F I F T H
T H I R D
B A N C O R P
2014
A N N U A L
R E P O R T
Corporate Profile
Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. As of December
31, 2014, the Company had $139 billion in assets and operated 15 affiliates with 1,302 full-service Banking Centers,
including 101 Bank Mart® locations, most open seven days a week, inside select grocery stores and 2,638 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 December 31, 2014, had $308 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.”
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2014 ANNUAL REPORT | 1
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A Message to Our Shareholders
Dear Fifth Third Shareholders,
If you have banked with us lately, you may have noticed
that something is different. That’s because at Fifth Third,
we have been changing the way we do business.
KEVIN T. KABAT
Vice Chairman and
Chief Executive Officer
We are repositioning the Company for a new age in banking.
In today’s world, this isn’t a simple task, nor is it singular in
its effects. It touches every part of our Company.
We are doing important work to enhance our culture and
our reputation as a well-run institution, one that provides
valuable solutions for our customers while appropriately
balancing risk and reward. We are continuing our efforts
to achieve the right business mix – one that produces
less volatile, more sustainable earnings growth – while
providing a good return for our investors and great
opportunities for our employees. Finding the right mix is
as much about the opportunities we pursue as it is about
the activities from which we choose to refrain. And, we
will continue to simplify the business in every way we
can by taking complexity out of processes and systems
and focusing on hiring and retaining strong talent. As we
think about the future of our Company in this context, we
continue to pursue our four main strategies: distinctive
innovation, and
execution, focused segmentation,
accelerating growth. Across all of our businesses, we are
doing exceptional work.
As we make our plans, we are closely attuned to the cyclical
nature of interest rates and the impact of external forces
on our industry. Competition from banks and non-banks
is intense. Evolving consumer behavior and technology
are challenging the status quo. Although the economy has
shown modest signs of improvement, progress has been
uneven and the low interest rate environment remains
a headwind. Heightened regulatory and supervisory
expectations continue to create substantial uncertainty,
although some significant areas of regulation, like capital
and liquidity requirements, are coming into focus. It’s clear
to us: The realities of the near-to-medium term climate for
the financial services industry make the case for change.
Our 2014 financial performance demonstrated our
ability to effectively address those things and, equally
effectively, execute on our business plans. Our results in
the years ahead will reflect the repositioning that is already
underway and our objectives to drive outperformance and
positive differentiation from our peers. The expectations –
from our customers, our investors, our employees, and our
regulators – are that we continue to pursue operational
excellence and successfully mitigate all categories of
2 | FIFTH THIRD BANCORP
Common Dividends Declared
($MM)
risk while also anticipating and managing change in our
business. We are well along the path.
$407
$427
$325
$257
$32
2010
2011
2012
2013
2014
Book Value Per Share
$15.10
$15.85
$17.35
$13.06
$13.92
2014 net income available to common shareholders was
$1.4 billion and earnings per diluted share were $1.66.
Results included solid performance across our business
lines highlighted by growth
in corporate banking,
payments processing, and investment advisory revenue.
This contributed to a return on average assets of 1.1
percent, which is above the average of our commercial
bank peers, and return on average tangible common
equity* of 12.2 percent. It takes focused execution to
deliver on the promise of creating long-term value, and the
solid returns that we produced provide a good barometer
for our progress. Our persistent focus on the things we can
control and our day-to-day execution on the fundamentals
were evident as we strengthened the balance sheet, grew
net interest income, reduced expenses, and saw continued
improvement in credit metrics throughout the year.
Our results have been supplemented by gains on our
position in the payment processing company, Vantiv, Inc.
2010
2011
2012
2013
2014
* Non-GAAP measure. For further information, see the Non-
GAAP Financial Measures section of MD&A.
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
$18
$16
$14
$12
$10
$8
$6
$4
$2
$0
2014 PERFORMANCE
Full year 2014 net income available to common
areas that we don’t believe have a compelling risk/
shareholders of $1.4 billion decreased 21 percent from
return profile. Average loans and leases increased to
2013. Earnings per diluted common share of $1.66
$91.1 billion, with 9 percent growth in commercial and
decreased 17 percent.
industrial loans.
Results for both years included the benefit of earnings
We also continued to grow high-value, low-cost
related to our holding in Vantiv. In 2014, after-tax
transaction deposits in 2014, with average balances
Vantiv net gains were approximately $148 million
increasing 8 percent from 2013. We view the strength
(approximately $0.17 per share), compared with
of our deposit franchise to be the driving force for
net gains of $403 million (approximately $0.45 per
profitable balance sheet growth in the coming years.
share) in 2013. Excluding Vantiv-related items, diluted
earnings per share declined 5 percent year-over-year,
driven by lower motgage banking net revenue.
In a year with continued pressure on margins, we grew
net interest income 1 percent. We took advantage of rate
opportunities throughout the year to add to and change
Our balance sheet is strong as we maintained our
the composition of our securities portfolio in order
cautious approach to lending and scaled back in
to improve our liquidity position. At year-end, we
This has proven to be a strategic advantage for us as we have
recognized approximately $3.2 billion in total pre-tax gains
from our sale of the processing business in 2009 to today,
including net gains of $227 million in 2014. We currently
own a 22.8 percent interest in Vantiv, whose market
capitalization was $5.8 billion at year-end. Fifth Third has
benefited tremendously from its investment in Vantiv, and
while we would expect to manage our position downward
over time in a disciplined way, it continues to give us
significant capital flexibility.
We increased our annual common dividend 9 percent from
2013, to a level consistent with the Federal Reserve’s near-
term dividend payout ratio guidance of 30 percent. Including
common stock repurchases, we returned $1.1 billion to
shareholders. We have reduced our share count by 4 percent
from year-end 2013 and grew tangible book value per share
by 11 percent. Despite these returns, our capital levels remain
very strong overall, with a Tier 1 common equity ratio* of
9.7 percent, up 20 basis points, and 9.4 percent as estimated
pro forma under the Basel III requirements.
* Non-GAAP measure. For further information, see the Non-
GAAP Financial Measures section of MD&A.
2014 ANNUAL REPORT | 3
Average Assets
($B)
$140
$120
$112.43
$112.67
$117.61
$123.73
$131.94
$100
$80
$60
$40
$20
$0
2010
2011
2012
2013
2014
NPA Ratio
2.23%
1.49%
1.10%
0.82%
3.0%
2.79%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2010
2011
2012
2013
2014
estimated Fifth Third’s liquidity coverage ratio (LCR)
achieve our return targets. Total noninterest expense
to be above 110 percent, which currently compares
declined 6 percent from 2013 despite a 4 percent
favorably with many similarly-sized banks and positions
increase in technology and communications expense as
us to be compliant with the Federal Banking Regulators’
we continue to invest in our businesses.
LCR requirements.
Credit trends reflected our continued de-risking of the
Noninterest income decreased 23 percent from 2013,
business. Full year net charge-offs increased 15 percent
reflecting the lower net benefit from our investment in
while nonperforming assets declined 24 percent from
Vantiv and a 56 percent decline in mortgage banking net
2013. We reduced our loan loss reserves by $260 million;
revenue. Otherwise, fee income results were highlighted
although our coverage ratios remain solid at 1.47 percent
by corporate banking revenue and categories that
of loans and 228 percent of nonperforming loans.
exhibit less volatility like card and processing revenue,
investment advisory fees, and service charges on
deposits.
Our focus on expense management was evident and
represents another cornerstone of our strategy to
Overall, we have good momentum in many of our core
businesses and believe we are taking appropriate steps
to position ourselves for long-term success.
4 | FIFTH THIRD BANCORP
In light of our results, we are disappointed that our one-
year total shareholder return (stock price plus dividends)
was negative 0.7 percent in 2014. Given the positive
momentum and outperformance we have seen over the
past several years, we are not satisfied with this outcome.
Looking out over a longer-term horizon, Fifth Third’s five-
year total shareholder return was 129.7 percent, which
outperformed both the S&P commercial banks index and
the S&P 500 index. As stewards of your capital, we believe
that we are positioning the Bank for stronger performance
than our one-year total return would suggest and we
are aligned with our shareholders in the desire to regain
positive momentum when it comes to our valuation. We
have reason to hope that as the market looks forward, we
will be rewarded for the actions we are taking to proactively
transform the Company for sustainable excellence and
competitive advantage in the years ahead.
Being proactive often means making tough decisions. In
2014, we took several steps to enhance our risk culture,
fine-tune our business mix, and reduce the complexity of
our operations, identifying ways to best use our strengths
while decreasing our dependency in areas where we face
risks or add limited value. We determined that certain
2014
HIGHLIGHTS
CONSUMER LENDING
$603
million
Total Revenue
$20.9
billion
Average Loans
$79
billion
We know that consumers value the security of accessing credit when needed. Across our
Consumer Lending solutions, we offer competitive rates with flexible terms in order to help
customers reach their goals, whether short- or long-term.
In our consumer credit card business, our focus remains on acquiring and activating existing
retail and small business customers to strengthen the total customer relationship. To fuel
continued growth in this business, we successfully launched a new rewards platform in
2014, we dramatically increased Access 360° sales through improved customer features and
benefits, and we continue to improve the features of our core credit card product offerings.
We are committed to developing new, customer-focused solutions, which will be further
accelerated by the creation of our new Payments and Commerce Solutions division.
Our auto business is another source of strength as it tends to be a high-quality, attractive
asset class. Our long-standing presence in this market has allowed us to develop strong
relationships with dealers across our 45-state indirect auto footprint. We are the sixth-
largest bank originator of indirect auto loans in the country.
Mortgage
Servicing Portfolio
Our mortgage business is the most cyclical of our businesses and we have managed well
through the most recent cycle. We have a fairly flexible business model that can be adjusted
9,693
Dealer Indirect
Auto Lending
Network
quickly in response to the changing environment. We are currently focused on winning in
the purchase mortgage market and growing through direct, relationship-oriented channels.
Across our lending solutions, we provide ample resources to simplify the process of
obtaining a loan and we proactively work with borrowers to explore options that make
sense within their current financial situation. It is important for us to be trusted and valued
over the life of the loans we make and for many years beyond.
2014 ANNUAL REPORT | 5
activities fell outside of our current risk parameters and
were willing to sacrifice near-term earnings for long-
term growth and a less volatile, more consistent earnings
stream over time. For example, in March, we decided
to exit the broker mortgage business given regulatory
concerns and the prevailing market environment at the
time. This business generated a little more than 30 percent
of our mortgage originations in 2013; while it is difficult
to walk away from that kind of contribution, this decision
strengthens our controls and simplifies our operations in
mortgage lending. Another decision we made was to end
enrollment of new customers and make changes to the
structure for existing customers in our deposit advance
product. We believe there is a need for a short-term, small-
dollar credit product within the banking industry and
we continue to proactively engage with key stakeholders
to review alternative solutions. We are also taking a
measured approach to lending. We are scaling back in
areas that we don’t believe have a compelling risk/return
profile, like certain segments of commercial lending, and
we have maintained our disciplined pricing methodology
in indirect auto lending.
Even as we scaled back, we increased portfolio loan
balances to $90.1 billion, up 2 percent from 2013, with 4
BRANCH BANKING
2014 HIGHLIGHTS
A strong Retail Bank is critical to our future. Consumer banking
continues to go through significant transformations. Some of our
changes thus far have been due to strategies we had planned and
executed, especially those geared toward providing consultative
and differentiated service. Others were driven by evolving consumer
behavior and our desire to offer our customers options in line with their
preferences. Amidst all of the changes, our affiliate model continues
to provide a competitive advantage for us. Our local teams are able to
connect with the unique and diverse areas of our footprint to create a
more personal banking experience.
While our banking centers represent the physical manifestation of our
brand in the community, our enhanced online and mobile presence is
becoming an increasingly valued tool for our customers. We will continue
to integrate our delivery channels to bring a consistent experience that
drives efficiencies and revenue opportunities for the Bank.
We are focused on reducing reliance on the aspects of consumer banking
that are exposed to regulation or which present return challenges. We
will benefit from the integrated, multi-channel delivery model that we
made enhancements to throughout this past year. Likewise, our focused
segmentation strategy is helping us to deliver new value propositions
with a fair-value exchange as we continue to emphasize the importance
of our relationship-banking orientation.
$2.3
billion
$16.6
billion
Total Revenue
Average Loans
$47.9
billion
1,302
Average Core
Deposits
Banking Centers
$1.6
million
Online
Banking
Customers
2,638
ATMs
approximately
900,000
Mobile
Banking
Customers
6 | FIFTH THIRD BANCORP
percent growth in commercial and industrial loans and
nearly doubling commercial construction balances. We
loaned over $31 billon to businesses in 2014, and are
committed to working with businesses to help them expand
and generate jobs in the years ahead. Across the balance
sheet, we grew average core deposits by 8 percent in 2014.
The FDIC’s annual deposit market share data showed that
we grew deposits in each of our 15 affiliates and gained
market share in 13 of them. The data also indicated that we
had the third largest increase in total deposits among peers
across our footprint. The strength of our deposit franchise
is a testament to the strategies we have maintained to drive
deposits and to develop deeper customer relationships.
In our Consumer Bank, we are providing a differentiated
customer experience with clear value propositions through
outstanding, consistent delivery. Our willingness to take
a thoughtful approach and to actively test and evaluate
different tactics will lead to the best solutions for Fifth
Third and our customers. We continue to redesign our
Fifth Third
introduced Now
Balance in 2014,
allowing customers
to quickly check their
account balances
without logging in
to mobile banking.
distribution network to better match our delivery options
with consumer demand. Mobile and ATM deposits now
account for more than one-third of our consumer deposit
transactions, a result that has corresponded with a decline
in teller transactions. As we optimize our distribution
network, we have become more efficient by rethinking the
role of branches, upgrading our ATM network, and making
enhancements to our digital delivery.
Our banking centers, especially in today’s competitive
deposit environment, provide valuable touch points with
customers. We are addressing branch efficiency primarily
through recalibrating our branch staff. Most impactful to
this shift has been our new “universal banker” role, which
combines personal banking and customer service skills.
We are also testing a smaller branch format that has lower
staffing requirements compared with traditional full-
service branches, and we are exploring alternative coverage
models where we could operate multiple branches with the
same management team. Our branches are complemented
by our network of 2,638 ATMs, all of which are now entirely
image-enabled. In select locations, we deployed ATMs with
additional consumer-friendly upgrades. We also rolled out
a number of new services geared to improve the mobile
customer experience. The most popular new feature, Now
Balance, allows customers to access their account balances
without logging in to mobile banking.
Banking is a relationship business and we align our teams
to place the customer in the center of every discussion.
As we work with our customers, we use innovation to
create solutions that drive shared value. Whether we
are improving products and services, sharpening the
technology used to deliver them, or utilizing a more
consultative sales technique, we are moving forward to
create value in the industry.
Fifth Third Bank is an integral part of our communities
and our customers’ lives, so we feel compelled to help
in ways that go beyond traditional banking. We are
succeeding with programs that take the concept of
impacting lives to a whole new level. Our work with Stand
Up To Cancer transformed the idea of what a bank could
do to help customers and communities. Similarly, our
continued partnership with NextJob for our Homeowner
2014 ANNUAL REPORT | 7
INVESTMENT ADVISORS
Investment Advisors is comprised of five distinct businesses tailored to the unique
needs of its customers. We put more than 100 years of experience to work to help
individuals, families, businesses, and institutional clients protect, grow, and manage
their wealth.
• Fifth Third Private Bank serves the complex financial needs of the Bank’s clients with
teams of professionals dedicated to helping clients achieve their financial goals.
• Fifth Third Securities helps individuals and families at every stage of their lives,
offering retirement, investment and education planning, managed money, annuities
and transactional brokerage services.
• Fifth Third Insurance helps clients minimize risk and protect wealth through
insurance products and services such as life insurance, long-term care insurance,
disability income protection and annuities.
• ClearArc Capital, Inc. provides asset management services to institutional clients.
2014
HIGHLIGHTS
$531
million
Total Revenue
$2.3
billion
Average Loans
$9.5
billion
• Fifth Third Institutional Services provides consulting, investment and record-
Average Core Deposits
keeping services for corporations, financial institutions, foundations, endowments
and not-for-profit organizations. Products include retirement plans, endowment
management, planned giving and global and domestic custody services.
Our Investment Advisors business has become successful through helping clients over
their lifetimes and becoming their trusted partner. In 2014 this business generated 9
percent of Bancorp revenue. We know that with wealth comes complexity. Throughout
our rich history, we have helped the Bank’s clients to articulate and reach their wealth
management goals. We are committed to a collaborative, team-based approach that is
rooted in our curiosity about our clients and their future.
$27
billion
Assets Under
Management
$308
billion
Assets Under Care
Reemployment Initiative has transformed lives and is
helping to shift our industry’s thinking about problem
resolution. This program was named a winner of the BAI-
Finacle Global Banking Innovation Award in Societal and
Community Impact, which recognizes innovation in the
retail banking industry that positively impacts customer
experience, bank efficiency, and profitability. We were the
only U.S.-headquartered firm to be nominated. While we
appreciate the recognition, we are most satisfied that we
are creating better outcomes for our customers.
Within our Investment Advisors business, our distinctive
leadership, a
Private Bank brand provides thought
differentiated wealth planning experience, and a dedicated
fulfillment process. We offer a complete set of externally
managed products and we have added wealth management
advisors to bring the right level of talent and expertise to
meet the needs of our clients. Productivity and results
have improved, leading to a record year for Investment
Advisory revenue in 2014. Our advice-based model is
built for sustainable growth, with recurring, asset-based
revenue growing faster than transactional fees. Our focus
on cross-sell is very important to the Investment Advisors
business and contributed to an increase in assets under
management of 6 percent in 2014. Also reflecting this
8 | FIFTH THIRD BANCORP
growth, Barron’s, a premier financial news magazine, listed
Fifth Third Private Bank as No. 25 on its list of top wealth
management firms (including both banks and independent
wealth managers) measured by assets under management.
Our ranking increased eight spots from 2013, more than
any other firm on the list.
In our Commercial Bank, we have been focused on
hiring and developing the right people and investing in
the right products to build lasting relationships with our
customers. Recent data from Greenwich Associates shows
that Fifth Third Bank is outperforming competitors in
customer satisfaction in this space. In fact, their results
during the year showed that Fifth Third relationship
managers’ performance ranked No. 1 in all eight categories
with customers in the $5 million to $500 million range
who consider Fifth Third their lead bank. The talent
and expertise of our strong relationship managers helped
contribute to growth in corporate banking revenue
of 7 percent in 2014. This also reflects our geographic
expansion as our vertical segmentation strategies bring
sector expertise and industry-leading solutions that have
grown our reach beyond our 12-state branch footprint.
2014 HIGHLIGHTS
COMMERCIAL BANKING
$2.5
billion
Total Revenue
$51.3
billion
Average Loans
$34.8
billion
Expertise, experience, innovation, and trust are valued in the marketplace.
Customers seek those assets as they build their business. Our Commercial
Bank delivers.
We develop relationships with business, government, and professional customers
through customized financial solutions. With our focused segmentation strategy,
we’re targeting clients ranging in size from those with $20 million in annual
revenue to some of the world’s largest companies. Our comprehensive and
competitive offerings span from traditional lending and depository products
to 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.
This wide range of service and experience allows us to address our clients’ needs
as our talented bankers become valued partners in our customers’ financial
Average Core Deposits
success. We have seen the benefits of our strategies in stronger partnerships
18,000
Clients
1,800
with our customers and in the steady growth of this business. In 2014, our
Commercial Bank produced 42 percent of Bancorp revenue and accounted for
more than half of our loan balances.
We are focused on sustaining the growth trajectory in this business by
cultivating relationships that go well beyond traditional lending arrangements
and that fit within our risk appetite. Our commitment to business lending
remains strong and our track record of success and ability to develop new
capabilities sets Fifth Third apart from the competition. We stand ready to help
businesses adapt to the new economy, drive innovation and growth, and access
Strategic Vertical Clients
the working capital needed to meet their goals.
2014 ANNUAL REPORT | 9
CPS units fill the cash room managed by Delaware North at Great American Ball Park in Cincinnati.
We believe our investments to develop and strengthen
our Commercial verticals in healthcare, mid-corporate,
and energy are ahead of the industry and allow us to serve
clients at a higher level. In 2014, we added a retail-focused
vertical as well.
We are seeing greater utilization of the sophisticated
payments, capital markets, and other non-credit products
that we offer. Results showed our strong levels of treasury
management sales, and we believe this business is growing
at a rate more than double the industry. One of our treasury
management solutions, Currency Processing Solutions
(CPS), was awarded a patent in 2014 and also was featured
in a Wall Street Journal article as a best practice in cash
management. In 2014, Fifth Third led the largest rollout
of smart safes in the United States, going out across 497
locations, in 446 cities in 42 states.
Our prospects for success in treasury management
are further enhanced through the realignment of our
Payments and Commerce Solutions business. We created
this new division to rethink those aspects of the customer
experience, both for businesses and consumers, and to
find ways to turn our curiosity about new technology into
greater value for customers. This provides yet another
example of how we are managing the Company to achieve
the right business mix. The new division optimizes
the resources of our existing businesses like treasury
management, commercial and consumer cards, and CPS
through consolidated strategy, product development,
and operational execution. We expect to leverage the
Company’s scale and extensive payments infrastructure to
provide solutions for complex, high-transaction industries
and to capture new market development opportunities
such as payment security, mobile payments, and cobranded
cards and loyalty programs.
Our commitment to improving the risk culture and
achieving the right business mix at Fifth Third extends
to investments we are making in our infrastructure
needed to support this enhancement. We are adding
talented and experienced employees to our enterprise
risk and compliance organizations and we will continue
to invest in talent, training, and systems to maintain a
strong and robust platform across our entire Company.
We are working to make our strength in these areas a
competitive advantage for Fifth Third. We are balancing
our investments with disciplined expense management
as we reduced total noninterest expense by 6 percent in
2014. We took significant costs out of mortgage and retail
10 | FIFTH THIRD BANCORP
“Part of our approach as The curious bank is to ask questions and listen
carefully. When we do that, we develop better solutions that represent
greater value to customers – and we develop better solutions to the
problems facing our communities.”
operations corresponding with the changes I discussed in
those businesses, and we continue to identify areas where
we could be more efficient.
Part of our approach as The curious bank is to ask questions
and listen carefully. When we do that, we develop better
solutions that represent greater value to customers –
and we develop better solutions to the problems facing
our communities. We’re putting people to work, we’re
helping people buy their first home, we’re sending kids to
college. We’re also expanding businesses, fighting cancer,
improving lives through financial empowerment, and so
much more. We bring a spirit of teamwork, accountability,
integrity, and respect to the way we work with customers.
Delivering greater value to customers equals success
in the marketplace, and helping solve problems in our
communities means building a better environment for us
and our customers.
I would personally like to thank William Isaac, Darryl
Allen, and John Schiff Jr. who retired from the Fifth Third
Bancorp Board of Directors in April 2014. These leaders
provided significant guidance and contributions during
one of the most challenging environments our industry has
faced. Their collective experience proved invaluable and we
are fortunate to have had the benefit of their expertise.
Our 2014 Employee Viewpoints Survey, administered
by Gallup, showed that we continued to strengthen the
Bank’s engaging and inclusive culture. We improved on
every item, a clear sign that we are each committed to
maintaining a great workplace, a place where employees
can build their futures, win together, and impact lives. I
thank all of our employees as well as my fellow directors
for their commitment to our Company. Certainly, we are
experiencing new challenges, but we are asking the right
questions and pursuing promising strategies that are
aligned with our risk appetite.
With 2015 underway, our Vision remains our strongest
aspiration: to become the one bank that people most value
and trust. We have reframed our thinking to recognize the
progress we have made so far and the work that remains at
hand. This includes making proactive risk management an
enduring part of our DNA, something we will achieve by
investing in people and technology. We will achieve the right
business mix, focusing on consistent execution and on those
areas where we add the most value. Finally, we will simplify
the business by taking complexity out of our systems and
processes. These are tall orders, but I am confident we can
deliver on them. I look forward to sharing our successes in
the months and years ahead.
Sincerely,
KEVIN T. KABAT
Vice Chairman and Chief Executive Officer
February 2015
2014 ANNUAL REPORT | 11
Fifth Third Bancorp
Community Commitment
Fifth Third seeks to markedly improve the lives of our customers and communities.
This is our corporate social responsibility (CSR) and our Purpose. We consider
carefully the needs of individuals, customers and communities, consistently working
to achieve maximum impact.
We do this by focusing on several key areas, those in which we
have developed core competencies over the years, including
reemployment and financial empowerment. We offer our
signature programs at no cost to the communities we serve.
They enable us to put our financial resources to the best use,
and more important, to channel the generosity and passion
of our employees into areas of great need and opportunity.
Homeowner Reemployment is our innovative program
with national reemployment solutions company NextJob,
in which we help our unemployed mortgage customers
land jobs. We do this by sponsoring them through
NextJob’s comprehensive, three-part job training program,
which includes personalized job coaching. This program,
which hundreds of mortgage customers have now used
and which boasts a success rate near 40 percent, earned
Fifth Third a Global Innovation Award in Societal and
Community Impact from BAI-Finacle in 2014. We were
the only U.S. bank to earn such honors. Since 2012, we
have expanded access to the program, in whole and in
part, to all Fifth Third customers year-round, and to non-
customers, including veterans, during special promotion
periods. At the end of 2014, more than 7,200 individuals
were using another tool—the free online training modules
that comprise the Job Seeker’s Toolkit, also from NextJob—
through 53.com.
Fifth Third’s suite of L.I.F.E. (Lives Improved through
Financial Empowerment) programs further supports
people, and at all ages and stages of life. We understand that
knowledge and basic skills about financial management
can greatly affect one’s quality of life. Our L.I.F.E. programs
include the Young Bankers Club for fifth-grade students;
Dave Ramsey’s Foundations in Personal Finance course
for high-school students; and EmpowerU financial
Randall Jackson was one of four original customers featured
in a Fifth Third advertising and social media campaign
designed to help job seekers reach prospective employers. He
landed a job after being long-term unemployed and is among
the near 40 percent of Bank NextJob participants to do so.
12 | FIFTH THIRD BANCORP
Celebrating 10 years of service in 2014, Fifth Third’s Financial Empowerment Mobiles, or eBuses, have logged 202,000 miles since 2004.
education classes for adults. We also offer SmallBizU
online courses for entrepreneurs and small business
owners. Our financial empowerment buses, or eBuses,
take financial education directly into low- and moderate-
income communities we serve.
Additionally, our strategic alliances enable us to offer
products that pair a quality financial service with a
community purpose. A prime example is the Fifth Third
Stand Up To Cancer (SU2C) credit and debit cards we have
offered since 2013. Last year, we ran special promotions
that enabled customers opening a new checking account
to earn $150 for themselves and generate a $150 donation
to SU2C, a charitable program dedicated to accelerating
cancer research and saving lives. As a result of this and
other campaigns benefitting SU2C, we have donated more
than $4 million in recent years.
The Bank also continued our fight against hunger. We use
the calendar date of May 3—Fifth Third Day—each year to
support sustainable community gardens, raise money and
volunteer to fight hunger in our communities. In 2014, we
provided 770,000 meals, representing an increase of more
than 220,000 versus our 2013 total.
Work in support of veterans is another important cause
for Fifth Third. In November, around the Veterans Day
holiday, our employees volunteered for projects that
commemorated, supported and raised funds for former
and current U.S. military members and their families. In
2014, we rehabbed veterans’ homes in 14 cities, conducted
a first-ever job fair for veterans and generated donations of
nearly $300,000 for charities who serve veterans.
Our ongoing work with Project SEARCH, a school-
to-work transition program for high school students
with developmental disabilities, benefits
individuals,
communities, our employees, and our Bank. We were
an original collaborator on Project SEARCH and today
operate three Project SEARCH campuses. We’re proud
that 25 Project SEARCH graduates are now valued Fifth
Third team members.
At Fifth Third, we all take our community responsibilities
seriously. Our employees and Organization give time,
talent and resources to improve the lives around us. This
commitment includes employee and corporate support of
United Way, with more than $7 million donated in 2014,
as well as ongoing efforts that include volunteerism, non-
profit board leadership, community sponsorships and
thought leadership. More information will be included in
the 2014 CSR Report, available in April at 53.com.
In 2014, Fifth Third Bank donated $190,000 to Rebuilding Together,
an organization that rebuilds homes for low-income homeowners,
to fund long-term home rebuilding projects for veterans.
Tennessee-area employees volunteered for two of 14 rebuild
projects across the Bank’s footprint during the month of November.
2014 ANNUAL REPORT
FINANCIAL CONTENTS
Glossary of Abbreviations and Acronyms
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Selected Financial Data
Overview
Non-GAAP Financial Measures
Recent Accounting Standards
Critical Accounting Policies
Risk Factors
Statements of Income Analysis
Business Segment Review
Fourth Quarter Review
Balance Sheet Analysis
Risk Management
Off-Balance Sheet Arrangements
Contractual Obligations and Other Commitments
Management’s Assessment as to the Effectiveness of Internal Control over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Summary of Significant Accounting and Reporting Policies
Supplemental Cash Flow Information
Restrictions on Cash and Dividends
Securities
Loans and Leases
Credit Quality and the Allowance for Loan and Lease Losses
Bank Premises and Equipment
Goodwill
Intangible Assets
Variable Interest Entities
Sales of Receivables and Servicing Rights
Derivative Financial Instruments
Offsetting Derivative Financial Instruments
Other Assets
Short-Term Borrowings
Long-Term Debt
Annual Report on Form 10-K
Consolidated Ten Year Comparison
Directors and Officers
Corporate Information
Stock-Based Compensation
Legal and Regulatory Proceedings
Related Party Transactions
Income Taxes
Retirement and Benefit Plans
90 Commitments, Contingent Liabilities and Guarantees
100
100
101
103
104 Accumulated Other Comprehensive Income
113 Common, Preferred and Treasury Stock
114
115 Other Noninterest Income and Other Noninterest Expense
116 Earnings Per Share
119
121 Certain Regulatory Requirements and Capital Ratios
126
126
127
128
Parent Company Financial Statements
Business Segments
Subsequent Event
Fair Value Measurements
171
187
188
14
15
16
21
23
23
27
36
43
50
52
57
81
82
83
84
85
86
87
88
89
130
134
136
137
138
143
145
147
151
152
153
164
165
167
170
FORWARD-LOOKING STATEMENTS
This report 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. 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 and adequate sources of funding and liquidity 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.
GLOSSARY OF ABBREVIATIONS AND ACRONYMS
Fifth Third Bancorp provides the following list of abbreviations and acronyms as a tool for the reader that are used in Management’s Discussion
and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and the Notes to Consolidated Financial
Statements.
ALCO: Asset Liability Management Committee
ALLL: Allowance for Loan and Lease Losses
AML: Anti-Money Laundering
AOCI: Accumulated Other Comprehensive Income
ARM: Adjustable Rate Mortgage
ATM: Automated Teller Machine
BCBS: Basel Committee on Banking Supervision
BHC: Bank Holding Company
BHCA: Bank Holding Company Act
BOLI: Bank Owned Life Insurance
BPO: Broker Price Opinion
bps: Basis points
BSA: Bank Secrecy Act
CCAR: Comprehensive Capital Analysis and Review
CDC: Fifth Third Community Development Corporation
CFPB: United States Consumer Financial Protection Bureau
CFTC: Commodity Futures Trading Commission
C&I: Commercial and Industrial
CPP: Capital Purchase Program
CRA: Community Reinvestment Act
DCF: Discounted Cash Flow
DFA: Dodd-Frank Act
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
FDIA: Federal Deposit Insurance Act
FDIC: Federal Deposit Insurance Corporation
FHA: Federal Housing Administration
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
FSOC: Financial Stability Oversight Council
FTAM: Fifth Third Asset Management, Inc.
FTE: Fully Taxable Equivalent
FTP: Funds Transfer Pricing
FTS: Fifth Third Securities
GDP: Gross Domestic Product
GNMA: Government National Mortgage Association
GSE: Government Sponsored Enterprise
HAMP: Home Affordable Modification Program
HARP: Home Affordable Refinance Program
HFS: Held for Sale
HQLA: High Quality Liquid Assets
IPO: Initial Public Offering
IRC: Internal Revenue Code
IRLC: Interest Rate Lock Commitment
IRS: Internal Revenue Service
ISDA: International Swaps and Derivatives Association, Inc.
LCR: Liquidity Coverage Ratio
LIBOR: London Interbank Offered Rate
LLC: Limited Liability Company
LTV: Loan-to-Value
MD&A: Management’s Discussion and Analysis of Financial
Condition and Results of Operations
MSR: Mortgage Servicing Right
N/A: Not Applicable
NASDAQ: National Association of Securities Dealers Automated
Quotations
NII: Net Interest Income
NM: Not Meaningful
NSFR: Net Stable Funding Ratio
OCC: Office of the Comptroller of the Currency
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
SBA: Small Business Administration
SEC: United States Securities and Exchange Commission
TARP: Troubled Asset Relief Program
TBA: To Be Announced
TDR: Troubled Debt Restructuring
TruPS: Trust Preferred Securities
U.S.: United States of America
U.S. GAAP: United States Generally Accepted Accounting
Principles
VA: Department of Veterans Affairs
VIE: Variable Interest Entity
VRDN: Variable Rate Demand Note
14 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is MD&A of certain significant factors that have affected Fifth Third Bancorp’s (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.
$
$
2014
2013
2012
2011
1.20
1.18
0.28
13.92
12.72
2.05
2.02
0.47
15.85
21.03
1.69
1.66
0.36
15.10
15.20
1.68
1.66
0.51
17.35
20.38
3,581
3,227
6,808
229
3,961
1,836
1,799
3,613
2,999
6,612
303
4,081
1,576
1,541
3,600
2,473
6,073
315
3,709
1,481
1,414
3,575
2,455
6,030
423
3,758
1,297
1,094
TABLE 1: SELECTED FINANCIAL DATA
For the years ended December 31 ($ in millions, except for per share data)
Income Statement Data
Net interest income(a)
Noninterest income
Total revenue(a)
Provision for loan and lease losses
Noninterest expense
Net income attributable to Bancorp
Net income available to common shareholders
Common Share Data
Earnings per share, basic
Earnings per share, diluted
Cash dividends per common share
Book value per share
Market value per share
Financial Ratios (%)
Return on average assets
Return on average common equity
Return on average tangible common equity(b)
Dividend payout ratio
Average Total Bancorp shareholders' equity as a percent of average assets
Tangible common equity(b)
Net interest margin(a)
Efficiency(a)
Credit Quality
Net losses charged-off
Net losses charged-off as a percent of average portfolio loans and leases
ALLL as a percent of portfolio loans and leases
Allowance for credit losses as a percent of portfolio loans and leases(c)
Nonperforming assets as a percent of portfolio loans, leases and other
assets, including other real estate owned(d)
Average Balances
Loans and leases, including held for sale
Total securities and other short-term investments
Total assets
Transaction deposits(e)
Core deposits(f)
Wholesale funding(g)
Bancorp shareholders’ equity
Regulatory Capital Ratios (%)
Tier I risk-based capital
Total risk-based capital
Tier I leverage
Tier I common equity(b)
(a) Amounts presented on a FTE basis. The FTE adjustment for the years ended December 31, 2014, 2013, 2012, 2011 and 2010 was $21, $20, $18, $18 and $18, respectively.
(b)
80,214
17,468
112,666
72,392
78,652
16,939
12,851
1.12 %
10.0
12.2
30.3
11.59
8.43
3.10
61.1
84,822
16,814
117,614
78,116
82,422
16,978
13,701
89,093
18,861
123,732
82,915
86,675
17,797
14,302
91,127
24,866
131,943
89,715
93,477
19,188
15,290
1.48
13.1
16.0
22.9
11.56
8.63
3.32
58.2
1.15
9.0
11.4
23.3
11.41
8.68
3.66
62.3
1.34
11.6
14.3
21.3
11.65
8.83
3.55
61.7
10.83 %
14.33
9.66
9.65
1,172
1.49
2.78
3.01
12.00
16.19
11.25
9.41
575
0.64 %
1.47
1.62
10.69
14.47
10.15
9.54
704
0.85
2.16
2.37
10.43
14.17
9.73
9.45
501
0.58
1.79
1.97
0.82
2.23
1.49
1.10
$
$
2010
3,622
2,729
6,351
1,538
3,855
753
503
0.63
0.63
0.04
13.06
14.68
0.67
5.0
7.0
6.3
12.22
7.04
3.66
60.7
2,328
3.02
3.88
4.17
2.79
79,232
19,699
112,434
65,662
76,188
18,917
13,737
13.89
18.08
12.79
7.48
The return on average tangible common equity, tangible common equity and Tier I common equity ratios are non-GAAP measures. For further information, refer to the Non-GAAP Financial
Measures section of MD&A.
The allowance for credit losses is the sum of the ALLL and the reserve for unfunded commitments.
(c)
(d) Excludes nonaccrual loans held for sale.
(e)
(f)
(g)
Includes demand, interest checking, savings, money market and foreign office deposits.
Includes transaction deposits plus other time deposits.
Includes certificates $100,000 and over, other deposits, federal funds purchased, other short-term borrowings and long-term debt.
15 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 borrower credit events, such as loan defaults and
inadequate collateral due to a weakened economy within the
Bancorp’s footprint.
Noninterest income is derived from service charges on
deposits, corporate banking revenue, investment advisory revenue,
mortgage banking net revenue, card and processing revenue and
other noninterest income. Noninterest expense is primarily driven
by personnel costs, net occupancy expenses, technology and
communication costs and other noninterest expense.
Vantiv, Inc. Share Sale
The Bancorp’s ownership position in Vantiv Holding, LLC was
reduced in the second quarter of 2014 when the Bancorp sold an
approximate three percent interest and recognized a $125 million
gain. The Bancorp’s remaining approximate 23% ownership in
Vantiv Holding, LLC was accounted for as an equity method
investment in the Bancorp’s Consolidated Financial Statements and
had a carrying value of $394 million as of December, 31, 2014. For
more information, refer to Note 19 of the Notes to Consolidated
Financial Statements.
Accelerated Share Repurchase Transactions
During 2013 and 2014, the Bancorp entered into a number of
accelerated share repurchase transactions. As part of these
transactions, the Bancorp entered into forward contracts in which
the final number of shares to be delivered at settlement was or will
be based generally on a discount to the average daily volume-
weighted average price of the Bancorp’s common stock during the
term of the Repurchase Agreement. For more information on the
accounting for these instruments, refer to Note 23 of the Notes to
Consolidated Financial Statements. For a summary of all accelerated
share repurchase transactions entered into or settled during 2013
and 2014 refer to Table 2. For further information on a subsequent
event related to capital actions refer to Note 31 of the Notes to
Consolidated Financial Statements.
OVERVIEW
Fifth Third Bancorp is a diversified financial services company
headquartered in Cincinnati, Ohio. At December 31, 2014, the
Bancorp had $138.7 billion in assets, operated 15 affiliates with
1,302 full-service Banking Centers, including 101 Bank Mart®
locations open seven days a week inside select grocery stores, and
in 12 states throughout the Midwestern and
2,638 ATMs
Southeastern regions of the U.S. The Bancorp reports on four
business
segments: Commercial Banking, Branch Banking,
Consumer Lending and Investment Advisors. The Bancorp also has
an approximate 23% interest in Vantiv Holding, LLC. The carrying
value of the Bancorp’s investment in Vantiv Holding, LLC was $394
million as of December 31, 2014.
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
trends, events, commitments, uncertainties,
understanding of
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 Bancorp’s financial
condition, results of operations and cash flows. In addition, see the
Glossary of Abbreviations and Acronyms in this report for a list of
terms included as a tool for the reader of this annual report on
Form 10-K. The abbreviations and 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.
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.
The Bancorp’s revenues are dependent on both net interest
income and noninterest income. For the year ended December 31,
2014, 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 U.S. from customers
domiciled in the United States. Revenue from foreign countries and
external customers domiciled in foreign countries was immaterial to
the Bancorp’s 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, other 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
16 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 2: SUMMARY OF ACCELERATED SHARE REPURCHASE TRANSACTIONS
(cid:3) (cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
Repurchase Date(cid:3)
November 9, 2012
December 19, 2012
January 31, 2013
May 24, 2013
November 18, 2013
December 13, 2013
January 31, 2014
May 1, 2014
July 24, 2014
October 23, 2014
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
Amount ($ in millions)
125
$
100
125
539
200
456
99
150
225
180
Shares Repurchased on
Repurchase Date
Shares Received from Forward
Contract Settlement
Total Shares
Repurchased
7,710,761
6,267,410
6,953,028
25,035,519
8,538,423
19,084,195
3,950,705
6,216,480
9,352,078
8,337,875
657,914
127,760
849,037
4,270,250
1,132,495
2,294,932
602,109
1,016,514
1,896,685
794,245
8,368,675
6,395,170
7,802,065
29,305,769
9,670,918
21,379,127
4,552,814
7,232,994
11,248,763
9,132,120
Settlement Date
February 12, 2013
February 27, 2013
April 5, 2013
October 1, 2013
March 5, 2014
March 31, 2014
March 31, 2014
July 21, 2014
October 14, 2014
January 8, 2015
Preferred Stock Offering
On June 5, 2014, the Bancorp issued in a registered public offering
300,000 depositary shares, representing 12,000 shares of 4.90%
fixed-to-floating rate non-cumulative Series J perpetual preferred
stock, for net proceeds of $297 million. The Series J preferred
shares are not convertible into Bancorp common shares or any
other securities. For more information, refer to Note 23 of the
Notes to Consolidated Financial Statements.
Senior Notes Offerings
On February 28, 2014, the Bancorp issued and sold $500 million of
2.30% unsecured senior fixed-rate notes, with a maturity of five
years, due on March 1, 2019. These notes will be redeemable by the
Bancorp, in whole or in part, on or after the date that is 30 days
prior to the maturity date at a redemption price equal to 100% of
the principal amount plus accrued and unpaid interest up to, but
excluding the redemption date.
On April 25, 2014, the Bank issued and sold $1.5 billion in
aggregate principal amount of unsecured senior bank notes. The
bank notes consisted of $850 million of 2.375% senior fixed-rate
notes, with a maturity of five years, due on April 25, 2019; and $650
million of 1.35% senior fixed-rate notes with a maturity of three
years, due on June 1, 2017. These bank notes will be redeemable by
the Bank, in whole or in part, on or after the date that is 30 days
prior to the maturity date at a redemption price equal to 100% of
the principal amount plus accrued and unpaid interest up to, but
excluding, the redemption date.
On September 5, 2014, the Bank issued and sold $850 million
of 2.875% unsecured senior fixed-rate bank notes, with a maturity
of seven years, due on October 1, 2021. These bank notes will be
redeemable by the Bank, in whole or in part, on or after the date
that is 30 days prior to the maturity date at a redemption price equal
to 100% of the principal amount plus accrued and unpaid interest
up to, but excluding, the redemption date. For additional
information on the senior notes offerings, refer to Note 16 of the
Notes to Consolidated Financial Statements.
Automobile Loan Securitizations
In securitization transactions that occurred in 2014, the Bancorp
transferred an aggregate amount of approximately $3.8 billion in
fixed-rate consumer automobile loans to bankruptcy remote trusts
which were deemed to be VIEs. The Bancorp concluded that it is
the primary beneficiary of these VIEs and, therefore, has
consolidated these VIEs. For additional
information on the
automobile loan securitizations, refer to Notes 10 and 16 of the
Notes to Consolidated Financial Statements.
Legislative Developments
On July 21, 2010, the DFA was signed into federal 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
established the 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, requires changes to
rules governing regulatory capital ratios and requires enhanced
liquidity standards.
The FRB launched the 2014 capital planning and stress testing
program, CCAR, on November 1, 2013. The CCAR program
requires BHCs with $50 billion or more of total consolidated assets
to submit annual capital plans to the FRB for review and to conduct
stress tests under a number of economic scenarios. The capital plan
and stress testing results were submitted by the Bancorp to the FRB
on January 6, 2014.
In March of 2014, the FRB disclosed its estimates of
participating institutions results under the FRB supervisory stress
scenario, including capital results, which assume all banks take
certain consistently applied future capital actions. In addition, the
FRB disclosed its estimates of participating institutions results under
the FRB supervisory severe stress scenarios including capital results
based on each company’s own base scenario capital actions.
On March 26, 2014, the Bancorp announced the results of its
capital plan submitted to the FRB as part of the 2014 CCAR. The
FRB indicated to the Bancorp that it did not object to the following
capital actions for the period beginning April 1, 2014 and ending
March 31, 2015:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
The potential increase in the quarterly common stock
dividend to $0.13 per share;
The potential repurchase of common shares in an
amount up to $669 million;
The additional ability to repurchase shares in the
amount of any after-tax gains from the sale of Vantiv,
Inc. common stock; and
The
preferred stock.
issuance of an additional $300 million
in
For more information on the 2014 CCAR results, refer to the
Capital Management section of MD&A.
17 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The BHCs that participated in the 2014 CCAR, including the
Bancorp, were required to conduct mid-cycle company-run stress
tests using data as of March 31, 2014. The stress tests must be based
on three BHC defined economic scenarios – baseline, adverse and
severely adverse. As required, the Bancorp reported the mid-cycle
stress test results to the FRB on July 7, 2014. In addition, the
Bancorp published a Form 8-K providing a summary of the results
under the severely adverse scenario on September 18, 2014, which is
available on Fifth Third’s website at https://www.53.com. These
results represented estimates of the Bancorp’s results from the
second quarter of 2014 through the second quarter of 2016 under
the severely adverse scenario, which is considered highly unlikely to
occur.
Fifth Third offers qualified deposit customers a deposit
advance product if they choose to avail themselves of this product
to meet short-term, small-dollar financial needs. In April of 2013,
the CFPB issued a “White Paper” which studied financial services
industry offerings and customer use of deposit advance products as
well as payday loans and is considering whether rules governing
these products are warranted. At the same time, the OCC and FDIC
each issued proposed supervisory guidance for public comment to
institutions they supervise which supplements existing OCC and
FDIC guidance, detailing the principles they expect financial
institutions to follow in connection with deposit advance products
and supervisory expectations for the use of deposit advance
products. The Federal Reserve also issued a statement in April of
2013 to state member banks like Fifth Third for whom the Federal
Reserve is the primary regulator. This statement encouraged state
member banks to respond to customers’ small-dollar credit needs in
a responsible manner; emphasized that they should take into
consideration the risks associated with deposit advance products,
including potential consumer harm and potential elevated
compliance risk; and reminded them that these product offerings
must comply with applicable laws and regulations.
Fifth Third’s deposit advance product is designed to fully
comply with the applicable federal and state laws and use of this
product is subject to strict eligibility requirements and advance
restriction guidelines to limit dependency on this product as a
borrowing source. The Bancorp’s deposit advance balances are
included in other consumer loans and leases in the Bancorp’s
Consolidated Balance Sheets and represent substantially all of the
revenue reported in interest and fees on other consumer loans and
leases in the Bancorp’s Consolidated Statements of Income and in
Table 8 in the Statements of Income Analysis section of MD&A.
On January 17, 2014, given developments in industry practice, Fifth
Third announced that it would no longer enroll new customers in its
deposit advance product and expected to phase out the service to
existing customers by the end of 2014. To avoid a disruption to its
existing customers during the extension period while the banking
industry awaits further regulatory guidance on the deposit advance
product, on November 3, 2014, Fifth Third announced changes to
its current deposit advance product for existing customers
beginning January 1, 2015, including a lower transaction fee, an
extended repayment period and a reduced maximum advance
period. The Bancorp currently expects to continue to offer the
service to existing deposit advance customers until further
regulatory guidance is provided. The Bancorp currently expects
these changes to the deposit advance product to negatively impact
net interest income by approximately $100 million in 2015.
In December of 2010 and revised in June of 2011, the BCBS
issued Basel III, a global regulatory framework, to enhance
international capital standards. In June of 2012, U.S. banking
regulators proposed enhancements
the regulatory capital
requirements for U.S. banks, which implement aspects of Basel III,
such as re-defining the regulatory capital elements and minimum
to
18 Fifth Third Bancorp
capital ratios, introducing regulatory capital buffers above those
minimums, revising the agencies’ rules for calculating risk-weighted
assets and introducing a new Tier I common equity ratio. In July of
2013, U.S. banking regulators approved the final enhanced
regulatory capital rules (Basel III Final Rule), which included
modifications to the proposed rules. The Bancorp continues to
evaluate the Basel III Final Rule and its potential impact. For more
information on the impact of the regulatory capital enhancements,
refer to the Capital Management section of MD&A. Refer to the
Non-GAAP section of MD&A for an estimate of the Basel III Tier
I common equity ratio.
On December 10, 2013, the banking agencies finalized section
619 of the DFA, known as the Volcker Rule, which became
effective April 1, 2014. Though the final rule was effective April 1,
2014, the FRB granted the industry an extension of time until July
21, 2015 to conform certain of its activities related to proprietary
trading to comply with the Volcker Rule. In addition, the FRB has
granted the industry an extension of time until July 21, 2016, and
announced its intention to grant a one year extension of the
conformance period until July 21, 2017, to conform certain
ownership interests in, sponsorship activities of and relationships
with private equity or hedge funds as well as holding certain
collateralized loan obligations that were in place as of December 31,
2013. It is possible that additional conformance period extensions
could be granted either to the entire industry, or, upon request, to
requesting banking organizations on a case-by-case basis. The final
rule prohibits banks and bank holding companies from engaging in
short-term proprietary trading of certain securities, derivatives,
commodity futures and options on these instruments for their own
account. The Volcker Rule also restricts banks and their affiliated
entities from owning, sponsoring or having certain relationships
with private equity and hedge funds, as well as holding certain
collateralized loan obligations that are deemed to contain ownership
interests. Exemptions are provided for certain activities such as
underwriting, market making, hedging,
in certain
government obligations and organizing and offering a hedge fund or
private equity fund. Fifth Third does not sponsor any private equity
or hedge funds that, under the final rule, it is prohibited from
sponsoring. As of December 31, 2014, the Bancorp held no
collateralized loan obligations. As of December 31, 2014, the
Bancorp had approximately $165 million
interests and
approximately $60 million in binding commitments to invest in
private equity funds that are affected by the Volcker Rule. It is
expected that over time the Bancorp may need to sell or redeem
these investments, however no formal plan to sell has been
approved as of December 31, 2014. As a result of the announced
conformance period extension, the Bancorp believes it is likely that
these investments will be reduced over time in the ordinary course
of events before compliance is required.
trading
in
implementing a quantitative
On October 10, 2014, the U.S. Banking Agencies published
final rules
liquidity requirement
consistent with the LCR standard established by the BCBS for large
internationally active banking organizations, generally those with
$250 billion or more in total consolidated assets or $10 billion or
more in on-balance sheet foreign exposure. In addition, a modified
LCR requirement was implemented for BHCs with $50 billion or
more in total consolidated assets but that are not internationally
active, such as Fifth Third. The modified LCR is effective January 1,
2016 and requires BHCs to calculate its LCR on a monthly basis.
Refer to the Liquidity Risk Management section of MD&A for
further discussion on these ratios.
On July 31, 2013, the U.S. District Court for the District of
Columbia issued an order granting summary judgment to the
plaintiffs in a case challenging certain provisions of the FRB’s rule
concerning electronic debit card transaction fees and network
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
exclusivity arrangements (the “Current Rule”) that were adopted to
implement Section 1075 of the DFA, known as the Durbin
Amendment. The Court held that, in adopting the Current Rule, the
FRB violated the Durbin Amendment’s provisions concerning
which costs are allowed to be taken into account for purposes of
setting fees that are reasonable and proportional to the costs
incurred by the issuer and therefore the Current Rule’s maximum
permissible fees were too high. In addition, the Court held that the
Current Rule’s network non-exclusivity provisions concerning
unaffiliated payment networks for debit cards also violated the
Durbin Amendment. The Court vacated the Current Rule, but
stayed its ruling to provide the FRB an opportunity to replace the
invalidated portions. The FRB appealed this decision and on March
21, 2014, the D.C. Circuit Court of Appeals reversed the District
Court’s grant of summary judgment and remanded the case for
further proceedings in accordance with its opinion. The merchants
have filed a petition for writ of certiorari to the U.S. Supreme Court.
However, on January 20, 2015, the U.S. Supreme Court declined to
hear an appeal of the Circuit Court reversal, thereby largely
upholding the Current Rule and substantially reducing uncertainty
surrounding debit card interchange fees the Bancorp is permitted to
charge. Refer to the Noninterest Income subsection of the
Statements of Income Analysis section of MD&A for further
information regarding the Bancorp’s debit card interchange revenue.
19 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 3: CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ in millions, except per share data)
Interest income (FTE)
Interest expense
Net interest income (FTE)
Provision for loan and lease losses
Net interest income after provision for loan and lease losses (FTE)
Noninterest income
Noninterest expense
Income before income taxes (FTE)
Fully taxable equivalent adjustment
Applicable income tax expense
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to Bancorp
Dividends on preferred stock
Net income available to common shareholders
Earnings per share - basic
Earnings per share - diluted
Cash dividends declared per common share
2014
4,051
451
3,600
315
3,285
2,473
3,709
2,049
21
545
1,483
2
1,481
67
1,414
1.68
1.66
0.51
$
$
$
$
2013
3,993
412
3,581
229
3,352
3,227
3,961
2,618
20
772
1,826
(10)
1,836
37
1,799
2.05
2.02
0.47
2012
4,125
512
3,613
303
3,310
2,999
4,081
2,228
18
636
1,574
(2)
1,576
35
1,541
1.69
1.66
0.36
2011
4,236
661
3,575
423
3,152
2,455
3,758
1,849
18
533
1,298
1
1,297
203
1,094
1.20
1.18
0.28
2010
4,507
885
3,622
1,538
2,084
2,729
3,855
958
18
187
753
-
753
250
503
0.63
0.63
0.04
Holding, LLC and a decrease in equity method earnings from
Vantiv Holding, LLC.
Noninterest expense decreased $252 million, or six percent, in
2014 compared to 2013 primarily due to decreases in total personnel
costs and other noninterest expense. Total personnel costs
decreased $155 million in 2014 compared to 2013 driven by a
decrease in incentive compensation primarily in the mortgage
business due to lower production levels and a decrease in base
compensation and employee benefits as a result of a decline in the
number of full-time equivalent employees. Other noninterest
expense decreased $125 million in 2014 compared to 2013 primarily
due to decreases in loan and lease expense, FDIC insurance and
other taxes, losses and adjustments, marketing expense, debt
extinguishment costs and an increase in the benefit from the reserve
for unfunded commitments, partially offset by an increase in
impairment on affordable housing investments.
Credit Summary
The provision for loan and lease losses was $315 million and $229
million for the years ended December 31, 2014 and 2013,
respectively. Net charge-offs as a percent of average portfolio loans
and leases increased to 0.64% during 2014 compared to 0.58%
during 2013. At December 31, 2014, nonperforming assets as a
percent of
including OREO
leases and other assets,
(excluding nonaccrual loans held for sale) decreased to 0.82%,
compared to 1.10% at December 31, 2013. For further discussion
on credit quality, refer to the Credit Risk Management section in
MD&A.
loans,
Capital Summary
The Bancorp’s capital ratios exceed the “well-capitalized” guidelines
as defined by the Board of Governors of the Federal Reserve
System. As of December 31, 2014, the Tier I risk-based capital ratio
was 10.83%, the Tier I leverage ratio was 9.66% and the Total risk-
based capital ratio was 14.33%.
Earnings Summary
The Bancorp’s net income available to common shareholders for
the year ended December 31, 2014 was $1.4 billion, or $1.66 per
diluted share, which was net of $67 million in preferred stock
income available to common
dividends. The Bancorp’s net
shareholders for the year ended December 31, 2013 was $1.8 billion,
or $2.02 per diluted share, which was net of $37 million in preferred
stock dividends. Pre-provision net revenue was $2.3 billion and $2.8
billion for the years ended December 31, 2014 and 2013,
respectively. Pre-provision net revenue is a non-GAAP measure.
For further
information, refer to the Non-GAAP Financial
Measures section in the MD&A.
Net interest income was $3.6 billion for both the years ended
December 31, 2014 and 2013. Net interest income was positively
impacted by an increase in average taxable securities of $5.4 billion
for the year ended December 31, 2014 coupled with an increase in
yields on these securities of 16 bps compared to the prior year. In
addition, net interest income also included the benefit of an increase
in average loans and leases and a decrease in the rates paid on long-
term debt compared to the prior year, partially offset by lower yields
on loans and leases and an increase in average long-term debt. The
net interest rate spread decreased to 2.94% in 2014 from 3.15% in
2013 primarily due to a 21 bps decrease in yields on average interest-
earning assets for the year ended December 31, 2014. Net interest
margin was 3.10% and 3.32% for the years ended December 31,
2014 and 2013, respectively.
Noninterest income decreased $754 million, or 23%, in 2014
compared to 2013. The decrease from the prior year was primarily
due to decreases in mortgage banking net revenue and other
noninterest income. Mortgage banking net revenue decreased $390
million for the year ended December 31, 2014 compared to the
prior year primarily due to decreases in origination fees and gains on
loan sales and net mortgage servicing revenue. Other noninterest
income decreased $429 million compared to the prior year. The
decrease included the impact of a gain of $125 million on the sale of
Vantiv, Inc. shares in the second quarter of 2014, compared to gains
totaling $327 million during the second and third quarters of 2013.
The Bancorp recognized gains of $23 million and $9 million
associated with a tax receivable agreement with Vantiv, Inc. in the
fourth quarter of 2014 and 2013, respectively. Additionally, other
noninterest income decreased for the year ended December 31,
2014 compared to 2013 primarily due to decreases in the positive
valuation adjustments on the stock warrant associated with Vantiv
20 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NON-GAAP FINANCIAL MEASURES
The following are Non-GAAP measures which are important to the
reader of the Bancorp’s Consolidated Financial Statements but
should be supplemental to primary GAAP measures. The Bancorp
considers many factors when determining the adequacy of its
liquidity profile, including its LCR as defined by the U.S. Banking
Agencies Basel III LCR final rule. Generally, the LCR is designed to
ensure banks maintain an adequate level of unencumbered HQLA
to satisfy the estimated net cash outflows under a 30-day stress
scenario. The Bancorp will be subject to the Modified LCR whereby
TABLE 4: Non-GAAP Financial Measures - Liquidity Coverage Ratio
As of ($ in millions)
High Quality Liquid Assets
Estimated net cash outflow
Estimated Modified LCR
the net cash outflow under the 30-day stress scenario is multiplied
by a factor of 0.7. The final rule is not effective for the Bancorp
until January 1, 2016. The Bancorp believes there is no comparable
U.S. GAAP financial measure to LCR. The Bancorp believes
providing an estimated LCR is important for comparability to other
liquidity
institutions. For a further discussion on
financial
management and the LCR, refer to the Liquidity Risk Management
section of MD&A.
$
December 31,
2014
22,162
19,831
112 %
Pre-provision net revenue is net interest income plus noninterest
income minus noninterest expense. The Bancorp believes this
measure is important because it provides a ready view of the
Bancorp’s pre-tax earnings before the impact of provision expense.
The following table reconciles the non-GAAP financial measure of pre-provision net revenue to U.S. GAAP for the years ended December 31:
TABLE 5: Non-GAAP Financial Measures - Pre-Provision Net Revenue
($ in millions)
Net interest income (U.S. GAAP)
Add: Noninterest income
Less: Noninterest expense
Pre-provision net revenue
$
$
2014
3,579
2,473
3,709
2,343
2013
3,561
3,227
3,961
2,827
The Bancorp believes return on average tangible common equity is
an important measure for comparative purposes with other financial
institutions, but is not defined under U.S. GAAP, and therefore is
considered a non-GAAP financial measure.(cid:3)
The following table reconciles the non-GAAP financial measure of return on average tangible common equity to U.S. GAAP for the years ended
December 31:
TABLE 6: Non-GAAP Financial Measures - Return on Average Tangible Common Equity
($ in millions)
Net income available to common shareholders (U.S. GAAP)
Add: Intangible amortization, net of tax
Tangible net income available to common shareholders (1)
Average Bancorp's shareholders' equity (U.S. GAAP)
Less: Average preferred stock
Average goodwill
Average intangible assets and other servicing rights
Average Tangible common equity (2)
Return on average tangible common equity (1) / (2)
$
$
$
2014
1,414
3
1,417
15,290
(1,205)
(2,416)
(20)
$
11,649
2013
1,799
5
1,804
14,302
(604)
(2,416)
(29)
11,253
12.2 %
16.0
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 Bancorp’s capital adequacy using
The Bancorp believes
these ratios, the Bancorp believes they are useful to provide
investors the ability to assess its capital adequacy on the same basis.
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
Bancorp’s capitalization to other organizations. However, because
there are no standardized definitions for these ratios, the Bancorp’s
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.
21 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
U.S. banking regulators approved final capital rules (Basel III
Final Rule) in July of 2013 that substantially amend the existing risk-
based capital rules (Basel I) for banks. The Bancorp believes
providing an estimate of its capital position based upon the final
rules is important to complement the existing capital ratios and for
comparability to other financial institutions. Since these rules are not
effective for the Bancorp until January 1, 2015, they are considered
non-GAAP measures and therefore are included in the following
non-GAAP financial measures table.
The following table reconciles non-GAAP capital ratios to U.S. GAAP as of December 31:
TABLE 7: Non-GAAP Financial Measures - Capital Ratios
($ in millions)
Total Bancorp shareholders’ equity (U.S. GAAP)
Less: Preferred stock
Goodwill
Intangible assets and other servicing rights
Tangible common equity, including unrealized gains / losses
Less: Accumulated other comprehensive income
Tangible common equity, excluding unrealized gains / losses (1)
Add: Preferred stock
Tangible equity (2)
Total assets (U.S. GAAP)
Less: Goodwill
Intangible assets and other servicing rights
Accumulated other comprehensive income, before tax
Tangible assets, excluding unrealized gains / losses (3)
Total Bancorp shareholders’ equity (U.S. GAAP)
Less: Goodwill and certain other intangibles
Accumulated other comprehensive income
Add: Qualifying TruPS
Other
Tier I risk-based capital
Less: Preferred stock
Qualifying TruPS
Qualified noncontrolling interests in consolidated subsidiaries
Tier I common equity (4)
Risk-weighted assets (5)(a)
Ratios:
Tangible equity (2) / (3)
Tangible common equity (1) / (3)
Tier I common equity (4) / (5)
$
$
$
$
$
$
2014
15,626
(1,331)
(2,416)
(16)
11,863
(429)
11,434
1,331
12,765
138,706
(2,416)
(16)
(660)
135,614
15,626
(2,476)
(429)
60
(17)
12,764
(1,331)
(60)
(1)
11,372
2013
14,589
(1,034)
(2,416)
(19)
11,120
(82)
11,038
1,034
12,072
130,443
(2,416)
(19)
(126)
127,882
14,589
(2,492)
(82)
60
19
12,094
(1,034)
(60)
(37)
10,963
117,878
115,969
9.41 %
8.43 %
9.65 %
9.44
8.63
9.45
Basel III Final Rule - Estimated Tier I common equity ratio
Tier I common equity (Basel I)
Add: Adjustment related to capital components(b)
Estimated Tier I common equity under Basel III Final Rule without AOCI (opt out) (6)
Add: Adjustment related to AOCI(c)
Estimated Tier I common equity under Basel III Final Rule with AOCI (non opt out) (7)
Estimated risk-weighted assets under Basel III Final Rule (8)(d)
Estimated Tier I common equity ratio under Basel III Final Rule (opt out) (6) / (8)
Estimated Tier I common equity ratio under Basel III Final Rule (non opt out) (7) / (8)
(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
Bancorp’s total risk-weighted assets.
11,372
84
11,456
429
11,885
122,018
9.39 %
9.74 %
10,963
82
11,045
82
11,127
122,074
9.05
9.12
$
(b) Adjustments related to capital components include MSRs and deferred tax assets subject to threshold limitations and deferred tax liabilities related to intangible assets, which were deductions to
(c)
(d)
capital under Basel I capital rules.
Under Basel III, non-advanced approach banks are permitted to make a one-time election to opt out of the requirement to include AOCI in Tier I common equity.
Key differences under Basel III in the calculation of risk-weighted assets compared to Basel I include: (1) Risk-weighting for commitments less than 1 year; (2) Higher risk-weighting for exposures to
securitizations, past due loans, foreign banks and certain commercial real estate; (3) Higher risk-weighting for MSRs and deferred tax assets that are under certain thresholds as a percent of Tier I
capital; and (4) Derivatives are differentiated between exchange clearing and over-the-counter and the 50% risk-weight cap is removed.
22 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT ACCOUNTING STANDARDS
Note 1 of the Notes to Consolidated Financial Statements provides
a discussion of the significant new accounting standards adopted by
CRITICAL ACCOUNTING POLICIES
The Bancorp’s 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
Bancorp’s financial position, results of operations and cash flows.
The Bancorp’s critical accounting policies include the accounting for
the ALLL, reserve for unfunded commitments, income taxes,
valuation of servicing rights, fair value measurements, goodwill and
legal contingencies. No material changes were made to the valuation
techniques or models described below during the year ended
December 31, 2014.
ALLL
The Bancorp disaggregates its portfolio loans and leases into
portfolio segments for purposes of determining the ALLL. The
Bancorp’s 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 portfolio
segment include home equity, automobile, credit card, and other
consumer loans and leases. For an analysis of the Bancorp’s ALLL
by portfolio segment and credit quality information by class, refer to
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 Bancorp’s
review of the historical credit loss experience and such factors that,
in management’s judgment, deserve consideration under existing
economic conditions in estimating probable credit losses. The
includes a
Bancorp’s strategy
combination of conservative exposure limits significantly below
legal lending limits and conservative underwriting, documentation
and
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.
risk management
standards. The
for credit
collections
strategy
also
The Bancorp’s 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
in estimating and
measuring losses when evaluating allowances for individual loans or
pools of loans.
to recognize
imprecision
the
Larger commercial loans included within aggregate borrower
relationship balances exceeding $1 million that exhibit probable or
the Bancorp during 2014 and the expected impact of significant
accounting standards issued, but not yet required to be adopted.
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 guarantor’s 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 borrower’s
the Bancorp’s evaluation of
management. When individual loans are impaired, allowances are
determined based on management’s estimate of the borrower’s
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 loan’s 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 management’s 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 Bancorp’s internal credit reviewers.
The Bancorp’s 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 Bancorp’s
customers.
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
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
liabilities
23 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
analyzed in the determination of the adequacy of the Bancorp’s
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 the net deferred tax asset or liability is
reported in other assets or 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 management’s 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, such as the limitation on the use of any net
operating losses, 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
in the Consolidated Balance Sheets. The Bancorp
expenses
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 period’s income tax expense and can be significant to the
operating results of the Bancorp. For additional information on
income taxes, refer to 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
revenue. 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 and the weighted-average coupon 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
24 Fifth Third Bancorp
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, refer to Note 11 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). A
financial instrument’s categorization within the fair value hierarchy
is based upon the lowest level of input that is significant to the
instrument’s 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
that are derived principally from or
corroborated by observable market data by correlation
or other means.
inputs
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
Bancorp’s 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
Bancorp’s own
internally
developed pricing models and DCF methodologies, as
fair value
well as
determination
significant management
judgment.
financial data such as
instruments
for which
requires
the
The Bancorp’s 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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
trades and overall
exception reports based on certain analytical criteria, comparison to
previous
for
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.
review and assessments
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 DCFs. Examples of such instruments,
which are classified within Level 2 of the valuation
hierarchy, include federal agencies, obligations of states
and political subdivisions, agency residential mortgage-
backed securities, agency and non-agency commercial
mortgage-backed securities and asset-backed securities
and other debt securities. Corporate bonds are included
in asset-backed securities and other debt securities.
Federal agencies, obligations of states and political
subdivisions,
residential mortgage-backed
securities, agency and non-agency commercial mortgage-
backed securities and asset-backed securities and other
debt securities are generally valued using a market
approach based on observable prices of securities with
similar characteristics.
agency
Residential mortgage loans held for sale and held
for investment
For residential mortgage loans held for sale for which
the fair value election has been made, 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 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
the DCF model. These
of observable
observable inputs include interest rate spreads from
agency mortgage-backed securities market rates and
observable discount rates. For residential mortgage loans
in which the fair value election has been made that are
subsequently reclassified from held for sale to held for
investment, the fair value estimation
is based on
mortgage-backed securities prices, interest rate risk and
an internally developed credit component. Therefore,
these loans are classified within Level 3 of the valuation
hierarchy.
inputs
in
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
interest
hierarchy. Most of the Bancorp’s derivative contracts are
valued using DCF 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
rate swaps and options.
and structured
Derivatives that are valued based upon models with
significant unobservable market parameters are classified
within Level 3 of
the valuation hierarchy. At
December 31, 2014, derivatives classified as Level 3,
which are valued using an option-pricing model
containing unobservable inputs, consisted primarily of
the warrant associated with the initial sale of the
Bancorp’s 51% interest in Vantiv Holding, LLC to
Advent International and a total return swap associated
with the Bancorp’s sale of its Visa, Inc. Class B shares.
Level 3 derivatives also include IRLCs, 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 Bancorp’s 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 unit’s carrying amount of
goodwill exceeds its implied fair value. In testing goodwill for
impairment, U.S. GAAP 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.
In this qualitative assessment, the Bancorp evaluates events and
circumstances which may include, but are not limited to, the general
economic environment, banking industry and market conditions,
the overall financial performance of the Bancorp, the performance
of the Bancorp’s stock, the key financial performance metrics of the
reporting units, and events affecting the reporting units. If, after
assessing the totality of events and 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
the first step (Step 1) of the goodwill impairment test, and continue
to the second step (Step 2), if necessary. 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, Step 2 of the goodwill impairment test is performed to
measure the amount of impairment loss, 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
Bancorp’s reporting units are publicly traded, individual reporting
unit fair value determinations cannot be directly correlated to the
Bancorp’s stock price. To determine the fair value of a reporting
unit, the Bancorp employs an income-based approach, utilizing the
25 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
reporting unit’s forecasted cash flows (including a terminal value
approach to estimate cash flows beyond the final year of the
forecast) and the reporting unit’s 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
Bancorp’s 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 Bancorp’s 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 unit’s 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. A recognized impairment loss cannot exceed the
carrying amount of that goodwill and cannot be reversed in future
periods 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 8 of the Notes to Consolidated Financial
the Bancorp’s
Statements for further
goodwill.
information regarding
Legal Contingencies
The Bancorp is party to numerous claims and lawsuits as well as
threatened or potential actions or claims concerning matters arising
from the conduct of its business activities. The outcome of claims
or litigation and the timing of ultimate resolution are inherently
difficult to predict, and significant judgment may be required in the
determination of both the probability of loss and whether the
amount of the loss is reasonably estimable. The Bancorp’s estimates
are subjective and are based on the status of legal and regulatory
proceedings, the merit of the Bancorp’s defenses and consultation
with internal and external legal counsel. 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. This reserve is included
in Other Liabilities in the Consolidated Balance Sheets and is
adjusted from time to time as appropriate to reflect changes in
circumstances. Legal expenses are recorded in other noninterest
expense in the Consolidated Statements of Income.
26 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISK FACTORS
The risks listed below present risks that could have a material
impact on the Bancorp’s financial condition, the results of its
operations, or its business.
RISKS RELATING TO ECONOMIC AND MARKET
CONDITIONS
Weakness in the U.S. economy, including within Fifth Third’s
geographic footprint, has adversely affected Fifth Third in the
past and may adversely affect Fifth Third in the future.
If the strength of the U.S. economy in general or the strength of the
local economies in which Fifth Third conducts operations declines
this could result in, among other things, a deterioration in credit
quality or a reduced demand for credit, including a resultant effect
on Fifth Third’s loan portfolio and ALLL and in the receipt of
lower proceeds from the sale of loans and foreclosed properties.
These factors could result in higher delinquencies, greater charge-
offs and increased losses in future periods, which could materially
adversely affect Fifth Third’s financial condition and results of
operations.
The global financial markets continue to be strained as a
result of economic slowdowns and concerns, especially about
the creditworthiness of the European Union member states
and financial institutions in the European Union. These
factors could have international implications, which could
hinder the U.S. economic recovery and affect the stability of
global financial markets.
Certain European Union member states have fiscal obligations
greater than their fiscal revenue, which has caused investor concern
over such countries’ ability to continue to service their debt and
foster economic growth in their economies. The European debt
crisis and measures adopted to address it have significantly
weakened European economies. A weaker European economy may
cause investors to lose confidence in the safety and soundness of
European financial institutions and the stability of European
member economies. A failure to adequately address sovereign debt
concerns in Europe could hamper economic recovery or contribute
to recessionary economic conditions and severe stress in the
financial markets, including in the United States. Should the U.S.
economic recovery be adversely impacted by these factors, the
likelihood for loan and asset growth at U.S. financial institutions,
like Fifth Third, may deteriorate.
Changes in interest rates could affect Fifth Third’s income and
cash flows.
Fifth Third’s 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 Third’s 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
Third’s 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 impact
Fifth Third. Losses on behalf of its customers could expose Fifth
Third to litigation, credit risks or loss of revenue from those
customers. Additionally,
in Fifth Third’s trading and
investment positions could lead to a loss with respect to those
investments and may adversely affect cash flows and funding costs.
losses
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 Third’s stock price is volatile.
Fifth Third’s stock price has been volatile in the past and several
factors could cause the price to fluctuate substantially in the future.
These factors include:
(cid:120)
(cid:120)
(cid:120)
Actual or anticipated variations in earnings;
Changes in analysts’ recommendations or projections;
Fifth Third’s announcements of developments related to
its businesses;
(cid:120) Operating and stock performance of other companies
deemed to be peers;
Actions by government regulators;
(cid:120)
(cid:120) New technology used or services offered by traditional
and non-traditional competitors;
(cid:120) News reports of trends, concerns and other issues related
to the financial services industry;
(cid:120) Natural disasters;
(cid:120) Geopolitical conditions such as acts or threats of terrorism
or military conflicts.
The price for shares of Fifth Third’s common stock may fluctuate
significantly in the future, and these fluctuations may be unrelated to
Fifth Third’s performance. General market price declines or market
volatility in the future could adversely affect the price for shares of
Fifth Third’s common stock, and the current market price of such
shares may not be indicative of future market prices.
27 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Changes in retail distribution strategies and consumer
behavior may adversely impact Fifth Third’s investments in its
bank premises and equipment and other assets and may lead
to increased expenditures to change its retail distribution
channel
Fifth Third has significant investments in bank premises and
equipment for its branch network including its 1,302 full service
banking centers, 93 parcels of land held for the development of
future banking centers, as well as its retail work force and other
branch banking assets. Advances in technology such as e-commerce,
telephone, internet and mobile banking, and in-branch self-service
teller machines and other
technologies
equipment, as well as changing customer preferences for these other
methods of accessing Fifth Third’s products and services, could
decrease the value of Fifth Third’s branch network or other retail
distribution assets and may cause it to change its retail distribution
strategy, close and/or sell certain branches or parcels of land held
for development and restructure or reduce its remaining branches
and work force. These actions could lead to losses on these assets or
could adversely impact the carrying value of other long-lived assets
and may lead to increased expenditures to renovate and reconfigure
remaining branches or to otherwise reform its retail distribution
channel.
including automatic
RISKS RELATING TO FIFTH THIRD’S GENERAL
BUSINESS
Deteriorating credit quality, particularly in real estate loans,
has adversely impacted Fifth Third in the past and may
adversely impact Fifth Third in the future.
When Fifth Third lends money or commits to lend money the
Bancorp incurs credit risk or the risk of loss if borrowers do not
repay their loans. The credit performance of the loan portfolios
significantly affects the Bancorp’s 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
establishing reserves through a charge to earnings. The amount of
these reserves is based on Fifth Third’s assessment of credit losses
inherent
(including unfunded credit
commitments). The process for determining the amount of the
ALLL and the reserve for unfunded commitments is critical to Fifth
Third’s 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.
loan portfolio
the
in
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 borrower’s
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 ALLL and the reserve for
unfunded commitments are adequate to cover inherent losses at
December 31, 2014; 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 increase reserves in future periods, which would reduce earnings.
For more information, refer to the "Risk Management - Credit
Risk Management," "Critical Accounting Policies - Allowance for
28 Fifth Third Bancorp
Loan and Leases,” and “Reserve for Unfunded Commitments”
sections of 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 Third’s 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, 2014). In addition to customer deposits,
sources of liquidity include investments in the securities portfolio,
Fifth Third’s sale or securitization of loans in secondary markets
and the pledging of loans and investment securities to access
secured borrowing facilities through the FHLB and the FRB, and
Fifth Third’s ability to raise funds in domestic and international
money and capital markets.
Fifth Third’s 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 Third’s 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, increased regulatory requirements, and reductions in one or
more of Fifth Third’s credit ratings. A reduced credit rating could
adversely affect Fifth Third’s 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 Third’s 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.
and
additional
Recent regulatory changes relating to
liquidity and risk
management may also negatively impact Fifth Third’s results of
operations and competitive position. Various regulations recently
adopted or proposed,
regulations under
consideration, impose or could impose more stringent liquidity
requirements for large financial institutions, including Fifth Third.
These regulations address, among other matters, liquidity stress
testing, minimum liquidity requirements and restrictions on short-
term debt issued by top-tier holding companies. Given the overlap
and complex interactions of these regulations with other regulatory
framework
changes,
applicable to Fifth Third, the full impact of the adopted and
proposed regulations will remain uncertain until
their full
implementation.
resolution and
including
recovery
the
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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 or industry of
the borrowers or collateral.
Fifth Third’s 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.
loans for
investment or private
Fifth Third may be required to repurchase residential
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
residential mortgage
label
securitization. Fifth Third may be required to repurchase residential
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 60 days or less) after Fifth Third receives notice of
the breach. Contracts for residential mortgage loan sales to the
GSEs include various types of specific remedies and penalties that
could be applied to inadequate responses to repurchase requests. If
economic conditions and the housing market deteriorate or future
investor repurchase demand and success at appealing repurchase
requests differ from past experience, Fifth Third could 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 Third’s 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 Third’s 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 Third’s ability to grow its deposits. If
Fifth Third is unable to sufficiently grow its deposits to meet
liquidity objectives, 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 Third’s 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 Third’s 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 Bancorp’s 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
Bancorp’s 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 Bancorp’s
banking subsidiary and certain nonbank subsidiaries may pay.
Regulatory scrutiny of capital levels at bank holding companies and
insured depository institution subsidiaries has increased since the
financial crisis and has resulted in increased regulatory focus on all
aspects of capital planning,
including dividends and other
distributions to shareholders of banks such as the parent bank
holding companies. Also, Fifth Third Bancorp’s right to participate
in a distribution of assets upon a subsidiary’s liquidation or
reorganization is subject to the prior claims of that subsidiary’s
creditors. Limitations on the Bancorp’s 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
Third’s 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
including capital, access to capital, revenue
several factors,
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 Third’s 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 Third’s 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
29 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Third’s 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 Third’s 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 organization’s incentive compensation policies do not
encourage imprudent risk taking and are consistent with the safety
and soundness of the organization. In addition, the DFA 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 the
SEC proposed such rules in April 2011. In addition, in June 2012,
the SEC issued final rules to implement DFA’s requirement that the
SEC direct the national securities exchanges to adopt certain listing
standards related to the compensation committee of a company's
board of directors as well as its compensation advisers. If Fifth
Third is unable to attract and retain qualified employees, or do so at
rates necessary
if
compensation costs required to attract and retain employees
become more expensive, Fifth Third’s performance, including its
competitive position, could be materially adversely affected.
its competitive position, or
to maintain
Fifth Third’s 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,
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 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
30 Fifth Third Bancorp
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.
Fifth Third uses financial models for business planning
purposes that may not adequately predict future results.
Fifth Third uses financial models to aid in its planning for various
purposes including its capital and liquidity needs, potential charge-
offs, reserves, and other purposes. The models used may not
accurately account for all variables that could affect future results,
may fail to predict outcomes accurately and/or may overstate or
understate certain effects. As a result of these potential failures,
Fifth Third may not adequately prepare for future events and may
suffer losses or other setbacks due to these failures.
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 Third’s 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. If new information arises that
results in a material change to a reserve amount, such a change
could result in a change to previously announced financial results.
Refer to the “Critical Accounting Policies” section of MD&A for
more information regarding management’s significant estimates.
regulatory agencies, periodically change
Changes in accounting standards or interpretations could
impact Fifth Third’s reported earnings and financial
condition.
The accounting standard setters, including the FASB, the SEC and
financial
other
accounting and reporting standards that govern the preparation of
Fifth Third’s 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 Third’s prior period financial statements.
the
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
to
requisite
regulatory approvals,
Future acquisitions may dilute current shareholders’
ownership of Fifth Third and may cause Fifth Third to
become more susceptible to adverse economic events.
Subject
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.
requisite
approvals
receipt of
governmental
Difficulties in combining the operations of acquired entities
with Fifth Third’s own operations may prevent Fifth Third
from achieving the expected benefits from its acquisitions.
Upon
and
consummation of such transactions, 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, or owns a minority stake in, as applicable, 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 and/or interests,
including, for example, portions of our stake in Vantiv Holding,
LLC. If it were to determine to sell such businesses and/or interests,
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 and/or interests, it would suffer the loss
of income from the sold businesses and/or interests, including
those accounted for under the equity method of accounting, 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 systems will not be
inoperable. Fifth Third also has security to prevent unauthorized
access to the systems. 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 systems 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.
flaws or employee errors,
Fifth Third’s necessary dependence upon automated systems to
record and process its transaction volume poses the risk that
technical system
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 Third’s customers and result in a financial loss
or liability.
Fifth Third is exposed to cyber-security risks, including denial
of service, hacking, and identity theft.
Fifth Third relies heavily on communications and information
systems to conduct its business. Any failure, interruption or breach
in security of these systems could result in disruptions to its
accounting, deposit, loan and other systems, and adversely affect
our customer relationships. While Fifth Third has policies and
procedures designed to prevent or limit the effect of these possible
events, there can be no assurance that any such failure, interruption
or security breach will not occur or, if any does occur, that it can be
sufficiently remediated. There have been increasing efforts on the
part of third parties, including through cyber attacks, to breach data
security at financial institutions or with respect to financial
transactions. There have been several recent instances involving
financial services and consumer-based companies reporting the
unauthorized disclosure of client or customer information or the
destruction or theft of corporate data, by both private individuals
and foreign governments. In addition, because the techniques used
to cause such security breaches change frequently, often are not
recognized until launched against a target and may originate from
less regulated and remote areas around the world, Fifth Third may
be unable to proactively address these techniques or to implement
adequate preventative measures. Furthermore, there has been a well-
publicized series of apparently related distributed denial of service
attacks on large financial services companies, including Fifth Third
Bank. Distributed denial of service attacks are designed to saturate
the targeted online network with excessive amounts of network
traffic, resulting in slow response times, or in some cases, causing
the site to be temporarily unavailable. To date these attacks have not
been intended to steal financial data, but meant to interrupt or
suspend a company’s Internet service. These events did not result in
a breach of Fifth Third’s client data and account information
remained secure; however, the attacks did adversely affect the
performance of Fifth Third’s website and in some instances
prevented customers from accessing Fifth Third’s website. While
the event was resolved in a timely fashion and primarily resulted in
inconvenience to our customers, future cyber-attacks could be more
disruptive and damaging. Cyber threats are rapidly evolving and
Fifth Third may not be able to anticipate or prevent all such attacks.
Fifth Third may incur increasing costs in an effort to minimize these
risks or in the investigation of such cyber-attacks or related to the
protection of the Bancorp’s customers from identity theft as a result
31 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of such attacks. Nevertheless, the occurrence of any failure,
interruption or security breach of our systems, or of our third-party
service providers, particularly if widespread or resulting in financial
losses to customers, could also seriously damage Fifth Third’s
reputation, result in a loss of customer business, subject it to
additional regulatory scrutiny, or expose it to civil litigation and
financial liability.
Fifth Third is exposed to operational and reputational risk.
Fifth Third is exposed to many types of operational risk, including
but not
information
to, business continuity
management risk, fraud risk, model risk, third party service provider
risk, human resources risk, and process risk.
limited
risk,
Negative public opinion can result from Fifth Third’s actual or
alleged conduct in activities, such as lending practices, data security,
corporate governance and acquisitions, and may damage Fifth
Third’s reputation. Additionally, actions taken by government
regulators and community organizations may also damage Fifth
Third’s reputation. This negative public opinion can adversely affect
Fifth Third’s 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 Third’s operating results and financial
condition.
In 2009, Fifth Third sold an approximate 51% interest in its
processing business, Vantiv Holding, LLC (formerly Fifth Third
Processing Solutions). As a result of additional share sales
completed by Fifth Third in 2012, 2013 and 2014 the Bancorp’s
current ownership share in Vantiv Holding, LLC is approximately
23%. The Bancorp’s investment in Vantiv Holding, LLC is
accounted for under the equity method of accounting and is not
consolidated based on Fifth Third’s remaining ownership share in
Vantiv Holding, LLC. Vantiv Holding, LLC’s operating results
could be poor or favorable and could affect the operating results of
Fifth Third. In addition, Fifth Third participates in a multi-lender
credit facility to Vantiv Holding, LLC and repayment of these loans
is contingent on future cash flows from Vantiv Holding, LLC.
Weather related events or other natural disasters may have an
effect on the performance of Fifth Third’s loan portfolios,
especially in its coastal markets, thereby adversely impacting
its results of operations.
Fifth Third’s 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, investment practices, dividend policy
and growth. The Bancorp must maintain certain risk-based and
leverage capital ratios as required by the FRB which can change
depending upon general economic conditions and the Bancorp’s
32 Fifth Third Bancorp
In
capital
regulatory
2012, Federal banking
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 Bancorp’s ability to expand or maintain present
business levels.
June
agencies proposed
enhancements to the regulatory capital requirements for U.S.
banking organizations, which implemented aspects of Basel III,
such as re-defining the regulatory capital elements and minimum
capital ratios, introducing regulatory capital buffers above those
minimums, revising the agencies’ rules for calculating risk-weighted
assets and introducing a new Tier I common equity ratio. In July
2013, the Federal banking agencies issued final rules for the
enhanced
included
modifications to the proposed rules. The final rules provide the
option for certain banking organizations, including the Bancorp, to
opt out of including AOCI in Tier I capital and retain the treatment
of residential mortgage exposures consistent with the current Basel I
capital rules. The new capital rules are effective for the Bancorp on
January 1, 2015, subject to phase-in periods for certain components
and other provisions. The need to maintain more and higher quality
capital as well as greater liquidity going forward could limit our
business activities, including lending, and our ability to expand,
either organically or through acquisitions. Moreover, although these
new requirements are being phased in over time, U.S. Federal
banking agencies have been taking into account expectations
regarding the ability of banks to meet these new requirements,
including under stressed conditions, in approving actions that
represent uses of capital, such as dividend increases and share
repurchases.
requirements, which
The Bancorp’s 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
limitations or conditions on the Bancorp’s activities (and the
commencement of new activities) and could ultimately result in the
loss of financial holding company status. In addition, failure by the
Bancorp’s banking subsidiary to meet applicable capital guidelines
could subject the bank to a variety of enforcement remedies
include
available to the federal regulatory authorities. These
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 Third’s 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.
Previous 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 legislation such as the DFA.
Such programs and legislation subject Fifth Third and other
financial institutions to restrictions, oversight and/or costs that may
have an impact on Fifth Third’s 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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
have an adverse effect on its business, financial condition and
results of operations.
and/or financial statements, as applicable, and/or determinations of
material weaknesses in its disclosure controls and procedures.
Fifth Third is subject to various regulatory requirements that
may 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 FDIC, 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 Third’s 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.
to stress
testing, capital
In addition, Fifth Third, as well as other financial institutions
more generally, have recently been subjected to increased scrutiny
from government authorities, including bank regulatory authorities,
stemming from broader systemic regulatory concerns, including
with respect
levels, asset quality,
provisioning, AML/BSA, consumer compliance and other
prudential matters and efforts to ensure that financial institutions
take steps to improve their risk management and prevent future
crises. In this regard, government authorities, including the bank
regulatory agencies, are also pursuing aggressive enforcement
actions with respect to compliance and other legal matters involving
financial activities, which heightens the risks associated with actual
and perceived compliance failures and may also adversely affect our
ability to enter into certain transactions or engage in certain
activities, or obtain necessary regulatory approvals in connection
therewith.
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 Third’s regular examination
process, Fifth Third’s and its banking subsidiary’s 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 Third’s 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 various governmental
regulatory agencies and law enforcement authorities, as well
as self-regulatory agencies which may lead to adverse
consequences.
Fifth Third and/or its affiliates are or may become involved from
time
reviews,
information-gathering
investigations and proceedings (both formal and informal) by
governmental regulatory agencies and law enforcement authorities,
as well as self-regulatory agencies, regarding their respective
businesses. Such matters may
in material adverse
consequences, including without limitation, adverse judgments,
settlements,
injunctions or other actions,
amendments and/or restatements of Fifth Third’s SEC filings
fines, penalties,
requests,
result
time
to
in
Deposit insurance premiums levied against Fifth Third Bank
may increase if the number of bank failures increase or the
cost of resolving failed banks increases.
The FDIC maintains a DIF to protect insured depositors in the
event of bank failures. The DIF is funded by fees assessed on
insured depository institutions including Fifth Third Bank. Future
deposit premiums paid by Fifth Third Bank depend on the level of
the DIF and the magnitude and cost of future bank failures. Fifth
Third Bank may be required to pay significantly higher FDIC
premiums if market developments change such that the DIF
balance is reduced.
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 and
depositors. 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.
On July 21, 2010 the President of the United States signed into
law the DFA. Many parts of the DFA are now in effect, while
others are in an implementation stage likely to continue for several
years. A number of reform provisions are likely to significantly
impact the ways in which banks and bank holding companies,
including Fifth Third and its bank subsidiary, conduct their
business:
(cid:120)
(cid:120)
The CFPB has been given authority to regulate
consumer financial products and services sold by
banks and non-bank companies and to supervise
banks with assets of more than $10 billion and their
affiliates for compliance with Federal consumer
protection laws. Any new regulatory requirements
promulgated by the CFPB could require changes to
increased
our consumer businesses,
compliance costs and affect the streams of revenue of
such businesses. The FSOC has been charged with
identifying
stronger
financial regulation and identifying those non-bank
companies that are systemically important and thus
should be subject to regulation by the Federal
Reserve.
risks, promoting
systemic
result
in
and
“Volcker Rule” provisions
The DFA
final rule generally prohibit any
implementing
banking entity from (i) engaging
in short-term
proprietary trading for its own account and (ii)
sponsoring or acquiring ownership
in
private equity or hedge funds. The Volcker Rule,
however, contains a number of exceptions to these
interests
33 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
prohibitions. For example, transactions on behalf of
customers or in connection with certain underwriting
and market making activities, as well as risk-
mitigating hedging activities and certain foreign
banking activities are permitted. The risk-mitigating
hedging exemption applies to hedging activities that
are designed to reduce or significantly mitigate
specific, identifiable risks of individual or aggregated
positions. Fifth Third is required to conduct an
analysis supporting its hedging strategy and the
effectiveness of hedges must be monitored and
recalibrated as necessary. Fifth Third will be required
to
the
transaction,
for certain
transactions that present heighted compliance risks.
Under the market-making exemption, a trading desk
is required to routinely stand ready to purchase and
sell one or more types of financial instruments. The
trading desk’s inventory in these types of financial
instruments has to be designed not to exceed, on an
ongoing basis, the reasonably expected near-term
demands of customers.
contemporaneously with
rationale
the hedging
document,
(cid:120)
(cid:120)
$60 million
approximately
The Volcker Rule and the rulemakings promulgated
thereunder restrict banks and their affiliated entities
from investing in or sponsoring certain private equity
and hedge funds. Fifth Third does not sponsor any
private equity or hedge funds that it is prohibited
from sponsoring. As of December 31, 2014, the
Bancorp had approximately $165 million in interests
in binding
and
commitments to invest in private equity funds likely
to be affected by the Volcker rule. It is expected that
the Bancorp may need to eliminate these investments
although it is likely that these investments will be
reduced over time in the ordinary course before
compliance is required. In December 2014, the FRB
extended the conformance period through July 2016
for
in and relationships with such
covered funds that were in place prior to December
31, 2013, and indicated that it intends to further
extend the compliance period for such investments
through July 2017. An ultimate forced sale of some
of these investments could result in Fifth Third
receiving less value than it would otherwise have
received.
investments
The FDIC and the Federal Reserve adopted a final
rule that requires bank holding companies that have
$50 billion or more in assets, like Fifth Third, to
periodically submit to the Federal Reserve, the FDIC
and the FSOC a plan discussing how the company
could be resolved in a rapid and orderly fashion if the
company were to fail or experience material financial
distress. In a related rulemaking, the FDIC adopted a
final rule that requires insured depository institutions
with $50 billion or more in assets, like Fifth Third, to
annually prepare and submit a resolution plan to the
FDIC, which would include, among other things, an
analysis of how the institution could be resolved
under the FDIA in a manner that protects depositors
and limits losses or costs to creditors of the bank.
Initial plans for Fifth Third and its bank subsidiary
have been submitted, in accordance with the final
34 Fifth Third Bancorp
regulatory rules, for review by the FDIC, the Federal
Reserve, and the FSOC. The Federal Reserve and the
FDIC may jointly impose restrictions on Fifth Third
or its bank subsidiary, including additional capital
requirements or limitations on growth, if the agencies
determine that the institution’s plan is not credible or
would not facilitate a rapid and orderly resolution of
Fifth Third under the U.S. Bankruptcy Code, or Fifth
Third Bank under the FDIA, and additionally could
require Fifth Third to divest assets or take other
actions if it did not submit an acceptable resolution
within two years after any such restrictions were
imposed.
Title VII of DFA imposes a new regulatory regime
on the U.S. derivatives markets. While most of the
provisions related to derivatives markets are now in
effect, several additional requirements await final
regulations from the relevant regulatory agencies for
derivatives, the CFTC and the SEC. One aspect of
this new regulatory regime for derivatives is that
substantial oversight responsibility has been provided
to the CFTC, which, as a result, now has a
meaningful supervisory role with respect to some of
Fifth Third’s businesses. In 2014, Fifth Third Bank
registered as a swap dealer with the CFTC and
became subject to new substantive requirements,
including real time trade reporting and robust record
keeping requirements, business conduct requirements
(including daily valuations, disclosure of material risks
associated with swaps and disclosure of material
incentives and conflicts of interest), and mandatory
clearing and exchange trading of all standardized
swaps designated by the relevant regulatory agencies
as required to be cleared. Although the ultimate
impact will depend on the promulgation of all final
regulations, Fifth Third‘s derivatives business will
to new substantive
likely be
requirements,
in
excess of current market practice and capital
requirements
this business. These
to
requirements will collectively impose implementation
and ongoing compliance burdens on Fifth Third and
will introduce additional legal risk (including as a
result of newly applicable antifraud and anti-
manipulation provisions and private rights of action).
Once finalized, the rules may raise the costs and
liquidity burden associated with Fifth Third’s
derivatives businesses and adversely affect or cause
Fifth Third to change its derivatives products.
including margin requirements
further subject
specific
for
the U.S. Treasury
Financial institutions may be required, regardless of
risk, to pay taxes or other fees to the U.S. Treasury.
Such taxes or other fees could be designed to
reimburse
the many
government programs and initiatives it has taken or
may undertake as part of its economic stimulus
efforts. The Department of Treasury issued an
interim final rule in 2012 to establish an assessment
schedule for the collection of fees from bank holding
companies with at least $50 billion in assets and
foreign banks with at least $50 billion in assets in the
U.S. to cover the expenses of the Office of Financial
Research and FSOC. In August 2013, the FRB also
(cid:120)
(cid:120)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
adopted a final rule to implement an assessment
provision under the DFA equal to the expense the
FRB estimates are necessary or appropriate to
supervise and regulate bank holding companies with
$50 billion or more in assets.
(cid:120) On July 31, 2013, the U.S. District Court for the
issued an order granting
District of Columbia
summary
in a case
judgment to the plaintiffs
challenging certain provisions of the FRB’s rule
concerning electronic debit card transaction fees and
(the “Current
network exclusivity arrangements
Rule”) that were adopted to implement Section 1075
of the DFA, known as the Durbin Amendment. The
Court held that, in adopting the Current Rule, the
FRB violated the Durbin Amendment’s provisions
concerning which costs are allowed to be taken into
account for purposes of setting fees that are
reasonable and proportional to the costs incurred by
the issuer and therefore the Current Rule’s maximum
permissible fees were too high. In addition, the Court
held that the Current Rule’s network non-exclusivity
provisions concerning unaffiliated payment networks
for debit cards also violated the Durbin Amendment.
The Court vacated the Current Rule, but stayed its
ruling to provide the FRB an opportunity to replace
the invalidated portions. The FRB appealed this
decision and on March 21, 2014, the D.C. Circuit
Court of Appeals reversed the District Court’s grant
of summary judgment and remanded the case for
further proceedings in accordance with its opinion.
The merchants have filed a petition for writ of
certiorari to the U.S. Supreme Court. However, on
January 20, 2015, the U.S. Supreme Court declined to
hear an appeal of the Circuit Court reversal, thereby
largely upholding the Current Rule and substantially
reducing uncertainty
card
interchange fees the Bancorp is permitted to charge.
Refer to the Noninterest Income subsection of the
Statements of Income Analysis section of MD&A for
further information regarding the Bancorp’s debit
card interchange revenue.
surrounding debit
It is clear that the reforms, both under the DFA and otherwise, are
having a significant effect on the entire financial industry. Fifth
Third believes compliance with the DFA and implementing its
regulations and other initiatives will likely continue to negatively
impact revenue and increase the cost of doing business, both in
terms of transition expenses and on an ongoing basis, and may also
limit Fifth Third’s ability to pursue certain desirable business
opportunities. Any new regulatory requirements or changes to
existing requirements could require changes to Fifth Third’s
businesses, result in increased compliance costs and affect the
profitability of such businesses. Additionally, reform could affect
the behaviors of third parties that we deal with in the course of our
business, such as rating agencies,
insurance companies and
investors. 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/or its affiliates are or may become the subject
of litigation which could result in legal liability and damage to
Fifth Third’s 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 Third’s 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. The SEC has announced a
policy of seeking admissions of liability in certain settled cases,
which could adversely impact the defense of private litigation. These
matters could result in material adverse judgments, settlements,
fines, penalties, injunctions or other relief, amendments and/or
restatements of Fifth Third’s SEC filings and/or financial
statements, as applicable and/or determinations of material
weaknesses in its disclosure controls and procedures. 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 Third’s ability to pay or increase dividends on its
common stock or to repurchase its capital stock is restricted.
Fifth Third’s ability to pay dividends or repurchase stock is subject
to regulatory requirements and the need to meet regulatory
expectations. Fifth Third is subject to an annual assessment by the
FRB as part of CCAR. 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 Bancorp’s business plan that are likely to have a material impact
on its capital adequacy or liquidity, a detailed description of the
Bancorp’s process for assessing capital adequacy and the Bancorp’s
capital policy. The capital plan must reflect the revised capital
framework
the
implementation of the Basel III accord, including the framework’s
minimum regulatory capital ratios and transition arrangements. Fifth
Third’s stress testing results and 2015 capital plan were submitted to
the FRB on January 5, 2015.
in connection with
the FRB adopted
that
The FRB’s review of the capital plan will assess the
comprehensiveness of the capital plan, the reasonableness of the
the capital plan.
the analysis underlying
assumptions and
Additionally, the FRB will review the robustness of the capital
adequacy process, the capital policy and the Bancorp’s ability to
maintain capital above the minimum regulatory capital ratios and
above a Tier I common ratio of 5 percent under baseline and
stressful conditions throughout a nine-quarter planning horizon.
35 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
increase
interest
in average money market deposits, average
checking deposits and average demand deposits, partially offset by a
decrease in average savings deposits. The cost of average interest
bearing core deposits was 27 bps for both the years ended
December 31, 2014 and 2013. Interest expense on money market
deposits increased during the year ended December 31, 2014
compared to the year ended December 31, 2013 driven by a $5.2
billion increase in average money market deposits and a 10 bps
increase in the rate paid on average money market deposits. This
increase was partially offset by a decrease of 27 bps in the rate paid
on other time deposits for the year ended December 31, 2014
compared to the year ended December 31, 2013. Refer to the
Deposits subsection of the Balance Sheet Analysis section of
MD&A for additional information on the Bancorp’s deposits.
Interest expense on average wholesale funding for the year
ended December 31, 2014 increased $23 million, or nine percent,
compared to the year ended December 31, 2013, primarily due to an
increase in interest expense related to long-term debt partially offset
by a decrease in average certificates $100,000 and over. Interest
expense on long-term debt increased during the year ended
December 31, 2014 compared to the year ended December 31, 2013
driven by a $5.0 billion increase in average long-term debt partially
offset by a 67 bps decrease in the rate paid on long-term debt
primarily due to the redemption of $750 million of outstanding
TruPS during the fourth quarter of 2013 and the lower cost of new
debt issuances in 2014. Interest expense on average certificates
$100,000 and over decreased during the year ended December 31,
2014 compared to the year ended December 31, 2013 driven
primarily by a $2.4 billion decrease in average certificates $100,000
and over partially offset by a 7 bps increase in the rate paid on
average certificates $100,000 and over. Refer to the Borrowings
subsection of the Balance Sheet Analysis section of MD&A for
additional information on the Bancorp’s borrowings. During both
the years ended December 31, 2014 and 2013, wholesale funding
represented 24% of average interest-bearing liabilities. For more
information on the Bancorp’s interest rate risk management,
including estimated earnings sensitivity to changes in market interest
rates, refer to the Market Risk Management section of MD&A.
STATEMENTS OF INCOME ANALYSIS
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, other 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 yield 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 8 presents the components of net interest income, net
interest margin and net interest rate spread for the years ended
December 31, 2014, 2013 and 2012. 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 9 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 both the years ended
December 31, 2014 and 2013. Net interest income was positively
impacted by an increase in average taxable securities of $5.4 billion
for the year ended December 31, 2014 coupled with an increase in
yields on these securities of 16 bps for the year ended December 31,
2014 compared to the year ended December 31, 2013. Net interest
income also included the benefit of an increase in average loans and
leases of $2.0 billion for the year ended December 31, 2014, as well
as a decrease in the rates paid on long-term debt for the year ended
December 31, 2014 compared to the year ended December 31,
2013. These benefits were partially offset by lower yields on loans
and leases and an increase in average long-term debt of $5.0 billion
for the year ended December 31, 2014 compared to the year ended
December 31, 2013. For the year ended December 31, 2014, the net
interest rate spread decreased to 2.94% from 3.15% in 2013 driven
by a 21 bps decrease in yields on average interest-earning assets for
the year ended December 31, 2014.
Net interest margin was 3.10% for the year ended December
31, 2014 compared to 3.32% for the year ended December 31, 2013.
The decrease from December 31, 2013 was driven primarily by the
previously mentioned decrease in the net interest rate spread,
partially offset by increases in average free funding balances.
Interest income from loans and leases decreased $148 million,
or four percent, compared to the year ended December 31, 2013
primarily due to a decrease of 25 bps in yields on average loans and
leases partially offset by an increase of two percent in average loans
and leases for the year ended December 31, 2014 compared to the
year ended December 31, 2013. The increase in average loans and
leases for the year ended December 31, 2014 was driven primarily
by an increase of nine percent in average commercial and industrial
loans partially offset by a decrease in average residential mortgage
loans of eight percent compared to the year ended December 31,
2013. For more information on the Bancorp’s loan and lease
portfolio, refer to the Loans and Leases subsection of the Balance
Sheet Analysis section of MD&A. Interest income from investment
securities and other short-term investments increased $206 million
compared to the year ended December 31, 2013 driven by the
factors discussed above.
Average core deposits increased $6.8 billion, or eight percent,
compared to the year ended December 31, 2013 primarily due to an
36 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 8: CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
For the years ended December 31
2013
2014
2012
Average Revenue/
Balance
Cost
Average
Yield/
Rate
Average
Balance
Revenue/
Cost
Average
Yield/
Rate
Average Revenue/
Balance
Cost
Average
Yield/
Rate
$
21,770
53
3,043
115,993
2,892
14,539
(1,481)
131,943
41,178
7,745
1,492
3,585
54,000
13,344
9,059
12,068
2,271
385
37,127
91,127
($ in millions)
Assets
Interest-earning assets:
Loans and leases:(a)
Commercial and industrial loans
Commercial mortgage
Commercial construction
Commercial leases
Subtotal – commercial
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Subtotal – consumer
Total loans and leases
Securities:
Taxable
Exempt from income taxes(a)
Other short-term investments
Total interest-earning assets
Cash and due from banks
Other assets
Allowance for loan and lease losses
Total assets
Liabilities and Equity
Interest-bearing liabilities:
Interest checking
Savings
Money market
Foreign office deposits
Other time deposits
Certificates - $100,000 and over
Other deposits
Federal funds purchased
Other short-term borrowings
Long-term debt
Total interest-bearing liabilities
Demand deposits
Other liabilities
Total liabilities
Total equity
Total liabilities and equity
Net interest income
Net interest margin
Net interest rate spread
Interest-bearing liabilities to interest-earning assets
(a)
25,382
16,080
14,670
1,828
3,762
3,929
-
458
1,873
12,928
80,910
31,755
3,950
116,615
15,328
131,943
$
$
$
$ 1,346
260
51
108
1,765
518
336
334
227
138
1,553
3,318
722
3
8
4,051
$
56
16
51
5
40
34
-
-
2
247
451
$ 1,361
306
27
116
1,810
564
355
373
209
155
1,656
3,466
518
3
6
3,993
$
53
22
23
4
50
50
-
1
5
204
412
3.27 % $
3.36
3.44
3.01
3.27
3.88
3.71
2.77
9.98
35.99
4.18
3.64
37,770
8,481
793
3,565
50,609
14,428
9,554
12,021
2,121
360
38,484
89,093
3.32
4.94
0.26
3.49
16,395
49
2,417
107,954
2,482
15,053
(1,757)
$ 123,732
0.22 % $
0.10
0.35
0.29
1.06
0.85
0.02
0.09
0.10
1.91
0.56
23,582
18,440
9,467
1,501
3,760
6,339
17
503
3,024
7,914
74,547
29,925
4,917
109,389
14,343
$ 123,732
$ 1,349
369
25
127
1,870
543
393
439
192
155
1,722
3,592
527
2
4
4,125
$
49
37
11
4
68
46
-
1
8
288
512
3.60 % $
3.60
3.45
3.26
3.58
3.91
3.71
3.10
9.87
42.93
4.30
3.89
32,911
9,686
835
3,502
46,934
13,370
10,369
11,849
1,960
340
37,888
84,822
3.16
5.29
0.26
3.70
15,262
57
1,495
101,636
2,355
15,695
(2,072)
$ 117,614
0.23 % $
0.12
0.25
0.28
1.33
0.78
0.11
0.12
0.18
2.58
0.55
23,096
21,393
4,903
1,528
4,306
3,102
27
560
4,246
9,043
72,204
27,196
4,462
103,862
13,752
$ 117,614
$ 3,600
$ 3,581
$ 3,613
3.10 %
2.94
69.75
3.32 %
3.15
69.05
4.10 %
3.81
2.99
3.62
3.98
4.06
3.79
3.70
9.79
45.32
4.54
4.23
3.45
3.29
0.26
4.06
0.22 %
0.17
0.22
0.27
1.59
1.48
0.13
0.14
0.18
3.17
0.71
3.55 %
3.35
71.04
The FTE adjustments included in the above table were $21, $20 and $18 for the years ended December 31, 2014, 2013 and 2012, respectively. The federal statutory rate utilized was 35% for
all periods presented.
37 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
$
Total
2014 Compared to 2013
Volume Yield/Rate
(15)
(46)
24
(8)
(45)
(46)
(19)
(39)
18
(17)
(103)
(148)
(131)
(20)
-
(9)
(160)
(4)
(1)
(40)
2
(26)
(69)
(229)
TABLE 9: CHANGES IN NET INTEREST INCOME ATTRIBUTABLE TO VOLUME AND YIELD/RATE(a)
For the years ended December 31
($ in millions)
Assets
Interest-earning assets:
Loans and leases:
Commercial and industrial loans
Commercial mortgage
Commercial construction
Commercial leases
Subtotal – commercial loans and leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Subtotal – consumer loans and leases
Total loans and leases
Securities:
Taxable
Exempt from income taxes
Other short-term investments
Subtotal – securities and other short-term investments
Total change in interest income
Liabilities
Interest-bearing liabilities:
Interest checking
Savings
Money market
Foreign office deposits
Other time deposits
Certificates - $100,000 and over
Federal funds purchased
Other short-term borrowings
Long-term debt
Total change in interest expense
Total change in net interest income
(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.
116
(26)
24
1
115
(42)
(18)
1
16
9
(34)
81
-
177
-
2
179
260
-
(4)
12
-
(10)
4
-
(2)
(63)
(63)
(139)
3
(6)
28
1
(10)
(16)
(1)
(3)
43
39
19
3
(2)
16
1
-
(20)
(1)
(1)
106
102
158
27
-
-
27
(202)
204
-
2
206
58
$
$
$
$
$
2013 Compared to 2012
Volume
Yield/Rate
Total
(175)
(19)
4
(13)
(203)
(21)
(7)
(72)
2
(8)
(106)
(309)
(47)
-
-
(47)
(356)
4
(11)
1
-
(10)
(29)
-
-
(50)
(95)
(261)
12
(63)
2
(11)
(60)
21
(38)
(66)
17
-
(66)
(126)
(9)
1
2
(6)
(132)
4
(15)
12
-
(18)
4
-
(3)
(84)
(100)
(32)
187
(44)
(2)
2
143
42
(31)
6
15
8
40
183
38
1
2
41
224
-
(4)
11
-
(8)
33
-
(3)
(34)
(5)
229
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 increased to $315
million in 2014 compared to $229 million in 2013. The increase in
provision expense for 2014 compared to the prior year was
primarily due to an increase in net charge-offs related to certain
impaired commercial and industrial loans in the first and third
quarters of 2014 and an increase in net charge-offs related to the
transfer of certain residential mortgage loans from the portfolio to
held for sale in the fourth quarter of 2014. The impact of these
increases in charge-offs on provision expense in 2014 was partially
offset by decreases in nonperforming loans and leases and improved
delinquency metrics. The ALLL declined $260 million from $1.6
billion at December 31, 2013 to $1.3 billion at December 31, 2014.
As of December 31, 2014, the ALLL as a percent of portfolio loans
and leases decreased to 1.47%, compared to 1.79% at December 31,
2013.
Refer to the Credit Risk Management section of 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,
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.
including an analysis of
38 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Income
Noninterest income decreased $754 million, or 23%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The
components of noninterest income are as follows:
TABLE 10: NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Service charges on deposits
Corporate banking revenue
Investment advisory revenue
Mortgage banking net revenue
Card and processing revenue
Other noninterest income
Securities gains, net
Securities gains, net, non-qualifying hedges on mortgage servicing rights
Total noninterest income
Service charges on deposits
Service charges on deposits increased $11 million in 2014 compared
to 2013. Commercial deposit revenue increased $15 million in 2014
compared to 2013 primarily due to new customer acquisition and
product expansion. Consumer deposit revenue decreased $4 million
in 2014 compared to 2013 primarily due to a decrease in consumer
checking and savings fees from a decline in the percentage of
consumer customers being charged service fees, partially offset by
an increase in overdraft fees.
Corporate banking revenue
Corporate banking revenue increased $30 million in 2014 compared
to 2013. The increase from the prior year was primarily the result of
an increase in syndication and lease remarketing fees. Syndication
fees increased $22 million compared to 2013 due to the investment
2014
560
430
407
310
295
450
21
-
2,473
$
$
2013
549
400
393
700
272
879
21
13
3,227
2012
522
413
374
845
253
574
15
3
2,999
2011
520
350
375
597
308
250
46
9
2,455
2010
574
364
361
647
316
406
47
14
2,729
in resources in the commercial business and a strengthening
economy in 2014. The increase in lease remarketing fees included
the impact of a $9 million write-down of equipment value on an
operating lease during the fourth quarter of 2013.
increased $14 million
Investment advisory revenue
Investment advisory revenue
in 2014
compared to 2013. The increase was primarily due to an increase of
$15 million in private client service fees due to growth in personal
asset management fees, partially offset by a decrease in securities
broker fees due to a decline in transactional brokerage revenue. The
Bancorp had approximately $308 billion and $302 billion in total
assets under care as of December 31, 2014 and 2013, respectively,
and managed $27 billion in assets for individuals, corporations and
not-for-profit organizations as of December 31, 2014 and 2013.
Mortgage banking net revenue
Mortgage banking net revenue decreased $390 million, or 56%, in 2014 compared to 2013. The components of mortgage banking net revenue are
as follows:
TABLE 11: COMPONENTS OF MORTGAGE BANKING NET REVENUE
For the years ended December 31 ($ in millions)
Origination fees and gains on loan sales
Net mortgage servicing revenue:
Gross mortgage servicing fees
Mortgage servicing rights amortization
Net valuation adjustments on mortgage servicing rights and free-standing derivatives
entered into to economically hedge MSR
Net mortgage servicing revenue
Mortgage banking net revenue
2014
153
246
(119)
30
157
310
$
$
2013
453
251
(166)
162
247
700
2012
821
250
(186)
(40)
24
845
Origination fees and gains on loan sales decreased $300 million in
2014 compared to 2013 primarily as the result of a 66% decrease in
residential mortgage loan originations. Residential mortgage loan
originations decreased to $7.5 billion in 2014 from $22.3 billion in
2013 due to strong refinancing activity that occurred during the year
ended December 31, 2013.
and outstanding
Net mortgage 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
financial
instruments used to economically hedge the MSR portfolio. Net
servicing revenue decreased $90 million in 2014 compared to 2013
driven primarily by a decrease of $132 million in net valuation
adjustments, partially offset by a decrease in mortgage servicing
rights amortization of $47 million.
free-standing derivative
The net valuation adjustment gain of $30 million during 2014
included $95 million in gains from derivatives economically hedging
the MSRs partially offset by temporary impairment of $65 million
on the MSRs. The net valuation adjustment gain of $162 million
during 2013 included a recovery of temporary impairment of $192
million on MSRs partially offset by $30 million in losses from
derivatives economically hedging
the MSRs. Mortgage rates
decreased during 2014 which caused the modeled prepayments
speeds to increase, which led to temporary impairment on servicing
rights during the year. Mortgage rates increased in 2013 which
caused the modeled prepayment speeds to slow, and led to the
recovery of temporary impairment on servicing rights in 2013.
Servicing rights are deemed impaired when a borrower’s 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 borrower’s loan rate. Further detail on the
valuation of MSRs can be found in Note 11 of the Notes to
Consolidated Financial Statements. The Bancorp maintains a non-
qualifying hedging strategy to manage a portion of the risk
39 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
associated with changes in the valuation on the MSR portfolio.
Refer to Note 12 of the Notes to Consolidated Financial Statements
for more information on the free-standing derivatives used to
economically hedge the MSR portfolio.
The Bancorp’s total residential loans serviced as of December
31, 2014 and 2013 was $79.0 billion and $82.7 billion, respectively,
with $65.4 billion and $69.2 billion, respectively, of residential
mortgage loans serviced for others.
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. The Bancorp
did not sell securities related to the non-qualifying hedging strategy
during the year ended December 31, 2014. Net gains on the sale of
Other noninterest income
The major components of other noninterest income are as follows:
these securities were $13 million during the year ended 2013,
recorded in securities gains, net, non-qualifying hedges on mortgage
servicing rights in the Bancorp’s Consolidated Statements of
Income.
Card and processing revenue
Card and processing revenue increased $23 million in 2014
compared to 2013. The increase was primarily the result of an
increase in the number of actively used cards as well as higher
processing fees related to additional ATM locations. Debit card
interchange revenue, included in card and processing revenue, was
$128 million and $122 million for the years ended December 31,
2014 and 2013, respectively.
TABLE 12: COMPONENTS OF OTHER NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Gain on Vantiv, Inc. IPO and sale of Vantiv, Inc. shares
Operating lease income
Equity method income from interest in Vantiv Holding, LLC
Cardholder fees
BOLI income
Valuation adjustments on the warrant and put options associated with Vantiv Holding, LLC
Banking center income
Consumer loan and lease fees
Insurance income
Gain on loan sales
Loss on OREO
Loss on swap associated with the sale of Visa, Inc. Class B shares
Other, net
Total other noninterest income
2014
148
84
48
45
44
31
30
25
13
-
(14)
(38)
34
450
$
$
2013
336
75
77
47
52
206
34
27
25
3
(26)
(31)
54
879
2012
272
60
61
46
35
67
32
27
28
20
(57)
(45)
28
574
Other noninterest income decreased $429 million in 2014 compared
to 2013. The decrease included the impact of a gain of $125 million
on the sale of Vantiv, Inc. shares in the second quarter of 2014
compared to gains totaling $327 million during the second and third
quarters of 2013. The Bancorp recognized gains of $23 million and
$9 million associated with a tax receivable agreement with Vantiv,
Inc. in the fourth quarter of 2014 and 2013, respectively. In
addition, the positive valuation adjustments on the stock warrant
associated with Vantiv Holding, LLC were $31 million and $206
million for the years ended December 31, 2014 and 2013,
respectively. The fair value of the stock warrant is calculated using
the Black-Scholes valuation model, which utilizes several key inputs
(Vantiv, Inc. stock price, strike price of the warrant and several
unobservable inputs). The positive valuation adjustments for the
years ended December 31, 2014 and 2013 were primarily due to
increases of four percent and 60%, respectively, in Vantiv, Inc.’s
share price from December 31, 2013 to December 31, 2014 and
from December 31, 2012 to December 31, 2013, respectively.
Equity method earnings from the Bancorp’s interest in Vantiv
Holding, LLC decreased $29 million from 2013 primarily due to
charges taken by Vantiv Holding, LLC related to an acquisition in
2014 and a decrease in the Bancorp’s ownership percentage of
Vantiv Holding, LLC from approximately 25% at December 31,
2013 to approximately 23% at December 31, 2014.
Insurance income decreased $12 million in 2014 compared to
2013 due to a decrease in premiums and fees collected in 2014.
Additionally, the Bancorp recognized $38 million and $31 million in
negative valuation adjustments related to the Visa total return swap
for the years ended December 31, 2014 and 2013, respectively. For
additional information on the valuation of the swap associated with
the sale of Visa, Inc. Class B shares and the valuation of the warrant
and put options associated with the sale of Vantiv Holding, LLC,
refer to Note 27 of the Notes to Consolidated Financial Statements.
The “other” caption decreased $20 million for the year ended
2014 compared to 2013. The decrease was primarily the result of
$20 million in impairment charges in 2014 for branches and land.
For more information on these impairment charges, refer to Note 7
of the Notes to Consolidated Financial Statements.
40 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Expense
Noninterest expense decreased $252 million, or six percent, for the year ended December 31, 2014 compared to the year ended December 31,
2013, primarily due to decreases in total personnel costs (salaries, wages and incentives plus employee benefits) and other noninterest expense.
The components of noninterest expense are as follows:
TABLE 13: NONINTEREST EXPENSE
For the years ended December 31 ($ in millions)
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Card and processing expense
Equipment expense
Other noninterest expense
Total noninterest expense
Efficiency ratio
$
$
2014
1,449
334
313
212
141
121
1,139
3,709
61.1 %
2013
1,581
357
307
204
134
114
1,264
3,961
58.2
2012
1,607
371
302
196
121
110
1,374
4,081
61.7
2011
1,478
330
305
188
120
113
1,224
3,758
62.3
2010
1,430
314
298
189
108
122
1,394
3,855
60.7
Total personnel costs decreased $155 million, or eight percent, in
2014 compared to 2013 driven by a decrease
incentive
compensation primarily in the mortgage business due to lower
production levels and a decrease in base compensation and
in
employee benefits as a result of a decline in the number of full time
equivalent employees in 2014. Full time equivalent employees
totaled 18,351 at December 31, 2014 compared to 19,446 at
December 31, 2013.
The major components of other noninterest expense are as follows:
TABLE 14: COMPONENTS OF OTHER NONINTEREST EXPENSE
For the years ended December 31 ($ in millions)
Losses and adjustments
Impairment on affordable housing investments
Loan and lease
Marketing
FDIC insurance and other taxes
Professional service fees
Operating lease
Travel
Postal and courier
Data processing
Recruitment and education
OREO expense
Insurance
Supplies
Intangible asset amortization
Loss on debt extinguishment
Benefit from the reserve for unfunded commitments
Other, net
Total other noninterest expense
Total other noninterest expense decreased $125 million, or 10%, in
2014 compared to 2013 primarily due to decreases in loan and lease
expense, FDIC insurance and other taxes, losses and adjustments,
marketing expense, debt extinguishment costs and an increase in the
benefit from the reserve for unfunded commitments, partially offset
by increases in impairment on affordable housing investments.
Loan and lease expense decreased $39 million in 2014
compared to 2013 due to lower loan closing and appraisal costs
driven by a decline in mortgage originations. FDIC insurance and
other taxes decreased $38 million in 2014 compared to 2013
primarily due to the change in the mix of the Bancorp’s funding
base and higher capital levels, a change in tax laws during 2014 and
the implementation of the large bank assessment fee, which
included billings for prior periods during 2013. Losses and
adjustments decreased $33 million in 2014 compared to 2013
primarily due to a decrease in legal settlements and reserve expense.
Marketing expense decreased $16 million in 2014 compared to 2013
due to management’s expense control efforts. Debt extinguishment
2014
188
135
119
98
89
72
67
52
47
41
28
17
16
15
4
-
(27)
178
1,139
$
$
2013
221
108
158
114
127
76
57
54
48
42
26
16
17
16
8
8
(17)
185
1,264
2012
187
90
183
128
114
56
43
52
48
40
28
21
18
17
13
169
(2)
169
1,374
costs decreased $8 million in 2014 compared to 2013. During the
fourth quarter of 2013, the Bancorp incurred $8 million of debt
extinguishment costs associated with the redemption of outstanding
TruPS issued by Fifth Third Capital Trust IV. The benefit from the
reserve for unfunded commitments was $27 million and $17 million
in 2014 and 2013, respectively. The increase in the benefit
recognized reflects a decrease in estimated loss rates related to
unfunded commitments due to improved credit trends partially
offset by an increase in unfunded commitments for which the
Bancorp holds reserves.
Impairment on affordable housing investments increased $27
million in 2014 compared to 2013, primarily driven by a $12 million
benefit from the sale of affordable housing investments in 2013 and
incremental losses on previous investments.
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
41 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
interest income (FTE) and noninterest income) was 61.1% for 2014
compared to 58.2% in 2013.
Applicable Income Taxes
Applicable income tax expense for all periods includes the benefit
from tax-exempt income, tax-advantaged investments, certain gains
on sales of leveraged leases that are exempt from federal taxation
and tax credits, partially offset by the effect of certain 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 rates for the years ended December 31, 2014
and 2013 were primarily impacted by $164 million and $155 million,
respectively, in tax credits, $27 million of tax benefit from tax
exempt income in 2014 and 2013, respectively, and a $9 million
non-cash charge to income tax expense related to stock-based
awards during the year ended December 31, 2013. The Bancorp did
not recognize a similar non-cash charge related to stock-based
awards during the year ended December 31, 2014.
As required under U.S. GAAP, the Bancorp established a
deferred tax asset for stock-based awards granted to its employees
and directors. 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 and where the
Bancorp has not accumulated an excess tax benefit for previously
exercised or released stock-based awards, the Bancorp is required to
recognize a non-cash charge to income tax expense upon the write-
off of the deferred tax asset previously established for these stock-
based awards. As a result of the expiration of certain stock options
and SARs, the lapse of restrictions on certain shares of restricted
stock and because the Bancorp did not have an accumulated excess
tax benefit, the Bancorp was required to recognize a non-cash
charge to income tax expense of $9 million for the write-off of the
deferred tax asset previously established for these awards during the
year ended December 31, 2013. Based on the accumulated excess
tax benefit at December 31, 2014 the Bancorp was not required to
recognize a non-cash charge to income tax expense related to stock-
based awards for the year ended December 31, 2014.
Based on the Bancorp’s stock price at December 31, 2014 and
the Bancorp’s accumulation of an excess tax benefit through the
year ended December 31, 2014, the Bancorp does not believe it will
be required to recognize a non-cash charge to income tax expense
over the next twelve months related to stock-based awards.
However, the Bancorp cannot predict its stock price or whether its
employees will exercise other stock-based awards with lower
exercise prices in the future. Therefore, it is possible the Bancorp
may need to recognize a non-cash charge to income tax expense in
the future.
The Bancorp’s income before income taxes, applicable income tax expense and effective tax rate are as follows:
TABLE 15: APPLICABLE INCOME TAXES
For the years ended December 31 ($ in millions)
Income before income taxes
Applicable income tax expense
Effective tax rate
$
2014
2,028
545
26.9 %
2013
2,598
772
29.7
2012
2,210
636
28.8
2011
1,831
533
29.1
2010
940
187
19.8
42 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS SEGMENT REVIEW
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 Bancorp’s 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
Bancorp’s business segments are not necessarily comparable with
similar information for other financial institutions. The Bancorp
refines its methodologies from time to time as management’s
accounting practices or businesses change.
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 and deposit products. The FTP system
assigns charge rates and credit rates to classes of assets and
liabilities, respectively, based on expected duration and the U.S.
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 Bancorp’s 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 interest-bearing liabilities. The credit rate provided for
demand deposit accounts is reviewed annually based upon the
account type, its estimated duration and the corresponding fed
funds, U.S. swap curve or swap rate. The credit rates for several
deposit products were reset January 1, 2014 to reflect the current
market rates and updated duration assumptions. These rates were
generally higher than those in place during 2013, thus net interest
income for deposit providing businesses was positively impacted
during 2014.
The business segments are charged provision expense based on
the actual net charge-offs experienced on the loans and leases
owned by each segment. Provision expense attributable to loan and
lease growth and changes in ALLL factors are captured in General
Corporate and Other. The financial results of the business segments
include allocations for shared services and headquarters expenses.
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.
The results of operations and financial position for the years
ended December 31, 2013 and 2012 were adjusted to reflect the
transfer of certain customers and Bancorp employees from Branch
Banking to Commercial Banking, effective January 1, 2014. In
addition, the 2013 and 2012 balances were adjusted to reflect a
change in internal allocation methodology.
Net income (loss) by business segment is summarized in the following table:
TABLE 16: BUSINESS SEGMENT NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
For the years ended December 31 ($ in millions)
Income Statement Data
Commercial Banking
Branch Banking
Consumer Lending
Investment Advisors
General Corporate & Other
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to Bancorp
Dividends on preferred stock
Net income available to common shareholders
2014
2013
2012
$
$
819
346
(68)
54
332
1,483
2
1,481
67
1,414
814
204
183
68
557
1,826
(10)
1,836
37
1,799
714
144
223
43
450
1,574
(2)
1,576
35
1,541
43 Fifth Third Bancorp
MANAGEMENT’S 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:
$
2014
2013
2012
1,673
235
1,612
194
TABLE 17: COMMERCIAL BANKING
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income (FTE)(a)
Provision for loan and lease losses
Noninterest income:
Corporate banking revenue
Service charges on deposits
Other noninterest income
Noninterest expense:
Salaries, incentives and employee benefits
Other noninterest expense
Income before taxes
Applicable income tax expense(a)(b)
Net income
Average Balance Sheet Data
Commercial loans, including held for sale
Demand deposits
Interest checking deposits
Savings and money market deposits
Other time deposits and certificates - $100,000 and over
Foreign office deposits and other deposits
(a)
(b) Applicable income tax expense 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
The FTE adjustments included in the above table were $21, $20 and $17 million for the years ended December 31, 2014, 2013 and 2012, respectively.
44,028
16,742
7,795
3,368
1,795
1,298
47,762
17,116
7,095
4,987
1,330
1,486
51,310
18,935
8,068
5,946
1,399
1,824
310
925
1,001
187
814
306
1,013
1,006
187
819
304
883
888
174
714
429
286
172
402
251
121
392
267
159
1,550
249
$
$
Applicable Income Taxes section of the MD&A for additional information.
Comparison of 2014 with 2013
Net income was $819 million for the year ended December 31,
2014, compared to net income of $814 million for the year ended
December 31, 2013. The increase in net income was the result of
increases in net interest income and noninterest income, partially
offset by increases in noninterest expense and the provision for loan
and lease losses.
Net interest income increased $61 million from the prior year
primarily due to growth in average commercial construction loans,
an increase in FTP credits due to an increase in demand deposits
and a decrease in FTP charges, partially offset by a decline in yields
of 29 bps on average commercial loans.
Provision for loan and lease losses increased $41 million from
the prior year due to an increase in net charge-offs related to certain
impaired commercial and industrial loans in the first and third
quarters of 2014. Net charge-offs as a percent of average portfolio
loans and leases increased to 46 bps for 2014 compared to 41 bps
for 2013.
Noninterest income increased $69 million from the prior year
due to increases in corporate banking revenue, service charges on
deposits and other noninterest income. Corporate banking revenue
increased $37 million from 2013 primarily driven by increases in
syndication fees and lease remarketing fees. Service charges on
deposits increased $19 million from 2013 primarily driven by higher
commercial deposit revenue which increased due to the acquisition
of new customers and product expansion. Other noninterest
income increased $13 million from 2013 primarily due to increases
in operating lease income and card and processing revenue.
Noninterest expense increased $84 million from the prior year
as a result of an increase in other noninterest expense, partially
offset by a decrease in salaries, incentives and benefits. Other
44 Fifth Third Bancorp
in corporate overhead allocations,
noninterest expense increased $88 million from 2013 driven by
impairment on
increases
affordable housing investments and operating lease expense. The
decrease in salaries, incentives and employee benefits of $4 million
was due to a decrease in incentive compensation resulting from a
change to the structure of the incentive compensation plans in the
first quarter of 2014.
in average commercial mortgage
Average commercial loans increased $3.5 billion from the prior
year primarily due to increases in average commercial and industrial
loans and average commercial construction loans, partially offset by
loans. Average
a decrease
commercial and industrial portfolio loans and average commercial
construction portfolio loans increased $3.5 billion and $689 million,
respectively, from the prior year as a result of an increase in new
loan origination activity and utilization
from a
strengthening economy and targeted marketing efforts. Average
commercial mortgage portfolio loans decreased $651 million from
the prior year due to continued run-off as the level of new
originations was less than the repayments on the current portfolio.
resulting
Average core deposits increased $4.1 billion from the prior
year. The increase was the result of strong growth in average
demand deposits, average interest checking deposits, average savings
and money market deposits and average foreign deposits and other
deposits which increased $1.8 billion, $973 million, $959 million and
$338 million, respectively, from to the prior year.
Comparison of 2013 with 2012
Net income was $814 million for the year ended December 31,
2013, compared to net income of $714 million for the year ended
December 31, 2012. The increase in net income was primarily
driven by increases in net interest income and noninterest income
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and a decrease in the provision for loan and lease losses, partially
offset by higher noninterest expense.
Net interest income increased $62 million from 2012 primarily
due to growth in average commercial and industrial loans, an
increase in FTP credits due to increases in savings and money
market deposits and demand deposits and a decrease in FTP
charges on loans, partially offset by a decline in yields of 28 bps on
average commercial loans.
Provision for loan and lease losses decreased $55 million from
2012 as a result of improved credit trends. Net charge-offs as a
percent of average portfolio loans and leases decreased to 41 bps for
2013 compared to 57 bps for 2012.
Noninterest income increased $44 million from 2012 primarily
due to increases in other noninterest income and service charges on
deposits, partially offset by a decrease in corporate banking revenue.
The increase in other noninterest income of $38 million from 2012
was primarily due to decreases in negative valuation adjustments on
OREO, increases in operating lease income and card and processing
revenue, and decreases in negative valuation adjustments on loans
held for sale, partially offset by decreases in gains on loan sales.
Service charges on deposits increased $16 million from 2012
primarily driven by commercial deposit revenue which increased
due to fee repricing and the acquisition of new customers. The
decrease in corporate banking revenue of $10 million from the prior
year was primarily driven by decreases in lease remarketing and
letter of credit fees, partially offset by increases in syndication fees,
foreign exchange fees and business lending fees.
Branch Banking
Branch Banking provides a full range of deposit and loan and lease
products to individuals and small businesses through 1,302 full-
service Banking Centers. Branch Banking offers depository and loan
products, such as checking and savings accounts, home equity loans
Noninterest expense increased $48 million from 2012 as a
result of increases in other noninterest expense and salaries,
incentives and employee benefits. Other noninterest expense
increased $42 million from the prior year primarily driven by
increases in impairment on affordable housing investments and
operating lease expense, partially offset by a decrease in loan and
lease expense. The increase in salaries, incentives and employee
benefits of $6 million from 2012 was primarily the result of an
increase in base compensation primarily driven by improved
production levels.
Average commercial loans increased $3.7 billion from the prior
year primarily due to an increase in average commercial and
industrial loans, partially offset by a decrease in average commercial
mortgage loans. Average commercial and industrial portfolio loans
increased $4.9 billion from December 31, 2012 as a result of an
increase in new origination activity from an increase in demand due
to a strengthening economy and targeted marketing efforts. Average
commercial mortgage loans decreased $1.1 billion due to continued
run-off as the level of new originations was less than the repayments
of the existing portfolio.
Average core deposits increased $1.5 billion from December
31, 2012. The increase was primarily driven by strong growth in
average savings and money market deposits and average demand
deposits, which increased $1.6 billion and $374 million, respectively,
from to the prior year, partially offset by a decrease in interest
checking deposits of $700 million.
and lines of credit, credit cards and loans for automobiles and other
personal financing needs, as well as products designed to meet the
specific needs of small businesses, including cash management
services.
The following table contains selected financial data for the Branch Banking segment:
TABLE 18: BRANCH BANKING
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Service charges on deposits
Card and processing revenue
Investment advisory revenue
Other noninterest income
Noninterest expense:
Salaries, incentives and employee benefits
Net occupancy and equipment expense
Card and processing expense
Other noninterest expense
Income before taxes
Applicable income tax expense
Net income
Average Balance Sheet Data
Consumer loans, including held for sale
Commercial loans, including held for sale
Demand deposits
Interest checking deposits
Savings and money market deposits
Other time deposits and certificates - $100,000 and over
2014
2013
2012
$
1,546
181
1,356
210
1,261
268
272
226
152
70
537
246
133
635
534
188
346
279
207
148
106
547
241
125
660
313
109
204
268
195
129
107
537
238
115
579
223
79
144
14,978
1,583
11,228
8,998
23,911
4,690
15,223
1,807
10,750
8,841
22,110
4,709
14,926
1,905
8,391
9,080
22,031
5,386
$
$
45 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of 2014 with 2013
Net income was $346 million for the year ended December 31,
2014, compared to net income of $204 million for the year ended
December 31, 2013. The increase was driven by an increase in net
interest income and declines in the provision for loan and lease
losses and noninterest expense, partially offset by a decrease in
noninterest income.
Net interest income increased $190 million from the prior year
primarily driven by increases in the FTP credit rates for savings and
money market deposits, demand deposits and interest checking
deposits and a decrease in the FTP charges on loans and leases.
These increases were partially offset by declines in yields on average
commercial loans and a decrease in interest income relating to the
Bancorp’s decision to no longer enroll new customers in the deposit
advance product.
Provision for loan and lease losses for 2014 decreased $29
million from the prior year as a result of improved credit trends.
Net charge-offs as a percent of average portfolio loans and leases
decreased to 110 bps for 2014 compared to 123 bps for 2013.
Noninterest income decreased $20 million from the prior year.
The decrease was primarily driven by decreases in other noninterest
income and service charges on deposits, partially offset by an
increase in card and processing revenue. Other noninterest income
decreased $36 million from 2013 primarily due to $20 million in
impairment charges in 2014 for branches and land. For more
information on these impairment charges, refer to Note 7 of the
Notes to Consolidated Financial Statements. The remaining
decrease in other noninterest income was primarily due to decreases
in gains on loan sales and mortgage origination fees and retail
service fees. Service charges on deposits decreased $7 million from
2013 primarily due to a decrease in consumer checking and savings
fees from a decline in the percentage of consumer customers being
charged service fees. Card and processing revenue increased $19
million from the prior year primarily as a result of an increase in the
number of actively used cards as well as higher processing fees
related to additional ATM locations.
Noninterest expense decreased $22 million from the prior year,
primarily driven by decreases in other noninterest expense and
salaries, incentives and employee benefits, partially offset by
increases in card and processing expense and net occupancy and
equipment expense. Other noninterest expense decreased $25
million from the prior year due to lower marketing expense and loan
and lease expense. Salaries, incentives and employee benefits
decreased $10 million from the prior year primarily driven by lower
compensation costs due to a decline in the number of full-time
equivalent employees. Card and processing expense increased $8
million from 2013 primarily due to higher rewards expense relating
to credit cards and increased fraud-related charges. Net occupancy
and equipment expense increased $5 million from 2013 primarily
due to an increase in rent expense driven by additional ATM
locations.
Average consumer loans decreased $245 million in 2014
primarily due to a decrease in average home equity loans of $382
million as payoffs exceeded new advances and new loan production.
This decrease was partially offset by an increase in average credit
card loans of $147 million from the prior year primarily due to an
increase in open and active accounts driven by the volume of new
accounts.
Average core deposits increased $2.4 billion from the prior
year primarily driven by net growth in average savings and money
market deposits of $1.8 billion and growth in average demand
deposits of $478 million.
46 Fifth Third Bancorp
Comparison of 2013 with 2012
Net income was $204 million for the year ended December 31,
2013, compared to net income of $144 million for the year ended
December 31, 2012. The increase was driven by an increase in net
interest income and noninterest income and a decline in the
provision for loan and lease losses, partially offset by an increase in
noninterest expense.
Net interest income increased $95 million from 2012 primarily
driven by an increase in the FTP credit rates for savings and money
market deposits, demand deposits and interest checking deposits, a
decrease in the FTP charges on loans and leases and a decline in
interest expense on core deposits due to favorable shifts from
certificates of deposit to lower cost transaction deposits.
Provision for loan and lease losses for 2013 decreased $58
million from 2012 as a result of improved credit trends. Net charge-
offs as a percent of average portfolio loans and leases decreased to
123 bps for 2013 compared to 159 bps for 2012.
Noninterest income increased $41 million from 2012. The
increase was primarily driven by increases in investment advisory
revenue, card and processing revenue and service charges on
deposits. Investment advisory revenue increased $19 million from
2013 primarily due to increased securities and brokerage fees due to
an increase in equity and bond market values. Card and processing
revenue increased $12 million from the prior year due to higher
transaction volumes, higher levels of consumer spending and the
benefit of new products. Service charges on deposits increased $11
million from 2012 primarily due to an increase in account
maintenance fees due to the full year impact of new deposit product
offerings.
Noninterest expense
increased $104 million from 2012,
primarily driven by increases in salaries, incentives and employee
benefits, card and processing expense and other noninterest
expense. Salaries, incentives and employee benefits increased from
2012 primarily due to an
incentive
compensation associated with improved securities and brokerage
revenue. Card and processing expense increased from 2012 due
primarily to increases in debit and credit card transaction volumes,
consumer spending, fraud insurance costs and credit card rewards
expense. The increase in other noninterest expense was primarily
due to an increase in corporate overhead allocations during 2013
compared to 2012.
in bonus and
increase
Average consumer loans increased $297 million in 2013
primarily due to increases in average residential mortgage portfolio
loans of $942 million from the prior year as a result of continued
retention of certain shorter term residential mortgage loans. In
addition, average credit card loans increased from 2012 due to
increases in average balances per account and the volume of new
customers. These increases were partially offset by decreases in
average home equity portfolio loans of $743 million from 2012 as
payoffs exceeded new loan production.
Average core deposits increased $1.7 billion from the prior
year as growth in demand deposits due to excess customer liquidity
and a continued low interest rate environment was partially offset by
the run-off of higher priced other time deposits.
Consumer Lending
Consumer Lending includes the Bancorp’s mortgage, home equity,
automobile and other indirect lending activities. Lending activities
include the origination, retention and servicing of mortgage and
home equity loans or lines of credit, sales and securitizations of
those loans, pools of loans or lines of credit, and all associated
hedging activities. Indirect lending activities include loans to
consumers through correspondent lenders and automobile dealers.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table contains selected financial data for the Consumer Lending segment:
TABLE 19: CONSUMER LENDING
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Mortgage banking net revenue
Other noninterest income
Noninterest expense:
Salaries, incentives and employee benefits
Other noninterest expense
(Loss) income before taxes
Applicable income tax (benefit) expense
Net (loss) income
Average Balance Sheet Data
Residential mortgage loans, including held for sale
Home equity
Automobile loans, including held for sale
Other consumer loans and leases
Comparison of 2014 with 2013
Consumer Lending incurred a net loss of $68 million in 2014
compared to net income of $183 million in 2013. The decrease was
driven by decreases in net interest income and noninterest income
and an increase in the provision for loan and lease losses, partially
offset by a decrease in noninterest expense.
Net interest income decreased $55 million from the prior year
primarily due to decreases in average residential mortgage loans and
average home equity loans as well as lower yields on average
automobile loans, partially offset by a decrease in FTP charges on
loans and leases.
The provision for loan and lease losses increased $64 million
from the prior year primarily due to an $87 million charge-off
related to the transfer of certain residential mortgage loans from the
portfolio to held for sale in the fourth quarter of 2014, partially
offset by improved delinquency metrics on home equity loans. Net
charge-offs as a percent of average loans and leases increased to 77
bps for 2014 compared to 46 bps for 2013.
Noninterest income decreased $402 million from 2013 as a
result of decreases in mortgage banking net revenue of $383 million
and other noninterest income of $19 million. The decrease in
mortgage banking net revenue was due to a $293 million decline in
mortgage origination fees and gains on loan sales due to a decline in
mortgage originations and a $90 million decrease in net mortgage
servicing revenue. Refer to the Noninterest Income section of
MD&A for additional information on the fluctuations in mortgage
banking net revenue. The decrease in other noninterest income was
primarily due to a $16 million decrease in securities gains.
Noninterest expense decreased $133 million due to decreases
of $93 million in salaries, incentives and benefits and $40 million in
other noninterest expense from the prior year. The decrease in
salaries, incentives and employee benefits was primarily the result of
lower mortgage loan originations. The decrease in other noninterest
expense was primarily due to decreases in loan and lease expense
and corporate overhead allocations.
Average consumer loans and leases decreased $1.3 billion from
the prior year. Average residential mortgage loans, including held for
sale, decreased $1.4 billion from the prior year due primarily to a
decline of $1.5 billion in average residential mortgage loans held for
sale from reduced origination volumes driven by a reduction in
refinance activity and the exit of the broker origination channel
$
$
$
2014
2013
2012
257
156
304
42
122
430
(105)
(37)
(68)
312
92
687
61
215
470
283
100
183
314
176
830
46
231
439
344
121
223
8,866
483
11,517
19
10,222
560
11,409
16
10,143
643
11,191
30
during 2014. This decrease was partially offset by the continued
retention of certain shorter term residential mortgage
loans
originated through the Bancorp’s retail branches and the decision to
retain certain conforming ARMs and certain other fixed-rate loans
originated during the year ended December 31, 2014. Average home
equity loans decreased $77 million from the prior year as payoffs
exceeded new loan production. Average automobile loans, including
held for sale, increased $108 million for the current year from the
prior year due to new originations exceeding run-off.
Comparison of 2013 with 2012
Net income was $183 million in 2013 compared to net income of
$223 million in 2012. The decrease was driven by a decrease in
noninterest income and an increase in noninterest expense, partially
offset by a decline in the provision for loan and lease losses.
Net interest income decreased $2 million from 2012 due
primarily to lower yields on average residential mortgage and
automobile loans, partially offset by a decrease in FTP charges on
loans and leases and increases in average residential mortgage and
average automobile loans.
The provision for loan and lease losses decreased $84 million
from 2012 as delinquency metrics and underlying loss trends
improved across all consumer loan types. Net charge-offs as a
percent of average loans and leases decreased to 46 bps for 2013
compared to 88 bps for 2012.
Noninterest
income decreased $128 million from 2012
primarily due to a decrease in mortgage banking net revenue of $143
million, partially offset by an increase in other noninterest income of
$15 million. The decrease in mortgage banking net revenue was
primarily due to a decrease in gains on loan sales of $368 million as
a result of a decrease in profit margins on sold residential mortgage
loans coupled with a decrease
loan
originations, partially offset by a $223 million increase in net
residential mortgage servicing revenue. The
in net
residential mortgage servicing revenue was driven by an increase of
$202 million in net valuation adjustments on MSRs and free-
standing derivatives entered into to economically hedge the MSRs
and a decrease of $20 million in servicing rights amortization. The
increase in other noninterest income was primarily due to a $12
million increase in securities gains and a $7 million decline in losses
on the sale of OREO.
in residential mortgage
increase
47 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest expense increased $15 million driven by an
increase of $31 million in other noninterest expense, partially offset
by a decrease of $16 million in salaries, incentives and employee
benefits compared to 2012. The increase in other noninterest
expense was primarily due to higher litigation expense and an
increase in corporate overhead allocations, partially offset by a
decrease in loan and lease expense due to lower appraisal costs. The
decrease in salaries, incentives and employee benefits was due to a
decline in incentive compensation driven primarily by a decline in
originations during 2013 compared to 2012, partially offset by an
increase in deferred compensation for 2013 compared to 2012.
Average consumer loans and leases increased $200 million
from 2012. Average residential mortgage loans, including held for
sale, increased $79 million for 2013 compared to 2012 due to strong
refinancing activity that occurred in the first half of 2013. Average
automobile loans increased $218 million in 2013 compared to 2012
due to an increase in originations primarily driven by modest
improvement in general economic conditions and a continued low
interest rate environment. Average home equity portfolio loans
decreased $83 million for 2013 compared to 2012 as payoffs
exceeded new loan production. Average other consumer loans and
leases decreased $14 million in 2013 resulting from a decrease in
average consumer leases due to run-off as the Bancorp discontinued
automobile leasing in 2008, partially offset by an increase in average
other consumer loans.
(cid:3)
Investment Advisors
Investment Advisors provides a full range of investment alternatives
for
individuals, companies and not-for-profit organizations.
Investment Advisors is made up of four main businesses: FTS, an
indirect wholly-owned subsidiary of the Bancorp; ClearArc Capital,
Inc. (formerly FTAM), an indirect wholly-owned subsidiary of the
Bancorp; Fifth Third Private Bank; and Fifth Third Institutional
Services. FTS offers full service retail brokerage services to
individual clients and broker dealer services to the institutional
marketplace. ClearArc Capital, Inc. provides asset management
services. Fifth Third Private Bank offers holistic strategies to
affluent clients in wealth planning, investing, insurance and wealth
protection. Fifth Third Institutional Services provides advisory
services for institutional clients including states and municipalities.
The following table contains selected financial data for the Investment Advisors segment:
TABLE 20: INVESTMENT ADVISORS
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Investment advisory revenue
Other noninterest income
Noninterest expense:
Salaries, incentives and employee benefits
Other noninterest expense
Income before taxes
Applicable income tax expense
Net income
Average Balance Sheet Data
Loans and leases
Core deposits
2014
2013
2012
121
3
397
13
162
283
83
29
54
154
2
384
22
159
294
105
37
68
117
10
366
30
161
276
66
23
43
2,270
9,535
2,014
8,815
1,877
7,709
$
$
$
Comparison of 2014 with 2013
Net income was $54 million in 2014 compared to net income of $68
million for 2013. The decrease in net income was primarily due to a
decrease in net interest income, partially offset by a decrease in
noninterest expense and an increase in noninterest income.
Net interest income decreased $33 million from 2013 primarily
due to a decrease in the FTP credit rate on certain interest checking
deposits.
Noninterest income increased $4 million from the prior year
due to a $13 million increase in investment advisory revenue
primarily driven by an increase of $12 million in private client
services revenue due to growth in personal asset management fees,
partially offset by a decrease in securities broker fees due to a
decline in transactional brokerage revenue. This increase was
partially offset by a $9 million decrease in other noninterest income
as other noninterest income in the prior year included gains on the
sale of certain advisory contracts.
Noninterest expense decreased $8 million from the prior year
primarily due to a decrease in other noninterest expense driven by
decreases in operational losses, marketing expense and corporate
overhead allocations.
48 Fifth Third Bancorp
Average loans and leases increased $256 million from the prior
year primarily driven by increases in average residential mortgage
loans and average commercial mortgage loans, partially offset by a
decrease in average home equity loans. Average core deposits
increased $720 million from the prior year due to growth in average
interest checking balances as customers have opted to maintain
excess funds in liquid transaction accounts as a result of interest
rates remaining near historic lows.
Comparison of 2013 with 2012
Net income was $68 million in 2013 compared to net income of $43
million for 2012. The increase in net income was primarily due to
increases in net interest income and noninterest income and a
decrease in the provision for loan and lease losses, partially offset by
an increase in noninterest expense.
Net interest income increased $37 million from 2012 due to an
increase in FTP credits resulting from an increase in interest
checking deposits.
Provision for loan and lease losses decreased $8 million from
the prior year. Net charge-offs as a percent of average loans and
leases decreased to 9 bps compared to 53 bps for the prior year
reflecting improved credit trends during 2013.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest income increased $10 million compared to 2012
due to an increase in investment advisory revenue, partially offset a
decrease in other noninterest income. The increase in investment
advisory revenue was primarily driven by increases in securities and
brokerage fees and private client service fees due to strong
production and an increase in equity and bond market values. The
decrease in other noninterest income was due to a decrease in gains
on sales of held for sale loans and the impact of the gain on the sale
of certain FTAM funds in the third quarter of 2012.
Noninterest expense increased $16 million compared to 2012
due to an increase in other noninterest expense primarily driven by
increases in corporate allocations and fraud losses.
Average loans and leases increased $137 million compared to
2012 primarily driven by increases in average residential mortgage,
average other consumer and average commercial and industrial
loans, partially offset by a decrease in average commercial mortgage
loans. Average core deposits increased $1.1 billion compared to
2012 due to growth in interest checking as customers have opted to
maintain excess funds in liquid transaction accounts as a result of
the low interest rate environment.
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 2014 with 2013
Results for 2014 and 2013 were impacted by a benefit of $260
million and $269 million, respectively, due to reductions in the
ALLL. Net interest income decreased from $147 million in 2013 to
$3 million for 2014 primarily due to increases in FTP credits and
interest expense on long-term debt and a decrease in the benefit
related to the FTP charges on loans and leases, partially offset by an
increase in interest income on taxable securities. Noninterest
income was $256 million for 2014 compared to $659 million in
2013. Noninterest income included the impact of a gain of $125
million on the sale of Vantiv, Inc. shares in the second quarter of
2014 compared to gains totaling $327 million during the second and
third quarters of 2013. The Bancorp also recognized gains of $23
million and $9 million associated with a tax receivable agreement
with Vantiv, Inc. in the fourth quarter of 2014 and 2013,
respectively. The positive valuation adjustments on the stock
warrant associated with Vantiv Holding, LLC were $31 million and
$206 million for the years ended December 31, 2014 and 2013,
respectively. Additionally, the equity method earnings from the
Bancorp’s interest in Vantiv Holding, LLC decreased $29 million
from 2013. Noninterest income also included $38 million in
negative valuation adjustments related to the Visa total return swap
for the year ended December 31, 2014 compared to $31 million for
the year ended December 31, 2013.
Noninterest expense for the year ended December 31, 2014
was a benefit of $12 million compared to an expense of $159
million for the year ended December 31, 2013. The decrease was
driven by decreases in compensation expense, FDIC insurance and
other taxes and litigation and regulatory activity, partially offset by a
decrease in the benefit from other noninterest expense driven by
decreased corporate overhead allocations from General Corporate
and Other to the other business segments.
Comparison of 2013 with 2012
Results for 2013 and 2012 were impacted by a benefit of $269
million and $400 million, respectively, due to reductions in the
ALLL. The decrease in provision expense was primarily due to a
decrease in nonperforming loans and leases and improvements in
delinquency metrics and underlying loss trends. Net interest income
decreased from $370 million in 2012 to $147 million for 2013
primarily due to a decrease in FTP charges partially offset by a
decrease in interest expense on long-term debt. Noninterest income
increased $278 million compared to 2012 primarily due to positive
valuation adjustments on the stock warrant associated with Vantiv
Holding, LLC which increased $139 million in 2013 compared to
2012. In addition, gains of $242 million and $85 million were
recognized on the sales of Vantiv, Inc. shares in the second and
third quarters of 2013, respectively, compared to gains of $115
million related to the Vantiv, Inc. IPO and $157 million on the sale
of Vantiv, Inc. shares in 2012. The Bancorp also recognized a gain
of $9 million associated with a tax receivable agreement with Vantiv,
Inc. in the fourth quarter of 2013. The equity method earnings from
the Bancorp’s interest in Vantiv Holding, LLC increased $16 million
from 2012.
in
the Bancorp
Noninterest expense decreased $286 million compared to 2012
due to decreases in other noninterest expense and total personnel
costs. Other noninterest expense decreased due to a decrease in
debt extinguishment costs, an increase in corporate overhead
allocations assigned to the segments, a decrease in loan and lease
expense and a decrease
losses and adjustments. Debt
extinguishment costs decreased $161 million during 2013 compared
to 2012. During the fourth quarter of 2013, the Bancorp incurred $8
million of debt extinguishment costs associated with the redemption
of outstanding TruPS issued by Fifth Third Capital Trust IV.
During 2012,
incurred $160 million of debt
extinguishment costs associated with the redemption of certain
TruPS and the termination of certain FHLB debt. Loan and lease
expense decreased $72 million during 2013 compared to 2012
primarily due to a decrease in loan closing fees due to a decline in
mortgage originations. Losses and adjustments decreased $17
million compared to 2012 primarily driven by a decline in the
provision for representation and warranty claims partially offset by
an increase in litigation expense. The provision for representation
and warranty claims changed from a $49 million expense for the
year ended December 31, 2012 to a benefit of $39 million for the
year ended December 31, 2013 due to the Bancorp recording
significant additions to the reserve in 2012 as the result of additional
information obtained from FHLMC regarding their file selection
criteria which enabled the Bancorp to better estimate the losses that
were probable on loans sold to FHLMC with representation and
warranty provisions. In addition, 2013 included a decrease in the
representation and warranty reserve due to improving underlying
repurchase metrics and the settlement with FHLMC. The decrease
in representation and warranty expense was partially offset by a $54
million
litigation expense. Total personnel costs
decreased $38 million from 2012 due primarily to decreases in
incentive compensation and employee benefits.
increase
in
49 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOURTH QUARTER REVIEW
The Bancorp’s 2014 fourth quarter net income available to common
shareholders was $362 million, or $0.43 per diluted share, compared
to net income available to common shareholders of $328 million, or
$0.39 per diluted share, for the third quarter of 2014 and net income
available to common shareholders of $383 million, or $0.43 per
diluted share, for the fourth quarter of 2013. Fourth quarter 2014
earnings included a $56 million positive adjustment on the valuation
of the warrant associated with the sale of Vantiv Holding, LLC, a
$23 million gain from Vantiv Inc. pursuant to a tax receivable
agreement and a $19 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. Third quarter 2014 results included a $53 million
negative adjustment on the valuation of the warrant associated with
the sale of Vantiv Holding, LLC. Fourth quarter 2013 earnings
included a $91 million positive adjustment on the valuation of the
warrant associated with the sale of Vantiv Holding, LLC, $69
million in net charges to increase litigation reserves, an $18 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 and $8 million of
debt extinguishment costs associated with the redemption of TruPS
issued by Fifth Third Capital Trust IV.
Fourth quarter 2014 net interest income of $888 million
decreased $20 million from the third quarter of 2014 and $17
million from the same period a year ago. Interest income decreased
$7 million from the third quarter of 2014 primarily driven by the
effects of loan repricing and lower average investment securities
balances. Interest expense increased $13 million from the third
quarter of 2014 primarily driven by the issuance of $850 million of
long-term debt during the third quarter and higher deposit costs
during the quarter. The decrease in net interest income in
comparison to the fourth quarter of 2013 was driven by the effects
of loan repricing and higher interest expense from increased long-
term debt balances, partially offset by higher average investment
securities balances and average loan balances.
Fourth quarter 2014 noninterest income of $653 million
increased $133 million compared to the third quarter of 2014 and
decreased $50 million compared to the fourth quarter of 2013. The
increase from the third quarter of 2014 was primarily due to
increases in other noninterest income and corporate banking
revenue. The year-over-year decline was primarily the result of lower
mortgage banking net revenue and other noninterest income,
partially offset by higher corporate banking revenue.
Service charges on deposits of $142 million decreased $3
million from the previous quarter and were flat compared to the
fourth quarter of 2013. The decrease from the third quarter of 2014
was primarily due to a decrease in commercial service charges due to
a decrease in treasury management fees and a decrease in retail
service charges due to lower overdraft occurrences.
Corporate banking revenue of $120 million increased $20
million from the previous quarter and $26 million from the fourth
quarter of 2013. The increase from the third quarter of 2014 was
primarily due to a $13 million increase in syndication fees during the
fourth quarter of 2014 due to the investment in resources in the
commercial business. In addition, the increase from the third
quarter of 2014 was due to an increase in business lending fees and
an increase in foreign exchange fees, partially offset by a decrease in
institutional sales revenue. The year-over-year increase was driven
by higher syndication fees and lease remarketing fees. The increase
in syndication fees from the fourth quarter of 2013 was due to the
investment
in the commercial business and a
strengthening economy. The increase in lease remarketing fees year-
over-year was impacted by a $9 million write-down of equipment
value on an operating lease during the fourth quarter of 2013.
in resources
50 Fifth Third Bancorp
Investment advisory revenue of $100 million decreased $3
million from the previous quarter and increased $2 million from the
fourth quarter of 2013. The decline from the third quarter of 2014
was due to a decrease in private client service fees and insurance
fees relative to elevated levels in the third quarter, as well as a
decrease in securities and brokerage fees due to a continued shift
from transaction-based fees to recurring revenue streams. The year-
over-year increase was due to an increase in personal asset
management fees due to market-related growth, partially offset by a
decrease in securities and brokerage fees.
Mortgage banking net revenue was $61 million in both the
fourth and third quarters of 2014 and $126 million in the fourth
quarter of 2013. Fourth quarter 2014 originations were $1.7 billion,
compared with $2.1 billion in the previous quarter and $2.6 billion
in the fourth quarter of 2013. Fourth quarter 2014 originations
resulted in gains of $36 million on mortgages sold, compared with
gains of $34 million during the previous quarter and $60 million
during the fourth quarter of 2013. The increase from the prior
quarter was driven by higher gain on sale margins, partially offset by
lower production. The decrease from the prior year was due to
lower production, including Fifth Third’s exit from the broker
channel, partially offset by higher gain on sale margins. Mortgage
servicing fees were $60 million in the fourth quarter of 2014, $61
million in the third quarter of 2014 and $63 million in the fourth
quarter of 2013. Mortgage banking net revenue is also affected by
net servicing asset valuation adjustments, which include MSR
amortization and MSR valuation adjustments, including mark-to-
market
to
economically hedge the MSR portfolio. These net servicing asset
valuation adjustments were negative $34 million in both the fourth
and third quarters of 2014 and positive $3 million in the fourth
quarter of 2013.
free-standing derivatives used
adjustments on
Card and processing revenue of $76 million increased $1
million compared to the third quarter of 2014 and $5 million from
the fourth quarter of 2013. The increases from both periods were
driven by higher transaction volumes and an increase in the number
of actively used cards.
Other noninterest income of $150 million increased $117
million compared to the third quarter of 2014 and decreased $20
million from the fourth quarter of 2013. Fourth quarter 2014
results included a $56 million positive valuation adjustment on the
Vantiv Holding, LLC warrant and $23 million in gains pursuant to
Fifth Third’s tax receivable agreement with Vantiv Holding, LLC.
This compares with a $53 million negative warrant valuation
adjustment in the third quarter of 2014, and a $91 million positive
warrant valuation adjustment in the fourth quarter of 2013 as well as
$9 million in gains pursuant to Fifth Third’s tax receivable
agreement with Vantiv Holding, LLC, recognized in the fourth
quarter of 2013. 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. Negative valuation
adjustments on this swap were $19 million, $3 million and $18
million in the fourth quarter of 2014, the third quarter of 2014 and
the fourth quarter of 2013, respectively.
The net gains on investment securities were $4 million in the
fourth quarter of 2014, $3 million in the third quarter of 2014 and
$2 million in the fourth quarter of 2013.
Noninterest expense of $918 million increased $30 million
from the previous quarter and decreased $71 million from the
fourth quarter of 2013. The increase in noninterest expense
compared to the third quarter of 2014 was driven by an increase in
personnel costs, an increase in provision expense from the reserve
for unfunded commitments and an increase in operational losses in
the fourth quarter of 2014. The decrease in noninterest expense
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
from the fourth quarter of 2013 was primarily due to $69 million in
charges to litigation reserves in the fourth quarter of 2013 compared
to a $3 million reversal of litigation reserves in the fourth quarter of
2014, partially offset by an increase in credit-related costs in the
fourth quarter of 2014.
The ALLL as a percentage of portfolio loans and leases was
1.47% as of December 31, 2014, compared to 1.56% as of
September 30, 2014 and 1.79% as of December 31, 2013. Net
TABLE 21: QUARTERLY INFORMATION (unaudited)
charge-offs were $191 million in the fourth quarter of 2014, or 83
bps of average loans on an annualized basis, compared with net
charge-offs of $115 million in the third quarter of 2014 and $148
million in the fourth quarter of 2013. During the fourth quarter of
2014, the Bancorp transferred certain residential mortgage loans
from the portfolio to held for sale resulting in a charge-off of $87
million.
2014
2013
3/31
For the three months ended ($ in millions, except per share data)
893
Net interest income(a)
62
Provision for loan and lease losses
743
Noninterest income
978
Noninterest expense
422
Net income attributable to Bancorp
413
Net income available to common shareholders
0.47
Earnings per share, basic
Earnings per share, diluted
0.46
(a) Amounts presented on a FTE basis. The FTE adjustment for the three months ended December 31, 2014, September 30, 2014, June 30, 2014, March 31, 2014, December 31,
6/30
885
64
1,060
1,035
591
582
0.67
0.65
12/31
$ 888
99
653
918
385
362
0.44
0.43
12/31
905
53
703
989
402
383
0.44
0.43
3/31
898
69
564
950
318
309
0.36
0.36
9/30
908
71
520
888
340
328
0.39
0.39
6/30
905
76
736
954
439
416
0.49
0.49
9/30
898
51
721
959
421
421
0.47
0.47
2013, September 30, 2013, June 30, 2013 and March 31, 2013 was $5.
b
COMPARISON OF THE YEAR ENDED 2013 WITH 2012
The Bancorp’s net income available to common shareholders for
the year ended December 31, 2013 was $1.8 billion, or $2.02 per
diluted share, which was net of $37 million in preferred stock
dividends. The Bancorp’s net
income available to common
shareholders for the year ended December 31, 2012 was $1.5 billion,
or $1.66 per diluted share, which was net of $35 million in preferred
stock dividends. Overall, credit trends improved in 2013, and as a
result, the provision for loan and lease losses decreased to $229
million in 2013 compared to $303 million in 2012.
Net interest income was $3.6 billion for both the years ended
December 31, 2013 and 2012. Net interest income was negatively
impacted by a decline of 36 bps in yields on the Bancorp’s interest-
earning assets, partially offset by a $4.3 billion increase in average
loans and leases due primarily to increases in average commercial
and industrial loans and average residential mortgage loans. In
addition, interest expense decreased primarily due to a decrease in
rates paid on average long-term debt and a reduction in higher cost
average long-term debt.
Noninterest income increased $228 million, or eight percent, in
2013 compared to 2012. The increase from 2012 was primarily due
to increases in other noninterest income partially offset by decreases
in mortgage banking net revenue. Other noninterest income
increased $305 million compared to 2012, primarily due to positive
valuation adjustments on the stock warrant associated with Vantiv
Holding, LLC. In addition, the Bancorp recognized gains of $242
million and $85 million, on the sale of Vantiv, Inc. shares in the
second and third quarters of 2013, respectively, compared to gains
of $115 million related to the Vantiv, Inc. IPO recorded in the first
quarter of 2012 and a $157 million gain on the sale of Vantiv shares
during the fourth quarter of 2012. Mortgage banking net revenue
decreased $145 million for the year ended December 31, 2013
compared to 2012 primarily due to a decrease in origination fees and
gains on loan sales partially offset by an increase in positive net
valuation adjustments on mortgage servicing rights and free-
standing derivatives entered into to economically hedge the MSR
portfolio.
Noninterest expense decreased $120 million, or three percent,
in 2013 compared to 2012 primarily due to a decrease in other
noninterest expense driven by a decrease in debt extinguishment
costs and a decrease in the provision for representation and
warranty claims partially offset by an increase in litigation expense.
Net charge-offs as a percent of average portfolio loans and
leases decreased to 0.58% during 2013 compared to 0.85% during
2012 largely due to improved credit trends across all commercial
and consumer loan types.
The Bancorp took a number of actions that impacted its capital
position in 2013. In March of 2013, the Bancorp announced the
results of its capital plan submitted to the FRB as part of the 2013
CCAR. The FRB indicated to the Bancorp that it did not object to
the following proposed capital actions for the period beginning
April 1, 2013 and ending March 31, 2014: the potential increase in
its quarterly common stock dividend to $0.12 per share; the
potential repurchase of up to $750 million in TruPS, subject to the
determination of a regulatory capital event and replacement with the
issuance of a similar amount of Tier II-qualifying subordinated debt;
the potential conversion of the $398 million in outstanding Series G
8.5% convertible preferred stock into approximately 35.5 million
common shares issued to the holders and the repurchase of an
equivalent amount of common shares issued in the conversion up
to $550 million in market value, and the issuance of $550 million in
preferred shares; the potential repurchase of common shares in an
amount up to $984 million, including any shares issued in a Series G
preferred stock conversion; incremental repurchase of common
shares in the amount of any after-tax gains from the sale of Vantiv,
Inc stock and the potential issuance of an additional $500 million in
preferred stock. Actions consistent with these proposed capital
actions were substantially completed in 2013.
The FRB launched the 2014 stress testing program and CCAR
on November 1, 2013. The stress testing results and capital plan
were submitted by the Bancorp to the FRB on January 6, 2014.
Additionally, the Bancorp entered into a number of accelerated
share repurchase transactions in 2013. Refer to Note 23 of the
Notes to Consolidated Financial Statements for more information
on the accelerated share repurchase transactions.
51 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BALANCE SHEET ANALYSIS
Loans and Leases
The Bancorp classifies its loans and leases based upon the primary
purpose of the loan or lease. Table 22 summarizes end of period
loans and leases, including loans held for sale and Table 23
summarizes average total loans and leases, including loans held for
sale.
$
2014
TABLE 22: COMPONENTS OF TOTAL LOANS AND LEASES (INCLUDES HELD FOR SALE)
As of December 31 ($ in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Subtotal – commercial
Consumer:
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Subtotal – consumer
Total loans and leases
Total portfolio loans and leases (excludes loans held for sale)
13,582
8,886
12,037
2,401
436
37,342
91,345
90,084
40,801
7,410
2,071
3,721
54,003
$
$
2013
2012
2011
2010
39,347
8,069
1,041
3,626
52,083
13,570
9,246
11,984
2,294
381
37,475
89,558
88,614
36,077
9,116
707
3,549
49,449
14,873
10,018
11,972
2,097
312
39,272
88,721
85,782
30,828
10,214
1,037
3,531
45,610
13,474
10,719
11,827
1,978
364
38,362
83,972
81,018
27,275
10,992
2,111
3,378
43,756
10,857
11,513
10,983
1,896
702
35,951
79,707
77,491
Loans and leases, including loans held for sale, increased $1.8
billion, or two percent, from December 31, 2013. The increase in
loans and leases from December 31, 2013 was the result of a $1.9
billion, or four percent, increase in commercial loans and leases
partially offset by a $133 million decrease in consumer loans and
leases.
Commercial loans and leases increased from December 31,
2013 primarily due to increases in commercial and industrial loans
and commercial construction loans partially offset by a decrease in
commercial mortgage loans. Commercial and industrial loans
increased $1.5 billion, or four percent, from December 31, 2013 and
commercial construction loans increased $1.0 billion, or 99%, from
December 31, 2013 primarily driven by an increase in new loan
origination activity and utilization resulting from a strengthening
economy and targeted marketing efforts. Commercial mortgage
loans decreased $659 million, or eight percent, from December 31,
2013 due to continued run-off as the level of new originations was
outpaced by increased repayments on the current portfolio.
Consumer loans and leases decreased from December 31, 2013
primarily due to a decrease in home equity partially offset by an
increase in credit card loans. Home equity decreased $360 million,
or four percent, from December 31, 2013 as payoffs exceeded new
loan production. Credit card loans increased $107 million, or five
percent, from December 31, 2013 primarily due to an increase in
average balances per account and an increase in new customer
accounts.
$
2014
2013
TABLE 23: COMPONENTS OF AVERAGE TOTAL LOANS AND LEASES (INCLUDES HELD FOR SALE)
For the years ended December 31 ($ in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Subtotal – commercial
Consumer:
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Subtotal – consumer
Total average loans and leases
Total average portfolio loans and leases (excludes loans held for sale)
14,428
9,554
12,021
2,121
360
38,484
89,093
86,950
13,344
9,059
12,068
2,271
385
37,127
91,127
90,485
37,770
8,481
793
3,565
50,609
41,178
7,745
1,492
3,585
54,000
$
$
2012
2011
2010
32,911
9,686
835
3,502
46,934
13,370
10,369
11,849
1,960
340
37,888
84,822
82,733
28,546
10,447
1,740
3,341
44,074
11,318
11,077
11,352
1,864
529
36,140
80,214
78,533
26,334
11,585
3,066
3,343
44,328
9,868
11,996
10,427
1,870
743
34,904
79,232
77,045
Average loans and leases, including loans held for sale, increased
$2.0 billion, or two percent, from December 31, 2013. The increase
from December 31, 2013 was the result of a $3.4 billion, or seven
percent, increase in average commercial loans and leases partially
offset by a $1.4 billion, or four percent, decrease in average
consumer loans and leases.
52 Fifth Third Bancorp
leases
increased
loans and
Average commercial
from
in average
increases
December 31, 2013 primarily due
loans and average commercial
commercial and
construction
in average
loans partially offset by a decrease
commercial mortgage loans. Average commercial and industrial
loans increased $3.4 billion, or nine percent, from December 31,
2013 and average commercial construction loans increased $699
industrial
to
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
million, or 88%, from December 31, 2013 primarily due to an
increase in new loan origination activity and utilization resulting
from a strengthening economy and targeted marketing efforts.
Average commercial mortgage loans decreased $736 million, or nine
percent, from December 31, 2013 due to continued run-off as the
level of new originations was outpaced by increased repayments on
the current portfolio.
Average consumer loans and leases decreased from December
31, 2013 primarily due to decreases in average residential mortgage
loans and average home equity partially offset by an increase in
average credit card loans. Average residential mortgage loans
decreased $1.1 billion, or eight percent, from December 31, 2013
primarily due to a decline in average loans held for sale of $1.5
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, 2014, total investment
securities were $23.0 billion compared to $19.1 billion at December
31, 2013. Refer to Note 1 of the Notes to Consolidated Financial
Statements for the Bancorp’s methodology for both classifying
investment securities and management’s evaluation of securities in
an unrealized loss position for OTTI.
At December 31, 2014, the Bancorp’s investment portfolio
consisted primarily of AAA-rated available-for-sale securities. The
Bancorp did not hold asset-backed securities backed by subprime
mortgage loans in its investment portfolio. Additionally, securities
TABLE 24: COMPONENTS OF INVESTMENT SECURITIES
As of December 31 ($ in millions)
Available-for-sale and other: (amortized cost basis)
U.S. Treasury and federal agencies
Obligations of states and political subdivisions
Mortgage-backed securities:
Agency residential mortgage-backed securities
Agency commercial mortgage-backed securities
Non-agency residential mortgage-backed securities
Non-agency commercial mortgage-backed securities
Asset-backed securities and other debt securities
Equity securities(a)
Total available-for-sale and other securities
Held-to-maturity: (amortized cost basis)
Obligations of states and political subdivisions
Asset-backed securities and other debt securities
Total held-to-maturity
Trading: (fair value)
U.S. Treasury and federal agencies
Obligations of states and political subdivisions
Mortgage-backed securities:
Agency residential mortgage-backed securities
Non-agency residential mortgage-backed securities
billion from reduced origination volumes driven by a reduction in
refinance activity and the exit of the broker origination channel
during 2014. This decrease was partially offset by the continued
retention of certain shorter term residential mortgage
loans
originated through the Bancorp’s retail branches and the decision to
retain certain conforming ARMs and certain other fixed-rate loans
originated during the year ended December 31, 2014. Average home
equity decreased $495 million, or five percent, from December 31,
2013 as payoffs exceeded new loan production. Average credit card
loans increased $150 million, or seven percent, from December 31,
2013 primarily due to an increase in open and active accounts driven
by the volume of new customer accounts.
classified as below
immaterial as of
investment grade were
December 31, 2014 and 2013. The Bancorp’s management has
evaluated the securities in an unrealized loss position in the
available-for-sale and held-to-maturity portfolios for OTTI. The
Bancorp recognized $24 million, $74 million and $58 million of
OTTI on its available-for-sale and other debt securities, included in
securities gains, net and securities gains, net – non-qualifying hedges
on mortgage servicing rights, in the Bancorp’s Consolidated
Statements of Income during the years ended December 31, 2014,
2013 and 2012, respectively. The Bancorp did not recognize OTTI
on any of its available-for-sale equity securities or held-to-maturity
debt securities for the years ended December 31, 2014, 2013 and
2012.
2014
2013
2012
2011
2010
$
$
$
$
$
1,545
185
11,968
4,465
-
1,489
1,324
701
21,677
186
1
187
14
8
1,549
187
1,771
203
1,953
96
1,789
170
12,294
-
-
1,368
2,146
865
18,409
207
1
208
5
13
8,403
-
-
1,089
2,072
1,033
14,571
282
2
284
7
17
9,743
-
28
498
1,266
1,030
14,614
320
2
322
-
9
10,570
-
41
-
1,297
1,052
14,919
348
5
353
1
21
9
-
13
316
360
3
-
7
315
343
7
-
15
161
207
11
1
12
144
177
8
-
120
144
294
Asset-backed securities and other debt securities
Equity securities
Total trading
(a) Equity 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, 2014, available-for-sale and other securities on
an amortized cost basis increased $3.3 billion, or 18%, from
December 31, 2013 primarily due to an increase in agency
commercial mortgage-backed securities partially offset by a decrease
in asset-backed securities and other debt securities. Agency
commercial mortgage-backed securities increased $4.5 billion from
December 31, 2013 due to $4.7 billion in purchases of agency
commercial mortgage-backed securities partially offset by $196
million in sales and $20 million in paydowns on the portfolio during
the year ended December 31, 2014. Asset-backed securities and
other debt securities decreased $822 million, or 38%, due primarily
to sales of $1.1 billion of asset-backed securities, collateralized loan
obligations and corporate bonds and paydowns on the portfolio of
53 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$45 million partially offset by the purchase of $297 million of asset-
backed securities during the year ended December 31, 2014.
On an amortized cost basis, available-for-sale and other
securities were 18% and 16% of total interest-earning assets at
December 31, 2014 and 2013, respectively. The estimated weighted-
average life of the debt securities in the available-for-sale and other
portfolio was 5.8 years at December 31, 2014, compared to 6.7 years
at December 31, 2013. In addition, at December 31, 2014, the
available-for-sale and other securities portfolio had a weighted-
average yield of 3.31%, compared to 3.39% at December 31, 2013.
Information presented in Table 25 is on a weighted-average life
is
basis, anticipating future prepayments. Yield
information
presented on a 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 and
other securities portfolio were $731 million at December 31, 2014,
compared to $188 million at December 31, 2013. The increase from
December 31, 2013 was primarily due to a decrease in interest rates
during the year ended December 31, 2014. The fair value of
investment securities is impacted by interest rates, credit spreads,
market volatility and
liquidity conditions. The fair value of
investment securities generally increases when interest rates decrease
or when credit spreads contract.
TABLE 25: CHARACTERISTICS OF AVAILABLE-FOR-SALE AND OTHER SECURITIES
As of December 31, 2014 ($ in millions)
U.S. Treasury and federal agencies:
Average life 1 – 5 years
Total
Obligations of states and political subdivisions:(a)
Average life of one year or less
Average life 1 – 5 years
Average life 5 – 10 years
Average life greater than 10 years
Total
Agency residential mortgage-backed securities:
Average life of one year or less
Average life 1 – 5 years
Average life 5 – 10 years
Average life greater than 10 years
Total
Agency commercial mortgage-backed securities:
Average life of one year or less
Average life 1 – 5 years
Average life 5 – 10 years
Average life greater than 10 years
Total
Non-agency commercial mortgage-backed securities:
Average life of one year or less
Average life 1 – 5 years
Average life 5 – 10 years
Amortized Cost
Fair Value
Life (in years)
Yield
Weighted-Average Weighted-Average
$
1,545
1,545
39
111
30
5
185
42
3,224
8,386
316
11,968
15
865
3,350
235
4,465
54
561
874
1,489
1,632
1,632
39
115
32
6
192
43
3,361
8,665
335
12,404
15
874
3,427
249
4,565
54
576
920
1,550
2.0
2.0
0.4
2.9
7.9
10.3
3.4
0.4
4.1
5.9
12.9
5.6
0.3
4.4
7.7
13.6
7.3
0.5
2.3
7.9
5.5
3.62 %
3.62
0.03
3.72
3.67
3.78
2.93
5.61
3.80
3.33
3.83
3.47
-
2.83
3.13
3.90
3.10
2.19
2.69
3.67
3.25
Total
Asset-backed securities and other debt securities:
Average life of one year or less
Average life 1 – 5 years
Average life 5 – 10 years
Average life greater than 10 years
Total
Equity securities
Total available-for-sale and other securities
(a)
97
514
244
469
1,324
701
21,677
Taxable-equivalent yield adjustments included in the above table are 0.01%, 0.00%, 1.94%, 2.01% and 0.37 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.
102
524
253
483
1,362
703
22,408
2.05
2.76
1.90
1.91
2.25
0.2
3.1
6.9
14.5
7.6
3.31 %
5.8
$
Deposits
The Bancorp’s 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% of the
Bancorp’s asset funding base for both of the years ended December
31, 2014 and 2013.
54 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 26: DEPOSITS
As of December 31 ($ in millions)
Demand
Interest checking
Savings
Money market
Foreign office
Transaction deposits
Other time
Core deposits
Certificates - $100,000 and over
Other
Total deposits
Core deposits increased $6.1 billion, or seven percent, compared to
December 31, 2013, driven by an increase of $5.7 billion, or six
percent, in transaction deposits and an increase of $430 million, or
12%, in other time deposits. Total transaction deposits increased
from December 31, 2013 due to increases in money market
deposits, demand deposits and interest checking deposits partially
offset by decreases in savings deposits and foreign office deposits.
Money market deposits increased $5.4 billion, or 47%, from
December 31, 2013 primarily driven by balance migration from
savings deposits which decreased $2.0 billion, or 12%. The
remaining increase in money market deposits was due to a
promotional product offering and the acquisition of new customers.
Demand deposits increased $2.2 billion, or seven percent, from
December 31, 2013 primarily due to an increase in commercial
customer balances and new commercial customer accounts. Interest
2014
34,809
26,800
15,051
17,083
1,114
94,857
3,960
98,817
2,895
-
101,712
$
$
2013
32,634
25,875
17,045
11,644
1,976
89,174
3,530
92,704
6,571
-
99,275
2012
30,023
24,477
19,879
6,875
885
82,139
4,015
86,154
3,284
79
89,517
2011
27,600
20,392
21,756
4,989
3,250
77,987
4,638
82,625
3,039
46
85,710
2010
21,413
18,560
20,903
5,035
3,721
69,632
7,728
77,360
4,287
1
81,648
checking deposits increased $925 million, or four percent, from
December 31, 2013 primarily due to an increase in commercial
customer balances and new commercial customer accounts. Foreign
office deposits decreased $862 million, or 44%, from December 31,
2013 primarily due to lower balances per account. Other time
deposits increased $430 million, or 12%, from December 31, 2013
primarily from the acquisition of new customers due to promotional
interest rates.
The Bancorp uses certificates $100,000 and over as a method
to fund earning assets. At December 31, 2014, certificates $100,000
and over decreased $3.7 billion, or 56%, compared to December 31,
2013 primarily due to the maturity and run-off of retail and
institutional certificates of deposit during the year ended December
31, 2014.
The following table presents average deposits for the years ended December 31:
TABLE 27: AVERAGE DEPOSITS
($ in millions)
Demand
Interest checking
Savings
Money market
Foreign office
Transaction deposits
Other time
Core deposits
Certificates - $100,000 and over
Other
Total average deposits
2014
31,755
25,382
16,080
14,670
1,828
89,715
3,762
93,477
3,929
-
97,406
$
$
2013
29,925
23,582
18,440
9,467
1,501
82,915
3,760
86,675
6,339
17
93,031
2012
27,196
23,096
21,393
4,903
1,528
78,116
4,306
82,422
3,102
27
85,551
2011
23,389
18,707
21,652
5,154
3,490
72,392
6,260
78,652
3,656
7
82,315
2010
19,669
18,218
19,612
4,808
3,355
65,662
10,526
76,188
6,083
6
82,277
On an average basis, core deposits increased $6.8 billion, or eight
percent, compared to December 31, 2013 primarily due to an
increase of $6.8 billion, or eight percent, in average transaction
deposits. The increase in average transaction deposits was driven by
an increase in average money market deposits, average demand
deposits and average interest checking deposits, partially offset by a
decrease in average savings deposits. Average money market
deposits increased $5.2 billion, or 55%, from December 31, 2013
primarily driven by balance migration from savings deposits which
decreased $2.4 billion, or 13%. The remaining increase in average
money market deposits was due to a promotional product offering,
an increase in average commercial account balances and new
customer accounts. Average demand deposits increased $1.8 billion,
or six percent, from December 31, 2013 primarily due to an increase
in average commercial account balances and new commercial
customer accounts. Average interest checking deposits increased
$1.8 billion, or eight percent from December 31, 2013 primarily due
to an increase in average balance per account and new commercial
customer accounts. Average certificates $100,000 and over
decreased $2.4 billion, or 38%, from December 31, 2013 due
primarily to the maturity and run-off of retail and institutional
certificates of deposit during the year ended December 31, 2014.
55 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The contractual maturities of certificates $100,000 and over as of December 31, 2014 are summarized in the following table:
TABLE 28: CONTRACTUAL MATURITIES OF CERTIFICATES $100,000 AND OVER
($ in millions)
Three months or less
After three months through six months
After six months through 12 months
After 12 months
Total
2014
759
203
273
1,660
2,895
$
$
The contractual maturities of other time deposits and certificates $100,000 and over as of December 31, 2014 are summarized in the following
table:
TABLE 29: CONTRACTUAL MATURITIES OF OTHER TIME DEPOSITS AND CERTIFICATES $100,000 AND OVER
($ in millions)
Next 12 months
13-24 months
25-36 months
37-48 months
49-60 months
After 60 months
Total
2014
2,507
1,617
961
626
884
260
6,855
$
$
Borrowings
Total borrowings increased $5.4 billion, or 48%, from December
31, 2013 due to increases in other short-term borrowings and long-
term debt, partially offset by a decrease in federal funds purchased.
Total borrowings as a percentage of interest-bearing liabilities were
20% and 14% at December 31, 2014 and 2013, respectively.
TABLE 30: BORROWINGS
As of December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total borrowings
Federal funds purchased decreased $140 million, or 49%, from
December 31, 2013 driven by a decrease in 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 increased $176 million, or 13%, from
December 31, 2013 driven by an increase in cash held as collateral
related to derivative agreements with various counterparties.
Additionally, the utilization of short-term funding remained low in
2014 due to strong deposit growth and to comply with regulatory
standards which require greater dependency on long-term and stable
TABLE 31: AVERAGE BORROWINGS
For the years ended December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total average borrowings
Average total borrowings increased $3.8 billion, or 33%, compared
to December 31, 2013, due to an increase in average long-term debt
partially offset by decreases in average federal funds purchased and
average other short-term borrowings. The increase in average long-
term debt of $5.0 billion, or 63%, was driven primarily by the
issuances of long-term debt as discussed above. The level of average
federal funds purchased and average other short-term borrowings
can fluctuate significantly from period to period depending on
funding needs and which sources are used to satisfy those needs.
Additionally, the utilization of short-term funding remained low in
2014 due to strong deposit growth and to comply with regulatory
56 Fifth Third Bancorp
2014
144
1,556
14,967
16,667
2013
284
1,380
9,633
11,297
2012
901
6,280
7,085
14,266
2011
346
3,239
9,682
13,267
2010
279
1,574
9,558
11,411
$
$
funding. Long-term debt increased $5.3 billion, or 55%, from
December 31, 2013 primarily driven by the issuance of $2.9 billion
of unsecured senior bank notes and the issuance of asset-backed
securities by consolidated VIEs of $3.8 billion related to automobile
loan securitizations during 2014, partially offset by $1.4 billion of
paydowns on long-term debt associated with automobile loan
securitizations. For additional information regarding automobile
securitizations and long-term debt, refer to Note 10 and 16,
respectively, of the Notes to Consolidated Financial Statements.
2014
458
1,873
12,928
15,259
$
$
2013
503
3,024
7,914
11,441
2012
2011
2010
560
4,246
9,043
13,849
345
2,777
10,154
13,276
291
1,635
10,902
12,828
standards which require greater dependency on long-term and stable
funding.
Information on the average rates paid on borrowings is
discussed in the net interest income section of MD&A. In addition,
refer to the Liquidity Risk Management section for a discussion on
the role of borrowings in the Bancorp’s liquidity management.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISK MANAGEMENT
Managing risk is an essential component of successfully operating a
financial services company. The Bancorp’s risk management
approach includes processes for identifying, assessing, managing,
monitoring and reporting risks. The ERM division, led by the
Bancorp’s Chief Risk Officer ensures the consistency and adequacy
of the Bancorp’s risk management approach within the structure of
the Bancorp’s affiliate operating model. In addition, the Internal
Audit division provides an independent assessment of the Bancorp’s
internal control structure and related systems and processes.
an
that
comprise
integrated
The assumption of risk requires robust and active risk
and
management practices
comprehensive set of activities, measures and strategies that apply to
the entire organization. The Bancorp has established a Risk Appetite
Framework, approved by the Board, that provides the foundations
of corporate risk capacity, risk appetite and risk tolerances. The
Bancorp’s risk capacity is represented by its available financial
resources. Risk capacity sets an absolute limit on risk-assumption in
the Bancorp’s 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 regulatory capital
buffers required per Capital Policy Targets that would reduce risk
capacity. Those factors take the form of capacity adjustments to
arrive at an Operating Risk Capacity which represents the operating
risk level the Bancorp can assume while maintaining its solvency
standard. The Bancorp’s policy currently discounts its Operating
Risk Capacity by a minimum of five percent to provide a buffer; as a
result, the Bancorp’s 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 Bancorp’s risks. The Bancorp
measures economic capital under the assumption that it expects to
maintain debt ratings at strong investment grade levels over time.
The Bancorp’s 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
Bancorp’s 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 Bancorp’s 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. On a quarterly basis, the
Risk and Compliance Committee of the Board reviews performance
against key risk limits as well as current assessments of each of the
eight risk types relative to the established tolerance. Any results over
limits or outside of tolerance require the development of an action
plan that describes actions to be taken to return the measure to
within the limit or tolerance.
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 Bancorp’s risk program which includes the following key
functions:
• Enterprise Risk Management 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 is responsible for
overseeing the safety and soundness of the commercial loan
portfolio within an independent portfolio management
framework that supports the Bancorp’s 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 and risk management governance and reporting;
• Consumer Credit Risk Management is responsible for
overseeing the safety and soundness of the consumer
portfolio within an independent management framework
that supports
loan growth
the Bancorp’s consumer
strategies, ensuring portfolio optimization, appropriate risk
controls and oversight, reporting, and monitoring of
underwriting and credit administration processes;
• Operational Risk Management works with lines of business
and affiliates 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 processes related to
fiduciary, CRA and fair lending compliance. 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
oversee risk management 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 Bancorp’s 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
the Management Compliance
Operational Risk Committee,
57 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Committee, the Asset/Liability Committee and the Enterprise
Marketing Committee. Other committees accountable to the ERMC
oversee the ALLL, capital and CRA/fair lending functions. In
addition, the Legal and Regulatory Reserve Committee, which is
accountable to the Operational Risk Committee, reviews and
monitors significant legal and regulatory matters to ensure that
reserves for potential litigation losses are established when such
losses are both probable and subject to reasonable estimation. 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 approved by the Risk
and Compliance Committee of the Board of Directors.
is based on
CREDIT RISK MANAGEMENT
The objective of the Bancorp’s 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 the failure of a
borrower or counterparty to honor its financial or contractual
obligations to the Bancorp. The Bancorp's credit risk management
three core principles: conservatism,
strategy
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 Bancorp's credit risk management strategy also
emphasizes diversification on a geographic, industry and customer
level as well as ongoing portfolio monitoring 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
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,
nonaccrual status, specific reserves and monitoring for charge-offs.
Credit Risk Review reports directly to the Risk and Compliance
Committee of the Board of Directors and administratively to the
Chief Auditor.
The Bancorp conducts regular reviews of the business it serves
based on the changing competitive and regulatory environment.
Based on the most recent review, the Bancorp exited the Residential
Wholesale Loan Broker business during the first quarter of 2014.
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
Bancorp’s 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. The Bancorp defines potential problem loans and
leases as those rated substandard that do not meet the definition of
a nonperforming asset or a restructured loan. Refer to Note 6 of
the Notes to Consolidated Financial Statements for further
information on the Bancorp’s credit grade categories, which are
derived from standard regulatory rating definitions.
The following tables provide a summary of potential problem loans and leases as of December 31:
TABLE 32: POTENTIAL PROBLEM LOANS AND LEASES
Carrying
Value
1,022
272
7
29
1,330
Carrying
Value
1,032
517
44
18
1,611
$
$
$
$
Unpaid
Principal
Balance
1,028
273
7
29
1,337
Unpaid
Principal
Balance
1,034
520
44
18
1,616
Exposure
1,344
273
11
29
1,657
Exposure
1,323
520
50
18
1,911
2014 ($ in millions)
Commercial and industrial
Commercial mortgage
Commercial construction
Commercial leases
Total
TABLE 33: POTENTIAL PROBLEM LOANS AND LEASES
2013 ($ in millions)
Commercial and industrial
Commercial mortgage
Commercial construction
Commercial leases
Total
58 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 for credit approval and pricing, portfolio
monitoring and capital allocation that includes a “through-the-cycle”
rating philosophy for modeling expected losses. The dual risk rating
system includes 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-category risk rating system.
The Bancorp has completed significant validation and testing of the
dual risk rating system as a commercial credit risk management tool.
The Bancorp is assessing the necessary modifications to the dual
risk rating system outputs to develop a U.S. GAAP compliant
ALLL model and will make a decision on the use of modified dual
risk ratings for purposes of determining the Bancorp’s ALLL once
the FASB has
issued a final standard regarding proposed
methodology changes to the determination of credit impairment as
outlined in the FASB’s proposed Accounting Standard Update—
Financial Instruments–Credit Losses (Subtopic 825-15)
issued on
December 20, 2012. Scoring systems, various analytical tools and
portfolio performance monitoring are used to assess the credit risk
in the Bancorp’s homogenous consumer and small business loan
portfolios.
Overview
Economic growth is improving and GDP is expected to maintain its
modest expansionary pattern. The job market is slowly but steadily
improving. Housing prices have largely stabilized and are increasing
in many markets, but overall current economic conditions are
causing weaker than desired qualified loan demand and a relatively
low interest rate environment, which directly impacts the Bancorp’s
growth and profitability.
the Bancorp began
Among consumer portfolios,
residential mortgage and
brokered home equity portfolios exhibited the most stress. As of
December 31, 2014, consumer real estate loans originated from
2005 through 2008 represent approximately 24% of the consumer
real estate portfolio and approximately 68% of total losses in 2014.
Loss rates continue to improve as newer vintages are performing
within expectations. With the stabilization of certain real estate
to selectively originate new
markets,
homebuilder and developer
lending and nonowner-occupied
commercial lending in the third quarter of 2011. Currently, the level
of new commercial real estate fundings is slightly above the
amortization and pay-off of the portfolio. The Bancorp continues to
aggressively engage in other loss mitigation strategies such as
reducing credit commitments, restructuring certain commercial and
consumer loans, as well as utilizing commercial and consumer loan
workout teams. For commercial and consumer loans owned by the
Bancorp, loan modification strategies are developed that are
workable for both the borrower and the Bancorp when the
borrower displays a willingness to cooperate. These strategies
typically involve either a reduction of the stated interest rate of the
loan, an extension of the loan’s maturity date(s) with 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 loan’s accrued interest. For residential mortgage
loans serviced for FHLMC and FNMA, the Bancorp participates in
the HAMP and HARP 2.0 programs. For loans refinanced under
the HARP 2.0 program, the Bancorp strictly adheres to the
underwriting requirements of the program and promptly sells the
refinanced loan back to the agencies. Loan restructuring under the
HAMP program is performed on behalf of FHLMC or FNMA and
the Bancorp does not take possession of these loans during the
modification process. Therefore, participation in these programs
does not significantly impact the Bancorp’s credit quality statistics.
The Bancorp participates in trial modifications in conjunction with
the HAMP program for loans it services for FHLMC and FNMA.
As these trial modifications relate to loans serviced for others, they
are not included in the Bancorp’s TDRs as they are not assets of the
Bancorp. In the event there is a representation and warranty
violation on loans sold through the programs, the Bancorp may be
required to repurchase the sold loan. As of December 31, 2014,
repurchased loans restructured or refinanced under these programs
the Bancorp’s Consolidated Financial
were
Statements. Additionally, as of December 31, 2014 and 2013, $22
million and $111 million, respectively, of loans refinanced under
HARP 2.0 were included in loans held for sale in the Bancorp’s
Consolidated Balance Sheets. For the years ended December 31,
2014 and 2013, the Bancorp recognized $13 million and $97 million,
respectively, of noninterest income in mortgage banking net revenue
in the Bancorp’s Consolidated Statements of Income related to the
sale of loans restructured or refinanced under the HAMP and
HARP 2.0 programs.
immaterial
to
In the financial services industry, there has been heightened
focus on foreclosure activity and processes. The Bancorp 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 is careful to ensure that customer and
loan data are accurate.
During the fourth quarter of 2013, the Bancorp settled certain
repurchase claims related to mortgage loans originated and sold to
FHLMC prior to January 1, 2009 for $25 million, after paid claim
credits and other adjustments. The settlement removes the
Bancorp’s responsibility to repurchase or indemnify FHLMC for
representation and warranty violations on any loan sold prior to
January 1, 2009 except in limited circumstances.
Commercial Portfolio
The Bancorp’s 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.
loan
The risk within the commercial loan and lease portfolio is
managed and monitored through an underwriting process utilizing
detailed origination policies, continuous
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 nonowner-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), sensitivity and pro-forma
analysis requirements and interest rate sensitivity. 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
59 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
value ascribed in the assessment of charge-offs and specific reserves.
In addition, the Bancorp applies incremental valuation adjustments
to older appraisals that relate to collateral dependent loans, which
can currently be up to 20-30% of the appraised value based on the
type of collateral. These incremental valuation adjustments 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
changes to the appraisal adjustments 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 tables provide
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 34: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION
As of December 31, 2014 ($ in millions)
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Total
LTV > 100% LTV 80-100% LTV (cid:148) 80%
1,982
2,423
4,405
248
333
581
148
243
391
$
$
TABLE 35: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION
As of December 31, 2013 ($ in millions)
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Total
LTV > 100% LTV 80-100% LTV (cid:148) 80%
2,152
1,798
3,950
345
353
698
240
274
514
$
$
60 Fifth Third Bancorp
MANAGEMENT’S 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 Bancorp’s commercial loans and leases:
TABLE 36: COMMERCIAL LOAN AND LEASE PORTFOLIO (EXCLUDING LOANS HELD FOR SALE)
As of December 31 ($ in millions)
By industry:
Manufacturing
Financial services and insurance
Real estate
Business services
Wholesale trade
Healthcare
Retail trade
Transportation and warehousing
Communication and information
Construction
Mining
Accommodation and food
Entertainment and recreation
Utilities
Other services
Public administration
Agribusiness
Individuals
Other
Total
By loan size:
Less than $200,000
$200,000 to $1 million
$1 million to $5 million
$5 million to $10 million
$10 million to $25 million
Greater than $25 million
Total
By state:
Ohio
Michigan
Illinois
Florida
Indiana
Kentucky
North Carolina
Tennessee
Pennsylvania
All other states
Total
Outstanding
2014
Exposure
Nonaccrual
Outstanding
2013
Exposure
Nonaccrual
$
$
10,315
6,097
5,392
4,644
4,314
4,133
3,754
3,012
2,409
1,864
1,862
1,712
1,451
1,044
881
567
318
170
14
53,953
1 %
5
11
8
25
50
100 %
17 %
9
7
7
5
3
3
3
3
43
100 %
20,496
13,557
8,612
7,109
8,004
6,322
7,190
4,276
4,140
3,352
3,323
2,945
2,321
2,551
1,207
658
444
201
17
96,725
1
3
9
7
22
58
100
20
8
8
6
5
3
4
3
2
41
100
$
55
20
32
79
62
20
22
1
3
25
3
9
10
-
11
-
11
4
-
367 $
6
15
22
19
24
14
100
11
11
6
17
5
2
2
-
7
39
100
10,299
5,998
5,027
4,910
4,407
4,038
3,301
3,134
1,801
1,865
1,580
1,668
1,149
773
1,013
541
356
174
12
52,046
1 %
5
13
10
27
44
100 %
19 %
10
7
7
5
3
3
3
3
40
100 %
19,955
14,010
7,302
7,411
8,406
6,220
6,673
4,416
3,295
3,196
3,206
2,556
1,955
2,332
1,362
734
504
218
12
93,763
1
4
10
8
23
54
100
22
8
7
6
5
3
3
3
3
40
100
55
25
70
55
35
26
18
1
2
36
55
12
12
-
24
-
26
6
-
458
8
18
23
10
34
7
100
16
11
8
19
9
2
1
1
7
26
100
The Bancorp has identified certain categories of loans which it
believes represent a higher level of risk compared to the rest of the
Bancorp’s commercial loan portfolio, due to economic or market
conditions within the Bancorp’s key lending areas.
61 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables provide an analysis of nonowner-occupied commercial real estate loans (excluding loans held for sale):
TABLE 37: NONOWNER-OCCUPIED COMMERCIAL REAL ESTATE(a)
As of December 31, 2014 ($ in millions)
By State:
Ohio
Michigan
Florida
Illinois
North Carolina
Indiana
All other states
Total
(a)
By State:
Ohio
Michigan
Florida
Illinois
North Carolina
Indiana
All other states
Total
(a)
Included in commercial mortgage and commercial construction loans on the Consolidated Balance Sheets.
TABLE 38: NONOWNER-OCCUPIED COMMERCIAL REAL ESTATE(a)
As of December 31, 2013 ($ in millions)
Included in commercial mortgage and commercial construction loans on the Consolidated Balance Sheets.
Outstanding
1,283
724
575
449
369
250
1,865
5,515
$
$
Exposure
1,685
797
871
964
537
344
3,560
8,758
90 Days
Past Due
-
-
-
-
-
-
-
-
Nonaccrual
7
9
16
6
-
-
19
57
For the Year Ended
December 31, 2014
Net Charge-offs
(Recoveries)
(1)
8
5
2
-
-
4
18
Outstanding
1,086
851
508
353
248
161
1,270
4,477
$
$
Exposure
1,377
925
629
593
428
253
2,173
6,378
For the Year Ended
December 31, 2013
90 Days
Past Due
Nonaccrual
Net Charge-offs
-
-
-
-
-
-
-
-
14
17
7
6
2
4
7
57
12
5
3
4
1
1
1
27
62 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consumer Portfolio
The Bancorp’s consumer portfolio is materially comprised of three
loans: residential mortgage, home equity and
categories of
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 residential mortgage
portfolio through conservative underwriting and documentation
standards and geographic and product diversification. The Bancorp
may also package and sell loans in the portfolio.
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
ARMs are not expected to have a material impact on credit costs in
the current interest rate environment, as approximately $900 million
of adjustable rate residential mortgage loans will have rate resets
during the next twelve months. Approximately three fourths of
those resets are expected to experience an increase in rate, with an
average increase of approximately an eighth of a percent.
Certain residential mortgage products have contractual features
that may increase credit exposure to the Bancorp in the event of a
decline in housing values. These types of mortgage products offered
by the Bancorp include loans with high LTV ratios, multiple loans
on the same collateral that when combined result in a LTV greater
than 80% and interest-only loans. The Bancorp has deemed
residential mortgage loans with greater than 80% LTV ratios and no
mortgage insurance as loans that represent a higher level of risk.
The following table provides an analysis of the residential mortgage portfolio loans outstanding by LTV at origination:
TABLE 39: RESIDENTIAL MORTGAGE PORTFOLIO LOANS BY LTV AT ORIGINATION
As of December 31 ($ in millions)
LTV (cid:148) 80%
LTV > 80%, with mortgage insurance
LTV > 80%, no mortgage insurance
Total
2014
2013
Outstanding
Weighted
Average LTV
Outstanding
Weighted
Average LTV
$
$
9,220
1,206
1,963
12,389
65.1 % $
93.8
96.2
73.0 % $
9,507
1,242
1,931
12,680
65.2 %
93.7
95.9
72.7 %
The following tables provide an analysis of the residential mortgage portfolio loans outstanding with a greater than 80% LTV ratio and no mortgage
insurance:
TABLE 40: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
As of December 31, 2014 ($ in millions)
By State:
Ohio
Illinois
Michigan
Florida
Indiana
North Carolina
Kentucky
All other states
Total
(a)
Outstanding
$
509
293
265
247
126
100
78
345
$
1,963
90 Days
Past Due Nonaccrual
1
1
1
1
1
1
-
-
6
10
4
5
5
2
1
1
2
30
For the Year Ended
December 31, 2014
Net Charge-offs
22
3
11
3
3
-
2
2
46
(a)
Includes $34 in charge-offs related to the transfer of $720 of restructured residential mortgage loans from the portfolio to loans held for sale during the fourth quarter of 2014.
63 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 41: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
For the Year Ended
December 31, 2013
90 Days
Past Due Nonaccrual
Net Charge-offs
3
-
2
1
1
-
-
1
8
20
5
7
11
4
2
3
2
54
10
2
5
3
1
-
2
1
24
Outstanding
$
583
236
305
260
120
94
83
250
1,931
34% are in senior lien positions and 66% are in junior lien
positions at December 31, 2014;
Approximately 90% of non-delinquent borrowers made at
least one payment greater than the minimum payment
during the year ended December 31, 2014; and
The portfolio had an average refreshed FICO score of 740
and 736 at December 31, 2014 and 2013, respectively.
$
(cid:120)
(cid:120)
(cid:120)
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 junior lien home equity loans
which become 60 days or more past due, the Bancorp tracks the
performance of the senior lien loans in which the Bancorp is the
servicer and utilizes consumer credit bureau attributes to monitor
the status of the senior lien loans that the Bancorp does not service.
If the senior lien loan is found to be 120 days or more past due, the
junior lien home equity loan is placed on nonaccrual status unless
both loans are well-secured and in the process of collection.
Additionally, if the junior lien home equity loan becomes 120 days
or more past due and the senior lien loan is also 120 days or more
past due, the junior lien home equity loan is assessed for charge-off,
unless it is well-secured and in the process of collection. Refer to the
Analysis of Nonperforming Assets section of MD&A for more
information.
As of December 31, 2013 ($ in millions)
By State:
Ohio
Illinois
Michigan
Florida
Indiana
North Carolina
Kentucky
All other states
Total
Home Equity Portfolio
The Bancorp’s home equity portfolio is primarily comprised of
home equity lines of credit. Beginning in the first quarter of 2013,
the Bancorp’s newly originated home equity lines of credit have a
10-year interest only draw period followed by a 20-year amortization
period. The home equity line of credit previously offered by the
Bancorp was 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 calculated on a pooled basis with senior lien and junior
lien categories segmented in the determination of 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 for each category, as adjusted for certain
prescriptive loss rate factors and certain qualitative adjustment
factors to reflect risks associated with current conditions and trends.
The prescriptive
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.
include adjustments
loss rate
factors
The home equity portfolio is managed in two primary groups:
loans outstanding with a combined 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 $3.0
billion and $5.9 billion, respectively, as of December 31, 2014. Of
the total $8.9 billion of outstanding home equity loans:
(cid:120)
84% reside within the Bancorp’s Midwest footprint of
Ohio, Michigan, Kentucky, Indiana and Illinois;
64 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides an analysis of home equity loans outstanding disaggregated based upon refreshed FICO score as of:
(cid:3)
TABLE 42: HOME EQUITY PORTFOLIO LOANS OUTSTANDING BY REFRESHED FICO SCORE
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
($ in millions)
Senior Liens:
FICO < 620
FICO 621-719
FICO > 720
Total Senior Liens
Junior Liens: (cid:3)
FICO < 620
FICO 621-719
FICO > 720
Total Junior Liens
Total
December 31, 2014
% of
Total
December 31, 2013
$
$
178
613
2,257
3,048
471
1,542
3,825
5,838
8,886
2 % $
7
25
34 (cid:3)
(cid:3)(cid:3)
6
17
43
66
100 % $
201
638
2,253
3,092
565
1,662
3,927
6,154
9,246
% of
Total
2 %
7
24
33
6
18
43
67
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 senior and junior lien position by LTV at origination:
TABLE 43: HOME EQUITY PORTFOLIO LOANS OUTSTANDING BY LTV AT ORIGINATION
As of December 31 ($ in millions)
Senior Liens:
LTV (cid:148) 80%
LTV > 80%
Total Senior Liens
Junior Liens:
LTV (cid:148) 80%
LTV > 80%
Total Junior Liens
Total
2014
2013
Outstanding
Weighted
Average LTV
Outstanding
Weighted
Average LTV
$
$
2,635
413
3,048
3,281
2,557
5,838
8,886
55.2 % $
89.1
60.0
67.4
91.1
79.6
72.4 % $
2,645
447
3,092
3,353
2,801
6,154
9,246
54.9 %
89.2
60.1
67.3
91.4
80.2
72.9 %
The following tables provide an analysis of home equity loans by state with a combined LTV greater than 80%:
TABLE 44: HOME EQUITY PORTFOLIO LOANS OUTSTANDING WITH A LTV GREATER THAN 80%
As of December 31, 2014 ($ in millions)
By State:
Ohio
Michigan
Illinois
Indiana
Kentucky
Florida
All other states
Total
Outstanding
$
1,123
613
346
260
246
107
275
2,970
$
For the Year Ended
December 31, 2014
90 Days
Past Due Nonaccrual
Net Charge-offs
-
-
-
-
-
-
-
-
9
7
6
4
3
2
5
36
9
8
6
3
3
2
4
35
Exposure
1,838
882
507
404
390
143
376
4,540
65 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 45: HOME EQUITY PORTFOLIO LOANS OUTSTANDING WITH A LTV GREATER THAN 80%
As of December 31, 2013 ($ in millions)
By State:
Ohio
Michigan
Illinois
Indiana
Kentucky
Florida
All other states
Total
For the Year Ended
December 31, 2013
90 Days
Past Due Nonaccrual
Net Charge-offs
-
-
-
-
-
-
-
-
10
7
6
3
2
3
4
35
18
14
9
4
3
4
7
59
Exposure
1,868
987
554
454
436
157
425
4,881
Outstanding
$
1,161
697
383
296
278
116
317
3,248
$
Automobile Portfolio
The automobile portfolio is characterized by direct and indirect
lending products to consumers. As of December 31, 2014, 51% of
the automobile loan portfolio is comprised of loans collateralized by
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 46: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING BY LTV AT ORIGINATION
As of December 31 ($ in millions)
LTV (cid:148) 100%
LTV > 100%
Total
2014
2013
Outstanding
8,212
3,825
12,037
$
$
Weighted
Average LTV
Outstanding
Weighted
Average LTV
81.6 % $
111.0
91.3 % $
8,306
3,678
11,984
81.4 %
110.7
90.7 %
The following table provides an analysis of the Bancorp’s automobile loans with a LTV at origination greater than 100%:
TABLE 47: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING WITH A LTV GREATER THAN 100%
As of ($ in millions)
December 31, 2014
December 31, 2013
$
Outstanding
3,825
3,678
90 Days Past
Due and Accruing
5
5
Net Charge-offs for the
Nonaccrual
Year Ended
1
1
16
14
European Exposure
The Bancorp has no direct sovereign exposure to any European
government as of December 31, 2014. 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 Bancorp’s risk appetite for foreign country
exposure is managed by having established country exposure limits.
The Bancorp’s total exposure to European domiciled or owned
businesses and European financial institutions was $4.4 billion and
funded exposure was $2.3 billion as of December 31, 2014.
Additionally, the Bancorp was within its established country
exposure limits for all European countries.
The following table provides detail about the Bancorp’s exposure to all European domiciled and owned businesses and financial institutions as of
December 31, 2014:
TABLE 48: EUROPEAN EXPOSURE
Sovereigns
Financial Institutions
Non-Financial
Institutions
Total
Total
Total
($ in millions)
Peripheral Europe(b)
Other Eurozone(c)
Total Eurozone
Other Europe(d)
Total Europe
(a)
(b)
(c)
(d) Other Europe includes European countries not part of the Eurozone (primarily the United Kingdom and Switzerland).
(e)
Total exposure includes funded exposure and unfunded commitments, reported net of collateral.
Peripheral Europe includes Greece, Ireland, Italy, Portugal and Spain.
Eurozone includes countries participating in the European common currency (Euro).
Funded
Exposure Exposure
-
$
-
-
-
-
Includes $1,778 related to U.S. based customers owned by European entities.
-
-
-
-
-
$
Total
Funded
Funded
Total
Exposure Exposure Exposure Exposure Exposure a
162
3,156
3,318
1,082
4,400 a
(e)
91
1,682
1,773
510
2,283
162
3,145
3,307
1,052
4,359
-
11
11
25
36
-
11
11
30
41
Funded
(a) Exposure
91
1,693
1,784
535
2,319
66 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 49. For
further information on the Bancorp’s policies related to accounting
for delinquent and nonperforming loans refer to the Nonaccrual
Loans and Leases section of Note 1 of the Notes to Consolidated
Financial Statements.
Total nonperforming assets, including loans held for sale, were
$783 million at December 31 2014 compared to $986 million at
December 31, 2013. At December 31, 2014, $39 million of
nonaccrual loans, consisting primarily of real estate secured loans,
were held for sale, compared to $6 million at December 31, 2013.
Total nonperforming assets, including loans held for sale, as a
percentage of total loans, leases and other assets, including OREO
as of December 31, 2014 were 0.86%, compared to 1.10% as of
December 31, 2013. Excluding nonaccrual loans held for sale,
nonperforming assets as a percentage of portfolio loans, leases and
other assets, including OREO were 0.82% as of December 31,
2014, compared to 1.10% as of December 31, 2013. The
composition of nonaccrual loans and leases continues to be
concentrated in real estate as 50% of nonaccrual loans and leases
were secured by real estate as of December 31, 2014 compared to
60% as of December 31, 2013.
Commercial nonperforming loans and leases were $391 million
at December 31, 2014, a decrease of $73 million from December 31,
2013 as charge-offs, loan paydowns/payoffs, loan transfers to
performing and loans sold from the portfolio outpaced new
nonaccruals. Excluding commercial nonperforming loans and leases
held for sale, commercial nonperforming loans and leases at
December 31, 2014 decreased $91 million compared to December
31, 2013.
Consumer nonperforming loans and leases were $227 million
at December 31, 2014, a decrease of $66 million from December 31,
2013 as loan pay downs/payoffs, charge-offs and transfers to
performing and OREO outpaced new nonaccrual loans. Excluding
consumer nonperforming loans and leases held for sale, consumer
nonperforming loans and leases at December 31, 2014 decreased
$81 million compared to December 31, 2013. Geographical market
conditions continue to be a large driver of nonaccrual activity as
Florida properties represent approximately 11% and seven percent
of residential mortgage and home equity balances, respectively, but
represent 32% and 15% of nonaccrual loans for each category at
December 31, 2014. Refer to Table 50 for a rollforward of the
nonperforming loans and leases.
OREO and other repossessed property was $165 million at
December 31, 2014, compared to $229 million at December 31,
2013. The Bancorp recognized $26 million and $45 million in losses
on the sale or write-down of OREO properties in 2014 and 2013,
respectively. The decrease from the prior year was primarily due to a
modest improvement in general economic conditions.
In 2014 and 2013, approximately $49 million and $71 million,
respectively, of interest income would have been recognized 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.
67 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
2014
86
64
-
3
44
72
-
-
TABLE 49: SUMMARY OF NONPERFORMING ASSETS AND DELINQUENT LOANS
As of December 31 ($ in millions)
Nonaccrual loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Other consumer loans and leases
Restructured loans and leases:
Commercial and industrial loans
Commercial mortgage loans(e)
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card and other
Total nonperforming portfolio loans and leases(d)
OREO and other repossessed property(c)
Total nonperforming portfolio assets
Nonaccrual loans held for sale
Total nonperforming assets including loans held for sale
Loans and leases 90 days past due and accruing:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Residential mortgage loans(b)
Home equity
Automobile loans
Credit card and other
Total loans and leases 90 days past due and accruing
Nonperforming assets as a percent of portfolio loans, leases and
other assets, including OREO(a)
Allowance for loan and lease losses as a percent of
nonperforming assets(a)
(a) Excludes nonaccrual loans held for sale.
(b)
142
71
-
1
33
21
1
41
579
165
744
39
783
-
-
-
56
-
8
23
87
178
$
$
$
0.82 %
2013
2012
2011
2010
127
90
10
3
83
74
-
-
154
53
19
2
83
19
1
33
751
229
980
6
986
-
-
-
66
-
8
29
103
234
215
70
1
114
30
-
1
96
67
6
8
123
23
2
39
1,029
257
1,286
29
1,315
1
22
1
75
58
8
30
195
408
358
123
9
134
25
-
1
79
63
15
3
141
29
2
48
1,438
378
1,816
138
1,954
4
3
1
79
74
9
30
200
473
407
182
11
152
23
1
84
95
28
10
8
116
33
2
55
1,680
494
2,174
294
2,468
16
11
3
100
89
13
42
274
1.10
1.49
2.23
2.79
161
144
124
138
Information for all periods presented excludes loans whose repayments are insured by the FHA or guaranteed by the VA. As of December 31, 2014, 2013, 2012, 2011, and 2010 these advances
were $373, $378, $414, $309 and $279, respectively. The Bancorp recognized losses of $13 for the year ended December 31, 2014, $5 for 2013 and $2 for 2012 due to claim denials and
curtailments associated with these advances.
Excludes $71, $77, $72, $64 and $38 of OREO related to government insured loans at December 31, 2014, 2013, 2012, 2011 and 2010, respectively.
Includes $9, $10, $10, $17 and $24 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at December 31, 2014, 2013, 2012, 2011 and 2010,
respectively, and $4, $2, $1, $2, and $0 of restructured nonaccrual government insured commercial loans at December 31, 2014, 2013, 2012, 2011 and 2010, respectively.
Excludes $21 of restructured nonaccrual loans at December 31, 2014 and 2013 associated with a consolidated VIE in which the Bancorp has no continuing credit risk due to the risk being
assumed by a third party.
(c)
(d)
(e)
68 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides a rollforward of portfolio nonperforming loans and leases, by portfolio segment:
TABLE 50: ROLLFORWARD OF PORTFOLIO NONPERFORMING LOANS AND LEASES
For the year ended December 31, 2014 ($ in millions)
Beginning Balance
Transfers to nonperforming
Transfers to performing
Transfers to performing (restructured)
Transfers to held for sale
Loans sold from portfolio
Loan paydowns/payoffs
Transfers to other real estate owned
Charge-offs
Draws/other extensions of credit
Ending Balance
For the year ended December 31, 2013 ($ in millions)
Beginning Balance
Transfers to nonperforming
Transfers to performing
Transfers to performing (restructured)
Transfers to held for sale
Loans sold from portfolio
Loan paydowns/payoffs
Transfers to other real estate owned
Charge-offs (recoveries)
Draws/other extensions of credit
Ending Balance
Commercial
Residential
Mortgage
458
520
(22)
(49)
(4)
(43)
(181)
(41)
(279)
8
367
697
409
(9)
(15)
(3)
(38)
(295)
(81)
(221)
14
458
166
135
(39)
(40)
(24)
-
(41)
(67)
(13)
-
77
237
204
(52)
(41)
-
-
(112)
(73)
3
-
166
$
$
$
$
Consumer
127
219
(42)
(46)
-
-
(9)
(22)
(92)
-
135
95
297
(60)
(62)
-
-
(11)
(13)
(122)
3
127
Total
751
874
(103)
(135)
(28)
(43)
(231)
(130)
(384)
8
579
1,029
910
(121)
(118)
(3)
(38)
(418)
(167)
(340)
17
751
$
$
$
$
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,
reduce the accrued interest 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 loans modified as part
of a TDR are maintained on accrual status provided there is a
sustained payment history of six months or greater prior to the
modification in accordance with the modified terms and all
remaining contractual payments under the modified terms are
reasonably assured of collection. TDRs of commercial loans and
credit card loans that do not have a sustained payment history of six
months or greater in accordance with the modified terms remain on
nonaccrual status until a six month payment history is sustained.
Consumer restructured loans on accrual status totaled $905
million and $1.7 billion at December 31, 2014 and December 31,
2013, respectively. The decrease from the prior year was primarily
due to the transfer of $720 million of restructured residential
mortgage loans from the portfolio to loans held for sale during the
fourth quarter of 2014. As a result of the transfer, the Bancorp
recognized a charge-off of $87 million in 2014. As of December 31,
2014, the percentage of restructured residential mortgage loans,
home equity loans, and credit card loans that are past due 30 days or
more were 40%, 12% and 33%, respectively.
The following tables summarize TDRs by loan type and delinquency status:
TABLE 51: PERFORMING AND NONPERFORMING TDRs
As of December 31, 2014 ($ in millions)
Commercial loans(b)(c)
Residential mortgage loans(a)(c)
Home equity
Credit card
Automobile and other consumer loans and leases
Total
(a)
Current
867
312
337
31
22
1,569
$
$
Performing
30-89 Days
Past Due
2
54
23
6
1
86
90 Days or
More Past Due
-
119
-
-
-
119
Nonaccrual
214
33
21
41
1
310
$
$
Total
1,083
518
381
78
24
2,084
Information includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. As of December 31,
2014, these advances represented $165 of current loans, $42 of 30-89 days past due loans and $102 of 90 days or more past due loans.
(b) As of December 31, 2014, excludes $7 of restructured accruing loans and $21 of restructured nonaccrual loans associated with a consolidated VIE in which the Bancorp has no continuing credit
risk due to the risk being assumed by a third party.
Excludes restructured nonaccrual loans held for sale.
(c)
69 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 52: PERFORMING AND NONPERFORMING TDRs
As of December 31, 2013 ($ in millions)
Commercial loans(b)(c)
Residential mortgage loans(a)
Home equity
Credit card
Automobile and other consumer loans and leases
Total
(a)
Current
869
1,045
368
25
24
2,331
$
$
Performing
30-89 Days
Past Due
-
82
26
-
1
109
90 Days or
More Past Due
-
114
-
-
-
114
Nonaccrual
228
84
18
33
1
364
$
$
Total
1,097
1,325
412
58
26
2,918
Information includes loans whose repayments are insured by the FHA or guaranteed by the VA. As of December 31, 2013, these loans represented $155 of current loans, $31 of 30-89 days past
due loans and $88 of 90 days or more past due loans.
(b) As of December 31, 2013, excludes $8 of restructured accruing loans and $21 of restructured nonaccrual loans associated with a consolidated VIE in which the Bancorp has no continuing credit
The ratio of consumer loan and lease net charge-offs to
average consumer loans and leases increased to 86 bps in 2014
compared to 77 bps in 2013. Net charge-offs on residential
mortgage loans, which typically involve partial charge-offs based
upon appraised values of underlying collateral, increased $66 million
from the prior year. The increase in net charge-offs on residential
mortgage loans was primarily due to an $87 million charge-off
related to the transfer of certain residential mortgage loans from the
portfolio to held for sale in the fourth quarter of 2014, partially
offset by improvements in delinquencies and loss severities. The
Bancorp 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 $38 million compared
to the prior year, primarily due to improvements in loss severities.
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
increased $5 million
compared to 2013 due to increased delinquencies and losses in the
indirect portfolio. Credit card net charge-offs increased $4 million
risk-adjusted pricing
from 2013. The Bancorp utilizes a
methodology to ensure adequate compensation is received for those
products that have higher credit costs.
(c)
risk due to the risk being assumed by a third party.
Excludes restructured nonaccrual loans held for sale.
A
Analysis of Net Loan Charge-offs
Net charge-offs were 64 bps and 58 bps of average portfolio loans
and leases for the years ended December 31, 2014 and 2013,
respectively. Table 53 provides a summary of credit loss experience
and net charge-offs as a percentage of average portfolio loans and
leases outstanding by loan category.
The ratio of commercial loan and lease net charge-offs to
average portfolio commercial loans and leases increased to 48 bps
during 2014 compared to 44 bps in 2013, as a result of increases in
net charge-offs of $41 million partially offset by an increase in
average commercial loan and lease balances of $3.4 billion. The
increase in net charge-offs during 2014 was driven primarily by an
increase in charge-offs on certain commercial and industrial loans,
primarily due to $96 million in aggregate net charge-offs related to
six impaired commercial and industrial loans in the first and third
quarters of 2014. The increases in commercial and industrial loan
and commercial construction loan net charge-offs during 2014 were
partially offset by a decrease in commercial mortgage loan net
charge-offs, compared to 2013, due to improvements in general
economic conditions and previous actions taken by the Bancorp to
address problem loans. Net charge-offs for 2014 related to
nonowner-occupied commercial real estate were $18 million
compared to $27 million in 2013. Net charge-offs related to
nonowner-occupied commercial real estate are recorded in the
commercial mortgage loans and commercial construction loans
captions in Table 53. Net charge-offs on these loans represented
seven percent of total commercial loan and lease net charge-offs in
2014 and 12% in 2013.
70 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
$
TABLE 53: SUMMARY OF CREDIT LOSS EXPERIENCE
For the years ended December 31 ($ in millions)
Losses charged-off:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total losses
Recoveries of losses previously charged-off:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total recoveries
Net losses charged-off:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total net losses charged-off
Net charge-offs as a percent of average loans and leases (excluding held for sale):
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total commercial loans
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total consumer loans and leases
Total net losses charged-off
2014
2013
2012
2011
2010
(248)
(37)
(13)
(1)
(139)
(75)
(44)
(95)
(27)
(679)
26
11
1
-
13
16
17
13
7
104
(222)
(26)
(12)
(1)
(126)
(59)
(27)
(82)
(20)
(575)
0.54 %
0.34
0.79
0.01
0.48
0.99
0.65
0.22
3.60
5.80
0.86
0.64 %
(207)
(66)
(9)
(2)
(70)
(114)
(44)
(92)
(33)
(637)
39
19
5
1
10
17
22
14
9
136
(168)
(47)
(4)
(1)
(60)
(97)
(22)
(78)
(24)
(501)
0.44
0.56
0.51
0.04
0.44
0.48
1.02
0.18
3.67
6.71
0.77
0.58
(194)
(120)
(34)
(10)
(129)
(172)
(55)
(90)
(33)
(837)
29
21
9
2
7
15
24
16
10
133
(165)
(99)
(25)
(8)
(122)
(157)
(31)
(74)
(23)
(704)
0.50
1.02
3.08
0.22
0.63
1.07
1.51
0.26
3.79
7.02
1.13
0.85
(314)
(211)
(89)
(1)
(180)
(234)
(85)
(114)
(86)
(1,314)
38
16
4
3
7
14
32
16
12
142
(276)
(195)
(85)
2
(173)
(220)
(53)
(98)
(74)
(1,172)
0.97
1.89
4.96
(0.08)
1.26
1.75
1.97
0.47
5.19
15.29
1.79
1.49
(631)
(541)
(265)
(7)
(441)
(276)
(132)
(164)
(28)
(2,485)
45
17
13
5
2
12
44
9
10
157
(586)
(524)
(252)
(2)
(439)
(264)
(88)
(155)
(18)
(2,328)
2.23
4.58
8.48
0.05
3.10
5.49
2.20
0.85
8.28
2.58
2.92
3.02
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 level of the ALLL as a
percentage of loans. 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. Refer to the Critical Accounting Policies section of
MD&A for more information.
In 2014, 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 Bancorp’s methodology for determining the ALLL.
The provision for unfunded commitments is included in other
noninterest expense in the Consolidated Statements of Income.
71 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The ALLL attributable to the portion of the residential
mortgage and consumer loan and lease portfolio that has not been
restructured is determined on a pooled basis with the segmentation
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
include
consumer
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 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.
the prescriptive
loss rate
factors
loans,
The Bancorp’s 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 $162 million at
December 31, 2014. In addition, the Bancorp’s 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 $34 million at December 31, 2014.
As several qualitative and quantitative factors are considered in
determining the ALLL, these sensitivity analyses do not necessarily
reflect the nature and extent of future changes in the ALLL. They
are intended to provide insights into the impact of adverse changes
to risk grades and estimated loss rates and do not imply any
expectation of future deterioration in the risk ratings or loss rates.
Given current processes employed by the Bancorp, management
believes the risk grades and estimated loss rates currently assigned
are appropriate.
TABLE 54: CHANGES IN ALLOWANCE FOR CREDIT LOSSES
For the years ended December 31 ($ in millions)
ALLL:
Balance, beginning of period
Impact of change in accounting principle
Losses charged-off
Recoveries of losses previously charged-off
Provision for loan and lease losses
Balance, end of period
Reserve for unfunded commitments:
Balance, beginning of period
Impact of change in accounting principle
Benefit from the reserve for unfunded commitments
Balance, end of period
2014
2013
2012
2011
2010
$
$
$
$
1,582
-
(679)
104
315
1,322
162
-
(27)
135
1,854
-
(637)
136
229
1,582
179
-
(17)
162
2,255
-
(837)
133
303
1,854
181
-
(2)
179
3,004
-
(1,314)
142
423
2,255
227
-
(46)
181
3,749
45
(2,485)
157
1,538
3,004
294
(43)
(24)
227
Certain inherent, but unconfirmed losses are probable within the
loan and lease portfolio. The Bancorp’s 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 restructured loans and other
qualitative adjustments. Due to the heavy reliance on realized
historical losses and the credit grade rating process, the model-
derived estimate of ALLL tends 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
these model
limitations, the qualitative adjustment factors may be incremental or
decremental to the quantitative model results.
themselves. Given
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 both December 31, 2014 and 2013 was 0.12%. The unallocated
allowance was eight percent of the total allowance as of December
31, 2014 compared to seven percent as of December 31, 2013.
As shown in Table 55, the ALLL as a percent of portfolio
loans and leases was 1.47% at December 31, 2014, compared to
1.79% at December 31, 2013. The ALLL was $1.3 billion as of
December 31, 2014, compared to $1.6 billion at December 31, 2013.
The decrease was reflective of decreases in nonperforming loans
and leases and improved delinquency metrics in commercial and
consumer loans and leases.
72 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
$
2014
2013
2012
673
140
17
45
104
87
33
104
13
106
1,322
802
333
33
68
229
143
28
87
20
111
1,854
767
212
26
53
189
94
23
92
16
110
1,582
TABLE 55: ATTRIBUTION OF ALLOWANCE FOR LOAN AND LEASE LOSSES TO PORTFOLIO LOANS AND LEASES
As of December 31 ($ in millions)
Allowance attributed to:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Unallocated
Total ALLL
Portfolio loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total portfolio loans and leases
Attributed allowance as a percent of respective portfolio loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Unallocated (as a percent of total portfolio loans and leases)
Total portfolio loans and leases
40,765
7,399
2,069
3,720
12,389
8,886
12,037
2,401
418
90,084
39,316
8,066
1,039
3,625
12,680
9,246
11,984
2,294
364
88,614
36,038
9,103
698
3,549
12,017
10,018
11,972
2,097
290
85,782
1.65 %
1.89
0.82
1.21
0.84
0.98
0.27
4.33
3.11
0.12
1.47 %
1.95
2.63
2.50
1.46
1.49
1.02
0.19
4.01
4.40
0.12
1.79
2.23
3.66
4.73
1.92
1.91
1.43
0.23
4.15
6.90
0.13
2.16
$
$
2011
929
441
77
80
227
195
43
106
21
136
2,255
30,783
10,138
1,020
3,531
10,672
10,719
11,827
1,978
350
81,018
3.02
4.35
7.55
2.27
2.13
1.82
0.36
5.36
6.00
0.17
2.78
2010
1,123
597
158
111
310
265
73
158
59
150
3,004
27,191
10,845
2,048
3,378
8,956
11,513
10,983
1,896
681
77,491
4.13
5.50
7.71
3.29
3.46
2.30
0.66
8.33
8.66
0.19
3.88
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:
(cid:120) Assets and liabilities may mature or reprice at different times;
(cid:120) Short-term and long-term market interest rates may change
by different amounts; or
(cid:120) 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 Bancorp’s
earnings. Stability of the Bancorp’s net income is largely dependent
upon the effective management of interest rate risk. Management
continually reviews the Bancorp’s 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.
Interest Rate Risk Management Oversight
The Bancorp’s Executive ALCO, which
senior
management representatives and is accountable to the ERM
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.
includes
Net Interest Income Sensitivity
The Bancorp employs 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
Bancorp’s assets, liabilities and off-balance sheet exposures and
incorporates market-based assumptions regarding the effect of
changing interest rates on the prepayment rates of certain assets and
attrition rates of certain liabilities. The model also includes senior
management’s 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 simulated
results due to timing, magnitude and frequency of interest rate
changes as well as changes in market conditions and management
strategies.
73 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Bancorp’s interest rate risk exposure is evaluated by
measuring the anticipated change in net interest income over 12-
month and 24-month horizons assuming 100 bps and 200 bps
parallel ramped increases in interest rates. In accordance with
internal policy, rate movements are assumed to occur over one year
and are sustained thereafter. The analysis would typically include
100 bps and 200 bps parallel ramped decreases in interest rates;
however, this analysis is currently omitted due to the current low
levels of certain interest rates. Applying the ramps would result in
certain interest rates becoming negative in the parallel ramped
decrease scenarios.
The following table shows the Bancorp’s estimated NII sensitivity profile and ALCO policy limits as of December 31:
TABLE 56: ESTIMATED NII SENSITIVITY PROFILE
2014
2013
Change in Interest Rates (bps)
12 Months
13 to 24
Months
Percent Change in NII
(FTE)
ALCO Policy Limits
13 to 24
Months
12 Months
Percent Change in NII
(FTE)
12 Months
13 to 24
Months
ALCO Policy Limits
13 to 24
Months
12 Months
+200
+100
2.19 %
1.16
6.49
4.18
(4.00)
-
(6.00)
-
1.73 %
0.77
6.89
3.37
(4.00)
-
(6.00)
-
At December 31, 2014, the Bancorp’s net interest income would
benefit in year one and year two under these parallel ramp increases.
The benefit was attributable to the combination of floating-rate
assets, including the predominantly floating-rate commercial loan
portfolio, and certain intermediate-term fixed-rate liabilities. The
benefit was up modestly compared to December 31, 2013 with the
exception of the +200 scenario from 13 to 24 months, which was
down slightly. Improvements in the NII benefit were attributable to
continued growth in commercial loans and core deposits, and the
issuance of fixed-rate debt securities. The modest decline in the
+200 scenario from 13 to 24 months compared to December 31,
2013 was primarily due to changes in expected loan and security
prepayment speeds.
Economic Value of Equity Sensitivity
The Bancorp also uses EVE as a measurement tool in managing
interest rate risk. Whereas the net interest income sensitivity analysis
highlights the impact on forecasted NII over one and two year time
horizons, the EVE analysis is a point in time analysis of the current
positions that incorporates all cash flows over their estimated
remaining lives. The EVE of the balance sheet is defined as the
discounted present value of all asset and net derivative cash flows
less the discounted value of all liability cash flows. Due to this
longer horizon, 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 NII sensitivity analysis. As with the
NII 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 loan and security
prepayments and the expected balance attrition and pricing of
transaction deposits.
The following table shows the Bancorp’s EVE sensitivity profile as of December 31:
TABLE 57: ESTIMATED EVE SENSITIVITY PROFILE
Change in Interest Rates (bps)
+200
+100
+25
-25
2014
Change in EVE ALCO Policy Limit
(12.00)
(2.21)%
(0.62)
(0.06)
(0.05)
2013
Change in EVE ALCO Policy Limit
(12.00)
(5.78)%
(2.91)
(0.70)
0.63
The EVE sensitivity was modestly negative at December 31, 2014
and has improved from the EVE sensitivity at December 31, 2013.
The lower level of EVE risk since December 31, 2013 was
attributable to continued growth in commercial loans and core
deposits, and the issuance of fixed-rate debt securities.
While an instantaneous shift in interest rates was 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 or exacerbate the impact of changes in interest rates. The
NII simulations and EVE analyses do not necessarily include certain
74 Fifth Third Bancorp
actions that management may undertake to manage 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
interest rate risk
integral component of the Bancorp’s
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, options, swaptions and TBA securities.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 IRLCs 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
through collateral
the Bancorp minimizes
contracts, which
arrangements, approvals, limits and monitoring procedures. For
further information including the notional amount and fair values of
these derivatives, refer to Note 12 of the Notes to Consolidated
Financial Statements
Portfolio Loans and Leases and Interest Rate Risk
Although the Bancorp’s 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. The following table summarizes the expected cash flows
of the carrying value of the Bancorp’s portfolio loans and leases as
of December 31, 2014:
Less than 1 year
$
TABLE 58: PORTFOLIO LOANS AND LEASES EXPECTED MATURITIES
($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Subtotal - commercial loans and leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Subtotal - consumer loans and leases
Total
23,653
3,328
847
735
28,563
2,497
1,203
5,209
481
404
9,794
38,357
$
1-5 years
16,371
3,613
1,183
1,623
22,790
5,428
3,460
6,704
1,920
14
17,526
40,316
Over 5 years
741
458
39
1,362
2,600
4,464
4,223
124
-
-
8,811
11,411
Total
40,765
7,399
2,069
3,720
53,953
12,389
8,886
12,037
2,401
418
36,131
90,084
Additionally, the following table displays a summary of expected cash flows, excluding interest receivable, occurring after one year for both fixed
and floating/adjustable rate loans and leases, as of December 31, 2014:
TABLE 59: PORTFOLIO LOANS AND LEASES PRINCIPAL CASH FLOWS OCCURING AFTER ONE YEAR
($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Subtotal - commercial loans and leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Subtotal - consumer loans and leases
Total
$
$
Fixed
2,672
1,031
31
2,985
6,719
7,031
736
6,783
627
-
15,177
21,896
Interest Rate
Floating or Adjustable
14,440
3,040
1,191
-
18,671
2,861
6,947
45
1,293
14
11,160
29,831
Residential Mortgage Servicing Rights and Interest Rate Risk
The net carrying amount of the residential MSR portfolio was $856
million and $967 million as of December 31, 2014 and 2013,
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 the year ended December 31,
2014 which caused actual prepayments on the servicing portfolio to
increase. The increase in actual prepayments on the servicing
portfolio during the year ended December 31, 2014 caused the
modeled prepayment speeds to increase, which led to a temporary
impairment of $65 million on servicing rights during the year ended
December 31, 2014. Mortgage rates increased during the year ended
December 31, 2013 which caused actual prepayments on the
servicing portfolio to decrease. The decrease in actual prepayments
on the servicing portfolio during the year ended December 31, 2013
caused the modeled prepayment speeds to decrease, which led to a
recovery of temporary impairment of $192 million on servicing
rights during the year ended December 31, 2013.
Servicing rights are deemed temporarily impaired when a
borrower’s loan rate is distinctly higher than prevailing rates.
Temporary impairment on servicing rights is reversed when the
75 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
prevailing rates return to a level commensurate with the borrower’s
loan rate. In addition to the mortgage servicing rights valuation, the
Bancorp recognized net gains of $95 million and net losses of $17
million on its non-qualifying hedging strategy for the years ended
2014 and 2013, respectively. These amounts include net gains on
securities related to the Bancorp’s non-qualifying hedging strategy
which were zero during 2014 and $13 million during 2013. The
Bancorp may adjust its hedging strategy to reflect its assessment of
the composition of its MSR portfolio, the cost of hedging and the
anticipated effectiveness of the hedges given the economic
environment. Refer to Note 11 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
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 Bancorp’s 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.
Expected maturities from loan and lease repayments are
included in Table 58 of the Market Risk Management section of
MD&A. Of the $22.4 billion of securities in the Bancorp’s available-
for-sale and other portfolio at December 31, 2014, $3.3 billion in
principal and interest is expected to be received in the next 12
months and an additional $3.5 billion is expected to be received in
the next 13 to 24 months. For further information on the Bancorp’s
securities portfolio, refer to the Investment Securities subsection of
the Balance Sheet Analysis of MD&A.
Asset-driven liquidity is provided by the Bancorp’s ability to
sell or securitize loans and leases. 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 certain other 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, 2014 and 2013, the Bancorp sold or
securitized loans totaling $9.4 billion and $23.4 billion, respectively.
76 Fifth Third Bancorp
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
Bancorp’s foreign denominated loans at December 31, 2014 and
December 31, 2013 was $720 million and $581 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.
For further information on the transfer of financial assets, refer to
Note 11 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
Bancorp’s average core deposits and shareholders’ equity funded
82% of its average total assets during 2014 and 2013. 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 with a balance of $100,000
or more and deposits in the Bancorp’s 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.
On February 25, 2014, the Bancorp issued and sold $500
million of unsecured senior fixed-rate notes. On June 5, 2014, The
Bancorp issued in a registered public offering 300,000 depositary
shares, representing 12,000 shares of 4.90% fixed-to-floating rate
non-cumulative Series J perpetual preferred stock, for net proceeds
of $297 million. As of December 31, 2014, $3.0 billion of debt or
other securities were available for issuance under the current
Bancorp’s 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. At
December 31, 2014, the Bancorp has approximately $41.7 billion of
borrowing capacity available through secured borrowing sources
including the FHLB and FRB.
In 2013, the Bancorp’s banking subsidiary updated and
amended its existing global bank note program to increase the
capacity from $20 billion to $25 billion. On April 25, 2014, the Bank
issued and sold $1.5 billion in aggregate principal amount of
unsecured senior bank notes. On September 5, 2014, the Bank
issued and sold $850 million of unsecured senior fixed-rate bank
notes. The Bancorp has $19.1 billion of funding available for
issuance under the global bank note program as of December 31,
2014.
For the year ended December 31, 2014, the Bancorp
transferred approximately $3.8 billion in consumer automobile loans
to bankruptcy remote trusts which were deemed to be VIEs. The
Bancorp concluded that it is the primary beneficiary of these VIEs
and, therefore, has consolidated these VIEs. The assets of these
VIEs are restricted to the settlement of the notes and other
obligations of the VIEs. Third-party holders of the notes do not
have recourse to the general assets of the Bancorp.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity Coverage Ratio and Net Stable Funding Ratio
A key reform within the Basel III framework to strengthen
international liquidity standards was the introduction of the LCR
and NSFR. On January 7, 2013, the BCBS issued a final standard
for the LCR applicable to large internationally active banking
organizations. The BCBS plans on implementing the NSFR in 2018.
Section 165 of the DFA requires the FRB to establish
enhanced liquidity standards in the U.S. for BHCs with total assets
of $50 billion or greater. On October 10, 2014, the U.S. Banking
Agencies published final rules implementing a quantitative liquidity
requirement consistent with the LCR standard established by the
internationally active banking organizations,
BCBS for
generally those with $250 billion or more in total consolidated assets
or $10 billion or more in on-balance sheet foreign exposure. In
addition, a modified LCR requirement was finalized for BHCs with
$50 billion or more in total consolidated assets that are not
internationally active, such as Fifth Third. The Modified LCR
requires BHCs to maintain HQLA equal to its calculated net cash
outflows over a 30 calendar-day stress period multiplied by a factor
of 0.7. The modified LCR is effective January 1, 2016 and requires
BHCs to calculate its LCR on a monthly basis. The final rule
includes a transition period for the modified LCR in which BHCs
must maintain HQLA of 90% of its calculated net cash outflows for
2016 and then 100% beginning in 2017. The Bancorp estimates its
large
TABLE 60: AGENCY RATINGS
As of February 25, 2015
Fifth Third Bancorp:
Short-term
Senior debt
Subordinated debt
Fifth Third Bank:
Short-term
Long-term deposit
Senior debt
Subordinated debt
OPERATIONAL RISK MANAGEMENT
The Bancorp faces ongoing and emerging risks and regulations
related to the activities that surround the delivery of banking and
financial products. The Bancorp believes that effective management
of operational risk plays a major role in both the level and the
stability of profitability. Operational risk is the risk of loss from
inadequate or failed internal processes, people or systems or from
external events. This includes, but is not limited to, the following
types of risk: business continuity risk, information management
risk, fraud risk, model risk, third party service provider risk, human
resources risk, and process risk.
The Bancorp’s risk management framework consists of five
integrated components, including identifying, assessing, managing,
monitoring, and reporting risks. The Operational Risk Management
function
the
implementation of the Bancorp’s approach to managing operational
is responsible for developing and overseeing
CAPITAL MANAGEMENT
Management regularly reviews the Bancorp’s capital levels to help
ensure it is appropriately positioned under various operating
environments. The Bancorp has established a Capital Committee
which is responsible for making capital plan recommendations to
management. These recommendations are reviewed by the ERM
Committee and the capital plan is approved by the Board of
Directors. The Capital Committee is responsible for execution
oversight of the capital actions of the capital plan.
modified LCR was 112% at December 31, 2014 calculated under
the modified LCR final rule. For more information on LCR, refer to
the Non-GAAP Financial Measures section of MD&A.
Credit Ratings
The cost and availability of financing to the Bancorp are impacted
by its credit ratings. A downgrade to the Bancorp’s credit ratings
could affect its ability to access the credit markets and increase its
borrowing costs, thereby adversely
impacting the Bancorp’s
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 Bancorp’s credit ratings are summarized in Table 60. The
ratings reflect the ratings agencies view on the Bancorp’s capacity to
meet financial commitments. *
* 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. Additional
information on the credit rating ranking within the overall classification system is
located on the website of each credit rating agency.
Moody's
Standard and Poor's
Fitch
DBRS
No rating
Baa1
Baa2
P-2
A3
A3
Baa1
A-2
BBB+
BBB
A-2
No rating
A-
BBB+
F1
A
A-
F1
A+
A
A-
R-1L
AL
BBBH
R-1L
A
A
AL
risk. This includes providing training, tools, guidance and oversight
to support implementation of key risk programs and systems as they
relate to operational risk management, such as risk and control self-
assessments, new product/initiative risk reviews, key risk indicators,
and operational losses. The function is also responsible for
developing reports that support the proactive management of
operational risk across the enterprise. The lines of business and
corporate functions are responsible for managing the operational
risks associated with their areas in accordance with the risk
management framework. The framework is intended to enable the
Bancorp to function with a sound and well-controlled operational
environment. These processes support the Bancorp’s goals to
minimize future operational losses and strengthen the Bancorp’s
performance by maintaining sufficient capital to absorb operational
losses that are incurred.
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
77 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
sheet foreign exposures of $10 billion were required to adopt the
advanced approach effective April 1, 2008. The Bancorp does not
meet these thresholds and, therefore, is not subject to the
requirements of Basel II.
The DFA 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 DFA will
phase out the inclusion of certain TruPS as a component of Tier I
risk-based capital when the Bancorp implements the revised
regulatory capital rules known as Basel III.
to
In December of 2010 and revised in June of 2011, the BCBS
issued Basel III, a global regulatory framework, to enhance
international capital standards. In June of 2012, U.S. banking
regulators proposed enhancements
the regulatory capital
requirements for U.S. banks, which implement aspects of Basel III,
such as re-defining the regulatory capital elements and minimum
capital ratios, introducing regulatory capital buffers above those
minimums, revising the agencies’ rules for calculating risk-weighted
assets and introducing a new Tier I common equity ratio. In July of
2013, U.S. banking regulators approved final enhanced regulatory
included
capital requirements (Basel III Final Rule), which
modifications to the proposed rules. The Basel III Final Rule
provides for certain banks, including the Bancorp, to opt out of
including AOCI in Tier I capital and retain the treatment of
residential mortgage exposures consistent with the current Basel I
capital rules. The Basel III Final Rule phases out the inclusion of
certain TruPS as a component of Tier I capital. Under these
provisions, these TruPS qualify as a component of Tier II capital. At
December 31, 2014 the Bancorp’s Tier I capital included $60 million
of TruPS representing approximately 5 bps of risk-weighted assets.
The Basel III Final Rule is effective for the Bancorp as of January 1,
2015, subject to phase-in periods for certain of its components and
other provisions.
The Bancorp’s current estimate of the pro-forma fully phased
in Tier I common equity ratio at December 31, 2014 under the
Basel III Final Rule is approximately 9.39% compared with 9.65%
as calculated under the existing Basel I capital framework. The
primary drivers of the change from the existing Basel I capital
framework to the Basel III Final Rule are an increase in Tier I
common equity of approximately 74 bps (primarily from the
elimination of the current 10% deduction of mortgage servicing
rights from capital), which would be more than offset by the impact
of increases in risk-weighted assets (primarily from the treatment of
securitizations, mortgage servicing rights and commitments with an
original maturity of one year or less). If the Bancorp elected to
include AOCI components in capital, the December 31, 2014 pro
forma Basel III Final Rule Tier I common ratio would have
increased by approximately 35 bps. The pro-forma Tier I common
equity ratio exceeds the proposed minimum Tier I common equity
ratio of 7% comprised of a minimum of 4.5% plus a capital
conservation buffer of 2.5%. The pro-forma Tier I common equity
ratio does not include the effect of any mitigating actions the
Bancorp may undertake to offset the impact of the proposed capital
enhancements. Additionally, pursuant to the Basel III Final Rule,
the minimum capital ratios as of January 1, 2015 are 6% for the Tier
I capital ratio, 8% for the Total risk-based capital ratio and 4% for
the Tier I capital to average consolidated assets (leverage ratio). For
further discussion on the Basel I and Basel III Tier I common
equity ratios, refer to the Non-GAAP Financial Measures section of
MD&A.
TABLE 61: CAPITAL RATIOS
As of December 31 ($ in millions)
Average equity as a percent of average assets
Tangible equity as a percent of tangible assets(a)
Tangible common equity as a percent of tangible assets(a)
Tier I capital
Total risk-based capital
Risk-weighted assets(b)
2014
11.59 %
9.41
8.43
$
12,764
16,895
117,878
2013
11.56
9.44
8.63
12,094
16,431
115,969
2012
11.65
9.17
8.83
11,685
15,811
109,301
2011
11.41
9.03
8.68
12,503
16,876
104,219
2010
12.22
10.42
7.04
13,965
18,178
100,561
Regulatory capital ratios:
Tier I risk-based capital
Total risk-based capital
Tier I leverage
Tier I common equity(a)
(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
For further information on these ratios, refer to the Non-GAAP Financial Measures section of MD&A.
10.83 %
14.33
9.66
9.65
13.89
18.08
12.79
7.48
10.69
14.47
10.15
9.54
12.00
16.19
11.25
9.41
10.43
14.17
9.73
9.45
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.
Preferred Stock Offering and Conversion
As contemplated by the 2013 CCAR, on May 16, 2013 the Bancorp
issued in a registered public offering 600,000 depositary shares,
representing 24,000 shares of 5.10% fixed-to-floating rate non-
cumulative Series H perpetual preferred stock, for net proceeds of
$593 million. Each preferred share has a $25,000 liquidation
preference. The preferred stock accrues dividends, on a non-
cumulative semi-annual basis, at an annual rate of 5.10% through
but excluding June 30, 2023, at which time it converts to a quarterly
floating rate dividend of three-month LIBOR plus 3.033%. Subject
to any required regulatory approval, the Bancorp may redeem the
Series H preferred shares at its option in whole or in part, at any
time on or after June 30, 2023 and may redeem in whole, but not in
part, following a regulatory capital event at any time prior to June
30, 2023. The Series H preferred shares are not convertible into
Bancorp common shares or any other securities.
On June 11, 2013, the Bancorp’s Board of Directors authorized
the conversion into common stock, no par value, of all outstanding
shares of the Bancorp’s 8.50% non-cumulative convertible perpetual
preferred stock, Series G, which shares are represented by
depositary shares each representing 1/250th of a share of Series G
preferred stock, pursuant to the Amended Articles of Incorporation.
The Articles grant the Bancorp the right, at its option, to convert all
outstanding shares of Series G preferred stock if the closing price of
common stock exceeded 130% of the applicable conversion price
for 20 trading days within any period of 30 consecutive trading days.
The closing price of shares of common stock satisfied such
threshold for the 30 trading days ended June 10, 2013, and the
78 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Bancorp gave the required notice of its exercise of its conversion
right.
On July 1, 2013, the Bancorp converted the remaining 16,442
outstanding shares of Series G preferred stock, which represented
4,110,500 depositary shares, into shares of Fifth Third’s common
stock. Each share of Series G preferred stock was converted into
2,159.8272 shares of common stock, representing a total of
35,511,740 issued shares. The common shares issued in the
conversion are exempt securities pursuant to Section 3(a)(9) of the
Securities Act of 1933, as amended, as the securities exchanged were
exclusively with Bancorp’s existing security holders where no
commission or other remuneration was paid. Upon conversion, the
depositary shares were delisted from the NASDAQ Global Select
Market and withdrawn from the Exchange.
On December 9, 2013, the Bancorp issued, in a registered
public offering, 18,000,000 depositary shares, representing 18,000
shares of 6.625% fixed-to-floating rate non-cumulative Series I
perpetual preferred stock, for net proceeds of $441 million. Each
preferred share has a $25,000 liquidation preference. The preferred
stock accrues dividends, on a non-cumulative quarterly basis, at an
annual rate of 6.625% through but excluding December 31, 2023, at
which time it converts to a quarterly floating rate dividend of three-
month LIBOR plus 3.71%. Subject to any required regulatory
approval, the Bancorp may redeem the Series I preferred shares at
its option in whole or in part, at any time on or after December 31,
2023 and may redeem in whole, but not in part, following a
regulatory capital event at any time prior to December 31, 2023. The
Series I preferred shares are not convertible into Bancorp common
shares or any other securities.
As contemplated by the 2014 CCAR, on June 5, 2014, the
Bancorp issued in a registered public offering 300,000 depositary
shares, representing 12,000 shares of 4.90% fixed-to-floating rate
non-cumulative Series J perpetual preferred stock, for net proceeds
of $297 million. Each preferred share has a $25,000 liquidation
preference. The preferred stock accrues dividends, on a non-
cumulative semi-annual basis, at an annual rate of 4.90% through
but excluding September 30, 2019, at which time it converts to a
quarterly floating rate dividend of three-month LIBOR plus
3.129%. Subject to any required regulatory approval, the Bancorp
may redeem the Series J preferred shares at its option in whole or in
part, at any time on or after September 30, 2019, or at any time
following a regulatory capital event. The Series J preferred shares are
not convertible into Bancorp common shares or any other
securities.
Redemption of TruPS
The Bancorp redeemed all $750 million of the outstanding TruPS
issued by Fifth Third Capital Trust IV on December 30, 2013.
These securities had a distribution rate of 6.50% and a scheduled
maturity date of April 1, 2067. Pursuant to the terms of the TruPS,
the securities of Fifth Third Capital Trust IV were redeemable
within ninety days of a Capital Treatment Event. The Bancorp
determined that a Capital Treatment Event occurred upon the
publication of a Final Rule regarding Regulatory Capital Rules
jointly by the Federal Reserve System and the OCC. The
redemption price was $1,000 per security, which reflected 100% of
the liquidation amount, plus accrued and unpaid distributions to the
actual redemption date of $10 million. The Bancorp recognized an
$8 million loss on the extinguishment of this debt within other
noninterest expense in the Consolidated Statements of Income.
Dividend Policy and Stock Repurchase Program
The Bancorp’s 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 declared dividends per common share of $0.51 and
$0.47 during the years ended December 31, 2014 and 2013,
respectively. The Bancorp entered into accelerated share repurchase
transactions during the years ended December 31, 2014 and 2013.
Refer to the Overview section of MD&A and Note 23 of the Notes
to Consolidated Financial Statements for additional information on
the accelerated share repurchase transactions.
A
The following table summarizes shares authorized for repurchase for the years ended December 31, 2014 and 2013:
TABLE 62: SHARE REPURCHASES
For the years ended December 31
Shares authorized for repurchase at January 1
Additional authorizations(a) (b)
Share repurchases(c)
Shares authorized for repurchase at December 31
Average price paid per share
(a)
2014
43,071,613
64,908,628
(34,799,873)
73,180,368
$ 20.87
2013
63,046,682
45,541,057
(65,516,126)
43,071,613
$ 18.80
2012
19,201,518
86,269,178
(42,424,014)
63,046,682
$ 14.82
In March 2014, the Bancorp announced that its Board of Directors had authorized management to purchase 100 million shares of the Bancorp’s common stock through the open market or in any
private transaction. The authorization does not include specific price targets or an expiration date. This share repurchase authorization replaces the Board’s previous authorization pursuant to which
approximately 35 million shares remained available for repurchase by the Bancorp.
In March 2013, the Bancorp announced that its Board of Directors had authorized management to purchase 100 million shares of the Bancorp’s common stock through the open market or in any
private transaction. The authorization does not include specific price targets or an expiration date. This share repurchase authorization replaces the Board’s previous authorization pursuant to which
approximately 54 million shares remained available for repurchase by the Bancorp.
Excludes 2,116,370, 1,863,097 and 2,059,003 shares repurchased during 2014, 2013 and 2012, 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.
(b)
(c)
Stress Tests and CCAR
In 2011, the FRB adopted the capital plan rule, which requires
BHCs with consolidated assets of $50 billion or more to submit
annual capital plans to the FRB for review. Under the rule, these
capital plans must included detailed descriptions of the following:
the BHC’s internal processes for assessing capital adequacy; the
policies governing capital actions such as common stock issuances,
dividends, and share repurchases; and all planned capital actions
over a nine-quarter planning horizon. Further, each BHC must also
report to the FRB the results of stress tests conducted by the BHC
under a number of scenarios that assess the sources and uses of
capital under baseline and stressed economic scenarios. The FRB
launched the 2014 stress testing program and CCAR on November
1, 2013, with firm submissions of stress test results and capital plans
due to the FRB on January 6, 2014, which the Bancorp submitted as
required. Refer to Note 3 of the Notes to Consolidated Financial
79 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements for a discussion on the FRB’s review of the capital plan,
the FRB’s non-objection to the Bancorp’s proposed capital actions
and the Bancorp’s capital actions taken in 2014.
The BHCs that participated in the 2014 CCAR, including the
Bancorp, are required to conduct mid-cycle company-run stress
tests using data as of March 31, 2014. The stress tests must be based
on three BHC defined scenarios – baseline, adverse and severely
adverse. As required, the Bancorp reported the mid-cycle stress test
results to the FRB on July 7, 2014. In addition, the Bancorp
published a Form 8-K providing a summary of the results under the
severely adverse scenario on September 18, 2014, which is available
on Fifth Third’s website at https://www.53.com. These results
represented estimates of the Bancorp’s results from the second
quarter of 2014 through the second quarter of 2016 under the
severely adverse scenario, which is considered highly unlikely to
occur.
The FRB launched the 2015 stress testing program and CCAR
on October 23, 2014. The stress testing results and capital plan were
submitted by the Bancorp to the FRB on January 5, 2015.
The FRB expects to release summary results of the 2015 stress
testing program and CCAR in March of 2015. The results will
include supervisory projections of capital ratios, losses and revenues
under the supervisory adverse and supervisory severely adverse
scenarios. The FRB will also issue an objection or non-objection to
each participating institution’s capital plan submitted under CCAR.
The FRB’s summary results will also include an overview of
methodologies used for supervisory tests. Additionally, as a CCAR
institution, Fifth Third is required to disclose its own estimates of
results under the supervisory severely adverse scenario using the
same consistently applied capital actions noted above, and to
provide information related to risks included in its stress testing; a
summary description of the methodologies used; estimates of
aggregate pre-provision net revenue, losses, provisions, and pro
forma capital ratios at the end of the forward-looking planning
horizon of at least nine quarters; and an explanation of the most
significant causes of changes in regulatory capital ratios. These
disclosures are required to be sent to the FRB and publicly disclosed
within 15 days of the date the FRB discloses the results of its DFA
supervisory stress test.
80 Fifth Third Bancorp
MANAGEMENT’S 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 that are considered off-balance sheet arrangements as
they involve varying elements of market, credit and liquidity risk in
excess of the amounts recognized in the Bancorp’s Consolidated
Balance Sheets. The Bancorp’s off-balance sheet arrangements
liabilities, guarantees, and
include commitments, contingent
transactions with non-consolidated VIEs. A brief discussion of
these transactions is as follows:
Commitments
The Bancorp has certain commitments to make future payments
under contracts, including commitments to extend credit, letters of
credit, forward contracts related to held for sale mortgage loans,
noncancelable lease obligations, capital commitments for private
equity investments and purchase obligations. Refer to Note 17 of
the Notes to Consolidated Financial Statements for additional
information on commitments.
Guarantees and Contingent Liabilities
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 Bancorp’s
reinsurance coverage typically ranges from 5% to 10% of the total
PMI coverage. The Bancorp’s maximum exposure in the event of
nonperformance by the underlying borrowers is equivalent to the
Bancorp’s total outstanding reinsurance coverage, which was $29
million at December 31, 2014 and $37 million at December 31,
2013. As of December 31, 2014 and 2013, the Bancorp maintained a
reserve of $2 million and $10 million, respectively, related to
exposures within the reinsurance portfolio which was included in
other liabilities in the Consolidated Balance Sheets. The change in
the reserve was due to a decrease in both the outstanding exposure
and expected losses. During 2009, the Bancorp suspended the
practice of providing reinsurance of PMI for newly originated
mortgage loans.
The Bancorp has performance obligations upon the occurrence
of certain events provided in certain contractual arrangements,
including residential mortgage loans sold with representation and
warranty provisions or credit recourse. Refer to Note 17 of the
Notes
for additional
to Consolidated Financial Statements
information on guarantees and contingent liabilities.
Transactions with Non-consolidated VIEs
The Bancorp 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 investments in
those entities in which the Bancorp was determined not to be the
primary beneficiary but holds a variable interest in the entity are
accounted for under the equity method of accounting or other
accounting standards as appropriate and not consolidated. Refer to
Note 10 of the Notes to Consolidated Financial Statements for
additional information on non-consolidated VIEs.
81 Fifth Third Bancorp
MANAGEMENT’S 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, 2014 are shown in
Table 63. As of December 31, 2014, 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 refer to Note 20 of the Notes
to Consolidated Financial Statements.
TABLE 63: CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
As of December 31, 2014 ($ in millions)
Less than 1
year
1-3 years
3-5 years
Greater than
5 years
Total
$
$
94,857
2,507
1,700
702
999
92
191
22
51
11
101,132
-
2,578
-
6,499
-
166
118
40
26
14
9,441
-
1,510
-
3,649
-
145
24
34
28
10
5,400
-
260
-
4,117
-
294
31
80
-
2
4,784
94,857
6,855
1,700
14,967
999
697
364
176
105
37
120,757
Contractually obligated payments due by period:
Deposits with a stated maturity of less than one year(a)
Time deposits(c)
Short-term borrowings(e)
Long-term debt(b)
Forward contracts related to held for sale mortgage loans(d)
Noncancelable operating lease obligations(f)
Partnership investment commitments(g)
Pension benefit payments(i)
Purchase obligations and capital expenditures(h)
Capital lease obligations
Total contractually obligated payments due by period
Other commitments by expiration period
Commitments to extend credit(j)
Letters of credit(k)
Total other commitments by expiration period
(a)
(b)
$
26,540
2,181
28,721
63,905
3,974
67,879
Includes demand, interest checking, savings, money market and foreign office deposits. For additional information, refer to the Deposits discussion in the Balance Sheet Analysis section of MD&A.
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. Refer to Note 16 of the Notes to Consolidated Financial Statements for additional information on these debt instruments.
Includes other time and certificates $100,000 and over. For additional information, refer to the Deposits discussion in the Balance Sheet Analysis section of MD&A.
Refer to Note 12 of the Notes to Consolidated Financial Statements for additional information on forward contracts to sell residential mortgage loans.
Includes federal funds purchased and borrowings with an original maturity of less than one year. For additional information, refer to Note 15 of the Notes to Consolidated Financial Statements.
Includes rental commitments.
Includes low-income housing and historic tax investments. For additional information, refer to Note 10 of the Notes to Consolidated Financial Statements.
Represents agreements to purchase goods or services and includes commitments to various general contractors for work related to banking center construction.
Refer to Note 21 of the Notes to Consolidated Financial Statements for additional information on pension obligations.
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 include capital commitments for private equity investments and do not necessarily represent future cash flow requirements. For
additional information, refer to Note 17 of the Notes to Consolidated Financial Statements.
17,602
590
18,192
12,105
1,160
13,265
7,658
43
7,701
$
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k) Letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. For additional information, refer to Note 17 of the Notes to Consolidated Financial
Statements.
82 Fifth Third Bancorp
MANAGEMENT’S 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 Bancorp’s management, including the Bancorp’s
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Bancorp’s 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 Bancorp’s Chief Executive Officer and Chief Financial Officer concluded that the Bancorp’s 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 Bancorp’s management assessed the effectiveness of the
Bancorp’s internal control over financial reporting as of December 31, 2014. Management’s assessment is based on the criteria established in the
Internal Control — Integrated Framework (2013) 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, 2014.
Based on this assessment, management believes that the Bancorp maintained effective internal control over financial reporting as of December 31,
2014. The Bancorp’s independent registered public accounting firm, that audited the Bancorp’s consolidated financial statements included in this
annual report, has issued an audit report on our internal control over financial reporting as of December 31, 2014. This report appears on page 84
of the annual report.
The Bancorp’s 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 Bancorp’s internal
control over financial reporting. Based on this evaluation, there has been no such change during the year covered by this report.
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
Kevin T. Kabat
Vice Chairman and Chief Executive Officer Executive Vice President and Chief Financial Officer
February 25, 2015
February 25, 2015
Tayfun Tuzun
83 Fifth Third Bancorp
To the Shareholders and Board of Directors of Fifth Third Bancorp:
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the internal control over financial reporting of Fifth Third Bancorp and subsidiaries (the “Bancorp”) as of December 31, 2014,
based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Bancorp's 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 Management’s Assessment as to the
Effectiveness of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Bancorp’s 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 company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive
and principal financial officers, or persons performing similar functions, and effected by the company’s 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 company’s 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 company’s 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, 2014, based
on the criteria established in Internal Control— Integrated Framework (2013) 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, 2014 of the Bancorp and our report dated February 25, 2015 expressed an
unqualified opinion on those consolidated financial statements.
Cincinnati, Ohio
February 25, 2015
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, 2014
and 2013, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the
period ended December 31, 2014. These consolidated financial statements are the responsibility of the Bancorp’s 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 as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2014, 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 Bancorp’s
internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control—Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2015 expressed an
unqualified opinion on the Bancorp’s internal control over financial reporting.
Cincinnati, Ohio
February 25, 2015
84 Fifth Third Bancorp
CONSOLIDATED BALANCE SHEETS
2014
2013
$
3,178
18,597
208
343
5,116
944
3,091
22,408
187
360
7,914
1,261
40,765
7,399
2,069
3,720
12,389
8,886
12,037
2,401
418
90,084
(1,322)
88,762
2,465
728
2,416
15
858
8,241
138,706
39,316
8,066
1,039
3,625
12,680
9,246
11,984
2,294
364
88,614
(1,582)
87,032
2,531
730
2,416
19
971
8,358
130,443
As of December 31 ($ in millions, except share data)
Assets
Cash and due from banks(a)
Available-for-sale and other securities(b)
Held-to-maturity securities(c)
Trading securities
Other short-term investments
Loans held for sale(d)
Portfolio loans and leases:
Commercial and industrial loans
Commercial mortgage loans(a)
Commercial construction loans
Commercial leases
Residential mortgage loans(e)
Home equity
Automobile loans(a)
Credit card
Other consumer loans and leases
Portfolio loans and leases
Allowance for loan and lease losses(a)
Portfolio loans and leases, net
Bank premises and equipment
Operating lease equipment
Goodwill
Intangible assets
Servicing rights
Other assets(a)
Total Assets
Liabilities
Deposits:
Demand
Interest checking
Savings
Money market
Other time
Certificates - $100,000 and over
Foreign office
Total deposits
Federal funds purchased
Other short-term borrowings
Accrued taxes, interest and expenses
Other liabilities(a)
Long-term debt(a)
Total Liabilities
Equity
2,051
Common stock(f)
1,034
Preferred stock(g)
2,561
Capital surplus
10,156
Retained earnings
82
Accumulated other comprehensive income
(1,295)
Treasury stock(f)
14,589
Total Bancorp shareholders’ equity
37
Noncontrolling interests
14,626
Total Equity
Total Liabilities and Equity
130,443
(a) At December 31, 2014 and 2013, includes $179 and $49 of cash and due from banks, $47 and $48 of commercial mortgage loans, $3,331 and $1,010 of automobile loans, $(22) and $(15)
of ALLL, $25 and $13 of other assets, $5 and $1 of other liabilities, $3,434 and $1,048 of long-term debt from consolidated VIEs that are included in their respective captions. For further
information, refer to Note 10.
32,634
25,875
17,045
11,644
3,530
6,571
1,976
99,275
284
1,380
1,758
3,487
9,633
115,817
34,809
26,800
15,051
17,083
3,960
2,895
1,114
101,712
144
1,556
2,020
2,642
14,967
123,041
2,051
1,331
2,646
11,141
429
(1,972)
15,626
39
15,665
138,706
$
$
$
(b) Amortized cost of $21,677 and $18,409 at December 31, 2014 and 2013, respectively.
(c)
(d)
(e)
(f)
Fair value of $187 and $208 at December 31, 2014 and 2013, respectively.
Includes $561 and $890 of residential mortgage loans held for sale measured at fair value at December 31, 2014, and 2013, respectively.
Includes $108 and $92 of residential mortgage loans measured at fair value at December 31, 2014 and 2013, respectively.
Common shares: Stated value $2.22 per share; authorized 2,000,000; outstanding at December 31, 2014 – 824,046,952 (excludes 99,845,629 treasury shares) and December 31,
2013 – 855,305,745 (excludes 68,586,836 treasury shares).
(g) 446,000 and 458,000 shares of undesignated no par value preferred stock are authorized and unissued at December 31, 2014 and December 31, 2013, respectively; fixed-to-floating rate non-
cumulative Series H perpetual preferred stock with a $25,000 liquidation preference: 24,000 authorized, issued and outstanding at December 31, 2014 and December 31, 2013; fixed-to-
floating rate non-cumulative Series I perpetual preferred stock with a $25,000 liquidation preference: 18,000 authorized, issued and outstanding at December 31, 2014 and December 31,
2013; and fixed-to-floating rate non-cumulative Series J perpetual preferred stock with a $25,000 liquidation preference: 12,000 authorized shares, issues and outstanding at December 31,
2014.
See Notes to Consolidated Financial Statements.
85 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF INCOME
2014
3,298
724
8
4,030
202
2
247
451
3,579
315
3,264
560
430
407
310
295
450
21
-
2,473
2013
3,447
520
6
3,973
202
6
204
412
3,561
229
3,332
549
400
393
700
272
879
21
13
3,227
2012
3,574
529
4
4,107
216
8
288
512
3,595
303
3,292
522
413
374
845
253
574
15
3
2,999
1,449
334
313
212
141
121
1,139
3,709
2,028
545
1,483
2
1,481
67
1,414
1.68
1.66
833,116,349
842,967,356
0.51
1,581
357
307
204
134
114
1,264
3,961
2,598
772
1,826
(10)
1,836
37
1,799
2.05
2.02
869,462,977
894,736,445
0.47
1,607
371
302
196
121
110
1,374
4,081
2,210
636
1,574
(2)
1,576
35
1,541
1.69
1.66
904,425,226
945,554,102
0.36
$
$
$
$
$
For the years ended December 31 ($ in millions, except share data)
Interest Income
Interest and fees on loans and leases
Interest on securities
Interest on other short-term investments
Total interest income
Interest Expense
Interest on deposits
Interest on other short-term borrowings
Interest on long-term debt
Total interest expense
Net Interest Income
Provision for loan and lease losses
Net Interest Income After Provision for Loan and Lease Losses
Noninterest Income
Service charges on deposits
Corporate banking revenue
Investment advisory revenue
Mortgage banking net revenue
Card and processing revenue
Other noninterest income
Securities gains, net
Securities gains, net - non-qualifying hedges on mortgage servicing rights
Total noninterest income
Noninterest Expense
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Card and processing expense
Equipment expense
Other noninterest expense
Total noninterest expense
Income Before Income Taxes
Applicable income tax expense
Net Income
Less: Net income attributable to noncontrolling interests
Net Income Attributable to Bancorp
Dividends on preferred stock
Net Income Available to Common Shareholders
Earnings per share - basic
Earnings per share - diluted
Average common shares outstanding - basic
Average common shares outstanding - diluted
Cash dividends declared per common share
See Notes to Consolidated Financial Statements.
86 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31 ($ in millions)
Net income
Other comprehensive income (loss), net of tax:
Unrealized gains on available-for-sale securities:
Unrealized holding gains (losses) on available-for-sale securities arising during the year
Reclassification adjustment for net (gains) losses included in net income
Unrealized gains on cash flow hedge derivatives:
Unrealized holding gains (losses) on cash flow hedge derivatives arising during the year
Reclassification adjustment for net gains included in net income
Defined benefit pension plans:
Net actuarial (loss) gain arising during the year
Reclassification of amounts to net periodic benefit costs
Other comprehensive income (loss)
Comprehensive income
Less: Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Bancorp
See Notes to Consolidated Financial Statements.
$
$
2014
1,483
378
(24)
39
(29)
(25)
8
347
1,830
2
1,828
2013
1,826
(295)
4
(8)
(29)
25
10
(293)
1,533
(10)
1,543
2012
1,574
(63)
(10)
24
(54)
(5)
13
(95)
1,479
(2)
1,481
87 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Bancorp Shareholders’ Equity
Accumulated
Other
Total
Bancorp
Non-
Common Preferred Capital Retained Comprehensive Treasury Shareholders’ Controlling
Interests
Income
Equity
Stock
Stock
Stock
$
2,051
398
Surplus Earnings
7,554
1,576
2,792
470
(64)
(95)
(23)
(11)
2,051
398
2,758
1,034
(398)
2,051
1,034
(78)
(142)
22
1
2,561
(325)
(35)
(2)
8,768
1,836
(407)
(37)
(4)
10,156
1,481
(427)
(67)
375
(293)
82
347
297
72
13
$
2,051
1,331
2,646
(2)
11,141
429
(627)
54
3
(634)
(1,242)
540
38
3
(1,295)
(726)
47
2
(1,972)
13,201
1,576
(95)
(325)
(35)
(650)
43
1
13,716
1,836
(293)
(407)
(37)
(1,320)
1,034
-
60
-
14,589
1,481
347
(427)
(67)
(654)
297
60
-
15,626
50
(2)
48
(10)
(1)
37
2
39
Total
Equity
13,251
1,574
(95)
(325)
(35)
(650)
43
1
13,764
1,826
(293)
(407)
(37)
(1,320)
1,034
-
60
(1)
14,626
1,483
347
(427)
(67)
(654)
297
60
-
15,665
($ in millions, except per share data)
Balance at December 31, 2011
Net income
Other comprehensive loss
Cash dividends declared:
Common stock at $0.36 per share
Preferred stock
Shares acquired for treasury
Impact of stock transactions under
stock compensation plans, net
Other
Balance at December 31, 2012
Net income
Other comprehensive loss
Cash dividends declared:
Common stock at $0.47 per share
Preferred stock
Shares acquired for treasury
Issuance of preferred stock
Redemption of preferred stock, Series G
Impact of stock transactions under
stock compensation plans, net
Other
Balance at December 31, 2013
Net income
Other comprehensive income
Cash dividends declared:
Common stock at $0.51 per share
Preferred stock
Shares acquired for treasury
Issuance of preferred stock
Impact of stock transactions under
stock compensation plans, net
Other
Balance at December 31, 2014
See Notes to Consolidated Financial Statements.
88 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 ($ in millions)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses
Depreciation, amortization and accretion
Stock-based compensation expense
Provision for deferred income taxes
Securities gains, net
Securities gains, net - non-qualifying hedges on mortgage servicing rights
Provision for (recovery of) MSR impairment
Net gains on sales of loans and fair value adjustments on loans held for sale
Net losses on disposition and impairment of bank premises and equipment
Loss on extinguishment of debt
Proceeds from sales of loans held for sale
Loans originated for sale, net of repayments
Dividends representing return on equity method investments
Gain on sales of Vantiv, Inc. shares and Vantiv, Inc. IPO
Net change in:
Trading securities
Other assets
Accrued taxes, interest and expenses
Other liabilities
Net Cash Provided by Operating Activities
Investing Activities
Sales:
Available-for-sale securities
Loans
Bank premises and equipment
Repayments / maturities:
Available-for-sale securities
Held-to-maturity securities
Purchases:
Available-for-sale securities
Bank premises and equipment
Proceeds from sales and dividends representing return of equity method investments
Net change in:
Other short-term investments
Loans and leases
Operating lease equipment
Net Cash Used in Investing Activities
Financing Activities
Net change in:
Core deposits
Certificates - $100,000 and over, including foreign office and other
Federal funds purchased
Other short-term borrowings
Dividends paid on common stock
Dividends paid on preferred stock
Proceeds from issuance of long-term debt
Repayment of long-term debt
Repurchases of treasury shares and related forward contracts
Issuance of preferred stock
Other
Net Cash Provided by Financing Activities
(Decrease) Increase in Cash and Due from Banks
Cash and Due from Banks at Beginning of Period
Cash and Due from Banks at End of Period
2014
1,483
315
414
83
79
(21)
-
65
(67)
19
-
5,477
(4,874)
42
(148)
(16)
(221)
1
(555)
2,076
5,234
147
24
2,265
20
(10,691)
(216)
279
(2,798)
(3,136)
(66)
(8,938)
6,114
(3,677)
(140)
176
(423)
(67)
6,570
(1,399)
(654)
297
(22)
6,775
(87)
3,178
3,091
2013
1,826
229
507
78
253
(21)
(13)
(192)
(622)
6
8
22,047
(19,003)
54
(336)
(131)
(672)
8
569
4,595
9,328
657
33
3,191
74
(16,216)
(274)
674
(2,695)
(4,750)
(206)
(10,184)
6,550
3,208
(618)
(4,900)
(393)
(37)
5,044
(2,225)
(1,320)
1,034
(17)
6,326
737
2,441
3,178
2012
1,574
303
531
69
271
(15)
(3)
103
(583)
21
169
22,044
(21,439)
45
(272)
(28)
4
1
(238)
2,557
2,521
275
13
4,100
36
(6,813)
(362)
393
(640)
(5,930)
(126)
(6,533)
3,529
279
555
3,041
(309)
(35)
523
(3,159)
(650)
-
(20)
3,754
(222)
2,663
2,441
$
$
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.
89 Fifth Third Bancorp
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.
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 OCI.
For equity securities, the Bancorp’s 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
Bancorp’s 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 amortized cost 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.
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 company’s ALLL,
nor does the Bancorp add to its existing ALLL as part of purchase
accounting.
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 loan’s 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 acqusition
date, increases in expected cash flows over those expected at the
acquisition date are recognized prospectively as interest income over
the remaining life of the loan. The present value of any decreases in
expected cash flows resulting directly from a change in the
contractual interest rate are recognized prospectively as a reduction
of the accretable yield. The present value of any decreases in
expected cash flows after the acquisition date as a result of credit
deterioration 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 Bancorp’s 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
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 of
accounting and not consolidated. The investments in 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.
transactions and balances have been
eliminated.
Intercompany
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 management’s
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 OCI. 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 DCF
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
90 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and Leases
When a loan is placed on nonaccrual status, the accrual of interest,
amortization of loan premium, accretion of loan discount, and
amortization/accretion of deferred net loan fees are 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 borrower’s cash flows 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 90 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 as nonaccrual unless the loan is 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. Home
equity loans and lines of credit are reported on nonaccrual status if
principal or interest has been in default for 90 days or more unless
the loan is both well secured and in the process of collection. Home
equity loans and lines of credit that have been in default for 60 days
or more are also reported on nonaccrual status if the senior lien has
been in default 120 days or more, unless the loan is both well
secured and in the process of collection. Residential mortgage,
home equity, 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 unless the loan is both well
secured and in the process of collection. Commercial and 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 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 loan’s 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 and are reasonably assured of repayment in accordance
with the contractual terms of the loan agreement, or when the loan
is both well-secured and in the process of collection.
Commercial
including those
loans on nonaccrual status,
modified in a TDR, 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 loans, home
equity loans and lines of credit and credit card loans that have
principal and interest payments that have become past due 180 days
are assessed for a charge-off to the ALLL, unless such loans are
both well-secured and in the process of collection. Home equity
loans and lines of credit are also assessed for charge-off to the
ALLL when such loans or lines of credit have become past due 120
days if the senior lien is also 120 days past due, 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 assessed for a
charge-off to the ALLL, unless such loans are both well-secured and
in the process of collection.
Restructured Loans and Leases
A loan is accounted for as a TDR if the Bancorp, for economic or
legal reasons related to the borrower’s 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 remaining principal 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. During the third quarter of 2012, the
OCC, a national bank regulatory agency,
interpretive
guidance that requires non-reaffirmed loans included in Chapter 7
bankruptcy filings to be accounted for as nonperforming TDRs and
collateral dependent loans regardless of their payment history and
capacity to pay in the future. The Bancorp’s banking subsidiary is a
state chartered bank which therefore is not subject to guidance of
the OCC. The Bancorp does not consider the bankruptcy court’s
discharge of the borrower’s debt a concession when the discharged
debt is not reaffirmed, and as such these loans are classified as
TDRs only if one or more of the previously mentioned concessions
are granted.
issued
The Bancorp measures the impairment loss of a TDR based on
the difference between the original loan’s 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. Commercial loans and credit
card loans modified as part of a TDR are maintained on accrual
status provided there is a sustained payment history of six-months
or greater prior to the modification in accordance with the modified
91 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
remaining contractual payments under
terms and all
the
modified terms are reasonably assured of collection. TDRs of
commercial loans and credit cards that do not have a sustained
payment history of six months or greater in accordance with their
modified terms remain on nonaccrual status until a six-month
payment history is sustained. In certain cases, commercial TDRs on
nonaccrual status may be 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 and Leases
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.
Impaired loans generally consist of nonaccrual loans and leases,
loans modified in a TDR and loans over $1 million that are
currently on accrual status and not yet modified in a TDR, but for
which the Bancorp has determined that it is probable that it will
grant a payment concession in the near term due to the borrower’s
financial difficulties. 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
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
Bancorp’s methodology
loans and
identifying
determination of the need for a loss accrual.
in years after the restructuring
impaired
impaired
for
Loans Held for Sale
Loans held for sale primarily represent conforming fixed-rate
residential mortgage loans originated or acquired with the intent to
sell in the secondary market and jumbo residential mortgage loans,
commercial loans, other residential mortgage loans and other
consumer loans that management has the intent 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 for
which the fair value election has been made is estimated based upon
mortgage-backed securities prices and spreads to those prices or, for
certain ARM
incorporate the
loans, DCF models that may
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.
intent
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,
thereafter, reported within the Bancorp’s residential mortgage class
of portfolio loans and leases. In such cases, the residential mortgage
to sell residential mortgage
Management’s
92 Fifth Third Bancorp
loans will continue to be measured at fair value, which is based on
mortgage-backed securities prices, interest rate risk and an internally
developed credit component.
Loans held for sale are placed on nonaccrual status consistent
with the Bancorp’s 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 for impairment 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
include commercial, residential
Bancorp’s portfolio segments
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 portfolio
segment include home equity, automobile, credit card, and other
consumer loans and leases. For an analysis of the Bancorp’s ALLL
by portfolio segment and credit quality information by class, refer to
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 Bancorp’s
review of the historical credit loss experience and such factors that,
in management’s judgment, deserve consideration under existing
economic conditions in estimating probable credit losses. The
includes a
Bancorp’s strategy
combination of conservative exposure limits significantly below
legal lending limits and conservative underwriting, documentation
and
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.
risk management
standards. The
for credit
collections
strategy
also
The Bancorp’s 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
in estimating and
measuring losses when evaluating allowances for individual loans or
pools of loans.
to recognize
imprecision
the
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 guarantor’s liquidity and willingness to
cooperate, the loan structure, and other factors when evaluating
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 borrower’s
the Bancorp’s evaluation of
management. When individual loans are impaired, allowances are
determined based on management’s estimate of the borrower’s
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 loan’s 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 management’s 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 Bancorp’s internal credit reviewers.
The Bancorp’s 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 Bancorp’s
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 Bancorp’s portfolio segments.
liabilities
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 the Consolidated Balance Sheets. The
in other
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’s
ALLL, as discussed above. Net adjustments to the reserve for
unfunded commitments are included in other noninterest expense
in the Consolidated Statements of Income.
is recognized
Loan Sales and Securitizations
The Bancorp periodically sells loans through either securitizations
or individual loan sales in accordance with its investment policies.
The sold loans are removed from the balance sheet and a net gain or
loss
in the Bancorp’s Consolidated Financial
Statements at the time of sale. The Bancorp typically isolates the
loans through the use of a VIE and thus 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. 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. Refer to Note 10 for further
information on consolidated and non-consolidated VIEs.
temporary
The Bancorp’s loan sales and securitizations are generally
structured with servicing retained. As a result, servicing rights
resulting from residential mortgage 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 in the Consolidated
Statements of Income. Servicing rights are assessed for impairment
monthly, based on fair value, with
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, and the weighted-average coupon, 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.
Reserve for 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
management’s estimate of losses based on a combination of factors.
The Bancorp’s estimation process requires management to
make subjective and complex judgments about matters that are
inherently uncertain, such as future demand expectations, economic
factors and the specific characteristics of the loans subject to
repurchase. Such factors incorporate historical investor audit and
repurchase demand rates, appeals success rates, historical loss
93 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
severity, and any additional information obtained from the GSEs
regarding future mortgage repurchase and file request criteria. At the
time of a loan sale, the Bancorp records a representation and
warranty reserve at the estimated fair value of the Bancorp’s
guarantee and continually updates the reserve during the life of the
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.
Legal Contingencies
The Bancorp is party to numerous claims and lawsuits as well as
threatened or potential actions or claims concerning matters arising
from the conduct of its business activities. The outcome of claims
or litigation and the timing of ultimate resolution are inherently
difficult to predict, and significant judgment may be required in the
determination of both the probability of loss and whether the
amount of the loss is reasonably estimable. The Bancorp’s estimates
are subjective and are based on the status of legal and regulatory
proceedings, the merit of the Bancorp’s defenses and consultation
with internal and external legal counsel. 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. This reserve is included
in Other Liabilities in the Consolidated Balance Sheets and is
adjusted from time to time as appropriate to reflect changes in
circumstances. Legal expenses are recorded in other noninterest
expense in the Consolidated Statements of Income.
income
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
tax purposes.
is used for
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. Whenever events or
changes in circumstances dictate, the Bancorp tests its long-lived
assets for impairment by determining whether the sum of the
estimated undiscounted future cash flows attributable to a long-lived
asset or asset group is less than the carrying amount of the long-
through a probability-weighted
lived asset or asset group
approach. In the event the carrying amount of the long-lived asset
or asset group is not recoverable, an impairment loss is measured as
the amount by which the carrying amount of the long-lived asset or
asset group exceeds its fair value. Maintenance, repairs and minor
the
improvements are charged
Consolidated Statements of Income as incurred.
to noninterest expense
in
the Bancorp designates
Derivative Financial Instruments
The Bancorp accounts for its derivatives as either assets or liabilities
measured at fair value through adjustments to AOCI and/or current
earnings, as appropriate. On the date the Bancorp enters into a
derivative contract,
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 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 AOCI and subsequently
reclassified to net income in the same period(s) that the hedged
94 Fifth Third Bancorp
impacts net
transaction
income. For free-standing derivative
instruments, changes in fair values are reported in current period net
income.
the
relationship between
Prior to entering into a hedge transaction, the Bancorp
formally documents
the hedging
instrument and the hedged item, as well as the risk management
objective and strategy for undertaking the hedge transaction. This
process includes linking the derivative instrument designated as a
fair value or cash flow hedge to a specific asset or liability on the
balance sheet or to specific forecasted transactions and the risk
being hedged, 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.
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 the net deferred tax asset or liability is
reported in other assets or accrued taxes, interest and expenses 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 management’s
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, such as the limitation on the use of any net
operating losses, to determine whether realization is more likely
than not.
judgment
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 period’s income tax expense and can be significant to the
operating results of the Bancorp. Any interest and penalties incurred
in connection with income taxes are recorded as a component of
income tax expense in the Consolidated Financial Statements. For
additional information on income taxes, refer to 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, the exercise of dilutive stock-based awards and warrants and
the dilutive effect of the settlement of outstanding forward
contracts.
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. Goodwill is required to be tested for
impairment at the Bancorp’s 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 unit’s carrying amount of
goodwill exceeds its implied fair value. In testing goodwill for
impairment, U.S. GAAP 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.
In this qualitative assessment, the Bancorp evaluates events and
circumstances which may include, but are not limited to, the general
economic environment, banking industry and market conditions,
the overall financial performance of the Bancorp, the performance
of the Bancorp’s common stock, the key financial performance
metrics of the Bancorp’s reporting units, and events affecting the
reporting units. If, after assessing the totality of events and
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
test would be
unnecessary. However, if the Bancorp concludes otherwise, it would
then be required to perform the first step (Step 1) of the goodwill
impairment test, and continue to the second step (Step 2), if
necessary. Step 1 of the goodwill impairment test 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, Step 2 of the goodwill impairment test is performed to
measure the amount of impairment loss, if any.
impairment
two-step
the
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. As none of the
Bancorp’s reporting units are publicly traded, individual reporting
unit fair value determinations cannot be directly correlated to the
Bancorp’s stock price. To determine the fair value of a reporting
unit, the Bancorp employs an income-based approach, utilizing the
reporting unit’s forecasted cash flows (including a terminal value
approach to estimate cash flows beyond the final year of the
forecast) and the reporting unit’s 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
Bancorp’s 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 Bancorp’s 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 unit’s 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. A recognized impairment loss cannot exceed the
carrying amount of that goodwill and cannot be reversed in future
periods even if the fair value of the reporting unit subsequently
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 does it recognize previously unrecognized intangible assets in
the Consolidated Financial Statements as a result of this assignment
process. Refer to Note 8 for further information regarding the
Bancorp’s 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). A
financial instrument’s categorization within the fair value hierarchy
is based upon the lowest level of input that is significant to the
instrument’s 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
95 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
derived principally from or corroborated by observable
market data by correlation or other means.
is
little,
reflect
Level 3 – Unobservable inputs for the asset or liability for
if any, market activity at the
which there
measurement date. Unobservable
the
inputs
Bancorp’s 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 Bancorp’s own
financial data such as internally developed pricing models
and DCF methodologies, as well as instruments for which
the fair value determination requires significant management
judgment.
The Bancorp’s 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
for
reasonableness. Refer to Note 27 for further information on fair
value measurements.
review and assessments
trades and overall
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 policy’s respective cash surrender value, with
changes recorded in other noninterest income in the Consolidated
Statements of Income.
lists, non-compete
Other intangible assets consist of core deposit intangibles,
customer
cardholder
relationships. Other intangible assets are amortized on either a
straight-line or an accelerated basis over their estimated useful lives.
The Bancorp reviews other intangible assets for impairment
whenever events or changes in circumstances indicate that carrying
amounts may not be recoverable.
agreements
and
Stock-Based Compensation
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. All awards, both those with cliff vesting and
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 the 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 Bancorp’s stock-based compensation plans,
refer to Note 24.
Pension Plans
The Bancorp uses an expected long-term rate of return applied to
the fair market value of assets as of the beginning of the year and
the expected cash flow during the year for calculating the expected
investment return on all pension plan assets. Amortization of the
net gain or loss resulting from experience different from that
assumed and from changes in assumptions (excluding asset gains
and losses not yet reflected in market-related value) is included as a
component of net periodic benefit cost. If, as of the beginning of
the year, that net gain or loss exceeds 10% of the greater of the
projected benefit obligation and the market-related value of plan
assets, the amortization is that excess divided by the average
remaining service period of participating employees expected to
receive benefits under the plan. The Bancorp uses a third-party
actuary to compute the remaining service period of participating
employees. This period reflects expected turnover, pre-retirement
mortality, and other applicable employee demographics.
Other
Securities and other property held by Fifth Third Investment
Advisors, a division of the Bancorp’s banking subsidiary, in a
fiduciary or agency capacity are not included in the Consolidated
96 Fifth Third Bancorp
Securities sold under repurchase agreements are accounted for
as secured borrowings and included in other short-term borrowings
in the Consolidated Balance Sheets at the amounts at 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
Obligations Resulting from Joint and Several Liability Arrangements for
Which the Total Amount of the Obligation is Fixed at the Reporting Date
In February 2013, the FASB issued amended guidance relating to
the measurement of obligations resulting from joint and several
liability arrangements for which the total amount under the
arrangement is fixed at the reporting date. For the total amount of
an obligation under an arrangement to be considered fixed at the
reporting date, there can be no measurement uncertainty relating to
the total amount of the obligation. The obligation resulting from
joint and several liability arrangements would be measured initially
as the sum of 1) the amount the Bancorp has agreed to pay on the
basis of its arrangement among its co-obligors and 2) any additional
amount the Bancorp expects to pay on behalf of its co-obligors.
The amended guidance also would require the Bancorp to disclose
the nature and amount of the obligation as well as information
about the risks that such obligations pose to future cash flows. The
amended guidance was effective for reporting periods beginning
after December 15, 2013 and was applied retrospectively to all prior
periods presented for those obligations resulting from joint and
several liability arrangements that exist at the beginning of the fiscal
year of adoption. The Bancorp adopted the amended guidance on
January 1, 2014 and the adoption did not have a material impact on
the Bancorp’s Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
In July 2013, the FASB issued amended guidance to clarify that an
unrecognized tax benefit, or a portion of an unrecognized tax
benefit, should be presented in the financial statements as a
reduction to a deferred tax asset for a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward, except
as follows. To the extent a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward is not available at the reporting
date under the tax law of the applicable jurisdiction to settle any
income taxes that would result from the disallowance of a tax
position or the tax law of the applicable jurisdiction does not require
the entity to use, and the entity does not intend to use, the deferred
tax asset for such purpose, the unrecognized tax benefit should be
presented in the financial statements as a liability and should not be
combined with deferred tax assets. The assessment of whether a
deferred tax asset is available is based on the unrecognized tax
benefit and deferred tax asset that exist at the reporting date and
should be made presuming disallowance of the tax position at the
reporting date. The amended guidance was effective for fiscal years,
those years, beginning after
and
December 15, 2013, with early adoption permitted. The Bancorp
adopted the amended guidance on January 1, 2014 and the adoption
of the amended guidance did not have a material impact on the
Bancorp’s Consolidated Financial Statements.
interim periods within
Accounting for Investments in Qualified Affordable Housing Projects
In January 2014, the FASB issued amended guidance which would
permit the Bancorp to make an accounting policy election to
account for its investments in qualified affordable housing projects
using a proportional amortization method if certain conditions are
met and to present the amortization as a component of income tax
expense. The amended guidance would be applied retrospectively to
all periods presented and is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2014, with
early adoption permitted. Regardless of the policy election, the
amended guidance requires disclosures to enable the users of the
financial statements to understand the nature of the Bancorp’s
investments in qualified affordable housing projects and the effect
of the measurement of the investments in qualified affordable
housing projects and the related tax credits on the Bancorp’s
financial position and results of operation.
The Bancorp adopted the amended guidance on January 1,
2015, and did not make an accounting policy election to apply the
proportional amortization method for its investments in qualified
affordable housing projects. Therefore, the adoption did not have
an impact on the Bancorp’s Consolidated Financial Statements.
Reclassification of Residential Real Estate Collateralized Consumer Mortgage
Loans upon Foreclosure
In January 2014, the FASB issued amended guidance that clarifies
when a creditor should be considered to have received physical
possession of residential real estate property collateralizing a
consumer mortgage loan such that the loan receivable should be
derecognized and the real estate property recognized. The amended
guidance clarifies that an in substance repossession or foreclosure
occurs, and a creditor is considered to have received physical
possession of residential real estate property collateralizing a
consumer mortgage loan, upon either (1) the creditor obtaining legal
title to the residential real estate property upon completion of a
foreclosure or (2) the borrower conveying all interest in the
residential real estate property to the creditor to satisfy that loan
through completion of a deed in lieu of foreclosure or through a
similar legal agreement. In addition, the amended guidance requires
interim and annual disclosures of both (1) the amount of foreclosed
residential real estate property held by the creditor and (2) the
recorded investment in consumer mortgage loans collateralized by
residential real estate property that are in the process of foreclosure
according to local requirements of the applicable jurisdiction. The
amended guidance may be applied prospectively or through a
modified retrospective approach and is effective for fiscal years, and
interim periods within those years, beginning after December 15,
2014, with early adoption permitted. The Bancorp adopted the
amended guidance on January 1, 2015 and the adoption of the
amended guidance did not have a material impact on the Bancorp’s
Consolidated Financial Statements.
Reporting Discontinued Operations and Disclosures of Disposals of
Components of an Entity
In April 2014, the FASB issued amended guidance that changes the
criteria for reporting discontinued operations. The amended
guidance requires a disposal of a component of an entity or a group
of components of an entity to be reported in discontinued
operations if the disposal represents a strategic shift that has (or will
have) a major effect on an entity’s operations and financial results
when any of the following occurs: 1) the component of an entity or
group of components of an entity meets the criteria to be classified
as held for sale; 2) the component of an entity or group of
components of an entity is disposed of by sale; or 3) the component
of an entity or group of components of an entity is disposed of
other than by sale (for example, by abandonment or in a distribution
to owners in a spinoff). The amended guidance requires an entity to
present, for each comparative period, the assets and liabilities of a
disposal group that includes a discontinued operation separately in
the asset and liability sections, respectively, of the statement of
financial position, as well as additional disclosures about
discontinued operations. The amended guidance is to be applied
prospectively for 1) all disposals (or classifications as held for sale)
of components of an entity that occur within annual periods
beginning on or after December 15, 2014, and interim periods
within those years; and 2) all businesses or nonprofit activities that,
on acquisition, are classified as held for sale that occur within annual
periods beginning on or after December 15, 2014, and interim
periods within those years. Early adoption is permitted, but only for
disposals (or classifications as held for sale) that have not been
reported in financial statements previously issued. The Bancorp
adopted the amended guidance on January 1, 2015 and the adoption
of the amended guidance did not have a material impact on the
Bancorp’s Consolidated Financial Statements.
Revenue from Contracts with Customers
In May 2014, the FASB issued amended guidance on revenue
recognition from contracts with customers. The standard outlines a
single comprehensive model for entities to use in accounting for
revenue arising from contracts with customers and supersedes most
contract revenue recognition guidance, including industry-specific
guidance. The core principle of the amended guidance is that an
entity should recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange
for those goods or services. The amended guidance is effective for
annual reporting periods beginning after December 15, 2016, and
interim periods within the reporting period, and should be applied
either retrospectively to each prior reporting period presented or
retrospectively with the cumulative effect of initially applying the
amendments recognized at the date of initial application. Early
adoption is prohibited. The Bancorp is currently in the process of
97 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
evaluating the impact of the amended guidance on its Consolidated
Financial Statements.
for a
transfer of a
transactions, and
Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures
In June 2014, the FASB issued amended guidance that changes the
accounting for repurchase-to-maturity transactions to secured
borrowing accounting. The amended guidance also requires separate
financial asset executed
accounting
contemporaneously with a repurchase agreement with the same
counterparty, which will result in secured borrowing accounting for
the repurchase agreement. The amended guidance requires
disclosures for certain transactions comprising: 1) a transfer of a
financial asset accounted for as a sale and 2) an agreement with the
same transferee entered into in contemplation of the initial transfer
that results in the transferor retaining substantially all of the
exposure to the economic return on the transferred financial asset
throughout the term of the transaction. The amended guidance also
requires new disclosures for repurchase agreements, securities
lending
transactions
accounted for as secured borrowings. The amended guidance is
effective for fiscal years, and interim periods within those years,
beginning after December 15, 2014, with early adoption prohibited.
Changes in accounting for transactions outstanding on the effective
date should be presented as a cumulative-effect adjustment to
retained earnings as of the beginning of the period of adoption. The
disclosures for certain transactions accounted for as a sale are
required to be presented for interim and annual periods beginning
after December 15, 2014, and the disclosures for repurchase
agreements, securities lending transactions, and repurchase-to-
maturity transactions accounted for as secured borrowings are
required to be presented for annual periods beginning after
December 15, 2014, and interim periods beginning after March 15,
2015. The Bancorp adopted the amended guidance on January 1,
2015 and the adoption of the amended guidance did not have a
material
the Bancorp’s Consolidated Financial
Statements.
repurchase-to-maturity
impact on
Accounting for Share-Based Payments When the Terms of the Award Provide
That a Performance Target Could be Achieved after the Requisite Service
Period
In June 2014, the FASB issued amended guidance which clarifies
that a performance target that affects vesting and can be achieved
after the requisite service period be treated as a performance
condition. The amended guidance provides that an entity should
apply existing guidance as it relates to awards with performance
conditions that affect vesting to account for such awards. As such,
the performance target should not be reflected in estimating the
grant-date fair value of the award. Compensation cost should be
recognized in the period in which it becomes probable that the
performance target will be achieved and should represent the
compensation cost attributable to the period(s) for which the
requisite service has already been rendered. If the performance
target becomes probable of being achieved before the end of the
requisite service period, the remaining unrecognized compensation
cost should be recognized prospectively over the remaining requisite
service period. The total amount of compensation cost recognized
during and after the requisite service period should reflect the
number of awards that are expected to vest and should be adjusted
to reflect those awards that ultimately vest. The requisite service
period ends when the employee can cease rendering service and still
be eligible to vest in the award if the performance target is achieved.
The amended guidance is effective for annual periods, and interim
periods within those annual periods, beginning after December 15,
2015, with early adoption permitted. The amended guidance may be
adopted either prospectively to all awards granted or modified after
98 Fifth Third Bancorp
the effective date or retrospectively to all awards with performance
targets that are outstanding as of the beginning of the earliest annual
period presented in the financial statements and to all new or
modified awards thereafter. If retrospective transition is adopted,
the cumulative effect of applying the amended guidance as of the
beginning of the earliest annual period presented in the financial
statements should be recognized as an adjustment to the opening
retained earnings balance at that date. The amended guidance is not
expected to have a material impact on the Bancorp’s Consolidated
Financial Statements.
Measuring the Financial Assets and Financial Liabilities of a Consolidated
Collateralized Financing Entity
In August 2014, the FASB issued amended guidance that provides
an alternative to ASC Topic 820: Fair Value Measurement for
measuring the financial assets and financial liabilities of a CFE, such
as a collateralized debt obligation or a collateralized loan obligation
entity consolidated as a VIE when a) all of the financial assets and
the financial liabilities of that CFE are measured at fair value in the
consolidated financial statements and b) the changes in the fair
values of those financial assets and financial liabilities are reflected
in earnings. If elected, the measurement alternative would allow the
Bancorp to measure both the financial assets and the financial
liabilities of the CFE by using the more observable of the fair value
of the financial assets or the fair value of the financial liabilities and
to eliminate any measurement difference. When the measurement
alternative is not elected for a consolidated CFE within the scope of
this amended guidance, the amendments clarify that 1) the fair value
of the financial assets and the fair value of the financial liabilities of
the consolidated CFE should be measured using the requirements
of Topic 820 and 2) any difference in the fair value of the financial
assets and the fair value of the financial liabilities of that
consolidated CFE should be reflected in earnings and attributed to
the Bancorp in the Consolidated Statements of Income. The
amended guidance may be applied retrospectively or through a
modified retrospective approach and is effective for fiscal years, and
interim periods within
fiscal years, beginning after
December 15, 2015. The amended guidance is not expected to have
a material
impact on the Bancorp’s Consolidated Financial
Statements.
those
Classification of Certain Government-Guaranteed Mortgage Loans upon
Foreclosure
In August 2014, the FASB issued amended guidance clarifying the
classification of certain foreclosed mortgage loans that are either full
or partially guaranteed under government programs. The amended
guidance requires that a mortgage loan be derecognized and that a
separate other receivable be recognized upon foreclosure if the
following conditions are met: 1) the loan has a government
guarantee that is not separable from the loan before foreclosure; 2)
at the time of foreclosure, the creditor has the intent to convey the
real estate property to the guarantor and make a claim on the
guarantee, and the creditor has the ability to recover under that
claim; and 3) at the time of foreclosure, any amount of the claim
that is determined on the basis of the fair value of the real estate is
fixed. Upon foreclosure, the separate other receivable would be
measured based on the amount of the loan balance (principal and
interest) expected to be recovered from the guarantor. The
amended guidance may be applied prospectively or through a
modified retrospective approach and is effective for fiscal years, and
interim periods within those years, beginning after December 15,
2014, with early adoption permitted. The Bancorp adopted the
amended guidance on January 1, 2015 and the adoption of the
amended guidance did not have a material impact on the Bancorp’s
Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pushdown Accounting
In November 2014, the FASB issued amended guidance on whether
and at what threshold an acquired entity that is a business or
nonprofit activity can apply pushdown accounting in its separate
financial statements upon the occurrence of an event in which an
acquirer (an individual or an entity) obtains control of the acquired
entity. The amended guidance provides that an acquired entity may
elect the option to apply pushdown accounting in the reporting
period in which the change-in-control event occurs. An acquired
entity should determine whether to elect to apply pushdown
accounting for each individual change-in-control event in which an
acquirer obtains control of the acquired entity. If pushdown
accounting is not applied in the reporting period in which the
change-in-control event occurs, an acquired entity will have the
option to elect to apply pushdown accounting in a subsequent
reporting period to the acquired entity’s most recent change-in-
control event. An election to apply pushdown accounting in a
reporting period after the reporting period in which the change-in-
control event occurred should be considered a change in accounting
principle. If pushdown accounting is applied to an individual
change-in-control event, that election is irrevocable. If an acquired
entity elects the option to apply pushdown accounting in its separate
financial statements, it should disclose information in the current
reporting period that enables users of financial statements to
evaluate the effect of pushdown accounting. The amended guidance
was effective upon issuance, and the adoption of the amended
guidance did not have a material impact on the Bancorp’s
Consolidated Financial Statements.
Determining Whether the Host Contract in a Hybrid Financial Instrument
Issued in the Form of a Share is More Akin to Debt or Equity
In November 2014, the FASB issued amended guidance that
clarifies how current GAAP should be interpreted in evaluating the
economic characteristics and risks of a host contract in a hybrid
financial instrument that is issued in the form of a share.
Specifically, the amendments clarify that an entity should consider
all relevant terms and features—including the embedded derivative
features being evaluated for bifurcation—in evaluating the nature of
the host contract. Furthermore, the amendments clarify that no
single term or feature would necessarily determine the economic
characteristics and risks of the host contract. Rather, the nature of
the host contract depends upon the economic characteristics and
risks of the entire hybrid financial instrument. The amended
guidance is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2015, with early
adoption permitted. The effects of initially adopting the amended
guidance should be applied on a modified retrospective basis to
existing hybrid financial instruments issued in the form of a share as
of the beginning of the fiscal year for which the amendments are
effective and shall be reported as a cumulative-effect adjustment
directly to retained earnings as of the beginning of the year of
adoption. The amended guidance is not expected to have a material
impact on the Bancorp’s Consolidated Financial Statements.
Simplifying Income Statement Presentation by Eliminating the Concept of
Extraordinary Items
In January 2015, the FASB issued amended guidance that eliminates
the concept of extraordinary items from GAAP. Presently, an event
or transaction is presumed to be an ordinary and usual activity of a
reporting entity unless evidence clearly supports its classification as
an extraordinary item, which must be both unusual in nature and
infrequent in occurrence. An entity was required to segregate the
extraordinary item from the results of ordinary operations and show
the item separately in the income statement, net of tax, after income
from continuing operations. An entity was also required to disclose
applicable income taxes and either present or disclose earnings-per-
share data applicable to the extraordinary item. The presentation
and disclosure guidance for items that are unusual in nature or occur
infrequently will be retained and will be expanded to include items
that are both unusual in nature and infrequently occurring. The
amended guidance is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2015, with
early adoption permitted provided that the guidance is applied from
the beginning of the fiscal year of adoption. The amended guidance
may be applied prospectively or retrospectively to all periods
presented in the financial statements. The amended guidance is not
expected to have a material impact on the Bancorp’s Consolidated
Financial Statements
Amendments to the Consolidation Analysis
In February 2015, the FASB issued amended guidance that changes
the analysis a reporting entity must perform to determine whether it
should consolidate certain types of legal entities. The amended
guidance 1) modifies the evaluation of whether limited partnerships
and similar legal entities are VIEs or voting interest entities; 2)
eliminates the presumption that a general partner should consolidate
a limited partnership; 3) affects the consolidation analysis of
reporting entities that are involved with VIEs, particularly those that
have fee arrangements and related party relationships; and 4)
provides a scope exception from consolidation guidance for
reporting entities that are required to comply with or operate in
accordance with requirements that are similar to those in Rule 2a-7
of the Investment Company Act of 1940 for registered money
market funds. The amended guidance is effective for fiscal years,
and
those years, beginning after
December 15, 2015, with early adoption permitted. The amended
guidance may be applied using either a retrospective approach or a
modified
cumulative-effect
adjustment to equity as of the beginning of the fiscal year of
adoption. The Bancorp is currently in the process of evaluating the
impact of adopting the amended guidance on the Bancorp’s
Consolidated Financial Statements..
interim periods within
approach with
retrospective
a
99 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
Cash payments:
Interest
Income taxes
Noncash Investing and Financing Activities:
Portfolio loans to loans held for sale
Loans held for sale to portfolio loans
Portfolio loans to OREO
Loans held for sale to OREO
Capital lease obligation
(cid:3)
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 reserve requirement is calculated based on a two-week average
of daily 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, 2014 and
2013, the Bancorp’s banking subsidiary reserve requirement was
$1.8 billion and $1.6 billion, respectively. Vault cash was not
sufficient to meet the total reserve requirement; therefore, as of
December 31, 2014 and 2013, the Bancorp’s banking subsidiary
satisfied the remaining reserve requirement with $1.0 billion and
$942 million, respectively, of the Bancorp’s total deposit at the FRB.
The noninterest-bearing portion of the Bancorp’s deposit at the
FRB is held in cash and due from banks in the Consolidated
Balance Sheets while the interest bearing portion is held in other
short-term investments in the Consolidated Balance Sheets.
The dividends paid by the Bancorp’s banking subsidiary are
subject to regulations and limitations prescribed by state and federal
supervisory agencies. The Bancorp’s banking subsidiary paid the
Bancorp’s nonbank subsidiary holding company, which in turn paid
the Bancorp $1.1 billion and $859 million in dividends during the
years ended December 31, 2014 and 2013, respectively.
In 2011, the FRB adopted the capital plan rule, which requires
BHCs with consolidated assets of $50 billion or more to submit
annual capital plans to the FRB for review. Under the rule, these
capital plans must include detailed descriptions of the following: the
BHC’s internal processes for assessing capital adequacy; the policies
governing capital actions such as common stock
issuances,
dividends, and share repurchases; and all planned capital actions
over a nine-quarter planning horizon. Further, each BHC must also
report to the FRB the results of stress tests conducted by the BHC
under a number of scenarios that assess the sources and uses of
capital under baseline and stressed economic scenarios. The FRB
launched the 2014 stress testing program and CCAR on November
1, 2013, with firm submissions of stress test results and capital plans
due to the FRB on January 6, 2014, which the Bancorp submitted as
required.
review of
The FRB’s
the capital plan assessed
the
comprehensiveness of the capital plan, the reasonableness of the
the capital plan.
the analysis underlying
assumptions and
Additionally, the FRB reviewed the robustness of the capital
adequacy process, the capital policy and the Bancorp’s ability to
maintain capital above the minimum regulatory capital ratios and
above a Tier I common ratio of five percent on a pro forma basis
under expected and stressful conditions throughout the planning
horizon. The FRB assessed the Bancorp’s strategies for addressing
100 Fifth Third Bancorp
$
2014
429
550
855
31
145
2
15
2013
406
535
641
44
204
4
-
2012
524
383
62
77
272
23
-
proposed revisions to the regulatory capital framework agreed upon
by the BCBS and requirements arising from the DFA.
On March 26, 2014, the FRB announced it had completed the
2014 CCAR. For BHCs that proposed capital distributions in their
plans, the FRB either objected to the plan or provided a non-
objection whereby the FRB permitted the proposed 2014 capital
distributions. The FRB indicated to the Bancorp that it did not
object to the following proposed capital actions for the period
beginning April 1, 2014 and ending March 31, 2015:
(a) The potential increase in the quarterly common stock
dividend to $0.13 per share;
(b) The potential repurchase of common shares in an amount
up to $669 million;
(c) The additional ability to repurchase shares in the amount
of any after-tax gains from the sale of Vantiv, Inc.
common stock; and
(d) The issuance of $300 million in preferred stock.
As contemplated by the 2014 CCAR, during the second quarter
of 2014, the Bancorp increased the quarterly common stock
dividend from $0.12 to $0.13 per share, entered into a $150 million
accelerated share repurchase transaction, and
issued 300,000
depositary shares of non-cumulative perpetual preferred stock for
net proceeds of $297 million. Additionally, during the third and
fourth quarters of 2014, the Bancorp entered into accelerated share
repurchase
transactions of $225 million and $180 million,
respectively.
Additionally, as a CCAR institution, the Bancorp is required to
disclose the results of its company-run stress test under the
supervisory severely adverse scenario, and to provide information
related to the types of risk included in its stress testing; a general
description of the methodologies used; estimates of certain financial
results and pro forma capital ratios; and an explanation of the most
significant causes of changes in regulatory capital ratios. On March
26, 2014 the Bancorp publicly disclosed the results of its company-
run stress test as required by the DFA stress testing rules.
The BHCs that participated in the 2014 CCAR, including the
Bancorp, are required to conduct mid-cycle company-run stress
tests using data as of March 31, 2014. The stress tests must be based
on three BHC defined scenarios – baseline, adverse and severely
adverse. As required, the Bancorp reported the mid-cycle stress test
results to the FRB on July 7, 2014. These results represented
estimates of the Bancorp’s results from the second quarter of 2014
through the second quarter of 2016 under the severely adverse
scenario, which is considered highly unlikely to occur.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The FRB launched the 2015 stress testing program and CCAR
on October 23, 2014. The stress testing results and capital plan were
submitted by the Bancorp to the FRB on January 5, 2015.
The FRB expects to release summary results of the 2015 stress
testing program and CCAR in March of 2015. The results will
include supervisory projections of capital ratios, losses and revenues
under the supervisory adverse and supervisory severely adverse
scenarios. The FRB will also issue an objection or non-objection to
each participating institution’s capital plan submitted under CCAR.
Additionally, as a CCAR institution, the Bancorp will be required to
publicly disclose the results of its company run stress test as
required by the DFA, within 15 days of the date the FRB discloses
the results of its DFA supervisory stress test.
4. SECURITIES
The following table provides the amortized cost, fair value and unrealized gains and losses for the major categories of the available-for-sale and
other and held-to-maturity securities portfolios as of December 31:
2014
2013
Amortized Unrealized Unrealized
Gains
Losses
Cost
$
1,545
185
87
7
-
-
Fair
Value
1,632
192
Amortized Unrealized Unrealized
Gains
Losses
Cost
1,549
187
121
5
-
-
Fair
Value
1,670
192
($ in millions)
Available-for-sale and other:
U.S. Treasury and federal agencies
Obligations of states and political subdivisions
Mortgage-backed securities:
Agency residential mortgage-backed securities(a)
Agency commercial mortgage-backed securities
Non-agency commercial mortgage-backed securities
11,968
4,465
1,489
1,324
701
$ 21,677
437
101
61
40
3
736
(1)
(1)
-
(2)
(1)
(5)
12,404
4,565
1,550
1,362
703
22,408
12,294
-
1,368
2,146
865
18,409
140
-
28
48
5
347
(150)
-
(1)
(7)
(1)
(159)
12,284
-
1,395
2,187
869
18,597
Asset-backed securities and other debt securities
Equity securities(b)
Total
Held-to-maturity:
Obligations of states and political subdivisions
Asset-backed securities and other debt securities
Total
(a) Includes interest-only mortgage-backed securities of $175 and $262 as of December 31, 2014 and 2013, respectively, recorded at fair value with fair value changes recorded in securities gains, net and
186
1
187
186
1
187
207
1
208
207
1
208
-
-
-
-
-
-
-
-
-
-
-
-
$
$
securities gains, net – non-qualifying hedges on mortgage servicing rights in the Consolidated Statements of Income.
(b) Equity securities consist of FHLB and FRB restricted stock holdings of $248 and $352, respectively, at December 31, 2014 and, $402 and $349, respectively, at December 31, 2013, that are
carried at cost, and certain mutual fund and equity security holdings.
The following table presents realized gains and losses that were recognized in income from available-for-sale securities for the years ended
December 31:
($ in millions)
Realized gains
Realized losses
OTTI
Net realized gains (losses)(a)
(a) Excludes net losses on interest-only mortgage-backed securities of $17 for the year ended December 31, 2014 and net gains on interest-only mortgage-backed securities of $129 for the year ended
77
(102)
(74)
(99)
70
(9)
(24)
37
75
(2)
(58)
15
2012
2013
2014
$
$
December 31, 2013.
Trading securities totaled $360 million as of December 31, 2014,
compared to $343 million at December 31, 2013. Gross realized
gains on trading securities were $4 million, $1 million and $2 million
for the years ended December 31, 2014, 2013 and 2012,
respectively. Gross realized losses on trading securities were
immaterial to the Bancorp for the years ended December 31, 2014,
2013 and 2012. Net unrealized losses on trading securities were $3
million at December 31, 2014 and net unrealized gains on trading
securities were $3 million and $1 million at December 31, 2013 and
2012, respectively.
At December 31, 2014 and 2013 securities with a fair value of
$14.2 billion and $11.6 billion, respectively, were pledged to secure
borrowings, public deposits, trust funds, derivative contracts and for
other purposes as required or permitted by law.
101 Fifth Third Bancorp
The expected maturity distribution of the Bancorp’s mortgage-backed securities and the contractual maturity distribution of the Bancorp’s available-
for-sale and other and held-to-maturity securities as of December 31, 2014 are shown in the following table:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Available-for-Sale and Other
Held-to-Maturity
($ in millions)
Debt securities:(a)
Less than 1 year
1-5 years
5-10 years
Over 10 years
Equity securities
Total
(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.
168
6,583
12,784
1,441
701
21,677
169
6,841
13,190
1,505
703
22,408
Amortized Cost
Fair Value
$
$
148
21
17
1
-
187
Amortized Cost
Fair Value
148
21
17
1
-
187
The following table provides the fair value and gross unrealized losses on available-for-sale and other 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:
($ in millions)
2014
Agency residential mortgage-backed securities
Agency commercial mortgage-backed securities
Asset-backed securities and other debt securities
Equity securities
Total
2013
Agency residential mortgage-backed securities
Non-agency commercial mortgage-backed securities
Asset-backed securities and other debt securities
Equity securities
Total
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
$
$
$
73
355
286
-
714
7,221
168
427
33
7,849
(1)
(1)
(1)
-
(3)
(150)
(1)
(4)
(1)
(156)
-
-
74
30
104
1
28
104
4
137
-
-
(1)
(1)
(2)
-
-
(3)
-
(3)
73
355
360
30
818
7,222
196
531
37
7,986
(1)
(1)
(2)
(1)
(5)
(150)
(1)
(7)
(1)
(159)
Other-Than-Temporary Impairments
The Bancorp recognized $24 million, $74 million and $58 million of
OTTI on its available-for-sale and other debt securities, included in
securities gains, net and securities gains, net – non-qualifying hedges
on mortgage servicing rights, in the Bancorp’s Consolidated
Statements of Income during the years ended December 31, 2014,
2013 and 2012, respectively. The Bancorp did not recognize OTTI
on any of its available-for-sale equity securities or held-to-maturity
debt securities for the years ended December 31, 2014, 2013 and
2012. Less than one percent of unrealized losses in the available-for-
sale securities portfolio were represented by non-rated securities at
December 31, 2014 and 2013.
102 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS AND LEASES
The Bancorp diversifies its loan and lease portfolio by offering a
variety of loan and lease products with various payment terms and
rate structures. Lending activities are concentrated within those
states in which the Bancorp has banking centers and are primarily
located in the Midwestern and Southeastern regions of the United
States. The Bancorp’s commercial loan portfolio consists of lending
to various industry types. Management periodically reviews the
performance of its loan and lease products to evaluate whether they
are performing within acceptable interest rate and credit risk levels
and changes are made to underwriting policies and procedures as
needed. The Bancorp maintains an allowance to absorb loan and
lease losses inherent in the portfolio. For further information on
credit quality and the ALLL, refer to Note 6.
The following table provides a summary of the total loans and leases classified by primary purpose as of December 31:
($ in millions)
Loans and leases held for sale:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Other consumer loans and leases
Total loans and leases held for sale
Portfolio loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total consumer loans and leases
Total portfolio loans and leases
2014
2013
$
$
$
$
36
11
2
1
1,193
18
1,261
40,765
7,399
2,069
3,720
53,953
12,389
8,886
12,037
2,401
418
36,131
90,084
31
3
2
1
890
17
944
39,316
8,066
1,039
3,625
52,046
12,680
9,246
11,984
2,294
364
36,568
88,614
Total portfolio loans and leases are recorded net of unearned
income, which totaled $665 million as of December 31, 2014 and
$700 million as of December 31, 2013. 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 $169 million and
$111 million as of December 31, 2014 and 2013, respectively.
The Bancorp’s FHLB and FRB advances are generally secured by
loans. The Bancorp had loans of $11.1 billion and $10.9 billion at
December 31, 2014 and 2013, respectively, pledged at the FHLB,
and loans of $33.9 billion and $33.5 billion at December 31, 2014
and 2013, respectively, pledged at the FRB.
The following table presents a summary of the total loans and leases owned by the Bancorp as of and for the years ended December 31:
($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total loans and leases
Less: Loans held for sale
Total portfolio loans and leases
Balance
90 Days Past Due
and Still Accruing
Net
Charge-Offs
2014
40,801
7,410
2,071
3,721
13,582
8,886
12,037
2,401
436
91,345
1,261
90,084
$
$
$
$
2014
-
-
-
-
56
-
8
23
-
87
2013
39,347
8,069
1,041
3,626
13,570
9,246
11,984
2,294
381
89,558
944
88,614
$
$
2013
-
-
-
-
66
-
8
29
-
103
$
$
2014
222
26
12
1
126
59
27
82
20
575
2013
168
47
4
1
60
97
22
78
24
501
103 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bancorp engages in commercial lease products primarily related
to the financing of commercial equipment. The Bancorp had $2.8
billion and $2.7 billion of direct financing leases, net of unearned
income, at December 31, 2014 and 2013, respectively, and $874
million and $881 million of leveraged leases, net of unearned
income, at December 31, 2014 and 2013, respectively.
Pre-tax income from leveraged leases was $25 million during
both the years ended December 31, 2014 and 2013 and the tax
effect of this income was an expense of $9 million during both the
years ended December 31, 2014 and 2013.
The following table provides the components of the investment in portfolio commercial lease financing at December 31:
($ in millions)
Rentals receivable, net of principal and interest on nonrecourse debt
Estimated residual value of leased assets
Initial direct cost, net of amortization
Gross investment in lease financing
Unearned income
Net investment in lease financing(a)
(a)
2014
3,589
779
17
4,385
(665)
3,720
$
$
2013
3,556
754
15
4,325
(700)
3,625
The accumulated allowance for uncollectible minimum lease payments was $45 million and $53 million at December 31, 2014 and 2013, 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 and $13 million of residual value write-downs
related to commercial leases for the years ended December 31, 2014
and 2013, respectively. The residual value write-downs related to
(cid:3)
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.
commercial leases are recorded in corporate banking revenue in the
Consolidated Statements of Income. At December 31, 2014, the
minimum future lease payments receivable for each of the years
2015 through 2019 was $681 million, $625 million, $501 million,
$405 million and $329 million, respectively.
Allowance for Loan and Lease Losses
The following tables summarize transactions in the ALLL by portfolio segment:
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
$
$
$
$
$
$
1,058
(299)
38
78
875
189
(139)
13
41
104
225
(241)
53
200
237
110
-
-
(4)
106
1,582
(679)
104
315
1,322
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
1,236
(284)
64
42
1,058
229
(70)
10
20
189
278
(283)
62
168
225
111
-
-
(1)
110
1,854
(637)
136
229
1,582
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
1,527
(358)
61
6
1,236
227
(129)
7
124
229
365
(350)
65
198
278
136
-
-
(25)
111
2,255
(837)
133
303
1,854
For the year ended December 31, 2014
($ in millions)
Transactions in the ALLL:
Balance at January 1
Losses charged-off
Recoveries of losses previously charged-off
Provision for loan and lease losses
Balance at December 31
For the year ended December 31, 2013
($ in millions)
Transactions in the ALLL:
Balance at January 1
Losses charged-off
Recoveries of losses previously charged-off
Provision for loan and lease losses
Balance at December 31
For the year ended December 31, 2012
($ in millions)
Transactions in the ALLL:
Balance at January 1
Losses charged-off
Recoveries of losses previously charged-off
Provision for loan and lease losses
Balance at December 31
104 Fifth Third Bancorp
The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2014 ($ in millions)
ALLL:(a)
Individually evaluated for impairment
Collectively evaluated for impairment
Unallocated
Total ALLL
Portfolio loans and leases:(b)
Commercial
Residential
Mortgage
$
$
(c)
179 a
696
-
875
65
39
-
104
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
Total portfolio loans and leases
(a)
(b) Excludes $108 of residential mortgage loans measured at fair value, and includes $874 of leveraged leases, net of unearned income.
(c)
518
11,761
2
12,281
(c)
1,260 a
52,693
-
53,953
Includes $6 related to leveraged leases.
$
$
Consumer
Unallocated
Total
61
176
-
237
483
23,259
-
23,742
-
-
106
106
-
-
-
-
305
911
106
1,322
2,261
87,713
2
89,976
Includes five restructured nonaccrual loans at December 31, 2014 associated with a consolidated VIE, in which the Bancorp has no continuing credit risk due to the risk being assumed by a third
party, with a recorded investment of $28 and an allowance of $10.
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
As of December 31, 2013 ($ in millions)
ALLL:(a)
Individually evaluated for impairment
Collectively evaluated for impairment
Unallocated
Total ALLL
Portfolio loans and leases:(b)
$
$
186 a
(c)
872
-
1,058
139
50
-
189
53
172
-
225
496
23,392
-
23,888
-
-
110
110
-
-
-
-
378
1,094
110
1,582
3,381
85,137
4
88,522
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
Total portfolio loans and leases
(a)
(b) Excludes $92 of residential mortgage loans measured at fair value, and includes $881 of leveraged leases, net of unearned income.
(c)
1,560 a
50,486
-
52,046
1,325
11,259
4
12,588
Includes $9 related to leveraged leases.
(c)
$
$
Includes five restructured loans at December 31, 2013 associated with a consolidated VIE, in which the Bancorp has no continuing credit risk due to the risk being assumed by a third party, with a
recorded investment of $28 and an allowance of $11.
A
CREDIT RISK PROFILE
Commercial Portfolio Segment
For purposes of monitoring
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.
the credit quality and
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 at least
annually 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 management’s
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 Bancorp’s 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-off, they are not included in the following tables.
105 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize the credit risk profile of the Bancorp’s commercial portfolio segment, by class:
As of December 31, 2014 ($ in millions)
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Total
As of December 31, 2013 ($ in millions)
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Total
Pass
38,013
3,430
3,198
1,966
3,678
50,285
Pass
36,776
3,866
2,879
855
3,546
47,922
$
$
$
$
Special
Mention
1,352
137
76
65
9
1,639
Special
Mention
1,118
209
248
32
56
1,663
Substandard
1,400
267
284
38
33
2,022
Substandard
1,419
415
431
152
23
2,440
Doubtful
-
-
7
-
-
7
Doubtful
3
17
1
-
-
21
Total
40,765
3,834
3,565
2,069
3,720
53,953
Total
39,316
4,507
3,559
1,039
3,625
52,046
Consumer Portfolio Segment
For purposes of monitoring
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 Bancorp’s residential mortgage portfolio segment is also a
separate class.
the credit quality and
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 while the performing versus nonperforming
status is presented in the table below. Refer to the nonaccrual loans
and leases section of Note 1 for additional delinquency and
nonperforming information.
The following table presents a summary of the Bancorp’s residential mortgage and consumer portfolio segments, by class, disaggregated into
performing versus nonperforming status as of December 31:
Performing
($ in millions)
12,204
Residential mortgage loans(a)
8,793
Home equity
12,036
Automobile loans
2,360
Credit card
418
Other consumer loans and leases
Total
35,811
(a) Excludes $108 and $92 of loans measured at fair value at December 31, 2014 and 2013, respectively.
(cid:3)
$
$
2014
Nonperforming
77
93
1
41
-
212
Performing
12,423
9,153
11,982
2,261
364
36,183
2013
Nonperforming
165
93
2
33
-
293
106 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Age Analysis of Past Due Loans and Leases
The following tables summarize the Bancorp’s recorded investment in portfolio loans and leases by age and class:
Information for current residential mortgage loans includes loans whose repayments are insured by the FHA or guaranteed by the VA. As of December 31, 2014, $99 of these loans were 30-89
days past due and $373 were 90 days or more past due. The Bancorp recognized $14 of losses for the year ended December 31, 2014 due to claim denials and curtailments associated with these
insured or guaranteed loans.
Includes accrual and nonaccrual loans and leases.
(c)
As of December 31, 2014
($ in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Residential mortgage loans(a)(b)
Consumer:
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total portfolio loans and leases(a)
(a) Excludes $108 of loans measured at fair value.
(b)
As of December 31, 2013
($ in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Residential mortgage loans(a)(b)
Consumer:
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total portfolio loans and leases(a)
(a) Excludes $92 of loans measured at fair value.
(b)
Current
Loans and
Leases(c)
30-89
Days(c)
Past Due
90 Days
and
Greater(c)
Total
Past Due
Total Loans
and Leases
90 Days Past
Due and Still
Accruing
$
$
40,651
3,774
3,537
2,069
3,717
12,109
8,710
11,953
2,335
417
89,272
29
7
11
-
3
38
100
74
34
1
297
85
53
17
-
-
134
76
10
32
-
407
114
60
28
-
3
172
176
84
66
1
704
40,765
3,834
3,565
2,069
3,720
12,281
8,886
12,037
2,401
418
89,976
-
-
-
-
-
56
-
8
23
-
87
Current
Loans and
Leases(c)
30-89
Days(c)
Past Due
90 Days
and
Greater(c)
Total
Past Due
Total Loans
and Leases
90 Days Past
Due and Still
Accruing
$
$
39,118
4,423
3,515
1,010
3,620
12,284
9,058
11,919
2,225
362
87,534
53
15
9
-
-
73
102
55
36
2
345
145
69
35
29
5
231
86
10
33
-
643
198
84
44
29
5
304
188
65
69
2
988
39,316
4,507
3,559
1,039
3,625
12,588
9,246
11,984
2,294
364
88,522
-
-
-
-
-
66
-
8
29
-
103
Information for current residential mortgage loans includes loans whose repayments are insured by the FHA or guaranteed by the VA. As of December 31, 2013, $81 of these loans were 30-89
days past due and $378 were 90 days or more past due. The Bancorp recognized $5 of losses for the year ended December 31, 2013 due to claim denials and curtailments associated with these
insured or guaranteed loans.
Includes accrual and nonaccrual loans and leases.
(c)
107 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired Loans and Leases
Larger commercial loans and leases included within aggregate
borrower relationship balances exceeding $1 million that exhibit
probable or observed credit weaknesses are subject to individual
review for impairment. The Bancorp also performs an individual
review on loans and leases that are restructured in a TDR. The
Bancorp considers the current value of collateral, credit quality of
any guarantees, the loan structure, and other factors when
evaluating whether an individual loan or lease is impaired. Other
factors may include the geography and industry of the borrower,
size and financial condition of the borrower, cash flow and
leverage of the borrower, and the Bancorp’s evaluation of the
borrower’s management. Smaller balance homogenous loans or
leases that are collectively evaluated for impairment are not
included in the following tables.
The following tables summarize the Bancorp’s impaired loans and leases (by class) that were subject to individual review, which includes all
portfolio loans and leases restructured in a TDR as of December 31:
2014
($ in millions)
With a related ALLL recorded:
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans(b)
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Restructured residential mortgage loans
Restructured consumer:
Home equity
Automobile loans
Credit card
Total impaired loans and leases with a related ALLL
With no related ALLL recorded:
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Restructured residential mortgage loans
Restructured consumer:
Home equity
Automobile loans
Total impaired loans and leases with no related ALLL
Total impaired loans and leases
(a)
Unpaid
Principal
Balance
Recorded
Investment
ALLL
$
$
$
$
598
54
69
18
3
388
203
19
78
1,430
311
72
251
48
2
155
183
5
1,027
2,457
486
46
57
15
3
383
201
19
78
1,288
276
68
231
48
2
135
180
5
945
(a)
2,233 a
149
14
4
-
2
65
42
3
16
295
-
-
-
-
-
-
-
-
-
295
Includes $869, $485 and $420, respectively, of commercial, residential mortgage and consumer TDRs on accrual status; $214, $33 and $63, respectively, of commercial, residential mortgage and
consumer TDRs on nonaccrual status.
(b) Excludes five restructured nonaccrual loans at December 31, 2014 associated with a consolidated VIE, in which the Bancorp has no continuing credit risk due to the risk being assumed by a
third party, with an unpaid principal balance of $28, a recorded investment of $28, and an allowance of $10.
108 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2013
($ in millions)
With a related ALLL recorded:
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans(b)
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Restructured residential mortgage loans
Restructured consumer:
Home equity
Automobile loans
Credit card
Total impaired loans and leases with a related ALLL
With no related ALLL recorded:
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Restructured residential mortgage loans
Restructured consumer:
Home equity
Automobile loans
Total impaired loans and leases with no related ALLL
Total impaired loans and leases
(a)
Unpaid
Principal
Balance
Recorded
Investment
ALLL
$
$
$
$
870
85
154
68
12
1,081
377
23
59
2,729
181
106
154
77
14
313
43
3
891
3,620
759
74
134
54
12
1,052
373
23
58
2,539
177
98
147
63
14
273
39
3
814
(a)
3,353 a
145
11
14
5
-
139
39
3
11
367
-
-
-
-
-
-
-
-
-
367
Includes $869, $1,241 and $444, respectively, of commercial, residential mortgage and consumer TDRs on accrual status; $228, $84 and $52, respectively, of commercial, residential mortgage and
consumer TDRs on nonaccrual status.
(b) Excludes five restructured nonaccrual loans at December 31, 2013 associated with a consolidated VIE, in which the Bancorp has no continuing credit risk due to the risk being assumed by a third
party, with an unpaid principal balance of $28, a recorded investment of $28, and an allowance of $11.
(cid:3)
The following table summarizes the Bancorp’s average impaired loans and leases (by class) and interest income (by class) for the year ended
December 31:
2014
2013
2012
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
($ in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans(a)
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Restructured residential mortgage loans
Restructured consumer:
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total impaired loans and leases
(a) Excludes five restructured nonaccrual loans at December 31, 2014 associated with a consolidated VIE, in which the Bancorp has no continuing credit risk due to the risk being assumed by a
third party, with an average recorded investment of $28 for the years ended December 31, 2014 and 2013 and an immaterial amount of interest income recognized for the years ended
December 31, 2014 and 2013.
517
146
321
108
11
1,311
448
156
361
160
10
1,276
786
149
268
92
13
1,273
429
29
68
2
2,942
439
38
80
1
2,969
394
24
62
-
3,061
23
1
4
-
113
20
1
5
-
119
16
4
8
4
-
53
4
4
10
2
-
47
25
4
8
2
-
54
24
1
4
-
96
$
109 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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; commercial and credit card TDRs which have not yet met the requirements to be classified as a performing asset; consumer TDRs
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. The following table summarizes the Bancorp’s nonperforming loans and leases, by class,
as of December 31:
2014
2013
($ in millions)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans(a)
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
Residential mortgage loans
Consumer:
Home equity
Automobile loans
Credit card
Total consumer loans and leases
Total nonperforming loans and leases(b)(c)
OREO and other repossessed property(d)
(a) Excludes $21 of restructured nonaccrual loans at December 31, 2014 and 2013 associated with a consolidated VIE in which the Bancorp has no continuing credit risk due the risk being
281
95
48
29
5
458
166
228
78
57
-
4
367
77
93
1
33
127
751
229
93
1
41
135
579
165
$
$
assumed by a third party.
(b) Excludes $39 and $6 of nonaccrual loans held for sale at December 31, 2014 and 2013, respectively.
(c)
Includes $9 and $10 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at December 31, 2014 and 2013, respectively, and $4 and $2 of restructured
nonaccrual government insured commercial loans at December 31, 2014 and 2013, respectively.
(d) Excludes $71 and $77 of OREO related to government insured loans at December 31, 2014 and 2013, respectively.
A
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
Bancorp’s loan classes, TDRs typically involve either a reduction of
the stated interest rate of the loan, an extension of the loan’s
maturity date(s) with 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 loan’s accrued
interest. Modifying the terms of a loan may result in an increase or
decrease to the ALLL depending upon the terms modified, the
method used to measure the ALLL for a loan prior to modification,
and whether any charge-offs were recorded on the loan before or at
the time of modification. Refer to the ALLL section of Note 1 for
information on
the Bancorp’s ALLL methodology. Upon
loan, the Bancorp measures the related
modification of a
impairment as the difference between the estimated future cash
flows expected to be collected on the modified loan, discounted at
the original effective yield of the loan, and the carrying value of the
loan. The resulting measurement may result in the need for minimal
or no valuation allowance because it is probable that all cash flows
will be collected under the modified terms of the loan. In addition,
if the stated interest rate was increased in a TDR, the cash flows on
the modified loan, using the pre-modification interest rate as the
discount rate, often exceed the recorded investment of the loan.
Conversely, upon a modification that reduces the stated interest rate
on a loan, the Bancorp recognizes an impairment loss as an increase
to the ALLL.
If a TDR involves a reduction of the principal balance of the
loan or the loan’s accrued interest, that amount is charged-off to the
ALLL. As of December 31, 2014 and 2013, the Bancorp had $89
million and $86 million in line of credit and letter of credit
commitments, respectively, to lend additional funds to borrowers
whose terms have been modified in a TDR.
110 Fifth Third Bancorp
The following tables provide a summary of loans modified in a TDR by the Bancorp during the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2014 ($ in millions)(a)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Residential mortgage loans
Consumer:
Home equity
Automobile loans
Credit card
Total portfolio loans and leases
2013 ($ in millions)(a)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans(c)
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Consumer:
Home equity
Automobile loans
Credit card
Total portfolio loans and leases
Number of loans
modified in a TDR
during the year(b)
Recorded investment
in loans modified
in a TDR
during the year
Increase
(Decrease)
to ALLL upon
modification
Charge-offs
recognized upon
modification
128
32
28
1,093
284
608
8,929
11,102
$
$
230
54
30
160
12
10
52
548
12
(1)
(3)
8
-
1
10
27
6
-
2
-
-
-
-
8
Number of loans
modified in a TDR
during the year(b)
Recorded investment
in loans modified
in a TDR
during the year
Increase
(Decrease)
to ALLL upon
modification
Charge-offs
recognized upon
modification
146
65
59
4
1
1,620
695
499
8,202
11,291
$
$
604
19
72
34
2
249
37
14
50
1,081
39
(2)
(7)
(2)
(5)
28
(1)
1
7
58
44
-
-
-
-
-
-
-
-
44
2012 ($ in millions)(a)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Consumer:
Home equity
Automobile loans
Credit card
Total portfolio loans and leases
(a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality.
(b) Represents number of loans post-modification.
(c)
Number of loans
modified in a TDR
during the year(b)
Recorded investment
in loans modified
in a TDR
during the year
Increase
(Decrease)
to ALLL upon
modification
Charge-offs
recognized upon
modification
108
67
67
17
8
1,758
1,343
1,289
11,407
16,064
$
$
84
53
91
38
7
340
82
23
75
793
(7)
(8)
(7)
(4)
1
35
1
2
11
24
9
2
-
-
-
-
-
-
-
11
Excludes five loans modified in a TDR during the year ended December 31, 2013 associated with a consolidated VIE in which the Bancorp has no continuing credit risk due to the risk being
assumed by a third party. The TDR had a recorded investment of $29 at modification, ALLL increased $7 upon modification, and a charge-off of $2 was recognized upon modification.
The Bancorp considers TDRs that become 90 days or more past
due under the modified terms as subsequently defaulted. For
commercial loans not subject to individual review for impairment,
loss rates that are applied for purposes of determining the allowance
include historical losses associated with subsequent defaults on
loans previously modified in a TDR. For consumer loans, the
Bancorp performs a qualitative assessment of the adequacy of the
consumer ALLL by comparing the consumer ALLL to forecasted
consumer losses over the projected loss emergence period (the
forecasted losses include the impact of subsequent defaults of
consumer TDRs). When a residential mortgage, home equity, auto
or other consumer loan that has been modified in a TDR
subsequently defaults, the present value of expected cash flows used
in the measurement of the potential impairment loss is generally
limited to the expected net proceeds from the sale of the loan’s
underlying collateral and any resulting impairment loss is reflected as
a charge-off or an increase in ALLL. The Bancorp fully reserves for
credit card loans modified in a TDR that subsequently default.
111 Fifth Third Bancorp
The following tables provide a summary of subsequent defaults that occurred during the years ended December 31, 2014 and 2013 and within 12
months of the restructuring date:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014 ($ in millions)(a)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Residential mortgage loans
Consumer:
Home equity
Automobile loans
Credit card
Total portfolio loans and leases
December 31, 2013 ($ in millions)(a)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Residential mortgage loans
Consumer:
Home equity
Automobile loans
Credit card
Total portfolio loans and leases
December 31, 2012 ($ in millions)(a)
Commercial:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Residential mortgage loans
Consumer:
Home equity
Automobile loans
Credit card (revised)
Total portfolio loans and leases
(a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality.
Number of
Contracts
Recorded
Investment
11
3
2
235
30
6
2,059
2,346
Number of
Contracts
6
7
375
65
4
1,768
2,225
Number of
Contracts
2
3
2
2
332
101
42
1,832
2,316
$
$
$
$
$
$
36
4
1
32
2
-
12
87
Recorded
Investment
11
1
58
4
-
11
85
Recorded
Investment
3
2
1
3
57
7
-
13
86
112 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. BANK PREMISES AND EQUIPMENT
The following is a summary of bank premises and equipment at December 31:
($ in millions)
Land and improvements
Buildings
Equipment
Leasehold improvements
Construction in progress
Accumulated depreciation and amortization
Total
Depreciation and amortization expense related to bank premises
and equipment was $254 million in 2014, $245 million in 2013 and
$233 million in 2012.
At December 31, 2014 and 2013, land and improvements
included $165 million and $196 million, respectively, associated with
parcels of undeveloped land intended for future branch expansion.
The Bancorp monitors changing customer preferences associated
with the channels it uses for banking transactions to evaluate the
efficiency, competitiveness and quality of the customer service
experience of its retail transaction network. As part of this ongoing
assessment the Bancorp may determine that it is no longer fully
committed to maintaining full-service branches at certain of its
existing banking center locations. Similarly, the Bancorp may also
determine that it is no longer fully committed to building banking
centers on certain parcels of land which had previously been held
for future branch expansion. In these circumstances, the Bancorp
performs an assessment of the recoverability of these long-lived
Estimated Useful Life
2 to 30 yrs.
1 to 30 yrs.
5 to 30 yrs.
2014
816
1,810
1,682
416
98
(2,357)
2,465
$
$
2013
838
1,763
1,581
397
118
(2,166)
2,531
assets. Impairment losses associated with such assessments and
lower of cost or market adjustments were $20 million, $6 million
and $21 million for the years ended December 31, 2014, 2013 and
2012, respectively. The recognized impairment losses were recorded
in other noninterest income in the Consolidated Statements of
Income. The Bancorp’s assessment of the recoverability of these
asset groups requires the exercise of judgment in projecting the
extent and nature of their future use and the related cash flows
which may be impacted by unanticipated events or circumstances.
is
included
in net occupancy expense
Gross occupancy expense for cancelable and noncancelable
leases, which
in the
Consolidated Statements of Income, was $100 million in 2014, $98
million in 2013 and $99 million in 2012, which was reduced by
rental income from leased premises of $17 million in 2014, $16
million in 2013 and $17 million in 2012. The Bancorp’s subsidiaries
have entered into a number of noncancelable operating and capital
lease agreements with respect to bank premises and equipment.
The following table provides the annual future minimum payments under noncancelable operating leases and capital leases at December 31, 2014:
($ in millions)
Year ending December 31,
2015
2016
2017
2018
2019
Thereafter
Total minimum lease payments
Less: Amounts representing interest
Present value of net minimum lease payments
Noncancelable
Operating Leases
Capital Leases
$
$
92
87
79
76
69
294
697
-
-
11
9
5
5
5
2
37
9
28
113 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. GOODWILL
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. During the fourth
quarter of 2008, the Bancorp determined that the Commercial
Banking and Consumer Lending reporting units’ goodwill carrying
amounts exceeded their associated implied fair values by $750
million and $215 million, respectively. The resulting $965 million
goodwill impairment charge was recorded in the fourth quarter of
2008 and represents the total amount of accumulated impairment
losses as of December 31, 2014.
Changes in the net carrying amount of goodwill, by reporting unit, for the years ended December 31, 2014 and 2013 were as follows:
($ in millions)
Net carrying value as of December 31, 2012
Acquisition activity
Net carrying value as of December 31, 2013
Acquisition activity
Net carrying value as of December 31, 2014
Commercial
Banking
Branch
Banking
Consumer
Lending
Investment
Advisors
Total
$
$
$
613
-
613
-
613
1,655
-
1,655
-
1,655
-
-
-
-
-
148
-
148
-
148
2,416
-
2,416
-
2,416
The Bancorp completed its annual goodwill impairment test as of
September 30, 2014 by performing a qualitative assessment of
goodwill at the reporting unit level to determine whether any
indicators of impairment existed. In performing this qualitative
assessment, the Bancorp evaluated events and circumstances since
the last impairment analysis, macroeconomic conditions, banking
industry and market conditions, and key financial metrics of the
Bancorp as well as reporting unit and overall Bancorp financial
performance. After assessing the totality of the events and
circumstances, the Bancorp determined that it was not more likely
than not that the fair value of each of its reporting units was less
than its carrying amounts and, therefore, the first and second steps
of
test were deemed
unnecessary.
the quantitative goodwill
impairment
114 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INTANGIBLE ASSETS
Intangible assets consist of core deposit intangibles, customer lists,
non-compete agreements and cardholder relationships. Intangible
assets are amortized on either a straight-line or an accelerated basis
The details of the Bancorp’s intangible assets are shown in the following table:
over their estimated useful lives. Intangible assets have an estimated
remaining weighted-average life at December 31, 2014 of 4.5 years.
($ in millions)
As of December 31, 2014
Core deposit intangibles
Other
Total intangible assets
As of December 31, 2013
Core deposit intangibles
Other
Total intangible assets
Gross Carrying
Amount
Accumulated
Amortization
Valuation
Allowance
Net Carrying
Amount
$
$
$
$
122
45
167
154
45
199
(112)
(40)
(152)
(141)
(39)
(180)
-
-
-
-
-
-
10
5
15
13
6
19
As of December 31, 2014, all of the Bancorp’s intangible assets
were being amortized. Amortization expense recognized on
intangible assets for the years ended December 31, 2014, 2013 and
2012 was $4 million, $8 million and $13 million, respectively.
The Bancorp's projections of amortization expense shown below are based on existing asset balances as of December 31, 2014. Future
amortization expense may vary from these projections. Estimated amortization expense for the years ending December 31, 2015 through 2019 is
as follows:
($ in millions)
2015
2016
2017
2018
2019
$
Total
2
2
2
2
1
115 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. 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 fund’s expected losses
or receive a majority of the fund’s 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 requires 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 tables provide a summary of the classifications of consolidated VIE assets, liabilities and noncontrolling interests included in the
Consolidated Balance Sheets as of:
December 31, 2014 ($ in millions)
Assets:
Cash and due from banks
Commercial mortgage loans
Automobile loans
ALLL
Other assets
Total assets
Liabilities:
Other liabilities
Long-term debt
Total liabilities
Noncontrolling interests
December 31, 2013 ($ in millions)
Assets:
Cash and due from banks
Commercial mortgage loans
Automobile loans
ALLL
Other assets
Liabilities:
Other liabilities
Long-term debt
Total liabilities
Noncontrolling interests
in consumer automobile
Automobile Loan Securitization
In securitization transactions that occurred during 2014 and 2013,
the Bancorp transferred an aggregate amount of $3.8 billion and
$1.3 billion, respectively,
loans to
bankruptcy remote trusts which were deemed to be VIEs. The
primary purposes of the VIEs were to issue asset-backed securities
with varying levels of credit subordination and payment priority, as
well as residual interests, and to provide the Bancorp with access to
liquidity for its originated loans. The Bancorp retained residual
interests in the VIEs 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 concluded that it is the primary beneficiary of
the VIEs and, therefore, has consolidated these VIEs. The assets of
116 Fifth Third Bancorp
Automobile Loan
Securitization
CDC
Investments
178
-
3,331
(11)
23
3,521
5
3,434
3,439
-
1
47
-
(11)
2
39
-
-
-
39
Total
179
47
3,331
(22)
25
3,560
5
3,434
3,439
39
Automobile Loan
Securitization
CDC
Investments
Total
49
-
1,010
(2)
11
1,068
1
1,048
1,049
-
-
48
-
(13)
2
37
-
-
-
37
49
48
1,010
(15)
13
1,105
1
1,048
1,049
37
$
$
$
$
$
$
$
$
$
the VIEs are restricted to the settlement of the notes and other
obligations of the VIEs. Third-party holders of the notes 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 VIEs are exposed include credit risk and
prepayment risk. The credit and prepayment risks are managed
through credit enhancements in the form of reserve accounts,
overcollateralization, excess
the
subordination of certain classes of asset-backed securities to other
classes.
interest on
loans and
the
CDC Investments
CDC, a wholly owned indirect subsidiary of the Bancorp, was
created to invest in projects to create affordable housing, revitalize
business and residential areas, and preserve historic landmarks.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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’s subsidiaries serve 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
the equity attributable
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 investor members’
interests in these VIEs are presented as noncontrolling interests in
the Bancorp’s Consolidated Financial Statements. This presentation
includes reporting separately
the
noncontrolling interests in the Consolidated Balance Sheets and
Consolidated Statements of Changes in Equity and reporting
separately
the
noncontrolling
the Consolidated Statements of
Comprehensive Income and the net income attributable to the
noncontrolling interests in the Consolidated Statements of Income.
The Bancorp’s maximum exposure related to these indemnifications
at December 31, 2014 and 2013 was $24 million and $21 million,
respectively, which is based on an amount required to meet the
investor members’ defined target rate of return.
the comprehensive
attributable
interests
income
to
to
in
Non-consolidated VIEs
The following tables provide a summary of assets and liabilities carried on the Consolidated Balance Sheets related to non-consolidated VIEs for
which the Bancorp holds an interest, but is not the primary beneficiary of the VIE, as well as the Bancorp’s maximum exposure to losses
associated with its interests in the entities as of:
December 31, 2014 ($ in millions)
CDC investments
Private equity investments
Loans provided to VIEs
Automobile loan securitization
December 31, 2013 ($ in millions)
CDC investments
Private equity investments
Loans provided to VIEs
Automobile loan securitization
Restructured loans
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 Bancorp’s funding requirements are limited to its invested
capital and any additional unfunded commitments for future equity
contributions. The Bancorp’s 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
$
$
Total
Assets
1,432
189
1,900
2
Total
Assets
1,436
204
1,830
4
1
Total
Liabilities
364
-
-
-
Total
Liabilities
407
-
-
-
-
Maximum
Exposure
1,432
267
2,759
2
Maximum
Exposure
1,436
294
2,792
4
1
level of projected tax credits to be received by the limited
partners/investor members, thereby minimizing a portion of the
Bancorp’s risk.
Private Equity Investments
The Bancorp, through a wholly owned subsidiary, 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 Bancorp’s
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
funds. As a limited partner, the Bancorp’s maximum exposure to
loss is limited to the carrying amounts of the investments plus
these
unfunded commitments. The carrying
amounts of
117 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
investments in these VIEs under the equity method or cost method
of accounting based on its percentage of ownership and ability to
exercise significant influence.
The Bancorp’s maximum exposure to loss as a result of its
involvement with these VIEs was limited to the equity capital
investments, the principal and accrued interest on the outstanding
loans, and any unfunded commitments. The Bancorp had
outstanding loans to these VIEs included in commercial loans in the
Consolidated Balance Sheets. The Bancorp had no unfunded loan
commitments to these VIEs as of December 31, 2014 and 2013.
The loans to these VIEs are included in the Bancorp’s overall
analysis of the ALLL. The Bancorp does not provide any implicit or
explicit liquidity guarantees or principal value guarantees to these
VIEs.
investments, which are included in other assets in the Consolidated
Balance Sheets, are included in the previous tables. Also, as of
December 31, 2014 and 2013, the unfunded commitment amounts
to the funds were $78 million and $90 million, respectively. The
Bancorp made capital contributions of $27 million and $31 million
to private equity funds during 2014 and 2013, respectively.
Additionally, in response to the issuance of the Volcker Rule in the
fourth quarter of 2013, the Bancorp recognized $4 million of OTTI
on its investments in private equity funds during 2013. The Bancorp
recognized no OTTI on its investments in private equity funds
during 2014. Refer to Note 27 for further information.
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 that most significantly impact
the economic performance of the entity and, therefore, is not the
primary beneficiary.
included
The principal risk to which these entities are exposed is credit
risk related to the underlying assets. The Bancorp’s maximum
exposure to loss is equal to the carrying amounts of the loans and
unfunded commitments to the VIEs. The Bancorp’s outstanding
in the
loans to these VIEs,
Consolidated Balance Sheets, are included in the previous tables for
all periods presented. As of December 31, 2014 and 2013, the
Bancorp’s unfunded commitments to these entities were $859
million and $962 million, respectively. The loans and unfunded
commitments to these VIEs are included in the Bancorp’s 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.
in commercial
loans
Automobile Loan Securitization
In March of 2013, the Bancorp recognized an immaterial loss on the
securitization and sale of certain automobile loans with a carrying
amount of approximately $509 million. The securitization and the
resulting sale of all underlying securities qualified for sale
accounting. The Bancorp has concluded that it is not the primary
beneficiary of the trust because it has neither the obligation to
absorb losses of the entity that could potentially be significant to the
VIE nor the right to receive benefits from the entity that could
potentially be significant to the VIE. The Bancorp is not required
and does not currently intend to provide any additional financial
support to the trust. Investors and creditors only have recourse to
the assets held by the trust. The interest the Bancorp holds in the
VIE relates to servicing rights that are included in the Consolidated
Balance Sheets. The maximum exposure to loss is equal to the
carrying value of the servicing asset.
Restructured Loans
As part of loan restructuring efforts, the Bancorp received equity
capital from certain borrowers to facilitate the restructuring of the
borrower’s loans. These borrowers meet the definition of a VIE
because the Bancorp was involved in their refinancing and because
their equity capital at risk was insufficient to fund ongoing
its equity capital
operations. The Bancorp accounted
for
118 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SALES OF RECEIVABLES AND SERVICING RIGHTS
Automobile Loan Securitization
In March of 2013, the Bancorp recognized an immaterial loss on the
securitization and sale of certain automobile loans with a carrying
amount of approximately $509 million. The Bancorp utilized a
securitization trust to facilitate the securitization process. The trust
issued asset-backed securities in the form of notes and equity
certificates, with varying levels of credit subordination and payment
priority. The Bancorp does not hold any of the notes or equity
certificates issued by the trust, and the investors in these securities
have no credit recourse to the Bancorp’s assets for failure of debtors
to pay when due. As part of the sale, the Bancorp obtained servicing
responsibilities and recognized a servicing asset with an initial fair
value of $6 million.
Residential Mortgage Loan Sales
The Bancorp sold fixed and adjustable rate residential mortgage
loans during 2014, 2013 and 2012. In those sales, the Bancorp
obtained servicing responsibilities and the investors have no
recourse to the Bancorp’s other assets for failure of debtors to pay
when due. The Bancorp receives annual servicing fees based on a
percentage of the outstanding balance. The Bancorp identifies
classes of servicing assets based on financial asset type and interest
rates.
Information related to residential mortgage loan sales and the Bancorp’s mortgage banking activity, which is included in mortgage banking net
revenue in the Consolidated Statements of Income, for the years ended December 31 is as follows:
($ in millions)
Residential mortgage loan sales
Origination fees and gains on loan sales
Gross mortgage servicing fees
$
2014
5,467
153
246
2013
21,529
453
251
2012
21,574
821
250
Servicing Rights
The following table presents changes in the servicing rights related to residential mortgage and automobile loans for the years ended December 31:
($ in millions)
Carrying amount before valuation allowance as of the beginning of the period
Servicing rights that result from the transfer of residential mortgage loans
Servicing rights that result from the transfer of automobile loans
Amortization
Carrying amount before valuation allowance
Valuation allowance for servicing rights:
Beginning balance
(Provision for) recovery of MSR impairment
Ending balance
Carrying amount as of the end of the period
2014
1,440
73
-
(121)
1,392
(469)
(65)
(534)
858
$
$
2013
1,358
244
6
(168)
1,440
(661)
192
(469)
971
Amortization expense recognized on servicing rights for the years
ended December 31, 2014, 2013 and 2012 was $121 million, $168
million and $186 million, respectively. The Bancorp's projections of
amortization expense shown below are based on existing asset
balances as of December 31, 2014. Future amortization expense
may vary from these projections.
Estimated amortization expense for the years ending December 31, 2015 through 2019 is as follows:
($ in millions)
2015
2016
2017
2018
2019
$
Total
125
113
103
93
85
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.
119 Fifth Third Bancorp
The following table displays the beginning and ending fair value of the servicing rights for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Fixed-rate residential mortgage loans:
Beginning balance
Ending balance
Adjustable rate residential mortgage loans:
Beginning balance
Ending balance
Fixed-rate automobile loans:
Beginning balance
Ending balance
2014
2013
$
929
823
38
33
4
2
664
929
33
38
-
4
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)
Securities gains, net - non-qualifying hedges on MSRs
Changes in fair value and settlement of free-standing derivatives purchased
to economically hedge the MSR portfolio (Mortgage banking net revenue)
(Provision for) recovery of MSR impairment (Mortgage banking net revenue)
$
2014
-
95
(65)
2013
13
(30)
192
2012
3
63
(103)
As of December 31, 2014 and 2013, the key economic assumptions used in measuring the interests in residential mortgage loans 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:
2014
2013
Weighted-
Average Life
(in years)
Rate
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 rights
Servicing rights
Fixed
Adjustable
6.6
3.7
11.3 %
22.3
10.0 %
11.7
N/A
N/A
7.3
3.6
9.1 %
22.8
10.2 %
11.5
N/A
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, 2014 and 2013, the Bancorp
serviced $65.4 billion and $69.2 billion, respectively, of residential
mortgage loans for other investors. The value of MSRs that
continue to be held by the Bancorp is subject to credit, prepayment
and interest rate risks on the sold financial assets.
At December 31, 2014, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in
prepayment speed assumptions and immediate 10% and 20% adverse changes in other assumptions are as follows:
Prepayment
Speed Assumption
Residual Servicing
Cash Flows
($ in millions)(a)
Residential mortgage loans:
Servicing rights
Servicing rights
(a)
Fair
Value
Weighted-
Average Life (in
years)
Rate
Rate
Impact of Adverse Change
on Fair Value
20%
50%
10%
Impact of Adverse
Change on Fair
Value
10%
20%
Discount
Rate
Fixed
Adjustable
$
823
33
6.0
3.1
12.0 % $
26.2
(37)
(1)
(72)
(2)
(161)
(5)
9.9 % $
11.8
(29)
(1)
(57)
(2)
The impact of the weighted-average default rate on the current fair value of residual cash flows for all scenarios is immaterial.
These sensitivities are hypothetical and should be used with caution.
As the figures indicate, changes in fair value based on these
variations 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. The Bancorp believes variations of
these levels are reasonably possible; however, there is the potential
that adverse changes in key assumptions could be even greater.
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
120 Fifth Third Bancorp
the Bancorp
by
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), which might magnify or counteract these
sensitivities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. 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
The Bancorp’s interest rate risk management strategy involves
modifying
financial
repricing characteristics of certain
instruments so that changes in interest rates do not adversely affect
the Bancorp’s 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.
interest
(principal-only swaps,
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
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
in foreign currencies. Derivative
instruments that the Bancorp may use to economically hedge these
foreign denominated loans include foreign exchange swaps and
forward contracts.
loans denominated
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
reputable
contracts with
counterparties with substantially matching terms and currencies.
Credit risk arises from the possible inability of counterparties to
meet the terms of their contracts. The Bancorp’s exposure is limited
to the replacement value of the contracts rather than the notional,
principal or contract amounts. Credit risk is minimized through
third-party
approved,
credit approvals, limits, counterparty collateral and monitoring
procedures.
The Bancorp’s derivative assets include certain contractual
features 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, 2014 and
2013, the balance of collateral held by the Bancorp for derivative
assets was $830 million and $514 million, respectively. The credit
component negatively impacting the fair value of derivative assets
associated with customer accommodation contracts as of December
31, 2014 and 2013 was $16 million and $12 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 posts
collateral primarily in the form of cash and securities to offset
changes in fair value of the derivatives, including changes in fair
value due to the Bancorp’s credit risk. As of December 31, 2014 and
2013, the balance of collateral posted by the Bancorp for derivative
liabilities was $574 million and $559 million, respectively. Certain of
the Bancorp’s 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, 2014 and 2013, 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 immaterial
to the Bancorp’s Consolidated Financial Statements. The posting of
collateral has been determined to remove the need for further
consideration of credit risk. As a result, the Bancorp determined
that the impact of the Bancorp’s credit risk to the valuation of its
derivative liabilities was immaterial to the Bancorp’s 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. For further information on offsetting derivatives, refer to
Note 13 of the Notes to Consolidated Financial Statements.
121 Fifth Third Bancorp
The following tables reflect the notional amounts and fair values for all derivative instruments included in the Consolidated Balance Sheets as of:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value
Notional
Amount
Derivative
Assets
Derivative
Liabilities
$
2,205
3,150
4,487
999
691
1,092
29,558
613
3,558
16,745
$
399
399
36
36
435
181
-
415
-
596
272
12
348
417
1,049
1,645
2,080
-
-
-
-
-
-
6
-
49
55
278
-
338
372
988
1,043
1,043
Fair Value
Notional
Amount
Derivative
Assets
Derivative
Liabilities
$
3,205
2,200
4,092
1,448
664
947
28,112
924
3,300
19,688
$
292
292
40
40
332
141
13
384
-
538
329
12
66
276
683
1,221
1,553
13
13
21
21
34
14
1
-
48
63
339
1
65
252
657
720
754
December 31, 2014 ($ in millions)
Qualifying hedging instruments
Fair value hedges:
Interest rate swaps related to long-term debt
Total fair value hedges
Cash flow hedges:
Interest rate swaps related to C&I loans
Total cash flow hedges
Total derivatives designated as qualifying hedging instruments
Derivatives not designated as qualifying hedging instruments
Free-standing derivatives - risk management and other business purposes:
Interest rate contracts related to MSRs
Forward contracts related to held for sale mortgage loans
Stock warrant associated with Vantiv Holding, LLC
Swap associated with the sale of Visa, Inc. Class B shares
Total free-standing derivatives - risk management and other business purposes
Free-standing derivatives - customer accommodation:
Interest rate contracts for customers
Interest rate lock commitments
Commodity contracts
Foreign exchange contracts
Total free-standing derivatives - customer accommodation
Total derivatives not designated as qualifying hedging instruments
Total
December 31, 2013 ($ in millions)
Qualifying hedging instruments
Fair value hedges:
Interest rate swaps related to long-term debt
Total fair value hedges
Cash flow hedges:
Interest rate swaps related to C&I loans
Total cash flow hedges
Total derivatives designated as qualifying hedging instruments
Derivatives not designated as qualifying hedging instruments
Free-standing derivatives - risk management and other business purposes:
Interest rate contracts related to MSRs
Forward contracts related to held for sale mortgage loans
Stock warrant associated with Vantiv Holding, LLC
Swap associated with the sale of Visa, Inc. Class B shares
Total free-standing derivatives - risk management and other business purposes
Free-standing derivatives - customer accommodation:
Interest rate contracts for customers
Interest rate lock commitments
Commodity contracts
Foreign exchange contracts
Total free-standing derivatives - customer accommodation
Total derivatives not designated as qualifying hedging instruments
Total
122 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, 2014 and
2013, 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
and measurement of
effectiveness
assessment of hedge
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)
Interest rate contracts:
Change in fair value of interest rate swaps hedging long-term debt
Interest on long-term debt
Change in fair value of hedged long-term debt attributable to the risk being hedged Interest on long-term debt
$
120
(126)
(279)
276
(104)
107
Consolidated Statements of Income
Caption
2014
2013
2012
liabilities may be grouped
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
in
circumstances where they share the same risk exposure that the
Bancorp desires 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, 2014, all hedges designated
as cash flow hedges were 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 item’s 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 AOCI and are reclassified from AOCI to current period
earnings when the forecasted transaction affects earnings. As of
December 31, 2014, the maximum length of time over which the
Bancorp is hedging its exposure to the variability in future cash
flows is 60 months.
Reclassified gains and losses on interest rate contracts related
to commercial and industrial loans are recorded within interest
income in the Consolidated Statements of Income. As of December
31, 2014 and 2013, $23 million and $13 million, respectively, of net
deferred gains, net of tax, on cash flow hedges were recorded in
AOCI in the Consolidated Balance Sheets. As of December 31,
2014, $33 million in net deferred gains, net of tax, recorded in
AOCI are expected to be reclassified into earnings during the next
twelve months. This amount could differ from amounts actually
recognized due to changes in interest rates, hedge de-designations,
and the addition of other hedges subsequent to December 31, 2014.
During 2014 and 2013, there were no gains or losses
reclassified from accumulated AOCI into earnings associated with
the discontinuance of cash flow hedges because it was probable that
the original forecasted transaction would no longer occur by the end
of the originally specified time period or within the additional period
of time as defined by U.S. GAAP.
The following table presents the pretax net gains (losses) recorded in the Consolidated Statements of Income and the Consolidated Statements of
Comprehensive Income relating to derivative instruments designated as cash flow hedges:
For the year ended December 31 ($ in millions)
Amount of pretax net gains (losses) recognized in OCI
Amount of pretax net gains reclassified from OCI into net income
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.
$
2014
60
44
2013
(13)
44
2012
37
83
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. IRLCs 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.
Additionally, as part of the Bancorp’s overall risk management
strategy with respect to minimizing significant fluctuations in
earnings and cash flows caused by interest rate and prepayment
volatility, the Bancorp may enter into free-standing derivative
instruments (options, swaptions and interest rate swaps). The gains
123 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and losses on these derivative contracts are recorded within other
noninterest income in the Consolidated Statements of Income.
In conjunction with the initial sale of the Bancorp’s 51%
interest in Vantiv Holding, LLC, the Bancorp received a warrant
and issued a put option, which are accounted for as free-standing
derivatives. The put option expired as a result of the Vantiv, Inc.
IPO in March of 2012. Refer to Note 27 for further discussion of
significant inputs and assumptions used in the valuation of the
warrant.
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. Refer to Note 27 for further discussion of significant
inputs and assumptions used in the valuation of this instrument.
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)
Interest rate contracts:
Forward contracts related to mortgage loans held for sale
Interest rate contracts related to MSR portfolio
Interest rate swaps related to long-term debt
Foreign exchange contracts:
Foreign exchange contracts for risk management purposes
Equity contracts:
Stock warrant associated with Vantiv Holding, LLC
Put option associated with Vantiv Holding, LLC
Swap associated with sale of Visa, Inc. Class B shares
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 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,
independent
counterparties with substantially matching terms. The Bancorp
hedges
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.
reputable,
its
Consolidated Statements of Income
Caption
2014
2013
2012
Mortgage banking net revenue
Mortgage banking net revenue
Other noninterest income
$
Other noninterest income
Other noninterest income
Other noninterest income
Other noninterest income
(18)
95
-
14
31
-
(38)
24
(30)
-
5
206
-
(31)
28
63
2
-
66
1
(45)
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, 2014 and 2013, the total
notional amount of the risk participation agreements was $1.1
billion and $1.2 billion, respectively, and the fair value was a liability
of $2 million at December 31, 2014 and $3 million at December 31,
2013, which is included in interest rate contracts for customers. As
of December 31, 2014, the risk participation agreements had an
average remaining life of 2.6 years.
The Bancorp’s maximum exposure in the risk participation
agreements is contingent on the fair value of the underlying interest
rate derivative contracts in an asset position at the time of default.
The Bancorp monitors the credit risk associated with the underlying
customers in the risk participation agreements through the same risk
grading system currently utilized for establishing loss reserves in its
loan and lease portfolio.
Risk ratings of the notional amount of risk participation agreements under this risk rating system are summarized in the following table:
At December 31 ($ in millions)
Pass
Special mention
Substandard
Total
124 Fifth Third Bancorp
2014
2013
$
$
1,052
59
2
1,113
1,153
38
12
1,203
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
Interest rate contracts:
Interest rate contracts for customers (contract revenue)
Interest rate contracts for customers (credit losses)
Interest rate contracts for customers (credit portion of fair value adjustment)
Interest rate lock commitments
Commodity contracts:
Commodity contracts for customers (contract revenue)
Commodity contracts for customers (credit portion of fair value adjustment)
Foreign exchange contracts:
Foreign exchange contracts - customers (contract revenue)
Foreign exchange contracts - customers (credit portion of fair value adjustment)
Consolidated Statements of
Income Caption
2014
2013
2012
Corporate banking revenue
Other noninterest expense
Other noninterest expense
Mortgage banking net revenue
$
Corporate banking revenue
Other noninterest expense
Corporate banking revenue
Other noninterest expense
19
(3)
3
124
6
(7)
72
-
29
(3)
7
58
7
-
69
(2)
30
(2)
6
417
7
2
65
2
125 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. OFFSETTING DERIVATIVE FINANCIAL INSTRUMENTS
The Bancorp’s derivative transactions are generally governed by
ISDA Master Agreements and similar arrangements, which include
provisions governing the setoff of assets and liabilities between the
parties. When the Bancorp has more than one outstanding
derivative transaction with a single counterparty, the setoff
provisions contained within these agreements generally allow the
non-defaulting party the right to reduce its liability to the defaulting
party by amounts eligible for setoff, including the collateral received
as well as eligible offsetting transactions with that counterparty,
irrespective of the currency, place of payment, or booking office.
The Bancorp’s policy is to present its derivative assets and derivative
liabilities on the Consolidated Balance Sheets on a gross basis, even
when provisions allowing for setoff are in place.
Collateral amounts included in the tables below consist
primarily of cash and highly-rated government-backed securities.
As of December 31, 2014 ($ in millions)
Gross Amount
Recognized in the
Consolidated Balance Sheets(a)
Gross Amounts Not Offset in the
Consolidated Balance Sheets
Derivatives
Collateral(b)
Net Amount
Assets
Derivatives
Total assets
Liabilities
Derivatives
Total liabilities
As of December 31, 2013 ($ in millions)
Assets
Derivatives
Total assets
$
$
1,653
1,653
1,043
1,043
(440)
(440)
(440)
(440)
$
(684)
(684)
(293)
(293)
$
529
529
310
310
Gross Amount
Recognized in the
Consolidated Balance Sheets(a)
Gross Amounts Not Offset in the
Consolidated Balance Sheets
Derivatives
Collateral(b)
Net Amount
$
1,157
1,157
(321)
(321)
$
(390)
(390)
446
446
Liabilities
Derivatives
$
Total liabilities
(a) Amount does not include the stock warrant associated with Vantiv Holding, LLC and IRLCs because these instruments are not subject to master netting or similar arrangements.
(b) Amount of collateral received as an offset to asset positions or pledged as an offset to liability positions. Collateral values in excess of related derivative amounts recognized in the Consolidated Balance
(321)
(321)
(302)
(302)
753
753
130
130
$
Sheets were excluded from this table.
14. OTHER ASSETS
The following table provides the components of other assets included in the Consolidated Balance Sheets as of December 31:
($ in millions)
Derivative instruments
Partnership investments
Bank owned life insurance
Accounts receivable and drafts-in-process
Investment in Vantiv Holding, LLC
Accrued interest receivable
OREO and other repossessed personal property
Income tax receivable
Prepaid expenses
Other
Total
2014
2,080
1,685
1,623
1,452
394
312
236
107
97
255
8,241
2013
1,553
1,687
1,587
1,433
423
361
306
12
94
902
8,358
$
$
The Bancorp utilizes 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
and for other business purposes. For further information on
derivative instruments, refer to Note 12.
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. In addition, Fifth Third
Capital Holdings, a wholly owned subsidiary of the Bancorp, invests
as a direct private equity investor and as a limited partner in private
equity funds, which are included above as partnership investments.
The Bancorp has determined that these partnership investments are
VIEs and the Bancorp’s investments represent variable interests.
Refer to Note 10 for further information. Additionally, in response
to the issuance of the Volcker Rule, the Bancorp recognized $4
million of OTTI on its investments in private equity funds during
126 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2013. The Bancorp recognized no OTTI on its investments in
private equity funds during 2014. Refer to Note 27 for further
information.
The Bancorp purchases life insurance policies on the lives of
certain directors, officers and employees and is the owner and
beneficiary of the policies. Certain BOLI policies have a stable value
agreement through either a large, well-rated bank or multi-national
insurance carrier that provides
limited cash surrender value
protection from declines in the value of each policy’s underlying
investments. Refer to Note 1 for further information.
In 2009, the Bancorp sold an approximate 51% interest in its
processing business, Vantiv Holding, LLC. As a result of additional
share sales completed by the Bancorp, its current ownership share
in Vantiv Holding, LLC is approximately 23%. The Bancorp’s
ownership in Vantiv Holding, LLC is accounted for under the
equity method of accounting. Refer to Note 19 for further
information.
OREO represents property acquired through foreclosure or
other proceedings and is carried at the lower of cost or fair value,
less costs to sell. Refer to Note 1 for further information.
15. SHORT-TERM BORROWINGS
Borrowings with original maturities of one year or less are classified
as short term, and include federal funds purchased and other short-
term borrowings. Federal funds purchased are excess balances in
reserve accounts held at FRBs that the Bancorp purchased from
A summary of short-term borrowings and weighted-average rates follows:
other member banks on an overnight basis. Other short-term
borrowings include securities sold under repurchase agreements,
derivative collateral, FHLB advances and other borrowings with
original maturities of one year or less.
($ in millions)
As of December 31:
Federal funds purchased
Other short-term borrowings
Average for the years ended December 31:
Federal funds purchased
Other short-term borrowings
Maximum month-end balance for the years ended December 31:
Federal funds purchased
Other short-term borrowings
2014
2013
Amount
Rate
Amount
Rate
$
$
$
144
1,556
0.08% $
0.08
284
1,380
0.03%
0.09
458
1,873
0.09% $
0.10
503
3,024
0.12%
0.18
286
3,756
$
925
8,001
127 Fifth Third Bancorp
16. LONG-TERM DEBT
The following table is a summary of the Bancorp’s long-term borrowings at December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Parent Company
Senior:
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Subordinated:(a)
Floating-rate notes
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Subsidiaries
Senior:
Fixed-rate notes
Fixed-rate notes
Floating-rate notes
Floating-rate notes
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Subordinated:(a)
Fixed-rate bank notes
Junior subordinated:(b)
Floating-rate debentures
FHLB advances
Notes associated with consolidated VIE:
Automobile loan securitization:
Fixed-rate notes
Other
Total
(a) Qualify as Tier II capital for regulatory capital purposes.
(b) Qualify as Tier I capital for regulatory capital purposes. Refer to Note 28 for further information. .
Maturity
Interest Rate
2014
2013
2016
2019
2022
2016
2017
2018
2024
2038
2016
2016
2016
2016
2017
2018
2019
2021
3.625%
2.30%
3.50%
0.67%
5.45%
4.50%
4.30%
8.25%
1.15%
0.90%
0.74%
0.64%
1.35%
1.45%
2.375%
2.875%
$
1,000
499
497
250
539
544
748
1,317
1,000
400
750
300
654
597
850
846
999
-
497
250
558
555
748
1,150
1,000
400
750
300
-
587
-
-
2015
4.75%
502
524
2035
1.66% - 1.93%
2015-2041 0.05% - 6.87%
51
41
51
44
2015-2021 0.19% - 1.47%
2015-2039
Varies
3,434
148
14,967
1,048
172
9,633
$
The Bancorp pays down long-term debt in accordance with contractual terms over maturity periods summarized in the above table. The aggregate
annual maturities of long-term debt obligations (based on final maturity dates) as of December 31, 2014, are presented in the following table:
($ in millions)
2015
2016
2017
2018
2019
Thereafter
Total
At December 31, 2014, the Bancorp had outstanding principal
balances of $14.6 billion, net discounts of $25 million and additions
for mark-to-market adjustments on its hedged debt of $407 million.
At December 31, 2013, the Bancorp had outstanding principal
balances of $9.4 billion, net discounts of $21 million and additions
for mark-to-market adjustments on its hedged debt of $278 million.
The Bancorp was in compliance with all debt covenants at
December 31, 2014.
PARENT COMPANY LONG-TERM BORROWINGS
Senior Notes
On January 25, 2011, the Bancorp issued and sold $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 notes are unsecured,
128 Fifth Third Bancorp
Parent
Subsidiaries
Total
-
1,250
539
544
499
2,562
5,394
702
2,768
1,942
1,407
1,199
1,555
9,573
702
4,018
2,481
1,951
1,698
4,117
14,967
$
$
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 Bancorp’s option at any
time prior to maturity.
to
third party
investors, and entered
On March 7, 2012, the Bancorp issued and sold $500 million of
senior notes
into a
Supplemental Indenture dated March 7, 2012 with the Trustee,
which modified the existing Indenture for Senior Debt Securities
dated April 30, 2008. The Supplemental Indenture and the
Indenture define the rights of the senior notes, which senior notes
are represented by a Global Security dated as of March 7, 2012. The
senior notes bear a fixed-rate of interest of 3.50% per annum. The
notes are unsecured, senior obligations of the Bancorp. Payment of
the full principal amounts of the notes will be due upon maturity on
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 15, 2022. The notes are not subject to redemption at the
Bancorp’s option at any time until 30 days prior to maturity.
On February 28, 2014, the Bancorp issued and sold $500
million of senior notes to third party investors. The senior notes
bear a fixed-rate of interest of 2.30% per annum. The notes are
unsecured, senior obligations of the Bancorp. Payment of the full
principal amounts of the notes is due upon maturity on March 1,
2019. The notes are not subject to redemption at the Bancorp’s
option at any time until 30 days 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, 2014.
The rates paid on the swaps hedging the subordinated floating-rate
notes due in 2017 and 2018 were 0.69% and 0.48%, respectively, at
December 31, 2014. 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 3.28% at December 31, 2014.
On November 20, 2013, the Bancorp issued and sold $750
million of 4.30% unsecured subordinated fixed-rate notes with a
maturity date of January 16, 2024. These fixed-rate notes will be
redeemable by the Bancorp, in whole or in part, on or after the date
that is 30 days prior to the maturity date at a redemption price equal
to 100% of the principal amount plus accrued and unpaid interest
up to, but excluding, the redemption date.
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
Bancorp’s banking subsidiary. On February 25, 2013, the Bancorp’s
banking subsidiary updated and amended its existing global bank
note program. The amended global bank note program increased
the Bank’s capacity to issue its senior and subordinated unsecured
bank notes from $20 billion to $25 billion. As of December 31,
2014, $19.1 billion was available for future issuance under the global
bank note program. 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, 2014, the
weighted-average rate paid on the swaps was 0.33%.
On February 28, 2013, the Bank issued and sold, under its
amended bank notes program, $1.3 billion in aggregate principal
amount of unsecured senior bank notes. The bank notes consisted
of: $600 million of 1.45% senior fixed-rate notes due on
February 28, 2018; $400 million of 0.90% senior fixed-rate notes
due on February 26, 2016; and $300 million of senior floating-rate
notes due on February 26, 2016. Interest on the floating-rate notes
is 3-month LIBOR plus 41 bps. These bank notes will be
redeemable by the Bank, in whole or in part, on or after the date
that is 30 days prior to the maturity date at a redemption price equal
to 100% of the principal amount plus accrued and unpaid interest
through the redemption date.
On November 20, 2013, the Bank issued and sold, under its
amended bank notes program, $1.8 billion in aggregate principal
amount of unsecured senior bank notes. The bank notes consisted
of $1.0 billion of 1.15% senior fixed-rate notes due on
November 18, 2016 and $750 million of senior floating-rate notes
due on November 18, 2016. Interest on the floating-rate notes is 3-
month LIBOR plus 51 bps. These bank notes will be redeemable by
the Bank, in whole or in part, on or after the date that is 30 days
prior to the maturity date at a redemption price equal to 100% of
the principal amount plus accrued and unpaid interest up to, but
excluding, the redemption date.
On April 25, 2014, the Bank issued and sold, under its
amended bank notes program, $1.5 billion in aggregate principal
amount of unsecured senior bank notes. The bank notes consisted
of $850 million of 2.375% senior fixed-rate notes due on April 25,
2019 and $650 million of 1.35% senior fixed-rate notes due on June
1, 2017. These bank notes will be redeemable by the Bank, in whole
or in part, on or after the date that is 30 days prior to the maturity
date at a redemption price equal to 100% of the principal amount
plus accrued and unpaid interest up to, but excluding, the
redemption date.
On September 5, 2014, the Bank issued and sold, under its
amended bank notes program, $850 million of 2.875% unsecured
senior fixed-rate bank notes with a maturity date of October 1,
2021. These bank notes will be redeemable by the Bank, in whole or
in part, on or after the date that is 30 days prior to the maturity date
at a redemption price equal to 100% of the principal amount plus
accrued and unpaid interest up to, but excluding, the redemption
date.
Junior Subordinated Debt
The junior subordinated floating-rate bank notes due in 2035 were
assumed by the Bancorp’s banking subsidiary 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 a floating-rate at three-
month LIBOR plus 169 bps and 142 bps, respectively. The Bank
has fully and unconditionally guaranteed all obligations under the
acquired TruPS issued by First Charter Capital Trust I and II.
FHLB Advances
At December 31, 2014, FHLB advances have rates ranging from
0.05% to 6.87%, with interest payable monthly. The advances are
secured by certain residential mortgage loans and securities totaling
$20.5 billion. The $41 million in remaining advances mature as
follows: $2 million in 2015, $3 million in 2016, $1 million in 2017,
$4 million in 2018, $9 million in 2019 and $22 million thereafter.
Notes Associated with Consolidated VIE
As previously discussed in Note 10, the Bancorp was determined to
be the primary beneficiary of various VIEs associated with
automobile loan securitizations completed during the years ended
December 31, 2014 and 2013. As such, $3.4 billion of long-term
debt related to these VIEs was consolidated in the Bancorp’s
Consolidated Financial Statements as of December 31, 2014. Third-
party holders of this debt do not have recourse to the general assets
of the Bancorp.
129 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES
The Bancorp, in the normal course of business, enters into financial
instruments and various agreements to meet the financing needs of
its customers. The Bancorp also enters into certain transactions and
agreements to manage its interest rate and prepayment risks, provide
funding, equipment and locations for its operations and invest in its
communities. These instruments and agreements involve, to varying
degrees, elements of credit risk, counterparty risk and market risk in
excess of the amounts recognized in the Consolidated Balance
Sheets. The creditworthiness of counterparties for all instruments
and agreements is evaluated on a case-by-case basis in accordance
with the Bancorp’s credit policies. The Bancorp’s significant
commitments, contingent liabilities and guarantees in excess of the
in the Consolidated Balance Sheets are
amounts recognized
discussed in further detail below:
Commitments
The Bancorp has certain commitments to make future payments under contracts. The following table reflects a summary of significant
commitments as of December 31:
($ in millions)
Commitments to extend credit
Letters of credit
Forward contracts related to held for sale mortgage loans
Noncancelable operating lease obligations
Capital commitments for private equity investments
Purchase obligations
Capital lease obligations
Capital expenditures
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 event of
The Bancorp
nonperformance by the counterparty for the amount of the
contract. Fixed-rate commitments are also subject to market risk
to credit risk
is exposed
in
$
2014
63,827
3,974
999
697
78
77
37
28
2013
62,050
4,129
1,448
746
90
84
19
33
resulting from fluctuations in interest rates and the Bancorp’s
exposure is limited to the replacement value of those commitments.
As of December 31, 2014 and 2013, the Bancorp had a reserve for
unfunded commitments, including letters of credit, totaling $135
million and $162 million, respectively, included in other liabilities in
the Consolidated Balance Sheets. The Bancorp monitors the credit
risk associated with commitments to extend credit using the same
risk rating system utilized within its loan and lease portfolio.
Risk ratings under this risk rating system are summarized in the following table as of December 31:
($ in millions)
Pass
Special mention
Substandard
Doubtful
Total
2014
2013
$
$
62,787
660
380
-
63,827
61,364
369
316
1
62,050
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, 2014:
($ in millions)
Less than 1 year(a)
1 - 5 years(a)
Over 5 years
Total
(a)
2,181
1,750
43
3,974
Includes $88 and $17 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 97% of total letters of credit
at December 31, 2014 and 2013 and are considered guarantees in
accordance with U.S. GAAP. Approximately 60% and 48% of the
total standby letters of credit were collateralized as of December 31,
2014 and 2013, respectively. 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, 2014 and 2013 the reserve related to these standby
letters of credit was $1 million and $2 million, respectively, and is
included in the total reserve for unfunded commitments. The
Bancorp monitors the credit risk associated with letters of credit
using the same risk rating system utilized within its loan and lease
portfolio.
130 Fifth Third Bancorp
Risk ratings under this risk rating system are summarized in the following table as of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Pass
Special mention
Substandard
Doubtful
Total
At December 31, 2014 and 2013, 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,
2014 and 2013, total VRDNs in which the Bancorp was the
remarketing agent or were supported by a Bancorp letter of credit
were $1.7 billion and $2.1 billion of which FTS acted as the
remarketing agent to issuers on $1.4 billion and $1.8 billion,
respectively. As remarketing agent, FTS is responsible for finding
purchasers for VRDNs that are put by investors. The Bancorp
issued letters of credit, as a credit enhancement, to $1.2 billion and
$1.5 billion of the VRDNs remarketed by FTS, in addition to $247
million and $300 million in VRDNs remarketed by third parties at
December 31, 2014 and 2013, respectively. These letters of credit
are included in the total letters of credit balance provided in the
previous table.
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 for all periods presented.
Noncancelable lease obligations and other commitments
The Bancorp’s 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 Bancorp’s
reinsurance coverage typically ranges from 5% to 10% of the total
PMI coverage. The Bancorp’s maximum exposure in the event of
nonperformance by the underlying borrowers is equivalent to the
Bancorp’s total outstanding reinsurance coverage, which was $29
million at December 31, 2014 and $37 million at December 31,
2013. As of December 31, 2014 and 2013, the Bancorp maintained a
reserve of $2 million and $10 million, respectively, related to
exposures within the reinsurance portfolio which was included in
2014
2013
$
$
3,483
147
299
45
3,974
3,651
99
355
24
4,129
other liabilities in the Consolidated Balance Sheets. During 2009, the
Bancorp suspended the practice of providing reinsurance of PMI
for newly originated mortgage loans.
Legal claims
There are legal claims pending against the Bancorp and its
subsidiaries that have arisen in the normal course of business. Refer
to 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
management’s estimate of losses based on a combination of factors.
The Bancorp’s estimation process requires management to make
subjective and complex judgments about matters that are inherently
uncertain, such as, future demand expectations, economic factors
and the specific characteristics of the loans subject to repurchase.
Such factors incorporate historical investor audit and repurchase
demand rates, appeals success rates, historical loss severity and any
additional information obtained from the GSEs regarding future
mortgage repurchase and file request criteria. At the time of a loan
sale, the Bancorp records a representation and warranty reserve at
the estimated fair value of the Bancorp’s guarantee and continually
updates the reserve during the life of the 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.
During the fourth quarter of 2013, the Bancorp settled certain
repurchase claims related to mortgage loans originated and sold to
FHLMC prior to January 1, 2009 for $25 million, after paid claim
credits and other adjustments. The settlement removes the
Bancorp’s responsibility to repurchase or indemnify FHLMC for
representation and warranty violations on any loan sold prior to
January 1, 2009 except in limited circumstances.
As of December 31, 2014 and 2013, the Bancorp maintained
reserves related to loans sold with representation and warranty
provisions totaling $35 million and $44 million, respectively,
included in other liabilities in the Consolidated Balance Sheets.
131 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
is
The Bancorp uses the best information available to it in
its mortgage representation and warranty reserve,
estimating
inherently uncertain and
however, the estimation process
imprecise and, accordingly, losses in excess of the amounts accrued
as of December 31, 2014, are reasonably possible. The Bancorp
currently estimates that it is reasonably possible that it could incur
losses related to mortgage representation and warranty provisions in
an amount up to approximately $57 million in excess of amounts
reserved. This estimate was derived by modifying the key
assumptions discussed above to reflect management's judgment
regarding reasonably possible adverse changes to those assumptions.
The actual repurchase losses could vary significantly from the
recorded mortgage representation and warranty reserve or this
estimate of reasonably possibly losses, depending on the outcome of
various factors, including those noted above.
During 2014 and 2013, the Bancorp paid $11 million and $64
million, respectively, in the form of make whole payments and
repurchased $59 million and $89 million,
in
outstanding principal of loans to satisfy investor demands. Total
repurchase demand requests during 2014 and 2013 were $97 million
and $263 million, respectively. Total outstanding repurchase
demand inventory was $7 million at December 31, 2014 compared
to $46 million at December 31, 2013.
respectively,
The following table summarizes activity in the reserve for representation and warranty provisions for the years ended:
($ in millions)
Balance, beginning of period
Net additions to the reserve
Losses charged against the reserve
Balance, end of period
2014
44
6
(15)
35
2013
110
7
(73)
44
$
$
The following tables provide a rollforward of unresolved claims by claimant type for the years ended:
December 31, 2014 ($ in millions)
Balance, beginning of period
New demands
Loan paydowns/payoffs
Resolved demands
Balance, end of period
December 31, 2013 ($ in millions)
Balance, beginning of period
New demands
Loan paydowns/payoffs
Resolved demands
Balance, end of period
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 $548 million and $579 million
at December 31, 2014 and 2013, respectively, and the delinquency
rates were 4.0% at December 31, 2014 and 4.4% at December 31,
2013. The Bancorp maintained an estimated credit loss reserve on
these loans sold with credit recourse of $11 million at December 31,
2014 and $16 million at December 31, 2013 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
132 Fifth Third Bancorp
GSE
Private Label
Units
264
744
(44)
(927)
37
$
$
Dollars
41
95
(5)
(125)
6
Units
33
14
(2)
(44)
1
$
$
Dollars
5
2
(1)
(5)
1
GSE
Private Label
Units
294
1,962
(20)
(1,972)
264
$
$
Dollars
48
259
(3)
(263)
41
Units
124
237
(6)
(322)
33
$
$
Dollars
19
4
(1)
(17)
5
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
$13 million at December 31, 2014 and $12 million at December 31,
2013. 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 certain fully and unconditionally guaranteed long-
term borrowing obligations issued by wholly-owned issuing trust
entities of $62 million as of December 31, 2014.
Visa litigation
The Bancorp, as a member bank of Visa prior to Visa’s
reorganization and IPO (the “IPO”) of its Class A common shares
(the “Class A Shares”) in 2008, had certain indemnification
obligations pursuant to Visa’s certificate of incorporation and by-
laws and in accordance with their membership agreements. In
accordance with Visa’s by-laws prior to the IPO, the Bancorp could
the Bancorp’s
have been required
indemnify Visa for
to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
proportional share of losses based on the pre-IPO membership
interests. As part of its reorganization and IPO, the Bancorp’s
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 for the
Bancorp to recognize a liability equal to the fair value of the
indemnification liability.
In conjunction with the IPO, the Bancorp received 10.1 million
of Visa’s Class B common shares (the “Class B Shares”) based on
the Bancorp’s 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 Bancorp’s 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 Visa’s 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 Class A 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.
In 2009, the Bancorp completed the sale of the Class B Shares
and 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 Visa’s IPO or the date on
which the Covered Litigation is settled. Refer to Note 27 for
information on the valuation of the swap. The
additional
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 Bancorp’s
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 Bancorp’s sale of the Class B Shares and
through December 31, 2014, 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 the 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. The fair value of the swap liability was $49 million
and $48 million at December 31, 2014 and 2013, respectively. Refer
to Notes 12 and 18 for further information.
After the Bancorp’s sale of the Class B Shares, Visa has funded
additional amounts into the litigation escrow account which have
resulted in further dilution in the conversion of Class B Shares into
Class A Shares, and along with other terms of the total return swap,
required the Bancorp to make cash payments to the swap
counterparty as follows:
($ in millions)
Period
Q2 2010
Q4 2010
Q2 2011
Q1 2012
Q3 2012
Q3 2014
$
Visa
Funding Amount
500
800
400
1,565
150
450
$
Bancorp Cash
Payment Amount
20
35
19
75
6
18
133 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, claimed that the
interchange fees charged by card-issuing banks were unreasonable
and sought 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 judgment and loss sharing agreements with Visa,
MasterCard and certain other named defendants. In October 2012,
the parties to the litigation entered into a settlement agreement. The
court entered a Class Settlement Preliminary Approval Order in
November 2012. Pursuant to the terms of the settlement agreement,
the Bancorp paid $46 million into a class settlement escrow account.
Previously, the Bancorp paid an additional $4 million in another
settlement escrow in connection with the settlement of claims from
plaintiffs not included in the class action. More than 7,900
merchants have requested exclusion from the class settlement.
Pursuant to the terms of the settlement agreement, 25% of the
funds paid into the class settlement escrow account have been
returned to the control of the defendants through Class Exclusion
Takedown Payments. Approximately 460 of the merchants who
requested exclusion from the class have filed separate federal
lawsuits against Visa, MasterCard and certain other defendants
alleging similar antitrust violations. These “opt-out” federal lawsuits
have been transferred to the United States District Court for the
Eastern District of New York. The Bancorp was not named as a
defendant in any of the opt-out federal lawsuits, but may have
obligations pursuant to indemnification arrangements and/or the
judgment or loss sharing agreements noted above. In addition, one
merchant filed a separate state court
lawsuit against Visa,
MasterCard and certain other defendants, including the Bancorp,
alleging similar antitrust violations. On January 14, 2014, the court
entered a final order approving the class settlement. A number of
merchants have filed appeals from that approval. On July 18, 2014,
the court in which all but one of the opt-out federal lawsuits has
been consolidated denied defendants’ motion to dismiss the
complaints. Several of the opt-out federal lawsuits have been
resolved. Refer to Note 17 for further information.
In 2008, two cases were filed in the United States District
Court for the Southern District of Ohio against the Bancorp and
certain officers styled Dudenhoeffer v Fifth Third Bancorp et al. Case No.
1:08-cv-538. The complaints alleged violations of ERISA based on
allegations similar to those set forth in the previously reported
securities class action cases. The ERISA actions were dismissed by
the trial court, but the Sixth Circuit Court of Appeals reversed the
trial court decision. The Bancorp petitioned the United States
Supreme Court to review and reverse the Sixth Circuit decision and
sought a stay of proceedings in the trial court pending appeal. On
December 13, 2013, the Supreme Court granted certiorari and
agreed to hear the appeal. Oral arguments were held on April 2,
2014 and on June 25, 2014 the Supreme Court unanimously vacated
the Sixth Circuit decision and remanded the case for further
proceedings consistent with the standards articulated in its decision.
The Supreme Court issued its mandate remanding the case back to
the Sixth Circuit Court of Appeals but no further proceedings have
occurred.
In November 2014, a shareholder of the Bancorp filed a
shareholder derivative suit in the Court of Common Pleas for
Hamilton County, Ohio, against current and former members of the
Bancorp’s Board of Directors, the Bancorp’s former Chief Financial
Officer and current Executive Vice President, Daniel T. Poston, the
134 Fifth Third Bancorp
Bancorp’s Chief Executive Officer, Kevin T. Kabat, and, nominally,
the Bancorp. The suit alleges breach of fiduciary duty, waste of
corporate assets and unjust enrichment in connection with the
Bancorp’s alleged violations of federal and state securities laws,
among other charges, in relation to its administrative settlement
with the United States Securities and Exchange Commission
announced on December 4, 2013 to resolve the previously reported
investigation of the Bancorp’s historical accounting and reporting
with respect to certain commercial loans that were sold or
reclassified as held for sale by the Bancorp in the fourth quarter of
2008. The suit seeks, among other things, unspecified monetary
damages, disgorgement of profits, certain corporate governance and
personnel actions and compliance and disclosure changes. On
January 16, 2015 a motion to dismiss the complaint was filed on
behalf of all defendants. The impact of the final disposition of this
lawsuit cannot be assessed at this time.
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 Bancorp’s consolidated financial position, results of
operations or cash flows.
The Bancorp and/or its affiliates are involved in information-
gathering requests, reviews, investigations and proceedings (both
formal and informal) by various governmental regulatory agencies
and law enforcement authorities, as well as self-regulatory bodies
regarding their respective businesses. Additional matters will likely
arise from time to time. Any of these matters may result in material
adverse consequences to the Bancorp, its affiliates and/or their
respective directors, officers and other personnel, including adverse
judgments, findings, settlements, fines, penalties, orders, injunctions
or other actions, amendments and/or restatements of the Bancorp’s
SEC filings and/or financial statements, as applicable, and/or
determinations of material weaknesses in our disclosure controls
and procedures. Investigations by regulatory authorities may from
time to time result in civil or criminal referrals to law enforcement
authorities such as the Department of Justice or a United States
Attorney. Among other matters, the Bancorp has been cooperating
with the Department of Justice, the Department of Housing and
Urban Development and the Federal Housing Finance Authority in
civil investigations regarding compliance with requirements relating
to certain Federal Housing Agency-insured loans and certain loans
sold to government sponsored entities originated by affiliates of the
Bancorp. The investigations could lead to liability under the Federal
False Claims Act and/or the Federal Financial Institutions Reform,
Recovery and Enforcement Act of 1989, which allow up to treble
and other special damages substantially in excess of actual losses.
Additionally, the Bancorp is also cooperating with an investigation
by the Department of Justice to determine whether the Bank
engaged in any discriminatory practices in connection with the
Bank's indirect automobile loan portfolio. Any claim resulting from
this investigation could include direct and indirect damages and civil
money penalties.
The Bancorp is party to numerous claims and lawsuits as well
as threatened or potential actions or claims concerning matters
arising from the conduct of its business activities. The outcome of
claims or 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to
(due
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
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 and
regulatory proceedings including the matters discussed above in an
aggregate amount up to approximately $105 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 Bancorp’s 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 Bancorp’s 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 the Bancorp’s 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.
135 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Bancorp’s normal
underwriting and approval procedures. Prior to approving a loan to
a related party, Compliance Risk Management must review and
determine whether the transaction requires approval from or a post
notification to the Bancorp’s Board of Directors. At December 31,
2014 and 2013, 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 Bancorp’s banking subsidiary.
The following table summarizes the Bancorp’s activities with its principal shareholders, directors and executives at December 31:
($ in millions)
Commitments to lend, net of participations:
Directors and their affiliated companies
Executive officers
Total
Outstanding balance on loans, net of participations and undrawn commitments
2014
2013
$
$
$
525
3
528
63
586
2
588
86
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 a warrant. The Bancorp retained
the remaining approximate 49% interest in Vantiv Holding, LLC.
During the first quarter of 2012, Vantiv, Inc. priced an IPO of
its shares and contributed the net proceeds to Vantiv Holding, LLC
for additional ownership interests. As a result of this offering, the
Bancorp’s ownership of Vantiv Holding, LLC was reduced to
approximately 39%. The impact of the capital contributions to
Vantiv Holding, LLC and the resulting dilution in the Bancorp’s
interest resulted in a gain of $115 million recognized by the Bancorp
in the first quarter of 2012.
The following table provides a summary of the sales transactions that impacted the Bancorp's ownership interest in Vantiv Holding, LLC after the
initial IPO:
($ in millions)
Period
Q4 2012
Q2 2013
Q3 2013
Q2 2014
(a)
Ownership
Percentage Sold
6 %
5
3
3
$
Gain on Sale
Remaining Ownership
Percentage(a)
157
242
85
125
33 %
28
25
23
The Bancorp’s remaining investment in Vantiv Holding, LLC of $394 as of December 31, 2014 was accounted for as an equity method investment in the Bancorp’s Consolidated Financial
Statements.
A
As of December 31, 2014, the Bancorp continued to hold
approximately 43 million Class B units of Vantiv Holding, LLC and
a warrant to purchase approximately 20.4 million Class C non-
voting units of Vantiv Holding, LLC, both of which may be
exchanged for Class A Common Stock of Vantiv, Inc. on a one for
one basis or at Vantiv, Inc.’s option for cash. In addition, the
Bancorp holds approximately 43 million Class B common shares of
Vantiv, Inc. The Class B common shares give the Bancorp voting
rights, but no economic interest in Vantiv, Inc. The voting rights
attributable to the Class B common shares are limited to 18.5% of
the voting power in Vantiv, Inc. at any time other than in
connection with a stockholder vote with respect to a change in
control in Vantiv, Inc. These securities are subject to certain terms
and restrictions.
The Bancorp recognized $48 million, $77 million and $61
million respectively, in noninterest income as part of its equity
method investment in Vantiv Holding, LLC for the years ended
December 31, 2014, 2013 and 2012 and received cash distributions
totaling $23 million, $40 million and $30 million during 2014, 2013
and 2012, respectively.
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 initially required to support Vantiv
Holding, LLC as a standalone entity during the deconversion
period. The majority of services previously provided by the Bancorp
to support Vantiv Holding, Inc. as a standalone entity are no longer
necessary and are now limited to certain general business resources.
Vantiv Holding, LLC paid the Bancorp $1 million for these services
for the years ended December 31, 2014, 2013 and 2012,
respectively. Other services provided to Vantiv Holding, LLC by the
Bancorp, have continued beyond the deconversion period, include
clearing, settlement and sponsorship. Vantiv Holding, LLC paid the
Bancorp $44 million for these services for the year ended December
31, 2014 and $34 million for the years ended December 31, 2013
and 2012, respectively. 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 $83 million, $88
136 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million and $83 million for the years ended December 31, 2014,
2013 and 2012, respectively.
As part of the initial sale, Vantiv Holding, LLC assumed loans
totaling $1.25 billion owed to the Bancorp, which were refinanced
in 2010 into a larger syndicated loan structure that included the
Bancorp. The outstanding balance of loans to Vantiv Holding, LLC
was $204 million and $348 million at December 31, 2014 and 2013,
respectively. Interest income relating to the loans was $5 million, $7
million and $11 million, respectively, for the years ended December
31, 2014, 2013 and 2012 and is included in interest and fees on
loans and leases in the Consolidated Statements of Income. Vantiv
Holding, LLC’s line of credit was $50 million as of December 31,
2014 and 2013. Vantiv Holding, LLC did not draw upon its line of
credit during the years ended December 31, 2014 or 2013.
20. INCOME TAXES
The Bancorp and its subsidiaries file a consolidated federal income tax return. The following is a summary of applicable income taxes included in
the Consolidated Statements of Income for the years ended December 31:
($ in millions)
Current income tax expense:
U.S. Federal income taxes
State and local income taxes
Foreign income taxes
Total current tax expense
Deferred income tax expense (benefit):
U.S. Federal income taxes
State and local income taxes
Foreign income taxes
Total deferred income tax expense
Applicable income tax expense
2014
2013
2012
424
34
8
466
71
9
(1)
79
545
494
23
2
519
232
23
(2)
253
772
327
38
-
365
252
19
-
271
636
$
$
The following is a reconciliation between the statutory U.S. Federal income tax rate and the Bancorp’s effective tax rate for the years ended
December 31:
Statutory tax rate
Increase (decrease) resulting from:
State taxes, net of federal benefit
Tax-exempt income
Credits
Unrealized stock-based compensation benefits
Other, net
Effective tax rate
Tax-exempt income in the rate reconciliation table includes interest
on municipal
lending,
interest
income/charges on life insurance policies held by the Bancorp, and
tax-exempt
bonds,
on
2014
35.0 %
1.4
(1.4)
(8.1)
-
-
26.9 %
2013
35.0
1.2
(1.1)
(6.0)
0.3
0.3
29.7
2012
35.0
1.7
(2.1)
(6.7)
0.8
0.1
28.8
certain gains on sales of leases that are exempt from federal
taxation.
The following table provides a reconciliation of the beginning and ending amounts of the Bancorp’s unrecognized tax benefits:
($ in millions)
Unrecognized tax benefits at January 1
Gross increases for tax positions taken during prior period
Gross decreases for tax positions taken during prior period
Gross increases for tax positions taken during current period
Settlements with taxing authorities
Lapse of applicable statute of limitations
Unrecognized tax benefits at December 31(a)
(a) Amounts represent unrecognized tax benefits that if recognized would affect the annual effective tax rate.
2014
7
2
-
2
-
-
11
2013
18
1
(7)
1
(5)
(1)
7
2012
14
6
(3)
2
-
(1)
18
$
$
A
The Bancorp’s unrecognized tax benefits as of December 31, 2014,
2013 and 2012 relate 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.
While it is reasonably possible that the amount of the
unrecognized tax benefits with respect to certain of the Bancorp’s
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.
137 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes are comprised of the following items at December 31:
($ in millions)
Deferred tax assets:
Allowance for loan and lease losses
Deferred compensation
Reserves
Reserve for unfunded commitments
State net operating losses
Other
Total deferred tax assets
Deferred tax liabilities:
Lease financing
Investments in joint ventures and partnership interests
MSRs
Other comprehensive income
Qualifying hedges and free-standing derivatives
Bank premises and equipment
State deferred taxes
Other
Total deferred tax liabilities
Total net deferred tax liability
2014
2013
$
$
$
$
$
463
113
96
47
18
189
926
896
329
237
231
105
103
81
148
2,130
(1,204)
554
109
101
57
22
180
1,023
865
381
254
44
97
114
76
130
1,961
(938)
At December 31, 2014 and 2013, the Bancorp had recorded
deferred tax assets of $18 million and $22 million, respectively,
related to state net operating loss carryforwards. The deferred tax
assets relating to state net operating losses (primarily resulting from
leasing operations) are presented net of specific valuation
allowances of $19 million at December 31, 2014 and 2013. If these
carryforwards are not utilized, they will expire in varying amounts
through 2034.
The Bancorp has determined that a valuation allowance is not
needed against the remaining deferred tax assets as of December 31,
2014 or 2013. 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, 2014 and
2013 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 Bancorp’s remaining deferred tax
assets will be realized through the reversal of its existing taxable
temporary differences and its projected future taxable income.
The IRS is currently examining the Bancorp’s 2010 and 2011
federal income tax returns. The statute of limitations for the
Bancorp’s federal income tax returns remains open for tax years
(cid:3)
21. RETIREMENT AND BENEFIT PLANS
The Bancorp’s qualified defined benefit plan’s benefits were frozen
in 1998, except for grandfathered employees. The Bancorp’s other
retirement plans consist of nonqualified, supplemental retirement
plans, which are funded on an as needed basis. A majority of these
2010-2014. 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 state’s 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 years ended
December 31, 2014, 2013 and 2012, the Bancorp recognized an
immaterial amount of interest expense in connection with income
taxes. At December 31, 2014 and 2013, the Bancorp had accrued
interest liabilities, net of the related tax benefits, of $1 million. No
material liabilities were recorded for penalties related to income
taxes.
Retained earnings at December 31, 2014 and 2013 included
$157 million in allocations of earnings for bad debt deductions of
former thrift subsidiaries for which no income tax has been
provided. Under current tax law, if certain of the Bancorp’s
subsidiaries use these bad debt reserves for purposes other than to
absorb bad debt losses, they will be subject to federal income tax at
the current corporate tax rate.
plans were obtained in acquisitions from prior years. The Bancorp
recognizes the overfunded and underfunded status of its pension
plans as an asset and liability in the Consolidated Balance Sheets.
The overfunded and underfunded amounts recognized in other assets and other liabilities, respectively, on the Consolidated Balance Sheets were
as follows as of December 31:
($ in millions)
Prepaid benefit cost
Accrued benefit liability
Net underfunded status
138 Fifth Third Bancorp
$
$
2014
-
(52)
(52)
2013
6
(27)
(21)
The following tables summarize the defined benefit retirement plans as of and for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$
Plans with an Overfunded Status(a)
($ in millions)
Fair value of plan assets at January 1
Actual return on assets
Contributions
Settlement
Benefits paid
Fair value of plan assets at December 31
Projected benefit obligation at January 1
Service cost
Interest cost
Settlement
Actuarial gain
Benefits paid
Projected benefit obligation at December 31
Overfunded projected benefit obligation at December 31
(a) The Bancorp’s defined benefit plan had an Overfunded status at December 31, 2013. The plan was Underfunded at December 31, 2014 and is reflected in the Underfunded Status table.
2014
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
Plans with an Underfunded Status
($ in millions)
Fair value of plan assets at January 1
Actual return on assets
Contributions
Settlement
Benefits paid
Fair value of plan assets at December 31
Projected benefit obligation at January 1
Service cost
Interest cost
Settlement
Actuarial loss (gain)
Benefits paid
Projected benefit obligation at December 31
Unfunded projected benefit obligation at December 31
$
$
$
$
$
2014
200
12
3
(11)
(9)
195
221
-
10
(11)
36
(9)
247
(52)
2013
185
30
5
(13)
(7)
200
224
-
10
(13)
(20)
(7)
194
6
2013
-
-
4
-
(4)
-
32
-
1
-
(2)
(4)
27
(27)
The estimated net actuarial loss for the defined benefit pension
plans that will be amortized from AOCI into net periodic benefit
cost during 2015 is $10 million. The estimated net prior service cost
for the defined benefit pension plan that will be amortized from
AOCI into net periodic benefit cost during 2015 is immaterial to the
Consolidated Financial Statements.
The following table summarizes net periodic benefit cost and other changes in plan assets and benefit obligations recognized in OCI for the years
ended December 31:
($ in millions)
Components of net periodic benefit cost:
Service cost
Interest cost
Expected return on assets
Amortization of net actuarial loss
Amortization of net prior service cost
Settlement
Net periodic benefit cost
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Net actuarial loss (gain)
Net prior service cost
Amortization of net actuarial loss
Amortization of prior service cost
Settlement
Total recognized in other comprehensive income
Total recognized in net periodic benefit cost and
other comprehensive income
2014
2013
2012
$
$
$
$
-
10
(14)
7
-
5
8
37
-
(7)
-
(5)
25
33
-
10
(13)
11
-
5
13
(38)
-
(11)
-
(5)
(54)
(41)
-
10
(13)
14
-
6
17
7
-
(14)
-
(6)
(13)
4
139 Fifth Third Bancorp
Fair Value Measurements of Plan Assets
The following table summarizes plan assets measured at fair value on a recurring basis as of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2014 ($ in millions)
Equity securities:
Equity securities (Value)
Equity securities (Blended)(b)
Total equity securities
Mutual and exchange traded funds:
Money market funds
International funds
Domestic funds
Debt funds
Alternative strategies
Total mutual and exchange traded funds
Debt securities:
U.S. Treasury obligations
Agency mortgage-backed
Non-agency mortgage-backed
Corporate bonds(c)
Total debt securities
Total plan assets
2013 ($ in millions)
Equity securities:
Equity securities (Value)
Equity securities (Blended)(b)
Total equity securities
Mutual and exchange traded funds:
Money market funds
International funds
Domestic funds
Debt funds
Alternative strategies
Commodity funds
Total mutual and exchange traded funds
Debt securities:
U.S. Treasury obligations
Agency mortgage-backed
Non-agency mortgage-backed
Total debt securities
Total plan assets
(a)
(b)
(c)
For further information on fair value hierarchy levels, refer to Note 1.
Includes holdings in Bancorp common stock.
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.
140 Fifth Third Bancorp
Fair Value Measurements Using(a)
Level 1
Level 2
Level 3
Total Fair Value
10
46
56
7
-
-
-
-
7
3
-
-
-
3
66
8
40
48
7
-
-
-
-
6
13
3
-
-
3
64
-
-
-
-
38
31
22
22
113
-
11
2
3
16
129
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Fair Value Measurements Using(a)
Level 2
Level 3
-
-
-
-
43
41
20
17
-
121
-
13
2
15
136
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
10
46
56
7
38
31
22
22
120
3
11
2
3
19
195
Total Fair Value
8
40
48
7
43
41
20
17
6
134
3
13
2
18
200
Level 1
$
$
$
$
Mutual and exchange traded funds
All of the plan’s mutual and exchange traded funds are publicly
traded. The plan measures the value of these investments using the
fund’s quoted prices that 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 the redemption price of
units held, which is based on the current fair value of the fund’s
underlying assets. Unit values are determined by dividing the fund’s
net assets at fair value by its units outstanding at the valuation dates
to obtain the investment’s net asset value. Therefore, these
investments are classified within Level 2 of the valuation hierarchy.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt securities
Where quoted prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy. Level 1 securities
include U.S. Treasury obligations and federal agency securities. If
quoted market prices are not available, then fair values are estimated
using pricing models, quoted prices of securities with similar
characteristics, or DCFs. Examples of such instruments, which are
classified within Level 2 of the valuation hierarchy, include agency
mortgage-backed securities, non-agency mortgage-backed securities
and corporate bonds.
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 plan’s liabilities. The expected long-term rate
of return assumption reflects the average return expected on the
assets invested to provide for the plan’s 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.
In 2014, the Bancorp updated the mortality assumption which
resulted in an increase of $14 million to the projected benefit
obligation.
The following table summarizes the weighted-average plan assumptions for the years ended December 31:
For measuring benefit obligations at year end:
Discount rate
Rate of compensation increase
Expected return on plan assets
For measuring net periodic benefit cost:
Discount rate
Rate of compensation increase
Expected return on plan assets
2014
2013
2012
3.82 %
N/A(a)
7.25
4.72
N/A(a)
7.25
4.72
4.00
7.50
3.83
4.00
7.50
3.83
4.00
8.00
4.27
5.00
8.00
(a)
Since the Bancorp’s qualified defined benefit plan’s benefits were frozen in 1998, except for grandfathered employees, the rate of compensation increase is no longer applicable beginning in 2014 since
minimal grandfathered employees are still accruing benefits.
Lowering both the expected rate of return on the plan assets and
the discount rate by 0.25% would have increased the 2014 pension
expense by approximately $1 million.
Based on the actuarial assumptions, the Bancorp expects to
contribute $4 million to the plan in 2015. Estimated pension benefit
payments, which reflect expected future service, are $22 million in
2015, $21 million in 2016, $19 million in 2017, $18 million in 2018
and $16 million in 2019. The total estimated payments for the years
2020 through 2024 is $80 million.
Investment Policies and Strategies
The Bancorp’s 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 Bancorp’s
common stock), fixed-income securities (including federal agency
obligations, corporate bonds and notes), alternative strategies
and
(including
commodities) and cash.
funds, precious metals
traditional mutual
The following table provides the Bancorp’s targeted and actual weighted-average asset allocations by asset category for the years ended December
31:
(cid:3)(cid:3)
(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
Targeted range
2014
Equity securities
Bancorp common stock
Total equity securities(a)
Total fixed-income securities
Alternative strategies
Cash
Total
(a)
Includes mutual and exchange traded funds.
39-78 %
11-41
8-18
0-10
62 %
2
64
20
12
4
100 %
2013
65
2
67
22
7
4
100
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 portfolio’s value are
tolerated in an effort to achieve real capital growth. There were no
significant concentrations of risk associated with the investments of
the Bancorp’s benefit and retirement plan at December 31, 2014
and 2013.
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. Per ERISA,
the Bancorp’s common stock cannot exceed 10% 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
141 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
material changes in the Trustee’s outlook and recommended
investment policy.
Other Information on Retirement and Benefit Plans
The accumulated benefit obligation for all defined benefit plans was
$247 million and $221 million at December 31, 2014 and 2013,
respectively.
Amounts relating to the Bancorp’s defined benefit plans with assets exceeding benefit obligations were as follows at December 31:
($ in millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2014
2013
$
-
-
-
194
194
200
Amounts relating to the Bancorp’s defined benefit plans with benefit obligations exceeding assets were as follows at December 31:
2014
2013
$
247
247
195
27
27
-
($ in millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
As of December 31, 2014 and 2013, $195 million and $200 million,
respectively, of plan assets were managed by Fifth Third Bank, a
subsidiary of the Bancorp. Plan assets included $4 million of
Bancorp common stock as of December 31, 2014 and 2013,
respectively. Plan assets are not expected to be returned to the
Bancorp during 2015.
The Bancorp’s profit sharing plan expense was $19 million, $32
million and $46 million for the years ended December 31, 2014,
2013 and 2012, respectively. Expenses recognized for matching
contributions to the Bancorp’s defined contribution savings plans
were $44 million, $43 million and $42 million for the years ended
December 31, 2014, 2013 and 2012, respectively.
142 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. ACCUMULATED OTHER COMPREHENSIVE INCOME
The tables below present the activity of the components of OCI and AOCI for the years ended December 31:
($ in millions)
2014
Unrealized holding gains on available-for-sale securities arising
during period
Reclassification adjustment for net gains included in net income
Net unrealized gains on available-for-sale securities
Unrealized holding gains on cash flow hedge derivatives arising
during period
Reclassification adjustment for net gains on cash flow
hedge derivatives included in net income
Net unrealized gains on cash flow hedge derivatives
Net actuarial loss arising during the period
Reclassification of amounts to net periodic benefit costs
Defined benefit pension plans, net
Total
2013
Unrealized holding losses on available-for-sale securities arising
during period
Reclassification adjustment for net losses included in net income
Net unrealized gains on available-for-sale securities
Unrealized holding losses on cash flow hedge derivatives arising
during period
Reclassification adjustment for net gains on cash flow
hedge derivatives included in net income
Net unrealized gains on cash flow hedge derivatives
Net actuarial gain arising during the period
Reclassification of amounts to net periodic benefit costs
Defined benefit pension plans, net
Total
2012
Unrealized holding losses on available-for-sale securities arising
during period
Reclassification adjustment for net gains included in net income
Net unrealized gains on available-for-sale securities
Unrealized holding gains on cash flow hedge derivatives arising
during period
Reclassification adjustment for net gains on cash flow
hedge derivatives included in net income
Net unrealized gains on cash flow hedge derivatives
Net actuarial loss arising during the period
Reclassification of amounts to net periodic benefit costs
Defined benefit pension plans, net
Total
Total Other
Comprehensive Income
Total Accumulated Other
Comprehensive Income
Pretax
Activity
Tax
Effect
Net
Activity
Beginning
Balance
Net
Activity
Ending
Balance
$
$
$
$
$
$
580
(37)
543
60
(44)
16
(37)
12
(25)
534
(454)
6
(448)
(13)
(44)
(57)
38
16
54
(451)
(97)
(15)
(112)
37
(83)
(46)
(7)
20
13
(145)
(202)
13
(189)
(21)
15
(6)
12
(4)
8
(187)
159
(2)
157
5
15
20
(13)
(6)
(19)
158
34
5
39
(13)
29
16
2
(7)
(5)
50
378
(24)
354
39
(29)
10
(25)
8
(17)
347
(295)
4
(291)
(8)
(29)
(37)
25
10
35
(293)
(63)
(10)
(73)
24
(54)
(30)
(5)
13
8
(95)
121
354
475
13
10
23
(52)
82
(17)
347
(69)
429
412
(291)
121
50
(37)
13
(87)
375
35
(293)
(52)
82
485
(73)
412
80
(30)
50
(95)
470
8
(95)
(87)
375
143 Fifth Third Bancorp
The table below presents reclassifications out of AOCI for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of AOCI: ($ in millions)
Net unrealized gains on available-for-sale securities:(b)
Net gains (losses) included in net income
Net unrealized gains on cash flow hedge derivatives:(b)
Interest rate contracts related to C&I loans
Interest rate contracts related to long-term debt
Net periodic benefit costs:(b)
Amortization of net actuarial loss
Settlements
Affected Line Item in the
Consolidated Statements of Income
2014
2013
Securities gains, net
Income before income taxes
Applicable income tax expense
Net income
$
Interest and fees on loans and leases
Interest on long-term debt
Income before income taxes
Applicable income tax expense
Net income
Employee benefits expense (a)
Employee benefits expense (a)
Income before income taxes
Applicable income tax expense
Net income
37
37
(13)
24
44
-
44
(15)
29
(7)
(5)
(12)
4
(8)
Net income
$
45
(6)
(6)
2
(4)
45
(1)
44
(15)
29
(11)
(5)
(16)
6
(10)
15
Total reclassifications for the period
(a)
(b) Amounts in parentheses indicate reductions to net income.
This AOCI component is included in the computation of net periodic benefit cost. Refer to Note 21 for information on the computation of net periodic benefit cost.
144 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:
($ in millions, except share data)
December 31, 2011
Shares acquired for treasury
Impact of stock transactions under stock compensation plans, net
Other
December 31, 2012
Shares acquired for treasury
Issuance of preferred shares, Series I
Issuance of preferred shares, Series H
Redemption of preferred shares, Series G
Impact of stock transactions under stock compensation plans, net
Other
December 31, 2013
Shares acquired for treasury
Issuance of preferred shares, Series J
Impact of stock transactions under stock compensation plans, net
Other
December 31, 2014
$
$
$
$
Preferred Stock—Series J
On June 5, 2014, the Bancorp issued, in a registered public offering,
300,000 depositary shares, representing 12,000 shares of 4.90%
fixed-to-floating rate non-cumulative Series J perpetual preferred
stock, for net proceeds of $297 million. Each preferred share has a
$25,000
liquidation preference. The preferred stock accrues
dividends, on a non-cumulative semi-annual basis, at an annual rate
of 4.90% through but excluding September 30, 2019, at which time
it converts to a quarterly floating rate dividend of three-month
LIBOR plus 3.129%. Subject to any required regulatory approval,
the Bancorp may redeem the Series J preferred shares at its option,
in whole or in part, at any time on or after September 30, 2019, or
any time prior following a regulatory capital event. The Series J
preferred shares are not convertible into Bancorp common shares
or any other securities.
Preferred Stock—Series I
On December 9, 2013, the Bancorp issued, in a registered public
offering, 18,000,000 depositary shares, representing 18,000 shares of
6.625% fixed-to-floating rate non-cumulative Series I perpetual
preferred stock, for net proceeds of $441 million. Each preferred
share has a $25,000 liquidation preference. The preferred stock
accrues dividends, on a non-cumulative quarterly basis, at an annual
rate of 6.625% through but excluding December 31, 2023, at which
time it converts to a quarterly floating rate dividend of three-month
LIBOR plus 3.71%. Subject to any required regulatory approval, the
Bancorp may redeem the Series I preferred shares at its option in
whole or in part, at any time on or after December 31, 2023 and
may redeem in whole but not in part, following a regulatory capital
event at any time prior to December 31, 2023. The Series I
preferred shares are not convertible into Bancorp common shares
or any other securities.
Preferred Stock—Series H
On May 16, 2013, the Bancorp issued, in a registered public
offering, 600,000 depositary shares, representing 24,000 shares of
5.10% fixed-to-floating rate non-cumulative Series H perpetual
preferred stock, for net proceeds of $593 million. Each preferred
share has a $25,000 liquidation preference. The preferred stock
accrues dividends, on a non-cumulative semi-annual basis, at an
annual rate of 5.10% through but excluding June 30, 2023, at which
Shares
923,892,581 $
923,892,581 $
Common Stock
Value
2,051
-
-
-
2,051
-
-
-
-
-
-
2,051
-
-
-
-
2,051
923,892,581 $
923,892,581 $
-
-
-
-
-
-
-
-
-
-
-
-
-
Preferred Stock
Value
398
-
-
-
398
-
441
593
(398)
-
-
1,034
-
297
-
-
1,331
Shares
16,450 $
-
-
-
16,450 $
-
18,000
24,000
(16,450)
-
-
42,000 $
-
12,000
-
-
54,000 $
Treasury Stock
Value
(64)
(627)
54
3
(634)
(1,242)
-
-
540
38
3
(1,295)
(726)
-
47
2
(1,972)
Shares
4,088,145
42,424,014
(4,654,165)
(117,470)
41,740,524
65,516,126
-
-
(35,529,018)
(3,697,042)
556,246
68,586,836
34,799,873
-
(3,493,671)
(47,409)
99,845,629
time it converts to a quarterly floating rate dividend of three-month
LIBOR plus 3.033%. Subject to any required regulatory approval,
the Bancorp may redeem the Series H preferred shares at its option
in whole or in part, at any time on or after June 30, 2023 and may
redeem in whole but not in part, following a regulatory capital event
at any time prior to June 30, 2023. The Series H preferred shares are
not convertible into Bancorp common shares or any other
securities.
Preferred Stock—Series G
In 2008, the Bancorp issued 8.50% non-cumulative Series G
convertible preferred stock. The depositary shares represented
1/250th of a share of Series G convertible preferred stock and had a
liquidation preference of $25,000 per preferred share of Series G
stock. The preferred stock was 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 June 11, 2013, pursuant to the Amended Articles of
Incorporation, the Bancorp’s Board of Directors authorized the
conversion into common stock, no par value, of all outstanding
shares of the Bancorp’s Series G perpetual preferred stock. The
Articles grant the Bancorp the right, at its option, to convert all
outstanding shares of Series G preferred stock if the closing price of
common stock exceeded 130% of the applicable conversion price
for 20 trading days within any period of 30 consecutive trading days.
The closing price of shares of common stock satisfied such
threshold for the 30 trading days ended June 10, 2013, and the
Bancorp gave the required notice of its exercise of its conversion
right.
On July 1, 2013, the Bancorp converted the remaining 16,442
outstanding shares of Series G preferred stock, which represented
4,110,500 depositary shares, into shares of Fifth Third’s common
stock. Each share of Series G preferred stock was converted into
2,159.8272 shares of common stock, representing a total of
35,511,740 issued shares. The common shares issued in the
conversion are exempt securities pursuant to Section 3(a)(9) of the
Securities Act of 1933, as amended, as the securities exchanged were
exclusively with the Bancorp’s existing security holders where no
commission or other remuneration was paid. Upon conversion, the
145 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
depositary shares were delisted from the NASDAQ Global Select
Market and withdrawn from the Exchange.
Treasury Stock
On March 13, 2012, the Bancorp announced the results of its capital
plan submitted to the FRB as part of the 2012 CCAR. The FRB
indicated to the Bancorp that it did not object to the repurchase of
common shares in an amount equal to any after-tax gains realized by
the Bancorp from the sale of Vantiv, Inc. common shares by either
the Bancorp or Vantiv, Inc. On August 21, 2012, the Bancorp
announced that the FRB did not object to its capital plan
resubmitted under the 2012 CCAR process, which included the
repurchases of common shares of up to $600 million through the
first quarter of 2013, in addition to any incremental repurchase of
common shares related to any after-tax gains realized by the
Bancorp from the sale of Vantiv, Inc. common shares by either the
Bancorp or Vantiv, Inc. As a result, on August 21, 2012, Fifth
Third’s Board of Directors authorized the Bancorp to repurchase up
to 100 million shares of its outstanding common stock in the open
market or in privately negotiated transactions, and to utilize any
derivative or similar
to affect share repurchase
transactions.
instrument
On March 14, 2013, the Bancorp announced the results of its
capital plan submitted to the FRB as part of the 2013 CCAR. The
FRB indicated to the Bancorp that it did not object to the potential
repurchase of common shares in an amount up to $984 million,
including any shares issued in a Series G preferred stock conversion,
and the repurchase of common shares in an amount equal to any
after-tax gains realized by the Bancorp from the sale of Vantiv, Inc.
common stock. On March 19, 2013, the Board of Directors
authorized the Bancorp to repurchase up to 100 million common
shares in the open market or in privately negotiated transactions,
and to utilize any derivative or similar instrument to effect share
repurchase
transactions. This share repurchase authorization
replaced the Board’s previous authorization from August of 2012.
On March 18, 2014, the Board of Directors authorized the
Bancorp to repurchase up to 100 million common shares in the
open market or in privately negotiated transactions, and to utilize
any derivative or similar instrument to effect share repurchase
transactions. This share repurchase authorization replaced the
Board’s previous authorization from March of 2013.
On March 26, 2014, the Bancorp announced the results of its
capital plan submitted to the FRB as part of the 2014 CCAR. The
FRB indicated to the Bancorp that it did not object to the potential
repurchase of $669 million of common shares with the additional
ability to repurchase common shares in an amount equal to any
after-tax gains realized by the Bancorp from the sale of Vantiv, Inc.
common stock for the period beginning April 1, 2014 and ending
March 31, 2015.
The Bancorp entered into a number of accelerated share
repurchase transactions during 2012, 2013 and 2014. As part of
these transactions, the Bancorp entered into forward contracts in
which the final number of shares delivered at settlement was based
generally on a discount to the average daily volume weighted
average price of the Bancorp’s common stock during the term of
these repurchase agreements. The accelerated share repurchases
were treated as two separate transactions (i) the acquisition of
treasury shares on the acquisition date and (ii) a forward contract
indexed to the Bancorp’s stock.
146 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a summary of the Bancorp's accelerated share repurchase transactions that were entered into or settled during 2012,
2013 and 2014. For more information on a subsequent event related to capital actions refer to Note 31 of the Notes to Consolidated Financial
Statements.
Shares Repurchased on
Repurchase Date
(cid:3)
Shares Received from Forward
Contract Settlement
Total Shares
Repurchased
Settlement Date
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
Amount ($ in millions)
75
$
350
125
100
125
539
200
456
99
150
225
180
(cid:3)(cid:3)
Repurchase Date(cid:3)
April 26, 2012
August 28, 2012
November 9, 2012
December 19, 2012
January 31, 2013
May 24, 2013
November 18, 2013
December 13, 2013
January 31, 2014
May 1, 2014
July 24, 2014
October 23, 2014
(cid:3)
24. STOCK-BASED COMPENSATION
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
4,838,710
21,531,100
7,710,761
6,267,410
6,953,028
25,035,519
8,538,423
19,084,195
3,950,705
6,216,480
9,352,078
8,337,875
631,986
1,444,047
657,914
127,760
849,037
4,270,250
1,132,495
2,294,932
602,109
1,016,514
1,896,685
794,245
5,470,696
22,975,147
8,368,675
6,395,170
7,802,065
29,305,769
9,670,918
21,379,127
4,552,814
7,232,994
11,248,763
9,132,120
June 1, 2012
October 24, 2012
February 12, 2013
February 27, 2013
April 5, 2013
October 1, 2013
March 5, 2014
March 31, 2014
March 31, 2014
July 21, 2014
October 14, 2014
January 8, 2015
and remaining shares available for future issuance under all of the
Bancorp’s equity compensation plans as of December 31, 2014:
Plan Category (shares in thousands)
Equity compensation plans approved by shareholders
SARs
Restricted stock
Stock options(c)
Phantom stock units
Performance units
Employee stock purchase plan
Number of Shares to be
Issued Upon Exercise
Weighted-Average
Exercise Price
(b)
7,253
7
(d)
(e)
(b)
N/A
$32.26
N/A
N/A
Shares Available for
Future Issuance
30,786 (a)
(a)
(a)
(a)
N/A
(a)
7,431 (f)
38,217
Total shares
(a) Under the 2014 Incentive Compensation Plan, 36 million shares of stock were authorized for issuance as incentive and nonqualified stock options, SARs, restricted stock and restricted stock units,
7,260
(b)
(c)
(d)
(e)
(f)
performance units and performance RSAs.
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.
Excludes 0.3 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 $13.76 per share.
Phantom stock units are settled in cash.
The number of shares to be issued is dependent upon the Bancorp achieving certain predefined performance targets and ranges from zero shares to approximately 2 million shares.
Represents remaining shares of Fifth Third common stock under the Bancorp’s 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 Bancorp’s
Incentive Compensation Plan to key employees and directors of the
Bancorp and its subsidiaries. The Incentive Compensation Plan was
approved by shareholders on April 15, 2014, and authorized the
issuance of up to 36 million shares, including 16 million shares for
Full Value Awards, as equity compensation and provides for
incentive and nonqualified stock options, SARs, RSAs and restricted
stock units, and performance shares. 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
2014 Incentive Compensation Plan, the potential dilution to which
the Bancorp’s 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 is 10%.
SARs, restricted stock, stock options and performance units
outstanding represent seven percent of the Bancorp’s issued shares
at December 31, 2014.
All of the Bancorp’s stock-based awards are to be settled with
stock. 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 Bancorp’s 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 award grants vest after four
years, or ratably over three or four 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
Bancorp’s common stock on the date of grant, have 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 market conditions as
defined by the plan. All of the Bancorp’s executive stock-based
awards contain an annual performance hurdle of two percent return
on tangible common equity. If this threshold is not met all awards
147 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
that would vest in the next year are forfeited. The Bancorp met this
threshold as of December 31, 2014.
Stock-based compensation expense was $83 million, $78
million and $69 million for the years ended December 31, 2014,
2013 and 2012, respectively, and is included in salaries, wages, and
incentives in the Consolidated Statements of Income. The total
related income tax benefit recognized was $30 million, $28 million
and $24 million for the years ended December 31, 2014, 2013 and
2012, 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 December 31:
Expected life (in years)
Expected volatility
Expected dividend yield
Risk-free interest rate
2014
6
35%
2.4%
2.0%
2013
6
36%
3.0%
1.0%
2012
6
37%
2.8%
1.2%
The expected life is generally derived from historical exercise
patterns and represents the amount of time that SARs granted are
expected to be outstanding. The expected volatility is based on a
combination of historical and implied volatilities of the Bancorp’s
common stock. The expected dividend yield is based on annual
dividends divided by the Bancorp’s stock price. Annual dividends
are based on projected dividends, estimated using an expected 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 SARs 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 $6.53, $4.56 and $4.23 per share for the
years ended 2014, 2013 and 2012, respectively. The total grant-date
fair value of SARs that vested during 2014, 2013 and 2012 was $34
million, $29 million, and $22 million, respectively.
At December 31, 2014, there was $57 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 2.4 years.
SARs (Number of SARs in thousands)
Outstanding at January 1
Granted
Exercised
Forfeited or expired
Outstanding at December 31
Exercisable at December 31
2014
Weighted-
Average
Grant Price
19.98
21.63
13.63
34.19
19.79
21.71
Number of
SARs
48,599 $
4,526
(4,408)
(3,127)
45,590 $
27,950 $
2013
Number of
SARs
44,120
10,267
(2,904)
(2,884)
48,599
26,462
$
$
$
Weighted-
Average
Grant Price
20.41
16.16
11.18
21.78
19.98
24.14
2012
Weighted-
Average
Grant Price
22.20
14.36
6.29
23.33
20.41
26.76
Number of
SARs
36,502 $
12,179
(1,271)
(3,290)
44,120 $
23,248 $
The following table summarizes outstanding and exercisable SARs by grant price at December 31, 2014:
Grant price per share
Under $10.00
$10.01-$20.00
$20.01-$30.00
$30.01-$40.00
Over $40.00
All SARs
Outstanding SARs
Exercisable SARs
Number of
SARs at
Year End
(000s)
3,363 $
29,089
4,362
6,443
2,333
45,590 $
Weighted-
Average
Grant Price
3.98
15.36
21.64
38.67
42.16
19.79
Weighted-
Average
Remaining
Contractual
Life
(in years)
4.3
6.7
9.3
1.7
0.8
5.8
Number of
SARs at
Year End
(000s)
3,360 $
15,783
31
6,443
2,333
27,950 $
Weighted-
Average
Grant Price
3.99
15.54
22.73
38.67
42.16
21.71
Weighted-
Average
Remaining
Contractual
Life
(in years)
4.3
5.9
3.4
1.7
0.8
4.3
Restricted Stock Awards
The total grant-date fair value of RSAs that vested during 2014,
2013 and 2012 was $32 million, $40 million and $32 million,
respectively. At December 31, 2014, there was $88 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 2.6 years.
148 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2014
Weighted-
Average
Shares
6,710 $
3,264
(2,183)
(538)
7,253 $
Grant-Date
Fair Value
15.11
21.61
14.84
16.73
17.98
2013
Weighted-
Average
Grant-Date
Fair Value
14.32
16.21
14.71
14.97
15.11
Shares
6,379 $
3,583
(2,720)
(532)
6,710 $
RSAs (shares in thousands)
Nonvested at January 1
Granted
Exercised
Forfeited
Nonvested at December 31
2012
Weighted-
Average
Shares
Grant-Date
Fair Value
15.95
14.33
18.37
15.35
14.32
4,764 $
3,863
(1,826)
(422)
6,379 $
The following table summarizes unvested RSAs by grant-date fair value at December 31, 2014:
Grant-Date Fair Value Per Share
Under $5.00
$5.01-$10.00
$10.01-$15.00
$15.01-$20.00
$20.01-$25.00
All RSAs
Nonvested RSAs
Number of
RSAs at Year End
(000s)
Weighted-Average
Remaining
Contractual Life
(in years)
-
48
1,801
2,320
3,084
7,253
-
0.8
0.7
1.3
1.8
1.4
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 2014, 2013 and 2012.
The total intrinsic value of options exercised was $1 million in
2014, 2013 and 2012, respectively. Cash received from options
exercised was $1 million in 2014 and $2 million in both 2013 and
2012. The tax benefit realized from exercised options was
immaterial to the Bancorp’s Consolidated Financial Statements
during 2014, 2013 and 2012. All stock options were vested as of
December 31, 2008, therefore, no stock options vested during 2014,
2013 or 2012. As of December 31, 2014, the aggregate intrinsic
value of both outstanding options and exercisable options was $2
million.
Stock Options (Number of Options in thousands)
Outstanding at January 1
Exercised
Forfeited or expired
Outstanding at December 31
Exercisable at December 31
2014
Weighted-
Average
Exercise Price
Number of
Options
546 $
(115)
(166)
265 $
265 $
20.72
12.84
36.42
14.25
14.25
2013
Number of
Options
3,877
(190)
(3,141)
546
546
$
$
$
Weighted-
Average
Exercise Price
45.00
11.88
51.23
20.72
20.72
The following table summarizes outstanding and exercisable stock options by exercise price at December 31, 2014:
Number of
Options
2012
Weighted-
Average
Grant Price
53.88
10.32
66.25
45.00
45.00
7,584 $
(205)
(3,502)
3,877 $
3,877 $
Exercise price per share
Under $10.00
$10.01-$20.00
$20.01-$30.00
$30.01-$40.00
Over $40.00
All stock options
Outstanding and Exercisable Stock Options
Number of
Options at Year
End (000s)
Weighted-
Average
Exercise Price
1 $
258
1
-
5
265 $
8.59
13.76
24.41
-
40.98
14.25
Weighted-Average
Remaining
Contractual Life
(in years)
4.0
1.0
3.0
-
2.0
1.0
149 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to
in reaction
Other stock-based compensation
The Bancorp’s Board of Directors previously approved the use of
phantom stock units as part of its compensation for executives in
connection with changes made
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 Bancorp’s 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 Bancorp’s
common stock on the pay date for such pay period. The phantom
stock units vested immediately on issuance. Phantom stock was
expensed based on the number of outstanding units multiplied by
the closing price of the Bancorp’s 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 executive’s death. Units issued thereafter were settled in
cash with 50% settled on June 15, 2012 and 50% settled on June 15,
2013. The amount paid on settlement of the phantom stock units
was equal to the total amount of phantom stock units settled at the
reported closing price of the Bancorp’s common stock on the
settlement date. Under the phantom stock program, no phantom
stock units were granted during the years ended December 31, 2014,
2013 and 2012. No phantom stock units were settled during the year
ended December 31, 2014 and 200,130 and 199,813 phantom stock
units were settled during the years ended December 31, 2013 and
2012, respectively.
Performance units are payable contingent upon the Bancorp
achieving certain predefined performance targets over the three-year
measurement period. Awards granted during 2014, 2013 and 2012
will be entirely settled in stock. The performance targets are based
on the Bancorp’s performance relative to a defined peer group.
During 2014, 2013 and 2012, 322,567, 348,595, and 344,741
performance units, respectively, were granted by the Bancorp. These
awards were granted at a weighted-average grant-date fair value of
$15.61, $16.15 and $14.36 per unit during 2014, 2013 and 2012,
respectively.
The Bancorp sponsors a stock purchase plan that allows
qualifying employees to purchase shares of the Bancorp’s common
stock with a 15% match. During the years ended December 31,
2014, 2013 and 2012, there were 599,101, 690,039 and 827,709
shares, respectively, purchased by participants and the Bancorp
recognized stock-based compensation expense of $1 million in each
of the respective years.
150 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE
The following table presents the major components of other noninterest income and other noninterest expense for the years ended December 31:
($ in millions)
Other noninterest income:
Gain on Vantiv, Inc. IPO and sale of Vantiv, Inc. shares
Operating lease income
Equity method income from interest in Vantiv Holding, LLC
Cardholder fees
BOLI income
Valuation adjustments on the warrant and put options associated with sale of Vantiv Holding, LLC
Banking center income
Consumer loan and lease fees
Insurance income
Gain on loan sales
Loss on OREO
Loss on swap associated with the sale of Visa, Inc. class B shares
Other, net
Total other noninterest income
Other noninterest expense:
Losses and adjustments
Impairment on affordable housing investments
Loan and lease
Marketing
FDIC insurance and other taxes
Professional services fees
Operating lease
Travel
Postal and courier
Data processing
Recruitment and education
OREO expense
Insurance
Supplies
Intangible asset amortization
Loss on debt extinguishment
Benefit from the reserve for unfunded commitments
Other, net
Total other noninterest expense
2014
2013
2012
$
$
$
$
148
84
48
45
44
31
30
25
13
-
(14)
(38)
34
450
188
135
119
98
89
72
67
52
47
41
28
17
16
15
4
-
(27)
178
1,139
336
75
77
47
52
206
34
27
25
3
(26)
(31)
54
879
221
108
158
114
127
76
57
54
48
42
26
16
17
16
8
8
(17)
185
1,264
272
60
61
46
35
67
32
27
28
20
(57)
(45)
28
574
187
90
183
128
114
56
43
52
48
40
28
21
18
17
13
169
(2)
169
1,374
151 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26. EARNINGS PER SHARE
The following table provides the calculation of earnings per share and the reconciliation of earnings per share and earnings per diluted share for
the years ended December 31:
2014
2013
2012
Average Per Share
Shares Amount
Income
Average Per Share
Shares Amount
Income
Average Per Share
Shares Amount
1.68
1,836
37
1,799
14
1,785
1,799
-
18
1,817
14
869
2.05
8
18
1,576
35
1,541
10
1,531
1,541
-
35
1,576
10
904
1.69
6
36
1.66
1,803
895
2.02
1,566
946
1.66
833
10
-
843
$
$
$
1,414
Income
1,481
67
1,414
12
1,402
(in millions, except per share data)
Earnings per share:
Net income attributable to Bancorp
Dividends on preferred stock
Net income available to common shareholders
Less: Income allocated to participating securities
Net income allocated to common shareholders
Earnings per diluted share:
Net income available to common shareholders
Effect of dilutive securities:
Stock-based awards
Series G convertible preferred stock
Net income available to common shareholders
plus assumed conversions
Less: Income allocated to participating securities
Net income allocated to common shareholders
plus assumed conversions
(cid:3)
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 2014, 2013
and 2012 excludes 13 million, 24 million, and 36 million,
respectively, of SARs and an immaterial amount, 1 million, and 5
million, respectively, of stock options because their inclusion would
have been anti-dilutive.
-
-
1,414
1,402
12
$
The diluted earnings per share computation for the year ended
December 31, 2014 excludes the impact of the forward contract
related to the October 23, 2014 accelerated share repurchase
transaction. Based on the average daily volume-weighted average
price of the Bancorp’s common stock during the fourth quarter of
2014, the counterparty to the transaction would have been required
to deliver additional shares for the settlement of the forward
contract as of December 31, 2014, and thus the impact of the
accelerated share repurchase transaction would have been anti-
dilutive to earnings per share.
The diluted earnings per share computation for the year ended
December 31, 2013 excludes the impact of the forward contracts
related to the November 18, 2013 and December 13, 2013
accelerated share repurchase transactions. Based upon the average
daily volume-weighted average price of the Bancorp’s common
stock during the fourth quarter of 2013, the counterparty to the
transactions would have been required to deliver additional shares
for the settlement of the forward contracts as of December 31,
2013, and thus the impact of the two accelerated share repurchase
transactions would have been anti-dilutive to earnings per share.
to
The diluted earnings per share computation for the year ended
December 31, 2012 excludes the impact of the forward contracts
related
the November 6, 2012 and December 14, 2012
accelerated share repurchase transactions. Based upon the average
daily volume-weighted average price of the Bancorp’s common
stock during the fourth quarter of 2012, the counterparty to the
transactions would have been required to deliver additional shares
for the settlement of the forward contracts as of December 31,
2012, and thus the impact of the two accelerated share repurchase
transactions would have been anti-dilutive to earnings per share.
152 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27. 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. 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 instrument’s
categorization within the fair value hierarchy is based upon the
lowest level of input that is significant to the instrument’s fair value
measurement. For more information regarding the fair value
hierarchy and how the Bancorp measures fair value, refer to 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:
December 31, 2014 ($ in millions)
Assets:
Available-for-sale and other securities:
U.S. Treasury and federal agencies
Obligations of states and political subdivisions
Mortgage-backed securities
Agency residential mortgage-backed securities
Agency commercial mortgage-backed securities
Non-agency commercial mortgage-backed securities
Asset-backed securities and other debt securities
Equity securities(a)
Available-for-sale and other securities(a)
Trading securities:
U.S. Treasury and federal agencies
Obligations of states and political subdivisions
Mortgage-backed securities
Agency residential mortgage-backed securities
Asset-backed securities and other debt securities
Equity securities
Trading securities
Residential mortgage loans held for sale
Residential mortgage loans(b)
Derivative assets:
Interest rate contracts
Foreign exchange contracts
Equity contracts
Commodity contracts
Derivative assets
Total assets
Liabilities:
Derivative liabilities:
Interest rate contracts
Foreign exchange contracts
Equity contracts
Commodity contracts
Derivative liabilities
Short positions
Total liabilities
Fair Value Measurements Using
Level 1(c)
Level 2(c)
Level 3
Total Fair Value
$
$
$
$
25
-
-
-
-
-
84
109
-
-
-
-
316
316
-
-
-
-
-
68
68
493
6
-
-
58
64
16
80
1,607
192
12,404
4,565
1,550
1,362
19
21,699
14
8
9
13
-
44
561
-
888
417
-
280
1,585
23,889
276
372
-
280
928
5
933
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
108
12
-
415
-
427
535
2
-
49
-
51
-
51
1,632
192
12,404
4,565
1,550
1,362
103
21,808
14
8
9
13
316
360
561
108
900
417
415
348
2,080
24,917
284
372
49
338
1,043
21
1,064
153 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using
Level 1(c)
Level 2(c)
Level 3
Total Fair Value
December 31, 2013 ($ in millions)
Assets:
Available-for-sale and other securities:
U.S. Treasury and federal agencies
Obligations of states and political subdivisions
Mortgage-backed securities:
Agency residential mortgage-backed securities
Non-agency commercial mortgage-backed securities
Asset-backed securities and other debt securities
Equity securities(a)
Available-for-sale and other securities(a)
Trading securities:
U.S. Treasury and federal agencies
Obligations of states and political subdivisions
Mortgage-backed securities:
Agency residential mortgage-backed securities
Asset-backed securities and other debt securities
Equity securities
Trading securities
Residential mortgage loans held for sale
Residential mortgage loans(b)
Derivative assets:
Interest rate contracts
Foreign exchange contracts
Equity contracts
Commodity contracts
Derivative assets
Total assets
Liabilities:
Derivative liabilities:
Interest rate contracts
Foreign exchange contracts
Equity contracts
Commodity contracts
Derivative liabilities
$
$
$
26
-
-
-
-
89
115
1
-
-
-
315
316
-
-
13
-
-
18
31
462
1
-
-
9
10
1,644
192
12,284
1,395
2,187
29
17,731
4
12
3
7
-
26
890
-
802
276
-
48
1,126
19,773
384
252
-
56
692
-
-
-
-
-
-
-
-
1
-
-
-
1
-
92
12
-
384
-
396
489
4
-
48
-
52
1,670
192
12,284
1,395
2,187
118
17,846
5
13
3
7
315
343
890
92
827
276
384
66
1,553
20,724
389
252
48
65
754
8
762
-
Short positions
Total liabilities
52
(a) Excludes FHLB and FRB restricted stock totaling $248 and $352, respectively, at December 31, 2014 and $402 and $349, respectively, at December 31, 2013.
(b)
(c) During the years ended December 31, 2014 and 2013, no assets or liabilities were transferred between Level 1 and Level 2.
Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.
4
696
4
14
$
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.
Available-for-sale and other 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
similar
characteristics, or DCFs. Examples of such instruments, which are
classified within Level 2 of the valuation hierarchy, include federal
agencies, obligations of states and political subdivisions, agency
residential mortgage-backed securities, agency and non-agency
commercial mortgage-backed securities and asset-backed securities
and other debt securities. Corporate bonds are included in asset-
backed securities and other debt securities in the previous table.
Federal agencies, obligations of states and political subdivisions,
securities with
154 Fifth Third Bancorp
agency residential mortgage-backed securities, agency and non-
agency commercial mortgage-backed securities and asset-backed
securities and other debt securities are generally valued using a
market approach based on observable prices of securities with
similar characteristics.
Residential mortgage loans held for sale
For residential mortgage loans held for sale for which the fair value
election has been made, fair value is estimated based upon
mortgage-backed securities prices and spreads to those prices or, for
certain ARM
incorporate the
loans, DCF models that may
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
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.
Residential mortgage loans
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. It is the Bancorp’s policy to value any transfers
between levels of the fair value hierarchy based on end of period
fair values.
interest rate risk and an
For residential mortgage loans reclassified from held for sale to
held for investment, the fair value estimation is based on mortgage-
backed securities prices,
internally
developed credit component. Therefore, these loans are classified
within Level 3 of the valuation hierarchy. An adverse change in the
loss rate or severity assumption would result in a decrease in fair
value of the related loan. The Secondary Marketing Department,
which reports to the Bancorp’s Chief Operating Officer, in
conjunction with the Consumer Credit Risk Department, which
reports to the Bancorp’s Chief Risk Officer, are responsible for
determining the valuation methodology for residential mortgage
loans held for investment. The Secondary Marketing Department
if
reviews
adjustments are necessary based on decreases in observable housing
market data. This group also reviews trades
in comparable
benchmark securities and adjusts the values of loans as necessary.
Consumer Credit Risk is responsible for the credit component of
the fair value which is based on internally developed loss rate
models that take into account historical loss rates and loss severities
based on underlying collateral values.
loss severity assumptions quarterly to determine
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 Bancorp’s(cid:3)
derivative contracts are valued using DCF 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, foreign
exchange and commodity 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, 2014 and 2013, derivatives classified as Level 3,
which are valued using models containing unobservable inputs,
consisted primarily of a warrant associated with the initial sale of the
Bancorp’s 51% interest in Vantiv Holding, LLC to Advent
International and a total return swap associated with the Bancorp’s
sale of Visa, Inc. Class B shares. Level 3 derivatives also include
IRLCs, which utilize
loan closing rate
assumptions as a significant unobservable input in the valuation
process.
internally generated
The warrant allows the Bancorp to purchase approximately 20
million incremental nonvoting units in Vantiv Holding, LLC at an
exercise price of $15.98 per unit and requires settlement under
certain defined conditions involving change of control. The fair
value of the warrant is calculated in conjunction with a third party
valuation provider by applying Black-Scholes option valuation
models using probability weighted scenarios which contain the
following inputs: Vantiv, Inc. stock price, strike price per the
Warrant Agreement and several unobservable inputs, such as
expected term, expected volatility, and expected dividend rate.
For the warrant, an increase in the expected term (years) and
the expected volatility assumptions would result in an increase in the
fair value; conversely, a decrease in these assumptions would result
in a decrease in the fair value. The Accounting and Treasury
Departments, both of which report to the Bancorp’s Chief Financial
Officer, determined the valuation methodology for the warrant.
Accounting and Treasury review changes in fair value on a quarterly
basis for reasonableness based on changes in historical and implied
volatilities, expected terms, probability weightings of the related
scenarios, and other assumptions.
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.
Additionally, the Bancorp will make a quarterly payment based on
Visa’s stock price and the conversion rate of the Visa, Inc. Class B
shares into Class A shares until the date on which the Covered
Litigation is settled. The fair value of the total return swap was
calculated using a DCF model based on unobservable inputs
consisting of management’s estimate of the probability of certain
litigation scenarios, the timing of the resolution of the Covered
Litigation and Visa litigation loss estimates in excess, or shortfall, of
the Bancorp’s proportional share of escrow funds.
An increase in the loss estimate or a delay in the resolution of
the Covered Litigation would result in an increase in fair value;
conversely, a decrease in the loss estimate or an acceleration of the
resolution of the Covered Litigation would result in a decrease in
fair value. The Accounting and Treasury Departments determined
the valuation methodology for the total return swap. Accounting
and Treasury review the changes in fair value on a quarterly basis
for reasonableness based on Visa stock price changes, litigation
contingencies, and escrow funding.
The net fair value asset of the IRLCs at December 31, 2014
was $12 million. Immediate decreases in current interest rates of 25
bps and 50 bps would result in increases in the fair value of the
IRLCs of approximately $5 million and $9 million, respectively.
Immediate increases of current interest rates of 25 bps and 50 bps
would result in decreases in the fair value of the IRLCs of
approximately $5 million and $11 million, respectively. The decrease
in fair value of IRLCs due to immediate 10% and 20% adverse
changes in the assumed loan closing rates would be approximately
$1 million and $2 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 $1 million and $2 million,
respectively. These sensitivities are hypothetical and should be used
with caution, as changes in fair value based on a variation in
assumptions
the
relationship of the change in assumptions to the change in fair value
may not be linear.
typically cannot be extrapolated because
The Secondary Marketing Department and the Consumer Line
of Business Finance Department, which reports to the Bancorp’s
Chief Financial Officer, are responsible for determining the
valuation methodology for IRLCs. Secondary Marketing,
in
conjunction with a third party valuation provider, periodically
review loan closing rate assumptions and recent loan sales to
determine if adjustments are needed for current market conditions
not reflected in historical data.
155 Fifth Third Bancorp
The following tables are a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs
(Level 3):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
For the year ended December 31, 2014
($ in millions)
Beginning balance
Total gains or losses (realized/unrealized):
Included in earnings
Purchases
Sales
Settlements
Transfers into Level 3(b)
Ending balance
The amount of total gains (losses) for the period
included in earnings attributable to the change in
unrealized gains or losses relating to assets
still held at December 31, 2014(c)
For the year ended December 31, 2013
($ in millions)
Beginning balance
Total gains or losses (realized/unrealized):
Included in earnings
Purchases
Settlements
Transfers into Level 3(b)
Ending balance
The amount of total gains (losses) for the period
included in earnings attributable to the change in
unrealized gains or losses relating to assets
still held at December 31, 2013(c)
$
$
$
$
$
$
1
-
-
(1)
-
-
-
-
1
-
-
-
-
1
-
Trading
Securities
Residential
Mortgage
Loans
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives,
Net(a)
92
4
-
-
(17)
29
108
8
125
(1)
-
(122)
-
10
336
(7)
-
-
37
-
366
Total
Fair Value
437
$
122
(1)
(1)
(102)
29
484
$
4
13
(7)
$
10
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Trading
Securities
Residential
Mortgage
Loans
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives,
Net(a)
76
(1)
-
(17)
34
92
57
59
(2)
(106)
-
8
144
175
-
17
-
336
Total
Fair Value
278
$
233
(2)
(106)
34
437
$
(1)
11
175
$
185
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Residential
Mortgage
Loans
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives,
Net(a)
65
Trading
Securities
1
$
For the year ended December 31, 2012
($ in millions)
Beginning balance
Total gains or losses (realized/unrealized):
Included in earnings
Settlements
Transfers into Level 3(b)
Ending balance
The amount of total gains for the period
included in earnings attributable to the change in
unrealized gains or losses relating to assets
still held at December 31, 2012(c)
255
(a) Net interest rate derivatives include derivative assets and liabilities of $12 and $2, respectively, as of December 31, 2014, $12 and $4, respectively as of December 31, 2013 and $60 and $3,
respectively, as of December 31, 2012. Net equity derivatives include derivative assets and liabilities of $415 and $49, respectively, as of December 31, 2014, $384 and $48, respectively, as of
December 31, 2013, and $177 and $33, respectively, as of December 31, 2012.
Includes residential mortgage loans held for sale that were transferred to held for investment.
Includes interest income and expense.
Total
Fair Value
130
$
418
(393)
-
57
440
(318)
26
278
22
90
-
144
-
(15)
26
76
-
-
-
1
(b)
(c)
233
32
32
22
-
-
$
$
$
$
156 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)
Mortgage banking net revenue
Corporate banking revenue
Other noninterest income
Total gains
2014
127
2
(7)
122
$
$
2013
57
1
175
233
2012
418
1
21
440
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, 2014, 2013 and 2012 were recorded in the Consolidated Statements of Income as follows:
($ in millions)
Mortgage banking net revenue
Corporate banking revenue
Other noninterest income
Total gains
2014
16
1
(7)
10
$
$
2013
10
-
175
185
2012
233
1
21
255
The following tables present information as of December 31, 2014 and 2013 about significant unobservable inputs related to the Bancorp’s
material categories of Level 3 financial assets and liabilities measured on a recurring basis:
As of December 31, 2014 ($ in millions)
Financial Instrument
Residential mortgage loans
Fair Value
$ 108
Valuation Technique
Loss rate model
IRLCs, net
12
Stock warrant associated with Vantiv Holding, LLC 415
Discounted cash flow
Black-Scholes option
valuation model
Swap associated with the sale of Visa, Inc.
Class B shares
(49)
Discounted cash flow
As of December 31, 2013 ($ in millions)
Financial Instrument
Residential mortgage loans
Fair Value
$ 92
Valuation Technique
Loss rate model
IRLCs, net
11
Stock warrant associated with Vantiv Holding, LLC 384
Discounted cash flow
Black-Scholes option
valuation model
Swap associated with the sale of Visa, Inc.
Class B shares
(a)
Based on historical and implied volatilities of comparable companies assuming similar expected terms.
(48)
Discounted cash flow
Significant Unobservable
Inputs
Interest rate risk factor
Credit risk factor
Loan closing rates
Expected term (years)
Expected volatility(a)
Expected dividend rate
Timing of the resolution
of the Covered Litigation
Significant Unobservable
Inputs
Interest rate risk factor
Credit risk factor
Loan closing rates
Expected term (years)
Expected volatility(a)
Expected dividend rate
Timing of the resolution
of the Covered Litigation
Ranges of
Inputs
(7.2) - 17.7%
0 - 46.6%
8.8 - 86.7%
2.0 - 14.5
22.9 - 32.2%
-
12/31/2015 -
6/30/2020
Ranges of
Inputs
(23.7) - 16.5%
0 - 63.4%
14.9 - 98.7%
2.0 - 15.5
18.5 - 33.2%
-
12/31/2014 -
12/31/2019
Weighted-Average
5.0%
1.8%
65.2%
6.0
26.5%
-
NM
Weighted-Average
2.3%
2.6%
68.5%
5.1
25.4%
-
NM
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.
157 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide the fair value hierarchy and carrying amount of all assets that were held as of December 31, 2014 and 2013, and for
which a nonrecurring fair value adjustment was recorded during the years ended December 31, 2014 and 2013, and the related gains and losses
from fair value adjustments on assets sold during the period as well as assets still held as of the end of the period.
As of December 31, 2014 ($ in millions)
Commercial loans held for sale(a)
Residential mortgage loans held for sale
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
MSRs
OREO
Bank premises
Total
As of December 31, 2013 ($ in millions)
Commercial loans held for sale(a)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
MSRs
OREO
Bank premises
Private equity investment funds
Total
(a)
Includes commercial nonaccrual loans held for sale.
$
Fair Value Measurements Using
Level 2
-
-
-
-
-
-
-
Level 1
-
-
-
-
-
-
-
Level 3
33
554
456
110
23
856
90
22
$
-
-
2,144
Fair Value Measurements Using
Level 2
-
-
-
-
-
-
-
-
-
Level 3
3
443
61
16
967
87
8
181
1,766
Level 1
-
-
-
-
-
-
-
-
-
$
$
Total
33
554
456
110
23
856
90
22
2,144
Total
3
443
61
16
967
87
8
181
1,766
Total Losses
2014
(12)
(87)
(382)
(36)
(1)
(65)
(26)
(20)
(629)
Total Losses
2013
(7)
(281)
(41)
(10)
192
(45)
(6)
(4)
(202)
The following tables present information as of December 31, 2014 and 2013 about significant unobservable inputs related to the Bancorp’s
material categories of Level 3 financial assets and liabilities measured on a nonrecurring basis:
As of December 31, 2014 ($ in millions)
Financial Instrument
Commercial loans held for sale
Fair Value Valuation Technique
$ 33
Appraised value
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted-Average
Appraised value
Cost to sell
Residential mortgage loans held for sale
554
Comparable transactions Estimated sales proceeds from
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
456
110
23
Appraised value
Appraised value
Appraised value
comparable transactions
Collateral value
Collateral value
Collateral value
MSRs
856
Discounted cash flow
Prepayment speed
0 - 100%
Discount rates
9.6 - 13.2%
NM
NM
NM
NM
NM
NM
NM
10.0%
15.0%
NM
NM
NM
(Fixed) 12.0%
(Adjustable) 26.2%
(Fixed) 9.9%
(Adjustable) 11.8%
OREO
Bank Premises
90
22
Appraised value
Appraised value
Appraised value
Appraised value
NM
NM
NM
NM
158 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NM
10.0%
NM
NM
NM
(Fixed) 10.3%
(Adjustable) 25.6%
(Fixed) 10.4%
(Adjustable) 11.6%
NM
NM
As of December 31, 2013 ($ in millions)
Financial Instrument
Commercial loans held for sale
Fair Value Valuation Technique
$ 3
Appraised value
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
443
61
16
Appraised value
Appraised value
Appraised value
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted-Average
Appraised value
Cost to sell
Collateral value
Collateral value
Collateral value
NM
NM
NM
NM
NM
MSRs
967
Discounted cash flow
Prepayment speed
0 - 100%
OREO
Bank premises
Private equity investment funds
87
8
44(a)
Appraised value
Appraised value
Liquidity discount applied
to fund's net asset value
(a)
3.0%
Includes funds the Bancorp will be prohibited from retaining after the July 21, 2016 end of the conformance period for the final rules, adopted under the BHCA, that implemented the provision of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as the Volcker Rule.
Liquidity discount
0-18.0%
Discount rates
Appraised value
Appraised value
9.4 - 18.0%
NM
NM
Commercial loans held for sale
During 2014 and 2013, the Bancorp transferred $28 million and $5
million, respectively, of commercial loans from the portfolio to
loans held for sale that upon transfer were measured at lower of
cost or fair value. These loans had fair value adjustments in 2014
and 2013 totaling $10 million and $4 million, respectively, and were
generally based on appraisals of the underlying collateral and were
therefore, classified within Level 3 of the valuation hierarchy.
Additionally, during 2014 and 2013
there were fair value
adjustments on existing commercial loans held for sale of $2 million
and $3 million, respectively. The fair value adjustments were also
based on appraisals of the underlying collateral and were therefore
classified within Level 3 of the valuation hierarchy. An adverse
change in the fair value of the underlying collateral would result in a
decrease in the fair value measurement.
The Accounting Department determines the procedures for
valuation of commercial HFS
include a
comparison to recently executed transactions of similar type loans.
A monthly review of the portfolio is performed for reasonableness.
Quarterly, appraisals approaching a year old are updated and the
Real Estate Valuation group, which reports to the Chief Risk
Officer, in conjunction with the Commercial Line of Business
review the third party appraisals for reasonableness. Additionally,
the Commercial Line of Business Finance Department, which
reports to the Bancorp Chief Financial Officer, in conjunction with
Accounting review all loan appraisal values, carrying values and
vintages.
loans which may
Residential mortgage loans held for sale
During 2014, the Bancorp transferred $720 million of restructured
residential mortgage loans from the portfolio to loans held for sale
that upon transfer were measured at lower of cost or fair value using
loans had fair value
inputs. These
significant unobservable
adjustments in 2014 totaling $87 million. The fair value adjustments
were based on estimated third-party valuations utilizing recent sales
data from similar transactions. Broker opinion statements were also
obtained as additional evidence
third-party
valuations. The Treasury Department worked with the third-party
advisor to estimate the fair value adjustments. The discounts taken
were intended to represent the perspective of a market participant,
considering among other things, required investor returns which
include liquidity discounts reflected in similar bulk transactions. An
adverse change in the fair value of the underlying collateral would
result in a decrease in the fair value measurement.
to support
the
Commercial loans held for investment
During 2014 and 2013, the Bancorp recorded nonrecurring
impairment adjustments to certain commercial and industrial,
commercial mortgage and commercial construction loans held for
investment. 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 considers the current value of
collateral, credit quality of any guarantees, the guarantor’s liquidity
and willingness to cooperate, the loan structure and other factors
when evaluating whether an individual loan is impaired. When the
loan is collateral dependent, the fair value of the loan is generally
based on the fair value of the underlying collateral supporting the
loan and therefore these loans were classified within Level 3 of the
valuation hierarchy. In cases where the carrying value exceeds the
fair value, an impairment loss is recognized.
An adverse change in the fair value of the underlying collateral
would result in a decrease in the fair value measurement. The fair
values and recognized impairment losses are reflected in the
previous table. Commercial Credit Risk, which reports to the Chief
Risk Officer, is responsible for preparing and reviewing the fair
value estimates for commercial loans held for investment.
MSRs
Mortgage interest rates decreased during the year ended December
31, 2014 and the Bancorp recognized temporary impairment in
certain classes of the MSR portfolio and the carrying value was
adjusted to the fair value. The Bancorp recognized a recovery of
temporary impairment on servicing rights during the year ended
December 31, 2013. 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
internal DCF models with certain unobservable inputs, primarily
prepayment speed assumptions, discount rates and weighted average
lives, resulting in a classification within Level 3 of the valuation
hierarchy. Refer to Note 11 for further information on the
assumptions used in the valuation of the Bancorp’s MSRs. The
Secondary Marketing Department and Treasury Department are
responsible for determining the valuation methodology for MSRs.
Representatives from Secondary Marketing, Treasury, Accounting
reviewing key
and Risk Management are
assumptions used in the internal DCF model. Two external
responsible
for
159 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Private equity investment funds
The Volcker Rule, was approved by the respective federal agencies
on December 10, 2013 and prohibits the Bancorp from retaining an
interest in certain of its private equity fund investments. Therefore,
while the Bancorp has not approved a formal plan to sell any of the
private equity funds, the Bancorp has determined that it may be
forced to sell certain of these funds prior to their scheduled
redemption dates to comply with the Volcker Rule conformance
period. As a result, the Bancorp has performed nonrecurring fair
value measurements on a fund by fund basis to determine whether
OTTI exists. The Bancorp estimated the fair value of a fund by
using the net asset value reported by the fund manager, and in some
cases, applying an estimated market discount to the reported net
asset value of the fund. Because the length of time until the
investment will become redeemable is generally not certain, these
funds were classified within Level 3 of the valuation hierarchy. The
Bancorp recognized $4 million of OTTI on its investments in
private equity funds during 2013. The Bancorp recognized no OTTI
on its investments in private equity funds during 2014. An adverse
change in the reported net asset values or estimated market
discounts where applicable, would result in a decrease in the fair
value estimate. In cases where the carrying value exceeds the fair
value, an impairment loss is recognized. The Bancorp’s private
equity department, which reports to the Chief Operating Officer, in
conjunction with Accounting, is responsible for preparing and
reviewing the fair value estimates.
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. Electing to measure residential mortgage loans held for sale
at fair value reduces certain timing differences and better matches
changes in the value of these assets with changes in the value of
derivatives used as economic hedges for these assets. Management’s
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 Bancorp’s loan
portfolio. In such cases, the loans will continue to be measured at
fair value.
Fair value changes recognized in earnings for instruments held
at December 31, 2014 and 2013 for which the fair value option was
elected as well as the changes in fair value of the underlying IRLCs,
included gains of $26 million and $20 million, respectively. These
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 $2 million at both
December 31, 2014 and 2013. Interest on residential mortgage loans
measured at fair value is accrued as it is earned using the effective
interest method and
in the
Consolidated Statements of Income.
is reported as
interest
income
valuations of the MSR portfolio are obtained from third parties that
use valuation models in order to assess the reasonableness of the
internal DCF model. Additionally, the Bancorp participates in peer
surveys that provide additional confirmation of the reasonableness
of key assumptions utilized in the MSR valuation process and the
resulting MSR prices.
OREO
During 2014 and 2013, 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. These nonrecurring losses are
primarily due to declines in real estate values of the properties
recorded in OREO. For the years ended December 31, 2014 and
2013, these losses include $12 million and $19 million, respectively,
recorded as charge-offs, on new OREO properties transferred from
loans during the respective periods and $14 million and $26 million,
respectively, recorded as negative fair value adjustments on OREO
in other noninterest income subsequent to their transfer from loans.
As discussed in the following paragraphs, the 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.
The Real Estate Valuation department, which reports to the
Chief Risk Officer, is solely responsible for managing the appraisal
process and evaluating the appraisal for all commercial properties
transferred to OREO. All appraisals on commercial OREO
properties are updated on at least an annual basis.
The Real Estate Valuation department reviews the BPO data
and internal market information to determine the initial charge-off
on residential real estate loans transferred to OREO. Once the
foreclosure process is completed, the Bancorp performs an interior
inspection to update the initial fair value of the property. These
properties are reviewed at least every 30 days after the initial interior
inspections are completed. The Asset Manager receives a monthly
status report for each property which includes the number of
showings, recently sold properties, current comparable listings and
overall market conditions.
Bank Premises
The Bancorp monitors consumer preferences
for banking
interactions and related customer behavior patterns in an effort to
ensure that its retail distribution network is both responsive to such
trends and efficient. As part of this ongoing assessment, the
Bancorp determined that certain components of its Bank Premises
would no longer be held for or used for their intended purposes and
therefore these properties were written down to their lower of cost
or market value. At least annually thereafter, the Bancorp will review
these properties for market fluctuations. The fair value amounts
were generally based on appraisals of the property values, resulting
in a classification within Level 3 of the valuation hierarchy. For
further information, refer to Note 7.
160 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
December 31, 2014
Residential mortgage loans measured at fair value
Past due loans of 90 days or more
Nonaccrual loans
December 31, 2013
Residential mortgage loans measured at fair value
Past due loans of 90 days or more
Nonaccrual loans
A
Aggregate
Fair Value
Aggregate Unpaid
Principal Balance
Difference
$
$
669
2
3
982
1
2
643
2
3
962
2
2
26
-
-
20
(1)
-
161 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2014 ($ in millions)
Financial assets:
Cash and due from banks
Other securities
Held-to-maturity securities
Other short-term investments
Loans held for sale
Portfolio loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Unallocated allowance for loan and lease losses
Total portfolio loans and leases, net
Financial liabilities:
Deposits
Federal funds purchased
Other short-term borrowings
Long-term debt
As of December 31, 2013 ($ in millions)
Financial assets:
Cash and due from banks
Other securities
Held-to-maturity securities
Other short-term investments
Loans held for sale
Portfolio loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Unallocated allowance for loan and lease losses
Total portfolio loans and leases, net
Financial liabilities:
Deposits
Federal funds purchased
Other short-term borrowings
Long-term debt
Net Carrying
Fair Value Measurements Using
Total
Amount
Level 1
Level 2
Level 3
Fair Value
$
3,091
600
187
7,914
700
40,092
7,259
2,052
3,675
12,177
8,799
12,004
2,297
405
(106)
88,654
101,712
144
1,556
14,967
3,091
-
-
7,914
-
-
-
-
-
-
-
-
-
-
-
-
-
600
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
144
-
14,993
101,715
-
1,561
655
-
-
187
-
700
40,781
6,878
1,735
3,426
12,249
9,224
11,748
2,586
414
-
89,041
-
-
-
-
Net Carrying
Amount
Fair Value Measurements Using
Level 2
Level 3
Level 1
$
3,178
751
208
5,116
54
38,549
7,854
1,013
3,572
12,399
9,152
11,961
2,202
348
(110)
86,940
99,275
284
1,380
9,633
3,178
-
-
5,116
-
-
-
-
-
-
-
-
-
-
-
-
-
751
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
284
-
9,645
99,288
-
1,380
577
-
-
208
-
54
39,804
7,430
856
3,261
11,541
9,181
11,748
2,380
361
-
86,562
-
-
-
-
3,091
600
187
7,914
700
40,781
6,878
1,735
3,426
12,249
9,224
11,748
2,586
414
-
89,041
101,715
144
1,561
15,648
Total
Fair Value
3,178
751
208
5,116
54
39,804
7,430
856
3,261
11,541
9,181
11,748
2,380
361
-
86,562
99,288
284
1,380
10,222
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), federal funds purchased,
162 Fifth Third Bancorp
and other short-term borrowings excluding FHLB borrowings. Fair
values for other time deposits, certificates of deposit $100,000 and
over and FHLB borrowings were estimated using a DCF calculation
that applies prevailing LIBOR/swap interest rates and a spread for
new issuances with similar terms.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Held-to-maturity securities
The Bancorp’s 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 DCF 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 residential mortgage loans held for sale
were valued based on estimated third-party valuations utilizing
recent sales data from similar transactions. Broker opinion
statements were also obtained as additional evidence to support the
third-party valuations. Fair values for other consumer loans held for
sale were 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, similar remaining maturities, prepayment speeds and
loss severities.
Long-term debt
Fair value of long-term debt was based on quoted market prices,
when available, or a DCF calculation using LIBOR/swap interest
rates and, in some cases, Fifth Third credit and/or debt instrument
spreads for new issuances with similar terms.
163 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28. 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 Bancorp’s banking subsidiary are subject to regulations and
limitations prescribed by
the appropriate state and federal
supervisory authorities. The Bancorp’s 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 Bancorp’s 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 balances on deposit with the FRB. In 2014 and
2013, the banking subsidiary was required to maintain average cash
reserve balances of $1.7 billion and $1.6 billion, respectively.
The Board of Governors of the Federal Reserve System issued
capital adequacy guidelines pursuant to which it assesses the
adequacy of capital in examining and supervising a BHC and in
analyzing applications to it under the BHCA 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 risk-based 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 TruPS. 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 gains and losses on cash flow
hedges. The revised regulatory capital rules known as Basel III will
phase out the inclusion of certain TruPS as a component of Tier I
capital when the rules become effective for the Bancorp beginning
January 1, 2015. Under these provisions, these TruPS would qualify
as a component of Tier II capital. At December 31, 2014, the
Bancorp’s Tier I capital included $60 million of TruPS representing
approximately 5 bps of risk-weighted assets. Tier II capital consists
principally of term subordinated debt and, subject to limitations,
allowances for credit 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 Board of Governors of the Federal Reserve System issued
capital adequacy guidelines for banking subsidiaries substantially
similar to those adopted for 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 FDIA. 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 risk-
based 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 FDIA.
The Bancorp and its banking subsidiary, Fifth Third Bank, had
Tier I risk-based capital, Total risk-based capital and Tier I leverage
ratios above the well-capitalized levels at December 31, 2014 and
2013. As of December 31, 2014, 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 Bancorp’s
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:
2014
2013
Amount Ratio
Amount
Ratio
$
12,764
13,760
10.83% $
11.85
12,094
13,245
10.43%
11.59
16,895
15,213
14.33
13.10
16,431
14,785
14.17
12.94
12,764
13,760
9.66
10.58
12,094
13,245
9.73
10.83
($ in millions)
Tier I risk-based capital (to risk-weighted assets):
Fifth Third Bancorp (Consolidated)
Fifth Third Bank
Total risk-based capital (to risk-weighted assets):
Fifth Third Bancorp (Consolidated)
Fifth Third Bank
Tier I leverage (to average assets):
Fifth Third Bancorp (Consolidated)
Fifth Third Bank
164 Fifth Third Bancorp
29. PARENT COMPANY FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statements of Income (Parent Company Only)
For the years ended December 31 ($ in millions)
Income
Dividends from subsidiaries:
Consolidated bank subsidiaries(a)
Consolidated nonbank subsidiary
Interest on loans to subsidiaries
Total income
Expenses
Interest
Other
Total expenses
Income Before Income Taxes and Change in Undistributed
Earnings of Subsidiaries
Applicable income tax benefit
Income Before Change in Undistributed Earnings of Subsidiaries
Change in undistributed earnings
Net Income
(a)
2014
2013
2012
$
$
-
1,094
14
1,108
163
17
180
928
62
990
491
1,481
-
859
14
873
178
36
214
659
74
733
1,103
1,836
-
1,959
17
1,976
215
61
276
1,700
96
1,796
(220)
1,576
The Bancorp’s indirect banking subsidiary paid dividends to the Bancorp’s direct nonbank subsidiary holding company of $1.1 billion, $859 million and $2.0 billion for the years ended
December 31, 2014, 2013 and 2012, respectively.
Condensed Statements of Comprehensive Income (Parent Company Only)
For the years ended December 31 ($ in millions)
Net income
Other comprehensive income, net of tax:
Unrealized gains on cash flow hedge derivatives
Other comprehensive income
Comprehensive income attributable to Parent
2014
1,481
-
-
1,481
$
$
2013
1,836
-
-
1,836
2012
1,576
3
3
1,579
165 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Balance Sheets (Parent Company Only)
As of December 31 ($ in millions)
Assets
Cash
Short-term investments
Loans to subsidiaries:
Bank subsidiaries
Nonbank subsidiaries
Total loans to subsidiaries
Investment in subsidiaries
Nonbank subsidiaries
Total investment in subsidiaries
Goodwill
Other assets
Total Assets
Liabilities
Other short-term borrowings
Accrued expenses and other liabilities
Long-term debt (external)
Total Liabilities
Shareholders' Equity
Common stock
Preferred stock
Capital surplus
Retained earnings
Accumulated other comprehensive income
Treasury stock
Noncontrolling interests
Total Equity
Total Liabilities and Equity
2014
2013
$
$
$
-
3,189
-
984
984
17,186
17,186
80
451
21,890
426
405
5,394
6,225
2,051
1,331
2,646
11,141
429
(1,972)
39
15,665
21,890
-
2,505
-
974
974
16,254
16,254
80
323
20,136
311
442
4,757
5,510
2,051
1,034
2,561
10,156
82
(1,295)
37
14,626
20,136
Condensed Statements of Cash Flows (Parent Company Only)
For the years ended December 31 ($ in millions)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2014
2013
2012
$
1,481
1,836
1,576
(Benefit from) provision for deferred income taxes
Net change in undistributed earnings
Net change in:
Other assets
Accrued expenses and other liabilities
Net Cash Provided by Operating Activities
Investing Activities
Net change in:
Short-term investments
Loans to subsidiaries
Net Cash (Used in) Provided by Investing Activities
Financing Activities
Net change in other short-term borrowings
Proceeds from issuance of long-term debt
Repayment of long-term debt
Dividends paid on common shares
Dividends paid on preferred shares
Issuance of preferred stock
Repurchases of treasury shares and related forward contracts
Other, net
Net Cash Used in Financing Activities
Net Decrease in Cash
Cash at Beginning of Year
Cash at End of Year
166 Fifth Third Bancorp
(1)
(491)
8
(40)
957
(684)
(10)
(694)
115
499
-
(423)
(67)
297
(654)
(30)
(263)
-
-
-
$
(1)
(1,103)
13
(28)
717
976
47
1,023
(255)
750
(1,500)
(393)
(37)
1,034
(1,320)
(19)
(1,740)
-
-
-
2
220
57
18
1,873
107
11
118
(89)
500
(1,440)
(309)
(35)
-
(650)
(18)
(2,041)
(50)
50
-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30. BUSINESS SEGMENTS
The Bancorp reports on four business segments: Commercial
Banking, Branch Banking, Consumer Lending and Investment
Advisors. Results of the Bancorp’s 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 Bancorp’s business
segments are not necessarily comparable with similar information
for other
its
methodologies from time to time as management’s accounting
practices and businesses change.
institutions. The Bancorp
financial
refines
The Bancorp manages interest rate risk centrally at the
corporate
level by employing an 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 U.S. 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 Bancorp’s 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 interest-bearing liabilities and by the review of the
estimated durations for the indeterminate-lived deposits. The credit
rate provided for demand deposit accounts is reviewed annually
based upon the account type, its estimated duration and the
corresponding fed funds, U.S. swap curve or swap rate. The credit
rates for several deposit products were reset January 1, 2014 to
reflect the current market rates and updated market assumptions.
These rates were generally higher than those in place during 2013,
thus net interest income for deposit providing businesses was
positively impacted during 2014.
The business segments are charged provision expense based on
the actual net charge-offs experienced by the loans and leases
owned by each segment. Provision expense attributable to loan and
lease growth and changes in ALLL factors are captured in General
Corporate and Other. The financial results of the business segments
include allocations for shared services and headquarters expenses.
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.
The results of operations and financial position for the years
ended December 31, 2013 and 2012 were adjusted to reflect the
transfer of certain customers and Bancorp employees from Branch
Banking to Commercial Banking, effective January 1, 2014. In
addition, the 2013 and 2012 balances were adjusted to reflect a
change in internal allocation methodology.
The following is a description of each of the Bancorp’s
business segments, and the products and services they provide to
their respective client bases.
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.
Branch Banking provides a full range of deposit and loan and
lease products to individuals and small businesses through 1,302
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.
Consumer Lending includes the Bancorp’s mortgage, home
equity, automobile and other indirect lending activities. Direct
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
extending loans to consumers through correspondent lenders and
automobile dealers.
for
companies
individuals,
Investment Advisors provides a full range of investment
and not-for-profit
alternatives
organizations. Investment Advisors is made up of four main
businesses: FTS, an indirect wholly-owned subsidiary of the
Bancorp; ClearArc Capital, Inc., 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. ClearArc Capital, Inc. provides asset
management services and previously advised
the Bancorp’s
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
provides advisory services for institutional clients including states
and municipalities.
167 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Results of operations and assets by segment for each of the three years ended December 31 are:
General
Consumer
Lending
Investment Corporate
Advisors
and Other Eliminations
-
-
3
(260)
Total
3,579
315
2014 ($ in millions)
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan
and lease losses
Noninterest income:
Service charges on deposits
Corporate banking revenue
Investment advisory revenue
Mortgage banking net revenue
Card and processing revenue
Other noninterest income
Securities gains, net
Securities gains, net - non-qualifying hedges on
mortgage servicing rights
Total noninterest income
Noninterest expense:
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Card and processing expense
Equipment expense
Other noninterest expense
Total noninterest expense
Income (loss) before income taxes
Applicable income tax expense (benefit)
Net income (loss)
Less: Net income attributable to noncontrolling interests
Net income (loss) attributable to Bancorp
Dividends on preferred stock
Net income (loss) available to common shareholders
Total goodwill
Total assets
(a)
(b)
Banking
Commercial Branch
Banking
1,546
181
1,652
235
$
1,417
1,365
286
429
3
-
64
105
-
-
887
259
47
26
10
8
10
959
1,319
985
166
819
-
819
-
819
613
56,871
272
4
152
5
226
61 a
-
(b)
-
720
421
116
187
4
133
59
631
1,551
534
188
346
-
346
-
346
1,655
50,920
$
$
$
257
156
101
-
-
-
304
-
42
-
-
346
95
27
8
2
-
-
420
552
(105)
(37)
(68)
-
(68)
-
(68)
-
22,554
121
3
118
2
2
397
1
5
3
-
-
410
136
26
9
-
-
-
274
445
83
29
54
-
54
-
54
148
10,443
Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income.
Includes an impairment charge of $20 for branches and land. For more information refer to Note 7 and Note 27 of the Notes to Consolidated Financial Statements.
263
-
(5)
1
-
-
239
21
-
256
538
118
83
196
-
52
(999)
(12)
531
199
332
2
330
67
263
-
(2,082)
-
3,264
(a)
-
-
(146)a
-
-
-
-
-
(146)
-
-
-
-
-
-
(146)
(146)
-
-
-
-
-
-
-
-
-
560
430
407
310
295
450
21
-
2,473
1,449
334
313
212
141
121
1,139
3,709
2,028
545
1,483
2
1,481
67
1,414
2,416
138,706
168 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General
Banking
Commercial Branch
Banking
1,356
210
1,592
194
$
Consumer
Lending
Investment Corporate
Advisors
and Other Eliminations
-
-
147
(269)
Total
3,561
229
2013 ($ in millions)
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan
and lease losses
Noninterest income:
Service charges on deposits
Corporate banking revenue
Investment advisory revenue
Mortgage banking net revenue
Card and processing revenue
Other noninterest income
Securities gains, net
Securities gains, net - non-qualifying hedges on
mortgage servicing rights
Total noninterest income
Noninterest expense:
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Card and processing expense
Equipment expense
Other noninterest expense
Total noninterest expense
Income before income taxes
Applicable income tax expense
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to Bancorp
Dividends on preferred stock
Net income available to common shareholders
Total goodwill
Total assets
(a)
(b)
(cid:3)
(cid:3)
$
$
$
312
92
220
-
-
-
687
-
45
3
13
748
154
2
152
3
3
384
1
5
10
-
-
406
175
40
8
1
-
1
460
685
283
100
183
-
183
-
183
-
22,610
134
25
10
-
-
-
284
453
105
37
68
-
68
-
68
148
10,711
1,398
1,146
267
392
5
-
60
94
-
-
818
279
7
148
12
207
87 a
-
-
740
(b)
261
49
25
11
8
4
877
1,235
981
167
814
-
814
-
814
613
55,081
429
118
183
4
125
58
656
1,573
313
109
204
-
204
-
204
1,655
47,221
Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income.(cid:3)
Includes an impairment charge of $6 for branches and land.(cid:3)
416
-
(2)
-
-
-
643
18
-
659
582
125
81
188
1
51
(869)
159
916
359
557
(10)
567
37
530
-
(5,180)
-
3,332
(a)
-
-
(144)a
-
-
-
-
-
(144)
-
-
-
-
-
-
(144)
(144)
-
-
-
-
-
-
-
-
-
549
400
393
700
272
879
21
13
3,227
1,581
357
307
204
134
114
1,264
3,961
2,598
772
1,826
(10)
1,836
37
1,799
2,416
130,443
169 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General
2012 ($ in millions)
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan
and lease losses
Noninterest income:
Service charges on deposits
Corporate banking revenue
Investment advisory revenue
Mortgage banking net revenue
Card and processing revenue
Other noninterest income
Securities gains, net
Securities gains, net - non-qualifying hedges on
mortgage servicing rights
Total noninterest income
Noninterest expense:
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Card and processing expense
Equipment expense
Other noninterest expense
Total noninterest expense
Income before income taxes
Applicable income tax expense
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to Bancorp
Dividends on preferred stock
Net income available to common shareholders
Total goodwill
Total assets
(a)
(b)
Commercial
Banking
Branch
Banking
Consumer
Lending
$
1,533
249
1,261
268
1,284
993
251
402
6
-
54
61
-
-
774
257
47
24
10
5
2
842
1,187
871
157
714
-
714
-
714
613
51,392
268
8
129
14
195
85 a
-
-
699
(b)
420
117
184
3
115
54
576
1,469
223
79
144
-
144
-
144
1,655
46,157
$
$
$
314
176
138
-
-
-
830
-
42
1
3
876
192
39
8
1
-
1
429
670
344
121
223
-
223
-
223
-
24,657
Investment Corporate
Advisors
and Other Eliminations
-
-
370
(400)
Total
3,595
303
117
10
107
3
3
366
1
4
19
-
-
396
136
25
11
-
-
1
264
437
66
23
43
-
43
-
43
148
9,212
770
-
-
-
-
-
367
14
-
381
602
143
75
182
1
52
(610)
445
706
256
450
(2)
452
35
417
-
(9,524)
-
3,292
(a)
-
-
(127)a
-
-
-
-
-
(127)
-
-
-
-
-
-
(127)
(127)
-
-
-
-
-
-
-
-
-
522
413
374
845
253
574
15
3
2,999
1,607
371
302
196
121
110
1,374
4,081
2,210
636
1,574
(2)
1,576
35
1,541
2,416
121,894
Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income.
Includes an impairment charge of $21 for branches and land.
31. SUBSEQUENT EVENT
On January 22, 2015, the Bancorp entered into an accelerated share
repurchase transaction with a counterparty pursuant to which the
Bancorp purchased 8,542,713 shares, or approximately $180 million,
of its outstanding common stock on January 27, 2015. The Bancorp
repurchased the shares of its common stock as part of its Board
approved 100 million share repurchase program previously
announced on March 18, 2014. The Bancorp expects the settlement
of the transaction to occur on or before April 23, 2015.
170 Fifth Third Bancorp
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
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:
Name of each exchange
on which registered:
The NASDAQ Stock Market
LLC
The NASDAQ Stock Market
LLC
Title of each class:
Common Stock, Without Par
Value
Depositary Shares Representing a
1/1000th Ownership Interest in a
Share of 6.625% Fixed-to-
Floating Rate Non-Cumulative
Perpetual Preferred Stock, Series
I
Indicate by checkmark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes: (cid:95) No: (cid:133)
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes: (cid:133)
No: (cid:95)
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: (cid:95) No: (cid:133)
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: (cid:95)
No: (cid:133)
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
registrant’s knowledge,
information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. (cid:95)
in definitive proxy or
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 (cid:95) Accelerated filer (cid:133) Non-accelerated
filer (cid:133) (Do not check if a smaller reporting company) Smaller
reporting company (cid:133)
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes: (cid:133) No: (cid:95)
There were 814,765,191 shares of the Bancorp’s Common Stock,
without par value, outstanding as of January 31, 2015. The
Aggregate Market Value of the Voting Stock held by non-
affiliates of the Bancorp was $17,964,278,097 as of June 30,
2014.
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 Bancorp’s Proxy Statement for the 2015
Annual Meeting of Shareholders is incorporated by reference into
Part III of this report.
Only those sections of this 2014 Annual Report to Shareholders
that are specified in this Cross Reference Index constitute part of
the Registrant’s Form 10-K for the year ended December 31,
2014. No other information contained in this 2014 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
Registrant’s Form 10-K.
10-K Cross Reference Index
PART I
Item 1.
Business
Employees
Segment Information
Average Balance Sheets
Analysis of Net Interest Income and Net Interest
Income Changes
Investment Securities Portfolio
Loan and Lease Portfolio
Risk Elements of Loan and Lease Portfolio
Deposits
Return on Equity and Assets
Short-term Borrowings
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of the Bancorp
PART II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
Financial Statements and Supplementary Data
Item 8.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate
Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and
Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
16-20, 172-179
41
43-49, 167-170
37
36-38
53-54, 101-102
52-53, 103-104
57-73
54-56
15
56, 127
27-35
None
180
134-135
N/A
180
181
15
15-82
73-76
85-170
None
83
None
183
183
147-150, 183
183
183
171 Fifth Third Bancorp
`(cid:3)
Item 15. Exhibits, Financial Statement Schedules
SIGNATURES
183-185
186
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 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 SEC’s 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 Bancorp’s 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 Bancorp’s web site at
www.53.com on a same day basis after they are electronically
filed with or furnished to the SEC.
172 Fifth Third Bancorp
PART I
ITEM 1. BUSINESS
General Information
The Bancorp, an Ohio corporation organized in 1975, is a bank
holding company (“BHC”) 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 Bancorp’s principal office is
located in Cincinnati, Ohio.
The Bancorp’s 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 (the “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, 2014.
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 Bancorp’s
Consolidated Financial Statements.
Additional information regarding the Bancorp’s businesses is
included in Management’s 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 Bancorp’s 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,
the accelerating pace of
product delivery systems and
consolidation
service providers. These
financial
among
competitive trends are likely to continue.
Acquisitions
The Bancorp’s 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
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
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 Bancorp’s banking
subsidiary is subject to regulation by the FDIC, which insures the
bank’s deposits as permitted by law.
functional
regulators
other
and
The federal and state laws and regulations that are applicable
to banks and to BHCs regulate, among other matters, the scope of
their business, their activities, their investments, capital and
liquidity levels, 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 as applicable. 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 BHCs 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 Bancorp’s 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 laws 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 BHC 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, BHC or savings association, or to
increase any such non-majority ownership or control of any bank,
BHC or savings association, or to merge or consolidate with any
BHC.
The BHCA prohibits a BHC 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 BHC 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 BHC 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 BHC 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 BHC 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”). The Dodd-Frank Wall Street Reform
and Consumer Protection Act (the “DFA”) also extended the well
capitalized and well managed requirement to the BHC. 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 material restrictions on the activities
of the FHC and may also adversely affect the FHC’s ability to
enter into certain transactions or obtain necessary approvals in
connection therewith, as well as 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 BHCs 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 BHCs to pay dividends unless a
BHC’s net income is sufficient to fund the dividends and the
expected rate of earnings retention is consistent with the
organization’s capital needs, asset quality and overall financial
condition. The ability to pay dividends may be further limited by
provisions of
(see
“Regulatory Reform”).
the DFA and
regulations
implanting
Source of Strength
Under long-standing FRB policy and now as codified in the DFA,
a BHC 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 BHC may not have the resources to provide it.
FDIC Assessments
As contemplated by the DFA 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 took effect
for the quarter beginning April 1, 2011.
173 Fifth Third Bancorp
`(cid:3)
Prior to the passage of the DFA, a large IDI’s DIF premiums
principally were based on the size of an IDI’s domestic deposit
base. The DFA changed the assessment base from a large IDI’s
domestic deposit base to its total assets less tangible equity. In
addition to potentially greatly increasing the size of a large IDI’s
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.
implement
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.
this provision,
To
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 BHC. The Bancorp’s 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 Bancorp’s banking
subsidiary is limited in its extension of credit to any affiliate to
10% of the banking subsidiary’s capital stock and surplus and its
extension of credit to all affiliates to 20% of the banking
subsidiary’s 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 Bancorp’s 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
the 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 BHCs and FHCs.
The FRB, the Division and the FDIC have also issued regulations
establishing capital requirements for banks. Failure to meet
174 Fifth Third Bancorp
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”
information on capital
for additional
requirements impacting the Bancorp.
section
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 Bancorp’s Board of Directors.
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 subsidiary’s policies and procedures. The
Bancorp’s 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
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 Bancorp’s Board has approved policies
and procedures that are believed to be compliant with the Patriot
Act.
to, among other matters, anti-money
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
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
riskless principal
conducting a de minimis number of
transactions, certain asset-backed
transactions and certain
securities lending transactions. The Bancorp only conducts non-
exempt brokerage activities through its affiliated registered
broker-dealer.
for
laws,
responsible
Regulatory Reform
On July 21, 2010, President Obama signed into law the DFA,
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
DFA 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
implementing and enforcing
new agency
compliance with consumer financial
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. Not
all the rules required or expected to be implemented under the
DFA have been proposed or adopted, and certain of the rules that
have been proposed or adopted under the DFA are subject to
phase-in or transitional periods. The implication of the DFA for
the Bancorp and its banking subsidiary continue to depend in
large part upon the implementation of the legislation by the FRB
and other agencies. Set forth below is a discussion of some of the
major sections of the DFA 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 DFA, 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 DFA created 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 March 15, 2012, the
Department of Treasury issued an interim final rule to establish
an assessment schedule for the collection of fees from BHCs and
foreign banks with at least $50 billion in assets to cover the
expenses of the Office of Financial Research and FSOC. The fees
would also cover certain expenses incurred by the FDIC. The
Bancorp paid approximately $1 million for the assessment
periods from October 1, 2013 through March 31, 2015.
On August 16, 2013, the FRB also adopted a final rule to
implement an assessment provision under the DFA equal to the
expense and the FRB estimates are necessary or appropriate to
supervise and regulate BHCs with $50 billion or more in assets.
The Bancorp paid approximately $3 million for the 2014 annual
assessment period under the FRB’s rule.
Executive Compensation
The DFA provides for a say on pay for shareholders of all public
companies. Under the DFA, each company must give its
shareholders the opportunity to vote on the compensation of its
executives at least once every three years. The DFA also adds
disclosure and voting
for golden parachute
requirements
compensation that is payable to named executive officers in
connection with sale transactions. The SEC adopted rules
finalizing these say on pay provisions in January 2011.
Pursuant to the DFA, in June 2012, the SEC adopted a final
rule directing the stock exchanges to prohibit listing classes of
equity securities
if a company’s compensation committee
members are not independent. The rule also provides that a
company’s 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 DFA to issue rules obligating
companies to disclose in proxy materials for annual 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 company’s stock and
dividends or distributions. The DFA also requires the SEC to
propose rules requiring companies to disclose the ratio of the
compensation of its chief executive officer to the median
its employees. The SEC proposed rules
compensation of
implementing the pay ratio provisions in September 2013.
The DFA 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 DFA requires the SEC to adopt a 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 DFA clarifies that the SEC may, but is not required to
promulgate rules that would require that a company’s 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.
175 Fifth Third Bancorp
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The DFA 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 DFA includes a number of provisions that are targeted at
improving the reliability of credit ratings. In August of 2014 the
SEC adopted new requirements for credit rating agencies to
enhance governance, protect against conflicts of interest, and
increase transparency to improve the quality of credit rating
agency accountability.
Consumer Issues
The DFA created a new bureau, the CFPB, which has the
authority
to numerous
implement regulations pursuant
to
laws and has supervisory authority,
consumer protection
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.
to
the DFA,
Debit Card Interchange Fees
The DFA 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
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. On July
31, 2013, the U.S. District Court for the District of Columbia
issued an order granting summary judgment to the plaintiffs in a
case challenging certain provisions of the FRB’s rule concerning
electronic debit card transaction fees and network exclusivity
arrangements (the “Current Rule”)
to
implement Section 1075 of the DFA, known as the Durbin
Amendment. The Court held that, in adopting the Current Rule,
the FRB violated the Durbin Amendment’s provisions concerning
which costs are allowed to be taken into account for purposes of
setting fees that are reasonable and proportional to the costs
incurred by the issuer and therefore the Current Rule’s maximum
permissible fees were too high. In addition, the Court held that the
Current Rule’s network non-exclusivity provisions concerning
unaffiliated payment networks for debit cards also violated the
Durbin Amendment. The Court vacated the Current Rule, but
stayed its ruling to provide the FRB an opportunity to replace the
invalidated portions. The FRB appealed this decision and on
March 21, 2014, the D.C. Circuit Court of Appeals reversed the
that were adopted
176 Fifth Third Bancorp
District Court’s grant of summary judgment and remanded the
case for further proceedings in accordance with its opinion. The
merchants have filed a petition for writ of certiorari to the U.S.
Supreme Court. However, on January 20, 2015, the U.S. Supreme
Court declined to hear an appeal of the Circuit Court reversal,
thereby largely upholding the Current Rule and substantially
reducing uncertainty surrounding debit card interchange fees the
Bancorp is permitted to charge. Refer to the Noninterest Income
subsection of the Statements of Income Analysis section of
MD&A for further information regarding the Bancorp’s debit
card interchange revenue.
FDIC Matters and Resolution Planning
Title II of the DFA creates an orderly liquidation process that the
FDIC can employ for failing systemically important financial
companies. Additionally, the DFA 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 January 2012, the FDIC issued a 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 institution’s failure. The rule
became effective in January 2012; however, submission of plans
are staggered over a period of time. The Bancorp’s banking
subsidiary is subject to this rule and submitted its most recent
resolution plan pursuant to this rule as of December 31, 2014.
In October 2011, the FRB and FDIC issued a final rule
implementing the resolution planning requirements of Section
165(d) of the DFA. The final rule requires BHCs 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
company’s strategy for rapid and orderly resolution in bankruptcy
during times of financial distress. Under the final rule,
companies must submit their initial resolution plans on a
staggered basis.
The Bancorp submitted its most recent
resolution plan pursuant to this rule as of December 31, 2014.
Proprietary Trading and Investing in Certain Funds
The DFA sets forth new restrictions on banking organizations’
ability to engage in proprietary trading and sponsors of or invest
in private equity and hedge funds (the “Volcker Rule”). The final
regulations implementing the Volcker Rule (“Final Rules”) were
adopted on December 10, 2013. The Volcker Rule generally
prohibits any banking entity from (i) engaging in short-term
proprietary trading for its own account and (ii) sponsoring or
acquiring any ownership interest in a private equity or hedge
fund. The Volcker Rule and Final Rules contain a number of
exceptions. The Volcker 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. The Final Rules
exclude certain funds from the prohibition on fund ownership and
sponsorship including wholly-owned subsidiaries, joint ventures,
and acquisitions vehicles, as well as SEC registered investment
companies. De minimis ownership of private equity or hedge
funds is also permitted under the Final Rules. In addition to the
general prohibition on sponsorship and investment, the Volcker
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 is required under the Final Rules to demonstrate that
it has a Volcker Rule compliance program. In connection with the
issuance of the Final Rules, the Federal Reserve extended the
conformance period generally until July 21, 2015. The Final
Rules became effective April 2014 and in December 2014, the
FRB extended the compliance period through July 2016 for
investments in and relationships with such covered funds that
were in place prior to December 31, 2013, and indicated that it
intends to further extend the compliance period for such
investments through July 2017. Further, with respect to covered
funds that are “illiquid funds”, the FRB has the authority to grant
up to five more years for the Bancorp to conform to the final
Volcker Rule with respect to such illiquid funds.
Derivatives
Title VII of the DFA 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.
In 2014, Fifth Third Bank registered as a swap dealer with the
CFTC and became subject to new substantive requirements,
including real time trade reporting and robust record keeping
requirements, business conduct requirements (including daily
valuations, disclosure of material risks associated with swaps and
disclosure of material incentives and conflicts of interest), and
mandatory clearing and exchange trading of all standardized
swaps designated by the relevant regulatory agencies as required
to be cleared. As with the Volcker Rule, Fifth Third Bank is
required to demonstrate that it has a satisfactory compliance
program to monitor the activities of the swap dealer and comply
with the applicable regulations. Although the ultimate impact of
the regulatory changes will depend on the promulgation of all
final regulations, Fifth Third Bank’s derivatives business will
likely be further subject to additional substantive requirements
including margin requirements in excess of current market
practice and certain capital requirements. These requirements
may 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 DFA 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, a state
bank chartered in that state would be permitted to establish a
branch.
Systemically Significant Companies and Capital
Title I of the DFA creates a new regulatory regime for large
BHCs. U.S. BHCs with $50 billion or more in total consolidated
assets, including Fifth Third, are subject to enhanced prudential
standards and early remediation requirements under Title I. Title I
of the DFA 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 DFA requires the FRB to impose enhanced capital and
risk-management standards on these firms and mandates the FRB
to conduct annual stress tests on all BHCs with $50 billion or
more in assets to determine whether they have adequate capital
available to absorb losses in baseline, adverse, or severely adverse
economic conditions. In November 2011, the FRB adopted final
rules requiring BHCs 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
institution’s capital adequacy,
internal capital adequacy,
assessment processes and capital distribution plans such as
dividend payments and stock repurchases. Banks are also required
to report certain data to the FRB on a quarterly basis to allow the
FRB to monitor progress against the approved capital plans.
The CCAR process is intended to help ensure that BHCs
have robust, forward-looking capital planning processes that
account for each company’s unique risks and that permit
continued operations during times of economic and financial
stress. The 2015 CCAR required BHCs with consolidated assets
of $50 billion or more to submit a capital plan to the FRB by
January 5, 2015. The mandatory elements of the capital plan are
an assessment of the expected uses and sources of capital over a
nine-quarter planning horizon, a description of all planned capital
actions over the planning horizon, a discussion of any expected
changes to the Bancorp’s business plan that are likely to have a
material impact on its capital adequacy or liquidity, a detailed
description of the Bancorp’s process for assessing capital
adequacy and the Bancorp’s capital policy. The stress tests
require increased involvement by boards of directors in stress
testing and public disclosure of the results of both the FRB’s
annual stress tests and a BHC’s annual supervisory stress tests,
and semi-annual internal stress tests. The Bancorp submitted its
capital plan, along with all supporting materials, to the FRB on
January 5, 2015. The FRB will release the results of the
supervisory stress tests on March 5, 2015 and the related results
from the 2015 CCAR on March 11, 2015.
The FRB recently amended its capital planning and stress
testing rules to, among other things, generally limit a BHC’s
ability to make quarterly capital distributions – that is, dividends
and share repurchases – commencing April 1, 2015 if the amount
of the bank’s actual cumulative quarterly capital issuances of
instruments that qualify as regulatory capital are less than the
bank had indicated in its submitted capital plan as to which it
received a non-objection from the FRB. For example, if the BHC
issued a smaller amount of additional common stock than it had
stated in its capital plan, it would be required to reduce common
dividends and/or the amount of common stock repurchases so that
the dollar amount of capital distributions, net of the dollar amount
of additional common stock issued (“net distributions”), is no
greater than the dollar amount of net distributions relating to its
common stock included in its capital plan, as measured on an
aggregate basis beginning in the third quarter of the nine-quarter
planning horizon through the end of the then current quarter.
However, not raising sufficient amounts of common stock as
planned would not affect distributions related to Additional Tier I
Capital instruments and/ or Tier II Capital. These limitations also
contain several important qualifications and exceptions, including
that scheduled dividend payments on (as opposed to repurchases
of) a BHC’s Additional Tier I Capital and Tier II Capital
instruments are not restricted if the BHC fails to issue a sufficient
amount of such instruments as planned, as well as provisions for
certain de minimis excess distributions.
In December of 2010 and revised in June of 2011, the Basel
Committee on Banking Supervision (the “Basel Committee”)
issued Basel III, a global regulatory framework, to enhance
international capital standards. 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
capital
minimum
requirements
introduces
capital
and
177 Fifth Third Bancorp
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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.
In July of 2013, U.S. banking regulators approved the final
enhanced regulatory capital rules (“Final Capital Rules”), which
included modifications to the proposed rules. The Final Capital
Rules substantially revise the risk-based capital requirements
applicable to BHCs and their depository institution subsidiaries as
compared to the previous U.S. risk-based capital and leverage
ratio rules, and thereby implement certain provisions of the DFA.
The Final Capital Rules, among other things, (i) introduce a
new capital measure “Common Equity Tier I” (“CET1”), (ii)
specify that Tier I capital consists of CET1 and “Additional Tier I
capital” instruments meeting specified requirements, (iii) define
CET1 narrowly by requiring that most adjustments to regulatory
capital measures be made to CET1 and not to the other
components of capital and (iv) expand the scope of the
adjustments as compared to existing regulations. CET1 capital
consists of common stock instruments that meet the eligibility
criteria in the final rules, including; common stock and related
surplus, net of treasury stock and retained earnings, certain
minority interests and accumulated other comprehensive income
(“AOCI”), if elected.
When fully phased-in on January 1, 2019, the Final Capital
Rules require banking organizations to maintain (i) a minimum
ratio of CET1 to risk-weighted assets of at least 4.5%, plus a
2.5% “capital conservation buffer” (which is added to the 4.5%
CET1 ratio as that buffer is phased-in, effectively resulting in a
minimum ratio of CET1 to risk-weighted assets of at least 7.0%
upon full implementation), (ii) a minimum ratio of Tier I capital
to risk-weighted assets of at least 6.0%, plus the capital
conservation buffer (which is added to the 6.0% Tier I capital
ratio as that buffer is phased-in, effectively resulting in a
minimum Tier I capital ratio of 8.5% upon full implementation),
(iii) a minimum ratio of total capital (that is, Tier I plus Tier 2
capital) to risk-weighted assets of at least 8.0%, plus the capital
conservation buffer (which is added to the 8.0% total capital ratio
as that buffer is phased-in, effectively resulting in a minimum
total capital ratio of 10.5% upon full implementation) and (iv) a
minimum leverage ratio of 4.0%, calculated as the ratio of Tier I
capital to adjusted average consolidated assets.
Banking institutions with a ratio of CET1 to risk-weighted
assets above the minimum but below the conservation buffer will
face limitations on the payment of dividends, common stock
repurchases and discretionary cash payments to executive officers
based on the amount of the shortfall.
The Final Capital Rules provide for a number of deductions
from and adjustments to CET1. These include, for example, the
requirement that mortgage servicing rights, deferred tax assets
dependent upon future taxable income and significant investments
in non-consolidated financial entities be deducted from CET1 to
the extent that any one such category exceeds 10% of CET1 or all
such categories in the aggregate exceed 15% of CET1. Under
current capital standards, the effects of AOCI items included in
capital are excluded for the purposes of determining regulatory
capital ratios. Under the Final Capital Rules, Bancorp has a one-
time election (the “Opt-out Election”) to filter certain AOCI
components, comparable to the treatment under the current
general risk-based capital rule.
The Final Capital Rules were effective for the Bancorp on
January 1, 2015, subject to phase-in periods for certain of their
components and other provisions. Although not currently
178 Fifth Third Bancorp
required, Fifth Third Bancorp believes the aforementioned capital
ratios under the revised Final Capital Rules meet or exceed the
ratios on a fully phased in basis. Refer to the Non-GAAP section
of MD&A for an estimate of the Basel III CET1 ratio as of
December 31, 2014.
In February 2014,
the FRB approved a final rule
requirements.
several heightened prudential
implementing
Beginning in 2015, the rules require BHCs with $10 billion or
more in consolidated assets to establish risk committees and
require BHCs with $50 billion or more in total consolidated assets
to comply with enhanced liquidity and overall risk management
standards, including company-run liquidity stress testing and a
buffer of highly liquid assets based on projected funding needs
for various time horizons, including 30, 60, and 90 days. These
liquidity-related provisions are designed to be complementary,
and in addition to the Final LCR Rule applicable to BHCs (as
discussed below). Rules to implement two other components of
the DFA’s enhanced prudential standards –single-counterparty
credit limits and early remediation requirements– are still under
consideration by the FRB. Fifth Third has conducted a self
evaluation of all the requirements within the enhanced prudential
standards, and believe the necessary steps have been taken to
ensure compliance with all requirements regarding liquidity, risk
exposures, and early remediation.
Liquidity Regulation
Liquidity risk management and supervision have become
increasingly important since the financial crisis. On September 3,
2014, the FRB and other banking regulators adopted final rules
(“Final LCR Rule”) implementing a U.S. version of the Basel
Committee’s Liquidity Coverage Ratio requirement (“LCR”),
which is designed to ensure that the banking entity maintains an
adequate level of unencumbered high-quality liquid assets
(“HQLA”) equal to the entity’s expected net cash outflow for a
30-day time horizon (or, if greater, 25% of its expected total cash
outflow) under an acute liquidity stress scenario. The rules apply
in modified form to banking organizations, such as the Bancorp,
having $50 billion or more in total consolidated assets but less
than $250 billion. The LCR is the ratio of an institution’s stock of
HQLA (the numerator) over projected net cash out-flows over the
30-day horizon (the denominator), in each case, as calculated
pursuant to the Final LCR Rule. Once fully phased-in, a subject
institution must maintain an LCR equal to at least 100% in order
to satisfy this regulatory requirement. Only specific classes of
assets,
including U.S. Treasuries, other U.S. government
obligations and agency mortgaged-backed securities, qualify
under the rule as HQLA, with classes of assets deemed relatively
less liquid and/or subject to greater degree of credit risk subject to
certain haircuts and caps for purposes of calculating the
numerator under the Final LCR Rule. The total net cash outflows
amount is determined under the rule by applying certain
hypothetical outflow and inflow rates, which reflect certain
standardized stressed assumptions, against the balances of the
banking organization’s funding sources, obligations, transactions
and assets over the 30-day stress period. Inflows that can be
included to offset outflows are limited to 75% of outflows (which
effectively means that banking organizations must hold high-
quality liquid assets equal to 25% of outflows even if outflows
perfectly match inflows over the stress period). The total net cash
outflow amount for the modified LCR applicable to the Bancorp
is capped at 70% of the outflow rate that applies to the full LCR.
The initial compliance date for the modified LCR will be
January 2016, with the requirement fully phased-in by January
2017. The LCR is a minimum requirement, and the FRB can
impose additional liquidity requirements as a supervisory matter.
In addition, the Bancorp is also subject to the liquidity-related
requirements of
the enhanced prudential supervision rules
adopted by the FRB under Section 165 of the DFA, as described
above. As of December 31, 2014 the Bancorp’s internally
calculated LCR would have complied with the fully phased in
LCR requirements which will become effective in 2016 as
outlined in the final rule.
In addition to the LCR, the Basel III framework also
included a second standard, referred to as the net stable funding
ratio (“NSFR”), which is designed to promote more medium-and
long-term funding of the assets and activities of banks over a one-
year time horizon. Although the Basel Committee finalized its
formulation of the NSFR in 2014, the U.S. banking agencies have
not yet proposed an NSFR for application to U.S. banking
organizations or addressed the scope of banking organizations to
which it will apply. The Basel Committee’s final NSFR
document states that the NSFR applies to internationally active
banks, as did its final LCR document as to that ratio.
179 Fifth Third Bancorp
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ITEM 2. PROPERTIES
The Bancorp’s 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 Bancorp’s 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, 2014, the Bancorp, through its banking and non-
banking subsidiaries, operated 1,302 banking centers, of which 931
were owned, 259 were leased and 112 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 Bancorp’s 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 25, are listed below along
with their business experience during the past 5 years:
Kevin T. Kabat, 58. Vice Chairman of the Bancorp since September
2012 and Chief Executive Officer of the Bancorp since April 2007.
Previously, Mr. Kabat was President of the Bancorp from June 2006
to September 2012 and Chairman from June 2008 to June 2010. Prior
to that, Mr. Kabat was Executive Vice President of the Bancorp since
December 2003.
Chad M. Borton, 44. Executive Vice President of the Bancorp since
April 2014. Previously, Mr. Borton was Head of Retail Banking for
Fifth Third Bank from July 2012 to April 2014. Prior to that, Mr.
Borton served in multiple positions at JP Morgan Chase including the
Head of Branch Administration from August 2011 to July 2012;
Senior Vice President and Market Manager from August 2010 to
August 2011; Head of Retail Distribution from 2008 to 2010 and
Consumer Bank Chief Financial Officer from 2006 to 2008.
Greg D. Carmichael, 53. President of the Bancorp since September
2012 and Chief Operating Officer of the Bancorp since June 2006.
Previously, Mr. Carmichael was the Executive Vice President and
Chief Information Officer of the Bancorp since June 2003.
Frank R. Forrest, 60. Executive Vice President and Chief Risk
Officer of the Bancorp since April 2014. Previously, Mr. Forrest was
Executive Vice President and Chief Risk and Credit Officer of the
Bancorp since September 2013. Prior to that, Mr. Forrest served with
Bank of America Merrill Lynch. From March 2012 until June 2013,
Mr. Forrest served as Managing Director and Quality Control
Executive for Legacy Asset Services, a division of Bank of America.
From September 2008 until March 2012, Mr. Forrest was Managing
Director and Global Debt Products Executive for Global Corporate
and Investment Banking. Formerly from January 2007 to September
2008, Mr. Forrest was Risk Management Executive for Commercial
Banking.
Mark D. Hazel, 49. Senior Vice President and Controller of the
Bancorp since February 2010. Prior to that, Mr. Hazel was the
Assistant Bancorp Controller since 2006 and was the Controller of
Nonbank entities since 2003.
Gregory L. Kosch, 55. Executive Vice President of the Bancorp
since June 2005. Previously, Mr. Kosch was Senior Vice President
180 Fifth Third Bancorp
and head of the Bancorp’s Commercial Division in the Chicago
affiliate since June 2002.
James C. Leonard, 45. Senior Vice President and Treasurer of the
Bancorp since October 2013. Previously, Mr. Leonard was the
Director of Business Planning and Analysis since 2006 and was the
Chief Financial Officer of the Commercial Banking Division since
2001.
Philip R. McHugh, 50, Executive Vice President of the Bancorp
since December 2014. Previously, Mr. McHugh was Executive Vice
President of Fifth Third Bank since June 2011 and was Senior Vice
President of Fifth Third Bank from June 2010 through June 2011.
Prior to that, Mr. McHugh was the President and CEO of the
Louisville Affiliate of Fifth Third Bank from January 2005 through
June 2010.
Daniel T. Poston, 56. Executive Vice President of the Bancorp since
June 2003, and Chief Strategy and Administrative Officer of the
Bancorp since October 2013. Previously, Mr. Poston was the Chief
Financial Officer of the Bancorp from September 2009 to October
2013. 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.
Joseph R. Robinson, 47. 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, 60. Senior Executive Vice President of the
Bancorp since December 2002.
Teresa J. Tanner, 46. 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.
Mary E. Tuuk, 50. Executive Vice President of Corporate Services
& Board Secretary of the Bancorp since July 2013. Previously, Ms.
Tuuk served as Affiliate President of Fifth Third Bank (Western
Michigan) from November 2011 to June 2013. Prior to that, Ms.
Tuuk was the Executive Vice President and Chief Risk Officer of the
Bancorp from June 2007 to October 2011 and from July 2013
through September 2013. Ms. Tuuk was Senior Vice President of
Fifth Third Bancorp since 2003.
Tayfun Tuzun, 50. Executive Vice President and Chief Financial
Officer of the Bancorp since October 2013. Previously, Mr. Tuzun
was the Senior Vice President and Treasurer of the Bancorp from
December 2011 to October 2013. Prior to that, Mr. Tuzun was the
Assistant Treasurer and Balance Sheet Manager of Fifth Third
Bancorp. Previously, Mr. Tuzun was the Structured Finance Manager
since 2007.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Bancorp’s 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
2014
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2013
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
$20.82
$21.79
$23.41
$23.90
High
$21.14
$19.79
$18.74
$16.77
Low
$17.65
$19.45
$19.82
$20.37
Low
$17.49
$17.80
$15.62
$15.19
Dividends Paid
Per Share
$0.13
$0.13
$0.13
$0.12
Dividends Paid
Per Share
$0.12
$0.12
$0.12
$0.11
See a discussion of dividend limitations that the subsidiaries can pay to the Bancorp discussed in Note 3 of the Notes to Consolidated
Financial Statements. Additionally, as of December 31, 2014, the Bancorp had 46,876 shareholders of record.
Issuer Purchases of Equity Securities
Period
October 2014
November 2014
December 2014
Total
(a) The Bancorp repurchased 117,961, 34,182 and 46,119 shares during October, November and December of 2014 in connection with various employee
$18.15
-
-
$18.15
Shares
Purchased(a)
10,234,560
-
-
10,234,560
Average Price
Paid Per
Share
Maximum
Shares that
May Be
Purchased
Under the
Plans or
Programs
Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
10,234,560 73,180,368
- 73,180,368
- 73,180,368
10,234,560 73,180,368
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 Consolidated Financial Statements.
181 Fifth Third Bancorp
`(cid:3)
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 Bancorp's shareholders over the years 2009 through 2014, and 2004
through 2014, respectively, compared to the S&P 500 Stock and the S&P Banks indices.
(cid:3)
FIFTH THIRD BANCORP VS. MARKET INDICES
(cid:3)
182 Fifth Third Bancorp
III
ITEM 10. DIRECTORS, EXECUTIVE
PART
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.”
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
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
Bancorp’s Proxy Statement for the 2015 Annual Meeting of
Shareholders.
Public Accounting Firm
Fifth Third Bancorp and Subsidiaries Consolidated Financial
Statements
Notes to Consolidated Financial Statements
Pages
84
85-89
90-
170
The information required by this item concerning the Audit
Committee and Code of Business Conduct and Ethics is
captions
incorporated herein by
“CORPORATE GOVERNANCE”
“BOARD OF
DIRECTORS,
ITS COMMITTEES, MEETINGS AND
FUNCTIONS” of the Bancorp’s Proxy Statement for the 2015
Annual Meeting of Shareholders.
reference under
and
the
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 Bancorp’s Proxy Statement for the 2015 Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference under the captions “COMPENSATION DISCUSSION
“COMPENSATION OF NAMED
AND ANALYSIS,”
DIRECTORS,”
EXECUTIVE
“COMPENSATION
and
“COMPENSATION COMMITTEE
INTERLOCKS AND
INSIDER PARTICIPATION” of the Bancorp’s Proxy Statement
for the 2015 Annual Meeting of Shareholders.
COMMITTEE
OFFICERS
REPORT”
AND
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”
“COMPENSATION OF NAMED
EXECUTIVE OFFICERS AND DIRECTORS” of the Bancorp’s
Proxy Statement for the 2015 Annual Meeting of Shareholders.
and
The information required by this item concerning Equity
Compensation Plan information is included in Note 24 of the
Notes to 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”,
“CORPORATE
“ELECTION
ITS
GOVERNANCE” and “BOARD OF DIRECTORS,
COMMITTEES, MEETINGS AND FUNCTIONS” of
the
Bancorp’s Proxy Statement for the 2015 Annual Meeting of
Shareholders.
DIRECTORS”,
OF
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
The information required by this item is incorporated herein by
reference under the caption “PRINCIPAL INDEPENDENT
EXTERNAL AUDIT FIRM FEES” of the Bancorp’s Proxy
Statement for the 2015 Annual Meeting of Shareholders.
The schedules for the Bancorp and its subsidiaries are omitted
because of the absence of conditions under which they are
required, or because
the
Consolidated Financial Statements or the notes thereto.
is set forth
information
the
in
The following lists the Exhibits to the Annual Report on Form 10-K.(cid:3)(cid:3)
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
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 Registrant’s Current
Report on Form 8-K filed with the Commission on July 2, 2009.
Amended Articles of Incorporation of Fifth Third Bancorp, as
amended. Incorporated by reference to Exhibit 3.1 to the Registrant’s
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
2014.
Code of Regulations of Fifth Third Bancorp, as Amended as of
September 15, 2014. Incorporated by reference to Exhibit 3.1 to the
Registrant’s Current Report on Form 8-K filed with the Commission
on September 17, 2014.
Junior Subordinated Indenture, dated as of March 20, 1997 between
Fifth Third Bancorp and Wilmington Trust Company, as Debenture
Trustee. Incorporated by reference to Registrant’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on
March 26, 1997.
Indenture, dated as of May 23, 2003, between Fifth Third Bancorp
and Wilmington Trust Company, as Trustee. Incorporated by
reference to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 22, 2003.
Global security representing Fifth Third Bancorp’s $500,000,000
4.50% Subordinated Notes due 2018. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on May 22, 2003.
First Supplemental Indenture, dated as of December 20, 2006,
between Fifth Third Bancorp and Wilmington Trust Company, as
Trustee. Incorporated by reference to Registrant's Annual Report on
Form 10-K filed for the fiscal year ended December 31, 2006.
Global security representing Fifth Third Bancorp’s $500,000,000
5.45% Subordinated Notes due 2017. Incorporated by reference to
Registrant's Annual Report on Form 10-K filed for the fiscal year
ended December 31, 2006.
Global security representing Fifth Third Bancorp’s $250,000,000
Floating Rate Subordinated Notes due 2016. Incorporated by
reference to Registrant's Annual Report on Form 10-K filed for the
fiscal year ended December 31, 2006.
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 Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 30, 2007.
Global security dated as of March 4, 2008 representing Fifth Third
Bancorp’s $500,000,000 8.25% Subordinated Notes due 2038.
Incorporated by reference to Registrant's Quarterly Report on Form
10-Q filed for the quarter ended March 31, 2008. (1)
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 Registrant’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on
May 6, 2008.
183 Fifth Third Bancorp
`(cid:3)
4.10
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
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 25, 2011.
4.23
4.24
4.11 Global Security dated as of January 25, 2011 representing Fifth Third
4.12
Bancorp’s $500,000,000 3.625% Senior Notes due 2016.
Incorporated by reference to the Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on January
25, 2011. (2)
Second Supplemental Indenture dated as of March 7, 2012 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
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on March 7, 2012.
4.13 Global Security dated as of March 7, 2012 representing Fifth Third
Bancorp’s $500,000,000 3.500% Senior Notes due 2022.
Incorporated by reference to the Registrant’s Current Report on Form
8-K/A filed with the Securities and Exchange Commission on
March 7, 2012.
to
4.15
issued
receipts
time of
the depositary
4.14 Deposit Agreement dated May 16, 2013, between Fifth Third
Bancorp, as issuer, Wilmington Trust, National Association, as
depositary and calculation agent, American Stock Transfer & Trust
Company, LLC, as transfer agent and registrar, and the holders from
time
thereunder.
Incorporated by reference to Exhibit 4.3 of the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on May 16, 2013.
Form of Certificate Representing the 5.10% Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, Series H, of Fifth Third
Bancorp. Incorporated by reference to Exhibit 4.2 of the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 16, 2013.
Form of Depositary Receipt for the 5.10% Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, Series H, of Fifth Third
Bancorp. Incorporated by reference to Exhibit 4.4 of the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 16, 2013.
4.16
4.17 Global Security dated as of November 20, 2013 representing Fifth
Third Bancorp’s $500,000,000 4.30% Subordinated Notes due 2024.
Incorporated by reference to Exhibit 4.1 of the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on November 20, 2013.
to
4.19
issued
receipts
time of
the depositary
4.18 Deposit Agreement dated December 9, 2013, between Fifth Third
Bancorp, as issuer, Wilmington Trust, National Association, as
depositary and calculation agent, American Stock Transfer & Trust
Company, LLC as transfer agent and registrar, and the holders from
time
thereunder.
Incorporated by reference to Exhibit 4.3 of the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on December 9, 2013.
Form of Certificate Representing the 6.625% Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, Series I, of Fifth Third
Bancorp. Incorporated by reference to Exhibit 4.2 of the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 9, 2013.
Form of Depositary Receipt for the 6.625% Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, Series I, of Fifth Third
Bancorp. Incorporated by reference to Exhibit 4.4 of the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 9, 2013.
4.20
Form of Depositary Receipt for the 4.90% Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, Series J, of Fifth Third
Bancorp. Incorporated by reference to Exhibit 4.4 of the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 5, 2014.
Third Supplemental Indenture dated as of February 28, 2014 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 Bancorp and the Trustee. Incorporated by
reference to Exhibit 4.1 of the Registrant’s Current Report on Form
8-K filed with the Commission on February 28, 2014.
4.25 Global Security dated as of February 28, 2014, representing Fifth
Third Bancorp’s $500,000,000 in principal amount of its 2.30%
Senior Notes due 2019. Incorporated by reference to Exhibit 4.2 of
the Registrant’s Current Report on Form 8-K filed with the
Commission on February 28, 2014.
10.2
10.1
4.28
4.27
4.26 Deposit Agreement dated June 5, 2014, among Fifth Third Bancorp,
as issuer, Wilmington Trust, National Association, as depositary and
calculation agent, American Stock Transfer & Trust Company, LLC
as transfer agent and registrar, and the holders from time to time of
the depositary receipts issued thereunder. Incorporated by reference
to Exhibit 4.3 of the Registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on June 5, 2014.
Form of Certificate Representing the 4.90% Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, Series J, of Fifth Third
Bancorp. Incorporated by reference to Exhibit 4.2 of the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 5, 2014.
Form of Depositary Receipt for the 4.90% Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, Series J, of Fifth Third
Bancorp. Incorporated by reference to Exhibit 4.4 of the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 5, 2014.
Fifth Third Bancorp Unfunded Deferred Compensation Plan for Non-
Employee Directors, as Amended and Restated. Incorporated by
reference to Exhibit 10.1 of the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2013. *
Indenture effective November 19, 1992 between Fifth Third Bancorp,
Issuer and NBD Bank, N.A., Trustee. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on November 18, 1992 and as Exhibit 4.1 to
the Registrant’s Registration Statement on Form S-3, Registration
No. 33-54134.
Fifth Third Bancorp Master Profit Sharing Plan, as Amended and
Restated. Incorporated by reference to the Registrant’s Annual Report
on Form 10-K for the year ended December 31, 2011.*
First Amendment to Fifth Third Bancorp Master Profit Sharing Plan,
as Amended and Restated. Incorporated by reference to the
Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2011.*
Second Amendment to Fifth Third Bancorp Master Profit Sharing
Plan, as Amended and Restated. Incorporated by reference to Exhibit
10.7 of the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2012.*
Third Amendment to Fifth Third Bancorp Master Profit Sharing Plan,
as Amended and Restated. Incorporated by reference to Exhibit 10.8
of the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2013.*
Fifth Third Bancorp 401(k) Savings Plan, as Amended and Restated.*
The Fifth Third Bancorp Master Retirement Plan, as Amended and
Restated.*
Fifth Third Bancorp Incentive Compensation Plan. Incorporated by
reference to Registrant’s Proxy Statement dated February 19, 2004.*
10.7
10.8
10.9
10.6
10.5
10.4
10.3
4.21 Deposit Agreement dated June 5, 2014, among Fifth Third Bancorp,
as issuer, Wilmington Trust, National Association, as depositary and
calculation agent, American Stock Transfer & Trust Company, LLC
as transfer agent and registrar, and the holders from time to time of
the depositary receipts issued thereunder. Incorporated by reference
to Exhibit 4.3 of the Registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on June 5, 2014.
Form of Certificate Representing the 4.90% Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, Series J, of Fifth Third
Bancorp. Incorporated by reference to Exhibit 4.2 of the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 5, 2014.
4.22
184 Fifth Third Bancorp
10.10 Fifth Third Bancorp 2008 Incentive Compensation Plan. Incorporated
by reference to the Registrant’s Proxy Statement dated March 6,
2008.*
10.11 Fifth Third Bancorp 2014 Incentive Compensation Plan. Incorporated
by reference to the Registrant’s Proxy Statement dated March 6,
2014.*
10.12 Amended and Restated Fifth Third Bancorp 1993 Stock Purchase
Plan. Incorporated by reference to Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2011.*
10.13 Fifth Third Bancorp Non-qualified Deferred Compensation Plan, as
Amended and Restated. Incorporated by reference to the Registrant’s
Annual Report on Form 10-K for the year ended December 31,
2013.*
10.14 Amendment to the Fifth Third Bancorp Non-qualified Deferred
Compensation Plan, as Amended and Restated.*
10.15 Fifth Third Bancorp Stock Option Gain Deferral Plan. Incorporated
by reference to Registrant’s Proxy Statement dated February 9,
2001.*
10.16 Amendment No. 1 to Fifth Third Bancorp Stock Option Gain Deferral
Plan. Incorporated by reference to Registrant’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on
May 26, 2006. *
10.17 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. *
10.18 Fifth Third Bancorp Executive Change in Control Severance Plan,
effective January 1, 2015. Incorporated by reference to Exhibit 10.1
to Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on November 21, 2014.*
10.19 Form of Executive Agreement effective February 3, 2014, between
Fifth Third Bancorp and Tayfun Tuzun. Incorporated by reference to
Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on February 7, 2014.*
10.20 Form of Executive Agreement effective February 3, 2014, between
Fifth Third Bancorp and Frank R. Forrest. Incorporated by reference
to Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on February 7, 2014.*
10.21 Executive Agreement effective August 19, 2014, between Fifth Third
Bancorp and Chad M. Borton. Incorporated by reference to
Registrant’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2014.*
10.22 Form of Amended Executive Agreement effective January 19, 2012,
between Fifth Third Bancorp and Daniel T. Poston. Incorporated by
reference to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 24, 2012. *
10.23 Warrant dated June 30, 2009 issued by Vantiv Holding, LLC to Fifth
Third Bank. Incorporated by reference to the Registrant’s Schedule
13D filed with the Commission on April 2, 2012.
10.24 Second Amended & Restated Limited Liability Company Agreement
(excluding certain exhibits) dated as of March 21, 2012 by and among
Vantiv, Inc., Fifth Third Bank, FTPS Partners, LLC, Vantiv Holding,
LLC and each person who becomes a member after March 21, 2012.
Incorporated by reference to the Registrant’s Schedule 13D filed with
the Commission on April 2, 2012.
10.25 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 Registrant’s Current
Report on Form 8-K filed with the Commission on July 2, 2009.
10.26 Registration Rights Agreement dated as of March 21, 2012 by and
among Vantiv, Inc., Fifth Third Bank, FTPS Partners, LLC, JPDN
Inc.
Enterprises, LLC and certain stockholders of Vantiv,
Incorporated by reference to the Registrant’s Schedule 13D filed with
the Commission on April 2, 2012.
10.27 Exchange Agreement dated as of March 21, 2012 by and among
Vantiv, Inc., Vantiv Holding, LLC, Fifth Third Bank, FTPS Partners,
LLC and such other holders of Class B Units and Class C Non-Voting
Units that are from time to time parties of the Exchange Agreement.
Incorporated by reference to the Registrant’s Schedule 13D filed with
the Commission on April 2, 2012.
10.28 Recapitalization Agreement dated as of March 21, 2012 by and
among Vantiv, Inc., Vantiv Holding, LLC, Fifth Third Bank, FTPS
Partners, LLC, JPDN Enterprises, LLC and certain stockholders of
Vantiv, Inc. Incorporated by reference to the Registrant’s Schedule
13D filed with the Commission on April 2, 2012.
10.29 Description of Vantiv, Inc. Director Compensation for Greg D.
Carmichael. Incorporated by reference to Exhibit 10.8 of the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2012. On May 10, 2012, Daniel T. Poston was elected as a
Class B Director of Vantiv, Inc. Mr. Poston is subject to a
substantially similar compensation arrangement as described in
Exhibit 10.8 of the Registrant’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2012.*
10.30 Stock Appreciation Right Award Agreement. Incorporated by
reference to Exhibit 10.2 of the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2013.*
10.31 Performance Share Award Agreement. Incorporated by reference to
Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2013.*
10.32 Restricted Stock Award Agreement (for Directors). Incorporated by
reference to Exhibit 10.4 of the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2013.*
10.33 Restricted Stock Award Agreement (for Executive Officers).
Incorporated by reference to Exhibit 10.5 of the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.*
10.34 Stock Appreciation Right Award Agreement.*
10.35 Performance Share Award Agreement.*
10.36 Restricted Stock Unit Agreement (for Directors).*
10.37 Restricted Stock Award Agreement (for Executive Officers).*
10.38 Master Confirmation, as
supplemented by a Supplemental
Confirmation, for accelerated share repurchase transaction dated
October 20, 2014 between Fifth Third Bancorp and Deutsche Bank
AG, London Branch**
Computations of Consolidated Ratios of Earnings to Fixed Charges.
Computations of Consolidated Ratios of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements.
Fifth Third Bancorp Subsidiaries, as of December 31, 2014.
Consent of Independent Registered Public Accounting Firm-Deloitte
& Touche LLP.
12.1
12.2
21
23
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.
101
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.
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 Comprehensive Income
(iv) the Consolidated Statements of Changes in Equity, (v) the
Consolidated Statements of Cash Flows, and (vi) 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 January 25,
2011 representing an additional $500,000,000 of its 3.625% Senior Notes
due 2016.
* Denotes management contract or compensatory plan or arrangement.
** An application for confidential treatment for selected portions of this
exhibit has been filed with the Securities and Exchange Commission.
185 Fifth Third Bancorp
`(cid:3)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
FIFTH THIRD BANCORP
Registrant
/s/ Kevin T. Kabat
Kevin T. Kabat
Vice Chairman and CEO
Principal Executive Officer
February 25, 2015
Pursuant to requirements of the Securities Exchange Act of 1934,
this report has been signed on February 25, 2015 by the
following persons on behalf of the Registrant and in the
capacities indicated.
OFFICERS:
/s/ Kevin T. Kabat
Kevin T. Kabat
Vice Chairman and CEO
Principal Executive Officer
/s/ Tayfun Tuzun
Tayfun Tuzun
Executive Vice President and CFO
Principal Financial Officer
/s/ Mark D. Hazel
Mark D. Hazel
Senior Vice President and Controller
Principal Accounting Officer
DIRECTORS:
/s/ James P. Hackett
James P. Hackett
Chairman
/s/ Marsha C. Williams
Marsha C. Williams
Lead Director
/s/ Nicholas K. Akins
Nicholas K. Akins
/s/ B. Evan Bayh III
B. Evan Bayh III
/s/ Katherine B. Blackburn
Katherine B. Blackburn
/s/ Ulysses L. Bridgeman, Jr.
Ulysses L. Bridgeman, Jr.
/s/ Emerson L. Brumback
Emerson L. Brumback
/s/ Gary R. Heminger
Gary R. Heminger
/s/ Jewell D. Hoover
Jewell D. Hoover
/s/ Kevin T. Kabat
Kevin T. Kabat
/s/ Mitchel D. Livingston, Ph.D.
Mitchel D. Livingston, Ph.D.
/s/ Michael B. McCallister
Michael B. McCallister
/s/ Hendrik G. Meijer
Hendrik G. Meijer
186 Fifth Third Bancorp
AVERAGE ASSETS FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS)
CONSOLIDATED TEN YEAR COMPARISON
Interest-Earning Assets
Interest-
Bearing
Deposits in
Banks(a)
Federal Funds
Sold (a)
-
1
2
1
11
12
438
257
252
88
3,043
2,416
1,493
2,030
3,317
1,023
183
147
144
113
Year
2014 $
2013
2012
2011
2010
2009
2008
2007
2006
2005
Loans and
Leases
91,127
89,093
84,822
80,214
79,232
83,391
85,835
78,348
73,493
67,737
Securities
21,823 $
16,444
15,319
15,437
16,371
17,100
13,424
11,630
20,910
24,806
Total
115,993
107,954
101,636
97,682
98,931
101,526
99,880
90,382
94,799
92,744
Cash and Due
from Banks
2,892
2,482
2,355
2,352
2,245
2,329
2,490
2,275
2,477
2,750
Other
Assets
14,539 $
15,053
15,695
15,335
14,841
14,266
13,411
10,613
8,713
8,102
Total Average
Assets
131,943
123,732
117,614
112,666
112,434
114,856
114,296
102,477
105,238
102,876
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS)
Year
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
Demand
31,755
$
29,925
27,196
23,389
19,669
16,862
14,017
13,261
13,741
13,868
Interest
Checking
25,382
23,582
23,096
18,707
18,218
15,070
14,191
14,820
16,650
18,884
Savings
16,080
18,440
21,393
21,652
19,612
16,875
16,192
14,836
12,189
10,007
Deposits
Money
Market
14,670
9,467
4,903
5,154
4,808
4,320
6,127
6,308
6,366
5,170
Other
Time
3,762
3,760
4,306
6,260
10,526
14,103
11,135
10,778
10,500
8,491
Certificates
$100,000 and
Over
3,929
6,339
3,102
3,656
6,083
10,367
9,531
6,466
5,795
4,001
Foreign
Office
1,828
1,518
1,555
3,497
3,361
2,265
4,220
3,155
3,711
3,967
$
Total
97,406
93,031
85,551
82,315
82,277
79,862
75,413
69,624
68,952
64,388
$
Short-Term
Borrowings
2,331
3,527
4,806
3,122
1,926
6,980
10,760
6,890
8,670
9,511
Total
99,737
96,558
90,357
85,437
84,203
86,842
86,173
76,514
77,622
73,899
INCOME FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Year
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
$
Interest
Income
4,030
3,973
4,107
4,218
4,489
4,668
5,608
6,027
5,955
4,995
Interest
Expense
451
412
512
661
885
1,314
2,094
3,018
3,082
2,030
Noninterest
Income
2,473
3,227
2,999
2,455
2,729
4,782
2,946
2,467
2,012
2,374
Noninterest
Expense
3,709
3,961
4,081
3,758
3,855
3,826
4,564
3,311
2,915
2,801
Net Income (Loss)
Available to
Common
Shareholders
1,414
1,799
1,541
1,094
503
511
(2,180)
1,075
1,188
1,548
Earnings
1.68
2.05
1.69
1.20
0.63
0.73
(3.91)
1.99
2.13
2.79
MISCELLANEOUS AT DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Bancorp Shareholders' Equity
Per Share(b)
Originally Reported
Diluted
Earnings
1.66
2.02
1.66
1.18
0.63
0.67
(3.91)
1.98
2.12
2.77
Dividends
Declared Earnings
1.68
2.05
1.69
1.20
0.63
0.73
(3.94)
2.00
2.14
2.79
0.51
0.47
0.36
0.28
0.04
0.04
0.75
1.70
1.58
1.46
Diluted
Earnings
$ 1.66
2.02
1.66
1.18
0.63
0.67
(3.94)
1.99
2.13
2.77
Common
Shares
Outstanding
824,046,952 $
855,305,745
882,152,057
919,804,436
796,272,522
795,068,164
577,386,612
532,671,925
556,252,674
555,623,430
Common
Stock
2,051
2,051
2,051
2,051
1,779
1,779
1,295
1,295
1,295
1,295
Preferred
Stock
1,331
1,034
398
398
3,654
3,609
4,241
9
9
9
Capital
Surplus
2,646
2,561
2,758
2,792
1,715
1,743
848
1,779
1,812
1,827
Retained
Earnings
11,141
10,156
8,768
7,554
6,719
6,326
5,824
8,413
8,317
8,007
Year
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
Accumulated
Other
Comprehensive
Income
429
82
375
470
314
241
98
(126)
(179)
(413)
$
Treasury
Stock
(1,972)
(1,295)
(634)
(64)
(130)
(201)
(229)
(2,209)
(1,232)
(1,279)
Total
15,626
14,589
13,716
13,201
14,051
13,497
12,077
9,161
10,022
9,446
$
Book Value
Per Share
17.35
15.85
15.10
13.92
13.06
12.44
13.57
17.18
18.00
16.98
Allowance for
Loan and
Lease Losses
1,322
1,582
1,854
2,255
3,004
3,749
2,787
937
771
744
Federal funds sold and interest-bearing deposits in banks are combined in other short-term investments in the Consolidated Financial Statements.
(a)
(b) Adjusted for accounting guidance related to the calculation of earnings per share, which was adopted retroactively on January 1, 2009.
187 Fifth Third Bancorp
DIRECTORS AND OFFICERS
Michael B. McCallister
Retired Chairman & CEO
Humana Inc.
Hendrik G. Meijer
Co-Chairman, Director
& CEO
Meijer, Inc.
DIRECTORS EMERITI(cid:3)(cid:3)
Darryl F. Allen
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
Richard T. Farmer
John D. Geary
Ivan W. Gorr
Joseph H. Head, Jr.
Allen M. Hill
William M. Isaac
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
George A. Schaefer, Jr.
John J. Schiff, Jr.
Donald B. Shackelford
David B. Sharrock
Stephen Stranahan
Dudley S. Taft
Alton C. Wendzel
FIFTH THIRD BANCORP
OFFICERS
Kevin T. Kabat
Vice Chairman & CEO
Greg D. Carmichael
President &
Chief Operating Officer
Chad M. Borton
Executive Vice President
Frank R. Forrest
Executive Vice President &
Chief Risk Officer
Mark D. Hazel
Senior Vice President &
Controller
Gregory L. Kosch
Executive Vice President
James C. Leonard
Senior Vice President &
Treasurer
Philip R. McHugh
Executive Vice President
Daniel T. Poston
Executive Vice President &
Chief Strategy and
Administrative Officer
Joseph R. Robinson
Executive Vice President &
Chief Information Officer
Robert A. Sullivan
Senior Executive(cid:3)Vice(cid:3)
President(cid:3)
Teresa J. Tanner
Executive Vice President &
Chief Human Resources
Officer
Mary E. Tuuk
Executive Vice President of
Corporate Services &
Board Secretary
Tayfun Tuzun
Executive Vice President &
Chief Financial Officer
AFFILIATE PRESIDENTS
Donald Abel, Jr.
Steven Alonso
David A. Call
Hal Clemmer
David Girodat
Shawn Hagan
Thomas Heiks
Jerry Kelsheimer
Robert W. LaClair
Brian Lamb
Ralph S. Michael III
Jordan A. Miller, Jr.
Thomas Partridge
Robert A. Sullivan
Thomas G. Welch, Jr.
FIFTH THIRD BANCORP
BOARD COMMITTEES
Finance Committee
Gary R. Heminger, Chair
Emerson L. Brumback
James P. Hackett
Kevin T. Kabat
Marsha C. Williams
Audit Committee
Emerson L. Brumback, Chair
Nicholas K. Akins
Jewell D. Hoover
Michael B. McCallister
Human Capital and
Compensation Committee
Marsha C. Williams, Chair
Nicholas K. Akins
Gary R. Heminger
Mitchel D. Livingston, Ph. D.
Hendrik G. Meijer
Nominating and Corporate
Governance Committee
Ulysses L. Bridgeman, Jr.,
Chair
B. Evan Bayh III
Gary R. Heminger
Hendrik G. Meijer
Risk and Compliance
Committee
Jewell D. Hoover, Chair
B. Evan Bayh III
Mitchel D. Livingston, Ph. D.
Hendrik G. Meijer
Marsha C. Williams
FIFTH THIRD BANCORP
DIRECTORS
James P. Hackett, Chairman
Vice Chair, Board of
Directors
Steelcase, Inc.
Marsha C. Williams, Lead
Director
Retired Senior Vice President
& Chief Financial Officer
Orbitz Worldwide, Inc.
Nicholas K. Akins
President & CEO
American Electric Power
Company
B. Evan Bayh III
Partner
McGuireWoods LLP
Katherine B. Blackburn
Executive Vice President
Cincinnati Bengals
Ulysses L. Bridgeman, Jr.
President
B.F. Companies
Emerson L. Brumback
Retired President & COO
M&T Bank
Gary R. Heminger
President, CEO & Director
Marathon Petroleum
Corporation
Jewell D. Hoover
Principal & Bank Consultant
Hoover and Associates, LLC
Kevin T. Kabat
Vice Chairman & CEO
Fifth Third Bancorp
Mitchel D. Livingston, Ph.D.
Retired Vice President for
Student Affairs
& Chief Diversity Officer
University of Cincinnati
(cid:3)
188 Fifth Third Bancorp
Financial Highlights 2014
For the years ended December 31
$ in millions, except per share data
2014
2013
2012
EARNINGS AND DIVIDENDS
Net income attributable to Bancorp
$
1,481
$
1,836
$
1,576
Common dividends declared
Preferred dividends declared
PER COMMON SHARE
Earnings
$
Diluted earnings
Cash dividends
Book value per share
AT YEAR-END
427
67
1.68
1.66
0.51
17.35
407
37
$
2.05
$
2.02
0.47
15.85
325
35
1.69
1.66
0.36
15.10
Total Assets
$ 138,706
$ 130,443
$ 121,894
Total Loans and Leases (incl. held-for-sale)
Bancorp Shareholders’ Equity
Deposits
KEY RATIOS
Net Interest Margin (FTE)
Efficiency Ratio (FTE)
Tier 1 Common Ratio*
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
ACTUALS
91,345
101,712
15,626
3.10%
61.1%
9.65%
10.83%
14.33%
89,558
99,275
14,589
3.32%
58.2%
9.45%
10.43%
14.17%
88,721
89,517
13,716
3.55%
61.7%
9.54%
10.69%
14.47%
Common Shares Outstanding (000’s)
824,047
855,306
882,152
Banking Centers
ATMs
Full-Time Equivalent Employees
1,302
2,638
18,351
1,320
2,586
19,446
1,325
2,415
20,798
* Non-GAAP measure. For further information, see the Non-GAAP Financial Measures section of MD&A.
2014
Stock Performance
Fourth Quarter
Third Quarter
Second Quarter
High
$20.82
$21.79
$23.41
Low
$17.65
$19.45
$19.82
First Quarter
$23.90
$20.37
Dividends
Declared
Per Share
$0.13
$0.13
$0.13
$0.12
2013
Low
$17.49
$17.80
$15.62
$15.19
Dividends
Declared
Per Share
$0.12
$0.12
$0.12
$0.11
High
$21.14
$19.79
$18.74
$16.77
Fifth Third’s common stock is traded on the NASDAQ® Global Select Market under the symbol “FITB.”
FIFTH THIRD BANCORP
TRANSFER AGENT
Corporate Address
Investor Relations
American Stock Transfer and Trust Company, LLC.
38 Fountain Square Plaza
Cincinnati, OH 45263
Website: www.53.com
(For Inquiries of Shareholders Only)
For Correspondence:
38 Fountain Square Plaza, MD 1090QC
Cincinnati, OH 45263
6201 15th Ave
Website: www.amstock.com
Brooklyn, NY 11219
Telephone: 1-888-294-8285
Telephone: 1-800-972-3030
e-mail: ir@53.com
For Dividend Reinvestment and Direct Stock
Telephone: 1-866-670-0468
Purchase Plan Transaction Processing:
P.O. Box 922
Wall Street Station
New York, NY 10269-0560
www.53.com