution Account on the basis of the number of his Vesting Years with which he is credited, pursuant to the following vesting schedule:
Vesting Years |
Nonforfeitable Percentage | |||
Less than 2 |
0% | |||
2 |
25% | |||
3 |
50% | |||
4 |
75% | |||
5 or more |
100% |
Upon and after a Participants attainment of age 65, if he is then in the service of the Employer or an Affiliate, he shall have a nonforfeitable right to his First Charter Employer Contribution Account.
Notwithstanding the above vesting schedule, a Participant shall be fully vested in his First Charter Employer Contribution Account provided the Administrator determines in its sole and absolute discretion that the Participant has been identified in writing by Fifth Third Bancorp (or any of its subsidiaries) for severance under Fifth Third Bancorps severance policy in connection with the merger of First Charter Corporation into Fifth Third Financial Corporation (whether or not such Participant continues employment until his actual release date and actually receives severance pay).
(iv) FNB Employer Contribution Account . A Participant shall have a nonforfeitable right to a percentage of his FNB Employer Contribution Account on the basis of the number of his Vesting Years with which he is credited, pursuant to the following vesting schedule:
Vesting Years |
Nonforfeitable Percentage | |||
Less than 1 |
0% | |||
1 |
20% | |||
2 |
40% | |||
3 |
60% | |||
4 |
80% | |||
5 or more |
100% |
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Upon and after a Participants attainment of age 62, if he is then in the service of the Employer or an Affiliate, he shall have a nonforfeitable right to his FNB Employer Contribution Account.
Notwithstanding the above vesting schedule, a Participant whose position as an Employee was affected by the restructuring of F.N.B. Corporation and who was notified of such before August 20, 2003, shall be fully vested in his FNB Employer Contribution Account provided his employment continued through the separation date set by his employer.
A Participant whose position was eliminated as a result of the affiliation of First National Bankshares of Florida, Inc. (and subsidiaries) with Fifth Third Bancorp and who receives a benefit under the First National Bankshares of Florida, Inc. Severance Pay Plan, shall be fully vested in his FNB Employer Contribution Account.
(v) Post-2006 Profit Sharing Account. A Participant shall have a nonforfeitable right to a percentage of his Post-2006 Profit Sharing Account (attributable to contributions for Plan Years beginning on or after January 1, 2007) on the basis of the number of Vesting Years with which he is credited, pursuant to the following schedule:
Vesting Years |
Nonforfeitable Percentage | |
Less than 3 |
0% | |
3 or more |
100% |
(B) Death or Disability . Anything in (A) above to the contrary notwithstanding, if a Participants employment by the Employer terminates because of his death or incurrence of a Disability, then his entire Account (including each of its subaccounts) shall be fully vested.
(C) Changes in Vesting Schedule . Anything in the foregoing to the contrary notwithstanding, if the adoption of the Plan or of an amendment thereto results in a change in any vesting schedule, then each Participant shall have a nonforfeitable right to a percentage of the particular Account to which such vesting schedule relates that is no less than the vested percentage in such Account computed on the date immediately prior to the later of the date of such adoption or the effective date of such adoption, and without regard to such adoption.
(3) Forfeiture for Break in Service . If a Participant incurs a Break in Service, then his forfeitable interest (as of such incurrence) in his Account shall be forfeited.
(4) Effect of Certain Distributions . Except as otherwise provided in paragraph (5) or (6) below, if a Participant who is not fully vested in his First Charter Employer Contribution Account or his FNB Employer Contribution Account receives an amount therefrom prior to his incurrence of a Break in Service, then, at any relevant time after such distribution and prior to his incurrence of a Break in Service, the vested portion (X) of his First Charter Employer Contribution Account or his FNB Employer Contribution Account, as the case may be, after the distribution (AB) shall be an amount determined by the formula
X = P (AB + D) - D
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where P is the vested percentage at the relevant time and D is the amount of the distribution.
(5) Effect of Cash-Out Distributions .
(A) Forfeiture . If a Participant, who is not fully vested in his Account, terminates service and receives a distribution of the present value of his entire nonforfeitable interest, then his forfeitable interest therein shall be forfeited immediately; provided however, if the present value of the portion of the distribution attributable to Employer contributions exceeds $5,000, then there shall be no forfeiture hereunder unless the Participant has voluntarily requested to receive such distribution.
(B) Restoration . Any amount that a Participant forfeited under (A) above shall be restored, unadjusted for any gains or losses, if such Participant resumes employment with the Employer covered by the Plan and if he repays to the Plan the full amount of such distribution before the earlier of:
(i) his incurrence of a Break in Service, or
(ii) the end of the five-year period beginning with his resumption of employment with an Employer covered by the Plan.
(C) Source of Restoration . Any restoration under (B) above shall be made from available forfeitures before any other allocation thereof, and, if such forfeitures are insufficient, then the Employer shall contribute the difference.
(D) Special Rule . A Participant, who has no vested interest in his Account and who terminates service, shall be treated for purposes of (A) above as if he had received a distribution of the present value of his entire nonforfeitable interest as of the date of his termination of service. Such a Participant who resumes employment with the Employer covered by the Plan before he incurs a Break in Service, shall be treated under (B) above as if he had repaid to the Plan the full amount of that distribution as of the date of his resumption of employment.
(6) Forfeiture for Death After Separation from Service . If a Participant dies after his termination of employment with the Employer and if the Administrator has notice thereof, then any forfeitable portion of his Account shall be forfeited.
6.2 Allocation of Forfeitures . Forfeitures occurring during a Plan Year, first, shall be applied under Section 6.1(b)(5)(B) to the restoration of forfeitures and then, to the reduction of the Employers contributions to the Plan.
6.3 Vesting Upon Termination or Partial Termination of the Plan or Discontinuance of Contributions . Notwithstanding the provisions of Section 6.1, upon the termination or partial termination of the Plan or the complete discontinuance of contributions under the Plan, the amounts then credited to all affected Participants Accounts shall be nonforfeitable.
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6.4 Unclaimed Benefits . Anything in the Plan to the contrary notwithstanding, if a Participant or other person entitled to a benefit (including a benefit being paid or payable under the Old Plan) has not been found within 5 years after such payment becomes due, then such benefit shall be forfeited. However, if such Participant or other person is thereafter located, then, no later than 60 days after the date on which such Participant or other person is located, the Employer shall contribute the amount of such benefit to the Plan, and such contribution shall be used to restore such benefit retroactively and shall be in the same amount as was payable at the time such benefit became due without any adjustment for the time between the date such benefit became due and such restoration.
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ARTICLE 7
INVESTMENT OF ACCOUNTS
7.1 Funding Policy and Method .
(a) Establishment . The Administrator shall establish, for the Plan, a funding policy and method, which shall be consistent with the objectives of the Plan, ERISA and any other applicable legal requirements and which shall identify the Plans short-run and long-run financial needs with respect to liquidity and investment growth, as the same may change from time to time. Such funding policy shall be communicated as soon as practicable to those who are responsible for investment of the Plan Assets.
(b) Funding Entity . The Plan Assets shall be held under and the benefits under the Plan shall be funded through The Fifth Third Profit Sharing Trust as it may be amended from time to time. The trust so established and maintained is and shall be a part of the Plan. In addition, Plan Assets may be held under and the benefits under the Plan may be funded through such other trusts as the Employer, in its discretion, may establish or cause to be established or entered into for the purposes of carrying out the Plan. The Employer shall determine the form and terms of any such trust, from time to time, consistent with the objectives of the Plan, ERISA and any other applicable legal requirements, and may remove any trustee and select a successor trustee or trustees or may terminate any such trust. Any such trust so established and maintained is and shall be a part of the Plan.
(c) Investment Elections .
(1) Participant Investment Elections . Each Participant shall elect the manner in which his Account, including any future contributions thereto, are to be invested as provided in this Section 7.1(c). Neither the Administrator, the Employer, nor the Trustee shall have any fiduciary responsibility in connection with the Participants investment choices.
(A) Core Investment Funds . Each Participant may invest part or all of his Account using such core investment funds as are made available under the Plan. The Administrator shall direct the Trustee as to the core investment funds to be made available, including the Fifth Third Stock Fund (as defined below).
(B) Self-Directed Brokerage Account . Each Participant also has the choice of investing part or all of his Account under the self-directed brokerage account arrangement made available under the Plan. Under this feature, the Participant may choose from among a high number of investment options made available through the brokerage arrangement. Neither the Administrator, the Employer, nor the Trustee shall have any duty to determine the suitability or prudence of any of the investment options available under the brokerage arrangement.
(2) Procedural . An investment election shall be made in such manner as the Administrator shall direct. The Administrator may prescribe rules including rules which limit the frequency of changes to elections, prescribe times for making elections, regulate the amount or increment a Participant may allocate to a particular fund or the self-directed brokerage
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account, require or allow an election (or election change) to relate only to future contributions, specify how an election may apply to the subaccounts within an Account and provide for the investment of an Account of a Participant who fails to make an investment election.
7.2 Investment Adjustment . The Administrator shall account for the investments and investment transactions attributable to each Account separately. Earnings or losses on Plan Assets attributable to a particular Account shall be allocated solely to that Account. All determinations of the investment adjustments under this Section and under Section 7.3 below and any Appendix shall be made by the Administrator, and such determinations when so made by the Administrator shall be conclusive and shall be binding upon all persons.
7.3 Fifth Third Stock Fund .
(a) General . The Trustee shall segregate a portion of the Plan Assets into a separate fund to be known as the Fifth Third Stock Fund. The Fifth Third Stock Fund shall be invested primarily in shares of common stock of Fifth Third Bancorp. The Fund may also be invested in short-term liquid investments to the extent the Administrator or Trustee determines desirable to accommodate the expected short-run liquidity needs of the Plan or Fund. The Trustee shall have no discretionary authority to sell Fifth Third Bancorp shares or to refrain from acquiring additional Fifth Third Bancorp shares with funds not held for short-run liquidity needs. In the event of a merger or other corporate transaction, the Fund may hold whatever assets that may be received.
(b) Investment Adjustment . The Plan Assets comprising the Fifth Third Stock Fund shall be valued daily at fair market value and the Participants Accounts (and appropriate subaccounts) shall be adjusted daily to reflect the change in value of the Fifth Third Stock Fund.
(c) Voting of Employer Securities . To the extent a Participants Account (or any subaccount) is invested in the Fifth Third Stock Fund, the Participant (or in the event of his death, his Beneficiary) shall have the right to instruct the Trustee in writing as to the manner in which the shares represented by his interest in such Fund are to be voted at each annual or special meeting of the shareholders of Fifth Third Bancorp and as to the manner in which any other right relating to such stock is to be exercised. In the event that any Participant (or Beneficiary) shall fail to instruct the Trustee, then the Trustee shall vote such shares in the same ratio in which the total shares with respect to which timely instructions were received were voted in such matters.
(d) ESOP Dividend Pass-Through Election . A Participant with an Account (including any subaccount) invested in the Fifth Third Stock Fund (or in the event of his death, his Beneficiary), shall have the right to elect, in accordance with instructions or procedures of the Administrator, or its delegate to either (1) leave such dividends in the Plan for reinvestment in common stock of Fifth Third Bancorp under the Fifth Third Stock Fund or otherwise; or (2) take the dividends in cash. This election shall be available with respect to only those subaccounts (invested in the Fifth Third Stock Fund) in which the Participant (or Beneficiary) is 100% vested.
7.4 Life Insurance . No life insurance shall be purchased under the Plan.
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7.5 Loans .
(a) Eligibility . Upon filing the proper application form with the Administrator by a Participant, the Administrator may authorize and direct the Trustee on behalf of the Plan, to grant a loan to such Participant from the Plan Assets, subject to the conditions set forth below.
(b) Conditions . Loans under (a) above shall meet all of the following requirements:
(1) Loans shall be made available to all Participants on a reasonably equivalent basis; provided that loans shall not be available to Participants who are not Employees (other than former Employees who are parties in interest within the meaning of section 3(14) of ERISA).
(2) A Participant may borrow solely from his Section 401(k) Salary Deferral Account, Old Kent Pre-Tax Account, Rollover Account, Old Kent Rollover/Transfer Account and other subaccounts referred to in an Appendix to the extent attributable to elective deferrals described in section 402(g)(3) of the Code or rollover contributions.
(3) A Participant may have only one loan outstanding at any time.
(4) A Participant loan must be in an amount equal to at least $1,000.
(5) Loans shall not be made available to Highly Compensated Employees in an amount greater than the amount made available to other Participants.
(6) Loans shall bear a reasonable rate of interest equal to the rate that the Fifth Third Bank, in its lending business, would charge on a similar loan.
(7) Loans shall be adequately secured, which security shall, notwithstanding Section 14.2, consist of an assignment of up to 50 percent of a borrowing Participants nonforfeitable Account under the Plan. The Administrator may allow such an assignment to consist solely of amounts not attributable to elective deferrals described in section 402(g)(3) of the Code if such amounts would constitute adequate security.
(8) Loans shall be repaid only by payroll withholding properly authorized by the Participant; provided that the Administrator may allow complete prepayment through other means; and provided further, a Participant who is on a leave of absence may pay installments by personal check or other means to the extent his pay (if any) is insufficient to meet the repayment schedule.
(9) No Participant loan shall exceed the limitations under (c) below.
(10) In the event of default, foreclosure on the Participants accrued nonforfeitable benefit, to the extent used as security for the loan, will occur after a distributable event occurs under the Plan. Events constituting default shall be specified in the promissory note or security agreement to be executed by the Participant.
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(c) Limitation on Amount . A loan under the Plan (when added to any other loans outstanding under the Plan and any other plans taken into account under section 72(p)(2)(D) of the Code) to a Participant shall not exceed the lesser of:
(1) $50,000 reduced by the excess (if any) of
(A) the highest outstanding balance of loans from the Plan (and other plans taken into account) during the one-year period ending on the day before the date on which such loan was made, over
(B) the outstanding balance of loans from the Plan (and other plans taken into account) on the date such loan was made, or
(2) one-half of the nonforfeitable portion of the Participants Account.
(d) Distributable Event . Solely for purposes of foreclosure on the Participants nonforfeitable Account, to the extent used as security for the loan, default on a Participants note shall be deemed to be a distributable event for such a Participant (in addition to the other distributable events under the Plan); provided however, with respect to a Participants Section 401(k) Salary Deferral Account, and any other amounts subject to the distribution limitations of section 401(k)(2), to the extent used as security for the loan, such a default shall be deemed a distributable event if, and only if, the Participant has attained age 59-1/2.
(e) Repayment Period . Each loan, by its terms, shall be required to be repaid within 5 years. In addition, loans shall be due and payable in full upon a Participants termination of employment (except in the case of parties in interest within the meaning of section 3(14) of ERISA) and such repayment need not be through payroll withholding.
(f) Level Amortization . Each loan shall be subject to substantially level amortization, with payments of principal and interest not less frequently than quarterly, over the term of the loan.
(g) Earmarking . If a loan is made to a Participant pursuant to (a) above, then his interest in other Plan Assets shall be reduced by the amount of the loan, the loan shall be an investment of his Account, and interest and other amounts allocable to such loan shall be allocated only to his Account.
(h) Effect of Default on Benefits . Upon a Participants death, if less than 100 percent of his Account is payable to his Surviving Spouse, then, in determining the amount payable to the Surviving Spouse, the amount treated as payment in satisfaction of any loan (including accrued interest) shall first be treated as reducing the Account.
(i) Administration . The Administrator is authorized to administer the loan program. Loans will be approved if the proper forms and documentation are completed and delivered to the Administrator, the amount of the loan requested does not exceed the limits specified in this Section, adequate security authorized in this Section is delivered to the Trustee, and the other provisions of this Section are satisfied. The Administrator is authorized to impose on a Participant a reasonable administrative fee for his loan.
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7.6 Separately Allocable Plan Expenses. The Administrator may direct that any expenses attributable to specific Participants Accounts due to investment elections (including the self-directed brokerage account), loans, withdrawals, distributions, domestic relations orders or any other reasons, be deducted directly from the Account for which the expense was incurred to the extent paid from Plan Assets.
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ARTICLE 8
WITHDRAWALS AND DISTRIBUTIONS
8.1 Hardship Withdrawals .
(a) Election. During his employment with the Employer, and subject to filing such forms and following such time and other limitations as the Administrator shall prescribe, a Participant may make withdrawals in the event of hardship from his Section 401(k) Salary Deferral Account, except to the extent a loan is secured by such subaccount; provided however, that the aggregate of any such withdrawals from his Section 401(k) Salary Deferral Account shall not exceed the aggregate of the compensation reduction contributions made on the Participants behalf under Section 4.1 and any section 401(k) elective deferrals transferred or merged into such subaccount from a Predecessor Plan.
(b) Hardship .
(1) General . For purposes of (a) above, hardship means an immediate and heavy financial need of an Employee determined in accordance with (2) below. A withdrawal based upon financial hardship cannot exceed the amount required to satisfy that need (including taxes and penalties on the withdrawal) determined in accordance with (3) below.
(2) Immediate and Heavy Financial Need . A withdrawal will be deemed to be made on account of an immediate and heavy financial need of an Employee if and only if the withdrawal is on account of:
(A) expenses for (or necessary to obtain) medical care that would be deductible under section 213(d) of the Code (determined without regard to whether the expenses exceed 7.5% of adjusted gross income);
(B) purchase (excluding mortgage payments) of a principal residence of the Employee;
(C) payment of tuition, related educational fees, and room and board expenses, for up to the next 12 months of post-secondary education for the Employee, or the Employees spouse, children, or dependents (as defined in section 152 of the Code, without regard to Code section 152(b)(1), (b)(2) and (d)(1)(B));
(D) the need to prevent the eviction of the Employee from his principal residence or foreclosure on the mortgage on the Employees principal residence;
(E) payments for burial or funeral expenses for the Employees deceased parent, spouse, children or dependents (as defined in section 152 of the Code without regarding to section 152(d)(1)(B) of the Code); or
(F) expenses for the repair of damage to the Employees principal residence that would qualify for the casualty deduction under section 165 of the Code (determined without regard to whether the loss exceeds 10% of adjusted gross income).
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(3) Necessity of the Withdrawal . A withdrawal will be deemed necessary to satisfy an immediate and heavy financial need if and only if the Administrator relies on the Employees representations (unless the Administrator has actual knowledge to the contrary) that the need cannot be relieved by any of the following:
(A) reimbursement or compensation by insurance, or otherwise;
(B) reasonable liquidation of the Employees assets and the assets of the Employees spouse and minor children (except for such assets which are held under an irrevocable trust or under the Uniform Gifts to Minors Act) to the extent such liquidation itself would not cause an immediate and heavy financial need;
(C) discontinuance of compensation reduction contributions under Section 4.1 and voluntary participant contributions under Section 4.5 by the Employee to the Plan;
(D) available withdrawals and distributions (including distribution of ESOP dividends under section 404(k) of the Code) or loans from all plans maintained by the Employer or by another employer; or
(E) loans from banks or other commercial lenders.
In addition to such certification, the Employees section 401(k) contributions under Section 4.1 shall be suspended for six months after receipt of the hardship withdrawal.
(c) Time of Payment. Any withdrawal pursuant to this Section shall be payable in a reasonable time (giving consideration to the nature of the Plan investments) after the Trustee receives notice of such withdrawal.
8.2 Withdrawals from Certain Accounts .
(a) Election. During his employment with the Employer, and subject to filing such forms and following such time and other limitations as the Administrator shall prescribe, a Participant shall have the right to make withdrawals from his After-Tax Account, Old Kent After-Tax Account, Rollover Account, Old Kent Rollover/Transfer Account, Old Kent Matching Account, and his Ohio Company SIP Matching Contribution Account, except to the extent a loan is secured by any such subaccount.
(b) Time of Payment. Any withdrawal pursuant to this Section shall be payable in a reasonable time (giving consideration to the nature of the Plan investments) after the Trustee receives notice of such withdrawal.
8.3 Withdrawals on or After Attainment of Age 59-1/2 .
(a) Election . During his employment with the Employer, and subject to filing such forms and following such time and other limitations as the Administrator shall prescribe, a Participant may make withdrawals from his Account (from such subaccounts as he may elect) except to the extent a loan is secured thereby, after his attainment of age 59-1/2.
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(b) Payment . Any withdrawal pursuant to this Section shall be payable in a reasonable time (giving consideration to the nature of the Plan investments) after the Trustee receives notice of such withdrawal.
(c) Limitations . The amount of any withdrawal from a subaccount may not exceed the Participants vested and nonforfeitable interest in that subaccount.
8.4 Events of Distribution to Participants . A Participants benefit shall become distributable to him on account of:
(a) termination of employment; or
(b) the date required under Section 8.6(c).
8.5 Amount of Payment . The amount of any payment under the Plan shall be based on the nonforfeitable percentage of the Participants Account at the cash value of the Plan Assets allocable to such Account, as said Plan Assets are converted to cash (after taking into account all prior payments and/or withdrawals and the allocation of all contributions to which the Participant is entitled).
8.6 Time of Payment to a Participant .
(a) General . Subject to (b), (c) and (d) below, distribution to a Participant whose benefit has become distributable shall commence as soon as administratively feasible after the Participant elects commencement of his benefit.
(b) Participant Consent .
(1) General . If the value of a Participants nonforfeitable benefit under the Plan exceeds $5,000 (including the value of a Participants Rollover Account and other subaccounts specified in an Appendix attributable to rollover contributions), then no part of such benefit may be distributed to him prior to Normal Retirement Age unless he consents in writing to the distribution.
(2) Written Explanation . Effective for Plan Years beginning on or after January 1, 2007, the Administrator shall provide to each Participant whose consent is required under (1) above, no less than 30 days and no more than 180 days prior to the commencement of benefit payments, a written explanation of the material features and relative values of the optional forms of benefit under the Plan, and his right (if any) to defer receipt of the distribution, including the consequences of failing to defer such receipt. A Participant may elect to commence his distribution in less than thirty days (if administratively feasible) from the date he is provided with the explanation provided he is informed of his right to the 30-day period.
(3) Time of Consent . A Participants consent to a distribution must not be made before he receives the written explanation under (2) above and, effective for Plan Years beginning on or after January 1, 2007, must not be made more than 180 days before benefit payments commence.
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(c) Latest Date of Payment . The payment of a Participants distribution under the Plan shall begin not later than the earlier of:
(1) the later of:
(A) the 60th day after the close of the Plan Year in which occurs the latest of
(i) the attainment by the Participant of Normal Retirement Age,
(ii) the 10th anniversary of the date on which the Participant commenced participation in the Plan, or
(iii) the termination of the Participants service with the Employer and all Affiliates; or
(B) such date as the Participant may elect (but not earlier than the consent of a person if required under (c) above), or
(2) the April 1 of the calendar year following the later of
(A) the calendar year in which the Participant attains age 70-1/2 or
(B) the calendar year in which the Participant retires; provided however, this subparagraph (B) shall not apply to a Participant who is a Five-Percent Owner.
With respect to a Participant who first becomes a Five-Percent Owner in a Plan Year after the Plan Year ending in the calendar year in which he attains age 70-1/2, the calendar year in which such subsequent Plan Year ends shall be the applicable time for purposes of subparagraph (B).
(d) Cash-Out Distributions . Any other provisions of the Plan to the contrary notwithstanding, any amount payable to a Participant under the Plan shall be paid in a single sum, provided that the value of the Participants nonforfeitable benefit under the Plan (including the value of a Participants Rollover Account and other subaccounts specified in an Appendix attributable to rollover contributions), determined as of the date of distribution, does not exceed $5,000, and such payment is made before payment otherwise begins. Such single sum shall be paid as soon as administratively feasible after the amount otherwise becomes distributable under the Plan.
In the event of such a mandatory distribution greater than $1,000, if the Participant does not elect to have such distribution paid directly to an eligible retirement plan specified by the Participant in a direct rollover or to receive the distribution directly in accordance with Section 9.3, then the Administrator will pay the distribution in a direct rollover to an individual retirement plan designated by the Administrator.
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8.7 Restrictions on Section 401(k) Withdrawals and Distributions . Notwithstanding any other provisions to the contrary, a Participants Section 401(k) Salary Deferral Account, Qualified Non-Elective Contribution Account, and any other portion of his Account attributable to compensation deferral contributions under a section 401(k) feature of a Predecessor Plan shall not be withdrawn or distributed earlier than one of the following:
(a) the Participants severance from employment;
(b) the Participants death;
(c) the Participants incurrence of a Disability;
(d) the termination of the Plan without the establishment or maintenance of another defined contribution plan (other than an employee stock ownership plan as defined in section 4975(e)(7) or 409(a) of the Code, a simplified employee pension as defined in section 408(k) of the Code, a SIMPLE IRA plan as defined in section 408(p) of the Code, a plan or contract that satisfies the requirements of section 403(b) of the Code, or a plan that is described in section 457(b) of the Code);
(e) to the extent provided in Article 8, attainment of age 59-1/2 or incurrence of a hardship.
An event described in (d) shall qualify as an event allowing a withdrawal or distribution only if the payment is in a lump sum.
8.8 Effect of Reemployment . If a Participant is reemployed by an Employer subsequent to the commencement of a distribution to him under the Plan, then, subject to Section 8.6(c), the payment of any unapplied amount from his Account may be suspended at the election of the Participant during the period of such reemployment and, if so suspended, then shall resume as of the first day of the month following the termination of his reemployment.
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ARTICLE 9
FORM OF PAYMENT TO PARTICIPANTS
9.1 General .
(a) Withdrawals . Any in-service withdrawal made pursuant to Section 8.1, 8.2, or 8.3 shall be paid in a single sum. The single sum shall be payable in cash. However, a Participant making an in-service withdrawal from his Old Kent Pre-Tax Account, Old Kent After-Tax Account, Old Kent Matching Account or Old Kent Rollover/Transfer Account, may elect to have whole shares of Fifth Third Bancorp stock withdrawn to the extent the applicable subaccount is invested in the Fifth Third Stock Fund. In the absence of a valid election by the date the withdrawal is to be paid, the withdrawal shall be in cash.
(b) Distributions . The distribution to which a Participant is entitled shall, subject to (c) below, be paid in such of the following forms as the Participant elects:
(1) a single sum,
(2) periodic installments, not less frequently than annually, with any installments remaining unpaid at the Participants death to be paid to his Beneficiary, or
(3) with respect to Participants covered by an Appendix, such other form or forms as are specified in the applicable Appendix.
For a distribution commencing on or after the Effective Date, if the Participant elects periodic installments under (b)(2) above, any amount remaining unpaid at the Participants death shall be paid in a single sum cash distribution as soon as administratively feasible after the Participants death.
The foregoing are the exclusive forms of benefit available under the Plan. References below to annuity forms of payment serve only to implement the minimum distribution rules with respect to annuity forms (if any) that potentially could be available to particular Participants under a future Appendix.
If a single sum payment is otherwise applicable, to the extent the Participant has his Account invested in the Fifth Third Stock Fund, he may elect to have whole shares of Fifth Third Bancorp stock distributed to him in accordance with rules and procedures established by the Administrator, with the remainder of his distribution in cash.
In the absence of a valid election by the date benefit payments are to commence, the form of payout shall be a single sum cash distribution.
Periodic installments shall be in cash, and a periodic installment election shall be irrevocable.
(c) Cash-Out Distributions . Any other provisions of the Plan to the contrary notwithstanding, any amount payable to a Participant under the Plan shall be paid in a single sum, provided that the value of the Participants nonforfeitable benefit under the Plan,
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determined as of the date of distribution exceeds $5,000 (including the value of a Participants Rollover Account and other subaccounts specified in an Appendix attributable to rollover contributions), and such payment is made before payment otherwise begins. Such single sum shall be paid as soon as administratively feasible after the amount otherwise becomes distributable under the Plan.
9.2 Distributions under Predecessor Plans . The amount and form of any distribution being paid or payable or forfeited under a Predecessor Plan to or by a person, by reason of the occurrence of any event prior to the effective date of the merger of such Predecessor Plan into the Plan, shall continue to be subject to the provisions of such Predecessor Plan as in effect on the date of such occurrence, unless otherwise expressly provided by the Plan.
9.3 Direct Rollover .
(a) General . Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributees election under this Section, but subject to such exceptions permitted by the Internal Revenue Service, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover.
(b) Definitions .
(1) Eligible rollover distribution . An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributees designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under section 401(a)(9) of the Code; any hardship distribution; and except as provided in (c) below, the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities).
(2) Eligible retirement plan . An eligible retirement plan is an individual retirement account described in section 408(a) of the Code (including a Roth IRA described in Section 408A of the Code effective for distributions after December 31, 2007), an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code, or a qualified trust described in section 401(a) of the Code, that accepts the distributees eligible rollover distribution. An eligible retirement plan shall also mean an annuity contract described in Section 403(b) of the Code and an eligible plan under Section 457(b) of the Code which is maintained by a state, political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for accounts transferred into such plan from this Plan.
(3) Distributee . A distributee includes an employee or former employee. In addition, the employees or former employees surviving spouse and the employees or former employees spouse or former spouse who is the alternate payee under a qualified domestic
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relations order, as defined in section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. To the extent provided in (d) below, a Beneficiary may also be an eligible distributee.
(4) Direct rollover . A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee.
(c) Modification of Definition of Eligible Rollover Distribution to Include After-Tax Employee Contributions . For purposes of the direct rollover provisions in Section 9.3, a portion of a distribution shall not fail to be an eligible rollover distribution merely because the portion consists of after-tax employee contributions which are not includible in gross income. However, such portion may be transferred only to an individual retirement account or annuity described in section 408(a) or (b) of the Code, or to a qualified plan described in section 401(a) or 403(a) of the Code that agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible.
(d) Distributions to Inherited Individual Retirement Plan of Nonspouse Beneficiary . An individual who is a designated Beneficiary of an Employee and who is not the surviving spouse may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution made pursuant to Article 10 paid directly to an individual retirement plan specified by such Beneficiary in a direct rollover. For purposes of this subsection (d), an individual retirement plan is an individual retirement account described in section 408(a) of the Code or an individual retirement annuity (other than an endowment contract) described in section 408(b) of the Code. To the extent a Beneficiary elects to make such a direct rollover, the individual retirement plan shall be treated as an inherited individual retirement account or individual retirement annuity (within the meaning of section 408(d)(3)(C) of the Code), and section 401(a)(9)(B) of the Code (other than clause (iv) thereof) shall apply to such plan.
For purposes of this subsection (d), to the extent provided in rules prescribed by the Secretary of Treasury, a trust maintained for the benefit of one or more designated Beneficiaries shall be treated in the same manner as an individual who is a designated Beneficiary of an Employee.
(e) Roth 401(k) Account and Roth Rollover Account . A direct rollover of amounts from a Roth 401(k) Account or Roth Rollover Account may be made only to another Roth elective deferral account under an applicable retirement plan described in section 402A(e)(1) of the Code or a Roth IRA described in section 408A of the Code.
9.4 Minimum Distribution Requirements .
(a) General Rules .
(1) Effective Date . The provisions of this Section will apply for purposes of determining required minimum distributions for calendar years beginning with the 2003 calendar year.
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(2) Precedence . The requirements of this Section will take precedence over any inconsistent provisions of the Plan.
(3) Requirements of Treasury Regulations Incorporated . All distributions required under this Section will be determined and made in accordance with the Treasury Regulations under section 401(a)(9) of the Code.
(4) TEFRA Section 242(b)(2) Elections. Notwithstanding the other provisions of this Section, distributions may be made under a designation made before January 1, 1984, in accordance with section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act (TEFRA) and the provisions of the Plan that relate to section 242(b)(2) of TEFRA.
(b) Time and Manner of Distribution.
(1) Required Beginning Date . The Participants entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participants required beginning date.
(2) Death of Participant Before Distributions Begin. If the participant dies before distributions begin, the Participants entire interest will be distributed, or begin to be distributed, no later than as follows:
(A) If the Participants surviving spouse is the Participants sole designated Beneficiary, then, distributions to the surviving spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70-1/2, if later.
(B) If the Participants surviving spouse is not the Participants sole designated Beneficiary, then, distributions to the designated Beneficiary may begin by December 31 of the calendar year immediately following the calendar year in which the Participant died.
(C) Effective January 1, 2003, unless (A), (B) or (D) applies, the Participants entire interest will be distributed by December 31 of the calendar year containing the fifth anniversary of the Participants death.
(D) If the Participants surviving spouse is the Participants sole designated Beneficiary and the surviving spouse dies after the Participant but before distributions to the surviving spouse begin, this Section 9.4(b)(2), other than Section 9.4(b)(2)(A), will apply as if the surviving spouse were the Participant.
For purposes of this Section 9.4(b)(2) and Section 9.4(d), unless Section 9.4(b)(2)(D) applies, distributions are considered to begin on the Participants required beginning date. If Section 9.4(b)(2)(D) applies, distributions are considered to begin on the date distributions are required to begin to the surviving spouse under Section 9.4(b)(2)(A). If distributions under an annuity purchased from an insurance company irrevocably commence to the Participant before the Participants required beginning date (or to the Participants surviving spouse before the date
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distributions are required to begin to the surviving spouse under Section 9.4(b)(2)(A)), the date distributions are considered to begin is the date distributions actually commence.
In the case of the death of a Participant on or after the Effective Date, then notwithstanding anything to the contrary written above, the Participants entire interest will be distributed by December 31 of the calendar year containing the fifth anniversary of the Participants death, and distributions need not commence before that date.
(3) Forms of Distribution . Unless the Participants interest is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the required beginning date, as of the first distribution calendar year distributions will be made in accordance with Sections 9.4(c) and (d). If the Participants interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of section 401(a)(9) of the Code and the Treasury Regulations.
(c) Required Minimum Distributions During Participants Lifetime.
(1) Amount of Required Minimum Distribution For Each Distribution Calendar Year . During the Participants lifetime, the minimum amount that will be distributed for each distribution calendar year is the lesser of:
(A) the quotient obtained by dividing the Participants Account balance by the distribution period in the Uniform Lifetime Table set forth in section 1.401(a)(9)-9 of the Treasury Regulations, using the Participants age as of the Participants birthday in the distribution calendar year; or
(B) if the Participants sole designated Beneficiary for the distribution calendar year is the Participants spouse, the quotient obtained by dividing the Participants Account balance by the number in the Joint and Last Survivor Table set forth in section 1.401(a)(9)-9 of the Treasury Regulations, using the Participants and spouses attained ages as of the Participants and spouses birthdays in the distribution calendar year.
(2) Lifetime Required Minimum Distributions Continue Through Year of Participants Death . Required minimum distributions will be determined under this Section 9.4(c) beginning with the first distribution calendar year and up to and including the distribution calendar year that includes the Participants date of death.
(d) Required Minimum Distributions After Participants Death .
(1) Death On or After Date Distributions Begin .
(A) Participant Survived by Designated Beneficiary . If the Participant dies on or after the date distributions begin and there is a designated Beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Participants death is the quotient obtained by dividing the Participants Account balance by the longer of the remaining life expectancy of the Participant or the remaining life expectancy of the Participants designated Beneficiary, determined as follows:
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(i) The Participants remaining life expectancy is calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.
(ii) If the Participants surviving spouse is the Participants sole designated Beneficiary, the remaining life expectancy of the surviving spouse is calculated for each distribution calendar year after the year of the Participants death using the surviving spouses age as of the spouses birthday in that year. For distribution calendar years after the year of the surviving spouses death, the remaining life expectancy of the surviving spouse is calculated using the age of the surviving spouse as of the spouses birthday in the calendar year of the spouses death, reduced by one for each subsequent calendar year.
(iii) If the Participants surviving spouse is not the Participants sole designated Beneficiary, the designated Beneficiarys remaining life expectancy is calculated using the age of the Beneficiary in the year following the year of the Participants death, reduced by one for each subsequent year.
(B) No Designated Beneficiary . If the Participant dies on or after the date distributions begin and there is no designated Beneficiary as of September 30 of the year after the year of the Participants death, the minimum amount that will be distributed for each distribution calendar year after the year of the Participants death is the quotient obtained by dividing the Participants Account balance by the Participants remaining life expectancy calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.
(2) Death Before Date Distributions Begin.
(A) Participant Survived by Designated Beneficiary. If the Participant dies before the date distributions begin and there is a designated Beneficiary, minimum distributions may begin by December 31 of the calendar year immediately following the calendar year of the Participants death. In such a case, the minimum amount that will be distributed for each distribution calendar year after the year of the Participants death is the quotient obtained by dividing the Participants Account balance by the remaining life expectancy of the Participants designated Beneficiary, determined as provided in Section 9.4 (d)(1). The payment alternative in this paragraph (A) shall no longer be available in the case of a Participants death on or after the Effective Date.
(B) Five-Year Rule. Effective January 1, 2003, if the Participant dies before the date distributions begin, unless (A) or (C) applies, distribution of the Participants entire interest will be completed by December 31 of the calendar year containing the fifth anniversary of the Participants death.
(C) Death of Surviving Spouse Before Distributions to Surviving Spouse Are Required to Begin. If the Participant dies before the date distributions begin, the Participants surviving spouse is the Participants sole designated Beneficiary, and the surviving spouse dies before distributions are required to begin to the surviving spouse under Section 9.4(b)(2)(A), this Section 9.4(d)(2) will apply as if the surviving spouse were the Participant.
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The payment alternative in this paragraph (C) shall no longer be available in the case of a Participants death on or after the Effective Date.
(e) Definitions .
(1) Designated Beneficiary . The individual who is designated as the Beneficiary under Section 2.9 of the Plan and is the designated Beneficiary under section 401 (a)(9) of the Code and section 1.401 (a)(9)- 1, Q&A-4, of the Treasury Regulations.
(2) Distribution Calendar Year . A calendar year for which a minimum distribution is required. For distributions beginning before the Participants death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participants required beginning date. For distributions beginning after the Participants death, the first distribution calendar year is the calendar year in which distributions are required to begin under Section 9.4(b)(2). The required minimum distribution for the Participants first distribution calendar year will be made on or before the Participants required beginning date. The required minimum distribution for other distribution calendar years, including the required minimum distribution for the distribution calendar year in which the Participants required beginning date occurs, will be made on or before December 31 of that distribution calendar year.
(3) Life Expectancy . Life expectancy as computed by use of the Single Life Table in section 1.401(a)(9)-9 of the Treasury Regulations.
(4) Participants Account Balance . The Account balance as of the last valuation date in the calendar year immediately preceding the distribution calendar year (valuation calendar year) increased by the amount of any contributions made and allocated or forfeitures allocated to the Account balance as of dates in the valuation calendar year after the valuation date and decreased by distributions made in the valuation calendar year after the valuation date. The Account balance for the valuation calendar year includes any amounts rolled over or transferred to the Plan either in the valuation calendar year or in the distribution calendar year if distributed or transferred in the valuation calendar year.
(5) Required Beginning Date . The date specified in Section 8.6(c)(2) of the Plan.
(f) Permitted Waiver of 2009 Distributions . A Participant or Beneficiary who would be required to take a minimum distribution hereunder for the 2009 distribution calendar year shall not be required to take any distribution for the 2009 distribution calendar year. Foregoing the 2009 required minimum distribution shall have no effect on the determination of the required beginning date for purposes of determining required minimum distributions for distribution calendar years after 2009. The 5-year period described in section 401(a)(9)(B)(ii) of the Code (and the corresponding provisions of the Plan) shall be determined without regard to calendar year 2009. The Administrator is permitted (but not required) to treat a distribution for the 2009 distribution calendar year as an eligible rollover distribution under Section 9.3.
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ARTICLE 10
DEATH BENEFITS
10.1 Death Benefit .
(a) Entitlement . Upon the death of a Participant, prior to the application of his Account for his benefit and after receipt by the Administrator of proof of such Participants death in a form it determines to be proper, his Beneficiary shall be entitled to a benefit equal to:
(1) the nonforfeitable percentage of such Participants Account at the cash value of the Plan Assets allocable to such Account as said Plan Assets are converted to cash; plus
(2) any nonforfeitable contributions made by or on behalf of such Participant not yet credited to his Account; minus
(3) any payments to and/or withdrawals by such Participant not yet debited to his Account.
(b) Payment of Death Benefits . Death benefits under (a) above shall, subject to Section 9.4, be payable to a Participants Beneficiary in such of the following forms as the Participant or Beneficiary elects:
(1) a single sum cash distribution,
(2) periodic installment payments in cash, not less frequently than annually, with any installments remaining unpaid at the Beneficiarys death to be paid to the Participants remaining Beneficiary, or
(3) with respect to Participants (and their Beneficiaries) covered by an Appendix, such other form or forms (if any) of death benefit as are specified in the applicable Appendix.
Subject to Section 9.4, distribution of death benefits under (a) above shall commence at such time as the Participant or Beneficiary elects and, unless administratively impractical, shall first be available for distribution within 90 days after the Participants death. In the case of the death of a Participant on or after the Effective Date, periodic installment payments under Section 10.1(b)(2) must be completed by December 31 of the calendar year containing the fifth anniversary of the Participants death.
The foregoing are the exclusive forms of death benefit under (a) above available under the Plan. References in Section 9.4 to annuity forms of payment serve only to implement the minimum distribution rules with respect to annuity forms of death benefit that potentially could be available to particular Beneficiaries under a future Appendix to the Plan.
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ARTICLE 11
ADMINISTRATION
11.1 | Administrator . |
(a) Named Fiduciary . The Administrator shall be a Named Fiduciary for the Plan.
(b) Responsibilities . The Administrator shall discharge its responsibilities with respect to the Plan in accordance with the documents and instruments governing the Plan insofar as such documents and instruments are consistent with the provisions of title I of ERISA.
(c) Powers . In addition to the powers which are expressly provided in the Plan, the Administrator shall have the power and authority in its sole, absolute and uncontrolled discretion to control and manage the operation and administration of the Plan and shall have all powers necessary to accomplish these purposes including, but not limited to the following:
(1) the power to determine who is a Participant;
(2) the power to determine allocations, balances, and nonforfeitable percentages with respect to Participants Accounts;
(3) the power to determine when, to whom, in what amount, and in what form distributions are to be made; and
(4) such powers as are necessary, appropriate or desirable to enable it to perform its responsibilities, including the power to establish rules, regulations and forms with respect thereto.
Benefits under this Plan will be paid only if the Administrator decides in its discretion that the applicant is entitled to them.
11.2 | Procedures for Delegation . |
(a) Delegations . The Administrator or the Board may delegate to one or more persons or entities certain of the Administrators fiduciary responsibilities (other than duties involving the management or control of the Plan Assets) under an arrangement whereby it shall have the opportunity for such periodic review of the delegates performance as is appropriate under the circumstances and at such times and in such manner as it may choose for the purpose of its evaluation of continuing such designation and delegation and whereby it can promptly terminate the delegates services.
(b) Advisors . The Administrator shall have the right to employ one or more persons or entities to render advice with regard to any responsibility it has under the Plan.
(c) Claims Review Committee . The Administrator shall create a Claims Review Committee and shall appoint such individuals to serve on that Committee as it deems appropriate
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from time to time. The Claims Review Committee shall have the duty and power, in its sole, absolute and uncontrolled discretion to administer the initial claims procedure under Section 11.4 and the claim review procedure under Section 11.5. The Claims Review Committee shall have sole, absolute and uncontrolled discretion to decide all claims under the initial claims procedure and under the claim review procedure and its decisions shall be binding on all parties.
(d) Removal, Resignation, and Vacancies . A holder of a delegated position of fiduciary responsibility (including an individual member of a group holding such position) may be removed therefrom at any time and without cause by the person or entity making the delegation and may resign at any time upon prior written notice to such person or entity. Vacancies in any such positions created by removal, resignation, death or other cause may be filled by such person or entity or the fiduciary responsibilities for such position may be retained and/or redelegated by such person or entity.
11.3 Miscellaneous Administration Provisions .
(a) Administrative Expenses . The Employer may pay the reasonable expenses of administering the Plan, including any expenses incident to the functioning of the Administrator and the professional fees of any consultants or advisors with respect to the Plan; provided however, any expenses not so paid by the Employer shall be paid from the Plan Assets; and provided further, no person who already receives full-time pay from the Employer shall receive any compensation from the Plan, except for reimbursement of expenses properly and actually incurred.
(b) Indemnification . The Employer may indemnify, through insurance or otherwise, some or all of the fiduciaries with respect to the Plan against claims, losses, damages, expenses and liabilities arising from their performance of their responsibilities under the Plan.
(c) Interpretations . All interpretations of the Plan and questions concerning its administration and application as determined by the Administrator in its sole, absolute and uncontrolled discretion shall be binding on all persons having an interest under the Plan.
(d) Uniform and Non-Discriminatory Application . All determinations and actions under the Plan shall be uniformly and consistently applied in a non-discriminatory manner to all persons under similar circumstances.
(e) Qualified Domestic Relations Order Procedures . The Administrator shall establish reasonable procedures to determine the qualified status, under section 414(p) of the Code, of domestic relations orders and to administer distributions under such qualified orders.
(f) Effectiveness of Elections, etc . An election, designation, request or revocation provided for in the Plan shall be made in writing and shall not become effective until it has been properly filed with the Administrator.
(g) Written Records . The Administrator shall maintain all such books of account and other records and data as are necessary for the proper performance of its responsibilities under the Plan.
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(h) Administration Consistent with ERISA and the Code . The Plan is intended to comply with the provisions of ERISA and of the Code, and the Plan shall be interpreted and administered consistently with such provisions and with the applicable regulations and rulings thereunder.
(i) Service in More Than One Fiduciary Capacity . Any person or entity may serve in more than one fiduciary capacity for the Plan, including service both as Administrator and as trustee.
11.4 Initial Claims Procedure .
(a) Claim .
(1) Filing . In order to present a complaint regarding the nonpayment of a Plan benefit or a portion thereof (a Claim), a Participant or beneficiary under the Plan (a Claimant) or his duly authorized representative must file such Claim by mailing or delivering a writing stating such Claim to the department, officer, or employee responsible for employee benefit matters of the Employer.
(2) Acknowledgment . Upon such receipt of a Claim, the Claims Review Committee shall furnish to the Claimant a written acknowledgment which shall inform such Claimant of the time limit set forth in (b)(1) below and of the effect, pursuant to (b)(3) below, of failure to decide the Claim within such time limit.
(b) Initial Decision .
(1) Time Limit . The Claims Review Committee shall decide upon a Claim within a reasonable period of time after receipt of such Claim; provided however, that such period shall in no event exceed 90 days, unless special circumstances require an extension of time for processing. If such an extension of time for processing is required, then the Claimant shall, prior to the termination of the initial 90-day period, be furnished a written notice indicating such special circumstances and the date by which the Claims Review Committee expects to render a decision. In no event shall an extension exceed a period of 90 days from the end of the initial period.
(2) Notice of Denial . If the Claim is wholly or partially denied, then the Claims Review Committee shall furnish to the Claimant, within the time limit applicable under (1) above, a written notice setting forth in a manner calculated to be understood by the Claimant:
(A) the specific reason or reasons for such denial;
(B) specific reference to the pertinent Plan provisions on which such denial is based;
(C) a description of any additional material or information necessary for such Claimant to perfect his Claim and an explanation of why such material or information is necessary; and
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(D) appropriate information as to the steps to be taken if such Claimant wishes to submit his Claim for review pursuant to Section 11.5, including notice of the time limits set forth in Section 11.5(b)(2).
(3) Deemed Denial for Purposes of Review . If a Claim is not granted and if, despite the provisions of (1) and (2) above, notice of the denial of a Claim is not furnished within the time limit applicable under (1) above, then the Claimant may deem such Claim denied and may request a review of such deemed denial pursuant to the provisions of Section 11.5.
11.5 Claim Review Procedure .
(a) Claimants Rights . If a Claim is wholly or partially denied under Section 11.4, then the Claimant or his duly authorized representative shall have the following rights:
(1) to obtain, subject to (b) below, a full and fair review by the Claims Review Committee;
(2) to review pertinent documents; and
(3) to submit issues and comments in writing.
(b) Request for Review .
(1) Filing . To obtain a review pursuant to (a) above, a Claimant entitled to such a review or his duly authorized representative shall, subject to (2) below, mail or deliver a written request for such a review (a Request for Review) to the department, officer, or employee responsible for employee benefit matters of his Employer.
(2) Time Limits for Requesting a Review . A Request for Review must be mailed or delivered within 60 days after receipt by the Claimant of written notice of the denial of the Claim or within such longer period as is reasonable and related to the nature of the benefit which is the subject of the Claim and to other attendant circumstances.
(3) Acknowledgment . Upon such receipt of a Request for Review, the Claims Review Committee shall furnish to the Claimant a written acknowledgment which shall inform such Claimant of the time limit set forth in (c)(1) below and of the effect, pursuant to (c)(3) below, of failure to furnish a decision on review within such time limit.
(c) Decision on Review .
(1) Time Limit .
(A) General . If, pursuant to (b) above, a review is requested, then, except as otherwise provided in (B) below, the Claims Review Committee or its delegate (but only if such delegate has been given the authority to make a final decision on the Claim) shall make a decision promptly and no later than 60 days after receipt of the Request for Review; except that, if special circumstances require an extension of time for processing, then the decision shall be made as soon as possible but not later than 120 days after receipt of the Request
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for Review. The Claims Review Committee must furnish the Claimant written notice of any extension prior to its commencement.
(B) Regularly Scheduled Meetings . Anything to the contrary in (A) above notwithstanding, if the decision on review is to be made by a committee which holds regularly scheduled meetings at least quarterly, then its decision on review shall be made no later than the date of the meeting which immediately follows the receipt of the Request for Review; provided however, if such Request for Review is received within 30 days preceding the date of such meeting, then such decision on review shall be made no later than the date of the second meeting which follows such receipt; and provided further that, if special circumstances require a further extension of time for processing, and if the Claimant is furnished written notice of such extension prior to its commencement, then such decision on review shall be rendered no later than the third meeting which follows such receipt.
(2) Notice of Decision . The Claims Review Committee or its delegate shall furnish to the Claimant, within the time limit applicable under (1) above, a written notice setting forth in a manner calculated to be understood by the Claimant:
(A) the specific reason or reasons for the decision on review; and
(B) specific reference to the pertinent Plan provisions on which the decision on review is based.
(3) Deemed Denial . If, despite the provisions of (1) and (2) above, the decision on review is not furnished within the time limit applicable under (1) above, then the Claimant shall be deemed to have exhausted his remedies under the Plan and he may deem the Claim to have been denied on review.
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ARTICLE 12
AMENDMENT AND TERMINATION
12.1 Amendment and Termination .
(a) Right to Amend or Terminate . Fifth Third Bank reserves the right to amend or terminate the Plan in accordance with the procedures set forth in (b) below, and each other Employer irrevocably delegates such power to Fifth Third Bank. The power to amend and terminate shall include, but not be limited to, the power to merge other plans into this Plan, the power to accept transfers of assets and benefits from other plans, the power to determine the terms of any such merger or transfer; and the power to add, modify or delete an Appendix and to otherwise determine the terms and conditions applicable to any other Employer.
(b) (1) Amendment Procedure . Any amendment of the Plan shall be by action of The Fifth Third Bank Pension, Profit Sharing and Medical Plan Committee or the Chairman of such Committee. If an amendment is being made by the Committee, it must be approved by a majority of the members of the Committee as constituted at the time of adoption of the amendment. Any amendment may be given retroactive effect as determined by said Committee or the Chairman. An amendment may be evidenced in such manner as said Committee or Chairman shall determine. If the amendment is approved by the Committee, such evidence may include (but shall not be limited to) a written resolution signed by a majority of the members of the Committee or minutes of a meeting of the Committee reflecting approval by a majority of the members.
(2) Termination Procedure . Any termination of the Plan shall be by action of The Fifth Third Bank Pension and Profit Sharing Committee. Any termination must be approved by a majority of the members of the Committee as constituted at the time of adoption of the termination; and any such termination may be given retroactive effect as determined by said Committee. A termination may be evidenced in such manner as said Committee shall determine, and such evidence may include (but shall not be limited to) a written resolution signed by a majority of the members of the Committee or minutes of a meeting of the Committee reflecting approval by a majority of the members.
(c) Conditions on Amendments and Termination .
(1) Accrued Benefit .
(A) General . No amendment to the Plan shall be effective to the extent that it has the effect of reducing a Participants accrued benefit, except as permitted under section 412(c)(8) of the Code.
(B) Treatment of Certain Amendments . For purposes of (A) above, an amendment which has the effect, with respect to benefits attributable to service before the amendment, of -
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(i) eliminating or reducing an early retirement benefit or a retirement-type subsidy or
(ii) (except as otherwise provided by Treasury Regulations) eliminating an optional form of benefit shall be treated as reducing accrued benefits. In the case of a retirement-type subsidy, the preceding sentence shall apply only with respect to a Participant who satisfies (either before or after the amendment) the preamendment conditions for the subsidy.
(2) Changes in Vesting Schedule . No amendment shall reduce the nonforfeitable percentage of a Participants accrued benefit (determined as of the later of the date such amendment is adopted or the date such amendment becomes effective).
12.2 Distribution of Plan Assets Upon Termination of the Plan . If the Plan is terminated, then distributions and withdrawals shall continue to be made as provided in the Plan; provided however, subject to Article 8, the Administrator may cause Participants Accounts to be paid to them, pursuant to the provisions of Article 9, on account of such termination of the Plan.
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ARTICLE 13
TOP-HEAVY RULES
13.1 Definitions . For purposes of this Article 13, the following terms shall have the following meanings:
(a) Aggregation Group means:
(1) each qualified plan or simplified employee pension of the Employer or an Affiliate in which a Key Employee is a participant,
(2) each other plan of the Employer or an Affiliate which enables any plan described in (1) above to meet the requirements of section 401(a)(4) or 410 of the Code,
(3) any other plan or plans which the Employer elects to include provided that the group would continue to meet the requirements of sections 401(a)(4) and 410 of the Code with such plan or plans being taken into account, and
(4) any other plan which would have been included in the foregoing had it not terminated.
(b) Determination Date, with respect to any Plan Year for the Plan, means the last day of the preceding Plan Year (or, in the case of the first Plan Year of the Plan, the last day of such Plan Year).
(c) Determination Period means, with respect to any Plan Year, the five Plan Years ending on the Determination Date with respect to such Plan Year.
(d) Key Employee, means any Employee or former Employee (including any deceased Employee) who at any time during the Plan Year that includes the Determination Date was an officer of the Employer having annual compensation greater than $160,000 (as adjusted under section 416(i)(l) of the Code) a Five-Percent Owner of the Employer, or a 1-percent owner of the Employer having annual compensation of more than $150,000. For this purpose, annual compensation means compensation within the meaning of section 415(c)(3) of the Code. The determination of who is a Key Employee will be made in accordance with section 416(i)(l) of the Code and the applicable regulations and other guidance of general applicability issued thereunder.
(e) Present Value means, with respect to a defined benefit plan, the present value based on the interest and mortality rates specified under the applicable defined benefit plan for purposes of computing the Top-Heavy Ratio. The actuarial assumptions used for all plans within the same Aggregation Group must be the same.
(f) Top-Heavy Plan means the Plan, with respect to any Plan Year after 1983, if the Top-Heavy Ratio exceeds 60 percent.
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(g) Top-Heavy Ratio means, for the Plan or an Aggregation Group of which the Plan is a part, a fraction, the numerator of which is the sum of defined contribution account balances and the Present Values of defined benefit accrued benefits for all Key Employees and the denominator of which is the sum of defined contribution account balances and the Present Values of defined benefit accrued benefits for all participants. The Top-Heavy Ratio shall be determined in accordance with section 416 of the Code and the applicable regulations thereunder, including, without limitation, the provisions relating to rollovers and the following provisions:
(1) The value of account balances under the Plan will be determined as of the Determination Date with respect to the applicable Plan Year.
(2) The value of account balances and accrued benefits under plans aggregated with the Plan shall be calculated with reference to the determination dates under such plans that fall within the same calendar year as the applicable Determination Date under the Plan.
(3) The value of account balances and the present value of accrued benefits will be determined as of the most recent valuation date that falls within or ends with the 12-month period ending on the applicable determination date, except as provided in section 416 of the Code and the regulations thereunder for the first and second plan years of a defined benefit plan.
(4) A simplified employee pension shall be treated as a defined contribution plan; provided however, at the election of the Employer, the Top-Heavy Ratio shall be computed by taking into account aggregate employer contributions in lieu of the aggregate of the accounts of employees.
(5) Distributions (including distributions under a terminated plan which had it not been terminated would have been included in the Aggregation Group) within the 1-year period ending on a Determination Date shall be taken into account. In the case of a distribution made for a reason other than severance from employment, death, or disability, this provision shall be applied by substituting 5-year period for 1-year period.
(6) Defined contribution account balances shall be adjusted to reflect any contribution not actually made as of a Determination Date but required to be taken into account on that date under section 416 of the Code and the regulations thereunder.
(7) Deductible voluntary contributions shall not be included.
(8) There shall be disregarded the account balances and accrued benefits of a Participant
(A) who is not a Key Employee but who was a Key Employee in a prior Plan Year or
(B) who has not performed services for the employer maintaining the plan at any time during the 1-year period ending on the Determination Date.
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(9) The accrued benefit of a Participant other than a Key Employee shall be determined (A) under the method, if any, which uniformly applies for accrual purposes under all defined benefit plans of the Employer, or (B) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of section 411(b)(1)(C) of the Code.
(h) Valuation Date, with respect to a Determination Date under the Plan, means the Accounting Date coinciding with such Determination Date.
13.2 Minimum Contribution .
(a) General . For any Plan Year for which the Plan is a Top-Heavy Plan, the Employer contribution and forfeitures (excluding compensation reduction contributions under Section 4.1) allocated on behalf of any Participant who is not a Key Employee and who is an Employee on the last day of the Plan Year shall not be less than such Participants Section 415 Compensation times the lesser of (1) three percent (3%) or (2) the largest percentage of such contributions and forfeitures (including compensation reduction contributions under Section 4.1), expressed as a percentage of Section 415 Compensation, allocated on behalf of any Key Employee for that Plan Year. For these purposes, Section 415 Compensation shall mean the first $245,000 (as adjusted by the Secretary of Treasury in accordance with section 401(a)(17) of the Code) of a Participants Section 415 Compensation (as defined in Section 5.1(d)). This minimum contribution shall be made even though, under other Plan provisions, the Participant would not otherwise be entitled to receive an allocation, or would have received a lesser allocation for the year because the Participant received compensation of less than a stated amount.
Employer matching contributions shall be taken into account for purposes of satisfying the minimum contribution requirements of section 416(c)(2) of the Code and the Plan. The preceding sentence shall apply with respect to matching contributions under the Plan or, if the Plan provides that the minimum contribution requirement shall be met in another plan, such other plan. Employer matching contributions that are used to satisfy the minimum contribution requirements shall be treated as matching contributions for purposes of the actual contribution percentage test and other requirements of section 401(m) of the Code.
(b) Participants Also Covered Under Defined Benefit Plan . If a Participant who is not a Key Employee and who is an Employee on the last day of the Plan Year also participates in one or more defined benefit plans which are part of the same Aggregation Group as the Plan, and if such defined benefit plan or plans do not satisfy the minimum benefit requirements of section 416 of the Code with respect to such Participant, then, with respect to such Participant, five percent (5%) shall be substituted for the lesser of (1) three percent (3%) or (2) the largest percentage of such contributions and forfeitures (including contributions under Section 4.1) expressed as a percentage of Section 415 Compensation, allocated on behalf of any Key Employee for that Plan Year in (a) above.
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ARTICLE 14
MISCELLANEOUS
14.1 | Construction . |
(a) Article and Section References . Except as otherwise indicated by the context, all references to Articles or Sections in the Plan refer to Articles or Sections of the Plan. The titles thereto are for convenience of reference only and the Plan shall not be construed by reference thereto.
(b) Gender and Number . As used in the Plan, except when otherwise indicated by the context, the genders of pronouns and the singular and plural numbers of terms shall be interchangeable.
14.2 Assignment or Alienation of Benefits .
(a) General . Except as provided in (b) below and section 401(a)(13)(C) of the Code, benefits provided under the Plan may not be anticipated, assigned (either at law or in equity), alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process. Except as provided in the foregoing, if any attempt shall be made to reach the beneficial interest of any Participant or beneficiary by legal process not preempted by ERISA, the Administrator may suspend any rights of distribution which any Participant or beneficiary may have, and may direct that such persons beneficial interest hereunder be paid over or applied for the benefit of such person, or for the benefit of dependents of such person, as the Administrator shall determine.
(b) QDRO .
(1) General . Notwithstanding (a) above, benefits shall be paid in accordance with the applicable requirements of any domestic relations order which is a qualified domestic relations order (as defined in section 206(d) of ERISA or section 414(p) of the Code); and provided further that benefits shall be paid pursuant to any domestic relations order entered before January 1, 1985 if either the Plan is paying benefits pursuant to such order on such date or the Administrator elects to treat such order as a qualified domestic relations order.
(2) Immediate Single Sum Distribution . If a qualified domestic relations order so provides, the Alternate Payees entire benefit shall be paid as soon as administratively feasible after the Administrators receipt of the order, determination of its qualified status and determination of the amount payable thereunder. Otherwise, payment shall be made only at such time as the Participants benefit would otherwise be payable or as provided in section 414(p) of the Code.
(3) Alternate Payees Beneficiary . In the event an Alternate Payee who is entitled to a benefit hereunder pursuant to a qualified domestic relations order dies prior to the receipt of the entire benefit due, the Alternate Payees remaining benefit shall be payable to the Alternate Payees beneficiary designated in the order or on a form specified by the Administrator and received by the Administrator prior to the Alternate Payees death. In the event there is no
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designated beneficiary to receive any such amount, then such amount shall be payable to the estate of the Alternate Payee.
(4) Alternate Payee Defined . Alternate Payee shall have the meaning given in section 414(p)(8) of the Code.
14.3 Data .
(a) Obligation to Furnish . Each person who participates or claims benefits under the Plan shall furnish to the Administrator, any trustee, or any insurance company involved in the funding of the benefits under the Plan, such signatures, documents, evidence, or information as the Administrator, such trustee, or such insurance company shall consider necessary or desirable for the purpose of administering the Plan.
(b) Mistakes or Misstatements . In the event of a mistake or a misstatement as to any item of such information, as is furnished pursuant to (a) above, which has an effect on the amount of benefits to be paid under the Plan, or in the event of a mistake or misstatement as to the amount of payments to be made to a person entitled to receive a benefit under the Plan, the Administrator shall cause such amounts to be withheld or accelerated, as shall in its judgment accord to such person the payment to which he is properly entitled under the Plan.
14.4 Employment Relationship .
(a) No Enlargement of Rights . Except as otherwise provided by law or legally enforceable contract, the establishment of the Plan or of any fund or any insurance contract thereunder, any amendment of the Plan, participation in the Plan, or the payment of any benefits under the Plan, shall not be construed as giving any person whomsoever any legal or equitable claims or rights against any Employer, or its officers, directors, or shareholders, as such, or as giving any person the right to be retained in the employment of any Employer.
(b) Employers Rights . The right of an Employer to discipline or discharge an employee shall not be affected by reason of any of the provisions of the Plan.
14.5 Merger or Transfer of Plan Assets . In the case of any merger or consolidation of the Plan with, or transfer of assets or liabilities of the Plan to, any other plan, each Participant in the Plan shall (if the surviving plan terminated immediately after the merger, consolidation, or transfer) be entitled to receive a benefit which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer (if the Plan had then terminated). In the case of a transfer to another plan of any Section 401(k) Salary Deferral Account or any other portion of an Account subject to the 401(k) restrictions on distributions, such a transfer may take place only if it is reasonably concluded that the transferee plan contains the restrictions described in Section 8.7.
14.6 Incompetency or Disability . Each person to whom a distribution is payable under the Plan shall be conclusively presumed to be mentally competent and not under a disability that renders him unable to care for his affairs, until the date on which the Administrator receives a written notice, in a form and manner acceptable to the Administrator, indicating that a guardian, conservator, or other party legally vested with the care of the person or the estate of such person
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has been appointed by a court of competent jurisdiction, and any payment of a distribution due thereafter shall be made to the same, provided that proper proof of his appointment and continuing qualification is furnished in a form and manner acceptable to the Administrator. The Administrator shall not be required to look to the application of any such payment so made.
14.7 Nontransferability of Annuities . Any annuity contract distributed from the Plan must be nontransferable.
14.8 USERRA and HEART Act . Notwithstanding any provision of the Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code. Upon the death of any Participant who dies on or after January 1, 2007, while on a leave of absence to perform qualified military service with reemployment rights described in Code section 414(u), the Participants Beneficiary shall be entitled to any additional benefits (other than benefit accruals related to the period of qualified military service) that would be provided under the Plan had the Participant died as an active Employee, in accordance with section 401(a)(37) of the Code.
14.9 Governing Law . The Plan and all rights and duties under the Plan shall be governed, construed and administered in accordance with the laws of the State of Ohio, except as governed separately by or preempted by federal law.
14.10 Severability . In case any provision of this Plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining provisions of this Plan, and this Plan shall be construed and interpreted as if such illegal or invalid provision had never been a part of it.
IN WITNESS WHEREOF, FIFTH THIRD BANK has caused this Plan, as supplemented by the Appendices hereto, to be executed this 20 day of December, 2010.
FIFTH THIRD BANK | ||
BY: | /s/ Paul L. Reynolds |
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THE FIFTH THIRD BANCORP
MASTER PROFIT SHARING PLAN
APPENDIX I
PREDECESSOR EMPLOYER INDEX
Service crediting and/or other substantive provisions are applicable with respect to the following predecessor employers in the Appendices indicated:
Predecessor Employer |
Service Crediting under Appendix |
Other Substantive
Provisions under Appendix |
||
ACI Merchant Services, Inc. |
II | |||
Bank of Ashland (and affiliates) |
II | |||
Bank One, National Association |
II | |||
Boone State Bank |
IV | IV | ||
Capital Holdings, Inc. (and Capital Bank, N.A.) |
II | |||
Card Management Corporation |
XXII | XXII | ||
CitFed Bancorp, Inc. (and subsidiaries) |
XIV | XIV | ||
Citizens Heritage Bank, National Association |
II | |||
CNB Bancshares, Inc. (and Civitas Bank and other subsidiaries) |
XVI | XVI | ||
Commercial National Bank |
II | II | ||
Cumberland Federal Savings Bank |
VII | VII | ||
Decatur County Bank |
II | |||
Enterprise Federal Savings Bank (and Enterprise Federal Bancorp, Inc.) |
XV | XV | ||
Falls Savings Bank, FSB |
IX | IX | ||
First Charter Corporation (and subsidiaries) |
XXV | XXV | ||
First Horizon National Corporation (and First Tennessee Bank National Association) |
II | |||
First-Mason Bank |
III | III | ||
First National Bankshares of Florida, Inc. (and subsidiaries) |
XXI | XXI | ||
First Nationwide Bank, a Federal Savings Bank (fka California Federal) |
XI | XI | ||
First Ohio Bancshares, Inc. (and First National Bank of Toledo and other subsidiaries) |
VI | VI | ||
Franklin Financial Corporation (and subsidiaries) |
XX | XX | ||
Freedom Bank |
II | |||
Gateway Leasing Corporation |
II | |||
Great Lakes National Bank, Ohio, N. A. |
II |
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Predecessor Employer |
Service Crediting under Appendix |
Other
Substantive Provisions under Appendix |
||
Heartland Capital Management, Inc. |
II | |||
Integrated Delivery Technologies, Inc. |
II | |||
Kentucky Enterprise Bank, FSB (and Kentucky Enterprise Bancorp, Inc.) |
II | |||
Mutual Federal Savings Bank |
VIII | VIII | ||
NBD Bancorp, Inc. |
X | X | ||
New Palestine Bank |
V | V | ||
The Ohio Company (and subsidiaries) |
XII | XII | ||
Old Kent Financial Corporation (and subsidiaries) |
XVIII | XVIII | ||
Ottawa Financial Corporation (and AmeriBank) |
XVII | XVII | ||
Peoples Bank Corporation of Indianapolis (and subsidiaries) |
II | |||
R-G Crown Bank, FSB |
XXIV | XXIV | ||
Resource Management, Inc. (dba Maxus Investment Group) |
II | |||
Skipjack Financial Services, Inc. and Transactive Ecommerce Solutions, Inc. |
II | |||
South Florida Bank (and South Florida Bank Holding Corporation) |
II | |||
State Savings Bank (and affiliates) |
XIII | XIII | ||
Strongsville Savings Bank (and Emerald Financial Corp) |
II | |||
USB, Inc. |
XIX | XIX | ||
Vanguard Financial Company |
II | |||
W. Lyman Case & Company |
II and XXIII | XXIII |
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THE FIFTH THIRD BANCORP
MASTER PROFIT SHARING PLAN
APPENDIX II
Service Crediting for Certain Predecessor Employers
1. Predecessor Employers . The crediting of Service under this Appendix shall apply only to those Employees described below.
(i) | CITIZENS HERITAGE BANK, NATIONAL ASSOCIATION . Employees of Citizens Heritage Bank, National Association (Citizens) who became Employees on March 31, 1988 in connection with Citizens adoption of the Old Plan on that date shall be credited with Service under Section 2.53 of the Plan for their service with Citizens. |
(ii) | COMMERCIAL NATIONAL BANK . Employees of Commercial National Bank (Commercial) who became Employees on or before August 1, 1988 in connection with the merger of Commercial into the Fifth Third Bank of Northwestern Ohio, National Association, shall be credited with Service under Section 2.53 of the Plan for their service with Commercial. |
(iii) | DECATUR COUNTY BANK . Employees of Decatur County Bank (Decatur) who became Employees on September 23, 1988 in connection with Decatur County Banks adoption of the Plan, shall be credited with Service under Section 2.53 of the Plan for their service with Decatur. |
(iv) | KENTUCKY ENTERPRISE BANK, FSB . Employees of Kentucky Enterprise Bank, FSB and Kentucky Enterprise Bancorp, Inc. who became Employees on or before March 15, 1996 in connection with the merger of Kentucky Enterprise Bancorp, Inc. into Fifth Third Bancorp shall be credited with Service under Section 2.53 of the Plan for their service with Kentucky Enterprise Bank, FSB and Kentucky Enterprise Bancorp, Inc. |
(v) | GATEWAY LEASING CORPORATION, an Ohio Corporation . Former employees of Gateway Leasing Corporation (Gateway) who became Employees on or before June 7, 1997 in connection with The Fifth Third Leasing Companys Asset Purchase Agreement with Gateway shall be credited with Service under Section 2.53 of the Plan for their service with Gateway. |
(vi) | GREAT LAKES NATIONAL BANK, OHIO, N.A. Former employees of Great Lakes National Bank, Ohio, N.A. (Great Lakes) who became Employees on or before September 26, 1997 in connection with the Employers acquisition of certain assets of Great Lakes shall be credited with Service under Section 2.53 of the Plan for their service with Great Lakes. |
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(vii) | BANK ONE, NATIONAL ASSOCIATION . Former employees of Bank One, National Association (Bank One) who became Employees on or before October 16, 1998 in connection with Fifth Third Bank of Southern Ohios acquisition of certain assets of Bank One shall be credited with Service under Section 2.53 of the Plan for their service with Bank One. |
(viii) | BANK OF ASHLAND . Employees of Ashland Bankshares, Inc. or Bank of Ashland, Inc. (a subsidiary of Ashland Bankshares, Inc.) who became Employees on or before April 16, 1999 in connection with the merger of Bank of Ashland, Inc. and Fifth Third Bank, Ohio Valley, shall be credited with Service under Section 2.53 of the Plan for their service with Ashland Bankshares, Inc. or Bank of Ashland, Inc. |
(ix) | SOUTH FLORIDA BANK AND SOUTH FLORIDA BANK HOLDING CORPORATION . Employees of South Florida Bank or South Florida Bank Holding Corporation who became Employees of an Employer as a result of the mergers of South Florida Bank into Fifth Third Bank, Florida or South Florida Bank Holding Corporation into Fifth Third Bancorp and who were Employees of an Employer on the first business day after the Effective Time shall be credited with Service under Section 2.53 of the Plan for their service with South Florida Bank or South Florida Bank Holding Corporation. |
(x) | STRONGSVILLE SAVINGS BANK AND EMERALD FINANCIAL CORP . Employees of The Strongsville Savings Bank or Emerald Financial Corp., who became Employees of an Employer as a result of the mergers of The Strongsville Savings Bank into Fifth Third Bank, Northwestern Ohio N.A. or Emerald Financial Corporation into Fifth Third Bancorp and who were Employees of an Employer on the first business day after August 6, 1999, shall be credited with Service under Section 2.53 of the Plan for their service with The Strongsville Savings Bank and Emerald Financial Corp. |
(xi) | ACI MERCHANT SERVICES, INC. Employees of ACI Merchant Services, Inc. (ACI) who became Employees on October 2, 2000 in connection with the merger of ACI into Midwest Payment Systems, Inc. shall be credited with Service under Section 2.53 of the Plan for their service with ACI. |
(xii) | PEOPLES BANK CORPORATION OF INDIANAPOLIS. Each Peoples Bank Employee who was an Employee of an Employer on January 1, 2000 (and who was an employee of any subsidiary of Fifth Third Bancorp on the first business day after the merger of Peoples Bank Corporation of Indianapolis into Fifth Third Bancorp), shall be credited with Service under Section 2.53 of the Plan for his service with Peoples Bank Corporation of Indianapolis, Peoples Bank & Trust Company and any other subsidiary of Peoples Bank Corporation of Indianapolis. Peoples Bank Employee means an individual who, immediately prior to the merger of Peoples Bank Corporation of Indianapolis into Fifth Third Bancorp, was employed by Peoples Bank Corporation of Indianapolis, or any subsidiary of Peoples Bank Corporation of Indianapolis. |
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(xiii) | HEARTLAND CAPITAL MANAGEMENT, INC. Individuals who were Employees of Heartland Capital Management, (Heartland) on February 4, 2000 became Participants on February 4, 2000. In addition to the Service credited under Section 2.53 for the period that Heartland has been an Affiliate, each individual who was an Employee of Heartland on February 4, 2000 (and who was an employee of Heartland on the first business day after the day Heartland became an Affiliate) shall be credited with Service under Section 2.53 of the Plan for his service with Heartland prior to its having become an Affiliate. |
(xiv) | INTEGRATED DELIVERY TECHNOLOGIES, INC. Employees of Integrated Delivery Technologies, Inc. who become Employees as of the effective time of the merger of Integrated Delivery Technologies, Inc. and Midwest Payment Systems East, Inc. in connection with such merger, shall be credited with Service under Section 2.53 of the Plan for their service with Integrated Delivery Technologies, Inc. |
(xv) | RESOURCE MANAGEMENT, INC. (dba MAXUS INVESTMENT GROUP). Employees of Resource Management, Inc. or any of its subsidiaries, who became Employees on January 2, 2001 in connection with the merger of Resource Management, Inc, into Fifth Third Bancorp shall be credited with Service under Section 2.53 of the Plan for their service with Resource Management, Inc. or its subsidiaries. |
(xvi) | CAPITAL HOLDINGS, INC. Employees of Capital Holdings, Inc. or Capital Bank, N.A. who became Employees on or before the effective time of the merger of Capital Holdings, Inc. and Fifth Third Bancorp (i.e., the close of business on March 9, 2001) in connection with such merger, shall be credited with Service under Section 2.53 of the Plan for their service with Capital Holdings, Inc. or Capital Bank, N.A. |
(xvii) | W. LYMAN CASE & COMPANY. Employees of W. Lyman Case & Company (WLC) who became Employees on the date WLC became an Affiliate of Fifth Third Bank in connection with such affiliation, shall be credited with Service under Section 2.53 of the Plan for their service with WLC for the period prior to the date WLC became an Affiliate of Fifth Third Bank. |
(xviii) | VANGUARD FINANCIAL COMPANY. Employees of Vanguard Financial Company who became Employees as of the effective time of the merger of Vanguard Financial Company into Fifth Third Bancorp, shall be credited with Service under Section 2.53 of the Plan for their service with Vanguard prior to such merger. |
(xix) |
FIRST HORIZON NATIONAL CORPORATION . Former employees of First Horizon National Corporation (or First Tennessee Bank National Association) (together First Horizon), who became Employees on or before May 3, 2008 in connection with Fifth Third Bancorps (and Fifth Third Banks) acquisition of |
AII - 3
certain assets of First Horizon, shall be credited with Service under Section 2.53 of the Plan for their service with First Horizon. |
(xx) | FREEDOM BANK . Former employees of Freedom Bank, who became Employees on December 22, 2008 in connection with Fifth Third Banks acquisition of certain assets of Freedom Bank, shall be credited with Service under Section 2.53 of the Plan for their service with Freedom Bank. |
(xxi) | SKIPJACK FINANCIAL SERVICES, INC. AND TRANSACTIVE ECOMMERCE SOLUTIONS, INC. Former employees of Skipjack Financial Services, Inc. or Transactive Ecommerce Solutions, Inc., who became Employees on April 1, 2009 in connection with Fifth Third Banks acquisition of certain assets of Skipjack Financial Services, Inc. and Transactive Ecommerce Solutions, Inc., shall be credited with Service under Section 2.53 of the Plan for their service with Skipjack Financial Services, Inc. and Transactive Ecommerce Solutions, Inc. |
However, Section 3.4 of the Plan shall continue to apply. As such, notwithstanding such crediting of Service, an Employee who falls into an ineligible class of Employees, as described in Section 3.4, shall not be eligible to Participate in the Plan, or to make or receive allocations of contributions or forfeitures under the Plan.
2. Crediting of Service . Service with the predecessor employers described in paragraph 1 above shall be credited to such Employees specified in paragraph 1 above under rules comparable to those under Section 2.53 of the Plan.
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THE FIFTH THIRD BANCORP
MASTER PROFIT SHARING PLAN
APPENDIX III
THE FIRST-MASON BANK EMPLOYEES PROFIT SHARING PLAN
Effective December 31, 1982, The First-Mason Bank Employees Profit Sharing Plan (the First-Mason Plan) was merged into the Plan. The First-Mason Plan, as in effect prior to January 29, 1982, is a Predecessor Plan such that service taken into account under The First-Mason Plan shall count as Service under Section 2.53 under this Plan. The portion of a Participants Account attributable to his accrued benefit under the First-Mason Plan shall be reflected in the appropriate subaccount(s) in this Plan, as determined by the Administrator.
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THE FIFTH THIRD BANCORP
MASTER PROFIT SHARING PLAN
APPENDIX IV
BOONE STATE BANK PROFIT SHARING PLAN
1. Predecessor Plan . Effective December 31, 1986 (the Merger Date), the Boone State Bank Profit Sharing Plan (the Boone State Plan) was merged into the Plan. The Boone State Plan is a Predecessor Plan such that service taken into account under the Boone State Plan shall count as Service under Section 2.53 under this Plan.
2. Accounting . The portion of a Participants Account attributable to his accrued benefit under the Boone State Plan was previously accounted for under this Plan in a separate Boone State Account. Any amounts remaining in a Participants Boone State Account are now reflected in his Prior Plan Employer Contribution Account.
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THE FIFTH THIRD BANCORP
MASTER PROFIT SHARING PLAN
NEW PALESTINE BANK EMPLOYEES 401(k) PLAN
APPENDIX V
1. Predecessor Plan . Effective December 31, 1989 (the Merger Date), the New Palestine Bank Employees 401(k) Plan (the New Palestine Plan) merged into the Plan. The New Palestine Plan is a Predecessor Plan such that service taken into account under the New Palestine Plan shall count as Service under Section 2.53 under this Plan.
2. Accounting . Effective as of the Merger Date, amounts in a Participants Salary Savings Account, Regular Account and Rollover Account under the New Palestine Plan were reflected in this Plan in the same Participants Section 401(k) Salary Deferral Account, New Palestine Account (a prior subaccount in this Plan), and Rollover Account, respectively. Any amounts remaining in a Participants New Palestine Account are now reflected in his Prior Plan Employer Contribution Account.
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THE FIFTH THIRD BANCORP
MASTER PROFIT SHARING PLAN
APPENDIX VI
FIRST OHIO BANCSHARES, INC. STOCK PURCHASE, 401(k) AND SAVINGS PLAN
1. Predecessor Plan . Effective January 1, 1990, the First Ohio Bancshares, Inc. Stock Purchase, 401(k) and Savings Plan (the First Ohio Plan) became a Predecessor Plan such that service taken into account under the First Ohio Plan shall count as Service under Section 2.53 under this Plan.
2. Accounting . Under the applicable provisions of the Old Plan, trust-to-trust transfers were made on behalf of certain Participants from the First Ohio Plan to the Plan with the transfers reflected in the appropriate subaccounts under this Plan. Any amounts remaining in a Participants Toledo Matching Account (a prior subaccount in this Plan) are now reflected in his Prior Plan Employer Contribution Account.
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THE FIFTH THIRD BANCORP
MASTER PROFIT SHARING PLAN
APPENDIX VII
FINANCIAL INSTITUTIONS THRIFT PLAN,
AS ADOPTED BY THE CUMBERLAND FEDERAL SAVINGS BANK
1. Predecessor Plan . Effective August 27, 1994, the Financial Institutions Thrift Plan, as adopted by The Cumberland Federal Savings Bank (The Cumberland Plan), became a Predecessor Plan such that service taken into account under the Cumberland Plan shall count as Service under Section 2.53 under this Plan.
2. Accounting . In accordance with the terms of The Cumberland Plan and as directed by the Administrator, certain Participants with accounts in The Cumberland Plan elected to transfer those accounts and related plan assets to this Plan. Amounts in a Participants Regular Account, 401(k) Account and Rollover Account under The Cumberland Plan initially were reflected in this Plan in the same Participants Cumberland Regular Account, Cumberland 401(k) Account, and Cumberland Rollover Account respectively (all prior subaccounts in this Plan). Any amounts remaining in a Participants Cumberland Regular Account, Cumberland 401(k) Account and Cumberland Rollover Account are now reflected in his After-Tax Account, Section 401(k) Salary Deferral Account and Rollover Account, respectively.
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THE FIFTH THIRD BANCORP
MASTER PROFIT SHARING PLAN
APPENDIX VIII
MUTUAL FEDERAL SAVINGS BANK RETIREMENT SAVINGS PLAN
1. Predecessor Plan . Effective as of the date the Administrator determined (the Merger Date), the Mutual Federal Savings Bank Retirement Savings Plan merged into the Plan. The Mutual Federal Savings Bank Retirement Savings Plan (the Mutual Federal Plan) is a Predecessor Plan such that service taken into account under the Mutual Federal Plan shall count as Service under Section 2.53 under this Plan.
2. Accounting . The portion of a Participants Account attributable to his accrued benefit under the Mutual Federal Plan was previously accounted for under this Plan in a Mutual Federal Discretionary Contribution Account (attributable to any discretionary employer contributions and forfeitures allocated to the Participant under the Mutual Federal Plan), a Mutual Federal 401(k) Account (attributable to a Participants Elective Deferral Contributions under the Mutual Federal Plan), a Mutual Federal Matching Contribution Account (attributable to any Matching Contributions allocated to the Participant under the Mutual Federal Plan) and a Mutual Federal Rollover Account (attributable to a Participants Rollover Contributions under the Mutual Federal Plan).
Any amounts remaining in a Participants Mutual Federal Discretionary Contribution Account or Mutual Federal Matching Contribution Account are now reflected in his Prior Plan Employer Contribution Account. Any amounts remaining in a Participants Mutual Federal 401(k) Account and Mutual Federal Rollover Account are now reflected in his Section 401(k) Salary Deferral Account and Rollover Account, respectively.
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APPENDIX IX
FALLS SAVINGS BANK, FSB SALARY SAVINGS PLAN
1. Predecessor Plan . Effective as of April 30, 1996 (the Merger Date), the Falls Savings Bank, FSB Salary Savings Plan (the Fall Savings Plan) merged into the Plan. The Falls Savings Plan is a Predecessor Plan such that service taken into account under the Falls Savings Plan shall count as Service under Section 2.53 under this Plan.
2. Accounting . The portion of a Participants Account attributable to his accrued benefit under the Falls Savings Plan was previously accounted for under this Plan in a Falls Savings Discretionary Contribution Account (attributable to any discretionary employer contributions allocated to the Participant under the Falls Savings Plan), a Falls Savings 401(k) Account (attributable to a Participants Elective Contributions under the Falls Savings Plan), a Falls Savings Rollover Account (attributable to a Participants Rollover Contributions under the Falls Savings Plan) and a Falls Savings Matching Contribution Account (attributable to any Matching Contributions allocated to the Participant under the Falls Savings Plan).
Any amounts remaining in a Participants Falls Savings Discretionary Contribution Account or Falls Savings Matching Contribution Account are now reflected in his Prior Plan Employer Contribution Account. Any amounts remaining in a Participants Falls Savings 401(k) Account or Falls Savings Rollover Account are now reflected in his Section 401(k) Salary Deferral Account and Rollover Account, respectively.
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APPENDIX X
NBD BANCORP, INC. EMPLOYEES SAVINGS AND INVESTMENT PLAN
1. Predecessor Plan . Upon the transfer referred to in paragraph 2 below, the NBD Bancorp, Inc. Employees Savings and Investment Plan (the NBD Plan) became a Predecessor Plan solely with respect to each Participant who had amounts transferred from the NBD Plan to this Plan pursuant to paragraph 2 below such that service taken into account under the NBD Plan for such Participants shall count as Service under Section 2.53 under this Plan.
2. Accounting . As of the transfer date determined by the Administrator, Participants who were Employees of an Employer on such transfer date and who had accounts in the NBD Plan had those accounts and related plan assets transferred to this Plan. Amounts in a Participants Participant Contribution Account, Matching Contribution Account and Rollover Account under the NBD Plan initially were reflected in this Plan in the same Participants NBD Participant Contribution Account, NBD Matching Contribution Account and NBD Rollover Account, respectively (all prior subaccounts in the Plan). Any amounts remaining in a Participants NBD Participant Contribution Account, NBD Matching Contribution Account and NBD Rollover Account are now reflected in his Section 401(k) Salary Deferral Account, Prior Plan Employer Contribution Account and Rollover Account, respectively.
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APPENDIX XI
CALIFORNIA FEDERAL EMPLOYEES INVESTMENT PLAN
1. Past Service Credit . Upon the transfer referred to in paragraph 2 below from the California Federal Employees Investment Plan (formerly known as the First Nationwide Employees Investment Plan) (the Cal Fed Plan), each Participant who had amounts transferred from the Cal Fed Plan to this Plan pursuant to paragraph 2 below was credited with Service under Section 2.53 of the Plan for the Participants service with First Nationwide Bank, a Federal Savings Bank (FNB). Service with FNB shall be determined under rules comparable to those under Section 2.53 of the Plan.
2. Accounting . As of the transfer date determined by the Administrator, Participants who were Employees of an Employer on the fifth business day before the transfer date and who had accounts in the Cal Fed Plan had those accounts and related plan assets transferred to this Plan.
Amounts in a Participants Prior Plan Salary Deferral Account, Company Matching Account and Prior Plan Matching Account, Profit Sharing Account, Rollover Account and Prior Plan After-Tax Account under the Cal Fed Plan, initially were reflected in this Plan in the same Participants Cal Fed Salary Deferral Account, Cal Fed Company Matching Account, Cal Fed Profit Sharing Account, Cal Fed Rollover Account and Cal Fed After-Tax Account, respectively (all prior subaccounts in this Plan).
Any amounts remaining in a Participants Cal Fed Company Matching Account and Cal Fed Profit Sharing Account are now reflected in his Prior Plan Employer Contribution Account. Any amounts remaining in a Participants Cal Fed Salary Deferral Account, Cal Fed Rollover Account and Cal Fed After-Tax Account are now reflected in his Section 401(k) Salary Deferral Account, Rollover Account and After-Tax Account, respectively.
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APPENDIX XII
FIFTH THIRD/THE OHIO COMPANY
AND
FIFTH THIRD INSURANCE AGENCY CORPORATION
1. | Past Service Credit . |
(a) Ohio Company Employees . For purposes of this Appendix, Ohio Company Employee means an individual who, immediately prior to the effective time of the merger of The Ohio Company and Fifth Third Securities, Inc., was employed by The Ohio Company or any of its subsidiaries and who became an Employee as of the effective time of such merger. Ohio Company Employee also means an individual who would have met the foregoing criteria except for the fact that he became an Employee prior to that time but in connection with the merger of The Ohio Company and Fifth Third Securities, Inc.
(b) Past Service Credit and Eligibility . Ohio Company Employees shall be credited with Service under Section 2.53 of the Plan for their service with The Ohio Company and any of its subsidiaries. Service with The Ohio Company and its subsidiaries shall be determined under rules comparable to those under Section 2.53 of the Plan. In no event shall there be any duplication of service for the same period.
2. Trust-to-Trust Transfer from The Ohio Company Profit Sharing Plan . As of the transfer date determined by Fifth Third Bank, individuals who had Accounts in The Ohio Company Profit Sharing Plan had those Accounts and related plan assets, except for any portion in the Individual Direction Fund in The Ohio Company Profit Sharing Plan, transferred to this Plan. Amounts transferred from a Participants Profit Sharing Account under The Ohio Company Profit Sharing Plan initially were reflected in the same Participants Ohio Company Profit Sharing Account under this Plan. Any amounts remaining in a Participants Ohio Company Profit Sharing Account are now reflected in his Prior Plan Employer Contribution Account.
3. Merger of The Ohio Company Salary Investment Plan into the Plan .
(a) Predecessor Plan . Effective as of July 1, 1999 (the Merger Date), The Ohio Company Salary Investment Plan merged into the Plan. The Ohio Company Salary Investment Plan is a Predecessor Plan; provided, however, there shall be no duplication of Service for the same period of time, by reason of the crediting of Service under paragraph 1 above and the crediting of service under Section 2.53(a)(4) by reason of the designation of the Predecessor Plan.
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(b) Accounting . The portion of a Participants Account attributable to his accrued benefit under The Ohio Company Salary Investment Plan was previously accounted for under this Plan in an Ohio Company SIP 401(k) Account (attributable to his Deferral Contributions under The Ohio Company Salary Investment Plan), an Ohio Company SIP Rollover Account (attributable to a Participants rollover contributions (if any) under The Ohio Company Salary Investment Plan), and an Ohio Company SIP Matching Contribution Account (attributable to any Matching Contributions allocated to the participant under The Ohio Company Salary Investment Plan).
Any amounts remaining in a Participants Ohio Company SIP 401(k) Account or Ohio Company SIP Rollover Account are now reflected in his Section 401(k) Salary Deferral Account and Rollover Account, respectively. The Ohio Company SIP Matching Contribution Account remains as a separate subaccount under the Plan.
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APPENDIX XIII
STATE SAVINGS BANK, CENTURY BANK
AND
STATE SAVINGS BANK, F.S.B.
1. Past Service Credit.
(a) State Savings Employees . For purposes of this Appendix, State Savings Employee means an individual who, immediately prior to June 19, 1998, was employed by State Savings Bank, Century Bank or State Savings Bank, F.S.B. and who became an Employee as of June 19, 1998. State Savings Employee also means an individual who would have met the foregoing criteria except for the fact that he became an Employee prior to June 19, 1998 but in connection with the acquisition of State Savings Company and subsidiaries by Fifth Third Bancorp.
(b) Past Service Credit and Eligibility . State Savings Employees shall be credited with Service under Section 2.53 of the Plan for their service with State Savings Company and any of its subsidiaries. Service with State Savings Company and its subsidiaries shall be determined under rules comparable to those under Section 2.53 of the Plan. In no event shall there be any duplication of service for the same period.
2. Merger of the State Savings Bank Profit Sharing Plan into the Plan .
(a) Merger Date . Effective as of October 1, 1999 (the Merger Date), the State Savings Bank Profit Sharing Plan (the State Savings Plan) merged into the Plan. The State Savings Plan is a Predecessor Plan; provided, however, there shall be no duplication of Service for the same period of time, by reason of the crediting of Service under paragraph 1 above and the crediting of service under Section 2.53(a)(4) by reason of the designation of the Predecessor Plan.
(b) Accounting . The portion of a Participants Account attributable to his accrued benefit under the State Savings Plan was previously accounted for under this Plan in a State Savings Employee Pre-Tax Contribution Account (attributable to a Participants Employee Pre-Tax Contribution Account under the State Savings Plan), a State Savings Employer Matching Contribution Account (attributable to a Participants Employer Matching Contribution Account under the State Savings Plan), a State Savings Employer Nonelective Contribution Account (attributable to a Participants Employer Nonelective Contribution Account under the State Savings Plan), a State Savings Employee After-Tax Contribution Account (attributable to a Participants Employee After-Tax Contribution Account under the
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State Savings Plan) and a State Savings Rollover Contribution Account (attributable to a Participants Rollover Contribution Account under the State Savings Plan).
Any amounts remaining in a Participants State Savings Employer Matching Contribution Account and State Savings Employer Nonelective Contribution Account are now reflected in his Prior Plan Employer Contribution Account. Any amounts remaining in a Participants State Savings Employee Pre-Tax Contribution Account, State Savings Employee After-Tax Contribution Account and State Savings Rollover Contribution Account are now reflected in his Section 401(k) Salary Deferral Account, After-Tax Account and Rollover Account, respectively.
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APPENDIX XIV
CITIZENS FEDERAL BANK, F.S.B.
1. Past Service Credit.
(a) CitFed Employees . For purposes of this Appendix, CitFed Employee means an individual who, immediately prior to June 26, 1998, was employed by CitFed Bancorp, Inc. or any of its subsidiaries and who became an Employee as of June 26, 1998. CitFed Employee also means an individual who would have met the foregoing criteria except for the fact that he became an Employee prior to June 26, 1998 but in connection with the acquisition of CitFed Bancorp, Inc. and subsidiaries by Fifth Third Bancorp.
(b) Past Service Credit and Eligibility . CitFed Employees shall be credited with Service under Section 2.53 of the Plan for their service with CitFed Bancorp, Inc. and its subsidiaries. Service with CitFed Bancorp, Inc. and its subsidiaries shall be determined under rules comparable to those under Section 2.53 of the Plan. In no event shall there be any duplication of service for the same period.
2. Merger of the Citizens Federal Bank, F.S.B. and Related Companies Amended and Restated Savings and Investment 401 (k) Plan into the Plan .
(a) Merger Date . Effective as of October 1, 1999 (the Merger Date), the Citizens Federal Bank, F.S.B. and Related Companies Amended and Restated Savings and Investment 401(k) Plan (the Citizens Federal Plan) merged into the Plan. The Citizens Federal Plan is a Predecessor Plan; provided, however, there shall be no duplication of Service for the same period of time, by reason of the crediting of Service under paragraph 1 above and the crediting of service under Section 2.53(a)(4) by reason of the designation of the Predecessor Plan.
(b) Accounting . The portion of a Participants Account attributable to his accrued benefit under the Citizens Federal Plan was previously accounted for under this Plan in a Citizens Federal Participants Elective Account (attributable to a Participants Elective Account under the Citizens Federal Plan), a Citizens Federal Participants Account (attributable to a Participants Account and Restricted Stock Account under the Citizens Federal Plan) and a Citizens Federal Participants Rollover Account (attributable to a Participants Rollover Account under the Citizens Federal Plan).
Any amounts remaining in a Participants Citizens Federal Participants Elective Account, Citizens Federal Participants Account and Citizens Federal Participants Rollover Account are now reflected in his Section 401(k) Salary Deferral Account, After-Tax Account and Rollover Account, respectively.
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APPENDIX XV
ENTERPRISE FEDERAL SAVINGS BANK
AND
ENTERPRISE FEDERAL BANCORP, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
1. Past Service Credit .
(a) Enterprise Federal Employees . For purposes of this Appendix, Enterprise Federal Employee means an individual who, immediately prior to May 14, 1999, was employed by Enterprise Federal Savings Bank or Enterprise Federal Bancorp, Inc. and who became an Employee as of May 14, 1999. Enterprise Federal Employee also means an individual who would have met the foregoing criteria except for the fact that he became an Employee prior to May 14, 1999 but in connection with the merger of Enterprise Federal Savings Bank and Enterprise Federal Bancorp into Fifth Third Bank and Fifth Third Bancorp.
(b) Past Service Credit and Eligibility . Enterprise Federal Employees shall be credited with Service under Section 2.53 of the Plan for their service with Enterprise Federal Savings Bank, Enterprise Federal Bancorp, Inc. and any predecessor employer for which Enterprise Federal Savings Bank has credited service. Such Service shall be determined under rules comparable to those under Section 2.53 of the Plan. The transition rules in Section 2.53 (a)(4) of the Plan shall have no effect with respect to Enterprise Federal Employees. In no event shall there be any duplication of service for the same period.
2. Merger of Enterprise Federal ESOP into the Plan .
(a) Merger Date . Effective as of July 31, 1999 (the Plan Merger Date), the Enterprise Federal Bancorp, Inc. Employee Stock Ownership Plan (the Enterprise ESOP) merged into the Plan. The Enterprise ESOP is a Predecessor Plan; provided, however, there shall be no duplication of Service for the same period of time, by reason of the crediting of Service under paragraph 1 above and the crediting of service under Section 2.53(a)(4) by reason of the designation of the Predecessor Plan.
(b) Accounting . The portion of a Participants Account attributable to his accrued benefit under the Enterprise ESOP was previously accounted for under this Plan in an Enterprise ESOP Account (which was attributable to his Company Stock Account under the Enterprise ESOP). Any amounts remaining in a Participants Enterprise ESOP Account are now reflected in his Prior Plan Employer Contribution Account.
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APPENDIX XVI
CNB BANCSHARES, INC.
AND
SUBSIDIARIES
1. Past Service Credit .
(a) CNB Employee . For purposes of this Appendix, CNB Employee means an individual who, immediately prior to the merger of CNB Bancshares, Inc. into Fifth Third Bancorp, was employed by CNB Bancshares, Inc., or any subsidiary of CNB Bancshares, Inc.
(b) Past Service Credit and Eligibility . Each CNB Employee who was an Employee of an Employer on January 1, 2000 (and who was an employee of any subsidiary of Fifth Third Bancorp on the first business day after the merger of CNB Bancshares, Inc. into Fifth Third Bancorp), shall be credited with Service under Section 2.53 of the Plan for his service with CNB Bancshares, Inc., Civitas Bank (now know as Fifth Third Bank, Indiana), Wedgewood Partners, Inc., Civitas Insurance and any other subsidiary of CNB Bancshares, Inc. Such Service shall be determined under rules comparable to those under Section 2.53 of the Plan. In no event shall there be any duplication of service for the same period.
2. Merger of the Citizens Incentive Savings Plan into the Plan .
(a) Merger Date . Effective as of August 24, 2001 (the Merger Date), the Citizens Incentive Savings Plan (the CISP) merged into the Plan. The CISP is a Predecessor Plan; provided, however, there shall be no duplication of Service for the same period of time, by reason of the crediting of Service under paragraph 1 above and the crediting of service under Section 2.53(a)(4) by reason of the designation of the Predecessor Plan.
(b) Accounting . The portion of a Participants Account attributable to his accrued benefit under the CISP is accounted for under this Plan as follows:
(1) Amounts attributable to an Employee Deferral Account under the CISP are reflected in the Section 401(k) Salary Deferral Account in this Plan.
(2) Amounts attributable to an Employer Matching Contribution Account under the CISP were previously reflected in the CISP Matching Contribution Account (a prior subaccount in this Plan). Any amounts remaining in a Participants CISP Matching Contribution Account are now reflected in his Prior Plan Employer Contribution Account.
(3) Amounts attributable to an Employer Discretionary Contribution Account under the CISP were previously reflected in the CISP Discretionary Contribution
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Account (a prior subaccount in this Plan). Any amounts remaining in a Participants CISP Discretionary Contribution Account are now reflected in his Prior Plan Employer Contribution Account.
(4) Amounts attributable to an Employee Rollover Contribution Account under the CISP are reflected in the Rollover Account in this Plan.
(5) Amounts attributable to a Merger Account under the CISP were previously reflected in the CISP Merger Account (a prior subaccount in this Plan) Any amounts remaining in a Participants CISP Merger Account are now reflected in his Prior Plan Employer Contribution Account.
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APPENDIX XVII
OTTAWA FINANCIAL CORPORATION
AND SUBSIDIARIES
1. Past Service Credit .
(a) Ottawa Employee . Effective as of the Effective Time as defined in the Affiliation Agreement between Ottawa Financial Corporation and Fifth Third Bancorp (the Company Merger Date), Ottawa Financial Corporation merged into Fifth Third Bancorp and its subsidiary, AmeriBank, merged into Fifth Third Bank, Indiana. For purposes of this Appendix, Ottawa Employee means an individual who, immediately prior to the Company Merger Date, was employed by Ottawa Financial Corporation or any subsidiary of Ottawa Financial Corporation.
(b) Past Service Credit and Eligibility . Effective as of the Company Merger Date, Ottawa Employees shall be credited with Service under Section 2.53 of the Plan for their service with Ottawa Financial Corporation, its subsidiaries and any predecessor employer for which Ottawa Financial Corporation or its subsidiaries have credited service. Such Service shall be determined under rules comparable to those under Section 2.53 of the Plan.
2. Merger of Ottawa Financial Corporation ESOP into the Plan .
(a) Merger Date . Effective as of March 26, 2001 (the Plan Merger Date), the Ottawa Financial Corporation Employee Stock Ownership Plan (the Ottawa ESOP) merged into the Plan. The Ottawa ESOP is a Predecessor Plan; provided, however, there shall be no duplication of Service for the same period of time, by reason of the crediting of Service under paragraph (b) above and the crediting of service under Section 2.53(a)(4) by reason of the designation of the Predecessor Plan.
(b) Accounting . The portion of a Participants Account attributable to his accrued benefit under Ottawa ESOP was previously accounted for under this Plan in an Ottawa ESOP Participant Account (which was attributable to his Employee Stock Ownership Account under the Ottawa ESOP). Any amounts remaining in a Participants Ottawa ESOP Participant Account are now reflected in his Prior Plan Employer Contribution Account.
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APPENDIX XVIII
OLD KENT FINANCIAL CORPORATION AND SUBSIDIARIES
1. Merger of Old Kent Thrift Plan .
(a) Merger . Effective as of the close of business on December 31, 2001 (the Merger Date), the Old Kent Thrift Plan is completely amended and restated and merged into this Plan.
(b) Predecessor Plan and Crediting of Past Service . The Old Kent Thrift Plan is a Predecessor Plan. Past service shall be credited under Section 2.53(a)(4) with respect to such Predecessor Plan, which shall be interpreted and operated as follows. Service under such Predecessor Plan shall be treated as Service under this Plan based on such Predecessor Plans hour counting methodology through that Predecessor Plans computation period ending December 31, 2001. Thereafter, Service shall be credited under this Plans elapsed time method treating January 1, 2002 as the Participants Employment Commencement Date (for individuals who are Employees on January 1, 2002). In all events, there shall be no duplication of Service for the same period.
(c) Accounting . The portion of a Participants Account attributable to his accrued benefit under the Old Kent Thrift Plan is accounted for under this Plan as follows:
(1) Amounts attributable to a Participants Thrift Plus Account under the Old Kent Thrift Plan are reflected in his Old Kent Pre-Tax Account in this Plan.
(2) Amounts attributable to a Participants Regular Account under the Old Kent Thrift Plan are reflected in his Old Kent After-Tax Account in this Plan.
(3) Amounts attributable to a Participants Matching Account under the Old Kent Thrift Plan are reflected in his Old Kent Matching Account in this Plan.
(4) Amounts attributable to a Participants Rollover/Transfer Account under the Old Kent Thrift Plan are reflected in his Old Kent Rollover/Transfer Account in this Plan.
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APPENDIX XIX
USB, INC.
1. Definitions .
(a) USB Employee . For purposes of this Appendix, USB Employee means an individual who, immediately prior to the merger of USB, Inc. contemplated by the Agreement and Conditional Plan of Merger dated February 21, 2001 among Fifth Third Financial Corporation, FTFC, Inc. and USB, Inc., was employed by USB, Inc. as an employee and became an Employee in connection with such merger.
(b) Active USB Employee . For purposes of this Appendix, Active USB Employee means a USB Employee who, immediately prior to the merger was actively contributing under the section 401(k) feature of the USB, Inc. 401(k) Savings Plan (the USB Plan).
2. Past Service Credit . Effective January 1, 2002, each USB Employee who is an Employee of an Employer on January 1, 2002, shall be credited with Service under Section 2.53(a)(1), (2) and (3) of the Plan for his service with USB, Inc. Such Service shall be determined under rules comparable to those under Section 2.53(a)(1), (2) and (3) of the Plan.
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APPENDIX XX
FRANKLIN FINANCIAL CORPORATION
Franklin Employee . For purposes of this Appendix, Franklin Employee means an individual who, immediately prior to the merger of Franklin Financial Corporation on June 11, 2004, as contemplated by the Affiliation Agreement dated July 23, 2002 among Fifth Third Bancorp, Fifth Third Financial Corporation and Franklin Financial Corporation, was employed by Franklin Financial Corporation or a subsidiary of Franklin Financial Corporation, as an employee and became an Employee immediately upon the completion of such merger on June 11, 2004.
Past Service Credit . Effective June 11, 2004, each Franklin Employee shall be credited with Service under Section 2.53(a)(1), (2) and (3) of the Plan for his service with Franklin Financial Corporation or any subsidiary of Franklin Financial Corporation. Such Service shall be determined under rules comparable to those under Section 2.53(a)(1), (2) and (3) of the Plan.
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APPENDIX XXI
FIRST NATIONAL BANKSHARES OF FLORIDA, INC. SALARY SAVINGS PLAN
1. Merger of First National Bankshares of Florida, Inc. Salary Savings Plan . Effective as of January 1, 2005 upon the merger of First National Bankshares of Florida, Inc. into Fifth Third Financial Corporation (the Merger Date), the First National Bankshares of Florida, Inc. Salary Savings Plan (the FNB Plan) is completely amended and restated and merged into this Plan. The FNB Plan is a Predecessor Plan such that service taken into account under the FNB Plan shall count as service under Section 2.53 of this Plan.
2. Accounting . The portion of a Participants Account attributable to his accrued benefit under the FNB Plan is accounted for under this Plan as follows:
(a) Amounts attributable to a Participants Elective Deferral Contributions under the FNB Plan were previously reflected in his FNB 401(k) Account (a prior subaccount in this Plan). Any amounts remaining in a Participants FNB 401(k) Account are now reflected in his Section 401(k) Salary Deferral Account in this Plan.
(b) Amounts attributable to a Participants Qualified Matching Contributions (Matching Contributions made on or after January 1, 2004) under the FNB Plan, were previously reflected in his FNB Qualified Matching Account (a prior subaccount in this Plan). Any amounts remaining in a Participants FNB Qualified Matching Account are now reflected in his Prior Plan Employer Contribution Account in this Plan.
(c) Amounts attributable to a Participants Matching Contributions made before January 1, 2004 under the FNB Plan were previously reflected in his FNB Pre-2004 Matching Account (a prior subaccount in this Plan). Any amounts remaining in a Participants FNB Pre-2004 Matching Account are now reflected in his FNB Employer Contribution Account in this Plan.
(d) Amounts attributable to a Participants Additional Contributions under the FNB Plan other than such amounts credited to the FNB Pre-Spin-Off Additional Contribution Account, were previously reflected in his FNB Additional Contribution Account (a prior subaccount in this Plan). Any amounts remaining in a Participants FNB Additional Contribution Account are now reflected in his FNB Employer Contribution Account in this Plan.
(e) Amounts attributable to Additional Contributions under the FNB Plan, which immediately after the spin-off of First National Bankshares of Florida, Inc. by F.N.B. Corporation were invested in F.N.B. Corporation stock, were previously reflected in his FNB Pre-Spin-Off Additional Contribution Account (a prior subaccount in this Plan). Any amounts remaining in a Participants FNB Pre-Spin-Off Additional Contribution Account are now reflected in his FNB Employer Contribution Account in this Plan.
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(f) Amounts attributable to a Participants Rollover Contributions under the FNB Plan were previously reflected in his FNB Rollover Account (a prior subaccount in this Plan). Any amounts remaining in a Participants FNB Rollover Account are now reflected in his Rollover Account in this Plan.
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APPENDIX XXII
CARD MANAGEMENT CORPORATION
1. CMC Employee . For purposes of this Appendix, CMC Employee means an individual who, immediately prior to the acquisition of stock of Card Management Corporation on January 19, 2006 pursuant to the Stock Purchase Agreement dated December 22, 2005 among Fifth Third Bank, Card Management Corporation and its shareholders, was employed by Card Management Corporation as an employee and became an Employee in connection with such acquisition.
2. Past Service Credit . Effective January 19, 2006, each CMC Employee shall be credited with Vesting Service under Section 2.59(a) of the Plan for his service with Card Management Corporation. Such service shall be determined under rules comparable to those under Section 2.53(a)(1), (2) and (3).
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APPENDIX XXIII
W. LYMAN CASE & COMPANY 401(k) PROFIT SHARING PLAN
1. Merger of W. Lyman Case & Company 401(k) Profit Sharing Plan . Effective as of November 2, 2007 (the Merger Date), the W. Lyman Case & Company 401(k) Profit Sharing Plan (the WLC Plan) is merged into this Plan. The WLC Plan is a Predecessor Plan such that service taken into account under the WLC Plan shall count as Service under Section 2.53 of this Plan; provided, however, there shall be no duplication of Service under the Plan for the same period of time.
2. Accounting . The portion of a Participants Account attributable to his accrued benefit under the WLC Plan is accounted for under this Plan as follows:
(a) Amounts attributable to a Participants elective deferrals under the WLC Plan were previously reflected in his WLC 401(k) Account (a prior subaccount in this Plan). Any amounts remaining in a Participants WLC 401(k) Account are now reflected in his Section 401(k) Salary Deferral Account in this Plan.
(b) Amounts attributable to a Participants matching contributions under the WLC Plan were previously reflected in his WLC Employer Matching Account (a prior subaccount in this Plan). Any amounts remaining in a Participants WLC Employer Matching Account are now reflected in his Prior Plan Employer Contribution Account in this Plan.
(c) Amounts attributable to a Participants rollover contributions under the WLC Plan were previously reflected in his WLC Rollover Account (a prior subaccount in this Plan). Any amounts remaining in a Participants WLC Rollover Account are now reflected in his Rollover Account in this Plan.
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APPENDIX XXIV
R-G CROWN BANK, FSB
1. Crown Employee . For purposes of this Appendix, Crown Employee means an individual who, immediately prior to the acquisition of stock of R-G Crown Bank, FSB on November 2, 2007, pursuant to the Stock Purchase Agreement dated May 20, 2007, among Fifth Third Financial Corporation, R-G Crown Bank, FSB, R&G Financial Corporation, and R&G Acquisition Holdings Corporation, was employed by R-G Crown Bank, FSB as an employee and became an Employee in connection with such acquisition.
2. Past Service Credit . Effective November 2, 2007, each Crown Employee shall be credited with Service under Section 2.53(a)(5) of the Plan for his service with R-G Crown Bank, FSB. Such service shall be determined under rules comparable to those under Section 2.53(a)(1), (2) and (3). Such Service shall be taken into account in determining Eligibility Service and Vesting Service.
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APPENDIX XXV
FIRST CHARTER CORPORATION AND SUBSIDIARIES
1. Merger of First Charter Corporation Retirement Savings Plan . Effective as of July 10, 2008 (the Merger Date), the First Charter Corporation Retirement Savings Plan (the First Charter Plan) is completely amended and restated and merged into this Plan.
2. Predecessor Plan and Crediting of Past Service . The First Charter Plan is a Predecessor Plan. Past service shall be credited as provided in (a) below for purposes of determining a Participants nonforfeitable percentage under the Plan of those subaccounts subject to a vesting schedule. Past service shall be credited as provided in (b) below for purposes of determining a Participants eligibility under Section 3.1(b) of the Plan (and paragraph 1(d) above).
(a) Crediting of Past Service for Vesting Purposes . For purposes of determining a Participants Vesting Years, Service shall be determined under Section 2.53(a)(4) with respect to the First Charter Plan. As such, Service under such Predecessor Plan shall be treated as Service under this Plan based on such Predecessor Plans hour counting methodology through that Predecessor Plans computation period ending December 31, 2007. Thereafter, the transition rule in Section 2.53(a)(4)(B) shall apply, and Service shall be credited under this Plans elapsed time method. In no event shall there be any duplication of Service for the same period.
(b) Crediting of Past Service for Eligibility . For purposes of determining a Participants Eligibility Service, Section 2.53(a)(4) shall be disregarded. Instead, a Participants past service with First Charter Corporation or any subsidiary of First Charter Corporation, as well as service with any such entity after it became an Affiliate, shall be taken into account under the elapsed time method under rules comparable to the rules in Section 2.53(a)(1), (2) and (3) of the Plan. In all events there shall be no duplication of service for the same period.
The Administrator shall have the sole power and authority to determine Service under the foregoing.
3. Accounting . The portion of a Participants Account attributable to his accrued benefit under the First Charter Plan is accounted for under this Plan as follows:
(a) Amounts attributable to a Participants Deferral Subaccount under the First Charter Plan were previously reflected in his First Charter 401(k) Account (a prior subaccount in this Plan). Any amounts remaining in a Participants First Charter 401(k) Account are now reflected in his Section 401(k) Salary Deferral Account in this Plan.
(b) Amounts attributable to a Participants Extra Savings Subaccount under the First Charter Plan were previously reflected in his First Charter After-Tax Account (a prior
AXXV - 1
subaccount in this Plan). Any amounts remaining in a Participants First Charter After-Tax Account are now reflected in his After-Tax Account in this Plan.
(c) Amounts attributable to a Participants Company Discretionary Contribution Account under the First Charter Plan were previously reflected in his First Charter Discretionary Contribution Account (a prior subaccount in this Plan). Any amounts remaining in a Participants First Charter Discretionary Contribution Account are now reflected in his First Charter Employer Contribution Account in this Plan.
(d) Amounts attributable to a Participants Match Subaccount, under the First Charter Plan were previously reflected in his First Charter Matching Account (a prior subaccount in this Plan). Any amounts remaining in a Participants First Charter Matching Account are now reflected in his First Charter Employer Contribution Account in this Plan.
(e) Amounts attributable to a Participants Bank Savings Subaccount under the First Charter Plan were previously reflected in his First Charter Qualified Nonelective Account (a prior subaccount in this Plan). Any amounts remaining in a Participants First Charter Qualified Nonelective Account are now reflected in his Qualified Non-Elective Contribution Account in this Plan.
(f) Amounts attributable to a Participants Rollover Subaccount under the First Charter Plan, were previously reflected in his First Charter Rollover Account (a prior subaccount in this Plan). Any amounts remaining in a Participants First Charter Rollover Account are now reflected in his Rollover Account in this Plan.
AXXVI - 2
THE FIFTH THIRD BANCORP MASTER
PROFIT SHARING PLAN
APPENDIX XXVI
SPIN-OFF OF FIFTH THIRD PROCESSING
SOLUTIONS, LLC 401(k) RETIREMENT PLAN
1. Definition of Transferred Fifth Third Employee . For purposes of this Appendix, Transferred Fifth Third Employee means an individual who meets one of the following:
(a) A Participant who the Plan Administrator determines is a Transferred Employee within the meaning of the Master Investment Agreement among Fifth Third Bank, Advent-Kong Blocker Corp., Fifth Third Processing Solutions, LLC and FTPS Opco, LLC; or
(b) A Participant who, upon agreement of Fifth Third Bank and Fifth Third Processing Solutions, LLC, has a change of employment from an Employer to Fifth Third Processing Solutions, LLC (or a member of the same controlled group of businesses (within the meaning of section 414(c) of the Code) as Fifth Third Processing Solutions, LLC) after January 1, 2010 and no later than June 30, 2011.
2. Spin-Off of Fifth Third Processing Solutions, LLC 401(k) Retirement Plan .
(a) Transfer . Subject to Section 14.5 of the Plan, as of the transfer date(s) on or about December 31, 2009, determined by the Administrator, each Participant who, as of that date, has an Account in the Plan and who is a Transferred Fifth Third Employee described in 1(a) above, shall have his Account and related Plan Assets transferred to the Fifth Third Processing Solutions, LLC 401(k) Retirement Plan (the FTPS Plan). The transfer shall include each subaccount of such a Participants Account and shall include all vested and non-vested amounts.
Subsequent to January 1, 2010 but not later than June 30, 2011, the Plan Administrator shall determine subsequent transfer dates applicable to Transferred Fifth Third Employees described in 1(b) above. Subject to Section 14.5 of the Plan, as of each such transfer date, each Participant who, as of that date, has an Account in the Plan and who is a Transferred Fifth Third Employee described in 1(b) above, shall have his Account and related Plan Assets transferred to the FTPS Plan. The transfer shall include each subaccount of such a Participants Account and shall include all vested and non-vested amounts.
(b) Participation and Vesting . Upon the transfer of Plan Assets attributable to a Participants Account, such Participant shall become a participant in the FTPS Plan. In addition, a Participants beginning vested account balance in the FTPS Plan shall be the same as the vested account balance transferred from this Plan. Upon such transfer, neither the Participant nor any of his Beneficiaries shall have any further rights under this Plan.
(c) Administration of Spin-Off . The Administrator or its delegate shall have complete discretion and authority in administering the spin-off. This authority shall include, without limitation, the authority to impose a blackout period during which Participants temporarily are unable to exercise such investment, withdrawal, distribution, loan and other
AXXVI - 1
rights under this Plan, as well as the authority to determine who is considered to be a Transferred Fifth Third Employee as of the applicable transfer date.
(d) Ongoing Restrictions on Section 401(k) Withdrawals and Restrictions . As provided in Section 14.5 of the Plan, amounts transferred to the FTPS Plan which are subject to the restrictions on section 401(k) withdrawals and distributions in Section 8.7, must be subject to the same restrictions in the FTPS Plan.
3. No Severance of Employment; No Retirement . A Transferred Fifth Third Employee who has a change of employment from an Employer to Fifth Third Processing Solutions, LLC (or a member of the same controlled group of businesses (within the meaning of section 414(c) of the Code) as Fifth Third Processing Solutions, LLC) shall not be considered to have a severance from employment (or termination of employment) which would entitle him to a distribution under this Plan. Therefore, such a Transferred Employee does not have a distributable event under Section 8.4 of the Plan and shall not be entitled to a distribution under this Plan. In addition, a Transferred Fifth Third Employee shall not be considered to have retired or to be an Eligible Participant under Section 4.2(c) and so will not be eligible for an allocation of the Employer contribution under Section 4.2 for the Plan Year in which his employment transfers.
AXXVI-2
Exhibit 10.6
FIRST AMENDMENT
TO
THE FIFTH THIRD BANCORP MASTER
PROFIT SHARING PLAN
(as amended and restated effective as of September 20, 2010)
Pursuant to the reserved power of amendment contained in Section 12.1 of The Fifth Third Bancorp Master Profit Sharing Plan (as amended and restated effective as of September 20, 2010) (the Plan), the Plan is hereby amended effective September 20, 2010 by changing Section 3.4(a) of the Plan to read as follows:
(a) Ineligible Class of Employees . Notwithstanding anything to the contrary in this Article 3 or in Article 4, during the time that an Employee falls within one or more of the following classes of Employees, he shall not be eligible to participate in the Plan, or to make or receive allocations of contributions or forfeitures under the Plan:
(1) a nonresident alien who is not paid through the Employers primary United States payroll system and who receives no earned income from the Employer which constitutes United States source income, or who does receive such income if all of such income is exempt from United States income tax under an applicable income tax convention; or
(2) an Employee who is not paid through the Employers primary United States payroll system and whose position is located primarily (as determined by the Employer) outside the United States.
IN WITNESS WHEREOF, Fifth Third Bank has caused this Amendment to be adopted as of this 12 th day of May, 2011.
FIFTH THIRD BANK | ||
BY: | /s/ Paul L. Reynolds |
Exhibit 10.8
Amended and Restated
Fifth Third Bancorp
1993 Stock Purchase Plan
The FIFTH THIRD BANCORP 1993 STOCK PURCHASE PLAN (the Plan) is hereby amended and restated effective August 1, 2009 pursuant to the direction of the Board of Directors of Fifth Third Bancorp, an Ohio corporation (Company), subject to the approval of the shareholders of the Company. All capitalized terms not otherwise defined have the meaning set forth in Section 21 of this Plan.
1. | Purpose. The purpose of the Plan is to facilitate the purchase of the Companys Common Stock by Company employees on terms and conditions that enhance the ability of the employees to acquire a financial interest in the Company. The Company believes that employee ownership will promote productivity and encourage continued growth of the Company for the mutual benefit of the Companys employees and shareholders. |
2. | Eligibility. Any full-time or part-time Employee of the Company or any Subsidiary who is at least eighteen years of age is eligible to participate in the Plan upon hire. The Companys Directors and executive officers (as defined by the rules and regulations of the Securities and Exchange Commission) are not eligible to participate in the Plan |
3. | Number of Shares of Common Stock Subject to Plan. The total number of shares of Common Stock that may be purchased under the Plan from and after January 1, 2004 shall not exceed, in the aggregate, 14,500,000 shares of Common Stock (subject to adjustment as set forth below). If the number of shares of Common Stock outstanding is hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of (a) any reorganization, merger, consolidation, recapitalization, reclassification, stock split, reverse stock split, combination of shares, or dividend payable in shares of Common Stock, or (b) any other similar corporate transaction or event that affects the Common Stock such that an adjustment is determined, by the Board of Directors in its sole discretion, to be appropriate to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the number of shares of Common Stock that may be purchased under this Plan shall be increased or decreased proportionately, and/or the different kind of shares or other securities of the Company or of another corporation shall be substituted, as the case may be. |
4. |
Participation; Payroll Deduction. Any eligible Employee may become a participant in the Plan by enrolling via the mechanism designated by the Company at any time. The enrollment mechanism will authorize and instruct the Company to deduct from the Employees Compensation each pay period a certain uniform dollar amount of Compensation as specified by the |
Employees deduction authorization. All Payroll Deductions must be at least $5.00 per pay period. The maximum Payroll Deduction for each Participant is 10 percent of the Participants Compensation not to exceed $26,000 in any calendar year, provided the remaining Compensation of the Participant is sufficient to pay all payroll taxes, withholdings and any other payroll deductions. Payroll Deductions will be effective with pay checks issued not later than the second pay date following enrollment. Thereafter, the Payroll Deduction will be made on each pay day for each applicable pay period. The dollar amount of Payroll Deduction may be changed at any time and may be terminated at any time upon seven days prior notice via a change to the election on HR Direct Online bythe Participant. |
5. | Purchase of Common Stock. As soon as administratively possible, usually the next business day, the Company will remit to the Custodian the total of all Payroll Deductions related to the immediately preceding pay period plus an additional amount payable by the Company equal to 15 percent of the total of all such payroll deductions. The Custodian will then apply such aggregate amount to the purchase in the open market, through securities brokers/dealers who are members of the National Association of Securities Dealers, Inc. and who are duly licensed to buy and sell securities in each state in which there are Participants, as many whole shares of Common Stock as may be purchased with such funds at the then prevailing Fair Market Value. Purchases of Common Stock will be completed as soon as administratively possible, usually the next business day, following receipt by the Custodian of such Payroll Deductions. Failure to so timely purchase Common Stock will not subject the Custodian to reimbursement for any damages a Participant might suffer as a result of any delay in purchasing Common Stock. On at least an annual basis, the Custodian will provide each Participant with a report as to the total number of shares of Common Stock allocated to his or her Account as of the last day of the reporting period. |
6. |
Custody; Delivery of Common Stock. Shares of Common Stock purchased under the Plan will be allocated to the respective Accounts of the Participants at the end of each pay period in proportion to the contributions made by each Participant. Allocations will be made in full shares and in fractional shares to the sixth decimal place. The Custodian will hold shares for the Common Stock purchased in its nominee name until any such shares are distributed to the Participant. Pursuant to section 11, upon written request of a Participant to the Company at any time, all or part of the whole shares of Common Stock credited to the Participants Account will be registered in the Participants name promptly and delivered to the Participant. Fractional shares will not be issued. Instead, fractional shares which have been credited to the Participants Account will be converted in to cash by the Custodian at the then prevailing Fair Market Value on the sale date and promptly paid to the Participant in cash. The Participant may also request, at any time, for all or part of their |
2
shares to be sold or transferred. There is a $.06 per share trading/execution fee ($15 minimum) to be paid by the participant if a request for a sale is made via the Custodians website and a $.06 per share ($40 minimum) fee for customer service assisted sales. |
7. | Participant Rights in Common Stock. Each Participant will have all the rights of a shareholder of the Company with respect to the shares of Common Stock allocated to the Participants Account. Such rights include without limitation the right to vote such shares and the right to receive all distributions of cash or other property with respect to such shares. In addition, appropriate adjustments will be made in the number of shares credited to Participants Accounts to give effect to any stock dividends, stock splits, recapitalizations and similar changes. |
8. | Dividend Reinvestment. Any cash dividends on the Common Stock, if and when declared and received by the Custodian with respect to shares held by the Plan, will be credited to the Participants in proportion to the number of shares of Common Stock held by the Custodian for the Participants Account on the dividend record date. Any cash dividends received by the Custodian with respect to Common Stock held under the Plan shall be applied toward the purchase for the Accounts of all Participants under the Plan of additional shares of Common Stock as soon as administratively possible, usually the next business day following the date of receipt of the dividend. |
9. | Voting. All shares, including fractional shares, of Common Stock in each Participants Account will be voted in accordance with proxy instructions duly delivered to the Custodian by the respective Participant. Each Participant may instruct the Custodian how to vote the shares credited to the Participants Account and the Custodian will vote such shares accordingly. In the event no voting instructions are provided, the Custodian shall vote the shares in the same proportion as the shares held under the Plan for which the Custodian receives voting instructions. |
10. | No Interest. No Participant shall be entitled, at any time, to any payment or credit for interest with respect to or on the Payroll Deductions contemplated herein, or on any other assets held hereunder for the Participants Account. |
11. |
Suspension of Payroll Deductions. Pursuant to section 6, a Participant may request the transfer of all or a portion of his or her whole shares in the Plan from such Participants Account. Upon such request, the Participants Payroll Deductions shall be suspended for a period of six months commencing on the date the shares are transferred to the Participant. Upon the expiration of the six-month suspension period, the Employee may re-enroll in the Plan by enrolling on HR Direct Online pursuant to section 6. Notwithstanding the foregoing, a Participant may request delivery of the shares in his or her |
3
Account for the purpose of exercising stock options, as granted by Fifth Third Bancorp under its stock option plans, without becoming subject to a suspension period. As contemplated by Section 15, the Companys Board of Directors has designated the Pension and Profit Sharing Committee the Administrator of the Plan. The Administrator may from time to time also adopt other rules and procedures relating to partial terminations and/or other matters. |
12. |
Termination of Participation. A Participants participation in the Plan shall terminate on the Participants pay date for the pay period in which one of the following occurs: (a) a Participants death or termination of employment; (b) discontinuance of the Plan by the Company; or (c) the Participants written election to terminate participation in the Plan is received by the Company. Within 90 days following termination, a Participant may elect to sell, transfer or certificate the shares credited to the Participants Account. There is a $.06 per share ($15 minimum) fee to be borne by the participant for all sales via the Custodians website. Customer service assisted sales are $.06 per share ($40 minimum), to be borne by the participant. If no election has been made on or before the 90 th day following the Participants termination, the total number of whole shares of Common Stock credited to the Participants Account will be transferred to the Participant or in the event of death to the Participants legal representative. The Custodian will deliver these shares to the Participant or legal representative promptly. Fractional shares which have been credited to the Participants Account will be converted in to cash by the Custodian at the then prevailing Fair Market Value on the sale date and promptly paid to the Participant in cash. If such request to terminate falls between the record date and payable date of a dividend or stock split, the transfer of whole shares and the sale of fractional shares will be processed after the payable date of the dividend. |
13. | Designation of Custodian. The Company has designated AST Equity Plan Solutions, a division of American Stock Transfer and Trust Company, LLC, as the Custodian subject to the Companys right to terminate the designation at any time and appoint a successor Custodian. |
14. | Plan Expenses. The charges of the Custodian and all costs of maintaining records, administering the Plan and executing transfers by the Custodian will be borne by the Company with the exception of trading/execution fees via the Custodians website which are $.06 per share ($15 minimum) or customer service assisted trading/execution fees of $.06 per share ($40 minimum). These fees are to be borne by the Participant. |
15. |
Administration of Plan. The Board of Directors of the Company shall appoint the Pension and Profit Sharing Committee to serve as Administrator of the Plan. The duties of the Administrator will be to announce the existence |
4
of the Plan; to provide employees with copies of the Plan and Payroll Deduction authorization instructions; to supervise Payroll Deductions; to forward Payroll Deductions to the Custodian; to provide the Custodian with names and addresses of employees to facilitate communications regarding the Plan; and, if requested by the Custodian, to address and distribute communications to employees from the Custodian. |
The Board of Directors of the Company shall be vested with full authority to make and interpret all rules and regulations as it deems necessary for the Administrator to administer the Plan. Any determination, decision or act of the Board of Directors with respect to any action in connection with the construction, interpretation, or application of the Plan shall be final and binding upon all Employees, Participants, and all persons claiming under or through them.
16. | Limitation of Activities. Neither the Administrator nor any other employee or representative of the Company or a Subsidiary shall solicit Employees to participate in the Plan, render investment advice of any kind or perform any function or activity relative to the Plan except the specified duties of the Administrator set forth in paragraph 15 above. All questions of Participants regarding administration of the Plan shall be directed solely to the Administrator, and any questions relating to investment advice shall be directed solely to the Participants personal advisors. |
17. | Term of Plan; Amendments. The Plan is effective on the date hereof and has no fixed expiration date, however, the Plan may be amended or discontinued by the Board of Directors of the Company at any time. The Plan is intended to be a permanent program, but the Board or Directors of the Company shall have the right at any time to declare the Plan terminated completely as to it or as to any Subsidiary. No amendment may make any change in any right previously granted which would adversely affect the rights of any Participant. |
18. | Nonguaranty of Employment. The Plan is strictly a voluntary undertaking on the part of the Company and shall not constitute a contract between the Company or any Subsidiary and any Employee, or consideration for an inducement or a condition of, the employment of an Employee. Nothing contained in the Plan shall give any Employee the right to be retained in the service of the Company or any Subsidiary or to interfere with or restrict the right of the Company or any Subsidiary, which right is hereby expressly reserved, to discharge or retire any Employee at any time, with or without cause and with or without notice. Participation in the Plan will not give any Employee any right or claim to any benefits hereunder except to the extent such right has specifically become fixed under the terms of the Plan. |
5
19. | Governmental Approvals. Implementation and continuation of the Plan and the transactions contemplated hereby shall be subject to the Company obtaining any registration or qualification under any federal or state law or obtaining the consent or approval of any governmental regulatory body which the Company shall determine, in its sole discretion, is necessary or desirable as a condition to, or in connection with, the operation of the Plan. |
20. | Section Headings. Section headings are provided herein for convenience only and are not to serve as the basis for interpretations or construction of the Plan. |
21. | Definitions: |
(a) | Account means that separate account maintained for each Participant under the Plan, which account shall be credited with the Participants Payroll Deduction, charged for the purchases of Common Stock for that Participant under the Plan, and allocated that number of shares of Common Stock as have been acquired with Payroll Deductions contributed by the Participant. Each Account shall be the property of the Participant for whom it is maintained and shall be nonforfeitable at all times. |
(b) | Business Day means a day in which the, NASDAQ Global Select Market System, or such other market system or exchange on which the Common Stock is then primarily traded, is open for business. |
(c) | Common Stock means the common stock, no par value, of the Company. |
(d) | Compensation means the Employees Benefits Salary as that term is defined from time to time by the Compensation Committee of the Board of Directors of the Company. |
(e) | Custodian means that person or entity appointed by the Company in its sole discretion from time to time to take responsibility for safekeeping of the funds paid in to the Plan and of the Common Stock purchased under the Plan. |
(f) | Employee means an individual who renders services to the Company or any Subsidiary as a common law employee or officer (i.e., a person whose wages from the Company or any Subsidiary are subject to federal income tax withholding). A person rendering services to the Company or any Subsidiary as an independent contractor is not an Employee. |
(g) |
Fair Market Value means the price(s) at which the Custodian is able to purchase Common Stock on the NASDAQ Global Select Market System, |
6
or such other market system or exchange on which the Common Stock is then primarily traded, on the purchase date. |
(h) | Participant means any Employee who is eligible to participate in the Plan and who authorizes Payroll Deductions under the Plan pursuant to Section 4 of the Plan. |
(i) | Payroll Deduction means the amount of Compensation authorized by a Participant to be deducted from his Compensation under the Plan. |
(j) | Subsidiary means any corporation, partnership, trade or business which is wholly owned, directly or indirectly, by the Company. |
Executed as of August 1, 2009 | ||
FIFTH THIRD BANCORP | ||
By: | /s/ Kevin T. Kabat | |
Kevin T. Kabat | ||
President & Chief Executive Officer |
7
Exhibit 10.10
THE FIFTH THIRD BANCORP
NONQUALIFIED DEFERRED COMPENSATION PLAN
(as amended and restated effective as of January 1, 2009)
THE FIFTH THIRD BANCORP
NONQUALIFIED DEFERRED COMPENSATION PLAN
(as amended and restated effective as of January 1, 2009)
ARTICLE I INTRODUCTION AND SECTION 409A COMPLIANCE
1.1 | Amendment and Restatement . Fifth Third Bancorp most recently amended and restated The Fifth Third Bancorp Nonqualified Deferred Compensation Plan in its entirety effective November 1, 2007. Fifth Third Bancorp hereby again amends and restates the Plan effective January 1, 2009. |
1.2 | Transition Rules under Section 409A . |
(a) | 2005 Payment Elections . In accordance with Paragraph 10.3, the Committee allowed new payment elections under Article X in 2005 which, for purposes of Article X, were treated as a Participants timely initial election under Paragraph 10.2(a) and not as a change in election under Paragraph 10.2(c). Any such election shall be administered by the Committee in its sole and absolute discretion and in compliance with Internal Revenue Service Notice 2005-1 and any other applicable legal authority. |
(b) | 2007 and 2008 Payment Elections . In its discretion, the Committee may allow a Participant who remains actively employed by an Employer to complete a new payment election under Paragraph 10.1 by a date in 2007 or 2008 determined by the Committee. The Committee may allow such an election on a case-by-case basis in its discretion without being required to extend the opportunity to all Participants. Any such election shall be treated as an initial election under Paragraph 10.2(a) and not a change under Paragraph 10.2(c). Any such election shall be administered by the Committee in compliance with Internal Revenue Service Notice 2006-79 (for elections in 2007) and Notice 2007-86 (for elections in 2008) and any other applicable legal authority. |
(c) | 2007 Performance Based Restricted Stock Deferral . In accordance with Paragraph 4.4, the Committee shall administer deferral elections with respect to certain Performance Based Restricted Stock in 2007. Any such election shall be administered by the Committee in its sole and absolute discretion and in compliance with Internal Revenue Service Notice 2006-79 and any other applicable legal authority. |
(d) |
Required 2008 Payment Elections by Active Participants . A Participant who, as of the first day of the Open Enrollment Period in 2008, is actively employed by an Employer (i.e., has not had a Separation from Service) shall be required to complete a new payment election under Paragraph 10.1 by a date in 2008 determined by the Committee. Any such election shall be treated as an initial |
election under Paragraph 10.2(a) and not a change under Paragraph 10.2(c). If such a Participant does not make a timely election in 2008 under this Paragraph 1.2(d), payment shall be made (consistent with Paragraph 10.2(b)) as of the first business day of August of the Plan Year immediately following the Plan Year in which the Separation from Service occurs in a single lump sum cash distribution (except as provided in Paragraph 10.2(c) in the case of a valid change in payment election). Any prior payment elections by such a Participant shall have no force and effect. |
ARTICLE II- DEFINITIONS
2.1 | Account shall mean the account established by an Employer as a book reserve to reflect the amounts credited to a Participant under this Plan. A Participants Account under the Plan may include one or more of the following subaccounts: |
(a) | Deferred Compensation Account. |
(b) | Matching Account. |
(c) | Predecessor Plan Account. |
(d) | Profit Sharing Account. |
2.2 | Beneficiary shall mean the person or persons entitled to receive the distributions, if any, payable under the Plan upon or after a Participants death, to such person or persons as such Participants Beneficiary. Each Participant may designate a Beneficiary by filing the proper form with the Committee. A Participant may designate one or more contingent Beneficiaries to receive any distributions after the death of a prior Beneficiary. A designation shall be effective upon said filing, provided that it is so filed during such Participants lifetime, and may be changed from time to time by the Participant. |
2.3 | Claims Review Committee shall mean the committee established by the Committee for purposes of administering the claims and claim review procedures under the Plan. |
2.4 | Code shall mean the Internal Revenue Code of 1986, as amended at the particular time applicable. A reference to a section of the Code shall include said section and any comparable section or sections of any future legislation that amends, supplements or supersedes said section. |
2.5 | Committee shall mean The Fifth Third Bank Pension, Profit Sharing and Medical Plan Committee which is responsible for the administration of this Plan in accordance with the provisions of the Plan as set forth in this document. A reference to the Committee includes its delegate. |
2.6 |
Compensation shall mean the total base earnings plus variable compensation (but excluding performance-based, additional cash compensation incentives) paid by an |
- 2 -
Employer to a Participant or which would otherwise be paid but for a deferral election hereunder. |
2.7 | Deferred Compensation Account shall mean the account established by an Employer as a book reserve to reflect the amounts deferred by a Participant under Paragraphs 4.1 and 4.2, as adjusted by earnings (and losses) under Article VIII and as reduced by distributions under Article X and Article XI. |
2.8 | Effective Date shall mean January 1, 2009. |
2.9 | Employer shall mean Fifth Third Bank, an Ohio Banking Corporation, and any other subsidiary of Fifth Third Bancorp or any successor or assignee of any of them. |
2.10 | Executive shall mean an employee of an Employer who is employed on a full-time basis and who is a Bank President, Bank Executive Vice President, Bank Senior Vice President or Bank Vice President. |
2.11 | Grandfathered Participant shall mean a Participant (other than an individual who is a Participant under Paragraph 2.16(b)) whose service with all Employers terminated prior to September 1, 1999. |
2.12 | Key Employee shall mean an employee of an Employer who is employed by an Employer on a full-time basis and who is in Pay Band A, B, C, D, P or Q, as determined by Fifth Third Bancorp. |
2.13 | Master Profit Sharing Plan shall mean The Fifth Third Bancorp Master Profit Sharing Plan, as amended from time to time. |
2.14 | Matching Account shall mean the account established by an Employer as a book reserve to reflect the amounts credited by an Employer as matching contributions under Article V, as adjusted by earnings (and losses) under Article VIII and as reduced by distributions under Article X and Article XI. |
2.15 | Open Enrollment Period shall mean such period no more than thirty (30) days in length prescribed by the Committee, closing no later than the last day of the Plan Year immediately preceding the Plan Year for which elections to defer Compensation under Article IV are permitted. |
2.16 | Participant shall mean any of the following: |
(a) | any Executive or Key Employee who satisfies the eligibility requirements of Article III and who receives an allocation to his Account under Article IV, Article V, or Article VI, as well as any former Executive or Key Employee who has an Account under the Plan; or |
(b) | any person who has a Predecessor Plan Account attributable to his employment covered by a Predecessor Plan. |
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2.17 | Performance Based Restricted Stock shall mean common stock without par value of Fifth Third Bancorp, granted under the 2004 Fifth Third Bancorp Incentive Compensation Plan, or any successor plan, subject to the satisfaction of specified performance goals, provided the grant is not includible in the income of the recipient in the year of grant for federal income tax purposes (and the recipient does not make an election under section 83(b) of the Code to include the grant in income in the year of the grant). |
2.18 | Plan shall mean The Fifth Third Bancorp Nonqualified Deferred Compensation Plan as described in this instrument, and as may be amended, thereafter. |
2.19 | Plan Year shall mean the calendar year. |
2.20 | Predecessor Plan shall mean any other nonqualified deferred compensation plan designated by the Committee. Each such Predecessor Plan was completely amended and restated into this Plan. |
2.21 | Predecessor Plan Account shall mean an account established by the Employer as a book reserve to reflect amounts credited hereunder with respect to a Predecessor Plan, as adjusted by earnings (and losses) under Article VIII and as reduced by distributions under Article X and Article XI. Previously, the Plan maintained a Predecessor Plan Diversified Account separate from a Predecessor Plan Stock Account to reflect differing investment rights. The Predecessor Plan Account is the successor to each of these prior subaccounts now that the investment rights no longer differ. |
2.22 | Profit Sharing Account shall mean the account established by an Employer as a book reserve to reflect the amounts credited by an Employer as profit sharing contributions under Article VI, as adjusted by earnings (and losses) under Article VIII and as reduced by distributions under Article X and Article XI. |
2.23 | Qualified Executive shall mean an employee of an Employer (a) who is an Executive, (b) who was an Executive for the 2007 Plan Year, and (c) who had a Compensation deferral election in effect under the Plan for the 2007 Plan Year and thereafter. An individual meeting this criteria shall no longer be considered a Qualified Executive if, at any time and for any reason (including termination of employment and voluntary decision to cease deferring), he no longer has a Compensation deferral election in effect. |
2.24 |
Separation from Service means the termination of employment with all Employers. Whether a termination of employment has occurred shall be determined based on whether the facts and circumstances indicate that the Employer and Participant reasonably anticipate that no further services would be performed after a certain date or that the level of bona fide services would permanently decrease to no more than 20 percent of the average level of bona fide services performed over the immediately preceding 36-month period (or the full period of employment if the Participant has been employed by an Employer less than 36 months). A Participant is not treated as having terminated employment while he is on military leave, sick leave or other bona fide leave of absence |
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if the period of such leave does not exceed six months, or if longer, so long as the individual retains a right to reemployment under an applicable statute or by contract. The determination of whether a Separation of Service has occurred shall be based on applicable regulations and other applicable legal authority under section 409A of the Code. |
ARTICLE III ELIGIBILITY AND PARTICIPATION
3.1 | For Plan Years Before 2008 . Eligibility and participation shall be determined in accordance with this Paragraph 3.1 for Plan Years beginning before January 1, 2008. Each individual who is an Executive on the first day of an Open Enrollment Period: |
(a) | may elect to defer Compensation for services performed during the ensuing Plan Year to which the Open Enrollment Period relates, in accordance with Article IV; and |
(b) | shall be eligible for matching allocations under Article V and profit sharing allocations under Article VI for the Plan Year in which such Open Enrollment Period falls. |
An individual who is not an Executive on the first day of an Open Enrollment Period but who later becomes an Executive shall not be eligible to elect to defer Compensation until the first day of the next Open Enrollment Period with respect to which he is still an Executive (for the Plan Year to which such next Open Enrollment Period relates); and he shall not be eligible for matching or profit sharing allocations until the Plan Year containing the next Open Enrollment Period as of the first day of which he is an Executive.
3.2 | For Plan Year 2008 . Eligibility and participation shall be determined in accordance with this Paragraph 3.2 for the 2008 Plan Year. Each individual who, on the first day of the Open Enrollment Period relating to the 2008 Plan Year, is either a Key Employee or a Qualified Executive: |
(a) | may elect to defer Compensation for services performed during the 2008 Plan Year, in accordance with Article IV; and |
(b) | shall be eligible for matching allocations under Article V and profit sharing allocations under Article VI for the Plan Year in which such Open Enrollment Period falls. |
An individual who is not a Key Employee or a Qualified Executive on the first day of an Open Enrollment Period but who later becomes a Key Employee shall not be eligible to defer Compensation until the first day of the next Open Enrollment Period with respect to which he is still a Key Employee (for the Plan Year to which such next Open Enrollment Period relates); and he shall not be eligible for matching or profit sharing allocations until the Plan Year containing
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the next Open Enrollment Period as of the first day of which he is a Key Employee.
A Qualified Executives eligibility for matching allocations under Article V and profit sharing allocations under Article VI may be limited to the amount his allocations under the Master Profit Sharing Plan are reduced by reason of his Compensation deferrals under this Plan.
3.3 | For Plan Years 2009 and Later . Eligibility and participation shall be determined in accordance with this Paragraph 3.3 for Plan Years beginning on or after January 1, 2009. Each individual who, on the first day of an Open Enrollment Period relating to the 2009 Plan Year or a later Plan Year, is either a Key Employee or a Qualified Executive: |
(a) | may elect to defer Compensation for services performed during the ensuing Plan Year to which the Open Enrollment Period relates, in accordance with Article IV; and |
(b) | shall be eligible for matching allocations under Article V and profit sharing allocations under Article VI for the ensuing Plan Year to which such Open Enrollment Period relates. |
An individual who is not a Key Employee or a Qualified Executive on the first day of an Open Enrollment Period but who later becomes a Key Employee shall not be eligible to defer Compensation until the first day of the next Open Enrollment Period with respect to which he is still a Key Employee (for the Plan Year to which such next Open Enrollment Period relates); and he shall not be eligible for matching or profit sharing allocations until the Plan Year following the next Open Enrollment Period as of the first day of which he is a Key Employee.
A Qualified Executives eligibility for matching allocations under Article V and profit sharing allocations under Article VI may be limited to the amount his allocations under the Master Profit Sharing Plan are reduced by reason of his Compensation deferrals under this Plan.
3.4 | Eligibility for Deferral of Performance Based Restricted Stock . If the Committee allows a Key Employee to make a deferral election during an Open Enrollment Period with respect to Performance Based Restricted Stock granted during the ensuing Plan Year, as provided in Paragraph 4.2(a)(i), a Key Employee would be eligible to make such a deferral election only if he is a Key Employee on the first day of the applicable Open Enrollment Period. If the Committee allows a Key Employee to make a deferral election during an election period it establishes during the year of the grant of Performance Based Restricted Stock, as provided in Paragraph 4.2(a)(ii), a Key Employee could be eligible to make such a deferral election only if he is a Key Employee on the first day of the applicable election period established by the Committee. |
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ARTICLE IV - ELECTION TO DEFER COMPENSATION OR RESTRICTED STOCK
4.1 | Compensation Deferral |
(a) | Compensation Deferral . Each Key Employee and Qualified Executive (Executive, for Plan Years before 2008) eligible under Article III may elect to have a portion of his Compensation for services performed during a Plan Year deferred and credited with earnings in accordance with the terms and conditions of the Plan. The amount of Compensation deferred for any Plan Year by a Participant may not reduce the amount of base pay such Participant receives in a Plan Year below $50,000. |
(b) |
Implementation . The Compensation otherwise payable to the Participant during the Plan Year shall be reduced by the amount of the Participants election under this Paragraph 4.1. Such amounts shall be credited to the Participants Deferred Compensation Account at the time his Compensation is so reduced. For purposes of this Paragraph 4.1, base earnings payable after December 31 st solely for services performed during the final payroll period containing such December 31 st , shall be treated as Compensation for services performed in the subsequent taxable year in which the payment is made. |
4.2 | Performance Based Restricted Stock Deferral . |
(a) | Deferral of Performance Based Restricted Stock . |
(i) | During Open Enrollment . The Committee may allow each Key Employee eligible under Article III to elect to have all (and not less than all) eligible Performance Based Restricted Stock granted to him during the ensuing Plan Year to which an Open Enrollment Period relates to be deferred and credited with earnings in accordance with the terms and conditions of the Plan. |
(ii) | During Year of Grant . With respect to Performance Based Restricted Stock meeting the requirements of Paragraph 4.2(b)(ii) below, the Committee may allow each Key Employee to elect to have all (and not less than all) eligible Performance Based Restricted Stock granted to him during the Plan Year of the grant to be deferred and credited with earnings in accordance with the terms and conditions of the Plan. The Committee shall determine, the period within the Plan Year of the grant, during which such a deferral election must be made subject to the following: |
(A) |
the election must be made on or before the 30 th day after the grant; and |
(B) |
the election must be made at least twelve (12) months in advance of the earliest date at which the forfeiture restrictions could lapse. A condition will not be treated as failing this requirement merely |
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because the Performance Based Restricted Stock becomes fully vested such that there is no further requirement of services upon the death or disability (as defined in applicable Treasury Regulations) of the Key Employee or upon a change in control event (as defined in applicable Treasury Regulations). However, if such death, disability or change in control event occurs before the end of twelve (12) months of service, the deferral election shall not be given effect. |
(b) | Eligible Performance Based Restricted Stock . Performance Based Restricted Stock is eligible for deferral under (a)(i) above pursuant to an election during the Open Enrollment Period if it meets one or both of the conditions in (i) and (ii) below. Performance Based Restricted Stock is eligible for deferral under (a)(ii) above pursuant to an election during the Plan Year of the grant only if it meets the conditions in (ii) below. |
(i) | The Performance Based Restricted Stock is granted solely for services performed during the Plan Year in which the grant occurs or future services (but not for any past services); or |
(ii) | The Performance Based Restricted Stock is granted subject to a requirement that the Key Employee continue to provide services for a period of at least twelve (12) months from the date of the grant in order to avoid forfeiture of such Performance Based Restricted Stock. A condition will not be treated as failing this requirement merely because the Performance Based Restricted Stock becomes fully vested such that there is no further requirement of services upon the death or disability (as defined in applicable Treasury Regulations) of the Key Employee or upon a change in control event (as defined in applicable Treasury Regulations). However, if such death, disability or change in control event occurs before the end of twelve (12) months of service, the deferral election shall not be given effect. |
(c) | Implementation . At such time as any eligible Performance Based Restricted Stock subject to a deferral election becomes both earned and vested according to the terms of the grant and plan under which it was granted, such Performance Based Restricted Stock shall be deemed to be credited to the Participants Deferred Compensation Account rather than being released in a taxable event to the Key Employee. Performance Based Restricted Stock which is not earned or which is forfeited shall not be deemed credited under this Plan. |
(d) |
Deemed Investment in Fifth Third Stock Fund . Amounts credited to a Participants Deferred Compensation Account pursuant to an election to defer Performance Based Restricted Stock shall be credited with earnings (or losses) under Article VIII as if invested in the Fifth Third Stock Fund. The other |
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investment benchmarks generally available under Article VIII are not available for such amounts which must remain in the Fifth Third Stock Fund. |
(e) | Dividends on Unvested Performance Based Restricted Stock . Any dividends payable with respect to Performance Based Restricted Stock prior to such time as the Performance Based Restricted Stock is earned or vested, shall not be eligible for deferral hereunder. |
4.3 | Election Procedure . An eligible Key Employee or Qualified Executive (Executive, for Plan Years before 2008) desiring to exercise an available election under Paragraph 4.1 or 4.2 for a Plan Year shall notify the Committee each Plan Year of his deferral election during the Open Enrollment Period or other election period established by the Committee under Paragraph 4.2(a)(ii). Such notice must be in writing, on a form provided by the Committee, and delivered to the Committee during the applicable election period. A deferral election shall be effective for the entire Plan Year (but not for any future Plan Year) to which it relates and may not be modified or terminated for that Plan Year. A deferral election with respect to Performance Based Restricted Stock shall be effective for the entire grant regardless of the future year(s) in which the forfeiture restrictions lapse; and an election with respect to such grant may not be modified or terminated. |
4.4 | 2007 Election to Defer Non-Vested Performance Based Restricted Stock . The Committee may allow an individual who, on the first day of the Open Enrollment Period falling in 2007 (relating to the 2008 Plan Year), is a Key Employee, to elect to defer Performance Based Restricted Stock previously granted to him, in accordance with the following provisions and Internal Revenue Service Notice 2006-79, Section 3.02. Any such deferral election must be completed by a date in 2007 determined by the Committee. Such a deferral election may be made and given effect only with respect to Performance Based Restricted Stock which has always been subject to a substantial risk of forfeiture (as defined for purposes of section 409A of the Code) and which remains subject to a substantial risk of forfeiture throughout 2007 (i.e., the substantial risk of forfeiture has not lapsed and does not lapse in 2007). Such an election shall be treated as a valid and timely election under Paragraph 4.2(a), and Paragraphs 4.2(c), (d) and (e) (but not Paragraph 4.2(b)) shall apply. |
ARTICLE V- MATCHING ALLOCATIONS
5.1 | Matching Allocations . An Employer, in its discretion, may credit a matching allocation to the Matching Account of any Key Employee or Qualified Executive (Executive, for Plan Years before 2008) eligible under Article III it selects provided: |
(a) | he remains in the employment of an Employer as a Key Employee or Qualified Executive (Executive, for Plan Years before 2008) (or is on an Employer-approved leave of absence) on the date the Committee determines to credit the allocation; and |
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(b) | he either has a Compensation deferral election in effect under Paragraph 4.1 for the Plan Year, or has Annual Compensation (as defined in the Master Profit Sharing Plan) in the corresponding Plan Year of that plan in excess of the compensation limitation imposed by section 401(a)(17) of the Code. |
The matching allocations for such selected Participants shall be determined by the Employer and may vary for each such Participant. The amount of the matching allocations as so determined under this paragraph shall be credited to the Participants Matching Accounts as of the last day of the Plan Year, or at such other time or times determined by the Committee.
ARTICLE VI- PROFIT SHARING ALLOCATIONS
6.1 | Profit Sharing Allocations . An Employer, in its discretion, may credit a profit sharing allocation to the Profit Sharing Account of any Key Employee or Qualified Executive (Executive, for Plan Years before 2008) eligible under Article III it selects for a Plan Year provided he remains in the employment of an Employer as a Key Employee or Qualified Executive (Executive, for Plan Years before 2008) (or is on an Employer-approved leave of absence) on the date the Committee determines to credit the allocation. |
The profit sharing allocations for such selected Participants shall be determined by the Employer and may vary for each such Participant. The amount of the profit sharing allocations as so determined under this paragraph shall be credited to the Participants Profit Sharing Accounts as of the last day of the Plan Year, or at such other time or times determined by the Committee.
ARTICLE VII- PARTICIPANTS INTEREST
7.1 | Unsecured Creditor . No Participant or his designated Beneficiary shall acquire any property interest in his Account or any other assets of the Employer or Fifth Third Bancorp, their rights being limited to receiving from the Employer or Fifth Third Bancorp deferred payments as set forth in this Plan and these rights are conditioned upon continued compliance with the terms and conditions of this Plan. To the extent that any Participant or Beneficiary acquires a right to receive benefits under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Employer or Fifth Third Bancorp. |
ARTICLE VIII- CREDITING OF EARNINGS
8.1 | General . There shall be credited to the Account of each Participant an additional amount of earnings (or losses) determined under this Article VIII. |
8.2 |
Investment Elections . As provided in Paragraph 4.2(d), that part of a Participants Account credited with deferred Performance Based Restricted Stock shall be credited with earnings (or losses) as if invested in the Fifth Third Stock Fund. Each Participant |
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shall elect to have earnings (or losses) credited to all other parts of his Account from among various investment benchmarks the Committee determines to establish for this purpose. One of such investment benchmarks shall be the Fifth Third Stock Fund. |
Such an election shall be made in such manner as the Committee shall direct.
The Committee may prescribe rules including rules which limit the frequency of changes to elections, prescribe times for making elections, regulate the amount or increment a Participant may allocate to a particular investment benchmark, require or allow an election (or election change) to relate only to future allocations, require an election to apply consistently to all subaccounts and provide for the investment of an Account of a Participant who fails to make an election.
8.3 | Rate of Return Benchmarks . The Committee shall determine the rate of return for the Fifth Third Stock Fund, as well as each of the other investment benchmarks selected by the Committee under Paragraph 8.2 above. |
8.4 | Crediting . The Participants Account shall be increased or decreased as if it had earned the rate of return corresponding to the Participants investment election. The time and method of such crediting and the recordkeeping methodologies used shall be determined in the sole and absolute discretion of the Committee. |
ARTICLE IX VESTING
9.1 | Vesting Provisions . A Participants rights to his Account (including each of its subaccounts) shall be nonforfeitable at all times. |
ARTICLE X- PLAN BENEFITS
10.1 | Distributions . |
(a) | Time and Form of Payment . In accordance with the election procedures in Paragraph 10.2, a Participant may elect to have the amounts represented by the Participants vested Account paid (or commence to be paid) as of the first business day of August of the Plan Year immediately following the Plan Year in which the Participants Separation from Service with all Employers occurs, or the first business day of August of any subsequent year, but not later than the first business day of August of the tenth Plan Year following the Plan Year in which such Separation from Service occurs. In accordance with the election procedures in Paragraph 10.2, a Participant may elect to have such amounts paid in one of the following forms: |
(i) | single lump sum distribution; or |
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(ii) | substantially equal annual installments, the last payment of which is no later than the first business day of August of the tenth Plan Year following the Plan Year in which such Separation from Service occurs. |
If installment payments are in effect, the Participants Account shall continue to be credited with earnings (or losses) under Article VIII until fully paid.
Notwithstanding the foregoing or Paragraph 10.3(a), (b) or (c), effective December 31, 2005, in the event the Participants vested Account does not exceed $25,000 as of any December 31 st after the Participant has a Separation from Service, then any payment election by a Participant shall be disregarded. In such a case, the vested Account (or remaining balance thereof) shall be paid in a single lump sum distribution as of the first business day of August following such December 31 st (even if such vested Account exceeds $25,000 at that time).
(b) | Medium of Payment . The payment as a lump sum or installments under (a) above or 10.3 shall be in cash. Previously, the Plan provided for payment in common stock of Fifth Third Bancorp, and election forms used under the Plan referenced payment in such stock. References to payment in stock on such forms shall be disregarded, and payments shall be in cash. |
10.2 | Election Procedures . |
(a) | A Participant who wishes to make an initial election referred to in Paragraph 10.1 must do so within the first Open Enrollment Period applicable to him under Article III, or, if earlier, within such other election period applicable to him established by the Committee under Paragraph 4.2(a)(ii). |
Any such election shall be effective immediately.
As provided in Paragraph 1.2, a payment election before 2009 under Internal Revenue Service Notice 2005-1, 2006-79 or 2007-86 shall be considered a timely initial election.
(b) | If a Participant does not make a timely initial election concerning the commencement date and payment schedule of benefits under Paragraph 10.2(a), then, except as provided in (c) below, payment shall be made as of the first business day of August of the Plan Year immediately following the Plan Year in which the Separation from Service occurs in a single lump sum cash distribution. |
(c) |
A Participant may make or change an election after the deadline established in (a) above at any time in order to defer payment for a period of not less than five years from the date payment would otherwise begin (but not to accelerate any payment). Payment shall be made in accordance with any such election only if the Participant has a Separation from Service at least one year following the date of the election. Otherwise, the payment shall be made in accordance with the |
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election (if any) in effect immediately prior to the changed election, or in accordance with (b) above if no such election is in effect. |
(d) | Elections shall be made in writing on a form provided by the Committee and shall be made in accordance with the rules established by the Committee. |
10.3 | Transition Rules . |
(a) |
Grandfathered Participants . A Grandfathered Participant shall be paid in cash in accordance with the payment provisions under the Plan or election (whichever is controlling) in effect immediately prior to September 1, 1999. In the event the Participants vested Account does not exceed $25,000 as of any December 31 st , then any payment election by a Participant shall be disregarded. In such a case, the vested Account (or remaining balance thereof) shall be paid in a single lump sum cash distribution as of the first business day of August following such December 31 st (even if such vested Account exceeds $25,000 at that time). |
(b) |
Participants in Pay Status in 2005 . A Participant (who is not a Grandfathered Participant) who has commenced receiving installment payments in 2005 or earlier, shall continue to receive such payments in accordance with the payment provisions under the Plan or election (whichever is controlling) in effect prior to the Effective Date provided that the value of his vested Account as of a date in 2005 determined by the Committee is greater than $10,000. If the value of such a Participants vested Account as of such date is not greater than $10,000, then he shall receive a single lump sum distribution of his entire vested Account in 2005. Effective December 31, 2005, in the event the Participants vested Account does not exceed $25,000 as of any December 31 st , then any payment election by a Participant shall be disregarded. In such a case, the vested Account (or remaining balance thereof) shall be paid in a single lump sum distribution as of the first business day of August following such December 31 st (even if such vested Account exceeds $25,000 at that time). |
(c) |
Terminated Participants Not in Pay Status in 2005 . A Participant (who is not a Grandfathered Participant) who has separated from service in 2005 or earlier, but who, as of a date in 2005 determined by the Committee, has not received or commenced receiving payments of his vested Account, shall be subject to the payment provisions of Paragraph 10.1, and any prior payment elections shall be of no force or effect. As provided in Paragraph 1.2, such a Participant had the opportunity to complete a new election by a date in 2005 determined by the Committee. Such a Participant who did not properly complete and return such an election by such date received a single lump sum distribution of his entire vested Account as of August 1, 2006. Notwithstanding the foregoing, if such a Participants vested Account as of a date in 2005 determined by the Committee was not greater than $10,000, then he received a single lump sum distribution of his entire vested Account in 2005. Effective December 31, 2005, in the event the Participants vested Account does not exceed $25,000 as of any December 31 st , |
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then any payment election shall be disregarded. In such a case, the vested Account (or remaining balance thereof) shall be paid in a single lump sum distribution as of the first business day of August following such December 31 st (even if such vested Account exceeds $25,000 at that time). |
(d) | 2005 Payment Elections by Participants Actively Employed . A Participant who remains employed by an Employer as of a date in 2005 determined by the Committee shall be subject to the payment provisions of Paragraph 10.1 and any prior elections shall be of no force or effect. As provided in Paragraph 1.2, such a Participant had the opportunity to complete a new election by a date in 2005 determined by the Committee. Any such election shall be treated as an initial election under Paragraph 10.2(a). Such a Participant who does not make a timely election shall be treated the same as provided for in Paragraph 10.2(b) and 10.2(c) for Participants who do not make timely initial elections. |
10.4 | Facility of Payment . A payment required to be made hereunder on or as of a specified date may be made in a reasonable period after such date for administrative convenience, provided the payment is made in the same taxable year as the specified date. |
ARTICLE XI - DEATH
11.1 | If a Participant dies before commencing payment of the amounts represented by the Participants Account, then the Participants Account shall be paid to the Participants Beneficiary in a single lump sum cash distribution, as soon as reasonably possible after the Committee is notified of the Participants death and in all events not more than ninety (90) days following the Participants death. Neither the Participant nor the Beneficiary shall have the right to designate the taxable year of the payment. If the Participant has already commenced receiving the amounts represented by the Participants Account in the installment payment form, the installment payments shall continue to be paid to the Participants Beneficiary in cash. |
ARTICLE XII - NON-ASSIGNABLE/NON-ATTACHMENT
12.1 | Except as required by law, no right of the Participant or designated Beneficiary to receive payments under this Plan shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law and any attempt, voluntary or involuntary, to effect any such action shall be null and void and of no effect. |
ARTICLE XIII - ADMINISTRATION
13.1 | Administration . In addition to the powers which are expressly provided in the Plan, the Committee shall have the power and authority in its sole, absolute and uncontrolled discretion to control and manage the operation and administration of the Plan and shall |
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have all powers necessary to accomplish these purposes including, but not limited to the following: |
(a) | the power to determine who is a Participant; |
(b) | the power to determine allocations, balances, and nonforfeitable percentages with respect to Participants Accounts; |
(c) | the power to determine when, to whom, in what amount, and in what form distributions are to be made; and |
(d) | such powers as are necessary, appropriate or desirable to enable it to perform its responsibilities, including the power to interpret the Plan, establish rules, regulations and forms with respect thereto. |
Benefits under this Plan will be paid only if the Committee decides in its discretion that the applicant is entitled to them.
13.2 | 409A of the Code . This Plan is intended to satisfy the applicable requirements of section 409A of the Code and shall be interpreted accordingly. |
ARTICLE XIV - CONSOLIDATION OR MERGER
14.1 | In the event that Fifth Third Bancorp or any entity (resulting from any merger or consolidation or which shall be a purchaser or transferee so referred to), shall at any time be merged or consolidated into or with any other entity or entities, or in the event that substantially all of the assets of Fifth Third Bancorp or any such entity shall be sold or otherwise transferred to another entity, the provisions of this Plan shall be binding upon and shall inure to the benefit of the continuing entity or the entity resulting from such merger or consolidation or the entity to which such assets shall be sold or transferred. Except as provided in the preceding sentence, this Plan shall not be assignable by Fifth Third Bancorp or by any entity referred to in such preceding sentence. |
ARTICLE XV - AMENDMENT OR TERMINATION
15.1 |
Amendment . Fifth Third Bancorp reserves the right to amend the Plan. Any amendment of the Plan shall be by action of the Committee or by the Chairman of the Committee. If an amendment is being made by said Committee, it must be approved by a majority of the members of the Committee as constituted at the time of adoption of the amendment. Any amendment may be given retroactive effect as determined by said Committee or Chairman. Any amendment may, without limitation, (a) affect a Participant whether or not vested, employed or in pay status, and (b) affect or modify Participant elections and payment methods. An amendment may be evidenced in such manner as said Committee or Chairman shall determine. If the amendment is approved by said Committee, such evidence may include (but shall not be limited to) a written resolution signed by a |
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majority of the members of the Committee or minutes of a meeting of the Committee reflecting approval by a majority of the members. |
15.2 | Termination . Fifth Third Bancorp reserves the right to terminate the Plan. Any termination of the Plan shall be by action of the Committee. Any termination must be approved by a majority of the members of said Committee as constituted at the time of adoption of the termination; and any such termination may be given retroactive effect as determined by said Committee. Any termination may, without limitation, (a) affect a Participant whether or not vested, employed or in pay status, and (b) affect or modify Participant elections and payment methods. A termination may be evidenced in such manner as said Committee shall determine, and such evidence may include (but shall not be limited to) a written resolution signed by a majority of the members of the Committee or minutes of a meeting of the Committee reflecting approval by a majority of the members. |
ARTICLE XVI - CLAIMS
16.1 | Initial Claims Procedure . |
(a) | Claim . In order to present a complaint regarding the nonpayment of a Plan benefit or a portion thereof (a Claim), a Participant or Beneficiary under the Plan (a Claimant) or his duly authorized representative must file such Claim by mailing or delivering a writing stating such Claim to the department, officer, or Employee responsible for employee benefit matters of the Employer. Upon such receipt of a Claim, the Claims Review Committee shall furnish to the Claimant a written acknowledgment which shall inform such Claimant of the time limit set forth in (b)(i) below and of the effect, pursuant to (b)(iii) below, of failure to decide the Claim within such time limit. |
(b) | Initial Decision . |
(i) | Time Limit . The Claims Review Committee shall decide upon a Claim within a reasonable period of time after receipt of such Claim; provided, however, that such period shall in no event exceed 90 days, unless special circumstances require an extension of time for processing. If such an extension of time for processing is required, then the Claimant shall, prior to the termination of the initial 90-day period, be furnished a written notice indicating such special circumstances and the date by which the Claims Review Committee expects to render a decision. In no event shall an extension exceed a period of 90 days from the end of the initial period. |
(ii) | Notice of Denial. If the Claim is wholly or partially denied, then the Claims Review Committee shall furnish to the Claimant, within the time limit applicable under (i) above, a written notice setting forth in a manner calculated to be understood by the Claimant: |
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(A) | the specific reason or reasons for such denial; |
(B) | specific reference to the pertinent Plan provisions on which such denial is based; |
(C) | a description of any additional material or information necessary for such Claimant to perfect his Claim and an explanation of why such material or information is necessary; and |
(D) | appropriate information as to the steps to be taken if such Claimant wishes to submit his Claim for review pursuant to Paragraph 16.2, including notice of the time limits set forth in subsection 16.2(b)(ii). |
(iii) | Deemed Denial for Purposes of Review . If a Claim is not granted and if, despite the provisions of (i) and (ii) above, notice of the denial of a Claim is not furnished within the time limit applicable under (i) above, then the Claimant may deem such Claim denied and may request a review of such deemed denial pursuant to the provisions of Paragraph 16.2. |
16.2 | Claim Review Procedure . |
(a) | Claimants Rights . If a Claim is wholly or partially denied under Paragraph 16.1, then the Claimant or his duly authorized representative shall have the following rights: |
(i) | to obtain, subject to (b) below, a full and fair review by the Claims Review Committee; |
(ii) | to review pertinent documents; and |
(iii) | to submit issues and comments in writing. |
(b) | Request for Review . |
(i) | Filing . To obtain a review pursuant to (a) above, a Claimant entitled to such a review or his duly authorized representative shall, subject to (ii) below, mail or deliver a written request for such a review (a Request for Review) to the department, officer, or Employee responsible for employee benefit matters of the Employer. |
(ii) | Time Limits for Requesting a Review . A Request for Review must be mailed or delivered within 60 days after receipt by the Claimant of written notice of the denial of the Claim. |
(iii) |
Acknowledgment . Upon such receipt of a Request for Review, the Claims Review Committee shall furnish to the Claimant a written |
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acknowledgment which shall inform such Claimant of the time limit set forth in (c)(i) below and of the effect, pursuant to (c)(iii) below, of failure to furnish a decision on review within such time limit. |
(c) | Decision on Review . |
(i) | Time Limit . |
(A) | General . If, pursuant to (b) above, a review is requested, then, except as otherwise provided in (B) below, the Claims Review Committee or its delegate (but only if such delegate has been given the authority to make a final decision on the Claim) shall make a decision promptly and no later than 60 days after receipt of the Request for Review; except that, if special circumstances require an extension of time for processing, then the decision shall be made as soon as possible but not later than 120 days after receipt of the Request for Review. The Claims Review Committee must furnish the Claimant written notice of any extension prior to its commencement. |
(B) | Regularly Scheduled Meetings . Anything to the contrary in (A) above notwithstanding, if the Claims Review Committee holds regularly scheduled meetings at least quarterly, then its decision on review shall be made no later than the date of the meeting which immediately follows the receipt of the Request for Review; provided, however, if such Request for Review is received within 30 days preceding the date of such meeting, then such decision on review shall be made no later than the date of the second meeting which follows such receipt; and provided further that, if special circumstances require a further extension of time for processing, and if the Claimant is furnished written notice of such extension prior to its commencement, then such decision on review shall be rendered no later than the third meeting which follows such receipt. |
(ii) | Notice of Decision . The Claims Review Committee or its delegate shall furnish to the Claimant, within the time limit applicable under (i) above, a written notice setting forth in a manner calculated to be understood by the Claimant: |
(A) | the specific reason or reasons for the decision on review; |
(B) | specific reference to the pertinent Plan provisions on which the decision on review is based; |
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(C) | a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the Claimants claim for benefits; and |
(D) | a statement of the Claimants right to bring an action under section 502(a) of the Employee Retirement Income Security Act of 1974. |
(iii) | Deemed Denial . If, despite the provisions of (i) and (ii) above, the decision on review is not furnished within the time limit applicable under (i) above, then the Claimant shall be deemed to have exhausted his remedies under the Plan and he may deem the Claim to have been denied on review. |
The Claims Review Committee shall have the sole, absolute and uncontrolled discretion to decide all claims under the initial claims procedure and under the claims review procedure, and its decisions shall be binding on all parties.
16.3 | Required Exhaustion of Administrative Remedies . Before a Participant may file a lawsuit regarding the Plan or benefits under the Plan, the Participant must first use the Initial Claims Procedure and the Claim Review Procedure (including the requirement of a timely request for review) described above. |
ARTICLE XVII - MISCELLANEOUS
17.1 | No Enlargement of Employment Rights . Neither this Plan, nor any action of Fifth Third Bancorp, an Employer or the Committee, nor any election to defer Compensation hereunder shall be held or construed to confer on any person any legal right to be continued as an employee of Fifth Third Bancorp, or any Employer. |
17.2 | Withholdings . Fifth Third Bancorp and the Participants Employer shall have the right to deduct from a Participants Account and/or any payments due a Participant or Beneficiary under the Plan any and all taxes determined by the Committee to be applicable with respect to such benefits. In the discretion of the Committee, Fifth Third Bancorp and the Participants Employer may accept payment by the Participant (or Beneficiary) of the amount of any applicable taxes in lieu of deducting such amount from the Participants Account or payments due under the Plan. |
17.3 |
Entire Agreement . This Plan document constitutes the entire agreement between the Employer and any Participant (or Beneficiary), and supersedes all other prior agreements, undertakings, both written and oral, with respect to the subject matter hereof. This Plan document may not be amended orally or by any course or purported course of dealing, |
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but only by an amendment in accordance with Paragraph 15.1 specifically identified within its text as a Plan amendment. Written communications and descriptions not specifically identified within their text as amendments, shall not constitute amendments and shall have no interpretive or controlling effect on the interpretation of this Plan. Oral communications shall not constitute amendments and shall have no interpretation or controlling effect on the interpretation of this Plan. |
17.4 | No Guarantee of Tax Consequences. The Participant (or Beneficiary) shall be responsible for all taxes with respect to his benefit hereunder. Neither Fifth Third Bancorp nor any Employer guarantees any particular tax consequences. This includes, without limitation, any taxes, interest or penalties imposed by, or with respect to, section 409A of the Code. |
IN WITNESS WHEREOF, Fifth Third Bancorp has caused this Plan to be executed this 18 th day of December, 2008.
FIFTH THIRD BANCORP | ||
By: | /s/ Nancy Phillips | |
Nancy Phillips, Chairman of The Fifth Third Bank Pension, Profit Sharing and Medical Plan Committee |
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Exhibit 10.11
FIRST AMENDMENT
TO
THE FIFTH THIRD BANCORP
NONQUALIFIED DEFERRED COMPENSATION PLAN
(as amended and restated effective as of January 1, 2009)
Pursuant to the reserved power of amendment contained in paragraph 15.1 of The Fifth Third Bancorp Nonqualified Deferred Compensation Plan (as amended and restated effective as of January 1, 2009) (the Plan), Section 2.23 of the Plan is hereby amended in its entirety, effective as of January 1, 2010, and the Open Enrollment Period relating to the 2010 Plan Year, to read as follows:
2.23 Qualified Executive shall mean an employee of an Employer who is an Executive who meets the criteria in either (a) or (b) below:
(a) an Executive is a Qualified Executive if he was an Executive for the 2007 Plan year who had a Compensation deferral election in effect under the Plan for the 2007 Plan Year and thereafter;
(b) an Executive is a Qualified Executive if (i) he was a Key Employee who had a Compensation deferral election in effect under the Plan for the most recent Plan Year in which he was eligible to do so as a Key Employee, and thereafter, and (ii) as of the first day of an Open Enrollment Period, he no longer qualifies as a Key Employee by reason of a change in his Pay Band (i.e., he is no longer in Pay Band A, B, C, D, P or Q).
An individual meeting the criteria in (a) or (b) shall no longer be considered a Qualified Executive if, at any time and for any reason (including termination of employment and voluntary decision to cease deferring), he no longer has a Compensation deferral election in effect.
IN WITNESS WHEREOF, Fifth Third Bancorp has caused this Amendment to be adopted this 18 th day of November, 2009.
FIFTH THIRD BANCORP
|
||
By: | /s/ Nancy R. Phillips | |
Nancy R. Phillips, Chairman of The Fifth Third Bank Pension, Profit Sharing and Medical Plan Committee |
Exhibit 10.12
SECOND AMENDMENT
TO
THE FIFTH THIRD BANCORP
NONQUALIFIED DEFERRED COMPENSATION PLAN
(as amended and restated effective as of January 1, 2009)
Pursuant to the reserved power of amendment contained in paragraph 15.1 of The Fifth Third Bancorp Nonqualified Deferred Compensation Plan (as amended and restated effective as of January 1, 2009) (the Plan), the Plan is hereby amended effective as of January 1, 2011, in the following respects:
1. | Article III is amended by adding a new paragraph 3.5 to read as follows: |
3.5 | Changes in Eligibility Status . A new, separate Account shall be established for a Participant who (a) has an existing Account balance, (b) is not eligible for contributions under Paragraph 3.3 in at least one Plan Year after having been eligible previously, and (c) again meets the eligibility criteria in Paragraph 3.3 for a future Plan Year. |
The payment provisions (including available elections and changes) in Article X shall be applied separately as to each of a Participants separate Accounts. As an example, such a Participant, upon becoming eligible again after a period of ineligibility, may make an initial payment election under Paragraph 10.2(a) within the first Open Enrollment Period applicable to him after again meeting the eligibility requirements of Paragraph 3.3; and such election (or default payment under Paragraph 10.2(b)) shall apply solely to his new Account and shall not affect the payment provisions applicable to his prior Account.
In the event of multiple changes in eligibility, the above process shall be repeated such that a Participant may have multiple separate Accounts each with payment provisions unaffected by the payment provisions applicable to the others.
Notwithstanding the above, Paragraph 2.2 (regarding the Participants designation of a Beneficiary) and Article XI (regarding the payment upon death) shall not be applied separately as to each of a Participants Accounts. Instead, a Participants Beneficiary designation under Paragraph 2.2 shall apply to a Participants entire benefit in the Plan.
2. | Paragraph 2.2 is amended by adding the following thereto: |
If there is no designated Beneficiary to receive any amount that becomes payable to a Beneficiary, then the Participants Beneficiary shall be the estate of the last to die of the Participant and any properly designated Beneficiaries.
3. | Paragraph 2.6 is amended in its entirety to read as follows: |
Compensation shall mean the total base earnings plus the cash portion of variable compensation (but excluding performance-based, additional cash compensation incentives) paid by an Employer to a Participant or which would otherwise be paid but for a deferral election hereunder.
IN WITNESS WHEREOF, Fifth Third Bancorp has caused this Amendment to be adopted this 20 day of December, 2010.
FIFTH THIRD BANCORP | ||
By: | /s/ Paul L. Reynolds |
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Exhibit 10.42
2012 EXECUTIVE AGREEMENT
THIS AMENDED AGREEMENT between FIFTH THIRD BANCORP, an Ohio Corporation, and its Subsidiaries (individually and collectively, the Company) and Tayfun Tuzun (the Executive), effective as of January 17, 2012, completely amends, restates and replaces any prior Executive Agreement between the parties.
RECITALS:
WHEREAS , the Board of Directors of the Company (the Board) recognizes that the possibility of a Change in Control (as hereinafter defined in Section 2(c)) exists and that the threat of or the occurrence of a Change in Control can result in significant distractions of its key management personnel because of the uncertainties inherent in such a situation; and
WHEREAS , the Board has determined that it is essential and in the best interest of the Company and its shareholders to retain the services of the Executive in the event of a threat or occurrence of a Change in Control and to ensure such Executives continued dedication and efforts in such event without undue concern for personal financial and employment security; and
WHEREAS , in order to induce the Executive to remain in the employ of the Company, particularly in the event of a threat of or the occurrence of a Change in Control, the Company desires to enter into this Agreement with the Executive.
AGREEMENT:
1. Term of Agreement. This Agreement will begin on January 17, 2012 and will continue in effect through December 31, 2012. On December 31, 2012, and on the anniversary date of each term thereafter (a Renewal Date), the term of this Agreement will be extended automatically for an additional one-year period unless, not later than 30 days prior to such Renewal Date, the Company gives written notice to the Executive that it has elected not to extend this Agreement. Notwithstanding the above, if a Change in Control (as defined herein) of the Company occurs during the term of this Agreement, the term of this Agreement will be extended for 24 months beyond the end of the month in which any such Change in Control occurs.
2. Definitions. The following defined terms shall have the meanings set forth below, for purposes of this Agreement:
(a) Base Annual Salary . Base Annual Salary means the greater of (1) the highest annual rate of base salary in effect for the Executive during the 12 month period immediately prior to a Change in Control or, (2) the annual rate of base salary in effect at the time Notice of Termination is given (or on the date employment is terminated if no Notice of Termination is required).
(b) Cause. Cause means any of the following:
(1) The Executive shall have committed a felony or an intentional act of gross misconduct, moral turpitude, fraud, embezzlement,
or theft in connection with the Executives duties or in the course of the Executives employment with the Company or any Subsidiary, and the Board shall have determined that such act is materially harmful to the Company;
(2) The Company or any Subsidiary shall have been ordered or directed by any federal or state regulatory agency with jurisdiction to terminate or suspend the Executives employment and such order or directive has not been vacated or reversed upon appeal; or
(3) After being notified in writing by the Board to cease any particular Competitive Activity (as defined herein), the Executive shall have continued such Competitive Activity and the Board shall have determined that such act is materially harmful to the Company.
For purposes of this Agreement, no act or failure to act on the part of the Executive shall be deemed intentional if it was due primarily to an error in judgment or negligence, but shall be deemed intentional only if done or omitted to be done by the Executive not in good faith and without reasonable belief that the Executives action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause under this Agreement unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the Board at a meeting called and held for such purposes, after reasonable notice to the Executive and an opportunity for the Executive, together with the Executives counsel (if the Executive chooses to have counsel present at such meeting), to be heard before the Board, finding that, in the good faith opinion of the Board, the Executive had committed an act constituting Cause as defined in this Agreement and specifying the particulars of the act constituting Cause in detail. Nothing in this Agreement will limit the right of the Executive or the Executives beneficiaries to contest the validity or propriety of any such determination.
(c) Change in Control shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied:
(i) any person (as such term is used in Sections 13 (d) and 14 (d) of the Securities Exchange Act of 1934, as amended from time to time) (other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the common shareholders of the Company in substantially the same proportions as their ownership of Stock of the Company), is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Companys then outstanding securities; or
(ii) during any period of two (2) consecutive years (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board and any new Director, whose election by the Board or
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nomination for election by the Companys shareholders, was approved by a vote of at least two-thirds ( 2 / 3 ) of the Directors then still in office who either were Directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or
(iii) the consummation of (1) the sale or disposition of all or substantially all the Companys assets; or (2) a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), at least 50% of the combined voting power of the voting securities of the Company (or such surviving entity) outstanding immediately after such merger or consolidation; or
(iv) the shareholders of the Company approve a plan of complete liquidation of the Company.
However, in no event shall a Change in Control be deemed to have occurred, with respect to the Executive, if the Executive is part of a purchasing group which consummates the Change in Control transaction. The Executive shall be deemed part of a purchasing group... for purposes of the preceding sentence if the Executive is an equity participant or has agreed to become an equity participant in the purchasing company or group (except for (i) passive ownership of less than 5% of the voting securities of the purchasing company or (ii) ownership of equity participation in the purchasing company or group which is otherwise not deemed to be significant, as determined prior to the Change in Control by a majority of the continuing members of the Board who are not also Employees).
(d) Code. Code means the Internal Revenue Code of 1986, as amended.
(e) Competitive Activity. Competitive Activity means that Executives participation, without the written consent of an officer of the Company, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Company and such enterprises revenues derived from any product or service competitive with any product or service of the Company amounted to 10% or more of such enterprises revenues for its most recently completed fiscal year and if the Companys revenues for such product or service amounted to 10% of the Companys revenues for its most recently completed fiscal year. Competitive Activity will not include (i) the mere ownership of securities in any such enterprise and the exercise of rights appurtenant thereto and (ii) participation in the management of any such enterprise other than in connection with the competitive operations of such enterprise.
(f) Disability; Disabled. Disability or Disabled means that, as a result of the Executives incapacity due to physical or mental illness, the Executive shall be eligible for the receipt of benefits under the Companys long term disability plan.
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(g) Employee Benefits . Employee Benefits means the perquisites, benefits, and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs, or arrangements in which the Executive is entitled to participate, including without limitation any stock option, stock purchase, restricted stock, stock appreciation, interim awards and accrued and unpaid bonuses under the Variable Compensation Plan, accrued and unpaid performance units under the Incentive Compensation Plan, other awards under Stock and Incentive Plans, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital, or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, expense reimbursement, and other employee benefit policies, plans, programs, or arrangements that may now exist or any equivalent successor policies, plans, programs, or arrangements that may be adopted hereafter, providing perquisites, benefits, and service credit for benefits at least as great in a monetary equivalent as are payable thereunder prior to a Change in Control.
(h) Employment Agreement. Employment Agreement means an executed employment agreement between the Company and the Executive.
(i) Good Reason. Good Reason means the occurrence of any one or more of the following:
(1) A material diminution in the Executives authority, duties or responsibilities;
(2) A material diminution in the authority, duties, or responsibilities of the supervisor to whom the Executive is required to report, including a requirement that the Executive report to a corporate officer or employee instead of reporting directly to the Board of Directors;
(3) A material diminution in the budget over which the Executive retains authority;
(4) A material diminution by the Company in the Executives base compensation (as that term is used in Treasury Regulations under section 409A of the Code) as of the day immediately prior to a Change in Control of the Company and/or Executives Annual Award and Long- Term Award potential which existed immediately prior to such Change in Control under the Companys Variable Compensation Plan, Long-Term Incentive Plan, or any successor plans;
(5) A demand by the Company that the Executive make a material relocation in the geographic area from the location where the Executive is currently based;
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(6) Any other action or inaction that constitutes a material breach by Company of any agreement under which Executive provides services.
The existence of Good Reason shall not be affected by the Executives incapacity due to physical or mental illness. The Executives continued employment shall not constitute a waiver of the Executives rights with respect to any circumstance constituting Good Reason under this Agreement. The Executive must give notice to the Company within 90 days of the initial existence of the condition, and the Company shall have 30 days upon receipt of such notice to remedy the condition so as to eliminate Good Reason.
(j) Incentive Compensation Plan. Incentive Compensation Plan means the Companys Incentive Compensation Plan approved and accepted by the Companys Shareholders in 2004, as well as any successor plan.
(k) Long-Term Award. Long-Term Award means the total amount paid or payable to the Executive pursuant to Performance Shares or similar awards made to Executives under the provisions of the Incentive Compensation Plan and any similar provisions under a successor plan.
(1) Notice of Termination. Notice of Termination means a written notice indicating the specific termination provision in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the employment under the provision so indicated.
(m) Release. Release shall mean a general release that releases, waives, remises, and forever discharges the Company from any and all claims that the Executive has against the Company, including any claims arising under state or federal statute, including all state and federal employment discrimination laws including, but not limited to, Ohio Revised Code Chapter 4112 and Title VII of the Civil Rights Act of 1964; the Age Discrimination in Employment Act; the Employee Retirement Income Security Act; and any applicable state, local, or common laws of similar intent, without exception. For purposes of the Release, the Company includes the Company as it is defined in this Agreement and as further defined to include all of the Companys past, present, and future assigns, successors, affiliates, parent and subsidiary organizations, divisions and Companys, officers, directors, shareholders, employees, and agents of the same, as well as their heirs, executors, administrators, successors, assigns, and other personal representatives, individually and in their respective corporate and personal capacities.
(n) Retirement. Retirement means having reached normal retirement age.
(o) Separation from Service. Separation from Service means the termination of employment with the Company and all related employers under section 414(b) or (c) of the Code. Whether a termination of employment has occurred shall be determined based on whether the facts and circumstances indicate that the Executive reasonably anticipates that no further services would be performed after a certain date or
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that the level of bona fide services would permanently decrease to no more than 20 percent of the average level of bona fide services performed over the immediately preceding 36-month period (or the full period of employment if the Executive has been employed less than 36 months). An Executive is not treated as having terminated employment while he is on military leave, sick leave or other bona fide leave of absence if the period of such leave does not exceed six months, or if longer, so long as the individual retains a right to reemployment under an applicable statute or by contract. The determination of whether a Separation of Service has occurred shall be based on applicable regulations and other applicable legal authority under section 409A of the Code.
(p) Severance Benefits. Severance Benefits means the benefits described in Section 4 of this Agreement.
(q) Stock and Incentive Plans . Stock and Incentive Plans means the Companys 1990 Stock Option Plan, the 1998 Stock Option Plan, the Incentive Compensation Plan and any other Stock and Incentive Compensation Plan that the Company may adopt from time to time.
(r) Subsidiary and Subsidiaries. Subsidiary means any Company, bank, or other entity, a majority of the voting control of which is directly or indirectly owned or controlled at the time by the Company. Subsidiaries means more than one Subsidiary.
(s) Transition Pay Plan. Transition Pay Plan means any transition or severance pay plan of the Company in effect as of the Effective Date of this Agreement, as well as any successor or replacement plan.
(t) Variable Compensation Plan. Variable Compensation Plan means the Variable Compensation Plan of the Company, authorized under the Incentive Compensation Plan and which provides for awards in the form of annual cash bonuses, and any successor plan.
3. Eligibility for Severance Benefits. The Company or its successor shall pay or provide to the Executive the Severance Benefits if the Executive has a Separation from Service and his employment is terminated voluntarily or involuntarily during the term of this Agreement, either:
(a) by the Company (1) at any time within 24 months after a Change in Control of the Company, or (2) at any time prior to a Change in Control but after the commencement of any discussions with a third party relating to a possible Change in Control of the Company involving such third party, if such termination is in contemplation of such possible Change in Control and such Change in Control is actually consummated within 12 months after the date of such termination, in either case unless the termination is on account of the Executives death or Disability or for Cause, provided that, in the case of a termination on account of the Executives Disability or for Cause, the Company shall give Notice of Termination to the Executive with respect thereto; or
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(b) by the Executive for Good Reason (1) at any time within 24 months after a Change in Control of the Company or (2) at any time after the commencement of any discussions with a third party relating to a possible Change in Control of the Company involving such third party, if such Change in Control is actually consummated within 12 months after the date of such termination, and, in any such case, provided that the Executive shall give Notice of Termination to the Company with respect thereto.
For purposes of clarity, with respect to Section 3 above, an Executive who is collecting Disability benefits will not be eligible for benefits under this Agreement. An Executive who is no longer Disabled will be eligible for benefits under this Agreement if, in the period extending from 12 months before the Change in Control to 24 months after the Change in Control, either of the following occur: (1) the Executive attempts to return to his or her position, and no such position is available, or (2) the Executive returns to employment and is subsequently terminated pursuant to Section 3(a) or Section 3(b) above.
4. Severance Benefits. The Executive, if eligible under Section 3, shall receive the following Severance Benefits (in addition to other Employee Benefits that the Executive was otherwise entitled to):
(a) Base Annual Salary. In addition to any accrued compensation payable as of the Executives termination of employment (either by reason of an Employment Agreement or otherwise), a lump sum cash amount equal to the Executives Base Annual Salary, multiplied by 1.0.
(b) Variable Compensation. In addition to any interim award that the Company owes to the Executive under the Variable Compensation Plan (or any similar provisions in a successor to the Variable Compensation Plan), the Executive shall be paid a lump sum cash amount equal to 1.0 times the target annual award under the Variable Compensation Plan for the Executives job for the calendar year during which the Change in Control occurs. In order to be entitled to a payment pursuant to this Section 4(b), the Executive must have been a participant in the Companys Variable Compensation Plan at some time during the calendar year in which the Change in Control occurred or the calendar year immediately preceding the calendar year in which the Change in Control occurred.
(c) Long-Term Incentive Compensation. Long-Term Awards granted to the Executive and outstanding at the time that a Change in Control occurs shall be treated in the manner set forth in the Companys Incentive Compensation Plan.
(d) Insurance Benefits. For a 12 month period after the date of his Separation from Service, the Company will arrange to provide to the Executive and family members who are currently covered and remain eligible under the terms of the Medical Plan at the Companys expense, with:
(1) Health Care . Health care coverage comparable to that in effect for the Executive immediately prior to the termination (or, if more favorable to the Executive, that furnished generally to salaried employees
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of the Company), including, but not limited to, hospital, surgical, medical, dental and prescription. Upon the expiration of the health care benefits required to be provided pursuant to this subsection 4(d), the Executive shall be entitled to the continuation of such benefits under the provisions of the Consolidated Omnibus Budget Reconciliation Act (COBRA). After the COBRA coverage expires if the Executive would have been eligible for retiree medical coverage they may elect that coverage at the current retiree medical rates. Health care benefits otherwise receivable by the Executive pursuant to this subsection 4(d) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the 12 month period following the date the employment is terminated and any such benefits actually received by the Executive shall be reported by the Executive to the Company. For purposes of clarity and otherwise, to the extent the Executive receives any greater health care benefits or health care benefits for a longer time period under an employment agreement between the Executive and the Company, the Company shall provide the Executive with the health care benefits described in the employment agreement. Health care benefits shall be paid in all events on or before the last day of the calendar year following the calendar year in which the claim was incurred.
(2) Life Insurance. Life and accidental death and dismemberment insurance coverage (including any supplemental coverage, purchase opportunity, and double indemnity for accidental death that was available to the Executive) equal (including policy terms) to that in effect at the time Notice of Termination is given (or on the date the employment is terminated if no Notice of Termination is required) or, if more favorable to the Executive, equal to that in effect at the date the Change in Control occurs.
In the event the Executives participation in any such plan or program is not permitted, the Company will directly provide, at its discretion and at no after-tax cost to the Executive, either (1) the benefits to which the Executive would be entitled under such plans and programs either under an individual insurance policy or on a self-funded basis; or (2) a lump-sum cash payment equal to the after-tax value of the benefits at the time provided in the last paragraph of Section 4.
(e) Retirement Benefits. As additional Severance Benefits, the Executive will be entitled to receive the amount of defined contribution retirement benefits Executive would have received from the Company under all (qualified and nonqualified) defined contribution retirement plans (which shall not include severance plans) of the Company in which the Executive participates, had the Executive continued in the employ of the Company through the end of the plan year containing the 12-month anniversary of the date of Executives Separation from Service. For this purpose, future plan changes shall be disregarded and this additional period shall be inclusive of and shall not be in addition to any period of service credited under any severance plan of the Company.
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In all events, the amount of any profit sharing and matching contribution shall be based on the percentage paid to the Executive in the year prior to the Change in Control or, if greater, the percentage amount being accrued by the Company prior to the Change in Control, and using as the contribution base, the Executives benefit under subsections 4(a) and 4(b). For purposes of clarification, Executive shall receive such matching contribution amount without the need to make any of his own contributions.
In the case of any defined benefit plan (qualified or nonqualified) in which Executive has a benefit, if Executive is under age 60 on the first day of the month on or after Separation from Service, as an additional Severance Benefit hereunder, Executive shall receive such additional lump sum amount he would receive under such plans determined as if he were to take a lump sum under such plans as of the first day of the month on or after his Separation from Service, but computed as if he were age 60 as of such date.
Additional Severance Benefits specified in this subsection are to be provided on an unfunded basis, are not intended to meet the qualification requirements of Section 401 of the Internal Revenue Code, and shall be payable solely from the general assets of the Company. Payment shall be made as provided in the last paragraph of Section 4.
(f) Stock and Incentive Plans . Stock, stock options, stock appreciation rights, restricted stock, restricted stock units, and other awards pursuant to Stock and Incentive Compensation Plan held by the Executive become exercisable upon a Change in Control according to the terms of the Companys Stock and Incentive Plans as interpreted by the Companys Compensation Committee as such Committee existed immediately prior to the Change in Control.
In computing and determining Severance Benefits under subsections 4(a), (b), (c), (d), (e) , and (f) above, a decrease in the Executives salary, incentive bonus potential, or insurance benefits shall be disregarded if such decrease occurs within six months before a Change in Control, is in contemplation of such Change in Control, and is taken to avoid the effect of this Agreement should such action be taken after such Change in Control. In such event, the salary, incentive bonus potential, and/or insurance benefits used to determine Severance Benefits shall be that in effect immediately before the decrease that is disregarded pursuant to this Section 4.
The Severance Benefits provided in subsections 4(a), (b) and (e) and, as provided in subsection 4(d) above, shall be paid not later than 60 business days following the Executives Separation from Service, provided the Executive shall have no right to designate the taxable year of the payment.
If reducing the Severance Benefit or other benefit paid to Executive under this Agreement by ten percent (10%) or less would avoid payment of the excise tax pursuant to Section 4999 of the code (or any similar federal or state excise tax) then the Severance Benefit will be reduced by the amount necessary, if any, so that the excise tax is not payable.
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5. Withholding of Taxes. The Company may withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as required by law provided that any stock withheld will only be withheld at the minimum statutory rates.
6. Release of Company and Non-Compete by Executive. As a condition of receiving the payments and benefits set forth in this Agreement, the Executive will be required to execute a Release in the form of an agreement prescribed by the Company and a Non-Compete in the form of Exhibit B attached hereto. The Executive must deliver to Company a fully executed and binding Release and Non-Compete Agreement, the Executive must not revoke the Release and Non-Compete Agreement, and the Release and Non-Compete Agreement must be irrevocable, not later than 60 business days following the Executives Separation from Service. Otherwise, the Executive will not be entitled to receive Severance Benefits under this Agreement.
7. Acknowledgement. The Company hereby acknowledges that it will be difficult and may be impossible for the Executive to find reasonably comparable employment, or to measure the amount of damages which the Executive may suffer as a result of termination of employment hereunder. Accordingly, the payment of the Severance Benefits by the Company to the Executive in accordance with the terms of this Agreement is hereby acknowledged by the Company to be reasonable and will be liquidated damages, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings, or other benefits from any source whatsoever create any mitigation, offset, reduction, or any other obligation on the part of the Executive hereunder or otherwise, except for a reduction in health insurance coverage as provided in subsection 4(d)(1). The Company shall not be entitled to set off or counterclaim against amounts payable hereunder with respect to any claim, debt, or obligation of the Executive.
8. Enforcement Costs; Interest. The Company is aware that, upon the occurrence of a Change in Control, the Board or a stockholder of the Company may then cause or attempt to cause the Company to refuse to comply with its obligations under this Agreement, or may cause or attempt to cause the Company to institute, or may institute, litigation, arbitration, or other legal action seeking to have this Agreement declared unenforceable, or may take, or attempt to take, other action to deny the Executive the benefits intended under this Agreement. In these circumstances, the purpose of this Agreement could be frustrated. It is the intent of the Company that the Executive not be required to incur the expenses associated with the enforcement of the Executives rights under this Agreement by litigation, arbitration, or other legal action nor be bound to negotiate any settlement of the Executives rights hereunder under threat of incurring such expenses because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive under this Agreement. Accordingly, if following a Change in Control it should appear to the Executive that the Company has failed to comply with any of its obligations under this Agreement, or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institute any litigation or other legal action designed to deny, diminish, or to recover from the Executive, the benefits intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel (legal and accounting) of the Executives choice at
- 10 -
the expense of the Company as provided in this Section 9 to represent the Executive in connection with or the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, stockholder, or other person affiliated with the Company. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive entering into an attorney-client relationship with such counsel, and in that connection the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. The reasonable fees and expenses of counsel selected from time to time by the Executive as provided in this Section shall be paid or reimbursed to the Executive by the Company on a regular, periodic basis upon presentation by the Executive of a statement or statements prepared by such counsel in accordance with its customary practices. In all events, such amounts shall be paid on or before the last day of the Executives taxable year following the taxable year in which the expense was incurred. In any action involving this Agreement, the Executive shall be entitled to prejudgment interest on any amounts found to be due him from the date such amounts would have been payable to the Executive pursuant to this Agreement at an annual rate of interest equal to the prime commercial rate in effect at Fifth Third Bank or its successor from time to time during the prejudgment period plus 4 percent.
9. Indemnification. From and after the earliest to occur of a Change in Control or termination of employment, the Company shall (a) for a period of five years after such occurrence, provide the Executive (including the Executives heirs, executors, and administrators) with coverage under a standard directors and officers liability insurance policy at the Companys expense, and (b) indemnify and hold harmless the Executive, to the fullest extent permitted or authorized by the law of the State of Ohio as it may from time to time be amended, if the Executive is (whether before or after the Change in Control) made or threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, by reason of the fact that the Executive is or was a director, officer, or employee of the Company or any Subsidiary, or is or was serving at the request of the Company or any Subsidiary as a director, trustee, officer, or employee of a bank, Company, partnership, joint venture, trust, or other enterprise. The indemnification provided by this Section 9 shall not be deemed exclusive of any other rights to which the Executive may be entitled under the charter or bylaws of the Company or of any Subsidiary, or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in the Executives official capacity and as to action in another capacity while holding such office, and shall continue as to the Executive after the Executive has ceased to be a director, trustee, officer, or employee and shall inure to the benefit of the heirs, executors, and administrators of the Executive.
10. Arbitration. The initial method for resolving any dispute arising out of this Agreement shall be nonbinding arbitration in accordance with this Section. Except as provided otherwise in this Section, arbitration pursuant to this Section shall be governed by the Commercial Arbitration Rules of the American Arbitration Association. A party wishing to obtain arbitration of an issue shall deliver written notice to the other party, including a description of the issue to be arbitrated. Within 15 days after either party demands arbitration, the Company and the Executive shall each appoint an arbitrator. Within 15 additional days, these two arbitrators shall appoint the third arbitrator by mutual agreement; if they fail to agree within this 15 day period, then the third arbitrator shall be selected promptly pursuant to the rules of the
- 11 -
American Arbitration Association for Commercial Arbitration. The arbitration panel shall hold a hearing in Cincinnati, Ohio, within 90 days after the appointment of the third arbitrator. The fees and expenses of the arbitrator, and any American Arbitration Association fees, shall be paid by the Company. Both the Company and the Executive may be represented by counsel and may present testimony and other evidence at the hearing. Within 90 days after commencement of the hearing, the arbitration panel will issue a written decision; the majority vote of two of the three arbitrators shall control. The majority decision of the arbitrators shall not be binding on the parties, and the parties may pursue other available legal remedies if the parties are not satisfied with the majority decision of the arbitrator. The Executive shall be entitled to seek specific performances of the Executives rights under this Agreement during the pendency of any dispute or controversy arising under or in connection with this Agreement.
11. Employment Rights. This Agreement sets forth the Severance Benefits payable to the Executive in the event the Executives employment with the Company is terminated under certain conditions specified in Section 3. This Agreement is not an employment contract nor shall it confer upon the Executive any right to continue in the employ of the Company or its Subsidiaries and shall not in any way affect the right of the Company or its Subsidiaries to dismiss or otherwise terminate the Executives employment at any time with or without Cause.
12. Arrangements Not Exclusive. The specific benefit arrangements referred to in this Agreement are not intended to exclude the Executive from participation in or from other benefits available to executive personnel generally or to preclude the Executives right to other compensation or benefits as may be authorized by the Board at any time. The provisions of this Agreement and any payments provided for hereunder shall not reduce any amounts otherwise payable, or in any way diminish the Executives existing rights, or rights which would accrue solely as the result of the passage of time under any compensation plan, benefit plan, incentive plan, stock option plan, employment agreement, or other contract, plan, or arrangement except as may be specified in such contract, plan, or arrangement. Notwithstanding anything to the contrary in this Section 12, the Severance Benefits provided in Section 4 are in lieu of any benefits to which the Executive would be entitled following the termination of his or her employment pursuant to any Employment Agreement (except as provided in subsection 4(d)(1)) or pursuant to the Companys Transition Pay Plan or any successor to or replacement of such Plan.
13. Termination. Except for termination of employment described in Section 3, this Agreement shall terminate if the employment of the Executive with the Company shall terminate prior to a Change in Control. For purposes of this Agreement, the Executives employment will be considered terminated if the Executive is informed prior to a Change in Control that the Executives employment is terminated under the terms of Companys Transition Pay Plan, and such termination was not in contemplation of a Change in Control. In these circumstances, this Agreement shall terminate on the Executives last day of active employment, and the Executive will not be eligible for payments or benefits under this Agreement while receiving or while eligible to receive pay or benefits under the Transition Pay Plan, or at any time thereafter.
14. Successors; Binding Agreements. This Agreement shall inure to the benefit of and be enforceable by the Executives personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. The Executives rights and
- 12 -
benefits under this Agreement may not be assigned, except that if the Executive dies while any amount would still be payable to the Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement, to the beneficiaries designated by the Executive to receive benefits under this Agreement in a writing on file with the Company at the time of the Executives death or, if there is no such beneficiary, to the Executives estate. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company (or of any division or Subsidiary thereof employing the Executive) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms to which the Executive would be entitled hereunder if the Executive terminated employment for Good Reason following a Change in Control, on the first day after the Change in Control. As such, the last paragraph of Section 4 shall be controlling as to the time of payment of the amounts specified therein determined as if the Separation from Service is on the day after the Change in Control.
15. No Vested Interest. Neither the Executive nor the Executives beneficiaries shall have any right, title, or interest in any benefit under this Agreement prior to the occurrence of the right to the payment of such benefit.
16. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered personally or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the such addresses as each party may designate from time to time to the other party in writing in the manner provided herein. Unless designated otherwise notices to the Company should be sent to the Company at:
Fifth Third Bancorp
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Attention: Paul L. Reynolds
Until designated otherwise, notices shall be sent to the employee at the address indicated on the Beneficiary Designation and Notice form attached hereto as Exhibit A. If the parties by mutual agreement supply each other with telecopier numbers for the purposes of providing notice by facsimile, such notice shall also be proper notice under this Agreement. Notice sent by certified or registered mail shall be effective two days after deposit by delivery to the U.S. Post Office.
17. Savings Clause. If any payments otherwise payable to the Executive under this Agreement are prohibited or limited by any statute or regulation in effect at the time the payments would otherwise be payable, including, without limitation, any regulation issued by the
- 13 -
Treasury Department under the Emergency Economic Stabilization Act of 2008 or the Federal Deposit Insurance Company (the FDIC) that limits executive Change in Control or other payments that can be made by Company (any such limiting statute or regulation a Limiting Rule), the Executive will be entitled to elect to have apply, and therefore to receive benefits directly under, either (i) this Agreement (as limited by the Limiting Rule) or (ii) any generally applicable Company severance, separation pay, and/or salary continuation plan that may be in effect at the time of the Executives termination.
Following any such election, the Executive will be entitled to receive benefits under this Agreement or plan elected only if and to the extent the Agreement or plan is applicable and subject to its specific terms.
18. Amendment; Waiver. The Company may amend, without the approval of the Executive, any provision of this Agreement to the extent necessary to comply with Section 409A of the Code (or to avoid the application of Section 409A of the Code) so as to avoid any penalty or excise tax from being levied on the Executive; provided, however, that the Company may not decrease the amount of any benefit the Executive is entitled to receive under this Agreement without the Executives consent. Regarding any other amendment, the Company may not amend or modify this Agreement, and no provision may be waived, unless such amendment, modification, or waiver is agreed to in writing and signed by the Executive and the Company.
19. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
20. Prior Executive Agreements. Upon the effective date of this Agreement, this Agreement supersedes any and all prior Executive Agreements between the Company (or any predecessor of the Company) and the Executive and no payments or benefits of any kind shall be made under, on account of, or by reference to the prior Executive Agreements.
21. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.
22. Governing Law. Except as otherwise provided, this Agreement shall be governed by the laws of the State of Ohio, without giving effect to any conflict of law provisions.
23. Section 409A Compliance. It is the parties intention that the various applicable provisions of this Agreement either are exempt from Section 409A of the Code or satisfy the requirements of Section 409A of the Code. The parties agree that this Agreement shall be interpreted accordingly, including without limitation the following provisions. If at the time of the Executives termination of employment with the Company, the Executive is a specified employee within the meaning of Section 409A of the Code and the final regulations and any other guidance promulgated thereunder, no Severance Benefit that may be considered deferred compensation under Section 409A of the Code and that is payable on account of the Executives Separation from Service may be paid prior to the earlier of: (i) the expiration of the six-month
- 14 -
period measured from the date of the Executives Separation from Service under Section 409A of the Code, or (ii) the Executives death. Notwithstanding the foregoing, any portion of the Severance Benefits that would otherwise be payable during the six-month period from the date of the Executives Separation from Service, but that is not treated as a payment of deferred compensation under Section 409A of the Code either due to (i) the application of the short-term deferral rule or (ii) because such Severance Benefits are separation pay due to involuntary separation from service that satisfies the amount and duration limits of Section 409A of the Code, may be paid in the six-month period from the Executives Separation from Service.
Any portion of the Severance Benefits that would otherwise be payable during the six-month period from the date of the Executives Separation from Service, but that cannot be paid at that time under the preceding paragraph shall accrue and become payable on the date that is six months and one day following the date of the Executives Separation from Service. All subsequent Severance Benefits, if any, will be payable in accordance with the applicable payment schedule. For these purposes, each Severance Benefit payment is hereby designated as a separate payment and will not collectively be treated as a single payment. This provision is intended to comply with the requirements of Section 409A of the Code so that none of the Severance Benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A of the Code, and any ambiguities herein will be interpreted to so comply. The Company and the Executive agree to work together in good faith to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to the Executive under Section 409A of the Code.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the day and year written above.
COMPANY: |
EXECUTIVE |
|||||||
FIFTH THIRD BANCORP |
||||||||
By: |
/s/ Paul L. Reynolds |
By: |
/s/ Tayfun Tuzun |
|||||
Paul L. Reynolds |
Tayfun Tuzun |
|||||||
Executive Vice President |
Senior Vice President |
|||||||
January 23, 2012 |
January 23, 2012 |
- 15 -
EXHIBIT A
Beneficiary Designation and Notice Form
Beneficiary Designation
In the event of my death, I direct that any amounts due me under the Agreement to which this Beneficiary Designation is attached shall be distributed to the person designated below. If no beneficiary shall be living to receive such assets they shall be paid to the administrator or executor of my estate.
Notice
Until notified otherwise, pursuant to Section 16 of the Agreement, notices should be sent to me at the following address
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Street Address |
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City, State and Zip Code |
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Executive |
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Date |
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Beneficiary |
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Relationship to Executive |
EXHIBIT B
NON-COMPETITION AGREEMENT AND GENERAL RELEASE OF ALL CLAIMS
T HE EXECUTION OF THIS A GREEMENT between FIFTH THIRD BANCORP, an Ohio Corporation, and its Subsidiaries, and Successors (individually and collectively, the Company) and (the Executive), is a condition of receiving the payments and benefits set forth in the Executive Agreement signed by both parties.
In consideration of the mutual covenants contained herein, the sufficiency of which are hereby acknowledged, Executive and Company, its predecessors, officers and directors agree as follows:
A. Your employment will end as of . If you comply with the terms and conditions of the Executive Agreement and this Agreement, you will receive the payments and benefits set forth in the Executive Agreement.
B. In exchange for the above referenced payments and benefits and to preserve the interests of the Company in its clients and customers, Executive agrees that for a period of one year after the termination of Executives employment, Executive will not:
1. |
Enter into an ownership, consulting or employment arrangement with, or render services for, any individual or entity rendering services or handling products competitive with the Company in any geographic region or territory in which Executive worked or had responsibility during the twenty-four (24) month period preceding departure from the Company; |
2. |
Directly or indirectly solicit, divert, entice or take away any customers, business or prospective business with whom Executive had contact, involvement or responsibility during Executives employment with the Company, or attempt to do so for the sale of any product or service that competes with a product or service offered by the Company; |
3. |
Directly or indirectly solicit, divert, entice or take away any potential customer identified, selected or targeted by Company with whom Executive had contact, involvement or responsibility during Executives employment with Company, or attempt to do so for the sale of any product or service that competes with a product or service offered by the Company; |
4. |
Accept or provide assistance in the accepting of (including, but not limited to, providing any service, information or assistance or other facilitation or other involvement) business or orders from customers or any potential customers of the Company with whom Executive has had contact, involvement, or responsibility on behalf of any third party or otherwise for Executives own benefit; |
- 17 -
5. |
Directly or indirectly solicit, induce, confer or discuss with any employee of the Company or attempt to solicit, induce, confer or discuss with any employee of Company the prospect of leaving the employ of Company or the subject of employment by some other person or organization; |
6. |
Directly or indirectly hire or attempt to hire any employee of Company; |
7. |
Nothing contained in this Section shall preclude Executive from accepting employment with or creating a company, firm or business that competes with Company so long as Executives activities do not violate any of the terms of this Agreement; |
8. |
The restrictive covenants contained in this section shall supersede any previous obligations imposed upon Executive by agreements entered into between Executive and the Company as they relate to post-employment solicitation of customers and/or employees. However, any prior obligations prohibiting the use, possession, and dissemination of confidential, proprietary and/or trade secret protected information shall remain in full force and effect. |
C. As additional consideration, Executive, on Executives behalf and on behalf of Executives heirs, executors, successors, and assigns hereby release the Company, as well as all of their officers, directors, executives, managers and employees, from any and all debts, claims, demands, rights, actions, causes of action, suits or damages, whatsoever and of every kind of nature, whether known or unknown (collectively the Claims), against the Company and the others released herein, which relate to or arose from Executives employment with or separation from the Company as contemplated herein except to the extent such Claims cannot be released under applicable law. Released claims include, without limitation, any and all claims arising under federal, state or local laws, including, without limitation, claims under the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, the Americans With Disabilities Act, Title VII of the Civil Rights Act of 1964, as amended, the Equal Pay Act, any other federal, state or local law prohibiting employment discrimination or otherwise regulating wages, hours or working conditions, and any and all claims under the common law for breach of express or implied contract, violation of the covenant of good faith and fair dealing, violation of public policy, negligence, slander, defamation, invasion of privacy, false light, false imprisonment, trespass, breach of fiduciary duty, intentional interference, intentional or negligent infliction of emotional distress, intrusion, loss of consortium, retaliatory or wrongful termination, punitive damages, and claims that you have or may have which may have arisen up to and including the date of this Agreement. Executive acknowledges and agrees that as a matter of public policy, Executive cannot waive any rights to file claims with the Equal Employment Opportunity Commission and/or any similar state agency, however, in the event such claim(s) is/are filed, Executive hereby expressly waives the right to receive any monetary damages as a result of such action(s) and expressly waives the right to receive any monetary damages in connection with such proceedings.
- 18 -
D. Executive and Company agree that any action to enforce this Agreement may be brought in a state or federal court located in Hamilton County, Ohio. Executive and Company hereby agree that such courts shall have jurisdiction and venue with respect to any such action.
E. Executive also agrees to fully cooperate with the Company and its customers during this transition. If Executive fails to cooperate to Companys satisfaction as determined by the Company, Executive will be deemed to have voluntarily resigned, and the waiver and releases in favor of the Company in this Agreement shall remain in full force and effect.
F. Executive will not make any disparaging remarks concerning Company or any of its employees to anyone.
G. Executive agrees that apart from discussions with personal counsel and immediate family, whom Executive will ask not to divulge the terms of this Agreement, Executive will not disclose, publicize or discuss either the terms of this Agreement or termination from the Company with anyone within or outside of Company unless required by subpoena or any other legal compulsion, and will give immediate notice to Company of the receipt of any subpoena or other legal document which might call upon you to disclose either any of the contents of this Agreement or your employment with and termination from Company.
H. Executive represents and warrants that Executive has returned to the Company the original and any copies of all keys, identification cards, charge cards, equipment, papers, reports, memoranda or other items of Company property. You acknowledge that the Company has returned to you all items of your personal property.
I. Executive recognizes and agrees that nothing in this Agreement constitutes an admission of liability or wrongdoing by Executive or by the Company or any of the others released herein.
J. This Agreement will be governed by Ohio law.
K. In October 1990, the Older Workers Benefit Protection Act (Act) was enacted. The Act provides, among other things, that notice be given to you in writing and in a manner calculated to be understood by the average individual affected by this termination. As provided in the Act, you have a right to consider this Agreement for a period of forty-five days. If you choose to accept it, you must sign it and return it to your Human Resource Manager on or before . You will then have seven days after such acceptance to change your mind and revoke the Agreement. If you accept the Agreement and do not revoke it, payment will be made to you as provided in the Agreement. If you decide not to accept the Agreement or accept the Agreement but revoke acceptance within seven days, nothing will be paid to you under the Agreement and your employment will end on . You are advised to consult with an attorney before acting on this Agreement.
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Signed this day of , .
Accepted and agreed to: |
Witnessed and accepted: |
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EXECUTIVE |
FIFTH THIRD BANCORP |
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BY: |
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DATE: |
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- 20 -
Exhibit 12.1
Fifth Third Bancorp
Computations of Consolidated Ratios of Earnings to Fixed Charges
($ In Millions)
Year Ended December 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
Excluding Interest on Deposits: |
||||||||||||||||||||
Fixed Charges: |
||||||||||||||||||||
Interest Expense (excluding interest on deposits) |
$ | 309 | 293 | 361 | 805 | 1,012 | ||||||||||||||
One-Third of Rents, Net of Income from Subleases |
27 | 26 | 29 | 28 | 24 | |||||||||||||||
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|
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|||||||||||
Total Fixed Charges |
$ | 336 | 319 | 390 | 833 | 1,036 | ||||||||||||||
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|
|||||||||||
Earnings: |
||||||||||||||||||||
Income (Loss) Before Income Taxes |
$ | 1,831 | 940 | 767 | (2,664 | ) | 1,537 | |||||||||||||
Fixed Charges |
336 | 319 | 390 | 833 | 1,036 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Total Earnings |
$ | 2,167 | 1,259 | 1,157 | (1,831 | ) | 2,573 | |||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Ratio of Earnings to Fixed Charges, Excluding Interest On Deposits |
6.45x | 3.94x | 2.97x | N/A | (a) | 2.48x | ||||||||||||||
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|
|
|
|
|
|
|
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|||||||||||
Coverage Deficiency |
| | | (2,664 | ) | | ||||||||||||||
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|||||||||||
Including Interest on Deposits: |
||||||||||||||||||||
Fixed Charges: |
||||||||||||||||||||
Interest Expense |
$ | 661 | 885 | 1,314 | 2,094 | 3,018 | ||||||||||||||
One-Third of Rents, Net of Income from Subleases |
27 | 26 | 29 | 28 | 24 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Total Fixed Charges |
$ | 688 | 911 | 1,343 | 2,122 | 3,042 | ||||||||||||||
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|
|
|
|
|
|||||||||||
Earnings: |
||||||||||||||||||||
Income (Loss) Before Income Taxes |
$ | 1,831 | 940 | 767 | (2,664 | ) | 1,537 | |||||||||||||
Fixed Charges |
688 | 911 | 1,343 | 2,122 | 3,042 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Total Earnings |
$ | 2,519 | 1,851 | 2,110 | (542 | ) | 4,579 | |||||||||||||
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|
|
|
|
|
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|||||||||||
Ratio of Earnings to Fixed Charges, Including Interest On Deposits |
3.66x | 2.03x | 1.57x | N/A | (a) | 1.51x | ||||||||||||||
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Coverage Deficiency |
| | | (2,664 | ) | | ||||||||||||||
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|
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(a) | Earnings were inadequate to cover fixed charges by $2.7 billion |
Exhibit 12.2
Fifth Third Bancorp
Computations of Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements
($ In Millions)
Year Ended December 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
Excluding Interest on Deposits: |
||||||||||||||||||||
Fixed Charges: |
||||||||||||||||||||
Interest Expense (excluding interest on deposits) |
$ | 309 | 293 | 361 | 805 | 1,012 | ||||||||||||||
One-Third of Rents, Net of Income from Subleases |
27 | 26 | 29 | 28 | 24 | |||||||||||||||
Preferred Stock Dividends |
203 | 250 | 226 | 67 | 1 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Total Fixed Charges |
$ | 539 | 569 | 616 | 900 | 1,037 | ||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Earnings: |
||||||||||||||||||||
Income (Loss) Before Income Taxes |
$ | 1,831 | 940 | 767 | (2,664 | ) | 1,537 | |||||||||||||
Fixed ChargesExcluding Preferred Stock Dividends |
336 | 319 | 390 | 833 | 1,036 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Earnings |
$ | 2,167 | 1,259 | 1,157 | (1,831 | ) | 2,573 | |||||||||||||
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|||||||||||
Ratio of Earnings to Fixed Charges, Excluding Interest On Deposits |
4.02x | 2.21x | 1.88x | N/A | (a) | 2.48x | ||||||||||||||
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Coverage Deficiency |
| | | (2,731 | ) | | ||||||||||||||
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|||||||||||
Including Interest on Deposits: |
||||||||||||||||||||
Fixed Charges: |
||||||||||||||||||||
Interest Expense |
$ | 661 | 885 | 1,314 | 2,094 | 3,018 | ||||||||||||||
One-Third of Rents, Net of Income from Subleases |
27 | 26 | 29 | 28 | 24 | |||||||||||||||
Preferred Stock Dividends |
203 | 250 | 226 | 67 | 1 | |||||||||||||||
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|
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|
|
|
|||||||||||
Total Fixed Charges |
$ | 891 | 1,161 | 1,569 | 2,189 | 3,043 | ||||||||||||||
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|
|
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Earnings: |
||||||||||||||||||||
Income (Loss) Before Income Taxes |
$ | 1,831 | 940 | 767 | (2,664 | ) | 1,537 | |||||||||||||
Fixed ChargesExcluding Preferred Stock Dividends |
688 | 911 | 1,343 | 2,122 | 3,042 | |||||||||||||||
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|
|
|
|
|
|
|
|
|||||||||||
Total Earnings |
$ | 2,519 | 1,851 | 2,110 | (542 | ) | 4,579 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ratio of Earnings to Fixed Charges, Including Interest On Deposits |
2.83x | 1.59x | 1.34x | N/A | (a) | 1.50x | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Coverage Deficiency |
| | | (2,731 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
(a) | Earnings were inadequate to cover fixed charges by $2.7 billion |
Exhibit 21
FIFTH THIRD BANCORP SUBSIDIARIES
As of December 31, 2011
Name |
Jurisdiction
of Incorporation |
|
Fifth Third Capital Trust IV |
Delaware | |
Fifth Third Capital Trust V |
Delaware | |
Fifth Third Capital Trust VI |
Delaware | |
Fifth Third Financial Corporation |
Ohio | |
Fifth Third Bank |
Ohio | |
Fifth Third Equipment Finance Company |
Ohio | |
The Fifth Third Auto Leasing Trust |
Delaware | |
Fifth Third International Company |
Kentucky | |
Fifth Third Trade Services Limited |
Hong Kong | |
Fifth Third Real Estate Capital Markets Company |
Ohio | |
Fifth Third Holdings, LLC |
Delaware | |
Fifth Third Holdings Funding, LLC |
Delaware | |
Fifth Third Auto Trust 2008-1 |
Delaware | |
Fifth Third Conduit Holdings, LLC |
Delaware | |
Fifth Third Auto Conduit Funding, LLC |
Delaware | |
Fifth Third Auto Conduit Funding Two, LLC |
Delaware | |
Fifth Third Mortgage Insurance Reinsurance Company |
Vermont | |
Fifth Third Mortgage Company |
Ohio | |
Fifth Third Real Estate Investment Trust, Inc. |
Maryland | |
Fifth Third Securities, Inc. |
Ohio | |
Fifth Third Asset Management, Inc. |
Ohio | |
Fifth Third Insurance Agency, Inc. |
Ohio | |
FTPS Partners, LLC |
Delaware | |
Old Kent Investment Corporation |
Nevada | |
GNB Management, LLC |
Delaware | |
GNB Realty, LLC |
Delaware | |
Old Kent Mortgage Services, Inc. |
Michigan | |
Fifth Third Mortgage Michigan, LLC |
Delaware | |
Fifth Third Funding, LLC |
Delaware | |
Fifth Third Home Equity Loan Trust 2003-1 |
Delaware | |
Walnut & Vine Holdings, LLC |
Delaware | |
Walnut & Vine Properties I, LLC |
Delaware | |
Walnut & Vine Properties II, LLC |
Delaware | |
Fifth Third Community Development Corporation |
Indiana | |
Fifth Third New Markets Development Co., LLC |
Ohio | |
Fifth Third Capital Holdings, LLC |
Delaware | |
Fountain Square Life Reinsurance Company, Ltd. |
Turks and Caicos Islands | |
Vista Settlement Services, LLC |
Delaware | |
Fifth Third Investment Company |
Ohio | |
Fifth Third Mauritius Holdings Limited |
Mauritius | |
First Charter Capital Trust I |
Delaware | |
First Charter Capital Trust II |
Delaware |
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements of Fifth Third Bancorp and subsidiaries (the Bancorp) of our reports dated February 29, 2012, relating to the consolidated financial statements of the Bancorp, and the effectiveness of the Bancorps internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Bancorp for the year ended December 31, 2011:
Form S-8 |
Form S-3 |
|
No. 33-34075 |
No. 33-54134 | |
No. 33-55553 |
No. 333-157703 | |
No. 333-52182 |
No. 333-165689 | |
No. 333-52188 |
||
No. 333-58249 |
||
No. 333-58618 |
||
No. 333-63518 |
||
No. 333-72910 |
||
No. 333-108996 |
||
No. 333-114001 |
||
No. 333-116535 |
||
No. 333-119280 |
||
No. 333-123493 |
||
No. 333-147533 |
||
No. 333-157687 |
||
No. 333-158742 |
||
No. 333-175258 |
/s/ Deloitte and Touche LLP
Cincinnati, Ohio
February 29, 2012
Exhibit 31(i)
CERTIFICATION PURSUANT
TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, | Kevin T. Kabat, certify that: |
1. | I have reviewed this annual report on Form 10-K of Fifth Third Bancorp (the Registrant); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
/s/ Kevin T. Kabat |
Kevin T. Kabat |
President and Chief Executive Officer |
February 29, 2012 |
Exhibit 31(ii)
CERTIFICATION PURSUANT
TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Daniel T. Poston, certify that:
1. | I have reviewed this annual report on Form 10-K of Fifth Third Bancorp (the Registrant); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
/s/ Daniel T. Poston |
Daniel T. Poston |
Executive Vice President and Chief Financial Officer |
February 29, 2012 |
Exhibit 32(i)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Fifth Third Bancorp (the Registrant) on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Kevin T. Kabat, President and Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
/s/ Kevin T. Kabat |
Kevin T. Kabat |
President and Chief Executive Officer |
February 29, 2012 |
Exhibit 32(ii)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Fifth Third Bancorp (the Registrant) on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Daniel T. Poston, Executive Vice President and Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
/s/ Daniel T. Poston |
Daniel T. Poston |
Executive Vice President and Chief Financial Officer |
February 29, 2012 |
Exhibit 99.1
CERTIFICATION PURSUANT
TO SECTION 111(b)(4) OF THE
EMERGENCY ECONOMIC STABILIZATION ACT OF 2008
I, Kevin T. Kabat, certify, based on my knowledge, that:
(i) | The compensation committee of Fifth Third Bancorp has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, senior executive officer (SEO) compensation plans and employee compensation plans and the risks these plans pose to Fifth Third Bancorp; |
(ii) | The compensation committee of Fifth Third Bancorp has identified and limited during any part of the most recently completed fiscal year that was a TARP period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Fifth Third Bancorp and has identified any features of the employee compensation plans that pose risks to Fifth Third Bancorp and has limited those features to ensure that Fifth Third Bancorp is not unnecessarily exposed to risks; |
(iii) | The compensation committee has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Fifth Third Bancorp to enhance the compensation of an employee, and has limited any such features; |
(iv) | The compensation committee of Fifth Third Bancorp will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above; |
(v) | The compensation committee of Fifth Third Bancorp will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was a TARP period the features in |
(A) | SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Fifth Third Bancorp; |
(B) | Employee compensation plans that unnecessarily expose Fifth Third Bancorp to risks; and |
(C) | Employee compensation plans that could encourage the manipulation of reported earnings of Fifth Third Bancorp to enhance the compensation of an employee; |
(vi) | Fifth Third Bancorp has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or clawback provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria; |
(vii) | Fifth Third Bancorp has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to a SEO or any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period; |
(viii) | Fifth Third Bancorp has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period; |
(ix) | Fifth Third Bancorp and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period; and any expenses that, pursuant to the policy, required approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved; |
(x) | Fifth Third Bancorp will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during any part of the most recently completed fiscal year that was a TARP period; |
(xi) | Fifth Third Bancorp will disclose the amount, nature, and justification for the offering, during any part of the most recently completed fiscal year that was a TARP period, of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii); |
(xii) | Fifth Third Bancorp will disclose whether Fifth Third Bancorp, the board of directors of Fifth Third Bancorp, or the compensation committee of Fifth Third Bancorp has engaged during any part of the most recently completed fiscal year that was a TARP period a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period; |
(xiii) | Fifth Third Bancorp has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period; |
(xiv) | Fifth Third Bancorp has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Fifth Third Bancorp and Treasury, including any amendments; |
(xv) | Fifth Third Bancorp has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified; and |
(xvi) | I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both. ( See, for example 18 U.S.C. 1001.) |
/s/ Kevin T. Kabat |
Kevin T. Kabat |
President and Chief Executive Officer |
February 29, 2012 |
Exhibit 99.2
CERTIFICATION PURSUANT
TO SECTION 111(b)(4) OF THE
EMERGENCY ECONOMIC STABILIZATION ACT OF 2008
I, Daniel T. Poston, certify, based on my knowledge, that:
(i) | The compensation committee of Fifth Third Bancorp has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, senior executive officer (SEO) compensation plans and employee compensation plans and the risks these plans pose to Fifth Third Bancorp; |
(ii) | The compensation committee of Fifth Third Bancorp has identified and limited during any part of the most recently completed fiscal year that was a TARP period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Fifth Third Bancorp and has identified any features of the employee compensation plans that pose risks to Fifth Third Bancorp and has limited those features to ensure that Fifth Third Bancorp is not unnecessarily exposed to risks; |
(iii) | The compensation committee has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Fifth Third Bancorp to enhance the compensation of an employee, and has limited any such features; |
(iv) | The compensation committee of Fifth Third Bancorp will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above; |
(v) | The compensation committee of Fifth Third Bancorp will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was a TARP period the features in |
(A) | SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Fifth Third Bancorp; |
(B) | Employee compensation plans that unnecessarily expose Fifth Third Bancorp to risks; and |
(C) | Employee compensation plans that could encourage the manipulation of reported earnings of Fifth Third Bancorp to enhance the compensation of an employee; |
(vi) | Fifth Third Bancorp has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or clawback provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria; |
(vii) | Fifth Third Bancorp has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to a SEO or any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period; |
(viii) | Fifth Third Bancorp has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period; |
(ix) | Fifth Third Bancorp and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period; and any expenses that, pursuant to the policy, required approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved; |
(x) | Fifth Third Bancorp will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during any part of the most recently completed fiscal year that was a TARP period; |
(xi) | Fifth Third Bancorp will disclose the amount, nature, and justification for the offering, during any part of the most recently completed fiscal year that was a TARP period, of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii); |
(xii) | Fifth Third Bancorp will disclose whether Fifth Third Bancorp, the board of directors of Fifth Third Bancorp, or the compensation committee of Fifth Third Bancorp has engaged during any part of the most recently completed fiscal year that was a TARP period a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period; |
(xiii) | Fifth Third Bancorp has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period; |
(xiv) | Fifth Third Bancorp has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Fifth Third Bancorp and Treasury, including any amendments; |
(xv) | Fifth Third Bancorp has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified; and |
(xvi) | I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both. ( See, for example 18 U.S.C. 1001.) |
/s/ Daniel T. Poston |
Daniel T. Poston |
Executive Vice President and Chief Financial Officer |
February 29, 2012 |