2015 | ANNUAL REPORT
Corporate Profile
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5
1
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$141B
I N A S S E T S
O P E R AT E S
1,254
F U L L - S E R V I C E
B A N K I N G
C E N T E R S
95
B A N K M A R T ®
L O C AT I O N S
2,593
ATMs
OH, KY, IN, MI, IL,
FL, TN, WV, PA, MO,
GA, NC
31
CO R P O R AT E
O F F I C E
LO C AT I O N S
ESTABLISHED IN
1858
Fifth Third Bancorp, established
in 1858, is a diversified financial
services company headquartered
in Cincinnati, Ohio.
Corporate Office Locations (London and Toronto offices not shown)
Fifth Third Bank Regional Footprint as of Dec. 31, 2015
Fifth Third operates four main businesses:
Commercial Banking, Branch Banking,
Consumer Lending, and Investment Advisors.
Fifth Third also has an 18.3% interest in Vantiv
Holding, LLC. Fifth Third is among the largest money
managers in the Midwest and, as of Dec. 31, 2015,
had $297 billion in assets under care, of which it
managed $26 billion for individuals, corporations
and not-for-profit organizations. Member FDIC.
Equal Housing Lender.
A Message To
Our Shareholders
Greg D. Carmichael
President and Chief Executive Officer
Dear Fifth Third Shareholders,
It is my great pleasure to address you as chief executive officer of Fifth Third
Bancorp. I am honored by the Board’s appointment to this post and I look
forward to helping our Company deliver new solutions that will continue to
raise the bar on the services we provide as a trusted advisor to our retail and
commercial customers.
Before turning to the highlights and challenges of 2015, and on behalf of
everyone at Fifth Third, I want to thank Kevin Kabat for his 33 years of
strong and steady leadership. Having served as CEO for more than eight
of those years, Kevin deftly guided Fifth Third through the financial crisis with a
steadfast commitment to deliver shareholder value and support the communities
we serve. I want to thank him for his guidance, his support and his friendship.
2015 was a transformative year for Fifth Third; a year in which we took bold
steps to better navigate, manage and anticipate industry change as well as risk,
and a year in which we redoubled our efforts to keep the customer at the center
of everything we do.
The second half of the year was especially active as we worked to position
Fifth Third for sustainable success through every economic cycle.
For example, we welcomed several top-caliber executives who are already
contributing to our talented leadership team. We chose to exit two of our retail
markets to improve efficiency and competitiveness. And we resolved a number
of long-standing regulatory matters, allowing us to take a strong step forward
on the road ahead.
Given the grounding early in my career in technology and operations, you will
not be surprised to hear that this road will include significant technological
milestones as well as a focus on process improvements, customer service and
regulatory excellence. We are firmly committed to growing our businesses
profitably and responsibly.
2015 Performance
Our progress in 2015 across our businesses and markets provides a good start.
Net income available to common shareholders was $1.6 billion and earnings
per diluted share were $2.01. The results reflect a solid performance across each
of our business lines, highlighted by revenue growth in mortgage banking,
payments processing and wealth management. This contributed to a return on
average assets of 1.2 percent, which is an increase from 2014 and higher than
the average of our commercial bank peers.
Return on average tangible common equity1 of 13.5 percent was a 130-basis-point
increase from 2014. Loan and lease balances grew by more than $2 billion in
2015, as our continued focus on the commercial and industrial space remained
strong. The growth in our commercial business was complemented by customer
deposits, which increased by over $5 billion. We continued to recognize significant
value from our position in Vantiv and, as a result, generated over $500 million
of after-tax cash proceeds after liquidating a portion of our position.
1 Non-GAAP measure. For further information, see the Non-GAAP Financial Measures section of MD&A.
FIFTH THIRD BANCORP 2015 ANNUAL REPORT | 1
A Message To Our Shareholders continued
Expenses were up in 2015 as we invested in our commitment to digitize our
business and regulatory excellence. However, we improved our efficiency ratio
by carefully managing the relationship between revenue and expenses. Line of
business performance also improved. Mortgage banking revenue grew 12 percent
due to more than $8 billion in originations. Wealth management revenue grew
3 percent as asset management and securities and brokerage fees grew 3 and
4 percent, respectively. Payment processing revenue increased 2 percent as we
issued more credit cards to meet customer needs and grew our client base. We
also continued to return capital to shareholders through a 2 percent dividend
increase and the repurchase of over 42 million shares of common stock.
Common Dividend Per Share
$1.00
$0.75
$0.50
$0.25
$0
$0.47
$0.51
$0.52
$0.36
$0.28
2011
2012
2013
2014
2015
Driving Consistently Strong Results
In a world of higher and higher expectations—in terms of service, efficiency,
results and returns—our own expectation for Fifth Third is to deliver a consistently
strong performance throughout the cycle. To meet that expectation, we have
added and enhanced talent and ramped up the level of accountability at all
levels of the Company.
Our commitment to growing our businesses will be calibrated and
measured, with a focus on profitability, lower volatility and risk
management. Resources will be allocated strategically and carefully managed.
Additionally, we will seek relationships with the right risk/return profiles.
This includes avoiding an over-reliance on credit income and building out more
fee-driven relationships, specifically showcasing our suite of products across
our consumer and core middle-market sectors.
The substantial investments we have made in people, products and services are
already moving us toward a better mix of fee and credit income. By focusing on
having a greater proportion of our revenue driven by fee-based products and
services, we are supporting our goal to operate with lower volatility. We have also
worked to reshape our business mix, again to manage the volatility inherent in
certain, more cyclical industries. We regularly consider opportunities that could
be additive to our existing businesses or could expand our existing lineup.
We are very pleased to have assembled a leadership team that brings together
significant experience from within the industry and from companies that have
served the industry. New additions include Lars Anderson, a seasoned
commercial banker with a 30-year record of success at other large regional banks.
Since the day he joined us as chief operating officer last August, Lars has modeled
the high level of work ethic and performance that is necessary for us to win.
Tim Spence came to Fifth Third in September from Oliver Wyman, where he
was a partner in the regional banking practice. As our new chief strategy officer,
Tim brings along substantial knowledge about our Company, our industry
and the competitive landscape. Chief Legal Officer Heather Russell Koenig,
who also joined in September, has deep experience with regulatory affairs at
several other large financial institutions. In addition to these great executives,
we also have added senior talent in sales, credit and risk management
over the last 18 months. These leaders, along with the highly capable and
engaged individuals all across our Company, have the skill and energy to execute
on our vision.
2 | FIFTH THIRD BANCORP 2015 ANNUAL REPORT
Book Value Per Share
$20
$15.10
$15.85
$13.92
$17.35
$18.48
$16
$12
$8
$4
$0
2011
2012
2013
2014
2015
Average Assets ($B)
$160
$120
$112.67
$117.61
$123.73
$131.94 $140.11
$80
$40
$0
2011
2012
2013
2014
2015
NPA Ratio
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2.23%
1.49%
1.10%
0.82% 0.70%
2011
2012
2013
2014
2015
Common Shares Outstanding
950
920
900
850
800
750
700
882
855
824
785
2011
2012
2013
2014
2015
Our commitment to growing
our businesses will be
calibrated & measured, with a
focus on profitability,
lower volatility and risk
management.
Dealing Effectively with Uncertainty
Along with investing to grow and drive efficiencies in
our core businesses, we are also mindful of the challenges
of operating through different economic cycles to protect
the value of the business. As you may know, interest rates
have recently dominated discussion around bank earnings,
and we continue to perform well in the current low
interest rate environment. Our balance sheet is positioned
very well and reflects our expectations for slowly rising
interest rates, as our securities portfolio is structured
with lower exposures to prepayments and re-pricing.
At the same time, however, we have also maintained the
flexibility to adapt to an even lower rate environment in the event that the Fed takes
a slower-than-expected approach. We believe this strategy will be pivotal to
supporting a stable earnings stream in a continually uncertain rate environment.
In any environment, the keys to our future are steadfast: keep the
customer at the center, operate with excellence, proactively manage
risk and foster engagement among our teams.
Achieving Excellence in Risk Management and Operations
While we are constantly looking ahead, we are also focused on day-to-day operational
excellence while managing the risks that are inherent in the business of banking.
As I mentioned earlier, we settled a few significant regulatory matters in 2015
and we were pleased to put these matters behind us. We are focused on ensuring
that we meet or exceed our regulatory and compliance targets to avoid regulatory
enforcement actions in the future.
As the Dodd-Frank Act and other banking regulations take effect, we are gaining
more clarity around the types of regulatory and compliance expectations we
will be required to meet in the coming years. We have made the necessary
investments to continue to meet these expectations and ensure that our risk
management culture will be a competitive advantage going forward.
Our commitment to risk management is not just about the back office, or narrowly
focused in support of regulatory and compliance areas. Our commitment is also
a big driver of how we think about customer satisfaction as we strive to achieve
service excellence. When we deliver on our operational duties, risks are
mitigated, and both our customers and our Company win.
This means that whether a customer is standing in front of us or banking online,
at the ATM or on the phone, he or she should have a great experience with
Fifth Third. We need to make sure we do all we can, every time, to deliver from
an operational standpoint. This will mitigate risk to the customer and to us, all
while ensuring that every customer has a great overall experience at Fifth Third.
Ultimately, we are proving to our customers that they can and should trust
us to provide high-quality and highly efficient services that connect them with
their goals.
FIFTH THIRD BANCORP 2015 ANNUAL REPORT | 3
A Message To Our Shareholders continued
Keeping Customers at the Center
Doing the right thing, the right way, is a core principle of our Company. We
want to be the One Bank people most value and trust. To achieve this, we will
remain focused on understanding and meeting customer needs; being clear
and transparent; and delivering solutions when, and how they want to bank.
We will look at processes through the lens of the customer and work to continually
meet and exceed expectations. We know that by putting the customer
at the center of everything we do, we will continue to create
shareholder value.
With the right foundation in place, we are firmly focused on growing direct,
profitable relationships with our customers. Being a trusted advisor and taking
care of our customers are vital to creating value for our franchise, and will require
us to increase the pace of play across each of our businesses.
In the Consumer Bank, investments in technology and efforts to
develop and improve digital channels are essential to building these
relationships. Customer demographics are changing, and by any measure, it’s
clear that their comfort level with digital channels is growing. Digital channel
experiences are generally more highly rated than traditional service channels
and online services in retail and other categories are increasing expectations
for access, transparency and speed.
Digital channels are integral to the way people shop for, apply for and
use financial services and we are already using these tools to increase
the number of customer touch points. This places a higher focus on
customer-facing actions while helping to develop a consultative sales process
in which we are the trusted advisor to our consumer customers.
Late last year, we rolled out a new website with an enhanced look and feel
to improve the customer experience, which is the most important factor in
the ultimate success of digital deployment. As the frequency of digital contact
is growing relative to physical contact, our investments have been increasingly
moving to ensure and improve the quality of the experience. This also has led
us to more effective management of our brick and mortar branch network.
These strategies will improve customer experience and take risks out of processes,
4 | FIFTH THIRD BANCORP 2015 ANNUAL REPORT
We will look at processes
through the lens of
the customer and work to
continually meet and
exceed expectations.
all while allowing us to deliver services and solutions to
our customers safely and efficiently through the channels
they most prefer.
In the Commercial Bank, we are targeting high-
value customers with the right risk/reward
balance. We have enhanced the capabilities available
to our relationship managers so that they have the
necessary tools to be assets to their customers, especially
on the go. It is important that we monitor and consult
on significant macroeconomic trends to help benefit
commercial clients in a dynamic rate environment. By
offering fast, seamless, convenient and flexible solutions,
we will earn respect from our customers by promoting trust and integrity as the
valuable advantages to doing business with Fifth Third.
In the wealth management business, our investments in mobile
enhancements and our convenient Life360 tool will connect our
customers and advisors to more information faster, which will improve
the quality of relationships. Our specific focus on intergenerational wealth
transfer will help build long-term relationships driven by the value Fifth Third
provides as a trusted advisor.
Over the last several years, we have also continued to grow our Payments and
Commerce Solutions business, and I am enthused about the opportunities we
have in this space. We are bringing value-added services to customers faster than
the competition and are focused on this competitive advantage going forward.
Through emerging products in mobile payments, digital sales and consulting
tools, we continue to drive customer-centric innovations.
Overall, we are using technology to enhance our ability to be nimble
and opportunistic in all aspects of our Company. While we will continue
to have an intense focus on expenses in 2016, we have invested wisely in the
digital space. Technology is transforming our industry through its impact on day-
to-day operations, its success in widening the delivery channels for products and
services, and the value that data analytics provides. Our digital investments will
set the stage for ongoing outperformance through all economic cycles.
Digital channels are integral to the way people
shop for, apply for and use financial services
and we are already using these tools to increase the
number of customer touch points.
FIFTH THIRD BANCORP 2015 ANNUAL REPORT | 5
A Message To Our Shareholders continued
Improving the Lives of Customers and the Well-being
of Communities
Fifth Third is committed to improving the lives of customers and the well-being
of our communities. This commitment shows in our products, services and
relationships, and it also shows in the way we step up and step together to
positively impact the places where we live and work.
This long legacy of caring, which has been a hallmark of our Company,
continued in 2015. Last August, for example, we announced that Fifth Third’s
headquarters and Cincinnati region had held the most successful United Way
campaign to date, raising more than $3 million from employee contributions
alone. We provided roughly 800,000 meals to the hungry through Fifth Third
Day celebrations in 2015 (5/3 on the calendar).
In June, we received the prestigious Community Service Award from
the Illinois Bankers Association (IBA) for our many efforts to help the
communities we serve, especially through our “Honoring Our Veterans”
campaign. This campaign included providing veterans and military families
with college scholarships, care packages, house remodeling, free pet adoptions,
job coaching assistance and training for support dogs. It culminated on Veterans
Day, when more than 200 veterans received either jobs or solid job leads at our
first-of-its-kind “Hiring Fair” for veterans.
Additionally, since our collaboration with Stand Up To Cancer (SU2C) began
in 2013, Fifth Third has raised $6 million by providing opportunities for customers
and community members to help in the fight against this disease by donating
to SU2C’s innovative research programs.
We could not have this kind of community impact, nor could we deliver the
financial products and services that improve the lives of individual and families,
without the dedication of our more than 18,000
employees. Our employees are the face of
Fifth Third. They also are the hands
that put their neighbors in homes; help
businesses launch, expand and operate;
put kids through college and send workers
to a secure retirement. I am proud to be
part of this industry, this Company and this team.
I look forward to the future with confidence,
optimism and great faith that Fifth Third will
continue to make a positive difference in the
lives of customers, communities, employees
and shareholders.
Sincerely,
Greg D. Carmichael
President and Chief Executive Officer
6 | FIFTH THIRD BANCORP 2015 ANNUAL REPORT
I look forward to the
future with confidence,
optimism & great faith
that Fifth Third will continue
to make a positive difference
in the lives of customers,
communities, employees
and shareholders.
S
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5
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2
Full-year net income
available to
common shareholders
INCREASED
16%
Average loans & leases
INCREASED TO
$93.3B
Average securities
INCREASED
$5.2B
Average
transaction deposits
INCREASED
6%
At year-end, our
LCR was
116%
exceeding Federal
requirements
Noninterest income
INCREASED
21%
2015 Financial Review
Full-year 2015 net income available to common shareholders of
$1.6 billion increased 16 percent from 2014. Earnings per diluted
common share of $2.01 increased 21 percent.
Results for both years included the benefit to earnings related to our holding
in Vantiv. In 2015, after-tax Vantiv net gains were approximately
$519 million (approximately $0.64 per share), compared with net gains
of $148 million (approximately $0.17 per share) in 2014. We reduced our direct
ownership stake and realized significant gains, and our remaining interest in
Vantiv will continue to be a source of significant future returns.
Our balance sheet is strong as we maintained our disciplined approach to lending
and focused on areas that we believe have a compelling risk/return profile.
Average loans and leases increased to $93.3 billion, with a majority of
the growth in commercial and industrial and commercial construction loans.
Average securities increased $5.2 billion as we worked toward an optimal
mix for the current and near-term rate and liquidity environment.
We also continued to grow high-value, low-cost transaction deposits in 2015,
with average balances increasing 6 percent from 2014. We view the strength
of our deposit franchise to be the driving force for profitable balance
sheet growth in the coming years.
Full-year net interest income declined 1 percent as we nearly offset $94 million
dollars of revenue reduction from the changes made to our deposit advance
product that went into effect on Jan. 1, 2015. Excluding that, NII was up 1 percent.
At year-end, our liquidity coverage ratio (LCR) was 116 percent, which exceeds
the Federal Banking Regulators’ LCR requirements.
Noninterest income increased 21 percent from 2014, reflecting the higher
net benefit from our investment in Vantiv, partially offset by charges associated
with branch rationalization plans, and an 11 percent decline in corporate
banking revenue. Otherwise, fee income results were highlighted by mortgage
banking net revenue and investment advisory fees. Throughout the year, we
maintained our focus on expenses, and while total noninterest expense increased
2 percent from 2014, we are driving efficiencies in our operations that are largely
funding our investments in our risk and compliance infrastructure.
Credit trends reflected the benign environment and our continued focus to improve
our businesses and results. Full-year net charge-offs decreased 22 percent, while
nonperforming assets declined 16 percent from 2014. Our coverage ratios remain
solid at 1.37 percent of loans and 252 percent of nonperforming loans.
Overall, we have momentum in many of our core businesses.
WeWe believe we are taking appropriate steps to be successful today
and toto position ourselves for long-term success.
FIFTH THIRD BANCORP 2015 ANNUAL REPORT | 7
Consumer Lending
We offer competitive rates with flexible terms
to help customers reach their goals.
S
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2
$656M
TOTAL REVENUE
$21B
AV E R A G E
L O A N S
$73B
M O R T G A G E
S E RV I C I N G
P O R T F O L I O
8,717
D E A L E R
I N D I R E C T AU TO
L E N D I N G
N E T WO R K
Our Consumer Lending division offers competitive
rates with flexible terms to help customers reach
their goals, whether short- or long-term. In our
consumer credit card business, we focus
on acquiring and activating existing retail and
small business customers to strengthen the total
customer relationship. The recent creation of
our Payments and Commerce Solutions division
takes this strategy even further, allowing us to
accelerate and deepen customer relationships.
Our auto business is another important
component of Consumer Lending, and it
is a business that has remained stable in size
throughout 2015. There is no shortage of
opportunity to generate substantial auto loan
growth, given the industry volume, but we believe
we are sized right to effectively manage risk and
controls in this area. Fifth Third is one of the
largest bank originators of indirect auto loans
in the country, and we continue to value the
relationships with our extensive dealer network
across our 45-state indirect auto footprint.
Mortgage 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 quickly in
response to the changing environment. Fifth
Third is primarily an in-footprint, direct and retail
lender, though we also purchase loans through
a correspondent channel. We offer home loans
to our existing customers and new prospects,
knowing that ideally, we can provide additional
products and services beyond their home loan.
Mortgage often opens the door to deeper, more
profitable relationships, and our One Bank
approach to holistically serving the needs of
customers is key to leveraging these opportunities.
Regardless of whether our credit customers
come to us through card, auto, mortgage or
other Consumer Lending areas, Fifth Third
provides ample resources to simplify the process
of obtaining a loan. We proactively work with
borrowers to explore options that make sense
within their current financial situation. Our
commitment to demonstrate better listening,
better ideas and better solutions helps earn us
the trust that creates value…value that lasts well
beyond the life of the loan.
We proactively work
with borrowers
to explore options that
make sense within
their current financial
situation.
8 | FIFTH THIRD BANCORP 2015 ANNUAL REPORT
Branch Banking
Our mobile app and re-designed
website makes it easier to
bank where and when our
customers prefer.
We continue to believe a strong Retail Bank
is critical to the future of Fifth Third.
Customers’ expectations for access, transparency
and speed are quickly rising. Accordingly,
we are prioritizing our investments to align
with the demographic and technological
changes that are reshaping these markets.
The traditional lines across retail delivery
channels are no longer well-defined, and our
investments will continue to integrate every
touch point into a universal sales, service and
marketing strategy. We believe our efforts
to effectively integrate digital technology in
this fast-changing environment will not only
improve the lives of our customers, but also will
provide significant shareholder value.
We offer a complete suite of retail banking
products and services, and our localized,
high-touch service model allows us to connect
with the unique and diverse areas of our
footprint to create a more personal banking
experience. Our branch network is fundamental
to our success, as customers have indicated that
convenience and branch proximity are still top
factors in selecting a bank.
Our physical infrastructure complements
our digital efforts. Over the last several years,
we have taken significant action to re-engineer
our retail operations to better meet the evolving
needs of customers. As we announced in June,
this work included changes to the size of our
branch network. We are in the process of selling
or consolidating 107 branches across our
footprint. 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.
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5
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$2.2B
TOTAL REVENUE
$16.4B
AV E R A G E
L O A N S
$51.2B
AV E R A G E
C O R E
D E P O S I T S
1.7M
O N L I N E
B A N K I N G
C U S T O M E R S
~1.2M
M O B I L E
B A N K I N G
C U S T O M E R S
FIFTH THIRD BANCORP 2015 ANNUAL REPORT | 9
Investment Advisors
We provide our clients with complete, powerful
financial solutions from one trusted advisor.
Our Investment Advisors business has become
successful through helping clients over their
lifetimes and becoming their trusted partner.
Client behaviors, preferences and expectations
are evolving alongside shifts in demographics.
We are prioritizing our investments in recognition
of these significant changes. One such investment
is in digital tools to help clients better manage
their personal wealth and enhance their
experience with us.
By providing holistic advice, guidance and
service, and focusing on the needs of our clients,
Investment Advisors is poised to continue to
deliver growth to Fifth Third.
Investment Advisors is comprised of four
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.
• ClearArc Capital, Inc. provides asset
management services to institutional clients.
• Fifth Third Institutional Services provides
consulting, investment and record-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.
S
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$546M
TOTAL REVENUE
$2.8B
AV E R A G E
L O A N S
$9.4B
AV E R A G E
C O R E
D E P O S I T S
$26B
A S S E T S U N D E R
M A N AG E M E N T
$297B
A S S E T S U N D E R
C A R E
We put more than 100 years
of experience to work to help
our clients protect, grow and
manage their wealth.
10 | FIFTH THIRD BANCORP 2015 ANNUAL REPORT
Commercial Banking
We offer a variety of services that
can help your business succeed—
no matter your industry.
Our commitment to business lending
remains strong.
In the Commercial Bank, we develop
relationships with business, government, and
professional customers through customized
financial solutions. With our focused
segmentation strategy, we are 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 success. We have
seen the benefits of our strategies in stronger
partnerships with our customers and in the
steady growth of this business. In 2015, our
Commercial Bank produced 38 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. We are focused on selecting
high-value customers with the right risk/
reward balance. Our commitment to business
lending remains strong. Our track record
of success and ability to develop new
capabilities sets Fifth Third apart from
the competition. We have built specialized
verticals and significantly strengthened our
credit underwriting by adding experienced
talent in these areas as well.
We stand ready to help businesses adapt to the
new economy, drive innovation and growth,
and access the working capital needed to
meet their goals. We are confident we have
the experience and knowledge to grow this
business profitably.
2
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1
5
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S
$2.5B
TOTAL REVENUE
$53B
AV E R A G E
L O A N S
$37.2B
AV E R A G E
C O R E
D E P O S I T S
14,000
C L I E N T S
1,800
S T R AT E G I C
V E R T I C A L
C L I E N T S
FIFTH THIRD BANCORP 2015 ANNUAL REPORT | 11
Community Giving
Our purpose is to improve lives, and by
extension, our communities.
We are committed to serving our community
by delivering signature programs that keep our
customers at the center of everything we do.
Our alliance with Stand Up to Cancer
(SU2C) hit a major milestone in 2015—the
raising of $6 million for cancer research since
our collaboration began in 2013. We helped
to raise the funds through our SU2C credit
and debit cards, regional SU2C Nights at minor
league ballparks and an innovative social
media campaign, which encouraged people
to share stories about how they fight cancer
with the #howifight hash tag. Fifth Third
donated $1 to SU2C for each eligible post and
more than 35,000 stories were shared.
The Bank also expanded its unique collaboration
with national employment solutions company,
NextJob, to help fight against unemployment
in the United States. In 2015, our outreach
included offering $1,000 scholarships to recent
college graduates to get career coaching from
NextJob experts.
For more than 10 years, Fifth Third has worked
to empower people through educational
programs that equip people with the knowledge
and tools they need to be financially successful.
Our Fifth Third Bank L.I.F.E. (Lives Improved
through Financial Empowerment®)
programs teach budgeting, saving and planning
strategies for major life events like homeownership,
college funding and retirement.
The Young Banker’s Club®, our L.I.F.E.
program for fifth-graders, graduated more
than 2,000 students in 2015. We took our
sponsorship of Dave Ramsey’s Foundations
in Personal Finance® curriculum into our
fifth consecutive year and into approximately
1,800 schools. More than 800,000 students
have gone through the program to date.
Empower U®, our program for adults,
reached more employees within our business
client base in 2015, as did our Fifth Third
Financial Empowerment Mobiles, or eBuses,
which conducted more than 200 tours in
over 100 cities. The eBuses are staffed by Bank
professionals who bring credit counseling, job
search assistance, foreclosure prevention and
homeownership help directly into underserved
and minority neighborhoods.
We expanded our “Feeding Our Communities”
initiative in 2015 where the fundraising
and volunteer efforts of our employees helped
to provide more than 800,000 meals and
personal care items to those in need in our local
neighborhoods.
Veterans, too, continued to receive our
admiration and support. We provided NextJob
scholarships for veterans looking to transition
from their military career into a civilian role.
We invested $220,000 with Rebuilding Together
National to do 17 home rebuild projects for
low-income veterans in our regional markets.
We hosted job fairs, commemorative events and
key sponsorships to give back and serve those
who have served.
Finally, our innovative school-to-work transition
program for people with disabilities, Project
SEARCH®, continued to positively impact the
lives of student interns served at our three
Project SEARCH campuses. We had 30 student
interns in 2015. Further, the Bank hosted its
annual Tee Off for Project SEARCH golf outing
and raised $151,000. Over the past 10 years,
the Bank has helped raise more than $1 million
in support of the program.
Beyond our signature programs, we also
invested directly into our communities. Our
2015 corporate and employee donations to
United Way were more than $7.8 million.
We invested over $190 million in affordable
housing, historic preservation projects through
the Fifth Third Community Development
Corporation. We made more than $4 million
in grants through the Fifth Third Foundation.
These investments, and many others, helped
to improve the lives of hundreds of thousands
of people in the markets we serve.
12 | FIFTH THIRD BANCORP 2015 ANNUAL REPORT
2015 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, Dividends and Other Capital Actions
Investment Securities
Loans and Leases
Credit Quality and the Allowance for Loan and Lease Losses
Bank Premises and Equipment
Operating Lease Equipment
Goodwill
Intangible Assets
Variable Interest Entities
Sales of Receivables and Servicing Rights
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
Income Taxes
Stock-Based Compensation
89 Commitments, Contingent Liabilities and Guarantees
100 Legal and Regulatory Proceedings
100 Related Party Transactions
101
103 Retirement and Benefit Plans
105 Accumulated Other Comprehensive Income
114 Common, Preferred and Treasury Stock
115
116 Other Noninterest Income and Other Noninterest Expense
116 Earnings Per Share
117 Fair Value Measurements
120 Certain Regulatory Requirements and Capital Ratios
122 Parent Company Financial Statements
127 Business Segments
128
Subsequent Event
129
171
187
188
14
15
16
21
23
23
26
35
42
50
52
57
80
81
82
83
84
85
86
87
88
132
136
138
140
142
146
147
149
153
154
155
166
167
168
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. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to those set forth in the Risk Factors section of MD&A in
this report. 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) difficulties in separating the operations of any branches or other assets divested; (23) inability to achieve expected
benefits from branch consolidations and planned sales within desired timeframes, if at all; (24) ability to secure confidential information and deliver products and services through the use of computer systems and
telecommunications networks; and (25) 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
ASU: Accounting Standards Update
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
CET1: Common Equity Tier 1
CFE: Collateralized Financing Entity
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 Wall Street Reform and Consumer Protection Act
DIF: Deposit Insurance Fund
DOJ: United States Department of Justice
DTCC: Depository Trust & Clearing Corporation
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
FFIEC: Federal Financial Institutions Examination Council
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
FTE: Fully Taxable Equivalent
FTP: Funds Transfer Pricing
FTS: Fifth Third Securities
GDP: Gross Domestic Product
GNMA: Government National Mortgage Association
GSE: United States Government Sponsored Enterprise
HAMP: Home Affordable Modification Program
HARP: Home Affordable Refinance Program
HFS: Held for Sale
HQLA: High-Quality Liquid Assets
HUD: Department of Housing and Urban Development
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
MSA: Metro Statistical Area
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
OAS: Option-Adjusted Spread
OCC: Office of the Comptroller of the Currency
OCI: Other Comprehensive Income (Loss)
OREO: Other Real Estate Owned
OTTI: Other-Than-Temporary Impairment
PCA: Prompt Corrective Action
PMI: Private Mortgage Insurance
PSAs: Performance Share Awards
RSAs: Restricted Stock Awards
RSUs: Restricted Stock Units
SARs: Stock Appreciation Rights
SBA: Small Business Administration
SEC: United States Securities and Exchange Commission
TARP: Troubled Asset Relief Program
TBAs: To Be Announced
TDR: Troubled Debt Restructuring
TRA: Tax Receivable Agreement
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 Management’s Discussion and Analysis of Financial Condition and Results of Operations 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.
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 declared 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 as a percent of tangible assets(b)(i)
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 portfolio assets as a percent of portfolio loans and leases
and OREO
Average Balances
Loans and leases, including held for sale
Total securities and other short-term investments
Total assets
Transaction deposits(d)
Core deposits(e)
Wholesale funding(f)
Bancorp shareholders’ equity
Regulatory Capital Ratios
CET1 capital
Tier I risk-based capital
Total risk-based capital
Tier I leverage
2015
2014
2013
2012
2011
3,600
2,473
6,073
315
3,709
1,481
1,414
1.68
1.66
0.51
17.35
20.38
1.12
10.0
12.2
30.3
11.59
8.43
3.10
61.1
575
0.64
1.47
1.62
0.82
3,581
3,227
6,808
229
3,961
1,836
1,799
2.05
2.02
0.47
15.85
21.03
1.48
13.1
16.0
22.9
11.56
8.63
3.32
58.2
501
0.58
1.79
1.97
1.10
3,613
2,999
6,612
303
4,081
1,576
1,541
1.69
1.66
0.36
15.10
15.20
1.34
11.6
14.3
21.3
11.65
8.83
3.55
61.7
704
0.85
2.16
2.37
1.49
3,575
2,455
6,030
423
3,758
1,297
1,094
1.20
1.18
0.28
13.92
12.72
1.15
9.0
11.4
23.3
11.41
8.68
3.66
62.3
1,172
1.49
2.78
3.01
2.23
91,127
24,866
131,943
89,715
93,477
19,188
15,290
N/A
10.83
14.33
9.66
89,093
18,861
123,732
82,915
86,675
17,797
14,302
84,822
16,814
117,614
78,116
82,422
16,978
13,701
Basel I(h)
N/A
10.43
14.17
9.73
N/A
10.69
14.47
10.15
80,214
17,468
112,666
72,392
78,652
16,939
12,851
N/A
12.00
16.19
11.25
$
$
$
$
3,554
3,003
6,557
396
3,775
1,712
1,637
2.03
2.01
0.52
18.48
20.10
1.22 %
11.3
13.5
25.6
11.32
8.59
2.88
57.6
446
0.48
1.37
1.52
0.70
93,339
30,245
140,111
95,244
99,295
20,243
15,865
Basel III
Transitional(g)
9.82 %
10.93
14.13
9.54
Basel III Fully
Phased-In
CET1 capital(b)
(a) Amounts presented on an FTE basis. The FTE adjustment for the years ended December 31, 2015, 2014, 2013, 2012 and 2011 was $21, $21, $20, $18 and $18, respectively.
(b) These are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.
(c) The allowance for credit losses is the sum of the ALLL and the reserve for unfunded commitments.
(d)
(e)
(f)
(g) Under the U.S. banking agencies’ Basel III Final Rule, assets and credit equivalent amounts of off-balance sheet exposures are calculated according to the standardized approach for risk-weighted
Includes demand deposits, interest checking deposits, savings deposits, money market deposits and foreign office deposits.
Includes transaction deposits and other time deposits.
Includes certificates $100,000 and over, other deposits, federal funds purchased, other short-term borrowings and long-term debt.
9.72 %
N/A
N/A
N/A
N/A
assets. The resulting values are added together in the Bancorp’s total risk-weighted assets.
(h) These capital ratios were calculated under the Supervisory Agencies general risk-based capital rules (Basel I) which were in effect prior to January 1, 2015.
(i) Excludes unrealized gains and losses.
15 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Fifth Third Bancorp is a diversified financial services company
headquartered in Cincinnati, Ohio. At December 31, 2015, the
Bancorp had $141.1 billion in assets and operates 1,254 full-service
banking centers, including 95 Bank Mart® locations, open seven
days a week, inside select grocery stores and 2,593 ATMs in twelve
states throughout the Midwestern and 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 18% interest in
Vantiv Holding, LLC. The carrying value of the Bancorp’s
investment in Vantiv Holding, LLC was $360 million as of
December 31, 2015.
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, refer to
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.
Net interest income, net interest margin and the efficiency ratio
are presented in MD&A on an 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,
2015, net interest income on an FTE basis and noninterest income
provided 54% and 46% 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 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 of MD&A, 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
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
16 Fifth Third Bancorp
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, investment advisory revenue, corporate banking revenue,
mortgage banking net revenue, card and processing revenue,
securities gains, net and other noninterest income. Noninterest
expense
includes personnel costs, net occupancy expense,
technology and communication costs, card and processing expense,
equipment expense and other noninterest expense.
to 2030,
Vantiv, Inc. and Vantiv Holding, LLC Transactions
During the fourth quarter of 2015, the Bancorp entered into an
agreement with Vantiv, Inc. under which a portion of its TRA with
Vantiv, Inc. was terminated and settled in full for a cash payment of
approximately $49 million from Vantiv, Inc. Under the agreement,
the Bancorp sold certain TRA cash flows it expected to receive
from 2017
totaling an estimated $140 million.
Approximately half of the sold TRA cash flows related to 2025 and
later. This sale did not impact the TRA payment recognized during
the fourth quarter of 2015 and is not expected to impact the TRA
payment to be recognized in the fourth quarter of 2016. In addition
to the impact of the TRA termination discussed above, the Bancorp
recognized $31 million, $23 million and $9 million in noninterest
income in the Consolidated Statements of Income associated with
the TRA during the years ended December 31, 2015, 2014 and
2013, respectively.
the Bancorp exercised
The Bancorp agreed during the fourth quarter of 2015 to
cancel rights to purchase approximately 4.8 million Class C units in
Vantiv Holding, LLC, the wholly-owned principal operating
subsidiary of Vantiv, Inc., underlying the Bancorp’s warrant in
exchange for a cash payment of $200 million. Subsequent to this
cancellation,
to purchase
approximately 7.8 million Class C units underlying the Bancorp’s
warrant at the $15.98 strike price. This exercise was settled on a net
basis for approximately 5.4 million Class C units, which were then
exchanged for approximately 5.4 million shares of Vantiv, Inc. Class
A common stock that were sold in the secondary offering. The
Bancorp recognized a gain of $89 million on the 62% of the warrant
that was settled or net exercised.
right
its
Additionally, during the fourth quarter of 2015, the Bancorp
exchanged 8 million Class B units of Vantiv Holding, LLC for 8
million Class A shares in Vantiv, Inc., which were also sold in the
secondary offering, and on which the Bancorp recognized a gain of
$331 million. The Bancorp’s remaining investment in Vantiv
Holding, LLC continues to be accounted for under the equity
method of accounting. For more information, refer to Note 19 of
the Notes to Consolidated Financial Statements.
Branch Consolidation and Sales Plan
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 in its consumer distribution 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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for future branch expansion. On June 16, 2015, the Bancorp’s
Board of Directors authorized management to pursue a plan to
further develop its distribution strategy, including a plan to
consolidate and/or sell certain operating branch locations and to sell
certain parcels of undeveloped land that had been acquired by the
Bancorp for future branch expansion (the “Branch Consolidation
and Sales Plan”). The Bancorp expects to receive $60 million in
annual savings from operating expenses upon completion of the
Branch Consolidation and Sales Plan.
On September 3, 2015, the Bancorp announced the decision to
enter into an agreement to sell branch banking locations, retail
loan
accounts, certain private banking deposits and related
relationships in the Pittsburgh MSA to First National Bank of
Pennsylvania. On September 30, 2015, the Bancorp announced the
decision to enter into an agreement to sell its retail operations,
including retail accounts, certain private banking deposits and
related loan relationships in the St. Louis MSA to Great Southern
Bank. Both transactions are part of the Branch Consolidation and
Sales Plan and are expected to close in the first half of 2016. As of
December 31, 2015, the Bancorp intended to consolidate and/or
sell 107 operating branch locations and to sell an additional 32
parcels of undeveloped land that had been acquired by the Bancorp
for future branch expansion. For further
information on a
subsequent event related to the Branch Consolidation and Sales
Plan, refer to Note 31 of the Notes to Consolidated Financial
Statements.
The Bancorp performs assessments of the recoverability of
long-lived assets when events or changes in circumstances indicate
that their carrying values may not be recoverable. Impairment losses
associated with such assessments and lower of cost or market
adjustments were $109 million, $20 million and $6 million for the
years ended December 31, 2015, 2014 and 2013, respectively. The
recognized impairment losses were recorded in other noninterest
income in the Consolidated Statements of Income. For more
information on the Branch Consolidation and Sales Plan, refer to
Note 7 of the Notes to Consolidated Financial Statements.
Accelerated Share Repurchase Transactions
During the years ended December 31, 2015 and 2014, the Bancorp
entered into or settled a number of accelerated share repurchase
transactions. As part of these transactions, the Bancorp entered into
forward contracts in which the final number of shares delivered at
settlement was based generally on a discount to the average daily
volume weighted-average price of the Bancorp’s common stock
during
the repurchase agreements. For more
information on the accelerated share repurchase program, refer to
Note 23 of the Notes to Consolidated Financial Statements. For a
summary of the Bancorp’s accelerated share repurchase transactions
that were entered into or settled during the years ended December
31, 2015 and 2014, refer to Table 2.
term of
the
TABLE 2: SUMMARY OF ACCELERATED SHARE REPURCHASE TRANSACTIONS
Repurchase Date
November 18, 2013
December 13, 2013
January 31, 2014
May 1, 2014
July 24, 2014
October 23, 2014
January 27, 2015
April 30, 2015
August 3, 2015
September 9, 2015
December 14, 2015
Amount ($ in millions)
200
456
99
150
225
180
180
155
150
150
215
Shares Repurchased on
Repurchase Date
Shares Received from Forward
Contract Settlement
Total Shares
Repurchased
8,538,423
19,084,195
3,950,705
6,216,480
9,352,078
8,337,875
8,542,713
6,704,835
6,039,792
6,538,462
9,248,482
1,132,495
2,294,932
602,109
1,016,514
1,896,685
794,245
1,103,744
842,655
1,346,314
1,446,613
1,782,477
9,670,918
21,379,127
4,552,814
7,232,994
11,248,763
9,132,120
9,646,457
7,547,490
7,386,106
7,985,075
11,030,959
Settlement Date
March 5, 2014
March 31, 2014
March 31, 2014
July 21, 2014
October 14, 2014
January 8, 2015
April 28, 2015
July 31, 2015
September 3, 2015
October 23, 2015
January 14, 2016
Senior Notes Offerings
On July 27, 2015, the Bancorp issued and sold $1.1 billion of
2.875% unsecured senior fixed-rate notes, with a maturity of five
years, due on July 27, 2020. The notes are not subject to redemption
at the Bancorp’s option at any time until 30 days prior to maturity.
On August 20, 2015, the Bank issued and sold $1.3 billion in
aggregate principal amount of unsecured senior bank notes, with a
maturity of three years, due on August 20, 2018. The bank notes
consisted of $1.0 billion of 2.15% senior fixed-rate notes and $250
million of senior floating-rate notes. The Bancorp entered into
interest rate swaps to convert the fixed-rate notes to floating-rate,
which resulted in an effective rate of three-month LIBOR plus 90
bps. Interest on the floating-rate notes is three-month LIBOR plus
91 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. For additional information on the senior notes
offerings, refer to Note 16 of the Notes to Consolidated Financial
Statements.
Automobile Loan Securitization
On November 5, 2015, the Bancorp transferred an aggregate
amount of approximately $750 million in consumer automobile
loans to a bankruptcy remote trust which was deemed to be a VIE.
The Bancorp concluded that it is the primary beneficiary of this
VIE and, therefore, has consolidated this VIE. For additional
information on the automobile loan securitization refer to Note 11
and Note 16 of the Notes to Consolidated Financial Statements.
insurance assessments of
Legislative and Regulatory Developments
The FDIC published a notice of proposed rulemaking in October
of 2015 which would implement a 4.5 bps surcharge on the
quarterly FDIC
insured depository
institutions with total consolidated assets of $10 billion or more.
The surcharge would take effect at the same time the FDIC is
required to lower the regular FDIC insurance assessments by
approximately 2 bps under a rule adopted by the FDIC in 2011 that
is triggered by the DIF reserve ratio reaching 1.15% of insured
deposits. The FDIC estimates the DIF reserve ratio will reach
1.15% in 2016 and the surcharge would be sufficient to raise the
DIF reserve ratio to the 1.35% minimum mandated by the DFA in
approximately eight quarters. Fifth Third estimates the proposed
17 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
changes to the FDIC assessments would result in a net increase in
its FDIC insurance expense of approximately $25 million on an
annual basis. The comment period for this proposal ended January
5, 2016.
the Bancorp agreed
On September 30, 2015,
to pay
approximately $85 million to cover losses on approximately 500
loans for which HUD had paid FHA insurance claims, and an
additional $2 million to HUD, in connection with the Bancorp’s
entry into a Stipulation and Order of Settlement and Dismissal with
the DOJ and HUD, which was approved by the U.S. District Court
for the Southern District of New York on October 5, 2015, and a
related Settlement Agreement with HUD. On September 28, 2015,
the Bancorp entered into consent orders and agreed, without
admitting or denying any of the findings of fact or conclusions of
law (except to establish jurisdiction), to pay $18 million to
consumers in a settlement with the DOJ and the CFPB related to an
investigation into whether Fifth Third Bank engaged in any
discriminatory practices in connection with the Bank’s indirect
automobile loan portfolio. On September 28, 2015, the Bancorp
agreed to pay an amount not less than $3 million in redress to
consumers and a civil penalty of $500,000 to the CFPB in
connection with its entry into a consent order with the CFPB
related to the marketing and administration of the Bancorp’s debt
protection credit card “add-on” product for those enrolled in the
product from January 1, 2007 through November 11, 2013. For
additional information on these legal and regulatory proceedings
refer to Note 18 of the Notes to Consolidated Financial Statements.
On March 11, 2015, the Bancorp announced the results of its
capital plan submitted to the FRB as part of the 2015 CCAR. The
FRB indicated to the Bancorp that it did not object to the following
capital actions for the period beginning April 1, 2015 and ending
June 30, 2016:
The potential increase in the quarterly common stock
dividend to $0.14 per share in 2016;
The potential repurchase of common shares in an
amount up to $765 million; and
The additional ability to repurchase shares in the
amount of any after-tax gains from the sale of Vantiv,
Inc. common stock.
The BHCs that participated in the 2015 CCAR, including the
Bancorp, were required to conduct mid-cycle company-run stress
tests using data as of March 31, 2015. For more information on the
2015 CCAR results and 2015 mid-cycle stress test, refer to Note 3
of the Notes to Consolidated Financial Statements.
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
18 Fifth Third Bancorp
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 Loans and
Leases subsection of the Balance Sheet Analysis section of MD&A
and in Table 9 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 is continuing to offer the
service to existing deposit advance customers until further
regulatory guidance is finalized. These changes to the deposit
advance product negatively impacted net interest income by $94
million for the year ended December 31, 2015.
In July of 2013, U.S. banking regulators approved final
enhanced regulatory capital requirements (Basel III Final Rule),
which included modifications to the proposed rules. The Basel III
Final Rule provided for certain banks, including the Bancorp, to opt
out of including AOCI in regulatory capital and also retained 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. The
Bancorp became subject to the Basel III Final Rule on January 1,
2015. The Bancorp made a one-time permanent election not to
include AOCI in regulatory capital in the March 31, 2015 FFIEC
031 and FR Y-9C filings. For more information on the impact of
the
the Capital
Management subsection of the Risk Management section of
MD&A.
regulatory capital enhancements,
refer
to
On December 10, 2013, the U.S. 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 BHCs 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
in certain
underwriting, market making, hedging,
government obligations and organizing and offering a hedge fund or
trading
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
private equity fund. Fifth Third does not sponsor any private equity
or hedge funds that, under the Final Rule, it is prohibited from
sponsoring. At December 31, 2015, the Bancorp did not hold
collateralized loan obligations. At December 31, 2015, the Bancorp
had approximately $186 million in interests and approximately $37
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 dispose of these investments, however no
formal plan to sell has been approved as of December 31, 2015. 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.
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 became effective
January 1, 2016 and requires BHCs to calculate its LCR on a
monthly basis. Refer to the Liquidity Risk Management subsection
of the 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
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 District of Columbia 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
the Current Rule and
reversal,
substantially
card
surrounding debit
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.
reducing uncertainty
largely upholding
thereby
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
2015
4,049
495
3,554
396
3,158
3,003
3,775
2,386
21
659
1,706
(6)
1,712
75
1,637
2.03
2.01
0.52
$
$
$
$
$
2014
2013
2012
2011
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
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
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
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
Earnings Summary
The Bancorp’s net income available to common shareholders for
the year ended December 31, 2015 was $1.6 billion, or $2.01 per
diluted share, which was net of $75 million in preferred stock
dividends. 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 dividends. Pre-provision net revenue was $2.8 billion and $2.3
billion for the years ended December 31, 2015 and 2014,
respectively. Pre-provision net revenue is a non-GAAP measure.
For further
information, refer to the Non-GAAP Financial
Measures section of MD&A.
Net interest income on an FTE basis was $3.6 billion for both
the years ended December 31, 2015 and 2014. Net interest income
was negatively impacted by a decrease in the net interest rate spread,
changes made to the Bancorp’s deposit advance product beginning
January 1, 2015 and an increase in average long-term debt of $1.7
billion for the year ended December 31, 2015 compared to the year
ended December 31, 2014. These negative impacts were partially
offset by increases in average taxable securities and average loans
and leases of $5.2 billion and $2.2 billion, respectively, for the year
ended December 31, 2015 compared to the year ended December
31, 2014. Net interest margin on an FTE basis was 2.88% and
3.10% for the years ended December 31, 2015 and 2014,
respectively.
Noninterest income increased $530 million from the year
ended December 31, 2014 primarily due to increases in other
noninterest income and mortgage banking net revenue partially
19 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Summary
The Bancorp’s capital ratios exceed the “well-capitalized” guidelines
as defined by the PCA requirements of the U.S. banking agencies.
As of December 31, 2015, as calculated under the Basel III
transition provisions, the CET1 capital ratio was 9.82%, the Tier I
risk-based capital ratio was 10.93%, the Total risk-based capital ratio
was 14.13% and the Tier I leverage ratio was 9.54%.
offset by a decrease
in corporate banking revenue. Other
noninterest income increased $529 million from the year ended
December 31, 2014. The increase included the impact of a gain of
$331 million on the sale of Vantiv, Inc. shares in the fourth quarter
of 2015 compared to a gain of $125 million during the second
quarter of 2014. The positive valuation adjustments on the stock
warrant associated with Vantiv Holding, LLC were $236 million and
$31 million for the years ended December 31, 2015 and 2014,
respectively. During the fourth quarter of 2015, the Bancorp
recognized a gain of $89 million on both the sale and exercise of a
portion of the warrant associated with Vantiv Holding, LLC.
Additionally, the Bancorp recognized a gain of $49 million from the
payment from Vantiv, Inc. to terminate a portion of the TRA and
also recognized a gain of $31 million associated with the annual
TRA payment during the fourth quarter of 2015. The Bancorp
recognized a gain of $23 million associated with the TRA during the
fourth quarter of 2014. Mortgage banking net revenue increased $38
million from the year ended December 31, 2014 primarily due to
increases in net mortgage servicing revenue and origination fees and
gains on loan sales. Corporate banking revenue decreased $46
million for the year ended December 31, 2015 compared to the year
ended December 31, 2014 primarily driven by decreases in
syndication fees and lease remarketing fees.
in
the mortgage
business. Technology
Noninterest expense increased $66 million for the year ended
December 31, 2015 compared to the year ended December 31, 2014
primarily due to increases in personnel costs, technology and
communications expense and card and processing expense partially
offset by a decrease in other noninterest expense. Personnel costs
increased $65 million for the year ended December 31, 2015
compared to the year ended December 31, 2014 driven by higher
executive retirement and severance costs as well as an increase in
base compensation and an increase in incentive compensation,
primarily
and
communications expense increased $12 million for the year ended
December 31, 2015 compared to the year ended December 31, 2014
driven primarily by increased investment in information technology
associated with regulatory and compliance
initiatives, system
maintenance, and other growth initiatives. Card and processing
expense increased $12 million for the year ended December 31,
2015 compared to the year ended December 31, 2014 driven
primarily by increased fraud prevention related expenses. Other
noninterest expense decreased $34 million for the year ended
December 31, 2015 compared to the year ended December 31, 2014
primarily due to a decrease in losses and adjustments partially offset
by increases in the provision for the reserve for unfunded
commitments, marketing expense, donations expense, impairment
on affordable housing investments, FDIC insurance and other taxes
and operating lease expense.
For more information on net interest income, noninterest
income and noninterest expense, refer to the Statements of Income
Analysis section of MD&A.
Credit Summary
The provision for loan and lease losses was $396 million and $315
million for the years ended December 31, 2015 and 2014,
respectively. Net losses charged-off as a percent of average portfolio
loans and leases decreased to 0.48% during the year ended
December 31, 2015 compared to 0.64% during the year ended
December 31, 2014. At December 31, 2015, nonperforming
portfolio assets as a percent of portfolio loans and leases and
OREO decreased to 0.70% compared to 0.82% at December 31,
2014. For further discussion on credit quality, refer to the Credit
Risk Management subsection of the Risk Management section of
MD&A.
20 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NON-GAAP FINANCIAL MEASURES
The following are non-GAAP measures which are important to the
reader of the Consolidated Financial Statements but should be
supplemental to primary U.S. GAAP measures.
The Bancorp considers many factors when determining the
adequacy of its liquidity profile, including its LCR as defined by the
U.S. banking agencies Basel III LCR Final Rule. Generally, the LCR
is designed to ensure banks maintain an adequate level of
unencumbered HQLA to satisfy the estimated net cash outflows
under a 30-day stress scenario. The Bancorp is subject to the
Modified LCR whereby the net cash outflow under the 30-day stress
scenario is multiplied by a factor of 0.7. The LCR Final Rule became
effective for the Bancorp on January 1, 2016. The Bancorp believes
there is no comparable U.S. GAAP financial measure to the LCR.
The Bancorp believes providing an estimated Modified LCR is
important for comparability to other financial institutions. For a
further discussion on liquidity management and the LCR, refer to
the Liquidity Risk Management subsection of the Risk Management
section of MD&A.
TABLE 4: NON-GAAP FINANCIAL MEASURES – ESTIMATED MODIFIED LIQUIDITY COVERAGE RATIO
As of ($ in millions)
Estimated HQLA
Estimated net cash outflow
Estimated Modified LCR
$
December 31,
2015
21,897
18,849
116 %
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
2015
2014
$
$
3,533
3,003
(3,775)
2,761
3,579
2,473
(3,709)
2,343
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.
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)
2015
2014
$
$
$
1,637
2
1,639
15,865
(1,331)
(2,416)
(14)
$
12,104
1,414
3
1,417
15,290
(1,205)
(2,416)
(20)
11,649
Average Bancorp 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)
13.5 %
12.2
The Bancorp considers various measures when evaluating capital
utilization and adequacy, including the tangible equity ratio and
tangible 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. Additionally, the Bancorp became subject to the Basel III
Final Rule on January 1, 2015. The CET1 capital ratio is a new
measure defined by the banking regulatory agencies under the Basel
III Final Rule. The CET1 capital ratio has transition provisions that
will be phased out over time. The Bancorp is presenting the CET1
capital ratio on a fully phased-in basis for comparative purposes
with other organizations. Since analysts and banking regulators may
assess the Bancorp’s capital adequacy using these ratios, the
Bancorp believes they are useful to provide investors the ability to
assess its capital adequacy on the same basis. The Bancorp
encourages
its Consolidated Financial
Statements in their entirety and not to rely on any single financial
measure.
to consider
readers
21 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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: AOCI
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
AOCI, before tax
Tangible assets, excluding unrealized gains / losses (3)
Total Bancorp Shareholders’ Equity (U.S. GAAP)
Less: Goodwill and certain other intangibles
Unrealized gains
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)
Ratios:
Tangible equity as a percent of tangible assets (2) / (3)(e)
Tangible common equity as a percent of tangible assets (1) / (3)(e)
Risk-weighted assets (5)
Ratio:
Tier I common equity (4) / (5)
2015
2014
$
$
$
$
$
$
15,839
(1,331)
(2,416)
(13)
12,079
(197)
11,882
1,331
13,213
141,082
(2,416)
(13)
(303)
138,350
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
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
9.55 %
8.59
9.41
8.43
Basel III
Transitional(a)
121,290
$
Basel I(b)
117,878
N/A
9.65 %
Basel III Final Rule - Transition to Fully Phased-In
CET1 capital (transitional)
Less: Adjustments to CET1 capital from transitional to fully phased-in(c)
CET1 capital (fully phased-in) (6)
Risk-weighted assets (transitional)
Add: Adjustments to risk-weighted assets from transitional to fully phased-in(d)
Risk-weighted assets (fully phased-in) (7)
Estimated CET1 capital ratio under Basel III Final Rule (fully phased-in) (6) / (7)
(a) Under the U.S. banking agencies’ Basel III Final Rule, assets and credit equivalent amounts of off-balance sheet exposures are calculated according to the standardized approach for risk-weighted
11,917
(8)
11,909
121,290
1,178
122,468
N/A
N/A
N/A
N/A
N/A
N/A
N/A
9.72 %
$
$
assets. The resulting weighted values are added together resulting in the Bancorp’s total risk-weighted assets.
Primarily relates to disallowed intangible assets (other than goodwill and MSRs, net of associated deferred tax liabilities).
(b) This capital amount and ratio were calculated under the Supervisory Agencies general risk-based capital rules (Basel I) which were in effect prior to January 1, 2015.
(c)
(d) Primarily relates to higher risk weighting for MSRs.
(e) Excludes unrealized gains and losses.
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, 2015.
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. 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
Bancorp’s strategy
includes a
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
judgement and
The Bancorp’s methodology for determining the ALLL
requires significant management
is based on
historical loss rates, current credit grades, specific allocation on
loans modified in a TDR and impaired commercial credits above
specified thresholds and other qualitative adjustments. Allowances
on individual commercial loans, TDRs and historical loss rates are
reviewed quarterly and adjusted as necessary based on changing
borrower and/or collateral conditions and actual collection and
charge-off experience. An unallocated allowance is maintained to
recognize the imprecision in estimating and measuring losses when
evaluating allowances for individual loans or pools of loans.
Larger commercial loans included within aggregate borrower
relationship balances exceeding $1 million that exhibit probable or
observed credit weaknesses, as well as loans that have been
modified in a TDR, are subject to individual review for impairment.
The Bancorp considers the current value of collateral, credit quality
of any guarantees, the 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 Bancorp during 2015 and the expected impact of significant
accounting standards issued, but not yet required to be adopted.
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.
Refer to the Allowance for Credit Losses subsection of the
Risk Management section of MD&A for a discussion on the
Bancorp’s ALLL sensitivity analysis.
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 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
analyzed in the determination of the adequacy of the Bancorp’s
ALLL, as discussed above. Net adjustments to the reserve for
23 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
unfunded commitments are included in other noninterest expense
in the Consolidated Statements of Income.
Income Taxes
The income tax laws of the jurisdictions in which the Bancorp
operates are complex and may be
to different
interpretations. The Bancorp evaluates and assesses the relative risks
and appropriate tax treatment of transactions and filing positions
after considering relevant statutes, regulations, judicial decisions and
other information. The Bancorp maintains tax accruals consistent
with its evaluation of these items.
subject
Changes in the estimate of tax accruals occur periodically as a
result of changes in tax rates, interpretation of tax laws and
regulations, and other guidance issued by tax authorities and the
status of examinations conducted by tax authorities, as well as the
expiration of statutes of limitations. These changes may significantly
impact the Bancorp’s tax accruals, deferred taxes and income tax
expense and may significantly impact the operating results of the
Bancorp.
Deferred taxes are determined using the balance sheet method.
Under this method, the net deferred tax asset or liability is calculated
based on the difference between the book and tax bases of the
assets and liabilities using enacted tax rates. Significant management
judgment is required to determine the realizability of deferred tax
assets. Deferred tax assets are recognized when management
believes that it is more likely than not that the deferred tax assets
will be realized. Where management has determined that it is not
more likely than not that certain deferred tax assets will be realized,
a valuation allowance is maintained. For additional information on
income taxes, refer to Note 20 of the Notes to Consolidated
Financial Statements.
reasonableness of key assumptions utilized in the internal OAS
model. For purposes of measuring impairment, the MSRs 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 12 of the Notes to Consolidated
Financial Statements.
Fair Value Measurements
The Bancorp measures certain financial assets and liabilities at fair
value in accordance with U.S. GAAP, which defines fair value as the
price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. Valuation techniques the Bancorp uses to
measure fair value include the market approach, income approach
and cost approach. The market approach uses prices or relevant
information generated by market transactions involving identical or
comparable assets or liabilities. The income approach involves
discounting future amounts to a single present amount and is based
on current market expectations about those future amounts. The
cost approach is based on the amount that currently would be
required to replace the service capacity of the asset.
U.S. GAAP establishes a fair value hierarchy, which prioritizes
the inputs to valuation techniques used to measure fair value into
three broad levels. The fair value hierarchy gives the highest priority
to quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3). 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 additional information on
the fair value hierarchy and fair value measurements, refer to Note 1
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 other-than-temporary
impairment
recognized through a write-off of the servicing asset and related
valuation allowance. Significant management judgement is necessary
to identify key economic assumptions used in measuring any
the
potential
prepayment speeds of the underlying loans, the weighted-average
life, the OAS spread 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. In
order to assist in this assessment, the Bancorp obtains external
valuations of the MSR portfolio from third parties and participates
in peer surveys that provide additional confirmation of the
the servicing rights
impairment of
including
trades and overall
review and assessments
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
for
previous
reasonableness. The level of management judgement necessary to
determine fair value varies based upon the methods used in the
determination of fair value. Financial instruments that are measured
at fair value using quoted prices in active markets (Level 1) require
minimal judgement. The valuation of financial instruments when
quoted market prices are not available (Levels 2 and 3) may require
significant management judgement to assess whether quoted prices
for similar instruments exist, the impact of changing market
conditions including reducing liquidity in the capital markets, and,
the use of estimates surrounding significant unobservable inputs.
Table 8 provides a summary of the fair value of financial
instruments carried at fair value on a recurring basis and the
amounts of financial instruments valued using Level 3 inputs.
24 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 8: FAIR VALUE SUMMARY
As of ($ in millions)
Assets carried at fair value
As a percent of total assets
Liabilities carried at fair value
As a percent of total liabilities
December 31, 2015
December 31, 2014
Balance
Level 3
Balance
Level 3
$
$
31,364
22 %
967
1 %
444
-
64
-
24,917
18
1,064
1
535
-
51
-
Refer to Note 27 of the Notes to Consolidated Financial Statements
for further information on fair value measurements including a
description of the valuation methodologies used for significant
financial instruments.
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. Refer to Note 1 of the Notes to Consolidated Financial
Statements for a discussion on the methodology used by the
Bancorp to assess goodwill for impairment.
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 to determine
if it is not more likely than not that the fair value of a reporting unit
is less than its carrying amount. If the two-step impairment test is
required or the decision to bypass the qualitative assessment is
elected, the Bancorp would be required to perform the first step
(Step 1) of the impairment test by comparing 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. The determination of the fair value of a
reporting unit is a subjective process that involves the use of
estimates and judgments, particularly related to cash flows, the
appropriate discount rates and an applicable control premium. 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.
Significant management judgment is necessary in the preparation of
each reporting unit’s forecasted cash flows surrounding expectations
for earnings projections, growth and credit loss expectations and
actual results may differ from forecasted results. 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. Significant management
judgement is necessary in the identification and valuation of
unrecognized intangible assets and the valuation of the reporting
unit’s recorded assets and liabilities. 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 9 of the Notes to Consolidated Financial
the Bancorp’s
Statements for further
goodwill.
information regarding
Legal Contingencies
The Bancorp and its subsidiaries are parties 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. An accrual 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.
Refer to Note 18 of the Notes to Consolidated Financial Statements
for further information regarding the Bancorp’s legal proceedings.
25 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.
Global financial conditions 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.
The global financial markets continue to be strained as a result of
economic slowdowns, geopolitical concerns and the related path of
commodity prices and interest rates. Divergence in economic
growth in the U.S. and international economies and the resulting
differences in monetary policy are placing strains on financial
markets and strengthening the U.S. dollar. The relative strength of
the U.S. dollar may continue to negatively impact the U.S.
manufacturing sector. These factors could negatively impact the
U.S. economy and affect the stability of global financial markets.
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.
26 Fifth Third Bancorp
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 clients
and customers. Additionally, losses 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.
Problems encountered by financial institutions larger than or
similar to Fifth Third could adversely affect financial markets
generally and have direct and indirect adverse effects on Fifth
Third.
Fifth Third has exposure to counterparties in the financial services
industry and other industries, and routinely executes transactions
with such counterparties, including brokers and dealers, commercial
banks, investment banks, mutual and hedge funds, and other
institutional clients. Many of Fifth Third’s transactions with other
financial institutions expose Fifth Third to credit risk in the event of
default of a counterparty or client. In addition, Fifth Third’s credit
risk may be affected when the collateral it holds cannot be realized
or is liquidated at prices not sufficient to recover the full amount of
the loan or derivative exposure. 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:
Actual or anticipated variations in earnings;
Changes in analysts’ recommendations or projections;
Fifth Third’s announcements of developments related to
its businesses;
Operating and stock performance of other companies
deemed to be peers;
Actions by government regulators;
New technology used or services offered by traditional
and non-traditional competitors;
News reports of trends, concerns and other issues related
to the financial services industry;
Natural disasters;
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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
including automatic
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 1,254 full-service
banking centers, 56 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
affect 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. Further advances in technology and/or changes in
customer preferences could have additional changes in Fifth Third’s
retail distribution strategy and/or branch network. 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.
RISKS RELATING TO FIFTH THIRD’S GENERAL
BUSINESS
Deteriorating credit quality 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, 2015; 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 Credit Risk Management
subsection of the Risk Management section of MD&A and the
Allowance for Loan and Losses and Reserve for Unfunded
Commitments subsections of the Critical Accounting Policies
section 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 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, 2015). 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
changes,
framework
applicable to Fifth Third, the full impact of the adopted and
resolution and
including
recovery
the
27 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
proposed regulations will remain uncertain until
implementation.
their full
If Fifth Third is unable to continue to fund assets through
customer bank deposits or access capital markets on favorable terms
or if Fifth Third suffers an increase in borrowing costs or otherwise
fails to manage liquidity effectively; then Fifth Third’s liquidity,
operating margins, and 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
commodity 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 specified 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 Fifth Third’s 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 appropriately 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, and specialty finance, telecommunications, technology 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. Fifth Third may
make strategic investments and may expand an existing line of
28 Fifth Third Bancorp
business or enter into new lines of business to remain competitive.
If it does not execute the appropriate strategies to effectively
compete with or does not do so in an appropriate or timely manner
its business may suffer. Additionally, these strategies, products and
lines of business may bring with them unforeseeable or unforeseen
risks and may not generate the expected results or returns, which
could adversely affect Fifth Third’s results of operations or future
growth prospects.
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 Fifth Third’s 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. For further information refer to Note 3 of the
Notes to Consolidated Financial Statements.
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, telecommunications and technology and other companies
offering financial services in the U.S., globally and over the internet.
Fifth Third competes on the basis of several factors, including
capital, access to capital, revenue generation, products, services,
transaction execution, innovation, reputation and price. Over time,
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
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, which may
increase Fifth Third’s expenses and may result in Fifth Third not
being able to hire these candidates or 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.
Compensation paid by financial institutions such as Fifth Third
has become increasingly regulated, particularly under the DFA,
which regulation affects the amount and form of compensation
Fifth Third pays to hire and retain talented employees. 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
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 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 other-than-temporary 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.
29 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
other
financial
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
Future acquisitions may dilute current shareholders’
ownership of Fifth Third and may cause Fifth Third to
become more susceptible to adverse economic events.
Future business acquisitions could be material to Fifth Third and it
may issue additional shares of stock to pay for those acquisitions,
which would dilute current shareholders’ ownership interests.
Acquisitions also could require Fifth Third to use substantial cash or
other liquid assets or to incur debt. In those events, Fifth Third
could become more susceptible to economic downturns and
competitive pressures.
Difficulties in combining the operations of acquired entities
with Fifth Third’s own operations may prevent Fifth Third
from achieving the expected benefits from its acquisitions.
Inherent uncertainties exist when integrating the operations of an
acquired entity. Fifth Third may not be able to fully achieve its
strategic objectives and planned operating efficiencies
in an
acquisition. In addition, the markets and industries in which Fifth
Third and its potential acquisition targets operate are highly
competitive. Fifth Third may lose customers or the customers of
acquired entities as a result of an acquisition. Future acquisition and
integration activities may require Fifth Third to devote substantial
time and resources and as a result Fifth Third may not be able to
pursue other business opportunities.
After completing an acquisition, Fifth Third may find certain
items are not accounted for properly in accordance with financial
accounting and reporting standards. Fifth Third may also not realize
the expected benefits of the acquisition due to lower financial
results pertaining to the acquired entity. For example, Fifth Third
could experience higher charge-offs than originally anticipated
related to the acquired loan portfolio.
Fifth Third may sell or consider selling one or more of its
businesses. Should it determine to sell such a business, it may
not be able to generate gains on sale or related increase in
shareholders’ equity commensurate with desirable levels.
Moreover, if Fifth Third sold such businesses, the loss of
income could have an adverse effect on its earnings and future
growth.
Fifth Third owns, 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 and undertaken (and, in the case of Vantiv, has
announced its intention to continue) the sale of such businesses
and/or interests, including, for example, portions of Fifth Third’s
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 any of its businesses and/or interests in third
parties, it would suffer the loss of income from the sold businesses
and/or interests, including those accounted for under the equity
30 Fifth Third Bancorp
method of accounting, and such loss of income could have an
adverse effect on its future earnings and growth. Additionally, Fifth
Third may encounter difficulties in separating the operations of any
businesses it sells, which may affect its business or results of
operations.
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).
the Bancorp could
its customers, thereby
Third parties with which the Bancorp does business, as well as
retailers and other third parties with which the Bancorp’s customers
do business, can also be sources of operational risk to the Bancorp,
particularly where activities of customers are beyond the Bancorp’s
security and control systems, such as through the use of the
internet, personal computers, tablets, smart phones and other
mobile services. Security breaches affecting
the Bancorp’s
customers, or systems breakdowns or failures, security breaches or
employee misconduct affecting such other third parties, may require
the Bancorp to take steps to protect the integrity of its own
operational systems or to safeguard confidential information of the
Bancorp or
increasing the Bancorp’s
operational costs and potentially diminishing customer satisfaction.
If personal, confidential or proprietary information of customers or
clients in the Bancorp’s possession were to be mishandled or
regulatory
misused,
significant
consequences, reputational damage and financial
loss. Such
mishandling or misuse could include circumstances where, for
example, such information was erroneously provided to parties who
are not permitted to have the information, either through the fault
of the Bancorp’s systems, employees or counterparties, or where
such information was intercepted or otherwise compromised by
third parties. The Bancorp may be subject to disruptions of its
operating systems arising from events that are wholly or partially
beyond the Bancorp’s control, which may include, for example,
security breaches; electrical or telecommunications outages; failures
of computer servers or other damage to the Bancorp’s property or
assets; natural disasters or severe weather conditions; health
emergencies; or events arising from local or larger-scale political
events, including outbreaks of hostilities or terrorist acts. While the
Bancorp believes that its current resiliency plans are both sufficient
and adequate, there can be no assurance that such plans will fully
mitigate all potential business continuity risks to the Bancorp or its
customers and clients. Any failures or disruptions of the Bancorp’s
systems or operations could give rise to losses in service to
suffer
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
customers and clients, adversely affect the Bancorp’s business and
results of operations by subjecting the Bancorp to losses or liability,
or require the Bancorp to expend significant resources to correct
the failure or disruption, as well as by exposing the Bancorp to
litigation, regulatory fines or penalties or losses not covered by
insurance.
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 its
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. These events adversely
affected the performance of Fifth Third’s website and in some
instances prevented customers from accessing Fifth Third’s website.
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 of such
attacks. Despite this effort, the occurrence of any failure,
interruption or security breach of Fifth Third’s systems or 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,
Fifth Third’s actual or alleged conduct in activities, such as
lending practices, data security, corporate governance and
acquisitions, may result in negative public opinion and may damage
Fifth Third’s reputation. Actions taken by government regulators
and community organizations may also damage Fifth Third’s
reputation. Additionally, whereas negative public opinion once was
primarily driven by adverse news coverage in traditional media, the
advent and expansion of social media facilitates the rapid
dissemination of information. Though Fifth Third monitors social
media channels, the potential remains for rapid and widespread
dissemination of inaccurate, misleading or false information that
could damage Fifth Third’s reputation. Negative public opinion can
adversely affect Fifth Third’s ability to attract and keep customers
and can increase the risk that it will be a target of 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 2013, 2014 and 2015, the Bancorp’s
ownership share in Vantiv Holding, LLC as of December 31, 2015,
is approximately 18%. The Bancorp’s investment in Vantiv Holding,
LLC is currently 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 and could negatively affect the
operating results of Fifth Third. In addition, Fifth Third owns a
warrant to acquire approximately 7.8 million Class C non-voting
units of Vantiv Holding, LLC. Fifth Third participates in a multi-
lender credit facility to Vantiv Holding, LLC and repayment of these
loans is contingent on the future cash flows of Vantiv Holding,
LLC.
Changes in Fifth Third’s ownership in Vantiv Holding, LLC
could have an impact on Fifth Third’s stock price, operating
results, financial condition, and future outlook.
Fifth Third expects that it will reduce its equity and derivative
investments in Vantiv Holding, LLC and its publicly traded parent,
Vantiv, Inc., in whole or in part, but there can be no assurance that
such sales will occur or as to when they will occur or the value that
might be received by Fifth Third. A reduction in Fifth Third’s
Vantiv ownership interest may result from a series of sale
transactions similar to transactions in Vantiv securities engaged in
by Fifth Third to date, or could occur as a result of one or more
larger transactions, depending on strategic considerations, market
conditions, or other factors deemed important by Fifth Third.
Additionally, Fifth Third’s ownership in Vantiv could be affected by
transactions that Vantiv may undertake. The nature, terms, and
timing of transactions engaged in by Vantiv may not be entirely
within Fifth Third’s control, if at all. If and when Fifth Third’s
ownership in Vantiv is reduced, such changes in ownership could
have a material impact, positive or negative, on Fifth Third’s stock
price, operating results, financial condition and future outlook.
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. These regions have
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.
31 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
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.
In July 2013, the Federal banking agencies issued final rules for
the enhanced regulatory capital requirements for U.S. banking
organizations, which implemented aspects of Basel III. The final
rules provide the option for certain banking organizations, including
the Bancorp, to opt out of including AOCI in regulatory capital and
retain the treatment of residential mortgage exposures consistent
with the current Basel I capital rules. The new capital rules became
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
could limit Fifth Third’s business activities, including lending, and
the 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.
The Bank must be 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, including merger with or acquisitions of other
financial institutions) and could ultimately result in the loss of
financial holding company status. The FRB conducted a regularly
scheduled examination covering 2011 through 2013 to determine
the Bancorp's banking subsidiary's compliance with the CRA.
Although the FRB has not made a final determination, the Bancorp
believes that the results of such CRA examination may result in a
rating of "Needs to Improve". If that would occur, such rating
would last at least until the Bancorp's banking subsidiary's next CRA
examination.
In addition, failure by the Bancorp’s banking subsidiary to meet
applicable capital guidelines could subject the Bank to a variety of
enforcement remedies available to the federal regulatory authorities.
These include limitations on the ability to pay dividends, the
issuance by the regulatory authority of a capital directive to increase
capital, and the termination of deposit insurance by the FDIC.
Fifth 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
32 Fifth Third Bancorp
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
have an adverse effect on its business, financial condition and
results of operations.
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
Fifth Third’s 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 negatively
affect Fifth Third’s ability to engage in new activities and certain
transactions, as well as have a material adverse effect on Fifth
Third’s business and results of operations and may not be publicly
disclosed.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
to
time
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
in material adverse
businesses. Such matters may
consequences, including without limitation, adverse judgments,
settlements,
injunctions or other actions,
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.
fines, penalties,
requests,
result
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. Under a
rule adopted by the FDIC in 2011, regular assessment rates for all
banks will decline when the reserve ratio reaches 1.15%, which the
FDIC expects will occur in early 2016. In October 2015, the FDIC
issued a proposed rule which would impose on banks with at least
$10 billion in assets, such as Fifth Third, a surcharge of 4.5 cents per
$100 of their assessment base, after making certain adjustments. The
Bancorp estimates the impact of these changes will increase Fifth
Third’s FDIC premiums by approximately $25 million per year.
Future deposit premiums paid by Fifth Third Bank depend on
FDIC rules, which are subject to change, 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
or the FDIC changes its rules to require higher premiums.
Fifth Third is subject to extensive governmental regulation
which 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.
The DFA, enacted in 2010, is complex and broad in scope and
several of its provisions are still being implemented. The DFA
established the CFPB which has 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. Since its formation, the CFPB has finalized a
number of significant rules that could have a significant impact on
Fifth Third’s business and the financial services industry more
generally including integrated mortgage disclosures under the Truth
in Lending Act and the Real Estate Settlement Procedures Act.
Compliance with the rules and policies adopted by the CFPB may
limit the products Fifth Third may permissibly offer to customers,
or limit the terms on which those products may be issued, or may
adversely affect Fifth Third’s ability to conduct its business as
previously conducted. Fifth Third may also be required to add
additional compliance personnel or
incur other significant
compliance-related expenses. Fifth Third’s business, results of
operations or competitive position may be adversely affected as a
result.
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
Fifth Third deals with in the course of 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.
Conforming Covered Activities to the Volcker Rule may
require the expenditure of resources and management
attention.
The DFA “Volcker Rule” provisions implementing the final rule
generally 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, 2015, the
Bancorp had approximately $186 million
interests and
approximately $37 million in binding commitments to invest in
private equity funds likely to be affected by the Volcker Rule. It is
expected that the Bancorp may need to dispose of 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 investments in and relationships with
such covered funds that were in place prior to December 31, 2013,
and announced its intention to grant a one year extension of the
conformance period until July 21, 2017. An ultimate forced sale of
some of these investments could result in Fifth Third receiving less
value than it would otherwise have received.
in
If an orderly liquidation of a systemically important bank
holding company or non-bank financial company were
triggered, Fifth Third could face assessments for the Orderly
Liquidation Fund.
The DFA creates authority for
liquidation of
systemically important bank holding companies and non-bank
financial companies and is based on the FDIC’s bank resolution
model. The Secretary of the U.S. Treasury may trigger a liquidation
under this authority only after consultation with the President of the
United States and after receiving a recommendation from the
boards of the FDIC and the Federal Reserve upon a two-thirds
vote. Liquidation proceedings will be funded by the Orderly
the orderly
33 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Fifth Third’s stress testing results and 2016 capital
plan will be submitted to the FRB by April 5, 2016.
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 CET1 ratio of 5% under baseline and stressful conditions
throughout a nine-quarter planning horizon.
Liquidation Fund established under the DFA, which will borrow
from the U.S. Treasury and impose risk-based assessments on
covered financial companies. Risk-based assessments would be
made, first, on entities that received more in the resolution than they
would have received in the liquidation to the extent of such excess,
and second, if necessary, on, among others, bank holding companies
with total consolidated assets of $50 billion or more, such as Fifth
Third. Any such assessments may adversely affect Fifth Third’s
business, financial condition or results of operations.
in effect,
Regulation of Fifth Third by the CFTC imposes additional
operational and compliance costs.
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
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
to new substantive
business will
requirements, including margin requirements in excess of current
market practice and capital requirements specific to this business.
These 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.
likely be further subject
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 may seek admissions
of liability when settling 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.
34 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STATEMENTS OF INCOME ANALYSIS
Net Interest Income
Net interest income is the interest earned on loans and leases
(including yield-related fees), securities and other short-term
investments less the interest paid for core deposits (includes
transaction deposits and other time deposits) and wholesale funding
(includes certificates $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 9 presents the components of net interest income, net
interest margin and net interest rate spread for the years ended
December 31, 2015, 2014 and 2013. 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 10 provides the relative
impact of changes in the balance sheet and changes in interest rates
on net interest income.
Net interest income on an FTE basis was $3.6 billion for both
the years ended December 31, 2015 and 2014. Net interest income
was negatively impacted by a decrease in the net interest rate spread,
changes made to the Bancorp’s deposit advance product beginning
January 1, 2015 and an increase in average long-term debt of $1.7
billion for the year ended December 31, 2015 compared to the year
ended December 31, 2014. These negative impacts were partially
offset by increases in average taxable securities and average loans
and leases of $5.2 billion and $2.2 billion, respectively, for the year
ended December 31, 2015 compared to the year ended December
31, 2014. The net interest rate spread decreased to 2.69% during the
year ended December 31, 2015 from 2.94% in 2014 driven by a 21
bps decrease in yields on average interest-earning assets coupled
with a 3 bps increase in the rates paid on average interest-bearing
liabilities.
Net interest margin on an FTE basis was 2.88% for the year
ended December 31, 2015 compared to 3.10% for the year ended
December 31, 2014. The decrease from December 31, 2014 was
driven primarily by the previously mentioned decrease in the net
interest rate spread coupled with a $7.6 billion increase in average
interest-earning assets partially offset by an increase in average free
funding balances. The increase in average free funding balances was
driven by increases in average demand deposits and average
shareholders’ equity of $3.4 billion and $572 million, respectively,
for the year ended December 31, 2015 compared to the year ended
December 31, 2014.
Interest income on an FTE basis from loans and leases
decreased $147 million compared to the year ended December 31,
2014 primarily due to a decrease of 24 bps in yields on average loans
and leases partially offset by an increase of 2% in average loans and
leases. The decrease in yields for the year ended December 31, 2015
was primarily due to a $93 million decline in interest income on
other consumer loans and leases primarily due to changes made to
the Bancorp’s deposit advance product beginning January 1, 2015.
The decrease also
in yields on average
commercial and industrial loans, average residential mortgage loans
and average automobile loans of 14 bps, 19 bps and 11 bps,
respectively, for the year ended December 31, 2015 compared to the
year ended December 31, 2014. The increase in average loans and
included decreases
leases for the year ended December 31, 2015 was driven primarily
by increases in average commercial loans and leases and average
residential mortgage loans. 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
$145 million compared to the year ended December 31, 2014
primarily as a result of the aforementioned increase in average
taxable securities.
Interest expense on core deposits decreased $15 million for the
year ended December 31, 2015 compared to the year ended
December 31, 2014 as a decline in the cost of average interest-
bearing core deposits more than offset an increase in average
interest-bearing core deposits. The cost of average interest-bearing
core deposits decreased to 24 bps for the year ended December 31,
2015 from 27 bps for the year ended December 31, 2014. Average
interest-bearing core deposits increased $2.4 billion for the year
ended December 31, 2015 compared to the year ended December
31, 2014. The increase was primarily due to increases in average
money market deposits. 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 increased $59
million for the year ended December 31, 2015 compared to the year
ended December 31, 2014 primarily due to a $1.7 billion increase in
average long-term debt coupled with a 18 bps increase in the rates
paid on average long-term debt. 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, 2015 and 2014, average 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, see the Market Risk Management subsection of the Risk
Management section of MD&A.
35 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 9: CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
2015
For the years ended December 31
2014
2013
Average
Yield/
Rate
Average
Yield/
Rate
Average Revenue/
Cost
Average Revenue/
Balance
Cost
Average
Balance
Revenue/
Cost
$
Balance
3.22
5.23
0.25
3.28
722
3
8
4,051
867
3
8
4,049
26,932
55
3,258
123,584
2,608
15,212
(1,293)
140,111
37,770
8,481
793
3,565
50,609
14,428
9,554
12,021
2,121
360
38,484
89,093
41,178
7,745
1,492
3,585
54,000
13,344
9,059
12,068
2,271
385
37,127
91,127
42,594
7,121
2,717
3,796
56,228
13,798
8,592
11,847
2,303
571
37,111
93,339
$ 1,346
260
51
108
1,765
518
336
334
227
138
1,553
3,318
$ 1,334
227
86
106
1,753
509
312
315
237
45
1,418
3,171
3.13 % $
3.19
3.17
2.78
3.12
3.69
3.63
2.66
10.27
8.00
3.82
3.40
3.27 % $
3.36
3.44
3.01
3.27
3.88
3.71
2.77
9.98
35.99
4.18
3.64
($ in millions)
Assets
Interest-earning assets:
Loans and leases:(a)
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 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 deposits
Savings deposits
Money market deposits
Foreign office deposits
Other time deposits
Total interest-bearing core 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 (FTE)
Net interest margin (FTE)
Net interest rate spread (FTE)
Interest-bearing liabilities to interest-earning assets
(a) The FTE adjustments included in the above table were $21 for both the years ended December 31, 2015 and 2014 and $20 for the year ended December 31, 2013.
25,382
16,080
14,670
1,828
3,762
61,722
3,929
-
458
1,873
12,928
80,910
31,755
3,950
116,615
15,328
131,943
23,582
18,440
9,467
1,501
3,760
56,750
6,339
17
503
3,024
7,914
74,547
29,925
4,917
109,389
14,343
123,732
26,160
14,951
18,152
817
4,051
64,131
2,869
57
920
1,721
14,677
84,375
35,164
4,672
124,211
15,900
140,111
0.19 % $
0.06
0.24
0.16
1.20
0.24
1.16
0.16
0.13
0.12
2.09
0.59
0.22 % $
0.10
0.35
0.29
1.06
0.27
0.85
0.02
0.09
0.10
1.91
0.56
21,770
53
3,043
115,993
2,892
14,539
(1,481)
131,943
16,395
49
2,417
107,954
2,482
15,053
(1,757)
123,732
50
9
44
1
49
153
33
-
1
2
306
495
56
16
51
5
40
168
34
-
-
2
247
451
2.88 %
2.69
68.27
3.32
4.94
0.26
3.49
3.10 %
2.94
69.75
$ 3,554
$ 3,600
$
$
$
$
$
$
$
$
$
$
$ 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
152
50
-
1
5
204
412
$ 3,581
Average
Yield/
Rate
3.60 %
3.60
3.45
3.26
3.58
3.91
3.71
3.10
9.87
42.93
4.30
3.89
3.16
5.29
0.26
3.70
0.23 %
0.12
0.25
0.28
1.33
0.27
0.78
0.11
0.12
0.18
2.58
0.55
3.32 %
3.15
69.05
36 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
Total
Volume Yield/Rate
2015 Compared to 2014
45
(21)
39
6
69
17
(17)
(5)
3
47
45
114
(57)
(12)
(4)
(8)
(81)
(26)
(7)
(14)
7
(140)
(180)
(261)
(12)
(33)
35
(2)
(12)
(9)
(24)
(19)
10
(93)
(135)
(147)
TABLE 10: 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 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 loans and leases
Securities:
Taxable
Other short-term investments
Total change in interest income
Liabilities
Interest-bearing liabilities:
Interest checking deposits
Savings deposits
Money market deposits
Foreign office deposits
Other time deposits
Total interest-bearing core 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.
(6)
(7)
(7)
(4)
9
(15)
(1)
1
-
59
44
(46)
(8)
(6)
(17)
(2)
6
(27)
10
-
-
24
7
(290)
2
(1)
10
(2)
3
12
(11)
1
-
35
37
244
(22)
-
(283)
145
-
167
-
281
(2)
$
$
$
2014 Compared to 2013
Yield/Rate
Total
Volume
116
(26)
24
1
115
(42)
(18)
1
16
9
(34)
81
177
2
260
3
(2)
16
1
-
18
(20)
(1)
(1)
106
102
158
(131)
(20)
-
(9)
(160)
(4)
(1)
(40)
2
(26)
(69)
(229)
27
-
(202)
-
(4)
12
-
(10)
(2)
4
-
(2)
(63)
(63)
(139)
(15)
(46)
24
(8)
(45)
(46)
(19)
(39)
18
(17)
(103)
(148)
204
2
58
3
(6)
28
1
(10)
16
(16)
(1)
(3)
43
39
19
Provision for Loan and Lease Losses
The Bancorp provides as an expense an amount for probable losses
within the loan and lease portfolio that is based on factors
previously discussed in the Critical Accounting Policies section of
MD&A. 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 was $396 million for
the year ended December 31, 2015 compared to $315 million for
the same period in the prior year. The increase in provision expense
for the year ended December 31, 2015 compared to the prior year
was primarily due to the restructuring of a student loan backed
commercial credit originated in 2007, a broadening global economic
slowdown, stress on capital markets and the prolonged softness in
commodity prices. The ALLL declined $50 million from December
31, 2014 to $1.3 billion at December 31, 2015. At December 31,
2015, the ALLL as a percent of portfolio loans and leases decreased
to 1.37%, compared to 1.47% at December 31, 2014.
Refer to the Credit Risk Management subsection of the 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, including an analysis of loan
portfolio composition, nonperforming assets, net charge-offs and
other factors considered by the Bancorp in assessing the credit
quality of the loan and lease portfolio and the ALLL.
37 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Income
Noninterest income increased $530 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. The following
table presents the components of noninterest income:
TABLE 11: COMPONENTS OF NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Service charges on deposits
Investment advisory revenue
Corporate banking revenue
Mortgage banking net revenue
Card and processing revenue
Other noninterest income
Securities gains, net
Securities gains, net - non-qualifying hedges on mortgage service rights
Total noninterest income
Service charges on deposits
Service charges on deposits increased $3 million for the year ended
December 31, 2015 compared to the year ended December 31, 2014
due primarily to a $3 million increase in commercial deposit fees.
The increase in commercial deposit fees was driven by an increase
in activity from existing customers and new customer acquisition.
Investment advisory revenue
Investment advisory revenue increased $11 million for the year
ended December 31, 2015 compared to the year ended December
31, 2014. The increase was primarily due to an increase of $6 million
in recurring securities brokerage fees driven by higher sales volume
and an increase of $5 million in private client service fees due to an
increase in personal asset management fees. The Bancorp had
approximately $297 billion and $308 billion in total assets under care
as of December 31, 2015 and 2014, respectively, and managed $26
billion and $27 billion in assets for individuals, corporations and
2015
563
418
384
348
302
979
9
-
3,003
$
$
2014
560
407
430
310
295
450
21
-
2,473
2013
549
393
400
700
272
879
21
13
3,227
2012
522
374
413
845
253
574
15
3
2,999
2011
520
375
350
597
308
250
46
9
2,455
not-for-profit organizations as of December 31, 2015 and 2014,
respectively.
Corporate banking revenue
Corporate banking revenue decreased $46 million for the year ended
December 31, 2015 compared to the year ended December 31,
2014. The decrease from the prior year was primarily the result of a
decrease in syndication and lease remarketing fees. Syndication fees
decreased $29 million compared to the year ended December 31,
2014 as a result of decreased activity in the market and the
Bancorp’s reduced leveraged loan appetite. The decrease in lease
remarketing fees included the impact of impairment charges of $36
million related to certain operating lease equipment that was
recognized during the year ended December 31, 2015. The
decreases for the year ended December 31, 2015 were partially
offset by higher institutional sales revenue and gains on the sale of
operating lease equipment.
Mortgage banking net revenue
Mortgage banking net revenue increased $38 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. The
following table presents the components of mortgage banking net revenue:
TABLE 12: COMPONENTS OF MORTGAGE BANKING NET REVENUE
For the years ended December 31 ($ in millions)
Origination fees and gains on loan sales
Net mortgage servicing revenue:
Gross mortgage servicing fees
MSR amortization
Net valuation adjustments on MSRs and free-standing derivatives
entered into to economically hedge MSRs
Net mortgage servicing revenue
Mortgage banking net revenue
Origination fees and gains on loan sales increased $18 million for
the year ended December 31, 2015 compared to the year ended
December 31, 2014 primarily as the result of an 11% increase in
residential mortgage loan originations. Residential mortgage loan
originations increased to $8.3 billion for the year ended December
31, 2015 from $7.5 billion for the year ended December 31, 2014
due to strong refinancing activity that occurred during the year
ended December 31, 2015.
Net mortgage servicing revenue
is comprised of gross
mortgage servicing fees and related MSR amortization as well as
2015
171
222
(139)
94
177
348
$
$
2014
153
246
(119)
30
157
310
2013
453
251
(166)
162
247
700
valuation adjustments on MSRs and mark-to-market adjustments on
both settled and outstanding free-standing derivative financial
instruments used to economically hedge the MSR portfolio. Net
mortgage servicing revenue increased $20 million for the year ended
December 31, 2015 compared to the year ended December 31, 2014
driven primarily by an increase of $64 million in net valuation
adjustments, partially offset by a decrease in gross mortgage
servicing fees of $24 million and an increase in mortgage servicing
rights amortization of $20 million.
38 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the components of net valuation adjustments on the MSR portfolio and the impact of the non-qualifying hedging
strategy for the years ended December 31:
TABLE 13: COMPONENTS OF NET VALUATION ADJUSTMENTS ON MSRs
($ in millions)
Changes in fair value and settlement of free-standing derivatives purchased
to economically hedge the MSR portfolio
Recovery of (provision for) MSR impairment
Net valuation adjustments on MSRs and free-standing derivatives
entered into to economically hedge MSRs
2015
2014
2013
$
$
90
4
94
95
(65)
(30)
192
30
162
Mortgage rates increased during the year ended December 31, 2015
which caused the modeled prepayment speeds to slow, and led to
the recovery of temporary impairment on servicing rights during the
year. Mortgage rates decreased during the year ended December 31,
2014 which caused the modeled prepayments speeds to increase,
which led to temporary impairment on servicing rights during the
year ended December 31, 2014.
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 12 of the Notes to
Consolidated Financial Statements. The Bancorp maintains a non-
qualifying hedging strategy to manage a portion of the risk
associated with changes in the valuation on the MSR portfolio.
Refer to Note 13 of the Notes to Consolidated Financial Statements
for more information on the free-standing derivatives used to
economically hedge the MSR portfolio.
In addition to the derivative positions used to economically
hedge the MSR portfolio, the Bancorp may acquire 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 years ended December 31, 2015 and
2014. Net gains on the sale of these securities were $13 million
during the year ended December 31, 2013, recorded in securities
gains, net - non-qualifying hedges on mortgage servicing rights in
the Consolidated Statements of Income.
The Bancorp’s total residential mortgage loans serviced as of
December 31, 2015 and 2014 were $73.4 billion and $79.0 billion,
respectively, with $59.0 billion and $65.4 billion, respectively, of
residential mortgage loans serviced for others.
Card and processing revenue
Card and processing revenue increased $7 million for the year ended
December 31, 2015 compared to the year ended December 31,
2014. The increase was primarily the result of an increase in the
number of actively used cards and an increase in customer spend
volume. Debit card interchange revenue, included in card and
processing revenue, was $137 million and $128 million for the years
ended December 31, 2015 and 2014, respectively.
Other noninterest income
The following table presents the major components of other noninterest income:
TABLE 14: COMPONENTS OF OTHER NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Gain on sale of Vantiv, Inc. shares
Valuation adjustments on the warrant associated with Vantiv Holding, LLC
Gain on sale and exercise of the warrant associated with Vantiv Holding, LLC
Operating lease income
Income from the TRA associated with Vantiv, Inc.
Equity method income from interest in Vantiv Holding, LLC
BOLI income
Cardholder fees
Gain on loan sales
Private equity investment income
Consumer loan and lease fees
Banking center income
Insurance income
Net losses on disposition and impairment of bank premises and equipment
Loss on swap associated with the sale of Visa, Inc. Class B shares
Other, net
Total other noninterest income
2015
2014
2013
$
$
331
236
89
89
80
63
48
43
38
28
23
21
14
(101)
(37)
14
979
125
31
-
84
23
48
44
45
-
27
25
30
13
(19)
(38)
12
450
327
206
-
75
9
77
52
47
3
24
27
34
25
(6)
(31)
10
879
Other noninterest income increased $529 million for the year ended
December 31, 2015 compared to the year ended December 31,
2014. The increase included the impact of a gain of $331 million on
the sale of Vantiv, Inc. shares in the fourth quarter of 2015
compared to a gain of $125 million in 2014. The positive valuation
adjustments on the stock warrant associated with Vantiv Holding,
LLC were $236 million and $31 million for the years ended
December 31, 2015 and 2014, respectively. The fair value of the
stock warrant is calculated using the Black-Scholes option-pricing
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,
2015 and 2014 were primarily due to increases of 40% and 4%,
respectively, in Vantiv, Inc.’s share price from December 31, 2014
to December 31, 2015 and from December 31, 2013 to December
31, 2014, respectively. During the fourth quarter of 2015, the
Bancorp recognized a gain of $89 million on both the sale and
exercise of a portion of the warrant associated with Vantiv Holding,
39 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LLC. Additionally, the Bancorp recognized a gain of $49 million
from the payment from Vantiv, Inc. to terminate a portion of the
TRA and also recognized a gain of $31 million associated with the
annual TRA payment during the fourth quarter of 2015. The
Bancorp recognized a gain of $23 million associated with the TRA
during the fourth quarter of 2014.
In addition to the increases discussed above, gain on loan sales
increased $38 million during the year ended December 31, 2015
compared to the same period in the prior year primarily due to a $37
million gain on the sale of certain residential mortgage loans
classified as TDRs during the first quarter of 2015. Equity method
earnings from the Bancorp’s interest in Vantiv Holding, LLC
increased $15 million from the year ended December 31, 2014 as
2014 included charges taken by Vantiv Holding, LLC related to an
acquisition during 2014.
The year ended December 31, 2015 also included impairment
charges, included in net losses on disposition and impairment of
bank premises and equipment in other noninterest income of $109
million compared to $20 million for the same period in the prior
year. For more information on these impairment charges, refer to
Note 7 of the Notes to Consolidated Financial Statements.
Noninterest Expense
Noninterest expense increased $66 million for the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due
to increases in personnel costs (salaries, wages and incentives plus employee benefits), technology and communications and card and processing
expense partially offset by a decrease in other noninterest expense. The following table presents the major components of noninterest expense:
TABLE 15: COMPONENTS OF NONINTEREST EXPENSE
For the years ended December 31 ($ 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
$
$
2015
1,525
323
321
224
153
124
1,105
3,775
57.6 %
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
Personnel costs increased $65 million for the year ended December
31, 2015 compared to the year ended December 31, 2014 driven by
higher executive retirement and severance costs as well as an
increase in base compensation and an increase in incentive
compensation, primarily
in the mortgage business. Full-time
equivalent employees totaled 18,261 at December 31, 2015
compared to 18,351 at December 31, 2014.
Technology and communications expense
increased $12
million for the year ended December 31, 2015 compared to the year
information
ended December 31, 2014 driven primarily by increased investment
regulatory and
technology associated with
in
compliance initiatives, system maintenance and other growth
initiatives.
Card and processing expense increased $12 million for the year
ended December 31, 2015 compared to the year ended December
31, 2014 driven primarily by increased fraud prevention related
expenses.
The following table presents the major components of other noninterest expense:
TABLE 16: COMPONENTS OF OTHER NONINTEREST EXPENSE
For the years ended December 31 ($ in millions)
Impairment on affordable housing investments
Loan and lease
Marketing
FDIC insurance and other taxes
Operating lease
Professional service fees
Losses and adjustments
Travel
Postal and courier
Data processing
Recruitment and education
Donations
Insurance
Supplies
Provision for (benefit from) the reserve for unfunded commitments
Other, net
Total other noninterest expense
40 Fifth Third Bancorp
2015
2014
2013
$
$
145
118
110
99
74
70
55
54
45
45
33
29
17
16
4
191
1,105
135
119
98
89
67
72
188
52
47
41
28
18
16
15
(27)
181
1,139
108
158
114
127
57
76
221
54
48
42
26
24
17
16
(17)
193
1,264
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other noninterest expense decreased $34 million for the year ended
December 31, 2015 compared to the year ended December 31, 2014
primarily due to a decrease in losses and adjustments partially offset
by increases in the provision for the reserve for unfunded
commitments, marketing expense, donations expense, impairment
on affordable housing investments, FDIC insurance and other taxes
and operating lease expense.
Losses and adjustments decreased $133 million for the year
ended December 31, 2015 compared to the year ended December
31, 2014 primarily due to a decrease in legal settlements and reserve
expense. The provision for the reserve for unfunded commitments
increased $31 million for the year ended December 31, 2015
compared to the year ended December 31, 2014 primarily due to an
increase in unfunded commitments for which the Bancorp holds
reserves. Marketing expense increased $12 million for the year
ended December 31, 2015 compared to the year ended December
31, 2014. Donations expense increased $11 million for the year
ended December 31, 2015 compared to the year ended December
31, 2014 driven by contributions of $14 million to the Fifth Third
Applicable Income Taxes
Applicable income tax expense for all periods includes the benefit
from tax-exempt income, tax-advantaged investments, and 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, 2015
and 2014 were primarily impacted by $178 million and $164 million,
respectively, in tax credits and $39 million and $27 million of tax
benefits from tax-exempt income in 2015 and 2014, respectively.
The increase in the effective tax rate for the year ended December
31, 2015 from the year ended December 31, 2014 was primarily
related to an increase in income before income taxes partially offset
by the increased amount of tax credits.
As required under U.S. GAAP, the Bancorp established a
deferred tax asset for stock-based awards granted to its employees
Foundation. Impairment on affordable housing
investments
increased $10 million for the year ended December 31, 2015
compared to the year ended December 31, 2014 primarily due to
incremental losses resulting from previous growth in the portfolio.
FDIC insurance and other taxes increased $10 million for the year
ended December 31, 2015 compared to the year ended December
31, 2014 primarily driven by an increase in the assessment rate due
to a change in asset mix as well as an increase in the assessment
base. Operating lease expense increased $7 for the year ended
December 31, 2015 compared to the year ended December 31, 2014
due primarily to an increase in depreciation on operating lease
equipment.
The Bancorp continues to focus on efficiency initiatives as part
of its core emphasis on operating leverage and expense control. The
efficiency ratio (noninterest expense divided by the sum of net
interest income (FTE) and noninterest income) was 57.6% for the
year ended December 31, 2015 compared to 61.1% for the year
ended December 31, 2014.
and directors. When the actual tax deduction for these stock-based
awards is less than the expense previously recognized for financial
reporting or when the awards expire unexercised and where the
Bancorp has not accumulated an excess tax benefit for previously
exercised or released stock-based awards, the Bancorp is required to
recognize a non-cash charge to income tax expense upon the write-
off of the deferred tax asset previously established for these stock-
based awards. As the Bancorp had an accumulated excess tax
benefit at December 31, 2015 and 2014, the Bancorp was not
required to recognize a non-cash charge to income tax expense
during the years ended December 31, 2015 and 2014.
Based on the Bancorp’s stock price at December 31, 2015 and
the Bancorp’s accumulation of an excess tax benefit through the
period ended December 31, 2015, the Bancorp does not believe it
will be required to recognize a non-cash charge to income tax
expense over the next twelve months related to stock-based awards.
However, the Bancorp cannot predict its stock price or whether its
employees will exercise other stock-based awards with lower
exercise prices in the future. Therefore, it is possible the Bancorp
may be required to recognize a non-cash charge to income tax
expense in the future.
The following table presents the Bancorp’s income before income taxes, applicable income tax expense and effective tax rate:
TABLE 17: APPLICABLE INCOME TAXES
For the years ended December 31 ($ in millions)
Income before income taxes
Applicable income tax expense
Effective tax rate
$
2015
2,365
659
27.8 %
2014
2,028
545
26.9
2013
2,598
772
29.7
2012
2,210
636
28.8
2011
1,831
533
29.1
41 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 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 an 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 following table summarizes net income (loss) by business segment:
TABLE 18: NET INCOME (LOSS) BY BUSINESS SEGMENT
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
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 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
federal funds, U.S. swap curve or swap rate. The credit rates for
several deposit products were reset January 1, 2015 to reflect the
current market rates and updated duration assumptions. These rates
were generally lower than those in place during 2014, thus net
interest income for deposit-providing businesses was negatively
impacted during 2015.
The business segments are charged provision expense based on
the actual net charge-offs experienced on the loans and leases
owned by each business 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, 2014 and 2013 were adjusted to reflect the
transfer of certain customers and Bancorp employees from
Commercial Banking to Branch Banking, effective January 1, 2015.
In addition, the balances for the years ended December 31, 2014
and 2013 were adjusted to reflect a change in internal allocation
methodology.
2015
2014
2013
$
$
739
311
112
58
486
1,706
(6)
1,712
75
1,637
800
365
(66)
54
330
1,483
2
1,481
67
1,414
798
219
187
68
554
1,826
(10)
1,836
37
1,799
42 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:
$
2015
2014
2013
1,646
239
1,648
235
TABLE 19: 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:
Personnel costs
Other noninterest expense
Income before income taxes
Applicable income tax expense(a)(b)
Net income
Average Balance Sheet Data
Commercial loans and leases, 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
(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
Includes FTE adjustments of $21 for both the years ended December 31, 2015 and 2014 and $20 for the year ended December 31, 2013.
53,010
20,677
9,069
6,652
1,230
813
50,718
18,381
7,995
5,792
1,399
1,817
47,197
16,582
7,031
4,844
1,330
1,483
304
1,013
976
176
800
303
1,099
858
119
739
306
924
975
177
798
391
262
158
429
280
171
378
284
191
1,589
195
$
$
Applicable Income Taxes section of MD&A for additional information.
Comparison of the year ended 2015 with 2014
Net income was $739 million for the year ended December 31, 2015
compared to net income of $800 million for the year ended
December 31, 2014. The decrease in net income was the result of an
increase
in
noninterest income.
in noninterest expense coupled with a decrease
Net interest income decreased $2 million from the year ended
December 31, 2014 primarily driven by a decline in yields of 19 bps
on average commercial loans and leases and increases in FTP
charges on loans and leases driven by an increase in average
balances. These decreases for the year ended December 31, 2015
were partially offset by increases in FTP credits on core deposits
driven by increases in average balances.
Provision for loan and lease losses increased $4 million from
the year ended December 31, 2014. The increase included a $102
million charge-off during the third quarter of 2015 associated with
the restructuring of a student loan backed commercial credit
originated in 2007. The year ended December 31, 2014 included 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 decreased to 45 bps for
the year ended December 31, 2015 compared to 46 bps for the year
ended December 31, 2014.
Noninterest income decreased $27 million from the year ended
December 31, 2014 due primarily to a decrease in corporate banking
revenue partially offset by an increase in other noninterest income.
Corporate banking revenue decreased $51 million from the year
ended December 31, 2014 primarily driven by decreases in
syndication fees and lease remarketing fees. The decrease in
syndication fees was the result of decreased activity in the market
and the Bancorp’s reduced leveraged loan appetite. The decrease in
lease remarketing fees included the impact of impairment charges of
$36 million related to certain operating lease equipment that was
recognized during the year ended December 31, 2015. Refer to
Note 8 of the Notes to Consolidated Financial Statements for
additional information. The decrease in corporate banking revenue
for the year ended December 31, 2015 was partially offset by higher
institutional sales revenue. Other noninterest income increased $20
million from the year ended December 31, 2014 primarily driven by
increases in gains on loan sales.
Noninterest expense increased $85 million from the year ended
December 31, 2014 driven by an increase in other noninterest
expense. The increase in other noninterest expense was primarily
driven by increases in corporate overhead allocations, operating
lease expense and impairment on affordable housing investments.
industrial
Average commercial loans increased $2.3 billion from the year
ended December 31, 2014 primarily due to increases in average
loans and average commercial
commercial and
construction
in average
loans partially offset by a decrease
commercial mortgage loans. Average commercial and industrial
loans and average commercial construction loans increased $1.4
billion and $1.2 billion, respectively, from the year ended December
31, 2014 primarily as a result of an increase in new loan origination
activity resulting from an increase in demand and targeted marketing
efforts. Average commercial mortgage loans decreased $552 million
from the year ended December 31, 2014 primarily due to a decline
in new loan origination activity driven by increased competition and
an increase in paydowns.
Average core deposits increased $3.2 billion from the year
ended December 31, 2014. The increase was the result of growth in
average demand deposits, average interest checking deposits and
average savings and money market deposits which increased $2.3
43 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
billion, $1.1 billion and $860 million, respectively, from the year
ended December 31, 2014. This increase was partially offset by a
decrease in average foreign deposits of $1.0 billion from the year
ended December 31, 2014.
Comparison of the year ended 2014 with 2013
Net income was $800 million for the year ended December 31, 2014
compared to net income of $798 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 $59 million from the year ended
December 31, 2013 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 $40 million from
the year ended December 31, 2013 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 the year
ended December 31, 2014 compared to 41 bps for the year ended
December 31, 2013.
Noninterest income increased $69 million from the year ended
December 31, 2013 due to increases in corporate banking revenue,
service charges on deposits and other noninterest
income.
Corporate banking revenue increased $38 million from the year
ended December 31, 2013 primarily driven by
in
syndication fees and lease remarketing fees. Service charges on
deposits increased $18 million from the year ended December 31,
increases
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
the year ended December 31, 2013 primarily due to increases in
operating lease income and card and processing revenue.
Noninterest expense increased $87 million from the year ended
December 31, 2013 primarily as a result of an increase in other
noninterest expense. Other noninterest expense increased $89
million from the year ended December 31, 2013 driven by increases
in corporate overhead allocations,
impairment on affordable
housing investments and operating lease expense.
industrial
Average commercial loans increased $3.5 billion from the year
ended December 31, 2013 primarily due to increases in average
loans and average commercial
commercial and
construction
in average
loans partially offset by a decrease
commercial mortgage loans. Average commercial and industrial
loans and average commercial construction loans increased $3.5
billion and $684 million, respectively, from the year ended
December 31, 2013 as a result of an increase in new loan origination
activity and utilization resulting from a strengthening economy and
targeted marketing efforts. Average commercial mortgage loans
decreased $671 million from the year ended December 31, 2013 due
to continued run-off as the level of new originations was less than
the repayments on the current portfolio.
Average core deposits increased $4.0 billion from the year
ended December 31, 2013. The increase was the result of growth in
average demand deposits, average
interest checking deposits,
average savings and money market deposits and average foreign
deposits which increased $1.8 billion, $964 million, $948 million and
$334 million, respectively, from the year ended December 31, 2013.
44 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Branch Banking
Branch Banking provides a full range of deposit and loan products
to individuals and small businesses through 1,254 full-service
banking centers. Branch Banking offers depository and loan
products, such as checking and savings accounts, home equity loans
and lines of credit, credit cards and loans for automobiles and other
personal financing needs, as well as products designed to meet the
specific needs of small businesses, including cash management
services.
The following table contains selected financial data for the Branch Banking segment:
TABLE 20: BRANCH BANKING
For the years ended December 31 ($ 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:
Personnel costs
Net occupancy and equipment expense
Card and processing expense
Other noninterest expense
Income before income 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
2015
2014
2013
$
1,555
159
1,573
181
1,380
211
277
236
157
(18)
524
248
145
650
481
170
311
278
227
152
69
539
246
133
636
564
199
365
284
208
147
106
550
241
125
660
338
119
219
14,374
2,021
12,715
9,128
25,342
5,161
14,978
2,175
11,781
9,071
24,065
4,690
15,223
2,370
11,284
8,905
22,252
4,709
$
$
Comparison of the year ended 2015 with 2014
Net income was $311 million for the year ended December 31, 2015
compared to net income of $365 million for the year ended
December 31, 2014. The decrease was driven by decreases in
noninterest income and net interest income as well as an increase in
noninterest expense partially offset by a decrease in the provision
for loan and lease losses.
Net interest income decreased $18 million from the year ended
December 31, 2014 primarily driven by changes made to the
Bancorp’s deposit advance product beginning January 1, 2015 and a
decline in interest income on home equity loans and residential
mortgage loans driven by decreases in average balances partially
offset by a decrease in FTP charges due to the decrease in these
average balances. The decline in net interest income was partially
offset by a decrease in interest expense on core deposits due to a
decline in the rates paid and by increases in the benefits from FTP
credits for demand deposits, other time deposits and interest
checking deposits.
Provision for loan and lease losses decreased $22 million from
the year ended December 31, 2014 primarily due to improved credit
trends. Net charge-offs as a percent of average portfolio loans and
leases decreased to 96 bps for the year ended December 31, 2015
compared to 106 bps for the year ended December 31, 2014.
Noninterest income decreased $74 million from the year ended
December 31, 2014. The decrease was primarily driven by decreases
in other noninterest income partially offset by increases in card and
processing revenue and
investment advisory revenue. Other
noninterest income decreased $87 million from the year ended
losses
December 31, 2014 primarily driven by
associated with lower of cost or market adjustments on long-lived
impairment
assets of $109 million for the year ended December 31, 2015
compared to $20 million for the year ended December 31, 2014.
Refer to Note 7 of the Notes to Consolidated Financial Statements
for additional information on impairment of bank premises and
equipment. Card and processing revenue increased $9 million from
the year ended December 31, 2014 primarily due to an increase in
the number of actively used cards and an increase in customer
spend volume. Investment advisory revenue increased $5 million
from the year ended December 31, 2014 primarily due to an
increase of $3 million in recurring securities brokerage fees driven
by higher sales volume and an increase of $2 million in private client
service fees due to an increase in personal asset management fees.
increases
Noninterest expense increased $13 million from the year ended
December 31, 2014 primarily driven by
in other
noninterest expense and card and processing expense partially offset
by a decrease in personnel costs. Other noninterest expense
increased $14 million from the year ended December 31, 2014 due
to higher operational losses and an increase in corporate overhead
allocations. Card and processing expense increased $12 million from
the year ended December 31, 2014 driven by increased fraud
prevention related expenses. Personnel costs decreased $15 million
from the year ended December 31, 2014 driven by a decrease in
employee benefits expense due to changes in the Bancorp’s
employee benefit plan implemented in 2015 as well as a decrease in
base compensation due to a decline in the number of full-time
equivalent employees.
Average consumer loans decreased $604 million from the year
ended December 31, 2014 primarily due to a decrease in average
home equity loans and average residential mortgage loans of $336
million and $261 million, respectively, as payoffs exceeded new loan
45 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
production. Average commercial loans decreased $154 million from
the year ended December 31, 2014 primarily due to a decrease in
average commercial mortgage loans and average commercial and
industrial loans of $97 million and $63 million, respectively, as
payoffs exceeded new loan production.
Average core deposits increased $2.6 billion from the year
ended December 31, 2014 primarily driven by net growth in average
savings and money market deposits of $1.3 billion and growth in
average demand deposits of $934 million. The net growth in average
savings and money market deposits was driven by a promotional
product offering and the growth in average demand deposits was
driven by an increase in average account balances.
Comparison of the year ended 2014 with 2013
Net income was $365 million for the year ended December 31, 2014
compared to net income of $219 million for the year ended
December 31, 2013. The increase was driven by an increase in net
interest income and decreases in the provision for loan and lease
losses and noninterest expense partially offset by a decrease in
noninterest income.
Net interest income increased $193 million from the year
ended December 31, 2013 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 December 31, 2014
decreased $30 million from the year ended December 31, 2013 as a
result of improved credit trends. Net charge-offs as a percent of
average portfolio loans and leases decreased to 106 bps for the year
ended December 31, 2014 compared to 119 bps for the year ended
December 31, 2013.
Noninterest income decreased $19 million from the year ended
December 31, 2013. 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 $37 million from the year ended
December 31, 2013 primarily due to $20 million in impairment
charges during the year ended December 31, 2014 for branches and
land. 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 $6 million from the year ended December 31, 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 year ended December 31, 2013 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 year
ended December 31, 2013 primarily driven by decreases in other
noninterest expense and personnel costs partially offset by increases
in card and processing expense and net occupancy and equipment
expense. Other noninterest expense decreased $24 million from the
year ended December 31, 2013 primarily due to lower marketing
expense and loan and lease expense. Personnel costs decreased $11
million from the year ended December 31, 2013 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 the year ended December 31, 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 the year ended December 31, 2013 primarily due to an
increase in rent expense driven by additional ATM locations.
Average consumer loans decreased $245 million from the year
ended December 31, 2013 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 $146 million
from the year ended December 31, 2013 primarily due to an
increase in open and active accounts driven by the volume of new
accounts.
Average core deposits increased $2.5 billion from the year
ended December 31, 2013 primarily driven by net growth in average
savings and money market deposits of $1.8 billion and growth in
average demand deposits of $497 million.
46 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consumer Lending
Consumer Lending includes the Bancorp’s residential mortgage,
home equity, automobile and other indirect lending activities. Direct
lending activities include the origination, retention and servicing of
residential mortgage and home equity loans or lines of credit, sales
and securitizations of those loans, pools of loans or lines of credit
and all associated hedging activities. Indirect lending activities
include loans to consumers through correspondent lenders and
automobile dealers.
The following table contains selected financial data for the Consumer Lending segment:
TABLE 21: CONSUMER LENDING
For the years ended December 31 ($ 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:
Personnel costs
Other noninterest expense
Income (loss) before income taxes
Applicable income tax expense (benefit)
Net income (loss)
Average Balance Sheet Data
Residential mortgage loans, including held for sale
Home equity
Automobile loans, including held for sale
Other consumer loans and leases, including held for sale
Comparison of the year ended 2015 with 2014
Net income was $112 million for the year ended December 31, 2015
compared to a net loss of $66 million for the year ended December
31, 2014. The increase was driven by decreases in noninterest
expense and the provision for loan and lease losses as well as an
increase in noninterest income partially offset by a decrease in net
interest income.
Net interest income decreased $9 million from the year ended
December 31, 2014 primarily driven by lower yields on average
residential mortgage loans and average automobile loans and a
decline in average home equity loans partially offset by decreases in
FTP charge rates on loans and leases.
The provision for loan and lease losses decreased $111 million
from the year ended December 31, 2014 as the prior year included
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. The decrease was also due to improved delinquency
metrics on residential mortgage loans and home equity loans. Net
charge-offs as a percent of average portfolio loans and leases
decreased to 22 bps for the year ended December 31, 2015
compared to 77 bps for the year ended December 31, 2014.
Noninterest income increased $57 million from the year ended
December 31, 2014 as a result of increases in mortgage banking net
revenue and other noninterest income. Mortgage banking net
revenue increased $36 million from the year ended December 31,
2014 driven by a $16 million increase in mortgage origination fees
and gains on loan sales and a $20 million increase 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. Other noninterest income increased $21
million from the year ended December 31, 2014 primarily driven by
a $37 million gain on the sale of held for sale residential mortgage
loans classified as TDRs in the first quarter of 2015. This increase
was partially offset by a decrease in retail service fees.
Noninterest expense decreased $118 million from the year
ended December 31, 2014 driven by a decrease in other noninterest
$
$
$
2015
2014
2013
249
45
341
66
185
251
175
63
112
258
156
305
45
181
373
(102)
(36)
(66)
312
93
688
67
281
404
289
102
187
9,251
424
11,341
11
8,866
496
11,517
19
10,222
572
11,409
16
expense of $122 million. The decrease in other noninterest expense
was primarily due to decreased legal expenses and operational losses
partially offset by an increase in corporate overhead allocations.
Average consumer loans and leases increased $129 million
from the year ended December 31, 2014. Average residential
mortgage loans increased $385 million from the year ended
December 31, 2014 primarily due to the continued retention of
certain conforming ARMs and certain other fixed-rate loans.
Average automobile loans and average home equity loans decreased
$176 million and $72 million, respectively, from the year ended
December 31, 2014 as payoffs exceeded new loan production.
Comparison of the year ended 2014 with 2013
Consumer Lending incurred a net loss of $66 million for the year
ended December 31, 2014 compared to net income of $187 million
from the year ended December 31, 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 $54 million from the year ended
December 31, 2013 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 $63 million
from the year ended December 31, 2013 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 portfolio
loans and leases increased to 77 bps for the year ended December
31, 2014 compared to 46 bps for the year ended December 31,
2013.
Noninterest income decreased $405 million from the year
ended December 31, 2013 as a result of decreases in mortgage
banking net revenue of $383 million and other noninterest income
47 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of $22 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. The decrease in
other noninterest income was primarily due to a $16 million
decrease in securities gains.
Noninterest expense decreased $131 million due to decreases
of $100 million in personnel costs and $31 million in other
noninterest expense from the year ended December 31, 2013. The
decrease in personnel costs 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 year ended December 31, 2013. Average residential mortgage
loans decreased $1.4 billion from the year ended December 31, 2013
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 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 $76 million from the
year ended December 31, 2013 as payoffs exceeded new loan
production. Average automobile loans increased $108 million from
the year ended December 31, 2013 due to new originations
exceeding run-off.
Investment Advisors
Investment Advisors provides a full range of investment alternatives
for
individuals, companies and not-for-profit organizations.
Investment Advisors is made up of four main businesses: FTS, an
indirect wholly-owned subsidiary of the Bancorp; ClearArc Capital,
Inc., an indirect wholly-owned subsidiary of the Bancorp; Fifth
Third Private Bank; and Fifth Third Institutional Services. FTS
offers full-service retail brokerage services to individual clients and
broker dealer services to the institutional marketplace. ClearArc
Capital, Inc. provides asset management services. Fifth Third
Private Bank offers holistic strategies to affluent clients in wealth
planning, investing, insurance and wealth protection. Fifth Third
Institutional Services provides advisory services for institutional
clients including states and municipalities.
The following table contains selected financial data for the Investment Advisors segment:
TABLE 22: INVESTMENT ADVISORS
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Investment advisory revenue
Other noninterest income
Noninterest expense:
Personnel costs
Other noninterest expense
Income before income taxes
Applicable income tax expense
Net income
Average Balance Sheet Data
Loans and leases, including held for sale
Core deposits
2015
2014
2013
128
3
406
12
170
285
88
30
58
121
3
397
13
162
283
83
29
54
154
2
384
22
159
294
105
37
68
2,805
9,357
2,270
9,535
2,014
8,815
$
$
$
Comparison of the year ended 2015 with 2014
Net income was $58 million for the year ended December 31, 2015
compared to net income of $54 million for the year ended
December 31, 2014. The increase in net income was primarily due
to increases in net interest income and noninterest income partially
offset by an increase in noninterest expense.
Net interest income increased $7 million from the year ended
December 31, 2014 primarily due to increases in interest income on
loans and leases and FTP credits on demand deposits both due to
increases in average balances as well as an increase in FTP credits on
interest checking deposits due to an increase in FTP credit rates.
These increases were partially offset by increases on FTP charges on
loans and leases driven by increases in average balances.
Noninterest income increased $8 million from the year ended
December 31, 2014 primarily due to a $9 million increase in
investment advisory revenue driven by increases in recurring
securities brokerage fees and private client service fees.
Noninterest expense increased $10 million from the year ended
December 31, 2014 primarily due to increases in personnel costs
due to higher incentive compensation and base compensation.
Average loans and leases increased $535 million from the year
ended December 31, 2014 primarily driven by increases in average
residential mortgage loans and average other consumer loans as a
result of increases in new loan origination activity partially offset by
a decrease in average home equity loans as payoffs exceeded new
loan production.
Average core deposits decreased $178 million from the year
ended December 31, 2014 primarily due to a decrease in average
interest checking balances partially offset by increases in average
savings and money market deposits and average demand deposits.
Comparison of the year ended 2014 with 2013
Net income was $54 million for the year ended December 31, 2014
compared to net income of $68 million for the year ended
December 31, 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 the year ended
December 31, 2013 primarily due to a decrease in the FTP credit
rate on certain interest checking deposits.
48 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest income increased $4 million from the year ended
December 31, 2013 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 year ended
December 31, 2013 primarily due to a decrease in other noninterest
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 the year ended 2015 with 2014
Net interest income decreased $24 million from the year ended
December 31, 2014 primarily due to increases in FTP credits on
deposits allocated to business segments driven by increases in
average deposits. The remaining decrease in net interest income was
due to an increase in 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. Results for the year ended December 31, 2015 were
impacted by a benefit of $50 million compared to a benefit of $260
million for the year ended December 31, 2014 due to reductions in
the ALLL.
Noninterest income was $822 million for the year ended
December 31, 2015 compared to $253 million for the year ended
December 31, 2014. The increase in noninterest income included
the impact of a gain of $331 million on the sale of Vantiv, Inc.
shares in the fourth quarter of 2015 compared to a gain of $125
million in 2014. The positive valuation adjustments on the stock
warrant associated with Vantiv Holding, LLC were $236 million and
$31 million for the years ended December 31, 2015 and 2014,
respectively. During the fourth quarter of 2015, the Bancorp
recognized a gain of $89 million on both the sale and exercise of a
portion of the warrant associated with Vantiv Holding, LLC.
Additionally, the Bancorp recognized a gain of $49 million from the
payment from Vantiv, Inc. to terminate a portion of a TRA and also
recognized a gain of $31 million associated with the annual TRA
payment during the fourth quarter of 2015. The Bancorp recognized
a gain of $23 million associated with the TRA during the fourth
quarter of 2014. Equity method earnings from the Bancorp’s
interest in Vantiv Holding, LLC increased $15 million from the year
ended December 31, 2014. Noninterest income also included $37
million in negative valuation adjustments related to the Visa total
return swap for the year ended December 31, 2015 compared to $38
million for the year ended December 31, 2014.
Noninterest expense for the year ended December 31, 2015
was an expense of $64 million compared to a benefit of $15 million
for the year ended December 31, 2014. The increase was primarily
due to an increase in personnel costs and an increase in the
provision for the reserve for unfunded commitments as well as
increases in FDIC insurance and other taxes, donations expense,
technology and communications expense and marketing expense.
expense driven by decreases in operational losses, marketing
expense and corporate overhead allocations.
Average loans and leases increased $256 million from the year
ended December 31, 2013 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 year
ended December 31, 2013 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.
The increase was partially offset by decreased litigation and
regulatory activity and increased corporate overhead allocations
from General Corporate and Other to the other business segments.
Comparison of the year ended 2014 with 2013
Net interest income decreased $146 million from the year ended
December 31, 2013 primarily due to increases in FTP credits on
deposits allocated to business segments driven by increases in
average deposits. The remaining decrease in net interest income was
due to an increase in 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. Results for the year ended December 31, 2014 were
impacted by a benefit of $260 million compared to a benefit of $272
for the year ended December 31, 2013 due to reductions in the
ALLL.
Noninterest income was $253 million for the year ended
December 31, 2014 compared to $654 million for the year ended
December 31, 2013. The year ended December 31, 2014 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 TRA 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 the year ended December 31, 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 $15 million compared to an expense of $161
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.
49 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOURTH QUARTER REVIEW
The Bancorp’s 2015 fourth quarter net income available to common
shareholders was $634 million, or $0.79 per diluted share, compared
to net income available to common shareholders of $366 million, or
$0.45 per diluted share, for the third quarter of 2015 and net income
available to common shareholders of $362 million, or $0.43 per
diluted share, for the fourth quarter of 2014.
Net interest income on an FTE basis was $904 million during
the fourth quarter of 2015 and decreased $2 million from the third
quarter of 2015 and increased $16 million from the fourth quarter
of 2014. The decrease from the third quarter of 2015 was primarily
driven by the impact of the issuance of $2.4 billion of long-term
debt during the third quarter of 2015, the $750 million auto
securitization completed in November of 2015 and commercial loan
yield compression, partially offset by higher average loan balances.
The increase in net interest income in comparison to the fourth
quarter of 2014 was driven by higher investment securities balances,
partially offset by a decline due to changes to the Bancorp’s deposit
advance product beginning January 1, 2015.
Fourth quarter 2015 noninterest income of $1.1 billion
increased $391 million compared to the third quarter of 2015 and
increased $451 million compared to the fourth quarter of 2014. The
increase from the third quarter of 2015 was primarily due to an
increase in other noninterest income. The year-over-year increase
was primarily the result of increases in other noninterest income and
mortgage banking net revenue, partially offset by lower corporate
banking revenue.
Service charges on deposits of $144 million decreased $1
million from the previous quarter and increased $2 million
compared to the fourth quarter of 2014. The decrease from the
third quarter of 2015 was primarily due to a decrease in retail service
charges due to lower overdraft occurrences. The increase from the
fourth quarter of 2014 was driven by an increase in commercial
service charges due to an increase in activity from existing
customers and new customer acquisition.
Corporate banking revenue of $104 million was flat compared
to the previous quarter and decreased $16 million from the fourth
quarter of 2014. The year-over-year decrease was driven by lower
loan syndications revenue, foreign exchange fees and business
lending fees, partially offset by higher lease remarketing and
institutional sales revenue. The decrease in syndication fees from the
fourth quarter of 2014 was the result of decreased activity in the
market and the Bancorp’s reduced leveraged loan appetite.
Mortgage banking net revenue was $74 million in the fourth
quarter of 2015 compared to $71 million in the third quarter of 2015
and $61 million in the fourth quarter of 2014. Fourth quarter 2015
originations were $1.8 billion, compared with $2.3 billion in the
previous quarter and $1.7 billion in the fourth quarter of 2014.
Fourth quarter 2015 originations resulted in gains of $37 million on
mortgages sold, compared with gains of $46 million during the
previous quarter and $36 million during the fourth quarter of 2014.
The decrease from the prior quarter was driven by lower production
due to an increase in interest rates during the fourth quarter of 2015.
The increase from the prior year was due to stronger refinancing
activity during the fourth quarter of 2015. Gross mortgage servicing
fees were $53 million in the fourth quarter of 2015, $54 million in
the third quarter of 2015 and $60 million in the fourth quarter of
2014. 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 adjustments
on free-standing derivatives used to economically hedge the MSR
portfolio. These net servicing asset valuation adjustments were
negative $16 million and negative $29 million in the fourth and third
50 Fifth Third Bancorp
quarters of 2015, respectively, and negative $34 million in the fourth
quarter of 2014.
Investment advisory revenue of $102 million decreased $1
million from the previous quarter and increased $2 million from the
fourth quarter of 2014. The decline from the third quarter of 2015
was due to a decrease in securities and brokerage fees. The year-
over-year increase was due to an increase in private client services
revenue.
Card and processing revenue of $77 million was flat compared
to the third quarter of 2015 and increased $1 million compared to
the fourth quarter of 2014. The increase from the prior year was
driven by an increase in the number of actively used cards and an
increase in customer spend volume.
Other noninterest income of $602 million increased $389
million compared to the third quarter of 2015 and increased $452
million from the fourth quarter of 2014. Fourth quarter 2015 results
included a $331 million gain on the sale of Vantiv, Inc. shares, an
$89 million gain on both the sale and exercise of a portion of the
warrant associated with Vantiv, Holding, LLC, a $49 million gain
from a payment received from Vantiv, Inc. to terminate a portion of
the TRA, a $31 million gain from Vantiv, Inc. pursuant to the TRA
and a $21 million positive valuation adjustment on the Vantiv
Holding, LLC warrant. This compares with a $130 million positive
warrant valuation adjustment in the third quarter of 2015, and a $56
million positive warrant valuation adjustment in the fourth quarter
of 2014 as well as $23 million in gains pursuant to Fifth Third’s
TRA with Vantiv Holding, LLC recognized in the fourth quarter of
2014. 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 $10 million, $8 million and $19 million in the fourth quarter of
2015, the third quarter of 2015 and the fourth quarter of 2014,
respectively.
The net gains on investment securities were $1 million in the
fourth quarter of 2015 and $4 million in the fourth quarter of 2014.
There were no net gains on investment securities during the third
quarter of 2015.
Noninterest expense of $963 million increased $20 million
from the previous quarter and increased $45 million from the fourth
quarter of 2014. The increase in noninterest expense compared to
the third quarter of 2015 was driven by a $10 million contribution to
the Fifth Third Foundation and higher net occupancy expense. The
increase in noninterest expense from the fourth quarter of 2014 was
primarily due to a $10 million contribution to the Fifth Third
Foundation, higher personnel costs, net occupancy expense and
technology and communications expense.
The ALLL as a percentage of portfolio loans and leases was
1.37% as of December 31, 2015, compared to 1.35% as of
September 30, 2015 and 1.47% as of December 31, 2014. The
provision for loan and lease losses was $91 million in the fourth
quarter of 2015 compared to $156 million in the third quarter of
2015 and $99 million in the fourth quarter of 2014. Net charge-offs
were $80 million in the fourth quarter of 2015, or 34 bps of average
portfolio loans and leases on an annualized basis, compared with net
charge-offs of $188 million in the third quarter of 2015 and $191
million in the fourth quarter of 2014. The third quarter of 2015
included a charge-off of $102 million associated with the
restructuring of a student loan backed commercial credit originated
in 2007. 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 $87 million.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 23: QUARTERLY INFORMATION (unaudited)
2015
2014
For the three months ended ($ in millions, except per share data)
12/31
9/30
Net interest income(a)
Provision for loan and lease losses
Noninterest income
Noninterest expense
Net income attributable to Bancorp
Net income available to common shareholders
Earnings per share, basic
Earnings per share, diluted
(a) Amounts presented on an FTE basis. The FTE adjustment was $5 for all periods presented.
$ 904
91
1,104
963
657
634
0.80
0.79
906
156
713
943
381
366
0.46
0.45
6/30
892
79
556
947
315
292
0.36
0.36
3/31
12/31
9/30
852
69
630
923
361
346
0.42
0.42
888
99
653
918
385
362
0.44
0.43
908
71
520
888
340
328
0.39
0.39
6/30
905
76
736
954
439
416
0.49
0.49
3/31
898
69
564
950
318
309
0.36
0.36
COMPARISON OF THE YEAR ENDED 2014 WITH 2013
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
dividends. 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 provision for loan and lease losses increased to
$315 million during the year ended December 31, 2014 compared to
$229 million during the year ended December 31, 2013 as the result
of an increase in net charge-offs related to certain impaired
commercial and industrial loans and an increase in net charge-offs
loans related to the transfer of certain residential mortgage loans
from the portfolio to held for sale during 2014. The impact of these
increases in charge-offs on provision expense during the year ended
December 31, 2014 was partially offset by decreases
in
nonperforming loans and leases and improved delinquency metrics.
Net charge-offs as a percent of average portfolio loans and leases
increased to 0.64% during 2014 compared to 0.58% during the year
ended December 31, 2013.
Net interest income was $3.6 billion for both of the years
ended December 31, 2014 and 2013. For the year ended December
31, 2014, net interest income was positively impacted by an increase
in average taxable securities of $5.4 billion coupled with an increase
in yields on these securities of 16 bps 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 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.
Noninterest income decreased $754 million during the year
ended December 31, 2014 compared to the year ended December
31, 2013. The decrease from December 31, 2013 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 2013 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 year ended December 31, 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 the TRA with Vantiv, Inc. in the fourth quarters of
2014 and 2013, respectively. Additionally, other noninterest income
decreased for the year ended December 31, 2014 compared to 2013
primarily due to positive valuation adjustments on the stock warrant
associated with Vantiv Holding, LLC of $31 million during 2014
compared to positive valuation adjustments of $206 million during
2013 and a decrease in equity method earnings from Vantiv
Holding, LLC.
Noninterest expense decreased $252 million during the year
ended December 31, 2014 compared to 2013 primarily due to
decreases in total personnel costs and other noninterest expense.
The decrease in total personnel costs was 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 during
the year ended December 31, 2014 compared to 2013 primarily due
to decreases in loan and lease expense, FDIC insurance and other
taxes,
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.
adjustments, marketing
losses
and
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 commercial loans and leases based upon
their primary purpose and consumer loans and leases based upon
product or collateral. Table 24 summarizes end of period loans and
leases, including loans held for sale and Table 25 summarizes
average total loans and leases, including loans held for sale.
$
2015
TABLE 24: COMPONENTS OF TOTAL LOANS AND LEASES (INCLUDING HELD FOR SALE)
As of December 31 ($ in millions)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
Consumer loans and leases:
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total consumer loans and leases
Total loans and leases
Total portfolio loans and leases (excluding loans held for sale)
14,424
8,336
11,497
2,360
658
37,275
93,485
92,582
42,151
6,991
3,214
3,854
56,210
$
$
2014
2013
2012
2011
40,801
7,410
2,071
3,721
54,003
13,582
8,886
12,037
2,401
436
37,342
91,345
90,084
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
Loans and leases, including loans held for sale, increased $2.1
billion, or 2%, from December 31, 2014. The increase in loans and
leases from December 31, 2014 was the result of a $2.2 billion, or
4%, increase in commercial loans and leases partially offset by a $67
million decrease in consumer loans and leases.
Commercial loans and leases increased from December 31,
2014 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 $1.4 billion, or 3%, from December 31, 2014 and
commercial construction loans increased $1.1 billion, or 55%, from
December 31, 2014 primarily as a result of an increase in new loan
origination activity resulting from an increase in demand and
targeted marketing efforts. Commercial mortgage loans decreased
$419 million, or 6%, from December 31, 2014 primarily due to a
decline in new loan origination activity driven by increased
competition and an increase in paydowns.
Consumer loans and leases decreased from December 31, 2014
primarily due to decreases in home equity and automobile loans
partially offset by increases in residential mortgage loans and other
consumer loans and leases. Home equity decreased $550 million, or
6%, from December 31, 2014 and automobile loans decreased $540
million, or 4%, from December 31, 2014 as payoffs exceeded new
loan production. Residential mortgage loans increased $842 million,
or 6%, from December 31, 2014 primarily due to the continued
retention of certain conforming ARMs and certain other fixed-rate
loans originated during the year ended December 31, 2015. Other
consumer loans and leases increased $222 million, or 51%, from
December 31, 2014 primarily as a result of an increase in new loan
origination activity.
$
2015
2014
TABLE 25: COMPONENTS OF TOTAL AVERAGE LOANS AND LEASES (INCLUDING HELD FOR SALE)
For the years ended December 31 ($ in millions)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
Consumer loans and leases:
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total consumer loans and leases
Total average loans and leases
Total average portfolio loans and leases (excluding loans held for sale)
13,344
9,059
12,068
2,271
385
37,127
91,127
90,485
13,798
8,592
11,847
2,303
571
37,111
93,339
92,423
41,178
7,745
1,492
3,585
54,000
42,594
7,121
2,717
3,796
56,228
$
$
2013
2012
2011
37,770
8,481
793
3,565
50,609
14,428
9,554
12,021
2,121
360
38,484
89,093
86,950
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
Average loans and leases, including loans held for sale, increased
$2.2 billion, or 2%, from December 31, 2014. The increase from
December 31, 2014 was the result of a $2.2 billion, or 4%, increase
in average commercial loans and leases partially offset by a $16
million decrease in average consumer loans and leases.
52 Fifth Third Bancorp
loans and
Average commercial
from
in average
increases
December 31, 2014 primarily due
loans and average commercial
commercial and
construction
in average
loans partially offset by a decrease
commercial mortgage loans. Average commercial and industrial
increased
industrial
leases
to
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
loans increased $1.4 billion, or 3%, from December 31, 2014 and
average commercial construction loans increased $1.2 billion, or
82%, from December 31, 2014 primarily as a result of an increase in
new loan origination activity resulting from an increase in demand
and targeted marketing efforts. Average commercial mortgage loans
decreased $624 million, or 8%, from December 31, 2014 due to a
decline in new loan origination activity driven by increased
competition and an increase in paydowns.
Average consumer loans and leases decreased from December
31, 2014 primarily due to decreases in average home equity and
average automobile loans partially offset by increases in average
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, 2015, total investment
securities were $29.5 billion compared to $23.0 billion at December
31, 2014. The taxable investment securities portfolio had an
effective duration of 5.1 years at December 31, 2015 compared to
4.5 years at December 31, 2014.
At December 31, 2015, the Bancorp’s investment portfolio
consisted primarily of AAA-rated available-for-sale securities.
Securities classified as below investment grade were immaterial as of
December 31, 2015 and 2014. The Bancorp’s management has
evaluated the securities in an unrealized loss position in the
TABLE 26: COMPONENTS OF INVESTMENT SECURITIES
As of December 31 ($ in millions)
Available-for-sale and other securities: (amortized cost basis)
U.S. Treasury and federal agencies securities
Obligations of states and political subdivisions securities
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 securities: (amortized cost basis)
Obligations of states and political subdivisions securities
Asset-backed securities and other debt securities
Total held-to-maturity securities
Trading securities: (fair value)
U.S. Treasury and federal agencies securities
Obligations of states and political subdivisions securities
Mortgage-backed securities:
Agency residential mortgage-backed securities
Non-agency residential mortgage-backed securities
residential mortgage loans and average other consumer loans and
leases. Average home equity decreased $467 million, or 5%, from
December 31, 2014 and average automobile loans decreased $221
million, or 2%, from December 31, 2014 as payoffs exceeded new
loan production. Average residential mortgage loans increased $454
million, or 3%, from December 31, 2014 primarily driven by the
continued retention of certain conforming ARMs and certain other
fixed-rate loans. Average other consumer loans and leases increased
$186 million, or 48%, from December 31, 2014 primarily as a result
of an increase in new loan origination activity.
available-for-sale and held-to-maturity portfolios for OTTI. The
Bancorp recognized $5 million, $24 million and $74 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 Consolidated Statements of
Income during the years ended December 31, 2015, 2014 and 2013,
respectively. The Bancorp did not recognize OTTI on any of its
available-for-sale equity securities or held-to-maturity debt securities
during the years ended December 31, 2015, 2014 and 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.
2015
2014
2013
2012
2011
$
$
$
$
$
1,155
50
14,811
7,795
-
2,801
1,363
703
28,678
68
2
70
19
9
1,545
185
1,549
187
11,968
4,465
-
1,489
1,324
701
21,677
186
1
187
14
8
12,294
-
-
1,368
2,146
865
18,409
207
1
208
5
13
1,771
203
8,403
-
-
1,089
2,072
1,033
14,571
282
2
284
7
17
1,953
96
9,743
-
28
498
1,266
1,030
14,614
320
2
322
-
9
6
-
19
333
386
9
-
13
316
360
3
-
7
315
343
7
-
15
161
207
11
1
12
144
177
Asset-backed securities and other debt securities
Equity securities
Total trading securities
(a) Equity securities consist of FHLB, FRB and DTCC restricted stock holdings that are carried at par, FHLMC and FNMA preferred stock holdings and certain mutual fund holdings and equity
$
security holdings.
On an amortized cost basis, available-for-sale and other securities
increased $7.0 billion, or 32%, from December 31, 2014 primarily
due to repositioning of the portfolio for LCR purposes resulting in
increases in agency residential mortgage-backed securities, agency
commercial mortgage-backed securities and non-agency commercial
mortgage-backed securities. Agency residential mortgage-backed
securities increased $2.8 billion, or 24%, from December 31, 2014
primarily due to the purchase of $18.8 billion of agency residential
mortgage-backed securities partially offset by sales of $13.6 billion
and paydowns of $2.5 billion during the year ended December 31,
2015. Agency commercial mortgage-backed securities increased $3.3
billion, or 75%, from December 31, 2014 primarily due to the
purchase of $5.6 billion of agency commercial mortgage-backed
securities partially offset by sales of $2.1 billion and paydowns of
$146 million during the year ended December 31, 2015. Non-agency
commercial mortgage-backed securities increased $1.3 billion, or
88%, from December 31, 2014 primarily due to the purchase of $1.9
billion of non-agency commercial mortgage-backed securities
53 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
partially offset by sales of $483 million and paydowns of $105
million during the year ended December 31, 2015.
On an amortized cost basis, available-for-sale and other
securities were 23% and 18% of total interest-earning assets at
December 31, 2015 and 2014, respectively. The estimated weighted-
average life of the debt securities in the available-for-sale and other
portfolio was 6.4 years at December 31, 2015 compared to 5.8 years
at December 31, 2014. In addition, at December 31, 2015, the
available-for-sale and other securities portfolio had a weighted-
average yield of 3.19% compared to 3.31% at December 31, 2014.
Information presented in Table 27 is on a weighted-average life
is
basis, anticipating future prepayments. Yield
information
presented on an FTE basis and is computed using amortized cost
balances. Maturity and yield calculations for the total available-for-
sale and other 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 $366 million at December 31,
2015 compared to $731 million at December 31, 2014. The decrease
from December 31, 2014 was primarily due to an increase in interest
rates and wider spreads during the year ended December 31, 2015.
The fair value of investment securities is impacted by interest rates,
credit spreads, market volatility and liquidity conditions. The fair
value of investment securities generally increases when interest rates
decrease or when credit spreads contract.
TABLE 27: CHARACTERISTICS OF AVAILABLE-FOR-SALE AND OTHER SECURITIES
As of December 31, 2015 ($ in millions)
U.S. Treasury and federal agencies securities:
Average life of 1 year or less
Average life 1 – 5 years
Average life 5 – 10 years
Total
Obligations of states and political subdivisions securities:(a)
Average life of 1 year or less
Average life 1 – 5 years
Average life 5 – 10 years
Total
Agency residential mortgage-backed securities:
Average life of 1 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:
Amortized Cost
Fair Value
Life (in years)
Yield
Weighted-Average Weighted-Average
$
$
$
$
549
530
76
1,155
14
1
35
50
13
4,992
9,154
652
14,811
561
550
76
1,187
14
1
37
52
14
5,106
9,295
666
15,081
0.70
1.50
5.10
1.30
0.80
1.80
7.30
5.30
0.70
3.90
6.50
12.90
5.90
3.76 %
3.97
1.80
3.72 %
0.01
5.79
3.93
2.80 %
4.15
3.49
3.18
3.45
3.30 %
$
4.40
8.20
13.10
7.80
1,083
6,585
194
7,862
1,063
6,542
190
7,795
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 1 year or less
Average life 1 – 5 years
Average life 5 – 10 years
Total
Asset-backed securities and other debt securities:
Average life of 1 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) Taxable-equivalent yield adjustments included in the above table are 0.00%, 0.24%, 2.09% and 1.46% for securities with an average life of 1 year or less, 1-5 years, 5-10 years and in total,
87
607
199
462
1,355
703
29,044
89
606
207
461
1,363
703
28,678
2.17
2.73
2.62
2.10
2.46 %
0.20
2.70
8.30
14.00
7.20
3.09
3.26
3.30
3.29 %
3.11
2.99
2.86
3.01 %
117
365
2,319
2,801
118
370
2,316
2,804
0.50
2.80
8.10
7.10
3.19 %
6.40
$
$
$
respectively.
54 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 average asset funding base for both of the years ended
December 31, 2015 and 2014.
TABLE 28: COMPONENTS OF 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(a)
Other
Total deposits
(a)
2015
36,267
26,768
14,601
18,494
464
96,594
4,019
100,613
2,592
-
103,205
$
$
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
Includes $1,449, $1,483, $1,479, $1,402 and $1,772 of certificates $250,000 and over at December 31, 2015, 2014, 2013, 2012 and 2011, respectively.
Core deposits increased $1.8 billion, or 2%, from December 31,
2014, driven by an increase of $1.7 billion, or 2%, in transaction
deposits. Transaction deposits increased from December 31, 2014
due to increases in demand deposits and money market deposits,
partially offset by decreases in savings deposits and foreign office
deposits. Demand deposits increased $1.5 billion, or 4%, from
December 31, 2014 primarily due to higher balances per customer
account and the acquisition of new commercial customers. Money
market deposits increased $1.4 billion, or 8%, from December 31,
2014 driven primarily by higher balances per commercial account
and the acquisition of new commercial customers. The remaining
increase in money market deposits was due to a promotional
product offering causing balance migration from savings deposits
which decreased $450 million, or 3%, from December 31, 2014.
Foreign office deposits decreased $650 million, or 58%, from
December 31, 2014 driven primarily by lower balances per
commercial account.
The Bancorp uses certificates $100,000 and over as a method
to fund earning assets. At December 31, 2015, certificates $100,000
and over decreased $303 million, or 10%, compared to December
31, 2014 primarily due to the maturity and run-off of retail and
institutional certificates of deposit since December 31, 2014.
The following table presents the components of average deposits for the years ended December 31:
TABLE 29: COMPONENTS OF AVERAGE DEPOSITS
($ in millions)
Demand
Interest checking
Savings
Money market
Foreign office
Transaction deposits
Other time
Core deposits
Certificates $100,000 and over(a)
Other
Total average deposits
(a)
2015
35,164
26,160
14,951
18,152
817
95,244
4,051
99,295
2,869
57
102,221
$
$
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
Includes $1,410, $1,424, $1,283, $1,678 and $1,732 of average certificates $250,000 and over during the years ended December 31, 2015, 2014, 2013, 2012 and 2011, respectively.
On an average basis, core deposits increased $5.8 billion, or 6%,
compared to December 31, 2014 due to increases of $5.5 billion, or
6%, in average transaction deposits and $289 million, or 8%, in
average other time deposits. The increase in average transaction
deposits was driven by increases in average money market deposits,
average demand deposits and average interest checking deposits,
partially offset by decreases in average savings deposits and average
foreign office deposits. Average money market deposits increased
$3.5 billion, or 24%, from December 31, 2014 due to a balance
migration from average savings deposits which decreased $1.1
billion, or 7%, from December 31, 2014 driven by a promotional
product offering. The remaining increase in average money market
deposits was due to an increase in average commercial account
balances and the acquisition of new commercial customers. Average
demand deposits increased $3.4 billion, or 11%, from December 31,
2014 primarily due to an increase in average commercial account
balances and new commercial customer accounts. Average interest
checking deposits increased $778 million, or 3%, from December
31, 2014 primarily due to an increase in average commercial account
balances and new commercial customer accounts. Average foreign
office deposits decreased $1.0 billion, or 55%, from December 31,
2014 primarily due to lower balances per account for commercial
customers. Average other time deposits increased $289 million, or
8%, from December 31, 2014 primarily driven by the acquisition of
new customers due
interest rates. Average
certificates $100,000 and over decreased $1.1 billion, or 27%, from
December 31, 2014 due primarily to the maturity and run-off of
retail and institutional certificates of deposit since December 31,
2014.
to promotional
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, 2015 are summarized in the following table:
TABLE 30: CONTRACTUAL MATURITIES OF CERTIFICATES $100,000 AND OVER
($ in millions)
Next 3 months
3-6 months
6-12 months
After 12 months
Total certificates $100,000 and over
2015
401
203
237
1,751
2,592
$
$
The contractual maturities of other time deposits and certificates $100,000 and over as of December 31, 2015 are summarized in the following
table:
TABLE 31: 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 other time deposits and certificates $100,000 and over
2015
2,425
1,570
637
1,025
930
24
6,611
$
$
Borrowings
Total borrowings increased $835 million, or 5%, from December
31, 2014. Table 32 summarizes the end of period components of
total borrowings. As of December 31, 2015, total borrowings as a
percentage of interest-bearing liabilities were 21% compared to 20%
at December 31, 2014.
2015
151
1,507
15,844
17,502
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
$
$
securitization in 2015. These increases were partially offset by the
maturity of $500 million of subordinated fixed-rate bank notes and
$1.7 billion of paydowns on long-term debt associated with
automobile
information
regarding automobile securitizations and long-term debt, refer to
Note 11 and Note 16, respectively, of the Notes to Consolidated
Financial Statements.
securitizations. For additional
loan
2015
920
1,721
14,677
17,318
$
$
2014
458
1,873
12,928
15,259
2013
2012
2011
503
3,024
7,914
11,441
560
4,246
9,043
13,849
345
2,777
10,154
13,276
Information on the average rates paid on borrowings is presented in
the Net Interest Income subsection of the Statements of Income
Analysis section of MD&A. In addition, refer to the Liquidity Risk
Management subsection of the Risk Management section of MD&A
for a discussion on the role of borrowings in the Bancorp’s liquidity
management.
TABLE 32: COMPONENTS OF BORROWINGS
As of December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total borrowings
Other short-term borrowings decreased $49 million, or 3%, from
December 31, 2014 driven primarily by a decrease in commercial
repurchase agreements. Long-term debt increased $877 million, or
6%, from December 31, 2014 primarily driven by issuances of $1.1
billion of unsecured senior notes, $1.3 billion of unsecured senior
bank notes and the issuance of asset-backed securities by a
consolidated VIE of $750 million related to an automobile loan
TABLE 33: COMPONENTS OF AVERAGE BORROWINGS
For the years ended December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total average borrowings
Average total borrowings increased $2.1 billion, or 13%, compared
to December 31, 2014, due to increases in average long-term debt
and average federal funds purchased, partially offset by a decrease in
average other short-term borrowings. The increase in average long-
term debt of $1.7 billion, or 14%, was driven primarily by the
issuances of long-term debt as discussed above and the issuance of
asset-backed securities by a consolidated VIE of $1.0 billion related
to an automobile loan securitization during the fourth quarter of
2014. The impact of these issuances was partially offset by the
aforementioned maturity of subordinated fixed-rate bank notes and
paydowns on long-term debt associated with automobile loan
securitizations since December 31, 2014. 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.
56 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISK MANAGEMENT - OVERVIEW
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 operating model. Management within the lines of
business and support functions assess and manage risks associated
with their activities and determine if actions need to be taken to
strengthen risk management or reduce risk given their risk profile.
They are responsible for considering risk when making business
decisions and for integrating risk management into business
processes. 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
management practices
and
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 5% 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; however certain risk types also have quantitative metrics that
are used to measure the Bancorp’s level of risk against its risk
tolerances. 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 current assessments of each of the eight risk types relative
to
these
assessments, including policy limits and key risk indicators, is also
reported to the Risk and Compliance Committee of the Board. Any
results outside of tolerance require the development of an action
plan that describes actions to be taken to return the measure to
within the tolerance.
tolerance. Information supporting
the established
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:
•
•
•
•
•
•
•
•
•
including
ERM 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
the oversight of
effective risk governance,
Sarbanes-Oxley compliance;
Commercial Credit Risk Management is responsible for
overseeing the safety and soundness of the commercial loan
independent portfolio management
portfolio within an
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;
Consumer Credit Risk Management
is responsible for
overseeing the safety and soundness of the consumer
portfolio within an independent management framework that
supports the Bancorp’s consumer loan growth strategies,
ensuring portfolio optimization, appropriate risk controls
and oversight, reporting, and monitoring of underwriting and
credit administration processes;
Operational Risk Management works with lines of business
and regional management 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
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 provides
independent oversight to ensure that an enterprise-wide
framework, including processes and procedures, are in place
to comply with applicable laws, regulations, rules and other
regulatory requirements; internal policies and procedures;
and principles of integrity and fair dealing applicable to the
Bancorp’s activities and functions The Bancorp focuses on
managing regulatory compliance risk in accordance with the
Bancorp’s integrated risk management framework, which
identifying, assessing,
ensures consistent processes for
managing, monitoring and reporting risks; and
The ERM division creates and maintains other functions,
committees or processes as are necessary to effectively
oversee risk management throughout the Bancorp.
liquidity,
57 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, regional market
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
Operational Risk Committee,
the Management Compliance
Committee, the Asset/Liability Committee and the Enterprise
Marketing Committee. Other committees accountable to the ERMC
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
strategy
three core principles: conservatism,
diversification and monitoring. The Bancorp believes that effective
credit risk management begins with conservative lending practices.
These practices include conservative exposure and counterparty
limits and conservative underwriting, documentation and collection
standards. The 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
oversee the ALLL, capital, model risk and regulatory change
management functions. There are also new products and initiatives
processes applicable to every line of business to ensure an
appropriate standard readiness assessment is performed before
launching a new product or initiative. Significant risk policies
approved by the management governance committees are also
reviewed and approved by the Risk and Compliance Committee of
the Board of Directors.
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.
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
nonaccrual loan 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 portfolio loans and leases as of December 31:
TABLE 34: POTENTIAL PROBLEM PORTFOLIO LOANS AND LEASES
2015 ($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total potential problem portfolio loans and leases
TABLE 35: POTENTIAL PROBLEM PORTFOLIO LOANS AND LEASES
2014 ($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total potential problem portfolio loans and leases
Carrying
Value
1,383
170
6
36
1,595
Carrying
Value
1,022
272
7
29
1,330
$
$
$
$
Unpaid
Principal
Balance
1,384
171
6
36
1,597
Unpaid
Principal
Balance
1,028
273
7
29
1,337
Exposure
1,922
172
7
39
2,140
Exposure
1,344
273
11
29
1,657
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.
58 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
issued a final standard regarding proposed
the FASB has
methodology changes to the determination of credit impairment as
outlined in the FASB’s Proposed ASU–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 continues to improve, and GDP is expected to
maintain its modest expansionary pattern. The U.S. job market is
slowly but steadily improving. Housing prices have largely stabilized
and are increasing in many markets. However, overall current
economic and competitive conditions are causing weaker than
desired qualified loan growth, that combined with a weakness in
global economic conditions and a relatively low interest rate
environment, may directly or indirectly impact the Bancorp’s growth
and profitability.
Among consumer portfolios,
residential mortgage and
brokered home equity portfolios exhibited the most stress. As of
December 31, 2015, consumer real estate loans originated from
2005 through 2008 represent approximately 20% of the consumer
real estate portfolio and approximately 60% of total losses for the
year ended December 31, 2015. Loss rates continue to improve as
newer vintages are performing within expectations. Currently, the
level of new commercial real estate fundings is slightly above the
amortization and payoff of the portfolio with growth in the
commercial construction portfolio as
those markets have
rebounded. The Bancorp continues to engage in 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 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. 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
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
loans. As of December 31, 2015, repurchased loans restructured or
refinanced under
the
these programs were
Consolidated Financial Statements. Additionally, as of December
in trial modifications
immaterial
to
31, 2015 and 2014, $14 million and $22 million, respectively, of
loans refinanced under HARP 2.0 were included in loans held for
sale in the Consolidated Balance Sheets. For the years ended
December 31, 2015 and 2014, the Bancorp recognized $6 million
and $13 million, respectively, of noninterest income in mortgage
banking net revenue in the Consolidated Statements of Income
related to the sale of loans restructured or refinanced under the
HAMP and HARP 2.0 programs.
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.
$1.7 billion,
At December 31, 2015, the Bancorp’s non-power producing
energy portfolio balance was
representing
approximately 2% of total loans and leases. This portfolio continues
to be an important part of the Bancorp’s commercial business
strategy. Due to the sensitivity of this portfolio to downward
movements in oil prices, the Bancorp has seen migration in the
portfolio
into criticized classifications during 2015. When
establishing the ALLL, all portfolio and general economic factors
are considered, including the level of criticized assets and the level
of commodity prices.
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
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
59 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 36: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION
As of December 31, 2015 ($ in millions)
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Total
LTV > 100% LTV 80-100% LTV < 80%
2,063
2,032
4,095
119
120
239
216
194
410
$
$
TABLE 37: 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 < 80%
1,982
2,423
4,405
148
243
391
248
333
581
$
$
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 38: COMMERCIAL LOAN AND LEASE PORTFOLIO (EXCLUDING LOANS HELD FOR SALE)
As of December 31 ($ in millions)
By Industry:
Manufacturing
Real estate
Financial services and insurance
Healthcare
Business services
Wholesale trade
Retail trade
Transportation and warehousing
Communication and information
Accommodation and food
Construction
Mining
Utilities
Entertainment and recreation
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
Florida
Illinois
Indiana
North Carolina
Tennessee
Kentucky
Pennsylvania
All other states
Total
Outstanding
2015
Exposure
Nonaccrual
Outstanding
2014
Exposure
Nonaccrual
$
$
10,572
6,494
5,896
4,676
4,471
4,082
3,764
3,111
2,913
2,507
1,871
1,499
1,217
1,210
864
495
368
139
7
56,156
1 %
4
10
8
24
53
100 %
16 %
8
8
7
5
4
3
3
3
43
100 %
20,422
10,293
13,021
6,879
6,765
7,254
7,391
4,619
5,052
4,104
3,403
2,695
2,854
2,066
1,188
562
527
187
6
99,288
1
3
8
7
21
60
100
17
7
7
8
5
4
3
3
3
43
100
70
40
3
22
96
23
8
1
2
6
8
36
-
4
10
-
4
2
6
341
7
10
25
25
15
18
100
8
9
12
20
4
1
-
1
2
43
100
10,315
5,392
6,097
4,133
4,644
4,314
3,754
3,012
2,409
1,712
1,864
1,862
1,044
1,451
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
8,612
13,557
6,322
7,109
8,004
7,190
4,276
4,140
2,945
3,352
3,323
2,551
2,321
1,207
658
444
201
17
96,725
1
3
9
7
22
58
100
20
8
6
8
5
4
3
3
2
41
100
55
32
20
20
79
62
22
1
3
9
25
3
-
10
11
-
11
4
-
367
6
15
22
19
24
14
100
11
11
17
6
5
2
-
2
7
39
100
61 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Bancorp has identified certain categories of loans which it
believes represent a higher level of risk compared to the rest of the
Bancorp’s commercial loan portfolio, due to economic or market
conditions within the Bancorp’s key lending areas.
The following tables provide an analysis of nonowner-occupied commercial real estate loans (excluding loans held for sale):
TABLE 39: NONOWNER-OCCUPIED COMMERCIAL REAL ESTATE(a)
As of December 31, 2015 ($ in millions)
By State:
Ohio
Florida
Illinois
Michigan
North Carolina
Indiana
All other states
$
Outstanding
Exposure
90 Days
Past Due
Nonaccrual
For the Year Ended
December 31, 2015
Net Charge-offs
(Recoveries)
1,334
687
650
598
375
294
2,467
6,405
1,594
1,041
1,028
722
669
521
4,383
9,958
-
-
-
-
-
-
-
-
7
9
2
13
-
-
4
35
(2)
2
-
7
(1)
-
11
17
Total
(a)
$
Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.
TABLE 40: NONOWNER-OCCUPIED COMMERCIAL REAL ESTATE(a)
As of December 31, 2014 ($ in millions)
By State:
Outstanding
Exposure
90 Days
Past Due
Nonaccrual
For the Year Ended
December 31, 2014
Net Charge-offs
(Recoveries)
$
Ohio
Florida
Illinois
Michigan
North Carolina
Indiana
All other states
7
16
6
9
-
-
19
57
$
Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.
1,685
871
964
797
537
344
3,560
8,758
1,283
575
449
724
369
250
1,865
5,515
-
-
-
-
-
-
-
-
Total
(a)
(1)
5
2
8
-
-
4
18
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 ARM 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 $846 million of ARM loans will have
rate resets during the next twelve months. Of those resets, 89% are
expected to experience an increase in rate, with an average increase
of approximately one third of a percent.
Certain residential mortgage products have contractual features
that may increase credit exposure to the Bancorp in the event of a
decline in housing values. These types of mortgage products offered
by the Bancorp include loans with high LTV ratios, multiple loans
on the same collateral that when combined result in a LTV greater
than 80% and interest-only loans. The Bancorp has deemed
residential mortgage loans with greater than 80% LTV ratios and no
mortgage insurance as loans that represent a higher level of risk.
62 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides an analysis of the residential mortgage portfolio loans outstanding by LTV at origination:
TABLE 41: RESIDENTIAL MORTGAGE PORTFOLIO LOANS BY LTV AT ORIGINATION
2015
2014
As of December 31 ($ in millions)
LTV ≤ 80%
LTV > 80%, with mortgage insurance
LTV > 80%, no mortgage insurance
Total
Outstanding
Weighted-
Average LTV
Outstanding
Average LTV
Weighted-
$
$
10,198
1,300
2,218
13,716
65.6 % $
93.3
96.0
9,220
1,206
1,963
73.4 % $
12,389
65.1 %
93.8
96.2
73.0 %
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 42: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
As of December 31, 2015 ($ in millions)
By State:
Ohio
Illinois
Michigan
Florida
Indiana
North Carolina
Kentucky
All other states
Total
Outstanding
90 Days
Past Due Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2015
$
517
375
280
278
137
108
84
439
$
2,218
2
-
1
1
1
-
1
-
6
4
1
1
4
1
1
-
1
13
3
1
2
-
-
-
-
-
6
TABLE 43: 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
90 Days
Past Due Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2014
$
$
509
293
265
247
126
100
78
345
1,963
1
1
1
1
1
1
-
-
6
10
4
5
5
2
1
1
2
30
22
3
11
3
3
-
2
2
46 (a)
Includes $34 in charge-offs related to the transfer of $720 restructured residential mortgage loans from the portfolio to loans held for sale during the fourth quarter of 2014.
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.
for
The prescriptive
delinquency trends, LTV trends and refreshed FICO score trends.
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
63 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
equity loans and 80% or less LTV home equity loans were $2.7
billion and $5.6 billion, respectively, as of December 31, 2015. Of
the total $8.3 billion of outstanding home equity loans:
85% reside within the Bancorp’s Midwest footprint of
Ohio, Michigan, Kentucky, Indiana and Illinois as of
December 31, 2015;
35% are in senior lien positions and 65% are in junior lien
positions at December 31, 2015;
Over 80% of non-delinquent borrowers made at least one
payment greater than the minimum payment during the
year ended December 31, 2015; and
The portfolio had an average refreshed FICO score of 742
and 740 at December 31, 2015 and 2014, respectively.
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 subsection of
the Risk
Management section of MD&A for more information.
The following table provides an analysis of home equity portfolio loans outstanding disaggregated based upon refreshed FICO score as of:
TABLE 44: HOME EQUITY PORTFOLIO LOANS OUTSTANDING BY REFRESHED FICO SCORE
($ in millions)
Senior Liens:
FICO < 620
FICO 621-719
FICO > 720
Total senior liens
Junior Liens:
FICO < 620
FICO 621-719
FICO > 720
Total junior liens
Total
December 31, 2015
% of
Total
December 31, 2014
$
$
159
563
2,210
2,932
389
1,399
3,581
5,369
8,301
2 %
7
26
35
5
17
43
65
100 %
$
$
178
613
2,257
3,048
471
1,542
3,825
5,838
8,886
% of
Total
2 %
7
25
34
6
17
43
66
100 %
64 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Bancorp believes that home equity portfolio 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 portfolio loans outstanding in a senior and junior lien position by LTV at origination:
TABLE 45: HOME EQUITY PORTFOLIO LOANS OUTSTANDING BY LTV AT ORIGINATION
As of December 31 ($ in millions)
Senior Liens:
LTV ≤ 80%
LTV > 80%
Total senior liens
Junior Liens:
LTV ≤ 80%
LTV > 80%
Total junior liens
Total
2015
2014
Outstanding
Weighted-
Average LTV
Outstanding
Weighted-
Average LTV
$
$
2,557
375
2,932
3,088
2,281
5,369
8,301
55.1 % $
89.1
59.7
67.6
90.9
79.2
71.8 % $
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 %
The following tables provide an analysis of home equity portfolio loans by state with a combined LTV greater than 80%:
TABLE 46: HOME EQUITY PORTFOLIO LOANS OUTSTANDING WITH A LTV GREATER THAN 80%
As of December 31, 2015 ($ in millions)
By State:
Ohio
Michigan
Illinois
Indiana
Kentucky
Florida
All other states
Total
Outstanding
Exposure
90 Days
Past Due Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2015
$
$
1,081
519
305
220
208
95
228
2,656
1,830
773
457
352
344
129
320
4,205
-
-
-
-
-
-
-
-
10
5
3
3
2
2
5
30
6
5
3
3
1
1
2
21
TABLE 47: 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
For the Year Ended
December 31, 2014
Outstanding
Exposure
90 Days
Past Due Nonaccrual
Net Charge-offs
$
$
1,123
613
346
260
246
107
275
2,970
1,838
882
507
404
390
143
376
4,540
-
-
-
-
-
-
-
-
9
7
6
4
3
2
5
36
9
8
6
3
3
2
4
35
65 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Automobile Portfolio
The automobile portfolio is characterized by direct and indirect
lending products to consumers. As of December 31, 2015, 50% 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 portfolio loans outstanding by LTV at origination:
TABLE 48: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING BY LTV AT ORIGINATION
As of December 31 ($ in millions)
LTV ≤ 100%
LTV > 100%
Total
2015
Outstanding
7,740
3,753
11,493
$
$
Weighted-
Average LTV
2014
Weighted-
Outstanding
Average LTV
81.7 % $
111.3
91.7 % $
8,212
3,825
12,037
81.6 %
111.0
91.3 %
The following table provides an analysis of the Bancorp’s automobile portfolio loans with a LTV at origination greater than 100%:
TABLE 49: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING WITH A LTV GREATER THAN 100%
As of ($ in millions)
December 31, 2015
December 31, 2014
$
Outstanding
3,753
3,825
90 Days Past
Due and Accruing
5
5
Net Charge-offs for the
Nonaccrual
Year Ended
1
1
20
16
European Exposure
The Bancorp has no direct sovereign exposure to any European
government as of December 31, 2015. 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
letters of credit,
derivatives, guarantees, bankers acceptances and securities. The
loan commitments,
loans,
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 $3.7 billion and funded
exposure was $1.9 billion as of December 31, 2015. Additionally,
the Bancorp was within its established country exposure limits for
all European countries.
The following table provides detail about the Bancorp’s exposure to all European domiciled and owned businesses and financial institutions as of
December 31, 2015:
TABLE 50: EUROPEAN EXPOSURE
Sovereigns
Total
($ in millions)
Peripheral Europe(b)
Other Eurozone(c)
Total Eurozone
Other Europe(d)
Total Europe
(a) Total exposure includes funded exposure and unfunded commitments.
(b) Peripheral Europe includes Greece, Ireland, Italy, Portugal and Spain.
(c) Eurozone includes countries participating in the European common currency (Euro).
(d) Other Europe includes European countries not part of the Eurozone (primarily the United Kingdom and Switzerland).
Funded
Exposure(a) Exposure
-
$
-
-
-
-
270
294
564
145
709
-
-
-
-
-
$
$
Non-Financial
Institutions
Total
Financial Institutions
Funded
Total
Total
Total
Funded
Funded
Exposure(a) Exposure Exposure(a) Exposure Exposure(a) Exposure
252
43
1,127
1,850
1,379
1,893
509
1,058
1,888
2,951
24
994
1,018
417
1,435
313
2,144
2,457
1,203
3,660
228
133
361
92
453
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
including OREO and other repossessed property. A
assets,
summary of nonperforming assets is included in Table 51. For
further information on the Bancorp’s policies related to accounting
for delinquent and nonperforming loans and leases refer to the
Nonaccrual Loans and Leases section of Note 1 of the Notes to
Consolidated Financial Statements.
Nonperforming assets were $659 million at December 31 2015
compared to $783 million at December 31, 2014. At December 31,
2015, $12 million of nonaccrual loans were held for sale, compared
to $39 million at December 31, 2014. The decrease in nonaccrual
loans held for sale from December 31, 2014 was primarily due to
the sale in 2015 of $10 million of held for sale residential mortgage
loans classified as TDRs. The remaining decrease was due to
paydowns and additional sales of nonaccrual loans held for sale.
Nonperforming assets as a percentage of total loans and leases
and OREO, as of December 31, 2015 were 0.70%, compared to
0.86% as of December 31, 2014. Nonperforming portfolio assets as
a percent of portfolio loans and leases and OREO were 0.70% as of
December 31, 2015, compared to 0.82% as of December 31, 2014.
Nonaccrual loans and leases secured by real estate were 43% of total
66 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
nonaccrual loans and leases as of December 31, 2015 compared to
50% as of December 31, 2014.
Commercial portfolio nonaccrual loans and leases were $341
million at December 31, 2015, a decrease of $26 million from
December 31, 2014 as charge-offs, loan paydowns/payoffs, loan
transfers to OREO and loans sold outpaced new nonaccruals.
Consumer portfolio nonaccrual loans and leases were $165
million at December 31, 2015, a decrease of $47 million from
December 31, 2014. The decrease was primarily due to charge-offs,
loan paydowns/payoffs and transfers to accrual status and OREO
which outpaced new nonaccrual
loans. Geographical market
conditions continue to be a large driver of nonaccrual activity as
Florida properties represent approximately 11% of residential
mortgage balances, but represent 27% of nonaccrual loans at
December 31, 2015. Refer to Table 52 for a rollforward of the
nonaccrual loans and leases.
OREO and other repossessed property was $141 million at
December 31, 2015, compared to $165 million at December 31,
2014. The Bancorp recognized $24 million and $26 million in losses
on the sale or write-down of OREO properties during the years
ended December 31, 2015 and 2014, respectively. The decrease
from the prior year was primarily due to a modest improvement in
general economic conditions.
During the years ended December 31, 2015 and 2014,
approximately $35 million and $49 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.
$
2015
82
56
-
-
28
62
-
TABLE 51: SUMMARY OF NONPERFORMING ASSETS AND DELINQUENT LOANS
As of December 31 ($ in millions)
Nonaccrual portfolio loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Other consumer loans and leases
Nonaccrual portfolio restructured loans and leases:
Commercial and industrial loans
Commercial mortgage loans(c)
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Total nonaccrual portfolio loans and leases(b)
OREO and other repossessed property(d)
Total nonperforming portfolio assets
Nonaccrual loans held for sale
Nonaccrual restructured loans held for sale
Total nonperforming assets
Loans and leases 90 days past due and accruing:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Residential mortgage loans(a)
Home equity
Automobile loans
Credit card
Total loans and leases 90 days past due and accruing
Nonperforming portfolio assets as a percent of portfolio loans and leases
and OREO
ALLL as a percent of nonperforming portfolio assets
(a)
177
25
-
1
23
17
2
33
506
141
647
1
11
659
7
-
-
40
-
10
18
75
0.70 %
197
$
$
$
2014
2013
2012
2011
86
64
-
3
44
72
-
142
71
-
1
33
21
1
41
579
165
744
24
15
783
-
-
-
56
-
8
23
87
0.82
178
127
90
10
3
83
74
-
154
53
19
2
83
19
1
33
751
229
980
6
-
986
-
-
-
66
-
8
29
103
1.10
161
234
215
70
1
114
30
1
96
67
6
8
123
23
2
39
1,029
257
1,286
25
4
1,315
1
22
1
75
58
8
30
195
1.49
144
408
358
123
9
134
25
1
79
63
15
3
141
29
2
48
1,438
378
1,816
131
7
1,954
4
3
1
79
74
9
30
200
2.23
124
Information for all periods presented excludes loans whose repayments are insured by the FHA or guaranteed by the VA. These loans were $335, $373, $378, $414 and $309 as of December
31, 2015, 2014, 2013, 2012, and 2011, respectively. The Bancorp recognized losses of $8, $13, $5, $2 and immaterial for the years ended December 31, 2015, 2014, 2013, 2012 and
2011, respectively, due to claim denials and curtailments associated with these advances.
Includes $6, $9, $10, $10 and $17 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at December 31, 2015, 2014, 2013, 2012 and 2011,
respectively, and $2, $4, $2, $1, and $2 of restructured nonaccrual government insured commercial loans at December 31, 2015, 2014, 2013, 2012 and 2011, respectively.
(b)
(c) Excludes $20 of restructured nonaccrual loans at December 31, 2015 and $21 at both 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.
(d) Excludes $14, $71, $77, $72 and $64 of OREO related to government insured loans at December 31, 2015, 2014, 2013, 2012 and 2011, respectively. The Bancorp has historically
excluded government guaranteed loans classified in OREO from its nonperforming asset disclosures. Upon the prospective adoption on January 1, 2015 of ASU 2014-14, “Classification of Certain
Government-Guaranteed Mortgage Loans Upon Foreclosure,” government guaranteed loans meeting certain criteria will be reclassified to other receivables rather than OREO upon foreclosure. As of
December 31, 2015, the Bancorp had $44 of government guaranteed loans classified as other receivables. Refer to Note 1 of the Notes to Consolidated Financial Statements for further
information on the adoption of this amended guidance.
67 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides a rollforward of portfolio nonaccrual loans and leases, by portfolio segment:
TABLE 52: ROLLFORWARD OF PORTFOLIO NONACCRUAL LOANS AND LEASES
For the year ended December 31, 2015 ($ in millions)
Balance, beginning of period
Transfers to nonaccrual
Transfers to accrual status
Transfers from held for sale
Transfers to held for sale
Loans sold from portfolio
Loan paydowns/payoffs
Transfers to OREO
Charge-offs
Draws/other extensions of credit
Balance, end of period
For the year ended December 31, 2014 ($ in millions)
Balance, beginning of period
Transfers to nonaccrual
Transfers to accrual status
Transfers to held for sale
Loans sold from portfolio
Loan paydowns/payoffs
Transfers to OREO
Charge-offs
Draws/other extensions of credit
Balance, end of period
Commercial
Residential
Mortgage
$
$
$
$
367
515
(9)
-
(12)
(11)
(189)
(32)
(298)
10
341
458
520
(71)
(4)
(43)
(181)
(41)
(279)
8
367
77
65
(39)
5
-
-
(15)
(29)
(13)
-
51
166
135
(79)
(24)
-
(41)
(67)
(13)
-
77
Consumer
135
155
(68)
-
(1)
-
(28)
(18)
(61)
-
114
127
219
(88)
-
-
(9)
(22)
(92)
-
135
Total
579
735
(116)
5
(13)
(11)
(232)
(79)
(372)
10
506
751
874
(238)
(28)
(43)
(231)
(130)
(384)
8
579
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 $979
million and $905 million at December 31, 2015 and 2014,
respectively. As of December 31, 2015, the percentage of
restructured residential mortgage loans, home equity loans, and
credit card loans that are past due 30 days or more were 30%, 11%
and 31%, respectively.
The following tables summarize TDRs by loan type and delinquency status:
TABLE 53: ACCRUING AND NONACCRUING PORTFOLIO TDRs
As of December 31, 2015 ($ in millions)
Commercial loans(b)(c)
Residential mortgage loans(a)
Home equity
Automobile loans
Credit card
Total
(a)
Current
487
443
307
17
24
1,278
$
$
Accruing
30-89 Days
Past Due
4
54
20
-
4
82
90 Days or
More Past Due
Nonaccruing
Total
-
110
-
-
-
110
203
23
17
2
33
278
694
630
344
19
61
1,748
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,
2015, these advances represented $202 of current loans, $42 of 30-89 days past due loans and $99 of 90 days or more past due loans.
(b) As of December 31, 2015, excludes $7 of restructured accruing loans and $20 of restructured nonaccrual loans associated with a consolidated VIE in which the Bancorp has no continuing credit
risk due to the risk being assumed by a third party.
(c) Excludes restructured nonaccrual loans held for sale.
68 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 54: ACCRUING AND NONACCRUING PORTFOLIO TDRs
As of December 31, 2014 ($ in millions)
Commercial loans(b)
Residential mortgage loans(a)(c)
Home equity
Automobile loans
Credit card
Total
(a)
Current
867
312
337
22
31
1,569
$
$
Accruing
30-89 Days
Past Due
2
54
23
1
6
86
90 Days or
More Past Due
Nonaccruing
-
119
-
-
-
119
214
33
21
1
41
310
Total
1,083
518
381
24
78
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.
(c) Excludes restructured nonaccrual loans held for sale.
Analysis of Net Loan Charge-offs
Net charge-offs were 48 bps and 64 bps of average portfolio loans
and leases for the years ended December 31, 2015 and 2014,
respectively. Table 55 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 decreased to 46 bps
during the year ended December 31, 2015 compared to 48 bps in
the same period in the prior year, primarily as a result of an increase
in average commercial loan and lease balances of $2.3 billion.
Commercial net charge-offs were flat for the year ended December
31, 2015 compared to the year ended December 31, 2014.
The ratio of consumer loan and lease net charge-offs to
average consumer loans and leases decreased to 51 bps for the year
ended December 31, 2015 compared to 86 bps for the year ended
December 31, 2014. Residential mortgage loan net charge-offs,
which typically involve partial charge-offs based upon appraised
values of underlying collateral, decreased $109 million from
December 31, 2014. The decrease 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
portfolio to held for sale in the fourth quarter of 2014. The
remaining decrease was due to 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 residential mortgage loans.
Home equity net charge-offs decreased $20 million compared
to
to
the year ended December 31, 2014, primarily due
improvements in loss severities. In addition, management actively
manages lines of credit and makes reductions in lending limits when
it believes it is necessary based on FICO score deterioration and
property devaluation.
Automobile loans, credit card and other consumer loans and
leases net charge-offs remained relatively flat compared to the prior
year. The Bancorp utilizes a risk-adjusted pricing methodology to
ensure adequate compensation is received for those products that
have higher credit costs.
69 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 55: SUMMARY OF CREDIT LOSS EXPERIENCE
For the years ended December 31 ($ 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 charged-off
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 of losses previously charged-off
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 losses charged-off as a percent of average 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 net losses charged-off as a percent of average portfolio loans and leases
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 percent
of portfolio loans and leases. 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
70 Fifth Third Bancorp
2015
2014
2013
2012
2011
$
$
(253)
(39)
(4)
(2)
(28)
(55)
(46)
(94)
(21)
(542)
24
12
1
-
11
16
18
12
2
96
(229)
(27)
(3)
(2)
(17)
(39)
(28)
(82)
(19)
(446)
0.54 %
0.38
0.11
0.04
0.46
0.13
0.46
0.24
3.60
3.26
0.51
0.48 %
(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
current national and local economic conditions that might impact
the portfolio. Refer to the Critical Accounting Policies section of
MD&A for more information.
During the year ended December 31, 2015, 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.
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,
TABLE 56: CHANGES IN ALLOWANCE FOR CREDIT LOSSES
For the years ended December 31 ($ in millions)
ALLL:
Balance, beginning of period
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
Provision for (benefit from) unfunded commitments
Charge-offs
Balance, end of period
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 tends not to be as responsive when improved
conditions have presented
these model
limitations, the qualitative adjustment factors may be incremental or
detrimental to the quantitative model results.
themselves. Given
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 $149 million at
December 31, 2015. In addition, the Bancorp’s determination of the
ALLL for residential mortgage and consumer loans and leases is
sensitive to changes in estimated loss rates. In the event that
estimated loss rates would increase by 10%, the ALLL for
residential mortgage and consumer loans and leases would increase
by approximately $32 million at December 31, 2015. 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.
2015
2014
2013
2012
2011
$
$
$
$
1,322
(542)
96
396
1,272
135
4
(1)
138
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
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, 2015 and 2014 was 0.12%. The unallocated
allowance was 9% of the total allowance as of December 31, 2015
compared to 8% as of December 31, 2014.
As shown in Table 57, the ALLL as a percent of portfolio
loans and leases was 1.37% at December 31, 2015, compared to
1.47% at December 31, 2014. The ALLL was $1.3 billion at both
December 31, 2015 and 2014.
71 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
$
2015
2014
2013
652
117
24
47
100
67
40
99
11
115
1,272
767
212
26
53
189
94
23
92
16
110
1,582
673
140
17
45
104
87
33
104
13
106
1,322
TABLE 57: ATTRIBUTION OF ALLOWANCE FOR LOAN AND LEASE LOSSES TO PORTFOLIO LOANS AND LEASES
As of December 31 ($ in millions)
Attributed ALLL:
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 attributed 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 ALLL 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 portfolio loans and leases)
Attributed ALLL as a percent of portfolio loans and leases
42,131
6,957
3,214
3,854
13,716
8,301
11,493
2,259
657
92,582
39,316
8,066
1,039
3,625
12,680
9,246
11,984
2,294
364
88,614
40,765
7,399
2,069
3,720
12,389
8,886
12,037
2,401
418
90,084
1.55 %
1.68
0.75
1.22
0.73
0.81
0.35
4.38
1.67
0.12
1.37 %
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
$
$
2012
802
333
33
68
229
143
28
87
20
111
1,854
36,038
9,103
698
3,549
12,017
10,018
11,972
2,097
290
85,782
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
MARKET RISK MANAGEMENT
Market risk arises from the potential for market fluctuations in
interest rates, foreign exchange rates and equity prices that may
result in potential reductions in net income. Interest rate risk, a
component of market risk, is the exposure to adverse changes in net
interest income or financial position due to changes in interest rates.
Management considers interest rate risk a prominent market risk in
terms of its potential impact on earnings. Interest rate risk can occur
for any one or more of the following reasons:
Assets and liabilities may mature or reprice at different times;
Short-term and long-term market interest rates may change
by different amounts; or
The expected maturity of various assets or liabilities may
shorten or lengthen as interest rates change.
In addition to the direct impact of interest rate changes on net
interest income, interest rates can indirectly impact earnings through
their effect on loan demand, credit losses, mortgage originations, the
value of servicing rights and other sources of the 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.
72 Fifth Third Bancorp
Interest Rate Risk Management Oversight
includes senior management
The Bancorp’s ALCO, which
representatives and is accountable to the ERMC, 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.
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.
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 and a 25 bps parallel rate decrease in
interest rates. In accordance with policy, the 100 bps and 200 bps
parallel ramped increased rate movements are assumed to occur
over one year and are sustained thereafter. The 25 bps parallel rate
decrease is an immediate change. 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.
In this economic cycle, banks have experienced significant
growth in deposit balances, particularly in noninterest-bearing
demand deposits. The Bancorp, like other banks, is exposed to
deposit balance run-off in a rising interest rate environment. In
consideration of this risk, the Bancorp’s NII sensitivity modeling
assumes that approximately $2.5 billion of noninterest-bearing
demand deposit balances run-off for each 100 bps increase in short-
term market interest rates. These lost noninterest-bearing demand
deposit balances are modeled to flow into funding products that
reprice in conjunction with market rate increases.
Another important deposit modeling assumption is the amount
by which interest-bearing deposit rates will increase when market
rates increase. This deposit repricing sensitivity is known as the beta
and it represents the expected amount by which the Bancorp
deposit rates will increase for a given increase in short-term market
rates. The Bancorp’s NII sensitivity modeling assumes a weighted-
average interest-bearing deposit beta of approximately 70%, which
is approximately 20 percentage points higher than the 50% beta that
the Bancorp experienced in the last FRB tightening cycle from June
2004 to June 2006.
risk measures
The Bancorp continually evaluates the sensitivity of its interest
rate
important deposit modeling
assumptions. The Bancorp also evaluates the sensitivity of other
important modeling assumptions, such as
loan and security
prepayments and early withdrawals on fixed-rate customer liabilities.
these
to
The following table shows the Bancorp’s estimated NII sensitivity profile and ALCO policy limits as of December 31:
TABLE 58: ESTIMATED NII SENSITIVITY PROFILE
2015
2014
Change in Interest Rates (bps)
+200
+100
-25
% Change in NII (FTE)
13-24
Months
12 Months
ALCO Policy Limits
13-24
Months
12 Months
2.05 %
1.12
(1.39)
5.93
3.87
(2.49)
(4.00)
-
-
(6.00)
-
-
% Change in NII (FTE)
12 Months
2.19
1.16
(1.43)
13-24
Months
6.49
4.18
(2.41)
ALCO Policy Limits
13-24
Months
12 Months
(4.00)
-
-
(6.00)
-
-
At December 31, 2015, the Bancorp’s net interest income would
benefit in year one and year two under parallel ramp increases and
suffer from a parallel rate curve decline. The benefit to rising rates
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 rising rates
benefit was down modestly compared to December 31, 2014. The
decline in the NII benefit was primarily attributable to growth in the
investment portfolio, with a partial offset from core deposit growth.
The year two benefit was also impacted by changes to wholesale
funding assumptions, which include a greater reliance on floating-
rate debt.
Tables 59 and 60 provide information on the Bancorp’s
estimated net interest income sensitivity profile given changes to
balances or certain key assumptions.
The following table shows the Bancorp's estimated net interest income sensitivity profile with a $1 billion decrease and a $1 billion increase in
demand deposit balances as of December 31, 2015:
TABLE 59: ESTIMATED NII SENSITIVITY ASSUMING A $1 BILLION CHANGE IN DEMAND DEPOSIT BALANCES
Change in Interest Rates (bps)
+200
+100
% Change in NII (FTE)
$1 Billion Balance Decrease
13-24
12
Months
Months
$1 Billion Balance Increase
13-24
Months
12
Months
1.77 %
0.98
5.37
3.59
2.33
1.26
6.49
4.14
The following table shows the Bancorp's estimated net interest income sensitivity profile with a 25% increase and a 25% decrease to the deposit
beta assumption as of December 31, 2015. The resulting weighted-average interest-bearing deposit beta included in this analysis is approximately
88% and 52%, respectively, as of December 31, 2015:
73 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 60: ESTIMATED NII SENSITIVITY WITH DEPOSIT BETA ASSUMPTION CHANGES
Change in Interest Rates (bps)
+200
+100
% Change in NII (FTE)
Betas 25% Higher
Betas 25% Lower
12
Months
13-24
Months
12
Months
13-24
Months
(1.07) %
(0.44)
(0.30)
0.75
5.16
2.68
12.16
6.98
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 estimated EVE sensitivity profile as of December 31:
TABLE 61: ESTIMATED EVE SENSITIVITY PROFILE
Change in Interest Rates (bps)
Change in EVE
2015
ALCO Policy Limit
(12.00)
-
-
-
(5.21) %
(2.30)
(0.44)
0.32
Change in EVE
2014
ALCO Policy Limit
(12.00)
-
-
-
(2.21)
(0.62)
(0.06)
(0.05)
interest rate swaps, interest rate floors, interest rate caps, forward
contracts, forward starting interest rate swaps, options, swaptions
and TBA securities.
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
contracts, which
through collateral
the Bancorp minimizes
arrangements, approvals, limits and monitoring procedures. For
further information including the notional amount and fair values of
these derivatives, refer to Note 13 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 carrying value of
the Bancorp’s portfolio loans and leases expected cash flows as of
December 31, 2015:
+200
+100
+25
-25
The EVE sensitivity to rising rates was modestly negative at
December 31, 2015 and exposure to rising rates has increased from
the EVE sensitivity at December 31, 2014. The higher level of EVE
risk since December 31, 2014 was attributable to growth in the
investment portfolio and certain fixed-rate consumer loans.
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
actions that management may undertake to manage risk in response
to anticipated changes in interest rates.
The Bancorp regularly evaluates its exposures to a static
balance sheet forecast, LIBOR, Prime Rate and other basis risks,
yield curve twist risks and embedded options risks. In addition, the
impact on NII on an FTE basis 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
74 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Less than 1 year
$
TABLE 62: PORTFOLIO LOANS AND LEASES EXPECTED CASH FLOWS
($ in millions)
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
21,699
2,728
1,301
751
26,479
2,446
1,050
5,159
452
482
9,589
36,068
$
1-5 years
18,933
3,781
1,881
1,756
26,351
6,229
1,654
6,203
1,807
135
16,028
42,379
Over 5 years
1,499
448
32
1,347
3,326
5,041
5,597
131
-
40
10,809
14,135
Total
42,131
6,957
3,214
3,854
56,156
13,716
8,301
11,493
2,259
657
36,426
92,582
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, 2015:
TABLE 63: PORTFOLIO LOANS AND LEASES EXPECTED CASH FLOWS OCCURRING AFTER 1 YEAR
($ in millions)
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
Residential Mortgage Servicing Rights and Interest Rate Risk
The net carrying amount of the residential MSR portfolio was $784
million and $856 million as of December 31, 2015 and 2014,
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 increased during the year ended December 31,
2015 which caused actual prepayments on the servicing portfolio to
decrease. The decrease in actual prepayments on the servicing
portfolio caused the modeled prepayment speeds to decrease, which
led to a recovery of temporary impairment of $4 million on
servicing rights during the year ended December 31, 2015. 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 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.
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
prevailing rates return to a level commensurate with the borrower’s
$
$
Fixed
2,729
958
4
3,103
6,794
8,113
624
6,280
535
20
15,572
22,366
Interest Rate
Floating or Adjustable
17,703
3,271
1,909
-
22,883
3,157
6,627
54
1,272
155
11,265
34,148
loan rate. In addition to the MSR valuation, the Bancorp recognized
net gains of $90 million and $95 million on derivatives associated
with its non-qualifying hedging strategy during the years ended
December 31, 2015 and 2014, respectively. 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 12 of the Notes to Consolidated Financial Statements for
further discussion on servicing rights and the instruments used to
hedge interest rate risk on MSRs.
Foreign Currency Risk
The Bancorp may enter into foreign exchange derivative contracts
to economically hedge certain foreign denominated loans. The
derivatives are classified as free-standing instruments with the
revaluation gain or loss being recorded in other noninterest income
in the Consolidated Statements of Income. The balance of the
Bancorp’s foreign denominated loans at December 31, 2015 and
December 31, 2014 was $812 million and $720 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.
75 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 cash, 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.
Table 62 of the Market Risk Management subsection of the
Risk Management section of MD&A illustrates the expected
maturities from loan and lease repayments. Of the $29.0 billion of
securities in the Bancorp’s available-for-sale and other portfolio at
December 31, 2015, $3.9 billion in principal and interest is expected
to be received in the next 12 months and an additional $3.7 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
section 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, 2015 and 2014, the Bancorp sold or
securitized loans totaling $6.4 billion and $9.4 billion, respectively.
For further information on the transfer of financial assets, refer to
Note 12 of the Notes to Consolidated Financial Statements.
Core deposits have historically provided the Bancorp with a
sizeable source of relatively stable and low cost funds. The
Bancorp’s average core deposits and average shareholders’ equity
funded 82% of its average total assets during the years ended
December 31, 2015 and 2014. 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 $100,000 and over 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.
As of December 31, 2015, $8.9 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
76 Fifth Third Bancorp
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. On July 27, 2015,
the Bancorp issued and sold $1.1 billion of senior fixed-rate notes.
At December 31, 2015, the Bancorp has approximately $38.6 billion
of borrowing capacity available through secured borrowing sources
including the FHLB and FRB.
The Bancorp’s banking subsidiary’s global bank note program
has a borrowing capacity of $25 billion. On August 20, 2015, the
Bank issued and sold $1.0 billion of senior fixed-rate notes and $250
million of senior floating-rate notes. The Bank has $18.4 billion of
borrowing capacity under the bank note program as of December
31, 2015.
For the year ended December 31, 2015, the Bancorp
transferred approximately $750 million in consumer automobile
loans to a bankruptcy remote trust which was deemed to be a VIE.
The Bancorp concluded that it is the primary beneficiary of this
VIE and, therefore, has consolidated this VIE. The assets of this
VIE are restricted to the settlement of the notes and other
obligations of the VIE. Third-party holders of the notes do not
have recourse to the general assets of the Bancorp.
Liquidity Coverage Ratio and Net Stable Funding Ratio
A key reform within the Basel III framework to strengthen
international liquidity standards was the BCBS’ 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 issued a final NSFR standard in
the fourth quarter of 2014 and disclosure requirements in the
second quarter of 2015 which are applicable to internationally active
banks. The NSFR will become a minimum standard by January 1,
2018. The Bancorp is currently evaluating the BCBS’ standard for
NSFR and will begin to conform to a domestic version of the
NSFR once adopted by the U.S. banking regulators.
large
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 the Bancorp. 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
Modified LCR was 116% at December 31, 2015 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Bancorp’s credit ratings are summarized in Table 64. The
ratings reflect the ratings agency’s 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.
TABLE 64: AGENCY RATINGS
As of February 25, 2016
Fifth Third Bancorp:
Short-term
Senior debt
Subordinated debt
Fifth Third Bank:
Short-term
Long-term deposit
Senior debt
Subordinated debt
OPERATIONAL RISK MANAGEMENT
Operational risk is the risk of loss resulting from inadequate or
failed processes or systems or due to external events that are neither
market nor credit-related. Operational risk is inherent in the
Bancorp’s activities and can manifest itself in various ways including
fraudulent acts, business interruptions, inappropriate behavior of
employees, unintentional failure to comply with applicable laws and
regulations, cyber-security incidents and privacy breaches, or failure
of vendors to perform in accordance with their arrangements. These
events could result in financial losses, litigation and regulatory fines,
as well as other damage to the Bancorp. The Bancorp’s risk
management goal is to keep operational risk at appropriate levels
consistent with the Bancorp’s risk appetite, financial strength, the
characteristics of its businesses, the markets in which it operates,
and the competitive and regulatory environment to which it is
subject.
To control, monitor, and govern operational risk, the Bancorp
maintains an overall Risk Management Framework which comprises
governance oversight, risk assessment, capital measurement,
monitoring, and reporting as well as a formal three lines of defense
approach. ERM is responsible for prescribing the framework to the
lines of business and corporate functions, and to provide
independent oversight of its implementation (second line of
defense). In 2015, Business Controls Directors were appointed in
each of the lines of business to ensure consistent implementation
COMPLIANCE RISK MANAGEMENT
Regulatory Compliance Risk is defined as the risk of legal or
regulatory sanctions, financial loss, or damage to reputation as a
result of noncompliance with (i) applicable laws, regulations, rules
and other regulatory requirements (including but not limited to the
risk of consumers experiencing economic loss or other legal harm as
a result of noncompliance with consumer protection
laws,
regulations and requirements); (ii) internal policies and procedures,
standards of best practice or codes of conduct; and (iii) principles of
integrity and fair dealing applicable to Fifth Third’s activities and
functions. Fifth Third focuses on managing regulatory compliance
risk in accordance with the Bancorp’s integrated risk management
framework, which ensures consistent processes for identifying,
assessing, managing, monitoring, and reporting risks.
The
Bancorp’s risk management goal is to keep compliance risk at
appropriate levels consistent with the Bancorp’s risk appetite.
The current regulatory environment, including heightened
laws and
regulatory expectations and material changes
regulations, increases compliance risk. To mitigate compliance risk,
in
Moody's
Standard and Poor's
Fitch
DBRS
No rating
Baa1
Baa1
P-1
Aa3
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
and execution of managing day to day operational risk (first line of
defense).
is
relate
responsible
and overseeing
The Bancorp’s risk management framework consists of five
integrated components, including identifying, assessing, managing,
monitoring and independent governance reporting of risk. The
corporate Operational Risk Management function within Enterprise
the
for developing
Risk
implementation of the Bancorp’s approach to managing operational
risk. This includes providing governance, awareness and training,
tools, guidance and oversight to support implementation of key risk
risk
they
programs and systems as
management, such as risk and control self-assessments, new
product/initiative risk reviews, key risk indicators, Vendor Risk
Management, and operational
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.
losses. The function
to operational
Compliance Risk Management provides independent oversight to
ensure consistency and sufficiency, and ensures that lines of
business, regions and support functions are adequately identifying,
assessing and monitoring compliance risks and adopting proper
mitigation strategies. The lines of business and enterprise functions
are responsible for managing the compliance risks associated with
their areas. Additionally, Compliance Risk Management implements
key compliance programs and processes including but not limited
to, risk assessments, key risk indicators program, issues tracking,
regulatory compliance
anti-money
laundering, privacy, and oversees the Bancorp’s compliance with the
Community Reinvestment Act.
and monitoring,
testing
Fifth Third also focuses on reporting and escalation of
compliance issues to senior management and the Board. The
Management Compliance Committee is the key committee that
in the management of
oversees and supports Fifth Third
compliance
The Management
risk across
Compliance Committee addresses Fifth Third-wide compliance
issues, industry best practices, legislative developments, regulatory
the enterprise.
77 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
concerns, and other leading indicators of compliance risk. The
Management Compliance Committee reports to the Enterprise Risk
Management Committee, which reports to Risk and Compliance
Committee of the Board of Directors.
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 ERMC
and the annual 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.
Regulatory Capital Ratios
The Basel III Final Rule was effective for the Bancorp on January 1,
2015, subject to phase-in periods for certain of its components and
other provisions. It established quantitative measures that assign risk
weightings to assets and off-balance sheet items and also defined
and set minimum regulatory capital requirements. Prior to January 1,
2015, the Bancorp was subject to the General Risk-Based Capital
Rules (Basel I). The minimum capital ratios established under the
Basel III Final Rule are 4.5% for the CET1 capital ratio, 6% for the
Tier I risk-based capital ratio, 8% for the Total risk-based capital
ratio and 4% for the Tier I Leverage ratio (Tier I capital to average
consolidated assets). The PCA provisions adopted by the U.S.
banking agencies define “well-capitalized” ratios for CET1 capital,
Tier I risk-based capital, Total risk-based capital and Tier I Leverage
greater than or equal to 6.5%, 8%, 10% and 5%, respectively.
Additionally, the Basel III Final Rule includes a capital conservation
buffer of CET1 capital of 2.5% in additional to the 4.5% minimum
requirement, or 7%, in order to avoid limitations on capital
distributions and discretionary bonus payments to executive
officers. The Bancorp exceeded these “well-capitalized” and “capital
conservation buffer” ratios for all periods presented.
The Bancorp made a one-time permanent election to not
include AOCI in regulatory capital in the March 31, 2015 FFIEC
031 and FR Y-9C filings. The Basel III Final Rule phases out the
inclusion of certain TruPS as a component of Tier I capital. Under
these provisions, these TruPS would qualify as a component of Tier
II capital. At December 31, 2015, the Bancorp’s Tier I capital
included $13 million of TruPS representing approximately 1 bp of
risk-weighted assets under the transition provisions of the Basel III
Final Rule.
The following table summarizes the Bancorp's capital ratios as of December 31:
TABLE 65: CAPITAL RATIOS
($ in millions)
Average total Bancorp shareholders' equity as a percent of average assets
Tangible equity as a percent of tangible assets(a)(d)
Tangible common equity as a percent of tangible assets(a)(d)
2015
2014
2013
2012
2011
11.32 %
9.55
8.59
11.59
9.41
8.43
11.56
9.44
8.63
11.65
9.17
8.83
11.41
9.03
8.68
CET1 capital
Tier I capital
Total regulatory capital
Risk-weighted assets
Regulatory capital ratios:
CET1 capital
Tier I risk-based capital
Total risk-based capital
Tier I leverage
Tier I common equity(a)
Basel III
Transitional(b)
$
11,917
13,260
17,134
121,290
9.82 %
10.93
14.13
9.54
N/A
Basel III
Fully Phased-In
N/A
12,764
16,895
117,878
N/A
10.83
14.33
9.66
9.65
Basel I(c)
N/A
12,094
16,431
115,969
N/A
11,685
15,811
109,301
N/A
10.43
14.17
9.73
9.45
N/A
10.69
14.47
10.15
9.54
N/A
12,503
16,876
104,219
N/A
12.00
16.19
11.25
9.41
CET1 capital(a)
(a) These are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.
(b) Under the U.S. banking agencies’ Basel III Final Rule, assets and credit equivalent amounts of off-balance sheet exposures are calculated according to the standardized approach for risk-weighted
9.72 %
N/A
N/A
N/A
N/A
assets. The resulting weighted values are added together resulting in the total risk-weighted assets.
(c) These capital amounts and ratios were calculated under the Supervisory Agencies general risk-based capital rules (Basel I) which were in effect prior to January 1, 2015.
(d) Excludes unrealized gains and losses.
Preferred Stock Offering
As contemplated by the 2014 capital plan part of the FRB’s 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
78 Fifth Third Bancorp
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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 include detailed descriptions of the following: the BHC’s
internal processes for assessing capital adequacy; the policies
issuances,
governing capital actions such as common stock
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 2015 stress testing program and CCAR on October 23,
2014, with firm submissions of stress test results and capital plans to
the FRB due to the FRB on January 5, 2015, which the Bancorp
submitted as required. Refer to Note 3 and Note 23 of the Notes to
Consolidated Financial 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
2015.
The FRB launched the 2016 stress testing program and CCAR
on January 28, 2016. The stress testing results and capital plan are
required to be submitted by the Bancorp to the FRB by April 5,
2016.
The FRB expects to release summary results of the 2016 stress
testing program and CCAR in June of 2016. 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, the Bancorp will be required to 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.
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 $0.52 and
$0.51 during the years ended December 31, 2015 and 2014,
respectively. The Bancorp entered into or settled a number of
accelerated share repurchase transactions during the years ended
December 31, 2015 and 2014. Refer to Note 23 of the Notes to
Consolidated Financial Statements for additional information on the
accelerated share repurchases.
The following table summarizes shares authorized for repurchase for the years ended December 31:
TABLE 66: SHARE REPURCHASES
2015
2014
Shares authorized for repurchase at January 1
Additional authorizations(a)
Share repurchases(b)
Shares authorized for repurchase at December 31
Average price paid per share(b)
(a)
43,071,613
64,908,628
(34,799,873)
73,180,368
20.87
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.
73,180,368
-
(42,607,855)
30,572,513
19.60
$
(b) Excludes 1,930,233 and 2,116,370 shares repurchased during the years ended December 31, 2015 and 2014, respectively, in connection with various employee compensation plans. These
purchases are not included in the calculation for average price paid per share and do not count against the maximum number of shares that may yet be repurchased under the Board of Directors’
authorization.
79 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 Consolidated Balance
Sheets. The Bancorp’s off-balance sheet arrangements include
commitments, contingent liabilities, guarantees and 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 residential mortgage
loans, noncancelable operating
lease obligations, purchase
obligations, capital commitments for private equity investments and
capital expenditures. Refer to Note 17 of the Notes to Consolidated
Financial Statements for additional information on commitments.
Guarantees and Contingent Liabilities
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 11 of the Notes to Consolidated Financial Statements for
additional information on non-consolidated VIEs.
80 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, 2015 are shown in
Table 67. As of December 31, 2015, 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
following table. For further detail on the impact of income taxes,
refer to Note 20 of the Notes to Consolidated Financial Statements.
TABLE 67: CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
As of December 31, 2015 ($ in millions)
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 residential 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)
Less than 1
year
1-3 years
3-5 years
Greater than
5 years
Total
$
$
96,594
2,425
1,658
3,844
1,330
91
212
19
47
7
106,227
-
2,207
-
4,813
-
166
86
35
31
12
7,350
-
1,955
-
3,484
-
136
37
32
12
6
5,662
-
24
-
3,703
-
242
32
79
-
2
4,082
96,594
6,611
1,658
15,844
1,330
635
367
165
90
27
123,321
$
28,469
1,700
30,169
66,944
3,055
69,999
Includes demand, interest checking, savings, money market and foreign office deposits. For additional information, refer to the Deposits subsection of 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 subsection of the Balance Sheet Analysis section of MD&A.
(c)
(d) Refer to Note 13 of the Notes to Consolidated Financial Statements for additional information on forward contracts to sell residential mortgage loans.
(e)
Includes federal funds purchased and borrowings with an original maturity of less than one year. For additional information, refer to Note 15 of the Notes to Consolidated Financial Statements.
(f)
Includes rental commitments.
(g)
Includes low-income housing and historic tax investments. For additional information, refer to Note 11 of the Notes to Consolidated Financial Statements.
(h) Represents agreements to purchase goods or services and includes commitments to various general contractors for work related to banking center construction.
(i) Refer to Note 21 of the Notes to Consolidated Financial Statements for additional information on pension obligations.
(j) Commitments to extend credit are agreements to lend, typically having fixed expiration dates or other termination clauses that may require payment of a fee. Many of the commitments to extend credit
may expire without being drawn upon. The total commitment amounts 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.
13,095
771
13,866
17,774
530
18,304
7,606
54
7,660
$
(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.
81 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, 2015. 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, 2015.
Based on this assessment, management believes that the Bancorp maintained effective internal control over financial reporting as of December 31,
2015. 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, 2015. This report appears on page 83
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.
Greg D. Carmichael
President and Chief Executive Officer Executive Vice President and Chief Financial Officer
February 25, 2016
February 25, 2016
Tayfun Tuzun
82 Fifth Third Bancorp
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Fifth Third Bancorp:
We have audited the internal control over financial reporting of Fifth Third Bancorp and subsidiaries (the “Bancorp”) as of December 31, 2015,
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, 2015,
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, 2015 of the Bancorp and our report dated February 25, 2016 expressed an
unqualified opinion on those consolidated financial statements.
Cincinnati, Ohio
February 25, 2016
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, 2015
and 2014, 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, 2015. 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, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2015, 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, 2015, 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, 2016 expressed an
unqualified opinion on the Bancorp’s internal control over financial reporting.
Cincinnati, Ohio
February 25, 2016
83 Fifth Third Bancorp
CONSOLIDATED BALANCE SHEETS
2015
2014
$
$
$
$
2,540
29,044
70
386
2,671
903
92,582
(1,272)
91,310
2,239
707
2,416
12
785
7,999
141,082
36,267
66,938
103,205
151
1,507
2,164
2,341
15,844
125,212
3,091
22,408
187
360
7,914
1,261
90,084
(1,322)
88,762
2,465
728
2,416
15
858
8,241
138,706
34,809
66,903
101,712
144
1,556
2,020
2,642
14,967
123,041
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(a)(e)
Allowance for loan and lease losses(a)
Portfolio loans and leases, net
Bank premises and equipment(f)
Operating lease equipment
Goodwill
Intangible assets
Servicing rights
Other assets(a)
Total Assets
Liabilities
Deposits:
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits(g)
Federal funds purchased
Other short-term borrowings
Accrued taxes, interest and expenses
Other liabilities(a)
Long-term debt(a)
Total Liabilities
Equity
Common stock(h)
Preferred stock(i)
Capital surplus
Retained earnings
Accumulated other comprehensive income
Treasury stock(h)
Total Bancorp shareholders’ equity
Noncontrolling interests
Total Equity
Total Liabilities and Equity
(a)
2,051
1,331
2,646
11,141
429
(1,972)
15,626
39
15,665
138,706
Includes $152 and $179 of cash and due from banks, $2,537 and $3,378 of portfolio loans and leases, $(28) and $(22) of ALLL, $20 and $25 of other assets, $3 and $5 of other liabilities
and $2,493 and $3,434 of long-term debt from consolidated VIEs that are included in their respective captions above at December 31, 2015 and 2014, respectively. For further information,
refer to Note 11.
2,051
1,331
2,666
12,358
197
(2,764)
15,839
31
15,870
141,082
$
$
$
(b) Amortized cost of $28,678 and $21,677 at December 31, 2015 and 2014, respectively.
(c)
(d)
(e)
(f)
(g)
(h) Common shares: Stated value $2.22 per share; authorized 2,000,000; outstanding at December 31, 2015 – 785,080,314 (excludes 138,812,267 treasury shares), 2014 – 824,046,952
Fair value of $70 and $187 at December 31, 2015 and 2014, respectively.
Includes $519 and $561 of residential mortgage loans held for sale measured at fair value at December 31, 2015 and 2014, respectively.
Includes $167 and $108 of residential mortgage loans measured at fair value at December 31, 2015 and 2014, respectively.
Includes $81 and $26 of bank premises and equipment held for sale at December 31, 2015 and 2014, respectively. For further information refer to Note 7.
Includes $628 and $0 of deposits held for sale at December 31, 2015 and 2014, respectively. For further information refer to Note 7.
(excludes 99,845,629 treasury shares).
(i) 446,000 shares of undesignated no par value preferred stock are authorized and unissued at December 31, 2015 and 2014; fixed-to-floating rate non-cumulative Series H perpetual preferred
stock with a $25,000 liquidation preference: 24,000 authorized shares, issued and outstanding at December 31, 2015 and 2014; fixed-to-floating rate non-cumulative Series I perpetual
preferred stock with a $25,000 liquidation preference: 18,000 authorized shares, issued and outstanding at December 31, 2015 and 2014; and fixed-to-floating rate non-cumulative Series J
perpetual preferred stock with a $25,000 liquidation preference: 12,000 authorized shares, issued and outstanding at December 31, 2015 and 2014.
Refer to Notes to Consolidated Financial Statements.
84 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ 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 federal funds purchased
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
Investment advisory revenue
Corporate banking 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
Refer to Notes to Consolidated Financial Statements.
2015
3,151
869
8
4,028
186
1
2
306
495
3,533
396
3,137
563
418
384
348
302
979
9
-
3,003
2014
3,298
724
8
4,030
202
-
2
247
451
3,579
315
3,264
560
407
430
310
295
450
21
-
2,473
2013
3,447
520
6
3,973
202
-
6
204
412
3,561
229
3,332
549
393
400
700
272
879
21
13
3,227
1,525
323
321
224
153
124
1,105
3,775
2,365
659
1,706
(6)
1,712
75
1,637
2.03
2.01
798,628,173
807,658,669
0.52
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
$
$
$
$
$
85 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31 ($ in millions)
Net Income
Other Comprehensive (Loss) Income, Net of Tax:
Unrealized gains on available-for-sale securities:
Unrealized holding (losses) gains 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) arising during the year
Reclassification adjustment for net gains included in net income
Defined benefit pension plans, net:
Net actuarial (loss) gain arising during the year
Reclassification of amounts to net periodic benefit costs
Other comprehensive (loss) income, net of tax
Comprehensive Income
Less: Comprehensive income attributable to noncontrolling interests
Comprehensive Income Attributable to Bancorp
Refer to Notes to Consolidated Financial Statements.
$
$
2015
1,706
(227)
(10)
48
(49)
(5)
11
(232)
1,474
(6)
1,480
2014
1,483
2013
1,826
378
(24)
39
(29)
(25)
8
347
1,830
2
1,828
(295)
4
(8)
(29)
25
10
(293)
1,533
(10)
1,543
86 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Bancorp Shareholders’ Equity
Accumulated
Other
Total
Bancorp
Non-
$
(78)
398
540
375
(142)
(634)
(293)
Stock
Stock
Stock
1,034
2,051
2,051
2,758
Equity
(1,242)
Income
(407)
(37)
1,034
(398)
Total
Equity
22
1
2,561
13,716
1,836
(293)
13,764
1,826
(293)
(407)
(37)
(1,320)
1,034
-
(407)
(37)
(1,320)
1,034
-
Surplus Earnings
8,768
1,836
Common Preferred Capital Retained Comprehensive Treasury Shareholders’ Controlling
Interests
48
(10)
($ in millions, except per share data)
Balance at December 31, 2012
Net income
Other comprehensive loss
Cash dividends declared:
Common stock at $0.47 per share
Preferred stock(a)
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(b)
Shares acquired for treasury
Issuance of preferred stock
Impact of stock transactions under
stock compensation plans, net
Other
Balance at December 31, 2014
Net income
Other comprehensive loss
Cash dividends declared:
Common stock at $0.52 per share
Preferred stock(c)
Shares acquired for treasury
Impact of stock transactions under
75
stock compensation plans, net
(2)
Other
Balance at December 31, 2015
15,870
(a) For the year ended December 31, 2013, dividends were $1,074.31 per preferred share for Perpetual Preferred Stock, Series G and $796.88 per preferred share for Perpetual Preferred Stock, Series
60
-
15,626
1,712
(232)
60
-
15,665
1,706
(232)
60
(1)
14,626
1,483
347
60
-
14,589
1,481
347
52
3
(2,764)
75
-
15,839
(2)
11,141
1,712
(4)
10,156
1,481
(427)
(67)
(654)
297
(427)
(67)
(654)
297
47
2
(1,972)
38
3
(1,295)
(417)
(75)
(850)
(417)
(75)
(850)
(3)
12,358
(1)
37
2
(417)
(75)
(427)
(67)
(2)
31
39
(6)
2,666
2,646
2,051
1,331
2,051
1,331
(847)
(232)
(726)
429
297
347
197
23
13
72
82
(3)
$
H.
(b) For the year ended December 31, 2014, dividends were $1,275.00 per preferred share for Perpetual Preferred Stock, Series H, $1,757.46 per preferred share for Perpetual Preferred Stock, Series I
(c)
and $391.32 per preferred share for Perpetual Preferred Stock, Series J.
For the year ended December 31, 2015, dividends were $1,275.00 per preferred share for Perpetual Preferred Stock, Series H, $1,656.24 per preferred share for Perpetual Preferred Stock,
Series I and $1,225.00 per preferred share for Perpetual Preferred Stock, Series J.
Refer to Notes to Consolidated Financial Statements.
87 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 ($ 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
(Benefit from) provision for deferred income taxes
Securities gains, net
Securities gains, net - non-qualifying hedges on mortgage servicing rights
(Recovery of) provision for 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
Net losses on disposition and impairment of operating lease 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 sale of Vantiv, Inc. shares
Gain on the TRA associated with Vantiv, Inc.
Net change in:
Trading securities
Other assets
Accrued taxes, interest and expenses
Other liabilities
Net Cash Provided by Operating Activities
Investing Activities
Proceeds from sales:
Available-for-sale and other securities
Loans
Bank premises and equipment
Proceeds from repayments / maturities:
Available-for-sale and other securities
Held-to-maturity securities
Purchases:
Available-for-sale and other 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:
Deposits
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
2015
1,706
396
441
100
(71)
(5)
-
(4)
(98)
101
33
-
5,102
(5,142)
25
(331)
(31)
(34)
94
327
(191)
2,418
16,828
741
37
2,865
117
(26,733)
(164)
458
5,243
(3,238)
(85)
(3,931)
1,493
7
(49)
(422)
(75)
3,091
(2,205)
(850)
-
(28)
962
(551)
3,091
2,540
2014
1,483
315
414
83
79
(21)
-
65
(67)
19
-
-
5,477
(4,874)
42
(125)
(23)
(16)
(221)
1
(555)
2,076
5,234
147
24
2,265
20
(10,691)
(216)
279
(2,798)
(3,136)
(66)
(8,938)
2,437
(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
(327)
(9)
(131)
(672)
8
569
4,595
9,328
657
33
3,191
74
(16,216)
(274)
674
(2,695)
(4,750)
(206)
(10,184)
9,758
(618)
(4,900)
(393)
(37)
5,044
(2,225)
(1,320)
1,034
(17)
6,326
737
2,441
3,178
$
$
Refer to Notes to Consolidated Financial Statements. Note 2 contains cash payments related to interest and income taxes in addition to non-cash investing and financing activities.
88 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.
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 noninterest-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
securities with
unrealized losses are reviewed quarterly for possible OTTI. For debt
securities, if the Bancorp intends to sell the debt security or will
and held-to-maturity
more likely than not be required to sell the debt security before
recovery of the entire amortized cost basis, then an OTTI has
occurred. However, even if the Bancorp does not intend to sell the
debt security and will not likely be required to sell the debt security
before recovery of its entire amortized cost basis, the Bancorp must
evaluate expected cash flows to be received and determine if a credit
loss has occurred. In the event of a credit loss, the credit
component of the impairment is recognized within noninterest
income and the non-credit component is recognized through 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
loan
and costs and any direct principal charge-offs. Direct
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
acquisition 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, residential 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
89 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
aggregate of lease payments plus estimated residual value of the
leased property, less unearned income. Interest income on direct
financing leases is recognized over the term of the lease to achieve a
constant periodic rate of return on the outstanding investment.
Leveraged leases are carried at the aggregate of lease payments
(less nonrecourse debt payments) plus estimated residual value of
the leased property, less unearned income. Interest income on
leveraged leases is recognized over the term of the lease to achieve a
constant rate of return on the outstanding investment in the lease,
net of the related deferred income tax liability, in the years in which
the net investment is positive.
Nonaccrual Loans 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 more 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 the 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
90 Fifth Third Bancorp
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
at a stated interest rate lower than the current market rate for a new
loan with similar risk. In 2012, the OCC, a national bank regulatory
agency, issued 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.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
remaining contractual payments under
or more prior to the modification in accordance with the modified
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 more 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
loans and
identifying
Bancorp’s methodology
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
certain 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
incorporate the
loans, DCF models that may
certain ARM
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,
to sell residential mortgage
Management’s
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
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. For government-
guaranteed mortgage loans, upon foreclosure, a separate other
receivable is recognized if certain conditions are met for the amount
of the loan balance (principal and interest) expected to be recovered
from the guarantor. This receivable is also included in other assets,
separate from OREO, in the Consolidated Balance Sheets.
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
Bancorp’s strategy
includes a
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
91 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to recognize
maintained
in estimating and
measuring losses when evaluating allowances for individual loans or
pools of loans.
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
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.
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.
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
liabilities
92 Fifth Third Bancorp
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 previously discussed. Net adjustments to the reserve for
unfunded commitments are included in other noninterest expense
in the Consolidated Statements of Income.
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 is recognized in the 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 11 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 other-than-temporary
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Legal Contingencies
The Bancorp and its subsidiaries are parties 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. An accrual 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 accrual 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 and Other Long-Lived
Assets
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-
lived asset or asset group
through a probability-weighted
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
improvements are charged
the
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
transaction
income. For free-standing derivative
instruments, changes in fair values are reported in current period net
income.
impacts net
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
by taxing jurisdiction 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 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
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
93 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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 or elects
to bypass the qualitative assessment, 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
two-step
the
94 Fifth Third Bancorp
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. 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 9 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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Level 1 – Quoted prices (unadjusted) in active markets for
identical assets or liabilities that the Bancorp has the ability
to access at the measurement date.
Level 2 – Inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly or indirectly. Level 2 inputs include: quoted prices
for similar assets or liabilities in active markets; quoted
prices for identical or similar assets or liabilities in markets
that are not active; inputs other than quoted prices that are
observable for the asset or liability; and inputs that are
derived principally from or corroborated by observable
market data by correlation or other means.
is
little,
reflect
Level 3 – Unobservable inputs for the asset or liability for
if any, market activity at the
which there
the
inputs
measurement date. Unobservable
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
for
previous
reasonableness. Refer to Note 27 for further information on fair
value measurements.
review and assessments
trades and overall
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
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
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
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
95 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 of the
amended guidance did not have a material
impact on the
Consolidated Financial Statements. The required disclosures are
included in Note 11.
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
Consolidated Financial Statements. The required disclosures are
included in Note 6.
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
96 Fifth Third Bancorp
periods beginning on or after December 15, 2014, and interim
periods within those years. 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 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, 2017, 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 permitted only as of annual reporting periods beginning
after December 15, 2016 and interim reporting periods within those
fiscal years. The Bancorp is currently in the process of 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
accounting
financial asset executed
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 impact on the Consolidated Financial Statements. The
required disclosures are included in Note 15.
repurchase-to-maturity
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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 Bancorp adopted the
amended guidance prospectively on January 1, 2016 and the
adoption of the amended guidance did not have a material impact
on the 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 Bancorp adopted the amended guidance
on January 1, 2016 and the adoption did not have a material impact
on the 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 prospectively on January 1, 2015 and the
adoption of the amended guidance did not have a material impact
on the Consolidated Financial Statements. The required disclosures
are included in Note 6.
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 U.S. 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 Bancorp adopted the amended guidance on January
1, 2016 and the adoption of the amended guidance did not have a
material impact on the 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 U.S. GAAP. Presently, an
event or transaction is presumed to be an ordinary and usual activity
its
of a reporting entity unless evidence clearly supports
97 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Bancorp adopted the amended guidance prospectively on
January 1, 2016 and the adoption of the amended guidance did not
have a material impact on the 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,
those years, beginning after
and
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 adopted the amended guidance on January
1, 2016 and the adoption of the amended guidance did not have a
material impact on the Consolidated Financial Statements.
interim periods within
approach with
retrospective
a
Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued amended guidance to address the
different balance sheet presentation requirements for debt issuance
costs and debt discounts and premiums. The amended guidance
requires that debt issuance costs related to a recognized debt liability
be presented in the balance sheet as a direct deduction from the
carrying amount of that debt
liability, consistent with debt
discounts. The recognition and measurement guidance for debt
issuance costs are not affected by the amended guidance. The
amended guidance is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2015, with
early adoption permitted for financial statements that have not been
previously issued. The amended guidance should be applied
retrospectively, wherein the balance sheet of each individual period
presented should be adjusted to reflect the period-specific effects of
applying the amended guidance. As of December 31, 2015 and
2014, the Bancorp had approximately $34 million and $36 million of
debt issuance costs, respectively, recorded within other assets in the
Consolidated Balance Sheets that were required to be reclassified
and presented as a direct deduction from the debt liability upon the
adoption of the amended guidance on January 1, 2016.
98 Fifth Third Bancorp
Practical Expedient for the Measurement Date of an Employer’s Defined
Benefit Obligation and Plan Assets
In April 2015, the FASB issued amended guidance intended to
simplify an entity’s measurement of the fair value of plan assets of a
defined benefit pension or other postretirement benefit plan when
the fiscal year-end does not coincide with a month end. For an
entity with a fiscal year-end that does not coincide with a month-
end, the amended guidance provides a practical expedient that
permits the entity to measure defined benefit plan assets and
obligations using the month-end that is closest to the entity’s fiscal
year-end and apply that practical expedient consistently from year to
year. 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 amended guidance should
be applied prospectively. The adoption of the amended guidance
did not have an impact on the Consolidated Financial Statements as
the Bancorp’s fiscal year-end coincides with a month end.
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
In April 2015, the FASB issued amended guidance on a customer’s
accounting for fees paid in a cloud computing arrangement. Under
the amended guidance, if a cloud computing arrangement includes a
software license, then the customer should account for the software
license element of the arrangement consistent with the acquisition
of other software licenses. If a cloud computing arrangement does
not include a software license, the customer should account for the
arrangement as a service contract. 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 amended guidance may be applied either
prospectively to all arrangements entered into or materially modified
after the effective date, or retrospectively. The Bancorp adopted the
amended guidance prospectively on January 1, 2016 and the
adoption did not have material impact on the Consolidated
Financial Statements.
Disclosures for Investments in Certain Entities That Calculate Net Asset
Value per Share
In May 2015, the FASB issued amended guidance to remove the
requirement to categorize within the fair value hierarchy all
investments for which fair value is measured using the net asset
value per share practical expedient. The amended guidance also
removes the requirement to make certain disclosures for all
investments that are eligible to be measured at fair value using the
net asset value per share practical expedient. Rather, those
disclosures are limited to investments for which the entity has
elected to measure the fair value using that practical expedient. The
amended guidance is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2015. The
amended guidance should be applied retrospectively to all periods
presented. The retrospective approach requires that an investment
for which fair value is measured using the net asset value per share
practical expedient be removed from the fair value hierarchy in all
periods presented
in an entity’s financial statements. Earlier
application is permitted. The Bancorp adopted the amended
guidance on January 1, 2016 and the adoption did not have a
material impact on the Consolidated Financial Statements.
Presentation and Subsequent Measurement of Debt Issuance Costs Associated
with Line-Of-Credit Agreements
In August 2015, the FASB issued amended guidance about the
presentation and subsequent measurement of debt issuance costs
associated with line of credit arrangements. Given the absence of
authoritative guidance for debt issuance costs related to line of
credit arrangements within ASU 2015-03, the amended guidance
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amendments require an entity to present separately in other
comprehensive income the portion of the change in fair value that
results from a change in instrument-specific credit risk. For public
business entities, the amendments 1) eliminate the requirement to
disclose the method(s) and significant assumptions used to estimate
fair value for financial instruments measured at amortized cost and
2) require, for disclosure purposes, the use of an exit price notion in
the determination of the fair value of financial instruments. The
amended guidance is effective for fiscal years and interim periods
within those fiscal years, beginning after December 15, 2017. Upon
adoption, the Bancorp will be required to make a cumulative-effect
adjustment to the Consolidated Balance Sheets as of the beginning
of the fiscal year of adoption. The guidance on equity securities
without readily determinable fair value will be applied prospectively
to all equity investments that exist as of the date of adoption of the
standard. Early adoption of the amendments is not permitted with
the exception of the presentation of certain fair value changes for
financial liabilities measured at fair value for which early application
is permitted. The Bancorp is currently in the process of evaluating
the impact of the amended guidance on its Consolidated Financial
Statements.
provides that the SEC staff would not object to an entity deferring
and presenting debt issuance costs as an asset and subsequently
amortizing the deferred debt issuance costs ratably over the term of
the line of credit arrangement, regardless of whether there were any
outstanding borrowings on the line of credit arrangement. The
amended guidance is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2015. The
amended guidance should be applied retrospectively, where in the
balance sheet of each individual period presented should be adjusted
to reflect the period-specific effects of applying the amendments.
Early adoption is permitted for financial statements that have not
issued. The Bancorp adopted the amended
been previously
guidance on January 1, 2016 and the adoption did not have a
material impact on the Consolidated Financial Statements.
Simplifying the Accounting for Measurement-Period Adjustments
In September 2015, the FASB issued amended guidance to simplify
the accounting for adjustments made to provisional amounts
recognized in a business combination. The amended guidance
eliminates the requirement to retrospectively account for those
adjustments and requires that an acquirer recognize adjustments to
provisional amounts that are identified during the measurement
period in the reporting period in which the adjustment amounts are
determined. The acquirer shall record, in the same period’s financial
statements, the effect on earnings of changes in depreciation,
amortization or other income effects, if any, as a result of the
change to the provisional amounts, calculated as if the accounting
had been completed at the acquisition date. The amended guidance
requires an entity to present separately on the face of the income
statement or disclose in the notes the portion of the amount
recorded in current-period earnings by line item that would have
been recorded in previous reporting periods if the adjustment to the
provisional amounts had been recognized as of the acquisition date.
The amended guidance is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2015, with earlier application permitted for financial statements that
have not been issued. The amended guidance should be applied
prospectively to adjustments to provisional amounts that occur after
the effective date of the amended guidance. The Bancorp adopted
the amended guidance on January 1, 2016 and the adoption did not
have an impact on the Consolidated Financial Statements.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued amended guidance to improve
certain aspects of recognition, measurement, presentation and
disclosure of financial instruments. Specifically, the amendments
significantly revise an entity’s accounting related to 1) the
classification and measurement of investments in equity securities,
2) the presentation of certain fair value changes for financial
liabilities measured at fair value, and 3) certain disclosure
requirements associated with the fair value of financial instruments.
The amendments require equity
those
accounted for under the equity method of accounting or those that
result in consolidation of the investee) to be measured at fair value
with changes in fair value recognized in net income. However, an
entity may choose to measure equity investments that do not have
readily determinable fair values at cost minus impairment, if any,
plus or minus changes as a result of an observable price change. The
amendments also simplify the impairment assessment of equity
investments for which fair value is not readily determinable by
requiring an entity to perform a qualitative assessment to identify
impairment. If qualitative indicators are identified, the entity will be
required to measure the investment at fair value. For financial
liabilities that an entity has elected to measure at fair value, the
investments
(except
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 non-cash investing and financing activities are presented in the following table
for the years ended December 31:
($ in millions)
Cash Payments:
Interest
Income taxes
Non-cash 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
$
2015
475
400
487
288
105
-
4
2014
429
550
855
31
145
2
15
2013
406
535
641
44
204
4
-
3. RESTRICTIONS ON CASH, DIVIDENDS AND OTHER CAPITAL ACTIONS
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 average vault cash during the following two-
week maintenance period. When vault cash is not sufficient to meet
the reserve requirement, the remaining amount must be satisfied
with average funds held at the FRB. At December 31, 2015 and
2014, the Bancorp’s banking subsidiary reserve requirement was
$1.9 billion and $1.8 billion, respectively. The Bancorp’s banking
subsidiary satisfied its reserve requirement during the two-week
maintenance periods covering December 31, 2015 and 2014. 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
strategies for addressing proposed revisions to the regulatory capital
framework agreed upon by the BCBS and requirements arising from
the DFA.
On March 11, 2015, the Bancorp announced the results of its
capital plan submitted to the FRB as part of the 2015 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 2015 capital distributions. The FRB
indicated to the Bancorp that it did not object to the following
capital actions for the period beginning April 1, 2015 and ending
June 30, 2016:
The potential increase in the quarterly common stock
The potential repurchase of common shares in an amount
dividend to $0.14 per share in 2016;
up to $765 million; and
The additional ability to repurchase shares in the amount
of any after-tax gains from the sale of Vantiv, Inc.
common stock.
indirect banking
subsidiary are subject to regulations and limitations prescribed by
state and federal supervisory agencies. The Bancorp’s indirect
banking subsidiary paid the Bancorp’s direct nonbank subsidiary
holding company, which in turn paid the Bancorp $1.0 billion and
$1.1 billion in dividends during the years ended December 31, 2015
and 2014, 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 2015 stress testing program and CCAR on October 23,
2014, with firm submissions of stress test results and capital plans
due to the FRB on January 5, 2015, 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 (changed to CET1 on January 1, 2015)
of 5% on a pro forma basis under expected and stressful conditions
throughout the planning horizon. The FRB assessed the Bancorp’s
100 Fifth Third Bancorp
As contemplated by the 2014 capital plan part of the FRB’s
CCAR, during the first quarter of 2015, the Bancorp entered into a
transaction. As
share
$180 million accelerated
contemplated by the 2015 capital plan part of the FRB’s CCAR, the
Bancorp entered into $155 million, $300 million and $215 million of
accelerated share repurchase transactions during the second, third
and fourth quarters of 2015, respectively.
repurchase
Additionally, as a CCAR institution, the Bancorp is required to
disclose the results of its company-run stress test under the
supervisory severely adverse scenario, and to provide information
related to the types of risk included in its stress testing; a general
description of the methodologies used; estimates of certain financial
results and pro forma capital ratios; and an explanation of the most
significant causes of changes in regulatory capital ratios. On March
5, 2015 the Bancorp publicly disclosed the results of its company-
run stress test as required by the DFA stress testing rules, in a press
release.
The BHCs that participated in the 2015 CCAR, including the
Bancorp, were required to also conduct mid-cycle company-run
stress tests using data as of March 31, 2015. The stress tests must be
based on three BHC defined scenarios – baseline, adverse and
severely adverse. The Bancorp submitted the results of its mid-cycle
stress test to the FRB by the required July 6, 2015 submission date.
In addition, the Bancorp published a Form 8-K providing a
summary of the results under the severely adverse scenario on July
27, 2015. These results represented estimates of the Bancorp’s
results from the second quarter of 2015 through the second quarter
of 2017 under the severely adverse scenario.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENT SECURITIES
The following table provides the amortized cost, fair value and unrealized gains and losses for the major categories of the available-for-sale and
other and held-to-maturity investment securities portfolios as of December 31:
2015
2014
($ in millions)
Available-for-sale and other securities:
U.S. Treasury and federal agencies securities
Obligations of states and political subdivisions securities
Mortgage-backed securities:
Agency residential mortgage-backed securities(a)
Agency commercial mortgage-backed securities
Non-agency commercial mortgage-backed securities
Asset-backed securities and other debt securities
Equity securities(b)
Total available-for-sale and other securities
Held-to-maturity securities:
Obligations of states and political subdivisions securities $
Asset-backed securities and other debt securities
Total held-to-maturity securities
(a)
$
1,155
50
14,811
7,795
2,801
1,363
703
$ 28,678
Amortized Unrealized Unrealized
Gains
Losses
Cost
Fair
Value
1,187
52
15,081
7,862
2,804
1,355
703
29,044
Amortized Unrealized Unrealized
Gains
Losses
Cost
1,545
185
11,968
4,465
1,489
1,324
701
21,677
87
7
437
101
61
40
3
736
-
-
(1)
(1)
-
(2)
(1)
(5)
Fair
Value
1,632
192
12,404
4,565
1,550
1,362
703
22,408
32
2
283
100
35
13
2
467
-
-
(13)
(33)
(32)
(21)
(2)
(101)
-
-
-
Includes interest-only mortgage-backed securities of $50 and $175 as of December 31, 2015 and 2014, respectively, recorded at fair value with fair value changes recorded in securities gains, net,
in the Consolidated Statements of Income.
186
1
187
186
1
187
68
2
70
68
2
70
-
-
-
-
-
-
-
-
-
$
(b) Equity securities consist of FHLB, FRB and DTCC restricted stock holdings of $248, $355, and $1, respectively, at December 31, 2015 and $248, $352 and $0, respectively, at December
31, 2014, that are carried at cost, and certain mutual fund and equity security holdings.
The following table presents realized gains and losses that were recognized in income from available-for-sale securities for the years ended
December 31:
($ in millions)
Realized gains
Realized losses
OTTI
Net realized gains (losses)(a)
(a) Excludes net losses on interest-only mortgage-backed securities of $4 and $17 for the years ended December 31, 2015 and 2014, respectively, and net gains on interest-only mortgage-backed
97
(76)
(5)
16
70
(9)
(24)
37
77
(102)
(74)
(99)
2013
2014
2015
$
$
securities of $129 for the year ended December 31, 2013.
Trading securities were $386 million as of December 31, 2015, compared to $360 million at December 31, 2014. The following table presents total
gains and losses that were recognized in income from trading securities for the years ended December 31:
($ in millions)
Realized gains(a)
Realized losses(b)
Net unrealized (losses) gains(c)
Total trading securities losses
(a)
2015
2014
2013
$
$
6
(10)
(3)
(7)
8
(7)
(3)
(2)
5
(8)
3
-
Includes realized gains of $6, $4 and $4 for the years ended December 31, 2015, 2014 and 2013, respectively, recorded in corporate banking revenue and investment advisory revenue in the
Consolidated Statements of Income.
Includes realized losses of $10, $7 and $8 for the years ended December 31, 2015, 2014 and 2013, respectively, recorded in corporate banking revenue and investment advisory revenue in the
Consolidated Statements of Income.
Includes an immaterial amount of net unrealized gains for the years ended December 31, 2015, 2014 and 2013 recorded in corporate banking revenue and investment advisory revenue in the
Consolidated Statements of Income.
(b)
(c)
At December 31, 2015 and 2014, securities with a fair value of $11.0
billion and $14.2 billion, respectively, were pledged to secure
borrowings, public deposits, trust funds, derivative contracts and for
other purposes as required or permitted by law.
101 Fifth Third Bancorp
The expected maturity distribution of the Bancorp’s mortgage-backed securities and the contractual maturity distribution of the remainder of the
Bancorp’s available-for-sale and other and held-to-maturity investment securities as of December 31, 2015 are shown in the following table:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Available-for-Sale and Other
Held-to-Maturity
($ 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.
707
7,441
18,372
1,821
703
29,044
695
7,277
18,191
1,812
703
28,678
Amortized Cost
Fair Value
$
$
43
12
13
2
-
70
Amortized Cost
Fair Value
43
12
13
2
-
70
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)
2015
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
Total
2014
Agency residential mortgage-backed securities
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
$
$
$
$
2,903
3,111
1,610
623
1
8,248
73
355
286
-
714
(13)
(33)
(32)
(11)
(1)
(90)
(1)
(1)
(1)
-
(3)
-
-
-
226
37
263
-
-
74
30
104
-
-
-
(10)
(1)
(11)
-
-
(1)
(1)
(2)
2,903
3,111
1,610
849
38
8,511
73
355
360
30
818
(13)
(33)
(32)
(21)
(2)
(101)
(1)
(1)
(2)
(1)
(5)
Other-Than-Temporary Impairments
The Bancorp recognized $5 million, $24 million and $74 million of
OTTI on its available-for-sale and other debt securities, included in
securities gains, net and securities gains, net – non-qualifying hedges
on mortgage servicing rights in the Consolidated Statements of
Income during the years ended December 31, 2015, 2014 and 2013,
respectively. The Bancorp did not recognize OTTI on any of its
available-for-sale equity securities or held-to-maturity debt securities
during the years ended December 31, 2015, 2014 and 2013. At
December 31, 2015, 1% of unrealized losses in the available-for-sale
and other securities portfolio were represented by non-rated
securities, compared to less than 1% at December 31, 2014.
102 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS AND LEASES
The Bancorp diversifies its loan and lease portfolio by offering a
variety of loan and lease products with various payment terms and
rate structures. Lending activities are generally concentrated within
those states in which the Bancorp has banking centers and are
primarily located in the Midwestern and Southeastern regions of the
United States. The Bancorp’s commercial loan portfolio consists of
lending to various industry types. Management periodically reviews
the performance of its loan and lease products to evaluate whether
they are performing within acceptable interest rate and credit risk
levels and changes are made to underwriting policies and procedures
as needed. The Bancorp maintains an allowance to absorb loan and
lease losses inherent in the portfolio. For further information on
credit quality and the ALLL, refer to Note 6.
The following table provides a summary of commercial loans and leases classified by primary purpose and consumer loans and leases classified
based upon product or collateral as of December 31:
($ in millions)
Loans and leases held for sale:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
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
Total portfolio loans and leases are recorded net of unearned
income, which totaled $624 million as of December 31, 2015 and
$665 million as of December 31, 2014. 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 $220 million and
$169 million as of December 31, 2015 and 2014, respectively.
The Bancorp’s FHLB and FRB advances are generally secured
by loans. The Bancorp had loans of $11.9 billion and $11.1 billion at
December 31, 2015 and 2014, respectively, pledged at the FHLB,
and loans of $33.7 billion and $33.9 billion at December 31, 2015
and 2014, respectively, pledged at the FRB.
2015
2014
$
$
$
$
20
34
-
-
708
35
4
101
1
903
42,131
6,957
3,214
3,854
56,156
13,716
8,301
11,493
2,259
657
36,426
92,582
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
103 Fifth Third Bancorp
The following table presents a summary of the total loans and leases owned by the Bancorp and net charge-offs as of and for the years ended
December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Balance
90 Days Past Due
and Still Accruing
Net
Charge-Offs
($ 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 and leases held for sale
Total portfolio loans and leases
2015
42,151
6,991
3,214
3,854
14,424
8,336
11,497
2,360
658
93,485
903
92,582
$
$
$
$
2014
40,801
7,410
2,071
3,721
13,582
8,886
12,037
2,401
436
91,345
1,261
90,084
2015
7
-
-
-
40
-
10
18
-
75
2014
-
-
-
-
56
-
8
23
-
87
2015
229
27
3
2
17
39
28
82
19
446
2014
222
26
12
1
126
59
27
82
20
575
The Bancorp engages in commercial lease products primarily related
to the financing of commercial equipment. The Bancorp had $3.1
billion and $2.8 billion of direct financing leases, net of unearned
income, at December 31, 2015 and 2014, respectively, and $801
million and $874 million of leveraged leases, net of unearned
income, at December 31, 2015 and 2014, respectively.
Pre-tax income from leveraged leases was $27 million during
the year ended December 31, 2015 and $25 million during both the
years ended December 31, 2014 and 2013 and the tax effect of this
income was an expense of $1 million for the year ended December
31, 2015 and $9 million during both the years ended December 31,
2014 and 2013.
The following table provides the components of the commercial lease financing portfolio as of December 31:
($ 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 commercial lease financing(a)
(a) The accumulated allowance for uncollectible minimum lease payments was $47 and $45 at December 31, 2015 and 2014, respectively.
2015
3,550
906
22
4,478
(624)
3,854
$
$
2014
3,589
779
17
4,385
(665)
3,720
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 $8 million and $4 million of residual value write-downs
related to commercial leases for the years ended December 31, 2015
and 2014, respectively. The residual value write-downs related to
commercial leases are recorded in corporate banking revenue in the
Consolidated Statements of Income. At December 31, 2015, the
minimum future lease payments receivable for each of the years
2016 through 2020 was $715 million, $632 million, $532 million,
$449 million and $333 million, respectively.
104 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. CREDIT QUALITY AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES
The Bancorp disaggregates ALLL balances and transactions in the ALLL by portfolio segment. Credit quality related disclosures for loans and
leases are further disaggregated by class.
Allowance for Loan and Lease Losses
The following tables summarize transactions in the ALLL by portfolio segment for the years ended December 31:
2015 ($ in millions)
Balance, beginning of period
Losses charged-off
Recoveries of losses previously charged-off
Provision for loan and lease losses
Balance, end of period
2014 ($ in millions)
Balance, beginning of period
Losses charged-off
Recoveries of losses previously charged-off
Provision for loan and lease losses
Balance, end of period
2013 ($ in millions)
Balance, beginning of period
Losses charged-off
Recoveries of losses previously charged-off
Provision for loan and lease losses
Balance, end of period
Commercial
875
(298)
37
226
840
Commercial
1,058
(299)
38
78
875
Commercial
1,236
(284)
64
42
1,058
$
$
$
$
$
$
Residential
Mortgage
104
(28)
11
13
100
Residential
Mortgage
189
(139)
13
41
104
Residential
Mortgage
229
(70)
10
20
189
Consumer
237
(216)
48
148
217
Consumer
225
(241)
53
200
237
Consumer
278
(283)
62
168
225
Unallocated
106
-
-
9
115
Unallocated
110
-
-
(4)
106
Unallocated
111
-
-
(1)
110
Total
1,322
(542)
96
396
1,272
Total
1,582
(679)
104
315
1,322
Total
1,854
(637)
136
229
1,582
The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment:
As of December 31, 2015 ($ in millions)
ALLL:(a)
Individually evaluated for impairment
Collectively evaluated for impairment
Unallocated
Total ALLL
Portfolio loans and leases:(b)
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
$
$
(c)
119 a
721
-
840
67
33
-
100
49
168
-
217
-
-
115
115
-
-
-
-
235
922
115
1,272
1,869
90,544
2
92,415
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
Total portfolio loans and leases
(a)
(b) Excludes $167 of residential mortgage loans measured at fair value and includes $801 of leveraged leases, net of unearned income, at December 31, 2015.
(c)
Includes $5 related to leveraged leases at December 31, 2015.
815 a
55,341
-
56,156
424
22,286
-
22,710
630
12,917
2
13,549
$
$
(c)
Includes five restructured loans at December 31, 2015 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 $27 and an ALLL of $15.
105 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
As of December 31, 2014 ($ in millions)
ALLL:(a)
Individually evaluated for impairment
Collectively evaluated for impairment
Unallocated
Total ALLL
Portfolio loans and leases:(b)
$
$
(c)
179 a
696
-
875
65
39
-
104
61
176
-
237
-
-
106
106
-
-
-
-
305
911
106
1,322
2,261
87,713
2
89,976
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, at December 31, 2014.
(c)
Includes $6 related to leveraged leases at December 31, 2014.
1,260 a
52,693
-
53,953
483
23,259
-
23,742
518
11,761
2
12,281
$
$
(c)
Includes five restructured 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 ALLL of $10.
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 leases.
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 and 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.
106 Fifth Third Bancorp
The following tables summarize the credit risk profile of the Bancorp’s commercial portfolio segment, by class:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2015 ($ in millions)
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
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 commercial loans and leases
Pass
38,756
3,344
3,105
3,201
3,724
52,130
Pass
38,013
3,430
3,198
1,966
3,678
50,285
$
$
$
$
Special
Mention
1,633
124
63
4
93
1,917
Special
Mention
1,352
137
76
65
9
1,639
Substandard
1,742
191
130
9
37
2,109
Substandard
1,400
267
284
38
33
2,022
Doubtful
-
-
-
-
-
-
Doubtful
-
-
7
-
-
7
Total
42,131
3,659
3,298
3,214
3,854
56,156
Total
40,765
3,834
3,565
2,069
3,720
53,953
Residential Mortgage and Consumer Portfolio Segments
For purposes of monitoring
risk
the credit quality and
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 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 following table. 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)
13,498
Residential mortgage loans(a)
8,222
Home equity
11,491
Automobile loans
2,226
Credit card
657
Other consumer loans and leases
Total residential mortgage and consumer loans and leases(a)
36,094
(a) Excludes $167 and $108 of loans measured at fair value at December 31, 2015 and 2014, respectively.
$
$
2015
Nonperforming
51
79
2
33
-
165
Performing
12,204
8,793
12,036
2,360
418
35,811
2014
Nonperforming
77
93
1
41
-
212
107 Fifth Third Bancorp
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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Current
Loans and
Leases(c)
$
As of December 31, 2015 ($ in millions)
Commercial loans and leases:
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 loans and leases:
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total portfolio loans and leases(a)
(a) Excludes $167 of residential mortgage loans measured at fair value at December 31, 2015.
(b)
41,996
3,610
3,262
3,214
3,850
13,420
8,158
11,407
2,207
656
91,780
$
30-89
Days(c)
Past Due
90 Days
or More(c)
Total
Past Due
Total Loans
and Leases
90 Days Past
Due and Still
Accruing
55
15
9
-
3
37
82
75
29
1
306
80
34
27
-
1
92
61
11
23
-
329
135
49
36
-
4
129
143
86
52
1
635
42,131
3,659
3,298
3,214
3,854
13,549
8,301
11,493
2,259
657
92,415
7
-
-
-
-
40
-
10
18
-
75
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,
2015, $102 of these loans were 30-89 days past due and $335 were 90 days or more past due. The Bancorp recognized $8 of losses during the year ended December 31, 2015 due to claim
denials and curtailments associated with these insured or guaranteed loans.
Includes accrual and nonaccrual loans and leases.
(c)
Current
Loans and
Leases(c)
$
As of December 31, 2014 ($ in millions)
Commercial loans and leases:
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 loans and leases:
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total portfolio loans and leases(a)
(a) Excludes $108 of residential mortgage loans measured at fair value at December 31, 2014.
(b)
8,710
11,953
2,335
417
89,272
40,651
3,774
3,537
2,069
3,717
12,109
$
30-89
Days(c)
Past Due
90 Days
or More(c)
Total
Past Due
Total Loans
and Leases
90 Days Past
Due and Still
Accruing
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
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,
$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 during 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)
108 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired Portfolio Loans and Leases
Larger commercial loans and leases included within aggregate
borrower relationship balances exceeding $1 million that exhibit
probable or observed credit weaknesses are subject to individual
review for impairment. The Bancorp also performs an individual
review on loans and leases that are restructured in a TDR. The
Bancorp considers the current value of collateral, credit quality of
any guarantees, the loan structure and other factors when
evaluating whether an individual loan or lease is impaired. Other
factors may include the geography and industry of the borrower,
size and financial condition of the borrower, cash flow and
leverage of the borrower and the Bancorp’s evaluation of the
borrower’s management. Smaller-balance homogenous loans or
leases that are collectively evaluated for impairment are not
included in the following tables.
The following tables summarize the Bancorp’s impaired portfolio loans and leases, by class, that were subject to individual review, which includes
all portfolio loans and leases restructured in a TDR as of December 31:
2015 ($ in millions)
With a related ALLL:
Commercial loans and leases:
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 loans and leases:
Home equity
Automobile loans
Credit card
Total impaired portfolio loans and leases with a related ALLL
With no related ALLL:
Commercial loans and leases:
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 loans and leases:
Home equity
Automobile loans
Total impaired portfolio loans and leases with no related ALLL
Total impaired portfolio loans and leases
(a)
Unpaid
Principal
Balance
Recorded
Investment
ALLL
$
$
$
$
412
28
75
4
3
450
226
17
61
1,276
228
54
126
9
1
210
122
3
753
2,029
346
21
64
4
3
444
225
16
61
1,184
182
51
111
5
1
186
119
3
658
(a)
1,842 a
84
5
12
2
1
67
32
2
15
220
-
-
-
-
-
-
-
-
-
220
Includes $491, $607 and $372, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $203, $23 and $52, respectively, of commercial, residential
mortgage and consumer portfolio TDRs on nonaccrual status at December 31, 2015.
(b) Excludes five restructured loans at December 31, 2015 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 $27, a recorded investment of $27 and an ALLL of $15.
109 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2014 ($ in millions)
With a related ALLL:
Commercial loans and leases:
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 loans and leases:
Home equity
Automobile loans
Credit card
Total impaired portfolio loans and leases with a related ALLL
With no related ALLL:
Commercial loans and leases:
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 loans and leases:
Home equity
Automobile loans
Total impaired portfolio loans and leases with no related ALLL
Total impaired portfolio 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 portfolio TDRs on accrual status and $214, $33 and $63, respectively, of commercial, residential
mortgage and consumer portfolio TDRs on nonaccrual status at December 31, 2014.
(b) Excludes five restructured 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 ALLL of $10.
The following table summarizes the Bancorp’s average impaired portfolio loans and leases, by class, and interest income, by class, for the years
ended December 31:
2015
2014
2013
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
($ in millions)
Commercial loans and leases:
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 loans and leases:
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total average impaired portfolio loans and leases
(a) Excludes five restructured 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, with an average recorded
investment of $27 for the year ended December 31, 2015 and $28 for both of the years ended December 31, 2014 and 2013. An immaterial amount of interest income was recognized during the
years ended December 31, 2015, 2014 and 2013.
786
149
268
92
13
1,273
517
146
321
108
11
1,311
361
22
68
-
2,062
394
24
62
-
3,061
429
29
68
2
2,942
663
92
224
41
5
586
20
1
5
-
119
23
1
4
-
113
16
4
8
4
-
53
25
4
8
2
-
54
21
2
7
1
-
23
13
1
6
-
74
$
110 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; 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. The following table presents the Bancorp’s nonperforming
loans and leases, by class, and OREO and other repossessed property as of December 31:
2015
2014
($ in millions)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage owner-occupied loans(a)
Commercial mortgage nonowner-occupied loans
Commercial leases
Total nonaccrual portfolio commercial loans and leases
Residential mortgage loans
Consumer loans and leases:
Home equity
Automobile loans
Credit card
Total nonaccrual portfolio consumer loans and leases
Total nonaccrual portfolio loans and leases(b)(c)
OREO and other repossessed property(d)
Total nonperforming portfolio assets(b)(c)(d)
(a) Excludes $20 and $21 of restructured nonaccrual loans at December 31, 2015 and 2014, respectively, associated with a consolidated VIE in which the Bancorp has no continuing credit risk
79
2
33
114
506
141
647
93
1
41
135
579
165
744
259
46
35
1
341
51
228
78
57
4
367
77
$
$
$
due the risk being assumed by a third party.
(b) Excludes $12 and $39 of nonaccrual loans held for sale at December 31, 2015 and 2014, respectively.
(c)
Includes $6 and $9 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at December 31, 2015 and 2014, respectively, and $2 and $4 of restructured
nonaccrual government insured commercial loans at December 31, 2015 and 2014, respectively.
(d) Excludes $14 and $71 of OREO related to government insured loans at December 31, 2015 and 2014, respectively. The Bancorp has historically excluded government guaranteed loans
classified in OREO from its nonperforming asset disclosures. Upon the prospective adoption on January 1, 2015 of ASU 2014-14 “Classification of Certain Government-Guaranteed Mortgage
Loans Upon Foreclosure”, government guaranteed loans meeting certain criteria were reclassified to other receivables rather than OREO upon foreclosure. At December 31, 2015, the Bancorp
had $44 of government guaranteed loans classified as other receivables. Refer to Note 1 for further information on the adoption of this amended guidance.
The Bancorp’s recorded investment of consumer mortgage loans
secured by residential real estate properties for which formal
local
foreclosure proceedings are
requirements of the applicable jurisdiction was $303 million as of
December 31, 2015.
in process according
to
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 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
the Bancorp’s ALLL methodology. Upon
information on
modification of a
loan, the Bancorp measures the related
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, 2015, the Bancorp had $39 million and
$23 million in line of credit and letter of credit commitments,
respectively, compared to $63 million and $26 million in line of
credit and letter of credit commitments as of December 31, 2014,
respectively, to lend additional funds to borrowers whose terms
have been modified in a TDR.
111 Fifth Third Bancorp
The following tables provide a summary of loans by class modified in a TDR by the Bancorp during the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Number of loans
modified in a TDR
during the year(b)
Recorded investment
in loans modified
in a TDR
during the year
Increase
(Decrease)
to ALLL upon
modification
Charge-offs
recognized upon
modification
2015 ($ in millions)(a)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Residential mortgage loans
Consumer loans and leases:
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 which were accounted for within a pool.
(b) Represents number of loans post-modification and excludes loans previously modified in a TDR.
267
440
12,569
14,472
77
18
12
1,089
$
$
146
16
7
155
16
7
62
409
7
(2)
(1)
8
(1)
1
11
23
3
-
-
-
-
-
7
10
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
2014 ($ in millions)(a)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Residential mortgage loans
Consumer loans and leases:
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 which were accounted for within a pool.
(b) Represents number of loans post-modification and excludes loans previously modified in a TDR.
284
608
8,929
11,102
128
32
28
1,093
$
$
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
$
2013 ($ in millions)(a)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage owner-occupied loans(c)
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Consumer loans and leases:
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 which were accounted for within a pool.
(b) Represents number of loans post-modification and excludes loans previously modified in a TDR.
(c) 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, the ALLL increased $7 upon modification and a charge-off of $2 was 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
44
-
-
-
-
-
(1)
1
7
58
-
-
-
44
$
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 ALLL
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,
automobile 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
112 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reflected as a charge-off or an increase in ALLL. The Bancorp
recognizes ALLL for the entire balance of the credit card loans
modified in a TDR that subsequently default.
The following tables provide a summary of TDRs that subsequently defaulted during the years ended December 31, 2015, 2014 and 2013 that was
within twelve months of the restructuring date:
December 31, 2015 ($ in millions)(a)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Residential mortgage loans
Consumer loans and leases:
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.
December 31, 2014 ($ in millions)(a)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Residential mortgage loans
Consumer loans and leases:
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.
December 31, 2013 ($ in millions)(a)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Residential mortgage loans
Consumer loans and leases:
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.
Number of
Contracts
Recorded
Investment
7
3
156
15
8
1,935
2,124
Number of
Contracts
11
3
2
235
30
6
2,059
2,346
Number of
Contracts
6
7
375
65
4
1,768
2,225
$
$
$
$
$
$
11
1
21
1
-
8
42
Recorded
Investment
36
4
1
32
2
-
12
87
Recorded
Investment
11
1
58
4
-
11
85
113 Fifth Third Bancorp
7. BANK PREMISES AND EQUIPMENT
The following table provides a summary of bank premises and equipment as of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Estimated Useful Life
2015
Land and improvements(a)
Buildings
Equipment
Leasehold improvements
Construction in progress
Bank premises and equipment held for sale:
Land and improvements
Buildings
Equipment
Leasehold improvements
Accumulated depreciation and amortization
Total bank premises and equipment
(a) At December 31, 2015 and 2014, land and improvements included $102 and $165, respectively, associated with parcels of undeveloped land intended for future branch expansion.
55
20
3
3
(2,466)
2,239
685
1,755
1,696
403
85
2 - 30 yrs.
2 - 30 yrs.
5 - 30 yrs.
$
$
2014
793
1,807
1,682
416
98
23
3
-
-
(2,357)
2,465
relationships in the Pittsburgh MSA to First National Bank of
Pennsylvania. On September 30, 2015, the Bancorp announced the
decision to enter into an agreement to sell its retail operations,
including retail accounts, certain private banking deposits and
related loan relationships in the St. Louis MSA to Great Southern
Bank. Both transactions are part of the Branch Consolidation and
Sales Plan and are expected to close in the first half of 2016. As of
December 31, 2015, the Bancorp intended to consolidate and/or
sell 107 operating branch locations and to sell an additional 32
parcels of undeveloped land that had been acquired by the Bancorp
for future branch expansion. For further
information on a
subsequent event related to the Branch Consolidation and Sales
Plan, refer to Note 31.
The Bancorp performs assessments of the recoverability of
long-lived assets when events or changes in circumstances indicate
that their carrying values may not be recoverable. Impairment losses
associated with such assessments and lower of cost or market
adjustments were $109 million, $20 million and $6 million for the
years ended December 31, 2015, 2014 and 2013, respectively. The
recognized impairment losses were recorded in other noninterest
income in the Consolidated Statements of Income.
Depreciation and amortization expense related to bank premises
and equipment was $256 million, $254 million and $245 million for
the years ended December 31, 2015, 2014 and 2013, respectively.
The Bancorp monitors changing customer preferences
associated with the channels it uses for banking transactions to
evaluate the efficiency, competitiveness and quality of the customer
service experience in its consumer distribution network. As part of
this ongoing assessment, the Bancorp may determine that it is no
longer fully committed to maintaining full-service branches at
certain of its existing banking center locations. Similarly, the
Bancorp may also determine that it is no longer fully committed to
building banking centers on certain parcels of land which had
previously been held for future branch expansion. On June 16,
2015, the Bancorp’s Board of Directors authorized management to
pursue a plan to further develop its distribution strategy, including a
plan to consolidate and/or sell certain operating branch locations
and certain parcels of undeveloped land that had been acquired by
the Bancorp
(the “Branch
Consolidation and Sales Plan”).
future branch expansion
for
On September 3, 2015, the Bancorp announced the decision to
enter into an agreement to sell branch banking locations, retail
loan
accounts, certain private banking deposits and related
114 Fifth Third Bancorp
The following table summarizes the assets and liabilities classified as held for sale as a result of the Branch Consolidation and Sales Plan as of:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Assets:
Loans held for sale:
Commercial and industrial loans
Commercial mortgage loans
Residential mortgage loans
Home equity
Automobile loans
Total loans held for sale(a)
Bank premises and equipment held for sale (included in the preceding table):
Land and improvements(b)
Buildings(b)
Equipment(b)
Leasehold improvements(b)
Total bank premises and equipment held for sale (included in the preceding table)
Total assets held for sale
Liabilities:
Deposits held for sale:
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits held for sale(c)
Total liabilities held for sale
(a)
(b)
(c)
(d)
Included in loans held for sale in the Consolidated Balance Sheets.
Included in bank premises and equipment in the Consolidated Balance Sheets.
Included in noninterest-bearing deposits and interest-bearing deposits in the Consolidated Balance Sheets.
Included in the Branch Banking, Consumer Lending and Investment Advisors business segments.
December 31, 2015(d)
20
22
188
35
4
269
25
14
3
3
45
314
117
511
628
628
$
$
$
$
$
$
$
Gross occupancy expense for cancelable and noncancelable leases,
which is included in net occupancy expense in the Consolidated
Statements of Income, was $110 million, $100 million and $98
million for the years ended December 31, 2015, 2014 and 2013,
respectively, which was reduced by rental income from leased
premises of $18 million, $17 million and $16 million during the
years ended December 31, 2015, 2014 and 2013, respectively. The
Bancorp’s subsidiaries have entered into a number of noncancelable
operating and capital lease agreements with respect to bank
premises and equipment.
The following table provides the annual future minimum payments under noncancelable operating leases and capital leases for the years ending
December 31:
($ in millions)
2016
2017
2018
2019
2020
Thereafter
Total minimum lease payments
Less: Amounts representing interest
Present value of net minimum lease payments
Noncancelable
Operating Leases
Capital Leases
$
$
91
84
82
74
62
242
635
-
-
7
6
6
5
1
2
27
3
24
8. OPERATING LEASE EQUIPMENT
As part of a periodic review of long-lived assets for impairment
associated with operating lease assets, during the first quarter of
2015, the Bancorp identified an impairment regarding certain
medium and large cabin corporate aircraft subject to leases expiring
in 2017 and later. After applying the appropriate tests under current
accounting guidance, it was determined that such recoverability was
in doubt and the assets had, in fact, been impaired. The impact of
the impairment was $30 million which was recognized as a
reduction to corporate banking revenue in the Consolidated
Statements of Income during the first quarter of 2015 as such
diminution in value of the assets was associated with both the first
quarter of 2015 and prior periods. The Bancorp assessed the
materiality of this impairment and concluded it was immaterial to
interim amounts during the first quarter of 2015 and previously
reported annual and interim amounts. During the second and third
quarters of 2015, the Bancorp recorded $4 million and $2 million,
respectively, of impairment associated with operating lease assets.
The impact of the impairments was recognized as a reduction to
corporate banking revenue in the Consolidated Statements of
Income.
115 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. 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 $965 million
goodwill impairment charge was recorded in the fourth quarter of
2008 and represents the total amount of accumulated impairment
losses as of December 31, 2015.
Changes in the net carrying amount of goodwill, by reporting unit, for the years ended December 31, 2015 and 2014 were as follows:
($ in millions)
Net carrying value as of December 31, 2013
Acquisition activity
Net carrying value as of December 31, 2014
Acquisition activity
Net carrying value as of December 31, 2015
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, 2015 and the estimated fair values of the Commercial
Banking, Branch Banking and Investment Advisors reporting units
substantially exceeded their carrying values, including goodwill.
10. 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
over their estimated useful lives. Intangible assets have an estimated
remaining weighted-average life at December 31, 2015 of 4.3 years.
The details of the Bancorp’s intangible assets are shown in the following table:
($ in millions)
As of December 31, 2015
Core deposit intangibles
Other
Total intangible assets
As of December 31, 2014
Core deposit intangibles
Other
Total intangible assets
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
$
$
$
$
34
33
67
122
45
167
(26)
(29)
(55)
(112)
(40)
(152)
8
4
12
10
5
15
As of December 31, 2015, all of the Bancorp’s intangible assets
were being amortized. Amortization expense recognized on
intangible assets for the years ended December 31, 2015, 2014 and
2013 was $2 million, $4 million and $8 million, respectively.
The Bancorp's projections of amortization expense shown below are based on existing asset balances as of December 31, 2015. Future
amortization expense may vary from these projections. Estimated amortization expense for the years ending December 31, 2016 through 2020 is
as follows:
($ in millions)
2016
2017
2018
2019
2020
116 Fifth Third Bancorp
$
Total
2
2
2
1
1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. VARIABLE INTEREST ENTITIES
The Bancorp, in the normal course of business, engages in a variety
of activities that involve VIEs, which are legal entities that lack
sufficient equity to finance their activities or the equity investors of
the entities as a group lack any of the characteristics of a controlling
interest. The primary beneficiary of a VIE is generally the enterprise
that has both the power to direct the activities most significant to
the economic performance of the VIE and the obligation to absorb
losses or receive benefits that could potentially be significant to the
VIE. For certain investment funds, the primary beneficiary is the
enterprise that will absorb a majority of the 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, 2015 ($ 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, 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
Automobile Loan Securitizations
In securitization transactions that occurred during the years ended
December 31, 2015 and 2014, the Bancorp transferred an aggregate
amount of approximately $750 million and $3.8 billion, respectively,
in consumer automobile 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
Automobile Loan
Securitizations
CDC
Investments
151
-
2,490
(11)
20
2,650
3
2,493
2,496
-
1
47
-
(17)
-
31
-
-
-
31
Automobile Loan
Securitizations
CDC
Investments
178
-
3,331
(11)
23
3,521
5
3,434
3,439
-
1
47
-
(11)
2
39
-
-
-
39
$
$
$
$
$
$
$
$
$
$
Total
152
47
2,490
(28)
20
2,681
3
2,493
2,496
31
Total
179
47
3,331
(22)
25
3,560
5
3,434
3,439
39
consolidated these VIEs. The assets of 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
117 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
business and residential areas and preserve historic landmarks. CDC
generally co-invests with other unrelated companies and/or
individuals and typically makes investments in a separate legal entity
that owns the property under development. The entities are usually
formed as limited partnerships and LLCs and CDC typically invests
as a limited partner/investor member in the form of equity
contributions. The economic performance of the VIEs is driven by
the performance of their underlying investment projects as well as
the VIEs’ ability to operate in compliance with the rules and
regulations necessary for the qualification of tax credits generated by
equity investments. Typically, the general partner or managing
member will be the party that has the right to make decisions that
will most significantly impact the economic performance of the
entity. The Bancorp’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, 2015 and 2014 was $27 million and $24 million,
respectively, which is based on an amount required to meet the
investor members’ defined target rate of return.
the comprehensive
attributable
interests
income
to
to
in
Non-consolidated VIEs
The following tables provide a summary of assets and liabilities carried on the Consolidated Balance Sheets related to non-consolidated VIEs for
which the Bancorp holds an interest, but is not the primary beneficiary of the VIE, as well as the Bancorp’s maximum exposure to losses
associated with its interests in the entities as of:
December 31, 2015 ($ in millions)
CDC investments
Private equity investments
Loans provided to VIEs
Automobile loan securitization
December 31, 2014 ($ in millions)
CDC investments
Private equity investments
Loans provided to VIEs
Automobile loan securitization
$
$
Total
Assets
1,455
211
1,630
1
Total
Assets
1,432
189
1,900
2
Total
Liabilities
367
-
-
-
Total
Liabilities
364
-
-
-
Maximum
Exposure
1,455
271
2,599
1
Maximum
Exposure
1,432
267
2,759
2
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
level of projected tax credits to be received by the limited
partners/investor members, thereby minimizing a portion of the
Bancorp’s risk.
At both December 31, 2015 and 2014, the Bancorp’s CDC
investments included $1.3 billion of investments in affordable
housing tax credits recognized in other assets in the Consolidated
Balance Sheets. The unfunded commitments related to these
investments were $356 million and $357 million as of December 31,
2015 and 2014, respectively. The unfunded commitments as of
December 31, 2015 are expected to be funded from 2016 to 2033.
118 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bancorp has accounted for all of its investments in qualified affordable housing tax credits using the equity method of accounting. The
following table summarizes the impact to the Consolidated Statements of Income relating to investments in qualified affordable housing
investments:
For the years ended December 31 ($ in millions)
Pre-tax equity method and impairment losses(a)
Tax credits and other benefits
(a) The Bancorp did not recognize impairment losses resulting from the forfeiture or ineligibility of tax credits or other circumstances during the years ended December 31, 2015, 2014 and 2013.
126
(205)
118
(185)
2013
2014
2015
90
(164)
$
Affected Line Item in the
Consolidated Statements of Income
Other noninterest expense
Applicable income tax expense
Private Equity Investments
The Bancorp, through Fifth Third Capital Holdings, a wholly-
owned indirect subsidiary of the Bancorp, invests as a limited
partner in private equity funds which provide the Bancorp an
opportunity to obtain higher rates of return on invested capital,
while also creating cross-selling opportunities for the 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.
amounts of
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
unfunded commitments. The carrying
these
investments, which are included in other assets in the Consolidated
Balance Sheets, are included in the previous tables. Also, as of
December 31, 2015 and 2014, the unfunded commitment amounts
to the funds were $60 million and $78 million, respectively. The
Bancorp made capital contributions of $30 million and $27 million
to private equity funds during the years ended December 31, 2015
and 2014, respectively. The Bancorp recognized $1 million, zero and
$4 million of OTTI on its investments in private equity funds
during the years ended December 31, 2015, 2014 and 2013,
respectively. 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.
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
loans to these VIEs are included in commercial loans in Note 5. As
of December 31, 2015 and 2014, the Bancorp’s unfunded
commitments to these entities were $969 million and $859 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.
Automobile Loan Securitization
The Bancorp previously securitized and sold certain automobile
loans with a carrying amount of approximately $509 million in a
transaction that 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 which are
included in the Consolidated Balance Sheets. The maximum
exposure to loss is equal to the carrying value of the servicing asset.
119 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in other noninterest
12. SALES OF RECEIVABLES AND SERVICING RIGHTS
Residential Mortgage TDR Loan Sale
In March of 2015, the Bancorp recognized a $37 million gain,
included
the Consolidated
Statements of Income, on the sale of certain HFS residential
mortgage loans with a carrying value of $568 million that were
previously modified in a TDR. As part of this sale, the Bancorp
provided
and warranties.
Additionally, the Bancorp did not obtain servicing responsibilities
on the sales of these loans and the investors have no credit recourse
to the Bancorp’s other assets for failure of debtors to pay when due.
representations
standard
income
certain
in
Residential Mortgage Loan Sales
The Bancorp sold fixed and adjustable-rate residential mortgage
loans during the years ended December 31, 2015, 2014 and 2013. In
those sales, the Bancorp obtained servicing responsibilities and
provided certain standard representations and warranties, however
the investors have no recourse to the Bancorp’s other assets for
failure of debtors to pay when due. The Bancorp receives annual
servicing fees based on a percentage of the outstanding balance. The
Bancorp identifies classes of servicing assets based on financial asset
type and interest rates.
Information related to residential mortgage loan sales and the Bancorp’s mortgage banking activity, which is included in mortgage banking net
revenue in the Consolidated Statements of Income, for the years ended December 31 is as follows:
($ in millions)
Residential mortgage loan sales(a)
Origination fees and gains on loan sales
Gross mortgage servicing fees
(a) Represents the unpaid principal balance at the time of the sale.
(b) Excludes $568 of HFS residential mortgage loans previously modified in a TDR that were sold during the first quarter of 2015.
2015
2014
2013
$
5,078
(b)
5,467
21,529
171
222
153
246
453
251
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:
Balance, beginning of period
Servicing rights that result from the transfer of residential mortgage loans
Amortization
Other-than-temporary impairment
Balance, end of period
Valuation allowance for servicing rights:
Balance, beginning of period
Recovery of (provision for) MSR impairment
Other-than-temporary impairment
Balance, end of period
Carrying amount after valuation allowance
2015
2014
$
$
$
$
1,392
63
(140)
(111)
1,204
(534)
4
111
(419)
785
1,440
73
(121)
-
1,392
(469)
(65)
-
(534)
858
Amortization expense recognized on servicing rights for the years
ended December 31, 2015, 2014 and 2013 was $140 million, $121
million and $168 million, respectively. The Bancorp's projections of
amortization expense shown below are based on existing asset
balances and static key economic assumptions as of December 31,
2015. Future amortization expense may vary from these projections.
Estimated amortization expense for the years ending December 31, 2016 through 2020 is as follows:
($ in millions)
2016
2017
2018
2019
2020
$
Total
114
103
93
85
77
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. Other-than-temporary impairment recognized through a
write-off of the servicing right and related valuation allowance is
captured as a component of servicing rights on the Consolidated
Balance Sheets. 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.
120 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:
Balance, beginning of period
Balance, end of period
Adjustable-rate residential mortgage loans:
Balance, beginning of period
Balance, end of period
Fixed-rate automobile loans:
Balance, beginning of period
Balance, end of period
2015
2014
$
823
757
33
27
2
1
929
823
38
33
4
2
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)
Recovery of (provision for) MSR impairment (mortgage banking net revenue)
2015
-
$
90
4
2014
-
95
(65)
2013
13
(30)
192
As of December 31, 2015 and 2014, 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:
2015
2014
Weighted-
Average
Life
(in years)
Rate
Prepayment
Speed
(annual)
OAS Spread
(bps)
Weighted-
Average
Default Rate
Weighted-
Average
Life
(in years)
Prepayment
Speed
(annual)
Weighted-
Discount Rate Average
(annual) Default Rate
Residential mortgage loans:
Servicing rights
Servicing rights
Fixed
Adjustable
6.9
3.4
11.0 %
25.2
534
303
N/A
N/A
6.6
3.7
11.3 %
22.3
10.0 %
11.7
N/A
N/A
During the first quarter of 2015, the Bancorp adopted an OAS
valuation approach for valuing its MSRs. This approach projects
servicing cash flows over multiple interest rate scenarios, which are
then discounted at risk-adjusted rates.
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, 2015 and 2014, the Bancorp
serviced $59.0 billion and $65.4 billion, respectively, of residential
mortgage loans for other investors. The value of MSRs that
continue to be held by the Bancorp is subject to credit, prepayment
and interest rate risks on the sold financial assets.
At December 31, 2015, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in
prepayment speed assumptions and immediate 10% and 20% adverse changes in other assumptions are as follows:
Prepayment
Speed Assumption
Residual Servicing
Cash Flows
Fair
Value
Weighted-
Average Life
(in years)
Impact of Adverse Change
on Fair Value
20%
50%
10%
Impact of Adverse
Change on Fair
Value
10%
20%
OAS Spread
(bps)
($ in millions)(a)
Residential mortgage loans:
Servicing rights
Servicing rights
(a) The impact of the weighted-average default rate on the current fair value of residual cash flows for all scenarios is immaterial.
Fixed
Adjustable
11.8 % $
27.0
757
27
5.9
3.0
Rate
Rate
$
(32)
(2)
(61)
(3)
(134)
(7)
618
703
$
(18)
(1)
(34)
(1)
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.
the Bancorp
Also, in the previous table, the effect of a variation in a particular
assumption on the fair value of the interests that continue to be held
by
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.
121 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
than the notional, principal or contract amounts. Credit risk is
minimized through 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, 2015 and
2014, the balance of collateral held by the Bancorp for derivative
assets was $821 million and $830 million, respectively. The credit
component negatively impacting the fair value of derivative assets
associated with customer accommodation contracts as of December
31, 2015 and 2014 was $9 million and $16 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, 2015 and
2014, the balance of collateral posted by the Bancorp for derivative
liabilities was $504 million and $574 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, 2015 and 2014, 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.
13. DERIVATIVE FINANCIAL INSTRUMENTS
The Bancorp maintains an overall risk management strategy that
incorporates the use of derivative instruments to reduce certain risks
related to interest rate, prepayment and foreign currency volatility.
Additionally, the Bancorp holds derivative instruments for the
benefit of its commercial customers and for other business
purposes. The Bancorp does not enter into unhedged speculative
derivative positions.
the
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, forward starting interest rate
swaps, 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
rate
free-standing derivatives
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 economically hedges significant
exposures related to these free-standing derivatives by entering into
offsetting third-party contracts with approved, reputable and
independent counterparties with substantially matching terms and
inability of
currencies. Credit risk arises from the possible
counterparties to meet the terms of their contracts. The Bancorp’s
exposure is limited to the replacement value of the contracts rather
122 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
December 31, 2015 ($ 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 residential 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, 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 residential 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
Fair Value
Notional
Amount
Derivative
Assets
Derivative
Liabilities
$
2,705
5,475
11,657
1,330
369
1,292
29,889
721
2,464
16,243
$
372
372
39
39
411
239
3
262
-
504
242
15
294
386
937
1,441
1,852
2
2
-
-
2
9
1
-
61
71
249
-
276
340
865
936
938
Fair Value
Notional
Amount
Derivative
Assets
Derivative
Liabilities
$
2,205
3,150
4,487
999
691
1,092
29,558
613
3,558
16,475
$
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
123 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. For all interest rate swaps as of
December 31, 2015, an assessment of hedge effectiveness using
regression analysis was performed and such swaps were accounted
for using the “long-haul” method. The long-haul method requires a
quarterly assessment of hedge effectiveness and measurement of
ineffectiveness. For interest rate swaps accounted for as a fair value
hedge using the long-haul method, ineffectiveness is the difference
between the changes in the fair value of the interest rate swap and
changes in fair value of the related hedged item attributable to the
risk being hedged. The ineffectiveness on interest rate swaps
hedging fixed-rate funding is reported within interest expense in the
Consolidated Statements of Income.
The following table reflects the change in fair value of interest rate contracts, designated as fair value hedges, as well as the change in fair value of
the related hedged items attributable to the risk being hedged, included in the Consolidated Statements of Income:
For the years ended December 31 ($ in millions)
Interest rate contracts:
Interest on long-term debt
Change in fair value of interest rate swaps hedging long-term debt
Change in fair value of hedged long-term debt attributable to the risk being hedged Interest on long-term debt
Consolidated Statements of
Income Caption
2015
2014
2013
$
(29)
25
120
(126)
(279)
276
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, 2015, 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, 2015, the maximum length of time over which the
Bancorp is hedging its exposure to the variability in future cash
flows is 48 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, 2015 and 2014, $22 million and $23 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,
2015, $25 million in net deferred gains, net of tax, recorded in
AOCI are expected to be reclassified into earnings during the next
twelve months. This amount could differ from amounts actually
recognized due to changes in interest rates, hedge de-designations,
and the addition of other hedges subsequent to December 31, 2015.
During the years ended 2015 and 2014, there were no gains or
losses reclassified from AOCI into earnings associated with the
discontinuance of cash flow hedges because it was probable that the
original forecasted transaction would no longer occur by the end of
the originally specified time period or within the additional period of
time as defined by U.S. GAAP.
The following table presents the pretax net gains (losses) recorded in the Consolidated Statements of Income and the Consolidated Statements of
Comprehensive Income relating to derivative instruments designated as cash flow hedges:
For the years ended December 31 ($ 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.
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
124 Fifth Third Bancorp
$
2015
74
75
2014
60
44
2013
(13)
44
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.
In conjunction with the initial sale of the Bancorp’s 51%
interest in Vantiv Holding, LLC, the Bancorp received a warrant
which 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 the warrant. During the year ended December
31, 2015, the Bancorp both sold and exercised part of the warrant.
For more information, refer to Note 19.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
Consolidated Statements of
Income Caption
For the years ended December 31 ($ in millions)
Interest rate contracts:
Forward contracts related to residential mortgage loans held for sale
Interest rate contracts related to MSR portfolio
Foreign exchange contracts:
Foreign exchange contracts for risk management purposes
Equity contracts:
Stock warrant associated with Vantiv Holding, LLC
Swap associated with sale of Visa, Inc. Class B shares
(a) The Bancorp recognized a net gain of $89 million on both the sale and exercise of the warrant during the fourth quarter of 2015.
Other noninterest income
Other noninterest income
Other noninterest income
Mortgage banking net revenue
Mortgage banking net revenue
2015
2014
2013
$
8
90
23
325 (a)
(37)
(18)
95
14
31
(38)
24
(30)
5
206
(31)
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
interest rate exposure on commercial customer
hedges
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
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, 2015 and 2014, the total
notional amount of the risk participation agreements was $1.7
billion and $1.1 billion, respectively, and the fair value was a liability
of $3 million at December 31, 2015 and $2 million at December 31,
2014, which is included in other liabilities in the Consolidated
Balance Sheets. As of December 31, 2015, the risk participation
agreements had a weighted-average remaining life of 3.2 years.
The Bancorp’s maximum exposure in the risk participation
agreements is contingent on the fair value of the underlying interest
rate derivative contracts in an asset position at the time of default.
The Bancorp monitors the credit risk associated with the underlying
customers in the risk participation agreements through the same risk
grading system currently utilized for establishing loss reserves in its
loan and lease portfolio.
Risk ratings of the notional amount of risk participation agreements under this risk rating system are summarized in the following table:
At December 31 ($ in millions)
Pass
Special mention
Substandard
Total
2015
2014
$
$
1,650
7
7
1,664
1,052
59
2
1,113
125 Fifth Third Bancorp
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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years 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 losses)
Commodity contracts for customers (credit portion of fair value adjustment)
Foreign exchange contracts:
Foreign exchange contracts for customers (contract revenue)
Foreign exchange contracts for customers (credit portion of fair value adjustment)
Consolidated Statements of
Income Caption
2015
2014
2013
Corporate banking revenue
Other noninterest expense
Other noninterest expense
Mortgage banking net revenue
$
Corporate banking revenue
Other noninterest expense
Other noninterest expense
Corporate banking revenue
Other noninterest expense
23
(1)
1
111
5
(2)
6
70
-
19
(3)
3
124
6
-
(7)
72
-
29
(3)
7
58
7
-
-
69
(2)
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, 2015 ($ in millions)
Assets
Derivatives
Total assets
Gross Amount
Recognized in the
Consolidated Balance Sheets(a)
Gross Amounts Not Offset in the
Consolidated Balance Sheets
Derivatives
Collateral(b)
Net Amount
$
1,575
1,575
(512)
(512)
(627)
(627)
436
436
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
(512)
(512)
(173)
(173)
938
938
253
253
$
Sheets were excluded from this table.
As of December 31, 2014 ($ in millions)
Assets
Derivatives
Total assets
Gross Amount
Recognized in the
Consolidated Balance Sheets(a)
Gross Amounts Not Offset in the
Consolidated Balance Sheets
Derivatives
Collateral(b)
Net Amount
$
1,653
1,653
(440)
(440)
(684)
(684)
529
529
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
1,043
1,043
(440)
(440)
(293)
(293)
310
310
$
Sheets were excluded from this table.
126 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Accounts receivable and drafts-in-process
Bank owned life insurance
Investment in Vantiv Holding, LLC
Accrued interest and fees receivable
OREO and other repossessed personal property
Prepaid expenses
Income tax receivable
Other
Total other assets
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 13.
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,
which are included above in partnership investments. In addition,
Fifth Third Capital Holdings, a wholly-owned indirect 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
to Note 11 for further
information. The Bancorp recognized $1 million, zero and $4
million of OTTI on its investments in private equity funds during
the years ended December 31, 2015, 2014 and 2013, respectively.
Refer to Note 27 for further information.
interests. Refer
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 18%. The Bancorp’s
ownership in Vantiv Holding, LLC is currently 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.
2015
1,852
1,756
1,653
1,651
360
329
155
101
-
142
7,999
2014
2,080
1,685
1,452
1,623
394
312
236
97
107
255
8,241
$
$
127 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the FRB that the Bancorp purchased from
other member banks on an overnight basis. Other short-term
borrowings include securities sold under repurchase agreements,
derivative collateral, FHLB advances and other borrowings with
original maturities of one year or less.
The following table summarizes short-term borrowings and weighted-average rates:
($ 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
2015
Amount Rate
2014
Amount
Rate
$
$
$
151
1,507
0.30 % $
0.11
920
1,721
0.13 % $
0.12
144
1,556
458
1,873
0.08 %
0.08
0.09 %
0.10
200
4,904
$
286
3,756
The following table presents a summary of the Bancorp's other short-term borrowings as of December 31:
($ in millions)
Securities sold under repurchase agreements
Derivative collateral
Total other short-term borrowings
$
$
2015
2014
925
582
1,507
995
561
1,556
The Bancorp’s securities sold under repurchase agreements are
accounted for as secured borrowings and are collateralized by
securities included in available-for-sale and other securities in the
Consolidated Balance Sheets. These securities are subject to changes
in market value and, therefore, the Bancorp may increase or
decrease the level of securities pledged as collateral based upon
these movements in market value.
The following table summarizes the Bancorp's securities sold under repurchase agreements by the type of collateral securing the borrowing and
remaining contractual maturity as of December 31:
($ in millions)
Collateral type:
Agency residential mortgage-backed securities
U.S. Treasury and federal agencies securities
Total securities sold under repurchase agreements
2015
2014
Amount
Remaining Contractual
Maturity
Amount
Remaining Contractual
Maturity
$
$
646
279
925
Overnight
Overnight
$
$
896
99
995
Overnight
Overnight
128 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. LONG-TERM DEBT
The following table is a summary of the Bancorp’s long-term borrowings at December 31:
$
2015
2014
Maturity
Interest Rate
2016
2019
2020
2022
1,000
500
1,099
498
1,000
499
-
497
2016
2017
2018
2024
2038
250
520
532
748
1,327
3.625%
2.30%
2.875%
3.50%
0.99%
5.45%
4.50%
4.30%
8.25%
($ in millions)
Parent Company
Senior:
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Subordinated:(a)
Floating-rate notes(c)
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Subsidiaries
Senior:
Fixed-rate notes
Fixed-rate notes
Floating-rate notes(c)
Floating-rate notes(c)
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Floating-rate notes(c)
Fixed-rate notes
Fixed-rate notes
Subordinated:(a)
Fixed-rate bank notes
Junior subordinated:(b)
Floating-rate debentures(c)
FHLB advances
Notes associated with consolidated VIEs:
Automobile loan securitizations:
Fixed-rate and floating-rate notes(c)
Other
Total
(a) Qualifies as Tier II capital for regulatory capital purposes.
(b) Under the Basel III Final Rule transition provisions, $13 million qualifies as Tier I capital as of December 31, 2015 while the remaining amount qualifies as Tier II capital. The entire amount
1.15%
0.90%
0.87%
0.82%
1.35%
2.15%
1.45%
1.28%
2.375%
2.875%
1,000
400
750
300
654
-
597
-
850
846
1,000
400
750
300
652
998
598
250
850
846
2016 - 2022 0.43% - 1.79%
2016 - 2039
1.93% - 2.20%
2016 - 2041 0.05% - 6.87%
2016
2016
2016
2016
2017
2018
2018
2018
2019
2021
250
539
544
748
1,317
3,434
148
14,967
2,493
144
15,844
52
37
4.75%
Varies
51
41
2035
2015
502
-
$
qualified as Tier I capital as of December 31, 2014. Refer to Note 28 for further information.
(c) These rates reflect the floating rates as of December 31, 2015.
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, 2015 are presented in the following table:
($ in millions)
2016
2017
2018
2019
2020
Thereafter
Total
Parent
Subsidiaries
Total
1,250
520
532
500
1,099
2,573
6,474
2,594
954
2,807
1,221
664
1,130
9,370
3,844
1,474
3,339
1,721
1,763
3,703
15,844
$
$
129 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2015, the Bancorp had outstanding principal
balances of $15.5 billion, net discounts of $24 million and additions
for mark-to-market adjustments on its hedged debt of $382 million.
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.
The Bancorp was in compliance with all debt covenants at
December 31, 2015.
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,
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
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.
On July 27, 2015, the Bancorp issued and sold $1.1 billion of
senior notes to third-party investors. The senior notes bear a fixed-
rate of interest of 2.875% 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 July 27, 2020. 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, 2015.
The rates paid on the swaps hedging the subordinated floating-rate
notes due in 2017 and 2018 were 0.78% and 0.66%, respectively, at
December 31, 2015. 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 3.46% at December 31, 2015.
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.
130 Fifth Third Bancorp
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,
2015, $18.4 billion was available for future issuance under the global
bank note program.
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 three-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
three-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.
On August 20, 2015, 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 $1.0 billion of 2.15% senior fixed-rate notes due on August 20,
2018 and $250 million of senior floating-rate notes due on August
20, 2018. The Bancorp entered into interest rate swaps to convert
the fixed-rate notes to floating-rate, which resulted in an effective
rate of three-month LIBOR plus 90 bps. Interest on the floating-
rate notes is three-month LIBOR plus 91 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2015, FHLB advances have rates ranging from
0.05% to 6.87%, with interest payable monthly. The Bancorp has
pledged $17.3 billion of certain residential mortgage loans and
securities to secure its borrowing capacity at the Federal Home
Loan Bank which is partially utilized to fund $37 million in FHLB
advances that are outstanding. The FHLB advances mature as
follows: $2 million in 2016, $1 million in 2017, $4 million in 2018,
$9 million in 2019, $4 million in 2020 and $17 million thereafter.
Notes Associated with Consolidated VIEs
As previously discussed in Note 11, the Bancorp was determined to
be the primary beneficiary of various VIEs associated with
automobile loan securitizations completed during the years ended
December 31, 2015, 2014 and 2013. As such, $2.5 billion of long-
term debt related to these VIEs was consolidated in the Bancorp’s
Consolidated Financial Statements as of December 31, 2015. Third-
party holders of this debt do not have recourse to the general assets
of the Bancorp.
131 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES
The Bancorp, in the normal course of business, enters into financial
instruments and various agreements to meet the financing needs of
its customers. The Bancorp also enters into certain transactions and
agreements to manage its interest rate and prepayment risks, provide
funding, equipment and locations for its operations and invest in its
communities. These instruments and agreements involve, to varying
degrees, elements of credit risk, counterparty risk and market risk in
excess of the amounts recognized in the Consolidated Balance
Sheets. The creditworthiness of counterparties for all instruments
and agreements is evaluated on a case-by-case basis in accordance
with the Bancorp’s credit policies. The Bancorp’s significant
commitments, contingent liabilities and guarantees in excess of the
in the Consolidated Balance Sheets are
amounts recognized
discussed in further detail below:
Commitments
The Bancorp has certain commitments to make future payments under contracts. The following table reflects a summary of significant
commitments as of December 31:
($ in millions)
Commitments to extend credit
Letters of credit
Forward contracts related to held for sale residential mortgage loans
Noncancelable operating lease obligations
Capital commitments for private equity investments
Purchase obligations
Capital expenditures
Capital lease obligations
Commitments to extend credit
Commitments to extend credit are agreements to lend, typically
having fixed expiration dates or other termination clauses that may
require payment of a fee. Since many of the commitments to extend
credit may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash flow requirements.
The Bancorp
the event of
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
$
2015
66,884
3,055
1,330
635
60
60
30
27
2014
63,827
3,974
999
697
78
77
28
37
resulting from fluctuations in interest rates and the Bancorp’s
exposure is limited to the replacement value of those commitments.
As of December 31, 2015 and 2014, the Bancorp had a reserve for
unfunded commitments, including letters of credit, totaling $138
million and $135 million, respectively, included in other liabilities in
the Consolidated Balance Sheets. The Bancorp monitors the credit
risk associated with commitments to extend credit using the same
risk rating system utilized within its loan and lease portfolio.
Risk ratings under this risk rating system are summarized in the following table as of December 31:
($ in millions)
Pass
Special mention
Substandard
Total commitments to extend credit
2015
65,645
647
592
66,884
$
$
2014
62,787
660
380
63,827
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, 2015:
($ in millions)
Less than 1 year(a)
1 - 5 years(a)
Over 5 years
Total letters of credit
(a)
$
$
1,700
1,301
54
3,055
Includes $28 and $15 issued on behalf of commercial customers to facilitate trade payments in U.S. dollars and foreign currencies which expire less than 1 year and between 1 and 5 years,
respectively.
guarantees
Standby letters of credit accounted for 99% and 97% of total letters
of credit at December 31, 2015 and 2014, respectively, and are
considered
accordance with U.S. GAAP.
Approximately 65% and 60% of the total standby letters of credit
were collateralized as of December 31, 2015 and 2014, respectively.
In the event of nonperformance by the customers, the Bancorp has
rights to the underlying collateral, which can include commercial
in
real estate, physical plant and property, inventory, receivables, cash
and marketable securities. The reserve related to these standby
letters of credit, which is included in the total reserve for unfunded
commitments, was immaterial at December 31, 2015 and $1 million
at December 31, 2014. The Bancorp monitors the credit risk
associated with letters of credit using the same risk rating system
utilized within its loan and lease portfolio.
132 Fifth Third Bancorp
Risk ratings under this risk rating system are summarized in the following table as of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Pass
Special mention
Substandard
Doubtful
Total letters of credit
At December 31, 2015 and 2014, 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,
2015 and 2014, total VRDNs in which the Bancorp was the
remarketing agent or were supported by a Bancorp letter of credit
were $1.3 billion and $1.7 billion, respectively, of which FTS acted
as the remarketing agent to issuers on $1.1 billion and $1.4 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 $921 million and
$1.2 billion of the VRDNs remarketed by FTS, in addition to $187
million and $247 million in VRDNs remarketed by third parties at
December 31, 2015 and 2014, respectively. These letters of credit
are included in the total letters of credit balance provided in the
previous table.
Forward contracts related to held for sale residential 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 $27
million at December 31, 2015 and $29 million at December 31,
2014. At both December 31, 2015 and 2014, the Bancorp
maintained a reserve of $2 million related to exposures within the
reinsurance portfolio which was included in other liabilities in the
Consolidated Balance Sheets. During 2009, the Bancorp suspended
2015
2014
$
$
2,606
130
258
61
3,055
3,483
147
299
45
3,974
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. For
more information on how the Bancorp establishes the residential
mortgage repurchase reserve, refer to Note 1.
During the fourth quarter of 2013, the Bancorp settled certain
repurchase claims related to residential 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, 2015 and 2014, the Bancorp maintained
reserves related to loans sold with representation and warranty
provisions totaling $25 million and $35 million, respectively,
included in other liabilities in the Consolidated Balance Sheets.
is
The Bancorp uses the best
information available when
its mortgage representation and warranty reserve;
estimating
however, the estimation process
inherently uncertain and
imprecise and, accordingly, losses in excess of the amounts reserved
as of December 31, 2015, 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 $27 million in excess of amounts
reserved. This estimate was derived by modifying the key
assumptions previously discussed 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 previously discussed.
During the years ended December 31, 2015 and 2014, the
Bancorp paid $2 million and $11 million, respectively, in the form of
make whole payments and repurchased $74 million and $59 million,
respectively, in outstanding principal of loans to satisfy investor
demands. Total repurchase demand requests during the years ended
133 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014 were $75 million and $97 million,
respectively. Total outstanding repurchase demand inventory was $4
million at December 31, 2015 compared to $7 million at December
31, 2014.
The following table summarizes activity in the reserve for representation and warranty provisions for the years ended December 31:
($ in millions)
Balance, beginning of period
Net (reductions) additions to the reserve
Losses charged against the reserve
Balance, end of period
2015
35
(3)
(7)
25
$
$
2014
44
6
(15)
35
The following tables provide a rollforward of unresolved claims by claimant type for the years ended December 31:
2015 ($ in millions)
Balance, beginning of period
New demands
Loan paydowns/payoffs
Resolved demands
Balance, end of period
2014 ($ 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 $465 million and $548 million
at December 31, 2015 and 2014, respectively, and the delinquency
rates were 3.0% at December 31, 2015 and 4.0% at December 31,
2014. The Bancorp maintained an estimated credit loss reserve on
these loans sold with credit recourse of $9 million at December 31,
2015 and $11 million at December 31, 2014 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.
indirect wholly-owned subsidiary of
Margin accounts
FTS, an
the Bancorp,
guarantees the collection of all margin account balances held by its
brokerage clearing agent for the benefit of its customers. FTS is
responsible for payment to its brokerage clearing agent for any loss,
liability, damage, cost or expense incurred as a result of customers
failing to comply with margin or margin maintenance calls on all
margin accounts. The margin account balance held by the brokerage
clearing agent was $10 million at December 31, 2015 and $13
million at December 31, 2014. 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.
134 Fifth Third Bancorp
GSE
Private Label
Dollars
6
$
33
(2)
(33)
4
$
Units
1
261
-
(260)
2
$
$
Dollars
1
42
-
(43)
-
GSE
Private Label
Dollars
41
$
95
(5)
(125)
6
$
Units
33
14
(2)
(44)
1
$
$
Dollars
5
2
(1)
(5)
1
Units
37
436
(29)
(428)
16
Units
264
744
(44)
(927)
37
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 at both December 31, 2015 and 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
have been required
the Bancorp’s
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 or anticipated 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.
indemnify Visa for
to
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. Since then, when Visa’s
litigation committee determined that the escrow account was
insufficient, Visa issued additional Class A Shares and deposited the
proceeds from the sale of the Class A Shares into the litigation
escrow account. When Visa funded the litigation escrow account,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Class B Shares were subjected 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 Visa, Inc. 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
additional
information on the valuation of the swap. The
counterparty to the swap as a result of its ownership of the Class B
Shares will be impacted by dilutive adjustments to the conversion
rate of the Class B Shares into Class A Shares caused by any
Covered Litigation losses in excess of the litigation escrow account.
If actual judgments in, or settlements of, the Covered Litigation
significantly exceed current expectations, then additional funding by
Visa of the litigation escrow account and the resulting dilution of
the Class B Shares could result in a scenario where the 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 Visa Class B Shares
and through December 31, 2015, 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
$61 million and $49 million at December 31, 2015 and 2014,
respectively. Refer to Note 13 and Note 27 for further information.
After the Bancorp’s sale of the Class B Shares, Visa has funded
additional amounts into the litigation escrow account which have
resulted in further dilutive adjustments to the conversion of Class B
Shares into Class A Shares, and along with other terms of the total
return swap, required the Bancorp to make cash payments in
varying amounts to the swap counterparty as follows:
Period ($ in millions)
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
135 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. On
January 14, 2014, the court entered a final order approving the class
settlement. A number of merchants have filed appeals from that
approval. The appellate court held a hearing on those appeals on
September 28, 2015, and the matter is under consideration. In
addition, on July 28, 2015, the merchants who oppose the class
settlement filed a motion in the District Court to set aside the order
approving the settlement because of alleged misconduct by one of
the merchant class counsel in another case and a former attorney for
MasterCard. Defendants opposed the motion on August 17, 2015.
The court has not set a hearing on the motion. 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. Approximately 8,000 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. More
than 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. The state
court lawsuit has been settled. On July 18, 2015, the court in which
all but one of the opt-out federal lawsuits have been consolidated
denied defendants’ motion to dismiss the complaints. Refer to Note
17 for further information.
On January 15, 2016, the Bancorp agreed to pay $6 million and
make certain changes to the Bancorp’s profit sharing plan to settle
two class action lawsuits consolidated as Dudenhoeffer v Fifth Third
Bancorp et al. (Case No. 1:08-cv-538) filed in 2008 in the United States
District Court for the Southern District of Ohio. The complaints
alleged that the Bancorp and certain officers violated ERISA by
continuing to offer Fifth Third stock in the Bancorp’s profit sharing
plan when it was no longer a prudent investment. The settlement is
subject to court approval.
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, Daniel T. Poston, the Bancorp’s former Chief Executive
Officer, Kevin T. Kabat, and, nominally, the Bancorp. The suit
alleges breach of fiduciary duty, waste of corporate assets and unjust
136 Fifth Third Bancorp
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, which the plaintiff
opposed. On May 18, 2015, the court dismissed the complaint with
prejudice and no appeal was filed. This matter has been concluded.
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 that
resulting liability, if any, 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.
the Bancorp agreed
On September 30, 2015,
to pay
approximately $85 million to cover losses on approximately 500
loans for which HUD had paid FHA insurance claims, and an
additional $2 million to HUD, in connection with the Bancorp’s
entry into a Stipulation and Order of Settlement and Dismissal with
the Department of Justice and HUD, which was approved by the
U.S. District Court for the Southern District of New York on
October 5, 2015, and a related Settlement Agreement with HUD.
The total amount is within the amount the Bancorp had previously
included in its accrual for this matter. The Bancorp has also agreed
to indemnify HUD for any losses related to approximately 900 loans
which have not been the subject of mortgage insurance claims. The
settlement resulted in part from the Bancorp’s voluntary disclosure
of approximately 1,400 mortgages that it had previously certified as
eligible for FHA insurance but which were later determined to be
ineligible for such insurance.
On September 28, 2015, the Bancorp entered into consent
orders and agreed, without admitting or denying any of the findings
of fact or conclusions of law (except to establish jurisdiction), to pay
$18 million to consumers in a settlement with the Department of
Justice and the CFPB related to an investigation into whether Fifth
Third Bank engaged in any discriminatory practices in connection
with the Bank’s indirect automobile loan portfolio. This amount is
within the amount included in the Bancorp’s accrual for this matter.
This amount is also subject to a credit of between $5 million and $6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million for remediation the Bancorp had already paid. The consent
orders also provide that the Bancorp will implement a new dealer
compensation policy and that the Bancorp’s Board of Directors will
oversee its compliance with the consent orders.
On September 28, 2015, the Bancorp agreed to pay an amount
not less than $3 million in redress to consumers and a civil penalty
of $500,000 to the CFPB in connection with its entry into a consent
order with the CFPB related to the marketing and administration of
the Bancorp’s debt protection credit card “add-on” product for
those enrolled in the product from January 1, 2007, through
November 11, 2013. This $3.5 million is within the amount the
Bancorp had included in its accrual for this matter. As part of this
settlement, the Bancorp has also agreed, without admitting or
denying any findings of fact or conclusions of law (except to
establish jurisdiction), to adopt a compliance plan with respect to
the advertising, marketing, promotion, offering or sale of any credit
card add-on products, the performance of any such products and
the management of its vendors with respect to such products and
not to market or sell similar debt protection add-on products
without first securing a determination of non-objection from the
CFPB.
The Bancorp and its subsidiaries are parties 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 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. An accrual 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 accrual is
adjusted from time to time thereafter as appropriate to reflect
changes in circumstances. The Bancorp also determines, when
possible (due to the uncertainties described above), estimates of
reasonably possible losses or ranges of reasonably possible losses, in
excess of amounts accrued. 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 in an aggregate
amount up to approximately $37 million in excess of amounts
accrued, 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 accrual that cannot be
estimated. Based on information currently available, advice of
counsel, available insurance coverage and established accruals, 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.
137 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,
2015 and 2014, certain directors, executive officers, principal
holders of Bancorp common stock and their related interests were
indebted, including undrawn commitments to lend, to the Bancorp’s
banking subsidiary.
The following table summarizes the Bancorp’s lending activities with its principal shareholders, directors, executives and their related interests 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
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.
Vantiv Holding, LLC
On June 30, 2009, the Bancorp completed the sale of a majority
interest in its processing business, Vantiv Holding, LLC. Advent
2015
2014
$
$
$
831
5
836
97
525
3
528
63
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 $115 million recognized by the Bancorp
in the first quarter of 2012.
The following table provides a summary of the sales transactions that impacted the Bancorp's ownership interest in Vantiv Holding, LLC after the
initial IPO:
Remaining Ownership
Percentage(a)
Ownership
Percentage Sold
6 %
5
3
3
5
($ in millions)
Q4 2012
Q2 2013
Q3 2013
Q2 2014
Q4 2015
(a) The Bancorp’s remaining investment in Vantiv Holding, LLC of $360 as of December 31, 2015 was accounted for as an equity method investment in the Bancorp’s Consolidated Financial
33 %
28
25
23
18
157
242
85
125
331
Gain on Sale
$
Statements.
to 2030,
During the fourth quarter of 2015, the Bancorp entered into an
agreement with Vantiv, Inc. under which a portion of its TRA with
Vantiv, Inc. was terminated and settled in full for a cash payment of
approximately $49 million from Vantiv, Inc. Under the agreement,
the Bancorp sold certain TRA cash flows it expected to receive
from 2017
totaling an estimated $140 million.
Approximately half of the sold TRA cash flows related to 2025 and
later. This sale did not impact the TRA payment recognized during
the fourth quarter of 2015 and is not expected to impact the TRA
payment to be recognized in the fourth quarter of 2016. In addition
to the impact of the TRA termination discussed above, the Bancorp
recognized $31 million, $23 million and $9 million in noninterest
income in the Consolidated Statements of Income associated with
the TRA during the years ended December 31, 2015, 2014 and
2013, respectively.
The Bancorp agreed during the fourth quarter of 2015 to
cancel rights to purchase approximately 4.8 million Class C units in
Vantiv Holding, LLC, the wholly-owned principal operating
subsidiary of Vantiv, Inc., underlying the warrant in exchange for a
138 Fifth Third Bancorp
cash payment of $200 million. Subsequent to this cancellation, the
Bancorp exercised its right to purchase approximately 7.8 million
Class C units underlying the warrant at the $15.98 strike price. This
exercise was settled on a net basis for approximately 5.4 million
Class C units, which were then exchanged for approximately 5.4
million shares of Vantiv, Inc. Class A common stock that were sold
in the secondary offering. The Bancorp recognized a gain of $89
million on the 62% of the warrant that was settled or net exercised.
Additionally, during the fourth quarter of 2015, the Bancorp
exchanged 8 million Class B units of Vantiv Holding, LLC for 8
million Class A shares in Vantiv, Inc., which were also sold in the
secondary offering and on which the Bancorp recognized a pre-tax
gain of $331 million. The Bancorp’s remaining investment in Vantiv
Holding, LLC continues to be accounted for under the equity
method of accounting.
As of December 31, 2015, the Bancorp continued to hold
approximately 35 million Class B units of Vantiv Holding, LLC and
a warrant to purchase approximately 7.8 million Class C non-voting
units of Vantiv Holding, LLC, both of which may be exchanged for
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 35 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 $63 million, $48 million and $77
million, respectively, in other noninterest income as part of its
equity method investment in Vantiv Holding, LLC for the years
ended December 31, 2015, 2014 and 2013 and received cash
distributions totaling $11 million, $23 million and $40 million during
the years ended December 31, 2015, 2014 and 2013, 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 each of the years ended December 31, 2015, 2014 and 2013.
Other services provided to Vantiv Holding, LLC by the Bancorp,
have continued beyond
include
interchange clearing, settlement and sponsorship. Vantiv Holding,
LLC paid the Bancorp $47 million, $44 million and $34 million for
these services for the years ended December 31, 2015, 2014 and
2013, respectively. In addition to the previously mentioned services,
the Bancorp previously 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
$89 million, $83 million and $88 million for the years ended
December 31, 2015, 2014 and 2013, respectively. These fees are
reported as a component of card and processing expense in the
the deconversion period,
Consolidated Statements of Income.
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 carrying value of loans to Vantiv
Holding, LLC was $191 and $204 million at December 31, 2015 and
2014, respectively. Interest income relating to the loans was $4
million, $5 million and $7 million, respectively, for the years ended
December 31, 2015, 2014 and 2013 and is included in interest and
fees on loans and leases in the Consolidated Statements of Income.
Vantiv Holding, LLC’s unused line of credit was $46 million and
$50 million as of December 31, 2015 and 2014, respectively.
investment under
SLK Global
As of December 31, 2015, the Bancorp owns 100% of Fifth Third
Mauritius Holdings Limited, which owns 49% of SLK Global, and
the equity method of
accounts for this
accounting. The Bancorp’s investment in SLK Global was $6
million at both December 31, 2015 and 2014. The Bancorp
recognized $3 million
the
Consolidated Statements of Income as part of its equity method
investment in SLK Global for the years ended December 31, 2015
and 2014 and $2 million for the year ended December 31, 2013 and
received an immaterial amount of cash distributions during the years
ended December 31, 2015, 2014 and 2013. The Bancorp paid SLK
Global $17 million, $13 million and $16 million for their process
and software services during the years ended December 31, 2015,
2014 and 2013, respectively.
in other noninterest
income
in
CDC Investments
The Bancorp had $5 million of loans outstanding to its CDC
investments at both December 31, 2015 and 2014 and unfunded
commitment balances of $88 million and $9 million at December
31, 2015 and 2014, respectively. The Bancorp held $23 million and
$29 million of deposits for its CDC investments at December 31,
2015 and 2014, respectively. For further information on CDC
investments, refer to Note 11.
139 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. INCOME TAXES
The Bancorp and its subsidiaries file a consolidated federal income tax return. The following is a summary of applicable income taxes included in
the Consolidated Statements of Income for the years ended December 31:
($ in millions)
Current income tax expense:
U.S. Federal income taxes
State and local income taxes
Foreign income taxes
Total current income tax expense
Deferred income tax (benefit) expense:
U.S. Federal income taxes
State and local income taxes
Foreign income taxes
Total deferred income tax (benefit) expense
Applicable income tax expense
2015
2014
2013
662
55
13
730
(78)
6
1
(71)
659
424
34
8
466
71
9
(1)
79
545
494
23
2
519
232
23
(2)
253
772
$
$
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
2015
35.0 %
1.7
(1.7)
(7.5)
-
0.3
27.8 %
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
in the rate reconciliation table
Credits
include Low-Income
Housing, New Markets, Rehabilitation Investment and Qualified
Zone Academy Bond tax credits. Tax-exempt income in the rate
reconciliation table includes interest on municipal bonds, interest on
tax-exempt lending, income/charges on life insurance policies held
by the Bancorp, and certain gains on sales of leases that are exempt
from federal taxation.
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.
2015
11
1
-
2
-
(1)
13
2014
7
2
-
2
-
-
11
2013
18
1
(7)
1
(5)
(1)
7
$
$
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
twelve months, the Bancorp believes
its
unrecognized tax benefits will change by a material amount during
the next twelve months.
is unlikely that
it
The Bancorp’s unrecognized tax benefits as of December 31, 2015,
2014, and 2013 primarily 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.
140 Fifth Third Bancorp
Deferred income taxes are comprised of the following items at December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Deferred tax assets:
Allowance for loan and lease losses
Deferred compensation
Reserves
Reserve for unfunded commitments
State net operating loss carryforwards
Other
Total deferred tax assets
Deferred tax liabilities:
Lease financing
Investments in joint ventures and partnership interests
MSRs and related economic hedges
Other comprehensive income
State deferred taxes
Qualifying hedges and free-standing derivatives
Bank premises and equipment
Other
Total deferred tax liabilities
Total net deferred tax liability
losses
(primarily resulting from
At December 31, 2015 and 2014, the Bancorp recorded deferred tax
assets of $10 million and $18 million, respectively, related to state
net operating loss carryforwards. The deferred tax assets relating to
state net operating
leasing
operations) are presented net of specific valuation allowances of $22
million and $19 million at December 31, 2015 and 2014,
respectively. If these carryforwards are not utilized, they will expire
in varying amounts through 2035. At December 31, 2015, the
Bancorp recorded a deferred tax asset of $5 million related to a
foreign tax credit carryforward. If not utilized, the deferred tax asset
relating to the foreign tax credit carryforward will expire in 2025.
The Bancorp has determined that a valuation allowance is not
needed against the remaining deferred tax assets as of December 31,
2015 or 2014. 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, 2015 and
2014 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 has concluded its audit of the Bancorp’s 2010 and
2011 federal income tax returns. No material issues were identified
as a result of the IRS audit and there are no contested issues
2015
2014
445
118
61
48
10
194
876
935
248
245
106
79
58
53
160
1,884
(1,008)
463
113
96
47
18
189
926
896
329
237
231
81
105
103
148
2,130
(1,204)
$
$
$
$
$
outstanding. The IRS is currently examining the Bancorp’s 2012 and
2013 federal income tax returns. The statute of limitations for the
Bancorp’s federal income tax returns remains open for tax years
2010-2015. 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
reasonable period of time. Otherwise, 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
the years ended
Consolidated Financial Statements. During
December 31, 2015, 2014 and 2013, the Bancorp recognized an
immaterial amount of interest expense/benefit in connection with
income taxes. At December 31, 2015 and 2014, 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, 2015 and 2014 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.
141 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 non-qualified, defined benefit plans,
which are frozen and funded on an as needed basis. A majority of
these plans were obtained in acquisitions from prior years and are
included with the qualified defined benefit plan in the following
tables (“the Plan”). The Bancorp recognizes the overfunded and
underfunded status of the Plan as an asset and liability, respectively,
in the Consolidated Balance Sheets. The Plan had an underfunded
projected benefit obligation at both December 31, 2015 and 2014.
The underfunded amounts recognized in other liabilities in the
Consolidated Balance Sheets were $54 million and $52 million at
December 31, 2015 and 2014, respectively.
The following table summarizes the Plan as of and for the years ended December 31:
$
($ 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
Interest cost
Settlement
Actuarial (gain) loss
Benefits paid
Projected benefit obligation at December 31
Underfunded projected benefit obligation at December 31
Accumulated benefit obligation at December 31(a)
(a)
2014
200
12
3
(11)
(9)
195
221
10
(11)
36
(9)
247
(52)
247
Since the Plan’s benefits were frozen, the rate of compensation increase is no longer an assumption used to calculate the accumulated benefit obligation. Therefore, the accumulated benefit obligation was
the same as the projected benefit obligation at both December 31, 2015 and 2014.
2015
195
(6)
4
(17)
(10)
166
247
9
(17)
(9)
(10)
220
(54)
220
$
$
$
$
$
The estimated net actuarial loss for the Plan that will be amortized
from AOCI into net periodic benefit cost during 2016 is $10
million. The estimated net prior service cost for the Plan that will be
amortized from AOCI into net periodic benefit cost during 2016 is
immaterial to the Consolidated Financial Statements.
The following table summarizes net periodic benefit cost and other changes in the Plan's assets and benefit obligations recognized in OCI for the
years ended December 31:
($ in millions)
Components of net periodic benefit cost:
Interest cost
Expected return on assets
Amortization of net actuarial loss
Settlement
Net periodic benefit cost
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Net actuarial loss (gain)
Amortization of net actuarial loss
Settlement
Total recognized in other comprehensive income
Total recognized in net periodic benefit cost and other comprehensive income
2015
2014
2013
$
$
$
$
9
(13)
10
7
13
9
(10)
(7)
(8)
5
10
(14)
7
5
8
37
(7)
(5)
25
33
10
(13)
11
5
13
(38)
(11)
(5)
(54)
(41)
142 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements of Plan Assets
The following tables summarize plan assets measured at fair value on a recurring basis as of December 31:
2015 ($ in millions)
Equity securities(b)
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 and federal agencies securities
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(c)
Total debt securities
Total plan assets
(a) For further information on fair value hierarchy levels, refer to Note 1.
(b)
(c)
Includes holdings in Bancorp common stock.
Includes corporate bonds.
2014 ($ in millions)
Equity securities(b)
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 and federal agencies securities
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(c)
Total debt securities
Total plan assets
(a) For further information on fair value hierarchy levels, refer to Note 1.
(b)
(c)
Includes holdings in Bancorp common stock.
Includes corporate bonds.
Fair Value Measurements Using(a)
Level 1
Level 2
Level 3
Total Fair Value
$
$
$
$
$
$
$
$
52
15
-
-
-
-
6
21
2
-
-
-
-
2
75
Level 1
56
7
-
-
-
-
7
3
-
-
-
-
3
66
-
-
35
31
3
11
-
80
2
3
2
1
3
11
91
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
52
15
35
31
3
11
6
101
4
3
2
1
3
13
166
Fair Value Measurements Using(a)
Level 2
Level 3
Total Fair Value
-
-
38
31
22
22
113
-
4
7
2
3
16
129
-
-
-
-
-
-
-
-
-
-
-
-
-
-
56
7
38
31
22
22
120
3
4
7
2
3
19
195
The following is a description of the valuation methodologies used
for instruments measured at fair value, as well as the general
classification of such
instruments pursuant to the valuation
hierarchy.
Equity securities
The Plan measures common stock using quoted prices which are
available in an active market and classifies these investments within
Level 1 of the valuation hierarchy.
Mutual and exchange-traded funds
All of the 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. Level 1 securities include money market funds and
commodity funds. 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, investments such as international funds, domestic funds,
debt funds and alternative strategies are classified within Level 2 of
the valuation hierarchy.
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 securities. If quoted market prices are not
143 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
include federal agency securities, agency
valuation hierarchy,
residential mortgage-backed
commercial
mortgage-backed securities, non-agency commercial mortgage-
backed securities and asset-backed securities and other debt
securities.
securities,
agency
Plan Assumptions
The Plan’s 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 2015, the Bancorp updated the mortality assumption which
resulted in a decrease of $3 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
2015
2014
2013
4.16 %
N/A(a)
7.00
3.82
N/A(a)
7.00
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
(a)
Since the Plan’s benefits were frozen, 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 2015 pension
expense by approximately $1 million.
Based on the actuarial assumptions, the Bancorp expects to
contribute $3 million to the Plan in 2016. Estimated pension benefit
payments, which reflect expected future service, are $19 million in
2016, $18 million in 2017, $17 million in 2018, $16 million in 2019
and $16 million in 2020. The total estimated payments for the years
2021 through 2025 is $79 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 U.S. Treasury
and federal agencies securities, mortgage-backed securities and
asset-backed securities), alternative strategies (including traditional
mutual funds, precious metals and commodities) and cash.
The following table provides the Bancorp’s targeted and actual weighted-average asset allocations by asset category for the years ended December
31:
Equity securities
Bancorp common stock
Total equity securities(a)
Fixed-income securities
Alternative strategies
Cash
Total
(a)
(b) These reflect the targeted ranges for the year ended December 31, 2015.
Includes mutual and exchange-traded funds.
Targeted range(b)
2015
60-90 %
5-25
3-11
0-13
69 %
2
71
16
7
6
100 %
2014
62
2
64
20
12
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 Plan at December 31, 2015 and 2014.
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 plan assets
in a manner consistent with the plan agreement and other
regulatory, federal and state laws. The Fifth Third Bank Pension,
Profit Sharing and Medical Plan Committee (the “Committee”) is
the plan administrator. The Trustee is required to provide to the
Committee monthly and quarterly reports covering a list of plan
assets, portfolio performance, transactions and asset allocation. The
Trustee is also required to keep the Committee apprised of any
material changes in the Trustee’s outlook and recommended
investment policy. There were no fees paid by the Plan for
144 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
investment management, accounting or administrative services
provided by the Trustee.
As of December 31, 2015 and 2014, $166 million and $195
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 at both December 31, 2015 and 2014. Plan
assets are not expected to be returned to the Bancorp during 2016.
recognized
contribution. Expenses
Other Information on Retirement and Benefit Plans
The Bancorp has a qualified defined contribution savings plan that
allows participants to make voluntary 401(k) contributions on a pre-
tax or Roth basis, subject to statutory limitations. The Bancorp
amended and restated the qualified defined contribution savings
plan in its entirety, effective as of January 1, 2015. Beginning with
the 2015 plan year, the Bancorp provides a higher company 401(k)
match
for matching
contributions to the Bancorp’s qualified defined contribution
savings plan were $71 million, $44 million and $43 million for the
years ended December 31, 2015, 2014 and 2013, respectively. The
Bancorp did not make a profit sharing contribution during the year
ended December 31, 2015. The Bancorp’s profit sharing plan
expense was $19 million and $32 million for the years ended
December 31, 2014 and 2013, respectively. In addition, the Bancorp
has a non-qualified defined contribution plan that allows certain
employees to make voluntary contributions
into a deferred
compensation plan. Expenses recognized by the Bancorp for its
non-qualified defined contribution plan were $3 million for the year
ended December 31, 2015 and $2 million for both of the years
ended December 31, 2014 and 2013.
145 Fifth Third Bancorp
22. ACCUMULATED OTHER COMPREHENSIVE INCOME
The table below presents the activity of the components of OCI and AOCI for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total Other
Comprehensive Income
Total Accumulated Other
Comprehensive Income
Pretax
Activity
Tax
Effect
Net
Activity
Beginning
Balance
Net
Activity
Ending
Balance
$
(349)
(16)
(365)
74
(75)
(1)
(9)
17
8
(358)
122
6
128
(26)
26
-
4
(6)
(2)
126
580
(202)
(37)
543
60
(44)
16
(37)
12
(25)
534
13
(189)
(21)
15
(6)
12
(4)
8
(187)
(227)
(10)
(237)
48
(49)
(1)
(5)
11
6
(232)
378
(24)
354
39
(29)
10
(25)
8
(17)
347
(454)
159
(295)
6
(448)
(13)
(44)
(57)
38
16
54
(451)
(2)
157
5
15
20
(13)
(6)
(19)
158
4
(291)
(8)
(29)
(37)
25
10
35
(293)
$
$
$
$
$
475
(237)
238
23
(1)
22
(69)
429
6
(232)
(63)
197
121
354
475
13
10
23
(52)
82
(17)
347
(69)
429
412
(291)
121
50
(37)
13
(87)
375
35
(293)
(52)
82
($ in millions)
2015
Unrealized holding losses on available-for-sale securities arising
during the year
Reclassification adjustment for net gains on available-for-sale
securities included in net income
Net unrealized gains on available-for-sale securities
Unrealized holding gains on cash flow hedge derivatives arising
during the year
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 year
Reclassification of amounts to net periodic benefit costs
Defined benefit pension plans, net
Total
2014
Unrealized holding gains on available-for-sale securities arising
during the year
Reclassification adjustment for net gains on available-for-sale
securities included in net income
Net unrealized gains on available-for-sale securities
Unrealized holding gains on cash flow hedge derivatives arising
during the year
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 year
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 the year
Reclassification adjustment for net losses on available-for-sale
securities included in net income
Net unrealized gains on available-for-sale securities
Unrealized holding losses on cash flow hedge derivatives arising
during the year
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 year
Reclassification of amounts to net periodic benefit costs
Defined benefit pension plans, net
Total
146 Fifth Third Bancorp
37
37
(13)
24
44
-
44
(15)
29
(7)
(5)
(12)
4
(8)
45
(6)
(6)
2
(4)
45
(1)
44
(15)
29
(11)
(5)
(16)
6
(10)
15
Treasury Stock
The table below presents reclassifications out of AOCI for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of
Income Caption
2015
2014
2013
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
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
16
16
(6)
10
75
-
75
(26)
49
(10)
(7)
(17)
6
(11)
Total reclassifications for the period
(a) 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.
(b) Amounts in parentheses indicate reductions to net income.
Net income
$
48
23. COMMON, PREFERRED AND TREASURY STOCK
The table presents a summary of the share activity within common, preferred and treasury stock for the years ended:
($ in millions, except share data)
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
Shares acquired for treasury
Impact of stock transactions under stock compensation plans, net
Other
December 31, 2015
$
$
$
$
Shares
923,892,581 $
Common Stock
Value
2,051
-
-
-
-
-
-
2,051
-
-
-
-
2,051
-
-
-
2,051
923,892,581 $
923,892,581 $
923,892,581 $
-
-
-
-
-
-
-
-
-
-
-
-
-
Preferred Stock
Value
398
-
441
593
(398)
-
-
1,034
-
297
-
-
1,331
-
-
-
1,331
Shares
16,450 $
-
18,000
24,000
(16,450)
-
-
Value
(634)
(1,242)
-
-
540
38
3
42,000 $ (1,295)
(726)
-
47
2
54,000 $ (1,972)
(847)
52
3
54,000 $ (2,764)
-
12,000
-
-
-
-
-
Shares
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
42,607,855
(3,593,406)
(47,811)
138,812,267
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
liquidation preference. The preferred stock accrues
$25,000
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
147 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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 the Bancorp’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
depositary shares were delisted from the NASDAQ Global Select
Market and withdrawn from the Exchange.
Treasury Stock
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.
On March 11, 2015, the Bancorp announced the results of its
capital plan submitted to the FRB as part of the 2015 CCAR. The
FRB indicated to the Bancorp that it did not object to the potential
repurchase of $765 million of common shares with the additional
ability to repurchase common shares in an amount equal to any
after-tax gains realized by the Bancorp from the sale of Vantiv, Inc.
common stock for the period beginning April 1, 2015 and ending
June 30, 2016.
The Bancorp entered into a number of accelerated share
repurchase transactions during the years ended December 31, 2014
and 2015. As part of these transactions, the Bancorp entered into
forward contracts in which the final number of shares delivered at
settlement was based generally on a discount to the average daily
volume weighted-average price of the Bancorp’s common stock
during the term of these repurchase agreements. The accelerated
share repurchases were treated as two separate transactions: (i) the
acquisition of treasury shares on the acquisition date and (ii) a
forward contract indexed to the Bancorp’s common stock.
148 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a summary of the Bancorp's accelerated share repurchase transactions that were entered into or settled during the
years ended December 31, 2014 and 2015.
Repurchase Date
November 18, 2013
December 13, 2013
January 31, 2014
May 1, 2014
July 24, 2014
October 23, 2014
January 27, 2015
April 30, 2015
August 3, 2015
September 9, 2015
December 14, 2015
Amount ($ in millions)
200
456
99
150
225
180
180
155
150
150
215
Shares Repurchased on
Repurchase Date
Shares Received from Forward
Contract Settlement
Total Shares
Repurchased
8,538,423
19,084,195
3,950,705
6,216,480
9,352,078
8,337,875
8,542,713
6,704,835
6,039,792
6,538,462
9,248,482
1,132,495
2,294,932
602,109
1,016,514
1,896,685
794,245
1,103,744
842,655
1,346,314
1,446,613
1,782,477
9,670,918
21,379,127
4,552,814
7,232,994
11,248,763
9,132,120
9,646,457
7,547,490
7,386,106
7,985,075
11,030,959
Settlement Date
March 5, 2014
March 31, 2014
March 31, 2014
July 21, 2014
October 14, 2014
January 8, 2015
April 28, 2015
July 31, 2015
September 3, 2015
October 23, 2015
January 14, 2016
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
Plan Category (shares in thousands)
Equity compensation plans approved by shareholders
SARs
RSAs
RSUs
Stock options(c)
Phantom stock units
PSAs
Employee stock purchase plan
and remaining shares available for future issuance under all of the
Bancorp’s equity compensation plans approved by shareholders as
of December 31, 2015:
Number of Shares to be
Issued Upon Exercise
Weighted-Average
Exercise Price Per Share
Shares Available for
Future Issuance
(b)
8,281
371
7
(d)
(e)
N/A
N/A
N/A
$32.26
N/A
N/A
24,667 (a)
(a)
(a)
(a)
(a)
N/A
(a)
6,813 (f)
31,480
Total shares
(a) Under the 2014 Incentive Compensation Plan, 36 million shares were authorized for issuance as SARs, RSAs, RSUs, stock options, performance share or unit awards, dividend or dividend
8,659
equivalent rights and stock awards.
(b) The number of shares to be issued upon exercise will be determined at exercise based on the difference between the grant price and the market price on the date of exercise and the calculation of taxes
owed on the exercise.
(c) Excludes 0.1 million outstanding options awarded under plans assumed by the Bancorp in connection with certain mergers and acquisitions. The Bancorp has not made any awards under these plans
and will make no additional awards under these plans. The weighted-average exercise price of the outstanding options is $13.89 per share.
(d) Phantom stock units are settled in cash.
(e) The number of shares to be issued is dependent upon the Bancorp achieving certain predefined performance targets and ranges from zero shares to approximately 1 million shares.
(f) 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 executives, directors and key
employees 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 SARs, RSAs, RSUs, stock options,
performance share or unit awards, dividend or dividend equivalent
rights and stock awards. Full Value Awards are defined as awards
with no cash outlay for the employee to obtain the full value. Based
on total stock-based awards outstanding (including SARs, RSAs,
RSUs, stock options and PSAs) 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
and its subsidiaries is 10%. SARs, RSAs, RSUs, stock options and
PSAs outstanding represent 7% of the Bancorp’s issued shares at
December 31, 2015.
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. RSAs and RSUs vest after four years or ratably
over three or four years of continued employment. RSAs 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, had up to ten year terms and vested and
became fully exercisable ratably over a three or four year period of
continued employment. PSAs have three year cliff vesting terms
with market conditions and/or performance conditions as defined
by the plan. All of the Bancorp’s executive stock-based awards
contain an annual performance hurdle of 2% return on tangible
common equity. If this threshold is not met, all PSAs that would
vest in the next year are forfeited and all SARs and RSAs that would
vest in the next year may also be forfeited at the discretion of the
Human Capital and Compensation Committee of the Board of
149 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Directors. The Bancorp met this threshold as of December 31,
2015.
Stock-based compensation expense was $100 million, $83
million and $78 million for the years ended December 31, 2015,
2014 and 2013, respectively, and is included in salaries, wages and
incentives in the Consolidated Statements of Income. The total
related income tax benefit recognized was $36 million, $30 million
and $28 million for the years ended December 31, 2015, 2014 and
2013, 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
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-
2015
2014
2013
6
35 %
2.7
1.6
6
35
2.4
2.0
6
36
3.0
1.0
Scholes option-pricing model. The weighted-average grant-date fair
value of SARs granted was $5.52, $6.53 and $4.56 per share for the
years ended December 31, 2015, 2014 and 2013, respectively. The
total grant-date fair value of SARs that vested during the years
ended December 31, 2015, 2014 and 2013 was $35 million, $34
million and $29 million, respectively.
At December 31, 2015, there was $45 million of stock-based
compensation expense related
to nonvested SARs not yet
recognized. The expense is expected to be recognized over an
estimated remaining weighted-average period at December 31, 2015
of 2.4 years.
SARs (in thousands, except per share data)
Outstanding at January 1
Granted
Exercised
Forfeited or expired
Outstanding at December 31
Exercisable at December 31
2015
Weighted-
2014
Weighted-
2013
Weighted-
Number of
SARs
45,590 $
5,219
(3,242)
(3,438)
44,129 $
29,721 $
Average Grant
Price Per Share
19.79
18.99
13.59
32.96
19.14
19.71
Number of
SARs
48,599 $
4,526
(4,408)
(3,127)
45,590 $
27,950 $
Average Grant Number of
Price Per Share
19.98
21.63
13.63
34.19
19.79
21.71
SARs
44,120 $
10,267
(2,904)
(2,884)
48,599 $
26,462 $
Average Grant
Price Per Share
20.41
16.16
11.18
21.78
19.98
24.14
The following table summarizes outstanding and exercisable SARs by grant price per share at December 31, 2015:
Outstanding SARs
Exercisable SARs
SARs (in thousands, except per share data)
Under $10.00
$10.01-$20.00
$20.01-$30.00
$30.01-$40.00
Over $40.00
All SARs
SARs
2,943 $
30,488
4,047
6,069
582
44,129 $
3.98
15.99
21.64
38.66
40.11
19.14
Weighted-
Number of Average Grant Contractual Life
Price Per Share
Weighted-
Number of Average Grant Contractual Life
Price Per Share
Weighted-
Average
Remaining
(in years)
3.3
6.3
8.2
0.8
1.3
5.5
Weighted-
Average
Remaining
(in years)
3.3
5.3
8.1
0.8
1.3
4.2
SARs
2,943 $
19,074
1,053
6,069
582
29,721 $
3.98
15.37
21.66
38.66
40.11
19.71
Restricted Stock Awards
The total grant-date fair value of RSAs that vested during the years
ended December 31, 2015, 2014 and 2013 was $43 million, $32
million and $40 million, respectively. At December 31, 2015, there
was $101 million of stock-based compensation expense related to
nonvested RSAs not yet recognized. The expense is expected to be
recognized over an estimated remaining weighted-average period at
December 31, 2015 of 2.7 years.
150 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2015
Weighted-Average
2014
Weighted-Average
2013
Weighted-Average
Grant-Date
Fair Value
Per Share
17.98
19.11
16.86
18.64
18.88
Shares
7,253 $
4,250
(2,580)
(642)
8,281 $
Grant-Date
Fair Value
Per Share
15.11
21.61
14.84
16.73
17.98
Shares
6,710 $
3,264
(2,183)
(538)
7,253 $
Grant-Date
Fair Value
Per Share
14.32
16.21
14.71
14.97
15.11
Shares
6,379 $
3,583
(2,720)
(532)
6,710 $
RSAs (in thousands, except per share data)
Nonvested at January 1
Granted
Exercised
Forfeited
Nonvested at December 31
The following table summarizes nonvested RSAs by grant-date fair value at December 31, 2015:
RSAs (in thousands)
$10.01-$15.00
$15.01-$20.00
$20.01-$25.00
All RSAs
Nonvested RSAs
Weighted-Average
Remaining
Contractual Life
(in years)
0.3
1.6
1.4
1.4
Shares
690
5,153
2,438
8,281
Restricted Stock Units
The total grant-date fair value of RSUs that vested during the year
ended December 31, 2015 was $2 million. At December 31, 2015,
there was $4 million of stock-based compensation expense related
to nonvested RSUs not yet recognized. The expense is expected to
be recognized over an estimated remaining weighted-average period
at December 31, 2015 of 2.9 years.
RSUs (in thousands, except per share data)
Nonvested at January 1
Granted
Released
Forfeited
Nonvested at December 31
The following table summarizes nonvested RSUs by grant-date fair value at December 31, 2015:
RSUs (in thousands)
$15.01-$20.00
$20.01-$25.00
All RSUs
2015
Weighted-Average
Grant-Date
Fair Value
Per Share
N/A
19.58
21.63
19.46
19.56
Shares
- $
377
(5)
(1)
371 $
Nonvested RSUs
Weighted-Average
Remaining
Contractual Life
(in years)
1.8
-
1.6
Shares
318
53
371
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 the years ended December 31, 2015, 2014 and 2013.
The total intrinsic value of stock options exercised was $1
million for the years ended December 31, 2015, 2014 and 2013,
respectively. Cash received from stock options exercised was $2
million, $1 million and $2 million for the years ended December 31,
2015, 2014 and 2013, respectively. The tax benefit realized from
exercised stock options was
the Bancorp’s
immaterial
to
the years ended
Consolidated Financial Statements during
December 31, 2015, 2014 and 2013. All stock options were vested
as of December 31, 2008, therefore, no stock options vested during
the years ended December 31, 2015, 2014 or 2013. As of December
31, 2015, the aggregate intrinsic value of both outstanding stock
options and exercisable stock options was $1 million.
151 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options (in thousands, except per share data)
Outstanding at January 1
Exercised
Forfeited or expired
Outstanding at December 31
Exercisable at December 31
2015
2014
2013
Weighted-Average
Weighted-Average
Weighted-Average
Number of
Options
Exercise Price
Per Share
Number of
Options
265 $
(126)
(20)
119 $
119 $
14.25
13.67
13.59
14.97
14.97
546 $
(115)
(166)
265 $
265 $
Exercise Price
Per Share
20.72
12.84
36.42
14.25
14.25
Number of
Options
Exercise Price
Per Share
3,877 $
(190)
(3,141)
546 $
546 $
45.00
11.88
51.23
20.72
20.72
The following table summarizes outstanding and exercisable stock options by exercise price per share at December 31, 2015:
Outstanding and Exercisable Stock Options
Weighted-Average
Weighted-Average
Exercise Price
Per Share
Remaining
Contractual Life
(in years)
8.59
13.89
24.41
-
40.98
14.97
3.0
0.8
2.0
-
1.0
0.8
Number of Options
$
1
112
1
-
5
119
$
The Bancorp sponsors an employee 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, 2015, 2014 and 2013, there were 617,829, 599,101
and 690,039 shares, respectively, purchased by participants and the
Bancorp recognized stock-based compensation expense of $1
million in each of the respective years.
Stock Options (in thousands, except per share data)
Under $10.00
$10.01-$20.00
$20.01-$30.00
$30.01-$40.00
Over $40.00
All stock options
to
in response
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 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 upon 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, 2015,
2014 and 2013. No phantom stock units were settled during both
the years ended December 31, 2015 and 2014 and 200,130 phantom
stock units were settled during the year ended December 31, 2013.
the
targets over
PSAs are payable contingent upon the Bancorp achieving
certain predefined performance
three-year
measurement period. Awards granted during the years ended
December 31, 2015, 2014 and 2013 will be entirely settled in stock.
The performance targets are based on the Bancorp’s performance
relative to a defined peer group. During the years ended December
31, 2015, 2014 and 2013, 458,355, 322,567 and 348,595 PSAs,
respectively, were granted by the Bancorp. These awards were
granted at a weighted-average grant-date fair value of $19.48, $15.61
and $16.15 per unit during the years ended December 31, 2015,
2014 and 2013, respectively.
152 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE
The following table presents the major components of other noninterest income and other noninterest expense for the years ended December 31:
($ in millions)
Other noninterest income:
Gain on sale of Vantiv, Inc. shares
Valuation adjustments on the warrant associated with sale of Vantiv Holding, LLC
Gain on sale and exercise of the warrant associated with Vantiv Holding, LLC
Operating lease income
Income from the TRA associated with Vantiv, Inc.
Equity method income from interest in Vantiv Holding, LLC
BOLI income
Cardholder fees
Gain on loan sales
Private equity investment income
Consumer loan and lease fees
Banking center income
Insurance income
Net losses on disposition and impairment of bank premises and equipment
Loss on swap associated with the sale of Visa, Inc. Class B shares
Other, net
Total other noninterest income
Other noninterest expense:
Impairment on affordable housing investments
Loan and lease
Marketing
FDIC insurance and other taxes
Operating lease
Professional services fees
Losses and adjustments
Travel
Postal and courier
Data processing
Recruitment and education
Donations
Insurance
Supplies
Provision for (benefit from) the reserve for unfunded commitments
Other, net
Total other noninterest expense
2015
2014
2013
$
$
$
$
331
236
89
89
80
63
48
43
38
28
23
21
14
(101)
(37)
14
979
145
118
110
99
74
70
55
54
45
45
33
29
17
16
4
191
1,105
125
31
-
84
23
48
44
45
-
27
25
30
13
(19)
(38)
12
450
135
119
98
89
67
72
188
52
47
41
28
18
16
15
(27)
181
1,139
327
206
-
75
9
77
52
47
3
24
27
34
25
(6)
(31)
10
879
108
158
114
127
57
76
221
54
48
42
26
24
17
16
(17)
193
1,264
153 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:
($ 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
2015
Average
Shares
Income
Per Share
Amount
Income
2014
Average
Shares
Per Share
Amount
Income
2013
Average
Shares
Per Share
Amount
$
$
$
1,712
75
1,637
15
1,622
1,637
-
-
1,637
15
$
799 $
2.03 $
1,481
67
1,414
12
1,402
$
833 $
1.68 $
1,836
37
1,799
14
1,785
869 $
2.05
$
1,414
$
1,799
9
-
10
-
-
-
1,414
12
8
18
-
18
1,817
14
$
1,622
808 $
2.01 $
1,402
843 $
1.66 $
1,803
895 $
2.02
Shares are excluded from the computation of net income per diluted
share when their inclusion has an anti-dilutive effect on earnings per
share. The diluted earnings per share computation for the years
ended December 31, 2015, 2014 and 2013 excludes 16 million, 13
million and 24 million, respectively, of SARs and an immaterial
amount for both the years ended December 31, 2015 and 2014 and
1 million for the year ended December 31, 2013, of stock options
because their inclusion would have been anti-dilutive.
The diluted earnings per share computation for the year ended
December 31, 2015 excludes the impact of the forward contract
related to the December 14, 2015 accelerated share repurchase
transaction. Based upon the average daily volume weighted-average
price of the Bancorp’s common stock during the fourth quarter of
2015, the counterparty to the transaction would have been required
to deliver additional shares for the settlement of the forward
contract as of December 31, 2015, and thus the impact of the
forward contract related to 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, 2014 excludes the impact of the forward contract
related to the October 23, 2014 accelerated share repurchase
transaction. Based upon 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
forward contract related to 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 forward contracts related to the
two accelerated share repurchase transactions would have been anti-
dilutive to earnings per share.
154 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. 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:
Fair Value Measurements Using
Level 1(c)
Level 2(c)
Level 3
Total Fair Value
December 31, 2015 ($ in millions)
Assets:
Available-for-sale and other securities:
U.S. Treasury and federal agencies securities
Obligations of states and political subdivisions securities
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 securities
Obligations of states and political subdivisions securities
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(d)
Total assets
Liabilities:
Derivative liabilities:
Interest rate contracts
Foreign exchange contracts
Equity contracts
Commodity contracts
Derivative liabilities(e)
$
$
$
100
-
-
-
-
-
98
198
-
-
-
-
333
333
-
-
3
-
-
54
57
588
1
-
-
37
38
Short positions(e)
Total liabilities
(a) Excludes FHLB, FRB and DTCC restricted stock totaling $248, $355 and $1, respectively, at December 31, 2015.
(b)
Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.
(c) During the year ended December 31, 2015, no assets or liabilities were transferred between Level 1 and Level 2.
(d)
(e)
Included in other assets in the Consolidated Balance Sheets.
Included in other liabilities in the Consolidated Balance Sheets
22
60
$
1,087
52
15,081
7,862
2,804
1,355
1
28,242
19
9
6
19
-
53
519
-
892
386
-
240
1,518
30,332
257
340
-
239
836
7
843
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
167
15
-
262
-
277
444
3
-
61
-
64
-
64
1,187
52
15,081
7,862
2,804
1,355
99
28,440
19
9
6
19
333
386
519
167
910
386
262
294
1,852
31,364
261
340
61
276
938
29
967
155 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, 2014 ($ in millions)
Assets:
Available-for-sale and other securities:
U.S. Treasury and federal agencies securities
Obligations of states and political subdivisions securities
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 securities
Obligations of states and political subdivisions securities
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(d)
Total assets
Liabilities:
Derivative liabilities:
Interest rate contracts
Foreign exchange contracts
Equity contracts
Commodity contracts
Derivative liabilities(e)
$
$
$
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
Short positions(e)
Total liabilities
(a) Excludes FHLB and FRB restricted stock totaling $248 and $352, respectively, at December 31, 2014.
(b)
Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.
(c) During the year ended December 31, 2014, no assets or liabilities were transferred between Level 1 and Level 2.
(d)
(e)
Included in other assets in the Consolidated Balance Sheets.
Included in other liabilities in the Consolidated Balance Sheets
$
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 U.S. Treasury securities 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 securities, obligations of states and political subdivisions
securities, agency residential mortgage-backed securities, agency and
non-agency commercial mortgage-backed securities and asset-
backed securities and other debt securities. These 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
156 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
within Level 2 of the valuation hierarchy as the valuation is based on
external pricing for similar instruments. ARM loans classified as
held for sale are also classified within Level 2 of the valuation
hierarchy due to the use of observable inputs in the 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 for which the fair value election
has been made, and that are 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 Head of the Consumer Bank, 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
reviews
if
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
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, 2015 and 2014, 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. For further information on the
warrant, refer to Note 19. Level 3 derivatives also include IRLCs,
which utilize internally generated loan closing rate assumptions as a
significant unobservable input in the valuation process.
As of December 31, 2015, the warrant allows the Bancorp to
purchase approximately 7.8 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-pricing 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 and expected volatility.
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. The
Accounting and Treasury departments 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. The
Accounting and Treasury departments 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, 2015
was $15 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 $6 million and $11 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 $7 million and $14 million, respectively. The decrease
in the fair value of IRLCs due to immediate 10% and 20% adverse
changes in the assumed loan closing rates would be approximately
$2 million and $3 million, respectively, and the increase in the fair
value due to immediate 10% and 20% favorable changes in the
assumed loan closing rates would be approximately $2 million and
$3 million, respectively. These sensitivities are hypothetical and
should be used with caution, as changes in fair value based on a
variation in assumptions typically cannot be extrapolated because
the relationship of the change in assumptions to the change in fair
value may not be linear.
The Consumer Line of Business Finance department, which
reports to the Bancorp’s Chief Financial Officer, and the
aforementioned Secondary Marketing department 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.
157 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)
Trading
Securities
Residential
Mortgage
Loans
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives,
Net(a)
Total
Fair Value
484
$
-
108
For the year ended December 31, 2015 ($ in millions)
Balance, beginning of period
Total gains or losses (realized/unrealized):
Included in earnings
Purchases
Sale and exercise of warrant
Settlements
Transfers into Level 3(b)
Balance, end of period
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, 2015(c)
83
(a) Net interest rate derivatives include derivative assets and liabilities of $15 and $3, respectively, as of December 31, 2015. Net equity derivatives include derivative assets and liabilities of $262
399
(2)
(477)
(111)
87
380
288
-
(477)
24
-
201
111
(2)
-
(107)
-
12
-
-
-
(28)
87
167
-
-
-
-
-
-
366
66
10
17
-
-
$
$
and $61, respectively, as of December 31, 2015.
Includes residential mortgage loans held for sale that were transferred to held for investment.
Includes interest income and expense.
(b)
(c)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Trading
Securities
Residential
Mortgage
Loans
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives,
Net(a)
Total
Fair Value
437
$
1
92
For the year ended December 31, 2014 ($ in millions)
Balance, beginning of period
Total gains or losses (realized/unrealized):
Included in earnings
Purchases
Sales
Settlements
Transfers into Level 3(b)
Balance, end of period
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)
10
(a) Net interest rate derivatives include derivative assets and liabilities of $12 and $2, respectively as of December 31, 2014. Net equity derivatives include derivative assets and liabilities of $415 and
125
(1)
-
(122)
-
10
122
(1)
(1)
(102)
29
484
4
-
-
(17)
29
108
(7)
-
-
37
-
366
-
-
(1)
-
-
-
336
13
(7)
-
4
8
$
$
$49, respectively, as of December 31, 2014.
Includes residential mortgage loans held for sale that were transferred to held for investment.
Includes interest income and expense.
(b)
(c)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Residential
Mortgage
Loans
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives,
Net(a)
Trading
Securities
1
$
Total
Fair Value
278
For the year ended December 31, 2013 ($ in millions)
Balance, beginning of period
Total gains or losses (realized/unrealized):
Included in earnings
Purchases
Settlements
Transfers into Level 3(b)
Balance, end of period
The amount of total gains (losses) for the period
included in earnings attributable to the change in
unrealized gains or losses relating to assets
185
still held at December 31, 2013(c)
(a) Net interest rate derivatives include derivative assets and liabilities of $12 and $4, respectively, as of December 31, 2013. Net equity derivatives include derivative assets and liabilities of $384 and
59
(2)
(106)
-
8
233
(2)
(106)
34
437
175
-
17
-
336
(1)
-
(17)
34
92
-
-
-
-
1
175
144
76
11
57
(1)
-
$
$
$48, respectively, as of December 31, 2013.
Includes residential mortgage loans held for sale that were transferred to held for investment.
Includes interest income and expense.
(b)
(c)
158 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total gains and losses included in earnings for assets and liabilities measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) were recorded in the Consolidated Statements of Income during the years ended December 31, 2015, 2014 and 2013 as follows:
($ in millions)
Mortgage banking net revenue
Corporate banking revenue
Other noninterest income
Total gains
2015
110
1
288
399
$
$
2014
127
2
(7)
122
2013
57
1
175
233
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, 2015, 2014 and 2013 were recorded in the Consolidated Statements of Income as follows:
($ in millions)
Mortgage banking net revenue
Corporate banking revenue
Other noninterest income
Total gains
2015
16
1
66
83
$
$
2014
16
1
(7)
10
2013
10
-
175
185
The following tables present information as of December 31, 2015 and 2014 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, 2015 ($ in millions)
Financial Instrument
Residential mortgage loans
Fair Value
$ 167
Valuation Technique
Loss rate model
IRLCs, net
Stock warrant associated with Vantiv Holding, LLC 262
15
Discounted cash flow
Black-Scholes option-
pricing model
Discounted cash flow
Swap associated with the sale of Visa, Inc.
Class B shares
(a) Based on historical and implied volatilities of Vantiv, Inc. and comparable companies assuming similar expected terms.
(61)
As of December 31, 2014 ($ in millions)
Financial Instrument
Residential mortgage loans
Fair Value
$ 108
Valuation Technique
Loss rate model
12
IRLCs, net
Stock warrant associated with Vantiv Holding, LLC 415
Discounted cash flow
Black-Scholes option-
pricing model
Discounted cash flow
Swap associated with the sale of Visa, Inc.
Class B shares
(a) Based on historical and implied volatilities of Vantiv, Inc. and comparable companies assuming similar expected terms.
(49)
Significant Unobservable
Inputs
Interest rate risk factor
Credit risk factor
Loan closing rates
Expected term (years)
Expected volatility(a)
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)
Timing of the resolution
of the Covered Litigation
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.
Ranges of
Inputs
(9.2) - 16.5%
0 - 80.5%
5.8 - 94.0%
2.0 - 13.5
22.6 - 31.2%
12/31/2016 -
3/31/2021
Weighted-Average
3.1%
1.3%
76.3%
5.9
25.9%
NM
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
Weighted-Average
5.0%
1.8%
65.2%
6.0
26.5%
NM
159 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, 2015 and 2014, and for
which a nonrecurring fair value adjustment was recorded during the years ended December 31, 2015 and 2014, 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, 2015 ($ in millions)
Commercial loans held for sale
Residential mortgage loans held for sale
Automobile loans held for sale
Credit cards held for sale
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Residential mortgage loans
MSRs
OREO
Bank premises and equipment
Operating lease equipment
Private equity investment funds
$
Fair Value Measurements Using
Level 3
Level 2
13
-
68
-
2
-
4
-
344
-
103
-
6
-
55
-
784
-
58
-
83
-
42
-
13
-
Level 1
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
$
-
-
1,575
As of December 31, 2014 ($ in millions)
Commercial loans held for sale
Residential mortgage loans held for sale
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
MSRs
OREO
Bank premises and equipment
Total
$
$
Level 1
Fair Value Measurements Using
Level 3
Level 2
33
-
554
-
456
-
110
-
23
-
856
-
90
-
22
-
2,144
-
-
-
-
-
-
-
-
-
-
Total
13
68
2
4
344
103
6
55
784
58
83
42
13
1,575
Total
33
554
456
110
23
856
90
22
2,144
Total (Losses) Gains
For the year ended December 31, 2015
3
(2)
-
(2)
(137)
(41)
(5)
(1)
4
(24)
(101)
(33)
(1)
(340)
Total Losses
For the year ended December 31, 2014
(12)
(87)
(382)
(36)
(1)
(65)
(26)
(20)
(629)
The following tables present information as of December 31, 2015 and 2014 about significant unobservable inputs related to the Bancorp’s
material categories of Level 3 financial assets measured on a nonrecurring basis:
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted-Average
As of December 31, 2015 ($ in millions)
Financial Instrument
Commercial loans held for sale
Residential mortgage loans held for sale
Automobile loans held for sale
Credit cards held for sale
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Residential mortgage loans
Fair
Value
13
68
$
2
4
344
103
6
55
Valuation Technique
Discounted cash flow
Loss rate model
Discount spread
Interest rate risk factor
Credit risk factor
Discount spread
Discounted cash flow
Comparable transactions Estimated sales proceeds from
Appraised value
Appraised value
Appraised value
Appraised value
comparable transactions
Collateral value
Collateral value
Collateral value
Appraised value
NM
(7.5) - 0.1%
NM
NM
NM
NM
NM
NM
NM
MSRs
784
Discounted cash flow
Prepayment speed
1.0 - 100%
OAS spread (bps)
364 - 1,515
4.4%
(1.6%)
0.1%
3.1%
NM
NM
NM
NM
NM
(Fixed) 11.8%
(Adjustable) 27.0%
(Fixed) 618
(Adjustable) 703
OREO
Bank premises and equipment
Operating lease equipment
Private equity investment funds
58
83
42
13
Appraised value
Appraised value
Appraised value
Liquidity discount applied Liquidity discount
to fund's net asset value
Appraised value
Appraised value
Appraised value
NM
NM
NM
NM
NM
NM
NM
18.0%
160 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2014 ($ in millions)
Financial Instrument
Commercial loans held for sale
Fair
Value
33
$
Valuation Technique
Appraised value
Significant Unobservable
Ranges of
Inputs
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%
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%
NM
NM
OREO
Bank premises and equipment
90
22
Appraised value
Appraised value
Commercial loans held for sale
During the years ended December 31, 2015 and 2014, the Bancorp
transferred $37 million and $28 million, respectively, of commercial
loans from the portfolio to loans held for sale that upon transfer
were measured at the lower of cost or fair value. These loans had
fair value adjustments during the years ended December 31, 2015
and 2014 totaling $1 million and $10 million, respectively, and were
generally based on either appraisals of the underlying collateral or
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
and were, therefore, classified within Level 3 of the valuation
hierarchy. Additionally, during the years ended December 31, 2015
and 2014 there were fair value adjustments on existing loans held
for sale of $1 million and $2 million, respectively. The fair value
adjustments were also based on appraisals of the underlying
collateral. The Bancorp recognized $5 million in gains on the sale of
certain commercial loans held for sale during the year ended
December 31, 2015.
The Accounting department determines the procedures for the
valuation of commercial loans held for sale using appraised value
which may include a comparison to recently executed transactions
of similar type loans. A monthly review of the portfolio is
performed for reasonableness. Quarterly, appraisals approaching
one year old are updated and the Real Estate Valuation group,
which reports to the Bancorp’s 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’s Chief
Financial Officer, in conjunction with the Accounting department
reviews all loan appraisal values, carry values and vintages. The
Treasury department, which reports to the Bancorp’s Chief
Financial Officer, is responsible for the estimate of fair value
adjustments when a discounted future cash flow valuation technique
is employed.
Residential mortgage loans held for sale
During the year ended December 31, 2015, the Bancorp transferred
$233 million of residential mortgage loans from the portfolio to
loans held for sale that upon transfer were measured at the lower of
cost or fair value using significant unobservable inputs. Fair values
were estimated based on mortgage-backed securities prices, interest
rate risk and an internally developed credit component. These loans
had $2 million of fair value adjustments during the year ended
December 31, 2015. The Secondary Marketing department, which
in
reports to the Bancorp’s Head of the Consumer Bank,
Discount rates
Appraised value
Appraised value
9.6 - 13.2%
NM
NM
loss severity assumptions quarterly to determine
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
reviews
if
adjustments are necessary based on decreases in observable housing
in comparable
market data. This group also reviews trades
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.
During the year ended December 31, 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 the lower of cost or fair value using significant
unobservable inputs. These loans had fair value adjustments during
the year ended December 31, 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 to support the
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.
Automobile loans held for sale
During the year ended December 31, 2015, the Bancorp transferred
$5 million of automobile loans from the portfolio to loans held for
sale that upon transfer were measured at the lower of cost or fair
value using significant unobservable inputs. 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. These
loans had an immaterial amount of fair value adjustments during the
year ended December 31, 2015. The Treasury department, which
reports to the Bancorp’s Chief Financial Officer, is responsible for
the estimate of fair value adjustments.
Credit cards held for sale
During the year ended December 31, 2015, the Bancorp transferred
$102 million of credit cards from the portfolio to loans held for sale
that upon transfer were measured at the lower of cost or fair value
using significant unobservable inputs. Fair values were estimated
161 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
based on recent sales data from similar transactions. These loans
had fair value adjustments of $2 million during the year ended
December 31, 2015. The Consumer Credit Risk department, which
reports to the Bancorp’s Chief Risk Officer, in conjunction with the
Accounting department, which reports to the Bancorp’s Chief
Financial Officer, are responsible for the estimate of fair value
adjustments.
to
adjustments
loans held for
Commercial loans held for investment
During the years ended December 31, 2015 and 2014, the Bancorp
recorded nonrecurring
certain
impairment
commercial and industrial loans, commercial mortgage loans and
commercial construction
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. The fair values and recognized
impairment losses are reflected in the previous tables. Commercial
Credit Risk, which reports to the Bancorp’s Chief Risk Officer, is
responsible for preparing and reviewing the fair value estimates for
commercial loans held for investment.
Residential mortgage loans held for investment
During the year ended December 31, 2015, the Bancorp transferred
approximately $55 million of restructured residential mortgage loans
from held for sale to the portfolio as the Bancorp no longer had the
intent to sell the loans. Upon transfer, the Bancorp recognized a
nonrecurring fair value adjustment of $1 million on these loans,
which had previously been transferred to held for sale in the fourth
quarter of 2014.
MSRs
Mortgage interest rates increased during the year ended December
31, 2015 which led to a recovery of temporary impairment on
servicing rights. Mortgage 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 fair value. 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 OAS models with certain unobservable inputs,
primarily prepayment speed assumptions, OAS and weighted-
average lives, resulting in a classification within Level 3 of the
valuation hierarchy. Refer to Note 12 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
and Risk Management are
reviewing key
assumptions used in the internal OAS model. Two external
valuations of the MSR portfolio are obtained from third parties that
use valuation models in order to assess the reasonableness of the
internal OAS 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.
responsible
for
162 Fifth Third Bancorp
OREO
During the years ended December 31, 2015 and 2014, 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 were primarily due to declines in real estate values of the
properties recorded in OREO. For the years ended December 31,
2015 and 2014, these losses include $14 million and $12 million,
respectively, recorded as charge-offs, on new OREO properties
transferred from loans during the respective periods and $10 million
and $14 million, respectively, recorded as negative fair value
adjustments on OREO in other noninterest expense in the
Consolidated Statements of 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
Bancorp’s Chief Risk Officer, is solely responsible for managing the
appraisal process and evaluating the appraisal for 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 and equipment
The Bancorp performs assessments of the recoverability of long-
lived assets when events or changes in circumstances indicate that
their carrying values may not be recoverable. These properties were
written down to their lower of cost or market values. 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. Corporate Facilities, which
reports
in
conjunction with Accounting, is responsible for preparing and
reviewing the fair value estimates for bank premises and equipment.
For further information on bank premises and equipment and
discussion on changes to the branch network, refer to Note 7 and
Note 31.
the Bancorp’s Chief Administrative Officer,
to
Operating lease equipment
During the year ended December 31, 2015, the Bancorp recorded
nonrecurring impairment adjustments to certain operating lease
equipment. When evaluating whether an individual asset is impaired,
the Bancorp considers the current fair value of the asset, the
changes in overall market demand for the asset and the rate of
technological
change
improvements that impact the demand for the specific asset under
review. As part of this ongoing assessment, the Bancorp determined
that the carrying values of certain operating lease equipment were
not recoverable and as a result, the Bancorp recorded an
impairment loss equal to the amount by which the carrying value of
the assets exceeded the fair value. The fair value amounts were
associated with
advancements
in
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
generally based on appraised values of the assets, resulting in a
classification within Level 3 of the valuation hierarchy. The
Commercial Leasing department, which reports to the Bancorp’s
Chief Operating Officer, is responsible for preparing and reviewing
the fair value estimates for operating lease equipment. Refer to Note
8 for further information on the impairment charge related to
certain operating lease equipment.
Private equity investment funds
On December 10, 2013, the U.S. 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 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, 2015. 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. 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
$1 million of OTTI on its investments in private equity funds
during the year ended December 31, 2015. The Bancorp did not
recognize OTTI on its investments in private equity funds during
the year ended December 31, 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 the
Accounting department, 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, 2015 and 2014 for which the fair value option was
elected, as well as the changes in fair value of the underlying IRLCs,
included gains of $17 million and $26 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 $2 million at both
December 31, 2015 and 2014. Interest on residential mortgage loans
measured at fair value is accrued as it is earned using the effective
interest method and
in the
Consolidated Statements of Income.
is reported as
interest
income
The following table summarizes the difference between the fair value and the principal balance for residential mortgage loans measured at fair
value as of:
($ in millions)
December 31, 2015
Residential mortgage loans measured at fair value
Past due loans of 90 days or more
Nonaccrual loans
December 31, 2014
Residential mortgage loans measured at fair value
Past due loans of 90 days or more
Nonaccrual loans
Aggregate
Fair Value
Aggregate Unpaid
Principal Balance
Difference
$
$
686
2
2
669
2
3
669
2
2
643
2
3
17
-
-
26
-
-
163 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, 2015 ($ 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, 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
Net Carrying
Fair Value Measurements Using
Total
Amount
Level 1
Level 2
Level 3
Fair Value
$
2,540
604
70
2,671
384
41,479
6,840
3,190
3,807
13,449
8,234
11,453
2,160
646
(115)
91,143
103,205
151
1,507
15,844
2,540
-
-
2,671
-
-
-
-
-
-
-
-
-
-
-
-
-
604
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
151
-
15,637
103,219
-
1,507
625
-
-
70
-
384
41,802
6,656
2,918
3,533
14,061
8,948
11,170
2,551
643
-
92,282
-
-
-
-
Fair Value Measurements Using
Level 2
Level 3
Level 1
3,091
-
-
7,914
-
-
-
-
-
-
-
-
-
-
-
-
-
600
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
187
-
700
40,781
6,878
1,735
3,426
12,249
9,224
11,748
2,586
414
-
89,041
Net Carrying
Amount
$
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
2,540
604
70
2,671
384
41,802
6,656
2,918
3,533
14,061
8,948
11,170
2,551
643
-
92,282
103,219
151
1,507
16,262
Total
Fair Value
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
-
144
-
14,993
101,715
-
1,561
655
-
-
-
-
101,715
144
1,561
15,648
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
and other short-term borrowings excluding FHLB borrowings. Fair
164 Fifth Third Bancorp
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.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 based on either appraisals of the
underlying collateral or 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. The Bancorp estimates fair values at the transaction
level whenever possible. For certain products with a large number
of homogenous transactions, the Bancorp employs a pool approach.
This approach involves stratifying and sorting the entire population
like
of transactions
characteristics. Characteristics may include maturity date, coupon,
origination date and principal amortization method.
into a smaller number of pools with
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.
165 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.
a one-time permanent election to not include AOCI in regulatory
capital in the March 31, 2015 FFIEC 031 and FR Y-9C filings. The
Basel III Final Rule phases out the inclusion of certain TruPS as a
component of Tier I capital. Under these provisions, these TruPS
would qualify as a component of Tier II capital. At December 31,
2015, the Bancorp’s Tier I capital included $13 million of TruPS
representing approximately 1 bp of risk-weighted assets. Tier II
capital consists principally of term subordinated debt and, subject to
limitations, allowances for credit losses.
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 2015 and
2014, the Bancorp’s banking subsidiary was required to maintain
average cash reserve balances of $1.8 billion and $1.7 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. The Basel III
Final Rule was effective for the Bancorp on January 1, 2015, subject
to phase-in periods for certain of its components and other
provisions. It revised the quantitative measures used to define risk
weightings to assets and off-balance sheet items and also defined the
regulatory capital components and set minimum regulatory capital
requirements. The minimum capital ratios established under the
Basel III Final Rule are Common equity Tier 1 capital of at least
4.5% (CET1 ratio), Tier I capital (core capital) of at least 6% of risk-
weighted assets (Tier I risk-based capital ratio), Total regulatory
capital (Tier I plus Tier II capital) of at least 8% of risk-weighted
assets (Total risk-based capital ratio) and Tier I capital of at least 4%
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.
The Basel III Final Rule provided for certain banks, including
the Bancorp, to opt out of including AOCI in regulatory capital and
also retained the treatment of residential mortgage exposures
consistent with the current Basel I capital rules. The Bancorp made
The Bancorp’s assets and credit equivalent amounts of off-
balance sheet items are assigned to one of several broad risk
categories according to the Standardized Approach for risk-
weighting assets as defined in the Basel III Final Rule. The aggregate
dollar value of the amount of each category is multiplied by the
associated risk weighting. 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 BHCs, as described previously. In
addition, the U.S. 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
CET1 ratio of 6.5% or more, a Tier I risk-based capital ratio of 8%
or more, a Total risk-based capital ratio of 10% or more, a Tier I
leverage ratio of 5% 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
a CET1 capital ratio above the well-capitalized level at December
31, 2015 and Tier I risk-based capital, Total risk-based capital and
Tier I leverage ratios above the well-capitalized levels at December
31, 2015 and 2014. 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:
($ in millions)
2015
Basel III
Transitional(a)
2014
Basel I(b)
Amount Ratio
Amount
Ratio
CET1 capital (to risk-weighted assets):
Fifth Third Bancorp
Fifth Third Bank
Tier I risk-based capital (to risk-weighted assets):
Fifth Third Bancorp
Fifth Third Bank
Total risk-based capital (to risk-weighted assets):
Fifth Third Bancorp
Fifth Third Bank
Tier I leverage (to average assets):
Fifth Third Bancorp
Fifth Third Bank
(a) Under the U.S. banking agencies’ Basel III Final Rule, assets and credit equivalent amounts of off-balance sheet exposures are calculated according to the standardized approach for risk-weighted
9.82 %
11.92
10.83 %
11.85
9.54
10.43
10.93
11.92
14.13
13.12
9.66
10.58
14.33
13.10
12,764
13,760
12,764
13,760
16,895
15,213
13,260
14,216
13,260
14,216
17,134
15,642
11,917
14,216
N/A
N/A
N/A
N/A
$
$
assets. The resulting weighted values are added together resulting in the total risk-weighted assets.
(b) These capital amounts and ratios were calculated under the Supervisory Agencies general risk-based capital rules (Basel I) which were in effect prior to January 1, 2015.
166 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 nonbank subsidiaries(a)
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
Other Comprehensive Income
Comprehensive Income Attributable to Bancorp
(a)
2015
2014
2013
$
$
$
1,040
15
1,055
178
22
200
855
69
924
788
1,712
-
1,712
1,094
14
1,108
163
17
180
928
62
990
491
1,481
-
1,481
859
14
873
178
36
214
659
74
733
1,103
1,836
-
1,836
The Bancorp’s indirect banking subsidiary paid dividends to the Bancorp’s direct nonbank subsidiary holding company of $1.0 billion, $1.1 billion and $859 million for the years ended
December 31, 2015, 2014 and 2013, respectively.
Condensed Balance Sheets (Parent Company Only)
As of December 31 ($ in millions)
Assets
Cash
Short-term investments
Loans to 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
2015
2014
$
$
$
$
$
$
128
3,728
982
982
17,831
17,831
80
432
23,181
404
433
6,474
7,311
2,051
1,331
2,666
12,358
197
(2,764)
31
15,870
23,181
-
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
167 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
Benefit from 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 shares
Repurchase of treasury shares and related forward contract
Other, net
Net Cash Used in Financing Activities
Increase in Cash
Cash at Beginning of Period
Cash at End of Period
2015
2014
2013
$
1,712
1,481
(4)
(788)
(19)
32
933
(539)
2
(537)
(22)
1,099
-
(422)
(75)
-
(850)
2
(268)
128
-
128
$
(1)
(491)
8
(40)
957
(684)
(10)
(694)
115
499
-
(423)
(67)
297
(654)
(30)
(263)
-
-
-
1,836
(1)
(1,103)
13
(28)
717
976
47
1,023
(255)
750
(1,500)
(393)
(37)
1,034
(1,320)
(19)
(1,740)
-
-
-
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
168 Fifth Third Bancorp
rates for several deposit products were reset January 1, 2015 to
reflect the current market rates and updated market assumptions.
These rates were generally lower than those in place during 2014,
thus net interest income for deposit-providing businesses was
negatively impacted during 2015.
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, 2014 and 2013 were adjusted to reflect the
transfer of certain customers and Bancorp employees from
Commercial Banking to Branch Banking, effective January 1, 2015.
In addition, the balances for the years ended December 31, 2014
and 2013 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Branch Banking provides a full range of deposit and loan and
lease products to individuals and small businesses through 1,254
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
the Bancorp’s residential
includes
mortgage, home equity, automobile and other indirect lending
activities. Direct lending activities include the origination, retention
and servicing of residential 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
through
correspondent lenders and automobile dealers.
consumers
extending
include
loans
to
for
companies
individuals,
Investment Advisors provides a full range of investment
alternatives
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., 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.
Results of operations and assets by business segment for the years ended December 31 are:
General
Consumer Investment Corporate
Lending
Advisors
Commercial
Banking
$
Branch
Banking
1,555
159
1,396
853 (c)
1,625
239
1,386
2015 ($ in millions)
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Total noninterest income
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) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income.
(b)
(c)
Includes an impairment charge of $109 for branches and land. For more information refer to Note 7 and Note 27.
Includes an impairment charge of $36 for operating lease equipment. For more information refer to Note 8 and Note 27.
249
45
204
407
436
175
63
112
-
112
-
112
-
22,656
1,567
481
170
311
-
311
-
311
1,655
53,587
1,402
837
98
739
-
739
-
739
613
58,166
652 (b)
$
$
$
128
3
125
418
455
88
30
58
-
58
-
58
148
9,938
and Other Eliminations
-
-
-
(149) (a)
(149)
-
-
-
-
-
-
-
-
-
(24)
(50)
26
822
64
784
298
486
(6)
492
75
417
-
(3,265)
Consumer
Lending
Investment Corporate
Advisors
General
Commercial Branch
Banking
Banking
$
2014 ($ in millions)
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Total noninterest income
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) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income.
(b)
258
156
102
350
554
(102)
(36)
(66)
-
(66)
-
(66)
-
22,567
1,573
181
1,392
726
1,554
564
199
365
-
365
-
365
1,655
51,462
1,627
235
1,392
880
1,317
955
155
800
-
800
-
800
613
56,306
Includes an impairment charge of $20 for branches and land. For more information refer to Note 7 and Note 27.
121
3
118
410
445
83
29
54
-
54
-
54
148
10,443
$
$
$
(b)
(a)
and Other Eliminations
-
-
-
(146)
(146)
-
-
-
-
-
-
-
-
-
-
(260)
260
253
(15)
528
198
330
2
328
67
261
-
(2,072)
Total
3,533
396
3,137
3,003
3,775
2,365
659
1,706
(6)
1,712
75
1,637
2,416
141,082
Total
3,579
315
3,264
2,473
3,709
2,028
545
1,483
2
1,481
67
1,414
2,416
138,706
169 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General
Consumer
Lending
Investment Corporate
Advisors
Commercial Branch
Banking
Banking
$
2013 ($ in millions)
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Total noninterest income
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) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income.
(b)
1,569
195
1,374
811
1,230
955
157
798
-
798
-
798
613
54,495
1,380
211
1,169
745
1,576
338
119
219
-
219
-
219
1,655
47,788
312
93
219
755
685
289
102
187
-
187
-
187
-
22,624
Includes an impairment charge of $6 for branches and land. For more information refer to Note 7 and Note 27.
154
2
152
406
453
105
37
68
-
68
-
68
148
10,711
$
$
$
(b)
and Other Eliminations
-
-
-
(144) (a)
(144)
-
-
-
-
-
-
-
-
-
146
(272)
418
654
161
911
357
554
(10)
564
37
527
-
(5,175)
Total
3,561
229
3,332
3,227
3,961
2,598
772
1,826
(10)
1,836
37
1,799
2,416
130,443
31. SUBSEQUENT EVENT
On January 29, 2016, the Bancorp closed the previously announced
sale of its retail operations, including retail accounts, certain private
banking deposits and related loan relationships in the St. Louis MSA
to Great Southern Bank. The sale included loans, premises and
equipment and deposits with aggregate carrying amounts of
approximately $158 million, $18 million and $228 million,
respectively. The Bancorp recorded a gain on the sale of
approximately $8 million that will be recognized in the Bancorp’s
first quarter 2016 Quarterly Report on Form 10-Q.
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, 2015
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: No:
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:
No:
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: No:
Indicate by check mark whether the Registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes:
No:
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of
registrant’s knowledge,
information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
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 Accelerated filer Non-accelerated
filer (Do not check if a smaller reporting company) Smaller
reporting company
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes: No:
There were 783,231,128 shares of the Bancorp’s Common Stock,
without par value, outstanding as of January 31, 2016. The
Aggregate Market Value of the Voting Stock held by non-
affiliates of the Bancorp was $16,277,829,299 as of June 30,
2015.
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 2016
Annual Meeting of Shareholders is incorporated by reference into
Part III of this report.
Only those sections of this 2015 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,
2015. No other information contained in this 2015 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.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market
Risk
Financial Statements and Supplementary Data
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.
Item 13.
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and
Director Independence
Item 14. Principal Accounting Fees and Services
16-20, 172-178
40
42-49, 168-170
36
35-37
53-54, 101-102
52-53, 103-104
57-72
55-56
15
56, 128
26-34
None
179
136-137
N/A
179
180
15
15-81
72-75
84-170
None
82
None
182
182
149-152, 182
182
182
171 Fifth Third Bancorp
`
PART IV
Item 15. Exhibits, Financial Statement Schedules
SIGNATURES
182-185
186
PART I
ITEM 1. BUSINESS
General Information
Fifth Third Bancorp (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, 2015.
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.
Availability of Financial Information
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 https://www.53.com on a same day
basis after they are electronically filed with or furnished to the
SEC.
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
172 Fifth Third Bancorp
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. The
Bancorp and its subsidiaries are subject to an extensive regulatory
framework of complex and comprehensive federal and state laws
and regulations addressing the provision of banking and other
financial services and other aspects of the Bancorp’s businesses
and operations. Regulation and regulatory oversight have
increased significantly over the past five years, primarily as a
result of the passage of The Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “DFA”). The DFA imposes
regulatory requirements and oversight over banks and other
financial institutions in a number of ways, among which are
(i) creating the Consumer Financial Protection Bureau (the
“CFPB”) to regulate consumer financial products and services;
(ii) creating the Financial Stability Oversight Council to identify
and impose additional regulatory oversight on large financial
firms; (iii) granting orderly liquidation authority to the FDIC for
the liquidation of financial corporations that pose a risk to the
financial system of the U.S.; (iv) requiring financial institutions to
draft a resolution plan that contemplates the dissolution of the
enterprise and submit that resolution plan to both the Federal
Reserve and the FDIC; (v) limiting debit card interchange fees;
rights and
(vi) adopting certain changes
responsibilities, including a shareholder “say on pay” vote on
executive compensation; (vii) strengthening the SEC's powers to
regulate securities markets; (viii) regulating OTC derivative
markets; (ix) restricting variable-rate lending by requiring the
ability to repay to be determined for variable-rate loans by using
the maximum rate that will apply during the first five years of a
shareholder
to
variable-rate loan term, and making more loans subject to
provisions for higher cost loans, new disclosures, and certain
other revisions; (x) changing the base upon which the deposit
insurance assessment is assessed from deposits to, substantially,
average consolidated assets minus equity; and (xi) amending the
Truth in Lending Act with respect to mortgage originations,
including originator
repayment
standards, and prepayment considerations. 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. In addition, 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.
compensation, minimum
Regulators
The Bancorp and/or its banking subsidiary are subject to
regulation and supervision primarily by the FRB, the CFPB and
the Ohio Division of Financial Institutions (the “Division”) and
additionally by certain other functional regulators and self-
regulatory organizations. The Bancorp
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.
is also subject
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, their 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, the 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 banking subsidiary are required to
file various reports with, and is subject to examination by
regulators, including the FRB and the Division. The FRB, the
Division and the CFPB have the authority to issue orders for
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, the Division and the 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 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
the DFA and
Systematically Significant Companies and Capital).
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
`
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,
including the Bank, to identify the communities they serve and to
make loans and investments and provide services that meet the
credit needs of those communities and the CRA requires the FRB
to evaluate the performance of such depository institutions with
respect to these CRA obligations. Depository institutions must
maintain comprehensive records of their CRA activities for
purposes of these examinations. The FRB must take into account
the record of performance of depository institutions in meeting
the credit needs of the entire community served, including low-
and moderate-income neighborhoods. For purposes of CRA
examinations, the FRB rates such institutions’ compliance with
the CRA as "Outstanding," "Satisfactory," "Needs to Improve" or
"Substantial Noncompliance." The Bank must be 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, including
merger with or acquisitions of other financial institutions) and
could ultimately result in the loss of financial holding company
status. The FRB conducted a regularly scheduled examination
covering 2011 through 2013 to determine the Bancorp's banking
subsidiary's compliance with the CRA. Although the FRB has not
made a final determination, the Bancorp believes that the results
of such CRA examination may result in a rating of "Needs to
174 Fifth Third Bancorp
Improve". If that would occur, such rating would last at least until
the Bancorp's banking subsidiary's next CRA examination.
Capital Generally
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
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.
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 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.
In 2014, the FRB 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. The 2014 amendments
also revised the due date for capital plan and stress testing
submissions. BHCs with consolidated asset of $50 billion or more
are required to submit their 2016 capital plan to the FRB by April
5, 2016.
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
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.
requirements
introduces
capital
and
In July of 2013, U.S. banking regulators approved the final
enhanced regulatory capital rules (“Final Capital 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
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.
the scope of
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 Tier I 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 the
Final Capital Rules, the Bancorp made a one-time election (the
“Opt-out Election”)
filter certain AOCI components,
comparable to the treatment under the current general risk-based
capital rule.
to
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
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
Financial Measures section of MD&A for an estimated CET1
capital ratio under the Basel III Final Rule (fully phased-in) as of
December 31, 2015.
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
175 Fifth Third Bancorp
`
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 was
January 31, 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, 2015, the Bancorp’s estimated LCR
complied with the fully phased-in LCR requirements which
become effective in 2017 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.
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
176 Fifth Third Bancorp
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.
to
its subsidiaries,
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
implement policies and
Bancorp 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.
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. The Department of
Treasury established 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, 2014 through March 31,
2016.
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 2015 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
for golden parachute
requirements
disclosure and voting
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
compensation of its employees. The SEC adopted final rules
implementing the pay ratio provisions in August 2015. For a
registrant with a fiscal year ending on December 31, such as
Bancorp, the pay ratio will be required as part of its executive
compensation disclosure in proxy statements or Form 10-Ks filed
starting in 2018.
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.
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.
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
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.
that were adopted
177 Fifth Third Bancorp
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.
Certain affiliates of the Bancorp that engage in significant swap
activities may be required to register with the Commodity Futures
Trading Commission or the SEC as a swap dealer, security-based
swap dealer, major swap participant or major security-based swap
participant. As with the Volcker Rule, the Bancorp will be
required to demonstrate that it has a satisfactory compliance
program to monitor the activities of any such entity registered
under the new regulations. The ultimate impact of these
derivatives regulations, and the time it will take to comply,
continues to remain uncertain. The final regulations will impose
additional operational and compliance costs on us and may
require us to restructure certain businesses and negatively impact
our revenues and results of operations.
`
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 Bancorp’s
banking subsidiary is subject to this rule and submitted its most
recent resolution plan pursuant to this rule as of December 31,
2015.
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, 2015.
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
178 Fifth Third Bancorp
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, 2015, the Bancorp, through its banking and non-
banking subsidiaries, operated 1,254 banking centers, of which 902
were owned, 243 were leased and 109 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 five years:
Greg D. Carmichael, 54. Chief Executive Officer of the Bancorp
since November 2015 and President since September 2012.
Previously, Mr. Carmichael was Chief Operating Officer of the
Bancorp from June 2006 to August 2015, Executive Vice President
of the Bancorp from June 2006 to September 2012 and Chief
Information Officer of the Bancorp from June 2003 to June 2006.
Lars C. Anderson, 55. Executive Vice President and Chief
Operating Officer of the Bancorp since August 2015. Previously,
Mr. Anderson was Vice Chairman of Comerica Incorporated and
Comerica Bank since December 2010.
Chad M. Borton, 45. 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.
Frank R. Forrest, 61. 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, 50. 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.
Heather Russell Koenig, 44. Executive Vice President, Chief Legal
Officer and Corporate Secretary of the Bancorp since September
2015. Previously, Ms. Koenig was Global Chief Regulatory Counsel
and Head of the Office of Public Policy and Regulatory Affairs of
Bank of New York Mellon since July 2011 and Associate General
Counsel at Bank of America from October 2006 through June 2011.
Randolph J. Koporc, 49. Executive Vice President of the Bancorp
since October 2010. Previously, Mr. Koporc was President and Chief
Executive Officer of Fifth Third Bank (Georgia) from October 2010
to March 2014.
Gregory L. Kosch, 56. Executive Vice President of the Bancorp
since June 2005. Previously, Mr. Kosch was Senior Vice President
and head of the Bancorp’s Commercial Division in the Chicago
affiliate since June 2002.
James C. Leonard, 46. Executive Vice President since September
2015 and Treasurer of the Bancorp since October 2013. Previously,
Mr. Leonard was Senior Vice President from October 2013 to
September 2015, the Director of Business Planning and Analysis
from 2006 to 2013 and the Chief Financial Officer of the Commercial
Banking Division from 2001 to 2013.
Philip R. McHugh, 51. 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.
Joseph R. Robinson, 48. 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.
Timothy N. Spence, 37. Executive Vice President and Chief Strategy
Officer of
the Bancorp since September 2015. Previously,
Mr. Spence was a senior partner in the Financial Services practice at
Oliver Wyman, a global strategy and risk management consulting
firm.
Teresa J. Tanner, 47. Executive Vice President and Chief
Administrative Officer since September 2015. Previously, Ms.
Tanner was the Executive Vice President and Chief Human
Resources Officer of the Bancorp since February 2010 and Senior
Vice President and Director of Enterprise Learning since September
2008. Prior to that, she was Human Resources Senior Vice President
and Senior Business Partner for the Information Technology and
Central Operations divisions since July 2006. Previously, she was
Vice President and Senior Business Partner for Operations since
September 2004.
Tayfun Tuzun, 51. 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.
179 Fifth Third Bancorp
`
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
2015
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2014
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
$21.14
$21.93
$21.90
$20.53
High
$20.82
$21.79
$23.41
$23.90
Low
$18.15
$18.21
$18.63
$17.14
Low
$17.65
$19.45
$19.82
$20.37
Dividends Paid
Per Share
$0.13
$0.13
$0.13
$0.13
Dividends Paid
Per Share
$0.13
$0.13
$0.13
$0.12
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, 2015, the Bancorp had 44,678 shareholders of record.
Issuer Purchases of Equity Securities
Average Price Paid
Per Share
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or
Programs
Maximum Number of
Shares that May Yet be
Purchased Under the Plans
or Programs(b)
Period
October 2015
November 2015
December 2015
Total
(a) The Bancorp repurchased 78,967, 53,701 and 37,869 shares during October, November and December of 2015, respectively, in connection with various employee
compensation plans of the Bancorp. These purchases do not count against the maximum number of shares that may yet be purchased under the Board of
Directors’ authorization.
In March of 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 party transactions. The authorization does not include specific price targets or an expiration date.
1,446,613
-
9,248,482
10,695,095
39,820,995
39,820,995
30,572,513
30,572,513
18.79
19.31
19.95
19.78
(b)
$
$
Total Number
of Shares
Purchased(a)
1,525,580
53,701
9,286,351
10,865,632
See further discussion on accelerated share repurchase transactions and stock-based compensation in Note 23 and Note 24 of the Notes to
Consolidated Financial Statements.
180 Fifth Third Bancorp
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 2015, and 2004
through 2015, respectively, compared to the S&P 500 Stock and the S&P Banks indices.
FIFTH THIRD BANCORP VS. MARKET INDICES
181 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.”
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 2016 Annual Meeting of
Shareholders.
The information required by this item concerning the Audit
Committee and Code of Business Conduct and Ethics is
incorporated herein by
captions
“CORPORATE GOVERNANCE”
“BOARD OF
DIRECTORS,
ITS COMMITTEES, MEETINGS AND
FUNCTIONS” of the Bancorp’s Proxy Statement for the 2016
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 2016 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
and
“COMPENSATION
“COMPENSATION COMMITTEE
INTERLOCKS AND
INSIDER PARTICIPATION” of the Bancorp’s Proxy Statement
for the 2016 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 2016 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 2016 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
182 Fifth Third Bancorp
EXTERNAL AUDIT FIRM FEES” of the Bancorp’s Proxy
Statement for the 2016 Annual Meeting of Shareholders.
PART
STATEMENT SCHEDULES
ITEM
IV.
15. EXHIBITS,
Public Accounting Firm
Fifth Third Bancorp and Subsidiaries Consolidated Financial
Statements
Notes to Consolidated Financial Statements
FINANCIAL
Pages
83
84-88
89-
170
The schedules for the Bancorp and its subsidiaries are omitted
because of the absence of conditions under which they are
the
required, or because
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.
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
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 Exhibit 2.1 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.
Junior Subordinated Indenture, dated as of March 20, 1997 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 March 26,
1997.
Indenture, dated as of May 23, 2003, between Fifth Third Bancorp
and Wilmington Trust Company, as Trustee. Incorporated by
reference to Exhibit 4.1 to the 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
Exhibit 4.2 to the 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
Exhibit 4.15 to the 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 Exhibit 4.16 to the 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 Bancorp and Wilmington Trust Company. Incorporated
by reference to Exhibit 4.1 to the 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 Exhibit 4.1 to the Registrant's Quarterly
Report on Form 10-Q filed for the quarter ended March 31, 2008. (1)
4.9
4.10
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 Exhibit 4.2 to the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 6, 2008.
First 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
Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on January 25, 2011.
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 Exhibit 4.3 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 Bancorp and Wilmington Trust Company.
Incorporated by reference to Exhibit 4.1 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 Exhibit 4.2 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 as of 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 4.3 of the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 9, 2013.
4.20
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.
4.22
4.23
4.24
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.
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.
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.
Fourth Supplemental Indenture dated as of July 27, 2015 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 to the Registrant’s Current Report on Form 8-
K filed with the Commission on July 27, 2015.
4.28
4.29
10.2
10.1
10.3
4.30 Global Security dated as of July 27, 2015, representing Fifth Third
Bancorp’s $1,100,000,000 in principal amount of its 2.875% Senior
Notes due 2020. Incorporated by reference to Exhibit 4.2 to the
Registrant’s Current Report on Form 8-K filed with the Commission
on July 27, 2015.
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 Exhibit 10.5 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 Exhibit 10.6
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 to 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.*
10.6
10.5
10.4
183 Fifth Third Bancorp
`
10.7
10.8
10.9
Fifth Third Bancorp 401(k) Savings Plan, as Amended and Restated.
Incorporated by reference to Exhibit 10.7 to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2014.*
First Amendment to Fifth Third Bancorp 401(k) Savings Plan, as
Amended and Restated.*
The Fifth Third Bancorp Master Retirement Plan, as Amended and
Restated. Incorporated by reference
the
Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2014.**
to Exhibit 10.8 of
10.10 First Amendment toThe Fifth Third Bancorp Master Retirement Plan,
as Amended and Restated.*
10.11 Fifth Third Bancorp Incentive Compensation Plan. Incorporated by
reference to Annex 2 to the Registrant’s Proxy Statement dated
February 19, 2004.*
10.12 Fifth Third Bancorp 2008 Incentive Compensation Plan. Incorporated
by reference to Annex 2 to the Registrant’s Proxy Statement dated
March 6, 2008.*
10.13 Fifth Third Bancorp 2014 Incentive Compensation Plan. Incorporated
by reference to Annex A to the Registrant’s Proxy Statement dated
March 6, 2014.*
10.14 Amended and Restated Fifth Third Bancorp 1993 Stock Purchase
Plan. Incorporated by reference to Exhibit 10.8 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31,
2011.*
10.15 Fifth Third Bancorp Non-qualified Deferred Compensation Plan, as
Amended and Restated. Incorporated by reference to Exhibit 10.12
to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2013.*
10.16 Amendment to the Fifth Third Bancorp Non-qualified Deferred
Compensation Plan, as Amended and Restated. Incorporated by
reference to Exhibit 10.14 of the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2014.*
10.17 Fifth Third Bancorp Stock Option Gain Deferral Plan. Incorporated
by reference to Registrant’s Proxy Statement dated February 9,
2001.*
10.18 Amendment No. 1 to Fifth Third Bancorp Stock Option Gain Deferral
Plan. Incorporated by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 26, 2005. *
10.19 Amended and Restated First National Bankshares of Florida, Inc.
2003 Incentive Plan. Incorporated by reference to Exhibit 10.10 to
First National Bankshares of Florida, Inc.’s Annual Report on Form
10-K for the year ended December 31, 2003. *
10.20 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.*
10.21 Warrant dated June 30, 2009 issued by Vantiv Holding, LLC to Fifth
Third Bank. Incorporated by reference to Exhibit L to the Registrant’s
Schedule 13D/A filed with the Commission on December 30, 2015.
10.22 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 Exhibit C to the Registrant’s Schedule
13D filed with the Commission on April 2, 2012.
10.23 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 Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K filed with the Commission
on July 2, 2009.
10.24 Registration Rights Agreement dated as of March 21, 2012 by and
among Vantiv, Inc., Fifth Third Bank, FTPS Partners, LLC, JPDN
Enterprises, LLC and certain stockholders of Vantiv,
Inc.
Incorporated by reference to Exhibit E to the Registrant’s Schedule
13D filed with the Commission on April 2, 2012.
10.25 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 Exhibit B to the Registrant’s Schedule
13D filed with the Commission on April 2, 2012.
184 Fifth Third Bancorp
10.26 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 Exhibit D to the Registrant’s
Schedule 13D filed with the Commission on April 2, 2012.
10.27 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.*
10.28 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.*
10.29 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.*
10.30 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.*
10.31 Stock Appreciation Right Award Agreement. Incorporated by
reference to Exhibit 10.34 of the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2014.*
10.32 Performance Share Award Agreement. Incorporated by reference to
Exhibit 10.35 of the Registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2014.*
10.33 Restricted Stock Unit Agreement (for Directors). Incorporated by
reference to Exhibit 10.36 of the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2014.*
10.34 Restricted Stock Award Agreement (for Executive Officers).
Incorporated by reference to Exhibit 10.37 of the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2014.*
10.35 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. Incorporated by reference to Exhibit 10.38 of
the Registrant’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2014.**
10.36 Master Confirmation, as
supplemented by a Supplemental
Confirmation, for accelerated share repurchase transaction dated July
29, 2015 between Fifth Third Bancorp and Morgan Stanley & Co.
LLC. Incorporated by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q filed with the Commission on
November 5, 2015.**
10.37 Supplemental Confirmation dated September 3, 2015, to Master
Confirmation, dated May 21, 2013, for accelerated share repurchase
transaction between Fifth Third Bancorp and Deutsche Bank AG,
London Branch, with Deutsche Bank Securities Inc. acting as agent.
Incorporated by reference to Exhibit 10.2 to the Registrant’s
Quarterly Report on Form 10-Q filed with the Commission on
November 5, 2015. Master Confirmation is incorporated by reference
to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q
filed with the Commission on August 7, 2013.**
10.38 Separation Agreement between Fifth Third Bancorp and Dan Poston
dated October 2, 2015. Incorporated by reference to Exhibit 10.1 to
the Registrant’s Current Report on Form 8-K/A filed with the
Commission on October 6, 2015.
10.39 Master Confirmation, as
supplemented by a Supplemental
Confirmation, for accelerated share repurchase transaction dated
April 27, 2015 between Fifth Third Bancorp and Barclays Bank PLC,
through its agent Barclays Capital Inc. Incorporated by reference to
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed
with the Commission on August 5, 2015.**
10.40 Offer letter from Fifth Third Bancorp to Lars C. Anderson.
Incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed with the Commission on July 16, 2015**
10.41 Master Confirmation, dated January 22, 2015, and Supplemental
Confirmation, for accelerated share repurchase transaction dated
January 22, 2015 between Fifth Third Bancorp and Wells Fargo
Bank, National Association. Incorporated by reference to Exhibit 10.1
to the Registrant’s Quarterly Report on Form 10-Q filed with the
Commission on May 11, 2015.**
10.42 Supplemental Confirmation dated December 9, 2015, to Master
Confirmation dated January 22, 2015, for accelerated share
repurchase transaction between Fifth Third Bancorp and Wells Fargo
Bank, National Association.**
Computations of Consolidated Ratios of Earnings to Fixed Charges.
12.1
12.2
21
23
Computations of Consolidated Ratios of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements.
Fifth Third Bancorp Subsidiaries, as of December 31, 2015.
Consent of Independent Registered Public Accounting Firm-Deloitte
& Touche LLP.
31(i) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by Chief Executive Officer.
31(ii) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by Chief Financial Officer.
32(i) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief
Executive Officer.
32(ii) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief
Financial Officer.
99.1 Consent Order pursuant to the Consumer Financial Protection Act of
2010, dated September 28, 2015, between Fifth Third Bank and the
U.S. Department of Justice
loans.
Incorporated by reference to Exhibit 99.1 to the Registrant’s Current
Report on Form 8-K filed with the Commission on September 29,
2015.
indirect auto
regarding
99.2 Consent Order pursuant to the Consumer Financial Protection Act of
2010, dated September 28, 2015, between Fifth Third Bank and the
Consumer Financial Protection Bureau, including the Stipulation and
Consent to the Issuance of a Consent Order, dated September 28,
2015, by Fifth Third Bank regarding indirect auto loans. Incorporated
by reference to Exhibit 99.2 to the Registrant’s Current Report on
Form 8-K filed with the Commission on September 29, 2015.
99.3 Consent Order pursuant to the Consumer Financial Protection Act of
2010, dated September 28, 2015, between Fifth Third Bank and the
Consumer Financial Protection Bureau, including the Stipulation and
Consent to the Issuance of a Consent Order, dated September 28,
2015, by Fifth Third Bank regarding credit card add-on products.
Incorporated by reference to Exhibit 99.3 to the Registrant’s Current
Report on Form 8-K filed with the Commission on September 29,
2015.
99.5
99.4 Settlement Agreement entered into on September 30, 2015, between
the United States Department of Housing and Urban Development
and Fifth Third Bancorp and its subsidiaries. Incorporated by
reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed with the Commission on October 7, 2015.
Stipulation and Order of Settlement and Dismissal entered into on
September 30, 2015, by and among plaintiff the United States of
America and on behalf of the United States Department of Housing
and Urban Development and the Federal Housing Administration and
Fifth Third Bancorp and its subsidiaries (excluding exhibits).
Incorporated by reference to Exhibit 99.2 to the Registrant’s Current
Report on Form 8-K filed with the Commission on October 7, 2015.
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.
101
(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 $500,000,000 of its 3.625% Senior Notes
due 2016.
* Denotes management contract or compensatory plan or arrangement.
** An application for confidential treatment for selected portions of this
exhibit has been filed with the Securities and Exchange Commission.
185 Fifth Third Bancorp
`
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
FIFTH THIRD BANCORP
Registrant
/s/ Greg D. Carmichael
Greg D. Carmichael
President and CEO
Principal Executive Officer
February 25, 2016
Pursuant to requirements of the Securities Exchange Act of 1934,
this report has been signed on February 25, 2016 by the
following persons on behalf of the Registrant and in the
capacities indicated.
OFFICERS:
/s/ Greg D. Carmichael
Greg D. Carmichael
President and CEO
Principal Executive Officer
/s/ Tayfun Tuzun
Tayfun Tuzun
Executive Vice President and CFO
Principal Financial Officer
/s/ Mark D. Hazel
Mark D. Hazel
Senior Vice President and Controller
Principal Accounting Officer
DIRECTORS:
/s/ James P. Hackett
James P. Hackett
Chairman
/s/ Marsha C. Williams
Marsha C. Williams
Lead Director
/s/ Nicholas K. Akins
Nicholas K. Akins
/s/ B. Evan Bayh III
B. Evan Bayh III
/s/ Jorge L. Benitez
Jorge L. Benitez
/s/ Katherine B. Blackburn
Katherine B. Blackburn
/s/ Ulysses L. Bridgeman, Jr.
Ulysses L. Bridgeman, Jr.
/s/ Emerson L. Brumback
Emerson L. Brumback
/s/ Greg D. Carmichael
Greg D. Carmichael
/s/ Gary R. Heminger
Gary R. Heminger
/s/ Jewell D. Hoover
Jewell D. Hoover
/s/ Kevin T. Kabat
Kevin T. Kabat
/s/ Michael B. McCallister
Michael B. McCallister
/s/ Hendrik G. Meijer
Hendrik G. Meijer
186 Fifth Third Bancorp
AVERAGE ASSETS FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS)
CONSOLIDATED TEN YEAR COMPARISON
Interest-Earning Assets
Interest-
Bearing
Deposits in
Banks(a)
Federal Funds
Sold(a)
1
-
1
2
1
11
12
438
257
252
3,257
3,043
2,416
1,493
2,030
3,317
1,023
183
147
144
Year
2015 $
2014
2013
2012
2011
2010
2009
2008
2007
2006
Loans and
Leases
93,339
91,127
89,093
84,822
80,214
79,232
83,391
85,835
78,348
73,493
Securities
26,987
21,823
16,444
15,319
15,437
16,371
17,100
13,424
11,630
20,910
Total
123,584
115,993
107,954
101,636
97,682
98,931
101,526
99,880
90,382
94,799
Cash and Due
from Banks
2,608
2,892
2,482
2,355
2,352
2,245
2,329
2,490
2,275
2,477
Other
Assets
15,212
14,539
15,053
15,695
15,335
14,841
14,266
13,411
10,613
8,713
Total Average
Assets
140,111
131,943
123,732
117,614
112,666
112,434
114,856
114,296
102,477
105,238
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS)
Year
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
Demand
35,164
$
31,755
29,925
27,196
23,389
19,669
16,862
14,017
13,261
13,741
Interest
Checking
26,160
25,382
23,582
23,096
18,707
18,218
15,070
14,191
14,820
16,650
Savings
14,951
16,080
18,440
21,393
21,652
19,612
16,875
16,192
14,836
12,189
Deposits
Money
Market
18,152
14,670
9,467
4,903
5,154
4,808
4,320
6,127
6,308
6,366
Other
Time
4,051
3,762
3,760
4,306
6,260
10,526
14,103
11,135
10,778
10,500
Certificates
$100,000 and
Over
2,869
3,929
6,339
3,102
3,656
6,083
10,367
9,531
6,466
5,795
Foreign
Office
874
1,828
1,518
1,555
3,497
3,361
2,265
4,220
3,155
3,711
Total
102,221
97,406
93,031
85,551
82,315
82,277
79,862
75,413
69,624
68,952
Short-Term
Borrowings
2,641
2,331
3,527
4,806
3,122
1,926
6,980
10,760
6,890
8,670
Total
104,862
99,737
96,558
90,357
85,437
84,203
86,842
86,173
76,514
77,622
INCOME FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Year
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
$
Interest
Income
4,028
4,030
3,973
4,107
4,218
4,489
4,668
5,608
6,027
5,955
Interest
Expense
495
451
412
512
661
885
1,314
2,094
3,018
3,082
Noninterest
Income
3,003
2,473
3,227
2,999
2,455
2,729
4,782
2,946
2,467
2,012
Noninterest
Expense
3,775
3,709
3,961
4,081
3,758
3,855
3,826
4,564
3,311
2,915
Net Income (Loss)
Available to
Common
Shareholders
1,637
1,414
1,799
1,541
1,094
503
511
(2,180)
1,075
1,188
Earnings
2.03
1.68
2.05
1.69
1.20
0.63
0.73
(3.91)
1.99
2.13
MISCELLANEOUS AT DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Bancorp Shareholders' Equity
Per Share(b)
Originally Reported
Diluted
Earnings
2.01
1.66
2.02
1.66
1.18
0.63
0.67
(3.91)
1.98
2.12
Dividends
Declared Earnings
2.03
1.68
2.05
1.69
1.20
0.63
0.73
(3.94)
2.00
2.14
0.52
0.51
0.47
0.36
0.28
0.04
0.04
0.75
1.70
1.58
Diluted
Earnings
$ 2.01
1.66
2.02
1.66
1.18
0.63
0.67
(3.94)
1.99
2.13
Common
Shares
Year
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
Capital
Surplus
2,666
2,646
2,561
2,758
2,792
1,715
1,743
848
1,779
1,812
(a) Federal funds sold and interest-bearing deposits in banks are combined in other short-term investments in the Consolidated Financial Statements.
(b) Adjusted for accounting guidance related to the calculation of earnings per share, which was adopted retroactively on January 1, 2009.
Outstanding
785,080,314 $
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
Common
Stock
2,051
2,051
2,051
2,051
2,051
1,779
1,779
1,295
1,295
1,295
Retained
Earnings
12,358
11,141
10,156
8,768
7,554
6,719
6,326
5,824
8,413
8,317
Preferred
Stock
1,331
1,331
1,034
398
398
3,654
3,609
4,241
9
9
Treasury
Stock
(2,764)
(1,972)
(1,295)
(634)
(64)
(130)
(201)
(229)
(2,209)
(1,232)
Accumulated
Other
Comprehensive
Income
197
429
82
375
470
314
241
98
(126)
(179)
Total
15,839
15,626
14,589
13,716
13,201
14,051
13,497
12,077
9,161
10,022
$
Book Value
Per Share
18.48
17.35
15.85
15.10
13.92
13.06
12.44
13.57
17.18
18.00
Allowance for
Loan and
Lease Losses
1,272
1,322
1,582
1,854
2,255
3,004
3,749
2,787
937
771
187 Fifth Third Bancorp
DIRECTORS AND OFFICERS
FIFTH THIRD BANCORP OFFICERS
Greg D. Carmichael
President &
Chief Executive Officer
Lars C. Anderson
Executive Vice 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
Heather Russell Koenig
Executive Vice President,
Chief Legal Officer &
Corporate Secretary
Randolph J. Koporc
Executive Vice President
Gregory L. Kosch
Executive Vice President
James C. Leonard
Executive Vice President &
Treasurer
Philip R. McHugh
Executive Vice President
Joseph R. Robinson
Executive Vice President &
Chief Operations
and Technology Officer
Timothy N. Spence
Executive Vice President &
Chief Strategy Officer
Teresa J. Tanner
Executive Vice President &
Chief Administrative Officer
Tayfun Tuzun
Executive Vice President &
Chief Financial Officer
REGIONAL PRESIDENTS
Ralph S. Michael III
(Group Regional President)
Donald Abel, Jr.
Michael Ash
Steven Alonso
David A. Call
Hal Clemmer
Timothy Elsbrock
(Market President)
David Girodat
Thomas Heiks
Jerry Kelsheimer
Robert W. LaClair
Brian Lamb
Jordan A. Miller, Jr.
Robert A. Sullivan
Thomas G. Welch, Jr.
FIFTH THIRD BANCORP BOARD
COMMITTEES
Audit Committee
Emerson L. Brumback, Chair
Nicholas K. Akins
Katherine B. Blackburn
Jewell D. Hoover
Finance Committee
Gary R. Heminger, Chair
Emerson L. Brumback
James P. Hackett
Kevin T. Kabat
Marsha C. Williams
Human Capital and Compensation
Committee
Marsha C. Williams, Chair
Nicholas K. Akins
Gary R. Heminger
Michael B. McCallister
Hendrik G. Meijer
Nominating and Corporate Governance
Committee
Ulysses L. Bridgeman, Jr., Chair
B. Evan Bayh III
Gary R. Heminger
Hendrik G. Meijer
Regulatory Oversight Committee
Marsha C. Williams, Chair
Nicholas K. Akins
Emerson L. Brumback
Jewell D. Hoover
Risk and Compliance Committee
Jewell D. Hoover, Chair
B. Evan Bayh III
Jorge L. Benitez
Hendrik G. Meijer
Marsha C. Williams
FIFTH THIRD
BANCORP DIRECTORS
James P. Hackett, Chairman
Interim Director of Athletics
University of Michigan
Vice Chair and Director
Steelcase, Inc.
Marsha C. Williams, Lead Director
Retired Senior Vice President & Chief
Financial Officer
Orbitz Worldwide, Inc.
Nicholas K. Akins
Chairman, President & CEO
American Electric Power
Company
B. Evan Bayh III
Partner
McGuireWoods LLP
Jorge L. Benitez
Retired CEO (U.S.) and
Senior Managing Director
(North America), Accenture
Katherine B. Blackburn
Executive Vice President
Cincinnati Bengals, Inc.
Ulysses L. Bridgeman, Jr.
President
B.F. Companies
Emerson L. Brumback
Retired President & COO
M&T Bank
Greg D. Carmichael
President & CEO
Fifth Third Bancorp
Gary R. Heminger
President, CEO & Director
Marathon Petroleum
Corporation
Jewell D. Hoover
Principal & Bank Consultant
Hoover and Associates, LLC
Kevin T. Kabat
Vice Chairman
Fifth Third Bancorp
Michael B. McCallister
Retired Chairman & CEO
Humana Inc.
Hendrik G. Meijer
Co-Chairman, Director
& CEO
Meijer, Inc.
188 Fifth Third Bancorp
Financial Highlights 2015
For the years ended Dec. 31
$ in millions, except per share data
Earnings and Dividends
2015
2014
2013
Fifth Third Bancorp
Corporate Address
38 Fountain Square Plaza
Cincinnati, OH 45263
www.53.com
1.800.972.3030
Investor Relations
(For Inquiries of Shareholders Only)
38 Fountain Square Plaza
MD 1090QC
Cincinnati, OH 45263
ir@53.com
1.866.670.0468
Transfer Agent
American Stock Transfer
and Trust Company, LLC.
For Correspondence
6201 15th Ave.
Brooklyn, NY 11219
www.amstock.com
1.888.294.8285
For Dividend Reinvestment
and Direct Stock Purchase
Plan Transaction Processing
P.O. Box 922
Wall Street Station
New York, NY 10269-0560
Net income attributable to Bancorp
$ 1,712
$ 1,481
$ 1,836
Common dividends declared
Preferred dividends declared
417
75
427
67
407
37
Per Common Share
Earnings
Diluted earnings
Cash dividends
$ 2.03
$ 1.68
$ 2.05
2.01
1.66
2.02
0.52
0.51
0.47
Book value per share
18.48
17.35
15.85
At Year-End
Total Assets
$ 141,082
$ 138,706
$ 130,443
Total Loans and Leases (incl. held-for-sale)
93,485
91,345
89,558
Deposits
103,205
101,712
99,275
Bancorp Shareholders' Equity
15,839
15,626
14,589
Key Ratios
Net Interest Margin (FTE)
Efficiency Ratio (FTE)
Tier 1 Common Equity Ratio*
CET1 Ratio (Basel III Transitional)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
Actuals
2.88%
57.6%
N/A
9.82%
10.93%
14.13%
3.10%
61.1%
9.65%
N/A
10.83%
14.33%
3.32%
58.2%
9.45%
N/A
10.43%
14.17%
Common Shares Outstanding (000's)
785,080
824,047
855,306
Banking Centers
ATMs
1,254
1,302
1,320
2,593
2,638
2,586
Full-Time Equivalent Employees
18,261
18,351
19,446
* Non-GAAP measure. For further information, see the Non-GAAP Financial Measures section of MD&A.
2015
2014
Stock
Performance
High
Low
Dividends
Declared
Per Share
High
Low
Dividends
Declared
Per Share
Fourth Quarter
$ 21.14
$ 18.15
$ 0.13
$ 20.82
$ 17.65
$ 0.13
Third Quarter
Second Quarter
First Quarter
21.93
21.90
20.53
18.21
18.63
17.14
0.13
0.13
0.13
21.79
23.41
19.45
19.82
23.90
20.37
0.13
0.13
0.12
Fifth Third’s common stock is traded on the NASDAQ® Global Select Market under the symbol “FITB.”
FIFTH THIRD BANCORP 2015 ANNUAL REPORT |
www.53.com