2019 ANNUAL REPORT
Greg D. Carmichael
Chairman, President and CEO,
Fifth Third Bancorp
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For more than 160 years,
Fifth Third Bank has
done well by doing good,
and I am proud to report that
in 2019, your bank extended
that legacy of caring.
The commitments we made to employees,
customers, communities and the environment
were rewarded. Employee engagement,
reputation metrics, customer experience
scores and outside recognition all reached
new heights, as did our full-year earnings.
These measures increasingly are intertwined.
Investors, customers and employees want
to do business with companies they trust and
respect. Fifth Third works hard to be that
kind of company.
In 2019, this commitment led to our decision
to raise Fifth Third’s minimum wage to $18
an hour, marking a 50% increase in less than
two years. It meant taking steps to make
everyday banking easier and more convenient
for customers by accelerating our digital
transformation, resulting in Fifth Third being
ranked among the top banks in a well-known
mobile banking satisfaction study. It meant
continuing to make significant investments
in the regions where we operate through our
five-year, $32 billion Community Commitment,
announced in 2016.
Working hard to be a company worthy of trust
and respect also led us to become the first
Fortune 500 company in the world to achieve
100% renewable power through a single solar
power project. Our investment in the Aulander
Holloman Solar Facility in North Carolina
helped to bring online one of the largest solar
projects in the country last August. The facility
is expected to generate clean power that is
at least equal to the amount of energy our
Bank uses each year—enough to eliminate
143,000 metric tons of greenhouse gases and
power 25,000 homes. Fifth Third is now
the 10th-largest purchaser of solar power
in the U.S.—and the only bank.
FIFTH THIRD BANCORP 2019 ANNUAL REPORT | 1
Expanding our breadth and depth across
our Chicago market through the completed
acquisition of MB Financial, Inc., was another
way we demonstrated our commitment to
our customers, communities and employees.
The merger added 86 full-service banking
centers to the region, along with a deep
product portfolio and specialized expertise.
It allowed us to demonstrate, in a powerful
way, that Fifth Third means business.
These were just a few of the notable achieve-
ments during a busy year for the Bank.
By consistently delivering on these and other
commitments, we move closer to achieving
our Vision to be the One Bank people most
value and trust. And that, in turn, leads toward
our goal of being one of the nation’s top-
performing regional banks.
By consistently delivering
on these and other
commitments, we move
closer to achieving
our Vision to be the
One Bank people most
value and trust.
Our financial results reflect our progress.
In 2019, we generated record net income of
$2.5 billion and returned more than 101%
of earnings to our shareholders through
a 27% increase in our common dividend and
through share repurchases. In addition to
strong underlying results, we sold our final
ownership stake in Worldpay in the first
quarter of 2019 and completed a tax receivable
agreement transaction in the fourth quarter.
Since the spinoff of our processing business
10 years ago, that investment has generated
more than $7 billion on a pre-tax basis for
Fifth Third shareholders.
These financial results represent the strength
of our diversified revenue streams, continued
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NE T IN CO ME :
$2.5 billion
EA R NI NG S:
$3.33 per diluted share
ASSETS:
$169 billion
CO RE D EPOS ITS :
$123 billion
CO MMO N DI V IDE ND PER SHA RE :
27% increase
expense discipline, and ability to achieve
our targeted financial outcomes from the
MB acquisition.
As I reflect on the past year, I am very pleased
with the significant progress we have made
to position Fifth Third for long-term success.
Among our notable achievements:
• We generated peer-leading household and
deposit growth while reducing deposit costs
during the year.
• We successfully integrated MB Financial,
adding significant scale in the Chicago market.
• We delivered record fee income, including
in corporate banking, as our capital markets
business generated double-digit revenue
growth for the second consecutive year.
This growth was fueled, in part, by our
regional banking clients’ activities and the
power of our One Bank model.
• We also generated record revenue in wealth
and asset management, with positive inflows
every quarter during the year.
• Net charge-offs and other key credit metrics
remained at or near historically low levels
throughout 2019.
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*As of Dec. 31, 2019.
FIFTH THIRD
MEANS BUSINESS
IN CHICAGO
We were pleased to welcome 185,000
new clients, nearly $20 billion in assets and
2,600 new team members through the
acquisition of MB Financial, a premier Chicago
banking franchise. We believe our combined
organization will create significant value for
our commercial and retail customers while
generating stronger deposit, household and
revenue growth in the country’s third-largest
metropolitan area.
We continue to receive positive overall
feedback from former MB retail customers,
who now have access to one of the largest
branch networks in the market, award-winning
mobile technology and our expanded network
of approximately 53,000 fee-free ATMs.
At the same time, our commercial teams have
done a great job in laying a foundation to
leverage our capabilities and strengths across
the entire franchise, leading to incremental
revenue opportunities.
Although we have more work ahead of us
to ensure sustainable success, we are pleased
with the progress we have made so far and
remain confident in our ability to deliver the
expected financial synergies from the MB
acquisition. We completed many of the key
expense actions in 2019 and continue to
expect to realize the $255 million in annual
expense synergies. We also continue to expect
revenue synergies to generate approximately
$60–$75 million in annual pre-tax income
by 2022.
FIFTH THIRD BANCORP 2019 ANNUAL REPORT | 3
PROGRESS ON OUR
STRATEGIC PRIORITIES
As always, long-term performance requires
long-term planning and discipline in executing
on our strategic priorities. I am pleased to
report we again delivered on our four key
priorities in 2019.
ACCELERATE
DIGITAL
TRANSFORMATION
INVEST TO DRIVE
ORGANIC GROWTH
AND PROFITABILITY
EXPAND MARKET
SHARE IN KEY
GEOGRAPHIES
MAINTAIN
DISCIPLINE
ACCELERATE DIGITAL
TRANSFORMATION
Technology—including data analytics—is one
of our strategic priorities. We are committed to
fully leveraging these capabilities to accelerate
our digital transformation. At the same time,
we continue to modernize, simplify and
rationalize our systems and infrastructure.
Investments in these projects, and in digital
technologies overall, enable us to provide
solutions that are innovative, convenient and
meaningful in helping our customers achieve
their financial goals.
A prime example is our continued investment
in advanced fraud and cybersecurity tech-
nologies. Data security is critically important to
customers and to us, and our ability to quickly
detect and respond to threats builds trust and
confidence, and also protects our good name.
Our technology investment in 2019 exceeded
$650 million. It’s money well spent, and
will likely continue to grow in the years ahead.
These investments benefit all of our stake-
holders. For instance, in implementing a
single, cloud-based operating system, we will
streamline all customer and employee
interactions to drive increased efficiency,
transparency, profitability and regulatory
compliance across all lines of business.
Other examples include Expert AP, a state-of-
the-art accounts payable solution that provides
greater visibility, efficiency and control over our
commercial clients’ AP processes. In the middle
market, these processes are often manual
and labor intensive. Expert AP provides an
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opportunity to differentiate Fifth Third and
better serve our clients by offering a full-
service solution.
On the consumer side, we introduced new
features to Dobot, Powered by Fifth Third®,
which uses algorithms to help customers
achieve savings goals. The free app allows
users to specify how much they want to save
and when they need the money. Every week,
Dobot automatically transfers small amounts
of money from the customer’s checking
account to their Dobot savings. Since its launch
just over a year ago, Dobot has helped users
set goals to save more than $400 million.
INVEST TO DRIVE ORGANIC
GROWTH AND PROFITABILITY
We continue to invest in our business
to drive profitable organic growth and to
improve both the employee and customer
experience. Over the past year, we have
made several investments in technology
and talent to support our growth plans and
maximize productivity, including key additions
to our sales teams.
For example, in middle market banking we
have added key talent in our new markets,
including California and Texas. In our
corporate banking business, we continue
to see positive outcomes from our ongoing
investments in both our sales force and
technology, and expect significant growth
in our commercial fee-based businesses
going forward.
Last August, we announced the formation
of a Renewable Energy Investment Banking
Group in San Francisco. This dedicated group
offers M&A and capital markets advisory
services for the renewable energy industry and
adds to the capabilities, services and expertise
established by our Renewable Energy Finance
Group in Charlotte.
Since 2012, Fifth Third has provided financing
for solar projects in more than 25 states for
middle market companies. Renewable energy
capacity and generation have grown exponen-
tially, and we believe that will continue. Our
new Investment Banking group will be instru-
mental in building on our solar growth strategy
and delivering value for our clients.
EXPAND MARKET SHARE
IN KEY GEOGRAPHIES
We are continuing to optimize our branch
network in the legacy footprint in order to
support our faster-growing Southeast markets,
where we see stronger deposit growth trends,
higher expected population growth, and
greater market vitality.
FIFTH THIRD BANCORP 2019 ANNUAL REPORT | 5
NEXT
GENERATION
RETAIL
BRANCHES
There has been a fundamental shift in how
customers perceive and use retail bank branches,
in large part due to the rising role of digital tools.
Branches are still very relevant to our customers,
yet they are being used differently than they
have been in previous generations. In years past,
up to 90% of branch visits were intended for
transactions and sales. Today it’s about delivering
a holistic customer experience—digital and
physical blending perfectly to meet their needs.
So what are we doing? We’re exploring the smaller
scale of our retail branches and identifying ways
to maximize the value and relevance of every
square foot of these new branches. We’re look-
ing more closely at how our physical retail
experiences can be enhanced via technology.
We’re reorienting the allocation of space in our
retail branches away from tellers and back office.
And we are boosting areas of discovery and
education as our customers seek advice,
guidance and partnership.
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We opened 14 Next Gen branches in 2019,
with plans to open even more in 2020. The
new branches introduce a new design, new
retail model, and new way of banking. The
goal is to create a modern environment where
our customers feel welcome and comfortable.
We realize that customers’ expectations often
are influenced by their interactions with other
companies, even those outside the financial
market and without physical walls—we’re being
compared to their last best experience.
Our new branches, including the locations
currently targeted for the Southeast, will
reflect this new design.
MAINTAIN DISCIPLINE
With all the pressure from competitors and
the investment community looking for
growth and returns, it’s important for us
to stay disciplined.
We’ve worked hard over the past several years
to create a framework that will allow Fifth Third
to perform well through a full business cycle.
We’ve done that by reducing our leveraged
loan exposure by nearly 50%, and by pushing
out $5 billion in commercial credit that didn’t
conform to our risk or return profile.
We’re no longer involved in large-ticket
indirect leasing, commodity trading or whole-
sale brokerage. Our focus is on maximizing
through-the-cycle returns rather than
generating lower-quality loan growth, and
our teams have a strong track record of
delivering on this commitment.
I believe our clearly defined strategic priorities,
proactive balance sheet management, and
ongoing discipline throughout the bank position
us well for the future. We remain focused on
striking the right balance in order to drive
positive operating leverage while continuing
to invest for long-term outperformance.
FIFTH THIRD BANCORP 2019 ANNUAL REPORT | 7
AWARDS AND ACCOLADES
Fifth Third’s progress is being recognized. Our efforts to deliver on the
commitments we have made to customers, employees, communities and the
environment are being noticed. In 2019, these included the following:
Kiplinger’s
Best Regional Bank
CDP 2019
Climate score of A-
Forbes’
Best Employers
for Diversity
Diversity Best
Practices
Inclusion Index
Bloomberg
Gender Equality Index
America’s Top
Corporations for
Women’s Business
Enterprises
Human Rights
Campaign Foundation
Corporate Equality
Index
Newsweek’s
America’s
Most Responsible
Companies
Ethisphere’s
World’s Most Ethical
Companies
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DELIVERING ON OUR
COMMITMENTS
As important as it is for us to earn the trust
and respect of customers, communities and
share holders, it is equally critical that the
people who wear the Fifth Third pin believe
in what we’re doing, how we’re doing it and
why it matters.
RECOGNIZING OUR
EMPLOYEES
BUILDING STRONGER
COMMUNITIES
ENVIRONMENTAL,
SOCIAL & GOVERNANCE
RECOGNIZING
OUR EMPLOYEES
That plays out through actions like our
minimum wage increase, and in the everyday
practices and work environment at Fifth
Third Bank. We see it in our commitment to
inclusion and diversity, in continuous listening,
in workforce strategies and investments, and
in the employee experience we deliver. As a
result, Fifth Third routinely is recognized as
a top workplace in many of the regions where
we operate.
We were honored again to achieve a Perfect
score from the Human Rights Campaign in
2019 and the distinction of Best Places to
Work for LGBTQ Equality. Other 2019 awards
of which we are particularly proud include
being named to Newsweek’s first-ever list
of America’s Most Responsible Companies
and earning recognition from the Ethisphere
Institute®, a global leader in defining and
advancing the standards of ethical business
practices, as one of the World’s Most
Ethical Companies®.
Taken together, these and numerous other
accolades tell the story of a culture of which we
are proud. It’s a culture of inclusion—a culture
that inspires inno vative solutions and enables
people to thrive.
FIFTH THIRD BANCORP 2019 ANNUAL REPORT | 9
RAISING OUR
MINIMUM WAGE
For the past decade, the federal minimum
wage has been $7.25 per hour. While
politicians and advocacy groups debate
about an increase, the market has moved
forward. So, too, has Fifth Third. We raised
our minimum wage to $18 per hour on
October 28, marking the second increase
in under two years. The reason is simple:
It’s the right thing to do.
Increasing the minimum wage enables
us to lower turnover, improve employee
engagement and provide best-in-class
customer service. It supports our reputation
and reinforces the value of the partnerships
we have established to strengthen our
communities. Stronger communities, in
turn, build a stronger bank.
Higher wages, coupled with innovative
benefits such as parental bonding leave and
our maternity concierge program, help us to
attract and retain talent. The proof is in the
results. Year-over-year turnover in jobs most
affected by our previous minimum wage
increase dropped 16% in 2018.
Lexus Smith, a single mother of two who
started with the bank in 2017 and today
works as a customer service representative,
told us the wage increase has been life
changing. “The pay increase is helping me
start a college fund for my little girl and
little boy. I can take care of them and plan
for their future,” she said.
10-state footprint. This investment represents
one of the largest made by an institution
with a social impact investment strategy in
Opportunity Zones.
We’re contributing to our communities in
other notable ways too. More than 133,000
high school students completed courses
offered through the Fifth Third Finance
Academy in 2018–2019. Separately, our
employees volunteered more than 147,000
hours of their time through the Fifth Third
Serves program. And our annual “Feeding
Our Communities” initiative last May
provided nearly 3 million meals to fight
hunger across our footprint, triple our
original goal.
BUILDING STRONGER
COMMUNITIES
We are ahead of pace to deliver on the five-
year, $32 billion Community Commitment
plan we developed in 2016. Through the
end of 2019, our total commitment was more
than $28 billion. We are keeping our promise
to invest and improve our local communities
in the areas of mortgage, small business,
supplier diversity, banking services and
community development and investments.
One example of that commitment is our
recently announced $100 million investment
in projects that support community
development through four Opportunity
Zone fund partners. The funds will be used
to develop projects in low-income urban
and rural communities across Fifth Third’s
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ENVIRONMENTAL,
SOCIAL & GOVERNANCE
We recognize that environmental, social and
governance (ESG) issues are a growing focus
for many investors and other constituencies
we serve. We are committed to providing
more information about the good work being
done within Fifth Third. With that in mind,
we are working to develop a more robust
reporting framework for ESG.
As a first step, in December we published
our first Climate-Related Financial
Disclosure Report, which outlines some
of the work taking place to address the
risks and opportunities related to climate
change. The report—which can be found
in the Investor Relations section of our
website at 53.com—provides information
on governance, strategy, risk management
and metrics and targets.
On a related note, I’m proud to report that
Fifth Third earned an A- from the CDP
(formerly known as the Climate Disclosure
Project) in 2019 for our efforts and disclosures
related to climate change. This tied us for
the top spot among our regional bank peers.
That’s an improvement over previous years
and reflects the considerable effort we have
invested in increasing our disclosure.
We’re also making good progress on our
five bold sustainability goals and remain
on track to achieve all of them by 2022.
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RENEWABLE ENERGY PURCHASED:
100%
GREENHOUSE GAS EMI SSI O NS :
Reduce by 25%
WATER USAGE:
Reduce by 20%
ENERGY USE:
Reduce by 25%
LANDFILL WASTE:
Reduce by 20%
FINAL
THOUGHTS
We take our commitments to customers,
employees, communities and shareholders
very seriously, and we intend to continue
delivering on those in the year ahead. None
of that would be possible without the hard
work and tremendous efforts by employees
across the Bank, and for that I am grateful
and proud.
Together, we are working
to be the One Bank
people most value and
trust. Thank you for your
continued support.
GREG D. CARMICHAEL
Chairman, President and Chief Executive Officer,
Fifth Third Bancorp
FIFTH THIRD BANCORP 2019 ANNUAL REPORT | 11
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 higher-growth
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 ever-evolving
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 40-50%
less square footage, but these new branches
will meet our customers’ needs in fresh and
exciting ways.
Our efforts to more effectively integrate
digital technology in this rapidly changing
environment will continue to create significant
shareholder value. The Fifth Third Mobile
Banking app continues to average 4+ ratings
in both the App Store and Google Play. We
continue to enhance the customer experience
by making everyday banking possible anywhere
at any time.
With tech-enabled self-service capabilities
that are human centered, customers can
manage accounts, transfer funds, or pay bills
online with ease. The seamless physical-digital
integration provides innovative products and
services that digitally equip our bankers to
better serve and empower customers to attain
their financial goals.
KEY BRANCH BANKING INITIATIVES
• Retail-network optimization
• Branch redesign
• Digitizing branch operations
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TOTAL REVENUE:
$3.2 billion
AVERAGE LOANS:
$15.4 billion
AVERAGE CORE DEP OSITS:
$65.1 billion
DIGITAL BANKING CUSTOMERS:
2.7 million
FULL-SERVICE BANKING
CENTERS:
1,149
BRANCH
BANKING
As our customers’ banking
journey evolves, so do our
branches.
PERSONALIZED CUSTOMER EXPERIENCE
From handling complex service needs
to providing advice on important financial
decisions, our financial centers enable
customers to experience our company 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 through
our localized, high-touch service model
concentrated primarily in the Midwest and
Southeast. While a brick-and-mortar 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.
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*As of Dec. 31, 2019.
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TOTA L RE VEN UE:
$621 million
AV E RAGE LOA NS :
$23.4 billion
MO RTG AG E SERV ICI NG
PO RT FO LIO :
$98 billion
DEALER INDIRECT AUTO
LENDING NETWORK:
~6,600
direct channel and purchase loans through
a correspondent channel.
ADDRESSING PRESENT AND FUTURE
LENDING NEEDS
To drive profitable growth, meet our
customers’ 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 well-being 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 problem-solvers.
CONSUMER
LENDING
Creating new possibilities and
lasting relationships.
HELPING CUSTOMERS WITH
MAJOR PURCHASES
In Consumer Lending, we are here to help
customers with their major purchases—
whether buying a first home or purchasing
a new car.
Offering competitive rates and a variety
of products, our Consumer Lending division
helps customers reach their goals, whether
they’re short-term or long-term. 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 & SPECIALTY LENDING
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 our
more than 40-state indirect auto footprint.
With MB Financial, we’ve added lending
for RV, motorcycle, marine and power
sport products.
MORTGAGE LENDING
The mortgage business is one of the Bank’s
most cyclical business lines. 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 in-footprint retail
lender, though we also have a broad-footprint
*As of Dec. 31, 2019.
FIFTH THIRD BANCORP 2019 ANNUAL REPORT | 13
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TOTAL REVENUE:
$3.6 billion
AVERAGE LOANS:
$65.5 billion
AVERAGE CORE DEP OSITS:
$39.8 billion
CLIENTS:
~14,000
COMMERCIAL
BANKING
A strategic resource in our
customers’ financial success.
MAXIMIZING CLIENT VALUE
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 delivered through the One Bank
service model. Our wide range of services and
depth of experience enable the Commercial
Bank to address clients’ needs through strategic
capital and financing solutions, as well as
advanced payments capabilities.
Through focused segmentation and a broad
range of solutions, the Commercial Bank
targets clients in a wide range of industries,
combining a national corporate banking and
commercial real estate franchise, with a middle
market banking group that primarily aligns
with the Bank’s 10-state footprint and the
addition of California and Texas.
PLANNING FOR GREATER GROWTH
AND MARKET SHARE
We continue to focus on strengthening our
core middle market banking to expand market
share and enhance profitability. In addition, we
have been successful in using technology and
analytical advancements, as well as leveraging
the One Bank delivery model, to create strategic
partnerships and generate higher returns in 2019.
EXPANDING OUR INDUSTRY EXPERTISE
Given the unique challenges our clients face in
their respective industries, the Commercial Bank
has specialized verticals that provide industry-
specific banking expertise and comprehensive
financial solutions. In 2019, we expanded our
expertise with the addition of an experienced
investment banking team that is focused on
premier renewable energy companies.
OFFERING ROBUST FINANCING SOLUTIONS
AND STRATEGIC GUIDANCE
The Commercial Bank offers a wide range of
solutions through its credit products group, cap -
ital markets, and treasury management services:
• The credit products group provides comprehensive
specialized commercial financing solutions in asset
based lending, equipment finance and traditional
lending, which have been significantly enhanced
with the addition of the strategic business from MB
Financial. We have materially strengthened our credit
underwriting by adding experienced talent and by
maintaining centralized credit and risk functions.
• Capital markets provide critical market analysis,
strategic guidance and precise execution of capital
solutions through M&A advisory services, debt capi-
tal markets and equity capital markets. Additionally,
we offer a robust and state-of-the-art platform
delivering financial risk management products.
• Treasury management solutions include integrated
payables and receivables, risk management and
liquidity solutions.
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*As of Dec. 31, 2019.
WEALTH &
ASSET
MANAGEMENT
Delivering expert guidance to
clients and continued growth
to shareholders.
A YEAR OF INCREASED ASSETS
AND CLIENT SATISFACTION
Wealth & Asset Management draws on the
expertise of local advisors spanning the Bank’s
footprint, and they are supported by robust
digital capabilities. In 2019, total client assets
under management grew to $49 billion, with
net revenue up 7% and pre-tax income up 16%
from 2018. Each key business unit also recorded
a strong year of growth.
The number of Private Bank households grew
by 6%, with clients entrusting Wealth & Asset
Management with more than an additional
$2 billion in gross new assets under manage-
ment, helping to extend the period of positive
net asset flows to 10 consecutive quarters.
Additionally, client satisfaction scores
increased for the second consecutive year.
ACQUISITIONS, NEW TALENT AND
TECHNOLOGY HELP BOLSTER GROWTH
In March, the acquisition of MB Financial
added $4 billion of assets under management.
The team integrated the trust and registered
investment advisor (RIA) capabilities while
continuing to grow the insurance and RIA
acquisitions from 2017 and 2018 to record
another year of strong growth.
New individual producers were also a
focus in 2019. The number of Private Bank
wealth management advisors grew 20%,
demonstrating the strength of the regional
management teams to attract top talent in
every market.
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TOTA L RE VEN UE:
$671 million
AV E RAGE LOA NS :
$3.6 billion
AV E RAGE CO RE DEPOSITS:
$9.7 billion
ASSETS UNDER MANAGEMENT**:
$49 billion
ASSETS UNDE R CA RE**:
$413 billion
As our clients’ needs and preferences evolve,
investment in secure technology is also
essential for continued growth. Automation
of trust processing capabilities allow for more
efficient client onboarding coupled with more
than 50% of relationships using the Life360
tool, which provides a holistic view of assets
across all of their financial relationships.
ABOUT WEALTH & ASSET MANAGEMENT
Comprising 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 retirement plan services for
corporations, financial institutions, foundations,
endowments and not-for-profit organizations.
Fifth Third Insurance Agency includes two acquisi-
tions made in 2017, McGraw Insurance and Epic
Insurance Solutions. The insurance business is a
grow ing initiative to help clients with their financial
and risk management needs.
*As of Dec. 31, 2019.
**Includes trust and brokerage assets.
FIFTH THIRD BANCORP 2019 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, 2019, the Company had:
• $169 billion in assets
• 1,149 full-service banking centers
• Access to approximately 53,000 fee-free ATMs
• 4 business units: Branch Banking,
Commercial Banking, Consumer Lending
and Wealth & Asset Management
• $413 billion in assets under care*
• $49 billion in assets under management*
Fifth Third Bank was established in 1858.
FINANCIAL HIGHLIGHTS
TOTAL
PAYOUT RATIO 1
7
9
1
0
2 1
9
9
7
2
7
CASH DIVIDENDS PER
COMMON SHARE
0
.
1
:
E
L
A
C
S
2
5
0
.
3
5
0
.
.
4
7
0 0
6
0
.
4
9
0
.
N
B
0
0
5
6
1
$
.
:
E
L
A
C
S
AVERAGE
ASSETS
.
0
0
0
4
1
7
1
.
2
4
1
.
3
5
0
4
1
8
1
.
2
4
1
.
4
9
3
6
1
2015 2016 2017 2018 2019
2015
2016 2017 2018 2019
2015 2016 2017 2018 2019
COMMON SHARES
OUTSTANDING
BOOK VALUE
PER SHARE
NET CHARGE-OFF
RATIO
5
8
7
0
5
7
4
9
6
7
4
6
9
0
7
.
1
4
7
2
7
0
3
2
.
3
4
.
1
2
2
6
9
1
.
.
1
3
8
1
.
0
0
0
3
$
:
E
L
A
C
S
%
0
.
1
:
E
L
A
C
S
8
4
0
.
9
3
0
.
2
3
0
.
5
3
0
.
5
3
0
.
2015 2016 2017 2018 2019
2015 2016 2017 2018 2019
2015 2016 2017 2018 2019
%
0
0
1
:
E
L
A
C
S
M
M
0
0
9
:
E
L
A
C
S
2019 DETAILED FINANCIALS
1 Total payout ratio calculation: common stock dividends plus shares acquired for treasury divided by net income available to common shareholders.
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, 2019
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:
Name of each exchange on which registered:
FITB
FITBI
Trading Symbol(s):
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
Depositary Shares Representing a 1/40th Ownership Interest in a
Share of 6.00% Non-Cumulative Perpetual Class B Preferred
Stock, Series A
Depositary Shares Representing a 1/1000th Ownership Interest in
a Share of 4.95% Non-Cumulative Perpetual Preferred Stock,
Series K
Indicate by check mark 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
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
FITBO
FITBP
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 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 if 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 709,552,415 shares of the Bancorp’s Common Stock, without par value, outstanding as of January 31, 2020. The Aggregate
Market Value of the Voting Stock held by non-affiliates of the Bancorp was $18,260,843,027 as of June 30, 2019.
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 (the “SEC”) with respect
to annual reports on Form 10-K and annual reports to shareholders. Sections of the Bancorp’s Proxy Statement for the 2020 Annual Meeting
of Shareholders are incorporated by reference into Part III of this report.
Only those sections of this 2019 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, 2019. No other information contained in this 2019 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
Information about our Executive Officers
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
19-26
58
61-69, 192-195
54
53-55
73-75, 126-127
72-73, 128-129
79-93
75-77
43
77, 152
27-37
37
37
37
37
38
39
43
44-104
104
104-196
197
197
199
199
199
199
199
199
199-204
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 Fifth Third’s ability to realize the anticipated benefits of the merger with MB Financial,
Inc.; (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, National Association (the “Bank”).
As of December 31, 2019, Fifth Third had $169 billion in assets and
operates 1,149 full-service Banking Centers and 2,481 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, 2019, had $413 billion in
assets under care, of which it managed $49 billion for individuals,
corporations and not-for-profit organizations. Investor information
and press releases can be viewed at www.53.com. Information on or
accessible through our website is not deemed to be incorporated
into this Annual Report on Form 10-K. Website references in this
Annual Report are merely textual references. Fifth Third’s common
stock is traded on the NASDAQ® Global Select Market under the
symbol “FITB.”
to
the commercial,
The Bancorp’s subsidiaries provide a wide range of financial
products and services
financial, retail,
governmental, educational, energy and healthcare sectors. This
includes a variety 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. The 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, 2020.
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 annual proxy statement, 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,
annual proxy statement 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 website at www.53.com
on a same day basis after they are electronically filed with or
furnished to the SEC.
Information about the Bancorp’s Code of Business Conduct
and Ethics (as amended from time to time), is available on Fifth
Third’s corporate website at www.53.com. In addition, any future
waivers from a provision of the Fifth Third Code of Business
Conduct and Ethics covering any of Fifth Third’s directors or
executive officers (including Fifth Third’s principal executive
officer, principal financial officer, and principal accounting officer
or controller) will be posted at this internet address.
Competition
The Bancorp, primarily through the 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, investment
advisors, specialty finance, 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.
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
acquisitions and investments may take place and future 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.
Regulation and Supervision
In addition to the generally applicable state and federal laws
governing businesses and employers, the Bancorp and the Bank are
subject to extensive regulation and supervision 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 the 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 Bank and the Bancorp) by bank regulatory
agencies are the maintenance of the safety and soundness of
financial institutions, the maintenance of the federal deposit
insurance system and the protection of consumers or classes of
the protection of shareholders or
consumers, rather
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. The 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 of 2018 (“EGRRCPA”), will continue to
impact the Bancorp and the 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.
Both the scope of the laws and regulations and the intensity of
the supervision to which the Bancorp and its subsidiaries are subject
increased in response to the financial crisis, as well as other factors,
such as technological and market changes. Regulatory enforcement
than
19 Fifth Third Bancorp
and fines have also increased across the banking and financial
services sector. Many of these changes have occurred as a result of
Dodd-Frank and its implementing regulations, most of which are
now in place. While the regulatory environment has entered a
period of rebalancing of the post financial crisis framework, the
Bancorp expects that its business will remain subject to extensive
regulation and supervision.
On September 10, 2019, Fifth Third Bancorp announced that
Fifth Third Bank had received approval from the Office of the
Comptroller of the Currency (the “OCC”) to convert from an Ohio
state-chartered bank to a national bank. The Bank converted to a
national bank charter on November 14, 2019. As a result of the
conversion, the Bank is subject to supervision and regulation by the
OCC and subject to the National Bank Act and is no longer subject
to supervision and regulation by the Ohio Division of Financial
Institutions. Additionally, while the FRB is no longer the Bank’s
primary federal regulator, the Bank remains a member of the
Federal Reserve System.
On May 24, 2018, the EGRRCPA was signed into law. Among
other regulatory changes, the EGRRCPA amends various sections
of Dodd-Frank, including section 165, which was revised to raise
the asset thresholds for determining the application of enhanced
prudential standards for BHCs. The EGRRCPA’s increased asset
thresholds took effect immediately for BHCs with total consolidated
assets less than $100 billion, with the exception of risk committee
requirements, which now apply to publicly-traded BHCs with $50
billion or more of consolidated assets. BHCs with consolidated
assets between $100 billion and $250 billion, including the Bancorp,
were subject to the enhanced prudential standards that applied to
them before enactment of EGRRCPA until December 31, 2019,
when rules adopted by the FRB that tailor the applicability of
enhanced prudential standards and capital and liquidity requirements
for BHCs with $100 billion or more in total consolidated assets
became effective, as described in detail below.
On October 10, 2019, the FRB adopted a rule that adjusts the
thresholds at which certain enhanced prudential standards (“EPS”)
apply to BHCs with $100 billion or more in total consolidated assets
(the “EPS Tailoring Rule”) and the FRB, OCC and FDIC adopted a
rule that similarly adjusts the thresholds at which certain other
capital and liquidity standards apply to BHCs and banks with $100
billion or more in total consolidated assets (the “Capital and
Liquidity Tailoring Rule” and, together with the EPS Tailoring Rule,
the “Tailoring Rules”). The Tailoring Rules establish four risk-based
categories of institutions, and the extent to which enhanced
prudential standards and certain other capital and liquidity standards
apply to these BHCs and banks depends on the banking
organization’s category. Under the Tailoring Rules, the Bancorp and
the Bank each qualify as a Category IV banking organization subject
to the least restrictive of the requirements applicable to firms with
$100 billion or more in total consolidated assets.
Regulators
The Bancorp and/or the Bank are subject to regulation and
supervision primarily by the FRB, the Consumer Financial
Protection Bureau (the “CFPB”) and the OCC 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. The Bank is also subject to regulation by the FDIC,
which insures the 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
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
the Bank’s businesses,
their activities,
20 Fifth Third Bancorp
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 the Bank are required to file various reports
with and are subject to examination by various regulators, including
the FRB and the OCC. The FRB, the OCC and the CFPB have the
authority to issue orders for BHCs and banks to cease and desist
from certain banking practices and violations of conditions imposed
by, or violations of agreements with, the FRB, the OCC and the
CFPB. Certain of the Bancorp’s and the 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 the Bank and,
in some situations, the imposition of such additional requirements
and restrictions will not be publicly available information.
The following discussion describes certain elements of the
comprehensive regulatory framework applicable to the Bancorp and
its subsidiaries. This discussion is not intended to describe all laws
and regulations applicable to the Bancorp, the Bank, and the
Bancorp’s other subsidiaries.
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
The Bancorp is registered as a BHC with the FRB under the BHCA
and qualifies for and has elected to become an FHC. An 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 an FHC include securities underwriting and
dealing, insurance underwriting and brokerage, merchant banking
and other activities that are declared by the FRB, in cooperation
with the Treasury Department, to be “financial in nature or
incidental thereto” or are declared by the FRB unilaterally to be
“complementary” to financial activities. In addition, an 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 an 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 these 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
in
mergers and acquisitions) or obtain necessary approvals
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 is a legal entity separate and distinct from its
subsidiaries and depends in part upon dividends received from its
direct and indirect subsidiaries, including the Bank, to fund its
activities, including its ability to make capital distributions, such as
paying dividends or repurchasing shares. Under federal law, there
are various limitations on the extent to which the Bank can declare
and pay dividends to the Bancorp, including those related to
regulatory capital requirements, general regulatory oversight to
prevent unsafe or unsound practices, and federal banking law
requirements concerning the payment of dividends out of net
profits, surplus, and available earnings. Certain contractual
restrictions also may limit the ability of the Bank to pay dividends to
the Bancorp. No assurances can be given that the Bank will, in any
circumstances, pay dividends to the Bancorp.
The Bancorp’s ability to declare and pay dividends is similarly
limited by federal banking law and FRB regulations and policy. The
FRB has authority to prohibit BHCs from making capital
distributions if they would be 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 paying
dividends and repurchasing shares, is subject to the FRB’s non-
objection to the Bancorp’s capital plan as part of the FRB’s
Comprehensive Capital Analysis and Review (“CCAR”) process
discussed below (see Capital Planning and Stress Testing below).
Source of Strength
A BHC, including the Bancorp, 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 or when doing so is not otherwise in the interests of the
Bancorp or its shareholders or creditors. The FRB may require a
BHC to make capital injections into a troubled subsidiary bank and
may charge the BHC with engaging in unsafe and unsound practices
if the BHC fails to commit resources to such a subsidiary bank or if
it undertakes actions that the FRB believes might jeopardize the
BHC’s ability to commit resources to such subsidiary bank.
Under these requirements, the Bancorp may in the future be
required to provide financial assistance to the Bank should it
experience financial distress. Capital loans by the Bancorp to the
Bank would be subordinate in right of payment to deposits and
certain other debts of the Bank. In the event of the Bancorp’s
bankruptcy, any commitment by the Bancorp to a federal bank
regulatory agency to maintain the capital of the Bank would be
assumed by the bankruptcy trustee and entitled to a priority of
payment.
FDIC Assessments
The DIF provides insurance coverage for certain deposits, up to a
standard maximum deposit insurance amount of $250,000 per
depositor and is funded through assessments on insured depository
institutions, based on the risk each institution poses to the DIF.
The Bank accepts customer deposits that are insured by the DIF
and, therefore, must pay insurance premiums. The FDIC may
increase the Bank’s insurance premiums based on various factors,
including the FDIC’s assessment of its risk profile.
that
large
related
The FDIC has required
insured depository
institutions, including the Bank, enhance their deposit account
record keeping and
technology system
capabilities to facilitate prompt payment of insured deposits if such
an institution were to fail. The FDIC has established an initial
compliance date of April 1, 2020 while granting institutions an
optional extension of the compliance date for up to one year, to a
date no later than April 1, 2021.
information
Transactions with Affiliates
Federal banking laws restrict transactions between a bank and its
affiliates, including a parent BHC. The 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
that
transactions with affiliates be collateralized and
credit
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. Federal banking laws also place similar restrictions on
loans and other extensions of credit by FDIC-insured banks, such
as the Bank, and their subsidiaries to their directors, executive
officers, and principal shareholders.
insured depository
Community Reinvestment Act
The CRA generally requires
institutions,
including the Bank, to identify the communities they serve and to
make loans and investments and provide services that meet the
credit needs of those communities. The CRA requires the OCC to
evaluate the performance of national banks (including the Bank)
with respect to these CRA obligations. Depository institutions must
maintain comprehensive records of their CRA activities for
purposes of these examinations. The OCC must take into account
the institution’s record of performance in meeting the credit needs
of the entire community served, including low- and moderate-
income neighborhoods. For purposes of CRA examinations, the
OCC rates each
institution’s compliance with the CRA as
“Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial
Noncompliance.” The FRB, which was responsible for CRA
evaluations of the Bank prior to its conversion to a national bank
charter, conducted a regularly scheduled examination covering 2014
through 2016 to determine the Bank’s compliance with the CRA.
This CRA examination resulted in a change in rating from “Needs
to Improve” to “Outstanding.”
The CRA requires the relevant federal bank regulatory agency
to consider a bank’s CRA assessment when considering the bank’s
application to conduct certain mergers or acquisitions or to open or
relocate a branch office. The FRB also must consider the CRA
record of each subsidiary bank of a BHC in connection with any
acquisition or merger application filed by the BHC.
An
unsatisfactory CRA record could substantially delay or result in the
denial of an approval or application by the Bancorp or the Bank.
Leaders of the federal banking agencies recently have indicated
their support for revising the CRA regulatory framework, and in
December 2019, the OCC and FDIC issued a joint proposed rule
that would amend the CRA regulatory framework. It is too early to
tell whether and to what extent any changes will be made to
applicable CRA requirements.
21 Fifth Third Bancorp
Regulatory Capital Requirements
The Bancorp and the Bank are subject to certain risk-based capital
and leverage ratio requirements under the capital adequacy rules (the
“Final Capital Rules”) adopted by the FRB, for the Bancorp, and by
the OCC, for the Bank. These quantitative calculations are
minimums, and the FRB and OCC may determine that a banking
organization, based on its size, complexity, or risk profile, must
maintain a higher level of capital in order to operate in a safe and
sound manner. Failure to be well capitalized or to meet minimum
capital requirements could result in certain mandatory and possible
additional discretionary actions by regulators that, if undertaken,
could have an adverse material effect on the Bancorp’s operations
or financial condition. Failure to be well capitalized or to meet
minimum capital requirements could also result in restrictions on
the Bancorp’s or the Bank’s ability to pay dividends or otherwise
distribute capital or to receive regulatory approval of applications.
Under the Final Capital Rules, the Bancorp’s and the Bank’s
assets, exposures, and certain off-balance sheet items are subject to
risk weights used to determine the institutions’ risk-weighted assets.
These risk-weighted assets are used to calculate the following
minimum capital ratios for the Bancorp and the Bank:
to certain
CET1 capital primarily
• Common Equity Tier 1 (“CET1”) Risk-Based Capital
Ratio, equal to the ratio of CET1 capital to risk-weighted
includes common
assets.
shareholders’ equity
regulatory
subject
adjustments and deductions, including with respect to
goodwill, intangible assets, certain deferred tax assets, and
accumulated other comprehensive income (“AOCI”).
Under the Final Capital Rules, the Bancorp made a one-
time election to filter certain AOCI components, with the
result that those components are not recognized in the
Bancorp’s CET1. In July 2019, the FDIC, the FRB and
the OCC issued final rules that simplify the capital
treatment of mortgage servicing assets, deferred tax assets
arising from temporary differences that an institution
could not realize through net operating loss carrybacks,
and investments in the capital of unconsolidated financial
institutions, as well as simplify the recognition and
calculation of minority interests that are includable in
regulatory capital, for non-advanced approaches banking
organizations, including the Bancorp and the Bank.
Banking organizations may adopt these changes beginning
on January 1, 2020. In addition, in December 2018, the
U.S. federal banking agencies finalized rules that would
permit BHCs and banks to phase-in, for regulatory capital
purposes, the day-one impact of ASU 2016-13 (“CECL”)
on retained earnings over a period of three years. For
further discussion of CECL, see Note 1 of the Notes to
Consolidated Financial Statements.
• Tier 1 Risk-Based Capital Ratio, equal to the ratio of Tier
1 capital to risk-weighted assets. Tier 1 capital is primarily
comprised of CET1 capital, perpetual preferred stock and
certain qualifying capital instruments.
• Total Risk-Based Capital Ratio, equal to the ratio of total
capital, including CET1 capital, Tier 1 capital, and Tier 2
capital, to risk-weighted assets. Tier 2 capital primarily
includes qualifying subordinated debt and qualifying
allowance for loan and lease losses (“ALLL”). Tier 2
capital also includes, among other things, certain trust
preferred securities.
• Tier 1 Leverage Ratio, equal to the ratio of Tier 1 capital
to quarterly average assets (net of goodwill, certain other
intangible assets, and certain other deductions).
The Final Capital Rules also require banking organizations to
maintain a capital conservation buffer to avoid becoming subject to
restrictions on capital distributions and certain discretionary bonus
to management. The capital conservation buffer
payments
requirement was phased in over a three-year period that began on
January 1, 2016. The phase-in period ended on January 1, 2019, and
the capital conservation buffer was at its fully phased-in level of
2.5% throughout 2019. For more information related to the capital
conservation buffer, refer to Note 30 of the Notes to Consolidated
Financial Statements.
The total minimum regulatory capital ratios and well-capitalized
minimum ratios are reflected in the table below. The FRB has not
yet revised the well-capitalized standard for BHCs to reflect the
higher capital requirements imposed under the Final Capital Rules.
For purposes of the FRB’s Regulation Y, including determining
whether a BHC meets the requirements to be an FHC, BHCs, such
as the Bancorp, must maintain a Tier 1 Risk-Based Capital Ratio of
6.0% or greater and a Total Risk-Based Capital Ratio of 10.0% or
greater. If the FRB were to apply the same or a very similar well-
capitalized standard to BHCs as that applicable to the Bank, the
Bancorp’s capital ratios as of December 31, 2019 would exceed such
revised well-capitalized standard. The FRB may require BHCs,
including the Bancorp, to maintain capital ratios substantially in
excess of mandated minimum levels, depending upon general
economic conditions and a BHC’s particular condition, risk profile,
and growth plans.
22 Fifth Third Bancorp
The following table presents the minimum regulatory capital ratios, minimum ratio plus capital conservation buffer, and well-capitalized
minimums compared with the Bancorp’s and the Bank’s regulatory capital ratios as of December 31, 2019, calculated using the regulatory capital
methodology applicable during 2019:
Regulatory Capital Ratios:
CET1 risk-based capital ratio:
Fifth Third Bancorp
Fifth Third Bank, National Association
Tier I risk-based capital ratio:
Fifth Third Bancorp
Fifth Third Bank, National Association
Total risk-based capital ratio:
Fifth Third Bancorp
Fifth Third Bank, National Association
Tier I leverage ratio:
Fifth Third Bancorp
Fifth Third Bank, National Association
Minimum Regulatory
Capital Ratio
Minimum Ratio +
Capital Conservation(a)
Well-Capitalized
Minimums(b)
Actual at
December 31, 2019
4.50 %
4.50
6.00
6.00
8.00
8.00
4.00
4.00
7.00
7.00
8.50
8.50
10.50
10.50
N/A
N/A
N/A
6.50
6.00
8.00
10.00
10.00
N/A
5.00
9.75
11.86
10.99
11.86
13.84
13.46
9.54
10.36
(a) Reflects the fully phased-in capital conservation buffer of 2.5% applicable during 2019.
(b) Reflects the well-capitalized standard applicable to the Bancorp under FRB Regulation Y and the well-capitalized standard applicable to the Bank.
23 Fifth Third Bancorp
Liquidity Regulation
The FRB’s rules 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.
In prior years, the Bancorp was subject to the U.S. banking
ratio
regulators
requirement (“LCR”), but as a result of the Tailoring Rules, the
Bancorp, as a Category IV banking organization, is now exempt
from the LCR.
liquidity coverage
implementing
rule
the
Capital Planning and Stress Testing
BHCs with $100 billion or more in consolidated assets, including
the Bancorp, generally 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 total
consolidated assets. The CCAR process is intended to help ensure
that those BHCs have robust, forward-looking capital planning
processes that account for each company’s unique risks and that
permit continued operations during times of economic and financial
stress. The mandatory elements of the capital plan are an assessment
of the expected uses and sources of capital over a nine-quarter
planning horizon, a description of all planned capital actions over
the planning horizon, a discussion of any expected changes to the
BHC’s business plan that are likely to have a material impact on its
capital adequacy or liquidity, a detailed description of the BHC’s
process for assessing capital adequacy and the BHC’s capital policy.
A BHC’s ability to make capital distributions 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. On February 5,
2019, the FRB announced that certain less-complex U.S. BHCs with
less than $250 billion in total consolidated assets, including the
Bancorp, would not be subject to supervisory stress testing,
company-run stress testing, or the CCAR process for the 2019
capital plan and stress test cycle, and therefore the Bancorp did not
submit a capital plan for approval in 2019. Instead the Bancorp was
authorized by the FRB to make capital distributions for the 2019
capital planning cycle up to the amount that would have allowed the
Bancorp to remain above all minimum capital requirements in the
2018 CCAR process, subject to certain adjustments. These BHCs,
including the Bancorp, remain subject to the requirement to develop
and maintain a capital plan, and the board of directors (or
designated subcommittee thereof) at those BHCs remain subject to
the requirement to review and approve the BHC’s capital plan.
As part of the quantitative assessment of the Bancorp’s capital
described above, the Bancorp was subject to annual supervisory
stress tests, but as a result of the EPS Tailoring Rule, the Bancorp
will now be subject to supervisory stress tests every two years.
These supervisory stress tests are forward-looking quantitative
evaluations of the impact of stressful economic and financial market
conditions on the Bancorp’s capital. The Bancorp also was required
to conduct semi-annual company-run stress tests, the results of
which were filed with the FRB and publicly disclosed, but as a result
of the EPS Tailoring Rule, the Bancorp is no longer required to
conduct company-run stress tests. As noted above, the Bancorp
was not subject to supervisory stress testing or company-run stress
24 Fifth Third Bancorp
testing for the 2019 stress test cycle. In addition, the FRB has stated
that, as part of a future rulemaking to implement EGRRCPA, it may
further streamline the CCAR rules and other capital planning
requirements applicable to certain BHCs, including the Bancorp.
Proposed Stress Buffer Requirements
In April 2018, the FRB proposed a rule to establish stress buffer
requirements, which would integrate its annual capital planning and
stress testing requirements with certain ongoing regulatory capital
requirements. Under the proposal, the stress capital buffer (“SCB”)
would replace the 2.5% component of the capital conservation
buffer. The SCB, subject to a minimum of 2.5%, would be equal to
the maximum decline in the CET1 risk-based capital ratio under the
supervisory severely adverse scenario of the FRB’s supervisory
stress tests, plus a ratio based on 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 BHC’s 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,
including the Bancorp, to align with the proposed two-year
supervisory stress testing cycle for Category IV BHCs.
Enhanced Prudential Standards
Pursuant to Title I of Dodd-Frank, certain U.S. BHCs are subject to
enhanced prudential standards and early remediation requirements.
As a result, the Bancorp is subject to more stringent standards,
including liquidity and capital requirements, leverage limits, stress
testing, resolution planning, and risk management standards, than
those applicable to smaller institutions. Certain larger banking
organizations are subject
to additional enhanced prudential
standards.
As discussed above, under the EPS Tailoring Rule, the
Bancorp, as a Category IV banking organization, is subject to the
least restrictive enhanced prudential standards applicable to firms
with $100 billion or more in total consolidated assets. As compared
to enhanced prudential standards that were applicable to the
Bancorp, under the EPS Tailoring Rule, the Bancorp is no longer
subject to company-run stress testing requirements and is subject to
less frequent supervisory stress tests, less frequent internal liquidity
stress tests, and reduced liquidity risk management requirements.
Future rulemakings to implement EGRRCPA may further change
the enhanced prudential standards applicable to the Bancorp.
Heightened Governance and Risk Management Standards
The OCC has published guidelines to update expectations for the
governance and risk management practices of certain large financial
institutions, including the Bank. The guidelines require covered
institutions to establish and adhere to a written governance
framework in order to manage and control their risk-taking
activities. In addition, the guidelines provide standards for the
institutions’ boards of directors to oversee the risk governance
framework. The Bank currently has a written governance framework
and associated controls.
Privacy and Data Security
The OCC, 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
implement and maintain a comprehensive written
create,
information
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
in substantial harm or
inconvenience to any customer. In addition, various U.S. regulators,
including the OCC, 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.
that could result
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.
States are also increasingly proposing or enacting legislation
that relates to data privacy and data protection such as the California
Consumer Privacy Act which went into effect on January 1, 2020.
We continue to assess the requirements of such laws and proposed
legislation and their applicability to the Bancorp. Moreover, these
laws, and proposed legislation, are still subject to revision or formal
guidance and they may be interpreted or applied in a manner
inconsistent with our understanding.
Like other lenders, the Bank and other of the Bancorp’s
subsidiaries use credit bureau data in their underwriting activities.
Use of such data is regulated under the Fair Credit Reporting Act
(“FCRA”), and the FCRA also regulates reporting information to
credit bureaus, prescreening individuals for credit offers, sharing of
information between affiliates, and using affiliate data for marketing
purposes. Similar state laws may impose additional requirements on
the Bancorp and its subsidiaries.
Anti-Money Laundering and Sanctions
The Bancorp is subject to federal laws that are designed to counter
money laundering and terrorist financing, and transactions with
persons, companies or foreign governments sanctioned by the
United States. These include the Bank Secrecy Act, the Money
Laundering Control Act, the USA PATRIOT Act and regulations
for the International Emergency Economic Powers Act and the
Trading with the Enemy Act, as administered by the United States
Treasury Department’s Office of Foreign Assets Control. These
laws obligate depository institutions and broker-dealers to verify
their customers’ 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.
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 the Bancorp, the pay
ratio was first required as part of its executive compensation
disclosure in its annual proxy statement or Form 10-K 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 was required to comply with this new rule beginning
July 1, 2019.
The Bancorp’s compensation practices are also subject to
oversight by the FRB. The scope and content of compensation
regulation in the financial industry are continuing to develop, and
the regulations and resulting market practices are expected to
continue to evolve over a number of years. In June 2016, the SEC
and the federal banking agencies issued a proposed rule to
implement the 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.
Debit Card Interchange Fees
Dodd-Frank includes a set of rules requiring that interchange
transaction fees for electronic debit transactions be reasonable and
proportional to certain costs associated with processing the
transactions. Interchange fees for electronic debit transactions are
limited to 21 cents plus 0.05% of the transaction, plus an additional
one cent per transaction fraud adjustment. These fees impose
25 Fifth Third Bancorp
requirements regarding routing and exclusivity of electronic debit
transactions, and generally require that debit cards be usable in at
least two unaffiliated networks.
Resolution Planning
In past years, the Bancorp was required to submit annually to the
FRB and the FDIC a resolution plan for the orderly resolution of
the Bancorp and its significant legal entities under the U.S.
Bankruptcy Code or other applicable insolvency laws in a rapid and
orderly fashion in the event of future material financial distress or
failure. In October 2019, the FRB and the FDIC adopted
amendments to their resolution planning rule to adjust the
thresholds at which certain resolution planning requirements apply
to BHCs with $100 billion or more in total consolidated assets,
including the Bancorp. As a result of these amendments, the
Bancorp is no longer required to submit an annual resolution plan
to the FRB and the FDIC.
In addition, the Bank is required to periodically file a separate
resolution plan with the FDIC. EGRRCPA did not change the
FDIC’s rules that require the Bank to periodically file a separate
resolution plan. In April 2019, the FDIC released an advanced
notice of proposed rulemaking with respect to the FDIC’s bank
resolution plan requirements that requested comments on how to
better tailor bank resolution plans to a firm’s size, complexity, and
risk profile. Until the FDIC’s revisions to its bank resolution plan
requirement are finalized, no bank resolution plans will be required
to be filed.
Proprietary Trading and Investing in Certain Funds
Dodd-Frank sets forth restrictions on banking organizations’ ability
to engage in proprietary trading and to have certain ownership
interests in and relationships with certain 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.
As of October 2019, the FRB, OCC, FDIC, Commodity
Futures Trading Commission
(“CFTC”) and SEC finalized
amendments to the Volcker Rule. These amendments tailor the
Volcker Rule’s compliance requirements to the amount of a firm’s
trading activity, revise the definition of trading account, clarify
certain key provisions in the Volcker Rule, and modify the
information companies are required to provide to federal agencies.
These amendments to the Volcker Rule are not material to our
investing and trading activities.
trading, capital margin, segregation
Derivatives
Title VII of Dodd-Frank imposes a regulatory structure on the
over-the-counter derivatives market, including requirements for
clearing, exchange
trade
reporting, and recordkeeping. Title VII also requires certain persons
to register as a swap dealer or a security-based swap dealer. The
Bank is provisionally registered with the CFTC as a swap dealer.
The CFTC and U.S. banking regulators have finalized most rules
applicable to the over-the-counter derivatives markets and swap
dealers, and the SEC has finalized most of its rules related to
security-based swaps. The CFTC’s Title VII regulations are
applicable to the Bank’s activity as a swap dealer and include rules
related to
internal and external business conduct standards,
reporting and recordkeeping, mandatory clearing for certain swaps,
and trade documentation and confirmation requirements. In
addition, the U.S. banking regulators have finalized regulations
applicable to the Bank regarding mandatory posting and collection
of margin by certain swap counterparties and segregation of
customer funds. The Bank is not currently subject to regulation as a
security-based swap dealer.
Consumer Protection Regulation and Supervision
The Bancorp is subject to supervision and regulation by the CFPB
with respect to federal consumer protection laws. The Bancorp is
also subject to certain state consumer protection laws, and under
Dodd-Frank, state attorneys general and other state officials are
empowered to enforce certain federal consumer protection laws and
regulations. State authorities have increased their focus on and
enforcement of consumer protection rules. These federal and state
consumer protection laws apply to a broad range of our activities
and to various aspects of our business and include laws relating to
interest rates, fair lending, disclosures of credit terms and estimated
transaction costs to consumer borrowers, debt collection practices,
the use of and the provision of information to consumer reporting
agencies, and the prohibition of unfair, deceptive, or abusive acts or
practices in connection with the offer, sale, or provision of
consumer financial products and services.
The CFPB has promulgated many mortgage-related final rules
since it was established under Dodd-Frank, including rules related to
the ability to repay and qualified mortgage standards, mortgage
servicing standards, loan originator compensation standards, high-
cost mortgage requirements, Home Mortgage Disclosure Act
requirements, and appraisal and escrow standards for higher priced
mortgages. The mortgage-related final rules issued by the CFPB
the origination, servicing, and
have materially
securitization of residential mortgages in the United States. These
rules have impacted, and will continue to impact, the business
practices of mortgage lenders, including the Bancorp.
restructured
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 the Bancorp’s business, financial condition and results
of operations.
26 Fifth Third Bancorp
ITEM 1A. RISK FACTORS
The risks and uncertainties 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 and
uncertainties are interrelated and the occurrence of one or more of
them may exacerbate the effect of others. The risks and
uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that
we currently believe to be immaterial may also adversely affect our
business. See “Cautionary Note Regarding Forward-Looking
Statements” elsewhere in this Annual Report on Form 10-K for
more information.
CREDIT RISKS
Deteriorating credit quality has adversely impacted Fifth
Third in the past and may adversely impact Fifth Third in the
future.
When Fifth Third lends money or commits to lend money, the
Bancorp incurs credit risk or the risk of loss if borrowers do not
repay their loans, leases, credit cards, derivative obligations, or other
credit obligations. The performance of these credit portfolios
significantly affects the Bancorp’s financial results and condition. If
the current economic environment were to deteriorate, more
customers may have difficulty in repaying their credit obligations
which could result in a higher level of credit losses and reserves for
credit losses. Fifth Third reserves for credit losses by establishing
reserves through a charge to earnings. The amount of these reserves
is based on Fifth Third’s assessment of credit losses inherent in the
credit portfolios including unfunded credit commitments. The
process for determining the amount of the ALLL and the reserve
for unfunded commitments is critical to Fifth Third’s financial
results and condition. It requires difficult, subjective and complex
judgments about the environment, including analysis of economic
or market conditions that might impair the ability of borrowers to
repay their loans.
Fifth Third might underestimate the credit losses inherent in its
portfolios and have credit losses in excess of the amount reserved.
Fifth Third might increase the reserve because of changing
economic conditions, including falling home prices or higher
unemployment, or other factors such as changes in borrower’s
behavior 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, 2019; 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 and the Allowance for
Loan and Losses and Reserve for Unfunded Commitments
subsections of
the Critical Accounting Policies section of
Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
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
to borrowers who as a group may be uniquely or
or
disproportionately affected by economic or market conditions.
Deterioration in economic conditions, housing conditions and
commodity and real estate values in certain states or locations could
result in materially higher credit losses if loans are concentrated in
those locations. Fifth Third has significant exposures to businesses
in certain economic sectors such as manufacturing, real estate,
financial services, 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 71% of average total assets for the
year ending December 31, 2019). 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.
27 Fifth Third Bancorp
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.
A reduced credit rating could adversely affect Fifth Third’s
ability to borrow funds and raise the cost of borrowings
substantially and could cause creditors and business counterparties
to raise collateral requirements or take other actions that could
adversely affect Fifth Third’s ability to raise 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.
liquidity stress testing and minimum
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 financial
institutions, including Fifth Third. These regulations address, among
other matters,
liquidity
requirements. The application of certain of these regulations to
banking organizations, such as Fifth Third, have been modified,
including in connection with the implementation of the EGRRCPA.
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 interest rates that
Fifth Third pays on its securities are also influenced by, among
other things, the credit ratings that it, its subsidiaries and/or its
securities receive from recognized rating agencies. A downgrade to
Fifth Third or its subsidiaries’ credit rating could affect its ability to
access the capital markets, increase its borrowing costs and
negatively impact its profitability. A ratings downgrade to Fifth
Third, its subsidiaries or their securities could also create obligations
or liabilities 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.
28 Fifth Third Bancorp
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 investments during rising interest rate
environments, an 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 the Bank and put it in
alternative investments, causing Fifth Third to lose a lower cost
source of funding. Higher funding costs reduce Fifth Third’s net
interest margin and net interest income.
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 to the
Bancorp. Regulatory scrutiny of liquidity and capital levels at bank
holding companies and insured depository institutions 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. In addition, 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.
Regulatory limitations on the Bancorp’s ability to receive
dividends from its subsidiaries could have a material adverse effect
on its liquidity and ability to pay dividends on stock or interest and
principal on its debt and to engage in share repurchases. For further
information, refer to Regulation and Supervision and Note 4 of the
Notes to Consolidated Financial Statements.
OPERATIONAL RISKS
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 internet, digital applications and the 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. Failures, interruptions or breaches in the security
of these systems occur across our industry with some frequency
and, if a material event of this nature affects Fifth Third, this 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 and “ransom” attacks
where hackers have requested payments in exchange for not
disclosing customer information. The unintentional or willful acts or
omissions of employees may also create or exacerbate cybersecurity
risks
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. Across our
industry, the cost of minimizing these risks and investigating
incidents has continued to increase with the frequency and
sophistication of these threats. 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. Fifth
Third’s insurance may be inadequate to compensate for losses from
a cyber-attack.
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 be
inoperable. Fifth Third also has security to prevent unauthorized
access to the systems. In addition, Fifth Third requires its third-
party service providers to maintain similar controls. However, Fifth
Third cannot be certain that the measures will be successful.
A security breach in these systems or the loss or corruption of
confidential
information such as business results, transaction
records and related information could adversely impact Fifth Third’s
ability to provide timely and accurate financial information in
compliance with legal and regulatory requirements, which could
result
significant
reputational harm and the loss of confidence in Fifth Third.
Additionally, security breaches or the loss, theft or corruption of
customer information such as social security numbers, credit card
regulatory authorities,
sanctions
from
in
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.
flaws or employee errors,
Fifth Third’s necessary dependence upon automated systems to
record and process its transaction volume poses the risk that
technical system
tampering or
manipulation of those systems will result in losses and may be
difficult to detect. Fifth Third may also be subject to disruptions of
its operating systems arising from events that are beyond its control
(for example, computer viruses or electrical or telecommunications
outages).
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 failures, security breaches or employee misconduct affecting such
other third parties, may require the Bancorp to take steps to protect
the integrity of its own operational systems or to safeguard
confidential information of the Bancorp or its customers, thereby
increasing
the Bancorp’s operational costs and potentially
diminishing customer satisfaction. If personal, confidential or
proprietary information of customers or clients in the Bancorp’s or
such vendors’ or other third parties’ possession were to be
mishandled or misused, the Bancorp could suffer significant
regulatory consequences, reputational damage and financial loss.
Such mishandling or misuse could include circumstances where, for
example, such information was erroneously provided to parties who
are not permitted to have the information, either through the fault
of the Bancorp’s systems, employees or counterparties, or where
such information was intercepted or otherwise compromised by
third parties. The Bancorp may be subject to disruptions of its
operating systems arising from events that are wholly or partially
beyond the Bancorp’s control, which may include, for example,
security breaches; electrical or telecommunications outages; failures
of computer components or servers or other damage to the
Bancorp’s property or assets; natural disasters or severe weather
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’s
insurance may be inadequate to compensate for failures by third
parties upon which Fifth Third relies.
29 Fifth Third Bancorp
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 initiatives
at the same 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
initiatives. Fifth Third may have difficulty
various strategic
managing
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.
these organizational changes and executing
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 invests significant resources in information technology
system enhancements in order to provide functionality and security
at an appropriate level. Fifth Third may not be able to successfully
implement and integrate future system enhancements, or may not
be able to do so on a cost-effective basis. Such sanctions could
include fines and result in reputational harm and have other
negative effects. In addition, future system enhancements could
have higher than expected costs and/or result in operating
inefficiencies, which could increase the costs associated with the
implementation as well as ongoing operations. Failure to properly
utilize system enhancements that are implemented in the future
could result in impairment charges that adversely impact Fifth
Third’s financial condition and results of operations and could result
in significant costs
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.
to remediate or replace
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.
30 Fifth Third Bancorp
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,
adverse
consequences and Fifth Third could suffer unexpected losses that
may affect its financial condition or results of operations.
reputational damages
among other
Fifth Third may experience losses related to fraud, theft or
violence.
Fifth Third has experienced, and may experience again in the future,
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 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 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 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 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 OCC have the
authority to compel or restrict certain actions by the Bancorp and
the Bank. The Bancorp and the 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 that may be subject to prior approval include,
but are not limited to, increasing dividends or other capital
distributions by the Bancorp or the Bank, entering into a merger or
acquisition transaction, acquiring or establishing new branches, and
entering into certain new businesses.
Failure by the Bancorp or the Bank to meet the applicable
eligibility requirements for FHC status (including capital and
management requirements and that the 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
law enforcement, are also pursuing
regulatory agencies and
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 to
initiate
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.
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 the 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.
is subject to the
As a BHC and an FHC, the Bancorp
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.
Failure by the Bank to meet applicable capital requirements
could subject it to a variety of enforcement actions available to the
federal regulatory authorities. These include limitations on the ability
of the Bancorp to pay dividends and/or repurchase shares, the
issuance by the regulatory authority of a capital directive to increase
31 Fifth Third Bancorp
capital, loss of FHC status 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 expectations. As part of CCAR, the
Bancorp’s capital plan is generally 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. For more information,
refer to Regulation and Supervision—Dividends.
in effect,
Regulation of Fifth Third by the Commodity Futures Trading
Commission (“CFTC”) imposes additional operational and
compliance costs.
The CFTC and SEC are primarily responsible for regulation of the
U.S. derivatives markets. While most of the provisions related to
derivatives markets are now
several additional
requirements await final regulations from the relevant regulatory
agencies for derivatives, including the CFTC and the SEC. As a
result of this regulatory regime, the CFTC has a meaningful
supervisory role with respect to some of Fifth Third’s businesses. In
2014, the Bank provisionally registered as a swap dealer with the
CFTC and became subject to certain requirements, including real
time trade reporting and robust record keeping requirements,
business conduct
(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 certain swaps designated by the relevant
regulatory agencies as required to be cleared. Fifth Third’s
derivatives activity is also subject to the U.S. banking regulators’
margin and segregation requirements for uncleared swaps. These
requirements collectively impose implementation and ongoing
compliance burdens on Fifth Third and introduce additional legal
risk, including as a result of antifraud and anti-manipulation
provisions and private rights of action. These rules 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. For more information, refer to
Regulation and Supervision—Derivatives.
requirements
Deposit insurance premiums levied against the 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 the Bank. Future deposit
premiums paid by the Bank depend on FDIC rules, which are
subject to change, the level of the DIF and the magnitude and cost
of future bank failures. The 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
32 Fifth Third Bancorp
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 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 (“ARRC”),
selected and the Federal Reserve Bank of New York started in May
2018 to publish the Secured Overnight Finance Rate (“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 (“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:
•
•
•
•
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 rates, or other
securities or financial 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
counterparties
litigation or other actions with
and
interpretation
in disputes,
regarding
the
•
enforceability of certain fallback language in LIBOR-based
securities; and
require the transition to or development of appropriate
systems and analytics
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.
to effectively
transition
The manner and impact of this transition, as well as the effect
of these developments on Fifth Third’s funding costs, loan and
investment
asset-liability
management, and business, is uncertain.
securities portfolios,
trading
and
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.
increases
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 mortgage servicing rights (“MSR”) can increase
through
in fair value. When rates fall, mortgage
originations tend to increase and the value of MSRs tends to
decline, also with some offsetting revenue effect. Even though the
origination of mortgage loans can act as a “natural hedge,” the
hedge is not perfect, either in amount or timing. For example, the
negative effect on revenue from a decrease in the fair value of
residential MSRs is immediate, but any offsetting revenue benefit
from more originations and the MSRs relating to the new loans
would accrue over time. It is also possible that even if interest rates
were to fall, mortgage originations may also fall or any increase in
33 Fifth Third Bancorp
mortgage originations may not be enough to offset the decrease in
the MSRs value caused by the lower rates.
Fifth Third typically uses derivatives and other instruments to
hedge its mortgage banking interest rate risk. Fifth Third generally
does not hedge all of its risks and the fact that Fifth Third attempts
to hedge any of the risks does not mean Fifth Third will be
successful. Hedging is a complex process, requiring sophisticated
models and constant monitoring. Fifth Third may use hedging
instruments tied to U.S. Treasury rates, LIBOR or Eurodollars that
may not perfectly correlate with the value or income being hedged.
Fifth Third could incur significant losses from its hedging activities.
There may be periods where Fifth Third elects not to use derivatives
and other instruments to hedge mortgage banking interest rate risk.
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 the outcome of legal proceedings, amounts
accrued may not represent the ultimate loss to Fifth Third from the
legal proceedings in question. Thus, Fifth Third’s ultimate losses
may be higher, and possibly significantly so, than the amounts
accrued for legal loss contingencies, which could adversely affect
Fifth Third’s results of operations.
LEGAL RISKS
in
to
time
requests,
Fifth Third and/or its affiliates are or may become involved
from time to time in information-gathering 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 regulatory agencies and 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. Furthermore, 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,
limitation, adverse
including without
judgments, settlements, fines, penalties, injunctions or other actions,
amendments and/or restatements of Fifth Third’s SEC filings
and/or financial statements, as applicable, and/or determinations of
material weaknesses in its disclosure controls and procedures. In
addition, responding to information-gathering requests, reviews,
investigations and proceedings, regardless of the ultimate outcome
of the matter, could be time-consuming and expensive.
Like other large financial institutions and companies, Fifth
Third is also subject to risk from potential employee misconduct,
including non-compliance with policies and improper use or
disclosure of confidential information. Substantial legal liability or
significant regulatory or other enforcement action against Fifth
Third could materially adversely affect its business, financial
condition or results of operations and/or cause significant
reputational harm to its business. The outcome of lawsuits and
34 Fifth Third Bancorp
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
enforcement
environment makes it difficult to estimate probable losses, which
can lead to substantial disparities between legal reserves and actual
settlements or penalties.
settlements. The uncertain
regulatory
For further information on specific legal and regulatory
proceedings, refer to Note 20 of the Notes to Consolidated
Financial Statements.
trust,
investor or
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 government-sponsored enterprises (“GSE”) 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
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.
insurer, or
reimburse
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, investment
advisors and specialty 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, talent and price.
in customer preferences, regulation, changes
This increasingly competitive environment is primarily a result
of changes
in
technology and product delivery systems, as well as the accelerating
pace of consolidation among financial service providers. Rapidly
changing technology and consumer preferences may require Fifth
Third to effectively implement new technology-driven products and
services in order to compete and meet customer demands. Fifth
Third may not be able to do so or be successful in marketing these
products and services to its customers. As a result, Fifth Third’s
ability to effectively compete to retain or acquire new business may
be impaired, and its business, financial condition or results of
operations, may be adversely affected.
Fifth Third may make strategic investments and may expand an
existing line of business or enter into new lines of business to
remain competitive. If Fifth Third’s chosen strategies 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 1,149 full-service
banking centers and 25 parcels of land held for the development of
future banking centers of which 9 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 banking, and in-
branch self-service technologies including automatic teller machines
and other equipment, as well as changing customer preferences for
these other methods of accessing Fifth Third’s products and
services, could affect the value of Fifth Third’s branch network or
other retail distribution assets and may cause it to change its retail
distribution strategy, close and/or sell certain branches or parcels of
land held for development and restructure or reduce its remaining
branches and work force. Further advances in technology and/or
changes in customer preferences could have additional changes in
Fifth Third’s retail distribution strategy and/or branch network.
These actions could lead to losses on these assets or could adversely
impact the carrying value of other long-lived assets and may lead to
increased expenditures to renovate and reconfigure remaining
branches or to otherwise reform its retail distribution channel.
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. Acquisition or
investment targets may lose customers 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.
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
to economic downturns,
dislocations in capital markets and competitive pressures.
susceptible
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 or pricing of such sale 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
financial
accounting and reporting standards that govern the preparation of
regulatory agencies, periodically change
the
35 Fifth Third Bancorp
Fifth Third’s consolidated financial statements. For example, in June
2016, the FASB issued a new current expected credit loss rule,
CECL, 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, may fail to predict outcomes accurately, and/or may
overstate or understate certain effects. As a result of these potential
failures, Fifth Third may not adequately prepare for future events
and may suffer losses or other setbacks due to these failures.
Also, information Fifth Third provides to the public or to its
regulators based on models could be inaccurate or misleading due to
inadequate design or implementation, for example. Decisions that
its regulators make, including those related to capital distributions to
its shareholders, could be affected adversely due to the perception
that the models used to generate the relevant information are
unreliable or inadequate.
The preparation of financial statements requires Fifth Third to
make subjective determinations and use estimates that may
vary from actual results and materially impact its results of
operations or financial position.
The preparation of consolidated financial statements in conformity
with U.S. GAAP requires management to make significant estimates
that affect the financial statements. If new information arises that
results in a material change to a reserve amount, such a change
could result in a change to previously announced financial results.
Refer to the Critical Accounting Policies section of Management’s
Discussion and Analysis of Financial Condition and Results of
Operation for more information regarding management’s significant
estimates.
Weather-related events, other natural disasters, or health
emergencies may have an effect on the performance of Fifth
Third’s loan portfolios, 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.
Additionally, the impact of widespread health emergencies may
adversely impact Fifth Third’s results of operations, such as the
potential impact from the recent outbreak of the coronavirus, which
originated in Wuhan, Hubei Province, China but has now spread to
other countries. If its borrowers are adversely affected, or if the
virus leads to a widespread health emergency that impacts Fifth
Third employees, vendors or economic growth generally, Fifth
36 Fifth Third Bancorp
Third’s financial condition and results of operations could be
adversely affected, despite having no direct operations in China.
Societal responses to climate change could adversely affect
Fifth Third’s business and performance, including indirectly
through impacts on Fifth Third’s customers.
Concerns over the long-term impacts of climate change have led
and may continue to lead to governmental efforts around the world
to mitigate those impacts. Consumers and businesses also may
change their behavior on their own as a result of these concerns.
Fifth Third and its customers will need to respond to new laws and
regulations, as well as consumer and business preferences resulting
from climate change concerns. Fifth Third and its customers may
face cost increases, asset value reductions, operating process
changes, and the like. The impact on Fifth Third’s customers will
likely vary depending on their specific attributes, including reliance
on or role in carbon intensive activities. Fifth Third could
experience a drop in demand for Fifth Third’s products and
services, particularly in certain sectors. In addition, Fifth Third
could face reductions in creditworthiness on the part of some
customers or in the value of assets securing loans. Fifth Third’s
efforts to take these risks into account in making lending and other
decisions,
increasing business relationships with
climate-friendly companies, may not be effective in protecting Fifth
Third from the negative impact of new laws and regulations or
changes in consumer or business behavior.
including by
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, investments 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. Social activists are
increasingly targeting financial firms with public criticism for their
relationships with clients that are engaged in certain sensitive
industries, including businesses whose products are or are perceived
to be harmful to health or the social good. Activist criticism of Fifth
Third’s relationships with clients in sensitive industries could
potentially engender dissatisfaction among clients, customers,
investors and employees with how Fifth Third addresses social
concerns through business activities which could negatively affect
our reputation.
Potential noncompliance with evolving federal and state laws
governing cannabis-related businesses (CRBs) could subject
us to liabilities.
While 44 states have legalized some form of marijuana, it remains a
Class 1 controlled substance under federal law. Hemp is no longer
classified as a Class 1 controlled substance under federal law;
however, the regulatory scheme governing hemp has not been fully
developed. Further, the “naked eye” cannot distinguish between
legal hemp and illegal marijuana under federal law. There are a
number of states where Fifth Third operates with laws permitting
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 the Bank are
located on Fountain Square Plaza in downtown Cincinnati, Ohio in
a 32-story office tower, a five-story office building with an attached
parking garage and a separate ten-story office building known as the
Fifth Third Center, the William S. Rowe Building and the 530
Building, respectively. The Bancorp’s main operations campus is
located in Cincinnati, Ohio, and is comprised of a three-story
building with an attached parking garage known as the George A.
Schaefer, Jr. Operations Center, and a two-story building with
surface parking known as the Madisonville Office Building. The
Bank owns 100% of these buildings.
At December 31, 2019, the Bancorp, through its banking and
non-banking subsidiaries, operated 1,149 banking centers, of which
811 were owned, 233 were leased and 105 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 20 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.
medicinal or recreational marijuana, which increases the probability
of individuals or entities using bank products or services to sell,
distribute, cultivate, manufacture or profit from marijuana. This,
and the divergence and continued changes in laws governing CRBs
results in challenges to us to maintain compliance with them,
particularly in connection with our commercial and consumer
lending and capital markets businesses. While we monitor regulatory
developments in this area to avoid noncompliance, we cannot
assure you that we will be at all times fully compliant with CRB-
related laws, which could result in significant fines, penalties or
other losses.
RISKS RELATED TO MERGER WITH MB FINANCIAL,
INC.
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. (“MB Financial”). 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 continue 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 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.
Employee attrition 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.
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, the acquisition may 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.
37 Fifth Third Bancorp
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
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 2, 2020 are listed below
along with their business experience during the past five years:
Greg D. Carmichael, 58. 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
to September 2012 and Chief
Bancorp from June 2006
Information Officer of the Bancorp from June 2003 to June 2006.
Lars C. Anderson, 58. Executive Vice President and Vice
Chairman of Commercial Banking Strategic Growth Initiatives
since January 2020. Previously, Mr. Anderson was Executive
Vice President and Chief Operating Officer of the Bancorp from
August 2015 to January 2020. Mr. Anderson was Vice Chairman
of Comerica Incorporated and Comerica Bank since December
2010.
Mark D. Hazel, 54. 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.
Kevin P. Lavender, 58. Executive Vice President and Head of
Commercial Banking of the Bancorp since January 2020. Mr.
Lavender has been Executive Vice President of the Bank since
2016 and was the Head of Corporate Banking from 2016 to
January 2020. Previously, Mr. Lavender was Senior Vice
President and Managing Director of Large Corporate and
Specialized Lending from January 2009 to 2016 and the Senior
Vice President and Head of National Healthcare Lending from
December 2005 to January 2009.
James C. Leonard, 50. Executive Vice President and Chief Risk
Officer since January 2020. Mr. Leonard has been an Executive
Vice President of the Bancorp since September 2015 and was the
Treasurer of the Bancorp from October 2013 to January 2020.
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, 55. 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, 47. 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, 50. 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, 41. Executive Vice President and Head of
Consumer Bank, Payments, and Strategy of the Bancorp 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.
Tayfun Tuzun, 55. 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, 60. Executive Vice President, Chief
Legal Officer, and Corporate Secretary of the Bancorp 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 4 of the Notes to Consolidated
Financial Statements, which is incorporated herein by reference. Additionally, as of December 31, 2019, the Bancorp had 37,873
shareholders of record.
Issuer Purchases of Equity Securities
Period
October 2019
November 2019
December 2019
Total
(a)
Total Number
of Shares
Purchased(a)
9,243,819
141,014
1,229,677
10,614,510
$
$
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)
29.53
30.08
28.94
29.47
9,020,163
-
1,149,121
10,169,284
77,586,469
77,586,469
76,437,348
76,437,348
Includes 445,226 shares repurchased during the fourth quarter of 2019 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 second quarter of 2019, 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 20 million shares remained available for repurchase by the Bancorp.
See further discussion on share repurchase transactions and stock-based compensation in Note 25 and Note 26 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 2014 through 2019, and 2009
through 2019, respectively, compared to the S&P 500 Stock and the S&P Banks indices.
FIFTH THIRD BANCORP VS. MARKET INDICES
40 Fifth Third Bancorp
2019 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
Business Combination
Restrictions on Cash, Dividends and Other Capital Actions
Investment Securities
Loans and Leases
Credit Quality and the Allowance for Loan and Lease Losses
Bank Premises and Equipment
Operating Lease Equipment
Lease Obligations – Lessee
Goodwill
Intangible Assets
Variable Interest Entities
Sales of Receivables and Servicing Rights
Derivative Financial Instruments
Other Assets
Short-Term Borrowings
Income Taxes
112 Long-Term Debt
122 Commitments, Contingent Liabilities and Guarantees
122 Legal and Regulatory Proceedings
125 Related Party Transactions
126
128 Retirement and Benefit Plans
130 Accumulated Other Comprehensive Income
138 Common, Preferred and Treasury Stock
138
139 Other Noninterest Income and Other Noninterest Expense
141 Earnings Per Share
141 Fair Value Measurements
142 Regulatory Capital Requirements and Capital Ratios
145 Parent Company Financial Statements
147 Business Segments
152
Subsequent Event
152
Stock-Based Compensation
42
43
44
48
50
50
53
61
70
72
78
79
93
98
99
100
101
103
104
105
107
108
109
110
111
153
156
160
162
164
166
170
172
174
178
179
180
189
190
192
196
Management’s Assessment 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
197
198
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
BOLI: Bank Owned Life Insurance
BPO: Broker Price Opinion
bps: Basis Points
CCAR: Comprehensive Capital Analysis and Review
CDC: Fifth Third Community Development Corporation
CECL: Current Expected Credit Loss
CET1: Common Equity Tier 1
CFPB: United States Consumer Financial Protection Bureau
C&I: Commercial and Industrial
DCF: Discounted Cash Flow
DTCC: Depository Trust & Clearing Corporation
DTI: Debt-to-Income Ratio
ERM: Enterprise Risk Management
ERMC: Enterprise Risk Management Committee
EVE: Economic Value of Equity
FASB: Financial Accounting Standards Board
FDIC: Federal Deposit Insurance Corporation
FHA: Federal Housing Administration
FHLB: Federal Home Loan Bank
FHLMC: Federal Home Loan Mortgage Corporation
FICO: Fair Isaac Corporation (credit rating)
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
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 Ratio
MD&A: Management’s Discussion and Analysis of Financial
Condition and Results of Operations
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
PCI: Purchase Credit Impaired
PSA: Performance Share Award
RCC: Risk Compliance Committee
ROU: Right-of-Use
RSA: Restricted Stock Award
RSF: Required Stable Funding
RSU: Restricted Stock Unit
SAR: Stock Appreciation Right
SBA: Small Business Administration
SEC: United States Securities and Exchange Commission
SOFR: Secured Overnight Financing Rate
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
$
$
2019
2016
2017
2015
2018
2.00
1.97
0.52
18.31
20.10
3.11
3.06
0.74
23.07
23.53
1.92
1.91
0.53
19.62
26.97
3.38
3.33
0.94
27.41
30.74
2.86
2.81
0.60
21.43
30.34
4,140
4,156
2,790
6,946
207
3,958
2,193
2,118
3,533
3,554
3,003
6,557
400
3,643
1,685
1,610
3,615
3,640
2,696
6,336
366
3,737
1,547
1,472
4,797
4,814
3,536
8,350
471
4,660
2,512
2,419
3,798
3,824
3,224
7,048
261
3,782
2,180
2,105
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 credit losses(c)
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 (including AOCI)(b)
Return on average tangible common equity (excluding AOCI)(b)
Dividend payout
Average total Bancorp shareholders' equity as a percent of average assets
Tangible common equity as a percent of tangible assets (excluding AOCI)(b)
Net interest margin(a)(b)
Net interest rate spread(a)(b)
Efficiency(a)(b)
Credit Quality
Net losses charged-off
Net losses charged-off as a percent of average portfolio loans and leases
ALLL as a percent of portfolio loans and leases
Allowance for credit losses as a percent of portfolio loans and leases(d)
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(e)
Core deposits(f)
Wholesale funding(g)
Bancorp shareholders’ equity
Regulatory Capital Ratios
CET1 capital(h)
Tier I risk-based capital(h)
Total risk-based capital (h)
Tier I leverage
(a) Amounts presented on an FTE basis. The FTE adjustment for the years ended December 31, 2019, 2018, 2017, 2016 and 2015 was $17, $16, $26, $25 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 provision for credit losses is the sum of the provision for loan and lease losses and the provision for (benefit from) the reserve for unfunded commitments.
(d) The allowance for credit losses is the sum of the ALLL and the reserve for unfunded commitments.
(e)
(f)
(g)
(h) Under the U.S. banking agencies’ Basel III Final Rule, assets and credit equivalent amounts of off-balance sheet exposures are calculated according to the standardized approach for risk-weighted
Includes demand deposits, interest checking deposits, savings deposits, money market deposits and foreign office deposits.
Includes transaction deposits and other time deposits.
Includes certificates $100,000 and over, other deposits, federal funds purchased, other short-term borrowings and long-term debt.
1.53 %
13.1
17.1
18.2
27.8
12.14
8.44
3.31
2.92
55.8
1.55
13.9
16.6
16.9
21.0
11.69
8.83
3.03
2.76
53.7
1.09
9.7
11.6
12.2
27.6
11.57
8.77
2.88
2.66
59.0
1.20
11.2
13.5
13.9
26.0
11.24
8.50
2.88
2.69
55.6
94,320
31,965
142,173
95,371
99,381
21,813
16,453
93,339
30,245
139,999
95,244
99,295
20,210
15,742
92,731
33,562
140,527
96,052
99,823
20,360
16,424
107,794
37,610
163,936
111,130
116,600
22,451
19,902
1.54
14.5
17.5
16.7
23.8
11.23
8.71
3.22
2.87
57.0
93,876
35,029
142,183
97,914
102,020
20,573
15,970
9.75 %
10.99
13.84
9.54
369
0.35 %
1.10
1.23
0.62
298
0.32
1.30
1.48
0.53
10.39
11.50
15.02
9.90
362
0.39
1.36
1.54
0.80
10.61
11.74
15.16
10.01
330
0.35
1.16
1.30
0.41
446
0.48
1.37
1.52
0.70
10.24
11.32
14.48
9.72
9.82
10.93
14.13
9.54
$
$
assets. The resulting values are added together in the Bancorp’s total risk-weighted assets.
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,
2019, net interest income on an FTE basis and noninterest income
provided 58% and 42% 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.
income
Noninterest
is derived from corporate banking
revenue, service charges on deposits, wealth and asset management
revenue, card and processing revenue, mortgage banking net
revenue, net securities gains or losses and other noninterest income.
Noninterest expense includes personnel costs, technology and
communication costs, net occupancy expense, card and processing
expense, equipment expense and other noninterest expense.
Acquisition of MB Financial, Inc.
On March 22, 2019, Fifth Third Bancorp completed its acquisition
of MB Financial, Inc. in a stock and cash transaction valued at
approximately $3.6 billion. MB Financial, Inc. was headquartered in
Chicago, Illinois with reported assets of approximately $20 billion
and 86 branches (91 locations) as of December 31, 2018 and was
the holding company of MB Financial Bank, N.A. The acquisition
resulted in a combined company with a larger Chicago market
presence and core deposit funding base while also building scale in a
strategically important market.
Under the terms of the agreement, the Bancorp acquired 100%
of the common stock of MB Financial, Inc. In exchange, common
shareholders of MB Financial, Inc. received 1.45 shares of Fifth
Third Bancorp common stock and $5.54 in cash for each share of
MB Financial, Inc. common stock, for a total value per share of
$42.49, based on the $25.48 closing price of Fifth Third Bancorp’s
common stock on March 21, 2019. Upon closing of the transaction,
MB Financial, Inc. became a subsidiary of the Bancorp. However,
MB Financial, Inc.’s 6.00% non-cumulative Series C perpetual
preferred stock with a fair value of $197 million remained
outstanding and was recognized as a noncontrolling interest on the
Consolidated Balance Sheets. Through its ownership of all of the
common stock, the Bancorp controlled 95% of the voting equity
interests in MB Financial, Inc. with the remainder attributable to the
preferred shareholders’ noncontrolling interest.
On June 24, 2019, MB Financial, Inc. entered into an
Agreement and Plan of Merger with the Bancorp to provide for the
merger of MB Financial, Inc. with and into the Bancorp, with the
Bancorp as the surviving corporation. A special meeting of MB
Financial, Inc.’s stockholders was held on August 23, 2019 at which
the holders of MB Financial, Inc.’s common stock and preferred
stock, voting together as a single class, approved the merger. In the
merger, each outstanding share of MB Financial, Inc.’s preferred
stock was converted into the right to receive one share of a newly
created series of preferred stock of the Bancorp having substantially
the same terms as the MB Financial, Inc. preferred stock. See the
Preferred Stock Transactions section for additional information.
The acquisition of MB Financial, Inc. constituted a business
combination and was accounted for under the acquisition method
of accounting. Accordingly, the assets acquired, liabilities assumed
and noncontrolling interest recognized were recorded at their
estimated fair values as of the acquisition date. These fair value
estimates are considered preliminary as of December 31, 2019. Fair
value estimates, including loans and leases, intangible assets, bank
premises and equipment, certain tax-related matters and goodwill,
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
are subject to change for up to one year after the acquisition date as
additional information becomes available.
Bank Merger
On May 3, 2019 MB Financial Bank, N.A. merged with and into
Fifth Third Bank (now Fifth Third Bank, National Association),
with Fifth Third Bank, National Association as the surviving entity.
Fifth Third Bank, National Association is an indirect subsidiary of
Fifth Third Bancorp.
Worldpay Holding, LLC and Worldpay, Inc. Transactions
its remaining
On March 18, 2019, the Bancorp exchanged
10,252,826 Class B Units of Worldpay Holding, LLC for 10,252,826
shares of Class A common stock of Worldpay, Inc., and
subsequently sold those shares. As a result of this transaction, the
Bancorp recognized a gain of $562 million in other noninterest
income during the first quarter of 2019. As a result of the sale, the
Bancorp no longer beneficially owns any of Worldpay, Inc.’s equity
securities.
During the fourth quarter of 2019, the Bancorp entered into an
agreement with Fidelity National Information Services, Inc. and
Worldpay, Inc. under which Worldpay, Inc. may be obligated to pay
up to approximately $366 million to the Bancorp to terminate and
settle certain remaining TRA cash flows, totaling an estimated $720
million, upon the exercise of certain call options by Worldpay, Inc.
or certain put options by the Bancorp (“Worldpay, Inc. TRA
transaction”). If exercised, certain of the obligations would be
settled with four quarterly payments beginning in April 2020, a
second set of the obligations would be settled with four quarterly
payments beginning in April 2022, and a third set of the obligations
would be settled with four quarterly payments beginning in April
2023. In 2019, the Bancorp recognized a gain of approximately $345
million in other noninterest income associated with these options.
This agreement did not impact the TRA payment recognized in the
fourth quarter of 2019.
Accelerated Share Repurchase Transactions
The Bancorp entered into or settled a number of accelerated share
repurchase transactions during the year ended December 31, 2019.
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 the repurchase agreements. For more information on the
accelerated share repurchase program, refer to Note 25 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 year ended December 31, 2019,
refer to Table 1.
TABLE 1: SUMMARY OF ACCELERATED SHARE REPURCHASE TRANSACTIONS
Shares Repurchased on
Repurchase Date
Shares Received from
Total Shares
Forward Contract Settlement Repurchased
Repurchase Date
March 27, 2019(a)
April 29, 2019(b)
August 7, 2019
August 9, 2019(b)
October 25, 2019
(a) This accelerated share repurchase transaction consisted of two supplemental confirmations each with a notional amount of $456.5 million.
(b) This accelerated share repurchase transaction consisted of two supplemental confirmations each with a notional amount of $100 million.
Amount ($ in millions)
913
200
100
200
300
31,779,280
6,015,570
3,150,482
6,405,426
9,020,163
2,026,584
1,217,805
694,238
1,475,487
1,149,121
Settlement Date
33,805,864
June 28, 2019
7,233,375 May 23, 2019 - May 24, 2019
August 16, 2019
3,844,720
August 28, 2019
7,880,913
December 17, 2019
10,169,284
Open Market Share Repurchase Transactions
Between July 29, 2019 and July 30, 2019, the Bancorp repurchased
1,667,735 shares, or approximately $50 million, of its outstanding
common stock through open market repurchase transactions, which
settled between July 31, 2019 and August 1, 2019. For more
information on the open market share repurchase program, refer to
Note 25 of the Notes to Consolidated Financial Statements.
Preferred Stock Transactions
On August 26, 2019, the Bancorp issued 200,000 shares of 6.00%
non-cumulative perpetual Class B preferred stock, Series A. Each
preferred share has a $1,000 liquidation preference. These shares
were issued to the holders of MB Financial, Inc.’s 6.00% non-
cumulative perpetual preferred stock, Series C, in conjunction with
the merger of MB Financial, Inc. with and into Fifth Third Bancorp.
This transaction resulted in the elimination of the noncontrolling
interest in MB Financial, Inc. which was previously reported in the
Bancorp’s Consolidated Financial Statements. The newly issued
shares of Class B preferred stock, Series A were recognized by the
Bancorp at the carrying value previously assigned to the MB
Financial, Inc. Series C preferred stock prior to the transaction.
On September 17, 2019, the Bancorp issued in a registered
public offering 10,000,000 depositary shares, representing 10,000
shares of 4.95% non-cumulative perpetual preferred stock, Series K,
for net proceeds of approximately $242 million. Each preferred
share has a $25,000 liquidation preference. Subject to any required
regulatory approval, the Bancorp may redeem the Series K preferred
shares at its option (i) in whole or in part, on any dividend payment
date on or after September 30, 2024 and (ii) in whole, but not in
part, at any time following a regulatory capital event. The Series K
preferred shares are not convertible into Bancorp common shares
or any other securities. For more information on preferred stock
transactions, refer to Note 25 of the Notes to Consolidated
Financial Statements.
Senior Notes Offerings
On January 25, 2019, the Bancorp issued and sold $1.5 billion of
senior notes to third-party investors. The senior notes bear a fixed-
rate of interest of 3.65% per annum. The notes are unsecured,
senior obligations of the Bancorp. Payment of the full principal
amounts of the notes is due upon maturity on January 25, 2024.
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 1, 2019, the Bank issued and sold, under its bank
notes program, $300 million in unsecured senior floating-rate bank
notes due on February 1, 2022. Interest on the floating-rate notes is
three-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 up to, but excluding, the redemption date.
On October 28, 2019, the Bancorp issued and sold $750
million of senior notes to third-party investors. The senior notes
45 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
bear a fixed-rate of interest of 2.375% per annum. The notes are
unsecured, senior obligations of the Bancorp. Payment of the full
principal amounts of the notes is due upon maturity on January 28,
2025. These notes will be redeemable at the Bancorp’s option, in
whole or in part, at any time or from time to time, on or after April
25, 2020, and prior to December 29, 2024, in each case at a
redemption price, plus accrued and unpaid interest thereon, if any,
to, but excluding, the redemption date, equal to the greater of (i)
100% of the aggregate principal amount of the notes being
redeemed on that redemption date; and (ii) the sum of the present
values of the remaining scheduled payments of principal and
interest on the notes being redeemed that would be due if the notes
to be redeemed matured on December 29, 2024 discounted to the
redemption date on a semi-annual basis at the applicable treasury
rate plus 15 bps. Additionally, 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. For
additional information on these senior notes offerings, refer to Note
18 of the Notes to Consolidated Financial Statements.
For further information on a subsequent event related to long-
term debt, refer to Note 33 of the Notes to Consolidated Financial
Statements.
Automobile Loan Securitization
In a securitization transaction that occurred in 2019, the Bancorp
transferred approximately $1.43 billion in automobile loans to a
bankruptcy remote trust which subsequently issued approximately
$1.37 billion of asset-backed notes, of which approximately $68
million of the asset-backed notes were retained by the Bancorp,
resulting in approximately $1.3 billion of outstanding notes included
in long-term debt in the Consolidated Balance Sheets. Additionally,
the bankruptcy remote trust was deemed to be a VIE and the
Bancorp, as the primary beneficiary, consolidated the VIE. The
third-party holders of the asset-backed notes do not have recourse
to the general assets of the Bancorp.
GS Holdings and GreenSky, Inc. Transactions
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 were exchangeable
on a one-to-one basis for Class A common stock or cash.
During the first quarter of 2019, all of the Bancorp’s units in
GS Holdings were converted for Class A common stock on a one-
to-one basis. The Bancorp sold all of its Class A common stock
during 2019 and, therefore, no longer beneficially owns any of
GreenSky, Inc.’s equity securities.
Conversion to a National Bank Charter
On September 10, 2019, Fifth Third Bancorp announced that Fifth
Third Bank had received approval from the OCC to convert from
an Ohio state-chartered bank to a national bank. The Bank
converted to a national bank charter on November 14, 2019. As a
result of the conversion, the Bank is subject to supervision and
regulation by the OCC and subject to the National Bank Act and is
no longer subject to supervision and regulation by the Ohio
Division of Financial Institutions. Additionally, while the FRB is no
longer the Bank’s primary federal regulator, the Bank remains a
member of the Federal Reserve System.
46 Fifth Third Bancorp
LIBOR Transition
In July 2017, the Chief Executive of the United Kingdom Financial
regulates LIBOR,
(the “FCA”), which
Conduct Authority
announced that FCA will stop persuading or compelling banks to
submit rates for the calculation of LIBOR to the administrator of
LIBOR after 2021. Since then, central banks around the world,
including the Federal Reserve, have commissioned working groups
of market participants and official sector representatives with the
goal of finding suitable replacements for LIBOR. The Bancorp has
substantial exposure
its
commercial
lending, commercial deposits, business banking,
consumer lending, capital markets lines of business and corporate
treasury function. It is expected that a transition away from the
widespread use of LIBOR to alternative reference rates will occur
over the course of the next few years. Although the full impact of
such reforms and actions remains unclear, the Bancorp is preparing
to transition from LIBOR to these alternative reference rates.
to LIBOR-based products within
The Bancorp’s transition plan includes a number of key work
streams, including continued engagement with central bank and
industry working groups and regulators, active client engagement,
comprehensive review of legacy documentation, internal operational
readiness, and risk management, among other things, to facilitate
the transition to alternative reference rates.
including
The transition away from LIBOR is expected to be gradual and
complicated. There remain a number of unknown factors regarding
the transition from LIBOR that could impact the Bancorp’s
business, including, for example, the pace of the transition to
replacement rates,
industry coalescence around an
alternative benchmark, such as SOFR, our ability to identify
exposures to LIBOR across our business lines, the specific terms
and parameters for any potential alternative reference rates, the
prices of and the liquidity of trading markets for products based on
the alternative reference rates, our ability to transition to and
develop appropriate systems and analytics for one or more
alternative reference rates, our ability to maintain contractual
continuity and our ability to identify and remediate any operational
issues. For a further discussion of the various risks the Bancorp
faces in connection with the expected replacement of LIBOR on its
operations, see “Risk Factors—Market Risks—The replacement of
LIBOR could adversely affect Fifth Third’s revenue or expenses
and the value of those assets or obligations.” in Item 1A. Risk
Factors of this Annual Report on Form 10-K.
Legislative and Regulatory Developments
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, OCC and the FDIC proposed to remove
the application of the LCR regulations and the NSFR from certain
BHCs that qualify under the proposal as “Category IV” institutions,
primarily those BHCs with consolidated assets between $100 billion
and $250 billion, including Fifth Third Bancorp. On October 10,
2019, the Board of Governors of the FRB announced it finalized
the rules that tailor its regulations for banks to more closely match
their risk profile. Fifth Third, as a Category IV institution, will no
longer be subject to the LCR regulations and the NSFR regulations.
The final rules were effective December 31, 2019.
In August and September 2019, the five regulatory agencies
charged with
implementing the Volcker Rule released final
amendments to the Volcker Rule regulations that tailor the Volcker
Rule’s compliance requirements to the amount of a firm’s trading
activity, revise the definition of a trading account, clarify certain key
provisions in the Volcker Rule and simplify the information that
covered entities are required to provide to regulatory agencies. The
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Bancorp believes the amendments to the Volcker Rule are not
material to its business operations.
$
TABLE 2: CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ in millions, except per share data)
2018
Interest income (FTE)(a)
5,199
Interest expense
1,043
Net Interest Income (FTE)(a)
4,156
Provision for credit losses
207
Net Interest Income After Provision for Credit Losses (FTE)(a)
3,949
Noninterest income
2,790
Noninterest expense
3,958
Income Before Income Taxes (FTE)(a)
2,781
Fully taxable equivalent adjustment
16
Applicable income tax expense
572
Net Income
2,193
Less: Net income attributable to noncontrolling interests
-
Net Income Attributable to Bancorp
2,193
Dividends on preferred stock
75
Net Income Available to Common Shareholders
2,118
Earnings per share - basic
3.11
Earnings per share - diluted
3.06
Cash dividends declared per common share
0.74
(a) These are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.
2019
6,271
1,457
4,814
471
4,343
3,536
4,660
3,219
17
690
2,512
-
2,512
93
2,419
3.38
3.33
0.94
$
$
$
$
2017
4,515
691
3,824
261
3,563
3,224
3,782
3,005
26
799
2,180
-
2,180
75
2,105
2.86
2.81
0.60
2016
4,218
578
3,640
366
3,274
2,696
3,737
2,233
25
665
1,543
(4)
1,547
75
1,472
1.92
1.91
0.53
2015
4,049
495
3,554
400
3,154
3,003
3,643
2,514
21
814
1,679
(6)
1,685
75
1,610
2.00
1.97
0.52
Earnings Summary
The Bancorp’s net income available to common shareholders for
the year ended December 31, 2019 was $2.4 billion, or $3.33 per
diluted share, which was net of $93 million in preferred stock
dividends. 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.
Net interest income on an FTE basis (non-GAAP) was $4.8
billion and $4.2 billion for the years ended December 31, 2019 and
2018, respectively. Net interest income was positively impacted by
increases in average commercial and industrial loans and average
commercial mortgage loans from the year ended December 31,
2018. Additionally, net interest income benefited from an increase in
yields on average loans and leases from the year ended December
31, 2018. These positive impacts were partially offset by increases in
both the rates paid on and balances of average interest-bearing core
deposits and average long-term debt as well as an increase in average
certificates $100,000 and over for the year ended December 31,
2019 compared to the year ended December 31, 2018. Additionally,
net interest income was negatively impacted by the August 2019,
September 2019 and October 2019 decisions of the FOMC to lower
the target range of the federal funds rate. Net interest income for
the year ended December 31, 2019 included $65 million of
amortization and accretion of premiums and discounts on acquired
loans and leases and assumed deposits and long-term debt from
acquisitions. Net interest margin on an FTE basis (non-GAAP) was
3.31% for the year ended December 31, 2019 compared to 3.22%
for the year ended December 31, 2018.
Noninterest income increased $746 million for the year ended
December 31, 2019 compared to the year ended December 31, 2018
primarily due to increases in other noninterest income, corporate
banking revenue, mortgage banking net revenue and wealth and
asset management revenue. Other noninterest income increased
$337 million for the year ended December 31, 2019 compared to
the year ended December 31, 2018 primarily due to the recognition
of gains on the sale of Worldpay Inc. shares driven by the Bancorp’s
sale of shares during the first quarter of 2019, an increase in the
income from the TRA associated with Worldpay, Inc., an increase in
operating lease income and a decrease in the net losses on
disposition and impairment of bank premises and equipment. These
benefits were partially offset by the gain related to Vantiv, Inc.’s
acquisition of Worldpay Group plc. recognized during the first
quarter of 2018 as well as an increase in the loss on the swap
associated with the sale of Visa, Inc. Class B Shares. Corporate
banking revenue increased $132 million for the year ended
December 31, 2019 compared to the year ended December 31,
2018. The increase from the prior year was primarily driven by
increases in leasing business revenue, lease remarketing fees,
institutional sales revenue and business lending fees of $50 million,
$44 million, $26 million and $21 million, respectively. The increase
in leasing business revenue was driven by the acquisition of MB
Financial, Inc. These benefits were partially offset by a decrease of
$8 million in syndication fees from the year ended December 31,
2018. Mortgage banking net revenue increased $75 million for the
year ended December 31, 2019 compared to the year ended
December 31, 2018 primarily due to a $75 million increase in
origination fees and gains on loan sales due to the lower interest rate
environment. Wealth and asset management revenue increased $43
million for the year ended December 31, 2019 compared to the year
ended December 31, 2018 primarily due to an increase of $37
million in private client service fees. This increase was driven by
increased sales production and strong market performance as well as
the full-year benefit from acquisitions in 2018 and the acquisition of
MB Financial, Inc.
Noninterest expense increased $702 million for the year ended
December 31, 2019 compared to the year ended December 31, 2018
primarily due to increases in personnel costs, technology and
communications expense and other noninterest expense. Personnel
costs increased $303 million for the year ended December 31, 2019
compared to the year ended December 31, 2018 driven by $90
million in merger-related expenses for the year ended December 31,
2019, the addition of personnel costs from the acquisition of MB
Financial, Inc. and higher deferred compensation expense.
Technology and communications expense increased $137 million
for the year ended December 31, 2019 compared to the year ended
December 31, 2018 driven by $71 million in merger-related
expenses for the year ended December 31, 2019, as well as increased
investment in contemporizing information technology architecture,
mitigating information security risks and growth initiatives. Other
noninterest expense increased $209 million for the year ended
December 31, 2019 compared to the year ended December 31, 2018
47 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and included the impact of an increase of $23 million in merger-
related expenses related to the acquisition of MB Financial, Inc. as
well as increases in operating lease expense, intangible amortization
expense, losses and adjustments and loan and lease expense,
partially offset by a decrease in FDIC insurance and other taxes.
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 credit losses was $471 million and $207 million
for the years ended December 31, 2019 and 2018, respectively. Net
losses charged-off as a percent of average portfolio loans and leases
remained at 0.35% for both the years ended December 31, 2019 and
NON-GAAP FINANCIAL MEASURES
The following are non-GAAP measures which provide useful
insight to the reader of the Consolidated Financial Statements but
should be supplemental to primary U.S. GAAP measures and
should not be read in isolation or relied upon as a substitute for the
primary U.S. GAAP measures.
2018. At December 31, 2019, nonperforming portfolio assets as a
percent of portfolio loans and leases and OREO increased to 0.62%
compared to 0.41% at December 31, 2018. For further discussion
on credit quality, refer to the Credit Risk Management subsection of
the Risk Management section of MD&A.
Capital Summary
The Bancorp’s capital ratios exceed the “well-capitalized” guidelines
as defined by the U.S. banking agencies. As of December 31, 2019,
as calculated under the Basel III standardized approach, the CET1
capital ratio was 9.75%, the Tier I risk-based capital ratio was
10.99%, the Total risk-based capital ratio was 13.84% and the Tier I
leverage ratio was 9.54%.
The FTE basis adjusts for the tax-favored status of income
from certain loans and securities held by the Bancorp that are not
taxable for federal income tax purposes. The Bancorp believes this
presentation to be the preferred industry measurement of net
interest income as it provides a relevant comparison between
taxable and non-taxable amounts.
The following table reconciles the non-GAAP financial measures of net interest income on an FTE basis, interest income on an FTE basis, net
interest margin, net interest rate spread and the efficiency ratio to U.S. GAAP:
TABLE 3: NON-GAAP FINANCIAL MEASURES - FINANCIAL MEASURES AND RATIOS ON AN FTE BASIS
For the years ended December 31 ($ in millions)
Net interest income (U.S. GAAP)
Add: FTE adjustment
Net interest income on an FTE basis (1)
2019
4,797
17
4,814
$
$
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))
$
$
$
6,254
17
6,271
1,457
3,536
4,660
145,404
104,708
3.31 %
2.92
55.8
2018
2017
4,140
16
4,156
5,183
16
5,199
1,043
2,790
3,958
128,905
89,959
3.22
2.87
57.0
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
The Bancorp believes return on average tangible common equity is
an important measure for comparative purposes with other financial
institutions, but is not defined under U.S. GAAP, and therefore is
considered a non-GAAP financial measure. This measure is useful
for evaluating the performance of a business as it calculates the
return available to common shareholders without the impact of
intangible assets and their related amortization. The Bancorp also
measures average tangible common equity excluding AOCI. The
Bancorp believes this is a useful return measure as it calculates the
return available to common shareholders without the impact of
intangible assets, their related amortization as well as the volatility
primarily associated with fluctuations of unrealized gains and losses
on the Bancorp’s available-for-sale debt and other securities and
cash flow hedge derivatives.
48 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)
$
$
Average Bancorp shareholders' equity (U.S. GAAP)
Less: Average preferred stock
Average goodwill
Average intangible assets
Average tangible common equity, including AOCI (2)
Less: Average AOCI
Average tangible common equity, excluding AOCI (3)
Return on average tangible common equity, including AOCI (1) / (2)
Return on average tangible common equity, excluding AOCI (1) / (3)
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)
2019
2018
2,419
35
2,454
19,902
(1,470)
(3,888)
(169)
14,375
(875)
13,500
17.1 %
18.2
2,118
4
2,122
15,970
(1,331)
(2,462)
(29)
12,148
575
12,723
17.5
16.7
$
$
$
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.
2019
2018
$
$
$
$
21,203
(1,770)
(4,252)
(201)
(1,192)
13,788
1,770
15,558
169,369
(4,252)
(201)
(1,509)
163,407
16,250
(1,331)
(2,478)
(40)
112
12,513
1,331
13,844
146,069
(2,478)
(40)
142
143,693
9.52 %
8.44
9.63
8.71
49 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, 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, 2019.
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 7 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 and leases, TDRs and historical loss
rates are reviewed quarterly and adjusted as necessary based on
changing borrower and/or collateral conditions and actual
collection and charge-off experience. An unallocated allowance is
maintained
in estimating and
measuring losses when evaluating allowances for pools of loans and
leases.
to recognize
imprecision
the
Larger commercial loans and leases 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 or lease structure and other
50 Fifth Third Bancorp
to the Bancorp during 2019 and the expected impact of significant
accounting standards issued, but not yet required to be adopted.
factors when evaluating whether an individual loan or lease 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 Bancorp’s
evaluation of the borrower’s management. When individual loans
and leases are impaired, allowances are determined based on
management’s estimate of the borrower’s ability to repay the loan or
lease 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 and leases 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 and
leases 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 and leases
according to their internal risk grade. The risk grading system
utilized for allowance analysis purposes encompasses ten categories.
Homogenous loans 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
include
adjustments for delinquency trends, LTV trends, refreshed FICO
score trends and product mix.
loss rate factors
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,
geographic concentrations, estimated loss emergence period and
specific portfolio loans backed by enterprise valuations and private
equity sponsors. 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.
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
liabilities
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 provision for credit losses
in the Consolidated Statements of Income.
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. The Bancorp has elected to measure all existing
classes of its servicing rights at fair value at each reporting date with
changes in the fair value of servicing rights 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
and the weighted-average coupon rate, as applicable. The primary
risk of material changes to the value of the servicing rights resides in
the economic assumptions used,
the potential volatility
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 that provide additional
confirmation of the reasonableness of key assumptions utilized in
the internal OAS model. For additional information on servicing
rights, refer to Note 14 of the Notes to Consolidated Financial
Statements.
in
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.
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
December 31, 2019
December 31, 2018
$
$
Balance
40,446
24 %
890
1 %
Level 3
Balance
Level 3
1,194
1
171
-
35,792
25
1,012
1
1,124
1
133
-
Refer to Note 29 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
51 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
unit exceeds its fair value, Step 2 of the goodwill impairment test is
performed to measure the amount of impairment loss, if any.
The fair value of a reporting unit is the price that would be
received to sell the unit as a whole in an orderly transaction between
market participants at the measurement date. As none of the
Bancorp’s reporting units are publicly traded, individual reporting
unit fair value determinations cannot be directly correlated to the
Bancorp’s stock price. The determination of the fair value of a
reporting unit is a subjective process that involves the use of
estimates and judgments, particularly related to cash flows, the
appropriate discount rates and an applicable control premium. The
Bancorp employs an income-based approach, utilizing the reporting
unit’s forecasted cash flows (including a terminal value approach to
estimate cash flows beyond the final year of the forecast) and the
reporting unit’s estimated cost of equity as the discount rate.
Significant management judgment is necessary in the preparation of
each reporting unit’s forecasted cash flows surrounding expectations
for earnings projections, growth and credit loss expectations and
actual results may differ from forecasted results. Additionally, the
Bancorp determines its market capitalization based on the average
of the closing price of the Bancorp’s stock during the month
including the measurement date, incorporating an additional control
premium, and compares this market-based fair value measurement
to the aggregate fair value of the Bancorp’s reporting units in order
to corroborate the results of the income approach.
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
in a business combination. Significant management
acquired
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 11 of the Notes to Consolidated Financial
Statements for further
the Bancorp’s
goodwill.
information regarding
Legal Contingencies
The Bancorp and its subsidiaries are parties to numerous claims and
lawsuits as well as threatened or potential actions or claims
concerning matters arising from the conduct of its business
activities. The outcome of claims or litigation and the timing of
ultimate resolution are inherently difficult to predict and significant
judgment may be required in the determination of both the
probability of loss and whether the amount of the loss is reasonably
estimable. The Bancorp’s estimates are subjective and are based on
the status of legal and regulatory proceedings, the merit of the
Bancorp’s defenses and consultation with internal and external legal
counsel. An accrual for a potential litigation loss is established when
information related to the loss contingency indicates both that a loss
is probable and that the amount of loss can be reasonably estimated.
Refer to Note 20 of the Notes to Consolidated Financial Statements
for further information regarding the Bancorp’s legal proceedings.
52 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STATEMENTS OF INCOME ANALYSIS
Net Interest Income
Net interest income is the interest earned on loans and leases
(including yield-related fees), securities and other short-term
investments less the interest paid for core deposits (includes
transaction deposits and other time deposits) and wholesale funding
(includes certificates $100,000 and over, other deposits, federal
funds purchased, other short-term borrowings and long-term debt).
The net interest margin is calculated by dividing net interest income
by average interest-earning assets. Net interest rate spread is the
difference between the average yield earned on interest-earning
assets and the average rate paid on interest-bearing liabilities. Net
interest margin is typically greater than net interest rate spread due
to the interest income earned on those assets that are funded by
noninterest-bearing liabilities, or free funding, such as demand
deposits or shareholders’ equity.
Tables 7 and 8 present the components of net interest income,
net interest margin and net interest rate spread for the years ended
December 31, 2019, 2018 and 2017, 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 included in
average other assets.
Net interest income on an FTE basis (non-GAAP) was $4.8
billion and $4.2 billion for the years ended December 31, 2019 and
2018, respectively. Net interest income was positively impacted by
increases in average commercial and industrial loans and average
commercial mortgage loans of $7.5 billion and $3.2 billion,
respectively, from the year ended December 31, 2018. Additionally,
net interest income benefited from an increase in yields on average
loans and leases of 34 bps from the year ended December 31, 2018.
These positive impacts were partially offset by increases in both the
rates paid on and balances of average interest-bearing core deposits
and average long-term debt as well as an increase in average
certificates $100,000 and over for the year ended December 31,
2019 compared to the year ended December 31, 2018. The rates
paid on average interest-bearing core deposits increased 26 bps and
average interest-bearing core deposits increased $12.9 billion from
the year ended December 31, 2018. The rates paid on average long-
term debt increased 24 bps and average long-term debt increased
$818 million from the year ended December 31, 2018. Average
certificates $100,000 and over increased $2.1 billion from the year
ended December 31, 2018. Additionally, net interest income was
negatively impacted by the August 2019, September 2019 and
October 2019 decisions of the FOMC to lower the target range of
the federal funds rate. Net interest income for the year ended
December 31, 2019 included $65 million of amortization and
accretion of premiums and discounts on acquired loans and leases
and assumed deposits and long-term debt from acquisitions.
Net interest rate spread on an FTE basis (non-GAAP) was
2.92% during the year ended December 31, 2019 compared to
2.87% during the year ended December 31, 2018. Yields on average
interest-earning assets increased 28 bps, partially offset by a 23 bps
increase in rates paid on average interest-bearing liabilities for the
year ended December 31, 2019 compared to the year ended
December 31, 2018.
Net interest margin on an FTE basis (non-GAAP) was 3.31%
for the year ended December 31, 2019 compared to 3.22% for the
year ended December 31, 2018. The increase for the year ended
December 31, 2019 was driven primarily by the previously
mentioned increase in the net interest rate spread as well as an
increase in average free funding balances. The increase in average
in average
free funding balances was driven by
shareholders’ equity and average demand deposits of $4.0 billion
and $1.7 billion, respectively, for the year ended December 31, 2019
compared to the year ended December 31, 2018.
increases
Interest income on an FTE basis (non-GAAP) from loans and
leases increased $975 million compared to the year ended December
31, 2018 primarily due to the aforementioned increases in the
balances of average commercial and industrial loans and average
commercial mortgage loans as well as the increase in yields on
average loans and leases. 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 on
an FTE basis (non-GAAP) from investment securities and other
short-term investments increased $97 million from the year ended
December 31, 2018 primarily as a result of an increase in average
taxable securities.
Interest expense on core deposits increased $301 million for
the year ended December 31, 2019 compared to the year ended
December 31, 2018 primarily due to the previously mentioned
increases in both the cost and balances of average interest-bearing
core deposits. The increases in both the cost and balances of
average interest-bearing core deposits were primarily due to
increases in the rates paid on and balances of both 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 $113 million
for the year ended December 31, 2019 compared to the year ended
December 31, 2018 primarily due to the aforementioned increase in
the rates paid on and balances of average long-term debt and
increases in average certificates $100,000 and over. These increases
were partially offset by a decrease in average other short-term
borrowings of $565 million for the year ended December 31, 2019
compared to the year ended December 31, 2018. Refer to the
Borrowings subsection of the Balance Sheet Analysis section of
MD&A for additional information on the Bancorp’s borrowings.
Average wholesale funding represented 21% and 23% of average
interest-bearing liabilities during the years ended December 31, 2019
and 2018, respectively. For more information on the Bancorp’s
interest rate risk management,
including estimated earnings
sensitivity to changes in market interest rates, see the Market Risk
Management subsection of the Risk Management section of
MD&A.
53 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
2018
2017
2019
Average Revenue/
Balance
Cost
Average
Yield/
Rate
Average
Balance
Revenue/
Cost
Average
Yield/
Rate
Average
Balance
Revenue/
Cost
Average
Yield/
Rate
$
$
$
$
1,160
2
41
6,271
1,079
2
25
5,199
3.28% $
3.97
1.91
4.31% $
35,429
41
2,140
145,404
2,748
16,903
(1,119)
163,936
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
2,313
476
278
119
3,186
635
324
423
304
196
1,882
5,068
41,577
6,844
4,374
4,011
56,806
16,053
7,308
9,407
2,141
1,016
35,925
92,731
42,668
6,661
4,793
3,795
57,917
16,150
6,631
8,993
2,280
1,905
35,959
93,876
50,168
9,905
5,174
3,578
68,825
17,337
6,286
10,345
2,437
2,564
38,969
107,794
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% $
4.61% $
4.81
5.37
3.31
4.63
3.66
5.16
4.08
12.49
7.63
4.83
4.70% $
($ 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
Indirect secured consumer 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 $17, $16 and $26 for the years ended December 31, 2019, 2018 and 2017, 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
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
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
36,658
14,041
25,879
209
5,470
82,257
4,504
265
1,267
1,046
15,369
104,708
34,343
4,897
143,948
19,988
163,936
1.08% $
0.16
1.05
0.63
1.79
0.96
2.14
2.27
2.26
2.67
3.30
1.39% $
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 %
252
14
162
1
59
488
41
9
30
29
446
1,043
396
22
272
1
98
789
97
6
29
28
508
1,457
33,487
66
1,476
128,905
2,200
12,203
(1,125)
142,183
32,106
66
1,390
126,293
2,224
13,236
(1,226)
140,527
109
8
74
1
46
238
36
3
6
30
378
691
3.22% $
3.37
1.68
4.03% $
3.09 %
5.45
1.04
3.57 %
3.22%
2.87
69.79
3.31%
2.92
72.01
3.03 %
2.76
67.37
993
4
15
4,515
$
$
$
$
$
$
$
$
$
4,156
3,824
4,814
$
$
$
$
$
$
$
$
of MD&A.
54 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$
Total
Volume Yield/Rate
2019 Compared to 2018
338
154
20
(6)
506
43
(17)
50
20
50
146
652
149
24
18
17
208
12
15
69
5
14
115
323
487
178
38
11
714
55
(2)
119
25
64
261
975
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
Indirect secured consumer 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.
144
8
110
-
39
301
56
(3)
(1)
(1)
62
414
658
79
8
75
1
17
180
13
1
4
11
37
246
99
65
-
35
(1)
22
121
43
(4)
(5)
(12)
25
168
559
81
-
16
1,072
18
-
4
345
63
-
12
727
$
$
$
$
$
2018 Compared to 2017
Yield/Rate
Total
Volume
41
(7)
18
(4)
48
3
(31)
(12)
17
61
38
86
44
(1)
1
130
15
-
7
-
5
27
(2)
3
15
(20)
22
45
85
271
49
43
30
393
11
47
41
9
3
111
504
42
(1)
9
554
128
6
81
-
8
223
7
3
9
19
46
307
247
312
42
61
26
441
14
16
29
26
64
149
590
86
(2)
10
684
143
6
88
-
13
250
5
6
24
(1)
68
352
332
Provision for Credit Losses
The Bancorp provides as an expense an amount for probable credit
losses within the loan and lease portfolio and the portfolio of
unfunded loan commitments and letters of credit that is based on
factors previously discussed in the Critical Accounting Policies
section of MD&A. The provision is recorded to bring the ALLL
and reserve for unfunded commitments to a
level deemed
appropriate by the Bancorp to cover losses inherent in the
portfolios. 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 credit losses was $471 million for the year
ended December 31, 2019 compared to $207 million for the same
period in the prior year. The increase in provision expense for the
year ended December 31, 2019 compared to the prior year was
primarily due to increases in specific reserves on certain impaired
commercial loans and the level of commercial criticized assets as
well as increases in both outstanding loan balances and unfunded
commitments in 2019, exclusive of loans and leases acquired in the
MB Financial, Inc. acquisition.
The ALLL increased $99 million from December 31, 2018 to
$1.2 billion at December 31, 2019. At December 31, 2019, the
ALLL as a percent of portfolio loans and leases decreased to 1.10%,
compared to 1.16% at December 31, 2018. This decrease reflects
the impact of the MB Financial, Inc. acquisition, which added
approximately $13.4 billion in portfolio loans and leases at the
acquisition date. 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. The reserve for unfunded commitments
increased $13 million from December 31, 2018 to $144 million at
December 31, 2019. This increase reflects the impact of the MB
Financial, Inc. acquisition, which included approximately $8 million
in reserves for unfunded commitments at the acquisition date.
Refer to the Credit Risk Management subsection of the Risk
Management section of MD&A as well as Note 7 of the Notes to
Consolidated Financial Statements for more detailed information on
the provision for credit 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, ALLL, and reserve for
unfunded commitments.
55 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Income
Noninterest income increased $746 million for the year ended December 31, 2019 compared to the year ended December 31, 2018. The following
table presents the components of noninterest income:
TABLE 9: COMPONENTS OF NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Corporate banking revenue
Service charges on deposits
Wealth and asset management revenue
Card and processing revenue
Mortgage banking net revenue
Other noninterest income
Securities gains (losses), net
Securities gains (losses), net - non-qualifying hedges on MSRs
Total noninterest income
Corporate banking revenue
Corporate banking revenue increased $132 million for the year
ended December 31, 2019 compared to the year ended December
31, 2018. The increase from the prior year was primarily driven by
increases in leasing business revenue, lease remarketing fees,
institutional sales revenue and business lending fees of $50 million,
$44 million, $26 million and $21 million, respectively. The increase
in leasing business revenue was driven by the acquisition of MB
Financial, Inc. These benefits were partially offset by a decrease of
$8 million in syndication fees from the year ended December 31,
2018.
Service charges on deposits
Service charges on deposits increased $16 million for the year ended
December 31, 2019 compared to the year ended December 31, 2018
primarily due to an increase of $31 million in commercial deposit
fees, partially offset by a decrease of $14 million in consumer
deposit fees.
Wealth and asset management revenue
Wealth and asset management revenue increased $43 million for the
year ended December 31, 2019 compared to the year ended
2019
570
565
487
360
287
1,224
40
3
3,536
$
$
2018
438
549
444
329
212
887
(54)
(15)
2,790
2017
353
554
419
313
224
1,357
2
2
3,224
2016
432
558
404
319
285
688
10
-
2,696
2015
384
563
418
302
348
979
9
-
3,003
December 31, 2018 primarily due to an increase of $37 million in
private client service fees. This increase was driven by increased
sales production and strong market performance as well as the full-
year benefit from acquisitions in 2018 and the acquisition of MB
Financial, Inc. The Bancorp’s trust and registered investment
advisory businesses had approximately $413 billion and $356 billion
in total assets under care as of December 31, 2019 and 2018,
respectively, and managed $49 billion and $37 billion in assets for
individuals, corporations and not-for-profit organizations as of
December 31, 2019 and 2018, respectively.
Card and processing revenue
Card and processing revenue increased $31 million for the year
ended December 31, 2019 compared to the year ended December
31, 2018 primarily driven by increases in the number of actively
used cards, customer spend volume and other interchange revenue.
Mortgage banking net revenue
Mortgage banking net revenue increased $75 million for the year
ended December 31, 2019 compared to the year ended December
31, 2018.
The following table presents the components of mortgage banking net revenue:
TABLE 10: COMPONENTS OF MORTGAGE BANKING NET REVENUE
For the years ended December 31 ($ in millions)
Origination fees and gains on loan sales
Net mortgage servicing revenue:
Gross mortgage servicing fees
Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs
Net mortgage servicing revenue
Total mortgage banking net revenue
2019
175
267
(155)
112
287
$
$
2018
100
216
(104)
112
212
2017
138
206
(120)
86
224
Origination fees and gains on loan sales increased $75 million for
the year ended December 31, 2019 compared to the year ended
December 31, 2018 driven by an increase in originations due to the
lower
loan
interest rate environment. Residential mortgage
originations increased to $11.6 billion for the year ended December
31, 2019 from $7.1 billion for the year ended December 31, 2018.
Net mortgage servicing revenue remained flat for the year
ended December 31, 2019 compared to the year ended December
31, 2018 as an increase in gross mortgage servicing fees of $51
million was offset by an increase in net negative valuation
adjustments of $51 million from the year ended 2018. Refer to
Table 11 for the components of net valuation adjustments on the
MSR portfolio and the impact of the non-qualifying hedging
strategy.
56 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 11: COMPONENTS OF NET VALUATION ADJUSTMENTS ON MSRs
For the years ended December 31 ($ 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
Net valuation adjustments on MSRs and free-standing derivatives
purchased to economically hedge MSRs
2019
2018
2017
$
221
(203)
(173)
$
(155)
(21)
42
(125)
(104)
2
(1)
(121)
(120)
Mortgage rates decreased during the year ended December 31, 2019
which caused modeled prepayment speeds to rise. The fair value of
the MSR portfolio decreased $203 million due to changes to inputs
to the valuation model including prepayment speeds and OAS
assumptions and decreased $173 million due to the passage of time,
including the impact of regularly scheduled repayments, paydowns
and payoffs for the year ended December 31, 2019.
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 assumptions and decreased $125 million due to the passage of
time, including the impact of regularly scheduled repayments,
paydowns and payoffs for the year ended December 31, 2018.
Further detail on the valuation of MSRs can be found in Note
14 of the Notes to Consolidated Financial Statements. The Bancorp
maintains a non-qualifying hedging strategy to manage a portion of
Other noninterest income
The following table presents the components of other noninterest income:
TABLE 12: COMPONENTS OF OTHER NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Gain on sale of Worldpay, Inc. shares
Income from the TRA associated with Worldpay, Inc.
Operating lease income
Private equity investment income
BOLI income
Cardholder fees
Consumer loan and lease fees
Banking center income
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
Loss on sale of business
Gain related to Vantiv, Inc.'s acquisition of Worldpay Group plc.
Other, net
Total other noninterest income
the risk associated with changes in the valuation of the MSR
portfolio. Refer to Note 15 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 gains of $3 million during the year ended December
31, 2019, and net losses of $15 million during the year ended
December 31, 2018, recorded in securities gains (losses), net - non-
qualifying hedges on MSRs
the Bancorp’s Consolidated
in
Statements of Income.
The Bancorp’s total residential mortgage loans serviced at
December 31, 2019 and 2018 were $98.4 billion and $79.2 billion,
respectively, with $80.7 billion and $63.2 billion, respectively, of
residential mortgage loans serviced for others.
2019
2018
2017
$
$
562
346
151
65
60
58
23
22
19
3
2
(107)
(23)
(4)
-
47
1,224
205
20
84
63
56
56
23
21
20
2
1
(59)
(43)
-
414
24
887
1,037
44
96
36
52
54
23
20
8
(2)
47
(80)
-
-
-
22
1,357
Other noninterest income increased $337 million for the year ended
December 31, 2019 compared to the year ended December 31, 2018
primarily due to the recognition of gains on the sale of Worldpay
Inc. shares driven by the Bancorp’s sale of shares during the first
quarter of 2019, an increase in the income from the TRA associated
with Worldpay, Inc., an increase in operating lease income and a
decrease in the net losses on disposition and impairment of bank
premises and equipment. These benefits were partially offset by the
gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc.
recognized during the first quarter of 2018 as well as an increase in
the loss on the swap associated with the sale of Visa, Inc. Class B
Shares.
The Bancorp recognized a $562 million gain on the sale of
Worldpay, Inc. shares for the year ended December 31, 2019
compared to a $205 million gain on the sale of Worldpay, Inc.
shares for the year ended December 31, 2018. Income from the
TRA associated with Worldpay Inc. increased $326 million from the
year ended December 31, 2018 primarily driven by a $345 million
gain recognized in the fourth quarter of 2019 from the Worldpay,
Inc. TRA transaction. For additional information, refer to Note 21
of the Notes to Consolidated Financial Statements. Operating lease
income increased $67 million during the year ended December 31,
2019 compared to the year ended December 31, 2018 driven by the
acquisition of MB Financial, Inc. Net losses on disposition and
impairment of bank premises and equipment decreased $20 million
during the year ended December 31, 2019 compared to the same
period in the prior year driven by the impact of impairment charges
of $28 million during the year ended December 31, 2019 compared
57 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
to $45 million during the year ended December 31, 2018. For more
information, refer to Note 8 of the Notes to Consolidated Financial
Statements.
The Bancorp recognized a $414 million gain related to Vantiv,
Inc.’s acquisition of Worldpay Group plc. during the year ended
December 31, 2018. For the year ended December 31, 2019, the
Bancorp recognized negative valuation adjustments of $107 million
related to the Visa total return swap compared to negative valuation
adjustments of $59 million during the year ended December 31,
2018. The increase from the prior year was primarily due to the
impact of litigation developments during 2019 and an increase in
The following table presents the components of noninterest expense:
Visa, Inc.’s share price. For additional information on the valuation
of the swap associated with the sale of Visa, Inc. Class B Shares,
refer to Note 19, Note 20 and Note 29 of the Notes to
Consolidated Financial Statements.
Noninterest Expense
Noninterest expense increased $702 million for the year ended
December 31, 2019 compared to the year ended December 31,
2018, primarily due to increases in personnel costs (salaries, wages
and
and
communications expense and other noninterest expense.
employee benefits),
incentives plus
technology
TABLE 13: COMPONENTS OF NONINTEREST EXPENSE
For the years ended December 31 ($ in millions)
Salaries, wages and incentives
Employee benefits
Technology and communications
Net occupancy expense
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.
2,001
417
422
332
130
129
1,229
4,660
55.8 %
2019
$
$
2018
2017
2016
2015
1,783
332
285
292
123
123
1,020
3,958
57.0
1,633
356
245
295
129
117
1,007
3,782
53.7
1,612
339
234
299
132
118
1,003
3,737
59.0
1,525
323
224
321
153
124
973
3,643
55.6
The Bancorp recognized $222 million and $31 million of merger-
related expenses related to the MB Financial, Inc. acquisition for the
years ended December 31, 2019 and 2018, respectively.
The following table provides a summary of merger-related expenses recorded in noninterest expense:
TABLE 14: MERGER-RELATED EXPENSES
For the years ended December 31 ($ in millions)
Salaries, wages and incentives
Employee benefits
Technology and communications
Net occupancy expense
Card and processing expense
Equipment expense
Other noninterest expense
Total
2019
2018
$
$
87
3
71
13
1
1
46
222
1
-
6
-
1
-
23
31
Personnel costs
increased $303 million for the year ended
December 31, 2019 compared to the year ended December 31, 2018
driven by $90 million in merger-related expenses for the year ended
December 31, 2019, the addition of personnel costs from the
acquisition of MB Financial, Inc. and higher deferred compensation
totaled 19,869 at
expense. Full-time equivalent employees
December 31, 2019 compared to 17,437 at December 31, 2018.
Technology and communications expense increased $137
million for the year ended December 31, 2019 compared to the year
ended December 31, 2018 driven by $71 million in merger-related
expenses for the year ended December 31, 2019, as well as increased
investment in contemporizing information technology architecture,
mitigating information security risks and growth initiatives.
58 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the components of other noninterest expense:
TABLE 15: COMPONENTS OF OTHER NONINTEREST EXPENSE
For the years ended December 31 ($ in millions)
Marketing
Loan and lease
Operating lease
Losses and adjustments
FDIC insurance and other taxes
Professional service fees
Data processing
Travel
Intangible amortization
Postal and courier
Donations
Recruitment and education
Supplies
Insurance
Loss (gain) on partnership investments
Other, net
Total other noninterest expense
Other noninterest expense increased $209 million for the year ended
December 31, 2019 compared to the year ended December 31, 2018
and included the impact of an increase of $23 million of merger-
related expenses related to the acquisition of MB Financial, Inc. as
well as increases in operating lease expense, intangible amortization
expense, losses and adjustments, and loan and lease expense,
partially offset by a decrease in FDIC insurance and other taxes.
Operating lease expense and intangible amortization expense
increased $48 million and $40 million, respectively, for the year
ended December 31, 2019 compared to the year ended December
31, 2018 primarily driven by the acquisition of MB Financial, Inc.
Losses and adjustments increased $41 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, 2019
and 2018 were primarily impacted by $160 million and $189 million,
respectively, of low-income housing tax credits and other tax
benefits and $40 million and $23 million, respectively, of tax
benefits from tax exempt income, and were partially offset by $140
million and $154 million, respectively, of proportional amortization
related to qualifying LIHTC investments. The increase in the
effective tax rate for the year ended December 31, 2019 from 2018
was impacted by the increase in state income taxes. The effective tax
rate for the year ended December 31, 2017 was 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 U.S. government enacted comprehensive tax legislation,
the TCJA, on December 22, 2017. The TCJA made broad and
2019
2018
2017
$
$
162
142
124
102
81
70
70
68
45
38
30
28
14
14
2
239
1,229
147
112
76
61
119
67
57
52
5
35
21
32
13
13
(4)
214
1,020
114
102
87
59
127
83
58
46
2
42
28
35
14
12
14
184
1,007
December 31, 2019 compared to the year ended December 31, 2018
primarily driven by increases in credit valuation adjustments on
derivatives as well as legal settlements. Loan and lease expense
increased $30 million for the year ended December 31, 2019
compared to the year ended December 31, 2018 primarily as a result
of an increase in loan closing costs due to an increase in residential
mortgage loan originations. FDIC insurance and other taxes
decreased $38 million for the year ended December 31, 2019
compared to the year ended December 31, 2018 primarily due to the
elimination of the FDIC surcharge in the fourth quarter of 2018.
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, 2019, the Bancorp estimates that it may be necessary
to recognize $6 million of additional income tax benefit over the
next twelve months related to the settlement of stock-based awards,
primarily in the first half of 2020. However, the amount of income
tax expense or benefit recognized upon settlement may vary
significantly from expectations based on the Bancorp’s stock price
and the number of SARs exercised by employees.
59 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Bancorp’s income before income taxes, applicable income tax expense and effective tax rate are as follows:
TABLE 16: APPLICABLE INCOME TAXES
For the years ended December 31 ($ in millions)
Income before income taxes
Applicable income tax expense
Effective tax rate
$
2019
3,202
690
21.6 %
2018
2,765
572
20.7
2017
2,979
799
26.8
2016
2,208
665
30.1
2015
2,493
814
32.6
60 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 32 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 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
The following table summarizes net income (loss) by business segment:
TABLE 17: 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
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, 2019 to reflect the
current market rates and updated market assumptions. These rates
were generally higher than those in place during 2018, thus net
interest
income for deposit-providing business segments was
positively impacted during 2019. 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 2019.
The Bancorp’s methodology for allocating provision for credit
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 credit 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
taking advantage of cross-sell
segments form synergies by
opportunities and funding operations by accessing the capital
markets as a collective unit.
2019
2018
2017
$
$
1,424
860
92
112
24
2,512
1,139
702
(1)
97
256
2,193
827
455
17
65
816
2,180
61 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:
$
2019
2018
2017
1,729
(26)
2,377
183
TABLE 18: COMMERCIAL BANKING
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income (FTE)(a)
Provision for (benefit from) credit 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 $17, $16 and $26 for the years ended December 31, 2019, 2018 and 2017, respectively.
65,475
16,424
18,259
4,904
332
209
53,743
19,519
9,080
5,337
899
372
54,748
16,560
12,203
4,128
377
362
294
940
1,244
417
827
344
919
1,409
270
1,139
466
1,155
1,760
336
1,424
348
287
203
565
308
314
432
273
212
1,678
38
$
$
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 2019 with 2018
Net income was $1.4 billion for the year ended December 31, 2019
compared to net income of $1.1 billion for the year ended
December 31, 2018. The increase in net income was driven by
increases in net interest income on an FTE basis and noninterest
income partially offset by increases in noninterest expense and
provision for credit losses.
Net interest income on an FTE basis increased $648 million
from the year ended December 31, 2018 primarily driven by
increases in both average balances and yields on commercial loans
and leases, increases in FTP credits on interest checking deposits
and increases in FTP credit rates on demand deposits. These
increases were partially offset by increases in FTP charges on loans
and leases and increases in both average balances and rates paid on
interest checking deposits.
Provision for credit losses increased $209 million from the year
ended December 31, 2018 driven by the impact of an increase in
criticized asset levels partially offset by a decrease in net charge-offs
on commercial and industrial loans. Net charge-offs as a percent of
average portfolio loans and leases decreased to 14 bps for the year
ended December 31, 2019 compared to 18 bps for the year ended
December 31, 2018.
Noninterest income increased $270 million from the year
ended December 31, 2018 driven by increases in corporate banking
revenue, other noninterest income and service charges on deposits.
Corporate banking revenue increased $133 million from the year
ended December 31, 2018 driven by increases in leasing business
revenue, lease remarketing fees, institutional sales revenue and
business lending fees. Other noninterest income increased $102
million from the year ended December 31, 2018 primarily due to
62 Fifth Third Bancorp
increases in operating lease income, card and processing revenue
and private equity investment income. Service charges on deposits
increased $35 million from the year ended December 31, 2018
primarily driven by an increase in commercial deposit fees.
Noninterest expense increased $358 million from the year
ended December 31, 2018 due to increases in other noninterest
expense and personnel costs. Other noninterest expense increased
$236 million from the year ended December 31, 2018 primarily due
to increases in corporate overhead allocations, operating lease
expense,
and
amortization expense
adjustments. Personnel costs increased $122 million from the year
ended December 31, 2018 due to increases in base compensation
and incentive compensation primarily as a result of the MB
Financial, Inc. acquisition as well as an increase in employee benefits
expense.
intangible
losses
and
Average commercial loans and leases increased $10.7 billion
from the year ended December 31, 2018 primarily due to increases
in average commercial and industrial loans and average commercial
mortgage loans. Average commercial and industrial loans increased
$7.4 billion from the year ended December 31, 2018 primarily as a
result of the acquisition of MB Financial, Inc. as well as an increase
in loan originations. Average commercial mortgage loans increased
$3.2 billion from the year ended December 31, 2018 as a result of
the acquisition of MB Financial, Inc. and increases in loan
originations as well as permanent financing from the Bancorp’s
commercial construction loan portfolio.
Average core deposits increased $6.6 billion from the year
ended December 31, 2018 primarily driven by increases in average
interest checking deposits and average savings and money market
deposits partially offset by decreases in average foreign office
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
deposits and average demand deposits. Average interest checking
deposits increased $6.1 billion from the year ended December 31,
2018 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 MB Financial, Inc.
Average savings and money market deposits increased $776 million
from the year ended December 31, 2018 primarily due to the
acquisition of MB Financial, Inc. and an increase in average balances
per commercial customer account. Average foreign office deposits
decreased $153 million from the year ended December 31, 2018
driven by balance migration into interest checking deposits. Average
demand deposits decreased $136 million from the year ended
December 31, 2018 primarily driven by balance migration into
interest checking deposits partially offset by the acquisition of MB
Financial, Inc.
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 credit 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 credit losses decreased $64 million from the year
ended December 31, 2017 primarily driven by a decrease in
commercial criticized asset levels as well as a decrease 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
lines of credit. Average commercial
on existing revolving
construction loans increased $404 million from the year ended
December 31, 2017 primarily due to increases in draw levels on
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 $3.1 billion compared to the
year ended December 31, 2017 primarily due to balance migration
from demand deposit accounts and an increase in average balances
per commercial customer account as well as the acquisition of new
commercial customers.
63 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Branch Banking
Branch Banking provides a full range of deposit and loan products
to individuals and small businesses through 1,149 full-service
banking centers. Branch Banking offers depository and loan
products, such as checking and savings accounts, home equity loans
and lines of credit, credit cards and loans for automobiles and other
personal financing needs, as well as products designed to meet the
specific needs of small businesses, including cash management
services.
The following table contains selected financial data for the Branch Banking segment:
TABLE 19: BRANCH BANKING
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income
Provision for credit losses
Noninterest income:
Card and processing revenue
Service charges on deposits
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
Commercial loans
Demand deposits
Interest checking deposits
Savings and money market deposits
Other time deposits and certificates $100,000 and over
2019
2018
2017
$
2,371
224
2,034
171
1,782
153
285
260
158
99
601
221
123
915
1,089
229
860
13,200
2,170
15,802
10,716
33,173
7,532
$
$
266
275
150
63
536
225
121
846
889
187
702
251
265
141
99
526
228
127
800
704
249
455
13,034
1,938
14,336
10,187
29,473
5,348
13,008
1,918
13,895
10,226
27,603
4,965
Comparison of the year ended 2019 with 2018
Net income was $860 million for the year ended December 31, 2019
compared to net income of $702 million for the year ended
December 31, 2018. The increase was driven by increases in net
interest income and noninterest income partially offset by increases
in noninterest expense and provision for credit losses.
Net interest income increased $337 million from the year
ended December 31, 2018. The increase was primarily due to
increases in FTP credits on core deposits and certificates $100,000
and over as well as increases in average balances of other consumer
loans and credit card. These benefits were partially offset by
increases in both the rates paid on and average balances of savings
and money market deposits and other time deposits and certificates
$100,000 and over as well as an increase in FTP charge rates on
loans and leases.
Provision for credit losses increased $53 million from the year
ended December 31, 2018 primarily due to increases in net charge-
offs on credit card and other consumer loans. Net charge-offs as a
percent of average portfolio loans and leases increased to 144 bps
for the year ended December 31, 2019 compared to 114 bps for the
year ended December 31, 2018.
Noninterest income increased $48 million from the year ended
December 31, 2018 driven by increases in other noninterest income,
card and processing revenue and wealth and asset management
revenue partially offset by a decrease in service charges on deposits.
Other noninterest income increased $36 million from the year
ended December 31, 2018 primarily due to the impact of
impairment on bank premises and equipment recognized during
2018. Card and processing revenue increased $19 million from the
year ended December 31, 2018 primarily driven by increases in the
number of actively used cards and customer spend volume. Wealth
and asset management revenue increased $8 million from the year
64 Fifth Third Bancorp
ended December 31, 2018 primarily driven by
in
brokerage fees and private client service fees. Service charges on
deposits decreased $15 million from the year ended December 31,
2018 due to a decrease in consumer deposit fees partially offset by
an increase in commercial deposit fees.
increases
Noninterest expense increased $132 million from the year
ended December 31, 2018 primarily due to increases in other
noninterest expense and personnel costs. Other noninterest expense
increased $69 million from the year ended December 31, 2018
primarily due to increases in corporate overhead allocations,
intangible amortization expense and loan and lease expense partially
offset by a decrease in FDIC insurance and other taxes. Personnel
costs increased $65 million from the year ended December 31, 2018
due to higher base compensation primarily as a result of the MB
Financial, Inc. acquisition as well as increases in employee benefits
expense and incentive compensation.
Average consumer loans increased $166 million from the year
ended December 31, 2018 primarily driven by an increase in average
other consumer loans of $649 million primarily due to growth in
point-of-sale loan originations. This increase was partially offset by
decreases in average home equity loans of $303 million and average
residential mortgage loans of $259 million as payoffs exceeded loan
production.
Average core deposits increased $7.0 billion from the year
ended December 31, 2018 primarily driven by growth in average
savings and money market deposits of $3.7 billion and growth in
average demand deposits of $1.5 billion. These increases were
primarily due to the acquisition of MB Financial, Inc. as well as
promotional product offerings, which drove consumer customer
acquisition and growth in balances from existing customers. The
increase in average core deposits also included an increase in interest
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
checking deposits of $529 million from the year ended December
31, 2018 primarily as a result of the acquisition of MB Financial, Inc.
Average other time deposits and certificates $100,000 and over
increased $2.2 billion from the year ended December 31, 2018
primarily as a result of the acquisition of MB Financial, Inc. as well
as promotional product offerings, which drove
increased
production.
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 provision for credit 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 credit 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
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 $383 million from the year ended
December 31, 2017 primarily due to shifting customer preferences
as a result of the rising-rate environment.
65 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consumer Lending
Consumer Lending includes the Bancorp’s residential mortgage,
lending activities. Residential
automobile and other
mortgage activities within Consumer Lending
the
origination, retention and servicing of residential mortgage loans,
sales and securitizations of those loans, pools of loans, and all
indirect
include
associated hedging activities. Residential mortgages are primarily
originated through a dedicated sales force and through third-party
correspondent lenders. Automobile and other indirect lending
activities include extending loans to consumers through automobile
dealers, motorcycle dealers, powersport dealers, recreational vehicle
dealers and marine dealers.
The following table contains selected financial data for the Consumer Lending segment:
TABLE 20: CONSUMER LENDING
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income
Provision for credit losses
Noninterest income:
Mortgage banking net revenue
Other noninterest income
Noninterest expense:
Personnel costs
Other noninterest expense
Income (loss) before income taxes
Applicable income tax expense (benefit)
Net income (loss)
Average Balance Sheet Data
Residential mortgage loans, including held for sale
Home equity
Indirect secured consumer loans
Comparison of the year ended 2019 with 2018
Net income was $92 million for the year ended December 31, 2019
compared to a net loss of $1 million for the year ended December
31, 2018. The increase was driven by increases in noninterest
income and net interest income partially offset by increases in
noninterest expense and provision for credit losses.
Net interest income increased $88 million from the year ended
December 31, 2018 primarily driven by increases in both yields on
and average balances of indirect secured consumer loans and
residential mortgage loans as well as an increase in FTP credits on
demand deposits. These benefits were partially offset by increases in
FTP charges on loans and leases.
Provision for credit losses increased $7 million from the year
ended December 31, 2018 primarily driven by an increase in net
charge-offs on indirect secured consumer loans partially offset by a
decrease in net charge-offs on residential mortgage loans. Net
charge-offs as a percent of average portfolio loans and leases
increased to 22 bps for the year ended December 31, 2019
compared to 21 bps for the year ended December 31, 2018.
Noninterest income increased $91 million from the year ended
December 31, 2018 driven by increases in mortgage banking net
revenue and other noninterest income. Mortgage banking net
revenue increased $73 million from the year ended December 31,
2018 primarily driven by an increase in origination fees and gains on
loan sales. Refer to the Noninterest Income subsection of the
Statements of Income Analysis section of MD&A for additional
information on the fluctuations in mortgage banking net revenue.
Other noninterest income increased $18 million from the year
ended December 31, 2018 primarily due to the recognition of $3
million of gains on securities acquired as a component of the
Bancorp’s non-qualifying hedging strategy of MSRs during the year
ended December 31, 2019 compared to the recognition of $15
million of losses during the year ended December 31, 2018.
Noninterest expense increased $53 million from the year ended
December 31, 2018 primarily due to an increase in other noninterest
expense primarily driven by increases in corporate overhead
allocations, loan and lease expense and losses and adjustments.
66 Fifth Third Bancorp
$
$
$
2019
2018
2017
325
49
279
17
196
259
117
25
92
237
42
206
(1)
192
210
(2)
(1)
(1)
240
40
217
20
189
222
26
9
17
13,027
220
10,109
11,803
243
8,676
11,494
293
8,939
Average consumer loans increased $2.6 billion from the year
ended December 31, 2018 primarily driven by increases in average
indirect secured consumer loans and average residential mortgage
loans. Average indirect secured consumer loans increased $1.4
billion from the year ended December 31, 2018 primarily driven by
the acquisition of MB Financial, Inc. and higher loan production
exceeding payoffs. Average residential mortgage loans increased
$1.2 billion from the year ended December 31, 2018 primarily
driven by the acquisition of MB Financial, Inc.
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 credit 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 acquired as a
component of the Bancorp’s non-qualifying hedging strategy of
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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Average consumer loans decreased $4 million from the year
ended December 31, 2017. Average indirect secured consumer loans
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, 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
companies
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 continued to pay down. Average residential
mortgage loans increased $309 million from the year ended
December 31, 2017 primarily driven by the continued retention of
certain agency conforming ARMs and certain other fixed-rate loans.
the institutional marketplace. Fifth Third Insurance Agency assists
clients with their financial and risk management needs. Fifth Third
Private Bank offers wealth management strategies to high net worth
through wealth planning,
and ultra-high net worth clients
investment management, banking,
insurance, trust and estate
services. Fifth Third Institutional Services provides advisory services
for institutional clients including middle market businesses, non-
profits, states and municipalities.
The following table contains selected financial data for the Wealth and Asset Management segment:
TABLE 21: WEALTH AND ASSET MANAGEMENT
For the years ended December 31 ($ in millions)
Income Statement Data
Net interest income
Provision for credit 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 2019 with 2018
Net income was $112 million for the year ended December 31, 2019
compared to net income of $97 million for the year ended
December 31, 2018. The increase in net income was driven by an
increase in noninterest income as well as a decrease in provision for
credit losses partially offset by an increase in noninterest expense.
Net interest income remained flat for the year ended December
31, 2019 compared to the year ended December 31, 2018. Net
interest income was positively impacted by increases in FTP credits
on interest checking deposits and savings and money market
deposits as well as increases in both yields on and average balances
of loans and leases. These positive impacts were offset by an
increase in the rates paid on interest checking deposits as well as an
increase in FTP charges on loans and leases.
Provision for credit losses decreased $12 million from the year
ended December 31, 2018 driven by a decrease in net charge-offs
on commercial and industrial loans. This decrease was partially
offset by the impact of the benefit of lower criticized asset levels for
the year ended December 31, 2018.
Noninterest income increased $33 million from the year ended
December 31, 2018 due to an increase in wealth and asset
management revenue partially offset by a decrease in other
noninterest
income. Wealth and asset management revenue
increased $40 million from the year ended December 31, 2018
primarily due to an increase in private client service fees driven by
2019
2018
2017
182
-
469
20
217
312
142
30
112
182
12
429
27
202
302
122
25
97
154
6
407
12
181
287
99
34
65
3,580
9,701
3,421
9,332
3,277
8,782
$
$
$
increased sales production and strong market performance as well as
the full-year benefit from acquisitions in 2018 and the acquisition of
MB Financial, Inc. Other noninterest income decreased $7 million
from the year ended December 31, 2018 primarily due to a loss on
sale of a business recognized during the second quarter of 2019.
Noninterest expense increased $25 million from the year ended
December 31, 2018 due to increases in personnel costs and other
noninterest expense. Personnel costs increased $15 million from the
year ended December 31, 2018 primarily due to higher base
compensation driven by the full-year impact from acquisitions in
2018 and the acquisition of MB Financial, Inc. Other noninterest
expense increased $10 million from the year ended December 31,
2018 primarily driven by an increase in corporate overhead
allocations partially offset by a decrease in FDIC insurance and
other taxes.
Average loans and leases increased $159 million from the year
ended December 31, 2018 primarily due to an increase in average
residential mortgage loans driven by the acquisition of MB
Financial, Inc., partially offset by a decrease in average commercial
and industrial loans as payoffs exceeded new loan production.
Average core deposits increased $369 million from the year
ended December 31, 2018 primarily due to an increase in average
interest checking deposits primarily as a result of the acquisition of
MB Financial, Inc. as well as an increase in average savings and
money market deposits.
67 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
credit 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 credit 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.
increases
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
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
ended December 31, 2017 driven by
in average
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.
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 credit 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 2019 with 2018
Net interest income decreased $415 million from the year ended
December 31, 2018 primarily driven by an increase in FTP credits
on deposits allocated to the business segments and increases in
interest expense on long-term debt. These negative impacts were
68 Fifth Third Bancorp
partially offset by an increase in the benefit related to FTP charges
on loans and leases and an increase in interest income on taxable
securities.
Provision for credit losses increased $7 million from the year
ended December 31, 2018 primarily due to increases in both
outstanding loan balances and unfunded commitments in 2019,
exclusive of loans and leases acquired in the MB Financial, Inc.
acquisition. This was partially offset by an increase in the allocation
of provision expense to the business segments driven by an increase
in commercial criticized asset levels.
Noninterest income increased $309 million from the year
ended December 31, 2018 primarily driven by the recognition of a
$562 million gain on the sale of Worldpay, Inc. shares for the year
ended December 31, 2019 in addition to a $345 million gain
recognized in the fourth quarter of 2019 from the Worldpay, Inc.
TRA transaction compared to a $205 million gain on the sale of
Worldpay, Inc. shares for the year ended December 31, 2018 and a
$414 million gain recognized in the first quarter of 2018 related to
Vantiv, Inc.’s acquisition of Worldpay Group plc. The increase from
the year ended December 31, 2018 also included securities gains of
$40 million during the year ended December 31, 2019 compared to
securities losses of $54 million during the year ended December 31,
2018. These positive impacts were partially offset by an increase in
the loss on the swap associated with the sale of Visa, Inc. Class B
Shares. The Bancorp recognized negative valuation adjustments of
$107 million related to the Visa total return swap for the year ended
December 31, 2019 compared to negative valuation adjustments of
$59 million during the year ended December 31, 2018.
Noninterest expense increased $139 million from the year
ended December 31, 2018. The increase was primarily due to
increases in technology and communications expense, personnel
costs and net occupancy expense driven by merger-related expenses
as a result of the acquisition of MB Financial, Inc. partially offset by
an
in corporate overhead allocations from General
Corporate and Other to the other business segments. Refer to the
Noninterest Expense subsection of the Statements of Income
Analysis section of MD&A for additional information on merger-
related expenses.
increase
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 credit losses decreased $16 million from the year
ended December 31, 2017 primarily due to an increased benefit
from the reserve for unfunded commitments partially offset by 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 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $79 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.
69 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOURTH QUARTER REVIEW
The Bancorp’s 2019 fourth quarter net income available to common
shareholders was $701 million, or $0.96 per diluted share, compared
to net income available to common shareholders of $530 million, or
$0.71 per diluted share, for the third quarter of 2019 and net income
available to common shareholders of $432 million, or $0.64 per
diluted share, for the fourth quarter of 2018.
Net interest income on an FTE basis was $1.2 billion for the
fourth quarter of 2019, a decrease of $14 million from the third
quarter of 2019 and an increase of $147 million from the fourth
quarter of 2018. The decrease from the third quarter of 2019 was
primarily driven by lower short-term market rates, partially offset by
growth in the indirect secured consumer portfolio, as well as the
favorable impact of previously executed cash flow hedges. The
increase from the fourth quarter 2018 was primarily driven by an
increase in interest-earning assets, including the impact from the
MB Financial, Inc. acquisition, partially offset by the declining-rate
environment. Net interest income for the fourth quarter of 2019
included $18 million of amortization and accretion of premiums and
discounts on acquired loans and leases and assumed deposits and
long-term debt from acquisitions compared to $28 million in the
third quarter of 2019 and an immaterial amount in the fourth
quarter of 2018.
Noninterest income was $1.0 billion for the fourth quarter of
2019, an increase of $295 million compared to the third quarter of
2019 and $460 million compared to the fourth quarter of 2018. The
increase from the third quarter of 2019 was primarily due to an
increase in other noninterest income, partially offset by a decrease in
mortgage banking net revenue and corporate banking revenue. The
year-over-year increase was primarily the result of an increase in
other noninterest income.
Service charges on deposits were $149 million for the fourth
quarter of 2019, an increase of $6 million compared to the previous
quarter and $14 million compared to the fourth quarter of 2018.
The increases from both the previous quarter and the fourth quarter
of 2018 were primarily driven by higher commercial deposit fees.
The increase from the third quarter of 2019 was also driven by
higher consumer deposit fees.
Corporate banking revenue was $153 million for the fourth
quarter of 2019, a decrease of $15 million compared to the third
quarter of 2019 and an increase of $23 million compared to the
fourth quarter of 2018. The decrease from the previous quarter was
primarily driven by a decrease in leasing business revenue, partially
offset by an increase in loan syndication revenue. The increase
compared to the fourth quarter of 2018 was primarily driven by an
increase in leasing business revenue primarily resulting from the MB
Financial, Inc. acquisition, as well as an increase in corporate bond
fees.
Mortgage banking net revenue was $73 million for the fourth
quarter of 2019 compared to $95 million in the third quarter of 2019
and $54 million in the fourth quarter of 2018. The decrease in
mortgage banking net revenue compared to the third quarter of
2019 was primarily driven by lower origination fees and gains on
loan sales, partially offset by an increase in origination volumes. The
increase in mortgage banking net revenue compared to the fourth
quarter of 2018 was primarily driven by higher mortgage
originations. Mortgage banking net revenue is affected by net
valuation adjustments, which include MSR valuation adjustments
caused by fluctuating OAS, 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 $47 million and $40 million in
the fourth and third quarters of 2019, respectively, and $24 million
in the fourth quarter of 2018. Originations for the fourth quarter of
2019 were $3.8 billion, compared with $3.4 billion in the previous
70 Fifth Third Bancorp
quarter and $1.6 billion the fourth quarter of 2018. Originations for
the fourth quarter of 2019 resulted in gains of $49 million on
mortgages sold, compared with gains of $64 million for the previous
quarter and $23 million for the fourth quarter of 2018. Gross
mortgage servicing fees were $72 million in the fourth quarter of
2019, $71 million in the third quarter of 2019 and $54 million in the
fourth quarter of 2018.
Wealth and asset management revenue was $129 million for
the fourth quarter of 2019, an increase of $5 million from the
previous quarter and $20 million from the fourth quarter of 2018.
The increase from the third quarter of 2019 was primarily driven by
higher personal asset management revenue and brokerage fees. The
increase compared to the fourth quarter of 2018 was primarily
driven by higher personal asset management revenue.
Card and processing revenue was $95 million for the fourth
quarter of 2019, an increase of $1 million from the third quarter of
2019 and $11 million from the fourth quarter of 2018. The increase
from the fourth quarter of 2018 was primarily driven by increases in
the number of actively used cards, customer spend volume and
other interchange revenue.
Other noninterest income was $427 million for the fourth
quarter of 2019, an increase of $316 million compared to the third
quarter of 2019 and $334 million from the fourth quarter of 2018.
The increase from both the third quarter of 2019 and the fourth
quarter of 2018 was primarily due to an increase in the income from
the TRA associated with Worldpay, Inc. driven by the Worldpay,
Inc. TRA transaction in the fourth quarter of 2019, partially offset
by an increase in negative valuation adjustments related to the Visa
total return swap.
The net gains on investment securities were $10 million for the
fourth quarter of 2019 compared to $5 million in the third quarter
of 2019 and net losses of $32 million for the fourth quarter of 2018.
The increase in gains from the previous quarter was primarily due to
realized gains on available-for-sale debt and other securities. The
increase in gains from the fourth quarter of 2018 was primarily
related to unrealized losses on equity securities in the fourth quarter
of 2018. Net losses on securities held as non-qualifying hedges for
MSRs were $1 million for the fourth quarter of 2019 compared to
immaterial net losses for the third quarter of 2019 and net gains of
$2 million for the fourth quarter of 2018.
Noninterest expense was $1.2 billion for the fourth quarter of
2019, an increase of $1 million from the previous quarter and $185
million from the fourth quarter of 2018. The increase in noninterest
expense compared to the fourth quarter of 2018 was primarily
related to increases in other noninterest expense, personnel costs
and technology and communications expense. The increase in other
noninterest expense was primarily driven by increases in donations
expense, operating lease expense, loan and lease expense and
intangible amortization. The increase in personnel costs was driven
by the addition of personnel costs from the acquisition of MB
Financial, Inc. and higher deferred compensation expense. The
increase in technology and communications expense was driven by
increased investment in contemporizing information technology
architecture, mitigating information security risks and growth
initiatives.
The ALLL as a percentage of portfolio loans and leases was
1.10% as of December 31, 2019, compared to 1.04% as of
September 30, 2019 and 1.16% as of December 31, 2018. The
provision for credit losses was $162 million in the fourth quarter of
2019 compared with $134 million in the third quarter of 2019 and
$97 million in the fourth quarter of 2018. Net losses charged-off
were $113 million in the fourth quarter of 2019, or 41 bps of
average portfolio loans and leases on an annualized basis, compared
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
with net losses charged-off of $99 million in the third quarter of
2019 and $83 million in the fourth quarter of 2018.
TABLE 22: QUARTERLY INFORMATION (unaudited)
2019
2018
$
For the three months ended ($ in millions, except per share data)
3/31
Net interest income(a)
999
Provision for credit losses
13
Noninterest income
909
Noninterest expense
1,010
Net income attributable to Bancorp
701
Net income available to common shareholders
686
Earnings per share, basic
0.98
Earnings per share, diluted
0.96
(a) Amounts presented on an FTE basis. The FTE adjustment was $4 for both the three months ended December 31, 2019 and September 30, 2019, $5 for the three months ended June
30, 2019 and $4 for the three months ended March 31, 2019. 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.
3/31
1,086
90
1,101
1,097
775
760
1.14
1.12
9/30
1,246
134
740
1,159
549
530
0.72
0.71
6/30
1,250
85
660
1,243
453
427
0.57
0.57
12/31
1,232
162
1,035
1,160
734
701
0.97
0.96
12/31
1,085
97
575
975
455
432
0.65
0.64
9/30
1,047
84
563
972
436
421
0.62
0.61
6/30
1,024
14
743
1,001
602
579
0.84
0.82
COMPARISON OF THE YEAR ENDED 2018 WITH 2017
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.
The provision for credit losses was $207 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.
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,
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 $176 million for the year ended
December 31, 2018 compared to the year ended December 31, 2017
primarily due to increases in personnel costs, technology and
communications expense and 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 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 investment in regulatory, compliance
and growth initiatives. Other noninterest expense increased $13
million for the year ended December 31, 2018 compared to the year
ended December 31, 2017 primarily due to increases in marketing
expense and loan and lease expense, partially offset by an increase in
gains on partnership investments and decreases in professional
service fees and FDIC insurance and other taxes.
71 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BALANCE SHEET ANALYSIS
Loans and Leases
The Bancorp classifies its commercial loans and leases based upon
primary purpose and consumer loans based upon product or
collateral. Table 23 summarizes end of period loans and leases,
including loans and leases held for sale, Table 24 summarizes loans
and leases acquired in the MB Financial, Inc. acquisition and Table
25 summarizes average total loans and leases, including loans and
leases held for sale.
TABLE 23: COMPONENTS OF LOANS AND LEASES (INCLUDING LOANS AND LEASES HELD FOR SALE)
As of December 31 ($ 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
50,677
10,964
5,090
3,363
70,094
44,407
6,977
4,657
3,600
59,641
2018
2019
$
Indirect secured consumer loans(a)
2017
41,170
6,610
4,553
4,068
56,401
16,077
7,014
9,112
2,299
1,559
36,061
92,462
91,970
2016
2015
41,736
6,904
3,903
3,974
56,517
42,151
6,991
3,214
3,854
56,210
15,737
7,695
9,983
2,237
680
36,332
92,849
92,098
14,424
8,336
11,497
2,360
658
37,275
93,485
92,582
17,988
6,083
11,538
2,532
2,723
40,864
110,958
109,558
16,041
6,402
8,976
2,470
2,342
36,231
95,872
95,265
Credit card
Other consumer loans
Total consumer loans
Total loans and leases
Total portfolio loans and leases (excluding loans and leases held for sale)
(a) The Bancorp acquired indirect motorcycle, powersport, recreational vehicle and marine loans in the acquisition of MB Financial, Inc. These loans are included in addition to automobile loans in the
$
$
line item “indirect secured consumer loans.”
Total loans and leases, including loans and leases held for sale,
increased $15.1 billion from December 31, 2018. The increase in
total loans and leases was primarily driven by the impact of the MB
Financial, Inc. acquisition, which added $13.4 billion in total loans
and leases upon acquisition. Table 24 summarizes the detail of loans
and leases acquired from MB Financial, Inc. on March 22, 2019.
TABLE 24: LOANS AND LEASES ACQUIRED
($ 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
Indirect secured consumer 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)
The following discussion excludes the impact of loans and leases
acquired in the MB Financial, Inc. acquisition. Commercial loans
and leases decreased $618 million from December 31, 2018 due to
decreases in commercial leases, commercial and industrial loans and
commercial construction loans, partially offset by an increase in
commercial mortgage loans. Commercial leases decreased $681
million, or 19%, from December 31, 2018 primarily as a result of a
planned
lease
originations. Commercial and industrial loans decreased $276
million, or 1%, from December 31, 2018 primarily due to elevated
payoff levels. Commercial construction loans decreased $62 million,
or 1%, from December 31, 2018 primarily due to decreased draw
levels on existing commitments. Commercial mortgage loans
increased $401 million, or 6%, from December 31, 2018 primarily as
a result of increases in loan originations and permanent financing
from the Bancorp’s commercial construction loan portfolio.
indirect non-relationship based
reduction
in
72 Fifth Third Bancorp
$
$
$
6,546
3,586
495
444
11,071
1,319
170
800
19
44
2,352
13,423
13,411
The following discussion excludes the impact of loans and
leases acquired in the MB Financial, Inc. acquisition. Consumer
loans increased $2.3 billion from December 31, 2018 due to
increases in indirect secured consumer loans, residential mortgage
loans, other consumer loans and credit card, partially offset by a
decrease in home equity. Indirect secured consumer loans increased
$1.8 billion, or 20%, from December 31, 2018 primarily as a result
of loan production exceeding payoffs. Residential mortgage loans
increased $628 million, or 4%, from December 31, 2018 primarily
driven by the continued retention of certain agency conforming
ARMs and certain other fixed-rate loans. Other consumer loans
increased $337 million, or 14%, from December 31, 2018 primarily
due to growth in point-of-sale loan originations. Credit card
increased $43 million, or 2%, from December 31, 2018 primarily
due to increases in balance-active customers and the balance per
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
active customer. Home equity decreased $489 million, or 8%, from
December 31, 2018 as payoffs exceeded new loan production.
TABLE 25: COMPONENTS OF AVERAGE LOANS AND LEASES (INCLUDING LOANS AND LEASES HELD FOR SALE)
For the years ended December 31 ($ 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
50,168
9,905
5,174
3,578
68,825
42,668
6,661
4,793
3,795
57,917
41,577
6,844
4,374
4,011
56,806
2017
2018
2019
$
Indirect secured consumer 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)
$
$
17,337
6,286
10,345
2,437
2,564
38,969
107,794
106,840
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
2016
43,184
6,899
3,648
3,916
57,647
15,101
7,998
10,708
2,205
661
36,673
94,320
93,426
2015
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
Average loans and leases, including loans and leases held for sale,
increased $13.9 billion, or 15%, from December 31, 2018 as a result
of a $10.9 billion, or 19%, increase in average commercial loans and
leases as well as a $3.0 billion, or 8%, increase in average consumer
loans.
leases
increased
Average commercial
from
loans and
December 31, 2018 due to increases in average commercial and
industrial loans, average commercial mortgage loans and average
commercial construction loans, partially offset by a decrease in
average commercial leases. Average commercial and industrial loans
increased $7.5 billion, or 18%, from December 31, 2018 primarily
due to the impact of the acquisition of MB Financial, Inc. and an
increase in loan originations. Average commercial mortgage loans
increased $3.2 billion, or 49%, from December 31, 2018 primarily
due to the impact of the acquisition of MB Financial, Inc. and
increases in loan originations as well as permanent financing from
the Bancorp’s commercial construction loan portfolio. Average
commercial construction loans increased $381 million, or 8%, from
December 31, 2018 primarily as a result of the acquisition of MB
Financial, Inc. Average commercial leases decreased $217 million, or
6%, from December 31, 2018 primarily as a result of a planned
reduction in indirect non-relationship based lease originations,
partially offset by commercial leases acquired in the MB Financial,
Inc. acquisition.
Average consumer loans increased from December 31, 2018
due to increases in indirect secured consumer loans, residential
mortgage loans, other consumer loans and credit card, partially
offset by a decrease in home equity. Average indirect secured
consumer loans increased $1.4 billion, or 15%, from December 31,
2018 primarily due to the acquisition of MB Financial, Inc. and
higher loan production exceeding payoffs. Average residential
mortgage loans increased $1.2 billion, or 7%, from December 31,
2018 primarily driven by the acquisition of MB Financial, Inc.
Average other consumer loans increased $659 million, or 35%, from
December 31, 2018 primarily due to growth in point-of-sale loan
originations. Average credit card increased $157 million, or 7%,
from December 31, 2018 primarily due to increases in balance-
active customers and the average balance per active customer.
Average home equity decreased $345 million, or 5%, from
December 31, 2018 as payoffs exceeded new loan production,
partially offset by home equity acquired in the MB Financial, Inc.
acquisition.
Investment Securities
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. Total
investment
securities were $36.9 billion and $33.6 billion at December 31, 2019
and December 31, 2018, respectively. The taxable available-for-sale
debt and other investment securities portfolio had an effective
duration of 5.1 years at December 31, 2019 compared to 5.0 years at
December 31, 2018.
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
for the purpose of selling them in the near term. At December 31,
2019, 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, 2019 and 2018.
For the year ended December 31, 2019, the Bancorp recognized $1
million of OTTI on its available-for-sale debt and other securities.
For the year ended December 31, 2018, the Bancorp did not
recognize any OTTI on its available-for-sale debt and other
securities. Refer to Note 1 of the Notes to Consolidated Financial
Statements for the Bancorp’s methodology for both classifying
investment securities and evaluating securities in an unrealized loss
position for OTTI.
73 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the end of period components of investment securities:
TABLE 26: COMPONENTS OF INVESTMENT SECURITIES
As of December 31 ($ 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.
2019
2018
2017
2016
2015
$
$
$
$
$
$
$
74
18
13,746
15,141
3,242
2,189
556
34,966
15
2
17
2
9
55
231
297
564
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
Includes interest-only mortgage-backed securities recorded at fair value with fair value changes recorded in securities gains (losses), net in the Consolidated Statements of Income.
On an amortized cost basis, available-for-sale debt and other
securities increased $1.8 billion, or 6%, from December 31, 2018
primarily due to increases in agency commercial mortgage-backed
securities, partially offset by decreases
in agency residential
mortgage-backed securities.
On an amortized cost basis, available-for-sale debt and other
securities were 24% and 25% of total interest-earning assets at
December 31, 2019 and December 31, 2018, respectively. The
estimated weighted-average life of the debt securities in the
available-for-sale debt and other securities portfolio was 6.6 and 6.5
years at December 31, 2019 and 2018, respectively. In addition, at
December 31, 2019 and 2018 the available-for-sale debt and other
securities portfolio had a weighted-average yield of 3.22% and
3.25%, respectively.
information
Information presented in Table 27 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 gains on the
available-for-sale debt and other securities portfolio were $1.1
billion at December 31, 2019 compared to net unrealized losses of
$298 million at December 31, 2018. The fair value of investment
securities is impacted by interest rates, credit spreads, market
volatility and liquidity conditions. The fair value of investment
securities generally increases when interest rates decrease or when
credit spreads contract.
74 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 27: CHARACTERISTICS OF AVAILABLE-FOR-SALE DEBT AND OTHER SECURITIES
Weighted-Average Weighted-Average
$
$
$
$
Yield
74
74
75
75
3.1
3.1
-
18
18
-
18
18
Fair Value
0.1
3.2
3.2
Life (in years)
Amortized Cost
2.12
2.12 %
7.47
1.74
1.76 %
5,259
7,592
895
13,746
5,376
7,823
916
14,115
As of December 31, 2019 ($ 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
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:(b)
Average life of 1 year or less
Average life 1 – 5 years
Average life 5 – 10 years
Average life greater than 10 years
Total
Non-agency commercial mortgage-backed securities:
Average life of 1 year or less
Average life 1 – 5 years
Average life 5 – 10 years
Total
Asset-backed securities and other debt securities:
Average life of 1 year or less
Average life 1 – 5 years
Average life 5 – 10 years
Average life greater than 10 years
Total
Other securities
Total available-for-sale debt and other securities
$
(a) Taxable-equivalent yield adjustments included in the above table are 1.57%, 0.00% and 0.01% for securities with an average life of 1 year or less, 1-5 years and in total, respectively.
(b) Taxable-equivalent yield adjustments included in the above table are 0.00%, 0.00%, 0.00%, 0.03% and 0.01% for securities with an average life of 1 year or less, 1-5 years, 5-10 years, greater
36
1,192
933
45
2,206
556
36,028
36
1,175
935
43
2,189
556
34,966
2.82
3.14
3.13
3.27
3.16 %
3.57
3.99
3.68
3.43
3.84 %
199
3,962
8,212
3,320
15,693
195
3,833
7,915
3,198
15,141
3.83
3.32
3.25
3.28 %
3.28
3.11
3.21
3.18 %
0.3
3.2
7.5
13.5
7.6
0.8
2.8
7.0
11.5
4.7
1
1,470
1,894
3,365
1
1,421
1,820
3,242
3.9
6.8
13.9
6.1
0.4
3.9
5.8
5.0
3.22 %
6.6
$
$
$
than 10 years and in total, respectively.
Deposits
The Bancorp’s deposit balances represent an important source of
funding and revenue growth opportunity. The Bancorp continues to
focus on core deposit growth in its retail and commercial franchises
by improving customer satisfaction, building full relationships and
offering competitive rates. Average core deposits represented 71%
and 72% of the Bancorp’s average asset funding base for the years
ended December 31, 2019 and 2018, respectively.
The following table presents the end of period components of deposits:
TABLE 28: COMPONENTS OF DEPOSITS
As of December 31 ($ in millions)
Demand
Interest checking
Savings
Money market
Foreign office
Transaction deposits
Other time
Core deposits
Certificates $100,000 and over(a)
Total deposits
(a)
$
2019
35,968
40,409
14,248
27,277
221
118,123
5,237
123,360
3,702
127,062
2018
32,116
34,058
12,907
22,597
240
101,918
4,490
106,408
2,427
108,835
2017
2016
2015
35,276
27,703
13,425
20,097
484
96,985
3,775
100,760
2,402
103,162
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
$
Includes $2.1 billion, $1.2 billion, $1.3 billion, $1.3 billion and $1.5 billion of institutional, retail and wholesale certificates $250,000 and over at December 31, 2019, 2018, 2017, 2016
and 2015, respectively.
Total deposits increased $18.2 billion, or 17%, from December 31,
2018 driven by the MB Financial, Inc. acquisition as the Bancorp
assumed commercial and consumer deposit balances of $14.5 billion
at acquisition. Table 29 summarizes the detail of deposits assumed
as a result of the MB Financial, Inc. acquisition on March 22, 2019.
75 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 29: DEPOSITS ASSUMED
($ in millions)
Demand
Interest checking
Savings
Money market
Total transaction deposits
Other time
Total core deposits
Certificates $100,000 and over
Total deposits
$
$
6,010
2,408
1,175
2,571
12,164
546
12,710
1,779
14,489
The following discussion excludes the impact of deposits assumed
in the MB Financial, Inc. acquisition. Core deposits increased $4.2
billion, or 4%, from December 31, 2018, driven by an increase in
transaction deposits. Transaction deposits increased $4.0 billion, or
4%, from December 31, 2018 primarily due to increases in interest
checking deposits and money market deposits partially offset by a
decrease in demand deposits. Interest checking deposits increased
$3.9 billion, or 12%, from December 31, 2018 primarily as a result
of higher balances per commercial customer account and balance
migration from demand deposit accounts. Money market deposits
increased $2.1 billion, or 9%, from December 31, 2018 primarily as
a result of promotional product offerings, which drove consumer
customer acquisition. Demand deposits decreased $2.2 billion, or
7%, from December 31, 2018 primarily as a result of balance
migration into interest checking deposits and lower balances per
commercial customer account.
The following table presents the components of average deposits for the years ended December 31:
TABLE 30: COMPONENTS OF AVERAGE DEPOSITS
($ in millions)
Demand
Interest checking
Savings
Money market
Foreign office
Transaction deposits
Other time
Core deposits
Certificates $100,000 and over(a)
Other
Total average deposits
(a)
$
2019
34,343
36,658
14,041
25,879
209
111,130
5,470
116,600
4,504
265
121,369
2018
32,634
29,818
13,330
21,769
363
97,914
4,106
102,020
2,426
476
104,922
2017
2016
2015
35,093
26,382
13,958
20,231
388
96,052
3,771
99,823
2,564
277
102,664
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
$
Includes $2.6 billion, $1.1 billion, $1.4 billion, $1.5 billion and $1.6 billion of average institutional, retail and wholesale certificates $250,000 and over during the years ended December 31,
2019, 2018, 2017, 2016 and 2015, respectively.
On an average basis, core deposits increased $14.6 billion, or 14%,
from December 31, 2018 due to an increase of $13.2 billion and
$1.4 billion 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,
average money market deposits and average demand deposits.
Average interest checking deposits increased $6.8 billion, or 23%,
from December 31, 2018 primarily due to the MB Financial, Inc.
acquisition as well as balance migration from demand deposit
accounts and an increase in average balances per commercial
customer account. Average money market deposits increased $4.1
billion, or 19%, from December 31, 2018 primarily due to the MB
Financial, Inc. acquisition as well as promotional product offerings,
which drove consumer customer acquisition. Average demand
deposits increased $1.7 billion, or 5%, from December 31, 2018
primarily due to the MB Financial, Inc. acquisition, partially offset
by balance migration into interest checking deposits and lower
balances per commercial customer account. The increase in average
other time deposits was primarily due to the MB Financial, Inc.
acquisition as well as promotional rate offers.
Average certificates $100,000 and over increased $2.1 billion
from December 31, 2018 primarily due to the MB Financial, Inc.
acquisition as well as an increase in retail brokered certificates of
deposit issued since December 31, 2018. Average other deposits
decreased $211 million primarily due to a decrease in average
Eurodollar trade deposits.
Contractual Maturities
The contractual maturities of certificates $100,000 and over as of December 31, 2019 are summarized in the following table:
TABLE 31: CONTRACTUAL MATURITIES OF CERTIFICATES $100,000 AND OVER
($ in millions)
Next 3 months
3-6 months
6-12 months
After 12 months
Total certificates $100,000 and over
$
$
1,884
806
525
487
3,702
76 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The contractual maturities of other time deposits and certificates $100,000 and over as of December 31, 2019 are summarized in the following
table:
TABLE 32: CONTRACTUAL MATURITIES OF OTHER TIME DEPOSITS AND CERTIFICATES $100,000 AND OVER
($ in millions)
Next 12 months
13-24 months
25-36 months
37-48 months
49-60 months
After 60 months
Total other time deposits and certificates $100,000 and over
$
$
7,714
914
186
52
66
7
8,939
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 17% at December 31,
2019 compared to 20% at December 31, 2018.
The following table summarizes the end of period components of borrowings:
TABLE 33: COMPONENTS OF BORROWINGS
As of December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total borrowings
in
increases
Total borrowings decreased $683 million, or 4%, from December
31, 2018 due to a decrease in federal funds purchased, partially
offset by
long-term debt and other short-term
borrowings. Federal funds purchased decreased $1.7 billion from
December 31, 2018 primarily due to a reduction in short-term
funding needs as a result of deposit growth. Long-term debt
increased $544 million from December 31, 2018 primarily driven by
the issuance of $2.3 billion of unsecured senior fixed-rate notes,
$300 million of unsecured senior floating-rate bank notes, the
issuance of asset-backed securities of $1.3 billion related to an
automobile loan securitization and $148 million of fair value
adjustments associated with interest rate swaps hedging long-term
debt. These increases were partially offset by the maturities of $2.6
billion of unsecured senior bank notes, $500 million of unsecured
senior notes and $689 million of paydowns on long-term debt
associated with automobile loan securitizations during the year
2019
260
1,011
14,970
16,241
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
$
$
ended December 31, 2019. For additional information regarding the
automobile loan securitization and long-term debt issuances, refer
to Note 13 and Note 18, respectively, of the Notes to Consolidated
Financial Statements. Other short-term borrowings increased $438
million from December 31, 2018 as a result of increases in collateral
held related to certain derivatives and in securities sold under
repurchase agreements driven by an
in commercial
customer activity. The level of other short-term borrowings can
fluctuate significantly from period to period depending on funding
needs and which sources are used to satisfy those needs. For further
information on the components of other short-term borrowings,
refer to Note 17 of the Notes to Consolidated Financial Statements.
For further information on a subsequent event related to long-term
debt, refer to Note 33 of the Notes to Consolidated Financial
Statements.
increase
The following table summarizes the components of average borrowings:
TABLE 34: COMPONENTS OF AVERAGE BORROWINGS
For the years ended December 31 ($ in millions)
Federal funds purchased
Other short-term borrowings
Long-term debt
Total average borrowings
2019
1,267
1,046
15,369
17,682
$
$
2018
1,509
1,611
14,551
17,671
2017
557
3,158
13,804
17,519
2016
2015
506
2,845
15,394
18,745
920
1,721
14,644
17,285
Total average borrowings increased $11 million compared to
December 31, 2018, due to an increase in average long-term debt,
partially offset by decreases in average other short-term borrowings
and average federal funds purchased. Average long-term debt
increased $818 million compared to December 31, 2018. The
increase was driven primarily by the issuances of long-term debt
during the first half of 2019 which consisted of $1.5 billion of
unsecured senior fixed-rate notes, $300 million of unsecured senior
floating-rate bank notes and the issuance of asset-backed securities
of $1.3 billion related to an automobile loan securitization. The
increase was partially offset by the maturities of unsecured senior
bank notes, unsecured senior notes and paydowns on long-term
debt associated with automobile loan securitizations, as discussed
above, during the year ended December 31, 2019. Average other
short-term borrowings decreased $565 million compared
to
December 31, 2018, driven primarily by a decrease in average FHLB
advances. Average federal funds purchased decreased $242 million
primarily due to a reduction in short-term funding needs as a result
of average deposit growth. 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 to 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, financial, and
capital planning processes. It is essential that the Bancorp’s business
strategies consistently align to its overall risk appetite and capital
considerations.
Key elements of Fifth Third’s Risk Management Framework
are as follows:
• The Bancorp ensures transparency of risk through defined
risk policies, governance, and a reporting structure that
includes the Risk and Compliance Committee of the Board
of Directors, the Enterprise Risk Management Committee,
and risk management committees.
•
• The Bancorp establishes a risk appetite in alignment with its
strategic, financial, and capital plans. The Bancorp’s risk
appetite is defined using quantitative metrics and qualitative
measures to ensure prudent risk taking, drive balanced
decision making, and ensure that no excessive risks are
taken.
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.
Fifth Third drives accountability for managing risk through its
Three Lines of Defense structure:
• The first line of defense is comprised of front line units that
create risk and are accountable for managing risk. These
groups are the Bancorp’s primary risk takers and are
responsible for implementing effective internal controls and
maintaining processes for identifying, assessing, controlling,
and mitigating the risks associated with their activities
consistent with established risk appetite and limits. The first
line of defense also includes business units that provide
information technology, operations, servicing, processing, or
other support.
• The second
line of defense, or Independent Risk
Management, consists of Risk Management, Compliance,
and Credit Review. The second line is responsible for
developing frameworks and policies to govern risk-taking
activities, overseeing risk-taking of the organization, advising
on controlling that risk, and providing input on key risk
decisions. Risk Management complements the front line’s
management of risk taking activities through its monitoring
and reporting responsibilities, including adherence to the risk
appetite. Additionally, Risk Management is responsible for
identifying, measuring, monitoring, and controlling aggregate
and emerging risks enterprise-wide.
• The third line of defense is Internal Audit, which provides
oversight of the first and second lines of defense, and
78 Fifth Third Bancorp
independent assurance to the Board on the effectiveness of
governance, risk management, and internal controls.
The Bancorp has eight defined risk types and manages each to a
prescribed tolerance. The risk types are as follows:
Liquidity Risk
• Credit Risk
•
• Market Risk (including Interest Rate Risk and Price Risk)
• Regulatory Compliance Risk
•
Legal Risk
• Operational Risk
• Reputational Risk
•
Strategic Risk
Fifth Third’s Risk Management processes ensure a consistent and
comprehensive approach in how to identify, measure and assess,
manage, monitor, and report risks. The Bancorp has also established
processes and programs to manage and report concentration risks;
talent, compensation, and performance
to ensure
management; and to aggregate risks across the enterprise.
robust
Below are the Bancorp’s core principles and qualitative factors that
define its risk appetite and are used to ensure the Bancorp is
operating in a safe and sound manner:
• Act with integrity in all activities.
• Understand the risks the Bancorp takes, and ensure that they
are in alignment with its business strategies and risk appetite.
• Avoid risks that cannot be understood, managed or
•
monitored.
Provide transparency of risk to the Bancorp’s management
and Board, and escalate risks and issues as necessary.
• Ensure Fifth Third’s products and services are aligned to its
core customer base and are designed, delivered and
maintained to provide value and benefit to customers and to
Fifth Third.
• Do not offer products or services that are not appropriate or
•
suitable for customers.
Focus on providing operational excellence by providing
reliable, accurate, and efficient services to meet customer’s
needs.
• Maintain a strong financial position to ensure that the
Bancorp meets its objectives through all economic cycles
with sufficient capital and liquidity, 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.
Risk appetite is measured and monitored to ensure:
• Risk-taking activities remain aligned with the Bancorp’s
established risk appetite, tolerances, and limits;
• Business decisions are based on a holistic and forward-
looking view of risk and returns, including interactions
between risks and results of stress tests, leading to an
efficient use of capital;
• Risk management activities are maintained through periods
of economic decline, as well as periods of economic growth
when risk management can be most critical and challenging.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quantitative metrics and limits are used to provide a view of the
overall risk profile of the Bancorp, which includes monitoring top
risks and areas of concentration risk.
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
strategic plan is approved by the Board of Directors annually. The
strategic plan includes a comprehensive assessment of risks that
currently have an impact on the Bancorp or risks that could have an
impact to risk appetite and impact to capital, liquidity, and earnings
during the time period covered by the plan.
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,
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
managing, monitoring
reporting of risk.
and
independent
governance
are
risk
types
• The Board and executive management have identified eight
risk types (defined above) for monitoring the overall risk of
the Bancorp, 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.
assessed using quantitative
These
measurements and qualitative factors 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
structure
governance
includes
management committees operating under delegation from,
and providing information directly or indirectly to, the
Board. The Bancorp Board delegates certain responsibilities
to Board sub-committees, including the RCC as outlined in
each respective Committee Charter, which may be found on
www.53.com. The ERMC, which reports to the RCC,
comprises senior management from across the Bancorp and
reviews and approves risk management frameworks and
policies, oversees the management of all risk types to ensure
that aggregated risks remain within the Bancorp’s risk
appetite and fosters a risk culture to ensure appropriate
escalation and transparency of risks.
are centrally managed, and ERM manages the policy and the
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
7 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.
79 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables provide a summary of potential problem portfolio loans and leases:
TABLE 35: POTENTIAL PROBLEM PORTFOLIO LOANS AND LEASES
As of December 31, 2019 ($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total potential problem portfolio loans and leases
(a)
1,100
342
75
61
1,578
Includes $287 million of PCI and $363 million of non-PCI loans and leases as of December 31, 2019 acquired in the MB Financial, Inc. acquisition.
$
$
Carrying
Value(a)
Unpaid
Principal
Balance
1,120
390
82
61
1,653
Unpaid
Principal
Balance
647
152
31
830
Exposure
1,488
342
84
61
1,975
Exposure
854
152
31
1,037
Carrying
Value
646
152
31
829
$
$
employment market where job growth, growth in average hourly
wages and growth in hours worked slowed in 2019 when compared
to 2018. Despite the softer job growth, the unemployment rate
declined to 3.5% in 2019 from 3.9% in 2018 as job growth outpaced
the growth in the labor force.
Even though employment growth slowed in 2019, the lowest
unemployment rate in a half century along with the availability of
consumer credit continued to support consumer confidence and
spending while lower interest rates supported a rebound in the
housing market. Existing home sales reached a two-year high
leaving inventories at their lowest level since 1999. Low inventories
along with stronger price gains will limit the growth in home sales in
2020.
Geopolitics will continue to play a significant role in the
outlook for global growth. Although the U.S. and China reached a
trade agreement in early January 2020, the path to a broader trade
deal appears unlikely before the November U.S. election. U.S.
concerns around national security, human rights, enforcement, and
Chinese subsidies for state-owned enterprises remain outstanding
with no clear solution. Meanwhile, geopolitical challenges outside
the U.S. will continue to limit the upside potential of the global
economy.
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
TABLE 36: 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
In addition to the individual review of larger commercial loans that
exhibit probable or observed credit weaknesses, the commercial
credit review process includes the use of two risk grading systems.
The risk grading system currently utilized for allowance for credit
loss analysis purposes encompasses ten categories. The Bancorp
also maintains a dual risk rating system for credit approval and
pricing, portfolio monitoring and capital allocation that includes a
“through-the-cycle” rating philosophy for assessing a borrower’s
creditworthiness. A “through-the-cycle” rating philosophy uses a
grading scale that assigns ratings based on average default rates
through an entire business cycle for borrowers with similar financial
performance. The dual risk rating system
thirteen
probabilities of default grade categories and an additional eleven
grade categories for estimating losses given an event of default. The
probability of default and loss given default evaluations are not
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
has also developed U.S. GAAP compliant CECL models as part of
the Bancorp’s adoption of ASU 2016-13 “Measurement of Credit Losses
on Financial Instruments,” which was adopted by the Bancorp on
January 1, 2020. These validated CECL models use separate
probabilities of default and loss given default ratings to estimate
credit losses. Scoring systems, various analytical tools and portfolio
performance monitoring are used to assess the credit risk in the
Bancorp's homogenous consumer and small business
loan
portfolios.
includes
Overview
U.S. economic growth slowed in the fourth quarter due to weakness
in the manufacturing sector and a softer trend in consumer
spending. Financial conditions eased during the quarter as the
expansion of the FRB’s balance sheet eased funding pressures in the
overnight funding markets. Also, the phase one trade deal between
the U.S. and China eased concerns around an escalation of the trade
conflict. The easing in financial conditions, along with the trade
agreement, supported a rally in equity and credit markets as
investors upgraded their outlook for global growth and earnings in
2020. FRB officials have strongly suggested that the FOMC is
expected to hold interest rates steady for 2020, indicating that
observation of a sustained and significant increase in inflation would
be needed before considering raising rates.
The theme of slower growth was also reflected in the
80 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The acquired commercial and industrial portfolio is comprised
primarily of small business and middle market commercial loans but
also includes specialty lending products, including lease banking,
small business leasing and asset-based lending. These products serve
distinct client needs and broaden Fifth Third’s lending capabilities.
The portfolios have been evaluated for credit quality and will be
managed within Fifth Third’s credit risk framework to ensure
adherence to risk appetite.
The following table provides detail on commercial loans 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 37: 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
Wholesale trade
Retail trade
Accommodation and food
Communication and information
Mining
Transportation and warehousing
Construction
Entertainment and recreation
Other services
Utilities
Public administration
Agribusiness
Other
Individuals
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:
Illinois
Ohio
Florida
Michigan
Indiana
Georgia
North Carolina
Tennessee
Kentucky
Other
Total
Outstanding
2019
Exposure
Nonaccrual
Outstanding
2018
Exposure
Nonaccrual
$
$
11,996
11,320
7,214
5,170
4,984
4,502
3,948
3,745
3,166
3,046
2,880
2,526
1,905
1,224
991
782
344
151
64
69,958
1 %
3
9
7
20
60
100 %
15 %
10
7
6
4
3
3
3
2
47
100 %
22,079
16,993
15,398
8,579
7,206
7,715
8,255
6,525
5,567
4,966
4,996
5,327
3,327
1,662
2,672
1,107
554
153
128
123,209
1
3
7
6
17
66
100
12
11
7
6
4
4
3
3
2
48
100
87
9
-
75
38
17
39
21
2
37
12
4
40
4
-
-
9
3
-
397
4
6
22
11
27
30
100
18
6
6
7
2
11
10
1
9
30
100
10,387
8,327
6,805
4,426
4,343
3,127
3,726
3,435
2,923
2,427
2,807
2,498
1,798
855
835
465
323
-
64
59,571
1
2
6
6
19
66
100
6
13
8
7
4
5
3
3
2
49
100
19,290
13,055
13,192
7,161
6,198
5,481
7,496
5,626
5,111
4,363
4,729
4,718
3,354
1,104
2,531
669
511
-
130
104,719
1
2
6
5
16
70
100
5
14
8
6
4
5
3
3
3
49
100
48
10
1
17
36
14
6
28
-
38
19
4
1
4
-
-
2
-
-
228
5
9
18
19
38
11
100
8
10
21
10
8
11
-
-
2
30
100
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 third-
party appraisals
in accordance with regulatory requirements.
Collateral values on criticized assets with relationships exceeding $1
million are reviewed quarterly to assess the appropriateness of the
value ascribed in the assessment of charge-offs and specific reserves.
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
81 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
loans individually evaluated. The Bancorp does not typically
aggregate the LTV ratios for commercial mortgage loans less than
$1 million.
TABLE 38: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION
As of December 31, 2019 ($ in millions)
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Total
126
58
184
$
$
LTV > 100% LTV 80-100%
TABLE 39: 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%
393
107
500
172
29
201
LTV < 80%
3,199
4,562
7,761
LTV < 80%
2,119
2,731
4,850
The Bancorp views non-owner-occupied commercial real estate as a
higher credit risk product compared to some other commercial loan
portfolios due to the higher volatility of the industry.
The following tables provide an analysis of nonowner-occupied commercial real estate loans by state (excluding loans held for sale):
TABLE 40: NONOWNER-OCCUPIED COMMERCIAL REAL ESTATE (EXCLUDING LOANS HELD FOR SALE)(a)
As of December 31, 2019 ($ in millions)
By State:
Outstanding
Exposure
90 Days
Past Due
Nonaccrual
Net Charge-offs
For the Year Ended
December 31, 2019
$
Illinois
Ohio
Florida
Michigan
North Carolina
Indiana
Georgia
All other states
-
1
-
-
-
-
-
-
1
$
Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.
3,639
1,861
1,605
849
1,040
865
897
4,569
15,325
3,097
1,402
951
714
635
582
351
2,883
10,615
6
-
-
-
-
-
-
-
6
Total
(a)
2
-
-
-
-
-
-
-
2
TABLE 41: 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
$
Illinois
Ohio
Florida
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.
1,076
1,918
1,536
771
872
853
729
4,187
11,942
750
1,574
978
657
646
528
357
2,590
8,080
-
-
-
-
-
-
-
-
-
Total
(a)
-
-
-
-
-
-
-
1
1
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,
indirect secured consumer 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 LTVs 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, 2019, consumer real estate loans, consisting of
residential mortgage loans and home equity loans, originated from
2005 through 2008 represent approximately 10% of the consumer
real estate portfolio. These loans accounted for 50% of total
consumer real estate secured net charge-offs for the year ended
82 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 2019. 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
indirect secured consumer
portfolio performance, which includes automobile loans. 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 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 LTVs 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
$671 million of ARM loans will have rate resets during the next
twelve months. Of these resets, 29% are expected to experience an
increase in rate, with an average increase of approximately 1%.
Underlying characteristics of these borrowers are relatively strong
with a weighted-average origination DTI of 32% and weighted-
average origination LTV of 71%.
Certain residential mortgage products have contractual features
that may increase credit exposure to the Bancorp in the event of a
decline in housing values. These types of mortgage products offered
by the Bancorp include loans with high LTVs, multiple loans
secured by the same collateral that when combined result in an LTV
greater than 80% and interest-only loans. The Bancorp has deemed
residential mortgage loans with greater than 80% LTVs and no
mortgage insurance as loans that represent a higher level of risk.
Portfolio residential mortgage loans from 2010 and later
vintages represented 94% of the portfolio as of December 31, 2019
and had a weighted-average origination LTV of 73% and a
weighted-average origination FICO of 760.
The following table provides an analysis of the residential mortgage portfolio loans outstanding by LTV at origination:
TABLE 42: RESIDENTIAL MORTGAGE PORTFOLIO LOANS BY LTV AT ORIGINATION
2019
Weighted-
2018
Weighted-
As of December 31 ($ 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
$
$
12,100
2,373
2,251
16,724
66.3 % $
95.2
93.1
74.3 % $
11,540
2,010
1,954
15,504
66.7 %
95.1
94.2
74.3 %
The following tables provide an analysis of the residential mortgage portfolio loans outstanding by state with a greater than 80% LTV and no
mortgage insurance:
TABLE 43: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
As of December 31, 2019 ($ in millions)
By State:
Ohio
Illinois
Florida
Michigan
Indiana
North Carolina
Kentucky
All other states
Total
Outstanding
90 Days
Past Due Nonaccrual
$
482
468
305
217
175
139
93
372
$
2,251
3
2
2
2
1
-
-
3
13
4
3
1
1
1
2
-
3
15
For the Year Ended
December 31, 2019
Net Charge-offs
(Recoveries)
1
1
(1)
-
-
-
-
1
2
83 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 44: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE
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 46 and Table 47. Of the total $6.1 billion of outstanding
home equity loans:
•
•
•
90% reside within the Bancorp’s Midwest footprint of
Ohio, Michigan, Kentucky, Indiana and Illinois as of
December 31, 2019;
37% are in senior lien positions and 63% are in junior lien
positions at December 31, 2019;
79% of non-delinquent borrowers made at least one
payment greater than the minimum payment during the
year ended December 31, 2019; and
• The portfolio had a weighted-average refreshed FICO
score of 745 at December 31, 2019.
The Bancorp actively manages lines of credit and makes
adjustments in lending limits when it believes it is necessary based
on FICO score deterioration and property devaluation. The
Bancorp does not routinely obtain appraisals on performing loans
to update LTVs after origination. However, the Bancorp monitors
the local housing markets by reviewing various home price indices
and incorporates the impact of the changing market conditions in its
ongoing credit monitoring processes. For junior lien home equity
loans which become 60 days or more past due, the Bancorp tracks
the performance of the senior lien loans in which the Bancorp is the
servicer and utilizes consumer credit bureau attributes to monitor
the status of the senior lien loans that the Bancorp does not service.
If the senior lien loan is found to be 120 days or more past due, the
junior lien home equity loan is placed on nonaccrual status unless
both loans are well-secured and in the process of collection.
Additionally, if the junior lien home equity loan becomes 120 days
or more past due and the senior lien loan is also 120 days or more
past due, the junior lien home equity loan is assessed for charge-off.
Refer to the Analysis of Nonperforming Assets subsection of the
Risk Management section of MD&A for more information.
As of December 31, 2018 ($ 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 25% of the balances
mature before 2025.
The ALLL provides coverage for probable and estimable losses
in the home equity portfolio. The allowance attributable to the
portion of the home equity portfolio that has not been restructured
in a TDR is 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.
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.
include adjustments
loss rate
factors
The home equity portfolio is managed in two primary groups:
loans outstanding with a combined LTV greater than 80% and
those loans with an LTV of 80% or less based upon appraisals at
origination. For additional information on these loans, refer to
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:
TABLE 45: 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
2019
2018
Outstanding
% of Total
Outstanding
% of Total
$
$
219
330
1,732
2,281
446
716
2,640
3,802
6,083
4 % $
5
28
37
7
12
44
63
100 % $
218
318
1,791
2,327
469
769
2,837
4,075
6,402
4 %
5
28
37
7
12
44
63
100 %
The Bancorp believes that home equity portfolio loans with a greater than 80% combined LTV 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 46: 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
2019
Weighted-
2018
Weighted-
Outstanding Average LTV
Outstanding Average LTV
$
$
1,964
317
2,281
2,213
1,589
3,802
6,083
53.8 % $
88.8
58.9
66.8
89.7
77.4
70.3 % $
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 %
The following tables provide an analysis of home equity portfolio loans outstanding by state with a combined LTV greater than 80%:
TABLE 47: HOME EQUITY PORTFOLIO LOANS OUTSTANDING WITH AN LTV GREATER THAN 80%
As of December 31, 2019 ($ in millions)
By State:
Ohio
Michigan
Illinois
Indiana
Kentucky
Florida
All other states
Total
For the Year Ended
December 31, 2019
Outstanding
Exposure
90 Days
Past Due
Nonaccrual
Net Charge-offs
$
$
1,145
239
169
105
95
50
103
1,906
2,431
413
279
196
191
78
162
3,750
-
-
-
-
-
-
-
-
11
6
5
5
2
2
4
35
3
1
3
1
-
1
1
10
85 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 48: 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
Indirect secured consumer portfolio
The indirect secured consumer portfolio is comprised of $10.7
billion of automobile loans and $882 million of indirect motorcycle,
powersport, recreational vehicle and marine loans. The Bancorp’s
indirect secured consumer portfolio balances have increased since
December 31, 2018 due to the acquisition of MB Financial, Inc. and
in
increase
loan origination activity. Additionally,
an
the
concentration of lower FICO (≤690) origination balances remained
within targeted credit risk tolerance during the year ended
December 31, 2019. All concentration and guideline changes are
monitored monthly to ensure alignment with original credit
performance and return projections.
The following table provides an analysis of indirect secured consumer portfolio loans outstanding disaggregated based upon FICO score:
TABLE 49: INDIRECT SECURED CONSUMER PORTFOLIO LOANS OUTSTANDING BY FICO SCORE AT ORIGINATION
2019
2018
As of December 31 ($ in millions)
FICO ≤ 690
FICO > 690
Total
Outstanding
1,681
9,857
11,538
$
$
% of Total
15 %
85
100 %
$
Outstanding
$
1,604
7,372
8,976
% of Total
18 %
82
100 %
As of December 31, 2019, 95% of the indirect secured consumer
loan portfolio is comprised of automobile loans, powersport loans
and motorcycle loans. It is a common industry practice to advance
on these types of loans an amount in excess of the collateral value
due
trade-in,
of
maintenance/warranty products, taxes, title and other fees paid at
inclusion
negative
equity
the
to
closing. The Bancorp monitors its exposure to these higher risk
loans. The remainder of the indirect secured consumer loan
portfolio is comprised of marine and recreational vehicle loans.
Credit policy limits the maximum advance rate on these to 100% of
collateral value.
The following table provides an analysis of indirect secured consumer portfolio loans outstanding by LTV at origination:
TABLE 50: INDIRECT SECURED CONSUMER PORTFOLIO LOANS OUTSTANDING BY LTV AT ORIGINATION
As of December 31 ($ in millions)
LTV ≤ 100%
LTV > 100%
Total
2019
Weighted-
2018
Weighted-
Outstanding Average LTV
Outstanding Average LTV
$
$
7,420
4,118
11,538
81.3 % $
113.4
93.1 % $
5,591
3,385
8,976
82.3 %
112.9
94.2 %
The following table provides an analysis of the Bancorp’s indirect secured consumer portfolio loans outstanding with an LTV at origination
greater than 100% as of and for the years ended:
TABLE 51: INDIRECT SECURED CONSUMER PORTFOLIO LOANS OUTSTANDING WITH AN LTV GREATER THAN 100%
($ in millions)
December 31, 2019
December 31, 2018
Outstanding
$
4,118
3,385
90 Days Past
Due and Accruing
Nonaccrual
Net Charge-offs
7
7
4
1
37
28
86 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Credit card portfolio
The credit card portfolio consists of predominately prime accounts
with 97% of balances existing within the Bancorp’s footprint as of
December 31, 2019. At December 31, 2019 and 2018, 67% and
71%, respectively, of the outstanding balances were originated
through branch-based relationships with the remainder coming
from direct mail campaigns and online acquisitions.
The following table provides an analysis of credit card portfolio loans outstanding disaggregated based upon FICO score at origination:
TABLE 52: CREDIT CARD PORTFOLIO LOANS OUTSTANDING BY FICO SCORE AT ORIGINATION
2019
2018
As of December 31 ($ in millions)
FICO ≤ 659
FICO 660-719
FICO ≥ 720
Total
Outstanding
% of Total
$
$
107
834
1,591
2,532
4 %
33
63
100 %
$
Outstanding
$
82
711
1,677
2,470
% of Total
3 %
29
68
100 %
Other consumer portfolio loans
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. The Bancorp had $289
million in unfunded commitments associated with loans originated
in connection with third-party financial technology companies as of
December 31, 2019. The Bancorp closely monitors the credit
performance of point-of-sale loans which, for the Bancorp, is
impacted by the credit loss protection coverage provided by the
third-party financial technology companies.
The following table provides an analysis of other consumer portfolio loans outstanding by product type at origination:
TABLE 53: OTHER CONSUMER PORTFOLIO LOANS OUTSTANDING BY PRODUCT TYPE AT ORIGINATION
2019
2018
As of December 31 ($ in millions)
Unsecured
Other secured
Point-of-sale
Total
Outstanding
% of Total
$
$
783
530
1,410
2,723
29 %
19
52
100 %
$
Outstanding
$
610
510
1,222
2,342
% of Total
26 %
22
52
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, credit card
and certain consumer
loans which have not yet met the
requirements to be classified as a performing asset; restructured
consumer loans which are 90 days past due based on the
restructured terms unless the loan is both well-secured and in the
process of collection; and certain other assets, including OREO and
other repossessed property. A summary of nonperforming assets is
included in Table 54. 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 $687 million at December 31, 2019
compared to $411 million at December 31, 2018. At December 31,
2019, $7 million of nonaccrual loans were held for sale, compared to
$16 million at December 31, 2018.
Nonperforming portfolio assets as a percent of portfolio loans
and leases and OREO were 0.62% as of December 31, 2019
compared to 0.41% as of December 31, 2018. Nonaccrual loans and
leases secured by real estate were 35% of nonaccrual loans and
leases as of December 31, 2019 compared to 34% as of December
31, 2018.
Portfolio commercial nonaccrual loans and leases were $397
million at December 31, 2019, an increase of $169 million from
December 31, 2018. Portfolio consumer nonaccrual loans were
$221 million at December 31, 2019, an increase of $101 million
from December 31, 2018. Refer to Table 55 for a rollforward of the
portfolio nonaccrual loans and leases.
OREO and other repossessed property was $62 million at
December 31, 2019, compared to $47 million at December 31,
2018. The Bancorp recognized $6 million and $7 million in losses
on the transfer, sale or write-down of OREO properties during the
years ended December 31, 2019 and 2018, respectively.
During the years ended December 31, 2019 and 2018,
approximately $35 million and $30 million, respectively, of interest
income would have been recognized if the nonaccrual and
renegotiated loans and leases on nonaccrual status had been current
in accordance with their original terms. Although these values help
demonstrate the costs of carrying nonaccrual credits, the Bancorp
does not expect to recover the full amount of interest as nonaccrual
loans and leases are generally carried below their principal balance.
87 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 54: SUMMARY OF NONPERFORMING ASSETS AND DELINQUENT LOANS
As of December 31 ($ in millions)
Nonaccrual portfolio loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
$
2019
2018
2017
2016
2015
118
21
1
26
12
55
1
2
220
9
2
79
39
6
27
618
62
680
-
7
687
54
9
-
18
10
56
-
1
139
4
4
12
13
1
27
348
47
395
-
16
411
144
12
-
-
17
56
-
-
132
14
4
13
18
1
26
437
52
489
5
1
495
302
27
-
2
17
55
-
-
176
14
2
17
18
2
28
660
78
738
4
9
751
82
56
-
-
28
62
-
-
177
25
1
23
17
2
33
506
141
647
1
11
659
$
Residential mortgage loans(a)
Home equity
Indirect secured consumer loans
Other consumer loans
Nonaccrual portfolio restructured loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial leases
Residential mortgage loans(a)
Home equity
Indirect secured consumer loans
Credit card
Total nonaccrual portfolio loans and leases(b)
OREO and other repossessed property(c)
Total nonperforming portfolio loans and leases and OREO
Nonaccrual loans held for sale
Nonaccrual restructured loans held for sale
Total nonperforming assets
Portfolio loans and leases 90 days past due and still accruing:
Commercial and industrial loans
Commercial mortgage loans
Residential mortgage loans(a)
$
Home equity
Indirect secured consumer loans
7
-
40
-
10
18
-
75
0.70
197
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 $261, $195, $290, $312 and $335 as of December 31, 2019, 2018, 2017, 2016 and 2015, respectively. The Bancorp recognized losses of $4, $5, $5, $6 and $8 for the
years ended December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
Includes $16, $6, $3, $4 and $6 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at December 31, 2019, 2018, 2017, 2016 and 2015,
respectively, of which $11, $2, $3, $1 and $2 were restructured nonaccrual government insured commercial loans at December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
Credit card
Other consumer loans
Total portfolio 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)
11
15
50
1
10
42
1
130
0.62 %
177
4
2
38
-
12
37
-
93
0.41
279
3
-
57
-
10
27
-
97
0.53
245
4
-
49
-
9
22
-
84
0.80
170
(c) Upon completion of Fifth Third Bank’s conversion to a national charter, the Bancorp conformed to OCC guidance with regard to branch-related real estate no longer intended to be used for banking
(b)
$
purposes. The impact of the change resulted in an increase to OREO of approximately $30 million with an offsetting reduction to bank premises and equipment.
88 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides a rollforward of portfolio nonaccrual loans and leases, by portfolio segment:
TABLE 55: ROLLFORWARD OF PORTFOLIO NONACCRUAL LOANS AND LEASES
For the year ended December 31, 2019 ($ in millions)
Balance, beginning of period
Transfers to nonaccrual status
Acquired nonaccrual loans
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, 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
include
Troubled Debt Restructurings
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.
reorganization,
TDRs
arrangement or other provisions of the Federal Bankruptcy Act. 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.
granted under
concessions
there
At the time of modification, the Bancorp maintains certain
consumer loan TDRs (including certain residential mortgage loans,
home equity loans and other consumer loans) on accrual status,
provided
repayment and
performance according to the modified terms based upon a current,
well-documented credit evaluation. Loans discharged in a Chapter 7
bankruptcy and not reaffirmed by the borrower are classified as
collateral-dependent TDRs and placed on nonaccrual status
regardless of the borrower’s payment history or capacity to repay in
reasonable assurance of
is
Commercial
228
456
8
-
(17)
(165)
(5)
(127)
19
397
306
252
(3)
(28)
(175)
(3)
(157)
36
228
$
$
$
$
Residential
Mortgage
22
107
-
(20)
-
(9)
(7)
(2)
-
91
30
34
(22)
-
(8)
(10)
(2)
-
22
Consumer
98
176
-
(72)
-
(30)
(4)
(38)
-
130
101
139
(67)
-
(32)
(7)
(36)
-
98
Total
348
739
8
(92)
(17)
(204)
(16)
(167)
19
618
437
425
(92)
(28)
(215)
(20)
(195)
36
348
the future. These loans are returned to accrual status provided there
is a sustained payment history of twelve months after bankruptcy
and collectability is reasonably assured for all remaining contractual
payments. Commercial loans modified as part of a TDR are
maintained on accrual status provided there is a sustained payment
history of six months or greater prior to the modification in
accordance with the modified terms and all remaining contractual
payments under the modified terms are reasonably assured of
collection. TDRs of commercial loans and credit card loans that do
not have a sustained payment history of six months or greater in
accordance with the modified terms remain on nonaccrual status
until a six-month payment history is sustained.
Consumer restructured loans on accrual status totaled $965
million and $961 million at December 31, 2019 and 2018,
respectively. As of December 31, 2019, the percentage of
restructured residential mortgage loans, home equity loans, and
credit card loans that are past due 30 days or more from their
modified terms were 32%, 19% and 38%, respectively.
89 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables summarize portfolio TDRs by loan type and delinquency status:
TABLE 56: ACCRUING AND NONACCRUING PORTFOLIO TDRs
Current
23
552
199
6
14
794
$
$
Accruing
30-89 Days
Past Due
90 Days or
More Past Due
Nonaccruing
Total
-
49
8
-
3
60
-
134
-
-
-
134
231
79
39
6
27
382
254
814
246
12
44
1,370
As of December 31, 2019 ($ in millions)
Commercial loans(a)
Residential mortgage loans(b)
Home equity
Indirect secured consumer loans
Credit card
Total(c)
(a) Excludes restructured nonaccrual loans held for sale.
(b)
As of December 31, 2018 ($ in millions)
Commercial loans(a)
Residential mortgage loans(b)
Home equity
Indirect secured consumer loans
Credit card
Total
(a) Excludes restructured nonaccrual loans held for sale.
(b)
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,
2019, these advances represented $321 of current loans, $40 of 30-89 days past due loans and $109 of 90 days or more past due loans.
(c) Upon completion of Fifth Third Bank’s conversion to a national charter, the Bancorp conformed to OCC guidance with regard to non-reaffirmed loans included in Chapter 7 bankruptcy filings to be
accounted for as TDRs and collateral dependent loans regardless of payment history and capacity to pay in the future. The impact of the change resulted in an increase to TDRs of approximately
$105, of which $83 were transferred to nonaccrual status.
TABLE 57: ACCRUING AND NONACCRUING PORTFOLIO TDRs
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.
Analysis of Net Loan Charge-offs
Net charge-offs were 35 bps of average portfolio loans and leases
for both the years ended December 31, 2019 and 2018. Table 58
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 16 bps during the
year ended December 31, 2019, compared to 23 bps during the year
ended December 31, 2018. The decrease was primarily due to an
increase in average commercial loans and leases as a result of the
MB Financial, Inc. acquisition as well as a decrease in net charge-
offs on commercial and industrial loans of $29 million.
The ratio of consumer loan net charge-offs to average portfolio
consumer loans was 68 bps for the year ended December 31, 2019
compared to 56 bps for the year ended December 31, 2018. The
increase was primarily due to increases in net charge-offs on credit
card and other consumer loans of $33 million and $17 million,
respectively.
90 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 58: SUMMARY OF CREDIT LOSS EXPERIENCE
For the years ended December 31 ($ in millions)
Losses charged-off:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Indirect secured consumer 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
Indirect secured consumer 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
Indirect secured consumer loans
Credit card
Other consumer loans
Total net losses charged-off
Net losses charged-off as a percent of average portfolio loans and leases:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
Residential mortgage loans
Home equity
Indirect secured consumer loans
2019
2018
2017
2016
2015
$
$
(120)
-
-
(7)
(9)
(28)
(81)
(156)
(109)
(510)
17
2
-
-
5
10
31
22
54
141
(103)
2
-
(7)
(4)
(18)
(50)
(134)
(55)
(369)
(151)
(5)
-
(1)
(13)
(23)
(63)
(125)
(69)
(450)
19
6
-
-
6
11
23
24
31
120
(132)
1
-
(1)
(7)
(12)
(40)
(101)
(38)
(330)
(136)
(16)
-
(2)
(15)
(32)
(58)
(94)
(28)
(381)
25
4
-
-
8
13
21
10
2
83
(111)
(12)
-
(2)
(7)
(19)
(37)
(84)
(26)
(298)
(205)
(22)
-
(5)
(19)
(41)
(54)
(89)
(21)
(456)
33
7
1
1
9
14
19
9
1
94
(172)
(15)
1
(4)
(10)
(27)
(35)
(80)
(20)
(362)
(253)
(39)
(4)
(2)
(28)
(55)
(46)
(94)
(21)
(542)
24
12
1
-
11
16
18
12
2
96
(229)
(27)
(3)
(2)
(17)
(39)
(28)
(82)
(19)
(446)
0.20 %
(0.02)
-
0.21
0.16
0.03
0.28
0.48
5.49
2.16
0.68
0.35 %
0.31
(0.01)
-
0.03
0.23
0.04
0.17
0.45
4.44
1.93
0.56
0.35
0.27
0.17
-
0.06
0.22
0.04
0.26
0.39
3.93
2.57
0.49
0.32
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
Credit card
Other consumer loans
Total consumer loans
Total net losses charged-off as a percent of average portfolio loans and leases
(a) For the years ended December 31, 2019 and 2018, the Bancorp recorded $48 and $29, respectively, 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.
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, 2019, 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
91 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
methodology for determining the ALLL. The provision for the
reserve for unfunded commitments is included in provision for
credit losses 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
collateral values
the prescriptive
reviews,
control
factors
loans,
loss
rate
TABLE 59: 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
Balance, end of period
Reserve for unfunded commitments:
Balance, beginning of period
Reserve for acquired unfunded commitments
$
$
$
its footprint and the volatility of collateral valuation trends when
determining the collateral value qualitative factor.
The Bancorp’s determination of the ALLL for commercial
loans and leases is sensitive to the risk grades it assigns to these
loans and leases. In the event that 10% of commercial loans and
leases in each risk category would experience a downgrade of one
risk category, the allowance for commercial loans and leases would
increase by approximately $171 million at December 31, 2019. In
addition, the Bancorp’s determination of the ALLL for residential
mortgage loans and consumer loans 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 would increase by approximately $37 million at
December 31, 2019. As several qualitative and quantitative factors
are considered in determining the ALLL, these sensitivity analyses
do not necessarily reflect the nature and extent of future changes in
the ALLL. They are intended to provide insights into the impact of
adverse changes to risk grades and estimated loss rates and do not
imply any expectation of future deterioration in the risk ratings or
loss rates. Given current processes employed by the Bancorp,
management believes the risk grades and estimated loss rates
currently assigned are appropriate.
2019
2018
2017
2016
2015
1,103
(510)
141
468
-
1,202
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
131
8
5
-
144
161
-
(30)
-
131
161
-
-
-
161
138
-
23
-
161
135
-
4
(1)
138
Provision for (benefit from) the reserve for unfunded commitments
Losses charged-off
$
Balance, end of period
(a) For the years ended December 31, 2019 and 2018, the Bancorp recorded $48 and $29, respectively, 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.
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 the 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, 2019 and 2018 was 0.11% and 0.12%, respectively.
The unallocated allowance was approximately 10% of the total
allowance at both December 31, 2019 and 2018.
As shown in Table 60, the ALLL as a percent of portfolio
loans and leases was 1.10% at December 31, 2019, compared to
1.16% at December 31, 2018. This decrease reflects the impact of
the MB Financial, Inc. acquisition, which added approximately $13.4
billion in portfolio loans and leases at the acquisition date. 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.
The ALLL was $1.2 billion and $1.1 billion at December 31, 2019
and 2018, respectively.
92 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 60: ATTRIBUTION OF ALLOWANCE FOR LOAN AND LEASE LOSSES TO PORTFOLIO LOANS AND LEASES
As of December 31 ($ in millions)
Attributed ALLL:
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
2017
2018
2019
$
2016
$
$
$
Indirect secured consumer 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
Indirect secured consumer 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
Indirect secured consumer 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
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. The ASU is effective for the Bancorp
on January 1, 2020.
Based on portfolio characteristics and economic conditions and
expectations as of January 1, 2020, the Bancorp recorded a
combined
increase to the ALLL and reserve for unfunded
commitments on January 1, 2020 of approximately $650 million
upon the adoption of ASU 2016-13. The increase is based on
economic forecasts that the Bancorp considers reasonable and
supportable for a period of three years followed by a reversion to
long-term historical loss rates for the remaining contractual life
(adjusted for expected prepayments) phased in over a period of two
years. The estimated increase in the ALLL is primarily attributable
to longer duration consumer loans.
This increase includes the differences between the purchase
accounting treatment of loans and leases acquired in the MB
Financial, Inc. acquisition and the treatment under ASU 2016-13. In
the legacy portfolio, excluding the MB Financial, Inc. loans and
leases, the Bancorp recognized an increase to the ALLL of
approximately $475 million.
The impact on the Bancorp’s ALLL in future periods may vary
significantly from the adoption date as it will be based on changes in
economic conditions, economic forecasts and the composition and
561
87
45
17
73
37
53
168
40
121
1,202
515
80
32
18
81
36
42
156
33
110
1,103
651
65
23
14
89
46
38
117
33
120
1,196
718
82
16
15
96
58
42
102
12
112
1,253
50,542
10,963
5,090
3,363
16,724
6,083
11,538
2,532
2,723
109,558
1.11 %
0.79
0.88
0.51
0.44
0.61
0.46
6.64
1.47
0.11
1.10 %
44,340
6,974
4,657
3,600
15,504
6,402
8,976
2,470
2,342
95,265
1.16
1.15
0.69
0.50
0.52
0.56
0.47
6.32
1.41
0.12
1.16
41,170
6,604
4,553
4,068
15,591
7,014
9,112
2,299
1,559
91,970
1.58
0.98
0.51
0.34
0.57
0.66
0.42
5.09
2.12
0.13
1.30
41,676
6,899
3,903
3,974
15,051
7,695
9,983
2,237
680
92,098
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
credit quality of the Bancorp’s loan and lease portfolio. The
adoption of ASU 2016-13 will also have an impact on the provision
for credit losses in periods after adoption, which could differ
materially from historical trends. For additional information on
ASU 2016-13, refer to Note 1 of the Notes to Consolidated
Financial Statements.
MARKET RISK MANAGEMENT
Market risk is the day-to-day potential for the value of a financial
instrument to fluctuate 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 income categories through changes in
interest income on earning assets and the cost of interest-bearing
liabilities, and through fee items that are related to interest sensitive
activities such as mortgage origination and servicing income and
through earnings credits earned on commercial deposits that offset
commercial deposit fees. 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
93 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
• 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
and interest-sensitive fees, interest rates can impact earnings
through their effect on loan and deposit demand, credit losses,
mortgage origination volumes, 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.
In addition to the traditional forms of interest rate risk
discussed in this section, the Bancorp is exposed to interest rate risk
associated with the retirement and replacement of LIBOR. For
more information on the LIBOR transition, refer to the Overview
section of MD&A.
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
projected assumptions, as well as from changes in market conditions
and management strategies.
As of December 31, 2019, 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 100 bps parallel ramped decrease in
interest rates. Additionally, the Bancorp routinely analyzes various
potential and extreme scenarios, including ramps, shocks and non-
parallel shifts in rates 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
$750 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 $750 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 short-term 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 71% at December 31, 2019, which is
approximately 10 to 30 percentage points higher than the average
beta that the Bancorp experienced in the FRB tightening cycles
from June 2004 to June 2006 and from December 2015 to
December 2018. The Bancorp’s NII sensitivity modeling assumes a
weighted-average falling-rate interest-bearing deposit beta of 41% at
December 31, 2019. 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 in prior
rate cycles.
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 61: ESTIMATED NII SENSITIVITY PROFILE AND ALCO POLICY LIMITS
2019
2018
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)
12
Months
(0.22) %
(0.16)
(2.66)
N/A
13-24
Months
3.94
2.07
(7.90)
N/A
12
Months
ALCO Policy Limits
13-24
Months
(6.00)
N/A
(12.00)
N/A
(4.00)
N/A
(8.00)
N/A
% Change in NII (FTE)
12
Months
(0.01)%
0.09
(2.83)
(4.34)
13-24
Months
2.11
1.34
(6.70)
(10.58)
ALCO Policy Limits
13-24
Months
(6.00)
N/A
N/A
(12.00)
12
Months
(4.00)
N/A
N/A
(8.00)
At December 31, 2019, the Bancorp’s NII sensitivity under the
parallel rate ramp increases is near neutral in the first year and would
benefit in the second year. Under the parallel 100 bps ramp decrease
in interest rates, the Bancorp’s NII would decline in both the first
and second years. The asymmetric 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 and managed-rate deposits.
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. However, proactive
management of the securities and derivatives portfolios has reduced
94 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the near-term risk to declining market rates. The changes in the
estimated NII sensitivity profile as of December 31, 2019 compared
to December 31, 2018 were primarily attributable to the acquisition
of MB Financial, Inc., which had a more asset-sensitive balance
sheet. The down rate scenarios were also impacted by lower market
interest rates and a higher composition of low-cost deposits, which
results in deposits hitting their floor rates more quickly in the
current year scenarios. However, the strategic repositioning of the
investment portfolio into securities that are less callable in the near
term more than offset the impact of the MB Financial, Inc.
acquisition on NII at risk in year one and partially offset the impact
in year two.
Tables 62 and 63 provide the sensitivity of the Bancorp’s estimated
NII profile at December 31, 2019 to changes to certain deposit
balance and deposit repricing sensitivity (betas) assumptions.
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, 2019:
TABLE 62: 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
% Change in NII (FTE)
Immediate $1 Billion Balance Decrease
Immediate $1 Billion Balance Increase
12
Months
13-24
Months
12
Months
13-24
Months
(0.43) %
(0.26)
(2.77)
3.54
1.87
(8.10)
(0.02)
(0.05)
(2.56)
4.34
2.27
(7.70)
The following table includes the Bancorp’s estimated NII sensitivity profile with a 25% increase and a 25% decrease to the corresponding
deposit beta assumptions as of December 31, 2019. The resulting weighted-average rising-rate interest-bearing deposit betas included in this
analysis were approximately 88% and 53%, respectively, and 51% and 31%, respectively, for falling rates as of December 31, 2019:
TABLE 63: 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
% Change in NII (FTE)
Betas 25% Higher
Betas 25% Lower
12
Months
13-24
Months
12
Months
13-24
Months
(3.52) %
(1.80)
(1.73)
(2.27)
(1.01)
(6.16)
3.07
1.48
(3.60)
10.15
5.15
(9.64)
Economic Value of Equity Sensitivity
The Bancorp also uses EVE as a measurement tool in managing
interest rate risk. Whereas the NII sensitivity analysis highlights the
impact on forecasted NII on an FTE basis (non-GAAP) over one
and two-year time horizons, EVE is a point-in-time analysis of the
economic sensitivity of current positions that incorporates all cash
flows over their estimated remaining lives. The EVE of the balance
sheet is defined as the discounted present value of all asset and net
derivative cash flows less the discounted value of all liability cash
flows. Due to this longer horizon, the sensitivity of EVE to changes
in the level of interest rates is a measure of longer-term interest rate
risk. EVE values only the current balance sheet and does not
incorporate the balance growth assumptions used in the NII
sensitivity analysis. As with the NII simulation model, assumptions
about the timing and variability of existing balance sheet cash flows
are critical
important are
loan and security prepayments and the
assumptions driving
indeterminate-lived
expected balance attrition and pricing of
deposits.
in the EVE analysis. Particularly
The following table shows the Bancorp’s estimated EVE sensitivity profile as of December 31:
TABLE 64: ESTIMATED EVE SENSITIVITY PROFILE
Change in Interest Rates (bps)
Change in EVE
+200 Shock
+100 Shock
-100 Shock
-150 Shock
-200 Shock
2019
ALCO Policy Limit
(12.00)
N/A
N/A
(12.00)
N/A
(5.12) %
(2.01)
N/A
(6.07)
N/A
Change in EVE
2018
ALCO Policy Limit
(7.09)
(3.21)
(1.01)
N/A
(5.27)
(12.00)
N/A
N/A
N/A
(12.00)
The EVE sensitivity is moderately negative in both a +200 bps
rising-rate and a -150 bps declining-rate market rate scenario at
December 31, 2019. The changes in the estimated EVE sensitivity
profile from December 31, 2018 were primarily related to
noninterest-bearing deposits growth from the acquisition of MB
Financial, Inc. and a decrease in market interest rates. These items
were partially offset by strategic repositioning of the investment
portfolio into securities that are less callable in the near term.
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
95 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
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.
Tables 65 and 66 show all swap and floor positions that are
utilized for purposes of managing the Bancorp’s exposures to the
variability of interest rates. These positions are used to convert the
contractual interest rate index of agreed-upon amounts of assets and
liabilities (i.e., notional amounts) to another interest rate index or to
hedge forecasted transactions for the variability in cash flows
attributable to the contractually specified interest rate. The volume,
maturity and mix of portfolio swaps change frequently as the
Bancorp adjusts its broader interest rate risk management objectives
and the balance sheet positions to be hedged. For further
information, including the notional amount and fair values of these
derivatives, refer to Note 15 of the Notes to Consolidated Financial
Statements.
The following tables present additional information about the interest rate swaps and floors used in Fifth Third’s asset and liability management
activities:
TABLE 65: WEIGHTED-AVERAGE MATURITY, RECEIVE RATE AND PAY RATE ON QUALIFYING HEDGING INSTRUMENTS
As of December 31, 2019 ($ in millions)
Interest rate swaps – cash flow – receive-fixed
Interest rate swaps – cash flow – receive-fixed – forward starting(a)
Interest rate swaps – fair value – receive-fixed
Total interest rate swaps
Interest rate floors – cash flow – receive-fixed
(a) Forward starting swaps will become effective January 2, 2020.
Notional
Amount
Fair
Value
Remaining
(years)
Receive
Rate
$
$
$
7,000
1,000
2,705
10,705
3,000
(2)
-
393
391
115
3.9
5.0
6.8
5.0
LIBOR Index /
Strike
1 ML
1 ML
1 ML / 3 ML
3.0 %
3.2
4.4
1.7
1 ML / 2.25%
TABLE 66: WEIGHTED-AVERAGE MATURITY, RECEIVE RATE AND PAY RATE ON QUALIFYING HEDGING INSTRUMENTS
As of December 31, 2018 ($ in millions)
Interest rate swaps – cash flow – receive-fixed
Interest rate swaps – cash flow – receive-fixed – forward starting(a)
Interest rate swaps – fair value – receive-fixed
Total interest rate swaps
Interest rate floors – cash flow – forward starting(b)
(a) Forward starting swaps will become effective January 2, 2020.
(b) Forward starting floors became effective December 16, 2019.
Additionally, 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. The Bancorp economically hedges its exposure to
residential mortgage loans held for sale through the use of forward
contracts and mortgage options as well. See the Residential
Mortgage Servicing Rights and Interest Rate Risk section for the
discussion of the use of derivatives to economically hedge this
exposure.
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 the counterparties to meet the terms of their contracts,
which the Bancorp minimizes through collateral arrangements,
96 Fifth Third Bancorp
Notional
Amount
Fair
Value
Remaining
(years)
Receive
Rate
LIBOR Index /
Strike
1 ML
1 ML
1 ML / 3 ML
3.0 %
3.1
3.8
4.6
5.7
6.3
$
$
$
5,000
3,000
3,455
11,455
3,000
(13)
1
260
248
69
6.0
N/A
1 ML / 2.25%
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 information, including the notional
amount and fair values of these derivatives, refer to Note 15 of the
Notes to Consolidated Financial Statements.
Portfolio Loans and Leases and Interest Rate Risk
Although the Bancorp’s portfolio loans and leases contain both
fixed and floating/adjustable-rate products, the rates of interest
earned by the Bancorp on the outstanding balances are generally
established for a period of time. The interest rate sensitivity of loans
and leases is directly related to the length of time the rate earned is
established.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2019:
Less than 1 year
$
TABLE 67: PORTFOLIO LOANS AND LEASES EXPECTED CASH FLOWS
($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
Residential mortgage loans
Home equity
Indirect secured consumer loans
Credit card
Other consumer loans
Total consumer loans
Total portfolio loans and leases
29,675
4,143
2,452
925
37,195
3,290
1,924
4,266
506
1,433
11,419
48,614
$
1-5 years
20,144
6,038
2,499
1,647
30,328
7,469
3,306
6,590
2,026
1,117
20,508
50,836
Over 5 years
723
782
139
791
2,435
5,965
853
682
-
173
7,673
10,108
Total
50,542
10,963
5,090
3,363
69,958
16,724
6,083
11,538
2,532
2,723
39,600
109,558
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, 2019:
TABLE 68: PORTFOLIO LOANS AND LEASES EXPECTED CASH FLOWS OCCURRING AFTER 1 YEAR
($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
Residential mortgage loans
Home equity
Indirect secured consumer loans
Credit card
Other consumer loans
Total consumer loans
Total portfolio loans and leases
Residential Mortgage Servicing Rights and Interest Rate Risk
The fair value of the residential MSR portfolio was $993 million and
$938 million at December 31, 2019 and December 31, 2018,
respectively. The portfolio of servicing rights included $263 million
of servicing rights acquired in the acquisition of MB Financial, Inc.
on March 22, 2019. The value of servicing rights can fluctuate
sharply depending on changes in interest rates and other factors.
Generally, as interest rates decline and loans are prepaid to take
advantage of refinancing, the total value of existing servicing rights
declines because no further servicing fees are collected on repaid
loans. The Bancorp maintains a non-qualifying hedging strategy
relative to its mortgage banking activity in order to manage a
portion of the risk associated with changes in the value of its MSR
portfolio as a result of changing interest rates.
Mortgage rates decreased during the year ended December 31,
2019 which caused modeled prepayment speeds to rise. The fair
value of the MSR portfolio decreased $203 million due to changes
to inputs to the valuation model including prepayment speeds and
OAS assumptions and decreased $173 million due to the passage of
time, including the impact of regularly scheduled repayments,
paydowns and payoffs for the year ended December 31, 2019.
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 assumptions and decreased $125 million due to the passage of
$
$
Fixed
3,162
1,542
35
2,438
7,177
9,880
485
7,254
472
1,037
19,128
26,305
Interest Rate
Floating or Adjustable
17,705
5,278
2,603
-
25,586
3,554
3,674
18
1,554
253
9,053
34,639
time, including the impact of regularly scheduled repayments,
paydowns and payoffs for the year ended December 31, 2018.
The Bancorp recognized net gains of $224 million and net
losses of $36 million, respectively, on its non-qualifying hedging
strategy during the years ended December 31, 2019 and 2018. These
amounts include net gains of $3 million and net losses of $15
million, respectively, on securities related to the Bancorp’s non-
qualifying hedging strategy during the years ended December 31,
2019 and 2018. 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 14 of the Notes to
Consolidated Financial Statements for further discussion on
servicing rights and the instruments used to hedge interest rate risk
on MSRs.
Foreign Currency Risk
The Bancorp may enter into foreign exchange derivative contracts
to economically hedge certain foreign denominated loans. The
derivatives are classified as free-standing instruments with the
revaluation gain or loss being recorded in other noninterest income
in the Consolidated Statements of Income. The balance of the
Bancorp’s foreign denominated loans at December 31, 2019 and
2018 was $880 million and $948 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
97 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
rate derivative contracts entered into with commercial customers,
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
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 19 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 with independent oversight
provided by ERM, 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.
Liquidity risk is monitored and managed for both Fifth Third
Bancorp and its subsidiaries. The Bancorp receives substantially all
of its liquidity from dividends from its subsidiaries, primarily Fifth
Third Bank, National Association. Subsidiary dividends are
supplemented with term debt to enable the Bancorp to maintain
sufficient liquidity to meet its cash obligations, including debt
service and scheduled maturities, common and preferred dividends,
unfunded commitments to subsidiaries and other planned capital
actions in the form of share repurchases. Liquidity resources are
more limited at the Bancorp, making its liquidity position more
susceptible to market disruptions. Bancorp liquidity is assessed using
a cash coverage horizon, ensuring the entity maintains sufficient
liquidity to withstand a period of sustained market disruption while
meeting its anticipated obligations over an extended stressed
horizon.
The Bancorp’s ALCO, which includes senior management
representatives and is accountable to the ERMC, monitors and
manages liquidity and funding risk within Board-approved policy
limits. In addition to the risk management activities of ALCO, the
Bancorp has a Market Risk Management function as part of ERM
that provides independent oversight of liquidity risk management.
98 Fifth Third Bancorp
price fluctuations. Similar to the hedging of foreign exchange and
interest rate risk from interest rate derivative contracts, the Bancorp
into commodity contracts with major financial
also enters
institutions to economically hedge a substantial portion of the
exposure from client driven commodity activity. The Bancorp may
also offset this risk with exchange-traded commodity contracts. The
Bancorp has risk limits and internal controls in place to help ensure
excessive risk is not taken in providing this service to customers.
These controls include an independent determination of commodity
volatility and credit equivalent exposure on these contracts and
counterparty credit approvals performed by independent risk
management.
Sources of Funds
The Bancorp’s primary sources of funds relate to cash flows from
loan and lease repayments, payments from securities related to sales
and maturities, the sale or securitization of loans and leases and
funds generated by core deposits, in addition to the use of public
and private debt offerings.
Table 67 of the Market Risk Management subsection of the Risk
Management section of MD&A illustrates the expected maturities
from loan and lease repayments. Of the $36.0 billion of securities in
the Bancorp’s available-for-sale debt and other securities portfolio at
December 31, 2019, $3.4 billion in principal and interest is expected
to be received in the next 12 months and an additional $3.8 billion is
expected to be received in the next 13 to 24 months. For further
information on the Bancorp’s securities portfolio, refer to the
Investment Securities subsection of the Balance Sheet Analysis
section of MD&A.
Asset-driven liquidity is provided by the Bancorp’s ability to sell
or securitize loans and leases. In order to reduce the exposure to
interest rate fluctuations and to manage liquidity, the Bancorp has
developed securitization and sale procedures for several types of
interest-sensitive assets. A majority of the long-term, fixed-rate
single-family residential mortgage loans underwritten according to
FHLMC or FNMA guidelines are sold for cash upon origination.
Additional assets such as certain other residential 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 and leases totaling $9.7 billion
during the year ended December 31, 2019 compared to $5.5 billion
during the year ended December 31, 2018. For further information,
refer to Note 13 and Note 14 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, 2019 and 2018. 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 certain 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, 2019, $4.8 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
December 31, 2019, the Bancorp issued and sold $1.5 billion of
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3.65% senior fixed-rate notes and $750 million of 2.375% senior
fixed-rate notes. Additionally, during the year ended December 31,
2019, the Bancorp issued in a registered public offering 10,000,000
depositary shares, representing 10,000 shares of 4.95% non-
cumulative Series K perpetual preferred stock, for net proceeds of
approximately $242 million.
As of December 31, 2019, the Bank’s global bank note program
had a borrowing capacity of $25.0 billion, of which $19.3 billion was
available for issuance. During the year ended 2019, the Bank issued
and sold $300 million of senior floating-rate bank notes. For further
information on a subsequent event related to long-term debt, refer
to Note 33 of the Notes to Consolidated Financial Statements.
Additionally, at December 31, 2019, the Bank had approximately
$48.3 billion of borrowing capacity available through secured
borrowing sources including the FRB and FHLB.
In a securitization transaction that occurred in 2019, the
Bancorp transferred approximately $1.43 billion in automobile loans
to a bankruptcy
issued
approximately $1.37 billion of asset-backed notes, of which
approximately $68 million of the asset-backed notes were retained
by the Bancorp, and resulted in approximately $1.3 billion of
outstanding notes included in long-term debt in the Consolidated
Balance Sheets. The bankruptcy remote trust was deemed to be a
VIE and the Bancorp, as the primary beneficiary, consolidated the
VIE. The third-party holders of the asset-backed notes do not have
recourse to the general assets of the Bancorp. Refer to Note 18 of
the Notes to Consolidated Financial Statements for additional
information.
trust which subsequently
remote
Liquidity Coverage Ratio and Net Stable Funding Ratio
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
TABLE 69: AGENCY RATINGS
As of March 2, 2020
Fifth Third Bancorp:
Short-term borrowings
Senior debt
Subordinated debt
Fifth Third Bank, National Association:
Short-term borrowings
Short-term deposit
Long-term deposit
Senior debt
Subordinated debt
Rating Agency Outlook for Fifth Third Bancorp and
Fifth Third Bank, National Association:
OPERATIONAL RISK MANAGEMENT
Operational risk is the risk to current or projected financial
condition and resilience arising from inadequate or failed internal
processes or systems, human errors or misconduct, or adverse
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, poor design
or delivery of products and services, cyber security or physical
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
Act”). Among the proposals, the Board of Governors, joined by the
Department of Treasury, OCC and the FDIC proposed to remove
the application of the LCR regulations and the NSFR from certain
BHCs that qualify under the proposal as “Category IV” institutions,
primarily those BHCs with consolidated assets between $100 billion
and $250 billion. On October 10, 2019, the Board of Governors of
the FRB announced it finalized the rules that tailor its regulations
for banks to more closely match their risk profile. Fifth Third, as a
Category IV institution, is no longer subject to the LCR regulations
and the NSFR regulations, effective December 31, 2019.
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 69. The ratings reflect the ratings agency’s view on the
Bancorp’s and Bank’s capacity to meet financial commitments.*
*As an investor, you should be aware that a security rating is not a
recommendation to buy, sell or hold securities, that it may be subject to revision
or withdrawal at any time by the assigning rating organization and that each
rating should be evaluated independently of any other rating. Additional
information on the credit rating ranking within the overall classification system is
located on the website of each credit rating agency.
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
No rating
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
businesses, the markets in which it operates and the competitive and
regulatory environment to which it is subject.
To control, monitor and govern operational risk, the Bancorp
maintains an overall Risk Management Framework which comprises
governance oversight, risk assessment, capital measurement,
monitoring and reporting as well as a formal three lines of defense
approach. ERM is responsible for prescribing the framework to the
lines of business and corporate
functions and providing
independent oversight of its implementation (second line of
defense). Business Controls groups are in place in each of the lines
of business to ensure consistent implementation and execution of
managing day-to-day operational risk (first line of defense).
The Bancorp’s risk management framework consists of five
integrated components, including identifying, assessing, managing,
monitoring and independent governance reporting of risk. The
corporate Operational Risk Management function within Enterprise
99 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
policies and programs, network monitoring and testing, access
controls and dedicated security personnel. Fifth Third has adopted
the National Institute of Standards and Technology Cybersecurity
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, National Association.
Fifth Third’s operational risk management and information
security programs have been actively engaged to evaluate and
oversee MB Financial, Inc.’s products and processes to ensure risks
are understood, well managed and in alignment with the Bancorp’s
risk appetite.
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 testing and monitoring and privacy. The
Chief Compliance Officer also partners with the Financial Crimes
Division to oversee anti-money laundering processes and partners
with the Community and Economic Development team to oversee
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, National Association.
Fifth Third’s compliance risk management and anti-money
laundering programs have been actively engaged to evaluate and
oversee MB Financial, Inc.’s products and processes to ensure risks
are understood, well managed and in alignment with the Bancorp’s
risk appetite.
is
relate
responsible
to operational
and overseeing
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
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
COMPLIANCE RISK MANAGEMENT
Regulatory compliance risk is defined as the risk of legal or
regulatory sanctions, financial loss or damage to reputation as a
result of noncompliance with (i) applicable laws, regulations, rules
and other regulatory requirements (including but not limited to the
risk of consumers experiencing economic loss or other legal harm as
a result of noncompliance with consumer protection
laws,
regulations and requirements); (ii) internal policies and procedures,
standards of best practice or codes of conduct; and (iii) principles of
integrity and fair dealing applicable to Fifth Third’s activities and
functions. Fifth Third focuses on managing regulatory compliance
risk in accordance with the Bancorp’s integrated risk management
framework, which ensures consistent processes for identifying,
assessing, managing, monitoring and reporting risks. The Bancorp’s
risk management goal is to keep compliance risk at appropriate
levels consistent with the Bancorp’s risk appetite.
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
the
Officer
Compliance Risk Management program which implements key
for establishing and overseeing
is responsible
100 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 sets minimum regulatory capital ratios as
well as defines the measure of “well-capitalized” for insured
depository institutions.
TABLE 70: PRESCRIBED CAPITAL RATIOS
CET1 capital:
Fifth Third Bancorp
Fifth Third Bank, National Association
Tier I risk-based capital:
Fifth Third Bancorp
Fifth Third Bank, National Association
Total risk-based capital:
Fifth Third Bancorp
Fifth Third Bank, National Association
Tier I leverage:
Fifth Third Bancorp
Fifth Third Bank, National Association
Minimum
Well-Capitalized
4.50 %
4.50
6.00
6.00
8.00
8.00
4.00
4.00
N/A
6.50
6.00
8.00
10.00
10.00
N/A
5.00
The Bancorp is subject to a capital conservation buffer of 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 phased-in
over a three-year period beginning on January 1, 2016 at 0.625%,
increasing by an additional 0.625% each year, culminating on
January 1, 2019 at the fully phased-in rate of 2.5%. 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. The proposed rule was adopted as final
effective July 1, 2019. The phase-in provisions of the final rule are
optional for a banking organization that experiences a reduction in
retained earnings due to CECL adoption as of the beginning of the
fiscal year in which the banking organization adopts CECL. A
banking organization that elects the phase-in provisions of the final
rule for regulatory capital purposes must phase in 25% of the
transitional amounts impacting regulatory capital in the first year of
adoption of CECL, 50% in the second year, 75% in the third year,
with full impact beginning in the fourth year. The Bancorp adopted
ASU 2016-13 on January 1, 2020 and plans to elect the phase-in
option for the impact of CECL on regulatory capital with its
regulatory filings as of March 31, 2020. For additional information
on ASU 2016-13, refer to Note 1 of the Notes to Consolidated
Financial Statements.
On July 22, 2019, the federal banking regulators published the
Regulatory Capital Simplification final rule in the Federal Register.
Under the final rule, non-advanced approach banks, such as the
Bancorp, will be subject to simpler regulatory capital requirements
for mortgage servicing assets, certain deferred tax assets arising
from temporary differences and investments in the capital of
unconsolidated financial institutions than those currently applied.
The final rule increases the deduction threshold for mortgage
servicing assets, certain deferred tax assets arising from temporary
differences and investments in the capital of unconsolidated
financial institutions from 10% to 25% of CET1, but increases the
risk-weighted assets percentage for the non-deducted elements from
100% to 250%. The final rule pertaining to these regulatory capital
elements is effective on April 1, 2020.
The following table summarizes the Bancorp's capital ratios as of December 31:
TABLE 71: CAPITAL RATIOS
($ in millions)
Average total Bancorp shareholders' equity as a percent of average assets
Tangible equity as a percent of tangible assets(a)(c)
Tangible common equity as a percent of tangible assets(a)(c)
Regulatory capital:
CET1 capital
Tier I capital
Total regulatory capital
Risk-weighted assets(b)
2019
2018
2017
2016
2015
12.14 %
9.52
8.44
11.23
9.63
8.71
$
13,847
15,616
19,661
142,065
12,534
13,864
17,723
122,432
11.69
9.79
8.83
12,517
13,848
17,887
117,997
11.57
9.72
8.77
12,426
13,756
17,972
119,632
11.24
9.46
8.50
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
9.75 %
10.99
13.84
9.54
10.24
11.32
14.48
9.72
10.39
11.50
15.02
9.90
10.61
11.74
15.16
10.01
9.82
10.93
14.13
9.54
assets. The resulting values are added together resulting in the Bancorp’s total risk-weighted assets.
(c) Excludes AOCI.
101 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Planning
In 2011 the FRB adopted the capital plan rule, which requires BHCs
with consolidated assets of $50 billion or more to submit annual
capital plans to the FRB for review. Under the rule, these capital
plans must include detailed descriptions of the following: the BHC’s
internal processes for assessing capital adequacy; the policies
issuances,
governing capital actions such as common stock
dividends and share repurchases; and all planned capital actions over
a nine-quarter planning horizon. Furthermore, each BHC must
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 conditions.
During the first quarter of 2019, the FRB provided relief from
certain regulatory requirements related to supervisory stress testing
and company-run stress testing for the 2019 stress test cycle,
including disclosure requirements. As a result, the Bancorp was not
required to submit a capital plan or participate in CCAR 2019. The
requirement for the Bancorp to submit an annual capital plan to the
FRB has been extended until April 5, 2020. However, the Bancorp
remains subject to the requirement to develop and maintain a capital
plan, and the Board of Directors of the Bancorp must review and
approve the capital plan. The FRB further clarified that relief from
the 2019 stress test cycle should not be construed as relief from any
regulatory capital requirements and that the Bancorp will be subject
to the full CCAR 2020 stress test requirements.
In June of 2019, the Bancorp announced its capital distribution
capacity of approximately $2 billion for the period of July 1, 2019
through June 30, 2020. This includes the ability to execute share
repurchases up to $1.24 billion as well as increase quarterly common
stock dividends by up to $0.03 per share. These distributions will be
governed under the FRB’s 2019 extended stress test process for
BHCs with less than $250 billion of total consolidated assets.
Preferred Stock Transactions
On August 26, 2019, the Bancorp issued 200,000 shares of 6.00%
non-cumulative perpetual Class B preferred stock, Series A. Each
preferred share has a $1,000 liquidation preference. These shares
were issued to the holders of MB Financial, Inc.’s 6.00% non-
cumulative perpetual preferred stock, Series C, in conjunction with
the merger of MB Financial, Inc. with and into Fifth Third Bancorp.
This transaction resulted in the elimination of the noncontrolling
interest in MB Financial, Inc. which was previously reported in the
Bancorp’s Consolidated Financial Statements. The newly issued
shares of Class B preferred stock, Series A were recognized by the
Bancorp at the carrying value previously assigned to the MB
Financial, Inc. Series C preferred stock prior to the transaction.
On September 17, 2019, the Bancorp issued in a registered
public offering 10,000,000 depositary shares, representing 10,000
shares of 4.95% non-cumulative perpetual preferred stock, Series K,
for net proceeds of approximately $242 million. Each preferred
share has a $25,000 liquidation preference. Subject to any required
regulatory approval, the Bancorp may redeem the Series K preferred
shares at its option (i) in whole or in part, on any dividend payment
date on or after September 30, 2024 and (ii) in whole, but not in
part, at any time following a regulatory capital event. The Series K
preferred shares are not convertible into Bancorp common shares
or any other securities.
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 $0.94 and
$0.74 during the years ended December 31, 2019 and 2018,
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, 2019 and 2018.
Refer to Note 25 of the Notes to Consolidated Financial Statements
for additional information on the accelerated share repurchase and
open market share repurchase transactions.
The following table summarizes shares authorized for repurchase as part of publicly announced plans or programs:
TABLE 72: SHARE REPURCHASES
For the years ended December 31
23,147,891
Shares authorized for repurchase at January 1
87,383,525
Additional authorizations(a)
(49,967,134)
Share repurchases(b)
Shares authorized for repurchase at December 31
60,564,282
29.44
Average price paid per share(b)
(a) During the second quarter of 2019, the Bancorp announced that its Board of Directors had authorized management to purchase 100 million shares of the Bancorp’s common stock through the open
market or in any private party transactions. The authorization does not include specific price targets or an expiration date. This share repurchase authorization replaces the Board’s previous
authorization pursuant to which approximately 20 million shares remained available for repurchase by the Bancorp.
60,564,282
80,474,957
(64,601,891)
76,437,348
26.05
(b) Excludes 2,693,318 and 2,155,189 shares repurchased during the years ended December 31, 2019 and 2018, 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.
2018
2019
$
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
include commitments, guarantees, contingent
liabilities and
transactions with non-consolidated VIEs. A brief discussion of
these transactions is as follows:
Commitments
The Bancorp has certain commitments to make future payments
under contracts, including commitments to extend credit, letters of
credit, forward contracts related to residential mortgage loans held
for sale, purchase obligations, capital commitments for private
equity investments and capital expenditures. Refer to Note 19 of the
Notes
for additional
information on commitments.
to Consolidated Financial Statements
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 19 of the
Notes
for additional
to Consolidated Financial Statements
information on guarantees and contingent liabilities.
Transactions with Non-consolidated VIEs
The Bancorp engages in a variety of activities that involve VIEs,
which are legal entities that lack sufficient equity to finance their
activities, or the equity investors of the entities as a group lack any
of the characteristics of a controlling interest. The investments in
those entities in which the Bancorp was determined not to be the
primary beneficiary but holds a variable interest in the entity are
accounted for under the equity method of accounting or other
accounting standards as appropriate and not consolidated. Refer to
Note 13 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, 2019 are shown in
Table 73. As of December 31, 2019, the Bancorp had 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 22 of the Notes to Consolidated Financial Statements.
TABLE 73: CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
As of December 31, 2019 ($ 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)
Operating lease obligations(g)
Partnership investment commitments(h)
Pension benefit payments(i)
Purchase obligations and capital expenditures(j)
Finance lease obligations(g)
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
$
$
118,123
2,172
7,714
1,271
2,901
90
230
16
133
6
132,656
-
5,271
1,100
-
-
157
131
34
58
10
6,761
-
2,853
118
-
-
125
28
33
6
4
3,167
-
4,674
7
-
-
280
39
70
-
26
5,096
118,123
14,970
8,939
1,271
2,901
652
428
153
197
46
147,680
$
$
28,673
1,022
29,695
75,771
2,137
77,908
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 18 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 17 of the Notes to Consolidated Financial Statements.
(b)
(c)
(d)
(e)
(f) Refer to Note 15 of the Notes to Consolidated Financial Statements for additional information on forward contracts to sell residential mortgage loans.
(g) Refer to Note 10 of the Notes to Consolidated Financial Statements for additional information on lease obligations.
(h)
(i) Refer to Note 23 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 19 of the Notes to Consolidated Financial Statements.
Includes LIHTC and New Markets Tax Credit investments. For additional information, refer to Note 13 of the Notes to Consolidated Financial Statements.
22,654
592
23,246
16,263
518
16,781
8,181
5
8,186
(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 19 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 93-98 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, 2019
and 2018, 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, 2019, 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, 2019 and 2018, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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 2, 2020
expressed an unqualified opinion on the Bancorp’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Bancorp's management. Our responsibility is to express an opinion on the Bancorp's
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Bancorp in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated
or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements
and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any
way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a
separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan and Lease Losses (“ALLL”) — Commercial Portfolio Segment Qualitative Factors — Refer to Note 1 and Note 7
of the Notes to Consolidated Financial Statements
Critical Audit Matter Description
The Bancorp maintains the ALLL to absorb probable loan and lease losses inherent in its portfolio segments.
The Bancorp’s current methodology for determining the ALLL is based on historical loss rates, current credit grades, impaired commercial credits,
and adjusted for qualitative factors. Historical credit loss rates are applied to commercial loans that are not impaired or are not subject to specific
allowance allocations. The key qualitative factors include adjustments for changes in policies or procedures in underwriting, monitoring or
collections, economic conditions, estimated loss emergence period, and specific portfolio loans backed by enterprise valuations and private equity
sponsors.
The ALLL for the commercial portfolio segment was $710 million at December 31, 2019, which includes adjustments for the qualitative factors
noted above.
Considering the estimation and judgment in determining adjustments for qualitative factors, our audit of the ALLL and the related disclosures
involved subjective judgment with regard to the qualitative adjustments to the commercial portfolio segment ALLL.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the qualitative adjustments for the commercial portfolio segment ALLL included the following, among others:
• We tested the effectiveness of the Bancorp’s controls over the qualitative adjustments to the ALLL for the commercial portfolio
segment.
• We assessed the reasonableness of, and evaluated support for, key qualitative adjustments based on market conditions and/or
commercial portfolio performance metrics.
105 Fifth Third Bancorp
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
• We tested the completeness and accuracy and evaluated the relevance of the key data used as inputs to the qualitative adjustment
estimation process, including:
o Commercial portfolio segment loan balances by class
o Commercial portfolio segment net losses charged-off
o Relevant macroeconomic indicators
o Relevant internal loan portfolio data
• With the assistance of our credit specialists, we tested the mathematical accuracy of the underlying support used as a basis for the
qualitative adjustments to the historical loss rates.
• We evaluated the Bancorp’s historical qualitative factor estimation process by comparing actual commercial loan losses to the ALLL
recorded in historical periods for the commercial portfolio segment, inclusive of these qualitative adjustments.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
March 2, 2020
We have served as the Company’s auditor since 1970.
106 Fifth Third Bancorp
CONSOLIDATED BALANCE SHEETS
2019
2018
$
$
$
$
3,278
1,950
36,028
17
297
564
1,400
109,558
(1,202)
108,356
1,995
848
4,252
201
993
9,190
169,369
35,968
91,094
127,062
260
1,011
2,441
2,422
14,970
148,166
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
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)
Total Assets
Liabilities
Deposits:
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
Federal funds purchased
Other short-term borrowings
Accrued taxes, interest and expenses
Other liabilities(a)
Long-term debt(a)
Total Liabilities
Equity
Common stock(g)
Preferred stock(h)
Capital surplus
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock(g)
Total Bancorp shareholders’ equity
Noncontrolling interests
Total Equity
Total Liabilities and Equity
(a)
2,051
1,331
2,873
16,578
(112)
(6,471)
16,250
-
16,250
146,069
Includes $74 and $40 of other short-term investments, $1,354 and $668 of portfolio loans and leases, $(7) and $(4) of ALLL, $8 and $5 of other assets, $2 and $1 of other liabilities and
$1,253 and $606 of long-term debt from consolidated VIEs that are included in their respective captions above at December 31, 2019 and 2018, respectively. For further information, refer to
Note 13.
2,051
1,770
3,599
18,315
1,192
(5,724)
21,203
-
21,203
169,369
$
$
$
(b) Amortized cost of $34,966 and $33,128 at December 31, 2019 and 2018, respectively.
(c)
(d)
Fair value of $17 and $18 at December 31, 2019 and 2018, respectively.
Includes $1,264 and $537 of residential mortgage loans held for sale measured at fair value and $0 and $7 of commercial loans held for sale measured at fair value at December 31, 2019 and
2018, respectively.
Includes $183 and $179 of residential mortgage loans measured at fair value at December 31, 2019 and 2018, respectively.
Includes $27 and $42 of bank premises and equipment held for sale at December 31, 2019 and 2018, respectively. For further information, refer to Note 8.
(e)
(f)
(g) Common shares: Stated value $2.22 per share; authorized 2,000,000,000; outstanding at December 31, 2019 – 708,915,629 (excludes 214,976,952 treasury shares), 2018 –
646,630,857 (excludes 277,261,724 treasury shares).
(h) 500,000 shares of no par value preferred stock were authorized at both December 31, 2019 and 2018. There were 436,000 and 446,000 unissued shares of undesignated no par value preferred
stock at December 31, 2019 and 2018, respectively. Each issued share of undesignated no par value preferred stock has a liquidation preference of $25,000. 500,000 shares of no par value
Class B preferred stock were authorized at December 31, 2019. There were 300,000 unissued shares of undesignated no par value Class B preferred stock at December 31, 2019. Each
issued share of no par value Class B preferred stock has a liquidation preference of $1,000.
Refer to the Notes to Consolidated Financial Statements.
107 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ in millions, except share data)
Interest Income
Interest and fees on loans and leases
Interest on securities
Interest on other short-term investments
Total interest income
Interest Expense
Interest on deposits
Interest on federal funds purchased
Interest on other short-term borrowings
Interest on long-term debt
Total interest expense
Net Interest Income
Provision for credit losses
Net Interest Income After Provision for Credit Losses
Noninterest Income
Corporate banking revenue
Service charges on deposits
Wealth and asset management revenue
Card and processing revenue
Mortgage banking net revenue
Other noninterest income
Securities gains (losses), net
Securities gains (losses), net - non-qualifying hedges on mortgage servicing rights
Total noninterest income
Noninterest Expense
Salaries, wages and incentives
Employee benefits
Technology and communications
Net occupancy expense
Card and processing expense
Equipment expense
Other noninterest expense
Total noninterest expense
Income Before Income Taxes
Applicable income tax expense
Net Income
Less: Net income attributable to noncontrolling interests
Net Income Attributable to Bancorp
Dividends on preferred stock
Net Income Available to Common Shareholders
Earnings per share - basic
Earnings per share - diluted
Average common shares outstanding - basic
Average common shares outstanding - diluted
Refer to the Notes to Consolidated Financial Statements.
2019
2018
2017
$
$
$
$
5,051
1,162
41
6,254
892
29
28
508
1,457
4,797
471
4,326
570
565
487
360
287
1,224
40
3
3,536
2,001
417
422
332
130
129
1,229
4,660
3,202
690
2,512
-
2,512
93
2,419
3.38
3.33
710,433,611
720,065,498
4,078
1,080
25
5,183
538
30
29
446
1,043
4,140
207
3,933
438
549
444
329
212
887
(54)
(15)
2,790
3,478
996
15
4,489
277
6
30
378
691
3,798
261
3,537
353
554
419
313
224
1,357
2
2
3,224
1,783
332
285
292
123
123
1,020
3,958
2,765
572
2,193
-
2,193
75
2,118
3.11
3.06
673,346,168
685,488,498
1,633
356
245
295
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
108 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31 ($ in millions)
Net Income
Other Comprehensive Income (Loss), Net of Tax:
Unrealized gains (losses) on available-for-sale debt securities:
Unrealized holding gains (losses) arising during the year
Reclassification adjustment for net (gains) losses included in net income
Unrealized gains (losses) on cash flow hedge derivatives:
Unrealized holding gains (losses) arising during the year
Reclassification adjustment for net (gains) losses included in net income
Defined benefit pension plans, net:
Net actuarial (loss) gain arising during the year
Reclassification of amounts to net periodic benefit costs
Other comprehensive income (loss), net of tax
Comprehensive Income
Less: Comprehensive income attributable to noncontrolling interests
Comprehensive Income Attributable to Bancorp
Refer to the Notes to Consolidated Financial Statements.
2019
2018
2017
$
2,512
2,193
2,180
1,046
(7)
275
(13)
(5)
8
1,304
3,816
-
3,816
(371)
9
169
2
1
7
(183)
2,010
-
2,010
21
4
(7)
(12)
1
7
14
2,194
-
2,194
$
109 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
13,290
2,180
2,756
Income (Loss)
59
(17)
51
$
2,051
1,331
2,790
2,051
1,331
2,790
41
42
$
2,051
1,331
2,873
(436)
(75)
(2)
14,957
6
14,963
2,193
(499)
(75)
(4)
16,578
14
73
(2)
71
(183)
(112)
Stock
Equity
(3,433)
(1,588)
16
3
(5,002)
(5,002)
(1,494)
23
2
(6,471)
16,054
2,180
14
(436)
(75)
(1,605)
67
1
16,200
4
16,204
2,193
(183)
(499)
(75)
(1,453)
65
(2)
16,250
Interests
27
(7)
20
20
(20)
-
Total
Equity
16,081
2,180
14
(436)
(75)
(1,605)
67
(6)
16,220
4
16,224
2,193
(183)
(499)
(75)
(1,453)
65
(22)
16,250
($ in millions, except per share data)
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
in accounting principles
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
stock compensation plans, net
Other
Balance at December 31, 2018
Impact of cumulative effect of change
-
(112)
1,331
1,304
2,051
2,873
(6,471)
10
16,588
2,512
10
16,260
2,512
1,304
10
16,260
2,512
1,304
in accounting principle(c)
Balance at January 1, 2019
Net income
Other comprehensive income, net of tax
Cash dividends declared:
Common stock(a)
Preferred stock(b)
Shares acquired for treasury
Issuance of preferred stock
Conversion of outstanding preferred
stock issued by a Bancorp subsidiary
Impact of MB Financial, Inc. acquisition
Impact of stock transactions under
56
stock compensation plans, net
7
Other
(5,724)
Balance at December 31, 2019
(a) For the years ended December 31, 2019, 2018 and 2017, dividends declared per common share were $0.94, $0.74 and $0.60, respectively.
(b) For the years ended December 31, 2019, 2018 and 2017, dividends were $1,275.00 per preferred share for Perpetual Preferred Stock, Series H and $1,656.24 per preferred share for
Perpetual Preferred Stock, Series I. For the years ended December 31, 2019, 2018 and 2017, dividends per preferred share for Perpetual Preferred Stock, Series J were $1,559.42, $1,225.00
and $1,225.00, respectively. For the year ended December 31, 2019, dividends were $357.50 per preferred share for Perpetual Preferred Stock, Series K, $20.83 per preferred share for
Perpetual Class B Preferred Stock, Series A and $30.00 per preferred share for Perpetual Preferred Stock, Series C, of MB Financial, Inc., previously a subsidiary of the Bancorp.
(691)
(93)
(1,763)
242
(691)
(93)
(1,763)
242
2
(3)
18,315
72
4
21,203
72
4
21,203
-
3,356
197
3,159
(197)
197
(691)
(93)
(1,763)
2,447
3,599
1,770
2,051
1,192
242
712
197
14
$
-
(c) Related to the adoption of ASU 2016-02 as of January 1, 2019. Refer to Note 1 for additional information.
Refer to the Notes to Consolidated Financial Statements.
110 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 credit losses
Depreciation, amortization and accretion
Stock-based compensation expense
(Benefit from) provision for deferred income taxes
Securities (gains) losses, net
Securities (gains) losses, net-non-qualifying hedges on mortgage servicing rights
MSR fair value adjustment
Net gains on sales of loans and fair value adjustments on loans held for sale
Net losses on disposition and impairment of bank premises and equipment
Net losses (gains) 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 debt 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 securities and other investments
Loans and leases
Bank premises and equipment
Proceeds from repayments / maturities:
Available-for-sale securities and other investments
Held-to-maturity securities
Purchases:
Available-for-sale securities and other investments
Bank premises and equipment
MSRs
Proceeds from settlement of BOLI
Proceeds from sales and dividends representing return of equity investments
Net cash received (paid) on acquisitions
Net change in:
Federal funds sold
Other short-term investments
Loans and leases
Operating lease equipment
Net Cash (Used in) Provided by Investing Activities
Financing Activities
Net change in:
Deposits
Federal funds purchased
Other short-term borrowings
Dividends paid on common stock
Dividends paid on preferred stock
Proceeds from issuance of long-term debt
Repayment of long-term debt
Repurchases of treasury stock and related forward contracts
Issuance of preferred stock
Other
Net Cash (Used in) Provided by Financing Activities
Increase in Cash and Due from Banks
Cash and Due from Banks at Beginning of Period
Cash and Due from Banks at End of Period
$
2019
2018
2017
2,512
471
472
132
(246)
(47)
(3)
376
(137)
23
1
-
(562)
(346)
8,157
(8,896)
66
(29)
20
(49)
(91)
1,824
10,596
259
90
2,267
4
(13,959)
(243)
(26)
28
1,057
1,210
35
(647)
(1,407)
(61)
(797)
3,742
(1,665)
171
(660)
(93)
3,866
(4,212)
(1,763)
242
(58)
(430)
597
2,681
3,278
2,193
207
360
127
30
54
15
83
(71)
43
(6)
(414)
(205)
(20)
5,199
(5,378)
12
132
303
147
45
2,856
12,430
305
57
1,845
6
(16,207)
(192)
(82)
16
604
(43)
-
928
(3,866)
58
(4,141)
5,673
1,751
(3,439)
(467)
(98)
2,438
(2,884)
(1,453)
-
(69)
1,452
167
2,514
2,681
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
(446)
(31)
428
(659)
42
477
(430)
(75)
2,490
(1,969)
(1,605)
-
(57)
(1,786)
122
2,392
2,514
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.
111 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.
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.
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. Equity securities without
readily determinable fair values are measured at cost minus
impairment, if any, plus or minus changes as a result of an
observable price change for the identical or similar investment of
the same issuer. At each quarterly reporting period, the Bancorp
performs a qualitative assessment to evaluate whether impairment
indicators are present. If qualitative indicators are identified, the
investment is measured at fair value with the impairment loss
included in 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.
The premium on purchased callable debt securities is amortized
to the earliest call date if the call feature meets certain criteria.
Otherwise, the premium is amortized to maturity similar to the
discount on the callable debt securities.
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
accreted into
income (nonaccretable difference). The
remaining amount representing the difference in the expected cash
flows of acquired loans and the initial investment in the acquired
interest
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. Specifically, Fifth Third
reclassified the provision for the reserve for unfunded commitments
from other noninterest expense to the provision for credit losses.
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.
112 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
values 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
values of any decreases in expected cash flows after the acquisition
date as a result of credit deterioration are 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 sales-type, direct
financing and leveraged leases. Sales-type and 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 sales-type and 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, entered into before January 1, 2019, 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. Leveraged lease accounting is no longer applied for leases
entered into or modified after the Bancorp’s adoption of ASU 2016-
02, Leases, on January 1, 2019.
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. Loans
discharged in a Chapter 7 bankruptcy and not reaffirmed by the
borrower are classified as collateral-dependent TDRs and placed on
nonaccrual status regardless of the borrower’s payment history or
capacity to repay in the future. Residential mortgage, home equity,
automobile and other consumer loans that have been modified in a
TDR and subsequently become past due 90 days are placed on
nonaccrual status unless the loan is both well-secured and in the
process of collection. Commercial and credit card loans that have
terms. Well-secured
been modified in a TDR are classified as nonaccrual unless such
loans have sustained repayment performance of six months or more
and are reasonably assured of repayment in accordance with the
restructured
loans are collateralized by
perfected security interests in real and/or personal property for
which the Bancorp estimates proceeds from the sale would be
sufficient to recover the outstanding principal and accrued interest
balance of the loan and pay all costs to sell the collateral. The
Bancorp considers a loan in the process of collection if collection
efforts or legal action is proceeding and the Bancorp expects to
collect funds sufficient to bring the loan current or recover the
entire outstanding principal and accrued interest balance.
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 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.
113 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
include
concessions
granted under
TDRs
reorganization,
arrangement or other provisions of the Federal Bankruptcy Act. 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 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. Except for loans discharged in a
Chapter 7 bankruptcy that are not reaffirmed by the borrower,
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. Loans discharged in a
Chapter 7 bankruptcy and not reaffirmed by the borrower are
classified as collateral-dependent TDRs and placed on nonaccrual
status regardless of the borrower’s payment history or capacity to
repay in the future. These loans are returned to accrual status
provided there is a sustained payment history of twelve months
after bankruptcy and collectability is reasonably assured for all
remaining contractual payments.
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 the modified
terms. TDRs of commercial loans and credit card loans that do not
have a sustained payment history of six months or more in
accordance with their modified terms remain on nonaccrual status
until a six-month payment history is sustained. In certain cases,
commercial TDRs on nonaccrual status may be accounted for using
the cash basis method for income recognition, provided that full
repayment of principal under the modified terms of the loan is
reasonably assured.
Impaired loans and leases
A loan is considered to be impaired when, based on current
information and events, it is probable that the Bancorp will be
unable to collect all amounts due (including both principal and
interest) according to the contractual terms of the loan agreement.
Impaired loans generally consist of nonaccrual loans and leases,
loans modified in a TDR and loans over $1 million that are
currently on accrual status and not yet modified in a TDR, but for
which the Bancorp has determined that it is probable that it will
grant a payment concession in the near term due to the borrower’s
financial difficulties. For loans modified in a TDR, the contractual
terms of the loan agreement refer to the terms specified in the
original loan agreement. A loan restructured in a TDR is no longer
considered
if the
restructuring agreement specifies a rate equal to or greater than the
rate the Bancorp was willing to accept at the time of the
restructuring for a new loan with comparable risk and the loan is
not impaired based on the terms specified by the restructuring
agreement. Refer to the ALLL section for discussion regarding the
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
114 Fifth Third Bancorp
consumer loans that management has the intent to sell. Loans and
leases held for sale may be carried at the lower of cost or fair value,
or carried at fair value where the Bancorp has elected the fair value
option of accounting under U.S. GAAP. The Bancorp has elected to
measure certain groups of loans held for sale under the fair value
option, including certain residential mortgage loans originated as
held for sale and certain purchased commercial loans designated as
held for sale at acquisition. For loans in which the Bancorp has not
elected the fair value option, the lower of cost or fair value is
determined at the individual loan level.
The fair value of residential mortgage loans held for sale for
which the fair value election has been made is estimated based upon
mortgage-backed securities prices and spreads to those prices or, for
certain ARM loans, DCF models that may incorporate the
anticipated portfolio composition, credit spreads of asset-backed
securities with similar collateral and market conditions. The
anticipated portfolio composition includes the effects of interest
rate spreads and discount rates due to loan characteristics such as
the state in which the loan was originated, the loan amount and the
ARM margin. These fair value marks are recorded as a component
of noninterest income in mortgage banking net revenue. The
Bancorp generally has commitments to sell residential mortgage
loans held for sale in the secondary market. Gains or losses on sales
are recognized in mortgage banking net revenue.
intent
loans
classified as held for sale may change over time due to such factors
as changes in the overall liquidity in markets or changes in
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.
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 branch-related real estate no longer intended
to be used for banking purposes. OREO is carried at the lower of
cost or fair value, less costs to sell. All OREO property is
periodically evaluated for impairment and decreases in carrying
value are recognized as reductions in other noninterest income in
the Consolidated Statements of Income. For government-
guaranteed mortgage loans, upon foreclosure, a separate other
receivable is recognized if certain conditions are met for the amount
of the loan balance (principal and interest) expected to be recovered
from the guarantor. This receivable is also included in other assets,
separate from OREO, in the Consolidated Balance Sheets.
ALLL
The Bancorp disaggregates its portfolio loans and leases into
portfolio segments for purposes of determining the ALLL. The
Bancorp’s portfolio segments
include commercial, residential
mortgage and consumer. The Bancorp further disaggregates its
portfolio segments into classes for purposes of monitoring and
assessing credit quality based on certain risk characteristics. Classes
within the commercial portfolio segment include commercial and
industrial, commercial mortgage owner-occupied, commercial
mortgage nonowner-occupied, commercial construction and
commercial leasing. The residential mortgage portfolio segment is
also considered a class. Classes within the consumer portfolio
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 7.
The Bancorp maintains the ALLL to absorb probable loan and
lease losses inherent in its portfolio segments. The ALLL is
maintained at a level the Bancorp considers to be adequate and is
based on ongoing quarterly assessments and evaluations of the
collectability and historical loss experience of loans and leases.
Credit losses are charged and recoveries are credited to the ALLL.
Provisions for loan and lease losses are based on the Bancorp’s
review of the historical credit loss experience and such factors that,
in management’s judgment, deserve consideration under existing
economic conditions in estimating probable credit losses. The
Bancorp’s strategy
includes a
combination of conservative exposure limits significantly below
legal lending limits and conservative underwriting, documentation
emphasizes
and
diversification on a geographic, industry and customer level, regular
credit examinations and quarterly management reviews of large
credit exposures and loans experiencing deterioration of credit
quality.
risk management
standards. The
for credit
collections
strategy
also
The Bancorp’s methodology for determining the ALLL 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 and leases, TDRs and
historical loss rates are reviewed quarterly and adjusted as necessary
based on changing borrower and/or collateral conditions and actual
collection and charge-off experience. An unallocated allowance is
maintained
in estimating and
measuring losses when evaluating allowances for pools of loans and
leases.
to recognize
imprecision
the
Larger commercial loans and leases 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 or lease structure and other
factors when evaluating whether an individual loan or lease 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 Bancorp’s
evaluation of the borrower’s management. When individual loans
and leases are impaired, allowances are determined based on
management’s estimate of the borrower’s ability to repay the loan or
lease 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 and leases 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 and
leases 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 and leases
according to their internal risk grade. The risk grading system
utilized for allowance analysis purposes encompasses ten categories.
Homogenous loans 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
include
adjustments for delinquency trends, LTV trends, refreshed FICO
score trends and product mix.
loss rate factors
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,
geographic concentrations, estimated loss emergence period and
specific portfolio loans backed by enterprise valuations and private
equity sponsors. 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 other
in the Consolidated Balance Sheets. The
determination of the adequacy of the reserve is based upon an
evaluation of the unfunded credit facilities, including an assessment
of historical commitment utilization experience, credit risk grading
and historical loss rates based on credit grade migration. This
process takes into consideration the same risk elements that are
analyzed in the determination of the adequacy of the Bancorp’s
ALLL, as previously discussed. Net adjustments to the reserve for
unfunded commitments are included in provision for credit losses
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 13 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
115 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recording of servicing rights. The Bancorp may also purchase
servicing rights. The Bancorp has elected to measure all existing
classes of its residential mortgage servicing rights portfolio at fair
value with changes in the fair value of servicing rights reported in
mortgage banking net revenue in the Consolidated Statements of
Income in the period in which the changes occur.
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 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
that provide additional confirmation of the reasonableness of the
key assumptions utilized in the internal OAS model.
Fees received for servicing loans owned by investors are based
on a percentage of the outstanding monthly principal balance of
such
in the
Consolidated Statements of Income as loan payments are received.
Costs of servicing loans are charged to expense as incurred.
loans and are
in noninterest
included
income
Reserve for Representation and Warranty Provisions
Conforming residential mortgage loans sold to unrelated third
parties are generally sold with representation and warranty
provisions. A contractual liability arises only in the event of a breach
of these representations and warranties and, in general, only when a
loss results from the breach. The Bancorp may be required to
repurchase any previously sold loan or indemnify (make whole) the
investor or insurer for which the representation or warranty of the
Bancorp proves to be inaccurate, incomplete or misleading. The
Bancorp establishes a residential mortgage repurchase reserve
related to various representations and warranties that reflects
management’s estimate of losses based on a combination of factors.
The Bancorp’s estimation process requires management to
make subjective and complex judgments about matters that are
inherently uncertain, such as future demand expectations, economic
factors and the specific characteristics of the loans subject to
repurchase. Such factors incorporate historical investor audit and
repurchase demand rates, appeals success rates, historical loss
severity and any additional information obtained from the GSEs
regarding future mortgage repurchase and file request criteria. At the
time of a loan sale, the Bancorp records a representation and
warranty reserve at the estimated fair value of the Bancorp’s
guarantee and continually updates the reserve during the life of the
loan as losses in excess of the reserve become probable and
reasonably estimable. The provision for the estimated fair value of
the representation and warranty guarantee arising from the loan
sales is recorded as an adjustment to the gain on sale, which is
included
the Consolidated
Statements of Income at the time of sale. Updates to the reserve are
recorded
in the Consolidated
Statements of Income.
in other noninterest expense
in other noninterest
income
in
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
116 Fifth Third Bancorp
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.
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
tax purposes.
accelerated depreciation
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
Lessee Accounting
ROU assets and lease liabilities are recognized for all leases unless
the initial term of the lease is 12 months or less. Lease costs for
operating leases are recognized on a straight-line basis over the lease
term unless another systematic basis is more representative of the
pattern of consumption. The lease term includes any renewal period
that the Bancorp is reasonably certain to exercise. The Bancorp uses
its incremental borrowing rate to discount the lease payments if the
rate implicit in the lease is not readily determinable. Variable lease
payments associated with operating leases are recognized in the
period in which the obligation for payments is incurred.
For finance leases, the lease liability is measured using the
effective interest method such that the liability is increased for
interest based on the discount rate that is implicit in the lease or the
Bancorp’s incremental borrowing rate if the implicit rate cannot be
readily determined, offset by a decrease in the liability resulting from
the periodic lease payments. The ROU asset associated with the
finance lease is amortized on a straight-line basis unless there is
another systematic and rational basis that better reflects how the
benefits of the underlying assets are consumed over the lease term.
The period over which the ROU asset is amortized is generally the
lesser of the remaining lease term or the remaining useful life of the
leased asset. Variable lease payments associated with finance leases
are recognized in the period in which the obligation for those
payments is incurred.
When the lease liability is remeasured to reflect changes to the
lease payments as a result of a lease modification, the ROU asset is
adjusted for the amount of the lease liability remeasurement. If a
lease modification reduces the scope of a lease, the ROU asset
would be reduced proportionately based on the change in the lease
liability and the difference between the lease liability adjustment and
the resulting ROU asset adjustment would be recognized as a gain
or loss in the Consolidated Statements of Income. Additionally, the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amortization of the ROU asset is adjusted prospectively from the
date of remeasurement.
The Bancorp performs impairment assessments for ROU assets
when events or changes in circumstances indicate that their carrying
values may not be recoverable. Any impairment loss is recognized in
net occupancy expense. Refer to the Bank Premises and Equipment
and Other Long-Lived Assets section of this note for further
information.
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 are recorded in
AOCI and subsequently reclassified to net income in the same
period(s) that the hedged transaction impacts net income. For free-
standing derivative instruments, changes in fair values are reported
in current period net income.
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 either a
qualitative or a quantitative assessment (regression analysis).
Additionally, 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 the
shortcut method is no longer appropriate, the Bancorp would apply
the long-haul method identified at inception of the hedging
transaction for assessing hedge effectiveness as long as the hedge is
highly effective. 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. One of the TRAs has
been settled and terminated and the Bancorp accounts for the
remaining TRA as a gain contingency 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 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 impairment associated with the investments recognized in
other noninterest expense in the Consolidated Statements of
Income.
Income Taxes
The Bancorp accounts for income taxes using the asset and liability
method, which requires the recognition of deferred tax assets and
liabilities for expected future tax consequences. Under the asset and
liability method, deferred tax assets and liabilities are determined by
applying the federal and state tax rates to the differences between
financial statement carrying amounts and the corresponding tax
bases of assets and liabilities. Deferred tax assets are also recorded
for any tax attributes, such as tax credits and net operating loss
carryforwards. The net balances of deferred tax assets and liabilities
are reported in other assets and accrued taxes, interest and expenses
in the Consolidated Balance Sheets. Any effect of a change in
federal or state tax rates on deferred tax assets and liabilities is
recognized in income tax expense in the period that includes the
enactment date. The Bancorp reflects the expected amount of
income tax to be paid or refunded during the year as current income
tax expense or benefit. Accrued taxes represent the net expected
amount due to and/or from taxing jurisdictions and are reported in
accrued taxes, interest and expenses in the Consolidated Balance
Sheets.
judgment about
The Bancorp evaluates the realization of deferred tax assets
based on all positive and negative evidence available at the balance
sheet date. Realization of deferred tax assets is based on the
Bancorp’s
their
realization, including the taxable income within any applicable
carryback periods, future projected taxable income, the reversal of
taxable temporary differences and tax-planning strategies. The
Bancorp records a valuation allowance for deferred tax assets where
the Bancorp does not believe that it is more-likely-than-not that the
deferred tax assets will be realized.
factors affecting
relevant
Income
the relevant
tax benefits from uncertain
tax positions are
recognized in the financial statements only if the Bancorp believes
that it is more-likely-than-not that the uncertain tax position will be
sustained based solely on the technical merits of the tax position
and consideration of
taxing authority’s widely
understood administrative practices and precedents. If the Bancorp
does not believe that it is more-likely-than-not that an uncertain tax
position will be sustained, the Bancorp records a liability for the
uncertain tax position. If the Bancorp believes that it is more likely
than not that an uncertain tax position will be sustained, the
Bancorp only records a tax benefit for the portion of the uncertain
tax position where the likelihood of realization is greater than 50%
upon settlement with the relevant taxing authority that has full
knowledge of all relevant information. The Bancorp recognizes
interest expense,
to
unrecognized tax benefits within current income tax expense. Refer
to Note 22 for further discussion regarding income taxes.
income and penalties
interest
related
117 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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
118 Fifth Third Bancorp
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 11 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 29 for further information on
fair value measurements.
review and assessments
trades and overall
Stock-Based Compensation
The Bancorp recognizes compensation expense for the grant-date
fair value of stock-based awards that are expected to vest over the
requisite service period. All awards, both those with cliff vesting and
graded vesting, are expensed on a straight-line basis. Awards to
employees that meet eligible retirement status are expensed
immediately. As compensation expense is recognized, a deferred tax
asset is recorded that represents an estimate of the future tax
deduction from exercise or release of restrictions. At the time
awards are exercised, cancelled, expire or restrictions are released,
the Bancorp recognizes an adjustment to income tax expense for
the difference between the previously estimated tax deduction and
the actual tax deduction realized. For further information on the
Bancorp’s stock-based compensation plans, refer to Note 26.
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,
securities and other short-term
investments. The Bancorp
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:
•
are
satisfied over
typically collected
transaction-based fees are
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
time while performance
typically
obligations for
typically
satisfied at a point in time. Revenues are recognized on
an accrual basis when or as the services are provided to
the customer, net of applicable discounts, waivers and
reversals. Payments
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
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, for which the
performance 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.
clients. The Bancorp’s
119 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• 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
leases.
Underwriting revenue is generally recognized on the
trade date, which is when the Bancorp’s performance
obligations are satisfied.
loans and
• 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 are generally complete when 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).
• 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
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
income
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. 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. 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, operating leases, non-compete agreements, trade
names and books of business. 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.
120 Fifth Third Bancorp
Advertising costs are generally expensed as incurred.
ACCOUNTING AND REPORTING DEVELOPMENTS
Standards Adopted in 2019
The Bancorp adopted the following new accounting standards
effective January 1, 2019:
and
2018)
2019-01
in March 2019). These
in December
issued
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 12 months. Leases are 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. Subsequent to the issuance of ASU 2016-02, the
FASB 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), 2018-20 (Narrow-Scope Improvements for Lessors,
(Codification
issued
Improvements,
subsequent
amendments did not change the core principles in the original ASU,
but did provide an additional optional transition method which was
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 January 1,
2019, using the optional transition method. The Bancorp initially
applied the new standard by recognizing a cumulative-effect
adjustment to the opening balance of retained earnings on the
adoption date without restating the prior comparative periods. As
part of the adoption, the Bancorp has elected certain accounting
policies as allowed under the ASU. The Bancorp elected the
practical expedients package provided within the new standard,
which among other things, permitted the Bancorp not to reassess
the lease classification of existing leases. The Bancorp also elected
not to use hindsight in evaluating the lease term. Additionally, the
Bancorp elected to not recognize ROU assets and lease liabilities for
leases with an initial term of 12 months or less on the Consolidated
Balance Sheets and elected a practical expedient, by class of
underlying asset, to not separate nonlease components from the
associated lease component and instead, to account for them as a
single lease component. Upon adoption on January 1, 2019, the
Bancorp recognized additional ROU assets and lease liabilities of
$509 million related to its operating lease commitments based on
the present value of unpaid lease payments as of the date of
adoption and also recorded a cumulative-effect adjustment to
retained earnings of $10 million for the 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. The required disclosures are included in
Note 6, Note 9 and Note 10.
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.
Standards Issued but Not Yet Adopted
The following accounting standards were issued but not yet adopted
by the Bancorp as of December 31, 2019:
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. Subsequent to the
issuance of ASU 2016-13, the FASB has issued additional ASUs
containing clarifying guidance, transition relief provisions and minor
updates to the original ASU. These include ASU 2018-19 (issued in
November 2018), ASU 2019-04 (issued in April 2019), ASU 2019-
05 (issued in May 2019), and ASU 2019-11 (issued in November
2019).
The Bancorp adopted the amended guidance on January 1, 2020,
using a modified
retrospective approach, although certain
provisions of the guidance are only required to be applied on a
prospective basis. Upon adoption, the Bancorp recorded a
combined
increase to the ALLL and reserve for unfunded
commitments of approximately $650 million. Of this amount,
approximately $30 million pertained to the recognition of an ALLL
on purchased financial assets with credit deterioration and was also
added to the carrying value of the related loans. The Bancorp will be
subject to the amended disclosure requirements beginning with the
filing of the Bancorp’s first quarter of 2020 quarterly report on
Form 10-Q. Adoption of the amended guidance did not have a
material impact to the Bancorp’s investment securities portfolio.
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 Bancorp adopted the amended guidance on January 1, 2020.
The amended guidance will be applied prospectively to all goodwill
impairment tests performed after the adoption date.
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 Bancorp adopted the
amended guidance on January 1, 2020 and will conform to the
amended disclosure requirements in the Bancorp’s first quarter of
2020 Form 10-Q.
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 Bancorp adopted the
amended guidance on January 1, 2020 on a prospective basis.
ASU 2019-12 – Income Taxes (Topic 740): Simplifying the Accounting
for Income Taxes
In December 2019, the FASB issued ASU 2019-12 which simplifies
the accounting for income taxes by removing certain exceptions to
the general principles in Topic 740. The amendments also clarify
and amend existing guidance for other areas of Topic 740. The
amended guidance is effective for the Bancorp on January 1, 2021
with early adoption permitted, and
is to be applied either
prospectively or retrospectively for the specific amendment based
on the transition method prescribed by the FASB. The Bancorp is
in the process of evaluating the impact of the amended guidance on
its Consolidated Financial Statements.
121 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
Supplemental Disclosures:
Conversion of outstanding preferred stock issued by a Bancorp subsidiary
Additions to right-of-use assets under operating leases
Additions to right-of-use assets under finance leases
Right-of-use assets recognized at adoption of ASU 2016-02
3. BUSINESS COMBINATION
On March 22, 2019, Fifth Third Bancorp completed its acquisition
of MB Financial, Inc. in a stock and cash transaction valued at
approximately $3.6 billion. MB Financial, Inc. was headquartered in
Chicago, Illinois with reported assets of approximately $20 billion
and 86 branches (91 locations) as of December 31, 2018 and was
the holding company of MB Financial Bank, N.A. The acquisition
resulted in a combined company with a larger Chicago market
presence and core deposit funding base while also building scale in a
strategically important market.
Under the terms of the agreement, the Bancorp acquired 100%
of the common stock of MB Financial, Inc. In exchange, common
shareholders of MB Financial, Inc. received 1.45 shares of Fifth
Third Bancorp common stock and $5.54 in cash for each share of
MB Financial, Inc. common stock, for a total value per share of
$42.49, based on the $25.48 closing price of Fifth Third Bancorp’s
common stock on March 21, 2019. Upon closing of the transaction,
MB Financial, Inc. became a subsidiary of the Bancorp. However,
MB Financial, Inc.’s 6.00% non-cumulative Series C perpetual
preferred stock with a fair value of $197 million remained
outstanding and was recognized as a noncontrolling interest on the
Consolidated Balance Sheets. Through its ownership of all of the
common stock, the Bancorp controlled 95% of the voting equity
interests in MB Financial, Inc. with the remainder attributable to the
preferred shareholders’ noncontrolling interest.
On June 24, 2019, MB Financial, Inc. entered into an
Agreement and Plan of Merger with the Bancorp to provide for the
merger of MB Financial, Inc. with and into the Bancorp, with the
Bancorp as the surviving corporation. A special meeting of MB
Financial, Inc.’s stockholders was held on August 23, 2019 at which
$
2019
2018
2017
1,441
726
211
37
29
197
76
24
509
1,016
359
699
1,035
275
95
39
-
-
-
-
255
29
34
-
-
-
-
the holders of MB Financial, Inc.’s common stock and preferred
stock, voting together as a single class, approved the merger. In the
merger, each outstanding share of MB Financial, Inc.’s preferred
stock was converted into the right to receive one share of a newly
created series of preferred stock of the Bancorp having substantially
the same terms as the MB Financial, Inc. preferred stock.
On August 26, 2019, the Bancorp issued 200,000 shares of
6.00% non-cumulative Class B perpetual preferred stock, Series A.
Each preferred share has a $1,000 liquidation preference. These
shares were issued to the holders of MB Financial, Inc.’s 6.00%
non-cumulative Series C perpetual preferred stock in conjunction
with the merger of MB Financial, Inc. with and into Fifth Third
Bancorp. This transaction resulted in the elimination of the
noncontrolling interest in MB Financial, Inc. which was previously
reported in the Bancorp’s Consolidated Financial Statements. The
newly issued shares of Class B preferred stock, Series A were
recognized by the Bancorp at the carrying value previously assigned
to the MB Financial, Inc. Series C preferred stock prior to the
transaction.
The acquisition of MB Financial, Inc. constituted a business
combination and was accounted for under the acquisition method
of accounting. Accordingly, the assets acquired, liabilities assumed
and noncontrolling interest recognized were recorded at their
estimated fair values as of the acquisition date. These fair value
estimates are considered preliminary as of December 31, 2019. Fair
value estimates, including loans and leases, intangible assets, bank
premises and equipment, certain tax-related matters and goodwill,
are subject to change for up to one year after the acquisition date as
additional information becomes available.
122 Fifth Third Bancorp
The following table reflects consideration paid and the noncontrolling interest recognized for MB Financial, Inc.’s net assets and the amounts of
acquired identifiable assets and liabilities assumed at their estimated fair value as of the acquisition date:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Consideration paid
Cash payments
Fair value of common stock issued
Stock-based awards
Dividend receivable from MB Financial, Inc.
Total consideration paid
Fair value of noncontrolling interest in acquiree
Net Identifiable Assets Acquired, at Fair Value:
Assets
Cash and due from banks
Federal funds sold
Other short-term investments
Available-for-sale debt and other securities
Held-to-maturity securities
Equity securities
Loans and leases held for sale
Portfolio loans and leases(a)
Bank premises and equipment(a)
Operating lease equipment(a)
Intangible assets(a)
Servicing rights
Other assets(a)
Total assets acquired
Liabilities
Deposits
Other short-term borrowings(a)
Accrued taxes, interest and expenses(a)
Other liabilities(a)
Long-term debt(a)
Total liabilities assumed
$
$
$
469
3,121
38
(20)
3,608
197
$
$
$
$
1,679
35
53
832
4
51
12
13,411
266
394
220
263
750
17,970
14,489
267
265
194
727
15,942
Net identifiable assets acquired
Goodwill
(a) Fair values have been updated from the estimates reported in the March 31, 2019 quarterly report on Form 10-Q.
$
2,028
1,777
In connection with the acquisition, the Bancorp recognized
approximately $1.8 billion of goodwill, of which $15 million relates
to 15-year tax deductible goodwill from MB Financial, Inc.’s prior
acquisitions. See Note 11 for further information on goodwill
recognized and Note 12 for further information on intangible assets
acquired in the acquisition of MB Financial, Inc.
The following is a description of the methods used to determine the
estimated fair values of significant assets and liabilities presented
above.
Cash and due from banks and other short-term investments
For financial instruments with a short-term or no stated maturity,
prevailing market rates and limited credit risk, carrying amounts
approximate fair value.
Available-for-sale debt and other securities, held-to-maturity securities and
equity securities
Fair values for securities were based on quoted market prices, where
available. If quoted market prices were not available, fair value
estimates were based on observable inputs including quoted market
prices for similar instruments, quoted market prices that are not in
an active market or other inputs that are observable in the market.
In the absence of observable inputs, fair value was estimated based
on pricing models and/or DCF methodologies.
Loans and leases held for sale and portfolio loans and leases
Fair values for loans were based on a DCF methodology that
considered factors including the type of loan and related collateral,
fixed or variable interest rate, remaining term, credit quality ratings
or scores, amortization status and current discount rates. Loans with
similar characteristics were pooled together when applying various
valuation techniques. The discount rates used for loans were based
on an evaluation of current market rates for new originations of
comparable loans and a market participant’s required rate of return
to purchase similar assets, including adjustments for liquidity and
credit quality when necessary. For PCI loans, the DCF methodology
was based on the Bancorp’s estimate of contractual cash flows
expected to be collected.
Bank premises and equipment
Fair values for bank premises and equipment were generally based
on appraisals of the property values.
Operating lease equipment
Fair values for operating lease equipment were generally developed
using the cost approach. The seller’s historical cost was adjusted by
cost trend indices relevant to the asset type and vintage to arrive at a
current reproduction cost. This reproduction cost was then adjusted
for deterioration based on the age and typical life of each class of
123 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assets. Residual values were estimated based on analysis of the
seller’s historical trends of residual value realization by asset class.
intangible asset represents
Intangible assets
The core deposit
the value of
relationships with deposit customers. The fair value was estimated
based on a DCF methodology that considered expected customer
attrition rates, net maintenance cost of the deposit base, alternative
cost of funds and the interest costs associated with customer
deposits. The core deposit intangible is being amortized on an
accelerated basis over its estimated useful life.
For acquired operating leases where the Bancorp is the lessor,
intangible assets are recognized when contract terms of the lease are
more favorable than market terms as of the acquisition date.
Operating lease intangibles are amortized on a straight-line basis
over the remaining lease term.
Servicing rights
Fair values for servicing rights were estimated using internal OAS
models with certain unobservable inputs, primarily prepayment
speed assumptions, OAS and weighted-average lives.
Other assets
Fair values for ROU assets associated with real estate operating
leases were based on current market rental rates for similar
properties in the same area, discounted at the Bancorp’s incremental
borrowing rates as of the acquisition date. Estimates of current
market rental rates were generally based on third-party market rent
studies performed for each significant property.
Deposits
The fair values for time deposits were estimated using a DCF
methodology whereby the contractual remaining cash flows were
discounted using market rates currently being offered for time
deposits of similar maturities. For transactional deposits, carrying
amounts approximate fair value.
Long-term debt
The fair values of long-term debt instruments were estimated based
on quoted market prices for identical or similar instruments if
available, or by using DCF analyses based on current incremental
borrowing rates for similar types of instruments.
Merger-Related Expenses
Direct merger-related expenses related to the acquisition of MB
Financial, Inc. were expensed as incurred by the Bancorp and
amounted to $222 million and $31 million for the years ended
December 31, 2019 and 2018, respectively.
The following table provides a summary of merger-related expenses recorded in noninterest expense:
($ in millions)
Salaries, wages and incentives
Employee benefits
Technology and communications
Net occupancy expense
Card and processing expense
Equipment expense
Other noninterest expense
Total
For the years ended December 31,
2019
2018
$
$
87
3
71
13
1
1
46
222
1
-
6
-
1
-
23
31
information combines
Pro Forma Information
The following table presents unaudited pro forma information as if
the acquisition of MB Financial, Inc. had occurred on January 1,
2018. This pro forma
the historical
condensed consolidated results of operations of Fifth Third
Bancorp and MB Financial, Inc. after giving effect to certain
adjustments, including purchase accounting fair value adjustments,
amortization of intangibles, stock-based compensation expense and
acquisition costs, as well as the related income tax effects of those
adjustments. The pro forma results also reflect reclassification
adjustments to noninterest income and noninterest expense to
conform MB Financial, Inc.’s presentation of operating lease
income and the related depreciation expense with the Bancorp's
presentation. Direct costs associated with the acquisition are
included in pro forma earnings as of January 1, 2018.
The pro forma information does not necessarily reflect the
results of operations that would have occurred had Fifth Third
Bancorp acquired MB Financial, Inc. on January 1, 2018.
Furthermore, cost savings and other business synergies related to
the acquisition are not reflected in the unaudited pro forma
amounts.
($ in millions)
Net interest income
Noninterest income
Net income available to common shareholders
Unaudited Pro Forma Information
For the years ended December 31,
2019
2018
$
4,911
3,638
2,529
4,836
3,184
2,282
Acquired Loans and Leases
Purchased loans are evaluated for evidence of credit deterioration at
acquisition and recorded at their initial fair value. Generally, the fair
value discount or premium on acquired loans and leases is
amortized over the contractual life of the loan as an adjustment to
yield. For loans acquired with evidence of credit impairment (PCI
loans), the Bancorp determined at the acquisition date the excess of
the loan’s contractually required payments over all cash flows
expected to be collected as an amount that should not be accreted
into interest income (nonaccretable difference). The remaining
amount representing the difference in the expected cash flows of
acquired loans and the initial investment in the acquired loans is
accreted into interest income over the remaining life of the loan or
pool of loans (accretable yield). This method of accounting for loans
124 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
acquired with credit impairment does not apply to loans carried at
fair value, residential mortgage loans held for sale and loans under
revolving credit agreements. Refer to Note 1 for additional
information on the accounting for PCI loans. The Bancorp has
elected to account for loans acquired from MB Financial, Inc.,
which were not considered impaired but exhibited evidence of
credit deterioration since origination, in the same manner as PCI
loans.
The following table reflects the contractually required payments receivable, cash flows expected to be collected and estimated fair value of loans
identified as PCI loans on the acquisition date of MB Financial, Inc. These fair value estimates are considered preliminary as of December 31,
2019.
($ in millions)
Contractually required payments including interest
Less: Nonaccretable difference
Cash flows expected to be collected
Less: Accretable yield
Fair value of loans acquired
A summary of activity related to accretable yield is as follows:
($ in millions)
Balance as of December 31, 2018
Additions
Accretion
Reclassifications (to) from nonaccretable difference
Balance as of December 31, 2019
March 22, 2019
1,139
$
81
1,058
202
856
$
Accretable Yield
$
$
-
202
(41)
(14)
147
As of December 31, 2019, contractual balances on the purchased
PCI loans and leases totaled $764 million with a corresponding carry
value of $551 million.
At the MB Financial, Inc. acquisition date, contractual balances
on the purchased non-PCI loans and leases totaled $12.7 billion
with a corresponding fair value of $12.5 billion.
Bank Merger
On May 3, 2019 MB Financial Bank, N.A. merged with and into
Fifth Third Bank (now Fifth Third Bank, National Association),
with Fifth Third Bank, National Association as the surviving entity.
Fifth Third Bank, National Association is an indirect subsidiary of
Fifth Third Bancorp.
4. RESTRICTIONS ON CASH, DIVIDENDS AND OTHER CAPITAL ACTIONS
Reserve Requirement
The FRB, under Regulation D, requires that banks hold cash in
reserve against deposit liabilities when total reservable deposit
liabilities are greater than the regulatory exemption, known as the
reserve requirement. The reserve requirement is calculated based on
a two-week average of daily net transaction account deposits as
defined by the FRB and may be satisfied with average vault cash
during the following two-week maintenance period. When vault
cash is not sufficient to meet the reserve requirement, the remaining
amount must be satisfied with average funds held at the FRB. At
December 31, 2019 and 2018, the Bancorp’s banking subsidiary
reserve requirement was $1.7 billion and $1.5 billion, respectively.
Additionally, the Bancorp’s banking subsidiary average reserve
requirement was $1.7 billion and $1.5 billion in 2019 and 2018,
respectively.
Capital Actions
During the first quarter of 2019, the FRB provided relief from
certain regulatory requirements related to supervisory stress testing
and company-run stress testing for the 2019 stress test cycle,
including disclosure requirements. As a result, the Bancorp was not
required to submit a capital plan or participate in CCAR 2019. The
requirement for the Bancorp to submit an annual capital plan to the
FRB has been extended until April 5, 2020. However, the Bancorp
remains subject to the requirement to develop and maintain a capital
plan, and the Board of Directors of the Bancorp must review and
approve the capital plan. The FRB further clarified that relief from
the 2019 stress test cycle should not be construed as relief from any
regulatory capital requirements and that the Bancorp will be subject
to the full CCAR 2020 stress test requirements.
Restrictions on Cash Dividends
The principal source of income and funds for the Bancorp (parent
company) are dividends from its subsidiaries. The dividends paid by
the Bancorp’s banking subsidiary are subject to regulations and
limitations prescribed by state and federal supervisory agencies. The
Bancorp’s banking subsidiary paid
the Bancorp’s nonbank
subsidiary holding company, which in turn paid the Bancorp $2.0
billion and $1.9 billion in dividends during the years ended
December 31, 2019 and 2018, respectively. Additionally, a $200
million dividend was paid by MB Financial, Inc. to the Bancorp
during the year ended December 31, 2019. 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.
In June of 2019, the Bancorp announced its capital distribution
capacity of approximately $2 billion for the period of July 1, 2019
through June 30, 2020. This includes the ability to execute share
repurchases up to $1.24 billion as well as increase quarterly common
stock dividends by up to $0.03 per share. These distributions will be
governed under the FRB’s 2019 extended stress test process for
BHCs with less than $250 billion of total consolidated assets.
The Bancorp also entered into or settled share repurchase and
open market share repurchase transactions during the years ended
December 31, 2019 and 2018. For more information related to
these transactions, refer to Note 25. In the second quarter of 2019,
the Bancorp increased the quarterly common stock dividend to
$0.24 per share.
125 Fifth Third Bancorp
5. INVESTMENT SECURITIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
2019
2018
Amortized Unrealized Unrealized
Gains
Losses
Cost
$
74
18
1
-
-
-
Fair
Value
75
18
Amortized Unrealized Unrealized
Gains
Losses
Cost
98
2
-
-
(1)
-
Fair
Value
97
2
($ 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
Agency commercial mortgage-backed securities
Non-agency commercial mortgage-backed securities
13,746
15,141
3,242
2,189
556
34,966
388
564
123
29
-
1,105
(19)
(12)
-
(12)
-
(43)
14,115
15,693
3,365
2,206
556
36,028
16,403
10,770
3,305
1,998
552
33,128
86
44
9
27
-
166
(242)
(164)
(47)
(10)
-
(464)
16,247
10,650
3,267
2,015
552
32,830
Asset-backed securities and other debt securities
Other securities(a)
Total available-for-sale debt and other securities
Held-to-maturity securities:
16
Obligations of states and political subdivisions securities
2
Asset-backed securities and other debt securities
18
Total held-to-maturity securities
(a) Other securities consist of FHLB, FRB and DTCC restricted stock holdings of $76, $478 and $2, respectively, at December 31, 2019 and $184, $366 and $2, respectively, at December 31,
16
2
18
15
2
17
15
2
17
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
2018, 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
2019
2018
$
297
564
287
452
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 gains (losses), net – non-qualifying hedges on
MSRs in the Consolidated Statements of Income.
The following table presents securities gains (losses) 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 gains (losses) on available-for-sale debt and other securities
Total trading debt securities gains (losses)
Total equity securities gains (losses)(a)
Total gains (losses) recognized in income from available-for-sale debt and other
securities, trading debt securities and equity securities(b)
(a)
(b) Excludes $7 of net securities gains for the year ended December 31, 2019 and an insignificant amount of net securities gains (losses) for both the years ended December 31, 2018 and 2017
included in corporate banking revenue and wealth and asset management revenue in the Consolidated Statements of Income related to securities held by FTS to facilitate the timely execution of
customer transactions.
Includes $26 of net unrealized gains, $45 of net unrealized losses and $5 of net unrealized gains for the years ended December 31, 2019, 2018 and 2017, respectively.
60
(50)
(1)
9
3
31
85
(36)
(54)
(5)
2
7
72
(82)
-
(10)
(15)
(44)
2017
2018
(69)
$
$
$
2019
43
4
$
$
126 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2019 and 2018, investment securities with a fair
value of $8.1 billion and $7.0 billion, respectively, were pledged to
secure borrowings, public deposits, trust funds, derivative contracts
and for other purposes as required or permitted by law.
The expected maturity distribution of the Bancorp’s mortgage-backed securities and the contractual maturity distribution of the remainder of the
Bancorp’s available-for-sale debt and other securities and held-to-maturity investment securities as of December 31, 2019 are shown in the
following table:
($ 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.
200
11,288
18,173
5,811
556
36,028
195
10,983
17,566
5,666
556
34,966
$
$
5
10
-
2
-
17
5
10
-
2
-
17
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)
2019
Agency residential mortgage-backed securities
Agency commercial mortgage-backed securities
Asset-backed securities and other debt securities
Total
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
$
$
$
$
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
2,159
1,602
367
4,128
-
3,235
2,022
884
314
6,455
(19)
(12)
(3)
(34)
-
(21)
(37)
(6)
(6)
(70)
4
-
379
383
97
7,892
5,260
1,621
241
15,111
-
-
(9)
(9)
(1)
(221)
(127)
(41)
(4)
(394)
2,163
1,602
746
4,511
97
11,127
7,282
2,505
555
21,566
(19)
(12)
(12)
(43)
(1)
(242)
(164)
(47)
(10)
(464)
At both December 31, 2019 and 2018, an immaterial amount of
unrealized losses in the available-for-sale debt and other securities
portfolio were comprised of non-rated securities.
127 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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 and lease portfolio
consists of
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
to various
industry
lending
policies and procedures as needed. The Bancorp acquired indirect
motorcycle, powersport, recreational vehicle and marine loans in the
acquisition of MB Financial, Inc. These loans are included in
addition to automobile loans in the line item “indirect secured
consumer loans”. 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 7.
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
Indirect secured consumer loans
Credit card
Other consumer loans
Total consumer loans
Total portfolio loans and leases
2019
2018
$
$
$
$
135
1
1,264
1,400
50,542
10,963
5,090
3,363
69,958
16,724
6,083
11,538
2,532
2,723
39,600
109,558
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
Portfolio loans and leases are recorded net of unearned income,
which totaled $354 million as of December 31, 2019 and $479
million as of December 31, 2018. Additionally, portfolio loans and
leases, excluding PCI loans, are recorded net of unamortized
premiums and discounts, deferred direct loan origination fees and
costs and fair value adjustments (associated with acquired loans or
loans designated as fair value upon origination) which totaled a net
premium of $249 million and $296 million as of December 31, 2019
and 2018, respectively.
The Bancorp’s FHLB and FRB borrowings are generally
secured by loans. The Bancorp had loans of $16.7 billion and $13.1
billion at December 31, 2019 and 2018, respectively, pledged at the
FHLB, and loans of $47.3 billion and $42.6 billion at December 31,
2019 and 2018, respectively, pledged at the FRB.
The following table presents a summary of the total loans and leases owned by the Bancorp and net charge-offs (recoveries) as of and for the years
ended December 31:
Carrying Value
90 Days Past Due
and Still Accruing
Net
Charge-Offs (Recoveries)
($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Indirect secured consumer loans
Credit card
Other consumer loans
Total loans and leases
Less: Loans and leases held for sale
Total portfolio loans and leases
2019
50,677
10,964
5,090
3,363
17,988
6,083
11,538
2,532
2,723
110,958
1,400
109,558
$
$
$
$
2018
44,407
6,977
4,657
3,600
16,041
6,402
8,976
2,470
2,342
95,872
607
95,265
The Bancorp engages in commercial lease products primarily related
to the financing of commercial equipment. Leases are classified as
sales-type if the Bancorp transfers control of the underlying asset to
the lessee. The Bancorp classifies leases that do not meet any of the
criteria for a sales-type lease as a direct financing lease if the present
value of the sum of the lease payments and any residual value
128 Fifth Third Bancorp
2019
11
15
-
-
50
1
10
42
1
130
2018
4
2
-
-
38
-
12
37
-
93
2019
103
(2)
-
7
4
18
50
134
55
369
2018
132
(1)
-
1
7
12
40
101
38
330
guaranteed by the lessee and/or any other third party equals or
exceeds substantially all of the fair value of the underlying asset and
the collection of the lease payments and residual value guarantee is
probable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the components of the net investment in leases as of:
($ in millions)
Net investment in direct financing leases:
Lease payment receivable (present value)
Unguaranteed residual assets (present value)
Net discount on acquired leases
Deferred selling profits
Net investment in sales-type leases:
Lease payment receivable (present value)
Unguaranteed residual assets (present value)
Net discount on acquired leases
(a) Excludes $429 of leveraged leases at December 31, 2019.
The following table provides the components of the commercial lease financing portfolio as of:
($ 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
Interest income recognized in the Consolidated Statements of
Income for the year ended December 31, 2019 was $88 million for
direct financing leases and $13 million for sales-type leases.
December 31, 2019(a)
$
2,196
220
(7)
-
510
15
-
December 31, 2018
$
3,256
804
19
4,079
(479)
3,600
$
The following table presents undiscounted cash flows for both direct financing and sales-type leases for 2020 through 2024 and thereafter as well
as a reconciliation of the undiscounted cash flows to the total lease receivables as follows:
As of December 31, 2019 ($ in millions)
2020
2021
2022
2023
2024
Thereafter
Total undiscounted cash flows
Less: Difference between undiscounted cash flows and discounted cash flows
Present value of lease payments (recognized as lease receivables)
The lease residual value represents the present value of the
estimated fair value of the leased equipment at the end of the lease.
The Bancorp performs quarterly reviews of residual values
associated with its leasing portfolio considering factors such as the
subject equipment, structure of the transaction, industry, prior
experience with the lessee and other factors that impact the residual
value to assess for impairment. At December 31, 2019, the Bancorp
maintained an allowance of $17 million to cover the inherent losses,
including the potential losses related to the residual value, in the net
Direct Financing
Leases
Sales-Type
Leases
$
$
$
679
523
428
257
184
273
2,344
148
2,196
121
133
112
70
63
75
574
64
510
investment in leases. Refer to Note 7 for additional information on
credit quality and the ALLL.
At December 31, 2018, the Bancorp maintained an allowance
of $18 million to cover the losses related to the minimum lease
payments. Any declines in residual value that were deemed to be
other-than-temporary were recognized as a loss and included as a
component of corporate banking revenue in the Consolidated
Statements of Income.
129 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. 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:
Balance, end of period
(a) For the year ended December 31, 2019, the Bancorp recorded $48 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.
$
2019 ($ in millions)
Balance, beginning of period
Losses charged-off(a)
Recoveries of losses previously charged-off(a)
Provision for (benefit from) loan and lease losses
$
2018 ($ in millions)
Balance, beginning of period
Losses charged-off(a)
Recoveries of losses previously charged-off(a)
Provision for (benefit from) loan and lease losses
$
Commercial
Unallocated
Residential
Mortgage
81
(9)
5
(4)
73
Residential
Mortgage
89
(13)
6
(1)
81
Consumer
267
(374)
117
288
298
Consumer
234
(280)
89
224
267
645
(127)
19
173
710
753
(157)
25
24
645
110
-
-
11
121
120
-
-
(10)
110
Total
1,103
(510)
141
468
1,202
Total
1,196
(450)
120
237
1,103
Commercial
Unallocated
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.
$
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
Balance, end of period
Commercial
831
(154)
29
66
(19)
753
$
$
Residential
Mortgage
96
(15)
8
-
-
89
Consumer
214
(212)
46
186
-
234
Unallocated
112
-
-
9
(1)
120
Total
1,253
(381)
83
261
(20)
1,196
The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment:
As of December 31, 2019 ($ 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
$
$
$
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
82
628
-
710
55
18
-
73
33
265
-
298
413
69,047
498
69,958
814
15,690
37
16,541
302
22,558
16
22,876
-
-
121
121
-
-
-
-
170
911
121
1,202
1,529
107,295
551
109,375
Purchased credit impaired
Total portfolio loans and leases
(a)
(b) Excludes $183 of residential mortgage loans measured at fair value and includes $429 of leveraged leases, net of unearned income, at December 31, 2019.
Includes $1 related to leveraged leases at December 31, 2019.
$
130 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial
Residential
Mortgage
Consumer
Unallocated
Total
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)
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.
278
19,912
20,190
736
14,589
15,325
277
59,294
59,571
$
$
$
$
42
603
-
645
61
20
-
81
38
229
-
267
-
-
110
110
-
-
-
141
852
110
1,103
1,291
93,795
95,086
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, 2019 ($ 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, 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
Pass
47,671
4,421
5,866
4,963
3,222
66,143
Pass
42,695
3,122
3,632
4,657
3,475
57,581
$
$
$
$
Special
Mention
1,423
162
135
52
53
1,825
Special
Mention
779
23
27
-
72
901
Substandard
1,406
293
82
75
88
1,944
Substandard
853
139
31
-
53
1,076
Doubtful
42
4
-
-
-
46
Doubtful
13
-
-
-
-
13
Total
50,542
4,880
6,083
5,090
3,363
69,958
Total
44,340
3,284
3,690
4,657
3,600
59,571
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,
indirect secured consumer 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
Indirect secured consumer loans
Credit card
Other consumer loans
Total residential mortgage and consumer loans(a)
(a) Excludes $183 and $179 of residential mortgage loans measured at fair value at December 31, 2019 and 2018, respectively.
Performing
16,450
5,989
11,531
2,505
2,721
39,196
91
94
7
27
2
221
$
$
Nonperforming
2019
Performing
15,303
6,332
8,975
2,444
2,341
35,395
2018
Nonperforming
22
70
1
26
1
120
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:
As of December 31, 2019 ($ 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
Indirect secured consumer loans
Current
Loans and
Leases(b)(c)
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
$
50,305
4,853
6,072
5,089
3,338
16,372
5,965
11,389
2,434
2,702
108,519
133
4
5
1
11
27
61
132
50
18
442
104
23
6
-
14
142
57
17
48
3
414
237
27
11
1
25
169
118
149
98
21
856
50,542
4,880
6,083
5,090
3,363
16,541
6,083
11,538
2,532
2,723
109,375
11
9
6
-
-
50
1
10
42
1
130
Credit card
Other consumer loans
Total portfolio loans and leases(a)
(a) Excludes $183 of residential mortgage loans measured at fair value at December 31, 2019.
(b)
$
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,
2019, $94 of these loans were 30-89 days past due and $261 were 90 days or more past due. The Bancorp recognized $4 of losses during the year ended December 31, 2019 due to claim denials
and curtailments associated with these insured or guaranteed loans.
Includes accrual and nonaccrual loans and leases.
(c)
132 Fifth Third Bancorp
As of December 31, 2018 ($ 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
Indirect secured consumer loans
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Current
Loans and
Leases(b)(c)
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
$
44,213
3,277
3,688
4,657
3,597
15,227
6,280
8,844
2,381
2,323
94,487
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
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)
$
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)
Impaired Portfolio Loans and Leases
Larger commercial loans and leases included within aggregate
borrower relationship balances exceeding $1 million that exhibit
probable or observed credit weaknesses are subject to individual
review for impairment. The Bancorp also performs an individual
review on loans and leases that are restructured in a TDR. The
Bancorp considers the current value of collateral, credit quality of
any guarantees, the loan structure and other factors when
evaluating whether an individual loan or lease is impaired. Other
factors may include the geography and industry of the borrower,
size and financial condition of the borrower, cash flow and
leverage of the borrower and the Bancorp’s evaluation of the
borrower’s management. Smaller-balance homogenous loans or
leases that are collectively evaluated for impairment are not
included in the following tables.
The following tables summarize the Bancorp’s impaired portfolio loans and leases, by class, that were subject to individual review, which includes
all portfolio loans and leases restructured in a TDR as of December 31:
2019 ($ 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
Indirect secured consumer loans
Credit card
Total impaired portfolio loans and leases with a related ALLL
With no related ALLL:
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial leases
Restructured residential mortgage loans
Restructured consumer loans:
Home equity
Indirect secured consumer loans
Total impaired portfolio loans and leases with no related ALLL
Total impaired portfolio loans and leases
(a)
Unpaid
Principal
Balance
Recorded
Investment
ALLL
$
$
$
$
$
277
4
1
26
431
127
4
47
917
156
21
3
2
401
125
10
718
1,635
215
4
-
26
429
127
4
44
849
142
21
3
2
385
119
8
680
1,529 (a)
76
-
-
6
55
20
-
13
170
-
-
-
-
-
-
-
-
170
133 Fifth Third Bancorp
Includes $23, $735 and $230, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $231, $79 and $72, respectively, of commercial, residential
mortgage and consumer portfolio TDRs on nonaccrual status at December 31, 2019.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2018 ($ 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
Indirect secured consumer 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
Indirect secured consumer loans
Total impaired portfolio loans and leases 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
Includes $60, $724 and $237, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $147, $12 and $41, respectively, of commercial, residential
mortgage and consumer portfolio TDRs on nonaccrual status at December 31, 2018.
The following table summarizes the Bancorp’s average impaired portfolio loans and leases, by class, and interest income, by class, for the years
ended December 31:
($ in millions)
Commercial loans and leases:
Commercial and industrial loans
Commercial mortgage owner-occupied loans
Commercial mortgage nonowner-occupied loans
Commercial leases
Restructured residential mortgage loans
Restructured consumer loans:
Home equity
Indirect secured consumer loans
Credit card
Total average impaired portfolio loans and leases
2019
2018
2017
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
$
306
23
8
28
756
221
7
44
1,393
7
-
-
1
30
11
-
4
53
373
15
24
18
743
244
8
44
1,469
15
-
-
-
28
12
-
5
60
579
35
61
3
657
281
11
50
1,677
10
-
1
-
25
12
-
4
52
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 loans which have not yet
met the requirements to be returned to accrual status; certain
restructured consumer and residential mortgage 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:
2019
2018
$
$
$
338
29
1
1
28
397
91
94
7
27
2
130
618
62
680
193
11
2
-
22
228
22
69
1
27
1
98
348
47
395
($ 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
Total nonaccrual portfolio commercial loans and leases
Residential mortgage loans
Consumer loans:
Home equity
Indirect secured consumer 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 $7 and $16 of nonaccrual loans and leases held for sale at December 31, 2019 and 2018, respectively.
(b)
Includes $16 and $6 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at December 31, 2019 and 2018, respectively, of which $11 and $2 are
restructured nonaccrual government insured commercial loans at December 31, 2019 and 2018, respectively.
The Bancorp’s recorded investment of consumer mortgage loans
secured by residential real estate properties for which formal
foreclosure proceedings are
local
requirements of the applicable jurisdiction was $212 million and
$153 million as of December 31, 2019 and 2018, respectively.
in process according
to
include
concessions
granted under
Troubled Debt Restructurings
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.
reorganization,
TDRs
arrangement or other provisions of the Federal Bankruptcy Act.
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 information on the Bancorp’s ALLL
methodology. Upon modification of a loan, the Bancorp measures
the related impairment as the difference between the estimated
future cash flows expected to be collected on the modified loan,
discounted at the original effective yield of the loan, and the
carrying value of the loan. The resulting measurement may result in
the need for minimal or no 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. Loans discharged in a Chapter
7 bankruptcy and not reaffirmed by the borrower are treated as
nonaccrual collateral-dependent loans with impairment recognized
to reduce the carrying values of such loans to the fair value of the
related collateral less costs to sell.
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 $41 million and
$58 million, respectively, as of December 31, 2019 compared with
$24 million and $67 million, respectively, as of December 31, 2018.
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
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) Excludes loans classified as TDRs as a result of the Bancorp’s conformance to OCC guidance with regard to non-reaffirmed loans included in Chapter 7 bankruptcy filings.
(c) Represents number of loans post-modification and excludes loans previously modified in a TDR.
$
2019 ($ in millions)(a)(b)
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
Indirect secured consumer loans
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
Indirect secured consumer loans
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
Indirect secured consumer loans
Number of Loans
Modified in a TDR
During the Year(c)
Recorded Investment
in Loans Modified
in a TDR
During the Year
(Decrease)
Increase
Charge-offs
to ALLL Upon Recognized Upon
Modification
Modification
97
15
1
722
$
223
12
-
101
(19)
-
-
1
80
100
6,041
7,056
4
-
34
374
-
-
8
(10)
5
-
-
-
-
-
3
8
Number of Loans
Modified in a TDR
During the Year(b)
Recorded Investment
in Loans Modified
in a TDR
During the Year
Increase
(Decrease)
Charge-offs
to ALLL Upon Recognized Upon
Modification
Modification
$
54
6
3
1,128
111
84
7,483
8,869
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
$
75
9
4
1
830
150
102
8,085
9,256
237
8
-
4
116
10
-
38
413
(5)
5
-
-
5
-
-
8
13
6
-
-
-
-
-
-
1
7
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.
$
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.
$
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,
indirect secured consumer loan 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide a summary of TDRs that subsequently defaulted during the years ended December 31, 2019, 2018 and 2017 and were
within twelve months of the restructuring date:
December 31, 2019 ($ in millions)(a)(b)
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
Credit card
Total portfolio loans and leases
(a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality.
(b) Excludes loans classified as TDRs as a result of the Bancorp’s conformance to OCC guidance with regard to non-reaffirmed loans included in Chapter 7 bankruptcy filings.
12
4
1
274
15
655
961
$
$
Number of
Contracts
Recorded
Investment
20
1
-
42
-
3
66
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.
Number of
Contracts
Recorded
Investment
8
2
225
10
655
900
Number of
Contracts
7
4
172
16
1,633
1,832
$
$
$
$
61
-
35
-
4
100
Recorded
Investment
17
1
24
2
8
52
137 Fifth Third Bancorp
8. 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:
25
Land and improvements
14
Buildings
3
Equipment
(2,785)
Accumulated depreciation and amortization
Total bank premises and equipment
1,861
(a) At December 31, 2019 and 2018, land and improvements, buildings and construction in progress included $51 and $55, respectively, associated with parcels of undeveloped land intended for
8
18
1
(2,889)
1,995
1 - 30 yrs.
2 - 20 yrs.
1 - 30 yrs.
586
1,547
1,987
403
81
639
1,575
2,126
432
85
2018
2019
$
$
future branch expansion.
Depreciation and amortization expense related to bank premises
and equipment, including amortization of finance lease ROU assets,
was $255 million, $238 million and $234 million for the years ended
December 31, 2019, 2018 and 2017, 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,
2019, the Bancorp expects the total number of branch closures
under the 2018 Branch Optimization Plan to be 126 branches of
which 69 branches have already been closed, with an additional 30
branches identified for closure in 2020. The Bancorp expects the
the 2018 Branch
to be closed under
remaining branches
Optimization Plan in 2021.
9. OPERATING LEASE EQUIPMENT
Operating lease equipment was $848 million and $518 million at
December 31, 2019 and 2018, respectively. Lease income relating to
lease payments for operating leases was $151 million, $84 million
and $96 million for the years ended December 31, 2019, 2018 and
2017, respectively. Additionally, the Bancorp received payments of
$157 million related to operating leases during the year ended
December 31, 2019.
The Bancorp performs assessments of the recoverability of
long-lived assets when events or changes in circumstances indicate
As a result of the MB Financial, Inc. acquisition, the Bancorp
identified 46 branches in the Chicago market that it planned to
close. Of these locations, 45 were closed in the third quarter of 2019
and the 46th location is expected to close in the first quarter of 2020.
These 46 branches are not part of the aforementioned 2018 Branch
Optimization Plan and are in addition to the branch in the Chicago
market that the Bancorp closed in November 2018. In addition, the
Bancorp previously identified 11 other non-branch locations that it
planned to sell. These locations had a fair value, less cost to sell, of
$15 million and were acquired from MB Financial, Inc. Of these
locations, 7 have been sold as of December 31, 2019.
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 $28 million, $45 million and $7 million for the
years ended December 31, 2019, 2018 and 2017, respectively. For
the year ended December 31, 2019, impairment charges included
$14 million associated with Fifth Third branches in the Chicago
market that have been assessed for impairment as a result of the MB
Financial, Inc. acquisition. The recognized impairment losses were
the Consolidated
recorded
Statements of Income.
in other noninterest
income
in
that their carrying values may not be recoverable. As a result of
these recoverability assessments, the Bancorp recognized $3 million,
$4 million and $52 million of impairment losses associated with
operating lease assets for the years ended December 31, 2019, 2018
and 2017, respectively. The recognized impairment losses were
in the Consolidated
recorded
Statements of Income.
in corporate banking revenue
The following table presents undiscounted future lease payments for operating leases for the years ending December 31:
As of December 31, 2019 ($ in millions)
2020
2021
2022
2023
2024
Thereafter
Total operating lease payments
138 Fifth Third Bancorp
Undiscounted Cash
Flows
$
$
152
124
94
67
38
63
538
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LEASE OBLIGATIONS - LESSEE
The Bancorp leases certain banking centers, ATM sites, land for
owned buildings and equipment. The Bancorp’s lease agreements
typically do not contain any residual value guarantees or any material
restrictive covenants. Refer to Note 1 for additional information.
The following table provides a summary of lease assets and lease liabilities as of:
Consolidated Balance Sheets Caption
($ in millions)
Assets
Operating lease right-of-use assets
Finance lease right-of-use assets
Total right-of-use assets(a)
Liabilities
Operating lease liabilities
Finance lease liabilities
Total lease liabilities
(a) Operating and finance lease right-of-use assets are recorded net of accumulated amortization of $75 and $27 as of December 31, 2019, respectively.
Accrued taxes, interest and expenses
Long-term debt
Other assets
Bank premises and equipment
The following table presents the components of lease costs:
($ in millions)
Lease costs:
Amortization of right-of-use assets
Interest on lease liabilities
Consolidated Statements of Income Caption
Net occupancy and equipment expense
Interest on long-term debt
Total finance lease costs
Operating lease cost
Short-term lease cost
Variable lease cost
Sublease income
Total operating lease costs
Total lease costs
Net occupancy expense
Net occupancy expense
Net occupancy expense
Net occupancy expense
December 31, 2019
$
$
$
$
473
34
507
555
35
590
For the year ended
December 31, 2019
$
$
$
$
$
6
1
7
96
1
30
(3)
124
131
Gross occupancy expense for cancelable and noncancelable leases,
which was included in net occupancy expense in the Consolidated
Statements of Income, was $101 million for both the years ended
December 31, 2018 and 2017.
The Bancorp performs impairment assessments for ROU
assets when events or changes in circumstances indicate that their
carrying values may not be recoverable. In addition to the lease
costs disclosed in the table above, the Bancorp recognized $15
million of impairment losses and termination charges for the ROU
assets related to certain operating leases for the year ended
December 31, 2019. The recognized losses were recorded in net
occupancy expense in the Consolidated Statements of Income.
The following table presents undiscounted cash flows for both operating leases and finance leases for 2020 through 2024 and thereafter as well as
a reconciliation of the undiscounted cash flows to the total lease liabilities as follows:
As of December 31, 2019 ($ in millions)
2020
2021
2022
2023
2024
Thereafter
Total undiscounted cash flows
Less: Difference between undiscounted cash flows and discounted cash flows
Present value of lease liabilities
Operating
Leases
90
81
76
67
58
280
652
97
555
$
$
$
Finance Leases
6
5
5
2
2
26
46
11
35
Total
96
86
81
69
60
306
698
108
590
The following table presents the weighted-average remaining lease term and weighted-average discount rate as of:
Weighted-average remaining lease term (years):
Operating leases
Finance leases
Weighted-average discount rate:
Operating leases
Finance leases
December 31, 2019
9.48
14.17
3.19%
4.30
139 Fifth Third Bancorp
December 31, 2019
97
1
5
5
The following table presents information related to lease transactions for the year ended:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Cash paid for amounts included in the measurement of lease liabilities:(a)
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
$
Gains on sale and leaseback transactions
(a) The cash flows related to the short-term and variable lease payments are not included in the amounts in the table as they were not included in the measurement of lease liabilities.
140 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. 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. On March
22, 2019 the Bancorp completed its acquisition of MB Financial,
Inc. In connection with the acquisition, the Bancorp recorded
approximately $1.8 billion of goodwill. The estimated fair value of
assets acquired, liabilities assumed and noncontrolling interest
recognized are considered preliminary as of December 31, 2019 and
are subject to change for up to one year after the acquisition date as
additional information becomes available. The amount of goodwill
recognized and the allocation to the Bancorp’s reporting units are
also considered preliminary and subject to change for up to one year
from the acquisition date.
The Bancorp completed its annual goodwill impairment test as
of September 30, 2019 and the estimated fair values of the
Commercial Banking, Branch Banking and Wealth and Asset
Management reporting units exceeded
their carrying values,
including goodwill.
Changes in the net carrying amount of goodwill, by reporting unit, for the years ended December 31, 2019 and 2018 were as follows:
($ in millions)
Goodwill
Accumulated impairment losses
Net carrying amount as of December 31, 2017
Acquisition activity
Net carrying amount as of December 31, 2018
Acquisition activity
Sale of business
Net carrying amount as of December 31, 2019
Commercial
Banking
Branch
Banking
1,363
(750)
613
17
630
1,324
-
1,954
1,655
-
1,655
-
1,655
391
-
2,046
$
$
$
$
Management
Consumer Wealth and Asset
Lending
215
(215)
-
-
-
-
-
-
177
-
177
16
193
62
(3)
252
Total
3,410
(965)
2,445
33
2,478
1,777
(3)
4,252
12. INTANGIBLE ASSETS
Intangible assets consist of core deposit intangibles, customer
relationships, operating leases, non-compete agreements, trade
names and books of business. Intangible assets are amortized on
either a straight-line or an accelerated basis over their estimated
useful lives and, based on the type of intangible asset, the
amortization expense may be recorded in either other noninterest
income or other noninterest expense
the Consolidated
Statements of Income.
in
On March 22, 2019, the Bancorp completed its acquisition of
MB Financial, Inc. In connection with the acquisition, the Bancorp
recorded a $195 million core deposit intangible asset with a
weighted-average amortization period of 7.2 years. Additionally, the
Bancorp recorded a $25 million operating lease intangible asset with
a weighted-average amortization period of 1.7 years. The fair values
of these intangibles are subject to change as additional information
becomes available.
The details of the Bancorp’s intangible assets are shown in the following table:
($ in millions)
As of December 31, 2019
Core deposit intangibles
Customer relationships
Operating leases
Non-compete agreements
Other
Total intangible assets
As of December 31, 2018
Core deposit intangibles
Customer relationships
Non-compete agreements
Other
Total intangible assets
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
$
$
$
$
229
29
23
13
4
298
34
32
14
7
87
(70)
(6)
(9)
(11)
(1)
(97)
(30)
(3)
(11)
(3)
(47)
159
23
14
2
3
201
4
29
3
4
40
As of December 31, 2019, all of the Bancorp’s intangible assets
were being amortized. Amortization expense recognized on
intangible assets was $54 million, $5 million and $2 million for the
years ended December 31, 2019, 2018 and 2017, respectively. The
Bancorp’s projections of amortization expense shown in the
following table are based on existing asset balances as of December
31, 2019. Future amortization expense may vary from these
projections.
141 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated amortization expense for the years ending December 31, 2020 through 2024 is as follows:
($ in millions)
2020
2021
2022
2023
2024
$
Total
56
43
34
24
16
13. 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 table provides a summary of the classifications of consolidated VIE assets, liabilities and noncontrolling interests included in the
Consolidated Balance Sheets as of:
December 31, 2019
December 31, 2018
$
$
$
$
74
1,354
(7)
8
1,429
2
1,253
1,255
40
668
(4)
5
709
1
606
607
to the VIEs. In addition, the Bancorp retained servicing rights for
the underlying loans and, therefore, holds the power to direct the
activities of the VIEs that most significantly impact the economic
performance of the VIEs. As a result, the Bancorp concluded that it
is the primary beneficiary of the VIEs and 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. The third-
party holders of the asset-backed 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
($ in millions)
Assets:
Other short-term investments
Indirect secured consumer loans
ALLL
Other assets
Total assets
Liabilities:
Other liabilities
Long-term debt
Total liabilities
Automobile loan securitizations
In a securitization transaction that occurred in 2019, the Bancorp
transferred approximately $1.43 billion in automobile loans to a
bankruptcy remote trust which was deemed to be a VIE. This trust
then subsequently issued approximately $1.37 billion of asset-
backed notes, of which approximately $68 million were retained by
the Bancorp. Refer to Note 18 for further information. The
Bancorp also has previously completed securitization transactions in
which the Bancorp transferred certain consumer automobile loans
to bankruptcy remote trusts which were also deemed to be VIEs. In
each of these securitization transactions, the primary purposes of
the VIEs were to issue asset-backed securities with varying levels of
credit subordination and payment priority, as well as residual
interests, and to provide the Bancorp with access to liquidity for its
originated loans. The Bancorp retained residual interests in the VIEs
and, therefore, has an obligation to absorb losses and a right to
receive benefits from the VIEs that could potentially be significant
142 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Non-consolidated VIEs
The following tables provide a summary of assets and liabilities carried on the Consolidated Balance Sheets related to non-consolidated VIEs for
which the Bancorp holds an interest, but is not the primary beneficiary of the VIE, as well as the Bancorp’s maximum exposure to losses
associated with its interests in the entities as of:
December 31, 2019 ($ in millions)
CDC investments
Private equity investments
Loans provided to VIEs
Lease pool entities
December 31, 2018 ($ in millions)
CDC investments
Private equity investments
Loans provided to VIEs
CDC investments
CDC, a wholly-owned indirect subsidiary of the Bancorp, was
created to invest in projects to create affordable housing, revitalize
business and residential areas and preserve historic landmarks. CDC
generally co-invests with other unrelated companies and/or
individuals and typically makes investments in a separate legal entity
that owns the property under development. The entities are usually
formed as limited partnerships and LLCs and CDC typically invests
as a limited partner/investor member in the form of equity
contributions. The economic performance of the VIEs is driven by
the performance of their underlying investment projects as well as
the VIEs’ ability to operate in compliance with the rules and
regulations necessary for the qualification of tax credits generated by
equity investments. 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.
$
$
Total
Assets
1,435
89
2,715
74
Total
Assets
1,198
41
2,331
Total
Liabilities
428
-
-
-
Total
Liabilities
376
-
-
Maximum
Exposure
1,435
164
4,083
74
Maximum
Exposure
1,198
73
3,617
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 December 31, 2019 and 2018, the Bancorp’s CDC
investments included $1.2 billion and $1.1 billion of investments in
affordable housing tax credits recognized in other assets in the
Consolidated Balance Sheets,
respectively. The unfunded
commitments related to these investments were $428 million and
$374 million at December 31, 2019 and 2018, respectively. The
unfunded commitments as of December 31, 2019 are expected to
be funded from 2020 to 2035.
The Bancorp has accounted for all of its qualifying LIHTC investments using the proportional amortization method of accounting. The following
table summarizes the impact to the Consolidated Statements of Income related to these investments:
For the years ended December 31 ($ 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, 2019, 2018 and 2017. The
Applicable income tax expense
Applicable income tax expense
140
(163)
154
(192)
223
(220)
2017
2018
2019
$
Consolidated Statements of
Income Caption(a)
Bancorp recognized $57 of impairment losses primarily due to the change in the federal statutory corporate tax rate during the year ended December 31, 2017.
Private equity investments
The Bancorp invests as a limited partner in private equity
investments which provide the Bancorp an opportunity to obtain
higher rates of return on invested capital, while also creating cross-
selling opportunities for the Bancorp’s commercial products. Each
of the limited partnerships has an unrelated third-party general
partner responsible for appointing the fund manager. The Bancorp
has not been appointed fund manager for any of these private equity
investments. The funds finance primarily all of their activities from
the partners’ capital contributions and investment returns. The
Bancorp has determined that it is not the primary beneficiary of the
funds because it does not have the obligation to absorb the funds’
expected losses or the right to receive the funds’ expected residual
returns that could potentially be significant to the funds and lacks
the power to direct the activities that most significantly impact the
economic performance of the funds. The Bancorp, as a limited
partner, does not have substantive participating or substantive kick-
out rights over the general partner. Therefore, the Bancorp accounts
for its investments in these limited partnerships under the equity
method of accounting.
The Bancorp is exposed to losses arising from the negative
performance of the underlying investments in the private equity
143 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amounts of
investments. As a limited partner, the Bancorp’s maximum exposure
to loss is limited to the carrying amounts of the investments plus
these
unfunded commitments. The carrying
investments, which are included in other assets in the Consolidated
Balance Sheets, are presented in previous tables. Also, at December
31, 2019 and 2018, the Bancorp’s unfunded commitment amounts
to the private equity funds were $75 million and $32 million,
respectively. As part of previous commitments, the Bancorp made
capital contributions to private equity investments of $12 million
and $7 million during the years ended December 31, 2019 and 2018,
respectively. The Bancorp did not recognize OTTI associated with
certain nonconforming investments affected by the Volcker Rule
during the year ended December 31, 2019, and recognized $8
million and $1 million for the years ended 2018 and 2017,
respectively.
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 6. As
of December 31, 2019 and 2018, the Bancorp’s unfunded
commitments to these entities were $1.4 billion and $1.3 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.
Lease pool entities
As a result of the acquisition of MB Financial, Inc., the Bancorp co-
invested with other unrelated leasing companies in three LLCs
designed for the purpose of purchasing pools of residual interests in
leases which have been originated or purchased by the other
investing member. For each LLC, the leasing company is the
managing member and has full authority over the day-to-day
operations of the entity. While the Bancorp holds more than 50% of
the equity interests in each LLC, the operating agreements require
both members to consent to significant corporate actions, such as
liquidating the entity or removing the manager. In addition, the
Bancorp has a preference with regards to distributions such that all
of the Bancorp’s equity contribution for each pool must be
distributed, plus a pre-defined rate of return, before the other
member may receive distributions. The leasing company is also
entitled to the return of its investment plus a pre-defined rate of
return before any residual profits are distributed to the members.
The lease pool entities are primarily subject to risk of losses on
the lease residuals purchased. The Bancorp has determined that it is
not the primary beneficiary of these VIEs because it does not have
the power to direct the activities that most significantly impact the
economic performance of the entities. This power is held by the
leasing company, who as managing member controls the servicing
of the leases and collection of the proceeds on the residual interests.
144 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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, 2019, 2018 and 2017. 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.
2019
7,781
$
2018
5,078
2017
6,369
175
267
100
216
138
206
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
Servicing rights purchased
Servicing rights obtained in acquisition
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 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.
2019
2018
$
$
938
142
26
263
(203)
(173)
993
858
81
82
-
42
(125)
938
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, 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 gains (losses), 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)
(a) Included in mortgage banking net revenue in the Consolidated Statements of Income.
$
2019
3
221
(203)
2018
(15)
(21)
42
2017
2
2
(1)
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
2019
Prepayment
Speed
(annual)
Residential mortgage loans:
Servicing rights
Servicing rights
Fixed
Adjustable
5.9
-
12.6 %
-
OAS
(bps)
530
-
Weighted-
Average Life
(in years)
2018
Prepayment
Speed
(annual)
6.6
2.6
10.5 %
30.3
OAS
(bps)
522
647
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, 2019 and 2018, the Bancorp
145 Fifth Third Bancorp
serviced $80.7 billion and $63.2 billion, respectively, of residential
mortgage loans for other investors. The value of MSRs that
continue to be held by the Bancorp is subject to credit, prepayment
and interest rate risks on the sold financial assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2019, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in
prepayment speed assumptions and immediate 10% and 20% adverse changes in OAS are as follows:
Prepayment
Speed Assumption
Fair
Value
Weighted-
Average Life
(in years)
Impact of Adverse Change
on Fair Value
20%
50%
10%
($ 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
13.0 % $
22.6
983
10
(36)
(1)
5.3
3.6
Rate
Rate
(69)
(1)
(158)
(3)
OAS
Assumption
Impact of Adverse Change
on Fair Value
10%
20%
$
(21)
-
(40)
-
OAS
(bps)
602
921
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.
146 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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
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, 2019 and
2018, the balance of collateral held by the Bancorp for derivative
assets was $894 million and $481 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 $623 million and $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, 2019 and 2018,
respectively. The credit component negatively impacting the fair
value of derivative assets associated with customer accommodation
contracts was $17 million and $3 million as of December 31, 2019
and 2018, respectively.
In measuring the fair value of derivative liabilities, the Bancorp
considers its own credit risk, taking into consideration collateral
maintenance requirements of certain derivative counterparties and
the duration of instruments with counterparties that do not require
collateral maintenance. When necessary,
the Bancorp posts
collateral primarily in the form of cash and securities to offset
changes in fair value of the derivatives, including changes in fair
value due to the Bancorp’s credit risk. As of December 31, 2019 and
2018, the balance of collateral posted by the Bancorp for derivative
liabilities was $347 million and $551 million, respectively.
Additionally, $488 million and $23 million of variation margin
payments were applied to the respective derivative contracts to
reduce the Bancorp’s derivative liabilities as of December 31, 2019
and 2018, respectively, and were also not included in the total
amount of collateral posted. Certain of the Bancorp’s derivative
liabilities contain credit-risk related contingent features that could
result in the requirement to post additional collateral upon the
occurrence of specified events. As of December 31, 2019 and 2018,
the fair value of the additional collateral that could be required to be
posted as a result of the credit-risk related contingent features being
triggered was immaterial to the Bancorp’s Consolidated Financial
Statements. The posting of collateral has been determined to
remove the need for further consideration of credit risk. As a result,
the Bancorp determined that the impact of the Bancorp’s credit risk
to the valuation of its derivative liabilities was immaterial to the
Bancorp’s Consolidated Financial Statements.
The Bancorp holds certain derivative instruments that qualify
for hedge accounting treatment and are designated as either fair
value hedges or cash flow hedges. Derivative instruments that do
not qualify for hedge accounting treatment, or for which hedge
accounting is not established, are held as free-standing derivatives.
All customer accommodation derivatives are held as free-standing
derivatives.
147 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables reflect the notional amounts and fair values for all derivative instruments included in the Consolidated Balance Sheets as of:
December 31, 2019 ($ 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(a)
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
(a) Derivative assets and liabilities are presented net of variation margin of $40 and $493, respectively.
December 31, 2018 ($ 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
Fair Value
Notional
Amount
Derivative
Assets
Derivative
Liabilities
$
2,705
3,000
8,000
6,420
2,901
3,082
195
73,327
907
8,525
50
14,144
$
393
393
115
-
115
508
131
1
-
-
132
579
18
271
-
165
1,033
1,165
1,673
-
-
-
2
2
2
2
5
163
5
175
148
-
270
-
146
564
739
741
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 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, 2019, certain
interest rate swaps met the criteria required to qualify for the
shortcut method of accounting that permits the assumption of
148 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
perfect offset. For all designated fair value hedges of interest rate
risk as of December 31, 2019 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
2019
152
(147)
2018
(36)
41
2017
(33)
31
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, 2019
3,093
$
402
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, 2019, 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, 2019,
the maximum length of time over which the Bancorp is hedging its
exposure to the variability in future cash flows is 60 months.
Reclassified gains and losses on interest rate contracts related
to commercial and industrial loans are recorded within interest
income in the Consolidated Statements of Income. As of December
31, 2019 and 2018, $422 million of net deferred gains, net of tax and
$160 million of net deferred gains, net of tax, respectively, on cash
flow hedges were recorded in AOCI in the Consolidated Balance
Sheets. As of December 31, 2019, $101 million in net unrealized
losses, net of tax, recorded in AOCI are expected to be reclassified
into earnings during the next twelve months. This amount could
differ from amounts actually recognized due to changes in interest
rates, hedge de-designations, and the addition of other hedges
subsequent to December 31, 2019.
During the years ended 2019 and 2018, there were no gains or
losses reclassified from AOCI into earnings associated with the
discontinuance of cash flow hedges because it was probable that the
original forecasted transaction would no longer occur by the end of
the originally specified time period or within the additional period of
time as defined by U.S. GAAP.
The following table presents the pre-tax net gains (losses) recorded in the Consolidated Statements of Income and in the Consolidated Statements
of Comprehensive Income relating to derivative instruments designated as cash flow hedges:
For the years ended December 31 ($ in millions)
Amount of pre-tax net gains (losses) recognized in OCI
Amount of pre-tax net gains (losses) reclassified from OCI into net income
$
2019
348
16
2018
214
(2)
2017
(11)
19
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 sale of Visa, Inc. Class B Shares in
2009, the Bancorp entered into a total return swap in which the
Bancorp will make or receive payments based on subsequent
changes in the conversion rate of the Class B Shares into Class A
Shares. This total return swap is accounted for as a free-standing
derivative. Refer to Note 27 for further discussion of significant
inputs and assumptions used in the valuation of this instrument.
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 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
Swap associated with sale of Visa, Inc. Class B Shares
Free-Standing Derivative Instruments – Customer
Accommodation
The majority of the free-standing derivative instruments the
Bancorp enters into are for the benefit of its commercial customers.
These derivative contracts are not designated against specific assets
or liabilities on the Consolidated Balance Sheets or to forecasted
transactions and, therefore, do not qualify for hedge accounting.
These instruments include foreign exchange derivative contracts
entered into for the benefit of commercial customers involved in
international trade to hedge their exposure to foreign currency
fluctuations and commodity contracts to hedge such items as
natural gas and various other derivative contracts. The Bancorp may
economically hedge significant exposures related to these derivative
contracts entered into for the benefit of customers by entering into
offsetting contracts with approved,
independent
counterparties with substantially matching terms. The Bancorp
hedges
interest rate exposure on commercial customer
transactions by executing offsetting swap agreements with primary
dealers. Revaluation gains and losses on interest rate, foreign
exchange, commodity and other commercial customer derivative
contracts are recorded as a component of corporate banking
revenue or other noninterest income in the Consolidated Statements
of Income.
reputable,
its
Consolidated Statements of
Income Caption
2019
2018
2017
Mortgage banking net revenue
Mortgage banking net revenue
$
Other noninterest income
Other noninterest income
Other noninterest income
4
221
(7)
-
(107)
(8)
(21)
10
-
(59)
(17)
2
(7)
(1)
(80)
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, 2019 and 2018, the total
notional amount of the risk participation agreements was $3.9
billion and $4.0 billion, respectively, and the fair value was a liability
of $8 million, at both December 31, 2019 and 2018, which is
included in other liabilities in the Consolidated Balance Sheets. As
of December 31, 2019, the risk participation agreements had a
weighted-average remaining life of 3.6 years.
The Bancorp’s maximum exposure in the risk participation
agreements is contingent on the fair value of the underlying interest
rate derivative contracts in an asset position at the time of default.
The Bancorp monitors the credit risk associated with the underlying
customers in the risk participation agreements through the same risk
grading system currently utilized for establishing loss reserves in its
loan and lease portfolio.
Risk ratings of the notional amount of risk participation agreements under this risk rating system are summarized in the following table:
At December 31 ($ in millions)
Pass
Special mention
Substandard
Total
2019
2018
$
$
3,841
86
16
3,943
3,919
79
4
4,002
150 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
2019
2018
2017
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
40
-
(15)
144
8
-
1
49
12
-
-
32
-
-
70
9
-
(1)
55
14
-
1
21
(5)
2
93
6
1
-
48
-
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, 2019 ($ 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
$
1,655
1,655
(417)
(417)
(504)
(504)
734
734
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
(417)
(417)
741
741
(97)
(97)
227
227
$
Sheets were excluded from this table.
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
(410)
(410)
(123)
(123)
874
874
341
341
$
Sheets were excluded from this table.
151 Fifth Third Bancorp
16. 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
Operating lease right-of-use assets
Accrued interest and fees receivable
Worldpay, Inc. TRA receivable
Prepaid expenses
OREO and other repossessed personal property
Income tax receivable
Investment in Worldpay Holding, LLC
Other
Total other assets
2019
2,278
1,960
1,729
1,673
473
424
345
101
64
32
-
111
9,190
2018
1,963
1,760
1,390
1,114
-
438
-
93
48
56
420
90
7,372
$
$
17. 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
2019
Amount Rate
2018
Amount
Rate
$
$
$
260
1,011
1,267
1,046
2,693
4,046
1.49%
1.24
2.26%
2.67
$
$
$
1,925
573
1,509
1,611
2,684
6,313
2.40%
1.95
1.97%
1.82
The following table presents a summary of the Bancorp's other short-term borrowings as of December 31:
($ in millions)
Securities sold under repurchase agreements
Derivative collateral
Total other short-term borrowings
$
$
2019
2018
469
542
1,011
302
271
573
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, 2019
and 2018, 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
18. 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
Fixed-rate notes
Fixed-rate notes
Subordinated:(a)
Fixed-rate notes
Fixed-rate notes
Subsidiaries
Senior:
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Floating-rate notes(c)
Fixed-rate notes
Floating-rate notes(b)
Fixed-rate notes
Fixed-rate notes
Fixed-rate notes
Floating-rate notes(b)
Floating-rate notes(b)
Fixed-rate notes
Subordinated:(a)
Fixed-rate bank notes
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, 2019.
(c) These rates reflect the floating rates as of December 31, 2018.
Maturity
Interest Rate
2019
2018
2019
2020
2021
2022
2022
2024
2025
2028
2024
2038
2019
2019
2019
2019
2020
2020
2021
2021
2021
2021
2022
2025
2026
2027
$
2.30 %
2.875 %
2.37 %
2.60 %
3.50 %
3.65 %
2.375 %
3.95 %
4.30 %
8.25 %
2.375 %
2.30 %
1.625 %
3.412 %
2.20 %
2.186 %
2.25 %
2.875 %
3.35 %
2.376 %
2.549 %
3.95 %
3.85 %
4.00 %
2035
2020 - 2047
3.31 % - 3.58 %
0.05 % - 6.87 %
2022-2026
2022
2020 - 2040
1.80 % - 2.69 %
1.91 %
Varies
-
1,099
250
699
499
1,493
746
646
748
1,333
-
-
-
-
752
300
1,249
848
508
299
299
797
748
171
53
91
500
1,098
250
698
498
-
-
646
747
1,238
850
750
743
250
742
300
1,248
847
502
299
-
764
747
-
52
22
1,147
42
153
14,970
568
11
56
14,426
$
In aggregate, $2.7 billion and $2.6 billion qualifies as Tier II capital for regulatory capital purposes for the years ended December 31, 2019 and 2018, respectively.
The Bancorp pays down long-term debt in accordance with contractual terms over maturity periods summarized in the above table. The aggregate
annual maturities of long-term debt obligations (based on final maturity dates) as of December 31, 2019 are presented in the following table:
($ in millions)
2020
2021
2022
2023
2024
Thereafter
Total
Parent
Subsidiaries
Total
$
$
1,099
250
1,198
-
2,241
2,725
7,513
1,073
2,923
900
514
98
1,949
7,457
2,172
3,173
2,098
514
2,339
4,674
14,970
At December 31, 2019, the Bancorp’s long-term borrowings
consisted of outstanding principal balances of $14.6 billion, net
discounts of $18 million, debt issuance costs of $33 million and
additions for mark-to-market adjustments on its hedged debt of
$402 million. 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. The Bancorp was in compliance with all debt
covenants at December 31, 2019 and 2018.
For further information on a subsequent event related to long-
term debt, refer to Note 33.
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 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
the principal amount plus accrued and unpaid interest up to, but
excluding, the redemption date.
On January 25, 2019, the Bancorp issued and sold $1.5 billion
of senior notes to third-party investors. The senior notes bear a
fixed-rate of interest of 3.65% per annum. The notes are unsecured,
senior obligations of the Bancorp. Payment of the full principal
amounts of the notes is due upon maturity on January 25, 2024.
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
154 Fifth Third Bancorp
amount plus accrued and unpaid interest up to, but excluding, the
redemption date.
On October 28, 2019, the Bancorp issued and sold $750
million of senior notes to third-party investors. The senior notes
bear a fixed-rate of interest of 2.375% per annum. The notes are
unsecured, senior obligations of the Bancorp. Payment of the full
principal amounts of the notes is due upon maturity on January 28,
2025. These notes will be redeemable at the Bancorp’s option, in
whole or in part, at any time or from time to time, on or after April
25, 2020, and prior to December 29, 2024, in each case at a
redemption price, plus accrued and unpaid interest thereon, if any,
to, but excluding, the redemption date, equal to the greater of (i)
100% of the aggregate principal amount of the notes being
redeemed on that redemption date; and (ii) the sum of the present
values of the remaining scheduled payments of principal and
interest on the notes being redeemed that would be due if the notes
to be redeemed matured on December 29, 2024 discounted to the
redemption date on a semi-annual basis at the applicable treasury
rate plus 15 bps. Additionally, 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.
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 4.96% at December 31, 2019.
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, 2019, $19.3 billion was available for future
issuance under the global bank note program.
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, $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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
On February 1, 2019, the Bank issued and sold, under its bank
notes program, $300 million in unsecured senior floating-rate bank
notes due on February 1, 2022. Interest on the floating-rate notes is
three-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 up to, but excluding, the redemption date.
As a result of the MB Financial, Inc. acquisition, the Bank
assumed $175 million of 4.00% subordinated fixed-rate notes due
on December 1, 2027. These bank notes will be redeemable by the
Bank, in whole or in part, on any interest payment date on or after
December 1, 2022 at a redemption price equal to 100% of the
principal amount plus accrued and unpaid interest up to, but
excluding, the redemption date. From December 1, 2022 until
maturity, the bank notes pay interest quarterly on the first day of
March, June, September and December.
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, 2019, FHLB advances have rates ranging from
0.05% to 6.87%, with interest payable monthly. The Bancorp has
pledged $17.6 billion of certain residential mortgage loans and
securities to secure its borrowing capacity at the Federal Home
Loan Bank which is partially utilized to fund $91 million in FHLB
advances that are outstanding. The FHLB advances mature as
follows: $2 million in 2020, $2 million in 2021, $1 million in 2022,
$72 million in 2023, an immaterial amount in 2024, and $14 million
thereafter.
Notes associated with consolidated VIEs
As previously discussed in Note 13, 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 2019, the Bancorp
transferred approximately $1.43 billion in automobile loans to a
bankruptcy remote trust which was deemed to be a VIE. This trust
then subsequently issued approximately $1.37 billion of asset-
backed notes, of which approximately $68 million were retained by
the Bancorp. Approximately $940 million of outstanding notes from
the 2019 securitization transaction are included in long-term debt in
the Consolidated Balance Sheets as of December 31, 2019.
Additionally, in prior years the Bancorp completed securitization
transactions in which the Bancorp transferred certain consumer
automobile loans to bankruptcy remote trusts which were also
deemed to be VIEs. As such, approximately $249 million of
outstanding notes related to these VIEs were included in long-term
debt in the Consolidated Balance Sheets as of December 31, 2019.
155 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES
The Bancorp, in the normal course of business, enters into financial
instruments and various agreements to meet the financing needs of
its customers. The Bancorp also enters into certain transactions and
agreements to manage its interest rate and prepayment risks, provide
funding, equipment and locations for its operations and invest in its
communities. These instruments and agreements involve, to varying
degrees, elements of credit risk, counterparty risk and market risk in
excess of the amounts recognized in the Consolidated Balance
Sheets. The creditworthiness of counterparties for all instruments
and agreements is evaluated on a case-by-case basis in accordance
with the Bancorp’s credit policies. The Bancorp’s significant
commitments, contingent liabilities and guarantees in excess of the
in the Consolidated Balance Sheets are
amounts recognized
discussed in the following sections.
Commitments
The Bancorp has certain commitments to make future payments under contracts. The following table reflects a summary of significant
commitments as of December 31:
($ in millions)
Commitments to extend credit
Letters of credit
Forward contracts related to residential mortgage loans held for sale
Purchase obligations
Capital commitments for private equity investments
Capital expenditures
Commitments to extend credit
Commitments to extend credit are agreements to lend, typically
having fixed expiration dates or other termination clauses that may
require payment of a fee. Since many of the commitments to extend
credit may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash flow requirements.
The Bancorp
the event of
nonperformance by the counterparty for the amount of the
contract. Fixed-rate commitments are also subject to market risk
to credit risk
is exposed
in
$
2019
75,696
2,137
2,901
113
75
84
2018
70,415
2,041
926
126
32
45
resulting from fluctuations in interest rates and the Bancorp’s
exposure is limited to the replacement value of those commitments.
As of December 31, 2019 and 2018, the Bancorp had a reserve for
unfunded commitments, including letters of credit, totaling $144
million and $131 million, respectively, included in other liabilities in
the Consolidated Balance Sheets. The Bancorp monitors the credit
risk associated with commitments to extend credit using the same
standard regulatory risk rating system utilized for its loan and lease
portfolio.
Risk ratings of outstanding commitments to extend credit under this risk rating system are summarized in the following table as of December 31:
($ in millions)
Pass
Special mention
Substandard
Doubtful
Total commitments to extend credit
$
$
2019
74,654
633
408
1
75,696
2018
69,928
271
216
-
70,415
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, 2019:
($ in millions)
Less than 1 year(a)
1 - 5 years(a)
Over 5 years
Total letters of credit
(a) Includes $2 and $2 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.
$
$
1,022
1,110
5
2,137
guarantees
Standby letters of credit accounted for approximately 99% of total
letters of credit at both December 31, 2019 and 2018 and are
considered
accordance with U.S. GAAP.
Approximately 66% and 60% of the total standby letters of credit
were collateralized as of December 31, 2019 and 2018, respectively.
In the event of nonperformance by the customers, the Bancorp has
rights to the underlying collateral, which can include commercial
in
real estate, physical plant and property, inventory, receivables, cash
and marketable securities. The reserve related to these standby
letters of credit, which is included in the total reserve for unfunded
commitments, was $20 million at December 31, 2019 and $17
million at December 31, 2018. The Bancorp monitors the credit risk
associated with letters of credit using the same standard regulatory
risk rating system utilized for its loan and lease portfolio.
156 Fifth Third Bancorp
Risk ratings of letters of credit under this risk rating system are summarized in the following table as of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Pass
Special mention
Substandard
Doubtful
Total letters of credit
At December 31, 2019 and 2018, 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,
2019 and 2018, total VRDNs in which the Bancorp was the
remarketing agent or were supported by a Bancorp letter of credit
were $449 million and $487 million, respectively, of which FTS
acted as the remarketing agent to issuers on $445 million and $481
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 $187 million and $256
million of the VRDNs remarketed by FTS, in addition to $3 million
and $6 million in VRDNs remarketed by third parties at December
31, 2019 and 2018, respectively. These letters of credit are included
in the total letters of credit balance provided in the previous table.
The Bancorp held $3 million and $9 million of these VRDNs in its
portfolio and classified them as trading securities at December 31,
2019 and 2018, 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.
Other commitments
The Bancorp has also entered into a limited number of agreements
for work related to banking center construction and to purchase
goods or services.
$
$
2019
2,005
20
111
1
2,137
2018
1,905
10
126
-
2,041
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 20 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 both December 31, 2019 and 2018, the Bancorp
maintained reserves related to loans sold with representation and
warranty provisions totaling $6 million 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, 2019, are reasonably possible. The Bancorp
currently estimates that it is reasonably possible that it could incur
losses related to mortgage representation and warranty provisions in
an amount up to approximately $11 million in excess of amounts
reserved. This estimate was derived by modifying the key
assumptions to reflect management's judgment regarding reasonably
possible adverse changes to those assumptions. The actual
repurchase losses could vary significantly from the recorded
mortgage representation and warranty reserve or this estimate of
reasonably possible losses, depending on the outcome of various
factors, including those previously discussed.
During both the years ended December 31, 2019 and 2018, the
Bancorp paid an immaterial amount in the form of make whole
payments and repurchased $25 million and $18 million, respectively,
in outstanding principal of loans to satisfy investor demands. Total
repurchase demand requests during the years ended December 31,
2019 and 2018 were $45 million and $19 million, respectively. Total
outstanding repurchase demand inventory was $6 million and $1
million at December 31, 2019 and 2018, respectively.
157 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity in the reserve for representation and warranty provisions for the years ended December 31:
($ in millions)
Balance, beginning of period
Net reductions to the reserve
Balance, end of period
2019
6
-
6
$
$
2018
9
(3)
6
The following tables provide a rollforward of unresolved claims by claimant type for the years ended December 31:
2019 ($ in millions)
Balance, beginning of period
New demands
Loan paydowns/payoffs
Resolved demands
Balance, end of period
2018 ($ in millions)
Balance, beginning of period
New demands
Resolved demands
Balance, end of period
indirect wholly-owned subsidiary of
Margin accounts
the Bancorp,
FTS, an
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 $12 million and $13 million at December 31,
2019 and 2018, 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, 2019 and 2018.
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
158 Fifth Third Bancorp
GSE
Private Label
Units
9
258
(3)
(237)
27
Units
6
121
(118)
9
Dollars
1
45
-
(40)
6
Dollars
1
19
(19)
1
$
$
GSE
$
$
Units
1
8
-
(8)
1
$
$
Dollars
-
1
-
(1)
-
Private Label
Units
1
-
-
1
$
$
Dollars
-
-
-
-
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 29 for
additional
information on the valuation of the swap. The
counterparty to the swap as a result of its ownership of the Class B
Shares will be impacted by dilutive adjustments to the conversion
rate of the Class B Shares into Class A Shares caused by any
Covered Litigation losses in excess of the litigation escrow account.
If actual judgments in, or settlements of, the Covered Litigation
significantly exceed current expectations, then additional funding by
Visa of the litigation escrow account and the resulting dilution of
the Class B Shares could result in a scenario where the Bancorp’s
ultimate exposure associated with the Covered Litigation (the “Visa
Litigation Exposure”) exceeds the value of the Class B Shares
owned by the swap counterparty (the “Class B Value”). In the event
the Bancorp concludes that it is probable that the Visa Litigation
Exposure exceeds the Class B Value, the Bancorp would record a
litigation reserve liability and a corresponding amount of other
noninterest expense for the amount of the excess. Any such
litigation reserve liability would be separate and distinct from the
fair value derivative liability associated with the total return swap.
As of the date of the Bancorp’s sale of the Visa Class B Shares
and through December 31, 2019, 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
$163 million and $125 million at December 31, 2019 and 2018,
respectively. Refer to Note 15 and Note 29 for further information.
After the Bancorp’s sale of the Class B Shares, Visa has funded
additional amounts into the litigation escrow account which have
resulted in further dilutive adjustments to the conversion of Class B
Shares into Class A Shares, and along with other terms of the total
return swap, required the Bancorp to make cash payments in
varying amounts to the swap counterparty as follows:
Period ($ in millions)
Q2 2010
Q4 2010
Q2 2011
Q1 2012
Q3 2012
Q3 2014
Q2 2018
Q3 2019
$
Visa
Funding Amount
500
800
400
1,565
150
450
600
300
Bancorp Cash
Payment Amount
20
35
19
75
6
18
26
12
159 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. 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 currently also subject to a possible indemnification
obligation of Visa as discussed in Note 19 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 had 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 had been already returned to the control
of the defendants. The remaining settlement funds paid by the
Bancorp have been 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
September 17, 2018, the defendants in the consolidated class action
signed a second settlement agreement (the “Amended Settlement
Agreement”) resolving the claims seeking monetary damages by the
proposed plaintiffs’ class (the “Plaintiff Damages Class”) and
superseding the original settlement agreement entered into in
October 2012. The Amended Settlement Agreement included,
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 provided for a total payment by all
defendants of
approximately $6.24 billion, composed of
approximately $5.34 billion held in escrow plus an additional $900
million in new funds. However, the Settlement Agreement also
provided that if between 15% and 25% of class members (by
payment volume) opted out of the class, up to $700 million of the
additional settlement funds would be returned to the defendants. It
has now been determined that more than 25% of the class members
have elected to opt out of the Amended Settlement Agreement, and,
therefore, $700 million of the additional $900 million has been
returned to the defendants. The Bancorp’s allocated share of the
settlement is within existing reserves, including funds maintained in
160 Fifth Third Bancorp
escrow. On December 13, 2019, the Court entered an order
granting final approval for the settlement. The settlement does not
resolve the claims of the separate proposed plaintiffs’ class seeking
injunctive relief or the claims of merchants who have opted out of
the proposed class settlement and are pursuing, or may in the future
decide to pursue, private lawsuits. The ultimate outcome in this
matter, including the timing of resolution, therefore remains
uncertain. Refer to Note 19 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
to eligible customers with
deposit-advance program offered
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 sought 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. On May 28, 2019, the
Sixth Circuit Court of Appeals reversed the dismissal of plaintiffs’
breach of contract claim and remanded for further proceedings. The
plaintiffs’ claimed damages for the alleged breach of contract claim
exceed $280 million. Under the Court’s scheduling order, the
plaintiffs’ motion for class certification is currently due April 20,
2020. No trial date has been set.
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 alleged 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 sought over $800 million in alleged damages, attorney’s fees,
removal of Fifth Third as trustee, and injunctive relief. Fifth Third
denied 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. On December 18,
2019, the Ohio Court of Appeals affirmed the Probate Court’s
dismissal of all of plaintiffs’ claims based upon allegations of Fifth
Third’s alleged failure to diversify assets held in two trusts for
Plaintiffs’ benefit. The appeals court reversed summary judgment on
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
one claim related to Fifth Third’s alleged unjust enrichment through
its receipt of certain fees in managing the trusts. The Court of
Appeals remanded the case to the Probate Court for further
consideration of the lone surviving claim, which comprises a small
fraction of the damages originally sought by plaintiffs in the lawsuit.
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 asserted claims for breach of
contract and the implied covenant of good faith and fair dealing and
for alleged failure to comply with Article 4A-202 of the Uniform
Commercial Code (the “UCC claim”), with losses allegedly totaling
almost $40 million, plus interest. Fifth Third denied 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). On March 22, 2019, the Court granted summary judgment
to Fifth Third on Upsher-Smith’s claims for breach of contract and
the implied covenant of good faith and fair dealing, but denied
summary judgment on the UCC claim. On June 27, 2019, the parties
entered into a confidential settlement of this matter for an amount
that was immaterial to the Bancorp’s Consolidated Financial
Statements.
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.
reviews,
requests,
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, OCC, CFPB, SEC, FINRA, U.S.
Department of Justice, etc., as well as state and other governmental
authorities and self-regulatory bodies regarding their respective
businesses. For example, the CFPB staff has notified Fifth Third
that it intends to file an enforcement action in relation to alleged
unauthorized account openings. Fifth Third believes that the facts
do not warrant an enforcement proceeding and intends to defend
itself vigorously if such an action should be filed. The impact of this
potential enforcement action has been reflected in our reasonably
possible losses. 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
controls
in our disclosure
weaknesses
and procedures.
Investigations by regulatory authorities may from time to time result
in civil or criminal referrals to law enforcement. Additionally, in
some cases, regulatory authorities may take supervisory actions that
are considered to be confidential supervisory information which
may not be publicly disclosed.
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, including known
contemplated enforcement actions and Fifth Third’s intended
response
to
approximately $56 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.
in an aggregate amount up
to such actions,
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
21. 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,
2019 and 2018, 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
2019
2018
$
$
$
736
5
741
49
700
6
706
10
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. In
conjunction with Worldpay, Inc.’s IPO, the Bancorp entered into
two TRAs with Worldpay, Inc. Refer to Note 1 for further
information.
The Bancorp completed transactions that
impacted the
Bancorp’s ownership interest in Worldpay, Inc. from the time of the
initial IPO in the first quarter of 2012 through the first quarter of
2019. On March 18, 2019, the Bancorp exchanged its remaining
10,252,826 Class B Units of Worldpay Holding, LLC for 10,252,826
shares of Class A common stock of Worldpay, Inc., and
subsequently sold those shares. As a result of this transaction, the
Bancorp recognized a gain of $562 million in other noninterest
income during the first quarter of 2019. As a result of the sale, as of
January 1, 2020, Worldpay Holding, LLC and Worldpay, Inc. are no
longer considered related parties of the Bancorp as the Bancorp no
longer beneficially owns any of Worldpay, Inc.’s equity securities.
The following table provides a summary of the transactions that impacted the Bancorp's ownership interest in Worldpay Holding, LLC after the
initial IPO:
($ in millions)
Q4 2012
Q2 2013
Q3 2013
Q2 2014
Q4 2015
Q3 2017
Q1 2018
Q2 2018
Q1 2019
Gain on Transactions
Remaining Ownership
Percentage
$
157
242
85
125
331
1,037
414
205
562
33.1 %
27.7
25.1
22.8
18.3
8.6
4.9
3.3
-
The Bancorp recognized $2 million, $1 million and $47 million,
respectively, in other noninterest income as part of its equity
method investment in Worldpay Holding, LLC for the years ended
December 31, 2019, 2018 and 2017 and received cash distributions
totaling $1 million, $3 million and $19 million during the years
ended December 31, 2019, 2018 and 2017, respectively.
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
162 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. This agreement did
not impact the TRA payment recognized in the fourth quarter of
2017.
During the fourth quarter of 2019, the Bancorp entered into an
agreement with Fidelity National Information Services, Inc. and
Worldpay, Inc. under which Worldpay, Inc. may be obligated to pay
up to approximately $366 million to the Bancorp to terminate and
settle certain remaining TRA cash flows, totaling an estimated $720
million, upon the exercise of certain call options by Worldpay, Inc.
or certain put options by the Bancorp. If exercised, certain of the
obligations would be settled with four quarterly payments beginning
in April 2020, a second set of the obligations would be settled with
four quarterly payments beginning in April 2022, and a third set of
the obligations would be settled with four quarterly payments
beginning in April 2023. In 2019, the Bancorp recognized a gain of
approximately $345 million in other noninterest income associated
with these options. This agreement did not impact the TRA
payment recognized in the fourth quarter of 2019.
In addition to the impact of the TRA agreement discussed
above, the Bancorp recognized $1 million, $20 million and $44
million in other noninterest income in the Consolidated Statements
of Income associated with the TRA during the years ended
December 31, 2019, 2018 and 2017, respectively.
The following table provides the estimated cash flows expected to be received subsequent to December 31, 2019 associated with the TRA for the
years ending December 31, 2020 and thereafter:
Cash Flows to be
Received from Put/Call
Options Expected to be
Estimated Cash Flows to
be Received not Subject
Cash Flows to be
Received from Put/Call
Options Exercised in
the First Quarter of 2020
31
11
($ in millions)
2020
2021
2022
2023
2024
2025
Total
(a) The 2020 cash flow of $1 million was agreed upon with Worldpay, Inc. and recognized as a gain in other noninterest income during the fourth quarter of 2019 with payment received by the Bancorp
1
73
44
45
22
11
196
to Put/Call Option(a)
139
150
35
Exercised
324
42
$
$
in January 2020. The remaining estimated cash flows in this column will be recognized in future periods when the related uncertainties are resolved.
The Bancorp and Worldpay Holding, LLC have various agreements
in place covering services including interchange clearing, settlement
and sponsorship. Worldpay Holding, LLC paid the Bancorp $87
million, $75 million and $68 million for these services for the years
ended December 31, 2019, 2018 and 2017, 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 $77 million, $74 million and $72
million for the years ended December 31, 2019, 2018 and 2017,
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. There was no outstanding carrying value of
loans and unused line of credit to Worldpay Holding, LLC as of
December 31, 2019. The outstanding carrying value of loans and
unused line of credit to Worldpay Holding, LLC was $187 million
and $74 million at December 31, 2018, respectively. Interest income
relating to the loans was $2 million, $7 million and $5 million for the
years ended December 31, 2019, 2018 and 2017, respectively, and is
included in interest and fees on loans and leases in the Consolidated
Statements of Income.
income
in other noninterest
SLK Global Solutions Private Limited
As of December 31, 2019, 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 $3
million and $2 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, 2019 and 2018, respectively. The Bancorp
received cash distributions of $1 million during the year ended
December 31, 2019 and did not receive cash distributions during the
year ended December 31, 2018. The Bancorp’s investment in SLK
Global Solutions Private Limited was $26 million and $23 million at
December 31, 2019 and 2018, respectively. The Bancorp paid SLK
Global Solutions Private Limited $22 million, $21 million and $21
million for their process and software services during the years
ended December 31, 2019, 2018 and 2017, respectively, which are
included
the Consolidated
Statements of Income.
in other noninterest expense
in
CDC investments
The Bancorp’s subsidiary, CDC, has equity investments in entities in
which the Bancorp had $12 million and $83 million of loans
outstanding at December 31, 2019 and 2018, respectively, and
unfunded commitment balances of $21 million and $80 million at
December 31, 2019 and 2018, respectively. The Bancorp held $116
million and $77 million of deposits for these entities at December
31, 2019 and 2018, respectively. For further information on CDC
investments, refer to Note 13.
163 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. INCOME TAXES
The Bancorp and its subsidiaries file a consolidated federal income tax return. The following is a summary of applicable income taxes included in
the Consolidated Statements of Income for the years ended December 31:
($ 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 (benefit) expense:
U.S. Federal income taxes
State and local income taxes
Foreign income taxes
Total deferred income tax (benefit) expense
Applicable income tax expense
2019
2018
2017
$
$
788
148
-
936
(212)
(35)
1
(246)
690
463
71
8
542
24
4
2
30
572
986
68
(3)
1,051
(254)
2
-
(252)
799
The following is a reconciliation between the federal statutory corporate tax rate and the Bancorp’s effective tax rate for the years ended
December 31:
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
2019
21.0 %
2.8
(1.2)
(5.0)
4.4
(0.2)
-
(0.2)
21.6 %
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
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 $253 million.
The following table provides a reconciliation of the beginning and ending amounts of the Bancorp’s unrecognized tax benefits:
($ 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 $6 and $5 in 2019 and 2018, respectively, all amounts represent unrecognized tax benefits that, if recognized, would affect the annual effective tax rate.
2019
55
25
(3)
6
(9)
(9)
65
$
$
2018
34
20
(1)
8
(5)
(1)
55
2017
24
17
(1)
3
(7)
(2)
34
The Bancorp’s unrecognized tax benefits as of December 31, 2019,
2018 and 2017 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.
164 Fifth Third 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
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
2019
2018
252
103
-
30
32
9
154
580
650
25
144
47
73
352
127
1,418
(838)
232
79
42
28
28
7
112
528
599
131
107
73
60
-
102
1,072
(544)
$
$
$
$
$
At December 31, 2019 and 2018, the Bancorp recorded deferred tax
assets of $9 million and $7 million, respectively, related to state net
operating loss carryforwards. The deferred tax assets relating to state
losses are presented net of specific valuation
net operating
allowances of $17 million and $25 million at December 31, 2019
and 2018, respectively. If these carryforwards are not utilized, they
will expire in varying amounts through 2038.
The Bancorp has determined that a valuation allowance is not
needed against the remaining deferred tax assets as of December 31,
2019 or 2018. 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, 2019 and
2018 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 2015
federal income tax return and is currently examining the Bancorp’s
2016 federal income tax return. The statute of limitations for the
Bancorp’s federal income tax returns remains open for tax years
2016-2019. 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, 2019, 2018 and 2017, the Bancorp recognized $1
million, $1 million and $2 million, respectively, of interest expense
in connection with income taxes. At December 31, 2019 and 2018,
the Bancorp had accrued interest liabilities, net of the related tax
benefits, of $4 million and $3 million, respectively. No material
liabilities were recorded for penalties related to income taxes.
Retained earnings at December 31, 2019 and 2018 included
$157 million in allocations of earnings for bad debt deductions of
former thrift subsidiaries for which no income tax has been
provided. Under current tax law, if certain of the Bancorp’s
subsidiaries use these bad debt reserves for purposes other than to
absorb bad debt losses, they will be subject to federal income tax at
the current corporate tax rate.
165 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. RETIREMENT AND BENEFIT PLANS
The Bancorp’s qualified defined benefit plan’s benefits were frozen
in 1998, except for grandfathered employees. The Bancorp’s other
defined benefit retirement plans consist of non-qualified plans
which are frozen and funded on an as-needed basis. A majority of
these plans were obtained in acquisitions and are included with the
qualified defined benefit plan in the following tables (“the Plan”).
The Bancorp recognizes the overfunded and underfunded status of
the Plan as an asset and liability, respectively, in the Consolidated
Balance Sheets.
The overfunded and underfunded amounts recognized in other assets and accrued taxes, interest and expense, respectively, on the Consolidated
Balance Sheets were as follows as of December 31:
($ in millions)
Prepaid benefit cost
Accrued benefit liability
Net underfunded status
$
$
2019
2018
-
(19)
(19)
1
(18)
(17)
The following tables summarize the defined benefit retirement plans as of and for the years ended December 31:
Plans with an overfunded status(a)
($ in millions)
185
Fair value of plan assets at January 1
(6)
Actual return on assets
(9)
Settlement
(6)
Benefits paid
164
Fair value of plan assets at December 31
188
Projected benefit obligation at January 1
6
Interest cost
(9)
Settlement
(16)
Actuarial gain
(6)
Benefits paid
163
Projected benefit obligation at December 31
1
Overfunded projected benefit obligation at December 31
Accumulated benefit obligation at December 31(b)
163
(a) The Bancorp’s qualified defined benefit plan had an underfunded status at December 31, 2019 and is reflected in the underfunded status table. The Plan had an overfunded status at December
-
-
-
-
-
-
-
-
-
-
-
-
-
2018
2019
$
$
$
$
$
$
(b)
31, 2018.
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.
$
2019
2018
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 loss (gain)
Benefits paid
Projected benefit obligation at December 31
Underfunded projected benefit obligation at December 31
Accumulated benefit obligation at December 31(a)
(a)
-
-
3
-
(3)
-
21
1
-
(1)
(3)
18
(18)
18
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, 2019 and 2018.
164
26
2
(9)
(8)
175
181
7
(9)
23
(8)
194
(19)
194
$
$
$
$
$
The estimated net actuarial loss for the Plan that will be amortized
from AOCI into net periodic benefit cost during 2020 is $6 million.
The estimated net prior service cost for the Plan that will be
amortized from AOCI into net periodic benefit cost during 2020 is
immaterial to the Consolidated Financial Statements.
166 Fifth Third Bancorp
The following table summarizes net periodic benefit cost and other changes in the Plan’s assets and benefit obligations recognized in OCI for the
years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ 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 loss (gain)
Amortization of net actuarial loss
Settlement
Total recognized in other comprehensive income
Total recognized in net periodic benefit cost and other comprehensive income
2019
2018
2017
$
$
$
$
7
(8)
6
3
8
5
(6)
(3)
(4)
4
7
(11)
6
3
5
(1)
(6)
(3)
(10)
(5)
8
(10)
7
4
9
(1)
(7)
(4)
(12)
(3)
Fair Value Measurements of Plan Assets
The following tables summarize Plan assets measured at fair value on a recurring basis as of December 31:
2019 ($ 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
Asset-backed securities and other debt securities(b)
Total debt securities
Total Plan assets
(a) For further information on fair value hierarchy levels, refer to Note 1.
(b)
(c) During the year ended December 31, 2019, no assets or liabilities were transferred between Level 1 and Level 2.
Includes corporate bonds.
$
$
$
Level 1(c)
14
76
57
Fair Value Measurements Using(a)
Level 2(c)
-
-
6
1
21
28
28
Level 3
Total Fair Value
-
-
-
-
-
-
-
14
76
63
1
21
85
175
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
Level 1(d)
Fair Value Measurements Using(a)
Level 2(d)
Level 3
Total Fair Value
$
25
46
43
-
-
3
-
-
-
25
46
46
1
18
65
136
28
164
1
18
22
22
-
-
-
-
Asset-backed securities and other debt securities(b)
Total debt securities
Total Plan assets, excluding collective funds
Collective funds (NAV)(c)
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.
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.
Mutual and exchange-traded funds
The Plan measures its mutual and exchange-traded funds, which are
registered with the SEC, 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.
167 Fifth Third Bancorp
-
-
57
147
-
-
43
114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt securities
Where quoted prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy. Level 1 securities
include U.S. Treasury securities. If quoted market prices are not
available, then fair values are estimated using pricing models, quoted
prices of securities with similar characteristics, or DCFs. Examples
of such instruments, which are classified within Level 2 of the
valuation hierarchy, include federal agency securities, 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:
2019
2018
2017
For measuring benefit obligations at year end:(a)
Discount rate
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
5.50
3.97
6.00
3.47
6.00
3.05 %
3.47
4.10
accruing benefits.
Lowering both the expected rate of return on the plan assets and
the discount rate by 0.25% would have increased the 2019 pension
expense by approximately $1 million.
Based on the actuarial assumptions, the Bancorp expects to
contribute $2 million to the Plan in 2020. Estimated pension benefit
payments are $16 million for 2020, $17 million for each of the years
2021 through 2023 and $16 million for 2024. The total estimated
payments for the years 2025 through 2029 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, corporate bonds and
municipal 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(a)
Fixed-income securities
Alternative strategies
Cash or cash equivalents
Total
(a)
(b) These reflect the targeted ranges for the year ended December 31, 2019.
Includes mutual and exchange-traded funds.
Plan Management’s objective is to maintain a fully-funded status of
the qualified defined benefit plan while also minimizing the risk of
the
excess assets. During 2018, Plan Management revised
investment policy to shift from a return-seeking strategy, with a high
level of tolerance to volatility, to a low-risk strategy to maintain the
funded plan status at or above 100%. As a result, the portfolio
assets of the qualified defined benefit plan will continue to reduce
exposure to equity securities and 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, 2019
and 2018.
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
including puts, calls, straddles or other option
instruments
strategies, as approved by management.
168 Fifth Third Bancorp
Targeted Range(b)
2019
2018
0-55 %
50-100
0-5
0-100
19
59
-
22
100 %
67
23
3
7
100
Fifth Third Bank, National Association, 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, 2019 and 2018, $175 million and $164 million,
respectively, of Plan assets were managed by Fifth Third Bank,
National Association. The Fifth Third Bank Pension, 401(k) and
Medical Plan Committee
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. Plan assets are not expected to be returned
to the Bancorp during 2020.
(the “Committee”)
is
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Expenses
recognized for matching contributions to the Bancorp’s qualified
defined contribution savings plan were $90 million, $83 million and
$79 million for the years ended December 31, 2019, 2018 and 2017,
respectively. The Bancorp recognized $4 million of profit sharing
expense associated with the MB Financial, Inc. acquisition during
the year ended December 31, 2019. The Bancorp did not make
profit sharing contributions during both the years ended December
31, 2018 and 2017. 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 $6 million for the year ended December 31,
2019 and $4 million for both of the years ended December 31, 2018
and 2017.
169 Fifth Third Bancorp
24. ACCUMULATED OTHER COMPREHENSIVE INCOME
The tables below present the activity of the components of OCI and AOCI for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2019 ($ in millions)
Unrealized holding gains on available-for-sale debt securities arising
Pre-tax
Activity
Total OCI
Tax
Effect
Net
Activity
Beginning
Balance
Total AOCI
Net
Activity
Ending
Balance
during the year
$
1,369
(323)
1,046
Reclassification adjustment for net gains on available-for-sale
debt securities included in net income
Net unrealized gains on available-for-sale debt 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
$
(9)
1,360
348
(16)
332
(5)
9
4
1,696
2
(321)
(73)
3
(70)
-
(1)
(1)
(392)
(7)
1,039
275
(13)
262
(5)
8
3
1,304
(227)
1,039
812
160
262
422
(45)
(112)
3
1,304
(42)
1,192
2018 ($ in millions)
Unrealized holding losses on available-for-sale debt securities arising
Pre-tax
Activity
Total OCI
Tax
Effect
Net
Activity
Beginning
Balance
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
Net actuarial gain arising during the year
Reclassification of amounts to net periodic benefit costs
Defined benefit pension plans, net
Total
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
170 Fifth Third Bancorp
$
$
$
112
(2)
110
(45)
-
(45)
-
(2)
(2)
63
(371)
9
(362)
169
2
171
1
7
8
(183)
135
(362)
(227)
(11)
171
160
(53)
71
8
(183)
(45)
(112)
11
(472)
214
2
216
1
9
10
(246)
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
The table below presents reclassifications out of AOCI for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of AOCI: ($ in millions)
Net unrealized gains (losses) on available-for-sale debt securities:(b)
Net gains (losses) included in net income
Net unrealized gains (losses) 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
2019
2018
2017
Securities gains (losses), 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
9
9
(2)
7
16
16
(3)
13
(6)
(3)
(9)
1
(8)
(11)
(11)
2
(9)
(2)
(2)
-
(2)
(6)
(3)
(9)
2
(7)
(18)
(3)
(3)
(1)
(4)
19
19
(7)
12
(7)
(4)
(11)
4
(7)
1
Total reclassifications for the period
(a) This AOCI component is included in the computation of net periodic benefit cost. Refer to Note 23 for information on the computation of net periodic benefit cost.
(b) Amounts in parentheses indicate reductions to net income.
Net income
$
12
171 Fifth Third Bancorp
25. 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, 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
Shares acquired for treasury
Issuance of preferred shares, Series K
Conversion of outstanding preferred stock issued by a Bancorp subsidiary
Impact of MB Financial, Inc. acquisition
Impact of stock transactions under stock compensation plans, net
Other
December 31, 2019
Preferred Stock—Series K
On September 17, 2019, the Bancorp issued, in a registered public
offering 10,000,000 depositary shares, representing 10,000 shares of
4.95% non-cumulative Series K perpetual preferred stock, for net
proceeds of approximately $242 million. Each preferred share has a
$25,000 liquidation preference. Subject to any required regulatory
approval, the Bancorp may redeem the Series K preferred shares at
its option in whole or in part, on any dividend payment date on or
after September 30, 2024 and may redeem in whole, but not in part,
at any time following a regulatory capital event. The Series K
preferred shares are not convertible into Bancorp common shares
or any other securities.
Preferred Stock—Class B, Series A
On August 26, 2019, the Bancorp issued 200,000 shares of 6.00%
non-cumulative perpetual Class B preferred stock, Series A. Each
preferred share has a $1,000 liquidation preference. These shares
were issued to the holders of MB Financial, Inc.’s 6.00% non-
cumulative perpetual preferred stock, Series C, in conjunction with
the merger of MB Financial, Inc. with and into Fifth Third Bancorp.
This transaction resulted in the elimination of the noncontrolling
interest in MB Financial, Inc. which was previously reported in the
Bancorp’s Consolidated Financial Statements. The newly issued
shares of Class B preferred stock, Series A were recognized by the
Bancorp at the carrying value previously assigned to the MB
Financial, Inc. Series C preferred stock prior to the transaction.
Preferred Stock—Series J
On June 5, 2014, the Bancorp issued, in a registered public offering,
300,000 depositary shares, representing 12,000 shares of 4.90%
fixed to floating-rate non-cumulative Series J perpetual preferred
stock, for net proceeds of $297 million. Each preferred share has a
liquidation preference. The preferred stock accrued
$25,000
dividends, on a non-cumulative semi-annual basis, at an annual rate
of 4.90% through but excluding September 30, 2019, at which time
it converted 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.
172 Fifth Third Bancorp
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
-
242
197
-
-
-
1,770
$
$
Treasury Stock
Value
$ (3,433)
(1,588)
16
3
$ (5,002)
(1,494)
23
2
$ (6,471)
(1,763)
-
-
2,447
56
7
$ (5,724)
Shares
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
64,601,891
-
-
(122,848,442)
(4,258,132)
219,911
214,976,952
54,000
-
-
-
54,000
-
-
-
54,000
-
10,000
200,000
-
-
-
264,000
Preferred Stock—Series I
On December 9, 2013, the Bancorp issued, in a registered public
offering, 18,000,000 depositary shares, representing 18,000 shares of
6.625% fixed to floating-rate non-cumulative Series I perpetual
preferred stock, for net proceeds of $441 million. Each preferred
share has a $25,000 liquidation preference. The preferred stock
accrues dividends, on a non-cumulative quarterly basis, at an annual
rate of 6.625% through but excluding December 31, 2023, at which
time it converts to a quarterly floating-rate dividend of three-month
LIBOR plus 3.71%. Subject to any required regulatory approval, the
Bancorp may redeem the Series I preferred shares at its option in
whole or in part, at any time on or after December 31, 2023 and
may redeem in whole but not in part, following a regulatory capital
event at any time prior to December 31, 2023. The Series I
preferred shares are not convertible into Bancorp common shares
or any other securities.
Preferred Stock—Series H
On May 16, 2013, the Bancorp issued, in a registered public
offering, 600,000 depositary shares, representing 24,000 shares of
5.10% fixed to floating-rate non-cumulative Series H perpetual
preferred stock, for net proceeds of $593 million. Each preferred
share has a $25,000 liquidation preference. The preferred stock
accrues dividends, on a non-cumulative semi-annual basis, at an
annual rate of 5.10% through but excluding June 30, 2023, at which
time it converts to a quarterly floating-rate dividend of three-month
LIBOR plus 3.033%. Subject to any required regulatory approval,
the Bancorp may redeem the Series H preferred shares at its option
in whole or in part, at any time on or after June 30, 2023 and may
redeem in whole but not in part, following a regulatory capital event
at any time prior to June 30, 2023. The Series H preferred shares are
not convertible into Bancorp common shares or any other
securities.
Treasury Stock
In June of 2019, 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 February of 2018.
On June 28, 2017, the Bancorp announced the results of its
capital plan submitted to the FRB as part of the 2017 CCAR. The
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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.
During the first quarter of 2019, the FRB provided relief from
certain regulatory requirements related to supervisory stress testing
and company-run stress testing for the 2019 stress test cycle,
including disclosure requirements. As a result, the Bancorp was not
required to submit a capital plan or participate in CCAR 2019. The
requirement for the Bancorp to submit an annual capital plan to the
FRB has been extended until April 5, 2020. However, the Bancorp
remains subject to the requirement to develop and maintain a capital
plan, and the Board of Directors of the Bancorp must review and
approve the capital plan. The FRB further clarified that relief from
the 2019 stress test cycle should not be construed as relief from any
regulatory capital requirements and that the Bancorp will be subject
to the full CCAR 2020 stress test requirements.
In June of 2019, the Bancorp announced its capital distribution
capacity of approximately $2 billion for the period of July 1, 2019
through June 30, 2020. This includes the ability to execute share
repurchases up to $1.24 billion as well as increase quarterly common
stock dividends by up to $0.03 per share. These distributions will be
governed under the FRB’s 2019 extended stress test process for
BHCs with less than $250 billion of total consolidated assets.
The Bancorp entered into a number of accelerated share
repurchase transactions during the years ended December 31, 2019
and 2018. As part of these transactions, the Bancorp entered into
forward contracts in which the final number of shares delivered at
settlement was based generally on a discount to the average daily
volume weighted-average price of the Bancorp’s common stock
during the term of these repurchase agreements. The accelerated
share repurchases were treated as two separate transactions: (i) the
repurchase of treasury shares on the repurchase date and (ii) a
forward contract indexed to the Bancorp’s common stock.
The following table presents a summary of the Bancorp's accelerated share repurchase transactions that were entered into or settled during the
years ended December 31, 2019 and 2018:
Shares Repurchased on Shares Received from Total Shares
Repurchased
Repurchase Date
Amount ($ in millions)
Repurchase Date
273
December 19, 2017
318
February 12, 2018
235
May 25, 2018
March 27, 2019(a)
913
April 29, 2019(b)
200
100
August 7, 2019
August 9, 2019(b)
200
October 25, 2019
300
(a) This accelerated share repurchase transaction consisted of two supplemental confirmations each with a notional amount of $456.5 million.
(b) This accelerated share repurchase transaction consisted of two supplemental confirmations each with a notional amount of $100 million.
7,727,273
8,691,318
6,402,244
31,779,280
6,015,570
3,150,482
6,405,426
9,020,163
824,367
1,015,731
1,172,122
2,026,584
1,217,805
694,238
1,475,487
1,149,121
Forward Contract
Settlement
8,551,640
9,707,049
7,574,366
33,805,864
7,233,375
3,844,720
7,880,913
10,169,284
Settlement Date
March 19, 2018
March 26, 2018
June 15, 2018
June 28, 2019
May 23, 2019 - May 24, 2019
August 16, 2019
August 28, 2019
December 17, 2019
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.
Between July 29, 2019 and July 30, 2019, the Bancorp
repurchased 1,667,735 shares, or approximately $50 million, of its
outstanding common stock through open market repurchase
transactions, which settled between July 31, 2019 and August 1,
2019.
173 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26. STOCK-BASED COMPENSATION
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 2019 Incentive
Compensation Plan was approved by shareholders on April 16,
2019 and authorized the issuance of up to 40 million shares, as
equity compensation and provides for SARs, RSAs, RSUs, stock
options, performance share or unit awards, dividend or dividend
equivalent rights and stock awards. As of December 31, 2019, there
were 39.5 million shares available for future issuance. Based on total
stock-based awards outstanding (including SARs, RSAs, RSUs,
stock options and PSAs) and shares remaining for future grants
under the 2019 Incentive Compensation Plan, the potential dilution
to which the Bancorp’s shareholders of common stock are exposed
due to the potential that stock-based compensation will be awarded
to executives, directors or key employees of the Bancorp and its
subsidiaries is 10%. SARs, RSAs, RSUs, stock options and PSAs
outstanding represent 5% of the Bancorp’s issued shares at
December 31, 2019.
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
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
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, 2019.
Under the terms of the merger agreement with MB Financial,
Inc., the Bancorp granted stock-based awards to replace those
awards previously granted by MB Financial, Inc. that were
outstanding as of the date of the merger. The replacement awards
included RSAs, RSUs, and stock options. Approximately 1.65
replacement awards were granted to replace each outstanding MB
Financial, Inc. award and the strike prices of replacement stock
options were also adjusted to reflect this exchange ratio. Otherwise,
the replacement awards were granted with substantially the same
terms as the MB Financial, Inc. awards that were being replaced,
including vesting and expiration dates.
The fair value of the awards being replaced and the
replacement awards were measured as of the date of the merger.
The portion of the fair value of the awards being replaced which
was attributable to pre-combination service was included as a
component of the consideration paid in the merger. The portion
attributable to post-combination service,
in addition to any
increased value of the replacement awards over the awards being
replaced, was recognized as stock-based compensation expense over
each award’s remaining service period.
Stock-based compensation expense was $132 million, $127
million and $118 million for the years ended December 31, 2019,
2018 and 2017, 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, $27 million
and $41 million for the years ended December 31, 2019, 2018 and
2017, 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-
2019
2018
2017
7
32 %
3.3
2.6
7
35
1.9
2.6
6
37
2.1
2.1
Scholes option-pricing model. The weighted-average grant-date fair
value of SARs granted was $7.38, $11.33 and $8.55 per share for the
years ended December 31, 2019, 2018 and 2017, respectively. The
total grant-date fair value of SARs that vested during the years
ended December 31, 2019, 2018 and 2017 was $20 million, $26
million and $29 million, respectively.
At December 31, 2019, there was $7 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, 2019
of 1.1 years.
174 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SARs (in thousands, except per share data)
Outstanding at January 1
Granted
Exercised
Forfeited or expired
Outstanding at December 31
Exercisable at December 31
2019
Weighted-
Number of
SARs
26,196
399
(4,829)
(317)
21,449
18,249
$
$
$
Average Grant
Price Per Share
17.30
26.72
13.34
23.47
18.38
17.50
2018
Weighted-
Average Grant
Price Per Share
17.22
33.15
16.96
20.93
17.30
15.90
$
$
$
Number of
SARs
31,929
272
(5,058)
(947)
26,196
20,132
2017
Weighted-
Number of
SARs
40,041
3,672
(6,953)
(4,831)
31,929
21,403
$
$
$
Average Grant
Price Per Share
18.30
26.52
16.00
35.08
17.22
15.30
The following table summarizes outstanding and exercisable SARs by grant price per share at December 31, 2019:
SARs (in thousands, except per share data)
$10.01-$20.00
$20.01-$30.00
$30.01-$40.00
All SARs
Outstanding SARs
Exercisable SARs
Number of
SARs
15,944
5,236
269
21,449
$
$
Weighted-
Average Grant
Price Per Share
16.12
24.50
33.15
18.38
Weighted-
Average Remaining
Contractual Life
(in years)
3.7
6.1
8.0
4.4
Number of
SARs
14,694
3,464
91
18,249
$
$
Weighted-
Average Grant
Price Per Share
16.00
23.44
33.15
17.50
Weighted-
Average Remaining
Contractual Life
(in years)
3.5
5.3
7.9
3.9
Restricted Stock Awards
The total grant-date fair value of RSAs that were released during the
years ended December 31, 2019, 2018 and 2017 was $16 million,
$27 million and $39 million, respectively. At December 31, 2019,
stock-based compensation expense related to outstanding RSAs not
yet recognized was immaterial. The expense is expected to be
recognized over an estimated remaining weighted-average period at
December 31, 2019 of 1.2 years.
RSAs (in thousands, except per share data)
Outstanding at January 1
Granted
Assumed
Released
Forfeited
Outstanding at December 31
2019
2018
2017
Weighted-Average
Weighted-Average
Weighted-Average
Grant-Date
Fair Value
Per Share
19.18
-
25.48
18.91
19.01
25.48
Shares
868
-
11
(867)
(12)
-
$
$
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
$
$
Restricted Stock Units
The total grant-date fair value of RSUs that were released during the
years ended December 31, 2019, 2018 and 2017 was $73 million,
$42 million and $21 million, respectively. At December 31, 2019,
there was $125 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, 2019 of 2.3 years.
175 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RSUs (in thousands, except per unit data)
Outstanding at January 1
Granted
Assumed
Released
Forfeited
Outstanding at December 31
2019
2018
2017
Weighted-Average
Weighted-Average
Weighted-Average
Grant-Date
Fair Value
Per Unit
27.04
26.68
25.48
24.76
27.41
27.30
Units
8,020
4,375
1,476
(2,951)
(914)
10,006
$
$
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
$
$
The following table summarizes outstanding RSUs by grant-date fair value per unit at December 31, 2019:
RSUs (in thousands)
$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)
0.7
0.5
1.2
1.6
1.2
Units
870
243
6,477
2,416
10,006
Stock Options
There were no stock options granted during the years ended
December 31, 2019, 2018 and 2017, except for replacement stock
option awards assumed in conjunction with the MB Financial, Inc.
acquisition. While the Bancorp has historically utilized the Black-
Scholes option pricing model to measure the fair value of stock
option grants, the fair value of these grants were measured using the
Hull-White option pricing model as it was expected to provide a
more precise estimate of fair value in a business combination
scenario. The assumptions used in the valuation model varied for
each grant tranche, but included expected volatility of 23%-29%, no
expected dividend yield, risk-free interest rates of 2.34%-2.51%, a
departure rate of 10% and exercise ratios of 2.2-2.8. The
replacement stock option awards had a weighted-average time to
maturity of 5.4 years as of the date of the merger.
The total intrinsic value of stock options exercised was $7
million for the year ended December 31, 2019 and immaterial for
both the years ended December 31, 2018 and 2017. Cash received
from stock options exercised was $11 million for the year ended
December 31, 2019 and immaterial for both the years ended
December 31, 2018 and 2017. The tax benefit realized from
exercised stock options was $1 million for the year ended December
31, 2019 and immaterial for the years ended December 31, 2018 and
2017. No stock options vested during the years ended December
31, 2019, 2018 or 2017. As of December 31, 2019, the aggregate
intrinsic value of outstanding stock options and exercisable stock
options was $15 million and $13 million, respectively.
2019
2018
2017
Weighted-Average
Weighted-Average
Weighted-Average
Number of
Stock Options (in thousands, except per share data) Options
-
Outstanding at January 1
2,120
Assumed
(660)
Exercised
(79)
Forfeited or expired
1,381
Outstanding at December 31
1,162
Exercisable at December 31
$
$
$
Exercise Price
Per Share
-
19.34
17.36
22.18
20.15
19.17
Number of
Options
2 $
-
(1)
(1)
- $
- $
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
The following table summarizes outstanding and exercisable stock options by exercise price per share at December 31, 2019:
Outstanding Stock Options
Exercisable Stock Options
Stock Options (in thousands, except per share data)
Under $10.00
$10.01-$20.00
$20.01-$30.00
All stock options
Number of
Options
9
884
488
1,381
$
$
Exercise Price Contractual Life
Exercise Price Contractual Life
Weighted-
Average
Per Share
8.62
17.04
25.98
20.15
Weighted-
Average
Remaining
(in years)
Number of
Options
7
811
344
1,162
$
$
6.7
3.5
4.4
3.8
Weighted-
Average
Per Share
8.52
16.91
26.14
19.17
Weighted-
Average
Remaining
(in years)
6.7
3.3
2.7
3.2
Other Stock-Based Compensation
PSAs are payable contingent upon the Bancorp achieving certain
predefined performance targets over the three-year measurement
period and ranges from zero shares to approximately 1 million
176 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares. Awards granted during the years ended December 31, 2019,
2018 and 2017 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, 2019, 2018 and 2017, 328,068, 279,568 and
407,069 PSAs, respectively, were granted by the Bancorp. These
awards were granted at a weighted-average grant-date fair value of
$26.72, $33.15 and $26.52 per unit during the years ended
December 31, 2019, 2018 and 2017, 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, 2019, 2018 and 2017, there were 564,061, 471,818
and 475,466 shares, respectively, purchased by participants and the
Bancorp recognized stock-based compensation expense of $2
million, $2 million and $1 million in each of the respective years. As
of December 31, 2019, there were 4.6 million shares available for
future issuance, which represents the remaining shares of Fifth
Third common stock under the Bancorp’s 1993 Stock Purchase
Plan, as amended and restated, including an additional 1.5 million
shares approved by shareholders on March 28, 2007 and an
additional 12 million shares approved by shareholders on April 21,
2009.
177 Fifth Third Bancorp
27. OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE
The following table presents the major components of other noninterest income and other noninterest expense for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Other noninterest income:
Gain on sale of Worldpay, Inc. shares
Income from the TRA associated with Worldpay, Inc.
Operating lease income
Private equity investment income
BOLI income
Cardholder fees
Consumer loan and lease fees
Banking center income
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
Loss on sale of business
Gain related to Vantiv, Inc.'s acquisition of Worldpay Group plc.
Other, net
Total other noninterest income
Other noninterest expense:
Marketing
Loan and lease
Operating lease
Losses and adjustments
FDIC insurance and other taxes
Professional service fees
Data processing
Travel
Intangible amortization
Postal and courier
Donations
Recruitment and education
Supplies
Insurance
Loss (gain) on partnership investments
Other, net
Total other noninterest expense
2019
2018
2017
$
$
$
$
562
346
151
65
60
58
23
22
19
3
2
(107)
(23)
(4)
-
47
1,224
162
142
124
102
81
70
70
68
45
38
30
28
14
14
2
239
1,229
205
20
84
63
56
56
23
21
20
2
1
(59)
(43)
-
414
24
887
147
112
76
61
119
67
57
52
5
35
21
32
13
13
(4)
214
1,020
1,037
44
96
36
52
54
23
20
8
(2)
47
(80)
-
-
-
22
1,357
114
102
87
59
127
83
58
46
2
42
28
35
14
12
14
184
1,007
178 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28. 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
2019
Average
Shares
Income
Per Share
Amount
Income
2018
Average
Shares
Per Share
Amount
Income
2017
Average
Shares
Per Share
Amount
$
$
$
2,419
21
2,398
2,419
-
2,419
21
710
3.38
10
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
$
2,398
720
3.33
2,095
685
3.06
2,082
741
2.81
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, 2019, 2018 and 2017 excludes 2 million, 3
million and 4 million, respectively, of SARs. The diluted earnings
per share computation for the years ended December 31, 2019 and
2017 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.
179 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
29. 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)
$
75
-
Level 1(c)
-
-
-
-
75
December 31, 2019 ($ in millions)
Assets:
Available-for-sale debt and other securities:
U.S. Treasury and federal agency 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 agency 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)
Servicing rights
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 $76, $478 and $2, respectively, at December 31, 2019.
(b)
Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.
(c) During the year ended December 31, 2019, 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.
2
-
-
-
2
554
-
-
-
5
-
-
17
22
49
71
1
-
37
38
669
$
$
$
-
18
14,115
15,693
3,365
2,206
35,397
-
9
55
231
295
10
1,264
-
-
1,218
165
234
1,617
38,583
144
151
-
253
548
100
648
Level 3
Total Fair Value
-
-
-
-
-
-
-
-
-
-
-
-
-
-
183
993
18
-
-
18
1,194
8
-
163
-
171
-
171
75
18
14,115
15,693
3,365
2,206
35,472
2
9
55
231
297
564
1,264
183
993
1,237
165
271
1,673
40,446
157
151
163
270
741
149
890
180 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 agency 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 agency 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
Servicing rights
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
$
$
$
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
-
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
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
similar
pricing models, quoted prices of
characteristics or DCFs. Level 2 securities may include federal
agency securities, obligations of states and political subdivisions
securities, agency residential mortgage-backed securities, agency and
non-agency commercial mortgage-backed securities, asset-backed
securities and other debt securities and equity securities. These
securities are generally valued using a market approach based on
observable prices of securities with similar characteristics.
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.
Servicing rights
MSRs do not trade in an active, open market with readily observable
prices. While sales of MSRs do occur, the precise terms and
conditions typically are not readily available. Accordingly, the
Bancorp estimates the fair value of MSRs using internal OAS
models with certain unobservable inputs, primarily prepayment
speed assumptions, OAS and weighted-average lives, resulting in a
classification within Level 3 of the valuation hierarchy. Refer to
Note 14 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, 2019 and 2018, 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, 2019
was $18 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 $12 million and $22 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 $13 million and $28 million, respectively. The
decrease in fair value of IRLCs due to immediate 10% and 20%
adverse changes in the assumed loan closing rates would be
approximately $2 million and $4 million, respectively, and the
increase in fair value due to immediate 10% and 20% favorable
changes in the assumed loan closing rates would be approximately
$2 million and $4 million, respectively. These sensitivities are
hypothetical and should be used with caution, as changes in fair
value based on a variation in assumptions typically cannot be
extrapolated because the relationship of the change in assumptions
to the change in fair value may not be linear.
The Consumer Line of Business Finance department, which
reports to the Bancorp’s Chief Financial Officer, and the
aforementioned Secondary Marketing department are responsible
for determining the valuation methodology for IRLCs. Secondary
Marketing, in conjunction with a third-party valuation provider,
periodically review loan closing rate assumptions and recent loan
sales to determine if adjustments are needed for current market
conditions not reflected in historical data.
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
Net(a)
(1)
Equity
Derivatives
(125)
Servicing
Rights
938
Total
Fair Value
991
$
Loans
179
For the year ended December 31, 2019 ($ 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, 2019(c)
(a) Net interest rate derivatives include derivative assets and liabilities of $18 and $8, respectively, as of December 31, 2019.
(b)
(c)
Includes certain residential mortgage loans originated as held for sale that were transferred to held for investment.
Includes interest income and expense.
(1)
-
(31)
36
183
(1)
$
$
(376)
431
-
-
993
(250)
145
(3)
(131)
-
10
(107)
-
69
-
(163)
(339)
428
(93)
36
1,023
20
(107)
(338)
$
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 held for sale that were transferred to held for investment.
Includes interest income and expense.
(3)
-
(19)
64
179
(3)
$
$
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Interest Rate
Residential
Derivatives,
Mortgage
Net(a)
3
Equity
Derivatives
(137)
Servicing
Rights
858
Total
Fair Value
861
(83)
163
-
-
938
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
Derivatives, Derivatives,
Residential
Mortgage
Equity
Servicing
Rights
744
(122)
236
-
-
858
Net(a)
8
94
(2)
(97)
-
3
Net
(91)
(80)
-
34
-
(137)
Total
Fair Value
804
(107)
234
(86)
16
861
$
Loans
143
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)
Includes certain residential mortgage loans held for sale that were transferred to held for investment.
Includes interest income and expense.
1
-
(23)
16
137
1
$
$
(122)
10
(80)
(191)
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, 2019, 2018 and 2017 as follows:
($ in millions)
Mortgage banking net revenue
Corporate banking revenue
Other noninterest income
Total losses
2019
(235)
3
(107)
(339)
$
$
2018
(16)
2
(59)
(73)
2017
(29)
2
(80)
(107)
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, 2019, 2018 and 2017 were recorded in the Consolidated Statements of Income as follows:
($ in millions)
Mortgage banking net revenue
Corporate banking revenue
Other noninterest income
Total losses
2019
(233)
2
(107)
(338)
$
$
2018
-
2
(59)
(57)
2017
(113)
2
(80)
(191)
The following tables present information as of December 31, 2019 and 2018 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, 2019 ($ in millions)
Financial Instrument
Residential mortgage loans
Fair Value Valuation Technique
$
Loss rate model
183
Significant Unobservable
Inputs
Ranges of
Inputs
Interest rate risk factor
Credit risk factor
(9.2) - 9.8 %
0 - 26.5 %
Servicing rights
993 DCF
Prepayment speed
0.5 - 97.0 %
IRLCs, net
Swap associated with the sale of Visa, Inc.
Class B Shares
18
DCF
(163) DCF
As of December 31, 2018 ($ in millions)
Financial Instrument
Residential mortgage loans
Fair Value
$
179
Valuation Technique
Loss rate model
OAS (bps)
Loan closing rates
Timing of the resolution
of the Covered Litigation
507 -
1,513
7.3 - 97.1 %
Q1 2022 -
Q4 2023
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted-
Average
Interest rate risk factor
Credit risk factor
(13.2) -
9.4 %
0 - 39.9 %
Servicing rights
938 DCF
Prepayment speed
0.5 - 100 %
IRLCs, net
Swap associated with the sale of Visa, Inc.
Class B Shares
7
DCF
(125) DCF
OAS (bps)
Loan closing rates
Timing of the resolution
of the Covered Litigation
441 -
1,513
9.5 - 96.7 %
Q1 2021 -
Q4 2023
Weighted-
Average
(0.2) %
0.5 %
(Fixed) 13.0 %
(Adjustable) 22.6 %
602
921
81.7 %
Q3 2022
(Fixed)
(Adjustable)
0.5 %
0.7 %
(Fixed) 10.2 %
(Adjustable) 23.0 %
534
863
86.0 %
Q4 2021
(Fixed)
(Adjustable)
Assets and Liabilities Measured at Fair Value on a
Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a
nonrecurring basis. These assets and liabilities are not measured at
fair value on an ongoing basis; however, they are subject to fair
value adjustments in certain circumstances, such as when there is
evidence of impairment.
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, 2019 and 2018 and for
which a nonrecurring fair value adjustment was recorded during the years ended December 31, 2019 and 2018, 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, 2019 ($ in millions)
Commercial and industrial loans
Commercial mortgage loans
Commercial leases
OREO
Bank premises and equipment
Operating lease equipment
Private equity investments
Total
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
Fair Value Measurements Using
Level 3
Level 2
169
-
12
-
20
-
13
-
27
-
6
-
2
11
249
11
Level 1
-
-
-
-
-
-
-
-
Fair Value Measurements Using
Level 3
Level 2
16
-
93
-
2
-
14
-
20
-
32
-
-
-
3
67
2
-
182
67
Level 1
-
-
-
-
-
-
-
-
-
-
$
$
$
$
Total
169
12
20
13
27
6
13
260
Total
16
93
2
14
20
32
-
70
2
249
Total (Losses) Gains
For the year ended December 31, 2019
(96)
-
(6)
(6)
(27)
(3)
8
(130)
Total (Losses) Gains
For the year ended December 31, 2018
(3)
(41)
7
(11)
(7)
(45)
(2)
43
(8)
(67)
The following tables present information as of December 31, 2019 and 2018 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, 2019 ($ in millions)
Financial Instrument
Commercial and industrial loans
Commercial mortgage loans
Commercial leases
OREO
Bank premises and equipment
Operating lease equipment
Private equity investments
Fair Value
$
Valuation Technique
Significant Unobservable Inputs
169 Appraised value
12
Appraised value
20
Appraised value
13
Appraised value
27
Appraised value
6
Appraised value
2
Comparable company analysis
Collateral value
Collateral value
Collateral value
Appraised value
Appraised value
Appraised value
Market comparable transactions
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
93
2
14
20
32
-
-
3
2
Appraised value
Appraised value
Appraised value
Appraised value
Appraised value
Appraised value
Liquidity discount applied
to fund's NAV
Comparable company analysis
Appraised value
Ranges of
Inputs
NM
NM
NM
NM
NM
NM
NM
Weighted-Average
NM
NM
NM
NM
NM
NM
NM
Ranges of
Inputs
NM
NM
NM
NM
NM
NM
NM
NM
0 - 43.0 %
Weighted-Average
NM
10.0 %
NM
NM
NM
NM
NM
NM
12.9 %
Portfolio commercial loans and leases
During the years ended December 31, 2019 and 2018, the Bancorp
recorded nonrecurring
certain
impairment
commercial and industrial loans, commercial mortgage loans and
commercial leases held for investment. Larger commercial loans
adjustments
to
Market comparable transactions
Appraised value
NM
NM
NM
NM
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
185 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and other factors when evaluating whether an individual loan is
impaired. When the loan is collateral dependent, the fair value of the
loan is generally based on the fair value of the underlying collateral
supporting the loan and therefore these loans were classified within
Level 3 of the valuation hierarchy. In cases where the carrying value
exceeds the fair value, an impairment loss is recognized. The fair
values and recognized impairment losses are reflected in the
previous tables. Commercial Credit Risk, which reports to the
Bancorp’s Chief Risk Officer, is responsible for preparing and
reviewing the fair value estimates for commercial loans held for
investment.
OREO
During the years ended December 31, 2019 and 2018, the Bancorp
recorded nonrecurring adjustments to certain commercial and
residential real estate properties classified as OREO and measured
at the lower of carrying amount or fair value. These nonrecurring
losses were primarily due to declines in real estate values of the
properties recorded in OREO. For the years ended December 31,
2019 and 2018, these losses include $3 million and $4 million,
respectively, recorded as charge-offs, on new OREO properties
transferred from loans during the respective periods and $3 million
for both periods recorded as negative fair value adjustments on
OREO in other noninterest expense in the Consolidated Statements
of Income subsequent to their transfer from loans. As discussed in
the following paragraphs, the fair value amounts are generally based
on appraisals of the property values, resulting in a classification
within Level 3 of the valuation hierarchy. In cases where the
carrying amount exceeds the fair value, less costs to sell, an
impairment loss is recognized. The previous tables reflect the fair
value measurements of the properties before deducting the
estimated costs to sell.
The Real Estate Valuation department is solely responsible for
managing the appraisal process and evaluating the 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.
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 Human Resources Officer, in
conjunction with Accounting, are responsible for preparing and
reviewing the fair value estimates for bank premises and equipment.
For further information on bank premises and equipment refer to
Note 8.
186 Fifth Third Bancorp
Operating lease equipment and other assets
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. 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 Equipment Finance department, which reports to the
is responsible for
Bancorp’s Head of Commercial Banking,
preparing and reviewing the fair value estimates for operating lease
equipment.
Private equity investments
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 $13 million and $64 million during the years ended
December 31, 2019 and 2018, respectively, resulting from
observable price changes. The carrying value of the Bancorp’s
private equity investments still held as of December 31, 2019
includes a cumulative $47 million of positive adjustments as a result
of observable price changes since January 1, 2018. 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 DCF 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 impairment charges of
$5 million and $12 million during the years ended December 31,
2019 and 2018, respectively. The carrying value of the Bancorp’s
private equity investments still held as of December 31, 2019
includes a cumulative $17 million of impairment charges recognized
since adoption of the measurement alternative to fair value on
January 1, 2018.
The Bancorp did not recognize any OTTI during the year
ended December 31, 2019 and recognized $10 million of OTTI
primarily associated with certain nonconforming
investments
affected by the Volcker Rule during the year ended December 31,
2018. The Bancorp performed nonrecurring
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
fair
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Consumer
Banking, Payments and Strategy, in conjunction with Accounting, is
responsible for preparing and reviewing the fair value estimates.
Fair Value Option
The Bancorp elected to measure certain residential mortgage 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.
in earnings for residential
Fair value changes recognized
mortgage loans held at December 31, 2019 and 2018 for which the
intent
fair value option was elected, as well as the changes in fair value of
the underlying IRLCs, included gains of $37 million and $20 million,
respectively. These gains are reported in mortgage banking net
revenue in the Consolidated Statements of Income. The Bancorp
did not hold any commercial loans held for sale at December 31,
2019 for which the fair value option was elected. 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.
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 $1 million at both
December 31, 2019 and 2018. Valuation adjustments related to
instrument-specific credit risk for commercial loans measured at fair
value had an immaterial impact on the fair value of those loans at
December 31, 2018. Interest on loans measured at fair value is
accrued as it is earned using the effective interest method and is
reported as interest income in the Consolidated Statements of
Income.
The following table summarizes the difference between the fair value and the unpaid principal balance for residential mortgage loans and
commercial loans measured at fair value as of:
($ in millions)
December 31, 2019
Residential mortgage loans measured at fair value
Past due loans of 90 days or more
Nonaccrual loans
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
Aggregate
Fair Value
Aggregate Unpaid
Principal Balance
Difference
$
$
1,447
2
1
716
2
2
7
1,410
2
1
696
2
2
7
37
-
-
20
-
-
-
187 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:
Fair Value Measurements Using
Level 2
Level 3
Level 1
3,278
1,950
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
556
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
17
136
51,128
10,823
5,249
3,133
17,509
6,315
11,331
2,774
2,866
-
111,128
-
260
-
15,244
127,059
-
1,011
700
Fair Value Measurements Using
Level 2
Level 1
Level 3
2,681
1,825
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
552
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,925
-
14,287
108,782
-
573
445
Total
Fair Value
3,278
1,950
556
17
136
51,128
10,823
5,249
3,133
17,509
6,315
11,331
2,774
2,866
-
111,128
127,059
260
1,011
15,944
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
-
-
-
-
-
-
-
18
63
44,668
6,851
4,688
3,180
15,688
6,719
8,717
2,759
2,428
-
95,698
-
-
-
-
$
$
$
$
$
$
Net Carrying
Amount
3,278
1,950
556
17
136
49,981
10,876
5,045
3,346
16,468
6,046
11,485
2,364
2,683
(121)
108,173
127,062
260
1,011
14,970
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
As of December 31, 2019 ($ 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
Indirect secured consumer 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, 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
Indirect secured consumer 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
188 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30. 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. 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 Banking Agencies with the Basel
III Final Rule which was effective for the Bancorp on January 1,
2015. It established quantitative measures defining minimum
regulatory capital requirements as well as the measure of “well-
capitalized” status. Additionally, the Banking Agencies issued similar
guidelines for minimum regulatory capital requirements and “well-
capitalized” measurements for banking subsidiaries.
PRESCRIBED CAPITAL RATIOS
CET1 capital:
Fifth Third Bancorp
Fifth Third Bank, National Association
Tier I risk-based capital:
Fifth Third Bancorp
Fifth Third Bank, National Association
Total risk-based capital:
Fifth Third Bancorp
Fifth Third Bank, National Association
Tier I leverage:
Fifth Third Bancorp
Fifth Third Bank, National Association
Minimum
Well-Capitalized
4.50 %
4.50
6.00
6.00
8.00
8.00
4.00
4.00
N/A
6.50
6.00
8.00
10.00
10.00
N/A
5.00
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, the
includes a capital conservation buffer
Basel III Final Rule
requirement of 2.5%
the minimum capital
in addition
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.
to
The Bancorp and its banking subsidiary, Fifth Third Bank,
National Association, 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, 2019 and 2018. 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:
2019
2018
Amount Ratio
($ in millions)
CET1 capital:
Fifth Third Bancorp
Fifth Third Bank, National Association
Tier I risk-based capital:
Fifth Third Bancorp
Fifth Third Bank, National Association
Total risk-based capital:
Fifth Third Bancorp
Fifth Third Bank, National Association
Tier I leverage:(a)
Fifth Third Bancorp
9.72
10.27
Fifth Third Bank, National Association
(a) 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 Banking Agencies
9.75 % $
11.86
11.32
11.93
10.24 %
11.93
14.48
13.57
13,864
14,435
13,864
14,435
17,723
16,427
12,534
14,435
15,616
16,704
15,616
16,704
19,661
18,968
13,847
16,704
10.99
11.86
9.54
10.36
13.84
13.46
Amount
Ratio
$
determines should be deducted from Tier I capital.
189 Fifth Third Bancorp
31. 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)
Securities gains, net
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
a)
2019
2018
2017
$
$
$
2,155
2
24
2,181
267
65
332
1,849
(69)
1,918
594
2,512
-
2,512
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
The Bancorp’s indirect banking subsidiary paid dividends to the Bancorp’s direct nonbank subsidiary holding company of $2.0 billion, $1.9 billion and $2.3 billion for the years ended
December 31, 2019, 2018 and 2017, respectively. Additionally, a $200 million dividend was paid by MB Financial, Inc. to the Bancorp during the year ended December 31, 2019.
2019
118
4,723
49
444
444
23,779
23,779
80
379
29,572
359
497
7,513
8,369
2,051
1,770
3,599
18,315
1,192
(5,724)
-
21,203
29,572
$
$
$
$
$
$
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
Condensed Balance Sheets (Parent Company Only)
As of December 31 ($ in millions)
Assets
Cash
Short-term investments
Equity securities
Loans to subsidiaries:
Nonbank subsidiaries
Total loans to subsidiaries
Investment in subsidiaries:
Nonbank subsidiaries
Total investment in subsidiaries
Goodwill
Other assets
Total Assets
Liabilities
Other short-term borrowings
Accrued expenses and other liabilities
Long-term debt (external)
Total Liabilities
Equity
Common stock
Preferred stock
Capital surplus
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock
Noncontrolling interests
Total Equity
Total Liabilities and Equity
190 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statements of Cash Flows (Parent Company Only)
For the years ended December 31 ($ in millions)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
(Benefit from) provision for deferred income taxes
Securities gains, net
Equity in undistributed earnings
Net change in:
Equity securities
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 paid on acquisition
Net Cash (Used in) Provided by Investing Activities
Financing Activities
Net change in other short-term borrowings
Dividends paid on common stock
Dividends paid on preferred stock
Proceeds from issuance of long-term debt
Repayment of long-term debt
Issuance of preferred stock
Repurchase of treasury stock and related forward contract
Other, net
Net Cash Used in Financing Activities
(Decrease) Increase in Cash
Cash at Beginning of Period
Cash at End of Period
2019
2018
$
2,512
(11)
(2)
(594)
(49)
(80)
134
1,910
(1,081)
127
(469)
(1,423)
106
(660)
(93)
2,235
(500)
242
(1,763)
(56)
(489)
(2)
120
118
$
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
191 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
32. 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, 2019 to reflect the
current market rates and updated market assumptions. These rates
were generally higher than those in place during 2018, thus net
interest
income for deposit-providing business segments was
positively impacted during 2019. 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 2019.
The Bancorp’s methodology for allocating provision for credit
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 credit 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
taking advantage of cross-sell
segments form synergies by
opportunities and funding operations by accessing the capital
markets as a collective unit.
The following is a description of each of the Bancorp’s
business segments and the products and services they provide to
their respective client bases.
Commercial Banking offers credit
intermediation, cash
management and financial services to large and middle-market
businesses and government and professional customers. In addition
to the traditional lending and depository offerings, Commercial
Banking products and services include global cash management,
foreign exchange and international trade finance, derivatives and
capital markets services, asset-based lending, real estate finance,
public finance, commercial leasing and syndicated finance.
Branch Banking provides a full range of deposit and loan and
lease products to individuals and small businesses through 1,149
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, automobile and other
lending activities.
indirect
Residential mortgage activities within Consumer Lending include
the origination, retention and servicing of residential mortgage
loans, sales and securitizations of those loans, pools of loans, and all
associated hedging activities. Residential mortgages are primarily
originated through a dedicated sales force and through third-party
correspondent lenders. Automobile and other indirect lending
activities include extending loans to consumers through automobile
dealers, motorcycle dealers, powersport dealers, recreational vehicle
dealers and marine dealers.
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 wealth management
strategies to high net worth and ultra-high net worth clients through
wealth planning, investment management, banking, insurance, trust
and estate services. Fifth Third Institutional Services provides
advisory services for institutional clients including middle market
businesses, non-profits, states and municipalities.
192 Fifth Third Bancorp
The following tables present the results of operations and assets by business segment for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial
Branch
Banking
Consumer
Lending Management and Other Eliminations Total
Wealth
General
and Asset Corporate
$
Banking
182
-
182
325
49
276
2,371
224
2,147
2,360
183
2,177
4
260
158
285
6
89
-
-
802
-
-
-
-
279
14
-
3
296
1
1
469
3
2
13
-
-
489
565 (c)
308
3
66
-
245
-
-
1,187
2019 ($ in millions)
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income:
Corporate banking revenue
Service charges on deposits
Wealth and asset management 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
Technology and communications
Net occupancy expense(e)
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)
(e)
Includes impairment charges of $28 for branches and land. For more information, refer to Note 8 and Note 29.
Includes impairment charges of $3 for operating lease equipment. For more information, refer to Note 9 and Note 29.
Includes bank premises and equipment of $27 classified as held for sale. For more information, refer to Note 8.
Includes impairment losses and termination charges of $15 for ROU assets related to certain operating leases. For more information, refer to Note 10.
406
60
11
28
8
25
1,083
1,621
1,743
319
1,424
1,954
74,570
158
38
8
10
-
-
241
455
117
25
92
-
26,555
489
112
4
173
123
48
911
1,860
1,089
229
860
2,046
69,413
185
32
1
13
1
1
296
529
142
30
112
252
10,500
$
$
(441)
15
(456)
-
(4)
-
6
-
863
40
-
905
763
175
398
108
(2)
55
(1,159)
338
111
87
24
-
(11,669)(d)
-
-
-
-
-
(143)(a)
-
-
-
-
-
(143)
4,797
471
4,326
570
565
487
360
287
1,224
40
3
3,536
-
-
-
-
-
-
(143)
(143)
-
-
-
-
-
2,001
417
422
332
130
129
1,229
4,660
3,202
690
2,512
4,252
169,369
193 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial
Branch
Banking
Consumer
Lending Management and Other Eliminations Total
Wealth
General
and Asset Corporate
182
12
170
2
1
429
5
1
18
-
-
456
$
Banking
237
42
195
2,034
171
1,863
1,713
(26)
1,739
5
275
150
266
5
53
-
-
754
-
-
-
-
206
14
-
(15)
205
432 (c)
273
3
58
-
151
-
-
917
2018 ($ in millions)
Net interest income
Provision for (benefit from) credit losses
Net interest income after provision for credit losses
Noninterest income:
Corporate banking revenue
Service charges on deposits
Wealth and asset management 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
Technology and communications
Net occupancy expense
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)
(d)
Includes impairment charges of $45 for branches and land. For more information, refer to Note 8 and Note 29.
Includes impairment charges of $4 for operating lease equipment. For more information, refer to Note 9 and Note 29.
Includes bank premises and equipment of $42 classified as held for sale. For more information, refer to Note 8.
156
36
5
10
-
-
195
402
(2)
(1)
(1)
-
22,044
438
98
5
175
121
50
841
1,728
889
187
702
1,655
61,040
300
44
7
26
4
23
859
1,263
1,393
254
1,139
630
61,630
$
$
173
29
1
12
-
1
288
504
122
25
97
193
10,337
(26)
8
(34)
(1)
-
-
-
-
651
(54)
-
596
716
125
267
69
(2)
49
(1,025)
199
363
107
256
-
(8,982)(d)
-
-
-
-
-
(138)(a)
-
-
-
-
-
(138)
-
-
-
-
-
-
(138)
(138)
-
-
-
-
-
4,140
207
3,933
438
549
444
329
212
887
(54)
(15)
2,790
1,783
332
285
292
123
123
1,020
3,958
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
1,652
38
1,614
1,782
153
1,629
-
-
-
-
217
18
-
2
237
5
265
141
251
6
88
-
-
756
348 (c)
287
3
57
-
143
-
-
838
2017 ($ in millions)
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income:
Corporate banking revenue
Service charges on deposits
Wealth and asset management 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
Technology and communications
Net occupancy expense
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 8.
Includes impairment charges of $52 for operating lease equipment. For more information, refer to Note 9.
Includes bank premises and equipment of $27 classified as held for sale.
252
42
9
26
3
18
884
1,234
1,218
391
827
613
58,456
152
37
2
10
-
-
210
411
26
9
17
-
22,218
425
101
4
176
127
52
796
1,681
704
249
455
1,655
57,931
$
$
154
6
148
1
1
407
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
230
72
(1)
47
(1,027)
120
932
116
816
-
(6,018)(d)
-
-
-
-
-
(132)(a)
-
-
-
-
-
(132)
-
-
-
-
-
-
(132)
(132)
-
-
-
-
-
3,798
261
3,537
353
554
419
313
224
1,357
2
2
3,224
1,633
356
245
295
129
117
1,007
3,782
2,979
799
2,180
2,445
142,081
195 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
33. SUBSEQUENT EVENT
On January 31, 2020, the Bank issued and sold, under its bank notes
program, $1.25 billion in aggregate principal amount of senior fixed-
rate notes. The bank notes consisted of $650 million of 1.80%
senior fixed-rate notes, with a maturity of three years, due on
January 30, 2023; and $600 million of 2.25% senior fixed-rate notes,
with a maturity of seven years, due on February 1, 2027. On or after
the date that is 30 days before the maturity date, the 1.80% senior
fixed-rate notes will be redeemable, in whole or in part, at any time
and from time to time, at the Bank’s option at a redemption price
equal to 100% of the aggregate principal amount of the 1.80%
senior fixed-rate notes being redeemed, plus accrued and unpaid
interest thereon, if any, to, but excluding, the redemption date. The
2.25% senior fixed-rate notes will be redeemable at the Bank’s
option, in whole or in part, at any time or from time to time, on or
after July 31, 2020, and prior to January 4, 2027 (the “Applicable Par
Call Date”), in each case at a redemption price, plus accrued and
unpaid interest thereon, if any, to, but excluding, the redemption
date, equal to the greater of: (a) 100% of the aggregate principal
amount of the 2.25% senior fixed-rate notes being redeemed on
that redemption date; and (b) the sum of the present values of the
remaining scheduled payments of principal and interest on the
2.25% senior fixed-rate notes being redeemed that would be due if
the 2.25% senior fixed-rate notes to be redeemed matured on the
Applicable Par Call Date (not including any portion of such
payments of interest accrued to the redemption date) discounted to
the redemption date on a semi-annual basis (assuming a 360-day
year consisting of twelve 30-day months) at the applicable Treasury
Rate plus the Applicable Spread for the Notes to be redeemed.
Additionally, on or after January 4, 2027, the 2.25% senior fixed-rate
notes will also be redeemable, in whole or in part, at any time and
from time to time, at the Bank’s option at a redemption price equal
to 100% of the aggregate principal amount of the 2.25% senior
fixed-rate notes being redeemed, plus accrued and unpaid interest
thereon, if any, to, but excluding, the redemption date.
196 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, 2019. 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, 2019. Based on
this assessment, management believes that the Bancorp maintained effective internal control over financial reporting as of December 31, 2019.
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, 2019. This report appears on page 198 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 2, 2020
/s/ Tayfun Tuzun
Tayfun Tuzun
Executive Vice President and Chief Financial Officer
March 2, 2020
197 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, 2019,
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, 2019, 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, 2019, of the Bancorp and our report dated March 2, 2020 expressed
an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Bancorp's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment as to the Effectiveness of
Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Bancorp’s internal control over financial reporting
based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Bancorp in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
March 2, 2020
198 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
“INFORMATION ABOUT OUR EXECUTIVE OFFICERS.”
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 2020 Annual Meeting of
Shareholders.
the
and
reference under
The information required by this item concerning the Audit
Committee and Code of Business Conduct and Ethics is
captions
incorporated herein by
“CORPORATE GOVERNANCE”
“BOARD OF
DIRECTORS,
ITS COMMITTEES, MEETINGS AND
FUNCTIONS” of the Bancorp’s Proxy Statement for the 2020
Annual Meeting of Shareholders. Fifth Third’s Code of Business
Conduct and Ethics is available on Fifth Third’s corporate
website at www.53.com. In addition, any future amendments to,
or waivers from, a provision of the Fifth Third Code of Business
Conduct and Ethics that applies to Fifth Third’s directors or
executive officers (including Fifth Third’s principal executive
officer, principal financial officer, and principal accounting
officer or controller) will be posted at this internet address.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference under the captions “COMPENSATION DISCUSSION
“COMPENSATION OF NAMED
AND ANALYSIS,”
EXECUTIVE OFFICERS,”
“BOARD OF DIRECTORS
COMPENSATION,” “CEO PAY RATIO,” “HUMAN CAPITAL
and
AND COMPENSATION COMMITTEE REPORT”
“COMPENSATION COMMITTEE
INTERLOCKS AND
INSIDER PARTICIPATION” of the Bancorp’s Proxy Statement
for the 2020 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,”
EXECUTIVE
and
OFFICERS” of the Bancorp’s Proxy Statement for the 2020
Annual Meeting of Shareholders.
“COMPENSATION OF NAMED
The information required by this item concerning Equity
Compensation Plan information is included in Note 26 of the
Notes to Consolidated Financial Statements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by
reference under the captions “CERTAIN TRANSACTIONS”,
“CORPORATE
“ELECTION
ITS
GOVERNANCE” and “BOARD OF DIRECTORS,
COMMITTEES, MEETINGS AND FUNCTIONS” of
the
Bancorp’s Proxy Statement for the 2020 Annual Meeting of
Shareholders.
DIRECTORS”,
OF
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
The information required by this item is incorporated herein by
reference under the caption “PRINCIPAL INDEPENDENT
EXTERNAL AUDIT FIRM FEES” of the Bancorp’s Proxy
Statement for the 2020 Annual Meeting of Shareholders.
PART IV
ITEM
SCHEDULES
15. EXHIBITS, FINANCIAL
STATEMENT
Public Accounting Firm
Fifth Third Bancorp and Subsidiaries Consolidated Financial
Statements
Notes to Consolidated Financial Statements
Pages
105-106,
198
107-111
112-196
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
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
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.
Incorporated by reference to Exhibit 3.1 to the Registrant’s
Current Report on Form 8-K filed with the SEC on June 20,
2019.
Amendment to the Amended Articles of Incorporation of
Fifth Third Bancorp. Incorporated by reference to Exhibit
3.1 to the Registrant’s Current Report on Form 8-K filed
with the SEC on August 26, 2019.
Amendment to the Amended Articles of Incorporation of
Fifth Third Bancorp, as Amended (included as Attachment
to Exhibit 3.3). Incorporated by reference to Exhibit 4.1 to
the Registrant’s Current Report on Form 8-K filed with the
SEC on September 17, 2019.
Code of Regulations of Fifth Third Bancorp, as Amended as
of August 26, 2019. Incorporated by reference to Exhibit
3.2 to the Registrant’s Current Report on Form 8-K filed
with the SEC on August 26, 2019.
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.
First Supplemental Indenture, dated as of December 20,
2006, between Fifth Third Bancorp and Wilmington Trust
Company, as Trustee. Incorporated by reference to Exhibit
4.14 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2006.
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.
199 Fifth Third Bancorp
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
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.
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.
Deposit Agreement dated as of May 16, 2013, between
Fifth Third Bancorp, as issuer, Wilmington Trust, National
Association, as depositary and calculation agent, American
Stock Transfer & Trust Company, LLC, as transfer agent
and registrar, and the holders from time 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 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.
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)
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 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 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.
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.
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,
4.18
4.19
4.20
4.21
4.22
4.23
4.24
4.25
4.26
4.27
4.28
4.29
4.30
200 Fifth Third Bancorp
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.
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.
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.
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.
Second Amended and Restated Deposit Agreement, dated
as of August 26, 2019, among Fifth Third Bancorp, as
issuer, and American Stock Transfer & Trust Company,
LLC, as depositary, transfer agent and registrar, and the
holders from time to time of the depositary receipts issued.
4.31
4.32
4.33
4.34
4.35
4.36
4.37
4.38
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Incorporated by reference to Exhibit 4.1 to the Registrant’s
Form 8-A filed with the SEC on August 26, 2019.
Form of depositary receipt representing the Depositary
Shares (included as Exhibit A to Exhibit 4.34). Incorporated
by reference to Exhibit 4.1 to the Registrant’s Form 8-A
filed with the SEC on August 26, 2019.
Deposit Agreement dated September 17, 2019, between
Fifth Third Bancorp, as issuer, American Stock Transfer &
Trust Company, LLC, as depositary, transfer agent and
registrar, relating to receipts, Depositary Shares and related
4.95% Non-Cumulative Perpetual Preferred Stock, Series
K. Incorporated by reference to Exhibit 4.3 to the
Registrant’s Current Report on Form 8-K filed with the
SEC on September 17, 2019.
the 4.95% Non-
Form of Certificate Representing
Cumulative Perpetual Preferred Stock, Series K, of Fifth
Third Bancorp. Incorporated by reference to Exhibit 4.2 to
the Registrant’s Current Report on Form 8-K filed with the
SEC on September 17, 2019.
Form of Depositary Receipt for the 4.95% Non-Cumulative
Perpetual Preferred Stock, Series K, of Fifth Third Bancorp.
Incorporated by reference to Exhibit 4.4 to the Registrant’s
Current Report on Form 8-K filed with the SEC on
September 17, 2019.
Ninth Supplemental Indenture dated as of October 28, 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 October 28, 2019.
Form of 2.375% Senior Notes due 2025. Incorporated by
reference to Exhibit 4.2 to the Registrant’s Current Report
on Form 8-K filed with the SEC on October 28, 2019.
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.
Description of Registrant’s Securities
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.*
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
to
to
to Exhibit 10.14
to Exhibit 10.12
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.
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.*
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.*
Fourth Amendment to Fifth Third Bancorp 401(k) Savings
Plan, as Amended and Restated effective January 1, 2015.
the
Incorporated by reference
Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2017.*
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.*
Sixth Amendment to Fifth Third Bancorp 401(k) Savings
Plan, as Amended and Restated effective January 1, 2015.
the
Incorporated by reference
Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2018.*
Fifth Third Bancorp 401(k) Savings Plan, as Amended and
Restated effective January 1, 2020.*
The Fifth Third Bancorp Master Retirement Plan, as
Amended and Restated. Incorporated by reference to
Exhibit 10.8 of the Registrant’s Annual Report on Form 10-
K for the fiscal year ended December 31, 2014.*
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.*
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.*
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.*
Fourth Amendment to The Fifth Third Bancorp Master
Retirement Plan, as Amended and Restated. Incorporated by
reference to Exhibit 10.19 to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December
31, 2018.*
Fifth Third Bancorp 2008 Incentive Compensation Plan.
Incorporated by reference to Annex 2 to the Registrant’s
Proxy Statement dated March 6, 2008.*
First Amendment to the Fifth Third Bancorp 2008 Incentive
Compensation Plan. Incorporated by reference to Exhibit
10.22 to the Registrant’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2018.*
Fifth Third Bancorp 2011 Incentive Compensation Plan.
Incorporated by reference to Annex 1 to the Registrant’s
Proxy Statement dated March 10, 2011.*
First Amendment to the Fifth Third Bancorp 2011 Incentive
Compensation Plan. Incorporated by reference to Exhibit
10.24 to the Registrant’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2018.*
Fifth Third Bancorp 2014 Incentive Compensation Plan.
Incorporated by reference to Annex A to the Registrant’s
Proxy Statement dated March 6, 2014.*
201 Fifth Third Bancorp
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
to Exhibit 10.14 of
First Amendment to the Fifth Third Bancorp 2014 Incentive
Compensation Plan. Incorporated by reference to Exhibit
10.26 to the Registrant’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2018.*
Fifth Third Bancorp 2017 Incentive Compensation Plan.
Incorporated by reference to Annex A to the Registrant’s
Proxy Statement dated March 9, 2017.*
First Amendment to the Fifth Third Bancorp 2017 Incentive
Compensation Plan. Incorporated by reference to Exhibit
10.28 to the Registrant’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2018.*
Fifth Third Bancorp 2019 Incentive Compensation Plan.
Incorporated by reference to Exhibit 4.3 to the Registrant’s
Form S-8 Registration Statement filed on April 16, 2019
(Registration Statement No. 333-230900).*
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.*
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.*
Amendment to the Fifth Third Bancorp Non-qualified
Deferred Compensation Plan, as Amended and Restated.
the
Incorporated by reference
Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2014.*
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.*
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.*
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.*
Fifth Amendment to Fifth Third Bancorp Non-qualified
Deferred Compensation Plan, as Amended and Restated
effective January 1, 2013. Incorporated by reference to
Exhibit 10.35 to the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2018.*
Fifth Third Bancorp Stock Option Gain Deferral Plan.
Incorporated by reference to Annex 5 to the Registrant’s
Proxy Statement dated February 9, 2001.*
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.*
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.*
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.*
First Amendment to the Fifth Third Bancorp Executive
Change
in Control Severance Plan. Incorporated by
reference to Exhibit 10.40 to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December
31, 2018.*
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.*
Performance Share Award Agreement. Incorporated by
reference to Exhibit 10.3 of the Registrant’s Quarterly
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
202 Fifth Third Bancorp
to Exhibit 10.36 of
Report on Form 10-Q for the fiscal quarter ended June 30,
2013.*
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.*
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.*
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.*
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.*
(for Directors).
Restricted Stock Unit Agreement
Incorporated by reference
the
Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2014.*
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.*
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, 2013.**
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.**
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.**
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.**
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.*
Master Confirmation, dated January 22, 2015, and
Supplemental Confirmation,
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.**
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.*
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.*
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.*
accelerated
for
10.59
10.60
10.61
10.62
10.63
10.64
10.65
10.66
10.67
10.68
10.69
10.70
10.71
10.72
10.73
10.74
10.75
10.76
10.77
10.78
to
to Exhibit 10.70
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.*
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.*
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.*
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.*
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.*
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.*
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.*
Long-Term Incentive Award Overview 2018 Grants.
the
Incorporated by reference
Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2017.*
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.*
2018 Long-Term
Incentive Compensation Program
Overview February 2019 Grants. Incorporated by reference
to Exhibit 10.74 to the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2018.*
2019 Performance Share Award Agreement. Incorporated
by reference to Exhibit 10.75 to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December
31, 2018.*
2019 Restricted Stock Unit Agreement (for Executive
Officers). Incorporated by reference to Exhibit 10.76 to the
Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2018.*
2019 Stock Appreciation Right Award Agreement (for
Executive Officers). Incorporated by reference to Exhibit
10.77 to the Registrant’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2018.*
2019 Long-Term
Overview February 2020 Grants.*
2020 Performance Share Award Agreement.*
2020 Restricted Stock Unit Agreement (for Executive
Officers).*
2020 Stock Appreciation Right Award Agreement (for
Executive Officers).*
2019 Restricted Stock Unit Grant Agreement
Directors).*
Master Confirmation,
two
share
Supplemental Confirmations,
repurchase transaction dated March 11, 2019 between Fifth
Third Bancorp and JPMorgan Chase Bank, National
Association, London Branch. Incorporated by reference to
Exhibit 10.1 to the Registrant’s Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 2019.**
Supplemental Confirmations dated April 25, 2019, to
Master Confirmation dated March 11, 2019, for accelerated
share repurchase transaction between Fifth Third Bancorp
and JPMorgan Chase Bank, National Association, London
Branch. Incorporated by reference to Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2019.***
Incentive Compensation Program
by
accelerated
supplemented
(for
for
as
10.79
10.80
10.81
10.82
14
21
23
31(i)
31(ii)
32(i)
32(ii)
99.1
99.2
99.3
Master Confirmation dated as of August 5, 2019, as
supplemented by a Supplemental Confirmation dated
August 5, 2019, for accelerated share repurchase transaction
between Fifth Third Bancorp and Citibank, N.A.
Incorporated by reference to Exhibit 10.2 to the Registrant’s
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2019.***
Supplemental Confirmations dated August 7, 2019, to
Master Confirmation dated as of August 5, 2019, for
accelerated share repurchase transaction between Fifth
Third Bancorp and Citibank, N.A. Incorporated by
reference to Exhibit 10.3 to the Registrant’s Quarterly
Report on Form 10-Q for
the fiscal quarter ended
September 30, 2019.***
Supplemental Confirmation dated October 23, 2019, to
Master Confirmation dated as of January 22, 2015, for
accelerated share repurchase transaction between Fifth
Third Bancorp and Wells Fargo Bank, National
Association.***
Employment Agreement between Fifth Third Bancorp,
Fifth Third Bank, and Teresa Tanner dated July 1, 2019.
Incorporated by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K/A filed with the SEC on July
3, 2019.*
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 20, 2019.
Fifth Third Bancorp Subsidiaries, as of February 15, 2020.
Consent of Independent Registered Public Accounting
Firm-Deloitte & Touche LLP.
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 by Chief Executive Officer.
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 by Chief Financial Officer.
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.
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.
the Consumer Financial
to
Consent Order pursuant
Protection Act of 2010, dated September 28, 2015, between
Fifth Third Bank and the U.S. Department of Justice
regarding indirect auto 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.
Consent Order pursuant
the Consumer Financial
to
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.
Consent Order pursuant
the Consumer Financial
to
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.
101.INSXBRL Instance Document.
101.SCHXBRL Taxonomy Extension Schema Document.
101.CALXBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFXBRL Taxonomy Extension Definition Linkbase Document.
101.LABXBRL Taxonomy Extension Label Linkbase Document.
101.PREXBRL Taxonomy Extension Presentation Linkbase Document.
104 Cover Page Interactive Data File (formatted as Inline XBRL
and contained in Exhibit 101).
203 Fifth Third Bancorp
(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 $250,000,000 in principal
amount of its 4.30% Subordinated Notes due 2024.
*Denotes management contract or compensatory plan or arrangement.
**An application for confidential treatment for selected portions of this
exhibit has been filed with the SEC.
***Selected portions of this exhibit have been omitted in accordance with
Item 601(b)(10) of Regulation S-K.
ITEM 16. FORM 10–K SUMMARY
None.
204 Fifth Third Bancorp
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
FIFTH THIRD BANCORP
Registrant
/s/ Greg D. Carmichael
Greg D. Carmichael
Chairman, President and CEO
Principal Executive Officer
March 2, 2020
Pursuant to requirements of the Securities Exchange Act of 1934,
this report has been signed on March 2, 2020 by the following
persons on behalf of the Registrant and in the capacities
indicated.
OFFICERS:
/s/ Greg D. Carmichael
Greg D. Carmichael
Chairman, President and CEO
Principal Executive Officer
/s/ Tayfun Tuzun
Tayfun Tuzun
Executive Vice President and CFO
Principal Financial Officer
/s/ Mark D. Hazel
Mark D. Hazel
Senior Vice President and Controller
Principal Accounting Officer
DIRECTORS:
/s/ Greg D. Carmichael
Greg D. Carmichael
Chairman
/s/ Marsha C. Williams
Marsha C. Williams
Lead Independent Director
/s/ Nicholas K. Akins
Nicholas K. Akins
/s/ B. Evan Bayh III
B. Evan Bayh III
/s/ Jorge L. Benitez
Jorge L. Benitez
/s/ Katherine B. Blackburn
Katherine B. Blackburn
/s/ Emerson L. Brumback
Emerson L. Brumback
/s/ Jerry W. Burris
Jerry W. Burris
/s/ C. Bryan Daniels
C. Bryan Daniels
/s/ Thomas H. Harvey
Thomas H. Harvey
/s/ Gary R. Heminger
Gary R. Heminger
/s/ Jewell D. Hoover
Jewell D. Hoover
/s/ Eileen A. Mallesch
Eileen A. Mallesch
/s/ Michael B. McCallister
Michael B. McCallister
205 Fifth Third Bancorp
CONSOLIDATED TEN YEAR COMPARISON
AVERAGE ASSETS FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS)
$
Loans and
Leases
107,794
93,876
92,731
94,320
93,339
91,127
89,093
84,822
80,214
79,232
Interest-Earning Assets
Federal Funds
Sold(a)
1
1
1
1
1
-
1
2
1
11
Interest-Bearing
Deposits in
Banks(a)
2,139
1,475
1,389
1,865
3,257
3,043
2,416
1,493
2,030
3,317
Investment
Securities
35,470
33,553
32,172
30,099
26,987
21,823
16,444
15,319
15,437
16,371
Total
145,404
128,905
126,293
126,285
123,584
115,993
107,954
101,636
97,682
98,931
Cash and Due
from Banks
2,748
2,200
2,224
2,303
2,608
2,892
2,482
2,355
2,352
2,245
Other Assets
16,903
12,203
13,236
14,870
15,100
14,443
15,025
15,643
15,259
14,758
Total Average
Assets
163,936
142,183
140,527
142,173
139,999
131,847
123,704
117,562
112,590
112,351
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS)
Deposits
Money
Market Other Time
Foreign
Office and
Other
Demand
34,343
$
32,634
35,093
35,862
35,164
31,755
29,925
27,196
23,389
19,669
5,470
4,106
3,771
4,010
4,051
3,762
3,760
4,306
6,260
10,526
INCOME FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA)
25,879
21,769
20,231
19,523
18,152
14,670
9,467
4,903
5,154
4,808
474
839
665
830
874
1,828
1,518
1,555
3,497
3,361
2,313
3,120
3,715
3,351
2,641
2,331
3,527
4,806
3,122
1,926
Savings
14,041
13,330
13,958
14,346
14,951
16,080
18,440
21,393
21,652
19,612
Total
121,369
104,922
102,664
102,449
102,221
97,406
93,031
85,551
82,315
82,277
Interest
Checking
36,658
29,818
26,382
25,143
26,160
25,382
23,582
23,096
18,707
18,218
Certificates
$100,000 and
Over
4,504
2,426
2,564
2,735
2,869
3,929
6,339
3,102
3,656
6,083
Short-Term
Borrowings(b)
Total
123,682
108,042
106,379
105,800
104,862
99,737
96,558
90,357
85,437
84,203
Per Share
Earnings
Diluted
Earnings
Dividends
Declared
Interest Income
$
Noninterest
Income
Noninterest
Expense
Interest
Expense
1,457
1,043
691
578
495
451
412
512
661
885
4,660
3,958
3,782
3,737
3,643
3,619
3,978
4,083
3,804
3,879
MISCELLANEOUS AT DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Bancorp Shareholders' Equity
3,536
2,790
3,224
2,696
3,003
2,473
3,227
2,999
2,455
2,729
3.38
3.11
2.86
1.92
2.00
1.65
2.05
1.69
1.20
0.63
Net Income Available
to Common
Shareholders
2,419
2,118
2,105
1,472
1,610
1,384
1,799
1,541
1,094
503
6,254
5,183
4,489
4,193
4,028
4,030
3,973
4,107
4,218
4,489
Common Shares
Outstanding
Common
Stock
Preferred
Stock
Accumulated Other
Comprehensive
Income (Loss)
708,915,629 $
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
2,051
2,051
2,051
2,051
2,051
2,051
2,051
2,051
2,051
1,779
Capital
Surplus
3,599
2,873
2,790
2,756
2,666
2,646
2,561
2,758
2,792
1,715
Retained
Earnings
18,315
16,578
14,957
13,290
12,224
11,034
10,156
8,768
7,554
6,719
1,770
1,331
1,331
1,331
1,331
1,331
1,034
398
398
3,654
Treasury
Stock
(5,724)
(6,471)
(5,002)
(3,433)
(2,764)
(1,972)
(1,295)
(634)
(64)
(130)
Total
21,203
16,250
16,200
16,054
15,705
15,519
14,589
13,716
13,201
14,051
Book Value
Per Share
27.41
23.07
21.43
19.62
18.31
17.22
15.85
15.10
13.92
13.06
Allowance for
Loan and
Lease Losses
1,202
1,103
1,196
1,253
1,272
1,322
1,582
1,854
2,255
3,004
1,192
(112)
73
59
197
429
82
375
470
314
3.33
3.06
2.81
1.91
1.97
1.63
2.02
1.66
1.18
0.63
0.94
0.74
0.60
0.53
0.52
0.51
0.47
0.36
0.28
0.04
Year
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
Year
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
Year
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
Year
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
(a) Federal funds sold and interest-bearing deposits in banks are combined in other short-term investments in the Consolidated Financial Statements.
(b)
Includes federal funds purchased and other short-term investments.
206 Fifth Third Bancorp
FIFTH THIRD BANCORP DIRECTORS
Greg D. Carmichael
Chairman, President &
Chief Executive Officer
Fifth Third Bancorp
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
Senior Advisor
Apollo Global Management
Jorge L. Benitez
Retired Chief Executive Officer
North America of Accenture plc
Katherine B. Blackburn
Executive Vice President
Cincinnati Bengals, Inc.
DIRECTORS AND OFFICERS
FIFTH THIRD BANCORP OFFICERS
Greg D. Carmichael
Chairman, President &
Chief Executive Officer
Lars C. Anderson
Executive Vice President &
Vice Chairman of Commercial Banking
Strategic Growth Initiatives
Mark D. Hazel
Senior Vice President &
Controller
Kevin P. Lavender
Executive Vice President &
Head of Commercial Banking
James C. Leonard
Executive Vice President &
Chief Risk Officer
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
Jude A. Schramm
Executive Vice President &
Chief Information Officer
Jerry W. Burris
President and Chief Executive Officer
Midwest Can Company
Robert P. Shaffer
Executive Vice President &
Chief Human Resources Officer
Timothy N. Spence
Executive Vice President &
Head of Consumer Bank, Payments,
and Strategy
Tayfun Tuzun
Executive Vice President &
Chief Financial Officer
Susan B. Zaunbrecher
Executive Vice President,
Chief Legal Officer &
Corporate Secretary
C. Bryan Daniels
Founding Partner
Prairie Capital
Thomas H. Harvey
Chief Executive Officer
Energy Innovation: Policy and Technology,
LLC
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.
REGIONAL PRESIDENTS
Michael Ash
David A. Call
Joseph DiRocco
Timothy Elsbrock
Mitchell S. Feiger
Lee Fite
David Girodat
Tom Heiks
Francie Henry
Kevin Hipskind
Randy Koporc
Robert W. LaClair
Michael McKay
Thomas G. Welch, Jr.
FIFTH THIRD BANCORP BOARD
COMMITTEES
Audit Committee
Emerson L. Brumback, Chair
C. Bryan Daniels
Jewell D. Hoover
Jorge L. Benitez
Jerry W. Burris
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
Thomas H. Harvey
Gary R. Heminger
Marsha C. Williams
Risk and Compliance Committee
Jewell D. Hoover, Chair
B. Evan Bayh III
Jorge L. Benitez
Katherine B. Blackburn
Jerry W. Burris
C. Bryan Daniels
Thomas H. Harvey
Technology Committee
Jorge L. Benitez, Chair
Nicholas K. Akins
B. Evan Bayh III
C. Bryan Daniels
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
2019
2018
2017
EARNINGS AND DIVIDENDS
Net Income Attributable to Bancorp
$ 2,512
$ 2,193
$ 2,180
FIFTH THIRD BANCORP
Corporate Address
38 Fountain Square Plaza
Cincinnati, OH 45263
www.53.com
1.800.972.3030
Investor Relations
(For Inquiries of Shareholders Only)
38 Fountain Square Plaza
MD 1090QC
Cincinnati, OH 45263
Common Dividends Declared
Preferred Dividends Declared
691
93
499
75
436
75
ir@53.com
1.866.670.0468
PER COMMON SHARE
Earnings
Diluted Earnings
Cash Dividends Declared
Book Value
AT YEAR-END
Total Assets
$ 3.38
$ 3.11
$ 2.86
3.33
0.94
27.41
3.06
0.74
23.07
2.81
0.60
21.43
$ 169,369
$ 146,069
$ 142,081
Total Loans and Leases (incl. Held-for-Sale)
110,958
95,872
92,462
Deposits
Bancorp Shareholders’ Equity
KEY RATIOS
Net Interest Margin (FTE)1
Efficiency Ratio (FTE)1,2
CET1 Ratio
Tier 1 Risk-Based Ratio
Total Risk-Based Capital Ratio
ACTUALS
127,062
21,203
108,835
16,250
103,162
16,200
3.31%
55.8%
9.75%
10.99%
13.84%
3.22%
57.0%
10.24%
11.32%
14.48%
3.03%
53.7%
10.61%
11.74%
15.16%
Common Shares Outstanding (000's)
708,916
646,631
693,805
Banking Centers
ATMs
Full-Time Equivalent Employees
1,149
2,481
19,869
1,121
1,154
2,419
2,469
17,437
18,125
1 Non-GAAP measure. For further information, see the Non-GAAP Financial Measures section of MD&A.
2 Certain prior period data has been reclassified to conform to current period presentation.
2019
2018
Stock
Performance
High
Low
Dividends
Declared
Per Share
High
Low
Dividends
Declared
Per Share
Fourth Quarter
$ 31.64
$ 25.42
$ 0.24
$ 29.00
$ 22.12
$ 0.22
Third Quarter
Second Quarter
First Quarter
30.20
29.18
29.00
24.97
25.48
23.11
0.24
0.24
0.22
30.31
34.67
34.57
27.43
28.55
30.18
0.18
0.18
0.16
Includes intraday stock prices.
Fifth Third’s common stock is traded on the NASDAQ® Global Select Market under the symbol “FITB.”
TRANSFER AGENT
American Stock Transfer
and Trust Company, LLC.
For Correspondence:
6201 15th Ave.
Brooklyn, NY 11219
www.astfinancial.com
1.888.294.8285
For Dividend Reinvestment
and Direct Stock Purchase
Plan Transaction Processing:
P.O. Box 922
Wall Street Station
New York, NY 10269-0560