2 0 1 7 A N N U A L R E P O R T
2 0 1 7 A N N U A L R E P O R T
Fifth Third Bancorp is a diversified financial services company
headquartered in Cincinnati, Ohio.
Fifth Third Bank was established in 1858.
Member FDIC.
Equal Housing Lender.
Doing the right
thing is central to our
ability to achieve
our Vision: to be the
one bank people most
value and trust.
GREG D. CARMICHAEL
Chairman, President and CEO,
Fifth Third Bancorp
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DEAR SHAREHOLDERS:
As I reflect on 2017, I am proud of the progress we have made
on our strategic priorities.
Guided by our Board of Directors and executive team, we remain focused
on building an enduring bank that performs well through business cycles.
Our strategies are aligned with the interests of our shareholders, customers,
employees and the communities we serve. We are realizing our Vision
to be the one bank people most value and trust, built upon the strong
foundation of our Core Values.
State of our
business:
Our strong financial results reflect the continued progress we have
made toward achieving our goals.
In 2017, Fifth Third reported net income to common shareholders of $2.1 billion.
We returned approximately 96 percent of earnings to shareholders through dividends
and share buybacks. In addition to strong core underlying results, we generated over
$1 billion in pre-tax gains from the sale of a portion of our ownership interest in Vantiv
(now Worldpay). Over time, we have thoughtfully monetized our stake in Vantiv,
generating more than $5 billion in gains since 2009.
We returned a significant amount of capital to our shareholders and ended the year
with very strong capital ratios. Our Common Equity Tier 1 ratio increased from 10.4 percent
at the end of 2016 to 10.6 percent in 2017. Our capital ratios increased more than those of
our peers, even as key credit quality metrics significantly improved. In fact, non-performing
loans and criticized assets are at their lowest levels in more than a decade as we continue
to strengthen our balance sheet.
Industrywide, commercial loan demand remained relatively tepid in 2017. Our total loans
were roughly flat compared to the end of 2016. In part, this reflected our decision to exit
$1.5 billion in commercial loans that did not meet our desired risk or return profile. Loan
growth was also impacted by our decision to curtail originations in the auto loan business
until risk-adjusted returns improve.
Recently enacted tax legislation has resulted in improved optimism about U.S. economic
growth, and by extension, loan demand. However, as we discussed when we announced
our three-year NorthStar strategy in 2016, our financial targets are not predicated on the
expectation of a significant pickup in the U.S. economy.
I am pleased that we maintained a disciplined approach to balance sheet management.
In our commercial line of business, we continued to focus on those customers with whom
we expect to have longstanding and profitable relationships. If we do not find suitable
opportunities to grow such relationships, we will return capital to our shareholders. As
stewards of your capital, it is incumbent upon us to allocate capital wisely.
F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T / 3
Noninterest income was up year over year, driven by a gain on the sale of Vantiv shares
and increased Wealth and Asset Management revenues. In fact, recurring revenues
increased to represent over 80 percent of Wealth and Asset Management’s total revenue.
This reflects our focus on generating more stable revenue streams and lessening our
reliance on transactional activity.
We continue to expand capabilities that will broaden client relationships. We made
several acquisitions to enhance our capabilities and increase fee revenue, including:
R.G. McGraw Insurance and Epic Insurance Solutions, to expand
our insurance business.
Integrity HR, to enter the employee benefits and human resources
consulting business.
Retirement Corporation of America, an investment advisory firm
that assists in retirement planning.
Coker Capital, a premier M&A advisory services firm, which
complements our existing offerings in our Healthcare vertical.
While organic sources of revenue growth are a top priority, we continually evaluate
potential acquisitions that are strategically important and can drive growth in fee revenue.
We remained disciplined about managing expenses during the year while continuing to
invest in areas of strategic importance. Excluding items related to tax reform, full-year
expenses were flat year over year. We achieved this while making significant investments
related to our NorthStar initiatives. We delivered positive operating leverage in 2017 and
remain committed to driving positive operating leverage again in 2018 and beyond.
FINANCIAL PERFORMANCE TARGETS
TO BE ACHIEVED BY THE END OF 2019
UPPER END OF
14-16%
RETURN ON AVERAGE
TANGIBLE COMMON EQUITY
MID TO UPPER-END OF
1.35-1.45%
RETURN ON AVERAGE
ASSETS
<60%
EFFICIENCY
RATIO*
*Without the benefit of higher interest rates, corporate tax changes or a reduced regulatory environment.
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Technology and
innovation:
We have embraced the use of technology and innovation to transform
Fifth Third.
In doing so, we are able to quickly respond to the dynamic transformation both inside
and beyond the banking industry. The innovative solutions we are deploying have been
developed in-house as well as through collaboration with financial technology companies.
This has created a sustainable competitive advantage that improves the customer
experience and reduces costs. Our digital and omni channel capabilities have been
enhanced to deliver a better and faster “last best” experience to our customers.
In 2017, we created an innovation center, ONE67, to develop new products. The first
of many solutions incubated in this space was Fifth Third Momentum™, an app that helps
pay down student loan debt more quickly. Student loan debt affects our communities
as well as the economy, and we are proud to have created a solution to help relieve that
burden.
We are changing not only what we do, but how we do it, to serve our customers better
while improving our efficiency. We are re-engineering and automating internal processes
in many of our businesses. We are adopting the Agile methodology across the company.
And we are making better use of analytics and technology to help support and significantly
enhance our marketing capabilities.
The results of our work to improve customer service have been recognized in a number
of third-party customer surveys. Greenwich Associates, for example, ranked us as one
of the top brands in commercial middle market banking and as the top bank among our
peers in relationship manager product knowledge.
We were pleased to share these strategies and accolades at our inaugural Investor Day
in December. At the event, the senior leadership team discussed how we differentiate
ourselves from our peers, how we have transformed our bank since the crisis, and how
we are leveraging technology and analytics to improve the customer experience.
Here’s what analysts were saying about Fifth Third following Investor Day:
“Overall we walked away impressed
with the improvements Fifth Third
Bank has made in its technology
and risk management, as well as the
sizable investments it has made in
analytics and its brand.”
“FITB’s presentations left us with the
impression that this regional bank
seems able to differentiate itself
within its markets and can keep up
with the largest peers (who are able
to invest vast sums into such areas).”
—GOLDMAN SACHS ANALYST
—SANDLER O’NEILL + PARTNERS, L.P ANALYST
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Our people:
Behind every strong company are great employees who strive to deliver
solutions that are best in class. Our employees put 166.7 percent into
everything they do, and that commitment manifested itself in 2017.
To acknowledge their commitment to our customers and the communities we serve,
I was pleased to share some of the benefits from the newly passed tax legislation
with employees at the end of 2017. We raised our minimum hourly wage to $15 and
distributed a one-time bonus of $1,000 to more than 13,500 employees.
I strongly believe that a spirit of engagement and inclusion builds strong teams, and
strong teams build strong futures—for our customers, our employees and the Bank.
A diverse, highly engaged workforce is one of the best ways to achieve our strategic
and financial objectives. Each employee shares ownership in building and maintaining
an engaging environment.
Our annual Employee Viewpoints Survey enables us to receive feedback directly from
employees, to recognize where our strengths are and where we can improve. The
2017 results showed that we have a highly engaged team at Fifth Third, and engaged
employees have the biggest impact on keeping the customer at the center and providing
the best experience for the customer.
As a Gallup Great Workplace winner for the fourth year, we take pride in creating an
environment where employees feel supported and connected. Additional recognition
from Bloomberg as a Global Leader in Supporting Women in the Workplace and the perfect
score and distinction we received as a Best Place to Work for LGBTQ Equality further
validate our efforts.
We launched the first-of-its-kind Maternity Concierge program in order to provide an
environment and culture in which working mothers not only can succeed, but also excel.
We also expanded our parental leave for fathers, adoptive parents and foster parents.
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These initiatives were among the reasons Teresa Tanner, our chief administrative officer,
was again named to American Banker’s list of Most Powerful Women in Banking.
When devastating hurricanes struck Texas, Florida and Puerto Rico, our employees
and the Fifth Third Foundation stepped up to help friends, families, communities and
customers across the country. Donations toward relief efforts totaled almost $500,000.
In addition to monetary support and a match on employee and customer donations,
we provided short-term special assistance to customers in hurricane-affected areas in the
form of waived or refunded fees.
We were among the first banks to reopen, also dispatching mobile ATMs to stricken areas
to provide much-needed cash. We also deployed our financial empowerment mobiles, or
eBuses, across Florida to provide help with FEMA.
Our teams—many of whom also were impacted by the storms—delivered water, organized
food drives and delivered additional aid. Employee volunteer efforts and personal
commitments further extended the Bank’s reach after the crises. To lighten the load for
employees in the storms’ path, we made free concierge service available to them, as well
as enhanced employee assistance programs.
The pace at which business moves is faster than ever
before. However, one thing remains constant: the shared
expectation of our customers, shareholders and employees
that we always act with integrity. What hasn’t and won’t
change is our commitment to making responsible decisions
that are aligned with our Core Values.
THE COMPASS & OUR CORE VALUES
Our Core Values define how we act and interact with others
and are the heart of our culture. They guide us as we work
with customers and employees. In 2017, we launched the Fifth
Third Compass, a visual representation of the standards by
which our employees are expected to interact with each other
and our customers.
These are not just words, but behaviors that help guide us
toward our Vision to be the one bank people most value and
trust. In addition, our Code of Business Conduct & Ethics
has undergone an extensive review to ensure that we operate
at the highest level of ethical standards.
S
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W H Y W E D O WHAT WE DO
OUR VISION
WORK AS ONE
BANK
BUILD A STRONGER
COMMUNITY
W
H
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T
W
E
TAKE
ACCOUNTABILITY
PROVIDE BETTER
SOLUTIONS
I
&
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C
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W
W
O
H
BE RESPECTFUL
& INCLUSIVE
CUSTOMER AT THE
CENTER
STRIVE FOR
OPERATIONAL
EXCELLENCE
ACT WITH
INTEGRITY
CONTINUOUSLY
MANAGE RISK
D
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F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T / 7
8 / F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T
Building stronger
communities:
Along with shareholders, customers and employees,
the communities we serve also are important stakeholders
in the success of Fifth Third Bank.
The previous year marked the second year of our five-year, $30 billion
Community Commitment. Funds support low- and moderate-income
borrowers and communities in mortgage lending, small business lending,
community development lending and investments, and impact programming.
I am proud to share that we have delivered community support of nearly
$15 billion in our first two years, nearly 30 percent ahead of our goal.
Regulators recognized our commitment to improving the lives of
customers and the well-being of communities by upgrading our
Community Reinvestment Act rating to “outstanding.”
In closing, I would like to thank all of our employees for their hard work
and dedication. Their commitment is evident in our financial results, our
customer satisfaction scores, and our community outreach efforts.
Together, we are building a future that’s a Fifth Third better for our
shareholders, our customers, our communities and each other.
Thank you.
GREG D. CARMICHAEL
Chairman, President and Chief Executive Officer,
Fifth Third Bancorp
F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T / 9
Brand relaunch:
In 2017, we took our advertising and branding in a bold,
new direction. Through extensive research and analysis,
the Bank recognized that there was a tremendous opportunity
to differentiate itself clearly by leveraging its unique name,
refreshing its branding and disrupting the status quo in the
banking category.
The campaign’s platform—This is banking a Fifth Third better®—is grounded in the Bank’s reputation
for striving to go above and beyond to serve its customers and communities. The improper fraction
“5/3” translates to 166.7 percent, meaning Fifth Third goes the extra mile to make banking better
for customers in tangible ways.
To further capitalize on the tie to 5/3, the concept launched on May 3, or 5/3, when the Bank and
its employees celebrate Fifth Third Day every year. The launch began with a series of high-impact
TV commercials and digital ads, radio, social and experiential marketing activations across the Bank’s
10-state footprint.
To engage the community in the launch, Fifth Third celebrated over 100 babies born in the Greater
Cincinnati area on May 3 by gifting each of them $1,053. Parents were encouraged to start their child’s
first savings account or a 529 college savings plan account. The Bank gave families a new parent care
package, including gift cards to popular local merchants, a spa gift card for a stress-relieving massage
and some fun surprises for the baby, too, including a “Banker in Training” onesie or piggy bank. The
Bank partnered with seven health systems and hospitals to celebrate the new babies.
As the campaign continues to gain momentum, Fifth Third is showing consumers that the Bank is more
than just a number. Being a Fifth Third better is about our employees’ commitment to keep the
customer at the center of everything we do.
Leveraging our unique name as a strength is resonating with
customers. However, what’s most important is that our customers
truly experience how employees put 166.7 percent into everything
they do at every interaction, whether it’s in person, on the phone
or through our digital channels.
Matt Jauchius
Chief Marketing Officer
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A team of Fifth Third volunteers
helps fight hunger at Second
Helpings in Indianapolis on Fifth
Third Day.
A baby born on May 3 sports the
custom “Banker in Training” onesie
that was included in a special Fifth
Third care package distributed as
part of the brand launch.
Graham Rahal works with the kids
at Flanner House’s urban garden
on Fifth Third Day.
F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T / 1 1
Innovation:
BUY, PARTNER, BUILD: A FORMULA FOR GROWTH
INNOVATION IS IN FIFTH THIRD’S DNA
Fifth Third continues to build a competitive advantage through
digital transformation. Actions are driven by a unique formula
and strategy to buy, partner or build. To that end, Fifth Third
is embracing non-bank acquisitions, fintech relationships and
in-house innovation to fuel growth.
Through collaboration with a leading fintech venture capital firm QED Investors, Fifth Third
has access to thought leadership and first-look opportunities to invest in and/or partner with
emerging technology companies, creating a distinct competitive advantage.
Fifth Third became the first bank to join the Mastercard B2B Hub powered by AvidXchange,
a platform that converts payments into electronic transactions. With more than half of B2B
payments made via cash1, this relationship will bring efficiency to our clients’ ability to manage
their accounts payable.
A STRONG TRACK RECORD
FOR PARTNER-DRIVEN INNOVATION
C
V
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M
Y
A
P
PRE-2016
2016
Technology provider to merchants
offering POS financing for customers
Payment
processing and
technology
provider
Leader in integrated bill
payment, invoicing, and cash
flow management solutions
Leading provider of electronic
billing and payment solutions
Provider of payroll services
and HR management tools
Cloud-based payment,
invoice, and digital banking
solutions
1 2 / F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T
1 2016 AFP Electronic Payments Survey
FIFTH THIRD MOMENTUM™
After in-depth analysis to research
millennials’ needs and aspirations, Fifth
Third launched Fifth Third Momentum™,
an app that helps college graduates pay
off student loans faster.
Using the mobile app, customers link debit cards to their student
loan servicer and then choose to round their purchases up to
the next dollar or add a dollar to every purchase to help pay
down their loan. That is just one example of how we are thinking
differently about our customer base and the products they need
to achieve financial success.
Most active venture capital firm
exclusively focused on fintechs
Ohio fintech accelerator
Largest network of
nonprofit small business
lenders in the US
Online lender focused
on providing capital
to franchises
2017
2018+
Industry leader in automating
invoice and payment processes
Leader in cash management
and payment solutions across
the gaming industry
App-controlled
debit card for teens
(and parents)
Network offering P2P
payments services
Investment accounts and
debit cards customized
for seniors
F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T / 1 3
Innovation:
ONE67: A FIFTH THIRD BETTER®
1 4 / F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T
One of the newest additions to Fifth Third’s Cincinnati head-
quarters is the innovation center, ONE67, which plays off a Fifth
Third better®, or 166.7 percent. ONE67 is a digital and innovation
capability center, acting as a lighthouse for the company that
sparks excitement and innovative thinking. It has several
types of workspaces that enable employees to be creative and
productive, and to collaborate effectively.
The center has an open design, a gallery with movable walls to showcase work or open up to a space
big enough to hold more than 100 for a meeting. It features casual work places, small meeting rooms
and pod-like spaces. The area helps encourage the Agile work process, which brings all people
working on a project into one collaborative space. Employees are encouraged to scribble ideas and
notes on the walls with abundant erasable surfaces.
Re-engineering a workspace is a key enabler to transforming how employees work. Moving to
more open floor plans and collaborative work environments creates capacity and drives efficiencies.
It also supports customer-centricity and innovation.
The flexible collaboration space can be configured to create
smaller gallery spaces or opened up to accommodate more
than 100 people for larger meetings.
A glimpse at the Agile work process in action in one of the
ONE67 work rooms.
F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T / 1 5
2017 HIGHLIGHTS
TOTAL REVENUE
$2.5 billion
AVERAGE LOANS
$14.9 billion
AVERAGE CORE DEPOSITS
$55.5 billion
ONLINE BANKING CUSTOMERS
2 million
FULL-SERVICE BANKING CENTERS
1,154
Branch Banking:
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.
Fifth Third’s financial centers will continue to play an important role in the customer’s
banking journey. It’s where its customers meet the face of Fifth Third and interact with its
brand on a human level. The physical infrastructure remains important. However, the Bank
also provides customers with superior, integrated experiences across branch and mobile
banking channels. Fifth Third continues to expand its digital channel capabilities to
adapt to evolving customer preferences.
The Bank is also digitizing its branch operations as it moves toward a paperless
environment. This will be achieved through branch scanning, the use of electronic
signatures and driving more self-service transactions. This initiative also includes the
replacement of its branch teller software platform. This new platform will improve
the customer experience, mitigate compliance and operational risk through automation,
and ultimately improve the efficiency and speed of processing transactions. The Bank
expects to reduce its paper count by approximately 700 million pages a year.
Fifth Third joined the Zelle® network to offer customers a safe,
fast and simple person-to-person, or P2P, payment option.
The service is incorporated into Fifth Third’s award-winning
mobile app, giving customers across the country a hassle-free
way to pay people.
Fifth Third is one of the few U.S. banks to offer customers the ability to use the
five major forms of mobile payments. With these mobile wallets, customers have
the option to make credit and debit card payments via Apple Pay, Samsung Pay,
MasterPass, Android Pay or Microsoft Wallet.
1 6 / F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T
Fifth Third’s efforts to integrate digital
technology more effectively in this rapidly
changing environment will continue to create
significant shareholder value.
F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T / 1 7
F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T / 1 7
2017 HIGHLIGHTS
TOTAL REVENUE
$477 million
AVERAGE LOANS
$20.7 billion
MORTGAGE SERVICING PORTFOLIO
$76 billion
DEALER INDIRECT AUTO LENDING NETWORK
~6,000
Consumer Lending:
Consumers value the security of knowing they have
access to 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. We continue to evolve our
Consumer Lending solutions to meet new challenges
and changing needs.
AUTO
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. 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 more than 40-state indirect auto footprint.
MORTGAGE
The mortgage business is one of Fifth Third’s most cyclical. Fifth Third managed well
through the most recent cycle due in part to 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. Mortgages often open the door to deeper, more
profitable relationships that holistically serve the needs of customers.
SMALL BUSINESS
To drive profitable growth and improve customer experience, Fifth Third recently
introduced a small business line of credit that provides access to funds from a credit card
to extend working capital—and entered into strategic relationships with ApplePie Capital
and GreenSky.
TURNING LOANS INTO LASTING RELATIONSHIPS
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. We work proactively with borrowers to explore options that make sense within
their current financial situation. We are committed to better listening and better problem-
solving. We want to create lasting value for our customers well beyond the life of an
initial loan.
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CUSTOMER AT THE CENTER
Meet Alaysyah.
Alaysyah Yahyisrael. wanted more space for her
family and a yard for their dog.
She wanted to maintain a manageable monthly
mortgage payment and to stay near the
neighborhood where she rented an apartment.
The location was close to her 3-year-old son’s
day care and a short commute to her job. She
had family and friends nearby, too.
She believed that a down payment for a house
was out of reach at age 24.
“The houses all seemed like too much—too much
money, too much of a down payment, too much
in taxes,” said Alaysyah. “It seemed like it wasn’t
going to work out.”
After meeting with her real estate agent and
her Fifth Third mortgage loan originator, things
began to change. Alaysyah qualified for Fifth
Third’s Down Payment Assistance program
offering 3 percent of the purchase price in
down payment assistance, up to $3,600, for
low-income borrowers or those purchasing in
a designated low-income area and financed
through Fifth Third.*
Alaysyah and her family moved into a four-
bedroom, two-bathroom, 2,246-square-foot
home in Cincinnati, Ohio. She brought less than
$200 to the closing.
“I love it. I can’t believe it,”
Alaysyah said, as she sat on the
front porch blowing bubbles
with her family. “It’s more than
I could have dreamed.”
F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T / 1 9
* To be eligible for the down payment assistance of 3% of the home’s purchase price, up to $3,600, the property must be in one of the following eligible states: MI, IN, IL, KY, TN, OH, WV, NC, GA, FL and either located in a low Income Census Tract or borrower must meet the low income limit threshold based on the qualifying income per FFIEC website. Down payment assistance may be taxable as income and reported to the IRS. Consult your tax advisor. Not available with all loan products.
2017 HIGHLIGHTS
TOTAL REVENUE
$2.5 billion
AVERAGE LOANS
$53.7 billion
AVERAGE CORE DEPOSITS
$34.3 billion
COMMERCIAL BANKING CLIENTS
~14,000
Commercial Banking:
Fifth Third’s Commercial Bank is focused on creating
strategic relationships with business, government and
professional customers through customized financial
solutions.
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 offerings of Fifth Third’s Commercial Bank span:
• Traditional lending and depository products.
• Global cash management.
• Foreign exchange and international trade finance.
• Derivatives and capital market services.
• Asset-based lending.
• Leveraged lending.
• Real estate finance.
• Public finance.
• Commercial leasing and lending.
• 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.
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 get
access to the working capital needed to meet their goals.
The Bank continues to focus on expanding product capabilities and industry
expertise, utilizing technology and analytical advancements, and leveraging the One
Bank delivery model to create strategic relationships and generate higher returns.
2 0 / F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T
CUSTOMER AT THE CENTER
Meet Susan.
Susan came to Fifth Third Bank over 20 years ago as a
business owner of a successful semi-truck after-market parts
and accessories company.
Over the years, she developed a close relation-
ship with her Fifth Third banker. Together they
navigated through a variety of transactions
together, including financing a facility expansion
in the early 2000s.
“Part of finishing well is not to leave a mess for
your family. Fifth Third has been instrumental
in helping me make sure that my estate plan is
fair for my children and to make sure that my
charitable inclinations are followed,” Susan said.
In 2017, Susan decided to sell the business.
Through Fifth Third’s One Bank partnership,
her banker introduced her to Mike Burr, senior
managing director and head of mergers and
acquisitions. Together, the team advised Susan
on the options for her business. Mike’s focus
was to listen and help Susan achieve her
strategic purposes and liquidity needs.
The team helped her find a buyer within
five months, an almost unheard of pace for
mergers and acquisitions.
It didn’t end there. Susan’s banker introduced
her to a wealth management advisor to help her
prepare her finances for retirement, set goals,
diversify her investments and make estate-
planning decisions.
Today, Susan enjoys retirement. She’s
rediscovered a joy of quilting and volunteers
with her church for the construction of a
new facility. Most importantly, every Sunday,
Susan is able to be the glue for her children,
grandchildren—and now great-grandchildren—
by welcoming them all home for a family meal.
As Susan puts it, “I’ve found
now that in retirement the
urgent no longer gets in the
way of the important.”
F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T / 2 1
2017 HIGHLIGHTS
TOTAL REVENUE
$573 million
AVERAGE LOANS
$3.3 billion
AVERAGE CORE DEPOSITS
$8.8 billion
ASSETS UNDER MANAGEMENT*
$37 billion
ASSETS UNDER CARE*
$362 billion
Wealth & Asset
Management:
Wealth & Asset Management is comprised of
businesses tailored to the unique needs of its customers.
Fifth Third puts more than 100 years of experience to work as trusted advisors to help
individuals, families across generations, 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. In 2017, the Private Bank was recognized by Global
Finance as the Best Private Bank in the Midwest.
Fifth Third Securities helps individuals and families at every stage of their
lives, offering retirement, investment and education planning, managed
money, annuities and transactional brokerage services.
Fifth Third Institutional Services provides consulting, investment and
record keeping services for corporations, financial institutions, foundations,
endowments and not-for-profit organizations.
Fifth Third Insurance Agency comprises acquisitions made in 2017 of
McGraw Insurance and Epic Insurance Solutions & Integrity HR. The insurance
business is a growing initiative to help clients with their financial and risk
management needs.
ClearArc Capital, Inc. provides asset management services
to institutional clients.
2 2 / F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T
* Assets under management and assets under care include trust and brokerage assets.
Fifth Third’s Wealth & Asset Management business has grown through successful acquisitions and
enduring relationships with clients. The team understands that the business is about the right talent
and expertise to understand where clients stand today, and where they want to go. As a top priority
to build upon the group’s strong talent, in the last year, Fifth Third added teams in North Carolina,
Kentucky, Georgia and East Michigan.
By providing advice, guidance and platforms that are both thoughtful and holistic, and by focusing
on the needs of clients, Wealth & Asset Management is poised to continue to deliver growth to Fifth
Third shareholders. The businesses provide stable and well-diversified revenue streams, leveraging
synergies through One Bank partnerships with other lines of business.
F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T / 2 3
Corporate Social
Responsibility:
INCLUSION & DIVERSITY
This past year, Fifth Third made
continuing progress in the area of
inclusion and diversity—from the
$30 billion Community Commitment
to Chairman, President & CEO Greg
Carmichael’s signing the CEO Action
for Diversity & Inclusion™.
FIFTH THIRD RECEIVED A NUMBER
OF ACCOLADES IN 2017, INCLUDING:
• A score of 100 percent on the
Corporate Equality Index (CEI) from
the Human Rights Campaign Foundation
for the third consecutive year.
• One of 33 companies to be included
on the inaugural Diversity Best
Practices Inclusion Index.
• Inclusion in the first sector-neutral
Bloomberg Gender Equality Index.
• The Disability Matters “Employer
of Choice” award.
• Recognition for its Project SEARCH
programs in Cincinnati, Madisonville
and Grand Rapids.
• Women’s Business Enterprise National
Council’s America’s Top Corporations
for Women’s Business Enterprises.
• Recognition by Women’s Forum
of New York for its gender diversity:
33 percent of Board members are
women, while people of color and
women represent 42 percent of
Board members.
2 4 / F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T
ENVIRONMENTAL
SUSTAINABILITY
In 2017, Fifth Third announced five
bold environmental sustainability
goals relative to a 2014 baseline. These
operational goals will promote a
healthy and sustainable environ ment
and help protect the planet for future
generations.
FIFTH THIRD IS COMMITTED TO THE
FOLLOWING GOALS, TO BE ACHIEVED
BY 2022:
• Reduce energy use by 25 percent.
• Reduce greenhouse gas emissions
by 25 percent.
• Reduce landfill waste by 20 percent.
• Reduce water usage by 20 percent.
• Purchase 100 percent renewable power.
F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T / 2 5
2017 HIGHLIGHTS
DONATION TO UNITED WAY
$7.1 million*
MEALS PROVIDED TO THE HUNGRY
1 million meals
AID FOR HURRICANE DISASTER RELIEF EFFORTS
More than $500,000
Community
Commitment:
2017 was a milestone year for Fifth Third in terms of
its commitment to improve lives and the well-being
of its communities.
In keeping customers and communities at the center of all our work, Fifth Third saw its
efforts result in a solid second year of the $30 billion Community Commitment and an
upgrade of its Community Reinvestment Act rating to “outstanding.”
Fifth Third reported a successful second year of its five-year, $30 billion Community
Commitment made in 2016 to lend or invest in low- and moderate-income borrowers and in
LMI communities through the year 2020. Fifth Third has delivered nearly
$15 billion in the first two years, nearly 30 percent ahead of goal.
• Nearly 20,000 customers have received mortgage loans since January 2017, and
many took advantage of our new assistance program that reduces the burden of
a down payment by providing up to $3,600 for low-income families or those purchasing
in low-income neighborhoods.
• Local business communities were also strengthened over the last two years, as
entrepreneurs turned to Fifth Third for 13,000 small business loans worth $1.8 billion.
In 2017, Fifth Third created a new small business community lender role and hired seven
diverse bankers to focus on low- and moderate-income markets.
• A $500,000 grant was awarded to Accion to support its digital platform and small
business loan fund, directly impacting the Ohio, Illinois, Michigan, Indiana and Florida
markets. This collaboration provides access to capital for over 500 entrepreneurs and
leverages $5 million in capital, which supports nearly 1,700 jobs.
• Fifth Third delivered more than $2 billion in community development loans and
invested $209 million through the Fifth Third Community Development Corporation.
One example is a $5 million investment made with IFF, a mission-driven lender and real
estate developer in Chicago, which creates opportunities for low-income communities
throughout the Midwest.
• The Fifth Third Foundation launched the Strengthening Our Communities (SOC) Fund
that awards organizations grants for affordable housing, small business micro lending
and technical assistance, and financial empowerment programs with a focus on workforce
development. The Foundation awarded $2.5 million in SOC grants in 2017.
2 6 / F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T
*Includes employee and corporate donations.
F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T / 2 7
Company facts:
FIFTH THIRD BANCORP
Fifth Third Bancorp is a diversified financial services company headquartered
in Cincinnati, Ohio. As of December 31, 2017, the Company had:
• $142 billion in assets.
• 1,154 full-service banking centers.
• More than 54,000 fee-free ATMs.
• 4 business units: Branch Banking, Commercial Banking,
Consumer Lending and Wealth & Asset Management.
• 8.6% interest in Vantiv Holding, LLC.
• $362 billion in assets under care.*
• $37 billion in assets under management.*
* Assets under management and assets under care include trust and brokerage assets.
FIVE-YEAR PERFORMANCE COMPARISON:
TOTAL
PAYOUT RATIO 1
0
0
6
9
.
5
4
6
7
.
0
4
7
7
.
9
5
.
1
7
.
2
3
6
9
AVERAGE
ASSETS
1
9
.
1
3
1
.
8
0
0
4
1
.
7
2
2
4
1
.
4
6
0
4
1
.
0
7
3
2
1
B
B
0
0
5
4
1
$
.
:
E
L
A
C
S
COMMON SHARES
OUTSTANDING
5
5
8
4
2
8
5
8
7
0
5
7
4
9
6
M
M
0
0
9
:
E
L
A
C
S
2013
2014 2015 2016 2017
2013
2014 2015 2016 2017
2013
2014 2015 2016 2017
BOOK VALUE
PER SHARE
7
6
.
1
2
2
8
9
1
.
8
4
8
1
.
5
3
7
1
.
5
8
5
1
.
NPA
RATIO
TOTAL NET
CHARGE-OFFS
0
1
.
1
%
0
2
.
:
E
L
A
C
S
2
8
0
.
0
8
0
.
0
7
0
.
3
5
0
.
0
0
.
1
:
E
L
A
C
S
4
6
0
.
8
5
0
.
8
4
0
.
9
3
0
.
2
3
0
.
2013
2014 2015 2016 2017
2013
2014 2015 2016 2017
2013
2014 2015 2016 2017
%
0
0
1
:
E
L
A
C
S
.
0
0
2
2
$
:
E
L
A
C
S
1 Total payout ratio calculation: common stock dividends plus shares acquired for treasury divided by net income available to common shareholders.
2017 DETAILED FINANCIALS
2 8 / F I F T H T H I R D B A N C O R P 2 0 1 7 A N N U A L R E P O R T
2017 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, Dividends and Other Capital Actions
Investment Securities
Loans and Leases
Credit Quality and the Allowance for Loan and Lease Losses
Bank Premises and Equipment
Operating Lease Equipment
Goodwill
Intangible Assets
Variable Interest Entities
Sales of Receivables and Servicing Rights
Derivative Financial Instruments
Other Assets
Short-Term Borrowings
Long-Term Debt
Annual Report on Form 10-K
Consolidated Ten Year Comparison
Directors and Officers
Corporate Information
Income Taxes
Stock-Based Compensation
97 Commitments, Contingent Liabilities and Guarantees
107 Legal and Regulatory Proceedings
107 Related Party Transactions
109
111 Retirement and Benefit Plans
113 Accumulated Other Comprehensive Income
121 Common, Preferred and Treasury Stock
121
122 Other Noninterest Income and Other Noninterest Expense
122 Earnings Per Share
123 Fair Value Measurements
126 Regulatory Capital Requirements and Capital Ratios
128 Parent Company Financial Statements
133 Business Segments
134
Subsequent Events
135
179
206
207
30
31
32
35
37
37
40
48
56
58
64
65
79
83
85
85
86
87
88
89
90
92
93
94
95
96
138
142
144
147
149
153
155
156
160
161
162
173
174
176
178
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) deteriorating credit quality; (2) loan
concentration by location or industry of borrowers or collateral; (3) problems encountered by other financial institutions; (4) inadequate sources of funding or liquidity; (5) unfavorable actions of rating agencies; (6)
inability to maintain or grow deposits; (7) limitations on the ability to receive dividends from subsidiaries; (8) cyber-security risks; (9) Fifth Third’s ability to secure confidential information and deliver products and
services through the use of computer systems and telecommunications networks; (10) failures by third-party service providers; (11) inability to manage strategic initiatives and/or organizational changes; (12) inability
to implement technology system enhancements; (13) failure of internal controls and other risk management systems; (14) losses related to fraud, theft or violence; (15) inability to attract and retain skilled personnel;
(16) adverse impacts of government regulation; (17) governmental or regulatory changes or other actions; (18) failures to meet applicable capital requirements; (19) regulatory objections to Fifth Third’s capital plan;
(20) regulation of Fifth Third’s derivatives activities; (21) regulatory objections to Fifth Third’s resolution plan; (22) deposit insurance premiums; (23) assessments for the orderly liquidation fund; (24) changes in
LIBOR; (25) weakness in the national or local economies; (26) global political and economic uncertainty or negative actions; (27) changes in interest rates; (28) changes and trends in capital markets; (29) fluctuation
of Fifth Third’s stock price; (30) volatility in mortgage banking revenue; (31) litigation, investigations, and enforcement proceedings by governmental authorities; (32) breaches of contractual covenants,
representations and warranties; (33) competition and changes in the financial services industry; (34) changing retail distribution strategies, customer preferences and behavior; (35) difficulties in identifying, acquiring
or integrating suitable strategic partnerships, investments or acquisitions; (36) potential dilution from future acquisitions; (37) loss of income and/or difficulties encountered in the sale and separation of businesses,
investments or other assets; (38) results of Vantiv Holding, LLC or other investments or acquired entities; (39) difficulties from or changes in Fifth Third’s investment in, relationship with, and nature of the
operations of Vantiv Holding, LLC; (40) changes in accounting standards or interpretation or declines in the value of Fifth Third’s goodwill or other intangible assets; (41) inaccuracies or other failures from the use
of models; (42) effects of critical accounting policies and judgments or the use of inaccurate estimates; (43) weather related events or other natural disasters; and (44) the impact of reputational risk created by these
or other developments on such matters as business generation and retention, funding and liquidity.
GLOSSARY OF ABBREVIATIONS AND ACRONYMS
Fifth Third Bancorp provides the following list of abbreviations and acronyms as a tool for the reader that are used in Management’s Discussion
and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and the Notes to Consolidated Financial
Statements.
ALCO: Asset Liability Management Committee
ALLL: Allowance for Loan and Lease Losses
AOCI: Accumulated Other Comprehensive Income
APR: Annual Percentage Rate
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
CFPB: United States Consumer Financial Protection Bureau
C&I: Commercial and Industrial
CRA: Community Reinvestment Act
DCF: Discounted Cash Flow
DFA: Dodd-Frank Wall Street Reform and Consumer Protection Act
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
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
FICA: Federal Insurance Contributions Act
FICO: Fair Isaac Corporation (credit rating)
FINRA: Financial Industry Regulatory Authority
FNMA: Federal National Mortgage Association
FRB: Federal Reserve Bank
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
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
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
PSA: Performance Share Award
RCC: Risk Compliance Committee
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
TCJA: Tax Cuts and Jobs Act
TDR: Troubled Debt Restructuring
TRA: Tax Receivable Agreement
TruPS: Trust Preferred Securities
U.S.: United States of America
U.S. GAAP: United States Generally Accepted Accounting
Principles
VA: Department of Veterans Affairs
VIE: Variable Interest Entity
VRDN: Variable Rate Demand Note
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.
$
$
2017
2013
2015
2016
2014
2.05
2.02
0.47
15.85
21.03
1.95
1.93
0.53
19.82
26.97
2.88
2.83
0.60
21.67
30.34
2.03
2.01
0.52
18.48
20.10
1.68
1.66
0.51
17.35
20.38
3,615
3,640
2,696
6,336
343
3,903
1,564
1,489
3,798
3,824
3,224
7,048
261
3,990
2,194
2,119
3,533
3,554
3,003
6,557
396
3,775
1,712
1,637
3,579
3,600
2,473
6,073
315
3,709
1,481
1,414
3,561
3,581
3,227
6,808
229
3,961
1,836
1,799
1.56%
13.9
16.5
20.8
11.80
8.94
3.03
2.76
56.6
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)
Net interest margin(a)(b)
Net interest rate spread(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
Modified LCR
(a) Amounts presented on an FTE basis. The FTE adjustment for the years ended December 31, 2017, 2016, 2015, 2014 and 2013 was $26, $25, $21, $21 and $20, 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
assets. The resulting weighted values are added together resulting in the total risk-weighted assets. Under the banking agencies’ Final Rule published in November 2017 pertaining to certain
regulatory capital items for banks subject to the standardized approach, the Bancorp is no longer subject to certain transition provisions and phase-outs beyond 2017.
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.
Basel III Transitional(g)
10.61%
11.74
15.16
10.01
91,127
24,866
131,909
89,715
93,477
19,154
15,290
89,093
18,861
123,704
82,915
86,675
17,769
14,302
93,339
30,245
140,078
95,244
99,295
20,210
15,865
94,320
31,965
142,266
95,371
99,381
21,813
16,597
1.12
10.0
12.2
30.3
11.59
8.43
3.10
2.94
61.1
1.48
13.1
16.0
22.9
11.56
8.63
3.32
3.15
58.2
92,731
33,562
140,636
96,052
99,823
20,360
16,590
1.22
11.3
13.5
25.6
11.33
8.59
2.88
2.69
57.6
1.10
9.8
11.6
27.2
11.67
8.87
2.88
2.66
61.6
-
10.83
14.33
9.66
-
-
10.43
14.17
9.73
-
9.82
10.93
14.13
9.54
-
298
0.32%
1.30
1.48
10.39
11.50
15.02
9.90
128
575
0.64
1.47
1.62
446
0.48
1.37
1.52
362
0.39
1.36
1.54
501
0.58
1.79
1.97
Basel I(h)
129
0.82
0.53
0.80
0.70
1.10
$
$
(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.
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, net interest rate
spread 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,
2017, net interest income on an FTE basis and noninterest income
provided 54% and 46% of total revenue, respectively. The Bancorp
derives the majority of its revenues within the U.S. from customers
domiciled in the U.S. 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
identification,
section of MD&A,
measurement, monitoring, control and reporting are important to
the management of risk and to the financial performance and capital
strength of the Bancorp.
risk
Net interest income is the difference between interest income
earned on assets such as loans, leases and securities, and interest
expense incurred on liabilities such as deposits, other short-term
borrowings and long-term debt. Net interest income is affected by
the general level of interest rates, the relative level of short-term and
long-term interest rates, changes in interest rates and changes in the
amount and composition of interest-earning assets and interest-
bearing liabilities. Generally, the rates of interest the Bancorp earns
on its assets and pays on its liabilities are established for a period of
time. The change in market interest rates over time exposes the
Bancorp to interest rate risk through potential adverse changes to
net interest income and financial position. The Bancorp manages
this risk by continually analyzing and adjusting the composition of
its assets and liabilities based on their payment streams and interest
rates, the timing of their maturities and their sensitivity to changes
in market interest rates. Additionally, in the ordinary course of
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 loss 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.
Noninterest income is derived from service charges on
deposits, wealth and asset management revenue, corporate banking
revenue, card and processing revenue, mortgage banking net
income.
revenue, net securities gains and other noninterest
Noninterest expense includes personnel costs, net occupancy
32 Fifth Third Bancorp
expense, technology and communication costs, card and processing
expense, equipment expense and other noninterest expense.
The Tax Cuts and Jobs Act
On December 22, 2017,
the U.S. government enacted
comprehensive tax legislation known as the TCJA. The TCJA makes
broad and complex changes to the U.S. tax code including, but not
limited to, reducing the top federal statutory corporate tax rate from
35 percent to 21 percent effective for tax years beginning after
December 31, 2017. U.S. GAAP requires the Bancorp to recognize
the tax effects of changes in tax laws and rates on its deferred taxes
in the period in which the law is enacted. As a result, for the year
ended December 31, 2017, the Bancorp remeasured its deferred tax
assets and liabilities and recognized an income tax benefit of
approximately $220 million. Additionally, as a result of the TCJA,
the Bancorp recognized a $27 million decrease to interest income
related to the tax treatment of leveraged leases and recognized $68
million of impairment on certain affordable housing investments in
other noninterest expense. As a result of the TCJA, during the
fourth quarter of 2017 the Bancorp decided to make a $15 million
contribution to the Fifth Third Foundation recognized within other
noninterest expense and also paid $15 million in one-time employee
bonuses.
Vantiv, Inc. and Vantiv Holding, LLC Transactions
During the third quarter of 2017, the Bancorp and Fifth Third Bank
entered into a transaction agreement with Vantiv, Inc. and Vantiv
Holding, LLC under which Fifth Third Bank agreed to exercise its
right to exchange 19.79 million of its Class B Units in Vantiv
Holding, LLC for 19.79 million shares of Vantiv, Inc.’s Class A
Common Stock and Vantiv, Inc. agreed to repurchase the newly
issued shares of Class A Common Stock upon issue directly from
Fifth Third Bank at a price of $64.04 per share, the closing share
price of the Class A Common Stock on the New York Stock
Exchange on August 4, 2017. As a result of these transactions, the
Bancorp recognized a gain of approximately $1.0 billion during the
third quarter of 2017.
As of December 31, 2017, the Bancorp continued to hold
approximately 15 million Class B Units of Vantiv Holding, LLC
which may be exchanged for Class A Common Stock of Vantiv,
Inc. (now Worldpay, Inc.), on a one-for-one basis or at Worldpay,
Inc.’s option for cash which represented approximately 8.6%
ownership of Vantiv Holding, LLC as of December 31, 2017. In
addition, the Bancorp holds approximately 15 million Class B
Common Shares of Worldpay, Inc., which give the Bancorp voting
rights, but no economic interest in Worldpay, Inc. These securities
are subject to certain terms and restrictions.
to
the Bancorp expects
On January 16, 2018, Vantiv, Inc. completed its previously
announced acquisition of Worldpay Group plc. with the resulting
combined company named Worldpay, Inc. As a result of this
transaction,
recognize a gain of
approximately $415 million in other noninterest income in the
Bancorp’s first quarter of 2018 Quarterly Report on Form 10-Q for
the dilution in its ownership interest in Vantiv Holding, LLC from
approximately 8.6%
to approximately 4.9%. The Bancorp’s
remaining interest in Vantiv Holding, LLC continues to be
accounted for as an equity method investment given the nature of
Vantiv Holding, LLC’s structure as a limited liability company and
contractual arrangements between Vantiv Holding, LLC and the
Bancorp. For more information on Worldpay, Inc., formerly Vantiv,
Inc., and Vantiv Holding, LLC transactions, refer to Note 19 and
Note 31 of the Notes to Consolidated Financial Statements.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NorthStar Strategy
In the third quarter of 2016, the Bancorp launched the NorthStar
Strategy, a three-year plan designed to help deliver strong, consistent
returns through longer term economic cycles. Underpinning the
strategy is the Bancorp’s goal of striving to be the One Bank people
most value and trust.
The Bancorp has implemented several initiatives to assist in
achieving these goals, including the following: our partnership with
fintech companies, 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.
The Bancorp is focused on:
• Building a differentiated brand and corporate reputation
by improving the customer experience and increasing
brand equity.
• Growing profitable and long-term relationships with
•
customers.
Leveraging analytics and technology to help drive further
efficiency improvements, revenue growth and improved
profitability.
• Generating an annualized return on average tangible
common equity (non-GAAP) at the upper end of a range
of 14% to 16%, a return on average assets at the mid to
upper end of a range of 1.35% to 1.45% and an efficiency
ratio below 60% by the end of 2019.
• Achieving risk and operational excellence.
Accelerated Share Repurchase Transactions
During the years ended December 31, 2017 and 2016, 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, 2017 and 2016, refer to Table 2. For further information on a
subsequent event related to an accelerated share repurchase
transaction, refer to Note 31 of the Notes to Consolidated Financial
Statements.
term of
the
TABLE 2: SUMMARY OF ACCELERATED SHARE REPURCHASE TRANSACTIONS
Shares Repurchased on
Repurchase Date
Amount ($ in millions)
Repurchase Date
December 14, 2015
March 4, 2016
August 5, 2016
December 20, 2016
May 1, 2017
August 17, 2017
December 19, 2017
(a) The settlement of the transaction is expected to occur on or before March 19, 2018.
215
240
240
155
342
990
273
9,248,482
12,623,762
10,979,548
4,843,750
11,641,971
31,540,480
7,727,273
Shares Received from
Forward Contract Settlement
1,782,477
1,868,379
1,099,205
1,044,362
2,248,250
4,291,170
(a)
Total Shares
Repurchased
Settlement Date
January 14, 2016
11,030,959
April 11, 2016
14,492,141
November 7, 2016
12,078,753
February 6, 2017
5,888,112
13,890,221
July 31, 2017
35,831,650 December 18, 2017
(a)
(a)
Senior Notes Offerings
On June 15, 2017, the Bancorp issued and sold $700 million of
senior notes to third-party investors. The senior notes bear a fixed-
rate of interest of 2.60% 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 June 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.
Automobile Loan Securitization
In a securitization transaction that occurred in September of 2017,
the Bancorp transferred an aggregate amount of $1.1 billion in
consumer automobile loans to a bankruptcy remote trust which was
deemed to be a VIE. This trust then subsequently
issued
approximately $1.0 billion of asset-backed notes, of which
approximately $261 million were retained by the Bancorp, resulting
in approximately $747 million of outstanding notes included in
long-term debt in the Consolidated Balance Sheets as of December
31, 2017. Third-party holders of this debt do not have recourse to
the general assets of the Bancorp. For additional information on this
automobile loan securitization, refer to Note 11 and Note 16 of the
Notes to Consolidated Financial Statements.
On October 30, 2017, the Bank issued and sold, under its bank
notes program, $1.1 billion in aggregate principal amount of
unsecured senior bank notes due on October 30, 2020. The bank
notes consisted of $750 million of 2.20% senior fixed-rate notes and
$300 million of senior floating-rate notes at three-month LIBOR
plus 25 bps. The Bancorp entered into an interest rate swap to
convert the fixed-rate notes to a floating-rate, which resulted in an
effective interest rate of three-month LIBOR plus 24 bps. These
bank notes will be redeemable by the Bank, in whole or in part, on
or after the date that is 30 days prior to the maturity date at a
redemption price equal to 100% of the principal amount plus
accrued and unpaid interest up to, but excluding, the redemption
date. For additional information on these senior notes offerings,
refer to Note 16 of the Notes to Consolidated Financial Statements.
Legislative and Regulatory Developments
The FRB conducted a regularly scheduled examination covering
2014 through 2016 to determine the Bank’s compliance with the
CRA. This CRA examination resulted in a change in rating from
“Needs to Improve” to “Outstanding”. For further information,
refer to the Regulation and Supervision subsection of Part I, Item 1
of the Annual Report on Form 10-K.
33 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
TABLE 3: CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ in millions, except per share data)
2016
Interest income (FTE)(a)
4,218
Interest expense
578
Net Interest Income (FTE)(a)
3,640
Provision for loan and lease losses
343
Net Interest Income After Provision for Loan and Lease Losses (FTE)(a)
3,297
Noninterest income
2,696
Noninterest expense
3,903
Income Before Income Taxes (FTE)(a)
2,090
Fully taxable equivalent adjustment
25
Applicable income tax expense
505
Net Income
1,560
Less: Net income attributable to noncontrolling interests
(4)
Net Income Attributable to Bancorp
1,564
Dividends on preferred stock
75
Net Income Available to Common Shareholders
1,489
Earnings per share - basic
1.95
Earnings per share - diluted
1.93
Cash dividends declared per common share
0.53
(a) These are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.
2017
4,515
691
3,824
261
3,563
3,224
3,990
2,797
26
577
2,194
-
2,194
75
2,119
2.88
2.83
0.60
$
$
$
$
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
Earnings Summary
The Bancorp’s net income available to common shareholders for
the year ended December 31, 2017 was $2.1 billion, or $2.83 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, 2016 was $1.5 billion,
or $1.93 per diluted share, which was net of $75 million in preferred
stock dividends.
Net interest income on an FTE basis (non-GAAP) was $3.8
billion and $3.6 billion for the years ended December 31, 2017 and
2016, respectively. Net interest income was positively impacted by
an increase in yields on average loans and leases, an increase in
average taxable securities and a decrease in average long-term debt
for the year ended December 31, 2017 compared to the year ended
December 31, 2016. Additionally, net interest income was positively
impacted by the decisions of the Federal Open Market Committee
to raise the target range of the federal funds rate 25 bps in
December 2016, March 2017, June 2017 and December 2017. These
positive impacts were partially offset by a decrease in average loans
and leases and increases in the rates paid on average other short-
term borrowings, average long-term debt and average interest-
bearing core deposits during the year ended December 31, 2017.
Net interest margin on an FTE basis (non-GAAP) was 3.03% and
2.88% for the years ended December 31, 2017 and 2016,
respectively.
Noninterest income increased $528 million for the year ended
December 31, 2017 compared to the year ended December 31, 2016
primarily due to an increase in other noninterest income, partially
offset by decreases in corporate banking revenue and mortgage
banking net revenue. Other noninterest income increased $669
million from the year ended December 31, 2016 primarily due to the
gain on sale of Vantiv, Inc. shares, an increase in private equity
investment income and the impact of the net losses on disposition
and impairment of bank premises and equipment during the year
ended December 31, 2016. These benefits were partially offset by
the impact of certain transactions that occurred during the year
ended December 31, 2016 which included the impact of income
from the TRA transactions associated with Vantiv, Inc., positive
valuation adjustments and the gain on sale of the warrant associated
with Vantiv Holding, LLC and gains on the sales of certain retail
branch operations. The year ended December 31, 2017 also
included an increase in the loss on the swap associated with the sale
34 Fifth Third Bancorp
of Visa, Inc. Class B Shares and a reduction in equity method
income from the Bancorp’s interest in Vantiv Holding, LLC.
Corporate banking revenue decreased $79 million from the year
ended December 31, 2016 primarily due to decreases in lease
remarketing fees, foreign exchange fees and letter of credit fees.
Mortgage banking net revenue decreased $61 million from the year
ended December 31 2016 primarily due to a decrease in origination
fees and gains on loan sales.
Noninterest expense increased $87 million for the year ended
December 31, 2017 compared to the year ended December 31, 2016
primarily due to increases in other noninterest expense and
personnel costs. Other noninterest expense increased $46 million
for the year ended December 31, 2017 compared to the year ended
December 31, 2016 primarily due to increases in the impairment on
affordable housing investments, professional service fees and
marketing expense, partially offset by decreases in the provision for
the reserve for unfunded commitments, losses and adjustments and
loan and lease expense. Personnel costs increased $38 million for
the year ended December 31, 2017 compared to the year ended
December 31, 2016 driven by increases in base compensation,
medical and FICA expenses and long-term incentive compensation,
partially offset by a decrease in severance costs related to the
Bancorp’s voluntary early retirement program in 2016. The increase
in personnel costs also included the impact of one-time employee
bonuses that the Bancorp paid as a result of benefits received from
the TCJA.
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 $261 million and $343
million for the years ended December 31, 2017 and 2016,
respectively. Net losses charged-off as a percent of average portfolio
loans and leases decreased to 0.32% during the year ended
December 31, 2017 compared to 0.39% during the year ended
December 31, 2016. At December 31, 2017, nonperforming
portfolio assets as a percent of portfolio loans and leases and
OREO decreased to 0.53% compared to 0.80% at December 31,
2016. For further discussion on credit quality, refer to the Credit
Risk Management subsection of the Risk Management section of
MD&A.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Summary
The Bancorp’s capital ratios exceed the “well-capitalized” guidelines
as defined by the PCA requirements of the U.S. banking agencies.
As of December 31, 2017, as calculated under the Basel III
standardized approach, the CET1 capital ratio was 10.61%, the Tier
NON-GAAP FINANCIAL MEASURES
The following are non-GAAP measures which provide useful
insight to the reader of the Consolidated Financial Statements but
should be supplemental to primary U.S. GAAP measures and
should not be read in isolation or relied upon as a substitute for the
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
I risk-based capital ratio was 11.74%, the Total risk-based capital
ratio was 15.16% and the Tier I leverage ratio was 10.01%.
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, interest income on an FTE basis, net
interest margin, net interest rate spread and the efficiency ratio to U.S. GAAP:
TABLE 4: NON-GAAP FINANCIAL MEASURES - FINANCIAL MEASURES AND RATIOS ON AN FTE BASIS
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)
2017
3,798
26
3,824
$
$
Interest income (U.S. GAAP)
Add: FTE adjustment
Interest income on an FTE basis (2)
Interest expense (3)
Noninterest income (4)
Noninterest expense (5)
Average interest-earning assets (6)
Average interest-bearing liabilities (7)
Ratios:
Net interest margin on an FTE basis (1) / (6)
Net interest rate spread on an FTE basis (2) / (6) - (3) / (7)
Efficiency ratio on an FTE basis (5) / (1) + (4)
$
$
$
4,489
26
4,515
691
3,224
3,990
126,293
85,090
3.03 %
2.76
56.6
2016
2015
3,615
25
3,640
4,193
25
4,218
578
2,696
3,903
126,285
85,332
2.88
2.66
61.6
3,533
21
3,554
4,028
21
4,049
495
3,003
3,775
123,584
84,342
2.88
2.69
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
2017
2,771
26
2,797
$
$
2016
2015
2,065
25
2,090
2,365
21
2,386
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.
35 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 6: 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)
$
$
2017
2016
2,119
1
2,120
16,590
(1,331)
(2,425)
(18)
12,816
1,489
1
1,490
16,597
(1,331)
(2,416)
(10)
12,840
16.5 %
11.6
$
$
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. The Bancorp encourages readers to
consider its Consolidated Financial Statements in their entirety and
not to rely on any single financial measure.
2017
2016
$
$
$
$
16,365
(1,331)
(2,445)
(27)
(73)
12,489
1,331
13,820
142,193
(2,445)
(27)
(92)
139,629
16,205
(1,331)
(2,416)
(10)
(59)
12,389
1,331
13,720
142,177
(2,416)
(10)
(91)
139,660
9.90 %
8.94
9.82
8.87
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)
The Bancorp considers various measures when evaluating capital
utilization and adequacy, including the tangible equity ratio and
tangible common equity ratio, in addition to capital ratios defined by
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
The following table reconciles non-GAAP capital ratios to U.S. GAAP:
TABLE 7: 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
AOCI
Tangible common equity, excluding unrealized gains / losses (1)
Add: Preferred stock
Tangible equity (2)
Total Assets (U.S. GAAP)
Less: Goodwill
Intangible assets and other servicing rights
AOCI, before tax
Tangible assets, excluding unrealized gains / losses (3)
Ratios:
Tangible equity as a percentage of tangible assets (2) / (3)
Tangible common equity as a percentage of tangible assets (1) / (3)
36 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 applicable
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. Effective January 1, 2017, the Bancorp elected
to adopt the fair value method of measuring all existing classes of its
residential mortgage servicing rights as described below. Previously,
the Bancorp had measured its servicing rights subsequent to initial
recognition using the amortization method. There have been no
other material changes to the valuation techniques or models
described below during the year ended December 31, 2017.
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. 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
emphasizes
and
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.
to the Bancorp during 2017 and the expected impact of significant
accounting standards issued, but not yet required to be adopted.
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
the borrower’s
the Bancorp’s evaluation of
borrower and
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.
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
liabilities
37 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
reasonableness of key assumptions utilized in the internal OAS
model. Prior to the election of the fair value method, servicing
rights were initially recorded at fair value and subsequently
amortized in proportion to, and over the period of, estimated net
servicing revenue. Servicing rights were 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. For additional information on
servicing rights, refer to Note 12 of the Notes to Consolidated
Financial Statements.
temporary
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. The Bancorp employs various valuation
approaches to measure fair value including the market, income and
cost approaches. 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.
trades and overall
review and assessments
The Bancorp’s fair value measurements involve various
valuation techniques and models, which involve inputs that are
observable, when available. Valuation techniques and parameters
used for measuring assets and liabilities are reviewed and validated
by the Bancorp on a quarterly basis. Additionally, the Bancorp
monitors the fair values of significant assets and liabilities using a
variety of methods including the evaluation of pricing runs and
exception reports based on certain analytical criteria, comparison to
for
previous
reasonableness. The level of management judgement necessary to
determine fair value varies based upon the methods used in the
determination of fair value. Financial instruments that are measured
at fair value using quoted prices in active markets (Level 1) require
minimal judgement. The valuation of financial instruments when
quoted market prices are not available (Levels 2 and 3) may require
significant management judgement to assess whether quoted prices
for similar instruments exist, the impact of changing market
conditions including reducing liquidity in the capital markets, and,
the use of estimates surrounding significant unobservable inputs.
Table 8 provides a summary of the fair value of financial
instruments carried at fair value on a recurring basis and the
amounts of financial instruments valued using Level 3 inputs.
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.
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.
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. The Bancorp may also purchase
servicing rights. Effective January 1, 2017, the Bancorp elected to
prospectively adopt the fair value method for all existing classes of
its residential mortgage servicing rights portfolio. Upon this
election, all servicing rights in these classes are measured at fair
value at each reporting date and changes in the fair value of
servicing rights are reported in earnings in the period in which the
changes occur. Servicing rights are valued using internal OAS
models. Significant management judgement is necessary to identify
key economic assumptions used in estimating the fair value of the
servicing rights including the 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. In order to assist in the assessment of the fair
value of servicing rights, the Bancorp obtains external valuations of
the servicing rights portfolio from third parties and participates in
the
peer surveys
that provide additional confirmation of
38 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 8: FAIR VALUE SUMMARY
As of ($ in millions)
Assets carried at fair value
As a percent of total assets
Liabilities carried at fair value
As a percent of total liabilities
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
December 31, 2017
Balance
34,287
24 %
633
1 %
Level 3
1,003
1
142
-
$
$
December 31, 2016
Balance
Level 3
32,872
23
687
1
156
-
96
-
actual results may differ from forecasted results. Additionally, the
Bancorp determines its market capitalization based on the average
of the closing price of the Bancorp’s stock during the month
including the measurement date, incorporating an additional control
premium, and compares this market-based fair value measurement
to the aggregate fair value of the Bancorp’s reporting units in order
to corroborate the results of the income approach.
When required to perform Step 2, the Bancorp compares the
implied fair value of a reporting unit’s goodwill with the carrying
amount of that goodwill. If the carrying amount exceeds the implied
fair value, an impairment loss equal to that excess amount is
recognized. A recognized impairment loss cannot exceed the
carrying amount of that goodwill and cannot be reversed in future
periods even if the fair value of the reporting unit 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
the Bancorp’s
Statements for further
goodwill.
information regarding
Legal Contingencies
The Bancorp and its subsidiaries are parties to numerous claims and
lawsuits as well as threatened or potential actions or claims
concerning matters arising from the conduct of its business
activities. The outcome of claims or litigation and the timing of
ultimate resolution are inherently difficult to predict and significant
judgment may be required in the determination of both the
probability of loss and whether the amount of the loss is reasonably
estimable. The Bancorp’s estimates are subjective and are based on
the status of legal and regulatory proceedings, the merit of the
Bancorp’s defenses and consultation with internal and external legal
counsel. An accrual for a potential litigation loss is established when
information related to the loss contingency indicates both that a loss
is probable and that the amount of loss can be reasonably estimated.
Refer to Note 18 of the Notes to Consolidated Financial Statements
for further information regarding the Bancorp’s legal proceedings.
39 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 9 and 10 present the components of net interest
income, net interest margin and net interest rate spread for the years
ended December 31, 2017, 2016 and 2015, 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 and
leases 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 and other securities included in other assets.
Net interest income on an FTE basis (non-GAAP) was $3.8
billion and $3.6 billion for the years ended December 31, 2017 and
2016, respectively. Net interest income was positively impacted by
an increase in yields on average loans and leases of 33 bps for the
year ended December 31, 2017. Net interest income also benefited
from an increase in average taxable securities of $2.1 billion and a
decrease in average long-term debt of $1.6 billion for the year ended
December 31, 2017 compared to the year ended December 31,
2016. Additionally, net interest income was positively impacted by
the decisions of the Federal Open Market Committee to raise the
target range of the federal funds rate 25 bps in December 2016,
March 2017, June 2017 and December 2017. These positive impacts
were partially offset by a decrease in average loans and leases and
increases in the rates paid on average other short-term borrowings,
average long-term debt and average interest-bearing core deposits
for the year ended December 31, 2017 compared to the year ended
December 31, 2016. Average loans and leases decreased $1.6 billion
for the year ended December 31, 2017 compared to the year ended
December 31, 2016. The rates paid on average other short-term
borrowings, average long-term debt and average interest-bearing
core deposits increased 60 bps, 39 bps and 11 bps, respectively, for
the year ended December 31, 2017 compared to the year ended
December 31, 2016.
Net interest rate spread was 2.76% during the year ended
December 31, 2017 compared to 2.66% during the year ended
December 31, 2016. Yields on average interest-earning assets
increased 23 bps, partially offset by a 13 bps increase in rates paid
on average interest-bearing liabilities for the year ended December
31, 2017 compared to the year ended December 31, 2016.
Net interest margin on an FTE basis (non-GAAP) was 3.03%
for the year ended December 31, 2017 compared to 2.88% for the
year ended December 31, 2016. The increase for the year ended
December 31, 2017 was driven primarily by the previously
mentioned increase in the net interest rate spread, partially offset by
a decrease in average free funding balances. The decrease in average
free funding balances was driven by a decrease in average demand
deposits of $769 million for the year ended December 31, 2017
compared to the year ended December 31, 2016.
Interest income on an FTE basis from loans and leases (non-
GAAP) increased $246 million compared to the year ended
December 31, 2016 driven by the previously mentioned increase in
yields on average loans and leases, partially offset by a decrease in
average loans and leases. Average loans and leases decreased
primarily due to a decrease in average commercial and industrial
loans and average automobile loans, partially offset by an increase in
average residential mortgage loans. Interest income from credit
cards included the impact of a $12 million benefit related to a
revised estimate of refunds offered to certain bankcard customers in
the first quarter of 2017 compared to a $16 million reduction in
interest income for the expected refunds in the fourth quarter of
2016. In addition, the Bancorp’s interest income on commercial
leases was reduced by $27 million during the fourth quarter of 2017
due to the remeasurement related to the tax treatment of leveraged
leases resulting from the impact of the TCJA. 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 $51 million compared to the year ended
December 31, 2016 primarily as a result of the aforementioned
increases in average taxable securities.
Interest expense on core deposits increased $70 million for the
year ended December 31, 2017 compared to the year ended
December 31, 2016. The increase was primarily due to an increase
in the cost of average interest-bearing core deposits to 37 bps for
the year ended December 31, 2017 from 26 bps for the year ended
December 31, 2016. The increase in the cost of average interest-
bearing core deposits was primarily due to an increase in the cost of
average interest checking deposits and average money market
deposits. Refer to the Deposits subsection of the Balance Sheet
Analysis section of MD&A for additional information on the
Bancorp’s deposits.
Interest expense on average wholesale funding increased $43
million for the year ended December 31, 2017 compared to the year
ended December 31, 2016 primarily due to the previously
mentioned increase in the rates paid on average other short-term
borrowings and average long-term debt, partially offset by the
aforementioned decrease 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 24% and 26% of average
interest-bearing liabilities during the years ended December 31, 2017
and 2016, 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.
40 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 9: CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME ON AN FTE BASIS
For the years ended December 31
2016
2015
2017
Average Revenue/
Balance
Cost
Average
Yield/
Rate
Average
Balance
Revenue/
Cost
Average
Yield/
Rate
Average
Balance
Revenue/
Cost
Average
Yield/
Rate
$
$
$
993
4
15
4,515
950
3
8
4,218
3.09
5.45
1.04
3.57% $
32,106
66
1,390
126,293
2,224
13,345
(1,226)
140,636
1,334
227
86
106
1,753
509
312
315
237
45
1,418
3,171
1,413
229
125
105
1,872
535
302
290
214
44
1,385
3,257
1,514
256
179
82
2,031
566
310
275
253
68
1,472
3,503
42,594
7,121
2,717
3,796
56,228
13,798
8,592
11,847
2,303
571
37,111
93,339
41,577
6,844
4,374
4,011
56,806
16,053
7,308
9,407
2,141
1,016
35,925
92,731
43,184
6,899
3,648
3,916
57,647
15,101
7,998
10,708
2,205
661
36,673
94,320
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% $
3.64% $
3.74
4.09
2.04
3.58
3.53
4.24
2.92
11.84
6.68
4.10
3.78% $
($ 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 assets
(a) The FTE adjustments included in the above table were $26, $25 and $21 for the years ended December 31, 2017, 2016 and 2015, respectively.
(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
25,143
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
26,160
14,951
18,152
817
4,051
64,131
2,869
57
920
1,721
14,644
84,342
35,164
4,672
124,178
15,900
140,078
26,382
13,958
20,231
388
3,771
64,730
2,564
277
557
3,158
13,804
85,090
35,093
3,839
124,022
16,614
140,636
0.41% $
0.06
0.37
0.20
1.23
0.37
1.38
1.05
1.01
0.96
2.74
0.81% $
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 %
30,019
80
1,866
126,285
2,303
14,963
(1,285)
142,266
26,932
55
3,258
123,584
2,608
15,179
(1,293)
140,078
58
7
53
1
49
168
36
1
2
10
361
578
50
9
44
1
49
153
33
-
1
2
306
495
109
8
74
1
46
238
36
3
6
30
378
691
3.16
4.51
0.44
3.34% $
3.22
5.23
0.25
3.28 %
3.03%
2.76
67.37
2.88%
2.66
67.57
2.88 %
2.69
68.25
867
3
8
4,049
$
$
$
$
$
$
$
$
$
3,824
3,640
3,554
$
$
$
$
$
$
$
$
of MD&A.
41 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
Total
Volume Yield/Rate
2017 Compared to 2016
(54)
(2)
27
3
(26)
34
(27)
(37)
(7)
23
(14)
(40)
155
29
27
(26)
185
(3)
35
22
46
1
101
286
101
27
54
(23)
159
31
8
(15)
39
24
87
246
TABLE 10: CHANGES IN NET INTEREST INCOME ATTRIBUTABLE TO VOLUME AND YIELD/RATE(a)
For the years ended December 31
($ in millions)
Assets:
Interest-earning assets:
Loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total consumer loans and leases
Total loans and leases
Securities:
Taxable
Exempt from income taxes
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.
51
1
21
-
(3)
70
-
2
4
20
17
113
184
47
2
20
-
-
69
2
2
3
19
56
151
124
4
(1)
1
-
(3)
1
(2)
-
1
1
(39)
(38)
60
43
1
7
297
(21)
1
9
275
64
-
(2)
22
$
$
$
$
$
2016 Compared to 2015
Yield/Rate
Total
Volume
19
(7)
32
3
47
47
(22)
(31)
(10)
8
(8)
39
98
(4)
-
133
(3)
-
4
-
(1)
-
(1)
1
-
2
15
17
116
60
9
7
(4)
72
(21)
12
6
(13)
(9)
(25)
47
(15)
4
-
36
11
(2)
5
-
1
15
4
-
1
6
40
66
(30)
79
2
39
(1)
119
26
(10)
(25)
(23)
(1)
(33)
86
83
-
-
169
8
(2)
9
-
-
15
3
1
1
8
55
83
86
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 $261 million for
the year ended December 31, 2017 compared to $343 million for
the same period in the prior year. The decrease in provision expense
for the year ended December 31, 2017 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 a decrease in outstanding loan balances. The ALLL
declined $57 million from December 31, 2016 to $1.2 billion at
December 31, 2017. At December 31, 2017, the ALLL as a percent
of portfolio loans and leases decreased to 1.30%, compared to
1.36% at December 31, 2016.
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
and lease 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.
42 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Income
Noninterest income increased $528 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The following
table presents the components of noninterest income:
TABLE 11: COMPONENTS OF NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Service charges on deposits
Wealth and asset management revenue
Corporate banking revenue
Card and processing revenue
Mortgage banking net revenue
Other noninterest income
Securities gains, net
Securities gains, net - non-qualifying hedges on MSRs
Total noninterest income
Service charges on deposits
Service charges on deposits decreased $4 million for the year ended
December 31, 2017 compared to the year ended December 31, 2016
primarily due to a decrease of $4 million in commercial deposit fees.
Wealth and asset management revenue
Wealth and asset management revenue increased $15 million for the
year ended December 31, 2017 compared to the year ended
December 31, 2016. The increase from the prior year was primarily
due to an increase of $13 million in private client service fees driven
by an increase in assets under management as a result of strong
market performance and the impact of an acquisition in the second
quarter of 2017. The Bancorp’s trust and registered investment
advisory businesses had approximately $362 billion and $315 billion
in total assets under care as of December 31, 2017 and 2016,
respectively, and managed $37 billion and $31 billion in assets for
individuals, corporations and not-for-profit organizations as of
December 31, 2017 and 2016, respectively.
Corporate banking revenue
Corporate banking revenue decreased $79 million for the year ended
December 31, 2017 compared to the year ended December 31,
2016. The decrease from the prior year was primarily driven by a
decrease in lease remarketing fees of $62 million which included $52
2017
554
419
353
313
224
1,357
2
2
3,224
$
$
2016
558
404
432
319
285
688
10
-
2,696
2015
563
418
384
302
348
979
9
-
3,003
2014
560
407
430
295
310
450
21
-
2,473
2013
549
393
400
272
700
879
21
13
3,227
million of impairment charges related to certain operating lease
assets for the year ended December 31, 2017 compared to $20
million during the year ended December 31, 2016. The decrease also
included $4 million in impairment charges on certain leveraged
leases during the year ended December 31, 2017 and the impact of
$16 million in gains on certain leveraged lease terminations during
the year ended December 31, 2016. Additionally, the decrease in
corporate banking revenue for the year ended December 31, 2017
compared to the year ended December 31, 2016 included a $15
million decrease in foreign exchange fees and a $6 million decrease
in letter of credit fees.
Card and processing revenue
Card and processing revenue decreased $6 million for the year
ended December 31, 2017 compared to the year ended December
31, 2016 primarily driven by higher reward costs.
Mortgage banking net revenue
Mortgage banking net revenue decreased $61 million for the year
ended December 31, 2017 compared to the year ended December
31, 2016.
The following table presents the components of mortgage banking net revenue:
TABLE 12: COMPONENTS OF MORTGAGE BANKING NET REVENUE
For the years ended December 31 ($ in millions)
Origination fees and gains on loan sales
Net mortgage servicing revenue:
Gross mortgage servicing fees
MSR amortization
Net valuation adjustments on MSRs and free-standing derivatives
purchased to economically hedge MSRs
Net mortgage servicing revenue
Mortgage banking net revenue
2017
138
$
206
-
(120)
86
224
$
2016
186
199
(131)
31
99
285
2015
171
222
(139)
94
177
348
Origination fees and gains on loan sales decreased $48 million for
the year ended December 31, 2017 compared to the year ended
December 31, 2016 driven by a decrease in originations and lower
margins due to the interest rate environment. Residential mortgage
loan originations decreased to $8.2 billion for the year ended
December 31, 2017 from $10.0 billion for the year ended December
31, 2016. Additionally, during the year ended December 31, 2017,
the Bancorp purchased $109 million of MSRs.
Effective January 1, 2017, the Bancorp elected to prospectively
adopt the fair value method for all existing classes of its residential
mortgage servicing rights portfolio. Upon this election, all servicing
rights are measured at fair value at each reporting date and changes
in the fair value of servicing rights are reported in mortgage banking
net revenue in the Consolidated Statements of Income in the period
in which the changes occur.
Prior to the election of the fair value method, servicing rights
were initially recorded at fair value and subsequently amortized in
proportion to, and over the period of, estimated net servicing
revenue. Servicing rights were assessed for impairment monthly,
based on fair value, with temporary impairment recognized through
a valuation allowance.
Net mortgage servicing revenue decreased $13 million for the
year ended December 31, 2017 compared to the year ended
December 31, 2016 primarily due to a decrease in net valuation
43 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
adjustments (including MSR amortization) of $20 million, partially
offset by an increase in gross mortgage servicing fees of $7 million.
Refer to Table 13 for the components of net valuation adjustments
on the MSR portfolio and the impact of the non-qualifying hedging
strategy:
TABLE 13: COMPONENTS OF NET VALUATION ADJUSTMENTS ON MSRs
For the years ended December 31 ($ in millions)
Changes in fair value and settlement of free-standing derivatives purchased
to economically hedge the MSR portfolio
Changes in fair value:
Due to changes in inputs or assumptions
Other changes in fair value
Recovery of MSR impairment
Net valuation adjustments on MSRs and free-standing derivatives
purchased to economically hedge MSRs
Mortgage rates decreased during the year ended December 31, 2017
which caused modeled prepayment speeds to increase, leading to
fair value adjustments on servicing rights. The fair value of the MSR
portfolio decreased $1 million due to changes to inputs to the
valuation model including prepayment speeds and OAS spread
assumptions and decreased $121 million due to the passage of time,
including the impact of regularly scheduled repayments, paydowns
and payoffs for the year ended December 31, 2017.
Mortgage rates increased during the year ended December 31,
2016 which caused the modeled prepayment speeds to decrease,
leading to a recovery of temporary impairment of $7 million on the
servicing rights during the year. Prior to the election of the fair value
method, servicing rights were deemed temporarily impaired when a
borrower’s loan rate was distinctly higher than prevailing rates.
Temporary impairment on servicing rights was reversed when the
level commensurate with the
prevailing rates returned to a
borrower’s loan rate.
Further detail on the valuation of MSRs can be found in Note
12 of the Notes to Consolidated Financial Statements. The Bancorp
Other noninterest income
The following table presents the components of other noninterest income:
TABLE 14: COMPONENTS OF OTHER NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Gain on sale of Vantiv, Inc. shares
Operating lease income
Cardholder fees
BOLI income
Equity method income from interest in Vantiv Holding, LLC
Income from the TRA associated with Vantiv, Inc.
Private equity investment income
Consumer loan and lease fees
Banking center income
Insurance income
Loss on swap associated with the sale of Visa, Inc. Class B Shares
Net (losses) gains on loan sales
Gain on sale of certain retail branch operations
Gain on sale and exercise of the warrant associated with Vantiv Holding, LLC
Valuation adjustments on the warrant associated with Vantiv Holding, LLC
Net losses on disposition and impairment of bank premises and equipment
Other, net
Total other noninterest income
2017
2016
2015
$
2
(1)
(121)
-
$
(120)
24
-
-
7
31
90
-
-
4
94
maintains a non-qualifying hedging strategy to manage a portion of
the risk associated with changes in the valuation of 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 recognized net gains of $2 million during the year
ended December 31, 2017, recorded in securities gains, net, non-
the Bancorp’s Consolidated
in
qualifying hedges on MSRs
Statements of Income. The Bancorp did not hold or sell any
securities related to the non-qualifying hedging strategy during the
year ended December 31, 2016.
The Bancorp’s total residential mortgage loans serviced at
December 31, 2017 and 2016 were $76.1 billion and $69.3 billion,
respectively, with $60.0 billion and $53.6 billion, respectively, of
residential mortgage loans serviced for others.
2017
1,037
96
54
52
47
44
36
23
20
8
(80)
(2)
-
-
-
-
22
1,357
$
$
2016
2015
-
102
46
53
66
313
11
23
20
11
(56)
10
19
9
64
(13)
10
688
331
89
43
48
63
80
28
23
21
14
(37)
38
-
89
236
(101)
14
979
Other noninterest income increased $669 million for the year ended
December 31, 2017 compared to the year ended December 31, 2016
primarily due to the gain on sale of Vantiv, Inc. shares, an increase
in private equity investment income and the impact of the net losses
on disposition and impairment of bank premises and equipment
during the year ended December 31, 2016. These benefits were
partially offset by the impact of certain transactions that occurred
during the year ended December 31, 2016 which included the
impact of income from the TRA transactions associated with
Vantiv, Inc., positive valuation adjustments and the gain on sale of
the warrant associated with Vantiv Holding, LLC and gains on the
sales of certain retail branch operations. The year ended December
44 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
31, 2017 also included an increase in the loss on the swap associated
with the sale of Visa, Inc. Class B Shares and a reduction in equity
method income from the Bancorp’s interest in Vantiv Holding,
LLC.
The Bancorp recognized a $1.0 billion gain on the sale of
Vantiv, Inc. shares during the year ended December 31, 2017. For
additional
information, refer to Note 19 of the Notes to
Consolidated Financial Statements.
income
investment
Private equity
increased $25 million
compared to the year ended December 31, 2016 driven by gains on
the sales of certain private equity funds during the year ended
December 31, 2017 and the impact of 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.
Net losses on disposition and impairment of bank premises
and equipment decreased $13 million during the year ended
December 31, 2017 compared to the same period in the prior year.
This decrease was driven by the impact of impairment charges of $7
million during the year ended December 31, 2017, compared to $32
million during the year ended December 31, 2016. 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. Refer to Note 7 of the Notes to
Consolidated Financial Statements for further information.
Income from the TRA associated with Vantiv, Inc. was $44
million during the year ended December 31, 2017 compared to $313
million for the year ended December 31, 2016. The decrease 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 the existing Vantiv, Inc. TRA and the expected
obligation to terminate and settle the remaining Vantiv, Inc. TRA
cash flows upon the exercise of put or call options. This termination
did not impact the TRA payments of $44 million and $33 million
recognized in 2017 and 2016, respectively.
The Bancorp recognized positive valuation adjustments on the
stock warrant associated with Vantiv, Holding LLC of $64 million
during the year ended December 31, 2016. The stock warrant was
not outstanding during 2017 as the Bancorp exercised the remaining
warrant in Vantiv Holding, LLC during the fourth quarter of 2016
and recognized a gain of $9 million.
During the year ended December 31, 2016, the Bancorp
recognized $19 million of gains on the sales of its retail branch
operations in the St. Louis MSA to Great Southern Bank and
Pittsburgh MSA to First National Bank of Pennsylvania.
The Bancorp recognized negative valuation adjustments of $80
million and $56 million related to the Visa total return swap during
the years ended December 31, 2017 and 2016, respectively. The
increase from
litigation
the prior year was attributable
developments during the year ended December 31, 2017 and an
increase in Visa, Inc.’s share price. 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.
to
Equity method earnings from the Bancorp’s interest in Vantiv
Holding, LLC decreased $19 million compared to the year ended
December 31, 2016 primarily due to a decrease in the Bancorp’s
ownership percentage of Vantiv Holding, LLC from approximately
17.9% at December 31, 2016 to approximately 8.6% at December
31, 2017.
Noninterest Expense
Noninterest expense increased $87 million for the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily due
to increases in other noninterest expense, personnel costs (salaries, wages and incentives plus employee benefits) and technology and
communications expense. The following table presents the components of noninterest expense:
TABLE 15: COMPONENTS OF NONINTEREST EXPENSE
For the years ended December 31 ($ in millions)
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Card and processing expense
Equipment expense
Other noninterest expense
Total noninterest expense
Efficiency ratio 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.
1,633
356
295
245
129
117
1,215
3,990
56.6 %
2017
$
$
2016
2015
2014
2013
1,612
339
299
234
132
118
1,169
3,903
61.6
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
Personnel costs increased $38 million for the year ended December
31, 2017 compared to the year ended December 31, 2016 driven by
increases in base compensation, medical and FICA expenses and
long-term incentive compensation, partially offset by a decrease in
severance costs related to the Bancorp’s voluntary early retirement
program in 2016. The increase in personnel costs also included the
impact of one-time employee bonuses of $15 million that the
Bancorp paid as a result of benefits received from the TCJA. Full-
time equivalent employees totaled 18,125 at December 31, 2017
compared to 17,844 at December 31, 2016.
Technology and communications expense
increased $11
million for the year ended December 31, 2017 compared to the year
ended December 31, 2016 driven primarily by increased investment
in regulatory, compliance and growth initiatives.
45 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the components of other noninterest expense:
TABLE 16: COMPONENTS OF OTHER NONINTEREST EXPENSE
For the years ended December 31 ($ in millions)
Impairment on affordable housing investments
FDIC insurance and other taxes
Marketing
Loan and lease
Operating lease
Professional service fees
Losses and adjustments
Data processing
Travel
Postal and courier
Recruitment and education
Donations
Supplies
Insurance
Provision for the reserve for unfunded commitments
Other, net
Total other noninterest expense
Other noninterest expense increased $46 million for the year ended
December 31, 2017 compared to the year ended December 31, 2016
primarily due to increases in the impairment on affordable housing
investments, professional service fees and marketing expense,
partially offset by decreases in the provision for the reserve for
unfunded commitments, losses and adjustments and loan and lease
expense.
impairment on certain affordable housing
Impairment on affordable housing investments increased $54
million for the year ended December 31, 2017 compared to the year
ended December 31, 2016. The increase was driven by $68 million
of
investments
recognized during the fourth quarter of 2017 primarily due to the
change in the federal statutory corporate tax rate pursuant to the
TCJA. Professional service fees increased $22 million for the year
ended December 31, 2017 compared to the year ended December
31, 2016 primarily due to investments in the NorthStar strategy and
other strategic initiatives. Marketing expense increased $10 million
2017
2016
2015
$
$
222
127
114
102
87
83
59
58
46
42
35
28
14
12
-
186
1,215
168
126
104
110
86
61
73
51
45
46
37
23
14
15
23
187
1,169
145
99
110
118
74
70
55
45
54
45
33
29
16
17
4
191
1,105
for the year ended December 31, 2017 compared to the year ended
December 31, 2016 primarily due to the new brand campaign. The
provision for the reserve for unfunded commitments decreased $23
million for the year ended December 31, 2017 compared to the year
ended December 31, 2016 primarily due to an increase in estimated
loss rates related to unfunded commitments during 2016 and a
decrease in the unfunded commitments outstanding during 2017.
Losses and adjustments decreased $14 million for the year ended
December 31, 2017 compared to the year ended December 31, 2016
primarily due to the impact of favorable legal settlements during the
year ended December 31, 2017 partially offset by increases in
operational losses. Loan and lease expense decreased $8 million for
the year ended December 31, 2017 compared to the year ended
December 31, 2016 primarily due to lower loan closing and
appraisal costs driven by a decline in residential mortgage loan
originations.
46 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Applicable Income Taxes
The U.S. government enacted comprehensive tax legislation, the
TCJA, on December 22, 2017. The TCJA makes broad and complex
changes to the U.S. tax code including, but not limited to, reducing
the top federal statutory corporate tax rate from 35 percent to 21
percent effective for tax years beginning after December 31, 2017.
U.S. GAAP requires the Bancorp to recognize the tax effects of
changes in tax laws and rates on its deferred taxes in the period in
which the law is enacted. For the year ended December 31, 2017 the
Bancorp is subject to a top federal statutory corporate tax rate of 35
percent. For years beginning after December 31, 2017, the Bancorp
will be subject to a federal statutory corporate tax rate of 21 percent.
As such, the Bancorp expects its effective tax rate to significantly
decrease from historical levels beginning in 2018.
income, tax-advantaged
Applicable income tax expense for all periods includes the
benefit from tax-exempt
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 rate for the year ended December 31, 2017
was 20.8% which was a decrease of 3.6% from 2016 primarily
driven by a $220 million benefit from the remeasurement of
deferred taxes as a result of the aforementioned reduction in the
federal statutory corporate tax rate resulting from the TCJA,
partially offset by the impact of an increase in income before taxes.
The effective tax rates for the years ended December 31, 2017 and
2016 included the impact of $178 million and $182 million,
respectively, in tax credits and $34 million and $56 million of tax
benefits from tax exempt income, respectively.
For stock-based awards, U.S. GAAP 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. The Bancorp cannot
predict its stock price or whether and when its employees will
exercise stock-based awards in the future. Based on its stock price at
December 31, 2017, the Bancorp estimates that it may be necessary
to recognize $12 million of additional income tax benefit over the
next twelve months related to the settlement of stock-based awards,
primarily in the first half of 2018. However, the amount of income
tax expense or benefit recognized upon settlement may vary
significantly from expectations based on the Bancorp’s stock price
and the number of SARs exercised by employees.
The Bancorp’s income before income taxes, applicable income tax expense and effective tax rate are as follows:
TABLE 17: APPLICABLE INCOME TAXES
For the years ended December 31 ($ in millions)
Income before income taxes
Applicable income tax expense
Effective tax rate
$
2017
2,771
577
20.8 %
2016
2,065
505
24.4
2015
2,365
659
27.8
2014
2,028
545
26.9
2013
2,598
772
29.7
47 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS SEGMENT REVIEW
The Bancorp reports on four business segments: Commercial
Banking, Branch Banking, Consumer Lending and Wealth and Asset
Management. Additional information on each business segment is
included in Note 30 of the Notes to Consolidated Financial
Statements. Results of the Bancorp’s business segments are
presented based on its management structure and management
accounting practices. The structure and accounting practices are
specific to the Bancorp; therefore, the financial results of the
Bancorp’s business segments are not necessarily comparable with
similar information for other financial institutions. The Bancorp
refines its methodologies from time to time as management’s
accounting practices or businesses change.
The Bancorp manages interest rate risk centrally at the
corporate level. 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
origination of
loans and acceptance of deposits. The FTP
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 rates 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
The following table summarizes net income (loss) by business segment:
TABLE 18: NET INCOME (LOSS) BY BUSINESS SEGMENT
For the years ended December 31 ($ in millions)
Income Statement Data
Commercial Banking
Branch Banking
Consumer Lending
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
curve is constructed using the U.S. swap curve, brokered CD pricing
and unsecured debt pricing.
The Bancorp adjusts the FTP charge rates and credit rates as
dictated by changes in interest rates for various interest-earning
assets and interest-bearing liabilities and by the review of behavioral
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, 2017 to reflect the
current market rates and updated market assumptions. These rates
were generally higher than those in place during 2016, thus net
interest
income for deposit-providing business segments was
positively impacted during 2017. 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 2017.
The Bancorp’s methodology for allocating provision for loan
and lease losses expense to the business segments includes 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. Provision for loan and
lease losses expense attributable to loan and lease growth and
changes in ALLL factors is 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.
2017
2016
2015
$
$
806
494
(19)
74
839
2,194
-
2,194
75
2,119
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
48 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:
$
2017
2016
2015
1,678
38
1,839
76
TABLE 19: COMMERCIAL BANKING
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income (FTE)(a)
Provision for loan and lease losses
Noninterest income:
Corporate banking revenue
Service charges on deposits
Other noninterest income
Noninterest expense:
Personnel costs
Other noninterest expense
Income before income taxes (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 $26, $25 and $21 for the years ended December 31, 2017, 2016 and 2015, respectively. This is a non-GAAP measure.
53,743
19,519
9,080
5,337
899
372
53,010
20,677
9,069
6,652
1,230
813
54,597
20,735
8,582
6,686
1,046
496
303
1,066
832
114
718
296
1,130
1,244
249
995
294
1,202
982
176
806
378
284
191
348
287
203
430
292
185
1,646
298
$
$
expenses. Refer to the Applicable Income Taxes subsection of the Statements of Income Analysis section of MD&A for additional information.
Comparison of the year ended 2017 with 2016
Net income was $806 million for the year ended December 31, 2017
compared to net income of $995 million for the year ended
December 31, 2016. The decrease in net income was driven by
decreases in net interest income and noninterest income and an
increase in noninterest expense partially offset by a decrease in the
provision for loan and lease losses.
Net interest income on an FTE basis decreased $161 million
from the year ended December 31, 2016 primarily driven by
increases in FTP charge rates on loans and leases and increases in
the rates paid of core deposits. The decrease in net interest income
was partially offset by increases in yields on average commercial
loans and leases of 37 bps from the year ended December 31, 2016.
Provision for loan and lease losses decreased $38 million from
the year ended December 31, 2016 primarily driven by a decrease in
net charge-offs on commercial and industrial loans partially offset
by a reduction in the benefit from criticized assets. Net charge-offs
as a percent of average portfolio loans and leases decreased to 19
bps for the year ended December 31, 2017 compared to 33 bps for
the year ended December 31, 2016.
Noninterest income decreased $69 million from the year ended
December 31, 2016 primarily driven by a decrease in corporate
banking revenue partially offset by an increase in other noninterest
income. Corporate banking revenue decreased $82 million from the
year ended December 31, 2016 driven by a decrease in lease
remarketing fees of $62 million which included $52 million of
impairment charges related to certain operating lease assets for the
year ended December 31, 2017 compared to $20 million during the
year ended December 31, 2016. Additionally, corporate banking
revenue included a $15 million decrease in foreign exchange fees
and a $6 million decrease in letter of credit fees for the year ended
December 31, 2017 compared to the year ended December 31,
2016. Other noninterest income increased $18 million from the year
ended December 31, 2016 driven by an increase in private equity
investment income primarily due to gains on the sale of certain
private equity investments.
Noninterest expense increased $70 million from the year ended
December 31, 2016 primarily as a result of an increase in other
noninterest expense. The increase in other noninterest expense was
driven by $68 million of impairment on certain affordable housing
investments recognized during the fourth quarter of 2017 primarily
due to the change in the federal statutory corporate tax rate
pursuant to the TCJA.
in average commercial construction
Average commercial loans decreased $854 million from the
year ended December 31, 2016 primarily due to a decrease in
average commercial and industrial loans partially offset by an
loans. Average
increase
commercial and industrial loans decreased $1.7 billion from the year
ended December 31, 2016 primarily as a result of deliberate exits
from certain loans that did not meet the Bancorp’s risk-adjusted
profitability targets and softer loan demand. Average commercial
construction loans increased $725 million from the year ended
December 31, 2016 primarily due to increases in demand and draw
levels on existing commitments.
Average core deposits decreased $2.2 billion from the year
ended December 31, 2016. The decrease was primarily driven by
decreases in average savings and money market deposits and
average demand deposits which decreased $1.3 billion and $1.2
billion, respectively, from the year ended December 31, 2016
primarily due to lower average balances per account. These
49 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
decreases were partially offset by an increase in average interest
checking deposits of $498 million from the year ended December
31, 2016 primarily due to the acquisition of new customers.
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 $317 million,
respectively, from the year ended December 31, 2015.
50 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Branch Banking
Branch Banking provides a full range of deposit and loan products
to individuals and small businesses through 1,154 full-service
banking centers. Branch Banking offers depository and loan
products, such as checking and savings accounts, home equity loans
and lines of credit, credit cards and loans for automobiles and other
personal financing needs, as well as products designed to meet the
specific needs of small businesses, including cash management
services.
The following table contains selected financial data for the Branch Banking segment:
TABLE 20: BRANCH BANKING
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Service charges on deposits
Card and processing revenue
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
2017
2016
2015
$
1,782
153
1,669
138
1,555
151
265
251
141
99
526
228
127
740
764
270
494
265
253
140
97
520
234
128
739
665
234
431
277
236
157
(18)
524
248
145
681
458
161
297
13,008
1,918
13,895
10,226
27,603
4,965
13,572
1,870
13,332
9,659
25,974
5,205
14,374
2,021
12,715
9,128
25,342
5,161
$
$
Comparison of the year ended 2017 with 2016
Net income was $494 million for the year ended December 31, 2017
compared to net income of $431 million for the year ended
December 31, 2016. The increase was driven by an increase in net
interest income partially offset by an increase in the provision for
loan and lease losses.
Net interest income increased $113 million from the year
ended December 31, 2016 primarily due to an increase in FTP
credits driven by an increase in average core deposits, an increase in
FTP credit rates on core deposits and increases in yields on average
consumer and commercial loans. These benefits to net interest
income were partially offset by increases in FTP charge rates on
loans and leases and increases in the rates paid on core deposits.
Additionally, interest income from credit cards included the impact
of a $12 million benefit related to a revised estimate of refunds
offered to certain bankcard customers in the first quarter of 2017
compared to a $16 million reduction in interest income for the
expected refunds in the fourth quarter of 2016.
Provision for loan and lease losses increased $15 million from
the year ended December 31, 2016 as net charge-offs as a percent of
average portfolio loans and leases increased to 102 bps for the year
ended December 31, 2017 compared to 91 bps for the year ended
December 31, 2016.
Noninterest income increased $1 million from the year ended
December 31, 2016 primarily driven by an increase in other
noninterest income partially offset by a decrease in card and
processing revenue. Other noninterest income increased $2 million
from the year ended December 31, 2016 primarily due to
impairment charges on bank premises and equipment of $7 million
recognized during the year ended December 31, 2017 compared to
$32 million recognized during the year ended December 31, 2016 as
well as an increase of $8 million in ATM transaction fees from the
year ended December 31, 2016. These positive impacts for the year
ended December 31, 2017 were partially offset by the recognition of
$19 million of gains on the sales of retail branch operations in the
St. Louis and Pittsburgh MSAs during the year ended December 31,
2016, as well as a gain of $11 million on the sale of the agent
bankcard loan portfolio during the second quarter of 2016. Card
and processing revenue decreased $2 million from the year ended
December 31, 2016 primarily driven by higher rewards costs.
Noninterest expense was flat from the year ended December
31, 2016 as a decrease in net occupancy and equipment expense was
offset by an increase in personnel costs. Net occupancy and
equipment expense decreased $6 million from the year ended
December 31, 2016 primarily due to a decrease in rent expense
driven by a reduction in the number of full-service banking centers
and ATM locations. Personnel costs increased $6 million from the
year ended December 31, 2016 primarily due to an increase in
incentive compensation partially offset by a decrease in base
compensation.
Average consumer loans decreased $564 million from the year
ended December 31, 2016 primarily driven by a decrease in average
home equity loans and average residential mortgage loans of $547
million and $236 million, respectively, as payoffs exceeded new loan
production. These declines were partially offset by an increase in
average other consumer loans of $285 million from the year ended
December 31, 2016 primarily due to growth in point-of-sale loan
originations.
Average core deposits increased $2.5 billion from the year
ended December 31, 2016 primarily driven by growth in average
savings and money market deposits of $1.6 billion, growth in
average interest checking deposits of $567 million and growth in
51 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
average demand deposits of $563 million. The growth in average
savings and money market deposits, average interest checking
deposits and average demand deposits was driven by an increase in
average balances per customer account and acquisition of new
customers.
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.
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 $531 million. The growth in average
savings and money market deposits, average demand deposits and
average interest checking deposits was driven by an increase in
average balances per customer account and acquisition of new
customers.
52 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consumer Lending
Consumer Lending includes the Bancorp’s residential mortgage,
home equity, automobile and other indirect lending activities. Direct
lending activities include the origination, retention and servicing of
residential mortgage and home equity loans or lines of credit, sales
and securitizations of those loans, pools of loans or lines of credit
and all associated hedging activities. Indirect lending activities
include extending loans to consumers through correspondent
lenders and automobile dealers.
The following table contains selected financial data for the Consumer Lending segment:
TABLE 21: CONSUMER LENDING
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Mortgage banking net revenue
Other noninterest income
Noninterest expense:
Personnel costs
Other noninterest expense
Income (loss) before income taxes
Applicable income tax (benefit) expense
Net income (loss)
Average Balance Sheet Data
Residential mortgage loans, including held for sale
Home equity
Automobile loans
Other consumer loans, including held for sale
Comparison of the year ended 2017 with 2016
Consumer Lending incurred a net loss of $19 million for the year
ended December 31, 2017 compared to net income of $20 million
for the year ended December 31, 2016. The decrease was driven by
a decrease in noninterest income.
Net interest income decreased $8 million from the year ended
December 31, 2016 primarily driven by an increase in FTP charges
on loans and leases partially offset by an increase in yields on
average automobile loans.
Provision for loan and lease losses decreased $4 million from
the year ended December 31, 2016. Net charge-offs as a percent of
average portfolio loans and leases decreased to 20 bps for the year
ended December 31, 2017 compared to 22 bps for the year ended
December 31, 2016.
Noninterest income decreased $66 million from the year ended
December 31, 2016 driven primarily by a decrease in mortgage
banking net revenue. Mortgage banking net revenue decreased $60
million from the year ended December 31, 2016 primarily driven by
decreases of $48 million and $12 million in mortgage origination
fees and gains on loan sales and net mortgage servicing revenue,
respectively. 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.
Noninterest expense decreased $8 million from the year ended
December 31, 2016 driven by a decrease in personnel costs.
Personnel costs decreased $6 million from the year ended
December 31, 2016 primarily driven by decreases in incentive and
base compensation.
Average consumer loans decreased $332 million from the year
ended December 31, 2016 as a decrease in average automobile loans
was partially offset by an increase in average residential mortgage
loans. Average automobile loans decreased $1.2 billion from the
year ended December 31, 2016 as payoffs exceeded new loan
production due to a strategic shift focusing on improving risk-
adjusted returns. Average residential mortgage loans, including held
for sale, increased $964 million from the year ended December 31,
$
$
$
2017
2016
2015
240
40
217
20
189
278
(30)
(11)
(19)
248
44
277
26
195
280
32
12
20
249
44
341
66
185
255
172
61
111
11,494
293
8,939
-
10,530
356
10,172
-
9,251
424
11,341
11
2016 primarily due to the continued retention of certain agency
conforming ARMs and certain other fixed-rate loans originated
during the year ended December 31, 2017.
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.
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. 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
53 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 2015 primarily driven by
compensation and variable compensation.
increases
in base
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 $1.2 billion
from the year ended December 31, 2015 as payoffs exceeded new
loan production.
for
companies
individuals,
Wealth and Asset Management
Wealth and Asset Management provides a full range of investment
alternatives
and not-for-profit
organizations. Wealth and Asset Management is made up of five
main businesses: FTS, an indirect wholly-owned subsidiary of the
Bancorp; ClearArc Capital, Inc., an
indirect wholly-owned
subsidiary of the Bancorp; Fifth Third Insurance Agency, Inc., an
indirect wholly-owned subsidiary of the Bancorp; Fifth Third
Private Bank; and Fifth Third Institutional Services. FTS offers full-
service retail brokerage services to individual clients and broker-
dealer services to the institutional marketplace. ClearArc Capital,
Inc. provides asset management services. Fifth Third Insurance
Agency, Inc. assists clients with their financial and risk management
needs. Fifth Third Private Bank offers holistic strategies to affluent
clients
insurance and wealth
protection. Fifth Third Institutional Services provides advisory
services for institutional clients including states and municipalities.
in wealth planning,
investing,
The following table contains selected financial data for the Wealth and Asset Management segment:
TABLE 22: WEALTH AND ASSET MANAGEMENT
For the years ended December 31 ($ 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 2017 with 2016
Net income was $74 million for the year ended December 31, 2017
compared to net income of $93 million for the year ended
December 31, 2016. The decrease in net income was driven by an
increase in noninterest expense and a decrease in net interest
income partially offset by an increase in noninterest income.
Net interest income decreased $14 million from the year ended
December 31, 2016 primarily due to to increases in FTP charge
rates on loans and leases as well as increases in the rates paid on
interest checking deposits. These negative impacts were partially
offset by increases in interest income on loans and leases as a result
of increases in yields and average balances. The decrease was also
partially offset by an increase in FTP credits on interest checking
deposits and savings and money market deposits.
Provision for loan and leases losses increased $5 million from
the year ended December 31, 2016 primarily driven by an increase
in net charge-offs on commercial and industrial loans.
increases
Noninterest income increased $20 million from the year ended
December 31, 2016 due to
in wealth and asset
management revenue and other noninterest income. Wealth and
asset management revenue increased $16 million from the year
ended December 31, 2016 primarily due to an increase in private
client service fees driven by an increase in assets under management
as a result of strong market performance and the impact of an
acquisition in the second quarter of 2017. Other noninterest income
increased $4 million from the year ended December 31, 2016 driven
by an increase in insurance income as a result of acquisitions in the
first and fourth quarters of 2017.
54 Fifth Third Bancorp
2017
2016
2015
154
6
407
12
181
273
113
39
74
168
1
391
8
168
254
144
51
93
128
3
406
12
170
285
88
30
58
3,277
8,782
3,135
8,554
2,805
9,357
$
$
$
Noninterest expense increased $32 million from the year ended
December 31, 2016 due to increases in other noninterest expense
and personnel costs. Other noninterest expense increased $19
million from the year ended December 31, 2016 driven by an
increase
in corporate overhead allocations. Personnel costs
increased $13 million from the year ended December 31, 2016 due
to higher base
the
aforementioned acquisitions completed during 2017 as well as
higher incentive compensation.
compensation primarily driven by
Average loans and leases increased $142 million from the year
ended December 31, 2016 driven by an increase in average
residential mortgage loans due to increases in new loan origination
activity. This increase was partially offset by a decline in average
home equity balances.
Average core deposits increased $228 million from the year
ended December 31, 2016 primarily due to increases in average
interest checking deposits and average savings and money market
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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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 2017 with 2016
Net interest income increased $254 million from the year ended
December 31, 2016 primarily driven by an increase in the benefit
related to the FTP charges on loans and leases as well as an increase
in interest income on taxable securities. These positive impacts were
partially offset by increases in FTP credit rates on deposits allocated
to the business segments, a decrease in interest income on loans and
leases as well as an increase in interest expense on long-term debt.
Provision for loan and leases losses decreased $60 million from
the year ended December 31, 2016 primarily due to a reduction in
the benefit for criticized assets allocated to the business segments
coupled with an increase in the benefit from the reduction in the
ALLL.
Noninterest income increased $643 million from the year
ended December 31, 2016 primarily driven by the recognition of a
$1.0 billion gain on the sale of Vantiv, Inc. shares during the third
quarter of 2017. The increase was partially offset by the impact of a
$280 million gain recognized during the third quarter of 2016 from
the termination and settlement of gross cash flows from the existing
Vantiv, Inc. TRA and the expected obligation to terminate and
settle the remaining Vantiv, Inc. TRA cash flows upon the exercise
of put or call options. This termination did not impact the TRA
payments of $44 million and $33 million recognized in 2017 and
2016, respectively. The year ended December 31, 2016 also included
positive valuation adjustments on the stock warrant associated with
Vantiv Holding, LLC of $64 million. The stock warrant was not
outstanding during 2017 as the Bancorp exercised the remaining
warrant in Vantiv Holding, LLC during the fourth quarter of 2016
and recognized a gain of $9 million. The increase in noninterest
income from December 31, 2016 was partially offset by negative
valuation adjustments related to the Visa total return swap of $80
million for the year ended December 31, 2017 compared with $56
million for the prior year. Additionally, equity method earnings from
the Bancorp’s interest in Vantiv Holding, LLC decreased $19
million from the year ended December 31, 2016. 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.
Noninterest expense decreased $6 million from the year ended
December 31, 2016. The decrease was primarily due to increases in
corporate overhead allocations from General Corporate and Other
to the other business segments and decreases in the provision for
the reserve for unfunded commitments partially offset by increases
in personnel costs and technical and communications expense.
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.
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.
55 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOURTH QUARTER REVIEW
The Bancorp’s 2017 fourth quarter net income available to common
shareholders was $486 million, or $0.67 per diluted share, compared
to net income available to common shareholders of $999 million, or
$1.35 per diluted share, for the third quarter of 2017 and net income
available to common shareholders of $372 million, or $0.49 per
diluted share, for the fourth quarter of 2016.
Net interest income on an FTE basis was $963 million during
the fourth quarter of 2017 and decreased $14 million from the third
quarter of 2017 and increased $54 million from the fourth quarter
of 2016. The decrease from the third quarter of 2017 was primarily
driven by a $27 million reduction due to the remeasurement related
to the tax treatment of leveraged leases resulting from the TCJA,
partially offset by an increase in yields on interest-earnings assets.
The increase in net interest income in comparison to the fourth
quarter of 2016 was primarily driven by an increase in short-term
market rates and the impact of a $16 million reduction in interest
income related to estimated refunds to be offered to certain
bankcard customers during the fourth quarter of 2016, partially
offset by the aforementioned leveraged lease remeasurement.
Fourth quarter 2017 noninterest income of $577 million
decreased $984 million compared to the third quarter of 2017 and
decreased $43 million compared to the fourth quarter of 2016. The
decrease from the third quarter of 2017 was primarily due to
decreases in other noninterest income, corporate banking revenue
and mortgage banking net revenue. The year-over-year decrease was
primarily the result of decreases in corporate banking revenue, other
noninterest income and mortgage banking net revenue.
Service charges on deposits of $138 million were flat compared
to the previous quarter and decreased $3 million compared to the
fourth quarter of 2016. The decrease from the fourth quarter of
2016 was driven by a decrease in commercial deposit fees.
Corporate banking revenue of $77 million decreased $24
million compared to both the third quarter of 2017 and the fourth
quarter of 2016. The decrease compared to both the third quarter of
2017 and the fourth quarter of 2016 was primarily driven by the
impact of $25 million of impairment charges related to certain
operating lease assets in the fourth quarter of 2017.
Mortgage banking net revenue was $54 million in the fourth
quarter of 2017 compared to $63 million in the third quarter of 2017
and $65 million in the fourth quarter of 2016. The decrease in
mortgage banking net revenue compared to the third quarter of
2017 was driven by lower origination fees and gains on loan sales.
The decrease from the prior year was driven by negative valuation
adjustments (including MSR amortization). Fourth quarter 2017
originations were $1.9 billion, compared with $2.1 billion in the
previous quarter and $2.7 billion in the fourth quarter of 2016.
Fourth quarter 2017 originations resulted in gains of $32 million on
mortgages sold, compared with gains of $40 million during the
previous quarter and $30 million during the fourth quarter of 2016.
Gross mortgage servicing fees were $54 million in the fourth quarter
of 2017, $56 million in the third quarter of 2017 and $48 million in
the fourth quarter of 2016. Mortgage banking net revenue is also
include MSR
affected by net valuation adjustments, which
amortization and MSR valuation adjustments, including adjustments
due to changes to prepayment speeds, OAS spread assumptions and
the passage of time and mark-to-market adjustments on free-
standing derivatives used to economically hedge the MSR portfolio.
Net negative valuation adjustments were $32 million and $33
56 Fifth Third Bancorp
million in the fourth and third quarters of 2017, respectively, and
$13 million in the fourth quarter of 2016.
Wealth and asset management revenue of $106 million
increased $4 million from the previous quarter and increased $6
million from the fourth quarter of 2016. The increases from the
third quarter of 2017 and the fourth quarter of 2016 were primarily
driven by an increase in private client service fees.
Card and processing revenue of $80 million increased $1
million from both the third quarter of 2017 and the fourth quarter
of 2016. The increase from the third quarter of 2017 and the fourth
quarter of 2016 reflected increased credit card spend volume,
partially offset by higher rewards.
Other noninterest income of $123 million decreased $953
million compared to the third quarter of 2017 and decreased $14
million from the fourth quarter of 2016. The decrease from the
third quarter of 2017 included the impact of a $1.0 billion gain on
the sale of Vantiv, Inc. shares recognized during the third quarter of
2017, partially offset by a gain of $44 million pursuant to Fifth
Third’s TRA with Vantiv, Inc. recognized in the fourth quarter of
2017. Quarterly results also included valuation adjustments on the
Visa total return swap which were charges of $11 million and $47
million in the fourth and third quarter of 2017, respectively, and a
benefit of $6 million in the fourth quarter of 2016. Fourth quarter
of 2016 also included a gain of $33 million pursuant to Fifth Third’s
TRA with Vantiv, Inc. and a gain of $9 million on the exercise of
the remaining warrant in Vantiv Holding, LLC.
The net gains on investment securities were $1 million during
the fourth quarter of 2017 compared to an immaterial amount in the
third quarter of 2017 and net losses of $3 million during the fourth
quarter of 2016. Net losses on securities held as non-qualifying
hedges for MSRs were $2 million during the fourth quarter of 2017
compared to net gains of $2 million during the third quarter of 2017
and zero during the fourth quarter of 2016.
Noninterest expense of $1.1 billion increased $98 million from
the previous quarter and increased $113 million from the fourth
quarter of 2016. The increases in noninterest expense compared to
both the third quarter of 2017 and the fourth quarter of 2016 were
primarily driven by increases in other noninterest expense and
personnel costs. The increases in other noninterest expense from
the third quarter of 2017 and the fourth quarter of 2016 were driven
by increases of $62 million and $63 million, respectively, in
impairment on affordable housing investments and a $15 million
contribution made to the Fifth Third Foundation during the fourth
quarter of 2017. The increase in noninterest expense from both the
third quarter of 2017 and fourth quarter of 2016 also included an
increase in personnel costs related to the impact of one-time
employee bonuses of $15 million that the Bancorp paid as a result
of benefits received from the TCJA.
The ALLL as a percentage of portfolio loans and leases was
1.30% as of December 31, 2017, compared to 1.31% as of
September 30, 2017 and 1.36% as of December 31, 2016. The
provision for loan and lease losses was $67 million in both the
fourth and third quarters of 2017 compared to $54 million in the
fourth quarter of 2016. Net losses charged-off were $76 million in
the fourth quarter of 2017, or 33 bps of average portfolio loans and
leases on an annualized basis, compared with net losses charged-off
of $68 million in the third quarter of 2017 and $73 million in the
fourth quarter of 2016.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 23: QUARTERLY INFORMATION (unaudited)
2017
2016
$
For the three months ended ($ in millions, except per share data)
Net interest income(a)(b)
Provision for loan and lease losses
Noninterest income
Noninterest expense
Net income attributable to Bancorp
Net income available to common shareholders
Earnings per share, basic
Earnings per share, diluted
(a) Amounts presented on an FTE basis. The FTE adjustment was $7 for both the three months ended December 31, 2017 and September 30, 2017 and $6 for both the three months
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
3/31
939
74
523
986
305
290
0.38
0.38
12/31
963
67
577
1,073
509
486
0.68
0.67
12/31
909
54
620
960
395
372
0.49
0.49
9/30
977
67
1,561
975
1,014
999
1.37
1.35
6/30
945
52
564
957
367
344
0.46
0.45
3/31(b)
909
119
637
986
326
311
0.40
0.40
ended June 30, 2017, March 31, 2017 and each period presented during the year ended December 31, 2016.
(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,
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 2016 WITH 2015
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.
The provision for loan and lease losses decreased to $343
million during the year ended December 31, 2016 compared to $396
million during the year ended December 31, 2015 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. 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.
Net interest income on an FTE basis (non-GAAP) was $3.6
billion for both the years ended December 31, 2016 and 2015. For
the year ended December 31, 2016, net interest income was
positively impacted by increases in average taxable securities of $3.1
billion and average loans and leases of $981 million 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 increases 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 both the years
ended December 31, 2016 and 2015, respectively.
increase
Noninterest income decreased $307 million from the year
ended December 31, 2015 primarily due to decreases in other
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 the 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 the same period in 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.
Noninterest expense increased $128 million during 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.
57 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
primary purpose and consumer loans and leases based upon product
or collateral. Table 24 summarizes end of period loans and leases,
including loans and leases held for sale and Table 25 summarizes
average total loans and leases, including loans and leases held for
sale.
$
2017
2015
2016
TABLE 24: COMPONENTS OF TOTAL LOANS AND LEASES (INCLUDING LOANS AND LEASES 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 and leases held for sale)
16,077
7,014
9,112
2,299
1,559
36,061
92,462
91,970
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
41,736
6,904
3,903
3,974
56,517
42,151
6,991
3,214
3,854
56,210
41,170
6,610
4,553
4,068
56,401
$
$
2014
2013
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
Loans and leases, including loans and leases held for sale, decreased
$387 million from December 31, 2016. The decrease from
December 31, 2016 was the result of a $271 million, or 1%, decrease
in consumer loans and leases and a $116 million decrease in
commercial loans and leases.
Consumer loans and leases decreased from December 31, 2016
primarily due to decreases in automobile loans and home equity,
partially offset by increases in other consumer loans and leases,
residential mortgage loans and credit card. Automobile loans
decreased $871 million, or 9%, from December 31, 2016 as payoffs
exceeded new loan production due to a strategic shift focusing on
improving risk-adjusted returns. Home equity decreased $681
million, or 9%, from December 31, 2016 as payoffs exceeded new
loan production. Other consumer loans and leases increased $879
million from December 31, 2016 primarily due to growth in point-
of-sale loan originations. Residential mortgage loans increased $340
million, or 2%, from December 31, 2016 primarily due to the
continued retention of certain agency conforming ARMs and certain
other fixed-rate loans originated during the year ended December
31, 2017. Credit card increased $62 million, or 3%, from December
31, 2016 due to increases in customer accounts and the average
balance per active customer as a result of a new product that
launched in the fourth quarter of 2016.
Commercial loans and leases decreased from December 31,
2016 primarily due to decreases in commercial and industrial loans
and commercial mortgage loans, partially offset by increases in
commercial constructions loans and commercial leases. Commercial
and industrial loans decreased $566 million, or 1%, from December
31, 2016 primarily as a result of deliberate exits from certain loans
that did not meet the Bancorp’s risk-adjusted profitability targets
and softer loan demand. Commercial mortgage loans decreased
$294 million, or 4% from December 31, 2016 primarily due to a
decline in new loan origination activity driven by increased
competition and an increase in paydowns. Commercial construction
loans increased $650 million, or 17%, from December 31, 2016
primarily due to increases in demand and draw levels on existing
commitments. Commercial leases increased $94 million, or 2%,
from December 31, 2016 primarily as a result of an increase in
syndication and participation origination activity.
$
2017
2016
2015
TABLE 25: COMPONENTS OF TOTAL AVERAGE LOANS AND LEASES (INCLUDING LOANS AND LEASES 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 and leases held for sale)
16,053
7,308
9,407
2,141
1,016
35,925
92,731
92,068
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
41,577
6,844
4,374
4,011
56,806
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
2014
$
$
2013
37,770
8,481
793
3,565
50,609
14,428
9,554
12,021
2,121
360
38,484
89,093
86,950
58 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Average loans and leases, including loans and leases held for sale,
decreased $1.6 billion, or 2%, from December 31, 2016 as a result
of an $841 million, or 1%, decrease in average commercial loans and
leases and a $748 million, or 2%, decrease in average consumer
loans and leases.
leases decreased
Average commercial
from
loans and
December 31, 2016 primarily due to a decrease in average
commercial and industrial loans, partially offset by an increase in
average commercial construction loans. Average commercial and
industrial loans decreased $1.6 billion, or 4%, from December 31,
2016 primarily as a result of deliberate exits from certain loans that
did not meet the Bancorp’s risk-adjusted profitability targets and
softer
loans
loan demand. Average commercial construction
increased $726 million, or 20%, from December 31, 2016 primarily
due
levels on existing
in demand and draw
to
commitments.
increases
Investment Securities
The Bancorp uses investment securities as a means of managing
interest rate risk, providing both collateral for pledging purposes
and liquidity for satisfying regulatory requirements. Total investment
securities were $32.7 billion and $31.6 billion at December 31, 2017
and December 31, 2016, respectively. The available-for-sale
investment securities portfolio had an effective duration of 4.7 years
at December 31, 2017 compared to 5.0 years at December 31, 2016.
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
classified as held-to-maturity and reported at amortized cost.
Average consumer loans and leases decreased from December
31, 2016 primarily due to decreases in average automobile loans,
average home equity and average credit card, partially offset by
increases in average residential mortgage loans and average other
consumer loans and leases. Average automobile loans decreased
$1.3 billion, or 12%, from December 31, 2016 as payoffs exceeded
new loan production due to a strategic shift focusing on improving
risk-adjusted returns. Average home equity decreased $690 million,
or 9%, from December 31, 2016 as payoffs exceeded new loan
production. Average credit card decreased $64 million, or 3%, from
December 31, 2016 primarily due to elevated paydowns of mature
accounts during the first half of 2017. Average residential mortgage
loans increased $952 million, or 6%, from December 31, 2016
primarily driven by the continued retention of certain agency
conforming ARMs and certain other fixed-rate loans. Average other
consumer loans and leases increased $355 million, or 54%, primarily
due to growth in point-of-sale loan originations.
Securities are classified as trading when bought and held principally
for the purpose of selling them in the near term. At December 31,
2017, the Bancorp’s investment portfolio consisted primarily of
AAA-rated available-for-sale securities. Securities classified as below
investment grade were immaterial at both December 31, 2017 and
2016. The Bancorp’s management has evaluated the securities in an
unrealized loss position in the available-for-sale and held-to-
maturity portfolios for OTTI. Refer to Note 1 of the Notes to
Consolidated Financial Statements for the Bancorp’s methodology
for both classifying investment securities and evaluating securities in
an unrealized loss position for OTTI.
The following table provides a summary of OTTI by security type for the years ended December 31:
TABLE 26: COMPONENTS OF OTTI BY SECURITY TYPE
($ 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.
2017
(54)
-
(54)
$
$
2016
(15)
(1)
(16)
2015
(5)
-
(5)
59 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 27: 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
2017
2016
2015
2014
2013
$
98
43
547
44
1,155
50
1,545
185
1,549
187
15,281
10,113
3,247
2,183
679
31,644
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
$
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
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.
12
22
395
63
370
862
23
39
8
15
325
410
19
9
6
19
333
386
5
13
3
7
315
343
14
8
9
13
316
360
207
1
208
186
1
187
68
2
70
24
2
26
22
2
24
$
$
$
$
security holdings.
On an amortized cost basis, available-for-sale and other securities
increased $620 million, or 2%, from December 31, 2016 primarily
due to increases in agency commercial mortgage-backed securities
and non-agency commercial mortgage-backed securities, partially
offset by decreases in U.S. Treasury and federal agencies securities
and agency residential mortgage-backed securities.
On an amortized cost basis, available-for-sale and other
securities were 25% and 24% of total interest-earning assets at
December 31, 2017 and December 31, 2016, respectively. The
estimated weighted-average life of the debt securities in the
available-for-sale and other securities portfolio was 6.5 years at
December 31, 2017 compared to 6.7 years at December 31, 2016. In
addition, at December 31, 2017 and 2016 the available-for-sale and
other securities portfolio had a weighted-average yield of 3.18% and
3.19%, respectively.
Trading securities increased $452 million from December 31,
2016 primarily due to an increase in agency residential mortgage-
backed securities purchased as part of the Bancorp’s non-qualifying
hedging strategy to economically hedge a portion of the risk
associated with the MSR portfolio. Refer to Note 12 of the Notes to
Consolidated Financial Statements for further information.
information
Information presented in Table 28 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 $176 million at
December 31, 2017 compared to $159 million at 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.
60 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 28: CHARACTERISTICS OF AVAILABLE-FOR-SALE AND OTHER SECURITIES
Weighted-Average Weighted-Average
$
$
$
Yield
Fair Value
9
18
16
43
9
19
16
44
Life (in years)
Amortized Cost
0.3
4.4
6.3
4.2
-
-
98
98
-
-
98
98
0.6
3.7
5.1
5.1
2.31 %
3.16
2.12
2.12 %
0.02
4.17
3.67
3.13 %
As of December 31, 2017 ($ 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%, 2.25%, 2.00% and 1.69% for securities with an average life of 1 year or less, 1-5 years, 5-10 years and in total,
17
533
264
1,404
2,218
681
31,820
17
528
259
1,379
2,183
679
31,644
3.24
3.49
2.99
3.41
3.38 %
2.88
2.90
3.04
3.00
3.00 %
3.81
3.43
3.12
3.07
3.25 %
8
2,794
6,335
1,030
10,167
8
2,799
6,273
1,033
10,113
88
6,488
7,875
868
15,319
87
6,476
7,844
874
15,281
3.86
3.15
3.26
3.26 %
0.6
2.9
7.5
15.4
11.3
0.4
3.5
7.3
12.1
6.7
24
137
3,086
3,247
24
138
3,131
3,293
0.7
3.6
6.8
11.1
5.7
0.5
3.1
7.0
6.7
3.18 %
6.5
$
$
$
$
$
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. Average core deposits represented 71%
and 70% of the Bancorp’s average asset funding base for the years
ended December 31, 2017 and 2016, respectively.
The following table presents the end of period components of deposits:
TABLE 29: 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)
2017
35,276
27,703
13,425
20,097
484
96,985
3,775
100,760
2,402
-
103,162
$
$
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
32,634
25,875
17,045
11,644
1,976
89,174
3,530
92,704
6,571
-
99,275
Includes $1.3 billion, $1.3 billion, $1.5 billion, $1.8 billion and $2.3 billion of institutional, retail and wholesale certificates $250,000 and over at December 31, 2017, 2016, 2015, 2014
and 2013, respectively.
61 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Core deposits decreased $683 million, or 1%, from December 31,
2016, driven by a decrease of $592 million in transaction deposits.
Transaction deposits decreased from December 31, 2016 primarily
due to decreases in money market deposits, savings deposits and
demand deposits partially offset by an increase in interest checking
deposits. Money market deposits decreased $652 million, or 3%,
from December 31, 2016 primarily due to lower balances per
account for commercial customers partially offset by competitive
pricing related to a promotional product offering during the second
half of 2017 which drove customer acquisition for consumer
accounts. The money market promotional product offering also
drove balance migration from savings deposits, which decreased
$516 million, or 4%, compared to December 31, 2016. Demand
deposits decreased $506 million, or 1%, from December 31, 2016
primarily due to lower balances per account for commercial
customers. Interest checking deposits increased $1.0 billion, or 4%,
from December 31, 2016 primarily due to the acquisition of new
commercial customers.
The following table presents the components of average deposits for the years ended December 31:
TABLE 30: COMPONENTS OF AVERAGE DEPOSITS
($ 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)
2017
35,093
26,382
13,958
20,231
388
96,052
3,771
99,823
2,564
277
102,664
$
$
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
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
Includes $1.4 billion, $1.5 billion, $1.6 billion, $1.8 billion and $2.1 billion of average institutional, retail and wholesale certificates $250,000 and over during the years ended December 31,
2017, 2016, 2015, 2014 and 2013, respectively.
On an average basis, core deposits increased $442 million from
December 31, 2016 primarily due to an increase of $681 million in
average transaction deposits partially offset by a decrease of $239
million in average other time deposits. The increase in average
transaction deposits was driven by increases in average interest
checking deposits and average money market deposits partially
offset by decreases in average demand deposits and average savings
deposits. Average interest checking deposits increased $1.2 billion,
or 5%, from December 31, 2016 primarily due to the acquisition of
new commercial customers. Average money market deposits
increased $708 million, or 4%, primarily due to competitive pricing
related to a promotional product offering during the second half of
2017 which drove customer acquisition for consumer accounts. The
money market promotional product offering also drove balance
migration from savings deposits, which decreased $388 million, or
3%, compared to December 31, 2016. The increase in average
money market deposits was partially offset by lower average
balances per account for commercial customers. Average demand
deposits decreased $769 million, or 2%, from December 31, 2016
primarily due to lower average balances per account for commercial
customers. Average other time deposits decreased $239 million, or
6%, from December 31, 2016 primarily due to a decrease in average
low rate
less than $100,000 as a result of the
certificates
environment. The change in average core deposits from December
31, 2016 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 the first half of 2016.
Average certificates $100,000 and over decreased $171 million,
or 6%, from December 31, 2016 due primarily to the maturity and
run-off of institutional certificates of deposit since December 31,
2016.
Contractual Maturities
The contractual maturities of certificates $100,000 and over as of December 31, 2017 are summarized in the following table:
TABLE 31: 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
$
$
805
184
383
1,030
2,402
62 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, 2017 are summarized in the following
table:
TABLE 32: 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
$
$
3,266
1,365
1,136
339
62
9
6,177
Borrowings
The Bancorp accesses a variety of 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 33 summarizes the end of
period components of total borrowings. Average total borrowings
as a percent of average interest-bearing liabilities were 21% at
December 31, 2017 compared to 22% at December 31, 2016.
The following table summarizes the end of period components of borrowings:
TABLE 33: COMPONENTS OF BORROWINGS
As of December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total borrowings
Total borrowings increased $1.0 billion, or 6%, from December 31,
2016 primarily due to increases in long-term debt and other short-
term borrowings. Long-term debt increased $516 million from
December 31, 2016 primarily driven by the issuances of $1.5 billion
of unsecured senior fixed-rate bank notes, $300 million of
unsecured senior floating-rate bank notes and asset-backed
securities of $750 million related
loan
securitization during the year ended December 31, 2017. These
increases were partially offset by $787 million of pay downs on
long-term debt associated with automobile loan securitizations and
the maturity of $650 million of unsecured senior bank notes and
$500 million of unsecured subordinated debt during the year ended
regarding
December 31, 2017. For additional
to an automobile
information
The following table summarizes the components of average borrowings:
TABLE 34: COMPONENTS OF AVERAGE BORROWINGS
For the years ended December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total average borrowings
Total average borrowings decreased $1.2 billion, or 7%, compared
to December 31, 2016, primarily due to a decrease in average long-
term debt partially offset by an increase in average other short-term
borrowings. Average
long-term debt decreased $1.6 billion
compared to December 31, 2016. The decrease was driven primarily
by the maturities of unsecured senior notes and subordinated debt,
as discussed above, during the first half of 2017, and paydowns on
long-term debt associated with automobile loan securitizations.
These were partially offset by the issuances of long-term debt, as
discussed above, primarily during the second half of 2017. Average
2017
174
4,012
14,904
19,090
2016
132
3,535
14,388
18,055
2015
151
1,507
15,810
17,468
2014
144
1,556
14,932
16,632
2013
284
1,380
9,605
11,269
$
$
automobile securitizations and long-term debt, refer to Note 11 and
Note 16, respectively, of the Notes to Consolidated Financial
Statements. Other short-term borrowings increased $477 million,
from December 31, 2016 driven by an increase of $625 million in
FHLB short-term borrowings partially offset by a $115 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.
2017
557
3,158
13,804
17,519
$
$
2016
506
2,845
15,394
18,745
2015
920
1,721
14,644
17,285
2014
2013
458
1,873
12,894
15,225
503
3,024
7,886
11,413
in
securities
other short-term borrowings increased $313 million compared to
December 31, 2016, driven primarily by the aforementioned
increase in FHLB short-term borrowings partially offset by the
decrease
repurchase agreements.
sold under
Information on the average rates paid on borrowings is discussed 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.
63 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISK MANAGEMENT - OVERVIEW
Risk management is critical for effectively serving customers’
financial needs while protecting the Bancorp and achieving strategic
goals. It is also essential to reducing the volatility of earnings and
safeguarding our brand and reputation. Further, risk management is
integral to the Bancorp’s strategic and capital planning processes. It
is essential that the Bancorp’s business strategies consistently align
to its overall risk appetite and capital considerations. Maintaining
risks within the Bancorp’s risk appetite requires that risks are
understood by all employees across the enterprise, and appropriate
risk mitigants and controls are in place to limit risk to within the risk
appetite. To achieve this, the Bancorp implements a framework for
managing risk that encompasses business as usual activities and the
utilization of a risk process for identifying, assessing, managing,
monitoring and reporting risks.
Fifth Third uses a structure consisting of three lines of defense
in order to clarify the roles and responsibilities for effective risk
management.
The risk taking functions within the lines of business comprise
the first line of defense. The first line of defense originates risk
through normal business as usual activities; therefore, it is essential
that they monitor, assess and manage the risks being taken,
implement controls necessary to mitigate those risks and take
responsibility for managing their business within the Bancorp’s risk
appetite.
Control functions, such as the Risk Management organization,
are the second line of defense and are responsible for providing
challenge, oversight and governance of activities performed by the
first line.
The Audit division is the third line of defense and provides an
independent assessment of the Bancorp’s internal control structure
and related systems and processes. The Credit Risk Review division
provides an independent assessment of credit risk, which includes
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.
Fifth Third’s core values and culture provide a foundation for
supporting sound risk management practices by setting expectations
for appropriate conduct and accountability across the organization.
All employees are expected to conduct themselves in alignment
with Fifth Third’s core values and Code of Business Conduct &
Ethics, which may be found on www.53.com, while carrying out
their responsibilities. Fifth Third’s Corporate Responsibility and
Reputation Committee provides oversight of business conduct
policies, programs and strategies, and monitors reporting of
potential misconduct, trends or themes across the enterprise.
Prudent risk management is a responsibility that is expected from all
employees across the first, second and third lines of defense and is a
foundational element of Fifth Third’s culture.
Below are the Bancorp’s core principles of risk management
that are used to ensure the Bancorp is operating in a safe and sound
manner:
•
• Understand the risks taken as a necessary part of business;
however, the Bancorp ensures risks taken are in alignment
with its strategy and risk appetite.
Provide transparency and escalate risks and issues as
necessary.
• Ensure Fifth Third’s products and services are designed,
delivered and maintained to provide value and benefit to its
customers and
that potential
to Fifth Third, and
opportunities remain aligned to the core customer base.
• Avoid risks that cannot be understood, managed and
monitored.
• Act with integrity in all activities.
64 Fifth Third Bancorp
•
Focus on providing operational excellence by providing
reliable, accurate and efficient services to meet customer’s
needs.
•
• Maintain a strong financial position to ensure that the
Bancorp meets its strategic objectives through all economic
cycles and is able to access the capital markets at all times,
even under stressed conditions.
Protect
thoroughly
understanding the consequences of business strategies,
products and processes.
the Bancorp’s
reputation
• Conduct business in compliance with all applicable laws,
rules and regulations and in alignment with internal policies
and procedures.
by
Fifth Third’s success
is dependent on effective
risk
management and understanding and controlling the risks taken in
order to deliver sustainable returns for employees and shareholders.
The Bancorp’s goal is to ensure that aggregate risks do not exceed
its risk capacity, and that risks taken are supportive of the Bancorp’s
portfolio diversification and profitability objectives.
Fifth Third’s Risk Management Framework, states its risk
appetite and the linkage to strategic and capital planning, defines
and sets the tolerance for each of the eight risk types, explains the
process used to manage risk across the enterprise and sets forth its
risk governance structure.
•
•
•
•
The Board of Directors (the “Board”) and executive
management define the risk appetite, which is considered in
the development of business strategies, and forms the basis
for enterprise risk management. The Bancorp’s risk appetite
is set annually in alignment with the strategic, capital and
financial plans, and is reviewed by the Board on an annual
basis.
The Risk Management Process provides a consistent and
integrated approach for managing risks and ensuring
appropriate risk mitigants and controls are in place, and risks
and issues are appropriately escalated. Five components are
utilized for effective risk management; identifying, assessing,
managing, monitoring and reporting risks.
The Board and executive management have identified eight
risk types for monitoring the overall risk of the Bancorp;
Credit Risk, Market Risk, Liquidity Risk, Operational Risk,
Regulatory Compliance Risk, Legal Risk, Reputation Risk
and Strategic Risk, and have also qualitatively established a
risk tolerance, which is defined as the maximum amount of
risk the Bancorp is willing to take for each of the eight risk
types. These risk types are assessed on an ongoing basis and
reported to the board each quarter, or more frequently, if
necessary. In addition, each business and operational
function (first line of defense) is accountable for proactively
identifying and managing risk using its risk management
process. Risk tolerances and risk limits are also established,
where appropriate, in order to ensure that businesses and
operational functions across the enterprise are able to
monitor and manage risks at a more granular level, while
ensuring that aggregate risks across the enterprise do not
exceed the overall risk appetite.
The Bancorp’s
includes
management committees operating under delegation from,
and providing information directly or indirectly to, the
Board. The Bancorp Board delegates certain responsibilities
to Board sub-committees, including the RCC as outlined in
each respective Committee Charter, which may be found on
www.53.com. The ERMC, which reports to the RCC,
comprises senior management from across the Bancorp and
governance
structure
risk
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
reviews and approves risk management frameworks and
policies, oversees the management of all risk types to ensure
that aggregated risks remain within the Bancorp’s risk
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
which are described below. These practices include the use of
intentional risk-based
limits for single name exposures and
counterparty selection criteria designed to reduce or eliminate
exposure to borrowers who have higher than average default risk
and defined weaknesses in financial performance. The Bancorp
carefully designed and monitors 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
appetite, and fosters a risk culture to ensure appropriate
escalation and transparency of risks.
authority delegation process directly. The Credit Risk Review
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 allowance for credit losses 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 and consumer
portfolios using the CCAR model and for certain portfolios, such as
real estate and leveraged lending, the stress testing is performed by
Credit department personnel at the individual loan level during
credit underwriting.
The following tables provide a summary of potential problem portfolio loans and leases:
TABLE 35: POTENTIAL PROBLEM PORTFOLIO LOANS AND LEASES
As of December 31, 2017 ($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial leases
Total 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
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. A “through the cycle” rating philosophy uses a
grading scale that assigns ratings based on average default rates
through an entire business cycle for borrowers with similar financial
performance. The dual risk rating system
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
includes
Carrying
Value
911
138
70
1,119
Carrying
Value
1,108
102
22
1,232
$
$
$
$
Unpaid
Principal
Balance
912
138
70
1,120
Unpaid
Principal
Balance
1,110
102
22
1,234
Exposure
1,370
138
70
1,578
Exposure
1,807
104
22
1,933
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
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.
65 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Economic growth continues to improve as data has been broadly
positive in the fourth quarter of 2017. Growth is expected to
continue in 2018 with the implementation of new corporate and
consumer tax reduction programs. There have been steady gains in
the job market and real GDP is expected to expand at a faster pace
in 2018. Household spending continues to be the strongest driver of
the U.S. economy. Inflation continues to run below the FRB’s
stated objective, however the rate of inflation is expected to increase
in 2018. 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. The Bancorp is monitoring
potential increased risks in the Retail sector as a result of
profitability declines among many large retailers and the year-end
2017 results are expected to show a continued shift to online
purchasing.
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 37: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION
As of December 31, 2017 ($ in millions)
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Total
79
14
93
$
$
LTV > 100% LTV 80-100%
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%
110
169
279
178
100
278
LTV < 80%
2,222
2,208
4,430
LTV < 80%
1,953
2,598
4,551
66 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 39: COMMERCIAL LOAN AND LEASE PORTFOLIO (EXCLUDING LOANS AND LEASES HELD FOR SALE)
As of December 31 ($ in millions)
By Industry:
Manufacturing
Real estate
Financial services and insurance
Healthcare
Business services
Retail trade
Communication and information
Accommodation and food
Wholesale trade
Transportation and warehousing
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
Georgia
North Carolina
Tennessee
Kentucky
Other
Total
Outstanding
2017
Exposure
Nonaccrual
Outstanding
2016
Exposure
Nonaccrual
$
$
10,044
7,713
5,792
4,712
4,147
3,617
3,322
3,268
3,017
3,012
2,374
1,624
1,454
869
714
370
304
27
15
56,395
1 %
3
7
6
21
62
100 %
14 %
8
7
7
4
4
3
3
3
47
100 %
18,948
12,493
11,933
6,486
6,512
7,950
5,308
5,321
5,363
4,621
4,449
2,911
3,001
2,333
1,017
474
478
57
15
99,670
1
2
6
5
18
68
100
15
8
7
6
4
5
3
3
3
46
100
74
25
1
35
42
3
-
4
6
29
2
7
56
-
16
-
2
-
4
306
5
8
15
10
57
5
100
7
6
13
9
3
2
1
8
1
50
100
10,070
7,206
5,648
4,649
4,599
4,048
2,901
3,051
3,482
3,059
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
4
3
3
45
100
19,646
11,919
11,522
6,450
6,996
7,598
4,726
4,817
6,249
4,473
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
5
4
3
3
44
100
50
26
2
23
65
6
-
5
24
38
3
3
246
-
24
-
2
1
5
523
3
5
16
13
54
9
100
4
5
5
9
2
5
-
1
2
67
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
migration into criticized classifications during 2015 through the
second quarter of 2016. However, in the second half of 2016 and
2017, the energy portfolio has stabilized and has shown improved
performance. There has been a decrease in nonperforming assets in
the past two quarters, primarily in the reserve-based lending
category. Oil prices have stabilized, which has contributed to the
improvement in the overall energy sector.
67 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 40: NON-POWER PRODUCING ENERGY PORTFOLIO
As of December 31, 2017 ($ in millions)
Reserve-based lending
Midstream
Oil field services
Oil and gas
Refining
Total
Pass
853
309
26
35
41
1,264
$
$
Criticized Outstanding Exposure
2,031
1,002
269
418
365
4,085
971
309
181
90
41
1,592
118
-
155
55
-
328
90 Days
Past Due
-
-
-
-
-
-
Nonaccrual
39
-
16
-
-
55
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
Criticized Outstanding
$
$
337
308
153
17
82
897
338
-
74
78
-
490
675
308
227
95
82
1,387
Exposure
1,368
1,001
357
475
471
3,672
90 Days
Past Due Nonaccrual
170
-
37
37
-
244
-
-
-
-
-
-
For the Year Ended
December 31, 2017
Net Charge-offs
-
-
5
-
-
5
For the Year Ended
December 31, 2016
Net Charge-offs
-
-
19
3
-
22
The following tables provide an analysis of nonowner-occupied commercial real estate loans by state (excluding loans held for sale):
TABLE 42: NONOWNER-OCCUPIED COMMERCIAL REAL ESTATE (EXCLUDING LOANS HELD FOR SALE)(a)
As of December 31, 2017 ($ in millions)
By State:
Outstanding
Exposure
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2017
$
Ohio
Florida
Illinois
Michigan
North Carolina
Indiana
Georgia
All other states
1
1
-
3
-
-
-
2
7
$
Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.
2,156
1,495
1,020
717
795
768
906
3,616
11,473
1,636
1,016
787
559
506
490
481
2,142
7,617
-
-
-
-
-
-
-
-
-
Total
(a)
8
-
-
1
-
-
-
1
10
TABLE 43: NONOWNER-OCCUPIED COMMERCIAL REAL ESTATE (EXCLUDING LOANS HELD FOR SALE)(a)
As of December 31, 2016 ($ in millions)
By State:
Outstanding
Exposure
90 Days
Past Due
Nonaccrual
For the Year Ended
December 31, 2016
Net Charge-offs
(Recoveries)
$
Ohio
Florida
Illinois
Michigan
North Carolina
Georgia
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
731
508
4,105
11,432
1,393
947
656
574
552
307
291
2,515
7,235
-
-
-
-
-
-
-
-
-
Total
(a)
(2)
1
1
3
-
-
-
3
6
68 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consumer Portfolio
Consumer credit risk management utilizes a framework that
identifying, assessing,
encompasses consistent processes
managing, monitoring, and reporting credit risk. These processes are
supported by a credit risk governance structure that includes Board
oversight, policies, risk limits, and risk committees.
for
The Bancorp’s consumer portfolio is materially comprised of
four categories of loans: residential mortgage loans, home equity
loans, automobile loans and credit card. The Bancorp has identified
certain credit characteristics within these four categories of loans
which it believes represent a higher level of risk compared to the
rest of the consumer loan portfolio. 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 past credit crisis. As of December 31, 2017,
consumer real estate loans, consisting of residential mortgage loans
and home equity loans, originated from 2005 through 2008
represent approximately 14% of the consumer real estate portfolio.
These loans accounted for 46% of total consumer real estate
secured losses for the year ended December 31, 2017. 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. The automobile market has
exhibited industry-wide gradual loosening of credit standards such
as lower FICOs, longer terms and higher LTVs. Fifth Third has
adjusted credit standards focused on improving risk-adjusted returns
while maintaining credit risk tolerance. 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 underwriting guidelines that limit exposure to
higher LTV ratios and lower FICO scores. Additionally, the
portfolio is governed by concentration limits that ensure geographic,
product and channel 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. Within the ARM portfolio approximately $630
million of ARM loans will have rate resets during the next twelve
months. Of these resets, 95% are expected to experience an increase
in rate, with an average increase of approximately 0.6%.
Certain residential mortgage products have contractual features
that may increase credit exposure to the Bancorp in the event of a
decline in housing values. These types of mortgage products offered
by the Bancorp include loans with high LTV ratios, multiple loans
on the same collateral that when combined result in an LTV greater
than 80% and interest-only loans. The Bancorp has deemed
residential mortgage loans with greater than 80% LTV ratios and no
mortgage insurance as loans that represent a higher level of risk.
Portfolio residential mortgage loans from 2010 and later
vintages represented 90% of the portfolio as of December 31, 2017
and had a weighted-average LTV of 72% and a weighted-average
origination FICO of 760.
The following table provides an analysis of the residential mortgage portfolio loans outstanding by LTV at origination as of:
TABLE 44: RESIDENTIAL MORTGAGE PORTFOLIO LOANS BY LTV AT ORIGINATION
2017
Weighted-
As of December 31 ($ in millions)
LTV ≤ 80%
LTV > 80%, with mortgage insurance(a)
LTV > 80%, no mortgage insurance
Total
(a)
Includes loans with both borrower and lender paid mortgage insurance.
$
Outstanding Average LTV
$
11,767
1,890
1,934
15,591
2016
Weighted-
Outstanding Average LTV
66.4 % $
94.8
94.7
73.7 % $
11,412
1,664
1,975
15,051
65.9 %
94.3
95.4
73.2 %
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 45: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
As of December 31, 2017 ($ 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, 2017
$
439
382
287
226
138
85
76
301
$
1,934
4
1
3
1
1
-
1
2
13
2
2
3
1
1
1
1
1
12
1
1
1
-
-
-
-
-
3
69 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
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 ALLL provides coverage for probable and estimable losses
in the home equity portfolio. The allowance attributable to the
portion of the home equity portfolio that has not been restructured
in a TDR is calculated on a pooled basis with senior lien and junior
lien categories segmented in the determination of the probable
credit losses in the home equity portfolio. The modeled loss factor
for the home equity portfolio is based on the trailing twelve month
historical loss rate for each category, as adjusted for certain
prescriptive loss rate factors and certain qualitative adjustment
factors to reflect risks associated with current conditions and trends.
The prescriptive
for
delinquency trends, LTV trends 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
those loans with an LTV of 80% or less based upon appraisals at
origination. For additional information on these loans, refer to
include adjustments
loss rate
factors
Outstanding
90 Days
Past Due Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2016
$
$
470
362
290
244
143
96
75
295
1,975
2
1
1
-
-
-
1
-
5
4
1
3
1
1
1
-
-
11
2
-
-
1
-
-
-
1
4
Table 48 and Table 49. Of the total $7.0 billion of outstanding
home equity loans:
•
•
•
88% reside within the Bancorp’s Midwest footprint of
Ohio, Michigan, Kentucky, Indiana and Illinois as of
December 31, 2017;
37% are in senior lien positions and 63% are in junior lien
positions at December 31, 2017;
79% of non-delinquent borrowers made at least one
payment greater than the minimum payment during the
year ended December 31, 2017; and
• The portfolio had an average refreshed FICO score of 744
at December 31, 2017.
The Bancorp actively manages lines of credit and makes
adjustments in credit limits when it believes that a customer has
encountered financial difficulties and/or a decreased ability to repay
their current obligations. The Bancorp does not routinely obtain
loans to update LTV ratios after
appraisals on performing
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.
70 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 as of:
TABLE 47: 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
2017
2016
Outstanding
% of Total
Outstanding
% of Total
$
$
246
358
1,976
2,580
541
853
3,040
4,434
7,014
4 % $
5
28
37
8
12
43
63
100 % $
262
424
2,112
2,798
633
975
3,289
4,897
7,695
3 %
6
27
36
8
13
43
64
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 48: 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
2017
Weighted-
2016
Weighted-
Outstanding Average LTV
Outstanding Average LTV
$
$
2,266
314
2,580
2,603
1,831
4,434
7,014
54.9 % $
88.9
59.3
67.5
90.4
78.3
70.9 % $
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 %
The following tables provide an analysis of home equity portfolio loans by state with a combined LTV greater than 80%:
TABLE 49: HOME EQUITY PORTFOLIO LOANS OUTSTANDING WITH AN LTV GREATER THAN 80%
As of December 31, 2017 ($ 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, 2017
$
$
1,047
357
228
155
143
68
147
2,145
1,943
569
357
264
257
98
216
3,704
-
-
-
-
-
-
-
-
9
5
3
3
2
2
3
27
4
1
2
1
1
-
-
9
71 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 50: HOME EQUITY PORTFOLIO LOANS OUTSTANDING WITH AN LTV GREATER THAN 80%
As of December 31, 2016 ($ in millions)
By State:
Ohio
Michigan
Illinois
Indiana
Kentucky
Florida
All other states
Total
For the Year Ended
December 31, 2016
Outstanding
Exposure
90 Days
Past Due
Nonaccrual
Net Charge-offs
$
$
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
Automobile portfolio
The Bancorp’s automobile portfolio balances have declined since
December 31, 2016 as payoffs exceeded new loan production due to
a strategic shift focusing on improving risk-adjusted returns.
Additionally, the concentration of lower FICO (<690) origination
balances remained within the Bancorp’s targeted credit risk
tolerance during
the year ended December 31, 2017. 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 as of:
TABLE 51: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING BY FICO SCORE AT ORIGINATION
2017
2016
As of December 31 ($ in millions)
FICO ≤ 690
FICO > 690
Total
Outstanding
1,563
7,549
9,112
$
$
% of Total
17 %
83
100 %
$
Outstanding
$
1,714
8,269
9,983
% of Total
17 %
83
100 %
The automobile portfolio is characterized by direct and indirect
lending products to consumers. As of December 31, 2017, 45% 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 negative equity trade-in, maintenance/warranty
products, 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 as of:
TABLE 52: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING BY LTV AT ORIGINATION
As of December 31 ($ in millions)
LTV ≤ 100%
LTV > 100%
Total
2017
Weighted-
2016
Weighted-
Outstanding Average LTV
Outstanding Average LTV
$
$
5,814
3,298
9,112
82.1 % $
112.4
93.5 % $
6,637
3,346
9,983
82.0 %
111.7
92.4 %
The following table provides an analysis of the Bancorp’s automobile portfolio loans with an LTV at origination greater than 100% as of and for
the years ended:
TABLE 53: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING WITH AN LTV GREATER THAN 100%
($ in millions)
December 31, 2017
December 31, 2016
Outstanding
$
3,298
3,346
90 Days Past
Due and Accruing
Nonaccrual
Net Charge-offs
7
5
1
1
24
23
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, 2017. At December 31, 2017 and December 31,
2016, 76% and 78%, respectively, of the outstanding balances were
originated through branch-based relationships with the remainder
coming from direct mail campaigns and online acquisitions.
72 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 as of:
TABLE 54: CREDIT CARD PORTFOLIO LOANS OUTSTANDING BY FICO SCORE AT ORIGINATION
2017
2016
As of December 31 ($ in millions)
FICO ≤ 659
FICO 660-719
FICO ≥ 720
Total
Outstanding
% of Total
$
$
61
581
1,657
2,299
3 %
25
72
100 %
$
Outstanding
$
45
521
1,671
2,237
% of Total
2 %
23
75
100 %
European Exposure
The Bancorp has no direct sovereign exposure to any European
government as of December 31, 2017. In providing services to
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
institutions was $3.2 billion and funded
European financial
exposure was $1.6 billion as of December 31, 2017. Additionally,
the Bancorp was within its established country exposure limits for
all European countries.
The Bancorp continues to monitor the Brexit situation and its
potential impact on the Bancorp. The Bancorp’s United Kingdom
exposure is shown in the following table.
The following table provides detail about the Bancorp’s exposure to all European domiciled and U.S. subsidiaries of European businesses as well
as European financial institutions as of December 31, 2017:
TABLE 55: EUROPEAN EXPOSURE
Sovereigns
Financial Institutions
Non-Financial
Institutions
Total
Total
Total
Funded
($ 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 and territories not part of the Eurozone (primarily Norway, Sweden, Switzerland and Isle of Man).
Funded
Exposure(a) Exposure
-
$
-
-
-
-
-
Funded
Exposure(a) Exposure Exposure(a) Exposure Exposure(a) Exposure
124
265
875
1,366
999
1,631
588
929
20
72
1,607
2,632
87
759
846
453
20
1,319
344
1,707
2,051
1,064
72
3,187
37
116
153
135
-
288
79
341
420
135
-
555
-
-
-
-
-
-
Funded
Total
Total
$
$
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 56. 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 $495 million at December 31, 2017
compared to $751 million at December 31, 2016. At December 31,
2017, $6 million of nonaccrual loans were held for sale, compared to
$13 million at December 31, 2016.
Nonperforming portfolio assets as a percent of portfolio loans
and leases and OREO were 0.53% as of December 31, 2017
compared to 0.80% as of December 31, 2016. Nonaccrual loans and
leases secured by real estate were 33% of nonaccrual loans and
leases as of December 31, 2017 compared to 25% as of December
31, 2016.
Commercial portfolio nonaccrual loans and leases were $306
million at December 31, 2017, a decrease of $217 million from
December 31, 2016 primarily due to a decrease of $189 million in
the energy related portfolio, of which $131 million was related to
the reserve-based lending energy portfolio.
Consumer portfolio nonaccrual loans and leases were $131
million at December 31, 2017, a decrease of $6 million from
December 31, 2016. Refer to Table 57 for a rollforward of the
portfolio nonaccrual loans and leases.
OREO and other repossessed property was $52 million at
December 31, 2017, compared to $78 million at December 31,
2016. The Bancorp recognized $10 million and $17 million in losses
on the sale or write-down of OREO properties during the years
ended December 31, 2017 and 2016, respectively.
During the years ended December 31, 2017 and 2016,
approximately $36 million and $41 million, respectively, of interest
income would have been recognized if the nonaccrual and
renegotiated loans and leases on nonaccrual status had been current
in accordance with their original terms. Although these values help
demonstrate the costs of carrying nonaccrual credits, the Bancorp
does not expect to recover the full amount of interest as nonaccrual
loans and leases are generally carried below their principal balance.
73 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 56: SUMMARY OF NONPERFORMING ASSETS AND DELINQUENT LOANS
2017
As of December 31 ($ in millions)
Nonaccrual portfolio loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
$
Residential mortgage loans
Home equity
Nonaccrual portfolio restructured loans and leases:
Commercial and industrial loans
Commercial mortgage loans(c)
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Total nonaccrual portfolio loans and leases(b)
OREO and other repossessed property(d)
Total nonperforming portfolio assets
Nonaccrual loans held for sale
Nonaccrual restructured loans held for sale
Total nonperforming assets
Loans and leases 90 days past due and still accruing:
Commercial and industrial loans
Residential mortgage loans(a)
144
12
-
-
17
56
132
14
-
4
13
18
1
26
437
52
489
5
1
495
3
57
10
27
97
0.53 %
245
$
$
$
2016
2015
2014
2013
302
27
-
2
17
55
176
14
-
2
17
18
2
28
660
78
738
4
9
751
4
49
9
22
84
0.80
170
82
56
-
-
28
62
177
25
-
1
23
17
2
33
506
141
647
1
11
659
7
40
10
18
75
0.70
197
86
64
-
3
44
72
142
71
-
1
33
21
1
41
579
165
744
24
15
783
-
56
8
23
87
0.82
178
127
90
10
3
83
74
154
53
19
2
83
19
1
33
751
229
980
6
-
986
-
66
8
29
103
1.10
161
Automobile loans
Credit card
Total loans and leases 90 days past due and still accruing
Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO
ALLL as a percent of nonperforming portfolio assets
(a)
(b)
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 $290, $312, $335, $373 and $378 as of December 31, 2017, 2016, 2015, 2014 and 2013, respectively. The Bancorp recognized losses of $5, $6, $8, $13 and $5 for
the years ended December 31, 2017, 2016, 2015, 2014 and 2013, respectively.
Includes $3, $4, $6, $9, and $10 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at December 31, 2017, 2016, 2015, 2014 and 2013,
respectively, of which $3, $1, $2, $4, and $2 were restructured nonaccrual government insured commercial loans at December 31, 2017, 2016, 2015, 2014 and 2013, respectively.
(c) Excludes $19, 20, 21, and 21 of restructured nonaccrual loans at December 31, 2016, 2015, 2014 and 2013, respectively, associated with a consolidated VIE in which the Bancorp had no
continuing credit risk due to the risk being assumed by a third party. Refer to Note 11 of the Notes to Consolidated Financial Statements for further discussion on the deconsolidation of the VIE
associated with these loans in the third quarter of 2017.
(d) Excludes $71 and $77 of OREO related to government insured loans at December 31, 2014 and 2013, respectively. The Bancorp had historically excluded government guaranteed loans classified
in OREO from its nonperforming asset disclosures. Upon the prospective adoption on January 1, 2015 of ASU 2014-14, “Classification of Certain Government-Guaranteed Mortgage Loans
Upon Foreclosure,” government guaranteed loans meeting certain criteria are reclassified to other receivables rather than OREO upon foreclosure.
74 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides a rollforward of portfolio nonaccrual loans and leases, by portfolio segment:
TABLE 57: ROLLFORWARD OF PORTFOLIO NONACCRUAL LOANS AND LEASES
For the year ended December 31, 2017 ($ 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, 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
Troubled Debt Restructurings
If a borrower is experiencing financial difficulty, the Bancorp may
consider, in certain circumstances, modifying the terms of their loan
these
to maximize collection of amounts due. Typically,
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
Commercial
523
300
(86)
(5)
(16)
(282)
(2)
(154)
28
306
341
716
(13)
(42)
(11)
(256)
(8)
(232)
28
523
$
$
$
$
Residential
Mortgage
34
46
(26)
-
-
(10)
(10)
(4)
-
30
51
51
(43)
-
-
(7)
(14)
(4)
-
34
Consumer
103
130
(55)
-
-
(29)
(7)
(41)
-
101
114
149
(70)
-
-
(31)
(11)
(48)
-
103
Total
660
476
(167)
(5)
(16)
(321)
(19)
(199)
28
437
506
916
(126)
(42)
(11)
(294)
(33)
(284)
28
660
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 $927
million and $958 million at December 31, 2017 and 2016,
respectively. As of December 31, 2017, the percentage of
restructured residential mortgage loans, home equity loans, and
credit card loans that are past due 30 days or more were 28%, 11%
and 37%, respectively.
The following tables summarize portfolio TDRs by loan type and delinquency status:
TABLE 58: ACCRUING AND NONACCRUING PORTFOLIO TDRs
As of December 31, 2017 ($ in millions)
Commercial loans(b)
Residential mortgage loans(a)
Home equity
Automobile loans
Credit card
Total
(a)
(b) Excludes restructured nonaccrual loans held for sale.
Current
249
478
236
8
16
987
$
$
Accruing
30-89 Days
Past Due
90 Days or
More Past Due
Nonaccruing
Total
-
52
12
-
3
67
-
122
-
-
-
122
150
13
18
1
26
208
399
665
266
9
45
1,384
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,
2017, these advances represented $282 of current loans, $40 of 30-89 days past due loans and $108 of 90 days or more past due loans.
75 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 59: ACCRUING AND NONACCRUING PORTFOLIO TDRs
As of December 31, 2016 ($ 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 had no continuing credit
risk due to the risk being assumed by a third party. Refer to Note 11 of the Notes to Consolidated Financial Statements for further discussion on the deconsolidation of the VIE associated with
these loans in the third quarter of 2017.
(c) Excludes restructured nonaccrual loans held for sale.
Analysis of Net Loan Charge-offs
Net charge-offs were 32 bps and 39 bps of average portfolio loans
and leases for the years ended December 31, 2017 and 2016,
respectively. Table 60 provides a summary of credit loss experience
and net charge-offs as a percentage of average portfolio loans and
leases outstanding by loan category.
The ratio of commercial loan and lease net charge-offs to
average portfolio commercial loans and leases decreased to 22 bps
during the year ended December 31, 2017, compared to 33 bps
during the year ended December 31, 2016. Commercial loan net
charge-offs decreased $65 million for the year ended December 31,
2017, compared to the same period in the prior year. The decrease
for the year ended December 31, 2017, was driven by a decrease in
net charge-offs on commercial and industrial loans. Included in net
charge-offs on commercial and industrial loans for the years ended
December 31, 2017 and 2016 were $25 million and $30 million,
respectively, of charge-offs related to certain healthcare loans and $5
million and $39 million, respectively, of charge-offs in the energy
related portfolio including oil field services and coal mining loans.
Consumer loan net charge-offs as a percent of average
portfolio consumer loans and leases were 49 bps for the year ended
December 31, 2017 compared to 48 bps for the year ended
December 31, 2016. Consumer loan net charge-offs increased $1
million for the year ended December 31, 2017 compared to the
same period in the prior year. Refer to Table 60 for a summary of
net charge-offs by consumer loan category.
76 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 60: SUMMARY OF CREDIT LOSS EXPERIENCE
For the years ended December 31 ($ in millions)
Losses charged-off:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total losses charged-off
Recoveries of losses previously charged-off:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total recoveries of losses previously charged-off
Net losses charged-off:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total net losses charged-off
Net losses charged-off as a percent of average portfolio loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total consumer loans and leases
Total net losses charged-off as a percent of average portfolio loans and leases
Allowance for Credit Losses
The allowance for credit losses is comprised of the ALLL and the
reserve for unfunded commitments. The ALLL provides coverage
for probable and estimable losses in the loan and lease portfolio.
The Bancorp evaluates the ALLL each quarter to determine its
adequacy to cover inherent losses. Several factors are taken into
consideration in the determination of the overall ALLL, including
an unallocated component. These factors include, but are not
limited to, the overall risk profile of the loan and lease portfolios,
net charge-off experience, the extent of impaired loans and leases,
the level of nonaccrual loans and leases, the level of 90 days past
due loans and leases and the overall level of the ALLL as a percent
of portfolio loans and leases. The Bancorp also considers overall
asset quality trends, credit administration and portfolio management
practices, risk identification practices, credit policy and underwriting
practices, overall portfolio growth, portfolio concentrations and
current economic conditions that might impact the portfolio. Refer
2017
2016
2015
2014
2013
$
$
(136)
(16)
-
(2)
(15)
(32)
(58)
(94)
(28)
(381)
25
4
-
-
8
13
21
10
2
83
(111)
(12)
-
(2)
(7)
(19)
(37)
(84)
(26)
(298)
0.27 %
0.17
-
0.06
0.22
0.04
0.26
0.39
3.93
2.57
0.49
0.32 %
(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
to the Critical Accounting Policies section of MD&A for more
information.
During the year ended December 31, 2017, the Bancorp did
not substantively change any material aspect of its overall approach
in the determination of the ALLL and there have been no material
changes in assumptions or estimation techniques as compared to
prior periods that impacted the determination of the current period
allowance. In addition to the ALLL, the Bancorp maintains a
reserve for unfunded commitments recorded in other liabilities in
the Consolidated Balance Sheets. The methodology used to
determine the adequacy of this reserve is similar to the Bancorp’s
methodology for determining the ALLL. The provision for
unfunded commitments is included in other noninterest expense in
the Consolidated Statements of Income.
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
77 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
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
TABLE 61: CHANGES IN ALLOWANCE FOR CREDIT LOSSES
For the years ended December 31 ($ in millions)
ALLL:
Balance, beginning of period
Losses charged-off
Recoveries of losses previously charged-off
Provision for loan and lease losses
Deconsolidation of a VIE(a)
Balance, end of period
Reserve for unfunded commitments:
Balance, beginning of period
$
$
$
commercial loans would increase by approximately $157 million at
December 31, 2017. In addition, the Bancorp’s determination of the
ALLL for residential mortgage loans 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 loans and consumer loans and leases would
increase by approximately $32 million at December 31, 2017. As
in
several qualitative and quantitative factors are considered
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.
During the third quarter of 2017, the United States incurred
two major hurricanes impacting the states of Texas and Florida. The
Bancorp provided assistance to customers that were negatively
impacted. The Bancorp’s ALLL included $10 million for the
estimated impact of hurricane related losses at December 31, 2017.
2017
2016
2015
2014
2013
1,253
(381)
83
261
(20)
1,196
161
-
-
161
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
Provision for (benefit from) unfunded commitments
Losses charged-off
Balance, end of period
(a) Refer to Note 11 of the Notes to Consolidated Financial Statements for further discussion on the deconsolidation of a VIE.
$
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
these model
conditions have presented
limitations, the qualitative adjustment factors may be incremental or
decremental to the quantitative model results.
themselves. Given
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 December 31, 2017 and 2016 was 0.13% and 0.12%, respectively.
The unallocated allowance was 10% and 9% of the total allowance
as of December 31, 2017 and 2016, respectively.
As shown in Table 62, the ALLL as a percent of portfolio
loans and leases was 1.30% at December 31, 2017, compared to
1.36% at December 31, 2016. The ALLL was $1.2 billion and $1.3
billion at December 31, 2017 and 2016, respectively.
78 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
$
2017
2016
2015
651
65
23
14
89
46
38
117
33
120
1,196
652
117
24
47
100
67
40
99
11
115
1,272
718
82
16
15
96
58
42
102
12
112
1,253
TABLE 62: 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
1.58 %
0.98
0.51
0.34
0.57
0.66
0.42
5.09
2.12
0.13
1.30 %
1.72 %
1.19
0.41
0.38
0.64
0.75
0.42
4.56
1.76
0.12
1.36 %
41,170
6,604
4,553
4,068
15,591
7,014
9,112
2,299
1,559
91,970
41,676
6,899
3,903
3,974
15,051
7,695
9,983
2,237
680
92,098
42,131
6,957
3,214
3,854
13,716
8,301
11,493
2,259
657
92,582
1.55
1.68
0.75
1.22
0.73
0.81
0.35
4.38
1.67
0.12
1.37
$
$
2014
673
140
17
45
104
87
33
104
13
106
1,322
40,765
7,399
2,069
3,720
12,389
8,886
12,037
2,401
418
90,084
1.65
1.89
0.82
1.21
0.84
0.98
0.27
4.33
3.11
0.12
1.47
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
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
79 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
projected assumptions, as well as from 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.
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 over 24 months above what is
included in senior management’s baseline projections for each 100
bps increase in short-term market interest rates. Similarly, the
Bancorp’s NII sensitivity modeling incorporates approximately $2.5
billion of growth in noninterest-bearing deposit balances over 24
months above senior management’s baseline projections for each
100 bps decrease
interest rates. The
in short-term market
noninterest-bearing demand deposit balance run-off and growth are
modeled to flow into and out of funding products that reprice in
conjunction with market rate changes.
Another important deposit modeling assumption is the amount
by which interest-bearing deposit rates will increase or decrease
when market interest rates increase or decrease. This deposit
repricing sensitivity is known as the beta, and it represents the
expected amount by which Bancorp deposit rates will change for a
given change in short-term market rates. The Bancorp’s NII
sensitivity modeling assumes a weighted-average rising rate interest-
bearing deposit beta of 69% at December 31, 2017.
risk measures
The Bancorp continually evaluates the sensitivity of its interest
rate
important deposit modeling
assumptions. The Bancorp also regularly monitors the sensitivity of
other important modeling assumptions, such as loan and security
prepayments and early withdrawals on fixed-rate customer liabilities.
these
to
The following table shows the Bancorp’s estimated NII sensitivity profile and ALCO policy limits as of December 31:
TABLE 63: ESTIMATED NII SENSITIVITY PROFILE AND ALCO POLICY LIMITS
2017
2016
12
Months
ALCO Policy Limits
13-24
Months
(6.00)
-
(12.00)
-
(4.00)
-
(8.00)
-
% 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
(6.00)
-
-
-
12
Months
(4.00)
-
-
-
scenario. The changes in the estimated NII sensitivity profile as of
December 31, 2017 compared to December 31, 2016 were primarily
attributable to changes in the composition of the investment
portfolio, including premium and discount positions, and higher
outstanding fixed-rate debt balances. These items were partially
offset by lower demand deposit balances.
Tables 64 and 65 provide the Bancorp’s estimated NII profile
at December 31, 2017 with changes to certain deposit balances and
deposit repricing sensitivity (betas) assumptions.
Change in Interest Rates (bps)
+200 Ramp over 12 months
+100 Ramp over 12 months
-75 Ramp over 9 months
-75 Ramp over 6 months
% Change in NII (FTE)
12
Months
2.05 %
1.23
(4.97)
-
13-24
Months
6.34
3.78
(9.44)
-
At December 31, 2017, 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. As the
Federal Reserve has increased its target range for federal funds, the
sensitivity to declining rates has increased, which is a reflection of
the balance sheet mix described above. Reductions in the yield of
the commercial loan portfolio would be expected to be only partially
offset by a decline in the cost of interest-bearing deposits in this
80 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table includes the Bancorp's estimated NII sensitivity profile with an immediate $1 billion decrease and an immediate $1 billion
increase in demand deposit balances as of December 31, 2017:
TABLE 64: 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
-75 Ramp over 9 months
% Change in NII (FTE)
Immediate $1 Billion Balance Decrease
Immediate $1 Billion Balance Increase
12
Months
13-24
Months
12
Months
13-24
Months
1.80 %
1.11
(5.22)
5.84
3.54
(9.62)
2.30
1.35
(4.72)
6.84
4.03
(9.26)
The following table includes the Bancorp's estimated NII sensitivity profile with a 25% increase and a 25% decrease to the 69% rising rate
deposit beta assumptions as of December 31, 2017. The resulting weighted-average interest-bearing deposit betas included in this analysis are
approximately 86% and 52%, respectively, as of December 31, 2017:
TABLE 65: 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
(0.87) %
(0.23)
0.50
0.87
4.97
2.69
12.18
6.70
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 basis (non-GAAP) 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 66: ESTIMATED EVE SENSITIVITY PROFILE
Change in Interest Rates (bps)
Change in EVE
+200 Shock
+100 Shock
-100 Shock
-75 Shock
2017
ALCO Policy Limit
(12.00)
-
-
-
(4.87) %
(1.82)
(1.57)
-
Change in EVE
2016
ALCO Policy Limit
(4.96)
(2.00)
-
(0.14)
(12.00)
-
-
-
The EVE sensitivity to the +200 bps rising rate scenario is
moderately negative at December 31, 2017, and slightly negative to a
100 bps decline in market rates. The changes in the estimated EVE
sensitivity profile from December 31, 2016 are primarily related to
the effects of a flatter yield curve, higher base case loan and deposit
values and lower fixed-rate 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
An
interest rate risk
integral component of the Bancorp’s
management strategy is its use of derivative instruments to minimize
significant fluctuations in earnings caused by changes in market
interest rates. Examples of derivative instruments that the Bancorp
81 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, swaptions
and TBA securities.
As part of its overall risk management strategy relative to its
residential 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 residential 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, 2017:
Less than 1 year
$
TABLE 67: 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
Total consumer loans
Total portfolio loans and leases
22,195
2,731
1,905
868
27,699
2,739
1,873
3,977
460
833
9,882
37,581
$
1-5 years
17,858
3,365
2,583
1,972
25,778
6,661
3,523
4,783
1,839
697
17,503
43,281
Over 5 years
1,117
508
65
1,228
2,918
6,191
1,618
352
-
29
8,190
11,108
Total
41,170
6,604
4,553
4,068
56,395
15,591
7,014
9,112
2,299
1,559
35,575
91,970
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, 2017:
TABLE 68: 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
Total consumer loans
Total portfolio loans and leases
$
$
Fixed
2,416
835
66
3,200
6,517
9,731
443
5,096
444
478
16,192
22,709
Interest Rate
Floating or Adjustable
16,559
3,038
2,582
-
22,179
3,121
4,698
39
1,395
248
9,501
31,680
Residential Mortgage Servicing Rights and Interest Rate Risk
Effective January 1, 2017, the Bancorp elected to prospectively
adopt the fair value method for all existing classes of its residential
mortgage servicing rights portfolio. Upon this election, all servicing
rights are measured at fair value at each reporting date and changes
in the fair value of servicing rights are reported in mortgage banking
net revenue in the Consolidated Statements of Income in the period
in which the changes occur. Prior to the election of the fair value
method, servicing rights were initially recorded at fair value and
subsequently amortized in proportion to, and over the period of,
estimated net servicing revenue. Servicing rights were assessed for
impairment monthly, based on fair value, with
impairment recognized through a valuation allowance.
temporary
The fair value of the residential MSR portfolio was $858
million at December 31, 2017 and the net carrying amount of the
residential MSR portfolio was $744 million as of December 31,
2016. 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
82 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
banking activity in order to manage a portion of the risk associated
with changes in the value of its MSR portfolio as a result of
changing interest rates.
Mortgage rates decreased during the year ended December 31,
2017 which caused modeled prepayment speeds to increase, leading
to fair value adjustments on servicing rights. The fair value of the
MSR portfolio decreased $1 million due to changes to inputs to the
valuation model including prepayment speeds and OAS spread
assumptions and decreased $121 million due to the passage of time,
including the impact of regularly scheduled repayments, paydowns
and payoffs for the year ended December 31, 2017.
Mortgage rates increased during the year ended December 31,
2016 which caused the modeled prepayment speeds to decrease,
leading to a recovery of temporary impairment of $7 million on the
servicing rights during the year. Previously, servicing rights were
deemed temporarily impaired when a borrower’s loan rate was
distinctly higher than prevailing rates. Temporary impairment on
servicing rights was reversed when the prevailing rates returned to a
level commensurate with the borrower’s loan rate.
The Bancorp recognized net gains of $4 million and $24
million, respectively, on its non-qualifying hedging strategy during
the years ended December 31, 2017 and 2016. These amounts
include net gains on securities related to the Bancorp’s non-
qualifying hedging strategy which were $2 million and zero,
respectively, during the years end December 31, 2017 and 2016. The
Bancorp may adjust its hedging strategy to reflect its assessment of
the composition of its MSR portfolio, the cost of hedging and the
anticipated effectiveness of the hedges given the economic
environment. Refer to Note 12 of the Notes to Consolidated
Financial Statements for further discussion on servicing rights and
the instruments used to hedge interest rate risk on MSRs.
Foreign Currency Risk
The Bancorp may enter into foreign exchange derivative contracts
to economically hedge certain foreign currency denominated loans.
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 and 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’s Treasury department manages funding and
liquidity based on point-in-time metrics as well as forward-looking
projections, which incorporate different sources and uses of funds
under base and stress scenarios. Liquidity risk is monitored and
managed by the Treasury department, and a series of Policy Limits
and Key Risk Indicators are established to ensure risks are managed
within the Bancorp’s risk tolerance. The Bancorp maintains a
contingency funding plan that provides for liquidity stress testing,
which assesses the liquidity needs under varying market conditions,
time horizons, asset growth rates and other events. 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. The contingency plan also outlines the
Bancorp’s response to various levels of liquidity stress and actions
that should be taken during various scenarios.
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, 2017 and
2016 was $939 million and $827 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 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.
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
also enters
into commodity contracts with major financial
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.
Liquidity Risk Management Oversight
The Bancorp’s ALCO, which
includes senior management
representatives and is accountable to the ERMC, monitors and
manages liquidity and funding 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 liquidity risk management.
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 67 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 $31.8 billion of securities in
the Bancorp’s available-for-sale and other portfolio at December 31,
2017, $4.4 billion in principal and interest is expected to be received
in the next 12 months and an additional $3.5 billion is expected to
be received in the next 13 to 24 months. For further information on
the Bancorp’s securities portfolio, refer to the Investment Securities
subsection of the Balance Sheet Analysis 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
83 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the institution’s amount of RSF, with the ASF representing the
numerator and the RSF representing the denominator of the NSFR.
Banking organizations subject to the modified NSFR would
multiply the RSF amount by 70%, such that the RSF amount
required for these 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 comment period
for this proposal ended on August 5, 2016. The Bancorp is currently
awaiting the final rule from the U.S. banking agencies.
increase
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.
The Bancorp’s and Bank’s credit ratings are summarized in
Table 69. 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.
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 $7.5 billion during
the year ended December 31, 2017 compared to $7.4 billion during
the year ended December 31, 2016. For further information, refer to
Note 11 and 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 83% of its average total assets for the year ended December
31, 2017 and 82% for the year ended December 31, 2016. In
addition to core deposit funding, the Bancorp also accesses a variety
of other short-term and long-term funding sources, which include
the use of the FHLB system. Certificates $100,000 and over and
deposits in the Bancorp’s foreign branch located in the Cayman
Islands are wholesale funding tools utilized to fund asset growth.
Management does not rely on any one source of liquidity and
manages availability in response to changing balance sheet needs.
As of December 31, 2017, $8.2 billion of debt or other securities
were available for issuance under the then-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. On June 15, 2017, the
Bancorp issued and sold $700 million of unsecured senior fixed-rate
notes.
The Bank’s global bank note program has a borrowing capacity
of $25.0 billion, of which $16.7 billion was available for issuance as
of December 31, 2017. On October 30, 2017, the Bank issued and
sold $1.1 billion in aggregate principal amount of unsecured senior
bank notes.
At December 31, 2017, the Bancorp has approximately $40.8
billion of borrowing capacity available through secured borrowing
sources including the FHLB and FRB.
In a securitization transaction that occurred in September of
2017, the Bancorp transferred $1.1 billion in aggregate automobile
loans to a bankruptcy remote trust which subsequently issued
approximately $1.0 billion of asset-backed notes, of which
approximately $261 million of the asset-backed notes were retained
by the Bancorp, resulting in approximately $747 million of
outstanding notes included in long-term debt in the Consolidated
Balance Sheets as of December 31, 2017. The bankruptcy remote
trust was deemed to be a VIE and the Bancorp, as the primary
beneficiary, consolidated the VIE. The third-party holders of the
asset-backed notes do not have recourse to the general assets of the
Bancorp. Refer to Note 11 for additional information.
Liquidity Coverage Ratio and Net Stable Funding Ratio
The Bancorp is subject to the Modified LCR requirement, which
stipulates that BHCs with $50 billion or more in total consolidated
assets that are not internationally active, such as the Bancorp,
maintain HQLA equal to their calculated net cash outflows over a
30 calendar-day stress period multiplied by a factor of 0.7. The
Bancorp’s Modified LCR was 129% at December 31, 2017.
On June 1, 2016, the U.S. banking agencies published 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,
the Bancorp.
Generally consistent with the BCBS’ framework, under the
proposed rule banking organizations would be required to hold an
amount of ASF over a one-year time horizon that equals or exceeds
including
84 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 69: AGENCY RATINGS
As of February 28, 2018
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:
OPERATIONAL RISK MANAGEMENT
Operational risk is the risk of loss resulting from inadequate or
failed processes or systems or due to external events that are neither
market nor credit-related. Operational risk is inherent in the
Bancorp’s activities and can manifest itself in various ways including
fraudulent acts, business interruptions, inappropriate behavior of
employees, unintentional failure to comply with applicable laws and
regulations, cyber-security incidents and privacy breaches or failure
of vendors to perform in accordance with their arrangements. These
events could result in financial losses, litigation and regulatory fines,
as well as other damage to the Bancorp. The Bancorp’s risk
management goal is to keep operational risk at appropriate levels
consistent with the Bancorp’s risk appetite, financial strength, the
characteristics of its businesses, the markets in which it operates and
the competitive and regulatory environment to which it is subject.
To control, monitor and govern operational risk, the Bancorp
maintains an overall Risk Management Framework which comprises
governance oversight, risk assessment, capital measurement,
monitoring and reporting as well as a formal three lines of defense
approach. ERM is responsible for prescribing the framework to the
lines of business and corporate functions, and to provide
independent oversight of its implementation (second line of
defense). 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).
is
responsible
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
Risk
the
for developing
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
programs and systems as
risk
they
management, such as risk and control self-assessments, new
product/initiative risk reviews, key risk indicators, Vendor Risk
and overseeing
to operational
relate
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
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-
BBB+
F1
A
A-
BBB+
Stable
DBRS
R-1L
AL
BBBH
R-1L
A
A
AL
Positive
Management, cyber security risk management and review of
operational losses. The function is also responsible for developing
reports that support the proactive management of operational risk
across the enterprise. The lines of business and corporate functions
are responsible for managing the operational risks associated with
their areas in accordance with the risk management framework. The
framework is intended to enable the Bancorp to function with a
sound and well-controlled operational environment. These
to minimize future
the Bancorp’s goals
processes support
operational losses and strengthen the Bancorp’s performance by
maintaining sufficient capital to absorb operational losses that are
incurred.
The Bancorp also maintains a robust information security
program to support the management of cyber security risk within
the organization with a focus on prevention, detection and recovery
processes. Fifth Third utilizes a wide array of techniques to secure
its operations and proprietary information such as Board approved
policies and programs, network monitoring and testing, access
controls, and dedicated security personnel. Fifth Third has adopted
the National Institute of Standards and Technology Cyber Security
Framework for the management and deployment of cyber security
controls and is an active participant in the financial sector
information sharing organization structure, known as the Financial
Services Information Sharing and Analysis Center. To ensure
resiliency of key Bancorp functions, Fifth Third also employs
redundancy protocols that include a robust business continuity
function that works to mitigate any potential impacts to Fifth Third
customers and its systems.
Fifth Third also focuses on the reporting and escalation of
operational control issues to senior management and the Board of
Directors. The Operational Risk Committee is the key committee
that oversees and supports Fifth Third in the management of
operational risk across the enterprise. The Operational Risk
Committee reports to the ERMC, which reports to the Risk and
Compliance Committee of the Board of Directors.
risk management goal is to keep compliance risk at appropriate
levels consistent with the Bancorp’s risk appetite.
in
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
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, the Chief Compliance
Officer
the
Compliance Risk Management program which implements key
compliance processes including but not limited to, risk assessments,
for establishing and overseeing
is responsible
85 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
key risk indicators, issues tracking, regulatory compliance testing and
monitoring, anti-money laundering, privacy and, in partnership with
the Corporate Responsibility and Reputation team, oversees the
Bancorp’s compliance with the Community Reinvestment Act.
Fifth Third also focuses on the reporting and escalation of
compliance issues to senior management and the Board of
Directors. The Management Compliance Committee, which is
chaired by the Chief Compliance Officer, is the key committee that
in the management of
oversees and supports Fifth Third
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.
TABLE 70: PRESCRIBED CAPITAL RATIOS
CET1 capital
Tier I risk-based capital
Total risk-based capital
Tier I leverage
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
ratios, in order to avoid limitations on certain capital distributions
and discretionary bonus payments to executive officers. The capital
conservation buffer was 0.625% in 2016 and is 1.25% in 2017. The
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.
The Capital Committee is responsible for execution and 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 and set minimum regulatory capital ratios as well as defined
the measure of “well-capitalized”.
Minimum
Well-Capitalized
4.50 %
6.00
8.00
4.00
6.50
8.00
10.00
5.00
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 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)
Tangible common equity as a percent of tangible assets(a)
CET1 capital
Tier I capital
Total regulatory capital
Risk-weighted assets
2017
11.80 %
9.90
8.94
2016
11.67
9.82
8.87
2015
11.33
9.55
8.59
2014
11.59
9.41
8.43
2013
11.56
9.44
8.63
$
Basel III
Transitional(b)
12,426
13,756
17,972
119,632
12,517
13,848
17,887
117,997
11,917
13,260
17,134
121,290
Basel I(c)
-
12,764
16,895
117,878
-
12,094
16,431
115,969
Regulatory capital ratios:
10.61 %
CET1 capital
11.74
Tier I risk-based capital
15.16
Total risk-based capital
10.01
Tier I leverage (to quarterly average assets)
(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
assets. The resulting weighted values are added together resulting in the total risk-weighted assets. Under the banking agencies’ Final Rule published in November 2017 pertaining to certain
regulatory items for banks subject to the standardized approach, the Bancorp is no longer subject to certain transition provisions and phase-outs beyond 2017.
9.82
10.93
14.13
9.54
10.39
11.50
15.02
9.90
-
10.83
14.33
9.66
-
10.43
14.17
9.73
(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.
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 2017 stress testing program and CCAR on February 3,
2017, with submissions of stress test results and capital plans to the
86 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FRB due on April 5, 2017, which the Bancorp submitted as
required. As a CCAR institution, the Bancorp is required to disclose
the results of its company-run stress test under the supervisory
adverse and supervisory severely adverse scenarios 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 22, 2017 the Bancorp publicly disclosed the results of its
company-run stress test as required by the DFA stress testing rules,
which is available on Fifth Third’s website at www.53.com. With
Fifth Third’s designation as a Large and Non-complex Bank, it is no
longer subject to the qualitative aspects of the CCAR program.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 2017.
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 $0.60 and
$0.53 during the years ended December 31, 2017 and 2016,
respectively. The Bancorp entered into or settled a number of
accelerated share repurchase transactions during the years ended
December 31, 2017 and 2016. Refer to Note 23 and Note 31 of the
Notes
for additional
information on the accelerated share repurchases.
to Consolidated Financial Statements
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)
30,572,513
85,702,105
(34,633,221)
81,641,397
18.86
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 transactions. 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.
81,641,397
-
(58,493,506)
23,147,891
27.00
2017
2016
(b) Excludes 2,397,589 and 2,430,179 shares repurchased during the years ended December 31, 2017 and 2016, 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.
$
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, and
include commitments, guarantees, 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, purchase
obligations, capital commitments for private equity investments,
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
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
for additional
to Consolidated Financial Statements
Notes
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.
87 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, 2017 are shown in
Table 73. As of December 31, 2017, 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, 2017 ($ 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
$
$
96,985
2,412
3,266
4,186
1,284
87
162
17
85
6
108,490
-
5,673
2,501
-
-
154
128
34
69
11
8,570
-
3,852
401
-
-
108
24
34
24
8
4,451
-
2,967
9
-
-
219
41
77
3
1
3,317
96,985
14,904
6,177
4,186
1,284
568
355
162
181
26
124,828
$
27,539
1,170
28,709
68,154
2,185
70,339
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.
10,232
416
10,648
22,893
583
23,476
(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
7,490
16
7,506
$
Statements.
88 Fifth Third Bancorp
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). Based on the foregoing, as of the end of the
period covered by this report, the Bancorp’s Chief Executive Officer and Chief Financial Officer concluded that the Bancorp’s disclosure controls
and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Bancorp files and
submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required and information is
accumulated and communicated to management including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
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, 2017. 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, 2017. Based on
this assessment, management believes that the Bancorp maintained effective internal control over financial reporting as of December 31, 2017.
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, 2017. This report appears on page 90 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
Chairman, President and Chief Executive Officer Executive Vice President and Chief Financial Officer
February 28, 2018
February 28, 2018
Tayfun Tuzun
89 Fifth Third Bancorp
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Fifth Third Bancorp:
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Fifth Third Bancorp and subsidiaries (the “Bancorp”) as of December 31, 2017,
based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). In our opinion, the Bancorp maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB) the
consolidated financial statements as of and for the year ended December 31, 2017, of the Bancorp and our report dated February 28, 2018
expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Bancorp in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting, may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Cincinnati, Ohio
February 28, 2018
90 Fifth Third Bancorp
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Fifth Third Bancorp:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Fifth Third Bancorp and subsidiaries (the “Bancorp”) as of December 31, 2017
and 2016, 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, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Bancorp as of December 31, 2017 and 2016, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles
generally accepted in the United States.
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, 2017, 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 28, 2018 expressed an
unqualified opinion on the Bancorp’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Bancorp's management. Our responsibility is to express an opinion on the Bancorp's
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Bancorp in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Cincinnati, Ohio
February 28, 2018
We have served as the Bancorp’s auditor since 1970.
91 Fifth Third Bancorp
CONSOLIDATED BALANCE SHEETS
2017
2016
$
$
$
$
2,514
31,820
24
862
2,753
492
91,970
(1,196)
90,774
2,003
646
2,445
27
858
6,975
142,193
35,276
67,886
103,162
174
4,012
1,412
2,144
14,904
125,808
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
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(a)
Loans and leases 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(g)
Other assets(a)
Total Assets
Liabilities
Deposits:
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
Federal funds purchased
Other short-term borrowings
Accrued taxes, interest and expenses
Other liabilities(a)
Long-term debt(a)
Total Liabilities
Equity
Common stock(h)
Preferred stock(i)
Capital surplus
Retained earnings
Accumulated other comprehensive income
Treasury stock(h)
Total Bancorp shareholders’ equity
Noncontrolling interests
Total Equity
Total Liabilities and Equity
(a)
2,051
1,331
2,756
13,441
59
(3,433)
16,205
27
16,232
142,177
Includes $0 and $85 of cash and due from banks, $62 and $0 of other short-term investments, $1,297 and $1,216 of portfolio loans and leases, $(6) and $(26) of ALLL, $7 and $9 of other
assets, $2 and $3 of other liabilities and $1,190 and $1,094 of long-term debt from consolidated VIEs that are included in their respective captions above at December 31, 2017 and 2016,
respectively. For further information, refer to Note 11.
2,051
1,331
2,790
15,122
73
(5,002)
16,365
20
16,385
142,193
$
$
$
(b) Amortized cost of $31,644 and $31,024 at December 31, 2017 and 2016, respectively.
(c)
(d)
(e)
(f)
(g) Effective January 1, 2017, the Bancorp has elected the fair value measurement method for all existing classes of its residential mortgage servicing rights. The servicing rights were measured at fair
Fair value of $24 and $26 at December 31, 2017 and 2016, respectively.
Includes $399 and $686 of residential mortgage loans held for sale measured at fair value at December 31, 2017 and 2016, respectively.
Includes $137 and $143 of residential mortgage loans measured at fair value at December 31, 2017 and 2016, respectively.
Includes $27 and $39 of bank premises and equipment held for sale at December 31, 2017 and 2016, respectively. For further information refer to Note 7.
value at December 31, 2017 and were measured under the amortization method at December 31, 2016. For further information refer to Note 12.
(h) Common shares: Stated value $2.22 per share; authorized 2,000,000,000; outstanding at December 31, 2017 – 693,804,893 (excludes 230,087,688 treasury shares), 2016 –
750,479,299 (excludes 173,413,282 treasury shares).
(i) 446,000 shares of undesignated no par value preferred stock are authorized and unissued at December 31, 2017 and 2016; 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, 2017 and 2016; 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, 2017 and 2016; and fixed-to-floating rate non-cumulative Series J
perpetual preferred stock with a $25,000 liquidation preference: 12,000 authorized shares, issued and outstanding at December 31, 2017 and 2016.
Refer to the Notes to Consolidated Financial Statements.
92 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ 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
Wealth and asset management revenue
Corporate banking revenue
Card and processing revenue
Mortgage banking net revenue
Other noninterest income
Securities gains, net
Securities gains, net - non-qualifying hedges on mortgage servicing rights
Total noninterest income
Noninterest Expense
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Card and processing expense
Equipment expense
Other noninterest expense
Total noninterest expense
Income Before Income Taxes
Applicable income tax expense
Net Income
Less: Net income attributable to noncontrolling interests
Net Income Attributable to Bancorp
Dividends on preferred stock
Net Income Available to Common Shareholders
Earnings per share - basic
Earnings per share - diluted
Average common shares outstanding - basic
Average common shares outstanding - diluted
Cash dividends declared per common share
Refer to the Notes to Consolidated Financial Statements.
2017
2016
2015
$
$
$
$
$
3,478
996
15
4,489
277
6
30
378
691
3,798
261
3,537
554
419
353
313
224
1,357
2
2
3,224
1,633
356
295
245
129
117
1,215
3,990
2,771
577
2,194
-
2,194
75
2,119
2.88
2.83
728,289,200
740,691,433
0.60
3,233
952
8
4,193
205
2
10
361
578
3,615
343
3,272
558
404
432
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
418
384
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
93 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31 ($ in millions)
Net Income
Other Comprehensive Income (Loss), Net of Tax:
Unrealized gains on available-for-sale securities:
Unrealized holding gains (losses) arising during the year
Reclassification adjustment for net losses (gains) included in net income
Unrealized (losses) gains on cash flow hedge derivatives:
Unrealized holding (losses) gains arising during the year
Reclassification adjustment for net gains included in net income
Defined benefit pension plans, net:
Net actuarial gain (loss) arising during the year
Reclassification of amounts to net periodic benefit costs
Other comprehensive income (loss), 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.
2017
2016
2015
$
2,194
1,560
1,706
21
4
(7)
(12)
1
7
14
2,208
-
2,208
(130)
(7)
19
(31)
(1)
12
(138)
1,422
(4)
1,426
(227)
(10)
48
(49)
(5)
11
(232)
1,474
(6)
1,480
$
94 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
$
$
(3)
23
429
(847)
(232)
1,331
1,331
2,646
2,051
2,051
2,666
Stock
Stock
Stock
(1,972)
Equity
Income
(417)
(75)
(417)
(75)
(850)
(417)
(75)
(850)
15,665
1,706
(232)
(3)
12,358
1,564
15,626
1,712
(232)
Interests
39
(6)
Surplus Earnings
11,141
1,712
($ in millions, except per share data)
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(a)
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(a)
Shares acquired for treasury
Impact of stock transactions under
stock compensation plans, net
Other
Balance at December 31, 2016
Net income
Other comprehensive income, net of tax
Cash dividends declared:
Common stock at $0.60 per share
Preferred stock(a)
Shares acquired for treasury
Impact of stock transactions under
67
stock compensation plans, net
(6)
Other
16,385
Balance at December 31, 2017
(a) For the years ended December 31, 2017, 2016 and 2015, dividends were $1,275.00 per preferred share for Perpetual Preferred Stock, Series H, $1,656.24 per preferred share for Perpetual
75
(2)
15,870
1,560
(138)
75
-
15,839
1,564
(138)
80
1
16,205
2,194
14
80
1
16,232
2,194
14
1
(2)
13,441
2,194
16
3
(5,002)
67
1
16,365
(436)
(75)
(1,605)
(436)
(75)
(1,605)
(4)
3
(3,433)
52
3
(2,764)
(405)
(75)
(661)
(405)
(75)
(661)
(2)
15,122
(436)
(75)
(405)
(75)
(2)
31
(4)
(7)
20
(1,588)
2,790
2,051
2,756
1,331
2,051
1,331
(668)
(138)
197
(17)
73
27
59
83
51
14
$
7
$
Preferred Stock, Series I and $1,225.00 per preferred share for Perpetual Preferred Stock, Series J.
Refer to the Notes to Consolidated Financial Statements.
95 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 ($ 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 deferred income taxes
Securities gains, net
Securities gains, net-non-qualifying hedges on mortgage servicing rights
MSR fair value adjustment
Recovery of MSR impairment
Net gains on sales of loans and fair value adjustments on loans held for sale
Net losses on disposition and impairment of bank premises and equipment
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 or purchased 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
MSRs
Proceeds from sales and dividends representing return of equity method investments
Net cash paid on sales of certain retail branch operations
Net cash paid on acquisitions
Net change in:
Other short-term investments
Loans and leases
Operating lease equipment
Net Cash Provided by (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
Other
Net Cash (Used in) Provided by Financing Activities
Increase (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
$
2017
2016
2015
2,194
261
341
118
(251)
(3)
(2)
122
-
(108)
-
-
39
(1,037)
(44)
6,453
(6,054)
46
(442)
(23)
(138)
22
1,494
12,637
164
40
2,331
3
(15,295)
(200)
(109)
1,363
-
(44)
1
(446)
(31)
414
(659)
42
477
(430)
(75)
2,490
(1,969)
(1,605)
(57)
(1,786)
122
2,392
2,514
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
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.
96 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Nature of Operations
Fifth Third Bancorp, an Ohio corporation, conducts its principal
lending, deposit gathering, transaction processing and service
advisory activities through its banking and non-banking subsidiaries
from banking centers located throughout the Midwestern and
Southeastern regions of the United States.
Basis of Presentation
The Consolidated Financial Statements include the accounts of the
Bancorp and its majority-owned subsidiaries and VIEs in which the
Bancorp has been determined to be the primary beneficiary. Other
entities, including certain joint ventures, in which the Bancorp has
the ability to exercise significant influence over operating and
financial policies of the investee, but upon which the Bancorp does
not possess control, are accounted for by the equity method of
accounting and not consolidated. The investments in those entities
in which the Bancorp does not have the ability to exercise
significant influence are generally carried at the lower of cost or fair
value. 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
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
97 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
or costs 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
in a TDR and
loans 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
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.
leases that have been modified
terms. Well-secured
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
98 Fifth Third 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
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 and Leases Held for Sale
Loans and leases 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 and
leases 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 groups of loans held for sale under the fair value
option, including certain residential mortgage loans originated as
held for sale and certain purchased commercial loans designated as
held for sale at acquisition. 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
to sell residential mortgage
Management’s
characteristics specific to certain loans held for sale. Consequently,
these loans may be reclassified to loans held for investment and,
thereafter, reported within the Bancorp’s residential mortgage class
of portfolio loans and leases. In such cases, the residential mortgage
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 and leases 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
99 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
collection and charge-off experience. An unallocated allowance is
maintained
in estimating and
the
measuring losses when evaluating allowances for pools of loans.
to recognize
imprecision
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.
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.
Reserve for Unfunded Commitments
The reserve for unfunded commitments is maintained at a level
believed by management to be sufficient to absorb estimated
100 Fifth Third Bancorp
liabilities
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 Consolidated 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.
The Bancorp’s loan sales and securitizations are generally
structured with servicing retained, which often results in the
recording of servicing rights. The Bancorp may also purchase
servicing rights. Effective January 1, 2017, the Bancorp elected to
prospectively adopt the fair value method for all existing classes of
its residential mortgage servicing rights portfolio. Upon this
election, all servicing rights are measured at fair value at each
reporting date and changes in the fair value of servicing rights are
reported in mortgage banking net revenue in the Consolidated
Statements of Income in the period in which the changes occur.
The election of the fair value method did not require a cumulative
effect adjustment to retained earnings as there was no difference
between the carrying value of the servicing rights, net of valuation
allowance, and the fair value.
Servicing rights are valued using internal OAS models. Key
economic assumptions used in estimating the fair value of the
servicing rights include the 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. In order to assist in the assessment of the fair
value of servicing rights, the Bancorp obtains external valuations of
the servicing rights portfolio from third parties and participates in
peer surveys
the
reasonableness of the key assumptions utilized in the internal OAS
model.
that provide additional confirmation of
Prior to the election of the fair value method, servicing rights
were initially recorded at fair value and subsequently amortized in
proportion to, and over the period of, estimated net servicing
revenue. Servicing rights were tested for impairment monthly, based
on fair value, with temporary impairment recognized through a
impairment
valuation
recognized through a write-off of the servicing asset and related
and other-than-temporary
allowance
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
valuation allowance. Amortization and provisions for impairment of
servicing rights were recorded as a component of mortgage banking
net revenue in the Consolidated Statements of Income.
Fees received for servicing loans owned by investors are based
on a percentage of the outstanding monthly principal balance of
such
in the
Consolidated Statements of Income as loan payments are received.
Costs of servicing loans are charged to expense as incurred.
loans and are
in noninterest
included
income
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
for
income
is used
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.
In the event the carrying amount of the long-lived asset or asset
group is not recoverable, an impairment loss is measured as the
amount by which the carrying amount of the long-lived asset or
asset group exceeds its fair value. Maintenance, repairs and minor
improvements are charged
the
Consolidated Statements of Income as incurred.
to noninterest expense
in
the Bancorp designates
Derivative Financial Instruments
The Bancorp accounts for its derivatives as either assets or liabilities
measured at fair value through adjustments to AOCI and/or current
earnings, as appropriate. On the date the Bancorp enters into a
derivative contract,
the derivative
instrument as either a fair value hedge, cash flow hedge or as a free-
standing derivative instrument. For a fair value hedge, changes in
the fair value of the derivative instrument and changes in the fair
value of the hedged asset or liability attributable to the hedged risk
are recorded in current period net income. For a cash flow hedge,
changes in the fair value of the derivative instrument, to the extent
that it is effective, are recorded in AOCI and subsequently
reclassified to net income in the same period(s) that the hedged
transaction
income. For free-standing derivative
instruments, changes in fair values are reported in current period net
income.
impacts net
the
relationship between
Prior to entering into a hedge transaction, the Bancorp
formally documents
the hedging
instrument and the hedged item, as well as the risk management
objective and strategy for undertaking the hedge transaction. This
process includes linking the derivative instrument designated as a
fair value or cash flow hedge to a specific asset or liability on the
balance sheet or to specific forecasted transactions and the risk
being hedged, along with a formal assessment at both inception of
the hedge and on an ongoing basis as to the effectiveness of the
derivative instrument in offsetting changes in fair values or cash
flows of the hedged item. If it is determined that the derivative
instrument is not highly effective as a hedge, hedge accounting is
discontinued.
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.
101 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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
to
interest expense,
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 exercise of dilutive stock-based awards 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
102 Fifth Third Bancorp
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,
test would be
then performing
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During Step 2, the Bancorp determines the implied fair value
of goodwill for a reporting unit by assigning the fair value of the
reporting unit to all of the assets and liabilities of that unit (including
any unrecognized intangible assets) as if the reporting unit had been
acquired in a business combination. The excess of the fair value of
the reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of goodwill. This assignment
process is only performed for purposes of testing goodwill for
impairment. The Bancorp does not adjust the carrying values of
recognized assets or liabilities (other than goodwill, if appropriate),
nor does it recognize previously unrecognized intangible assets in
the Consolidated Financial Statements as a result of this assignment
process. Refer to Note 9 for further information regarding the
Bancorp’s goodwill.
Fair Value Measurements
The Bancorp measures certain financial assets and liabilities at fair
value in accordance with U.S. GAAP, which defines fair value as the
price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. The Bancorp employs various valuation
approaches to measure fair value including the market, income and
cost approaches. 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
inputs are developed based on the best
liability. The
information available
in the circumstances, which might
include the Bancorp’s own financial data such as internally
developed pricing models and DCF methodologies, as well as
instruments for which the fair value determination requires
significant management judgment.
The Bancorp’s fair value measurements
involve various
valuation techniques and models, which involve inputs that are
observable, when available. Valuation techniques and parameters
used for measuring assets and liabilities are reviewed and validated
by the Bancorp on a quarterly basis. Additionally, the Bancorp
monitors the fair values of significant assets and liabilities using a
variety of methods including the evaluation of pricing runs and
exception reports based on certain analytical criteria, comparison to
previous
for
reasonableness. The Bancorp may, as a practical expedient, measure
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.
review and assessments
trades and overall
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.
Wealth and asset management revenue
in the Consolidated
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,
103 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Intangible assets consist of core deposit intangibles, customer
lists, customer relationships, non-compete agreements, trade names
and rent intangibles. Intangible assets are amortized on either a
straight-line or an accelerated basis over their estimated useful lives.
The Bancorp reviews 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 2017
The Bancorp adopted the following new accounting standards
effective January 1, 2017:
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 and 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 and 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
that
the
104 Fifth Third Bancorp
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 and the adoption did not
have a material impact on the 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
the
involving entities under common control. Specifically,
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.
The Bancorp adopted the amended guidance retrospectively on
January 1, 2017 and the adoption did not have a material impact on
the Consolidated Financial Statements.
Standards Issued but Not Yet Adopted
The following accounting standards were issued but not yet adopted
by the Bancorp as of December 31, 2017:
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
Expedients),
and
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 adopted
the amended guidance on January 1, 2018, using a modified
retrospective approach. 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 adoption of this amended guidance did not have a material
impact on the Bancorp’s Consolidated Financial Statements.
However, effective with the filing of the Bancorp’s first quarter of
2018 Form 10-Q, the Bancorp will be subject to expanded
disclosure requirements and after adoption has updated its revenue
recognition policies and procedures. While the Bancorp has
concluded the following changes are not material to its Consolidated
Financial Statements, upon adoption the Bancorp changed its
presentation of certain underwriting expenses incurred by its
broker-dealer subsidiary from net to gross presentation and also
changed its presentation of certain credit card rewards program
expenses from gross to net presentation. These changes will be
reflected in the Bancorp’s first quarter of 2018 Form 10-Q and
neither change had an impact on income before income taxes or net
income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to
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
impairment assessment of equity investments for which fair value is
not readily determinable by requiring an entity to perform a
qualitative assessment
impairment. If qualitative
identify
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 OCI the portion of the change in fair value
that results from a change in instrument-specific credit risk. For
public business entities,
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 adopted the amended guidance on
January 1, 2018. The adoption did not have a material impact on the
Consolidated Financial Statements. However, for certain equity
securities without a readily determinable fair value that are not
accounted for using the equity method, the Bancorp has elected to
use the permitted measurement alternative, which is to adjust the
cost basis of the investment upon either the occurrence of an
observable price change or the identification of an impairment. For
these securities, the amended guidance was applied prospectively to
investments that existed on or after January 1, 2018.
the amendments 1) eliminate
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. In January 2018, the FASB proposed
additional amendments to the new guidance which, among other
things,
include an option to recognize a cumulative effect
adjustment to retained earnings in the period of adoption instead of
applying the guidance to prior comparative periods, but these
additional amendments are not yet final. The Bancorp will adopt the
amended guidance on the required effective date of January 1, 2019,
and expects to elect the transition relief provisions. From a lessee
perspective, the Bancorp is currently finalizing its inventory of all
leases, accumulating the lease data necessary to apply the amended
guidance, and evaluating the business process and technology
requirements which will be necessary after adoption. 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 based on the present value of unpaid lease
payments as of the date of adoption, but does not expect a material
impact to expense recognition. From a lessor perspective, given the
limited changes, the Bancorp does not expect adoption of the
amended guidance to have a material impact, based on its
preliminary analysis. However, the Bancorp is continuing to evaluate
the impact of the amended guidance, particularly related to the
deferral of costs incurred in originating leases. The Bancorp also
expects to record a cumulative-effect adjustment to retained
earnings upon adoption to recognize any remaining deferred gains
on sale-leaseback transactions that occurred prior to the date of
initial application. The Bancorp had approximately $11 million of
such deferred gains recorded as of December 31, 2017. These
expectations may change as the implementation process continues.
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
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
Bancorp adopted the amended guidance on January 1, 2018 using a
modified retrospective approach. The adoption did not have a
material impact on the Consolidated Financial Statements.
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
and certain other instruments. This model applies to 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
105 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 in 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. Early
adoption is permitted as soon as January 1, 2019, but the Bancorp
currently expects to adopt on the mandatory effective date. 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
classification of certain cash receipts and payments within an entity’s
statement 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 Bancorp
adopted the amended guidance retrospectively on January 1, 2018
and will apply the requirements of this amended guidance in its first
quarter of 2018 Form 10-Q. The adoption did not have a material
impact on the 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
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 Bancorp adopted the
amended guidance on January 1, 2018, using a modified
retrospective approach and will apply the requirements of this
amended guidance in its first quarter of 2018 Form 10-Q. The
adoption did not have a material impact on the 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
106 Fifth Third Bancorp
group of similar assets, then the set of assets and activities would
not be considered a business. The Bancorp adopted the amended
guidance prospectively on January 1, 2018 and will apply this
amended guidance to future transactions to determine if they should
be accounted for as acquisitions (or disposals) of assets or
businesses.
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, with early adoption permitted, and
is to be applied
prospectively to all goodwill impairment tests performed after the
adoption date.
ASU 2017-05 – Other Income—Gains and Losses from the Derecognition of
Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset
Derecognition Guidance and Accounting for Partial Sales of Nonfinancial
Assets
In February 2017, the FASB issued ASU 2017-05 which clarifies the
scope of Subtopic 610-20 and defines the term “in substance
nonfinancial asset.” The amendments require that an entity should
initially identify each distinct nonfinancial asset or in substance
nonfinancial asset promised to a counterparty and derecognize each
asset when a counterparty obtains control of it. The amendments
provide specific guidance on accounting for partial sales of
nonfinancial assets, which require an entity to derecognize a distinct
nonfinancial asset or in substance nonfinancial asset in a partial sale
transaction when it 1) does not have (or ceases to have) a
controlling financial interest in the legal entity that holds the asset
and 2) transfers control of the asset. Once an entity transfers
control of a distinct nonfinancial asset or distinct in substance
nonfinancial asset, it is required to measure any noncontrolling
interest it receives (or retains) at fair value. The Bancorp adopted
the amended guidance on January 1, 2018, using a modified
retrospective approach. The adoption did not have a material
impact on the Consolidated Financial Statements.
ASU 2017-08 Receivables—Nonrefundable Fees and Other Costs (Subtopic
310-20): Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued ASU 2017-08 which shortens the
amortization period for certain callable debt securities held at a
premium. Specifically, the amendments require the premium to be
amortized to the earliest call date. The amendments do not require
an accounting change for securities held at a discount; the discount
continues to be amortized to maturity. The amended guidance is
effective for the Bancorp on January 1, 2019, with early adoption
permitted, and is to be applied on a modified retrospective basis
through a cumulative-effect adjustment directly to retained earnings
as of the beginning of the period of adoption. The Bancorp shall
provide a disclosure regarding the change in accounting principle.
The Bancorp plans to adopt the amended guidance on its required
effective date of January 1, 2019 and is currently in the process of
evaluating the impact of the amended guidance on its Consolidated
Financial Statements. However, the Bancorp does not currently
expect the impact of adoption to be material.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASU 2017-09 Compensation—Stock Compensation (Topic 718): Scope of
Modification Accounting
In May 2017, the FASB issued ASU 2017-09 which provides
guidance about which changes to the terms or conditions of a share-
based payment award require the application of modification
accounting in Topic 718. The amendments specify that an entity
should account for the effects of such changes as a modification
unless the fair value, vesting conditions and classification (as an
equity or liability) of the awards are all unaffected by the change.
The Bancorp adopted the amended guidance prospectively on
January 1, 2018. The adoption did not have a material impact on the
Consolidated Financial Statements.
ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements
to Accounting for Hedging Activities
In August 2017, the FASB issued ASU 2017-12 which makes several
amendments to existing guidance for hedge accounting. The
amendments are intended to simplify the application of hedge
accounting guidance in current U.S. GAAP, improve the alignment
of financial reporting with an entity’s risk management strategies
and allow more financial and nonfinancial hedging strategies to be
eligible for hedge accounting. Among other things, the amendments
1) permit hedge accounting for risk components in certain hedging
relationships including nonfinancial risk and interest rate risk, 2)
provide new alternatives for designating and measuring fair value
changes in the hedged item for fair value hedges of interest rate risk,
3) modify the recognition and presentation requirements for the
effects of hedging instruments, 4) allow entities to exclude certain
components from the assessment of hedge effectiveness and 5) ease
the application of current guidance related to the assessment of
hedge effectiveness. There are also additional modifications to
disclosure requirements. As permitted, the Bancorp elected to early
adopt the amended guidance on January 1, 2018. The amended
presentation and disclosure guidance was applied prospectively
while the elimination of separate measurement of ineffectiveness for
cash flow hedges was applied on a modified retrospective basis by
recording a cumulative-effect adjustment to retained earnings, the
amount of which was not material.
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
Transfers:
Portfolio loans to loans held for sale
Loans held for sale to portfolio loans
Portfolio loans to OREO
2017
2016
2015
$
699
1,035
255
29
34
578
800
238
28
49
475
400
487
288
105
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. At
December 31, 2017 and 2016, the Bancorp’s banking subsidiary
reserve requirement was $1.5 billion and $1.6 billion, respectively.
Additionally, the Bancorp’s banking subsidiary average reserve
requirement was $1.4 billion and $1.6 billion in 2017 and 2016,
respectively.
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 2017 stress testing program and CCAR on February 3,
2017, with submissions of stress test results and capital plans to the
FRB due on April 5, 2017, which the Bancorp submitted as
required.
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 $2.3
billion and $1.9 billion in dividends during the years ended
December 31, 2017 and 2016, 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.
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 28, 2017, the Bancorp announced the results of its
capital plan submitted to the FRB as part of the 2017 CCAR. For
BHCs that proposed capital distributions in their plans, the FRB
107 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2017 and ending June
30, 2018:
• The increase in the quarterly common stock dividend to
$0.16 from $0.14 beginning in the third quarter of 2017
and to $0.18 beginning in the second quarter of 2018;
• The repurchase of common shares in an amount up to
$1.161 billion, or a 76% increase over the 2016 capital
plan. These repurchases include $88 million in repurchases
related to share issuances under employee benefit plans
and $48 million in repurchases related to previously-
recognized TRA transaction after-tax gains;
• The additional ability to repurchase common shares in the
amount of any after-tax capital generated from the sale of
Vantiv, Inc. common stock;
• The additional ability to repurchase common shares in the
amount of any after-tax cash income generated from the
termination and settlement of gross cash flows from
existing TRAs with Vantiv, Inc. or potential future TRAs
that may be generated from additional sales of Vantiv, Inc.
The Bancorp recognized a gain on sale of Vantiv, Inc. shares of
$1.0 billion during the year ended December 31, 2017 and also
entered into accelerated share repurchase transactions during the
years ended December 31, 2017 and 2016. For more information
related to these transactions, refer to Note 19 and Note 23. In the
third quarter of 2017, the Bancorp increased the quarterly common
stock dividend to $0.16.
108 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENT SECURITIES
The following table provides the amortized cost, fair value and unrealized gains and losses for the major categories of the available-for-sale and
other and held-to-maturity investment securities portfolios as of December 31:
2017
2016
($ 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)
Amortized Unrealized Unrealized
Gains
Losses
Cost
$
98
43
15,281
10,113
3,247
2,183
679
$ 31,644
-
1
118
92
51
46
4
312
-
-
(80)
(38)
(5)
(11)
(2)
(136)
Fair
Value
98
44
15,319
10,167
3,293
2,218
681
31,820
Amortized Unrealized Unrealized
Gains
Losses
Cost
547
44
15,525
9,029
3,076
2,106
697
31,024
2
1
178
87
51
28
3
350
-
-
(95)
(61)
(15)
(18)
(2)
(191)
Fair
Value
549
45
15,608
9,055
3,112
2,116
698
31,183
-
-
-
Includes interest-only mortgage-backed securities of $34 and $60 as of December 31, 2017 and 2016, respectively, recorded at fair value with fair value changes recorded in securities gains, net, in
the Consolidated Statements of Income.
24
2
26
22
2
24
24
2
26
22
2
24
-
-
-
-
-
-
-
-
-
$
$
(b) Equity securities consist of FHLB, FRB and DTCC restricted stock holdings of $248, $362, and $2, respectively, at December 31, 2017 and $248, $358 and $1, respectively, at December
31, 2016, that are carried at cost, and certain mutual fund and equity security holdings.
Trading securities were $862 million as of December 31, 2017 compared to $410 million at December 31, 2016. The following table presents net
realized gains and losses that were recognized in income from available-for-sale and other securities as well as total gains and losses that were
recognized in income from trading securities for the years ended December 31:
($ in millions)
Available-for-sale and other securities:
Realized gains
85
Realized losses
(34)
OTTI
(54)
(3)
Net realized (losses) gains on available-for-sale and other securities(a)
10
Total trading securities gains (losses)(b)
7
Total gains and losses recognized in income from available-for-sale and other securities and trading securities
(a) Excludes net losses on interest-only mortgage-backed securities of $2, $4 and $4 for the years ended December 31, 2017, 2016 and 2015, respectively.
(b)
$
$
$
2017
$
2016
2015
72
(45)
(16)
11
-
11
97
(76)
(5)
16
(7)
9
Includes a net gain of $1 and net losses of $3 and $4 for the years ended December 31, 2017, 2016 and 2015, respectively, recorded in corporate banking revenue and wealth and asset
management revenue in the Consolidated Statements of Income.
The following table provides a summary of OTTI by security type:
($ 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.
2017
2016
2015
$
$
(54)
-
(54)
(15)
(1)
(16)
(5)
-
(5)
At December 31, 2017 and 2016, securities with a fair value of $7.8
billion and $10.1 billion, respectively, were pledged to secure
borrowings, public deposits, trust funds, derivative contracts and for
other purposes as required or permitted by law.
109 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The expected maturity distribution of the Bancorp’s mortgage-backed securities and the contractual maturity distribution of the remainder of the
Bancorp’s available-for-sale and other and held-to-maturity investment securities as of December 31, 2017 are shown in the following table:
($ in millions)
Debt securities:(a)
Available-for-Sale and Other
Fair Value
Amortized Cost
Held-to-Maturity
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.
141
9,707
17,734
3,557
681
31,820
140
9,695
17,592
3,538
679
31,644
$
$
5
13
4
2
-
24
5
13
4
2
-
24
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)
2017
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
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
$
$
$
$
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
98
7,337
2,900
449
317
-
11,101
199
6,223
3,183
1,052
422
-
11,079
-
(59)
(22)
(2)
(2)
-
(85)
-
(88)
(61)
(15)
(8)
-
(172)
-
479
526
145
386
37
1,573
-
172
-
-
336
37
545
-
(21)
(16)
(3)
(9)
(2)
(51)
-
(7)
-
-
(10)
(2)
(19)
98
7,816
3,426
594
703
37
12,674
199
6,395
3,183
1,052
758
37
11,624
-
(80)
(38)
(5)
(11)
(2)
(136)
-
(95)
(61)
(15)
(18)
(2)
(191)
At December 31, 2017 and 2016, an immaterial amount of
unrealized losses in the available-for-sale and other securities
portfolio were represented by non-rated securities.
110 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 classified based upon
product or collateral as of December 31:
($ in millions)
Loans and leases held for sale:
Commercial and industrial loans
Commercial mortgage loans
Residential mortgage loans
Total loans and leases held for sale
Portfolio loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans
Total consumer loans
Total portfolio loans and leases
2017
2016
$
$
$
$
-
6
486
492
41,170
6,604
4,553
4,068
56,395
15,591
7,014
9,112
2,299
1,559
35,575
91,970
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
Total portfolio loans and leases are recorded net of unearned
income, which totaled $523 million as of December 31, 2017 and
$503 million as of December 31, 2016. 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 $282 million and $240 million as of December 31, 2017
and 2016, respectively.
The Bancorp’s FHLB and FRB advances are generally secured
by loans. The Bancorp had loans of $13.0 billion and $13.1 billion at
December 31, 2017 and 2016, respectively, pledged at the FHLB,
and loans of $39.8 billion and $40.0 billion at December 31, 2017
and 2016, respectively, pledged at the FRB.
The following table presents a summary of the total loans and leases owned by the Bancorp and net charge-offs (recoveries) as of and for the years
ended December 31:
Carrying Value
90 Days Past Due
and Still Accruing
Net
Charge-Offs (Recoveries)
($ 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
Total loans and leases
Less: Loans and leases held for sale
Total portfolio loans and leases
2017
41,170
6,610
4,553
4,068
16,077
7,014
9,112
2,299
1,559
92,462
492
91,970
$
$
$
$
2016
41,736
6,904
3,903
3,974
15,737
7,695
9,983
2,237
680
92,849
751
92,098
2017
3
-
-
-
57
-
10
27
-
97
2016
4
-
-
-
49
-
9
22
-
84
2017
111
12
-
2
7
19
37
84
26
298
2016
172
15
(1)
4
10
27
35
80
20
362
The Bancorp engages in commercial lease products primarily related
to the financing of commercial equipment. The Bancorp had $3.4
billion and $3.3 billion of direct financing leases, net of unearned
income, at December 31, 2017 and 2016, respectively, and $674
million and $701 million of leveraged leases, net of unearned
income, at December 31, 2017 and 2016, respectively.
Pre-tax loss from leveraged leases was $11 million during the
year ended December 31, 2017, which included a remeasurement of
$27 million related to the tax treatment of leveraged leases resulting
from the impact of the TCJA during the fourth quarter of 2017.
Excluding the impact of the remeasurement, pre-tax income from
leveraged leases was $16 million during the year ended December
111 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31, 2017. 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. The tax effect of this income was an
expense of $6 million and a benefit of $10 million during the years
ended December 31, 2017 and 2016, respectively.
The following table provides the components of the commercial lease financing portfolio as of December 31:
($ 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 $14 and $15 at December 31, 2017 and 2016, respectively.
2017
3,684
885
22
4,591
(523)
4,068
$
$
2016
3,551
903
23
4,477
(503)
3,974
The Bancorp periodically reviews residual values associated with its
leasing portfolio. Declines in residual values that are deemed to be
other-than-temporary are recognized as a loss. The Bancorp
recognized $4 million and $1 million of residual value write-downs
related to commercial leases for the years ended December 31, 2017
and 2016, 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, 2017, the
minimum future lease payments receivable for each of the years
2018 through 2022 was $865 million, $814 million, $625 million,
$463 million and $414 million, respectively.
112 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. CREDIT QUALITY AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES
The Bancorp disaggregates ALLL balances and transactions in the ALLL by portfolio segment. Credit quality related disclosures for loans and
leases are further disaggregated by class.
Allowance for Loan and Lease Losses
The following tables summarize transactions in the ALLL by portfolio segment for the years ended December 31:
2017 ($ in millions)
Balance, beginning of period
Losses charged-off
Recoveries of losses previously charged-off
Provision for loan and lease losses
Deconsolidation of a VIE(a)
Balance, end of period
(a) Refer to Note 11 for further discussion on the deconsolidation of a VIE.
2016 ($ in millions)
Balance, beginning of period
Losses charged-off
Recoveries of losses previously charged-off
Provision for loan and lease losses
Balance, end of period
2015 ($ in millions)
Balance, beginning of period
Losses charged-off
Recoveries of losses previously charged-off
Provision for loan and lease losses
Balance, end of period
Commercial
831
(154)
29
66
(19)
753
Commercial
840
(232)
42
181
831
Commercial
875
(298)
37
226
840
$
$
$
$
$
$
Residential
Mortgage
96
(15)
8
-
-
89
Residential
Mortgage
100
(19)
9
6
96
Residential
Mortgage
104
(28)
11
13
100
Consumer
214
(212)
46
186
-
234
Consumer
217
(205)
43
159
214
Consumer
237
(216)
48
148
217
Unallocated
112
-
-
9
(1)
120
Unallocated
115
-
-
(3)
112
Unallocated
106
-
-
9
115
Total
1,253
(381)
83
261
(20)
1,196
Total
1,272
(456)
94
343
1,253
Total
1,322
(542)
96
396
1,272
The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment:
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
As of December 31, 2017 ($ 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
$
$
$
a
94
659
-
753
a
64
25
-
89
42
192
-
234
560
55,835
-
56,395
665
14,787
2
15,454
320
19,664
-
19,984
Total portfolio loans and leases
(a)
(b) Excludes $137 of residential mortgage loans measured at fair value, and includes $674 of leveraged leases, net of unearned income, at December 31, 2017.
Includes $1 related to leveraged leases at December 31, 2017.
$
-
-
120
120
-
-
-
-
200
876
120
1,196
1,545
90,286
2
91,833
113 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
a
118 (c)
713
-
831
68
28
-
96
44
170
-
214
a
904 (c)
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 had 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. Refer to Note 11 for further discussion on the deconsolidation of a VIE associated with these loans in the third quarter of 2017.
CREDIT RISK PROFILE
Commercial Portfolio Segment
For purposes of analyzing historical loss rates used in the
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.
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, 2017 ($ 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, 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
114 Fifth Third Bancorp
Pass
38,813
3,207
3,117
4,553
3,922
53,612
Pass
38,844
3,168
3,466
3,902
3,894
53,274
$
$
$
$
Special
Mention
1,115
75
28
-
72
1,290
Special
Mention
1,204
72
4
1
54
1,335
Substandard
1,235
80
97
-
74
1,486
Substandard
1,604
117
69
-
26
1,816
Doubtful
7
-
-
-
-
7
Doubtful
24
3
-
-
-
27
Total
41,170
3,362
3,242
4,553
4,068
56,395
Total
41,676
3,360
3,539
3,903
3,974
56,452
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Residential Mortgage and Consumer Portfolio Segments
For purposes of monitoring
risk
the credit quality and
characteristics of its consumer portfolio segment, the Bancorp
disaggregates the segment into the following classes: home equity,
automobile loans, credit card and other consumer loans and leases.
The Bancorp’s residential mortgage portfolio segment is also a
separate class.
The Bancorp considers repayment performance as the best
indicator of credit quality for residential mortgage and consumer
loans, which includes both the delinquency status and performing
versus nonperforming status of the loans. The delinquency status of
all residential mortgage and consumer loans is presented by class in
the age analysis section while the performing versus nonperforming
status is presented in the following table. Refer to the nonaccrual
loans and leases section of Note 1 for additional delinquency and
nonperforming information.
The following table presents a summary of the Bancorp’s residential mortgage and consumer portfolio segments, by class, disaggregated into
performing versus nonperforming status as of December 31:
($ in millions)
Residential mortgage loans(a)
Home equity
Automobile loans
Credit card
Other consumer loans
Total residential mortgage and consumer loans(a)
(a) Excludes $137 and $143 of residential mortgage loans measured at fair value at December 31, 2017 and 2016, respectively.
Performing
15,424
6,940
9,111
2,273
1,559
35,307
30
74
1
26
-
131
$
$
Nonperforming
2017
Performing
14,874
7,622
9,981
2,209
680
35,366
2016
Nonperforming
34
73
2
28
-
137
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(b)(c)
$
As of December 31, 2017 ($ 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)
Consumer loans:
Home equity
Automobile loans
Credit card
Other consumer loans
Total portfolio loans and leases(a)
(a) Excludes $137 of residential mortgage loans measured at fair value at December 31, 2017.
(b)
41,027
3,351
3,235
4,552
4,065
15,301
6,888
8,992
2,230
1,554
91,195
$
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
42
3
-
1
3
66
70
107
36
5
333
101
8
7
-
-
87
56
13
33
-
305
143
11
7
1
3
153
126
120
69
5
638
41,170
3,362
3,242
4,553
4,068
15,454
7,014
9,112
2,299
1,559
91,833
3
-
-
-
-
57
-
10
27
-
97
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,
2017, $95 of these loans were 30-89 days past due and $290 were 90 days or more past due. The Bancorp recognized $5 of losses during the year ended December 31, 2017 due to claim denials
and curtailments associated with these insured or guaranteed loans.
Includes accrual and nonaccrual loans and leases.
(c)
115 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Current
Loans and
Leases(b)(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)
Consumer loans:
Home equity
Automobile loans
Credit card
Other consumer loans
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)
Impaired Portfolio Loans and Leases
Larger commercial loans and leases included within aggregate
borrower relationship balances exceeding $1 million that exhibit
probable or observed credit weaknesses are subject to individual
review for impairment. The Bancorp also performs an individual
review on loans and leases that are restructured in a TDR. The
Bancorp considers the current value of collateral, credit quality of
any guarantees, the loan structure and other factors when
evaluating whether an individual loan or lease is impaired. Other
factors may include the geography and industry of the borrower,
size and financial condition of the borrower, cash flow and
leverage of the borrower and the Bancorp’s evaluation of the
borrower’s management. Smaller-balance homogenous loans or
leases that are collectively evaluated for impairment are not
included in the following tables.
The following tables summarize the Bancorp’s impaired portfolio loans and leases, by class, that were subject to individual review, which includes
all portfolio loans and leases restructured in a TDR as of December 31:
2017 ($ in millions)
With a 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:
Home equity
Automobile loans
Credit card
Total impaired portfolio loans and leases with a related ALLL
With no related ALLL:
Commercial loans:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Restructured residential mortgage loans
Restructured consumer loans:
Home equity
Automobile loans
Total impaired portfolio loans with no related ALLL
Total impaired portfolio loans and leases
(a)
116 Fifth Third Bancorp
Unpaid
Principal
Balance
Recorded
Investment
ALLL
$
$
$
$
$
433
16
4
4
469
172
8
52
1,158
151
18
35
218
97
2
521
1,679
358
14
3
4
465
172
7
45
1,068
131
15
35
200
94
2
477
1,545(a)
87
7
-
-
64
27
1
14
200
-
-
-
-
-
-
-
200
Includes $249, $652 and $275, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $150, $13 and $45, respectively, of commercial, residential
mortgage and consumer portfolio TDRs on nonaccrual status at December 31, 2017.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2016 ($ 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:
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:
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
$
$
$
$
$
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
(a)
1,901 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 had no continuing credit risk due to the risk being assumed by a third party, with
an unpaid principal balance of $26, a recorded investment of $26 and an ALLL of $18. Refer to Note 11 for further discussion on the deconsolidation of a VIE associated with these loans in the
third quarter of 2017.
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:
2017
2016
2015
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
($ in millions)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage owner-occupied loans(a)
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases
Restructured residential mortgage loans
Restructured consumer loans:
Home equity
Automobile loans
Credit card
Total average impaired portfolio loans and leases
(a) Excludes five restructured loans associated with a consolidated VIE in which the Bancorp had no continuing credit risk due to the risk being assumed by a third party, with an average recorded
investment of $13, $26 and $27 for the years ended December 31, 2017, 2016, and 2015, respectively. An immaterial amount of interest income was recognized during the years ended
December 31, 2017, 2016, and 2015. Refer to Note 11 for further discussion on the deconsolidation of the VIE associated with these loans in the third quarter of 2017.
579
35
61
-
3
657
691
63
139
3
5
647
663
92
224
41
5
586
281
11
50
1,677
325
17
56
1,946
361
22
68
2,062
10
-
1
-
-
25
10
1
5
-
-
25
21
2
7
1
-
23
12
-
4
52
12
-
5
58
13
1
6
74
$
117 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:
($ in millions)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage owner-occupied loans(c)
Commercial mortgage nonowner-occupied loans
Commercial leases
Total nonaccrual portfolio commercial loans and leases
Residential mortgage loans
Consumer loans:
Home equity
Automobile loans
Credit card
Total nonaccrual portfolio consumer loans
Total nonaccrual portfolio loans and leases(a)(b)
OREO and other repossessed property
Total nonperforming portfolio assets(a)(b)
(a) Excludes $6 and $13 of nonaccrual loans and leases held for sale at December 31, 2017 and 2016, respectively.
(b)
2017
2016
$
$
$
276
19
7
4
306
30
74
1
26
101
437
52
489
478
32
9
4
523
34
73
2
28
103
660
78
738
Includes $3 and $4 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at December 31, 2017 and 2016, respectively, of which $3 and $1 are
restructured nonaccrual government insured commercial loans at December 31, 2017 and 2016, respectively.
(c) Excludes $19 of restructured nonaccrual loans at December 31, 2016 associated with a consolidated VIE in which the Bancorp had no continuing credit risk due the risk being assumed by a third
party. Refer to Note 11 for further discussion on the deconsolidation of the VIE associated with these loans in the third quarter of 2017.
loan,
modification of a
the Bancorp measures the related
impairment as the difference between the estimated future cash
flows expected to be collected on the modified loan, discounted at
the original effective yield of the loan, and the carrying value of the
loan. The resulting measurement may result in the need for minimal
or no 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.
The Bancorp had commitments to lend additional funds to
borrowers whose terms have been modified in a TDR, consisting of
line of credit and letter of credit commitments of $53 million and
$78 million, respectively, as of December 31, 2017 compared with
$82 million and $57 million, respectively, as of December 31, 2016.
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 $235 million and
$260 million as of December 31, 2017 and 2016, respectively.
in process according
to
Troubled Debt Restructurings
If a borrower is experiencing financial difficulty, the Bancorp may
consider, in certain circumstances, modifying the terms of their loan
to maximize collection of amounts due. Within each of the
Bancorp’s loan classes, TDRs typically involve either a reduction of
the stated interest rate of the loan, an extension of the loan’s
maturity date with a stated rate lower than the current market rate
for a new loan with similar risk, or in limited circumstances, a
reduction of the principal balance of the loan or the loan’s accrued
interest. Modifying the terms of a loan may result in an increase or
decrease to the ALLL depending upon the terms modified, the
method used to measure the ALLL for a loan prior to modification,
and whether any charge-offs were recorded on the loan before or at
the time of modification. Refer to the ALLL section of Note 1 for
the Bancorp’s ALLL methodology. Upon
information on
118 Fifth Third Bancorp
The following tables provide a summary of loans and leases, by class, modified in a TDR by the Bancorp during the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Number of Loans
Modified in a TDR
During the Year(b)
Recorded Investment
in Loans Modified
in a TDR
During the Year
Increase
(Decrease)
Charge-offs
to ALLL Upon Recognized Upon
Modification
Modification
2017 ($ 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.
150
102
8,085
9,256
75
9
4
1
830
$
$
237
8
-
4
116
10
-
38
413
(5)
5
-
-
5
-
-
8
13
6
-
-
-
-
-
-
1
7
Number of Loans
Modified in a TDR
During the Year(b)
Recorded Investment
in Loans Modified
in a TDR
During the Year
Increase
Charge-offs
to ALLL Upon Recognized Upon
Modification
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)
Charge-offs
to ALLL Upon Recognized Upon
Modification
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
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.
119 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide a summary of TDRs that subsequently defaulted during the years ended December 31, 2017, 2016 and 2015 and were
within twelve months of the restructuring date:
December 31, 2017 ($ in millions)(a)
Commercial loans:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Residential mortgage loans
Consumer loans:
Home equity
Credit card
Total portfolio loans
(a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality.
December 31, 2016 ($ in millions)(a)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage owner-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.
Number of
Contracts
Recorded
Investment
7
4
172
16
1,633
1,832
Number of
Contracts
8
2
2
172
17
2
1,715
1,918
Number of
Contracts
7
3
156
15
8
1,935
2,124
$
$
$
$
$
$
17
1
24
2
8
52
Recorded
Investment
5
-
1
25
1
-
7
39
Recorded
Investment
11
1
21
1
-
8
42
120 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:
29
Land and improvements
9
Buildings
1
Equipment
(2,567)
Accumulated depreciation and amortization
2,065
Total bank premises and equipment
(a) At December 31, 2017 and 2016, land and improvements, buildings and construction in progress included $91 and $92, respectively, associated with parcels of undeveloped land intended for
17
9
1
(2,715)
2,003
2 - 30 yrs.
2 - 20 yrs.
1 - 30 yrs.
663
1,672
1,761
398
99
644
1,679
1,876
399
93
2016
2017
$
$
future branch expansion.
Depreciation and amortization expense related to bank premises
and equipment was $234 million, $242 million and $256 million for
the years ended December 31, 2017, 2016 and 2015, 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.
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 $7 million, $32 million and $109 million for the
years ended December 31, 2017, 2016 and 2015, respectively. The
recognized impairment losses were recorded 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 $101 million, $100 million
and $110 million for the years ended December 31, 2017, 2016 and
2015, respectively, which was reduced by rental income from leased
premises of $13 million, $16 million and $18 million during the
years ended December 31, 2017, 2016 and 2015, respectively. The
Bancorp’s subsidiaries have entered into a number of noncancelable
operating and capital lease agreements with respect to bank
premises and equipment.
The following table provides the annual future minimum payments under noncancelable operating leases and capital leases for the years ending
December 31:
($ in millions)
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
Less: Amounts representing interest
Present value of net minimum lease payments
Noncancelable
Operating Leases
Capital Leases
$
$
87
83
71
57
51
219
568
-
-
6
6
5
4
4
1
26
4
22
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 $52 million, $20
million and $36 million for the years ended December 31, 2017,
2016 and 2015, respectively. The recognized impairment losses were
in the Consolidated
recorded
Statements of Income.
in corporate banking revenue
121 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. GOODWILL
Business combinations entered into by the Bancorp typically include
the acquisition of goodwill. Acquisition activity includes acquisitions
in the respective period in addition to purchase accounting
adjustments related to previous acquisitions, if any. The Bancorp
completed its annual goodwill impairment test as of September 30,
2017 by performing a qualitative assessment of goodwill at the
reporting unit level to determine whether any indicators of
impairment existed. In performing this qualitative assessment, the
last
Bancorp evaluated events and circumstances since
the
impairment analysis, macroeconomic conditions, banking industry
and market conditions and key financial metrics of the Bancorp as
well as reporting unit and overall Bancorp financial performance.
After assessing the totality of the events and circumstances, the
Bancorp determined that it was not more likely than not that the fair
values of the Commercial Banking, Branch Banking and Wealth and
Asset Management reporting units were less than their respective
carrying amounts and, therefore, the first and second steps of the
quantitative goodwill impairment test were deemed unnecessary.
Changes in the net carrying amount of goodwill, by reporting unit, for the years ended December 31, 2017 and 2016 were as follows:
($ in millions)
Goodwill
Accumulated impairment losses
Net carrying amount as of December 31, 2015
Acquisition activity
Net carrying amount as of December 31, 2016
Acquisition activity
Net carrying amount as of December 31, 2017
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
29
177
Total
3,381
(965)
2,416
-
2,416
29
2,445
10. INTANGIBLE ASSETS
Intangible assets consist of core deposit intangibles, customer lists,
customer relationships, non-compete agreements, trade names and
rent intangibles. Intangible assets are amortized on either a straight-
line or an accelerated basis over their estimated useful lives. The
increase in gross carrying amount of intangible assets from the year
ended December 31, 2016 reflects acquisition activity during 2017.
The details of the Bancorp’s intangible assets are shown in the following table:
($ in millions)
As of December 31, 2017
Core deposit intangibles
Customer relationships
Non-compete agreements
Other
Total intangible assets
As of December 31, 2016
Core deposit intangibles
Non-compete agreements
Other
Total intangible assets
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
$
$
$
$
34
16
13
6
69
34
10
5
49
(29)
-
(10)
(3)
(42)
(27)
(10)
(3)
(40)
5
16
3
3
27
7
-
2
9
As of December 31, 2017, all of the Bancorp’s intangible assets
were being amortized. Amortization expense recognized on
intangible assets was $2 million for each of the years ended
December 31, 2017, 2016 and 2015. The Bancorp’s projections of
amortization expense shown in the following table is based on
existing asset balances as of December 31, 2017. Future
amortization expense may vary from these projections.
Estimated amortization expense for the years ending December 31, 2018 through 2022 is as follows:
($ in millions)
2018
2019
2020
2021
2022
122 Fifth Third Bancorp
$
Total
3
3
3
2
2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. VARIABLE INTEREST ENTITIES
The Bancorp, in the normal course of business, engages in a variety
of activities that involve VIEs, which are legal entities that lack
sufficient equity 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, 2017 ($ in millions)
Assets:
Other short-term investments
Commercial mortgage loans
Automobile loans
ALLL
Other assets
Total assets
Liabilities:
Other liabilities
Long-term debt
Total liabilities
Noncontrolling interests
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
In a securitization transaction that occurred in September of 2017,
the Bancorp transferred an aggregate amount of $1.1 billion in
consumer automobile loans to a bankruptcy remote trust which was
issued
deemed to be a VIE. This trust then subsequently
approximately $1.0 billion of asset-backed notes, of which
approximately $261 million were retained by the Bancorp. Refer to
Note 16 for further information. Additionally, in prior years the
Bancorp completed securitization transactions in which the Bancorp
transferred certain consumer automobile loans to bankruptcy
remote trusts which were also deemed to be VIEs. The primary
purposes of the VIEs were to issue asset-backed securities with
varying levels of credit subordination and payment priority, as well
as residual interests, and to provide the Bancorp with access to
liquidity for its originated loans. The Bancorp retained residual
interests in the VIEs and, therefore, has an obligation to absorb
losses and a right to receive benefits from the VIEs that could
potentially be significant to the VIEs. In addition, the Bancorp
retained servicing rights for the underlying loans and, therefore,
holds the power to direct the activities of the VIEs that most
Automobile Loan
Securitizations
CDC
Investments
62
-
1,277
(6)
7
1,340
2
1,190
1,192
-
-
20
-
-
-
20
-
-
-
20
Automobile Loan
Securitizations
CDC
Investments
84
-
1,170
(6)
9
1,257
3
1,094
1,097
-
1
46
-
(20)
-
27
-
-
-
27
$
$
$
$
$
$
$
$
$
$
Total
62
20
1,277
(6)
7
1,360
2
1,190
1,192
20
Total
85
46
1,170
(26)
9
1,284
3
1,094
1,097
27
significantly impact the economic performance of the VIEs. As a
result, the Bancorp concluded that it is the primary beneficiary of
the VIEs and 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
123 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
individuals and typically makes investments in a separate legal entity
that owns the property under development. The entities are usually
formed as limited partnerships and LLCs and CDC typically invests
as a limited partner/investor member in the form of equity
contributions. The economic performance of the VIEs is driven by
the performance of their underlying investment projects as well as
the VIEs’ ability to operate in compliance with the rules and
regulations necessary for the qualification of tax credits generated by
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
invested
in
to
to
the
During
income
interests
attributable
the comprehensive
the equity attributable
includes reporting separately
the
noncontrolling interests in the Consolidated Balance Sheets and
Consolidated Statements of Changes in Equity and reporting
separately
the
noncontrolling
the Consolidated Statements of
Comprehensive Income and the net income attributable to the
noncontrolling interests in the Consolidated Statements of Income.
the Bancorp’s
third quarter of 2017,
indemnification guarantee for one of the CDC investments for
which a Bancorp subsidiary served as the managing member expired
and the Bancorp transferred its remaining ownership interest in the
VIE to the investor member thus removing the Bancorp from
future operations of
the Bancorp
deconsolidated the VIE during the third quarter of 2017 resulting in
a decrease of $27 million in commercial mortgage loans, a decrease
of $20 million in ALLL associated with the commercial mortgage
loans and a decrease of $18 million in indemnification guarantee
exposure. The Bancorp’s maximum exposure related to these
indemnifications at December 31, 2017 and 2016 was $17 million
and $31 million, respectively, which is based on an amount required
to meet the investor member’s defined target rate of return.
the VIE. As a result,
Non-consolidated VIEs
The following tables provide a summary of assets and liabilities carried on the Consolidated Balance Sheets related to non-consolidated VIEs for
which the Bancorp holds an interest, but is not the primary beneficiary of the VIE, as well as the Bancorp’s maximum exposure to losses
associated with its interests in the entities as of:
December 31, 2017 ($ in millions)
CDC investments
Private equity investments
Loans provided to VIEs
December 31, 2016 ($ 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.
During the fourth quarter of 2017, the Bancorp recognized $68
million of impairment on certain affordable housing investments
primarily due to the change in the federal statutory corporate tax
rate pursuant to the TCJA. This impairment charge was recorded in
other noninterest expense in the Consolidated Statements of
Income. Refer to Note 27 for further information.
The Bancorp’s funding requirements are limited to its invested
capital and any additional unfunded commitments for future equity
$
$
Total
Assets
1,376
102
1,845
Total
Assets
1,421
176
1,735
Total
Liabilities
355
-
-
Total
Liabilities
357
-
-
Maximum
Exposure
1,376
150
2,910
Maximum
Exposure
1,421
232
2,672
contributions. The Bancorp’s maximum exposure to loss as a result
of its involvement with the VIEs is limited to the carrying amounts
of the investments, including the unfunded commitments. The
carrying amounts of these investments, which are included in other
assets in the Consolidated Balance Sheets, and the liabilities related
to the unfunded commitments, which are included in other liabilities
in the Consolidated Balance Sheets, are included in the previous
tables for all periods presented. The Bancorp has no other liquidity
arrangements or obligations to purchase assets of the VIEs that
would expose the Bancorp to a loss. In certain arrangements, the
general partner/managing member of the VIE has guaranteed a
level of projected tax credits to be received by the limited
partners/investor members, thereby minimizing a portion of the
Bancorp’s risk.
At both December 31, 2017 and 2016, 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 $355 million and $349 million at December 31,
2017 and 2016, respectively. The unfunded commitments as of
December 31, 2017 are expected to be funded from 2018 to 2034.
124 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bancorp has accounted for all of its investments in qualified affordable housing tax credits using the equity method of accounting. The
following table summarizes the impact to the Consolidated Statements of Income relating to investments in qualified affordable housing
investments:
For the years ended December 31 ($ in millions)
Pre-tax investment and impairment losses(a)
Tax credits and other benefits
(a) The Bancorp recognized $68 of impairment losses primarily due to the change in the federal statutory corporate tax rate during the year ended December 31, 2017 and did not recognize
Other noninterest expense
Applicable income tax expense
207
(246)
126
(205)
144
(220)
2015
2016
$
2017
Consolidated Statements of
Income Caption
impairment losses resulting from the forfeiture or ineligibility of tax credits or other circumstances during the years ended December 31, 2017, 2016 and 2015.
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
primarily all of
the partners’ capital
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 previous tables. Also, at December
31, 2017 and 2016, the Bancorp’s unfunded commitment amounts
to the private equity funds were $48 million and $56 million,
respectively. As part of previous commitments, the Bancorp made
capital contributions to private equity investments of $11 million
and $14 million during the years ended December 31, 2017 and
2016, respectively. The Bancorp recognized a gain of $11 million on
the sales of certain private equity funds during the year ended
amounts of
December 31, 2017. The Bancorp recognized $1 million, $9 million
and $1 million of OTTI primarily associated with certain
nonconforming investments affected by the Volcker Rule during the
years ended December 31, 2017, 2016, 2015, respectively. Refer to
Note 27 for further information.
Loans provided to VIEs
The Bancorp has provided funding to certain unconsolidated VIEs
sponsored by third parties. These VIEs are generally established to
finance certain consumer and small business loans originated by
third parties. The entities are primarily funded through the issuance
of a loan from the Bancorp or a 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, 2017 and 2016, the Bancorp’s unfunded
commitments to these entities were $1.1 billion and $937 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.
125 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 $568 million that were
previously modified in a TDR. As part of this sale, the Bancorp
provided certain standard representations and warranties which
have expired. Additionally, the Bancorp did not obtain servicing
responsibilities on the sales of these loans and the investors have no
credit recourse to the Bancorp’s other assets for failure of debtors
to pay when due.
in
Residential Mortgage Loan Sales
The Bancorp sold fixed and adjustable-rate residential mortgage
loans during the years ended December 31, 2017, 2016 and 2015. In
those sales, the Bancorp obtained servicing responsibilities and
provided certain standard representations and warranties, however
the investors have no recourse to the Bancorp’s other assets for
failure of debtors to pay when due. The Bancorp receives annual
servicing fees based on a percentage of the outstanding balance. The
Bancorp identifies classes of servicing assets based on financial asset
type and interest rates.
Information related to residential mortgage loan sales and the Bancorp’s mortgage banking activity, which is included in mortgage banking net
revenue in the Consolidated Statements of Income, for the years ended December 31 is as follows:
($ 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.
2017
6,369
$
2016
6,927
2015
5,078(b)
138
206
186
199
171
222
Servicing Rights
Effective January 1, 2017, the Bancorp elected to prospectively
adopt the fair value method for all classes of its residential mortgage
servicing rights portfolio. Upon this election, all servicing rights are
measured at fair value at each reporting date and changes in the fair
value of servicing rights are reported in mortgage banking net
revenue in the Consolidated Statements of Income in the period in
which the changes occur. The election of the fair value method did
not require a cumulative effect adjustment to retained earnings as
there was no difference between the carrying value of the servicing
rights, net of valuation allowance, and the fair value.
Prior to the election of the fair value method, servicing rights
were initially recorded at fair value and subsequently amortized in
proportion to, and over the period of, estimated net servicing
revenue. Servicing rights were assessed for impairment monthly,
based on fair value, with temporary impairment recognized through
a valuation allowance.
The following tables present changes in the servicing rights related to residential mortgage and automobile loans for the years ended December 31:
($ in millions)
Balance, beginning of period
Servicing rights originated - residential mortgage loans
Servicing rights acquired - residential mortgage loans
Changes in fair value:
Due to changes in inputs or assumptions(a)
Other changes in fair value(b)
Balance, end of period
(a) Primarily reflects changes in prepayment speed and OAS spread assumptions which are updated based on market interest rates.
(b) Primarily reflects changes due to collection of contractual cash flows and the passage of time.
($ in millions)
Carrying amount before valuation allowance:
Balance, beginning of period
Servicing rights that result from the transfer of residential mortgage loans
Amortization
Balance, end of period
Valuation allowance for servicing rights:
Balance, beginning of period
Recovery of MSR impairment
Balance, end of period
Carrying amount after valuation allowance
2017
744
127
109
(1)
(121)
858
2016
1,204
83
(131)
1,156
(419)
7
(412)
744
$
$
$
$
$
$
For the years ended December 31, 2016 and 2015, temporary
impairment, effected through a change in the MSR valuation
allowance, was captured as a component of mortgage banking net
revenue in the Consolidated Statements of Income. Amortization
expense recognized on servicing rights for the years ended
December 31, 2016 and 2015 was $131 million and $140 million,
respectively.
The Bancorp maintains a non-qualifying hedging strategy to
manage a portion of the risk associated with changes in the value of
the MSR portfolio. This strategy may include the purchase of free-
standing derivatives and various available-for-sale and trading
securities. The interest income, mark-to-market adjustments and
gain or loss from sale activities associated with these portfolios are
expected to economically hedge a portion of the change in value of
126 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the MSR portfolio caused by fluctuating OAS spreads, earnings
rates and prepayment speeds. The fair value of the servicing asset is
based on the present value of expected future cash flows.
The following table displays the beginning and ending fair value of the servicing rights for the years ended December 31:
($ 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
2017
2016
$
722
841
22
17
-
-
757
722
27
22
1
-
The following table presents activity related to valuations of the MSR portfolio and the impact of the non-qualifying hedging strategy for the years
ended December 31:
($ in millions)
Securities gains, net - non-qualifying hedges on MSRs
Changes in fair value and settlement of free-standing derivatives purchased
to economically hedge the MSR portfolio(a)
MSR fair value adjustment(a)
Recovery of MSR impairment(a)
(a) Included in mortgage banking net revenue in the Consolidated Statements of Income.
$
2017
2
2
(122)
-
2016
-
2015
-
24
-
7
90
-
4
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, securitization, or purchase resulting from transactions completed during the years ended December 31 were as follows:
Weighted-
Average Life
(in years)
Rate
2017
Prepayment
Speed
(annual)
OAS Spread
(bps)
Weighted-
Average Life
(in years)
2016
Prepayment
Speed
(annual)
OAS Spread
(bps)
Residential mortgage loans:
Servicing rights
Servicing rights
Fixed
Adjustable
7.5
2.7
9.1 %
32.1
497
660
7.2
2.8
10.3 %
30.2
584
679
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, 2017 and 2016, the Bancorp
serviced $60.0 billion and $53.6 billion, respectively, of residential
mortgage loans for other investors. The value of MSRs that
continue to be held by the Bancorp is subject to credit, prepayment
and interest rate risks on the sold financial assets.
At December 31, 2017, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in
prepayment speed assumptions and immediate 10% and 20% adverse changes in OAS spread are as follows:
Prepayment
Speed Assumption
OAS
Spread Assumption
Fair
Value
Weighted-
Average Life
(in years)
Impact of Adverse Change
on Fair Value
20%
10%
50%
OAS Spread
(bps)
Impact of Adverse Change
on Fair Value
10%
20%
($ in millions)(a)
Residential mortgage loans:
Servicing rights
Servicing rights
(a) The impact of the weighted-average default rate on the current fair value of residual cash flows for all scenarios is immaterial.
$
Fixed
Adjustable
11.4 % $
24.6
841
17
(36)
(1)
6.0
3.3
Rate
Rate
(69)
(2)
(158)
(5)
549
785
$
(17)
-
(33)
(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.
127 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE FINANCIAL INSTRUMENTS
The Bancorp maintains an overall risk management strategy that
incorporates the use of derivative instruments to reduce certain risks
related to interest rate, prepayment and foreign currency volatility.
Additionally, the Bancorp holds derivative instruments for the
benefit of its commercial customers and for other business
purposes. The Bancorp does not enter into unhedged speculative
derivative positions.
the
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.
(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, TBA securities and
interest rate swaps) to economically hedge prepayment volatility.
Principal-only swaps are total return swaps that are based on
changes in the value of the underlying mortgage principal-only trust.
TBA securities 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.
interest
loans denominated
Foreign currency volatility occurs as the Bancorp enters into
in foreign currencies. Derivative
certain
instruments that the Bancorp may use to economically hedge these
foreign denominated loans include foreign exchange swaps and
forward contracts.
The Bancorp also enters into derivative contracts (including
foreign exchange contracts, commodity contracts and interest rate
contracts) for the benefit of commercial customers and other
business purposes. The Bancorp 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
currencies. Credit risk arises from the possible
inability of
counterparties to meet the terms of their contracts. The Bancorp’s
exposure is limited to the replacement value of the contracts rather
than the notional, principal or contract amounts. Credit risk is
minimized through credit approvals, limits, counterparty collateral
and monitoring procedures.
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
128 Fifth Third Bancorp
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 with the exception of certain variation margin payments
that are considered legal settlements of the derivative contracts. For
derivative contracts cleared through certain central clearing parties
who have modified their rules to treat variation margin payments as
settlements, the variation margin payments are applied to net the
fair value of the respective derivative contracts.
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, 2017 and
2016, the balance of collateral held by the Bancorp for derivative
assets was $409 million and $444 million, respectively. For
derivative contracts cleared through certain central clearing parties
who have modified their rules to treat variation margin payments as
settlement of the derivative contract, the payments for variation
margin of $74 million were applied to reduce the respective
derivative contracts and were also not included in the total amount
of collateral held as of December 31, 2017. The credit component
negatively impacting the fair value of derivative assets associated
with customer accommodation contracts as of December 31, 2017
and 2016 was $3 million and $6 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, 2017 and
2016, the balance of collateral posted by the Bancorp for derivative
liabilities was $365 million and $399 million, respectively.
Additionally, $31 million of variation margin payments were applied
to the respective derivative contracts to reduce the Bancorp’s
derivative liabilities as of December 31, 2017 and were also not
included in the total amount of collateral posted. Certain of the
Bancorp’s derivative liabilities contain credit-risk related contingent
features that could result in the requirement to post additional
collateral upon the occurrence of specified events. As of December
31, 2017 and 2016, the fair value of the additional collateral that
could be required to be posted as a result of the credit-risk related
contingent features being triggered was immaterial to the Bancorp’s
Consolidated Financial Statements. The posting of collateral has
been determined to remove the need for further consideration of
credit risk. As a result, the Bancorp determined that the impact of
the Bancorp’s credit risk to the valuation of its derivative liabilities
was immaterial to the Bancorp’s Consolidated Financial Statements.
The Bancorp holds certain derivative instruments that qualify
for hedge accounting treatment and are designated as either fair
value hedges or cash flow hedges. Derivative instruments that do
not qualify for hedge accounting treatment, or for which hedge
accounting is not established, are held as free-standing derivatives.
All customer accommodation derivatives are held as free-standing
derivatives.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables reflect the notional amounts and fair values for all derivative instruments included in the Consolidated Balance Sheets as of:
December 31, 2017 ($ 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
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
TBA securities
Foreign exchange contracts
Total free-standing derivatives - customer accommodation
Total derivatives not designated as qualifying hedging instruments
Total
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
Fair Value
Notional
Amount
Derivative
Assets
Derivative
Liabilities
$
3,705
4,475
11,035
1,284
20
1,900
112
42,216
446
4,125
26
12,654
$
297
297
-
-
297
54
1
20
-
-
75
154
8
165
-
124
451
526
823
5
5
12
12
17
15
1
-
137
1
154
145
-
167
-
119
431
585
602
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 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
designated as fair value hedges as of December 31, 2017, an
assessment of hedge effectiveness using regression analysis was
performed and such swaps were accounted for using the “long-
long-haul method requires a quarterly
haul” method. The
and measurement of
effectiveness
assessment of hedge
ineffectiveness. Hedge ineffectiveness is the difference between the
129 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
changes in the fair value of the interest rate swap and changes in fair
value of the related hedged item attributable to the risk being
hedged. The ineffectiveness on interest rate swaps hedging fixed-
rate funding is reported within interest expense in the Consolidated
Statements of Income.
The following table reflects the change in fair value of interest rate contracts, designated as fair value hedges, as well as the change in fair value of
the related hedged items attributable to the risk being hedged, included in the Consolidated Statements of Income:
For the years ended December 31 ($ in millions)
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
2017
(33)
31
2016
(59)
54
2015
(29)
25
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, 2017, 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, 2017, the maximum length of time over which the
Bancorp is hedging its exposure to the variability in future cash
flows is 24 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, 2017 and 2016, $9 million of net deferred losses, net of tax and
$10 million of net deferred gains, net of tax, respectively, on cash
flow hedges were recorded in AOCI in the Consolidated Balance
Sheets. As of December 31, 2017, $3 million in net deferred gains,
net of tax, recorded in AOCI are expected to be reclassified into
earnings during the next twelve months. This amount could differ
from amounts actually recognized due to changes in interest rates,
hedge de-designations, and the addition of other hedges subsequent
to December 31, 2017.
During the years ended 2017 and 2016, there were no gains or
losses reclassified from AOCI into earnings associated with the
discontinuance of cash flow hedges because it was probable that the
original forecasted transaction would no longer occur by the end of
the originally specified time period or within the additional period of
time as defined by U.S. GAAP.
The following table presents the pre-tax net (losses) gains recorded in the Consolidated Statements of Income and in the Consolidated Statements
of Comprehensive Income relating to derivative instruments designated as cash flow hedges:
For the years ended December 31 ($ in millions)
Amount of pre-tax net (losses) 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, TBA securities 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
$
2017
(11)
19
2016
30
48
2015
74
75
instruments and the interest rate exposure on these commitments is
economically hedged primarily with forward contracts. Revaluation
gains and losses from free-standing derivatives related to mortgage
banking activity are recorded as a component of mortgage banking
net revenue in the Consolidated Statements of Income.
In conjunction with the initial sale of the Bancorp’s 51%
interest in Vantiv Holding, LLC in 2009, the Bancorp received a
warrant which was accounted for as a free-standing derivative.
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.
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.
130 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
Stock warrant
Swap associated with sale of Visa, Inc. Class B Shares
Consolidated Statements of
Income Caption
2017
2016
2015
Mortgage banking net revenue
Mortgage banking net revenue
$
Other noninterest income
Other noninterest income
Other noninterest income
Other noninterest income
(17)
2
(7)
-
(1)
(80)
14
24
2
73 (a)
-
(56)
8
90
23
325 (a)
-
(37)
(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
offsetting contracts with approved,
independent
counterparties with substantially matching terms. The Bancorp
hedges
interest rate exposure on commercial customer
transactions by executing offsetting swap agreements with primary
dealers. Revaluation gains and losses on interest rate, foreign
exchange, commodity and other commercial customer derivative
contracts are recorded as a component of corporate banking
revenue in the Consolidated Statements of Income.
reputable,
its
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, 2017 and 2016, the total
notional amount of the risk participation agreements was $2.8
billion and $2.5 billion, respectively, and the fair value was a liability
of $5 million at December 31, 2017 and $4 million at December 31,
2016, which is included in other liabilities in the Consolidated
Balance Sheets. As of December 31, 2017, the risk participation
agreements had a weighted-average remaining life of 2.9 years.
The Bancorp’s maximum exposure in the risk participation
agreements is contingent on the fair value of the underlying interest
rate derivative contracts in an asset position at the time of default.
The Bancorp monitors the credit risk associated with the underlying
customers in the risk participation agreements through the same risk
grading system currently utilized for establishing loss reserves in its
loan and lease portfolio.
Risk ratings of the notional amount of risk participation agreements under this risk rating system are summarized in the following table:
At December 31 ($ in millions)
Pass
Special mention
Substandard
Total
2017
2016
$
$
2,748
66
24
2,838
2,447
14
6
2,467
131 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
2017
2016
2015
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
21
(5)
2
93
6
1
-
48
2
1
22
-
1
114
6
(1)
1
62
(2)
1
23
(1)
1
111
5
(2)
6
70
-
-
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. However, for
derivative contracts cleared through certain central clearing parties
who have modified their rules to treat variation margin payments as
settlements, the fair value of the respective derivative contracts are
reported net of the variation margin payments.
Collateral amounts included in the tables below consist primarily
of cash and highly-rated government-backed securities and do not
include variation margin payments for derivative contracts with legal
rights of setoff for the year ended December 31, 2017.
The following tables provide a summary of offsetting derivative financial instruments:
As of December 31, 2017 ($ 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
$
815
815
(213)
(213)
(362)
(362)
240
240
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
(155)
(155)
(213)
(213)
602
602
234
234
$
Sheets were excluded from this table.
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.
132 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
Bank owned life insurance
Partnership investments
Derivative instruments
Accrued interest and fees receivable
Investment in Vantiv Holding, LLC
Vantiv, Inc. TRA put/call receivable
Prepaid expenses
Income tax receivable
OREO and other repossessed personal property
Other
Total other assets
2017
1,763
1,720
1,557
823
378
219
105
87
66
54
203
6,975
2016
2,158
1,681
1,689
1,057
350
414
165
83
1
84
162
7,844
$
$
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.
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 in
partnership investments. The Bancorp has determined that these
partnership investments are VIEs and the Bancorp’s investments
represent variable interests. Additionally, the Bancorp recorded
impairment on certain affordable housing investments during the
year ended December 31, 2017 and OTTI on investments in certain
private equity funds during the years ended December 31, 2017 and
2016. Refer to Note 11 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 ownership share in Vantiv
Holding, LLC as of December 31, 2017 was approximately 8.6%.
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.
In 2016, the Bancorp entered into an agreement with Vantiv,
Inc. in which 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 to a then estimated $394
million, upon the exercise of certain call options by Vantiv, Inc. or
certain put options by the Bancorp. The Bancorp received $63
million in settlement for certain call options and put options
exercised during 2017. Refer to Note 19 and Note 31 for further
information.
OREO represents property acquired through foreclosure or
other proceedings and is carried at the lower of cost or fair value,
less costs to sell. Refer to Note 1 for further information.
133 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SHORT-TERM BORROWINGS
Borrowings with original maturities of one year or less are classified
as short-term and include federal funds purchased and other short-
term borrowings. Federal funds purchased are excess balances in
reserve accounts held at the FRB that the Bancorp purchased from
other member banks on an overnight basis. Other short-term
borrowings include securities sold under repurchase agreements,
derivative collateral, FHLB advances and other borrowings with
original maturities of one year or less.
The following table summarizes short-term borrowings and weighted-average rates:
($ 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
2017
Amount Rate
2016
Amount
Rate
$
$
$
174
4,012
557
3,158
1,495
6,307
1.37%
1.28
1.01%
0.96
$
$
$
132
3,535
506
2,845
739
6,374
0.61%
0.54
0.39%
0.36
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
$
$
2017
2016
3,125
546
341
4,012
2,500
661
374
3,535
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. As of both December 31, 2017
and 2016, all securities sold under repurchase agreements were
secured by agency residential mortgage-backed securities with an
overnight remaining contractual maturity.
134 Fifth Third Bancorp
16. LONG-TERM DEBT
The following table is a summary of the Bancorp’s long-term borrowings at December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Parent Company
Senior:
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Subordinated:(a)
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Subsidiaries
Senior:
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Floating-rate notes(b)
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Floating-rate notes(b)
Fixed-rate notes
Floating-rate notes(b)
Fixed-rate notes
Fixed-rate notes
Subordinated:(a)
Fixed-rate bank notes
Junior subordinated:
Floating-rate debentures(b)
FHLB advances
Notes associated with consolidated VIEs:
Automobile loan securitizations:
Fixed-rate notes
Floating-rate notes(b)
Other
Total
(a)
(b) These rates reflect the floating rates as of December 31, 2017.
Maturity
Interest Rate
2017
2016
2019
2020
2022
2022
2017
2018
2024
2038
2017
2018
2018
2018
2019
2019
2019
2019
2020
2020
2021
2021
2026
2.30%
2.875%
2.60%
3.50%
5.45%
4.50%
4.30%
8.25%
1.35%
2.15%
1.45%
2.35%
2.375%
2.30%
1.625%
2.26%
2.20%
1.63%
2.25%
2.875%
3.85%
2035
3.01%-3.28%
2018 - 2041 0.05% - 6.87%
499
1,097
697
497
-
505
747
1,305
-
996
600
250
849
749
736
250
744
299
1,247
846
499
1,096
-
497
501
519
746
1,312
650
997
598
250
849
748
737
249
-
-
1,246
845
747
746
52
30
52
33
2018 - 2024
2020
2018 - 2039
1.30%-2.03%
1.63%
Varies
982
75
105
14,904
1,061
33
124
14,388
$
In aggregate, $2.6 billion and $2.7 billion qualifies as Tier II capital for regulatory capital purposes as of December, 31 2017 and 2016, respectively.
The Bancorp pays down long-term debt in accordance with contractual terms over maturity periods summarized in the above table. The aggregate
annual maturities of long-term debt obligations (based on final maturity dates) as of December 31, 2017 are presented in the following table:
($ in millions)
2018
2019
2020
2021
2022
Thereafter
Total
At December 31, 2017, the Bancorp’s long-term borrowings
consisted of outstanding principal balances of $14.7 billion, net
discounts of $21 million, debt issuance costs of $31 million and
additions for mark-to-market adjustments on its hedged debt of
$298 million. At December 31, 2016, the Bancorp’s long-term
borrowings consisted of 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. The Bancorp was in compliance with all debt
covenants at December 31, 2017 and 2016.
Parent
Subsidiaries
Total
$
$
505
499
1,097
-
1,194
2,052
5,347
1,907
2,600
1,477
2,195
463
915
9,557
2,412
3,099
2,574
2,195
1,657
2,967
14,904
to
third-party
Parent Company Long-Term Borrowings
Senior notes
On March 7, 2012, the Bancorp issued and sold $500 million of
into a
senior notes
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
investors and entered
135 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
On June 15, 2017, the Bancorp issued and sold $700 million of
senior notes to third-party investors. The senior notes bear a fixed-
rate of interest of 2.60% 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 June 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.
Subordinated debt
The Bancorp has entered into interest rate swaps to convert its
subordinated fixed-rate notes due in 2018 to floating-rate, which pay
interest at three-month LIBOR plus 25 bps at December 31, 2017.
The rate paid on the swaps hedging the subordinated floating-rate
notes due in 2018 was 1.73% at December 31, 2017. Of the $1.0
billion in 8.25% subordinated fixed-rate notes due in 2038, $705
million were subsequently hedged to floating-rate and paid a rate of
4.53% at December 31, 2017.
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
of December 31, 2017, $16.7 billion was available for future
issuance under the global bank note program.
On February 28, 2013, the Bank issued and sold, under its bank
136 Fifth Third Bancorp
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, $850 million of 2.375% senior fixed-rate notes due
on April 25, 2019. 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
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 October 30, 2017, the Bank issued and sold, under its bank
notes program, $1.1 billion in aggregate principal amount of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
unsecured senior bank notes due on October 30, 2020. The bank
notes consisted of $750 million of 2.20% senior fixed-rate notes and
$300 million of senior floating-rate notes at three-month LIBOR
plus 25 bps. The Bancorp entered into an interest rate swap to
convert the fixed-rate notes to a floating-rate, which resulted in an
effective interest rate of three-month LIBOR plus 24 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.
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, 2017, FHLB advances have rates ranging from
0.05% to 6.87%, with interest payable monthly. The Bancorp has
pledged $15.6 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 $30 million in FHLB
advances that are outstanding. The FHLB advances mature as
follows: $4 million in 2018, $8 million in 2019, $3 million in 2020,
$3 million in 2021, $1 million in 2022, and $11 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 securitizations. Third-party holders of this debt do
not have recourse to the general assets of the Bancorp. In a
securitization transaction that occurred in September of 2017, the
Bancorp transferred an aggregate amount of $1.1 billion in
consumer automobile loans to a bankruptcy remote trust which was
deemed to be a VIE. This trust then subsequently
issued
approximately $1.0 billion of asset-backed notes, of which
approximately $261 million were retained by the Bancorp, resulting
in approximately $747 million of outstanding notes included in
long-term debt in the Consolidated Balance Sheets as of December
31, 2017. Additionally, in prior years the Bancorp completed
securitization transactions in which the Bancorp transferred certain
consumer automobile loans to bankruptcy remote trusts which were
also deemed to be VIEs. As such, approximately $310 million of
outstanding notes related to these VIEs were included in long-term
debt in the Consolidated Balance Sheets as of December 31, 2017.
137 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES
The Bancorp, in the normal course of business, enters into financial
instruments and various agreements to meet the financing needs of
its customers. The Bancorp also enters into certain transactions and
agreements to manage its interest rate and prepayment risks, provide
funding, equipment and locations for its operations and invest in its
communities. These instruments and agreements involve, to varying
degrees, elements of credit risk, counterparty risk and market risk in
excess of the amounts recognized in the Consolidated Balance
Sheets. The creditworthiness of counterparties for all instruments
and agreements is evaluated on a case-by-case basis in accordance
with the Bancorp’s credit policies. The Bancorp’s significant
commitments, contingent liabilities and guarantees in excess of the
amounts recognized
in the Consolidated Balance Sheets are
discussed in the following sections.
Commitments
The Bancorp has certain commitments to make future payments under contracts. The following table reflects a summary of significant
commitments as of December 31:
($ in millions)
Commitments to extend credit
Letters of credit
Forward contracts related to residential mortgage loans held for sale
Noncancelable operating lease obligations
Purchase obligations
Capital commitments for private equity investments
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 event of
The Bancorp
nonperformance by the counterparty for the amount of the
contract. Fixed-rate commitments are also subject to market risk
resulting from fluctuations in interest rates and the Bancorp’s
to credit risk
is exposed
in
$
2017
68,106
2,185
1,284
568
144
48
37
26
2016
67,909
2,583
1,823
576
57
59
29
19
exposure is limited to the replacement value of those commitments.
As of both December 31, 2017 and 2016, the Bancorp had a reserve
for unfunded commitments, including letters of credit, totaling $161
million included in other liabilities in the Consolidated Balance
Sheets. The Bancorp monitors the credit risk associated with
commitments to extend credit using the same risk rating system
utilized within its loan and lease portfolio.
Risk ratings under this risk rating system are summarized in the following table as of December 31:
($ in millions)
Pass
Special mention
Substandard
Doubtful
Total commitments to extend credit
$
$
2017
67,254
330
522
-
68,106
2016
66,802
338
753
16
67,909
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, 2017:
($ in millions)
Less than 1 year(a)
1 - 5 years(a)
Over 5 years
Total letters of credit
(a) Includes $7 and $1 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.
$
$
1,170
999
16
2,185
guarantees
Standby letters of credit accounted for approximately 99% of total
letters of credit at both December 31, 2017 and 2016 and are
considered
accordance with U.S. GAAP.
Approximately 61% and 62% of the total standby letters of credit
were collateralized as of December 31, 2017 and 2016, 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
in
and marketable securities. The reserve related to these standby
letters of credit, which is included in the total reserve for unfunded
commitments, was $6 million at December 31, 2017 and $3 million
at December 31, 2016. The Bancorp monitors the credit risk
associated with letters of credit using the same risk rating system
utilized within its loan and lease portfolio.
138 Fifth Third Bancorp
Risk ratings under this risk rating system are summarized in the following table as of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Pass
Special mention
Substandard
Doubtful
Total letters of credit
At December 31, 2017 and 2016, 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,
2017 and 2016, total VRDNs in which the Bancorp was the
remarketing agent or were supported by a Bancorp letter of credit
were $602 million and $929 million, respectively, of which FTS
acted as the remarketing agent to issuers on $508 million and $784
million, 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 $331
million and $609 million of the VRDNs remarketed by FTS, in
addition to $94 million and $145 million in VRDNs remarketed by
third parties at December 31, 2017 and 2016, respectively. These
letters of credit are included in the total letters of credit balance
provided in the previous table. The Bancorp held $1 million and $6
million of these VRDNs in its portfolio and classified them as
trading securities at December 31, 2017 and 2016, 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 operating 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
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.
$
$
2017
1,830
67
218
70
2,185
2016
2,134
98
290
61
2,583
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.
As of December 31, 2017 and 2016, the Bancorp maintained
reserves related to loans sold with representation and warranty
provisions totaling $9 million and $13 million, respectively, included
in other liabilities in the Consolidated Balance Sheets.
is
The Bancorp uses the best
information available when
its mortgage representation and warranty reserve;
estimating
however, the estimation process
inherently uncertain and
imprecise and, accordingly, losses in excess of the amounts reserved
as of December 31, 2017, 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 $11 million in excess of amounts
reserved. This estimate was derived by modifying the key
assumptions previously discussed to reflect management's judgment
regarding reasonably possible adverse changes to those assumptions.
The actual repurchase losses could vary significantly from the
recorded mortgage representation and warranty reserve or this
estimate of reasonably possible losses, depending on the outcome of
various factors, including those previously discussed.
During both the years ended December 31, 2017 and 2016, the
Bancorp paid $1 million in the form of make whole payments and
repurchased $12 million and $17 million,
in
outstanding principal of loans to satisfy investor demands. Total
repurchase demand requests during the years ended December 31,
2017 and 2016 were $15 million and $22 million, respectively. Total
outstanding repurchase demand inventory was $1 million at
December 31, 2017 compared to $2 million at December 31, 2016.
respectively,
139 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity in the reserve for representation and warranty provisions for the years ended December 31:
($ in millions)
Balance, beginning of period
Net reductions to the reserve
Losses charged against the reserve
Balance, end of period
2017
13
(3)
(1)
9
$
$
2016
25
(10)
(2)
13
The following tables provide a rollforward of unresolved claims by claimant type for the years ended December 31:
2017 ($ in millions)
Balance, beginning of period
New demands
Loan paydowns/payoffs
Resolved demands
Balance, end of period
2016 ($ 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 $312 million and $374 million
at December 31, 2017 and 2016, respectively, and the delinquency
rates were 3.0% at December 31, 2017 and 3.2% at December 31,
2016. The Bancorp maintained an estimated credit loss reserve on
these loans sold with credit recourse of $5 million and $7 million at
December 31, 2017 and 2016, 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 both December 31, 2017 and 2016.
In the event of any customer default, FTS has rights to the
underlying collateral provided. Given the existence of the underlying
collateral provided and negligible historical credit losses, the
Bancorp does not maintain a loss reserve related to the margin
accounts.
140 Fifth Third Bancorp
GSE
Private Label
Units
13
109
(2)
(114)
6
Units
16
309
(8)
(304)
13
Dollars
2
15
-
(16)
1
Dollars
4
22
(1)
(23)
2
$
$
GSE
$
$
Units
-
1
-
-
1
$
$
Dollars
-
-
-
-
-
Private Label
Units
2
4
-
(6)
-
$
$
Dollars
-
-
-
-
-
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, 2017 and 2016.
Visa litigation
The Bancorp, as a member bank of Visa prior to Visa’s
reorganization and IPO (the “IPO”) of its Class A common shares
(the “Class A Shares”) in 2008, had certain indemnification
obligations pursuant to Visa’s certificate of incorporation and by-
laws and in accordance with their membership agreements. In
accordance with Visa’s by-laws prior to the IPO, the Bancorp could
have been required
the Bancorp’s
proportional share of losses based on the pre-IPO membership
interests. As part of its reorganization and IPO, the Bancorp’s
indemnification obligation was modified to include only certain
known or anticipated litigation (the “Covered Litigation”) as of the
date of the restructuring. This modification triggered a requirement
for the Bancorp to recognize a liability equal to the fair value of the
indemnification liability.
indemnify Visa for
to
In conjunction with the IPO, the Bancorp received 10.1 million
of Visa’s Class B common shares (the “Class B Shares”) based on
the Bancorp’s membership percentage in Visa prior to the IPO. The
Class B Shares are not transferable (other than to another member
bank) until the later of the third anniversary of the IPO closing or
the date which the Covered Litigation has been resolved; therefore,
the Bancorp’s Class B Shares were classified in other assets and
accounted for at their carryover basis of $0. Visa deposited $3
billion of the proceeds from the IPO into a litigation escrow
account, established for the purpose of funding judgments in, or
settlements of, the Covered Litigation. Since then, when Visa’s
litigation committee determined that the escrow account was
insufficient; Visa issued additional Class A Shares and deposited the
proceeds from the sale of the Class A Shares into the litigation
escrow account. When Visa funded the litigation escrow account,
the Class B Shares were subjected to dilution through an adjustment
in the conversion rate of Class B Shares into Class A Shares.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2017, 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
$137 million and $91 million at December 31, 2017 and 2016,
respectively. Refer to Note 13 and Note 27 for further information.
After the Bancorp’s sale of the Class B Shares, Visa has funded
additional amounts into the litigation escrow account which have
resulted in further dilutive adjustments to the conversion of Class B
Shares into Class A Shares, and along with other terms of the total
return swap, required the Bancorp to make cash payments in
varying amounts to the swap counterparty as follows:
Period ($ 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
141 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 (In re: Payment Card Interchange Fee and Merchant Discount
Antitrust Litigation). The plaintiffs, merchants operating
commercial businesses throughout the U.S. and trade associations,
claimed that the interchange fees charged by card-issuing banks
were unreasonable and sought injunctive relief and unspecified
damages. In addition to being a named defendant, the Bancorp is
also subject to a possible indemnification obligation of Visa as
discussed in Note 17 and has also entered into judgment and loss
sharing agreements with Visa, MasterCard and certain other named
defendants. In October 2012, the parties to the litigation entered
into a settlement agreement. On January 14, 2014, the 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. On March 27, 2017, the Supreme Court of the United
States denied a petition for writ of certiorari seeking to review the
Second Circuit’s decision. 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 overturned settlement
agreement, approximately 25% of the funds paid into the class
settlement escrow account were already returned to the control of
the defendants. The remaining approximately 75% of the settlement
funds paid by the Bancorp are maintained in the escrow account.
More than 500 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
individual federal lawsuits were transferred to the United States
District Court for the Eastern District of New York. While the
Bancorp is only named as a defendant in one of the individual
federal lawsuits, it may have obligations pursuant to indemnification
arrangements and/or the judgment or loss sharing agreements
noted above. Refer to Note 17 for further information.
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
142 Fifth Third Bancorp
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 federal Truth-In-Lending Act. 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. On March 17,
2017, after hearing motions for summary judgment, the court
dismissed, in part, Nina’s fraud claims against Fifth Third, Fifth
Third’s claims against the other defendants and Fifth Third’s claim
for fraudulent conveyance against Nina. On June 9, 2017, the
parties entered into a confidential settlement agreement fully and
finally resolving their respective claims in this action within existing
accruals for this matter and before accounting for any recovery on
related insurance policies. The Court entered an order dismissing
the matter with prejudice on June 20, 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 for the plaintiffs’ benefit. The lawsuit seeks over $800 million
in alleged damages, attorney’s fees, removal of Fifth Third as
trustee, and injunctive relief. Fifth Third denies all liability. On
January 5, 2016, the Court denied Fifth Third’s motion to dismiss.
On January 4, 2018, Fifth Third moved for summary judgment
seeking dismissal of all the plaintiffs’ claims on statute of limitations
and other grounds. Plaintiffs also moved for summary judgment on
their breach of fiduciary duty claim. Trial is currently scheduled for
June 18, 2018.
Upsher-Smith Laboratories, Inc. v. Fifth Third Bank
On February 12, 2016, 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 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 under Article 4A-
202 of the Uniform Commercial Code, with losses allegedly totaling
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
almost $40 million. Fifth Third denies all liability in this matter. 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. No trial date has been scheduled.
The Champions Home Owners Association, Inc. v. Jeffrey D. Quammen, et al.
On July 12, 2017, Fifth Third Bank and Royce Pulliam, P&P Real
Estate, LLC and Global Fitness Holdings, LLC (“Plaintiffs”)
entered into a settlement agreement pursuant to which the Plaintiffs
paid Fifth Third Bank $2.2 million following a 2017 bench trial and
ruling and award in favor of Fifth Third Bank in the Circuit Court
of Jessamine County, Kentucky. The Plaintiffs had filed their cross-
complaint against Fifth Third Bank on September 12, 2013, alleging
that Fifth Third Bank breached a contract to provide commercial
funding for Plaintiffs’ national fitness franchise. The Plaintiffs
claimed to have sustained over $50 million in damages from the
alleged contract breach. Fifth Third Bank denied that any breach of
contract occurred, and further asserted that Plaintiffs executed
multiple releases waiving the claims at issue in the litigation.
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.
their
reviews,
requests,
regarding
investigations
Governmental Investigations and Proceedings
The Bancorp and/or its affiliates are or may become involved in
information-gathering
and
proceedings (both formal and informal) by various governmental
regulatory agencies and law enforcement authorities, including but
not limited to the FRB, CFPB, SEC, FINRA, U.S. Department of
Justice, etc., as well as state and other governmental authorities and
respective businesses.
self-regulatory bodies
Additional matters will likely arise from time to time. Any of these
matters may result in material adverse consequences to the Bancorp,
its affiliates and/or their respective directors, officers and other
personnel, including adverse judgments, findings, settlements, fines,
penalties, orders, injunctions or other actions, amendments and/or
restatements of the Bancorp’s SEC filings and/or financial
statements, as applicable, and/or determinations of material
weaknesses
and procedures.
Investigations by regulatory authorities may from time to time result
in civil or criminal referrals to law enforcement. Additionally, in
some cases, regulatory authorities may take supervisory actions that
are considered to be confidential supervisory information which
may not be publicly disclosed.
in our disclosure
controls
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 $31 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.
143 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,
2017 and 2016, certain directors, executive officers, principal
holders of Bancorp common stock and their related interests were
indebted, including undrawn commitments to lend, to the Bancorp’s
banking subsidiary.
The following table summarizes the Bancorp’s lending activities with its principal shareholders, directors, executives and their related interests at
December 31:
($ in millions)
Commitments to lend, net of participations:
Directors and their affiliated companies
Executive officers
Total
Outstanding balance on loans, net of participations and undrawn commitments
The commitments to lend are in the form of loans and guarantees
for various business and personal interests. This indebtedness was
incurred in the ordinary course of business on substantially the same
terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with unrelated parties. This
indebtedness does not involve more than the normal risk of
repayment or present other features unfavorable to the Bancorp.
Vantiv Holding, LLC
On June 30, 2009, the Bancorp completed the sale of a majority
interest in its processing business, Vantiv Holding, LLC. Advent
International acquired an approximate 51% interest in Vantiv
2017
2016
$
$
$
546
6
552
20
618
4
622
54
Holding, LLC for cash and a warrant. The Bancorp retained the
remaining approximate 49% interest in Vantiv Holding, LLC.
During the first quarter of 2012, Vantiv, Inc. priced an IPO of
its shares and contributed the net proceeds to Vantiv Holding, LLC
for additional ownership interests. As a result of this offering, the
Bancorp’s ownership of Vantiv Holding, LLC was reduced to
approximately 39%. The impact of the capital contributions to
Vantiv Holding, LLC and the resulting dilution in the Bancorp’s
interest resulted in a gain of $115 million recognized by the Bancorp
in the first quarter of 2012.
The following table provides a summary of the sales transactions that impacted the Bancorp's ownership interest in Vantiv Holding, LLC after the
initial IPO:
($ in millions)
Q4 2012
Q2 2013
Q3 2013
Q2 2014
Q4 2015
Q3 2017
(a) The Bancorp’s remaining investment in Vantiv Holding, LLC of $219 as of December 31, 2017 was accounted for as an equity method investment in the Bancorp’s Consolidated Financial
33.1 %
27.7
25.1
22.8
18.3
8.6
157
242
85
125
331
1,037
Gain on Sale
$
Remaining Ownership
Percentage(a)
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
144 Fifth Third Bancorp
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
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.
During the third quarter of 2017, the Bancorp and Fifth Third
Bank entered into a transaction agreement with Vantiv, Inc. and
Vantiv Holding, LLC under which Fifth Third Bank agreed to
exercise its right to exchange 19.79 million of its Class B Units in
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Vantiv Holding, LLC for 19.79 million shares of Vantiv, Inc.’s Class
A Common Stock and Vantiv, Inc. agreed to repurchase the newly
issued shares of Class A Common Stock upon issue directly from
Fifth Third Bank at a price of $64.04 per share, the closing share
price of the Class A Common Stock on the New York Stock
Exchange on August 4, 2017. As a result of these transactions, the
Bancorp recognized a gain of approximately $1.0 billion during the
third quarter of 2017.
As of December 31, 2017, the Bancorp continued to hold
approximately 15 million Class B Units of Vantiv Holding, LLC
which may be exchanged for Class A Common Stock of Vantiv,
Inc. (now Worldpay, Inc.), on a one-for-one basis or at Worldpay,
Inc.’s option for cash which represented approximately 8.6%
ownership of Vantiv Holding, LLC as of December 31, 2017. In
addition, the Bancorp holds approximately 15 million Class B
Common Shares of Worldpay, Inc. which give the Bancorp voting
rights, but no economic interest in Worldpay, Inc. These securities
are subject to certain terms and restrictions. For more information
on a subsequent event related to Vantiv Holding, LLC, refer to
Note 31.
The Bancorp recognized $47 million, $66 million and $63
million, respectively, in other noninterest income as part of its
equity method investment in Vantiv Holding, LLC for the years
ended December 31, 2017, 2016 and 2015 and received cash
distributions totaling $19 million, $9 million and $11 million during
the years ended December 31, 2017, 2016 and 2015, respectively.
Given the nature of Vantiv Holding, LLC’s structure as a limited
liability company and contractual arrangements with Vantiv
Holding, LLC, the Bancorp’s remaining investment in Vantiv
Holding, LLC continues to be accounted for under the equity
method of accounting as of December 31, 2017.
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 to 2030, totaling to a then 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.
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 to a then 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 to a then estimated $394 million, upon the exercise of
certain call options by Vantiv, Inc. or certain put options by the
Bancorp. In 2016, the Bancorp recognized a gain of $164 million in
other noninterest income associated with these options. The
Bancorp received $63 million in settlement for the call options and
put options exercised during 2017. If the remaining associated call
options or put options are exercised during 2018, the Bancorp
expects to receive $108 million in 2018. This agreement did not
impact the TRA payments recognized in the fourth quarter of both
2017 and 2016.
In addition to the impact of the TRA terminations discussed
above, the Bancorp recognized $44 million, $33 million and $31
million in other noninterest income in the Consolidated Statements
of Income associated with the TRA during the years ended
December 31, 2017, 2016 and 2015, respectively.
The following table provides the estimated cash flows to be received as of December 31, 2017 associated with the TRA for the years ending
December 31, 2018 and thereafter:
Cash Flows to be Received
from Put/Call Option
Estimated Cash Flows to
be Received not Subject
to Put/Call Option(a)
Exercises (Fixed Amounts)(b)
($ in millions)
2018
2019
2020
2021
2022
2023
2024
2025
2026
Thereafter
Total
(a) The 2018 cash flow of $44 has been agreed upon with Vantiv, Inc. (now Worldpay, Inc.), for settlement in January 2018 and was recognized as a gain in other noninterest income during the fourth
quarter of 2017. The remaining estimated cash flows in this column (which include TRA benefits associated with the net exercise of the warrant in 2016 and the subsequent exchange of Vantiv
Holding units in the third quarter of 2017) will be recognized in future periods when the related uncertainties are resolved.
44
20
25
26
26
27
27
28
29
279
531
108
-
-
-
-
-
-
-
-
-
108
$
(b) As part of the agreement the Bancorp entered into with Vantiv, Inc. on July 27, 2016, Vantiv, Inc. made payments to the Bancorp of $63 during the year ended December 31, 2017 and may be
obligated to pay a total of approximately $108 to the Bancorp to terminate certain remaining TRA cash flows, initially estimated to be $394, upon the exercise of certain call options by Vantiv, Inc.
(now Worldpay, 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, Inc. as a standalone entity are no longer necessary and are
now limited to certain general business resources. Vantiv Holding,
LLC paid the Bancorp $1 million for these services for each of the
years ended December 31, 2017, 2016 and 2015. 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
$68 million, $58 million and $47 million for these services for the
145 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
this
investment under
SLK Global
As of December 31, 2017, 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 recognized $3 million in other noninterest
income in the Consolidated Statements of Income as part of its
equity method investment in SLK Global for the year ended
December 31, 2017. The Bancorp did not receive cash distributions
during the year ended December 31, 2017. The Bancorp’s
investment in SLK Global was $22 million at December 31, 2017.
The Bancorp paid SLK Global $21 million, $20 million and $17
million for their process and software services during the years
ended December 31, 2017, 2016 and 2015, respectively, which are
included other noninterest expense in the Consolidated Statements
of Income.
CDC Investments
The Bancorp’s subsidiary, CDC, has equity investments in entities in
which the Bancorp had $83 million and $76 million of loans
outstanding at December 31, 2017 and 2016, respectively, and
unfunded commitment balances of $80 million and $18 million at
December 31, 2017 and 2016, respectively. The Bancorp held $26
million and $28 million of deposits for these entities at December
31, 2017 and 2016, respectively. For further information on CDC
investments, refer to Note 11.
years ended December 31, 2017, 2016 and 2015, 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 $72 million, $76 million
and $89 million for the years ended December 31, 2017, 2016 and
2015, 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 $203 million and $210 million at December 31,
2017 and 2016, respectively. Additionally, as of December 31, 2017
and 2016, the Bancorp had derivative assets of $2 million and $7
million, respectively, related to interest rate contracts entered into
with Vantiv Holding, LLC which are included in other assets on the
Consolidated Balance Sheets. Interest income relating to the loans
was $5 million, $4 million and $4 million for the years ended
December 31, 2017, 2016 and 2015, respectively, 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 $4
million and $59 million as of December 31, 2017 and 2016,
respectively.
146 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. INCOME TAXES
The Bancorp and its subsidiaries file a consolidated federal income tax return. The following is a summary of applicable income taxes included in
the Consolidated Statements of Income for the years ended December 31:
($ 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:
U.S. Federal income taxes
State and local income taxes
Foreign income taxes
Total deferred income tax benefit
Applicable income tax expense
2017
2016
2015
$
$
763
68
(3)
828
(252)
1
-
(251)
577
598
55
-
653
(133)
(14)
(1)
(148)
505
662
55
13
730
(78)
6
1
(71)
659
The following is a reconciliation between the federal statutory corporate tax rate and the Bancorp’s effective tax rate for the years ended
December 31:
Federal statutory corporate tax rate
Increase (decrease) resulting from:
State taxes, net of federal benefit
Tax-exempt income
Low-income housing tax credits
Other tax credits
U.S. tax legislation impact on deferred taxes
Other, net
Effective tax rate
2017
35.0 %
1.6
(1.2)
(6.0)
(0.5)
(7.9)
(0.2)
20.8 %
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
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.
On December 22, 2017, the U.S. government enacted
comprehensive tax legislation known as the TCJA. The TCJA makes
broad and complex changes to the U.S. tax code including, but not
limited to, reducing the top federal statutory corporate tax rate from
35 percent to 21 percent effective for tax years beginning after
December 31, 2017. U.S. GAAP requires the Bancorp to recognize
the tax effects of changes in tax laws and rates on its deferred taxes
in the period in which the law is enacted. As a result, for the year
ended December 31, 2017, the Bancorp remeasured its deferred tax
assets and liabilities and recognized an income tax benefit of
approximately $220 million.
The following table provides a reconciliation of the beginning and ending amounts of the Bancorp’s unrecognized tax benefits:
($ 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.
2017
24
17
(1)
3
(7)
(2)
34
2016
13
9
-
2
-
-
24
2015
11
1
-
2
-
(1)
13
$
$
The Bancorp’s unrecognized tax benefits as of December 31, 2017,
2016 and 2015 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
147 Fifth Third Bancorp
Deferred income taxes are comprised of the following items at December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Deferred tax assets:
Allowance for loan and lease losses
Deferred compensation
Reserve for unfunded commitments
Reserves
State net operating loss carryforwards
Other
Total deferred tax assets
Deferred tax liabilities:
Lease financing
MSRs and related economic hedges
State deferred taxes
Bank premises and equipment
Investments in joint ventures and partnership interests
Other comprehensive income
Other
Total deferred tax liabilities
Total net deferred tax liability
2017
2016
$
$
$
$
$
251
77
34
29
9
102
502
616
111
64
42
34
21
137
1,025
(523)
439
122
56
57
9
223
906
940
202
64
61
219
34
173
1,693
(787)
At both December 31, 2017 and 2016, the Bancorp recorded
deferred tax assets of $9 million, 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 $27 million and $25 million at
December 31, 2017 and 2016, respectively. If these carryforwards
are not utilized, they will expire in varying amounts through 2037.
At December 31, 2017 and 2016, the Bancorp recorded a deferred
tax asset of $2 million and $3 million, respectively, related to a
foreign tax credit carryforward. If not utilized, the deferred tax asset
relating to the foreign tax credit carryforward will begin to expire in
2025.
The Bancorp has determined that a valuation allowance is not
needed against the remaining deferred tax assets as of December 31,
2017 or 2016. 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, 2017 and
2016 will ultimately be realized. The Bancorp reached this
conclusion as the Bancorp has taxable income in the carryback
period and it is expected that the Bancorp’s remaining deferred tax
assets will be realized through the reversal of its existing taxable
temporary differences and its projected future taxable income.
The IRS has concluded its examination of the Bancorp’s 2012
and 2013 federal income tax returns and is currently examining the
Bancorp’s 2014 federal income tax return. The statute of limitations
for the Bancorp’s federal income tax returns remains open for tax
years 2012-2017. On occasion, as various state and local taxing
jurisdictions examine the returns of the Bancorp and its subsidiaries,
the Bancorp may agree to extend the statute of limitations for a
reasonable period of time. Otherwise, the statutes of limitations for
state income tax returns remain open only for tax years in
accordance with each state’s statutes.
Any interest and penalties incurred in connection with income
taxes are recorded as a component of income tax expense in the
Consolidated Financial Statements. During
the years ended
December 31, 2017 and 2016, the Bancorp recognized $2 million
and $1 million, respectively, of interest expense in connection with
income taxes and an immaterial amount of interest benefit for the
year ended December 31, 2015. At December 31, 2017 and 2016,
the Bancorp had accrued interest liabilities, net of the related tax
benefits, of $3 million and $1 million, respectively. No material
liabilities were recorded for penalties related to income taxes.
Retained earnings at December 31, 2017 and 2016 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 federal statutory corporate tax rate.
148 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, 2017 and 2016.
The underfunded amounts recognized in other liabilities in the
Consolidated Balance Sheets were $24 million and $34 million at
December 31, 2017 and 2016, respectively.
The following table summarizes the Plan as of and for the years ended December 31:
$
2017
($ in millions)
166
Fair value of plan assets at January 1
11
Actual return on assets
20
Contributions
(15)
Settlement
(10)
Benefits paid
172
Fair value of plan assets at December 31
220
Projected benefit obligation at January 1
9
Interest cost
(15)
Settlement
2
Actuarial loss
(10)
Benefits paid
206
Projected benefit obligation at December 31
(34)
Underfunded projected benefit obligation at December 31
206
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
172
28
6
(11)
(10)
185
206
8
(11)
16
(10)
209
(24)
209
2016
$
$
$
$
$
the same as the projected benefit obligation at both December 31, 2017 and 2016.
The estimated net actuarial loss for the Plan that will be amortized
from AOCI into net periodic benefit cost during 2018 is $7 million.
The estimated net prior service cost for the Plan that will be
amortized from AOCI into net periodic benefit cost during 2018 is
immaterial to the Consolidated Financial Statements.
The following table summarizes net periodic benefit cost and other changes in the Plan's assets and benefit obligations recognized in OCI for the
years ended December 31:
($ 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 (gain) loss
Amortization of net actuarial loss
Settlement
Total recognized in other comprehensive income
Total recognized in net periodic benefit cost and other comprehensive income
2017
2016
2015
$
$
$
$
8
(10)
7
4
9
(1)
(7)
(4)
(12)
(3)
9
(11)
11
7
16
2
(11)
(7)
(16)
-
9
(13)
10
7
13
9
(10)
(7)
(8)
5
149 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
2017 ($ in millions)
Equity securities
Mutual and exchange-traded funds:
Money market funds
International funds
Domestic funds
Debt funds
Alternative strategies
Commodity funds
Total mutual and exchange-traded funds
Debt securities:
U.S. Treasury 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(b)
Total debt securities
Total plan assets
(a) For further information on fair value hierarchy levels, refer to Note 1.
(b)
Includes corporate bonds.
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.
Fair Value Measurements Using(a)
Level 1
Level 2
Level 3
Total Fair Value
73
7
-
-
-
1
5
13
8
-
-
-
-
8
94
-
-
30
29
1
9
-
69
2
1
2
1
16
22
91
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
73
7
30
29
1
10
5
82
10
1
2
1
16
30
185
Level 1
Fair Value Measurements Using(a)
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
$
$
$
$
$
$
$
$
The following is a description of the valuation methodologies used
for instruments measured at fair value, as well as the general
classification of such
instruments pursuant to the valuation
hierarchy.
Equity securities
The Plan measures common stock using quoted prices which are
available in an active market and classifies these investments within
Level 1 of the valuation hierarchy.
Mutual and exchange-traded funds
All of the Plan’s mutual and exchange-traded funds are publicly
traded. The Plan measures the value of these investments using the
fund’s quoted prices 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
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.
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
of such instruments, which are classified within Level 2 of the
valuation hierarchy, include federal agencies securities, agency
150 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
residential mortgage-backed
commercial
mortgage-backed securities, non-agency commercial mortgage-
backed securities and asset-backed securities and other debt
securities.
securities,
agency
Plan Assumptions
The Plan’s assumptions are evaluated annually and are updated as
necessary. The discount rate assumption reflects the yield on a
portfolio of high quality fixed-income instruments that have a
similar duration to the Plan’s liabilities. The expected long-term rate
of return assumption reflects the average return expected on the
assets invested to provide for the Plan’s liabilities. In determining
the expected long-term rate of return, the Bancorp evaluated
actuarial and economic inputs, including long-term inflation rate
assumptions and broad equity and bond indices long-term return
projections, as well as actual long-term historical plan performance.
The following table summarizes the weighted-average plan assumptions for the years ended December 31:
2017
2016
2015
For measuring benefit obligations at year end:(a)
Discount rate
Expected return on plan assets
For measuring net periodic benefit cost:(a)
Discount rate
Expected return on plan assets
(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
3.47 %
6.00
3.97
6.00
4.16
7.00
3.97
7.00
3.82
7.00
4.16
7.00
accruing benefits.
Lowering both the expected rate of return on the plan assets and
the discount rate by 0.25% would have increased the 2017 pension
expense by approximately $1 million.
Based on the actuarial assumptions, the Bancorp expects to
contribute $3 million to the Plan in 2018. Estimated pension benefit
payments are $17 million for each of the years 2018 through 2022.
The total estimated payments for the years 2023 through 2027 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, 2017 and 2016.
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, 2017 and 2016.
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 real estate investment trusts),
equipment leasing, precious metals, commodity transactions and
mortgages. The Plan utilizes derivative instruments including puts,
calls, straddles or other option strategies, as approved by
management. Per ERISA, the Bancorp’s common stock cannot
exceed 10% of the fair value of plan assets.
Fifth Third Bank, as Trustee, is expected to manage plan assets
in a manner consistent with the plan agreement and other
regulatory, federal and state laws. As of December 31, 2017 and
2016, $185 million and $172 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
Targeted Range(b)
2017
2016
%
60-90
5-25
3-11
0-13
76 %
1
77
16
3
4
100 %
73
2
75
14
6
5
100
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, 2017, there was no
Bancorp common stock in Plan assets. As of December 31, 2016,
Plan assets included $5 million of Bancorp common stock, which
was below the 10% ERISA threshold previously discussed. Plan
assets are not expected to be returned to the Bancorp during 2018.
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
contribution. Expenses
recognized
151 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
savings plan were $79 million, $75 million and $71 million for the
years ended December 31, 2017, 2016 and 2015, respectively. The
Bancorp did not make profit sharing contributions during the years
ended December 31, 2017, 2016 and 2015. In addition, the Bancorp
has a non-qualified defined contribution plan that allows certain
into a deferred
employees to make voluntary contributions
compensation plan. Expenses recognized by the Bancorp for its
non-qualified defined contribution plan were $4 million for the year
ended December, 31 2017 and $3 million for both of the years
ended December 31, 2016 and 2015.
152 Fifth Third Bancorp
22. ACCUMULATED OTHER COMPREHENSIVE INCOME
The tables below presents the activity of the components of OCI and AOCI for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2017 ($ in millions)
Unrealized holding gains on available-for-sale securities arising
during the year
Reclassification adjustment for net losses on available-for-sale
securities included in net income
Net unrealized gains on available-for-sale securities
Unrealized holding losses on cash flow hedge derivatives arising
during the year
Reclassification adjustment for net gains on cash flow hedge
derivatives included in net income
Net unrealized losses on cash flow hedge derivatives
Net actuarial gain arising during the year
Reclassification of amounts to net periodic benefit costs
Defined benefit pension plans, net
Total
2016 ($ in millions)
Unrealized holding losses on available-for-sale securities arising
Pre-tax
Activity
Total OCI
Tax
Effect
Net
Activity
Beginning
Balance
Total AOCI
Net
Activity
Ending
Balance
$
$
14
3
17
(11)
(19)
(30)
1
11
12
(1)
7
1
8
4
7
11
-
(4)
(4)
15
21
4
25
(7)
(12)
(19)
1
7
8
14
101
25
126
10
(19)
(9)
(52)
59
8
14
(44)
73
Pre-tax
Activity
Total OCI
Tax
Effect
Net
Activity
Beginning
Balance
Total AOCI
Net
Activity
Ending
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
2015 ($ in millions)
Unrealized holding losses on available-for-sale securities arising
Pre-tax
Activity
Total OCI
Tax
Effect
Net
Activity
Beginning
Balance
Total AOCI
Net
Activity
Ending
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
153 Fifth Third Bancorp
The table below presents reclassifications out of AOCI for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of AOCI: ($ in millions)
Net unrealized gains on available-for-sale securities:(b)
Net (losses) 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
2017
2016
2015
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
(3)
(3)
(1)
(4)
19
19
(7)
12
(7)
(4)
(11)
4
(7)
11
11
(4)
7
48
48
(17)
31
(11)
(7)
(18)
6
(12)
26
16
16
(6)
10
75
75
(26)
49
(10)
(7)
(17)
6
(11)
48
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
$
1
154 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
($ in millions, except share data)
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
Shares acquired for treasury
Impact of stock transactions under stock compensation plans, net
Other
December 31, 2017
Preferred Stock—Series J
On June 5, 2014, the Bancorp issued, in a registered public offering,
300,000 depositary shares, representing 12,000 shares of 4.90%
fixed to floating-rate non-cumulative Series J perpetual preferred
stock, for net proceeds of $297 million. Each preferred share has a
$25,000
liquidation preference. The preferred stock accrues
dividends, on a non-cumulative semi-annual basis, at an annual rate
of 4.90% through but excluding September 30, 2019, at which time
it converts to a quarterly floating-rate dividend of three-month
LIBOR plus 3.129%. Subject to any required regulatory approval,
the Bancorp may redeem the Series J preferred shares at its option,
in whole or in part, at any time on or after September 30, 2019, or
any time prior following a regulatory capital event. The Series J
preferred shares are not convertible into Bancorp common shares
or any other securities.
Preferred Stock—Series I
On December 9, 2013, the Bancorp issued, in a registered public
offering, 18,000,000 depositary shares, representing 18,000 shares of
6.625% fixed to floating-rate non-cumulative Series I perpetual
preferred stock, for net proceeds of $441 million. Each preferred
share has a $25,000 liquidation preference. The preferred stock
accrues dividends, on a non-cumulative quarterly basis, at an annual
rate of 6.625% through but excluding December 31, 2023, at which
time it converts to a quarterly floating-rate dividend of three-month
LIBOR plus 3.71%. Subject to any required regulatory approval, the
Bancorp may redeem the Series I preferred shares at its option in
whole or in part, at any time on or after December 31, 2023 and
may redeem in whole but not in part, following a regulatory capital
event at any time prior to December 31, 2023. The Series I
preferred shares are not convertible into Bancorp common shares
or any other securities.
Preferred Stock—Series H
On May 16, 2013, the Bancorp issued, in a registered public
offering, 600,000 depositary shares, representing 24,000 shares of
5.10% fixed to floating-rate non-cumulative Series H perpetual
preferred stock, for net proceeds of $593 million. Each preferred
share has a $25,000 liquidation preference. The preferred stock
accrues dividends, on a non-cumulative semi-annual basis, at an
annual rate of 5.10% through but excluding June 30, 2023, at which
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
Preferred Stock
Shares
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
1,331
$
-
-
-
1,331
-
-
-
1,331
-
-
-
1,331
$
$
Treasury Stock
Value
$ (1,972)
(847)
52
3
$ (2,764)
(668)
(4)
3
$ (3,433)
(1,588)
16
3
$ (5,002)
Shares
99,845,629
42,607,855
(3,593,406)
(47,811)
138,812,267
34,633,221
42,357
(74,563)
173,413,282
58,493,506
(1,693,503)
(125,597)
230,087,688
54,000
-
-
-
54,000
-
-
-
54,000
-
-
-
54,000
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 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.
On June 28, 2017, the Bancorp announced the results of its
capital plan submitted to the FRB as part of the 2017 CCAR. The
FRB indicated to the Bancorp that it did not object to the potential
repurchase of $1.161 billion of common shares with the additional
ability to repurchase common shares in an amount equal to any
after-tax gains realized by the Bancorp from the sale of Vantiv, Inc.
common stock or from the termination and settlement of any
portion of the TRA with Vantiv, Inc., if executed, for the period
beginning July 1, 2017 and ending June 30, 2018.
The Bancorp entered into a number of accelerated share
repurchase transactions during the years ended December 31, 2016
and 2017. As part of these transactions, the Bancorp entered into
forward contracts in which the final number of shares delivered at
settlement was based generally on a discount to the average daily
volume weighted-average price of the Bancorp’s common stock
during the term of these repurchase agreements. The accelerated
share repurchases were treated as two separate transactions: (i) the
155 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
repurchase of treasury shares on the repurchase date and (ii) a
forward contract indexed to the Bancorp’s common stock.
The following table presents a summary of the Bancorp's accelerated share repurchase transactions that were entered into or settled during the
years ended December 31, 2016 and 2017:
Repurchase Date
December 14, 2015
March 4, 2016
August 5, 2016
December 20, 2016
May 1, 2017
August 17, 2017
December 19, 2017
(a) The settlement of the transaction is expected to occur on or before March 19, 2018.
Amount ($ in millions)
215
240
240
155
342
990
273
Shares Repurchased on
Repurchase Date
Shares Received from
Forward Contract Settlement
1,782,477
1,868,379
1,099,205
1,044,362
2,248,250
4,291,170
(a)
Total Shares
Repurchased
Settlement Date
January 14, 2016
11,030,959
April 11, 2016
14,492,141
November 7, 2016
12,078,753
February 6, 2017
5,888,112
13,890,221
July 31, 2017
35,831,650 December 18, 2017
(a)
(a)
9,248,482
12,623,762
10,979,548
4,843,750
11,641,971
31,540,480
7,727,273
For further information on a subsequent event related to an
accelerated share repurchase transaction refer to Note 31.
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
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.
Bancorp’s equity compensation plans approved by shareholders as
of December 31, 2017:
Plan Category (shares in thousands)
Equity compensation plans
SARs
RSAs
RSUs
Stock options
Number of Shares to be
Issued Upon Exercise
Weighted-Average
Exercise Price Per Share
(b)
2,321
6,986
2
(c)
-
-
-
$16.50
-
Shares Available for
Future Issuance
21,687 (a)
(a)
(a)
(a)
(a)
(a)
5,653 (d)
27,340
PSAs
Employee stock purchase plan
Total shares
(a) Under the 2017 Incentive Compensation Plan, 17.5 million shares were authorized for issuance as SARs, RSAs, RSUs, stock options, performance share or unit awards, dividend or dividend
9,309
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) 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.
(d) Represents remaining shares of Fifth Third common stock under the Bancorp’s 1993 Stock Purchase Plan, as amended and restated, including an additional 1.5 million shares approved by
shareholders on March 28, 2007 and an additional 12 million shares approved by shareholders on April 21, 2009.
Stock-based awards are eligible for issuance under the Bancorp’s
Incentive Compensation Plan to executives, directors and key
employees of the Bancorp and its subsidiaries. The 2017 Incentive
Compensation Plan was approved by shareholders on April 18,
2017 and authorized the issuance of up to 6 million shares, in
addition to the 11.5 million unused shares from the 2014 Incentive
Compensation Plan, as equity compensation and provides for SARs,
RSAs, RSUs, stock options, performance share or unit awards,
dividend or dividend equivalent rights and stock awards. Based on
total stock-based awards outstanding (including SARs, RSAs, RSUs,
stock options and PSAs) and shares remaining for future grants
under the 2017 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 6% of the Bancorp’s issued shares at
December 31, 2017.
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
156 Fifth Third Bancorp
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 three or 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
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 in any one of the three years during the
performance period, one-third of PSAs are forfeited. Additionally, if
this threshold is not met, all SARs, RSAs and RSUs 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Directors. The Bancorp met this threshold as of December 31,
2017.
Stock-based compensation expense was $118 million, $111
million and $100 million for the years ended December 31, 2017,
2016 and 2015, respectively, and is included in salaries, wages and
incentives in the Consolidated Statements of Income. The total
related income tax benefit recognized was $41 million, $39 million
and $36 million for the years ended December 31, 2017, 2016 and
2015, 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-
2017
2016
2015
6
37 %
2.1
2.1
6
37
3.1
1.5
6
35
2.7
1.6
Scholes option-pricing model. The weighted-average grant-date fair
value of SARs granted was $8.55, $5.16 and $5.52 per share for the
years ended December 31, 2017, 2016 and 2015, respectively. The
total grant-date fair value of SARs that vested during the years
ended December 31, 2017, 2016 and 2015 was $29 million, $32
million and $35 million, respectively.
At December 31, 2017, there was $36 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, 2017
of 2.3 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
2017
Weighted-
Number of
SARs
40,041
3,672
(6,953)
(4,831)
31,929
21,403
$
$
$
Average Grant
Price Per Share
18.30
26.52
16.00
35.08
17.22
15.30
2016
Weighted-
Average Grant
Price Per Share
19.14
17.68
14.47
32.02
18.30
18.28
$
$
$
Number of
SARs
44,129
6,379
(6,291)
(4,176)
40,041
26,898
2015
Weighted-
Number of
SARs
45,590
5,219
(3,242)
(3,438)
44,129
29,721
$
$
$
Average Grant
Price Per Share
19.79
18.99
13.59
32.96
19.14
19.71
The following table summarizes outstanding and exercisable SARs by grant price per share at December 31, 2017:
SARs (in thousands, except per share data)
Under $10.00
$10.01-$20.00
$20.01-$30.00
All SARs
Outstanding SARs
Exercisable SARs
Number of
SARs
1,762
23,899
6,268
31,929
$
$
Weighted-
Average Grant
Price Per Share
3.98
16.33
24.31
17.22
Weighted-
Average Remaining
Contractual Life
(in years)
1.3
5.3
7.8
5.6
Number of
SARs
1,762
17,650
1,991
21,403
$
$
Weighted-
Average Grant
Price Per Share
3.98
15.71
21.63
15.30
Weighted-
Average Remaining
Contractual Life
(in years)
1.3
4.4
6.3
4.3
Restricted Stock Awards
The total grant-date fair value of RSAs that were released during the
years ended December 31, 2017, 2016 and 2015 was $39 million,
$55 million and $43 million, respectively. At December 31, 2017,
there was $21 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, 2017 of 1.3 years.
157 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
2017
2016
2015
Weighted-Average
Weighted-Average
Weighted-Average
Grant-Date
Fair Value
Per Share
19.44
21.14
19.10
19.75
19.72
Shares
4,638
7
(2,063)
(261)
2,321
$
$
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
$
$
The following table summarizes outstanding RSAs by grant-date fair value at December 31, 2017:
RSAs (in thousands)
$15.01-$20.00
Over $20.00
All RSAs
Outstanding RSAs
Weighted-Average
Remaining
Contractual Life
(in years)
0.9
0.5
0.8
Shares
1,627
694
2,321
Restricted Stock Units
The total grant-date fair value of RSUs that were released during the
years ended December 31, 2017, 2016 and 2015 was $21 million, $2
million and $2 million, respectively. At December 31, 2017, there
was $91 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, 2017 of 2.6 years.
RSUs (in thousands, except per unit data)
Outstanding at January 1
Granted
Released
Forfeited
Outstanding at December 31
2017
2016
2015
Weighted-Average
Weighted-Average
Weighted-Average
Grant-Date
Fair Value
Per Unit
17.84
26.71
17.64
21.02
22.25
Units
5,086
3,652
(1,194)
(558)
6,986
$
$
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
-
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, 2017:
RSUs (in thousands)
$10.01-$15.00
$15.01-$20.00
$20.01-$25.00
$25.01-$30.00
$30.01-$35.00
All RSUs
Outstanding RSUs
Weighted-Average
Remaining
Contractual Life
(in years)
0.6
1.2
1.0
1.7
2.0
1.4
Units
407
2,973
228
3,360
18
6,986
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, 2017, 2016 and 2015.
The total intrinsic value of stock options exercised was
immaterial for both the years ended December 31, 2017 and 2016
and $1 million for the year ended December 31, 2015. Cash received
from stock options exercised was immaterial for the year ended
December 31, 2017 and $1 million and $2 million for the years
ended December 31, 2016 and 2015, respectively. The tax benefit
realized from exercised stock options was immaterial to the
Bancorp’s Consolidated Financial Statements during the years ended
December 31, 2017, 2016 and 2015. All stock options were vested
as of December 31, 2008, therefore, no stock options vested during
the years ended December 31, 2017, 2016 or 2015. As of December
31, 2017, the aggregate intrinsic value of both outstanding stock
options and exercisable stock options was immaterial.
158 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2017
2016
2015
Weighted-Average
Weighted-Average
Weighted-Average
Number of
Stock Options (in thousands, except per share data) Options
25
Outstanding at January 1
(18)
Exercised
(5)
Forfeited or expired
2
Outstanding at December 31
2
Exercisable at December 31
$
$
$
Exercise Price
Per Share
19.17
14.05
40.98
16.50
16.50
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
The following table summarizes outstanding and exercisable stock options by exercise price per share at December 31, 2017:
Stock Options (in thousands, except per share data)
Under $10.00
$10.01-$20.00
$20.01-$30.00
All stock options
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, 2017,
2016 and 2015 will be entirely settled in stock. The performance
targets are based on the Bancorp’s performance relative to a defined
peer group. PSAs use a performance-based metric based on return
on tangible common equity in relation to peers. During the years
ended December 31, 2017, 2016 and 2015, 407,069, 583,608 and
458,355 PSAs, respectively, were granted by the Bancorp. These
awards were granted at a weighted-average grant-date fair value of
Weighted-Average
Weighted-Average
Exercise Price
Per Share
Remaining
Contractual Life
(in years)
8.59
-
24.41
16.50
1.0
-
-
0.5
Number of
Options
1
-
1
2
$
$
$26.52, $14.87 and $19.48 per unit during the years ended
December 31, 2017, 2016 and 2015, 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, 2017, 2016 and 2015, there were 475,466, 684,885
and 617,829 shares, respectively, purchased by participants and the
Bancorp recognized stock-based compensation expense of $1
million in each of the respective years.
159 Fifth Third Bancorp
25. OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE
The following table presents the major components of other noninterest income and other noninterest expense for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Other noninterest income:
Gain on sale of Vantiv, Inc. shares
Operating lease income
Cardholder fees
BOLI income
Equity method income from interest in Vantiv Holding, LLC
Income from the TRA associated with Vantiv, Inc.
Private equity investment income
Consumer loan and lease fees
Banking center income
Insurance income
Loss on swap associated with the sale of Visa, Inc. Class B Shares
Net (losses) gains on loan sales
Gain on sale of certain retail branch operations
Gain on sale and exercise of the warrant associated with Vantiv Holding, LLC
Valuation adjustments on the warrant associated with Vantiv Holding, LLC
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
Marketing
Loan and lease
Operating lease
Professional service fees
Losses and adjustments
Data processing
Travel
Postal and courier
Recruitment and education
Donations
Supplies
Insurance
Provision for the reserve for unfunded commitments
Other, net
Total other noninterest expense
2017
2016
2015
$
$
$
$
1,037
96
54
52
47
44
36
23
20
8
(80)
(2)
-
-
-
-
22
1,357
222
127
114
102
87
83
59
58
46
42
35
28
14
12
-
186
1,215
-
102
46
53
66
313
11
23
20
11
(56)
10
19
9
64
(13)
10
688
168
126
104
110
86
61
73
51
45
46
37
23
14
15
23
187
1,169
331
89
43
48
63
80
28
23
21
14
(37)
38
-
89
236
(101)
14
979
145
99
110
118
74
70
55
45
54
45
33
29
16
17
4
191
1,105
160 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 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
2017
Average
Shares
Income
Per Share
Amount
Income
2016
Average
Shares
Per Share
Amount
Income
2015
Average
Shares
Per Share
Amount
$
$
2,119
23
2,096
2,119
-
2,119
22
728
2.88
13
1,489
15
1,474
1,489
-
1,489
15
757
1.95
7
1,637
15
1,622
1,637
-
1,637
15
799
2.03
9
$
2,097
741
2.83
1,474
764
1.93
1,622
808
2.01
Shares are excluded from the computation of earnings 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, 2017, 2016 and 2015 excludes 4 million, 19
million and 16 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, 2017 excludes the impact of the forward contract
related to the December 19, 2017 accelerated share repurchase
transaction. Based upon the average daily volume weighted-average
price of the Bancorp’s common stock during the fourth quarter of
2017, the counterparty to the transaction would have been required
to deliver additional shares for the settlement of the forward
contract as of December 31, 2017, 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, 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 during 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 during the fourth quarter of
2015, the counterparty to the transaction would have been required
to deliver additional shares for the settlement of the forward
contract as of December 31, 2015, and thus the impact of the
forward contract related to the accelerated share repurchase
transaction would have been anti-dilutive to earnings per share.
161 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 as of:
Fair Value Measurements Using
$
-
-
-
-
1
-
98
44
-
44
98
-
11
22
Level 3
Level 2(c)
Level 1(c)
-
-
-
-
-
-
Total Fair Value
-
-
-
-
68
166
15,319
10,167
3,293
2,218
69
31,208
15,319
10,167
3,293
2,218
1
31,042
December 31, 2017 ($ 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:
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)
MSRs(f)
Derivative assets:
Interest rate contracts
Foreign exchange contracts
Equity contracts
Commodity contracts
Derivative assets(d)
Total assets
Liabilities:
Derivative liabilities:
Interest rate contracts
Foreign exchange contracts
Equity contracts
Commodity contracts
Derivative liabilities(e)
Short positions(e)
Total liabilities
(a) Excludes FHLB, FRB and DTCC restricted stock holdings totaling $248, $362 and $2, respectively, at December 31, 2017.
(b)
Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.
(c) During the year ended December 31, 2017, no assets or liabilities were transferred between Level 1 and Level 2.
(d)
(e)
(f) Effective January 1, 2017, the Bancorp has elected the fair value measurement method for all existing classes of its residential mortgage servicing rights. The servicing rights were measured at fair
Included in other assets in the Consolidated Balance Sheets.
Included in other liabilities in the Consolidated Balance Sheets.
505
124
20
126
775
32,707
514
124
20
165
823
34,287
8
-
-
-
8
1,003
-
-
-
-
-
137
858
-
-
370
371
-
-
-
395
63
-
491
399
-
-
172
120
-
129
421
6
427
395
63
370
862
399
137
858
178
120
137
167
602
31
633
5
-
137
-
142
-
142
1
-
-
39
40
577
1
-
-
38
39
25
64
12
22
$
$
$
value at December 31, 2017 and were measured under the amortization method at December 31, 2016.
162 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using
Level 2(c)
$
-
-
Level 1(c)
471
-
-
-
-
-
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 holdings 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 3
Total Fair Value
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
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
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
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,
residential mortgage-backed securities, agency and non-agency
commercial mortgage-backed securities, asset-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.
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
163 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
parameters are classified within Level 3 of the valuation hierarchy.
During the years ended December 31, 2017 and 2016, derivatives
classified as Level 3, which are valued using models containing
unobservable inputs, consisted primarily of 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
significant
unobservable input in the valuation process.
rate assumptions as a
loan closing
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 the fair value
of the derivative liability; conversely, a decrease in the loss estimate
or an acceleration of the resolution of the Covered Litigation would
result in a decrease in the fair value of the derivative liability. The
Accounting and Treasury departments, both of which report to the
Bancorp’s Chief Financial Officer, determined the valuation
methodology for the total return swap. Accounting and Treasury
review the changes
in fair value on a quarterly basis for
reasonableness based on Visa stock price changes, litigation
contingencies, and escrow funding.
The net asset fair value of the IRLCs at December 31, 2017
was $8 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 $3 million and $7 million, respectively. Immediate
increases of current interest rates of 25 bps and 50 bps would result
in decreases in fair value of the IRLCs of approximately $4 million
and $8 million, respectively. The decrease in fair value of IRLCs due
to immediate 10% and 20% adverse changes in the assumed loan
closing rates would be approximately $1 million and $2 million,
respectively, and the increase in fair value due to immediate 10%
and 20% favorable changes in the assumed loan closing rates would
be approximately $1 million and $2 million, respectively. These
sensitivities are hypothetical and should be used with caution, as
changes in fair value based on a variation in assumptions typically
cannot be extrapolated because the relationship of the change in
assumptions to the change in fair value may not be linear.
The Consumer Line of Business Finance department, which
reports to the Bancorp’s Chief Financial Officer, and the
aforementioned Secondary Marketing department are responsible
for determining the valuation methodology for IRLCs. Secondary
Marketing, in conjunction with a third party valuation provider,
periodically review loan closing rate assumptions and recent loan
sales to determine if adjustments are needed for current market
conditions not reflected in historical data.
fair values. 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, interest rate risk and an internally
developed credit component. Therefore, these loans are classified
within Level 3 of the valuation hierarchy. An adverse change in the
loss rate or severity assumption would result in a decrease in fair
value of the related loan. The Secondary Marketing department,
which reports to the Bancorp’s Head of the Consumer Bank, in
conjunction with the Consumer Credit Risk department, which
reports to the Bancorp’s Chief Risk Officer, are responsible for
determining the valuation methodology for residential mortgage
loans held for investment. The Secondary Marketing department
reviews
if
adjustments are necessary based on decreases in observable housing
market data. This group also reviews trades
in comparable
benchmark securities and adjusts the values of loans as necessary.
Consumer Credit Risk is responsible for the credit component of
the fair value which is based on internally developed loss rate
models that take into account historical loss rates and loss severities
based on underlying collateral values.
loss severity assumptions quarterly to determine
MSRs
Effective January 1, 2017, the Bancorp elected the fair value
measurement method for all existing classes of its residential
mortgage servicing rights. MSRs do not trade in an active, open
market with readily observable prices. While sales of MSRs do
occur, the precise terms and conditions typically are not readily
available. Accordingly, the Bancorp estimates the fair value of MSRs
using internal OAS models with certain unobservable inputs,
primarily prepayment speed assumptions, OAS and weighted-
average lives, resulting in a classification within Level 3 of the
valuation hierarchy. Refer to Note 12 for further information on the
assumptions used in the valuation of the Bancorp’s MSRs. The
Secondary Marketing department and Treasury department are
responsible for determining the valuation methodology for MSRs.
Representatives from Secondary Marketing, Treasury, Accounting
and Risk Management are
reviewing key
assumptions used in the internal OAS model. Two external
valuations of the MSR portfolio are obtained from third parties
quarterly that use valuation models
in order to assess the
reasonableness of the internal OAS model. Additionally, the
Bancorp participates
in peer surveys that provide additional
confirmation of the reasonableness of key assumptions utilized in
the MSR valuation process and the resulting MSR prices.
responsible
for
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
164 Fifth Third Bancorp
The following tables are a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs
(Level 3):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Interest Rate
Residential
Derivatives,
Mortgage
Equity
Derivatives
(91)
Total
Fair Value
804
$
Net(a)
8
Loans
143
MSRs(d)
744
For the year ended December 31, 2017 ($ in millions)
Balance, beginning of period
Total (losses) gains (realized/unrealized):
Included in earnings
Purchases/originations
Settlements
Transfers into Level 3(b)
Balance, end of period
The amount of total (losses) gains for the period
included in earnings attributable to the change in
unrealized gains or losses relating to instruments
still held at December 31, 2017(c)
(a) Net interest rate derivatives include derivative assets and liabilities of $8 and $5, respectively, as of December 31, 2017.
(b)
(c)
(d) Effective January 1, 2017, the Bancorp has elected the fair value measurement method for all existing classes of its residential mortgage servicing rights. The servicing rights were measured at fair
Includes certain residential mortgage loans originated as held for sale that were transferred to held for investment.
Includes interest income and expense.
(107)
234
(86)
16
861
(80)
-
34
-
(137)
(122)
236
-
-
858
1
-
(23)
16
137
94
(2)
(97)
-
3
(122)
(191)
(80)
10
$
$
1
value at December 31, 2017 and were measured under the amortization method at December 31, 2016.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Residential
Mortgage
Loans
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives,
Net(a)
Total
$
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 (losses) gains for the period
included in earnings attributable to the change in
unrealized gains or losses relating to instruments
still held at December 31, 2016(c)
(45)
$
(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
115
(3)
-
(116)
-
8
17
-
(334)
25
-
(91)
Fair Value
380
(2)
-
-
(40)
18
143
201
(56)
12
13
(2)
$
$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)
Residential
Mortgage
Loans
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives,
Net(a)
Total
$
108
For the year ended December 31, 2015 ($ in millions)
Balance, beginning of period
Total gains (realized/unrealized):
Included in earnings
Purchases
Sales 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
Fair Value
484
-
-
-
(28)
87
167
366
10
66
17
$
-
$61, respectively, as of December 31, 2015.
Includes certain residential mortgage loans held for sale that were transferred to held for investment.
Includes interest income and expense.
(b)
(c)
165 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total gains and losses included in earnings for assets and liabilities measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) were recorded in the Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015 as follows:
($ in millions)
Mortgage banking net revenue
Corporate banking revenue
Other noninterest income
Total (losses) gains
2017
(29)
2
(80)
(107)
$
$
2016
112
1
17
130
2015
110
1
288
399
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, 2017, 2016 and 2015 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
2017
(113)
2
(80)
(191)
$
$
2016
10
1
(56)
(45)
2015
16
1
66
83
The following tables present information as of December 31, 2017 and 2016 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, 2017 ($ in millions)
Financial Instrument
Residential mortgage loans
Fair Value
$
137
Valuation Technique
Loss rate model
Significant Unobservable
Inputs
Interest rate risk factor
Credit risk factor
Ranges of
Inputs
(10.6) - 14.5%
0 - 52.1%
Weighted-
Average
3.1%
1.4%
MSRs
858 Discounted cash flow
Prepayment speed
0 - 98.1%
(Fixed) 11.4%
(Adjustable) 24.6%
IRLCs, net
Swap associated with the sale of Visa, Inc.
Class B Shares
As of December 31, 2016 ($ in millions)
8
Discounted cash flow
(137) Discounted cash flow
OAS spread (bps)
Loan closing rates
Timing of the resolution
of the Covered Litigation
450 - 1,515
12.5 - 97.7%
12/31/2020 -
12/31/2023
(Fixed) 549
(Adjustable) 785
71.8%
8/15/2021
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
12
Discounted cash flow
(91) Discounted cash flow
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%
8/24/2020
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.
166 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, 2017 and 2016 and for
which a nonrecurring fair value adjustment was recorded during the years ended December 31, 2017 and 2016, 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, 2017 ($ in millions)
Commercial loans held for sale
Commercial and industrial loans
Commercial mortgage loans
Commercial leases
OREO
Bank premises and equipment
Operating lease equipment
Private equity investments
Affordable housing investments
Total
Fair Value Measurements Using
Level 3
Level 2
1
-
327
-
19
-
4
-
27
-
24
-
60
-
8
-
1,178
-
1,648
-
Level 1
-
-
-
-
-
-
-
-
-
-
$
$
Total
1
327
19
4
27
24
60
8
1,178
1,648
Total Losses
For the year ended December 31, 2017
(33)
(99)
(12)
(6)
(10)
(6)
(42)
(1)
(68)
(277)
$
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(a)
OREO
Bank premises and equipment
Operating lease equipment
Private equity investments
Total
-
(a) Effective January 1, 2017, the Bancorp has elected the fair value measurement method for all existing classes of its residential mortgage servicing rights. The servicing rights were measured at fair
Total (Losses) Gains
For the year ended December 31, 2016
(32)
(166)
(4)
2
(3)
7
(17)
(31)
(9)
(9)
(262)
Fair Value Measurements Using
Level 3
Level 2
5
-
412
-
15
-
-
-
3
-
744
-
42
-
28
-
37
-
60
1,346
Total
5
412
15
-
3
744
42
28
37
60
1,346
Level 1
-
-
-
-
-
-
-
-
-
$
-
value at December 31, 2017 and were measured under the amortization method at December 31, 2016.
The following tables present information as of December 31, 2017 and 2016 about significant unobservable inputs related to the Bancorp’s
material categories of Level 3 financial assets and liabilities measured on a nonrecurring basis:
As of December 31, 2017 ($ in millions)
Financial Instrument
Commercial loans held for sale
Commercial and industrial loans
Commercial mortgage loans
Commercial leases
OREO
Bank premises and equipment
Operating lease equipment
Private equity investments
Fair Value
1
$
Appraised value
Valuation Technique
327 Appraised value
19
Appraised value
4
Appraised value
27
Appraised value
24
Appraised value
60
Appraised value
8
Liquidity discount applied
to fund's net asset value
Significant Unobservable Inputs
Appraised value
Costs to sell
Collateral value
Collateral value
Collateral value
Appraised value
Appraised value
Appraised value
Liquidity discount
Affordable housing investments
1,178 Appraised value
Appraised value
Ranges of
Inputs
Weighted-Average
NM
NM
NM
NM
NM
NM
NM
NM
2.5 - 15.0%
NM
NM
10.0%
NM
NM
NM
NM
NM
NM
5.8%
NM
167 Fifth Third Bancorp
NM
NM
NM
NM
NM
(Fixed) 10.2%
(Adjustable) 25.3%
(Fixed) 654
(Adjustable) 738
NM
NM
NM
12.8%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Appraised value
15
Appraised value
-
Appraised value
3
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted-Average
Appraised value
Collateral value
Collateral value
Collateral value
Appraised value
NM
NM
NM
NM
NM
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%
Commercial loans held for sale
During the years ended December 31, 2017 and 2016, the Bancorp
respectively, of
transferred $85 million and $140 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, 2017 and 2016 totaling $31 million and $30 million, respectively,
and were generally based on appraisals of the underlying collateral
and were, therefore, classified within Level 3 of the valuation
hierarchy. Additionally, during the years ended December 31, 2017
and 2016 there were fair value adjustments on existing loans held
for sale of an immaterial amount and $2 million, respectively. The
fair value adjustments were also based on appraisals of the
underlying collateral. The Bancorp recognized $2 million in losses
on the sale of certain commercial loans held for sale during the year
ended December 31, 2017 and an immaterial amount of net gains
on the sale of certain commercial loans held for sale during the year
ended December 31, 2016.
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, review the third party appraisals for
reasonableness. Additionally, the Commercial Line of Business
Finance department, which reports to the Bancorp’s Chief Financial
Officer, in conjunction with the Accounting department reviews all
loan appraisal values, carry values and vintages.
to
adjustments
Commercial loans and leases held for investment
During the years ended December 31, 2017 and 2016, 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 were classified within Level 3 of the
valuation hierarchy. In cases where the carrying value exceeds the
168 Fifth Third Bancorp
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.
MSRs
Effective January 1, 2017, the Bancorp elected the fair value
measurement method for all existing classes of its residential
mortgage servicing rights. The servicing rights were measured at fair
value at December 31, 2017 and under the amortization method at
December 31, 2016. Mortgage interest rates increased during the
year ended December 31, 2016 and the Bancorp recognized a
recovery of temporary impairment in certain classes of the MSR
portfolio and the carrying value was adjusted to fair value. Refer to
the MSRs section of the Assets and Liabilities Measured at Fair
Value on a Recurring Basis discussion for additional information.
OREO
During the years ended December 31, 2017 and 2016, 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,
2017 and 2016, these losses include $4 million and $8 million,
respectively, recorded as charge-offs, on new OREO properties
transferred from loans during the respective periods and $6 million
and $9 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 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
inspection to update the initial fair value of the property. These
properties are reviewed at least every 30 days after the initial interior
inspections are completed. The Asset Manager receives a monthly
status report for each property which includes the number of
showings, recently sold properties, current comparable listings and
overall market conditions.
Bank premises and equipment
The Bancorp performs assessments of the recoverability of long-
lived assets when events or changes in circumstances indicate that
their carrying values may not be recoverable. These properties were
written down to their lower of cost or market values. At least
annually thereafter, the Bancorp will review these properties for
market fluctuations. The fair value amounts were generally based on
appraisals of the property values, resulting in a classification within
Level 3 of the valuation hierarchy. Corporate Facilities, which
in
reports
conjunction with Accounting, are responsible for preparing and
reviewing the fair value estimates for bank premises and equipment.
For further information on bank premises and equipment refer to
Note 7.
the Bancorp’s Chief Administrative Officer,
to
in
advancements
associated with
Operating lease equipment
During the years ended December 31, 2017 and 2016, 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, 2017 and 2016, the Bancorp recorded
net losses of $42 million and $9 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 $1 million and $9 million of OTTI
primarily associated with certain nonconforming
investments
affected by the Volcker Rule during the years ended December 31,
2017 and 2016, 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
conjunction with Accounting, is responsible for preparing and
reviewing the fair value estimates.
Affordable housing investments
During the year ended December 31, 2017, the Bancorp recorded
$68 million of nonrecurring impairment adjustments to certain
affordable housing investments. The impairment charges reflected
the decline in value of the investments primarily due to the change
in the federal statutory corporate tax rate pursuant to the TCJA. The
Accounting department is responsible for preparing and reviewing
the fair value estimates. For further information on affordable
housing investments refer to Note 11.
169 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2017 and 2016 for which the fair value option was
elected, as well as the changes in fair value of the underlying IRLCs,
included gains of $14 million and $6 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 $2 million at both
December 31, 2017 and 2016. Interest on residential mortgage loans
measured at fair value is accrued as it is earned using the effective
in the
interest method and
Consolidated Statements of Income.
is reported as
interest
income
The following table summarizes the difference between the fair value and the unpaid principal balance for residential mortgage loans measured at
fair value as of:
($ in millions)
December 31, 2017
Residential mortgage loans measured at fair value
Past due loans of 90 days or more
Nonaccrual loans
December 31, 2016
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
$
$
536
5
1
829
2
1
522
5
1
823
2
1
14
-
-
6
-
-
170 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:
Net Carrying
Fair Value Measurements Using
Total
Amount
Level 1
Level 2
Level 3
Fair Value
As of December 31, 2017 ($ in millions)
Financial assets:
Cash and due from banks
Other securities
Held-to-maturity securities
Other short-term investments
Loans and leases 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
Unallocated ALLL
Total portfolio loans and leases, net
Financial liabilities:
Deposits
Federal funds purchased
Other short-term borrowings
Long-term debt
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 and leases 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
Unallocated ALLL
Total portfolio loans and leases, net
Financial liabilities:
Deposits
Federal funds purchased
Other short-term borrowings
Long-term debt
$
$
$
$
$
$
2,514
612
24
2,753
93
40,519
6,539
4,530
4,054
15,365
6,968
9,074
2,182
1,526
(120)
90,637
103,162
174
4,012
14,904
Net Carrying
Amount
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
2,514
-
-
2,753
-
-
-
-
-
-
-
-
-
-
-
-
-
612
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
24
-
93
41,718
6,490
4,560
3,705
15,996
7,410
8,832
2,616
1,621
-
92,948
-
174
-
15,045
103,123
-
4,012
529
Fair Value Measurements Using
Level 2
Level 1
Level 3
2,392
-
-
2,754
-
-
-
-
-
-
-
-
-
-
-
-
-
607
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
132
-
14,288
103,811
-
3,535
545
2,514
612
24
2,753
93
41,718
6,490
4,560
3,705
15,996
7,410
8,832
2,616
1,621
-
92,948
103,123
174
4,012
15,574
Total
Fair Value
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
-
-
-
-
-
-
26
-
65
41,976
6,735
3,853
3,651
15,415
8,421
9,640
2,503
678
-
92,872
-
-
-
-
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.
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.
171 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loan and leases held for sale
Fair values for commercial loans and leases 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.
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.
172 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 defining minimum regulatory
capital requirements as well as the measure of “well-capitalized”
status. Additionally, the Board of Governors of the Federal Reserve
System issued similar guidelines for minimum regulatory capital
requirements and “well-capitalized” measurements for banking
subsidiaries.
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.
CET1 capital
Tier I risk-based capital
Total risk-based capital
Tier I leverage
Failure to meet the minimum capital requirements or falling below
the “well-capitalized” measure 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.
Minimum
Well-Capitalized
4.50 %
6.00
8.00
4.00
6.50
8.00
10.00
5.00
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 both
December 31, 2017 and 2016. 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:
($ 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
2017
2016
Amount Ratio
Amount
Ratio
$
12,517
14,008
13,848
14,008
17,887
16,126
13,848
14,008
10.61 % $
12.06
12,426
14,015
10.39 %
11.92
11.74
12.06
15.16
13.88
10.01
10.32
13,756
14,015
17,972
16,175
13,756
14,015
11.50
11.92
15.02
13.76
9.90
10.30
173 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
$
$
$
2017
2016
2015
2,343
21
2,364
176
42
218
2,146
68
2,214
(20)
2,194
-
2,194
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
(a) The Bancorp’s indirect banking subsidiary paid dividends to the Bancorp’s direct nonbank subsidiary holding company of $2.3 billion, $1.9 billion and $1.0 billion for the years ended
2017
80
3,493
843
843
17,695
17,695
80
329
22,520
315
472
5,348
6,135
2,051
1,331
2,790
15,122
73
(5,002)
20
16,385
22,520
$
$
$
$
$
$
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
December 31, 2017, 2016 and 2015, 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
Equity
Common stock
Preferred stock
Capital surplus
Retained earnings
Accumulated other comprehensive income
Treasury stock
Noncontrolling interests
Total Equity
Total Liabilities and Equity
174 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:
Provision for (benefit from) deferred income taxes
Net change in undistributed earnings
Net change in:
Other assets
Accrued expenses and other liabilities
Net Cash Provided by Operating Activities
Investing Activities
Net change in:
Short-term investments
Loans to subsidiaries
Net Cash (Used in) Provided by Investing Activities
Financing Activities
Net change in other short-term borrowings
Dividends paid on common stock
Dividends paid on preferred stock
Proceeds from issuance of long-term debt
Repayment of long-term debt
Repurchase of treasury stock and related forward contract
Other, net
Net Cash Used in Financing Activities
(Decrease) Increase in Cash
Cash at Beginning of Period
Cash at End of Period
2017
2016
$
2,194
2
20
37
(15)
2,238
(419)
126
(293)
(29)
(430)
(75)
697
(500)
(1,605)
(53)
(1,995)
(50)
130
80
$
1,564
-
214
14
(35)
1,757
654
13
667
(60)
(402)
(52)
-
(1,250)
(661)
3
(2,422)
2
128
130
2015
1,712
(4)
(788)
(18)
31
933
(539)
2
(537)
(22)
(422)
(75)
1,099
-
(850)
2
(268)
128
-
128
175 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
levels in addition to actual net charge-offs experienced by the loans
and leases owned by each business segment. Provision for loan and
lease losses expense attributable to loan and lease growth and
changes in ALLL factors is 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 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 1,154
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
through
activities
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. Wealth and Asset Management is made up of
five main businesses: FTS, an indirect wholly-owned subsidiary of
the Bancorp; ClearArc Capital, Inc., an indirect wholly-owned
subsidiary of the Bancorp; Fifth Third Insurance Agency, 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 Insurance
Agency, Inc. assists clients with their financial and risk management
needs. Fifth Third Private Bank offers holistic strategies to affluent
clients
insurance and wealth
protection. Fifth Third Institutional Services provides advisory
services for institutional clients including states and municipalities.
in wealth planning,
investing,
30. BUSINESS SEGMENTS
The Bancorp reports on four business segments: Commercial
Banking, Branch Banking, Consumer Lending and Wealth and Asset
Management. 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
origination of
loans and acceptance of deposits. The FTP
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 rates 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 Bancorp adjusts the FTP charge rates and credit rates as
dictated by changes in interest rates for various interest-earning
assets and interest-bearing liabilities and by the review of behavioral
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, 2017 to reflect the
current market rates and updated market assumptions. These rates
were generally higher than those in place during 2016, thus net
interest
income for deposit-providing business segments was
positively impacted during 2017. 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 2017.
The Bancorp’s methodology for allocating provision for loan
and lease losses expense to the business segments includes charges
or benefits associated with changes in criticized commercial loan
176 Fifth Third Bancorp
The following tables present the results of operations and assets by business segment for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial
Branch
Banking
Consumer
Lending Management and Other Eliminations Total
Wealth
General
and Asset Corporate
$
Banking
2017 ($ in millions)
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Total noninterest income
Total noninterest expense
Income (loss) before income taxes
Applicable income tax expense (benefit)
Net income (loss)
Less: Net income attributable to noncontrolling interests
Net income (loss) attributable to Bancorp
Dividends on preferred stock
Net income (loss) available to common shareholders
Total goodwill
Total assets
(a) Revenue sharing agreements between wealth and asset management and branch banking are eliminated in the Consolidated Statements of Income.
(b)
(c)
(d)
Includes impairment charges of $7 for branches and land. For more information refer to Note 7 and Note 27.
Includes impairment charges of $52 for operating lease equipment. For more information refer to Note 8 and Note 27.
Includes bank premises and equipment of $27 classified as held for sale. For more information, refer to Note 7.
1,652
38
1,614
838 (c)
1,496
956
150
806
-
806
-
806
613
58,568
1,782
153
1,629
756 (b)
1,621
764
270
494
-
494
-
494
1,655
57,892
240
40
200
237
467
(30)
(11)
(19)
-
(19)
-
(19)
-
22,218
154
6
148
419
454
113
39
74
-
74
-
74
177
9,485
$
$
$
(30)
24
(54)
1,106
84
968
129
839
-
839
75
764
-
(5,970)(d)
-
-
-
(132)(a)
(132)
-
-
-
-
-
-
-
-
-
3,798
261
3,537
3,224
3,990
2,771
577
2,194
-
2,194
75
2,119
2,445
142,193
Commercial
Branch
Banking
Consumer
Lending Management and Other Eliminations Total
Wealth
General
and Asset Corporate
$
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
168
1
167
399
422
144
51
93
-
93
-
93
148
9,487
$
$
$
(284)
84
(368)
463
90
5
(16)
21
(4)
25
75
(50)
-
(3,383)(d)
-
-
-
(131)(a)
(131)
-
-
-
-
-
-
-
-
-
3,615
343
3,272
2,696
3,903
2,065
505
1,560
(4)
1,564
75
1,489
2,416
142,177
Commercial
Branch
Banking
Consumer
Lending Management and Other Eliminations Total
Wealth
General
and Asset Corporate
$
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
(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 $109 for branches and land. For more information refer to Note 7.
Includes impairment charges of $36 for operating lease equipment. For more information, refer to Note 8.
Includes bank premises and equipment of $81 classified as held for sale.
1,625
298
1,327
853 (c)
1,369
811
93
718
-
718
-
718
613
58,105
1,555
151
1,404
652 (b)
1,598
458
161
297
-
297
-
297
1,655
53,609
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
$
$
$
(24)
(100)
76
822
62
836
314
522
(6)
528
75
453
-
(3,261)(d)
-
-
-
(149)(a)
(149)
-
-
-
-
-
-
-
-
-
3,533
396
3,137
3,003
3,775
2,365
659
1,706
(6)
1,712
75
1,637
2,416
141,048
177 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Bancorp expects
31. SUBSEQUENT EVENTS
On January 16, 2018, Vantiv, Inc. completed its previously
announced acquisition of Worldpay Group plc. with the resulting
combined company named Worldpay, Inc. As a result of this
transaction,
recognize a gain of
approximately $415 million in other noninterest income in the
Bancorp’s first quarter of 2018 Quarterly Report on Form 10-Q for
the dilution in its ownership interest in Vantiv Holding, LLC from
approximately 8.6% to approximately 4.9%. The Bancorp’s
remaining interest in Vantiv Holding, LLC continues to be
accounted for as an equity method investment given the nature of
Vantiv Holding, LLC’s structure as a limited liability company and
to
contractual arrangements between Vantiv Holding, LLC and the
Bancorp.
On February 8, 2018 the Bancorp entered into an accelerated
share repurchase transaction with a counterparty pursuant to which
the Bancorp paid $318 million on February 12, 2018 to repurchase
is
shares of
repurchasing the shares of its common stock as part of its Board
approved 100 million share repurchase program previously
announced on March 15, 2016. The Bancorp expects the settlement
of the transaction to occur on or before May 14, 2018.
its outstanding common stock. The Bancorp
178 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, 2017
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. ⌧
in definitive proxy or
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company or an emerging growth company. See
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth 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) Emerging growth company (cid:2)
If an emerging growth company, indicate by check mark whether
the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. (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 694,212,973 shares of the Bancorp’s Common Stock,
without par value, outstanding as of January 31, 2018. The
Aggregate Market Value of the Voting Stock held by non-
affiliates of the Bancorp was $19,144,447,530 as of June 30,
2017.
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 2018
Annual Meeting of Shareholders is incorporated by reference into
Part III of this report.
Only those sections of this 2017 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,
2017. No other information contained in this 2017 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
180-185
45
48-55, 176-177
41
40-42
59-61, 109-110
58-59, 111-112
65-79
61-63
31
63, 134
186-196
None
197
142-143
N/A
197
198
31
31-88
79-83
92-178
None
89
None
179 Fifth Third Bancorp
`
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
PART IV
Item 15. Exhibits, Financial Statement Schedules
SIGNATURES
200
200
156-159, 200
200
200
200-204
205
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 has elected to be treated as a financial holding
company (“FHC”) under the Gramm-Leach-Bliley Act of 1999
(“GLBA”) and regulations of 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, 2017, the
Company had $142 billion in assets and operates 1,154 full-
service Banking Centers, and 2,469 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. As of December 31,
2017 Fifth Third’s interest in Vantiv Holding, LLC was
approximately 8.6%. The carrying value of the Bancorp’s
investment in Vantiv Holding, LLC was $219 million as of
December 31, 2017. Fifth Third is among the largest money
managers in the Midwest and, as of December 31, 2017, had $362
billion in assets under care, of which it managed $37 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 commercial, financial, retail,
governmental, educational, energy and healthcare sectors. This
includes a wide range of checking, savings and money market
accounts, wealth management solutions, payments and commerce
solutions,
insurance services and credit products such as
commercial loans and leases, mortgage loans, credit cards,
installment loans, and auto loans. These products and services are
delivered through a variety of channels 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 (the “DIF”). 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, 2017.
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.
180 Fifth Third Bancorp
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
that file electronically with the SEC at www.sec.gov. The
Bancorp’s annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, proxy statements and
amendments to those reports filed or furnished pursuant to section
13(a) or 15(d) of the Exchange Act are accessible at no cost on
the Bancorp’s web site at www.53.com on a same day basis after
they are electronically filed with or furnished to the SEC.
telecommunications,
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, specialty
finance,
insurance
companies as well as large retailers. These companies compete
across geographic boundaries and provide customers with
meaningful alternatives to traditional banking services in nearly
competitive
all
environment is a result primarily of changes in regulation,
changes
the
accelerating pace of consolidation among financial service
providers. These competitive trends are likely to continue.
technology, product delivery systems and
products. The
increasingly
technology
significant
and
in
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 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”). To the extent the following material describes
statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statute or regulation.
Regulators
The Bancorp and/or its banking subsidiary are subject to
regulation and supervision primarily by the FRB, the Consumer
Financial Protection Bureau (the “CFPB”) and the Ohio Division
of Financial Institutions (the “Division”) and additionally by
certain
self-regulatory
organizations. The Bancorp is also subject to regulation by the
SEC by virtue of its status as a public company and due to the
nature of some of its businesses. The Bancorp’s banking
subsidiary is subject to regulation by the FDIC, which insures the
bank’s deposits as permitted by law.
functional
regulators
other
and
The federal and state laws and regulations that are applicable
to banks and to BHCs regulate, among other matters, the scope of
their business, their activities, their investments, their capital and
liquidity levels, their ability to make capital distributions (such as
share repurchases and dividends), 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
A FHC is permitted to engage directly or indirectly in a broader
range of activities than those permitted for a BHC under the
include securities
BHCA. Permitted activities for a FHC
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. 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 (including mergers and
acquisitions) or obtain necessary approvals
in connection
therewith, as well as loss of FHC status. If restrictions are
imposed on the activities of an FHC, such information may not
necessarily be available to the public.
Dividends
The Bancorp depends in part upon dividends received from its
direct and indirect subsidiaries, including its indirect banking
subsidiary, to fund its activities, including the payment of
dividends. The Bancorp and its banking subsidiary are subject to
various federal and state restrictions on their ability to pay
dividends. The FRB has authority to prohibit BHCs from paying
dividends if such payment is deemed to be an unsafe or unsound
practice.
The FRB has indicated generally that it may be an unsafe or
unsound practice for BHCs to pay dividends unless a BHC’s net
income is sufficient to fund the dividends and the expected rate of
earnings retention is consistent with the organization’s capital
needs, asset quality and overall financial condition. In addition,
the Bancorp’s ability to make capital distributions, including
dividends is subject to the FRB’s non-objection to the Bancorp’s
capital plan as part of the FRB’s Comprehensive Capital Analysis
and Review
(see
Systemically Significant Companies and Capital).
(“CCAR”) process discussed below
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.
181 Fifth Third Bancorp
`
that seeks
to capture both
FDIC Assessments
Under the FDIC’s assessment system for determining payments
to the DIF insured depository institutions with more than $10
billion in assets (“large IDIs”) are assessed under a complex
“scorecard” methodology
the
probability that an individual large IDI will fail and the
magnitude of the impact on the DIF if such a failure occurs. The
assessment base of a large IDI is its total assets less tangible
equity. This 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.
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 large IDIs. 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
total
31, 2019, on
consolidated assets of $10 billion or more, such as the Bancorp.
insured depository
institutions with
to
is subject
these restrictions, which
Transactions with Affiliates
Sections 23A and 23B of the Federal Reserve Act and the FRB’s
Regulation W restrict transactions between a bank and its
affiliates, including a parent BHC. The Bancorp’s banking
subsidiary
include
quantitative and qualitative limits on the amounts and types of
transactions that may take place, including extensions of credit to
affiliates, investments in the stock or securities of affiliates,
purchases of assets from affiliates and certain other transactions
with affiliates. These restrictions also require
that credit
transactions with affiliates be collateralized and that transactions
with affiliates be on market terms or better for the bank.
Generally, a bank’s covered transactions with any affiliate are
limited to 10% of the bank’s capital stock and surplus and
covered transactions with all affiliates are limited to 20% of the
bank’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 FRB conducted a regularly
scheduled examination covering 2014 through 2016 to determine
the Bancorp’s banking subsidiary’s compliance with the CRA.
This CRA examination resulted in a change in rating from “Needs
to Improve” to “Outstanding”.
Capital Generally
The Bancorp and its banking subsidiary are subject to the FRB’s
capital adequacy rules. Failure to meet capital requirements could
182 Fifth Third Bancorp
subject the Bancorp and its banking subsidiary to a variety of
restrictions and enforcement actions.
Systemically Significant Companies and Capital
Pursuant to Title I of the DFA, 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. The FRB imposes enhanced capital and risk-
management standards on these firms and conducts 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.
BHCs with $50 billion or more in consolidated assets must
submit capital plans to the FRB on an annual basis, and those
BHCs are generally required to receive the FRB’s non-objection
to their capital plan before making a capital distribution, such as a
share repurchase or dividend. In addition, even with an approved
capital plan, a BHC must seek the approval of the FRB before
making a capital distribution if, among other reasons, the BHC
would not meet its regulatory capital requirements after making
the proposed capital distribution.
Under its CCAR process, the FRB annually evaluates capital
adequacy, internal capital adequacy, assessment processes and
capital distribution plans of BHCs with $50 billion or more in
assets. The CCAR process is intended to help ensure that those
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 BHC’s business plan that are likely to have a
material impact on its capital adequacy or liquidity, a detailed
description of the BHC’s process for assessing capital adequacy
and the BHC’s capital policy. A BHC’s ability to make capital
distributions – that is, dividends and share repurchases – is
subject to limitations if the amount of the BHC’s actual capital
issuances are less than the amounts indicated in the BHC’s capital
plan as to which it received a non-objection from the FRB. The
2018 capital plan must be submitted to the FRB by April 5, 2018.
the U.S. banking regulators approved final
regulatory capital rules (the “Final Capital Rules”)
that
requirements
substantially
applicable to BHCs and their depository institution subsidiaries,
such as the Bancorp and its banking subsidiary, as compared to
the previous U.S. risk-based and leverage capital rules. The Final
Capital Rules were based on the Basel Committee on Banking
Supervision’s
for
(“Basel Committee”) capital
enhancing international capital standards (referred to as Basel III)
and also implemented certain provisions of the DFA.
risk-based capital
framework
In 2013,
revised
the
The Final Capital Rules, among other things, (i) include a
new capital measure “Common Equity Tier I” (“CET1”), (ii)
specify that Tier I capital consists of CET1 and “Additional Tier I
capital” instruments meeting specified requirements, (iii) define
CET1 narrowly by requiring that most adjustments to regulatory
capital measures be made to CET1 and not to the other
components of capital and (iv) expand the scope of the
adjustments as compared to existing regulations. CET1 capital
consists of common stock instruments that meet the eligibility
criteria in the final rules, including common stock and related
surplus, net of treasury stock, retained earnings, certain minority
interests and, for certain firms, accumulated other comprehensive
`
income (“AOCI”). Under the Final Capital Rules, the Bancorp
made a one-time election (the “Opt-out Election”) to filter certain
AOCI components, with the result that those components are not
recognized in the Bancorp’s CET1.
When fully phased-in on January 1, 2019, the Final Capital
Rules require banking organizations to maintain a capital
conservation buffer. For more information related to the capital
conservation buffer, refer to Note 28 of the Notes to Consolidated
Financial Statements.
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 common
stock 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. In September 2017, the U.S. banking
regulators proposed to revise and simplify the deductions for
these items for banking organizations, such as the Bancorp, that
are not subject to the “advanced approaches” under the Final
Capital Rules.
The Final Capital Rules were effective for the Bancorp on
January 1, 2015, with certain provisions subject to phase-in
periods. In November 2017, the U.S. banking regulators revised
the Final Capital Rules to extend the current transitional treatment
of the deductions described above for non-advanced approaches
banking organizations until the September 2017 proposal is
finalized.
for
certain
“unconditionally
risk weights and
In December 2017, the Basel Committee published standards
that it described as the finalization of the Basel III post-crisis
regulatory reforms (the standards are commonly referred to as
“Basel IV”). Among other things, these standards revise the Basel
Committee’s standardized approach for credit risk (including by
introducing new capital
recalibrating
requirements
cancellable
commitments,” such as unused credit card lines of credit) and
provides a new standardized approach for operational risk capital.
Under the Basel framework, these standards will generally be
effective on January 1, 2022, with an aggregate output floor
phasing in through January 1, 2027. Under the current U.S.
capital rules, operational risk capital requirements and a capital
floor apply only to advanced approaches institutions, and not to
the Bancorp or the Bank. The impact of Basel IV will depend on
the manner in which it is implemented by the U.S. banking
regulators.
The FRB’s 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 using various time
horizons and a buffer of highly liquid assets based on projected
funding needs for a 30-day time horizon. These liquidity-related
provisions are designed to be complementary 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. In addition to the
liquidity buffer requirement discussed above, the Bancorp is
subject to the U.S. banking regulators final rule (the “Final LCR
Rule”) implementing the Basel Committee’s Liquidity Coverage
Ratio requirement (“LCR”), which is designed to ensure that
banking entities maintain an adequate level of unencumbered
high-quality liquid assets (“HQLA”) under an acute 30-day
liquidity stress scenario. The LCR Rule applies in modified, less
stringent form to BHCs, such as the Bancorp, having $50 billion
or more but less than $250 billion in total consolidated assets and
less than $10 billion in total on-balance sheet foreign exposure.
The LCR is the ratio of an institution’s 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. The Final LCR Rule became fully phased-in on
January 1, 2017, and a subject institution must maintain an LCR
equal to at least 100%. 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 prescribed outflow and inflow rates against the
balances of
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 HQLA 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 LCR is a minimum requirement, and the FRB can impose
additional liquidity requirements as a supervisory matter.
the banking organization’s
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 U.S. banking regulators
proposed a rule to implement the NSFR. 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. As proposed the
NSFR rule would have taken effect on January 1, 2018; however,
the U.S. banking regulators have not issued a final rule.
Privacy and Data Security
The FRB, FDIC and other bank regulatory agencies have adopted
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
183 Fifth Third Bancorp
`
inconvenience to any customer. In addition, various U.S.
regulators, including the Federal Reserve and the SEC, have
increased
through guidance,
examinations and regulations. The Bancorp has adopted a
customer information security program that has been approved by
the Bancorp’s Board of Directors.
their focus on cyber-security
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.
terrorist
laundering and
Anti-Money Laundering and Sanctions
The Bancorp is subject to federal laws that are designed to
counter money
financing, and
transactions with persons, companies, or foreign governments
sanctioned by the United States. These include the Bank Secrecy
Act, the Money Laundering Control Act, the USA PATRIOT Act,
and regulations for the International Emergency Economic
Powers Act and the Trading with the Enemy Act, as administered
by the United States Treasury Department’s Office of Foreign
Assets Control. These laws obligate depository institutions and
broker-dealers
identity, conduct
customer due diligence, report on suspicious activity, file reports
of transactions in currency, and conduct enhanced due diligence
on certain accounts. They also prohibit U.S. persons from
engaging in transactions with certain designated restricted
countries and persons. Depository institutions and broker-dealers
are required by their federal regulators to maintain robust policies
and procedures in order to ensure compliance with these
obligations.
their customers’
to verify
Failure to comply with these laws or maintain an adequate
compliance program can lead to significant monetary penalties
and reputational damage, and federal regulators evaluate the
effectiveness of an applicant in combating money laundering
when determining whether to approve a proposed bank merger,
acquisition, restructuring, or other expansionary activity. There
have been a number of significant enforcement actions by
regulators, as well as state attorneys general and the Department
of Justice, against banks, broker-dealers and non-bank financial
institutions with respect to these laws and some have resulted in
substantial penalties, including criminal pleas. The Bancorp’s
Board has approved policies and procedures that are believed to
be compliant with these laws
Executive Compensation
Pursuant to the DFA, the SEC adopted rules in 2011 requiring
that each public company give its shareholders the opportunity to
vote on the compensation of its executives at least once every
three years. The SEC also adopted rules on disclosure and voting
requirements for golden parachute compensation that is payable
to named executive officers in connection with sale transactions.
The SEC’s rules also direct the stock exchanges to prohibit
listing classes of equity securities of a company if a company’s
compensation committee members are not independent. The rules
also provide 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
184 Fifth Third Bancorp
that affect the independence of a compensation consultant, legal
counsel or other advisor.
In August 2015, the SEC adopted final rules implementing
the pay ratio provisions of the DFA by requiring companies to
disclose the ratio of the compensation of its chief executive
officer to the median compensation of its employees. Under SEC
guidance issued in September 2017, companies such as the
Bancorp will be able to use widely-recognized tests to determine
who counts as an employee under the rule, use existing internal
records such as payroll and tax information and describe the ratio
as an estimate. 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. 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
incentive-based
compensation at institutions with assets of at least $1 billion. No
final rule has been issued.
establish new
requirements
implement
the
for
to
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. The FRB has
issued a final rule establishing certain standards and prohibitions
pursuant to the DFA, 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
imposes
requirements on the Bancorp and its banking subsidiary and may
negatively impact its revenues and results of operations.
to prevent fraud. The rule
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
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.
`
permanently increasing the amount of deposit insurance to
$250,000.
The FDIC’s rules require 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.
The FRB’s and FDIC’s rule implementing the resolution
planning requirements of Section 165(d) of the DFA 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 rule,
companies must submit their initial resolution plans on a
staggered basis. 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. The Bancorp
submitted its resolution plan pursuant to this rule as of December
31, 2016 by the required December 31, 2017 deadline.
Proprietary Trading and Investing in Certain Funds
The DFA sets forth restrictions on banking organizations’ ability
to engage in proprietary trading and sponsor or invest in “covered
funds,” such as private equity and hedge funds (the “Volcker
Rule”). The Volcker Rule generally prohibits any banking entity
from engaging in short-term proprietary trading for its own
account, but permits transactions in certain securities (such as
securities of the U.S. government), transactions on behalf of
customers and activities such as market making, underwriting and
risk-mitigating hedging. In addition, the Volcker Rule limits the
sponsorship of or investment in a covered fund by any banking
types of
entity. The Volcker Rule also prohibits certain
transactions between a banking entity and any covered fund that
is sponsored by the banking entity or for which it serves as
investment manager or investment advisor, similar to those
transactions between banks and their affiliates that are limited as
described above. The FRB granted extensions to banking entities,
including the Bancorp, to conform to the requirements of the
Volcker Rule with respect to “illiquid funds”, as defined in the
Volcker Rule. The Bancorp is also required to maintain a
satisfactory Volcker Rule compliance program.
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 maintain a satisfactory
compliance program
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 and may
the
restructuring of certain businesses and may negatively impact
revenues and results of operations.
its activities under
to monitor
require
185 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.
CREDIT RISKS
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, leases, credit cards or other credit obligations.
The performance of these credit 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 credit 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 credit portfolios 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 portfolios and have credit losses in excess of the amount
reserved. Fifth Third might increase the reserve because of
changing economic conditions, including falling home prices or
higher unemployment, or other factors such as changes in
borrower’s behavior. As
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, 2017; 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 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
186 Fifth Third Bancorp
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.
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.
LIQUIDITY RISKS
Fifth Third must maintain adequate sources of funding and
liquidity.
Fifth Third must maintain adequate funding sources in the normal
course of business to support its operations and fund outstanding
liabilities, as well as meet regulatory expectations. Fifth Third
primarily relies on bank deposits to be a low cost and stable
source of funding for the loans Fifth Third makes and the
operations of Fifth Third’s business. Core deposits, which include
transaction deposits and other time deposits, have historically
provided Fifth Third with a sizeable source of relatively stable
and low-cost funds (average core deposits funded 71% of average
total assets for the year ending December 31, 2017). 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.
and
could
creditors
A reduced credit rating could adversely affect Fifth Third’s
ability to borrow funds and raise the cost of borrowings
substantially
and business
cause
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.
financial
including
institutions,
Recent regulatory changes relating to liquidity and risk
management may also negatively impact Fifth Third’s results of
operations and competitive position. Various regulations have
been adopted to impose more stringent liquidity requirements for
large
including Fifth Third. These
regulations address, among other matters, liquidity stress testing
and minimum liquidity requirements. In addition, the NSFR has
been proposed. Given the overlap and complex interactions of
these new and prospective liquidity-related regulations with other
regulatory changes,
the resolution and recovery
framework applicable to Fifth Third, the full impact of these
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.
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. Fifth Third 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 or share repurchases to
preserve capital.
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
impact
its borrowing costs and negatively
rating could affect its ability to access the capital markets,
its
increase
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.
If Fifth Third is unable to maintain or 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 maintain or grow its
deposits. If Fifth Third is unable to sufficiently maintain or 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. Also, customers
to alternative
typically move money from bank deposits
investments during
rate environments, an
environment that the U.S. is expected to see over the medium-
term. 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. 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. Higher funding costs reduce Fifth Third’s net interest
margin and net interest income.
interest
rising
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 liquidity and capital levels at
bank holding companies and insured depository institution
subsidiaries 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
to
holding companies. Also, Fifth Third Bancorp’s right
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.
187 Fifth Third Bancorp
`
OPERATIONAL RISKS
the
and
internet,
applications,
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. This includes the use of
networks,
the
digital
telecommunications and computer systems of third parties to
perform business activities. Additionally, digital and mobile
technologies are leveraged to interact with customers, which
increases the risk of information security breaches. Any failure,
interruption or breach in security of these systems could result in
disruptions to Fifth Third’s 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, credit bureaus, 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. Specifically, the recent
Equifax breach included the compromise of millions of consumer
records, some of which were Fifth Third customers. 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.
Cyber threats are rapidly evolving and Fifth Third may not
be able to anticipate or prevent all such attacks. These risks are
heightened through the increasing use of digital and mobile
solutions which allow for rapid money movement and increase
the difficulty to detect and prevent fraudulent transactions. 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. Fifth Third may also be required to incur
significant costs in connection with any regulatory investigation
or civil litigation resulting from a cyber-attack. Despite its efforts,
the occurrence of any failure, interruption or security breach of
Fifth Third’s systems or third-party service providers (or
providers to such 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, result
in substantial remediation costs,
additional cyber-security protection costs and increased insurance
premiums, subject it to additional regulatory scrutiny, or expose it
to civil litigation and financial liability.
188 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).
costs
failures,
and potentially diminishing
Third parties with which the Bancorp does business both
domestically and offshore, as well as vendors 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
security breaches or employee
misconduct affecting such other third parties, may require the
Bancorp to take steps to protect the integrity of its own
operational systems or to safeguard confidential information of
the Bancorp or its customers, thereby increasing the Bancorp’s
operational
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 components or
servers or other damage to the Bancorp’s property or assets;
natural disasters or
conditions; health
emergencies; or events arising from local or larger-scale political
events, including outbreaks of hostilities or terrorist acts. For
example, it has been reported that there is a fundamental security
flaw in computer chips found in many types of computing
devices, including phones, tablets, laptops, and desktops. While
the Bancorp believes that its current resiliency plans are both
sufficient and adequate, there can be no assurance that such plans
severe weather
`
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. The Bancorp could also be
adversely affected if it loses access to information or services
from a third party service provider as a result of a security breach
or system or operational failure or disruption affecting the third
party service provider.
to effectively manage
Fifth Third may not be able
organizational changes and implement key initiatives in a timely
fashion, or at all, due to competing priorities which could
adversely affect its business, results of operations, financial
condition and reputation.
Fifth Third is subject to rapid changes in technology, regulation,
and product innovation, and faces intense competition for
customers, sources of revenue, capital, services, qualified
employees, and other essential business resources. In order to
meet these challenges, Fifth Third is or may be engaged in
numerous critical strategic
time.
Accomplishing these initiatives may be complex, time intensive
and require significant financial, technological, management and
other resources. These initiatives may consume management’s
attention and may compete for limited resources. In addition,
organizational changes may need to be implemented throughout
Fifth Third as a result of the new products, services, partnerships
and processes that arise from the execution of the various
strategic initiatives. Fifth Third may have difficulty managing
these organizational changes and executing these initiatives
effectively in a timely fashion, or at all. Fifth Third’s failure to
do so could expose it to litigation or regulatory action and may
damage Fifth Third’s business, results of operations, financial
condition and reputation.
initiatives at
the same
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
system
to
enhancements, or may not be able to do so on a cost-effective
basis, 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.
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, legal 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.
Fifth Third may experience losses related to fraud, theft or
violence.
Fifth Third may experience losses incurred due to customer or
employee fraud, theft or physical violence. Additionally, physical
violence may negatively affect Fifth Third’s key personnel,
facilities or systems. These losses may be material and negatively
affect Fifth Third’s results of operations, financial condition or
prospects. These losses could also lead to significant reputational
risks and other effects. The sophistication of external fraud actors
increases and in some cases includes large criminal rings, which
increases the resources and infrastructure needed to thwart these
attacks. The industry fraud threat continues to evolve, including
but not limited to card fraud, check fraud, social engineering and
phishing attacks for identity theft and account takeover. Fifth
Third continues to invest in fraud prevention in the forms of
people and systems designed to prevent, detect and mitigate the
customer and financial impacts.
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.
189 Fifth Third Bancorp
`
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.
REGULATORY COMPLIANCE RISKS
Fifth Third is subject to extensive governmental regulation
which could adversely impact Fifth Third or the businesses in
which Fifth Third is engaged.
Government regulation 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.
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.
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 negative
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.
Additionally, legislation or regulatory 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.
is uncertainty regarding whether
there
In addition, changes in laws or regulations that affect Fifth
Third’s customers and business partners could negatively affect
Fifth Third’s revenues and expenses. Certain changes in laws
such as recent tax law reforms that impose limitations on the
deductibility of interest may decrease the demand for Fifth
Third’s products or services and could negatively affect its
190 Fifth Third Bancorp
revenues and results of operations. Other changes in laws or
regulations could cause Fifth Third’s third party service providers
and other vendors to increase the prices they charge to Fifth Third
and negatively affect Fifth Third’s expenses and financial results.
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,
Failure by the Bancorp or Fifth Third Bank to meet the
applicable eligibility requirements for FHC 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.
Fifth Third and other financial institutions are subject to
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 and law enforcement, 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. The
government enforcement authority includes, among other things,
the ability to assess significant civil or criminal monetary
penalties, fines, or restitution; to issue cease and desist or removal
injunctive actions against banking
orders; and
organizations and institution-affiliated parties. These enforcement
actions may be initiated for violations of laws and regulations and
unsafe or unsound practices.
initiate
to
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.
Fifth Third could face serious negative consequences if its third
party service providers, business partners or investments fail to
comply with applicable laws, rules or regulations.
Fifth Third is expected to oversee the legal and regulatory
compliance of its business endeavors, including those performed
by third party service providers, business partners, other vendors
and certain companies in which Fifth Third has invested. Legal
authorities and regulators could hold Fifth Third responsible for
failures by these parties to comply with applicable laws, rules or
regulations. These failures could expose Fifth Third to significant
litigation or regulatory action that could limit its activities or
impose significant fines or other financial losses. Additionally,
Fifth Third could be subject to significant litigation from
consumers or other parties harmed by these failures and could
suffer significant losses of business and revenue, as well as
reputational harm as a result of these failures.
As a regulated entity, the Bancorp is subject to certain capital
requirements that may limit its operations and potential growth.
As a BHC and an FHC, the Bancorp is subject to the
comprehensive, consolidated supervision and regulation of the
FRB, including risk-based and leverage capital requirements,
investment practices, dividend policy and growth. The Bancorp
must maintain certain risk-based and leverage capital ratios as
required by the FRB which can change depending upon general
economic conditions and the Bancorp’s particular condition, risk
profile and growth plans. Compliance with
the capital
requirements, including leverage ratios, may limit operations that
require the intensive use of capital and could adversely affect the
Bancorp’s ability to expand or maintain present business levels.
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
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
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).
Regulation of Fifth Third by the CFTC imposes additional
operational and compliance costs.
The Commodity Futures Trading Commission, (“CFTC”) and
SEC regulate the U.S. derivatives markets pursuant to the
authority provided under Title VII of DFA. 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 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 is subject to FRB margin requirements and may also be
subject to capital requirements specific to this derivatives activity.
These requirements will collectively impose implementation and
ongoing compliance burdens on Fifth Third and will introduce
additional legal risk (including as a result of newly applicable
antifraud and anti-manipulation provisions and private rights of
action). Once finalized, the rules may raise the costs and liquidity
burden associated with Fifth Third’s derivatives activities and
could have an adverse effect on its business, financial condition
and results of operations.
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.
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
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
191 Fifth Third Bancorp
`
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.
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
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.
MARKET RISKS
Interest rates on our outstanding financial instruments might be
subject to change based on regulatory developments, which
could adversely affect our revenue, expenses, and the value of
those financial instruments.
LIBOR and certain other “benchmarks” are the subject of recent
national,
international, and other regulatory guidance and
proposals for reform. These reforms may cause such benchmarks
to perform differently than in the past or have other consequences
which cannot be predicted. On July 27, 2017, the United
regulates
Kingdom’s Financial Conduct Authority, which
LIBOR, publicly announced that it intends to stop persuading or
compelling banks to submit LIBOR rates after 2021. It is unclear
whether, at that time, LIBOR will cease to exist or if new
methods of calculating LIBOR will be established. If LIBOR
ceases to exist or if the methods of calculating LIBOR change
from current methods for any reason, interest rates on our floating
rate obligations, loans, deposits, derivatives, and other financial
instruments tied to LIBOR rates, as well as the revenue and
expenses associated with those financial instruments, may be
adversely affected. Further, any uncertainty regarding
the
continued use and reliability of LIBOR as a benchmark interest
rate could adversely affect the value of our floating rate
obligations, loans, deposits, derivatives, and other financial
instruments tied to LIBOR rates.
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
192 Fifth Third Bancorp
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 political and economic uncertainties and changes may
adversely affect Fifth Third.
Global financial markets, including the United States, face
political and economic uncertainties that may delay investment
and hamper economic activity. International events such as
separatist movements, leadership changes and political and
military conflicts could adversely affect global financial activity
and markets and could negatively affect the U.S. economy.
Additionally, the Federal Reserve and other major central banks
have begun the process of removing or reducing monetary
accommodation, increasing the risk of recession and may also
negatively impact asset values and credit spreads that were
impacted by extraordinary monetary stimulus. These potential
negative effects on financial markets and economic activity could
lead to reduced revenues, increased costs, increased credit risks,
and volatile markets and could negatively impact Fifth Third’s
businesses, results of operations and financial condition.
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 as well as customers’ ability
to repay loans. 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, its
customers 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.
`
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;
• 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.
Fifth Third’s mortgage banking net 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.
LEGAL RISKS
in
to
to
in
time
time
time
requests,
information-gathering
regulatory agencies and
Fifth Third and/or its affiliates are or may become involved
from
requests,
investigations and litigation, regulatory or other enforcement
proceedings by various governmental regulatory agencies and
law enforcement authorities, as well as self-regulatory agencies
which may lead to adverse consequences.
Fifth Third and/or its affiliates are or may become involved from
time
reviews,
information-gathering
investigations and proceedings (both formal and informal) by
governmental
law enforcement
authorities, as well as self-regulatory agencies, regarding their
respective customers and businesses, as well as their sales
practices, data
security, product offerings, compensation
practices, and other compliance issues. Also, a violation of law or
regulation by another financial institution may give rise to an
inquiry or investigation by regulators or other authorities of the
same or similar practices by Fifth Third. In addition, the
complexity of the federal and state regulatory and enforcement
regimes in the U.S. means that a single event or topic may give
rise to numerous and overlapping investigations and regulatory
proceedings. In addition, 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, as well as regulatory or other enforcement
proceedings. 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
jurisdictions.
Each of the matters described above may result in material
adverse consequences, including without limitation, adverse
judgments, settlements, 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. In addition, responding to information-gathering
requests, reviews, investigations and 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 to the inherent subjectivity of the
legal
assessments and unpredictability of
proceedings, amounts accrued may not represent the ultimate loss
the outcome of
193 Fifth Third Bancorp
`
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.
In addition, there has been a trend of public settlements with
governmental agencies that may adversely affect other financial
institutions, to the extent such settlements are used as a template
for future settlements. 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.
Please see “Legal and Regulatory Proceedings” in Fifth
for
to Consolidated Financial Statements
Third’s Notes
information on specific legal and regulatory proceedings.
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
securitization. Fifth Third may be required
to repurchase
residential mortgage loans, indemnify the securitization trust,
investor or insurer, or reimburse the securitization trust, investor
or insurer for credit losses incurred on loans in the event of a
breach of contractual representations or warranties that is not
remedied within a specified period (usually 60 days or less) after
Fifth Third receives notice of the breach. Contracts for residential
mortgage loan sales to the GSEs include various types of specific
remedies and penalties that could be applied to inadequate
responses to repurchase requests. If economic conditions and the
housing market deteriorate or future investor repurchase demand
and Fifth Third’s success at appealing repurchase requests differ
from past experience, Fifth Third could have increased repurchase
obligations and increased loss severity on repurchases, requiring
material additions to the repurchase reserve.
STRATEGIC RISKS
If Fifth Third does not respond to intense competition and 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 as well
as large retailers who seek to offer one-stop financial services in
addition to other products and services desired by consumers 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. Many of these other firms may be significantly
larger than Fifth Third and may have access to customers, and
financial resources that are beyond Fifth Third’s capability. Fifth
Third competes with these firms with respect to capital, access to
capital, revenue generation, products, services,
transaction
execution, innovation, reputation and price.
investment
advisors,
specialty
and
194 Fifth Third Bancorp
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.
in-branch self-service
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 1,194 full-service
banking centers, 50 parcels of land held for the development of
future banking centers and 8 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.
technologies
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.
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.
Fifth Third may sell or consider selling one or more of its
businesses or investments. Should it determine to sell such a
business or investment, it may not be able to generate gains on
sale or related increase in shareholders’ equity commensurate
with desirable levels. Moreover, if Fifth Third sold such
businesses or investments, 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, investments and other assets that
are not significantly synergistic with its core financial services
businesses or, in the future, may no longer be aligned with Fifth
Third’s strategic plans or regulatory expectations. Further, Fifth
Third is expected to conform to the final Volcker Rule with
respect to certain illiquid funds within an extended compliance
period. 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, investments
and/or interests, including, for example, portions of Fifth Third’s
stake in Vantiv Holding, LLC and certain illiquid funds that do
not conform to the Volcker Rule. In any such sales, Fifth Third
would be subject to market forces that may affect the timing,
pricing or result in an unsuccessful sale. If Fifth Third were to
complete the sale of any of its businesses, investments 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 in separating
the operations of any businesses it sells, which may affect its
business 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 between 2013 and 2017, the Bancorp
ownership share in Vantiv Holding, LLC as of December 31,
2017, was approximately 8.6% (which was reduced further to
approximately 4.9% after the closing of Vantiv’s acquisition of
Worldpay Group plc.). The Bancorp’s investment in Vantiv
Holding, LLC is currently accounted for under the equity method
of accounting and is not consolidated based on the nature of
Vantiv Holding, LLC’s structure as a limited liability company
and contractual arrangements between Vantiv Holding, LLC and
Fifth Third. Vantiv Holding, LLC’s operating results could be
poor and could negatively affect the operating results of Fifth
Third. Also, 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
their own risks and uncertainties.
Additionally, Fifth Third’s contractual arrangements with Vantiv
Holding, LLC are subject
risks and
to
uncertainties.
further unique
to
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, Worldpay,
Inc. (formerly, 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 additional 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.
GENERAL BUSINESS RISKS
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.
195 Fifth Third Bancorp
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 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.
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
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.
Fifth Third is exposed to reputational risk.
Fifth Third’s actual or alleged conduct in activities, such as
certain sales and lending practices, data security, corporate
governance and acquisitions, behavior of employees, association
with particular customers, business partners, investment or
vendors, as well as developments from any of the other risks
described above, may result in negative public opinion and may
damage Fifth Third’s reputation. Actions taken by government
regulators, shareholder activists 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
196 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, 2017, the Bancorp, through its banking and non-
banking subsidiaries, operated 1,154 banking centers, of which 835
were owned, 221 were leased and 98 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, West Virginia, Georgia and North Carolina. 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 28, 2018 are listed below
along with their business experience during the past five years:
Greg D. Carmichael, 56. Chairman of the Board since February
2018, 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, 56. 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.
Frank R. Forrest, 63. 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, 52. 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.
Aravind Immaneni, 47. Executive Vice President and Chief
Operations and Technology Officer since November 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, 48. 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, 53. 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, 44. Executive Vice President, Chief Legal
Officer and Corporate Secretary since January 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
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.
to
Timothy N. Spence, 39. Executive Vice President and Head of
Payments, Strategy and Digital Solutions since 2017, Chief Strategy
Officer of
the Bancorp since September 2015. Previously,
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, 49. 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, 53. 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.
197 Fifth Third Bancorp
`
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Bancorp’s common stock is traded in the over-the-counter market and is listed under the symbol “FITB” on the NASDAQ® Global
Select Market System.
High and Low Stock Prices and Dividends Paid Per Share
2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
$31.83
$28.06
$26.69
$28.97
High
$27.88
$21.11
$19.34
$19.73
Low
$27.38
$24.66
$23.20
$24.02
Low
$19.57
$16.26
$16.02
$13.84
Dividends Paid
Per Share
$0.16
$0.16
$0.14
$0.14
Dividends Paid
Per Share
$0.14
$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, 2017, the Bancorp had 40,387 shareholders of record.
Issuer Purchases of Equity Securities
Period
October 2017
November 2017
December 2017
Total
(a)
Total Number
of Shares
Purchased(a)
108,119
76,403
12,124,851
12,309,373
$
$
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)
27.63
27.87
29.17
29.15
-
-
12,018,443
12,018,443
35,166,334
35,166,334
23,147,891
23,147,891
(b)
Includes 290,930 shares repurchased during the fourth quarter of 2017 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 transactions. 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.
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.
198 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 2012 through 2017, and 2007
through 2017, respectively, compared to the S&P 500 Stock and the S&P Banks indices.
FIFTH THIRD BANCORP VS. MARKET INDICES
199 Fifth Third Bancorp
`
III
ITEM 10. DIRECTORS, EXECUTIVE
PART
OFFICERS AND CORPORATE GOVERNANCE
The information required by this item relating to the Executive
Officers of the Registrant is included in PART I under
“EXECUTIVE OFFICERS OF THE BANCORP.”
The information required by this item concerning Directors
and the nomination process is incorporated herein by reference
under the caption “ELECTION OF DIRECTORS” of the
Bancorp’s Proxy Statement for the 2018 Annual Meeting of
Shareholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
The information required by this item is incorporated herein by
reference under the caption “PRINCIPAL INDEPENDENT
EXTERNAL AUDIT FIRM FEES” of the Bancorp’s Proxy
Statement for the 2018 Annual Meeting of Shareholders.
PART
STATEMENT SCHEDULES
ITEM
IV
15. EXHIBITS, FINANCIAL
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 2018
Annual Meeting of Shareholders.
reference under
and
the
Report of Independent Registered Public Accounting Firm
Fifth Third Bancorp and Subsidiaries Consolidated Financial
Statements
Notes to Consolidated Financial Statements
Pages
90-91
92-96
97-178
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 2018 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,”
EXECUTIVE OFFICERS,”
“BOARD OF DIRECTOR
COMPENSATION,” “CEO PAY RATIO,” “COMPENSATION
“COMPENSATION
COMMITTEE
COMMITTEE
INSIDER
PARTICIPATION” of the Bancorp’s Proxy Statement for the
2018 Annual Meeting of Shareholders.
INTERLOCKS
REPORT”
AND
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,” “BOARD OF DIRECTOR COMPENSATION,”
EXECUTIVE
and
OFFICERS” of the Bancorp’s Proxy Statement for the 2018
Annual Meeting of Shareholders.
“COMPENSATION OF NAMED
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,
the
COMMITTEES, MEETINGS AND FUNCTIONS” of
Bancorp’s Proxy Statement for the 2018 Annual Meeting of
Shareholders.
DIRECTORS”,
OF
200 Fifth Third Bancorp
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
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).
`
4.7
4.8
4.9
Indenture for Senior Debt Securities dated as of April 30, 2008
between Fifth Third Bancorp and Wilmington Trust Company, as
trustee. Incorporated by reference to Exhibit 4.2 to the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 6, 2008.
First Supplemental Indenture dated as of January 25, 2011 between
Fifth Third Bancorp and Wilmington Trust Company, as Trustee, to
the Indenture for Senior Debt Securities dated as of April 30, 2008
between Fifth Third and the Trustee. Incorporated by reference to
Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on January 25, 2011.
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 as Exhibit A 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.
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. (2)
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
time
thereunder.
Incorporated by reference to Exhibit 4.3 of the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on December 9, 2013.
Form of Certificate Representing the 6.625% Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, Series I, of Fifth Third
Bancorp. Incorporated by reference to Exhibit 4.2 of the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 9, 2013.
Form of Depositary Receipt for the 6.625% Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, Series I, of Fifth Third
Bancorp. Incorporated by reference as Exhibit A 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
4.19
4.20
4.21
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 as Exhibit A 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.
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
10.1
4.27
4.26
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.
Fifth Supplemental Indenture dated as of June 15, 2017 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 SEC on June 15, 2017.
Form of 2.600% Senior Notes due 2022. Incorporated by reference to
Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with
the SEC on June 15, 2017.
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.*
First Amendment to Fifth Third Bancorp Unfunded Deferred
Compensation Plan for Non-Employee Directors, as Amended and
Restated effective June 1, 2013. Incorporated by reference to Exhibit
10.5 to the Registrant’s Quarterly Report on Form 10-Q filed with the
Commission on August 8, 2017.*
Second Amendment to Fifth Third Bancorp Unfunded Deferred
Compensation Plan for Non-Employee Directors, as Amended and
Restated effective June 1, 2013. Incorporated by reference to Exhibit
10.3 to the Registrant’s Quarterly Report on Form 10-Q filed with the
Commission on November 6, 2017.*
Fifth Third Bancorp Master Profit Sharing Plan, as Amended and
Restated. Incorporated by reference to Exhibit 10.5 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31,
2011.*
First Amendment to Fifth Third Bancorp Master Profit Sharing Plan,
as Amended and Restated. Incorporated by reference to Exhibit 10.6
to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2011.*
Second Amendment to Fifth Third Bancorp Master Profit Sharing
Plan, as Amended and Restated. Incorporated by reference to Exhibit
10.7 to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2012.*
Third Amendment to Fifth Third Bancorp Master Profit Sharing Plan,
as Amended and Restated. Incorporated by reference to Exhibit 10.8
of the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2013.*
10.3
10.4
10.5
10.7
10.6
201 Fifth Third Bancorp
`
10.8
10.9
Fifth Third Bancorp 401(k) Savings Plan, as Amended and Restated.
Incorporated by reference to Exhibit 10.7 to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2014.*
First Amendment to Fifth Third Bancorp 401(k) Savings Plan, as
Amended and Restated. 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.*
10.10 Second Amendment to Fifth Third Bancorp 401(k) Savings Plan, as
Amended and Restated effective January 1, 2015. Incorporated by
reference to Exhibit 10.4 to the Registrant’s Quarterly Report on
Form 10-Q filed with the Commission on August 8, 2017.*
10.11 Third Amendment to Fifth Third Bancorp 401(k) Savings Plan, as
Amended and Restated effective January 1, 2015. Incorporated by
reference to Exhibit 10.2 to the Registrant’s Quarterly Report on
Form 10-Q filed with the Commission on November 6, 2017.*
10.12 Fourth Amendment to Fifth Third Bancorp 401(k) Savings Plan, as
Amended and Restated effective January 1, 2015.*
10.13 The Fifth Third Bancorp Master Retirement Plan, as Amended and
the
Restated. Incorporated by reference
Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2014.**
to Exhibit 10.8 of
10.14 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.*
10.15 Second Amendment to The Fifth Third Bancorp Master Retirement
Plan, as Amended and Restated. Incorporated by reference to Exhibit
10.11 to the Registrant’s Annual Report on Form 10-K filed with the
SEC on February 24, 2017.*
10.16 Third Amendment to The Fifth Third Bancorp Master Retirement
Plan, as Amended and Restated.*
10.17 Fifth Third Bancorp Incentive Compensation Plan. Incorporated by
reference to Annex 2 to the Registrant’s Proxy Statement dated
February 19, 2004.*
10.18 Fifth Third Bancorp 2008 Incentive Compensation Plan. Incorporated
by reference to Annex 2 to the Registrant’s Proxy Statement dated
March 6, 2008.*
10.19 Fifth Third Bancorp 2011 Incentive Compensation Plan. Incorporated
by reference to Annex 1 to the Registrant’s Proxy Statement dated
March 10, 2011.*
10.20 Fifth Third Bancorp 2014 Incentive Compensation Plan. Incorporated
by reference to Annex A to the Registrant’s Proxy Statement dated
March 6, 2014.*
10.21 Fifth Third Bancorp 2017 Incentive Compensation Plan. Incorporated
by reference to Annex A to the Registrant’s Proxy Statement dated
March 9, 2017.*
10.22 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.*
10.23 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.*
10.24 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.*
10.25 Second Amendment to the Fifth Third Bancorp Non-qualified
Deferred Compensation Plan, as Amended and Restated effective
January 1, 2013. Incorporated by reference to Exhibit 10.6 to the
Registrant’s Quarterly Report on Form 10-Q filed with
the
Commission on August 8, 2017.*
10.26 Third Amendment to Fifth Third Bancorp Non-qualified Deferred
Compensation Plan, as Amended and Restated effective January 1,
2013. Incorporated by reference to Exhibit 10.4 to the Registrant’s
Quarterly Report on Form 10-Q filed with the Commission on
November 6, 2017.*
10.27 Fifth Third Bancorp Stock Option Gain Deferral Plan. Incorporated
by reference to Annex 5 to the Registrant’s Proxy Statement dated
February 9, 2001.*
10.28 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. *
202 Fifth Third Bancorp
10.29 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. *
10.30 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.*
10.31 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.
10.32 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.
10.33 Registration Rights Agreement dated as of March 21, 2012 by and
among Vantiv, Inc., Fifth Third Bank, FTPS Partners, LLC, JPDN
Enterprises, LLC and certain stockholders of Vantiv,
Inc.
Incorporated by reference to Exhibit E to the Registrant’s Schedule
13D filed with the Commission on April 2, 2012.
10.34 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.
10.35 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.
10.36 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.*
10.37 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.*
10.38 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.*
10.39 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.*
10.40 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.*
10.41 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.*
10.42 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.*
10.43 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.*
10.44 Master Confirmation 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 10.6 to the Registrant’s
Quarterly Report on Form 10-Q filed with the Commission on August
7, 2013.**
10.45 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.**
10.46 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.**
10.47 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.
10.48 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.
10.49 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.**
10.50 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**
10.51 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.**
10.52 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.**
10.53 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**
10.54 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**
10.55 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*
10.56 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. Incorporated by reference to Exhibit 10.47 of the
Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2016.**
10.57 2016 Restricted Stock Unit Grant Agreement (for Directors).
Incorporated by reference to Exhibit 10.48 of the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2016.*
10.58 2017 Stock Appreciation Right Award Agreement (for Executive
Officers). Incorporated by reference to Exhibit 10.49 of the
Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2016.*
10.59 2017 Performance Share Award Agreement. Incorporated by
reference to Exhibit 10.50 of the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2016.*
10.60 2017 Restricted Stock Unit Grant Agreement (for Executive
Officers). Incorporated by reference to Exhibit 10.51 of the
Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2016.*
10.61 Long-Term Incentive Award Overview February 2017 Grants.
Incorporated by reference to Exhibit 10.52 of the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2016.*
10.62 Supplemental Confirmation dated April 26, 2017,
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 August
8, 2017.**
10.63 Restricted Stock Unit Agreement (for Directors) for Fifth Third
Bancorp 2017 Incentive Compensation Plan. Incorporated by
reference to Exhibit 10.3 to the Registrant’s Quarterly Report on
Form 10-Q filed with the Commission on August 8, 2017.*
10.64 Supplemental Confirmation dated August 15, 2017, to Master
Confirmation, dated April 23, 2012, for accelerated share repurchase
transaction between Fifth Third Bancorp and Goldman, Sachs & 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 6, 2017.**
10.65 Supplemental Confirmation dated December 15, 2017, to Master
Confirmation, dated July 29, 2015, for accelerated share repurchase
transaction between Fifth Third Bancorp and Morgan Stanley & Co.
LLC.**
10.66 Supplemental Confirmation dated February 8, 2018, to Master
Confirmation, dated July 29, 2015, for accelerated share repurchase
transaction between Fifth Third Bancorp and Morgan Stanley & Co.
LLC.**
10.67 2018 Stock Appreciation Right Award Agreement (for Executive
Officers).*
10.68 2018 Performance Share Award Agreement.*
10.69 2018 Restricted Stock Unit Agreement (for Executive Officers.) *
10.70 Long-Term Incentive Award Overview 2018 Grants.*
12.1
12.2
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, 2017.
Consent of Independent Registered Public Accounting Firm-Deloitte
& Touche LLP.
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
U.S. Department of Justice
loans.
Incorporated by reference to Exhibit 99.1 to the Registrant’s Current
Report on Form 8-K filed with the Commission on September 29,
2015.
indirect auto
regarding
99.2 Consent Order pursuant to the Consumer Financial Protection Act of
2010, dated September 28, 2015, between Fifth Third Bank and the
Consumer Financial Protection Bureau, including the Stipulation and
Consent to the Issuance of a Consent Order, dated September 28,
2015, by Fifth Third Bank regarding indirect auto loans. Incorporated
by reference to Exhibit 99.2 to the Registrant’s Current Report on
Form 8-K filed with the Commission on September 29, 2015.
99.3 Consent Order pursuant to the Consumer Financial Protection Act of
2010, dated September 28, 2015, between Fifth Third Bank and the
Consumer Financial Protection Bureau, including the Stipulation and
Consent to the Issuance of a Consent Order, dated September 28,
2015, by Fifth Third Bank regarding credit card add-on products.
Incorporated by reference to Exhibit 99.3 to the Registrant’s Current
Report on Form 8-K filed with the Commission on September 29,
2015.
99.4 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
99.5
203 Fifth Third Bancorp
`
101
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.
(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 $250,000,000 in principal
amount of its 4.30% Subordinated Notes due 2024.
* Denotes management contract or compensatory plan or arrangement.
** An application for confidential treatment for selected portions of this
exhibit has been filed with the Securities and Exchange Commission.
204 Fifth Third Bancorp
`
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DIRECTORS:
/s/ Marsha C. Williams
Marsha C. Williams
Lead Director
FIFTH THIRD BANCORP
Registrant
/s/ Greg D. Carmichael
Greg D. Carmichael
Chairman, President and CEO
Principal Executive Officer
February 28, 2018
Pursuant to requirements of the Securities Exchange Act of 1934,
this report has been signed on February 28, 2018 by the
following persons on behalf of the Registrant and in the
capacities indicated.
OFFICERS:
/s/ Greg D. Carmichael
Greg D. Carmichael
Chairman, President and CEO
Principal Executive Officer
/s/ Tayfun Tuzun
Tayfun Tuzun
Executive Vice President and CFO
Principal Financial Officer
/s/ Mark D. Hazel
Mark D. Hazel
Senior Vice President and Controller
Principal Accounting Officer
Nicholas K. Akins
/s/ B. Evan Bayh III
B. Evan Bayh III
/s/ Jorge L. Benitez
Jorge L. Benitez
/s/ Katherine B. Blackburn
Katherine B. Blackburn
/s/ Emerson L. Brumback
Emerson L. Brumback
/s/ Jerry W. Burris
Jerry W. Burris
/s/ Greg D. Carmichael
Greg D. Carmichael
/s/ Gary R. Heminger
Gary R. Heminger
/s/ Jewell D. Hoover
Jewell D. Hoover
/s/ Eileen A. Mallesch
Eileen A. Mallesch
/s/ Michael B. McCallister
Michael B. McCallister
205 Fifth Third Bancorp
CONSOLIDATED TEN YEAR COMPARISON
AVERAGE ASSETS FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS)
$
Loans and
Leases
92,731
94,320
93,339
91,127
89,093
84,822
80,214
79,232
83,391
85,835
Interest-Earning Assets
Federal Funds
Sold(a)
1
1
1
-
1
2
1
11
12
438
Interest-Bearing
Deposits in
Banks(a)
1,389
1,865
3,257
3,043
2,416
1,493
2,030
3,317
1,023
183
Securities
32,172
30,099
26,987
21,823
16,444
15,319
15,437
16,371
17,100
13,424
Total
126,293
126,285
123,584
115,993
107,954
101,636
97,682
98,931
101,526
99,880
Cash and Due
from Banks
2,224
2,303
2,608
2,892
2,482
2,355
2,352
2,245
2,329
2,490
Other Assets
13,345
14,963
15,179
14,505
15,025
15,643
15,259
14,758
14,179
13,326
Total Average
Assets
140,636
142,266
140,078
131,909
123,704
117,562
112,590
112,351
114,769
114,211
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS)
Deposits
Foreign
Office and
Other
Money
Market Other Time
Interest
Checking
26,382
25,143
26,160
25,382
23,582
23,096
18,707
18,218
15,070
14,191
Demand
3,715
3,771
35,093
$
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
14,017
10,760
11,135
INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Savings
13,958
14,346
14,951
16,080
18,440
21,393
21,652
19,612
16,875
16,192
Total
102,664
102,449
102,221
97,406
93,031
85,551
82,315
82,277
79,862
75,413
20,231
19,523
18,152
14,670
9,467
4,903
5,154
4,808
4,320
6,127
665
830
874
1,828
1,518
1,555
3,497
3,361
2,265
4,220
Certificates
$100,000 and
Over
2,564
2,735
2,869
3,929
6,339
3,102
3,656
6,083
10,367
9,531
Short-Term
Borrowings
Total
106,379
105,800
104,862
99,737
96,558
90,357
85,437
84,203
86,842
86,173
$
Interest
Income
4,489
4,193
4,028
4,030
3,973
4,107
4,218
4,489
4,668
5,608
Interest
Expense
691
578
495
451
412
512
661
885
1,314
2,094
Noninterest
Income
3,224
2,696
3,003
2,473
3,227
2,999
2,455
2,729
4,782
2,946
Noninterest
Expense
3,990
3,903
3,775
3,709
3,961
4,081
3,758
3,855
3,826
4,564
Net Income (Loss)
Available to Common
Shareholders
2,119
1,489
1,637
1,414
1,799
1,541
1,094
503
511
(2,180)
Per Share(b)
Originally Reported
Earnings
2.88
1.95
2.03
1.68
2.05
1.69
1.20
0.63
0.73
(3.91)
Diluted
Earnings
2.83
1.93
2.01
1.66
2.02
1.66
1.18
0.63
0.67
(3.91)
Dividends
Declared Earnings
2.88
1.95
2.03
1.68
2.05
1.69
1.20
0.63
0.73
(3.94)
0.60
0.53
0.52
0.51
0.47
0.36
0.28
0.04
0.04
0.75
Diluted
Earnings
2.83
1.93
2.01
1.66
2.02
1.66
1.18
0.63
0.67
(3.94)
MISCELLANEOUS AT DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Bancorp Shareholders' Equity
Year
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
Year
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
Year
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
Common
Stock
Preferred
Stock
Year
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
Common Shares
Outstanding
693,804,893 $
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
2,051
2,051
2,051
2,051
2,051
2,051
2,051
1,779
1,779
1,295
Capital
Surplus
2,790
2,756
2,666
2,646
2,561
2,758
2,792
1,715
1,743
848
Retained
Earnings
15,122
13,441
12,358
11,141
10,156
8,768
7,554
6,719
6,326
5,824
Accumulated Other
Comprehensive
Income
73
59
197
429
82
375
470
314
241
98
Treasury
Stock
(5,002)
(3,433)
(2,764)
(1,972)
(1,295)
(634)
(64)
(130)
(201)
(229)
1,331
1,331
1,331
1,331
1,034
398
398
3,654
3,609
4,241
Book Value
Per Share
21.67
19.82
18.48
17.35
15.85
15.10
13.92
13.06
12.44
13.57
Allowance for
Loan and
Lease Losses
1,196
1,253
1,272
1,322
1,582
1,854
2,255
3,004
3,749
2,787
Total
16,365
16,205
15,839
15,626
14,589
13,716
13,201
14,051
13,497
12,077
(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.
206 Fifth Third Bancorp
FIFTH THIRD BANCORP DIRECTORS
Greg D. Carmichael
Chairman, President & Chief Executive
Officer
Fifth Third Bancorp
DIRECTORS AND OFFICERS
FIFTH THIRD BANCORP OFFICERS
Greg D. Carmichael
Chairman, President &
Chief Executive Officer
Marsha C. Williams, Lead Director
Retired Chief Financial Officer
Orbitz Worldwide, Inc.
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.
Gary R. Heminger
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.
Lars C. Anderson
Executive Vice President &
Chief Operating Officer
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
Head of Consumer Bank
Jelena McWilliams
Executive Vice President,
Chief Legal Officer &
Corporate Secretary
Timothy N. Spence
Executive Vice President &
Head of Payments, Strategy and
Digital Solutions
Teresa J. Tanner
Executive Vice President &
Chief Administrative Officer
Tayfun Tuzun
Executive Vice President &
Chief Financial Officer
REGIONAL PRESIDENTS
Steven Alonso
(Group Regional President)
Michael Ash
Kevin Hipskind
David A. Call
Michael McKay
Timothy Elsbrock
David Girodat
Thomas Heiks
Lee Fite
(Market President)
Joseph DiRocco
Randy Koporc
Robert W. LaClair
Jordan A. Miller, Jr.
Francie Henry
(Market President)
Eric Smith
Thomas G. Welch, Jr.
FIFTH THIRD BANCORP BOARD
COMMITTEES
Audit Committee
Emerson L. Brumback, Chair
Katherine B. Blackburn
Jerry W. Burris
Jewell D. Hoover
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
Eileen A. Mallesch
Nominating and Corporate Governance
Committee
Nicholas K. Akins, Chair
B. Evan Bayh III
Jorge L. Benitez
Katherine B. Blackburn
Gary R. Heminger
Marsha C. Williams
Risk and Compliance Committee
Jewell D. Hoover, Chair
B. Evan Bayh III
Jorge L. Benitez
Jerry W. Burris
Eileen A. Mallesch
207 Fifth Third Bancorp
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208 Fifth Third Bancorp
2017
2016
2015
FIFTH THIRD BANCORP
Performance
comparison:
For the years ended Dec. 31
$ in millions, except per share data
Earnings and Dividends
Net Income Attributable to Bancorp
$ 2,194
$ 1,564
$ 1,712
Common Dividends Declared
Preferred Dividends Declared
436
75
405
75
417
75
Per Common Share
Earnings
Diluted Earnings
Cash Dividends
Book Value Per Share
At Year-End
Total Assets
Total Loans and Leases (incl. held-for-sale)
Deposits
Bancorp Shareholders' Equity
Key Ratios
Net Interest Margin (FTE)1
Efficiency Ratio (FTE)1
CET1 Ratio (Basel III Transitional)2
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
Actuals
$ 2.88
$ 1.95
$ 2.03
2.83
0.60
21.67
1.93
2.01
0.53
0.52
19.82
18.48
$ 142,193
92,462
103,162
16,365
$ 142,177
$ 141,048
92,849
93,485
103,821
103,205
16,205
15,839
3.03%
56.6%
10.61%
11.74%
15.16%
2.88%
61.6%
10.39%
11.50%
15.02%
2.88%
57.6%
9.82%
10.93%
14.13%
Common Shares Outstanding (000's)
693,805
750,479
785,080
Banking Centers
ATMs
Full-Time Equivalent Employees
1,154
2,469
18,125
1,191
1,254
2,495
2,593
17,844
18,261
1 Non-GAAP measure. For further information, see the Non-GAAP Financial Measures section of MD&A.
2 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.
2017
2016
Stock
Performance
High
Low
Dividends
Declared
Per Share
High
Low
Dividends
Declared
Per Share
Fourth Quarter
$ 31.83
$ 27.38
$ 0.16
$27.88
$19.57
$0.14
Third Quarter
28.06
24.66
Second Quarter
26.69
23.20
First Quarter
28.97
24.02
0.16
0.14
0.14
21.11
19.34
19.73
16.26
16.02
13.84
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
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and Trust Company, LLC.
For Correspondence:
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www.astfinancial.com
1.888.294.8285
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and Direct Stock Purchase
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