Fifth Third Bancorp (Nasdaq: FITB) today reported second quarter 2014 net income of $439 million versus net income of $318 million in the first quarter of 2014 and $591 million in the second quarter of 2013. After preferred dividends, net income available to common shareholders was $416 million, or $0.49 per diluted share, in the second quarter of 2014, compared with $309 million, or $0.36 per diluted share, in the first quarter of 2014, and $582 million, or $0.65 per diluted share, in the second quarter of 2013.

Second quarter 2014 included:

Income

  • $125 million gain on the sale of Vantiv shares
  • $63 million positive valuation adjustment on the Vantiv warrant
  • ($17 million) negative valuation adjustments for land upon which the Bancorp no longer expects to build branches
  • ($16 million) charge related to the valuation of the total return swap entered into as part of the 2009 sale of Visa, Inc. Class B shares
  • ($12 million) negative impact to equity method income from the Bancorp’s interest in Vantiv related to certain charges recognized by Vantiv as a result of their acquisition of Mercury Payment Systems

Expenses

  • ($61 million) in litigation reserve charges

Results also included an immaterial amount in mortgage repurchase provision.

First quarter 2014 included:

Income

  • ($36 million) negative valuation adjustment on the Vantiv warrant
  • $1 million benefit related to the valuation of the total return swap entered into as part of the 2009 sale of Visa, Inc. Class B shares

Expenses

  • ($51 million) in litigation reserve charges

Results also included the impact of $3 million in mortgage repurchase provision.

Second quarter 2013 included:

Income

  • $242 million gain on the sale of Vantiv shares
  • $76 million positive valuation adjustment on the Vantiv warrant
  • $10 million pre-tax benefit resulting from a settlement related to the previously surrendered bank-owned life insurance (BOLI) policy
  • ($5 million) charge related to the valuation of the total return swap entered into as part of the 2009 sale of Visa, Inc. Class B shares

Expenses

  • ($51 million) in charges to increase litigation reserves

Results also included the impact of $20 million in mortgage repurchase provision.

                     
Earnings Highlights
                                     
For the Three Months Ended     % Change
June March December September June
2014   2014   2013   2013   2013     Seq   Yr/Yr
Earnings ($ in millions)
Net income attributable to Bancorp $ 439 $ 318 $ 402 $ 421 $ 591 38 % (26 %)
Net income available to common shareholders $ 416 $ 309 $ 383 $ 421 $ 582 35 % (29 %)
 
Common Share Data
Earnings per share, basic 0.49 0.36 0.44 0.47 0.67 36 % (27 %)
Earnings per share, diluted 0.49 0.36 0.43 0.47 0.65 36 % (25 %)
Cash dividends per common share 0.13 0.12 0.12 0.12 0.12 8 % 8 %
 
Financial Ratios
Return on average assets

1.34

%

 

1.00

%

 

1.24

%

 

1.35

%

 

1.94

%

 

34 % (31 %)
Return on average common equity 11.9 9.0 10.8 12.1 17.3 31 % (31 %)
Return on average tangible common equity(b) 14.4 11.0 13.1 14.7 21.1 31 % (32 %)
Tier I risk-based capital 10.80 10.45 10.43 11.21 11.14 3 % (3 %)
Tier I common equity(b) 9.61 9.51 9.45 9.95 9.49 1 % 1 %
Net interest margin(a) 3.15 3.22 3.21 3.31 3.33 (2 %) (5 %)
Efficiency(a) 58.2 64.9 61.5 59.2 53.2 (10 %) 9 %
 
Common shares outstanding (in thousands) 844,489 847,569 855,306 887,030 851,474 - (1 %)
Average common shares outstanding
(in thousands):
Basic 838,492 845,860 868,077 880,183 858,583 (1 %) (2 %)
Diluted 848,245 857,924 877,511 888,111 900,625 (1 %) (6 %)

(a)

  

Presented on a fully taxable equivalent basis.

(b)

The tangible common equity and tier 1 common equity ratios, while not required by accounting principles generally accepted in the United States of America (U.S. GAAP), are considered to be critical metrics with which to analyze banks. The ratios have been included herein to facilitate a greater understanding of the Bancorp's capital structure and financial condition. See the Regulation G Non-GAAP Reconciliation table for a reconciliation of these ratios to U.S. GAAP.

The percentages in all of the tables in this earning release are calculated on actual dollar amounts and not the rounded dollar amounts.
NM: Not meaningful.
 

“Second quarter results reflected our continued focus on revenue generation and core expense management, which contributed to return on average assets of 1.34 percent and return on average tangible common equity* of 14.4 percent,” said Kevin Kabat, CEO of Fifth Third Bancorp. “During the quarter, we also continued to monetize our ownership position in Vantiv by selling 6 million shares that contributed $125 million in pre-tax earnings. Vantiv continues to be an important investment for us and we still own 22.8 percent of the company and remain their largest shareholder.

“Balance sheet growth in the quarter reflected the strategic investments we have made in our businesses as well as increased investment securities balances. We continued to see solid growth in our commercial business, particularly in C&I lending, which was up 10 percent compared with last year and commercial core deposits, which were up 16 percent compared with the prior year. Overall, core deposits were up 9 percent over last year.

“Fee income results for the quarter demonstrated solid core operating trends and sequential growth was highlighted by card and processing revenue, up 11 percent, and service charges on deposits, up 5 percent. Credit results improved in the quarter including net charge-offs of 45 basis points of loans. Our nonperforming asset ratio was 92 basis points and was below 100 basis points for the first time since the third quarter of 2007.

“During the quarter, we increased our quarterly common stock dividend 8 percent to $0.13 and entered into an agreement to repurchase $150 million of common shares, which represented the first quarter of share repurchases under our 2014 CCAR plan. We continue to maintain strong capital ratios as our Tier I common equity ratio* was 9.6 percent, and 9.3 percent as estimated pro forma under the Basel III rules.”

* Non-GAAP measure; see Reg. G reconciliation on page 33 in Exhibit 99.1 of 8-k filing dated 7/17/14.

Income Statement Highlights

                      
                                     
For the Three Months Ended     % Change
June   March   December   September   June          
2014   2014   2013   2013   2013     Seq   Yr/Yr
Condensed Statements of Income ($ in millions)
Net interest income (taxable equivalent) $ 905 $ 898 $ 905 $ 898 $ 885 1 % 2 %
Provision for loan and lease losses 76 69 53 51 64 10 % 20 %
Total noninterest income 736 564 703 721 1,060 31 % (31 %)
Total noninterest expense           954     950     989     959     1,035   -     (8 %)
Income before income taxes (taxable equivalent)           611     443     566     609     846   38 %   (28 %)
 
Taxable equivalent adjustment 5 5 5 5 5 (11 %) (3 %)
Applicable income taxes           167     119     159     183     250   40 %   (33 %)
Net income 439 319 402 421 591 38 % (26 %)
Less: Net income attributable to noncontrolling interests           -    

1

    -     -     -   (60 %)   24 %
Net income attributable to Bancorp 439 318 402 421 591 38 % (26 %)
Dividends on preferred stock           23     9     19     -     9   NM   NM
Net income available to common shareholders           416     309     383     421     582   35 %   (29 %)
Earnings per share, diluted         $ 0.49   $ 0.36   $ 0.43   $ 0.47   $ 0.65   36 %   (25 %)
 
Net Interest Income                      
                                     
For the Three Months Ended     % Change
June March December September June
2014   2014   2013   2013   2013     Seq   Yr/Yr
Interest Income ($ in millions)
Total interest income (taxable equivalent) $ 1,013 $ 998 $ 1,007 $ 997 $ 989 1 % 2 %
Total interest expense           108       100       102       99       104       8 %   4 %
Net interest income (taxable equivalent)         $ 905     $ 898     $ 905     $ 898     $ 885       1 %   2 %
 
Average Yield
Yield on interest-earning assets (taxable equivalent) 3.53 % 3.58 % 3.57 % 3.68 % 3.73 % (1 %) (6 %)
Rate paid on interest-bearing liabilities           0.54 %     0.51 %     0.52 %     0.54 %     0.57 %     5 %   (6 %)
Net interest rate spread (taxable equivalent)           2.99 %     3.07 %     3.05 %     3.14 %     3.16 %     (2 %)   (5 %)
Net interest margin (taxable equivalent) 3.15 % 3.22 % 3.21 % 3.31 % 3.33 % (2 %) (5 %)
 
Average Balances ($ in millions)
Loans and leases, including held for sale $ 91,241 $ 90,238 $ 88,865 $ 89,154 $ 89,473 1 % 2 %
Total securities and other short-term investments 23,940 22,940 23,043 18,528 16,962 4 % 41 %
Total interest-earning assets 115,181 113,178 111,908 107,682 106,435 2 % 8 %
Total interest-bearing liabilities 80,770 79,130 77,573 73,190 73,363 2 % 10 %
Bancorp shareholders' equity           15,157       14,862       14,757       14,440       14,221       2 %   7 %
 

Net interest income of $905 million on a fully taxable equivalent basis increased $7 million from the first quarter driven by interest-earning asset growth and an additional day in the second quarter. These benefits were partially offset by the effects of loan repricing and higher interest expense associated with debt issuances in the first half of 2014.

The net interest margin was 3.15 percent, a decrease of 7 bps from the previous quarter primarily due to the effects of loan repricing and debt issuances partially offset by higher yields on investment securities. Additionally, day count negatively impacted the net interest margin by 2 bps.

Compared with the second quarter of 2013, net interest income increased $20 million and the net interest margin decreased 18 bps. The increase in net interest income was driven by higher balances and yields on investment securities as well as higher loan balances partially offset by the effect of loan repricing. The decline in the net interest margin was primarily driven by the impact of loan repricing.

Securities

Average securities and other short-term investments were $23.9 billion in the second quarter of 2014 compared with $22.9 billion in the previous quarter and $17.0 billion in the second quarter of 2013. Average securities of $21.8 billion increased $1.3 billion from the prior quarter due to net additions of approximately $2.1 billion of securities in the second quarter of 2014 primarily reflecting purchases of securities with favorable treatment under the proposed LCR standards. Other short-term investments average balances of $2.2 billion decreased $327 million sequentially.

Loans                      
                                     
For the Three Months Ended     % Change
June March December September June
2014   2014   2013   2013   2013     Seq   Yr/Yr
Average Portfolio Loans and Leases ($ in millions)
Commercial:
Commercial and industrial loans $ 41,374 $ 40,377 $ 38,835 $ 38,133 $ 37,630 2 % 10 %
Commercial mortgage loans 7,885 7,981 8,047 8,273 8,618 (1 %) (8 %)
Commercial construction loans 1,362 1,116 952 793 713 22 % 91 %
Commercial leases           3,555     3,607     3,578     3,572     3,552     (1 %)   -  
Subtotal - commercial loans and leases           54,176     53,081     51,412     50,771     50,513     2 %   7 %
Consumer:
Residential mortgage loans 12,611 12,659 12,609 12,486 12,260 - 3 %
Home equity 9,101 9,194 9,296 9,432 9,625 (1 %) (5 %)
Automobile loans 12,070 12,023 12,019 12,083 11,887 - 2 %
Credit card 2,232 2,230 2,202 2,140 2,071 - 8 %
Other consumer loans and leases           359     343     357     360     351     5 %   2 %
Subtotal - consumer loans and leases           36,373     36,449     36,483     36,501     36,194     -     -  
Total average loans and leases (excluding held for sale) $ 90,549 $ 89,530 $ 87,895 $ 87,272 $ 86,707 1 % 4 %
 
Average loans held for sale           692     708     970     1,882     2,766     (2 %)   (75 %)
 

Average loan and lease balances (excluding loans held-for-sale) increased $1.0 billion, or 1 percent, sequentially and increased $3.8 billion, or 4 percent, from the second quarter of 2013. The sequential increase in average loans and leases was primarily driven by growth in the commercial and industrial (C&I) and commercial construction loans. Sequential growth was partially offset primarily by declines in commercial mortgage and home equity loans. Period end loans and leases (excluding loans held-for-sale) of $90.5 billion increased $779 million, or 1 percent, sequentially and $3.5 billion, or 4 percent, from a year ago.

Average commercial portfolio loan and lease balances increased $1.1 billion, or 2 percent, sequentially and increased $3.7 billion, or 7 percent, from the second quarter of 2013. The increase was largely driven by growth in average C&I loans of $997 million from the prior quarter and $3.7 billion from the second quarter of 2013. Within commercial real estate, average commercial mortgage balances continued to decline and average commercial construction balances increased for the sixth consecutive quarter. Commercial line usage, on an end of period basis, was 32 percent of committed lines in the second quarter of 2014 compared with 30 percent in the first quarter of 2014 and 31 percent in the second quarter of 2013.

Average consumer portfolio loan and lease balances were flat sequentially and year-over-year. Average residential mortgage loans were flat sequentially and increased 3 percent from a year ago. On a sequential basis, average home equity loans declined 1 percent while average credit card loans and automobile loans were flat. Compared with the second quarter of 2013, average home equity loans declined 5 percent while average credit card loans increased 8 percent and automobile loans increased 2 percent.

Average loans held-for-sale balances of $692 million decreased $16 million sequentially and $2.1 billion compared with the second quarter of 2013. Period end loans held-for-sale of $682 million decreased $98 million from the previous quarter and $1.5 billion from the second quarter of 2013 reflecting lower residential mortgage held-for-sale balances.

Deposits                      
                                     
For the Three Months Ended     % Change
June March December September June
2014   2014   2013   2013   2013     Seq   Yr/Yr
Average Deposits ($ in millions)
Demand $ 31,275 $ 30,626 $ 30,765 $ 30,655 $ 29,682 2 % 5 %
Interest checking 25,222 25,911 24,650 23,116 22,796 (3 %) 11 %
Savings 16,509 16,903 17,323 18,026 18,864 (2 %) (12 %)
Money market 13,942 12,439 11,285 9,693 8,918 12 % 56 %
Foreign office(a)           2,200     2,017     1,717     1,755     1,418     9 %   55 %
Subtotal - Transaction deposits 89,148 87,896 85,740 83,245 81,678 1 % 9 %
Other time           3,693     3,616     3,529     3,676     3,859     2 %   (4 %)
Subtotal - Core deposits 92,841 91,512 89,269 86,921 85,537 1 % 9 %
Certificates - $100,000 and over 3,840 5,576 7,456 7,315 6,519 (31 %) (41 %)
Other           -     -     -     17     10     NM   NM
Total deposits         $ 96,681   $ 97,088   $ 96,725   $ 94,253   $ 92,066     -     5 %
(a)   Includes commercial customer Eurodollar sweep balances for which the Bancorp pays rates comparable to other commercial deposit accounts.
 

Average core deposits increased $1.3 billion, or 1 percent, sequentially and increased $7.3 billion, or 9 percent, from the second quarter of 2013. Average transaction deposits increased $1.3 billion, or 1 percent, from the first quarter of 2014 primarily driven by higher money market account and demand deposit balances, partially offset by lower interest checking and savings balances. Year-over-year transaction deposits increased $7.5 billion, or 9 percent, driven by higher money market account, interest checking, and demand deposit balances, partially offset by lower savings balances. Other time deposits increased 2 percent sequentially and decreased 4 percent compared with the second quarter of 2013.

Commercial average transaction deposits were flat sequentially and increased 16 percent from the previous year. Sequential performance reflected higher demand deposit, foreign office, and savings balances, offset by lower interest checking and money market account balances and year-over-year growth reflected higher demand deposit, interest checking, money market account, and foreign office balances due to customers holding higher balances.

Consumer average transaction deposits increased 2 percent sequentially and 4 percent from the second quarter of 2013. The sequential increase reflected higher money market account and demand deposit balances partially offset by lower savings and interest checking balances. Year-over-year growth was driven by increased money market account and interest checking balances partially offset by lower savings and demand deposit balances.

Wholesale Funding                      
                                     
For the Three Months Ended     % Change
June March December September June
2014   2014   2013   2013   2013     Seq   Yr/Yr
Average Wholesale Funding ($ in millions)
Certificates - $100,000 and over $ 3,840 $ 5,576 $ 7,456 $ 7,315 $ 6,519 (31 %) (41 %)
Other deposits - - - 17 10 NM NM
Federal funds purchased 606 547 301 464 560 11 % 8 %
Other short-term borrowings 2,234 1,808 2,177 1,675 2,867 24 % (22 %)
Long-term debt           12,524     10,313     9,135     7,453     7,552     21 %   66 %
Total wholesale funding         $ 19,204   $ 18,244   $ 19,069   $ 16,924   $ 17,508     5 %   10 %
 

Average wholesale funding of $19.2 billion increased $960 million, or 5 percent, sequentially and $1.7 billion, or 10 percent, compared with the second quarter of 2013. The sequential increase was driven by an increase in long-term debt, partially offset by a decrease in certificates $100,000 and over. Average other short-term borrowings increased $426 million from the prior quarter primarily due to an increase in FHLB borrowings. The year-over-year increase reflected an increase in long-term debt, partially offset by a decrease in certificates $100,000 and over and other short-term borrowings. Average long-term debt balances reflected the issuance of $1.5 billion of bank senior debt in the second quarter of 2014, as well as the full quarter impact of $500 million in Bancorp senior debt issued in the first quarter of 2014. On June 11, 2014, Fifth Third completed a $1.5 billion auto securitization, which did not significantly impact average balances due to timing.

Noninterest Income                      
                                     
For the Three Months Ended     % Change
June March December September June
2014   2014   2013   2013   2013     Seq   Yr/Yr
Noninterest Income ($ in millions)
Service charges on deposits $ 139 $ 133 $ 142 $ 140 $ 136 5 % 2 %
Corporate banking revenue 107 104 94 102 106 3 % 1 %
Mortgage banking net revenue 78 109 126 121 233 (29 %) (67 %)
Investment advisory revenue 102 102 98 97 98 - 4 %
Card and processing revenue 76 68 71 69 67 11 % 12 %
Other noninterest income 226 41 170 185 414 NM (45 %)
Securities gains, net 8 7 2 2 - 16 % NM
Securities gains, net - non-qualifying
hedges on mortgage servicing rights           -     -     -     5     6     -     (100 %)
Total noninterest income         $ 736   $ 564   $ 703   $ 721   $ 1,060     31 %   (31 %)
 

Noninterest income of $736 million increased $172 million sequentially and decreased $324 million compared with prior year results. These comparisons reflect the impacts described below.

For the quarters ending June 30, 2014, March 31, 2014, and June 30, 2013, the impacts of Vantiv warrant valuation adjustments were positive $63 million, negative $36 million, and positive $76 million, respectively. Quarterly results also included charges related to the valuation of the total return swap entered into as part of the 2009 sale of Visa, Inc. Class B shares. Valuation adjustments on this swap were a negative $16 million, positive $1 million, and negative $5 million in the second quarter of 2014, the first quarter of 2014, and the second quarter of 2013, respectively. Gains on sales of Vantiv shares were $125 million in the second quarter of 2014 and $242 million in the second quarter of 2013. Additionally, second quarter 2014 results included a $17 million negative valuation adjustment for land upon which the Bancorp no longer expects to build branches, and a $12 million negative impact to equity method income from the Bancorp’s interest in Vantiv related to certain charges recognized by Vantiv as a result of their acquisition of Mercury Payment Systems during the quarter. Second quarter 2013 results also included a pre-tax benefit of $10 million resulting from the settlement related to a previously surrendered BOLI policy. Excluding these items and net securities gains in all periods, noninterest income of $585 million decreased $7 million, or 1 percent, from the previous quarter and decreased $152 million, or 21 percent, from the second quarter of 2013. The sequential and year-over-year decline was primarily due to lower mortgage banking net revenue.

Service charges on deposits of $139 million increased 5 percent from the first quarter and 2 percent compared with the same quarter last year. Sequential growth was due to a 6 percent increase in retail service charges from seasonally lower first quarter volume as well as a 4 percent increase in commercial service charges. The year-over-year increase was driven by an increase in commercial service charges of 7 percent, partially offset by a 6 percent decline in retail service charges due to higher initial consumer service charges that followed the final rollout of our new deposit products in the year ago quarter. The sequential and year-over-year increase in commercial service charges was primarily related to new products and new clients.

Corporate banking revenue of $107 million increased 3 percent from the first quarter of 2014 and 1 percent from the second quarter last year. The sequential increase was due to higher syndication fees, foreign exchange fees, and interest rate derivatives, partially offset by a decline in lease remarketing fees and institutional sales revenue. The year-over-year increase was driven by higher syndication fees, institutional sales revenue and letter of credit fees, partially offset by a decline in interest rate derivatives, lease remarketing fees, business lending fees, and foreign exchange fees.

Mortgage banking net revenue was $78 million in the second quarter of 2014, a 29 percent decrease from the first quarter of 2014 and a 67 percent decrease from the second quarter of 2013. Second quarter 2014 originations were $2.0 billion, compared with $1.7 billion in the previous quarter and $7.5 billion in the second quarter of 2013. Second quarter 2014 originations resulted in gains of $42 million on mortgages sold, compared with gains of $41 million during the previous quarter and $150 million during the second quarter of 2013. The decrease from the prior year reflected lower production and lower gain on sale margins, while sequentially higher mortgage originations were offset by lower gain on sale margins. Mortgage servicing fees were $62 million this quarter, the first quarter of 2014, and the second quarter of 2013. Mortgage banking net revenue is also affected by net servicing asset valuation adjustments, which include mortgage servicing rights (MSR) amortization and MSR valuation adjustments (including mark-to-market adjustments on free-standing derivatives used to economically hedge the MSR portfolio). These net servicing asset valuation adjustments were negative $26 million in the second quarter of 2014 (reflecting MSR amortization of $32 million and MSR valuation adjustments of positive $6 million); positive $6 million in the first quarter of 2014 (MSR amortization of $22 million and MSR valuation adjustments of positive $28 million); and positive $21 million in the second quarter of 2013 (MSR amortization of $51 million and MSR valuation adjustments of positive $72 million). The mortgage servicing asset, net of the valuation reserve, was $928 million at quarter-end on a servicing portfolio of $68 billion.

Investment advisory revenue of $102 million was flat from the first quarter and increased 4 percent year-over-year. Sequential comparisons reflected an increase in brokerage fees which were offset by lower tax-related private client services revenue, which is seasonally stronger in the first quarter. The year-over-year increase was attributable to higher private client services revenue, partially offset by lower securities fees.

Card and processing revenue of $76 million in the second quarter of 2014 increased 11 percent sequentially and 12 percent from the second quarter of 2013. The sequential increase reflected higher transaction volumes compared with seasonally weak first quarter volumes. The year-over-year increase reflects an increase in the number of actively used cards as well as higher processing fees related to additional ATM locations.

Other noninterest income totaled $226 million in the second quarter of 2014, compared with $41 million in the previous quarter and $414 million in the second quarter of 2013. As described above, included in results were the impact of gains on sales of Vantiv shares, Vantiv warrant valuation adjustments, charges related to the valuation of the Visa total return swap, a valuation adjustment for land upon which the Bancorp no longer expects to build branches, a negative impact to equity method income from the Bancorp’s interest in Vantiv related to certain charges recognized by Vantiv as a result of their acquisition of Mercury Payment Systems, and a settlement related to a previously surrendered BOLI policy. Excluding these items, other noninterest income of $83 million increased approximately $7 million, or 9 percent, from the first quarter of 2014 primarily related to an improvement in net credit related costs and decreased approximately $8 million, or 9 percent, from the second quarter of 2013 primarily due to a decrease in insurance income related to mortgage production.

Net gains on investment securities were $8 million in the second quarter of 2014, compared with $7 million in the previous quarter and an immaterial amount in the second quarter of 2013.

Noninterest Expense                              
                                             
For the Three Months Ended     % Change
June March December September June
2014     2014     2013     2013     2013     Seq   Yr/Yr
Noninterest Expense ($ in millions)
Salaries, wages and incentives $ 368 $ 359 $ 388 $ 389 $ 404 2 % (9 %)
Employee benefits 79 101 78 83 83 (22 %) (5 %)
Net occupancy expense 79 80 77 75 76 (1 %) 3 %
Technology and communications 52 53 53 52 50 (3 %) 4 %
Equipment expense 30 30 29 29 28 1 % 9 %
Card and processing expense 37 31 37 33 33 17 % 10 %
Other noninterest expense           309       296       327       298       361     5 %   (14 %)
Total noninterest expense         $ 954     $ 950     $ 989     $ 959     $ 1,035     -     (8 %)
 

Noninterest expense of $954 million was flat compared with the first quarter of 2014 and declined 8 percent from the second quarter of 2013.

Second quarter 2014 expenses included $61 million in charges to litigation reserves compared with $51 million each in the first quarter of 2014 and second quarter of 2013. Excluding these items, noninterest expense of $893 million was down $6 million, or 1 percent, sequentially and decreased $91 million, or 9 percent, year-over-year. The year-over-year decline reflected lower compensation-related expense and benefits expense, primarily due to changes in our mortgage and retail staffing.

Second quarter 2014 other noninterest expense included provision for mortgage repurchases of $1 million. This compared with expense of $3 million in the first quarter and expense of $20 million a year ago. (Realized mortgage repurchase losses were $5 million in the second quarter of 2014, compared with $10 million last quarter and $14 million in the second quarter of 2013).

Credit Quality                
                           
For the Three Months Ended
June March December September June
2014   2014   2013   2013   2013
Total net losses charged off ($ in millions)
Commercial and industrial loans ($31 ) ($97 ) ($66 ) ($44 ) ($33 )
Commercial mortgage loans (9 ) (3 ) (8 ) (2 ) (10 )
Commercial construction loans (8 ) (5 ) (4 ) 2 -
Commercial leases - - - - (2 )
Residential mortgage loans (8 ) (15 ) (13 ) (12 ) (15 )
Home equity (18 ) (16 ) (26 ) (19 ) (23 )
Automobile loans (5 ) (8 ) (6 ) (6 ) (5 )
Credit card (21 ) (19 ) (21 ) (19 ) (19 )
Other consumer loans and leases         (1 )   (5 )   (4 )   (9 )   (5 )
Total net losses charged off (101 ) (168 ) (148 ) (109 ) (112 )
 
Total losses (127 ) (190 ) (183 ) (141 ) (145 )
Total recoveries         26     22     35     32     33  
Total net losses charged off ($101 ) ($168 ) ($148 ) ($109 ) ($112 )
Ratios (annualized)
Net losses charged off as a percent of average loans and leases
(excluding held for sale) 0.45 % 0.76 % 0.67 % 0.49 % 0.51 %
Commercial 0.35 % 0.79 % 0.60 % 0.35 % 0.36 %
Consumer         0.60 %   0.72 %   0.76 %   0.70 %   0.73 %
 

Net charge-offs were $101 million, or 45 bps, of average loans on an annualized basis, in the second quarter of 2014 compared with net charge-offs of $168 million, or 76 bps, in the first quarter of 2014 and $112 million, or 51 bps, in the second quarter of 2013. The first quarter of 2014 included three credits that together resulted in combined charge-offs of $60 million (27 bps).

Commercial net charge-offs were $48 million, or 35 bps, down $57 million sequentially. C&I net charge-offs of $31 million decreased $66 million from the previous quarter primarily reflecting the impact of the charge-offs mentioned above. Commercial real estate net charge-offs increased $9 million from $8 million in the previous quarter.

Consumer net charge-offs were $53 million, or 60 bps, down $10 million sequentially. Net charge-offs on residential mortgage loans in the portfolio were $8 million, down $7 million from the previous quarter. Home equity net charge-offs were $18 million, up $2 million from the first quarter of 2014, and net charge-offs in the auto portfolio of $5 million were down $3 million compared with the prior quarter. Net charge-offs on consumer credit card loans were $21 million, up $2 million from the first quarter. Net charge-offs on other consumer loans were $1 million, down $4 million compared with the previous quarter.

        For the Three Months Ended
June   March   December   September   June
2014   2014   2013   2013   2013
Allowance for Credit Losses ($ in millions)
Allowance for loan and lease losses, beginning $ 1,483 $ 1,582 $ 1,677 $ 1,735 $ 1,783
Total net losses charged off (101 ) (168 ) (148 ) (109 ) (112 )
Provision for loan and lease losses           76       69       53       51       64  
Allowance for loan and lease losses, ending 1,458 1,483 1,582 1,677 1,735
 
Reserve for unfunded commitments, beginning 153 162 167 166 168
Provision (benefit) for unfunded commitments           (11 )     (9 )     (5 )     1       (2 )
Reserve for unfunded commitments, ending 142 153 162 167 166
 
Components of allowance for credit losses:
Allowance for loan and lease losses 1,458 1,483 1,582 1,677 1,735
Reserve for unfunded commitments           142       153       162       167       166  
Total allowance for credit losses $ 1,600 $ 1,636 $ 1,744 $ 1,844 $ 1,901
Allowance for loan and lease losses ratio
As a percent of loans and leases 1.61 % 1.65 % 1.79 % 1.92 % 1.99 %
As a percent of nonperforming loans and leases(a) 228 % 202 % 211 % 218 % 191 %
As a percent of nonperforming assets(a) 175 % 157 % 161 % 165 % 151 %
 
(a) Excludes nonaccrual loans and leases in loans held for sale.
 

Provision for loan and lease losses totaled $76 million in the second quarter of 2014, up $7 million from the first quarter of 2014 and up $12 million from the second quarter of 2013. The allowance for loan and lease losses declined $25 million sequentially reflecting the portfolio’s overall risk profile and charges to the allowance. The allowance represented 1.61 percent of total loans and leases outstanding as of quarter end, compared with 1.65 percent last quarter, and represented 228 percent of nonperforming loans and leases, and 175 percent of nonperforming assets.

        As of
June   March   December   September   June
Nonperforming Assets and Delinquent Loans ($ in millions) 2014   2014   2013   2013   2013
Nonaccrual portfolio loans and leases:
Commercial and industrial loans $ 103 $ 153 $ 127 $ 146 $ 218
Commercial mortgage loans 86 96 90 106 169
Commercial construction loans 3 3 10 27 39
Commercial leases 2 3 3 1 1
Residential mortgage loans 56 68 83 83 96
Home equity 73 75 74 28 28
Automobile loans - - - - -
Other consumer loans and leases           -       -       -       -       -  
Total nonaccrual loans and leases (excludes restructured loans) $ 323 $ 398 $ 387 $ 391 $ 551
Restructured loans - commercial (nonaccrual)(c) 202 209 228 241 196
Restructured loans - consumer (nonaccrual)           115       126       136       138       162  
Total nonaccrual portfolio loans and leases $ 640 $ 733 $ 751 $ 770 $ 909
Repossessed personal property 18 6 7 7 6
Other real estate owned(a)           174       207       222       237       235  
Total nonperforming assets(b) $ 832 $ 946 $ 980 $ 1,014 $ 1,150
Nonaccrual loans held for sale 5 3 6 11 15
Restructured loans - commercial (nonaccrual) held for sale           -       -       -       -       -  
Total nonperforming assets including loans held for sale         $ 837     $ 949     $ 986     $ 1,025     $ 1,165  
 
Restructured Consumer loans and leases (accrual) $ 1,623 $ 1,682 $ 1,685 $ 1,694 $ 1,671
Restructured Commercial loans and leases (accrual)(c) $ 914 $ 847 $ 869 $ 499 $ 475
 
Total loans and leases 90 days past due $ 94 $ 94 $ 103 $ 156 $ 152
Nonperforming loans and leases as a percent of portfolio loans,
leases and other assets, including other real estate owned(b) 0.70 % 0.82 % 0.84 % 0.88 % 1.04 %
Nonperforming assets as a percent of portfolio loans, leases
and other assets, including other real estate owned(b) 0.92 % 1.05 % 1.10 % 1.16 % 1.32 %

(a)

  

Excludes government insured advances.

(b)

Does not include nonaccrual loans held for sale.

(c)

  

Excludes $20.9 million of restructured nonaccrual loans and $7.6 million of restructured accruing loans as of June 30, 2014, March 31, 2014 and December 31, 2013 and excludes $21.5 million of restructured nonaccrual loans and $7.6 million of restructured accruing loans as of September 30, 2013 and June 30, 2013 associated with a consolidated variable interest entity in which the Bancorp has no continuing credit risk.

 

Total nonperforming assets were $837 million, a decline of $112 million, or 12 percent, from the previous quarter. Nonperforming loans (NPLs) at quarter-end were $640 million or 0.70 percent of total loans, leases and OREO, and decreased $93 million, or 13 percent, from the previous quarter.

Commercial NPAs were $512 million, or 0.95 percent of commercial loans, leases and OREO, and decreased $83 million, or 14 percent, from the first quarter. Commercial NPLs were $396 million, or 0.73 percent of commercial loans and leases, and decreased $68 million from last quarter. C&I NPAs of $265 million decreased $39 million from the prior quarter. Commercial mortgage NPAs were $212 million, down $28 million from the previous quarter. Commercial construction NPAs were $31 million, a decrease of $15 million from the previous quarter. Commercial lease NPAs were $4 million, down $1 million from the previous quarter. Commercial NPAs included $202 million of nonaccrual troubled debt restructurings (TDRs), compared with $209 million last quarter.

Consumer NPAs of $320 million, or 0.88 percent of consumer loans, leases and OREO, decreased $31 million from the first quarter. Consumer NPLs were $244 million, or 0.67 percent of consumer loans and leases and decreased $25 million from last quarter. Residential mortgage NPAs were $172 million, $29 million lower than last quarter. Home equity NPAs of $110 million were flat sequentially and credit card NPAs of $32 million were down $1 million compared with the previous quarter. Consumer nonaccrual TDRs were $115 million in the second quarter of 2014, compared with $126 million in the first quarter of 2014.

Second quarter OREO balances included in NPA balances described above were $174 million, down $33 million from the first quarter, and included $103 million in commercial OREO and $71 million in consumer OREO. Repossessed personal property of $18 million increased $12 million from the prior quarter.

Loans still accruing over 90 days past due were $94 million, consistent with the first quarter of 2014. Commercial balances over 90 days past due were immaterial compared with $1 million in the prior quarter, and consumer balances 90 days past due of $94 million were up $1 million from the previous quarter. Loans 30-89 days past due of $243 million were flat from the previous quarter. Commercial balances 30-89 days past due of $11 million were up $2 million sequentially and consumer balances 30-89 days past due of $232 million decreased $2 million from the first quarter. The above delinquencies figures exclude nonaccruals described previously.

Capital Position                
                           
For the Three Months Ended
June March December September June
2014   2014   2013   2013   2013
Capital Position
Average shareholders' equity to average assets 11.57 % 11.53 % 11.51 % 11.71 % 11.64 %
Tangible equity(a) 9.77 % 9.61 % 9.44 % 9.75 % 9.65 %
Tangible common equity (excluding unrealized gains/losses)(a) 8.74 % 8.79 % 8.63 % 9.27 % 8.83 %
Tangible common equity (including unrealized gains/losses)(a) 9.00 % 8.93 % 8.69 % 9.42 % 8.94 %
Tangible common equity as a percent of risk-weighted assets (excluding unrealized gains/losses)(a)(b) 9.67 % 9.57 % 9.52 % 10.01 % 9.56 %

Regulatory capital ratios:(c)

Tier I risk-based capital 10.80 % 10.45 % 10.43 % 11.21 % 11.14 %
Total risk-based capital 14.30 % 14.02 % 14.17 % 14.43 % 14.43 %
Tier I leverage 9.86 % 9.71 % 9.70 % 10.64 % 10.45 %
Tier I common equity(a) 9.61 % 9.51 % 9.45 % 9.95 % 9.49 %
Book value per share 16.74 16.27 15.85 15.84 15.56
Tangible book value per share(a) 13.86 13.40 13.00 13.09 12.69
(a)   The tangible equity, tangible common equity, tier I common equity and tangible book value per share ratios, while not required by accounting principles generally accepted in the United States of America (U.S. GAAP), are considered to be critical metrics with which to analyze banks. The ratios have been included herein to facilitate a greater understanding of the Bancorp's capital structure and financial condition. See the Regulation G Non-GAAP Reconciliation table for a reconciliation of these ratios to U.S. GAAP.
(b) Under the banking agencies risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together resulting in the Bancorp's total risk weighted assets.
(c)   Current period regulatory capital data ratios are estimated.
 

Capital ratios remained strong during the quarter, reflecting growth in retained earnings, and included the impact of the issuance of preferred stock, the payment of preferred dividends, and share repurchase activity. Compared with the prior quarter, the Tier 1 common equity ratio* of 9.61 percent increased 10 bps. The tangible common equity to tangible assets ratio* was 8.74 percent (excluding unrealized gains/losses) and 9.00 percent (including unrealized gains/losses). The Tier 1 risk-based capital ratio increased 35 bps to 10.80 percent. The total risk-based capital ratio increased 28 bps to 14.30 percent and the Leverage ratio increased 15 bps to 9.86 percent.

Our current estimate of the pro-forma fully phased in Tier I common equity ratio at June 30, 2014 under the final capital rule, assuming the Company elected to maintain the current treatment of AOCI components in capital, would be approximately 9.3 percent**. This would compare with 9.6 percent* as calculated under the currently prevailing Basel I capital framework. Were Fifth Third to make the election to include AOCI components in capital, the June 30, 2014 pro forma Basel III Tier 1 common ratio would be increased by approximately 31 bps. Fifth Third’s pro forma Tier 1 common equity ratio exceeds the minimum buffered Tier 1 common equity ratio of 7 percent, comprising a minimum of 4.5 percent plus a capital conservation buffer of 2.5 percent. The pro forma Tier 1 common equity ratio does not include the effect of any mitigating actions the Bancorp may undertake to offset any impact of the final capital rules.

Book value per share at June 30, 2014 was $16.74 and tangible book value per share* was $13.86, compared with the March 31, 2014 book value per share of $16.27 and tangible book value per share of $13.40.

As previously announced, Fifth Third entered into a share repurchase agreement with a counterparty on April 28, 2014, whereby Fifth Third would purchase approximately $150 million of its outstanding common stock. This transaction reduced Fifth Third’s first quarter share count by 6.22 million shares on May 1, 2014. Settlement of the forward contract related to this agreement is expected to occur on or before July 28, 2014. In total, the incremental impact to the average diluted share count in the second quarter of 2014 was approximately 9 million shares due to share repurchase transactions in the first and second quarters of 2014.

Pursuant to Fifth Third’s 2014 CCAR capital plan, Fifth Third issued $300 million of 4.90 percent fixed-to-floating rate non-cumulative perpetual preferred stock (Series J preferred stock) on June 5, 2014.

* Non-GAAP measure; see Reg. G reconciliation on page 33 in Exhibit 99.1 of 8-k filing dated 7/17/14.
** Capital ratios estimated; presented under current U.S. capital regulations. The pro forma Basel III Tier I common equity ratio is management’s estimate based upon its current interpretation of recent prospective regulatory capital requirements approved in July 2013.

Tax Rate

The effective tax rate was 27.6 percent this quarter compared with 27.3 percent in the first quarter of 2014 and 29.7 percent in the second quarter of 2013.

Other

Fifth Third Bank owns 43 million units representing a 22.8 percent interest in Vantiv Holding, LLC, convertible into shares of Vantiv, Inc., a publicly traded firm (NYSE: VNTV). Based upon Vantiv’s closing price of $33.62 on June 30, 2014, our interest in Vantiv was valued at approximately $1.4 billion. Next month in our 10-Q, we will update our disclosure of the carrying value of our interest in Vantiv stock, which was $437 million as of March 31, 2014. The difference between the market value and the book value of Fifth Third’s interest in Vantiv’s shares is not recognized in Fifth Third’s equity or capital. Additionally, Fifth Third has a warrant to purchase additional shares in Vantiv which is carried as a derivative asset at a fair value of $412 million as of June 30, 2014.

Conference Call

Fifth Third will host a conference call to discuss these financial results at 9:30 a.m. (Eastern Time) today. This conference call will be webcast live by Thomson Financial and may be accessed through the Fifth Third Investor Relations website at www.53.com (click on “About Fifth Third” then “Investor Relations”). Institutional investors can access the call via Thomson Financial’s password-protected event management site, StreetEvents (www.streetevents.com).

Those unable to listen to the live webcast may access a webcast replay through the Fifth Third Investor Relations website at the same web address. Additionally, a telephone replay of the conference call will be available beginning approximately two hours after the conference call until Thursday, July 31 by dialing 800-585-8367 for domestic access and 404-537-3406 for international access (passcode 53688833#).

Corporate Profile

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. As of June 30, 2014, the Company had $133 billion in assets and operated 15 affiliates with 1,309 full-service Banking Centers, including 102 Bank Mart® locations, most open seven days a week, inside select grocery stores and 2,619 ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, Missouri, Georgia and North Carolina. Fifth Third operates four main businesses: Commercial Banking, Branch Banking, Consumer Lending, and Investment Advisors. Fifth Third also has a 22.8% interest in Vantiv Holding, LLC. Fifth Third is among the largest money managers in the Midwest and, as of June 30, 2014, had $305 billion in assets under care, of which it managed $27 billion for individuals, corporations and not-for-profit organizations. Investor information and press releases can be viewed at www.53.com. Fifth Third’s common stock is traded on the NASDAQ® Global Select Market under the symbol “FITB.”

Forward-Looking Statements

This news release contains statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to the risk factors set forth in our most recent Annual Report on Form 10-K. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us.

There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) general economic conditions and weakening in the economy, specifically the real estate market, either nationally or in the states in which Fifth Third, one or more acquired entities and/or the combined company do business, are less favorable than expected; (2) deteriorating credit quality; (3) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (4) changes in the interest rate environment reduce interest margins; (5) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; (6) Fifth Third’s ability to maintain required capital levels and adequate sources of funding and liquidity; (7) maintaining capital requirements may limit Fifth Third’s operations and potential growth; (8) changes and trends in capital markets; (9) problems encountered by larger or similar financial institutions may adversely affect the banking industry and/or Fifth Third; (10) competitive pressures among depository institutions increase significantly; (11) effects of critical accounting policies and judgments; (12) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (FASB) or other regulatory agencies; (13) legislative or regulatory changes or actions, or significant litigation, adversely affect Fifth Third, one or more acquired entities and/or the combined company or the businesses in which Fifth Third, one or more acquired entities and/or the combined company are engaged, including the Dodd-Frank Wall Street Reform and Consumer Protection Act; (14) ability to maintain favorable ratings from rating agencies; (15) fluctuation of Fifth Third’s stock price; (16) ability to attract and retain key personnel; (17) ability to receive dividends from its subsidiaries; (18) potentially dilutive effect of future acquisitions on current shareholders’ ownership of Fifth Third; (19) effects of accounting or financial results of one or more acquired entities; (20) difficulties from Fifth Third’s investment in, relationship with, and nature of the operations of Vantiv, LLC; (21) loss of income from any sale or potential sale of businesses that could have an adverse effect on Fifth Third’s earnings and future growth; (22) ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks; and (23) the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity.

You should refer to our periodic and current reports filed with the Securities and Exchange Commission, or “SEC,” for further information on other factors, which could cause actual results to be significantly different from those expressed or implied by these forward-looking statements.