Greg D. Carmichael
Chairman, President and CEO,
Fifth Third Bancorp
Dear Shareholders:
Since my last letter to you, we successfully
completed another year financially, commem
orated a historical milestone, and positioned
the bank for sustainable growth and outper
formance. We also announced our first bank
acquisition in many years and came together
after tragedy struck at our headquarters in
Cincinnati.
As we look back on the past 12 months, key
events and successes point to the path that
lies ahead.
Once again, we delivered strong
financial results
Since I became CEO at the end of 2015, we
have consistently demonstrated our ability
to execute successfully on our strategic and
financial objectives, as evidenced by our
substantially improved key financial and
credit metrics.
We have made very
strong progress
toward achieving our
goal of becoming one
of the top performing
regional banks.
That trend continued in 2018, as we reported
very strong fullyear financial results. We have
made very strong progress toward achieving
our goal of becoming one of the topperform
ing regional banks.
We generated net income available to common
share holders of $2.1 billion and returned 92 per
cent of earnings to our shareholders through
common dividends and share buybacks. We
executed nearly $1.5 billion in share repurchases
and raised our dividend nearly 40 percent
compared to the end of 2017. In addition to
strong underlying results, we generated over
$600 million in pretax gains in 2018 from
our ownership interest in Worldpay, as we
continued to monetize our position in a
thoughtful and strategic manner. Since 2009,
we have generated more than $6 billion for our
shareholders from our Vantiv/Worldpay stake.
In 2018, loan growth was muted across the
industry. Our performance for the year im
proved, however, thanks to several initiatives:
• As a result of our investments in our sales
force and our ongoing focus on process
reengineering—which created capacity for
our commercial relationship managers—we
saw our commercial loan portfolio grow by
6 percent (C&I loans by more than 7 percent),
which was fully funded with core deposits.
• Through loan growth and diligent interest rate
risk management, we expanded net interest
margin by 19 basis points and grew net inter
est in come by 9 percent compared to 2017.
• Our chargeoffs remained low overall, with
key credit metrics such as nonperforming
loans and criticized asset ratios declining
to their lowest levels in more than a decade.
• We also generated 15 percent revenue
growth in capital markets over 2017,
had a record year in our Wealth & Asset
Management business, and continued to
manage our expenses diligently.
NET INCOME AVAILABLE
TO COMMON SHAREHOLDERS:
$2.1 billion
TOTAL PAYOUT RATIO:
92%
AVERAGE ASSETS:
$142 billion
CORE DEPOSITS:
$102 billion
NET INTEREST MARGIN (FTE):
3.22%
NPA RATIO:
0.41%
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FIFTH THIRD BANCORP 2018 ANNUAL REPORT | 1
At the same time, we continued to invest in our
businesses that are necessary to deliver long
term shareholder value. Our three key primary
financial metrics—return on assets (“ROA”),
return on tangible common equity (“ROTCE”)
and the efficiency ratio—improved significantly
through the year.
Our 2018 financial performance was supported
by several initiatives under Project NorthStar,
our threeyear strategic plan established in late
2016 to drive meaningful improvement in our
throughthecycle financial performance. Key
points include:
• Our peer-leading credit improvement across
several metrics, reflecting our decision to de
risk our balance sheet.
• Solid growth in unsecured consumer
lending, which we expect to generate higher
riskadjusted, throughthecycle returns.
• Exceptional consumer household growth
throughout the year, led by our preferred
banking initiative as well as analytical
enhancements to our direct marketing.
• The redesign of our commercial mid-
and back-office processes through our
Commercial Client Experience Initiative,
which led to a 30 percent decline in the time
from application to funding. This has allowed
our relationship managers to be more directly
focused on generating new business, and
it has helped drive record middlemarket
originations during the year.
• Enhanced wholesale payments solutions
through both organic initiatives and
strategic partnerships (such as our Expert
AP automatic payables platform), which
supported 5 percent growth in gross business
service revenue.
• The continued expansion of our Wealth
& Asset Management business with the
acquisition of Franklin Street Partners in
North Carolina.
• The addition of Coker Capital Advisors to
support our continued growth in the health
care sector.
Looking to the future, our
rich history offers invaluable
perspective
2018 marked our 160th year in banking, a
milestone in the Company’s history. We are
extremely proud of our rich heritage. Who
we are today is the result of the tremendous
efforts of generations of bankers whose work
helped build the foundation of our Company.
As we go forward, our history provides us with
an exceptional perspective.
Nowadays, it may seem that change is the
only constant in banking, with heightened
competition outside the traditional banking
sector and evolving customer preferences.
However, some aspects of banking continue
to withstand the test of time.
As we seek to create enduring relationships,
our passion to be the One Bank our customers
most value and trust is as strong as ever. Also
constant is the belief that we create value for
2
Celebrating
160 years,
and counting…
our customers by keeping them at the center
of all we do.
Our passion to be
the One Bank our
customers most value
and trust is as strong
as ever.
We also continue to benefit from the lessons
of our history, including from the financial
crisis, now just 10 years behind us. While we do
not expect the banking sector to experience
a downturn as severe as the 2008 crisis
again, for several reasons, all of our strategic
initiatives are explicitly assessed through
a longerterm performance horizon, which
includes stressed macroeconomic scenarios.
History has proven that, over the long term,
being prudent, balanced and disciplined will
create substantially more shareholder value
than immediate growth and profits.
Driving innovation to deliver
a new level of banking services
We live in a rapidly changing world. As our
customers confront new challenges and
opportunities, their needs and expectations
grow, and the banking services we provide
must keep pace. To our customers, we are not
in the business of taking deposits or making
loans. Rather, we are in the “home buying”
business; the “building my credit” business;
the “protect my hardearned money” business;
the “improve working capital” business; the
“revenuecycle management” business. We are
constantly focused on delivering innovative
solutions to serve these goals.
One area in which we have made considerable
investment is harnessing the power of digital
technologies to make banking simple, seamless
and safe. Now, customers can leave home
without their wallets and still get cash using
the new “cardless ATM” functionality in
our mobile app, or pay at the point of sale
using a wide range of mobile wallets. We
also work hard to keep the financial lives of
our customers safe, using advanced fraud
and cybersecurity technologies, providing
alerts and realtime monitoring to detect and
respond to threats quickly. When customers
want to meet with a banker, they have the
convenience of scheduling an appointment at
the nearest branch just by going online.
We have made
considerable invest
ments…harnessing
the power of digital
technologies to make
banking simple,
seamless and safe.
Celebrating
160 years,
and counting…
FIFTH THIRD BANCORP 2018 ANNUAL REPORT | 3
relationships, even if it puts pressure on near
term growth and returns.
For example, while we remain moderately asset
sensitive in order to take advantage of higher
interest rates, we took proactive steps toward
the end of the year to reduce the impact of
a potential lower rate environment. Deposit
growth continues to be a top priority for us.
We know that our ability to grow deposits—
both retail and commercial—is a key element
to achieving our profitability targets. As in
2018, we plan to continue to fund loan growth
with core deposits in the future.
From a creditriskmanagement perspective,
our balance sheet derisking and optimization
efforts that I mentioned earlier were pre
dominantly focused on exiting relationships
where we believe we had suboptimal risk
adjusted returns. These exits led to a 50 per
cent decline in our leveraged lending portfolio
since 2015. In addition, we remain very cautious
in commercial real estate lending, given where
we believe we are in the business cycle.
We also are harnessing the power of digital in
small ways to help our customers achieve their
short and longterm goals. Our Momentum™
app allows customers to conveniently round up
their everyday debit card purchases in order to
pay down their student debt. We also recently
launched Dobot™, which uses algorithms to
help customers automatically achieve savings
goals through small, weekly transfers based
on their capacity to save. For planning long
term financial goals, our Life360 platform gives
customers a holistic view of their financial
situation under different scenarios.
We also are investing to drive innovation in
our commercial business lines. Our recently
launched Expert AP and Expert AR services
enable middle market finance organizations
to automate the payments, invoices, and
billing reconciliation processes. Similarly,
our MarketTrade online trading platform for
executing and confirming foreign exchange
trades enables clients to easily navigate and
initiate a currency transaction, which can
then be validated and executed electronically,
typically within seconds.
Key digital innovations
• Cardless ATM
• Fraud alerts and realtime monitoring
• Momentum™ app
• Dobot™
Ready for what’s next:
Positioned to outperform
through the cycle
While we believe the overall U.S. economic
backdrop was positive throughout 2018,
we know that all business cycles eventually
turn—although the timing and severity of the
next downturn can be difficult to predict with
much accuracy. That is why we have taken a
balanced and prudent approach to managing
the balance sheet. Over the last several years,
we have proactively fortified our balance sheet
to mitigate the impact of downside scenarios.
We have maintained our credit discipline and
focused on originating and growing profitable
4
We also remain focused on prudently
managing your capital. Our common equity
tier 1 ratio of 10.2 percent was relatively stable
from last year, but it has increased over 40
basis points since 2015. During this time,
we meaningfully improved our risk profile,
as shown by the better credit performance
projections under the Federal Reserve’s CCAR
loss models compared to our peer group. We
believe that we have an opportunity to return
more capital to our shareholders while still
maintaining an appropriate buffer above the
wellcapitalized levels under stressed economic
scenarios.
I am confident that we have positioned the
Company properly and are executing the right
strategies to deliver on our financial targets
under NorthStar by the end of 2019, while
also improving our financial performance
beyond NorthStar. As a reminder, in light
of the aforementioned industry tailwinds,
we improved our original NorthStar ROTCE
target by over 300 basis points. In other
words, we are holding ourselves accountable
for delivering strong financial results under
the prevailing macroeconomic, interest rate,
regulatory and legislative environments. We
remain committed to delivering the standalone
financial results under Project NorthStar—more
than 16 percent ROTCE, 1.35 to 1.45 percent
ROA and an efficiency ratio below 57 percent—
by the end of this year.
We are holding
ourselves accountable
for delivering strong
financial results
under the prevailing
macroeconomic,
interest rate, regula
tory and legislative
environments.
AW A R D S & R E C O G N I T I O N
AW A R D S & R E C O G N I T I O N
Our transformation
is being noticed
Although receiving accolades and
awards isn’t something we dwell on, it
is gratifying to know that our efforts to
bring innovation to banking have been
recognized outside our organization,
with honors including:
Bank Director:
#1 Bank Overall—Best Technology Strategy
(based on innovative products and talent)
Bank Director:
#1 Midwest Bank at Attracting
Millennial Employees
Kiplinger’s:
Best Regional Bank award
Javelin Online Banking:
Top Leader (Money Movement)
(one of just seven institutions to be named
a leader in multiple categories)
ESRI:
Special Achievement in Geosciences
(only bank)
American Banker:
Digital Banker of the Year:
Tim Spence
Information Age:
Digital Leader of the Year:
Melissa Stevens
FIFTH THIRD BANCORP 2018 ANNUAL REPORT | 5
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E X P A N D I N G O U R C H I C A G O P R E S E N C E
MB Financial acquisition
In May 2018, we announced the acquisition
of MB Financial, Inc., our first whole bank
transaction in quite some time. As we have said
previously, we firmly believe this transaction
is very compelling from both a financial and a
strategic perspective.
MB is a premier Chicago banking franchise
with a strong track record of success. With this
transaction, we will be adding significant scale
to our operations in the attractive Chicago
market and creating a toptier middle market
lender. MB’s bestinclass business bank
will join with Fifth Third’s existing bankers
in Chicago, positioning us well to serve our
combined customer base. Additionally, we
expect to roll out MB’s unique and successful
commercial leasing and asset based lending
businesses across the Fifth Third footprint. This
acquisition creates significant value for our
combined commercial and retail customers as
well as our shareholders.
We are very optimistic about being able to
leverage our product and service capabilities
to build significantly upon MB’s core business.
The combined franchise will rank third in retail
deposits in the Chicago market. Additionally,
we expect to have a 20 percent share of
middle market relationships in Chicago, which
would rank us second in the country’s third
largest metropolitan area. We have stressed
the importance of having local scale many
times over the years. Thus, we are excited that
after the deal closes we will have a top three
market share in twothirds of our deposit
franchise. This will allow us to create an even
more efficient network and help drive further
operating leverage. Having a large share of
deposits in our key markets also gives us
additional pricing flexibility.
The combined
franchise ranks third
in retail deposits in
the Chicago market.
Excluding any revenue benefits from the
synergies of combining our businesses,
we expect all of our key financial targets
to improve substantially on a pro forma
basis by the second year, with our ROTCE
improving by approximately 200 basis points,
ROA improving by approximately 12 basis
points, and the efficiency ratio improving by
approximately 400 basis points.
As this letter heads to print, we have received
all necessary shareholder approvals and also
received a nonobjection from the Federal
Reserve on our Resubmitted CCAR Capital
Plan, including the pro forma impact of the
acquisition. We expect to close the transaction
in the first quarter of 2019.
FIFTH THIRD BANCORP 2018 ANNUAL REPORT | 7
Compelling strategic priorities
lead us beyond NorthStar
As I mentioned earlier, we have positioned
ourselves for growth beyond our original
NorthStar horizon, which concludes at the
end of 2019.
Our long-term strategic priorities are based
on four key principles:
• Our preference to achieve a higher market
share in large and high-growth markets.
• Our requirement to improve financial
performance without meaningfully changing
our risk profile.
• Working with the right partners and hiring
the right employees who have a strong
cultural fit with Fifth Third.
• Pursuing a balanced growth strategy
between consumer and commercial.
As a result, we are primarily focused on
capitalizing on organic growth opportunities
across all areas of our lines of business.
For instance, in our retail business we are
thoughtfully redeploying resources in our
branch network to existing highergrowth
markets in the Southeast, where we seek to
enhance our market share and continue to
generate solid household and deposit growth.
Our plans are staged over multiple years and
include the rollout of a stateoftheart branch
design. Our nextgeneration branches will be
40 percent smaller than the legacy network,
and they will be highly automated. We believe
our branch network optimization plans enable
us to capitalize on a smartscale presence in
targeted markets while maintaining top market
share in existing markets.
We also plan to continue adding to our sales
force in order to drive improved returns in
a capitalefficient manner. To enhance the
growth prospects for fee income—already
above the peer median—we are particularly
focused where we can add talent in Wealth
& Asset Management, our Capital Markets
business and Treasury Management. Further,
we continue to assess opportunities in high
Standalone
financial
performance
targets to be
achieved by the
end of 2019:
16%+
RETURN ON AVERAGE
TANGIBLE COMMON EQUITY
MID TO UPPEREND OF
1.35-1.45%
RETURN ON AVERAGE ASSETS
<57%
EFFICIENCY RATIO
8
growth markets to improve our middlemarket
lending franchise. Our strategy consists of
combining strong talent with local market
knowledge and our enhanced product
capabilities to grow the portfolio.
As I mentioned, we also remain focused on
delivering innovative customer solutions to
accelerate our digital transformation. We
have invested heavily in technology, advanced
analytics, and select fintech partnerships to
improve the customer experience and deliver
more personalized relationship banking.
Our goal is to make the customer experience
with Fifth Third simple, seamless and, of
course, secure.
In fact, our annual technology investments—
excluding fintech partnerships and
investments—have grown over 10 percent
per year since I became CEO. I expect that
growth to be our baseline for the foreseeable
future as we continue to invest heavily in
digital initiatives, both in our consumer and
commercial business.
Despite our growth rates, we recognize that
we cannot innovate and lead in all areas
of banking, so we continue to select new
investments that focus primarily in areas
that directly improve the customer and
client experience and to achieve operational
excellence through enhanced cybersecurity.
Our ongoing strategic priorities remain aligned
with the interests of our shareholders, customers,
employees and the communities we serve.
Making work life
a Fifth Third better®
While we continue to make investments to
move the Company forward, perhaps the
most important investments concern our most
critical assets: our 18,000 employees. A diverse
and inclusive workplace helps create a culture
in which all can flourish and excel. Such a
positive culture cannot be announced, but it
can be achieved—through creative ideas and
dedicated efforts.
A diverse and inclusive
workplace helps create
a culture in which all
can flourish and excel.
FIFTH THIRD BANCORP 2018 ANNUAL REPORT | 9
Pausing to Remember
On September 6, 2018, tragedy struck
our downtown Cincinnati headquarters
with a shooting that led to the loss of three
innocent lives from our Fifth Third family.
We are deeply appreciative of the heroic
efforts of the Cincinnati Police Department,
the first responders, medics, and many
others, including our own employees,
who helped prevent additional loss of life.
Since the tragedy, it has been remarkably
humbling to witness how we have come
together as a company and as a community.
10
That is why we are making considerable
investments to transform our employees’ work
life. The innovative steps we have taken are
centered on improving employee engagement
and efficiency. For example, in order to foster
increased employee collaboration, we continue
to redesign our workspaces throughout our
footprint. Other ways we’re investing to meet
evolving employee needs include:
• One67 Innovation Center
• OurWorkplace expansion
• Maternity Concierge program
An award-winning work culture
Our outcomes have been recognized by
experts, who evaluate companies by strict
independent standards and against other
companies and industries. It’s no small feat
that we have been ranked among the Top
Workplaces by independent local publications
in cities across our footprint, including Chicago,
Columbus, Toledo, Cleveland, Cincinnati,
Indianapolis, Detroit, Charlotte and Nashville.
It also has been our honor once again to
rank well in the Bloomberg Gender Equality
2018 Index—and to receive a 100 percent
rating for LGBTQrelated policies and
practices in the 2018 Human Rights Campaign
Foundation’s Corporate Equality Index—both
important indicators of diversity performance.
Additionally, our Maternity Concierge
program has earned numerous accolades
for best practice and innovation, including
from Working Mothers Media, BAI Banking
Strategies and other publications.
Committed to building
stronger communities
Progress continues toward our five-year,
$32 billion Community Commitment in
lending, investments and services. We are
ahead of our goal, with $18.6 billion in capital
and community investments already made
in the first two years. We were also proud to
announce a $2 billion increase in the total
commitment from the original $30 billion,
which includes a larger commitment to the
Chicago region reflecting our larger presence.
Nonprofit organizations that support
underserved communities in our footprint
often need additional funding to make
their work possible. Through the Fifth Third
Foundation’s Strengthening Our Communities
awards, these organizations are able to provide
opportunities to local communities.
We were proud to
announce a $2 billion
increase in the total
commitment from the
original $30 billion,
which includes a
larger commitment
to the Chicago region
reflecting our larger
presence.
Also, in early March, we announced that Fifth
Third will achieve 100 percent renewable
energy use through solar power. This made
Fifth Third the first bank and the first publicly
traded company worldwide to commit to
buying 100 percent solar power through a
single project. We did this by signing a virtual
power purchase agreement, guaranteeing
to buy the power and the renewable energy
certificates from the project at a fixed price.
I am proud of this historic contract and our
overall commitment to the environment.
In closing
I want to thank all of our employees for their
hard work and dedication throughout the year,
which was apparent in our strong financial
results. We are wellpositioned to build on our
success in 2019.
Together, we are creating a future that’s a
Fifth Third Stronger for our shareholders, our
customers, our communities and each other.
Thank you,
Greg D. Carmichael
Chairman, President and Chief Executive Officer,
Fifth Third Bancorp
FIFTH THIRD BANCORP 2018 ANNUAL REPORT | 11
Branch Banking
As our customers’ banking
journey evolves, so do our
branches.
From providing banking services to
educational seminars, our financial centers
enable customers to experience our brand
on a more personal level. They remain
critical to the future of the Bank.
At Fifth Third, we offer a complete suite
of retail banking products and services.
Our localized, hightouch service model
is concentrated primarily in the Midwest
and Southeast. While a brickandmortar
presence remains important, we also
provide customers with superior, integrated
experiences across branch and digital
banking channels—and we continue to
expand our digital capabilities to adapt to
evolving customer preferences.
A blueprint for meeting
changing needs
During 2018, we announced an initiative to
optimize our retail network. Through this
initiative, the Bank will reposition its branch
network to invest more in highergrowth
markets, even as we maintain a top market
share in the Midwest. We also are redesigning
our branches and digitizing our branch
operations in an effort to meet everevolving
customer preferences.
The financial centers themselves are evolving,
too. Our redesigned branches will improve the
customer experience by providing a more open
atmosphere with increased digital capabilities.
They will encompass 40 percent to 50 percent
less square footage, but these new branches
will meet our customers’ needs in fresh and
exciting ways.
The Fifth Third Mobile Banking app continues
to be rated in the top 25 percent among our
peer group for both the App Store and Google
Play.
Fifth Third is one of the few U.S. banks to offer
customers the ability to use all 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™, Google Pay or Microsoft
Wallet.
Our efforts to more effectively integrate
digital technology in this rapidly changing
environment will continue to create significant
shareholder value.
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TOTAL REVENUE:
$2.8 billion
AVERAGE LOANS:
$15.0 billion
AVERAGE CORE DEPOSITS:
$58.1 billion
ONLINE BANKING CUSTOMERS:
~2.4 million
FULL-SERVICE BANKING CENTERS:
1,121
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*As of Dec. 31, 2018.
Consumer
Lending
Creating new possibilities and
lasting relationships.
In Consumer Lending, we are here to help
customers with their present needs—and their
future ones, too.
Offering competitive rates and a variety
of products, our Consumer Lending division
helps customers reach their goals, whether
they’re shortterm or longterm. That’s just
the beginning. Our goal is to create lasting
value for our customers well beyond the life
of an initial loan. We do this by striving to
make the loan process as simple and seamless
as possible, whether credit customers come
to the Bank through auto, mortgage or other
consumer lending areas:
Auto
Fifth Third’s auto business is an important
component of lending to consumers. Fifth
Third is one of the largest bank originators
of indirect auto loans in the country, and we
continue to value these relationships with an
extensive dealer network across its more than
40state indirect auto footprint.
Mortgage
The mortgage business is one of the Bank’s
most cyclical. We managed well through the
most recent cycle, in part due to a business
model that can be adjusted quickly in response
to the changing environment. Fifth Third is
primarily an infootprint retail lender, though
we also have a broadfootprint direct channel
and purchase loans through a correspondent
channel.
Student loan refinance
One area of particular focus for our customers
and the Bank is student debt. The Bank has
made considerable efforts to help students
reduce the costs of their debt through
a recently announced partnership with
CommonBond.
Addressing present and
future lending needs
To drive profitable growth, meet our
customer’s changing needs and improve the
customer experience, we have focused on
expanding our personal lending offerings.
We continue to explore ways to improve the
financial wellbeing of our customers, while
providing a holistic digital experience.
We believe lasting relationships start by
working proactively with borrowers to explore
options that make sense with their current
financial situation. To that end, we will always
be committed to being better listeners and
problemsolvers.
TOTAL REVENUE:
$442 million
AVERAGE LOANS:
$20.7 billion
MORTGAGE SERVICING
PORTFOLIO:
$79 billion
DEALER INDIRECT AUTO
LENDING NETWORK:
~6,300
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FIFTH THIRD BANCORP 2018 ANNUAL REPORT | 13
Commercial
Banking
A strategic resource in our
customers’ financial success.
Fifth Third’s Commercial Banking business
is focused on building and deepening client
relationships through a full-service platform
that combines creative solutions with strategic
insights in order to maximize client value.
The comprehensive offerings of the
Commercial Bank span from traditional
lending and treasury management to capital
markets and advisory services, with a full suite
of complementary products and solutions
delivered through the One Bank service
model. Our wide range of services and depth
of experience enable the Commercial Bank
to help our clients meet their objectives by
providing financial solutions and insights.
Planning for greater growth
and market share
Through focused segmentation and a broad
range of solutions, the Commercial Bank
serves clients in a wide range of industries,
combining a national corporate banking and
commercial real estate franchise, with a middle
TOTAL REVENUE:
$2.6 billion
AVERAGE LOANS:
$54.8 billion
AVERAGE CORE DEPOSITS:
$33.3 billion
CLIENTS:
~14,000
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market banking group that primarily aligns
with the Bank’s 10state footprint and targeted
expansion markets. In addition, we have been
successful in using technology and analytical
advancements, as well as leveraging the One
Bank delivery model, to create strategic partner
ships and generate higher returns in 2018.
Expanding our industry expertise
Given the unique challenges our clients face
in their respective industries, the Commercial
Bank has specialized verticals that provide
industryspecific banking expertise and
comprehensive financial solutions. In 2018,
we expanded our expertise in the health care
industry through the acquisition of Coker
Capital Advisors, a premier merger and
acquisition advisory firm that is focused on
middlemarket health care companies.
Offering robust financing
solutions and strategic guidance
The Commercial Bank offers a wide range of
specialized solutions and product capabilities
through its credit products group, capital
markets, and treasury management services:
• The credit products group provides compre
hensive or nontraditional commercial
financing solutions in asset based lending,
equipment finance and traditional lending.
We have significantly strengthened our
credit underwriting by adding experienced
talent and by maintaining centralized credit
and risk functions.
• Capital markets provides critical market
ana lysis, strategic guidance and precise exe
cution of financial risk management products,
as well as, capital solutions through M&A
advisory services, debt capital markets and
equity capital markets.
• Treasury management solutions include
integrated payables and receivables, risk
management and liquidity solutions.
The Commercial Bank is committed to helping
businesses adapt to the new economy, drive
innovation and growth, and assure access
to financial solutions and insights to meet
their goals.
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*As of Dec. 31, 2018.
Wealth & Asset
Management
Delivering expert guidance to
clients and continued growth
to shareholders.
By providing advice, guidance and platforms
that are thoughtful and holistic—and by
focusing on the unique needs of our clients—
Wealth & Asset Management is poised to keep
delivering strong results for shareholders.
A year of increased client
satisfaction and household growth
Wealth & Asset Management draws on the
expertise of local advisors spanning the Bank’s
footprint, and it is supported by robust digital
capabilities. In 2018, total client assets under
management were $37 billion, with net revenue
up 11 percent and pretax income up 23 percent
from 2017. Each key business unit also recorded
a strong year of growth.
The number of Private Bank households grew
by 7 percent. Also, Private Bank more than
doubled its net asset flows from 2017, and it
achieved the highest clientsatisfaction rating
since the program began in 2014.
Building on success with
expanded capabilities
Successful acquisitions and enduring
relationships also helped drive growth in 2018.
The team integrated insurance acquisitions
and completed the purchase of Franklin Street
Partners. Based in North Carolina, Franklin
Street, through its Franklin Street Advisors
and Franklin Street Trust Co. units, provides
complex advisory services, separate account
management, estate planning and settlement,
and other advisory services.
As our clients’ needs and preferences evolve,
investment in secure technology is also
essential for continued growth. With this in
mind, we have extended our expertise into
key digital platforms, including Life360 and
OptiFiSM. Life360 is an integrated tool that gives
clients a holistic view of their assets across all
of their financial relationships. OptiFiSM is an
automated investment platform, launched in
2018, that provides investors with easy access
to a lowcost automated investment service
from their computers or mobile devices.
About Wealth & Asset Management
Comprising of four business units, Wealth & Asset
Management puts more than 100 years of experience
to work for its individual and institutional clients:
Fifth Third Private Bank serves complex financial
needs with teams of professionals dedicated to
helping clients achieve their unique financial goals.
Fifth Third Securities helps individuals and families
at every stage of their lives, offering retirement,
investment and education planning, money manage-
ment, annuities and transactional brokerage services.
Fifth Third Institutional Services provides custody,
investment and recordkeeping services for corpora-
tions, financial institutions, foundations, endowments
and not-for-profit organizations.
Fifth Third Insurance Agency includes two acqui-
sitions made in 2017, 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.
TOTAL REVENUE:
$638 million
AVERAGE LOANS:
$3.4 billion
AVERAGE CORE DEPOSITS:
$9.3 billion
ASSETS UNDER MANAGEMENT:**
$37 billion
ASSETS UNDER CARE:**
$356 billion
*
S
T
H
G
I
L
H
G
H
8
1
0
2
I
*As of Dec. 31, 2018.
**Includes trust and brokerage assets.
FIFTH THIRD BANCORP 2018 ANNUAL REPORT | 15
Company Facts
Fifth Third Bancorp is a
diversified financial services
company headquartered in
Cincinnati, Ohio.
*Assets under management and assets under care include trust and brokerage
assets Member FDIC.
Equal Housing Lender.
As of December 31, 2018, the Company had:
• $146 billion in assets
• 1,121 fullservice banking centers
• Approximately 52,000 feefree ATMs
• 4 business units: Branch Banking,
Commercial Banking, Consumer Lending
and Wealth & Asset Management
• $356 billion in assets under care*
• $37 billion in assets under management*
Fifth Third Bank was established in 1858.
Financial Highlights1 &
Five-year Performance Comparison
TOTAL
PAYOUT RATIO 2
6
9
6
9
.
6
1
.
2
9
1
1
.
8
7
0
7
8
7
.
2
4
2
7
.
AVERAGE
ASSETS
.
0
0
0
4
1
7
1
.
2
4
1
.
3
5
0
4
1
8
1
.
2
4
1
5
8
.
1
3
1
N
B
0
0
5
4
1
$
.
:
E
L
A
C
S
COMMON SHARES
OUTSTANDING
4
2
8
5
8
7
0
5
7
4
9
6
7
4
6
M
M
0
0
9
:
E
L
A
C
S
2014
2015 2016 2017 2018
2014
2015 2016 2017 2018
2014
2015 2016 2017 2018
BOOK VALUE
PER SHARE
7
0
3
2
.
3
4
.
1
2
.
1
3
8
1
2
2
7
1
.
2
6
9
1
.
NPA
RATIO
NET CHARGE-OFF
RATIO
2
8
0
.
0
8
0
.
0
7
0
.
%
0
.
1
:
E
L
A
C
S
3
5
0
.
1
4
0
.
%
0
.
1
:
E
L
A
C
S
4
6
0
.
8
4
0
.
9
3
0
.
2
3
0
.
5
3
0
.
2014
2015
2016 2017 2018
2014
2015 2016 2017 2018
2014
2015 2016 2017 2018
%
0
0
1
:
E
L
A
C
S
.
0
0
4
2
$
:
E
L
A
C
S
1 Effective in the fourth quarter of 2018, Fifth Third retrospectively applied a change in its accounting policy for investments in affordable housing projects that qualify
for low-income housing tax credits (LIHTC) to all prior period amounts presented. As a result, prior period financial results may differ compared to previous disclosures.
2 Total payout ratio calculation: common stock dividends plus shares acquired for treasury divided by net income available to common shareholders.
2018 DETAILED FINANCIALS
16
`
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, 2018
Commission File Number 001-33653
(Exact Name of registrant as specified in its charter)
Ohio
(State or other jurisdiction
of incorporation or organization)
31-0854434
(I.R.S. Employer
Identification Number)
38 Fountain Square Plaza
Cincinnati, Ohio 45263
(Address of principal executive offices)
Registrant’s telephone number, including area code: (800) 972-3030
Securities registered pursuant to Section 12(b) of the Act:
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: ⌧
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
Name of each exchange on which registered:
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 every Interactive Data File required to be submitted 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 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, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:2)
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) 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 647,259,351 shares of the Bancorp’s Common Stock, without par value, outstanding as of January 31, 2019. The Aggregate
Market Value of the Voting Stock held by non-affiliates of the Bancorp was $19,429,251,571 as of June 30, 2018.
17 Fifth Third Bancorp
`
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. Sections of the Bancorp’s Proxy Statement for the 2019 Annual Meeting of
Shareholders are incorporated by reference into Part III of this report.
Only those sections of this 2018 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, 2018. No other information contained in this 2018 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.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
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
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of the Bancorp
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10–K Summary
SIGNATURES
19-25
57
60-68, 193-196
53
52-54
73-74, 126-127
72-73, 128-129
79-93
74-76
43
76-77, 152
26-37
37
37
37
37
38
39
43
44-104
104
104-197
198
198
200
200
200
200
200
200
200-204
204
205
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) deposit insurance premiums; (22) assessments for the orderly liquidation fund; (23) replacement of LIBOR; (24) weakness in the national or local economies;
(25) global political and economic uncertainty or negative actions; (26) changes in interest rates; (27) changes and trends in capital markets; (28) fluctuation of Fifth Third’s stock price; (29) volatility in mortgage
banking revenue; (30) litigation, investigations, and enforcement proceedings by governmental authorities; (31) breaches of contractual covenants, representations and warranties; (32) competition and changes in the
financial services industry; (33) changing retail distribution strategies, customer preferences and behavior; (34) risks relating to the potential merger with MB Financial, Inc. and Fifth Third’s ability to realize
anticipated benefits of the merger; (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 investments or acquired entities; (39) changes in accounting standards or interpretation or
declines in the value of Fifth Third’s goodwill or other intangible assets; (40) inaccuracies or other failures from the use of models; (41) effects of critical accounting policies and judgments or the use of inaccurate
estimates; (42) weather-related events or other natural disasters; and (43) the impact of reputational risk created by these or other developments on such matters as business generation and retention, funding and
liquidity.
18 Fifth Third Bancorp
`
PART I
ITEM 1. BUSINESS
General Information
Fifth Third Bancorp (the “Bancorp” or “Fifth Third”), 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 and is the indirect holding
company of Fifth Third Bank (the “Bank”). As of December 31,
2018, Fifth Third had $146 billion in assets and operates 1,121
full-service Banking Centers and 2,419 Fifth Third branded
ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida,
Tennessee, West Virginia, Georgia and North Carolina. The
Bancorp operates four main businesses: Commercial Banking,
Branch Banking, Consumer Lending and Wealth & Asset
Management. Fifth Third is among the largest money managers in
the Midwest and, as of December 31, 2018, had $356 billion in
assets under care, of which it managed $37 billion for individuals,
corporations
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.”
organizations.
not-for-profit
and
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 February
15, 2019.
Additional information regarding the Bancorp’s businesses is
included in Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Availability of Financial Information
The Bancorp files reports with the SEC. Those reports include the
annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and proxy statements, as well as any
amendments to those reports. The 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.
Competition
investment
The Bancorp, primarily through Fifth Third Bank, 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,
finance,
advisors,
telecommunications, technology and 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 all significant products. The
increasingly competitive environment is a result primarily of
changes in regulation, changes in technology, product delivery
systems and the accelerating pace of consolidation among
financial service providers. These competitive trends are likely to
continue.
specialty
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 regarding
take place and future
acquisitions and
transactions 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.
investments may
Regulation and Supervision
In addition to the generally applicable state and federal laws
governing businesses and employers, the Bancorp and Fifth Third
Bank 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 Fifth Third Bank 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 Fifth Third Bank and 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 or
debtholders 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. Dodd-Frank Wall Street Reform and Consumer
Protection Act (“Dodd-Frank”) and recent legislation modifying
Dodd-Frank, the Economic Growth, Regulatory Relief and
Consumer Protection Act (“EGRRCPA”) of 2018, will continue
to impact the Bancorp and Fifth Third Bank. To the extent the
following material describes statutory or regulatory provisions, it
is qualified in its entirety by reference to the particular statute or
regulation.
Regulators
The Bancorp and/or Fifth Third Bank are subject to regulation
and supervision primarily by the FRB, the Consumer Financial
19 Fifth Third Bancorp
`
Protection Bureau (the “CFPB”) and the Ohio Division of
Financial Institutions (the “Division”) and additionally by certain
other functional regulators and 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. Fifth Third Bank is subject to regulation by the FDIC,
which insures Fifth Third Bank’s deposits as permitted by law.
The federal and state laws and regulations that are applicable
to banks and to BHCs regulate, among other matters, the scope of
the Bancorp’s and/or Fifth Third Bank’s businesses, 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 Fifth Third Bank are required to file
various reports with and are 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 Fifth Third Bank’s 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 Fifth Third Bank 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 generally 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
BHCA. Permitted activities for a FHC
include securities
underwriting and dealing, insurance underwriting and brokerage,
merchant banking and other activities that are declared by the
FRB, in cooperation with the Treasury Department, to be
“financial in nature or incidental thereto” or are declared by the
FRB unilaterally to be “complementary” to financial activities. In
20 Fifth Third Bancorp
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”). Dodd-
Frank 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 Fifth Third Bank, to
fund its activities, including the payment of dividends. The
Bancorp and Fifth Third Bank 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
(see
and Review
Systemically Significant Companies and Capital).
(“CCAR”) process discussed below
Source of Strength
Under long-standing FRB policy and now as codified in Dodd-
Frank, 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.
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
the
“scorecard” methodology
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. Fifth Third Bank became
subject to the FDIC surcharge on July 1, 2016. The surcharge
continued through September 30, 2018 when the reserve ratio
reached 1.36% of insured deposits, exceeding the statutorily
required minimum reserve ratio of 1.35%.
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. Fifth Third Bank is subject to
these restrictions, which 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. Dodd-Frank expanded the scope of these regulations,
including by applying them to the credit exposure arising under
derivative
transactions, repurchase and reverse repurchase
agreements, and securities borrowing and lending transactions.
their CRA activities
Community Reinvestment Act
The CRA generally requires insured depository institutions,
including Fifth Third Bank, to identify the communities they
serve and to make loans and investments and provide services
that meet the credit needs of those communities. The CRA
requires the FRB to evaluate the performance of state member
banks (including Fifth Third Bank) with respect to these CRA
obligations. Depository institutions must maintain comprehensive
records of
these
examinations. The FRB must take into account the institution’s
record of performance in meeting the credit needs of the entire
community served,
low- and moderate-income
neighborhoods. For purposes of CRA examinations, the FRB
the CRA as
rates each
Improve” or
“Outstanding,”
“Substantial Noncompliance.” The FRB conducted a regularly
scheduled examination covering 2014 through 2016 to determine
Fifth Third Bank’s compliance with the CRA. This CRA
examination resulted in a change in rating from “Needs to
Improve” to “Outstanding”.
institution’s compliance with
to
for purposes of
“Satisfactory,”
including
“Needs
Capital Generally
The Bancorp and Fifth Third Bank are subject to the FRB’s
capital adequacy rules. Failure to meet capital requirements could
subject the Bancorp and Fifth Third Bank to a variety of
restrictions and enforcement actions.
Systemically Significant Companies and Capital
In 2013, the U.S. banking regulators approved final regulatory
capital rules (the “Final Capital Rules”) that substantially revised
the risk-based capital requirements applicable to BHCs and their
depository institution subsidiaries, such as the Bancorp and Fifth
Third Bank, 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 (“Basel Committee”)
capital framework for enhancing international capital standards
(referred to as Basel III) and also implemented certain provisions
of Dodd-Frank.
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 prior capital rules. 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.
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 27 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.
The FRB’s rules require BHCs with $50 billion or more in
consolidated assets to establish risk committees and require BHCs
with $100 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).
BHCs with $100 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 $100 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
21 Fifth Third Bancorp
`
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
2019 capital plan must be submitted to the FRB by April 5, 2019.
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 Fifth Third Bank. The impact of Basel IV will
depend on the manner in which it is implemented by the U.S.
banking regulators.
risk weights and
“unconditionally
certain
for
in
losses
In April 2018, the FRB proposed a rule to establish stress
buffer requirements. Under the proposal, the stress capital buffer
(“SCB”) would replace the 2.5% component of the capital
conservation buffer discussed below. The SCB, subject to a
the
minimum of 2.5%, would reflect stressed
supervisory severely adverse scenario of the FRB’s supervisory
stress tests and would also include four quarters of planned
common stock dividends. The proposal would also introduce a
stress leverage buffer requirement, similar to the SCB, which
would apply to the Tier 1 leverage ratio. In addition, the proposal
would require BHCs to reduce their planned capital distributions
if those distributions would not be consistent with the applicable
capital buffer constraints based on the BHCs’ own baseline
scenario projections. The FRB has stated that it intends to propose
revisions to the stress buffer requirements that would be
applicable to Category IV BHCs to align with the proposed two-
year supervisory stress testing cycle for Category IV BHCs.
to BHCs
in section 165
Pursuant to Title I of Dodd-Frank, certain U.S. BHCs are
subject to enhanced prudential standards and early remediation
requirements. On May 24, 2018, the EGRRCPA was signed into
law. Among other regulatory changes, the EGRRCPA amends
various sections of Dodd-Frank, the most impactful of which
include changes to section 165 to raise the asset threshold above
which the FRB is required to apply the enhanced prudential
standards
to $250 billion. The
EGRRCPA’s increased asset threshold took effect immediately
for BHCs with total consolidated assets less than $100 billion.
The increased asset threshold generally will become effective 18
months after the date of enactment for BHCs with total
consolidated assets of $100 billion or more but less than
$250 billion, including the Bancorp. The FRB is authorized,
however, during the 18-month period to exempt, by order, any
BHC with assets between $100 billion and $250 billion from any
enhanced prudential standard requirement. The FRB is also
authorized to apply any enhanced prudential standard requirement
to any BHC with between $100 billion and $250 billion in total
consolidated assets that would otherwise be exempt under the
EGRRCPA, if the FRB determines that such action is appropriate
22 Fifth Third Bancorp
to address risks to financial stability and promote safety and
soundness, taking into consideration certain factors including the
BHC’s capital structure, riskiness, complexity, financial activities
(including financial activities of subsidiaries), size and any other
risk-related factors that the FRB deems appropriate. U.S. globally
systematically important banks (“G-SIBs”) and BHCs with $250
billion or more in total consolidated assets remain fully subject to
Dodd-Frank’s enhanced prudential standard requirements.
to
related
rulemaking
(“Tailoring NPRs”)
Under the EGRRCPA, BHCs with between $100 billion and
$250 billion in total consolidated assets are subject to “periodic”
supervisory stress tests to determine whether they have adequate
capital available to absorb losses as a result of adverse economic
conditions. On October 31, 2018, the FRB released two notices of
proposed
the
EGRRCPA. The proposed rules would establish four risk-based
categories of institutions and tailor the application of capital and
liquidity requirements, as well as stress testing and other
enhanced prudential standards, for each category. These proposals
are subject to modification through the federal rulemaking
process in accordance with the Administrative Procedures Act,
but based upon the Bancorp’s interpretation of the Tailoring
NPRs, the Bancorp expects that it would qualify as a Category IV
BHC subject to the least stringent of the proposed enhanced
prudential requirements. As proposed, Category IV BHCs would
be subject to FRB supervisory stress testing on a two-year cycle.
The Tailoring NPRs indicated that the FRB expects to revise
its guidance relating to capital planning to align with the proposed
categories of standards set forth in the Tailoring NPRs and the
impact of the future proposal on Bancorp and its capital planning
process will depend on the final form of the FRB’s revised
guidance.
The Tailoring NPR’s will likely be finalized in 2019, but
timing is uncertain as to when the FRB, and other federal
regulators, will release proposed amendments to the capital plan
rules and SCB for comment. However, on February 5, 2019, the
FRB announced that less-complex firms with consolidated assets
between $100 billion and $250 billion will be afforded regulatory
relief by moving these firms to an extended stress test cycle. As a
result, the Bancorp will not be subject to a supervisory stress test
during the 2019 cycle and its capital distributions for this year
will be largely based on the results from the 2018 supervisory
stress test. Additionally, the FRB will propose for notice and
comment a final capital distribution method for firms on an
extended stress test cycle in future years sometime in early 2019.
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.
As proposed, the Tailoring NPRs would eliminate LCR and
NSFR requirements for Category IV BHCs. The ultimate benefits
or consequences of the EGRRCPA and the Tailoring NPRs on the
Bancorp, Fifth Third Bank and their respective subsidiaries and
activities will be subject to the final form of the Tailoring NPRs
and additional rulemakings issued by the FRB and other federal
regulators. The Bancorp cannot predict future changes in the
applicable laws, regulations and regulatory agency policies, yet
such changes may have a material impact on the Bancorp’s
business, financial condition or results of operations.
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
inconvenience to any customer. In addition, various U.S.
regulators, including the FRB and the SEC, have increased their
focus on cyber-security 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.
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
financing, and
counter money
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 the Bancorp
believes comply with these laws.
Executive Compensation
Pursuant to Dodd-Frank, 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
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 Dodd-Frank by requiring companies to
disclose the ratio of the compensation of its chief executive
officer to the median compensation of its employees. For a
registrant with a fiscal year ending on December 31, such as
Bancorp, the pay ratio was first required as part of its executive
23 Fifth Third Bancorp
`
compensation disclosure in proxy statements or Form 10-Ks filed
starting in 2018.
Dodd-Frank 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.
Dodd-Frank required 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. The SEC adopted final rules requiring this disclosure on
December 18, 2018. The Bancorp will be required to comply
with this new rule beginning July 1, 2019.
In June 2016, the SEC and the federal banking agencies
issued a proposed rule
incentive-based
compensation provisions of section 956 of Dodd-Frank. The
proposal would establish new requirements for incentive-based
compensation at institutions with assets of at least $1 billion. No
final rule has been issued.
implement
the
to
Debit Card Interchange Fees
Dodd-Frank 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 Dodd-Frank, including establishing standards for
debit card
interchange fees and allowing for an upward
adjustment if the issuer develops and implements policies and
procedures reasonably designed to prevent fraud. The rule
imposes requirements on the Bancorp and Fifth Third Bank and
may negatively impact the Bancorp’s revenues and results of
operations.
FDIC Matters and Resolution Planning
Title II of Dodd-Frank creates an orderly liquidation process that
the FDIC can employ for failing systemically important financial
companies. Additionally, Dodd-Frank codifies many of the
temporary changes that had already been implemented, such as
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. Fifth Third Bank is subject to this rule and
submitted its most recent resolution plan pursuant to this rule on
June 30, 2018.
24 Fifth Third Bancorp
The FRB’s and FDIC’s rule implementing the resolution
planning requirements of Section 165(d) of Dodd-Frank requires
BHCs with assets of $100 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 resolution plans on a staggered
basis. The Bancorp submitted its most recent resolution plan on
December 31, 2017. The FRB has stated that it intends to issue a
proposal that would address the applicability of resolution
planning requirements to BHCs with total consolidated assets
between $100 billion and $250 billion, including the Bancorp.
Proprietary Trading and Investing in Certain Funds
Dodd-Frank 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 entity. The Volcker Rule also prohibits certain types of
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. In July 2018, the
FRB, Office of the Comptroller of the Currency, FDIC,
Commodity Futures Trading Commission (“CFTC”) and SEC
issued a notice of proposed rulemaking intended to tailor the
application of the Volcker Rule based on the size and scope of a
banking entity’s trading activities and to clarify and amend
certain definitions, requirements and exemptions. The ultimate
impact of any amendments to the Volcker Rule will depend on,
among other things, further rulemaking and implementation
guidance from the relevant U.S. federal regulatory agencies and
the development of market practices and standards.
Derivatives
Title VII of Dodd-Frank 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 CFTC as a swap dealer. As with the Volcker Rule, Fifth
Third Bank is required to maintain a satisfactory compliance
program to monitor its activities under these regulations. Certain
regulations implementing Title VII of Dodd-Frank 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 could impose additional operational and compliance
costs and may require the restructuring of certain businesses and
may negatively impact revenues and results of operations.
`
Future Legislative and Regulatory Initiatives
Federal and state legislators as well as regulatory agencies may
introduce or enact new laws and rules, or amend existing laws
and rules, that may affect the regulation of financial institutions
and their holding companies. The impact of any future legislative
or regulatory changes cannot be predicted. However, such
changes could affect Bancorp’s business, financial condition and
results of operations.
25 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
the current economic environment were
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, derivative obligations, or
other credit obligations. The performance of
these credit
portfolios significantly affects the Bancorp’s financial results and
condition. If
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 or changing protections in credit agreements.
As an example, borrowers may “strategically default,” or
discontinue making payments on their real estate-secured loans if
the value of the real estate is less than what they owe, even if they
are still financially able to make the payments.
Fifth Third believes that both the ALLL and the reserve for
unfunded commitments are adequate to cover inherent losses at
December 31, 2018; 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
26 Fifth Third Bancorp
could result in materially higher credit losses if loans are
concentrated in those locations. Fifth Third has significant
exposures to businesses in certain economic sectors such as
manufacturing, real estate, financial services, insurance and
healthcare, 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 72% of average
total assets for the year ending December 31, 2018). 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 due to competition from
other banks or due 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
and business
cause
substantially
counterparties to raise collateral requirements or take other
actions that could adversely affect Fifth Third’s ability to raise
liquidity or 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. There can be no
assurance that significant disruption and volatility in the financial
markets will not occur again in the future.
financial
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. Given the overlap and
complex interactions of these new and prospective liquidity-
related regulations with other regulatory changes, including the
capital and resolution and recovery framework applicable to Fifth
Third, the full impact of these regulations will remain uncertain
until their full implementation. Although the application of
certain of these regulations to banking organizations such as Fifth
Third are expected to be modified, including in connection with
the implementation of the EGRRCPA, there remains uncertainty
as to the timing, scope and nature of any changes to regulatory
requirements. Uncertainty about the timing and scope of 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 and liquidity 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 and liquidity.
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
its borrowing costs and negatively
interest rates that Fifth Third pays on its securities are also
influenced by, among other things, the credit ratings that it, its
subsidiaries and/or its securities receive from recognized rating
agencies. A downgrade to Fifth Third or its subsidiaries’ credit
rating could affect its ability to access the capital markets,
increase
its
profitability. A ratings downgrade to Fifth Third, its subsidiaries
or their securities could also create obligations or liabilities of
Fifth Third under the terms of its outstanding securities that could
increase Fifth Third’s costs or otherwise have a negative effect on
its results of operations or financial condition. Additionally, a
downgrade of the credit rating of any particular security issued by
Fifth Third or its subsidiaries could negatively affect the ability of
the holders of that security to sell the securities and the prices at
which any such securities may be sold.
impact
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
typically move money from bank deposits
to alternative
rate environments, an
investments during
environment that the U.S. has seen recently and is expected to see
over the medium-term. Customers may also move noninterest-
bearing deposits to interest-bearing accounts increasing the cost
of those deposits. 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 Fifth Third 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
holding companies. Also, Fifth Third Bancorp’s right
to
participate in a distribution of assets upon a subsidiary’s
liquidation or reorganization is subject to the prior claims of that
subsidiary’s creditors. Limitations on the Bancorp’s ability to
receive dividends from its subsidiaries could have a material
27 Fifth Third Bancorp
`
adverse effect on its liquidity and ability to pay dividends on
stock or interest and principal on its debt and to engage in share
repurchases. For further information refer to Note 3 of the Notes
to Consolidated Financial Statements.
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. 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.
28 Fifth Third Bancorp
Fifth Third relies on its systems and certain third-party service
providers and certain failures could materially adversely affect
operations.
Fifth Third’s operations, including its financial and accounting
systems, use computer systems and telecommunications networks
operated by both Fifth Third and third-party service providers.
Additionally, Fifth Third collects, processes and stores sensitive
consumer data by utilizing those and other systems and networks.
Fifth Third has security, backup and recovery systems in place, as
well as a business continuity plan to ensure the systems will not
to prevent
be
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.
inoperable. Fifth Third also has security
to provide
compliance with
A security breach in these systems or the loss or corruption
of confidential information such as business results, transaction
records and related information could adversely impact Fifth
timely and accurate financial
Third’s ability
information
regulatory
in
requirements, which could result in sanctions from regulatory
authorities, significant reputational harm and
loss of
confidence in Fifth Third. Additionally, security breaches or the
loss, theft or corruption of confidential customer information such
as social security numbers, credit card numbers, account balances
or other information could result in losses by our customers,
litigation, regulatory sanctions, lost customers and revenue,
increased costs and significant reputational harm.
legal
and
the
Fifth Third’s necessary dependence upon automated systems
to record and process its transaction volume poses the risk that
technical system flaws or employee errors,
tampering or
manipulation of those systems will result in losses and may be
difficult to detect. Fifth Third may also be subject to disruptions
of its operating systems arising from events that are beyond its
control
(for example, computer viruses or electrical or
telecommunications outages).
failures,
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
and potentially diminishing
costs
`
severe weather
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
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.
Fifth Third may not be able
to effectively manage
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
invests significant
Fifth Third may not be able to successfully implement future
information technology system enhancements, which could
adversely affect Fifth Third’s business operations and
profitability.
Fifth Third
information
technology system enhancements in order to provide functionality
and security at an appropriate level. Fifth Third may not be able
to
system
enhancements, or may not be able to do so on a cost-effective
basis. Such sanctions could
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
include fines and result
implement and
successfully
resources
integrate
future
in
to properly utilize
increase the costs associated with the implementation as well as
system
ongoing operations. Failure
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
continues to increase, 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
29 Fifth Third Bancorp
`
in the activities and markets that Fifth Third serves is intense,
which may increase Fifth Third’s expenses and may result in
Fifth Third not being able to hire candidates or retain them. If
Fifth Third is not able to hire qualified candidates or retain its key
personnel, Fifth Third may be unable to execute its business
strategies and may suffer adverse consequences to its business,
operations and financial condition.
Compensation paid by financial institutions such as Fifth
Third is heavily regulated, particularly under Dodd-Frank, 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.
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.
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
revenues and results of operations. Other changes in laws or
regulations could cause Fifth Third’s third-party service providers
30 Fifth Third Bancorp
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
Division have the authority to compel or restrict certain actions
by the Bancorp and Fifth Third Bank. The Bancorp and Fifth
Third Bank are subject to such supervisory authority and, more
generally, must, in certain instances, obtain prior regulatory
approval before engaging in certain activities or corporate
decisions. There can be no assurance that such approvals, if
required, would be forthcoming or that such approvals would be
granted in a timely manner. Failure to receive any such approval,
if required, could limit or impair the Bancorp’s operations, restrict
its growth, ability to compete, innovate or participate in industry
consolidation and/or affect its dividend policy. Such actions and
activities subject to prior approval include, but are not limited to,
increasing dividends or capital distributions by the Bancorp or
Fifth Third Bank, entering
into a merger or acquisition
transaction, acquiring or establishing new branches, and entering
into certain new businesses.
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, liquidity and 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
orders; and
injunctive actions against banking
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, the Bancorp and Fifth Third Bank’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 as well as the ability to make
capital distributions. 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 Fifth Third Bank to meet applicable capital
requirements could subject it to a variety of enforcement remedies
available to the federal regulatory authorities. These include
limitations on the ability to pay dividends and/or repurchase
shares, the issuance by the regulatory authority of a capital
directive to increase capital and the termination of deposit
insurance by the FDIC.
The Bancorp’s ability to pay or increase dividends on its
common stock or to repurchase its capital stock is restricted.
The Bancorp’s ability to pay dividends or repurchase stock is
subject to regulatory requirements and the need to meet
regulatory expectations. As part of CCAR, the Bancorp’s capital
plan is subject to an annual assessment by the FRB, and the FRB
may object to the Bancorp’s capital plan if the Bancorp does not
demonstrate an ability to maintain capital above the minimum
regulatory capital ratios under baseline and stressful conditions
throughout a nine-quarter planning horizon. If the FRB objects to
the Bancorp’s capital plan, it 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 CFTC and SEC regulate the U.S. derivatives markets
pursuant to the authority provided under Title VII of Dodd-Frank.
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.
Deposit insurance premiums levied against Fifth Third Bank
may increase if the number of bank failures increase or the cost
of resolving failed banks increases.
The FDIC maintains a DIF to protect insured depositors in the
event of bank failures. The DIF is funded by fees assessed on
insured depository institutions including Fifth Third Bank. Future
deposit premiums paid by Fifth Third Bank depend on FDIC
rules, which are subject to change, the level of the DIF and the
magnitude and cost of future bank failures. Fifth Third Bank may
be required to pay significantly higher FDIC premiums if market
developments change such that the DIF balance is reduced or the
FDIC changes its rules to require higher premiums.
If an orderly liquidation of a systemically important BHC or
non-bank financial company were triggered, Fifth Third could
face assessments for the Orderly Liquidation Fund.
Dodd-Frank created authority for the orderly liquidation of
systemically important BHCs 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 board of the FDIC and
the FRB upon a two-thirds vote. Liquidation proceedings will be
funded by the Orderly Liquidation Fund established under Dodd-
Frank, which will borrow from the U.S. Treasury and impose
31 Fifth Third Bancorp
`
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
The replacement of LIBOR could adversely affect Fifth Third’s
revenue or expenses and the value of those assets or obligations.
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
Kingdom’s Financial Conduct Authority, which
regulates
LIBOR, publicly announced that it intends to stop persuading or
compelling banks to submit LIBOR rates after 2021. The
announcement indicates that the continuation of LIBOR on the
current basis cannot be guaranteed after 2021. While there is no
consensus on what rate or rates may become accepted alternatives
to LIBOR, a group of large banks, the Alternative Reference Rate
Committee or ARRC, selected and the Federal Reserve Bank of
New York started in May 2018 to publish the Secured Overnight
Finance Rate or SOFR as an alternative to LIBOR. SOFR is a
broad measure of
the cost of borrowing cash overnight
collateralized by Treasury securities, given the depth and
robustness of the U.S. Treasury repurchase market. Furthermore,
the Bank of England has commenced publication of a reformed
Sterling Overnight Index Average or SONIA, comprised of a
broader set of overnight Sterling money market transactions, as of
April 23, 2018. The SONIA has been recommended as the
alternative to Sterling LIBOR by the Working Group on Sterling
Risk-Free Reference Rates. At this time, it is impossible to
predict whether SOFR and SONIA will become accepted
alternatives to LIBOR.
The market transition away from LIBOR to an alternative
reference rate, including SOFR or SONIA, is complex and could
have a range of adverse effects on Fifth Third’s business,
financial condition and results of operations. In particular, any
such transition could:
•
•
•
•
securities or
adversely affect the interest rates paid or received on,
and the revenue and expenses associated with, the
Bancorp’s floating rate obligations, loans, deposits,
derivatives and other financial instruments tied to
LIBOR
financial
rates, or other
arrangements given LIBOR’s role
in determining
market interest rates globally;
adversely affect the value of the Bancorp’s floating rate
obligations,
loans, deposits, derivatives and other
financial instruments tied to LIBOR rates, or other
securities or financial arrangements given LIBOR’s role
in determining market interest rates globally;
prompt inquiries or other actions from regulators in
respect of the Bancorp’s preparation and readiness for
the replacement of LIBOR with an alternative reference
rate;
result in disputes, litigation or other actions with
and
counterparties
interpretation
regarding
the
32 Fifth Third Bancorp
•
enforceability of certain fallback language in LIBOR-
based securities; and
require the transition to or development of appropriate
systems and analytics to effectively transition the
Bancorp’s risk management processes from LIBOR-
based products to those based on the applicable
alternative pricing benchmark, such as SOFR or
reformed SONIA.
The manner and impact of this transition, as well as the
effect of these developments on Fifth Third’s funding costs, loan
and investment and trading securities portfolios, asset-liability
management, and business, is uncertain.
Weakness in the U.S. economy, including within Fifth Third’s
geographic footprint, has adversely affected Fifth Third in the
past and may adversely affect Fifth Third in the future.
If the strength of the U.S. economy in general or the strength of
the local economies in which Fifth Third conducts operations
declines, this could result in, among other things, a decreased
demand for Fifth Third’s products and services, a deterioration in
credit quality or a reduced demand for credit, including a resultant
effect on Fifth Third’s loan portfolio and ALLL and in the receipt
of lower proceeds from the sale of loans and foreclosed
properties. These factors could result in higher delinquencies,
greater charge-offs and increased losses in future periods, which
could materially adversely affect Fifth Third’s financial condition
and results of operations.
Global 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 trade
disputes, 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 FRB 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 reputational issues,
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
33 Fifth Third Bancorp
`
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
assessments and unpredictability of
legal
proceedings, amounts accrued may not represent the ultimate loss
to Fifth Third from the legal proceedings in question. Thus, Fifth
Third’s ultimate losses may be higher, and possibly significantly
so, than the amounts accrued for legal loss contingencies, which
could adversely affect Fifth Third’s results of operations.
the outcome of
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.
For further information on specific legal and regulatory
proceedings refer to Note 17 of the Notes to Consolidated
Financial Statements.
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.
34 Fifth Third Bancorp
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
specialty
advisors
and
changing
This increasingly competitive environment is primarily a
result of changes in customer preferences, regulation, changes in
technology and product delivery systems, as well as the
accelerating pace of consolidation among financial service
consumer
providers. Rapidly
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.
technology
and
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
allow Fifth Third 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.
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 1,121 full-service
banking centers and 28 parcels of land held for the development
of future banking centers of which 15 properties 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
including
banking, and
in-branch self-service
technologies
`
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.
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, acquiring or
integrating the operations of another business or investment or
relationship opportunity. Fifth Third may not be able to fully
achieve its strategic objectives and planned operating efficiencies
relevant to 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.
lose customers or
Acquisition or
otherwise perform poorly or unprofitably, or in the case of an
acquired business or strategic relationship, cause Fifth Third to
lose customers or perform poorly or unprofitably. Future
acquisition and investment activities and efforts to monitor newly
acquired businesses 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.
targets may
investment
After completing an acquisition, Fifth Third may find that
certain material information was not adequately disclosed during
the due diligence process or that 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, dislocations in capital markets 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. If Fifth Third
were to sell one or more of its businesses or investments, it 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.
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. For example, in
June 2016, the FASB issued a new current expected credit loss
rule, which will require banks to record, at the time of origination,
credit losses expected throughout the life of the asset portfolio on
loans and held-to-maturity securities, as opposed to the current
practice of recording losses when it is probable that a loss event
has occurred. For additional information, refer to Note 1 of the
Notes to 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.
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.
35 Fifth Third Bancorp
`
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 and it has offices
in many other areas of the country. Some of these regions have
experienced weather events including hurricanes, tornadoes, fires
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 or
misinformation. Though Fifth Third monitors social media
channels,
the potential remains for rapid and widespread
dissemination of inaccurate, misleading or false information that
could damage Fifth Third’s reputation. Negative public opinion
can adversely affect Fifth Third’s ability to attract and keep
customers and can increase the risk that it will be a target of
litigation and regulatory action.
RISKS RELATED TO MERGER WITH MB FINANCIAL,
INC. (“MB FINANCIAL”)
The acquisition of MB Financial will dilute current
shareholders’ ownership of Fifth Third and may cause Fifth
Third to become more susceptible to adverse economic events.
Fifth Third will issue a substantial number of additional shares of
stock in its merger with MB Financial, which will dilute current
shareholders’ ownership interests and increase Fifth Third’s
dividend payments. Fifth Third will also use substantial cash or
other liquid assets or incur debt to fund the merger. This liquidity
need combined with 2019 maturities and liquidity needed to
satisfy rating agency requirements will elevate capital markets
execution risk. As a result, Fifth Third could become more
36 Fifth Third Bancorp
susceptible to economic downturns, market conditions and
competitive pressures.
Fifth Third and MB Financial will incur transaction and
integration costs in connection with the merger.
Each of Fifth Third and MB Financial has incurred and expects
that it will incur additional significant, non-recurring costs in
connection with consummating the merger. In addition, Fifth
Third will incur additional integration costs following the
completion of the merger as Fifth Third integrates the businesses
facilities and systems
including
of
consolidation costs and employment-related costs. There can be
no assurances that the expected benefits and efficiencies related to
the combined businesses will be realized to offset these
transaction and integration costs over time.
two companies,
the
Fifth Third may fail to realize the anticipated benefits of the
merger and may face increased risks as a result of it.
Inherent uncertainties exist when assessing, acquiring, or
integrating the operations of another business or investment or
relationship opportunity. Fifth Third may not be able to fully
achieve its strategic objectives and planned operating efficiencies
in its acquisition of MB Financial, Inc. Additionally, Fifth Third
may face additional risks as a result of the acquisition.
The success of the merger, including anticipated benefits and
cost savings, will depend on, among other things, Fifth Third’s
ability to combine the businesses of Fifth Third and MB Financial
in a manner that permits growth opportunities, including, among
other things, enhanced revenues and revenue synergies, an
expanded market reach and operating efficiencies, and does not
materially disrupt the existing customer relationships of Fifth
Third or MB Financial or result in decreased revenues due to any
loss of customers. If Fifth Third is not able to successfully
achieve these objectives, the anticipated benefits of the merger
may not be realized fully or at all or may take longer to realize
than expected. Failure to achieve these anticipated benefits could
result in increased costs, decreases in the amount of expected
revenues and diversion of management’s time and energy and
could have an adverse effect on the combined company’s
business, financial condition, operating results and prospects.
Employees that Fifth Third wishes to retain may elect to
terminate their employment as a result of the merger, which could
delay or disrupt the integration process. It is possible that the
integration process could result in the disruption of Fifth Third’s
or MB Financial’s ongoing businesses or cause inconsistencies in
standards, controls, procedures and policies that adversely affect
the ability of Fifth Third or MB Financial
to maintain
relationships with customers and employees or to achieve the
anticipated benefits of the merger.
After completing the acquisition, Fifth Third may find that
certain material information was not adequately disclosed during
the due diligence process or that 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 and may face increased risks pertaining
to the acquired entity or assets. For example, Fifth Third could
experience greater credit risk and higher charge-offs than
originally anticipated related to the acquired loan portfolio.
Additionally,
increase Fifth Third’s
compliance and legal risks including increased litigation or
regulatory actions such as fines or restrictions related to the
business practices or operations of the acquired business.
the acquisition may
`
Regulatory approvals may not be received, may take longer than
expected or may impose conditions that are not presently
anticipated or cannot be met.
Before the transactions contemplated in the merger agreement can
be completed, various approvals must be obtained from the bank
regulatory and other governmental authorities. In deciding
whether to grant these approvals, the relevant governmental
entities will consider a variety of factors, including the regulatory
standing of each of the parties and the effect of the merger on
competition. An adverse development in either party’s regulatory
standing or other factors could result in an inability to obtain one
or more of the required regulatory approvals or delay receipt of
required approvals.
The FRB has stated that if supervisory issues arise during
processing of an application for approval of a merger transaction,
a banking organization will be expected to withdraw its
application pending resolution of such supervisory concerns.
Accordingly, if there is an adverse development in either party’s
regulatory standing, Fifth Third may be required to withdraw its
application for approval of the proposed merger and, if possible,
resubmit it after the applicable supervisory concerns have been
resolved.
The terms of the approvals that are granted may impose
conditions, limitations, obligations or costs, or place restrictions
on the conduct of the combined company’s business or require
changes to the terms of the transactions contemplated by the
merger agreement. There can be no assurance that regulators will
not impose any such conditions, limitations, obligations or
restrictions and that such conditions, limitations, obligations or
restrictions will not have the effect of delaying the completion of
any of the transactions contemplated by the merger agreement,
imposing additional material costs on or materially limiting the
revenues of the combined company following the merger or
otherwise reduce the anticipated benefits of the merger if the
merger were consummated successfully within the expected
timeframe. Nor can there be any assurance that any such
conditions, terms, obligations or restrictions will not result in the
delay or abandonment of
the
completion of the merger is conditioned on the absence of certain
orders, injunctions or decrees by any court or regulatory agency
of competent jurisdiction that would prohibit or make illegal the
completion of any of the transactions contemplated by the merger
agreement.
the merger. Additionally,
Fifth Third and MB Financial believe that the proposed
merger should not raise significant regulatory concerns and that
Fifth Third will be able to obtain all requisite regulatory
approvals in a timely manner. In addition, despite the parties’
commitments to use their reasonable best efforts to comply with
conditions imposed by regulatory entities, under the terms of the
merger agreement, Fifth Third and MB Financial will not be
required to take actions that would reasonably be expected to
have a material adverse effect on Fifth Third and its subsidiaries,
taken as a whole, after giving effect to the merger (measured on a
scale relative to MB Financial and its subsidiaries, taken as a
whole).
The merger agreement may be terminated in accordance with its
terms and the merger may not be completed.
The merger agreement is subject to a number of conditions which
must be fulfilled in order to complete the transaction. Those
conditions include: receipt of requisite regulatory approvals,
absence of orders prohibiting completion of any of the proposed
transactions, approval of the Fifth Third common shares to be
issued in connection with the merger for listing on the NASDAQ,
the accuracy of the representations and warranties by both parties
(subject to the materiality standards set forth in the merger
agreement), the performance by both parties of their covenants
and agreements and the receipt by both parties of legal opinions
from their respective tax counsels. These conditions to the closing
of the merger may not be fulfilled in a timely manner or at all,
and, accordingly, the merger may not be completed. In addition,
the parties can mutually decide to terminate the merger agreement
at any time, or Fifth Third or MB Financial may elect to terminate
the merger agreement in certain other circumstances, as set forth
in the agreement.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There are no SEC staff comments regarding Fifth Third’s periodic
or current reports under the Exchange Act that are pending
resolution.
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. Fifth Third Bank owns 100% of
these buildings.
At December 31, 2018, the Bancorp, through its banking and
non-banking subsidiaries, operated 1,121 banking centers, of
which 795 were owned, 224 were leased and 102 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.
ITEM 3. LEGAL PROCEEDINGS
Refer to Note 17 of the Notes to Consolidated Financial
Statements in Part II, Item 8 of this report for information
regarding legal proceedings, which is incorporated herein by
reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
37 Fifth Third Bancorp
`
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 March 1, 2019 are listed below
along with their business experience during the past five years:
Greg D. Carmichael, 57. 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, 57. 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, 64. 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, 53. 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.
James C. Leonard, 49. 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, 54. Executive Vice President of the Bancorp
since December 2014, and Head of Regional Banking, Wealth
and Asset Management, and Business Banking of the Bancorp
since August 2018. 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.
Jude A. Schramm, 46. Executive Vice President and Chief
Information Officer since March 2018. Previously, Mr. Schramm
served as Chief Information Officer for GE Aviation and held
various positions at GE beginning in 2001.
Robert P. Shaffer, 49. Executive Vice President and Chief
Human Resource Officer since February 2017. Previously, Mr.
Shaffer was Chief Auditor from August 2007 to February 2017.
He was named Executive Vice President in 2010 and Senior Vice
President in 2004. Prior to that, he held various positions within
Fifth Third’s audit division.
Timothy N. Spence, 40. Executive Vice President and Head of
Consumer Bank, Payments, and Strategy since August 2018.
Previously, Mr. Spence was Head of Payments, Strategy and
Digital Solutions since 2017, and Chief Strategy Officer of the
Bancorp since September 2015. Previously, Mr. Spence was a
senior partner in the Financial Services practice at Oliver Wyman
since 2006, a global strategy and risk management consulting
firm.
Teresa J. Tanner, 50. 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, 54. 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.
Susan B. Zaunbrecher, 59. Executive Vice President, Chief
Legal Officer, and Corporate Secretary since May 2018.
Previously, Ms. Zaunbrecher was a partner at the law firm
Dinsmore and Shohl LLP.
38 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.
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, which is incorporated herein by reference. Additionally, as of December 31, 2018, the Bancorp had 38,562
shareholders of record.
Issuer Purchases of Equity Securities
Period
October 2018
November 2018
December 2018
Total
(a)
Total Number
of Shares
Purchased(a)
5,904,503
9,141,525
28,849
15,074,877
$
$
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)
26.01
27.35
23.41
26.82
5,808,786
9,107,546
-
14,916,332
69,671,828
60,564,282
60,564,282
60,564,282
Includes 158,545 shares repurchased during the fourth quarter of 2018 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.
(b) During the first quarter of 2018, 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 13 million shares remained available for repurchase by
the Bancorp.
See further discussion on share repurchase transactions and stock-based compensation in Note 22 and Note 23 of the Notes to Consolidated
Financial Statements, which is incorporated herein by reference.
39 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 2013 through 2018, and 2008
through 2018, respectively, compared to the S&P 500 Stock and the S&P Banks indices.
FIFTH THIRD BANCORP VS. MARKET INDICES
40 Fifth Third Bancorp
`
2018 ANNUAL REPORT
FINANCIAL CONTENTS
Glossary of Abbreviations and Acronyms
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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
Report 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
Goodwill
Intangible Assets
Variable Interest Entities
Sales of Receivables and Servicing Rights
Derivative Financial Instruments
Other Assets
Short-Term Borrowings
Long-Term Debt
Commitments, Contingent Liabilities and Guarantees
Management’s Assertion as to the Effectiveness of
Internal Control over Financial Reporting
Report of Independent Registered Public Accounting
Firm
Consolidated Ten Year Comparison
Directors and Officers
Corporate Information
42
43
44
47
49
49
52
60
69
72
78
79
93
97
99
99
100
103
104
105
106
107
108
109
110
160
162
165
167
171
173
174
178
179
180
190
191
193
197
197
Income Taxes
Stock-Based Compensation
111 Legal and Regulatory Proceedings
124 Related Party Transactions
124
126 Retirement and Benefit Plans
128 Accumulated Other Comprehensive Income
130 Common, Preferred and Treasury Stock
138
139 Other Noninterest Income and Other Noninterest Expense
140 Earnings Per Share
141 Fair Value Measurements
144 Regulatory Capital Requirements and Capital Ratios
146 Parent Company Financial Statements
151 Business Segments
152 Pending Acquisition
153
Subsequent Events
156
198
199
206
207
41 Fifth Third Bancorp
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 (Loss)
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
CRA: Community Reinvestment Act
C&I: Commercial and Industrial
DCF: Discounted Cash Flow
DFA: Dodd-Frank Wall Street Reform & Consumer Protection Act
DTCC: Depository Trust & Clearing Corporation
DTI: Debt-to-Income
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
FOMC: Federal Open Market Committee
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
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
LIHTC: Low-Income Housing Tax Credit
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
NAV: Net Asset Value
NII: Net Interest Income
NM: Not Meaningful
NPR: Notice of Proposed Rulemaking
NSFR: Net Stable Funding Ratio
OAS: Option-Adjusted Spread
OCC: Office of the Comptroller of the Currency
OCI: Other Comprehensive Income (Loss)
OREO: Other Real Estate Owned
OTTI: Other-Than-Temporary Impairment
PCA: Prompt Corrective Action
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
SCB: Stress Capital Buffer
SEC: United States Securities and Exchange Commission
SLB: Stress Leverage Buffer
TBA: To Be Announced
TCJA: Tax Cuts and Jobs Act
TDR: Troubled Debt Restructuring
TILA: Truth in Lending Act
TRA: Tax Receivable Agreement
TruPS: Trust Preferred Securities
U.S.: United States of America
U.S. GAAP: United States Generally Accepted Accounting
Principles
VA: United States Department of Veterans Affairs
VIE: Variable Interest Entity
VRDN: Variable Rate Demand Note
42 Fifth Third Bancorp
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
$
$
2018
2016(j)
2015(j)
2017(j)
2014(j)
1.65
1.63
0.51
17.22
20.38
2.86
2.81
0.60
21.43
30.34
3.11
3.06
0.74
23.07
23.53
1.92
1.91
0.53
19.62
26.97
2.00
1.97
0.52
18.31
20.10
3,798
3,824
3,224
7,048
261
3,782
2,180
2,105
4,140
4,156
2,790
6,946
237
3,928
2,193
2,118
3,579
3,600
2,473
6,073
315
3,592
1,451
1,384
3,615
3,640
2,696
6,336
343
3,760
1,547
1,472
3,533
3,554
3,003
6,557
396
3,647
1,685
1,610
1.54%
14.5
17.5
23.8
11.23
8.71
3.22
2.87
56.5
As of and 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
Average total Bancorp shareholders' equity as a percent of average assets
Tangible common equity as a percent of tangible assets(b)(i)
Net interest margin(a)(b)
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
Securities and other short-term investments
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, 2018, 2017, 2016, 2015 and 2014 was $16, $26, $25, $21 and $21, 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 values are added together resulting in the Bancorp’s 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.
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.
93,339
30,245
139,999
95,244
99,295
20,210
15,742
94,320
31,965
142,173
95,371
99,381
21,813
16,453
91,127
24,866
131,847
89,715
93,477
19,154
15,196
92,731
33,562
140,527
96,052
99,823
20,360
16,424
1.20
11.2
13.5
26.0
11.24
8.50
2.88
2.69
55.6
1.09
9.7
11.6
27.6
11.57
8.77
2.88
2.66
59.3
1.10
9.9
12.0
30.9
11.53
8.36
3.10
2.94
59.2
93,876
35,029
142,183
97,914
102,020
20,573
15,970
1.55
13.9
16.6
21.0
11.69
8.83
3.03
2.76
53.7
10.24%
11.32
14.48
9.72
128
330
0.35%
1.16
1.30
0.41
9.82
10.93
14.13
9.54
-
10.39
11.50
15.02
9.90
128
-
10.83
14.33
9.66
-
10.61
11.74
15.16
10.01
129
446
0.48
1.37
1.52
0.70
298
0.32
1.30
1.48
0.53
362
0.39
1.36
1.54
0.80
575
0.64
1.47
1.62
0.82
(h) These capital ratios were calculated under the Supervisory Agencies general risk-based capital rules (Basel I) which were in effect prior to January 1, 2015.
(i) Excludes unrealized gains and losses.
(j) Effective in the fourth quarter of 2018, Fifth Third retrospectively applied a change in its accounting policy for investments in affordable housing projects that qualify for LIHTC in accordance with
Basel I(h)
Basel III (g)(k)
$
$
ASU 2014-01. Refer to Note 1 of the Notes to Consolidated Financial Statements for additional information.
(k) The regulatory capital data and ratios have not been restated as a result of the Bancorp’s change in accounting for investments in affordable housing projects that qualify for LIHTC. Refer to Note 1
of the Notes to Consolidated Financial Statements for additional information.
43 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (MD&A)
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.
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
trends, events, commitments, uncertainties,
understanding of
liquidity, capital resources and critical accounting policies and
estimates, you should carefully read this entire document. Each of
these items could have an impact on the Bancorp’s financial
condition, results of operations and cash flows. In addition, refer to
the Glossary of Abbreviations and Acronyms in this report for a list
of terms included as a tool for the reader of this annual report on
Form 10-K. The abbreviations and acronyms identified therein are
used throughout this MD&A, as well as the Consolidated Financial
Statements and Notes to Consolidated Financial Statements.
Net interest income, net interest margin, 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,
2018, net interest income on an FTE basis and noninterest income
provided 60% and 40% 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 section of MD&A, risk identification, assessment,
management, monitoring and independent governance reporting of
risk are important to the management of risk and to the financial
performance and capital strength of the Bancorp.
Net interest income is the difference between interest income
earned on assets such as loans, leases and securities, and interest
expense incurred on liabilities such as deposits, other short-term
borrowings and long-term debt. Net interest income is affected by
the general level of interest rates, the relative level of short-term and
long-term interest rates, changes in interest rates and changes in the
amount and composition of interest-earning assets and interest-
bearing liabilities. Generally, the rates of interest the Bancorp earns
on its assets and pays on its liabilities are established for a period of
time. The change in market interest rates over time exposes the
Bancorp to interest rate risk through potential adverse changes to
net interest income and financial position. The Bancorp manages
this risk by continually analyzing and adjusting the composition of
its assets and liabilities based on their payment streams and interest
rates, the timing of their maturities and their sensitivity to changes
in market interest rates. Additionally, in the ordinary course of
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
44 Fifth Third Bancorp
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
revenue, net securities gains or losses and other noninterest income.
Noninterest expense includes personnel costs, net occupancy
expense, technology and communication costs, card and processing
expense, equipment expense and other noninterest expense.
Worldpay, Inc. and Worldpay Holding, LLC Transactions
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, the Bancorp recognized a gain of $414 million in other
noninterest income during the first quarter of 2018 associated with
the dilution in its ownership interest in Worldpay Holding, LLC
from approximately 8.6% to approximately 4.9%.
On June 27, 2018, the Bancorp completed the sale of 5 million
shares of Class A common stock of Worldpay, Inc. The Bancorp
had previously received these Class A shares in exchange for Class B
Units of Worldpay Holding, LLC. The Bancorp recognized a gain of
$205 million related to the sale. As a result of the sale, the Bancorp
beneficially owns approximately 3.3% of Worldpay’s equity through
its ownership of approximately 10.3 million Class B Units. At
December 31, 2018, the Bancorp’s remaining interest in Worldpay
Holding, LLC of $420 million continues to be accounted for as an
equity method investment given the nature of Worldpay Holding,
LLC’s structure as a limited liability company and contractual
arrangements between Worldpay Holding, LLC and the Bancorp.
GS Holdings Transaction
In May 2018, GreenSky, Inc. launched an IPO and issued 38 million
shares of Class A common stock for a valuation of $23 per share. In
connection with this IPO, the Bancorp’s investment in GreenSky,
LLC, which was comprised of 252,550 membership units, was
converted to 2,525,498 units of the newly formed GreenSky
Holdings, LLC (“GS Holdings”), representing a 1.4% interest in GS
Holdings. The Bancorp’s units in GS Holdings are exchangeable on
a one-to-one basis for Class A common stock or cash.
At the time of the IPO, the Bancorp recognized a $16 million
gain on its investment in GreenSky, LLC, which was included in
other noninterest income in the Consolidated Statements of Income
for the year ended December 31, 2018. At December 31, 2018, the
investment in GS Holdings was $24 million, which was included in
equity securities in the Consolidated Balance Sheets.
Accelerated Share Repurchase Transactions
During the years ended December 31, 2018 and 2017, the Bancorp
entered into or settled a number of accelerated share repurchase
transactions. As part of these transactions, the Bancorp entered into
forward contracts in which the final number of shares delivered at
settlement was based generally on a discount to the average daily
volume weighted-average price of the Bancorp’s common stock
the repurchase agreements. For more
during
term of
the
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
information on the accelerated share repurchase program, refer to
Note 22 of the Notes to Consolidated Financial Statements. For a
summary of the Bancorp’s accelerated share repurchase transactions
that were entered into or settled during the years ended December
31, 2018 and 2017, refer to Table 1.
TABLE 1: SUMMARY OF ACCELERATED SHARE REPURCHASE TRANSACTIONS
Repurchase Date
December 20, 2016
May 1, 2017
August 17, 2017
December 19, 2017
February 12, 2018
May 25, 2018
Amount ($ in millions)
$
155
342
990
273
318
235
Shares Repurchased on
Repurchase Date
4,843,750
11,641,971
31,540,480
7,727,273
8,691,318
6,402,244
Shares Received from
Forward Contract Settlement
1,044,362
2,248,250
4,291,170
824,367
1,015,731
1,172,122
Total Shares
Repurchased
Settlement Date
February 6, 2017
5,888,112
13,890,221
July 31, 2017
35,831,650 December 18, 2017
March 19, 2018
8,551,640
March 26, 2018
9,707,049
June 15, 2018
7,574,366
Open Market Share Repurchase Transactions
Between July 20, 2018 and August 2, 2018, the Bancorp repurchased
16,945,020 shares, or approximately $500 million, of its outstanding
common stock through open market repurchase transactions, which
settled between July 24, 2018 and August 6, 2018.
Between October 24, 2018 and November 9, 2018, the
Bancorp repurchased 14,916,332 shares, or approximately $400
million, of its outstanding common stock through open market
repurchase transactions, which settled between October 26, 2018
and November 14, 2018. For more information on the open market
share repurchase program, refer to Note 22 of the Notes to
Consolidated Financial Statements.
Senior Notes Offerings
On March 14, 2018, the Bancorp issued and sold $650 million of
senior notes to third-party investors. The senior notes bear a fixed-
rate of interest of 3.95% 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 14, 2028.
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 5, 2018, the Bancorp issued and sold $250 million of
senior notes to third-party investors. The senior notes bear a
floating-rate of three-month LIBOR plus 47 bps. The notes are
unsecured, senior obligations of the Bancorp. Payment of the full
principal amounts of the notes is due upon maturity on June 4,
2021. These floating-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 26, 2018 the Bank issued and sold, under its bank
notes program, $1.55 billion in aggregate principal amount of
unsecured senior bank notes. The bank notes consisted of $500
million of 3.35% senior fixed-rate notes, with a maturity of three
years, due on July 26, 2021; $300 million of senior floating-rate
notes at three-month LIBOR plus 44 bps, with a maturity of three
years, due on July 26, 2021; and $750 million of 3.95% senior fixed-
rate notes, with a maturity of seven years, due July 28, 2025. The
Bank entered into interest rate swaps to convert the fixed-rate notes
due in 2021 and 2025 to a floating-rate, which resulted in an
effective interest rate of one-month LIBOR plus 53 bps and 104
bps, respectively. 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 15 of the Notes to Consolidated Financial
Statements.
For further information on subsequent events related to long-
term debt, refer to Note 31 of the Notes to Consolidated Financial
Statements.
2018 Branch Optimization Plan
Customer interactions and service and sales activity in Branch
Banking continue to evolve with changing demographics and
technology applications. Customers are increasingly utilizing digital
tools to interact with their financial institutions in conducting their
transactions while still utilizing physical branches for consultations
and new product and service initiation. During the past three years,
these developments and other business strategies led to a net
decrease of 133 in the number of retail branches, or 11% of the
Bancorp’s total branch count, through consolidations and sales.
to evaluate
The Bancorp continues
its retail network
distribution in light of changes in customer behavior while
developing new analytical tools that provide enhanced capabilities to
optimize the profitability and growth potential of branches. In
slower growth mature markets these developments enable the
Bancorp to achieve efficiencies through well-executed branch
consolidations without materially impacting deposit flows and/or
revenue growth while maintaining the service quality standards.
While continuing to evaluate such actions, the Bancorp is also
focused on achieving higher retail household and deposit growth in
other parts of its footprint – mainly in markets that exhibit faster
economic growth and where
the Bancorp has significant
opportunities to capture higher market share. To that extent, based
on the strategic business evaluation that was performed during the
second quarter of 2018, over the next 2-3 years, as part of the 2018
Branch Optimization Plan, the Bancorp plans to close between 100-
125 branches in more mature markets and open between 100-125
new branches in higher growth markets where the Bancorp already
has an existing retail branch presence. With the existing local
presence and familiarity with the customer demographics, and with
newly developed analytical tools, the Bancorp expects to achieve
higher growth rates as a result of these actions.
As of December 31, 2018, the Bancorp had closed 31 branches
under the 2018 Branch Optimization Plan. The Bancorp expects to
identify the remaining branches to be closed under the 2018 Branch
Optimization Plan prior to December 31, 2019. As part of the
adoption of the 2018 Branch Optimization Plan, the Bancorp has
also elected to sell 21 parcels of land which had previously been
held for future branch expansion. For further information about the
2018 Branch Optimization plan, refer to Note 7 of the Notes to
Consolidated Financial Statements.
Change in Accounting Policy
Effective in the fourth quarter of 2018, the Bancorp changed its
accounting policy for qualifying LIHTC investments from the
equity method to the proportional amortization method as it was
45 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
an
management’s determination to be the preferable method. The
proportional
improved
amortization method provides
presentation for the reporting of these investments by presenting
the investment performance net of taxes as a component of income
tax expense, which more fairly represents the economics and
provides users with a better understanding of the returns from such
investments than the prior equity method. Additionally, the
proportional amortization method has been elected as a preferred
accounting method for LIHTC investments by many of the
Bancorp’s peers. Changing the accounting policy for LIHTC
investments from the equity method of accounting to the
proportional amortization method will make
the Bancorp’s
presentation of the LIHTC investments comparable to that of its
peers. The adoption of the proportional amortization method was
applied retrospectively and resulted
in a cumulative effect
adjustment to reduce retained earnings by $134 million as of January
1, 2016. Unless otherwise noted, all prior period information has
been restated to conform to the accounting policy change. Refer to
Note 1 of the Notes to Consolidated Financial Statements for
further information including the impact of adoption on prior
period financial statements.
$
TABLE 2: CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ in millions, except per share data)
2017
Interest income (FTE)(a)
4,515
Interest expense
691
Net Interest Income (FTE)(a)
3,824
Provision for loan and lease losses
261
Net Interest Income After Provision for Loan and Lease Losses (FTE)(a)
3,563
Noninterest income
3,224
Noninterest expense
3,782
Income Before Income Taxes (FTE)(a)
3,005
Fully taxable equivalent adjustment
26
Applicable income tax expense
799
Net Income
2,180
Less: Net income attributable to noncontrolling interests
-
Net Income Attributable to Bancorp
2,180
Dividends on preferred stock
75
Net Income Available to Common Shareholders
2,105
Earnings per share - basic
2.86
Earnings per share - diluted
2.81
Cash dividends declared per common share
0.60
(a) These are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.
2018
5,199
1,043
4,156
237
3,919
2,790
3,928
2,781
16
572
2,193
-
2,193
75
2,118
3.11
3.06
0.74
$
$
$
$
2016
4,218
578
3,640
343
3,297
2,696
3,760
2,233
25
665
1,543
(4)
1,547
75
1,472
1.92
1.91
0.53
2015
4,049
495
3,554
396
3,158
3,003
3,647
2,514
21
814
1,679
(6)
1,685
75
1,610
2.00
1.97
0.52
2014
4,051
451
3,600
315
3,285
2,473
3,592
2,166
21
692
1,453
2
1,451
67
1,384
1.65
1.63
0.51
Earnings Summary
The Bancorp’s net income available to common shareholders for
the year ended December 31, 2018 was $2.1 billion, or $3.06 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, 2017 was $2.1 billion,
or $2.81 per diluted share, which was net of $75 million in preferred
stock dividends.
Net interest income on an FTE basis (non-GAAP) was $4.2
billion and $3.8 billion for the years ended December 31, 2018 and
2017, respectively. Net interest income was positively impacted by
increases in yields on average loans and leases and average taxable
securities and an increase in average taxable securities for the year
ended December 31, 2018 compared to the year ended December
31, 2017. Additionally, net interest income was positively impacted
by the decisions of the FOMC to raise the target range of the
federal funds rate 25 bps in December 2017, March 2018, June
2018, September 2018 and December 2018. These positive impacts
were partially offset by increases in the rates paid on average
interest-bearing core deposits and average long-term debt during the
year ended December 31, 2018 compared to the year ended
December 31, 2017. Net interest margin on an FTE basis (non-
GAAP) was 3.22% and 3.03% for the years ended December 31,
2018 and 2017, respectively.
Noninterest income decreased $434 million for the year ended
December 31, 2018 compared to the year ended December 31, 2017
primarily due to a decrease in other noninterest income, partially
offset by increases in corporate banking revenue, wealth and asset
management revenue and card and processing revenue. Other
noninterest income decreased $470 million from the year ended
December 31, 2017 primarily due to the gain on sale of Worldpay,
46 Fifth Third Bancorp
Inc. shares recognized in the prior year, a reduction in equity
method income from the Bancorp’s interest in Worldpay Holding,
LLC, the impact of the net losses on disposition and impairment of
bank premises and equipment and income from the TRA associated
with Worldpay, Inc. recognized in the prior year. These reductions
were partially offset by the gain related to Vantiv, Inc.’s acquisition
of Worldpay Group plc., an increase in private equity investment
income, as well as a decrease in the loss on the swap associated with
the sale of Visa, Inc. Class B Shares. Corporate banking revenue
increased $85 million for the year ended December 31, 2018
compared to the year ended December 31, 2017. The increase from
the prior year was primarily driven by increases in lease remarketing
fees, institutional sales revenue, syndication fees and contract
revenue from commercial customer derivatives. Wealth and asset
management revenue increased $25 million from the year ended
December 31, 2017 primarily due to increases in private client
service fees and brokerage fees. Card and processing revenue
increased $16 million from the year ended December 31 2017
primarily due to increases in the number of actively used cards and
customer spend volume.
Noninterest expense increased $146 million for the year ended
December 31, 2018 compared to the year ended December 31, 2017
primarily due to increases in personnel costs and technology and
communications expenses, partially offset by a decrease in other
noninterest expense. Personnel costs increased $126 million for the
year ended December 31, 2018 compared to the year ended
December 31, 2017 driven by increases in base compensation,
performance-based compensation and severance costs. The increase
in base compensation was primarily due to an increase in the
Bancorp’s minimum wage as a result of benefits received from the
TCJA and personnel additions associated with strategic investments
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
investment
and acquisitions. Technology and communications expense
increased $40 million for the year ended December 31, 2018
compared to the year ended December 31, 2017 driven primarily by
increased
in regulatory, compliance and growth
initiatives. Other noninterest expense decreased $17 million for the
year ended December 31, 2018 compared to the year ended
December 31, 2017 primarily due to an increase in the benefit from
the reserve for unfunded commitments, gains on partnership
investments and decreases in professional service fees and FDIC
insurance and other taxes, partially offset by increases in marketing
expense and loan and lease expense.
For more information on net interest income, noninterest
income and noninterest expense, refer to the Statements of Income
Analysis section of MD&A.
Credit Summary
The provision for loan and lease losses was $237 million and $261
million for the years ended December 31, 2018 and 2017,
respectively. Net losses charged-off as a percent of average portfolio
NON-GAAP FINANCIAL MEASURES
The following are non-GAAP measures which provide useful
insight to the reader of the Consolidated Financial Statements but
should be supplemental to primary U.S. GAAP measures and
should not be read in isolation or relied upon as a substitute for the
primary U.S. GAAP measures.
The FTE basis adjusts for the tax-favored status of income
from certain loans and securities held by the Bancorp that are not
loans and leases decreased to 0.35% during the year ended
December 31, 2018 compared to 0.32% during the year ended
December 31, 2017. At December 31, 2018, nonperforming
portfolio assets as a percent of portfolio loans and leases and
OREO decreased to 0.41% compared to 0.53% at December 31,
2017. For further discussion on credit quality, refer to the Credit
Risk Management subsection of the Risk Management section of
MD&A.
Capital Summary
The Bancorp’s capital ratios exceed the “well-capitalized” guidelines
as defined by the PCA requirements of the U.S. banking agencies.
As of December 31, 2018, as calculated under the Basel III
standardized approach, the CET1 capital ratio was 10.24%, the Tier
I risk-based capital ratio was 11.32%, the Total risk-based capital
ratio was 14.48% and the Tier I leverage ratio was 9.72%.
taxable for federal income tax purposes. The Bancorp believes this
presentation to be the preferred industry measurement of net
interest income as it provides a relevant comparison between
taxable and non-taxable amounts.
The following table reconciles the non-GAAP financial measures of net interest income on an FTE basis, interest income on an FTE basis, net
interest margin, net interest rate spread and the efficiency ratio to U.S. GAAP:
TABLE 3: NON-GAAP FINANCIAL MEASURES - FINANCIAL MEASURES AND RATIOS ON AN FTE BASIS
For the years ended December 31 ($ in millions)
Net interest income (U.S. GAAP)
Add: FTE adjustment
Net interest income on an FTE basis (1)
2018
4,140
16
4,156
$
$
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))
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
2017
2016
3,798
26
3,824
4,489
26
4,515
691
3,224
3,782
126,293
85,090
3.03
2.76
53.7
3,615
25
3,640
4,193
25
4,218
578
2,696
3,760
126,285
85,332
2.88
2.66
59.3
$
$
$
5,183
16
5,199
1,043
2,790
3,928
128,905
89,959
3.22 %
2.87
56.5
return available to common shareholders without the impact of
intangible assets and their related amortization.
47 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 4: 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)
$
$
2018
2017
2,118
4
2,122
15,970
(1,331)
(2,462)
(29)
12,148
2,105
1
2,106
16,424
(1,331)
(2,425)
(18)
12,650
17.5 %
16.6
$
$
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.
2018
2017
$
$
$
$
16,250
(1,331)
(2,478)
(40)
112
12,513
1,331
13,844
146,069
(2,478)
(40)
142
143,693
16,200
(1,331)
(2,445)
(27)
(73)
12,324
1,331
13,655
142,081
(2,445)
(27)
(92)
139,517
9.63 %
8.71
9.79
8.83
Average Bancorp shareholders' equity (U.S. GAAP)
Less: Average preferred stock
Average goodwill
Average intangible assets
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 5: 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
AOCI
Tangible common equity, excluding unrealized gains / losses (1)
Add: Preferred stock
Tangible equity (2)
Total Assets (U.S. GAAP)
Less: Goodwill
Intangible assets
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)
48 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. There have been no material changes to the
valuation techniques or models described below during the year
ended December 31, 2018.
ALLL
The Bancorp disaggregates its portfolio loans and leases into
portfolio segments for purposes of determining the ALLL. The
include commercial, residential
Bancorp’s portfolio segments
mortgage and consumer. The Bancorp further disaggregates its
portfolio segments into classes for purposes of monitoring and
assessing credit quality based on certain risk characteristics. For an
analysis of the Bancorp’s ALLL by portfolio segment and credit
quality information by class, refer to Note 6 of the Notes to
Consolidated Financial Statements.
The Bancorp maintains the ALLL to absorb probable loan
and lease losses inherent in its portfolio segments. The ALLL is
maintained at a level the Bancorp considers to be adequate and is
based on ongoing quarterly assessments and evaluations of the
collectability and historical loss experience of loans and leases.
Credit losses are charged and recoveries are credited to the ALLL.
Provisions for loan and lease losses are based on the Bancorp’s
review of the historical credit loss experience and such factors that,
in management’s judgment, deserve consideration under existing
economic conditions in estimating probable credit losses. The
Bancorp’s strategy
includes a
combination of conservative exposure limits significantly below
legal lending limits and conservative underwriting, documentation
and
emphasizes
diversification on a geographic, industry and customer level, regular
credit examinations and quarterly management reviews of large
credit exposures and loans experiencing deterioration of credit
quality.
risk management
standards. The
for credit
collections
strategy
also
The Bancorp’s methodology for determining the ALLL
requires significant management judgment and is based on historical
loss rates, current credit grades, specific allocation on loans
modified in a TDR and impaired commercial credits above specified
thresholds and other qualitative adjustments. Allowances on
individual commercial loans, TDRs and historical loss rates are
reviewed quarterly and adjusted as necessary based on changing
borrower and/or collateral conditions and actual collection and
charge-off experience. An unallocated allowance is maintained to
recognize the imprecision in estimating and measuring losses when
evaluating allowances for pools of loans.
Larger commercial loans included within aggregate borrower
relationship balances exceeding $1 million that exhibit probable or
observed credit weaknesses, as well as loans that have been
modified in a TDR, are subject to individual review for impairment.
The Bancorp considers the current value of collateral, credit quality
of any guarantees, the guarantor’s liquidity and willingness to
cooperate, the loan structure and other factors when evaluating
whether an individual loan is impaired. Other factors may include
to the Bancorp during 2018 and the expected impact of significant
accounting standards issued, but not yet required to be adopted.
the industry and geographic region of the borrower, size and
financial condition of the borrower, cash flow and leverage of the
borrower and
the borrower’s
the Bancorp’s evaluation of
management. When individual loans are impaired, allowances are
determined based on management’s estimate of the borrower’s
ability to repay the loan given the availability of collateral and other
sources of cash flow, as well as an evaluation of legal options
available to the Bancorp. Allowances for impaired loans are
measured based on the present value of expected future cash flows
discounted at the loan’s effective interest rate, fair value of the
underlying collateral or readily observable secondary market values.
The Bancorp evaluates the collectability of both principal and
interest when assessing the need for a loss accrual.
Historical credit loss rates are applied to commercial loans that
are not impaired or are impaired, but smaller than the established
threshold of $1 million and thus not subject to specific allowance
allocations. The loss rates are derived from migration analyses for
several portfolio stratifications, which track the historical net
charge-off experience sustained on loans according to their internal
risk grade. The risk grading system utilized for allowance analysis
purposes encompasses ten categories.
Homogenous loans and leases in the residential mortgage and
consumer portfolio segments are not individually risk graded.
Rather, standard credit scoring systems and delinquency monitoring
are used to assess credit risks and allowances are established based
on the expected net charge-offs. Loss rates are based on the trailing
twelve month net charge-off history by loan category. Historical loss
rates may be adjusted for certain prescriptive and qualitative factors
that, in management’s judgment, are necessary to reflect losses
inherent in the portfolio. The prescriptive loss rate factors include
adjustments for delinquency trends, LTV trends, refreshed FICO
score trends and product mix.
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 in its footprint and the volatility of collateral valuation
trends when determining the collateral value qualitative factor.
When evaluating the adequacy of allowances, consideration is
given to regional geographic concentrations and the closely
associated effect changing economic conditions have on the
Bancorp’s customers. Refer to the Allowance for Credit Losses
subsection of the Risk Management section of MD&A for a
discussion on the Bancorp’s ALLL sensitivity analysis.
liabilities
Reserve for Unfunded Commitments
The reserve for unfunded commitments is maintained at a level
believed by management to be sufficient to absorb estimated
probable losses related to unfunded credit facilities and is included
in other
in the Consolidated Balance Sheets. The
determination of the adequacy of the reserve is based upon an
evaluation of the unfunded credit facilities, including an assessment
of historical commitment utilization experience, credit risk grading
and historical loss rates based on credit grade migration. This
process takes into consideration the same risk elements that are
analyzed in the determination of the adequacy of the Bancorp’s
ALLL, as previously discussed. Net adjustments to the reserve for
49 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
amortized in proportion to, and over the period of, estimated net
servicing revenue. Servicing rights were assessed for impairment
impairment
fair value, with
monthly, based on
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 11 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
previous
for
reasonableness. The level of management judgment 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 judgment. The valuation of financial instruments when
quoted market prices are not available (Levels 2 and 3) may require
significant management judgment 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
6 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.
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 19 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 judgment 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
peer surveys
the
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
that provide additional confirmation of
50 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 6: 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 26 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, 2018
Balance
Level 3
December 31, 2017
Balance
Level 3
$
$
35,792
25 %
1,012
1 %
1,124
1
133
-
34,287
24
633
1
1,003
1
142
-
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
judgment 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 8 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 17 of the Notes to Consolidated Financial Statements
for further information regarding the Bancorp’s legal proceedings.
51 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
year ended December 31, 2018 compared to the year ended
December 31, 2017.
Net interest margin on an FTE basis (non-GAAP) was 3.22%
for the year ended December 31, 2018 compared to 3.03% for the
year ended December 31, 2017. The increase for the year ended
December 31, 2018 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 $2.5 billion for the year ended December 31, 2018
compared to the year ended December 31, 2017.
Interest income on an FTE basis from loans and leases (non-
GAAP) increased $590 million compared to the year ended
December 31, 2017 driven by the previously mentioned increase in
yields on average loans and leases, as well as an increase in the
volume of average other consumer loans and average commercial
and industrial loans. For more information on the Bancorp’s loan
and lease portfolio, refer to the Loans and Leases subsection of the
Balance Sheet Analysis section of MD&A. Interest income from
investment securities and other short-term investments increased
$94 million compared to the year ended December 31, 2017
primarily as a result of the aforementioned increases in average
taxable securities and yields on average taxable securities.
Interest expense on core deposits increased $250 million for
the year ended December 31, 2018 compared to the year ended
December 31, 2017. The increase was primarily due to an increase
in the cost of average interest-bearing core deposits to 70 bps for
the year ended December 31, 2018 from 37 bps for the year ended
December 31, 2017. The increase in the cost of average interest-
bearing core deposits was primarily due to increases in the rates paid
on 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 wholesale funding increased $102 million
for the year ended December 31, 2018 compared to the year ended
December 31, 2017 primarily due to the aforementioned increase in
the rates paid on average long-term debt coupled with an increase in
average long-term debt. Refer to the Borrowings subsection of the
Balance Sheet Analysis section of MD&A for additional information
on
funding
represented 23% and 24% of average interest-bearing liabilities
during the years ended December 31, 2018 and 2017, respectively.
interest rate risk
For more
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.
the Bancorp’s borrowings. Average wholesale
information on
the Bancorp’s
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 7 and 8 present the components of net interest income,
net interest margin and net interest rate spread for the years ended
December 31, 2018, 2017 and 2016, as well as the relative impact of
changes in the average 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 debt and other securities included in average other assets.
Net interest income on an FTE basis (non-GAAP) was $4.2
billion and $3.8 billion for the years ended December 31, 2018 and
2017, respectively. Net interest income was positively impacted by
increases in yields on average loans and leases of 58 bps and yields
on average taxable securities of 13 bps for the year ended December
31, 2018 compared to the year ended December 31, 2017. Net
interest income also benefited from an increase in average taxable
securities of $1.4 billion for the year ended December 31, 2018
compared to the year ended December 31, 2017. Additionally, net
interest income was positively impacted by the decisions of the
FOMC to raise the target range of the federal funds rate 25 bps in
December 2017, March 2018, June 2018, September 2018 and
December 2018. These positive impacts were partially offset by
increases in the rates paid on average interest-bearing core deposits
and average long-term debt for the year ended December 31, 2018
compared to the year ended December 31, 2017. The rates paid on
average interest-bearing core deposits and average long-term debt
increased 33 bps and 32 bps, respectively, for the year ended
December 31, 2018 compared to the same period in the prior year.
Net interest rate spread on an FTE basis (non-GAAP) was
2.87% during the year ended December 31, 2018 compared to
2.76% during the year ended December 31, 2017. Yields on average
interest-earning assets increased 46 bps, partially offset by a 35 bps
increase in rates paid on average interest-bearing liabilities for the
52 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 7: CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME ON AN FTE BASIS
For the years ended December 31
2017
2016
2018
Average Revenue/
Balance
Average
Yield/
Rate
Average
Balance
Revenue/
Cost
Average
Yield/
Rate
Average
Balance
Revenue/
Cost
Average
Yield/
Rate
$
$
$
Cost
1,079
2
25
5,199
993
4
15
4,515
3.22
3.37
1.68
4.03% $
33,487
66
1,476
128,905
2,200
12,203
(1,125)
142,183
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
1,826
298
240
108
2,472
580
326
304
279
132
1,621
4,093
43,184
6,899
3,648
3,916
57,647
15,101
7,998
10,708
2,205
661
36,673
94,320
42,668
6,661
4,793
3,795
57,917
16,150
6,631
8,993
2,280
1,905
35,959
93,876
3.27 %
3.32
3.42
2.69
3.25
3.54
3.78
2.71
9.69
6.56
3.78
3.45 %
41,577
6,844
4,374
4,011
56,806
16,053
7,308
9,407
2,141
1,016
35,925
92,731
3.64% $
3.74
4.09
2.04
3.58
3.53
4.24
2.92
11.84
6.68
4.10
3.78% $
4.28% $
4.47
5.01
2.84
4.27
3.59
4.92
3.38
12.25
6.94
4.51
4.36% $
($ 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
Total consumer loans
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 $16, $26 and $25 for the years ended December 31, 2018, 2017 and 2016, 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
26,382
13,958
20,231
388
3,771
64,730
2,564
277
557
3,158
13,804
85,090
35,093
3,897
124,080
16,447
140,527
25,143
14,346
19,523
497
4,010
63,519
2,735
333
506
2,845
15,394
85,332
35,862
4,497
125,691
16,482
142,173
29,818
13,330
21,769
363
4,106
69,386
2,426
476
1,509
1,611
14,551
89,959
32,634
3,603
126,196
15,987
142,183
0.85% $
0.10
0.74
0.33
1.44
0.70
1.69
1.94
1.97
1.82
3.06
1.16% $
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 %
252
14
162
1
59
488
41
9
30
29
446
1,043
32,106
66
1,390
126,293
2,224
13,236
(1,226)
140,527
30,019
80
1,866
126,285
2,303
14,870
(1,285)
142,173
109
8
74
1
46
238
36
3
6
30
378
691
58
7
53
1
49
168
36
1
2
10
361
578
3.09
5.45
1.04
3.57% $
3.16
4.51
0.44
3.34 %
3.22%
2.87
69.79
3.03%
2.76
67.37
2.88 %
2.66
67.57
950
3
8
4,218
$
$
$
$
$
$
$
$
$
3,824
3,640
4,156
$
$
$
$
$
$
$
$
of MD&A.
53 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
Total
Volume Yield/Rate
2018 Compared to 2017
41
(7)
18
(4)
48
3
(31)
(12)
17
61
38
86
271
49
43
30
393
11
47
41
9
3
111
504
312
42
61
26
441
14
16
29
26
64
149
590
TABLE 8: 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
Total consumer loans
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.
143
6
88
-
13
250
5
6
24
(1)
68
352
332
128
6
81
-
8
223
7
3
9
19
46
307
247
15
-
7
-
5
27
(2)
3
15
(20)
22
45
85
86
(2)
10
684
42
(1)
9
554
44
(1)
1
130
$
$
$
$
$
2017 Compared to 2016
Yield/Rate
Total
Volume
(54)
(2)
27
3
(26)
34
(27)
(37)
(7)
23
(14)
(40)
64
-
(2)
22
4
(1)
1
-
(3)
1
(2)
-
1
1
(39)
(38)
60
155
29
27
(26)
185
(3)
35
22
46
1
101
286
(21)
1
9
275
47
2
20
-
-
69
2
2
3
19
56
151
124
101
27
54
(23)
159
31
8
(15)
39
24
87
246
43
1
7
297
51
1
21
-
(3)
70
-
2
4
20
17
113
184
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 is referred to as a charge-off.
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 $237 million for
the year ended December 31, 2018 compared to $261 million for
the same period in the prior year. The decrease in provision expense
for the year ended December 31, 2018 compared to the prior year
was primarily due to a decrease in the level of commercial criticized
assets combined with overall improved credit quality, partially offset
by an increase in outstanding commercial loan balances and an
increase in consumer reserve rates for certain products. The ALLL
declined $93 million from December 31, 2017 to $1.1 billion at
December 31, 2018. At December 31, 2018, the ALLL as a percent
of portfolio loans and leases decreased to 1.16%, compared to
1.30% at December 31, 2017.
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.
54 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Income
Noninterest income decreased $434 million for the year ended December 31, 2018 compared to the year ended December 31, 2017. The following
table presents the components of noninterest income:
TABLE 9: COMPONENTS OF NONINTEREST INCOME
For the years ended December 31 ($ 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 (losses) gains, net
Securities (losses) gains, net - non-qualifying hedges on MSRs
Total noninterest income
Service charges on deposits
Service charges on deposits decreased $5 million for the year ended
December 31, 2018 compared to the year ended December 31, 2017
primarily due to a decrease of $13 million in commercial deposit
fees, partially offset by an increase of $8 million in consumer
deposit fees.
Wealth and asset management revenue
Wealth and asset management revenue increased $25 million for the
year ended December 31, 2018 compared to the year ended
December 31, 2017. The increase from the prior year was primarily
due to increases of $16 million and $10 million, respectively, in
private client service fees and brokerage fees. These increases were
driven by an increase in average assets under management as a result
of market performance and increased asset inflows during the year
ended December 31, 2018. The Bancorp’s trust and registered
investment advisory businesses had approximately $356 billion and
$362 billion in total assets under care as of December 31, 2018 and
2017, respectively, and managed $37 billion in assets for individuals,
corporations and not-for-profit organizations as of both December
31, 2018 and 2017.
Corporate banking revenue
Corporate banking revenue increased $85 million for the year ended
December 31, 2018 compared to the year ended December 31,
2018
549
444
438
329
212
887
(54)
(15)
2,790
$
$
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
2017. The increase from the prior year was primarily driven by
increases in lease remarketing fees, institutional sales revenue,
syndication fees and contract revenue from commercial customer
derivatives of $46 million, $18 million, $13 million and $11 million,
respectively. The increase in lease remarketing fees for the year
ended December 31, 2018 included the impact of a $52 million
impairment charge related to certain operating lease assets that was
recognized during the year ended December 31, 2017. These
benefits were partially offset by decreases of $7 million and $6
million, respectively, in letter of credit fees and business lending fees
from the year ended December 31, 2017.
Card and processing revenue
Card and processing revenue increased $16 million for the year
ended December 31, 2018 compared to the year ended December
31, 2017 primarily driven by increases in the number of actively
used cards and customer spend volume.
Mortgage banking net revenue
Mortgage banking net revenue decreased $12 million for the year
ended December 31, 2018 compared to the year ended December
31, 2017.
The following table presents the components of mortgage banking net revenue:
TABLE 10: COMPONENTS OF MORTGAGE BANKING NET REVENUE
For the years ended December 31 ($ 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
2018
100
216
-
(104)
112
212
$
$
2017
138
206
-
(120)
86
224
2016
186
199
(131)
31
99
285
Origination fees and gains on loan sales decreased $38 million for
the year ended December 31, 2018 compared to the year ended
December 31, 2017 driven by a decrease in originations and lower
margins due to the interest rate environment. Residential mortgage
loan originations decreased to $7.1 billion for the year ended
December 31, 2018 from $8.2 billion for the year ended December
31, 2017.
Net mortgage servicing revenue increased $26 million for the
year ended December 31, 2018 compared to the year ended
December 31, 2017 primarily due to a decrease in net negative
valuation adjustments on MSRs of $16 million and an increase in
gross mortgage servicing fees of $10 million. Refer to Table 11 for
the components of net valuation adjustments on the MSR portfolio
and the impact of the non-qualifying hedging strategy.
55 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 11: COMPONENTS OF NET VALUATION ADJUSTMENTS ON MSRs
For the years ended December 31 ($ 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 increased during the year ended December 31, 2018
which caused modeled prepayment speeds to slow. The fair value of
the MSR portfolio increased $42 million due to changes to inputs to
the valuation model including prepayment speeds and OAS spread
assumptions and decreased $125 million due to the passage of time,
including the impact of regularly scheduled repayments, paydowns
and payoffs for the year ended December 31, 2018.
Mortgage rates decreased during the year ended December 31,
2017 which caused the modeled prepayment speeds to increase,
which led 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 $121 million due to passage
of time, including the impact of regularly scheduled repayments,
paydowns and payoffs for the year ended December 31, 2017.
Further detail on the valuation of MSRs can be found in Note
11 of the Notes to Consolidated Financial Statements. The Bancorp
maintains a non-qualifying hedging strategy to manage a portion of
Other noninterest income
The following table presents the components of other noninterest income:
TABLE 12: COMPONENTS OF OTHER NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Gain related to Vantiv, Inc.'s acquisition of Worldpay Group plc.
Gain on sale of Worldpay, Inc. shares
Operating lease income
Private equity investment income
BOLI income
Cardholder fees
Consumer loan and lease fees
Banking center income
Income from the TRA associated with Worldpay, Inc.
Insurance income
Net gains (losses) on loan sales
Equity method income from interest in Worldpay Holding, LLC
Loss on swap associated with the sale of Visa, Inc. Class B Shares
Net losses on disposition and impairment of bank premises and equipment
Valuation adjustments on the warrant associated with Worldpay Holding, LLC
Gain on sales of certain retail branches
Gain on sale and exercise of the warrant associated with Worldpay Holding, LLC
Other, net
Total other noninterest income
2018
2017
2016
$
(21)
42
(125)
-
$
(104)
2
(1)
(121)
-
(120)
24
-
-
7
31
the risk associated with changes in the valuation of the MSR
portfolio. Refer to Note 12 of the Notes to Consolidated Financial
Statements for more information on the free-standing derivatives
used to economically hedge the MSR portfolio.
In addition to the derivative positions used to economically
hedge the MSR portfolio, the Bancorp acquires various securities as
a component of its non-qualifying hedging strategy. The Bancorp
recognized net losses of $15 million during the year ended
December 31, 2018, and net gains of $2 million during the year
ended December 31, 2017, recorded in securities (losses) gains, net -
non-qualifying hedges on MSRs in the Bancorp’s Consolidated
Statements of Income.
The Bancorp’s total residential mortgage loans serviced at
December 31, 2018 and 2017 were $79.2 billion and $76.1 billion,
respectively, with $63.2 billion and $60.0 billion, respectively, of
residential mortgage loans serviced for others.
2018
2017
2016
$
$
414
205
84
63
56
56
23
21
20
20
2
1
(59)
(43)
-
-
-
24
887
-
1,037
96
36
52
54
23
20
44
8
(2)
47
(80)
-
-
-
-
22
1,357
-
-
102
11
53
46
23
20
313
11
10
66
(56)
(13)
64
19
9
10
688
Other noninterest income decreased $470 million for the year ended
December 31, 2018 compared to the year ended December 31, 2017
primarily due to the gain on sale of Worldpay, Inc. shares
recognized in the prior year, a reduction in equity method income
from the Bancorp’s interest in Worldpay Holding, LLC, the impact
of the net losses on disposition and impairment of bank premises
and equipment and
income from the TRA associated with
Worldpay, Inc. recognized in the prior year. These reductions were
partially offset by the gain related to Vantiv, Inc.’s acquisition of
Worldpay Group plc., an increase in private equity investment
income, as well as a decrease in the loss on the swap associated with
the sale of Visa, Inc. Class B Shares.
The Bancorp recognized a $205 million gain on the sale of
Worldpay, Inc. shares for the year ended December 31, 2018
compared to a $1.0 billion gain on the sale of Worldpay, Inc. shares
for the year ended December 31, 2017. The Bancorp also
recognized a $414 million gain related to Vantiv, Inc.’s acquisition
of Worldpay Group plc. for the year ended December 31, 2018. For
more information, refer to Note 18 of the Notes to Consolidated
Financial Statements. Equity method income from the Bancorp’s
56 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
interest in Worldpay Holding, LLC decreased $46 million for the
year ended December 31, 2018 compared to the same period in the
prior year primarily due to a decrease in the Bancorp’s ownership
percentage in Worldpay Holding, LLC from approximately 8.6% as
of December 31, 2017 to approximately 3.3% as of December 31,
2018 and the impact of a reduction in Worldpay Holding, LLC’s net
income for the year ended December 31, 2018 compared to the
prior year. Income from the TRA associated with Worldpay Inc.
was $20 million during the year ended December 31, 2018
compared to $44 million for the year ended December 31, 2017.
Net losses on disposition and impairment of bank premises
and equipment increased $43 million during the year ended
December 31, 2018 compared to the same period in the prior year.
This increase was driven by the impact of impairment charges of
$45 million during the year ended December 31, 2018 compared to
$7 million during the year ended December 31, 2017. For more
Noninterest Expense
Noninterest expense increased $146 million for the year ended
December 31, 2018 compared to the year ended December 31,
2017, primarily due to increases in personnel costs (salaries, wages
incentives plus employee benefits) and technology and
and
communications expense, partially offset by a decrease in other
The following table presents the components of noninterest expense:
information, refer to Note 7 of the Notes to Consolidated Financial
Statements.
Private equity investment income increased $27 million for the
year ended December 31, 2018 compared to the same period in the
prior year primarily due to valuation adjustments on certain private
equity investments. For the year ended December 31, 2018, the
Bancorp recognized negative valuation adjustments of $59 million
related to the Visa total return swap compared to negative valuation
adjustments of $80 million during the year ended December 31,
2017. The decrease from the prior period was primarily attributable
to the impact of litigation developments during 2017. For additional
information on the valuation of the swap associated with the sale of
Visa, Inc. Class B Shares, refer to Note 16, Note 17 and Note 26 of
the Notes to Consolidated Financial Statements.
noninterest expense. Additionally, the Bancorp recognized $31
million in merger-related expenses for the year ended December 31,
2018.
TABLE 13: COMPONENTS OF NONINTEREST EXPENSE
For the years ended December 31 ($ 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.
1,783
332
292
285
123
123
990
3,928
56.5 %
2018
$
$
2017
2016
2015
2014
1,633
356
295
245
129
117
1,007
3,782
53.7
1,612
339
299
234
132
118
1,026
3,760
59.3
1,525
323
321
224
153
124
977
3,647
55.6
1,449
334
313
212
141
121
1,022
3,592
59.2
Personnel costs
increased $126 million for the year ended
December 31, 2018 compared to the year ended December 31, 2017
driven by increases in base compensation, performance-based
compensation and severance costs. The
in base
compensation was primarily due to an increase in the Bancorp’s
minimum wage as a result of benefits received from the TCJA and
personnel additions associated with strategic investments and
increase
acquisitions. Full-time equivalent employees totaled 17,437 at
December 31, 2018 compared to 18,125 at December 31, 2017.
Technology and communications expense
increased $40
million for the year ended December 31, 2018 compared to the year
ended December 31, 2017 driven primarily by increased investment
in regulatory, compliance and growth initiatives.
57 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the components of other noninterest expense:
TABLE 14: COMPONENTS OF OTHER NONINTEREST EXPENSE
For the years ended December 31 ($ in millions)
Marketing
FDIC insurance and other taxes
Loan and lease
Operating lease
Professional service fees
Losses and adjustments
Data processing
Travel
Postal and courier
Recruitment and education
Donations
Supplies
Insurance
(Gain) loss on partnership investments
(Benefit from) provision for the reserve for unfunded commitments
Other, net
Total other noninterest expense
Other noninterest expense decreased $17 million for the year ended
December 31, 2018 compared to the year ended December 31, 2017
primarily due to an increase in the benefit from the reserve for
unfunded commitments, gains on partnership investments and
decreases in professional service fees and FDIC insurance and other
taxes, partially offset by increases in marketing expense and loan and
lease expense.
The benefit from the reserve for unfunded commitments
increased $30 million for the year ended December 31, 2018
compared to the year ended December 31, 2017 primarily due to
overall improved credit quality. Gains on partnership investments
were $4 million for the year ended December 31, 2018 compared to
losses of $14 million for the year ended December 31, 2017.
Professional service fees decreased $16 million for the year ended
Applicable Income Taxes
Applicable income tax expense for all periods includes the benefit
from tax-exempt income, tax-advantaged investments, certain gains
on sales of leveraged leases that are exempt from federal taxation
and tax credits (and other related tax benefits), partially offset by the
effect of proportional amortization of qualifying LIHTC
investments and certain nondeductible expenses. The tax credits are
associated with the Low-Income Housing Tax Credit program
established under Section 42 of the IRC, the New Markets Tax
Credit program established under Section 45D of the IRC, the
Rehabilitation Investment Tax Credit program established under
Section 47 of the IRC and the Qualified Zone Academy Bond
program established under Section 1397E of the IRC.
The effective tax rates for the years ended December 31, 2018
and 2017 were primarily impacted by $189 million and $206 million,
respectively, of low-income housing tax credits and other tax
benefits and $23 million and $34 million of tax benefits from tax
exempt income in 2018 and 2017, respectively and were partially
offset by $154 million and $223 million of proportional
amortization related to qualifying LIHTC investments. The effective
tax rate for the year ended December 31, 2017 was also impacted by
a $253 million benefit from the remeasurement of deferred taxes as
a result of the reduction in the federal income tax rate from 35
percent to 21 percent for years beginning after December 31, 2017.
The decrease in the effective tax rate from the year ended
December 31, 2016 to the year ended December 31, 2017 was
primarily related to the remeasurement of deferred taxes mentioned
58 Fifth Third Bancorp
2018
2017
2016
$
$
147
119
112
76
67
61
57
52
35
32
21
13
13
(4)
(30)
219
990
114
127
102
87
83
59
58
46
42
35
28
14
12
14
-
186
1,007
104
126
110
86
61
73
51
45
46
37
23
14
15
25
23
187
1,026
December 31, 2018 compared to the year ended December 31, 2017
primarily due to decreases in legal and consulting fees. FDIC
insurance and other taxes decreased $8 million for the year ended
December 31, 2018 compared to the year ended December 31, 2017
primarily due to the elimination of the FDIC surcharge in the fourth
quarter of 2018. Marketing expense increased $33 million for the
year ended December 31, 2018 compared to the year ended
December 31, 2017 primarily due to promotional offers during the
year ended December 31, 2018. Loan and lease expense increased
$10 million for the year ended December 31, 2018 compared to the
year ended December 31, 2017 driven by an increase in loan
servicing expenses on point-of-sale loans as a result of growth in
point-of-sale originations.
above, partially offset by the impact of an increase in income before
taxes.
The U.S. government enacted comprehensive tax legislation,
the TCJA, on December 22, 2017. The TCJA made broad and
complex changes to the U.S. tax code including, but not limited to,
reducing the 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
$253 million. For the year ended December 31, 2017, the Bancorp
was subject to a federal statutory corporate tax rate of 35 percent.
For years beginning after December 31, 2017, the Bancorp is
subject to a federal statutory corporate tax rate of 21 percent.
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, 2018, the Bancorp estimates that it may be necessary
to recognize $6 million of additional income tax benefit over the
next twelve months related to the settlement of stock-based awards,
primarily in the first half of 2019. However, the amount of income
tax expense or benefit recognized upon settlement may vary
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
significantly from expectations based on the Bancorp’s stock price
and the number of SARs exercised by employees.
The Bancorp’s income before income taxes, applicable income tax expense and effective tax rate are as follows:
TABLE 15: APPLICABLE INCOME TAXES
For the years ended December 31 ($ in millions)
Income before income taxes
Applicable income tax expense
Effective tax rate
$
2018
2,765
572
20.7 %
2017
2,979
799
26.8
2016
2,208
665
30.1
2015
2,493
814
32.6
2014
2,145
692
32.3
59 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 29 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 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 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 the cash flows allocates interest income
and interest expense to each business segment so its resulting net
interest income is insulated from future changes in benchmark
interest rates. The Bancorp’s FTP methodology also allocates the
contribution to net interest income of the asset-generating and
deposit-providing businesses on a duration-adjusted basis to better
attribute the driver of the performance. As the asset and liability
durations are not perfectly matched, the residual impact of the FTP
methodology is captured in General Corporate and Other. The
charge and credit rates are determined using the FTP rate curve,
which is based on an estimate of Fifth Third’s marginal borrowing
cost
is
in the wholesale funding markets. The FTP curve
constructed using the U.S. swap curve, brokered CD pricing and
unsecured debt pricing.
The following table summarizes net income (loss) by business segment:
TABLE 16: 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
The Bancorp adjusts the FTP charge and credit rates as
dictated by changes in interest rates for various interest-earning
assets and interest-bearing liabilities and by the review of 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, 2018 to reflect the
current market rates and updated market assumptions. These rates
were generally higher than those in place during 2017, thus net
interest
income for deposit-providing business segments was
positively impacted during 2018. 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 2018.
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 funding operations by
accessing the capital markets as a collective unit.
The results of operations and financial position for the years
ended December 31, 2017 and 2016 were adjusted to reflect
changes in internal expense allocation methodologies as well as a
change in accounting policy for qualifying LIHTC investments.
2018
2017
2016
$
$
1,139
702
(1)
97
256
2,193
827
455
17
65
816
2,180
1,014
390
50
86
3
1,543
60 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:
$
2018
2017
2016
1,678
38
1,729
(26)
TABLE 17: COMMERCIAL BANKING
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income (FTE)(a)
(Benefit from) 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 $16, $26 and $25 for the years ended December 31, 2018, 2017 and 2016, respectively.
54,748
16,560
12,203
4,128
377
362
54,597
20,735
8,582
6,686
1,046
496
53,743
19,519
9,080
5,337
899
372
296
932
1,442
428
1,014
294
940
1,244
417
827
344
919
1,409
270
1,139
430
292
185
432
273
212
348
287
203
1,839
76
$
$
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 2018 with 2017
Net income was $1.1 billion for the year ended December 31, 2018
compared to net income of $827 million for the year ended
December 31, 2017. The increase in net income was driven by
increases in noninterest income and net interest income on an FTE
basis 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 $51 million
from the year ended December 31, 2017 primarily driven by
increases in yields on average commercial loans and leases and
increases in FTP credits on interest checking deposits. These
increases were partially offset by increases in FTP charge rates on
loans and leases, increases in the rates paid on core deposits and
decreases in FTP credits on demand deposits driven by lower
average balances.
Provision for loan and lease losses decreased $64 million from
the year ended December 31, 2017 primarily driven by a decrease in
commercial criticized asset levels partially offset by an increase in
net charge-offs. Net charge-offs as a percent of average portfolio
loans and leases decreased to 18 bps for the year ended December
31, 2018 compared to 19 bps for the year ended December 31,
2017.
Noninterest income increased $79 million from the year ended
December 31, 2017 primarily driven by an increase in corporate
banking revenue and other noninterest income partially offset by a
decrease in service charges on deposits. Corporate banking revenue
increased $84 million from the year ended December 31, 2017
driven by increases in lease remarketing fees, institutional sales
revenue, syndication fees, contract revenue from commercial
customer derivatives and foreign exchange fees partially offset by
decreases in letter of credit fees and business lending fees. The
increase in lease remarketing fees for the year ended December 31,
2018 included the impact of $52 million of impairment charges
related to certain operating lease assets that were recognized during
the year ended December 31, 2017. Other noninterest income
increased $9 million from the year ended December 31, 2017
primarily due to an increase in private equity investment income.
Service charges on deposits decreased $14 million from the year
ended December 31, 2017.
Noninterest expense increased $29 million from the year ended
December 31, 2017 due to an increase in personnel costs partially
offset by a decrease in other noninterest expense. Personnel costs
increased $50 million from the year ended December 31, 2017
primarily due to increased incentive compensation and base
compensation. Other noninterest expense decreased $21 million
from the year ended December 31, 2017 primarily due to the impact
of gains and losses on partnership investments and decreases in
operating lease expense and consulting expense partially offset by an
increase in corporate overhead allocations.
industrial
Average commercial loans increased $1.0 billion from the year
ended December 31, 2017 primarily due to increases in average
loans and average commercial
commercial and
construction
in average
loans partially offset by decreases
commercial leases and average commercial mortgage loans. Average
commercial and industrial loans increased $973 million from the
year ended December 31, 2017 as a result of an increase in loan
originations, a decrease in payoffs and an increase in drawn balances
on existing revolving
lines of credit. Average commercial
construction loans increased $404 million from the year ended
December 31, 2017 primarily due to increases in draw levels on
61 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
existing commitments. Average commercial leases decreased $218
million from the year ended December 31, 2017 primarily as a result
of a planned reduction in indirect non-relationship based lease
originations. Average commercial mortgage loans decreased $154
million from the year ended December 31, 2017 due to an increase
in paydowns in the fourth quarter of 2017 and lower loan
origination activity through the first two quarters of 2018.
Average core deposits decreased $1.1 billion from the year
ended December 31, 2017. The decrease was driven by decreases in
average demand deposits of $3.0 billion and average savings and
money market deposits of $1.2 billion compared to the year ended
December 31, 2017 primarily due to lower average balances per
account. These decreases were partially offset by an increase in
average interest checking deposits of $3.1 billion compared to the
year ended December 31, 2017 primarily due to balance migration
from demand deposit accounts and an increase in average balances
per commercial customer account as well as the acquisition of new
commercial customers.
Comparison of the year ended 2017 with 2016
Net income was $827 million for the year ended December 31, 2017
compared to net income of $1.0 billion 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 commercial 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 $6 million from the year ended
December 31, 2016 primarily as a result of an increase in other
noninterest expense driven by increases in corporate overhead
allocations partially offset by decreases in losses on partnership
investments.
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
increase
loans. Average
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
decreases were partially offset by an increase in average interest
checking deposits of $498 million from the year ended December
31, 2016 primarily due to the acquisition of new customers.
62 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Branch Banking
Branch Banking provides a full range of deposit and loan products
to individuals and small businesses through 1,121 full-service
banking centers. Branch Banking offers depository and loan
products, such as checking and savings accounts, home equity loans
and lines of credit, credit cards and loans for automobiles and other
personal financing needs, as well as products designed to meet the
specific needs of small businesses, including cash management
services.
The following table contains selected financial data for the Branch Banking segment:
TABLE 18: BRANCH BANKING
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Service charges on deposits
Card and processing revenue
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
Demand deposits
Interest checking deposits
Savings and money market deposits
Other time deposits and certificates $100,000 and over
2018
2017
2016
$
2,034
171
1,782
153
1,669
138
275
266
150
63
536
225
121
846
889
187
702
265
251
141
99
526
228
127
800
704
249
455
265
253
140
97
520
234
128
801
603
213
390
13,034
1,938
14,336
10,187
29,473
5,348
13,008
1,918
13,895
10,226
27,603
4,965
13,572
1,870
13,332
9,659
25,974
5,205
$
$
Comparison of the year ended 2018 with 2017
Net income was $702 million for the year ended December 31, 2018
compared to net income of $455 million for the year ended
December 31, 2017. The increase was driven by an increase in net
interest income partially offset by increases in noninterest expense
and the provision for loan and lease losses.
Net interest income increased $252 million from the year
ended December 31, 2017. The increase was primarily due to
increases in FTP credit rates on core deposits as well as increases in
interest income on other consumer loans driven by higher average
balances. These benefits were partially offset by increases in FTP
charge rates on loans and leases and increases in the rates paid on
savings and money market deposits. In addition, the increase in net
interest income was partially offset by the impact of a $12 million
benefit in the first quarter of 2017 related to a revised estimate of
refunds to be offered to certain bankcard customers.
Provision for loan and lease losses increased $18 million from
the year ended December 31, 2017 primarily due to an increase in
net charge-offs on other consumer loans and credit card. Net
charge-offs as a percent of average portfolio loans and leases
increased to 114 bps for the year ended December 31, 2018
compared to 102 bps for the year ended December 31, 2017.
Noninterest income decreased $2 million from the year ended
December 31, 2017 primarily driven by a decrease in other
noninterest income partially offset by increases in card and
processing revenue, service charges on deposits and wealth and
asset management revenue. Other noninterest income decreased
$36 million from the year ended December 31, 2017 primarily due
to the impact of impairments on bank premises and equipment.
Card and processing revenue increased $15 million from the year
ended December 31, 2017 primarily driven by increases in the
number of actively used cards and customer spend volume. Service
charges on deposits increased $10 million from the year ended
December 31, 2017 primarily due to an increase in consumer
deposit fees. Wealth and asset management revenue increased $9
million from the year ended December 31, 2017 primarily driven by
increases in private client service fees and brokerage fees.
Noninterest expense increased $47 million from the year ended
December 31, 2017 primarily due to increases in other noninterest
expense and personnel costs. Other noninterest expense increased
$46 million from the year ended December 31, 2017 primarily due
to increases in corporate overhead allocations and loan and lease
expense. Personnel costs increased $10 million from the year ended
December 31, 2017 primarily due to higher base compensation
driven by an increase in the Bancorp’s minimum wage as a result of
benefits received from the TCJA.
Average consumer loans increased $26 million from the year
ended December 31, 2017 primarily driven by an increase in average
other consumer loans of $1.0 billion primarily due to growth in
point-of-sale loan originations. This increase from the year ended
December 31, 2017 was partially offset by decreases in average
home equity loans of $530 million and average residential mortgage
loans of $310 million as payoffs exceeded new loan production.
Average core deposits increased $2.6 billion from the year
ended December 31, 2017 primarily driven by growth in average
savings and money market deposits of $1.9 billion and growth in
average demand deposits of $441 million. Average savings and
money market deposits increased as a result of promotional rate
offers facilitated by the rising-rate environment and growth in the
Fifth Third Preferred Banking program. Average demand deposits
63 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
increased primarily due to an increase in average balances per
customer account and the acquisition of new customers driven by
increased marketing efforts. Other time deposits and certificates
$100,000 and over increased $383 million from the year ended
December 31, 2017 primarily due to shifting customer preferences
as a result of the rising-rate environment.
Comparison of the year ended 2017 with 2016
Net income was $455 million for the year ended December 31, 2017
compared to net income of $390 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 decreased $2 million from the year ended
December 31, 2016 primarily due to decreases in net occupancy and
equipment expense and other noninterest expense partially 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. Other noninterest expense decreased $1 million from the
year ended December 31, 2016 primarily driven by a decrease in
corporate overhead allocations partially offset by increases in
marketing expense and FDIC insurance and other taxes. 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
average demand deposits of $563 million. The growth in average
savings and money market deposits, average interest checking
deposits and average demand deposits was driven by an increase in
average balances per customer account and acquisition of new
customers.
64 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consumer Lending
Consumer Lending includes the Bancorp’s residential mortgage,
home equity, automobile and other indirect lending activities. Direct
lending activities include the origination, retention and servicing of
residential mortgage and home equity loans or lines of credit, sales
and securitizations of those loans, pools of loans or lines of credit
and all associated hedging activities. Indirect lending activities
include extending loans to consumers through correspondent
lenders and automobile dealers.
The following table contains selected financial data for the Consumer Lending segment:
TABLE 19: CONSUMER LENDING
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Mortgage banking net revenue
Other noninterest income
Noninterest expense:
Personnel costs
Other noninterest expense
(Loss) income before income taxes
Applicable income tax (benefit) expense
Net (loss) income
Average Balance Sheet Data
Residential mortgage loans, including held for sale
Home equity
Automobile loans
Comparison of the year ended 2018 with 2017
Consumer Lending incurred a net loss of $1 million for the year
ended December 31, 2018 compared to net income of $17 million
for the year ended December 31, 2017. The decrease was driven by
a decrease in noninterest income partially offset by a decrease in
noninterest expense.
Net interest income decreased $3 million from the year ended
December 31, 2017 primarily driven by an increase in FTP charge
rates on loans and leases partially offset by increases in yields on
average automobile loans and average residential mortgage loans.
Provision for loan and lease losses increased $2 million from
the year ended December 31, 2017. Net charge-offs as a percent of
average portfolio loans and leases increased to 21 bps for the year
ended December 31, 2018 compared to 20 bps for the year ended
December 31, 2017.
Noninterest income decreased $32 million from the year ended
December 31, 2017 driven by decreases in other noninterest income
and mortgage banking net revenue. Other noninterest income
decreased $21 million from the year ended December 31, 2017
primarily due to an increase in the loss on securities related to non-
qualifying hedges on MSRs resulting from increased interest rates.
Mortgage banking net revenue decreased $11 million from the year
ended December 31, 2017 primarily driven by a decrease in
mortgage origination fees and gains on loan sales partially offset by
an increase in net mortgage servicing revenue. 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 $9 million from the year ended
December 31, 2017 driven by a decrease in other noninterest
expense partially offset by an increase in personnel costs. Other
noninterest expense decreased $12 million from the year ended
December 31, 2017 primarily due to decreases in corporate
overhead allocations and operational
losses. Personnel costs
increased $3 million from the year ended December 31, 2017
primarily due to an increase in base compensation.
$
$
$
2018
2017
2016
237
42
206
(1)
192
210
(2)
(1)
(1)
240
40
217
20
189
222
26
9
17
248
44
277
26
195
235
77
27
50
11,803
243
8,676
11,494
293
8,939
10,530
356
10,172
Average consumer loans decreased $4 million from the year
ended December 31, 2017. Average automobile loans decreased
$263 million from the year ended December 31, 2017 as payoffs
exceeded new loan production due to a strategic shift focusing on
improving risk-adjusted returns. Average home equity decreased $50
million from the year ended December 31, 2017 as the vintage
portfolio continues to pay down. Average residential mortgage loans
increased $309 million from the year ended December 31, 2017
primarily driven by the continued retention of certain agency
conforming ARMs and certain other fixed-rate loans.
Comparison of the year ended 2017 with 2016
Net income was $17 million for the year ended December 31, 2017
compared to net income of $50 million for the year ended
December 31, 2016. The decrease was driven by a decrease in
noninterest income partially offset by a decrease in noninterest
expense.
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 $19 million from the year
ended December 31, 2016 driven by decreases in other noninterest
65 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
expense and personnel costs. Other noninterest expense decreased
$13 million from the year ended December 31, 2016 primarily
driven by a decrease in corporate overhead allocations. 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
for
individuals,
Wealth and Asset Management
Wealth and Asset Management provides a full range of investment
alternatives
and not-for-profit
organizations. Wealth and Asset Management is made up of four
main businesses: FTS; Fifth Third Insurance Agency; Fifth Third
Private Bank; and Fifth Third Institutional Services. FTS offers full-
service retail brokerage services to individual clients and broker-
institutional marketplace. Fifth Third
dealer services to the
companies
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 $964 million from the year ended December 31,
2016 primarily due to the continued retention of certain agency
conforming ARMs and certain other fixed-rate loans originated
during the year ended December 31, 2017.
Insurance Agency assists clients with their financial and risk
management needs. Fifth Third Private Bank offers holistic
strategies to affluent clients in wealth planning, investing, insurance
and wealth protection. Fifth Third Institutional Services provides
advisory services for institutional clients including states and
municipalities.
The following table contains selected financial data for the Wealth and Asset Management segment:
TABLE 20: WEALTH AND ASSET MANAGEMENT
For the years ended December 31 ($ 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 2018 with 2017
Net income was $97 million for the year ended December 31, 2018
compared to net income of $65 million for the year ended
December 31, 2017. The increase in net income was driven by
increases in noninterest income and net interest income partially
offset by increases in noninterest expense and the provision for loan
and lease losses.
Net interest income increased $28 million from the year ended
December 31, 2017 primarily due to increases in FTP credit rates on
interest checking deposits and savings and money market deposits
as well as increases in yields on average loans and leases. These
positive impacts were partially offset by increases in the rates paid
on interest checking deposits as well as an increase in FTP charge
rates on loans and leases.
Provision for loan and lease losses increased $6 million from
the year ended December 31, 2017 driven by an increase in net
charge-offs partially offset by the impact of the benefit of lower
commercial criticized assets. Net charge-offs as a percent of average
portfolio loans and leases increased to 52 bps for the year ended
December 31, 2018 compared to 11 bps for the year ended
December 31, 2017.
Noninterest income increased $37 million from the year ended
December 31, 2017 due to
in wealth and asset
management revenue and other noninterest income. Wealth and
asset management revenue increased $22 million from the year
ended December 31, 2017 primarily due to increases in private
increases
66 Fifth Third Bancorp
2018
2017
2016
182
12
429
27
202
302
122
25
97
154
6
407
12
181
287
99
34
65
168
1
391
8
168
264
134
48
86
3,421
9,332
3,277
8,782
3,135
8,554
$
$
$
client service fees and brokerage fees. These increases were driven
by an increase in average assets under management as a result of
market performance and
increased asset production. Other
noninterest income increased $15 million from the year ended
December 31, 2017 due to an increase in insurance income as a
result of the full year impact of acquisitions from 2017.
Noninterest expense increased $36 million from the year ended
December 31, 2017 due to increases in personnel costs and other
noninterest expense. Personnel costs increased $21 million from the
year ended December 31, 2017 due to higher base compensation
and incentive compensation primarily driven by the aforementioned
acquisitions completed during 2017. Other noninterest expense
increased $15 million from the year ended December 31, 2017
primarily driven by an increase in corporate overhead allocations.
Average loans and leases increased $144 million from the year
in average
ended December 31, 2017 driven by
commercial and industrial loans and average residential mortgage
loans due to increases in loan origination activity. These increases
were partially offset by a decline in average home equity balances.
increases
Average core deposits increased $550 million from the year
ended December 31, 2017 primarily due to increases in average
interest checking deposits and average savings and money market
deposits.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of the year ended 2017 with 2016
Net income was $65 million for the year ended December 31, 2017
compared to net income of $86 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 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 lease 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.
Noninterest expense increased $36 million from the year ended
December 31, 2016 due to increases in other noninterest expense
and personnel costs. Other noninterest expense increased $23
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.
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 for loan and lease losses 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 2018 with 2017
Net interest income increased $4 million from the year ended
December 31, 2017 primarily driven by an increase in the benefit
related to the FTP charge rates on loans and leases as well as an
increase in interest income on taxable securities. These benefits were
partially offset by increases in FTP credit rates on deposits allocated
to the business segments and increases in interest expense on long-
term debt and federal funds purchased.
Provision for loan and lease losses increased $14 million from
the year ended December 31, 2017 primarily due to the decrease in
the allocation of provision expense to the business segments driven
by a decrease in commercial criticized assets.
Noninterest income decreased $510 million from the year
ended December 31, 2017 primarily driven by the recognition of a
$1.0 billion gain on the sale of Vantiv, Inc. (now Worldpay, Inc.)
shares during the third quarter of 2017. The decrease was partially
offset by the recognition of a $205 million gain on the sale of
Worldpay, Inc. shares during the second quarter of 2018 and a $414
million gain related to Vantiv, Inc.’s acquisition of Worldpay Group
plc. during the first quarter of 2018. Additionally, equity method
earnings from the Bancorp’s interest in Worldpay Holding, LLC
decreased $46 million from the year ended December 31, 2017
primarily due to a decrease in the Bancorp’s ownership interest in
Worldpay Holding, LLC and the impact of a reduction in Worldpay
Holding, LLC net income. Income from the TRA associated with
Worldpay, Inc. decreased to $20 million during the year ended
December 31, 2018 compared to $44 million for the year ended
December 31, 2017. These decreases were partially offset by a
decrease in the loss on the swap associated with the sale of Visa,
Inc. Class B Shares. For the year ended December 31, 2018, the
Bancorp recognized negative valuation adjustments of $59 million
related to the Visa total return swap compared to negative valuation
adjustments of $80 million during the year ended December 31,
2017.
Noninterest expense increased $49 million from the year ended
December 31, 2017. The increase was primarily due to increases in
personnel expenses, technology and communications expense and
marketing expense partially offset by an increase in corporate
overhead allocations from General Corporate and Other to the
other business segments and an increased benefit from the reserve
for unfunded commitments from the year ended December 31,
2017.
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 lease losses decreased $60 million from
the year ended December 31, 2016 primarily due to a reduction in
the benefit for commercial 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 Worldpay, 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 Worldpay, Inc. TRA and the expected obligation to
terminate and settle the remaining Worldpay, 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 Worldpay Holding, LLC of $64
million. The stock warrant was not outstanding during 2017 as the
Bancorp exercised the remaining warrant in Worldpay Holding,
LLC during the fourth quarter of 2016 and recognized a gain of $9
million. The increase in noninterest income from December 31,
67 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
Worldpay 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 increased $2 million from the year ended
December 31, 2016. The increase was primarily due to increases in
personnel costs and technology and communications expense
partially offset by a decrease in the provision for the reserve for
unfunded commitments and an increase in corporate overhead
allocations from General Corporate and Other to the other business
segments.
68 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOURTH QUARTER REVIEW
The Bancorp’s 2018 fourth quarter net income available to common
shareholders was $432 million, or $0.64 per diluted share, compared
to net income available to common shareholders of $421 million, or
$0.61 per diluted share, for the third quarter of 2018 and net income
available to common shareholders of $504 million, or $0.70 per
diluted share, for the fourth quarter of 2017.
Net interest income on an FTE basis was $1.1 billion for the
fourth quarter of 2018, an increase of $38 million from the third
quarter of 2018 and $122 million from the fourth quarter of 2017.
The increase from both the previous quarter and fourth quarter of
2017 was reflective of growth in commercial and industrial loans
and the securities portfolio balance as well as higher short-term
market rates, partially offset by increases in the rates paid on average
interest-bearing core deposits and average long-term debt. The
increase in net interest income in comparison to the fourth quarter
of 2017 was also impacted by a $27 million remeasurement related
to the tax treatment of leveraged leases resulting from the TCJA in
the fourth quarter of 2017.
Noninterest income was $575 million for the fourth quarter of
2018, an increase of $12 million compared to the third quarter of
2018 and a decrease of $2 million compared to the fourth quarter of
2017. The increase from the third quarter of 2018 was primarily due
to increases in corporate banking revenue and other noninterest
income, partially offset by an increase in securities losses, net. The
year-over-year decrease was primarily the result of an increase in
securities losses, net and decreases in other noninterest income,
partially offset by an increase in corporate banking revenue.
Service charges on deposits were $135 million for the fourth
quarter of 2018, a decrease of $4 million compared to the previous
quarter and $3 million compared to the fourth quarter of 2017. The
decreases from both the previous quarter and the fourth quarter of
2017 were primarily driven by a decrease in commercial deposit
fees.
Corporate banking revenue was $130 million for the fourth
quarter of 2018, an increase of $30 million compared to the third
quarter of 2018 and $53 million compared to the fourth quarter of
2017. The increases from both the previous quarter and the fourth
quarter of 2017 were primarily driven by increases in institutional
sales revenue and syndication fees. The increase compared to the
fourth quarter of 2017 was also impacted by a $25 million lease
remarketing impairment in the fourth quarter of 2017.
Mortgage banking net revenue was $54 million for the fourth
quarter of 2018 compared to $49 million in the third quarter of 2018
and $54 million in the fourth quarter of 2017. The increase in
mortgage banking net revenue compared to the third quarter of
2018 was primarily driven by
lower negative net valuation
adjustments on MSRs partially offset by lower origination fees and
gains on loan sales. Mortgage banking net revenue is affected by net
valuation adjustments, which include MSR valuation adjustments
caused by fluctuating OAS spreads, earning rates and prepayment
speeds, as well as mark-to-market adjustments on free-standing
derivatives used to economically hedge the MSR portfolio. Net
negative valuation adjustments on MSRs were $24 million and $33
million in the fourth and third quarters of 2018, respectively, and
$32 million in the fourth quarter of 2017. Originations for the
fourth quarter of 2018 were $1.6 billion, compared with $1.9 billion
in both the previous quarter and the fourth quarter of 2017.
Originations for the fourth quarter of 2018 resulted in gains of $23
million on mortgages sold, compared with gains of $25 million for
the previous quarter and $32 million for the fourth quarter of 2017.
Gross mortgage servicing fees were $54 million in the fourth quarter
of 2018, $56 million in the third quarter of 2018 and $54 million in
the fourth quarter of 2017.
Wealth and asset management revenue was $109 million for
the fourth quarter of 2018, a decrease of $5 million from the
previous quarter and an increase of $3 million from the fourth
quarter of 2017. The decrease from the third quarter of 2018 was
primarily driven by lower institutional trust and brokerage fees. The
increase compared to the fourth quarter of 2017 was primarily
driven by increases in private client service fees and brokerage fees.
Card and processing revenue was $84 million for the fourth
quarter of 2018, an increase of $2 million from the third quarter of
2018 and $4 million from the fourth quarter of 2017. The increase
from both the third quarter of 2018 and the fourth quarter of 2017
reflected increased customer credit card spend volume, partially
offset by higher rewards.
Other noninterest income was $93 million for the fourth
quarter of 2018, an increase of $7 million compared to the third
quarter of 2018 and a decrease of $30 million from the fourth
quarter of 2017. The increase from the third quarter of 2018 was
primarily due to a benefit from the positive valuation adjustment on
the Visa total return swap and revenue recognized from Worldpay,
Inc. related to the TRA, partially offset by a decrease in private
equity investment income and the impact of the net losses on
disposition and impairment of bank premises and equipment. The
decrease in other noninterest income from the fourth quarter of
2017 was primarily due to a decrease in revenues from the TRA
associated with Worldpay, Inc., a reduction in equity method
income from the Bancorp’s interest in Worldpay Holding, LLC and
a decrease in private equity investment income. These reductions
were partially offset by an increase in the benefit from the positive
valuation adjustment on the Visa total return swap associated with
the sale of Visa, Inc. Class B Shares.
The net losses on investment securities were $32 million for
the fourth quarter of 2018 compared to $6 million in the third
quarter of 2018 and net gains of $1 million for the fourth quarter of
2017. The increase in losses from both the previous quarter and the
fourth quarter of 2017 was primarily related to unrealized losses on
equity securities. Net gains on securities held as non-qualifying
hedges for MSRs were $2 million for the fourth quarter of 2018
compared to net losses of $1 million for the third quarter of 2018
and $2 million for the fourth quarter of 2017.
increases
Noninterest expense was $977 million for the fourth quarter of
2018, an increase of $7 million from the previous quarter and $2
million from the fourth quarter of 2017. The
in
noninterest expense compared to both the previous quarter and the
fourth quarter of 2017 were primarily related to increases in
technology and communications expense and personnel costs,
partially offset by decreases in other noninterest expense. The
increase in technology and communications expense was driven
primarily by increased investment in regulatory, compliance and
growth initiatives. The increase in personnel costs was driven by
increases
in base and performance-based compensation. The
increase in base compensation was primarily due to an increase in
the Bancorp’s minimum wage as a result of benefits received from
the TCJA and personnel additions associated with strategic
investments and acquisitions. The decrease in other noninterest
expense from the third quarter of 2018 included a reduction in
FDIC insurance and other taxes due to the elimination of the FDIC
surcharge, partially offset by an increase in professional service fees.
The decrease in other noninterest expense from the fourth quarter
of 2017 was primarily due to a reduction in donations expense and
the aforementioned decrease in FDIC insurance and other taxes,
partially offset by an increase in marketing expense. Additionally,
the Bancorp recognized $27 million in merger-related expenses
during the fourth quarter of 2018.
69 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The ALLL as a percentage of portfolio loans and leases was
1.16% as of December 31, 2018, compared to 1.17% as of
September 30, 2018 and 1.30% as of December 31, 2017. The
provision for loan and lease losses was $95 million in the fourth
quarter of 2018 compared with $86 million in the third quarter of
2018 and $67 million in the fourth quarter of 2017. Net losses
TABLE 21: QUARTERLY INFORMATION (unaudited)
For the three months ended
($ in millions, except per share data)
12/31/2018
charged-off were $83 million in the fourth quarter of 2018, or 35
bps of average portfolio loans and leases on an annualized basis,
compared with net losses charged-off of $72 million in the third
quarter of 2018 and $76 million in the fourth quarter of 2017.
9/30/2018
6/30/2018
3/31/2018
Pre-LIHTC
Adjustment As Adjusted
As
Originally
Reported As Adjusted
As
Originally
Reported As Adjusted
Net interest income (FTE)(a)(c)
$
Provision for loan and lease losses(c)
Noninterest income(c)
Noninterest expense(b)
Net income attributable to Bancorp(b)
Net income available to common
shareholders(b)
Earnings per share - basic(b)
Earnings per share - diluted(b)
1,085
95
575
1,013
451
428
0.65
0.64
1,085
95
575
977
455
432
0.65
0.64
1,047
86
563
1,008
433
418
0.62
0.61
1,047
86
563
970
436
421
0.62
0.61
1,024
33
743
1,037
586
563
0.81
0.80
1,024
33
743
982
602
579
0.84
0.82
As
Originally
Reported As Adjusted
999
23
909
1,000
701
999
23
909
1,046
704
689
0.99
0.97
686
0.98
0.96
For the three months ended
($ in millions, except per share data)
12/31/2017
9/30/2017
6/30/2017
3/31/2017
As
Originally
Reported As Adjusted
As
Originally
Reported As Adjusted
Net interest income (FTE)(a)(c)
$
Provision for loan and lease losses(c)
Noninterest income(c)
Noninterest expense(b)
Net income attributable to Bancorp(b)
Net income available to common
963
67
577
1,073
509
963
67
577
975
527
977
67
1,561
975
1,014
977
67
1,561
936
992
As
Originally
Reported As Adjusted
945
52
564
921
359
945
52
564
957
367
As
Originally
Reported As Adjusted
939
74
523
951
302
939
74
523
986
305
shareholders(b)
Earnings per share - basic(b)
Earnings per share - diluted(b)
287
0.38
0.37
(a) Amounts presented on an FTE basis. The FTE adjustment was $4 for the three months ended December 31, 2018, September 30, 2018 and June 30, 2018 and $3 for the three
months ended March 31, 2018. The FTE adjustment was $7 for the both the three months ended December 31, 2017 and September 30, 2017 and $6 for both the three months ended June
30, 2017 and March 31, 2017.
(b) Effective in the fourth quarter of 2018, Fifth Third retrospectively applied a change in its accounting policy for investments in affordable housing projects that qualify for LIHTC in accordance
336
0.45
0.44
999
1.37
1.35
977
1.34
1.32
344
0.46
0.45
504
0.71
0.70
290
0.38
0.38
486
0.68
0.67
with ASU 2014-01. Refer to Note 1 of the Notes to Consolidated Financial Statements for additional information.
(c) Net interest income, provision for loan and lease losses and noninterest income were not impacted as a result of the Bancorp’s change in accounting policy for investments in affordable housing
projects that qualify for LIHTC in accordance with ASU 2014-01. Refer to Note 1 of the Notes to Consolidated Financial Statements for additional information.
COMPARISON OF THE YEAR ENDED 2017 WITH 2016
The Bancorp’s net income available to common shareholders for
the year ended December 31, 2017 was $2.1 billion, or $2.81 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 $1.91 per diluted share, which was net of $75 million in preferred
stock dividends.
The provision for loan and lease losses decreased to $261
million for the year ended December 31, 2017 compared to $343
million for the year ended December 31, 2016 primarily due to the
decrease in the level of commercial criticized assets, which reflected
improvement
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 0.32% for the year ended December 31, 2017
compared to 0.39% for the year ended December 31, 2016.
in
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
70 Fifth Third Bancorp
impacted by the decisions of the FOMC 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. 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 Worldpay, 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 for 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 Worldpay, Inc., positive valuation
adjustments and the gain on sale of the warrant associated with
Worldpay Holding, LLC and gains on the sales of certain retail
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
branch operations. The year ended December 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 Worldpay 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 $22 million for the year ended
December 31, 2017 compared to the year ended December 31, 2016
primarily due to increases in personnel costs and technology and
communications expense, partially offset by a decrease in other
noninterest 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. Technology and communication expense increased $11
million for the year ended December 31, 2017 compared to the year
ended December 31, 2016 primarily due to increased investment in
regulatory, compliance and growth initiatives. Other noninterest
expense decreased $19 million for the year ended December 31,
2017 compared to the year ended December 31, 2016 primarily due
to decreases in the provision for the reserve for unfunded
commitments, losses and adjustments and losses on partnership
investments, partially offset by increases in professional service fees
and marketing expense.
71 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 based upon product or
collateral. Table 22 summarizes end of period loans and leases,
including loans and leases held for sale and Table 23 summarizes
average total loans and leases, including loans and leases held for
sale.
2016
$
2018
2017
TABLE 22: COMPONENTS OF 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:
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans
Total consumer loans
Total loans and leases
Total portfolio loans and leases (excluding loans and leases held for sale)
16,041
6,402
8,976
2,470
2,342
36,231
95,872
95,265
16,077
7,014
9,112
2,299
1,559
36,061
92,462
91,970
44,407
6,977
4,657
3,600
59,641
41,170
6,610
4,553
4,068
56,401
$
$
41,736
6,904
3,903
3,974
56,517
15,737
7,695
9,983
2,237
680
36,332
92,849
92,098
2015
2014
42,151
6,991
3,214
3,854
56,210
14,424
8,336
11,497
2,360
658
37,275
93,485
92,582
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
Total loans and leases increased $3.4 billion from December 31,
2017. The increase from December 31, 2017 was the result of a $3.2
billion, or 6%, increase in commercial loans and leases as well as a
$170 million increase in consumer loans.
increases
industrial
in commercial and
Commercial loans and leases increased from December 31,
2017 due to
loans,
commercial mortgage loans and commercial construction loans,
partially offset by a decrease in commercial leases. Commercial and
industrial loans increased $3.2 billion, or 8%, from December 31,
2017 primarily as a result of an increase in loan originations, a
decrease in payoffs and an increase in drawn balances on existing
revolving lines of credit during the year ended December 31, 2018.
Commercial mortgage loans increased $367 million, or 6% from
December 31, 2017 primarily due to an increase in loan originations
and
the Bancorp’s
in permanent financing from
commercial construction loan portfolio. Commercial construction
loans increased $104 million, or 2%, from December 31, 2017
primarily due to increases in draw levels on existing commitments.
increases
Commercial leases decreased $468 million, or 12%, from December
31, 2017 primarily as a result of a planned reduction in indirect non-
relationship based lease originations.
Consumer loans and leases increased from December 31, 2017
primarily due to increases in other consumer loans and credit card,
partially offset by a decrease in home equity and automobile loans.
Other consumer loans increased $783 million, or 50%, from
December 31, 2017 primarily due to growth in point-of-sale loan
originations. Credit card increased $171 million, or 7%, from
December 31, 2017 primarily due to an increase in balance active
customers and an increase in card usage resulting in an increase in
the average balance per active customer. Home equity decreased
$612 million, or 9%, from December 31, 2017 as payoffs exceeded
new loan production. Automobile loans decreased $136 million, or
1%, from December 31, 2017 as payoffs exceeded new loan
production due to a strategic shift focusing on improving risk-
adjusted returns.
$
2018
2017
2016
TABLE 23: COMPONENTS OF 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 commercial loans and leases
Consumer loans:
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans
Total consumer loans
Total average loans and leases
Total average portfolio loans and leases (excluding loans and leases held for sale)
16,150
6,631
8,993
2,280
1,905
35,959
93,876
93,216
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
42,668
6,661
4,793
3,795
57,917
41,577
6,844
4,374
4,011
56,806
43,184
6,899
3,648
3,916
57,647
$
$
42,594
7,121
2,717
3,796
56,228
13,798
8,592
11,847
2,303
571
37,111
93,339
92,423
2015
2014
41,178
7,745
1,492
3,585
54,000
13,344
9,059
12,068
2,271
385
37,127
91,127
90,485
Total average loans and leases increased $1.1 billion, or 1%, from
December 31, 2017 as a result of a $1.1 billion, or 2%, increase in
average commercial loans and leases and a $34 million increase in
average consumer loans.
72 Fifth Third Bancorp
Average commercial
December 31, 2017 primarily due
commercial and
construction
industrial
loans and
leases
increased
from
in average
increases
loans and average commercial
in average
to
loans, partially offset by decreases
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
commercial leases and average commercial mortgage loans. Average
commercial and industrial loans increased $1.1 billion, or 3%, from
December 31, 2017 primarily as a result of an increase in loan
originations, a decrease in payoffs and an increase in drawn balances
on existing revolving
lines of credit. Average commercial
construction loans increased $419 million, or 10%, from December
31, 2017 primarily due to increases in draw levels on existing
commitments. Average commercial leases decreased $216 million,
or 5%, from December 31, 2017 primarily as a result of a planned
reduction in indirect non-relationship based lease originations.
Average commercial mortgage loans decreased $183 million, or 3%,
from December 31, 2017 primarily due to an increase in paydowns
in the fourth quarter of 2017 and lower loan origination activity
through the first two quarters of 2018.
Average consumer loans increased from December 31, 2017
primarily due to increases in other consumer loans, credit card and
residential mortgage loans, partially offset by decreases in home
Investment Securities
The Bancorp uses investment securities as a means of managing
interest rate risk, providing collateral for pledging purposes and for
investment
liquidity to satisfy regulatory requirements. Total
securities were $33.6 billion and $32.7 billion at December 31, 2018
and December 31, 2017, respectively. The taxable available-for-sale
debt and other investment securities portfolio had an effective
duration of 5.0 years at December 31, 2018 compared to 4.7 years at
December 31, 2017.
Debt 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 that
management has the intent and ability to hold to maturity are
classified as held-to-maturity and reported at amortized cost. Debt
securities are classified as trading when bought and held principally
equity and automobile loans. Average other consumer loans
increased $889 million, or 88%, from December 31, 2017 primarily
due to growth in point-of-sale loan originations. Average credit card
increased $139 million, or 6%, from December 31, 2017 primarily
due to an increase in balance active customers and an increase in
card usage resulting in an increase in the average balance per active
customer. Average residential mortgage loans increased $97 million,
or 1%, from December 31, 2017 primarily driven by the continued
retention of certain agency conforming ARMs and certain other
fixed-rate loans. Average home equity decreased $677 million, or
9%, from December 31, 2017 as payoffs exceeded new loan
production. Average automobile loans decreased $414 million, or
4%, from December 31, 2017 as payoffs exceeded new loan
production due to a strategic shift focusing on improving risk-
adjusted returns.
for the purpose of selling them in the near term. At December 31,
2018, the Bancorp’s investment portfolio consisted primarily of
AAA-rated available-for-sale debt and other securities. The Bancorp
held an immaterial amount in below-investment grade available-for-
sale debt and other securities at both December 31, 2018 and 2017.
For the year ended December 31, 2018 the Bancorp did not
recognize any OTTI on its available-for-sale debt and other
securities. For the year ended December 31, 2017 the Bancorp
recognized $54 million of OTTI on its available-for-sale debt and
other securities, included in securities (losses) gains, net, in the
Consolidated Statements of Income. Refer to Note 1 of the Notes
to Consolidated Financial Statements
the Bancorp’s
investment securities and
methodology for both classifying
evaluating securities in an unrealized loss position for OTTI.
for
The following table summarizes the end of period components of investment securities:
TABLE 24: COMPONENTS OF INVESTMENT SECURITIES
As of December 31 ($ in millions)
Available-for-sale debt 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
Asset-backed securities and other debt securities
Other securities(b)
Total available-for-sale debt 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 debt securities (fair value):
U.S. Treasury and federal agencies securities
Obligations of states and political subdivisions securities
Agency residential mortgage-backed securities
Asset-backed securities and other debt securities
Total trading debt securities
Total equity securities (fair value)
(a)
(b) Other securities consist of FHLB, FRB and DTCC restricted stock holdings that are carried at cost.
2018
2017
2016
2015
2014
$
$
$
$
$
$
$
98
2
16,403
10,770
3,305
1,998
552
33,128
16
2
18
16
35
68
168
287
452
98
43
15,281
10,113
3,247
2,183
612
31,577
22
2
24
12
22
395
63
492
439
547
44
15,525
9,029
3,076
2,106
607
30,934
24
2
26
23
39
8
15
85
416
1,155
50
14,811
7,795
2,801
1,363
604
28,579
68
2
70
19
9
6
19
53
432
1,545
185
11,968
4,465
1,489
1,324
600
21,576
186
1
187
14
8
9
13
44
419
Includes interest-only mortgage-backed securities recorded at fair value with fair value changes recorded in securities (losses) gains, net in the Consolidated Statements of Income.
73 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On an amortized cost basis, available-for-sale debt and other
securities increased $1.6 billion, or 5%, from December 31, 2017
primarily due to increases in agency residential mortgage-backed
securities and agency commercial mortgage-backed securities,
partially offset by decreases in asset-backed securities and other debt
securities.
On an amortized cost basis, available-for-sale debt and other
interest-earning assets at both
securities were 25% of total
December 31, 2018 and December 31, 2017. The estimated
weighted-average life of the debt securities in the available-for-sale
debt and other securities portfolio was 6.5 years at both December
31, 2018 and 2017. In addition, at December 31, 2018 and 2017 the
available-for-sale debt and other securities portfolio had a weighted-
average yield of 3.25% and 3.18%, respectively.
Trading debt securities decreased $205 million from December
31, 2017 primarily due to a decrease in agency residential mortgage-
backed securities.
information
Information presented in Table 25 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 debt and other securities portfolio exclude other securities that
have no stated yield or maturity. Total net unrealized losses on the
available-for-sale debt and other securities portfolio were $298
million at December 31, 2018 compared to net unrealized gains of
$174 million at December 31, 2017. 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 decreases when interest rates increase or when
credit spreads expand.
TABLE 25: CHARACTERISTICS OF AVAILABLE-FOR-SALE DEBT AND OTHER SECURITIES
Weighted-Average Weighted-Average
$
$
Yield
98
98
97
97
4.1
4.1
-
-
2
2
-
-
2
2
Fair Value
Life (in years)
Amortized Cost
0.1
2.1
5.6
5.3
2.12
2.12 %
6,473
9,316
614
16,403
5.90
5.90
-
0.54 %
As of December 31, 2018 ($ in millions)
U.S. Treasury and federal agencies securities:
Average life 1 – 5 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 1 – 5 years
Average life 5 – 10 years
Average life greater than 10 years
Total
Agency commercial mortgage-backed securities:
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
Other securities
Total available-for-sale debt and other securities
(a) Taxable-equivalent yield adjustments included in the above table are 0.00%, 0.48%, 0.00% and 0.03% for securities with an average life of 1 year or less, 1-5 years, 5-10 years and in total,
22
1,207
636
150
2,015
552
32,830
22
1,191
635
150
1,998
552
33,128
3.42
4.24
3.86
3.76
4.08 %
2.98
3.14
3.13
3.10 %
3.90
3.29
3.26
3.27 %
3.42
3.15
3.12
3.26 %
2,435
6,140
2,075
10,650
2,455
6,177
2,138
10,770
6,459
9,185
603
16,247
0.5
3.5
6.7
10.3
5.0
1
866
2,400
3,267
1
866
2,438
3,305
3.4
7.6
11.5
7.4
4.3
7.2
11.2
6.2
0.9
4.4
6.5
5.9
3.25 %
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 72%
and 71% of the Bancorp’s average asset funding base for the years
ended December 31, 2018 and 2017, respectively.
74 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the end of period components of deposits:
$
$
TABLE 26: 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)
Total deposits
(a)
2018
32,116
34,058
12,907
22,597
240
101,918
4,490
106,408
2,427
108,835
2017
35,276
27,703
13,425
20,097
484
96,985
3,775
100,760
2,402
103,162
2016
2015
2014
35,782
26,679
13,941
20,749
426
97,577
3,866
101,443
2,378
103,821
36,267
26,768
14,601
18,494
464
96,594
4,019
100,613
2,592
103,205
34,809
26,800
15,051
17,083
1,114
94,857
3,960
98,817
2,895
101,712
$
Includes $1.2 billion, $1.3 billion, $1.3 billion, $1.5 billion and $1.8 billion of institutional, retail and wholesale certificates $250,000 and over at December 31, 2018, 2017, 2016, 2015
and 2014, respectively.
time deposits,
Core deposits increased $5.6 billion, or 6%, from December 31,
2017, driven by increases of $4.9 billion and $715 million in
transaction deposits and other
respectively.
Transaction deposits increased from December 31, 2017 primarily
due to increases in interest checking deposits and money market
deposits partially offset by a decrease in demand deposits. Interest
checking deposits increased $6.4 billion, or 23%, from December
31, 2017 driven primarily by balance migration from demand
deposit accounts and higher balances per commercial customer
account as well as the acquisition of new commercial customers.
Money market deposits increased $2.5 billion, or 12%, from
December 31, 2017 primarily as a result of promotional rate offers
facilitated by the rising-rate environment and growth in the Fifth
Third Preferred Banking program. Demand deposits decreased $3.2
billion, or 9%, from December 31, 2017 primarily as a result of the
into
aforementioned commercial customer balance migration
interest checking deposits and lower balances per commercial
customer account. Other time deposits increased from December
31, 2017 primarily due to promotional rate offers facilitated by the
rising-rate environment.
The following table presents the components of average deposits for the years ended December 31:
TABLE 27: COMPONENTS OF AVERAGE DEPOSITS
($ 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)
2018
32,634
29,818
13,330
21,769
363
97,914
4,106
102,020
2,426
476
104,922
2017
35,093
26,382
13,958
20,231
388
96,052
3,771
99,823
2,564
277
102,664
2016
2015
2014
35,862
25,143
14,346
19,523
497
95,371
4,010
99,381
2,735
333
102,449
35,164
26,160
14,951
18,152
817
95,244
4,051
99,295
2,869
57
102,221
31,755
25,382
16,080
14,670
1,828
89,715
3,762
93,477
3,929
-
97,406
$
Includes $1.1 billion, $1.4 billion, $1.5 billion, $1.6 billion and $1.8 billion of average institutional, retail and wholesale certificates $250,000 and over during the years ended December 31,
2018, 2017, 2016, 2015 and 2014, respectively.
On an average basis, core deposits increased $2.2 billion from
December 31, 2017 primarily due to an increase of $1.9 billion and
$335 million in average transaction deposits and average other time
deposits, respectively. The increase in average transaction deposits
was driven by increases in average interest checking deposits and
average money market deposits partially offset by a decrease in
average demand deposits. Average interest checking deposits
increased $3.4 billion, or 13%, from December 31, 2017 primarily
due to balance migration from demand deposit accounts and an
increase in average balances per commercial customer account as
well as the acquisition of new commercial customers. Average
money market deposits increased $1.5 billion, or 8%, from
December 31, 2017 as a result of promotional rate offers facilitated
by the rising-rate environment and growth in the Fifth Third
Preferred Banking program. Average demand deposits decreased
$2.5 billion, or 7%, from December 31, 2017 primarily as a result of
the aforementioned migration into interest checking deposits and
lower average balances per commercial customer account. The
increase in average other time deposits was primarily due to
promotional rate offers facilitated by the rising-rate environment.
75 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Contractual Maturities
The contractual maturities of certificates $100,000 and over as of December 31, 2018 are summarized in the following table:
TABLE 28: 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
$
$
676
398
558
795
2,427
The contractual maturities of other time deposits and certificates $100,000 and over as of December 31, 2018 are summarized in the following
table:
TABLE 29: CONTRACTUAL MATURITIES OF OTHER TIME DEPOSITS AND CERTIFICATES $100,000 AND OVER
($ in millions)
Next 12 months
13-24 months
25-36 months
37-48 months
49-60 months
After 60 months
Total other time deposits and certificates $100,000 and over
$
$
3,967
2,293
550
74
25
8
6,917
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. Average total borrowings as a percent
of average interest-bearing liabilities were 20% at December 31,
2018 compared to 21% at December 31, 2017.
The following table summarizes the end of period components of borrowings:
TABLE 30: COMPONENTS OF BORROWINGS
As of December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total borrowings
Total borrowings decreased $2.2 billion, or 11%, from December
31, 2017 due to decreases in other short-term borrowings and long-
term debt, partially offset by an increase in federal funds purchased.
Other short-term borrowings decreased $3.4 billion from December
31, 2017 driven by a decrease in FHLB advances. 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 14 of the Notes to
Consolidated Financial Statements. Long-term debt decreased $478
million from December 31, 2017 primarily driven by the maturity of
$1.9 billion of unsecured senior bank notes and $500 million of
unsecured subordinated debt, $480 million of paydowns on long-
term debt associated with automobile loan securitizations and $44
million of fair value adjustments associated with interest rate swaps
The following table summarizes the components of average borrowings:
2018
1,925
573
14,426
16,924
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
$
$
hedging long-term debt during the year ended December 31, 2018.
These decreases were partially offset by the issuance of $1.3 billion
of unsecured fixed-rate senior bank notes, $650 million of
unsecured fixed-rate senior notes, $300 million of unsecured
floating-rate senior bank notes and $250 million of unsecured
floating-rate senior notes since December 31, 2017. For additional
information regarding long-term debt issuances, refer to Note 15 of
the Notes to Consolidated Financial Statements. Federal funds
purchased increased $1.8 billion from December 31, 2017 due to a
reallocation of other
further
information on subsequent events related to long-term debt, refer to
Note 31 of the Notes to Consolidated Financial Statements.
short-term borrowings. For
TABLE 31: COMPONENTS OF AVERAGE BORROWINGS
For the years ended December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total average borrowings
2018
1,509
1,611
14,551
17,671
$
$
2017
557
3,158
13,804
17,519
2016
506
2,845
15,394
18,745
2015
2014
920
1,721
14,644
17,285
458
1,873
12,894
15,225
Total average borrowings increased $152 million, or 1%, compared
to December 31, 2017, due to increases in average federal funds
purchased and average long-term debt, partially offset by a decrease
in average other short-term borrowings. Average federal funds
76 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
purchased increased $952 million due to a reallocation of other
short-term borrowings. Average long-term debt increased $747
million compared to December 31, 2017. The increase was driven
primarily by the issuances of long-term debt during the second half
of 2017 which consisted of $750 million of unsecured fixed-rate
senior bank notes and $300 million of unsecured floating-rate senior
bank notes and the issuances during the year ended December 31,
2018, as discussed above. The increase was partially offset by the
maturities of unsecured senior bank notes and subordinated debt
and paydowns on long-term debt associated with automobile loan
securitizations, as discussed above, during the year ended December
31, 2018. Average other short-term borrowings decreased $1.5
billion compared to December 31, 2017, driven primarily by the
aforementioned decrease in FHLB advances. 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.
77 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 the Bancorp’s 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.
78 Fifth Third Bancorp
• Act with integrity in all activities.
•
Focus on providing operational excellence by providing
reliable, accurate and efficient services to meet customers’
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
by
•
• Conduct business in compliance with all applicable laws,
rules and regulations and in alignment with internal policies
and procedures.
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
governance
and
reporting of risk.
independent
• 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 business 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
risk
includes
management committees operating under delegation from,
and providing information directly or indirectly to, the
Board. The Bancorp Board delegates certain responsibilities
governance
structure
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
reviews and approves risk management frameworks and
is based on
CREDIT RISK MANAGEMENT
The objective of the Bancorp’s credit risk management strategy is to
quantify and manage credit risk on an aggregate portfolio basis, as
well as to limit the risk of loss resulting from the failure of a
borrower or counterparty to honor its financial or contractual
obligations to the Bancorp. The Bancorp's credit risk management
strategy
three core principles: conservatism,
diversification and monitoring. The Bancorp believes that effective
credit risk management begins with conservative lending practices
which are described below. These practices include the use of
limits for single name exposures and
intentional risk-based
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
policies, oversees the management of all risk types to ensure
that aggregated risks remain within the Bancorp’s risk
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 32: POTENTIAL PROBLEM PORTFOLIO LOANS AND LEASES
As of December 31, 2018 ($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial leases
Total potential problem portfolio loans and leases
TABLE 33: 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
Carrying
Value
646
152
31
829
Carrying
Value
911
138
70
1,119
$
$
$
$
Unpaid
Principal
Balance
647
152
31
830
Unpaid
Principal
Balance
912
138
70
1,120
Exposure
854
152
31
1,037
Exposure
1,370
138
70
1,578
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
includes
grade categories for estimating losses given an event of default. The
probability of default and loss given default evaluations are not
separated in the ten-category risk rating system. The Bancorp has
completed significant validation and testing of the dual risk rating
system as a commercial credit risk management tool. The Bancorp
is assessing the necessary modifications to the dual risk rating
system outputs to develop a U.S. GAAP compliant ALLL model
and will evaluate the use of modified dual risk ratings for purposes
of determining the Bancorp’s ALLL as part of the Bancorp’s
adoption of ASU 2016-13 “Measurement of Credit Losses on Financial
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
79 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Bancorp's homogenous consumer and small business
portfolios.
loan
Overview
Inflationary expectations have changed little and are expected to
remain near 2% in the coming year. The labor market has continued
to tighten and unemployment remains low. Household spending has
continued to show strong growth. The FOMC stated that risks to
the economic outlook are roughly balanced, but the Committee will
continue to monitor global economic and financial developments
and assess their implications for the economic outlook. Market
professionals continue to have an increased focus on wages, interest
rates, input costs, tariffs, trade negotiations and foreign exchange.
During December 2018, the FOMC enacted an additional 25 bp
increase in the target rate for Federal Funds. The Federal Reserve
median forecast for change in 2019 real GDP is 2.41%, a slight
decrease from the 3.1% rate in 2018. The Federal Reserve, in their
minutes, continues to be concerned that tariffs could hurt the
current economic recovery but are waiting to see evidence of any
damage. Also concerning is the recent slowdown in homebuilding.
There is a chance of higher interest rates in 2019 that would
generally be detrimental to the Bancorp’s clients’ financial condition.
Market data and vacancies remain positive. Competition for
term loans on stabilized or near-stabilized assets remains highly
aggressive in terms of pricing, recourse and repayment structures, as
banks seek to diversify away from construction. Construction costs
continue to escalate and will likely be exacerbated by the impact of
tariffs. The Bancorp is also monitoring potential increased risks in
the Retail sector as a result of changes in distribution models with
increasing levels of online purchasing and recent weakness in certain
specialty retailers. However, needs-based retail and online retailers
moving to brick and mortar are supporting continued development
and lease-up for mixed-use retail centers. The Bancorp has been
focused on tenants that have multi-channel distribution and/or
provide entertainment such as restaurants, cosmetic stores, fitness,
grocery and drug.
During the third quarter of 2018, the southeastern United
States experienced a major hurricane impacting the eastern portions
of the states of North Carolina and South Carolina. The Bancorp
has limited credit exposure in the coastal regions of both states;
however, temporary assistance was provided to customers that were
negatively impacted. There is no expectation of any material net
charge-offs as a result of the hurricane.
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.
industrial
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
for commercial and
the risks and
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.
loans outline
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), pro-
forma analysis requirements and interest rate sensitivity. The
Bancorp requires a valuation of real estate collateral, which may
include third-party appraisals, be performed at the time of
origination and renewal in accordance with regulatory requirements
and on an as-needed basis when market conditions justify. Although
the Bancorp does not back test these collateral value assumptions,
the Bancorp maintains an appraisal review department to order and
review
in accordance with regulatory
requirements. Collateral values on criticized assets with relationships
the
exceeding $1 million are reviewed quarterly
appropriateness of the value ascribed in the assessment of charge-
offs and specific reserves.
third-party appraisals
to assess
The Bancorp assesses all real estate and non-real estate
collateral securing a loan and considers all cross-collateralized loans
in the calculation of the LTV ratio. The following tables provide
detail on the most recent LTV ratios for commercial mortgage loans
greater than $1 million, excluding impaired commercial mortgage
loans individually evaluated. The Bancorp does not typically
aggregate the LTV ratios for commercial mortgage loans less than
$1 million.
TABLE 34: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION
As of December 31, 2018 ($ in millions)
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Total
126
40
166
$
$
LTV > 100% LTV 80-100%
TABLE 35: 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%
172
29
201
110
169
279
LTV < 80%
2,119
2,731
4,850
LTV < 80%
2,222
2,208
4,430
80 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides detail on commercial loan and leases by industry classification (as defined by the North American Industry
Classification System), by loan size and by state, illustrating the diversity and granularity of the Bancorp’s commercial loans and leases:
TABLE 36: COMMERCIAL LOAN AND LEASE PORTFOLIO (EXCLUDING LOANS AND LEASES HELD FOR SALE)
As of December 31 ($ in millions)
By Industry:
Manufacturing
Real estate
Financial services and insurance
Business services
Healthcare
Retail trade
Accommodation and food
Wholesale trade
Communication and information
Transportation and warehousing
Construction
Mining
Entertainment and recreation
Other services
Utilities
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
Georgia
Indiana
North Carolina
Tennessee
Kentucky
Other
Total
Outstanding
2018
Exposure
Nonaccrual
Outstanding
2017
Exposure
Nonaccrual
$
$
10,387
8,327
6,805
4,426
4,343
3,726
3,435
3,127
2,923
2,807
2,498
2,427
1,798
855
835
465
323
64
-
59,571
1 %
2
6
6
19
66
100 %
13 %
8
7
6
5
4
3
3
2
49
100 %
19,290
13,055
13,192
7,161
6,198
7,496
5,626
5,481
5,111
4,729
4,718
4,363
3,354
1,104
2,531
669
511
130
-
104,719
1
2
6
5
16
70
100
14
8
6
5
5
4
3
3
3
49
100
48
10
1
17
36
6
28
14
-
19
4
38
1
4
-
-
2
-
-
228
5
9
18
19
38
11
100
10
21
10
8
11
8
-
-
2
30
100
10,044
7,713
5,792
4,147
4,712
3,617
3,268
3,017
3,322
3,012
2,374
1,454
1,624
714
869
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
6,512
6,486
7,950
5,321
5,363
5,308
4,621
4,449
3,001
2,911
1,017
2,333
474
478
57
15
99,670
1
2
6
5
18
68
100
15
8
7
6
5
4
3
3
3
46
100
74
25
1
42
35
3
4
6
-
29
2
56
7
16
-
-
2
-
4
306
5
8
15
10
57
5
100
7
6
13
9
2
3
1
8
1
50
100
The Bancorp’s 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.
81 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables provide an analysis of nonowner-occupied commercial real estate loans by state (excluding loans held for sale):
TABLE 37: NONOWNER-OCCUPIED COMMERCIAL REAL ESTATE (EXCLUDING LOANS HELD FOR SALE)(a)
As of December 31, 2018 ($ in millions)
By State:
Outstanding
Exposure
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2018
$
Ohio
Florida
Illinois
Michigan
North Carolina
Indiana
Georgia
All other states
-
-
-
-
-
-
-
2
2
$
Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.
1,918
1,536
1,076
771
872
853
729
4,187
11,942
1,574
978
750
657
646
528
357
2,590
8,080
-
-
-
-
-
-
-
-
-
Total
(a)
-
-
-
-
-
-
-
1
1
TABLE 38: 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
Consumer Portfolio
Consumer credit risk management utilizes a framework that
encompasses consistent processes
identifying, assessing,
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
five categories of loans: residential mortgage loans, home equity,
automobile loans, credit card and other consumer loans. The
Bancorp has identified certain credit characteristics within these five
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,
2018, consumer real estate loans, consisting of residential mortgage
loans and home equity loans, originated from 2005 through 2008
represent approximately 12% of the consumer real estate portfolio.
These loans accounted for 47% of total consumer real estate
secured losses for the year ended December 31, 2018. 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. The Bancorp has
adjusted credit standards focused on improving risk-adjusted returns
82 Fifth Third Bancorp
while maintaining credit risk tolerance. The Bancorp actively
manages the automobile portfolio through concentration limits,
which mitigate 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 residential 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
$665 million of ARM loans will have rate resets during the next
twelve months. Of these resets, 95% are expected to experience an
increase in rate, with an average increase of approximately one
percent. Underlying characteristics of these borrowers are relatively
strong with a weighted average origination DTI of 33% and
weighted average origination LTV of 74%.
Certain residential mortgage products have contractual features
that may increase credit exposure to the Bancorp in the event of a
decline in housing values. These types of mortgage products offered
by the Bancorp include loans with high LTV ratios, multiple loans
on the same collateral that when combined result in an LTV greater
than 80% and interest-only loans. The Bancorp has deemed
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
residential mortgage loans with greater than 80% LTV ratios and no
mortgage insurance as loans that represent a higher level of risk.
Portfolio residential mortgage loans from 2010 and later
vintages represented 92% of the portfolio as of December 31, 2018
and had a weighted-average LTV of 73% and a weighted-average
origination FICO of 760.
The following table provides an analysis of the residential mortgage portfolio loans outstanding by LTV at origination as of:
TABLE 39: RESIDENTIAL MORTGAGE PORTFOLIO LOANS BY LTV AT ORIGINATION
2018
Weighted-
2017
Weighted-
As of December 31 ($ 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
Outstanding Average LTV
$
$
11,540
2,010
1,954
15,504
66.7 % $
95.1
94.2
74.3 % $
11,767
1,890
1,934
15,591
66.4 %
94.8
94.7
73.7 %
The following tables provide an analysis of the residential mortgage portfolio loans outstanding with a greater than 80% LTV ratio and no
mortgage insurance:
TABLE 40: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
As of December 31, 2018 ($ 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, 2018
$
436
390
284
217
144
92
81
310
$
1,954
2
1
1
1
1
-
-
3
9
3
1
2
1
1
1
-
2
11
1
-
-
-
-
-
-
1
2
TABLE 41: 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
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.
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
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 determined 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 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.
include adjustments
loss rate
factors
83 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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
Table 43 and Table 44. Of the total $6.4 billion of outstanding
home equity loans:
•
•
•
89% reside within the Bancorp’s Midwest footprint of
Ohio, Michigan, Kentucky, Indiana and Illinois as of
December 31, 2018;
37% are in senior lien positions and 63% are in junior lien
positions at December 31, 2018;
81% of non-delinquent borrowers made at least one
payment greater than the minimum payment during the
year ended December 31, 2018; and
• The portfolio had an average refreshed FICO score of 745
at December 31, 2018.
The Bancorp actively manages lines of credit and makes
adjustments in lending limits when it believes it is necessary based
on FICO score deterioration and property devaluation. The
Bancorp does not routinely obtain appraisals on performing loans
to update LTV ratios after origination. However, the Bancorp
monitors the local housing markets by reviewing various home price
indices and incorporates the impact of the changing market
conditions in its ongoing credit monitoring processes. For junior
lien home equity loans which become 60 days or more past due, the
Bancorp tracks the performance of the senior lien loans in which
the Bancorp is the servicer and utilizes consumer credit bureau
attributes to monitor the status of the senior lien loans that the
Bancorp does not service. If the senior lien loan is found to be 120
days or more past due, the junior lien home equity loan is placed on
nonaccrual status unless both loans are well-secured and in the
process of collection. Additionally, if the junior lien home equity
loan becomes 120 days or more past due and the senior lien loan is
also 120 days or more past due, the junior lien home equity loan is
assessed for charge-off. Refer to the Analysis of Nonperforming
Assets subsection of the Risk Management section of MD&A for
more information.
84 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 42: 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
2018
2017
Outstanding
% of Total
Outstanding
% of Total
$
$
218
318
1,791
2,327
469
769
2,837
4,075
6,402
4 % $
5
28
37
7
12
44
63
100 % $
246
358
1,976
2,580
541
853
3,040
4,434
7,014
4 %
5
28
37
8
12
43
63
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 43: 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
2018
Weighted-
2017
Weighted-
Outstanding Average LTV
Outstanding Average LTV
$
$
2,022
305
2,327
2,367
1,708
4,075
6,402
54.5 % $
88.8
59.2
67.2
90.1
78.0
70.9 % $
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 %
The following tables provide an analysis of home equity portfolio loans by state with a combined LTV greater than 80%:
TABLE 44: HOME EQUITY PORTFOLIO LOANS OUTSTANDING WITH AN LTV GREATER THAN 80%
As of December 31, 2018 ($ 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, 2018
$
$
1,082
297
200
133
118
59
124
2,013
2,146
492
321
231
224
86
188
3,688
-
-
-
-
-
-
-
-
8
4
4
2
2
2
3
25
2
1
2
-
-
-
1
6
85 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 45: 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
Automobile portfolio
The Bancorp’s automobile portfolio balances have declined since
December 31, 2017 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 targeted credit risk tolerance during the
year ended December 31, 2018. 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 46: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING BY FICO SCORE AT ORIGINATION
2018
2017
As of December 31 ($ in millions)
FICO ≤ 690
FICO > 690
Total
Outstanding
1,604
7,372
8,976
$
$
% of Total
18 %
82
100 %
$
Outstanding
$
1,563
7,549
9,112
% of Total
17 %
83
100 %
The automobile portfolio is characterized by direct and indirect
lending products to consumers. As of December 31, 2018, 43% 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 47: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING BY LTV AT ORIGINATION
As of December 31 ($ in millions)
LTV ≤ 100%
LTV > 100%
Total
2018
Weighted-
2017
Weighted-
Outstanding Average LTV
Outstanding Average LTV
$
$
5,591
3,385
8,976
82.3 % $
112.9
94.2 % $
5,814
3,298
9,112
82.1 %
112.4
93.5 %
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 48: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING WITH AN LTV GREATER THAN 100%
($ in millions)
December 31, 2018
December 31, 2017
Outstanding
$
3,385
3,298
90 Days Past
Due and Accruing
Nonaccrual
Net Charge-offs
7
7
1
1
28
24
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, 2018. At December 31, 2018 and December 31,
2017, 71% and 76%, respectively, of the outstanding balances were
originated through branch-based relationships with the remainder
coming from direct mail campaigns and online acquisitions.
86 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 49: CREDIT CARD PORTFOLIO LOANS OUTSTANDING BY FICO SCORE AT ORIGINATION
2018
2017
As of December 31 ($ in millions)
FICO ≤ 659
FICO 660-719
FICO ≥ 720
Total
Outstanding
% of Total
$
$
82
711
1,677
2,470
3 %
29
68
100 %
$
Outstanding
$
61
581
1,657
2,299
% of Total
3 %
25
72
100 %
Other consumer portfolio loans
The other consumer portfolio loans are comprised of secured and
unsecured loans originated through the Bancorp’s branch network
as well as point-of-sale loans originated in connection with third-
party financial technology companies. Outstanding balances for
other consumer loans increased approximately $783 million, or
50%, from December 31, 2017 primarily due to an increase in
originations in connection with third-party financial technology
companies. Additionally, the Bancorp has approximately $374
million in unfunded commitments associated with loans originated
in connection with third-party financial technology companies as of
December 31, 2018. Fifth Third closely monitors the credit
performance of these point-of-sale loans which, for Fifth Third, is
impacted by the credit loss protection coverage provided by the
third-party financial technology companies.
The following table provides an analysis of other consumer portfolio loans outstanding by product type at origination as of:
TABLE 50: OTHER CONSUMER PORTFOLIO LOANS OUTSTANDING BY PRODUCT TYPE AT ORIGINATION
2018
2017
As of December 31 ($ in millions)
Unsecured
Other secured
Point-of-sale
Total
Outstanding
% of Total
$
$
610
510
1,222
2,342
26 %
22
52
100 %
$
Outstanding
$
461
482
616
1,559
% of Total
30 %
31
39
100 %
Analysis of Nonperforming Assets
Nonperforming assets include nonaccrual loans and leases for
which ultimate collectability of the full amount of the principal
and/or interest is uncertain; restructured commercial and credit card
loans which have not yet met the requirements to be classified as a
performing asset; restructured consumer loans which are 90 days
past due based on the restructured terms unless the loan is both
well-secured and in the process of collection; and certain other
including OREO and other repossessed property. A
assets,
summary of nonperforming assets is included in Table 51. For
further information on the Bancorp’s policies related to accounting
for delinquent and nonperforming loans and leases, refer to the
Nonaccrual Loans and Leases section of Note 1 of the Notes to
Consolidated Financial Statements.
Nonperforming assets were $411 million at December 31, 2018
compared to $495 million at December 31, 2017. At December 31,
2018, $16 million of nonaccrual loans were held for sale, compared
to $6 million at December 31, 2017.
Nonperforming portfolio assets as a percent of portfolio loans
and leases and OREO were 0.41% as of December 31, 2018
compared to 0.53% as of December 31, 2017. Nonaccrual loans and
leases secured by real estate were 34% of nonaccrual loans and
leases as of December 31, 2018 compared to 33% as of December
31, 2017.
Commercial portfolio nonaccrual loans and leases were $228
million at December 31, 2018, a decrease of $78 million from
December 31, 2017. Consumer portfolio nonaccrual loans and
leases were $120 million at December 31, 2018, a decrease of $11
million from December 31, 2017. Refer to Table 52 for a
rollforward of the portfolio nonaccrual loans and leases.
OREO and other repossessed property was $47 million at
December 31, 2018, compared to $52 million at December 31,
2017. The Bancorp recognized $7 million and $10 million in losses
on the transfer, sale or write-down of OREO properties during the
years ended December 31, 2018 and 2017, respectively.
During the years ended December 31, 2018 and 2017,
approximately $30 million and $36 million, respectively, of interest
income would have been recognized if the nonaccrual and
renegotiated loans and leases on nonaccrual status had been current
in accordance with their original terms. Although these values help
demonstrate the costs of carrying nonaccrual credits, the Bancorp
does not expect to recover the full amount of interest as nonaccrual
loans and leases are generally carried below their principal balance.
87 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 51: SUMMARY OF NONPERFORMING ASSETS AND DELINQUENT LOANS
As of December 31 ($ in millions)
Nonaccrual portfolio loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial leases
$
2018
Residential mortgage loans
Home equity
Other consumer loans
Nonaccrual portfolio restructured loans and leases:
Commercial and industrial loans
Commercial mortgage loans(c)
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
Commercial mortgage loans
Residential mortgage loans(a)
54
9
18
10
56
1
139
4
4
12
13
1
27
348
47
395
-
16
411
4
2
38
12
37
93
0.41 %
279
$
$
$
2017
2016
2015
2014
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
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
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 $195, $290, $312, $335 and $373 as of December 31, 2018, 2017, 2016, 2015 and 2014, respectively. The Bancorp recognized losses of $5, $5, $6, $8 and $13 for
the years ended December 31, 2018, 2017, 2016, 2015 and 2014, respectively.
Includes $6, $3, $4, $6 and $9 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at December 31, 2018, 2017, 2016, 2015 and 2014,
respectively, of which $2, $3, $1, $2 and $4 were restructured nonaccrual government insured commercial loans at December 31, 2018, 2017, 2016, 2015 and 2014, respectively.
(c) Excludes $19, $20 and $21 of restructured nonaccrual loans at December 31, 2016, 2015 and 2014, 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 10 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 $71 of OREO related to government insured loans at December 31, 2014. The Bancorp had historically excluded government guaranteed loans classified in OREO from its
nonperforming asset disclosures. Upon the prospective adoption on January 1, 2015 of ASU 2014-14, “Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure,”
government guaranteed loans meeting certain criteria are reclassified to other receivables rather than OREO upon foreclosure.
88 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides a rollforward of portfolio nonaccrual loans and leases, by portfolio segment:
TABLE 52: ROLLFORWARD OF PORTFOLIO NONACCRUAL LOANS AND LEASES
For the year ended December 31, 2018 ($ in millions)
Balance, beginning of period
Transfers to nonaccrual status
Transfers to accrual status
Transfers to held for sale
Loan paydowns/payoffs
Transfers to OREO
Charge-offs
Draws/other extensions of credit
Balance, end of period
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
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
to maximize collection of amounts due. Typically,
these
modifications reduce the loan interest rate, extend the loan term,
reduce the accrued interest or in limited circumstances, reduce the
principal balance of the loan. These modifications are classified as
TDRs.
At the time of modification, the Bancorp maintains certain
consumer loan TDRs (including residential mortgage loans, home
equity loans and other consumer loans) on accrual status, provided
there is reasonable assurance of repayment and performance
according to the modified terms based upon a current, well-
documented credit evaluation. Commercial loans modified as part
of a TDR are maintained on accrual status provided there is a
Commercial
306
252
(3)
(28)
(175)
(3)
(157)
36
228
523
300
(86)
(21)
(282)
(2)
(154)
28
306
$
$
$
$
Residential
Mortgage
30
34
(22)
-
(8)
(10)
(2)
-
22
34
46
(26)
-
(10)
(10)
(4)
-
30
Consumer
101
139
(67)
-
(32)
(7)
(36)
-
98
103
130
(55)
-
(29)
(7)
(41)
-
101
Total
437
425
(92)
(28)
(215)
(20)
(195)
36
348
660
476
(167)
(21)
(321)
(19)
(199)
28
437
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 $961
million and $927 million at December 31, 2018 and 2017,
respectively. As of December 31, 2018, the percentage of
restructured residential mortgage loans, home equity loans, and
credit card loans that are past due 30 days or more were 25%, 11%
and 39%, respectively.
The following tables summarize portfolio TDRs by loan type and delinquency status:
TABLE 53: ACCRUING AND NONACCRUING PORTFOLIO TDRs
As of December 31, 2018 ($ 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
60
552
203
5
14
834
$
$
Accruing
30-89 Days
Past Due
90 Days or
More Past Due
Nonaccruing
Total
-
52
12
-
3
67
-
120
-
-
-
120
147
12
13
1
27
200
207
736
228
6
44
1,221
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,
2018, these advances represented $321 of current loans, $42 of 30-89 days past due loans and $101 of 90 days or more past due loans.
89 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 54: ACCRUING AND NONACCRUING PORTFOLIO TDRs
As of December 31, 2017 ($ in millions)
Commercial loans(b)
Residential mortgage loans(a)
Home equity
Automobile loans
Credit card
Total
(a)
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.
(b) Excludes restructured nonaccrual loans held for sale.
Analysis of Net Loan Charge-offs
Net charge-offs were 35 bps and 32 bps of average portfolio loans
and leases for the years ended December 31, 2018 and 2017,
respectively. Table 55 provides a summary of credit loss experience
and net charge-offs as a percentage of average portfolio loans and
leases outstanding by loan category.
The ratio of commercial loan and lease net charge-offs to
average portfolio commercial loans and leases was 23 bps during the
year ended December 31, 2018, compared to 22 bps during the year
ended December 31, 2017.
Consumer loan net charge-offs as a percent of average
portfolio consumer loans was 56 bps for the year ended December
31, 2018 compared to 49 bps for the year ended December 31,
2017. The increase was primarily due to increases in net charge-offs
on credit card of $17 million and increases in net charge-offs on
other consumer loans of $12 million as a result of growth in
unsecured loans.
90 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
2018
2017
2015
2016
2014
25
4
-
-
8
13
21
10
2
83
19
6
-
-
6
11
23
24
31
120
(248)
(37)
(13)
(1)
(139)
(75)
(44)
(95)
(27)
(679)
(136)
(16)
-
(2)
(15)
(32)
(58)
(94)
(28)
(381)
(253)
(39)
(4)
(2)
(28)
(55)
(46)
(94)
(21)
(542)
(205)
(22)
-
(5)
(19)
(41)
(54)
(89)
(21)
(456)
(151)
(5)
-
(1)
(13)
(23)
(63)
(125)
(69)
(450)
TABLE 55: SUMMARY OF CREDIT LOSS EXPERIENCE
For the years ended December 31 ($ in millions)
Losses charged-off:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans(a)
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(a)
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
Total net losses charged-off
Net losses charged-off as a percent of average portfolio loans and leases:
0.54
Commercial and industrial loans
0.34
Commercial mortgage loans
0.79
Commercial construction loans
0.01
Commercial leases
0.48
Total commercial loans and leases
0.99
Residential mortgage loans
0.65
Home equity
0.22
Automobile loans
3.60
Credit card
5.80
Other consumer loans
0.86
Total consumer loans
Total net losses charged-off as a percent of average portfolio loans and leases
0.64
(a) For the year ended December 31, 2018, the Bancorp recorded $29 in both losses charged-off and recoveries of losses charged-off related to customer defaults on point-of-sale consumer loans for which
the Bancorp obtained recoveries under third-party credit enhancements.
0.31 %
(0.01)
-
0.03
0.23
0.04
0.17
0.45
4.44
1.93
0.56
0.35 %
(132)
1
-
(1)
(7)
(12)
(40)
(101)
(38)
(330)
0.40
0.23
(0.01)
0.10
0.33
0.07
0.33
0.33
3.69
2.93
0.48
0.39
0.54
0.38
0.11
0.04
0.46
0.13
0.46
0.24
3.60
3.26
0.51
0.48
0.27
0.17
-
0.06
0.22
0.04
0.26
0.39
3.93
2.57
0.49
0.32
(172)
(15)
1
(4)
(10)
(27)
(35)
(80)
(20)
(362)
(229)
(27)
(3)
(2)
(17)
(39)
(28)
(82)
(19)
(446)
(111)
(12)
-
(2)
(7)
(19)
(37)
(84)
(26)
(298)
(222)
(26)
(12)
(1)
(126)
(59)
(27)
(82)
(20)
(575)
26
11
1
-
13
16
17
13
7
104
33
7
1
1
9
14
19
9
1
94
24
12
1
-
11
16
18
12
2
96
$
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
to the Critical Accounting Policies section of MD&A for more
information.
During the year ended December 31, 2018, 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 the
91 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
reserve 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 portfolios that has not been
restructured in a TDR is calculated on a pooled basis with the
segmentation based on the similarity of credit risk characteristics.
Loss factors for consumer loans are developed for each pool based
on the trailing twelve month historical loss rate, as adjusted for
certain prescriptive
loss rate factors and certain qualitative
adjustment factors. The prescriptive loss rate factors and qualitative
adjustments are designed to reflect risks associated with current
conditions and trends which are not believed to be fully reflected in
the trailing twelve month historical loss rate. For real estate backed
consumer
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
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.
collateral values
the prescriptive
reviews,
control
factors
loans,
loss
rate
TABLE 56: CHANGES IN ALLOWANCE FOR CREDIT LOSSES
For the years ended December 31 ($ in millions)
ALLL:
Balance, beginning of period
Losses charged-off(a)
Recoveries of losses previously charged-off(a)
Provision for loan and lease losses
Deconsolidation of a VIE(b)
Balance, end of period
Reserve for unfunded commitments:
Balance, beginning of period
$
$
$
The Bancorp’s determination of the ALLL for commercial
loans is sensitive to the risk grades it assigns to these loans. In the
event that 10% of commercial loans in each risk category would
experience a downgrade of one risk category, the allowance for
commercial loans would increase by approximately $163 million at
December 31, 2018. 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 $35 million at December 31, 2018. 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.
2018
2017
2016
2015
2014
1,196
(450)
120
237
-
1,103
1,253
(381)
83
261
(20)
1,196
1,272
(456)
94
343
-
1,253
1,322
(542)
96
396
-
1,272
1,582
(679)
104
315
-
1,322
161
(30)
-
131
161
-
-
161
138
23
-
161
135
4
(1)
138
162
(27)
-
135
(Benefit from) provision for the reserve for unfunded commitments
Losses charged-off
$
Balance, end of period
(a) For the year ended December 31, 2018, the Bancorp recorded $29 in both losses charged-off and recoveries of losses charged-off related to customer defaults on point-of-sale consumer loans for
which the Bancorp obtained recoveries under third-party credit enhancements.
(b) Refer to Note 10 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
conditions have presented
these model
limitations, the qualitative adjustment factors may be incremental or
decremental to the quantitative model results.
themselves. Given
An unallocated component 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, 2018 and 2017 was 0.12% and 0.13%, respectively.
The unallocated allowance was 10% of the total allowance at both
December 31, 2018 and 2017.
As shown in Table 57, the ALLL as a percent of portfolio
loans and leases was 1.16% at December 31, 2018, compared to
1.30% at December 31, 2017. The ALLL was $1.1 billion and $1.2
billion at December 31, 2018 and 2017, respectively.
92 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
$
2018
2017
2016
515
80
32
18
81
36
42
156
33
110
1,103
718
82
16
15
96
58
42
102
12
112
1,253
651
65
23
14
89
46
38
117
33
120
1,196
TABLE 57: ATTRIBUTION OF ALLOWANCE FOR LOAN AND LEASE LOSSES TO PORTFOLIO LOANS AND LEASES
As of December 31 ($ in millions)
Attributed ALLL:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans
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
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
Unallocated (as a percent of portfolio loans and leases)
Attributed ALLL as a percent of portfolio loans and leases
1.16 %
1.15
0.69
0.50
0.52
0.56
0.47
6.32
1.41
0.12
1.16 %
44,340
6,974
4,657
3,600
15,504
6,402
8,976
2,470
2,342
95,265
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
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
$
$
2015
652
117
24
47
100
67
40
99
11
115
1,272
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
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 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 manage
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
The Bancorp’s ALCO, which
includes senior management
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 estimated 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
93 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.
As of December 31, 2018, the Bancorp’s interest rate risk
exposure is governed by a risk framework that utilizes the change in
NII over 12-month and 24-month horizons assuming a 200 bps
parallel ramped increase and a 150 bps parallel ramped decrease in
interest rates. Additionally, the Bancorp routinely analyzes various
potential and extreme scenarios, including ramps, shocks and twists
to assess where risks to net interest income persist or develop as
changes in the balance sheet and market rates evolve.
In order to recognize the risk of noninterest-bearing demand
deposit balance run-off in a rising interest rate environment, the
Bancorp’s NII sensitivity modeling assumes that approximately
$500 million of additional 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 $500 million of incremental growth in noninterest-
bearing deposit balances over 24 months above
senior
management’s baseline projections for each 100 bps decrease in
short-term market interest rates. The incremental 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 70% at December 31, 2018, which is
approximately 10 to 20 percentage points higher than the average
beta that the Bancorp experienced in the last FRB tightening cycle
from June 2004 to June 2006 and higher than the most recent beta
experienced in the current tightening cycle to date. The Bancorp’s
NII sensitivity modeling assumes a weighted-average falling rate
interest-bearing deposit beta of 40% at December 31, 2018. In
addition, the modeling assumes there is no lag between the timing
of changes in market rates and the timing of deposit repricing
despite such timing lags having occurred for each rate move thus far
in the current tightening cycle.
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 58: ESTIMATED NII SENSITIVITY PROFILE AND ALCO POLICY LIMITS
2018
2017
12
Months
ALCO Policy Limits
13-24
Months
(6.00)
N/A
N/A
N/A
(12.00)
(4.00)
N/A
N/A
N/A
(8.00)
% Change in NII (FTE)
12
Months
13-24
Months
ALCO Policy Limits
13-24
Months
12
Months
2.05 %
1.23
(4.97)
N/A
N/A
6.34
3.78
(9.44)
N/A
N/A
(4.00)
N/A
(8.00)
N/A
N/A
(6.00)
N/A
(12.00)
N/A
N/A
month horizon. Additionally, $3.2 billion in out of the money cash
flow hedges, originally maturing in 2019, were terminated to
enhance asset sensitivity over the next year and to increase the
capacity for additional cash flow hedges, as warranted. The changes
in the estimated NII sensitivity profile as of December 31, 2018
compared to December 31, 2017 were primarily attributable to an
increase in the outstanding taxable securities balances, a net increase
in outstanding receive-fixed swaps against floating-rate commercial
loans, the addition of forward starting floors against one-month
LIBOR, reduced noninterest-bearing deposit balances and a
decrease in outstanding fixed-rate long-term debt. These items were
partially offset by an overall increase in core deposit balances and a
reduction in fixed-rate commercial leases and residential mortgage.
Tables 59 and 60 provide the Bancorp’s estimated NII profile
at December 31, 2018 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
-100 Ramp over 12 months
-150 Ramp over 12 months
% Change in NII (FTE)
12
Months
(0.01) %
0.09
N/A
(2.83)
(4.34)
13-24
Months
2.11
1.34
N/A
(6.70)
(10.58)
At December 31, 2018, the Bancorp’s NII sensitivity is near neutral
in year one and would benefit in year two under the parallel rate
ramp increases. The Bancorp’s NII would decline in both year one
and year two under the parallel 150 bps ramp 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 FOMC has increased its target range for the federal
funds rate, the sensitivity to declining rates has increased, which is a
reflection of the balance sheet mix previously described. 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 scenario. During the fourth quarter of 2018, the
Bancorp executed hedges with notional amounts of $4 billion in
spot starting and $1 billion in forward starting receive-fixed interest
rate swaps and $3 billion in forward starting interest rate floors,
which reduced the Bancorp’s exposure to falling rates while
allowing the balance sheet to remain asset sensitive over the 24-
94 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, 2018:
TABLE 59: 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
-100 Ramp over 12 months
-150 Ramp over 12 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
(0.25) %
(0.03)
(2.95)
(4.52)
1.66
1.12
(6.93)
(10.92)
0.22
0.20
(2.72)
(4.17)
2.56
1.57
(6.48)
(10.24)
The following table includes the Bancorp's estimated NII sensitivity profile with a 25% increase and a 25% decrease to the deposit beta
assumptions as of December 31, 2018. The resulting weighted-average interest-bearing deposit betas included in this analysis are approximately
88% and 53%, respectively, as of December 31, 2018:
TABLE 60: ESTIMATED NII SENSITIVITY WITH DEPOSIT BETA ASSUMPTION CHANGES
Change in Interest Rates (bps)
+200 Ramp over 12 months
+100 Ramp over 12 months
-100 Ramp over 12 months
-150 Ramp over 12 months
% Change in NII (FTE)
Betas 25% Higher
Betas 25% Lower
12
Months
13-24
Months
12
Months
13-24
Months
(3.01) %
(1.41)
(1.98)
(3.12)
(3.67)
(1.52)
(5.05)
(8.60)
2.98
1.58
(3.68)
(5.57)
7.89
4.21
(8.30)
(12.77)
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
important are
are critical
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 61: ESTIMATED EVE SENSITIVITY PROFILE
Change in Interest Rates (bps)
Change in EVE
+200 Shock
+100 Shock
-100 Shock
-200 Shock
2018
ALCO Policy Limit
(12.00)
N/A
N/A
(12.00)
(7.09) %
(3.21)
(1.01)
(5.27)
Change in EVE
2017
ALCO Policy Limit
(4.87)
(1.82)
(1.57)
N/A
(12.00)
N/A
N/A
N/A
The EVE sensitivity is moderately negative in both the +200 bps
rising rate and the -200 bps falling rate scenarios at December 31,
2018. The changes in the estimated EVE sensitivity profile from
December 31, 2017 are primarily related to an increase in the
outstanding taxable securities balance, migration from noninterest-
bearing deposits to interest-bearing deposits with higher attrition
assumptions, the addition of receive-fixed swaps against floating-
rate commercial loans and the addition of interest rate floors. These
items were partially offset by net run-off of the fixed-rate
commercial lease and residential mortgage portfolios and overall
deposit growth.
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
95 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
impacts on NII on an FTE basis and EVE of extreme changes in
interest rates are modeled, wherein the Bancorp employs the use of
yield curve shocks and environment-specific scenarios.
Use of Derivatives to Manage Interest Rate Risk
An
interest rate risk
integral component of the Bancorp’s
management strategy is its use of derivative instruments to minimize
significant fluctuations in earnings caused by changes in market
interest rates. Examples of derivative instruments that the Bancorp
may use as part of its interest rate risk management strategy include
interest rate swaps, interest rate floors, interest rate caps, forward
contracts, 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,
approvals, limits and monitoring procedures. 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 interest rate
volatility and credit equivalent exposure on these contracts and
counterparty credit approvals performed by independent risk
management. For further
including the notional
amount and fair values of these derivatives, refer to Note 12 of the
Notes to Consolidated Financial Statements.
information
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, 2018:
Less than 1 year
$
TABLE 62: PORTFOLIO LOANS AND LEASES EXPECTED CASH FLOWS
($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans
Total consumer loans
Total portfolio loans and leases
24,942
2,552
2,217
829
30,540
2,430
1,635
3,731
494
1,575
9,865
40,405
$
1-5 years
18,820
3,803
2,351
1,656
26,630
6,515
3,270
4,873
1,976
708
17,342
43,972
Over 5 years
578
619
89
1,115
2,401
6,559
1,497
372
-
59
8,487
10,888
Total
44,340
6,974
4,657
3,600
59,571
15,504
6,402
8,976
2,470
2,342
35,694
95,265
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, 2018:
TABLE 63: PORTFOLIO LOANS AND LEASES EXPECTED CASH FLOWS OCCURRING AFTER 1 YEAR
($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans
Total consumer loans
Total portfolio loans and leases
$
$
Fixed
2,380
864
31
2,771
6,046
9,793
495
5,218
480
482
16,468
22,514
Interest Rate
Floating or Adjustable
17,018
3,558
2,409
-
22,985
3,281
4,272
27
1,496
285
9,361
32,346
Residential Mortgage Servicing Rights and Interest Rate Risk
The fair value of the residential MSR portfolio was $938 million and
$858 million at December 31, 2018 and December 31, 2017,
respectively. The value of servicing rights can fluctuate sharply
depending on changes in interest rates and other factors. Generally,
as interest rates decline and loans are prepaid to take advantage of
refinancing, the total value of existing servicing rights declines
because no further servicing fees are collected on repaid loans. The
96 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Bancorp maintains a non-qualifying hedging strategy relative to its
mortgage banking activity in order to manage a portion of the risk
associated with changes in the value of its MSR portfolio as a result
of changing interest rates.
Mortgage rates increased during the year ended December 31,
2018 which caused modeled prepayment speeds to slow. The fair
value of the MSR portfolio increased $42 million due to changes to
inputs to the valuation model including prepayment speeds and
OAS spread assumptions and decreased $125 million due to the
passage of time, including the impact of regularly scheduled
repayments, paydowns and payoffs for the year ended December
31, 2018.
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.
The Bancorp recognized net losses of $36 million and net gains
of $4 million, respectively, on its non-qualifying hedging strategy
during the years ended December 31, 2018 and 2017. These
amounts include net losses of $15 million and net gains of $2
million, respectively, on securities related to the Bancorp’s non-
qualifying hedging strategy during the years ended December 31,
2018 and 2017. The Bancorp may adjust its hedging strategy to
reflect its assessment of the composition of its MSR portfolio, the
cost of hedging and the anticipated effectiveness of the hedges
given the economic environment. Refer to Note 11 of the Notes to
Consolidated Financial Statements for further discussion on
servicing rights and the instruments used to hedge interest rate risk
on MSRs.
Foreign Currency Risk
The Bancorp may enter into foreign exchange derivative contracts
to economically hedge certain foreign denominated loans. The
LIQUIDITY RISK MANAGEMENT
The goal of liquidity management is to provide adequate funds to
meet changes in loan and lease demand, unexpected levels of
deposit withdrawals and other contractual obligations. Mitigating
liquidity risk is accomplished by maintaining liquid assets in the
form of 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 16 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.
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, 2018 and
2017 was $948 million and $939 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 independent risk
management.
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 independent risk
management.
Liquidity Risk Management Oversight
includes senior management
The Bancorp’s ALCO, which
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 62 of the Market Risk Management subsection of the Risk
Management section of MD&A illustrates the expected maturities
from loan and lease repayments. Of the $32.8 billion of securities in
the Bancorp’s available-for-sale debt and other securities portfolio at
December 31, 2018, $3.3 billion in principal and interest is expected
to be received in the next 12 months and an additional $3.2 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
97 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
interest rate fluctuations and to manage liquidity, the Bancorp has
developed securitization and sale procedures for several types of
interest-sensitive assets. A majority of the long-term, fixed-rate
single-family residential mortgage loans underwritten according to
FHLMC or FNMA guidelines are sold for cash upon origination.
Additional assets such as certain other residential 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 $5.5 billion during
the year ended December 31, 2018 compared to $7.5 billion during
the year ended December 31, 2017. For further information, refer to
Note 10 and Note 11 of the Notes to Consolidated Financial
Statements.
Core deposits have historically provided the Bancorp with a
sizeable source of relatively stable and low-cost funds. The
Bancorp’s average core deposits and average shareholders’ equity
funded 83% of its average total assets for both the years ended
December 31, 2018 and 2017. 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, 2018, $7.3 billion of debt or other securities
were available for issuance under the current Bancorp’s Board of
Directors’ authorizations and the Bancorp is authorized to file any
necessary registration statements with the SEC to permit ready
access to the public securities markets; however, access to these
markets may depend on market conditions. During the year ended
2018, the Bancorp issued and sold $900 million of senior notes.
The Bank’s global bank note program has a borrowing capacity
of $25.0 billion, of which $17.0 billion was available for issuance as
of December 31, 2018. During the year ended 2018, the Bank issued
and sold $1.6 billion of senior bank notes. Additionally, at
December 31, 2018, the Bank had approximately $45.2 billion of
borrowing capacity available through secured borrowing sources
including the FHLB and FRB.
For further information on subsequent events related to long-
term debt, refer to Note 31 of the Notes to Consolidated Financial
Statements.
Liquidity Coverage Ratio and Net Stable Funding Ratio
The Bancorp is subject to the Modified LCR requirement, which
stipulates that BHCs with at least $50 billion but less than $250
billion in total consolidated assets that are not internationally active,
such as the Bancorp, maintain HQLA equal to their calculated net
cash outflows over a 30 calendar-day stress period multiplied by a
factor of 0.7. The Bancorp’s Modified LCR was 128% at December
31, 2018.
Further, beginning with the fourth quarter of 2018, BHCs
subject to the Modified LCR are required to calculate and disclose
the quarterly average components used to calculate their Modified
LCR.
The following table presents the components of the Bancorp’s Quarterly Average Modified LCR for the three months ended:
TABLE 64: QUARTERLY AVERAGE MODIFIED LCR
($ in millions)
HQLA(a)
Net Outflows
LCR
HQLA in Excess of Net Outflows(a)
(a) Average HQLA shown after application of applicable haircuts and limits on Level 2 liquid assets.
including
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
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.
On October 31, 2018, the Board of Governors of the FRB
released a series of regulatory proposals to implement the Economic
Growth, Regulatory Relief, and Consumer Protection Act (“Reform
Act”). Among the proposals, the Board of Governors, joined by the
Department of Treasury, Office of the Comptroller of the Currency
and the Federal Deposit Insurance Corporation proposed to
remove the application of the LCR regulations and the NSFR from
certain BHCs that qualify under the proposal as “Category IV”
98 Fifth Third Bancorp
December 31, 2018
21,469
$
17,449
123%
4,020
$
institutions, primarily those BHCs with consolidated assets between
$100 billion and $250 billion, including Fifth Third Bancorp.
The NPR’s public comment period ended January 22, 2019 and
could be further amended by the FRB and other financial regulators
prior to adoption. As such, the ultimate impacts of the NPR to Fifth
Third Bancorp, Fifth Third Bank and their respective subsidiaries
and activities will be subject to the final form of these NPRs and
additional rulemakings issued. Fifth Third cannot predict future
changes in the applicable laws, regulations and regulatory agency
policies, yet such changes may have a material effect on its business,
financial condition or results of operations.
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
markets and
its borrowing costs, thereby adversely
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 65. The ratings reflect the ratings agency’s view on the
Bancorp’s and Bank’s capacity to meet financial commitments.*
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
*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
TABLE 65: AGENCY RATINGS
As of March 1, 2019
Fifth Third Bancorp:
Short-term borrowings
Senior debt
Subordinated debt
Fifth Third Bank:
Short-term borrowings
Short-term deposit
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
functions and providing
lines of business and corporate
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
Management, cyber security risk management and review of
and overseeing
to operational
relate
information on the credit rating ranking within the overall classification system is
located on the website of each credit rating agency.
Moody's
Standard and Poor's
Fitch
No rating
Baa1
Baa1
P-2
P-1
Aa3
A3
Baa1
Stable
A-2
BBB+
BBB
A-2
No rating
A-
A-
BBB+
Stable
F1
A-
BBB+
F1
F1
A
A-
BBB+
Stable
DBRS
R-1L
A
AL
R-1M
No rating
AH
AH
A
Stable
operational losses. The function is also responsible for developing
reports that support the proactive management of operational risk
across the enterprise. The lines of business and corporate functions
are responsible for managing the operational risks associated with
their areas in accordance with the risk management framework. The
framework is intended to enable the Bancorp to function with a
sound and well-controlled operational environment. These
processes support
to minimize future
the Bancorp’s goals
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 Joint Committee of the Board of Directors of Fifth
Third Bancorp and Fifth Third Bank.
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
laws,
a result of noncompliance with consumer protection
regulations and requirements); (ii) internal policies and procedures,
standards of best practice or codes of conduct; and (iii) principles of
integrity and fair dealing applicable to Fifth Third’s activities and
functions. Fifth Third focuses on managing regulatory compliance
risk in accordance with the Bancorp’s integrated risk management
framework, which ensures consistent processes for identifying,
assessing, managing, monitoring and reporting risks. The Bancorp’s
risk management goal is to keep compliance risk at appropriate
levels consistent with the Bancorp’s risk appetite.
99 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
independent oversight
To mitigate compliance risk, Compliance Risk Management
provides
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, executive- and
board-level governance and reporting routines, compliance-related
policies, risk assessments, key risk indicators, issues tracking,
regulatory compliance
anti-money
laundering, privacy and, in partnership with the Community and
for establishing and overseeing
and monitoring,
is responsible
testing
Economic Development 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
oversees and supports Fifth Third
in the management of
compliance risk across the enterprise. The Management Compliance
Committee oversees Fifth Third-wide compliance issues, industry
best practices, legislative developments, regulatory concerns and
other leading indicators of compliance risk. The Management
Compliance Committee reports to the ERMC, which reports to the
Risk and Compliance Joint Committee of the Board of Directors of
Fifth Third Bancorp and Fifth Third Bank.
CAPITAL MANAGEMENT
Management regularly reviews the Bancorp’s capital levels to help
ensure it is appropriately positioned under various operating
environments. The Bancorp has established a Capital Committee
which is responsible for making capital plan recommendations to
management. These recommendations are reviewed by the ERMC
and the annual capital plan is approved by the Board of Directors.
The Capital Committee is responsible for execution 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”.
TABLE 66: 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, 1.25% in 2017, and is
1.875% in 2018. The Bancorp exceeded these “well-capitalized” and
“capital conservation buffer” ratios for all periods presented.
In April 2018, the federal banking regulators proposed
transitional arrangements to permit banking organizations to phase
in the day-one impact of the adoption of ASU 2016-13, referred to
as the current expected credit loss model, on regulatory capital over
a period of three years. For additional information on ASU 2016-13,
Minimum
Well-Capitalized
4.50 %
6.00
8.00
4.00
6.50
8.00
10.00
5.00
refer to Note 1 of the Notes to Consolidated Financial Statements.
The Bancorp is evaluating the impact of this proposal.
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.
100 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the Bancorp's capital ratios as of December 31:
TABLE 67: 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)(d)
2018
2017
11.23 %
9.63
8.71
11.69
9.79
8.83
2016
11.57
9.72
8.77
2015
11.24
9.46
8.50
2014
11.53
9.34
8.36
CET1 capital
Tier I capital
Total regulatory capital
Risk-weighted assets
$
12,534
13,864
17,723
122,432
Basel III(b)(e)
12,517
13,848
17,887
117,997
12,426
13,756
17,972
119,632
Basel I(c)(e)
-
12,764
16,895
117,878
11,917
13,260
17,134
121,290
Regulatory capital ratios:
CET1 capital
Tier I risk-based capital
Total risk-based capital
Tier I leverage
(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 values are added together resulting in the Bancorp’s 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.
10.24 %
11.32
14.48
9.72
10.61
11.74
15.16
10.01
10.39
11.50
15.02
9.90
9.82
10.93
14.13
9.54
-
10.83
14.33
9.66
(c) These capital amounts and ratios were calculated under the Supervisory Agencies general risk-based capital rules (Basel I) which were in effect prior to January 1, 2015.
(d) Excludes unrealized gains and losses
(e) The regulatory capital data and ratios have not been restated as a result of the Bancorp’s change in accounting for investments in affordable housing projects that qualify for low-income housing tax
credits (LIHTC). Refer to Note 1 of the Notes to Consolidated Financial Statements for additional information.
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
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 2018 stress testing program and CCAR on February 1,
2018, with submissions of stress test results and capital plans to the
FRB due on April 5, 2018, 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 21, 2018 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. It is,
however, subject to the FRB’s Horizontal Capital Review, which
was conducted in the third quarter of 2018. Refer to Note 3 and
Note 22 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 2018.
On May 21, 2018, the Bancorp announced the planned
acquisition of MB Financial, Inc. As a result of this transaction, the
FRB required the Bancorp to resubmit its CCAR plan recognizing
the pro forma impact of the combined Fifth Third/MB Financial,
Inc. post-merger entity. On October 5, 2018, Fifth Third
resubmitted its capital plan to the FRB. On December 27, 2018, the
FRB indicated to the Bancorp that it did not object to the
resubmitted capital plan. The resubmitted capital plan called for no
change to the originally submitted total capital actions over the 2018
CCAR approval horizon (the third quarter of 2018 through the
second quarter of 2019). However, the share repurchase authority
increased from $1.651 billion to $1.81 billion as a result of after-tax
gains related to the sale of Worldpay, Inc. common stock.
In April 2018, the FRB proposed to introduce stress buffer
requirements. Under the proposal, a SCB would replace the 2.5%
capital conservation buffer. The SCB would reflect stressed losses in
the supervisory severely adverse scenario of the FRB’s CCAR stress
tests plus four quarters of planned common stock dividends, subject
to a floor of 2.5%. The proposal would also introduce a SLB
requirement, analogous to the SCB, that would apply to the Tier I
leverage ratio. In addition, the proposal would require BHCs to
reduce their planned capital distributions if those distributions
would not be consistent with the applicable capital buffer
constraints based on the BHCs’ own baseline scenario projections.
The proposal is applicable for BHCs with $50 billion or more in
including the Bancorp. Under the
total consolidated assets,
proposal, a BHC’s first SCB and SLB requirements would become
effective on October 1, 2019. The Bancorp is evaluating the impact
of this proposal.
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 $0.74 and
$0.60 during the years ended December 31, 2018 and 2017,
respectively. The Bancorp entered into or settled a number of
accelerated share repurchase and open market share repurchase
transactions during the years ended December 31, 2018 and 2017.
Refer to Note 22 of the Notes to Consolidated Financial Statements
101 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for additional information on the accelerated share repurchases and
open market share repurchase transactions.
The following table summarizes shares authorized for repurchase as part of publicly announced plans or programs:
TABLE 68: SHARE REPURCHASES
For the years ended December 31
81,641,397
Shares authorized for repurchase at January 1
-
Additional authorizations(a)
(58,493,506)
Share repurchases(b)
23,147,891
Shares authorized for repurchase at December 31
27.00
Average price paid per share(b)
(a) During the first quarter of 2018, 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 13 million shares remained available for repurchase by the Bancorp.
23,147,891
87,383,525
(49,967,134)
60,564,282
29.44
(b) Excludes 2,155,189 and 2,397,589 shares repurchased during the years ended December 31, 2018 and 2017, 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.
2017
2018
$
102 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, the Bancorp enters into financial
transactions that are considered off-balance sheet arrangements as
they involve varying elements of market, credit and liquidity risk in
excess of the amounts recognized in the Bancorp’s Consolidated
Balance Sheets. The Bancorp’s off-balance sheet arrangements
liabilities 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 expenditures, capital commitments for private
equity investments and capital lease obligations. Refer to Note 16 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 16 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 10 of the Notes to Consolidated Financial Statements for
additional information on non-consolidated VIEs.
103 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, 2018 are shown in
Table 69. As of December 31, 2018, 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 19 of the Notes to Consolidated Financial Statements.
TABLE 69: CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
As of December 31, 2018 ($ in millions)
Contractually obligated payments due by period:
Deposits with no stated maturity(a)(b)
Long-term debt(a)(c)
Time deposits(a)(d)
Short-term borrowings(a)(e)
Forward contracts related to residential mortgage loans held for sale(f)
Noncancelable operating lease obligations(g)
Partnership investment commitments(h)
Pension benefit payments(i)
Purchase obligations and capital expenditures(j)
Capital lease obligations
Total contractually obligated payments due by period
Other commitments by expiration period:
Commitments to extend credit(k)
Letters of credit(l)
Total other commitments by expiration period
(a)
Less than 1
year
1-3 years
3-5 years
Greater than
5 years
Total
$
$
101,918
3,110
3,967
2,498
926
86
175
17
89
6
112,792
-
5,351
2,843
-
-
147
135
32
57
9
8,574
-
1,658
99
-
-
114
26
32
25
4
1,958
-
4,307
8
-
-
256
40
70
-
1
4,682
101,918
14,426
6,917
2,498
926
603
376
151
171
20
128,006
$
$
26,922
1,044
27,966
70,447
2,041
72,488
Interest-bearing obligations are principally used to fund interest-earning assets. Interest charges on contractual obligations were excluded from reported amounts, as the potential cash outflows would
have corresponding cash inflows from interest-earning assets.
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.
Includes debt obligations with an original maturity of greater than one year. Refer to Note 15 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.
Includes federal funds purchased and borrowings with an original maturity of less than one year. For additional information, refer to Note 14 of the Notes to Consolidated Financial Statements.
(b)
(c)
(d)
(e)
(f) Refer to Note 12 of the Notes to Consolidated Financial Statements for additional information on forward contracts to sell residential mortgage loans.
(g)
(h)
(i) Refer to Note 20 of the Notes to Consolidated Financial Statements for additional information on pension obligations.
(j) Represents agreements to purchase goods or services and includes commitments to various general contractors for work related to banking center construction.
(k) 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 16 of the Notes to Consolidated Financial Statements.
Includes rental commitments.
Includes low-income housing and historic tax investments. For additional information, refer to Note 10 of the Notes to Consolidated Financial Statements.
22,658
517
23,175
13,061
472
13,533
7,806
8
7,814
(l) Letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. For additional information, refer to Note 16 of the Notes to Consolidated Financial
Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is set forth in the Market Risk Management section of Item 7 of this Report on pages 93-97 and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
104 Fifth Third Bancorp
REPORT 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, 2018
and 2017, 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, 2018, 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, 2018 and 2017, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2018, 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) (PCAOB), the
Bancorp’s internal control over financial reporting as of December 31, 2018, 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 March 1, 2019
expressed an unqualified opinion on the Bancorp’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, effective October 1, 2018, the Bancorp elected to change its accounting for qualifying Low-
Income Housing Tax Credit investments from the equity method to the proportional amortization method, resulting in retrospective adjustments
to reflect the accounting change within the 2018 financial statements and to adjust the originally reported amounts for the 2017 and 2016 financial
statements.
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.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
March 1, 2019
We have served as the Bancorp’s auditor since 1970.
105 Fifth Third Bancorp
As of December 31 ($ in millions, except share data)
Assets
Cash and due from banks
Other short-term investments(a)
Available-for-sale debt and other securities(b)
Held-to-maturity securities(c)
Trading debt securities
Equity securities
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
Other assets(a)(i)
Total Assets
Liabilities
Deposits:
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
Federal funds purchased
Other short-term borrowings
Accrued taxes, interest and expenses(i)
Other liabilities(a)
Long-term debt(a)
Total Liabilities
Equity
Common stock(g)
Preferred stock(h)
Capital surplus
Retained earnings(i)
Accumulated other comprehensive (loss) income
Treasury stock(g)
Total Bancorp shareholders’ equity
Noncontrolling interests
Total Equity
Total Liabilities and Equity
(a)
CONSOLIDATED BALANCE SHEETS
2018
2017(i)
$
$
$
$
$
$
$
2,681
1,825
32,830
18
287
452
607
95,265
(1,103)
94,162
1,861
518
2,478
40
938
7,372
146,069
32,116
76,719
108,835
1,925
573
1,562
2,498
14,426
129,819
2,051
1,331
2,873
16,578
(112)
(6,471)
16,250
-
16,250
146,069
2,514
2,753
31,751
24
492
439
492
91,970
(1,196)
90,774
2,003
646
2,445
27
858
6,863
142,081
35,276
67,886
103,162
174
4,012
1,465
2,144
14,904
125,861
2,051
1,331
2,790
14,957
73
(5,002)
16,200
20
16,220
142,081
Includes $40 and $62 of other short-term investments, $668 and $1,297 of portfolio loans and leases, $(4) and $(6) of ALLL, $5 and $7 of other assets, $1 and $2 of other liabilities and $606
and $1,190 of long-term debt from consolidated VIEs that are included in their respective captions above at December 31, 2018 and 2017, respectively. For further information, refer to Note
10.
(b) Amortized cost of $33,128 and $31,577 at December 31, 2018 and 2017, respectively.
(c)
(d)
Fair value of $18 and $24 at December 31, 2018 and 2017, respectively.
Includes $537 and $399 of residential mortgage loans held for sale measured at fair value and $7 and $0 of commercial loans held for sale measured at fair value at December 31, 2018 and
2017, respectively.
Includes $179 and $137 of residential mortgage loans measured at fair value at December 31, 2018 and 2017, respectively.
Includes $42 and $27 of bank premises and equipment held for sale at December 31, 2018 and 2017, respectively. For further information refer to Note 7.
(e)
(f)
(g) Common shares: Stated value $2.22 per share; authorized 2,000,000,000; outstanding at December 31, 2018 – 646,630,857 (excludes 277,261,724 treasury shares), 2017 –
693,804,893 (excludes 230,087,688 treasury shares).
(h) 446,000 shares of undesignated no par value preferred stock are authorized and unissued at December 31, 2018 and 2017; 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, 2018 and 2017; 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, 2018 and 2017; 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, 2018 and 2017.
(i) Effective in the fourth quarter of 2018, Fifth Third retrospectively applied a change in its accounting policy for investments in affordable housing projects that qualify for LIHTC in accordance with
ASU 2014-01. Refer to Note 1 for additional information.
Refer to the Notes to Consolidated Financial Statements.
106 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF INCOME
$
2018
2016(a)
2017(a)
3,233
952
8
4,193
3,478
996
15
4,489
4,078
1,080
25
5,183
277
6
30
378
691
3,798
261
3,537
205
2
10
361
578
3,615
343
3,272
538
30
29
446
1,043
4,140
237
3,903
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 (losses) gains, net
Securities (losses) gains, net - non-qualifying hedges on mortgage servicing rights
Total noninterest income
Noninterest Expense
1,612
Salaries, wages and incentives
339
Employee benefits
299
Net occupancy expense
234
Technology and communications
132
Card and processing expense
118
Equipment expense
1,026
Other noninterest expense(a)
3,760
Total noninterest expense
Income Before Income Taxes
2,208
665
Applicable income tax expense(a)
Net Income
1,543
(4)
Less: Net income attributable to noncontrolling interests
Net Income Attributable to Bancorp
1,547
75
Dividends on preferred stock
Net Income Available to Common Shareholders
1,472
Earnings per share - basic(a)
1.92
Earnings per share - diluted(a)
1.91
Average common shares outstanding - basic
757,432,291
Average common shares outstanding - diluted
764,495,353
(a) Effective in the fourth quarter of 2018, Fifth Third retrospectively applied a change in its accounting policy for investments in affordable housing projects that qualify for LIHTC in accordance with
1,783
332
292
285
123
123
990
3,928
2,765
572
2,193
-
2,193
75
2,118
3.11
3.06
673,346,168
685,488,498
1,633
356
295
245
129
117
1,007
3,782
2,979
799
2,180
-
2,180
75
2,105
2.86
2.81
728,289,200
740,691,433
549
444
438
329
212
887
(54)
(15)
2,790
558
404
432
319
285
688
10
-
2,696
554
419
353
313
224
1,357
2
2
3,224
$
$
$
ASU 2014-01. Refer to Note 1 for additional information.
Refer to the Notes to Consolidated Financial Statements.
107 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31 ($ in millions)
Net Income(a)
Other Comprehensive (Loss) Income, Net of Tax:
Unrealized (losses) gains on available-for-sale debt securities:
Unrealized holding (losses) gains arising during the year
Reclassification adjustment for net losses (gains) included in net income
Unrealized gains (losses) on cash flow hedge derivatives:
Unrealized holding gains (losses) arising during the year
Reclassification adjustment for net losses (gains) included in net income
Defined benefit pension plans, net:
2018
2017(a)
2016(a)
$
2,193
2,180
1,543
(371)
9
169
2
21
4
(7)
(12)
(130)
(7)
19
(31)
Net actuarial gain (loss) arising during the year
Reclassification of amounts to net periodic benefit costs
(1)
12
(138)
Other comprehensive (loss) income, net of tax
Comprehensive Income
1,405
(4)
Less: Comprehensive income attributable to noncontrolling interests
Comprehensive Income Attributable to Bancorp
1,409
(a) Effective in the fourth quarter of 2018, Fifth Third retrospectively applied a change in its accounting policy for investments in affordable housing projects that qualify for LIHTC in accordance with
1
7
14
2,194
-
2,194
1
7
(183)
2,010
-
2,010
$
ASU 2014-01. Refer to Note 1 for additional information.
Refer to the Notes to Consolidated Financial Statements.
108 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
Stock
Stock
$
2,051
1,331
Surplus Earnings
12,358
2,666
(Loss) Income
197
Stock
(2,764)
Equity
15,839
Interests
31
Total
Equity
15,870
2,051
1,331
2,666
7
83
$
2,051
1,331
2,756
(17)
51
$
2,051
1,331
2,790
(134)
12,224
1,547
(405)
(75)
1
(2)
13,290
2,180
(436)
(75)
(2)
14,957
197
(2,764)
(138)
(668)
(4)
3
(3,433)
(1,588)
16
3
(5,002)
59
14
73
(134)
15,705
1,547
(138)
(405)
(75)
(661)
80
1
16,054
2,180
14
(436)
(75)
(1,605)
67
1
16,200
(134)
15,736
1,543
(138)
(405)
(75)
(661)
80
1
16,081
2,180
14
(436)
(75)
(1,605)
67
(6)
16,220
31
(4)
27
(7)
20
($ in millions, except per share data)
Balance at December 31, 2015
Impact of cumulative effect of change
in accounting principle(d)
Balance at January 1, 2016
Net income
Other comprehensive loss, net of tax
Cash dividends declared:
Common stock(a)
Preferred stock(b)
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(a)
Preferred stock(b)
Shares acquired for treasury
Impact of stock transactions under
stock compensation plans, net
Other
Balance at December 31, 2017
Impact of cumulative effect of change
1,331
2,051
2,790
(2)
71
6
14,963
2,193
in accounting principles(c)
Balance at January 1, 2018
Net income
Other comprehensive loss, net of tax
Cash dividends declared:
Common stock(a)
Preferred stock(b)
Shares acquired for treasury
Impact of stock transactions under
23
stock compensation plans, net
2
Other
Balance at December 31, 2018
(6,471)
(a) For the years ended December 31, 2018, 2017 and 2016, dividends declared per common share were $0.74, $0.60 and $0.53, respectively.
(b) For the years ended December 31, 2018, 2017 and 2016, dividends were $1,275.00 per preferred share for Perpetual Preferred Stock, Series H, $1,656.24 per share for Perpetual Preferred
4
16,204
2,193
(183)
4
16,224
2,193
(183)
65
(2)
16,250
65
(22)
16,250
(499)
(75)
(1,453)
(499)
(75)
(1,453)
(4)
16,578
(499)
(75)
(20)
-
(5,002)
(1,494)
2,873
2,051
1,331
(183)
(112)
42
20
41
$
Stock, Series I and $1,225.00 per preferred share for Perpetual Preferred Stock, Series J.
(c) Related to the adoption as of January 1, 2018 of ASU 2016-01, ASU 2017-12 and ASU 2018-02. Refer to Note 1 for additional information.
(d) Effective in the fourth quarter of 2018, Fifth Third retrospectively applied a change in its accounting policy for investments in affordable housing projects that qualify for LIHTC in accordance with
ASU 2014-01. Refer to Note 1 for additional information.
Refer to the Notes to Consolidated Financial Statements.
109 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 ($ in millions)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
Provision for loan and lease losses
Depreciation, amortization and accretion
Stock-based compensation expense
Provision for (benefit from) deferred income taxes
Securities losses (gains), net
Securities losses (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 (gains) losses on disposition and impairment of operating lease equipment
Gain related to Vantiv, Inc.'s acquisition of Worldpay Group plc.
Gain on sale of Worldpay, Inc. shares
Gain on the TRA associated with Worldpay, Inc.
Proceeds from sales of loans held for sale
Loans originated or purchased for sale, net of repayments
Dividends representing return on equity investments
Net change in:
Trading and equity securities
Other assets
Accrued taxes, interest and expenses
Other liabilities
Net Cash Provided by Operating Activities
Investing Activities
Proceeds from sales:
Available-for-sale debt and other securities
Loans and leases
Bank premises and equipment
Proceeds from repayments / maturities:
Available-for-sale debt and other securities
Held-to-maturity securities
Purchases:
Available-for-sale debt and other securities
Bank premises and equipment
MSRs
Proceeds from settlement of BOLI
Proceeds from sales and dividends representing return of equity 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
2018
2017(a)
2016(a)
2,193
237
360
127
30
54
15
83
-
(71)
43
-
(6)
(414)
(205)
(20)
5,199
(5,378)
12
132
303
147
15
2,856
12,430
305
57
1,845
6
(16,207)
(192)
(82)
16
604
-
(43)
2,180
261
341
118
(252)
(3)
(2)
122
-
(108)
-
-
39
-
(1,037)
(44)
6,453
(6,054)
46
(442)
(22)
(138)
22
1,480
12,637
164
40
2,331
3
(15,295)
(200)
(109)
14
1,363
-
(44)
1,543
343
453
111
(141)
(7)
-
-
(7)
(101)
13
(19)
9
-
-
(197)
6,895
(7,014)
28
(23)
338
(157)
24
2,091
18,280
360
82
3,776
44
(24,636)
(186)
-
23
64
(219)
-
928
(3,866)
58
(4,141)
1
(446)
(31)
428
(83)
(243)
(126)
(2,864)
Net Cash (Used in) Provided by Investing Activities
Financing Activities
Net change in:
1,146
Deposits
(19)
Federal funds purchased
2,028
Other short-term borrowings
(402)
Dividends paid on common stock
(52)
Dividends paid on preferred stock
3,735
Proceeds from issuance of long-term debt
(5,119)
Repayment of long-term debt
(661)
Repurchases of treasury stock and related forward contracts
(31)
Other
Net Cash Provided by (Used in) Financing Activities
625
Increase (Decrease) in Cash and Due from Banks
(148)
Cash and Due from Banks at Beginning of Period
2,540
Cash and Due from Banks at End of Period
2,392
(a) Effective in the fourth quarter of 2018, Fifth Third retrospectively applied a change in its accounting policy for investments in affordable housing projects that qualify for LIHTC in accordance with
5,673
1,751
(3,439)
(467)
(98)
2,438
(2,884)
(1,453)
(69)
1,452
167
2,514
2,681
(659)
42
477
(430)
(75)
2,490
(1,969)
(1,605)
(57)
(1,786)
122
2,392
2,514
$
ASU 2014-01. Refer to Note 1 for additional information.
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.
110 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 fair value unless the
investment does not have a readily determinable fair value. The
investments without a readily
Bancorp accounts for equity
determinable fair value using the measurement alternative to fair
value, representing
investment minus any
impairment recorded, if any, and plus or minus changes resulting
from observable price changes in orderly transactions for the
identical or a similar investment of the same issuer. Intercompany
transactions and balances among consolidated entities have been
eliminated. Certain prior period data has been reclassified to
conform to current period presentation.
the cost of
the
Use of Estimates
The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Cash and Due From Banks
Cash and due from banks consist of currency and coin, cash items
in the process of collection and due from banks. Currency and coin
includes both U.S. and foreign currency owned and held at Fifth
Third offices and that is in-transit to the FRB. Cash items in the
process of collection include checks and drafts that are drawn on
another depository
institution or the FRB that are payable
immediately upon presentation in the U.S. Balances due from banks
include noninterest-bearing balances that are funds on deposit at
other depository institutions or the FRB.
Investment Securities
Debt 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. Debt
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. Debt securities are classified as
trading when bought and held principally for the purpose of selling
them in the near term. Available-for-sale debt securities are reported
at fair value with unrealized gains and losses, net of related deferred
income taxes, included in OCI. Trading debt securities are reported
at fair value with unrealized gains and losses included in noninterest
income.
Available-for-sale and held-to-maturity debt securities with
unrealized losses are reviewed quarterly for possible OTTI. 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.
Effective January 1, 2018, equity securities with readily
determinable fair values not accounted for under the equity method
are reported at fair value with unrealized gains and losses included
in noninterest income in the Consolidated Statements of Income.
Prior to January 1, 2018, equity securities were classified as
available-for-sale or trading on the date of purchase, and the
accounting for unrealized gains and losses was the same as for debt
securities classified as available-for-sale and
trading. Equity
securities were classified as trading when bought and held
principally for the purpose of selling them in the near term. For
equity securities classified as available-for-sale, the Bancorp’s
management evaluated the securities in an unrealized loss position
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 was
determined that the impairment on an equity security was other-
than-temporary, an impairment loss equal to the difference between
the amortized cost of the security and its fair value was recognized
within noninterest income in the Consolidated Statements of
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.
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.
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
income (nonaccretable difference). The
accreted into
remaining amount representing the difference in the expected cash
interest
111 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. This method of accounting for
loans acquired with
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
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
loans and
in a TDR and
subsequently become past due 90 days are placed on nonaccrual
status unless the loan is both well-secured and in the process of
collection. Commercial and credit card loans that have been
modified in a TDR are classified as nonaccrual unless such loans
have sustained repayment performance of six months or more and
are reasonably assured of repayment in accordance with the
restructured
loans are collateralized by
perfected security interests in real and/or personal property for
which the Bancorp estimates proceeds from the sale would be
leases that have been modified
terms. Well-secured
112 Fifth Third Bancorp
sufficient to recover the outstanding principal and accrued interest
balance of the loan and pay all costs to sell the collateral. The
Bancorp considers a loan in the process of collection if collection
efforts or legal action is proceeding and the Bancorp expects to
collect funds sufficient to bring the loan current or recover the
entire outstanding principal and accrued interest balance.
Nonaccrual commercial loans and nonaccrual credit card loans
are generally accounted for on the cost recovery method. The
Bancorp believes the cost recovery method is appropriate for
nonaccrual commercial loans and nonaccrual credit card loans
because the assessment of collectability of the remaining recorded
investment of these loans involves a high degree of subjectivity and
uncertainty due to the nature or absence of underlying collateral.
Under the cost recovery method, any payments received are applied
to reduce principal. Once the entire recorded investment is
collected, additional payments received are treated as recoveries of
amounts previously charged-off until recovered in full, and any
subsequent payments are treated as interest income. Nonaccrual
residential mortgage loans and other nonaccrual consumer loans are
generally accounted for on the cash basis method. The Bancorp
believes the cash basis method is appropriate for nonaccrual
residential mortgage and other nonaccrual consumer loans because
such loans have generally been written down to estimated collateral
values and the collectability of the remaining investment involves
only an assessment of the fair value of the underlying collateral,
which can be measured more objectively with a lesser degree of
uncertainty than assessments of typical commercial loan collateral.
Under the cash basis method, interest income is recognized when
cash is received, to the extent such income would have been
accrued on the loan’s remaining balance at the contractual rate.
Nonaccrual loans may be returned to accrual status when all
delinquent interest and principal payments become current in
accordance with the loan agreement and are reasonably assured of
repayment in accordance with the contractual terms of the loan
agreement, or when the loan is both well-secured and in the process
of collection.
Commercial
including those
loans on nonaccrual status,
modified in a TDR, as well as criticized commercial loans with
aggregate borrower relationships exceeding $1 million, are subject to
an individual review to identify charge-offs. The Bancorp does not
have an established delinquency threshold for partially or fully
charging off commercial loans. Residential mortgage loans, home
equity loans and lines of credit and credit card loans that have
principal and interest payments that have become past due 180 days
are assessed for a charge-off to the ALLL, unless such loans are
both well-secured and in the process of collection. Home equity
loans and lines of credit are also assessed for charge-off to the
ALLL when such loans or lines of credit have become past due 120
days if the senior lien is also 120 days past due, unless such loans are
both well-secured and in the process of collection. Automobile and
other consumer loans and leases that have principal and interest
payments that have become past due 120 days are assessed for a
charge-off to the ALLL, unless such loans are both well-secured and
in the process of collection.
Restructured loans and leases
A loan is accounted for as a TDR if the Bancorp, for economic or
legal reasons related to the borrower’s financial difficulties, grants a
concession to the borrower that it would not otherwise consider. A
TDR typically involves a modification of terms such as a reduction
of the stated interest rate or remaining principal amount of the loan,
a reduction of accrued interest or an extension of the maturity date
at a stated interest rate lower than the current market rate for a new
loan with similar risk. The OCC, a national bank regulatory agency,
has issued interpretive guidance that requires non-reaffirmed loans
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
or more prior to the modification in accordance with the modified
terms and collectability is reasonably assured for all remaining
contractual payments under
terms. TDRs of
commercial loans and credit cards that do not have a sustained
payment history of six months or more in accordance with their
modified terms remain on nonaccrual status until a six month
payment history is sustained. In certain cases, commercial TDRs on
nonaccrual status may be accounted for using the cash basis method
for income recognition, provided that full repayment of principal
under the modified terms of the loan is reasonably assured.
the modified
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
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.
to sell residential mortgage
Management’s
Loans and leases held for sale are placed on nonaccrual status
consistent with the Bancorp’s nonaccrual policy for portfolio loans
and leases.
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
if the
considered
restructuring agreement specifies a rate equal to or greater than the
rate the Bancorp was willing to accept at the time of the
restructuring for a new loan with comparable risk and the loan is
not impaired based on the terms specified by the restructuring
agreement. Refer to the ALLL section for discussion regarding the
Bancorp’s methodology
loans and
identifying
determination of the need for a loss accrual.
in years after the restructuring
impaired
impaired
for
Loans 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
Other Real Estate Owned
OREO, which is included in other assets in the Consolidated
Balance Sheets, 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 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.
in other noninterest
income
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. 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.
113 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit losses are charged and recoveries are credited to the ALLL.
Provisions for loan and lease losses are based on the Bancorp’s
review of the historical credit loss experience and such factors that,
in management’s judgment, deserve consideration under existing
economic conditions in estimating probable credit losses. The
Bancorp’s strategy
includes a
combination of conservative exposure limits significantly below
legal lending limits and conservative underwriting, documentation
and
emphasizes
diversification on a geographic, industry and customer level, regular
credit examinations and quarterly management reviews of large
credit exposures and loans experiencing deterioration of credit
quality.
risk management
standards. The
for credit
collections
strategy
also
The Bancorp’s methodology for determining the ALLL is
based on historical loss rates, current credit grades, specific
allocation on loans modified in a TDR and impaired commercial
credits above specified thresholds and other qualitative adjustments.
Allowances on individual commercial loans, TDRs and historical
loss rates are reviewed quarterly and adjusted as necessary based on
changing borrower and/or collateral conditions and actual
collection and charge-off experience. An unallocated allowance is
in estimating and
the
maintained
measuring losses when evaluating allowances for pools of loans.
to recognize
imprecision
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, refreshed FICO
score trends and product mix.
The Bancorp also considers qualitative factors in determining
the ALLL. These include adjustments for changes in policies or
114 Fifth Third Bancorp
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.
When evaluating the adequacy of allowances, consideration is
given to regional geographic concentrations and the closely
associated effect changing economic conditions have on the
Bancorp’s customers.
In the current year, the Bancorp has not substantively changed
any material aspect to its overall approach to determining its ALLL
for any of its portfolio segments. There have been no material
changes in criteria or estimation techniques as compared to prior
periods that impacted the determination of the current period
ALLL for any of the Bancorp’s portfolio segments.
liabilities
Reserve for Unfunded Commitments
The reserve for unfunded commitments is maintained at a level
believed by management to be sufficient to absorb estimated
probable losses related to unfunded credit facilities and is included
in the Consolidated Balance Sheets. The
in other
determination of the adequacy of the reserve is based upon an
evaluation of the unfunded credit facilities, including an assessment
of historical commitment utilization experience, credit risk grading
and historical loss rates based on credit grade migration. This
process takes into consideration the same risk elements that are
analyzed in the determination of the adequacy of the Bancorp’s
ALLL, as 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 10 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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.
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
valuation
impairment
recognized through a write-off of the servicing asset and related
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.
and other-than-temporary
allowance
Fees received for servicing loans owned by investors are based
on a percentage of the outstanding monthly principal balance of
in the
such
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
for
income
is used
Bank Premises and Equipment and Other Long-Lived
Assets
Bank premises and equipment, including leasehold improvements,
are carried at cost less accumulated depreciation and amortization.
Depreciation is calculated using the straight-line method based on
estimated useful lives of the assets for book purposes, while
accelerated depreciation
tax purposes.
Amortization of leasehold improvements is computed using the
straight-line method over the lives of the related leases or useful
lives of the related assets, whichever is shorter. Whenever events or
changes in circumstances dictate, the Bancorp tests its long-lived
assets for impairment by determining whether the sum of the
estimated undiscounted future cash flows attributable to a long-lived
asset or asset group is less than the carrying amount of the long-
lived asset or asset group through a probability-weighted approach.
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
income. For free-standing derivative
transaction
instruments, changes in fair values are reported in current period net
income.
impacts net
When entering into a hedge transaction, the Bancorp formally
documents the relationship between the hedging instrument and the
hedged item, as well as the risk management objective and strategy
for undertaking the hedge transaction before the end of the quarter
in which the transaction is consummated. 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 the inception of the hedge as to the
effectiveness of the derivative instrument in offsetting changes in
fair values or cash flows of the hedged item. The Bancorp continues
to assess hedge effectiveness on an ongoing basis using a qualitative
analysis of
assessment when
appropriate. A quantitative
115 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
effectiveness may be performed either in place of or in addition to a
qualitative assessment if deemed necessary. Effective January 1,
2018, in conjunction with adoption of ASU 2017-12, the Bancorp
may also utilize the shortcut method to evaluate hedge effectiveness
for certain qualifying hedges with matched terms that permit the
assumption of perfect offset. 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 (now Worldpay, Inc.) IPO in
2012, the Bancorp entered into two TRAs with Worldpay, Inc. The
TRAs provide for payments by Worldpay, 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 (now Worldpay Holding, LLC) from
the Bancorp or from the exchange of equity units in Worldpay
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
Worldpay, Inc., which depends on the amount and timing of
Worldpay, 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.
Investments in Qualified Affordable Housing Projects
The Bancorp invests in projects to create affordable housing,
revitalize business and residential areas and preserve historic
landmarks. These investments are classified as other assets on the
Bancorp’s Consolidated Balance Sheets. Investments in affordable
housing projects that qualify for LIHTC are accounted for using the
proportional amortization method. Under
the proportional
amortization method, the initial cost of the investment is amortized
in proportion to the tax credits and other benefits received and
recognized as a component of applicable income tax expense
(benefit) in the Consolidated Statements of Income. Investments
which do not meet the qualification criteria for the proportional
amortization method are accounted for using the equity method of
accounting with
investments
recognized in other noninterest expense in the Consolidated
Statements of Income.
impairment associated with the
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.
116 Fifth Third Bancorp
judgment about
The Bancorp evaluates the realization of deferred tax assets
based on all positive and negative evidence available at the balance
sheet date. Realization of deferred tax assets is based on the
Bancorp’s
their
realization, including the taxable income within any applicable
carryback periods, future projected taxable income, the reversal of
taxable temporary differences and tax-planning strategies. The
Bancorp records a valuation allowance for deferred tax assets where
the Bancorp does not believe that it is more-likely-than-not that the
deferred tax assets will be realized.
factors affecting
relevant
Income
the relevant
tax benefits from uncertain
tax positions are
recognized in the financial statements only if the Bancorp believes
that it is more-likely-than-not that the uncertain tax position will be
sustained based solely on the technical merits of the tax position
and consideration of
taxing authority’s widely
understood administrative practices and precedents. If the Bancorp
does not believe that it is more-likely-than-not that an uncertain tax
position will be sustained, the Bancorp records a liability for the
uncertain tax position. If the Bancorp believes that it is more likely
than not that an uncertain tax position will be sustained, the
Bancorp only records a tax benefit for the portion of the uncertain
tax position where the likelihood of realization is greater than 50%
upon settlement with the relevant taxing authority that has full
knowledge of all relevant information. The Bancorp recognizes
interest expense,
to
unrecognized tax benefits within current income tax expense. Refer
to Note 19 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
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 business 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
that the fair value of a reporting unit is less than its carrying amount.
In this qualitative assessment, the Bancorp evaluates events and
circumstances which may include, but are not limited to, the general
economic environment, banking industry and market conditions,
the overall financial performance of the Bancorp, the performance
of the Bancorp’s common stock, the key financial performance
metrics of the Bancorp’s reporting units and events affecting the
reporting units. If, after assessing the totality of events and
circumstances, the Bancorp determines it is not more likely than not
that the fair value of a reporting unit is less than its carrying amount,
then performing
test would be
unnecessary. However, if the Bancorp concludes otherwise or elects
to bypass the qualitative assessment, it would then be required to
perform the first step (Step 1) of the goodwill impairment test, and
continue to the second step (Step 2), if necessary. Step 1 of the
goodwill impairment test compares the fair value of a reporting unit
with its carrying amount, including goodwill. If the carrying amount
of the reporting unit exceeds its fair value, Step 2 of the goodwill
impairment test is performed to measure the amount of impairment
loss, if any.
impairment
two-step
the
The fair value of a reporting unit is the price that would be
received to sell the unit as a whole in an orderly transaction between
market participants at the measurement date. As none of the
Bancorp’s reporting units are publicly traded, individual reporting
unit fair value determinations cannot be directly correlated to the
Bancorp’s stock price. To determine the fair value of a reporting
unit, the Bancorp employs an income-based approach, utilizing the
reporting unit’s forecasted cash flows (including a terminal value
approach to estimate cash flows beyond the final year of the
forecast) and the reporting unit’s estimated cost of equity as the
discount rate. Additionally, the Bancorp determines its market
capitalization based on the average of the closing price of the
Bancorp’s stock during the month including the measurement date,
incorporating an additional control premium, and compares this
market-based fair value measurement to the aggregate fair value of
the Bancorp’s reporting units in order to corroborate the results of
the income approach.
When required to perform Step 2, the Bancorp compares the
implied fair value of a reporting unit’s goodwill with the carrying
amount of that goodwill. If the carrying amount exceeds the implied
fair value, an impairment loss equal to that excess amount is
recognized. A recognized impairment loss cannot exceed the
carrying amount of that goodwill and cannot be reversed in future
periods even if the fair value of the reporting unit subsequently
recovers.
During Step 2, the Bancorp determines the implied fair value
of goodwill for a reporting unit by assigning the fair value of the
reporting unit to all of the assets and liabilities of that unit (including
any unrecognized intangible assets) as if the reporting unit had been
acquired in a business combination. The excess of the fair value of
the reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of goodwill. This assignment
process is only performed for purposes of testing goodwill for
impairment. The Bancorp does not adjust the carrying values of
recognized assets or liabilities (other than goodwill, if appropriate),
nor does it recognize previously unrecognized intangible assets in
the Consolidated Financial Statements as a result of this assignment
process. Refer to Note 8 for further information regarding the
Bancorp’s goodwill.
Fair Value Measurements
The Bancorp measures certain financial assets and liabilities at fair
value in accordance with U.S. GAAP, which defines fair value as the
price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. 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 26 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
117 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 23.
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.
Revenue Recognition
The Bancorp generally measures revenue based on the amount of
consideration the Bancorp expects to be entitled for the transfer of
goods or services to a customer, then recognizes this revenue when
or as the Bancorp satisfies its performance obligations under the
contract, except in transactions where U.S. GAAP provides other
applicable guidance. When the amount of consideration is variable,
the Bancorp will only recognize revenue to the extent that it is
probable that the cumulative amount recognized will not be subject
to a significant reversal in the future. Substantially all of the
Bancorp’s contracts with customers have expected durations of one
year or less and payments are typically due when or as the services
are rendered or shortly thereafter. When third parties are involved in
providing goods or services to customers, the Bancorp recognizes
revenue on a gross basis when it has control over those goods or
services prior to transfer to the customer; otherwise, revenue is
recognized for the net amount of any fee or commission. The
Bancorp excludes sales taxes from the recognition of revenue and
recognizes the incremental costs of obtaining contracts as an
expense if the period of amortization for those costs would be one
year or less.
The Bancorp’s interest income is derived from loans and leases,
investments. The Bancorp
securities and other short-term
recognizes interest income in accordance with the applicable
guidance in U.S. GAAP for these assets. Refer to the Portfolio
Loans and Leases and Investment Securities sections of this
footnote for further information. The following provides additional
information about the components of noninterest income:
•
Service charges on deposits consist primarily of treasury
management fees for commercial clients, monthly
service charges on consumer deposit accounts,
transaction-based fees (such as overdraft fees and wire
transfer
fees), and other deposit account-related
charges. The Bancorp’s performance obligations for
treasury management fees and consumer deposit
account service charges are typically satisfied over time
while performance obligations for transaction-based
fees are typically satisfied at a point in time. Revenues
118 Fifth Third Bancorp
are recognized on an accrual basis when or as the
services are provided to the customer, net of applicable
discounts, waivers and reversals. Payments are typically
collected from customers directly from the related
deposit account at the time the transaction is processed
and/or at the end of the customer’s statement cycle
(typically monthly).
• Wealth and asset management
revenue consists
primarily of service fees for investment management,
custody, and trust administration services provided to
commercial and consumer clients. The Bancorp’s
performance obligations for these services are generally
satisfied over time and revenues are recognized
monthly based on the fee structure outlined
in
individual contracts. Transaction prices are most
commonly based on the market value of assets under
management or care and/or a fee per transaction
processed. The Bancorp offers certain services, like tax
return preparation,
the performance
for which
obligations are satisfied and revenue is recognized at a
point in time, when the services are performed. Wealth
and asset management revenue also includes trailing
commissions received from investments and annuities
held in customer accounts, which are recognized in
revenue when the Bancorp determines that it has
satisfied its performance obligations and has sufficient
information to estimate the amount of the commissions
to which it expects to be entitled.
• Corporate banking revenue consists primarily of service
fees and other income related to loans and leases to
commercial clients, underwriting revenue recognized by
the Bancorp’s broker-dealer subsidiary and fees for
other services provided to commercial clients. Revenue
related to loans and leases is recognized in accordance
with the Bancorp’s policies for portfolio loans and
leases. Underwriting revenue is generally recognized on
the
the Bancorp’s
is when
performance obligations are satisfied.
trade date, which
are
generally
complete when
• Card and processing revenue consists primarily of ATM
fees and interchange fees earned when the Bancorp’s
credit and debit cards are processed through card
association networks. The Bancorp’s performance
obligations
the
transactions generating the fees are processed. Revenue
is recognized on an accrual basis as such services are
performed, net of certain costs not controlled by the
Bancorp (primarily interchange fees charged by credit
card associations and expenses of certain transaction-
based rewards programs offered to customers). These
revenue by
costs
approximately $127 million
the year ended
December 31, 2018.
reduced card and processing
for
• Mortgage banking net revenue consists primarily of
origination fees and gains on loan sales, mortgage
servicing fees and the impact of MSRs. Refer to the
Loans and Leases Held for Sale and Loan Sales and
Securitizations sections of this footnote for further
information.
• Other noninterest
income from
operating leases, certain fees derived from loans and
leases, BOLI income, gains and losses on other assets,
and other miscellaneous revenues and gains.
includes
income
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The Bancorp purchases life insurance policies on the lives of
certain directors, officers and employees and is the owner and
beneficiary of the policies. The Bancorp invests in these policies,
known as BOLI, to provide an efficient form of funding for long-
term retirement and other employee benefits costs. The Bancorp
records these BOLI policies within other assets in the Consolidated
Balance Sheets at each policy’s respective cash surrender value, with
changes recorded in other noninterest income in the Consolidated
Statements of Income.
Intangible assets consist of core deposit intangibles, 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 2018
The Bancorp adopted the following new accounting standards
effective January 1, 2018:
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
issued additional guidance to clarify certain implementation issues,
including ASUs 2016-08 (Principal versus Agent Considerations),
2016-10 (Identifying Performance Obligations and Licensing), 2016-
12 (Narrow-Scope Improvements and Practical Expedients), and
2016-20 (Technical Corrections and Improvements) in March,
April, May and December 2016, respectively. These amendments
did not change the core principles in ASU 2014-09 and follow the
same effective date and transition requirements. 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,
to expanded disclosure
is subject
requirements and 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
its presentation of certain
adoption
the Bancorp changed
the Bancorp
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. Neither change impacts income before income taxes
or net income.
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. In February 2018, the FASB also issued ASU 2018-03
which makes technical corrections and improvements to the
amendments in ASU 2016-01. The Bancorp adopted the amended
guidance on January 1, 2018. As permitted, the Bancorp elected to
early adopt ASU 2018-03 on January 1, 2018, concurrent with the
adoption of ASU 2016-01. The adoption did not have a material
impact on the Consolidated Financial Statements. However, equity
securities affected by the amended guidance which were previously
classified as trading or available-for-sale have been reclassified in the
Consolidated Balance Sheets as equity securities. 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 other
portions of the amended guidance were applied on a modified
retrospective basis.
the amendments 1) eliminate
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
119 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2016-15 – 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.
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.
Previous U.S. GAAP prohibited 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. 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
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 2017-05 – 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
120 Fifth Third Bancorp
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 2017-09 – 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. As
permitted, the Bancorp elected to early adopt the amended guidance
on January 1, 2018. For certain fair value hedges of interest rate risk,
the Bancorp elected to modify the measurement methodology for
the hedged item to be the benchmark rate component of the
contractual coupon cash flows and also elected to de-designate a
portion of the existing hedging relationship, as permitted. Upon
adoption, changes in the fair value of cash flow hedges are recorded
in AOCI and then subsequently reclassified into earnings when the
hedged item affects earnings. Also, for both fair value hedges and
cash flow hedges, changes in the fair value of the derivative
instrument are recorded in the same income statement line item as
the effects of
the separate
measurement of hedge ineffectiveness. The Bancorp recorded a
cumulative-effect adjustment to retained earnings for the impact of
these elections as well as the elimination of the separate
measurement of ineffectiveness from AOCI for cash flow hedges
existing at January 1, 2018, the amount of which was not material.
The amended presentation and disclosure guidance was applied
prospectively.
item, eliminating
the hedged
ASU 2018-02 – Income Statement—Reporting Comprehensive Income
(Topic 220): Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income
In February 2018, the FASB issued ASU 2018-02 which allows for
reclassification from AOCI to retained earnings of stranded tax
effects resulting from the TCJA. Stranded tax effects result from the
reduction in the top federal statutory income tax rate from 35
percent to 21 percent as deferred tax assets and liabilities are
adjusted for the impact of a change in tax rate through income tax
expense, even in situations when the related items giving rise to the
deferred taxes are components of AOCI, which are carried net of
tax. As permitted, the Bancorp elected to early adopt this amended
guidance and recorded a reclassification adjustment from AOCI to
retained earnings as of January 1, 2018, the amount of which was
not material.
Standards Issued but Not Yet Adopted
The following accounting standards were issued but not yet adopted
by the Bancorp as of December 31, 2018:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASU 2016-02 – Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02 which establishes
a new accounting model for leases. The amended guidance requires
lessees to record lease liabilities on the lessees’ balance sheets along
with corresponding right-of-use assets for all leases with terms
longer than twelve months. Leases will be classified as either finance
or operating, with classification affecting the pattern of expense
recognition in the lessee’s statements of income. From a lessor
perspective, the accounting model is largely unchanged, except that
the amended guidance includes certain targeted improvements to
align, where necessary, lessor accounting with the lessee accounting
model and the revenue recognition guidance in ASC Topic 606. The
amendments also modify disclosure requirements for an entity’s
lease arrangements. The amended guidance 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.
Subsequent to the issuance of ASU 2016-02, the FASB has
issued additional guidance to clarify certain implementation issues
and provide transition relief in certain circumstances including
ASUs 2018-01 (Land Easement Practical Expedient, issued in
January 2018), 2018-10 (Codification Improvements, issued in July
2018), 2018-11 (Targeted Improvements, also issued in July 2018),
and 2018-20 (Narrow-Scope Improvements for Lessors, issued in
December 2018). These subsequent amendments do not change the
core principles in the original ASU, but do provide an additional
optional transition method which is to initially apply the amended
guidance at the adoption date and record a cumulative-effect
adjustment to opening retained earnings without retrospective
application to prior comparative periods. Entities not electing to use
this optional transition method must apply the amended guidance
on a modified retrospective basis to all periods presented.
The Bancorp adopted the amended guidance on the required
effective date of January 1, 2019, and elected the transition relief
provisions (i.e. the practical expedient package) and not to use
hindsight in evaluating the lease term. The Bancorp also elected the
optional transition method to record a cumulative effect adjustment
to retained earnings on the adoption date without applying the
guidance to prior comparative periods. Upon adoption, the Bancorp
recognized additional right-of-use assets and lease liabilities of
approximately $510 million
lease
commitments and also recorded a cumulative-effect adjustment to
retained earnings of approximately $13 million, which was primarily
attributable to recognizing remaining deferred gains on sale-
leaseback transactions that occurred prior to January 1, 2019. From
a lessor perspective, adoption of the amended guidance did not have
a material
impact on the Bancorp’s Consolidated Financial
Statements at transition, but prospectively impacts the classification
of certain leases, the presentation of lessor costs and the recognition
and measurement of initial direct costs.
its operating
related
to
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
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.
In November 2018, the FASB issued ASU 2018-19 which made
minor clarifications to the pending guidance in ASU 2016-13. The
FASB has also established a Transition Resource Group for Credit
Losses to evaluate implementation issues arising from the amended
guidance and make recommendations to the FASB on which issues
may warrant the issuance of additional clarifying guidance. The
Bancorp continues to monitor the issues discussed by the Transition
Resource Group and the recommended amendments proposed to
the FASB as part of its implementation analysis.
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,
is to be applied
2020, with early adoption permitted, and
prospectively to all goodwill impairment tests performed after the
adoption date.
121 Fifth Third Bancorp
NOTES TO 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 Bancorp adopted the
amended guidance on January 1, 2019 on a modified retrospective
basis. The adoption did not have a material impact on the
Consolidated Financial Statements.
for
requirements
ASU 2018-13 – Fair Value Measurement (Topic 820): Disclosure
Framework—Changes to the Disclosure Requirements for Fair Value
Measurement
In August 2018, the FASB issued ASU 2018-13 which modifies the
disclosure
fair value measurements. The
amendments remove the requirements to disclose the amount of
and reasons for transfers between Level 1 and Level 2 of the fair
value hierarchy, the policy for timing of transfers between levels and
the valuation processes for Level 3 fair value measurements. The
amendments also add new disclosure requirements regarding
unrealized gains and losses from recurring Level 3 fair value
measurements and the significant unobservable inputs used to
develop Level 3 fair value measurements. The amended guidance is
effective for the Bancorp on January 1, 2020 with early adoption
permitted. Certain of
to be applied
prospectively while others are to be applied retrospectively. Also,
early adoption of
removed and modified disclosure
requirements is permitted before adoption of the newly added
requirements. The Bancorp is in the process of evaluating the
impact of the amended guidance on its Consolidated Financial
Statements.
the amendments are
the
incurred by customers
ASU 2018-15 – Intangibles—Goodwill and Other—Internal-Use
Software (Subtopic 350-40): Customer’s Accounting for Implementation
Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract
In August 2018, the FASB issued ASU 2018-15 which provides
guidance on the accounting for implementation, setup, and other
upfront costs
in cloud computing
arrangements that are accounted for as service contracts. The
amendments require that implementation costs be evaluated for
capitalization using the framework applicable to costs incurred to
develop or obtain internal-use software. Those capitalized costs are
to be expensed over the term of the cloud computing arrangement
and presented in the same financial statement line items as the
service contract and its associated fees. The amended guidance is
effective for the Bancorp on January 1, 2020, with early adoption
permitted, and may be applied either
retrospectively or
prospectively. The Bancorp is in the process of evaluating the
impact of the amended guidance on its Consolidated Financial
Statements.
an
Change in Accounting Policy
Effective in the fourth quarter of 2018, the Bancorp changed its
accounting policy for qualifying LIHTC investments from the
equity method to the proportional amortization method as it was
management’s determination to be the preferable method. The
improved
amortization method provides
proportional
presentation for the reporting of these investments by presenting
the investment performance net of taxes as a component of income
tax expense, which more fairly represents the economics and
provides users with a better understanding of the returns from such
investments than the prior equity method. Additionally, the
proportional amortization method is used by many of the Bancorp’s
peers. Thus, changing the accounting policy for LIHTC investments
made the Bancorp’s presentation of the LIHTC investments
comparable to that of its peers. The adoption of the proportional
amortization method was applied retrospectively and resulted in a
cumulative effect adjustment to reduce retained earnings by $134
million as of January 1, 2016.
122 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provides a summary of the impact of the change in accounting principle for qualifying LIHTC investments on the Bancorp’s
Consolidated Financial Statements as of and for the years ended December 31:
$ in millions, except per share data
Consolidated Balance Sheet caption
Other assets
Accrued taxes, interest and expenses
Retained earnings
Consolidated Statement of Income caption
Total noninterest expense
Income before income taxes
Applicable income tax expense
Net income
Earnings per share - basic
Earnings per share - diluted
$ in millions, except per share data
Consolidated Balance Sheet caption
Other assets
Accrued taxes, interest and expenses
Retained earnings
Consolidated Statement of Income caption
Total noninterest expense
Income before income taxes
Applicable income tax expense
Net income
Earnings per share - basic
Earnings per share - diluted
$ in millions, except per share data
Consolidated Balance Sheet caption
Other assets
Accrued taxes, interest and expenses
Retained earnings
Consolidated Statement of Income caption
Total noninterest expense
Income before income taxes
Applicable income tax expense
Net income
Earnings per share - basic
Earnings per share - diluted
2018
Pre-LIHTC
Adjustment Adjustments As Adjusted
7,463
1,508
16,723
4,103
2,590
417
2,173
3.10
3.05
(91)
54
(145)
(175)
175
155
20
0.01
0.01
7,372
1,562
16,578
3,928
2,765
572
2,193
3.11
3.06
2017
As Originally
Reported
Adjustments As Adjusted
6,975
1,412
15,122
3,990
2,771
577
2,194
2.88
2.83
(112)
53
(165)
(208)
208
222
(14)
(0.02)
(0.02)
6,863
1,465
14,957
3,782
2,979
799
2,180
2.86
2.81
2016
As Originally
Reported
Adjustments As Adjusted
7,844
1,800
13,441
3,903
2,065
505
1,560
1.95
1.93
(97)
54
(151)
(143)
143
160
(17)
(0.03)
(0.02)
7,747
1,854
13,290
3,760
2,208
665
1,543
1.92
1.91
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
123 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments related to interest and income taxes in addition to non-cash investing and financing activities are presented in the following table
for the years ended December 31:
($ in millions)
Cash Payments:
Interest
Income taxes
Transfers:
Portfolio loans to loans held for sale
Loans held for sale to portfolio loans
Portfolio loans to OREO
2018
2017
2016
$
1,016
359
275
95
39
699
1,035
255
29
34
578
800
238
28
49
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
both December 31, 2018 and 2017, the Bancorp’s banking
subsidiary reserve requirement was $1.5 billion. Additionally, the
Bancorp’s banking subsidiary average reserve requirement was $1.5
billion and $1.4 billion in 2018 and 2017, respectively.
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, 2018, the Bancorp announced the results of its
capital plan submitted to the FRB as part of the 2018 CCAR. For
BHCs that proposed capital distributions in their plans, the FRB
either objected to the plan or provided a non-objection whereby the
FRB permitted the proposed capital distributions. The FRB
indicated to the Bancorp that it did not object to the following
capital actions for the period beginning July 1, 2018 and ending June
30, 2019:
• The increase in the quarterly common stock dividend to
$0.22 from $0.18 beginning in the fourth quarter of 2018
and to $0.24 beginning in the second quarter of 2019, a
33% increase over the then current dividend rate;
Restrictions on Cash Dividends
The principal source of income and funds for the Bancorp (parent
company) are dividends from its subsidiaries. The dividends paid by
the Bancorp’s banking subsidiary are subject to regulations and
limitations prescribed by state and federal supervisory agencies. The
Bancorp’s banking subsidiary paid
the Bancorp’s nonbank
subsidiary holding company, which in turn paid the Bancorp $1.9
billion and $2.3 billion in dividends during the years ended
December 31, 2018 and 2017, respectively. The Bancorp’s nonbank-
subsidiaries are also limited by certain federal and state statutory
provisions and regulations covering the amount of dividends that
may be paid in any given year.
Capital Actions
In 2011 the FRB adopted the capital plan rule, which requires BHCs
with consolidated assets of $50 billion or more to submit annual
capital plans to the FRB for review. Under the rule, these capital
plans must include detailed descriptions of the following: the BHC’s
internal processes for assessing capital adequacy; the policies
governing capital actions such as common stock
issuances,
dividends and share repurchases; and all planned capital actions over
a nine-quarter planning horizon. Further, each BHC must also
report to the FRB the results of stress tests conducted by the BHC
under a number of scenarios that assess the sources and uses of
capital under baseline and stressed economic scenarios. The FRB
launched the 2018 stress testing program and CCAR on February 1,
2018, with submissions of stress test results and capital plans to the
FRB due on April 5, 2018, which the Bancorp submitted as
required.
review of
The FRB’s
the capital plan assessed
the
comprehensiveness of the capital plan, the reasonableness of the
the capital plan.
the analysis underlying
assumptions and
Additionally, the FRB reviewed the robustness of the capital
adequacy process, the capital policy and the Bancorp’s ability to
124 Fifth Third Bancorp
• The repurchase of common shares in an amount up to
$1.651 billion, or a 42% increase over the 2017 capital
plan. These repurchases include $81 million in repurchases
related to share issuances under employee benefit plans
and $53 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
Worldpay, 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 Worldpay, Inc. or potential future
TRAs that may be generated from additional sales of
Worldpay, Inc.
On May 21, 2018, the Bancorp announced the planned
acquisition of MB Financial, Inc. As a result of this transaction, the
FRB required the Bancorp to resubmit its CCAR plan recognizing
the pro forma impact of the combined Fifth Third/MB Financial,
Inc. post-merger entity. On October 5, 2018, Fifth Third
resubmitted its capital plan to the FRB. On December 27, 2018, the
FRB indicated to the Bancorp that it did not object to the
resubmitted capital plan. The resubmitted capital plan called for no
change to the originally submitted total capital actions over the 2018
CCAR approval horizon (the third quarter of 2018 through the
second quarter of 2019). However, the share repurchase authority
increased from $1.651 billion to $1.81 billion as a result of after-tax
gains related to the sale of Worldpay, Inc. common stock.
The Bancorp recognized a gain of $414 million in the first
quarter of 2018 when Vantiv, Inc. completed its previously
announced acquisition of Worldpay Group plc. with the resulting
combined company named Worldpay, Inc., associated with the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
dilution in its ownership interest in Worldpay Holding, LLC.
Additionally, the Bancorp recognized a gain on the sale of
Worldpay, Inc. shares of $205 million during the second quarter of
2018. The Bancorp also entered into accelerated share repurchase
and open market share repurchase transactions during the years
ended December 31, 2018 and 2017. For more information related
to these transactions, refer to Note 18 and Note 22. In the fourth
quarter of 2018, the Bancorp increased the quarterly common stock
dividend to $0.22.
125 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENT SECURITIES
The following table provides the amortized cost, fair value and unrealized gains and losses for the major categories of the available-for-sale debt
and other securities and held-to-maturity securities portfolios as of December 31:
2018
2017
($ in millions)
Available-for-sale debt 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
Other securities(b)
Total available-for-sale debt 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
2
16,403
10,770
3,305
1,998
552
$ 33,128
-
-
86
44
9
27
-
166
(1)
-
(242)
(164)
(47)
(10)
-
(464)
Fair
Value
97
2
16,247
10,650
3,267
2,015
552
32,830
Amortized Unrealized Unrealized
Gains
Losses
Cost
98
43
15,281
10,113
3,247
2,183
612
31,577
-
1
118
92
51
46
-
308
-
-
(80)
(38)
(5)
(11)
-
(134)
Fair
Value
98
44
15,319
10,167
3,293
2,218
612
31,751
-
-
-
Includes interest-only mortgage-backed securities of $0 and $34 as of December 31, 2018 and 2017, respectively, recorded at fair value with fair value changes recorded in securities (losses) gains,
net, in the Consolidated Statements of Income.
22
2
24
22
2
24
16
2
18
16
2
18
-
-
-
-
-
-
-
-
-
$
$
(b) Other securities consist of FHLB, FRB and DTCC restricted stock holdings of $184, $366 and $2, respectively, at December 31, 2018 and $248, $362 and $2, respectively, at December 31,
2017, that are carried at cost.
The following table provides the fair value of trading debt securities and equity securities as of December 31:
($ in millions)
Trading debt securities
Equity securities
2018
2017
$
287
452
492
439
The Bancorp uses investment securities as a means of managing
interest rate risk, providing collateral for pledging purposes and for
liquidity to satisfy regulatory requirements. As part of managing
interest rate risk, the Bancorp acquires securities as a component of
its MSR non-qualifying hedging strategy, with net gains or losses
recorded in securities (losses) gains, net – non-qualifying hedges on
MSRs in the Consolidated Statements of Income.
The following table presents securities (losses) gains recognized in the Consolidated Statements of Income as of December 31:
($ in millions)
Available-for-sale debt and other securities:
Realized gains
Realized losses
OTTI
Net realized (losses) gains on available-for-sale debt and other securities
Total trading debt securities (losses) gains
Total equity securities (losses) gains(a)
Total (losses) gains recognized in income from available-for-sale debt and other
securities, trading debt securities and equity securities(b)
(a)
(b) Excludes an insignificant amount of securities gains (losses) included in corporate banking revenue and wealth and asset management revenue in the Consolidated Statements of Income related to
Includes $45 of net unrealized losses for the year ended December 31, 2018 and net unrealized gains of $5 and $3 for the years ended December 31, 2017 and 2016, respectively.
72
(82)
-
(10)
(15)
(44)
72
(49)
(15)
8
-
2
85
(36)
(54)
(5)
2
7
2017
2016
(69)
$
$
$
10
2018
4
$
$
securities held by FTS to facilitate the timely execution of customer transactions.
126 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2018 and 2017, investment securities with a fair
value of $7.0 billion and $7.8 billion, respectively, were pledged to
secure borrowings, public deposits, trust funds, derivative contracts
law.
and for other purposes as required or permitted by
The expected maturity distribution of the Bancorp’s mortgage-backed securities and the contractual maturity distribution of the remainder of the
Bancorp’s available-for-sale debt and other securities and held-to-maturity investment securities as of December 31, 2018 are shown in the
following table:
($ in millions)
Debt securities:(a)
Available-for-Sale Debt and Other
Amortized Cost
Fair Value
Held-to-Maturity
Amortized Cost
Fair Value
Less than 1 year
1-5 years
5-10 years
Over 10 years
Other 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.
3
10,052
18,394
4,127
552
33,128
3
10,015
18,197
4,063
552
32,830
$
$
-
16
-
2
-
18
-
16
-
2
-
18
The following table provides the fair value and gross unrealized losses on available-for-sale debt 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)
2018
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
Total
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
Total
$
$
$
$
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
-
3,235
2,022
884
314
6,455
98
7,337
2,900
449
317
11,101
-
(21)
(37)
(6)
(6)
(70)
-
(59)
(22)
(2)
(2)
(85)
97
7,892
5,260
1,621
241
15,111
-
479
526
145
386
1,536
(1)
(221)
(127)
(41)
(4)
(394)
-
(21)
(16)
(3)
(9)
(49)
97
11,127
7,282
2,505
555
21,566
98
7,816
3,426
594
703
12,637
(1)
(242)
(164)
(47)
(10)
(464)
-
(80)
(38)
(5)
(11)
(134)
At both December 31, 2018 and 2017, an immaterial amount of
unrealized losses in the available-for-sale debt and other securities
portfolio were represented by non-rated securities.
127 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. The Bancorp’s commercial loan portfolio consists of
lending to various industry types. Management periodically reviews
the performance of its loan and lease products to evaluate whether
they are performing within acceptable interest rate and credit risk
levels and changes are made to underwriting policies and procedures
as needed. The Bancorp maintains an allowance to absorb loan and
lease losses inherent in the portfolio. For further information on
credit quality and the ALLL, refer to Note 6.
The following table provides a summary of commercial loans and leases classified by primary purpose and consumer loans 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
2018
2017
$
$
$
$
67
3
537
607
44,340
6,974
4,657
3,600
59,571
15,504
6,402
8,976
2,470
2,342
35,694
95,265
-
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
Total portfolio loans and leases are recorded net of unearned
income, which totaled $479 million as of December 31, 2018 and
$523 million as of December 31, 2017. Additionally, portfolio loans
and
leases are recorded net of unamortized premiums 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 $296 million and $282 million as of December 31, 2018
and 2017, respectively.
The Bancorp’s FHLB and FRB advances are generally secured
by loans. The Bancorp had loans of $13.1 billion and $13.0 billion at
December 31, 2018 and 2017, respectively, pledged at the FHLB,
and loans of $42.6 billion and $39.8 billion at December 31, 2018
and 2017, respectively, pledged at the FRB.
The following table presents a summary of the total loans and leases owned by the Bancorp and net charge-offs (recoveries) as of and for the years
ended December 31:
Carrying Value
90 Days Past Due
and Still Accruing
Net
Charge-Offs (Recoveries)
($ 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
2018
44,407
6,977
4,657
3,600
16,041
6,402
8,976
2,470
2,342
95,872
607
95,265
$
$
$
$
2017
41,170
6,610
4,553
4,068
16,077
7,014
9,112
2,299
1,559
92,462
492
91,970
2018
4
2
-
-
38
-
12
37
-
93
2017
3
-
-
-
57
-
10
27
-
97
2018
132
(1)
-
1
7
12
40
101
38
330
2017
111
12
-
2
7
19
37
84
26
298
The Bancorp engages in commercial lease products primarily related
to the financing of commercial equipment. The Bancorp had $3.0
billion and $3.4 billion of direct financing leases, net of unearned
income, at December 31, 2018 and 2017, respectively, and $624
million and $674 million of leveraged leases, net of unearned
income, at December 31, 2018 and 2017, respectively.
Pre-tax income from leveraged leases was $34 million and
included $15 million of gains on early terminations during the year
ended December 31, 2018. 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 year ended December 31, 2017. Excluding the impact of
128 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the remeasurement, pre-tax income from leveraged leases was $16
million during the year ended December 31, 2017. The tax effect of
this income was an expense of $8 million and $6 million during the
years ended December 31, 2018 and 2017, respectively.
The following table provides the components of the commercial lease financing portfolio as of December 31:
($ 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 commercial lease financing
Unearned income
Net investment in commercial lease financing(a)
(a) The accumulated allowance for uncollectible minimum lease payments was $18 and $14 at December 31, 2018 and 2017, respectively.
2018
3,256
804
19
4,079
(479)
3,600
$
$
2017
3,684
885
22
4,591
(523)
4,068
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 of residual value write-downs related to
commercial leases for both the years ended December 31, 2018 and
2017. The residual value write-downs related to commercial leases
are recorded in corporate banking revenue in the Consolidated
Statements of Income. At December 31, 2018, the future minimum
lease payments receivable for each of the years 2019 through 2023
was $815 million, $666 million, $528 million, $430 million and $350
million, respectively.
129 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. CREDIT QUALITY AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES
The Bancorp disaggregates ALLL balances and transactions in the ALLL by portfolio segment. Credit quality related disclosures for loans and
leases are further disaggregated by class.
Allowance for Loan and Lease Losses
The following tables summarize transactions in the ALLL by portfolio segment for the years ended December 31:
Recoveries of losses previously charged-off(a)
2018 ($ in millions)
Balance, beginning of period
Losses charged-off(a)
Total
1,196
(450)
120
237
Balance, end of period
1,103
(a) For the year ended December 31, 2018, the Bancorp recorded $29 in both losses charged-off and recoveries of losses charged-off related to customer defaults on point-of-sale consumer
loans for which the Bancorp obtained recoveries under third-party credit enhancements.
Consumer
234
(280)
89
224
267
Provision for (benefit from) loan and lease losses
753
(157)
25
24
645
120
-
-
(10)
110
Commercial
Unallocated
$
$
Residential
Mortgage
89
(13)
6
(1)
81
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 10 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 (benefit from) loan and lease losses
Balance, end of period
Commercial
831
(154)
29
66
(19)
753
Commercial
840
(232)
42
181
831
$
$
$
$
Residential
Mortgage
96
(15)
8
-
-
89
Residential
Mortgage
100
(19)
9
6
96
Consumer
214
(212)
46
186
-
234
Consumer
217
(205)
43
159
214
Unallocated
112
-
-
9
(1)
120
Unallocated
115
-
-
(3)
112
Total
1,253
(381)
83
261
(20)
1,196
Total
1,272
(456)
94
343
1,253
The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment:
As of December 31, 2018 ($ in millions)
ALLL:(a)
Individually evaluated for impairment
Collectively evaluated for impairment
Unallocated
Total ALLL
Portfolio loans and leases:(b)
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
$
$
a
42
603
-
645
a
61
20
-
81
38
229
-
267
-
-
110
110
-
-
-
141
852
110
1,103
1,291
93,795
95,086
Individually evaluated for impairment
Collectively evaluated for impairment
Total portfolio loans and leases
(a)
(b) Excludes $179 of residential mortgage loans measured at fair value and includes $624 of leveraged leases, net of unearned income, at December 31, 2018.
Includes $1 related to leveraged leases at December 31, 2018.
277
59,294
59,571
278
19,912
20,190
736
14,589
15,325
$
$
130 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
$
$
$
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
a
94
659
-
753
64
25
-
89
42
192
-
234
a
560
55,835
-
56,395
665
14,787
2
15,454
320
19,664
-
19,984
-
-
120
120
-
-
-
-
200
876
120
1,196
1,545
90,286
2
91,833
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.
$
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, 2018 ($ 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, 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
Pass
42,695
3,122
3,632
4,657
3,475
57,581
Pass
38,813
3,207
3,117
4,553
3,922
53,612
$
$
$
$
Special
Mention
779
23
27
-
72
901
Special
Mention
1,115
75
28
-
72
1,290
Substandard
853
139
31
-
53
1,076
Substandard
1,235
80
97
-
74
1,486
Doubtful
13
-
-
-
-
13
Doubtful
7
-
-
-
-
7
Total
44,340
3,284
3,690
4,657
3,600
59,571
Total
41,170
3,362
3,242
4,553
4,068
56,395
131 Fifth Third Bancorp
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. 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 $179 and $137 of residential mortgage loans measured at fair value at December 31, 2018 and 2017, respectively.
Performing
15,303
6,332
8,975
2,444
2,341
35,395
22
70
1
26
1
120
$
$
Nonperforming
2018
Performing
15,424
6,940
9,111
2,273
1,559
35,307
2017
Nonperforming
30
74
1
26
-
131
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, 2018 ($ 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 $179 of residential mortgage loans measured at fair value at December 31, 2018.
(b)
44,213
3,277
3,688
4,657
3,597
15,227
6,280
8,844
2,381
2,323
94,487
$
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
32
1
1
-
1
37
71
119
47
17
326
95
6
1
-
2
61
51
13
42
2
273
127
7
2
-
3
98
122
132
89
19
599
44,340
3,284
3,690
4,657
3,600
15,325
6,402
8,976
2,470
2,342
95,086
4
2
-
-
-
38
-
12
37
-
93
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,
2018, $90 of these loans were 30-89 days past due and $195 were 90 days or more past due. The Bancorp recognized $5 of losses during the year ended December 31, 2018 due to claim denials
and curtailments associated with these insured or guaranteed loans.
Includes accrual and nonaccrual loans and leases.
(c)
132 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
Impaired Portfolio Loans and Leases
Larger commercial loans and leases included within aggregate
borrower relationship balances exceeding $1 million that exhibit
probable or observed credit weaknesses are subject to individual
review for impairment. The Bancorp also performs an individual
review on loans and leases that are restructured in a TDR. The
Bancorp considers the current value of collateral, credit quality of
any guarantees, the loan structure and other factors when
evaluating whether an individual loan or lease is impaired. Other
factors may include the geography and industry of the borrower,
size and financial condition of the borrower, cash flow and
leverage of the borrower and the Bancorp’s evaluation of the
borrower’s management. Smaller-balance homogenous loans or
leases that are collectively evaluated for impairment are not
included in the following tables.
The following tables summarize the Bancorp’s impaired portfolio loans and leases, by class, that were subject to individual review, which includes
all portfolio loans and leases restructured in a TDR as of December 31:
2018 ($ 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)
Unpaid
Principal
Balance
Recorded
Investment
ALLL
$
$
$
$
$
156
2
2
23
465
146
5
47
846
137
9
11
292
85
2
536
1,382
107
2
1
22
462
145
4
44
787
125
9
11
274
83
2
504
1,291 (a)
34
1
-
7
61
22
1
15
141
-
-
-
-
-
-
-
141
133 Fifth Third Bancorp
Includes $60, $724 and $237, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $147, $12 and $41, respectively, of commercial, residential
mortgage and consumer portfolio TDRs on nonaccrual status at December 31, 2018.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2017 ($ 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 and leases:
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 and leases with no related ALLL
Total impaired portfolio loans and leases
(a)
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
(a)
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.
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:
2018
2017
2016
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 and $26 for the years ended December 31, 2017 and 2016, respectively. An immaterial amount of interest income was recognized during both the years ended December 31, 2017
and 2016. Refer to Note 10 for further discussion on the deconsolidation of the VIE associated with these loans in the third quarter of 2017.
373
15
24
-
18
743
579
35
61
-
3
657
691
63
139
3
5
647
244
8
44
1,469
281
11
50
1,677
325
17
56
1,946
15
-
-
-
-
28
10
-
1
-
-
25
10
1
5
-
-
25
12
-
5
60
12
-
4
52
12
-
5
58
$
134 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
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
Other consumer loans
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 $16 and $6 of nonaccrual loans and leases held for sale at December 31, 2018 and 2017, respectively.
(b)
2018
2017
$
$
$
193
11
2
22
228
22
69
1
27
1
98
348
47
395
276
19
7
4
306
30
74
1
26
-
101
437
52
489
Includes $6 and $3 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at December 31, 2018 and 2017, respectively, of which $2 and $3 are
restructured nonaccrual government insured commercial loans at December 31, 2018 and 2017, respectively.
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 $153 million and
$235 million as of December 31, 2018 and 2017, 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
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 $24 million and
$67 million, respectively, as of December 31, 2018 compared with
$53 million and $78 million, respectively, as of December 31, 2017.
135 Fifth Third Bancorp
The following tables provide a summary of loans and leases, by class, modified in a TDR by the Bancorp during the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Number of Loans
Modified in a TDR
During the Year(b)
Recorded Investment
in Loans Modified
in a TDR
During the Year
Increase
(Decrease)
Charge-offs
to ALLL Upon Recognized Upon
Modification
Modification
2018 ($ in millions)(a)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Residential mortgage loans
Consumer loans:
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.
111
84
7,483
8,869
54
6
3
1,128
$
$
200
3
-
168
7
-
37
415
1
(1)
-
4
-
-
9
13
7
-
-
-
-
-
2
9
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
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
136 Fifth Third Bancorp
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.
The following tables provide a summary of TDRs that subsequently defaulted during the years ended December 31, 2018, 2017 and 2016 and were
within twelve months of the restructuring date:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 ($ in millions)(a)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Residential mortgage loans
Consumer loans:
Home equity
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, 2017 ($ in millions)(a)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Residential mortgage loans
Consumer loans:
Home equity
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, 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.
Number of
Contracts
Recorded
Investment
8
2
225
10
655
900
Number of
Contracts
7
4
172
16
1,633
1,832
Number of
Contracts
8
2
2
172
17
2
1,715
1,918
$
$
$
$
$
$
61
-
35
-
4
100
Recorded
Investment
17
1
24
2
8
52
Recorded
Investment
5
-
1
25
1
-
7
39
137 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:
17
Land and improvements
9
Buildings
1
Equipment
(2,715)
Accumulated depreciation and amortization
2,003
Total bank premises and equipment
(a) At December 31, 2018 and 2017, land and improvements, buildings and construction in progress included $55 and $91, respectively, associated with parcels of undeveloped land intended for
25
14
3
(2,785)
1,861
2 - 30 yrs.
2 - 20 yrs.
1 - 30 yrs.
644
1,679
1,876
399
93
586
1,547
1,987
403
81
2017
2018
$
$
future branch expansion.
Depreciation and amortization expense related to bank premises
and equipment was $238 million, $234 million and $242 million for
the years ended December 31, 2018, 2017 and 2016, 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.
During the second quarter of 2018, the Bancorp adopted a plan
to close approximately 100 to 125 branches over the next three
years (the “2018 Branch Optimization Plan”). As of December 31,
2018, the Bancorp closed 31 branches under the 2018 Branch
Optimization Plan. The Bancorp expects to identify the remaining
branches to be closed under the 2018 Branch Optimization Plan
prior to December 31, 2019. As part of the adoption of the 2018
Branch Optimization Plan, the Bancorp has also elected to sell 21
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 $45 million, $7 million and $32 million for the
years ended December 31, 2018, 2017 and 2016, 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, $101 million
and $100 million for the years ended December 31, 2018, 2017 and
2016, respectively, and was reduced by rental income from leased
premises of $12 million, $13 million and $16 million during the
years ended December 31, 2018, 2017 and 2016, respectively. The
Bancorp’s subsidiaries have entered into a number of noncancelable
operating lease 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:
Noncancelable
Operating Leases
Capital Leases
$
$
$
86
80
67
60
54
256
603
-
-
6
5
4
4
-
1
20
2
18
($ in millions)
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Less: Amounts representing interest
Present value of net minimum lease payments
138 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. GOODWILL
Business combinations entered into by the Bancorp typically result
includes
in the recognition of goodwill. Acquisition activity
acquisitions in the respective period in addition to purchase
accounting adjustments related to previous acquisitions. The
Bancorp completed its most recent annual goodwill impairment test
as of September 30, 2018 by performing a qualitative assessment of
goodwill at the reporting unit level to determine whether any
indicators of impairment existed. In performing this qualitative
assessment, the Bancorp evaluated events and circumstances since
the last impairment analysis, macroeconomic conditions, banking
industry and market conditions and key financial metrics of the
Bancorp as well as reporting unit and overall Bancorp financial
performance. After assessing the totality of the events and
circumstances, the Bancorp determined that it was not more likely
than not that the fair 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, 2018 and 2017 were as follows:
($ in millions)
Goodwill
Accumulated impairment losses
Net carrying amount as of December 31, 2016
Acquisition activity
Net carrying amount as of December 31, 2017
Acquisition activity
Net carrying amount as of December 31, 2018
Commercial
Banking
Branch
Banking
1,363
(750)
613
-
613
17
630
1,655
-
1,655
-
1,655
-
1,655
$
$
$
$
Management
Consumer Wealth and Asset
Lending
215
(215)
-
-
-
-
-
148
-
148
29
177
16
193
Total
3,381
(965)
2,416
29
2,445
33
2,478
139 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INTANGIBLE ASSETS
Intangible assets consist of core deposit intangibles, 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, 2017 reflects acquisition activity during 2018.
The details of the Bancorp’s intangible assets are shown in the following table:
($ in millions)
As of December 31, 2018
Core deposit intangibles
Customer relationships
Non-compete agreements
Other
Total intangible assets
As of December 31, 2017
Core deposit intangibles
Customer relationships
Non-compete agreements
Other
Total intangible assets
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
$
$
$
$
34
32
14
7
87
34
16
13
6
69
(30)
(3)
(11)
(3)
(47)
(29)
-
(10)
(3)
(42)
4
29
3
4
40
5
16
3
3
27
As of December 31, 2018, all of the Bancorp’s intangible assets
were being amortized. Amortization expense recognized on
intangible assets was $5 million for the year ended December 31,
2018 and $2 million for both the years ended December 31, 2017
and 2016. The Bancorp’s projections of amortization expense
shown in the following table are based on existing asset balances as
of December 31, 2018. Future amortization expense may vary from
these projections.
Estimated amortization expense for the years ending December 31, 2019 through 2023 is as follows:
($ in millions)
2019
2020
2021
2022
2023
$
Total
6
4
4
3
3
140 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. VARIABLE INTEREST ENTITIES
The Bancorp, in the normal course of business, engages in a variety
of activities that involve VIEs, which are legal entities that lack
sufficient equity 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, 2018 ($ 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, 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
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 15 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
40
-
668
(4)
5
709
1
606
607
-
-
-
-
-
-
-
-
-
-
-
Automobile Loan
Securitizations
CDC
Investments
62
-
1,277
(6)
7
1,340
2
1,190
1,192
-
-
20
-
-
-
20
-
-
-
20
$
$
$
$
$
$
$
$
$
$
Total
40
-
668
(4)
5
709
1
606
607
-
Total
62
20
1,277
(6)
7
1,360
2
1,190
1,192
20
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
141 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 have 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
investment.
tax credits generated by the
Accordingly, the Bancorp concluded that
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.
the equity
This presentation
attributable to the noncontrolling interests in the Consolidated
investor members’
separately
reporting
invested
includes
it
the
During
Balance Sheets and Consolidated Statements of Changes in Equity
and reporting separately the comprehensive income attributable to
the noncontrolling interests in the Consolidated Statements of
Comprehensive Income and the net income attributable to the
noncontrolling interests in the Consolidated Statements of Income.
the Bancorp’s
fourth quarter of 2018,
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 fourth quarter of 2018 resulting
in a decrease of $20 million in commercial mortgage loans and a
decrease of $19 million in indemnification guarantee exposure.
the VIE. As a result,
the
During
the Bancorp’s
third quarter of 2017,
indemnification guarantee for one of the CDC investments for
which a Bancorp subsidiary served as the managing member expired
and the Bancorp transferred its remaining ownership interest in the
VIE to the investor member thus removing the Bancorp from
future operations of
the Bancorp
deconsolidated the VIE during the third quarter of 2017.
the VIE. As a result,
Non-consolidated VIEs
The following tables provide a summary of assets and liabilities carried on the Consolidated Balance Sheets related to non-consolidated VIEs for
which the Bancorp holds an interest, but is not the primary beneficiary of the VIE, as well as the Bancorp’s maximum exposure to losses
associated with its interests in the entities as of:
December 31, 2018 ($ in millions)
CDC investments
Private equity investments
Loans provided to VIEs
December 31, 2017 ($ 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. For information
regarding the Bancorp’s accounting for these investments, refer to
Note 1.
During the fourth quarter of 2017, the Bancorp recognized $57
million, as adjusted, 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 applicable income tax expense in the Consolidated
Statements of Income and reflects the impact of the change in
accounting policy for qualifying LIHTC investments. Refer to Note
1 for further information and refer to Note 26 for further
information on the impairment charge.
142 Fifth Third Bancorp
$
$
Total
Assets
1,198
41
2,331
Total
Assets
1,264
102
1,845
Total
Liabilities
376
-
-
Total
Liabilities
355
-
-
Maximum
Exposure
1,198
73
3,617
Maximum
Exposure
1,264
150
2,910
The Bancorp’s funding requirements are limited to its invested
capital and any additional unfunded commitments for future equity
contributions. The Bancorp’s maximum exposure to loss as a result
of its involvement with the VIEs is limited to the carrying amounts
of the investments, including the unfunded commitments. The
carrying amounts of these investments, which are included in other
assets in the Consolidated Balance Sheets, and the liabilities related
to the unfunded commitments, which are included in other liabilities
in the Consolidated Balance Sheets, are included in the previous
tables for all periods presented. The Bancorp has no other liquidity
arrangements or obligations to purchase assets of the VIEs that
would expose the Bancorp to a loss. In certain arrangements, the
general partner/managing member of the VIE has guaranteed a
level of projected tax credits to be received by the limited
partners/investor members, thereby minimizing a portion of the
Bancorp’s risk.
At both December 31, 2018 and 2017, the Bancorp’s CDC
investments included $1.1 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 $374 million and $355 million at December 31,
2018 and 2017, respectively. The unfunded commitments as of
December 31, 2018 are expected to be funded from 2019 to 2034.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bancorp has accounted for all of its qualifying LIHTC investments using the proportional amortization method of accounting. The following
table summarizes the impact to the Consolidated Statements of Income relating to investments in qualified affordable housing investments:
For the years ended December 31 ($ in millions)
Proportional amortization
Tax credits and other benefits
(a) The Bancorp did not recognize impairment losses resulting from the forfeiture or ineligibility of tax credits or other circumstances during the years ended December 31, 2018, 2017 and 2016. The
Applicable income tax expense
Applicable income tax expense
154
(192)
153
(210)
223
(220)
2016
2017
2018
$
Consolidated Statements of
Income Caption(a)
Bancorp recognized $57, as adjusted, of impairment losses primarily due to the change in the federal statutory corporate tax rate during the year ended December 31, 2017.
from
their activities
Private equity investments
The Bancorp, through Fifth Third Capital Holdings, a wholly-
owned indirect subsidiary of the Bancorp, invests as a limited
partner in private equity investments which provide the Bancorp an
opportunity to obtain higher rates of return on invested capital,
while also creating cross-selling opportunities for the Bancorp’s
commercial products. Each of the limited partnerships has an
unrelated third-party general partner responsible for appointing the
fund manager. The Bancorp has not been appointed fund manager
for any of these private equity investments. The funds finance
the partners’ capital
primarily all of
contributions and investment returns. The Bancorp has determined
that it is not the primary beneficiary of the funds because it does not
have the obligation to absorb the funds’ expected losses or the right
to receive the funds’ expected residual returns that could potentially
be significant to the funds and lacks the power to direct the
activities that most significantly impact the economic performance
of the funds. The Bancorp, as a limited partner, does not have
substantive participating or substantive kick-out rights over the
general partner. Therefore, the Bancorp accounts for its investments
in these limited partnerships under the equity method of accounting.
The Bancorp is exposed to losses arising from the negative
performance of the underlying investments in the private equity
investments. As a limited partner, the Bancorp’s maximum exposure
to loss is limited to the carrying amounts of the investments plus
unfunded commitments. The carrying
these
investments, which are included in other assets in the Consolidated
Balance Sheets, are presented in previous tables. Also, at December
31, 2018 and 2017, the Bancorp’s unfunded commitment amounts
to the private equity funds were $32 million and $48 million,
respectively. As part of previous commitments, the Bancorp made
capital contributions to private equity investments of $7 million and
$11 million during the years ended December 31, 2018 and 2017,
respectively. The Bancorp recognized $8 million, $1 million and $9
million of OTTI primarily associated with certain nonconforming
amounts of
investments affected by the Volcker Rule during the years ended
December 31, 2018, 2017 and 2016, respectively. Additionally, the
Bancorp recognized a gain of $11 million on the sales of certain
private equity funds during the year ended December 31, 2017.
Refer to Note 26 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, 2018 and 2017, the Bancorp’s unfunded
commitments to these entities were $1.3 billion and $1.1 billion,
respectively. The loans and unfunded commitments to these VIEs
are included in the Bancorp’s overall analysis of the ALLL and
reserve for unfunded commitments, respectively. The Bancorp does
not provide any implicit or explicit liquidity guarantees or principal
value guarantees to these VIEs.
143 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SALES OF RECEIVABLES AND SERVICING RIGHTS
Residential Mortgage Loan Sales
The Bancorp sold fixed and adjustable-rate residential mortgage
loans during the years ended December 31, 2018, 2017 and 2016. In
those sales, the Bancorp obtained servicing responsibilities and
provided certain standard representations and warranties, however
the investors have no recourse to the Bancorp’s other assets for
failure of debtors to pay when due. The Bancorp receives servicing
fees based on a percentage of the outstanding balance. The Bancorp
identifies classes of servicing assets based on financial asset type and
interest rates.
Information related to residential mortgage loan sales and the Bancorp’s mortgage banking activity, which is included in mortgage banking net
revenue in the Consolidated Statements of Income, for the years ended December 31 is as follows:
($ 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.
Servicing Rights
The Bancorp measures all of its servicing rights at fair value with
changes in fair value reported in mortgage banking net revenue in
the Consolidated Statements of Income.
2018
5,078
$
2017
6,369
2016
6,927
100
216
138
206
186
199
The following table presents changes in the servicing rights related to residential mortgage 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.
$
$
2018
2017
858
81
82
42
(125)
938
744
127
109
(1)
(121)
858
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
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 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 (losses) 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 due to changes in inputs or assumptions(a)
Recovery of MSR impairment(a)
(a) Included in mortgage banking net revenue in the Consolidated Statements of Income.
2018
(15)
$
2017
2
2016
-
(21)
42
-
2
(1)
-
24
-
7
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
2018
Prepayment
Speed
(annual)
OAS Spread
(bps)
Weighted-
Average Life
(in years)
2017
Prepayment
Speed
(annual)
OAS Spread
(bps)
Residential mortgage loans:
Servicing rights
Servicing rights
Fixed
Adjustable
6.6
2.6
10.5 %
30.3
522
647
7.5
2.7
9.1 %
32.1
497
660
144 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on historical credit experience, expected credit losses for
residential mortgage loan servicing rights have been deemed
immaterial, as the Bancorp sold the majority of the underlying loans
without recourse. At December 31, 2018 and 2017, the Bancorp
serviced $63.2 billion and $60.0 billion, respectively, of residential
mortgage loans for other investors. The value of MSRs that
continue to be held by the Bancorp is subject to credit, prepayment
and interest rate risks on the sold financial assets.
At December 31, 2018, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in
prepayment speed assumptions and immediate 10% and 20% adverse changes in OAS spread are as follows:
Prepayment
Speed Assumption
OAS
Spread Assumption
Fair
Value
Weighted-
Average Life
(in years)
Impact of Adverse Change
on Fair Value
20%
50%
OAS Spread
(bps)
Impact of Adverse Change
on Fair Value
10%
20%
($ 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
10.2 % $
23.0
925
13
(36)
(1)
6.2
3.5
10%
Rate
Rate
(69)
(2)
(158)
(3)
534
863
$
(18)
-
(35)
(1)
These sensitivities are hypothetical and should be used with caution.
As the figures indicate, changes in fair value based on these
variations in the assumptions typically cannot be extrapolated
because the relationship of the change in assumption to the change
in fair value may not be linear. The Bancorp believes variations of
these levels are reasonably possible; however, there is the potential
that adverse changes in key assumptions could be even greater.
the Bancorp
Also, in the previous table, the effect of a variation in a particular
assumption on the fair value of the interests that continue to be held
by
is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in
another (for example, increases in market interest rates may result in
lower prepayments), which might magnify or counteract these
sensitivities.
145 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. DERIVATIVE FINANCIAL INSTRUMENTS
The Bancorp maintains an overall risk management strategy that
incorporates the use of derivative instruments to reduce certain risks
related to interest rate, prepayment and foreign currency volatility.
Additionally, the Bancorp holds derivative instruments for the
benefit of its commercial customers and for other business
purposes. The Bancorp does not enter into unhedged speculative
derivative positions.
the
The Bancorp’s interest rate risk management strategy involves
modifying
financial
repricing characteristics of certain
instruments so that changes in interest rates do not adversely affect
the Bancorp’s net interest margin and cash flows. Derivative
instruments that the Bancorp may use as part of its interest rate risk
management strategy include interest rate swaps, interest rate floors,
interest rate caps, forward contracts, forward starting interest rate
swaps, options, swaptions and TBA securities. 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
free-standing derivatives
rate
swaptions, interest rate floors, mortgage options, TBA securities and
interest rate swaps) to economically hedge prepayment volatility.
Principal-only swaps are total return swaps based on changes in the
value of the underlying mortgage principal-only trust. 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
certain
in foreign currencies. Derivative
instruments that the Bancorp may use to economically hedge these
foreign denominated loans include foreign exchange swaps and
forward contracts.
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
146 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, 2018 and
2017, the balance of collateral held by the Bancorp for derivative
assets was $481 million and $409 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 $249 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, 2018. The credit component
negatively impacting the fair value of derivative assets associated
with customer accommodation contracts was $3 million as of both
December 31, 2018 and 2017.
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, 2018 and
2017, the balance of collateral posted by the Bancorp for derivative
liabilities was $551 million and $365 million, respectively.
Additionally, $23 million of variation margin payments were applied
to the respective derivative contracts to reduce the Bancorp’s
derivative liabilities as of December 31, 2018 and were also not
included in the total amount of collateral posted. Certain of the
Bancorp’s derivative liabilities contain credit-risk related contingent
features that could result in the requirement to post additional
collateral upon the occurrence of specified events. As of December
31, 2018 and 2017, the fair value of the additional collateral that
could be required to be posted as a result of the credit-risk related
contingent features being triggered was immaterial to the Bancorp’s
Consolidated Financial Statements. The posting of collateral has
been determined to remove the need for further consideration of
credit risk. As a result, the Bancorp determined that the impact of
the Bancorp’s credit risk to the valuation of its derivative liabilities
was immaterial to the Bancorp’s Consolidated Financial Statements.
The Bancorp holds certain derivative instruments that qualify
for hedge accounting treatment and are designated as either fair
value hedges or cash flow hedges. Derivative instruments that do
not qualify for hedge accounting treatment, or for which hedge
accounting is not established, are held as free-standing derivatives.
All customer accommodation derivatives are held as free-standing
derivatives.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables reflect the notional amounts and fair values for all derivative instruments included in the Consolidated Balance Sheets as of:
December 31, 2018 ($ 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 floors related to C&I loans
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 MSR portfolio
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
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, 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 MSR portfolio
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
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
Fair Value
Notional
Amount
Derivative
Assets
Derivative
Liabilities
$
3,455
3,000
8,000
10,045
926
2,174
133
55,012
407
6,511
18
13,205
$
262
262
69
15
84
346
40
-
-
4
44
262
7
307
-
148
724
768
1,114
2
2
-
27
27
29
14
8
125
-
147
278
-
278
-
142
698
845
874
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 Hedges
The Bancorp may enter into interest rate swaps to convert its fixed-
rate funding to floating-rate. Decisions to convert fixed-rate funding
to floating are made primarily through consideration of the
asset/liability mix of the Bancorp, the desired asset/liability
sensitivity and interest rate levels. As of December 31, 2018, certain
interest rate swaps met the criteria required to qualify for the
shortcut method of accounting that permits the assumption of
147 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
perfect offset. For all designated fair value hedges of interest rate
risk as of December 31, 2018 that were not accounted for under the
shortcut method of accounting, the Bancorp performed an
assessment of hedge effectiveness using regression analysis with
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 recorded in the same income statement line in current
period net 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
2018
(36)
41
2017
(33)
31
2016
(59)
54
The following amounts were recorded in the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges as of:
($ in millions)
Carrying amount of the hedged items
Cumulative amount of fair value hedging adjustments included in the carrying
amount of the hedged items
Consolidated Balance Sheets Caption
Long-term debt
Long-term debt
December 31, 2018
3,991
$
(254)
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 for the variability in cash flows attributable to the
contractually specified interest rate. The assets or liabilities may be
grouped 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, 2018, hedges
designated as cash flow hedges were assessed for effectiveness using
either regression analysis (quantitative approach) or a qualitative
approach. The entire change in the fair value of the interest rate
swap included in the assessment of hedge effectiveness is recorded
in AOCI and reclassified from AOCI to current period earnings
when the hedged item affects earnings. As of December 31, 2018,
the maximum length of time over which the Bancorp is hedging its
exposure to the variability in future cash flows is 72 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, 2018 and 2017, $160 million of net deferred gains, net of tax and
$9 million of net deferred losses, net of tax, respectively, on cash
flow hedges were recorded in AOCI in the Consolidated Balance
Sheets. As of December 31, 2018, $10 million in net unrealized
losses, net of tax, recorded in AOCI are expected to be reclassified
into earnings during the next twelve months. This amount could
differ from amounts actually recognized due to changes in interest
rates, hedge de-designations, and the addition of other hedges
subsequent to December 31, 2018.
During the years ended 2018 and 2017, there were no gains or
losses reclassified from AOCI into earnings associated with the
discontinuance of cash flow hedges because it was probable that the
original forecasted transaction would no longer occur by the end of
the originally specified time period or within the additional period of
time as defined by U.S. GAAP.
The following table presents the pre-tax net gains (losses) recorded in the Consolidated Statements of Income and in the Consolidated Statements
of Comprehensive Income relating to derivative instruments designated as cash flow hedges:
For the years ended December 31 ($ in millions)
Amount of pre-tax net gains (losses) recognized in OCI
Amount of pre-tax net (losses) gains reclassified from OCI into net income
(a) For both the years ended December 31, 2017 and 2016, the amount of pre-tax net losses recognized in OCI represented the effective portion of the cumulative gains or losses on cash flow hedges and
ineffectiveness was reported within noninterest income. Upon the adoption of ASU 2017-12, the Bancorp recorded a cumulative effect adjustment to retained earnings effective January 1, 2018
related to the elimination of the separate measurement of ineffectiveness. Refer to Note 1 for additional information.
2016(a)
30
48
2017(a)
(11)
19
2018
214
(2)
$
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
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 (now Worldpay Holding, LLC) in
2009, the Bancorp received a warrant which was accounted for as a
free-standing derivative. During the year ended December 31, 2016,
the Bancorp exercised the remaining portion of the warrant.
148 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 26 for further discussion of significant
inputs and assumptions used in the valuation of this instrument.
The net gains (losses) recorded in the Consolidated Statements of Income relating to free-standing derivative instruments used for risk
management and other business purposes are summarized in the following table:
For the 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 Worldpay Holding, LLC
Stock warrant
Swap associated with sale of Visa, Inc. Class B Shares
Consolidated Statements of
Income Caption
2018
2017
2016
Mortgage banking net revenue
Mortgage banking net revenue
$
Other noninterest income
Other noninterest income
Other noninterest income
Other noninterest income
(8)
(21)
10
-
-
(59)
(17)
2
(7)
-
(1)
(80)
14
24
2
73 (a)
-
(56)
(a) The Bancorp recognized a net gain of $9 on the exercise of the remaining warrant during the fourth quarter of 2016.
Free-Standing Derivative Instruments – Customer
Accommodation
The majority of the free-standing derivative instruments the
Bancorp enters into are for the benefit of its commercial customers.
These derivative contracts are not designated against specific assets
or liabilities on the Consolidated Balance Sheets or to forecasted
transactions and, therefore, do not qualify for hedge accounting.
These instruments include foreign exchange derivative contracts
entered into for the benefit of commercial customers involved in
international trade to hedge their exposure to foreign currency
fluctuations and commodity contracts to hedge such items as
natural gas and various other derivative contracts. The Bancorp may
economically hedge significant exposures related to these derivative
contracts entered into for the benefit of customers by entering into
independent
offsetting contracts with approved,
counterparties with substantially matching terms. The Bancorp
hedges
interest rate exposure on commercial customer
transactions by executing offsetting swap agreements with primary
dealers. Revaluation gains and losses on interest rate, foreign
exchange, commodity and other commercial customer derivative
contracts are recorded as a component of corporate banking
revenue or other noninterest income 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, 2018 and 2017, the total
notional amount of the risk participation agreements was $4.0
billion and $2.8 billion, respectively, and the fair value was a liability
of $8 million at December 31, 2018 and $5 million at December 31,
2017, which is included in other liabilities in the Consolidated
Balance Sheets. As of December 31, 2018, the risk participation
agreements had a weighted-average remaining life of 3.5 years.
The Bancorp’s maximum exposure in the risk participation
agreements is contingent on the fair value of the underlying interest
rate derivative contracts in an asset position at the time of default.
The Bancorp monitors the credit risk associated with the underlying
customers in the risk participation agreements through the same risk
grading system currently utilized for establishing loss reserves in its
loan and lease portfolio.
Risk ratings of the notional amount of risk participation agreements under this risk rating system are summarized in the following table:
At December 31 ($ in millions)
Pass
Special mention
Substandard
Total
2018
2017
$
$
3,919
79
4
4,002
2,748
66
24
2,838
149 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 (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
2018
2017
2016
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 income
Other noninterest expense
Other noninterest expense
32
-
-
70
9
-
(1)
55
14
-
1
21
(5)
2
93
6
1
-
48
-
2
1
22
-
1
114
6
(1)
1
62
-
(2)
1
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 both periods shown.
The following tables provide a summary of offsetting derivative financial instruments:
As of December 31, 2018 ($ 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
$
1,107
1,107
(410)
(410)
(348)
(348)
349
349
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
(123)
(123)
(410)
(410)
874
874
341
341
$
Sheets were excluded from this table.
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
(213)
(213)
(155)
(155)
602
602
234
234
$
Sheets were excluded from this table.
150 Fifth Third Bancorp
13. 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 Worldpay Holding, LLC
Prepaid expenses
Income tax receivable
OREO and other repossessed personal property
Worldpay, Inc. TRA put/call receivable
Other
Total other assets
2018
1,963
1,760
1,390
1,114
438
420
93
56
48
-
90
7,372
2017
1,763
1,720
1,445
823
378
219
87
66
54
105
203
6,863
$
$
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. For further information on partnership
investments, refer to Note 10.
The Bancorp utilizes derivative instruments as part of its
overall risk management strategy to reduce certain risks related to
interest rate, prepayment and foreign currency volatility. The
Bancorp also holds derivatives instruments for the benefit of its
commercial customers and for other business purposes. For further
information on derivative instruments, refer to Note 12.
In 2009, the Bancorp sold an approximate 51% interest in its
processing business, Vantiv Holding, LLC (now Worldpay Holding,
LLC). As a result of additional share sales completed by the
Bancorp, its ownership share in Worldpay Holding, LLC was
approximately 8.6% as of December 31, 2017. 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 acquisition as well as additional
share sales completed by the Bancorp in 2018, its ownership share
in Worldpay Holding, LLC as of December 31, 2018 was
approximately 3.3%. The Bancorp’s ownership
in Worldpay
Holding, LLC is currently accounted for under the equity method of
accounting. Refer to Note 18 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.
151 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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
2018
Amount Rate
2017
Amount Rate
$
$
$
1,925
573
1,509
1,611
2,684
6,313
2.40%
1.95
1.97%
1.82
$
$
$
174
4,012
557
3,158
1,495
6,307
1.37%
1.28
1.01%
0.96
The following table presents a summary of the Bancorp's other short-term borrowings as of December 31:
($ in millions)
Securities sold under repurchase agreements
Derivative collateral
FHLB advances
Total other short-term borrowings
$
$
2018
2017
302
271
-
573
546
341
3,125
4,012
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, 2018
and 2017, all securities sold under repurchase agreements were
secured by agency residential mortgage-backed securities and the
repurchase agreements have an overnight remaining contractual
maturity.
152 Fifth Third Bancorp
15. 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
Floating-rate notes(b)
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Subordinated:(a)
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Subsidiaries
Senior:
Fixed-rate notes
Fixed-rate notes
Floating-rate notes
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
Fixed-rate notes
Floating-rate notes(b)
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, 2018.
Maturity
Interest Rate
2018
2017
2019
2020
2021
2022
2022
2028
2018
2024
2038
2018
2018
2018
2019
2019
2019
2019
2020
2020
2021
2021
2021
2021
2025
2026
$
2.30%
2.875%
3.206%
2.60%
3.50%
3.95%
4.50%
4.30%
8.25%
2.15%
1.45%
2.35%
2.375%
2.30%
1.625%
3.412%
2.20%
2.770%
2.25%
2.875%
3.35%
2.948%
3.95%
3.85%
2035
4.21%-4.48%
2019 - 2041 0.05% - 6.87%
500
1,098
250
698
498
646
-
747
1,238
-
-
-
850
750
743
250
742
300
1,248
847
502
299
764
499
1,097
-
697
497
-
505
747
1,305
996
600
250
849
749
736
250
744
299
1,247
846
-
-
-
747
747
52
22
52
30
2020 - 2024
2020
2019 - 2039
1.42%-2.03%
2.605%
Varies
568
11
56
14,426
982
75
105
14,904
$
In aggregate, $2.6 billion qualifies as Tier II capital for regulatory capital purposes for both years ended December, 31 2018 and 2017.
The Bancorp pays down long-term debt in accordance with contractual terms over maturity periods summarized in the above table. The aggregate
annual maturities of long-term debt obligations (based on final maturity dates) as of December 31, 2018 are presented in the following table:
($ in millions)
2019
2020
2021
2022
2023
Thereafter
Total
Parent
Subsidiaries
Total
$
$
500
1,098
250
1,196
-
2,631
5,675
2,610
1,105
2,898
461
1
1,676
8,751
3,110
2,203
3,148
1,657
1
4,307
14,426
At December 31, 2018, the Bancorp’s long-term borrowings
consisted of outstanding principal balances of $14.2 billion, net
discounts of $20 million, debt issuance costs of $30 million and
additions for mark-to-market adjustments on its hedged debt of
$254 million. 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. The Bancorp was in compliance with all debt
covenants at December 31, 2018 and 2017.
For further information on subsequent events related to long-
term debt, refer to Note 31.
153 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to
third-party
investors and entered
Parent Company Long-Term Borrowings
Senior notes
On March 7, 2012, the Bancorp issued and sold $500 million of
senior notes
into a
Supplemental Indenture dated March 7, 2012 with the Trustee,
which modified the existing Indenture for Senior Debt Securities
dated April 30, 2008. The Supplemental Indenture and the
Indenture define the rights of the senior notes and that they are
represented by a Global Security dated as of March 7, 2012. The
senior notes bear a fixed-rate of interest of 3.50% per annum. The
notes are unsecured, senior obligations of the Bancorp. Payment of
the full principal amounts of the notes will be due upon maturity on
March 15, 2022. These fixed-rate senior notes will be redeemable by
the Bancorp, in whole or in part, on or after the date that is 30 days
prior to the maturity date at a redemption price equal to 100% of
the principal amount plus accrued and unpaid interest up to, but
excluding, the redemption date.
On February 28, 2014, the Bancorp issued and sold $500
million of senior notes to third-party investors. The senior notes
bear a fixed-rate of interest of 2.30% per annum. The notes are
unsecured, senior obligations of the Bancorp. Payment of the full
principal amounts of the notes is due upon maturity on March 1,
2019. These fixed-rate senior notes will be redeemable by the
Bancorp, in whole or in part, on or after the date that is 30 days
prior to the maturity date at a redemption price equal to 100% of
the principal amount plus accrued and unpaid interest up to, but
excluding, the redemption date.
On July 27, 2015, the Bancorp issued and sold $1.1 billion of
senior notes to third-party investors. The senior notes bear a fixed-
rate of interest of 2.875% per annum. The notes are unsecured,
senior obligations of the Bancorp. Payment of the full principal
amounts of the notes is due upon maturity on July 27, 2020. These
fixed-rate senior notes will be redeemable by the Bancorp, in whole
or in part, on or after the date that is 30 days prior to the maturity
date at a redemption price equal to 100% of the principal amount
plus accrued and unpaid interest up to, but excluding, the
redemption date.
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.
On March 14, 2018, the Bancorp issued and sold $650 million
of senior notes to third-party investors. The senior notes bear a
fixed-rate of interest of 3.95% 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 14, 2028.
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 5, 2018, the Bancorp issued and sold $250 million of
senior notes to third-party investors. The senior notes bear a
floating-rate of three-month LIBOR plus 47 bps. The notes are
unsecured, senior obligations of the Bancorp. Payment of the full
principal amounts of the notes is due upon maturity on June 4,
2021. These floating-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
154 Fifth Third Bancorp
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 part of
its subordinated fixed-rate notes due in 2038 to floating-rate. 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 5.79% at December 31, 2018.
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 $25.0 billion.
As of December 31, 2018, $17.0 billion was available for future
issuance under the global bank note program.
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 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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.
On July 26, 2018 the Bank issued and sold, under its bank
notes program, $1.55 billion in aggregate principal amount of
unsecured senior bank notes. The bank notes consisted of $500
million of 3.35% senior fixed-rate notes, with a maturity of three
years, due on July 26, 2021; $300 million of senior floating-rate
notes at three-month LIBOR plus 44 bps, with a maturity of three
years, due on July 26, 2021; and $750 million of 3.95% senior fixed-
rate notes, with a maturity of seven years, due July 28, 2025. The
Bank entered into interest rate swaps to convert the fixed-rate notes
due in 2021 and 2025 to a floating-rate, which resulted in an
effective interest rate of one-month LIBOR plus 53 bps and 104
bps, respectively. 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 debentures due in 2035 were
assumed by the Bancorp’s direct nonbank subsidiary holding
company as part of the acquisition of First Charter in June 2008.
The obligation was issued to First Charter Capital Trust I and II.
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, 2018, FHLB advances have rates ranging from
0.05% to 6.87%, with interest payable monthly. The Bancorp has
pledged $14.4 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 $22 million in FHLB
advances that are outstanding. The FHLB advances mature as
follows: $7 million in 2019, $2 million in 2020, $2 million in 2021,
$2 million in 2022, $1 million in 2023, and $8 million thereafter.
Notes associated with consolidated VIEs
As previously discussed in Note 10, 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 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. Approximately $501 million of
outstanding notes from the 2017 securitization transaction are
included in long-term debt in the Consolidated Balance Sheets as of
December 31, 2018. Additionally, in prior years the Bancorp
completed securitization
the Bancorp
transactions
transferred certain consumer automobile loans to bankruptcy
remote trusts which were also deemed to be VIEs. As such,
approximately $78 million of outstanding notes related to these
VIEs were included in long-term debt in the Consolidated Balance
Sheets as of December 31, 2018.
in which
155 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES
The Bancorp, in the normal course of business, enters into financial
instruments and various agreements to meet the financing needs of
its customers. The Bancorp also enters into certain transactions and
agreements to manage its interest rate and prepayment risks, provide
funding, equipment and locations for its operations and invest in its
communities. These instruments and agreements involve, to varying
degrees, elements of credit risk, counterparty risk and market risk in
excess of the amounts recognized in the Consolidated Balance
Sheets. The creditworthiness of counterparties for all instruments
and agreements is evaluated on a case-by-case basis in accordance
with the Bancorp’s credit policies. The Bancorp’s significant
commitments, contingent liabilities and guarantees in excess of the
amounts recognized
in the Consolidated Balance Sheets are
discussed in the following sections.
Commitments
The Bancorp has certain commitments to make future payments under contracts. The following table reflects a summary of significant
commitments as of December 31:
($ 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 expenditures
Capital commitments for private equity investments
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
$
2018
70,415
2,041
926
603
126
45
32
20
2017
68,106
2,185
1,284
568
144
37
48
26
exposure is limited to the replacement value of those commitments.
As of December 31, 2018 and 2017, the Bancorp had a reserve for
unfunded commitments, including letters of credit, totaling $131
million and $161 million, respectively, included in other liabilities in
the Consolidated Balance Sheets. The Bancorp monitors the credit
risk associated with commitments to extend credit using the same
standard regulatory risk rating system utilized for its loan and lease
portfolio.
Risk ratings of outstanding commitments to extend credit under this risk rating system are summarized in the following table as of December 31:
($ in millions)
Pass
Special mention
Substandard
Total commitments to extend credit
$
$
2018
69,928
271
216
70,415
2017
67,254
330
522
68,106
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, 2018:
($ in millions)
Less than 1 year(a)
1 - 5 years(a)
Over 5 years
Total letters of credit
(a) Includes $1 and $18 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.
1,044
989
8
2,041
$
$
guarantees
Standby letters of credit accounted for approximately 99% of total
letters of credit at both December 31, 2018 and 2017 and are
considered
accordance with U.S. GAAP.
Approximately 60% and 61% of the total standby letters of credit
were collateralized as of December 31, 2018 and 2017, 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 $17 million at December 31, 2018 and $6 million
at December 31, 2017. The Bancorp monitors the credit risk
associated with letters of credit using the same standard regulatory
risk rating system utilized for its loan and lease portfolio.
156 Fifth Third Bancorp
Risk ratings under this risk rating system are summarized in the following table as of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Pass
Special mention
Substandard
Doubtful
Total letters of credit
At December 31, 2018 and 2017, 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,
2018 and 2017, total VRDNs in which the Bancorp was the
remarketing agent or were supported by a Bancorp letter of credit
were $487 million and $602 million, respectively, of which FTS
acted as the remarketing agent to issuers on $481 million and $508
million, respectively. As remarketing agent, FTS is responsible for
actively remarketing VRDNs to other investors when they have
been tendered. If another investor is not identified, FTS may choose
to purchase the VRDNs into inventory at its discretion while it
continues to remarket them. If FTS purchases the VRDNs into
inventory, it can subsequently tender back the VRDNs to the
issuer’s trustee with proper advance notice. The Bancorp issued
letters of credit, as a credit enhancement, to $256 million and $331
million of the VRDNs remarketed by FTS, in addition to $6 million
and $94 million in VRDNs remarketed by third parties at December
31, 2018 and 2017, respectively. These letters of credit are included
in the total letters of credit balance provided in the previous table.
The Bancorp held $9 million and $1 million of these VRDNs in its
portfolio and classified them as trading securities at December 31,
2018 and 2017, 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.
$
$
2018
1,905
10
126
-
2,041
2017
1,830
67
218
70
2,185
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 17 for additional information regarding these proceedings.
Guarantees
The Bancorp has performance obligations upon the occurrence of
certain events under financial guarantees provided in certain
contractual arrangements as discussed in the following sections.
Residential mortgage loans sold with representation and warranty provisions
Conforming residential mortgage loans sold to unrelated third
parties are generally sold with representation and warranty
provisions. A contractual liability arises only in the event of a breach
of these representations and warranties and, in general, only when a
loss results from the breach. The Bancorp may be required to
repurchase any previously sold loan, indemnify or 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, 2018 and 2017, the Bancorp maintained
reserves related to loans sold with representation and warranty
provisions totaling $6 million and $9 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, 2018, 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 $9 million in excess of amounts
reserved. This estimate was derived by modifying the key
assumptions 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 the years ended December 31, 2018 and 2017, the
Bancorp paid an immaterial amount and $1 million in the form of
make whole payments and repurchased $18 million and $12 million,
respectively, in outstanding principal of loans to satisfy investor
demands. Total repurchase demand requests during the years ended
December 31, 2018 and 2017 were $19 million and $15 million,
respectively. Total outstanding repurchase demand inventory was $1
million at both December 31, 2018 and December 31, 2017.
157 Fifth Third Bancorp
The following table summarizes activity in the reserve for representation and warranty provisions for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Balance, beginning of period
Net reductions to the reserve
Losses charged against the reserve
Balance, end of period
2018
9
(3)
-
6
$
$
2017
13
(3)
(1)
9
The following tables provide a rollforward of unresolved claims by claimant type for the years ended December 31:
2018 ($ in millions)
Balance, beginning of period
New demands
Resolved demands
Balance, end of period
2017 ($ 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 $272 million and $312 million
at December 31, 2018 and 2017, respectively, and the delinquency
rates were 2.2% at December 31, 2018 and 3.0% at December 31,
2017. The Bancorp maintained an estimated credit loss reserve on
these loans sold with credit recourse of $5 million at both
December 31, 2018 and 2017 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 $13 million and $15 million at December 31,
2018 and 2017, respectively. In the event of any customer default,
FTS has rights to the underlying collateral provided. Given the
existence of the underlying collateral provided and negligible
historical credit losses, the Bancorp does not maintain a loss reserve
related to the margin accounts.
Long-term borrowing obligations
The Bancorp had certain fully and unconditionally guaranteed long-
term borrowing obligations issued by wholly-owned issuing trust
entities of $62 million at both December 31, 2018 and 2017.
158 Fifth Third Bancorp
GSE
Private Label
Units
6
121
(118)
9
Units
13
109
(2)
(114)
6
Dollars
1
19
(19)
1
Dollars
2
15
-
(16)
1
$
$
GSE
$
$
Units
1
-
-
1
$
$
Dollars
-
-
-
-
Private Label
Units
-
1
-
-
1
$
$
Dollars
-
-
-
-
-
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.
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 26 for
information on the valuation of the swap. The
additional
counterparty to the swap as a result of its ownership of the Class B
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2018, 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
$125 million and $137 million at December 31, 2018 and 2017,
respectively. Refer to Note 12 and Note 26 for further information.
After the Bancorp’s sale of the Class B Shares, Visa has funded
additional amounts into the litigation escrow account which have
resulted in further dilutive adjustments to the conversion of Class B
Shares into Class A Shares, and along with other terms of the total
return swap, required the Bancorp to make cash payments in
varying amounts to the swap counterparty as follows:
Period ($ in millions)
Q2 2010
Q4 2010
Q2 2011
Q1 2012
Q3 2012
Q3 2014
Q2 2018
$
Visa
Funding Amount
500
800
400
1,565
150
450
600
Bancorp Cash
Payment Amount
20
35
19
75
6
18
26
159 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. 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, Case No. 05-MD-1720). The plaintiffs,
merchants operating commercial businesses throughout the U.S.
and trade associations, claimed that the interchange fees charged by
card-issuing banks were unreasonable and sought injunctive relief
and unspecified damages. In addition to being a named defendant,
the Bancorp is also subject to a possible indemnification obligation
of Visa as discussed in Note 16 and has also entered into judgment
and loss sharing agreements with Visa, MasterCard and certain other
named defendants. In October 2012, the parties to the litigation
entered into a settlement agreement. On January 14, 2014, the trial
court entered a final order approving the class settlement. A number
of merchants filed appeals from that approval. The U.S. Court of
Appeals for the Second Circuit held a hearing on those appeals and
on June 30, 2016, reversed the district court’s approval of the class
settlement, remanding the case to the district court for further
proceedings. 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. 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. On June 5, 2018, the defendants in the consolidated
class action reached an agreement to settle in principle with the
proposed plaintiffs’ class seeking monetary damages (the “Plaintiff
Damages Class”). On September 17, 2018, those parties signed a
settlement agreement (the “Amended Settlement Agreement”)
superseding the original settlement agreement entered into in
October 2012. The Amended Settlement Agreement includes,
among other terms, a release from participating class members for
liability for claims that accrue no later than five years after the
Amended Settlement Agreement becomes final. The Amended
Settlement Agreement provides for a total payment by all
defendants of $6.24 billion, composed of approximately $5.3 billion
held in escrow and an additional $900 million. The Bancorp’s
allocated share of the putative settlement is within existing reserves.
If more than 15% of class members (by payment volume) opt out
of the class, up to $700 million of the settlement payment may be
returned to the defendants. On September 18, 2018, the Plaintiff
Damages Class filed a Motion for Preliminary Approval of the
Amended Settlement Agreement. At a hearing on the Motion on
December 6, 2018, the Court announced that it will preliminarily
approve the Amended Settlement Agreement. This settlement does
160 Fifth Third Bancorp
not resolve the claims of the separate proposed plaintiffs’ class
seeking injunctive relief or the claims of merchants who are
pursuing separate lawsuits. The ultimate outcome in this matter,
including the timing of resolution, therefore remains uncertain.
Refer to Note 16 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
lawsuit as In re: Fifth Third Early Access Cash Advance Litigation
(Case No. 1:12-CV-00851). On behalf of a putative class, the
plaintiffs seek unspecified monetary and statutory damages,
injunctive relief, punitive damages, attorney’s fees, and pre- and
post-judgment interest. On March 30, 2015, the court dismissed all
claims alleged in the consolidated lawsuit except a claim under the
TILA. On January 10, 2018, plaintiffs filed a motion to hear the
immediate appeal of the dismissal of their breach of contract claim.
On March 28, 2018, the court granted plaintiffs’ motion and stayed
the TILA claim pending that appeal. On April 26, 2018, plaintiffs
filed their notice of appeal for the breach of contract claim with the
U.S. Court of Appeals for the Sixth Circuit. Oral argument on
plaintiffs’ appeal was held on January 29, 2019.
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, Case No.
2015003814). 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 April 20, 2018, the Court denied plaintiffs’
motion for summary judgment and granted summary judgment to
Fifth Third, dismissing the case in its entirety. The plaintiffs filed a
notice of appeal on May 5, 2018. The appeal is pending.
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, 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 almost $40 million, plus interest. Fifth Third
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (Upsher-Smith Laboratories Inc. v. Fifth Third Bank,
Case No. 16-cv-00556). No trial date has been scheduled.
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
self-regulatory bodies
respective businesses.
Additional matters will likely arise from time to time. Any of these
matters may result in material adverse consequences or reputational
harm to the Bancorp, its affiliates and/or their respective directors,
officers and other personnel, including adverse judgments, findings,
settlements, fines, penalties, orders, injunctions or other actions,
amendments and/or restatements of the Bancorp’s SEC filings
and/or financial statements, as applicable, and/or determinations of
material weaknesses in our disclosure controls and procedures.
Investigations by regulatory authorities may from time to time result
in civil or criminal referrals to law enforcement. Additionally, in
some cases, regulatory authorities may take supervisory actions that
are considered to be confidential supervisory information which
may not be publicly disclosed.
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 $14 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.
161 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. 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,
2018 and 2017, 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.
Worldpay, Inc. and Worldpay Holding, LLC
On June 30, 2009, the Bancorp completed the sale of a majority
interest in its processing business, Vantiv Holding, LLC (now
Worldpay Holding, LLC). Advent International acquired an
approximate 51% interest in Worldpay Holding, LLC for cash and a
warrant. The Bancorp retained the remaining approximate 49%
interest in Worldpay Holding, LLC.
During the first quarter of 2012, Vantiv, Inc. (now Worldpay,
Inc.) priced an IPO of its shares and contributed the net proceeds
to Worldpay Holding, LLC for additional ownership interests. As a
result of this offering, the Bancorp’s ownership of Worldpay
Holding, LLC was reduced to approximately 39%. The impact of
the capital contributions to Worldpay 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 Bancorp agreed during the fourth quarter of 2015 to
cancel rights to purchase approximately 4.8 million Class C Units in
Worldpay Holding, LLC, the wholly-owned principal operating
subsidiary of Worldpay, 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 Worldpay, 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
Worldpay Holding, LLC for 8 million Class A Shares in Worldpay,
Inc., which were also sold in the secondary offering and on which
the Bancorp recognized a gain of $331 million in other noninterest
income.
162 Fifth Third Bancorp
2018
2017
$
$
$
700
6
706
10
546
6
552
20
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 Worldpay,
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
Worldpay, 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 Worldpay
Holding, LLC.
During the third quarter of 2017, the Bancorp and Fifth Third
Bank entered into a transaction agreement with Worldpay, Inc. and
Worldpay Holding, LLC under which Fifth Third Bank agreed to
exercise its right to exchange 19.79 million of its Class B Units in
Worldpay Holding, LLC for 19.79 million shares of Worldpay, Inc.’s
Class A Common Stock and Worldpay, 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 in other noninterest income in the Consolidated Statements
of Income during the third quarter of 2017.
On January 16, 2018, Worldpay, Inc. completed its previously
announced acquisition of Worldpay Group plc. with the resulting
combined company named Worldpay, Inc. As a result of this
transaction, the Bancorp recognized a gain of $414 million in other
noninterest income in the Consolidated Statements of Income
during the first quarter of 2018 associated with the dilution in its
ownership interest in Worldpay Holding, LLC from approximately
8.6% to approximately 4.9%.
On June 27, 2018, the Bancorp completed the sale of 5 million
shares of Class A common stock of Worldpay, Inc. The Bancorp
had previously received these Class A shares in exchange for Class B
Units of Worldpay Holding, LLC. The Bancorp recognized a gain of
$205 million in other noninterest income in the Consolidated
Statements of Income related to the sale.
The following table provides a summary of the transactions that impacted the Bancorp's ownership interest in Worldpay Holding, LLC after the
initial IPO:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Q4 2012
Q2 2013
Q3 2013
Q2 2014
Q4 2015
Q3 2017
Q1 2018
Q2 2018
(a) The Bancorp’s remaining investment in Worldpay Holding, LLC of $420 as of December 31, 2018 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
4.9
3.3
157
242
85
125
331
1,037
414
205
Gain on Transactions
$
Remaining Ownership
Percentage(a)
Statements.
As of December 31, 2018, the Bancorp continued to hold
approximately 10.3 million Class B Units of Worldpay Holding,
LLC which may be exchanged for Class A Common Stock of
Worldpay, Inc., on a one-for-one basis or at Worldpay, Inc.’s option
for cash which represented approximately 3.3% ownership of
Worldpay Holding, LLC as of December 31, 2018. In addition, the
Bancorp holds approximately 10.3 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.
The Bancorp recognized $1 million, $47 million and $66
million, respectively, in other noninterest income as part of its
equity method investment in Worldpay Holding, LLC for the years
ended December 31, 2018, 2017 and 2016 and received cash
distributions totaling $3 million, $19 million and $9 million during
the years ended December 31, 2018, 2017 and 2016, respectively.
Given the nature of Worldpay Holding, LLC’s structure as a limited
liability company and contractual arrangements with Worldpay
Holding, LLC, the Bancorp’s remaining investment in Worldpay
Holding, LLC continues to be accounted for under the equity
method of accounting as of December 31, 2018.
During the fourth quarter of 2015, the Bancorp entered into an
agreement with Worldpay, Inc. under which a portion of its TRA
with Worldpay, Inc. was terminated and settled in full for a cash
payment of approximately $49 million from Worldpay, 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 Worldpay, Inc. under which a portion of its TRA
with Worldpay, Inc. was terminated and settled in full for
consideration of a cash payment in the amount of $116 million from
Worldpay, 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 in the Consolidated Statements of Income from this
settlement. Additionally, the agreement provides that Worldpay, 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 Worldpay, Inc. or certain put options by the
Bancorp. In 2016, the Bancorp recognized a gain of $164 million in
other noninterest income in the Consolidated Statements of Income
associated with these options. The Bancorp received $63 million
and $108 million in settlement for the call options and put options
exercised during 2017 and 2018, respectively. As of December 31,
2018, there are no remaining call options or put options. This
agreement did not impact the TRA payment recognized in the
fourth quarter of 2017.
In addition to the impact of the TRA terminations discussed
above, the Bancorp recognized $20 million, $44 million and $33
million in other noninterest income in the Consolidated Statements
of Income associated with the TRA during the years ended
December 31, 2018, 2017 and 2016, respectively.
163 Fifth Third Bancorp
The following table provides the estimated cash flows to be received as of December 31, 2018 associated with the TRA for the years ending
December 31, 2019 and thereafter:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated Cash Flows to
be Received not Subject
to Put/Call Option(a)(b)
($ in millions)
2019
2020
2021
2022
2023
2024
2025
2026
Thereafter
Total
(a) The 2019 cash flow of $20 has been agreed upon with Worldpay, Inc., for settlement in January 2019 and was recognized as a gain in other noninterest income during the fourth quarter of 2018.
The remaining estimated cash flows in this column (which include TRA benefits associated with the net exercise of the warrant in 2016, the subsequent exchange of Worldpay Holding, LLC units
in the third quarter of 2017 and the subsequent exchange of Worldpay Holding, LLC units in the second quarter of 2018) will be recognized in future periods when the related uncertainties are
resolved.
20
29
32
33
33
34
35
36
357
609
$
(b) The estimated cash flows assume that Worldpay, Inc. has sufficient taxable income to utilize the tax deductions associated with the TRA.
Interest income relating to the loans was $7 million, $5 million and
$4 million for the years ended December 31, 2018, 2017 and 2016,
respectively, and is included in interest and fees on loans and leases
in the Consolidated Statements of Income. Worldpay Holding,
LLC’s unused line of credit was $74 million and $4 million as of
December 31, 2018 and 2017, respectively.
income
in other noninterest
SLK Global Solutions Private Limited
As of December 31, 2018, the Bancorp owns 100% of Fifth Third
Mauritius Holdings Limited, which owns 49% of SLK Global
Solutions Private Limited, and accounts for this investment under
the equity method of accounting. The Bancorp recognized $2
million and $3 million
in the
Consolidated Statements of Income as part of its equity method
investment in SLK Global Solutions Private Limited for the years
ended December 31, 2018 and 2017, respectively. The Bancorp did
not receive cash distributions during both the years ended
December 31, 2018 and 2017. The Bancorp’s investment in SLK
Global Solutions Private Limited was $23 million and $22 million at
December 31, 2018 and 2017, respectively. The Bancorp paid SLK
Global Solutions Private Limited $21 million, $21 million and $20
million for their process and software services during the years
ended December 31, 2018, 2017 and 2016, 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 of loans outstanding at both
December 31, 2018 and 2017, and unfunded commitment balances
of $80 million at both December 31, 2018 and 2017. The Bancorp
held $77 million and $26 million of deposits for these entities at
December 31, 2018 and 2017, respectively. For further information
on CDC investments, refer to Note 10.
The Bancorp and Worldpay Holding, LLC have various agreements
in place covering services relating to the operations of Worldpay
Holding, LLC. The services provided by the Bancorp to Worldpay
Holding, LLC were initially required to support Worldpay Holding,
LLC as a standalone entity during the deconversion period. The
majority of services previously provided by the Bancorp to support
Worldpay Holding, Inc. as a standalone entity are no longer
necessary and are now limited to certain general business resources.
Worldpay Holding, LLC paid the Bancorp $1 million for these
services for each of the years ended December 31, 2018, 2017 and
2016. Other services provided to Worldpay Holding, LLC by the
Bancorp, have continued beyond the deconversion period, include
interchange clearing, settlement and sponsorship. Worldpay
Holding, LLC paid the Bancorp $75 million, $68 million and $58
million for these services for the years ended December 31, 2018,
2017 and 2016, respectively. In addition to the previously
mentioned services, the Bancorp previously entered
into an
agreement under which Worldpay Holding, LLC will provide
processing services to the Bancorp. The total amount of fees
relating to the processing services provided to the Bancorp by
Worldpay Holding, LLC totaled $74 million, $72 million and $76
million for the years ended December 31, 2018, 2017 and 2016,
respectively. These fees are primarily reported as a component of
card and processing expense in the Consolidated Statements of
Income.
As part of the initial sale, Worldpay 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
Worldpay Holding, LLC was $187 million and $203 million at
December 31, 2018 and 2017, respectively. Additionally, as of
December 31, 2018 and 2017, the Bancorp had derivative assets of
an immaterial amount and $2 million, respectively, related to interest
rate contracts entered into with Worldpay Holding, LLC which are
included in other assets on the Consolidated Balance Sheets.
164 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. INCOME TAXES
The Bancorp and its subsidiaries file a consolidated federal income tax return. The following is a summary of applicable income taxes included in
the Consolidated Statements of Income for the years ended December 31:
($ in millions)
Current income tax expense (benefit):
U.S. Federal income taxes
State and local income taxes
Foreign income taxes
Total current income tax expense
Deferred income tax expense (benefit):
U.S. Federal income taxes
State and local income taxes
Foreign income taxes
Total deferred income tax expense (benefit)
Applicable income tax expense
2018
2017
2016
463
71
8
542
24
4
2
30
572
986
68
(3)
1,051
(254)
2
-
(252)
799
751
55
-
806
(126)
(14)
(1)
(141)
665
$
$
Current U.S. Federal income taxes above include proportional amortization for qualifying LIHTC investments of $154 million, $223 million and
$153 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The following is a reconciliation between the statutory U.S. Federal income tax rate and the Bancorp’s effective tax rate for the years ended
December 31:
Statutory tax rate
Increase (decrease) resulting from:
State taxes, net of federal benefit
Tax-exempt income
LIHTC investment and other tax benefits
LIHTC investment proportional amortization
Other tax credits
U.S. tax legislation impact on deferred taxes
Other, net
Effective tax rate
2018
21.0 %
2.1
(0.8)
(6.8)
5.6
(0.1)
-
(0.3)
20.7 %
2017
35.0
1.5
(1.1)
(6.9)
7.4
(0.4)
(8.5)
(0.2)
26.8
2016
35.0
1.2
(2.5)
(9.4)
6.9
(0.8)
-
(0.3)
30.1
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 made
broad and complex changes to the U.S. tax code including, but not
limited to, reducing the federal statutory corporate tax rate from 35
percent to 21 percent 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 was 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 $253 million, as
adjusted.
The following table provides a reconciliation of the beginning and ending amounts of the Bancorp’s unrecognized tax benefits:
($ 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) With the exception of $5 in 2018, all amounts represent unrecognized tax benefits that, if recognized, would affect the annual effective tax rate.
2018
34
20
(1)
8
(5)
(1)
55
2017
24
17
(1)
3
(7)
(2)
34
2016
13
9
-
2
-
-
24
$
$
The Bancorp’s unrecognized tax benefits as of December 31, 2018,
2017 and 2016 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
165 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
Other comprehensive income
Reserve for unfunded commitments
Reserves
State net operating loss carryforwards
Other
Total deferred tax assets
Deferred tax liabilities:
Lease financing
Investments in joint ventures and partnership interests
MSRs and related economic hedges
State deferred taxes
Bank premises and equipment
Other comprehensive income
Other
Total deferred tax liabilities
Total net deferred tax liability
2018
2017
$
$
$
$
$
232
79
42
28
28
7
112
528
599
131
107
73
60
-
102
1,072
(544)
251
77
-
34
29
9
103
503
616
85
111
68
42
21
137
1,080
(577)
At December 31, 2018 and 2017, the Bancorp recorded deferred tax
assets of $7 million and $9 million, respectively, related to state net
operating loss carryforwards. The deferred tax assets relating to state
net operating losses (primarily resulting from leasing operations) are
presented net of specific valuation allowances of $25 million and
$27 million at December 31, 2018 and 2017, respectively. If these
carryforwards are not utilized, they will expire in varying amounts
through 2037.
The Bancorp has determined that a valuation allowance is not
needed against the remaining deferred tax assets as of December 31,
2018 or 2017. 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, 2018 and
2017 will ultimately be realized. The Bancorp reached this
conclusion as 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 2014
federal income tax return and is currently examining the Bancorp’s
2015 and 2016 federal income tax returns. The statute of limitations
for the Bancorp’s federal income tax returns remains open for tax
years 2015-2018. 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, 2018, 2017 and 2016, the Bancorp recognized $1
million, $2 million and $1 million, respectively, of interest expense
in connection with income taxes. At both December 31, 2018 and
2017, the Bancorp had accrued interest liabilities, net of the related
tax benefits, of $3 million. No material liabilities were recorded for
penalties related to income taxes.
Retained earnings at December 31, 2018 and 2017 included
$157 million in allocations of earnings for bad debt deductions of
former thrift subsidiaries for which no income tax has been
provided. Under current tax law, if certain of the Bancorp’s
subsidiaries use these bad debt reserves for purposes other than to
absorb bad debt losses, they will be subject to federal income tax at
the current corporate tax rate.
166 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. RETIREMENT AND BENEFIT PLANS
The Bancorp’s qualified defined benefit plan’s benefits were frozen
in 1998, except for grandfathered employees. The Bancorp’s other
retirement plans consist of non-qualified defined benefit plans
which are frozen and funded on an as-needed basis. A majority of
these plans were obtained in acquisitions from prior years and are
included with the qualified defined benefit plan in the following
tables (“the Plan”). The Bancorp recognizes the overfunded and
underfunded status of the Plan as an asset and liability, respectively,
in the Consolidated Balance Sheets.
The overfunded and underfunded amounts recognized in other assets and accrued taxes, interest and expense, respectively, on the Consolidated
Balance Sheets were as follows as of December 31:
($ in millions)
Prepaid benefit cost
Accrued benefit liability
Net underfunded status
$
$
2018
2017
1
(18)
(17)
-
(24)
(24)
The following tables summarize the defined benefit retirement plans as of and for the years ended December 31:
$
2018
Plans with an overfunded status(a)
($ in millions)
Fair value of plan assets at January 1
Actual return on assets
Settlement
Benefits paid
Fair value of plan assets at December 31
Projected benefit obligation at January 1
Interest cost
Settlement
Actuarial gain
Benefits paid
Projected benefit obligation at December 31
Overfunded projected benefit obligation at December 31
Accumulated benefit obligation at December 31(b)
(a) The Bancorp’s qualified defined benefit plan had an overfunded status at December 31, 2018. The Plan was underfunded at December 31, 2017 and is reflected in the underfunded status table.
(b)
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
the same as the projected benefit obligation at December 31, 2018.
185
(6)
(9)
(6)
164
188
6
(9)
(16)
(6)
163
1
163
-
-
-
-
-
-
-
-
-
-
-
-
-
2017
$
$
$
$
$
$
2018
2017
Plans with an underfunded status
($ in millions)
Fair value of plan assets at January 1
Actual return on assets
Contributions
Settlement
Benefits paid
Fair value of plan assets at December 31
Projected benefit obligation at January 1
Interest cost
Settlement
Actuarial (gain) loss
Benefits paid
Projected benefit obligation at December 31
Underfunded projected benefit obligation at December 31
Accumulated benefit obligation at December 31(a)
(a)
172
28
6
(11)
(10)
185
206
8
(11)
16
(10)
209
(24)
209
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
the same as the projected benefit obligation at both December 31, 2018 and 2017.
-
-
3
-
(3)
-
21
1
-
(1)
(3)
18
(18)
18
$
$
$
$
$
The estimated net actuarial loss for the Plan that will be amortized
from AOCI into net periodic benefit cost during 2019 is $6 million.
The estimated net prior service cost for the Plan that will be
amortized from AOCI into net periodic benefit cost during 2019 is
immaterial to the Consolidated Financial Statements.
167 Fifth Third Bancorp
The following table summarizes net periodic benefit cost and other changes in the Plan’s assets and benefit obligations recognized in OCI for the
years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ 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
2018
2017
2016
$
$
$
$
7
(11)
6
3
5
(1)
(6)
(3)
(10)
(5)
8
(10)
7
4
9
(1)
(7)
(4)
(12)
(3)
9
(11)
11
7
16
2
(11)
(7)
(16)
-
Fair Value Measurements of Plan Assets
The following tables summarize Plan assets measured at fair value on a recurring basis as of December 31:
2018 ($ in millions)
Cash equivalents
Mutual and exchange-traded funds
Debt securities:
U.S. Treasury and federal agencies securities
Mortgage-backed securities:
Non-agency commercial mortgage-backed securities
Fair Value Measurements Using(a)
$
Level 1(d)
25
46
Level 2(d)
-
-
43
3
Level 3
Total Fair Value
-
-
-
25
46
46
Asset-backed securities and other debt securities(b)
Total debt securities
Total Plan assets, excluding collective funds
Collective funds (NAV)
Total Plan assets
(a) For further information on fair value hierarchy levels, refer to Note 1.
(b)
(c) Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts
Includes corporate bonds.
$
$
$
presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of Plan assets presented elsewhere within this footnote.
(d) During the year ended December 31, 2018, no assets or liabilities were transferred between Level 1 and Level 2.
-
-
43
114
1
18
22
22
1
18
65
136
28 (c)
164
2017 ($ in millions)
Cash equivalents
Equity securities
Mutual and exchange-traded funds
Debt securities:
U.S. Treasury and federal agencies securities
Mortgage-backed securities:
Non-agency commercial mortgage-backed securities
Level 1(d)
Fair Value Measurements Using(a)
Level 2(d)
Level 3
Total Fair Value
$
7
27
92
9
-
-
-
3
-
-
-
-
7
27
92
12
-
-
9
135
1
17
21
21
Asset-backed securities and other debt securities(b)
Total debt securities
Total Plan assets, excluding collective funds
Collective funds (NAV)
Total Plan assets
(a) For further information on fair value hierarchy levels, refer to Note 1.
(b)
(c) Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts
Includes corporate bonds.
$
$
$
presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of Plan assets presented elsewhere within this footnote.
(d) During the year ended December 31, 2017, no assets or liabilities were transferred between Level 1 and Level 2.
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.
Cash equivalents
Cash equivalents are comprised of money market mutual funds that
invest in short-term money market instruments that are issued and
payable in U.S. dollars. The Plan measures its cash equivalent funds
that are exchange-traded using the fund’s quoted price, which is in
an active market. Therefore, these investments are classified within
Level 1 of the valuation hierarchy.
168 Fifth Third Bancorp
1
17
30
156
29 (c)
185
-
-
-
-
-
-
-
-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity securities
The Plan measures its common stock using the stock’s quoted price
which is available in an active market. Therefore, these investments
are classified within Level 1 of the valuation hierarchy.
Mutual and exchange-traded funds
The Plan measures its mutual and exchange-traded funds, which are
registered with the Securities and Exchange Commission, using the
funds’ quoted prices which are available in an active market.
Therefore, these investments are classified within Level 1 of the
valuation hierarchy. The mutual and exchange-traded funds held by
the Plan are open-ended funds and are required to publicly publish
their NAV on a daily basis. The funds are also required to transact
and use the daily NAV as a basis for transactions. Therefore, the
NAV reflects the fair value of the Plan’s investment.
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 non-agency commercial mortgage-
backed securities and asset-backed securities and other debt
securities.
Collective funds
Investments in collective funds are valued based upon the investee’s
NAV or its equivalent as a practical expedient. NAV is determined
by the fund’s management by dividing the fund’s net assets at fair
value by the number of units outstanding at the valuation date.
Investments valued using NAV as a practical expedient are not
classified within the fair value hierarchy.
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:
2018
2017
2016
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
4.10 %
6.00
3.47
6.00
3.97
7.00
3.47
6.00
4.16
7.00
3.97
6.00
accruing benefits.
Lowering both the expected rate of return on the plan assets and
the discount rate by 0.25% would have increased the 2018 pension
expense by approximately $1 million.
Based on the actuarial assumptions, the Bancorp expects to
contribute $2 million to the Plan in 2019. Estimated pension benefit
payments are $17 million for 2019 and $16 million for each of the
years 2020 through 2023. The total estimated payments for the years
2024 through 2028 is $70 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, fixed-income securities
(including U.S. Treasury and federal agencies securities, mortgage-
backed securities, asset-backed securities and corporate bonds),
alternative strategies (including traditional mutual funds, precious
metals and commodities) and cash.
The following table provides the Bancorp’s targeted and actual weighted-average asset allocations by asset category for the years ended December
31:
Equity securities
Bancorp common stock
Total equity securities(a)
Fixed-income securities
Alternative strategies
Cash
Total
(a)
(b) These reflect the targeted ranges for the year ended December 31, 2018.
Includes mutual and exchange-traded funds.
Targeted Range(b)
2018
2017
%
0-55
50-100
0-5
0-100
67 %
-
67
23
3
7
100 %
76
1
77
16
3
4
100
The Bancorp’s investment policy was revised during the third
quarter of 2018. The asset allocations as of December 31, 2018 were
in line with the revised investment policy. Plan Management’s
objective is to maintain the fully-funded status of the qualified
defined benefit plan while also minimizing the risk of excess assets.
As a result, the portfolio assets of the qualified defined benefit plan
will continue to increase the weighting of long duration fixed
income, or liability matching assets, as the funded status increases.
There were no significant concentrations of risk associated with the
investments of the Plan at December 31, 2018 and 2017.
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 and mortgages. The Plan utilizes derivative
169 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contribution. Expenses
Other Information on Retirement and Benefit Plans
The Bancorp has a qualified defined contribution savings plan that
allows participants to make voluntary 401(k) contributions on a pre-
tax or Roth basis, subject to statutory limitations. The Bancorp
amended and restated the qualified defined contribution savings
plan in its entirety, effective as of January 1, 2015. Beginning with
the 2015 plan year, the Bancorp provides a higher company 401(k)
for matching
match
contributions to the Bancorp’s qualified defined contribution
savings plan were $83 million, $79 million and $75 million for the
years ended December 31, 2018, 2017 and 2016, respectively. The
Bancorp did not make profit sharing contributions during the years
ended December 31, 2018, 2017 and 2016. In addition, the Bancorp
has a non-qualified defined contribution plan that allows certain
employees to make voluntary contributions
into a deferred
compensation plan. Expenses recognized by the Bancorp for its
non-qualified defined contribution plan were $4 million for both of
the years ended December, 31 2018 and 2017 and $3 million for the
year ended December 31, 2016.
recognized
instruments
strategies, as approved by management.
including puts, calls, straddles or other option
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, 2018 and
2017, $164 million and $185 million, respectively, of Plan assets
were managed by Fifth Third Bank. The Fifth Third Bank Pension,
401(k) and Medical Plan Committee (the “Committee”) is the plan
administrator. The Trustee is required to provide to the Committee
monthly and quarterly reports covering a list of Plan assets,
portfolio performance, transactions and asset allocation. The
Trustee is also required to keep the Committee apprised of any
material changes in the Trustee’s outlook and recommended
investment policy. There were no fees paid by the Plan for
investment management, accounting or administrative services
provided by the Trustee. As of December 31, 2018 and 2017, there
was no Bancorp common stock in Plan assets. Plan assets are not
expected to be returned to the Bancorp during 2019.
170 Fifth Third Bancorp
21. ACCUMULATED OTHER COMPREHENSIVE INCOME
The tables below present the activity of the components of OCI and AOCI for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2018 ($ in millions)
Unrealized holding losses on available-for-sale debt securities arising
Pre-tax
Activity
Total OCI
Tax
Effect
Net
Activity
Beginning
Balance(a)
Total AOCI
Net
Activity
Ending
Balance
during the year
$
(483)
Reclassification adjustment for net losses on available-for-sale
debt securities included in net income
Net unrealized losses on available-for-sale debt securities
Unrealized holding gains on cash flow hedge derivatives arising
during the year
Reclassification adjustment for net losses on cash flow hedge
derivatives included in net income
Net unrealized gains on cash flow hedge derivatives
11
(472)
214
2
216
112
(2)
110
(45)
-
(45)
(371)
9
(362)
169
2
171
135
(362)
(227)
(11)
171
160
Net actuarial gain arising during the year
Reclassification of amounts to net periodic benefit costs
Defined benefit pension plans, net
Total
(a) The Bancorp’s AOCI balance was adjusted as of January 1, 2018 to reflect the adoption of new accounting standards. Refer to Note 1 for additional information.
1
9
10
(246)
1
7
8
(183)
-
(2)
(2)
63
(53)
71
$
8
(183)
(45)
(112)
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
171 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 (losses) gains on available-for-sale debt securities:(b)
Net (losses) gains included in net income
Net unrealized (losses) 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
2018
2017
2016
Securities (losses) gains, net
Income before income taxes
Applicable income tax expense
Net income
$
Interest and fees on loans and leases
Income before income taxes
Applicable income tax expense
Net income
Employee benefits expense(a)
Employee benefits expense(a)
Income before income taxes
Applicable income tax expense
Net income
(11)
(11)
2
(9)
(2)
(2)
-
(2)
(6)
(3)
(9)
2
(7)
(3)
(3)
(1)
(4)
19
19
(7)
12
(7)
(4)
(11)
4
(7)
1
11
11
(4)
7
48
48
(17)
31
(11)
(7)
(18)
6
(12)
26
Total reclassifications for the period
(a) This AOCI component is included in the computation of net periodic benefit cost. Refer to Note 20 for information on the computation of net periodic benefit cost.
(b) Amounts in parentheses indicate reductions to net income.
Net income
$
(18)
172 Fifth Third Bancorp
22. 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, 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
Shares acquired for treasury
Impact of stock transactions under stock compensation plans, net
Other
December 31, 2018
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
$ (2,764)
(668)
(4)
3
$ (3,433)
(1,588)
16
3
$ (5,002)
(1,494)
23
2
$ (6,471)
Shares
138,812,267
34,633,221
42,357
(74,563)
173,413,282
58,493,506
(1,693,503)
(125,597)
230,087,688
49,967,134
(2,698,451)
(94,647)
277,261,724
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 February 27, 2018, 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 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.
On June 28, 2018, the Bancorp announced the results of its
capital plan submitted to the FRB as part of the 2018 CCAR. The
FRB indicated to the Bancorp that it did not object to the potential
repurchase of $1.651 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 Worldpay,
Inc. common stock or from the termination and settlement of any
portion of the TRA with Worldpay, Inc., if executed, for the period
beginning July 1, 2018 and ending June 30, 2019.
On May 21, 2018, the Bancorp announced the planned
acquisition of MB Financial, Inc. As a result of this transaction, the
FRB required the Bancorp to resubmit its CCAR plan recognizing
the pro forma impact of the combined Fifth Third/MB Financial,
Inc. post-merger entity. On October 5, 2018, Fifth Third
resubmitted its capital plan to the FRB. On December 27, 2018, the
FRB indicated to the Bancorp that it did not object to the
resubmitted capital plan. The resubmitted capital plan called for no
173 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
change to the originally submitted total capital actions over the 2018
CCAR approval horizon (the third quarter of 2018 through the
second quarter of 2019). However, the share repurchase authority
increased from $1.651 billion to $1.81 billion as a result of after-tax
gains related to the sale of Worldpay, Inc. common stock.
The Bancorp entered into a number of accelerated share
repurchase transactions during the years ended December 31, 2018
and 2017. As part of these transactions, the Bancorp entered into
forward contracts in which the final number of shares delivered at
settlement was based generally on a discount to the average daily
volume weighted-average price of the Bancorp’s common stock
during the term of these repurchase agreements. The accelerated
share repurchases were treated as two separate transactions: (i) the
repurchase of treasury shares on the repurchase date and (ii) a
forward contract indexed to the Bancorp’s common stock.
The following table presents a summary of the Bancorp's accelerated share repurchase transactions that were entered into or settled during the
years ended December 31, 2018 and 2017:
Repurchase Date
December 20, 2016
May 1, 2017
August 17, 2017
December 19, 2017
February 12, 2018
May 25, 2018
Amount ($ in millions)
155
342
990
273
318
235
Shares Repurchased on
Repurchase Date
4,843,750
11,641,971
31,540,480
7,727,273
8,691,318
6,402,244
Shares Received from
Forward Contract Settlement
1,044,362
2,248,250
4,291,170
824,367
1,015,731
1,172,122
Total Shares
Repurchased
Settlement Date
February 6, 2017
5,888,112
13,890,221
July 31, 2017
35,831,650 December 18, 2017
March 19, 2018
8,551,640
March 26, 2018
9,707,049
June 15, 2018
7,574,366
Open Market Share Repurchase Transactions
Between July 20, 2018 and August 2, 2018, the Bancorp repurchased
16,945,020 shares, or approximately $500 million, of its outstanding
common stock through open market repurchase transactions, which
settled between July 24, 2018 and August 6, 2018.
Between October 24, 2018 and November 9, 2018, the
Bancorp repurchased 14,916,332 shares, or approximately $400
million, of its outstanding common stock through open market
repurchase transactions, which settled between October 26, 2018
and November 14, 2018.
23. 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 Bancorp’s equity compensation plans approved by shareholders as of December 31, 2018:
Plan Category (shares in thousands)
Equity compensation plans
Number of Shares to be
Issued Upon Exercise
Weighted-Average
Exercise Price Per Share
SARs
RSAs
RSUs
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
(b)
868
8,020
(c)
8,888
-
-
-
-
Shares Available for
Future Issuance
13,290 (a)
(a)
(a)
(a)
(a)
5,181 (d)
18,471
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
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 8%. SARs, RSAs, RSUs and PSAs outstanding
represent 6% of the Bancorp’s issued shares at December 31, 2018.
All of the Bancorp’s stock-based awards are to be settled with
stock. The Bancorp has historically used treasury stock to settle
stock-based awards, when available. SARs, issued at fair value based
on the closing price of the Bancorp’s common stock on the date of
grant, have up to ten year terms and vest and become exercisable
ratably over a 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
174 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
date of grant, had up to ten year terms and vested and became fully
exercisable ratably over a three or four year period of continued
employment. PSAs have three year cliff vesting terms with market
conditions and/or performance conditions as defined by the plan.
All of the Bancorp’s executive stock-based awards contain an annual
performance hurdle of 2% return on tangible common equity. If
this threshold is not met 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
Directors. The Bancorp met this threshold as of December 31,
2018.
Stock-based compensation expense was $127 million, $118
million and $111 million for the years ended December 31, 2018,
2017 and 2016, respectively, and is included in salaries, wages and
incentives in the Consolidated Statements of Income. The total
related income tax benefit recognized was $27 million, $41 million
and $39 million for the years ended December 31, 2018, 2017 and
2016, 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-
2018
2017
2016
7
35 %
1.9
2.6
6
37
2.1
2.1
6
37
3.1
1.5
Scholes option-pricing model. The weighted-average grant-date fair
value of SARs granted was $11.33, $8.55 and $5.16 per share for the
years ended December 31, 2018, 2017 and 2016, respectively. The
total grant-date fair value of SARs that vested during the years
ended December 31, 2018, 2017 and 2016 was $26 million, $29
million and $32 million, respectively.
At December 31, 2018, there was $17 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, 2018
of 1.7 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
2018
Weighted-
Number of
SARs
31,929
272
(5,058)
(947)
26,196
20,132
$
$
$
Average Grant
Price Per Share
17.22
33.15
16.96
20.93
17.30
15.90
2017
Weighted-
Average Grant
Price Per Share
18.30
26.52
16.00
35.08
17.22
15.30
$
$
$
Number of
SARs
40,041
3,672
(6,953)
(4,831)
31,929
21,403
2016
Weighted-
Number of
SARs
44,129
6,379
(6,291)
(4,176)
40,041
26,898
$
$
$
Average Grant
Price Per Share
19.14
17.68
14.47
32.02
18.30
18.28
The following table summarizes outstanding and exercisable SARs by grant price per share at December 31, 2018:
SARs (in thousands, except per share data)
Under $10.00
$10.01-$20.00
$20.01-$30.00
$30.01-$40.00
All SARs
Outstanding SARs
Exercisable SARs
Number of
SARs
1,426
19,145
5,353
272
26,196
$
$
Weighted-
Average Grant
Price Per Share
3.96
16.10
24.33
33.15
17.30
Weighted-
Average Remaining
Contractual Life
(in years)
0.3
4.7
6.8
9.1
4.9
Number of
SARs
1,441
15,631
3,060
-
20,132
$
$
Weighted-
Average Grant
Price Per Share
3.96
15.67
22.69
-
15.90
Weighted-
Average Remaining
Contractual Life
(in years)
0.3
4.1
5.9
-
4.1
Restricted Stock Awards
The total grant-date fair value of RSAs that were released during the
years ended December 31, 2018, 2017 and 2016 was $27 million,
$39 million and $55 million, respectively. At December 31, 2018,
there was $4 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, 2018 of 0.5 years.
175 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2018
2017
2016
Weighted-Average
Weighted-Average
Weighted-Average
Grant-Date
Fair Value
Per Share
19.72
-
20.09
19.40
19.18
Shares
2,321
-
(1,347)
(106)
868
$
$
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
$
$
RSAs (in thousands, except per share data)
Outstanding at January 1
Granted
Released
Forfeited
Outstanding at December 31
The following table summarizes outstanding RSAs by grant-date fair value at December 31, 2018:
RSAs (in thousands)
$15.01-$20.00
Over $20.00
All RSAs
Outstanding RSAs
Weighted-Average
Remaining
Contractual Life
(in years)
0.5
0.5
0.5
Shares
775
93
868
Restricted Stock Units
The total grant-date fair value of RSUs that were released during the
years ended December 31, 2018, 2017 and 2016 was $42 million,
$21 million and $2 million, respectively. At December 31, 2018,
there was $115 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, 2018 of 2.4 years.
RSUs (in thousands, except per unit data)
Outstanding at January 1
Granted
Released
Forfeited
Outstanding at December 31
2018
2017
2016
Weighted-Average
Weighted-Average
Weighted-Average
Grant-Date
Fair Value
Per Unit
22.25
32.84
21.15
26.45
27.04
Units
6,986
3,674
(1,977)
(663)
8,020
$
$
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
$
$
The following table summarizes outstanding RSUs by grant-date fair value at December 31, 2018:
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)
0.1
0.7
0.5
1.2
1.6
1.2
Units
201
1,799
191
2,489
3,340
8,020
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, 2018, 2017 and 2016.
The total intrinsic value of stock options exercised was
immaterial for the years ended December 31, 2018, 2017 and 2016.
Cash received from stock options exercised was immaterial for both
the years ended December 31, 2018 and 2017 and $1 million for the
year ended December 31, 2016. The tax benefit realized from
exercised stock options was
the Bancorp’s
immaterial
to
the years ended
Consolidated Financial Statements during
December 31, 2018, 2017 and 2016. All stock options were vested
as of December 31, 2008, therefore, no stock options vested during
the years ended December 31, 2018, 2017 or 2016. As of December
31, 2018, the aggregate intrinsic value of both outstanding stock
options and exercisable stock options was zero.
176 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2018
2017
2016
Weighted-Average
Weighted-Average
Weighted-Average
Number of
Stock Options (in thousands, except per share data) Options
2
Outstanding at January 1
(1)
Exercised
(1)
Forfeited or expired
-
Outstanding at December 31
-
Exercisable at December 31
$
$
$
Exercise Price
Per Share
16.50
8.59
24.41
-
-
Number of
Options
25 $
(18)
(5)
2 $
2 $
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
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, 2018,
2017 and 2016 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, 2018, 2017 and 2016, 279,568, 407,069 and
583,608 PSAs, respectively, were granted by the Bancorp. These
awards were granted at a weighted-average grant-date fair value of
$33.15, $26.52 and $14.87 per unit during the years ended
December 31, 2018, 2017 and 2016, 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, 2018, 2017 and 2016, there were 471,818, 475,466
and 684,885 shares, respectively, purchased by participants and the
Bancorp recognized stock-based compensation expense of $2
million, $1 million and $1 million in each of the respective years.
177 Fifth Third Bancorp
24. OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE
The following table presents the major components of other noninterest income and other noninterest expense for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Other noninterest income:
Gain related to Vantiv, Inc.'s acquisition of Worldpay Group plc.
Gain on sale of Worldpay, Inc. shares
Operating lease income
Private equity investment income
BOLI income
Cardholder fees
Consumer loan and lease fees
Banking center income
Income from the TRA associated with Worldpay, Inc.
Insurance income
Net gains (losses) on loan sales
Equity method income from interest in Worldpay Holding, LLC
Loss on swap associated with the sale of Visa, Inc. Class B Shares
Net losses on disposition and impairment of bank premises and equipment
Valuation adjustments on the warrant associated with Worldpay Holding, LLC
Gain on sales of certain retail branches
Gain on sale and exercise of the warrant associated with Worldpay Holding, LLC
Other, net
Total other noninterest income
Other noninterest expense:
Marketing
FDIC insurance and other taxes
Loan and lease
Operating lease
Professional service fees
Losses and adjustments
Data processing
Travel
Postal and courier
Recruitment and education
Donations
Supplies
Insurance
(Gain) loss on partnership investments
(Benefit from) provision for the reserve for unfunded commitments
Other, net
Total other noninterest expense
2018
2017
2016
$
$
$
$
414
205
84
63
56
56
23
21
20
20
2
1
(59)
(43)
-
-
-
24
887
147
119
112
76
67
61
57
52
35
32
21
13
13
(4)
(30)
219
990
-
1,037
96
36
52
54
23
20
44
8
(2)
47
(80)
-
-
-
-
22
1,357
114
127
102
87
83
59
58
46
42
35
28
14
12
14
-
186
1,007
-
-
102
11
53
46
23
20
313
11
10
66
(56)
(13)
64
19
9
10
688
104
126
110
86
61
73
51
45
46
37
23
14
15
25
23
187
1,026
178 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. 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
2018
Average
Shares
Income
Per Share
Amount
Income
2017
Average
Shares
Per Share
Amount
Income
2016
Average
Shares
Per Share
Amount
$
$
2,118
23
2,095
2,118
-
2,118
23
673
3.11
12
2,105
23
2,082
2,105
-
2,105
23
728
2.86
13
1,472
15
1,457
1,472
-
1,472
15
757
1.92
7
$
2,095
685
3.06
2,082
741
2.81
1,457
764
1.91
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, 2018, 2017 and 2016 excludes 3 million, 4
million and 19 million, respectively, of SARs. The diluted earnings
per share computation for the years ended December 31, 2017 and
2016 excludes 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.
179 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26. 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
Level 2(c)
$
97
-
Level 1(c)
-
-
-
-
97
December 31, 2018 ($ in millions)
Assets:
Available-for-sale debt 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
Available-for-sale debt and other securities(a)
Trading debt securities:
U.S. Treasury and federal agencies securities
Obligations of states and political subdivisions securities
Agency residential mortgage-backed securities
Asset-backed securities and other debt securities
Trading debt securities
Equity securities
Residential mortgage loans held for sale
Residential mortgage loans(b)
Commercial loans held for sale
MSRs
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 $184, $366 and $2, respectively, at December 31, 2018.
(b)
Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.
(c) During the year ended December 31, 2018, 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.
-
-
-
-
-
452
-
-
-
-
8
-
-
19
27
110
137
-
-
93
93
642
$
$
$
-
2
16,247
10,650
3,267
2,015
32,181
16
35
68
168
287
-
537
-
7
-
648
152
214
1,014
34,026
313
142
-
259
714
28
742
Level 3
Total Fair Value
-
-
-
-
-
-
-
-
-
-
-
-
-
-
179
-
938
7
-
-
7
1,124
8
-
125
-
133
-
133
97
2
16,247
10,650
3,267
2,015
32,278
16
35
68
168
287
452
537
179
7
938
655
152
307
1,114
35,792
329
142
125
278
874
138
1,012
180 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using
Level 2(c)
$
98
-
Level 1(c)
-
-
-
-
98
December 31, 2017 ($ in millions)
Assets:
Available-for-sale debt 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
Available-for-sale debt and other securities(a)
Trading debt securities:
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
Trading debt securities
Equity securities
Residential mortgage loans held for sale
Residential mortgage loans(b)
MSRs
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)
Included in other assets in the Consolidated Balance Sheets.
Included in other liabilities in the Consolidated Balance Sheets.
1
-
-
-
1
438
-
-
-
1
-
-
39
40
577
1
-
-
38
39
25
64
$
$
$
Level 3
Total Fair Value
-
-
-
-
-
-
-
-
-
-
-
-
-
-
137
858
8
-
-
-
8
1,003
5
-
137
-
142
-
142
98
44
15,319
10,167
3,293
2,218
31,139
12
22
395
63
492
439
399
137
858
514
124
20
165
823
34,287
178
120
137
167
602
31
633
-
44
15,319
10,167
3,293
2,218
31,041
11
22
395
63
491
1
399
-
-
505
124
20
126
775
32,707
172
120
-
129
421
6
427
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 debt and other securities, trading debt securities and equity
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 equity securities. If quoted
market prices are not available, then fair values are estimated using
pricing models, quoted prices of
similar
characteristics or DCFs. Level 2 securities may include federal
agencies securities, obligations of states and political subdivisions
securities, residential mortgage-backed securities, agency and non-
securities, asset-backed
agency commercial mortgage-backed
securities and other debt securities and equity securities. These
securities are generally valued using a market approach based on
observable prices of securities with similar characteristics.
securities with
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.
181 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Residential mortgage loans
Residential mortgage loans held for sale that are reclassified to held
for investment are transferred from Level 2 to Level 3 of the fair
value hierarchy. It is the Bancorp’s policy to value any transfers
between levels of the fair value hierarchy based on end of period
fair values. 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
Commercial loans held for sale
For commercial loans held for sale for which the fair value election
has been made, fair value is estimated based upon quoted prices of
identical or similar assets in an active market, which are reviewed
and approved by the Market Risk department, which reports to the
Bancorp’s Chief Risk Officer. These loans are generally valued using
a market approach based on observable prices and are classified
within Level 2 of the valuation hierarchy.
MSRs
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 11 for further information on the assumptions used in the
valuation of the Bancorp’s MSRs. The Secondary Marketing
department and Treasury department are
for
determining the valuation methodology for MSRs. Representatives
from Secondary Marketing, Treasury, Accounting and Risk
Management are responsible for reviewing key assumptions used in
the internal OAS model. Two external valuations of the MSR
portfolio are obtained from third parties 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
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,
182 Fifth Third Bancorp
therefore, are classified within Level 2 of the valuation hierarchy.
Such derivatives include basic and structured interest rate, foreign
exchange and commodity swaps and options. Derivatives that are
valued based upon models with significant unobservable market
parameters are classified within Level 3 of the valuation hierarchy.
During the years ended December 31, 2018 and 2017, 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, 2018
was $7 million. Immediate decreases in current interest rates of 25
bps and 50 bps would result in increases in the fair value of the
IRLCs of approximately $3 million and $6 million, respectively.
Immediate increases of current interest rates of 25 bps and 50 bps
would result in decreases in the fair value of the IRLCs of
approximately $4 million and $9 million, respectively. The decrease
in fair value of IRLCs due to both immediate 10% and 20% adverse
changes in the assumed loan closing rates would be approximately
$1 million and the increase in fair value due to both immediate 10%
and 20% favorable changes in the assumed loan closing rates would
be approximately $1 million. 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.
Short positions
Where quoted prices are available in an active market, short
positions are classified within Level 1 of the valuation hierarchy. If
quoted market prices are not available, then fair values are estimated
using pricing models, quoted prices of securities with similar
characteristics or DCFs and therefore are classified within Level 2
of the valuation hierarchy.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables are a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs
(Level 3):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Interest Rate
Residential
Derivatives,
Mortgage
Equity
Derivatives
(137)
Total
Fair Value
861
$
Loans
137
For the year ended December 31, 2018 ($ 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, 2018(c)
(a) Net interest rate derivatives include derivative assets and liabilities of $7 and $8, respectively, as of December 31, 2018.
(b)
(c)
Includes certain residential mortgage loans originated as held for sale that were transferred to held for investment.
Includes interest income and expense.
(3)
-
(19)
64
179
(3)
$
$
MSRs
858
(83)
163
-
-
938
Net(a)
3
72
(5)
(71)
-
(1)
(59)
-
71
-
(125)
(4)
9
(59)
(73)
158
(19)
64
991
(57)
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 held for sale that were transferred to held for investment.
Includes interest income and expense.
(80)
-
34
-
(137)
(107)
234
(86)
16
861
(122)
236
-
-
858
1
-
(23)
16
137
94
(2)
(97)
-
3
(191)
(122)
(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
Fair Value
$
167
For the year ended December 31, 2016 ($ in millions)
Balance, beginning of period
Total gains (losses) (realized/unrealized):
Included in earnings
Purchases/originations
Sales 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
(45)
$
still held at December 31, 2016(c)
(a) Net interest rate derivatives include derivative assets and liabilities of $13 and $5, respectively, as of December 31, 2016. Net equity derivatives include derivative assets and liabilities of $0 and
115
(3)
-
(116)
-
8
130
(3)
(334)
(131)
18
60
17
-
(334)
25
-
(91)
(2)
-
-
(40)
18
143
380
201
(56)
12
13
(2)
$
$91, respectively, as of December 31, 2016.
Includes certain residential mortgage loans held for sale that were transferred to held for investment.
Includes interest income and expense.
(b)
(c)
183 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total gains and losses included in earnings for assets and liabilities measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) were recorded in the Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016 as follows:
($ in millions)
Mortgage banking net revenue
Corporate banking revenue
Other noninterest income
Total (losses) gains
2018
(16)
2
(59)
(73)
$
$
2017
(29)
2
(80)
(107)
2016
112
1
17
130
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, 2018, 2017 and 2016 were recorded in the Consolidated Statements of Income as follows:
($ in millions)
Mortgage banking net revenue
Corporate banking revenue
Other noninterest income
Total losses
2018
-
2
(59)
(57)
$
$
2017
(113)
2
(80)
(191)
2016
10
1
(56)
(45)
The following tables present information as of December 31, 2018 and 2017 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, 2018 ($ in millions)
Financial Instrument
Residential mortgage loans
Fair Value
$
179
Valuation Technique
Loss rate model
Significant Unobservable
Inputs
Interest rate risk factor
Credit risk factor
Ranges of
Inputs
(13.2) - 9.4%
0 - 39.9%
Weighted-
Average
0.5%
0.7%
MSRs
938 DCF
Prepayment speed
0.5 - 100.0%
IRLCs, net
Swap associated with the sale of Visa, Inc.
Class B Shares
7
DCF
(125) DCF
As of December 31, 2017 ($ in millions)
OAS spread (bps)
Loan closing rates
Timing of the resolution
of the Covered Litigation
441 - 1,513
9.5 - 96.7%
1/31/2021 -
11/30/2023
(Fixed) 10.2%
(Adjustable) 23.0%
(Fixed) 534
(Adjustable) 863
86.0%
11/11/2021
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 DCF
Prepayment speed
0 - 98.1%
(Fixed) 11.4%
(Adjustable) 24.6%
IRLCs, net
Swap associated with the sale of Visa, Inc.
Class B Shares
8
DCF
(137) DCF
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
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
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.
184 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, 2018 and 2017 and for
which a nonrecurring fair value adjustment was recorded during the years ended December 31, 2018 and 2017, 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, 2018 ($ 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
Other assets
Total
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
16
-
93
-
2
-
14
-
20
-
32
-
-
-
3
67
2
-
182
67
Level 1
-
-
-
-
-
-
-
-
-
-
Fair Value Measurements Using
Level 3
Level 2
1
-
327
-
19
-
4
-
27
-
24
-
60
-
8
-
1,078
-
1,548
-
Level 1
-
-
-
-
-
-
-
-
-
-
$
$
$
$
Total
16
93
2
14
20
32
-
70
2
249
Total
1
327
19
4
27
24
60
8
1,078
1,548
Total (Losses) Gains
For the year ended December 31, 2018
(3)
(41)
7
(11)
(7)
(45)
(2)
43
(8)
(67)
Total Losses
For the year ended December 31, 2017
(33)
(99)
(12)
(6)
(10)
(6)
(42)
(1)
(57)
(266)
The following tables present information as of December 31, 2018 and 2017 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, 2018 ($ 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
Other assets
Fair Value
16
$
Appraised value
Valuation Technique
Significant Unobservable Inputs
Appraised value
Costs to sell
Collateral value
Collateral value
Collateral value
Appraised value
Appraised value
Appraised value
Liquidity discount
Appraised value
Appraised value
Appraised value
Appraised value
Appraised value
Appraised value
Liquidity discount applied
to fund's NAV
Comparable company analysis Market comparable transactions
Appraised value
Appraised value
93
2
14
20
32
-
-
3
2
Ranges of
Inputs
Weighted-Average
NM
NM
NM
NM
NM
NM
NM
NM
0 - 43.0%
NM
NM
NM
10.0%
NM
NM
NM
NM
NM
NM
12.9%
NM
NM
185 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Affordable housing investments
Valuation Technique
Significant Unobservable
Inputs
Fair Value
1
$
Appraised value
327 Appraised value
Appraised value
19
Appraised value
4
Appraised value
27
Appraised value
24
Appraised value
60
Liquidity discount applied
8
to fund's NAV
1,078 Appraised value
Appraised value
Costs to sell
Collateral value
Collateral value
Collateral value
Appraised value
Appraised value
Appraised value
Liquidity discount
Ranges of
Inputs
NM
NM
NM
NM
NM
NM
NM
NM
2.5 - 15.0%
Weighted-Average
NM
10.0%
NM
NM
NM
NM
NM
NM
5.8%
NM
Appraised value
NM
totaling an
Commercial loans held for sale
During the years ended December 31, 2018 and 2017, the Bancorp
transferred $1 million and $85 million, respectively, of commercial
loans from the portfolio to loans held for sale that upon transfer
were measured at the lower of cost or fair value. These loans had
fair value adjustments during the years ended December 31, 2018
immaterial amount and $31 million,
and 2017
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, 2018 and 2017 there were fair value adjustments on
existing loans held for sale of $3 million and an immaterial amount,
respectively. The fair value adjustments were also based on
appraisals of the underlying collateral. The Bancorp recognized an
immaterial amount of gains and $2 million in losses on the sale of
certain commercial loans held for sale during the years ended
December 31, 2018 and 2017, respectively.
The Accounting department determines the procedures for the
valuation of commercial loans held for sale using appraised values
which may include a comparison to recently executed transactions
of similar type loans. A monthly review of the portfolio is
performed for reasonableness. Quarterly, appraisals approaching a
year old are updated and the Real Estate Valuation group, which
reports to the Bancorp’s Chief Risk Officer, in conjunction with the
Commercial Line of Business, reviews the third-party appraisals for
reasonableness. Additionally, the Commercial Line of Business
Finance department, which reports to the Bancorp’s Chief Financial
Officer, in conjunction with the Accounting department reviews all
loan appraisal values, carry values and vintages.
to
adjustments
Commercial loans and leases held for investment
During the years ended December 31, 2018 and 2017, the Bancorp
recorded nonrecurring
certain
impairment
commercial and industrial loans, commercial mortgage 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 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
186 Fifth Third Bancorp
reviewing the fair value estimates for commercial loans held for
investment.
OREO
During the years ended December 31, 2018 and 2017, 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 both the years ended December
31, 2018 and 2017, these losses include $4 million recorded as
charge-offs, on new OREO properties transferred from loans
during the respective periods and $3 million and $6 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
fair value
is
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 appraisals for
commercial properties transferred to OREO. All appraisals on
commercial OREO properties are updated on at least an annual
basis.
The Real Estate Valuation department reviews the BPO data and
internal market information to determine the initial charge-off on
residential real estate loans transferred to OREO. Once the
foreclosure process is completed, the Bancorp performs an interior
inspection to update the initial fair value of the property. These
properties are reviewed at least every 30 days after the initial interior
inspections are completed. The Asset Manager receives a monthly
status report for each property which includes the number of
showings, recently sold properties, current comparable listings and
overall market conditions.
recognized. The previous
reflect
tables
the
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. Enterprise Workplace Services,
which reports to the Bancorp’s Chief Administrative Officer, in
conjunction with Accounting, are responsible for preparing and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reviewing the fair value estimates for bank premises and equipment.
For further information on bank premises and equipment refer to
Note 7.
Operating lease equipment and other assets
During the years ended December 31, 2018 and 2017, the Bancorp
recorded nonrecurring impairment adjustments to certain operating
lease equipment, including returned 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 in advancements associated with
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.
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.
Private equity investments
As a result of adopting ASU 2016-01, effective January 1, 2018, the
Bancorp accounts for its private equity investments using the
measurement alternative to fair value, except for those accounted
for under the equity method of accounting. Under the measurement
alternative, the Bancorp carries each investment at its cost basis
minus impairment, if any, plus or minus changes resulting from
observable price changes in orderly transactions for identical or
similar investments of the same issuer. The Bancorp recognized
gains of $64 million resulting from observable price changes during
the year ended December 31, 2018. The carrying value of the
Bancorp’s private equity investments still held as of December 31,
2018 includes a cumulative $48 million of positive adjustments as a
result of observable price changes. Because these adjustments are
based on observable transactions in inactive markets, they are
classified in Level 2 of the fair value hierarchy.
For private equity investments which are accounted for using
the measurement alternative to fair value, the Bancorp qualitatively
evaluates each investment quarterly to determine if impairment may
exist. If necessary, the Bancorp then measures impairment by
estimating the value of its investment and comparing that to the
investment’s carrying value, whether or not the Bancorp considers
the impairment to be temporary. These valuations are typically
developed using a discounted cash flow method, but other methods
may be used if more appropriate for the circumstances. These
valuations are based on unobservable inputs and therefore are
classified in Level 3 of the fair value hierarchy. The Bancorp
recognized impairments of $12 million during the year ended
December 31, 2018. The carrying value of the Bancorp’s private
equity investments still held as of December 31, 2018 includes a
cumulative $12 million of impairment charges recognized since
adoption of the measurement alternative to fair value on January 1,
2018.
The Bancorp recognized $10 million and $1 million of OTTI
primarily associated with certain nonconforming
investments
affected by the Volcker Rule during the years ended December 31,
2018 and 2017, 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 the
funds by applying an estimated market discount to the reported
NAV of the fund or through a discounted cash flow analysis.
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 NAVs 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 Head of Payments, Strategy and Digital Solutions, in
conjunction with Accounting, is responsible for preparing and
reviewing the fair value estimates.
Affordable housing investments
During the fourth quarter of 2017, the Bancorp recognized $57
million, as adjusted, 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 applicable income tax expense in the Consolidated
Statements of Income and reflects the impact of the change in
accounting policy for qualifying LIHTC investments. Refer to Note
1 for further information.
187 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Option
The Bancorp elected to measure certain residential mortgage and
commercial 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.
Electing to measure certain commercial loans held for sale at fair
value reduces certain timing differences and better reflects changes
in fair value of these assets that are expected to be sold in the short
term. Management’s
to sell residential mortgage or
commercial 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 residential
mortgage loans held at December 31, 2018 and 2017 for which the
intent
fair value option was elected, as well as the changes in fair value of
the underlying IRLCs, included gains of $20 million and $14 million,
respectively. These gains are reported in mortgage banking net
revenue in the Consolidated Statements of Income. Fair value
changes recognized in earnings for commercial loans held at
December 31, 2018 for which the fair value option was elected
included gains of an immaterial amount. The Bancorp did not hold
any commercial loans held for sale at December 31, 2017.
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 $1 million and $2 million
at December 31, 2018 and 2017, respectively. Valuation adjustments
related to instrument-specific credit risk for commercial loans
measured at fair value had an immaterial impact on the fair value of
those loans at December 31, 2018. Interest on loans measured at
fair value is accrued as it is earned using the effective interest
method and is reported as interest income in the Consolidated
Statements of Income.
The following table summarizes the difference between the fair value and the unpaid principal balance for residential mortgage loans measured at
fair value as of:
($ in millions)
December 31, 2018
Residential mortgage loans measured at fair value
Past due loans of 90 days or more
Nonaccrual loans
Commercial loans measured at fair value
December 31, 2017
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
$
$
716
2
2
7
536
5
1
696
2
2
7
522
5
1
20
-
-
-
14
-
-
188 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Certain Financial Instruments
The following tables summarize the carrying amounts and estimated fair values for certain financial instruments, excluding financial instruments
measured at fair value on a recurring basis:
As of December 31, 2018 ($ in millions)
Financial assets:
Cash and due from banks
Other short-term investments
Other securities
Held-to-maturity securities
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, 2017 ($ in millions)
Financial assets:
Cash and due from banks
Other short-term investments
Other securities
Held-to-maturity securities
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
$
$
$
$
$
$
Net Carrying
Amount
2,681
1,825
552
18
63
43,825
6,894
4,625
3,582
15,244
6,366
8,934
2,314
2,309
(110)
93,983
108,835
1,925
573
14,426
Net Carrying
Amount
2,514
2,753
612
24
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
Fair Value Measurements Using
Level 2
Level 3
Level 1
2,681
1,825
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
552
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
18
63
44,668
6,851
4,688
3,180
15,688
6,719
8,717
2,759
2,428
-
95,698
-
1,925
-
14,287
108,782
-
573
445
Fair Value Measurements Using
Level 2
Level 1
Level 3
2,514
2,753
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
612
-
-
-
-
-
-
-
-
-
-
-
-
-
-
174
-
15,045
103,123
-
4,012
529
Total
Fair Value
2,681
1,825
552
18
63
44,668
6,851
4,688
3,180
15,688
6,719
8,717
2,759
2,428
-
95,698
108,782
1,925
573
14,732
Total
Fair Value
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
103,123
174
4,012
15,574
-
-
-
-
-
-
-
24
93
41,718
6,490
4,560
3,705
15,996
7,410
8,832
2,616
1,621
-
92,948
-
-
-
-
189 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27. 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.
PRESCRIBED CAPITAL RATIOS
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, 2018 and 2017. 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:
2018
2017(a)
Amount Ratio
($ in millions)
CET1 capital:
Fifth Third Bancorp
Fifth Third Bank
Tier I risk-based capital:
Fifth Third Bancorp
Fifth Third Bank
Total risk-based capital:
Fifth Third Bancorp
Fifth Third Bank
Tier I leverage:(b)
Fifth Third Bancorp
Fifth Third Bank
(a) The regulatory capital data and ratios have not been restated as a result of the Bancorp’s change in accounting for qualifying LIHTC investments. For additional information refer to Note 1.
(b) 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
10.24 % $
11.93
11.74
12.06
10.61 %
12.06
15.16
13.88
10.01
10.32
17,887
16,126
12,517
14,008
13,848
14,008
13,848
14,008
17,723
16,427
12,534
14,435
13,864
14,435
13,864
14,435
14.48
13.57
9.72
10.27
11.32
11.93
Amount
Ratio
$
be deducted from Tier I capital.
190 Fifth Third Bancorp
28. 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
Equity in undistributed earnings
Net Income Attributable to Bancorp
Other Comprehensive Income
Comprehensive Income Attributable to Bancorp
$
$
$
2018
2017
2016
1,890
24
1,914
211
34
245
1,669
50
1,719
474
2,193
-
2,193
2,343
21
2,364
176
42
218
2,146
68
2,214
(34)
2,180
-
2,180
1,886
18
1,904
171
18
189
1,715
63
1,778
(231)
1,547
-
1,547
(a) The Bancorp’s indirect banking subsidiary paid dividends to the Bancorp’s direct nonbank subsidiary holding company of $1.9 billion, $2.3 billion and $1.9 billion for the years ended
December 31, 2018, 2017 and 2016, respectively.
Condensed Balance Sheets (Parent Company Only)
As of December 31 ($ 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 (loss) income
Treasury stock
Noncontrolling interests
Total Equity
Total Liabilities and Equity
2018
120
3,642
571
571
17,921
17,921
80
268
22,602
253
424
5,675
6,352
2,051
1,331
2,873
16,578
(112)
(6,471)
-
16,250
22,602
$
$
$
$
$
$
2017
80
3,493
843
843
17,530
17,530
80
329
22,355
315
472
5,348
6,135
2,051
1,331
2,790
14,957
73
(5,002)
20
16,220
22,355
191 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 deferred income taxes
Equity in undistributed earnings
Net change in:
Other assets
Accrued expenses and other liabilities
Net Cash Provided by Operating Activities
Investing Activities
Net change in:
Short-term investments
Loans to subsidiaries
Net Cash Provided by (Used in) Investing Activities
Financing Activities
Net change in other short-term borrowings
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
Increase (Decrease) in Cash
Cash at Beginning of Period
Cash at End of Period
2018
$
2,193
3
(474)
61
(116)
1,667
(149)
272
123
(62)
(467)
(98)
895
(500)
(1,453)
(65)
(1,750)
40
80
120
$
2017
2,180
2
34
37
(15)
2,238
(419)
126
(293)
(29)
(430)
(75)
697
(500)
(1,605)
(53)
(1,995)
(50)
130
80
2016
1,547
-
231
14
(35)
1,757
654
13
667
(60)
(402)
(52)
-
(1,250)
(661)
3
(2,422)
2
128
130
192 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
29. 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 and credit rates to classes of assets and
liabilities, respectively, based on the estimated amount and timing of
the cash flows for each transaction. Assigning the FTP rate based
on matching the duration of cash flows allocates interest income
and interest expense to each business segment so its resulting net
interest income is insulated from future changes in benchmark
interest rates. The Bancorp’s FTP methodology also allocates the
contribution to net interest income of the asset-generating and
deposit-providing businesses on a duration-adjusted basis to better
attribute the driver of the performance. As the asset and liability
durations are not perfectly matched, the residual impact of the FTP
methodology is captured in General Corporate and Other. The
charge and credit rates are determined using the FTP rate curve,
which is based on an estimate of Fifth Third’s marginal borrowing
is
in the wholesale funding markets. The FTP curve
cost
constructed using the U.S. swap curve, brokered CD pricing and
unsecured debt pricing.
The Bancorp adjusts the FTP charge and credit rates as
dictated by changes in interest rates for various interest-earning
assets and interest-bearing liabilities and by the review of 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, 2018 to reflect the
current market rates and updated market assumptions. These rates
were generally higher than those in place during 2017, thus net
interest
income for deposit-providing business segments was
positively impacted during 2018. 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 2018.
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
for shared services and headquarters expenses.
allocations
Additionally, the business segments form synergies by taking
advantage of cross-sell opportunities and funding operations by
accessing the capital markets as a collective unit.
The results of operations and financial position for the years
ended December 31, 2017 and 2016 were adjusted to reflect
changes in internal expense allocation methodologies as well as a
change in accounting policy for qualifying LIHTC investments.
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 1,121
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
four main businesses: FTS, an indirect wholly-owned subsidiary of
the Bancorp; Fifth Third Insurance Agency; 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. Fifth Third Insurance
Agency 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,
193 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
182
12
170
1
429
2
5
1
18
-
-
456
$
Banking
237
42
195
2,034
171
1,863
1,713
(26)
1,739
273
3
432
58
-
151
-
-
917
275
150
5
266
5
53
-
-
754
-
-
-
-
206
14
-
(15)
205
2018 ($ in millions)
Net interest income
Provision for (benefit from) 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(b)
Securities losses, net
Securities losses, net - non-qualifying hedges on MSRs
Total noninterest income
Noninterest expense:
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Card and processing expense
Equipment expense
Other noninterest expense
Total noninterest expense
Income (loss) before income taxes
Applicable income tax expense (benefit)
Net income (loss)
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)
Includes impairment charges of $45 for branches and land. For more information refer to Note 7 and Note 26.
Includes bank premises and equipment of $42 classified as held for sale. For more information refer to Note 7.
156
36
10
5
-
-
195
402
(2)
(1)
(1)
-
22,044
300
44
26
7
4
23
859
1,263
1,393
254
1,139
630
61,630
438
98
175
5
121
50
841
1,728
889
187
702
1,655
61,040
$
$
173
29
12
1
-
1
288
504
122
25
97
193
10,337
(26)
38
(64)
-
-
(1)
-
-
651
(54)
-
596
716
125
69
267
(2)
49
(1,055)
169
363
107
256
-
(8,982)(c)
-
-
-
-
(138)(a)
-
-
-
-
-
-
(138)
4,140
237
3,903
549
444
438
329
212
887
(54)
(15)
2,790
-
-
-
-
-
-
(138)
(138)
-
-
-
-
-
1,783
332
292
285
123
123
990
3,928
2,765
572
2,193
2,478
146,069
194 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial
Branch
Banking
Consumer
Lending Management and Other Eliminations Total
Wealth
General
and Asset Corporate
$
Banking
240
40
200
1,782
153
1,629
1,652
38
1,614
265
141
5
251
6
88
-
-
756
-
-
-
-
217
18
-
2
237
287
3
348 (c)
57
-
143
-
-
838
2017 ($ in millions)
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Noninterest income:
Service charges on deposits
Wealth and asset management revenue
Corporate banking revenue
Card and processing revenue
Mortgage banking net revenue
Other noninterest income(b)
Securities gains, net
Securities gains, net - non-qualifying hedges on MSRs
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
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 26.
Includes impairment charges of $52 for operating lease equipment. For more information refer to Note 26.
Includes bank premises and equipment of $27 classified as held for sale. For more information refer to Note 7.
252
42
26
9
3
18
884
1,234
1,218
391
827
613
58,456
152
37
10
2
-
-
210
411
26
9
17
-
22,218
425
101
176
4
127
52
796
1,681
704
249
455
1,655
57,931
$
$
154
6
148
1
407
1
5
1
4
-
-
419
154
27
11
-
-
-
276
468
99
34
65
177
9,494
(30)
24
(54)
1
-
(1)
-
-
1,104
2
-
1,106
650
149
72
230
(1)
47
(1,027)
120
932
116
816
-
(6,018)(d)
-
-
-
-
(132)(a)
-
-
-
-
-
-
(132)
-
-
-
-
-
-
(132)
(132)
-
-
-
-
-
3,798
261
3,537
554
419
353
313
224
1,357
2
2
3,224
1,633
356
295
245
129
117
1,007
3,782
2,979
799
2,180
2,445
142,081
195 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial
Branch
Banking
Consumer
Lending Management and Other Eliminations Total
Wealth
General
and Asset Corporate
$
Banking
248
44
204
1,814
76
1,738
1,669
138
1,531
265
140
5
253
7
85
-
755
-
-
-
-
277
26
-
303
292
4
430 (c)
62
-
119
-
907
2016 ($ in millions)
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Noninterest income:
Service charges on deposits
Wealth and asset management revenue
Corporate banking revenue
Card and processing revenue
Mortgage banking net revenue
Other noninterest income(b)
Securities gains, net
Total noninterest income
Noninterest expense:
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Technology and communications
Card and processing expense
Equipment expense
Other noninterest expense
Total noninterest expense
Income (loss) before income taxes
Applicable income tax expense (benefit)
Net income
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.
Includes impairment charges of $20 for operating lease equipment.
Includes bank premises and equipment of $39 classified as held for sale.
254
42
26
13
4
16
873
1,228
1,417
403
1,014
613
57,995
158
37
10
1
-
-
224
430
77
27
50
-
22,041
419
101
178
3
128
56
798
1,683
603
213
390
1,655
55,979
$
$
168
1
167
2
391
-
4
1
1
-
399
142
26
10
-
-
-
254
432
134
48
86
148
9,494
(284)
84
(368)
(1)
-
(3)
-
-
457
10
463
639
133
75
217
-
46
(992)
118
(23)
(26)
3
-
(3,429)(d)
-
-
-
-
(131)(a)
-
-
-
-
-
(131)
-
-
-
-
-
-
(131)
(131)
-
-
-
-
-
3,615
343
3,272
558
404
432
319
285
688
10
2,696
1,612
339
299
234
132
118
1,026
3,760
2,208
665
1,543
2,416
142,080
196 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30. PENDING ACQUISITION
On May 21, 2018, Fifth Third Bancorp and MB Financial, Inc.
jointly announced the signing of a definitive merger agreement
under which, on the terms and conditions set forth therein, MB
Financial, Inc. (“MB Financial”) will merge with a subsidiary of
Fifth Third Bancorp in a transaction valued at approximately $4.7
billion based on the closing price of Fifth Third Bancorp’s common
shares on May 18, 2018. MB Financial is headquartered in Chicago,
Illinois with reported assets of approximately $20 billion as of
September 30, 2018 and is the holding company of MB Financial
Bank, N.A. In conjunction with the closing of the transaction, two
members of MB Financial’s Board of Directors are expected to join
the Fifth Third Bancorp Board.
Under the terms of the agreement, common shareholders of
MB Financial will receive 1.45 shares of Fifth Third Bancorp
common stock and $5.54 in cash for each share of MB Financial
common stock, which had an implied value of $54.20 per share of
MB Financial common stock, based on the closing price of Fifth
Third Bancorp’s common shares on May 18, 2018. The exchange
ratio of Fifth Third Bancorp common shares for MB Financial
31. SUBSEQUENT EVENTS
On January 25, 2019, the Bancorp issued and sold $1.5 billion of
3.65% senior fixed-rate notes, with a maturity of five years, due on
January 25, 2024. These notes will be redeemable by the Bancorp, in
whole or in part, on or after the date that is 30 days prior to the
maturity date at a redemption price equal to 100% of the principal
amount of the notes to be redeemed plus accrued and unpaid
interest thereon to, but excluding, the redemption date.
On February 1, 2019, the Bank issued and sold, under its bank
notes program, $300 million of senior floating-rate notes, with a
common shares is fixed and will not adjust based on changes in
Fifth Third Bancorp’s share trading price.
On September 18, 2018, MB Financial held a special meeting
of stockholders at which MB Financial stockholders voted on
proposals relating to the pending merger. MB Financial’s common
stockholders approved the Common Stockholder Merger Proposal
and the Charter Amendment Proposal but an insufficient number of
votes were received from MB Financial’s preferred stockholders to
approve the Preferred Stockholder Merger Proposal. As a result, the
merger will be completed through the Alternative Merger, the
merger of a newly-formed subsidiary of Fifth Third Bancorp with
and into MB Financial, with MB Financial surviving that merger, as
a subsidiary of Fifth Third Bancorp. Detailed voting results are
provided in a Current Report on Form 8-K filed with the SEC on
September 20, 2018 by MB Financial.
The transaction remains subject to regulatory approval and the
satisfaction of other customary closing conditions. The transaction
is expected to close in the first quarter of 2019.
maturity of three years, due on February 1, 2022. Interest on the
floating-rate notes is 3-month LIBOR plus 64 bps. These 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 of the notes to be redeemed plus
accrued and unpaid
interest thereon to, but excluding, the
redemption date.
197 Fifth Third Bancorp
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
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, 2018. 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, 2018. Based on
this assessment, management believes that the Bancorp maintained effective internal control over financial reporting as of December 31, 2018.
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, 2018. This report appears on page 199 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
/s/ Greg D. Carmichael
Greg D. Carmichael
Chairman, President and Chief Executive Officer
March 1, 2019
/s/ Tayfun Tuzun
Tayfun Tuzun
Executive Vice President and Chief Financial Officer
March 1, 2019
198 Fifth Third Bancorp
REPORT 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, 2018,
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, 2018, 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, 2018, of the Bancorp and our report dated March 1, 2019 expressed
an unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding the Bancorp’s election to
retrospectively change its accounting for qualifying Low-Income Housing Tax Credit investments from the equity method to the proportional
amortization method.
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.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
March 1, 2019
199 Fifth Third Bancorp
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE 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 2019 Annual Meeting of
Shareholders.
The information required by this item concerning the Audit
Committee and Code of Business Conduct and Ethics is
incorporated herein by
captions
“CORPORATE GOVERNANCE”
“BOARD OF
DIRECTORS,
ITS COMMITTEES, MEETINGS AND
FUNCTIONS” of the Bancorp’s Proxy Statement for the 2019
Annual Meeting of Shareholders.
reference under
and
the
The information required by this item concerning Section 16
(a) Beneficial Ownership Reporting Compliance is incorporated
herein by reference under the caption “SECTION 16 (a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” of
the Bancorp’s Proxy Statement for the 2019 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,”
“BOARD OF DIRECTORS
EXECUTIVE OFFICERS,”
COMPENSATION,” “CEO PAY RATIO,” “HUMAN CAPITAL
AND COMPENSATION COMMITTEE REPORT”
and
“COMPENSATION COMMITTEE
INTERLOCKS AND
INSIDER PARTICIPATION” of the Bancorp’s Proxy Statement
for the 2019 Annual Meeting of Shareholders.
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 DIRECTORS COMPENSATION,”
and
EXECUTIVE
OFFICERS” of the Bancorp’s Proxy Statement for the 2019
Annual Meeting of Shareholders.
“COMPENSATION OF NAMED
The information required by this item concerning Equity
Compensation Plan information is included in Note 23 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
DIRECTORS”,
OF
200 Fifth Third Bancorp
Bancorp’s Proxy Statement for the 2019 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 2019 Annual Meeting of Shareholders.
PART IV
ITEM
SCHEDULES
15. EXHIBITS, FINANCIAL
Public Accounting Firm
STATEMENT
Pages
105, 199
Fifth Third Bancorp and Subsidiaries Consolidated Financial
106-110
Statements
Notes to Consolidated Financial Statements
111-197
The schedules for the Bancorp and its subsidiaries are omitted
because of the absence of conditions under which they are
required, or because
the
Consolidated Financial Statements or the notes thereto.
is set forth
information
the
in
The following lists the Exhibits to the Annual Report on Form 10-
K:
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
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 SEC on
July 2, 2009.
Agreement and Plan of Merger by and among Fifth Third Bancorp,
Fifth Third Financial Corporation and MB Financial, Inc. dated as of
May 20, 2018. Incorporated by reference to Exhibit 2.1 to the
Registrants Current Report on Form 8-K filed with the SEC on May
22, 2018.
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 for the fiscal year ended
December 31, 2015.
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 SEC 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 SEC 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 SEC 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 for the fiscal year ended December 31, 2006.
4.5
4.6
4.7
4.8
4.9
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 SEC 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 for the fiscal quarter ended March 31, 2008.
(1).
Indenture for Senior Debt Securities dated as of April 30, 2008
between Fifth Third Bancorp and Wilmington Trust Company, as
trustee. Incorporated by reference to Exhibit 4.2 to the Registrant’s
Current Report on Form 8-K filed with the SEC 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 SEC 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 SEC on March 7, 2012.
to
time of
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 SEC on March 7, 2012.
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
thereunder.
time
Incorporated by reference to Exhibit 4.3 of the Registrant’s Current
Report on Form 8-K filed with the SEC 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 SEC 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 SEC on May
16, 2013.
the depositary
receipts
issued
4.13
4.12
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 SEC 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 SEC 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 SEC 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 SEC 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 SEC on June 5, 2014.
4.19
4.20
4.21
Form of Certificate Representing the 4.90% Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, Series J, of Fifth Third
Bancorp. Incorporated by reference to Exhibit 4.2 of the Registrant’s
Current Report on Form 8-K filed with the SEC 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 SEC 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 SEC 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 SEC 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 SEC on July 27, 2015.
4.23
4.27
4.25
4.26
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 SEC 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.
Sixth Supplemental Indenture dated as of March 14, 2018 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 March 14, 2018.
Form of 3.950% Senior Notes due 2028. Incorporated by reference to
Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with
the SEC on March 14, 2018.
Seventh Supplemental Indenture dated as of June 5, 2018 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 5, 2018.
Form of Floating Rate Senior Notes due 2021. Incorporated by
reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-
K filed with the SEC on June 5, 2018.
4.30
4.28
4.29
4.32
4.31 Amendment dated as of August 31, 2018 to Seventh Supplemental
Indenture dated as of June 5, 2018 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 Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 2018.
Eighth Supplemental Indenture dated as of January 25, 2019 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 January 25, 2019.
Form of 3.650% Senior Notes due 2024. Incorporated by reference to
Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with
the SEC on January 25, 2019.
4.33
201 Fifth Third Bancorp
4.34
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
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 fiscal 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 for the fiscal
quarter ended June 30, 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 for the fiscal
quarter ended September 30, 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 fiscal 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 fiscal 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 fiscal
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 fiscal
quarter ended June 30, 2013.*
Fifth Third Bancorp 401(k) Savings Plan, as Amended and Restated.
Incorporated by reference to Exhibit 10.7 to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2014.*
First Amendment to Fifth Third Bancorp 401(k) Savings Plan, as
Amended and Restated. Incorporated by reference to Exhibit 10.8 to
the Registrant’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2015.
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 for the fiscal quarter ended June 30, 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 for the fiscal quarter ended September 30, 2017.*
10.12 Fourth Amendment to Fifth Third Bancorp 401(k) Savings Plan, as
Amended and Restated effective January 1, 2015. Incorporated by
reference to Exhibit 10.12 to the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2017.*
10.13 Fifth Amendment to Fifth Third Bancorp 401(k) Savings Plan, as
Amended and Restated effective January 1, 2015. Incorporated by
reference to Exhibit 10.1 to the Registrant’s Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 2018.*
10.14 Sixth Amendment to Fifth Third Bancorp 401(k) Savings Plan, as
Amended and Restated effective January 1, 2015.*
10.15 The Fifth Third Bancorp Master Retirement Plan, as Amended and
Restated. Incorporated by reference
the
Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2014.**
to Exhibit 10.8 of
10.16 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 for the fiscal
year ended December 31, 2015.*
10.17 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 for the fiscal
year ended December 31, 2016.*
202 Fifth Third Bancorp
10.18 Third Amendment to The Fifth Third Bancorp Master Retirement
Plan, as Amended and Restated. Incorporated by reference to Exhibit
10.16 to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2017.*
10.19 Fourth Amendment to The Fifth Third Bancorp Master Retirement
Plan, as Amended and Restated.*
10.20 Fifth Third Bancorp Incentive Compensation Plan. Incorporated by
reference to Annex 2 to the Registrant’s Proxy Statement dated
February 19, 2004.*
10.21 Fifth Third Bancorp 2008 Incentive Compensation Plan. Incorporated
by reference to Annex 2 to the Registrant’s Proxy Statement dated
March 6, 2008.*
10.22 First Amendment to the Fifth Third Bancorp 2008 Incentive
Compensation Plan.*
10.23 Fifth Third Bancorp 2011 Incentive Compensation Plan. Incorporated
by reference to Annex 1 to the Registrant’s Proxy Statement dated
March 10, 2011.*
10.24 First Amendment to the Fifth Third Bancorp 2011 Incentive
Compensation Plan.*
10.25 Fifth Third Bancorp 2014 Incentive Compensation Plan. Incorporated
by reference to Annex A to the Registrant’s Proxy Statement dated
March 6, 2014.*
10.26 First Amendment to the Fifth Third Bancorp 2014 Incentive
Compensation Plan.*
10.27 Fifth Third Bancorp 2017 Incentive Compensation Plan. Incorporated
by reference to Annex A to the Registrant’s Proxy Statement dated
March 9, 2017.*
10.28 First Amendment to the Fifth Third Bancorp 2017 Incentive
Compensation Plan.*
10.29 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 fiscal year ended December 31,
2011.*
10.30 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 fiscal year
ended December 31, 2013.*
10.31 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.*
10.32 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 for the fiscal quarter
ended June 30, 2017.*
10.33 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 for the fiscal quarter ended
September 30, 2017.*
10.34 Fourth Amendment to Fifth Third Bancorp Non-qualified Deferred
Compensation Plan, as Amended and Restated effective January 1,
2013. Incorporated by reference to Exhibit 10.2 to the Registrant’s
Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2018.*
10.35 Fifth Amendment to Fifth Third Bancorp Non-qualified Deferred
Compensation Plan, as Amended and Restated effective January 1,
2013.*
10.36 Fifth Third Bancorp Stock Option Gain Deferral Plan. Incorporated
by reference to Annex 5 to the Registrant’s Proxy Statement dated
February 9, 2001.*
10.37 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 SEC on May 26, 2005. *
10.38 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 fiscal year ended December 31, 2003. *
10.39 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 SEC on
November 21, 2014.*
10.40 First Amendment to the Fifth Third Bancorp Executive Change in
Control Severance Plan.*
10.41 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 SEC on April 2, 2012.
10.42 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 SEC on July
2, 2009.
10.43 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 SEC on April 2, 2012.
10.44 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 SEC on April 2, 2012.
10.45 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 SEC on April 2, 2012.
10.46 Stock Appreciation Right Award Agreement. Incorporated by
reference to Exhibit 10.2 of the Registrant’s Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 2013.*
10.47 Performance Share Award Agreement. Incorporated by reference to
Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2013.*
10.48 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 fiscal quarter ended June 30, 2013.*
10.49 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 fiscal quarter ended June 30,
2013.*
10.50 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.*
10.51 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.*
10.52 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.*
10.53 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.*
10.54 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 for the fiscal quarter ended June 30,
2017.**
10.55 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.**
10.56 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 for the fiscal quarter ended
September 30, 2015.**
10.57 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 for
the fiscal quarter ended June 30, 2015.**
10.58 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 SEC on July 16, 2015**
10.59 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 for the fiscal
quarter ended March 31, 2015.**
10.60 Bancorp Director Pay Program. Incorporated by reference to Exhibit
10.2 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2016.*
10.61 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.*
10.62 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.*
10.63 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.*
10.64 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.*
10.65 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.*
10.66 Restricted Stock Unit Grant 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 for the fiscal quarter ended June 30, 2017.*
10.67 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. Incorporated by reference to Exhibit 10.66 to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended December 31,
2017.**
10.68 Supplemental Confirmation dated May 23, 2018,
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 for the fiscal quarter ended June 30,
2018.**
10.69 2018 Stock Appreciation Right Award Agreement (for Executive
Officers). Incorporated by reference to Exhibit 10.67 to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2017.*
10.70 2018 Performance Share Award Agreement. Incorporated by
reference to Exhibit 10.68 to the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2017.*
10.71 2018 Restricted Stock Unit Agreement (for Executive Officers).
Incorporated by reference to Exhibit 10.69 to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2017.*
10.72 Long-Term Incentive Award Overview 2018 Grants. Incorporated by
reference to Exhibit 10.70 to the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2017.*
10.73 2018 Restricted Stock Unit Grant Agreement (for Directors).
Incorporated by reference to Exhibit 10.3 to the Registrant’s
Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2018.*
10.74 2018 Long-Term
Incentive Compensation Program Overview
February 2019 Grants.*
10.75 2019 Performance Share Award Agreement.*
10.76 2019 Restricted Stock Unit Agreement (for Executive Officers).*
10.77 2019 Stock Appreciation Right Award Agreement (for Executive
Officers).*
203 Fifth Third Bancorp
ITEM 16. FORM 10–K SUMMARY
None.
14
18
21
23
Fifth Third Bancorp Code of Business Conduct and Ethics, as
amended and restated. Incorporated by reference to Exhibit 14 to the
Registrant’s Current Report on Form 8-K filed with the SEC on
September 24, 2018.
Preferability Letter of Independent Registered Public Accounting
Firm-Deloitte & Touche LLP.
Fifth Third Bancorp Subsidiaries, as of February 15, 2019.
Consent of Independent Registered Public Accounting Firm-Deloitte
& Touche LLP.
31(i) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by Chief Executive Officer.
31(ii) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by Chief Financial Officer.
32(i) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief
Executive Officer.
32(ii) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief
Financial Officer.
99.1 Consent Order pursuant to the Consumer Financial Protection Act of
2010, dated September 28, 2015, between Fifth Third Bank and the
U.S. Department of Justice
loans.
Incorporated by reference to Exhibit 99.1 to the Registrant’s Current
Report on Form 8-K filed with the SEC 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 SEC 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 SEC on September 29, 2015.
99.5
99.4 Settlement Agreement entered into on September 30, 2015, between
the United States Department of Housing and Urban Development
and Fifth Third Bancorp and its subsidiaries. Incorporated by
reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed with the SEC on October 7, 2015.
Stipulation and Order of Settlement and Dismissal entered into on
September 30, 2015, by and among plaintiff the United States of
America and on behalf of the United States Department of Housing
and Urban Development and the Federal Housing Administration and
Fifth Third Bancorp and its subsidiaries (excluding exhibits).
Incorporated by reference to Exhibit 99.2 to the Registrant’s Current
Report on Form 8-K filed with the SEC on October 7, 2015.
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the
Consolidated Balance Sheets, (ii) the Consolidated Statements of
Income, (iii) the Consolidated Statements of Comprehensive Income
(iv) the Consolidated Statements of Changes in Equity, (v) the
Consolidated Statements of Cash Flows, and (vi) the Notes to
Consolidated Financial Statements tagged as blocks of text and in
detail.
101
(1) Fifth Third Bancorp also entered into an identical security on March 4,
2008 representing an additional $500,000,000 of its 8.25% Subordinated
Notes due 2038.
(2) Fifth Third Bancorp also entered into an identical security on
November 20, 2013 representing an additional $250,000,000 in principal
amount of its 4.30% Subordinated Notes due 2024.
* Denotes management contract or compensatory plan or arrangement.
** An application for confidential treatment for selected portions of this
exhibit has been filed with the SEC.
204 Fifth Third Bancorp
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
FIFTH THIRD BANCORP
Registrant
/s/ Greg D. Carmichael
Greg D. Carmichael
Chairman, President and CEO
Principal Executive Officer
March 1, 2019
Pursuant to requirements of the Securities Exchange Act of 1934,
this report has been signed on March 1, 2019 by the following
persons on behalf of the Registrant and in the capacities
indicated.
OFFICERS:
/s/ Greg D. Carmichael
Greg D. Carmichael
Chairman, President and CEO
Principal Executive Officer
/s/ Tayfun Tuzun
Tayfun Tuzun
Executive Vice President and CFO
Principal Financial Officer
/s/ Mark D. Hazel
Mark D. Hazel
Senior Vice President and Controller
Principal Accounting Officer
DIRECTORS:
/s/ Greg D. Carmichael
Greg D. Carmichael
Chairman
Marsha C. Williams
Lead Independent Director
/s/ Nicholas K. Akins
Nicholas K. Akins
/s/ B. Evan Bayh III
B. Evan Bayh III
/s/ Jorge L. Benitez
Jorge L. Benitez
/s/ Katherine B. Blackburn
Katherine B. Blackburn
/s/ Emerson L. Brumback
Emerson L. Brumback
/s/ Jerry W. Burris
Jerry W. Burris
/s/ Gary R. Heminger
Gary R. Heminger
/s/ Jewell D. Hoover
Jewell D. Hoover
/s/ Eileen A. Mallesch
Eileen A. Mallesch
/s/ Michael B. McCallister
Michael B. McCallister
205 Fifth Third Bancorp
CONSOLIDATED TEN YEAR COMPARISON
AVERAGE ASSETS FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS)
$
Loans and
Leases
93,876
92,731
94,320
93,339
91,127
89,093
84,822
80,214
79,232
83,391
Interest-Earning Assets
Federal Funds
Sold(a)
1
1
1
1
-
1
2
1
11
12
Interest-Bearing
Deposits in
Banks(a)
1,475
1,389
1,865
3,257
3,043
2,416
1,493
2,030
3,317
1,023
Investment
Securities
33,553
32,172
30,099
26,987
21,823
16,444
15,319
15,437
16,371
17,100
Total
128,905
126,293
126,285
123,584
115,993
107,954
101,636
97,682
98,931
101,526
Cash and Due
from Banks Other Assets(c)
2,200
2,224
2,303
2,608
2,892
2,482
2,355
2,352
2,245
2,329
12,203
13,236
14,870
15,100
14,443
15,025
15,643
15,259
14,758
14,179
Total Average
Assets(c)
142,183
140,527
142,173
139,999
131,847
123,704
117,562
112,590
112,351
114,769
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS)
Deposits
Money
Market Other Time
Foreign
Office and
Other
Interest
Checking
29,818
26,382
25,143
26,160
25,382
23,582
23,096
18,707
18,218
15,070
Demand
32,634
$
35,093
35,862
35,164
31,755
29,925
27,196
23,389
19,669
16,862
4,106
3,771
4,010
4,051
3,762
3,760
4,306
6,260
10,526
14,103
INCOME FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA)
21,769
20,231
19,523
18,152
14,670
9,467
4,903
5,154
4,808
4,320
839
665
830
874
1,828
1,518
1,555
3,497
3,361
2,265
3,120
3,715
3,351
2,641
2,331
3,527
4,806
3,122
1,926
6,980
Savings
13,330
13,958
14,346
14,951
16,080
18,440
21,393
21,652
19,612
16,875
Total
104,922
102,664
102,449
102,221
97,406
93,031
85,551
82,315
82,277
79,862
Certificates
$100,000 and
Over
2,426
2,564
2,735
2,869
3,929
6,339
3,102
3,656
6,083
10,367
Short-Term
Borrowings(b)
Interest Income
$
Noninterest
Income
Interest
Expense
1,043
691
578
495
451
412
512
661
885
1,314
Noninterest
Expense(c)
3,928
3,782
3,760
3,647
3,592
3,961
4,081
3,758
3,855
3,826
MISCELLANEOUS AT DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Bancorp Shareholders' Equity
Net Income Available
to Common
Shareholders (c)
2,118
2,105
1,472
1,610
1,384
1,799
1,541
1,094
503
511
Earnings (c)
3.11
2.86
1.92
2.00
1.65
2.05
1.69
1.20
0.63
0.73
2,790
3,224
2,696
3,003
2,473
3,227
2,999
2,455
2,729
4,782
5,183
4,489
4,193
4,028
4,030
3,973
4,107
4,218
4,489
4,668
Per Share
Diluted
Earnings (c)
3.06
2.81
1.91
1.97
1.63
2.02
1.66
1.18
0.63
0.67
Total
108,042
106,379
105,800
104,862
99,737
96,558
90,357
85,437
84,203
86,842
Dividends
Declared
0.74
0.60
0.53
0.52
0.51
0.47
0.36
0.28
0.04
0.04
Common
Stock
Preferred
Stock
Common Shares
Outstanding
646,630,857 $
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
2,051
2,051
2,051
2,051
2,051
2,051
2,051
2,051
1,779
1,779
Capital
Surplus
2,873
2,790
2,756
2,666
2,646
2,561
2,758
2,792
1,715
1,743
Retained
Earnings (c)
16,578
14,957
13,290
12,224
11,034
10,156
8,768
7,554
6,719
6,326
1,331
1,331
1,331
1,331
1,331
1,034
398
398
3,654
3,609
Accumulated Other
Comprehensive
(Loss) Income
Treasury
Stock
(6,471)
(5,002)
(3,433)
(2,764)
(1,972)
(1,295)
(634)
(64)
(130)
(201)
Total (c)
Book Value
Per Share (c)
23.07
21.43
19.62
18.31
17.22
15.85
15.10
13.92
13.06
12.44
16,250
16,200
16,054
15,705
15,519
14,589
13,716
13,201
14,051
13,497
Allowance for
Loan and
Lease Losses
1,103
1,196
1,253
1,272
1,322
1,582
1,854
2,255
3,004
3,749
(112)
73
59
197
429
82
375
470
314
241
Year
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
Year
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
Year
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
Year
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
(a) Federal funds sold and interest-bearing deposits in banks are combined in other short-term investments in the Consolidated Financial Statements.
(b)
(c) Effective in the fourth quarter of 2018, Fifth Third retrospectively applied a change in its accounting policy for qualifying LIHTC investments in accordance with ASU 2014-01 for the years ended
Includes federal funds purchased and other short-term investments.
December 31, 2018 through 2014. Refer to Note 1 for additional information.
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
Cozen O’ Connor
Jorge L. Benitez
Retired Chief Executive Officer
North America of Accenture plc
Katherine B. Blackburn
Executive Vice President
Cincinnati Bengals, 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
James C. Leonard
Executive Vice President &
Treasurer
Philip R. McHugh
Executive Vice President &
Head of Regional Banking, Wealth and Asset
Management, and Business Banking
Emerson L. Brumback
Retired President & Chief Operating Officer
M&T Bank
Jerry W. Burris
President and Chief Executive Officer
Midwest Can Company
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.
Jude A. Schramm
Executive Vice President &
Chief Information Officer
Robert P. Shaffer
Executive Vice President &
Chief Human Resources Officer
Timothy N. Spence
Executive Vice President &
Head of Consumer Bank, Payments,
and Strategies
Teresa J. Tanner
Executive Vice President &
Chief Administrative Officer
Tayfun Tuzun
Executive Vice President &
Chief Financial Officer
Susan B. Zaunbrecher
Executive Vice President,
Chief Legal Officer &
Corporate Secretary
REGIONAL PRESIDENTS
Steven Alonso
(Group Regional President)
Michael Ash
Kevin Hipskind
David A. Call
Michael McKay
Timothy Elsbrock
David Girodat
Lee Fite
Joseph DiRocco
Randy Koporc
Robert W. LaClair
Francie Henry
Eric Smith
Thomas G. Welch, Jr.
FIFTH THIRD BANCORP BOARD
COMMITTEES
Audit Committee
Emerson L. Brumback, Chair
Jerry W. Burris
Jewell D. Hoover
Jorge L. Benitez
Eileen A. Mallesch
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
Katherine B. Blackburn
207 Fifth Third Bancorp
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208 Fifth Third Bancorp
Performance Comparison
For the years ended Dec. 31
$ in millions, except per share data
2018
2017
2016
Earnings and Dividends1
Net Income Attributable to Bancorp
$ 2,193
$ 2,180
$ 1,547
Common Dividends Declared
Preferred Dividends Declared
499
75
436
75
405
75
Per Common Share1
Earnings
Diluted Earnings
Cash Dividends Declared
Book Value
At Year-End1
Total Assets
Total Loans and Leases (incl. held-for-sale)
Deposits
Bancorp Shareholders' Equity
Key Ratios1,2
Net Interest Margin (FTE)3
Efficiency Ratio (FTE)3
CET1 Ratio
Tier 1 RiskBased Ratio
Total RiskBased Capital Ratio
Actuals
$ 3.11
3.06
0.74
23.07
$ 2.86
$ 1.92
2.81
1.91
0.60
0.53
21.43
19.62
$ 146,069
$ 142,081
$ 142,080
95,872
108,835
16,250
92,462
92,849
103,162
103,821
16,200
16,054
3.22%
56.5%
10.24%
11.32%
14.48%
3.03%
53.7%
10.61%
11.74%
15.16%
2.88%
59.3%
10.39%
11.50%
15.02%
Common Shares Outstanding (000's)
646,631
693,805
750,479
Banking Centers
ATMs
FullTime Equivalent Employees
1,121
2,419
17,437
1,154
1,191
2,469
2,495
18,125
17,844
1 Effective in the fourth quarter of 2018, Fifth Third retrospectively applied a change in its accounting policy for investments in affordable
housing projects that qualify for low-income housing tax credits (LIHTC) to all prior period amounts presented. As a result, prior period
financial results may differ compared to previous disclosures.
2 Effective in the fourth quarter of 2018, Fifth Third retrospectively applied a change in its accounting policy for investments in affordable
housing projects that qualify for low-income housing tax credits (LIHTC). Prior period regulatory capital ratios reflect amounts filed on
the Bancorp’s FR Y-9C filings and were not required to be restated as a result.
3 Non-GAAP measure. For further information, see the Non-GAAP Financial Measures section of MD&A.
2018
2017
Stock
Performance
High
Low
Dividends
Declared
Per Share
High
Low
Dividends
Declared
Per Share
Fourth Quarter
$ 29.00
$ 22.12
$ 0.22
$ 31.83
$ 27.38
$ 0.16
Third Quarter
Second Quarter
First Quarter
30.31
34.67
34.57
27.43
28.29
30.18
0.18
0.18
0.16
28.06
24.66
26.69
28.97
23.20
24.02
0.16
0.14
0.14
Fifth Third’s common stock is traded on the NASDAQ® Global Select Market under the symbol “FITB.”
FIFTH THIRD BANCORP
FIFTH THIRD BANCORP
Corporate Address
Corporate Address
38 Fountain Square Plaza
38 Fountain Square Plaza
Cincinnati, OH 45263
Cincinnati, OH 45263
www.53.com
www.53.com
1.800.972.3030
1.800.972.3030
Investor Relations
Investor Relations
(For Inquiries of Shareholders Only)
(For Inquiries of Shareholders Only)
38 Fountain Square Plaza
38 Fountain Square Plaza
MD 1090QC
MD 1090QC
Cincinnati, OH 45263
Cincinnati, OH 45263
ir@53.com
ir@53.com
1.866.670.0468
1.866.670.0468
TRANSFER AGENT
TRANSFER AGENT
American Stock Transfer
American Stock Transfer
and Trust Company, LLC.
and Trust Company, LLC.
For Correspondence:
For Correspondence:
6201 15th Ave.
6201 15th Ave.
Brooklyn, NY 11219
Brooklyn, NY 11219
www.astfinancial.com
www.astfinancial.com
1.888.294.8285
1.888.294.8285
For Dividend Reinvestment
For Dividend Reinvestment
and Direct Stock Purchase
and Direct Stock Purchase
Plan Transaction Processing:
Plan Transaction Processing:
P.O. Box 922
P.O. Box 922
Wall Street Station
Wall Street Station
New York, NY 10269-0560
New York, NY 10269-0560