2 0 1 6 | A N N UA L R E P O R T
CONTENTS
CONTENTS
2
3
10
1 1
12
13
14
CEO Quote
CEO Quote
2
CEO Letter
3
CEO Letter
The NorthStar Strategy
The NorthStar Strategy
10
2016 Financial Review
2016 Financial Review
1 1
Branch Banking
Branch Banking
12
Consumer Lending
Consumer Lending
13
Commercial Banking
Commercial Banking
14
15 Wealth & Asset Management
15 Wealth & Asset Management
16
18
20
22
24
Community Commitment
Community Commitment
16
Corporate Social Responsibility
Corporate Social Responsibility
18
Community Spotlight
Community Spotlight
20
Consumer Spotlight
Consumer Spotlight
22
Commercial Spotlight
Commercial Spotlight
24
26 Wealth & Asset Management Spotlight
26 Wealth & Asset Management Spotlight
Fifth Third Bancorp is a diversified
Fifth Third Bancorp is a diversified
financial services company
financial services company
head quartered in Cincinnati, Ohio.
head quartered in Cincinnati, Ohio.
As of December 31, 2016, the
As of December 31, 2016, the
Company had:
Company had:
$142B IN ASSETS
$142B IN ASS E TS
1,191 FULL-SERVI CE BAN KIN G CE N TE RS
2,495 ATMs
1,191 FULL-S E RV ICE B ANK ING CE NT E R S
2,495 ATMs
4 BUSINESS UN ITS: Commercial Banking, Branch Banking,
4 BUSINE SS U NITS : Commercial Banking, Branch Banking,
Consumer Lending And Wealth & Asset Management
Consumer Lending And Wealth & Asset Management
17.9% INTEREST IN VAN TIV H O LD I NG , LLC
17.9% INTE RE ST IN VANT IV H O LDIN G, LLC
$315B IN ASSETS U NDE R CAR E *
$315B IN ASS E TS U NDE R CAR E*
$31B IN ASSETS U NDE R MAN AGE ME NT*
$31B IN ASSE TS UN DER MANAGE ME N T*
*Assets under management and assets under care include trust and brokerage assets
Fifth Third Bank was established in 1858.
E Q UAL HO U SIN G LE NDE R .
MEMB ER FDIC .
*Assets under management and assets under care include trust and brokerage assets
Fifth Third Bank was established in 1858.
E Q UAL HO U SI NG LE NDE R.
MEM BE R FD IC.
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
1
1
Fifth Third works on things
that make a difference.
We hire great employees
who are committed to
supporting our customers
and communities.
Greg D. Carmichael
President and Chief Executive Officer,
Fifth Third Bancorp
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FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
DEAR SHAREHOLDERS:
DEAR SHAREHOLDERS:
DEAR SHAREHOLDERS:
Having recently completed my first full year at
Having recently completed my first full year at
the helm as CEO, I can tell you that I am proud of
the helm as CEO, I can tell you that I am proud of
our employees and what we accomplished in 2016.
our employees and what we accomplished in 2016.
During the year, we achieved several important
During the year, we achieved several important
objectives. I believe that the steps we took in 2016
objectives. I believe that the steps we took in 2016
have positioned our Bank to deliver stronger and
have positioned our Bank to deliver stronger and
more stable financial results through business cycles.
more stable financial results through business cycles.
Having recently completed my first full year at
the helm as CEO, I can tell you that I am proud of
our employees and what we accomplished in 2016.
During the year, we achieved several important
objectives. I believe that the steps we took in 2016
have positioned our Bank to deliver stronger and
more stable financial results through business cycles.
I’m happy to report that 2016 was a strong year
I’m happy to report that 2016 was a strong year
for our Bank. Guided by our Board of Directors and
for our Bank. Guided by our Board of Directors and
executive team, our employees worked hard to
executive team, our employees worked hard to
execute on our Vision to be the One Bank people
execute on our Vision to be the One Bank people
most value and trust.
most value and trust.
I’m happy to report that 2016 was a strong year
for our Bank. Guided by our Board of Directors and
executive team, our employees worked hard to
execute on our Vision to be the One Bank people
most value and trust.
CEO letter
CEO letter
CEO letter
Our Vision is rooted in a simple concept: Keeping
Our Vision is rooted in a simple concept: Keeping
Our Vision is rooted in a simple concept: Keeping
the customer at the center of everything we do.
the customer at the center of everything we do.
the customer at the center of everything we do.
We are committed to acting in the best interests
We are committed to acting in the best interests
We are committed to acting in the best interests
of our customers. It is a commitment that plays out
of our customers. It is a commitment that plays out
of our customers. It is a commitment that plays out
every day in the products and services we offer
every day in the products and services we offer
every day in the products and services we offer
and in the way we deliver them.
and in the way we deliver them.
and in the way we deliver them.
As stewards of your capital, we again were able
As stewards of your capital, we again were able
to return a significant amount of capital back
to return a significant amount of capital back
to you through dividends and share repurchases.
to you through dividends and share repurchases.
We also were able to invest in areas of strategic
We also were able to invest in areas of strategic
importance for our bank.
importance for our bank.
As stewards of your capital, we again were able
to return a significant amount of capital back
to you through dividends and share repurchases.
We also were able to invest in areas of strategic
importance for our bank.
We believe Fifth Third is well positioned, with
We believe Fifth Third is well positioned, with
sig nificant scale across our businesses. Our Branch
sig nificant scale across our businesses. Our Branch
Banking and Consumer Lending footprint has a
Banking and Consumer Lending footprint has a
well-defined geography and is concentrated in
well-defined geography and is concentrated in
the Midwest and the Southeast. Our Commercial
the Midwest and the Southeast. Our Commercial
business spans the United States and extends
business spans the United States and extends
into Canada and London for the convenience
into Canada and London for the convenience
of our customers.
of our customers.
We believe Fifth Third is well positioned, with
sig nificant scale across our businesses. Our Branch
Banking and Consumer Lending footprint has a
well-defined geography and is concentrated in
the Midwest and the Southeast. Our Commercial
business spans the United States and extends
into Canada and London for the convenience
of our customers.
We believe that in 2016 we laid the foundation
We believe that in 2016 we laid the foundation
necessary to achieve our longer term goals. There
necessary to achieve our longer term goals. There
were three goals in particular on which we focused:
were three goals in particular on which we focused:
We believe that in 2016 we laid the foundation
necessary to achieve our longer term goals. There
were three goals in particular on which we focused:
1 Strong financial performance through
1 Strong financial performance through
1 Strong financial performance through
business cycles;
business cycles;
business cycles;
2 Managing risk and striving for regulatory
2 Managing risk and striving for regulatory
2 Managing risk and striving for regulatory
excellence; and
excellence; and
excellence; and
3 Maintaining our brand value.
3 Maintaining our brand value.
3 Maintaining our brand value.
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
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THE NORTHSTAR STRATEGY
In September, Fifth Third launched the NorthStar
strategy, a three-year plan designed to achieve our
Vision to be the One Bank people most value and
trust. It is a set of initiatives that I believe will deliver
strong and consistent returns through longer term
economic cycles.
We expect our NorthStar strategy to help us achieve
specific goals by the end of 2019. These goals include
achieving a return on average tangible common
equity of 12 to 14 percent, a return on average assets
of 1.1 to 1.3 percent and an efficiency ratio below
60 percent.
DRIVING INCREASED STABILITY
We have taken deliberate actions to shift the risk
profile of our Bank. We are focused on driving stable
performance through the cycle while targeting
opportunities that fit our risk-return criteria. We are
striving to improve the performance of our Bank
without taking undue risks.
We believe that in 2016 our active risk management
enabled us to limit our exposure to macroeconomic
events such as lower energy prices and the immediate
fallout from Brexit.
Our criticized asset ratio has continued to improve
and is now at the lowest point since the third quarter
of 2007. Furthermore, our 2016 Compre hensive
Capital Analysis and Review (CCAR) results demon-
strate that we would have remained well capitalized
under a severely adverse economic scenario of
similar magnitude to the financial crisis of 2008-2010.
Our pre-provision net revenue (PPNR) to average
assets ratio remained above the peer-group average
even under a stressed scenario. Lastly, our results
also indicated “less capital destruction” than the
peer-group average in stressed scenarios, which
again speaks to our favorable portfolio positioning.
We also have taken other measures to maintain
a strong balance sheet and liquidity. In 2016, we
completely exercised our remaining position in the
Vantiv warrant and reduced our overall ownership
stake in Vantiv to 17.9 percent. Cumulatively, we
2016 BY THE NUMBERS
95
90
85
80
75
70
65
60
55
22
20
18
16
14
12
10
8
6
4
2
0
150
145
140
135
130
125
120
115
110
TOTAL PAYOUT RATIO (%)
92.7
72.2
72.8
66.2
60.4
2012
2013
2014
2015
2016
BOOK VALUE PER SHARE ($)
19.82
18.48
17.35
15.10
15.85
2012
2013
2014
2015
2016
AVERAGE ASSETS ($B)
142.27
140.08
131.91
123.70
117.56
2012
2013
2014
2015
2016
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FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
1.50
1.40
1.30
1.20
1.10
1.00
0.90
0.80
0.70
0.60
0.50
NPA RATIO (%)
1.49
1.10
.82
.80
.70
2012
2013
2014
2015
2016
COMMON SHARES OUTSTANDING (MM)
950
900
882
855
824
785
750
850
800
750
700
650
600
2012
2013
2014
2015
2016
TOTAL NET CHARGE-OFFS (BPS)
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
.85
.64
.58
.48
.39
2012
2013
2014
2015
2016
generated pre-tax gains of $812 million from our
ownership in the warrant. Exiting the warrant will
also reduce volatility in our reported results.
Separately, we took steps to mitigate the risk to
expected cash flows under a tax receivable agree-
ment (TRA) with Vantiv. We had expected to
receive $725 million in cash over a 15-plus year
period but decided to accelerate the monetization
of those cash flows.
Our balance sheet also maintains a strong level
of liquidity, with a Liquidity Coverage Ratio of
128 percent at the end of 2016.
Optimizing Our Balance Sheet
We have sharpened our focus on prudent capital
allocation and a measured balance of risk and
return rather than emphasizing loan growth or
in creasing our risk appetite. To that end, we delib-
erately exited over $3.5 billion dollars in commercial
relationships that did not meet our risk and/or
return criteria. While these actions created a head-
wind for loan growth in the near term, they were
consistent with our focus on improving the long-
term profitability and resiliency of our Bank. In the
Consumer Bank, we decided to decrease indirect
auto loan originations and redeploy capital to other
more attractive businesses.
As we continue to optimize our balance sheet, we
have three top priorities. First, we want to continue
to make progress in positioning our loan portfolio
for higher returns through the cycle. Second, we
seek to manage interest rate risk exposure while
maintaining an asset-sensitive position. Third, we
want to maintain a healthy level of liquidity on our
balance sheet.
As noted above, we also have a substantial owner-
ship position in Vantiv. Our ownership stake is a
potential source of additional capital and liquidity
that currently is not recognized in our balance sheet.
At the end of 2016, our ownership interest in Vantiv
was recorded at a carrying value of $414 million.
The market valuation for those shares imply an after-
tax gain of nearly $1 billion at current tax rates.
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
5
Committed to Expense Management
Although revenue growth is important, expense
management creates important stability in a
low-rate environment. We always have consid-
ered prudent expense control, like revenue
growth, to be a part of the ongoing responsibili-
ties of executive management. We have executed
several expense initiatives during the course
of the year that I expect to result in ongoing
improvements to pre-tax income.
They understand that behind every customer
account is a person with goals and dreams who
is unique and deserving of our utmost attention.
In 2016, our team adapted to changes in leadership,
technology and processes while demonstrating
our Core Values of Integrity, Teamwork and
Collaboration, Accountability and Respect and
Inclusion. We invested in new leadership across
our organization.
OUR PEOPLE
We would not be able to accomplish any of our
objectives without the effort and dedication of
our employees. These employees embrace our
service model, our commitment to community
involvement and our focus on improving lives.
In September, Jerry Burris and Eileen Mallesch
were appointed to our Board of Directors.
Mr. Burris’s background as CEO of Associated
Materials and his 20 years of management expe-
rience with General Electric provide deep and
broad management experience to the board.
Ms. Mallesch is a CPA and served as the senior
vice president and CFO for Nationwide Insurance
CONTRACT
VOLUNTARY EARLY
RETIREMENT PROGRAM
Fifth Third conducted its first-ever voluntary
early retirement program, executed in the first
quarter of 2016. The offering enabled Fifth
Third to further manage expenses and help
fund strategic investments, while also
creating a financial cushion for long-serving
employees who chose to take advantage
of the opportunity to retire early.
CONTRACT RENEGOTIATIONS
We extended our servicing and referral
agreement with Vantiv, Inc. by 5½ years.
This new agreement will generate higher
revenues and cost savings, designed to
increase over time.
We also actively reviewed our vendor
relationships to identify cost saving oppor-
tu nities and other efficiencies. During 2016,
we negotiated partner agreements with
multiple IT and operations vendors.
6
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
and has more than 25 years of broad finance
strategy experience in a variety of industries.
ment. Mr. Gokhale brings a deep understanding
of shareholder value creation to Fifth Third.
Former North Florida regional president
Brian Lamb was chosen to lead Fifth Third’s
newly created Corporate Responsibility and
Reputation division. This division oversees
Corporate Communications, Community and
Economic Development, Inclusion and Diversity,
and Ethics.
Aravind Immaneni joined as chief operations
and technology officer, responsible for all aspects
of technology and back-office operations.
Mr. Immaneni has extensive experience in trans-
forming businesses by reinventing operations,
technology and processes.
Melissa Stevens joined Fifth Third in the newly
created position of chief digital officer and head
of Omni-channel Banking, as we seek to continue
to improve the customer experience.
We were proud that our Chief Administrative
Officer Teresa Tanner was named to American
Banker’s list of Most Powerful Women in Banking.
American Banker highlighted Ms. Tanner’s role in
reinventing the Bank’s benefits offerings and her
work within the community—especially the arts.
The recognition also acknowledged her efforts
in recruiting and developing talent, including the
creation of the Women in Leadership program.
Sameer Gokhale joined as head of investor
relations and corporate performance measure-
Our annual Employee Viewpoints Survey again
showed that we have a highly engaged, highly
BRANCH OPTIMIZATION
ALTERNATIVE WORKSPACE STRATEGY
In our retail business, we completed a 105-branch
reduction that included the exits of the Pittsburgh
and St. Louis retail markets. These actions are
expected to generate over $60 million dollars
in annual savings.
We are on a journey to create work spaces that
inspire employees and encourage collaboration.
Our new open-office environments will reduce
both our need for physical workspace and our
overhead expenses.
We also planned to close or consolidate an
additional 42 branches and buildings as part
of our ongoing review of customer preferences
and our ability to best serve their needs. Changes
in technology and customer behavior will con-
tinue to transform our branch network.
The new workspaces will include significantly
greater technology that allows employees
to be more mobile, accommodates 30 to
35 percent more employees and decreases
underutilized space.
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
7
connected team at Fifth Third. It’s a team that
connected team at Fifth Third. It’s a team that
improved our communities in new and innova-
improved our communities in new and innova-
tive ways over the course of the year.
tive ways over the course of the year.
OUR COMMITMENT TO INCLUSION AND
DIVERSITY
OUR COMMITMENT TO INCLUSION AND
DIVERSITY
for certified minority-owned businesses by
70 percent, awarding contracts to more than 350
diverse suppliers. We were honored to be recog-
nized by the Ohio Minority Supplier Development
Council as a corporation of the year.
for certified minority-owned businesses by
70 percent, awarding contracts to more than 350
diverse suppliers. We were honored to be recog-
nized by the Ohio Minority Supplier Development
Council as a corporation of the year.
Fifth Third is deeply committed to inclusion
and diversity in every aspect of our business.
We believe that increased diversity is good for
our Bank and the communities we serve. We
continually evaluate diversity across a number
of dimensions—from our employee base, to our
community outreach efforts to the vendors we
use in our supply chain. We are proud to have
one of the most diverse Boards in the financial
services sector.
Fifth Third is deeply committed to inclusion
and diversity in every aspect of our business.
We believe that increased diversity is good for
our Bank and the communities we serve. We
continually evaluate diversity across a number
of dimensions—from our employee base, to our
community outreach efforts to the vendors we
use in our supply chain. We are proud to have
one of the most diverse Boards in the financial
services sector.
We also are committed to supplier diversity. In
2016, Fifth Third increased expense allocations
We also are committed to supplier diversity. In
2016, Fifth Third increased expense allocations
OUR COMMITMENT TO BUILDING
COMMUNITIES
OUR COMMITMENT TO BUILDING
COMMUNITIES
We firmly believe that when we build stronger
communities, we build a stronger Bank.
We firmly believe that when we build stronger
communities, we build a stronger Bank.
I was pleased to announce a landmark $30 billion
I was pleased to announce a landmark $30 billion
Community Commitment on November 18, 2016.
Community Commitment on November 18, 2016.
It was the largest community development
It was the largest community development
plan initiated by a single regional bank in recent
plan initiated by a single regional bank in recent
history, and it reflected strong collaboration with
history, and it reflected strong collaboration with
the National Community Reinvestment Coalition
the National Community Reinvestment Coalition
(NCRC), the leading organization in working
(NCRC), the leading organization in working
with financial institutions to address community
with financial institutions to address community
needs in banking services.
needs in banking services.
Jerry W. Burris
Jerry W. Burris
Gary R. Heminger
Gary R. Heminger
Nicholas K. Akins
Nicholas K. Akins
Katherine B.
Blackburn
Katherine B.
Blackburn
B. Evan
Bayh III
B. Evan
Bayh III
Jewell D.
Hoover
Jewell D.
Hoover
Marsha C.
Williams
Marsha C.
Williams
Retired President
and CEO, Associated
Materials Group, Inc.
Retired President
and CEO, Associated
Materials Group, Inc.
President, CEO
and Chairman,
Marathon Petroleum
Corporation
President, CEO
and Chairman,
Marathon Petroleum
Corporation
Executive Vice
President, Cincinnati
Bengals, Inc.
Executive Vice
President, Cincinnati
Bengals, Inc.
Chairman, President
and CEO,
American Electric
Power Company
Chairman, President
and CEO,
American Electric
Power Company
Partner, McGuire-
Woods LLP
Partner, McGuire-
Woods LLP
Retired Senior
Official, Comptroller
of the Currency
Retired Senior
Official, Comptroller
of the Currency
Retired CFO,
Orbitz
Worldwide, Inc.
Retired CFO,
Orbitz
Worldwide, Inc.
8
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FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
The $30 billion commitment in lending and invest-
The $30 billion commitment in lending and invest-
ments is $2.5 billion above the plan we announced
ments is $2.5 billion above the plan we announced
earlier in the year. It also includes $158 million in
earlier in the year. It also includes $158 million in
strategic impact initiatives such as financial services,
strategic impact initiatives such as financial services,
branch openings and cooperative public policy
branch openings and cooperative public policy
for low- and moderate-income and high-minority
for low- and moderate-income and high-minority
communities.
communities.
“Banks are our neighborhoods’ best hope,” said
“Banks are our neighborhoods’ best hope,” said
John Taylor, president and CEO of the NCRC,
John Taylor, president and CEO of the NCRC,
at our joint press conference. It was a statement
at our joint press conference. It was a statement
that made the entire Fifth Third team and me
that made the entire Fifth Third team and me
proud to be part of this industry.
proud to be part of this industry.
OUR COMMITMENT TO YOU
OUR COMMITMENT TO YOU
As shareholders of Fifth Third Bancorp, you
As shareholders of Fifth Third Bancorp, you
also are shareholders in the legacy we are creating.
also are shareholders in the legacy we are creating.
We are continually working to fundamentally
We are continually working to fundamentally
improve lives through financial solutions, financial
improve lives through financial solutions, financial
security and financial empowerment.
security and financial empowerment.
As we look ahead to 2017, we are confident that
we will build on this legacy while continuing to
drive value for you, our shareholders.
As we look ahead to 2017, we are confident that
we will build on this legacy while continuing to
drive value for you, our shareholders.
I want to thank our Board of Directors, our senior
I want to thank our Board of Directors, our senior
leadership team and all of our employees for
leadership team and all of our employees for
the skill, the passion and the commitment they
the skill, the passion and the commitment they
demonstrate every day. Together, we are building
demonstrate every day. Together, we are building
a stronger, more sustainable Fifth Third for our
a stronger, more sustainable Fifth Third for our
customers, our communities, our shareholders
customers, our communities, our shareholders
and each other.
and each other.
Greg D. Carmichael
President and Chief Executive Officer,
Fifth Third Bancorp
Greg D. Carmichael
President and Chief Executive Officer,
Fifth Third Bancorp
Hendrik G. Meijer
Hendrik G. Meijer
Co-Chairman,
CEO and Director,
Meijer, Inc.
Co-Chairman,
CEO and Director,
Meijer, Inc.
Emerson L.
Brumback
Emerson L.
Brumback
Retired President and
COO, M&T Bank
Retired President and
COO, M&T Bank
Jorge L. Benitez
Jorge L. Benitez
Eileen A. Mallesch
Eileen A. Mallesch
Greg D. Carmichael
Greg D. Carmichael
Retired CEO,
North America,
Accenture
Retired CEO,
North America,
Accenture
Retired Chairman
Retired Chairman
and CEO,
and CEO,
Humana Inc.
Humana Inc.
Retired CFO, Nationwide
Property & Casualty
Segment, Nationwide
Mutual Insurance Company
Retired CFO, Nationwide
Property & Casualty
Segment, Nationwide
Mutual Insurance Company
President and CEO,
Fifth Third Bancorp
President and CEO,
Fifth Third Bancorp
Michael B.
McCallister
Michael B.
McCallister
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
9
9
THE NORTHSTAR STRATEGY
In September, Fifth Third launched the NorthStar
strategy, a three-year plan designed to achieve
our Vision to be the One Bank people most value
and trust and deliver strong, consistent returns
through longer term economic cycles.
The strategy is designed to impact every line of
business, every employee and, most importantly,
every customer.
WE ARE FOCUSED ON:
Building a differentiated brand and cor porate
reputation by improving the customer experi-
ence, increasing brand equity and delivering on
the Bank’s $30 billion Community Commitment.
Delivering a better, more differentiated value
proposition by investing in our sales and service
channels and expanding on our products, solutions
and expertise.
Generating return on average tangible common
equity of 12 to 14 percent, return on average
assets of 1.1 to 1.3 percent and an efficiency ratio
below 60 percent by the end of 2019.
Achieving risk and operational excellence.
Fifth Third has disclosed participation in a number
of alliances to achieve these goals, including
GreenSky, ApplePie Capital, AvidXchange, Zelle
and Transactis.
NORTHSTAR FINANCIAL PERFORMANCE TARGETS
(TO BE ACHIEVED BY THE END OF 2019)
12-14%
RETURN ON
AVERAGE TANGIBLE
COMMON EQUITY
1.1-1.3%
RETURN ON
AVERAGE
ASSETS
<60%
EFFICIENCY
RATIO*
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FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
*Without the benefit of higher interest rates, corporate tax changes or a reduced regulatory environment.
2016 financial review
Full-year 2016 net income available to common
shareholders of $1.5 billion decreased 9 percent
from 2015. Earnings per diluted common share of
$1.93 decreased 4 percent from 2015. Results for
both years were significantly impacted by Vantiv-
related transactions.
In 2016, after-tax Vantiv net gains were approxi-
mately $295 million (approximately $0.38 per share),
compared with after-tax net gains of $519 million
(approximately $0.64 per share) in 2015. Fifth Third
will continue to evaluate further reductions in
its ownership stake in Vantiv in a thoughtful and
prudent manner.
In 2016, Fifth Third maintained a disciplined
approach and continued to focus on businesses
that met its desired risk-return requirements.
In 2016, average loans and leases increased 1 percent
to $94.3 billion, with growth in residential mortgages,
commercial and industrial loans and commercial
construction loans. Growth in these areas partially
was offset by a decline in automobile loans.
In 2015, Fifth Third made a strategic decision to
reduce auto loan originations while focusing on other
businesses that generated more attractive returns.
Average securities and short-term invest ments
increased $1.7 billion as Fifth Third continued to take
a balanced approach to liquidity and interest rate
risk management.
Fifth Third also continued to grow high-value, low-
cost transaction deposits in 2016. Transaction
deposits increased by 1 percent, even though the
Bank’s exits from the St. Louis and Pittsburgh
markets had a negative impact on growth. Fifth
Third’s deposit franchise will remain an important
driver of profitable balance sheet growth.
Net interest income increased 2 percent, partially
reflecting growth in interest-earning assets. During
the year, Fifth Third maintained a disciplined
approach to pricing and also benefited from higher
market interest rates. This was partially offset by
lower securities yields.
In 2016, despite low interest rates for most of the
year, Fifth Third’s net interest margin was flat
compared to 2015. At year-end, Fifth Third’s modified
liquidity coverage ratio (LCR) was 128 percent, up
from 116 percent in 2015.
Noninterest income decreased 10 percent from 2015,
primarily reflecting lower Vantiv-related gains. Fifth
Third reported a 13 percent increase in corporate
banking revenue driven by an increase in syndication
fees. Additionally, fee income growth reflected strong
card and processing revenue, offset by lower Wealth
& Asset Management fees and lower mortgage
banking net revenue.
Throughout the year, Fifth Third maintained a focus
on controlling expenses while continuing to execute
on strategic priorities. Total noninterest expense
increased 3 percent from 2015, primarily reflecting
higher compensation expense as the Bank added
personnel in Risk Management, Compliance and
Information Technology. This was partially offset by
lower occupancy expense, as well as reduced card
and processing expense due to key vendor contract
renegotiations.
Credit trends reflected the benign environment as
well as Fifth Third’s continued focus on positioning its
balance sheet to outperform through business cycles.
Full-year net charge-offs decreased 19 percent, as
commercial net-charge offs hit a 15-year low and the
Bank’s criticized assets decreased 21 percent. Fifth
Third’s reserve coverage ratios remain solid at 1.36
percent of portfolio loans and leases and 190 percent
of nonperforming loans and leases.
Fifth Third Bank has positive momentum in many
of its core businesses and is executing on its
strategic priorities under NorthStar. As we execute
on these priorities, we expect to deliver higher
returns for shareholders while positioning the Bank
for long-term success.
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
11
branch banking
proposition. These new card products are expected
to improve the Bank’s ability to compete for and win
customers. Fifth Third also is investing in analytical
capabilities to enhance risk-adjusted returns while
growing loan balances.
Customer expectations for simple and intuitive
access, transparency and speed continue to rise.
Accordingly, Fifth Third is prioritizing its 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 Fifth Third’s investments
will continue to integrate seamlessly across every
customer touch point into a universal sales, service
and marketing strategy. Fifth Third’s efforts to more
effectively integrate digital technology in this rapidly
evolving environment will create significant share-
holder value.
A strong Retail Bank is critical to the
future of Fifth Third. The Bank offers
a complete suite of Retail Banking
products and services. Its localized,
high-touch service model is primarily
concentrated in the Midwest and
Southeast.
In addition to providing services through the tradi-
tional branch channel, Fifth Third continues to adapt
to evolving customer preferences. While physical
infrastructure remains important, Fifth Third seeks to
provide customers with a superior, integrated experi-
ence across branch and mobile banking channels.
Fifth Third has been leveraging technology to help
provide superior customer service while reducing its
branch count. The Bank lowered its planned branch
count by approximately 12 percent over the past
eighteen months. Some of the savings generated by
these closures will be reinvested in its digital capabil-
ities. Fifth Third will continue to evaluate its branch
network on an ongoing basis.
The Bank also is investing in other initiatives. For
example, Fifth Third Bank is in the process of stream-
lining its existing operations by fully digitizing nearly
700 million paper-based transactions annually. Fifth
Third also recently announced that it has joined
Zelle’s person-to-person (P2P) payment network.
This will be a critical component to retaining client
engagement with Fifth Third’s mobile application.
In its Consumer Credit Card business, Fifth Third
remains focused on improving customer acquisition
and increasing cardholder activation. To that end,
it recently launched two products—Truly Simple
and TRIO—with a more attractive customer value
2016 HIGHLIGHTS
$2.4B
TOTAL
REVENUE
$15.4B
AV E R A G E
L O A N S
$52.9B
AV E R A G E
C O R E
D E P O S I T S
1.8M
O N L I N E
B A N K I N G
C U S T O M E R S
1,191
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
12
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
consumer lending
Fifth Third knows that consumers value
the security of being able to access a
line of credit when needed. The Bank’s
Consumer Lending division offers
competitive rates and a variety of
products to help customers reach their
goals, whether short or long term.
Fifth Third’s auto business is an important component
of Consumer Lending; however, the Bank has
deliberately lowered origination targets to focus on
improving risk-adjusted returns throughout the year.
Despite the lowered targets, Fifth Third remains
one of the largest bank originators of indirect auto
loans in the country, and continues to value the
relationships with an extensive dealer network across
its 44-state indirect auto footprint.
The mortgage business is one of the most cyclical
of Fifth Third’s businesses, and Fifth Third has
managed well through the most recent cycle. Fifth
Third has a business model that can be adjusted
quickly in response to the changing environment.
Fifth Third is primarily an in-footprint retail lender,
though it also has a broad-footprint direct channel
and purchases loans through a correspondent
channel. Mortgage often opens the door to deeper,
more profitable relationships that holistically serve
the needs of customers.
To fuel additional growth and improve the customer
experience, Fifth Third recently announced an
agree ment with Black Knight Financial Services to
consolidate its existing mortgage loan platforms.
This is expected to simplify the mortgage orig-
ination process for both clients and employees,
designed to give Fifth Third a competitive advan-
tage in the marketplace.
Regardless of whether credit customers come
to the Bank through auto, mortgage or other
Consumer Lending areas, Fifth Third continues
to work to simplify the process of obtaining a
loan. Fifth Third works proactively with borrowers
to explore options that make sense within their
current financial situation. Fifth Third maintains a
commitment to demonstrating better listening and
better problem solving. This helps the Bank earn
the trust that creates value—value that lasts well
beyond the life of the loan.
2016 HIGHLIGHTS
$551M
TOTAL
REVENUE
$21.1B
AV E R A G E
L O A N S
$69B
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
6,817
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
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
13
commercial banking
Fifth Third’s Commercial Bank is
focused on creating strategic partner-
ships with business, government
and professional customers through
customized financial solutions.
The Bank has built specialized verticals and
significantly strengthened its credit underwriting
by adding experienced talent in these areas. Fifth
Third is committed to helping businesses adapt
to the new economy, drive innovation and growth
and access the working capital needed to meet
their goals.
With its focused segmentation strategy and broad
client solution capabilities, the Commercial Bank
targets clients from $20 million in annual revenue
to some of the world’s largest companies.
The comprehensive and competitive offerings of
Fifth Third’s Commercial Bank span from traditional
lending and depository products to global cash
management, foreign exchange and international
trade finance, derivatives and capital markets ser-
vices, asset-based lending, leveraged lending, real
estate finance, public finance, commercial leasing
and lending and syndicated finance.
This wide range of services and experience allows
the Commercial Bank to address client needs
and provide capital and financing solutions to be
a strategic resource in our customers’ financial
success. Fifth Third is benefiting from these strong
and enduring relationships. The Bank’s disciplined
client selection aims to improve the risk-adjusted
returns in the business.
Fifth Third’s commitment to business lending
remains strong. In 2016, the Commercial Bank
pro duced 43 percent of Bancorp revenue and
accounted for more than half of loan balances.
This track record of success and ability to develop
new capabilities sets Fifth Third apart from the
competition.
2016 HIGHLIGHTS
$2.7B
TOTAL
REVENUE
$54.6B
$36.5B
AVERAGE
LOANS
AVERAGE
CORE
DEPOSITS
~14,000
CLIENTS
14
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
wealth & asset
management
Wealth & Asset Management is
comprised of four distinct businesses
tailored to the unique needs of its
customers. Fifth Third puts 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 unique
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 recordkeeping 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.
Fifth Third’s Wealth & Asset Management business
has grown through successful partnerships with
clients that assist them in achieving their financial
objectives. Fifth Third works to understand where
clients stand today and where they want to go.
Next, the Bank focuses on collaborating with
clients and their outside advisors to build a custom
plan for each client. Finally, the Bank works with
its clients to achieve those goals. The exclusive
Life360 platform reflects Fifth Third’s continued
investment in a comprehensive digital strategy.
The platform provides a holistic view, convenience
and control for clients as they work toward their
financial goals with confidence.
By providing holistic advice, guidance and service,
and focusing on the needs of clients, Wealth &
Asset Management is poised to continue to deliver
growth to Fifth Third shareholders.
2016 HIGHLIGHTS
$567M
TOTAL
REVENUE
$3.1B
AV E R A G E
L O A N S
$8.6B
AV E R A G E
C O R E
D E P O S I T S
$31B
A S S E T S U N D E R
M A N AG E M E N T *
$315B
A S S E T S U N D E R
C A R E *
* Assets under management and assets under care include trust and brokerage assets.
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
15
community
commitment
Fifth Third will lend or invest $30 billion to
low- and moderate-income (LMI) borrowers
and in LMI communities over a five-year
period from 2016 to 2020.
This agreement between
MORTGAGE LENDING
Fifth Third and the National
Community Reinvestment
Coalition (NCRC) was signed
by 145 NCRC member
comm unity organizations
and announced publicly on
November 18, 2016.
Community Commitment:
$11 billion over five years
Fifth Third is committing $11 billion to LMI borrowers
and LMI neighborhoods. The commitment includes
a specific target for home purchase loans.
SMALL BUSINESS LENDING
Community Commitment:
$10 billion over five years
Fifth Third has a lending goal of $10 billion
for small businesses.
16
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
COMMUNITY DEVELOPMENT LENDING
AND INVESTMENTS (CDLI)
CO
A
Community Commitment:
Co
$9 billion over five years
$
Fifth Third committed to $9 billion in CDLI over
Fi
five years. The Bank is evaluating expanding CDLI
fiv
activities to include affordable housing, pre-devel-
ac
opment loans, non-tax-credit-related projects to
op
assist with access to affordable housing, and support
as
for economic development projects that promote
fo
job creation and retention for LMI individuals and
jo
neighborhoods.
ne
FIFTH THIRD IMPACT PROGRAMMING
F I
Community Commitment:
Co
$154.8 million over five years
$
Philanthropy
Ph
Fifth Third will strengthen communities through
Fi
ph
philanthropic donations and impactful community
sp
sponsorships. Charitable giving will include supporting
or
organizations with resources for capacity building,
w
workforce training and assistance for older adults.
Housing-related Investments
Fifth Third will help address the gap for consumers
who need down payment assistance, support housing
counseling and financial literacy programs, and fund
housing loan pools for home repairs and gap financing
to support neighborhood revitalization.
Ho
Fi
w
co
ho
to
Small Business-related Investments
Fifth Third will help fund technical assistance programs
for small business development and growth and support
the ecosystem for small business lending.
Sm
Fi
fo
th
Branch and Staff Commitments
Fifth Third will seek to increase access to banking
services in LMI and/or high minority communities
by opening additional branches in those neigh-
borhoods. The Bank will support this activity and
improve delivery of these services by expanding
CRA staffing in mortgage lending and small business
lending.
Inclusion and Diversity
Fifth Third’s plan supports the Bank’s commitment
to ensure that its human capital is inclusive and
diverse. The Bank will increase its efforts to support
diverse suppliers: minority-owned, women-owned
and veteran-owned businesses.
Fifth Third L.I.F.E. Financial Education
Fifth Third will deliver its Fifth Third L.I.F.E. (Lives
Improved through Financial Empowerment) pro-
grams, which strive to reach consumers at every
age and stage of life through foundational financial
education. Fifth Third’s L.I.F.E. programs include its
Financial Empowerment Mobiles, or eBuses, which
deliver financial education, job training, tax prepara-
tion assistance and other help directly to low- and
moderate-income communities in partnership with
local community organizations.
Fifth Third Bank will form a national community
advisory forum that will review and monitor the
progress of the agreement, as well as statewide
advisory forums that will provide input to Fifth Third
for addressing community needs. Additionally, in
partnership with NCRC, Fifth Third will conduct
annual local community engagement meetings in
all its major markets.
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
FIF
17
corporate social
corporate social
responsibility
responsibility
For a dozen years now,
For a dozen years now,
Fifth Third Bank has been
Fifth Third Bank has been
working—often quietly
working—often quietly
and behind the scenes—
and behind the scenes—
to provide free financial
to provide free financial
education.
education.
The Bank has educated more than 1.25 million
The Bank has educated more than 1.25 million
people, from fifth-graders to high school students to
people, from fifth-graders to high school students to
adults, from low-income and underserved individuals
adults, from low-income and underserved individuals
to groups of clients’ employees and retirees.
to groups of clients’ employees and retirees.
Along the way, Fifth Third employees have seen
firsthand the transformative power of financial edu-
cation. The Bank has letters from parents and their
teenagers talking about the impact of their financial
education courses. Younger kids get excited about
saving and budgeting, others fortify their financial
confidence through eBus visits in neighborhoods;
and the Bank’s business clients have been provided
with class after class to help them and their employ-
ees learn about home ownership, saving for college,
protecting their identity and planning for retirement.
Along the way, Fifth Third employees have seen
firsthand the transformative power of financial edu-
cation. The Bank has letters from parents and their
teenagers talking about the impact of their financial
education courses. Younger kids get excited about
saving and budgeting, others fortify their financial
confidence through eBus visits in neighborhoods;
and the Bank’s business clients have been provided
with class after class to help them and their employ-
ees learn about home ownership, saving for college,
protecting their identity and planning for retirement.
Fifth Third employees, including President and CEO
Greg Carmichael, taught classes about budgeting
and saving, identity protection and home ownership
preparation.
Fifth Third employees, including President and CEO
Greg Carmichael, taught classes about budgeting
and saving, identity protection and home ownership
preparation.
financial empowerment. The Bank’s L.I.F.E. (Lives
Improved through Financial Empowerment) programs
are the way it delivers financial education to people
at all ages and stages of life.
financial empowerment. The Bank’s L.I.F.E. (Lives
Improved through Financial Empowerment) programs
are the way it delivers financial education to people
at all ages and stages of life.
In 2016, Fifth Third educated 14,000 fifth-grade
students through the Fifth Third Bank Young Bankers
Club®. The Young Bankers Club, a program developed
by Fifth Third, teaches money management basics
to elementary school students. The goal of Young
Bankers Club is to enable students to connect
the importance of education to their future and to
understand what money is and the difference between
needs and wants.
In 2016, Fifth Third educated 14,000 fifth-grade
students through the Fifth Third Bank Young Bankers
Club®. The Young Bankers Club, a program developed
by Fifth Third, teaches money management basics
to elementary school students. The goal of Young
Bankers Club is to enable students to connect
the importance of education to their future and to
understand what money is and the difference between
needs and wants.
A survey commissioned by Fifth Third demonstrated
that the need for this type of education is real, is
deep and is pressing.
A survey commissioned by Fifth Third demonstrated
that the need for this type of education is real, is
deep and is pressing.
Fifth Third celebrated a major milestone in 2016 with
the education of high school students. Its sponsor-
ship of a top-notch financial education program in
high schools over the past six years has enabled the
education of approximately 1 million students.
Fifth Third celebrated a major milestone in 2016 with
the education of high school students. Its sponsor-
ship of a top-notch financial education program in
high schools over the past six years has enabled the
education of approximately 1 million students.
FINANCIAL EMPOWERMENT
FINANCIAL EMPOWERMENT
One of the most obvious and long-lasting ways Fifth
Third improves lives is through its commitment to
One of the most obvious and long-lasting ways Fifth
Third improves lives is through its commitment to
The Fifth Third Financial Empowerment Mobiles,
or eBuses, also hit the road again in 2016, visiting
low- and moderate-income communities. There were
The Fifth Third Financial Empowerment Mobiles,
or eBuses, also hit the road again in 2016, visiting
low- and moderate-income communities. There were
18
18
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
17,600 visitors to eBus tour stops, where Fifth Third
professionals offered credit checks, tax preparation,
job search and training as well as access to financial
services.
2016 marked the first concentrated effort to take
Fifth Third Bank Empower U® into the communities.
This intensive outreach aims to teach individuals
throughout the Bank’s 10-state footprint. Fifth Third
taught over 150 classes—all of them free. They were
brought to life thanks to 70 community nonprofit
organizations working in close collaboration with
Fifth Third.
COMMUNITY DEVELOPMENT
The Fifth Third Community Development Corporation
(CDC) invested $175.5 million in affordable housing,
revitalization, historic preservation and small business
projects throughout the Bank’s footprint.
Fifth Third, its regions and the Fifth Third Foundation
made $19.3 million in grants for community support
in 2016. The Bank’s support focused on the areas of
community development and affordable housing,
small business technical assistance, and other health
and human services and arts support.
Fifth Third welcomed incoming classes to its Project
SEARCH program in the fall of 2016. Project SEARCH
is a school-to-work transition program for people
with physical or developmental disabilities. For 12
years, Fifth Third has operated three programs, two
in Cincinnati, Ohio, and one in Grand Rapids, Michigan.
Over that time, it has trained 236 individuals, 30 of
whom still are employees of the Bank.
In 2016, Fifth Third and its employees donated
$7 million to United Way. The Bank also provided
more than 630,000 meals to the hungry during its
annual drive in May.
SUSTAINABILITY
Fifth Third is committed to continually seeking ways
to reduce its carbon footprint and take care of the
natural environment. In 2016, it invested $4 million
with HP Energy for a major LED lighting retrofit in
some of its facilities. The project, which was com-
pleted in December 2016, was expected to reduce
lighting-related energy use by 50 percent at 136
bank facilities in Ohio, Kentucky, Indiana and North
Carolina. The corresponding energy savings were
6.3 million kilowatt hours per year, enough to provide
578 homes with electricity for one year. The invest-
ment with HP Energy was made after a successful
pilot program in Florida in January 2016.
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
19
community spotlight
Sustainability is very
important to Fifth
Third because it’s good
for the environment
and it’s a good business
practice.
Fifth Third undertook two large-scale projects this
year to decrease its footprint, energy consumption
and costs: converting to LED lighting and trans-
forming office space to be more collaborative.
LED LIGHTING
Fifth Third’s LED lighting installation project, one
of the biggest in the financial industry, will reduce
lighting-related energy consumption by 50 percent
while cutting energy costs by $650,000 a year.
Fifth Third upgraded the lighting at its branches in
Ohio, Kentucky, Indiana and North Carolina from
fluorescent bulbs to LED lighting. It also transformed
the lighting in five of its Cincinnati office buildings.
“This is a great way to save money, create a better
work environment for our employees and become
more sustainable,” said Scott Hassell, Fifth Third’s
director of Environmental Affairs. Fifth Third took
advantage of incentives from its energy provider to
make the conversion and will consider taking the
LED lighting initiative to other locations.
20
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
OFFICE RENOVATIONS
At the same time, Fifth Third began a large office
renovation to move to an open office concept to
decrease its footprint and create a collaborative
and more creative space for its employees.
The cost of open office renovations is approximately
16 percent higher than traditional renovations, but
one benefit is the new spaces include more robust
technology that allows employees to be more mobile,
accommodates 30 to 35 percent more employees,
and decreases underutilized space. It also will result
in lower costs and faster organization changes since
the Bank will move people and not walls.
“This is part of the new Fifth Third,” said Fifth
Third Bank President and CEO Greg Carmichael.
“We want to encourage more innovation and
collaboration. We want to create the best work environ-
ment for our teams to provide the best solutions for our
customers.”
We’re trying to create an environment
that inspires people. We can get more
efficiency out of our real estate this way,
while still contributing to innovation.
Donna Burnell
Managing director, Fifth Third Enterprise Workplace Services
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
21
consumer spotlight
consumer spotlight
One of the Consumer Bank’s main areas of focus is
One of the Consumer Bank’s main areas of focus is
helping the underserved in our communities.
helping the underserved in our communities.
DOWN PAYMENT ASSISTANCE PROGRAM
DOWN PAYMENT ASSISTANCE PROGRAM
As part of its response to the CFPB’s call to serve
the underserved, Fifth Third Bank wanted to help
low-income families purchase homes. One of the
biggest obstacles for first-time homebuyers is the
down payment.
As part of its response to the CFPB’s call to serve
the underserved, Fifth Third Bank wanted to help
low-income families purchase homes. One of the
biggest obstacles for first-time homebuyers is the
down payment.
“I didn’t think I could afford a house,” said Gustavo
Benedetti, a high school Spanish teacher in Cincinnati.
He recently used one of the Bank’s assistance pro-
grams to buy his three-bedroom home. “Fifth Third
made sure my monthly payments are affordable.
They didn’t just get me a mortgage; they made sure
I got in the right home.”
“I didn’t think I could afford a house,” said Gustavo
Benedetti, a high school Spanish teacher in Cincinnati.
He recently used one of the Bank’s assistance pro-
grams to buy his three-bedroom home. “Fifth Third
made sure my monthly payments are affordable.
They didn’t just get me a mortgage; they made sure
I got in the right home.”
“We want to help build strong communities,” said
“We want to help build strong communities,” said
Chad Borton, head of the Consumer Bank for
Chad Borton, head of the Consumer Bank for
Fifth Third Bancorp. “We know that making homes
Fifth Third Bancorp. “We know that making homes
affordable is one of the best ways we can help
affordable is one of the best ways we can help
improve our neighborhoods.”
improve our neighborhoods.”
So Fifth Third created the Down Payment Assistance
So Fifth Third created the Down Payment Assistance
Program, offering 3 percent of the purchase price
Program, offering 3 percent of the purchase price
in down payment assistance, up to $3,600, for
in down payment assistance, up to $3,600, for
low-income borrowers or those purchasing in a
low-income borrowers or those purchasing in a
designated low-income area and financing their loan
designated low-income area and financing their loan
through Fifth Third. Fifth Third’s program also can
through Fifth Third. Fifth Third’s program also can
be combined with state and local programs to help
be combined with state and local programs to help
consumers take advantage of free money for their
consumers take advantage of free money for their
down payments.
down payments.
EXPRESS BANKING
EXPRESS BANKING
When the Consumer Financial Protection Bureau
When the Consumer Financial Protection Bureau
(CFPB) urged the nation’s top banks to do more for
(CFPB) urged the nation’s top banks to do more for
the underserved, Fifth Third Bank already was ahead
the underserved, Fifth Third Bank already was ahead
of the pack. The Bank had recently introduced Express
of the pack. The Bank had recently introduced Express
Banking, a service created for the unbanked and
Banking, a service created for the unbanked and
underbanked—people who typically don’t have bank
underbanked—people who typically don’t have bank
accounts, relying instead on non-bank alternatives
accounts, relying instead on non-bank alternatives
such as check cashing centers.
such as check cashing centers.
Unlike some traditional bank accounts, Express
Unlike some traditional bank accounts, Express
Banking provides a way for people to manage their
Banking provides a way for people to manage their
money with no monthly service charges, balance
money with no monthly service charges, balance
requirements or overdraft fees. Meeting a need in
requirements or overdraft fees. Meeting a need in
the marketplace, Express Banking quickly attracted
the marketplace, Express Banking quickly attracted
customers. More than half of new Express Banking
customers. More than half of new Express Banking
customers also were new to Fifth Third Bank.
customers also were new to Fifth Third Bank.
We want to help our
We want to help our
customers become
customers become
financially empowered.
financially empowered.
Building strong
consumers helps build
strong communities.
Building strong
consumers helps build
strong communities.
Chad Borton
Head of Consumer Bank for Fifth Third
Chad Borton
Head of Consumer Bank for Fifth Third
22
22
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
I didn’t think I could afford
a house. Fifth Third made
sure my monthly payments
are affordable. They didn’t
just get me a mortgage;
they made sure I got in
the right home.
Gustavo Benedetti
High school Spanish
teacher and Fifth Third
Down Payment Assistance
Program customer
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
23
commercial spotlight
After several generations of family ownership,
Flash Foods turned to Fifth Third’s Capital
Markets team when it considered selling its
successful chain of convenience stores.
“The Flash Foods transaction is representative
of the consultative and strategic approach we take
with our clients,” explained Bob Marcus, co-head
of Fifth Third Capital Markets. “Our bankers go
beyond the transaction at hand to help our clients
evaluate all strategic alternatives, determining
the right path based on market conditions and
stakeholder objectives.”
While the Fifth Third Capital Markets team is filled
with veterans of large firms and boutique investment
banks, the offering from Fifth Third brings a new
capability to Bank customers and prospects. The
transaction was not just a strong success for our
client, but has established Fifth Third as a serious
merger-and-acquisition player with middle-market
companies looking to sell or acquire. The Flash Foods
transaction illustrated clearly that Fifth Third could
deliver strong value to our clients with a customized
and client-focused process.
In the words of Jimmy Jones, the outgoing CEO
of Flash Foods, “Fifth Third was our guide and friend
throughout the unfamiliar, complex and emotional
process of selling my family’s life’s work. They under-
stood the things that were uniquely important to my
family and were just as comfortable walking away
from an offer, even a very lucrative one, that didn’t
meet those important criteria.”
We are delivering on our
commitment to bring unique and
differentiated capital markets
capabilities to our middle-market
clients and prospects—and our
customers are rewarding us by
giving us not only their business,
but also their trust.
Bob Marcus
Co-head of Fifth Third Capital Markets
It wasn’t simply valuation the Jones family, who
had owned Flash Foods since 1952, were seeking.
It also was finding the right cultural fit for the
company’s employees and its legacy to thrive
under new ownership.
Fifth Third understood the Jones family’s needs,
and sought the right buyer that would utilize Flash
Food’s geographic dominance to help grow its
expanded business.
Fifth Third found that CST Brands Inc., a Texas-based
convenience store chain, was the right fit. The sale
offered advancement for Flash Foods’ employees
and increased distribution capabilities for CST
Brands. Fifth Third served as the exclusive financial
advisor to Flash Foods on their $425 million sale
to CST Brands.
24
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
Jimmy Jones
CEO of Flash Foods
Fifth Third was our
guide and friend
throughout the
complex, unfamiliar
and emotional
process of selling my
family’s life’s work.
They understood
the things that were
uniquely important
to my family.
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
25
wealth & asset
management spotlight
LUKE AND JEN BUCKINGHAM
LUKE AND JEN BUCKINGHAM
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4
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NET WORTH
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TODAYAYAY
TODAY
INVESTMENTS
INVESTMENTS
TODAY
TODAY
John Smith, CFP, CPA
John Smith, CFP, CPA
john.smith@53.com
john.smith@53.com
Office: (513) 535-5300
Office: (513) 535-5300
Mobile: (513) 535-3535
Mobile: (513) 535-3535
$7,235,600
$7,235,600
$1,899,543
$1,899,543
THIS MONTH
THIS MONTH
+$19,3,300
+$19,300
+1.65%
+1.65%
TODAY’S CHANGE
TODAY’S CHANGE
+$21,477
+$21,477
+4.29%
+4.29%
SINCE SEP.
SINCE SEP.
+$267,492
+$267,492
+9.05%
+9.05%
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All Advisorsrs
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ACCOUNTS
ACCOUNTS
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SPENDINGNG
SPENDING
NET
NET
567
$1,567
$1,5
BUDDDDGETGGG S
BUDGETS
UNDER:
UNDER:
$268
$268
Cash
Cash
$2,253,357
$2,253,357
You’ve spent $2,875 this month.
You’ve spent $2,875 this month.
11 days remaining this month
11 days remaining this month
Credit Cards
Credit Cards
-$4,530
-$4,530
Investments
Investments
$1,893,543
$1,893,543
Life Insurance
Life Insurance
$1,250,000
$1,250,000
Unclassified
Unclassified
Cash/ATM
Cash/ATM
Food
Food
More
More
$0
$0
$2,400
$2,400
SEP 19
SEP 19
Loans
Loans
Property
Property
Disclosureses Fifth Thirhird Private Bank
Disclosures Fifth Third Private Bank
-$487,050
-$487,050
PROTECTION
PROTECTION
MOBILE
MOBILE
MOBILE
$1,450,601
$1,450,601
Variable Universal Life
Variable Universal Life
Pacific Life
Pacific Life
Luke Buckingham
Luke Buckingham
$1,000,000
$1,000,000
Whole Life
Whole Life
Guardian
Guardian
Group Long Term
Group Long Term
Guardian
Guardian
Luke Buckingham
Luke Buckingham
$250,000
$250,000
Jen Buckingham
Jen Buckingham
$70,000 Annually
$70,000 Annually
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Your complete financiala
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picture is now available
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LUKE AND JEN BUCKINGHAM
LUKE AND JEN BUCKINGHAM
LUKE AND JEN BUCKINGHAM
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Cash
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$2,253,357
Credit Cards
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-$4,530
-$4,530
Investments
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$1,893,543
$1,893,543
Life Insurance
Life Insurance
$1,250,000
$1,250,000
L
Loans
$487 050
$487 050
Fifth Third Private Bank launched the Life360
digital platform to help simplify financial
complexity for clients, creating one place for
clients and their advisors to see updated assets
and liabilities, accounts and net worth daily.
26
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
Too often, advisors—from inside and outside
of the Bank—don’t see our clients’ full financial
picture. They all need to work together to reach
the financial goals that are most important to
clients, but each may hold only one piece of
the financial picture. So Fifth Third created the
Life360 digital program.
The Life360 platform is based on a 360-degree
view of each client. This includes a picture of the
client’s financial past, present and future, along
with personal, financial and professional goals.
The program allows clients to access all accounts
on one screen, combining statements from all
providers, updates on investments and the ability
to track progress against plans. The tool allows
customers to share access to their Life360 vault
with multiple financial advisors such as financial
planners, accountants and lawyers to ensure
they’re getting informed, collaborative guidance
on their financial goals. Family members and
beneficiaries can be given permission to ensure
important information is accessible in the event
of a health emergency or death.
In the first few months, hundreds of clients signed
on to the new digital experience, representing
some $7 billion of client assets, and clients cite
Life360 as a deciding factor when choosing the
Bank. One popular aspect of Life360 is a portal is
called “The Vault,” akin to a virtual safety deposit
box. Clients put information there and share it with
family and their advisory teams. This can include
wills and photos of items to pass down to their
children or grandchildren.
Life360 allows us to
help clients meet their
needs, collaborating with
them to identify their
dreams and goals—such
as saving for college and
retirement while factoring
in projected investment
returns—and working
together to build a plan
to reach and exceed
their goals.
Phil McHugh
Head of Wealth & Asset Management
FIFTH THIRD BANCORP | 2016 ANNUAL REPORT
27
2016 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
Statements of Income Analysis
Business Segment Review
Fourth Quarter Review
Balance Sheet Analysis
Risk Management - Overview
Credit Risk Management
Market Risk Management
Liquidity Risk Management
Operational Risk Management
Compliance Risk Management
Capital Management
Off-Balance Sheet Arrangements
Contractual Obligations and Other Commitments
Management’s Assessment as to the Effectiveness of Internal Control over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Summary of Significant Accounting and Reporting Policies
Supplemental Cash Flow Information
Restrictions on Cash and Dividends
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
Annual Report on Form 10-K
Consolidated Ten Year Comparison
Directors and Officers
Corporate Information
Income Taxes
100 Long-Term Debt
111 Commitments, Contingent Liabilities and Guarantees
111 Legal and Regulatory Proceedings
113 Related Party Transactions
115
117 Retirement and Benefit Plans
125 Accumulated Other Comprehensive Income
126 Common, Preferred and Treasury Stock
126
126 Other Noninterest Income and Other Noninterest Expense
127 Earnings Per Share
130 Fair Value Measurements
132 Regulatory Capital Requirements and Capital Ratios
137 Parent Company Financial Statements
138 Business Segments
Stock-Based Compensation
183
210
211
30
31
32
36
39
39
42
50
58
60
66
67
81
85
86
87
87
90
91
92
93
95
96
97
98
99
139
142
146
148
151
153
157
159
160
164
165
166
177
178
180
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,” “potential,” “estimate,” “forecast,” “projected,” “intends to,” or
may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,”
“might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to the risk factors set forth in the Risk Factors
section in Item 1A in this Annual Report on Form 10-K. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we may
make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us. There are a number of important factors that could cause
future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) general economic or real estate
market conditions, either nationally or in the states in which Fifth Third, one or more acquired entities and/or the combined company do business, weaken or 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) changes in customer preferences or
information technology systems; (12) effects of critical accounting policies and judgments; (13) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (FASB)
or other regulatory agencies; (14) 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; (15) ability to maintain favorable ratings
from rating agencies; (16) failure of models or risk management systems or controls; (17) fluctuation of Fifth Third’s stock price; (18) ability to attract and retain key personnel; (19) ability to receive dividends from
its subsidiaries; (20) potentially dilutive effect of future acquisitions on current shareholders’ ownership of Fifth Third; (21) declines in the value of Fifth Third’s goodwill or other intangible assets; (22) effects of
accounting or financial results of one or more acquired entities; (23) difficulties from Fifth Third’s investment in, relationship with, and nature of the operations of Vantiv Holding, LLC; (24) loss of income from
any sale or potential sale of businesses (25) difficulties in separating the operations of any branches or other assets divested; (26) losses or adverse impacts on the carrying values of branches and long-lived assets in
connection with their sales or anticipated sales; (27) inability to achieve expected benefits from branch consolidations and planned sales within desired timeframes, if at all; (28) ability to secure confidential
information and deliver products and services through the use of computer systems and telecommunications networks; and (29) the impact of reputational risk created by these developments on such matters as
business generation and retention, funding and liquidity.
Fifth Third Bancorp provides the following list of 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
AOCI: Accumulated Other Comprehensive Income
ARM: Adjustable Rate Mortgage
ASF: Available Stable Funding
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
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
CRA: Community Reinvestment Act
DCF: Discounted Cash Flow
DFA: Dodd-Frank Wall Street Reform and Consumer Protection Act
DIF: Deposit Insurance Fund
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)
FINRA: Financial Industry Regulatory Authority
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
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: Metropolitan 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
OREO: Other Real Estate Owned
OTTI: Other-Than-Temporary Impairment
PCA: Prompt Corrective Action
PMI: Private Mortgage Insurance
PSA: Performance Share Award
RSA: Restricted Stock Award
RSF: Required Stable Funding
RSU: Restricted Stock Unit
SAR: Stock Appreciation Right
SBA: Small Business Administration
SEC: United States Securities and Exchange Commission
TBA: To Be Announced
TDR: Troubled Debt Restructuring
TILA: Truth in Lending Act
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
30 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. The Bancorp’s banking subsidiary is referred to as the Bank.
TABLE 1: SELECTED FINANCIAL DATA
For the years ended December 31 ($ in millions, except for per share data)
Income Statement Data
Net interest income (U.S. GAAP)
Net interest income (FTE)(a)(b)
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)(b)
Efficiency(a)(b)
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 and Liquidity Ratios
CET1 capital
Tier I risk-based capital
Total risk-based capital
Tier I leverage
CET1 capital (fully phased-in)(b)
$
$
$
$
2016
2015
2014
2013
2012
3,615
3,640
2,696
6,336
343
3,903
1,564
1,489
1.95
1.93
0.53
19.82
26.97
1.10%
9.8
11.6
27.2
11.67
8.87
2.88
61.6
362
0.39%
1.36
1.54
0.80
3,533
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(j)
11.3
13.5
25.6
11.33(j)
8.59
2.88
57.6
446
0.48
1.37
1.52
0.70
3,579
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 (j)
10.0
12.2
30.3
11.59 (j)
8.43
3.10
61.1
575
0.64
1.47
1.62
0.82
3,561
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(j)
13.1
16.0
22.9
11.56(j)
8.63
3.32
58.2
501
0.58
1.79
1.97
1.10
3,595
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(j)
11.6
14.3
21.3
11.65(j)
8.83
3.55
61.7
704
0.85
2.16
2.37
1.49
94,320
31,965
142,266
95,371
99,381
21,813
16,597
93,339
30,245
140,078(j)
95,244
99,295
20,210(j)
15,865
Basel III Transitional(g)
10.39%
11.50
15.02
9.90
10.29
9.82(k)
10.93(k)
14.13(k)
9.54(k)
9.72(k)
91,127
24,866
131,909 (j)
89,715
93,477
19,154 (j)
15,290
N/A
10.83
14.33
9.66
N/A
89,093
18,861
123,704(j)
82,915
86,675
17,769(j)
14,302
Basel I(h)(k)
N/A
10.43
14.17
9.73
N/A
84,822
16,814
117,562(j)
78,116
82,422
16,926(j)
13,701
N/A
10.69
14.47
10.15
N/A
Modified LCR
(a) Amounts presented on an FTE basis. The FTE adjustment for the years ended December 31, 2016, 2015, 2014, 2013 and 2012 was $25, $21, $21, $20 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.
N/A
N/A
N/A
N/A
128
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.
(j) Upon adoption of ASU 2015-03 on January 1, 2016, the Consolidated Balance Sheets for the years ended 2015, 2014, 2013 and 2012 were adjusted to reflect the reclassification of $33, $34,
$28 and $52, respectively, of average debt issuance costs from average other assets to average long-term debt. For further information, refer to Note 1 of the Notes to Consolidated Financial
Statements.
(k) Ratios not restated for the adoption of the amended guidance of ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs.” Refer to Note 1 of the Notes to Consolidated Financial
Statements for further information.
31 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This overview of MD&A highlights selected information in the
financial results of the Bancorp and may not contain all of the
information that is important to you. For a more complete
understanding of
trends, events, commitments, uncertainties,
liquidity, capital resources and critical accounting policies and
estimates, you should carefully read this entire document. Each of
these items could have an impact on the 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 FTE basis for presenting net interest income is a
non-GAAP measure. For further information, refer to the Non-
GAAP Financial Measures section of MD&A.
The Bancorp’s revenues are dependent on both net interest
income and noninterest income. For the year ended December 31,
2016, net interest income on an FTE basis and noninterest income
provided 57% and 43% 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.
incurred on
Net interest income is the difference between interest income
earned on assets such as loans, leases and securities, and interest
expense
liabilities such as deposits, short-term
borrowings and long-term debt. Net interest income is affected by
the general level of interest rates, the relative level of short-term and
long-term interest rates, changes in interest rates and changes in the
amount and composition of interest-earning assets and interest-
bearing liabilities. Generally, the rates of interest the Bancorp earns
on its assets and pays on its liabilities are established for a period of
time. The change in market interest rates over time exposes the
Bancorp to interest rate risk through potential adverse changes to
net interest income and financial position. The Bancorp manages
this risk by continually analyzing and adjusting the composition of
its assets and liabilities based on their payment streams and interest
rates, the timing of their maturities and their sensitivity to changes
in market interest rates. Additionally, in the ordinary course of
business, the Bancorp enters into certain derivative transactions as
part of its overall strategy to manage its interest rate and prepayment
risks. The Bancorp is also exposed to the risk of losses on its loan
and lease portfolio as a result of changing expected cash flows
caused by borrower credit events, such as loan defaults and
inadequate collateral due to a weakened economy within the
Bancorp’s footprint.
Noninterest income is derived from service charges on
deposits, corporate banking revenue, wealth and asset management
revenue, card and processing revenue, mortgage banking net
income.
revenue, securities gains, net and other noninterest
32 Fifth Third Bancorp
Noninterest expense includes personnel costs, net occupancy
expense, technology and communication costs, card and processing
expense, equipment expense and other noninterest expense.
Vantiv, Inc. and Vantiv Holding, LLC Transactions
On July 27, 2016, 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 consideration of a cash payment in
the amount of $116 million from Vantiv, Inc. Under the agreement,
the Bancorp terminated and settled certain TRA cash flows it
expected to receive in the years 2019 to 2035, totaling an estimated
$331 million. The Bancorp recognized a gain of $116 million in
other noninterest income in the Consolidated Statements of Income
from this settlement in 2016.
Additionally, the agreement provides that Vantiv, Inc. may be
obligated to pay up to a total of approximately $171 million to the
Bancorp to terminate and settle certain remaining TRA cash flows,
totaling an estimated $394 million, upon the exercise of certain call
options by Vantiv, Inc. or certain put options by the Bancorp. If the
associated call options or put options are exercised, 10% of the
obligations would be settled with respect to each quarter in 2017
and 15% of the obligations would be settled with respect to each
quarter in 2018. The Bancorp recognized a gain of $164 million in
other noninterest income in the Consolidated Statements of Income
in 2016 associated with these options. This agreement did not
impact the TRA payments recognized in the fourth quarter of 2016
and is not expected to impact the TRA payment expected in the
fourth quarter of 2017.
During the fourth quarter of 2016, 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 5.7 million Class C Units, which were
then exchanged for approximately 5.7 million shares of Vantiv, Inc.
Class A Common Stock of which 4.8 million shares were sold in a
secondary offering and 0.9 million shares were repurchased by
Vantiv, Inc. The Bancorp recognized a gain of $9 million in other
noninterest income in the Consolidated Statements of Income in
2016 on the exercise of the remaining warrant in Vantiv Holding,
LLC.
Branch Consolidations and Sales Activity
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 to sell
certain parcels of undeveloped land that had been acquired by the
Bancorp for future branch expansion (the “Branch Consolidation
and Sales Plan”). In addition, the Bancorp announced on September
13, 2016 that it had identified an additional 44 branch locations and
5 parcels of undeveloped land that it planned to consolidate or sell.
On January 29, 2016, the Bancorp closed the previously
announced sale in the St. Louis MSA to Great Southern Bank and
recorded a gain on the sale of $8 million in other noninterest
income. Additionally, on April 22, 2016, the Bancorp closed the
previously announced sale in the Pittsburgh MSA to First National
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Bank of Pennsylvania and recorded a gain on the sale of $11 million
in other noninterest income. Both transactions were part of the
Branch Consolidation and Sales Plan.
As of December 31, 2016, the Bancorp had 64 branch
locations and 35 parcels of undeveloped land that had been acquired
for future branch expansion that it intended to consolidate or sell.
These branch locations and parcels of undeveloped land, which
include unsold properties from the Branch Consolidation and Sales
Plan as well as properties included in the September 13, 2016
announcement, represent $39 million, $16 million and $1 million of
land and improvements, buildings and equipment, respectively,
included in bank premises and equipment in the Consolidated
Balance Sheets as of December 31, 2016, of which $29 million, $9
million and $1 million, respectively, were classified as held for sale.
The Bancorp expects to receive approximately $72 million in annual
savings from operating expenses upon completion of the Branch
Consolidation and Sales Plan and the consolidation and/or sale of
properties included in the September 13, 2016 announcement.
Approximately $60 million of the $72 million in total estimated
annual savings are attributable to branches that were closed prior to
December 31, 2016. For further information, refer to Note 7 of the
Notes to Consolidated Financial Statements.
On September 29, 2016, the Bancorp closed on the sale of an
office complex. The sale also included all of the Bancorp’s rights,
title and interest as a landlord under existing leases in the complex.
Under the terms of the transaction, the Bancorp received proceeds
of approximately $31 million and entered into a lease agreement
whereby the Bancorp leased-back approximately 25% of the office
complex. In conjunction with the transaction, which qualified as a
sale-leaseback under U.S. GAAP, the Bancorp retired assets with a
net book value of approximately $10 million, recognized a deferred
gain of $10 million, which is being amortized as a reduction of rent
expense over the 15 year lease term, and recorded a gain on the
transaction of $11 million in other noninterest income.
NorthStar Strategy
In the third quarter of 2016, the Bancorp launched the NorthStar
Strategy, a three-year plan designed to achieve the Bancorp’s vision
to be the One Bank people most value and trust and deliver strong,
consistent returns through longer term economic cycles.
The strategy is designed to impact every line of business, every
employee and, most importantly, every customer. The Bancorp is
focused on:
• Building a differentiated brand and corporate reputation
by improving the customer experience, increasing brand
equity and delivering on the Bancorp’s $30 billion
community commitment.
• Delivering a better, more differentiated value proposition
by investing in our sales and service channels and
expanding on our products, solutions and expertise.
• Generating returns on average tangible common equity
(non-GAAP) of 12% to 14%, a return on average assets of
1.1% to 1.3% and an efficiency ratio below 60% by the
end of 2019.
• Achieving risk and operational excellence.
The Bancorp has implemented several initiatives to assist in
achieving these goals, including the following: our partnership with
GreenSky, upgrades to our mortgage and teller systems, expansion
of credit card and treasury management products, focused growth in
asset-based lending and our commercial verticals and acceleration of
our automation and robotics initiatives.
Accelerated Share Repurchase Transactions
During the years ended December 31, 2016 and 2015, the Bancorp
entered into or settled a number of accelerated share repurchase
transactions. As part of these transactions, the Bancorp entered into
forward contracts in which the final number of shares delivered at
settlement was based generally on a discount to the average daily
volume weighted-average price of the Bancorp’s common stock
during
the repurchase agreements. For more
information on the accelerated share repurchase program, refer to
Note 23 of the Notes to Consolidated Financial Statements. For a
summary of the Bancorp’s accelerated share repurchase transactions
that were entered into or settled during the years ended December
31, 2016 and 2015, refer to Table 2.
term of
the
TABLE 2: SUMMARY OF ACCELERATED SHARE REPURCHASE TRANSACTIONS
Repurchase Date
October 23, 2014
January 27, 2015
April 30, 2015
August 3, 2015
September 9, 2015
December 14, 2015
March 4, 2016
August 5, 2016
December 20, 2016
Amount
($ in millions)
Shares Repurchased on
Repurchase Date
Shares Received from Forward
Contract Settlement
Total Shares
Repurchased
180
180
155
150
150
215
240
240
155
8,337,875
8,542,713
6,704,835
6,039,792
6,538,462
9,248,482
12,623,762
10,979,548
4,843,750
794,245
1,103,744
842,655
1,346,314
1,446,613
1,782,477
1,868,379
1,099,205
1,044,362
9,132,120
9,646,457
7,547,490
7,386,106
7,985,075
11,030,959
14,492,141
12,078,753
5,888,112
Settlement Date
January 8, 2015
April 28, 2015
July 31, 2015
September 3, 2015
October 23, 2015
January 14, 2016
April 11, 2016
November 7, 2016
February 6, 2017
Open Market Share Repurchase Transactions
Between June 17, 2016 and June 20, 2016, the Bancorp repurchased
1,436,100 shares, or approximately $26 million, of its outstanding
common stock through open market repurchase transactions.
Senior and Subordinated Notes Offerings
On March 15, 2016, the Bank issued and sold $1.5 billion in
aggregate principal amount of unsecured bank notes. The bank
notes consisted of $750 million of 2.30% senior fixed-rate notes due
on March 15, 2019; and $750 million of 3.85% subordinated fixed-
rate notes due on March 15, 2026. 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 June 14, 2016, the Bank issued and sold $1.3 billion of
2.25% unsecured senior fixed-rate notes due on June 14, 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 September 27, 2016, the Bank issued and sold $1.0 billion
in aggregate principal amount of unsecured senior bank notes due
33 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
on September 27, 2019. The bank notes consisted of $750 million
of 1.625% senior fixed-rate notes and $250 million of senior
floating-rate notes at three-month LIBOR plus 59 bps. The
Bancorp entered into interest rate swaps to convert the fixed-rate
notes to a floating-rate, which resulted in an effective interest rate of
three-month LIBOR plus 53 bps. These bank notes will be
redeemable by the Bank, in whole or in part, on or after the date
that is 30 days prior to the maturity date at a redemption price equal
to 100% of the principal amount plus accrued and unpaid interest
up to, but excluding, the redemption date.
Legislative and Regulatory Developments
The FRB conducted a regularly scheduled examination covering
2011 through 2013 to determine the Bank’s compliance with the
CRA. This CRA examination resulted in a rating of “Needs to
Improve.” The Bank believes that the “Needs to Improve” rating
reflects
legacy issues that have been remediated during the
intervening three years. While the Bank’s CRA rating is “Needs to
Improve” the Bancorp and the Bank face limitations and conditions
on certain activities, including the commencement of new activities
and merger with or acquisitions of other financial institutions.
During the fourth quarter of 2016, the FRB began a CRA
examination of the Bank. For further information, refer to the
Regulation and Supervision subsection of Part I, Item 1 of the
Annual Report on Form 10-K.
TABLE 3: CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ 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
2016
4,218
578
3,640
343
3,297
2,696
3,903
2,090
25
505
1,560
(4)
1,564
75
1,489
1.95
1.93
0.53
$
$
$
$
$
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
4,051
451
3,600
315
3,285
2,473
3,709
2,049
21
545
1,483
2
1,481
67
1,414
1.68
1.66
0.51
2013
3,993
412
3,581
229
3,352
3,227
3,961
2,618
20
772
1,826
(10)
1,836
37
1,799
2.05
2.02
0.47
2012
4,125
512
3,613
303
3,310
2,999
4,081
2,228
18
636
1,574
(2)
1,576
35
1,541
1.69
1.66
0.36
Earnings Summary
The Bancorp’s net income available to common shareholders for
the year ended December 31, 2016 was $1.5 billion, or $1.93 per
diluted share, which was net of $75 million in preferred stock
income available to common
dividends. The Bancorp’s net
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. Pre-provision net revenue was $2.4 billion and $2.8
billion for the years ended December 31, 2016 and 2015,
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 (non-GAAP) was $3.6
billion for both the years ended December 31, 2016 and 2015. Net
interest income was positively impacted by increases in average
taxable securities of $3.1 billion and average loans and leases of
$981 million for the year ended December 31, 2016 compared to
the year ended December 31, 2015. Additionally, net interest
income was positively impacted by the decision of the Federal Open
Market Committee to raise the target range of the federal funds rate
25 bps to 50 bps in 2015 and 25 bps to 75 bps in 2016. These
positive impacts were partially offset by an increase in average long-
term debt of $750 million coupled with a decrease in the net interest
rate spread to 2.66% during the year ended December 31, 2016
from 2.69% during the year ended December 31, 2015. Net interest
margin on an FTE basis (non-GAAP) was 2.88% for the both years
ended December 31, 2016 and 2015, respectively.
Noninterest income decreased $307 million from the year
ended December 31, 2015 primarily due to decreases in other
34 Fifth Third Bancorp
increase
noninterest income and mortgage banking net revenue partially
offset by an
in corporate banking revenue. Other
noninterest income decreased $291 million from the year ended
December 31, 2015. The decrease included the impact of a gain of
$331 million on the sale of Vantiv, Inc. shares in the fourth quarter
of 2015. The Bancorp recognized positive valuation adjustments on
the stock warrant associated with Vantiv Holding, LLC of $64
million and $236 million for the years ended December 31, 2016
and 2015, respectively. In addition to valuation adjustments, 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 compared with a gain of $9
million on the sale of the remaining warrant in Vantiv Holding, LLC
during 2016. These decreases were partially offset by an increase in
income from the TRAs associated with Vantiv, Inc. of $233 million
during the year ended December 31, 2016 compared to the same
period in the prior year and a decrease in net losses on disposition
and impairment of bank premises and equipment of $88 million
during the year ended December 31, 2016 compared with the same
period in the prior year. Mortgage banking net revenue decreased
$63 million from the year ended December 31, 2015 primarily due
to a decrease in net mortgage servicing revenue, partially offset by
an increase in origination fees and gains on loan sales. Corporate
banking revenue increased $48 million for the year ended December
31, 2016 compared to the year ended December 31, 2015 primarily
driven by increases in syndication fees and lease remarketing fees,
partially offset by decreases in letter of credit fees and foreign
exchange fees.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest expense increased $128 million for the year ended
December 31, 2016 compared to the year ended December 31, 2015
primarily due to increases in personnel costs, technology and
communications expense and other noninterest expense partially
offset by decreases in net occupancy expense and card and
processing expense. Personnel costs increased $103 million for the
year ended December 31, 2016 compared to the year ended
December 31, 2015 driven by an increase in base compensation,
variable compensation, and higher retirement and severance costs
related to the Bancorp’s voluntary early retirement program.
Technology and communications expense increased $10 million for
the year ended December 31, 2016 compared to the year ended
December 31, 2015 driven primarily by increased investment in
information technology associated with regulatory and compliance
initiatives, system maintenance and other growth initiatives. Other
noninterest expense increased $64 million for the year ended
December 31, 2016 compared to the year ended December 31, 2015
primarily due to increases in FDIC insurance and other taxes,
impairment on affordable housing investments, the provision for
the reserve for unfunded commitments, losses and adjustments and
operating lease expense. These increases were partially offset by
decreases in travel expense, professional service fees and loan and
lease expense. Card and processing expense decreased $21 million
for the year ended December 31, 2016 compared to the year ended
December 31, 2015 primarily due to the impact of renegotiated
service contracts.
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 $343 million and $396
million for the years ended December 31, 2016 and 2015,
respectively. Net losses charged-off as a percent of average portfolio
loans and leases decreased to 0.39% during the year ended
December 31, 2016 compared to 0.48% during the year ended
December 31, 2015. At December 31, 2016, nonperforming
portfolio assets as a percent of portfolio loans and leases and
OREO increased to 0.80% compared to 0.70% at December 31,
2015. For further discussion on credit quality, refer to the Credit
Risk Management subsection of the Risk Management section of
MD&A.
Capital Summary
The Bancorp’s capital ratios exceed the “well-capitalized” guidelines
as defined by the PCA requirements of the U.S. banking agencies.
As of December 31, 2016, as calculated under the Basel III
transition provisions, the CET1 capital ratio was 10.39%, the Tier I
risk-based capital ratio was 11.50%, the Total risk-based capital ratio
was 15.02% and the Tier I leverage ratio was 9.90%.
35 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NON-GAAP FINANCIAL MEASURES
The following are non-GAAP measures which are important to the
reader of the Consolidated Financial Statements but should be
supplemental to primary U.S. GAAP measures.
The FTE basis adjusts for the tax-favored status of income
from certain loans and securities held by the Bancorp that are not
taxable for federal income tax purposes. The Bancorp believes this
presentation to be the preferred industry measurement of net
interest income as it provides a relevant comparison between
taxable and non-taxable amounts.
The following table reconciles the non-GAAP financial measures of net interest income on an FTE basis, net interest margin and the efficiency
ratio to U.S. GAAP:
TABLE 4: NON-GAAP FINANCIAL MEASURES - NET INTEREST INCOME ON AN FTE BASIS, NET INTEREST MARGIN AND
EFFICIENCY RATIO
For the years ended December 31 ($ in millions)
Net interest income (U.S. GAAP)
Add: FTE adjustment
Net interest income on an FTE basis (1)
2016
3,615
25
3,640
3,533
21
3,554
2015
$
$
Noninterest income (2)
Noninterest expense (3)
Average interest-earning assets (4)
Ratios:
Net interest margin (1) / (4)
Efficiency ratio (3) / (1) + (2)
$
2,696
3,903
126,285
3,003
3,775
123,584
2.88 %
61.6
2.88
57.6
The following table reconciles the non-GAAP financial measure of income before income taxes on an FTE basis to U.S. GAAP:
TABLE 5: NON-GAAP FINANCIAL MEASURE - INCOME BEFORE INCOME TAXES ON AN FTE BASIS
For the years ended December 31 ($ in millions)
Income before income taxes (U.S. GAAP)
Add: FTE adjustment
Income before income taxes on an FTE basis
$
$
2016
2,065
25
2,090
2015
2,365
21
2,386
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:
TABLE 6: NON-GAAP FINANCIAL MEASURE - PRE-PROVISION NET REVENUE
For the years ended December 31 ($ in millions)
Net interest income (U.S. GAAP)
Add: Noninterest income
Less: Noninterest expense
Pre-provision net revenue
2016
2015
$
$
3,615
2,696
(3,903)
2,408
3,533
3,003
(3,775)
2,761
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. This measure is useful
for evaluating the performance of a business as it calculates the
return available to common shareholders without the impact of
intangible assets and their related amortization.
36 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table reconciles the non-GAAP financial measure of return on average tangible common equity to U.S. GAAP:
TABLE 7: NON-GAAP FINANCIAL MEASURE - RETURN ON AVERAGE TANGIBLE COMMON EQUITY
For the years ended December 31 ($ in millions)
Net income available to common shareholders (U.S. GAAP)
Add: Intangible amortization, net of tax
Tangible net income available to common shareholders (1)
$
$
Average Bancorp 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)
$
$
2016
2015
1,489
1
1,490
16,597
(1,331)
(2,416)
(10)
12,840
1,637
2
1,639
15,865
(1,331)
(2,416)
(14)
12,104
11.6 %
13.5
The Bancorp considers various measures when evaluating capital
utilization and adequacy, including the tangible equity ratio, tangible
common equity ratio and tangible book value per share, in addition
to capital ratios defined by the U.S. banking agencies. These
calculations are intended to complement the capital ratios defined
by the U.S. banking agencies 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 which defined various regulatory
capital ratios including the CET1 ratio. 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. The Bancorp
considers the fully phased-in CET1 ratio a non-GAAP measure
since it is not the CET1 ratio in effect for the periods presented.
Since analysts and the U.S. banking agencies 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 readers to
consider its Consolidated Financial Statements in their entirety and
not to rely on any single financial measure.
37 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:
TABLE 8: NON-GAAP FINANCIAL MEASURES - CAPITAL RATIOS
As of December 31 ($ 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 (1)
Less: AOCI
Tangible common equity, excluding unrealized gains / losses (2)
Add: Preferred stock
Tangible equity (3)
Total Assets (U.S. GAAP)
Less: Goodwill
Intangible assets and other servicing rights
AOCI, before tax
Tangible assets, excluding unrealized gains / losses (4)
Common shares outstanding (shares in millions) (5)
Ratios:
Tangible equity as a percentage of tangible assets (3) / (4)
Tangible common equity as a percentage of tangible assets (2) / (4)
Tangible book value per share (1) / (5)
2016
2015
$
$
$
$
16,205
(1,331)
(2,416)
(10)
12,448
(59)
12,389
1,331
13,720
142,177
(2,416)
(10)
(91)
139,660
15,839
(1,331)
(2,416)
(13)
12,079
(197)
11,882
1,331
13,213
(e)
141,048
(2,416)
(13)
(303)
138,316
750
785
9.82 %
8.87
$
16.60
9.55
8.59
15.39
Basel III Final Rule - Transition to Fully Phased-In
CET1 capital (transitional)
Less: Adjustments to CET1 capital from transitional to fully phased-in(a)
CET1 capital (fully phased-in) (6)
Risk-weighted assets (transitional)(b)
Add: Adjustments to risk-weighted assets from transitional to fully phased-in(c)
Risk-weighted assets (fully phased-in) (7)
CET1 capital ratio under Basel III Final Rule (fully phased-in) (6) / (7)
(a) Primarily relates to disallowed intangible assets (other than goodwill and MSRs, net of associated deferred tax liabilities).
(b) Under the banking agencies’ risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar
amount in each risk category is multiplied by the associated risk-weight of the category. The resulting weighted values are added together, along with the measure for market risk, resulting in the
Bancorp’s total risk-weighted assets.
Primarily relates to higher risk weighting for MSRs.
(c)
(d) Balances not restated for the adoption of the amended guidance of ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs.” Refer to Note 1 of the Notes to Consolidated Financial
11,917
(8)
11,909
121,290
1,178
122,468
9.72
12,426
(4)
12,422
119,632
1,115
120,747
10.29 %
(d)
(d)
(d)
$
$
Statements for further information.
(e) Upon adoption of ASU 2015-03 on January 1, 2016, the December 31, 2015 Consolidated Balance Sheet was adjusted to reflect the reclassification of $34 of debt issuance costs from other assets
to long-term debt. For further information, refer to Note 1 of the Notes to Consolidated Financial Statements.
38 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, 2016.
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
The Bancorp’s methodology for determining the ALLL
requires significant management judgement and 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 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 2016 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 migration analyses for
several portfolio stratifications, which track 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. The prescriptive loss rate factors include
adjustments for delinquency trends, LTV trends and refreshed
FICO score trends.
The Bancorp also considers qualitative factors in determining
the ALLL. These include adjustments for changes in policies or
procedures in underwriting, monitoring or collections, economic
conditions, portfolio mix, lending and risk management personnel,
results of internal audit and quality control reviews, collateral values
and geographic concentrations. The Bancorp considers home price
index trends when determining the collateral value qualitative factor.
The Bancorp’s primary market areas for lending are the
Midwestern and Southeastern regions of the U.S. 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
39 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ALLL, as previously discussed. Net adjustments to the reserve for
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 statutes, regulations, judicial precedent 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 due
to 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 and laws. 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.
in peer surveys that provide additional confirmation of the
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
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
previous
for
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.
TABLE 9: 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
40 Fifth Third Bancorp
December 31, 2016
Balance
32,872
Level 3
23 %
687
1 %
December 31, 2015
Balance
Level 3
156
-
96
-
31,364
22
967
1
444
-
64
-
$
$
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. 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
Statements for further
the Bancorp’s
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.
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 common stock, the key financial performance
metrics of the Bancorp’s 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 goodwill 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. 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. 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.
41 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.
Tables 10 and 11 present the components of net interest
income, net interest margin and net interest rate spread for the years
ended December 31, 2016, 2015 and 2014, as well as the relative
impact of changes in the balance sheet and changes in interest rates
on net interest income. 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.
Net interest income on an FTE basis (non-GAAP) was $3.6
billion for both the years ended December 31, 2016 and 2015. Net
interest income was positively impacted by increases in average
taxable securities of $3.1 billion and average loans and leases of
$981 million for the year ended December 31, 2016 compared to
the year ended December 31, 2015. Additionally, net interest
income was positively impacted by the decision of the Federal Open
Market Committee to raise the target range of the federal funds rate
25 bps to 50 bps in December 2015 and 25 bps to 75 bps in
December 2016. These positive impacts were partially offset by an
increase in average long-term debt of $750 million coupled with a
decrease in the net interest rate spread to 2.66% during the year
ended December 31, 2016 from 2.69% during the year ended
December 31, 2015. The decrease in the net interest rate spread was
driven by a 9 bps increase on rates paid on average interest-bearing
liabilities partially offset by a 6 bps increase in yields on average
interest-earning assets.
Net interest margin on an FTE basis (non-GAAP) was 2.88%
for both the years ended December 31, 2016 and 2015. Net interest
margin was positively impacted by an increase in average free
funding balances partially offset by the aforementioned decrease in
net interest rate spread coupled with an increase of $2.7 billion in
average interest-earning assets. The increase in average free funding
balances was driven by increases in average demand deposits and
average shareholders’ equity of $698 million and $727 million,
respectively, for the year ended December 31, 2016 compared to the
year ended December 31, 2015.
Interest income on an FTE basis (non-GAAP) from loans and
leases increased $86 million compared to the year ended December
31, 2015 due to an increase in average loans and leases coupled with
an increase in yields on average loans and leases. Average loans and
leases increased $981 million during the year ended December 31,
2016 compared to the year ended December 31, 2015 and was
primarily driven by increases in average residential mortgage loans,
average commercial construction loans and average commercial and
industrial loans partially offset by decreases in average automobile
loans and average home equity. Yields on average loans and leases
increased 5 bps during the year ended December 31, 2016
compared to the year ended December 31, 2015 primarily as a result
of increases in yields on average commercial construction loans,
average commercial and industrial loans and average home equity
loans partially offset by a decrease in yields on average credit cards
which included the impact of a $16 million reduction in interest
income related to refunds to be offered to certain bankcard
customers. 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 $83 million
compared to the year ended December 31, 2015. The increase was
primarily the result of the previously mentioned increase in average
taxable securities, partially offset by a decrease of $14 million in
dividends on FRB stock, due to the amended provisions of the
Federal Reserve Act governing dividend payments to FRB
stockholders.
Interest expense on core deposits increased $15 million for the
year ended December 31, 2016 compared to the year ended
December 31, 2015. This increase was primarily due to increases in
the cost of average interest-bearing core deposits to 26 bps for the
year ended December 31, 2016 compared to 24 bps for the year
ended December 31, 2015. The increase in the cost of average
interest-bearing core deposits was primarily due to an increase in the
cost of average interest checking and 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 $68
million for the year ended December 31, 2016 compared to the year
ended December 31, 2015 primarily due to an increase of 26 bps in
the rates paid on average long-term debt coupled with the
aforementioned increase in 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.
Average wholesale funding represented 26% and 24% of average
interest-bearing liabilities during the years ended December 31, 2016
and 2015, respectively. 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.
42 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 10: CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME ON AN FTE BASIS
For the years ended December 31
2014
2015
2016
Average Revenue/
Balance
Cost
Average
Yield/
Rate
Average
Balance
Revenue/
Average
Yield/
Rate
Average
Balance
Revenue/
Average
Yield/
Rate
$
$
$
$
$
$
$
Cost
Cost
950
3
8
4,218
867
3
8
4,049
3.16
4.51
0.44
3.34%
30,019
80
1,866
126,285
2,303
14,963
(1,285)
142,266
1,334
227
86
106
1,753
509
312
315
237
45
1,418
3,171
1,346
260
51
108
1,765
518
336
334
227
138
1,553
3,318
1,413
229
125
105
1,872
535
302
290
214
44
1,385
3,257
41,178
7,745
1,492
3,585
54,000
13,344
9,059
12,068
2,271
385
37,127
91,127
43,184
6,899
3,648
3,916
57,647
15,101
7,998
10,708
2,205
661
36,673
94,320
42,594
7,121
2,717
3,796
56,228
13,798
8,592
11,847
2,303
571
37,111
93,339
3.27%
3.36
3.44
3.01
3.27
3.88
3.71
2.77
9.98
35.99
4.18
3.64%
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% $
3.32
3.42
2.69
3.25
3.54
3.78
2.71
9.69
6.56
3.78
3.45%
($ 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)(b)
Net interest margin (FTE)(b)
Net interest rate spread (FTE)(b)
Interest-bearing liabilities to interest-earning
(a) The FTE adjustments included in the above table were $25 for the year ended December 31, 2016 and $21 for both the years ended December 31, 2015 and 2014.
assets
(b) Net interest income (FTE), net interest margin (FTE) and net interest rate spread (FTE) are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section
25,382
16,080
14,670
1,828
3,762
61,722
3,929
-
458
1,873
12,894 (c)
80,876 (c)
31,755
3,950
116,581 (c)
15,328
131,909 (c)
26,160
14,951
18,152
817
4,051
64,131
2,869
57
920
1,721
14,644(c)
84,342(c)
35,164
4,672
124,178(c)
15,900
140,078(c)
25,143
14,346
19,523
497
4,010
63,519
2,735
333
506
2,845
15,394
85,332
35,862
4,445
125,639
16,627
142,266
0.23%
0.05
0.27
0.16
1.24
0.26
1.30
0.41
0.39
0.36
2.35
0.68%
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
14,505 (c)
(1,481)
131,909 (c)
26,932
55
3,258
123,584
2,608
15,179(c)
(1,293)
140,078(c)
58
7
53
1
49
168
36
1
2
10
361
578
56
16
51
5
40
168
34
-
-
2
247
451
50
9
44
1
49
153
33
-
1
2
306
495
3.22
5.23
0.25
3.28%
3.32
4.94
0.26
3.49%
2.88%
2.66
67.57
2.88%
2.69
68.25(c)
722
3
8
4,051
3.10%
2.94
69.73(c)
$ 3,640
$
$
$
3,554
3,600
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
of MD&A.
(c) Upon adoption of ASU 2015-03 on January 1, 2016, the December 31, 2015 and 2014 Consolidated Balance Sheets were adjusted to reflect the reclassification of $33 and $34, respectively, of
average debt issuance costs from average other assets to average long-term debt. For further information, refer to Note 1 of the Notes to Consolidated Financial Statements.
43 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
Total
Volume Yield/Rate
2016 Compared to 2015
19
(7)
32
3
47
47
(22)
(31)
(10)
8
(8)
39
79
2
39
(1)
119
26
(10)
(25)
(23)
(1)
(33)
86
60
9
7
(4)
72
(21)
12
6
(13)
(9)
(25)
47
TABLE 11: 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
Other deposits
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.
11
(2)
5
-
1
15
4
-
1
6
40
66
(30)
(3)
-
4
-
(1)
-
(1)
1
-
2
15
17
116
8
(2)
9
-
-
15
3
1
1
8
55
83
86
83
-
169
(15)
4
36
98
(4)
133
$
$
$
$
$
2015 Compared to 2014
Yield/Rate
Total
Volume
45
(21)
39
6
69
17
(17)
(5)
3
47
45
114
167
-
281
2
(1)
10
(2)
3
12
(11)
-
1
-
35
37
244
(57)
(12)
(4)
(8)
(81)
(26)
(7)
(14)
7
(140)
(180)
(261)
(22)
-
(283)
(8)
(6)
(17)
(2)
6
(27)
10
-
-
-
24
7
(290)
(12)
(33)
35
(2)
(12)
(9)
(24)
(19)
10
(93)
(135)
(147)
145
-
(2)
(6)
(7)
(7)
(4)
9
(15)
(1)
-
1
-
59
44
(46)
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 and leases actually removed
from the Consolidated Balance Sheets are 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 $343 million for
the year ended December 31, 2016 compared to $396 million for
the same period in the prior year. The decrease in provision expense
for the year ended December 31, 2016 compared to the prior year
was primarily due to the decrease in the level of commercial
criticized assets, which reflected improvement in the national
economy and stabilization of commodity prices, and a decrease in
outstanding loan balances. The ALLL declined $19 million from
December 31, 2015 to $1.3 billion at December 31, 2016. At
December 31, 2016, the ALLL as a percent of portfolio loans and
leases decreased to 1.36%, compared to 1.37% at December 31,
2015.
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.
44 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Income
Noninterest income decreased $307 million for the year ended December 31, 2016 compared to the year ended December 31, 2015. The following
table presents the components of noninterest income:
TABLE 12: COMPONENTS OF NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Service charges on deposits
Corporate banking revenue
Wealth and asset management revenue
Card and processing revenue
Mortgage banking net 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 decreased $5 million for the year ended
December 31, 2016 compared to the year ended December 31, 2015
due primarily to a $10 million decrease in consumer deposit fees
driven by a decrease in consumer checking fees, partially offset by a
$5 million increase in commercial deposit fees driven by new
customer acquisition.
Corporate banking revenue
Corporate banking revenue increased $48 million for the year ended
December 31, 2016 compared to the year ended December 31,
2015. The increase from the prior year was primarily driven by
increases in syndication fees and lease remarketing fees. The
increase was partially offset by decreases in letter of credit fees and
foreign exchange fees. Syndication fees increased $32 million
compared to the year ended December 31, 2015 as a result of
increased activity in the market and gains in specialized business
segments. Lease remarketing fees increased $30 million for the year
ended December 31, 2016 from the prior year and included the
lease
impact of $16 million
terminations. Additionally, the increase included the impact of
impairment charges of $20 million related to certain operating lease
equipment that were recognized during the year ended December
31, 2016 compared to $36 million recognized during the year ended
December 31, 2015. Letter of credit fees decreased $10 million for
the year ended December 31, 2016 compared to the prior year
primarily driven by a decrease in outstanding VRDNs. Foreign
in gains on certain
leveraged
2016
558
432
404
319
285
688
10
-
2,696
$
$
2015
563
384
418
302
348
979
9
-
3,003
2014
560
430
407
295
310
450
21
-
2,473
2013
549
400
393
272
700
879
21
13
3,227
2012
522
413
374
253
845
574
15
3
2,999
exchange fees decreased $8 million during the year ended December
31, 2016 compared to the prior year primarily driven by lower
volume coupled with lower currency volatility.
Wealth and asset management revenue
investment
Wealth and asset management revenue (formerly
advisory revenue) decreased $14 million for the year ended
December 31, 2016 compared to the year ended December 31,
2015. The decrease from the prior year was primarily due to a
decrease of $16 million in securities and brokerage fees driven by
lower transactional fees partially offset by an increase in managed
account fee-based business. The decrease was partially offset by a $2
million increase in private client service fees and institutional fees
for the year ended December 31, 2016 compared to the year ended
December 31, 2015. The Bancorp’s Trust, Brokerage and Insurance
businesses had approximately $315 billion and $297 billion in total
assets under care as of December 31, 2016 and 2015, respectively,
and managed $31 billion and $29 billion in assets for individuals,
corporations and not-for-profit organizations as of December 31,
2016 and 2015, respectively.
Card and processing revenue
Card and processing revenue increased $17 million for the year
ended December 31, 2016 compared to the year ended December
31, 2015 primarily driven by an increase in the number of actively
used cards and customer spend volume.
Mortgage banking net revenue
Mortgage banking net revenue decreased $63 million for the year ended December 31, 2016 compared to the year ended December 31, 2015.
The following table presents the components of mortgage banking net revenue:
TABLE 13: COMPONENTS OF MORTGAGE BANKING NET REVENUE
For the years ended December 31 ($ 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
purchased to economically hedge MSRs
Net mortgage servicing revenue
Mortgage banking net revenue
Origination fees and gains on loan sales increased $15 million for
the year ended December 31, 2016 compared to the year ended
December 31, 2015 driven by an increase in saleable residential
mortgage loan originations. Residential mortgage loan originations
increased to $10.0 billion for the year ended December 31, 2016
from $8.3 billion for the year ended December 31, 2015.
2016
186
$
199
(131)
31
99
285
$
2015
171
222
(139)
94
177
348
2014
153
246
(119)
30
157
310
Net mortgage servicing revenue
is comprised of gross
mortgage servicing fees and related MSR amortization as well as
valuation adjustments on MSRs and mark-to-market adjustments on
both settled and outstanding free-standing derivative financial
instruments used to economically hedge the MSR portfolio. Net
mortgage servicing revenue decreased $78 million for the year ended
December 31, 2016 compared to the year ended December 31, 2015
45 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
driven primarily by a decrease of $63 million in net valuation
adjustments, as well as a decrease in gross mortgage servicing fees of
$23 million. The decrease was partially offset by a decrease in MSR
amortization of $8 million for the year ended December 31, 2016
compared to the prior year.
The following table presents the components of net valuation adjustments on the MSR portfolio and the impact of the non-qualifying hedging
strategy for the years ended December 31:
TABLE 14: COMPONENTS OF NET VALUATION ADJUSTMENTS ON MSRs
($ 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
purchased to economically hedge MSRs
2016
2015
2014
$
$
24
7
31
90
4
94
95
(65)
30
Mortgage rates increased during the year ended December 31, 2016
which caused modeled prepayment speeds to decrease, leading to a
recovery of temporary impairment on the servicing rights during the
year. Mortgage rates increased during the year ended December 31,
2015 which caused the modeled prepayment speeds to decrease,
which led to a recovery of temporary impairment on the servicing
rights during the year.
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 hold or sell securities related to the non-
qualifying hedging strategy during the years ended December 31,
2016 and 2015.
The Bancorp’s total residential loans serviced at December 31,
2016 and 2015 were $69.3 billion and $73.4 billion, respectively,
with $53.6 billion and $59.0 billion, respectively, of residential
mortgage loans serviced for others.
Other noninterest income
The following table presents the components of other noninterest income:
TABLE 15: COMPONENTS OF OTHER NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Income from the TRA associated with Vantiv, Inc.
Operating lease income
Equity method income from interest in Vantiv Holding, LLC
Valuation adjustments on the warrant associated with Vantiv Holding, LLC
BOLI income
Cardholder fees
Consumer loan and lease fees
Banking center income
Gain on sale of certain retail branch operations
Private equity investment income
Insurance income
Net gains on loan sales
Gain on sale and exercise of the warrant associated with Vantiv Holding, LLC.
Gain on sale of Vantiv, Inc. shares
Loss on swap associated with the sale of Visa, Inc. Class B shares
Net losses on disposition and impairment of bank premises and equipment
Other, net
Total other noninterest income
2016
2015
2014
$
$
313
102
66
64
53
46
23
20
19
11
11
10
9
-
(56)
(13)
10
688
80
89
63
236
48
43
23
21
-
28
14
38
89
331
(37)
(101)
14
979
23
84
48
31
44
45
25
30
-
27
13
-
-
125
(38)
(19)
12
450
Other noninterest income decreased $291 million for the year ended
December 31, 2016 compared to the year ended December 31,
2015. The decrease included the impact of a gain of $331 million on
the sale of Vantiv, Inc. shares in the fourth quarter of 2015,
in positive valuation adjustments on the warrant
decreases
associated with Vantiv Holding, LLC, a decrease in the gain on the
sale and exercise of the warrant associated with Vantiv Holding,
LLC, decreases in net gains on loan sales and private equity
investment income, as well as an increase in the loss on the swap
associated with the sale of Visa, Inc. Class B shares. These decreases
were partially offset by increases in the income from the TRA
associated with Vantiv, Inc. and a decrease in the net losses on
disposition and impairment of bank premises and equipment as well
as gains on sales of certain retail branch operations and an increase
in operating lease income.
The Bancorp recognized positive valuation adjustments on the
stock warrant associated with Vantiv Holding, LLC of $64 million
and $236 million for the years ended December 31, 2016 and 2015,
respectively. The fair value of the stock warrant was 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
46 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
years ended December 31, 2016 and 2015 were primarily due to
increases of 24% and 40%, respectively, in Vantiv, Inc.’s share price
from December 31, 2015 to November 22, 2016 and from
December 31, 2014 to December 31, 2015, respectively. In addition
to valuation adjustments, 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. During the fourth quarter of 2016, the Bancorp recognized a
gain of $9 million on the exercise of the remaining warrant in Vantiv
Holding, LLC. For additional information on the valuation of the
warrant, refer to Note 27 of the Notes to Consolidated Financial
Statements.
Net gains on loan sales decreased $28 million for the year
ended December 31, 2016 compared to the same period in the prior
year as the prior period included the impact of a $37 million gain on
the sale of residential mortgage loans classified as TDRs during the
first quarter of 2015 which was partially offset by the $11 million
gain on the sale of the agent bankcard loan portfolio during the
second quarter of 2016.
Private equity investment income decreased $17 million for the
year ended December 31, 2016, compared to same period in the
prior year primarily driven by the recognition of $9 million of OTTI
on certain private equity investments in the third quarter of 2016.
Refer to Note 27 of the Notes to Consolidated Financial Statements
for further information.
During the year ended December 31, 2016, the Bancorp
recognized $56 million of negative valuation adjustments related to
the Visa total return swap compared to $37 million during same
period in the prior year. The adjustments for the year ended
December 31, 2016 were primarily attributable to the decision of
the U.S. Court of Appeals for the Second Circuit to vacate and
reverse the district court’s approval of the settlement of an
interchange antitrust class action litigation matter on June 30, 2016.
For additional information on the valuation of the swap associated
with the sale of Visa, Inc. Class B Shares and the related litigation
matters, refer to Note 17, Note 18 and Note 27 of the Notes to
Consolidated Financial Statements.
Income from the TRAs associated with Vantiv, Inc. increased
$233 million during the year ended December 31, 2016 compared to
the same period in the prior year. This increase was primarily driven
by a $280 million gain recognized in the third quarter of 2016 from
the termination and settlement of gross cash flows from existing
Vantiv, Inc. TRAs and the expected obligation to terminate and
settle the remaining Vantiv, Inc. TRA cash flows upon the exercise
of put or call options. During the fourth quarter of 2015, the
Bancorp recognized a $49 million gain from the payment from
Vantiv, Inc. to terminate a portion of the TRA. Additionally, the
Bancorp recognized a gain of $33 million associated with the annual
TRA payment during the fourth quarter of 2016 compared to a $31
million gain during the same period in the prior year.
Net losses on disposition and impairment of bank premises
and equipment decreased $88 million during the year ended
December 31, 2016 compared with the same period in the prior
year. This decrease was driven by impairment charges of $32 million
during the year ended December 31, 2016 compared to impairment
charges of $109 million recognized during the year ended December
31, 2015. The impairment charges for the year ended December 31,
2016 were partially offset by a gain of $11 million on the sale-
leaseback of an office complex during the third quarter of 2016. For
further information, refer to Note 7 of the Notes to Consolidated
Financial Statements.
Gains on sales of certain retail branch operations of $19 million
for the year ended December 31, 2016 included an $11 million gain
on the sale of the Bancorp’s retail operations in the Pittsburgh MSA
to First National Bank of Pennsylvania during the second quarter of
2016 and an $8 million gain on the sale of the Bancorp’s retail
operations in the St. Louis MSA to Great Southern Bank during the
first quarter of 2016.
Operating lease income increased $13 million primarily as a
result of an increase in syndication and participation origination
activity.
Noninterest Expense
Noninterest expense increased $128 million for the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily due
to increases in personnel costs (salaries, wages and incentives plus employee benefits), technology and communications and other noninterest
expense partially offset by decreases in net occupancy expense and card and processing expense. The following table presents the components of
noninterest expense:
TABLE 16: COMPONENTS OF NONINTEREST EXPENSE
For the years ended December 31 ($ 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 on an FTE basis(a)
(a) This is a non-GAAP measure. For further information, refer to the Non-GAAP Financial Measures section of MD&A.
1,612
339
299
234
132
118
1,169
3,903
61.6 %
2016
$
$
2015
2014
2013
2012
1,525
323
321
224
153
124
1,105
3,775
57.6
1,449
334
313
212
141
121
1,139
3,709
61.1
1,581
357
307
204
134
114
1,264
3,961
58.2
1,607
371
302
196
121
110
1,374
4,081
61.7
Personnel costs
increased $103 million for the year ended
December 31, 2016 compared to the year ended December 31, 2015
driven by an increase in base compensation, primarily due to
personnel additions in risk and compliance and information
technology, and increased variable compensation, as well as higher
retirement and severance costs related to the Bancorp’s voluntary
early retirement program. Full-time equivalent employees totaled
17,844 at December 31, 2016 compared to 18,261 at December 31,
2015.
Technology and communications expense
increased $10
million for the year ended December 31, 2016 compared to the year
ended December 31, 2015 driven primarily by increased investment
regulatory and
technology associated with
in
compliance initiatives, system maintenance and other growth
initiatives.
information
Net occupancy expense decreased $22 million for the year
ended December 31, 2016 compared to the year ended December
31, 2015 primarily due to a decrease in rent expense driven by a
47 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
reduction in the number of full-service banking centers and ATM
locations.
Card and processing expense decreased $21 million for the year
ended December 31, 2016 compared to the year ended December
The following table presents the components of other noninterest expense:
TABLE 17: COMPONENTS OF OTHER NONINTEREST EXPENSE
For the years ended December 31 ($ in millions)
Impairment on affordable housing investments
FDIC insurance and other taxes
Loan and lease
Marketing
Operating lease
Losses and adjustments
Professional service fees
Data processing
Postal and courier
Travel
Recruitment and education
Provision for (benefit from) the reserve for unfunded commitments
Donations
Insurance
Supplies
Other, net
Total other noninterest expense
Other noninterest expense increased $64 million for the year ended
December 31, 2016 compared to the year ended December 31, 2015
primarily due to increases in FDIC insurance and other taxes,
impairment on affordable housing investments, the provision for
the reserve for unfunded commitments, losses and adjustments and
operating lease expense partially offset by decreases in travel
expense, professional service fees and loan and lease expense.
FDIC insurance and other taxes increased $27 million for the
year ended December 31, 2016 compared to the year ended
December 31, 2015 primarily due to the implementation of the
FDIC surcharge in the third quarter of 2016 as well as an increase in
the FDIC insurance assessment base and a favorable settlement of a
tax liability related to prior years during the first quarter of 2015.
Impairment on affordable housing investments increased $23
million for the year ended December 31, 2016 compared to the year
ended December 31, 2015 primarily due to incremental losses
resulting from previous growth in the portfolio. For further
information, refer to Note 11 of the Notes to Consolidated
Financial Statements. The provision for the reserve for unfunded
commitments increased $19 million for the year ended December
31, 2016 compared to the year ended December 31, 2015 primarily
due to an increase in estimated loss rates related to unfunded
Applicable Income Taxes
Applicable income tax expense for all periods includes the benefit
from tax-exempt income, tax-advantaged investments, certain gains
on sales of leveraged leases that are exempt from federal taxation
and tax credits, partially offset by the effect of certain nondeductible
expenses. The tax credits are associated with the Low-Income
Housing Tax Credit program established under Section 42 of the
IRC, the New Markets Tax Credit program established under
Section 45D of the IRC, the Rehabilitation Investment Tax Credit
program established under Section 47 of the IRC and the Qualified
Zone Academy Bond program established under Section 1397E of
the IRC.
The effective tax rates for the years ended December 31, 2016
and 2015 were primarily impacted by $182 million and $178 million,
respectively, in tax credits and $56 million and $39 million of tax
48 Fifth Third Bancorp
31, 2015 primarily due to the impact of renegotiated service
contracts.
2016
2015
2014
$
$
168
126
110
104
86
73
61
51
46
45
37
23
23
15
14
187
1,169
145
99
118
110
74
55
70
45
45
54
33
4
29
17
16
191
1,105
135
89
119
98
67
188
72
41
47
52
28
(27)
18
16
15
181
1,139
commitments. Losses and adjustments increased $18 million for the
year ended December 31, 2016 compared to the year ended
December 31, 2015 primarily due to the impact of favorable legal
settlements for the year ended December 31, 2015 partially offset by
a decrease in legal settlements and reserve expense for the year
ended December 31, 2016. Operating lease expense increased $12
million for the year ended December 31, 2016 compared to the year
ended December 31, 2015 primarily due to an increase in the
volume of leases. Travel expense and professional service fees both
decreased $9 million for the year ended December 31, 2016
compared to the year ended December 31, 2015 primarily due to
overall expense control. Loan and lease expense decreased $8
million for the year ended December 31, 2016 compared to the year
ended December 31, 2015 primarily due to lower loan closing and
appraisal costs driven by a decline in automobile loan originations.
The Bancorp continues to focus on efficiency initiatives as part
of its core emphasis on operating leverage and expense control. The
efficiency ratio on an FTE basis was 61.6% for the year ended
December 31, 2016 compared to 57.6% for the year ended
December 31, 2015. The efficiency ratio on an FTE basis is a non-
GAAP measure. For further information, refer to the Non-GAAP
Financial Measures section of MD&A.
benefits from tax exempt income in 2016 and 2015, respectively.
The decrease in the effective tax rate from the year ended
December 31, 2015 to the year ended December 31, 2016 was
primarily related to a decrease in income before taxes, the increase
in tax exempt income, and a change in the estimated deductibility of
a prior expense.
the Bancorp
During 2016,
adopted ASU 2016-09,
“Improvements to Employee Share-Based Payment Accounting”,
effective as of January 1, 2016. Consistent with existing U.S. GAAP
and ASU 2016-09, the Bancorp establishes a deferred tax asset and
recognizes a corresponding deferred tax benefit for stock-based
awards granted to its employees and directors based on enacted tax
rates and the expense recorded for financial reporting purposes.
The actual tax deduction for these stock-based awards is determined
when the stock-based awards are settled or expired and the tax
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
deductions will typically be greater than or less than the expense
previously recognized for financial reporting.
Among other requirements, ASU 2016-09 requires that the tax
consequences for the difference between the expense recognized for
financial reporting and the Bancorp’s actual tax deduction for the
stock-based awards be recognized through income tax expense in
the interim periods in which they occur. Prior to the adoption of
ASU 2016-09, the tax consequences for the difference between the
expense recognized for financial reporting and the actual tax
deduction for stock-based awards was recognized either through
additional paid-in-capital when the Bancorp accumulated “excess
tax benefits” from stock based awards or through income tax
expense when the Bancorp depleted its accumulated “excess tax
benefits” from stock-based awards.
The Bancorp cannot predict its stock price or whether and
when its employees will exercise stock-based awards in the future.
As of December 31, 2016, the Bancorp does not believe it will be
necessary to recognize a material impact to tax expense over the
next twelve months related to the settlement of stock-based awards.
However, the amount of income tax expense or benefit recognized
upon settlement may vary significantly from expectations based on
the Bancorp’s stock price and the number of SARs exercised by
employees.
The Bancorp’s income before income taxes, applicable income tax expense and effective tax rate are as follows:
TABLE 18: APPLICABLE INCOME TAXES
For the years ended December 31 ($ in millions)
Income before income taxes
Applicable income tax expense
Effective tax rate
$
2016
2,065
505
24.4 %
2015
2,365
659
27.8
2014
2,028
545
26.9
2013
2,598
772
29.7
2012
2,210
636
28.8
49 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(formerly
BUSINESS SEGMENT REVIEW
The Bancorp reports on four business segments: Commercial
Banking, Branch Banking, Consumer Lending and Wealth and Asset
Management
Investment Advisors). Additional
information on each business segment is included in Note 30 of the
Notes to Consolidated Financial Statements. Results of the
its
Bancorp’s business segments are presented based on
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. In the second quarter of 2016, the Investment Advisors
segment name was changed to Wealth and Asset Management to
better reflect the services provided by the business segment.
The Bancorp manages interest rate risk centrally at the
corporate level. By employing an FTP methodology, the business
segments are insulated from most benchmark interest rate volatility,
enabling them to focus on serving customers through the
loans and acceptance of deposits. The FTP
origination of
methodology assigns charge rates and credit rates to classes of assets
and liabilities, respectively, based on the estimated amount and
timing of cash flows for each transaction. Assigning the FTP rate
based on matching the duration of cash flows allocates interest
income and interest expense to each business segment so its
resulting net interest income is insulated from future changes in
benchmark interest rates. The Bancorp’s FTP methodology also
allocates the contribution to net interest income of the asset-
generating and deposit-providing businesses on a duration-adjusted
basis to better attribute the driver of the performance. As the asset
and liability durations are not perfectly matched, the residual impact
of the FTP methodology is captured in General Corporate and
Other. The charge and credit rates are determined using the FTP
rate curve, which is based on an estimate of Fifth Third’s marginal
borrowing cost in the wholesale funding markets. The FTP curve is
constructed using the U.S. swap curve, brokered CD pricing and
unsecured debt pricing.
The following table summarizes net income (loss) by business segment:
TABLE 19: NET INCOME (LOSS) BY BUSINESS SEGMENT
For the years ended December 31 ($ in millions)
Income Statement Data
Commercial Banking
Branch Banking
Consumer Lending
Wealth and Asset Management
General Corporate and 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
interest-bearing
The Bancorp adjusts the FTP charge and credit rates as
dictated by changes in interest rates for various interest-earning
assets and
liabilities and by the review of
behavioural assumptions, such as prepayment rates on interest-
earning assets and the estimated durations for indeterminate-lived
deposits. Key assumptions, including the credit rates provided for
deposit accounts, are reviewed annually. Credit rates for deposit
products and charge rates for loan products may be reset more
frequently in response to changes in market conditions. The credit
rates for several deposit products were reset January 1, 2016 to
reflect the current market rates and updated market assumptions.
These rates were generally higher than those in place during 2015,
thus net interest income for deposit-providing business segments
was positively impacted during 2016. FTP charge rates on assets
were affected by the prevailing level of interest rates and by the
duration and repricing characteristics of the portfolio. As overall
market rates increased, the FTP charge increased for asset-
generating business segments during 2016.
During the first quarter of 2016, the Bancorp refined its
methodology for allocating provision expense to the business
segments to include charges or benefits associated with changes in
criticized commercial loan levels in addition to actual net charge-
offs experienced by the loans and leases owned by each business
segment. The results of operations and financial position for the
years ended December 31, 2015 and 2014 were adjusted to reflect
this change. 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, 2015 and 2014 were adjusted to reflect
changes in internal expense allocation methodologies.
2016
2015
2014
$
$
995
431
20
93
21
1,560
(4)
1,564
75
1,489
718
297
111
58
522
1,706
(6)
1,712
75
1,637
884
350
(69)
58
260
1,483
2
1,481
67
1,414
50 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:
$
2016
2014
2015
1,839
76
1,646
298
TABLE 20: 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 (FTE)
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, tax-advantaged investments and tax credits, partially offset by the effect of certain nondeductible
Includes FTE adjustments of $25 for the year ended December 31, 2016 and $21 for both the years ended December 31, 2015 and 2014.
54,597
20,735
8,582
6,686
1,046
496
50,718
18,381
7,995
5,792
1,399
1,817
53,010
20,677
9,069
6,652
1,230
813
304
977
1,106
222
884
303
1,066
832
114
718
296
1,130
1,244
249
995
429
280
171
378
284
191
430
292
185
1,648
141
$
$
expenses. Refer to the Applicable Income Taxes section of MD&A for additional information.
Comparison of the year ended 2016 with 2015
Net income was $995 million for the year ended December 31, 2016
compared to net income of $718 million for the year ended
December 31, 2015. The increase in net income was driven by
increases in net interest income and noninterest income and a
decrease in the provision for loan and lease losses partially offset by
an increase in noninterest expense.
Net interest income on an FTE basis increased $193 million
from the year ended December 31, 2015 primarily driven by an
increase in FTP credit rates on core deposits and an increase in
average commercial loan and lease balances as well as an increase in
their yields of 17 bps for the year ended December 31, 2016
compared to the prior year. These increases in net interest income
for the year ended December 31, 2016 were partially offset by an
increase in FTP charge rates on loans and leases.
Provision for loan and lease losses decreased $222 million from
the year ended December 31, 2015. The decrease was primarily due
to a decrease in criticized commercial loans during the year ended
December 31, 2016 as well as 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. Net charge-offs
as a percent of average portfolio loans and leases decreased to 33
bps for the year ended December 31, 2016 compared to 45 bps for
the year ended December 31, 2015.
Noninterest income increased $54 million from the year ended
December 31, 2015 primarily driven by an increase in corporate
banking revenue of $52 million driven by increases in lease
remarketing fees and syndication fees partially offset by decreases in
letter of credit fees and foreign exchange fees.
Noninterest expense increased $57 million from the year ended
December 31, 2015 primarily as a result of an increase in other
noninterest expense. The increase in other noninterest expense was
primarily driven by increases in corporate overhead allocations,
impairment on affordable housing investments and operating lease
expense partially offset by a decrease in loan and lease expense.
Average commercial loans increased $1.6 billion from the year
ended December 31, 2015 primarily due to increases in average
commercial and industrial loans, average commercial construction
loans and average commercial leases partially offset by a decrease in
average commercial mortgage loans. Average commercial and
industrial loans increased $657 million from the year ended
December 31, 2015 primarily as a result of an increase in new
origination activity resulting from an increase in demand and line
utilization in the first half of the year. Average commercial
construction loans increased $926 million from the year ended
December 31, 2015 primarily as a result of increased demand and
draw levels continuing to outpace attrition. Average commercial
leases increased $121 million from the year ended December 31,
2015 primarily as a result of an increase in syndication and
participation origination activity. Average commercial mortgage
loans decreased $117 million from the year ended December 31,
2015 primarily due to a decline in new loan origination activity
driven by increased competition and an increase in paydowns.
Average core deposits decreased $717 million from the year
ended December 31, 2015. The decrease was primarily driven by
decreases in average interest checking deposits and average foreign
deposits which decreased $487 million and $317 million,
respectively, from the year ended December 31, 2015.
Comparison of the year ended 2015 with 2014
Net income was $718 million for the year ended December 31, 2015
compared to net income of $884 million for the year ended
December 31, 2014. The decrease in net income was the result of
51 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
increases in the provision for loan and leases losses and noninterest
expense coupled with a decrease in noninterest income.
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 $157 million from
the year ended December 31, 2014 primarily due to an increase in
criticized commercial loans. The increase also 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, 2015 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, 2015 primarily driven by
increases in gains on loan sales.
Noninterest expense increased $88 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
billion, $1.1 billion and $860 million, respectively, from the year
ended December 31, 2014. The increase was partially offset by a
decrease in average foreign deposits of $1.0 billion from the year
ended December 31, 2014.
Branch Banking
Branch Banking provides a full range of deposit and loan products
to individuals and small businesses through 1,191 full-service
banking centers. Branch Banking offers depository and loan
products, such as checking and savings accounts, home equity loans
and lines of credit, credit cards and loans for automobiles and other
personal financing needs, as well as products designed to meet the
specific needs of small businesses, including cash management
services.
52 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table contains selected financial data for the Branch Banking segment:
TABLE 21: BRANCH BANKING
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Service charges on deposits
Card and processing revenue
Wealth and asset management 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
Comparison of the year ended 2016 with 2015
Net income was $431 million for the year ended December 31, 2016
compared to net income of $297 million for the year ended
December 31, 2015. The increase was driven by increases in net
interest income and noninterest income as well as a decrease in the
provision for loan and lease losses partially offset by an increase in
noninterest expense.
Net interest income increased $114 million from the year
ended December 31, 2015 primarily driven by an increase in the
benefits from FTP credits on core deposits partially offset by a
decrease in interest income on residential mortgage loans, home
equity loans, credit card loans and other consumer loans driven by a
decline in average balances. Additionally, net interest income was
negatively impacted by an increase in FTP charge rates on loans and
leases.
Provision for loan and lease losses decreased $13 million from
the year ended December 31, 2015 primarily due to improved credit
trends. Net charge-offs as a percent of average portfolio loans and
leases decreased to 91 bps for the year ended December 31, 2016
compared to 96 bps for the year ended December 31, 2015.
Noninterest income increased $103 million from the year
ended December 31, 2015. The increase for the year ended
December 31, 2016 was driven by an increase in other noninterest
income of $115 million primarily due to impairment charges on
bank premises and equipment of $32 million recognized during the
year ended December 31, 2016 compared to $109 million
recognized during the year ended December 31, 2015. Additionally,
the increase in other noninterest income for the year ended
December 31, 2016 included a gain of $19 million on the sale of
certain retail branch operations in the St. Louis and Pittsburgh
MSAs in the first and second quarters of 2016, respectively, as well
as a gain of $11 million on the sale of the agent bankcard loan
portfolio during the second quarter of 2016.
Noninterest expense increased $23 million from the year ended
December 31, 2015 primarily driven by an increase in other
noninterest expense partially offset by decreases in card and
processing expense and net occupancy and equipment expense.
2016
2015
2014
$
1,669
138
1,555
151
1,573
171
265
253
140
97
520
234
128
739
665
234
431
277
236
157
(18)
524
248
145
681
458
161
297
278
227
152
69
539
246
133
669
541
191
350
13,572
1,870
13,332
9,659
25,974
5,205
14,374
2,021
12,715
9,128
25,342
5,161
14,978
2,175
11,781
9,071
24,065
4,690
$
$
Other noninterest expense increased $58 million from the year
ended December 31, 2015 primarily driven by an increase in
corporate overhead allocations. Card and processing expense
decreased $17 million from the year ended December 31, 2015
primarily due to the impact of renegotiated service contracts. Net
occupancy and equipment expense decreased $14 million from the
year ended December 31, 2015 primarily due to a decrease in rent
expense driven by a reduction in the number of full-service banking
centers and ATM locations.
Average consumer loans decreased $802 million from the year
ended December 31, 2015 primarily driven by a decrease in average
home equity loans and average residential mortgage loans of $488
million and $262 million, respectively, as payoffs exceeded new loan
production. Average commercial loans decreased $151 million from
the year ended December 31, 2015 primarily due to a decrease in
average commercial mortgage loans and average commercial and
industrial loans of $100 million and $46 million, respectively, as
payoffs exceeded new loan production.
Average core deposits increased $1.7 billion from the year
ended December 31, 2015 primarily driven by growth in average
savings and money market deposits of $632 million, growth in
average demand deposits of $617 million and growth in average
interest checking deposits of $531 million. The growth in average
savings and money market deposits, average demand deposits and
average interest checking deposits was driven by an increase in
average balances per customer account and acquisition of new
customers.
Comparison of the year ended 2015 with 2014
Net income was $297 million for the year ended December 31, 2015
compared to net income of $350 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
53 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $20 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 wealth and asset management revenue.
Other noninterest income decreased $87 million from the year
ended December 31, 2014 primarily driven by impairment charges
on bank premises and equipment of $109 million for the year ended
December 31, 2015 compared to $20 million for the year ended
December 31, 2014. 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. Wealth and asset management 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.
Noninterest expense increased $11 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 $12 million from the year ended December 31, 2014 due
increases
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
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 growth in average
savings and money market deposits of $1.3 billion and growth in
average demand deposits of $934 million. The growth in average
savings and money market deposits was driven by a promotional
product offering and the growth in average demand deposits was
driven by an increase in average account balances.
Consumer Lending
Consumer Lending includes the Bancorp’s residential mortgage,
home equity, automobile and other indirect lending activities. Direct
lending activities include the origination, retention and servicing of
residential mortgage and home equity loans or lines of credit, sales
and securitizations of those loans, pools of loans or lines of credit
and all associated hedging activities. Indirect lending activities
include extending loans to consumers through correspondent
lenders and automobile dealers.
The following table contains selected financial data for the Consumer Lending segment:
TABLE 22: CONSUMER LENDING
For the years ended December 31 ($ 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
Other consumer loans and leases, including held for sale
$
$
$
2016
2015
2014
248
44
277
26
195
280
32
12
20
249
44
341
66
185
255
172
61
111
258
156
305
45
181
377
(106)
(37)
(69)
10,530
356
10,172
-
9,251
424
11,341
11
8,866
496
11,517
19
Comparison of the year ended 2016 with 2015
Net income was $20 million for the year ended December 31, 2016
compared to net income of $111 million for the year ended
December 31, 2015. The decrease was driven by a decrease in
noninterest income and an increase in noninterest expense.
Net interest income decreased $1 million from the year ended
December 31, 2015 primarily driven by an increase in FTP charges
on loans and leases partially offset by an increase in FTP credit rates
on demand deposits. Net interest income was also impacted by an
increase in average residential mortgage loan balances partially offset
by a decline in average automobile loan balances.
54 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The provision for loan and lease losses was flat from the year
ended December 31, 2015. Net charge-offs as a percent of average
portfolio loans and leases was 22 bps for both the years ended
December 31, 2016 and 2015.
Noninterest income decreased $104 million from the year
ended December 31, 2015 driven by decreases in mortgage banking
net revenue and other noninterest income. Mortgage banking net
revenue decreased $64 million from the year ended December 31,
2015 primarily driven by a $79 million decrease in net mortgage
servicing revenue partially offset by a $15 million increase in
mortgage origination fees and gains on loan sales. Refer to the
Noninterest Income subsection of the Statements of Income
Analysis section of MD&A for additional information on the
fluctuations in mortgage banking net revenue. Other noninterest
income decreased $40 million from the year ended December 31,
2015 primarily due to a $37 million gain on the sale of residential
mortgage loans held for sale classified as TDRs in the first quarter
of 2015.
Noninterest expense increased $35 million from the year ended
December 31, 2015 driven by increases in other noninterest expense
and personnel costs. Other noninterest expense increased $25
million from the year ended December 31, 2015 primarily driven by
increases in operational losses and corporate overhead allocations.
Personnel costs increased $10 million from the year ended
December 31, 2015 primarily driven by
in base
compensation and variable compensation.
increases
Average consumer loans and leases increased $31 million from
the year ended December 31, 2015. Average residential mortgage
loans, including held for sale, increased $1.3 billion from the year
ended December 31, 2015 primarily driven by the continued
retention of certain agency conforming ARMs and certain other
fixed-rate loans. Average automobile loans decreased $1.2 billion
from the year ended December 31, 2015 as payoffs exceeded new
loan production.
Comparison of the year ended 2015 with 2014
Net income was $111 million for the year ended December 31, 2015
compared to a net loss of $69 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 $112 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. Other noninterest income increased $21 million
from the year ended December 31, 2014 primarily driven by a $37
million gain on the sale of residential mortgage loans held for sale
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
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 agency conforming ARMs and certain other fixed-rate loans.
Average automobile loans and average home equity loans decreased
$176 million and $72 million, respectively, from the year ended
December 31, 2014 as payoffs exceeded new loan production.
for
companies
individuals,
Wealth and Asset Management
Wealth and Asset Management provides a full range of investment
alternatives
and not-for-profit
organizations. Wealth and Asset Management is made up of four
main businesses: FTS, an indirect wholly-owned subsidiary of the
Bancorp; ClearArc Capital, Inc., an
indirect wholly-owned
subsidiary of the Bancorp; Fifth Third Private Bank; and Fifth Third
Institutional Services. FTS offers full-service retail brokerage
services to individual clients and broker-dealer services to the
institutional marketplace. ClearArc Capital, Inc. provides asset
management services. Fifth Third Private Bank offers holistic
strategies to affluent clients in wealth planning, investing, insurance
and wealth protection. Fifth Third Institutional Services provides
advisory services for institutional clients including states and
municipalities.
55 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table contains selected financial data for the Wealth and Asset Management segment:
TABLE 23: WEALTH AND ASSET MANAGEMENT
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Wealth and asset management 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
Comparison of the year ended 2016 with 2015
Net income was $93 million for the year ended December 31, 2016
compared to net income of $58 million for the year ended
December 31, 2015. The increase in net income was primarily
driven by an increase in net interest income as well as a decrease in
noninterest expense partially offset by a decrease in noninterest
income.
Net interest income increased $40 million from the year ended
December 31, 2015 primarily due to an increase in FTP credit rates
on core deposits and an increase in interest income on loans and
leases driven by an increase in average balances on average
residential mortgage loans and average other consumer loans and
leases as well as higher yields on average commercial and industrial
loans and average other consumer loans and leases. This increase
was partially offset by an increase in FTP charges on loans and
leases driven by an increase in average balances.
Provision for loan and leases losses decreased $2 million from
the year ended December 31, 2015.
Noninterest income decreased $19 million from the year ended
December 31, 2015 primarily due to a $15 million decrease in
wealth and asset management revenue driven by a $15 million
decrease in securities and brokerage fees as a result of lower
transactional fees partially offset by an increase in managed account
fee-based business.
Noninterest expense decreased $33 million from the year
ended December 31, 2015 primarily driven by a $31 million
decrease in other noninterest expense primarily due to a decrease in
corporate overhead allocations partially offset by an increase in
operational losses.
Average loans and leases increased $330 million from the year
ended December 31, 2015 primarily due to increases in average
residential mortgage loans and average other consumer loans driven
by increases in new loan origination activity.
Average core deposits decreased $803 million from the year
ended December 31, 2015 primarily due to a decline in average
interest checking balances partially offset by an increase in average
savings and money market deposits.
Comparison of the year ended 2015 with 2014
Net income was $58 million for both the years ended December 31,
2015 and 2014.
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
56 Fifth Third Bancorp
2016
2015
2014
168
1
391
8
168
254
144
51
93
128
3
406
12
170
285
88
30
58
121
1
397
13
162
281
87
29
58
3,135
8,554
2,805
9,357
2,270
9,535
$
$
$
interest checking deposits due to an increase in FTP credit rates.
These increases were partially offset by increases in FTP charges on
loans and leases driven by increases in average balances.
Provision for loan and leases losses increased $2 million from
the year ended December 31, 2015.
Noninterest income increased $8 million from the year ended
December 31, 2014 primarily due to a $9 million increase in wealth
and asset management revenue driven by increases in recurring
securities brokerage fees and private client service fees.
Noninterest expense increased $12 million from the year ended
December 31, 2014 primarily due to an increase 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.
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, unallocated
provision expense or a benefit from the reduction of the ALLL, the
payment of preferred stock dividends and certain support activities
and other items not attributed to the business segments.
Comparison of the year ended 2016 with 2015
Net interest income decreased $260 million from the year ended
December 31, 2015 primarily driven by an increase in FTP credits
on deposits allocated to business segments primarily due to an
increase in FTP credit rates as well as an increase in interest expense
on long-term debt. This decrease in net interest income was partially
offset by an increase in interest income on taxable securities and an
increase in the benefit related to the FTP charges on loans and
leases. The provision for loan and leases losses was $84 million for
the year ended December 31, 2016 compared to a benefit of $100
million for the year ended December 31, 2015 primarily due to
decreases in the allocation of provision expense to the business
segments.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest income decreased $359 million from December
31, 2015. The decrease included the impact of a gain of $331 million
on the sale of Vantiv, Inc. shares and a gain of $89 million on both
the sale and exercise of a portion of the warrant associated with
Vantiv Holding, LLC, both of which were recognized in the fourth
quarter of 2015. In 2016, the Bancorp recognized a gain of $9
million on the exercise of the remaining warrant with Vantiv
Holding, LLC. The decrease was also due to the negative valuation
adjustment related to the Visa total return swap of $56 million for
the year ended December 31, 2016 compared with $37 million for
the prior year. In addition, the positive valuation adjustments on the
stock warrant associated with Vantiv Holding, LLC were $64
million for the year ended December 31, 2016 compared to the
positive valuation adjustments of $236 million during the year ended
December 31, 2015. The decrease in noninterest income was
partially offset by a $280 million gain recognized during the third
quarter of 2016 from the termination and settlement of gross cash
flows from existing Vantiv, Inc. TRAs and the expected obligation
to terminate and settle the remaining Vantiv, Inc. TRA cash flows
upon the exercise of put or call options compared with a $49
million gain recognized by the Bancorp in 2015 for the payment
from Vantiv, Inc. to terminate a portion of the Vantiv, Inc. TRA.
Noninterest income for the year ended December 31, 2016 also
included a gain of $11 million on the sale-leaseback of an office
complex during the third quarter of 2016 and a gain of $33 million
associated with the annual TRA payment during the fourth quarter
of 2016 compared to a $31 million gain during the prior year.
Additionally, equity method earnings from the Bancorp’s interest in
Vantiv Holding, LLC increased $3 million from December 31, 2015.
Noninterest expense was $90 million and $62 million for the
years ended December 31, 2016 and 2015, respectively. The increase
was primarily due to increases in personnel costs and the provision
for the reserve for unfunded commitments partially offset by an
increase in corporate overhead allocations from General Corporate
and Other to the other 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. The provision for loan and leases losses was a benefit of
$100 million for the year ended December 31, 2015 compared to a
benefit of $154 million for the year ended December 31, 2014 due
to decreases in the allocation of provision expense to the business
segments and 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 $62 million compared to a benefit of $14 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.
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.
57 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOURTH QUARTER REVIEW
The Bancorp’s 2016 fourth quarter net income available to common
shareholders was $372 million, or $0.49 per diluted share, compared
to net income available to common shareholders of $501 million, or
$0.65 per diluted share, for the third quarter of 2016 and net income
available to common shareholders of $634 million, or $0.79 per
diluted share, for the fourth quarter of 2015.
Net interest income on an FTE basis was $909 million during
the fourth quarter of 2016 and decreased $4 million from the third
quarter of 2016 and increased $5 million from the fourth quarter of
2015. The decrease from the third quarter of 2016 was primarily
driven by the impact of refunds to be offered to certain bankcard
customers during the fourth quarter of 2016, partially offset by
increased short-term market rates and higher investment securities
balances. The increase in net interest income in comparison to the
fourth quarter of 2015 was driven by higher investment securities
balances and increased short-term market rates, partially offset by
the aforementioned bankcard refunds.
Fourth quarter 2016 noninterest income of $620 million
decreased $220 million compared to the third quarter of 2016 and
decreased $484 million compared to the fourth quarter of 2015. The
decrease from the third quarter of 2016 was primarily due to a
decrease in other noninterest income and corporate banking
revenue. The year-over-year decrease was primarily the result of
decreases in other noninterest income and mortgage banking net
revenue.
Service charges on deposits of $141 million decreased $2
million from the previous quarter and decreased $3 million
compared to the fourth quarter of 2015. The decrease from the
third quarter of 2016 was primarily due to a decreases in commercial
service charges and retail service charges. The decrease from the
fourth quarter of 2015 was driven by a decrease in retail service
charges due to lower consumer checking fees.
Corporate banking revenue of $101 million decreased $10
million compared to the previous quarter and decreased $3 million
from the fourth quarter of 2015. The decrease compared to the
third quarter was driven by decreases in institutional sales revenue
and lease remarketing fees, partially offset by an increase in foreign
exchange fees. The year-over-year decrease was driven by lower
lease remarketing fees and letter of credit fees, partially offset by
higher foreign exchange fees and institutional sales revenue.
Mortgage banking net revenue was $65 million in the fourth
quarter of 2016 compared to $66 million in the third quarter of 2016
and $74 million in the fourth quarter of 2015. The decrease in
mortgage banking net revenue compared to the third quarter of
2016 was driven by lower production gains, partially offset by
positive valuation adjustments. The decrease from the prior year
was due to lower margins during the fourth quarter of 2016. Fourth
quarter 2016 originations were $2.7 billion, compared with $2.9
billion in the previous quarter and $1.8 billion in the fourth quarter
of 2015. Fourth quarter 2016 originations resulted in gains of $30
million on mortgages sold, compared with gains of $61 million
during the previous quarter and $37 million during the fourth
quarter of 2015. Gross mortgage servicing fees were $48 million in
the fourth quarter of 2016, $49 million in the third quarter of 2016
and $53 million in the fourth quarter of 2015. 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. MSR amortization
was $35 million during both the fourth and third quarters of 2016,
compared to $29 million during the fourth quarter of 2015. Net
servicing asset valuation adjustments were positive $23 million and
negative $9 million in the fourth and third quarters of 2016,
respectively, and positive $13 million in the fourth quarter of 2015.
58 Fifth Third Bancorp
Wealth and asset management revenue of $100 million
decreased $1 million from the previous quarter and decreased $2
million from the fourth quarter of 2015. The decline from the third
quarter of 2016 was due to a decrease in private client service fees.
The year-over-year decrease was due to a decrease in securities and
brokerage fees.
Card and processing revenue of $79 million was flat compared
to the third quarter of 2016 and increased $2 million compared to
the fourth quarter of 2015. 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 $137 million decreased $199
million compared to the third quarter of 2016 and decreased $465
million from the fourth quarter of 2015. Fourth quarter of 2016
results included a gain of $9 million on the exercise of the remaining
warrant in Vantiv Holding, LLC and a $33 million gain pursuant to
Fifth Third’s TRA with Vantiv, Inc. Third quarter of 2016 results
included a $280 million gain from the termination and settlement of
certain gross cash flows from the existing Vantiv, Inc. TRA and the
expected obligation to terminate and settle certain remaining Vantiv,
Inc. TRA cash flows upon the exercise of put or call options and a
gain of $11 million on the sale-leaseback of an office complex,
partially offset by $28 million in losses on disposition and
impairment of bank premises and equipment and the recognition of
$9 million of OTTI on certain private equity investments. 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 and a $31 million gain pursuant to
Fifth Third’s TRA with Vantiv, Inc. Fourth quarter of 2015 also
included a positive warrant valuation adjustment of $21 million
compared to a negative warrant valuation adjustment of $2 million
during the third quarter of 2016. Quarterly results also included
valuation adjustments on the Visa total return swap which was a
benefit of $6 million in the fourth quarter of 2016 and a charge of
$12 million and $10 million in the third quarter of 2016 and the
fourth quarter of 2015, respectively.
The net losses on investment securities were $3 million in the
fourth quarter of 2016 compared to net gains of $4 million in the
third quarter of 2016 and $1 million in the fourth quarter of 2015.
Noninterest expense of $960 million decreased $13 million
from the previous quarter and decreased $3 million from the fourth
quarter of 2015. The decrease in noninterest expense compared to
the third quarter of 2016 was driven by lower technology and
communications expense and seasonally lower marketing expense.
The decrease in noninterest expense from the fourth quarter of
2015 was primarily due to lower card and processing expense due to
lower net
the
occupancy expense due to a decrease in rent expense driven by a
reduction in the number of full-service banking centers and ATM
locations, partially offset by higher personnel costs.
impact of renegotiated service contracts and
The ALLL as a percentage of portfolio loans and leases was
1.36% as of December 31, 2016, compared to 1.37% as of both
September 30, 2016 and December 31, 2015. The provision for loan
and lease losses was $54 million in the fourth quarter of 2016
compared to $80 million in the third quarter of 2016 and $91
million in the fourth quarter of 2015. Net charge-offs were $73
million in the fourth quarter of 2016, or 31 bps of average portfolio
loans and leases on an annualized basis, compared with net charge-
offs of $107 million in the third quarter of 2016 and $80 million in
the fourth quarter of 2015.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 24: QUARTERLY INFORMATION (unaudited)
2016
2015
12/31
For the three months ended ($ in millions, except per share data)
$ 909
Net interest income(a)(b)
54
Provision for loan and lease losses
620
Noninterest income
960
Noninterest expense
395
Net income attributable to Bancorp
372
Net income available to common shareholders
0.49
Earnings per share, basic
0.49
Earnings per share, diluted
(a) Amounts presented on an FTE basis. The FTE adjustment was $6 and $5 for each period presented during the years ended December 31, 2016 and 2015, respectively.
(b) Net tax deficiencies of $1 million, $5 million and $0 were reclassified from capital surplus to applicable income tax expense at March 31, 2016, June 30, 2016 and September 30, 2016,
3/31(b)
909
119
637
986
326
311
0.40
0.40
9/30(b)
913
80
840
973
516
501
0.66
0.65
6/30(b)
908
91
599
983
328
305
0.40
0.39
12/31
904
91
1,104
963
657
634
0.80
0.79
9/30
906
156
713
943
381
366
0.46
0.45
6/30
892
79
556
947
315
292
0.36
0.36
3/31
852
69
630
923
361
346
0.42
0.42
respectively, related to the early adoption of ASU 2016-09 during the fourth quarter of 2016, with an effective date of January 1, 2016.
COMPARISON OF THE YEAR ENDED 2015 WITH 2014
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. The provision for loan and lease losses increased to
$396 million during the year ended December 31, 2015 compared to
$315 million during the year ended December 31, 2014 as the result
of 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.
Net charge-offs as a percent of average portfolio loans and leases
decreased to 0.48% during 2014 compared to 0.64% during the year
ended December 31, 2014.
Net interest income on an FTE basis (non-GAAP) was $3.6
billion for both of the years ended December 31, 2015 and 2014.
For the year ended December 31, 2015, 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 $1.8
billion 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.
Noninterest income increased $530 million during the year
ended December 31, 2015 compared to the year ended December
31, 2014 primarily due to increases in other noninterest income and
mortgage banking net revenue, partially offset by a decrease in
corporate banking revenue. Other noninterest income increased
$529 million 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 during the second quarter of 2014. Other
noninterest income also increased for the year ended December 31,
2015 compared to 2014 due to positive valuation adjustments on
the stock warrant associated with Vantiv Holding, LLC of $236
million during 2015 compared to positive valuation adjustments of
$31 million during 2014. 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 for the year ended December 31, 2015
compared to 2014 primarily due to increases in net mortgage
servicing revenue and origination fees and gains on loan sales.
Corporate banking revenue decreased $46 million compared to the
year ended December 31, 2014 primarily driven by decreases in
syndication fees and lease remarketing fees.
Noninterest expense increased $66 million during the year
ended December 31, 2015 compared to 2014 primarily due to
increases in total 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
in the mortgage business. Technology 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.
59 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 25 summarizes end of period loans and
leases, including loans held for sale and Table 26 summarizes
average total loans and leases, including loans held for sale.
$
2016
2015
TABLE 25: COMPONENTS OF TOTAL LOANS AND LEASES (INCLUDING LOANS 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)
15,737
7,695
9,983
2,237
680
36,332
92,849
92,098
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
41,736
6,904
3,903
3,974
56,517
$
$
2014
2013
2012
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
Loans and leases, including loans held for sale, decreased $636
million, or 1%, from December 31, 2015. The decrease from
December 31, 2015 was the result of a $943 million, or 3%, decrease
in consumer loans and leases, partially offset by a $307 million, or
1%, increase in commercial loans and leases.
Consumer loans and leases decreased from December 31, 2015
primarily due to decreases in automobile loans, home equity and
credit card, partially offset by an increase in residential mortgage
loans. Automobile loans decreased $1.5 billion, or 13%, from
December 31, 2015 and home equity decreased $641 million, or 8%,
from December 31, 2015 as payoffs exceeded new loan production.
Credit card decreased $123 million, or 5%, from December 31, 2015
primarily due to the sale of the agent bankcard loan portfolio during
the second quarter of 2016 and a decrease in the average balance per
active customer. Residential mortgage loans increased $1.3 billion,
or 9%, from December 31, 2015 primarily due to the continued
retention of certain agency conforming ARMs and certain other
fixed-rate loans originated during the year ended December 31,
2016.
Commercial loans and leases increased from December 31,
2015 primarily due to increases in commercial construction loans
and commercial leases, partially offset by decreases in commercial
and industrial loans and commercial mortgage loans. Commercial
construction loans increased $689 million, or 21%, from December
31, 2015 primarily as a result of increased demand and draw levels
continuing to outpace attrition. Commercial leases increased $120
million, or 3%, from December 31, 2015 primarily as a result of an
increase
in syndication and participation origination activity.
Commercial and industrial loans decreased $415 million, or 1%,
from December 31, 2015 primarily as a result of a decline in new
origination activity due to increased competition and an increase in
attrition from deliberate credit exits in the second half of the year.
Commercial mortgage loans decreased $87 million, or 1%, from
December 31, 2015 primarily due to a decline in new loan
origination activity driven by increased competition and an increase
in paydowns.
$
2016
2014
2015
TABLE 26: COMPONENTS OF TOTAL AVERAGE LOANS AND LEASES (INCLUDING LOANS 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 average commercial loans and leases
Consumer loans and leases:
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total average consumer loans and leases
Total average loans and leases
Total average portfolio loans and leases (excluding loans held for sale)
15,101
7,998
10,708
2,205
661
36,673
94,320
93,426
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
43,184
6,899
3,648
3,916
57,647
41,178
7,745
1,492
3,585
54,000
42,594
7,121
2,717
3,796
56,228
$
$
2013
2012
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
Average loans and leases, including loans held for sale, increased
$981 million, or 1%, from December 31, 2015 as a result of a $1.4
billion, or 3%, increase in average commercial loans and leases,
partially offset by a $438 million, or 1%, decrease in average
consumer loans and leases.
60 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
to
leases
increases
increased
loans and
loans. Average
Average commercial
commercial mortgage
from
December 31, 2015 primarily due
in average
commercial construction loans, average commercial and industrial
loans and average commercial leases, partially offset by a decrease in
average
commercial
construction loans increased $931 million, or 34%, from December
31, 2015 primarily as a result of increased demand and draw levels
continuing to outpace attrition. Average commercial and industrial
loans increased $590 million, or 1%, from December 31, 2015
primarily as a result of an increase in new origination activity
resulting from an increase in demand and line utilization in the first
half of the year. Average commercial leases increased $120 million,
or 3%, from December 31, 2015 primarily as a result of an increase
in syndication and participation origination activity. Average
commercial mortgage loans decreased $222 million, or 3%, from
December 31, 2015 primarily due to a decline in new loan
Investment Securities
The Bancorp uses investment securities as a means of managing
interest rate risk, providing liquidity support and providing collateral
for pledging purposes. Total investment securities were $31.6 billion
and $29.5 billion at December 31, 2016 and December 31, 2015,
respectively. The taxable investment securities portfolio had an
effective duration of 4.9 years at December 31, 2016 compared to
5.1 years at December 31, 2015.
in
Securities are classified as available-for-sale when,
management’s judgment, they may be sold in response to, or in
anticipation of, changes in market conditions. Securities that
management has the intent and ability to hold to maturity are
origination activity driven by increased competition and an increase
in paydowns.
Average consumer loans and leases decreased from December
31, 2015 primarily due to decreases in average automobile loans,
average home equity and average credit card, partially offset by an
increase in average residential mortgage loans. Average automobile
loans decreased $1.1 billion, or 10%, from December 31, 2015 and
average home equity decreased $594 million, or 7%, from
December 31, 2015 as payoffs exceeded new loan production.
Average credit card decreased $98 million, or 4%, primarily due to
the sale of the agent bankcard loan portfolio during the second
quarter of 2016 and a decrease in average balance per active
customer. Average residential mortgage loans increased $1.3 billion,
or 9%, from December 31, 2015 primarily driven by the continued
retention of certain agency conforming ARMs and certain other
fixed-rate loans.
classified as held-to-maturity and reported at amortized cost.
Securities are classified as trading when bought and held principally
for the purpose of selling them in the near term. At December 31,
2016, the Bancorp’s investment portfolio consisted primarily of
AAA-rated available-for-sale securities. Securities classified as below
investment grade were immaterial at both December 31, 2016 and
2015. The Bancorp’s management has evaluated the securities in an
unrealized loss position in the available-for-sale and held-to-
maturity portfolios for OTTI. Refer to Note 1 of the Notes to
Consolidated Financial Statements for the Bancorp’s methodology
for both classifying
investment securities and management’s
evaluation of securities in an unrealized loss position for OTTI.
The following table provides a summary of OTTI by security type for the years ended December 31:
TABLE 27: COMPONENTS OF OTTI BY SECURITY TYPE
($ in millions)
Available-for-sale and other debt securities
Available-for-sale equity securities
Total OTTI(a)
(a)
Included in securities gains, net, in the Consolidated Statements of Income.
2016
(15)
(1)
(16)
$
$
2015
(5)
-
(5)
2014
(24)
-
(24)
61 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the end of period components of investment securities:
TABLE 28: 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(a)
Agency commercial mortgage-backed securities
Non-agency commercial mortgage-backed securities
2016
2015
2014
2013
2012
$
547
44
1,155
50
1,545
185
1,549
187
1,771
203
15,525
9,029
3,076
2,106
697
31,024
14,811
7,795
2,801
1,363
703
28,678
11,968
4,465
1,489
1,324
701
21,677
12,294
-
1,368
2,146
865
18,409
8,403
-
1,089
2,072
1,033
14,571
$
Asset-backed securities and other debt securities
Equity securities(b)
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
Agency residential mortgage-backed securities
Asset-backed securities and other debt securities
Equity securities
Total trading securities
(a)
(b) Equity securities consist of FHLB, FRB and DTCC restricted stock holdings that are carried at cost, FHLMC and FNMA preferred stock holdings and certain mutual fund holdings and equity
Includes interest-only mortgage-backed securities recorded at fair value with fair value changes recorded in securities gains, net in the Consolidated Statements of Income.
23
39
8
15
325
410
5
13
3
7
315
343
14
8
9
13
316
360
19
9
6
19
333
386
7
17
7
15
161
207
207
1
208
186
1
187
282
2
284
24
2
26
68
2
70
$
$
$
$
security holdings.
On an amortized cost basis, available-for-sale and other securities
increased $2.3 billion, or 8%, from December 31, 2015 primarily
due to increases in agency residential and agency commercial
mortgage-backed securities and asset-backed securities and other
debt securities, partially offset by a decrease in U.S. Treasury and
federal agencies securities.
On an amortized cost basis, available-for-sale and other
securities were 24% and 23% of total interest-earning assets at
December 31, 2016 and December 31, 2015, respectively. The
estimated weighted-average life of the debt securities in the
available-for-sale and other securities portfolio was 6.7 years at
December 31, 2016 compared to 6.4 years at December 31, 2015. In
addition, at both December 31, 2016 and 2015 the available-for-sale
and other securities portfolio had a weighted-average yield of
3.19%.
information
Information presented in Table 29 is on a weighted-average life
basis, anticipating future prepayments. Yield
is
presented on an FTE basis and is computed using amortized cost
balances. Maturity and yield calculations for the total available-for-
sale and other securities 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 $159 million at
December 31, 2016 compared to $366 million at December 31,
2015. The decrease from December 31, 2015 was primarily due to
an increase in interest rates during the year ended December 31,
2016. 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.
62 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 29: CHARACTERISTICS OF AVAILABLE-FOR-SALE AND OTHER SECURITIES
Weighted-Average Weighted-Average
$
$
$
Yield
Fair Value
-
9
35
44
-
9
36
45
Life (in years)
Amortized Cost
0.4
1.4
6.3
5.2
0.2
4.6
5.3
4.4
76
177
296
549
75
177
295
547
4.39 %
1.82
2.11
2.33 %
5.76
0.10
3.93
3.15 %
As of December 31, 2016 ($ 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:
Average life of 1 year or less
Average life 1 – 5 years
Average life 5 – 10 years
Average life greater than 10 years
Total
Non-agency commercial mortgage-backed securities:
Average life of 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%, 0.01%, 2.14% and 1.68% for securities with an average life of 1 year or less, 1-5 years, 5-10 years and in total,
88
525
309
1,184
2,106
697
31,024
89
529
311
1,187
2,116
698
31,183
3.51
3.34
2.57
2.70
2.87 %
3.08
2.89
3.21
2.97
3.12 %
3.93
3.10
3.36
3.19
3.28 %
45
4,485
10,282
713
15,525
46
4,549
10,301
712
15,608
17
2,089
6,482
467
9,055
17
2,104
6,432
476
9,029
2.27
3.35
3.26
3.23 %
0.5
2.8
8.1
15.4
10.6
0.7
3.5
7.5
11.0
6.8
121
239
2,716
3,076
122
245
2,745
3,112
0.8
4.1
6.8
11.5
6.2
0.6
3.3
7.6
7.0
3.19 %
6.7
$
$
$
$
$
respectively.
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, 2016 and 2015.
The following table presents the end of period components of deposits:
TABLE 30: 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)
2016
35,782
26,679
13,941
20,749
426
97,577
3,866
101,443
2,378
-
103,821
$
$
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
2012
32,634
25,875
17,045
11,644
1,976
89,174
3,530
92,704
6,571
-
99,275
30,023
24,477
19,879
6,875
885
82,139
4,015
86,154
3,284
79
89,517
Includes $1,280, $1,449, $1,483, $1,479 and $1,402 of certificates $250,000 and over at December 31, 2016, 2015, 2014, 2013 and 2012, respectively.
Core deposits increased $830 million, or 1%, from December 31,
2015, driven by an increase of $983 million in transaction deposits.
Transaction deposits increased from December 31, 2015 primarily
due to an increase in money market deposits, partially offset by
decreases in savings deposits and demand deposits. Money market
deposits increased $2.3 billion, or 12%, from December 31, 2015
63 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
primarily due to competitive pricing related to a promotional
product offering during 2016 which drove customer acquisition and
balance migration from savings deposits from December 31, 2015.
Savings deposits decreased $660 million, or 5%, from December 31,
2015. Demand deposits decreased $485 million, or 1%, from
December 31, 2015 primarily due to lower balances per customer
account. Interest checking deposits included a decrease due to lower
balances per account for commercial customers, partially offset by
the benefit from a shift from the excess cash in trust accounts
managed by Fifth Third to interest checking deposit accounts as a
result of the recent enactment of new money market reform. The
increase in core deposits from December 31, 2015 included the
impact of the sale of $511 million of deposits as part of the
branches sold in the St. Louis MSA and Pittsburgh MSA during
2016.
Certificates $100,000 and over decreased $214 million, or 8%,
from December 31, 2015 primarily due to the maturity and run-off
of retail and institutional certificates of deposit since December 31,
2015.
The following table presents the components of average deposits for the years ended December 31:
TABLE 31: COMPONENTS OF AVERAGE DEPOSITS
($ 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)
$
2016
35,862
25,143
14,346
19,523
497
95,371
4,010
99,381
2,735
333
102,449
2015
35,164
26,160
14,951
18,152
817
95,244
4,051
99,295
2,869
57
102,221
2014
2013
2012
31,755
25,382
16,080
14,670
1,828
89,715
3,762
93,477
3,929
-
97,406
29,925
23,582
18,440
9,467
1,501
82,915
3,760
86,675
6,339
17
93,031
27,196
23,096
21,393
4,903
1,528
78,116
4,306
82,422
3,102
27
85,551
$
Includes $1,310, $1,410, $1,424, $1,283 and $1,678 of average certificates $250,000 and over during the years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively.
On an average basis, core deposits increased $86 million from
December 31, 2015 primarily due to an increase of $127 million in
average transaction deposits. The increase in average transaction
deposits was driven by increases in average money market deposits
and average demand deposits, partially offset by decreases in
average interest checking deposits, average savings deposits and
average foreign office deposits. Average money market deposits
increased $1.4 billion, or 8%, primarily due to competitive pricing
related to a promotional product offering during 2016 which drove
customer acquisition and balance migration from average savings
deposits. Average savings deposits decreased $605 million, or 4%,
compared to December 31, 2015. Average demand deposits
increased $698 million, or 2%, from December 31, 2015 due to
higher average customer balances per commercial customer
account. Average interest checking deposits and average foreign
office deposits decreased $1.0 billion, or 4%, and $320 million, or
39%, respectively, from December 31, 2015 primarily due to a
decrease in average commercial customer balances per account. The
increase in average core deposits from December 31, 2015 included
the sale of deposits as part of the St. Louis MSA and Pittsburgh
MSA during 2016, which impacted average core deposits by
approximately $200 million. Average other deposits increased $276
million from December 31, 2015 primarily due to an increase in
Eurodollar trade deposits. Average certificates $100,000 and over
decreased $134 million, or 5%, from December 31, 2015 due
primarily to the maturity and run-off of retail and institutional
certificates of deposit since December 31, 2015.
Contractual Maturities
The contractual maturities of certificates $100,000 and over as of December 31, 2016 are summarized in the following table:
TABLE 32: 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
$
$
191
125
483
1,579
2,378
64 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The contractual maturities of other time deposits and certificates $100,000 and over as of December 31, 2016 are summarized in the following
table:
TABLE 33: 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
$
$
2,173
1,601
1,181
999
275
15
6,244
Borrowings
The Bancorp accesses a variety of other short-term and long-term
funding sources. Borrowings with original maturities of one year or
less are classified as short-term and include federal funds purchased
and other short-term borrowings. Table 34 summarizes the end of
period components of total borrowings. Total borrowings as a
percentage of average interest-bearing liabilities were 21% at both
December 31, 2016 and 2015.
The following table summarizes the end of period components of borrowings:
TABLE 34: COMPONENTS OF BORROWINGS
As of December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total borrowings
(a)
2016
132
3,535
14,388
18,055
$
$
2015
151
1,507
15,810 (a)
17,468
2014
144
1,556
14,932 (a)
16,632
2013
284
1,380
9,605 (a)
11,269
2012
901
6,280
7,060 (a)
14,241
Upon adoption of ASU 2015-03 on January 1, 2016, the Consolidated Balance Sheets for the years ended December 31, 2015, 2014, 2013 and 2012 were adjusted to reflect the reclassification
of $34, $36, $28 and $25, respectively, of debt issuance costs from other assets to long-term debt. For further information, refer to Note 1 of the Notes to Consolidated Financial Statements.
increase
Total borrowings increased $587 million, or 3%, from December
in other short-term
31, 2015 primarily due to an
borrowings partially offset by a decrease in long-term debt. Other
short-term borrowings increased $2.0 billion, from December 31,
2015 driven by an increase of $2.5 billion in FHLB short-term
borrowings partially offset by a $264 million decrease in securities
sold under repurchase agreements. The level of other short-term
borrowings can fluctuate significantly from period to period
depending on funding needs and which sources are used to satisfy
those needs. For further information on the components of other
short-term borrowings, refer to Note 15 of the Notes to
Consolidated Financial Statements. Long-term debt decreased $1.4
billion, or 9%, from December 31, 2015 primarily driven by the
maturity of $3.5 billion of unsecured senior bank notes, the maturity
of $250 million of unsecured subordinated bank notes and $1.4
billion of pay downs on long-term debt associated with automobile
loan securitizations. The decrease was partially offset by debt
issuances during the year ended December 31, 2016 of $2.8 billion
of unsecured senior fixed-rate bank notes, $750 million of
unsecured subordinated fixed-rate bank notes, and $250 million of
unsecured
floating-rate bank notes. For additional
information regarding automobile securitizations and long-term
debt, refer to Note 11 and Note 16, respectively, of the Notes to
Consolidated Financial Statements.
senior
The following table summarizes the components of average borrowings:
TABLE 35: COMPONENTS OF AVERAGE BORROWINGS
For the years ended December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
$
2016
506
2,845
15,394
2015
920
1,721
14,644 (a)
2014
2013
2012
458
1,873
12,894 (a)
503
3,024
7,886 (a)
560
4,246
8,991 (a)
$
Total average borrowings
(a) . Upon adoption of ASU 2015-03 on January 1, 2016, the Consolidated Balance Sheets for the years ended 2015, 2014, 2013 and 2012 were adjusted to reflect the reclassification of $33, $34,
$28 and $52, respectively, of average debt issuance costs from average other assets to average long-term debt. For further information, refer to Note 1 of the Notes to Consolidated Financial
Statements.
18,745
17,285
15,225
13,797
11,413
Total average borrowings increased $1.5 billion, or 8%, compared to
December 31, 2015, due to increases in average long-term debt and
average other short-term borrowings partially offset by a decrease in
average federal funds purchased. The increase in average long-term
debt of $750 million, or 5%, was driven primarily by the issuances
of certain long-term debt as discussed above in the second and third
quarter of 2016, partially offset by certain maturities, as previously
mentioned, in the fourth quarter of 2016. 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.
The increase in average other short-term borrowings, compared to
December 31, 2015, of $1.1 billion was primarily due to an increase
in FHLB short-term advances. 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.
65 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 expectations 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 limits and key risk indicator thresholds. Those
limits and thresholds 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 the established tolerance.
Information supporting these assessments, including policy limits,
key risk indicators and qualitative factors, 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.
66 Fifth Third Bancorp
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:
•
that supports
the Bancorp’s
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
effective risk governance;
Credit Risk Management is responsible for overseeing the
safety and soundness of the commercial and consumer loan
independent portfolio management
portfolio within an
framework
loan growth
strategies and underwriting practices, ensuring portfolio
optimization and appropriate risk controls. Treasury is
responsible for the economic capital program. Credit Risk
Management is responsible for the quantitative analytics to
support the consumer and commercial portfolio and risk
rating models, ALLL methodology and analytics needed to
assess credit risk and develop mitigation strategies related to
that risk. Credit Risk Management also provides oversight,
reporting and monitoring of commercial and consumer
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 vendors
and information security to ensure 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;
is responsible for
Capital Markets Risk Management
instituting, monitoring, and reporting appropriate trading
limits within the Capital Markets groups and monitoring
liquidity, interest rate risk and risk tolerances resulting from
management of Fifth Third’s overall balance sheet;
independent
Compliance Risk Management provides
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 ensures
consistent processes for identifying, assessing, 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.
•
•
•
•
•
•
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 six 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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
committee responsible for the oversight of risk management is the
ERMC. Committees accountable to the ERMC, which support the
core risk programs, are the Corporate Credit Committee, the
Operational Risk Committee,
the Management Compliance
Committee, the Asset/Liability Committee and the Enterprise
Marketing Committee. Other committees accountable to the ERMC
oversee the ALLL, capital, model risk and regulatory change
management functions. There is also a risk assessment process
applicable to every line of business to ensure an appropriate
standard readiness assessment is performed before launching a new
or changing product or initiative. Significant risk policies approved
by the management governance committees are also reviewed and
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
are centrally managed, and ERM manages the policy and the
authority delegation process directly. The Credit Risk Review
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.
function provides independent and 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 ALLL 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. In addition, stress testing is performed
on various commercial portfolios using the CCAR model and for
certain portfolios, such as Real Estate and Leveraged Lending, the
stress testing is performed at the individual loan level during credit
underwriting.
The following tables provide a summary of potential problem portfolio loans and leases:
TABLE 36: POTENTIAL PROBLEM PORTFOLIO LOANS AND LEASES
As of December 31, 2016 ($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial leases
Total potential problem portfolio loans and leases
TABLE 37: POTENTIAL PROBLEM PORTFOLIO LOANS AND LEASES
As of December 31, 2015 ($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total potential problem portfolio loans and leases
Carrying
Value
1,108
102
22
1,232
Carrying
Value
1,383
170
6
36
1,595
$
$
$
$
Unpaid
Principal
Balance
1,110
102
22
1,234
Unpaid
Principal
Balance
1,384
171
6
36
1,597
Exposure
1,807
104
22
1,933
Exposure
1,922
172
7
39
2,140
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 allowance for credit
loss 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 assessing a borrower’s
creditworthiness. The dual risk rating system includes thirteen
probabilities of default grade categories and an additional eleven
grade categories for estimating losses given an event of default. The
probability of default and loss given default evaluations are not
separated in the ten-category risk rating system. The Bancorp has
completed significant validation and testing of the dual risk rating
system as a commercial credit risk management tool. The Bancorp
is assessing the necessary modifications to the dual risk rating
system outputs to develop a U.S. GAAP compliant ALLL model
and will evaluate the use of modified dual risk ratings for purposes
of determining the Bancorp’s ALLL as part of the Bancorp’s
adoption of ASU 2016-13 “Measurement of Credit Losses on Financial
67 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Instruments,” which will be effective for the Bancorp on January 1,
2020. 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 as data has been broadly
positive. There have been steady gains in the job market and real
GDP is expected to expand at a moderate pace in 2017. Household
spending continues to be the strongest driver of the U.S. economy.
Inflation continues to run below the FRB’s stated objective, but has
increased over the past several months and could rise further if
unemployment continues to fall. Improving global conditions are
supporting U.S. manufacturing activity and housing prices continue
to increase across the country. With regard to commercial real
estate, the credit market has become somewhat more selective even
though market data and vacancies remain positive.
Commercial Portfolio
The Bancorp’s credit risk management strategy seeks to minimize
concentrations of risk through diversification. The Bancorp has
commercial loan concentration limits based on industry, lines of
business within the commercial segment, geography and credit
product type. The risk within the commercial loan and lease
portfolio is managed and monitored through an underwriting
process utilizing detailed origination policies, continuous loan level
reviews, monitoring of industry concentration and product type
limits and continuous portfolio risk management reporting.
The Bancorp provides loans to a variety of customers ranging
from large multi-national firms to middle market businesses, sole
proprietors and high net worth individuals. The origination policies
the risks and
for commercial and
loans outline
industrial
underwriting requirements for loans to businesses in various
industries. Included in the policies are maturity and amortization
terms, collateral and leverage requirements, cash flow coverage
measures and hold limits. The Bancorp aligns credit and sales teams
with specific industry expertise to better monitor and manage
different industry segments of the portfolio.
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
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 accordance with
renewal
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 38: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION
As of December 31, 2016 ($ in millions)
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Total
106
22
128
$
$
LTV > 100% LTV 80-100%
TABLE 39: 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
119
120
239
$
$
LTV > 100% LTV 80-100%
178
100
278
216
194
410
LTV < 80%
1,953
2,598
4,551
LTV < 80%
2,063
2,032
4,095
68 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 40: 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
Retail trade
Wholesale trade
Transportation and warehousing
Accommodation and food
Communication and information
Construction
Entertainment and recreation
Mining
Utilities
Other services
Public administration
Agribusiness
Individuals
Other
Total
By Loan Size:
Less than $200,000
$200,000 to $1 million
$1 million to $5 million
$5 million to $10 million
$10 million to $25 million
Greater than $25 million
Total
By State:
Ohio
Florida
Michigan
Illinois
Indiana
North Carolina
Tennessee
Pennsylvania
Kentucky
All other states
Total
Outstanding
2016
Exposure
Nonaccrual
Outstanding
2015
Exposure
Nonaccrual
$
$
10,070
7,206
5,648
4,649
4,599
4,048
3,482
3,059
3,051
2,901
2,025
1,736
1,312
1,168
729
417
284
66
2
56,452
1 %
3
9
7
23
57
100 %
15 %
8
7
7
4
4
3
3
3
46
100 %
19,646
11,919
11,522
6,450
6,996
7,598
6,249
4,473
4,817
4,726
3,786
2,979
2,621
2,799
945
463
426
83
2
98,500
1
3
7
6
20
63
100
16
7
7
7
4
4
3
3
3
46
100
50
26
2
23
65
6
24
38
5
-
3
3
246
-
24
-
2
1
5
523
3
5
16
13
54
9
100
4
5
5
9
2
-
1
4
2
68
100
10,572
6,494
5,896
4,676
4,471
3,764
4,082
3,111
2,507
2,913
1,871
1,210
1,499
1,217
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
7,391
7,254
4,619
4,104
5,052
3,403
2,066
2,695
2,854
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
8
23
1
6
2
8
4
36
-
10
-
4
2
6
341
7
10
25
25
15
18
100
8
12
9
20
4
1
-
2
1
43
100
The Bancorp’s non-power producing energy and nonowner-
occupied commercial real estate portfolios have been identified by
the Bancorp as 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.
Due to the sensitivity of the non-power producing energy
portfolio to downward movements in oil prices, the Bancorp saw a
migration into criticized classifications during 2015 through the
second quarter of 2016. However, in the third and fourth quarters
of 2016, this portfolio has stabilized with signs of improvement.
The reserve-based energy loans that the Bancorp holds are senior
secured loans with a borrowing base that is re-determined on a
semi-annual basis.
69 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables provide an analysis of the non-power producing energy loan portfolio:
TABLE 41: NON-POWER PRODUCING ENERGY PORTFOLIO
As of December 31, 2016 ($ in millions)
Reserve-based lending
Midstream
Oil field services
Oil and gas
Refining
Total
Pass
337
308
153
17
82
897
$
$
Criticized Outstanding Exposure
1,368
1,001
357
475
471
3,672
675
308
227
95
82
1,387
338
-
74
78
-
490
90 Days
Past Due
-
-
-
-
-
-
Nonaccrual
170
-
37
37
-
244
TABLE 42: NON-POWER PRODUCING ENERGY PORTFOLIO
As of December 31, 2015 ($ in millions)
Reserve-based lending
Midstream
Oil field services
Oil and gas
Refining
Total
Pass
Criticized Outstanding
$
$
295
335
198
69
83
980
473
-
88
54
1
616
768
335
286
123
84
1,596
Exposure
1,296
1,029
450
523
634
3,932
90 Days
Past Due Nonaccrual
-
-
-
3
-
3
-
-
22
-
-
22
The following tables provide an analysis of nonowner-occupied commercial real estate loans (excluding loans held for sale):
TABLE 43: NONOWNER-OCCUPIED COMMERCIAL REAL ESTATE (EXCLUDING LOANS HELD FOR SALE)(a)
For the Year Ended
December 31, 2016
Net Charge-offs
-
-
19
3
-
22
For the Year Ended
December 31, 2015
Net Charge-offs
-
-
3
-
-
3
As of December 31, 2016 ($ in millions)
By State:
Outstanding
Exposure
90 Days
Past Due
For the Year Ended
December 31, 2016
Net Charge-offs
Nonaccrual
(Recoveries)
$
Ohio
Florida
Illinois
Michigan
North Carolina
Indiana
All other states
4
-
-
1
-
-
4
9
Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.
1,844
1,521
1,226
709
788
508
4,836
11,432
1,393
947
656
574
552
291
2,822
7,235
-
-
-
-
-
-
-
-
$
Total
(a)
(2)
1
1
3
-
-
3
6
TABLE 44: NONOWNER-OCCUPIED COMMERCIAL REAL ESTATE (EXCLUDING LOANS HELD FOR SALE)(a)
As of December 31, 2015 ($ in millions)
By State:
Outstanding
Exposure
90 Days
Past Due
Nonaccrual
For the Year Ended
December 31, 2015
Net Charge-offs
(Recoveries)
$
Ohio
Florida
Illinois
Michigan
North Carolina
Indiana
All other states
7
9
2
13
-
-
4
35
Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.
1,594
1,041
1,028
722
669
521
4,383
9,958
1,334
687
650
598
375
294
2,467
6,405
-
-
-
-
-
-
-
-
$
Total
(a)
(2)
2
-
7
(1)
-
11
17
Consumer Portfolio
Consumer credit risk management utilizes a framework that
identifying, assessing,
encompasses consistent processes
managing, monitoring, and reporting credit risk. These processes are
for
supported by a credit risk governance structure that includes Board
oversight, policies, risk limits, and risk committees.
The Bancorp’s consumer portfolio is materially comprised of
four categories of loans: residential mortgage loans, home equity
70 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
loans, automobile loans and credit card. The Bancorp has identified
certain categories within these four categories of loans 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. Among consumer portfolios,
legacy underwritten residential mortgage and brokered home equity
portfolios exhibited the most stress during the credit crisis. As of
December 31, 2016, consumer real estate loans, consisting of
residential mortgage loans and home equity loans, originated from
2005 through 2008 represent approximately 17% of the consumer
real estate portfolio. These loans accounted for 54% of total
consumer real estate secured losses for the year ended December
31, 2016. Current loss rates in the residential mortgage and home
equity portfolios are below pre-crisis levels. In addition to the
consumer real estate portfolio, credit risk management continues to
closely monitor the automobile portfolio performance. Increased
competition in the marketplace has led to industry-wide loosening
of underwriting guidelines. Fifth Third actively manages the
automobile portfolio through concentration limits, which mitigates
credit risk through limiting the exposure to lower FICO scores,
higher advance rates and extended term originations.
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-
rate 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 $758 million of ARM loans will have
rate resets during the next twelve months. Of these resets, 98% are
expected to experience an increase in rate, with an average increase
of approximately one half of a percent.
Certain residential mortgage products have contractual features
that may increase credit exposure to the Bancorp in the event of a
decline in housing values. These types of mortgage products offered
by the Bancorp include loans with high LTV ratios, multiple loans
on the same collateral that when combined result in a LTV greater
than 80% and interest-only loans. The Bancorp has deemed
residential mortgage loans with greater than 80% LTV ratios and no
mortgage insurance as loans that represent a higher level of risk.
Portfolio residential mortgage loans from 2010 and later
vintages represented 88% of the portfolio as of December 31, 2016
and had a weighted-average LTV of 71% and a weighted-average
origination FICO of 759.
The following table provides an analysis of the residential mortgage portfolio loans outstanding by LTV at origination:
TABLE 45: RESIDENTIAL MORTGAGE PORTFOLIO LOANS BY LTV AT ORIGINATION
2016
2015
As of December 31 ($ in millions)
LTV ≤ 80%
LTV > 80%, with mortgage insurance
LTV > 80%, no mortgage insurance
Total
Outstanding
11,412
1,284
2,355
15,051
$
$
Weighted-
Average LTV
Outstanding
Weighted-
Average LTV
65.9 % $
93.3
95.7
73.2 % $
10,198
1,300
2,218
13,716
65.6 %
93.3
96.0
73.4 %
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 46: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
As of December 31, 2016 ($ in millions)
By State:
Ohio
Illinois
Florida
Michigan
Indiana
North Carolina
Kentucky
All other states
Total
Outstanding
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2016
$
556
450
333
277
161
117
91
370
$
2,355
2
1
1
-
-
-
1
-
5
4
1
3
1
1
1
-
-
11
2
-
-
1
-
-
-
1
4
71 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 47: 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
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. Peak maturity years for the balloon home equity lines of
credit are 2025 to 2028 and approximately 26% of the balances
mature before 2025.
The aging of 2008 and prior vintages of home equity loans has
contributed to declining losses over the past twelve months. These
vintages represented 68% of the balances at December 31, 2016 and
95% of the losses during the year ended December 31, 2016
compared to 73% of the balances at December 31, 2015 and 97%
of the losses during the year ended December 31, 2015.
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 changes in policies
or procedures in underwriting, monitoring or collections, economic
conditions, portfolio mix, lending and risk management personnel,
results of internal audit and quality control reviews, collateral values
and geographic concentrations. The Bancorp considers home price
index trends when determining the collateral value qualitative factor.
The home equity portfolio is managed in two primary groups:
loans outstanding with a combined LTV greater than 80% and
include adjustments
loss rate
factors
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
those loans with a LTV 80% or less based upon appraisals at
origination. The carrying value of the greater than 80% LTV home
equity loans and 80% or less LTV home equity loans were $2.4
billion and $5.3 billion, respectively, as of December 31, 2016. Of
the total $7.7 billion of outstanding home equity loans:
•
•
•
86% reside within the Bancorp’s Midwest footprint of
Ohio, Michigan, Kentucky, Indiana and Illinois as of
December 31, 2016;
36% are in senior lien positions and 64% are in junior lien
positions at December 31, 2016;
79% of non-delinquent borrowers made at least one
payment greater than the minimum payment during the
year ended December 31, 2016; and
• The portfolio had an average refreshed FICO score of 743
at December 31, 2016.
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
ongoing 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.
Refer to the Analysis of Nonperforming Assets subsection of the
Risk Management section of MD&A for more information.
72 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides an analysis of home equity portfolio loans outstanding disaggregated based upon refreshed FICO score:
TABLE 48: HOME EQUITY PORTFOLIO LOANS OUTSTANDING BY REFRESHED FICO SCORE
As of December 31 ($ in millions)
Senior Liens:
FICO ≤ 659
FICO 660-719
FICO ≥ 720
Total senior liens
Junior Liens:
FICO ≤ 659
FICO 660-719
FICO ≥ 720
Total junior liens
Total
2016
2015
Outstanding
% of Total
Outstanding
% of Total
$
$
262
424
2,112
2,798
633
975
3,289
4,897
7,695
3 % $
6
27
36
8
13
43
64
100 % $
279
443
2,210
2,932
705
1,083
3,581
5,369
8,301
3 %
6
26
35
9
13
43
65
100 %
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 49: 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
2016
2015
Outstanding
Weighted-
Average LTV
Outstanding
Weighted-
Average LTV
$
$
2,454
344
2,798
2,892
2,005
4,897
7,695
55.1 % $
89.0
59.5
67.6
90.7
78.7
71.2 % $
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 %
The following tables provide an analysis of home equity portfolio loans by state with a combined LTV greater than 80%:
TABLE 50: HOME EQUITY PORTFOLIO LOANS OUTSTANDING WITH A LTV GREATER THAN 80%
As of December 31, 2016 ($ 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, 2016
$
$
1,029
434
264
185
172
82
183
2,349
1,826
666
402
302
297
114
260
3,867
-
-
-
-
-
-
-
-
9
5
3
2
2
2
4
27
5
2
3
1
1
-
3
15
73 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 51: 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
Automobile portfolio
The Bancorp’s automobile portfolio balances have declined since
December 31, 2015 through targeting more profitable risk-adjusted
returns. As a result, the concentration of lower FICO (<690)
origination balances have increased with overall credit quality
remaining within targeted credit risk tolerance. All concentration
and guideline changes are monitored monthly to ensure alignment
with original credit performance and return projections.
The following table provides an analysis of automobile portfolio loans outstanding disaggregated based upon FICO score:
TABLE 52: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING BY FICO SCORE AT ORIGINATION
2016
2015
As of December 31 ($ in millions)
FICO ≤ 690
FICO > 690
Total
Outstanding
1,714
8,269
9,983
$
$
% of Total
17 %
83
100 %
Outstanding
$
1,724
9,769
11,493
$
% of Total
15 %
85
100 %
The automobile portfolio is characterized by direct and indirect
lending products to consumers. As of December 31, 2016, 47% of
the automobile loan portfolio is comprised of loans collateralized by
new automobiles. It is a common industry 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 53: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING BY LTV AT ORIGINATION
As of December 31 ($ in millions)
LTV ≤ 100%
LTV > 100%
Total
2016
Outstanding
6,637
3,346
9,983
$
$
Weighted-
Average LTV
82.0 % $
111.7
92.4 % $
2015
Weighted-
Outstanding
7,740
3,753
11,493
Average LTV
81.7%
111.3
91.7%
The following table provides an analysis of the Bancorp’s automobile portfolio loans with a LTV at origination greater than 100% as of and for
the years ended:
TABLE 54: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING WITH A LTV GREATER THAN 100%
($ in millions)
December 31, 2016
December 31, 2015
$
Outstanding
3,346
3,753
90 Days Past
Due and Accruing
Nonaccrual
Net Charge-offs
5
5
1
1
23
20
Credit card portfolio
The credit card portfolio consists of predominately prime accounts
with 97% of loan balances existing within the Bancorp’s footprint as
of December 31, 2016. At December 31, 2016 and December 31,
2015, 78% and 80%, respectively, of the outstanding balances were
originated through branch-based relationships with the remainder
coming from direct mail campaigns and online acquisitions.
74 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides an analysis of credit card portfolio loans outstanding disaggregated based upon FICO score:
TABLE 55: CREDIT CARD PORTFOLIO LOANS OUTSTANDING BY FICO SCORE AT ORIGINATION
2016
2015
As of December 31 ($ in millions)
FICO ≤ 659
FICO 660-719
FICO ≥ 720
Total
Outstanding
% of Total
$
$
45
521
1,671
2,237
2 %
23
75
100 %
$
Outstanding
$
45
506
1,708
2,259
% of Total
2 %
22
76
100 %
loans during
HAMP and HARP Programs
For residential mortgage loans serviced for FHLMC and FNMA,
the Bancorp participates in the HAMP and HARP programs. For
loans refinanced under the HARP 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
the modification process. Therefore,
participation in these programs does not significantly impact the
Bancorp’s credit quality statistics and these loans 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, 2016, repurchased loans
restructured or refinanced under these programs were immaterial to
the Consolidated Financial Statements. Additionally, as of
December 31, 2016 and December 31, 2015, $12 million and $14
million, respectively, of loans refinanced under HARP were
included in loans held for sale in the Consolidated Balance Sheets.
The Bancorp recognized $6 million 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 programs for both periods ended December
31, 2016 and 2015.
European Exposure
The Bancorp has no direct sovereign exposure to any European
government as of December 31, 2016. In providing services to our
customers, the Bancorp routinely enters into financial transactions
with foreign domiciled and U.S. subsidiaries of foreign businesses as
well as foreign financial institutions. These financial transactions are
in the form of loans, loan commitments, letters of credit,
derivatives, guarantees, banker’s acceptances and securities. The
Bancorp’s risk appetite for foreign country exposure is managed by
having established country exposure limits. The Bancorp’s total
exposure to European domiciled or owned businesses and
European financial
institutions was $2.8 billion and funded
exposure was $1.3 billion as of December 31, 2016. Additionally,
the Bancorp was within its established country exposure limits for
all European countries.
The Bancorp has been closely monitoring the Brexit situation
and its potential impact on the Bancorp. The Bancorp’s United
Kingdom exposure is shown in the following table.
The following table provides detail about the Bancorp’s exposure to all European domiciled and U.S. subsidiaries of European businesses as well
as European financial institutions as of December 31, 2016:
TABLE 56: EUROPEAN EXPOSURE
Sovereigns
Financial Institutions
Non-Financial
Institutions
Total
$
Total
($ in millions)
Peripheral Europe(b)
Other Eurozone(c)
Total Eurozone
United Kingdom
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 Switzerland, Norway, and Sweden).
Funded
Exposure(a) Exposure
-
-
-
-
-
-
-
-
-
-
-
-
$
$
Total
Total
Total
Funded
Funded
Funded
Exposure(a) Exposure Exposure(a) Exposure Exposure(a) Exposure
82
117
856
1,375
938
1,492
359
740
37
111
1,334
2,343
45
749
794
304
34
1,132
196
1,718
1,914
795
114
2,823
37
107
144
55
3
202
79
343
422
55
3
480
Analysis of Nonperforming Assets
Nonperforming assets include nonaccrual loans and leases for
which ultimate collectability of the full amount of the principal
and/or interest is uncertain; restructured commercial and credit card
loans which have not yet met the requirements to be classified as a
performing asset; restructured consumer loans which are 90 days
past due based on the restructured terms unless the loan is both
well-secured and in the process of collection; and certain other
assets,
including OREO and other repossessed property. A
summary of nonperforming assets is included in Table 57. 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 $751 million at December 31, 2016
compared to $659 million at December 31, 2015. At December 31,
2016, $13 million of nonaccrual loans were held for sale, compared
to $12 million at December 31, 2015.
Nonperforming portfolio assets as a percent of total loans and
leases and OREO were 0.80% as of December 31, 2016 compared
to 0.70% as of December 31, 2015. Nonaccrual loans and leases
secured by real estate were 25% of total nonaccrual loans and leases
as of December 31, 2016 compared to 43% as of December 31,
2015.
75 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Commercial portfolio nonaccrual loans and leases were $523
million at December 31, 2016, an increase of $182 million from
December 31, 2015 primarily due to increases of $170 million in the
reserve-based lending energy portfolio and the impact of low oil
prices during the year ended 2016.
Consumer portfolio nonaccrual loans and leases were $137
million at December 31, 2016, a decrease of $28 million from
December 31, 2015. Refer to Table 58 for a rollforward of the
nonaccrual loans and leases.
OREO and other repossessed property was $78 million at
December 31, 2016, compared to $141 million at December 31,
2015. The Bancorp recognized $17 million and $24 million in losses
on the sale or write-down of OREO properties during the years
ended December 31, 2016 and 2015, respectively.
During the years ended December 31, 2016 and 2015,
approximately $41 million and $35 million, respectively, of interest
income would have been recognized if the nonaccrual and
renegotiated loans and leases on nonaccrual status had been current
in accordance with their original terms. Although these values help
demonstrate the costs of carrying nonaccrual credits, the Bancorp
does not expect to recover the full amount of interest as nonaccrual
loans and leases are generally carried below their principal balance.
TABLE 57: SUMMARY OF NONPERFORMING ASSETS AND DELINQUENT LOANS
As of December 31 ($ in millions)
Nonaccrual portfolio loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
2016
$
Home equity
Other consumer loans and leases
Nonaccrual portfolio restructured loans and leases:
Commercial and industrial loans
Commercial mortgage loans
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
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
302
27
-
2
17
55
-
176
14(c)
-
2
17
18
2
28
660
78
738
4
9
751
4
-
-
49
-
9
22
84
$
$
$
2015
2014
2013
2012
82
56
-
-
28
62
-
177
25(c)
-
1
23
17
2
33
506
141
647
1
11
659
7
-
-
40
-
10
18
75
86
64
-
3
44
72
-
142
71(c)
-
1
33
21
1
41
579
165(d)
744
24
15
783
-
-
-
56
-
8
23
87
127
90
10
3
83
74
-
154
53(c)
19
2
83
19
1
33
751
229(d)
980
6
-
986
-
-
-
66
-
8
29
103
234
215
70
1
114
30
1
96
67
6
8
123
23
2
39
1,029
257(d)
1,286
25
4
1,315
1
22
1
75
58
8
30
195
(b)
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)
1.49
144
Information for all periods presented excludes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA.
These advances were $312, $335, $373, $378 and $414 as of December 31, 2016, 2015, 2014, 2013, and 2012, respectively. The Bancorp recognized losses of $6, $8, $13, $5 and $2 for
the years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively.
Includes $4, $6, $9, $10 and $10 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at December 31, 2016, 2015, 2014, 2013 and 2012,
respectively, and $1, $2, $4, $2, and $1 of restructured nonaccrual government insured commercial loans at December 31, 2016, 2015, 2014, 2013 and 2012, respectively.
0.80 %
170
0.70
197
1.10
161
0.82
178
(c) Excludes $19 of restructured nonaccrual loans at December 31, 2016, $20 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 $71, $77 and $72 of OREO related to government insured loans at December 31, 2014, 2013 and 2012, respectively. The Bancorp has historically excluded government guaranteed
loans classified in OREO from its nonperforming asset disclosures. Upon the prospective adoption on January 1, 2015 of ASU 2014-14, “Classification of Certain Government-Guaranteed
Mortgage Loans Upon Foreclosure,” government guaranteed loans meeting certain criteria will be reclassified to other receivables rather than OREO upon foreclosure. Refer to Note 1 of the Notes to
Consolidated Financial Statements for further information on the adoption of this amended guidance.
76 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides a rollforward of portfolio nonaccrual loans and leases, by portfolio segment:
TABLE 58: ROLLFORWARD OF PORTFOLIO NONACCRUAL LOANS AND LEASES
For the year ended December 31, 2016 ($ in millions)
Balance, beginning of period
Transfers to nonaccrual status
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
For the year ended December 31, 2015 ($ in millions)
Balance, beginning of period
Transfers to nonaccrual status
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
Commercial
341
716
(13)
(42)
(11)
(256)
(8)
(232)
28
523
Residential
Mortgage
51
51
(43)
-
-
(7)
(14)
(4)
-
34
Consumer
114
149
(70)
-
-
(31)
(11)
(48)
-
103
Total
506
916
(126)
(42)
(11)
(294)
(33)
(284)
28
660
367
515
(9)
-
(12)
(11)
(189)
(32)
(298)
10
341
77
65
(39)
5
-
-
(15)
(29)
(13)
-
51
135
155
(68)
-
(1)
-
(28)
(18)
(61)
-
114
579
735
(116)
5
(13)
(11)
(232)
(79)
(372)
10
506
$
$
$
$
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 $958
million and $979 million at December 31, 2016 and 2015,
respectively. As of December 31, 2016, the percentage of
restructured residential mortgage loans, home equity loans, and
credit card loans that are past due 30 days or more were 30%, 12%
and 30%, respectively.
The following tables summarize TDRs by loan type and delinquency status:
TABLE 59: ACCRUING AND NONACCRUING PORTFOLIO TDRs
As of December 31, 2016 ($ in millions)
Commercial loans(b)(c)
Residential mortgage loans(a)
Home equity
Automobile loans
Credit card
Total
(a)
Current
319
458
269
12
20
1,078
$
$
Accruing
30-89 Days
Past Due
90 Days or
More Past Due
Nonaccruing
Total
3
56
18
-
4
81
-
121
-
-
-
121
192
17
18
2
28
257
514
652
305
14
52
1,537
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,
2016, these advances represented $230 of current loans, $46 of 30-89 days past due loans and $107 of 90 days or more past due loans.
(b) As of December 31, 2016, excludes $7 of restructured accruing loans and $19 of restructured nonaccrual loans associated with a consolidated VIE in which the Bancorp has no continuing credit
risk due to the risk being assumed by a third party.
(c) Excludes restructured nonaccrual loans held for sale.
77 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 60: ACCRUING AND NONACCRUING PORTFOLIO TDRs
As of December 31, 2015 ($ 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
90 Days or
More Past Due
Nonaccruing
Total
4
54
20
-
4
82
-
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
which typically involve partial charge-offs based upon appraised
values of underlying collateral, decreased $7 million from December
31, 2015, driven by improvements in delinquencies and loss
severities.
Home equity net charge-offs decreased $12 million compared
to
to
the year ended December 31, 2015, primarily due
improvements in loss severities. Management actively manages lines
of credit and makes reductions in lending limits when it believes it is
necessary based on FICO score deterioration and property
devaluation.
Automobile
loan net charge-offs
increased $7 million
compared to the same period in the prior year primarily due to a
strategic shift focusing on improving risk adjusted return along with
a modest decline in used car values at auction.
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.
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 39 bps and 48 bps of average portfolio loans
and leases for the years ended December 31, 2016 and 2015,
respectively. Table 61 provides a summary of credit loss experience
and net charge-offs as a percentage of average portfolio loans and
leases outstanding by loan category.
Commercial net charge-offs decreased to $190 million for the
year ended December 31, 2016 compared to $261 million for the
year ended December 31, 2015. The year ended December 31, 2015
included a charge-off associated with the restructuring of a student
loan backed commercial credit originated in 2007, included in net
charge-offs on commercial and industrial loans. The ratio of
commercial loan and lease net charge-offs to average portfolio
commercial loans and leases decreased to 33 bps during the year
ended December 31, 2016 compared to 46 bps in the same period
in the prior year.
The ratio of consumer loan and lease net charge-offs to
average consumer loans and leases decreased to 48 bps for the year
ended December 31, 2016 compared to 51 bps for the year ended
December 31, 2015. Residential mortgage loan net charge-offs,
78 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 61: SUMMARY OF CREDIT LOSS EXPERIENCE
For the years ended December 31 ($ in millions)
Losses charged-off:
2016
2015
2014
2013
2012
$
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
current national and local economic conditions that might impact
(205)
(22)
-
(5)
(19)
(41)
(54)
(89)
(21)
(456)
33
7
1
1
9
14
19
9
1
94
(172)
(15)
1
(4)
(10)
(27)
(35)
(80)
(20)
(362)
0.40 %
0.23
0.01
0.10
0.33
0.07
0.33
0.33
3.69
2.93
0.48
0.39 %
(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
the portfolio. Refer to the Critical Accounting Policies section of
MD&A for more information.
for
several commercial
During the year ended December 31, 2016, the Bancorp
refined certain estimation techniques associated with the ALLL.
Such refinements included the introduction of individual loss rate
loan portfolio
migration analyses
stratifications as contrasted to the single composite loss rate
migration analysis for the entire commercial loan portfolio which
was used in prior periods. These refinements did not substantively
change any material aspect of the Bancorp’s overall approach in the
determination of the ALLL and there have been no material
changes in assumptions 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
79 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
determining the ALLL. The provision for unfunded commitments
is included in other noninterest expense in the Consolidated
Statements of Income.
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
consumer loans are developed for each pool based on the trailing
twelve month historical loss rate, as adjusted for certain prescriptive
loss rate factors and certain qualitative adjustment factors. The
prescriptive
loss rate factors and qualitative adjustments are
designed to reflect risks associated with current conditions and
trends which are not believed to be fully reflected in the trailing
twelve month historical loss rate. For real estate backed consumer
loans, the prescriptive loss rate factors include adjustments for
delinquency trends, LTV trends, refreshed FICO score trends and
product mix, and the qualitative factors include adjustments for
changes in policies or procedures in underwriting, monitoring or
collections, economic conditions, portfolio mix, lending and risk
management personnel, results of internal audit and quality control
reviews, collateral values and geographic concentrations. The
Bancorp considers home price index trends in its footprint and the
TABLE 62: CHANGES IN ALLOWANCE FOR CREDIT LOSSES
For the years ended December 31 ($ in millions)
ALLL:
Balance, beginning of period
Charge-offs
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
decremental to the quantitative model results.
themselves. Given
volatility of collateral valuation trends when determining the
collateral value qualitative factor.
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 $190 million at
December 31, 2016. 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 $31 million at December 31, 2016. 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.
2016
2015
2014
2013
2012
$
$
$
$
1,272
(456)
94
343
1,253
138
23
-
161
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
An unallocated component of 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, 2016 and 2015 was 0.12%. The unallocated
allowance was 9% of the total allowance as of both December 31,
2016 and December 31, 2015.
As shown in Table 63, the ALLL as a percent of portfolio
loans and leases was 1.36% at December 31, 2016, compared to
1.37% at December 31, 2015. The ALLL was $1.3 billion at both
December 31, 2016 and 2015.
80 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
$
2016
2014
2015
652
117
24
47
100
67
40
99
11
115
1,272
673
140
17
45
104
87
33
104
13
106
1,322
718
82
16
15
96
58
42
102
12
112
1,253
TABLE 63: 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
1.72 %
1.19
0.41
0.38
0.64
0.75
0.42
4.56
1.76
0.12
1.36 %
41,676
6,899
3,903
3,974
15,051
7,695
9,983
2,237
680
92,098
40,765
7,399
2,069
3,720
12,389
8,886
12,037
2,401
418
90,084
42,131
6,957
3,214
3,854
13,716
8,301
11,493
2,259
657
92,582
1.65
1.89
0.82
1.21
0.84
0.98
0.27
4.33
3.11
0.12
1.47
1.55
1.68
0.75
1.22
0.73
0.81
0.35
4.38
1.67
0.12
1.37
$
$
2013
767
212
26
53
189
94
23
92
16
110
1,582
39,316
8,066
1,039
3,625
12,680
9,246
11,984
2,294
364
88,614
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
MARKET RISK MANAGEMENT
Market risk is the day-to-day potential for the value of a financial
instrument to increase or decrease due to movements in market
factors. The Bancorp’s market risk includes risks resulting from
movements in interest rates, foreign exchange rates, equity prices
and commodity prices. Interest rate risk, a component of market
risk, primarily impacts the Bancorp’s NII and interest sensitive fee
income categories through changes in interest income on earning
assets and cost of interest bearing liabilities, and through fee items
that are related to interest sensitive activities such as mortgage
origination and servicing income. Management considers interest
rate risk a prominent market risk in terms of its potential impact on
earnings. Interest rate risk may occur for any one or more of the
following reasons:
• Assets and liabilities mature or reprice at different times;
• Short-term and long-term market interest rates change by
different amounts; or
• The expected maturities of various assets or liabilities
shorten or lengthen as interest rates change.
In addition to the direct impact of interest rate changes on NII,
interest rates can indirectly impact earnings through their effect on
loan and deposit 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. A series of Policy Limits and Key Risk Indicators are
employed to ensure that this risk is managed within the Bancorp’s
risk tolerance.
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 NII to changes in
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, deviations from
81 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
projected assumptions, as well as changes in market conditions and
management strategies.
The Bancorp’s interest rate risk exposure is evaluated by
measuring the anticipated change in NII over 12-month and 24-
month horizons assuming 100 bps and 200 bps parallel ramped
increases and a 75 bps parallel ramped decrease in interest rates. 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 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 above what is included in senior
management’s baseline projections for each 100 bps increase in
short-term market interest rates. These 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 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 69% at December 31, 2016, which is
approximately 20 percentage points higher than the 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
loan and security
important modeling assumptions, such as
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 64: ESTIMATED NII SENSITIVITY PROFILE AND ALCO POLICY LIMITS
2016
2015
Change in Interest Rates (bps)
+200 Ramp over 12 months
+100 Ramp over 12 months
-75 Ramp over 6 months
% Change in NII (FTE)
12
Months
1.88 %
1.13
(5.77)
13-24
Months
6.78
4.32
(10.62)
ALCO Policy Limits
13-24
Months
12
Months
(4.00)
-
-
(6.00)
-
-
% Change in NII (FTE)
12
Months
2.05
1.12
N/A
13-24
Months
5.93
3.87
N/A
ALCO Policy Limits
13-24
Months
12
Months
(4.00)
-
-
(6.00)
-
-
At December 31, 2016, the Bancorp’s NII would benefit in both
year one and year two under the parallel rate ramp increases. The
Bancorp’s NII would decline in both year one and year two under
the parallel 75 bps ramped decrease in interest rates. The NII
sensitivity profile is attributable to the combination of floating-rate
assets, including the predominantly floating-rate commercial loan
portfolio, and certain intermediate-term fixed-rate liabilities. The
change in the sensitivity as of December 31, 2016 for the first 12
months compared to December 31, 2015 is primarily attributable to
fixed-rate mortgage asset growth, partially offset by runoff in the
indirect automobile loan portfolio. The change in the sensitivity as
of December 31, 2016 for the 13-24 month horizon compared to
December 31, 2015 is also attributable to fixed-rate mortgage asset
growth, partially offset by runoff in the indirect automobile loan
portfolio, but sensitivity is modestly improved from December 31,
2015 due to projected core deposit growth.
Tables 65 and 66 provide information on the Bancorp’s
estimated NII sensitivity profile given changes to certain key deposit
modeling assumptions.
82 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows the Bancorp's estimated NII sensitivity profile with a $1.0 billion decrease and a $1.0 billion increase in demand
deposit balances as of December 31, 2016:
TABLE 65: ESTIMATED NII SENSITIVITY ASSUMING A $1 BILLION CHANGE IN DEMAND DEPOSIT BALANCES
Change in Interest Rates (bps)
+200 Ramp over 12 months
+100 Ramp over 12 months
% Change in NII (FTE)
$1 Billion Balance Decrease
13-24
12
Months
Months
$1 Billion Balance Increase
12
Months
13-24
Months
1.61 %
1.00
6.24
4.05
2.15
1.27
7.31
4.58
The following table shows the Bancorp's estimated NII sensitivity profile with a 25% increase and a 25% decrease to the deposit beta
assumption as of December 31, 2016. The resulting weighted-average interest-bearing deposit betas included in this analysis are approximately
87% and 52%, respectively, as of December 31, 2016:
TABLE 66: ESTIMATED NII SENSITIVITY WITH DEPOSIT BETA ASSUMPTION CHANGES
Change in Interest Rates (bps)
+200 Ramp over 12 months
+100 Ramp over 12 months
% Change in NII (FTE)
Betas 25% Higher
Betas 25% Lower
12
Months
13-24
Months
12
Months
13-24
Months
(1.56) %
(0.59)
(0.10)
0.88
5.32
2.85
13.66
7.76
Economic Value of Equity Sensitivity
The Bancorp also uses EVE as a measurement tool in managing
interest rate risk. Whereas the NII sensitivity analysis highlights the
impact on forecasted NII on an FTE (non-GAAP) basis over one
and two year time horizons, EVE is a point in time analysis of the
economic sensitivity of 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 balance 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
important are
assumptions driving
loan and security prepayments and the
expected balance attrition and pricing of transaction deposits.
in the EVE analysis. Particularly
The following table shows the Bancorp’s estimated EVE sensitivity profile as of December 31:
TABLE 67: ESTIMATED EVE SENSITIVITY PROFILE
Change in Interest Rates (bps)
Change in EVE
+200 Shock
+100 Shock
+25 Shock
-75 Shock
2016
ALCO Policy Limit
(12.00)
-
-
-
(4.96) %
(2.00)
(0.36)
(0.14)
Change in EVE
2015
ALCO Policy Limit
(12.00)
-
-
-
(5.21)
(2.30)
(0.44)
N/A
The EVE sensitivity to the +200 bps rising rate scenario is
moderately negative at December 31, 2016, and is also slightly
negative to a 75 bps decline in market rates. The +100 and +200
bps rising rate sensitivities are down slightly from the sensitivities at
December 31, 2015. The decrease in risk is related to long-term
debt issuances, run-off of indirect automobile loan balances and a
shorter average life of certain fixed-rate commercial loans and
leases. These items were partially offset by growth in the investment
portfolio and fixed-rate mortgage loan balances.
While an instantaneous shift in interest rates is used in this
analysis to provide an estimate of exposure, the Bancorp believes
that a gradual shift in interest rates would have a much more modest
impact. Since EVE measures the discounted present value of cash
flows over the estimated lives of instruments, the change in EVE
does not directly correlate to the degree that earnings would be
impacted over a shorter time horizon (e.g., the current fiscal year).
Further, EVE does not take into account factors such as future
balance sheet growth, changes in product mix, changes in yield
curve relationships and changing product spreads that could
mitigate 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 actual 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
interest rate risk
integral component of the Bancorp’s
An
management strategy is its use of derivative instruments to minimize
significant fluctuations in earnings caused by changes in market
interest rates. Examples of derivative instruments that the Bancorp
may use as part of its interest rate risk management strategy include
interest rate swaps, interest rate floors, interest rate caps, forward
83 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
contracts, forward starting interest rate swaps, options, swaptions
and TBA securities.
As part of its overall risk management strategy relative to its
mortgage banking activities, 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 enters into derivative contracts with major
financial institutions to economically hedge market risks assumed in
interest rate derivative contracts with commercial customers.
Generally, these contracts have similar terms in order to protect the
Bancorp from market volatility. Credit risk arises from the possible
inability of counterparties to meet the terms of their contracts,
which the Bancorp minimizes through collateral arrangements,
further
approvals,
information including the notional amount and fair values of these
derivatives, refer to Note 13 of the Notes to Consolidated Financial
Statements.
limits and monitoring procedures. For
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, excluding interest receivable, as
of December 31, 2016:
Less than 1 year
$
TABLE 68: 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
22,633
2,646
1,290
837
27,406
2,651
971
4,527
447
512
9,108
36,514
$
1-5 years
17,561
3,797
2,576
1,929
25,863
6,258
1,465
5,342
1,790
129
14,984
40,847
Over 5 years
1,482
456
37
1,208
3,183
6,142
5,259
114
-
39
11,554
14,737
Total
41,676
6,899
3,903
3,974
56,452
15,051
7,695
9,983
2,237
680
35,646
92,098
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, 2016:
TABLE 69: 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
$
$
Fixed
2,515
843
13
3,137
6,508
9,382
514
5,399
543
22
15,860
22,368
Interest Rate
Floating or Adjustable
16,528
3,410
2,600
-
22,538
3,018
6,210
57
1,247
146
10,678
33,216
Residential Mortgage Servicing Rights and Interest Rate Risk
The net carrying amount of the residential MSR portfolio was $744
million and $784 million as of December 31, 2016 and 2015,
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,
2016 which caused modeled prepayment speeds to decrease, leading
to a recovery of temporary impairment on the servicing rights
during the year. 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
loan rate. In addition to the MSR valuation, the Bancorp recognized
net gains of $24 million and $90 million on derivatives associated
with its non-qualifying hedging strategy during the years ended
December 31, 2016 and 2015, respectively. The Bancorp may adjust
its hedging strategy to reflect its assessment of the composition of
84 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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 performed by the Capital Markets
Credit Department and Capital Markets Risk Department.
Foreign Currency Risk
The Bancorp may enter into foreign exchange derivative contracts
to economically hedge certain foreign currency 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, 2016 and
December 31, 2015 was $827 million and $812 million, respectively.
The Bancorp also enters into foreign exchange contracts for the
benefit of commercial customers to hedge their exposure to foreign
currency fluctuations. Similar to the hedging of interest rate risk
from interest rate derivative contracts, the Bancorp also enters into
foreign exchange contracts with major financial institutions to
economically hedge a substantial portion of the exposure from
client driven foreign exchange activity. The Bancorp has risk limits
and internal controls in place to help ensure excessive risk is not
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 68 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 $31.2 billion of
securities in the Bancorp’s available-for-sale and other portfolio at
December 31, 2016, $4.1 billion in principal and interest is expected
to be received in the next 12 months and an additional $3.3 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
Commodity Risk
The Bancorp also enters into commodity contracts for the benefit
of commercial customers to hedge their exposure to commodity
price fluctuations. Similar to the hedging of foreign exchange and
interest rate risk from interest rate derivative contracts, the Bancorp
into commodity contracts with major financial
also enters
institutions to economically hedge a substantial portion of the
exposure from client driven commodity activity. The Bancorp may
also offset this risk with exchange traded commodity contracts. The
Bancorp has risk limits and internal controls in place to help ensure
excessive risk is not taken in providing this service to customers.
These controls include an independent determination of commodity
volatility and credit equivalent exposure on these contracts and
counterparty credit approvals performed by the Capital Markets
Credit Department and Capital Markets Risk Department.
FHLMC or FNMA guidelines are sold for cash upon origination.
Additional assets such as certain other residential mortgage loans,
certain commercial loans, home equity loans, automobile loans and
other consumer loans are also capable of being securitized or sold.
The Bancorp sold or securitized loans totaling $7.4 billion during
the year ended December 31, 2016, compared to $6.4 billion during
the year ended December 31, 2015. 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 for both years ended
December 31, 2016 and December 31, 2015. In addition to core
deposit funding, the Bancorp also accesses a variety of other short-
term and long-term funding sources, which include securitized
advances from the FHLB system. Certificates of deposit $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, 2016, $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
file any necessary registration statements with the SEC to permit
ready access to the public securities markets; however, access to
these markets may depend on market conditions. At December 31,
2016, the Bancorp has approximately $42.3 billion of borrowing
capacity available through secured borrowing sources including the
FHLB and FRB.
The Bank’s global bank note program has a borrowing capacity
of $25.0 billion, of which $17.1 billion is available for issuance as of
December 31, 2016. On March 15, 2016, the Bank issued and sold
$1.5 billion in aggregate principal amount of unsecured bank notes.
On June 14, 2016, the Bank issued and sold $1.3 billion of
unsecured bank notes. On September 27, 2016, the Bank issued and
sold $1.0 billion of unsecured bank notes.
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
85 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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
BCBS for
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 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 became 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’s
Modified LCR was 128% at December 31, 2016 calculated under
the LCR final rule.
The U.S. banking agencies have issued a notice of proposed
rulemaking to implement a modified NSFR for certain bank holding
companies with at least $50 billion but less than $250 billion in total
consolidated assets and with less than $10 billion in on-balance
sheet foreign exposures, including the Bancorp. The NSFR is
designed to promote medium- and long-term stable funding of the
assets and off-balance-sheet activities of banks and bank holding
companies over a one-year time horizon. Generally consistent with
rule banking
the BCBS’
organizations would be required to hold an amount of ASF over a
one-year time horizon that equals or exceeds the institution’s
amount of RSF, with the ASF representing the numerator and the
the NSFR. Banking
RSF representing
organizations subject to the modified NSFR would multiply the
RSF amount by 70%, such that the RSF amount required for these
the denominator of
framework, under
the proposed
institutions would be equivalent to 70% of the RSF amount that
would be required pursuant to the full NSFR generally applicable to
institutions with at least $250 billion in total consolidated assets or
$10 billion or more in on-balance sheet foreign exposures under the
proposed rule. The proposed rule includes detailed descriptions of
the items that would comprise ASF and RSF and standardized
factors that would apply to ASF and RSF items, and would require
any institution whose applicable modified NSFR falls under 100%
to notify
the appropriate federal regulator and develop a
remediation plan.
ultimately
the
as
implementation of the NSFR could impact the Bancorp’s liquidity
and funding requirements and practices in the future, including by
incentivizing increased use of long-term debt as a funding source.
Under the proposal, the NSFR becomes effective January 1, 2018
with public disclosure requirements beginning for the calendar
quarter that ends on March 31, 2018. The comment period for this
proposal ended on August 5, 2016. The Bancorp is currently
evaluating the
impact of the U.S. banking agencies’ NSFR
framework.
proposed,
currently
adopted
If
Credit Ratings
The cost and availability of financing to the Bancorp and Bank are
impacted by its credit ratings. A downgrade to the Bancorp’s or
Bank’s credit ratings could affect its ability to access the credit
its borrowing costs, thereby adversely
markets and
impacting the Bancorp’s or Bank’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.
increase
The Bancorp’s and Bank’s credit ratings are summarized in
Table 70. The ratings reflect the ratings agency’s view on the
Bancorp’s and Bank’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 70: AGENCY RATINGS
As of February 24, 2017
Fifth Third Bancorp:
Short-term
Senior debt
Subordinated debt
Fifth Third Bank:
Short-term
Long-term deposit
Senior debt
Subordinated debt
Rating Agency Outlook for Fifth Third Bancorp and Fifth Third Bank:
Moody's
Standard and Poor's
Fitch
No rating
Baa1
Baa1
P-1
Aa3
A3
Baa1
Stable
A-2
BBB+
BBB
A-2
No rating
A-
BBB+
Stable
F1
A
A-
F1
A+
A
A-
Negative
DBRS
R-1L
AL
BBBH
R-1L
A
A
AL
Stable
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,
86 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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). Business Controls groups are in place in each of the lines
of business to ensure consistent implementation and execution of
managing day to day operational risk (first line of defense).
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
and overseeing
responsible
is
relate
function
losses. The
to operational
programs and systems as
risk
they
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.
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
regulatory expectations and material changes
laws and
regulations, increases compliance risk. To mitigate compliance risk,
Compliance Risk Management provides independent oversight to
ensure consistency and sufficiency in the execution of the program
and ensures that lines of business, regions and support functions are
in
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. 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 quarterly 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
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,
issues tracking, regulatory compliance testing and monitoring, anti-
money laundering, privacy and oversees the Bancorp’s compliance
with the Community Reinvestment Act.
that oversees and supports Fifth Third
Fifth Third also focuses on the reporting and escalation of
compliance issues to senior management and the Board of
Directors. The Management Compliance Committee is the key
committee
the
management of compliance risk across the enterprise. The
Management Compliance Committee oversees Fifth Third-wide
compliance issues, industry best practices, legislative developments
(in coordination with
the Regulatory Change Management
Committee), regulatory concerns and other leading indicators of
compliance risk. The Management Compliance Committee reports
to the ERMC, which reports to the Risk and Compliance
Committee of the Board of Directors.
in
risk-based capital and Tier I leverage greater than or equal to 6.5%,
8%, 10% and 5%, respectively.
On January 1, 2016, the Bancorp became subject to a capital
conservation buffer which will be phased in over a three-year period
ending January 1, 2019. Once fully phased-in,
the capital
conservation buffer will be 2.5% in addition to the minimum capital
requirements, in order to avoid limitations on certain capital
distributions and discretionary bonus payments to executive
officers. The capital conservation buffer is 0.625% in 2016. 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, 2016, the Bancorp’s TruPS no longer
qualified for Tier I capital, compared to $13 million, or 1 bp of risk-
weighted assets, which qualified as Tier I capital at December 31,
2015.
87 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the Bancorp's capital ratios as of December 31:
TABLE 71: CAPITAL RATIOS
($ 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)
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 (to quarterly average assets)
2016
2015
2014
2013
2012
11.67 %
9.82
8.87
11.33 (f)
9.55
8.59
11.59 (f)
9.41
8.43
11.56 (f)
9.44
8.63
11.65 (f)
9.17
8.83
$
Basel III
Transitional(b)
12,426
13,756
17,972
119,632
11,917
13,260
17,134
121,290 (e)
N/A
12,764
16,895
117,878 (e)
Basel I(c)
N/A
12,094
16,431
115,969 (e)
N/A
11,685
15,811
109,301 (e)
10.39 %
11.50
15.02
9.90
9.82 (e)
10.93 (e)
14.13 (e)
9.54 (e)
N/A
10.83 (e)
14.33 (e)
9.66 (e)
N/A
10.43 (e)
14.17 (e)
9.73 (e)
N/A
10.69 (e)
14.47 (e)
10.15 (e)
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
N/A
9.72 (e)
N/A
N/A
Basel III
Fully Phased-In
10.29 %
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.
(e)
Balances and ratios not restated for the adoption of the amended guidance of ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs.” Refer to Note 1 of the Notes to Consolidated
Financial Statements for further information.
(f) Upon adoption of ASU 2015-03 on January 1, 2016, the Consolidated Balance Sheets for the years ended 2015, 2014, 2013 and 2012 were adjusted to reflect the reclassification of $33, $34,
$28 and $52, respectively, of average debt issuance costs from average other assets to average long-term debt. For further information, refer to Note 1 of the Notes to Consolidated Financial
Statements.
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 2016 stress testing program and CCAR on January 28,
2016, with submissions of stress test results and capital plans to the
FRB due on April 5, 2016, 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 2016.
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 $0.53 and
$0.52 during the years ended December 31, 2016 and 2015,
respectively. The Bancorp entered into or settled a number of
accelerated share repurchase transactions during the years ended
December 31, 2016 and 2015. Refer to Note 23 of the Notes to
Consolidated Financial Statements for additional information on the
accelerated share repurchases.
88 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table summarizes shares authorized for repurchase as part of publicly announced plans or programs:
TABLE 72: SHARE REPURCHASES
For the years ended December 31
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)
73,180,368
-
(42,607,855)
30,572,513
19.60
In March 2016, 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 14 million shares remained available for repurchase by the Bancorp.
30,572,513
85,702,105
(34,633,221)
81,641,397
18.86
2016
2015
(b) Excludes 2,430,179 and 1,930,233 shares repurchased during the years ended December 31, 2016 and 2015, 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.
$
89 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, the Bancorp enters into financial
transactions that are considered off-balance sheet arrangements as
they involve varying elements of market, credit and liquidity risk in
excess of the amounts recognized in the Bancorp’s Consolidated
Balance Sheets. The Bancorp’s off-balance sheet arrangements
liabilities, guarantees and
include commitments, contingent
transactions with non-consolidated VIEs. A brief discussion of
these transactions is as follows:
Commitments
The Bancorp has certain commitments to make future payments
under contracts, including commitments to extend credit, letters of
credit, forward contracts related to residential mortgage loans held
for sale, noncancelable operating
lease obligations, capital
commitments for private equity investments, purchase obligations,
capital expenditures, and capital lease obligations. Refer to Note 17
of the Notes to Consolidated Financial Statements for additional
information on commitments.
Guarantees and Contingent Liabilities
For certain mortgage loans originated by the Bancorp, borrowers
are required to obtain PMI provided by third-party insurers. In
some instances, these insurers ceded a portion of the PMI
premiums to the Bancorp, and the Bancorp provided reinsurance
coverage within a specified range of the total PMI coverage. The
Bancorp’s reinsurance coverage typically ranged 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. As of December 31, 2015 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 Sheet. In the second quarter
of 2016, the Bancorp allowed one of its third-party insurers to
terminate its reinsurance agreement with the Bancorp, resulting in
the Bancorp releasing collateral to the insurer in the form of
investment securities and other assets with a carrying value of $6
million, and the insurer assuming the Bancorp’s obligations under
the reinsurance agreement, resulting in a decrease to the Bancorp’s
reserve liability of $2 million and a decrease in the Bancorp’s
maximum exposure of $26 million. In addition, the Bancorp
received a payment of $4 million related to the difference between
the release of the assets and the reserve liability assumed. During the
fourth quarter of 2016, the final policies under the reinsurance
agreement were terminated and as of December 31, 2016 the
Bancorp no longer had any remaining exposure or reserves related
to exposure within the reinsurance portfolio.
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.
90 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, 2016 are shown in
Table 73. As of December 31, 2016, 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 73: CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
As of December 31, 2016 ($ in millions)
Contractually obligated payments due by period:
Deposits with no stated maturity(a)
Long-term debt(b)
Time deposits(c)
Short-term borrowings(e)
Forward contracts related to residential mortgage loans held for sale(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
$
$
97,577
1,156
2,173
3,667
1,823
88
182
18
49
6
106,739
-
5,924
2,782
-
-
161
102
33
34
11
9,047
-
3,839
1,274
-
-
117
36
32
3
1
5,302
-
3,469
15
-
-
210
37
77
-
1
3,809
97,577
14,388
6,244
3,667
1,823
576
357
160
86
19
124,897
$
$
29,355
1,387
30,742
67,968
2,583
70,551
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 deposits 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.
15,388
814
16,202
15,702
350
16,052
(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
7,523
32
7,555
Statements.
91 Fifth Third Bancorp
MANAGEMENT’S ASSESSMENT AS TO THE EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
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 of 1934). The disclosure controls and procedures are
designed to ensure that information required to be disclosed in the reports the Bancorp files and submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported as and when required and information is accumulated and communicated to management
on a timely basis. Based on the evaluation, 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 not effective, because of deficiencies in the Bancorp’s
policies and procedures relating to the registration of, and prospectus delivery with respect to, the Bancorp’s employee benefit plans as described
in Part II, Item 5 (Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities).
MANAGEMENT’S ASSESSMENT AS TO THE EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING
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, 2016. 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, 2016. Based on
this assessment, management believes that the Bancorp maintained effective internal control over financial reporting as of December 31, 2016.
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, 2016. This report appears on page 93 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.
CHANGES IN INTERNAL CONTROLS
Greg D. Carmichael
President and Chief Executive Officer Executive Vice President and Chief Financial Officer
February 24, 2017
February 24, 2017
Tayfun Tuzun
92 Fifth Third Bancorp
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Fifth Third Bancorp:
We have audited the internal control over financial reporting of Fifth Third Bancorp and subsidiaries (the “Bancorp”) as of December 31, 2016,
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, 2016, 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, 2016 of the Bancorp and our report dated February 24, 2017 expressed an
unqualified opinion on those consolidated financial statements.
Cincinnati, Ohio
February 24, 2017
93 Fifth Third Bancorp
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2016
and 2015, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years
in the period ended December 31, 2016. 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, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2016, 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, 2016, 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 24, 2017 expressed an
unqualified opinion on the Bancorp’s internal control over financial reporting.
Cincinnati, Ohio
February 24, 2017
94 Fifth Third Bancorp
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)
CONSOLIDATED BALANCE SHEETS
2016
2015
$
$
$
$
$
$
$
2,392
31,183
26
410
2,754
751
92,098
(1,253)
90,845
2,065
738
2,416
9
744
7,844
142,177
35,782
68,039
103,821
132
3,535
1,800
2,269
14,388
125,945
2,051
1,331
2,756
13,441
59
(3,433)
16,205
27
16,232
142,177
2,540
29,044
70
386
2,671
903
92,582
(1,272)
91,310
2,239
707
2,416
12
785
7,965 (j)
141,048 (j)
36,267
66,938
103,205
151
1,507
2,164
2,341
15,810 (j)
125,178 (j)
2,051
1,331
2,666
12,358
197
(2,764)
15,839
31
15,870
141,048 (j)
Includes $85 and $152 of cash and due from banks, $1,216 and $2,537 of portfolio loans and leases, $(26) and $(28) of ALLL, $9 and $14 of other assets, $3 and $3 of other liabilities and
$1,094 and $2,487 of long-term debt from consolidated VIEs that are included in their respective captions above at December 31, 2016 and 2015, respectively. For further information, refer to
Note 11.
(b) Amortized cost of $31,024 and $28,678 at December 31, 2016 and 2015, respectively.
(c)
(d)
(e)
(f)
(g)
(h) Common shares: Stated value $2.22 per share; authorized 2 billion; outstanding at December 31, 2016 – 750,479,299 (excludes 173,413,282 treasury shares), 2015 – 785,080,314
Fair value of $26 and $70 at December 31, 2016 and 2015, respectively.
Includes $686 and $519 of residential mortgage loans held for sale measured at fair value at December 31, 2016 and 2015, respectively.
Includes $143 and $167 of residential mortgage loans measured at fair value at December 31, 2016 and 2015, respectively.
Includes $39 and $81 of bank premises and equipment held for sale at December 31, 2016 and 2015, respectively. For further information refer to Note 7.
Includes $0 and $628 of deposits held for sale at December 31, 2016 and 2015, respectively.
(excludes 138,812,267 treasury shares).
(i) 446,000 shares of undesignated no par value preferred stock are authorized and unissued at December 31, 2016 and 2015; 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, 2016 and 2015; 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, 2016 and 2015; 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, 2016 and 2015.
(j) Upon adoption of ASU 2015-03 on January 1, 2016, the December 31, 2015 Consolidated Balance Sheet was adjusted to reflect the reclassification of $34 of debt issuance costs from other assets
to long-term debt. For further information refer to Note 1.
Refer to the Notes to Consolidated Financial Statements.
95 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ 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
Corporate banking revenue
Wealth and asset management revenue
Card and processing revenue
Mortgage banking net revenue
Other noninterest income
Securities gains, net
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 the Notes to Consolidated Financial Statements.
2016
2015
2014
$
$
$
$
$
3,233
952
8
4,193
205
2
10
361
578
3,615
343
3,272
558
432
404
319
285
688
10
2,696
1,612
339
299
234
132
118
1,169
3,903
2,065
505
1,560
(4)
1,564
75
1,489
1.95
1.93
757,432,291
764,495,353
0.53
3,151
869
8
4,028
186
1
2
306
495
3,533
396
3,137
563
384
418
302
348
979
9
3,003
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
3,298
724
8
4,030
202
-
2
247
451
3,579
315
3,264
560
430
407
295
310
450
21
2,473
1,449
334
313
212
141
121
1,139
3,709
2,028
545
1,483
2
1,481
67
1,414
1.68
1.66
833,116,349
842,967,356
0.51
96 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 included in net income
Unrealized gains on cash flow hedge derivatives:
Unrealized holding gains arising during the year
Reclassification adjustment for net gains included in net income
Defined benefit pension plans, net:
Net actuarial loss 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 the Notes to Consolidated Financial Statements.
2016
2015
2014
$
1,560
1,706
1,483
(130)
(7)
19
(31)
(1)
12
(138)
1,422
(4)
1,426
(227)
(10)
48
(49)
(5)
11
(232)
1,474
(6)
1,480
378
(24)
39
(29)
(25)
8
347
1,830
2
1,828
$
97 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Bancorp Shareholders’ Equity
Accumulated
Other
Total
Bancorp
Non-
Common Preferred Capital Retained Comprehensive Treasury Shareholders’ Controlling
Total
Equity
$
$
82
72
13
297
347
(726)
2,051
2,051
1,331
1,034
2,646
2,561
Stock
Stock
Stock
(1,295)
Equity
Income
(427)
(67)
(427)
(67)
(654)
297
14,626
1,483
347
14,589
1,481
347
(427)
(67)
(654)
297
Interests
37
2
Surplus Earnings
10,156
1,481
($ in millions, except per share data)
Balance at December 31, 2013
Net income
Other comprehensive income, net of tax
Cash dividends declared:
Common stock at $0.51 per share
Preferred stock(a)
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, net of tax
Cash dividends declared:
Common stock at $0.52 per share
Preferred stock(b)
Shares acquired for treasury
Impact of stock transactions under
stock compensation plans, net
Other
Balance at December 31, 2015
Net income
Other comprehensive loss, net of tax
Cash dividends declared:
Common stock at $0.53 per share
Preferred stock(c)
Shares acquired for treasury
Impact of stock transactions under
80
stock compensation plans, net
1
Other
Balance at December 31, 2016
16,232
(a) 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
60
-
15,626
1,712
(232)
75
-
15,839
1,564
(138)
60
-
15,665
1,706
(232)
75
(2)
15,870
1,560
(138)
(4)
3
(3,433)
(2)
11,141
1,712
(3)
12,358
1,564
1
(2)
13,441
80
1
16,205
52
3
(2,764)
47
2
(1,972)
(405)
(75)
(661)
(417)
(75)
(850)
(405)
(75)
(661)
(417)
(75)
(850)
(405)
(75)
(417)
(75)
(2)
31
(4)
39
(6)
2,756
2,666
1,331
2,051
2,051
1,331
(668)
(138)
(232)
(847)
197
429
59
23
27
83
(3)
$
7
$
and $391.32 per preferred share for Perpetual Preferred Stock, Series J.
(b) 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
(c)
and $1,225.00 per preferred share for Perpetual Preferred Stock, Series J.
For the year ended December 31, 2016, 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 $1,225.00 per preferred share for Perpetual Preferred Stock, Series J.
Refer to the Notes to Consolidated Financial Statements.
98 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 ($ 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
(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
Gains on sales of certain retail branch operations
Net losses on disposition and impairment of operating lease equipment
Gain on sale of Vantiv, Inc. shares
Gain on the TRA associated with Vantiv, Inc.
Proceeds from sales of loans held for sale
Loans originated for sale, net of repayments
Dividends representing return on equity method investments
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 cash paid on sales of certain retail branch operations
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 stock and related forward contracts
Issuance of preferred stock
Other
Net Cash Provided by Financing Activities
Decrease in Cash and Due from Banks
Cash and Due from Banks at Beginning of Period
Cash and Due from Banks at End of Period
$
2016
2015
2014
1,560
343
453
111
(148)
(7)
(7)
(101)
13
(19)
9
-
(197)
6,895
(7,014)
28
(23)
351
(157)
24
2,114
18,280
360
82
3,776
44
(24,636)
(186)
64
(219)
(83)
(243)
(126)
(2,887)
1,146
(19)
2,028
(402)
(52)
3,735
(5,119)
(661)
-
(31)
625
(148)
2,540
2,392
1,706
396
441
100
(71)
(5)
(4)
(98)
101
-
33
(331)
(31)
5,102
(5,142)
25
(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
1,483
315
414
83
79
(21)
65
(67)
19
-
-
(125)
(23)
5,477
(4,874)
42
(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
Refer to the 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.
99 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.
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 direct loan
origination fees and costs and any direct principal charge-offs.
Direct loan origination fees and costs are deferred and the net
amount is amortized over the estimated life of the related loans as a
yield adjustment. Interest income is recognized based on the
principal balance outstanding computed using the effective interest
method.
Loans acquired by the Bancorp through a purchase business
combination are recorded at fair value as of the acquisition date.
The Bancorp does not carry over the acquired company’s ALLL,
nor does the Bancorp add to its existing ALLL as part of purchase
accounting.
interest
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
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 acquisition date, the methods
utilized to estimate the required ALLL are similar to originated
loans acquired with
loans. This method of accounting for
deteriorated credit quality does not apply to loans carried at fair
value, residential mortgage loans held for sale and loans under
revolving credit agreements.
The Bancorp’s lease portfolio consists of both direct financing
and leveraged leases. Direct financing leases are carried at the
aggregate of lease payments plus estimated residual value of the
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. Intercompany transactions and balances among consolidated
entities have been eliminated.
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
institution or the FRB that are payable
another depository
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
and held-to-maturity
securities with
unrealized losses are reviewed quarterly for possible OTTI. For debt
securities, if the Bancorp intends to sell the debt security or will
more likely than not be required to sell the debt security before
100 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 direct loan origination 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 nonaccrual 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
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 when
cash is received, to the extent such income 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
101 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the modified
or more prior to the modification in accordance with the modified
terms and collectability is reasonably assured for all remaining
terms. TDRs of
contractual payments under
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
certain ARM loans, DCF models that may incorporate the
anticipated portfolio composition, credit spreads of asset-backed
securities with similar collateral and market conditions. The
anticipated portfolio composition includes the effects of interest
rate spreads and discount rates due to loan characteristics such as
the state in which the loan was originated, the loan amount and the
ARM margin. These fair value marks are recorded as a component
of noninterest income in mortgage banking net revenue. The
Bancorp generally has commitments to sell residential mortgage
loans held for sale in the secondary market. Gains or losses on sales
are recognized in mortgage banking net revenue.
intent
loans
classified as held for sale may change over time due to such factors
as changes in the overall liquidity in markets or changes in
characteristics specific to certain loans held for sale. Consequently,
these loans may be reclassified to loans held for investment and,
to sell residential mortgage
Management’s
102 Fifth Third Bancorp
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
Bancorp’s portfolio segments
include commercial, residential
mortgage and consumer. The Bancorp further disaggregates its
portfolio segments into classes for purposes of monitoring and
assessing credit quality based on certain risk characteristics. Classes
within the commercial portfolio segment include commercial and
industrial, commercial mortgage owner-occupied, commercial
mortgage nonowner-occupied, commercial construction and
commercial leasing. The residential mortgage portfolio segment is
also considered a class. Classes within the consumer portfolio
segment include home equity, automobile, credit card and other
consumer loans and leases. For an analysis of the Bancorp’s ALLL
by portfolio segment and credit quality information by class, refer to
Note 6.
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
in estimating and
the
maintained
measuring losses when evaluating allowances for pools of loans.
to recognize
imprecision
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 migration analyses for
several portfolio stratifications, which track 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.
During 2016, the Bancorp refined its estimation techniques for
the ALLL to introduce individual loss rate migration analyses for
several commercial loan portfolio stratifications as contrasted to the
single composite
loss rate migration analysis for the entire
commercial loan portfolio which was used in prior periods. These
refinements did not substantively change any material aspect of the
Bancorp’s overall approach in the determination of the ALLL and
there have been no material changes in assumptions as compared to
prior periods that impacted the determination of the current period
allowance.
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. The prescriptive loss rate factors include
adjustments for delinquency trends, LTV trends and refreshed
FICO score trends.
The Bancorp also considers qualitative factors in determining
the ALLL. These include adjustments for changes in policies or
procedures in underwriting, monitoring or collections, economic
conditions, portfolio mix, lending and risk management personnel,
results of internal audit and quality control reviews, collateral values
and geographic concentrations. The Bancorp considers home price
index trends when determining the collateral value qualitative factor.
The Bancorp’s primary market areas for lending are the
Midwestern and Southeastern regions of the U.S. When evaluating
the adequacy of allowances, consideration is given to these regional
geographic concentrations and the closely associated effect changing
economic conditions have on the Bancorp’s customers.
In the current year, the Bancorp has not substantively changed
any material aspect to its overall approach to determining its ALLL
for any of its portfolio segments. There have been no material
changes in criteria or estimation techniques as compared to prior
periods that impacted the determination of the current period
ALLL for any of the Bancorp’s portfolio segments.
liabilities
Reserve for Unfunded Commitments
The reserve for unfunded commitments is maintained at a level
believed by management to be sufficient to absorb estimated
probable losses related to unfunded credit facilities and is included
in 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 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
impairment
fair value, with
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 and the OAS spread, 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.
103 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reserve for Representation and Warranty Provisions
Conforming residential mortgage loans sold to unrelated third
parties are generally sold with representation and warranty
provisions. A contractual liability arises only in the event of a breach
of these representations and warranties and, in general, only when a
loss results from the breach. The Bancorp may be required to
repurchase any previously sold loan or indemnify (make whole) the
investor or insurer for which the representation or warranty of the
Bancorp proves to be inaccurate, incomplete or misleading. The
Bancorp establishes a residential mortgage repurchase reserve
related to various representations and warranties that reflects
management’s estimate of losses based on a combination of factors.
The Bancorp’s estimation process requires management to
make subjective and complex judgments about matters that are
inherently uncertain, such as future demand expectations, economic
factors and the specific characteristics of the loans subject to
repurchase. Such factors incorporate historical investor audit and
repurchase demand rates, appeals success rates, historical loss
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.
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.
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.
is used
income
for
104 Fifth Third Bancorp
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
the derivative
derivative contract,
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.
Tax Receivable Agreements
In conjunction with Vantiv, Inc.’s IPO in 2012, the Bancorp entered
into two TRAs with Vantiv, Inc. The TRAs provide for payments
by Vantiv, Inc. to the Bancorp of 85% of the cash savings actually
realized as a result of the increase in tax basis that results from the
historical or future purchase of equity in Vantiv Holding, LLC from
the Bancorp or from the exchange of equity units in Vantiv
Holding, LLC for cash or Class A Stock, as well as any tax benefits
attributable to payments made under the TRA. Any actual increase
in tax basis, as well as the amount and timing of any payments made
under the TRA depend on a number of uncertain factors, the most
significant of which is the realization of the tax benefits by Vantiv,
Inc., which depends on the amount and timing of Vantiv, Inc.’s
reportable taxable income. The Bancorp accounts for these TRAs as
gain contingencies and recognizes income when all uncertainties
surrounding the realization of such amounts are resolved.
Income Taxes
The Bancorp accounts for income taxes using the asset and liability
method, which requires the recognition of deferred tax assets and
liabilities for expected future tax consequences. Under the asset and
liability method, deferred tax assets and liabilities are determined by
applying the federal and state tax rates to the differences between
financial statement carrying amounts and the corresponding tax
bases of assets and liabilities. Deferred tax assets are also recorded
for any tax attributes, such as tax credits and net operating loss
carryforwards. The net balances of deferred tax assets and liabilities
are reported in other assets and accrued taxes, interest and expenses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in the Consolidated Balance Sheets. Any effect of a change in
federal or state tax rates on deferred tax assets and liabilities is
recognized in income tax expense in the period that includes the
enactment date. The Bancorp reflects the expected amount of
income tax to be paid or refunded during the year as current income
tax expense or benefit. Accrued taxes represent the net expected
amount due to and/or from taxing jurisdictions and are reported in
accrued taxes, interest and expenses in the Consolidated Balance
Sheets.
judgment about
The Bancorp evaluates the realization of deferred tax assets
based on all positive and negative evidence available at the balance
sheet date. Realization of deferred tax assets is based on the
Bancorp’s
their
realization, including the taxable income within any applicable
carryback periods, future projected taxable income, the reversal of
taxable temporary differences and tax-planning strategies. The
Bancorp records a valuation allowance for deferred tax assets where
the Bancorp does not believe that it is more-likely-than-not that the
deferred tax assets will be realized.
factors affecting
relevant
Income
the relevant
tax benefits from uncertain
tax positions are
recognized in the financial statements only if the Bancorp believes
that it is more-likely-than-not that the uncertain tax position will be
sustained based solely on the technical merits of the tax position
and consideration of
taxing authority’s widely
understood administrative practices and precedents. If the Bancorp
does not believe that it is more-likely-than-not that an uncertain tax
position will be sustained, the Bancorp records a liability for the
uncertain tax position. If the Bancorp believes that it is more likely
than not that an uncertain tax position will be sustained, the
Bancorp only records a tax benefit for the portion of the uncertain
tax position where the likelihood of realization is greater than 50%
upon settlement with the relevant taxing authority that has full
knowledge of all relevant information. The Bancorp recognizes
interest expense,
to
unrecognized tax benefits within current income tax expense. Refer
to Note 20 for further discussion regarding income taxes.
income and penalties
interest
related
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 test is performed to measure the amount of impairment
loss, if any.
impairment
two-step
the
The fair value of a reporting unit is the price that would be
received to sell the unit as a whole in an orderly transaction between
market participants at the measurement date. As none of the
Bancorp’s reporting units are publicly traded, individual reporting
unit fair value determinations cannot be directly correlated to the
Bancorp’s stock price. To determine the fair value of a reporting
unit, the Bancorp employs an income-based approach, utilizing the
reporting unit’s forecasted cash flows (including a terminal value
approach to estimate cash flows beyond the final year of the
forecast) and the reporting unit’s estimated cost of equity as the
discount rate. Additionally, the Bancorp determines its market
capitalization based on the average of the closing price of the
Bancorp’s stock during the month including the measurement date,
incorporating an additional control premium, and compares this
market-based fair value measurement to the aggregate fair value of
the Bancorp’s reporting units in order to corroborate the results of
the income approach.
When required to perform Step 2, the Bancorp compares the
implied fair value of a reporting unit’s goodwill with the carrying
amount of that goodwill. If the carrying amount exceeds the implied
fair value, an impairment loss equal to that excess amount is
recognized. A recognized impairment loss cannot exceed the
carrying amount of that goodwill and cannot be reversed in future
periods even if the fair value of the reporting unit subsequently
recovers.
During Step 2, the Bancorp determines the implied fair value
of goodwill for a reporting unit by assigning the fair value of the
reporting unit to all of the assets and liabilities of that unit (including
any unrecognized intangible assets) as if the reporting unit had been
acquired in a business combination. The excess of the fair value of
the reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of goodwill. This assignment
process is only performed for purposes of testing goodwill for
105 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
Level 1 – Quoted prices (unadjusted) in active markets for
identical assets or liabilities that the Bancorp has the ability to
access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level
1 that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs include: quoted prices for similar
assets or liabilities in active markets; quoted prices for identical
or similar assets or liabilities in markets that are not active;
inputs other than quoted prices that are observable for the
asset or liability; and inputs that are derived principally from or
corroborated by observable market data by correlation or other
means.
Level 3 – Unobservable inputs for the asset or liability for which
there is little, if any, market activity at the measurement date.
Unobservable inputs reflect the Bancorp’s own assumptions
about what market participants would use to price the asset or
liability. The
inputs are developed based on the best
in the circumstances, which might
information available
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. The Bancorp may, as a practical expedient, measure
review and assessments
trades and overall
106 Fifth Third Bancorp
the fair value of certain investments on the basis of the net asset
value per share of the investment, or its equivalent. Any investments
which are valued using this practical expedient are not classified in
the fair value hierarchy. Refer to Note 27 for further information on
fair value measurements.
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 recognizes an adjustment to income tax expense for
the difference between the previously estimated tax deduction and
the actual tax deduction realized. For further information on the
Bancorp’s stock-based compensation plans, refer to Note 24.
Pension Plans
The Bancorp uses an expected long-term rate of return applied to
the fair market value of assets as of the beginning of the year and
the expected cash flow during the year for calculating the expected
investment return on all pension plan assets. Amortization of the
net gain or loss resulting from experience different from that
assumed and from changes in assumptions (excluding asset gains
and losses not yet reflected in market-related value) is included as a
component of net periodic benefit cost. If, as of the beginning of
the year, that net gain or loss exceeds 10% of the greater of the
projected benefit obligation and the market-related value of plan
assets, the amortization is that excess divided by the average
remaining service period of participating employees expected to
receive benefits under the plan. The Bancorp uses a third-party
actuary to compute the remaining service period of participating
employees. This period reflects expected turnover, pre-retirement
mortality and other applicable employee demographics.
Other
Securities and other property held by Fifth Third Wealth and Asset
Management, 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.
in the Consolidated
Wealth and asset management revenue
Statements of Income is recognized on the accrual basis. Wealth
and asset management 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.
Other intangible assets consist of core deposit intangibles,
cardholder
lists, non-compete
agreements
and
customer
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
Standards Adopted in 2016
The Bancorp adopted the following new accounting standards
effective January 1, 2016:
ASU 2014-12 – Compensation—Stock Compensation (Topic 718):
Accounting for Share-Based Payments When the Terms of an Award Provide
That a Performance Target Could Be Achieved after the Requisite Service
Period
In June 2014, the FASB issued ASU 2014-12 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 Bancorp
adopted the amended guidance prospectively and the adoption did
not have a material
impact on the Consolidated Financial
Statements.
ASU 2014-13 – Consolidation (Topic 810): Measuring the Financial Assets
and the Financial Liabilities of a Consolidated Collateralized Financing Entity
In August 2014, the FASB issued ASU 2014-13 which 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
Bancorp adopted the amended guidance retrospectively and the
adoption did not have a material impact on the Consolidated
Financial Statements.
ASU 2014-16 – Derivatives and Hedging (Topic 815): Determining Whether
the Host Contract in a Hybrid Financial Instrument Issued in the Form of a
Share Is More Akin to Debt or to Equity
In November 2014, the FASB issued ASU 2014-16 which 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 Bancorp adopted
the amended guidance on a modified retrospective basis and the
adoption did not have a material impact on the Consolidated
Financial Statements.
ASU 2015-01 – Income Statement—Extraordinary and Unusual Items
(Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating
the Concept of Extraordinary Items
In January 2015, the FASB issued ASU 2015-01 which eliminates
the concept of extraordinary items from U.S. GAAP. Previously, an
event or transaction was presumed to be an ordinary and usual
activity of a reporting entity unless evidence clearly supported its
classification as an extraordinary item, which had to 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 Bancorp adopted the amended guidance
prospectively and the adoption did not have a material impact on
the Consolidated Financial Statements.
to
the
(Topic 810): Amendments
ASU 2015-02 – Consolidation
Consolidation Analysis
In February 2015, the FASB issued ASU 2015-02 which 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
107 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the Investment Company Act of 1940 for registered money
market funds. The Bancorp adopted the amended guidance on a
modified retrospective basis and the adoption did not have a
material impact on the Consolidated Financial Statements.
ASU 2015-03 – Interest—Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued ASU 2015-03 which 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.
Subsequent to issuance of ASU 2015-03, the FASB also issued ASU
2015-15 to incorporate comments from the SEC that its staff would
not object to an entity deferring and presenting debt issuance costs
for line-of-credit arrangements as an asset and subsequently
amortizing these 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 Bancorp adopted
in ASU 2015-03 and ASU 2015-15
the amended guidance
reclassified
the Bancorp
adoption,
retrospectively. Upon
approximately $34 million of debt issuance costs from other assets
to a direct deduction from long-term debt in the Consolidated
Balance Sheets.
ASU 2015-04 – Practical Expedient for the Measurement Date of an
Employer’s Defined Benefit Obligation and Plan Assets
In April 2015, the FASB issued ASU 2015-04 which simplifies 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 Bancorp
adopted the amended guidance prospectively on January 1, 2016
and the adoption did not have an impact on the Consolidated
Financial Statements as the Bancorp’s fiscal year-end coincides with
a month-end.
ASU 2015-05 – Intangibles—Goodwill and Other—Internal-Use Software
(Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud
Computing Arrangement
In April 2015, the FASB issued ASU 2015-05 which 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 Bancorp adopted the amended guidance
prospectively to all arrangements entered into or materially modified
after the effective date. The adoption did not have a material impact
on the Consolidated Financial Statements.
ASU 2015-07 – Fair Value Measurement (Topic 820): Disclosures for
Investments in Certain Entities That Calculate Net Asset Value per Share (or
Its Equivalent)
In May 2015, the FASB issued ASU 2015-07 which removes 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
108 Fifth Third Bancorp
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
Bancorp adopted the amended guidance retrospectively and the
adoption did not have a material impact on the Consolidated
Financial Statements.
for adjustments made
ASU 2015-16 – Business Combinations (Topic 805): Simplifying the
Accounting for Measurement-Period Adjustments
In September 2015, the FASB issued ASU 2015-16 to simplify the
accounting
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 Bancorp adopted the amended guidance prospectively and the
adoption did not have a material impact on the Consolidated
Financial Statements.
ASU 2016-09 – Compensation—Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU 2016-09 to simplify the
accounting for share-based compensation paid to employees. The
amended guidance 1) requires excess tax benefits and tax
deficiencies on share-based payments to employees to be recognized
directly to income tax expense or benefit in the Consolidated
Income Statements; 2) requires excess tax benefits to be included as
operating activities on the Consolidated Statements of Cash Flows;
3) provides entities with the option of making an accounting policy
election to account for forfeitures of share-based payments as they
occur instead of estimating the awards expected to be forfeited; and
4) changes the threshold to qualify for equity classification to permit
withholdings up to the maximum statutory tax rate in the applicable
jurisdiction. In addition, excess tax benefits and tax deficiencies are
considered discrete items in the reporting period they occur and are
not included in the estimate of an entity’s annual effective tax rate.
As permitted, the Bancorp elected to early adopt the amended
guidance during the fourth quarter of 2016 with an effective date of
January 1, 2016. The changes to the recognition of excess tax
benefits were applied prospectively beginning January 1, 2016,
resulting in a reclassification from capital surplus to income tax
expense for the excess tax benefits originally recorded to capital
surplus during 2016. This reclassification did not materially impact
the Consolidated Financial Statements for the year ended December
31, 2016 but the reclassification did affect previously reported
results for interim periods. Net tax deficiencies of $1 million, $5
million and $0 were reclassified from capital surplus to applicable
income tax expense during the three months ended March 31, 2016,
June 30, 2016 and September 30, 2016, respectively, related to the
adoption. The Bancorp adopted the amendments to presentation
requirements for the Consolidated Statements of Cash Flows on a
prospective basis and the impact of adopting these amendments was
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
not material. The Bancorp elected to continue estimating awards
expected to be forfeited, and therefore this amended guidance did
not have an impact on the Consolidated Financial Statements. The
amended guidance also contained other provisions which either did
not apply to the Bancorp or did not have a material impact on the
Consolidated Financial Statements upon adoption.
Standards Issued but Not Yet Adopted
The following accounting standards were issued but not yet adopted
by the Bancorp as of December 31, 2016:
and
2016-20
(Technical Corrections
including ASUs 2016-08
ASU 2014-09 – Revenue from Contracts with Customers (Topic 606)
In May 2014, the FASB issued ASU 2014-09 which 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. Subsequent to the issuance of ASU 2014-09, the FASB
has issued additional guidance to clarify certain implementation
issues,
(Principal versus Agent
Considerations), 2016-10 (Identifying Performance Obligations and
Licensing), 2016-12 (Narrow-Scope Improvements and Practical
and
Expedients),
Improvements)
in March, April, May and December 2016,
respectively. These amendments do not change the core principles
in ASU 2014-09 and the effective date and transition requirements
are consistent with those in the original ASU. The Bancorp plans to
adopt the amended guidance on its required effective date of
January 1, 2018, using a modified retrospective approach, with the
cumulative effect of initially applying the amendments recognized at
the date of initial application. Because the amended guidance does
not apply to revenue associated with financial instruments, including
loans and securities that are accounted for under other U.S. GAAP,
the Bancorp’s preliminary analysis suggests that the adoption of this
amended guidance is not expected to have a material impact on its
Consolidated Financial Statements, although the Bancorp will also
be subject to expanded disclosure requirements upon adoption and
the Bancorp’s revenue recognition processes for wealth and asset
management revenue, corporate banking revenue, and card and
processing revenue may be affected. However, there are certain
areas of the amended guidance, such as credit card interchange fees
and related rewards programs, which are subject to interpretation
and for which the Bancorp has not made final conclusions regarding
the applicability and the related impact, if any. Accordingly, the
results of the Bancorp’s materiality analysis, as well as its selected
adoption method, may change as these conclusions are reached.
ASU 2016-01 – Financial Instruments—Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01 which revises 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 investments
(except 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
to
impairment assessment of equity investments for which fair value is
not readily determinable by requiring an entity to perform a
impairment. If qualitative
identify
qualitative assessment
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 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 Bancorp plans to adopt the amended
guidance on its required effective date of January 1, 2018. 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 a readily determinable
fair value will be applied
prospectively to all equity investments that exist as of the date of
adoption. 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.
ASU 2016-02 – Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02 which establishes
a new accounting model for leases. The amended guidance requires
lessees to record lease liabilities on the lessees’ balance sheets along
with corresponding right-of-use assets for all leases with terms
longer than twelve months. Leases will be classified as either finance
or operating, with classification affecting the pattern of expense
recognition in the lessee’s statements of income. From a lessor
perspective, the accounting model is largely unchanged, except that
the amended guidance includes certain targeted improvements to
align, where necessary, lessor accounting with the lessee accounting
model and the revenue recognition guidance in ASC Topic 606. The
amendments also modify disclosure requirements for an entity’s
lease arrangements. The amended guidance is effective for the
Bancorp on January 1, 2019, with early adoption permitted. The
amendments should be applied to each prior reporting period
presented using a modified retrospective approach, although the
amended guidance contains certain transition relief provisions that,
among other things, permit an entity to elect not to reassess the
classification of leases which existed or expired as of the date the
amendments are effective. The Bancorp is currently in the process
of developing an inventory of all leases and accumulating the lease
data necessary to apply the amended guidance. The Bancorp is
continuing to evaluate the impact of the amended guidance on its
Consolidated Financial Statements, but the effects of recognizing
most operating leases on the Consolidated Balance Sheets are
expected to be material. The Bancorp expects to recognize right-of-
use assets and lease liabilities for substantially all of its operating
lease commitments disclosed in Note 7 based on the present value
of unpaid lease payments as of the date of adoption.
ASU 2016-04 – Liabilities—Extinguishments of Liabilities (Subtopic 405-
20): Recognition of Breakage for Certain Prepaid Stored-Value Products
In March 2016, the FASB issued ASU 2016-04 which permits
proportional derecognition of the liability for unused funds on
certain prepaid stored-value products (known as breakage) to the
extent that it is probable that a significant reversal of the recognized
breakage amount will not subsequently occur. The amendments do
109 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
not apply to any prepaid stored-value products that are attached to a
segregated customer deposit account, or products for which unused
funds are subject to unclaimed property remittance laws. The
amended guidance may be applied retrospectively to all comparable
periods presented in the year of adoption or applied on a modified
retrospective basis by means of a cumulative-effect adjustment to
retained earnings as of the beginning of the fiscal year of adoption.
The Bancorp plans to adopt the amended guidance on its required
effective date of January 1, 2018 and is currently in the process of
evaluating the impact of the amended guidance on its Consolidated
Financial Statements. However, the Bancorp’s preliminary analysis
suggests that most of its prepaid stored-value products will not be
affected by the amended guidance.
ASU 2016-05 – Derivatives and Hedging (Topic 815): Effect of Derivative
Contract Novations on Existing Hedge Accounting Relationships
In March 2016, the FASB issued ASU 2016-05 which clarifies that a
change in counterparty in a derivative contract does not, in and of
itself, represent a change in critical terms that would require
discontinuation of hedge accounting provided that other hedge
accounting criteria continue to be met. The Bancorp adopted the
amended guidance prospectively on January 1, 2017. The adoption
did not have a material impact on the Consolidated Financial
Statements.
ASU 2016-06 – Derivatives and Hedging (Topic 815): Contingent Put and
Call Options in Debt Instruments
In March 2016, the FASB issued ASU 2016-06 which clarifies the
requirements for determining when contingent put and call options
embedded in debt instruments should be bifurcated from the debt
instrument and accounted for separately as derivatives. A four-step
decision sequence should be followed in determining whether such
options are clearly and closely
the economic
characteristics and risks of the debt instrument, which determines
whether bifurcation
is necessary. The Bancorp adopted the
amended guidance on January 1, 2017 on a modified retrospective
basis. The adoption did not have a material impact on the
Consolidated Financial Statements.
related
to
ASU 2016-07 – Investments—Equity Method and Joint Ventures (Topic
323): Simplifying the Transition to the Equity Method of Accounting
In March 2016, the FASB issued ASU 2016-07 to eliminate the
requirement that when an investment qualifies for use of the equity
method as a result of an increase in the level of ownership interest
or degree of influence, an investor must adjust the investment,
results of operations and retained earnings retroactively on a step-
by-step basis as if the equity method had been in effect during all
previous periods
investment had been held. The
amendments require that the equity method investor add the cost of
acquiring the additional interest in the investee to the current basis
of the investor’s previously held interest and adopt the equity
method of accounting as of the date the investment becomes
qualified for equity method accounting, eliminating the requirement
to retrospectively apply the equity method of accounting back to the
date of the initial investment. The Bancorp adopted the amended
guidance prospectively on January 1, 2017. The adoption did not
have a material impact on the Consolidated Financial Statements.
that
the
ASU 2016-13 – Financial Instruments—Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13 which establishes a
new approach to estimate credit losses on certain types of financial
instruments. The new approach changes the impairment model for
most financial assets, and will require the use of an “expected credit
loss” model for financial instruments measured at amortized cost
110 Fifth Third Bancorp
and certain other instruments, including trade and other receivables,
loans, debt securities, net investments in leases, and off-balance-
sheet credit exposures (such as loan commitments, standby letters
of credit, and financial guarantees not accounted for as insurance).
This model requires entities to estimate the lifetime expected credit
loss on such instruments and record an allowance that represents
the portion of the amortized cost basis that the entity does not
expect to collect. This allowance is deducted from the financial
asset’s amortized cost basis to present the net amount expected to
be collected. The new expected credit loss model will also apply to
purchased financial assets with credit deterioration, superseding
current accounting guidance for such assets. The amended guidance
also amends the impairment model for available-for-sale debt
securities, requiring entities to determine whether all or a portion of
the unrealized loss on such securities is a credit loss, and also
eliminating the option for management to consider the length of
time a security has been in an unrealized loss position as a factor in
concluding whether or not a credit loss exists. The amended model
states that an entity will recognize an allowance for credit losses on
available-for-sale debt securities as a contra account to the
amortized cost basis, instead of a direct reduction of the amortized
cost basis of the investment, as under current guidance. As a result,
entities will recognize improvements to estimated credit losses on
available-for-sale debt securities immediately in earnings as opposed
to interest income over time. There are also additional disclosure
requirements included in this guidance. The amended guidance is
effective for the Bancorp on January 1, 2020, with early adoption
permitted as early as January 1, 2019. The amended guidance is to
be applied on a modified retrospective basis with the cumulative
effect of initially applying the amendments recognized in retained
earnings at the date of initial application. However, certain
provisions of the guidance are only required to be applied on a
prospective basis. While the Bancorp is currently in the process of
evaluating the impact of the amended guidance on its Consolidated
Financial Statements, it currently expects the ALLL to increase
upon adoption given that the allowance will be required to cover the
full remaining expected life of the portfolio upon adoption, rather
than the incurred loss model under current U.S. GAAP. The extent
of this increase is still being evaluated and will depend on economic
conditions and the composition of the Bancorp’s loan and lease
portfolio at the time of adoption.
ASU 2016-15 – Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU 2016-15 to clarify the
guidance for classification of certain cash receipts and payments
within an entity’s statements of cash flows. These items include debt
prepayment or extinguishment costs, settlement of zero-coupon
debt instruments, contingent consideration payments made after a
business combination, proceeds from the settlement of insurance
claims, proceeds from the settlement of BOLI policies, distributions
received from equity method investees, and beneficial interests in
securitization transactions. The amended guidance also specifies
how to address classification of cash receipts and payments that
have aspects of more than one class of cash flows. The amended
guidance is effective for the Bancorp on January 1, 2018, with early
adoption permitted, and is to be applied on a retrospective basis
unless it is impractical to do so. The Bancorp is currently in the
process of evaluating the impact of the amended guidance on its
Consolidated Financial Statements.
ASU 2016-16 – Income Taxes (Topic 740): Intra-Entity Transfers of Assets
Other Than Inventory
In October 2016, the FASB issued ASU 2016-16 which requires an
entity to recognize the income tax consequences of an intra-entity
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
transfer of an asset other than inventory when the transfer occurs.
Current U.S. GAAP prohibits the recognition of current and
deferred income taxes for an intra-entity asset transfer until the asset
has been sold to an outside party. The amended guidance is
effective for the Bancorp on January 1, 2018, with early adoption
permitted, and is applied on a modified retrospective basis through
a cumulative-effect adjustment directly to retained earnings as of the
beginning of the fiscal year in which the guidance is effective. The
Bancorp is currently in the process of evaluating the impact of the
amended guidance on its Consolidated Financial Statements.
ASU 2016-17 – Consolidation (Topic 810): Interests Held Through Related
Parties That Are Under Common Control
In October 2016, the FASB issued ASU 2016-17 which changes the
accounting for the consolidation of VIEs in certain situations
involving entities under common control. Specifically,
the
amendments change how the indirect interests held through related
parties that are under common control should be included in a
reporting entity’s evaluation of whether it is a primary beneficiary of
a VIE. Under the amended guidance, the reporting entity is only
required to include the indirect interests held through related parties
that are under common control in a VIE on a proportionate basis.
Currently, the indirect interests held by the related parties that are
under common control are considered to be the equivalent of direct
interests in their entirety. The Bancorp adopted the amended
guidance retrospectively on January 1, 2017. The adoption did not
have a material impact on the Consolidated Financial Statements.
ASU 2016-18 – Statement of Cash Flows (Topic 230): Restricted Cash
In November 2016, the FASB issued ASU 2016-18 to provide
clarifying guidance on the classification and presentation of changes
in restricted cash on an entity’s statements of cash flows. The
guidance requires that restricted cash be included with cash and cash
equivalents when reconciling the beginning-of-period and end-of-
period total amounts shown on the statement of cash flows. The
amended guidance is effective for the Bancorp on January 1, 2018,
with early adoption permitted, and is to be applied retrospectively to
all periods presented. The Bancorp is currently in the process of
evaluating the impact of the amended guidance on its Consolidated
Financial Statements.
ASU 2017-01 – Business Combinations (Topic 805): Clarifying the
Definition of a Business
In January 2017, the FASB issued ASU 2017-01 which clarifies the
definition of a business in order to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or
disposals) of assets or businesses. The amended guidance provides a
screen which states that when substantially all of the fair value of
assets acquired (or disposed) is concentrated in a single asset or
group of similar assets, then the set of assets and activities would
not be considered a business. The amended guidance is effective for
the Bancorp on January 1, 2018, and is to be applied prospectively.
The Bancorp is currently in the process of evaluating the impact of
the amended guidance on its Consolidated Financial Statements.
ASU 2017-04 – Intangibles—Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04 which simplifies the
test for goodwill impairment by removing the second step, which
measures the amount of impairment loss, if any. Instead, the
amended guidance states that an entity should recognize an
impairment charge for the amount by which the carrying amount
exceeds the reporting unit’s fair value, except that the loss
recognized should not exceed the total amount of goodwill allocated
to that reporting unit. This would apply to all reporting units,
including those with zero or negative carrying amounts of net assets.
The amended guidance is effective for the Bancorp on January 1,
2020, and is to be applied prospectively. Early adoption is
permitted. The Bancorp is currently in the process of evaluating the
impact of the amended guidance on its 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
$
2016
2015
2014
578
800
238
28
49
-
-
475
400
487
288
105
-
4
429
550
855
31
145
2
15
3. RESTRICTIONS ON CASH, DIVIDENDS AND OTHER CAPITAL ACTIONS
Reserve Requirement
The FRB, under Regulation D, requires that banks hold cash in
reserve against deposit liabilities when total reservable deposit
liabilities are greater than the regulatory exemption, 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. 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. At December 31,
2016 and 2015,
reserve
requirement was $1.6 billion and $1.9 billion, respectively.
Additionally, the Bancorp’s banking subsidiary average reserve
requirement was $1.6 billion and $1.8 billion in 2016 and 2015,
respectively.
the Bancorp’s banking subsidiary
111 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• The potential repurchase of common shares in an amount
up to $660 million, which includes $84 million in
repurchases related to share issuances under employee
benefit plans;
• The additional ability to repurchase shares in the amount
of any realized after-tax gains from the sale of Vantiv, Inc.
common stock, if executed;
• The additional ability to repurchase shares in the amount
of any realized after-tax gains from the termination and
settlement of any portion of the TRA with Vantiv, Inc., if
executed.
As contemplated by the 2015 CCAR, during the first quarter of
2016, the Bancorp entered into a $240 million accelerated share
repurchase transaction and during the second quarter of 2016, the
Bancorp repurchased approximately $26 million of its outstanding
common stock through open market share repurchase transactions.
Additionally, as contemplated by the 2016 CCAR, the Bancorp
entered into $240 million and $155 million accelerated share
repurchase transactions during the third and fourth quarters of
2016, respectively. For further information, refer to Note 23. In the
fourth quarter of 2016, the Bancorp increased the quarterly
common stock dividend to $0.14.
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 June 23,
2016 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 2016 CCAR, including the
Bancorp, were required to also conduct mid-cycle company-run
stress tests using data as of June 30, 2016. The stress tests must be
based on three BHC defined scenarios – baseline, adverse and
severely adverse. The Bancorp reported its mid-cycle stress test
results to the FRB by the required October 5, 2016 submission date.
In addition, the Bancorp published a Form 8-K providing a
summary of the results under the severely adverse scenario on
October 27, 2016. These results represented estimates of the
Bancorp’s results from the third quarter of 2016 through the third
quarter of 2018 under the severely adverse scenario, which is
considered highly unlikely to occur.
Restrictions on Cash Dividends
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 state and federal supervisory agencies. The
Bancorp’s banking subsidiary paid
the Bancorp’s nonbank
subsidiary holding company, which in turn paid the Bancorp $1.9
billion and $1.0 billion in dividends during the years ended
December 31, 2016 and 2015, respectively. 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.
Capital Actions
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 2016 stress testing program and CCAR on January 28,
2016, with firm submissions of stress test results and capital plans
due to the FRB on April 5, 2016, 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
assumptions and
the capital plan.
the analysis underlying
Additionally, the FRB reviewed the robustness of the capital
adequacy process, the capital policy and the Bancorp’s ability to
maintain capital above each minimum regulatory capital ratio on a
pro forma basis under expected and stressful conditions throughout
the planning horizon.
On June 29, 2016, the Bancorp announced the results of its
capital plan submitted to the FRB as part of the 2016 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 capital distributions. The FRB
indicated to the Bancorp that it did not object to the following
capital actions for the period beginning July 1, 2016 and ending June
30, 2017:
• The potential increase in the quarterly common stock
dividend to $0.14 in the fourth quarter of 2016;
112 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENT SECURITIES
The following table provides the amortized cost, fair value and unrealized gains and losses for the major categories of the available-for-sale and
other and held-to-maturity investment securities portfolios as of December 31:
2016
2015
($ 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)
$
$
547
44
15,525
9,029
3,076
2,106
697
$ 31,024
Amortized Unrealized Unrealized
Gains
Losses
Cost
Fair
Value
549
45
15,608
9,055
3,112
2,116
698
31,183
Amortized Unrealized Unrealized
Gains
Losses
Cost
1,155
50
14,811
7,795
2,801
1,363
703
28,678
32
2
283
100
35
13
2
467
-
-
(13)
(33)
(32)
(21)
(2)
(101)
Fair
Value
1,187
52
15,081
7,862
2,804
1,355
703
29,044
2
1
178
87
51
28
3
350
-
-
(95)
(61)
(15)
(18)
(2)
(191)
-
-
-
Includes interest-only mortgage-backed securities of $60 and $50 as of December 31, 2016 and 2015, respectively, recorded at fair value with fair value changes recorded in securities gains, net, in
the Consolidated Statements of Income.
68
2
70
68
2
70
24
2
26
24
2
26
-
-
-
-
-
-
-
-
-
(b) Equity securities consist of FHLB, FRB and DTCC restricted stock holdings of $248, $358, and $1, respectively, at December 31, 2016 and $248, $355 and $1, respectively, at December
31, 2015, that are carried at cost, and certain mutual fund and equity security holdings.
The following table presents realized gains and losses that were recognized in income from available-for-sale securities for the years ended
December 31:
($ in millions)
Realized gains
Realized losses
OTTI
Net realized gains(a)
72
(45)
(16)
11
(a) Excludes net losses on interest-only mortgage-backed securities of $4, $4 and $17 for the years ended December 31, 2016, 2015 and 2014, respectively.
$
$
2016
2015
2014
97
(76)
(5)
16
70
(9)
(24)
37
The following table provides a summary of OTTI by security type:
($ in millions)
Available-for-sale and other debt securities
Available-for-sale equity securities
Total OTTI(a)
(a) Included in securities gains, net, in the Consolidated Statements of Income.
2016
2015
2014
$
$
(15)
(1)
(16)
(5)
-
(5)
(24)
-
(24)
Trading securities were $410 million as of December 31, 2016, compared to $386 million at December 31, 2015. The following table presents total
gains and losses that were recognized in income from trading securities for the years ended December 31:
($ in millions)
Realized gains(a)
Realized losses(b)
Net unrealized gains (losses)(c)
Total trading securities losses
(a)
2016
2015
2014
$
$
9
(13)
4
-
6
(10)
(3)
(7)
8
(7)
(3)
(2)
Includes realized gains of $7, $6 and $4 for the years ended December 31, 2016, 2015 and 2014, respectively, recorded in corporate banking revenue and wealth and asset management revenue
in the Consolidated Statements of Income.
Includes realized losses of $10, $10 and $7 for the years ended December 31, 2016, 2015 and 2014, respectively, recorded in corporate banking revenue and wealth and asset management
revenue in the Consolidated Statements of Income.
Includes an immaterial amount of net unrealized gains for the years ended December 31, 2016 and 2015, respectively, and an immaterial amount of net unrealized losses for the year ended 2014
recorded in corporate banking revenue and wealth and asset management revenue in the Consolidated Statements of Income.
(b)
(c)
At December 31, 2016 and 2015, securities with a fair value of $10.1
billion and $11.0 billion, respectively, were pledged to secure
borrowings, public deposits, trust funds, derivative contracts and for
other purposes as required or permitted by law.
113 Fifth Third Bancorp
The expected maturity distribution of the Bancorp’s mortgage-backed securities and the contractual maturity distribution of the remainder of the
Bancorp’s available-for-sale and other and held-to-maturity investment securities as of December 31, 2016 are shown in the following table:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Debt securities:(a)
Available-for-Sale and Other
Held-to-Maturity
Amortized Cost
Fair Value
Amortized Cost
Fair Value
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 a right to call or prepay obligations exists with or without call or prepayment penalties.
328
7,290
20,043
2,666
697
31,024
332
7,347
20,146
2,660
698
31,183
$
$
2
11
12
1
-
26
2
11
12
1
-
26
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)
2016
U.S. Treasury and federal agencies 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
Total
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
$
$
$
$
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
199
6,223
3,183
1,052
422
-
11,079
2,903
3,111
1,610
623
1
8,248
-
(88)
(61)
(15)
(8)
-
(172)
(13)
(33)
(32)
(11)
(1)
(90)
-
172
-
-
336
37
545
-
-
-
226
37
263
-
(7)
-
-
(10)
(2)
(19)
-
-
-
(10)
(1)
(11)
199
6,395
3,183
1,052
758
37
11,624
2,903
3,111
1,610
849
38
8,511
-
(95)
(61)
(15)
(18)
(2)
(191)
(13)
(33)
(32)
(21)
(2)
(101)
At December 31, 2016 and 2015, an immaterial amount and 1%,
respectively, of unrealized losses in the available-for-sale and other
securities portfolio were represented by non-rated securities.
114 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
U.S. The Bancorp’s commercial loan portfolio consists of lending to
industry types. Management periodically reviews the
various
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 held for sale:
Commercial and industrial loans
Commercial mortgage loans
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans
Total loans 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
2016
2015
$
$
$
$
60
5
686
-
-
-
-
751
41,676
6,899
3,903
3,974
56,452
15,051
7,695
9,983
2,237
680
35,646
92,098
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
Total portfolio loans and leases are recorded net of unearned
income, which totaled $503 million as of December 31, 2016 and
$624 million as of December 31, 2015. Additionally, portfolio loans
leases are recorded net of unamortized premiums and
and
discounts, deferred direct loan origination fees and costs and fair
value adjustments
loans
(associated with acquired
designated as fair value upon origination) which totaled a net
loans or
premium of $240 million and $220 million as of December 31, 2016
and 2015, respectively.
The Bancorp’s FHLB and FRB advances are generally secured
by loans. The Bancorp had loans of $13.1 billion and $11.9 billion at
December 31, 2016 and 2015, respectively, pledged at the FHLB,
and loans of $40.0 billion and $33.7 billion at December 31, 2016
and 2015, respectively, pledged at the FRB.
The following table presents a summary of the total loans and leases owned by the Bancorp and net charge-offs (recoveries) as of and for the years
ended December 31:
Carrying Value
90 Days Past Due
and Still Accruing
Net
Charge-Offs (Recoveries)
($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total loans and leases
Less: Loans held for sale
Total portfolio loans and leases
2016
41,736
6,904
3,903
3,974
15,737
7,695
9,983
2,237
680
92,849
751
92,098
$
$
$
$
2015
42,151
6,991
3,214
3,854
14,424
8,336
11,497
2,360
658
93,485
903
92,582
2016
4
-
-
-
49
-
9
22
-
84
2015
7
-
-
-
40
-
10
18
-
75
2016
172
15
(1)
4
10
27
35
80
20
362
2015
229
27
3
2
17
39
28
82
19
446
The Bancorp engages in commercial lease products primarily related
to the financing of commercial equipment. The Bancorp had $3.3
billion and $3.1 billion of direct financing leases, net of unearned
income, at December 31, 2016 and 2015, respectively, and $701
115 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million and $801 million of leveraged leases, net of unearned
income, at December 31, 2016 and 2015, respectively.
Pre-tax income from leveraged leases was $38 million and
included $16 million of gains on early terminations during the year
ended December 31, 2016. Pre-tax income from leveraged leases
was $27 million and included $7 million of gains on early
terminations during the year ended December 31, 2015. The tax
effect of this income was a benefit of $10 million and an expense $1
million during the years ended December 31, 2016 and 2015,
respectively.
The following table provides the components of the commercial lease financing portfolio as of December 31:
($ 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 $15 and $47 at December 31, 2016 and 2015, respectively.
2016
3,551
903
23
4,477
(503)
3,974
$
$
2015
3,550
906
22
4,478
(624)
3,854
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 $1 million and $8 million of residual value write-downs
related to commercial leases for the years ended December 31, 2016
and 2015, 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, 2016, the
minimum future lease payments receivable for each of the years
2017 through 2021 was $813 million, $716 million, $611 million,
$482 million and $361 million, respectively.
116 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. CREDIT QUALITY AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES
The Bancorp disaggregates ALLL balances and transactions in the ALLL by portfolio segment. Credit quality related disclosures for loans and
leases are further disaggregated by class.
Allowance for Loan and Lease Losses
The following tables summarize transactions in the ALLL by portfolio segment for the years ended December 31:
2016 ($ in millions)
Balance, beginning of period
Charge-offs
Recoveries of losses previously charged-off
Provision for loan and lease losses
Balance, end of period
2015 ($ in millions)
Balance, beginning of period
Charge-offs
Recoveries of losses previously charged-off
Provision for loan and lease losses
Balance, end of period
2014 ($ in millions)
Balance, beginning of period
Charge-offs
Recoveries of losses previously charged-off
Provision for loan and lease losses
Balance, end of period
Commercial
840
(232)
42
181
831
Commercial
875
(298)
37
226
840
Commercial
1,058
(299)
38
78
875
$
$
$
$
$
$
Residential
Mortgage
100
(19)
9
6
96
Residential
Mortgage
104
(28)
11
13
100
Residential
Mortgage
189
(139)
13
41
104
Consumer
217
(205)
43
159
214
Consumer
237
(216)
48
148
217
Consumer
225
(241)
53
200
237
Unallocated
115
-
-
(3)
112
Unallocated
106
-
-
9
115
Unallocated
110
-
-
(4)
106
Total
1,272
(456)
94
343
1,253
Total
1,322
(542)
96
396
1,272
Total
1,582
(679)
104
315
1,322
The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment:
As of December 31, 2016 ($ in millions)
ALLL:(a)
Individually evaluated for impairment
Collectively evaluated for impairment
Unallocated
Total ALLL
Portfolio loans and leases:(b)
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$
$
$
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
(c)
118 a
713
-
831
68
28
-
96
44
170
-
214
(c)
904 a
55,548
-
56,452
652
14,253
3
14,908
371
20,224
-
20,595
-
-
112
112
-
-
-
-
230
911
112
1,253
1,927
90,025
3
91,955
Includes $2 related to leveraged leases at December 31, 2016.
Total portfolio loans and leases
(a)
(b) Excludes $143 of residential mortgage loans measured at fair value, and includes $701 of leveraged leases, net of unearned income, at December 31, 2016.
(c)
Includes five restructured loans at December 31, 2016 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 $26 and an ALLL of $18.
$
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)
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$
$
$
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
119 a
(c)
721
-
840
67
33
-
100
49
168
-
217
815 a
(c)
55,341
-
56,156
630
12,917
2
13,549
424
22,286
-
22,710
-
-
115
115
-
-
-
-
235
922
115
1,272
1,869
90,544
2
92,415
Includes $5 related to leveraged leases at December 31, 2015.
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 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.
117 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CREDIT RISK PROFILE
Commercial Portfolio Segment
in the
For purposes of analyzing historic
determination of the ALLL and monitoring the credit quality and
risk characteristics of its commercial portfolio segment, the Bancorp
disaggregates the segment into the following classes: commercial
and industrial, commercial mortgage owner-occupied, commercial
mortgage nonowner-occupied, commercial construction and
commercial leases.
loss rates used
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.
The following tables summarize the credit risk profile of the Bancorp’s commercial portfolio segment, by class:
As of December 31, 2016 ($ 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, 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
Pass
38,844
3,168
3,466
3,902
3,894
53,274
Pass
38,756
3,344
3,105
3,201
3,724
52,130
$
$
$
$
Special
Mention
1,204
72
4
1
54
1,335
Special
Mention
1,633
124
63
4
93
1,917
Substandard
1,604
117
69
-
26
1,816
Substandard
1,742
191
130
9
37
2,109
Doubtful
24
3
-
-
-
27
Doubtful
-
-
-
-
-
-
Total
41,676
3,360
3,539
3,903
3,974
56,452
Total
42,131
3,659
3,298
3,214
3,854
56,156
Residential Mortgage and Consumer Portfolio Segments
risk
the credit quality and
For purposes of monitoring
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 information on
delinquency and nonperforming loan accounting and reporting
policies.
118 Fifth Third Bancorp
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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Residential mortgage loans(a)
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total residential mortgage and consumer loans and leases(a)
(a) Excludes $143 and $167 of loans measured at fair value at December 31, 2016 and 2015, respectively.
Performing
14,874
7,622
9,981
2,209
680
35,366
$
$
2016
Nonperforming
34
73
2
28
-
137
Performing
13,498
8,222
11,491
2,226
657
36,094
2015
Nonperforming
51
79
2
33
-
165
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:
Current
Loans and
Leases(c)
$
As of December 31, 2016 ($ 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 $143 of residential mortgage loans measured at fair value at December 31, 2016.
(b)
41,495
3,332
3,530
3,902
3,972
14,790
7,570
9,886
2,183
679
91,339
$
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
87
6
2
1
-
37
68
85
28
1
315
94
22
7
-
2
81
57
12
26
-
301
181
28
9
1
2
118
125
97
54
1
616
41,676
3,360
3,539
3,903
3,974
14,908
7,695
9,983
2,237
680
91,955
4
-
-
-
-
49
-
9
22
-
84
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,
2016, $110 of these loans were 30-89 days past due and $312 were 90 days or more past due. The Bancorp recognized $6 of losses during the year ended December 31, 2016 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, 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)
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
119 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
Unpaid
Principal
Balance
Recorded
Investment
ALLL
$
$
$
440
24
7
2
471
202
12
52
1,210
394
36
93
2
207
107
3
$ 842
2,052
$
414
16
6
2
465
201
12
52
1,168
320
35
83
2
187
104
2
733
1,901 a
(a)
94
5
1
-
68
30
2
12
212
-
-
-
-
-
-
-
-
212
Includes $322, $635 and $323, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $192, $17 and $48, respectively, of commercial, residential
mortgage and consumer portfolio TDRs on nonaccrual status at December 31, 2016.
(b) Excludes five restructured loans at December 31, 2016 associated with a consolidated VIE in which the Bancorp has no continuing credit risk due to the risk being assumed by a third party,
2016 ($ 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 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 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)
with an unpaid principal balance of $26, a recorded investment of $26 and an ALLL of $18.
120 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2015 ($ 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 $15.
The following table summarizes the Bancorp’s average impaired portfolio loans and leases, by class, and interest income, by class, for the years
ended December 31:
($ 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
Total average impaired portfolio loans and leases
2016
2015
2014
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
$
691
63
139
3
5
647
325
17
56
1,946
10
1
5
-
-
25
12
-
5
58
663
92
224
41
5
586
361
22
68
2,062
21
2
7
1
-
23
13
1
6
74
786
149
268
92
13
1,273
394
24
62
3,061
25
4
8
2
-
54
20
1
5
119
(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 $26, $27 and $28 for the years ended December 31, 2016, 2015 and 2014, respectively. An immaterial amount of interest income was recognized during the years ended
December 31, 2016, 2015 and 2014.
121 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nonperforming Assets
Nonperforming assets include nonaccrual loans and leases for which ultimate collectability of the full amount of the principal and/or interest is
uncertain; restructured commercial and credit card loans which have not yet met the requirements to be classified as a performing asset;
restructured consumer loans which are 90 days past due based on the restructured terms unless the loan is both well-secured and in the process of
collection; and certain other assets, including OREO and other repossessed property. The following table presents the Bancorp’s nonaccrual loans
and leases, by class, and OREO and other repossessed property as of December 31:
2016
2015
($ 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
Total nonperforming portfolio assets(b)(c)
(a) Excludes $19 and $20 of restructured nonaccrual loans at December 31, 2016 and 2015, respectively, associated with a consolidated VIE in which the Bancorp has no continuing credit risk
73
2
28
103
660
78
738
79
2
33
114
506
141
647
478
32
9
4
523
34
259
46
35
1
341
51
$
$
$
due the risk being assumed by a third party.
(b) Excludes $13 and $12 of nonaccrual loans held for sale at December 31, 2016 and 2015, respectively.
(c)
Includes $4 and $6 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at December 31, 2016 and 2015, respectively, and $1 and $2 of restructured
nonaccrual government insured commercial loans at December 31, 2016 and 2015, respectively.
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, 2016, the Bancorp had $82 million and
$57 million in line of credit and letter of credit commitments,
respectively, compared to $39 million and $23 million in line of
credit and letter of credit commitments as of December 31, 2015,
respectively, to lend additional funds to borrowers whose terms
have been modified in a TDR.
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 $260 million and
$303 million as of December 31, 2016 and 2015, respectively.
in process according
to
Troubled Debt Restructurings
If a borrower is experiencing financial difficulty, the Bancorp may
consider, in certain circumstances, modifying the terms of their loan
to maximize collection of amounts due. Within each of the
Bancorp’s loan classes, TDRs typically involve either a reduction of
the stated interest rate of the loan, an extension of the loan’s
maturity date with a stated rate lower than the current market rate
for a new loan with similar risk, or in limited circumstances, a
reduction of the principal balance of the loan or the loan’s accrued
interest. Modifying the terms of a loan may result in an increase or
decrease to the ALLL depending upon the terms modified, the
method used to measure the ALLL for a loan prior to modification,
and whether any charge-offs were recorded on the loan before or at
the time of modification. Refer to the ALLL section of Note 1 for
the Bancorp’s ALLL methodology. Upon
information on
the Bancorp measures the related
modification of a
loan,
122 Fifth Third Bancorp
The following tables provide a summary of loans, by class, modified in a TDR by the Bancorp during the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Number of loans
modified in a TDR
during the year(b)
Recorded investment
in loans modified
in a TDR
during the year
Increase
to ALLL upon
modification
Charge-offs
recognized upon
modification
2016 ($ in millions)(a)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial leases
Residential mortgage loans
Consumer loans:
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.
219
221
9,519
10,978
74
12
4
5
924
$
$
183
11
5
16
137
15
3
43
413
14
-
2
-
8
-
-
8
32
-
-
-
-
-
-
-
4
4
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:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Residential mortgage loans
Consumer loans:
Home equity
Automobile loans
Credit card
Total portfolio loans
(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:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Residential mortgage loans
Consumer loans:
Home equity
Automobile loans
Credit card
Total portfolio loans
(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
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
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.
123 Fifth Third Bancorp
The following tables provide a summary of TDRs that subsequently defaulted during the years ended December 31, 2016, 2015 and 2014 and were
within twelve months of the restructuring date:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 ($ in millions)(a)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage nonowner-occupied loans
Commercial leases
Residential mortgage loans
Consumer loans:
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, 2015 ($ in millions)(a)
Commercial loans:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Residential mortgage loans
Consumer loans:
Home equity
Automobile loans
Credit card
Total portfolio loans
(a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality.
December 31, 2014 ($ in millions)(a)
Commercial loans:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Residential mortgage loans
Consumer loans:
Home equity
Automobile loans
Credit card
Total portfolio loans
(a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality.
Number of
Contracts
Recorded
Investment
8
2
2
172
17
2
1,715
1,918
$
$
5
-
1
25
1
-
7
39
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
$
$
$
$
11
1
21
1
-
8
42
Recorded
Investment
36
4
1
32
2
-
12
87
124 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
Estimated Useful Life
($ in millions)
Land and improvements(a)
Buildings(a)
Equipment
Leasehold improvements
Construction in progress(a)
Bank premises and equipment held for sale:
55
Land and improvements
20
Buildings
3
Equipment
3
Leasehold improvements
(2,466)
Accumulated depreciation and amortization
Total bank premises and equipment
2,239
(a) At December 31, 2016 and 2015, land and improvements, buildings and construction in progress included $92 and $102, respectively, associated with parcels of undeveloped land intended for
29
9
1
-
(2,567)
2,065
2 - 30 yrs.
2 - 30 yrs.
1 - 30 yrs.
685
1,755
1,696
403
85
663
1,672
1,761
398
99
2015
2016
$
$
future branch expansion.
Depreciation and amortization expense related to bank premises
and equipment was $242 million, $256 million and $254 million for
the years ended December 31, 2016, 2015 and 2014, 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 for future branch expansion (the
“Branch Consolidation and Sales Plan”). In addition, the Bancorp
announced on September 13, 2016 that it had identified an
additional 44 branch locations and 5 parcels of undeveloped land
that it planned to consolidate or sell.
On January 29, 2016, the Bancorp closed the previously
announced sale in the St. Louis MSA to Great Southern Bank and
recorded a gain on the sale of $8 million in other noninterest
income in the Consolidated Statements of Income. Additionally, on
April 22, 2016, the Bancorp closed the previously announced sale in
the Pittsburgh MSA to First National Bank of Pennsylvania and
recorded a gain on the sale of $11 million in other noninterest
income
the Consolidated Statements of Income. Both
transactions were part of the Branch Consolidation and Sales Plan.
in
As of December 31, 2016, the Bancorp had 64 branch
locations and 35 parcels of undeveloped land that had been acquired
for future branch expansion that it intended to consolidate or sell.
These branch locations and parcels of undeveloped land, which
include unsold properties from the Branch Consolidation and Sales
Plan as well as properties included in the September 13, 2016
announcement, represent $39 million, $16 million and $1 million of
land and improvements, buildings and equipment, respectively,
included in bank premises and equipment in the Consolidated
Balance Sheets as of December 31, 2016, of which $29 million, $9
million and $1 million, respectively, were classified as held for sale.
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 $32 million, $109 million and $20 million for the
years ended December 31, 2016, 2015 and 2014, respectively. The
recognized impairment losses were recorded in other noninterest
income in the Consolidated Statements of Income.
On September 29, 2016, the Bancorp closed on the sale of an
office complex. The sale also included all of the Bancorp’s rights,
title and interest as a landlord under existing leases in the complex.
Under the terms of the transaction, the Bancorp received proceeds
of approximately $31 million and entered into a lease agreement
whereby the Bancorp leased-back approximately 25% of the office
complex. In conjunction with the transaction, which qualified as a
sale-leaseback under U.S. GAAP, the Bancorp retired assets with a
net book value of approximately $10 million, recognized a deferred
gain of $10 million, which is being amortized as a reduction of rent
expense over the 15 year lease term, and recorded a gain on the
transaction of $11 million in other noninterest income in the
Consolidated Statements of Income.
is
included
in net occupancy expense
Gross occupancy expense for cancelable and noncancelable
leases, which
in the
Consolidated Statements of Income, was $100 million, $110 million
and $100 million for the years ended December 31, 2016, 2015 and
2014, respectively, which was reduced by rental income from leased
premises of $16 million, $18 million and $17 million during the
years ended December 31, 2016, 2015 and 2014, respectively. The
Bancorp’s subsidiaries have entered into a number of noncancelable
operating and capital lease agreements with respect to bank
premises and equipment.
125 Fifth Third Bancorp
The following table provides the annual future minimum payments under noncancelable operating leases and capital leases for the years ending
December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
2017
2018
2019
2020
2021
Thereafter
Total minimum lease payments
Less: Amounts representing interest
Present value of net minimum lease payments
Noncancelable
Operating Leases
Capital Leases
$
$
88
84
77
65
52
210
576
-
-
6
6
5
1
-
1
19
2
17
8. OPERATING LEASE 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. Total impairment
losses associated with operating lease assets were $20 million and
$36 million for the years ended December 31, 2016 and 2015,
respectively. The recognized impairment losses were recorded in
corporate banking revenue in the Consolidated Statements of
Income.
9. GOODWILL
Business combinations entered into by the Bancorp typically include
the acquisition of goodwill. Acquisition activity includes acquisitions
in the respective period in addition to purchase accounting
adjustments
to previous acquisitions. The Bancorp
completed its annual goodwill impairment test as of September 30,
2016 by performing a qualitative assessment of goodwill at the
reporting unit level to determine whether any indicators of
impairment existed. In performing this qualitative assessment, the
last
Bancorp evaluated events and circumstances since
related
the
impairment analysis, macroeconomic conditions, banking industry
and market conditions and key financial metrics of the Bancorp as
well as reporting unit and overall Bancorp financial performance.
After assessing the totality of the events and circumstances, the
Bancorp determined that it was not more likely than not that the fair
values of the Commercial Banking, Branch Banking and Wealth and
Asset Management reporting units were less than their respective
carrying amounts and, therefore, the first and second steps of the
quantitative goodwill impairment test were deemed unnecessary.
Changes in the net carrying amount of goodwill, by reporting unit, for the years ended December 31, 2016 and 2015 were as follows:
($ in millions)
Goodwill
Accumulated impairment losses
Net carrying amount as of December 31, 2014
Acquisition activity
Net carrying amount as of December 31, 2015
Acquisition activity
Net carrying amount as of December 31, 2016
Commercial
Banking
Branch
Banking
1,363
(750)
613
-
613
-
613
1,655
-
1,655
-
1,655
-
1,655
$
$
$
$
Management
Consumer Wealth and Asset
Lending
215
(215)
-
-
-
-
-
148
-
148
-
148
-
148
Total
3,381
(965)
2,416
-
2,416
-
2,416
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, 2016 of 4.1 years.
The details of the Bancorp’s intangible assets are shown in the following table:
($ in millions)
As of December 31, 2016
Core deposit intangibles
Other
Total intangible assets
As of December 31, 2015
Core deposit intangibles
Other
Total intangible assets
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
$
$
$
$
34
15
49
34
33
67
(27)
(13)
(40)
(26)
(29)
(55)
7
2
9
8
4
12
As of December 31, 2016, all of the Bancorp’s intangible assets
were being amortized. Amortization expense recognized on
intangible assets for both the years ended December 31, 2016 and
2015 was $2 million and amortization expense recognized on
126 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
intangible assets for the year ended December 31, 2014 was $4
million. The Bancorp’s projections of amortization expense shown
on the following table is based on existing asset balances as of
December 31, 2016. Future amortization expense may vary from
these projections.
Estimated amortization expense for the years ending December 31, 2017 through 2021 is as follows:
($ in millions)
2017
2018
2019
2020
2021
$
Total
2
1
1
1
1
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 at risk to finance their activities without additional
subordinated financial support or the equity investors of the entities
as a group lack any of the characteristics of a controlling interest.
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, 2016 ($ 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
CDC
Investments
$
$
$
$
$
84
-
1,170
(6)
9
1,257
3
1,094
1,097
-
1
46
-
(20)
-
27
-
-
-
27
Total
85
46
1,170
(26)
9
1,284
3
1,094
1,097
27
Automobile Loan
Securitizations
CDC
Investments
December 31, 2015 ($ in millions)
Assets:
Cash and due from banks
Commercial mortgage loans
Automobile loans
ALLL
Other assets(a)
Total assets(a)
Liabilities:
Other liabilities
Long-term debt(a)
Total liabilities(a)
Noncontrolling interests
(a) Upon adoption of ASU 2015-03 on January 1, 2016, the December 31, 2015 Consolidated Balance Sheet was adjusted to reflect the reclassification of $6 of debt issuance costs from other assets to
152
47
2,490
(28)
14
2,675
151
-
2,490
(11)
14
2,644
1
47
-
(17)
-
31
3
2,487
2,490
31
3
2,487
2,490
-
-
-
-
31
Total
$
$
$
$
$
long-term debt. For further information refer to Note 1.
Automobile loan securitizations
In securitization transactions that occurred during the years ended
December 31, 2015 and 2014, the Bancorp transferred an aggregate
amount of $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
127 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
addition, the Bancorp retained servicing rights for the underlying
loans and, therefore, holds the power to direct the activities of the
VIEs that most significantly impact the economic performance of
the VIEs. As a result, the Bancorp concluded that it is the primary
beneficiary of the VIEs and, therefore, has consolidated these VIEs.
The assets of the VIEs are restricted to the settlement of the asset-
backed securities and other obligations of the VIEs. Third-party
holders of the notes do not have recourse to the general assets of
the Bancorp.
The economic performance of the VIEs is most significantly
impacted by the performance of the underlying loans. The principal
risks to which the VIEs are exposed include credit risk and
prepayment risk. The credit and prepayment risks are managed
through credit enhancements in the form of reserve accounts,
overcollateralization, excess
the
subordination of certain classes of asset-backed securities to other
classes.
interest on
loans and
the
CDC investments
CDC, a wholly-owned indirect subsidiary of the Bancorp, was
created to invest in projects to create affordable housing, revitalize
business and residential areas and preserve historic landmarks. 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
Non-consolidated VIEs
invested
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
investments. The Bancorp’s subsidiaries serve as the
equity
managing member of certain LLCs
in business
revitalization projects and have the right to make decisions that
most significantly impact the economic performance of the LLCs.
Additionally, the investor members do not own substantive kick-out
rights or substantive participating rights over the managing member.
The Bancorp has provided an indemnification guarantee to the
investor member of these LLCs related to the qualification of tax
credits generated by the investor members’ investment. Accordingly,
the Bancorp concluded that it is the primary beneficiary and,
therefore, has consolidated these VIEs. As a result, the investor
members’ interests in these VIEs are presented as noncontrolling
interests in the Consolidated Financial Statements. This presentation
the
includes reporting separately
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, 2016 and 2015 was $31 million and $27 million,
respectively, which is based on an amount required to meet the
investor member’s defined target rate of return.
the equity attributable
the comprehensive
attributable
interests
income
to
to
in
The following tables provide a summary of assets and liabilities carried on the Consolidated Balance Sheets related to non-consolidated VIEs for
which the Bancorp holds an interest, but is not the primary beneficiary of the VIE, as well as the Bancorp’s maximum exposure to losses
associated with its interests in the entities as of:
December 31, 2016 ($ in millions)
CDC investments
Private equity investments
Loans provided to VIEs
December 31, 2015 ($ in millions)
CDC investments
Private equity investments
Loans provided to VIEs
CDC investments
As noted previously, CDC typically invests in VIEs as a limited
partner or investor member in the form of equity contributions and
has no substantive kick-out or substantive participating rights over
the managing member. 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 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
128 Fifth Third Bancorp
$
$
Total
Assets
1,421
176
1,735
Total
Assets
1,455
211
1,630
Total
Liabilities
357
-
-
Total
Liabilities
367
-
-
Maximum
Exposure
1,421
232
2,672
Maximum
Exposure
1,455
271
2,599
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, 2016 and 2015, 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 $349 million and $356 million at December 31,
2016 and 2015, respectively. The unfunded commitments as of
December 31, 2016 are expected to be funded from 2017 to 2033.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bancorp has accounted for all of its investments in qualified affordable housing tax credits using the equity method of accounting. The
following table summarizes the impact to the Consolidated Statements of Income relating to investments in qualified affordable housing
investments:
Consolidated Statements of
For the years ended December 31 ($ in millions)
Pre-tax investment 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, 2016, 2015 and 2014.
Other noninterest expense
Applicable income tax expense
Income Caption
144
(220)
126
(205)
2015
2014
$
2016
118
(185)
from
their activities
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 investments 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 investments. The funds finance
the partners’ capital
primarily all of
contributions and investment returns. The Bancorp has determined
that it is not the primary beneficiary of the funds because it does not
have the obligation to absorb the funds’ expected losses or the right
to receive the funds’ expected residual returns that could potentially
be significant to the funds and lacks the power to direct the
activities that most significantly impact the economic performance
of the funds. The Bancorp, as a limited partner, does not have
substantive participating or substantive kick-out rights over the
general partner. Therefore, the Bancorp accounts for its investments
in these limited partnerships under the equity method of accounting.
The Bancorp is exposed to losses arising from the negative
performance of the underlying investments in the private equity
investments. 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, at
December 31, 2016 and 2015, the unfunded commitment amounts
to the funds were $56 million and $60 million, respectively. As part
of previous commitments, the Bancorp made capital contributions
to private equity investments of $14 million and $30 million during
the years ended December 31, 2016 and 2015, respectively. The
Bancorp recognized $9 million and $1 million of OTTI primarily
amounts of
associated with certain nonconforming investments affected by the
Volcker Rule during the years ended December 31, 2016 and 2015,
respectively. The Bancorp did not recognize any OTTI during the
year ended December 31, 2014. Refer to Note 27 for further
information.
Loans provided to VIEs
The Bancorp has provided funding to certain unconsolidated VIEs
sponsored by third parties. These VIEs are generally established to
finance certain consumer and small business loans originated by
third parties. The entities are primarily funded through the issuance
of a loan from the Bancorp or syndication through which the
Bancorp is involved. The sponsor/administrator of the entities is
responsible for servicing the underlying assets in the VIEs. Because
the sponsor/administrator, not the Bancorp, holds the servicing
responsibilities, which include the establishment and employment of
default mitigation policies and procedures, the Bancorp does not
hold the power to direct the activities that most significantly impact
the economic performance of the entity and, therefore, is not the
primary beneficiary.
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, 2016 and 2015, the Bancorp’s unfunded
commitments to these entities were $937 million and $969 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.
129 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
income
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 $568 million that were
previously modified in a TDR. As part of this sale, the Bancorp
provided certain standard representations and warranties which
have expired. Additionally, the Bancorp did not obtain servicing
responsibilities on the sales of these loans and the investors have no
credit recourse to the Bancorp’s other assets for failure of debtors
to pay when due.
in
Residential Mortgage Loan Sales
The Bancorp sold fixed and adjustable-rate residential mortgage
loans during the years ended December 31, 2016, 2015 and 2014. In
those sales, the Bancorp obtained servicing responsibilities and
provided certain standard representations and warranties, however
the investors have no recourse to the Bancorp’s other assets for
failure of debtors to pay when due. The Bancorp receives annual
servicing fees based on a percentage of the outstanding balance. The
Bancorp identifies classes of servicing assets based on financial asset
type and interest rates.
Information related to residential mortgage loan sales and the Bancorp’s mortgage banking activity, which is included in mortgage banking net
revenue in the Consolidated Statements of Income, for the years ended December 31 is as follows:
($ 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.
2016
6,927
$
2015
5,078 (b)
2014
5,467
186
199
171
222
153
246
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 MSR impairment
Other-than-temporary impairment
Balance, end of period
Carrying amount after valuation allowance
2016
2015
$
$
$
$
1,204
83
(131)
-
1,156
(419)
7
-
(412)
744
1,392
63
(140)
(111)
1,204
(534)
4
111
(419)
785
Amortization expense recognized on servicing rights for the years
ended December 31, 2016, 2015 and 2014 was $131 million, $140
million and $121 million, respectively. The Bancorp's projections of
amortization expense shown below are based on existing asset
balances and static key economic assumptions as of December 31,
2016. Future amortization expense may vary from these projections.
Estimated amortization expense for the years ending December 31, 2017 through 2021 is as follows:
($ in millions)
2017
2018
2019
2020
2021
$
Total
142
124
109
96
84
Temporary impairment or impairment recovery, effected 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 OAS spreads, earnings rates and
prepayment speeds. The fair value of the servicing asset is based on
the present value of expected future cash flows.
130 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
2016
2015
$
757
722
27
22
1
-
823
757
33
27
2
1
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 mortgage banking net revenue in the Consolidated Statements of Income for the years ended December 31:
($ 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
2016
2015
2014
24
7
90
4
95
(65)
As of December 31, 2016 and 2015, 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:
2016
2015
Weighted-
Average
Life
(in years)
Rate
Prepayment
Speed
(annual)
OAS Spread
(bps)
Weighted-
Average
Default Rate
Weighted-
Average
Life
(in years)
Prepayment
Speed
(annual)
OAS Spread
(bps)
Weighted-
Average
Default Rate
Residential mortgage loans:
Servicing rights
Servicing rights
Fixed
Adjustable
7.2
2.8
10.3 %
30.2
584
679
N/A
N/A
6.9
3.4
11.0 %
25.2
534
303
N/A
N/A
Based on historical credit experience, expected credit losses for
residential mortgage loan servicing assets have been deemed
immaterial, as the Bancorp sold the majority of the underlying loans
without recourse. At December 31, 2016 and 2015, the Bancorp
serviced $53.6 billion and $59.0 billion, respectively, of residential
mortgage loans for other investors. The value of MSRs that
continue to be held by the Bancorp is subject to credit, prepayment
and interest rate risks on the sold financial assets.
At December 31, 2016, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in
prepayment speed assumptions and immediate 10% and 20% adverse changes in other assumptions are as follows:
Prepayment
Speed Assumption
Residual Servicing
Cash Flows
Fair
Value
Weighted-
Average Life
(in years)
Impact of Adverse Change
on Fair Value
20%
10%
50%
OAS Spread
Impact of Adverse
Change on Fair
Value
(bps)
10%
20%
($ in millions)(a)
Residential mortgage loans:
(28)
Servicing rights
Servicing rights
(1)
(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
10.2 % $
25.3
722
22
6.5
3.2
Rate
Rate
$
(55)
(3)
(124)
(6)
654
738
$
(18)
-
(35)
(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.
131 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2016 and
2015, the balance of collateral held by the Bancorp for derivative
assets was $444 million and $821 million, respectively. The credit
component negatively impacting the fair value of derivative assets
associated with customer accommodation contracts as of December
31, 2016 and 2015 was $6 million and $9 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, 2016 and
2015, the balance of collateral posted by the Bancorp for derivative
liabilities was $399 million and $504 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, 2016 and 2015, 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
than the notional, principal or contract amounts. Credit risk is
minimized through credit approvals, limits, counterparty collateral
and monitoring procedures.
132 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables reflect the notional amounts and fair values for all derivative instruments included in the Consolidated Balance Sheets as of:
December 31, 2016 ($ in millions)
Derivatives Designated as 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 residential mortgage loans held for sale
Swap associated with the sale of Visa, Inc. Class B Shares
Foreign exchange contracts
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, 2015 ($ in millions)
Derivatives Designated as 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 residential mortgage loans held for sale
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 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, 2016, 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
Fair Value
Notional
Amount
Derivative
Assets
Derivative
Liabilities
$
3,455
4,475
10,522
1,823
1,300
111
33,431
701
2,095
11,013
$
323
323
22
22
345
165
20
-
-
185
205
13
107
202
527
712
1,057
12
12
-
-
12
39
3
91
-
133
210
1
106
204
521
654
666
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
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.
133 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
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
Consolidated Statements of
Income Caption
Interest on long-term debt $
Interest on long-term debt
2016
(59)
54
2015
(29)
25
2014
120
(126)
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, 2016, 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, 2016, the maximum length of time over which the
Bancorp is hedging its exposure to the variability in future cash
flows is 36 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, 2016 and 2015, $10 million and $22 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,
2016, $15 million in net deferred gains, net of tax, recorded in
AOCI are expected to be reclassified into earnings during the next
twelve months. This amount could differ from amounts actually
recognized due to changes in interest rates, hedge de-designations,
and the addition of other hedges subsequent to December 31, 2016.
During the years ended 2016 and 2015, there were no gains or
losses reclassified from AOCI into earnings associated with the
discontinuance of cash flow hedges because it was probable that the
original forecasted transaction would no longer occur by the end of
the originally specified time period or within the additional period of
time as defined by U.S. GAAP.
The following table presents the pre-tax net gains recorded in the Consolidated Statements of Income and the Consolidated Statements of
Comprehensive Income relating to derivative instruments designated as cash flow hedges:
For the years ended December 31 ($ in millions)
Amount of pre-tax net gains recognized in OCI
Amount of pre-tax 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
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
$
2016
30
48
2015
74
75
2014
60
44
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.
During the year ended December 31, 2016, the Bancorp exercised
the remaining portion 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
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.
134 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net gains (losses) recorded in the Consolidated Statements of Income relating to free-standing derivative instruments used for risk
management and other business purposes are summarized in the following table:
For the 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
Consolidated Statements of
Income Caption
2016
2015
2014
Mortgage banking net revenue
Mortgage banking net revenue
$
Other noninterest income
14
24
2
8
90
23
Other noninterest income
Other noninterest income
73 (a)
(56)
325 (a)
(37)
(18)
95
14
31
(38)
(a) The Bancorp recognized a net gain of $9 on the exercise of the remaining warrant during the fourth quarter of 2016 and a net gain of $89 on both the sale and partial exercise of the warrant during
the fourth quarter of 2015.
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
independent
offsetting contracts with approved,
counterparties with substantially matching terms. The Bancorp
hedges
interest rate exposure on commercial customer
transactions by executing offsetting swap agreements with primary
dealers. Revaluation gains and losses on interest rate, foreign
exchange, commodity and other commercial customer derivative
contracts are recorded as a component of corporate banking
revenue in the Consolidated Statements of Income.
reputable,
its
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, 2016 and 2015, the total
notional amount of the risk participation agreements was $2.5
billion and $1.7 billion, respectively, and the fair value was a liability
of $4 million at December 31, 2016 and $3 million at December 31,
2015, which is included in other liabilities in the Consolidated
Balance Sheets. As of December 31, 2016, the risk participation
agreements had a weighted-average remaining life of 3.1 years.
The Bancorp’s maximum exposure in the risk participation
agreements is contingent on the fair value of the underlying interest
rate derivative contracts in an asset position at the time of default.
The Bancorp monitors the credit risk associated with the underlying
customers in the risk participation agreements through the same risk
grading system currently utilized for establishing loss reserves in its
loan and lease portfolio.
Risk ratings of the notional amount of risk participation agreements under this risk rating system are summarized in the following table:
At December 31 ($ in millions)
Pass
Special mention
Substandard
Total
2016
2015
$
$
2,447
14
6
2,467
1,650
7
7
1,664
135 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net gains (losses) recorded in the Consolidated Statements of Income relating to free-standing derivative instruments used for customer
accommodation are summarized in the following table:
For the 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 losses)
Foreign exchange contracts for customers (credit portion of fair value adjustment)
Consolidated Statements of
Income Caption
2016
2015
2014
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
Other noninterest expense
22
-
1
114
6
(1)
1
62
(2)
1
23
(1)
1
111
5
(2)
6
70
-
-
19
(3)
3
124
6
-
(7)
72
-
-
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.
The following tables provide a summary of offsetting derivative financial instruments:
As of December 31, 2016 ($ 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
$
1,044
1,044
(374)
(374)
(377)
(377)
293
293
Liabilities
Derivatives
Total liabilities
(a) Amount does not include 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
(374)
(374)
(125)
(125)
665
665
166
166
$
Sheets were excluded from this table.
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
(173)
(173)
(512)
(512)
938
938
253
253
$
Sheets were excluded from this table.
136 Fifth Third Bancorp
14. OTHER ASSETS
The following table provides the components of other assets included in the Consolidated Balance Sheets as of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Accounts receivable and drafts-in-process
Partnership investments
Bank owned life insurance
Derivative instruments
Investment in Vantiv Holding, LLC
Accrued interest and fees receivable
Vantiv, Inc. TRA put/call receivable
OREO and other repossessed personal property
Prepaid expenses
Other
Total other assets
(a) Upon adoption of ASU 2015-03 on January 1, 2016, the December 31, 2015 Consolidated Balance Sheet was adjusted to reflect the reclassification of $34 of debt issuance costs from other assets
2015
1,653
1,756
1,651
1,852
360
329
-
155
101
108 (a)
7,965 (a)
2016
2,158
1,689
1,681
1,057
414
350
165
84
83
163
7,844
$
$
to long-term debt. For further information, refer to Note 1.
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 $9 million and $1 million of
OTTI on its investments in private equity funds during the years
ended December 31, 2016 and 2015, respectively. The Bancorp did
not recognize OTTI on its investments in private equity funds
during the year ended December 31, 2014. 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.
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.
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.
During 2016 the Bancorp entered into an agreement with
Vantiv, Inc. in which Vantiv, Inc. may be obligated to pay a total of
approximately $171 million to the Bancorp to terminate and settle
certain remaining TRA cash flows, totaling an estimated $394
million, upon the exercise of certain call options by Vantiv, Inc. or
certain put options by the Bancorp.
OREO represents property acquired through foreclosure or
other proceedings and is carried at the lower of cost or fair value,
less costs to sell. Refer to Note 1 for further information.
137 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SHORT-TERM BORROWINGS
Borrowings with original maturities of one year or less are classified
as short-term and include federal funds purchased and other short-
term borrowings. Federal funds purchased are excess balances in
reserve accounts held at the FRB that the Bancorp purchased from
other member banks on an overnight basis. Other short-term
borrowings include securities sold under repurchase agreements,
derivative collateral, FHLB advances and other borrowings with
original maturities of one year or less.
The following table summarizes short-term borrowings and weighted-average rates:
($ 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
2016
Amount Rate
2015
Amount
Rate
0.61%
0.54
0.39%
0.36
$
$
$
132
3,535
506
2,845
739
6,374
$
$
$
151
1,507
920
1,721
200
4,904
0.30%
0.11
0.13%
0.12
The following table presents a summary of the Bancorp's other short-term borrowings as of December 31:
($ in millions)
FHLB advances
Securities sold under repurchase agreements
Derivative collateral
Total other short-term borrowings
$
$
2016
2015
2,500
661
374
3,535
-
925
582
1,507
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)
Type of Collateral:
Agency residential mortgage-backed securities
U.S. Treasury and federal agencies securities
Total securities sold under repurchase agreements
2016
Remaining Contractual
Maturity
2015
Remaining Contractual
Maturity
Amount
Amount
$
$
661
-
661
Overnight
Overnight
$
$
646
279
925
Overnight
Overnight
138 Fifth Third Bancorp
16. LONG-TERM DEBT
The following table is a summary of the Bancorp’s long-term borrowings at December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$
2016
2015(d)
Maturity
Interest Rate
2016
2019
2020
2022
-
499
1,096
497
1,000
498
1,094
496
2016
2017
2018
2024
2038
-
501
519
746
1,312
250
520
532
746
1,320
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
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 notes
Floating-rate notes(c)
Other
Total
(a)
(b) Under the Basel III Final Rule transition provisions, $0 and $13 qualified as Tier I capital as of December 31, 2016 and 2015, respectively, while the remaining amounts as of December
1.15%
0.90%
0.87%
0.82%
1.35%
2.15%
1.45%
1.82%
2.375%
2.30%
1.625%
1.59%
2.25%
2.875%
In aggregate, $2.7 billion and $2.4 billion qualifies as Tier II capital for regulatory capital purposes as of December, 31 2016 and 2015, respectively.
-
-
-
-
650
997
598
250
849
748
737
249
1,246
845
2016
2016
2016
2016
2017
2018
2018
2018
2019
2019
2019
2019
2021
2021
999
400
749
300
652
996
597
250
848
-
-
-
-
844
2.38% - 2.65%
2017 - 2041 0.05% - 6.87%
2,301
186
143
15,810
1,061
33
124
14,388
2018 - 2022 0.68% - 1.79%
2018
2017 - 2039
1.25%
Varies
3.85%
52
33
52
37
2035
2026
746
-
$
31, 2016 and 2015 qualify as Tier II capital. Refer to Note 28 for further information.
(c) These rates reflect the floating rates as of December 31, 2016.
(d) Upon adoption of ASU 2015-03 on January 1, 2016, the December 31, 2015 Consolidated Balance Sheet was adjusted to reflect the reclassification of $34 of debt issuance costs from other assets
to long-term debt. For further information refer to Note 1.
The Bancorp pays down long-term debt in accordance with contractual terms over maturity periods summarized in the above table. The aggregate
annual maturities of long-term debt obligations (based on final maturity dates) as of December 31, 2016 are presented in the following table:
($ in millions)
2017
2018
2019
2020
2021
Thereafter
Total
Parent
Subsidiaries
Total
$
$
501
519
499
1,096
-
2,555
5,170
655
2,124
2,782
547
2,196
914
9,218
1,156
2,643
3,281
1,643
2,196
3,469
14,388
At December 31, 2016, the Bancorp had outstanding principal
balances of $14.1 billion, net discounts of $24 million, debt issuance
costs of $33 million and additions for mark-to-market adjustments
on its hedged debt of $328 million. At December 31, 2015, the
Bancorp had outstanding principal balances of $15.5 billion, net
discounts of $24 million, debt issuance costs of $34 million and
additions for mark-to-market adjustments on its hedged debt of
$382 million. The Bancorp was in compliance with all debt
139 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
covenants at December 31, 2016 and 2015.
to
third-party
investors and entered
Parent Company Long-Term Borrowings
Senior Notes
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 and that they 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. These fixed-rate senior notes will be redeemable by
the Bancorp, in whole or in part, on or after the date that is 30 days
prior to the maturity date at a redemption price equal to 100% of
the principal amount plus accrued and unpaid interest up to, but
excluding, the redemption date.
On 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. These fixed-rate senior notes will be redeemable by the
Bancorp, in whole or in part, on or after the date that is 30 days
prior to the maturity date at a redemption price equal to 100% of
the principal amount plus accrued and unpaid interest up to, but
excluding, the redemption date.
On 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. These
fixed-rate senior 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.
Subordinated Debt
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, 2016. The rates paid on the swaps
hedging the subordinated floating-rate notes due in 2017 and 2018
were 1.34% and 1.18%, respectively, at December 31, 2016. 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
3.98% at December 31, 2016.
On November 20, 2013, the Bancorp issued and sold $750
million of 4.30% unsecured subordinated fixed-rate notes due on
January 16, 2024. These fixed-rate notes will be redeemable by the
Bancorp, in whole or in part, on or after the date that is 30 days
prior to the maturity date at a redemption price equal to 100% of
the principal amount plus accrued and unpaid interest up to, but
excluding, the redemption date.
Subsidiary Long-Term Borrowings
Senior and Subordinated Debt
Medium-term senior notes and subordinated bank notes with
maturities ranging from one year to 30 years can be issued by the
Bancorp’s banking subsidiary. Under the Bancorp’s banking
subsidiary’s global bank note program, the Bank’s capacity to issue
its senior and subordinated unsecured bank notes is $25 billion. As
140 Fifth Third Bancorp
of December 31, 2016, $17.1 billion was available for future
issuance under the global bank note program.
On February 28, 2013, the Bank issued and sold, under its bank
notes program, $600 million of 1.45% unsecured senior fixed-rate
bank notes due on February 28, 2018. 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 April 25, 2014, the Bank issued and sold, under its 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
bank notes program, $850 million of 2.875% unsecured senior
fixed-rate bank notes due on October 1, 2021. These bank notes
will be redeemable by the Bank, in whole or in part, on or after the
date that is 30 days prior to the maturity date at a redemption price
equal to 100% of the principal amount plus accrued and unpaid
interest up to, but excluding, the redemption date.
On August 20, 2015, the Bank issued and sold, under its 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.
On March 15, 2016, the Bank issued and sold, under its bank
notes program, $1.5 billion in aggregate principal amount of
unsecured bank notes. The bank notes consisted of $750 million of
2.30% senior fixed-rate notes due on March 15, 2019; and $750
million of 3.85% subordinated fixed-rate notes due on March 15,
2026. 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 June 14, 2016, the Bank issued and sold, under its bank
notes program, $1.3 billion of 2.25% unsecured senior fixed-rate
notes due on June 14, 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 September 27, 2016, the Bank issued and sold, under its
bank notes program, $1.0 billion in aggregate principal amount of
unsecured senior bank notes due on September 27, 2019. The bank
notes consisted of $750 million of 1.625% senior fixed-rate notes
and $250 million of senior floating-rate notes at three-month
LIBOR plus 59 bps. The Bancorp entered into interest rate swaps to
convert the fixed-rate notes to a floating-rate, which resulted in an
effective interest rate of three-month LIBOR plus 53 bps. These
bank notes will be redeemable by the Bank, in whole or in part, on
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
or after the date that is 30 days prior to the maturity date at a
redemption price equal to 100% of the principal amount plus
accrued and unpaid interest up to, but excluding, the redemption
date.
Junior Subordinated Debt
The junior subordinated floating-rate bank notes due in 2035 were
assumed by the Bancorp’s banking subsidiary as part of the
acquisition of First Charter in June 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
Bancorp’s nonbank subsidiary holding company 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, 2016, 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 $33 million in FHLB
advances that are outstanding. The FHLB advances mature as
follows: $1 million in 2017, $4 million in 2018, $9 million in 2019,
$3 million in 2020, $3 million in 2021 and $13 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 certain
automobile loan securitization transactions. As such, $1.1 billion of
long-term debt related to these VIEs was consolidated in the
Bancorp’s Consolidated Financial Statements as of December 31,
2016. Third-party holders of this debt do not have recourse to the
general assets of the Bancorp.
141 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES
The Bancorp, in the normal course of business, enters into financial
instruments and various agreements to meet the financing needs of
its customers. The Bancorp also enters into certain transactions and
agreements to manage its interest rate and prepayment risks, provide
funding, equipment and locations for its operations and invest in its
communities. These instruments and agreements involve, to varying
degrees, elements of credit risk, counterparty risk and market risk in
excess of the amounts recognized in the Consolidated Balance
Sheets. The creditworthiness of counterparties for all instruments
and agreements is evaluated on a case-by-case basis in accordance
with the Bancorp’s credit policies. The Bancorp’s significant
commitments, contingent liabilities and guarantees in excess of the
in the Consolidated Balance Sheets are
amounts recognized
discussed in further detail below:
Commitments
The Bancorp has certain commitments to make future payments under contracts. The following table reflects a summary of significant
commitments as of December 31:
($ in millions)
Commitments to extend credit
Letters of credit
Forward contracts related to residential mortgage loans held for sale
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
$
2016
67,909
2,583
1,823
576
59
57
29
19
2015
66,884
3,055
1,330
635
60
60
30
27
resulting from fluctuations in interest rates and the Bancorp’s
exposure is limited to the replacement value of those commitments.
As of December 31, 2016 and 2015, the Bancorp had a reserve for
unfunded commitments, including letters of credit, totaling $161
million and $138 million, respectively, included in other liabilities in
the Consolidated Balance Sheets. The Bancorp monitors the credit
risk associated with commitments to extend credit using the same
risk rating system utilized within its loan and lease portfolio.
Risk ratings under this risk rating system are summarized in the following table as of December 31:
($ in millions)
Pass
Special mention
Substandard
Doubtful
Total commitments to extend credit
$
$
2016
66,802
338
753
16
67,909
2015
65,645
647
592
-
66,884
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, 2016:
($ in millions)
Less than 1 year(a)
1 - 5 years(a)
Over 5 years
Total letters of credit
(a) Includes $18 and $3 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 - 5 years, respectively.
1,387
1,164
32
2,583
$
$
Standby letters of credit accounted for 99% of total letters of credit
at both December 31, 2016 and 2015, and are considered guarantees
in accordance with U.S. GAAP. Approximately 62% and 65% of
the total standby letters of credit were collateralized as of December
31, 2016 and 2015, respectively. In the event of nonperformance by
the customers, the Bancorp has rights to the underlying collateral,
which can include commercial real estate, physical plant and
property, inventory, receivables, cash and marketable securities. The
reserve related to these standby letters of credit, which is included in
the total reserve for unfunded commitments, was $3 million at
December 31, 2016 and immaterial at December 31, 2015. The
Bancorp monitors the credit risk associated with letters of credit
using the same risk rating system utilized within its loan and lease
portfolio.
142 Fifth Third Bancorp
Risk ratings under this risk rating system are summarized in the following table as of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Pass
Special mention
Substandard
Doubtful
Total letters of credit
At December 31, 2016 and 2015, 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,
2016 and 2015, total VRDNs in which the Bancorp was the
remarketing agent or were supported by a Bancorp letter of credit
were $929 million and $1.3 billion, respectively, of which FTS acted
as the remarketing agent to issuers on $784 million and $1.1 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 $609 million and
$921 million of the VRDNs remarketed by FTS, in addition to $145
million and $187 million in VRDNs remarketed by third parties at
December 31, 2016 and 2015, respectively. These letters of credit
are included in the total letters of credit balance provided in the
previous table. The Bancorp held $6 million and an immaterial
amount of these VRDNs in its portfolio and classified them as
trading securities at December 31, 2016 and 2015, respectively.
Forward contracts related to residential mortgage loans held for sale
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
are required to obtain PMI provided by third-party insurers. In
some instances, these insurers ceded a portion of the PMI
premiums to the Bancorp, and the Bancorp provided reinsurance
coverage within a specified range of the total PMI coverage. The
Bancorp’s reinsurance coverage typically ranged from 5% to 10% of
the total PMI coverage. The Bancorp’s maximum exposure in the
event of nonperformance by the underlying borrowers was
equivalent to the Bancorp’s total outstanding reinsurance coverage,
which was $27 million at December 31, 2015. As of December 31,
2015, 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. In the second
$
$
2016
2,134
98
290
61
2,583
2015
2,606
130
258
61
3,055
quarter of 2016, the Bancorp allowed one of its third-party insurers
to terminate its reinsurance agreement with the Bancorp, resulting
in the Bancorp releasing collateral to the insurer in the form of
investment securities and other assets with a carrying value of $6
million, and the insurer assuming the Bancorp’s obligations under
the reinsurance agreement, resulting in a decrease to the Bancorp’s
reserve liability of $2 million and a decrease in the Bancorp’s
maximum exposure of $26 million. In addition, the Bancorp
received a payment of $4 million related to the difference between
the release of the assets and the reserve liability assumed. During the
fourth quarter of 2016, the final policies under the reinsurance
agreement were terminated and as of December 31, 2016 the
Bancorp no longer had any remaining exposure or reserves related
to exposure within the reinsurance portfolio.
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, 2016 and 2015, the Bancorp maintained
reserves related to loans sold with representation and warranty
provisions totaling $13 million and $25 million, respectively,
included in other liabilities in the Consolidated Balance Sheets.
The Bancorp uses the best
information available when
its mortgage representation and warranty reserve;
estimating
inherently uncertain and
however, the estimation process
imprecise and, accordingly, losses in excess of the amounts reserved
as of December 31, 2016, 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 $21 million in excess of amounts
reserved. This estimate was derived by modifying the key
is
143 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2016 and 2015, the
Bancorp paid $1 million and $2 million, respectively, in the form of
make whole payments and repurchased $17 million and $74 million,
respectively, in outstanding principal of loans to satisfy investor
demands. Total repurchase demand requests during the years ended
December 31, 2016 and 2015 were $22 million and $75 million,
respectively. Total outstanding repurchase demand inventory was $2
million at December 31, 2016 compared to $4 million at December
31, 2015.
The following table summarizes activity in the reserve for representation and warranty provisions for the years ended December 31:
($ in millions)
Balance, beginning of period
Net reductions to the reserve
Losses charged against the reserve
Balance, end of period
2016
25
(10)
(2)
13
$
$
2015
35
(3)
(7)
25
The following tables provide a rollforward of unresolved claims by claimant type for the years ended December 31:
2016 ($ in millions)
Balance, beginning of period
New demands
Loan paydowns/payoffs
Resolved demands
Balance, end of period
2015 ($ 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 $374 million and $465 million
at December 31, 2016 and 2015, respectively, and the delinquency
rates were 3.2% at December 31, 2016 and 3.0% at December 31,
2015. The Bancorp maintained an estimated credit loss reserve on
these loans sold with credit recourse of $7 million and $9 million at
December 31, 2016 and 2015, respectively, 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 $15 million at December 31, 2016 and $10
million at December 31, 2015. In the event of any customer default,
144 Fifth Third Bancorp
GSE
Private Label
Units
16
309
(8)
(304)
13
Units
37
436
(29)
(428)
16
Dollars
4
22
(1)
(23)
2
Dollars
6
33
(2)
(33)
4
$
$
GSE
$
$
Units
2
4
-
(6)
-
$
$
Dollars
-
-
-
-
-
Private Label
Units
1
261
-
(260)
2
$
$
Dollars
1
42
-
(43)
-
FTS has rights to the underlying collateral provided. Given the
existence of the underlying collateral provided and negligible
historical credit losses, the Bancorp does not maintain a loss reserve
related to the margin accounts.
Long-term borrowing obligations
The Bancorp had certain fully and unconditionally guaranteed long-
term borrowing obligations issued by wholly-owned issuing trust
entities of $62 million at both December 31, 2016 and 2015.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
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, 2016, 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
$91 million and $61 million at December 31, 2016 and 2015,
respectively. Refer to Note 13 and Note 27 for further information.
After the Bancorp’s sale of the Class B Shares, Visa has funded
additional amounts into the litigation escrow account which have
resulted in further dilutive adjustments to the conversion of Class B
Shares into Class A Shares, and along with other terms of the total
return swap, required the Bancorp to make cash payments in
varying amounts to the swap counterparty as follows:
Period ($ 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
145 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. LEGAL AND REGULATORY PROCEEDINGS
Litigation
Visa/Mastercard Merchant Interchange Litigation
In 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 16 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 trial court entered a final order approving the
class settlement. A number of merchants filed appeals from that
approval. The U.S. Court of Appeals for the Second Circuit held a
hearing on those appeals and on June 30, 2016, reversed the district
court’s approval of the class settlement, remanding the case to the
district court for further proceedings. In rejecting the settlement, the
appellate court found that counsel for plaintiffs was conflicted and
thus could not adequately represent the plaintiff-class members of
the separate monetary and injunctive relief settlement classes. The
appellate court decertified the settlement classes, ordered that the
case return to the trial court and directed the trial court to appoint
separate counsel for the separate plaintiff classes. Pursuant to the
terms of the overturned settlement agreement, the Bancorp
previously paid $46 million into a class settlement escrow account.
Because the appellate court ruling remands the case to the district
court for further proceedings, the ultimate outcome in this matter is
uncertain. Approximately 8,000 merchants requested exclusion from
the class settlement, and therefore, pursuant to the terms of the
settlement agreement, 25% of the funds paid into the class
settlement escrow account were already returned to the control of
the defendants. More than 460 of the merchants who requested
exclusion from the class filed separate federal lawsuits against Visa,
MasterCard and certain other defendants alleging similar antitrust
violations. These “opt-out” federal lawsuits were 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
to
indemnification arrangements and/or the judgment or loss sharing
agreements noted above. On July 18, 2015, the court in which all
the remaining opt-out federal lawsuits have been consolidated
denied defendants’ motion to dismiss the complaints. Refer to Note
17 for further information.
lawsuits, but may have obligations pursuant
Dudenhoeffer v. Fifth Third Bancorp
On March 29, 2016, the court in two class action lawsuits
consolidated as Dudenhoeffer v. Fifth Third Bancorp et al. filed in
2008 in the United States District Court for the Southern District of
Ohio preliminarily approved a settlement in which the Bancorp
agreed to pay $6 million and make certain changes to the Bancorp’s
profit sharing plan. 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. On July 11, 2016, the court issued a Final
Approval Order and Judgment approving the settlement in all
respects and ordering
settlement agreement be
implemented in accordance with its terms.
that
the
146 Fifth Third Bancorp
Klopfenstein v. Fifth Third Bank
On August 3, 2012, William Klopfenstein and Adam McKinney
filed a lawsuit against Fifth Third Bank in the United States District
Court for the Northern District of Ohio (Klopfenstein et al. v. Fifth
Third Bank), alleging that the 120% APR that Fifth Third disclosed
on its Early Access program was misleading. Early Access is a
deposit-advance program offered
to eligible customers with
checking accounts. The plaintiffs sought to represent a nationwide
class of customers who used the Early Access program and repaid
their cash advances within 30 days. On October 31, 2012, the case
was transferred to the United States District Court for the Southern
District of Ohio. In 2013, four similar putative class actions were
filed against Fifth Third Bank in federal courts throughout the
country (Lori and Danielle Laskaris v. Fifth Third Bank, Janet Fyock
v. Fifth Third Bank, Jesse McQuillen v. Fifth Third Bank, and Brian
Harrison v. Fifth Third Bank). Those four lawsuits were transferred
to the Southern District of Ohio and consolidated with the original
lawsuit as In re: Fifth Third Early Access Cash Advance Litigation.
On behalf of a putative class, the plaintiffs seek unspecified
monetary and statutory damages, injunctive relief, punitive damages,
attorney’s fees, and pre- and post-judgment interest. On March 30,
2015, the court dismissed all claims alleged in the consolidated
lawsuit except a claim under the TILA. The parties are currently
engaged in pre-trial proceedings. No trial date has been scheduled.
Nina Investments, LLC v. Fifth Third Bank
On July 5, 2012, Nina Investments, LLC (“Nina”) filed a lawsuit
against Fifth Third Bank (Nina Investments, LLC. v. Fifth Third
Bank, et al.) in the Circuit Court of Cook County, Illinois, alleging
fraud and conspiracy to commit fraud related to a credit facility
established by Fifth Third Bank in 2007 to finance life insurance
premiums. Nina invested funds in an entity related to the borrower
under the credit facility and is claiming over $70 million in damages
based on its alleged loss of these funds. Nina alleges that it would
have made different investment decisions if Fifth Third had
disclosed fraud committed by the borrower with the alleged
knowledge of Fifth Third employees. Nina filed this lawsuit in
response to a lawsuit filed by Fifth Third Bank in the same court on
June 11, 2010 against Nina and other defendants (Fifth Third Bank
v. Concord Capital Management, LLC, et al.) alleging fraud and
breach of contract. In 2015, the court dismissed Fifth Third's
contract and fraud claims against certain defendants. Fifth Third
currently has claims pending against other defendants, including a
claim for fraudulent conveyance against Nina. On October 20,
2016, the court denied Fifth Third’s motion to assert a new claim
against Nina and other investors for fraudulent inducement of a
guarantee related to the credit facility and to reassert claims for
breach of guarantee against certain of the investors who also acted
as guarantors. The trial has been scheduled in these consolidated
actions for April 24, 2017.
Helton v. Fifth Third Bank
On August 31, 2015, trust beneficiaries filed an action against Fifth
Third Bank, as trustee, in the Probate Court for Hamilton County,
Ohio (Helen Clarke Helton, et al. v. Fifth Third Bank). The
plaintiffs allege breach of the duty to diversify, breach of the duty of
impartiality, breach of trust/fiduciary duty, and unjust enrichment,
based on Fifth Third’s alleged failure to diversify assets held in two
trusts held for the plaintiffs’ benefit. The lawsuit seeks unspecified
monetary damages, attorney’s fees, removal of Fifth Third as
trustee, and injunctive relief. On January 5, 2016, the Court denied
Fifth Third’s motion to dismiss. The parties are currently engaged in
pre-trial proceedings. Trial is currently scheduled for September 18,
2017.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Upsher-Smith Laboratories, Inc. v. Fifth Third Bank
On February 2, 2012, Upsher-Smith Laboratories, Inc. (“Upsher-
Smith”) filed suit against Fifth Third Bank in the Fourth Judicial
District, Hennepin County, Minnesota (Upsher-Smith Laboratories
Inc. v. Fifth Third Bank), alleging that Fifth Third improperly
implemented foreign exchange (“FX”) transactions requested by
plaintiff’s authorized employee who allegedly was the victim of
fraud by a third party. Plaintiff asserts claims for breach of contract
and the implied covenant of good faith and fair dealing and under
Article 4A-202 of the Uniform Commercial Code, with losses
allegedly totalling almost $40 million. On March 3, 2016, Fifth Third
removed the case to the United States District Court for the District
of Minnesota. Fifth Third filed a motion to transfer venue to the
United States District Court for the Southern District of Ohio on
April 7, 2016, which was denied on December 29, 2016. Discovery
was stayed pending the Court’s ruling on the motion to transfer. No
trial date has been scheduled.
The Champions Home Owners Association, Inc. v. Jeffrey D. Quammen, et al.
On September 12, 2013 Fifth Third Bank was named as a defendant
in a cross-complaint filed by Royce Pulliam, P&P Real Estate, LLC
and Global Fitness Holdings, LLC (“Plaintiffs”) in the Jessamine
Circuit Court in Jessamine County, Kentucky. The Plaintiffs allege
that Fifth Third Bank breached a contract to provide commercial
funding for Plaintiffs’ national fitness franchise. The Plaintiffs claim
to have sustained over $50 million in damages from the alleged
contract breach. Fifth Third Bank denies that any breach of contract
occurred, and further asserts that Plaintiffs executed multiple
releases waiving the claims at issue in the litigation. Fifth Third Bank
has asserted a $1.5 million claim against Plaintiff Royce Pulliam for
breach of guaranty. On February 3, 2017 the Jessamine Circuit
Court ruled in favor of Fifth Third Bank granting summary
judgment on Fifth Third’s claim for breach of guaranty. The Court
denied Fifth Third Bank’s motion for summary judgment seeking
dismissal of the Plaintiffs’ claims. The case is set for a bench trial
beginning February 27, 2017.
Other Litigation
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 the
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.
Governmental Investigations and Proceedings
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, including but not limited to the
CFPB, FINRA, etc., 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
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.
financial
Reasonably Possible Losses in Excess of Accruals
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:
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 $43 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.
147 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. RELATED PARTY TRANSACTIONS
The Bancorp maintains written policies and procedures covering
related party transactions with 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,
2016 and 2015, 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
2016
2015
$
$
$
618
4
622
54
831
5
836
97
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
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 $414 as of December 31, 2016 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.
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 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 in
other noninterest income 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 gain
of $331 million in other noninterest income.
During the fourth quarter of 2016, the Bancorp exercised its
right to purchase approximately 7.8 million Class C Units underlying
148 Fifth Third Bancorp
the warrant at the $15.98 strike price. This exercise was settled on a
net basis for approximately 5.7 million Class C Units, which were
then exchanged for approximately 5.7 million shares of Vantiv, Inc.
Class A Common Stock of which 4.8 million shares were sold in a
secondary offering and 0.9 million shares were repurchased by
Vantiv, Inc. The Bancorp recognized a gain of $9 million in other
noninterest income in the Consolidated Statements of Income in
2016 on the exercise of the remaining warrant in Vantiv Holding,
LLC.
As of December 31, 2016, the Bancorp continued to hold
approximately 35 million Class B Units of Vantiv Holding, LLC
which may be exchanged for Class A Common Stock of Vantiv,
Inc. on a one-for-one basis or at Vantiv, Inc.’s option for cash
which represents approximately 17.9% ownership of Vantiv,
Holding, LLC. 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. At any time, other than in connection with a
stockholder vote with respect to a change in control in Vantiv, Inc.,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the voting rights attributable to the Class B Common Shares are
limited to the lesser of 18.5% or the Bancorp’s ownership
percentage of Vantiv Holding, LLC, currently 17.9%. These
securities are subject to certain terms and restrictions.
The Bancorp recognized $66 million, $63 million and $48
million, respectively, in other noninterest income as part of its
equity method investment in Vantiv Holding, LLC for the years
ended December 31, 2016, 2015 and 2014 and received cash
distributions totaling $9 million, $11 million and $23 million during
the years ended December 31, 2016, 2015 and 2014, respectively.
The Bancorp’s remaining investment in Vantiv Holding, LLC
continues to be accounted for under the equity method of
accounting as of December 31, 2016.
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.
to 2030,
During the third quarter of 2016, 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 consideration of a
cash payment in the amount of $116 million from Vantiv, Inc.
Under the agreement, the Bancorp terminated and settled certain
TRA cash flows it expected to receive in the years 2019 to 2035,
totaling an estimated $331 million. The Bancorp recognized a gain
of $116 million in other noninterest income from this settlement.
Additionally, the agreement provides that Vantiv, Inc. may be
obligated to pay up to a total of approximately $171 million to the
Bancorp to terminate and settle certain remaining TRA cash flows,
totaling an estimated $394 million, upon the exercise of certain call
options by Vantiv, Inc. or certain put options by the Bancorp. If the
associated call options or put options are exercised, 10% of the
obligations would be settled with respect to each quarter in 2017
and 15% of the obligations would be settled with respect to each
quarter in 2018. The Bancorp recognized a gain of $164 million in
other noninterest income associated with these options. This
agreement did not impact the TRA payments recognized in the
fourth quarter of 2016 and is not expected to impact the TRA
payment expected in the fourth quarter of 2017.
In addition to the impact of the TRA terminations discussed
above, the Bancorp recognized $33 million, $31 million and $23
million in noninterest income in the Consolidated Statements of
Income associated with the TRA during the years ended December
31, 2016, 2015 and 2014, respectively.
The following table provides the estimated cash flows to be received as of December 31, 2016 associated with the TRA for the years ending
December 31, 2017 and thereafter:
$
Estimated Cash Flows to
be Received not Subject to
Put/Call Option(a)
($ in millions)
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Thereafter
Total
(a) The 2017 cash flow of $33 has been agreed upon with Vantiv, Inc. for settlement in January 2017 and was recognized as a gain in noninterest income during the fourth quarter of 2016. The
remaining estimated cash flows in this column (which include TRA benefits associated with the net exercise of the warrant and the subsequent exchange of Vantiv Holding, LLC units in the fourth
quarter of 2016) will be recognized in future periods when the related uncertainties are resolved.
Cash Flows to be Received
From Put/Call Option
Exercises (Fixed Amounts)(b)
63
108
-
-
-
-
-
-
-
-
-
171
33
42
8
8
8
8
9
9
9
10
102
246
$
(b) As part of the agreement the Bancorp entered into with Vantiv, Inc. on July 27, 2016, Vantiv, Inc. may be obligated to pay a total of approximately $171 to the Bancorp to terminate certain
remaining TRA cash flows, totaling an estimated $394, upon the exercise of certain call options by Vantiv, Inc. or certain put options by the Bancorp.
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, LLC. 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, 2016, 2015 and 2014. Other services
provided to Vantiv Holding, LLC by the Bancorp, have continued
beyond the deconversion period, include interchange clearing,
settlement and sponsorship. Vantiv Holding, LLC paid the Bancorp
$58 million, $47 million and $44 million for these services for the
years ended December 31, 2016, 2015 and 2014, 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 $76 million, $89 million
and $83 million for the years ended December 31, 2016, 2015 and
2014, respectively. These fees are reported as a component of card
and processing expense in the 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 $210 million and $191 million at December 31,
2016 and 2015, respectively. Interest income relating to the loans
was $4 million, $4 million and $5 million, respectively, for the years
ended December 31, 2016, 2015 and 2014 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 $59
million and $46 million as of December 31, 2016 and 2015,
149 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
respectively.
this
investment under
SLK Global
As of December 31, 2016, the Bancorp owns 100% of Fifth Third
Mauritius Holdings Limited, which owns 49% of SLK Global, and
accounts for
the equity method of
accounting. The Bancorp’s investment in SLK Global was $6
million at both December 31, 2016 and 2015. The Bancorp
recognized $3 million
the
Consolidated Statements of Income as part of its equity method
investment in SLK Global for each of the years ended December
31, 2016, 2015, and 2014 and received an immaterial amount of cash
distributions during the years ended December 31, 2016, 2015 and
2014. The Bancorp paid SLK Global $20 million, $17 million and
in other noninterest
income
in
$13 million for their process and software services during the years
ended December 31, 2016, 2015 and 2014, respectively.
CDC Investments
The Bancorp’s subsidiary, CDC, has equity investments in entities in
which the Bancorp had $76 million and $5 million of loans
outstanding at December 31, 2016 and 2015, respectively, and
unfunded commitment balances of $18 million and $88 million at
December 31, 2016 and 2015, respectively. The Bancorp held $28
million and $23 million of deposits for these entities at December
31, 2016 and 2015, respectively. For further information on CDC
investments, refer to Note 11.
150 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. INCOME TAXES
The Bancorp and its subsidiaries file a consolidated federal income tax return. The following is a summary of applicable income taxes included in
the Consolidated Statements of Income for the years ended December 31:
($ 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
2016
2015
2014
$
$
598
55
-
653
(133)
(14)
(1)
(148)
505
662
55
13
730
(78)
6
1
(71)
659
424
34
8
466
71
9
(1)
79
545
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
Low-income housing tax credits
Other tax credits
Other, net
Effective tax rate
2016
35.0 %
1.3
(2.7)
(7.9)
(0.9)
(0.4)
24.4 %
2015
35.0
1.7
(1.7)
(6.6)
(0.9)
0.3
27.8
2014
35.0
1.4
(1.4)
(7.0)
(1.1)
-
26.9
Other tax credits in the rate reconciliation table include 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 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.
2016
13
9
-
2
-
-
24
2015
11
1
-
2
-
(1)
13
2014
7
2
-
2
-
-
11
$
$
The Bancorp’s unrecognized tax benefits as of December 31, 2016,
2015, and 2014 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.
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
151 Fifth Third Bancorp
Deferred income taxes are comprised of the following items at December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2016
2015
439
122
57
56
9
223
906
940
219
202
64
61
34
173
1,693
(787)
445
118
61
48
10
194
876
935
248
245
79
53
106
218
1,884
(1,008)
$
$
$
$
$
expense in connection with income taxes and an immaterial amount
of interest expense/benefit for the years ended December 31, 2015
and 2014. At December 31, 2016 and 2015, 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, 2016 and 2015 included
$157 million in allocations of earnings for bad debt deductions of
former thrift subsidiaries for which no income tax has been
provided. Under current tax law, if certain of the Bancorp’s
subsidiaries use these bad debt reserves for purposes other than to
absorb bad debt losses, they will be subject to federal income tax at
the current corporate tax rate.
the Bancorp
During 2016,
adopted ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting,
effective as of January 1, 2016. Consistent with existing U.S. GAAP
and ASU 2016-09, the Bancorp establishes a deferred tax asset and
recognizes a corresponding deferred tax benefit for stock-based
awards granted to its employees and directors based on enacted tax
rates
reporting
recorded
purposes. The actual tax deduction for these stock-based awards is
determined when the stock-based awards are settled or expired and
the tax deductions will typically be greater than or less than the
expense previously recognized for financial reporting.
the expense
financial
and
for
Among other requirements, ASU 2016-09 requires that the tax
consequences for the difference between the expense recognized for
financial reporting and the Bancorp’s actual tax deduction for the
stock-based awards be recognized through income tax expense in
the interim periods in which they occur. Prior to the adoption of
ASU 2016-09, the tax consequences for the difference between the
expense recognized for financial reporting and the actual tax
deduction for stock-based awards was recognized either through
additional paid-in-capital when the Bancorp accumulated “excess
tax benefits” from stock based awards or through income tax
expense when the Bancorp depleted its accumulated “excess tax
benefits” from stock-based awards.
($ 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
State deferred taxes
Bank premises and equipment
Other comprehensive income
Other
Total deferred tax liabilities
Total net deferred tax liability
At December 31, 2016 and 2015, the Bancorp recorded deferred tax
assets of $9 million and $10 million, respectively, related to state net
operating loss carryforwards. The deferred tax assets relating to state
net operating losses (primarily resulting from leasing operations) are
presented net of specific valuation allowances of $25 million and
$22 million at December 31, 2016 and 2015, respectively. If these
carryforwards are not utilized, they will expire in varying amounts
through 2035. At December 31, 2016 and 2015, the Bancorp
recorded a deferred tax asset of $3 million and $5 million,
respectively related to a foreign tax credit carryforward. If not
utilized, the majority of 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,
2016 or 2015. 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, 2016 and
2015 will ultimately be realized. The Bancorp reached this
conclusion as the Bancorp has taxable income in the carryback
period and it is expected that the Bancorp’s remaining deferred tax
assets will be realized through the reversal of its existing taxable
temporary differences and its projected future taxable income.
The IRS is currently examining the Bancorp’s 2012 and 2013
federal income tax returns. The statute of limitations for the
Bancorp’s federal income tax returns remains open for tax years
local taxing
2012-2016. On occasion, as various state and
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
Consolidated Financial Statements. During
the year ended
December 31, 2016, the Bancorp recognized $1 million of interest
152 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, 2016 and 2015.
The underfunded amounts recognized in other liabilities in the
Consolidated Balance Sheets were $34 million and $54 million at
December 31, 2016 and 2015, respectively.
The following table summarizes the Plan as of and for the years ended December 31:
$
2016
($ in millions)
195
Fair value of plan assets at January 1
(6)
Actual return on assets
4
Contributions
(17)
Settlement
(10)
Benefits paid
166
Fair value of plan assets at December 31
247
Projected benefit obligation at January 1
9
Interest cost
(17)
Settlement
(9)
Actuarial (gain) loss
(10)
Benefits paid
220
Projected benefit obligation at December 31
(54)
Underfunded projected benefit obligation at December 31
220
Accumulated benefit obligation at December 31(a)
(a) Since the Plan’s benefits are frozen, the rate of compensation increase is no longer an assumption used to calculate the accumulated benefit obligation. Therefore, the accumulated benefit obligation was
166
11
20
(15)
(10)
172
220
9
(15)
2
(10)
206
(34)
206
2015
$
$
$
$
$
the same as the projected benefit obligation at both December 31, 2016 and 2015.
The estimated net actuarial loss for the Plan that will be amortized
from AOCI into net periodic benefit cost during 2017 is $7 million.
The estimated net prior service cost for the Plan that will be
amortized from AOCI into net periodic benefit cost during 2017 is
immaterial to the Consolidated Financial Statements.
The following table summarizes net periodic benefit cost and other changes in the Plan's assets and benefit obligations recognized in OCI for the
years ended December 31:
($ 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
Amortization of net actuarial loss
Settlement
Total recognized in other comprehensive income
Total recognized in net periodic benefit cost and other comprehensive income
2016
2015
2014
$
$
$
$
9
(11)
11
7
16
2
(11)
(7)
(16)
-
9
(13)
10
7
13
9
(10)
(7)
(8)
5
10
(14)
7
5
8
37
(7)
(5)
25
33
153 Fifth Third Bancorp
Fair Value Measurements of Plan Assets
The following tables summarize plan assets measured at fair value on a recurring basis as of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2016 ($ 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
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.
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.
Fair Value Measurements Using(a)
Level 1
Level 2
Level 3
Total Fair Value
56
6
-
-
-
1
6
13
7
-
-
-
7
76
-
-
31
39
5
9
-
84
1
1
2
8
12
96
-
-
-
-
-
-
-
-
-
-
-
-
-
-
56
6
31
39
5
10
6
97
8
1
2
8
19
172
Level 1
Fair Value Measurements Using(a)
Level 2
Level 3
Total Fair Value
52
15
-
-
-
-
6
21
2
-
-
-
-
2
75
-
-
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
$
$
$
$
$
$
$
$
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.
strategies 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.
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 which are available in an active market and
classifies these investments within Level 1 of the valuation
hierarchy. Level 1 securities include money market funds, alternative
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
available, then fair values are estimated using pricing models, quoted
prices of securities with similar characteristics, or DCFs. Examples
154 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of such instruments, which are classified within Level 2 of the
valuation hierarchy, include federal agencies securities, agency
commercial
residential mortgage-backed
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.
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(a)
Expected return on plan assets
For measuring net periodic benefit cost:
Discount rate
Rate of compensation increase(a)
Expected return on plan assets
2016
2015
2014
3.97 %
N/A
7.00
4.16
N/A
7.00
4.16
N/A
7.00
3.82
N/A
7.00
3.82
N/A
7.25
4.72
N/A
7.25
(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 2016 pension
expense by approximately $1 million.
Based on the actuarial assumptions, the Bancorp expects to
contribute $3 million to the Plan in 2017. Estimated pension benefit
payments are $18 million in 2017, $17 million in 2018, $16 million
in 2019, $16 million in 2020 and $16 million in 2021. The total
estimated payments for the years 2022 through 2026 is $77 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, asset-
backed securities and corporate bonds), alternative strategies
(including
and
commodities) and cash.
funds, precious metals
traditional mutual
The following table provides the Bancorp’s targeted and actual weighted-average asset allocations by asset category for the years ended December
31:
Equity securities
Bancorp common stock
Total equity securities(a)
Fixed-income securities
Alternative strategies
Cash
Total
(a)
(b) These reflect the targeted ranges for both the years ended December 31, 2016 and 2015.
Includes mutual and exchange-traded funds.
The risk tolerance for the Plan is determined by management to be
“moderate to aggressive”, recognizing that higher returns involve
some volatility and that periodic declines in the 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, 2016 and 2015.
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.
Targeted Range(b)
2016
2015
60-90 %
5-25
3-11
0-13
73 %
2
75
14
6
5
100 %
69
2
71
16
7
6
100
155 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
for matching
match
contributions to the Bancorp’s qualified defined contribution
savings plan were $75 million, $71 million and $44 million for the
years ended December 31, 2016, 2015 and 2014, respectively. The
Bancorp did not make profit sharing contributions during the years
ended December 31, 2016 and 2015. The Bancorp’s profit sharing
plan expense was $19 million for the year ended December 31,
2014. In addition, the Bancorp has a non-qualified defined
contribution plan that allows certain employees to make voluntary
into a deferred compensation plan. Expenses
contributions
recognized by
its non-qualified defined
contribution plan were $3 million for both of the years ended
December 31, 2016 and 2015 and $2 million for the year ended
December 31, 2014.
the Bancorp
for
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. As of December 31, 2016 and
2015, $172 million and $166 million, respectively, of plan assets
were managed by Fifth Third Bank. The Fifth Third Bank Pension,
401(k) 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
investment management, accounting or administrative services
provided by the Trustee. As of December 31, 2016 and 2015, Plan
assets included $5 million and $4 million, respectively, of Bancorp
common stock, which
is below the 10% ERISA threshold
previously discussed. Plan assets are not expected to be returned to
the Bancorp during 2017.
156 Fifth Third Bancorp
22. ACCUMULATED OTHER COMPREHENSIVE INCOME
The tables below presents the activity of the components of OCI and AOCI for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
2016
Unrealized holding losses on available-for-sale securities arising
Total Other
Comprehensive Income
Tax
Effect
Pre-tax
Activity
Net
Activity
Total Accumulated Other
Comprehensive Income
Net
Activity
Ending
Balance
Beginning
Balance
during the year
$
(196)
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
$
(11)
(207)
30
(48)
(18)
(2)
18
16
(209)
66
4
70
(11)
17
6
1
(6)
(5)
71
(130)
(7)
(137)
19
(31)
(12)
(1)
12
11
(138)
238
(137)
101
22
(12)
10
(63)
197
11
(138)
(52)
59
($ in millions)
2015
Unrealized holding losses on available-for-sale securities arising
Total Other
Comprehensive Income
Tax
Effect
Net
Activity
Pre-tax
Activity
Total Accumulated Other
Comprehensive Income
Net
Activity
Ending
Balance
Beginning
Balance
during the year
$
(349)
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
$
(16)
(365)
74
(75)
(1)
(9)
17
8
(358)
122
6
128
(26)
26
-
4
(6)
(2)
126
(227)
(10)
(237)
48
(49)
(1)
(5)
11
6
(232)
475
(237)
238
23
(1)
22
(69)
429
6
(232)
(63)
197
157 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
2014
Unrealized holding gains on available-for-sale securities arising
Total Other
Comprehensive Income
Tax
Effect
Pre-tax
Activity
Net
Activity
Beginning
Balance
Total Accumulated Other
Comprehensive Income
Net
Activity
Ending
Balance
during the year
$
580
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
$
(37)
543
60
(44)
16
(37)
12
(25)
534
(202)
13
(189)
(21)
15
(6)
12
(4)
8
(187)
378
(24)
354
39
(29)
10
(25)
8
(17)
347
The table below presents reclassifications out of AOCI for the years ended December 31:
121
354
475
13
10
23
(52)
82
(17)
347
(69)
429
Components of AOCI: ($ in millions)
Net unrealized gains on available-for-sale securities:(b)
Net gains included in net income
Net unrealized gains on cash flow hedge derivatives:(b)
Interest rate contracts related to C&I loans
Net periodic benefit costs:(b)
Amortization of net actuarial loss
Settlements
Consolidated Statements of
Income Caption
2016
2015
2014
Securities gains, net
Income before income taxes
Applicable income tax expense
Net income
$
Interest and fees on loans and leases
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
11
11
(4)
7
48
48
(17)
31
(11)
(7)
(18)
6
(12)
16
16
(6)
10
75
75
(26)
49
(10)
(7)
(17)
6
(11)
48
37
37
(13)
24
44
44
(15)
29
(7)
(5)
(12)
4
(8)
45
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
$
26
158 Fifth Third Bancorp
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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Preferred Stock
Shares
($ in millions, except share data)
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 acquired for treasury
Impact of stock transactions under stock compensation plans, net
Other
December 31, 2016
Common Stock
Shares
923,892,581
-
-
-
-
923,892,581
-
-
-
923,892,581
-
-
-
923,892,581
Value
2,051
-
-
-
-
2,051
-
-
-
2,051
-
-
-
2,051
$
$
$
$
$
Value
1,034
$
-
297
-
-
1,331
-
-
-
1,331
-
-
-
1,331
$
$
Treasury Stock
Value
$ (1,295)
(726)
-
47
2
$ (1,972)
(847)
52
3
$ (2,764)
(668)
(4)
3
$ (3,433)
Shares
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
34,633,221
42,357
(74,563)
173,413,282
42,000
-
12,000
-
-
54,000
-
-
-
54,000
-
-
-
54,000
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
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.
Treasury Stock
On March 15, 2016, 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 2014.
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.
On June 29, 2016, the Bancorp announced the results of its
capital plan submitted to the FRB as part of the 2016 CCAR. The
FRB indicated to the Bancorp that it did not object to the potential
repurchase of $660 million of common shares with the additional
ability to repurchase common shares in an amount equal to any
after-tax gains realized by the Bancorp from the sale of Vantiv, Inc.
common stock or from the termination and settlement of any
portion of the TRA with Vantiv Inc., if executed, for the period
beginning July 1, 2016 and ending June 30, 2017.
The Bancorp entered into a number of accelerated share
repurchase transactions during the years ended December 31, 2015
and 2016. As part of these transactions, the Bancorp entered into
forward contracts in which the final number of shares delivered at
settlement was based generally on a discount to the average daily
volume weighted-average price of the Bancorp’s common stock
during the term of these repurchase agreements. The accelerated
share repurchases were treated as two separate transactions: (i) the
159 Fifth Third Bancorp
repurchase of treasury shares on the repurchase date and (ii) a
forward contract indexed to the Bancorp’s common stock.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a summary of the Bancorp's accelerated share repurchase transactions that were entered into or settled during the
years ended December 31, 2015 and 2016:
Repurchase Date
October 23, 2014
January 27, 2015
April 30, 2015
August 3, 2015
September 9, 2015
December 14, 2015
March 4, 2016
August 5, 2016
December 20, 2016
Amount ($ in millions)
180
180
155
150
150
215
240
240
155
Shares Repurchased on
Repurchase Date
Shares Received from Forward
Contract Settlement
Total Shares
Repurchased
8,337,875
8,542,713
6,704,835
6,039,792
6,538,462
9,248,482
12,623,762
10,979,548
4,843,750
794,245
1,103,744
842,655
1,346,314
1,446,613
1,782,477
1,868,379
1,099,205
1,044,362
9,132,120
9,646,457
7,547,490
7,386,106
7,985,075
11,030,959
14,492,141
12,078,753
5,888,112
Settlement Date
January 8, 2015
April 28, 2015
July 31, 2015
September 3, 2015
October 23, 2015
January 14, 2016
April 11, 2016
November 7, 2016
February 6, 2017
Open Market Share Repurchase Transactions
Between June 17, 2016 and June 20, 2016, the Bancorp repurchased
1,436,100 shares, or approximately $26 million, of its outstanding
common stock through open market repurchase transactions.
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
and remaining shares available for future issuance under all of the
Plan Category (shares in thousands)
Equity compensation plans
SARs
RSAs
RSUs
Stock options(c)
PSAs
Bancorp’s equity compensation plans approved by shareholders as
of December 31, 2016:
Number of Shares to be
Issued Upon Exercise
Weighted-Average
Exercise Price Per Share
Shares Available for
Future Issuance
18,478 (a)(f)
(b)
4,638
5,086
7
(d)
N/A
N/A
N/A
$32.26
N/A
(a)
(a)
(a)
(a)
(a)
6,129 (e)
24,607
Employee stock purchase plan
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
9,731
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 0.02 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 these outstanding options is $14.05 per share.
(d) The number of shares to be issued is dependent upon the Bancorp achieving certain predefined performance targets and ranges from zero shares to approximately 2 million shares.
(e) 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.
Includes 4 million shares for Full Value Awards.
(f)
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 9%. SARs, RSAs, RSUs, stock options and
PSAs outstanding represent 7% of the Bancorp’s issued shares at
December 31, 2016.
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
ratably 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 are released after three or four years or
ratably over three or four years of continued employment. RSAs
include dividend and voting rights while RSUs receive dividend
equivalents only. Stock options were previously issued at fair value
based on the closing price of the Bancorp’s common stock on the
160 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Directors. The Bancorp
met this threshold as of December 31, 2016.
Stock-based compensation expense was $111 million, $100
million and $83 million for the years ended December 31, 2016,
2015 and 2014, respectively, and is included in salaries, wages and
incentives in the Consolidated Statements of Income. The total
related income tax benefit recognized was $39 million, $36 million
and $30 million for the years ended December 31, 2016, 2015 and
2014, 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-
2016
2015
2014
6
37 %
3.1
1.5
6
35
2.7
1.6
6
35
2.4
2.0
Scholes option-pricing model. The weighted-average grant-date fair
value of SARs granted was $5.16, $5.52 and $6.53 per share for the
years ended December 31, 2016, 2015 and 2014, respectively. The
total grant-date fair value of SARs that vested during the years
ended December 31, 2016, 2015 and 2014 was $32 million, $35
million and $34 million, respectively.
At December 31, 2016, there was $40 million of stock-based
compensation expense related to outstanding SARs not yet
recognized. The expense is expected to be recognized over an
estimated remaining weighted-average period at December 31, 2016
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
2016
Number of
SARs
44,129
6,379
(6,291)
(4,176)
40,041
26,898
$
$
$
Weighted-
Average Grant
Price Per Share
19.14
17.68
14.47
32.02
18.30
18.28
2015
Weighted-
Average Grant
Price Per Share
19.79
18.99
13.59
32.96
19.14
19.71
$
$
$
Number of
SARs
45,590
5,219
(3,242)
(3,438)
44,129
29,721
2014
Number of
SARs
48,599
4,526
(4,408)
(3,127)
45,590
27,950
Weighted-
Average Grant
Price Per Share
19.98
21.63
13.63
34.19
19.79
21.71
$
$
$
The following table summarizes outstanding and exercisable SARs by grant price per share at December 31, 2016:
Outstanding SARs
Exercisable SARs
Weighted-
Average
Remaining
Weighted-
Weighted-
Average
Remaining
Weighted-
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
Number of
SARs
2,195
30,446
3,513
3,305
582
40,041
$
$
3.98
16.36
21.64
38.27
40.11
18.30
(in years)
2.3
6.1
7.3
0.3
0.3
5.4
Number of
SARs
2,195
19,125
1,691
3,305
582
26,898
$
$
3.98
15.51
21.65
38.27
40.11
18.28
(in years)
2.3
4.7
7.2
0.3
0.3
4.0
Average Grant Contractual Life
Price Per Share
Average Grant Contractual Life
Price Per Share
Restricted Stock Awards
The total grant-date fair value of RSAs that were released during the
years ended December 31, 2016, 2015 and 2014 was $55 million,
$43 million and $32 million, respectively. At December 31, 2016,
there was $52 million of stock-based compensation expense related
to outstanding RSAs not yet recognized. The expense is expected to
be recognized over an estimated remaining weighted-average period
at December 31, 2016 of 2.0 years.
161 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RSAs (in thousands, except per share data)
Outstanding at January 1
Granted
Released
Forfeited
Outstanding at December 31
2016
2015
2014
Weighted-Average
Weighted-Average
Weighted-Average
Grant-Date
Fair Value
Per Share
18.88
20.65
17.92
19.20
19.44
Shares
8,281
3
(3,090)
(556)
4,638
$
$
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
$
$
The following table summarizes outstanding RSAs by grant-date fair value at December 31, 2016:
RSAs (in thousands)
$15.01-$20.00
Over $20.00
All RSAs
Outstanding RSAs
Weighted-Average
Remaining
Contractual Life
(in years)
1.2
1.0
1.1
Shares
3,187
1,451
4,638
Restricted Stock Units
The total grant-date fair value of RSUs that were released during
both the years ended December 31, 2016 and 2015 was $2 million.
At December 31, 2016, there was $57 million of stock-based
compensation expense related to outstanding RSUs not yet
recognized. The expense is expected to be recognized over an
estimated remaining weighted-average period at December 31, 2016
of 2.9 years.
RSUs (in thousands, except per unit data)
Outstanding at January 1
Granted
Released
Forfeited
Outstanding at December 31
2016
2015
Weighted-Average
Weighted-Average
Grant-Date
Fair Value
Per Unit
19.56
17.75
19.76
17.89
17.84
Units
371
5,029
(79)
(235)
5,086
$
$
Grant-Date
Fair Value
Per Unit
N/A
19.58
21.63
19.46
19.56
Units
-
377
(5)
(1)
371
$
$
The following table summarizes outstanding RSUs by grant-date fair value at December 31, 2016:
RSUs (in thousands)
$10.01-$15.00
$15.01-$20.00
$20.01-$25.00
$25.01-$30.00
All RSUs
Outstanding RSUs
Weighted-Average
Remaining
Contractual Life
(in years)
1.1
1.8
2.0
2.1
1.7
Units
638
4,265
159
24
5,086
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, 2016, 2015 and 2014.
The total intrinsic value of stock options exercised was
immaterial for the year ended December 31, 2016 and $1 million for
both the years ended December 31, 2015 and 2014. Cash received
from stock options exercised was $1 million, $2 million and $1
million for the years ended December 31, 2016, 2015 and 2014,
respectively. The tax benefit realized from exercised stock options
was immaterial to the Bancorp’s Consolidated Financial Statements
during the years ended December 31, 2016, 2015 and 2014. All
stock options were vested as of December 31, 2008, therefore, no
stock options vested during the years ended December 31, 2016,
2015 or 2014. As of December 31, 2016, the aggregate intrinsic
value of both outstanding stock options and exercisable stock
options was immaterial.
162 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2016
2015
2014
Weighted-Average
Weighted-Average
Weighted-Average
Stock Options (in thousands, except per share
data)
Outstanding at January 1
Exercised
Forfeited or expired
Outstanding at December 31
Exercisable at December 31
$
Number of
Options
119
(94)
-
25
25
$
$
Exercise Price
Per Share
14.97
13.86
-
19.17
19.17
$
Number of
Options
265
(126)
(20)
119
119
$
$
Exercise Price
Per Share
14.25
13.67
13.59
14.97
14.97
$
Number of
Options
546
(115)
(166)
265
265
$
$
Exercise Price
Per Share
20.72
12.84
36.42
14.25
14.25
The following table summarizes outstanding and exercisable stock options by exercise price per share at December 31, 2016:
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
Weighted-Average
Weighted-Average
Exercise Price
Per Share
Remaining
Contractual Life
(in years)
8.59
14.05
24.41
-
40.98
19.17
2.0
0.1
1.0
-
-
0.2
Number of
Options
1
18
1
-
5
25
$
$
Other Stock-Based Compensation
PSAs are payable contingent upon the Bancorp achieving certain
predefined performance targets over the three-year measurement
period. Awards granted during the years ended December 31, 2016,
2015 and 2014 will be entirely settled in stock. The performance
targets are based on the Bancorp’s performance relative to a defined
peer group. During both 2016 and 2015, PSAs used a performance-
based metric based on return on tangible common equity in relation
to peers, whereas during 2014, a market-based metric was used
which assessed the stock price performance in relation to peers.
During the years ended December 31, 2016, 2015 and 2014,
583,608, 458,355 and 322,567 PSAs, respectively, were granted by
the Bancorp. These awards were granted at a weighted-average
grant-date fair value of $14.87, $19.48 and $15.61 per unit during
the years ended December 31, 2016, 2015 and 2014, respectively.
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, 2016, 2015 and 2014, there were 684,885, 617,829
and 599,101 shares, respectively, purchased by participants and the
Bancorp recognized stock-based compensation expense of $1
million in each of the respective years.
163 Fifth Third Bancorp
25. OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE
The following table presents the major components of other noninterest income and other noninterest expense for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Other noninterest income:
Income from the TRA associated with Vantiv, Inc.
Operating lease income
Equity method income from interest in Vantiv Holding, LLC
Valuation adjustments on the warrant associated with sale of Vantiv Holding, LLC
BOLI income
Cardholder fees
Consumer loan and lease fees
Banking center income
Gain on sale of certain retail branch operations
Private equity investment income
Insurance income
Net gains on loan sales
Gain on sale and exercise of the warrant associated with Vantiv Holding, LLC
Gain on sale of Vantiv, Inc. shares
Loss on swap associated with the sale of Visa, Inc. Class B Shares
Net losses on disposition and impairment of bank premises and equipment
Other, net
Total other noninterest income
Other noninterest expense:
Impairment on affordable housing investments
FDIC insurance and other taxes
Loan and lease
Marketing
Operating lease
Losses and adjustments
Professional services fees
Data processing
Postal and courier
Travel
Recruitment and education
Provision for (benefit from) the reserve for unfunded commitments
Donations
Insurance
Supplies
Other, net
Total other noninterest expense
2016
2015
2014
$
$
$
$
313
102
66
64
53
46
23
20
19
11
11
10
9
-
(56)
(13)
10
688
168
126
110
104
86
73
61
51
46
45
37
23
23
15
14
187
1,169
80
89
63
236
48
43
23
21
-
28
14
38
89
331
(37)
(101)
14
979
145
99
118
110
74
55
70
45
45
54
33
4
29
17
16
191
1,105
23
84
48
31
44
45
25
30
-
27
13
-
-
125
(38)
(19)
12
450
135
89
119
98
67
188
72
41
47
52
28
(27)
18
16
15
181
1,139
164 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
Net income available to common shareholders
plus assumed conversions
Less: Income allocated to participating securities
Net income allocated to common shareholders
plus assumed conversions
2016
Average
Shares
Income
Per Share
Amount
Income
2015
Average
Shares
Per Share
Amount
Income
2014
Average
Shares
Per Share
Amount
$
$
$
1,564
75
1,489
15
1,474
1,489
-
1,489
15
757
1.95
7
1,712
75
1,637
15
1,622
1,637
-
1,637
15
799
2.03
9
1,481
67
1,414
12
1,402
1,414
-
1,414
12
833
1.68
10
$
1,474
764
1.93
1,622
808
2.01
1,402
843
1.66
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, 2016, 2015 and 2014 excludes 19 million, 16
million and 13 million, respectively, of SARs and an immaterial
amount of stock options because their inclusion would have been
anti-dilutive.
The diluted earnings per share computation for the year ended
December 31, 2016 excludes the impact of the forward contract
related to the December 20, 2016 accelerated share repurchase
transaction. Based upon the average daily volume weighted-average
price of the Bancorp’s common stock from the repurchase date
through the fourth quarter of 2016, the counterparty to the
transaction would have been required to deliver additional shares
for the settlement of the forward contract as of December 31, 2016,
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, 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 from the repurchase date
through 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 from the repurchase date
through 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.
165 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
$
-
-
471
-
Level 1(c)
-
-
-
-
90
561
December 31, 2016 ($ 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
Commodity contracts
Derivative assets(d)
Total assets
Liabilities:
Derivative liabilities:
Interest rate contracts
Foreign exchange contracts
Equity contracts
Commodity contracts
Derivative liabilities(e)
Short positions(e)
Total liabilities
(a) Excludes FHLB, FRB and DTCC restricted stock totaling $248, $358 and $1, respectively, at December 31, 2016.
(b)
Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.
(c) During the year ended December 31, 2016, 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.
-
-
325
325
-
-
3
-
-
27
30
17
47
20
-
22
42
928
$
$
$
Level 2(c)
Level 3
Total Fair Value
78
45
15,608
9,055
3,112
2,116
1
30,015
23
39
8
15
-
85
686
-
715
202
85
1,002
31,788
257
204
-
79
540
4
544
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
143
13
-
-
13
156
5
-
91
-
96
-
96
549
45
15,608
9,055
3,112
2,116
91
30,576
23
39
8
15
325
410
686
143
748
202
107
1,057
32,872
265
204
91
106
666
21
687
166 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using
$
-
-
Level 1(c)
100
-
-
-
-
-
98
198
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:
1
Interest rate contracts
-
Foreign exchange contracts
-
Equity contracts
37
Commodity contracts
38
Derivative liabilities(e)
22
Short positions(e)
Total liabilities
60
(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.
3
-
-
54
57
588
-
-
333
333
-
-
$
$
$
Level 2(c)
Level 3
Total Fair Value
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
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 securities 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. Level 2 securities include federal agencies
securities, obligations of states and political subdivisions securities,
agency residential mortgage-backed securities, agency and non-
securities, asset-backed
agency commercial mortgage-backed
securities and other debt securities and equity 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 loans, DCF models that may incorporate the
anticipated portfolio composition, credit spreads of asset-backed
securities with similar collateral and market conditions. The
anticipated portfolio composition includes the effect of interest rate
spreads and discount rates due to loan characteristics such as the
state in which the loan was originated, the loan amount and the
ARM margin. Residential mortgage loans held for sale that are
valued based on mortgage-backed securities prices are classified
within Level 2 of the valuation hierarchy as the valuation is based on
external pricing for similar instruments. ARM loans classified as
held for sale are also classified within Level 2 of the valuation
hierarchy due to the use 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.
167 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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.
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.
During the years ended December 31, 2016 and 2015, derivatives
classified as Level 3, which are valued using models containing
unobservable inputs, consisted primarily of a warrant associated
with the initial sale of the Bancorp’s 51% interest in Vantiv Holding,
LLC to Advent International and a total return swap associated with
the Bancorp’s sale of Visa, Inc. Class B Shares. Level 3 derivatives
also include IRLCs, which utilize internally generated loan closing
rate assumptions as a significant unobservable input in the valuation
process.
During the fourth quarter of 2016, 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 5.7 million Class C Units, which were
then exchanged for approximately 5.7 million shares of Vantiv, Inc.
Class A Common Stock of which 4.8 million shares were sold in a
secondary offering and 0.9 million shares were repurchased by
Vantiv, Inc. For further information on the warrant transaction,
refer to Note 19.
Prior to the aforementioned warrant transaction, the fair value
of the warrant was calculated in conjunction with a third party
valuation provider by applying Black-Scholes option-pricing models
168 Fifth Third Bancorp
using probability weighted scenarios which contained the following
inputs: Vantiv, Inc. stock price, strike price per the Warrant
Agreement and 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.
Accounting and Treasury reviewed changes in fair value on a
quarterly basis for reasonableness based on changes in historical and
implied volatilities, expected terms, probability weightings of the
related scenarios and other assumptions.
Under the terms of the total return swap, the Bancorp will
make or receive payments based on subsequent changes in the
conversion rate of the Visa, Inc. Class B Shares into Class A Shares.
Additionally, the Bancorp will make a quarterly payment based on
Visa’s stock price and the conversion rate of the Visa, Inc. Class B
Shares into Class A Shares until the date on which the Covered
Litigation is settled. The fair value of the total return swap was
calculated using a DCF model based on unobservable inputs
consisting of management’s estimate of the probability of certain
litigation scenarios, the timing of the resolution of the Covered
Litigation and Visa litigation loss estimates in excess, or shortfall, of
the Bancorp’s proportional share of escrow funds.
An increase in the loss estimate or a delay in the resolution of
the Covered Litigation would result in an increase in fair value;
conversely, a decrease in the loss estimate or an acceleration of the
resolution of the Covered Litigation would result in a decrease in
fair value. The Accounting and Treasury departments determined
the valuation methodology for the total return swap. Accounting
and Treasury review the changes in fair value on a quarterly basis
for reasonableness based on Visa stock price changes, litigation
contingencies, and escrow funding.
in decreases
The net fair value asset of the IRLCs at December 31, 2016
was $12 million. Immediate decreases in current interest rates of 25
bps and 50 bps would result in increases in 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 fair value of the IRLCs of
approximately $6 million and $13 million, respectively. The decrease
in fair value of IRLCs due to immediate 10% and 20% adverse
changes in the assumed loan closing rates would be approximately
$1 million and $2 million, respectively, and the increase in fair value
due to immediate 10% and 20% favorable changes in the assumed
loan closing rates would be approximately $1 million and $2 million,
respectively. These sensitivities are hypothetical and should be used
with caution, as changes in fair value based on a variation in
the
assumptions
relationship of the change in assumptions to the change in fair value
may not be linear.
typically cannot be extrapolated because
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables are a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs
(Level 3):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Trading
Securities
Residential
Mortgage
Loans
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives,
Net(a)
Total
Fair Value
380
-
$
167
For the year ended December 31, 2016 ($ in millions)
Balance, beginning of period
Total gains (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 (losses) for the period
included in earnings attributable to the change in
unrealized gains or losses relating to instruments
(45)
still held at December 31, 2016(c)
(a) Net interest rate derivatives include derivative assets and liabilities of $13 and $5, respectively, as of December 31, 2016. Net equity derivatives include derivative assets and liabilities of $0 and
130
(3)
(334)
(131)
18
60
17
-
(334)
25
-
(91)
115
(3)
-
(116)
-
8
(2)
-
-
(40)
18
143
-
-
-
-
-
-
(56)
201
(2)
13
12
$
$
-
$91, respectively, as of December 31, 2016.
Includes certain 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
484
-
$
108
For the year ended December 31, 2015 ($ in millions)
Balance, beginning of period
Total gains (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 instruments
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 and
399
(2)
(477)
(111)
87
380
111
(2)
-
(107)
-
12
288
-
(477)
24
-
201
-
-
-
(28)
87
167
-
-
-
-
-
-
366
66
10
17
$
$
-
-
$61, respectively, as of December 31, 2015.
Includes certain 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
437
For the year ended December 31, 2014 ($ in millions)
Balance, beginning of period
Total gains (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 instruments
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
122
(1)
(1)
(102)
29
484
125
(1)
-
(122)
-
10
(7)
-
-
37
-
366
4
-
-
(17)
29
108
-
-
(1)
-
-
-
336
92
13
(7)
8
4
$
$
-
$49, respectively, as of December 31, 2014.
Includes certain residential mortgage loans held for sale that were transferred to held for investment.
Includes interest income and expense.
(b)
(c)
169 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total gains and losses included in earnings for assets and liabilities measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) were recorded in the Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014 as follows:
($ in millions)
Mortgage banking net revenue
Corporate banking revenue
Other noninterest income
Total gains
2016
112
1
17
130
$
$
2015
110
1
288
399
2014
127
2
(7)
122
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, 2016, 2015 and 2014 were recorded in the Consolidated Statements of Income as follows:
($ in millions)
Mortgage banking net revenue
Corporate banking revenue
Other noninterest income
Total (losses) gains
2016
10
1
(56)
(45)
$
$
2015
16
1
66
83
2014
16
1
(7)
10
The following tables present information as of December 31, 2016 and 2015 about significant unobservable inputs related to the Bancorp’s
material categories of Level 3 financial assets and liabilities measured at fair value on a recurring basis:
As of December 31, 2016 ($ in millions)
Financial Instrument
Residential mortgage loans
Fair Value
$
143
Valuation Technique
Loss rate model
IRLCs, net
Swap associated with the sale of Visa, Inc.
Class B Shares
As of December 31, 2015 ($ in millions)
12
Discounted cash flow
(91) Discounted cash flow
Financial Instrument
Residential mortgage loans
Fair Value
$
167
Valuation Technique
Loss rate model
IRLCs, net
Stock warrant associated with Vantiv Holding, LLC
15
262
Discounted cash flow
Black-Scholes option-
pricing model
(61) 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.
Significant Unobservable
Inputs
Interest rate risk factor
Credit risk factor
Loan closing rates
Timing of the resolution
of the Covered Litigation
Ranges of
Inputs
(11.5) - 13.8%
0 - 75.6%
23.8 - 99.5%
12/31/2018 -
12/31/2022
Weighted-
Average
2.3%
1.4%
76.8%
NM
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
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
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.
170 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, 2016 and 2015 and for
which a nonrecurring fair value adjustment was recorded during the years ended December 31, 2016 and 2015, 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, 2016 ($ in millions)
Commercial loans held for sale
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
MSRs
OREO
Bank premises and equipment
Operating lease equipment
Private equity investments
$
Fair Value Measurements Using
Level 1
-
-
-
-
-
-
-
-
-
-
Level 2
-
-
-
-
-
-
-
-
-
-
Level 3
5
412
15
-
3
744
42
28
37
60
Total
5
412
15
-
3
744
42
28
37
60
Total
$
-
-
1,346
1,346
Total (Losses) Gains
For the year ended December 31,
2016
(32)
(166)
(4)
2
(3)
7
(17)
(31)
(9)
(9)
(262)
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 investments
Total
$
Fair Value Measurements Using
Level 2
-
-
-
-
-
-
-
-
-
-
-
-
Level 1
-
-
-
-
-
-
-
-
-
-
-
-
Level 3
13
68
2
4
344
103
6
55
784
58
83
42
13
1,575
$
-
-
Total
13
68
2
4
344
103
6
55
784
58
83
42
13
1,575
Total (Losses) Gains
For the year ended December 31, 2015
3
(2)
-
(2)
(137)
(41)
(5)
(1)
4
(24)
(101)
(33)
(1)
(340)
The following tables present information as of December 31, 2016 and 2015 about significant unobservable inputs related to the Bancorp’s
material categories of Level 3 financial assets measured on a nonrecurring basis:
As of December 31, 2016 ($ in millions)
Financial Instrument
Commercial loans held for sale
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Valuation Technique
Fair Value
5
$
Appraised value
412 Appraised value
15
Appraised value
-
Appraised value
3
Appraised value
Significant Unobservable Inputs
Appraised value
Collateral value
Collateral value
Collateral value
Appraised value
NM
NM
NM
NM
NM
Ranges of
Inputs
Weighted-Average
MSRs
744 Discounted cash flow
Prepayment speed
0.7 - 100%
OREO
Bank premises and equipment
Operating lease equipment
Private equity investments
42
28
37
60
Appraised value
Appraised value
Appraised value
Liquidity discount applied
to fund's net asset value
OAS spread (bps)
Appraised value
Appraised value
Appraised value
Liquidity discount
100 - 1,515
NM
NM
NM
5.0 - 37.5%
NM
NM
NM
NM
NM
(Fixed) 10.2%
(Adjustable) 25.3%
(Fixed) 654
(Adjustable) 738
NM
NM
NM
12.8%
171 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2015 ($ in millions)
Financial Instrument
Commercial loans held for sale
Residential mortgage loans held for sale
Fair Value
$
Valuation Technique
13 Discounted cash flow
Loss rate model
68
Automobile loans held for sale
Credit cards held for sale
2
4
Discounted cash flow
Comparable transactions
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Residential mortgage loans
344 Appraised value
103 Appraised value
Appraised value
6
Appraised value
55
Significant Unobservable
Inputs
Discount spread
Interest rate risk factor
Credit risk factor
Discount spread
Estimated sales proceeds from
comparable transactions
Collateral value
Collateral value
Collateral value
Appraised value
Ranges of
Inputs
NM
(7.5) - 0.1%
NM
NM
NM
NM
NM
NM
NM
MSRs
784 Discounted cash flow
Prepayment speed
1.0 - 100%
OREO
Bank premises and equipment
Operating lease equipment
Private equity investments
58
83
42
13
Appraised value
Appraised value
Appraised value
Liquidity discount applied
to fund's net asset value
OAS spread (bps)
Appraised value
Appraised value
Appraised value
Liquidity discount
364 - 1,515
NM
NM
NM
NM
Weighted-Average
4.4%
(1.6%)
0.1%
3.1%
NM
NM
NM
NM
NM
(Fixed) 11.8%
(Adjustable) 27.0%
(Fixed) 618
(Adjustable) 703
NM
NM
NM
18.0%
Commercial loans held for sale
During the years ended December 31, 2016 and 2015, the Bancorp
respectively, of
transferred $140 million and $37 million,
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, 2016 and 2015 totaling $30 million and $1 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, 2016 and 2015 there were fair value adjustments on existing
loans held for sale of $2 million and $1 million, respectively. The
fair value adjustments were also based on appraisals of the
immaterial
underlying collateral. The Bancorp recognized an
amount of net gains on the sale of certain commercial loans held for
sale during the year ended December 31, 2016 and $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 a
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 reviews 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, 2016, the Bancorp did not
transfer any residential mortgage loans from the portfolio to loans
held for sale. During the year ended December 31, 2015, the
Bancorp transferred $233 million of residential mortgage loans from
172 Fifth Third Bancorp
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 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, is
responsible for determining
the valuation methodology for
residential mortgage loans held for investment. The Secondary
Marketing department reviews loss severity assumptions quarterly to
determine 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.
to
adjustments
Commercial loans held for investment
During the years ended December 31, 2016 and 2015, the Bancorp
recorded nonrecurring
certain
impairment
commercial and industrial loans, commercial mortgage loans,
commercial construction loans and commercial leases held for
investment. Larger commercial loans included within aggregate
borrower relationship balances exceeding $1 million that exhibit
probable or observed credit weaknesses are subject to individual
review for impairment. The Bancorp considers the current value of
collateral, credit quality of any guarantees, the guarantor’s liquidity
and willingness to cooperate, the loan structure and other factors
when evaluating whether an individual loan is impaired. When the
loan is collateral dependent, the fair value of the loan is generally
based on the fair value of the underlying collateral supporting the
loan and therefore these loans are 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Residential mortgage loans
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 both the years ended
December 31, 2016 and 2015 and the Bancorp recognized a
recovery of temporary impairment in certain classes of the MSR
portfolio and the carrying value was adjusted to the 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
for
determining the valuation methodology for MSRs. Representatives
from Secondary Marketing, Treasury, Accounting and Risk
Management are responsible for 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
OREO
During the years ended December 31, 2016 and 2015, 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,
2016 and 2015, these losses include $8 million and $14 million,
respectively, recorded as charge-offs, on new OREO properties
transferred from loans during the respective periods and $9 million
and $10 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 are
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 are 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, are responsible for preparing and
reviewing the fair value estimates for bank premises. For further
information on bank premises and equipment and discussion on
changes to the branch network, refer to Note 7.
the Bancorp’s Chief Administrative Officer,
to
in
advancements
associated with
Operating lease equipment
During the years ended December 31, 2016 and 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
change
technological
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
generally based on appraised values of the assets, resulting in a
classification within Level 3 of the valuation hierarchy. During the
years ended December 31, 2016 and 2015, the Bancorp recorded
net losses of $9 million and $33 million, respectively, as a reduction
to corporate banking revenue in the Consolidated Statements of
Income. 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 impairment charges
related to certain operating lease equipment.
Private equity investments
In December 2013, the U.S. banking agencies issued final rules to
implement section 619 of the DFA, known as the Volcker Rule,
which places limitations on banking organizations’ ability to own,
sponsor or have certain relationships with certain private equity
funds. The Bancorp recognized $9 million and $1 million of OTTI
primarily associated with certain nonconforming
investments
affected by the Volcker Rule during the years ended December 31,
2016 and 2015, respectively. The Bancorp performed nonrecurring
fair value measurements on a fund by fund basis to determine
whether OTTI existed. The Bancorp estimated the fair value of a
fund by 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. 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 Strategy Officer, in
173 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
conjunction with Accounting, is responsible for preparing and
reviewing the fair value estimates.
Fair Value Option
The Bancorp elected to measure certain residential mortgage loans
held for sale under the fair value option as allowed under U.S.
GAAP. Electing to measure residential mortgage loans held for sale
at fair value reduces certain timing differences and better matches
changes in the value of these assets with changes in the value of
derivatives used as economic hedges for these assets. Management’s
intent to sell residential mortgage loans classified as held for sale
may change over time due to such factors as changes in the overall
liquidity in markets or changes in characteristics specific to certain
loans held for sale. Consequently, these loans may be reclassified to
loans held for investment and maintained in the Bancorp’s loan
portfolio. In such cases, the loans will continue to be measured at
fair value.
Fair value changes recognized in earnings for instruments held at
December 31, 2016 and 2015 for which the fair value option was
elected, as well as the changes in fair value of the underlying IRLCs,
included gains of $6 million and $17 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 $2 million at both
December 31, 2016 and 2015. Interest on residential mortgage loans
measured at fair value is accrued as it is earned using the effective
interest method and
in the
Consolidated Statements of Income.
is reported as
interest
income
The following table summarizes the difference between the fair value and the principal balance for residential mortgage loans measured at fair
value as of:
($ in millions)
December 31, 2016
Residential mortgage loans measured at fair value
Past due loans of 90 days or more
Nonaccrual loans
December 31, 2015
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
$
$
829
2
1
686
2
2
823
2
1
669
2
2
6
-
-
17
-
-
174 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, 2016 ($ 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 ALLL
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
$
$
$
2,392
607
26
2,754
65
40,958
6,817
3,887
3,959
14,812
7,637
9,941
2,135
668
(112)
90,702
103,821
132
3,535
14,388
2,392
-
-
2,754
-
-
-
-
-
-
-
-
-
-
-
-
-
607
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
132
-
14,288
103,811
-
3,535
545
-
-
26
-
65
41,976
6,735
3,853
3,651
15,415
8,421
9,640
2,503
678
-
92,872
-
-
-
-
2,392
607
26
2,754
65
41,976
6,735
3,853
3,651
15,415
8,421
9,640
2,503
678
-
92,872
103,811
132
3,535
14,833
Net Carrying
Amount
Fair Value Measurements Using
Level 2
Total
Fair Value
$
Level 3
Level 1
-
-
70
-
384
-
604
-
-
-
2,540
-
-
2,671
-
2,540
604
70
2,671
384
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 ALLL
Total portfolio loans and leases, net
Financial liabilities:
103,219
Deposits
151
Federal funds purchased
1,507
Other short-term borrowings
16,228
Long-term debt(a)
(a) Upon adoption of ASU 2015-03 on January 1, 2016, the December 31, 2015 Consolidated Balance Sheet was adjusted to reflect the reclassification of $34 of debt issuance costs from other assets
41,479
6,840
3,190
3,807
13,449
8,234
11,453
2,160
646
(115)
91,143
41,802
6,656
2,918
3,533
14,061
8,948
11,170
2,551
643
-
92,282
41,802
6,656
2,918
3,533
14,061
8,948
11,170
2,551
643
-
92,282
103,219
-
1,507
625
103,205
151
1,507
15,810
2,540
604
70
2,671
384
-
151
-
15,603
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
to long-term debt. For further information, refer to Note 1.
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, other securities consisting of FHLB, FRB and
DTCC restricted stock, other short-term investments, certain
deposits (demand, interest checking, savings, money market, foreign
office deposits and other deposits), federal funds purchased and
other short-term borrowings excluding FHLB borrowings. Fair
values for other time deposits, certificates of deposit $100,000 and
over and FHLB borrowings were estimated using a DCF calculation
that applies prevailing LIBOR/swap interest rates and a spread for
new issuances with similar terms.
175 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Held-to-maturity securities
The Bancorp’s held-to-maturity securities are primarily composed of
instruments that provide income tax credits as the economic return
on the investment. The fair value of these instruments is estimated
based on current U.S. Treasury tax credit rates.
Loans held for sale
Fair values for commercial loans held for sale were valued based on
executable bids when available, or on DCF models incorporating
appraisals of the underlying collateral, as well as assumptions about
investor return requirements and amounts and timing of expected
cash flows. Fair values for residential mortgage loans held for sale
were valued based on estimated third-party valuations utilizing
recent sales data from similar transactions. Broker opinion
statements were also obtained as additional evidence to support the
third-party valuations. Fair values for other consumer loans held for
sale were based on contractual values upon which the loans may be
sold to a third party, and approximate their carrying value.
Portfolio loans and leases, net
Fair values were estimated 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
of transactions
like
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.
176 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28. REGULATORY CAPITAL REQUIREMENTS AND CAPITAL RATIOS
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 regulatory
capital requirements were revised by the Basel III Final Rule which
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. 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. Additionally, when fully phased-in in
2019, the Basel III Final Rule will include a capital conservation
buffer requirement of 2.5% in addition to the minimum capital
requirements of the CET1, Tier I capital and Total risk-based capital
ratios in order to avoid limitations on capital distributions and
discretionary bonus payments to executive officers.
longer qualified for Tier I capital, compared to $13 million of
TruPS, or 1 bp of risk-weighted assets, which qualified as Tier I
capital at December 31, 2015. The Bancorp’s Tier II capital consists
principally of term subordinated debt and, subject to limitations,
allowances for credit losses.
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 are a component of the Tier I leverage ratio
and 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 Basel III Final Rule provided for certain BHCs, including
the Bancorp, to opt out of including AOCI in regulatory capital and
also retained the treatment of residential mortgage exposures
consistent with the prior Basel I capital rules. Fifth Third made a
one-time permanent election to not include AOCI in regulatory
capital in the March 31, 2015 FFIEC 031 for its banking subsidiary
and FR Y-9C filing for the Bancorp. 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, 2016, the Bancorp’s TruPS no
The Bancorp and its banking subsidiary, Fifth Third Bank, had
CET1 capital, Tier I risk-based capital, Total risk-based capital and
Tier I leverage ratios above the well-capitalized levels at December
31, 2016 and 2015. 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. In addition, the Bancorp
exceeded the “capital conservation buffer” ratio for all periods
presented.
The following table presents capital and risk-based capital and leverage ratios for the Bancorp and its banking subsidiary at December 31:
2016
2015
Amount Ratio
($ in millions)
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 quarterly average assets):
Fifth Third Bancorp
Fifth Third Bank
(a) Ratios not restated for the adoption of the amended guidance of ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs.” For further information, refer to Note 1.
10.39 % $
11.92
13,756
14,015
13,756
14,015
17,972
16,175
12,426
14,015
9.90
10.30
15.02
13.76
11.50
11.92
$
17,134
15,642
13,260
14,216
13,260
14,216
11,917
14,216
Amount
Ratio(a)
9.82 %
11.92
10.93
11.92
14.13
13.12
9.54
10.43
177 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
$
$
$
2016
2015
2014
1,886
18
1,904
171
18
189
1,715
63
1,778
(214)
1,564
-
1,564
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
(a) The Bancorp’s indirect banking subsidiary paid dividends to the Bancorp’s direct nonbank subsidiary holding company of $1.9 billion, $1.0 billion and $1.1 billion for the years ended
December 31, 2016, 2015 and 2014, respectively.
Condensed Balance Sheets (Parent Company Only)
As of December 31 ($ 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
2016
130
3,074
969
969
17,588
17,588
80
366
22,207
344
461
5,170
5,975
2,051
1,331
2,756
13,441
59
(3,433)
27
16,232
22,207
$
$
$
$
$
$
2015
128
3,728
982
982
17,831
17,831
80
414 (a)
23,163 (a)
404
433
6,456 (a)
7,293 (a)
2,051
1,331
2,666
12,358
197
(2,764)
31
15,870
23,163 (a)
(a) Upon adoption of ASU 2015-03 on January 1, 2016, the December 31, 2015 Condensed Balance Sheet was adjusted to reflect the reclassification of $17 of debt issuance costs from other assets to
long-term debt. For further information refer to Note 1.
178 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statements of Cash Flows (Parent Company Only)
For the years ended December 31 ($ 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 Provided by (Used in) 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 stock
Dividends paid on preferred stock
Issuance of preferred stock
Repurchase of treasury stock 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
2016
$
1,564
-
214
14
(35)
1,757
654
13
667
(60)
-
(1,250)
(402)
(52)
-
(661)
3
(2,422)
2
128
130
$
2015
1,712
(4)
(788)
(18)
31
933
(539)
2
(537)
(22)
1,099
-
(422)
(75)
-
(850)
2
(268)
128
-
128
2014
1,481
(1)
(491)
9
(41)
957
(684)
(10)
(694)
115
499
-
(423)
(67)
297
(654)
(30)
(263)
-
-
-
179 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30. BUSINESS SEGMENTS
The Bancorp reports on four business segments: Commercial
Banking, Branch Banking, Consumer Lending and Wealth and Asset
Management (formerly 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
financial institutions. The Bancorp refines its methodologies from
time to time as management’s accounting practices and businesses
change.
The Bancorp manages interest rate risk centrally at the
corporate level. By employing an FTP methodology, the business
segments are insulated from most benchmark interest rate volatility,
enabling them to focus on serving customers through the
loans and acceptance of deposits. The FTP
origination of
methodology assigns charge rates and credit rates to classes of assets
and liabilities, respectively, based on the estimated amount and
timing of cash flows for each transaction. Assigning the FTP rate
based on matching the duration of cash flows allocates interest
income and interest expense to each business segment so its
resulting net interest income is insulated from future changes in
benchmark interest rates. The Bancorp’s FTP methodology also
allocates the contribution to net interest income of the asset-
generating and deposit-providing businesses on a duration-adjusted
basis to better attribute the driver of the performance. As the asset
and liability durations are not perfectly matched, the residual impact
of the FTP methodology is captured in General Corporate and
Other. The charge and credit rates are determined using the FTP
rate curve, which is based on an estimate of Fifth Third’s marginal
borrowing cost in the wholesale funding markets. The FTP curve is
constructed using the U.S. swap curve, brokered CD pricing and
unsecured debt pricing.
interest-bearing
The Bancorp adjusts the FTP charge and credit rates as
dictated by changes in interest rates for various interest-earning
assets and
liabilities and by the review of
behavioural assumptions, such as prepayment rates on interest-
earning assets and the estimated durations for indeterminate-lived
deposits. Key assumptions, including the credit rates provided for
deposit accounts, are reviewed annually. Credit rates for deposit
products and charge rates for loan products may be reset more
frequently in response to changes in market conditions. The credit
rates for several deposit products were reset January 1, 2016 to
reflect the current market rates and updated market assumptions.
These rates were generally higher than those in place during 2015,
thus net interest income for deposit-providing business segments
was positively impacted during 2016. FTP charge rates on assets
were affected by the prevailing level of interest rates and by the
duration and repricing characteristics of the portfolio. As overall
market rates increased, the FTP charge increased for asset-
generating business segments during 2016.
During the first quarter of 2016, the Bancorp refined its
methodology for allocating provision for loan and lease losses
expense to the business segments to include charges or benefits
associated with changes in criticized commercial loan levels in
addition to actual net charge-offs experienced by the loans and
leases owned by each business segment. The results of operations
180 Fifth Third Bancorp
and financial position for the years ended December 31, 2015 and
2014 were adjusted to reflect this change. Provision for loan and
lease losses 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
for shared services and headquarters expenses.
allocations
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, 2015 and 2014 were adjusted to reflect
changes in internal expense allocation methodologies.
The following is a description of each of the Bancorp’s
business segments and the products and services they provide to
their respective client bases.
Commercial Banking offers credit
intermediation, cash
management and financial services to large and middle-market
businesses and government and professional customers. In addition
to the traditional lending and depository offerings, Commercial
Banking products and services include global cash management,
foreign exchange and international trade finance, derivatives and
capital markets services, asset-based lending, real estate finance,
public finance, commercial leasing and syndicated finance.
Branch Banking provides a full range of deposit and loan and
lease products to individuals and small businesses through 1,191
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
Wealth and Asset Management provides a full range of
investment alternatives for individuals, companies and not-for-
profit organizations. In the second quarter of 2016, the Investment
Advisors segment name was changed to Wealth and Asset
Management to better reflect the services provided by the business
segment. Wealth and Asset Management 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 tables present the results of operations and assets by business segment for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$
Wealth
Banking
Commercial
Branch
Banking
2016 ($ 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 wealth and asset management and branch banking are eliminated in the Consolidated Statements of Income.
(b)
(c)
(d)
Includes impairment charges of $32 for branches and land. For more information refer to Note 7 and Note 27.
Includes impairment charges of $20 for operating lease equipment. For more information refer to Note 8 and Note 27.
Includes bank premises and equipment of $39 classified as held for sale. For more information, refer to Note 7.
1,814
76
1,738
907 (c)
1,426
1,219
224
995
-
995
-
995
613
58,092
1,669
138
1,531
755 (b)
1,621
665
234
431
-
431
-
431
1,655
55,940
248
44
204
303
475
32
12
20
-
20
-
20
-
22,041
General
Consumer
and Asset Corporate
Lending Management and Other Eliminations
-
-
-
(131)(a)
(131)
-
-
-
-
-
-
-
-
-
(284)
84
(368)
463
90
5
(16)
21
(4)
25
75
(50)
-
(3,383)(d)
168
1
167
399
422
144
51
93
-
93
-
93
148
9,487
$
$
$
Total
3,615
343
3,272
2,696
3,903
2,065
505
1,560
(4)
1,564
75
1,489
2,416
142,177
$
Total
Wealth
Banking
Commercial
Branch
Banking
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(e)
(a) Revenue sharing agreements between wealth and asset management and branch banking are eliminated in the Consolidated Statements of Income.
(b)
(c)
(d)
(e) Upon adoption of ASU 2015-03 on January 1, 2016, the December 31, 2015 Consolidated Balance Sheet was adjusted to reflect the reclassification of $34 of debt issuance costs from other assets
1,555
151
1,404
652 (b)
1,598
458
161
297
-
297
-
297
1,655
53,609
Includes impairment charges of $109 for branches and land. For more information refer to Note 7 and Note 27.
Includes impairment charges of $36 for operating lease equipment. For more information, refer to Note 8 and Note 27.
Includes bank premises and equipment of $81 classified as held for sale. For more information, refer to Note 7.
to long-term debt. For further information, refer to Note 1.
General
Consumer
and Asset Corporate
Lending Management and Other Eliminations
-
-
-
(149)(a)
(149)
-
-
-
-
-
-
-
-
-
(24)
(100)
76
822
62
836
314
522
(6)
528
75
453
-
(3,261)(d)
3,533
396
3,137
3,003
3,775
2,365
659
1,706
(6)
1,712
75
1,637
2,416
141,048
1,625
298
1,327
853 (c)
1,369
811
93
718
-
718
-
718
613
58,105
249
44
205
407
440
172
61
111
-
111
-
111
-
22,656
128
3
125
418
455
88
30
58
-
58
-
58
148
9,939
$
$
$
181 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$
Wealth
Banking
Commercial
Branch
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(d)
(a) Revenue sharing agreements between wealth and asset management and branch banking are eliminated in the Consolidated Statements of Income.
(b)
(c)
(d) Upon adoption of ASU 2015-03 on January 1, 2016, the December 31, 2014 Consolidated Balance Sheet was adjusted to reflect the reclassification of $36 of debt issuance costs from other assets
General
Consumer
and Asset Corporate
Lending Management and Other Eliminations
-
-
-
(146)(a)
(146)
-
-
-
-
-
-
-
-
-
Includes impairment charges of $20 for branches and land. For more information refer to Note 7 and Note 27.
Includes bank premises and equipment of $26 classified as held for sale. For more information, refer to Note 7.
-
(154)
154
253
(14)
421
161
260
2
258
67
191
-
(2,230)(c)
258
156
102
350
558
(106)
(37)
(69)
-
(69)
-
(69)
-
22,567
3,579
315
3,264
2,473
3,709
2,028
545
1,483
2
1,481
67
1,414
2,416
138,670
1,573
171
1,402
726 (b)
1,587
541
191
350
-
350
-
350
1,655
51,488
121
1
120
410
443
87
29
58
-
58
-
58
148
10,445
1,627
141
1,486
880
1,281
1,085
201
884
-
884
-
884
613
56,400
$
$
$
Total
to long-term debt. For further information, refer to Note 1.
182 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, 2016
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: (cid:2)
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes: (cid:2)
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: (cid:2)
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: (cid:2)
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of
registrant’s knowledge,
information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. (cid:2)
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 (cid:2) Non-accelerated
filer (cid:2) (Do not check if a smaller reporting company) Smaller
reporting company (cid:2)
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes: (cid:2) No: ⌧
There were 750,864,896 shares of the Bancorp’s Common Stock,
without par value, outstanding as of January 31, 2017. The
Aggregate Market Value of the Voting Stock held by non-
affiliates of the Bancorp was $13,447,748,736 as of June 30,
2016.
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 2017
Annual Meeting of Shareholders is incorporated by reference into
Part III of this report.
Only those sections of this 2016 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,
2016. No other information contained in this 2016 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. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Executive Officers of the Bancorp
PART II
Item 5.
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7.
Item 7A.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market
Risk
Item 8. Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate
Governance
Item 11. Executive Compensation
Item 12.
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
184-190
47
50-57, 180-182
43
42-44
61-63, 113-114
60-61, 115-116
67-81
63-65
31
65, 138
191-201
None
202
146-147
N/A
202
203
31
31-91
81-85
95-182
None
92
None
205
205
160-163, 205
205
205
183 Fifth Third Bancorp
`
PART IV
Item 15. Exhibits, Financial Statement Schedules
SIGNATURES
205-208
209
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 is a diversified financial services company
headquartered in Cincinnati, Ohio. As of December 31, 2016, the
Company had $142 billion in assets and operates 1,191 full-
service Banking Centers, and 2,495 ATMs in Ohio, Kentucky,
Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia,
Georgia and North Carolina. Fifth Third operates four main
businesses: Commercial Banking, Branch Banking, Consumer
Lending, and Wealth & Asset Management. Fifth Third also has a
17.9% interest in Vantiv Holding, LLC. The carrying value of the
Bancorp’s investment in Vantiv Holding, LLC was $414 million
as of December 31, 2016. Fifth Third is among the largest money
managers in the Midwest and, as of December 31, 2016, had $315
billion in assets under care, of which it managed $31 billion for
individuals, corporations and not-for-profit organizations.
Investor information and press releases can be viewed at
www.53.com. Fifth Third’s common stock is traded on the
NASDAQ® Global Select Market under the symbol “FITB.”
The Bancorp’s subsidiaries provide a wide range of financial
products and services to the retail, commercial, financial,
governmental, educational, energy and medical sectors, including
a wide variety of checking, savings and money market accounts,
treasury management products, wealth management solutions,
payments and commerce solutions, insurance services and credit
products such as credit cards, installment loans, mortgage loans
and leases. These products and services are delivered through a
variety of channels and methods including the Company’s
Banking Centers, other offices, telephone sales, the internet and
mobile applications. 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, 2016.
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 100 F Street, NE, 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
184 Fifth Third Bancorp
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 traditional
financial institutions, the Bancorp competes with securities
dealers, brokers, mortgage bankers, investment advisors and
insurance companies as well as financial technology companies.
These companies compete across geographic boundaries and
provide customers with meaningful alternatives to traditional
banking services
in nearly all significant products. The
increasingly competitive environment is a result primarily of
changes in regulation, changes in technology, product delivery
systems and the accelerating pace of consolidation among
financial service providers. These competitive trends are likely to
continue.
Acquisitions and Investments
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 and investment 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 since 2010 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
`
large
firms;
financial
the SEC's powers
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
(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; (vi) adopting certain
changes to shareholder rights and responsibilities, including a
shareholder “say on pay” vote on executive compensation;
(vii) strengthening
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 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 compensation,
minimum 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.
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-
to
regulatory organizations. The Bancorp
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
185 Fifth Third Bancorp
`
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
Pursuant to the DFA, in 2011 the FDIC 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”).
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
During the first quarter of 2016, the FDIC issued a final rule
implementing a 4.5 bps surcharge on the quarterly FDIC
insurance assessments of insured depository institutions with total
consolidated assets of $10 billion or more. The Bancorp became
subject to the FDIC surcharge and reduced regular FDIC
insurance assessments on July 1, 2016. The surcharges will
continue through the quarter that the DIF reserve ratio first
reaches or exceeds 1.35% of insured deposits, but not later than
December 31, 2018. If the reserve ratio does not reach 1.35% by
December 31, 2018, the FDIC will impose a shortfall assessment
on March 31, 2019, on insured depository institutions with total
consolidated assets of $10 billion or more.
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
186 Fifth Third Bancorp
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. This CRA examination
resulted in a rating of “Needs to Improve”. The Bank believes
that the “Needs to Improve” rating reflects legacy issues that have
been remediated during the intervening three years. While the
Bank’s CRA rating is “Needs to Improve” the Bancorp and the
Bank face limitations and conditions on certain activities,
including the commencement of new activities and merger with
or acquisitions of other financial institutions. The Bank’s next
CRA examination commenced during the fourth quarter of 2016.
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 created 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 established 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 required the FRB to impose enhanced capital and
risk-management standards on these firms and mandated 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 Comprehensive Capital Analysis and Review (CCAR)
process, the FRB annually evaluates 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. BHCs with consolidated
assets of $50 billion or more are required to submit their 2017
capital plan to the FRB by April 5, 2017.
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
minimum
capital
conservation and countercyclical buffers to induce banking
organizations to hold capital in excess of regulatory minimums.
In addition, Basel III establishes an international leverage
standard for internationally active banks.
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, 2016.
187 Fifth Third Bancorp
`
In February 2014,
the FRB approved a final rule
implementing several heightened prudential requirements. The
rules require BHCs with $10 billion or more in consolidated
assets to establish risk committees and require BHCs with $50
billion or more in total consolidated assets to comply with
enhanced liquidity and overall risk management standards,
including company-run liquidity stress testing and a buffer of
highly liquid assets based on projected funding needs for various
time horizons, including 30, 60, and 90 days. These liquidity-
related provisions are designed to be complementary, and in
addition to the Final LCR Rule applicable to BHCs (as discussed
below). Rules to implement two other components of the DFA’s
enhanced prudential standards –single-counterparty credit limits
and early remediation requirements– are still under consideration
by the FRB. Fifth Third has conducted a self evaluation of all the
requirements within the enhanced prudential standards, and
believe the necessary steps have been taken to ensure compliance
with all requirements regarding liquidity, risk exposures, and
early remediation.
Liquidity Regulation
Liquidity risk management and supervision have become
increasingly important since the financial crisis. On September 3,
2014, the FRB and other banking regulators adopted final rules
(“Final LCR Rule”) implementing a U.S. version of the Basel
Committee’s Liquidity Coverage Ratio requirement (“LCR”),
which is designed to ensure that the banking entity maintains an
adequate level of unencumbered high-quality liquid assets
(“HQLA”) equal to the entity’s expected net cash outflow for a
30-day time horizon (or, if greater, 25% of its expected total cash
outflow) under an acute liquidity stress scenario. The rules apply
in modified form to banking organizations, such as the Bancorp,
having $50 billion or more in total consolidated assets but less
than $250 billion. The LCR is the ratio of an institution’s stock of
HQLA (the numerator) over projected net cash out-flows over the
30-day horizon (the denominator), in each case, as calculated
pursuant to the Final LCR Rule. Once fully phased-in, a subject
institution must maintain an LCR equal to at least 100% in order
to satisfy this regulatory requirement. Only specific classes of
assets,
including U.S. Treasuries, other U.S. government
obligations and agency mortgaged-backed securities, qualify
under the rule as HQLA, with classes of assets deemed relatively
less liquid and/or subject to greater degree of credit risk subject to
certain haircuts and caps for purposes of calculating the
numerator under the Final LCR Rule. The total net cash outflows
amount is determined under the rule by applying certain
hypothetical outflow and inflow rates, which reflect certain
standardized stressed assumptions, against the balances of the
banking organization’s funding sources, obligations, transactions
and assets over the 30-day stress period. Inflows that can be
included to offset outflows are limited to 75% of outflows (which
effectively means that banking organizations must hold high-
quality liquid assets equal to 25% of outflows even if outflows
perfectly match inflows over the stress period). The total net cash
outflow amount for the modified LCR applicable to the Bancorp
is capped at 70% of the outflow rate that applies to the full LCR.
The initial compliance date for the modified LCR was
January 31, 2016, with the requirement fully phased-in on
January 1, 2017. The LCR is a minimum requirement, and the
FRB can
requirements as a
supervisory matter.
impose additional
liquidity
In addition, the Bancorp is also subject to the liquidity-
related requirements of the enhanced prudential supervision rules
188 Fifth Third Bancorp
adopted by the FRB under Section 165 of the DFA, as described
above. As of December 31, 2016, the Bancorp’s modified LCR
complied with the fully phased-in LCR requirements which
became effective on January 1, 2017.
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. In May, 2016, the federal banking agencies
proposed an NSFR Rule. As proposed the most stringent
requirements would apply to firms with $250 billion or more in
assets or $10 billion or more in on-balance sheet foreign
exposure. Holding companies with less than $250 billion, but
more than $50 billion in assets and less than $10 billion in on-
balance foreign exposure, such as the Bancorp, would be subject
to a less stringent, modified NFSR requirement.
Privacy
The FRB, FDIC and other bank regulatory agencies have adopted
final guidelines (the “Guidelines) for safeguarding confidential,
personal customer information. The Guidelines require each
financial institution, under the supervision and ongoing oversight
of its Board of Directors or an appropriate committee thereof, to
create,
implement and maintain a comprehensive written
information security program designed to ensure the security and
confidentiality of customer information, protect against any
anticipated threats or hazards to the security or integrity of such
information and protect against unauthorized access to or use of
such information that could result in substantial harm or
inconvenience to any customer. The Bancorp has adopted a
customer information security program that has been approved by
the Bancorp’s Board of Directors.
The GLBA requires financial institutions to implement
policies and procedures regarding the disclosure of nonpublic
personal information about consumers to non-affiliated third
parties. In general, the statute requires explanations to consumers
on policies and procedures regarding the disclosure of such
nonpublic personal information, and, except as otherwise required
by law, prohibits disclosing such information except as provided
in
the banking subsidiary’s policies and procedures. The
Bancorp’s banking subsidiary has implemented a privacy policy.
Anti-Money Laundering
The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001 (the “Patriot Act”), designed to deny terrorists and
others the ability to obtain access to the United States financial
system, has significant implications for depository institutions,
brokers, dealers and other businesses involved in the transfer of
money. The Patriot Act, as implemented by various federal
regulatory agencies, requires financial institutions, including the
Bancorp and its subsidiaries, to implement new policies and
procedures or amend existing policies and procedures with
respect
laundering,
compliance, suspicious activity and currency transaction reporting
and due diligence on customers. The Patriot Act and its
underlying regulations also permit information sharing for
counter-terrorist purposes between federal law enforcement
agencies and financial institutions, as well as among financial
institutions, subject to certain conditions, and require the FRB
(and other federal banking agencies) to evaluate the effectiveness
of an applicant in combating money laundering activities when
considering applications filed under Section 3 of the BHCA or the
to, among other matters, anti-money
`
Bank Merger Act. The Bancorp’s Board has approved policies
and procedures that are believed to be compliant with the Patriot
Act.
Exempt Brokerage Activities
The GLBA amended the federal securities laws to eliminate the
blanket exceptions that banks traditionally have had from the
definition of “broker” and “dealer.” The GLBA also required that
there be certain transactional activities that would not be
“brokerage” activities, which banks could effect without having
to register as a broker. In September 2007, the FRB and SEC
approved Regulation R to govern bank securities activities.
Various exemptions permit banks to conduct activities that would
otherwise constitute brokerage activities under the securities laws.
Those exemptions include conducting brokerage activities related
to trust, fiduciary and similar services, certain services and also
conducting a de minimis number of
riskless principal
transactions, certain asset-backed
transactions and certain
securities lending transactions. The Bancorp only conducts non-
exempt brokerage activities through its affiliated registered
broker-dealer.
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.
Executive Compensation
The DFA provides for a say on pay for shareholders of all public
companies. Under the DFA, each company must give its
shareholders the opportunity to vote on the compensation of its
executives at least once every three years. The DFA also adds
disclosure and voting requirements for golden parachute
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.
In June 2016, the SEC and the federal banking agencies
issued a proposed rule
incentive-based
compensation provisions of section 956 of the DFA. The
proposal would establish new requirements for incentive-based
compensation at institutions with assets of at least $1 billion.
implement
the
to
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.
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
the DFA,
to
189 Fifth Third Bancorp
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. Further, with respect
to covered funds that are “illiquid funds”, the FRB has the
authority to grant up to five more years for the Bancorp to
conform to the final Volcker Rule with respect to such illiquid
funds.
Derivatives
Title VII of the DFA includes measures to broaden the scope of
derivative instruments subject to regulation by requiring clearing
and exchange trading of certain derivatives, imposing new capital
and margin requirements for certain market participants and
imposing position limits on certain over-the-counter derivatives.
Fifth Third Bank is provisionally registered with the Commodity
Futures Trading Commission as a swap dealer. As with the
Volcker Rule, the Bank is required to demonstrate that it has a
satisfactory compliance program to monitor its activities under
these regulations. Certain regulations implementing Title VII of
the DFA have not been finalized. The ultimate impact of these
regulations, and the time it will take to comply, continues to
remain uncertain. The final regulations may impose additional
operational and compliance costs on us and may require us to
restructure certain businesses and negatively impact our revenues
and results of operations.
Future Legislative and Regulatory Initiatives
Federal and state legislators as well as regulatory agencies may
introduce or enact new laws and rules, or amend existing laws
and rules, that may affect the regulation of financial institutions
and their holding companies. The impact of any future legislative
or regulatory changes cannot be predicted. However, such
changes could affect Bancorp’s business, financial condition and
results of operations.
`
that were adopted
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.
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. In August
2016, the FDIC and the FRB announced that 38 firms, including
Fifth Third, will be required to submit their next resolutions by
December 31, 2017.
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
190 Fifth Third Bancorp
`
ITEM 1A. 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. Some of these risks are interrelated,
and the occurrence of one or more of them may exacerbate the
effect of others.
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 decreased
demand for Fifth Third’s products and services, 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. economy 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 in the U.S. or abroad and the policies of various
governmental and regulatory agencies (in particular, the FRB).
Changes in monetary policy, including changes in interest rates,
will influence the origination of loans, the prepayment speed of
loans, the purchase of investments, the generation of deposits and
the rates received on loans and investment securities and paid on
deposits or other sources of funding. The impact of these changes
may be magnified if Fifth Third does not effectively manage the
relative sensitivity of its assets and liabilities to changes in market
interest rates. Fluctuations in these areas may adversely affect
Fifth Third and its shareholders.
Changes and trends in the capital markets may affect Fifth
Third’s income and cash flows.
Fifth Third enters into and maintains trading and investment
positions in the capital markets on its own behalf and manages
investment positions on behalf of its customers. These investment
positions include derivative financial instruments. The revenues
and profits Fifth Third derives from managing proprietary and
customer trading and investment positions are dependent on
market prices. Market changes and trends may result in a decline
in wealth and asset management 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 Fifth Third’s income, 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, without limitation:
• 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 and changes in the
regulatory regime;
• 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;
• U.S. and global economic conditions;
• Natural disasters;
191 Fifth Third Bancorp
`
• Geopolitical conditions such as acts or threats of
terrorism, military conflicts and withdrawal from the EU
by the U.K. or other EU members.
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.
RISKS RELATING TO FIFTH THIRD’S GENERAL
BUSINESS
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 1,191 full-service
banking centers, 50 parcels of land held for the development of
future banking centers and 10 properties that are developed or in
the process of being developed as branches, 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
including
automatic teller machines and other 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.
in-branch self-service
technologies
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 in the loan portfolio 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.
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
192 Fifth Third Bancorp
changing economic conditions, including falling home prices or
higher unemployment, or other factors such as changes in
borrower’s behavior. As
example, borrowers may
an
"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, 2016; however, there is no assurance that they will
be sufficient to cover future credit losses, especially if housing
and employment conditions decline. 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 70% of average
total assets at December 31, 2016). 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
and business
cause
substantially
creditors
could
and
`
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.
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, and additional
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
these regulations with other
and complex
regulatory changes,
the resolution and recovery
framework applicable to Fifth Third, the full impact of the
adopted and proposed regulations will remain uncertain until their
full implementation. It is also uncertain whether adopted and
proposed regulations will ultimately be rolled back or modified as
a result of the change in administration in the U.S. Uncertainty
about the timing and scope of any such changes as well as the
cost of complying with a new regulatory regime may negatively
impact Fifth Third’s business.
interactions of
including
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 certain states or locations
could result in materially higher credit losses if loans are
concentrated in those locations. Fifth Third has significant
exposures to businesses in certain economic sectors such as
manufacturing, real estate, financial services and insurance and
weaknesses in those businesses may adversely impact Fifth
Third’s business, results of operations or financial condition.
Additionally Fifth Third has a substantial portfolio of commercial
and residential real estate loans and weaknesses in residential or
commercial real estate markets may adversely impact Fifth
Third’s business, results of operations or financial condition.
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 loans for investment or private label
to repurchase
securitization. Fifth Third may be required
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 respond to rapid changes in the
financial services industry or otherwise adapt to changing
customer preferences, 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,
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.
investment
advisors,
specialty
and
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. Rapidly
changing technology and consumer preferences may require Fifth
Third to effectively implement new technology-driven products
and services in order to compete and meet customer demands.
Fifth Third may not be able to do so or be successful in marketing
these products and services to its customers. As a result, Fifth
Third’s ability to effectively compete to retain or acquire new
business may be impaired, and its business, financial condition or
results of operations, may be adversely affected.
Fifth Third may make strategic investments and may expand
an existing line of business or enter into new lines of business to
remain competitive. If Fifth Third’s chosen strategies, for
example, the NorthStar Strategy initiatives, are not appropriate to
effectively compete or Fifth Third does not execute them in an
appropriate or timely manner, Fifth Third’s business and results
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 and cause Fifth Third to fail to meet its stated
goals and expectations.
193 Fifth Third Bancorp
`
in
future
integrate
resources
successfully
implement and
invests significant
Fifth Third may not be able to successfully implement future
information technology system enhancements, which could
adversely affect Fifth Third’s business operations and
profitability.
Fifth Third
information
technology system enhancements in order to provide functionality
and security at an appropriate level. Fifth Third may not be able
to
system
enhancements, which could adversely impact the ability to
provide timely and accurate financial information in compliance
with legal and regulatory requirements, which could result in
sanctions from regulatory authorities. Such sanctions could
include fines and result in reputational harm and have other
negative effects. In addition, future system enhancements could
have higher than expected costs and/or result in operating
inefficiencies, which could increase the costs associated with the
implementation as well as ongoing operations. Failure to properly
utilize system enhancements that are implemented in the future
could result in impairment charges that adversely impact Fifth
Third’s financial condition and results of operations and could
result in significant costs to remediate or replace the defective
components. In addition, Fifth Third may incur significant
training, licensing, maintenance, consulting and amortization
expenses during and after systems implementations, and any such
costs may continue for an extended period of time.
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
194 Fifth Third Bancorp
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, 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
profitability. A ratings downgrade to Fifth Third, its subsidiaries
or their securities could also create obligations or liabilities of
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.
its borrowing costs and negatively
impact
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 intense,
which may increase Fifth Third’s expenses and may result in
Fifth Third not being able to hire candidates or retain them. If
Fifth Third is not able to hire qualified candidates or retain its key
personnel, 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 to maintain its competitive
position, or 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.
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
in mortgage
originations may not be enough to offset the decrease in the
MSRs value caused by the lower rates.
increase
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 and other
purposes. The models used may not accurately account for all
variables and 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.
Also, information Fifth Third provides to the public or to its
regulators based on models could be inaccurate or misleading due
to inadequate design or implementation, for example. Decisions
that its regulators make, including those related to capital
distributions to its shareholders, could be affected adversely due
to the perception that the models used to generate the relevant
information are unreliable or inadequate.
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,
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.
including assumptions about
the
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 of MSRs
below amortized cost reduce earnings in the period in which the
decrease occurs.
The preparation of financial statements requires Fifth Third to
make subjective determinations and use estimates that may vary
from actual results and materially impact its results of
operations or financial position.
The preparation of consolidated
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.
financial statements
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 regulatory agencies, periodically change the 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.
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.
195 Fifth Third Bancorp
`
Difficulties in identifying suitable opportunities or combining
the operations of acquired entities or assets with Fifth Third’s
own operations or assessing the effectiveness of businesses in
which we make strategic investments or with which we enter
into strategic contractual relationships may prevent Fifth Third
from achieving the expected benefits from these acquisitions,
investments or relationships.
Inherent uncertainties exist when assessing or integrating the
operations of an acquired business or investment or relationship
opportunity. Fifth Third may not be able to fully achieve its
strategic objectives and planned operating efficiencies in an
acquisition or strategic relationship. In addition, the markets and
industries in which Fifth Third and its potential acquisition and
investment targets operate are highly competitive. Acquisition or
investment targets may lose customers or otherwise perform
poorly or unprofitably, in the case of an acquired business or
strategic relationship, cause Fifth Third to lose customers or
perform poorly or unprofitably. Future acquisition and integration
activities and efforts to monitor new investments or reap the
benefits of a new strategic relationship may require Fifth Third to
devote substantial time and resources and may cause these
acquisitions, investments and relationships to be unprofitable or
cause Fifth Third to be unable to pursue other business
opportunities.
After completing an acquisition, Fifth Third may find certain
items were 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 or assets. For
example, Fifth Third could experience higher charge-offs than
originally anticipated related to the acquired loan portfolio.
Additionally, acquired companies or businesses may increase
Fifth Third’s risk of regulatory action or restrictions related to the
operations of the acquired business.
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
levels.
shareholders’ equity commensurate with desirable
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 and other assets that are not
significantly synergistic with its core financial services businesses
or may no longer be aligned with Fifth Third’s strategic plans.
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 lose the income from the sold businesses and/or interests,
including those accounted for under the equity method of
accounting, and such loss of income could have an adverse effect
on its future earnings and growth. Additionally, Fifth Third may
encounter difficulties
the operations of any
businesses it sells, which may affect its business or results of
operations.
in separating
196 Fifth Third Bancorp
inoperable. Fifth Third also has security
Fifth Third relies on its systems and certain third party 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
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 significant reputational harm
and the loss of customers’ confidence in Fifth Third. As a result,
we may lose existing and new customers and incur significant
costs, including privacy monitoring activities.
Fifth Third’s necessary dependence upon automated systems
to record and process its transaction volume poses the risk that
tampering or
technical system flaws or employee errors,
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
(for example, computer viruses or electrical or
control
telecommunications outages).
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
to safeguard
its own operational systems or
confidential information of the Bancorp or its customers, thereby
the Bancorp’s operational costs and potentially
increasing
diminishing customer satisfaction. If personal, confidential or
proprietary information of customers or clients in the Bancorp’s
possession were to be mishandled or misused, the Bancorp could
suffer significant regulatory 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 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 reputational harm, 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, which could result in the
disclosure, theft or destruction of confidential information.
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, and
“ransom” attacks where hackers have requested payments in
exchange for not disclosing customer information. 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 limited to, business continuity risk, information
management risk, fraud risk, model risk, third party service
provider risk, human resources risk, and process 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.
Fifth Third’s framework for managing risks may not be
effective in mitigating its risk and loss.
Fifth Third’s risk management framework seeks to mitigate
risk and
loss. Fifth Third has established processes and
procedures intended to identify, measure, monitor, report, and
analyze the types of risk to which it is subject, including liquidity
risk, credit risk, market risk, interest rate risk, compliance risk,
strategic risk, reputational risk, and operational risk related to its
employees, systems and vendors, among others. Any system of
control and any system to reduce risk exposure, however well
designed and operated, is based in part on certain assumptions
and can provide only reasonable, not absolute, assurances that the
objectives of the system are met. A failure in Fifth Third’s
internal controls could have a significant negative impact not only
on its earnings, but also on the perception that customers,
regulators and investors may have of Fifth Third. Fifth Third
continues to devote a significant amount of effort, time and
resources to improving its controls and ensuring compliance with
complex regulations.
Additionally, instruments, systems and strategies used to
hedge or otherwise manage exposure to various types of market
compliance, credit, liquidity, operational and business risks and
enterprise-wide risk could be less effective than anticipated. As a
result, Fifth Third may not be able to effectively mitigate its risk
exposures in particular market environments or against particular
types of risk. If Fifth Third’s risk management framework proves
ineffective, Fifth Third could incur litigation, negative regulatory
consequences,
reputational damages among other adverse
consequences and Fifth Third could suffer unexpected losses that
may affect its financial condition or results of operations.
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, 2015 and 2016, the
Bancorp ownership share in Vantiv Holding, LLC as of
December 31, 2016, 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 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,
which are subject to their own risks and uncertainties.
197 Fifth Third Bancorp
`
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 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.
it
to
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,
the comprehensive,
is subject
consolidated supervision and regulation of the FRB, including
investment
risk-based and
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.
leverage capital
requirements,
U.S. federal banking agencies’ capital rules implementing
Basel III 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 the
capital requirements are being phased in over time, U.S. federal
banking agencies take into account expectations regarding the
ability of banks to meet the capital requirements, including under
198 Fifth Third Bancorp
stressed conditions, in approving actions that represent uses of
capital, such as dividend increases and share repurchases.
Failure by the Bancorp’s banking subsidiary to meet
applicable capital requirements could subject the Bank to a
variety of enforcement remedies available
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.
to
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 and scrutiny on the financial services industry.
The U.S. government has intervened on an unprecedented scale,
responding to what has been commonly referred to as the
financial crisis, by introducing various actions and passing
legislation such as the DFA. Such programs and legislation
subject Fifth Third and other financial institutions to restrictions,
oversight and/or costs that may have an impact on Fifth Third’s
business, financial condition, results of operations or the price of
its common stock.
Although
the
programs implemented and the legislation passed following the
financial crisis will remain in place or be modified or repealed
under the new administration in the U.S., any new proposals for
legislation and regulations introduced could further substantially
increase compliance costs in the financial services industry. In
addition, changes to laws and regulations could have a negatively
impact in the short term even if the longer-term impact of those
changes may be expected to be positive for Fifth Third. 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. Changes in regulation could affect
Fifth Third in a substantial way and could have an adverse effect
on its business, financial condition and results of operations.
is uncertainty regarding whether
there
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 Bank. 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
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.
that such approvals,
The Bancorp is a bank holding company and a financial
holding company. Failure by the Bancorp or Fifth Third Bank to
meet the applicable eligibility requirements for financial holding
`
company status (including capital and management requirements
and that Fifth Third Bank maintain at least a “Satisfactory” CRA
rating) may result in restrictions on certain activities of the
Bancorp, including the commencement of new activities and
mergers with or acquisitions of other financial institutions, and
could ultimately result in the loss of financial holding company
status.
In the wake of the most recent global financial crisis, Fifth
Third and other financial institutions more generally have been
subjected to increased scrutiny from government authorities,
including bank regulatory authorities, stemming from broader
systemic regulatory concerns, including with respect to stress
testing, capital 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.
the period covering 2011-2013 following
In July 2016, the FRB announced that Fifth Third Bank
received a rating of “Needs to Improve” on its CRA examination
for
its periodic
examination to determine Fifth Third Bank’s compliance with the
CRA from 2011 through 2013. While Fifth Third Bank’s CRA
rating is “Needs to Improve” the Bancorp and Fifth Third Bank
face limitations and conditions on certain activities (including the
commencement of new activities and merger with or acquisitions
of other financial institutions) and the potential loss of financial
holding company status. As a result of these limitations and
conditions, Fifth Third may be unable or may fail to pursue,
evaluate or complete
that might have been
transactions
strategically or competitively significant. The Bank’s next CRA
examination commenced during the fourth quarter of 2016.
to
in
time
time
information-gathering
Fifth Third and/or its affiliates are or may become involved
from
requests,
investigations and proceedings by various governmental
regulatory agencies and law enforcement authorities, as well as
self-regulatory agencies which may
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
law enforcement
authorities, as well as self-regulatory agencies, regarding their
respective customers and businesses. In addition, the complexity
of the federal and state regulatory and enforcement regimes in the
regulatory agencies and
requests,
time
lead
to
in
U.S. means that a single event or topic may give rise to numerous
and overlapping investigations and regulatory proceedings. Such
matters may result in material adverse consequences, including
without
fines,
penalties, 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.
judgments, settlements,
limitation, adverse
There has been a
large settlements with
trend of
governmental agencies that may adversely affect the outcomes for
other financial institutions, to the extent they are used as a
template for other settlements in the future. The uncertain
regulatory enforcement environment makes it difficult to estimate
probable losses, which can lead to substantial disparities between
legal reserves and actual settlements or penalties.
Deposit insurance premiums levied against Fifth Third Bank
may increase if the number of bank failures increase or the cost
of resolving failed banks increases.
The FDIC maintains a DIF to protect insured depositors in the
event of bank failures. The DIF is funded by fees assessed on
insured depository institutions including Fifth Third Bank. Future
deposit premiums paid by Fifth Third Bank depend on 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 and are not designed to protect security-holders. 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
199 Fifth Third Bancorp
`
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.
implementing
the DFA and
The reforms, both under the DFA and otherwise, are having
a significant effect on the entire financial industry. Fifth Third
believes compliance with
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.
We may become subject
to more stringent regulatory
requirements and activity restrictions if the FRB and FDIC
determine that Fifth Third’s resolution plan is not credible.
The DFA and implementing regulations jointly issued by the FRB
and FDIC require bank holding companies with more than $50
billion in assets to annually submit a resolution plan to the FRB
and the FDIC that, in the event of material financial distress or
failure, establish the rapid, orderly resolution under the U.S.
Bankruptcy Code. If the FRB and the FDIC jointly determine that
Fifth Third’s resolution plan is not “credible,” Fifth Third could
become subjected to more stringent capital, leverage or liquidity
requirements or restrictions, or restrictions on Fifth Third’s
growth, activities or operations, and could eventually be required
to divest certain assets or operations in ways that could negatively
impact its operations and strategy.
Conforming Covered Activities to the Volcker Rule may require
the expenditure of resources and management attention and
result in forced sales of assets.
Among other restricted activities, the DFA “Volcker Rule”
generally restricts banks and their affiliates from sponsoring or
retaining an interest in certain private equity and hedge funds. A
forced sale of some or all (“Legacy Covered Funds”) could result
in Fifth Third receiving less value than it would otherwise have
received.
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 created authority for the orderly 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 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
Liquidation Fund established under the DFA, which will borrow
from the U.S. Treasury and impose risk-based assessments on
200 Fifth Third Bancorp
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.
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
in effect, several additional
requirements await final regulations from the relevant regulatory
agencies for derivatives, the CFTC and the SEC. One aspect of
this new regulatory regime for derivatives is that substantial
oversight responsibility has been provided to the CFTC, which, as
a result, now has a meaningful supervisory role with respect to
some of Fifth Third’s businesses. In 2014, Fifth Third Bank
provisionally 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
activity will be subject to FRB margin requirements and may
also be subject to capital requirements specific to this derivatives
activity. These
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 activities and could have an adverse effect on its
business, financial condition and results of operations.
requirements will
collectively
Fifth Third and/or its affiliates are or may become the subject
of litigation or regulatory or other enforcement proceedings that
could result in substantial 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.
Enforcement authorities may seek admissions of wrongdoing and,
in some cases, criminal pleas as part of the resolutions of matters,
and any such resolution of a matter involving Fifth Third which
could lead to increased exposure to private litigation, could
adversely affect Fifth Third’s reputation, and could result in
limitations on Fifth Third’s ability to do business in certain
enforcement
jurisdictions. Legal,
proceedings could also result in material adverse judgments,
settlements,
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.
In addition, responding to inquiries, investigations, lawsuits and
injunctions or other
fines, penalties,
and other
regulatory
`
proceedings, regardless of the ultimate outcome of the matter,
could be time-consuming and expensive. 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 or other enforcement 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. The outcome of lawsuits and regulatory proceedings
may be difficult to predict or estimate. Although Fifth Third
establishes accruals for legal proceedings when information
related to the loss contingencies represented by those matters
indicates both that a loss is probable and that the amount of loss
can be reasonably estimated, Fifth Third does not have accruals
for all legal proceedings where it faces a risk of loss. In addition,
due
the assessments and
unpredictability of the outcome of legal proceedings, amounts
accrued may not represent the ultimate loss to Fifth Third from
the legal proceedings in question. Thus, Fifth Third’s ultimate
losses may be higher, and possibly significantly so, than the
amounts accrued for legal loss contingencies, which could
adversely affect Fifth Third’s results of operations. Please see
“Legal and Regulatory Proceedings” in Fifth Third’s Notes to
Consolidated Financial Statements for information on specific
legal and regulatory proceedings.
inherent subjectivity of
the
to
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. As part of CCAR, Fifth Third’s capital
plan is subject to an annual assessment by the FRB, and the FRB
may object to Fifth Third’s capital plan if Fifth Third does not
demonstrate an ability to maintain capital above the minimum
regulatory capital ratios under baseline and stressful conditions
throughout a nine-quarter planning horizon. If the FRB objects to
Fifth Third’s capital plan, Fifth Third would be subject to
limitations on its ability to make capital distributions (including
paying dividends and repurchasing stock).
201 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
campus is located in Cincinnati, Ohio, and is comprised of a three-
story building with an attached parking garage known as the George
A. Schaefer, Jr. Operations Center, and a two-story building with
surface parking known as the Madisonville Office Building. The
Bank owns 100% of these buildings.
At December 31, 2016, the Bancorp, through its banking and non-
banking subsidiaries, operated 1,191 banking centers, of which 859
were owned, 229 were leased and 103 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, 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 24, are listed below along
with their business experience during the past five years:
Greg D. Carmichael, 55. 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, 46. 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, 62. 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, 51. 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.
202 Fifth Third Bancorp
Aravind Immaneni, 46. Executive Vice President and Chief
Operations and Technology Officer since November 14, 2016.
Previously Mr. Immaneni worked for TD Bank as Executive Vice
President and Head of Retail Distribution Strategy & Operations
since November 2014, Senior Vice President and Head of Retail
Bank Operations from August 2013 to November 2014, and Senior
Vice President and Head of Deposit & Debit Operations from
February 2011 to August 2013.
James C. Leonard, 47. 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 2006.
Philip R. McHugh, 52. 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.
Jelena McWilliams, 43. Executive Vice President, Chief Legal
Officer and Corporate Secretary since January 9, 2017. Previously
Ms. McWilliams was Chief Counsel since January 2015 and Deputy
Staff Director since July 2016 of the U.S. Senate Committee on
Banking, Housing and Urban Affairs. Previously she was Senior
Counsel to the U.S. Senate Committee on Banking, Housing and
Urban Affairs from July 2012 to December 2015. Prior to that, she
served as Assistant Chief Counsel to the U.S. Senate Small Business
and Entrepreneurship Committee and before that as an attorney at the
Federal Reserve Board of Governors. Prior to government service,
she practiced as an attorney with Morrison & Foerster LLP in Palo
Alto, California and then with Hogan & Hartson LLP (now Hogan
Lovells LLP) in Washington, D.C.
Timothy N. Spence, 38. Executive Vice President and Chief Strategy
the Bancorp since September 2015. Previously,
Officer of
Mr. Spence was a senior partner in the Financial Services practice at
Oliver Wyman since 2006, a global strategy and risk management
consulting firm.
Teresa J. Tanner, 48. 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, 52. Executive Vice President and Chief Financial
Officer of the Bancorp since October 2013. Previously, Mr. Tuzun
was the Senior Vice President and Treasurer of the Bancorp from
December 2011 to October 2013. Prior to that, Mr. Tuzun was the
Assistant Treasurer and Balance Sheet Manager of Fifth Third
Bancorp. Previously, Mr. Tuzun was the Structured Finance Manager
since 2007.
`
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Bancorp’s common stock is traded in the over-the-counter market and is listed under the symbol “FITB” on the NASDAQ® Global
Select Market System.
High and Low Stock Prices and Dividends Paid Per Share
2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2015
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
$27.88
$21.11
$19.34
$19.73
High
$21.14
$21.93
$21.90
$20.53
Low
$19.57
$16.26
$16.02
$13.84
Low
$18.15
$18.21
$18.63
$17.14
Dividends Paid
Per Share
$0.14
$0.13
$0.13
$0.13
Dividends Paid
Per Share
$0.13
$0.13
$0.13
$0.13
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, 2016, the Bancorp had 42,892 shareholders of record.
Issuer Purchases of Equity Securities
Period
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)
Total Number of
Shares Purchased(a)
120,199
1,468,615
4,965,665
6,554,479
$
October 2016
November 2016
December 2016
Total
(a) The Bancorp repurchased 120,199, 369,410 and 121,915 shares during October, November and December of 2016, 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 2016, 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 14 million shares remained available for repurchase by the Bancorp.
87,584,352
86,485,147
81,641,397
81,641,397
-
1,099,205
4,843,750
5,942,955
20.24
20.87
27.17
25.63
(b)
$
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.
203 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 2011 through 2016, and 2006
through 2016, respectively, compared to the S&P 500 Stock and the S&P Banks indices.
FIFTH THIRD BANCORP VS. MARKET INDICES
Shares Issued Under Certain Employee Benefit Plans
As previously disclosed, during the fourth quarter of 2016, the Bancorp determined that a number of shares of Fifth Third Bancorp common
stock offered under our 401(k) Plan were previously inadvertently omitted from inclusion in the corresponding S-8 registration statement. As
a result, approximately 207,444 unregistered shares were sold through the 401(k) Plan during the fourth quarter of 2016.
The Bancorp filed the required Form S-8 for the 401(k) Plan on November 10, 2016 and plans to make a voluntary rescission offer to
eligible plan participants in order to remediate the registration defect during the first half of 2017. The Bancorp also plans to make rescission
offers to participants of other plans as well for previously disclosed registration and prospectus delivery failures. Based on the market price of
Fifth Third Bancorp’s common stock in February 2017, the Bancorp does not expect that the exercise of any applicable rescission rights will
have a material impact on its results of operations, financial condition, or liquidity.
204 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.”
EXTERNAL AUDIT FIRM FEES” of the Bancorp’s Proxy
Statement for the 2017 Annual Meeting of Shareholders.
PART
STATEMENT SCHEDULES
ITEM
IV
15. EXHIBITS, FINANCIAL
Report of Independent Registered Public Accounting Firm
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 2017 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 2017
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 2017 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 2017 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 2017 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 2017 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
Pages
93-94
95-99
Fifth Third Bancorp and Subsidiaries Consolidated Financial
Statements
Notes to Consolidated Financial Statements
100-182
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
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. Incorporated by reference to Exhibit 3.2 to the
Registrant’s Annual Report on Form 10-K filed with the SEC on
February 25, 2016.
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.
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
the 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)
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.
205 Fifth Third Bancorp
`
4.8
4.9
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.
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 the 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.
4.10 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
4.12
issued
receipts
time of
the depositary
4.11 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.
4.13
4.14 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
4.16
issued
receipts
time of
the depositary
4.15 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
thereunder.
time
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.
4.17
4.18 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
4.20
4.19
206 Fifth Third Bancorp
4.21
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.
4.22 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.
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.
4.23
10.2
10.3
10.1
4.25
4.24 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.
Certain instruments defining the rights of holders of long-term debt
securities of the Registrant and its subsidiaries are omitted pursuant to
Item 601(b)(4)(iii) of Regulation S-K. The Registrant hereby
undertakes to furnish to the SEC, upon request, copies of any such
instruments.
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.*
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. Incorporated by reference to Exhibit 10.8 to
the Registrant’s Annual Report on Form 10-K filed with the SEC on
February 25, 2016.*
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
10.9
10.8
10.4
10.7
10.6
10.5
10.10 First Amendment to The Fifth Third Bancorp Master Retirement
Plan, as Amended and Restated. Incorporated by reference to Exhibit
10.10 to the Registrant’s Annual Report on Form 10-K filed with the
SEC on February 25, 2016.*
10.11 Second Amendment to The Fifth Third Bancorp Master Retirement
Plan, as Amended and Restated.*
10.12 Fifth Third Bancorp Incentive Compensation Plan. Incorporated by
reference to Annex 2 to the Registrant’s Proxy Statement dated
February 19, 2004.*
`
10.13 Fifth Third Bancorp 2008 Incentive Compensation Plan. Incorporated
by reference to Annex 2 to the Registrant’s Proxy Statement dated
March 6, 2008.*
10.14 Fifth Third Bancorp 2014 Incentive Compensation Plan. Incorporated
by reference to Annex A to the Registrant’s Proxy Statement dated
March 6, 2014.*
10.15 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.*
10.16 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.*
10.17 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.*
10.18 Fifth Third Bancorp Stock Option Gain Deferral Plan. Incorporated
by reference to Registrant’s Proxy Statement dated February 9,
2001.*
10.19 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. *
10.20 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. *
10.21 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.*
10.22 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.
10.23 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.
10.24 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.
10.25 Registration Rights Agreement dated as of March 21, 2012 by and
among Vantiv, Inc., Fifth Third Bank, FTPS Partners, LLC, JPDN
Inc.
Enterprises, LLC and certain stockholders of Vantiv,
Incorporated by reference to Exhibit E to the Registrant’s Schedule
13D filed with the Commission on April 2, 2012.
10.26 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.
10.27 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.
10.28 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.*
10.29 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.*
10.30 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.*
10.31 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.*
10.32 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.*
10.33 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.*
10.34 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.*
10.35 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.*
10.36 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.**
10.37 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.**
10.38 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.**
10.39 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.
10.40 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.**
10.41 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**
10.42 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.**
10.43 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. Incorporated by reference to Exhibit
10.42 to the Registrant’s Annual Report on Form 10-K filed with the
SEC on February 25, 2016.**
10.44 Supplemental Confirmation dated March 1, 2016,
to Master
Confirmation dated July 29, 2015, for accelerated share repurchase
transaction 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 May 6,
2016**
10.45 Supplemental Confirmation dated August 2, 2016,
to Master
Confirmation dated January 22, 2015, for accelerated share
repurchase transaction 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 November 9, 2016**
207 Fifth Third Bancorp
`
10.46 Bancorp Director Pay Program. Incorporated by reference to Exhibit
10.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the
Commission on November 9, 2016*
10.47 Supplemental Confirmation dated December 15, 2016, to Master
Confirmation dated May 21, 2013, for accelerated share repurchase
transaction between Fifth Third Bancorp and Deutsche Bank AG,
London Branch.**
10.48 2016 Restricted Stock Unit Grant Agreement (for Directors).*
10.49 2017 Stock Appreciation Right Award Agreement (for Executive
Officers).*
10.50 2017 Performance Share Award Agreement.*
10.51 2017 Restricted Stock Unit Grant Agreement (for Executive
Officers).*
(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
November 20, 2013 representing an additional $250,000,000 in principal
amount of its 4.30% Subordinated Notes due 2024.
* 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.
10.52 Long-Term Incentive Award Overview February 2017 Grants.*
12.1
Computations of Consolidated Ratios of Earnings to Fixed 12.1
Computations of Consolidated Ratios of Earnings to Fixed
Charges.
Computations of Consolidated Ratios of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements.
Fifth Third Bancorp Subsidiaries, as of December 31, 2016.
Consent of Independent Registered Public Accounting Firm-Deloitte
& Touche LLP.
12.2
21
23
31(i) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by Chief Executive Officer.
31(ii) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by Chief Financial Officer.
32(i) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief
Executive Officer.
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
loans.
U.S. Department of Justice
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
208 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 24, 2017
Pursuant to requirements of the Securities Exchange Act of 1934,
this report has been signed on February 24, 2017 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/ Marsha C. Williams
Marsha C. Williams
Board Chair
/s/ Nicholas K. Akins
Nicholas K. Akins
B. Evan Bayh III
/s/ Jorge L. Benitez
Jorge L. Benitez
/s/ Katherine B. Blackburn
Katherine B. Blackburn
/s/ Emerson L. Brumback
Emerson L. Brumback
/s/ Jerry W. Burris
Jerry W. Burris
/s/ Greg D. Carmichael
Greg D. Carmichael
/s/ Gary R. Heminger
Gary R. Heminger
/s/ Jewell D. Hoover
Jewell D. Hoover
/s/ Eileen A. Mallesch
Eileen A. Mallesch
Michael B. McCallister
/s/ Hendrik G. Meijer
Hendrik G. Meijer
209 Fifth Third Bancorp
CONSOLIDATED TEN YEAR COMPARISON
AVERAGE ASSETS FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS)
$
Year
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Loans and
Leases
94,320
93,339
91,127
89,093
84,822
80,214
79,232
83,391
85,835
78,348
Interest-Earning Assets
Federal Funds
Sold(a)
1
1
-
1
2
1
11
12
438
257
Interest-Bearing
Deposits in
Banks(a)
1,865
3,257
3,043
2,416
1,493
2,030
3,317
1,023
183
147
Securities
30,099
26,987
21,823
16,444
15,319
15,437
16,371
17,100
13,424
11,630
Total
126,285
123,584
115,993
107,954
101,636
97,682
98,931
101,526
99,880
90,382
Cash and Due
from Banks Other Assets(c)
2,303
2,608
2,892
2,482
2,355
2,352
2,245
2,329
2,490
2,275
14,963
15,179
14,505
15,025
15,643
15,259
14,758
14,179
13,326
10,578
Total Average
Assets(c)
142,266
140,078
131,909
123,704
117,562
112,590
112,351
114,769
114,211
102,442
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS)
Deposits
Year
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Year
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Foreign
Office and
Other
Money
Market Other Time
Demand
3,351
4,010
35,862
$
2,641
4,051
35,164
2,331
3,762
31,755
3,527
3,760
29,925
4,806
4,306
27,196
3,122
6,260
23,389
1,926
10,526
19,669
6,980
14,103
16,862
10,760
11,135
14,017
13,261
6,890
10,778
INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Savings
14,346
14,951
16,080
18,440
21,393
21,652
19,612
16,875
16,192
14,836
Total
102,449
102,221
97,406
93,031
85,551
82,315
82,277
79,862
75,413
69,624
19,523
18,152
14,670
9,467
4,903
5,154
4,808
4,320
6,127
6,308
830
874
1,828
1,518
1,555
3,497
3,361
2,265
4,220
3,155
Interest
Checking
25,143
26,160
25,382
23,582
23,096
18,707
18,218
15,070
14,191
14,820
Certificates
$100,000 and
Over
2,735
2,869
3,929
6,339
3,102
3,656
6,083
10,367
9,531
6,466
Short-Term
Borrowings
Total
105,800
104,862
99,737
96,558
90,357
85,437
84,203
86,842
86,173
76,514
Per Share(b)
Originally Reported
$
Interest
Income
4,193
4,028
4,030
3,973
4,107
4,218
4,489
4,668
5,608
6,027
Interest
Expense
578
495
451
412
512
661
885
1,314
2,094
3,018
Noninterest
Income
2,696
3,003
2,473
3,227
2,999
2,455
2,729
4,782
2,946
2,467
Noninterest
Expense
3,903
3,775
3,709
3,961
4,081
3,758
3,855
3,826
4,564
3,311
Net Income (Loss)
Available to
Common
Shareholders
1,489
1,637
1,414
1,799
1,541
1,094
503
511
(2,180)
1,075
Earnings
1.95
2.03
1.68
2.05
1.69
1.20
0.63
0.73
(3.91)
1.99
Diluted
Earnings
1.93
2.01
1.66
2.02
1.66
1.18
0.63
0.67
(3.91)
1.98
Dividends
Declared Earnings
1.95
2.03
1.68
2.05
1.69
1.20
0.63
0.73
(3.94)
2.00
0.53
0.52
0.51
0.47
0.36
0.28
0.04
0.04
0.75
1.70
Diluted
Earnings
1.93
2.01
1.66
2.02
1.66
1.18
0.63
0.67
(3.94)
1.99
MISCELLANEOUS AT DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Bancorp Shareholders' Equity
Year
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Common Shares
Outstanding
750,479,299 $
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
Common
Stock
2,051
2,051
2,051
2,051
2,051
2,051
1,779
1,779
1,295
1,295
Preferred
Stock
1,331
1,331
1,331
1,034
398
398
3,654
3,609
4,241
9
Capital
Surplus
2,756
2,666
2,646
2,561
2,758
2,792
1,715
1,743
848
1,779
Retained
Earnings
13,441
12,358
11,141
10,156
8,768
7,554
6,719
6,326
5,824
8,413
Accumulated Other
Comprehensive
Income
59
197
429
82
375
470
314
241
98
(126)
Treasury
Stock
(3,433)
(2,764)
(1,972)
(1,295)
(634)
(64)
(130)
(201)
(229)
(2,209)
Total
16,205
15,839
15,626
14,589
13,716
13,201
14,051
13,497
12,077
9,161
Book Value
Per Share
19.82
18.48
17.35
15.85
15.10
13.92
13.06
12.44
13.57
17.18
Allowance for
Loan and
Lease Losses
1,253
1,272
1,322
1,582
1,854
2,255
3,004
3,749
2,787
937
(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.
(c) Upon adoption of ASU 2015-03 on January 1, 2016, the Consolidated Balance Sheets for the years ended 2007-2015 were adjusted to reflect the reclassification of average debt issuance costs from
average other assets to average long-term debt, respectively. For further information, refer to Note 1 of the Notes to Consolidated Financial Statements.
210 Fifth Third Bancorp
DIRECTORS AND OFFICERS
FIFTH THIRD BANCORP DIRECTORS
Marsha C. Williams, Board Chair
Retired Chief Financial Officer
Orbitz Worldwide, Inc.
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
Aravind Immaneni
Executive Vice President &
Chief Operations
and Technology Officer
James C. Leonard
Executive Vice President &
Treasurer
Philip R. McHugh
Executive Vice President
Jelena McWilliams
Executive Vice President,
Chief Legal Officer &
Corporate Secretary
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
Nicholas K. Akins
Chairman, President &
Chief Executive Officer
American Electric Power Company
B. Evan Bayh III
Partner
McGuireWoods LLP
Jorge L. Benitez
Retired Chief Executive Officer
North America of Accenture plc
Katherine B. Blackburn
Executive Vice President
Cincinnati Bengals, Inc.
Emerson L. Brumback
Retired President & Chief Operating Officer
M&T Bank
Jerry W. Burris
Retired President and Chief Executive Officer
Associated Materials Group, Inc.
Greg D. Carmichael
President & Chief Executive Officer
Fifth Third Bancorp
Gary R. Heminger
President, Chief Executive Officer &
Chairman
Marathon Petroleum Corporation
Jewell D. Hoover
Retired Senior Official
Comptroller of the Currency
Eileen A. Mallesch
Retired Chief Financial Officer
Nationwide Property & Casualty Segment,
Nationwide Mutual Insurance Company
Michael B. McCallister
Retired Chairman & Chief Executive Officer
Humana Inc.
Hendrik G. Meijer
Co-Chairman, Chief Executive Officer &
Director
Meijer, Inc.
REGIONAL PRESIDENTS
Ralph S. Michael III
(Group Regional President)
Michael Ash
Steven Alonso
David A. Call
Hal Clemmer
Timothy Elsbrock
(Market President)
David Girodat
Thomas Heiks
Jerry Kelsheimer
Randy Koporc
Robert W. LaClair
Jordan A. Miller, Jr.
Eric Smith
(Market President)
Robert A. Sullivan
Thomas G. Welch, Jr.
FIFTH THIRD BANCORP BOARD
COMMITTEES
Audit Committee
Emerson L. Brumback, Chair
Katherine B. Blackburn
Jerry W. Burris
Jewell D. Hoover
Marsha C. Williams
Finance Committee
Gary R. Heminger, Chair
Nicholas K. Akins
Emerson L. Brumback
Jewell D. Hoover
Michael B. McCallister
Marsha C. Williams
Human Capital and Compensation
Committee
Michael B. McCallister, Chair
Nicholas K. Akins
Gary R. Heminger
Hendrik G. Meijer
Nominating and Corporate Governance
Committee
Nicholas K. Akins, Chair
B. Evan Bayh III
Jorge L. Benitez
Gary R. Heminger
Marsha C. Williams
Risk and Compliance Committee
Jewell D. Hoover, Chair
B. Evan Bayh III
Jorge L. Benitez
Eileen A. Mallesch
Hendrik G. Meijer
Marsha C. Williams
211 Fifth Third Bancorp
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212 Fifth Third Bancorp
2016
2015
2014
FIFTH THIRD BANCORP
2016 financial
highlights
For the years ended Dec. 31
$ in millions, except per share data
Earnings and Dividends
Net income attributable to Bancorp
$ 1,564
$ 1,712
$ 1,481
Common dividends declared
Preferred dividends declared
405
75
417
75
427
67
Per Common Share
Earnings
Diluted earnings
Cash dividends
Book value per share
At Year-End
Total Assets
$ 1.95
$ 2.03
$ 1.68
1.93
2.01
1.66
0.53
19.82
0.52
0.51
18.48
17.35
$ 142,177
$ 141,048†
$ 138,670†
Total Loans and Leases (incl. held-for-sale)
92,849
93,485
91,345
Deposits
103,821
103,205
101,712
Bancorp Shareholders' Equity
16,205
15,839
15,626
Key Ratios
Net Interest Margin (FTE)
Efficiency Ratio (FTE)
CET1 Ratio (Basel III Transitional)*
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
Actuals
2.88%
61.6%
10.39%
11.50%
15.02%
2.88%
57.6%
9.82%
10.93%
14.13%
3.10%
61.1%
N/A
10.83%
14.33%
Common Shares Outstanding (000's)
750,479
785,080
824,047
Banking Centers
ATMs
1,191
1,254
1,302
2,495
2,593
2,638
Full-Time Equivalent Employees
17,844
18,261
18,351
* Under the banking agencies’ Basel III Final Rule, assets and credit equivalent amounts of off-balance sheet exposures are calculated
based upon the standardized approach for risk-weighted assets. The resulting values are added together resulting in the Bancorp’s
total risk-weighted assets.
† Upon adoption of ASU 2015-03 on January 1, 2016, Consolidated Balance Sheets for the years ended 2015 and 2014 were adjusted to
reflect the reclassification of $34 and $36, respectively, of debt issuance costs from other assets to long-term debt.
2016
2015
Stock
Performance
High
Low
Dividends
Declared
Per Share
High
Low
Dividends
Declared
Per Share
Fourth Quarter
$ 27.88
$ 19.57
$ 0.14
$21.14
$18.15
$0.13
Third Quarter
Second Quarter
First Quarter
21.11
19.34
19.73
16.26
16.02
13.84
0.13
0.13
0.13
21.93
18.21
21.90
18.63
20.53
17.14
0.13
0.13
0.13
Fifth Third’s common stock is traded on the NASDAQ® Global Select Market under the symbol “FITB.”
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