filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
545K characters. Original on sec.gov · Markdown
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: |
|---|
| ¡ | Commercial portfolio segment loan balances by class |
|---|
| ¡ | Commercial portfolio segment net losses charged-off |
|---|
| ¡ | Relevant macroeconomic indicators |
|---|
| ¡ | 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
| As of December 31 ($ in millions, except share data) | 2019 | 2018 | ||||||
| Assets | ||||||||
| Cash and due from banks | $ | 3,278 | 2,681 | |||||
| Other short-term investments (a) | 1,950 | 1,825 | ||||||
| Available-for-sale debt and other securities (b) | 36,028 | 32,830 | ||||||
| Held-to-maturity securities (c) | 17 | 18 | ||||||
| Trading debt securities | 297 | 287 | ||||||
| Equity securities | 564 | 452 | ||||||
| Loans and leases held for sale (d) | 1,400 | 607 | ||||||
| Portfolio loans and leases (a)(e) | 109,558 | 95,265 | ||||||
| Allowance for loan and lease losses (a) | (1,202) | (1,103) | ||||||
| Portfolio loans and leases, net | 108,356 | 94,162 | ||||||
| Bank premises and equipment (f) | 1,995 | 1,861 | ||||||
| Operating lease equipment | 848 | 518 | ||||||
| Goodwill | 4,252 | 2,478 | ||||||
| Intangible assets | 201 | 40 | ||||||
| Servicing rights | 993 | 938 | ||||||
| Other assets (a) | 9,190 | 7,372 | ||||||
| Total Assets | $ | 169,369 | 146,069 | |||||
| Liabilities | ||||||||
| Deposits: | ||||||||
| Noninterest-bearing deposits | $ | 35,968 | 32,116 | |||||
| Interest-bearing deposits | 91,094 | 76,719 | ||||||
| Total deposits | 127,062 | 108,835 | ||||||
| Federal funds purchased | 260 | 1,925 | ||||||
| Other short-term borrowings | 1,011 | 573 | ||||||
| Accrued taxes, interest and expenses | 2,441 | 1,562 | ||||||
| Other liabilities (a) | 2,422 | 2,498 | ||||||
| Long-term debt (a) | 14,970 | 14,426 | ||||||
| Total Liabilities | $ | 148,166 | 129,819 | |||||
| Equity | ||||||||
| Common stock (g) | $ | 2,051 | 2,051 | |||||
| Preferred stock (h) | 1,770 | 1,331 | ||||||
| Capital surplus | 3,599 | 2,873 | ||||||
| Retained earnings | 18,315 | 16,578 | ||||||
| Accumulated other comprehensive income (loss) | 1,192 | (112) | ||||||
| Treasury stock (g) | (5,724) | (6,471) | ||||||
| Total Bancorp shareholders’ equity | $ | 21,203 | 16,250 | |||||
| Noncontrolling interests | - | - | ||||||
| Total Equity | 21,203 | 16,250 | ||||||
| Total Liabilities and Equity | $ | 169,369 | 146,069 | |||||
| (a) | 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. |
|---|
| (b) | Amortized cost of $34,966 and $33,128 at December 31, 2019 and 2018, respectively. |
|---|
| (c) | Fair value of $17 and $18 at December 31, 2019 and 2018, respectively. |
|---|
| (d) | 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. |
|---|
| (e) | Includes $183 and $179 of residential mortgage loans measured at fair value at December 31, 2019 and 2018, respectively. |
|---|
| (f) | 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. |
|---|
| (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) | 2019 | 2018 | 2017 | |||||||||
| Interest Income | ||||||||||||
| Interest and fees on loans and leases | $ | 5,051 | 4,078 | 3,478 | ||||||||
| Interest on securities | 1,162 | 1,080 | 996 | |||||||||
| Interest on other short-term investments | 41 | 25 | 15 | |||||||||
| Total interest income | 6,254 | 5,183 | 4,489 | |||||||||
| Interest Expense | ||||||||||||
| Interest on deposits | 892 | 538 | 277 | |||||||||
| Interest on federal funds purchased | 29 | 30 | 6 | |||||||||
| Interest on other short-term borrowings | 28 | 29 | 30 | |||||||||
| Interest on long-term debt | 508 | 446 | 378 | |||||||||
| Total interest expense | 1,457 | 1,043 | 691 | |||||||||
| Net Interest Income | 4,797 | 4,140 | 3,798 | |||||||||
| Provision for credit losses | 471 | 207 | 261 | |||||||||
| Net Interest Income After Provision for Credit Losses | 4,326 | 3,933 | 3,537 | |||||||||
| Noninterest Income | ||||||||||||
| Corporate banking revenue | 570 | 438 | 353 | |||||||||
| Service charges on deposits | 565 | 549 | 554 | |||||||||
| Wealth and asset management revenue | 487 | 444 | 419 | |||||||||
| Card and processing revenue | 360 | 329 | 313 | |||||||||
| Mortgage banking net revenue | 287 | 212 | 224 | |||||||||
| Other noninterest income | 1,224 | 887 | 1,357 | |||||||||
| Securities gains (losses), net | 40 | (54 | ) | 2 | ||||||||
| Securities gains (losses), net - non-qualifying hedges on mortgage servicing rights | 3 | (15 | ) | 2 | ||||||||
| Total noninterest income | 3,536 | 2,790 | 3,224 | |||||||||
| Noninterest Expense | ||||||||||||
| Salaries, wages and incentives | 2,001 | 1,783 | 1,633 | |||||||||
| Employee benefits | 417 | 332 | 356 | |||||||||
| Technology and communications | 422 | 285 | 245 | |||||||||
| Net occupancy expense | 332 | 292 | 295 | |||||||||
| Card and processing expense | 130 | 123 | 129 | |||||||||
| Equipment expense | 129 | 123 | 117 | |||||||||
| Other noninterest expense | 1,229 | 1,020 | 1,007 | |||||||||
| Total noninterest expense | 4,660 | 3,958 | 3,782 | |||||||||
| Income Before Income Taxes | 3,202 | 2,765 | 2,979 | |||||||||
| Applicable income tax expense | 690 | 572 | 799 | |||||||||
| Net Income | 2,512 | 2,193 | 2,180 | |||||||||
| Less: Net income attributable to noncontrolling interests | - | - | - | |||||||||
| Net Income Attributable to Bancorp | 2,512 | 2,193 | 2,180 | |||||||||
| Dividends on preferred stock | 93 | 75 | 75 | |||||||||
| Net Income Available to Common Shareholders | $ | 2,419 | 2,118 | 2,105 | ||||||||
| Earnings per share - basic | $ | 3.38 | 3.11 | 2.86 | ||||||||
| Earnings per share - diluted | $ | 3.33 | 3.06 | 2.81 | ||||||||
| Average common shares outstanding - basic | 710,433,611 | 673,346,168 | 728,289,200 | |||||||||
| Average common shares outstanding - diluted | 720,065,498 | 685,488,498 | 740,691,433 | |||||||||
Refer to the Notes to Consolidated Financial Statements.
108 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| For the years ended December 31 ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Net Income | $ | 2,512 | 2,193 | 2,180 | ||||||||
| Other Comprehensive Income (Loss), Net of Tax: | ||||||||||||
| Unrealized gains (losses) on available-for-sale debt securities: | ||||||||||||
| Unrealized holding gains (losses) arising during the year | 1,046 | (371 | ) | 21 | ||||||||
| Reclassification adjustment for net (gains) losses included in net income | (7 | ) | 9 | 4 | ||||||||
| Unrealized gains (losses) on cash flow hedge derivatives: | ||||||||||||
| Unrealized holding gains (losses) arising during the year | 275 | 169 | (7 | ) | ||||||||
| Reclassification adjustment for net (gains) losses included in net income | (13 | ) | 2 | (12) | ||||||||
| Defined benefit pension plans, net: | ||||||||||||
| Net actuarial (loss) gain arising during the year | (5 | ) | 1 | 1 | ||||||||
| Reclassification of amounts to net periodic benefit costs | 8 | 7 | 7 | |||||||||
| Other comprehensive income (loss), net of tax | 1,304 | (183 | ) | 14 | ||||||||
| Comprehensive Income | 3,816 | 2,010 | 2,194 | |||||||||
| Less: Comprehensive income attributable to noncontrolling interests | - | - | - | |||||||||
| Comprehensive Income Attributable to Bancorp | $ | 3,816 | 2,010 | 2,194 | ||||||||
Refer to the Notes to Consolidated Financial Statements.
109 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
| Bancorp Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||
| ($ in millions, except per share data) | Common Stock | Preferred Stock | Capital Surplus | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Bancorp Shareholders’ Equity | Non- Controlling Interests | Total Equity | |||||||||||||||||||||||||||
| Balance at December 31, 2016 | $ | 2,051 | 1,331 | 2,756 | 13,290 | 59 | (3,433 | ) | 16,054 | 27 | 16,081 | |||||||||||||||||||||||||
| Net income | 2,180 | 2,180 | 2,180 | |||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | 14 | 14 | 14 | |||||||||||||||||||||||||||||||||
| Cash dividends declared: | ||||||||||||||||||||||||||||||||||||
| Common stock (a) | (436 | ) | (436 | ) | (436) | |||||||||||||||||||||||||||||||
| Preferred stock (b) | (75 | ) | (75 | ) | (75) | |||||||||||||||||||||||||||||||
| Shares acquired for treasury | (17 | ) | (1,588 | ) | (1,605 | ) | (1,605) | |||||||||||||||||||||||||||||
| Impact of stock transactions under stock compensation plans, net | 51 | 16 | 67 | 67 | ||||||||||||||||||||||||||||||||
| Other | (2 | ) | 3 | 1 | (7 | ) | (6) | |||||||||||||||||||||||||||||
| Balance at December 31, 2017 | $ | 2,051 | 1,331 | 2,790 | 14,957 | 73 | (5,002 | ) | 16,200 | 20 | 16,220 | |||||||||||||||||||||||||
| Impact of cumulative effect of change in accounting principles | 6 | (2 | ) | 4 | 4 | |||||||||||||||||||||||||||||||
| Balance at January 1, 2018 | 2,051 | 1,331 | 2,790 | 14,963 | 71 | (5,002 | ) | 16,204 | 20 | 16,224 | ||||||||||||||||||||||||||
| Net income | 2,193 | 2,193 | 2,193 | |||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | (183 | ) | (183 | ) | (183) | |||||||||||||||||||||||||||||||
| Cash dividends declared: | ||||||||||||||||||||||||||||||||||||
| Common stock (a) | (499 | ) | (499 | ) | (499) | |||||||||||||||||||||||||||||||
| Preferred stock (b) | (75 | ) | (75 | ) | (75) | |||||||||||||||||||||||||||||||
| Shares acquired for treasury | 41 | (1,494 | ) | (1,453 | ) | (1,453) | ||||||||||||||||||||||||||||||
| Impact of stock transactions under stock compensation plans, net | 42 | 23 | 65 | 65 | ||||||||||||||||||||||||||||||||
| Other | (4 | ) | 2 | (2 | ) | (20 | ) | (22) | ||||||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | 2,051 | 1,331 | 2,873 | 16,578 | (112 | ) | (6,471 | ) | 16,250 | - | 16,250 | ||||||||||||||||||||||||
| Impact of cumulative effect of change in accounting principle (c) | 10 | 10 | 10 | |||||||||||||||||||||||||||||||||
| Balance at January 1, 2019 | 2,051 | 1,331 | 2,873 | 16,588 | (112 | ) | (6,471 | ) | 16,260 | - | 16,260 | |||||||||||||||||||||||||
| Net income | 2,512 | 2,512 | 2,512 | |||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | 1,304 | 1,304 | 1,304 | |||||||||||||||||||||||||||||||||
| Cash dividends declared: | ||||||||||||||||||||||||||||||||||||
| Common stock (a) | (691 | ) | (691 | ) | (691) | |||||||||||||||||||||||||||||||
| Preferred stock (b) | (93 | ) | (93 | ) | (93) | |||||||||||||||||||||||||||||||
| Shares acquired for treasury | (1,763 | ) | (1,763 | ) | (1,763) | |||||||||||||||||||||||||||||||
| Issuance of preferred stock | 242 | 242 | 242 | |||||||||||||||||||||||||||||||||
| Conversion of outstanding preferred stock issued by a Bancorp subsidiary | 197 | 197 | (197 | ) | - | |||||||||||||||||||||||||||||||
| Impact of MB Financial, Inc. acquisition | 712 | 2,447 | 3,159 | 197 | 3,356 | |||||||||||||||||||||||||||||||
| Impact of stock transactions under stock compensation plans, net | 14 | 2 | 56 | 72 | 72 | |||||||||||||||||||||||||||||||
| Other | (3 | ) | 7 | 4 | 4 | |||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 2,051 | 1,770 | 3,599 | 18,315 | 1,192 | (5,724 | ) | 21,203 | - | 21,203 | |||||||||||||||||||||||||
| (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 $30.00 per preferred share for Perpetual Preferred Stock, Series C, of MB Financial, Inc., previously a subsidiary of the Bancorp. |
|---|
| (c) | Related to the adoption of ASU 2016-02 as of January 1, 2019. Refer to Note 1 for additional information. |
|---|
Refer to the Notes to Consolidated Financial Statements.
110 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the years ended December 31 ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Operating Activities | ||||||||||||
| Net income | $ | 2,512 | 2,193 | 2,180 | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Provision for credit losses | 471 | 207 | 261 | |||||||||
| Depreciation, amortization and accretion | 472 | 360 | 341 | |||||||||
| Stock-based compensation expense | 132 | 127 | 118 | |||||||||
| (Benefit from) provision for deferred income taxes | (246 | ) | 30 | (252) | ||||||||
| Securities (gains) losses, net | (47 | ) | 54 | (3) | ||||||||
| Securities (gains) losses, net-non-qualifying hedges on mortgage servicing rights | (3 | ) | 15 | (2) | ||||||||
| MSR fair value adjustment | 376 | 83 | 122 | |||||||||
| Net gains on sales of loans and fair value adjustments on loans held for sale | (137 | ) | (71 | ) | (108) | |||||||
| Net losses on disposition and impairment of bank premises and equipment | 23 | 43 | - | |||||||||
| Net losses (gains) on disposition and impairment of operating lease equipment | 1 | (6 | ) | 39 | ||||||||
| Gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc. | - | (414 | ) | - | ||||||||
| Gain on sale of Worldpay, Inc. shares | (562 | ) | (205 | ) | (1,037) | |||||||
| Gain on the TRA associated with Worldpay, Inc. | (346 | ) | (20 | ) | (44) | |||||||
| Proceeds from sales of loans held for sale | 8,157 | 5,199 | 6,453 | |||||||||
| Loans originated or purchased for sale, net of repayments | (8,896 | ) | (5,378 | ) | (6,054) | |||||||
| Dividends representing return on equity investments | 66 | 12 | 46 | |||||||||
| Net change in: | ||||||||||||
| Trading debt and equity securities | (29 | ) | 132 | (442) | ||||||||
| Other assets | 20 | 303 | (22) | |||||||||
| Accrued taxes, interest and expenses | (49 | ) | 147 | (138) | ||||||||
| Other liabilities | (91 | ) | 45 | 22 | ||||||||
| Net Cash Provided by Operating Activities | 1,824 | 2,856 | 1,480 | |||||||||
| Investing Activities | ||||||||||||
| Proceeds from sales: | ||||||||||||
| Available-for-sale securities and other investments | 10,596 | 12,430 | 12,637 | |||||||||
| Loans and leases | 259 | 305 | 164 | |||||||||
| Bank premises and equipment | 90 | 57 | 40 | |||||||||
| Proceeds from repayments / maturities: | ||||||||||||
| Available-for-sale securities and other investments | 2,267 | 1,845 | 2,331 | |||||||||
| Held-to-maturity securities | 4 | 6 | 3 | |||||||||
| Purchases: | ||||||||||||
| Available-for-sale securities and other investments | (13,959 | ) | (16,207 | ) | (15,295) | |||||||
| Bank premises and equipment | (243 | ) | (192 | ) | (200) | |||||||
| MSRs | (26 | ) | (82 | ) | (109) | |||||||
| Proceeds from settlement of BOLI | 28 | 16 | 14 | |||||||||
| Proceeds from sales and dividends representing return of equity investments | 1,057 | 604 | 1,363 | |||||||||
| Net cash received (paid) on acquisitions | 1,210 | (43 | ) | (44) | ||||||||
| Net change in: | ||||||||||||
| Federal funds sold | 35 | - | - | |||||||||
| Other short-term investments | (647 | ) | 928 | 1 | ||||||||
| Loans and leases | (1,407 | ) | (3,866 | ) | (446) | |||||||
| Operating lease equipment | (61 | ) | 58 | (31) | ||||||||
| Net Cash (Used in) Provided by Investing Activities | (797 | ) | (4,141 | ) | 428 | |||||||
| Financing Activities | ||||||||||||
| Net change in: | ||||||||||||
| Deposits | 3,742 | 5,673 | (659) | |||||||||
| Federal funds purchased | (1,665 | ) | 1,751 | 42 | ||||||||
| Other short-term borrowings | 171 | (3,439 | ) | 477 | ||||||||
| Dividends paid on common stock | (660 | ) | (467 | ) | (430) | |||||||
| Dividends paid on preferred stock | (93 | ) | (98 | ) | (75) | |||||||
| Proceeds from issuance of long-term debt | 3,866 | 2,438 | 2,490 | |||||||||
| Repayment of long-term debt | (4,212 | ) | (2,884 | ) | (1,969) | |||||||
| Repurchases of treasury stock and related forward contracts | (1,763 | ) | (1,453 | ) | (1,605) | |||||||
| Issuance of preferred stock | 242 | - | - | |||||||||
| Other | (58 | ) | (69 | ) | (57) | |||||||
| Net Cash (Used in) Provided by Financing Activities | (430 | ) | 1,452 | (1,786) | ||||||||
| Increase in Cash and Due from Banks | 597 | 167 | 122 | |||||||||
| Cash and Due from Banks at Beginning of Period | 2,681 | 2,514 | 2,392 | |||||||||
| Cash and Due from Banks at End of Period | $ | 3,278 | 2,681 | 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
- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Nature of Operations
Fifth Third Bancorp, an Ohio corporation, conducts its principal lending, deposit gathering, transaction processing and service advisory activities through its banking and
non-banking
subsidiaries from banking centers located throughout the Midwestern and Southeastern regions of the United States.
Basis of Presentation
The Consolidated Financial Statements include the accounts of the Bancorp and its majority-owned subsidiaries and VIEs in which the Bancorp has been determined to be the primary beneficiary. Other entities, including certain joint ventures, in which the Bancorp has the ability to exercise significant influence over operating and financial policies of the investee, but upon which the Bancorp does not possess control, are accounted for by the equity method of accounting and not consolidated. The investments in those entities in which the Bancorp does not have the ability to exercise significant influence are generally carried at fair value unless the investment does not have a readily determinable fair value. The Bancorp accounts for equity investments without a readily determinable fair value using the measurement alternative to fair value, representing the cost of the 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.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Due from Banks
Cash and due from banks consist of currency and coin, cash items in the process of collection and due from banks. Currency and coin includes both U.S. and foreign currency owned and held at Fifth Third offices and that is
in-transit
to the FRB. Cash items in the process of collection include checks and drafts that are drawn on another depository institution or the FRB that are payable immediately upon presentation in the U.S. Balances due from banks include noninterest-bearing balances that are funds on deposit at other depository institutions or the FRB.
Investment Securities
Debt securities are classified as
held-to-maturity,
available-for-sale
or trading on the date of purchase. Only those securities which management has the intent and ability to hold to maturity are classified as
held-to-maturity
and reported at amortized cost. Debt securities are classified as
available-for-sale
when, in management’s judgment, they may be sold in response to, or in anticipation of, changes in market conditions. Debt securities are classified as trading when bought and held principally for the purpose of selling them in the near term.
Available-for-sale
debt securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in OCI. Trading debt securities are reported at fair value with unrealized gains and losses included in noninterest income.
Available-for-sale
and
held-to-maturity
debt securities with unrealized losses are reviewed quarterly for possible OTTI. If the Bancorp intends to sell the debt security or will more likely than not be required to sell the debt security before recovery of the entire amortized cost basis, then an OTTI has occurred. However, even if the Bancorp does not intend to sell the debt security and will not likely be required to sell the debt security before recovery of its entire amortized cost basis, the Bancorp must evaluate expected cash flows to be received and determine if a credit loss has occurred. In the event of a credit loss, the credit component of the impairment is recognized within noninterest income and the
non-credit
component is recognized through OCI.
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 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).
112 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 been modified in a TDR are classified as nonaccrual unless such loans have sustained repayment performance of six months or more and are reasonably assured of repayment in accordance with the restructured terms. Well-secured loans are collateralized by perfected security interests in real and/or personal property for which the Bancorp estimates proceeds from the sale would be sufficient to recover the outstanding principal and accrued interest balance of the loan and pay all costs to sell the collateral. The Bancorp considers a loan in the process of collection if collection efforts or legal action is proceeding and the Bancorp expects to collect funds sufficient to bring the loan current or recover the entire outstanding principal and accrued interest balance.
Nonaccrual commercial loans and nonaccrual credit card loans are generally accounted for on the cost recovery method. The Bancorp believes the cost recovery method is appropriate for nonaccrual commercial loans and nonaccrual credit card loans because the assessment of collectability of the remaining recorded investment of these loans involves a high degree of subjectivity and uncertainty due to the nature or absence of underlying collateral. Under the cost recovery method, any payments received are applied to reduce principal. Once the entire recorded investment is collected, additional payments received are treated as recoveries of amounts previously
charged-off
until recovered in full, and any subsequent payments are treated as interest income. Nonaccrual residential mortgage loans and other nonaccrual consumer loans are generally accounted for on the cash basis method. The Bancorp believes the cash basis method is appropriate for nonaccrual residential mortgage and other nonaccrual consumer loans because such loans have generally been written down to estimated collateral values and the collectability of the remaining investment involves only an assessment of the fair value of the underlying collateral, which can be measured more objectively with a lesser degree of uncertainty than assessments of typical commercial loan collateral. Under the cash basis method, interest income is recognized when cash is received, to the extent such income would have been accrued on the loan’s remaining balance at the contractual rate. Nonaccrual loans may be returned to accrual status when all delinquent interest and principal payments become current in accordance with the loan agreement and are reasonably assured of repayment in accordance with the contractual terms of the loan agreement, or when the loan is both well-secured and in the process of collection.
Commercial loans on nonaccrual status, including those 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
TDRs include concessions granted under 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 impaired in years after the restructuring 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 for identifying impaired loans and determination of the need for a loss accrual.
Loans and Leases Held for Sale
Loans and leases held for sale primarily represent conforming fixed-rate residential mortgage loans originated or acquired with the intent to sell in the secondary market and jumbo residential mortgage loans, commercial loans, other residential mortgage loans and other consumer loans that management has the intent to sell.
Loans and leases held for sale may be carried at the lower of cost or fair value, or carried at fair value where the Bancorp has elected the fair value option of accounting under U.S. GAAP. The Bancorp has elected to measure certain groups of loans held for sale under the fair value option, including certain residential mortgage loans originated as held for sale and certain purchased commercial loans designated as held for sale at acquisition. For loans in which the Bancorp has not elected the fair value option, the lower of cost or fair value is determined at the individual loan level.
The fair value of residential mortgage loans held for sale for which the fair value election has been made is estimated based upon mortgage-backed securities prices and spreads to those prices or, for certain ARM loans, DCF models that may incorporate the anticipated portfolio composition, credit spreads of asset-backed securities with similar collateral and market conditions. The anticipated portfolio composition includes the effects of interest rate spreads and discount rates due to loan characteristics such as the state in which the loan was originated, the loan amount and the ARM margin. These fair value marks are recorded as a component of noninterest income in mortgage banking net revenue. The Bancorp generally has commitments to sell residential mortgage loans held for sale in the secondary market. Gains or losses on sales are recognized in mortgage banking net revenue.
Management’s intent to sell residential mortgage loans classified as held for sale may change over time due to such factors as changes in the overall liquidity in markets or changes in characteristics specific to certain loans held for sale. Consequently, these loans may be reclassified to loans held for investment and, thereafter, reported within the Bancorp’s residential mortgage class of portfolio loans and leases. In such cases, the residential mortgage loans will continue to be measured at fair value, which is based on mortgage-backed securities prices, interest rate risk and an internally developed credit component.
Loans and leases held for sale are placed on nonaccrual status consistent with the Bancorp’s nonaccrual policy for portfolio loans and leases.
Other Real Estate Owned
OREO, which is included in other assets 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.
114 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Classes within the consumer portfolio segment include home equity, automobile, credit card and other consumer loans. For an analysis of the Bancorp’s ALLL by portfolio segment and credit quality information by class, refer to Note 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 for credit risk management includes a combination of conservative exposure limits significantly below legal lending limits and conservative underwriting, documentation and collections standards. The strategy also 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.
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 to recognize the imprecision in estimating and measuring losses when evaluating allowances for pools of loans and leases.
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 loss rate factors include adjustments for delinquency trends, LTV trends, refreshed FICO score trends and product mix.
The Bancorp also considers qualitative factors in determining the ALLL. These include adjustments for changes in policies or procedures in underwriting, monitoring or collections, economic conditions, portfolio mix, lending and risk management personnel, results of internal audit and quality control reviews, collateral values, 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.
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 liabilities 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.
115 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bancorp’s loan sales and securitizations are generally structured with servicing retained, which often results in the recording of servicing rights. The Bancorp may also purchase servicing rights. 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 loans and are included in noninterest income in the Consolidated Statements of Income as loan payments are received. Costs of servicing loans are charged to expense as incurred.
Reserve for Representation and Warranty Provisions
Conforming residential mortgage loans sold to unrelated third parties are generally sold with representation and warranty provisions. A contractual liability arises only in the event of a breach of these representations and warranties and, in general, only when a loss results from the breach. The Bancorp may be required to repurchase any previously sold loan or indemnify (make whole) the investor or insurer for which the representation or warranty of the Bancorp proves to be inaccurate, incomplete or misleading. The Bancorp establishes a residential mortgage repurchase reserve related to various representations and warranties that reflects management’s estimate of losses based on a combination of factors.
The Bancorp’s estimation process requires management to make subjective and complex judgments about matters that are inherently uncertain, such as future demand expectations, economic factors and the specific characteristics of the loans subject to repurchase. Such factors incorporate historical investor audit and repurchase demand rates, appeals success rates, historical loss severity and any additional information obtained from the GSEs regarding future mortgage repurchase and file request criteria. At the time of a loan sale, the Bancorp records a representation and warranty reserve at the estimated fair value of the Bancorp’s guarantee and continually updates the reserve during the life of the loan as losses in excess of the reserve become probable and reasonably estimable. The provision for the estimated fair value of the representation and warranty guarantee arising from the loan sales is recorded as an adjustment to the gain on sale, which is included in other noninterest income in the Consolidated Statements of Income at the time of sale. Updates to the reserve are recorded in other noninterest expense in the Consolidated Statements of Income.
Legal Contingencies
The Bancorp and its subsidiaries are parties to numerous claims and lawsuits as well as threatened or potential actions or claims concerning matters arising from the conduct of its business activities. The outcome of claims or litigation and the timing of ultimate resolution are inherently difficult to predict and significant judgment may be required in the determination of both the probability of loss and whether the amount of the loss is reasonably estimable.
The Bancorp’s estimates are subjective and are based on the status of legal and regulatory proceedings, the merit of the Bancorp’s defenses and consultation with internal and external legal counsel. An accrual for a potential litigation loss is established when information related to the loss contingency indicates both that a loss is probable and that the amount of loss can be reasonably estimated. This accrual is included in other liabilities in the Consolidated Balance Sheets and is adjusted from time to time as appropriate to reflect changes in circumstances. Legal expenses are recorded in other noninterest expense in the Consolidated Statements of Income.
Bank Premises and Equipment and Other Long-Lived Assets
Bank premises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method based on estimated useful lives of the assets for book purposes, while accelerated depreciation is used for income tax purposes. Amortization of leasehold improvements is computed using the straight-line method over the lives of the related leases or useful lives of the related assets, whichever is shorter. Whenever events or changes in circumstances dictate, the Bancorp tests its long-lived assets for impairment by determining whether the sum of the estimated undiscounted future cash flows attributable to a long-lived asset or asset group is less than the carrying amount of the long-lived asset or asset group through a probability-weighted approach. In the event the carrying amount of the long-lived asset or asset group is not recoverable, an impairment loss is measured as the amount by which the carrying amount of the long-lived asset or asset group exceeds its fair value. Maintenance, repairs and minor improvements are charged to noninterest expense in the Consolidated Statements of Income as incurred.
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 amortization of the ROU asset is adjusted prospectively from the date of remeasurement.
116 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 Bancorp designates 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.
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 judgment about relevant factors affecting 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.
Income 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 the relevant 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, interest income and penalties related to unrecognized tax benefits within current income tax expense. Refer to Note 22 for further discussion regarding income taxes.
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 the
two-step
impairment 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.
The fair value of a reporting unit is the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. As none of the Bancorp’s reporting units are publicly traded, individual reporting unit fair value determinations cannot be directly correlated to the Bancorp’s stock price.
To determine the fair value of a reporting unit, the Bancorp employs an income-based approach, utilizing the reporting unit’s forecasted cash flows (including a terminal value approach to estimate cash flows beyond the final year of the forecast) and the reporting unit’s estimated cost of equity as the discount rate. Additionally, the Bancorp determines its market capitalization based on the average of the closing price of the Bancorp’s stock during the month including the measurement date, incorporating an additional control premium, and compares this market-based fair value measurement to the aggregate fair value of the Bancorp’s reporting units in order to corroborate the results of the income approach.
When required to perform Step 2, the Bancorp compares the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount exceeds the implied fair value, an impairment loss equal to that excess amount is recognized. A recognized impairment loss cannot exceed the carrying amount of that goodwill and cannot be reversed in future periods even if the fair value of the reporting unit subsequently recovers.
During Step 2, the Bancorp determines the implied fair value of goodwill for a reporting unit by assigning the fair value of the reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. This assignment process is only performed for purposes of testing goodwill for impairment. The Bancorp does not adjust the carrying values of recognized assets or liabilities (other than goodwill, if appropriate), nor does it recognize previously unrecognized intangible assets in the Consolidated Financial Statements as a result of this assignment process. Refer to Note 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 asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
118 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Level 3
– Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Bancorp’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best 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 trades and overall review and assessments 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.
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:
| ● | Service charges on deposits consist primarily of treasury management fees for commercial clients, monthly service charges on consumer deposit accounts, transaction-based fees (such as overdraft fees and wire transfer fees), and other deposit account-related charges. The Bancorp’s performance obligations for treasury management fees and consumer deposit account service charges are typically satisfied over time while performance obligations for transaction-based fees are typically satisfied at a point in time. Revenues are recognized on an accrual basis when or as the services are provided to the customer, net of applicable discounts, waivers and reversals. Payments are typically collected from customers directly from the related deposit account at the time the transaction is processed and/or at the end of the customer’s statement cycle (typically monthly). |
|---|
| ● | Wealth and asset management revenue consists primarily of service fees for investment management, custody, and trust administration services provided to commercial and consumer clients. The Bancorp’s performance obligations for these services are generally satisfied over time and revenues are recognized monthly based on the fee structure outlined in individual contracts. Transaction prices are most commonly based on the market value of assets under management or care and/or a fee per transaction processed. The Bancorp offers certain services, like tax return preparation, 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. |
|---|
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 loans and leases. Underwriting revenue is generally recognized on the trade date, which is when the Bancorp’s performance obligations are satisfied. |
|---|
| ● | 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 income includes income from operating leases, certain fees derived from loans and leases, BOLI income, gains and losses on other assets, and other miscellaneous revenues and gains. |
|---|
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.
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:
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, issued in December 2018) and
2019-01
(Codification Improvements, issued in March 2019). These 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.
120 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASU
2017-08
– Receivables—Nonrefundable Fees and Other Costs (Subtopic
310-20):
Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued ASU
2017-08
which shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The Bancorp adopted the amended guidance on January 1, 2019 on a modified retrospective basis. The adoption did not have a material impact on the Consolidated Financial Statements.
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.
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 requirements for 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.
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 incurred by customers 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) | 2019 | 2018 | 2017 | |||||||||
| Cash Payments: | ||||||||||||
| Interest | $ | 1,441 | 1,016 | 699 | ||||||||
| Income taxes | 726 | 359 | 1,035 | |||||||||
| Transfers: | ||||||||||||
| Portfolio loans to loans held for sale | 211 | 275 | 255 | |||||||||
| Loans held for sale to portfolio loans | 37 | 95 | 29 | |||||||||
| Portfolio loans to OREO | 29 | 39 | 34 | |||||||||
| Supplemental Disclosures: | ||||||||||||
| Conversion of outstanding preferred stock issued by a Bancorp subsidiary | 197 | - | - | |||||||||
| Additions to right-of-use assets under operating leases | 76 | - | - | |||||||||
| Additions to right-of-use assets under finance leases | 24 | - | - | |||||||||
| Right-of-use assets recognized at adoption of ASU 2016-02 | 509 | - | - | |||||||||
| 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 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 $1,000 liquidation preference. These shares were issued to the holders of MB Financial, Inc.’s 6.00%
non-cumulative
Series C perpetual preferred stock in conjunction with the merger of MB Financial, Inc. with and into Fifth Third Bancorp. This transaction resulted in the elimination of the noncontrolling interest in MB Financial, Inc. which was previously reported in the Bancorp’s Consolidated Financial Statements. The newly issued shares of Class B preferred stock, Series A were recognized by the Bancorp at the carrying value previously assigned to the MB Financial, Inc. Series C preferred stock prior to the transaction.
The acquisition of MB Financial, Inc. constituted a business combination and was accounted for under the acquisition method of accounting. Accordingly, the assets acquired, liabilities assumed and noncontrolling interest recognized were recorded at their estimated fair values as of the acquisition date. These fair value estimates are considered preliminary as of December 31, 2019. Fair value estimates, including loans and leases, intangible assets, bank premises and equipment, certain
tax-related
matters and goodwill, are subject to change for up to one year after the acquisition date as additional information becomes available.
122 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects consideration paid and the noncontrolling interest recognized for MB Financial, Inc.’s net assets and the amounts of acquired identifiable assets and liabilities assumed at their estimated fair value as of the acquisition date:
| ($ in millions) | ||||||||||||
| Consideration paid | ||||||||||||
| Cash payments | $ | 469 | ||||||||||
| Fair value of common stock issued | 3,121 | |||||||||||
| Stock-based awards | 38 | |||||||||||
| Dividend receivable from MB Financial, Inc. | (20) | |||||||||||
| Total consideration paid | $ | 3,608 | ||||||||||
| Fair value of noncontrolling interest in acquiree | $ | 197 | ||||||||||
| Net Identifiable Assets Acquired, at Fair Value: | ||||||||||||
| Assets | ||||||||||||
| Cash and due from banks | $ | 1,679 | ||||||||||
| Federal funds sold | 35 | |||||||||||
| Other short-term investments | 53 | |||||||||||
| Available-for-sale debt and other securities | 832 | |||||||||||
| Held-to-maturity securities | 4 | |||||||||||
| Equity securities | 51 | |||||||||||
| Loans and leases held for sale | 12 | |||||||||||
| Portfolio loans and leases (a) | 13,411 | |||||||||||
| Bank premises and equipment (a) | 266 | |||||||||||
| Operating lease equipment (a) | 394 | |||||||||||
| Intangible assets (a) | 220 | |||||||||||
| Servicing rights | 263 | |||||||||||
| Other assets (a) | 750 | |||||||||||
| Total assets acquired | $ | 17,970 | ||||||||||
| Liabilities | ||||||||||||
| Deposits | $ | 14,489 | ||||||||||
| Other short-term borrowings (a) | 267 | |||||||||||
| Accrued taxes, interest and expenses (a) | 265 | |||||||||||
| Other liabilities (a) | 194 | |||||||||||
| Long-term debt (a) | 727 | |||||||||||
| Total liabilities assumed | $ | 15,942 | ||||||||||
| Net identifiable assets acquired | 2,028 | |||||||||||
| Goodwill | $ | 1,777 |
(a) Fair values have been updated from the estimates reported in the March 31, 2019 quarterly report on Form
10-Q.
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.
123 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 assets. Residual values were estimated based on analysis of the seller’s historical trends of residual value realization by asset class.
Intangible assets
The core deposit intangible asset represents 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 $31 million for the years ended December 31, 2019 and 2018, respectively.
The following table provides a summary of merger-related expenses recorded in noninterest expense:
| For the years ended December 31, | ||||||||
| ($ in millions) | 2019 | 2018 | ||||||
| Salaries, wages and incentives | $ | 87 | 1 | |||||
| Employee benefits | 3 | - | ||||||
| Technology and communications | 71 | 6 | ||||||
| Net occupancy expense | 13 | - | ||||||
| Card and processing expense | 1 | 1 | ||||||
| Equipment expense | 1 | - | ||||||
| Other noninterest expense | 46 | 23 | ||||||
| Total | $ | 222 | 31 |
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 information combines 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.
| Unaudited Pro Forma Information | ||||||||
| For the years ended December 31, | ||||||||
| ($ in millions) | 2019 | 2018 | ||||||
| Net interest income | $ | 4,911 | 4,836 | |||||
| Noninterest income | 3,638 | 3,184 | ||||||
| Net income available to common shareholders | 2,529 | 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).
124 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This method of accounting for loans 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) | March 22, 2019 | |||
| Contractually required payments including interest | $ | 1,139 | ||
| Less: Nonaccretable difference | 81 | |||
| Cash flows expected to be collected | 1,058 | |||
| Less: Accretable yield | 202 | |||
| Fair value of loans acquired | $ | 856 | ||
| A summary of activity related to accretable yield is as follows: | ||||
| ($ in millions) | Accretable Yield | |||
| Balance as of December 31, 2018 | $ | - | ||
| Additions | 202 | |||
| Accretion | (41) | |||
| Reclassifications (to) from nonaccretable difference | (14) | |||
| Balance as of December 31, 2019 | $ | 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.
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.
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.
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 $0.24 per share.
125 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
- INVESTMENT SECURITIES
The following table provides the amortized cost, fair value and unrealized gains and losses for the major categories of the
available-for-sale
debt and other securities and
held-to-maturity
securities portfolios as of December 31:
| 2019 | 2018 | |||||||||||||||||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||||||||||
| ($ in millions) | Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | ||||||||||||||||||||||||
| Available-for-sale debt and other securities: | ||||||||||||||||||||||||||||||||
| U.S. Treasury and federal agencies securities | $ | 74 | 1 | - | 75 | 98 | - | (1) | 97 | |||||||||||||||||||||||
| Obligations of states and political subdivisions securities | 18 | - | - | 18 | 2 | - | - | 2 | ||||||||||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||||||||||
| Agency residential mortgage-backed securities | 13,746 | 388 | (19) | 14,115 | 16,403 | 86 | (242) | 16,247 | ||||||||||||||||||||||||
| Agency commercial mortgage-backed securities | 15,141 | 564 | (12) | 15,693 | 10,770 | 44 | (164) | 10,650 | ||||||||||||||||||||||||
| Non-agency commercial mortgage-backed securities | 3,242 | 123 | - | 3,365 | 3,305 | 9 | (47) | 3,267 | ||||||||||||||||||||||||
| Asset-backed securities and other debt securities | 2,189 | 29 | (12) | 2,206 | 1,998 | 27 | (10) | 2,015 | ||||||||||||||||||||||||
| Other securities (a) | 556 | - | - | 556 | 552 | - | - | 552 | ||||||||||||||||||||||||
| Total available-for-sale debt and other securities | $ | 34,966 | 1,105 | (43) | 36,028 | 33,128 | 166 | (464) | 32,830 | |||||||||||||||||||||||
| Held-to-maturity securities: | ||||||||||||||||||||||||||||||||
| Obligations of states and political subdivisions securities | $ | 15 | - | - | 15 | 16 | - | - | 16 | |||||||||||||||||||||||
| Asset-backed securities and other debt securities | 2 | - | - | 2 | 2 | - | - | 2 | ||||||||||||||||||||||||
| Total held-to-maturity securities | $ | 17 | - | - | 17 | 18 | - | - | 18 |
| (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 $2, respectively, at December 31, 2018, that are carried at cost. |
|---|
The following table provides the fair value of trading debt securities and equity securities as of December 31:
| ($ in millions) | 2019 | 2018 | ||||||
| Trading debt securities | $ 297 | 287 | ||||||
| Equity securities | 564 | 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) | 2019 | 2018 | 2017 | |||||||||
| Available-for-sale debt and other securities: | ||||||||||||
| Realized gains | $ | 60 | 72 | 85 | ||||||||
| Realized losses | (50 | ) | (82 | ) | (36) | |||||||
| OTTI | (1 | ) | - | (54) | ||||||||
| Net realized gains (losses) on available-for-sale debt and other securities | $ | 9 | (10 | ) | (5) | |||||||
| Total trading debt securities gains (losses) | $ | 3 | (15 | ) | 2 | |||||||
| Total equity securities gains (losses) (a) | $ | 31 | (44 | ) | 7 | |||||||
| Total gains (losses) recognized in income from available-for-sale debt and other securities, trading debt securities and equity securities (b) | $ | 43 | (69 | ) | 4 |
| (a) | 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. |
|---|
| (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. |
|---|
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 $7.0 billion,
respectively, were pledged to secure borrowings,
public deposits, trust funds, derivative contracts and for other purposes as required or permitted by law.
The expected maturity distribution of the Bancorp’s mortgage-backed securities and the contractual maturity distribution of the remainder of the Bancorp’s
available-for-sale
debt and other securities and
held-to-maturity
investment securities as of December 31, 2019 are shown in the following table:
| Available-for-Sale Debt and Other | Held-to-Maturity | |||||||||||||||||
| ($ in millions) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||
| Debt securities: (a) | ||||||||||||||||||
| Less than 1 year | $ | 195 | 200 | 5 | 5 | |||||||||||||
| 1-5 years | 10,983 | 11,288 | 10 | 10 | ||||||||||||||
| 5-10 years | 17,566 | 18,173 | - | - | ||||||||||||||
| Over 10 years | 5,666 | 5,811 | 2 | 2 | ||||||||||||||
| Other securities | 556 | 556 | - | - | ||||||||||||||
| Total | $ | 34,966 | 36,028 | 17 | 17 | |||||||||||||
| (a) | Actual maturities may differ from contractual maturities when a right to call or prepay obligations exists with or without call or prepayment penalties. |
|---|
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:
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
| ($ in millions) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
| 2019 | ||||||||||||||||||||||||
| Agency residential mortgage-backed securities | $ | 2,159 | (19) | 4 | - | 2,163 | (19) | |||||||||||||||||
| Agency commercial mortgage-backed securities | 1,602 | (12) | - | - | 1,602 | (12) | ||||||||||||||||||
| Asset-backed securities and other debt securities | 367 | (3) | 379 | (9) | 746 | (12) | ||||||||||||||||||
| Total | $ | 4,128 | (34) | 383 | (9) | 4,511 | (43) | |||||||||||||||||
| 2018 | ||||||||||||||||||||||||
| U.S. Treasury and federal agencies securities | $ | - | - | 97 | (1) | 97 | (1) | |||||||||||||||||
| Agency residential mortgage-backed securities | 3,235 | (21) | 7,892 | (221) | 11,127 | (242) | ||||||||||||||||||
| Agency commercial mortgage-backed securities | 2,022 | (37) | 5,260 | (127) | 7,282 | (164) | ||||||||||||||||||
| Non-agency commercial mortgage-backed securities | 884 | (6) | 1,621 | (41) | 2,505 | (47) | ||||||||||||||||||
| Asset-backed securities and other debt securities | 314 | (6) | 241 | (4) | 555 | (10) | ||||||||||||||||||
| Total | $ | 6,455 | (70) | 15,111 | (394) | 21,566 | (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
- 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 lending to various industry types. Management periodically reviews the performance of its loan and lease products to evaluate whether they are performing within acceptable interest rate and credit risk levels and changes are made to underwriting policies and procedures as needed.
The Bancorp 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) | 2019 | 2018 | ||||||
| Loans and leases held for sale: | ||||||||
| Commercial and industrial loans | $ | 135 | 67 | |||||
| Commercial mortgage loans | 1 | 3 | ||||||
| Residential mortgage loans | 1,264 | 537 | ||||||
| Total loans and leases held for sale | $ | 1,400 | 607 | |||||
| Portfolio loans and leases: | ||||||||
| Commercial and industrial loans | $ | 50,542 | 44,340 | |||||
| Commercial mortgage loans | 10,963 | 6,974 | ||||||
| Commercial construction loans | 5,090 | 4,657 | ||||||
| Commercial leases | 3,363 | 3,600 | ||||||
| Total commercial loans and leases | 69,958 | 59,571 | ||||||
| Residential mortgage loans | 16,724 | 15,504 | ||||||
| Home equity | 6,083 | 6,402 | ||||||
| Indirect secured consumer loans | 11,538 | 8,976 | ||||||
| Credit card | 2,532 | 2,470 | ||||||
| Other consumer loans | 2,723 | 2,342 | ||||||
| Total consumer loans | 39,600 | 35,694 | ||||||
| Total portfolio loans and leases | $ | 109,558 | 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 $42.6 billion at December 31, 2019 and 2018, respectively, pledged at the FRB.
The following table presents a summary of the total loans and leases owned by the Bancorp and net charge-offs (recoveries) as of and for the years ended December 31:
| 90 Days Past Due | Net | |||||||||||||||||||||||||
| Carrying Value | and Still Accruing | Charge-Offs (Recoveries) | ||||||||||||||||||||||||
| ($ in millions) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||
| Commercial and industrial loans | $ | 50,677 | 44,407 | 11 | 4 | 103 | 132 | |||||||||||||||||||
| Commercial mortgage loans | 10,964 | 6,977 | 15 | 2 | (2) | (1) | ||||||||||||||||||||
| Commercial construction loans | 5,090 | 4,657 | - | - | - | - | ||||||||||||||||||||
| Commercial leases | 3,363 | 3,600 | - | - | 7 | 1 | ||||||||||||||||||||
| Residential mortgage loans | 17,988 | 16,041 | 50 | 38 | 4 | 7 | ||||||||||||||||||||
| Home equity | 6,083 | 6,402 | 1 | - | 18 | 12 | ||||||||||||||||||||
| Indirect secured consumer loans | 11,538 | 8,976 | 10 | 12 | 50 | 40 | ||||||||||||||||||||
| Credit card | 2,532 | 2,470 | 42 | 37 | 134 | 101 | ||||||||||||||||||||
| Other consumer loans | 2,723 | 2,342 | 1 | - | 55 | 38 | ||||||||||||||||||||
| Total loans and leases | $ | 110,958 | 95,872 | 130 | 93 | 369 | 330 | |||||||||||||||||||
| Less: Loans and leases held for sale | $ | 1,400 | 607 | |||||||||||||||||||||||
| Total portfolio loans and leases | $ | 109,558 | 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 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.
128 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the components of the net investment in leases as of:
| ($ in millions) | December 31, 2019 (a) | |||
| Net investment in direct financing leases: | ||||
| Lease payment receivable (present value) | $ | 2,196 | ||
| Unguaranteed residual assets (present value) | 220 | |||
| Net discount on acquired leases | (7) | |||
| Deferred selling profits | - | |||
| Net investment in sales-type leases: | ||||
| Lease payment receivable (present value) | 510 | |||
| Unguaranteed residual assets (present value) | 15 | |||
| 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) | December 31, 2018 | |||
| Rentals receivable, net of principal and interest on nonrecourse debt | $ | 3,256 | ||
| Estimated residual value of leased assets | 804 | |||
| Initial direct cost, net of amortization | 19 | |||
| Gross investment in commercial lease financing | 4,079 | |||
| Unearned income | (479) | |||
| Net investment in commercial lease financing | $ | 3,600 | ||
Interest income recognized in the Consolidated Statements of Income for the year ended December 31, 2019 was $88 million for direct financing leases and $13 million for sales-type leases.
The following table presents undiscounted cash flows for both direct financing and sales-type leases for 2020 through 2024 and thereafter as well as a reconciliation of the undiscounted cash flows to the total lease receivables as follows:
| As of December 31, 2019 ($ in millions) | Direct Financing Leases | Sales-Type Leases | ||||
| 2020 | $ 679 | 121 | ||||
| 2021 | 523 | 133 | ||||
| 2022 | 428 | 112 | ||||
| 2023 | 257 | 70 | ||||
| 2024 | 184 | 63 | ||||
| Thereafter | 273 | 75 | ||||
| Total undiscounted cash flows | $ 2,344 | 574 | ||||
| Less: Difference between undiscounted cash flows and discounted cash flows | 148 | 64 | ||||
| Present value of lease payments (recognized as lease receivables) | $ 2,196 | 510 | ||||
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 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 $18 million to cover the losses related to the minimum lease payments. Any declines in residual value that were deemed to be other-than-temporary were recognized as a loss and included as a component of corporate banking revenue in the Consolidated Statements of Income.
129 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CREDIT QUALITY AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES
The Bancorp disaggregates ALLL balances and transactions in the ALLL by portfolio segment. Credit quality related disclosures for loans and leases are further disaggregated by class.
Allowance for Loan and Lease Losses
The following tables summarize transactions in the ALLL by portfolio segment for the years ended December 31:
| Residential | ||||||||||||||
| 2019 ($ in millions) | Commercial | Mortgage | Consumer | Unallocated | Total | |||||||||
| Balance, beginning of period | $ | 645 | 81 | 267 | 110 | 1,103 | ||||||||
| Losses charged-off (a) | (127) | (9) | (374) | - | (510) | |||||||||
| Recoveries of losses previously charged-off (a) | 19 | 5 | 117 | - | 141 | |||||||||
| Provision for (benefit from) loan and lease losses | 173 | (4) | 288 | 11 | 468 | |||||||||
| Balance, end of period | $ | 710 | 73 | 298 | 121 | 1,202 | ||||||||
(a) For the year ended
December 31, 2019
, the Bancorp recorded
$48
in both losses
charged-off
and recoveries of losses
charged-off
related to customer defaults on
point-of-sale
consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.
| Residential | ||||||||||||||
| 2018 ($ in millions) | Commercial | Mortgage | Consumer | Unallocated | Total | |||||||||
| Balance, beginning of period | $ | 753 | 89 | 234 | 120 | 1,196 | ||||||||
| Losses charged-off (a) | (157) | (13) | (280) | - | (450) | |||||||||
| Recoveries of losses previously charged-off (a) | 25 | 6 | 89 | - | 120 | |||||||||
| Provision for (benefit from) loan and lease losses | 24 | (1) | 224 | (10) | 237 | |||||||||
| Balance, end of period | $ | 645 | 81 | 267 | 110 | 1,103 | ||||||||
(a) For the year ended December 31, 2018, the Bancorp recorded $29 in both losses
charged-off
and recoveries of losses
charged-off
related to customer defaults on
point-of-sale
consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.
| Residential | ||||||||||||||
| 2017 ($ in millions) | Commercial | Mortgage | Consumer | Unallocated | Total | |||||||||
| Balance, beginning of period | $ | 831 | 96 | 214 | 112 | 1,253 | ||||||||
| Losses charged-off | (154) | (15) | (212) | - | (381) | |||||||||
| Recoveries of losses previously charged-off | 29 | 8 | 46 | - | 83 | |||||||||
| Provision for loan and lease losses | 66 | - | 186 | 9 | 261 | |||||||||
| Deconsolidation of a VIE | (19) | - | - | (1) | (20) | |||||||||
| Balance, end of period | $ | 753 | 89 | 234 | 120 | 1,196 | ||||||||
The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment:
| Residential | ||||||||||||||
| As of December 31, 2019 ($ in millions) | Commercial | Mortgage | Consumer | Unallocated | Total | |||||||||
| ALLL: (a) | ||||||||||||||
| Individually evaluated for impairment | $ | 82 | 55 | 33 | - | 170 | ||||||||
| Collectively evaluated for impairment | 628 | 18 | 265 | - | 911 | |||||||||
| Unallocated | - | - | - | 121 | 121 | |||||||||
| Total ALLL | $ | 710 | 73 | 298 | 121 | 1,202 | ||||||||
| Portfolio loans and leases: (b) | ||||||||||||||
| Individually evaluated for impairment | $ | 413 | 814 | 302 | - | 1,529 | ||||||||
| Collectively evaluated for impairment | 69,047 | 15,690 | 22,558 | - | 107,295 | |||||||||
| Purchased credit impaired | 498 | 37 | 16 | - | 551 | |||||||||
| Total portfolio loans and leases | $ | 69,958 | 16,541 | 22,876 | - | 109,375 | ||||||||
| (a) | Includes $1 related to leveraged leases at December 31, 2019 . |
|---|
| (b) | Excludes $183 of residential mortgage loans measured at fair value and includes $429 of leveraged leases, net of unearned income, at December 31, 2019 . |
|---|
130 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Residential | ||||||||||||||||||||
| As of December 31, 2018 ($ in millions) | Commercial | Mortgage | Consumer | Unallocated | Total | |||||||||||||||
| ALLL: (a) | ||||||||||||||||||||
| Individually evaluated for impairment | $ | 42 | 61 | 38 | - | 141 | ||||||||||||||
| Collectively evaluated for impairment | 603 | 20 | 229 | - | 852 | |||||||||||||||
| Unallocated | - | - | - | 110 | 110 | |||||||||||||||
| Total ALLL | $ | 645 | 81 | 267 | 110 | 1,103 | ||||||||||||||
| Portfolio loans and leases: (b) | ||||||||||||||||||||
| Individually evaluated for impairment | $ | 277 | 736 | 278 | - | 1,291 | ||||||||||||||
| Collectively evaluated for impairment | 59,294 | 14,589 | 19,912 | - | 93,795 | |||||||||||||||
| Total portfolio loans and leases | $ | 59,571 | 15,325 | 20,190 | - | 95,086 | ||||||||||||||
| (a) | Includes $1 related to leveraged leases at December 31, 2018. |
|---|
| (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. |
|---|
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:
| Special | ||||||||||||||||||||
| As of December 31, 2019 ($ in millions) | Pass | Mention | Substandard | Doubtful | Total | |||||||||||||||
| Commercial and industrial loans | $ | 47,671 | 1,423 | 1,406 | 42 | 50,542 | ||||||||||||||
| Commercial mortgage owner-occupied loans | 4,421 | 162 | 293 | 4 | 4,880 | |||||||||||||||
| Commercial mortgage nonowner-occupied loans | 5,866 | 135 | 82 | - | 6,083 | |||||||||||||||
| Commercial construction loans | 4,963 | 52 | 75 | - | 5,090 | |||||||||||||||
| Commercial leases | 3,222 | 53 | 88 | - | 3,363 | |||||||||||||||
| Total commercial loans and leases | $ | 66,143 | 1,825 | 1,944 | 46 | 69,958 | ||||||||||||||
| Special | ||||||||||||||||||||
| As of December 31, 2018 ($ in millions) | Pass | Mention | Substandard | Doubtful | Total | |||||||||||||||
| Commercial and industrial loans | $ | 42,695 | 779 | 853 | 13 | 44,340 | ||||||||||||||
| Commercial mortgage owner-occupied loans | 3,122 | 23 | 139 | - | 3,284 | |||||||||||||||
| Commercial mortgage nonowner-occupied loans | 3,632 | 27 | 31 | - | 3,690 | |||||||||||||||
| Commercial construction loans | 4,657 | - | - | - | 4,657 | |||||||||||||||
| Commercial leases | 3,475 | 72 | 53 | - | 3,600 | |||||||||||||||
| Total commercial loans and leases | $ | 57,581 | 901 | 1,076 | 13 | 59,571 | ||||||||||||||
131 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Residential Mortgage and Consumer Portfolio Segments
For purposes of monitoring the credit quality and risk 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:
| 2019 | 2018 | |||||||||||||||||||
| ($ in millions) | Performing | Nonperforming | Performing | Nonperforming | ||||||||||||||||
| Residential mortgage loans (a) | $ | 16,450 | 91 | 15,303 | 22 | |||||||||||||||
| Home equity | 5,989 | 94 | 6,332 | 70 | ||||||||||||||||
| Indirect secured consumer loans | 11,531 | 7 | 8,975 | 1 | ||||||||||||||||
| Credit card | 2,505 | 27 | 2,444 | 26 | ||||||||||||||||
| Other consumer loans | 2,721 | 2 | 2,341 | 1 | ||||||||||||||||
| Total residential mortgage and consumer loans (a) | $ | 39,196 | 221 | 35,395 | 120 |
| (a) | Excludes $183 and $179 of residential mortgage loans measured at fair value at December 31, 2019 and 2018, respectively. |
|---|
Age Analysis of Past Due Loans and Leases
The following tables summarize the Bancorp’s recorded investment in portfolio loans and leases, by age and class:
| Current | Past Due | 90 Days Past | ||||||||||||||||||||||
| Loans and | 30-89 | 90 Days | Total | Total Loans | Due and Still | |||||||||||||||||||
| As of December 31, 2019 ($ in millions) | Leases (b)(c) | Days (c) | or More (c) | Past Due | and Leases | Accruing | ||||||||||||||||||
| Commercial loans and leases: | ||||||||||||||||||||||||
| Commercial and industrial loans | $ | 50,305 | 133 | 104 | 237 | 50,542 | 11 | |||||||||||||||||
| Commercial mortgage owner-occupied loans | 4,853 | 4 | 23 | 27 | 4,880 | 9 | ||||||||||||||||||
| Commercial mortgage nonowner-occupied loans | 6,072 | 5 | 6 | 11 | 6,083 | 6 | ||||||||||||||||||
| Commercial construction loans | 5,089 | 1 | - | 1 | 5,090 | - | ||||||||||||||||||
| Commercial leases | 3,338 | 11 | 14 | 25 | 3,363 | - | ||||||||||||||||||
| Residential mortgage loans (a) | 16,372 | 27 | 142 | 169 | 16,541 | 50 | ||||||||||||||||||
| Consumer loans: | ||||||||||||||||||||||||
| Home equity | 5,965 | 61 | 57 | 118 | 6,083 | 1 | ||||||||||||||||||
| Indirect secured consumer loans | 11,389 | 132 | 17 | 149 | 11,538 | 10 | ||||||||||||||||||
| Credit card | 2,434 | 50 | 48 | 98 | 2,532 | 42 | ||||||||||||||||||
| Other consumer loans | 2,702 | 18 | 3 | 21 | 2,723 | 1 | ||||||||||||||||||
| Total portfolio loans and leases (a) | $ | 108,519 | 442 | 414 | 856 | 109,375 | 130 |
| (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 $4 of losses during the year ended December 31, 2019 due to claim denials and curtailments associated with these insured or guaranteed loans. |
|---|
| (c) | Includes accrual and nonaccrual loans and leases. |
|---|
132 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Current | Past Due | 90 Days Past | ||||||||||||||||||||||
| Loans and | 30-89 | 90 Days | Total | Total Loans | Due and Still | |||||||||||||||||||
| As of December 31, 2018 ($ in millions) | Leases (b)(c) | Days (c) | or More (c) | Past Due | and Leases | Accruing | ||||||||||||||||||
| Commercial loans and leases: | ||||||||||||||||||||||||
| Commercial and industrial loans | $ | 44,213 | 32 | 95 | 127 | 44,340 | 4 | |||||||||||||||||
| Commercial mortgage owner-occupied loans | 3,277 | 1 | 6 | 7 | 3,284 | 2 | ||||||||||||||||||
| Commercial mortgage nonowner-occupied loans | 3,688 | 1 | 1 | 2 | 3,690 | - | ||||||||||||||||||
| Commercial construction loans | 4,657 | - | - | - | 4,657 | - | ||||||||||||||||||
| Commercial leases | 3,597 | 1 | 2 | 3 | 3,600 | - | ||||||||||||||||||
| Residential mortgage loans (a) | 15,227 | 37 | 61 | 98 | 15,325 | 38 | ||||||||||||||||||
| Consumer loans: | ||||||||||||||||||||||||
| Home equity | 6,280 | 71 | 51 | 122 | 6,402 | - | ||||||||||||||||||
| Indirect secured consumer loans | 8,844 | 119 | 13 | 132 | 8,976 | 12 | ||||||||||||||||||
| Credit card | 2,381 | 47 | 42 | 89 | 2,470 | 37 | ||||||||||||||||||
| Other consumer loans | 2,323 | 17 | 2 | 19 | 2,342 | - | ||||||||||||||||||
| Total portfolio loans and leases (a) | $ | 94,487 | 326 | 273 | 599 | 95,086 | 93 |
| (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. |
|---|
| (c) | Includes accrual and nonaccrual loans and leases. |
|---|
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) | Unpaid Principal Balance | Recorded Investment | ALLL | |||||||||||||||||
| With a related ALLL: | ||||||||||||||||||||
| Commercial loans and leases: | ||||||||||||||||||||
| Commercial and industrial loans | $ | 277 | 215 | 76 | ||||||||||||||||
| Commercial mortgage owner-occupied loans | 4 | 4 | - | |||||||||||||||||
| Commercial mortgage nonowner-occupied loans | 1 | - | - | |||||||||||||||||
| Commercial leases | 26 | 26 | 6 | |||||||||||||||||
| Restructured residential mortgage loans | 431 | 429 | 55 | |||||||||||||||||
| Restructured consumer loans: | ||||||||||||||||||||
| Home equity | 127 | 127 | 20 | |||||||||||||||||
| Indirect secured consumer loans | 4 | 4 | - | |||||||||||||||||
| Credit card | 47 | 44 | 13 | |||||||||||||||||
| Total impaired portfolio loans and leases with a related ALLL | $ | 917 | 849 | 170 | ||||||||||||||||
| With no related ALLL: | ||||||||||||||||||||
| Commercial loans and leases: | ||||||||||||||||||||
| Commercial and industrial loans | $ | 156 | 142 | - | ||||||||||||||||
| Commercial mortgage owner-occupied loans | 21 | 21 | - | |||||||||||||||||
| Commercial mortgage nonowner-occupied loans | 3 | 3 | - | |||||||||||||||||
| Commercial leases | 2 | 2 | - | |||||||||||||||||
| Restructured residential mortgage loans | 401 | 385 | - | |||||||||||||||||
| Restructured consumer loans: | ||||||||||||||||||||
| Home equity | 125 | 119 | - | |||||||||||||||||
| Indirect secured consumer loans | 10 | 8 | - | |||||||||||||||||
| Total impaired portfolio loans and leases with no related ALLL | $ | 718 | 680 | - | ||||||||||||||||
| Total impaired portfolio loans and leases | $ | 1,635 | 1,529 | (a) | 170 |
| (a) | Includes $23 , $735 and $230 , respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $231 , $79 and $72 , respectively, of commercial, residential mortgage and consumer portfolio TDRs on nonaccrual status at December 31, 2019 . |
|---|
133 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2018 ($ in millions) | Unpaid Principal Balance | Recorded Investment | ALLL | |||||||||
| With a related ALLL: | ||||||||||||
| Commercial loans and leases: | ||||||||||||
| Commercial and industrial loans | $ | 156 | 107 | 34 | ||||||||
| Commercial mortgage owner-occupied loans | 2 | 2 | 1 | |||||||||
| Commercial mortgage nonowner-occupied loans | 2 | 1 | - | |||||||||
| Commercial leases | 23 | 22 | 7 | |||||||||
| Restructured residential mortgage loans | 465 | 462 | 61 | |||||||||
| Restructured consumer loans: | ||||||||||||
| Home equity | 146 | 145 | 22 | |||||||||
| Indirect secured consumer loans | 5 | 4 | 1 | |||||||||
| Credit card | 47 | 44 | 15 | |||||||||
| Total impaired portfolio loans and leases with a related ALLL | $ | 846 | 787 | 141 | ||||||||
| With no related ALLL: | ||||||||||||
| Commercial loans and leases: | ||||||||||||
| Commercial and industrial loans | $ | 137 | 125 | - | ||||||||
| Commercial mortgage owner-occupied loans | 9 | 9 | - | |||||||||
| Commercial mortgage nonowner-occupied loans | 11 | 11 | - | |||||||||
| Restructured residential mortgage loans | 292 | 274 | - | |||||||||
| Restructured consumer loans: | ||||||||||||
| Home equity | 85 | 83 | - | |||||||||
| Indirect secured consumer loans | 2 | 2 | - | |||||||||
| Total impaired portfolio loans and leases with no related ALLL | $ | 536 | 504 | - | ||||||||
| Total impaired portfolio loans and leases | $ | 1,382 | 1,291 | (a) | 141 | |||||||
| (a) | Includes $60, $724 and $237, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $147, $12 and $41, respectively, of commercial, residential mortgage and consumer portfolio TDRs on nonaccrual status at December 31, 2018. |
|---|
The following table summarizes the Bancorp’s average impaired portfolio loans and leases, by class, and interest income, by class, for the years ended December 31:
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| ($ in millions) | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||||
| Commercial loans and leases: | ||||||||||||||||||||||||
| Commercial and industrial loans | $ | 306 | 7 | 373 | 15 | 579 | 10 | |||||||||||||||||
| Commercial mortgage owner-occupied loans | 23 | - | 15 | - | 35 | - | ||||||||||||||||||
| Commercial mortgage nonowner-occupied loans | 8 | - | 24 | - | 61 | 1 | ||||||||||||||||||
| Commercial leases | 28 | 1 | 18 | - | 3 | - | ||||||||||||||||||
| Restructured residential mortgage loans | 756 | 30 | 743 | 28 | 657 | 25 | ||||||||||||||||||
| Restructured consumer loans: | ||||||||||||||||||||||||
| Home equity | 221 | 11 | 244 | 12 | 281 | 12 | ||||||||||||||||||
| Indirect secured consumer loans | 7 | - | 8 | - | 11 | - | ||||||||||||||||||
| Credit card | 44 | 4 | 44 | 5 | 50 | 4 | ||||||||||||||||||
| Total average impaired portfolio loans and leases | $ | 1,393 | 53 | 1,469 | 60 | 1,677 | 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
days past due based on the restructured terms unless the loan is both well-secured and in the process of collection; and certain other assets, including OREO and other repossessed property.
The following table presents the Bancorp’s nonaccrual loans and leases, by class, and OREO and other repossessed property as of December 31:
| ($ in millions) | 2019 | 2018 | ||||||
| Commercial loans and leases: | ||||||||
| Commercial and industrial loans | $ | 338 | 193 | |||||
| Commercial mortgage owner-occupied loans | 29 | 11 | ||||||
| Commercial mortgage nonowner-occupied loans | 1 | 2 | ||||||
| Commercial construction loans | 1 | - | ||||||
| Commercial leases | 28 | 22 | ||||||
| Total nonaccrual portfolio commercial loans and leases | 397 | 228 | ||||||
| Residential mortgage loans | 91 | 22 | ||||||
| Consumer loans: | ||||||||
| Home equity | 94 | 69 | ||||||
| Indirect secured consumer loans | 7 | 1 | ||||||
| Credit card | 27 | 27 | ||||||
| Other consumer loans | 2 | 1 | ||||||
| Total nonaccrual portfolio consumer loans | 130 | 98 | ||||||
| Total nonaccrual portfolio loans and leases (a)(b) | $ | 618 | 348 | |||||
| OREO and other repossessed property | 62 | 47 | ||||||
| Total nonperforming portfolio assets (a)(b) | $ | 680 | 395 | |||||
| (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 in process according to local requirements of the applicable jurisdiction was $212 million and $153 million as of December 31, 2019 and 2018, respectively.
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. TDRs include concessions granted under reorganization, 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 $67 million, respectively, as of December 31, 2018.
135 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide a summary of loans and leases, by class, modified in a TDR by the Bancorp during the years ended December 31:
| 2019 ($ in millions) (a)(b) | Number of Loans Modified in a TDR During the Year (c) | Recorded Investment in Loans Modified in a TDR During the Year | (Decrease) Increase to ALLL Upon Modification | Charge-offs Recognized Upon Modification | ||||||||||||
| Commercial loans and leases: | ||||||||||||||||
| Commercial and industrial loans | 97 | $ | 223 | (19 | ) | 5 | ||||||||||
| Commercial mortgage owner-occupied loans | 15 | 12 | - | - | ||||||||||||
| Commercial mortgage nonowner-occupied loans | 1 | - | - | - | ||||||||||||
| Residential mortgage loans | 722 | 101 | 1 | - | ||||||||||||
| Consumer loans: | ||||||||||||||||
| Home equity | 80 | 4 | - | - | ||||||||||||
| Indirect secured consumer loans | 100 | - | - | - | ||||||||||||
| Credit card | 6,041 | 34 | 8 | 3 | ||||||||||||
| Total portfolio loans and leases | 7,056 | $ | 374 | (10 | ) | 8 | ||||||||||
| (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. |
|---|
| 2018 ($ in millions) (a) | Number of Loans Modified in a TDR During the Year (b) | Recorded Investment in Loans Modified in a TDR During the Year | Increase (Decrease) to ALLL Upon Modification | Charge-offs Recognized Upon Modification | ||||||||||||
| Commercial loans and leases: | ||||||||||||||||
| Commercial and industrial loans | 54 | $ | 200 | 1 | 7 | |||||||||||
| Commercial mortgage owner-occupied loans | 6 | 3 | (1 | ) | - | |||||||||||
| Commercial mortgage nonowner-occupied loans | 3 | - | - | - | ||||||||||||
| Residential mortgage loans | 1,128 | 168 | 4 | - | ||||||||||||
| Consumer loans: | ||||||||||||||||
| Home equity | 111 | 7 | - | - | ||||||||||||
| Indirect secured consumer loans | 84 | - | - | - | ||||||||||||
| Credit card | 7,483 | 37 | 9 | 2 | ||||||||||||
| Total portfolio loans and leases | 8,869 | $ | 415 | 13 | 9 | |||||||||||
| (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. |
|---|
| 2017 ($ in millions) (a) | Number of Loans Modified in a TDR During the Year (b) | Recorded Investment in Loans Modified in a TDR During the Year | Increase (Decrease) to ALLL Upon Modification | Charge-offs Recognized Upon Modification | ||||||||||||
| Commercial loans and leases: | ||||||||||||||||
| Commercial and industrial loans | 75 | $ | 237 | (5 | ) | 6 | ||||||||||
| Commercial mortgage owner-occupied loans | 9 | 8 | 5 | - | ||||||||||||
| Commercial mortgage nonowner-occupied loans | 4 | - | - | - | ||||||||||||
| Commercial leases | 1 | 4 | - | - | ||||||||||||
| Residential mortgage loans | 830 | 116 | 5 | - | ||||||||||||
| Consumer loans: | ||||||||||||||||
| Home equity | 150 | 10 | - | - | ||||||||||||
| Indirect secured consumer loans | 102 | - | - | - | ||||||||||||
| Credit card | 8,085 | 38 | 8 | 1 | ||||||||||||
| Total portfolio loans and leases | 9,256 | $ | 413 | 13 | 7 | |||||||||||
| (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
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.
136 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide a summary of TDRs that subsequently defaulted during the years ended December 31, 2019, 2018 and 2017 and were within twelve months of the restructuring date:
| December 31, 2019 ($ in millions) (a)(b) | Number of Contracts | Recorded Investment | ||||||||||||
| Commercial loans and leases: | ||||||||||||||
| Commercial and industrial loans | 12 | $ | 20 | |||||||||||
| Commercial mortgage owner-occupied loans | 4 | 1 | ||||||||||||
| Commercial mortgage nonowner-occupied loans | 1 | - | ||||||||||||
| Residential mortgage loans | 274 | 42 | ||||||||||||
| Consumer loans: | ||||||||||||||
| Home equity | 15 | - | ||||||||||||
| Credit card | 655 | 3 | ||||||||||||
| Total portfolio loans and leases | 961 | $ | 66 | |||||||||||
| (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. | ||||||||||||||
| December 31, 2018 ($ in millions) (a) | Number of Contracts | Recorded Investment | ||||||||||||
| Commercial loans and leases: | ||||||||||||||
| Commercial and industrial loans | 8 | $ | 61 | |||||||||||
| Commercial mortgage owner-occupied loans | 2 | - | ||||||||||||
| Residential mortgage loans | 225 | 35 | ||||||||||||
| Consumer loans: | ||||||||||||||
| Home equity | 10 | - | ||||||||||||
| Credit card | 655 | 4 | ||||||||||||
| Total portfolio loans and leases | 900 | $ | 100 | |||||||||||
| (a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality. | ||||||||||||||
| December 31, 2017 ($ in millions) (a) | Number of Contracts | Recorded Investment | ||||||||||||
| Commercial loans and leases: | ||||||||||||||
| Commercial and industrial loans | 7 | $ | 17 | |||||||||||
| Commercial mortgage owner-occupied loans | 4 | 1 | ||||||||||||
| Residential mortgage loans | 172 | 24 | ||||||||||||
| Consumer loans: | ||||||||||||||
| Home equity | 16 | 2 | ||||||||||||
| Credit card | 1,633 | 8 | ||||||||||||
| Total portfolio loans and leases | 1,832 | $ | 52 | |||||||||||
| (a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality. |
137 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- BANK PREMISES AND EQUIPMENT
The following table provides a summary of bank premises and equipment as of December 31:
| ($ in millions) | Estimated Useful Life | 2019 | 2018 | |||||||||
| Land and improvements (a) | $ | 639 | 586 | |||||||||
| Buildings (a) | 1 - 30 yrs. | 1,575 | 1,547 | |||||||||
| Equipment | 2 - 20 yrs. | 2,126 | 1,987 | |||||||||
| Leasehold improvements | 1 - 30 yrs. | 432 | 403 | |||||||||
| Construction in progress (a) | 85 | 81 | ||||||||||
| Bank premises and equipment held for sale: | ||||||||||||
| Land and improvements | 8 | 25 | ||||||||||
| Buildings | 18 | 14 | ||||||||||
| Equipment | 1 | 3 | ||||||||||
| Accumulated depreciation and amortization | (2,889 | ) | (2,785 | ) | ||||||||
| Total bank premises and equipment | $ | 1,995 | 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 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 remaining branches to be closed under the 2018 Branch Optimization Plan in 2021.
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 46
th
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 recorded in other noninterest income in the Consolidated Statements of Income.
- 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 that their carrying values may not be recoverable.
As a result of these recoverability assessments,
t
he Bancorp recognized $3 million, $4 million and $52 million of impairment losses associated with operating lease assets for the years ended December 31, 2019, 2018 and 2017, respectively. The recognized impairment losses were recorded in corporate banking revenue in the Consolidated Statements of Income.
The following table presents undiscounted future lease payments for operating leases for the years ending December 31:
| As of December 31, 2019 ($ in millions) | Undiscounted Cash Flows | |||
| 2020 | $ | 152 | ||
| 2021 | 124 | |||
| 2022 | 94 | |||
| 2023 | 67 | |||
| 2024 | 38 | |||
| Thereafter | 63 | |||
| Total operating lease payments | $ | 538 | ||
138 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 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:
| ($ in millions) | Consolidated Balance Sheets Caption | December 31, 2019 | ||||
| Assets | ||||||
| Operating lease right-of-use assets | Other assets | $ | 473 | |||
| Finance lease right-of-use assets | Bank premises and equipment | 34 | ||||
| Total right-of-use assets (a) | $ | 507 | ||||
| Liabilities | ||||||
| Operating lease liabilities | Accrued taxes, interest and expenses | $ | 555 | |||
| Finance lease liabilities | Long-term debt | 35 | ||||
| Total lease liabilities | $ | 590 |
| (a) | Operating and finance lease right-of-use assets are recorded net of accumulated amortization of $75 and $27 as of December 31, 2019, respectively. |
|---|
The following table presents the components of lease costs:
| ($ in millions) | Consolidated Statements of Income Caption | For the year ended December 31, 2019 | ||||
| Lease costs: | ||||||
| Amortization of right-of-use assets | Net occupancy and equipment expense | $ | 6 | |||
| Interest on lease liabilities | Interest on long-term debt | 1 | ||||
| Total finance lease costs | $ | 7 | ||||
| Operating lease cost | Net occupancy expense | $ | 96 | |||
| Short-term lease cost | Net occupancy expense | 1 | ||||
| Variable lease cost | Net occupancy expense | 30 | ||||
| Sublease income | Net occupancy expense | (3) | ||||
| Total operating lease costs | $ | 124 | ||||
| Total lease costs | $ | 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) | Operating Leases | Finance Leases | Total | |||||||||
| 2020 | $ | 90 | 6 | 96 | ||||||||
| 2021 | 81 | 5 | 86 | |||||||||
| 2022 | 76 | 5 | 81 | |||||||||
| 2023 | 67 | 2 | 69 | |||||||||
| 2024 | 58 | 2 | 60 | |||||||||
| Thereafter | 280 | 26 | 306 | |||||||||
| Total undiscounted cash flows | $ | 652 | 46 | 698 | ||||||||
| Less: Difference between undiscounted cash flows and discounted cash flows | 97 | 11 | 108 | |||||||||
| Present value of lease liabilities | $ | 555 | 35 | 590 |
The following table presents the weighted-average remaining lease term and weighted-average discount rate as of:
| December 31, 2019 | ||||
| Weighted-average remaining lease term (years): | ||||
| Operating leases | 9.48 | |||
| Finance leases | 14.17 | |||
| Weighted-average discount rate: | ||||
| Operating leases | 3.19% | |||
| Finance leases | 4.30 | |||
139 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information related to lease transactions for the year ended:
| ($ in millions) | December 31, 2019 | |||
| Cash paid for amounts included in the measurement of lease liabilities: (a) | ||||
| Operating cash flows from operating leases | $ | 97 | ||
| Operating cash flows from finance leases | 1 | |||
| Financing cash flows from finance leases | 5 | |||
| Gains on sale and leaseback transactions | 5 | |||
| (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
- GOODWILL
Business combinations entered into by the Bancorp typically result in the recognition of goodwill. Acquisition activity includes 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) | Commercial Banking | Branch Banking | Consumer Lending | Wealth and Asset Management | Total | |||||||||||||||
| Goodwill | $ | 1,363 | 1,655 | 215 | 177 | 3,410 | ||||||||||||||
| Accumulated impairment losses | (750) | - | (215) | - | (965) | |||||||||||||||
| Net carrying amount as of December 31, 2017 | $ | 613 | 1,655 | - | 177 | 2,445 | ||||||||||||||
| Acquisition activity | 17 | - | - | 16 | 33 | |||||||||||||||
| Net carrying amount as of December 31, 2018 | $ | 630 | 1,655 | - | 193 | 2,478 | ||||||||||||||
| Acquisition activity | 1,324 | 391 | - | 62 | 1,777 | |||||||||||||||
| Sale of business | - | - | - | (3) | (3) | |||||||||||||||
| Net carrying amount as of December 31, 2019 | $ | 1,954 | 2,046 | - | 252 | 4,252 | ||||||||||||||
- 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 in the Consolidated Statements of Income.
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) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
| As of December 31, 2019 | ||||||||||||
| Core deposit intangibles | $ | 229 | (70) | 159 | ||||||||
| Customer relationships | 29 | (6) | 23 | |||||||||
| Operating leases | 23 | (9) | 14 | |||||||||
| Non-compete agreements | 13 | (11) | 2 | |||||||||
| Other | 4 | (1) | 3 | |||||||||
| Total intangible assets | $ | 298 | (97) | 201 | ||||||||
| As of December 31, 2018 | ||||||||||||
| Core deposit intangibles | $ | 34 | (30) | 4 | ||||||||
| Customer relationships | 32 | (3) | 29 | |||||||||
| Non-compete agreements | 14 | (11) | 3 | |||||||||
| Other | 7 | (3) | 4 | |||||||||
| Total intangible assets | $ | 87 | (47) | 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) | Total | |||
| 2020 | $ | 56 | ||
| 2021 | 43 | |||
| 2022 | 34 | |||
| 2023 | 24 | |||
| 2024 | 16 |
- 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 provide
s
a summary of the classifications of consolidated VIE assets,
liabilities
and noncontrolling interests included in the Consolidated Balance Sheets as of:
| ($ in millions) | December 31, 2019 | December 31, 2018 | ||||||
| Assets: | ||||||||
| Other short-term investments | $ | 74 | 40 | |||||
| Indirect secured consumer loans | 1,354 | 668 | ||||||
| ALLL | (7 | ) | (4) | |||||
| Other assets | 8 | 5 | ||||||
| Total assets | $ | 1,429 | 709 | |||||
| Liabilities: | ||||||||
| Other liabilities | $ | 2 | 1 | |||||
| Long-term debt | 1,253 | 606 | ||||||
| Total liabilities | $ | 1,255 | 607 |
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 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 interest on the loans and the subordination of certain classes of asset-backed securities to other classes.
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) | Total Assets | Total Liabilities | Maximum Exposure | |||||||||
| CDC investments | $ | 1,435 | 428 | 1,435 | ||||||||
| Private equity investments | 89 | - | 164 | |||||||||
| Loans provided to VIEs | 2,715 | - | 4,083 | |||||||||
| Lease pool entities | 74 | - | 74 | |||||||||
| December 31, 2018 ($ in millions) | Total Assets | Total Liabilities | Maximum Exposure | |||||||||
| CDC investments | $ | 1,198 | 376 | 1,198 | ||||||||
| Private equity investments | 41 | - | 73 | |||||||||
| Loans provided to VIEs | 2,331 | - | 3,617 | |||||||||
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.
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) | Consolidated Statements of Income Caption (a) | 2019 | 2018 | 2017 | ||||||||||||
| Proportional amortization | Applicable income tax expense | $ | 140 | 154 | 223 | |||||||||||
| Tax credits and other benefits | Applicable income tax expense | (163) | (192) | (220) | ||||||||||||
| (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 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.
143 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bancorp is exposed to losses arising from the negative performance of the underlying investments in the private equity investments. As a limited partner, the Bancorp’s maximum exposure to loss is limited to the carrying amounts of the investments plus unfunded commitments. The carrying amounts of these 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
- 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) | 2019 | 2018 | 2017 | |||||||||
| Residential mortgage loan sales (a) | $ 7,781 | 5,078 | 6,369 | |||||||||
| Origination fees and gains on loan sales | 175 | 100 | 138 | |||||||||
| Gross mortgage servicing fees | 267 | 216 | 206 | |||||||||
| (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.
The following table presents changes in the servicing rights related to residential mortgage loans for the years ended December 31:
| ($ in millions) | 2019 | 2018 | ||||||||||
| Balance, beginning of period | $ | 938 | 858 | |||||||||
| Servicing rights originated | 142 | 81 | ||||||||||
| Servicing rights purchased | 26 | 82 | ||||||||||
| Servicing rights obtained in acquisition | 263 | - | ||||||||||
| Changes in fair value: | ||||||||||||
| Due to changes in inputs or assumptions (a) | (203 | ) | 42 | |||||||||
| Other changes in fair value (b) | (173 | ) | (125 | ) | ||||||||
| Balance, end of period | $ | 993 | 938 | |||||||||
| (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. |
|---|
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) | 2019 | 2018 | 2017 | |||||||||||||
| Securities gains (losses), net - non-qualifying hedges on MSRs | $ | 3 | (15) | 2 | ||||||||||||
| Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio (a) | 221 | (21) | 2 | |||||||||||||
| MSR fair value adjustment due to changes in inputs or assumptions (a) | (203 | ) | 42 | (1 | ) | |||||||||||
| (a) | Included in mortgage banking net revenue in the Consolidated Statements of Income. |
|---|
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:
| 2019 | 2018 | |||||||||||||||||||||||||||||
| Rate | Weighted- Average Life (in years) | Prepayment Speed (annual) | OAS (bps) | Weighted- Average Life (in years) | Prepayment Speed (annual) | OAS (bps) | ||||||||||||||||||||||||
| Residential mortgage loans: | ||||||||||||||||||||||||||||||
| Servicing rights | Fixed | 5.9 | 12.6 | % | 530 | 6.6 | 10.5 | % | 522 | |||||||||||||||||||||
| Servicing rights | Adjustable | - | - | - | 2.6 | 30.3 | 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.
145 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2019 and 2018, the Bancorp serviced $80.7 billion and $63.2 billion, respectively, of residential mortgage loans for other investors. The value of MSRs that
continue to be held by the Bancorp is subject to credit, prepayment and interest rate risks on the sold financial assets.
At December 31, 2019, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in prepayment speed assumptions and immediate 10% and 20% adverse changes in OAS are as follows:
| Prepayment Speed Assumption | OAS Assumption | |||||||||||||||||||||||||||||||||||||||
| ($ in millions) (a) | Rate | Fair Value | Weighted- Average Life (in years) | Impact of Adverse Change on Fair Value | OAS (bps) | Impact of Adverse Change on Fair Value | ||||||||||||||||||||||||||||||||||
| Rate | 10% | 20% | 50% | 10% | 20% | |||||||||||||||||||||||||||||||||||
| Residential mortgage loans: | ||||||||||||||||||||||||||||||||||||||||
| Servicing rights | Fixed | $ | 983 | 5.3 | 13.0 | % | $ | (36) | (69 | ) | (158) | 602 | $ | (21 | ) | (40) | ||||||||||||||||||||||||
| Servicing rights | Adjustable | 10 | 3.6 | 22.6 | (1) | (1 | ) | (3) | 921 | - | - | |||||||||||||||||||||||||||||
| (a) | The impact of the weighted-average default rate on the current fair value of residual cash flows for all scenarios is immaterial. |
|---|
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.
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 the Bancorp 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
- 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 Bancorp’s interest rate risk management strategy involves modifying the repricing characteristics of certain financial 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.
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 (principal-only swaps, interest 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.
Foreign currency volatility occurs as the Bancorp enters into certain loans denominated 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 $23 million of variation margin payments were applied to the respective derivative contracts to reduce the Bancorp’s derivative liabilities as of December 31, 2019 and 2018, respectively, and were also not included in the total amount of collateral posted. Certain of the Bancorp’s derivative liabilities contain credit-risk related contingent features that could result in the requirement to post additional collateral upon the occurrence of specified events. As of December 31, 2019 and 2018, the fair value of the additional collateral that could be required to be posted as a result of the credit-risk related contingent features being triggered was immaterial to the Bancorp’s Consolidated Financial Statements.
The posting of collateral has been determined to remove the need for further consideration of credit risk. As a result, the Bancorp determined that the impact of the Bancorp’s credit risk to the valuation of its derivative liabilities was immaterial to the Bancorp’s Consolidated Financial Statements.
The Bancorp holds certain derivative instruments that qualify for hedge accounting treatment and are designated as either fair value hedges or cash flow hedges. Derivative instruments that do not qualify for hedge accounting treatment, or for which hedge accounting is not established, are held as free-standing derivatives. All customer accommodation derivatives are held as free-standing derivatives.
147 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables reflect the notional amounts and fair values for all derivative instruments included in the Consolidated Balance Sheets as of:
| Fair Value | ||||||||||||||||
| December 31, 2019 ($ in millions) | Notional Amount | Derivative Assets | Derivative Liabilities | |||||||||||||
| Derivatives Designated as Qualifying Hedging Instruments | ||||||||||||||||
| Fair value hedges: | ||||||||||||||||
| Interest rate swaps related to long-term debt | $ | 2,705 | 393 | - | ||||||||||||
| Total fair value hedges | 393 | - | ||||||||||||||
| Cash flow hedges: | ||||||||||||||||
| Interest rate floors related to C&I loans | 3,000 | 115 | - | |||||||||||||
| Interest rate swaps related to C&I loans | 8,000 | - | 2 | |||||||||||||
| Total cash flow hedges | 115 | 2 | ||||||||||||||
| Total derivatives designated as qualifying hedging instruments | 508 | 2 | ||||||||||||||
| Derivatives Not Designated as Qualifying Hedging Instruments | ||||||||||||||||
| Free-standing derivatives - risk management and other business purposes: | ||||||||||||||||
| Interest rate contracts related to MSR portfolio | 6,420 | 131 | 2 | |||||||||||||
| Forward contracts related to residential mortgage loans held for sale | 2,901 | 1 | 5 | |||||||||||||
| Swap associated with the sale of Visa, Inc. Class B Shares | 3,082 | - | 163 | |||||||||||||
| Foreign exchange contracts | 195 | - | 5 | |||||||||||||
| Total free-standing derivatives - risk management and other business purposes | 132 | 175 | ||||||||||||||
| Free-standing derivatives - customer accommodation: | ||||||||||||||||
| Interest rate contracts (a) | 73,327 | 579 | 148 | |||||||||||||
| Interest rate lock commitments | 907 | 18 | - | |||||||||||||
| Commodity contracts | 8,525 | 271 | 270 | |||||||||||||
| TBA securities | 50 | - | - | |||||||||||||
| Foreign exchange contracts | 14,144 | 165 | 146 | |||||||||||||
| Total free-standing derivatives - customer accommodation | 1,033 | 564 | ||||||||||||||
| Total derivatives not designated as qualifying hedging instruments | 1,165 | 739 | ||||||||||||||
| Total | $ | 1,673 | 741 | |||||||||||||
| (a) | Derivative assets and liabilities are presented net of variation margin of $40 and $493, respectively. |
|---|
| Fair Value | ||||||||||||||||
| December 31, 2018 ($ in millions) | Notional Amount | Derivative Assets | Derivative Liabilities | |||||||||||||
| Derivatives Designated as Qualifying Hedging Instruments | ||||||||||||||||
| Fair value hedges: | ||||||||||||||||
| Interest rate swaps related to long-term debt | $ | 3,455 | 262 | 2 | ||||||||||||
| Total fair value hedges | 262 | 2 | ||||||||||||||
| Cash flow hedges: | ||||||||||||||||
| Interest rate floors related to C&I loans | 3,000 | 69 | - | |||||||||||||
| Interest rate swaps related to C&I loans | 8,000 | 15 | 27 | |||||||||||||
| Total cash flow hedges | 84 | 27 | ||||||||||||||
| Total derivatives designated as qualifying hedging instruments | 346 | 29 | ||||||||||||||
| Derivatives Not Designated as Qualifying Hedging Instruments | ||||||||||||||||
| Free-standing derivatives - risk management and other business purposes: | ||||||||||||||||
| Interest rate contracts related to MSR portfolio | 10,045 | 40 | 14 | |||||||||||||
| Forward contracts related to residential mortgage loans held for sale | 926 | - | 8 | |||||||||||||
| Swap associated with the sale of Visa, Inc. Class B Shares | 2,174 | - | 125 | |||||||||||||
| Foreign exchange contracts | 133 | 4 | - | |||||||||||||
| Total free-standing derivatives - risk management and other business purposes | 44 | 147 | ||||||||||||||
| Free-standing derivatives - customer accommodation: | ||||||||||||||||
| Interest rate contracts | 55,012 | 262 | 278 | |||||||||||||
| Interest rate lock commitments | 407 | 7 | - | |||||||||||||
| Commodity contracts | 6,511 | 307 | 278 | |||||||||||||
| TBA securities | 18 | - | - | |||||||||||||
| Foreign exchange contracts | 13,205 | 148 | 142 | |||||||||||||
| Total free-standing derivatives - customer accommodation | 724 | 698 | ||||||||||||||
| Total derivatives not designated as qualifying hedging instruments | 768 | 845 | ||||||||||||||
| Total | $ | 1,114 | 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 perfect offset.
148 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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) | Consolidated Statements of Income Caption | 2019 | 2018 | 2017 | ||||||||||||
| Change in fair value of interest rate swaps hedging long-term debt | Interest on long-term debt | $ | 152 | (36) | (33) | |||||||||||
| Change in fair value of hedged long-term debt attributable to the risk being hedged | Interest on long-term debt | (147) | 41 | 31 | ||||||||||||
The following amounts were recorded in the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges as of:
| ($ in millions) | Consolidated Balance Sheets Caption | December 31, 2019 | ||||
| Carrying amount of the hedged items | Long-term debt | $ | 3,093 | |||
| Cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged items | Long-term debt | 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) | 2019 | 2018 | 2017 | |||||||||
| Amount of pre-tax net gains (losses) recognized in OCI | $ | 348 | 214 | (11) | ||||||||
| Amount of pre-tax net gains (losses) reclassified from OCI into net income | 16 | (2) | 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) | Consolidated Statements of Income Caption | 2019 | 2018 | 2017 | ||||||||||
| Interest rate contracts: | ||||||||||||||
| Forward contracts related to residential mortgage loans held for sale | Mortgage banking net revenue | $ | 4 | (8 | ) | (17) | ||||||||
| Interest rate contracts related to MSR portfolio | Mortgage banking net revenue | 221 | (21 | ) | 2 | |||||||||
| Foreign exchange contracts: | ||||||||||||||
| Foreign exchange contracts for risk management purposes | Other noninterest income | (7) | 10 | (7) | ||||||||||
| Equity contracts: | ||||||||||||||
| Stock warrant | Other noninterest income | - | - | (1) | ||||||||||
| Swap associated with sale of Visa, Inc. Class B Shares | Other noninterest income | (107) | (59 | ) | (80) | |||||||||
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, reputable, independent counterparties with substantially matching terms. The Bancorp hedges its 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.
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) | 2019 | 2018 | ||||||
| Pass | $ | 3,841 | 3,919 | |||||
| Special mention | 86 | 79 | ||||||
| Substandard | 16 | 4 | ||||||
| Total | $ | 3,943 | 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) | Consolidated Statements of Income Caption | 2019 | 2018 | 2017 | ||||||||||
| Interest rate contracts: | ||||||||||||||
| Interest rate contracts for customers (contract revenue) | Corporate banking revenue | $ | 40 | 32 | 21 | |||||||||
| Interest rate contracts for customers (credit losses) | Other noninterest expense | - | - | (5) | ||||||||||
| Interest rate contracts for customers (credit portion of fair value adjustment) | Other noninterest expense | (15 | ) | - | 2 | |||||||||
| Interest rate lock commitments | Mortgage banking net revenue | 144 | 70 | 93 | ||||||||||
| Commodity contracts: | ||||||||||||||
| Commodity contracts for customers (contract revenue) | Corporate banking revenue | 8 | 9 | 6 | ||||||||||
| Commodity contracts for customers (credit losses) | Other noninterest expense | - | - | 1 | ||||||||||
| Commodity contracts for customers (credit portion of fair value adjustment) | Other noninterest expense | 1 | (1 | ) | - | |||||||||
| Foreign exchange contracts: | ||||||||||||||
| Foreign exchange contracts for customers (contract revenue) | Corporate banking revenue | 49 | 55 | 48 | ||||||||||
| Foreign exchange contracts for customers (contract revenue) | Other noninterest income | 12 | 14 | - | ||||||||||
| Foreign exchange contracts for customers (credit losses) | Other noninterest expense | - | - | 2 | ||||||||||
| Foreign exchange contracts for customers (credit portion of fair value adjustment) | Other noninterest expense | - | 1 | 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:
| Gross Amount Recognized in the Consolidated Balance Sheets (a) | Gross Amounts Not Offset in the Consolidated Balance Sheets | |||||||||||||||
| As of December 31, 2019 ($ in millions) | Derivatives | Collateral (b) | Net Amount | |||||||||||||
| Assets: | ||||||||||||||||
| Derivatives | $ | 1,655 | (417 | ) | (504) | 734 | ||||||||||
| Total assets | 1,655 | (417 | ) | (504) | 734 | |||||||||||
| Liabilities: | ||||||||||||||||
| Derivatives | 741 | (417 | ) | (97) | 227 | |||||||||||
| Total liabilities | $ | 741 | (417 | ) | (97) | 227 | ||||||||||
| (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 Sheets were excluded from this table. | ||||||||||||||||
| Gross Amount Recognized in the Consolidated Balance Sheets (a) | Gross Amounts Not Offset in the Consolidated Balance Sheets | |||||||||||||||
| As of December 31, 2018 ($ in millions) | Derivatives | Collateral (b) | Net Amount | |||||||||||||
| Assets: | ||||||||||||||||
| Derivatives | $ | 1,107 | (410 | ) | (348) | 349 | ||||||||||
| Total assets | 1,107 | (410 | ) | (348) | 349 | |||||||||||
| Liabilities: | ||||||||||||||||
| Derivatives | 874 | (410 | ) | (123) | 341 | |||||||||||
| Total liabilities | $ | 874 | (410 | ) | (123) | 341 | ||||||||||
| (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 Sheets were excluded from this table. |
|---|
151 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- OTHER ASSETS
The following table provides the components of other assets included in the Consolidated Balance Sheets as of December 31:
| ($ in millions) | 2019 | 2018 | ||||||
| Accounts receivable and drafts-in-process | $ | 2,278 | 1,963 | |||||
| Bank owned life insurance | 1,960 | 1,760 | ||||||
| Partnership investments | 1,729 | 1,390 | ||||||
| Derivative instruments | 1,673 | 1,114 | ||||||
| Operating lease right-of-use assets | 473 | - | ||||||
| Accrued interest and fees receivable | 424 | 438 | ||||||
| Worldpay, Inc. TRA receivable | 345 | - | ||||||
| Prepaid expenses | 101 | 93 | ||||||
| OREO and other repossessed personal property | 64 | 48 | ||||||
| Income tax receivable | 32 | 56 | ||||||
| Investment in Worldpay Holding, LLC | - | 420 | ||||||
| Other | 111 | 90 | ||||||
| Total other assets | $ | 9,190 | 7,372 | |||||
- 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:
| 2019 | 2018 | |||||||||||||||
| ($ in millions) | Amount | Rate | Amount | Rate | ||||||||||||
| As of December 31: | ||||||||||||||||
| Federal funds purchased | $ | 260 | 1.49% | $ | 1,925 | 2.40% | ||||||||||
| Other short-term borrowings | 1,011 | 1.24 | 573 | 1.95 | ||||||||||||
| Average for the years ended December 31: | ||||||||||||||||
| Federal funds purchased | $ | 1,267 | 2.26% | $ | 1,509 | 1.97% | ||||||||||
| Other short-term borrowings | 1,046 | 2.67 | 1,611 | 1.82 | ||||||||||||
| Maximum month-end balance for the years ended December 31: | ||||||||||||||||
| Federal funds purchased | $ | 2,693 | $ | 2,684 | ||||||||||||
| Other short-term borrowings | 4,046 | 6,313 | ||||||||||||||
The following table presents a summary of the Bancorp’s other short-term borrowings as of December 31:
| ($ in millions) | 2019 | 2018 | ||||||
| Securities sold under repurchase agreements | $ | 469 | 302 | |||||
| Derivative collateral | 542 | 271 | ||||||
| Total other short-term borrowings | $ | 1,011 | 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- LONG-TERM DEBT
The following table is a summary of the Bancorp’s long-term borrowings at December 31:
| ($ in millions) | Maturity | Interest Rate | 2019 | 2018 | ||||||||||||
| Parent Company | ||||||||||||||||
| Senior: | ||||||||||||||||
| Fixed-rate notes | 2019 | 2.30 % | $ | - | 500 | |||||||||||
| Fixed-rate notes | 2020 | 2.875 % | 1,099 | 1,098 | ||||||||||||
| Floating-rate notes (b) | 2021 | 2.37 % | 250 | 250 | ||||||||||||
| Fixed-rate notes | 2022 | 2.60 % | 699 | 698 | ||||||||||||
| Fixed-rate notes | 2022 | 3.50 % | 499 | 498 | ||||||||||||
| Fixed-rate notes | 2024 | 3.65 % | 1,493 | - | ||||||||||||
| Fixed-rate notes | 2025 | 2.375 % | 746 | - | ||||||||||||
| Fixed-rate notes | 2028 | 3.95 % | 646 | 646 | ||||||||||||
| Subordinated: (a) | ||||||||||||||||
| Fixed-rate notes | 2024 | 4.30 % | 748 | 747 | ||||||||||||
| Fixed-rate notes | 2038 | 8.25 % | 1,333 | 1,238 | ||||||||||||
| Subsidiaries | ||||||||||||||||
| Senior: | ||||||||||||||||
| Fixed-rate notes | 2019 | 2.375 % | - | 850 | ||||||||||||
| Fixed-rate notes | 2019 | 2.30 % | - | 750 | ||||||||||||
| Fixed-rate notes | 2019 | 1.625 % | - | 743 | ||||||||||||
| Floating-rate notes (c) | 2019 | 3.412 % | - | 250 | ||||||||||||
| Fixed-rate notes | 2020 | 2.20 % | 752 | 742 | ||||||||||||
| Floating-rate notes (b) | 2020 | 2.186 % | 300 | 300 | ||||||||||||
| Fixed-rate notes | 2021 | 2.25 % | 1,249 | 1,248 | ||||||||||||
| Fixed-rate notes | 2021 | 2.875 % | 848 | 847 | ||||||||||||
| Fixed-rate notes | 2021 | 3.35 % | 508 | 502 | ||||||||||||
| Floating-rate notes (b) | 2021 | 2.376 % | 299 | 299 | ||||||||||||
| Floating-rate notes (b) | 2022 | 2.549 % | 299 | - | ||||||||||||
| Fixed-rate notes | 2025 | 3.95 % | 797 | 764 | ||||||||||||
| Subordinated: (a) | ||||||||||||||||
| Fixed-rate bank notes | 2026 | 3.85 % | 748 | 747 | ||||||||||||
| Fixed-rate bank notes | 2027 | 4.00 % | 171 | - | ||||||||||||
| Junior subordinated: | ||||||||||||||||
| Floating-rate debentures (b) | 2035 | 3.31 % - 3.58 % | 53 | 52 | ||||||||||||
| FHLB advances | 2020 - 2047 | 0.05 % - 6.87 % | 91 | 22 | ||||||||||||
| Notes associated with consolidated VIEs: | ||||||||||||||||
| Automobile loan securitizations: | ||||||||||||||||
| Fixed-rate notes | 2022 - 2026 | 1.80 % - 2.69 % | 1,147 | 568 | ||||||||||||
| Floating-rate notes (b) | 2022 | 1.91 % | 42 | 11 | ||||||||||||
| Other | 2020 - 2040 | Varies | 153 | 56 | ||||||||||||
| Total | $ | 14,970 | 14,426 | |||||||||||||
| (a) | In aggregate, $2.7 billion and $2.6 billion qualifies as Tier II capital for regulatory capital purposes for the years ended December 31, 2019 and 2018, respectively. |
|---|
| (b) | These rates reflect the floating rates as of December 31, 2019. |
|---|
| (c) | These rates reflect the floating rates as of December 31, 2018. |
|---|
The Bancorp pays down long-term debt in accordance with contractual terms over maturity periods summarized in the above table. The aggregate annual maturities of long-term debt obligations (based on final maturity dates) as of December 31, 2019 are presented in the following table:
| ($ in millions) | Parent | Subsidiaries | Total | |||||||||
| 2020 | $ | 1,099 | 1,073 | 2,172 | ||||||||
| 2021 | 250 | 2,923 | 3,173 | |||||||||
| 2022 | 1,198 | 900 | 2,098 | |||||||||
| 2023 | - | 514 | 514 | |||||||||
| 2024 | 2,241 | 98 | 2,339 | |||||||||
| Thereafter | 2,725 | 1,949 | 4,674 | |||||||||
| Total | $ | 7,513 | 7,457 | 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
Parent Company Long-Term Borrowings
Senior notes
On March 7, 2012, the Bancorp issued and sold $500 million of senior notes to third-party investors and entered 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 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.
154 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These bank notes will be redeemable by the Bank, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date.
On October 30, 2017, the Bank issued and sold, under its bank notes program, $1.1 billion in aggregate principal amount of 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
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 $249 million of outstanding notes related to these VIEs were included in long-term debt in the Consolidated Balance Sheets as of December 31, 2019.
155 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES
The Bancorp, in the normal course of business, enters into financial instruments and various agreements to meet the financing needs of its customers. The Bancorp also enters into certain transactions and agreements to manage its interest rate and prepayment risks, provide funding, equipment and locations for its operations and invest in its communities. These instruments and agreements involve, to varying degrees, elements of credit risk, counterparty risk and market risk in excess of the amounts recognized in the Consolidated Balance Sheets.
The creditworthiness of counterparties for all instruments and agreements is evaluated on a
case-by-case
basis in accordance with the Bancorp’s credit policies. The Bancorp’s significant commitments, contingent liabilities and guarantees in excess of the amounts recognized in the Consolidated Balance Sheets are discussed in the following sections.
Commitments
The Bancorp has certain commitments to make future payments under contracts. The following table reflects a summary of significant commitments as of December 31:
| ($ in millions) | 2019 | 2018 | ||||||
| Commitments to extend credit | $ | 75,696 | 70,415 | |||||
| Letters of credit | 2,137 | 2,041 | ||||||
| Forward contracts related to residential mortgage loans held for sale | 2,901 | 926 | ||||||
| Purchase obligations | 113 | 126 | ||||||
| Capital commitments for private equity investments | 75 | 32 | ||||||
| Capital expenditures | 84 | 45 | ||||||
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 is exposed to credit risk in the event of nonperformance by the counterparty for the amount of the contract.
Fixed-rate commitments are also subject to market risk resulting from fluctuations in interest rates and the Bancorp’s 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) | 2019 | 2018 | ||||||
| Pass | $ | 74,654 | 69,928 | |||||
| Special mention | 633 | 271 | ||||||
| Substandard | 408 | 216 | ||||||
| Doubtful | 1 | - | ||||||
| Total commitments to extend credit | $ | 75,696 | 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) | $ | 1,022 | ||
| 1 - 5 years (a) | 1,110 | |||
| Over 5 years | 5 | |||
| Total letters of credit | $ | 2,137 | ||
| (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. |
|---|
Standby letters of credit accounted for approximately 99% of total letters of credit at both December 31, 2019 and 2018 and are considered guarantees in 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 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 $17 million at December 31, 2018. The Bancorp monitors the credit risk associated with letters of credit using the same standard regulatory risk rating system utilized for its loan and lease portfolio.
156 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Risk ratings of letters of credit under this risk rating system are summarized in the following table as of December 31:
| ($ in millions) | 2019 | 2018 | ||||||
| Pass | $ | 2,005 | 1,905 | |||||
| Special mention | 20 | 10 | ||||||
| Substandard | 111 | 126 | ||||||
| Doubtful | 1 | - | ||||||
| Total letters of credit | $ | 2,137 | 2,041 | |||||
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.
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.
The Bancorp uses the best information available when estimating its mortgage representation and warranty reserve; however, the estimation process is 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) | 2019 | 2018 | ||||||
| Balance, beginning of period | $ | 6 | 9 | |||||
| Net reductions to the reserve | - | (3) | ||||||
| Balance, end of period | $ | 6 | 6 | |||||
The following tables provide a rollforward of unresolved claims by claimant type for the years ended December 31:
| GSE | Private Label | |||||||||||||||
| 2019 ($ in millions) | Units | Dollars | Units | Dollars | ||||||||||||
| Balance, beginning of period | 9 | $ | 1 | 1 | $ | - | ||||||||||
| New demands | 258 | 45 | 8 | 1 | ||||||||||||
| Loan paydowns/payoffs | (3 | ) | - | - | - | |||||||||||
| Resolved demands | (237 | ) | (40) | (8 | ) | (1) | ||||||||||
| Balance, end of period | 27 | $ | 6 | 1 | $ | - | ||||||||||
| GSE | Private Label | |||||||||||||||
| 2018 ($ in millions) | Units | Dollars | Units | Dollars | ||||||||||||
| Balance, beginning of period | 6 | $ | 1 | 1 | $ | - | ||||||||||
| New demands | 121 | 19 | - | - | ||||||||||||
| Resolved demands | (118 | ) | (19) | - | - | |||||||||||
| Balance, end of period | 9 | $ | 1 | 1 | $ | - | ||||||||||
Margin accounts
FTS, an indirect wholly-owned subsidiary of the Bancorp, guarantees the collection of all margin account balances held by its brokerage clearing agent for the benefit of its customers. FTS is responsible for payment to its brokerage clearing agent for any loss, liability, damage, cost or expense incurred as a result of customers failing to comply with margin or margin maintenance calls on all margin accounts. The margin account balance held by the brokerage clearing agent was $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 to indemnify Visa for 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.
In conjunction with the IPO, the Bancorp received 10.1 million of Visa’s Class B common shares (the “Class B Shares”) based on the Bancorp’s membership percentage in Visa prior to the IPO.
The Class B Shares are not transferable (other than to another member bank) until the later of the third anniversary of the IPO closing or the date which the Covered Litigation has been resolved; therefore, the Bancorp’s Class B Shares were classified in other assets and accounted for at their carryover basis of $0. Visa deposited $3 billion of the proceeds from the IPO into a litigation escrow account, established for the purpose of funding judgments in, or settlements of, the Covered Litigation. Since then, when Visa’s litigation committee determined that the escrow account was insufficient; Visa issued additional Class A Shares and deposited the proceeds from the sale of the Class A Shares into the litigation escrow account. When Visa funded the litigation escrow account, the Class B Shares were subjected to dilution through an adjustment in the conversion rate of Class B Shares into Class A Shares.
In 2009, the Bancorp completed the sale of Visa, Inc. Class B Shares and entered into a total return swap in which the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Class B Shares into Class A Shares. The swap terminates on the later of the third anniversary of Visa’s IPO or the date on which the Covered Litigation is settled. Refer to Note 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.
158 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on this determination, upon the sale of the Class B Shares, the Bancorp reversed its net Visa litigation reserve liability and recognized a free-standing derivative liability associated with the total return swap. The fair value of the swap liability was $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) | Visa Funding Amount | Bancorp Cash Payment Amount | ||||
| Q2 2010 | $ | 500 | 20 | |||
| Q4 2010 | 800 | 35 | ||||
| Q2 2011 | 400 | 19 | ||||
| Q1 2012 | 1,565 | 75 | ||||
| Q3 2012 | 150 | 6 | ||||
| Q3 2014 | 450 | 18 | ||||
| Q2 2018 | 600 | 26 | ||||
| Q3 2019 | 300 | 12 | ||||
159 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 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 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 deposit-advance program offered to eligible customers with checking accounts. The plaintiffs sought to represent a nationwide class of customers who used the Early Access program and repaid their cash advances within 30 days. On October 31, 2012, the case was transferred to the United States District Court for the Southern District of Ohio. In 2013, four similar putative class actions were filed against Fifth Third Bank in federal courts throughout the country (Lori and Danielle Laskaris v. Fifth Third Bank, Janet Fyock v. Fifth Third Bank, Jesse McQuillen v. Fifth Third Bank, and Brian Harrison v. Fifth Third Bank). Those four lawsuits were transferred to the Southern District of Ohio and consolidated with the original lawsuit as In re: Fifth Third Early Access Cash Advance Litigation (Case No.
1:12-CV-00851).
On behalf of a putative class, the plaintiffs 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.
160 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The appeals court reversed summary judgment on 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.
Governmental Investigations and Proceedings
The Bancorp and/or its affiliates are or may become involved in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by various governmental regulatory agencies and law enforcement authorities, including but not limited to the 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 weaknesses in our disclosure controls and procedures. Investigations by regulatory authorities may from time to time result in civil or criminal referrals to law enforcement.
Additionally, in some cases, regulatory authorities may take supervisory actions that are considered to be confidential supervisory information which may not be publicly disclosed.
Reasonably Possible Losses in Excess of Accruals
The Bancorp and its subsidiaries are parties to numerous claims and lawsuits as well as threatened or potential actions or claims concerning matters arising from the conduct of its business activities. The outcome of claims or litigation and the timing of ultimate resolution are inherently difficult to predict. The following factors, among others, contribute to this lack of predictability: claims often include significant legal uncertainties, damages alleged by plaintiffs are often unspecified or overstated, discovery may not have started or may not be complete and material facts may be disputed or unsubstantiated. As a result of these factors, the Bancorp is not always able to provide an estimate of the range of reasonably possible outcomes for each claim. An accrual for a potential litigation loss is established when information related to the loss contingency indicates both that a loss is probable and that the amount of loss can be reasonably estimated. Any such accrual is adjusted from time to time thereafter as appropriate to reflect changes in circumstances. The Bancorp also determines, when possible (due to the uncertainties described above), estimates of reasonably possible losses or ranges of reasonably possible losses, in excess of amounts accrued. Under U.S. GAAP, an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight.” Thus, references to the upper end of the range of reasonably possible loss for cases in which the Bancorp is able to estimate a range of reasonably possible loss mean the upper end of the range of loss for cases for which the Bancorp believes the risk of loss is more than slight.
For matters where the Bancorp is able to estimate such possible losses or ranges of possible losses, the Bancorp currently estimates that it is reasonably possible that it could incur losses related to legal and regulatory proceedings, including known contemplated enforcement actions and Fifth Third’s intended response to such actions, in an aggregate amount up 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.
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
- 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) | 2019 | 2018 | ||||||
| Commitments to lend, net of participations: | ||||||||
| Directors and their affiliated companies | $ | 736 | 700 | |||||
| Executive officers | 5 | 6 | ||||||
| Total | $ | 741 | 706 | |||||
| Outstanding balance on loans, net of participations and undrawn commitments | $ | 49 | 10 | |||||
The commitments to lend are in the form of loans and guarantees for various business and personal interests. This indebtedness was incurred in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties. This indebtedness does not involve more than the normal risk of repayment or present other features unfavorable to the Bancorp.
Worldpay, Inc. and Worldpay Holding, LLC
On June 30, 2009, the Bancorp completed the sale of a majority interest in its processing business, Vantiv Holding, LLC (now Worldpay Holding, LLC). Advent International acquired an approximate 51% interest in Worldpay Holding, LLC for cash and a warrant. The Bancorp retained the remaining approximate 49% interest in Worldpay Holding, LLC.
During the first quarter of 2012, Vantiv, Inc. (now Worldpay, Inc.) priced an IPO of its shares and contributed the net proceeds to Worldpay Holding, LLC for additional ownership interests.
As a result of this offering, the Bancorp’s ownership of Worldpay Holding, LLC was reduced to approximately 39%. The impact of the capital contributions to Worldpay Holding, LLC and the resulting dilution in the Bancorp’s interest resulted in a gain of $115 million recognized by the Bancorp in the first quarter of 2012. 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) | Gain on Transactions | Remaining Ownership Percentage | ||||||
| Q4 2012 | $ | 157 | 33.1 % | |||||
| Q2 2013 | 242 | 27.7 | ||||||
| Q3 2013 | 85 | 25.1 | ||||||
| Q2 2014 | 125 | 22.8 | ||||||
| Q4 2015 | 331 | 18.3 | ||||||
| Q3 2017 | 1,037 | 8.6 | ||||||
| Q1 2018 | 414 | 4.9 | ||||||
| Q2 2018 | 205 | 3.3 | ||||||
| Q1 2019 | 562 | - | ||||||
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.
162 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the third quarter of 2016, the Bancorp entered into an agreement with Worldpay, Inc. under which a portion of its TRA with Worldpay, Inc. was terminated and settled in full for consideration of a cash payment in the amount of $116 million from Worldpay, Inc. Under the agreement, the Bancorp terminated and settled certain TRA cash flows it expected to receive in the years 2019 to 2035, totaling to a then estimated $331 million. The Bancorp recognized a gain of $116 million in other noninterest income in the Consolidated Statements of Income from this settlement. Additionally, the agreement provides that Worldpay, Inc. may be obligated to pay up to a total of approximately $171 million to the Bancorp to terminate and settle certain remaining TRA cash flows, totaling to a then estimated $394 million, upon the exercise of certain call options by Worldpay, Inc. or certain put options by the Bancorp. In 2016, the Bancorp recognized a gain of $164 million in other noninterest income in the Consolidated Statements of Income associated with these options. The Bancorp received $63 million and $108 million in settlement for the call options and put options exercised during 2017 and 2018, respectively. 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 $44 million in other noninterest income in the Consolidated Statements of Income associated with the TRA during the years ended December 31, 2019, 2018 and 2017, respectively.
The following table provides the estimated cash flows expected to be received subsequent to December 31, 2019 associated with the TRA for the years ending December 31, 2020 and thereafter:
| ($ in millions) | Cash Flows to be Received from Put/Call Options Exercised in the First Quarter of 2020 | Cash Flows to be Received from Put/Call Options Expected to be Exercised | Estimated Cash Flows to be Received not Subject to Put/Call Option (a) | |||||||||||||
| 2020 | $ | 31 | 1 | |||||||||||||
| 2021 | 11 | 73 | ||||||||||||||
| 2022 | 139 | 44 | ||||||||||||||
| 2023 | 150 | 45 | ||||||||||||||
| 2024 | 35 | 22 | ||||||||||||||
| 2025 | 11 | |||||||||||||||
| Total | $ | 42 | 324 | 196 | ||||||||||||
| (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 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.
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 other noninterest income 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 in other noninterest expense in the Consolidated Statements of Income.
CDC investments
The Bancorp’s subsidiary, CDC, has equity investments in entities in which the Bancorp had $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 $77 million of deposits for these entities at December 31, 2019 and 2018, respectively. For further information on CDC investments, refer to Note 13.
163 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- INCOME TAXES
The Bancorp and its subsidiaries file a consolidated federal income tax return. The following is a summary of applicable income taxes included in the Consolidated Statements of Income for the years ended December 31:
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Current income tax expense (benefit): | ||||||||||||
| U.S. Federal income taxes | $ | 788 | 463 | 986 | ||||||||
| State and local income taxes | 148 | 71 | 68 | |||||||||
| Foreign income taxes | - | 8 | (3) | |||||||||
| Total current income tax expense | 936 | 542 | 1,051 | |||||||||
| Deferred income tax (benefit) expense: | ||||||||||||
| U.S. Federal income taxes | (212) | 24 | (254) | |||||||||
| State and local income taxes | (35) | 4 | 2 | |||||||||
| Foreign income taxes | 1 | 2 | - | |||||||||
| Total deferred income tax (benefit) expense | (246) | 30 | (252) | |||||||||
| Applicable income tax expense | $ | 690 | 572 | 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:
| 2019 | 2018 | 2017 | ||||||||||
| Statutory tax rate | 21.0 | % | 21.0 | 35.0 | ||||||||
| Increase (decrease) resulting from: | ||||||||||||
| State taxes, net of federal benefit | 2.8 | 2.1 | 1.5 | |||||||||
| Tax-exempt income | (1.2 | ) | (0.8 | ) | (1.1 | ) | ||||||
| LIHTC investment and other tax benefits | (5.0 | ) | (6.8 | ) | (6.9 | ) | ||||||
| LIHTC investment proportional amortization | 4.4 | 5.6 | 7.4 | |||||||||
| Other tax credits | (0.2 | ) | (0.1 | ) | (0.4 | ) | ||||||
| U.S. tax legislation impact on deferred taxes | - | - | (8.5 | ) | ||||||||
| Other, net | (0.2 | ) | (0.3 | ) | (0.2 | ) | ||||||
| Effective tax rate | 21.6 | % | 20.7 | 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) | 2019 | 2018 | 2017 | |||||||||
| Unrecognized tax benefits at January 1 | $ | 55 | 34 | 24 | ||||||||
| Gross increases for tax positions taken during prior period | 25 | 20 | 17 | |||||||||
| Gross decreases for tax positions taken during prior period | (3) | (1) | (1) | |||||||||
| Gross increases for tax positions taken during current period | 6 | 8 | 3 | |||||||||
| Settlements with taxing authorities | (9) | (5) | (7) | |||||||||
| Lapse of applicable statute of limitations | (9) | (1) | (2) | |||||||||
| Unrecognized tax benefits at December 31 (a) | $ | 65 | 55 | 34 | ||||||||
| (a) | With the exception of $6 and $5 in 2019 and 2018, respectively, all amounts represent unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. |
|---|
The Bancorp’s unrecognized tax benefits as of December 31, 2019, 2018 and 2017 primarily relate to state income tax exposures from taking tax positions where the Bancorp believes it is likely that, upon examination, a state will take a position contrary to the position taken by the Bancorp.
While it is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of the Bancorp’s uncertain tax positions could increase or decrease during the next twelve months, the Bancorp believes it is unlikely that its unrecognized tax benefits will change by a material amount during the next twelve months.
164 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes are comprised of the following items at December 31:
| ($ in millions) | 2019 | 2018 | ||||||
| Deferred tax assets: | ||||||||
| Allowance for loan and lease losses | $ | 252 | 232 | |||||
| Deferred compensation | 103 | 79 | ||||||
| Other comprehensive income | - | 42 | ||||||
| Reserve for unfunded commitments | 30 | 28 | ||||||
| Reserves | 32 | 28 | ||||||
| State net operating loss carryforwards | 9 | 7 | ||||||
| Other | 154 | 112 | ||||||
| Total deferred tax assets | $ | 580 | 528 | |||||
| Deferred tax liabilities: | ||||||||
| Lease financing | $ | 650 | 599 | |||||
| Investments in joint ventures and partnership interests | 25 | 131 | ||||||
| MSRs and related economic hedges | 144 | 107 | ||||||
| State deferred taxes | 47 | 73 | ||||||
| Bank premises and equipment | 73 | 60 | ||||||
| Other comprehensive income | 352 | - | ||||||
| Other | 127 | 102 | ||||||
| Total deferred tax liabilities | $ | 1,418 | 1,072 | |||||
| Total net deferred tax liability | $ | (838) | (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 net operating losses are presented net of specific valuation 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 $157 million in allocations of earnings for bad debt deductions of former thrift subsidiaries for which no income tax has been provided. Under current tax law, if certain of the Bancorp’s subsidiaries use these bad debt reserves for purposes other than to absorb bad debt losses, they will be subject to federal income tax at the current corporate tax rate.
165 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- RETIREMENT AND BENEFIT PLANS
The Bancorp’s qualified defined benefit plan’s benefits were frozen in 1998, except for grandfathered employees. The Bancorp’s other defined benefit retirement plans consist of
non-qualified
plans which are frozen and funded on an
as-needed
basis. A majority of these plans were obtained in acquisitions and are included with the
qualified defined benefit plan in the following tables (“the Plan”). The Bancorp recognizes the overfunded and underfunded status of the Plan as an asset and liability, respectively, in the Consolidated Balance Sheets.
The overfunded and underfunded amounts recognized in other assets and accrued taxes, interest and expense, respectively, on the Consolidated Balance Sheets were as follows as of December 31:
| ($ in millions) | 2019 | 2018 | ||||||
| Prepaid benefit cost | $ | - | 1 | |||||
| Accrued benefit liability | (19 | ) | (18 | ) | ||||
| Net underfunded status | $ | (19 | ) | (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) | 2019 | 2018 | ||||||
| Fair value of plan assets at January 1 | $ | - | 185 | |||||
| Actual return on assets | - | (6 | ) | |||||
| Settlement | - | (9 | ) | |||||
| Benefits paid | - | (6 | ) | |||||
| Fair value of plan assets at December 31 | $ | - | 164 | |||||
| Projected benefit obligation at January 1 | $ | - | 188 | |||||
| Interest cost | - | 6 | ||||||
| Settlement | - | (9 | ) | |||||
| Actuarial gain | - | (16 | ) | |||||
| Benefits paid | - | (6 | ) | |||||
| Projected benefit obligation at December 31 | $ | - | 163 | |||||
| Overfunded projected benefit obligation at December 31 | $ | - | 1 | |||||
| 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 31, 2018. |
|---|
| (b) | Since the Plan’s benefits are frozen, the rate of compensation increase is no longer an assumption used to calculate the accumulated benefit obligation. Therefore, the accumulated benefit obligation was the same as the projected benefit obligation at December 31, 2018. |
|---|
Plans with an underfunded status
| ($ in millions) | 2019 | 2018 | ||||||
| Fair value of plan assets at January 1 | $ | 164 | - | |||||
| Actual return on assets | 26 | - | ||||||
| Contributions | 2 | 3 | ||||||
| Settlement | (9 | ) | - | |||||
| Benefits paid | (8 | ) | (3 | ) | ||||
| Fair value of plan assets at December 31 | $ | 175 | - | |||||
| Projected benefit obligation at January 1 | $ | 181 | 21 | |||||
| Interest cost | 7 | 1 | ||||||
| Settlement | (9 | ) | - | |||||
| Actuarial loss (gain) | 23 | (1 | ) | |||||
| Benefits paid | (8 | ) | (3 | ) | ||||
| Projected benefit obligation at December 31 | $ | 194 | 18 | |||||
| Underfunded projected benefit obligation at December 31 | $ | (19 | ) | (18 | ) | |||
| Accumulated benefit obligation at December 31 (a) | $ | 194 | 18 |
| (a) | Since the Plan’s benefits are frozen, the rate of compensation increase is no longer an assumption used to calculate the accumulated benefit obligation. Therefore, the accumulated benefit obligation was the same as the projected benefit obligation at both December 31, 2019 and 2018. |
|---|
The estimated net actuarial loss for the Plan that will be amortized from AOCI into net periodic benefit cost during 2020 is $6 million. The estimated net prior service cost for the Plan that will be amortized from AOCI into net periodic benefit cost during 2020 is immaterial to the Consolidated Financial Statements.
166 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes net periodic benefit cost and other changes in the Plan’s assets and benefit obligations recognized in OCI for the years ended December 31:
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Components of net periodic benefit cost: | ||||||||||||
| Interest cost | $ | 7 | 7 | 8 | ||||||||
| Expected return on assets | (8 | ) | (11 | ) | (10 | ) | ||||||
| Amortization of net actuarial loss | 6 | 6 | 7 | |||||||||
| Settlement | 3 | 3 | 4 | |||||||||
| Net periodic benefit cost | $ | 8 | 5 | 9 | ||||||||
| Other changes in plan assets and benefit obligations recognized in other comprehensive income: | ||||||||||||
| Net actuarial loss (gain) | $ | 5 | (1 | ) | (1 | ) | ||||||
| Amortization of net actuarial loss | (6 | ) | (6 | ) | (7 | ) | ||||||
| Settlement | (3 | ) | (3 | ) | (4 | ) | ||||||
| Total recognized in other comprehensive income | (4 | ) | (10 | ) | (12 | ) | ||||||
| Total recognized in net periodic benefit cost and other comprehensive income | $ | 4 | (5 | ) | (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:
| Fair Value Measurements Using (a) | ||||||||||||||||
| 2019 ($ in millions) | Level 1 (c) | Level 2 (c) | Level 3 | Total Fair Value | ||||||||||||
| Cash equivalents | $ | 14 | - | - | 14 | |||||||||||
| Mutual and exchange-traded funds | 76 | - | - | 76 | ||||||||||||
| Debt securities: | ||||||||||||||||
| U.S. Treasury and federal agencies securities | 57 | 6 | - | 63 | ||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| Non-agency commercial mortgage-backed securities | - | 1 | - | 1 | ||||||||||||
| Asset-backed securities and other debt securities (b) | - | 21 | - | 21 | ||||||||||||
| Total debt securities | $ | 57 | 28 | - | 85 | |||||||||||
| Total Plan assets | $ | 147 | 28 | - | 175 |
| (a) | For further information on fair value hierarchy levels, refer to Note 1. |
|---|
| (b) | Includes corporate bonds. |
|---|
| (c) | During the year ended December 31, 2019, no assets or liabilities were transferred between Level 1 and Level 2. |
|---|
| Fair Value Measurements Using (a) | ||||||||||||||||
| 2018 ($ in millions) | Level 1 (d) | Level 2 (d) | Level 3 | Total Fair Value | ||||||||||||
| Cash equivalents | $ | 25 | - | - | 25 | |||||||||||
| Mutual and exchange-traded funds | 46 | - | - | 46 | ||||||||||||
| Debt securities: | ||||||||||||||||
| U.S. Treasury and federal agencies securities | 43 | 3 | - | 46 | ||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| Non-agency commercial mortgage-backed securities | - | 1 | - | 1 | ||||||||||||
| Asset-backed securities and other debt securities (b) | - | 18 | - | 18 | ||||||||||||
| Total debt securities | $ | 43 | 22 | - | 65 | |||||||||||
| Total Plan assets, excluding collective funds | $ | 114 | 22 | - | 136 | |||||||||||
| Collective funds (NAV) (c) | 28 | |||||||||||||||
| Total Plan assets | $ | 164 |
| (a) | For further information on fair value hierarchy levels, refer to Note 1. |
|---|
| (b) | Includes corporate bonds. |
|---|
| (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 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
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 | 3.05 | % | 4.10 | 3.47 | ||||||||
| For measuring net periodic benefit cost: (a) | ||||||||||||
| Discount rate | 4.10 | 3.47 | 3.97 | |||||||||
| Expected return on plan assets | 5.50 | 6.00 | 6.00 | |||||||||
| (a) | Since the Plan’s benefits were frozen, except for grandfathered employees, the rate of compensation increase is no longer applicable beginning in 2014 since minimal grandfathered employees are still accruing benefits. |
|---|
Lowering both the expected rate of return on the plan assets and the discount rate by 0.25% would have increased the 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:
| Targeted Range (b) | 2019 | 2018 | ||||||||||
| Equity securities (a) | 0-55 % | 19 | 67 | |||||||||
| Fixed-income securities | 50-100 | 59 | 23 | |||||||||
| Alternative strategies | 0-5 | - | 3 | |||||||||
| Cash or cash equivalents | 0-100 | 22 | 7 | |||||||||
| Total | 100 % | 100 | ||||||||||
| (a) | Includes mutual and exchange-traded funds. |
|---|
| (b) | These reflect the targeted ranges for the year ended December 31, 2019. |
|---|
Plan Management’s objective is to maintain a fully-funded status of the qualified defined benefit plan while also minimizing the risk of excess assets. During 2018, Plan Management revised the 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 instruments including puts, calls, straddles or other option strategies, as approved by management.
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 “Committee”) is the plan administrator. The Trustee is required to provide to the Committee monthly and quarterly reports covering a list of Plan assets, portfolio performance, transactions and asset allocation. The Trustee is also required to keep the Committee apprised of any material changes in the Trustee’s outlook and recommended investment policy. There were no fees paid by the Plan for investment management, accounting or administrative services provided by the Trustee. Plan assets are not expected to be returned to the Bancorp during 2020.
168 Fifth Third Bancorp
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 $4 million for both of the years ended December 31, 2018 and 2017.
169 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ACCUMULATED OTHER COMPREHENSIVE INCOME
The tables below present the activity of the components of OCI and AOCI for the years ended December 31:
| Total OCI | Total AOCI | |||||||||||||||||||||||||||||||||
| 2019 ($ in millions) | Pre-tax Activity | Tax Effect | Net Activity | Beginning Balance | Net Activity | Ending Balance | ||||||||||||||||||||||||||||
| Unrealized holding gains on available-for-sale debt securities arising during the year | $ | 1,369 | (323 | ) | 1,046 | |||||||||||||||||||||||||||||
| Reclassification adjustment for net gains on available-for-sale debt securities included in net income | (9 | ) | 2 | (7 | ) | |||||||||||||||||||||||||||||
| Net unrealized gains on available-for-sale debt securities | 1,360 | (321 | ) | 1,039 | (227 | ) | 1,039 | 812 | ||||||||||||||||||||||||||
| Unrealized holding gains on cash flow hedge derivatives arising during the year | 348 | (73 | ) | 275 | ||||||||||||||||||||||||||||||
| Reclassification adjustment for net gains on cash flow hedge derivatives included in net income | (16 | ) | 3 | (13 | ) | |||||||||||||||||||||||||||||
| Net unrealized gains on cash flow hedge derivatives | 332 | (70 | ) | 262 | 160 | 262 | 422 | |||||||||||||||||||||||||||
| Net actuarial loss arising during the year | (5 | ) | - | (5 | ) | |||||||||||||||||||||||||||||
| Reclassification of amounts to net periodic benefit costs | 9 | (1 | ) | 8 | ||||||||||||||||||||||||||||||
| Defined benefit pension plans, net | 4 | (1 | ) | 3 | (45 | ) | 3 | (42 | ) | |||||||||||||||||||||||||
| Total | $ | 1,696 | (392 | ) | 1,304 | (112 | ) | 1,304 | 1,192 | |||||||||||||||||||||||||
| Total OCI | Total AOCI | |||||||||||||||||||||||||||||||||
| 2018 ($ in millions) | Pre-tax Activity | Tax Effect | Net Activity | Beginning Balance | Net Activity | Ending Balance | ||||||||||||||||||||||||||||
| Unrealized holding losses on available-for-sale debt securities arising during the year | $ | (483 | ) | 112 | (371 | ) | ||||||||||||||||||||||||||||
| Reclassification adjustment for net losses on available-for-sale debt securities included in net income | 11 | (2 | ) | 9 | ||||||||||||||||||||||||||||||
| Net unrealized losses on available-for-sale debt securities | (472 | ) | 110 | (362 | ) | 135 | (362 | ) | (227 | ) | ||||||||||||||||||||||||
| Unrealized holding gains on cash flow hedge derivatives arising during the year | 214 | (45 | ) | 169 | ||||||||||||||||||||||||||||||
| Reclassification adjustment for net losses on cash flow hedge derivatives included in net income | 2 | - | 2 | |||||||||||||||||||||||||||||||
| Net unrealized gains on cash flow hedge derivatives | 216 | (45 | ) | 171 | (11 | ) | 171 | 160 | ||||||||||||||||||||||||||
| Net actuarial gain arising during the year | 1 | - | 1 | |||||||||||||||||||||||||||||||
| Reclassification of amounts to net periodic benefit costs | 9 | (2 | ) | 7 | ||||||||||||||||||||||||||||||
| Defined benefit pension plans, net | 10 | (2 | ) | 8 | (53 | ) | 8 | (45 | ) | |||||||||||||||||||||||||
| Total | $ | (246 | ) | 63 | (183 | ) | 71 | (183 | ) | (112 | ) | |||||||||||||||||||||||
| Total OCI | Total AOCI | |||||||||||||||||||||||||||||||||
| 2017 ($ in millions) | Pre-tax Activity | Tax Effect | Net Activity | Beginning Balance | Net Activity | Ending Balance | ||||||||||||||||||||||||||||
| Unrealized holding gains on available-for-sale securities arising during the year | $ | 14 | 7 | 21 | ||||||||||||||||||||||||||||||
| Reclassification adjustment for net losses on available-for-sale securities included in net income | 3 | 1 | 4 | |||||||||||||||||||||||||||||||
| Net unrealized gains on available-for-sale securities | 17 | 8 | 25 | 101 | 25 | 126 | ||||||||||||||||||||||||||||
| Unrealized holding losses on cash flow hedge derivatives arising during the year | (11 | ) | 4 | (7 | ) | |||||||||||||||||||||||||||||
| Reclassification adjustment for net gains on cash flow hedge derivatives included in net income | (19 | ) | 7 | (12 | ) | |||||||||||||||||||||||||||||
| Net unrealized losses on cash flow hedge derivatives | (30 | ) | 11 | (19 | ) | 10 | (19 | ) | (9 | ) | ||||||||||||||||||||||||
| Net actuarial gain arising during the year | 1 | - | 1 | |||||||||||||||||||||||||||||||
| Reclassification of amounts to net periodic benefit costs | 11 | (4 | ) | 7 | ||||||||||||||||||||||||||||||
| Defined benefit pension plans, net | 12 | (4 | ) | 8 | (52 | ) | 8 | (44 | ) | |||||||||||||||||||||||||
| Total | $ | (1 | ) | 15 | 14 | 59 | 14 | 73 | ||||||||||||||||||||||||||
170 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below presents reclassifications out of AOCI for the years ended December 31:
| Components of AOCI: ($ in millions) | Consolidated Statements of Income Caption | 2019 | 2018 | 2017 | ||||||||||||
| Net unrealized gains (losses) on available-for-sale debt securities: (b) | ||||||||||||||||
| Net gains (losses) included in net income | Securities gains (losses), net | $ | 9 | (11 | ) | (3) | ||||||||||
| Income before income taxes | 9 | (11 | ) | (3) | ||||||||||||
| Applicable income tax expense | (2 | ) | 2 | (1) | ||||||||||||
| Net income | 7 | (9 | ) | (4) | ||||||||||||
| Net unrealized gains (losses) on cash flow hedge derivatives: (b) | ||||||||||||||||
| Interest rate contracts related to C&I loans | Interest and fees on loans and leases | 16 | (2 | ) | 19 | |||||||||||
| Income before income taxes | 16 | (2 | ) | 19 | ||||||||||||
| Applicable income tax expense | (3 | ) | - | (7) | ||||||||||||
| Net income | 13 | (2 | ) | 12 | ||||||||||||
| Net periodic benefit costs: (b) | ||||||||||||||||
| Amortization of net actuarial loss | Employee benefits expense (a) | (6 | ) | (6 | ) | (7) | ||||||||||
| Settlements | Employee benefits expense (a) | (3 | ) | (3 | ) | (4) | ||||||||||
| Income before income taxes | (9 | ) | (9 | ) | (11) | |||||||||||
| Applicable income tax expense | 1 | 2 | 4 | |||||||||||||
| Net income | (8 | ) | (7 | ) | (7) | |||||||||||
| Total reclassifications for the period | Net income | $ | 12 | (18 | ) | 1 | ||||||||||
| (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. |
|---|
171 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- COMMON, PREFERRED AND TREASURY STOCK
The table presents a summary of the share activity within common, preferred and treasury stock for the years ended:
| Common Stock | Preferred Stock | Treasury Stock | ||||||||||||||||||||||
| ($ in millions, except share data) | Value | Shares | Value | Shares | Value | Shares | ||||||||||||||||||
| December 31, 2016 | $ | 2,051 | 923,892,581 | $ | 1,331 | 54,000 | $ | (3,433) | 173,413,282 | |||||||||||||||
| Shares acquired for treasury | - | - | - | - | (1,588) | 58,493,506 | ||||||||||||||||||
| Impact of stock transactions under stock compensation plans, net | - | - | - | - | 16 | (1,693,503) | ||||||||||||||||||
| Other | - | - | - | - | 3 | (125,597) | ||||||||||||||||||
| December 31, 2017 | $ | 2,051 | 923,892,581 | $ | 1,331 | 54,000 | $ | (5,002) | 230,087,688 | |||||||||||||||
| Shares acquired for treasury | - | - | - | - | (1,494) | 49,967,134 | ||||||||||||||||||
| Impact of stock transactions under stock compensation plans, net | - | - | - | - | 23 | (2,698,451) | ||||||||||||||||||
| Other | - | - | - | - | 2 | (94,647) | ||||||||||||||||||
| December 31, 2018 | $ | 2,051 | 923,892,581 | $ | 1,331 | 54,000 | $ | (6,471) | 277,261,724 | |||||||||||||||
| Shares acquired for treasury | - | - | - | - | (1,763) | 64,601,891 | ||||||||||||||||||
| Issuance of preferred shares, Series K | - | - | 242 | 10,000 | - | - | ||||||||||||||||||
| Conversion of outstanding preferred stock issued by a Bancorp subsidiary | - | - | 197 | 200,000 | - | - | ||||||||||||||||||
| Impact of MB Financial, Inc. acquisition | - | - | - | - | 2,447 | (122,848,442) | ||||||||||||||||||
| Impact of stock transactions under stock compensation plans, net | - | - | - | - | 56 | (4,258,132) | ||||||||||||||||||
| Other | - | - | - | - | 7 | 219,911 | ||||||||||||||||||
| December 31, 2019 | $ | 2,051 | 923,892,581 | $ | 1,770 | 264,000 | $ | (5,724) | 214,976,952 | |||||||||||||||
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 $25,000 liquidation preference. The preferred stock accrued 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.
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.
172 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The FRB indicated to the Bancorp that it did not object to the potential repurchase of $1.161 billion of common shares with the additional ability to repurchase common shares in an amount equal to any
after-tax
gains realized by the Bancorp from the sale of Vantiv, Inc. common stock or from the termination and settlement of any portion of the TRA with Vantiv, Inc., if executed, for the period beginning July 1, 2017 and ending June 30, 2018.
On June 28, 2018, the Bancorp announced the results of its capital plan submitted to the FRB as part of the 2018 CCAR. The FRB indicated to the Bancorp that it did not object to the potential repurchase of $1.651 billion of common shares with the additional ability to repurchase common shares in an amount equal to any
after-tax
gains realized by the Bancorp from the sale of Worldpay, Inc. common stock or from the termination and settlement of any portion of the TRA with Worldpay, Inc., if executed, for the period beginning July 1, 2018 and ending June 30, 2019.
On May 21, 2018, the Bancorp announced the planned acquisition of MB Financial, Inc. As a result of this transaction, the FRB required the Bancorp to resubmit its CCAR plan recognizing the pro forma impact of the combined Fifth Third/MB Financial, Inc. post-merger entity. On October 5, 2018, Fifth Third resubmitted its capital plan to the FRB. On December 27, 2018, the FRB indicated to the Bancorp that it did not object to the resubmitted capital plan. The resubmitted capital plan called for no 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 $250 billion of total consolidated assets.
The Bancorp entered into a number of accelerated share repurchase transactions during the years ended December 31, 2019 and 2018. As part of these transactions, the Bancorp entered into forward contracts in which the final number of shares delivered at settlement was based generally on a discount to the average daily volume weighted-average price of the Bancorp’s common stock during the term of these repurchase agreements. The accelerated share repurchases were treated as two separate transactions: (i) the repurchase of treasury shares on the repurchase date and (ii) a forward contract indexed to the Bancorp’s common stock.
The following table presents a summary of the Bancorp’s accelerated share repurchase transactions that were entered into or settled during the years ended December 31, 2019 and 2018:
| Shares Repurchased on | Shares Received from | Total Shares | ||||||||||||||||||
| Repurchase Date | Amount ($ in millions) | Repurchase Date | Forward Contract | Repurchased | Settlement Date | |||||||||||||||
| December 19, 2017 | 273 | 7,727,273 | 824,367 | 8,551,640 | March 19, 2018 | |||||||||||||||
| February 12, 2018 | 318 | 8,691,318 | 1,015,731 | 9,707,049 | March 26, 2018 | |||||||||||||||
| May 25, 2018 | 235 | 6,402,244 | 1,172,122 | 7,574,366 | June 15, 2018 | |||||||||||||||
| March 27, 2019 (a) | 913 | 31,779,280 | 2,026,584 | 33,805,864 | June 28, 2019 | |||||||||||||||
| April 29, 2019 (b) | 200 | 6,015,570 | 1,217,805 | 7,233,375 | May 23, 2019 - May 24, 2019 | |||||||||||||||
| August 7, 2019 | 100 | 3,150,482 | 694,238 | 3,844,720 | August 16, 2019 | |||||||||||||||
| August 9, 2019 (b) | 200 | 6,405,426 | 1,475,487 | 7,880,913 | August 28, 2019 | |||||||||||||||
| October 25, 2019 | 300 | 9,020,163 | 1,149,121 | 10,169,284 | December 17, 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. |
|---|
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
- 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:
| 2019 | 2018 | 2017 | ||||||||||
| Expected life (in years) | 7 | 7 | 6 | |||||||||
| Expected volatility | 32 | % | 35 | 37 | ||||||||
| Expected dividend yield | 3.3 | 1.9 | 2.1 | |||||||||
| Risk-free interest rate | 2.6 | 2.6 | 2.1 | |||||||||
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-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
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||
| SARs (in thousands, except per share data) | Number of SARs | Weighted- Average Grant Price Per Share | Number of SARs | Weighted- Average Grant Price Per Share | Number of SARs | Weighted- Average Grant Price Per Share | ||||||||||||||||||||||
| Outstanding at January 1 | 26,196 | $ | 17.30 | 31,929 | $ | 17.22 | 40,041 | $ | 18.30 | |||||||||||||||||||
| Granted | 399 | 26.72 | 272 | 33.15 | 3,672 | 26.52 | ||||||||||||||||||||||
| Exercised | (4,829) | 13.34 | (5,058) | 16.96 | (6,953) | 16.00 | ||||||||||||||||||||||
| Forfeited or expired | (317) | 23.47 | (947) | 20.93 | (4,831) | 35.08 | ||||||||||||||||||||||
| Outstanding at December 31 | 21,449 | $ | 18.38 | 26,196 | $ | 17.30 | 31,929 | $ | 17.22 | |||||||||||||||||||
| Exercisable at December 31 | 18,249 | $ | 17.50 | 20,132 | $ | 15.90 | 21,403 | $ | 15.30 | |||||||||||||||||||
The following table summarizes outstanding and exercisable SARs by grant price per share at December 31, 2019:
| Outstanding SARs | Exercisable SARs | |||||||||||||||||||||||||||
| SARs (in thousands, except per share data) | Number of SARs | Weighted- Average Grant Price Per Share | Weighted- Average Remaining Contractual Life (in years) | Number of SARs | Weighted- Average Grant Price Per Share | Weighted- Average Remaining Contractual Life (in years) | ||||||||||||||||||||||
| $10.01-$20.00 | 15,944 | $ | 16.12 | 3.7 | 14,694 | $ | 16.00 | 3.5 | ||||||||||||||||||||
| $20.01-$30.00 | 5,236 | 24.50 | 6.1 | 3,464 | 23.44 | 5.3 | ||||||||||||||||||||||
| $30.01-$40.00 | 269 | 33.15 | 8.0 | 91 | 33.15 | 7.9 | ||||||||||||||||||||||
| All SARs | 21,449 | $ | 18.38 | 4.4 | 18,249 | $ | 17.50 | 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.
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| RSAs (in thousands, except per share data) | Shares | Weighted-Average Grant-Date Fair Value Per Share | Shares | Weighted-Average Grant-Date Fair Value Per Share | Shares | Weighted-Average Grant-Date Fair Value Per Share | ||||||||||||||||||
| Outstanding at January 1 | 868 | $ | 19.18 | 2,321 | $ | 19.72 | 4,638 | $ | 19.44 | |||||||||||||||
| Granted | - | - | - | - | 7 | 21.14 | ||||||||||||||||||
| Assumed | 11 | 25.48 | - | - | - | - | ||||||||||||||||||
| Released | (867 | ) | 18.91 | (1,347 | ) | 20.09 | (2,063 | ) | 19.10 | |||||||||||||||
| Forfeited | (12 | ) | 19.01 | (106 | ) | 19.40 | (261 | ) | 19.75 | |||||||||||||||
| Outstanding at December 31 | - | $ | 25.48 | 868 | $ | 19.18 | 2,321 | $ | 19.72 | |||||||||||||||
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
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| RSUs (in thousands, except per unit data) | Units | Weighted-Average Grant-Date Fair Value Per Unit | Units | Weighted-Average Grant-Date Fair Value Per Unit | Units | Weighted-Average Grant-Date Fair Value Per Unit | ||||||||||||||||||
| Outstanding at January 1 | 8,020 | $ | 27.04 | 6,986 | $ | 22.25 | 5,086 | $ | 17.84 | |||||||||||||||
| Granted | 4,375 | 26.68 | 3,674 | 32.84 | 3,652 | 26.71 | ||||||||||||||||||
| Assumed | 1,476 | 25.48 | - | - | - | - | ||||||||||||||||||
| Released | (2,951 | ) | 24.76 | (1,977 | ) | 21.15 | (1,194 | ) | 17.64 | |||||||||||||||
| Forfeited | (914 | ) | 27.41 | (663 | ) | 26.45 | (558 | ) | 21.02 | |||||||||||||||
| Outstanding at December 31 | 10,006 | $ | 27.30 | 8,020 | $ | 27.04 | 6,986 | $ | 22.25 | |||||||||||||||
The following table summarizes outstanding RSUs by grant-date fair value per unit at December 31, 2019:
| Outstanding RSUs | ||||||||
| RSUs (in thousands) | Units | Weighted-Average Remaining Contractual Life (in years) | ||||||
| $15.01-$20.00 | 870 | 0.7 | ||||||
| $20.01-$25.00 | 243 | 0.5 | ||||||
| $25.01-$30.00 | 6,477 | 1.2 | ||||||
| $30.01-$35.00 | 2,416 | 1.6 | ||||||
| All RSUs | 10,006 | 1.2 | ||||||
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 | ||||||||||||||||||||||
| Stock Options (in thousands, except per share data) | Number of Options | Weighted-Average Exercise Price Per Share | Number of Options | Weighted-Average Exercise Price Per Share | Number of Options | Weighted-Average Exercise Price Per Share | ||||||||||||||||||
| Outstanding at January 1 | - | $ | - | 2 | $ | 16.50 | 25 | $ | 19.17 | |||||||||||||||
| Assumed | 2,120 | 19.34 | - | - | - | - | ||||||||||||||||||
| Exercised | (660) | 17.36 | (1) | 8.59 | (18) | 14.05 | ||||||||||||||||||
| Forfeited or expired | (79) | 22.18 | (1) | 24.41 | (5) | 40.98 | ||||||||||||||||||
| Outstanding at December 31 | 1,381 | $ | 20.15 | - | $ | - | 2 | $ | 16.50 | |||||||||||||||
| Exercisable at December 31 | 1,162 | $ | 19.17 | - | $ | - | 2 | $ | 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) | Number of Options | Weighted- Exercise Price Per Share | Weighted- Average Contractual Life (in years) | Number of Options | Weighted- Exercise Price Per Share | Weighted- Average Contractual Life (in years) | ||||||||||||||||||||||
| Under $10.00 | 9 | $ | 8.62 | 6.7 | 7 | $ | 8.52 | 6.7 | ||||||||||||||||||||
| $10.01-$20.00 | 884 | 17.04 | 3.5 | 811 | 16.91 | 3.3 | ||||||||||||||||||||||
| $20.01-$30.00 | 488 | 25.98 | 4.4 | 344 | 26.14 | 2.7 | ||||||||||||||||||||||
| All stock options | 1,381 | $ | 20.15 | 3.8 | 1,162 | $ | 19.17 | 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 shares.
Awards granted during the years ended December 31, 2019, 2018 and 2017 will be entirely settled in stock.
176 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $1 million in each of the respective years. As of December 31, 2019, there were 4.6 million shares available for future issuance, which represents the remaining shares of Fifth Third common stock under the Bancorp’s 1993 Stock Purchase Plan, as amended and restated, including an additional 1.5 million shares approved by shareholders on March 28, 2007 and an additional 12 million shares approved by shareholders on April 21, 2009.
177 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE
The following table presents the major components of other noninterest income and other noninterest expense for the years ended December 31:
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Other noninterest income: | ||||||||||||
| Gain on sale of Worldpay, Inc. shares | $ | 562 | 205 | 1,037 | ||||||||
| Income from the TRA associated with Worldpay, Inc. | 346 | 20 | 44 | |||||||||
| Operating lease income | 151 | 84 | 96 | |||||||||
| Private equity investment income | 65 | 63 | 36 | |||||||||
| BOLI income | 60 | 56 | 52 | |||||||||
| Cardholder fees | 58 | 56 | 54 | |||||||||
| Consumer loan and lease fees | 23 | 23 | 23 | |||||||||
| Banking center income | 22 | 21 | 20 | |||||||||
| Insurance income | 19 | 20 | 8 | |||||||||
| Net gains (losses) on loan sales | 3 | 2 | (2) | |||||||||
| Equity method income from interest in Worldpay Holding, LLC | 2 | 1 | 47 | |||||||||
| Loss on swap associated with the sale of Visa, Inc. Class B Shares | (107) | (59) | (80) | |||||||||
| Net losses on disposition and impairment of bank premises and equipment | (23) | (43) | - | |||||||||
| Loss on sale of business | (4) | - | - | |||||||||
| Gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc. | - | 414 | - | |||||||||
| Other, net | 47 | 24 | 22 | |||||||||
| Total other noninterest income | $ | 1,224 | 887 | 1,357 | ||||||||
| Other noninterest expense: | ||||||||||||
| Marketing | $ | 162 | 147 | 114 | ||||||||
| Loan and lease | 142 | 112 | 102 | |||||||||
| Operating lease | 124 | 76 | 87 | |||||||||
| Losses and adjustments | 102 | 61 | 59 | |||||||||
| FDIC insurance and other taxes | 81 | 119 | 127 | |||||||||
| Professional service fees | 70 | 67 | 83 | |||||||||
| Data processing | 70 | 57 | 58 | |||||||||
| Travel | 68 | 52 | 46 | |||||||||
| Intangible amortization | 45 | 5 | 2 | |||||||||
| Postal and courier | 38 | 35 | 42 | |||||||||
| Donations | 30 | 21 | 28 | |||||||||
| Recruitment and education | 28 | 32 | 35 | |||||||||
| Supplies | 14 | 13 | 14 | |||||||||
| Insurance | 14 | 13 | 12 | |||||||||
| Loss (gain) on partnership investments | 2 | (4) | 14 | |||||||||
| Other, net | 239 | 214 | 184 | |||||||||
| Total other noninterest expense | $ | 1,229 | 1,020 | 1,007 | ||||||||
178 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 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:
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||||||
| ($ in millions, except per share data) | Income | Average Shares | Per Share Amount | Income | Average Shares | Per Share Amount | Income | Average Shares | Per Share Amount | |||||||||||||||||||||||||||||
| Earnings Per Share: | ||||||||||||||||||||||||||||||||||||||
| Net income available to common shareholders | $ | 2,419 | 2,118 | 2,105 | ||||||||||||||||||||||||||||||||||
| Less: Income allocated to participating securities | 21 | 23 | 23 | |||||||||||||||||||||||||||||||||||
| Net income allocated to common shareholders | $ | 2,398 | 710 | 3.38 | 2,095 | 673 | 3.11 | 2,082 | 728 | 2.86 | ||||||||||||||||||||||||||||
| Earnings Per Diluted Share: | ||||||||||||||||||||||||||||||||||||||
| Net income available to common shareholders | $ | 2,419 | 2,118 | 2,105 | ||||||||||||||||||||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||||||||||||||||
| Stock-based awards | - | 10 | - | 12 | - | 13 | ||||||||||||||||||||||||||||||||
| Net income available to common shareholders plus assumed conversions | 2,419 | 2,118 | 2,105 | |||||||||||||||||||||||||||||||||||
| Less: Income allocated to participating securities | 21 | 23 | 23 | |||||||||||||||||||||||||||||||||||
| Net income allocated to common shareholders plus assumed conversions | $ | 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
- 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 | ||||||||||||||||
| December 31, 2019 ($ in millions) | Level 1 (c) | Level 2 (c) | Level 3 | Total Fair Value | ||||||||||||
| Assets: | ||||||||||||||||
| Available-for-sale debt and other securities: | ||||||||||||||||
| U.S. Treasury and federal agency securities | $ | 75 | - | - | 75 | |||||||||||
| Obligations of states and political subdivisions securities | - | 18 | - | 18 | ||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| Agency residential mortgage-backed securities | - | 14,115 | - | 14,115 | ||||||||||||
| Agency commercial mortgage-backed securities | - | 15,693 | - | 15,693 | ||||||||||||
| Non-agency commercial mortgage-backed securities | - | 3,365 | - | 3,365 | ||||||||||||
| Asset-backed securities and other debt securities | - | 2,206 | - | 2,206 | ||||||||||||
| Available-for-sale debt and other securities (a) | 75 | 35,397 | - | 35,472 | ||||||||||||
| Trading debt securities: | ||||||||||||||||
| U.S. Treasury and federal agency securities | 2 | - | - | 2 | ||||||||||||
| Obligations of states and political subdivisions securities | - | 9 | - | 9 | ||||||||||||
| Agency residential mortgage-backed securities | - | 55 | - | 55 | ||||||||||||
| Asset-backed securities and other debt securities | - | 231 | - | 231 | ||||||||||||
| Trading debt securities | 2 | 295 | - | 297 | ||||||||||||
| Equity securities | 554 | 10 | - | 564 | ||||||||||||
| Residential mortgage loans held for sale | - | 1,264 | - | 1,264 | ||||||||||||
| Residential mortgage loans (b) | - | - | 183 | 183 | ||||||||||||
| Servicing rights | - | - | 993 | 993 | ||||||||||||
| Derivative assets: | ||||||||||||||||
| Interest rate contracts | 1 | 1,218 | 18 | 1,237 | ||||||||||||
| Foreign exchange contracts | - | 165 | - | 165 | ||||||||||||
| Commodity contracts | 37 | 234 | - | 271 | ||||||||||||
| Derivative assets (d) | 38 | 1,617 | 18 | 1,673 | ||||||||||||
| Total assets | $ | 669 | 38,583 | 1,194 | 40,446 | |||||||||||
| Liabilities: | ||||||||||||||||
| Derivative liabilities: | ||||||||||||||||
| Interest rate contracts | $ | 5 | 144 | 8 | 157 | |||||||||||
| Foreign exchange contracts | - | 151 | - | 151 | ||||||||||||
| Equity contracts | - | - | 163 | 163 | ||||||||||||
| Commodity contracts | 17 | 253 | - | 270 | ||||||||||||
| Derivative liabilities (e) | 22 | 548 | 171 | 741 | ||||||||||||
| Short positions (e) | 49 | 100 | - | 149 | ||||||||||||
| Total liabilities | $ | 71 | 648 | 171 | 890 | |||||||||||
| (a) | Excludes FHLB, FRB and DTCC restricted stock holdings totaling $76 , $478 and $2 , respectively, at December 31, 2019 . |
|---|
| (b) | Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment. |
|---|
| (c) | During the year ended December 31, 2019 , no assets or liabilities were transferred between Level 1 and Level 2. |
|---|
| (d) | Included in other assets in the Consolidated Balance Sheets. |
|---|
| (e) | Included in other liabilities in the Consolidated Balance Sheets. |
|---|
180 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Fair Value Measurements Using | ||||||||||||||||
| December 31, 2018 ($ in millions) | Level 1 (c) | Level 2 (c) | Level 3 | Total Fair Value | ||||||||||||
| Assets: | ||||||||||||||||
| Available-for-sale debt and other securities: | ||||||||||||||||
| U.S. Treasury and federal agency securities | $ | 97 | - | - | 97 | |||||||||||
| Obligations of states and political subdivisions securities | - | 2 | - | 2 | ||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| Agency residential mortgage-backed securities | - | 16,247 | - | 16,247 | ||||||||||||
| Agency commercial mortgage-backed securities | - | 10,650 | - | 10,650 | ||||||||||||
| Non-agency commercial mortgage-backed securities | - | 3,267 | - | 3,267 | ||||||||||||
| Asset-backed securities and other debt securities | - | 2,015 | - | 2,015 | ||||||||||||
| Available-for-sale debt and other securities (a) | 97 | 32,181 | - | 32,278 | ||||||||||||
| Trading debt securities: | ||||||||||||||||
| U.S. Treasury and federal agency securities | - | 16 | - | 16 | ||||||||||||
| Obligations of states and political subdivisions securities | - | 35 | - | 35 | ||||||||||||
| Agency residential mortgage-backed securities | - | 68 | - | 68 | ||||||||||||
| Asset-backed securities and other debt securities | - | 168 | - | 168 | ||||||||||||
| Trading debt securities | - | 287 | - | 287 | ||||||||||||
| Equity securities | 452 | - | - | 452 | ||||||||||||
| Residential mortgage loans held for sale | - | 537 | - | 537 | ||||||||||||
| Residential mortgage loans (b) | - | - | 179 | 179 | ||||||||||||
| Commercial loans held for sale | - | 7 | - | 7 | ||||||||||||
| Servicing rights | - | - | 938 | 938 | ||||||||||||
| Derivative assets: | ||||||||||||||||
| Interest rate contracts | - | 648 | 7 | 655 | ||||||||||||
| Foreign exchange contracts | - | 152 | - | 152 | ||||||||||||
| Commodity contracts | 93 | 214 | - | 307 | ||||||||||||
| Derivative assets (d) | 93 | 1,014 | 7 | 1,114 | ||||||||||||
| Total assets | $ | 642 | 34,026 | 1,124 | 35,792 | |||||||||||
| Liabilities: | ||||||||||||||||
| Derivative liabilities: | ||||||||||||||||
| Interest rate contracts | $ | 8 | 313 | 8 | 329 | |||||||||||
| Foreign exchange contracts | - | 142 | - | 142 | ||||||||||||
| Equity contracts | - | - | 125 | 125 | ||||||||||||
| Commodity contracts | 19 | 259 | - | 278 | ||||||||||||
| Derivative liabilities (e) | 27 | 714 | 133 | 874 | ||||||||||||
| Short positions (e) | 110 | 28 | - | 138 | ||||||||||||
| Total liabilities | $ | 137 | 742 | 133 | 1,012 | |||||||||||
| (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) | Included in other assets in the Consolidated Balance Sheets. |
|---|
| (e) | Included in other liabilities in the Consolidated Balance Sheets. |
|---|
The following is a description of the valuation methodologies used for significant instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Available-for-sale
debt and other securities, trading debt securities and equity securities
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities and equity securities. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar 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.
Residential mortgage loans held for sale
For residential mortgage loans held for sale for which the fair value election has been made, fair value is estimated based upon mortgage-backed securities prices and spreads to those prices or, for certain ARM loans, DCF models that may incorporate the anticipated portfolio composition, credit spreads of asset-backed securities with similar collateral and market conditions. The anticipated portfolio composition includes the effect of interest rate spreads and discount rates due to loan characteristics such as the state in which the loan was originated, the loan amount and the ARM margin. Residential mortgage loans held for sale that are valued based on mortgage-backed securities prices are classified within Level 2 of the valuation hierarchy as the valuation is based on external pricing for similar instruments. ARM loans classified as held for sale are also classified within Level 2 of the valuation hierarchy due to the use of observable inputs in the DCF model. These observable inputs include interest rate spreads from agency mortgage-backed securities market rates and observable discount rates.
Residential mortgage loans
Residential mortgage loans held for sale that are reclassified to held for investment are transferred from Level 2 to Level 3 of the fair value hierarchy.
181 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 loss severity assumptions quarterly to determine if adjustments are necessary based on decreases in observable housing market data. This group also reviews trades in comparable benchmark securities and adjusts the values of loans as necessary. Consumer Credit Risk is responsible for the credit component of the fair value which is based on internally developed loss rate models that take into account historical loss rates and loss severities based on underlying collateral values.
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 responsible 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.
Derivatives
Exchange-traded derivatives valued using quoted prices and certain
over-the-counter
derivatives valued using active bids are classified within Level 1 of the valuation hierarchy. Most of the Bancorp’s derivative contracts are valued using DCF or other models that incorporate current market interest rates, credit spreads assigned to the derivative counterparties and other market parameters and, therefore, are classified within Level 2 of the valuation hierarchy. Such derivatives include basic and structured interest rate, foreign exchange and commodity swaps and options.
Derivatives that are valued based upon models with significant unobservable market parameters are classified within Level 3 of the valuation hierarchy. During the years ended December 31, 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 loan closing rate assumptions as a significant unobservable input in the valuation process.
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 $4 million, respectively. These sensitivities are hypothetical and should be used with caution, as changes in fair value based on a variation in assumptions typically cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear.
The Consumer Line of Business Finance department, which reports to the Bancorp’s Chief Financial Officer, and the aforementioned Secondary Marketing department are responsible for determining the valuation methodology for IRLCs. Secondary Marketing, in conjunction with a third-party valuation provider, periodically review loan closing rate assumptions and recent loan sales to determine if adjustments are needed for current market conditions not reflected in historical data.
Short positions
Where quoted prices are available in an active market, short positions are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics or DCFs and therefore are classified within Level 2 of the valuation hierarchy.
182 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables are a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Residential | Interest Rate | |||||||||||||||||||
| Mortgage | Servicing | Derivatives, | Equity | Total | ||||||||||||||||
| For the year ended December 31, 2019 ($ in millions) | Loans | Rights | Net (a) | Derivatives | Fair Value | |||||||||||||||
| Balance, beginning of period | $ | 179 | 938 | (1) | (125) | 991 | ||||||||||||||
| Total (losses) gains (realized/unrealized): | ||||||||||||||||||||
| Included in earnings | (1) | (376) | 145 | (107) | (339) | |||||||||||||||
| Purchases/originations | - | 431 | (3) | - | 428 | |||||||||||||||
| Settlements | (31) | - | (131) | 69 | (93) | |||||||||||||||
| Transfers into Level 3 (b) | 36 | - | - | - | 36 | |||||||||||||||
| Balance, end of period | $ | 183 | 993 | 10 | (163) | 1,023 | ||||||||||||||
| 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) | $ | (1) | (250) | 20 | (107) | (338) | ||||||||||||||
| (a) | Net interest rate derivatives include derivative assets and liabilities of $18 and $8 , respectively, as of December 31, 2019 . |
|---|
| (b) | Includes certain residential mortgage loans originated as held for sale that were transferred to held for investment. |
|---|
| (c) | Includes interest income and expense. |
|---|
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Residential | Interest Rate | |||||||||||||||||||
| Mortgage | Servicing | Derivatives, | Equity | Total | ||||||||||||||||
| For the year ended December 31, 2018 ($ in millions) | Loans | Rights | Net (a) | Derivatives | Fair Value | |||||||||||||||
| Balance, beginning of period | $ | 137 | 858 | 3 | (137) | 861 | ||||||||||||||
| Total (losses) gains (realized/unrealized): | ||||||||||||||||||||
| Included in earnings | (3) | (83) | 72 | (59) | (73) | |||||||||||||||
| Purchases/originations | - | 163 | (5) | - | 158 | |||||||||||||||
| Settlements | (19) | - | (71) | 71 | (19) | |||||||||||||||
| Transfers into Level 3 (b) | 64 | - | - | - | 64 | |||||||||||||||
| Balance, end of period | $ | 179 | 938 | (1) | (125) | 991 | ||||||||||||||
| 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) | $ | (3) | (4) | 9 | (59) | (57) | ||||||||||||||
| (a) | Net interest rate derivatives include derivative assets and liabilities of $7 and $8, respectively, as of December 31, 2018. |
|---|
| (b) | Includes certain residential mortgage loans held for sale that were transferred to held for investment. |
|---|
| (c) | Includes interest income and expense. |
|---|
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Residential | Interest Rate | Equity | ||||||||||||||||||
| Mortgage | Servicing | Derivatives, | Derivatives, | Total | ||||||||||||||||
| For the year ended December 31, 2017 ($ in millions) | Loans | Rights | Net (a) | Net | Fair Value | |||||||||||||||
| Balance, beginning of period | $ | 143 | 744 | 8 | (91) | 804 | ||||||||||||||
| Total (losses) gains (realized/unrealized): | ||||||||||||||||||||
| Included in earnings | 1 | (122) | 94 | (80) | (107) | |||||||||||||||
| Purchases/originations | - | 236 | (2) | - | 234 | |||||||||||||||
| Settlements | (23) | - | (97) | 34 | (86) | |||||||||||||||
| Transfers into Level 3 (b) | 16 | - | - | - | 16 | |||||||||||||||
| Balance, end of period | $ | 137 | 858 | 3 | (137) | 861 | ||||||||||||||
| 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) | $ | 1 | (122) | 10 | (80) | (191) | ||||||||||||||
| (a) | Net interest rate derivatives include derivative assets and liabilities of $8 and $5, respectively, as of December 31, 2017. |
|---|
| (b) | Includes certain residential mortgage loans held for sale that were transferred to held for investment. |
|---|
| (c) | Includes interest income and expense. |
|---|
183 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total gains and losses included in earnings for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) were recorded in the Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017 as follows:
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Mortgage banking net revenue | $ | (235 | ) | (16 | ) | (29) | ||||||
| Corporate banking revenue | 3 | 2 | 2 | |||||||||
| Other noninterest income | (107 | ) | (59 | ) | (80) | |||||||
| Total losses | $ | (339 | ) | (73 | ) | (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) | 2019 | 2018 | 2017 | |||||||||
| Mortgage banking net revenue | $ | (233 | ) | - | (113) | |||||||
| Corporate banking revenue | 2 | 2 | 2 | |||||||||
| Other noninterest income | (107 | ) | (59 | ) | (80) | |||||||
| Total losses | $ | (338 | ) | (57 | ) | (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 | Fair Value | Valuation Technique | Significant Unobservable Inputs | Ranges of Inputs | Weighted- Average | |||||||||||
| Residential mortgage loans | $ 183 | Loss rate model | Interest rate risk factor | (9.2) - 9.8% | (0.2)% | |||||||||||
| Credit risk factor | 0 - 26.5% | 0.5% | ||||||||||||||
| Servicing rights | 993 | DCF | Prepayment speed | 0.5 - 97.0% | (Fixed) 13.0% (Adjustable) 22.6% | |||||||||||
| OAS (bps) | 507 - 1,513 | (Fixed) 602 (Adjustable) 921 | ||||||||||||||
| IRLCs, net | 18 | DCF | Loan closing rates | 7.3 - 97.1% | 81.7% | |||||||||||
| Swap associated with the sale of Visa, Inc. Class B Shares | (163) | DCF | Timing of the resolution of the Covered Litigation | Q1 2022 - Q4 2023 | Q3 2022 | |||||||||||
| As of December 31, 2018 ($ in millions) | ||||||||||||||||
| Financial Instrument | Fair Value | Valuation Technique | Significant Unobservable Inputs | Ranges of Inputs | Weighted- Average | |||||||||||
| Residential mortgage loans | $ 179 | Loss rate model | Interest rate risk factor | (13.2) - 9.4% | 0.5% | |||||||||||
| Credit risk factor | 0 - 39.9% | 0.7% | ||||||||||||||
| Servicing rights | 938 | DCF | Prepayment speed | 0.5 - 100% | (Fixed) 10.2% (Adjustable) 23.0% | |||||||||||
| OAS (bps) | 441 - 1,513 | (Fixed) 534 (Adjustable) 863 | ||||||||||||||
| IRLCs, net | 7 | DCF | Loan closing rates | 9.5 - 96.7% | 86.0% | |||||||||||
| Swap associated with the sale of Visa, Inc. Class B Shares | (125) | DCF | Timing of the resolution of the Covered Litigation | Q1 2021 - Q4 2023 | Q4 2021 | |||||||||||
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.
| Fair Value Measurements Using | Total (Losses) Gains | |||||||||||||||||||||
| As of December 31, 2019 ($ in millions) | Level 1 | Level 2 | Level 3 | Total | For the year ended December 31, 2019 | |||||||||||||||||
| Commercial and industrial loans | $ | - | - | 169 | 169 | (96) | ||||||||||||||||
| Commercial mortgage loans | - | - | 12 | 12 | - | |||||||||||||||||
| Commercial leases | - | - | 20 | 20 | (6) | |||||||||||||||||
| OREO | - | - | 13 | 13 | (6) | |||||||||||||||||
| Bank premises and equipment | - | - | 27 | 27 | (27) | |||||||||||||||||
| Operating lease equipment | - | - | 6 | 6 | (3) | |||||||||||||||||
| Private equity investments | - | 11 | 2 | 13 | 8 | |||||||||||||||||
| Total | $ | - | 11 | 249 | 260 | (130) | ||||||||||||||||
| Fair Value Measurements Using | Total (Losses) Gains | |||||||||||||||||||||
| As of December 31, 2018 ($ in millions) | Level 1 | Level 2 | Level 3 | Total | For the year ended December 31, 2018 | |||||||||||||||||
| Commercial loans held for sale | $ | - | - | 16 | 16 | (3) | ||||||||||||||||
| Commercial and industrial loans | - | - | 93 | 93 | (41) | |||||||||||||||||
| Commercial mortgage loans | - | - | 2 | 2 | 7 | |||||||||||||||||
| Commercial leases | - | - | 14 | 14 | (11) | |||||||||||||||||
| OREO | - | - | 20 | 20 | (7) | |||||||||||||||||
| Bank premises and equipment | - | - | 32 | 32 | (45) | |||||||||||||||||
| Operating lease equipment | - | - | - | - | (2) | |||||||||||||||||
| Private equity investments | - | 67 | 3 | 70 | 43 | |||||||||||||||||
| Other assets | - | - | 2 | 2 | (8) | |||||||||||||||||
| Total | $ | - | 67 | 182 | 249 | (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 | Fair Value | Valuation Technique | Significant Unobservable Inputs | Ranges of Inputs | Weighted-Average | |||||||||||||||
| Commercial and industrial loans | $ | 169 | Appraised value | Collateral value | NM | NM | ||||||||||||||
| Commercial mortgage loans | 12 | Appraised value | Collateral value | NM | NM | |||||||||||||||
| Commercial leases | 20 | Appraised value | Collateral value | NM | NM | |||||||||||||||
| OREO | 13 | Appraised value | Appraised value | NM | NM | |||||||||||||||
| Bank premises and equipment | 27 | Appraised value | Appraised value | NM | NM | |||||||||||||||
| Operating lease equipment | 6 | Appraised value | Appraised value | NM | NM | |||||||||||||||
| Private equity investments | 2 | Comparable company analysis | Market comparable transactions | NM | NM | |||||||||||||||
| As of December 31, 2018 ($ in millions) | ||||||||||||||||||||
| Financial Instrument | Fair Value | Valuation Technique | Significant Unobservable Inputs | Ranges of Inputs | Weighted-Average | |||||||||||||||
| Commercial loans held for sale | $ | 16 | Appraised value | Appraised value Costs to sell | NM NM | NM 10.0 % | ||||||||||||||
| Commercial and industrial loans | 93 | Appraised value | Collateral value | NM | NM | |||||||||||||||
| Commercial mortgage loans | 2 | Appraised value | Collateral value | NM | NM | |||||||||||||||
| Commercial leases | 14 | Appraised value | Collateral value | NM | NM | |||||||||||||||
| OREO | 20 | Appraised value | Appraised value | NM | NM | |||||||||||||||
| Bank premises and equipment | 32 | Appraised value | Appraised value | NM | NM | |||||||||||||||
| Operating lease equipment | - | Appraised value | Appraised value | NM | NM | |||||||||||||||
| Private equity investments | - | Liquidity discount applied to fund’s NAV | Liquidity discount | 0 - 43.0 % | 12.9 % | |||||||||||||||
| 3 | Comparable company analysis | Market comparable transactions | NM | NM | ||||||||||||||||
| Other assets | 2 | Appraised value | Appraised value | NM | NM | |||||||||||||||
Portfolio commercial loans and leases
During the years ended December 31, 2019 and 2018, the Bancorp recorded nonrecurring impairment adjustments to certain commercial and industrial loans, commercial mortgage loans and commercial leases held for investment.
Larger commercial loans included within aggregate borrower relationship balances exceeding $1 million that exhibit probable or observed credit weaknesses are subject to individual review for impairment. The Bancorp considers the current value of collateral, credit quality of any guarantees, the guarantor’s liquidity and willingness to cooperate, the loan structure
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.
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 Bancorp’s Head of Commercial Banking, is responsible for 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 fair value measurements on a fund by fund basis to determine whether OTTI existed. The Bancorp estimated the fair value of the funds by applying an estimated market discount to the reported NAV of the fund or through a discounted cash flow analysis. Because the length of time until the investment will become redeemable is generally not certain, these funds were classified within Level 3 of the valuation hierarchy. An adverse change in the reported NAVs or estimated market discounts, where applicable, would result in a decrease in the fair value estimate.
186 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 intent to sell residential mortgage or commercial loans classified as held for sale may change over time due to such factors as changes in the overall liquidity in markets or changes in characteristics specific to certain loans held for sale. Consequently, these loans may be reclassified to loans held for investment and maintained in the Bancorp’s loan portfolio. In such cases, the loans will continue to be measured at fair value.
Fair value changes recognized in earnings for residential mortgage loans held at December 31, 2019 and 2018 for which the 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) | Aggregate Fair Value | Aggregate Unpaid Principal Balance | Difference | |||||||
| December 31, 2019 | ||||||||||
| Residential mortgage loans measured at fair value | $ | 1,447 | 1,410 | 37 | ||||||
| Past due loans of 90 days or more | 2 | 2 | - | |||||||
| Nonaccrual loans | 1 | 1 | - | |||||||
| December 31, 2018 | ||||||||||
| Residential mortgage loans measured at fair value | $ | 716 | 696 | 20 | ||||||
| Past due loans of 90 days or more | 2 | 2 | - | |||||||
| Nonaccrual loans | 2 | 2 | - | |||||||
| Commercial loans measured at fair value | 7 | 7 | - | |||||||
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:
| Net Carrying | Fair Value Measurements Using | Total | ||||||||||||||||||
| As of December 31, 2019 ($ in millions) | Amount | Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and due from banks | $ | 3,278 | 3,278 | - | - | 3,278 | ||||||||||||||
| Other short-term investments | 1,950 | 1,950 | - | - | 1,950 | |||||||||||||||
| Other securities | 556 | - | 556 | - | 556 | |||||||||||||||
| Held-to-maturity securities | 17 | - | - | 17 | 17 | |||||||||||||||
| Loans and leases held for sale | 136 | - | - | 136 | 136 | |||||||||||||||
| Portfolio loans and leases: | ||||||||||||||||||||
| Commercial and industrial loans | 49,981 | - | - | 51,128 | 51,128 | |||||||||||||||
| Commercial mortgage loans | 10,876 | - | - | 10,823 | 10,823 | |||||||||||||||
| Commercial construction loans | 5,045 | - | - | 5,249 | 5,249 | |||||||||||||||
| Commercial leases | 3,346 | - | - | 3,133 | 3,133 | |||||||||||||||
| Residential mortgage loans | 16,468 | - | - | 17,509 | 17,509 | |||||||||||||||
| Home equity | 6,046 | - | - | 6,315 | 6,315 | |||||||||||||||
| Indirect secured consumer loans | 11,485 | - | - | 11,331 | 11,331 | |||||||||||||||
| Credit card | 2,364 | - | - | 2,774 | 2,774 | |||||||||||||||
| Other consumer loans | 2,683 | - | - | 2,866 | 2,866 | |||||||||||||||
| Unallocated ALLL | (121 | ) | - | - | - | - | ||||||||||||||
| Total portfolio loans and leases, net | $ | 108,173 | - | - | 111,128 | 111,128 | ||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits | $ | 127,062 | - | 127,059 | - | 127,059 | ||||||||||||||
| Federal funds purchased | 260 | 260 | - | - | 260 | |||||||||||||||
| Other short-term borrowings | 1,011 | - | 1,011 | - | 1,011 | |||||||||||||||
| Long-term debt | 14,970 | 15,244 | 700 | - | 15,944 | |||||||||||||||
| Net Carrying | Fair Value Measurements Using | Total | ||||||||||||||||||
| As of December 31, 2018 ($ in millions) | Amount | Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and due from banks | $ | 2,681 | 2,681 | - | - | 2,681 | ||||||||||||||
| Other short-term investments | 1,825 | 1,825 | - | - | 1,825 | |||||||||||||||
| Other securities | 552 | - | 552 | - | 552 | |||||||||||||||
| Held-to-maturity securities | 18 | - | - | 18 | 18 | |||||||||||||||
| Loans and leases held for sale | 63 | - | - | 63 | 63 | |||||||||||||||
| Portfolio loans and leases: | ||||||||||||||||||||
| Commercial and industrial loans | 43,825 | - | - | 44,668 | 44,668 | |||||||||||||||
| Commercial mortgage loans | 6,894 | - | - | 6,851 | 6,851 | |||||||||||||||
| Commercial construction loans | 4,625 | - | - | 4,688 | 4,688 | |||||||||||||||
| Commercial leases | 3,582 | - | - | 3,180 | 3,180 | |||||||||||||||
| Residential mortgage loans | 15,244 | - | - | 15,688 | 15,688 | |||||||||||||||
| Home equity | 6,366 | - | - | 6,719 | 6,719 | |||||||||||||||
| Indirect secured consumer loans | 8,934 | - | - | 8,717 | 8,717 | |||||||||||||||
| Credit card | 2,314 | - | - | 2,759 | 2,759 | |||||||||||||||
| Other consumer loans | 2,309 | - | - | 2,428 | 2,428 | |||||||||||||||
| Unallocated ALLL | (110 | ) | - | - | - | - | ||||||||||||||
| Total portfolio loans and leases, net | $ | 93,983 | - | - | 95,698 | 95,698 | ||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits | $ | 108,835 | - | 108,782 | - | 108,782 | ||||||||||||||
| Federal funds purchased | 1,925 | 1,925 | - | - | 1,925 | |||||||||||||||
| Other short-term borrowings | 573 | - | 573 | - | 573 | |||||||||||||||
| Long-term debt | 14,426 | 14,287 | 445 | - | 14,732 | |||||||||||||||
188 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 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
| Minimum | Well-Capitalized | |||||||
| CET1 capital: | ||||||||
| Fifth Third Bancorp | 4.50 | % | N/A | |||||
| Fifth Third Bank, National Association | 4.50 | 6.50 | ||||||
| Tier I risk-based capital: | ||||||||
| Fifth Third Bancorp | 6.00 | 6.00 | ||||||
| Fifth Third Bank, National Association | 6.00 | 8.00 | ||||||
| Total risk-based capital: | ||||||||
| Fifth Third Bancorp | 8.00 | 10.00 | ||||||
| Fifth Third Bank, National Association | 8.00 | 10.00 | ||||||
| Tier I leverage: | ||||||||
| Fifth Third Bancorp | 4.00 | N/A | ||||||
| Fifth Third Bank, National Association | 4.00 | 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 Basel III Final Rule includes a capital conservation buffer requirement of 2.5% in addition to the minimum capital requirements of the CET1, Tier I capital and Total risk-based capital ratios in order to avoid limitations on capital distributions and discretionary bonus payments to executive
officers.
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 | |||||||||||||||
| ($ in millions) | Amount | Ratio | Amount | Ratio | ||||||||||||
| CET1 capital: | ||||||||||||||||
| Fifth Third Bancorp | $ | 13,847 | 9.75 % | $ | 12,534 | 10.24 % | ||||||||||
| Fifth Third Bank, National Association | 16,704 | 11.86 | 14,435 | 11.93 | ||||||||||||
| Tier I risk-based capital: | ||||||||||||||||
| Fifth Third Bancorp | 15,616 | 10.99 | 13,864 | 11.32 | ||||||||||||
| Fifth Third Bank, National Association | 16,704 | 11.86 | 14,435 | 11.93 | ||||||||||||
| Total risk-based capital: | ||||||||||||||||
| Fifth Third Bancorp | 19,661 | 13.84 | 17,723 | 14.48 | ||||||||||||
| Fifth Third Bank, National Association | 18,968 | 13.46 | 16,427 | 13.57 | ||||||||||||
| Tier I leverage: (a) | ||||||||||||||||
| Fifth Third Bancorp | 15,616 | 9.54 | 13,864 | 9.72 | ||||||||||||
| Fifth Third Bank, National Association | 16,704 | 10.36 | 14,435 | 10.27 | ||||||||||||
| (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 determines should be deducted from Tier I capital. |
|---|
189 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- PARENT COMPANY FINANCIAL STATEMENTS
| Condensed Statements of Income (Parent Company Only) | ||||||||||||
| For the years ended December 31 ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Income | ||||||||||||
| Dividends from subsidiaries: | ||||||||||||
| Consolidated nonbank subsidiaries (a) | $ | 2,155 | 1,890 | 2,343 | ||||||||
| Securities gains, net | 2 | - | - | |||||||||
| Interest on loans to subsidiaries | 24 | 24 | 21 | |||||||||
| Total income | 2,181 | 1,914 | 2,364 | |||||||||
| Expenses | ||||||||||||
| Interest | 267 | 211 | 176 | |||||||||
| Other | 65 | 34 | 42 | |||||||||
| Total expenses | 332 | 245 | 218 | |||||||||
| Income Before Income Taxes and Change in Undistributed Earnings of Subsidiaries | 1,849 | 1,669 | 2,146 | |||||||||
| Applicable income tax benefit | (69 | ) | (50 | ) | (68) | |||||||
| Income Before Change in Undistributed Earnings of Subsidiaries | 1,918 | 1,719 | 2,214 | |||||||||
| Equity in undistributed earnings | 594 | 474 | (34) | |||||||||
| Net Income Attributable to Bancorp | $ | 2,512 | 2,193 | 2,180 | ||||||||
| Other Comprehensive Income | - | - | - | |||||||||
| Comprehensive Income Attributable to Bancorp | $ | 2,512 | 2,193 | 2,180 | ||||||||
| a) | 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 $200 million dividend was paid by MB Financial, Inc. to the Bancorp during the year ended December 31, 2019 . |
|---|
| Condensed Balance Sheets (Parent Company Only) | ||||||||||||
| As of December 31 ($ in millions) | 2019 | 2018 | ||||||||||
| Assets | ||||||||||||
| Cash | $ | 118 | 120 | |||||||||
| Short-term investments | 4,723 | 3,642 | ||||||||||
| Equity securities | 49 | - | ||||||||||
| Loans to subsidiaries: | ||||||||||||
| Nonbank subsidiaries | 444 | 571 | ||||||||||
| Total loans to subsidiaries | 444 | 571 | ||||||||||
| Investment in subsidiaries: | ||||||||||||
| Nonbank subsidiaries | 23,779 | 17,921 | ||||||||||
| Total investment in subsidiaries | 23,779 | 17,921 | ||||||||||
| Goodwill | 80 | 80 | ||||||||||
| Other assets | 379 | 268 | ||||||||||
| Total Assets | $ | 29,572 | 22,602 | |||||||||
| Liabilities | ||||||||||||
| Other short-term borrowings | $ | 359 | 253 | |||||||||
| Accrued expenses and other liabilities | 497 | 424 | ||||||||||
| Long-term debt (external) | 7,513 | 5,675 | ||||||||||
| Total Liabilities | $ | 8,369 | 6,352 | |||||||||
| Equity | ||||||||||||
| Common stock | $ | 2,051 | 2,051 | |||||||||
| Preferred stock | 1,770 | 1,331 | ||||||||||
| Capital surplus | 3,599 | 2,873 | ||||||||||
| Retained earnings | 18,315 | 16,578 | ||||||||||
| Accumulated other comprehensive income (loss) | 1,192 | (112) | ||||||||||
| Treasury stock | (5,724) | (6,471) | ||||||||||
| Noncontrolling interests | - | - | ||||||||||
| Total Equity | 21,203 | 16,250 | ||||||||||
| Total Liabilities and Equity | $ | 29,572 | 22,602 | |||||||||
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) | 2019 | 2018 | 2017 | |||||||||
| Operating Activities | ||||||||||||
| Net income | $ | 2,512 | 2,193 | 2,180 | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| (Benefit from) provision for deferred income taxes | (11) | 3 | 2 | |||||||||
| Securities gains, net | (2) | - | - | |||||||||
| Equity in undistributed earnings | (594) | (474) | 34 | |||||||||
| Net change in: | ||||||||||||
| Equity securities | (49) | - | - | |||||||||
| Other assets | (80) | 61 | 37 | |||||||||
| Accrued expenses and other liabilities | 134 | (116) | (15) | |||||||||
| Net Cash Provided by Operating Activities | 1,910 | 1,667 | 2,238 | |||||||||
| Investing Activities | ||||||||||||
| Net change in: | ||||||||||||
| Short-term investments | (1,081) | (149) | (419) | |||||||||
| Loans to subsidiaries | 127 | 272 | 126 | |||||||||
| Net cash paid on acquisition | (469) | - | - | |||||||||
| Net Cash (Used in) Provided by Investing Activities | (1,423) | 123 | (293) | |||||||||
| Financing Activities | ||||||||||||
| Net change in other short-term borrowings | 106 | (62) | (29) | |||||||||
| Dividends paid on common stock | (660) | (467) | (430) | |||||||||
| Dividends paid on preferred stock | (93) | (98) | (75) | |||||||||
| Proceeds from issuance of long-term debt | 2,235 | 895 | 697 | |||||||||
| Repayment of long-term debt | (500) | (500) | (500) | |||||||||
| Issuance of preferred stock | 242 | - | - | |||||||||
| Repurchase of treasury stock and related forward contract | (1,763) | (1,453) | (1,605) | |||||||||
| Other, net | (56) | (65) | (53) | |||||||||
| Net Cash Used in Financing Activities | (489) | (1,750) | (1,995) | |||||||||
| (Decrease) Increase in Cash | (2) | 40 | (50) | |||||||||
| Cash at Beginning of Period | 120 | 80 | 130 | |||||||||
| Cash at End of Period | $ | 118 | 120 | 80 | ||||||||
191 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 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 cost in the wholesale funding markets. The FTP curve is constructed using the U.S. swap curve, brokered CD pricing and unsecured debt pricing.
The Bancorp adjusts the FTP charge 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 segments form synergies by taking advantage of cross-sell 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
includes the Bancorp’s residential mortgage, automobile and other indirect lending activities. 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the results of operations and assets by business segment for the years ended December 31:
| 2019 ($ in millions) | Commercial Banking | Branch Banking | Consumer Lending | Wealth and Asset Management | General Corporate and Other | Eliminations | Total | |||||||||||||||||||||
| Net interest income | $ | 2,360 | 2,371 | 325 | 182 | (441 | ) | - | 4,797 | |||||||||||||||||||
| Provision for credit losses | 183 | 224 | 49 | - | 15 | - | 471 | |||||||||||||||||||||
| Net interest income after provision for credit losses | 2,177 | 2,147 | 276 | 182 | (456 | ) | - | 4,326 | ||||||||||||||||||||
| Noninterest income: | ||||||||||||||||||||||||||||
| Corporate banking revenue | 565 (c) | 4 | - | 1 | - | - | 570 | |||||||||||||||||||||
| Service charges on deposits | 308 | 260 | - | 1 | (4 | ) | - | 565 | ||||||||||||||||||||
| Wealth and asset management revenue | 3 | 158 | - | 469 | - | (143) (a) | 487 | |||||||||||||||||||||
| Card and processing revenue | 66 | 285 | - | 3 | 6 | - | 360 | |||||||||||||||||||||
| Mortgage banking net revenue | - | 6 | 279 | 2 | - | - | 287 | |||||||||||||||||||||
| Other noninterest income (b) | 245 | 89 | 14 | 13 | 863 | - | 1,224 | |||||||||||||||||||||
| Securities gains, net | - | - | - | - | 40 | - | 40 | |||||||||||||||||||||
| Securities gains, net - non-qualifying hedges on MSRs | - | - | 3 | - | - | - | 3 | |||||||||||||||||||||
| Total noninterest income | 1,187 | 802 | 296 | 489 | 905 | (143 | ) | 3,536 | ||||||||||||||||||||
| Noninterest expense: | ||||||||||||||||||||||||||||
| Salaries, wages and incentives | 406 | 489 | 158 | 185 | 763 | - | 2,001 | |||||||||||||||||||||
| Employee benefits | 60 | 112 | 38 | 32 | 175 | - | 417 | |||||||||||||||||||||
| Technology and communications | 11 | 4 | 8 | 1 | 398 | - | 422 | |||||||||||||||||||||
| Net occupancy expense (e) | 28 | 173 | 10 | 13 | 108 | - | 332 | |||||||||||||||||||||
| Card and processing expense | 8 | 123 | - | 1 | (2 | ) | - | 130 | ||||||||||||||||||||
| Equipment expense | 25 | 48 | - | 1 | 55 | - | 129 | |||||||||||||||||||||
| Other noninterest expense | 1,083 | 911 | 241 | 296 | (1,159 | ) | (143 | ) | 1,229 | |||||||||||||||||||
| Total noninterest expense | 1,621 | 1,860 | 455 | 529 | 338 | (143 | ) | 4,660 | ||||||||||||||||||||
| Income before income taxes | 1,743 | 1,089 | 117 | 142 | 111 | - | 3,202 | |||||||||||||||||||||
| Applicable income tax expense | 319 | 229 | 25 | 30 | 87 | - | 690 | |||||||||||||||||||||
| Net income | 1,424 | 860 | 92 | 112 | 24 | - | 2,512 | |||||||||||||||||||||
| Total goodwill | $ | 1,954 | 2,046 | - | 252 | - | - | 4,252 | ||||||||||||||||||||
| Total assets | $ | 74,570 | 69,413 | 26,555 | 10,500 | (11,669) (d) | - | 169,369 | ||||||||||||||||||||
| (a) | Revenue sharing agreements between wealth and asset management and branch banking are eliminated in the Consolidated Statements of Income. |
|---|
| (b) | Includes impairment charges of $28 for branches and land. For more information, refer to Note 8 and Note 29. |
|---|
| (c) | Includes impairment charges of $3 for operating lease equipment. For more information, refer to Note 9 and Note 29. |
|---|
| (d) | Includes bank premises and equipment of $27 classified as held for sale. For more information, refer to Note 8. |
|---|
| (e) | Includes impairment losses and termination charges of $ 15 for ROU assets related to certain operating leases. For more information, refer to Note 10. |
|---|
193 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2018 ($ in millions) | Commercial Banking | Branch Banking | Consumer Lending | Wealth and Asset Management | General Corporate and Other | Eliminations | Total | |||||||||||||||||||||
| Net interest income | $ | 1,713 | 2,034 | 237 | 182 | (26 | ) | - | 4,140 | |||||||||||||||||||
| Provision for (benefit from) credit losses | (26 | ) | 171 | 42 | 12 | 8 | - | 207 | ||||||||||||||||||||
| Net interest income after provision for credit losses | 1,739 | 1,863 | 195 | 170 | (34 | ) | - | 3,933 | ||||||||||||||||||||
| Noninterest income: | ||||||||||||||||||||||||||||
| Corporate banking revenue | 432 (c) | 5 | - | 2 | (1 | ) | - | 438 | ||||||||||||||||||||
| Service charges on deposits | 273 | 275 | - | 1 | - | - | 549 | |||||||||||||||||||||
| Wealth and asset management revenue | 3 | 150 | - | 429 | - | (138) (a) | 444 | |||||||||||||||||||||
| Card and processing revenue | 58 | 266 | - | 5 | - | - | 329 | |||||||||||||||||||||
| Mortgage banking net revenue | - | 5 | 206 | 1 | - | - | 212 | |||||||||||||||||||||
| Other noninterest income (b) | 151 | 53 | 14 | 18 | 651 | - | 887 | |||||||||||||||||||||
| Securities losses, net | - | - | - | - | (54 | ) | - | (54) | ||||||||||||||||||||
| Securities losses, net - non-qualifying hedges on MSRs | - | - | (15 | ) | - | - | - | (15) | ||||||||||||||||||||
| Total noninterest income | 917 | 754 | 205 | 456 | 596 | (138 | ) | 2,790 | ||||||||||||||||||||
| Noninterest expense: | ||||||||||||||||||||||||||||
| Salaries, wages and incentives | 300 | 438 | 156 | 173 | 716 | - | 1,783 | |||||||||||||||||||||
| Employee benefits | 44 | 98 | 36 | 29 | 125 | - | 332 | |||||||||||||||||||||
| Technology and communications | 7 | 5 | 5 | 1 | 267 | - | 285 | |||||||||||||||||||||
| Net occupancy expense | 26 | 175 | 10 | 12 | 69 | - | 292 | |||||||||||||||||||||
| Card and processing expense | 4 | 121 | - | - | (2 | ) | - | 123 | ||||||||||||||||||||
| Equipment expense | 23 | 50 | - | 1 | 49 | - | 123 | |||||||||||||||||||||
| Other noninterest expense | 859 | 841 | 195 | 288 | (1,025 | ) | (138 | ) | 1,020 | |||||||||||||||||||
| Total noninterest expense | 1,263 | 1,728 | 402 | 504 | 199 | (138 | ) | 3,958 | ||||||||||||||||||||
| Income (loss) before income taxes | 1,393 | 889 | (2 | ) | 122 | 363 | - | 2,765 | ||||||||||||||||||||
| Applicable income tax expense (benefit) | 254 | 187 | (1 | ) | 25 | 107 | - | 572 | ||||||||||||||||||||
| Net income (loss) | 1,139 | 702 | (1 | ) | 97 | 256 | - | 2,193 | ||||||||||||||||||||
| Total goodwill | $ | 630 | 1,655 | - | 193 | - | - | 2,478 | ||||||||||||||||||||
| Total assets | $ | 61,630 | 61,040 | 22,044 | 10,337 | (8,982) (d) | - | 146,069 | ||||||||||||||||||||
| (a) | Revenue sharing agreements between wealth and asset management and branch banking are eliminated in the Consolidated Statements of Income. |
|---|
| (b) | Includes impairment charges of $45 for branches and land. For more information, refer to Note 8 and Note 29. |
|---|
| (c) | Includes impairment charges of $4 for operating lease equipment. For more information, refer to Note 9 and Note 29. |
|---|
| (d) | Includes bank premises and equipment of $42 classified as held for sale. For more information, refer to Note 8. |
|---|
194 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2017 ($ in millions) | Commercial Banking | Branch Banking | Consumer Lending | Wealth and Asset Management | General Corporate and Other | Eliminations | Total | |||||||||||||||||||||
| Net interest income | $ | 1,652 | 1,782 | 240 | 154 | (30 | ) | - | 3,798 | |||||||||||||||||||
| Provision for credit losses | 38 | 153 | 40 | 6 | 24 | - | 261 | |||||||||||||||||||||
| Net interest income after provision for credit losses | 1,614 | 1,629 | 200 | 148 | (54 | ) | - | 3,537 | ||||||||||||||||||||
| Noninterest income: | ||||||||||||||||||||||||||||
| Corporate banking revenue | 348 (c) | 5 | - | 1 | (1 | ) | - | 353 | ||||||||||||||||||||
| Service charges on deposits | 287 | 265 | - | 1 | 1 | - | 554 | |||||||||||||||||||||
| Wealth and asset management revenue | 3 | 141 | - | 407 | - | (132) (a) | 419 | |||||||||||||||||||||
| Card and processing revenue | 57 | 251 | - | 5 | - | - | 313 | |||||||||||||||||||||
| Mortgage banking net revenue | - | 6 | 217 | 1 | - | - | 224 | |||||||||||||||||||||
| Other noninterest income (b) | 143 | 88 | 18 | 4 | 1,104 | - | 1,357 | |||||||||||||||||||||
| Securities gains, net | - | - | - | - | 2 | - | 2 | |||||||||||||||||||||
| Securities gains, net - non-qualifying hedges on MSRs | - | - | 2 | - | - | - | 2 | |||||||||||||||||||||
| Total noninterest income | 838 | 756 | 237 | 419 | 1,106 | (132 | ) | 3,224 | ||||||||||||||||||||
| Noninterest expense: | ||||||||||||||||||||||||||||
| Salaries, wages and incentives | 252 | 425 | 152 | 154 | 650 | - | 1,633 | |||||||||||||||||||||
| Employee benefits | 42 | 101 | 37 | 27 | 149 | - | 356 | |||||||||||||||||||||
| Technology and communications | 9 | 4 | 2 | - | 230 | - | 245 | |||||||||||||||||||||
| Net occupancy expense | 26 | 176 | 10 | 11 | 72 | - | 295 | |||||||||||||||||||||
| Card and processing expense | 3 | 127 | - | - | (1 | ) | - | 129 | ||||||||||||||||||||
| Equipment expense | 18 | 52 | - | - | 47 | - | 117 | |||||||||||||||||||||
| Other noninterest expense | 884 | 796 | 210 | 276 | (1,027 | ) | (132 | ) | 1,007 | |||||||||||||||||||
| Total noninterest expense | 1,234 | 1,681 | 411 | 468 | 120 | (132 | ) | 3,782 | ||||||||||||||||||||
| Income before income taxes | 1,218 | 704 | 26 | 99 | 932 | - | 2,979 | |||||||||||||||||||||
| Applicable income tax expense | 391 | 249 | 9 | 34 | 116 | - | 799 | |||||||||||||||||||||
| Net income | 827 | 455 | 17 | 65 | 816 | - | 2,180 | |||||||||||||||||||||
| Total goodwill | $ | 613 | 1,655 | - | 177 | - | - | 2,445 | ||||||||||||||||||||
| Total assets | $ | 58,456 | 57,931 | 22,218 | 9,494 | (6,018) (d) | - | 142,081 | ||||||||||||||||||||
| (a) | Revenue sharing agreements between wealth and asset management and branch banking are eliminated in the Consolidated Statements of Income. |
|---|
| (b) | Includes impairment charges of $7 for branches and land. For more information, refer to Note 8. |
|---|
| (c) | Includes impairment charges of $52 for operating lease equipment. For more information, refer to Note 9. |
|---|
| (d) | Includes bank premises and equipment of $27 classified as held for sale. |
|---|
195 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 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
Previous: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK · Next: Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE