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2015 ANNUAL REPORTLOGO

2017 ANNUAL REPORT

FINANCIAL CONTENTS

 

Glossary of Abbreviations and Acronyms

   1430 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

Selected Financial Data

   1531 

Overview

   1632 

Non-GAAP Financial Measures

   2135 

Recent Accounting Standards

   2337 

Critical Accounting Policies

   23

Risk Factors

2637 

Statements of Income Analysis

   3540 

Business Segment Review

   4248 

Fourth Quarter Review

   5056 

Balance Sheet Analysis

   5258 

Risk Management - Overview

64

Credit Risk Management

   5765 

Market Risk Management

79

Liquidity Risk Management

83

Operational Risk Management

85

Compliance Risk Management

85

Capital Management

86

Off-Balance Sheet Arrangements

   8087 

Contractual Obligations and Other Commitments

   8188 

Management’s Assessment as to the Effectiveness of Internal Control over Financial Reporting

   8289 

Reports of Independent Registered Public Accounting Firm

   8390 

Financial Statements

  

Consolidated Balance Sheets

   8492 

Consolidated Statements of Income

   8593 

Consolidated Statements of Comprehensive Income

   8694 

Consolidated Statements of Changes in Equity

   8795 

Consolidated Statements of Cash Flows

   8896 

 

Notes to Consolidated Financial Statements

            

Summary of Significant Accounting and Reporting Policies

   89    Commitments, Contingent Liabilities and Guarantees   132     97   Commitments, Contingent Liabilities and Guarantees   138 

Supplemental Cash Flow Information

   100    Legal and Regulatory Proceedings   136     107   Legal and Regulatory Proceedings   142 

Restrictions on Cash, Dividends and Other Capital Actions

   100    Related Party Transactions   138     107   Related Party Transactions   144 

Investment Securities

   101    Income Taxes   140     109   Income Taxes   147 

Loans and Leases

   103    Retirement and Benefit Plans   142     111   Retirement and Benefit Plans   149 

Credit Quality and the Allowance for Loan and Lease Losses

   105    Accumulated Other Comprehensive Income   146     113   Accumulated Other Comprehensive Income   153 

Bank Premises and Equipment

   114    Common, Preferred and Treasury Stock   147     121   Common, Preferred and Treasury Stock   155 

Operating Lease Equipment

   115    Stock-Based Compensation   149     121   Stock-Based Compensation   156 

Goodwill

   116    Other Noninterest Income and Other Noninterest Expense   153     122   Other Noninterest Income and Other Noninterest Expense   160 

Intangible Assets

   116    Earnings Per Share   154     122   Earnings Per Share   161 

Variable Interest Entities

   117    Fair Value Measurements   155     123   Fair Value Measurements   162 

Sales of Receivables and Servicing Rights

   120    Certain Regulatory Requirements and Capital Ratios   166     126   Regulatory Capital Requirements and Capital Ratios   173 

Derivative Financial Instruments

   122    Parent Company Financial Statements   167     128   Parent Company Financial Statements   174 

Other Assets

   127    Business Segments   168     133   Business Segments   176 

Short-Term Borrowings

   128    Subsequent Event   170     134   Subsequent Events   178 

Long-Term Debt

   129         135     

Annual Report on Form 10-K

   171         179     

Consolidated Ten Year Comparison

   187         206     

Directors and Officers

   188         207     

Corporate Information

            

FORWARD-LOOKING STATEMENTS

This report contains statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule3b-6 promulgated thereunder. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language such as “will likely result,” “may,” “are expected to,” “is anticipated,” “potential,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to thosethe risk factors set forth in the Risk Factors section of MD&Ain Item 1A in this report.Annual Report on Form10-K. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) general economic conditions and weakening in the economy, specifically the real estate market, either nationally or in the states in which Fifth Third, one or more acquired entities and/or the combined company do business, are less favorable than expected; (2) deteriorating credit quality; (2) loan concentration by location or industry of borrowers or collateral; (3) political developments, wars orproblems encountered by other hostilities may disrupt or increase volatility in securities markets or other economic conditions;financial institutions; (4) changes in the interest rate environment reduce interest margins; (5) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; (6) Fifth Third’s ability to maintain required capital levels and adequateinadequate sources of funding andor liquidity; (7) maintaining capital requirements and adequate sources(5) unfavorable actions of funding and liquidity may limit Fifth Third’s operations and potential growth; (8) changes and trends in capital markets; (9) problems encountered by larger or similar financial institutions may adversely affect the banking industry and/or Fifth Third; (10) competitive pressures among depository institutions increase significantly; (11) effects of critical accounting policies and judgments; (12) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (FASB) or other regulatoryrating agencies; (13) legislative or regulatory changes or actions, or significant litigation, adversely affect Fifth Third, one or more acquired entities and/or the combined company or the businesses in which Fifth Third, one or more acquired entities and/or the combined company are engaged, including the Dodd-Frank Wall Street Reform and Consumer Protection Act; (14) ability(6) inability to maintain favorable ratings from rating agencies; (15) fluctuation of Fifth Third’s stock price; (16) ability to attract and retain key personnel; (17)or grow deposits; (7) limitations on the ability to receive dividends from its subsidiaries; (18) potentially dilutive effect of future acquisitions on current shareholders’ ownership of Fifth Third; (19) effects of accounting or financial results of one or more acquired entities; (20) difficulties from(8) cyber-security risks; (9) Fifth Third’s investment in, relationship with, and nature of the operations of Vantiv, LLC; (21) loss of income from any sale or potential sale of businesses that could have an adverse effect on Fifth Third’s earnings and future growth; (22) difficulties in separating the operations of any branches or other assets divested; (23) inability to achieve expected benefits from branch consolidations and planned sales within desired timeframes, if at all; (24) ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks; (10) failures by third-party service providers; (11) inability to manage strategic initiatives and/or organizational changes; (12) inability to implement technology system enhancements; (13) failure of internal controls and other risk management systems; (14) losses related to fraud, theft or violence; (15) inability to attract and retain skilled personnel; (16) adverse impacts of government regulation; (17) governmental or regulatory changes or other actions; (18) failures to meet applicable capital requirements; (19) regulatory objections to Fifth Third’s capital plan; (20) regulation of Fifth Third’s derivatives activities; (21) regulatory objections to Fifth Third’s resolution plan; (22) deposit insurance premiums; (23) assessments for the orderly liquidation fund; (24) changes in LIBOR; (25) weakness in the national or local economies; (26) global political and economic uncertainty or negative actions; (27) changes in interest rates; (28) changes and trends in capital markets; (29) fluctuation of Fifth Third’s stock price; (30) volatility in mortgage banking revenue; (31) litigation, investigations, and enforcement proceedings by governmental authorities; (32) breaches of contractual covenants, representations and warranties; (33) competition and changes in the financial services industry; (34) changing retail distribution strategies, customer preferences and behavior; (35) difficulties in identifying, acquiring or integrating suitable strategic partnerships, investments or acquisitions; (36) potential dilution from future acquisitions; (37) loss of income and/or difficulties encountered in the sale and separation of businesses, investments or other assets; (38) results of Vantiv Holding, LLC or other investments or acquired entities; (39) difficulties from or changes in Fifth Third’s investment in, relationship with, and nature of the operations of Vantiv Holding, LLC; (40) changes in accounting standards or interpretation or declines in the value of Fifth Third’s goodwill or other intangible assets; (41) inaccuracies or other failures from the use of models; (42) effects of critical accounting policies and judgments or the use of inaccurate estimates; (43) weather related events or other natural disasters; and (44) the impact of reputational risk created by these or other developments on such matters as business generation and retention, funding and liquidity.


GLOSSARY OF ABBREVIATIONS AND ACRONYMS

Fifth Third Bancorp provides the following list of abbreviations and acronyms as a tool for the reader that are used in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements.

 

ALCO:Asset Liability Management Committee

ALLL:Allowance for Loan and Lease Losses

AML:Anti-Money Laundering

AOCI: Accumulated Other Comprehensive Income

APR:Annual Percentage Rate

ARM: Adjustable Rate Mortgage

ASF: Available Stable Funding

ASU:Accounting Standards Update

ATM:Automated Teller Machine

BCBS: Basel Committee on Banking Supervision

BHC: Bank Holding Company

BHCA: Bank Holding Company Act

BOLI: Bank Owned Life Insurance

BPO: Broker Price Opinion

bps: Basis Points

BSA: Bank Secrecy Act

CCAR: Comprehensive Capital Analysis and Review

CDC: Fifth Third Community Development Corporation

CET1: Common Equity Tier 1

CFE: Collateralized Financing Entity

CFPB: United States Consumer Financial Protection Bureau

CFTC:Commodity Futures Trading Commission

C&I:Commercial and Industrial

CPP: Capital Purchase Program

CRA: Community Reinvestment Act

DCF: Discounted Cash Flow

DFA: Dodd-Frank Wall Street Reform and Consumer Protection Act

DIF: Deposit Insurance Fund

DOJ: United States Department of Justice

DTCC: Depository Trust & Clearing Corporation

ERISA: Employee Retirement Income Security Act

ERM:Enterprise Risk Management

ERMC:Enterprise Risk Management Committee

EVE:Economic Value of Equity

FASB:Financial Accounting Standards Board

FDIA:Federal Deposit Insurance Act

FDIC:Federal Deposit Insurance Corporation

FFIEC: Federal Financial Institutions Examination Council

FHA: Federal Housing Administration

FHLB:Federal Home Loan Bank

FHLMC:Federal Home Loan Mortgage Corporation

FICA:Federal Insurance Contributions Act

FICO: Fair Isaac Corporation (credit rating)

FINRA:Financial Industry Regulatory Authority

FNMA:Federal National Mortgage Association

FRB:Federal Reserve Bank

FSOC:Financial Stability Oversight Council

FTE:Fully Taxable Equivalent

FTP:Funds Transfer Pricing

FTS:Fifth Third Securities

GDP: Gross Domestic Product

GNMA: Government National Mortgage Association

GSE:United States Government Sponsored Enterprise

 

HAMP: Home Affordable Modification Program

HARP:Home Affordable Refinance Program

HFS:Held for Sale

HQLA:High-Quality Liquid Assets

HUD: Department of Housing and Urban Development

IPO:Initial Public Offering

IRC:Internal Revenue Code

IRLC: Interest Rate Lock Commitment

IRS: Internal Revenue Service

ISDA: International Swaps and Derivatives Association, Inc.

LCR: Liquidity Coverage Ratio

LIBOR:London Interbank Offered Rate

LLC:Limited Liability Company

LTV:Loan-to-Value

MD&A:Management’s Discussion and Analysis of Financial Condition and Results of Operations

MSA: MetroMetropolitan Statistical Area

MSR:Mortgage Servicing Right

N/A: Not Applicable

NASDAQ: National Association of Securities Dealers Automated Quotations

NII:Net Interest Income

NM:Not Meaningful

NSFR: Net Stable Funding Ratio

OAS: Option-Adjusted Spread

OCC:Office of the Comptroller of the Currency

OCI:Other Comprehensive Income (Loss)

OREO:Other Real Estate Owned

OTTI:Other-Than-Temporary Impairment

PCA: Prompt Corrective Action

PMI:Private Mortgage Insurance

PSAs:PSA: Performance Share AwardsAward

RSAs:RCC:Risk Compliance Committee

RSA:Restricted Stock AwardsAward

RSUsRSF: Required Stable Funding

RSU: Restricted Stock UnitsUnit

SARs:SAR:Stock Appreciation RightsRight

SBA: Small Business Administration

SEC:United States Securities and Exchange Commission

TARP: Troubled Asset Relief Program

TBAs:TBA:To Be Announced

TCJA:Tax Cuts and Jobs Act

TDR:Troubled Debt Restructuring

TRA: Tax Receivable Agreement

TruPS: Trust Preferred Securities

U.S.: United States of America

U.S. GAAP:United States Generally Accepted Accounting Principles

VA: Department of Veterans Affairs

VIE:Variable Interest Entity

VRDN:Variable Rate Demand Note

 

1430  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is Management’s Discussion and Analysis of Financial Condition and Results of Operations of certain significant factors that have affected Fifth Third Bancorp’s (the “Bancorp” or “Fifth Third”) financial condition and results of operations during the periods included in the Consolidated Financial Statements, which are a part of this filing. Reference to the Bancorp incorporates the parent holding company and all consolidated subsidiaries. The Bancorp’s banking subsidiary is referred to as the Bank.

 

TABLE 1: SELECTED FINANCIAL DATA

                              
For the years ended December 31 ($ in millions, except for per share data)        2015         2014           2013           2012           2011         2017          2016             2015             2014               2013          

Income Statement Data

                              

Net interest income(a)

  $3,554      3,600       3,581       3,613       3,575    

Net interest income (U.S. GAAP)

  $3,798   3,615    3,533    3,579    3,561  

Net interest income (FTE)(a)(b)

   3,824   3,640    3,554    3,600    3,581  

Noninterest income

   3,003      2,473       3,227       2,999       2,455       3,224   2,696    3,003    2,473    3,227  

Total revenue(a)

   6,557      6,073       6,808       6,612       6,030       7,048   6,336    6,557    6,073    6,808  

Provision for loan and lease losses

   396      315       229       303       423       261   343    396    315    229  

Noninterest expense

   3,775      3,709       3,961       4,081       3,758       3,990   3,903    3,775    3,709    3,961  

Net income attributable to Bancorp

   1,712      1,481       1,836       1,576       1,297       2,194   1,564    1,712    1,481    1,836  

Net income available to common shareholders

   1,637      1,414       1,799       1,541       1,094        2,119    1,489    1,637    1,414    1,799   

Common Share Data

                              

Earnings per share - basic

  $2.03      1.68       2.05       1.69       1.20      $2.88   1.95    2.03    1.68    2.05  

Earnings per share - diluted

   2.01      1.66       2.02       1.66       1.18       2.83   1.93    2.01    1.66    2.02  

Cash dividends declared per common share

   0.52      0.51       0.47       0.36       0.28       0.60   0.53    0.52    0.51    0.47  

Book value per share

   18.48      17.35       15.85       15.10       13.92       21.67   19.82    18.48    17.35    15.85  

Market value per share

   20.10      20.38       21.03       15.20       12.72        30.34    26.97    20.10    20.38    21.03   

Financial Ratios

                              

Return on average assets

   1.22    1.12       1.48       1.34       1.15       1.56  1.10    1.22    1.12    1.48  

Return on average common equity

   11.3      10.0       13.1       11.6       9.0       13.9   9.8    11.3    10.0    13.1  

Return on average tangible common equity(b)

   13.5      12.2       16.0       14.3       11.4       16.5   11.6    13.5    12.2    16.0  

Dividend payout ratio

   25.6      30.3       22.9       21.3       23.3       20.8   27.2    25.6    30.3    22.9  

Average total Bancorp shareholders’ equity as a percent of average assets

   11.32      11.59       11.56       11.65       11.41       11.80   11.67    11.33    11.59    11.56  

Tangible common equity as a percent of tangible assets(b)(i)

   8.59      8.43       8.63       8.83       8.68    

Net interest margin(a)

   2.88      3.10       3.32       3.55       3.66    

Efficiency(a)

   57.6      61.1       58.2       61.7       62.3     

Tangible common equity as a percent of tangible assets(b)

   8.94   8.87    8.59    8.43    8.63  

Net interest margin(a)(b)

   3.03   2.88    2.88    3.10    3.32  

Net interest rate spread(a)(b)

   2.76   2.66    2.69    2.94    3.15  

Efficiency(a)(b)

   56.6    61.6    57.6    61.1    58.2   

Credit Quality

                              

Net losses charged-off

  $446      575       501       704       1,172      $298   362    446    575    501  

Net losses charged-off as a percent of average portfolio loans and leases

   0.48      0.64       0.58       0.85       1.49       0.32  0.39    0.48    0.64    0.58  

ALLL as a percent of portfolio loans and leases

   1.37      1.47       1.79       2.16       2.78       1.30   1.36    1.37    1.47    1.79  

Allowance for credit losses as a percent of portfolio loans and leases(c)

   1.52      1.62       1.97       2.37       3.01       1.48   1.54    1.52    1.62    1.97  

Nonperforming portfolio assets as a percent of portfolio loans and leasesand OREO

   0.70      0.82       1.10       1.49       2.23        0.53    0.80    0.70    0.82    1.10   

Average Balances

                              

Loans and leases, including held for sale

  $93,339      91,127       89,093       84,822       80,214      $      92,731   94,320    93,339    91,127    89,093  

Total securities and other short-term investments

   30,245      24,866       18,861       16,814       17,468       33,562   31,965    30,245    24,866    18,861  

Total assets

   140,111      131,943       123,732       117,614       112,666       140,636   142,266    140,078    131,909    123,704  

Transaction deposits(d)

   95,244      89,715       82,915       78,116       72,392       96,052   95,371    95,244    89,715    82,915  

Core deposits(e)

   99,295      93,477       86,675       82,422       78,652       99,823   99,381    99,295    93,477    86,675  

Wholesale funding(f)

   20,243      19,188       17,797       16,978       16,939       20,360   21,813    20,210    19,154    17,769  

Bancorp shareholders’ equity

   15,865      15,290       14,302       13,701       12,851        16,590    16,597    15,865    15,290    14,302   
Regulatory Capital Ratios  Basel III
Transitional
(g) 
    Basel I(h)    
Regulatory Capital and Liquidity Ratios  Basel III Transitional(g)   Basel I(h) 

CET1 capital

   9.82    N/A       N/A       N/A       N/A       10.61  10.39    9.82    -    -  

Tier I risk-based capital

   10.93      10.83       10.43       10.69       12.00       11.74   11.50    10.93    10.83    10.43  

Total risk-based capital

   14.13      14.33       14.17       14.47       16.19       15.16   15.02    14.13    14.33    14.17  

Tier I leverage

   9.54      9.66       9.73       10.15       11.25       10.01   9.90    9.54    9.66    9.73  
  Basel III Fully
Phased-In
     

CET1 capital(b)

   9.72    N/A       N/A       N/A       N/A     

Modified LCR

   129    128    -    -    -   
(a)

Amounts presented on an FTE basis. The FTE adjustment for the years endedDecember 31, 20152017, 2016, 2015, 2014 2013, 2012 and 20112013 was$2126,$21,25, $21, $21 and $20, $18 and $18, respectively.

(b)

These arenon-GAAP measures. For further information, refer to theNon-GAAP Financial Measures section of MD&A.

(c)

The allowance for credit losses is the sum of the ALLL and the reserve for unfunded commitments.

(d)

Includes demand deposits, interest checking deposits, savings deposits, money market deposits and foreign office deposits.

(e)

Includes transaction deposits and other time deposits.

(f)

Includes certificates $100,000 and over, other deposits, federal funds purchased, other short-term borrowings and long-term debt.

(g)

Under the U.S. banking agencies’ Basel III Final Rule, assets and credit equivalent amounts ofoff-balance sheet exposures are calculated according to the standardized approach for risk-weighted assets. The resulting weighted values are added together resulting in the Bancorp’s total risk-weighted assets. Under the banking agencies’ Final Rule published in November 2017 pertaining to certain regulatory capital items for banks subject to the standardized approach, the Bancorp is no longer subject to certain transition provisions and phase-outs beyond 2017.

(h)

These capital ratios were calculated under the Supervisory Agencies general risk-based capital rules (Basel I) which were in effect prior to January 1, 2015.

(i)

Excludes unrealized gains and losses.

 

1531  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. At December 31, 2015, the Bancorp had $141.1 billion in assets and operates 1,254 full-service banking centers, including 95 Bank Mart® locations, open seven days a week, inside select grocery stores and 2,593 ATMs in twelve states throughout the Midwestern and Southeastern regions of the U.S. The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors. The Bancorp also has an approximate 18% interest in Vantiv Holding, LLC. The carrying value of the Bancorp’s investment in Vantiv Holding, LLC was $360 million as of December 31, 2015.

This overview of MD&A highlights selected information in the financial results of the Bancorp and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting policies and estimates, you should carefully read this entire document. Each of these items could have an impact on the Bancorp’s financial condition, results of operations and cash flows. In addition, refer to the Glossary of Abbreviations and Acronyms in this report for a list of terms included as a tool for the reader of this annual report on Form10-K. The abbreviations and acronyms identified therein are used throughout this MD&A, as well as the Consolidated Financial Statements and Notes to Consolidated Financial Statements.

Net interest income, net interest margin, net interest rate spread and the efficiency ratio are presented in MD&A on an FTE basis. The FTE basis adjusts for thetax-favored status of income from certain loans and securities held by the Bancorp that are not taxable for federal income tax purposes. The Bancorp believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison between taxable andnon-taxable amounts. The FTE basis for presenting net interest income is anon-GAAP measure. For further information, refer to theNon-GAAP Financial Measures section of MD&A.

The Bancorp’s revenues are dependent on both net interest income and noninterest income. For the year ended December 31, 2015,2017, net interest income on an FTE basis and noninterest income provided 54% and 46% of total revenue, respectively. The Bancorp derives the majority of its revenues within the U.S. from customers domiciled in the United States.U.S. Revenue from foreign countries and external customers domiciled in foreign countries was immaterial to the Consolidated Financial Statements. Changes in interest rates, credit quality, economic trends and the capital markets are primary factors that drive the performance of the Bancorp. As discussed later in the Risk Management section of MD&A, risk identification, measurement, monitoring, control and reporting are important to the management of risk and to the financial performance and capital strength of the Bancorp.

Net interest income is the difference between interest income earned on assets such as loans, leases and securities, and interest expense incurred on liabilities such as deposits, other short-term borrowings and long-term debt. Net interest income is affected by the general level of interest rates, the relative level of short-term and long-term interest rates, changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Generally, the rates of interest the Bancorp earns on its assets and pays on its liabilities are established for a period of time. The change in market interest rates over time exposes the Bancorp to interest rate risk through potential adverse changes to net interest income and financial position. The Bancorp manages this risk by continually analyzing and adjusting the composition of its assets and liabilities based on their payment streams and interest rates, the timing of their maturities and their sensitivity to changes in market interest rates. Additionally, in the ordinary course of business, the Bancorp enters into certain derivative transactions as

part of its overall strategy to manage its interest rate and prepayment risks. The Bancorp is also exposed to the risk of lossesloss on its loan and lease portfolio as a result of changing expected cash flows caused by borrower credit events, such as loan defaults and inadequate collateral due to a weakened economy within the Bancorp’s footprint.collateral.

Noninterest income is derived from service charges on deposits, investment advisorywealth and asset management revenue, corporate banking revenue, card and processing revenue, mortgage banking net revenue, card and processing revenue,net securities gains net and other noninterest income. Noninterest expense includes personnel costs, net occupancy expense, technology and communication costs, card and processing expense, equipment expense and other noninterest expense.

The Tax Cuts and Jobs Act

On December 22, 2017, the U.S. government enacted comprehensive tax legislation known as the TCJA. The TCJA makes broad and complex changes to the U.S. tax code including, but not limited to, reducing the top federal statutory corporate tax rate from 35 percent to 21 percent effective for tax years beginning after December 31, 2017. U.S. GAAP requires the Bancorp to recognize the tax effects of changes in tax laws and rates on its deferred taxes in the period in which the law is enacted. As a result, for the year ended December 31, 2017, the Bancorp remeasured its deferred tax assets and liabilities and recognized an income tax benefit of approximately $220 million. Additionally, as a result of the TCJA, the Bancorp recognized a $27 million decrease to interest income related to the tax treatment of leveraged leases and recognized $68 million of impairment on certain affordable housing investments in other noninterest expense. As a result of the TCJA, during the fourth quarter of 2017 the Bancorp decided to make a $15 million contribution to the Fifth Third Foundation recognized within other noninterest expense and also paid $15 million inone-time employee bonuses.

Vantiv, Inc. and Vantiv Holding, LLC Transactions

During the fourththird quarter of 2015,2017, the Bancorp and Fifth Third Bank entered into ana transaction agreement with Vantiv, Inc. and Vantiv Holding, LLC under which a portionFifth Third Bank agreed to exercise its right to exchange 19.79 million of its TRA with Vantiv, Inc. was terminated and settled in full for a cash payment of approximately $49 million from Vantiv, Inc. Under the agreement, the Bancorp sold certain TRA cash flows it expected to receive from 2017 to 2030, totaling an estimated $140 million. Approximately half of the sold TRA cash flows related to 2025 and later. This sale did not impact the TRA payment recognized during the fourth quarter of 2015 and is not expected to impact the TRA payment to be recognized in the fourth quarter of 2016. In addition to the impact of the TRA termination discussed above, the Bancorp recognized $31 million, $23 million and $9 million in noninterest income in the Consolidated Statements of Income associated with the TRA during the years ended December 31, 2015, 2014 and 2013, respectively.

The Bancorp agreed during the fourth quarter of 2015 to cancel rights to purchase approximately 4.8 million Class C unitsB Units in Vantiv Holding, LLC the wholly-owned principal operating subsidiary of Vantiv, Inc., underlying the Bancorp’s warrant in exchange for a cash payment of $200 million. Subsequent to this cancellation, the Bancorp exercised its right to purchase approximately 7.8 million Class C units underlying the Bancorp’s warrant at the $15.98 strike price. This exercise was settled on a net basis for approximately 5.4 million Class C units, which were then exchanged for approximately 5.419.79 million shares of Vantiv, Inc.’s Class A common stock that were sold inCommon Stock and Vantiv, Inc. agreed to repurchase the secondary offering. The Bancorp recognizednewly issued shares of Class A Common Stock upon issue directly from Fifth Third Bank at a gainprice of $89 million$64.04 per share, the closing share price of the Class A Common Stock on the 62%New York Stock Exchange on August 4, 2017. As a result of the warrant that was settled or net exercised.

Additionally, during the fourth quarter of 2015, the Bancorp exchanged 8 million Class B units of Vantiv Holding, LLC for 8 million Class A shares in Vantiv, Inc., which were also sold in the secondary offering, and on whichthese transactions, the Bancorp recognized a gain of $331 million.approximately $1.0 billion during the third quarter of 2017.

As of December 31, 2017, the Bancorp continued to hold approximately 15 million Class B Units of Vantiv Holding, LLC which may be exchanged for Class A Common Stock of Vantiv, Inc. (now Worldpay, Inc.), on aone-for-one basis or at Worldpay, Inc.’s option for cash which represented approximately 8.6% ownership of Vantiv Holding, LLC as of December 31, 2017. In addition, the Bancorp holds approximately 15 million Class B Common Shares of Worldpay, Inc., which give the Bancorp voting rights, but no economic interest in Worldpay, Inc. These securities are subject to certain terms and restrictions.

On January 16, 2018, Vantiv, Inc. completed its previously announced acquisition of Worldpay Group plc. with the resulting combined company named Worldpay, Inc. As a result of this transaction, the Bancorp expects to recognize a gain of approximately $415 million in other noninterest income in the Bancorp’s first quarter of 2018 Quarterly Report on Form10-Q for the dilution in its ownership interest in Vantiv Holding, LLC from approximately 8.6% to approximately 4.9%. The Bancorp’s remaining investmentinterest in Vantiv Holding, LLC continues to be accounted for under theas an equity method investment given the nature of accounting.Vantiv Holding, LLC’s structure as a limited liability company and contractual arrangements between Vantiv Holding, LLC and the Bancorp. For more information on Worldpay, Inc., formerly Vantiv, Inc., and Vantiv Holding, LLC transactions, refer to Note 19 and Note 31 of the Notes to Consolidated Financial Statements.

Branch Consolidation and Sales Plan

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.

 

 

16  Fifth Third Bancorp

32  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

On June 16, 2015,NorthStar Strategy

In the third quarter of 2016, the Bancorp launched the NorthStar Strategy, a three-year plan designed to help deliver strong, consistent returns through longer term economic cycles. Underpinning the strategy is the Bancorp’s Boardgoal of Directors authorized managementstriving to pursue a plan to further develop its distribution strategy, including a plan to consolidate and/or sell certain operating branch locationsbe the One Bank people most value and to sell certain parcels of undeveloped land that had been acquired by the Bancorp for future branch expansion (the “Branch Consolidation and Sales Plan”). trust.

The Bancorp expects to receive $60 million in annual savings from operating expenses upon completion of the Branch Consolidation and Sales Plan.is focused on:

On September 3, 2015, the Bancorp announced the decision to enter into an agreement to sell branch banking locations, retail accounts, certain private banking deposits and related loan relationships in the Pittsburgh MSA to First National Bank of Pennsylvania. On September 30, 2015, the Bancorp announced the decision to enter into an agreement to sell its retail operations, including retail accounts, certain private banking deposits and related loan relationships in the St. Louis MSA to Great Southern Bank. Both transactions are part of the Branch Consolidation and Sales Plan and are expected to close in the first half of 2016. As of December 31, 2015, the Bancorp intended to consolidate and/or sell 107 operating branch locations and to sell an additional 32 parcels of undeveloped land that had been acquired by the Bancorp for future branch expansion. For further information on a subsequent event related to the Branch Consolidation and Sales Plan, refer to Note 31 of the Notes to Consolidated Financial Statements.

Building a differentiated brand and corporate reputation by improving the customer experience and increasing brand equity.

Growing profitable and long-term relationships with customers.

Leveraging analytics and technology to help drive further efficiency improvements, revenue growth and improved profitability.

Generating an annualized return on average tangible common equity(non-GAAP) at the upper end of a range of 14% to 16%, a return on average assets at the mid to upper end of a range of 1.35% to 1.45% and an efficiency ratio below 60% by the end of 2019.

Achieving risk and operational excellence.

The Bancorp performs assessmentshas implemented several initiatives to assist in achieving these goals, including the following: our partnership with fintech companies, upgrades to our mortgage and teller systems, expansion of the recoverabilitycredit card and treasury management products, focused growth in asset-based lending and our commercial verticals and acceleration of long-lived assets when events or changes in circumstances indicate that their carrying values may not be recoverable. Impairment losses associated with such assessmentsour automation and lower of cost or market adjustments were $109 million, $20 million and $6 million for the years ended December 31, 2015, 2014 and 2013, respectively. The recognized impairment losses were recorded in other noninterest income in the Consolidated Statements of Income. For more information on the Branch Consolidation and Sales Plan, refer to Note 7 of the Notes to Consolidated Financial Statements.robotics initiatives.

Accelerated Share Repurchase Transactions

During the years ended December 31, 20152017 and 2014,2016, the Bancorp entered into or settled a number of accelerated share repurchase transactions. As part of these transactions, the Bancorp entered into forward contracts in which the final number of shares delivered at settlement was based generally on a discount to the average daily volume weighted-average price of the Bancorp’s common stock during the term of the repurchase agreements. For more information on the accelerated share repurchase program, refer to Note 23 of the Notes to Consolidated Financial Statements. For a summary of the Bancorp’s accelerated share repurchase transactions that were entered into or settled during the years ended December 31, 20152017 and 2014,2016, refer to Table 2. For further information on a subsequent event related to an accelerated share repurchase transaction, refer to Note 31 of the Notes to Consolidated Financial Statements.

 

 

TABLE 2: SUMMARY OF ACCELERATED SHARE REPURCHASE TRANSACTIONS

  

  

 

 
Repurchase Date  Amount ($ in millions)    

 

Shares Repurchased on 

Repurchase Date 

  Shares Received from Forward
Contract Settlement
  Total Shares  
Repurchased  
  Settlement Date     

 

 

November 18, 2013

   200    8,538,423    1,132,495    9,670,918    March 5, 2014  

December 13, 2013

   456    19,084,195    2,294,932    21,379,127    March 31, 2014  

January 31, 2014

   99    3,950,705    602,109    4,552,814    March 31, 2014  

May 1, 2014

   150    6,216,480    1,016,514    7,232,994    July 21, 2014  

July 24, 2014

   225    9,352,078    1,896,685    11,248,763    October 14, 2014  

October 23, 2014

   180    8,337,875    794,245    9,132,120    January 8, 2015  

January 27, 2015

   180    8,542,713    1,103,744    9,646,457    April 28, 2015  

April 30, 2015

   155    6,704,835    842,655    7,547,490    July 31, 2015  

August 3, 2015

   150    6,039,792    1,346,314    7,386,106    September 3, 2015  

September 9, 2015

   150    6,538,462    1,446,613    7,985,075    October 23, 2015  

December 14, 2015

   215    9,248,482    1,782,477    11,030,959    January 14, 2016  

 

 

TABLE 2: SUMMARY OF ACCELERATED SHARE REPURCHASE TRANSACTIONS    

 

 

Repurchase Date Amount ($ in millions)  

 

Shares Repurchased on 
Repurchase Date 

  Shares Received from
Forward Contract Settlement
  Total Shares  
Repurchased  
  Settlement Date     

 

 

December 14, 2015

  215   9,248,482   1,782,477   11,030,959   January 14, 2016 

March 4, 2016

  240   12,623,762   1,868,379   14,492,141   April 11, 2016 

August 5, 2016

  240   10,979,548   1,099,205   12,078,753   November 7, 2016 

December 20, 2016

  155   4,843,750   1,044,362   5,888,112   February 6, 2017 

May 1, 2017

  342   11,641,971   2,248,250   13,890,221   July 31, 2017 

August 17, 2017

  990   31,540,480   4,291,170   35,831,650   December 18, 2017 

December 19, 2017

  273   7,727,273   (a)   (a)   (a) 

 

 
(a)

The settlement of the transaction is expected to occur on or before March 19, 2018.

 

Senior Notes Offerings

On July 27, 2015,June 15, 2017, the Bancorp issued and sold $1.1 billion$700 million of 2.875% unsecured senior notes to third-party investors. The senior notes bear a fixed-rate notes, with a maturity of five years, due on July 27, 2020.interest of 2.60% per annum. The notes are not subject to redemption atunsecured, senior obligations of the Bancorp’s option at any time untilBancorp. 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 maturity.the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date.

On August 20, 2015,October 30, 2017, the Bank issued and sold, $1.3under its bank notes program, $1.1 billion in aggregate principal amount of unsecured senior bank notes with a maturity of three years, due on August 20, 2018.October 30, 2020. The bank notes consisted of $1.0 billion$750 million of 2.15%2.20% senior fixed-rate notes and $250$300 million of senior floating-rate notes.notes at three-month LIBOR plus 25 bps. The Bancorp entered into an interest rate swapsswap to convert the fixed-rate notes to a floating-rate, which resulted in an effective interest rate of three-month LIBOR plus 90 bps. Interest on the floating-rate notes is three-month LIBOR plus 9124 bps. These bank notes will be redeemable by the Bank, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date. For additional information on thethese senior notes offerings, refer to Note 16 of the Notes to Consolidated Financial Statements.

Automobile Loan Securitization

On November 5, 2015,In a securitization transaction that occurred in September of 2017, the Bancorp transferred an aggregate amount of approximately $750 million$1.1 billion in consumer automobile

loans to a bankruptcy remote trust which was deemed to be a VIE. TheThis trust then subsequently issued approximately $1.0 billion of asset-backed notes, of which approximately $261 million were retained by the Bancorp, concluded that it isresulting in approximately $747 million of outstanding notes included in long-term debt in the primary beneficiaryConsolidated Balance Sheets as of December 31, 2017. Third-party holders of this VIE and, therefore, has consolidated this VIE.debt do not have recourse to the general assets of the Bancorp. For additional information on thethis automobile loan securitization, refer to Note 11 and Note 16 of the Notes to Consolidated Financial Statements.

Legislative and Regulatory Developments

The FDIC publishedFRB conducted a notice of proposed rulemakingregularly scheduled examination covering 2014 through 2016 to determine the Bank’s compliance with the CRA. This CRA examination resulted in October of 2015 which would implement a 4.5 bps surcharge on the quarterly FDIC insurance assessments of insured depository institutions with total consolidated assets of $10 billion or more. The surcharge would take effect at the same time the FDIC is requiredchange in rating from “Needs to lower the regular FDIC insurance assessments by approximately 2 bps under a rule adopted by the FDIC in 2011 that is triggered by the DIF reserve ratio reaching 1.15% of insured deposits. The FDIC estimates the DIF reserve ratio will reach 1.15% in 2016 and the surcharge would be sufficientImprove” to raise the DIF reserve ratio“Outstanding”. For further information, refer to the 1.35% minimum mandated byRegulation and Supervision subsection of Part I, Item 1 of the DFA in approximately eight quarters. Fifth Third estimates the proposed changes to the FDIC assessments would result in a net increase in its FDIC insurance expense of approximately $25 millionAnnual Report on an annual basis. The comment period for this proposal ended January 5, 2016.Form10-K.

 

 

17  Fifth Third Bancorp

33  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

On September 30, 2015, the Bancorp agreed to pay approximately $85 million to cover losses on approximately 500 loans for which HUD had paid FHA insurance claims, and an additional $2 million to HUD, in connection with the Bancorp’s entry into a Stipulation and Order of Settlement and Dismissal with the DOJ and HUD, which was approved by the U.S. District Court for the Southern District of New York on October 5, 2015, and a related Settlement Agreement with HUD. On September 28, 2015, the Bancorp entered into consent orders and agreed, without admitting or denying any of the findings of fact or conclusions of law (except to establish jurisdiction), to pay $18 million to consumers in a settlement with the DOJ and the CFPB related to an investigation into whether Fifth Third Bank engaged in any discriminatory practices in connection with the Bank’s indirect automobile loan portfolio. On September 28, 2015, the Bancorp agreed to pay an amount not less than $3 million in redress to consumers and a civil penalty of $500,000 to the CFPB in connection with its entry into a consent order with the CFPB related to the marketing and administration of the Bancorp’s debt protection credit card “add-on” product for those enrolled in the product from January 1, 2007 through November 11, 2013. For additional information on these legal and regulatory proceedings refer to Note 18 of the Notes to Consolidated Financial Statements.

On March 11, 2015, the Bancorp announced the results of its capital plan submitted to the FRB as part of the 2015 CCAR. The FRB indicated to the Bancorp that it did not object to the following capital actions for the period beginning April 1, 2015 and ending June 30, 2016:

TABLE 3: CONDENSED CONSOLIDATED STATEMENTS OF INCOME    

         

 

 
For the years ended December 31 ($ in millions, except per share data)    2017     2016       2015       2014        2013      

 

 

Interest income (FTE)(a)

  $4,515    4,218   4,049   4,051    3,993  

Interest expense

   691    578   495   451    412  

 

 

Net Interest Income (FTE)(a)

   3,824    3,640   3,554   3,600    3,581  

Provision for loan and lease losses

   261    343   396   315    229  

 

 

Net Interest Income After Provision for Loan and Lease Losses (FTE)(a)

   3,563    3,297   3,158   3,285    3,352  

Noninterest income

   3,224    2,696   3,003   2,473    3,227  

Noninterest expense

   3,990    3,903   3,775   3,709    3,961  

 

 

Income Before Income Taxes (FTE)(a)

   2,797    2,090   2,386   2,049    2,618  

Fully taxable equivalent adjustment

   26    25   21   21    20  

Applicable income tax expense

   577    505   659   545    772  

 

 

Net Income

   2,194    1,560   1,706   1,483    1,826  

Less: Net income attributable to noncontrolling interests

   -    (4  (6  2    (10 

 

 

Net Income Attributable to Bancorp

   2,194    1,564   1,712   1,481    1,836  

Dividends on preferred stock

   75    75   75   67    37  

 

 

Net Income Available to Common Shareholders

  $        2,119    1,489   1,637   1,414    1,799  

 

 

Earnings per share - basic

  $2.88    1.95   2.03   1.68    2.05  

Earnings per share - diluted

  $2.83    1.93   2.01   1.66    2.02  

 

 

Cash dividends declared per common share

  $0.60    0.53   0.52   0.51    0.47  

 

 
(a)

The potential increase inThese arenon-GAAP measures. For further information, refer to the quarterly common stock dividend to $0.14 per share in 2016;Non-GAAP Financial Measures section of MD&A.                

The potential repurchase of common shares in an amount up to $765 million; and

The additional ability to repurchase shares in the amount of any after-tax gains from the sale of Vantiv, Inc. common stock.

The BHCs that participated in the 2015 CCAR, including the Bancorp, were required to conduct mid-cycle company-run stress tests using data as of March 31, 2015. For more information on the 2015 CCAR results and 2015 mid-cycle stress test, refer to Note 3 of the Notes to Consolidated Financial Statements.

Fifth Third offers qualified deposit customers a deposit advance product if they choose to avail themselves of this product to meet short-term, small-dollar financial needs. In April of 2013, the CFPB issued a “White Paper” which studied financial services industry offerings and customer use of deposit advance products as well as payday loans and is considering whether rules governing these products are warranted. At the same time, the OCC and FDIC each issued proposed supervisory guidance for public comment to institutions they supervise which supplements existing OCC and FDIC guidance, detailing the principles they expect financial institutions to follow in connection with deposit advance products and supervisory expectations for the use of deposit advance products. The Federal Reserve also issued a statement in April of 2013 to state member banks like Fifth Third for whom the Federal Reserve is the primary regulator. This statement encouraged state member banks to respond to customers’ small-dollar credit needs in a responsible manner; emphasized that they should take into consideration the risks associated with deposit advance products, including potential consumer harm and potential elevated compliance risk; and reminded them that these product offerings must comply with applicable laws and regulations.

Fifth Third’s deposit advance product is designed to fully comply with the applicable federal and state laws and use of this

product is subject to strict eligibility requirements and advance restriction guidelines to limit dependency on this product as a borrowing source. The Bancorp’s deposit advance balances are included in other consumer loans and leases in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A and in Table 9 in the Statements of Income Analysis section of MD&A. On January 17, 2014, given developments in industry practice, Fifth Third announced that it would no longer enroll new customers in its deposit advance product and expected to phase out the service to existing customers by the end of 2014. To avoid a disruption to its existing customers during the extension period while the banking industry awaits further regulatory guidance on the deposit advance product, on November 3, 2014, Fifth Third announced changes to its current deposit advance product for existing customers beginning January 1, 2015, including a lower transaction fee, an extended repayment period and a reduced maximum advance period. The Bancorp is continuing to offer the service to existing deposit advance customers until further regulatory guidance is finalized. These changes to the deposit advance product negatively impacted net interest income by $94 million for the year ended December 31, 2015.

In July of 2013, U.S. banking regulators approved final enhanced regulatory capital requirements (Basel III Final Rule), which included modifications to the proposed rules. The Basel III Final Rule provided for certain banks, including the Bancorp, to opt out of including AOCI in regulatory capital and also retained the treatment of residential mortgage exposures consistent with the current Basel I capital rules. The Basel III Final Rule phases out the inclusion of certain TruPS as a component of Tier I capital. The Bancorp became subject to the Basel III Final Rule on January 1, 2015. The Bancorp made a one-time permanent election not to include AOCI in regulatory capital in the March 31, 2015 FFIEC 031 and FR Y-9C filings. For more information on the impact of the regulatory capital enhancements, refer to the Capital Management subsection of the Risk Management section of MD&A.

On December 10, 2013, the U.S. banking agencies finalized section 619 of the DFA, known as the Volcker Rule, which became effective April 1, 2014. Though the Final Rule was effective April 1, 2014, the FRB granted the industry an extension of time until July 21, 2015 to conform certain of its activities related to proprietary trading to comply with the Volcker Rule. In addition, the FRB has granted the industry an extension of time until July 21, 2016, and announced its intention to grant a one year extension of the conformance period until July 21, 2017, to conform certain ownership interests in, sponsorship activities of and relationships with private equity or hedge funds as well as holding certain collateralized loan obligations that were in place as of December 31, 2013. It is possible that additional conformance period extensions could be granted either to the entire industry, or, upon request, to requesting banking organizations on a case-by-case basis. The Final Rule prohibits banks and BHCs from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments for their own account. The Volcker Rule also restricts banks and their affiliated entities from owning, sponsoring or having certain relationships with private equity and hedge funds, as well as holding certain collateralized loan obligations that are deemed to contain ownership interests. Exemptions are provided for certain activities such as underwriting, market making, hedging, trading in certain government obligations and organizing and offering a hedge fund or private equity fund. Fifth Third does not sponsor any private equity or hedge funds that, under the Final Rule, it is prohibited from sponsoring.

18  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

At December 31, 2015, the Bancorp did not hold collateralized loan obligations. At December 31, 2015, the Bancorp had approximately $186 million in interests and approximately $37 million in binding commitments to invest in private equity funds that are affected by the Volcker Rule. It is expected that over time the Bancorp may need to dispose of these investments, however no formal plan to sell has been approved as of December 31, 2015. As a result of the announced conformance period extension, the Bancorp believes it is likely that these investments will be reduced over time in the ordinary course of events before compliance is required.

On October 10, 2014, the U.S. banking agencies published final rules implementing a quantitative liquidity requirement consistent with the LCR standard established by the BCBS for large internationally active banking organizations, generally those with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure. In addition, a modified LCR requirement was implemented for BHCs with $50 billion or more in total consolidated assets but that are not internationally active, such as Fifth Third. The Modified LCR became effective January 1, 2016 and requires BHCs to calculate its LCR on a monthly basis. Refer to the Liquidity Risk Management subsection of the Risk Management section of MD&A for further discussion on these ratios.

On July 31, 2013, the U.S. District Court for the District of Columbia issued an order granting summary judgment to the plaintiffs in a case challenging certain provisions of the FRB’s rule concerning electronic debit card transaction fees and network

exclusivity arrangements (the “Current Rule”) that were adopted to implement Section 1075 of the DFA, known as the Durbin Amendment. The Court held that, in adopting the Current Rule, the FRB violated the Durbin Amendment’s provisions concerning which costs are allowed to be taken into account for purposes of setting fees that are reasonable and proportional to the costs incurred by the issuer and, therefore, the Current Rule’s maximum permissible fees were too high. In addition, the Court held that the Current Rule’s network non-exclusivity provisions concerning unaffiliated payment networks for debit cards also violated the Durbin Amendment. The Court vacated the Current Rule, but stayed its ruling to provide the FRB an opportunity to replace the invalidated portions. The FRB appealed this decision and on March 21, 2014, the District of Columbia Circuit Court of Appeals reversed the District Court’s grant of summary judgment and remanded the case for further proceedings in accordance with its opinion. The merchants have filed a petition for writ of certiorari to the U.S. Supreme Court. However, on January 20, 2015, the U.S. Supreme Court declined to hear an appeal of the Circuit Court reversal, thereby largely upholding the Current Rule and substantially reducing uncertainty surrounding debit card interchange fees the Bancorp is permitted to charge. Refer to the Noninterest Income subsection of the Statements of Income Analysis section of MD&A for further information regarding the Bancorp’s debit card interchange revenue.

TABLE 3: CONDENSED CONSOLIDATED STATEMENTS OF INCOME

         

 

For the years ended December 31 ($ in millions, except per share data)    2015    2014        2013       2012       2011       

 

Interest income (FTE)

  $4,049    4,051     3,993    4,125    4,236    

Interest expense

   495    451     412    512    661    

 

Net Interest Income (FTE)

   3,554    3,600     3,581    3,613    3,575    

Provision for loan and lease losses

   396    315     229    303    423    

 

Net Interest Income After Provision for Loan and Lease Losses (FTE)

   3,158    3,285     3,352    3,310    3,152    

Noninterest income

   3,003    2,473     3,227    2,999    2,455    

Noninterest expense

   3,775    3,709     3,961    4,081    3,758    

 

Income Before Income Taxes (FTE)

   2,386    2,049     2,618    2,228    1,849    

Fully taxable equivalent adjustment

   21    21     20    18    18    

Applicable income tax expense

   659    545     772    636    533    

 

Net Income

   1,706    1,483     1,826    1,574    1,298    

Less: Net income attributable to noncontrolling interests

   (6  2     (10  (2  1    

 

Net Income Attributable to Bancorp

   1,712    1,481     1,836    1,576    1,297    

Dividends on preferred stock

   75    67     37    35    203    

 

Net Income Available to Common Shareholders

  $        1,637    1,414     1,799    1,541    1,094    

 

Earnings per share - basic

  $2.03    1.68     2.05    1.69    1.20    

Earnings per share - diluted

  $2.01    1.66     2.02    1.66    1.18    

 

Cash dividends declared per common share

  $0.52    0.51     0.47    0.36    0.28    

 

 

Earnings Summary

The Bancorp’s net income available to common shareholders for the year ended December 31, 20152017 was $1.6$2.1 billion, or $2.01$2.83 per diluted share, which was net of $75 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the year ended December 31, 20142016 was $1.4$1.5 billion, or $1.66$1.93 per diluted share, which was net of $67$75 million in preferred stock dividends. Pre-provision net revenue

Net interest income on an FTE basis(non-GAAP) was $2.8$3.8 billion and $2.3$3.6 billion for the years ended December 31, 20152017 and 2014,2016, respectively. Pre-provision net revenue is a non-GAAP measure. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

Net interest income on an FTE basis was $3.6 billion for both the years ended December 31, 2015 and 2014. Net interest income was negativelypositively impacted by a decreasean increase in the net interest rate spread, changes made to the Bancorp’s deposit advance product beginning

January 1, 2015yields on average loans and leases, an increase in average taxable securities and a decrease in average long-term debt of $1.7 billion for the year ended December 31, 20152017 compared to the year ended December 31, 2014.2016. Additionally, net interest income was positively impacted by the decisions of the Federal Open Market Committee to raise the target range of the federal funds rate 25 bps in December 2016, March 2017, June 2017 and December 2017. These negativepositive impacts were partially offset by increasesa decrease in average taxable securities and average loans and leases of $5.2 billion and $2.2 billion, respectively,increases in the rates paid on average other short-term borrowings, average long-term debt and average interest-bearing core deposits during the year ended December 31, 2017. Net interest margin on an FTE basis(non-GAAP) was 3.03% and 2.88% for the years ended December 31, 2017 and 2016, respectively.

Noninterest income increased $528 million for the year ended December 31, 20152017 compared to the year ended December 31, 2014. Net interest margin on2016 primarily due to an FTE basis was 2.88%increase in other noninterest income, partially offset by decreases in corporate banking revenue and 3.10% for the years ended December 31, 2015 and 2014, respectively.

Noninterestmortgage banking net revenue. Other noninterest income increased $530$669 million from the year ended December 31, 20142016 primarily due to the gain on sale of Vantiv, Inc. shares, an increase in private equity investment income and the impact of the net losses on disposition and impairment of bank premises and equipment during the year ended December 31, 2016. These benefits were partially offset by the impact of certain transactions that occurred during the year ended December 31, 2016 which included the impact of income from the TRA transactions associated with Vantiv, Inc., positive valuation adjustments and the gain on sale of the warrant associated with Vantiv Holding, LLC and gains on the sales of certain retail branch operations. The year ended December 31, 2017 also included an increase in the loss on the swap associated with the sale

of Visa, Inc. Class B Shares and a reduction in equity method income from the Bancorp’s interest in Vantiv Holding, LLC. Corporate banking revenue decreased $79 million from the year ended December 31, 2016 primarily due to decreases in lease remarketing fees, foreign exchange fees and letter of credit fees. Mortgage banking net revenue decreased $61 million from the year ended December 31 2016 primarily due to a decrease in origination fees and gains on loan sales.

Noninterest expense increased $87 million for the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to increases in other noninterest incomeexpense and mortgage banking net revenue partially offset by a decrease in corporate banking revenue.personnel costs. Other noninterest incomeexpense increased $529 million from the year ended December 31, 2014. The increase included the impact of a gain of $331 million on the sale of Vantiv, Inc. shares in the fourth quarter of 2015 compared to a gain of $125 million during the second quarter of 2014.

19  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC were $236 million and $31 million for the years ended December 31, 2015 and 2014, respectively. During the fourth quarter of 2015, the Bancorp recognized a gain of $89 million on both the sale and exercise of a portion of the warrant associated with Vantiv Holding, LLC. Additionally, the Bancorp recognized a gain of $49 million from the payment from Vantiv, Inc. to terminate a portion of the TRA and also recognized a gain of $31 million associated with the annual TRA payment during the fourth quarter of 2015. The Bancorp recognized a gain of $23 million associated with the TRA during the fourth quarter of 2014. Mortgage banking net revenue increased $38 million from the year ended December 31, 2014 primarily due to increases in net mortgage servicing revenue and origination fees and gains on loan sales. Corporate banking revenue decreased $46 million for the year ended December 31, 20152017 compared to the year ended December 31, 2014 primarily driven by decreases in syndication fees and lease remarketing fees.

Noninterest expense increased $66 million for the year ended December 31, 2015 compared to the year ended December 31, 20142016 primarily due to increases in personnel costs, technologythe impairment on affordable housing investments, professional service fees and communications expense and card and processingmarketing expense, partially offset by a decrease in other noninterest expense. Personnel costs increased $65 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 driven by higher executive retirement and severance costs as well as an increase in base compensation and an increase in incentive compensation, primarily in the mortgage business. Technology and communications expense increased $12 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 driven primarily by increased investment in information technology associated with regulatory and compliance initiatives, system maintenance, and other growth initiatives. Card and processing expense increased $12 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 driven primarily by increased fraud prevention related expenses. Other noninterest expense decreased $34 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily due to a decrease in losses and adjustments partially offset by increasesdecreases in the provision for the reserve for unfunded commitments, marketing expense, donations expense, impairment on affordable housing investments, FDIC insurancelosses and other taxesadjustments and operatingloan and lease expense. Personnel costs increased $38 million for the year ended December 31, 2017 compared to the year ended December 31, 2016 driven by increases in base compensation, medical and FICA expenses and long-term incentive compensation, partially offset by a decrease in severance costs related to the Bancorp’s voluntary early retirement program in 2016. The increase in personnel costs also included the impact ofone-time employee bonuses that the Bancorp paid as a result of benefits received from the TCJA.

For more information on net interest income, noninterest income and noninterest expense, refer to the Statements of Income Analysis section of MD&A.

Credit Summary

The provision for loan and lease losses was $396$261 million and $315$343 million for the years ended December 31, 20152017 and 2014,2016, respectively. Net lossescharged-off as a percent of average portfolio loans and leases decreased to 0.48%0.32% during the year ended December 31, 20152017 compared to 0.64%0.39% during the year ended December 31, 2014.2016. At December 31, 2015,2017, nonperforming portfolio assets as a percent of portfolio loans and leases and OREO decreased to 0.70%0.53% compared to 0.82%0.80% at December 31, 2014.2016. For further discussion on credit quality, refer to the Credit Risk Management subsection of the Risk Management section of MD&A.

34  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Capital Summary

The Bancorp’s capital ratios exceed the “well-capitalized” guidelines as defined by the PCA requirements of the U.S. banking agencies. As of December 31, 2015,2017, as calculated under the Basel III

transition provisions, standardized approach, the CET1 capital ratio was 9.82%10.61%, the Tier I

risk-based capital ratio was 10.93%11.74%, the Total risk-based capital ratio was 14.13%15.16% and the Tier I leverage ratio was 9.54%10.01%.

 

 

20  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NON-GAAP FINANCIAL MEASURES

 

The following arenon-GAAP measures which are importantprovide useful insight to the reader of the Consolidated Financial Statements but should be supplemental to primary U.S. GAAP measures and should not be read in isolation or relied upon as a substitute for the primary U.S. GAAP measures.

The Bancorp considers many factors when determiningFTE basis adjusts for the adequacytax-favored status of its liquidity profile, including its LCR as definedincome from certain loans and securities held by the U.S. banking agencies Basel III LCR Final Rule. Generally, the LCR is designed to ensure banks maintain an adequate level of unencumbered HQLA to satisfy the estimated net cash outflows under a 30-day stress scenario. The Bancorp is subject to thethat are not

Modified LCR whereby the net cash outflow under the 30-day stress scenario is multiplied by a factor of 0.7. The LCR Final Rule became effectivetaxable for the Bancorp on January 1, 2016.federal income tax purposes. The Bancorp believes there is no comparable U.S. GAAP financial measurethis presentation to be the LCR. The Bancorp believes providing an estimated Modified LCR is important for comparability to other financial institutions. For a further discussion on liquidity management and the LCR, refer to the Liquidity Risk Management subsectionpreferred industry measurement of the Risk Management section of MD&A.

TABLE 4:  NON-GAAP FINANCIAL MEASURES - ESTIMATED MODIFIED LIQUIDITY COVERAGE RATIO

As of ($ in millions)

December 31,  

2015        

Estimated HQLA

$                    21,897   

Estimated net cash outflow

18,849   

Estimated Modified LCR

116%

Pre-provision net revenue is net interest income plus noninterest income minus noninterest expense. The Bancorp believes this

measure is important becauseas it provides a ready view of the Bancorp’s pre-tax earnings before the impact of provision expense.relevant comparison between taxable andnon-taxable amounts.

 

 

The following table reconciles thenon-GAAP financial measuremeasures of pre-provision net revenueinterest income on an FTE basis, interest income on an FTE basis, net interest margin, net interest rate spread and the efficiency ratio to U.S. GAAP for the years ended December 31:GAAP:

 

TABLE 5:  NON-GAAP FINANCIAL MEASURES - PRE-PROVISION NET REVENUE

  

 

 

($ in millions)  2015   2014        

 

Net interest income (U.S. GAAP)

  $3,533     3,579   

Add: Noninterest income

   3,003     2,473   

Less: Noninterest expense

   (3,775   (3,709 

 

Pre-provision net revenue

  $            2,761     2,343   

 

TABLE 4:NON-GAAP FINANCIAL MEASURES - FINANCIAL MEASURES AND RATIOS ON AN FTE BASIS       

 

 
For the years ended December 31 ($ in millions)      2017     2016         2015      

 

 

Net interest income (U.S. GAAP)

  $3,798        3,615      3,533   

Add: FTE adjustment

   26        25      21   

 

 

Net interest income on an FTE basis (1)

  $3,824        3,640      3,554   

Interest income (U.S. GAAP)

  $4,489        4,193      4,028   

Add: FTE adjustment

   26        25      21   

 

 

Interest income on an FTE basis (2)

  $4,515        4,218      4,049   

Interest expense (3)

  $691        578      495   

Noninterest income (4)

   3,224        2,696      3,003   

Noninterest expense (5)

   3,990        3,903      3,775   

Average interest-earning assets (6)

           126,293        126,285      123,584   

Average interest-bearing liabilities (7)

   85,090        85,332      84,342   

Ratios:

            

Net interest margin on an FTE basis (1) / (6)

   3.03       2.88      2.88   

Net interest rate spread on an FTE basis (2) / (6) - (3) / (7)

   2.76        2.66      2.69   

Efficiency ratio on an FTE basis (5) / (1) + (4)

   56.6        61.6      57.6   

 

 

 

The following table reconciles thenon-GAAP financial measure of income before income taxes on an FTE basis to U.S. GAAP:

 

 

TABLE 5:NON-GAAP FINANCIAL MEASURE - INCOME BEFORE INCOME TAXES ON AN FTE BASIS   

 

 
For the years ended December 31 ($ in millions)        2017     2016        2015      

 

 

Income before income taxes (U.S. GAAP)

  $2,771        2,065      2,365   

Add: FTE adjustment

   26        25      21   

 

 

Income before income taxes on an FTE basis

  $              2,797        2,090      2,386   

 

 

 

The Bancorp believes return on average tangible common equity is an important measure for comparative purposes with other financial

institutions, but is not defined under U.S. GAAP, and therefore is considered anon-GAAP financial measure. This measure is useful for evaluating the performance of a business as it calculates the

return available to common shareholders without the impact of intangible assets and their related amortization.

 

35  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table reconciles thenon-GAAP financial measure of return on average tangible common equity to U.S. GAAP for the years ended December 31:GAAP:

 

TABLE 6: NON-GAAP FINANCIAL MEASURES - RETURN ON AVERAGE TANGIBLE COMMON EQUITY

TABLE6: NON-GAAP FINANCIAL MEASURE - RETURN ON AVERAGE TANGIBLE COMMON EQUITYTABLE6: NON-GAAP FINANCIAL MEASURE - RETURN ON AVERAGE TANGIBLE COMMON EQUITY  

 
($ in millions)  2015 2014      
For the years ended December 31 ($ in millions)  2017 2016         

 

Net income available to common shareholders (U.S. GAAP)

  $1,637   1,414     $2,119  1,489  

Add: Intangible amortization, net of tax

   2   3      1  1  

 

Tangible net income available to common shareholders (1)

  $1,639   1,417     $2,120  1,490  

Average Bancorp shareholders’ equity (U.S. GAAP)

  $15,865   15,290     $16,590  16,597  

Less: Average preferred stock

   (1,331 (1,205    (1,331 (1,331 

Average goodwill

   (2,416 (2,416    (2,425 (2,416 

Average intangible assets and other servicing rights

   (14 (20    (18 (10 

 

Average tangible common equity (2)

  $          12,104   11,649     $          12,816  12,840  

Return on average tangible common equity (1) / (2)

   13.5  %  12.2      16.5  %  11.6  

 

 

The Bancorp considers various measures when evaluating capital utilization and adequacy, including the tangible equity ratio and tangible common equity ratio, in addition to capital ratios defined by the U.S. banking regulators.agencies. These calculations are intended to complement the capital ratios defined by the U.S. banking regulatorsagencies for both absolute and comparative purposes. Because U.S. GAAP does not include capital ratio measures, the Bancorp believes there

are no comparable U.S. GAAP financial measures to these ratios. These ratios are not formally defined by U.S. GAAP or codified in the federal banking regulations and, therefore, are considered to benon-GAAP financial measures. Additionally, the Bancorp became subject to the Basel III Final Rule on January 1, 2015. The CET1 capital ratio is a new

measure defined by the banking regulatory agencies under the Basel III Final Rule. The CET1 capital ratio has transition provisions that will be phased out over time. The Bancorp is presenting the CET1 capital ratio on a fully phased-in basis for comparative purposes with other organizations. Since analysts and banking regulators may assess the Bancorp’s capital adequacy using these ratios, the Bancorp believes they are useful to provide investors the ability to assess its capital adequacy on the same basis. The Bancorp encourages readers to consider its Consolidated Financial Statements in their entirety and not to rely on any single financial measure.

 

21  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table reconcilesnon-GAAP capital ratios to U.S. GAAP as of December 31:GAAP:

 

TABLE 7:  NON-GAAP FINANCIAL MEASURES - CAPITAL RATIOS

    

 

($ in millions)  2015  2014     

 

Total Bancorp Shareholders’ Equity (U.S. GAAP)

  $15,839    15,626   

Less:  Preferred stock

   (1,331  (1,331 

  Goodwill

   (2,416  (2,416 

  Intangible assets and other servicing rights

   (13  (16 

 

Tangible common equity, including unrealized gains / losses

   12,079    11,863   

Less:  AOCI

   (197  (429 

 

Tangible common equity, excluding unrealized gains / losses (1)

   11,882    11,434   

Add:  Preferred stock

   1,331    1,331   

 

Tangible equity (2)

  $13,213    12,765   

 

Total Assets (U.S. GAAP)

  $141,082    138,706   

Less:  Goodwill

   (2,416  (2,416 

  Intangible assets and other servicing rights

   (13  (16 

  AOCI, before tax

   (303  (660 

 

Tangible assets, excluding unrealized gains / losses (3)

  $138,350    135,614   

 

Total Bancorp Shareholders’ Equity (U.S. GAAP)

  $N/A    15,626   

Less:  Goodwill and certain other intangibles

   N/A    (2,476 

  Unrealized gains

   N/A    (429 

Add:  Qualifying TruPS

   N/A    60   

  Other

   N/A    (17 

 

Tier I risk-based capital

   N/A    12,764   

Less: Preferred stock

   N/A    (1,331 

  Qualifying TruPS

   N/A    (60 

  Qualified noncontrolling interests in consolidated subsidiaries

   N/A    (1 

 

Tier I common equity (4)

  $N/A    11,372   

 

Ratios:

    

Tangible equity as a percent of tangible assets (2) / (3)(e)

   9.55 %   9.41   

Tangible common equity as a percent of tangible assets (1) / (3)(e)

   8.59    8.43   
   Basel III        
    Transitional(a)      Basel I(b)      

Risk-weighted assets (5)

  $121,290    117,878   

Ratio:

    

Tier I common equity (4) / (5)

   N/A    9.65 %  

 

Basel III Final Rule - Transition to Fully Phased-In

    

 

CET1 capital (transitional)

  $11,917    N/A   

Less: Adjustments to CET1 capital from transitional to fully phased-in(c)

   (8  N/A   

 

CET1 capital (fully phased-in) (6)

   11,909    N/A   

 

Risk-weighted assets (transitional)

   121,290    N/A   

Add: Adjustments to risk-weighted assets from transitional to fully phased-in(d)

   1,178    N/A   

 

Risk-weighted assets (fully phased-in) (7)

  $122,468    N/A   

 

Estimated CET1 capital ratio under Basel III Final Rule (fully phased-in) (6) / (7)

   9.72 %   N/A   

 

(a)

Under the U.S. banking agencies’ Basel III Final Rule, assets and credit equivalent amounts of off-balance sheet exposures are calculated according to the standardized approach for risk-weighted assets. The resulting weighted values are added together resulting in the Bancorp’s total risk-weighted assets.

(b)

This capital amount and ratio were calculated under the Supervisory Agencies general risk-based capital rules (Basel I) which were in effect prior to January 1, 2015.

(c)

Primarily relates to disallowed intangible assets (other than goodwill and MSRs, net of associated deferred tax liabilities).

(d)

Primarily relates to higher risk weighting for MSRs.

(e)

Excludes unrealized gains and losses.

TABLE7:  NON-GAAP FINANCIAL MEASURES - CAPITAL RATIOS

    

 

As of December 31 ($ in millions)  2017  2016          

 

Total Bancorp Shareholders’ Equity (U.S. GAAP)

  $16,365   16,205  

Less:  Preferred stock

   (1,331  (1,331 

  Goodwill

   (2,445  (2,416 

  Intangible assets and other servicing rights

   (27  (10 

  AOCI

   (73  (59 

 

Tangible common equity, excluding unrealized gains / losses (1)

   12,489   12,389  

Add:  Preferred stock

   1,331   1,331  

 

Tangible equity (2)

  $13,820   13,720  

 

Total Assets (U.S. GAAP)

  $142,193   142,177  

Less:  Goodwill

   (2,445  (2,416 

   Intangible assets and other servicing rights

   (27  (10 

  AOCI, before tax

   (92  (91 

 

Tangible assets, excluding unrealized gains / losses (3)

  $            139,629   139,660  

 

Ratios:

    

Tangible equity as a percentage of tangible assets (2) / (3)

   9.90 %   9.82  

Tangible common equity as a percentage of tangible assets (1) / (3)

   8.94   8.87  

 

 

2236  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RECENT ACCOUNTING STANDARDS

 

Note 1 of the Notes to Consolidated Financial Statements provides a discussion of the significant new accounting standards adoptedapplicable

byto the Bancorp during 20152017 and the expected impact of significant accounting standards issued, but not yet required to be adopted.

 

 

CRITICAL ACCOUNTING POLICIES

 

The Bancorp’s Consolidated Financial Statements are prepared in accordance with U.S. GAAP. Certain accounting policies require management to exercise judgment in determining methodologies, economic assumptions and estimates that may materially affect the Bancorp’s financial position, results of operations and cash flows. The Bancorp’s critical accounting policies include the accounting for the ALLL, reserve for unfunded commitments, income taxes, valuation of servicing rights, fair value measurements, goodwill and legal contingencies. NoEffective January 1, 2017, the Bancorp elected to adopt the fair value method of measuring all existing classes of its residential mortgage servicing rights as described below. Previously, the Bancorp had measured its servicing rights subsequent to initial recognition using the amortization method. There have been no other material changes were made to the valuation techniques or models described below during the year ended December 31, 2015.2017.

ALLL

The Bancorp disaggregates its portfolio loans and leases into portfolio segments for purposes of determining the ALLL. The Bancorp’s portfolio segments include commercial, residential mortgage and consumer. The Bancorp further disaggregates its portfolio segments into classes for purposes of monitoring and assessing credit quality based on certain risk characteristics. For an analysis of the Bancorp’s ALLL by portfolio segment and credit quality information by class, refer to Note 6 of the Notes to Consolidated Financial Statements.

The Bancorp maintains the ALLL to absorb probable loan and lease losses inherent in its portfolio segments. The ALLL is maintained at a level the Bancorp considers to be adequate and is based on ongoing quarterly assessments and evaluations of the collectability and historical loss experience of loans and leases. Credit losses are charged and recoveries are credited to the ALLL. Provisions for loan and lease losses are based on the Bancorp’s review of the historical credit loss experience and such factors that, in management’s judgment, deserve consideration under existing economic conditions in estimating probable credit losses. The Bancorp’s strategy 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 requires significant management judgement and is based on historical loss rates, current credit grades, specific allocation on loans modified in a TDR and impaired commercial credits above specified thresholds and other qualitative adjustments. Allowances on individual commercial loans, TDRs and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection andcharge-off experience. An unallocated allowance is maintained to recognize the imprecision in estimating and measuring losses when evaluating allowances for individual loans or pools of loans.

Larger commercial loans included within aggregate borrower relationship balances exceeding $1 million that exhibit probable or observed credit weaknesses, as well as loans that have been modified in a TDR, are subject to individual review for impairment.

The Bancorp considers the current value of collateral, credit quality of any guarantees, the guarantor’s liquidity and willingness to cooperate, the loan structure and other factors when evaluating whether an individual loan is impaired. Other factors may include

the 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 are impaired, allowances are determined based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral and other sources of cash flow, as well as an evaluation of legal options available to the Bancorp. Allowances for impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, fair value of the underlying collateral or readily observable secondary market values. The Bancorp evaluates the collectability of both principal and interest when assessing the need for a loss accrual.

Historical credit loss rates are applied to commercial loans that are not impaired or are impaired, but smaller than the established threshold of $1 million and thus not subject to specific allowance allocations. The loss rates are derived from a migration analysis,analyses for several portfolio stratifications, which trackstrack the historical netcharge-off experience sustained on loans according to their internal risk grade. The risk grading system utilized for allowance analysis purposes encompasses ten categories.

Homogenous loans and leases in the residential mortgage and consumer portfolio segments are not individually risk graded. Rather, standard credit scoring systems and delinquency monitoring are used to assess credit risks and allowances are established based on the expected net charge-offs. Loss rates are based on the trailing twelve month netcharge-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. Factors that managementThe prescriptive loss rate factors include adjustments for delinquency trends, LTV trends and refreshed FICO score trends.

The Bancorp also considers qualitative factors in determining the analysisALLL. These include the effects of the national and local economies; trends in the nature and volume of delinquencies, charge-offs and nonaccrual loans;adjustments for changes in loan mix; credit score migration comparisons; asset quality trends;policies or procedures in underwriting, monitoring or collections, economic conditions, portfolio mix, lending and risk management personnel, results of internal audit and loan administration; changes inquality control reviews, collateral values and geographic concentrations. The Bancorp considers home price index trends when determining the internal lending policies and credit standards; collection practices; and examination results from bank regulatory agencies and the Bancorp’s internal credit reviewers.collateral value qualitative factor.

The Bancorp’s primary market areas for lending are the Midwestern and Southeastern regions of the United States.U.S. When evaluating the adequacy of allowances, consideration is given to these regional geographic concentrations and the closely associated effect changing economic conditions have on the Bancorp���sBancorp’s customers.

Refer to the Allowance for Credit Losses subsection of the Risk Management section of MD&A for a discussion on the Bancorp’s ALLL sensitivity analysis.

Reserve for Unfunded Commitments

The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities and is included in other 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.

37  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This process takes into consideration the same risk elements that are analyzed in the determination of the adequacy of the Bancorp’s ALLL, as discussed above.

23  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

previously discussed. Net adjustments to the reserve for unfunded commitments are included in other noninterest expense in the Consolidated Statements of Income.

Income Taxes

The income tax laws of the jurisdictions in which the Bancorp operates are complex and may be subject to different interpretations. The Bancorp evaluates and assesses the relative risks and appropriate tax treatment of transactions and filing positions after considering relevant statutes, regulations, judicial decisionsprecedent and other information. The Bancorp maintains tax accruals consistent with its evaluation of these items.

Changes in the estimate of tax accruals occur periodically as a result ofdue to changes in tax rates, interpretation of tax laws and regulations, and other guidance issued by tax authorities and the status of examinations conducted by tax authorities, as well as the expiration of statutes of limitations. These changes may significantly impact the Bancorp’s tax accruals, deferred taxes and income tax expense and may significantly impact the operating results of the Bancorp.

Deferred taxes are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is calculated based on the difference between the book and tax bases of the assets and liabilities using enacted tax rates.rates and laws. Significant management judgment is required to determine the realizability of deferred tax assets. Deferred tax assets are recognized when management believes that it is more likely than not that the deferred tax assets will be realized. Where management has determined that it is not more likely than not that certain deferred tax assets will be realized, a valuation allowance is maintained. For additional information on income taxes, refer to Note 20 of the Notes to Consolidated Financial Statements.

Valuation of Servicing Rights

When the Bancorp sells loans through either securitizations or individual loan sales in accordance with its investment policies, it often obtains servicing rights. ServicingThe Bancorp may also purchase servicing rights. Effective January 1, 2017, the Bancorp elected to prospectively adopt the fair value method for all existing classes of its residential mortgage servicing rights resulting from loan salesportfolio. Upon this election, all servicing rights in these classes are initially recordedmeasured at fair value at each reporting date and subsequently amortizedchanges in proportion to, and overthe fair value of servicing rights are reported in earnings in the period of, estimated net servicing revenue.in which the changes occur. Servicing rights are assessed for impairment monthly, based on fair value, with temporary impairment recognized through a valuation allowance and other-than-temporary impairment recognized through a write-off of the servicing asset and related valuation allowance.valued using internal OAS models. Significant management judgement is necessary to identify key economic assumptions used in measuring any potential impairmentestimating the fair value of the servicing rights including the prepayment speeds of the underlying loans, the weighted-average life, the OAS spread and the weighted-average coupon rate, as applicable. The primary risk of material changes to the value of the servicing rights resides in the potential volatility in the economic assumptions used, particularly the prepayment speeds. The Bancorp monitors risk and adjusts its valuation allowance as necessary to adequately reserve for impairment in the servicing portfolio. In order to assist in thisthe assessment of the fair value of servicing rights, the Bancorp obtains external valuations of the MSRservicing rights portfolio from third parties and participates in peer surveys that provide additional confirmation of the

reasonableness of key assumptions utilized in the internal OAS model. For purposesPrior to the election of measuringthe fair value method, servicing rights were initially recorded at fair value and subsequently amortized in proportion to, and over the period of, estimated net servicing revenue. Servicing rights were assessed for impairment the MSRs are stratified into classesmonthly, based on fair value, with temporary impairment recognized through a valuation allowance and other-than-temporary impairment recognized through awrite-off of the financialservicing asset type (fixed-rate vs. adjustable-rate) and interest rates.related valuation allowance. For additional information on servicing rights, refer to Note 12 of the Notes to Consolidated Financial Statements.

Fair Value Measurements

The Bancorp measures certain financial assets and liabilities at fair value in accordance with U.S. GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques theThe Bancorp usesemploys various valuation approaches to measure fair value includeincluding the market, approach, income approach and cost approach.approaches. The market approach uses prices or relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach involves discounting future amounts to a single present amount and is based on current market expectations about those future amounts. The cost approach is based on the amount that currently would be required to replace the service capacity of the asset.

U.S. GAAP establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. For additional information on the fair value hierarchy and fair value measurements, refer to Note 1 of the Notes to Consolidated Financial Statements.

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 level of management judgement necessary to determine fair value varies based upon the methods used in the determination of fair value. Financial instruments that are measured at fair value using quoted prices in active markets (Level 1) require minimal judgement. The valuation of financial instruments when quoted market prices are not available (Levels 2 and 3) may require significant management judgement to assess whether quoted prices for similar instruments exist, the impact of changing market conditions including reducing liquidity in the capital markets, and, the use of estimates surrounding significant unobservable inputs. Table 8 provides a summary of the fair value of financial instruments carried at fair value on a recurring basis and the amounts of financial instruments valued using Level 3 inputs.

 

 

2438  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

TABLE 8:  FAIR VALUE SUMMARY

  

 

 
As of ($ in millions)  December 31, 2015   December 31, 2014 

 

 
             Balance                      Level 3                       Balance                       Level 3           

 

 

Assets carried at fair value

  $31,364    444     24,917     535        

As a percent of total assets

   22  -     18     -        

Liabilities carried at fair value

  $967    64     1,064     51        

As a percent of total liabilities

   1  -     1     -        

 

 

TABLE 8: FAIR VALUE SUMMARY

       

 

 
As of ($ in millions)     December 31, 2017          December 31, 2016             

 

  

 

 

 
    Balance           Level 3           Balance            Level 3              

 

 

Assets carried at fair value

 $    34,287    1,003    32,872    156      

As a percent of total assets

    24      23    -      

Liabilities carried at fair value

 $    633    142    687    96      

As a percent of total liabilities

         1    -      

 

 

Refer to Note 27 of the Notes to Consolidated Financial Statements for further information on fair value measurements including a description of the valuation methodologies used for significant financial instruments.

Goodwill

Business combinations entered into by the Bancorp typically include the acquisition of goodwill. U.S. GAAP requires goodwill to be tested for impairment at the Bancorp’s reporting unit level on an annual basis, which for the Bancorp is September 30, and more frequently if events or circumstances indicate that there may be impairment. Refer to Note 1 of the Notes to Consolidated Financial Statements for a discussion on the methodology used by the Bancorp to assess goodwill for impairment.

Impairment exists when a reporting unit’s carrying amount of goodwill exceeds its implied fair value. In testing goodwill for impairment, U.S. GAAP permits the Bancorp to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In this qualitative assessment, the Bancorp evaluates events and circumstances which may include, but are not limited to, the general economic environment, banking industry and market conditions, the overall financial performance of the Bancorp, the performance of the Bancorp’s common stock, the key financial performance metrics of the Bancorp’s reporting units and events affecting the reporting units to determine if it is not more likely than not that the fair value of a reporting unit is less than its carrying amount. If thetwo-step impairment test is required or the decision to bypass the qualitative assessment is elected, the Bancorp would be required to perform the first step (Step 1) of the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, Step 2 of the goodwill impairment test is performed to measure the amount of impairment loss, if any.

The fair value of a reporting unit is the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. SinceAs none of the Bancorp’s reporting units are publicly traded, individual reporting unit fair value determinations cannot be directly correlated to the Bancorp’s stock price. The determination of the fair value of a reporting unit is a subjective process that involves the use of estimates and judgments, particularly related to cash flows, the appropriate discount rates and an applicable control premium. The Bancorp employs an income-based approach, utilizing the reporting unit’s forecasted cash flows (including a terminal value approach to estimate cash flows beyond the final year of the forecast) and the reporting unit’s estimated cost of equity as the discount rate. Significant management judgment is necessary in the preparation of each reporting unit’s forecasted cash flows surrounding expectations for earnings projections, growth and credit loss expectations and

actual results may differ from forecasted results. Additionally, the Bancorp determines its market capitalization based on the average of the closing price of the Bancorp’s stock during the month

including the measurement date, incorporating an additional control premium, and compares this market-based fair value measurement to the aggregate fair value of the Bancorp’s reporting units in order to corroborate the results of the income approach.

When required to perform Step 2, the Bancorp compares the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount exceeds the implied fair value, an impairment loss equal to that excess amount is recognized. A recognized impairment loss cannot exceed the carrying amount of that goodwill and cannot be reversed in future periods even if the fair value of the reporting unit subsequently recovers.

During Step 2, the Bancorp determines the implied fair value of goodwill for a reporting unit by assigning the fair value of the reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. Significant management judgement is necessary in the identification and valuation of unrecognized intangible assets and the valuation of the reporting unit’s recorded assets and liabilities. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. This assignment process is only performed for purposes of testing goodwill for impairment. The Bancorp does not adjust the carrying values of recognized assets or liabilities (other than goodwill, if appropriate), nor does it recognize previously unrecognized intangible assets in the Consolidated Financial Statements as a result of this assignment process. Refer to Note 9 of the Notes to Consolidated Financial Statements for further information regarding the Bancorp’s goodwill.

Legal Contingencies

The Bancorp and its subsidiaries are parties to numerous claims and lawsuits as well as threatened or potential actions or claims concerning matters arising from the conduct of its business activities. The outcome of claims or litigation and the timing of ultimate resolution are inherently difficult to predict and significant judgment may be required in the determination of both the probability of loss and whether the amount of the loss is reasonably estimable. The Bancorp’s estimates are subjective and are based on the status of legal and regulatory proceedings, the merit of the Bancorp’s defenses and consultation with internal and external legal counsel. An accrual for a potential litigation loss is established when information related to the loss contingency indicates both that a loss is probable and that the amount of loss can be reasonably estimated. Refer to Note 18 of the Notes to Consolidated Financial Statements for further information regarding the Bancorp’s legal proceedings.

 

 

2539  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RISK FACTORS

The risks listed below present risks that could have a material impact on the Bancorp’s financial condition, the results of its operations, or its business.

RISKS RELATING TO ECONOMIC AND MARKET CONDITIONS

Weakness in the U.S. economy, including within Fifth Third’s geographic footprint, has adversely affected Fifth Third in the past and may adversely affect Fifth Third in the future.

If the strength of the U.S. economy in general or the strength of the local economies in which Fifth Third conducts operations declines, this could result in, among other things, a deterioration in credit quality or a reduced demand for credit, including a resultant effect on Fifth Third’s loan portfolio and ALLL and in the receipt of lower proceeds from the sale of loans and foreclosed properties. These factors could result in higher delinquencies, greater charge-offs and increased losses in future periods, which could materially adversely affect Fifth Third’s financial condition and results of operations.

Global financial conditions could hamper economic recovery or contribute to recessionary economic conditions and severe stress in the financial markets, including in the United States. Should the U.S. economic recovery be adversely impacted by these factors, the likelihood for loan and asset growth at U.S. financial institutions, like Fifth Third, may deteriorate.

The global financial markets continue to be strained as a result of economic slowdowns, geopolitical concerns and the related path of commodity prices and interest rates. Divergence in economic growth in the U.S. and international economies and the resulting differences in monetary policy are placing strains on financial markets and strengthening the U.S. dollar. The relative strength of the U.S. dollar may continue to negatively impact the U.S. manufacturing sector. These factors could negatively impact the U.S. economy and affect the stability of global financial markets.

Changes in interest rates could affect Fifth Third’s income and cash flows.

Fifth Third’s income and cash flows depend to a great extent on the difference between the interest rates earned on interest-earning assets such as loans and investment securities, and the interest rates paid on interest-bearing liabilities such as deposits and borrowings. These rates are highly sensitive to many factors that are beyond Fifth Third’s control, including general economic conditions and the policies of various governmental and regulatory agencies (in particular, the FRB). Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the prepayment speed of loans, the purchase of investments, the generation of deposits and the rates received on loans and investment securities and paid on deposits or other sources of funding. The impact of these changes may be magnified if Fifth Third does not effectively manage the relative sensitivity of its assets and liabilities to changes in market interest rates. Fluctuations in these areas may adversely affect Fifth Third and its shareholders.

Changes and trends in the capital markets may affect Fifth Third’s income and cash flows.

Fifth Third enters into and maintains trading and investment positions in the capital markets on its own behalf and manages investment positions on behalf of its customers. These investment positions include derivative financial instruments. The revenues and profits Fifth Third derives from managing proprietary and customer trading and investment positions are dependent on market prices. Market changes and trends may result in a decline in investment

advisory revenue or investment or trading losses that may impact Fifth Third. Losses on behalf of its customers could expose Fifth Third to litigation, credit risks or loss of revenue from those clients and customers. Additionally, losses in Fifth Third’s trading and investment positions could lead to a loss with respect to those investments and may adversely affect cash flows and funding costs.

Problems encountered by financial institutions larger than or similar to Fifth Third could adversely affect financial markets generally and have direct and indirect adverse effects on Fifth Third.

Fifth Third has exposure to counterparties in the financial services industry and other industries, and routinely executes transactions with such counterparties, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of Fifth Third’s transactions with other financial institutions expose Fifth Third to credit risk in the event of default of a counterparty or client. In addition, Fifth Third’s credit risk may be affected when the collateral it holds cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure. The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading, clearing or other relationships between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Bancorp interacts on a daily basis, and therefore could adversely affect Fifth Third.

Fifth Third’s stock price is volatile.

Fifth Third’s stock price has been volatile in the past and several factors could cause the price to fluctuate substantially in the future. These factors include:

Actual or anticipated variations in earnings;

Changes in analysts’ recommendations or projections;

Fifth Third’s announcements of developments related to its businesses;

Operating and stock performance of other companies deemed to be peers;

Actions by government regulators;

New technology used or services offered by traditional and non-traditional competitors;

News reports of trends, concerns and other issues related to the financial services industry;

Natural disasters;

Geopolitical conditions such as acts or threats of terrorism or military conflicts.

The price for shares of Fifth Third’s common stock may fluctuate significantly in the future, and these fluctuations may be unrelated to Fifth Third’s performance. General market price declines or market volatility in the future could adversely affect the price for shares of Fifth Third’s common stock, and the current market price of such shares may not be indicative of future market prices.

26  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Changes in retail distribution strategies and consumer behavior may adversely impact Fifth Third’s investments in its bank premises and equipment and other assets and may lead to increased expenditures to change its retail distribution channel.

Fifth Third has significant investments in bank premises and equipment for its branch network including its 1,254 full-service banking centers, 56 parcels of land held for the development of future banking centers, as well as its retail work force and other branch banking assets. Advances in technology such as e-commerce, telephone, internet and mobile banking, and in-branch self-service technologies including automatic teller machines and other equipment, as well as changing customer preferences for these other methods of accessing Fifth Third’s products and services, could affect the value of Fifth Third’s branch network or other retail distribution assets and may cause it to change its retail distribution strategy, close and/or sell certain branches or parcels of land held for development and restructure or reduce its remaining branches and work force. Further advances in technology and/or changes in customer preferences could have additional changes in Fifth Third’s retail distribution strategy and/or branch network. These actions could lead to losses on these assets or could adversely impact the carrying value of other long-lived assets and may lead to increased expenditures to renovate and reconfigure remaining branches or to otherwise reform its retail distribution channel.

RISKS RELATING TO FIFTH THIRD’S GENERAL BUSINESS

Deteriorating credit quality has adversely impacted Fifth Third in the past and may adversely impact Fifth Third in the future.

When Fifth Third lends money or commits to lend money the Bancorp incurs credit risk or the risk of loss if borrowers do not repay their loans. The credit performance of the loan portfolios significantly affects the Bancorp’s financial results and condition. If the current economic environment were to deteriorate, more customers may have difficulty in repaying their loans or other obligations which could result in a higher level of credit losses and reserves for credit losses. Fifth Third reserves for credit losses by establishing reserves through a charge to earnings. The amount of these reserves is based on Fifth Third’s assessment of credit losses inherent in the loan portfolio including unfunded credit commitments. The process for determining the amount of the ALLL and the reserve for unfunded commitments is critical to Fifth Third’s financial results and condition. It requires difficult, subjective and complex judgments about the environment, including analysis of economic or market conditions that might impair the ability of borrowers to repay their loans.

Fifth Third might underestimate the credit losses inherent in its loan portfolio and have credit losses in excess of the amount reserved. Fifth Third might increase the reserve because of changing economic conditions, including falling home prices or higher unemployment, or other factors such as changes in borrower’s behavior. As an example, borrowers may “strategically default,” or discontinue making payments on their real estate-secured loans if the value of the real estate is less than what they owe, even if they are still financially able to make the payments.

Fifth Third believes that both the ALLL and the reserve for unfunded commitments are adequate to cover inherent losses at December 31, 2015; however, there is no assurance that they will be sufficient to cover future credit losses, especially if housing and employment conditions worsen. In the event of significant deterioration in economic conditions, Fifth Third may be required to increase reserves in future periods, which would reduce earnings.

For more information, refer to the Credit Risk Management subsection of the Risk Management section of MD&A and the Allowance for Loan and Losses and Reserve for Unfunded Commitments subsections of the Critical Accounting Policies section of MD&A.

Fifth Third must maintain adequate sources of funding and liquidity.

Fifth Third must maintain adequate funding sources in the normal course of business to support its operations and fund outstanding liabilities, as well as meet regulatory expectations. Fifth Third primarily relies on bank deposits to be a low cost and stable source of funding for the loans Fifth Third makes and the operations of Fifth Third’s business. Core deposits, which include transaction deposits and other time deposits, have historically provided Fifth Third with a sizeable source of relatively stable and low-cost funds (average core deposits funded 71% of average total assets at December 31, 2015). In addition to customer deposits, sources of liquidity include investments in the securities portfolio, Fifth Third’s sale or securitization of loans in secondary markets and the pledging of loans and investment securities to access secured borrowing facilities through the FHLB and the FRB, and Fifth Third’s ability to raise funds in domestic and international money and capital markets.

Fifth Third’s liquidity and ability to fund and run the business could be materially adversely affected by a variety of conditions and factors, including financial and credit market disruptions and volatility or a lack of market or customer confidence in financial markets in general similar to what occurred during the financial crisis in 2008 and early 2009, which may result in a loss of customer deposits or outflows of cash or collateral and/or ability to access capital markets on favorable terms.

Other conditions and factors that could materially adversely affect Fifth Third’s liquidity and funding include a lack of market or customer confidence in Fifth Third or negative news about Fifth Third or the financial services industry generally which also may result in a loss of deposits and/or negatively affect the ability to access the capital markets; the loss of customer deposits to alternative investments; inability to sell or securitize loans or other assets, increased regulatory requirements, and reductions in one or more of Fifth Third’s credit ratings. A reduced credit rating could adversely affect Fifth Third’s ability to borrow funds and raise the cost of borrowings substantially and could cause creditors and business counterparties to raise collateral requirements or take other actions that could adversely affect Fifth Third’s ability to raise capital. Many of the above conditions and factors may be caused by events over which Fifth Third has little or no control such as what occurred during the financial crisis. While market conditions have stabilized and, in many cases, improved, there can be no assurance that significant disruption and volatility in the financial markets will not occur in the future.

Recent regulatory changes relating to liquidity and risk management may also negatively impact Fifth Third’s results of operations and competitive position. Various regulations recently adopted or proposed, and additional regulations under consideration, impose or could impose more stringent liquidity requirements for large financial institutions, including Fifth Third. These regulations address, among other matters, liquidity stress testing, minimum liquidity requirements and restrictions on short-term debt issued by top-tier holding companies. Given the overlap and complex interactions of these regulations with other regulatory changes, including the resolution and recovery framework applicable to Fifth Third, the full impact of the adopted and proposed regulations will remain uncertain until their full implementation.

27  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

If Fifth Third is unable to continue to fund assets through customer bank deposits or access capital markets on favorable terms or if Fifth Third suffers an increase in borrowing costs or otherwise fails to manage liquidity effectively; then Fifth Third’s liquidity, operating margins, and financial results and condition may be materially adversely affected. As Fifth Third did during the financial crisis, it may also need to raise additional capital through the issuance of stock, which could dilute the ownership of existing stockholders, or reduce or even eliminate common stock dividends to preserve capital.

Fifth Third may have more credit risk and higher credit losses to the extent loans are concentrated by location or industry of the borrowers or collateral.

Fifth Third’s credit risk and credit losses can increase if its loans are concentrated to borrowers engaged in the same or similar activities or to borrowers who as a group may be uniquely or disproportionately affected by economic or market conditions. Deterioration in economic conditions, housing conditions and commodity and real estate values in these states and generally across the country could result in materially higher credit losses.

Fifth Third may be required to repurchase residential mortgage loans or reimburse investors and others as a result of breaches in contractual representations and warranties.

Fifth Third sells residential mortgage loans to various parties, including GSEs and other financial institutions that purchase residential mortgage loans for investment or private label securitization. Fifth Third may be required to repurchase residential mortgage loans, indemnify the securitization trust, investor or insurer, or reimburse the securitization trust, investor or insurer for credit losses incurred on loans in the event of a breach of contractual representations or warranties that is not remedied within a specified period (usually 60 days or less) after Fifth Third receives notice of the breach. Contracts for residential mortgage loan sales to the GSEs include various types of specific remedies and penalties that could be applied to inadequate responses to repurchase requests. If economic conditions and the housing market deteriorate or future investor repurchase demand and Fifth Third’s success at appealing repurchase requests differ from past experience, Fifth Third could have increased repurchase obligations and increased loss severity on repurchases, requiring material additions to the repurchase reserve.

If Fifth Third does not appropriately adjust to rapid changes in the financial services industry, its financial performance may suffer.

Fifth Third’s ability to deliver strong financial performance and returns on investment to shareholders will depend in part on its ability to expand the scope of available financial services to meet the needs and demands of its customers. In addition to the challenge of competing against other banks in attracting and retaining customers for traditional banking services, Fifth Third’s competitors also include securities dealers, brokers, mortgage bankers, investment advisors, and specialty finance, telecommunications, technology and insurance companies who seek to offer one-stop financial services that may include services that banks have not been able or allowed to offer to their customers in the past or may not be currently able or allowed to offer. This increasingly competitive environment is primarily a result of changes in regulation, changes in technology and product delivery systems, as well as the accelerating pace of consolidation among financial service providers. Fifth Third may make strategic investments and may expand an existing line of

business or enter into new lines of business to remain competitive. If it does not execute the appropriate strategies to effectively compete with or does not do so in an appropriate or timely manner its business may suffer. Additionally, these strategies, products and lines of business may bring with them unforeseeable or unforeseen risks and may not generate the expected results or returns, which could adversely affect Fifth Third’s results of operations or future growth prospects.

If Fifth Third is unable to grow its deposits, it may be subject to paying higher funding costs.

The total amount that Fifth Third pays for funding costs is dependent, in part, on Fifth Third’s ability to grow its deposits. If Fifth Third is unable to sufficiently grow its deposits to meet liquidity objectives, it may be subject to paying higher funding costs. Fifth Third competes with banks and other financial services companies for deposits. If competitors raise the rates they pay on deposits, Fifth Third’s funding costs may increase, either because Fifth Third raises rates to avoid losing deposits or because Fifth Third loses deposits and must rely on more expensive sources of funding. Higher funding costs reduce Fifth Third’s net interest margin and net interest income. Fifth Third’s bank customers could take their money out of the Bank and put it in alternative investments, causing Fifth Third to lose a lower cost source of funding. Checking and savings account balances and other forms of customer deposits may decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff.

The Bancorp’s ability to receive dividends from its subsidiaries accounts for most of its revenue and could affect its liquidity and ability to pay dividends.

Fifth Third Bancorp is a separate and distinct legal entity from its subsidiaries. Fifth Third Bancorp typically receives substantially all of its revenue from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on Fifth Third Bancorp’s stock and interest and principal on its debt. Various federal and/or state laws and regulations, as well as regulatory expectations, limit the amount of dividends that the Bancorp’s banking subsidiary and certain nonbank subsidiaries may pay. Regulatory scrutiny of capital levels at bank holding companies and insured depository institution subsidiaries has increased since the financial crisis and has resulted in increased regulatory focus on all aspects of capital planning, including dividends and other distributions to shareholders of banks such as the parent bank holding companies. Also, Fifth Third Bancorp’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of that subsidiary’s creditors. Limitations on the Bancorp’s ability to receive dividends from its subsidiaries could have a material adverse effect on its liquidity and ability to pay dividends on stock or interest and principal on its debt. For further information refer to Note 3 of the Notes to Consolidated Financial Statements.

The financial services industry is highly competitive and creates competitive pressures that could adversely affect Fifth Third’s revenue and profitability.

The financial services industry in which Fifth Third operates is highly competitive. Fifth Third competes not only with commercial banks, but also with insurance companies, mutual funds, hedge funds, telecommunications and technology and other companies offering financial services in the U.S., globally and over the internet. Fifth Third competes on the basis of several factors, including capital, access to capital, revenue generation, products, services, transaction execution, innovation, reputation and price.

28  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Over time, certain sectors of the financial services industry have become more concentrated, as institutions involved in a broad range of financial services have been acquired by or merged into other firms. These developments could result in Fifth Third’s competitors gaining greater capital and other resources, such as a broader range of products and services and geographic diversity. Fifth Third may experience pricing pressures as a result of these factors and as some of its competitors seek to increase market share by reducing prices.

Fifth Third and/or the holders of its securities could be adversely affected by unfavorable ratings from rating agencies.

Fifth Third’s ability to access the capital markets is important to its overall funding profile. This access is affected by the ratings assigned by rating agencies to Fifth Third, certain of its subsidiaries and particular classes of securities they issue. The interest rates that Fifth Third pays on its securities are also influenced by, among other things, the credit ratings that it, its subsidiaries and/or its securities receive from recognized rating agencies. A downgrade to Fifth Third or its subsidiaries’ credit rating could affect its ability to access the capital markets, increase its borrowing costs and negatively impact its profitability. A ratings downgrade to Fifth Third, its subsidiaries or their securities could also create obligations or liabilities to Fifth Third under the terms of its outstanding securities that could increase Fifth Third’s costs or otherwise have a negative effect on its results of operations or financial condition. Additionally, a downgrade of the credit rating of any particular security issued by Fifth Third or its subsidiaries could negatively affect the ability of the holders of that security to sell the securities and the prices at which any such securities may be sold.

Fifth Third could suffer if it fails to attract and retain skilled personnel.

Fifth Third’s success depends, in large part, on its ability to attract and retain key individuals. Competition for qualified candidates in the activities and markets that Fifth Third serves is great, which may increase Fifth Third’s expenses and may result in Fifth Third not being able to hire these candidates or retain them. If Fifth Third is not able to hire or retain these key individuals, Fifth Third may be unable to execute its business strategies and may suffer adverse consequences to its business, operations and financial condition.

Compensation paid by financial institutions such as Fifth Third has become increasingly regulated, particularly under the DFA, which regulation affects the amount and form of compensation Fifth Third pays to hire and retain talented employees. If Fifth Third is unable to attract and retain qualified employees, or do so at rates necessary to maintain its competitive position, or if compensation costs required to attract and retain employees become more expensive, Fifth Third’s performance, including its competitive position, could be materially adversely affected.

Fifth Third’s mortgage banking revenue can be volatile from quarter to quarter.

Fifth Third earns revenue from the fees it receives for originating mortgage loans and for servicing mortgage loans. When rates rise, the demand for mortgage loans tends to fall, reducing the revenue Fifth Third receives from loan originations. At the same time, revenue from MSRs can increase through increases in fair value. When rates fall, mortgage originations tend to increase and the value of MSRs tends to decline, also with some offsetting revenue effect. Even though the origination of mortgage loans can act as a “natural hedge,” the hedge is not perfect, either in amount or timing. For example, the negative effect on revenue from a decrease in the fair value of residential MSRs is immediate, but any offsetting revenue benefit from more originations and the MSRs relating to the new

loans would accrue over time. It is also possible that even if interest rates were to fall, mortgage originations may also fall or any increase in mortgage originations may not be enough to offset the decrease in the MSRs value caused by the lower rates.

Fifth Third typically uses derivatives and other instruments to hedge its mortgage banking interest rate risk. Fifth Third generally does not hedge all of its risks, and the fact that Fifth Third attempts to hedge any of the risks does not mean Fifth Third will be successful. Hedging is a complex process, requiring sophisticated models and constant monitoring. Fifth Third may use hedging instruments tied to U.S. Treasury rates, LIBOR or Eurodollars that may not perfectly correlate with the value or income being hedged. Fifth Third could incur significant losses from its hedging activities. There may be periods where Fifth Third elects not to use derivatives and other instruments to hedge mortgage banking interest rate risk.

Fifth Third uses models for business planning purposes that may not adequately predict future results.

Fifth Third uses financial models to aid in its planning for various purposes including its capital and liquidity needs, potential charge-offs, reserves, and other purposes. The models used may not accurately account for all variables that could affect future results, may fail to predict outcomes accurately and/or may overstate or understate certain effects. As a result of these potential failures, Fifth Third may not adequately prepare for future events and may suffer losses or other setbacks due to these failures.

Changes in interest rates could also reduce the value of MSRs.

Fifth Third acquires MSRs when it keeps the servicing rights after the sale or securitization of the loans that have been originated or when it purchases the servicing rights to mortgage loans originated by other lenders. Fifth Third initially measures all residential MSRs at fair value and subsequently amortizes the MSRs in proportion to, and over the period of, estimated net servicing income. Fair value is the present value of estimated future net servicing income, calculated based on a number of variables, including assumptions about the likelihood of prepayment by borrowers. Servicing rights are assessed for impairment monthly, based on fair value, with temporary impairment recognized through a valuation allowance and other-than-temporary impairment recognized through a write-off of the servicing asset and related valuation allowance.

Changes in interest rates can affect prepayment assumptions and thus fair value. When interest rates fall, borrowers are usually more likely to prepay their mortgage loans by refinancing them at a lower rate. As the likelihood of prepayment increases, the fair value of MSRs can decrease. Each quarter Fifth Third evaluates the fair value of MSRs, and decreases in fair value below amortized cost reduce earnings in the period in which the decrease occurs.

The preparation of Fifth Third’s financial statements requires the use of estimates that may vary from actual results.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make significant estimates that affect the financial statements. If new information arises that results in a material change to a reserve amount, such a change could result in a change to previously announced financial results. Refer to the Critical Accounting Policies section of MD&A for more information regarding management’s significant estimates.

Changes in accounting standards or interpretations could impact Fifth Third’s reported earnings and financial condition.

The accounting standard setters, including the FASB, the SEC and other regulatory agencies, periodically change the financial accounting and reporting standards that govern the preparation of Fifth Third’s consolidated financial statements.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

These changes can be hard to predict and can materially impact how Fifth Third records and reports its financial condition and results of operations. In some cases, Fifth Third could be required to apply a new or revised standard retroactively, which would result in the recasting of Fifth Third’s prior period financial statements.

Future acquisitions may dilute current shareholders’ ownership of Fifth Third and may cause Fifth Third to become more susceptible to adverse economic events.

Future business acquisitions could be material to Fifth Third and it may issue additional shares of stock to pay for those acquisitions, which would dilute current shareholders’ ownership interests. Acquisitions also could require Fifth Third to use substantial cash or other liquid assets or to incur debt. In those events, Fifth Third could become more susceptible to economic downturns and competitive pressures.

Difficulties in combining the operations of acquired entities with Fifth Third’s own operations may prevent Fifth Third from achieving the expected benefits from its acquisitions.

Inherent uncertainties exist when integrating the operations of an acquired entity. Fifth Third may not be able to fully achieve its strategic objectives and planned operating efficiencies in an acquisition. In addition, the markets and industries in which Fifth Third and its potential acquisition targets operate are highly competitive. Fifth Third may lose customers or the customers of acquired entities as a result of an acquisition. Future acquisition and integration activities may require Fifth Third to devote substantial time and resources and as a result Fifth Third may not be able to pursue other business opportunities.

After completing an acquisition, Fifth Third may find certain items are not accounted for properly in accordance with financial accounting and reporting standards. Fifth Third may also not realize the expected benefits of the acquisition due to lower financial results pertaining to the acquired entity. For example, Fifth Third could experience higher charge-offs than originally anticipated related to the acquired loan portfolio.

Fifth Third may sell or consider selling one or more of its businesses. Should it determine to sell such a business, it may not be able to generate gains on sale or related increase in shareholders’ equity commensurate with desirable levels. Moreover, if Fifth Third sold such businesses, the loss of income could have an adverse effect on its earnings and future growth.

Fifth Third owns, or owns a minority stake in, as applicable, several non-strategic businesses that are not significantly synergistic with its core financial services businesses. Fifth Third has, from time to time, considered and undertaken (and, in the case of Vantiv, has announced its intention to continue) the sale of such businesses and/or interests, including, for example, portions of Fifth Third’s stake in Vantiv Holding, LLC. If it were to determine to sell such businesses and/or interests, Fifth Third would be subject to market forces that may make completion of a sale unsuccessful or may not be able to do so within a desirable time frame. If Fifth Third were to complete the sale of any of its businesses and/or interests in third parties, it would suffer the loss of income from the sold businesses and/or interests, including those accounted for under the equity method of accounting, and such loss of income could have an adverse effect on its future earnings and growth. Additionally, Fifth Third may encounter difficulties in separating the operations of any businesses it sells, which may affect its business or results of operations.

Fifth Third relies on its systems and certain service providers, and certain failures could materially adversely affect operations.

Fifth Third collects, processes and stores sensitive consumer data by utilizing computer systems and telecommunications networks operated by both Fifth Third and third party service providers. Fifth Third has security, backup and recovery systems in place, as well as a business continuity plan to ensure the systems will not be inoperable. Fifth Third also has security to prevent unauthorized access to the systems. In addition, Fifth Third requires its third party service providers to maintain similar controls. However, Fifth Third cannot be certain that the measures will be successful. A security breach in the systems and loss of confidential information such as credit card numbers and related information could result in losing the customers’ confidence and thus the loss of their business as well as additional significant costs for privacy monitoring activities.

Fifth Third’s necessary dependence upon automated systems to record and process its transaction volume poses the risk that technical system flaws or employee errors, tampering or manipulation of those systems will result in losses and may be difficult to detect. Fifth Third may also be subject to disruptions of its operating systems arising from events that are beyond its control (for example, computer viruses or electrical or telecommunications outages).

Third parties with which the Bancorp does business, as well as retailers and other third parties with which the Bancorp’s customers do business, can also be sources of operational risk to the Bancorp, particularly where activities of customers are beyond the Bancorp’s security and control systems, such as through the use of the internet, personal computers, tablets, smart phones and other mobile services. Security breaches affecting the Bancorp’s customers, or systems breakdowns or failures, security breaches or employee misconduct affecting such other third parties, may require the Bancorp to take steps to protect the integrity of its own operational systems or to safeguard confidential information of the Bancorp or its customers, thereby increasing the Bancorp’s operational costs and potentially diminishing customer satisfaction. If personal, confidential or proprietary information of customers or clients in the Bancorp’s possession were to be mishandled or misused, the Bancorp could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could include circumstances where, for example, such information was erroneously provided to parties who are not permitted to have the information, either through the fault of the Bancorp’s systems, employees or counterparties, or where such information was intercepted or otherwise compromised by third parties. The Bancorp may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond the Bancorp’s control, which may include, for example, security breaches; electrical or telecommunications outages; failures of computer servers or other damage to the Bancorp’s property or assets; natural disasters or severe weather conditions; health emergencies; or events arising from local or larger-scale political events, including outbreaks of hostilities or terrorist acts. While the Bancorp believes that its current resiliency plans are both sufficient and adequate, there can be no assurance that such plans will fully mitigate all potential business continuity risks to the Bancorp or its customers and clients. Any failures or disruptions of the Bancorp’s systems or operations could give rise to losses in service to customers and clients, adversely affect the Bancorp’s business and results of operations by subjecting the Bancorp to losses or liability, or require the Bancorp to expend significant resources to correct the failure or disruption, as well as by exposing the Bancorp to litigation, regulatory fines or penalties or losses not covered by insurance.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Fifth Third is exposed to cyber-security risks, including denial of service, hacking, and identity theft.

Fifth Third relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in disruptions to its accounting, deposit, loan and other systems, and adversely affect its customer relationships. While Fifth Third has policies and procedures designed to prevent or limit the effect of these possible events, there can be no assurance that any such failure, interruption or security breach will not occur or, if any does occur, that it can be sufficiently remediated. There have been increasing efforts on the part of third parties, including through cyber attacks, to breach data security at financial institutions or with respect to financial transactions. There have been several recent instances involving financial services and consumer-based companies reporting the unauthorized disclosure of client or customer information or the destruction or theft of corporate data, by both private individuals and foreign governments. In addition, because the techniques used to cause such security breaches change frequently, often are not recognized until launched against a target and may originate from less regulated and remote areas around the world, Fifth Third may be unable to proactively address these techniques or to implement adequate preventative measures. Furthermore, there has been a well-publicized series of apparently related distributed denial of service attacks on large financial services companies, including Fifth Third Bank. Distributed denial of service attacks are designed to saturate the targeted online network with excessive amounts of network traffic, resulting in slow response times, or in some cases, causing the site to be temporarily unavailable. These events adversely affected the performance of Fifth Third’s website and in some instances prevented customers from accessing Fifth Third’s website. Future cyber-attacks could be more disruptive and damaging. Cyber threats are rapidly evolving and Fifth Third may not be able to anticipate or prevent all such attacks. Fifth Third may incur increasing costs in an effort to minimize these risks or in the investigation of such cyber-attacks or related to the protection of the Bancorp’s customers from identity theft as a result of such attacks. Despite this effort, the occurrence of any failure, interruption or security breach of Fifth Third’s systems or third-party service providers, particularly if widespread or resulting in financial losses to customers, could also seriously damage Fifth Third’s reputation, result in a loss of customer business, subject it to additional regulatory scrutiny, or expose it to civil litigation and financial liability.

Fifth Third is exposed to operational and reputational risk.

Fifth Third is exposed to many types of operational risk, including but not limited to, business continuity risk, information management risk, fraud risk, model risk, third party service provider risk, human resources risk, and process risk.

Fifth Third’s actual or alleged conduct in activities, such as lending practices, data security, corporate governance and acquisitions, may result in negative public opinion and may damage Fifth Third’s reputation. Actions taken by government regulators and community organizations may also damage Fifth Third’s reputation. Additionally, whereas negative public opinion once was primarily driven by adverse news coverage in traditional media, the advent and expansion of social media facilitates the rapid dissemination of information. Though Fifth Third monitors social media channels, the potential remains for rapid and widespread dissemination of inaccurate, misleading or false information that could damage Fifth Third’s reputation. Negative public opinion can

adversely affect Fifth Third’s ability to attract and keep customers and can increase the risk that it will be a target of litigation and regulatory action.

The results of Vantiv Holding, LLC could have a negative impact on Fifth Third’s operating results and financial condition.

In 2009, Fifth Third sold an approximate 51% interest in its processing business, Vantiv Holding, LLC (formerly Fifth Third Processing Solutions). As a result of additional share sales completed by Fifth Third in 2013, 2014 and 2015, the Bancorp ownership share in Vantiv Holding, LLC as of December 31, 2015, is approximately 18%. The Bancorp’s investment in Vantiv Holding, LLC is currently accounted for under the equity method of accounting and is not consolidated based on Fifth Third’s remaining ownership share in Vantiv Holding, LLC. Vantiv Holding, LLC’s operating results could be poor and could negatively affect the operating results of Fifth Third. In addition, Fifth Third owns a warrant to acquire approximately 7.8 million Class C non-voting units of Vantiv Holding, LLC. Fifth Third participates in a multi-lender credit facility to Vantiv Holding, LLC and repayment of these loans is contingent on the future cash flows of Vantiv Holding, LLC.

Changes in Fifth Third’s ownership in Vantiv Holding, LLC could have an impact on Fifth Third’s stock price, operating results, financial condition, and future outlook.

Fifth Third expects that it will reduce its equity and derivative investments in Vantiv Holding, LLC and its publicly traded parent, Vantiv, Inc., in whole or in part, but there can be no assurance that such sales will occur or as to when they will occur or the value that might be received by Fifth Third. A reduction in Fifth Third’s Vantiv ownership interest may result from a series of sale transactions similar to transactions in Vantiv securities engaged in by Fifth Third to date, or could occur as a result of one or more larger transactions, depending on strategic considerations, market conditions, or other factors deemed important by Fifth Third. Additionally, Fifth Third’s ownership in Vantiv could be affected by transactions that Vantiv may undertake. The nature, terms, and timing of transactions engaged in by Vantiv may not be entirely within Fifth Third’s control, if at all. If and when Fifth Third’s ownership in Vantiv is reduced, such changes in ownership could have a material impact, positive or negative, on Fifth Third’s stock price, operating results, financial condition and future outlook.

Weather related events or other natural disasters may have an effect on the performance of Fifth Third’s loan portfolios, especially in its coastal markets, thereby adversely impacting its results of operations.

Fifth Third’s footprint stretches from the upper Midwestern to lower Southeastern regions of the United States. These regions have experienced weather events including hurricanes and other natural disasters. The nature and level of these events and the impact of global climate change upon their frequency and severity cannot be predicted. If large scale events occur, they may significantly impact its loan portfolios by damaging properties pledged as collateral as well as impairing its borrowers’ ability to repay their loans.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RISKS RELATED TO THE LEGAL AND REGULATORY ENVIRONMENT

As a regulated entity, the Bancorp is subject to certain capital requirements that may limit its operations and potential growth.

The Bancorp is a bank holding company and a financial holding company. As such, it is subject to the comprehensive, consolidated supervision and regulation of the FRB, including risk-based and leverage capital requirements, investment practices, dividend policy and growth. The Bancorp must maintain certain risk-based and leverage capital ratios as required by the FRB which can change depending upon general economic conditions and the Bancorp’s particular condition, risk profile and growth plans. Compliance with the capital requirements, including leverage ratios, may limit operations that require the intensive use of capital and could adversely affect the Bancorp’s ability to expand or maintain present business levels.

In July 2013, the Federal banking agencies issued final rules for the enhanced regulatory capital requirements for U.S. banking organizations, which implemented aspects of Basel III. The final rules provide the option for certain banking organizations, including the Bancorp, to opt out of including AOCI in regulatory capital and retain the treatment of residential mortgage exposures consistent with the current Basel I capital rules. The new capital rules became effective for the Bancorp on January 1, 2015, subject to phase-in periods for certain components and other provisions. The need to maintain more and higher quality capital as well as greater liquidity could limit Fifth Third’s business activities, including lending, and the ability to expand, either organically or through acquisitions. Moreover, although these new requirements are being phased in over time, U.S. federal banking agencies have been taking into account expectations regarding the ability of banks to meet these new requirements, including under stressed conditions, in approving actions that represent uses of capital, such as dividend increases and share repurchases.

The Bank must be well-capitalized, well-managed and maintain at least a “Satisfactory” CRA rating for the Bancorp to retain its status as a financial holding company. Failure to meet these requirements could result in the FRB placing limitations or conditions on the Bancorp’s activities (and the commencement of new activities, including merger with or acquisitions of other financial institutions) and could ultimately result in the loss of financial holding company status. The FRB conducted a regularly scheduled examination covering 2011 through 2013 to determine the Bancorp’s banking subsidiary’s compliance with the CRA. Although the FRB has not made a final determination, the Bancorp believes that the results of such CRA examination may result in a rating of “Needs to Improve”. If that would occur, such rating would last at least until the Bancorp’s banking subsidiary’s next CRA examination.

In addition, failure by the Bancorp’s banking subsidiary to meet applicable capital guidelines could subject the Bank to a variety of enforcement remedies available to the federal regulatory authorities. These include limitations on the ability to pay dividends, the issuance by the regulatory authority of a capital directive to increase capital, and the termination of deposit insurance by the FDIC.

Fifth Third’s business, financial condition and results of operations could be adversely affected by new or changed regulations and by the manner in which such regulations are applied by regulatory authorities.

Previous economic conditions, particularly in the financial markets, have resulted in government regulatory agencies placing increased focus on and scrutiny of the financial services industry. The U.S. government has intervened on an unprecedented scale, responding to what has been commonly referred to as the financial crisis, by

introducing various actions and passing legislation such as the DFA. Such programs and legislation subject Fifth Third and other financial institutions to restrictions, oversight and/or costs that may have an impact on Fifth Third’s business, financial condition, results of operations or the price of its common stock.

New proposals for legislation and regulations continue to be introduced that could further substantially increase regulation of the financial services industry. Fifth Third cannot predict whether any pending or future legislation will be adopted or the substance and impact of any such new legislation on Fifth Third. Additional regulation could affect Fifth Third in a substantial way and could have an adverse effect on its business, financial condition and results of operations.

Fifth Third is subject to various regulatory requirements that may limit its operations and potential growth.

Under federal and state laws and regulations pertaining to the safety and soundness of insured depository institutions and their holding companies, the FRB, the FDIC, the CFPB and the Ohio Division of Financial Institutions have the authority to compel or restrict certain actions by Fifth Third and its banking subsidiary. Fifth Third and its banking subsidiary are subject to such supervisory authority and, more generally, must, in certain instances, obtain prior regulatory approval before engaging in certain activities or corporate decisions. There can be no assurance that such approvals, if required, would be forthcoming or that such approvals would be granted in a timely manner. Failure to receive any such approval, if required, could limit or impair Fifth Third’s operations, restrict its growth and/or affect its dividend policy. Such actions and activities subject to prior approval include, but are not limited to, increasing dividends paid by Fifth Third or its banking subsidiary, entering into a merger or acquisition transaction, acquiring or establishing new branches, and entering into certain new businesses.

In addition, Fifth Third, as well as other financial institutions more generally, have recently been subjected to increased scrutiny from government authorities, including bank regulatory authorities, stemming from broader systemic regulatory concerns, including with respect to stress testing, capital levels, asset quality, provisioning, AML/BSA, consumer compliance and other prudential matters and efforts to ensure that financial institutions take steps to improve their risk management and prevent future crises. In this regard, government authorities, including the bank regulatory agencies, are also pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial activities, which heightens the risks associated with actual and perceived compliance failures and may also adversely affect Fifth Third’s ability to enter into certain transactions or engage in certain activities, or obtain necessary regulatory approvals in connection therewith.

In some cases, regulatory agencies may take supervisory actions that may not be publicly disclosed, which restrict or limit a financial institution. Finally, as part of Fifth Third’s regular examination process, Fifth Third’s and its banking subsidiary’s respective regulators may advise it and its banking subsidiary to operate under various restrictions as a prudential matter. Such supervisory actions or restrictions, if and in whatever manner imposed, could negatively affect Fifth Third’s ability to engage in new activities and certain transactions, as well as have a material adverse effect on Fifth Third’s business and results of operations and may not be publicly disclosed.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Fifth Third and/or its affiliates are or may become involved from time to time in information-gathering requests, investigations and proceedings by various governmental regulatory agencies and law enforcement authorities, as well as self-regulatory agencies which may lead to adverse consequences.

Fifth Third and/or its affiliates are or may become involved from time to time in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by governmental regulatory agencies and law enforcement authorities, as well as self-regulatory agencies, regarding their respective businesses. Such matters may result in material adverse consequences, including without limitation, adverse judgments, settlements, fines, penalties, injunctions or other actions, amendments and/or restatements of Fifth Third’s SEC filings and/or financial statements, as applicable, and/or determinations of material weaknesses in its disclosure controls and procedures.

Deposit insurance premiums levied against Fifth Third Bank may increase if the number of bank failures increase or the cost of resolving failed banks increases.

The FDIC maintains a DIF to protect insured depositors in the event of bank failures. The DIF is funded by fees assessed on insured depository institutions including Fifth Third Bank. Under a rule adopted by the FDIC in 2011, regular assessment rates for all banks will decline when the reserve ratio reaches 1.15%, which the FDIC expects will occur in early 2016. In October 2015, the FDIC issued a proposed rule which would impose on banks with at least $10 billion in assets, such as Fifth Third, a surcharge of 4.5 cents per $100 of their assessment base, after making certain adjustments. The Bancorp estimates the impact of these changes will increase Fifth Third’s FDIC premiums by approximately $25 million per year. Future deposit premiums paid by Fifth Third Bank depend on FDIC rules, which are subject to change, the level of the DIF and the magnitude and cost of future bank failures. Fifth Third Bank may be required to pay significantly higher FDIC premiums if market developments change such that the DIF balance is reduced or the FDIC changes its rules to require higher premiums.

Fifth Third is subject to extensive governmental regulation which could adversely impact Fifth Third or the businesses in which Fifth Third is engaged.

Fifth Third is subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of its operations and limit the businesses in which Fifth Third may engage. These laws and regulations may change from time to time and are primarily intended for the protection of consumers and depositors. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact Fifth Third or its ability to increase the value of its business. Additionally, actions by regulatory agencies or significant litigation against Fifth Third could cause it to devote significant time and resources to defending itself and may lead to penalties that materially affect Fifth Third and its shareholders. Future changes in the laws, including tax laws, or regulations or their interpretations or enforcement may also be materially adverse to Fifth Third and its shareholders or may require Fifth Third to expend significant time and resources to comply with such requirements.

        The DFA, enacted in 2010, is complex and broad in scope and several of its provisions are still being implemented. The DFA established the CFPB which has authority to regulate consumer financial products and services sold by banks and non-bank companies and to supervise banks with assets of more than $10 billion and their affiliates for compliance with Federal consumer protection laws. Since its formation, the CFPB has finalized a number of significant rules that could have a significant impact on Fifth Third’s business and the financial services industry more generally including integrated mortgage disclosures under the Truth

in Lending Act and the Real Estate Settlement Procedures Act. Compliance with the rules and policies adopted by the CFPB may limit the products Fifth Third may permissibly offer to customers, or limit the terms on which those products may be issued, or may adversely affect Fifth Third’s ability to conduct its business as previously conducted. Fifth Third may also be required to add additional compliance personnel or incur other significant compliance-related expenses. Fifth Third’s business, results of operations or competitive position may be adversely affected as a result.

The reforms, both under the DFA and otherwise, are having a significant effect on the entire financial industry. Fifth Third believes compliance with the DFA and implementing its regulations and other initiatives will likely continue to negatively impact revenue and increase the cost of doing business, both in terms of transition expenses and on an ongoing basis, and may also limit Fifth Third’s ability to pursue certain desirable business opportunities. Any new regulatory requirements or changes to existing requirements could require changes to Fifth Third’s businesses, result in increased compliance costs and affect the profitability of such businesses. Additionally, reform could affect the behaviors of third parties that Fifth Third deals with in the course of business, such as rating agencies, insurance companies and investors. The extent to which Fifth Third can adjust its strategies to offset such adverse impacts also is not known at this time.

Conforming Covered Activities to the Volcker Rule may require the expenditure of resources and management attention.

The DFA “Volcker Rule” provisions implementing the final rule generally restrict banks and their affiliated entities from investing in or sponsoring certain private equity and hedge funds. Fifth Third does not sponsor any private equity or hedge funds that it is prohibited from sponsoring. As of December 31, 2015, the Bancorp had approximately $186 million in interests and approximately $37 million in binding commitments to invest in private equity funds likely to be affected by the Volcker Rule. It is expected that the Bancorp may need to dispose of these investments although it is likely that these investments will be reduced over time in the ordinary course before compliance is required. In December 2014, the FRB extended the conformance period through July 2016 for investments in and relationships with such covered funds that were in place prior to December 31, 2013, and announced its intention to grant a one year extension of the conformance period until July 21, 2017. An ultimate forced sale of some of these investments could result in Fifth Third receiving less value than it would otherwise have received.

33  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

If an orderly liquidation of a systemically important bank holding company or non-bank financial company were triggered, Fifth Third could face assessments for the Orderly Liquidation Fund.

The DFA creates authority for the orderly liquidation of systemically important bank holding companies and non-bank financial companies and is based on the FDIC’s bank resolution model. The Secretary of the U.S. Treasury may trigger a liquidation under this authority only after consultation with the President of the United States and after receiving a recommendation from the boards of the FDIC and the Federal Reserve upon a two-thirds vote. Liquidation proceedings will be funded by the Orderly Liquidation Fund established under the DFA, which will borrow from the U.S. Treasury and impose risk-based assessments on covered financial companies. Risk-based assessments would be made, first, on entities that received more in the resolution than they would have received in the liquidation to the extent of such excess, and second, if necessary, on, among others, bank holding companies with total consolidated assets of $50 billion or more, such as Fifth Third. Any such assessments may adversely affect Fifth Third’s business, financial condition or results of operations.

Regulation of Fifth Third by the CFTC imposes additional operational and compliance costs.

Title VII of DFA imposes a new regulatory regime on the U.S. derivatives markets. While most of the provisions related to derivatives markets are now in effect, several additional requirements await final regulations from the relevant regulatory agencies for derivatives, the CFTC and the SEC. One aspect of this new regulatory regime for derivatives is that substantial oversight responsibility has been provided to the CFTC, which, as a result, now has a meaningful supervisory role with respect to some of Fifth Third’s businesses. In 2014, Fifth Third Bank registered as a swap dealer with the CFTC and became subject to new substantive requirements, including real time trade reporting and robust record keeping requirements, business conduct requirements (including daily valuations, disclosure of material risks associated with swaps and disclosure of material incentives and conflicts of interest), and mandatory clearing and exchange trading of all standardized swaps designated by the relevant regulatory agencies as required to be cleared. Although the ultimate impact will depend on the promulgation of all final regulations, Fifth Third‘s derivatives business will likely be further subject to new substantive requirements, including margin requirements in excess of current market practice and capital requirements specific to this business. These requirements will collectively impose implementation and ongoing compliance burdens on Fifth Third and will introduce additional legal risk (including as a result of newly applicable antifraud and anti-manipulation provisions and private rights of action). Once finalized, the rules may raise the costs and liquidity burden associated with Fifth Third’s derivatives businesses and adversely affect or cause Fifth Third to change its derivatives products.

Fifth Third and/or its affiliates are or may become the subject of litigation which could result in legal liability and damage to Fifth Third’s reputation.

Fifth Third and certain of its directors and officers have been named from time to time as defendants in various class actions and other litigation relating to Fifth Third’s business and activities. Past, present and future litigation have included or could include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. The SEC may seek admissions of liability when settling cases, which could adversely impact the defense of private litigation. These matters could result in material

adverse judgments, settlements, fines, penalties, injunctions or other relief, amendments and/or restatements of Fifth Third’s SEC filings and/or financial statements, as applicable and/or determinations of material weaknesses in its disclosure controls and procedures. Like other large financial institutions and companies, Fifth Third is also subject to risk from potential employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information. Substantial legal liability or significant regulatory action against Fifth Third could materially adversely affect its business, financial condition or results of operations and/or cause significant reputational harm to its business.

Fifth Third’s ability to pay or increase dividends on its common stock or to repurchase its capital stock is restricted.

Fifth Third’s ability to pay dividends or repurchase stock is subject to regulatory requirements and the need to meet regulatory expectations. Fifth Third is subject to an annual assessment by the FRB as part of CCAR. The mandatory elements of the capital plan are an assessment of the expected use and sources of capital over the planning horizon, a description of all planned capital actions over the planning horizon, a discussion of any expected changes to the Bancorp’s business plan that are likely to have a material impact on its capital adequacy or liquidity, a detailed description of the Bancorp’s process for assessing capital adequacy and the Bancorp’s capital policy. Fifth Third’s stress testing results and 2016 capital plan will be submitted to the FRB by April 5, 2016.

The FRB’s review of the capital plan will assess the comprehensiveness of the capital plan, the reasonableness of the assumptions and the analysis underlying the capital plan. Additionally, the FRB will review the robustness of the capital adequacy process, the capital policy and the Bancorp’s ability to maintain capital above the minimum regulatory capital ratios and above a CET1 ratio of 5% under baseline and stressful conditions throughout a nine-quarter planning horizon.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

STATEMENTS OF INCOME ANALYSIS

 

Net Interest Income

Net interest income is the interest earned on loans and leases (including yield-related fees), securities and other short-term investments less the interest paid for core deposits (includes transaction deposits and other time deposits) and wholesale funding (includes certificates $100,000 and over, other deposits, federal funds purchased, other short-term borrowings and long-term debt). The net interest margin is calculated by dividing net interest income by average interest-earning assets. Net interest rate spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin is typically greater than net interest rate spread due to the interest income earned on those assets that are funded by noninterest-bearing liabilities, or free funding, such as demand deposits or shareholders’ equity.

TableTables 9 presentsand 10 present the components of net interest income, net interest margin and net interest rate spread for the years ended December 31, 2017, 2016 and 2015, 2014as well as the relative impact of changes in the balance sheet and 2013.changes in interest rates on net interest income. Nonaccrual loans and leases and loans and leases held for sale have been included in the average loan and lease balances. Average outstanding securities balances are based on amortized cost with any unrealized gains or losses onavailable-for-sale and other securities included in other assets. Table 10 provides the relative impact of changes in the balance sheet and changes in interest rates on net interest income.

Net interest income on an FTE basis(non-GAAP) was $3.8 billion and $3.6 billion for both the years ended December 31, 20152017 and 2014.2016, respectively. Net interest income was negativelypositively impacted by an increase in yields on average loans and leases of 33 bps for the year ended December 31, 2017. Net interest income also benefited from an increase in average taxable securities of $2.1 billion and a decrease in the net interest rate spread, changes made to the Bancorp’s deposit advance product beginning January 1, 2015 and an increase in average long-term debt of $1.7$1.6 billion for the year ended December 31, 20152017 compared to the year ended December 31, 2014.2016. Additionally, net interest income was positively impacted by the decisions of the Federal Open Market Committee to raise the target range of the federal funds rate 25 bps in December 2016, March 2017, June 2017 and December 2017. These negativepositive impacts were partially offset by increasesa decrease in average taxable securities and average loans and leases of $5.2 billion and $2.2 billion, respectively,increases in the rates paid on average other short-term borrowings, average long-term debt and average interest-bearing core deposits for the year ended December 31, 20152017 compared to the year ended December 31, 2014. The net interest rate spread2016. Average loans and leases decreased to 2.69% during the year ended December 31, 2015 from 2.94% in 2014 driven by a 21 bps decrease in yields on average interest-earning assets coupled with a 3 bps increase in the rates paid on average interest-bearing liabilities.

Net interest margin on an FTE basis was 2.88%$1.6 billion for the year ended December 31, 2015 compared to 3.10% for the year ended December 31, 2014. The decrease from December 31, 2014 was driven primarily by the previously mentioned decrease in the net interest rate spread coupled with a $7.6 billion increase in average interest-earning assets partially offset by an increase in average free funding balances. The increase in average free funding balances was driven by increases in average demand deposits and average shareholders’ equity of $3.4 billion and $572 million, respectively, for the year ended December 31, 20152017 compared to the year ended December 31, 2014.

Interest income on an FTE basis from loans and leases decreased $147 million compared to the year ended December 31, 2014 primarily due to a decrease of 24 bps in yields2016. The rates paid on average loans and leases partially offset by an increase of 2% inother short-term borrowings, average loans and leases. The decrease in yields for the year ended December 31, 2015 was primarily due to a $93 million decline in interest income on other consumer loans and leases primarily due to changes made to the Bancorp’s deposit advance product beginning January 1, 2015. The decrease also included decreases in yields on average commercial and industrial loans, average residential mortgage loanslong-term debt and average automobile loans of 14interest-bearing core deposits increased 60 bps, 1939 bps and 11 bps, respectively, for the year ended December 31, 20152017 compared to the year ended December 31, 2014. The2016.

Net interest rate spread was 2.76% during the year ended December 31, 2017 compared to 2.66% during the year ended December 31, 2016. Yields on average interest-earning assets increased 23 bps, partially offset by a 13 bps increase in rates paid on average loans and

leasesinterest-bearing liabilities for the year ended December 31, 20152017 compared to the year ended December 31, 2016.

Net interest margin on an FTE basis(non-GAAP) was 3.03% for the year ended December 31, 2017 compared to 2.88% for the

year ended December 31, 2016. The increase for the year ended December 31, 2017 was driven primarily by increasesthe previously mentioned increase in the net interest rate spread, partially offset by a decrease in average free funding balances. The decrease in average free funding balances was driven by a decrease in average demand deposits of $769 million for the year ended December 31, 2017 compared to the year ended December 31, 2016.

Interest income on an FTE basis from loans and leases(non-GAAP) increased $246 million compared to the year ended December 31, 2016 driven by the previously mentioned increase in yields on average loans and leases, partially offset by a decrease in average loans and leases. Average loans and leases decreased primarily due to a decrease in average commercial and industrial loans and leases andaverage automobile loans, partially offset by an increase in average residential mortgage loans. Interest income from credit cards included the impact of a $12 million benefit related to a revised estimate of refunds offered to certain bankcard customers in the first quarter of 2017 compared to a $16 million reduction in interest income for the expected refunds in the fourth quarter of 2016. In addition, the Bancorp’s interest income on commercial leases was reduced by $27 million during the fourth quarter of 2017 due to the remeasurement related to the tax treatment of leveraged leases resulting from the impact of the TCJA. For more information on the Bancorp’s loan and lease portfolio, refer to the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A. Interest income from investment securities and other short-term investments increased $145$51 million compared to the year ended December 31, 20142016 primarily as a result of the aforementioned increaseincreases in average taxable securities.

Interest expense on core deposits decreased $15increased $70 million for the year ended December 31, 20152017 compared to the year ended December 31, 2014 as a decline2016. The increase was primarily due to an increase in the cost of average interest-bearing core deposits more than offset an increase in average interest-bearing core deposits. The cost of average interest-bearing core deposits decreased to 2437 bps for the year ended December 31, 20152017 from 2726 bps for the year ended December 31, 2014. Average2016. The increase in the cost of average interest-bearing core deposits increased $2.4 billion for the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase was primarily due to increasesan increase in the cost of average interest checking deposits and average money market deposits. Refer to the Deposits subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s deposits.

Interest expense on average wholesale funding increased $59$43 million for the year ended December 31, 20152017 compared to the year ended December 31, 20142016 primarily due to a $1.7 billion increase in average long-term debt coupled with a 18 bpsthe previously mentioned increase in the rates paid on average other short-term borrowings and average long-term debt, partially offset by the aforementioned decrease in average long-term debt. Refer to the Borrowings subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s borrowings. During bothAverage wholesale funding represented 24% and 26% of average interest-bearing liabilities during the years ended December 31, 20152017 and 2014, average wholesale funding represented 24% of average interest-bearing liabilities.2016, respectively. For more information on the Bancorp’s interest rate risk management, including estimated earnings sensitivity to changes in market interest rates, see the Market Risk Management subsection of the Risk Management section of MD&A.

 

 

3540  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

TABLE 9: CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME

  

TABLE 9: CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME ON AN FTE BASIS

TABLE 9: CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME ON AN FTE BASIS

 

 

 
For the years ended December 31  2015 2014 2013   2017 2016 2015 

 

  

 

 

  

 

 

 
($ in millions)  Average
Balance
 Revenue/
Cost
   Average
Yield/
Rate
 Average
Balance
 Revenue/
Cost
   Average
Yield/
Rate
 Average
Balance
 Revenue/
Cost
   Average    
Yield/    
Rate    
   Average
Balance
   Revenue/
Cost
   

    Average    
    Yield/    

    Rate    

 Average
Balance
   Revenue/
Cost
   

    Average    
    Yield/    

    Rate    

 Average
Balance
   Revenue/
Cost
       Average    
    Yield/    
    Rate    
 

 

 

Assets

             

Assets:

                

Interest-earning assets:

                             

Loans and leases:(a)

                             

Commercial and industrial loans

  $42,594   $1,334     3.13  $41,178   $1,346     3.27  $37,770   $1,361     3.60 %    $41,577    1,514    3.64 $43,184    1,413    3.27 $42,594    1,334    3.13% 

Commercial mortgage loans

   7,121    227     3.19    7,745   260     3.36    8,481   306     3.60         6,844    256    3.74  6,899    229    3.32  7,121    227    3.19     

Commercial construction loans

   2,717    86     3.17    1,492   51     3.44    793   27     3.45         4,374    179    4.09  3,648    125    3.42  2,717    86    3.17     

Commercial leases

   3,796    106     2.78    3,585   108     3.01    3,565   116     3.26         4,011    82    2.04  3,916    105    2.69  3,796    106    2.78     

 

 

Total commercial loans and leases

   56,228    1,753     3.12    54,000   1,765     3.27    50,609     1,810     3.58         56,806    2,031    3.58  57,647    1,872    3.25  56,228    1,753    3.12     

 

 

Residential mortgage loans

   13,798    509     3.69    13,344   518     3.88    14,428   564     3.91         16,053    566    3.53  15,101    535    3.54  13,798    509    3.69     

Home equity

   8,592    312     3.63    9,059   336     3.71    9,554   355     3.71         7,308    310    4.24  7,998    302    3.78  8,592    312    3.63     

Automobile loans

   11,847    315     2.66    12,068   334     2.77    12,021   373     3.10         9,407    275    2.92  10,708    290    2.71  11,847    315    2.66     

Credit card

   2,303 ��  237     10.27    2,271   227     9.98    2,121   209     9.87         2,141    253    11.84  2,205    214    9.69  2,303    237    10.27     

Other consumer loans and leases

   571    45     8.00    385   138     35.99    360   155     42.93         1,016    68    6.68  661    44    6.56  571    45    8.00     

 

 

Total consumer loans and leases

   37,111    1,418     3.82    37,127   1,553     4.18    38,484   1,656     4.30         35,925    1,472    4.10  36,673    1,385    3.78  37,111    1,418    3.82     

 

 

Total loans and leases

   93,339    3,171     3.40    91,127   3,318     3.64    89,093   3,466     3.89        $92,731    3,503    3.78 $94,320    3,257    3.45 $93,339    3,171    3.40% 

Securities:

                             

Taxable

   26,932    867     3.22    21,770   722     3.32    16,395   518     3.16         32,106    993    3.09  30,019    950    3.16  26,932    867    3.22     

Exempt from income taxes(a)

   55    3     5.23    53   3     4.94    49   3     5.29         66    4    5.45  80    3    4.51  55    3    5.23     

Other short-term investments

   3,258    8     0.25    3,043   8     0.26    2,417   6     0.26         1,390    15    1.04  1,866    8    0.44  3,258    8    0.25     

 

 

Total interest-earning assets

   123,584    4,049     3.28    115,993   4,051     3.49    107,954   3,993     3.70        $126,293    4,515    3.57 $126,285    4,218    3.34 $123,584    4,049    3.28% 

Cash and due from banks

   2,608      2,892      2,482        2,224      2,303      2,608     

Other assets

   15,212      14,539      15,053        13,345      14,963      15,179     

Allowance for loan and lease losses

   (1,293    (1,481    (1,757      (1,226)      (1,285)      (1,293)     

 

 

Total assets

  $    140,111      $131,943      $123,732       $ 140,636      $142,266      $140,078     

 

 

Liabilities and Equity

             

Liabilities and Equity:

                

Interest-bearing liabilities:

                             

Interest checking deposits

  $26,160   $50     0.19  $25,382   $56     0.22  $23,582   $53     0.23 %    $26,382    109    0.41 $25,143    58    0.23 $26,160    50    0.19% 

Savings deposits

   14,951    9     0.06    16,080   16     0.10    18,440   22     0.12         13,958    8    0.06  14,346    7    0.05  14,951    9    0.06     

Money market deposits

   18,152    44     0.24    14,670   51     0.35    9,467   23     0.25         20,231    74    0.37  19,523    53    0.27  18,152    44    0.24     

Foreign office deposits

   817    1     0.16    1,828   5     0.29    1,501   4     0.28         388    1    0.20  497    1    0.16  817    1    0.16     

Other time deposits

   4,051    49     1.20    3,762   40     1.06    3,760   50     1.33         3,771    46    1.23  4,010    49    1.24  4,051    49    1.20     

 

 

Total interest-bearing core deposits

   64,131    153     0.24    61,722   168     0.27    56,750   152     0.27         64,730    238    0.37  63,519    168    0.26  64,131    153    0.24     

Certificates $100,000 and over

   2,869    33     1.16    3,929   34     0.85    6,339   50     0.78         2,564    36    1.38  2,735    36    1.30  2,869    33    1.16     

Other deposits

   57    -     0.16     -    -     0.02    17    -     0.11         277    3    1.05  333    1    0.41  57    -    0.16     

Federal funds purchased

   920    1     0.13    458    -     0.09    503   1     0.12         557    6    1.01  506    2    0.39  920    1    0.13     

Other short-term borrowings

   1,721    2     0.12    1,873   2     0.10    3,024   5     0.18         3,158    30    0.96  2,845    10    0.36  1,721    2    0.12     

Long-term debt

   14,677    306     2.09    12,928   247     1.91    7,914   204     2.58         13,804    378    2.74  15,394    361    2.35  14,644    306    2.09     

 

 

Total interest-bearing liabilities

   84,375    495     0.59    80,910   451     0.56    74,547   412     0.55        $85,090    691    0.81 $85,332    578    0.68 $84,342    495    0.59% 

Demand deposits

   35,164      31,755      29,925        35,093      35,862      35,164     

Other liabilities

   4,672      3,950      4,917        3,839      4,445      4,672     

 

 

Total liabilities

   124,211      116,615      109,389       $124,022      $125,639      $124,178     

Total equity

   15,900      15,328      14,343       $16,614      $16,627      $15,900     

 

 

Total liabilities and equity

  $140,111      $   131,943      $    123,732       $140,636      $  142,266      $  140,078     

 

 

Net interest income (FTE)(b)

   $  3,554      $  3,600      $3,581        $  3,824      $  3,640      $3,554   

Net interest margin (FTE)(b)

      2.88      3.10      3.32 %         3.03      2.88      2.88% 

Net interest rate spread (FTE)(b)

      2.69        2.94        3.15             2.76       2.66       2.69     

Interest-bearing liabilities to interest-earning assets

Interest-bearing liabilities to interest-earning assets

  

    68.27        69.75        69.05      

Interest-bearing liabilities to interest-earning assets

 

     67.37       67.57       68.25     

 

 
(a)

The FTE adjustments included in the above table were$2126, $25 and $21 for both the years endedDecember 31, 20152017, 2016 and 20142015, respectively.

(b)

Net interest income (FTE), net interest margin (FTE) and $20 fornet interest rate spread (FTE) arenon-GAAP measures. For further information, refer to the year ended December 31, 2013.Non-GAAP Financial Measures section of MD&A.

 

3641  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

TABLE 10: CHANGES IN NET INTEREST INCOME ATTRIBUTABLE TO VOLUME AND YIELD/RATE(a)

TABLE 10: CHANGES IN NET INTEREST INCOME ATTRIBUTABLE TO VOLUME AND YIELD/RATE(a)

  

TABLE 10: CHANGES IN NET INTEREST INCOME ATTRIBUTABLE TO VOLUME AND YIELD/RATE(a)

 

 

 
For the years ended December 31  2015 Compared to 2014 2014 Compared to 2013   2017 Compared to 2016     2016 Compared to 2015 

 

   

 

 

 
($ in millions)      Volume Yield/Rate   Total         Volume     Yield/Rate   Total               Volume Yield/Rate     Total         Volume       Yield/Rate Total         

 

 

Assets

         

Assets:

         

Interest-earning assets:

                  

Loans and leases:

                  

Commercial and industrial loans

  $45    (57)     (12 116   (131)     (15)      $(54  155   101     19  60  79    

Commercial mortgage loans

   (21  (12)     (33 (26 (20)     (46)       (2  29   27     (7 9  2    

Commercial construction loans

   39    (4)     35   24         24        27   27   54     32  7  39    

Commercial leases

   6    (8)     (2 1   (9)     (8)       3   (26  (23    3  (4 (1)   

 

 

Total commercial loans and leases

   69    (81)     (12 115   (160)     (45)       (26  185   159     47  72  119    

 

 

Residential mortgage loans

   17    (26)     (9 (42 (4)     (46)       34   (3  31     47  (21 26    

Home equity

   (17  (7)     (24 (18 (1)     (19)       (27  35   8     (22 12  (10)   

Automobile loans

   (5  (14)     (19 1   (40)     (39)       (37  22   (15    (31 6  (25)   

Credit card

   3         10   16        18        (7  46   39     (10 (13 (23)   

Other consumer loans and leases

   47    (140)     (93 9   (26)     (17)       23   1   24     8  (9 (1)   

 

 

Total consumer loans and leases

   45    (180)     (135 (34 (69)     (103)       (14  101   87     (8 (25 (33)   

 

 

Total loans and leases

   114    (261)     (147 81   (229)     (148)      $(40  286   246     39  47  86    

Securities:

                  

Taxable

   167    (22)     145   177   27      204        64   (21  43     98  (15 83    

Exempt from income taxes

   -   1   1     (4 4   -    

Other short-term investments

   -         -   2         2        (2  9   7     -   -   -    

 

 

Total change in interest income

  $281    (283)     (2 260   (202)     58       $22   275   297     133  36  169    

 

 

Liabilities

         

Liabilities:

         

Interest-bearing liabilities:

                  

Interest checking deposits

  $2    (8)     (6 3         3       $4   47   51     (3 11  8    

Savings deposits

   (1  (6)     (7 (2 (4)     (6)       (1  2   1     -  (2 (2)   

Money market deposits

   10    (17)     (7 16   12     28        1   20   21     4  5  9    

Foreign office deposits

   (2  (2)     (4 1         1        -   -   -     -   -   -    

Other time deposits

   3         9    -   (10)     (10)       (3  -   (3    (1 1   -    

 

 

Total interest-bearing core deposits

   12    (27)     (15 18   (2)     16        1   69   70     -  15  15    

Certificates $100,000 and over

   (11  10      (1 (20      (16)       (2  2   -     (1 4  3    

Other deposits

   -   2   2     1   -  1    

Federal funds purchased

   1         1   (1       (1)       1   3   4     -  1  1    

Other short-term borrowings

   -         -   (1 (2)     (3)       1   19   20     2  6  8    

Long-term debt

   35    24      59   106   (63)     43        (39  56   17     15  40  55    

 

 

Total change in interest expense

   37         44   102   (63)     39       $(38  151   113     17  66  83    

 

 

Total change in net interest income

  $            244    (290)     (46 158   (139)     19       $                60   124   184     116  (30 86    

 

 
(a)

Changes in interest not solely due to volume or yield/rate are allocated in proportion to the absolute dollar amount of change in volume and yield/rate.

 

Provision for Loan and Lease Losses

The Bancorp provides as an expense an amount for probable losses within the loan and lease portfolio that is based on factors previously discussed in the Critical Accounting Policies section of MD&A. The provision is recorded to bring the ALLL to a level deemed appropriate by the Bancorp to cover losses inherent in the portfolio. Actual credit losses on loans and leases are charged against the ALLL. The amount of loans and leases actually removed from the Consolidated Balance Sheets isare referred to as charge-offs. Net charge-offs include current period charge-offs less recoveries on previouslycharged-off loans and leases.

The provision for loan and lease losses was $396$261 million for the year ended December 31, 20152017 compared to $315$343 million for the same period in the prior year. The increasedecrease in provision expense for the year ended December 31, 20152017 compared to the prior year

was primarily due to the restructuringdecrease in the level of commercial criticized assets, which reflected improvement in the national economy and a studentdecrease in outstanding loan backed commercial credit originated in 2007, a broadening global economic slowdown, stress on capital markets and the prolonged softness in commodity prices.balances. The ALLL declined $50$57 million from December 31, 20142016 to $1.3$1.2 billion at December 31, 2015.2017. At December 31, 2015,2017, the ALLL as a percent of portfolio loans and leases decreased to 1.37%1.30%, compared to 1.47%1.36% at December 31, 2014.2016.

Refer to the Credit Risk Management subsection of the Risk Management section of MD&A as well as Note 6 of the Notes to Consolidated Financial Statements for more detailed information on the provision for loan and lease losses, including an analysis of loan and lease portfolio composition, nonperforming assets, net charge-offs and other factors considered by the Bancorp in assessing the credit quality of the loan and lease portfolio and the ALLL.

 

 

3742  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Noninterest Income

Noninterest income increased $530$528 million for the year ended December 31, 20152017 compared to the year ended December 31, 2014.2016. The following table presents the components of noninterest income:

 

TABLE 11: COMPONENTS OF NONINTEREST INCOME

                            

 

 
For the years ended December 31 ($ in millions)  2015       2014       2013       2012       2011          2017        2016        2015        2014        2013        

 

 

Service charges on deposits

  $563       560       549       522       520          $554    558    563    560    549       

Investment advisory revenue

   418       407       393       374       375        

Wealth and asset management revenue

   419    404    418    407    393       

Corporate banking revenue

   384       430       400       413       350           353    432    384    430    400       

Card and processing revenue

   313    319    302    295    272       

Mortgage banking net revenue

   348       310       700       845       597           224    285    348    310    700       

Card and processing revenue

   302       295       272       253       308        

Other noninterest income

   979       450       879       574       250           1,357    688    979    450    879       

Securities gains, net

   9       21       21       15       46           2    10    9    21    21       

Securities gains, net - non-qualifying hedges on mortgage service rights

   -       -       13       3       9        

Securities gains, net -non-qualifying hedges on MSRs

   2    -    -    -    13       

 

 

Total noninterest income

  $      3,003       2,473       3,227       2,999       2,455          $      3,224    2,696    3,003    2,473    3,227       

 

 

 

Service charges on deposits

Service charges on deposits increased $3decreased $4 million for the year ended December 31, 20152017 compared to the year ended December 31, 20142016 primarily due primarily to a $3decrease of $4 million increase in commercial deposit fees. The increase in commercial deposit fees was driven by an increase in activity from existing customers

Wealth and new customer acquisition.

Investment advisoryasset management revenue

Investment advisoryWealth and asset management revenue increased $11$15 million for the year ended December 31, 20152017 compared to the year ended December 31, 2014.2016. The increase from the prior year was primarily due to an increase of $6 million in recurring securities brokerage fees driven by higher sales volume and an increase of $5$13 million in private client service fees due todriven by an increase in personal assetassets under management fees.as a result of strong market performance and the impact of an acquisition in the second quarter of 2017. The BancorpBancorp’s trust and registered investment advisory businesses had approximately $297$362 billion and $308$315 billion in total assets under care as of December 31, 20152017 and 2014,2016, respectively, and managed $26$37 billion and $27$31 billion in assets for individuals, corporations and

not-for-profit organizations as of December 31, 20152017 and 2014,2016, respectively.

Corporate banking revenue

Corporate banking revenue decreased $46$79 million for the year ended December 31, 20152017 compared to the year ended December 31, 2014.2016. The decrease from the prior year was primarily the result ofdriven by a decrease in syndication and lease remarketing fees. Syndication fees decreased $29of $62 million which included $52

million of impairment charges related to certain operating lease assets for the year ended December 31, 2017 compared to $20 million during the year ended December 31, 2016. The decrease also included $4 million in impairment charges on certain leveraged leases during the year ended December 31, 2017 and the impact of $16 million in gains on certain leveraged lease terminations during the year ended December 31, 2016. Additionally, the decrease in corporate banking revenue for the year ended December 31, 2017 compared to the year ended December 31, 2014 as2016 included a result of decreased activity in the market and the Bancorp’s reduced leveraged loan appetite. The$15 million decrease in lease remarketingforeign exchange fees included the impactand a $6 million decrease in letter of impairment charges of $36credit fees.

Card and processing revenue

Card and processing revenue decreased $6 million related to certain operating lease equipment that was recognized during the year ended December 31, 2015. The decreases for the year ended December 31, 2015 were partially offset2017 compared to the year ended December 31, 2016 primarily driven by higher institutional sales revenue and gains on the sale of operating lease equipment.

reward costs.

Mortgage banking net revenue

Mortgage banking net revenue increased $38decreased $61 million for the year ended December 31, 20152017 compared to the year ended December 31, 2014. 2016.

The following table presents the components of mortgage banking net revenue:

 

TABLE 12: COMPONENTS OF MORTGAGE BANKING NET REVENUE

      

 

 
For the years ended December 31 ($ in millions)  2015     2014    2013        

 

 

Origination fees and gains on loan sales

  $171     153     453        

Net mortgage servicing revenue:

      

Gross mortgage servicing fees

   222     246     251        

MSR amortization

         (139   (119   (166)       

Net valuation adjustments on MSRs and free-standing derivatives entered into to economically hedge MSRs

   94     30     162        

 

 

Net mortgage servicing revenue

   177     157     247        

 

 

Mortgage banking net revenue

  $348     310     700        

 

 

TABLE 12: COMPONENTS OF MORTGAGE BANKING NET REVENUE

      

 

 
For the years ended December 31 ($ in millions)  2017     2016    2015        

 

 

Origination fees and gains on loan sales

  $138    186    171       

Net mortgage servicing revenue:

      

Gross mortgage servicing fees

   206    199    222       

MSR amortization

   -    (131   (139)      

Net valuation adjustments on MSRs and free-standing derivatives
purchased to economically hedge MSRs

         (120   31    94       

 

 

Net mortgage servicing revenue

   86    99    177       

 

 

Mortgage banking net revenue

  $224    285    348       

 

 

 

Origination fees and gains on loan sales increased $18decreased $48 million for the year ended December 31, 20152017 compared to the year ended December 31, 2014 primarily as2016 driven by a decrease in originations and lower margins due to the result of an 11% increase in residential mortgage loan originations.interest rate environment. Residential mortgage loan originations increaseddecreased to $8.3$8.2 billion for the year ended December 31, 20152017 from $7.5$10.0 billion for the year ended December 31, 2014 due to strong refinancing activity that occurred2016. Additionally, during the year ended December 31, 2015.2017, the Bancorp purchased $109 million of MSRs.

Net mortgage servicing revenue is comprisedEffective January 1, 2017, the Bancorp elected to prospectively adopt the fair value method for all existing classes of gross mortgage servicing fees and related MSR amortization as well as

valuation adjustments on MSRs and mark-to-market adjustments on both settled and outstanding free-standing derivative financial instruments used to economically hedge the MSR portfolio. Net mortgage servicing revenue increased $20 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 driven primarily by an increase of $64 million in net valuation adjustments, partially offset by a decrease in gross mortgage servicing fees of $24 million and an increase inits residential mortgage servicing rights amortizationportfolio. Upon this election, all servicing rights are measured at fair value at each reporting date and changes

in the fair value of $20 million.servicing rights are reported in mortgage banking net revenue in the Consolidated Statements of Income in the period in which the changes occur.

Prior to the election of the fair value method, servicing rights were initially recorded at fair value and subsequently amortized in proportion to, and over the period of, estimated net servicing revenue. Servicing rights were assessed for impairment monthly, based on fair value, with temporary impairment recognized through a valuation allowance.

 

 

3843  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following table presentsNet mortgage servicing revenue decreased $13 million for the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to a decrease in net valuation adjustments (including MSR amortization) of $20 million, partially offset by an increase in gross mortgage servicing fees of $7 million. Refer to Table 13 for the components of net valuation adjustments

on the MSR portfolio and the impact of thenon-qualifying hedging strategystrategy:

TABLE 13: COMPONENTS OF NET VALUATION ADJUSTMENTS ON MSRs

     

 

 
For the years ended December 31 ($ in millions)  2017      2016      2015        

 

 

Changes in fair value and settlement of free-standing derivatives purchased
to economically hedge the MSR portfolio

  $2   24    90       

Changes in fair value:

     

Due to changes in inputs or assumptions

   (1  -    -       

Other changes in fair value

   (121  -    -       

Recovery of MSR impairment

   -   7    4       

 

 

Net valuation adjustments on MSRs and free-standing
derivatives purchased to economically hedge MSRs

  $          (120  31    94       

 

 

Mortgage rates decreased during the year ended December 31, 2017 which caused modeled prepayment speeds to increase, leading to fair value adjustments on servicing rights. The fair value of the MSR portfolio decreased $1 million due to changes to inputs to the valuation model including prepayment speeds and OAS spread assumptions and decreased $121 million due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs for the yearsyear ended December 31:31, 2017.

TABLE 13: COMPONENTS OF NET VALUATION ADJUSTMENTS ON MSRs

        

 

 
($ in millions)  2015       2014    2013        

 

 

Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio

  $90       95     (30)       

Recovery of (provision for) MSR impairment

   4       (65   192        

 

 

Net valuation adjustments on MSRs and free-standing derivatives entered into to economically hedge MSRs

  $          94       30     162        

 

 

Mortgage rates increased during the year ended December 31, 20152016 which caused the modeled prepayment speeds to slow, and leddecrease, leading to thea recovery of temporary impairment of $7 million on the servicing rights during the year. Mortgage rates decreased duringPrior to the year ended December 31, 2014 which causedelection of the modeled prepayments speeds to increase, which led to temporary impairment onfair value method, servicing rights during the year ended December 31, 2014.

Servicing rights arewere deemed temporarily impaired when a borrower’s loan rate iswas distinctly higher than prevailing rates. ImpairmentTemporary impairment on servicing rights iswas reversed when the prevailing rates returnreturned to a level commensurate with the borrower’s loan rate.

Further detail on the valuation of MSRs can be found in Note 12 of the Notes to Consolidated Financial Statements. The Bancorp

maintains anon-qualifying hedging strategy to manage a portion of the risk associated with changes in the valuation onof the MSR portfolio. Refer to Note 13 of the Notes to Consolidated Financial Statements for more information on the free-standing derivatives used to economically hedge the MSR portfolio.

In addition to the derivative positions used to economically hedge the MSR portfolio, the Bancorp may acquire various

securities as a component of itsnon-qualifying hedging strategy. The Bancorp did not sell securities related to the non-qualifying hedging strategy during the years ended December 31, 2015 and 2014. Netrecognized net gains on the sale of these securities were $13$2 million during the year ended December 31, 2013,2017, recorded in securities gains, net, - non-qualifying hedges on mortgage servicing rightsMSRs in the Bancorp’s Consolidated Statements of Income. The Bancorp did not hold or sell any securities related to thenon-qualifying hedging strategy during the year ended December 31, 2016.

The Bancorp’s total residential mortgage loans serviced as ofat December 31, 20152017 and 20142016 were $73.4$76.1 billion and $79.0$69.3 billion, respectively, with $59.0$60.0 billion and $65.4$53.6 billion, respectively, of residential mortgage loans serviced for others.

Card and processing revenue

Card and processing revenue increased $7 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase was primarily the result of an increase in the number of actively used cards and an increase in customer spend volume. Debit card interchange revenue, included in card and processing revenue, was $137 million and $128 million for the years ended December 31, 2015 and 2014, respectively.

 

 

Other noninterest income

The following table presents the major components of other noninterest income:

 

TABLE 14: COMPONENTS OF OTHER NONINTEREST INCOME

             

 

 
For the years ended December 31 ($ in millions)  2015       2014       2013            2017   2016   2015          

 

 

Gain on sale of Vantiv, Inc. shares

  $331     125     327            $1,037         -  331       

Valuation adjustments on the warrant associated with Vantiv Holding, LLC

   236     31     206        

Gain on sale and exercise of the warrant associated with Vantiv Holding, LLC

   89     -     -        

Operating lease income

   89     84     75             96         102  89       

Cardholder fees

     54         46  43       

BOLI income

     52         53  48       

Equity method income from interest in Vantiv Holding, LLC

     47         66  63       

Income from the TRA associated with Vantiv, Inc.

   80     23     9             44         313  80       

Equity method income from interest in Vantiv Holding, LLC

   63     48     77        

BOLI income

   48     44     52        

Cardholder fees

   43     45     47        

Gain on loan sales

   38     -     3        

Private equity investment income

   28     27     24             36         11  28       

Consumer loan and lease fees

   23     25     27             23         23  23       

Banking center income

   21     30     34             20         20  21       

Insurance income

   14     13     25             8         11  14       

Loss on swap associated with the sale of Visa, Inc. Class B Shares

     (80)        (56 (37)      

Net (losses) gains on loan sales

     (2)        10  38       

Gain on sale of certain retail branch operations

     -         19   -       

Gain on sale and exercise of the warrant associated with Vantiv Holding, LLC

     -         9  89       

Valuation adjustments on the warrant associated with Vantiv Holding, LLC

     -         64  236       

Net losses on disposition and impairment of bank premises and equipment

           (101   (19   (6)            -         (13 (101)      

Loss on swap associated with the sale of Visa, Inc. Class B shares

   (37   (38   (31)       

Other, net

   14     12     10             22         10  14       

 

 

Total other noninterest income

  $979     450     879            $      1,357         688  979       

 

 

 

Other noninterest income increased $529$669 million for the year ended December 31, 20152017 compared to the year ended December 31, 2014. The increase included2016 primarily due to the impact of a gain of $331 million on the sale of Vantiv, Inc. shares, an increase in private equity investment income and the fourth quarterimpact of 2015 compared to a gainthe net losses on disposition and impairment of $125 million in 2014. Thebank premises and equipment during the year ended December 31, 2016. These benefits were

partially offset by the impact of certain transactions that occurred during the year ended December 31, 2016 which included the impact of income from the TRA transactions associated with Vantiv, Inc., positive valuation adjustments and the gain on the stock warrant associated with Vantiv Holding, LLC were $236 million and $31 million for the years ended December 31, 2015 and 2014, respectively. The fair value of the stock warrant is calculated using the Black-Scholes option-pricing

model, which utilizes several key inputs (Vantiv, Inc. stock price, strike price of the warrant and several unobservable inputs). The positive valuation adjustments for the years ended December 31, 2015 and 2014 were primarily due to increases of 40% and 4%, respectively, in Vantiv, Inc.’s share price from December 31, 2014 to December 31, 2015 and from December 31, 2013 to December 31, 2014, respectively. During the fourth quarter of 2015, the Bancorp recognized a gain of $89 million on both the sale and exercise of a portion of the warrant associated with Vantiv Holding, LLC.LLC and gains on the sales of certain retail branch operations.

 

 

3944  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Additionally, the Bancorp recognized a gain of $49 million from the payment from Vantiv, Inc. to terminate a portion of the TRA and also recognized a gain of $31 million associated with the annual TRA payment during the fourth quarter of 2015. The Bancorp recognized a gain of $23 million associated with the TRA during the fourth quarter of 2014.

In addition to the increases discussed above, gain on loan sales increased $38 million during the year ended December 31, 2015 compared to the same period2017 also included an increase in the prior year primarily due to a $37 million gainloss on the swap associated with the sale of certain residential mortgage loans classified as TDRs during the first quarter of 2015. EquityVisa, Inc. Class B Shares and a reduction in equity method

earnings income from the Bancorp’s interest in Vantiv Holding, LLC increased $15 million fromLLC.

The Bancorp recognized a $1.0 billion gain on the sale of Vantiv, Inc. shares during the year ended December 31, 2014 as 2014 included charges taken by Vantiv Holding, LLC related2017. For additional information, refer to an acquisition during 2014.Note 19 of the Notes to Consolidated Financial Statements.

ThePrivate equity investment income increased $25 million compared to the year ended December 31, 2015 also included impairment charges, included2016 driven by gains on the sales of certain private equity funds during the year ended December 31, 2017 and the impact of the recognition of $9 million of OTTI on certain private equity investments in netthe third quarter of 2016. Refer to Note 27 of the Notes to Consolidated Financial Statements for further information.

Net losses on disposition and impairment of bank premises and equipment in other noninterest income of $109decreased $13 million during the year ended December 31, 2017 compared to $20 million for the same period in the prior year. For more information on theseThis decrease was driven by the impact of impairment charges referof $7 million during the year ended December 31, 2017, compared to $32 million during the year ended December 31, 2016. The impairment charges for the year ended December 31, 2016 were partially offset by a gain of $11 million on the sale-leaseback of an office complex during the third quarter of 2016. Refer to Note 7 of the Notes to Consolidated Financial Statements for further information.

Income from the TRA associated with Vantiv, Inc. was $44 million during the year ended December 31, 2017 compared to $313 million for the year ended December 31, 2016. The decrease was primarily driven by a $280 million gain recognized in the third quarter of 2016 from the termination and settlement of gross cash flows from the existing Vantiv, Inc. TRA and the expected

obligation to terminate and settle the remaining Vantiv, Inc. TRA cash flows upon the exercise of put or call options. This termination did not impact the TRA payments of $44 million and $33 million recognized in 2017 and 2016, respectively.

The Bancorp recognized positive valuation adjustments on the stock warrant associated with Vantiv, Holding LLC of $64 million during the year ended December 31, 2016. The stock warrant was not outstanding during 2017 as the Bancorp exercised the remaining warrant in Vantiv Holding, LLC during the fourth quarter of 2016 and recognized a gain of $9 million.

During the year ended December 31, 2016, the Bancorp recognized $19 million of gains on the sales of its retail branch operations in the St. Louis MSA to Great Southern Bank and Pittsburgh MSA to First National Bank of Pennsylvania.

The Bancorp recognized negative valuation adjustments of $80 million and $56 million related to the Visa total return swap during the years ended December 31, 2017 and 2016, respectively. The increase from the prior year was attributable to litigation developments during the year ended December 31, 2017 and an increase in Visa, Inc.’s share price. For additional information on the valuation of the swap associated with the sale of Visa, Inc. Class B Shares and the related litigation matters, refer to Note 17, Note 18 and Note 27 of the Notes to Consolidated Financial Statements.

Equity method earnings from the Bancorp’s interest in Vantiv Holding, LLC decreased $19 million compared to the year ended December 31, 2016 primarily due to a decrease in the Bancorp’s ownership percentage of Vantiv Holding, LLC from approximately 17.9% at December 31, 2016 to approximately 8.6% at December 31, 2017.

 

 

Noninterest Expense

Noninterest expense increased $66$87 million for the year ended December 31, 20152017 compared to the year ended December 31, 2014,2016, primarily due to increases in other noninterest expense, personnel costs (salaries, wages and incentives plus employee benefits), and technology and communications and card and processing expense partially offset by a decrease in other noninterest expense. The following table presents the major components of noninterest expense:

 

TABLE 15: COMPONENTS OF NONINTEREST EXPENSE

                                

 

 
For the years ended December 31 ($ in millions)  2015       2014        2013        2012        2011            2017       2016        2015        2014        2013          

 

 

Salaries, wages and incentives

  $1,525     1,449       1,581       1,607       1,478            $1,633    1,612      1,525      1,449      1,581         

Employee benefits

   323     334       357       371       330             356    339      323      334      357         

Net occupancy expense

   321     313       307       302       305             295    299      321      313      307         

Technology and communications

   224     212       204       196       188             245    234      224      212      204         

Card and processing expense

   153     141       134       121       120             129    132      153      141      134         

Equipment expense

   124     121       114       110       113             117    118      124      121      114         

Other noninterest expense

   1,105     1,139       1,264       1,374       1,224             1,215    1,169      1,105      1,139      1,264         

 

 

Total noninterest expense

  $        3,775     3,709       3,961       4,081       3,758            $        3,990    3,903      3,775      3,709      3,961         

 

 

Efficiency ratio

   57.6   61.1       58.2       61.7       62.3          

Efficiency ratio on an FTE basis(a)

   56.6    61.6      57.6      61.1      58.2         

 

 
(a)

This is anon-GAAP measure. For further information, refer to theNon-GAAP Financial Measures section of MD&A.

 

Personnel costs increased $65$38 million for the year ended December 31, 20152017 compared to the year ended December 31, 20142016 driven by higher executive retirement and severance costs as well as an increaseincreases in base compensation, medical and anFICA expenses and long-term incentive compensation, partially offset by a decrease in severance costs related to the Bancorp’s voluntary early retirement program in 2016. The increase in incentive compensation, primarily inpersonnel costs also included the mortgage business. Full-timeimpact ofone-time employee bonuses of $15 million that the Bancorp paid as a result of benefits received from the TCJA. Full-

time equivalent employees totaled 18,26118,125 at December 31, 20152017 compared to 18,35117,844 at December 31, 2014.2016.

Technology and communications expense increased $12$11 million for the year ended December 31, 20152017 compared to the year

ended December 31, 20142016 driven primarily by increased investment in information technology associated with regulatory, and compliance initiatives, system maintenance and other growth initiatives.

Card and processing

45  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents the components of other noninterest expense:

TABLE 16: COMPONENTS OF OTHER NONINTEREST EXPENSE

            

 

 
For the years ended December 31 ($ in millions)    2017         2016         2015          

 

 

Impairment on affordable housing investments

    $222      168      145       

FDIC insurance and other taxes

     127      126      99       

Marketing

     114      104      110       

Loan and lease

     102      110      118       

Operating lease

     87      86      74       

Professional service fees

     83      61      70       

Losses and adjustments

     59      73      55       

Data processing

     58      51      45       

Travel

     46      45      54       

Postal and courier

     42      46      45       

Recruitment and education

     35      37      33       

Donations

     28      23      29       

Supplies

     14      14      16       

Insurance

     12      15      17       

Provision for the reserve for unfunded commitments

     -      23      4       

Other, net

     186      187      191       

 

 

Total other noninterest expense

    $          1,215      1,169      1,105       

 

 

Other noninterest expense increased $12$46 million for the year ended December 31, 20152017 compared to the year ended December 31, 20142016 primarily due to increases in the impairment on affordable housing investments, professional service fees and marketing expense, partially offset by decreases in the provision for the reserve for unfunded commitments, losses and adjustments and loan and lease expense.

Impairment on affordable housing investments increased $54 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase was driven by $68 million of impairment on certain affordable housing investments recognized during the fourth quarter of 2017 primarily due to the change in the federal statutory corporate tax rate pursuant to the TCJA. Professional service fees increased $22 million for the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to investments in the NorthStar strategy and other strategic initiatives. Marketing expense increased $10 million

for the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to the new brand campaign. The provision for the reserve for unfunded commitments decreased $23 million for the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to an increase in estimated loss rates related to unfunded commitments during 2016 and a decrease in the unfunded commitments outstanding during 2017. Losses and adjustments decreased $14 million for the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to the impact of favorable legal settlements during the year ended December 31, 2017 partially offset by increased fraud prevention related expenses.increases in operational losses. Loan and lease expense decreased $8 million for the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to lower loan closing and appraisal costs driven by a decline in residential mortgage loan originations.

 

 

The following table presents the major components of other noninterest expense:

TABLE 16: COMPONENTS OF OTHER NONINTEREST EXPENSE

          

 

 
For the years ended December 31 ($ in millions)    2015           2014         2013             

 

 

Impairment on affordable housing investments

    $145       135     108        

Loan and lease

     118       119     158        

Marketing

     110       98     114        

FDIC insurance and other taxes

     99       89     127        

Operating lease

     74       67     57        

Professional service fees

     70       72     76        

Losses and adjustments

     55       188     221        

Travel

     54       52     54        

Postal and courier

     45       47     48        

Data processing

     45       41     42        

Recruitment and education

     33       28     26        

Donations

     29       18     24        

Insurance

     17       16     17        

Supplies

     16       15     16        

Provision for (benefit from) the reserve for unfunded commitments

     4       (27   (17)       

Other, net

     191       181     193        

 

 

Total other noninterest expense

    $          1,105       1,139     1,264        

 

 

4046  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Other noninterest expense decreased $34 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily due to a decrease in losses and adjustments partially offset by increases in the provision for the reserve for unfunded commitments, marketing expense, donations expense, impairment on affordable housing investments, FDIC insurance and other taxes and operating lease expense.

Losses and adjustments decreased $133 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily due to a decrease in legal settlements and reserve expense. The provision for the reserve for unfunded commitments increased $31 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily due to an increase in unfunded commitments for which the Bancorp holds reserves. Marketing expense increased $12 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. Donations expense increased $11 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 driven by contributions of $14 million to the Fifth Third

Foundation. Impairment on affordable housing investments increased $10 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily due to incremental losses resulting from previous growth in the portfolio. FDIC insurance and other taxes increased $10 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily driven by an increase in the assessment rate due to a change in asset mix as well as an increase in the assessment base. Operating lease expense increased $7 for the year ended December 31, 2015 compared to the year ended December 31, 2014 due primarily to an increase in depreciation on operating lease equipment.

The Bancorp continues to focus on efficiency initiatives as part of its core emphasis on operating leverage and expense control. The efficiency ratio (noninterest expense divided by the sum of net interest income (FTE) and noninterest income) was 57.6% for the year ended December 31, 2015 compared to 61.1% for the year ended December 31, 2014.

Applicable Income Taxes

The U.S. government enacted comprehensive tax legislation, the TCJA, on December 22, 2017. The TCJA makes broad and complex changes to the U.S. tax code including, but not limited to, reducing the top federal statutory corporate tax rate from 35 percent to 21 percent effective for tax years beginning after December 31, 2017. U.S. GAAP requires the Bancorp to recognize the tax effects of changes in tax laws and rates on its deferred taxes in the period in which the law is enacted. For the year ended December 31, 2017 the Bancorp is subject to a top federal statutory corporate tax rate of 35 percent. For years beginning after December 31, 2017, the Bancorp will be subject to a federal statutory corporate tax rate of 21 percent. As such, the Bancorp expects its effective tax rate to significantly decrease from historical levels beginning in 2018.

Applicable income tax expense for all periods includes the benefit fromtax-exempt income,tax-advantaged investments, and certain gains on sales of leveraged leases that are exempt from federal taxation and tax credits, partially offset by the effect of certain nondeductible expenses. The tax credits are associated with theLow-Income Housing Tax Credit program established under Section 42 of the IRC, the New Markets Tax Credit program established under Section 45D of the IRC, the Rehabilitation Investment Tax Credit program established under Section 47 of the IRC and the Qualified Zone Academy Bond program established under Section 1397E of the IRC.

The effective tax rate for the year ended December 31, 2017 was 20.8% which was a decrease of 3.6% from 2016 primarily driven by a $220 million benefit from the remeasurement of deferred taxes as a result of the aforementioned reduction in the federal statutory corporate tax rate resulting from the TCJA, partially offset by the impact of an increase in income before taxes. The effective tax rates for the years ended December 31, 20152017 and 2014 were primarily impacted by2016 included the impact of $178 million and $164$182 million, respectively, in tax credits and $39$34 million and $27$56 million of tax benefits from tax-exempttax exempt income, in 2015 and 2014, respectively. The increase in

For stock-based awards, U.S. GAAP requires that the effective tax rateconsequences for the year ended December 31, 2015 fromdifference between the year ended December 31, 2014 was primarily related to an increase in income before income taxes partially offset byexpense recognized for financial reporting and the increased amount of tax credits.

As required under U.S. GAAP, the Bancorp established a deferred tax asset for stock-based awards granted to its employees

and directors. When theBancorp’s actual tax deduction for thesethe stock-based awards is less than the expense previouslybe recognized for financial reporting or when the awards expire unexercised and where the Bancorp has not accumulated an excess tax benefit for previously exercised or released stock-based awards, the Bancorp is required to recognize a non-cash charge tothrough income tax expense uponin the write-off of the deferred tax asset previously established for these stock-based awards. As the Bancorp had an accumulated excess tax benefit at December 31, 2015 and 2014, the Bancorp was not required to recognize a non-cash charge to income tax expense during the years ended December 31, 2015 and 2014.

Based on the Bancorp’s stock price at December 31, 2015 and the Bancorp’s accumulation of an excess tax benefit through the period ended December 31, 2015, the Bancorp does not believe it will be required to recognize a non-cash charge to income tax expense over the next twelve months related to stock-based awards. However, theinterim periods in which they occur. The Bancorp cannot predict its stock price or whether and when its employees will exercise other stock-based awards with lower exercise prices in the future. Therefore, it is possibleBased on its stock price at December 31, 2017, the Bancorp estimates that it may be requirednecessary to recognize a non-cash charge$12 million of additional income tax benefit over the next twelve months related to the settlement of stock-based awards, primarily in the first half of 2018. However, the amount of income tax expense inor benefit recognized upon settlement may vary significantly from expectations based on the future.Bancorp’s stock price and the number of SARs exercised by employees.

 

The following table presents the Bancorp’s income before income taxes, applicable income tax expense and effective tax rate:rate are as follows:

 

TABLE 17: APPLICABLE INCOME TAXES

                  

 

 
For the years ended December 31 ($ in millions)  2015 2014   2013   2012   2011           2017 2016   2015   2014   2013         

 

 

Income before income taxes

  $        2,365       2,028         2,598         2,210         1,831            $        2,771              2,065                2,365                2,028                2,598         

Applicable income tax expense

   659   545     772     636     533             577  505    659    545    772         

Effective tax rate

   27.8%  26.9     29.7     28.8     29.1             20.8 %  24.4    27.8    26.9    29.7         

 

 

 

4147  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

BUSINESS SEGMENT REVIEW

 

The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors.Wealth and Asset Management. Additional financial information on each business segment is included in Note 30 of the Notes to Consolidated Financial Statements. Results of the Bancorp’s business segments are presented based on its management structure and management accounting practices. The structure and accounting practices are specific to the Bancorp; therefore, the financial results of the Bancorp’s business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as management’s accounting practices or businesses change.

The Bancorp manages interest rate risk centrally at the corporate level and employslevel. By employing an FTP methodology, at the business segment level. This methodology insulates the business segments are insulated from most benchmark interest rate volatility, enabling them to focus on serving customers through loanthe origination of loans and deposit products.acceptance of deposits. The FTP systemmethodology assigns charge rates and credit rates to classes of assets and liabilities, respectively, based on expectedthe estimated amount and timing of cash flows for each transaction. Assigning the FTP rate based on matching the duration and the U.S. swap curve. Matching durationof 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 rate risk. In a rising rate environment, the Bancorp benefits from the widening spread between deposit costs and wholesale funding costs. However, therates. The Bancorp’s FTP system credits this benefitmethodology also allocates the contribution to net interest income of the asset-generating and deposit-providing businesses such as Branch Banking and Investment Advisors, on a duration-adjusted basis. The netbasis to better attribute the driver of the performance. As the asset and liability durations are not perfectly matched, the residual impact of the FTP methodology is captured in General Corporate and Other. The charge rates and credit rates are determined using the FTP rate curve, which is based on an estimate of Fifth Third’s marginal borrowing cost in the wholesale funding markets. The FTP

curve is constructed using the U.S. swap curve, brokered CD pricing and unsecured debt pricing.

The Bancorp adjusts the FTP charge rates and credit rates as dictated by changes in interest rates for various interest-earning assets and interest-bearing liabilities and by the review of behavioral assumptions, such as prepayment rates on interest-earning assets and the estimated durations for the indeterminate-lived deposits. TheKey assumptions, including the credit raterates provided for demand deposit accounts, isare reviewed annually based upon the account type, its estimated durationannually. Credit rates for deposit products and the corresponding federal funds, U.S. swap curve or swap rate.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, 20152017 to reflect the current market rates and updated durationmarket assumptions. These rates were generally lowerhigher than those in place during 2014,2016, thus net interest income for deposit-providing businessesbusiness segments was negativelypositively impacted during 2015.2017. FTP charge rates on assets were affected by the prevailing level of interest rates and by the duration and repricing characteristics of the portfolio. As overall market rates increased, the FTP charge increased for asset-generating business segments during 2017.

The Bancorp’s methodology for allocating provision for loan and lease losses expense to the business segments are charged provision expense based on theincludes charges or benefits associated with changes in criticized commercial loan levels in addition to actual net charge-offs experienced onby the loans and leases owned by each business segment. Provision for loan and lease losses expense attributable to loan and lease growth and changes in ALLL factors areis captured in General Corporate and Other. The financial results of the business segments include allocations for shared services and headquarters expenses. Additionally, the business segments form synergies by taking advantage of cross-sell opportunities and when funding operations by accessing the capital markets as a collective unit.

The results of operations and financial position for the years ended December 31, 2014 and 2013 were adjusted to reflect the transfer of certain customers and Bancorp employees from Commercial Banking to Branch Banking, effective January 1, 2015. In addition, the balances for the years ended December 31, 2014 and 2013 were adjusted to reflect a change in internal allocation methodology.

 

 

The following table summarizes net income (loss) by business segment:

 

TABLE 18: NET INCOME (LOSS) BY BUSINESS SEGMENT

        

 

 

For the years ended December 31 ($ in millions)

   2015       2014         2013             2017          2016          2015       

 

 

Income Statement Data

        

Commercial Banking

  $739   800   798          $806  995  718       

Branch Banking

   311   365   219           494  431  297       

Consumer Lending

   112   (66 187           (19 20  111       

Investment Advisors

   58   54   68        

General Corporate & Other

   486   330   554        

Wealth and Asset Management

   74  93  58       

General Corporate and Other

   839  21  522       

 

 

Net income

   1,706   1,483   1,826           2,194  1,560  1,706       

Less: Net income attributable to noncontrolling interests

   (6 2   (10)          -  (4 (6)      

 

 

Net income attributable to Bancorp

   1,712   1,481   1,836           2,194  1,564  1,712       

Dividends on preferred stock

   75   67   37           75  75  75       

 

 

Net income available to common shareholders

  $        1,637   1,414   1,799          $        2,119  1,489  1,637       

 

 

 

4248  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Commercial Banking

Commercial Banking offers credit intermediation, cash management and financial services to large and middle-market businesses and government and professional customers. In addition to the traditional lending and depository offerings, Commercial Banking

products and services include global cash management, foreign exchange and international trade finance, derivatives and capital markets services, asset-based lending, real estate finance, public finance, commercial leasing and syndicated finance.

 

 

The following table contains selected financial data for the Commercial Banking segment:

 

TABLE 19: COMMERCIAL BANKING

            

 

 
For the years ended December 31 ($ in millions)  2015    2014    2013           2017    2016    2015         

 

 

Income Statement Data

            

Net interest income (FTE)(a)

  $1,646     1,648     1,589          $1,678    1,839    1,646       

Provision for loan and lease losses

   239     235     195           38    76    298       

Noninterest income:

            

Corporate banking revenue

   378     429     391           348    430    378       

Service charges on deposits

   284     280     262           287    292    284       

Other noninterest income

   191     171     158           203    185    191       

Noninterest expense:

            

Personnel costs

   303     304     306           294    296    303       

Other noninterest expense

   1,099     1,013     924           1,202    1,130    1,066       

 

 

Income before income taxes

   858     976     975        

Income before income taxes (FTE)

   982    1,244    832       

Applicable income tax expense(a)(b)

   119     176     177           176    249    114       

 

 

Net income

  $739     800     798          $806    995    718       

 

 

Average Balance Sheet Data

            

Commercial loans and leases, including held for sale

  $      53,010         50,718         47,197          $      53,743        54,597        53,010       

Demand deposits

   20,677     18,381     16,582           19,519    20,735    20,677       

Interest checking deposits

   9,069     7,995     7,031           9,080    8,582    9,069       

Savings and money market deposits

   6,652     5,792     4,844           5,337    6,686    6,652       

Other time deposits and certificates $100,000 and over

   1,230     1,399     1,330           899    1,046    1,230       

Foreign office deposits

   813     1,817     1,483           372    496    813       

 

 
(a)

Includes FTE adjustments of$2126, $25 and $21 for both the years endedDecember 31, 20152017,2016 and 2014 and $20 for the year ended December 31,2013.2015, respectively. This is anon-GAAP measure.

(b)

Applicable income tax expense for all periods includes the tax benefit fromtax-exempt income,tax-advantaged investments and business tax credits partially offset by the effect of certain nondeductible expenses. Refer to the Applicable Income Taxes subsection of the Statements of Income Analysis section of MD&A for additional information.

 

Comparison of the year ended 20152017 with 20142016

Net income was $739$806 million for the year ended December 31, 20152017 compared to net income of $800$995 million for the year ended December 31, 2014.2016. The decrease in net income was the result ofdriven by decreases in net interest income and noninterest income and an increase in noninterest expense coupled withpartially offset by a decrease in noninterest income.the provision for loan and lease losses.

Net interest income on an FTE basis decreased $2$161 million from the year ended December 31, 20142016 primarily driven by a declineincreases in yieldsFTP charge rates on loans and leases and increases in the rates paid of 19 bpscore deposits. The decrease in net interest income was partially offset by increases in yields on average commercial loans and leases and increases in FTP charges on loans and leases driven by an increase in average balances. These decreases forof 37 bps from the year ended December 31, 2015 were partially offset by increases in FTP credits on core deposits driven by increases in average balances.2016.

Provision for loan and lease losses increased $4decreased $38 million from the year ended December 31, 2014.2016 primarily driven by a decrease in net charge-offs on commercial and industrial loans partially offset by a reduction in the benefit from criticized assets. Net charge-offs as a percent of average portfolio loans and leases decreased to 19 bps for the year ended December 31, 2017 compared to 33 bps for the year ended December 31, 2016.

Noninterest income decreased $69 million from the year ended December 31, 2016 primarily driven by a decrease in corporate banking revenue partially offset by an increase in other noninterest income. Corporate banking revenue decreased $82 million from the year ended December 31, 2016 driven by a decrease in lease remarketing fees of $62 million which included $52 million of impairment charges related to certain operating lease assets for the year ended December 31, 2017 compared to $20 million during the year ended December 31, 2016. Additionally, corporate banking revenue included a $15 million decrease in foreign exchange fees

and a $6 million decrease in letter of credit fees for the year ended December 31, 2017 compared to the year ended December 31, 2016. Other noninterest income increased $18 million from the year ended December 31, 2016 driven by an increase in private equity investment income primarily due to gains on the sale of certain private equity investments.

Noninterest expense increased $70 million from the year ended December 31, 2016 primarily as a result of an increase in other noninterest expense. The increase includedin other noninterest expense was driven by $68 million of impairment on certain affordable housing investments recognized during the fourth quarter of 2017 primarily due to the change in the federal statutory corporate tax rate pursuant to the TCJA.

Average commercial loans decreased $854 million from the year ended December 31, 2016 primarily due to a decrease in average commercial and industrial loans partially offset by an increase in average commercial construction loans. Average commercial and industrial loans decreased $1.7 billion from the year ended December 31, 2016 primarily as a result of deliberate exits from certain loans that did not meet the Bancorp’s risk-adjusted profitability targets and softer loan demand. Average commercial construction loans increased $725 million from the year ended December 31, 2016 primarily due to increases in demand and draw levels on existing commitments.

Average core deposits decreased $2.2 billion from the year ended December 31, 2016. The decrease was primarily driven by decreases in average savings and money market deposits and average demand deposits which decreased $1.3 billion and $1.2 billion, respectively, from the year ended December 31, 2016 primarily due to lower average balances per account.

49  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

These decreases were partially offset by an increase in average interest checking deposits of $498 million from the year ended December 31, 2016 primarily due to the acquisition of new customers.

Comparison of the year ended 2016 with 2015

Net income was $995 million for the year ended December 31, 2016 compared to net income of $718 million for the year ended December 31, 2015. The increase in net income was driven by increases in net interest income and noninterest income and a decrease in the provision for loan and lease losses partially offset by an increase in noninterest expense.

Net interest income on an FTE basis increased $193 million from the year ended December 31, 2015 primarily driven by an increase in FTP credit rates on core deposits and an increase in average commercial loan and lease balances as well as an increase in their yields of 17 bps for the year ended December 31, 2016 compared to the prior year. These increases in net interest income for the year ended December 31, 2016 were partially offset by an increase in FTP charge rates on loans and leases.

Provision for loan and lease losses decreased $222 million from the year ended December 31, 2015. The decrease was primarily due to a decrease in criticized commercial loans during the year ended December 31, 2016 as well as a $102 millioncharge-off during the third quarter of 2015 associated with the restructuring of a student loan backed commercial credit originated in 2007. The year ended December 31, 2014 included net charge-offs related to certain impaired commercial and industrial loans in the first and third quarters of 2014. Net charge-offs as a percent of average portfolio loans and leases decreased to 33 bps for the year ended December 31, 2016 compared to 45 bps for the year ended December 31, 2015 compared to 46 bps for the year ended December 31, 2014.2015.

Noninterest income decreased $27increased $54 million from the year ended December 31, 2014 due2015 primarily to a decreasedriven by an increase in corporate banking revenue of $52 million driven by increases in lease

remarketing fees and syndication fees partially offset by an increasedecreases in other noninterest income. Corporate banking revenue decreased $51letter of credit fees and foreign exchange fees.

Noninterest expense increased $57 million from the year ended December 31, 20142015 primarily driven by decreases in syndication fees and lease remarketing fees. The decrease in syndication fees was theas a result of decreased activity in the market and the Bancorp’s reduced leveraged loan appetite. The decrease in

lease remarketing fees included the impact of impairment charges of $36 million related to certain operating lease equipment that was recognized during the year ended December 31, 2015. Refer to Note 8 of the Notes to Consolidated Financial Statements for additional information. The decrease in corporate banking revenue for the year ended December 31, 2015 was partially offset by higher institutional sales revenue. Other noninterest income increased $20 million from the year ended December 31, 2014 primarily driven by increases in gains on loan sales.

Noninterest expense increased $85 million from the year ended December 31, 2014 driven by an increase in other noninterest expense. The increase in other noninterest expense was primarily driven by increases in corporate overhead allocations, operating lease expense and impairment on affordable housing investments.investments and operating lease expense partially offset by a decrease in loan and lease expense.

Average commercial loans increased $2.3$1.6 billion from the year ended December 31, 20142015 primarily due to increases in average commercial and industrial loans, and average commercial construction loans and average commercial leases partially offset by a decrease in average commercial mortgage loans. Average commercial and industrial loans and average commercial construction loans increased $1.4 billion and $1.2 billion, respectively,$657 million from the year ended December 31, 20142015 primarily as a result of an increase in new loan origination activity resulting from an increase in demand and targeted marketing efforts.line utilization in the first half of the year. Average commercial mortgageconstruction loans decreased $552increased $926 million from the year ended December 31, 20142015 primarily as a result of increased demand and draw levels continuing to outpace attrition. Average commercial leases increased $121 million from the year ended December 31, 2015 primarily as a result of an increase in syndication and participation origination activity. Average commercial mortgage loans decreased $117 million from the year ended December 31, 2015 primarily due to a decline in new loan origination activity driven by increased competition and an increase in paydowns.

Average core deposits increased $3.2 billiondecreased $717 million from the year ended December 31, 2014.2015. The increasedecrease was the result of growthprimarily driven by decreases in average demand deposits, average interest checking deposits and average savings and money marketforeign deposits which increased $2.3 billion, $1.1 billiondecreased $487 million and $860$317 million, respectively, from the year ended December 31, 2014.2015.

 

 

4350  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This increase was partially offset by a decrease in average foreign deposits of $1.0 billion from the year ended December 31, 2014.

Comparison of the year ended 2014 with 2013

Net income was $800 million for the year ended December 31, 2014 compared to net income of $798 million for the year ended December 31, 2013. The increase in net income was the result of increases in net interest income and noninterest income partially offset by increases in noninterest expense and the provision for loan and lease losses.

Net interest income increased $59 million from the year ended December 31, 2013 primarily due to growth in average commercial construction loans, an increase in FTP credits due to an increase in demand deposits and a decrease in FTP charges, partially offset by a decline in yields of 29 bps, on average commercial loans.

Provision for loan and lease losses increased $40 million from the year ended December 31, 2013 due to an increase in net charge-offs related to certain impaired commercial and industrial loans in the first and third quarters of 2014. Net charge-offs as a percent of average portfolio loans and leases increased to 46 bps for the year ended December 31, 2014 compared to 41 bps for the year ended December 31, 2013.

Noninterest income increased $69 million from the year ended December 31, 2013 due to increases in corporate banking revenue, service charges on deposits and other noninterest income. Corporate banking revenue increased $38 million from the year ended December 31, 2013 primarily driven by increases in syndication fees and lease remarketing fees. Service charges on deposits increased $18 million from the year ended December 31,

2013 primarily driven by higher commercial deposit revenue which increased due to the acquisition of new customers and product expansion. Other noninterest income increased $13 million from the year ended December 31, 2013 primarily due to increases in operating lease income and card and processing revenue.

Noninterest expense increased $87 million from the year ended December 31, 2013 primarily as a result of an increase in other noninterest expense. Other noninterest expense increased $89 million from the year ended December 31, 2013 driven by increases in corporate overhead allocations, impairment on affordable housing investments and operating lease expense.

Average commercial loans increased $3.5 billion from the year ended December 31, 2013 primarily due to increases in average commercial and industrial loans and average commercial construction loans partially offset by a decrease in average commercial mortgage loans. Average commercial and industrial loans and average commercial construction loans increased $3.5 billion and $684 million, respectively, from the year ended December 31, 2013 as a result of an increase in new loan origination activity and utilization resulting from a strengthening economy and targeted marketing efforts. Average commercial mortgage loans decreased $671 million from the year ended December 31, 2013 due to continued run-off as the level of new originations was less than the repayments on the current portfolio.

Average core deposits increased $4.0 billion from the year ended December 31, 2013. The increase was the result of growth in average demand deposits, average interest checking deposits, average savings and money market deposits and average foreign deposits which increased $1.8 billion, $964 million, $948 million and $334 million, respectively, from the year ended December 31, 2013.

44  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Branch Banking

Branch Banking provides a full range of deposit and loan products to individuals and small businesses through 1,2541,154 full-service banking centers. Branch Banking offers depository and loan products, such as checking and savings accounts, home equity loans

and lines of credit, credit cards and loans for automobiles and other personal financing needs, as well as products designed to meet the specific needs of small businesses, including cash management services.

 

 

The following table contains selected financial data for the Branch Banking segment:

 

TABLE 20: BRANCH BANKING

           

 

 
For the years ended December 31 ($ in millions)  2015  2014    2013           2017    2016    2015           

 

 

Income Statement Data

           

Net interest income

  $1,555   1,573     1,380       ��  $1,782    1,669    1,555       

Provision for loan and lease losses

   159   181     211           153    138    151       

Noninterest income:

           

Service charges on deposits

   277   278     284           265    265    277       

Card and processing revenue

   236   227     208           251    253    236       

Investment advisory revenue

   157   152     147        

Wealth and asset management revenue

   141    140    157       

Other noninterest income

   (18 69     106           99    97    (18)      

Noninterest expense:

           

Personnel costs

   524   539     550           526    520    524       

Net occupancy and equipment expense

   248   246     241           228    234    248       

Card and processing expense

   145   133     125           127    128    145       

Other noninterest expense

   650   636     660           740    739    681       

 

 

Income before income taxes

   481   564     338           764    665    458       

Applicable income tax expense

   170   199     119           270    234    161       

 

 

Net income

  $311   365     219          $494    431    297       

 

 

Average Balance Sheet Data

           

Consumer loans, including held for sale

  $      14,374       14,978         15,223          $      13,008        13,572        14,374       

Commercial loans, including held for sale

   2,021   2,175     2,370           1,918    1,870    2,021       

Demand deposits

   12,715   11,781     11,284           13,895    13,332    12,715       

Interest checking deposits

   9,128   9,071     8,905           10,226    9,659    9,128       

Savings and money market deposits

   25,342   24,065     22,252           27,603    25,974    25,342       

Other time deposits and certificates $100,000 and over

   5,161   4,690     4,709           4,965    5,205    5,161       

 

 

 

Comparison of the year ended 20152017 with 20142016

Net income was $311$494 million for the year ended December 31, 20152017 compared to net income of $365$431 million for the year ended December 31, 2014.2016. The decreaseincrease was driven by decreasesan increase in noninterest income and net interest income as well as an increase in noninterest expense partially offset by a decreasean increase in the provision for loan and lease losses.

Net interest income decreased $18increased $113 million from the year ended December 31, 20142016 primarily due to an increase in FTP credits driven by an increase in average core deposits, an increase in FTP credit rates on core deposits and increases in yields on average consumer and commercial loans. These benefits to net interest income were partially offset by increases in FTP charge rates on loans and leases and increases in the rates paid on core deposits. Additionally, interest income from credit cards included the impact of a $12 million benefit related to a revised estimate of refunds offered to certain bankcard customers in the first quarter of 2017 compared to a $16 million reduction in interest income for the expected refunds in the fourth quarter of 2016.

Provision for loan and lease losses increased $15 million from the year ended December 31, 2016 as net charge-offs as a percent of average portfolio loans and leases increased to 102 bps for the year ended December 31, 2017 compared to 91 bps for the year ended December 31, 2016.

Noninterest income increased $1 million from the year ended December 31, 2016 primarily driven by changes made to the Bancorp’s deposit advance product beginning January 1, 2015 and a declinean increase in interestother noninterest income on home equity loans and residential mortgage loans driven by decreases in average balances partially offset by a decrease in FTP chargescard and processing revenue. Other noninterest income increased $2 million from the year ended December 31, 2016 primarily due to impairment charges on bank premises and equipment of $7 million recognized during the year ended December 31, 2017 compared to $32 million recognized during the year ended December 31, 2016 as

well as an increase of $8 million in ATM transaction fees from the year ended December 31, 2016. These positive impacts for the year ended December 31, 2017 were partially offset by the recognition of $19 million of gains on the sales of retail branch operations in the St. Louis and Pittsburgh MSAs during the year ended December 31, 2016, as well as a gain of $11 million on the sale of the agent bankcard loan portfolio during the second quarter of 2016. Card and processing revenue decreased $2 million from the year ended December 31, 2016 primarily driven by higher rewards costs.

Noninterest expense was flat from the year ended December 31, 2016 as a decrease in thesenet occupancy and equipment expense was offset by an increase in personnel costs. Net occupancy and equipment expense decreased $6 million from the year ended December 31, 2016 primarily due to a decrease in rent expense driven by a reduction in the number of full-service banking centers and ATM locations. Personnel costs increased $6 million from the year ended December 31, 2016 primarily due to an increase in incentive compensation partially offset by a decrease in base compensation.

Average consumer loans decreased $564 million from the year ended December 31, 2016 primarily driven by a decrease in average balances. home equity loans and average residential mortgage loans of $547 million and $236 million, respectively, as payoffs exceeded new loan production. These declines were partially offset by an increase in average other consumer loans of $285 million from the year ended December 31, 2016 primarily due to growth inpoint-of-sale loan originations.

Average core deposits increased $2.5 billion from the year ended December 31, 2016 primarily driven by growth in average savings and money market deposits of $1.6 billion, growth in average interest checking deposits of $567 million and growth in average demand deposits of $563 million.

51  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The declinegrowth in average savings and money market deposits, average interest checking deposits and average demand deposits was driven by an increase in average balances per customer account and acquisition of new customers.

Comparison of the year ended 2016 with 2015

Net income was $431 million for the year ended December 31, 2016 compared to net income of $297 million for the year ended December 31, 2015. The increase was driven by increases in net interest income wasand noninterest income as well as a decrease in the provision for loan and lease losses partially offset by an increase in noninterest expense.

Net interest income increased $114 million from the year ended December 31, 2015 primarily driven by an increase in the benefits from FTP credits on core deposits partially offset by a decrease in interest expenseincome on core deposits due toresidential mortgage loans, home equity loans, credit card loans and other consumer loans driven by a decline in theaverage balances. Additionally, net interest income was negatively impacted by an increase in FTP charge rates paidon loans and by increases in the benefits from FTP credits for demand deposits, other time deposits and interest checking deposits.leases.

Provision for loan and lease losses decreased $22$13 million from the year ended December 31, 20142015 primarily due to improved credit trends. Net charge-offs as a percent of average portfolio loans and leases decreased to 91 bps for the year ended December 31, 2016 compared to 96 bps for the year ended December 31, 2015 compared to 106 bps for the year ended December 31, 2014.2015.

Noninterest income decreased $74increased $103 million from the year ended December 31, 2014.2015. The decreaseincrease for the year ended December 31, 2016 was primarily driven by decreasesan increase in other noninterest income partially offset by increasesof $115 million primarily due to impairment charges on bank premises and equipment of $32 million recognized during the year ended December 31, 2016 compared to $109 million recognized during the year ended December 31, 2015. Additionally, the increase in card and processing revenue and investment advisory revenue. Otherother noninterest income decreased $87for the year ended December 31, 2016 included a gain of $19 million on the sale of certain retail branch operations in the St. Louis and Pittsburgh

MSAs in the first and second quarters of 2016, respectively, as well as a gain of $11 million on the sale of the agent bankcard loan portfolio during the second quarter of 2016.

Noninterest expense increased $23 million from the year ended December 31, 20142015 primarily driven by impairment losses associated with lower of cost or market adjustments on long-lived

assets of $109 million for the year ended December 31, 2015 compared to $20 million for the year ended December 31, 2014. Refer to Note 7 of the Notes to Consolidated Financial Statements for additional information on impairment of bank premises and equipment. Cardan increase in other noninterest expense partially offset by decreases in card and processing revenueexpense and net occupancy and equipment expense. Other noninterest expense increased $9$58 million from the year ended December 31, 2014 primarily due to an increase in the number of actively used cards and an increase in customer spend volume. Investment advisory revenue increased $5 million from the year ended December 31, 2014 primarily due to an increase of $3 million in recurring securities brokerage fees driven by higher sales volume and an increase of $2 million in private client service fees due to an increase in personal asset management fees.

Noninterest expense increased $13 million from the year ended December 31, 20142015 primarily driven by increases in other noninterest expense and card and processing expense partially offset by a decrease in personnel costs. Other noninterest expense increased $14 million from the year ended December 31, 2014 due to higher operational losses and an increase in corporate overhead allocations. Card and processing expense increased $12decreased $17 million from the year ended December 31, 2014 driven by increased fraud prevention related expenses. Personnel costs2015 primarily due to the impact of renegotiated service contracts. Net occupancy and equipment expense decreased $15$14 million from the year ended December 31, 20142015 primarily due to a decrease in rent expense driven by a decrease in employee benefits expense due to changes in the Bancorp’s employee benefit plan implemented in 2015 as well as a decrease in base compensation due to a declinereduction in the number of full-time equivalent employees.full-service banking centers and ATM locations.

Average consumer loans decreased $604$802 million from the year ended December 31, 20142015 primarily due todriven by a decrease in average home equity loans and average residential mortgage loans of $336$488 million and $261$262 million, respectively, as payoffs exceeded new loan production.

45  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Average commercial loans decreased $154$151 million from the year ended December 31, 20142015 primarily due to a decrease in average commercial mortgage loans and average commercial and industrial loans of $97$100 million and $63$46 million, respectively, as payoffs exceeded new loan production.

Average core deposits increased $2.6$1.7 billion from the year ended December 31, 20142015 primarily driven by net growth in average savings and money market deposits of $1.3 billion and$632 million, growth in average demand deposits of $934$617 million and growth in average interest checking deposits of $531 million. The net growth in average savings and money market deposits, was driven by a promotional product offeringaverage demand deposits and the growth in average demandinterest checking deposits was driven by an increase in average balances per customer account balances.

Comparison of the year ended 2014 with 2013

Net income was $365 million for the year ended December 31, 2014 compared to net income of $219 million for the year ended December 31, 2013. The increase was driven by an increase in net interest income and decreases in the provision for loan and lease losses and noninterest expense partially offset by a decrease in noninterest income.

Net interest income increased $193 million from the year ended December 31, 2013 primarily driven by increases in the FTP credit rates for savings and money market deposits, demand deposits and interest checking deposits and a decrease in the FTP charges on loans and leases. These increases were partially offset by declines in yields on average commercial loans and a decrease in interest income relating to the Bancorp’s decision to no longer enroll new customers in the deposit advance product.

Provision for loan and lease losses for December 31, 2014 decreased $30 million from the year ended December 31, 2013 as a result of improved credit trends. Net charge-offs as a percent of average portfolio loans and leases decreased to 106 bps for the year ended December 31, 2014 compared to 119 bps for the year ended December 31, 2013.

Noninterest income decreased $19 million from the year ended December 31, 2013. The decrease was primarily driven by decreases in other noninterest income and service charges on deposits partially offset by an increase in card and processing revenue. Other noninterest income decreased $37 million from the year ended

December 31, 2013 primarily due to $20 million in impairment charges during the year ended December 31, 2014 for branches and land. The remaining decrease in other noninterest income was primarily due to decreases in gains on loan sales and mortgage origination fees and retail service fees. Service charges on deposits decreased $6 million from the year ended December 31, 2013 primarily due to a decrease in consumer checking and savings fees from a decline in the percentage of consumer customers being charged service fees. Card and processing revenue increased $19 million from the year ended December 31, 2013 primarily as a result of an increase in the number of actively used cards as well as higher processing fees related to additional ATM locations.

Noninterest expense decreased $22 million from the year ended December 31, 2013 primarily driven by decreases in other noninterest expense and personnel costs partially offset by increases in card and processing expense and net occupancy and equipment expense. Other noninterest expense decreased $24 million from the year ended December 31, 2013 primarily due to lower marketing expense and loan and lease expense. Personnel costs decreased $11 million from the year ended December 31, 2013 primarily driven by lower compensation costs due to a decline in the number of full-time equivalent employees. Card and processing expense increased $8 million from the year ended December 31, 2013 primarily due to higher rewards expense relating to credit cards and increased fraud-related charges. Net occupancy and equipment expense increased $5 million from the year ended December 31, 2013 primarily due to an increase in rent expense driven by additional ATM locations.

Average consumer loans decreased $245 million from the year ended December 31, 2013 primarily due to a decrease in average home equity loans of $382 million as payoffs exceeded new advances and new loan production. This decrease was partially offset by an increase in average credit card loans of $146 million from the year ended December 31, 2013 primarily due to an increase in open and active accounts driven by the volumeacquisition of new accounts.

Average core deposits increased $2.5 billion from the year ended December 31, 2013 primarily driven by net growth in average savings and money market deposits of $1.8 billion and growth in average demand deposits of $497 million.customers.

 

 

4652  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Consumer Lending

Consumer Lending includes the Bancorp’s residential mortgage, home equity, automobile and other indirect lending activities. Direct lending activities include the origination, retention and servicing of residential mortgage and home equity loans or lines of credit, sales

and securitizations of those loans, pools of loans or lines of credit

and all associated hedging activities. Indirect lending activities include extending loans to consumers through correspondent lenders and automobile dealers.

 

 

The following table contains selected financial data for the Consumer Lending segment:

 

TABLE 21: CONSUMER LENDING

          

 

 
For the years ended December 31 ($ in millions)  2015    2014  2013          2017 2016   2015       

 

 

Income Statement Data

          

Net interest income

  $249     258   312          $240  248    249       

Provision for loan and lease losses

   45     156   93           40  44    44       

Noninterest income:

          

Mortgage banking net revenue

   341     305   688           217  277    341       

Other noninterest income

   66     45   67           20  26    66       

Noninterest expense:

          

Personnel costs

   185     181   281           189  195    185       

Other noninterest expense

   251     373   404           278  280    255       

 

 

Income (loss) before income taxes

   175     (102 289           (30 32    172       

Applicable income tax expense (benefit)

   63     (36 102        

Applicable income tax (benefit) expense

   (11 12    61       

 

 

Net income (loss)

  $112     (66 187          $(19 20    111       

 

 

Average Balance Sheet Data

          

Residential mortgage loans, including held for sale

  $9,251     8,866       10,222          $      11,494  10,530    9,251       

Home equity

   424     496   572           293  356    424       

Automobile loans, including held for sale

  

 

      11,341

  

       11,517   11,409        

Other consumer loans and leases, including held for sale

   11     19   16        

Automobile loans

   8,939      10,172        11,341       

Other consumer loans, including held for sale

   -   -    11       

 

 

 

Comparison of the year ended 20152017 with 20142016

Net income was $112Consumer Lending incurred a net loss of $19 million for the year ended December 31, 20152017 compared to a net lossincome of $66$20 million for the year ended December 31, 2014.2016. The increasedecrease was driven by decreases in noninterest expense and the provision for loan and lease losses as well as an increase in noninterest income partially offset by a decrease in net interestnoninterest income.

Net interest income decreased $9$8 million from the year ended December 31, 20142016 primarily driven by loweran increase in FTP charges on loans and leases partially offset by an increase in yields on average residential mortgage loans and average automobile loans and a decline in average home equity loans partially offset by decreases in FTP charge rates on loans and leases.loans.

The provisionProvision for loan and lease losses decreased $111$4 million from the year ended December 31, 2014 as the prior year included an $87 million charge-off related to the transfer of certain residential mortgage loans from the portfolio to held for sale in the fourth quarter of 2014. The decrease was also due to improved delinquency metrics on residential mortgage loans and home equity loans.2016. Net charge-offs as a percent of average portfolio loans and leases decreased to 20 bps for the year ended December 31, 2017 compared to 22 bps for the year ended December 31, 2015 compared to 77 bps for the year ended December 31, 2014.2016.

Noninterest income increased $57decreased $66 million from the year ended December 31, 2014 as2016 driven primarily by a result of increasesdecrease in mortgage banking net revenue and other noninterest income.revenue. Mortgage banking net revenue increased $36decreased $60 million from the year ended December 31, 20142016 primarily driven by a $16decreases of $48 million increaseand $12 million in mortgage origination fees and gains on loan sales and a $20 million increase in net mortgage servicing revenue.revenue, respectively. Refer to the Noninterest Income subsection of the Statements of Income Analysis section of MD&A for additional information on the fluctuations in mortgage banking net revenue. Other noninterest income increased $21

Noninterest expense decreased $8 million from the year ended December 31, 2014 primarily2016 driven by a $37 million gain on the sale of held for sale residential mortgage loans classified as TDRs in the first quarter of 2015. This increase was partially offset by a decrease in retail service fees.

Noninterest expensepersonnel costs. Personnel costs decreased $118$6 million from the year ended December 31, 20142016 primarily driven by a decreasedecreases in other noninterest

expense of $122 million. The decrease in other noninterest expense was primarily due to decreased legal expensesincentive and operational losses partially offset by an increase in corporate overhead allocations.base compensation.

Average consumer loans and leases increased $129decreased $332 million from the year ended December 31, 2014.2016 as a decrease in average automobile loans was partially offset by an increase in average residential mortgage loans. Average automobile loans decreased $1.2 billion from the year ended December 31, 2016 as payoffs exceeded new loan production due to a strategic shift focusing on improving risk-adjusted returns. Average residential mortgage loans, including held for sale, increased $385$964 million from the year ended December 31, 2014

2016 primarily due to the continued retention of certain agency conforming ARMs and certain other fixed-rate loans. Average automobile loans and average home equity loans decreased $176 million and $72 million, respectively, fromoriginated during the year ended December 31, 2014 as payoffs exceeded new loan production.2017.

Comparison of the year ended 20142016 with 20132015

Consumer Lending incurred a net loss of $66Net income was $20 million for the year ended December 31, 20142016 compared to net income of $187$111 million for the year ended December 31, 2015. The decrease was driven by a decrease in noninterest income and an increase in noninterest expense.

Net interest income decreased $1 million from the year ended December 31, 2013. The decrease was2015 primarily driven by decreases in net interest income and noninterest income and an increase in the provision for loan and lease losses partially offset by a decrease in noninterest expense.

Net interest income decreased $54 million from the year ended December 31, 2013 primarily due to decreases in average residential mortgage loans and average home equity loans as well as lower yields on average automobile loans partially offset by a decrease in FTP charges on loans and leases.leases partially offset by an increase in FTP credit rates on demand deposits. Net interest income was also impacted by an increase in average residential mortgage loan balances partially offset by a decline in average automobile loan balances.

The provision for loan and lease losses increased $63 millionwas flat from the year ended December 31, 2013 primarily due to an $87 million charge-off related to the transfer of certain residential mortgage loans from the portfolio to held for sale in the fourth quarter of 2014 partially offset by improved delinquency metrics on home equity loans.2015. Net charge-offs as a percent of average portfolio loans and leases increased to 77was 22 bps for both the yearyears ended December 31, 2014 compared to 46 bps for the year ended December 31, 2013.2016 and 2015.

Noninterest income decreased $405$104 million from the year ended December 31, 2013 as a result of2015 driven by decreases in mortgage banking net revenue of $383 million and other noninterest income. Mortgage banking net revenue decreased $64 million from the year ended December 31, 2015 primarily driven by a $79 million decrease in net mortgage servicing revenue partially offset by a $15 million increase in mortgage origination fees and gains on loan sales. Other noninterest income decreased $40 million from the year ended December 31, 2015 primarily due to a $37 million gain on the sale of $22 million.residential mortgage loans held for sale classified as TDRs in the first quarter of 2015.

Noninterest expense increased $35 million from the year ended December 31, 2015 driven by increases in other noninterest expense and personnel costs. Other noninterest expense increased $25 million from the year ended December 31, 2015 primarily driven by increases in operational losses and corporate overhead allocations. Personnel costs increased $10 million from the year ended December 31, 2015 primarily driven by increases in base compensation and variable compensation.

 

 

4753  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The decrease in mortgage banking net revenue was due to a $293 million decline in mortgage origination feesAverage consumer loans and gains on loan sales due to a decline in mortgage originations and a $90 million decrease in net mortgage servicing revenue. The decrease in other noninterest income was primarily due to a $16 million decrease in securities gains.

Noninterest expense decreased $131 million due to decreases of $100 million in personnel costs andleases increased $31 million in other noninterest expense from the year ended December 31, 2013. The decrease in personnel costs was primarily the result of lower2015. Average residential mortgage loan originations. The decrease in other noninterest expense was primarily due to decreases in loan and lease expense and corporate overhead allocations.

Average consumer loans, and leases decreasedincluding held for sale, increased $1.3 billion from the year ended December 31, 2013. Average residential mortgage2015 primarily driven by the continued

retention of certain agency conforming ARMs and certain other fixed-rate loans. Average automobile loans decreased $1.4$1.2 billion from the year ended December 31, 2013 due primarily to a decline of $1.5 billion in average residential mortgage loans held for sale from reduced origination volumes driven by a reduction in refinance activity and the exit of the broker origination channel during 2014. This decrease was partially offset by the continued retention of certain shorter term residential mortgage loans originated through the Bancorp’s retail branches and the decision to retain certain conforming ARMs and certain other fixed-rate loans originated during the year ended December 31, 2014. Average home equity loans decreased $76 million from the year ended December 31, 20132015 as payoffs exceeded new loan production. Average automobile loans increased $108 million from the year ended December 31, 2013 due to new originations exceeding run-off.

 

Investment AdvisorsWealth and Asset Management

Investment AdvisorsWealth and Asset Management provides a full range of investment alternatives for individuals, companies andnot-for-profit organizations. Investment AdvisorsWealth and Asset Management is made up of fourfive main businesses: FTS, an indirect wholly-owned subsidiary of the Bancorp; ClearArc Capital, Inc., an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Insurance Agency, Inc., an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Private Bank; and Fifth Third Institutional Services. FTS offers

offers full-service retail brokerage services to individual clients and broker dealerbroker-dealer services to the institutional marketplace. ClearArc Capital, Inc. provides asset management services. Fifth Third Insurance Agency, Inc. assists clients with their financial and risk management needs. Fifth Third Private Bank offers holistic strategies to affluent clients in wealth planning, investing, insurance and wealth protection. Fifth Third Institutional Services provides advisory services for institutional clients including states and municipalities.

 

 

The following table contains selected financial data for the Investment AdvisorsWealth and Asset Management segment:

 

TABLE 22: INVESTMENT ADVISORS

          

TABLE 22: WEALTH AND ASSET MANAGEMENT

          

 

 
For the years ended December 31 ($ in millions)  2015       2014      2013          2017       2016      2015        

 

 

Income Statement Data

                    

Net interest income

  $128       121       154          $154      168      128       

Provision for loan and lease losses

   3       3       2           6      1      3       

Noninterest income:

                    

Investment advisory revenue

   406       397       384        

Wealth and asset management revenue

   407      391      406       

Other noninterest income

   12       13       22           12      8      12       

Noninterest expense:

                    

Personnel costs

   170       162       159           181      168      170       

Other noninterest expense

   285       283       294           273      254      285       

 

 

Income before income taxes

   88       83       105           113      144      88       

Applicable income tax expense

   30       29       37           39      51      30       

 

 

Net income

  $58       54       68          $74      93      58       

 

 

Average Balance Sheet Data

                    

Loans and leases, including held for sale

  $      2,805       2,270       2,014          $      3,277      3,135      2,805       

Core deposits

   9,357       9,535       8,815           8,782      8,554      9,357       

 

 

 

Comparison of the year ended 20152017 with 20142016

Net income was $58$74 million for the year ended December 31, 20152017 compared to net income of $54$93 million for the year ended December 31, 2014.2016. The increasedecrease in net income was primarily due to increasesdriven by an increase in noninterest expense and a decrease in net interest income and noninterest income partially offset by an increase in noninterest expense.income.

Net interest income increased $7decreased $14 million from the year ended December 31, 20142016 primarily due to to increases in FTP charge rates on loans and leases as well as increases in the rates paid on interest checking deposits. These negative impacts were partially offset by increases in interest income on loans and leases and FTP credits on demand deposits both due toas a result of increases in yields and average balances as well asbalances. The decrease was also partially offset by an increase in FTP credits on interest checking deposits due to an increase in FTP credit rates. These increases were partially offset by increases on FTP charges on loansand savings and money market deposits.

Provision for loan and leases driven by increases in average balances.

        Noninterest incomelosses increased $8$5 million from the year ended December 31, 20142016 primarily due to a $9 milliondriven by an increase in investment advisory revenue driven by increases in recurring securities brokerage feesnet charge-offs on commercial and private client service fees.industrial loans.

Noninterest expenseincome increased $10$20 million from the year ended December 31, 2014 primarily2016 due to increases in personnel costs due to higher incentive compensationwealth and base compensation.

Average loansasset management revenue and leasesother noninterest income. Wealth and asset management revenue increased $535$16 million from the year ended December 31, 20142016 primarily due to an increase in private client service fees driven by increasesan increase in average residential mortgage loans and average other consumer loansassets under management as a result of increasesstrong market performance and the impact of an acquisition in new loan origination activity partially offset by a decrease in average home equity loans as payoffs exceeded new loan production.

Average core deposits decreased $178the second quarter of 2017. Other noninterest income increased $4 million from the year ended December 31, 20142016 driven by an increase in insurance income as a result of acquisitions in the first and fourth quarters of 2017.

Noninterest expense increased $32 million from the year ended December 31, 2016 due to increases in other noninterest expense and personnel costs. Other noninterest expense increased $19 million from the year ended December 31, 2016 driven by an increase in corporate overhead allocations. Personnel costs increased $13 million from the year ended December 31, 2016 due to higher base compensation primarily driven by the aforementioned acquisitions completed during 2017 as well as higher incentive compensation.

Average loans and leases increased $142 million from the year ended December 31, 2016 driven by an increase in average residential mortgage loans due to increases in new loan origination activity. This increase was partially offset by a decline in average home equity balances.

Average core deposits increased $228 million from the year ended December 31, 2016 primarily due to a decreaseincreases in average interest checking balances partially offset by increases indeposits and average savings and money market deposits and average demand deposits.

Comparison of the year ended 20142016 with 20132015

Net income was $54$93 million for the year ended December 31, 20142016 compared to net income of $68$58 million for the year ended December 31, 2013.2015. The decreaseincrease in net income was primarily due todriven by an increase in net interest income as well as a decrease in net interest incomenoninterest expense partially offset by a decrease in noninterest expense and an increase in noninterest income.

Net interest income decreased $33 million from the year ended December 31, 2013 primarily due to a decrease in the FTP credit rate on certain interest checking deposits.

 

 

48  Fifth Third Bancorp

54  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

NoninterestNet interest income increased $4$40 million from the year ended December 31, 20132015 primarily due to a $13 millionan increase in investment advisory revenue primarilyFTP credit rates on core deposits and an increase in interest income on loans and leases driven by an increase of $12 million in private client services revenue due to growth in personal asset management fees partially offset by a decrease in securities broker fees due to a decline in transactional brokerage revenue.average balances on average residential mortgage loans and average other consumer loans and leases as well as higher yields on average commercial and industrial loans and average other consumer loans and leases. This increase was partially offset by a $9 million decreasean increase in other noninterest income as other noninterest incomeFTP charges on loans and leases driven by an increase in the prior year included gains on the sale of certain advisory contracts.average balances.

Noninterest expenseProvision for loan and leases losses decreased $8$2 million from the year ended December 31, 2013 primarily due to a decrease in other noninterest

expense driven by decreases in operational losses, marketing expense and corporate overhead allocations.2015.

Average loans and leases increased $256Noninterest income decreased $19 million from the year ended December 31, 20132015 primarily due to a $15 million decrease in wealth and asset management revenue driven by a $15 million decrease in securities and brokerage fees as a result of lower transactional fees partially offset by an increase in managed accountfee-based business.

Noninterest expense decreased $33 million from the year ended December 31, 2015 primarily driven by a $31 million decrease in other noninterest expense primarily due to a decrease in corporate overhead allocations partially offset by an increase in operational losses.

Average loans and leases increased $330 million from the year ended December 31, 2015 primarily due to increases in average residential mortgage loans and average commercial mortgageother consumer loans partially offsetdriven by a decreaseincreases in average home equity loans.new loan origination activity.

Average core deposits increased $720decreased $803 million from the year ended December 31, 20132015 primarily due to growtha decline in average interest checking balances as customers have opted to maintain excess fundspartially offset by an increase in liquid transaction accounts as a result of interest rates remaining near historic lows.average savings and money market deposits.

General Corporate and Other

General Corporate and Other includes the unallocated portion of the investment securities portfolio, securities gains and losses, certainnon-core deposit funding, unassigned equity, unallocated provision expense in excess of net charge-offs or a benefit from the reduction of the ALLL, representation and warranty expense in excess of actual losses or a benefit from the reduction of representation and warranty reserves, the payment of preferred stock dividends and certain support activities and other items not attributed to the business segments.

Comparison of the year ended 20152017 with 20142016

Net interest income decreased $24increased $254 million from the year ended December 31, 20142016 primarily due to increases in FTP credits on deposits allocated to business segments driven by increases in average deposits. The remaining decrease in net interest income was due to an increase in interest expense on long-term debt and a decrease in the benefit related to the FTP charges on loans and leases as well as an increase in interest income on taxable securities. These positive impacts were partially offset by increases in FTP credit rates on deposits allocated to the business segments, a decrease in interest income on loans and leases as well as an increase in interest expense on long-term debt.

Provision for loan and leases losses decreased $60 million from the year ended December 31, 2016 primarily due to a reduction in the benefit for criticized assets allocated to the business segments coupled with an increase in the benefit from the reduction in the ALLL.

Noninterest income increased $643 million from the year ended December 31, 2016 primarily driven by the recognition of a $1.0 billion gain on the sale of Vantiv, Inc. shares during the third quarter of 2017. The increase was partially offset by the impact of a $280 million gain recognized during the third quarter of 2016 from the termination and settlement of gross cash flows from the existing Vantiv, Inc. TRA and the expected obligation to terminate and settle the remaining Vantiv, Inc. TRA cash flows upon the exercise of put or call options. This termination did not impact the TRA payments of $44 million and $33 million recognized in 2017 and 2016, respectively. The year ended December 31, 2016 also included positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC of $64 million. The stock warrant was not outstanding during 2017 as the Bancorp exercised the remaining warrant in Vantiv Holding, LLC during the fourth quarter of 2016

and recognized a gain of $9 million. The increase in noninterest income from December 31, 2016 was partially offset by negative valuation adjustments related to the Visa total return swap of $80 million for the year ended December 31, 2017 compared with $56 million for the prior year. Additionally, equity method earnings from the Bancorp’s interest in Vantiv Holding, LLC decreased $19 million from the year ended December 31, 2016. Noninterest income for the year ended December 31, 2016 also included a gain of $11 million on the sale-leaseback of an office complex during the third quarter of 2016.

Noninterest expense decreased $6 million from the year ended December 31, 2016. The decrease was primarily due to increases in corporate overhead allocations from General Corporate and Other to the other business segments and decreases in the provision for the reserve for unfunded commitments partially offset by increases in personnel costs and technical and communications expense.

Comparison of the year ended 2016 with 2015

Net interest income decreased $260 million from the year ended December 31, 2015 primarily driven by an increase in FTP credits on deposits allocated to business segments primarily due to an increase in FTP credit rates as well as an increase in interest expense on long-term debt. This decrease in net interest income was partially offset by an increase in interest income on taxable securities. Resultssecurities and an increase in the benefit related to the FTP charges on loans and leases. The provision for the year ended December 31, 2015 were impacted by a benefit of $50 million compared to a benefit of $260loan and leases losses was $84 million for the year ended December 31, 2014 due2016 compared to reductions in the ALLL.

Noninterest income was $822a benefit of $100 million for the year ended December 31, 2015 comparedprimarily due to $253decreases in the allocation of provision expense to the business segments.

Noninterest income decreased $359 million for the year endedfrom December 31, 2014.2015. The increase in noninterest incomedecrease included the impact of a gain of $331 million on the sale of Vantiv, Inc. shares in the fourth quarter of 2015 compared to a gain of $125 million in 2014. The positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC were $236 million and $31 million for the years ended December 31, 2015 and 2014, respectively. During the fourth quarter of 2015, the Bancorp recognized a gain of $89 million on both the sale and exercise of a portion of the warrant associated with Vantiv Holding, LLC. Additionally,LLC, both of which were recognized in the fourth quarter of 2015. In 2016, the Bancorp recognized a gain of $49$9 million fromon the payment from Vantiv, Inc. to terminate a portionexercise of a TRA and also recognized a gain of $31 million associatedthe remaining warrant with the annual TRA payment during the fourth quarter of 2015. The Bancorp recognized a gain of $23 million associated with the TRA during the fourth quarter of 2014. Equity method earnings from the Bancorp’s interest in Vantiv Holding, LLC increased $15 million fromLLC. The decrease was also due to the year ended December 31, 2014. Noninterest income also included $37 million in negative valuation adjustmentsadjustment related to the Visa total return swap for the year ended December 31, 2015 compared to $38of $56 million for the year ended December 31, 2014.

Noninterest expense for the year ended December 31, 2015 was an expense of $64 million2016 compared to a benefit of $15with $37 million for the year ended December 31, 2014. The increase was primarily due to an increase in personnel costs and an increase inprior year. In addition, the provision for the reserve for unfunded commitments as well as increases in FDIC insurance and other taxes, donations expense, technology and communications expense and marketing expense.

The increase was partially offset by decreased litigation and regulatory activity and increased corporate overhead allocations from General Corporate and Other to the other business segments.

Comparison of the year ended 2014 with 2013

Net interest income decreased $146 million from the year ended December 31, 2013 primarily due to increases in FTP credits on deposits allocated to business segments driven by increases in average deposits. The remaining decrease in net interest income was due to an increase in interest expense on long-term debt and a decrease in the benefit related to the FTP charges on loans and leases partially offset by an increase in interest income on taxable securities. Results for the year ended December 31, 2014 were impacted by a benefit of $260 million compared to a benefit of $272 for the year ended December 31, 2013 due to reductions in the ALLL.

Noninterest income was $253 million for the year ended December 31, 2014 compared to $654 million for the year ended December 31, 2013. The year ended December 31, 2014 included the impact of a gain of $125 million on the sale of Vantiv, Inc. shares in the second quarter of 2014 compared to gains totaling $327 million during the second and third quarters of 2013. The Bancorp also recognized gains of $23 million and $9 million associated with a TRA with Vantiv, Inc. in the fourth quarter of 2014 and 2013, respectively. The positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC were $31 million and $206$64 million for the yearsyear ended December 31, 20142016 compared to the positive valuation adjustments of $236 million during the year ended December 31, 2015. The decrease in noninterest income was partially offset by a $280 million gain recognized during the third quarter of 2016 from the termination and 2013, respectively.settlement of gross cash flows from existing Vantiv, Inc. TRAs and the expected obligation to terminate and settle the remaining Vantiv, Inc. TRA cash flows upon the exercise of put or call options compared with a $49 million gain recognized by the Bancorp in 2015 for the payment from Vantiv, Inc. to terminate a portion of the Vantiv, Inc. TRA. Noninterest income for the year ended December 31, 2016 also included a gain of $11 million on the sale-leaseback of an office complex during the third quarter of 2016 and a gain of $33 million associated with the annual TRA payment during the fourth quarter of 2016 compared to a $31 million gain during the prior year. Additionally, the equity method earnings from the Bancorp’s interest in Vantiv Holding, LLC decreased $29increased $3 million from December 31, 2015.

Noninterest expense was $90 million and $62 million for the yearyears ended December 31, 2013. Noninterest income also included $38 million2016 and 2015, respectively. The increase was primarily due to increases in negative valuation adjustments related topersonnel costs and the Visa total return swapprovision for the year ended December 31, 2014 compared to $31 millionreserve for the year ended December 31, 2013.

Noninterest expense for the year ended December 31, 2014 was a benefit of $15 million compared to an expense of $161 million for the year ended December 31, 2013. The decrease was driven by decreases in compensation expense, FDIC insurance and other taxes and litigation and regulatory activityunfunded commitments partially offset by a decreasean increase in the benefit from other noninterest expense driven by decreased corporate overhead allocations from General Corporate and Other to the other business segments.

 

 

4955  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FOURTH QUARTER REVIEW

 

The Bancorp’s 20152017 fourth quarter net income available to common shareholders was $634$486 million, or $0.79$0.67 per diluted share, compared to net income available to common shareholders of $366$999 million, or $0.45$1.35 per diluted share, for the third quarter of 20152017 and net income available to common shareholders of $362$372 million, or $0.43$0.49 per diluted share, for the fourth quarter of 2014.2016.

Net interest income on an FTE basis was $904$963 million during the fourth quarter of 20152017 and decreased $2$14 million from the third quarter of 20152017 and increased $16$54 million from the fourth quarter of 2014.2016. The decrease from the third quarter of 20152017 was primarily driven by a $27 million reduction due to the impactremeasurement related to the tax treatment of leveraged leases resulting from the issuance of $2.4 billion of long-term debt during the third quarter of 2015, the $750 million auto securitization completed in November of 2015 and commercial loan yield compression,TCJA, partially offset by higher average loan balances.an increase in yields on interest-earnings assets. The increase in net interest income in comparison to the fourth quarter of 20142016 was primarily driven by higher investment securities balances,an increase in short-term market rates and the impact of a $16 million reduction in interest income related to estimated refunds to be offered to certain bankcard customers during the fourth quarter of 2016, partially offset by a decline due to changes to the Bancorp’s deposit advance product beginning January 1, 2015.aforementioned leveraged lease remeasurement.

Fourth quarter 20152017 noninterest income of $1.1 billion increased $391$577 million decreased $984 million compared to the third quarter of 20152017 and increased $451decreased $43 million compared to the fourth quarter of 2014.2016. The increasedecrease from the third quarter of 20152017 was primarily due to an increasedecreases in other noninterest income.income, corporate banking revenue and mortgage banking net revenue. The year-over-year increasedecrease was primarily the result of increasesdecreases in corporate banking revenue, other noninterest income and mortgage banking net revenue, partially offset by lower corporate banking revenue.

Service charges on deposits of $144$138 million decreased $1 million from the previous quarter and increased $2 million compared to the fourth quarter of 2014. The decrease from the third quarter of 2015 was primarily due to a decrease in retail service charges due to lower overdraft occurrences. The increase from the fourth quarter of 2014 was driven by an increase in commercial service charges due to an increase in activity from existing customers and new customer acquisition.

Corporate banking revenue of $104 million waswere flat compared to the previous quarter and decreased $16$3 million compared to the fourth quarter of 2016. The decrease from the fourth quarter of 2014. The year-over-year decrease2016 was driven by lower loan syndications revenue, foreign exchange fees and business lending fees, partially offset by higher lease remarketing and institutional sales revenue. Thea decrease in syndication fees fromcommercial deposit fees.

Corporate banking revenue of $77 million decreased $24 million compared to both the third quarter of 2017 and the fourth quarter of 20142016. The decrease compared to both the third quarter of 2017 and the fourth quarter of 2016 was primarily driven by the resultimpact of decreased activity$25 million of impairment charges related to certain operating lease assets in the market and the Bancorp’s reduced leveraged loan appetite.fourth quarter of 2017.

Mortgage banking net revenue was $74$54 million in the fourth quarter of 20152017 compared to $71$63 million in the third quarter of 20152017 and $61$65 million in the fourth quarter of 2014.2016. The decrease in mortgage banking net revenue compared to the third quarter of 2017 was driven by lower origination fees and gains on loan sales. The decrease from the prior year was driven by negative valuation adjustments (including MSR amortization). Fourth quarter 20152017 originations were $1.8$1.9 billion, compared with $2.3$2.1 billion in the previous quarter and $1.7$2.7 billion in the fourth quarter of 2014.2016. Fourth quarter 20152017 originations resulted in gains of $37$32 million on mortgages sold, compared with gains of $46$40 million during the previous quarter and $36$30 million during the fourth quarter of 2014. The decrease from the prior quarter was driven by lower production due to an increase in interest rates during the fourth quarter of 2015. The increase from the prior year was due to stronger refinancing activity during the fourth quarter of 2015.2016. Gross mortgage servicing fees were $53$54 million in the fourth quarter of 2015, $542017, $56 million in the third quarter of 20152017 and $60$48 million in the fourth quarter of 2014.2016. Mortgage banking net revenue is also affected by net servicing asset valuation adjustments, which include MSR amortization and MSR valuation adjustments, including adjustments due to changes to prepayment speeds, OAS spread assumptions and the passage of time andmark-to-market adjustments on free-standing derivatives used to economically hedge the MSR portfolio. These net servicing assetNet negative valuation adjustments were negative $16$32 million and negative $29

$33 million in the fourth and third

quarters of 2015,2017, respectively, and negative $34$13 million in the fourth quarter of 2014.2016.

Investment advisoryWealth and asset management revenue of $102$106 million decreased $1increased $4 million from the previous quarter and increased $2$6 million from the fourth quarter of 2014.2016. The declineincreases from the third quarter of 2015 was due to a decrease in securities2017 and brokerage fees. The year-over-year increase was due tothe fourth quarter of 2016 were primarily driven by an increase in private client services revenue.service fees.

Card and processing revenue of $77$80 million was flat compared toincreased $1 million from both the third quarter of 20152017 and increased $1 million compared to the fourth quarter of 2014.2016. The increase from the prior year was driventhird quarter of 2017 and the fourth quarter of 2016 reflected increased credit card spend volume, partially offset by an increase in the number of actively used cards and an increase in customer spend volume.higher rewards.

Other noninterest income of $602$123 million increased $389decreased $953 million compared to the third quarter of 20152017 and increased $452decreased $14 million from the fourth quarter of 2014. Fourth2016. The decrease from the third quarter 2015 resultsof 2017 included the impact of a $331 million$1.0 billion gain on the sale of Vantiv, Inc. shares an $89 million gain on both the sale and exercise of a portion of the warrant associated with Vantiv, Holding, LLC, a $49 million gain from a payment received from Vantiv, Inc. to terminate a portion of the TRA, a $31 million gain from Vantiv, Inc. pursuant to the TRA and a $21 million positive valuation adjustment on the Vantiv Holding, LLC warrant. This compares with a $130 million positive warrant valuation adjustment inrecognized during the third quarter of 2015, and2017, partially offset by a $56gain of $44 million positive warrant valuation adjustment in the fourth quarter of 2014 as well as $23 million in gains pursuant to Fifth Third’s TRA with Vantiv, Holding, LLCInc. recognized in the fourth quarter of 2014.2017. Quarterly results also included charges related tovaluation adjustments on the valuation of theVisa total return swap entered into as partwhich were charges of the 2009 sale of Visa, Inc. Class B shares. Negative valuation adjustments on this swap were $10 million, $8$11 million and $19$47 million in the fourth and third quarter of 2017, respectively, and a benefit of $6 million in the fourth quarter of 2015, the third2016. Fourth quarter of 20152016 also included a gain of $33 million pursuant to Fifth Third’s TRA with Vantiv, Inc. and a gain of $9 million on the fourth quarterexercise of 2014, respectively.the remaining warrant in Vantiv Holding, LLC.

The net gains on investment securities were $1 million induring the fourth quarter of 20152017 compared to an immaterial amount in the third quarter of 2017 and $4net losses of $3 million induring the fourth quarter of 2014. There2016. Net losses on securities held asnon-qualifying hedges for MSRs were no$2 million during the fourth quarter of 2017 compared to net gains on investment securitiesof $2 million during the third quarter of 2015.2017 and zero during the fourth quarter of 2016.

Noninterest expense of $963 million$1.1 billion increased $20$98 million from the previous quarter and increased $45$113 million from the fourth quarter of 2014.2016. The increaseincreases in noninterest expense compared to both the third quarter of 2015 was2017 and the fourth quarter of 2016 were primarily driven by increases in other noninterest expense and personnel costs. The increases in other noninterest expense from the third quarter of 2017 and the fourth quarter of 2016 were driven by increases of $62 million and $63 million, respectively, in impairment on affordable housing investments and a $10$15 million contribution made to the Fifth Third Foundation and higher net occupancy expense.during the fourth quarter of 2017. The increase in noninterest expense from both the third quarter of 2017 and fourth quarter of 2014 was primarily due to a $10 million contribution2016 also included an increase in personnel costs related to the Fifth Third Foundation, higher personnel costs, net occupancy expense and technology and communications expense.impact ofone-time employee bonuses of $15 million that the Bancorp paid as a result of benefits received from the TCJA.

The ALLL as a percentage of portfolio loans and leases was 1.37%1.30% as of December 31, 2015,2017, compared to 1.35%1.31% as of September 30, 20152017 and 1.47%1.36% as of December 31, 2014.2016. The provision for loan and lease losses was $91$67 million in both the fourth and third quarters of 2017 compared to $54 million in the fourth quarter of 2015 compared to $156 million in the third quarter of 2015 and $992016. Net lossescharged-off were $76 million in the fourth quarter of 2014. Net charge-offs were $80 million in the fourth quarter of 2015,2017, or 3433 bps of average portfolio loans and leases on an annualized basis, compared with net charge-offslossescharged-off of $188$68 million in the third quarter of 20152017 and $191$73 million in the fourth quarter of 2014. The third quarter of 2015 included a charge-off of $102 million associated with the restructuring of a student loan backed commercial credit originated in 2007. During the fourth quarter of 2014, the Bancorp transferred certain residential mortgage loans from the portfolio to held for sale resulting in a charge-off of $87 million.2016.

 

 

5056  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

TABLE 23: QUARTERLY INFORMATION (unaudited)TABLE 23: QUARTERLY INFORMATION (unaudited)                                          TABLE 23: QUARTERLY INFORMATION (unaudited)                                         
  2015    2014   2017   2016

For the three months ended ($ in millions, except per share data)

            12/31       9/30       6/30       3/31      12/31      9/30      6/30      3/31       12/31      9/30      6/30      3/31    12/31      9/30(b)       6/30(b)       3/31(b) 

Net interest income(a)(b)

    $ 904        906        892        852       888       908       905       898   $  963       977       945       939     909      913      908      909 

Provision for loan and lease losses

    91        156        79        69       99       71       76       69     67       67       52       74     54      80      91      119 

Noninterest income

    1,104        713        556        630       653       520       736       564     577       1,561       564       523     620      840      599      637 

Noninterest expense

    963        943        947        923       918       888       954       950     1,073       975       957       986     960      973      983      986 

Net income attributable to Bancorp

    657        381        315        361       385       340       439       318     509       1,014       367       305     395      516      328      326 

Net income available to common shareholders

    634        366        292        346       362       328       416       309     486       999       344       290     372      501      305      311 

Earnings per share, basic

    0.80        0.46        0.36        0.42       0.44       0.39       0.49       0.36     0.68       1.37       0.46       0.38     0.49      0.66      0.40      0.40 

Earnings per share, diluted

    0.79        0.45        0.36        0.42       0.43       0.39       0.49       0.36    0.67       1.35       0.45       0.38     0.49      0.65      0.39      0.40 
(a)

Amounts presented on an FTE basis. The FTE adjustment was$57for all periods presented.both the three months endedDecember 31, 2017 andSeptember 30, 2017 and $6for both the three months endedJune 30, 2017,March 31, 2017 and each period presented during the year ended December 31, 2016.

(b)

Net tax deficiencies of $1 million, $5 million and $0 were reclassified from capital surplus to applicable income tax expense at March 31, 2016, June 30, 2016 and September 30, 2016, respectively, related to the early adoption of ASU2016-09 during the fourth quarter of 2016, with an effective date of January 1, 2016.

 

COMPARISON OF THE YEAR ENDED 20142016 WITH 20132015

The Bancorp’s net income available to common shareholders for the year ended December 31, 20142016 was $1.4$1.5 billion, or $1.66$1.93 per diluted share, which was net of $67$75 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the year ended December 31, 20132015 was $1.8$1.6 billion, or $2.02$2.01 per diluted share, which was net of $37$75 million in preferred stock dividends.

The provision for loan and lease losses increaseddecreased to $315$343 million during the year ended December 31, 20142016 compared to $229$396 million during the year ended December 31, 2013 as the result of an increase in net charge-offs related to certain impaired commercial and industrial loans and an increase in net charge-offs loans related2015 primarily due to the transferdecrease in the level of certain residential mortgage loans fromcommercial criticized assets, which reflected improvement in the portfolio to held for sale during 2014. The impactnational economy and stabilization of these increasescommodity prices, and a decrease in charge-offs on provision expense during the year ended December 31, 2014 was partially offset by decreases in nonperforming loans and leases and improved delinquency metrics.outstanding loan balances. Net charge-offslossescharged-off as a percent of average portfolio loans and leases increaseddecreased to 0.64% during 2014 compared to 0.58%0.39% during the year ended December 31, 2013.2016 compared to 0.48% during the year ended December 31, 2015.

Net interest income on an FTE basis(non-GAAP) was $3.6 billion for both of the years ended December 31, 20142016 and 2013.2015. For the year ended December 31, 2014,2016, net interest income was positively impacted by an increaseincreases in average taxable securities of $5.4$3.1 billion coupled with an increase in yields on these securities of 16 bps compared to the year ended December 31, 2013. Net interest income also included the benefit of an increase inand average loans and leases of $2.0 billion as well as a decrease in the rates paid on long-term debt for the year ended December 31, 2014 compared to the year ended December 31, 2013. These benefits were partially offset by lower yields on loans and leases and an increase in average long-term debt of $5.0 billion for the year ended December 31, 2014 compared to the year ended December 31, 2013.

        Noninterest income decreased $754 million during the year ended December 31, 2014 compared to the year ended December 31, 2013. The decrease from December 31, 2013 was primarily due to decreases in mortgage banking net revenue and other noninterest income. Mortgage banking net revenue decreased $390 million for the year ended December 31, 2014 compared to 2013 primarily due to decreases in origination fees and gains on loan sales and net mortgage servicing revenue. Other noninterest income decreased $429$981 million compared to the year ended December 31, 2013.2015. Additionally, net interest income was positively impacted by the decision of the Federal Open Market Committee to raise the target range of the federal funds rate 25 bps to 50 bps in 2015 and 25 bps to 75 bps in 2016. These positive impacts were partially offset by an increases in average long-term debt of $750 million coupled with a decrease in the net interest rate spread to 2.66% during the year ended December 31, 2016 from 2.69% during the year ended December 31, 2015. Net interest margin on an FTE basis(non-GAAP) was 2.88% for both the years ended December 31, 2016 and 2015, respectively.

Noninterest income decreased $307 million from the year ended December 31, 2015 primarily due to decreases in other noninterest income and mortgage banking net revenue, partially offset by an increase in corporate banking revenue. Other noninterest income decreased $291 million from the year ended December 31, 2015. The decrease included the impact of a gain of $125$331 million on the sale of Vantiv, Inc. shares in the secondfourth quarter of 2014, compared to gains totaling $327 million during the second and third quarters of 2013.2015. The Bancorp recognized gains of $23 million and $9 million associated with the TRA with Vantiv, Inc. in the fourth quarters of 2014 and 2013, respectively. Additionally, other noninterest income decreased for the year ended December 31, 2014 compared to 2013 primarily due to positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC of $31$64 million and $236 million for the years ended December 31, 2016 and 2015, respectively. In addition to the valuation adjustments, during 2014the fourth quarter of 2015, the Bancorp recognized a gain of $89 million on both the sale and exercise of a portion of the warrant

compared to positive valuation adjustments of $206 million during 2013 and a decrease in equity method earnings fromassociated with Vantiv Holding, LLC.

Noninterest expense decreased $252LLC compared with a gain of $9 million on the sale of the remaining warrant in Vantiv Holding, LLC during the same period in 2016. These decreases were partially offset by an increase in income from the TRAs associated with Vantiv, Inc. of $233 million during the year ended December 31, 20142016 compared to 2013 primarily due to decreases in total personnel costs and other noninterest expense. The decrease in total personnel costs was driven by a decrease in incentive compensation primarilythe same period in the mortgage business due to lower production levelsprior year and a decrease in base compensationnet losses on disposition and employee benefits as a resultimpairment of a decline in the numberbank premises and equipment of full-time equivalent employees. Other noninterest expense decreased$88 million during the year ended December, 31 20142016 compared to 2013with the same period in the prior year. Mortgage banking net revenue decreased $63 million from the year ended December 31, 2015 primarily due to decreasesa decrease in loan and lease expense, FDIC insurance and other taxes, losses and adjustments, marketing expense, debt extinguishment costs and an increase in the benefit from the reserve for unfunded commitments,net mortgage servicing revenue, partially offset by an increase in origination fees and gains on loan sales. Corporate banking revenue increased $48 million for the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily driven by increases in syndication fees and lease remarketing fees, partially offset by decreases in letter of credit fees and foreign exchange fees.

Noninterest expense increased $128 million during the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily due to increases in personnel costs, technology and communications expense and other noninterest expense partially offset by decreases in net occupancy expense and card and processing expense. Personnel costs increased $103 million for the year ended December 31, 2016 compared to the year ended December 31, 2015 driven by an increase in base compensation, variable compensation and higher retirement and severance costs related to the Bancorp’s voluntary early retirement program. Technology and communications expense increased $10 million for the year ended December 31, 2016 compared to the year ended December 31, 2015 driven primarily by increased investment in information technology associated with regulatory and compliance initiatives, system maintenance, and other growth initiatives. Other noninterest expense increased $64 million for the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily due to increases in FDIC insurance and other taxes, impairment on affordable housing investments.investments, the provision for the reserve for unfunded commitments, losses and adjustments and operating lease expense. These increases were partially offset by decreases in travel expense, professional service fees and loan and lease expense. Card and processing expense decreased $21 million for the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily due to the impact of renegotiated service contracts.

 

 

51  Fifth Third Bancorp

57  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

BALANCE SHEET ANALYSIS

 

Loans and Leases

The Bancorp classifies its commercial loans and leases based upon their primary purpose and consumer loans and leases based upon product or collateral. Table 24 summarizes end of period loans and leases,

leases, including loans and leases held for sale and Table 25 summarizes average total loans and leases, including loans and leases held for sale.

 

 

TABLE 24: COMPONENTS OF TOTAL LOANS AND LEASES (INCLUDING HELD FOR SALE)

  

 

 
As of December 31 ($ in millions)  2015   2014   2013   2012   2011     

 

 

Commercial loans and leases:

          

Commercial and industrial loans

  $42,151         40,801         39,347         36,077         30,828      

Commercial mortgage loans

   6,991     7,410     8,069     9,116     10,214      

Commercial construction loans

   3,214     2,071     1,041     707     1,037      

Commercial leases

   3,854     3,721     3,626     3,549     3,531      

 

 

Total commercial loans and leases

   56,210     54,003     52,083     49,449     45,610      

 

 

Consumer loans and leases:

          

Residential mortgage loans

   14,424     13,582     13,570     14,873     13,474      

Home equity

   8,336     8,886     9,246     10,018     10,719      

Automobile loans

   11,497     12,037     11,984     11,972     11,827      

Credit card

   2,360     2,401     2,294     2,097     1,978      

Other consumer loans and leases

   658     436     381     312     364      

 

 

Total consumer loans and leases

   37,275     37,342     37,475     39,272     38,362      

 

 

Total loans and leases

  $        93,485     91,345     89,558     88,721     83,972      

 

 

Total portfolio loans and leases (excluding loans held for sale)

  $92,582     90,084     88,614     85,782     81,018      

 

 

TABLE 24: COMPONENTS OF TOTAL LOANS AND LEASES (INCLUDING LOANS AND LEASES HELD FOR SALE)

As of December 31 ($ in millions)  2017   2016   2015   2014   2013     

 

 

Commercial loans and leases:

          

Commercial and industrial loans

  $41,170        41,736        42,151        40,801        39,347     

Commercial mortgage loans

   6,610    6,904    6,991    7,410    8,069     

Commercial construction loans

   4,553    3,903    3,214    2,071    1,041     

Commercial leases

   4,068    3,974    3,854    3,721    3,626     

 

 

Total commercial loans and leases

   56,401    56,517    56,210    54,003    52,083     

 

 

Consumer loans and leases:

          

Residential mortgage loans

   16,077    15,737    14,424    13,582    13,570     

Home equity

   7,014    7,695    8,336    8,886    9,246     

Automobile loans

   9,112    9,983    11,497    12,037    11,984     

Credit card

   2,299    2,237    2,360    2,401    2,294     

Other consumer loans and leases

   1,559    680    658    436    381     

 

 

Total consumer loans and leases

   36,061    36,332    37,275    37,342    37,475     

 

 

Total loans and leases

  $        92,462    92,849    93,485    91,345    89,558     

 

 

Total portfolio loans and leases (excluding loans and leases held for sale)

  $91,970    92,098    92,582    90,084    88,614     

 

 

 

Loans and leases, including loans and leases held for sale, decreased $387 million from December 31, 2016. The decrease from December 31, 2016 was the result of a $271 million, or 1%, decrease in consumer loans and leases and a $116 million decrease in commercial loans and leases.

Consumer loans and leases decreased from December 31, 2016 primarily due to decreases in automobile loans and home equity, partially offset by increases in other consumer loans and leases, residential mortgage loans and credit card. Automobile loans decreased $871 million, or 9%, from December 31, 2016 as payoffs exceeded new loan production due to a strategic shift focusing on improving risk-adjusted returns. Home equity decreased $681 million, or 9%, from December 31, 2016 as payoffs exceeded new loan production. Other consumer loans and leases increased $2.1 billion,$879 million from December 31, 2016 primarily due to growth inpoint-of-sale loan originations. Residential mortgage loans increased $340 million, or 2%, from December 31, 2014. The increase in2016 primarily due to the continued retention of certain agency conforming ARMs and certain other fixed-rate loans and leases fromoriginated during the year ended December 31, 2014 was2017. Credit card increased $62 million, or 3%, from

December 31, 2016 due to increases in customer accounts and the average balance per active customer as a result of a $2.2 billion, or 4%, increasenew product that launched in commercial loans and leases partially offset by a $67 million decrease in consumer loans and leases.the fourth quarter of 2016.

Commercial loans and leases increaseddecreased from December 31, 20142016 primarily due to increasesdecreases in commercial and industrial loans and commercial constructionmortgage loans, partially offset by a decreaseincreases in commercial mortgage loans.constructions loans and commercial leases. Commercial and industrial loans increased $1.4 billion,decreased $566 million, or 3%1%, from December 31, 2014 and commercial construction loans increased $1.1 billion, or 55%, from December 31, 20142016 primarily as a result of an increase in newdeliberate exits from certain loans that did not meet the Bancorp’s risk-adjusted profitability targets and softer loan origination activity resulting from an increase in demand and targeted marketing efforts.demand. Commercial mortgage loans decreased $419$294 million, or 6%,4% from December 31, 20142016 primarily due to a

decline in new loan origination activity driven by increased competition and an increase in paydowns.

Consumer Commercial construction loans and leases decreased from December 31, 2014 primarily due to decreases in home equity and automobile loans partially offset by increases in residential mortgage loans and other consumer loans and leases. Home equity decreased $550increased $650 million, or 6%17%, from December 31, 20142016 primarily due to increases in demand and automobile loans decreased $540draw levels on existing commitments. Commercial leases increased $94 million, or 4%2%, from December 31, 2014 as payoffs exceeded new loan production. Residential mortgage loans increased $842 million, or 6%, from December 31, 2014 primarily due to the continued retention of certain conforming ARMs and certain other fixed-rate loans originated during the year ended December 31, 2015. Other consumer loans and leases increased $222 million, or 51%, from December 31, 20142016 primarily as a result of an increase in new loansyndication and participation origination activity.

 

 

TABLE 25: COMPONENTS OF TOTAL AVERAGE LOANS AND LEASES (INCLUDING HELD FOR SALE)

  

 

 
For the years ended December 31 ($ in millions)  2015   2014   2013   2012   2011     

 

 

Commercial loans and leases:

          

Commercial and industrial loans

  $42,594         41,178         37,770         32,911         28,546      

Commercial mortgage loans

   7,121     7,745     8,481     9,686     10,447      

Commercial construction loans

   2,717     1,492     793     835     1,740      

Commercial leases

   3,796     3,585     3,565     3,502     3,341      

 

 

Total commercial loans and leases

   56,228     54,000     50,609     46,934     44,074      

 

 

Consumer loans and leases:

          

Residential mortgage loans

   13,798     13,344     14,428     13,370     11,318      

Home equity

   8,592     9,059     9,554     10,369     11,077      

Automobile loans

   11,847     12,068     12,021     11,849     11,352      

Credit card

   2,303     2,271     2,121     1,960     1,864      

Other consumer loans and leases

   571     385     360     340     529      

 

 

Total consumer loans and leases

   37,111     37,127     38,484     37,888     36,140      

 

 

Total average loans and leases

  $93,339     91,127     89,093     84,822     80,214      

 

 

Total average portfolio loans and leases (excluding loans held for sale)

  $          92,423     90,485     86,950     82,733     78,533      

 

 

Average loans and leases, including loans held for sale, increased $2.2 billion, or 2%, from December 31, 2014. The increase from December 31, 2014 was the result of a $2.2 billion, or 4%, increase in average commercial loans and leases partially offset by a $16 million decrease in average consumer loans and leases.

Average commercial loans and leases increased from December 31, 2014 primarily due to increases in average commercial and industrial loans and average commercial construction loans partially offset by a decrease in average commercial mortgage loans.

TABLE 25: COMPONENTS OF TOTAL AVERAGE LOANS AND LEASES (INCLUDING LOANS AND LEASES HELD FOR SALE)

 

 

 
For the years ended December 31 ($ in millions)  2017   2016   2015   2014   2013     

 

 

Commercial loans and leases:

          

 Commercial and industrial loans

  $41,577        43,184        42,594        41,178        37,770     

 Commercial mortgage loans

   6,844    6,899    7,121    7,745    8,481     

 Commercial construction loans

   4,374    3,648    2,717    1,492    793     

 Commercial leases

   4,011    3,916    3,796    3,585    3,565     

 

 

Total average commercial loans and leases

   56,806    57,647    56,228    54,000    50,609     

 

 

Consumer loans and leases:

          

 Residential mortgage loans

   16,053    15,101    13,798    13,344    14,428     

 Home equity

   7,308    7,998    8,592    9,059    9,554     

 Automobile loans

   9,407    10,708    11,847    12,068    12,021     

 Credit card

   2,141    2,205    2,303    2,271    2,121     

 Other consumer loans and leases

   1,016    661    571    385    360     

 

 

Total average consumer loans and leases

   35,925    36,673    37,111    37,127    38,484     

 

 

Total average loans and leases

  $92,731    94,320    93,339    91,127    89,093     

 

 

Total average portfolio loans and leases (excluding loans and leases held for sale)

  $          92,068    93,426    92,423    90,485    86,950     

 

 

 

5258  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Average commercialloans and industrialleases, including loans increased $1.4and leases held for sale, decreased $1.6 billion, or 3%2%, from December 31, 2014 and average commercial construction loans increased $1.2 billion, or 82%, from December 31, 2014 primarily2016 as a result of an increase in new loan origination activity resulting from an increase in demand and targeted marketing efforts. Average commercial mortgage loans decreased $624$841 million, or 8%1%, from December 31, 2014 due todecrease in average commercial loans and leases and a decline$748 million, or 2%, decrease in new loan origination activity driven by increased competitionaverage consumer loans and an increase in paydowns.leases.

Average consumercommercial loans and leases decreased from December 31, 20142016 primarily due to decreasesa decrease in average home equitycommercial and average automobileindustrial loans, partially offset by increasesan increase in average

residential mortgage commercial construction loans. Average commercial and industrial loans and average other consumer loans and leases. Average home equity decreased $467 million,$1.6 billion, or 5%4%, from December 31, 2014 and average automobile loans decreased $221 million, or 2%, from December 31, 2014 as payoffs exceeded new loan production. Average residential mortgage loans increased $454 million, or 3%, from December 31, 2014 primarily driven by the continued retention of certain conforming ARMs and certain other fixed-rate loans. Average other consumer loans and leases increased $186 million, or 48%, from December 31, 20142016 primarily as a result of an increasedeliberate exits from certain loans that did not meet the Bancorp’s risk-adjusted profitability targets and softer loan demand. Average commercial construction loans increased $726 million, or 20%, from December 31, 2016 primarily due to increases in new loan origination activity.demand and draw levels on existing commitments.

Investment Securities

The Bancorp uses investment securities as a means of managing interest rate risk, providing liquidity support and providingboth collateral for pledging purposes. As of December 31, 2015, totalpurposes and liquidity for satisfying regulatory requirements. Total investment securities were $29.5$32.7 billion compared to $23.0and $31.6 billion at December 31, 2014.2017 and December 31, 2016, respectively. The taxableavailable-for-sale investment securities portfolio had an effective duration of 5.14.7 years at December 31, 20152017 compared to 4.55.0 years at December 31, 2014.2016.

Securities are classified asavailable-for-sale when, in management’s judgment, they may be sold in response to, or in anticipation of, changes in market conditions. Securities that management has the intent and ability to hold to maturity are classified asheld-to-maturity and reported at amortized cost.

Average consumer loans and leases decreased from December 31, 2016 primarily due to decreases in average automobile loans, average home equity and average credit card, partially offset by increases in average residential mortgage loans and average other consumer loans and leases. Average automobile loans decreased $1.3 billion, or 12%, from December 31, 2016 as payoffs exceeded new loan production due to a strategic shift focusing on improving risk-adjusted returns. Average home equity decreased $690 million, or 9%, from December 31, 2016 as payoffs exceeded new loan production. Average credit card decreased $64 million, or 3%, from December 31, 2016 primarily due to elevated paydowns of mature accounts during the first half of 2017. Average residential mortgage loans increased $952 million, or 6%, from December 31, 2016 primarily driven by the continued retention of certain agency conforming ARMs and certain other fixed-rate loans. Average other consumer loans and leases increased $355 million, or 54%, primarily due to growth inpoint-of-sale loan originations.

Securities are classified as trading when bought and held principally for the purpose of selling them in the near term. At December 31, 2015,2017, the Bancorp’s investment portfolio consisted primarily ofAAA-ratedavailable-for-sale securities. Securities classified as below investment grade were immaterial as ofat both December 31, 20152017 and 2014.2016. The Bancorp’s management has evaluated the securities in an unrealized loss position in the

available-for-sale andheld-to-maturity portfolios for OTTI. The Bancorp recognized $5 million, $24 million and $74 million of OTTI on its available-for-sale and other debt securities, included in securities gains, net and securities gains, net – non-qualifying hedges on mortgage servicing rights in the Consolidated Statements of Income during the years ended December 31, 2015, 2014 and 2013, respectively. The Bancorp did not recognize OTTI on any of its available-for-sale equity securities or held-to-maturity debt securities during the years ended December 31, 2015, 2014 and 2013. Refer to Note 1 of the Notes to Consolidated Financial Statements for the Bancorp’s methodology for both classifying investment securities and management’s evaluation ofevaluating securities in an unrealized loss position for OTTI.

 

 

TABLE 26: COMPONENTS OF INVESTMENT SECURITIES

  

 

 
As of December 31 ($ in millions)  2015   2014   2013   2012   2011     

 

 

Available-for-sale and other securities: (amortized cost basis)

          

U.S. Treasury and federal agencies securities

  $1,155     1,545     1,549     1,771     1,953      

Obligations of states and political subdivisions securities

   50     185     187     203     96      

Mortgage-backed securities:

          

Agency residential mortgage-backed securities

   14,811     11,968     12,294     8,403     9,743      

Agency commercial mortgage-backed securities

   7,795     4,465     -     -     -      

Non-agency residential mortgage-backed securities

   -     -     -     -     28      

Non-agency commercial mortgage-backed securities

   2,801     1,489     1,368     1,089     498      

Asset-backed securities and other debt securities

   1,363     1,324     2,146     2,072     1,266      

Equity securities(a)

   703     701     865     1,033     1,030      

 

 

Total available-for-sale and other securities

  $      28,678         21,677         18,409         14,571         14,614      

 

 

Held-to-maturity securities: (amortized cost basis)

          

Obligations of states and political subdivisions securities

  $68     186     207     282     320      

Asset-backed securities and other debt securities

   2     1     1     2     2      

 

 

Total held-to-maturity securities

  $70     187     208     284     322      

 

 

Trading securities: (fair value)

          

U.S. Treasury and federal agencies securities

  $19     14     5     7     -      

Obligations of states and political subdivisions securities

   9     8     13     17     9      

Mortgage-backed securities:

          

Agency residential mortgage-backed securities

   6     9     3     7     11      

Non-agency residential mortgage-backed securities

   -     -     -     -     1      

Asset-backed securities and other debt securities

   19     13     7     15     12      

Equity securities

   333     316     315     161     144      

 

 

Total trading securities

  $386     360     343     207     177      

 

 

The following table provides a summary of OTTI by security type for the years ended December 31:

TABLE 26: COMPONENTS OF OTTI BY SECURITY TYPE

 

 

 
($ in millions)  2017     2016    2015         

 

 

Available-for-sale and other debt securities

  $          (54   (15   (5)      

Available-for-sale equity securities

   -    (1   -       

 

 

Total OTTI(a)

  $          (54   (16   (5)      

 

 
(a)

Included in securities gains, net, in the Consolidated Statements of Income.

59  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table summarizes the end of period components of investment securities:

TABLE 27: COMPONENTS OF INVESTMENT SECURITIES

 

 

 
As of December 31 ($ in millions)  2017       2016       2015       2014       2013         

 

 

Available-for-sale and other securities (amortized cost basis):

          

  U.S. Treasury and federal agencies securities

  $98    547    1,155    1,545    1,549     

  Obligations of states and political subdivisions securities

   43    44    50    185    187     

  Mortgage-backed securities:

          

    Agency residential mortgage-backed securities(a)

   15,281    15,525    14,811    11,968    12,294     

    Agency commercial mortgage-backed securities

   10,113    9,029    7,795    4,465    -     

    Non-agency commercial mortgage-backed securities

   3,247    3,076    2,801    1,489    1,368     

  Asset-backed securities and other debt securities

   2,183    2,106    1,363    1,324    2,146     

  Equity securities(b)

   679    697    703    701    865     

 

 

Totalavailable-for-sale and other securities

  $      31,644        31,024        28,678        21,677        18,409     

 

 

Held-to-maturity securities (amortized cost basis):

          

  Obligations of states and political subdivisions securities

  $22    24    68    186    207     

  Asset-backed securities and other debt securities

   2    2    2    1    1     

 

 

Totalheld-to-maturity securities

  $24    26    70    187    208     

 

 

Trading securities (fair value):

          

  U.S. Treasury and federal agencies securities

  $12    23    19    14    5     

  Obligations of states and political subdivisions securities

   22    39    9    8    13     

  Residential mortgage-backed securities

   395    8    6    9    3     

  Asset-backed securities and other debt securities

   63    15    19    13    7     

  Equity securities

   370    325    333    316    315     

 

 

Total trading securities

  $862    410    386    360    343     

 

 
(a)

Includes interest-only mortgage-backed securities recorded at fair value with fair value changes recorded in securities gains, net in the Consolidated Statements of Income.

(b)

Equity securities consist of FHLB, FRB and DTCC restricted stock holdings that are carried at par,cost, FHLMC and FNMA preferred stock holdings and certain mutual fund holdings and equity security holdings.

 

On an amortized cost basis,available-for-sale and other securities increased $7.0 billion,$620 million, or 32%2%, from December 31, 20142016 primarily due to repositioning of the portfolio for LCR purposes resulting in increases in agency residential mortgage-backed securities, agency commercial mortgage-backed securities andnon-agency commercial mortgage-backed securities. Agency residential mortgage-backed securities increased $2.8 billion, or 24%, from December 31, 2014 primarily due to the purchase of $18.8 billion of agency residential mortgage-backed securities partially offset by sales of $13.6 billion

and paydowns of $2.5 billion during the year ended December 31, 2015. Agency commercial mortgage-backed securities increased $3.3 billion, or 75%, from December 31, 2014 primarily due to the purchase of $5.6 billion of agency commercial mortgage-backed securities, partially offset by sales of $2.1 billiondecreases in U.S. Treasury and paydowns of $146 million during the year ended December 31, 2015. Non-agency commercialfederal agencies securities and agency residential mortgage-backed securities increased $1.3 billion, or 88%, from December 31, 2014 primarily due to the purchase of $1.9 billion of non-agency commercial mortgage-backed securities partially offset by sales of $483 million and paydowns of $105 million during the year ended December 31, 2015.securities.

53  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On an amortized cost basis,available-for-sale and other securities were 23%25% and 18%24% of total interest-earning assets at December 31, 20152017 and 2014,December 31, 2016, respectively. The estimated weighted-average life of the debt securities in theavailable-for-sale and other securities portfolio was 6.46.5 years at December 31, 20152017 compared to 5.86.7 years at December 31, 2014.2016. In addition, at December 31, 2015,2017 and 2016 theavailable-for-sale and other securities portfolio had a weighted-average yield of 3.18% and 3.19% compared to 3.31% at, respectively.

Trading securities increased $452 million from December 31, 2014.2016 primarily due to an increase in agency residential mortgage-backed securities purchased as part of the Bancorp’snon-qualifying

hedging strategy to economically hedge a portion of the risk associated with the MSR portfolio. Refer to Note 12 of the Notes to Consolidated Financial Statements for further information.

Information presented in Table 2728 is on a weighted-average life basis, anticipating future prepayments. Yield information is

presented on an FTE basis and is computed using amortized cost balances. Maturity and yield calculations for the totalavailable-for-sale and other securities portfolio exclude equity securities that have no stated yield or maturity. Total net unrealized gains on theavailable-for-sale and other securities portfolio were $366$176 million at December 31, 20152017 compared to $731$159 million at December 31, 2014. The decrease from December 31, 2014 was primarily due to an increase in interest rates and wider spreads during the year ended December 31, 2015.2016. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally increases when interest rates decrease or when credit spreads contract.

 

 

TABLE 27: CHARACTERISTICS OF AVAILABLE-FOR-SALE AND OTHER SECURITIES

  

As of December 31, 2015 ($ in millions)            Amortized Cost  Fair Value  Weighted-Average
Life (in years)
  Weighted-Average    
Yield

U.S. Treasury and federal agencies securities:

            

Average life of 1 year or less

   $                  549     561     0.70     3.76%

Average life 1 – 5 years

    530     550     1.50     3.97 

Average life 5 – 10 years

    76     76     5.10     1.80 

Total

   $1,155     1,187     1.30     3.72%

Obligations of states and political subdivisions securities:(a)

            

Average life of 1 year or less

    14     14     0.80     0.01 

Average life 1 – 5 years

    1     1     1.80     5.79 

Average life 5 – 10 years

    35     37     7.30     3.93 

Total

   $50     52     5.30     2.80%

Agency residential mortgage-backed securities:

            

Average life of 1 year or less

    13     14     0.70     4.15 

Average life 1 – 5 years

    4,992     5,106     3.90     3.49 

Average life 5 – 10 years

    9,154     9,295     6.50     3.18 

Average life greater than 10 years

    652     666     12.90     3.45 

Total

   $14,811     15,081     5.90     3.30%

Agency commercial mortgage-backed securities:

            

Average life 1 – 5 years

    1,063     1,083     4.40     3.11 

Average life 5 – 10 years

    6,542     6,585     8.20     2.99 

Average life greater than 10 years

    190     194     13.10     2.86 

Total

   $7,795     7,862     7.80     3.01%

Non-agency commercial mortgage-backed securities:

            

Average life of 1 year or less

    117     118     0.50     3.09 

Average life 1 – 5 years

    365     370     2.80     3.26 

Average life 5 – 10 years

    2,319     2,316     8.10     3.30 

Total

   $2,801     2,804     7.10     3.29%

Asset-backed securities and other debt securities:

            

Average life of 1 year or less

    89     87     0.20     2.17 

Average life 1 – 5 years

    606     607     2.70     2.73 

Average life 5 – 10 years

    207     199     8.30     2.62 

Average life greater than 10 years

    461     462     14.00     2.10 

Total

   $1,363     1,355     7.20     2.46%

Equity securities

    703     703             

Total available-for-sale and other securities

   $28,678     29,044     6.40     3.19%
(a)

Taxable-equivalent yield adjustments included in the above table are 0.00%, 0.24%, 2.09% and 1.46% for securities with an average life of 1 year or less, 1-5 years, 5-10 years and in total, respectively.

5460  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 28: CHARACTERISTICS OFAVAILABLE-FOR-SALE AND OTHER SECURITIES

 

As of December 31, 2017 ($ in millions)        Amortized Cost   Fair Value   Weighted-Average
Life (in years)
   Weighted-Average    
Yield
 

U.S. Treasury and federal agencies securities:

        

Average life of 1 year or less

  $-            -      0.6              2.31%         

Average life 1 – 5 years

   -            -      3.7              3.16            

Average life 5 – 10 years

   98            98      5.1              2.12            

Total

  $            98            98      5.1              2.12%         

Obligations of states and political subdivisions securities:(a)

        

Average life of 1 year or less

   9            9      0.3              0.02            

Average life 1 – 5 years

   18            19      4.4              4.17            

Average life 5 – 10 years

   16            16      6.3              3.67            

Total

  $43            44      4.2              3.13%         

Agency residential mortgage-backed securities:

        

Average life of 1 year or less

   87            88      0.7              3.81            

Average life 1 – 5 years

   6,476            6,488      3.6              3.43            

Average life 5 – 10 years

   7,844            7,875      6.8              3.12            

Average life greater than 10 years

   874            868      11.1              3.07            

Total

  $15,281            15,319      5.7              3.25%         

Agency commercial mortgage-backed securities:

        

Average life of 1 year or less

   8            8      0.4              2.88            

Average life 1 – 5 years

   2,799            2,794      3.5          ��   2.90            

Average life 5 – 10 years

   6,273            6,335      7.3              3.04            

Average life greater than 10 years

   1,033            1,030      12.1              3.00            

Total

  $10,113            10,167      6.7              3.00%         

Non-agency commercial mortgage-backed securities:

        

Average life of 1 year or less

   24            24      0.5              3.86            

Average life 1 – 5 years

   137            138      3.1              3.15            

Average life 5 – 10 years

   3,086            3,131      7.0              3.26            

Total

  $3,247            3,293      6.7              3.26%         

Asset-backed securities and other debt securities:

        

Average life of 1 year or less

   17            17      0.6              3.24            

Average life 1 – 5 years

   528            533      2.9              3.49            

Average life 5 – 10 years

   259            264      7.5              2.99            

Average life greater than 10 years

   1,379            1,404      15.4              3.41            

Total

  $2,183            2,218      11.3              3.38%         

Equity securities

   679            681             

Totalavailable-for-sale and other securities

  $31,644            31,820      6.5              3.18%         
(a)

Taxable-equivalent yield adjustments included in the above table are 0.00%, 2.25%, 2.00% and 1.69% for securities with an average life of 1 year or less,1-5 years,5-10 years and in total, respectively.

 

Deposits

The Bancorp’s deposit balances represent an important source of funding and revenue growth opportunity. The Bancorp continues to focus on core deposit growth in its retail and commercial franchises

by improving customer satisfaction, building full relationships and offering competitive rates. CoreAverage core deposits represented 71% and 70% of the Bancorp’s average asset funding base for both of the years ended December 31, 20152017 and 2014.2016, respectively.

 

TABLE 28: COMPONENTS OF DEPOSITS

                       
As of December 31 ($ in millions)          2015    2014    2013    2012    2011        

Demand

   $36,267       34,809       32,634       30,023       27,600     

Interest checking

    26,768       26,800       25,875       24,477       20,392     

Savings

    14,601       15,051       17,045       19,879       21,756     

Money market

    18,494       17,083       11,644       6,875       4,989     

Foreign office

    464       1,114       1,976       885       3,250     

Transaction deposits

    96,594       94,857       89,174       82,139       77,987     

Other time

    4,019       3,960       3,530       4,015       4,638     

Core deposits

    100,613       98,817       92,704       86,154       82,625     

Certificates $100,000 and over(a)

    2,592       2,895       6,571       3,284       3,039     

Other

    -       -       -       79       46     

Total deposits

   $        103,205       101,712       99,275       89,517       85,710     

The following table presents the end of period components of deposits:

TABLE 29: COMPONENTS OF DEPOSITS     

 

 

 
As of December 31 ($ in millions)     2017         2016         2015         2014         2013       

 

 

Demand

  $   35,276      35,782      36,267      34,809      32,634   

Interest checking

     27,703      26,679      26,768      26,800      25,875   

Savings

     13,425      13,941      14,601      15,051      17,045   

Money market

     20,097      20,749      18,494      17,083      11,644   

Foreign office

     484      426      464      1,114      1,976   

 

 

Transaction deposits

     96,985      97,577      96,594      94,857      89,174   

Other time

     3,775      3,866      4,019      3,960      3,530   

 

 

Core deposits

     100,760      101,443      100,613     ��98,817      92,704   

Certificates $100,000 and over(a)

     2,402      2,378      2,592      2,895      6,571   

Other

     -      -      -      -      -   

 

 

Total deposits

  $       103,162              103,821              103,205              101,712              99,275   

 

 
(a)

Includes$1,4491, $1,483, $1,479, $1,402.3 billion, $1.3 billion, $1.5 billion, $1.8 billion and $1,772$2.3 billion of institutional, retail and wholesale certificates $250,000 and over atDecember 31, 20152017, 2016, 2015, 2014 2013, 2012 and 2011,2013, respectively.

 

61  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Core deposits increased $1.8 billion,decreased $683 million, or 2%1%, from December 31, 2014,2016, driven by an increasea decrease of $1.7 billion, or 2%,$592 million in transaction deposits. Transaction deposits increaseddecreased from December 31, 20142016 primarily due to increasesdecreases in demandmoney market deposits, savings deposits and money marketdemand deposits partially offset by decreasesan increase in interest checking deposits. Money market deposits decreased $652 million, or 3%, from December 31, 2016 primarily due to lower balances per account for commercial customers partially offset by competitive pricing related to a promotional product offering during the second half of 2017 which drove customer acquisition for consumer

accounts. The money market promotional product offering also drove balance migration from savings deposits, and foreign office deposits.which decreased $516 million, or 4%, compared to December 31, 2016. Demand deposits decreased $506 million, or 1%, from December 31, 2016 primarily due to lower balances per account for commercial customers. Interest checking deposits increased $1.5$1.0 billion, or 4%, from December 31, 20142016 primarily due to higher balances per customer account and the acquisition of new commercial customers. Money market deposits increased $1.4 billion, or 8%, from December 31, 2014 driven primarily by higher balances per commercial account and the acquisition of new commercial customers. The remaining

increase in money market deposits was due to a promotional product offering causing balance migration from savings deposits which decreased $450 million, or 3%, from December 31, 2014. Foreign office deposits decreased $650 million, or 58%, from December 31, 2014 driven primarily by lower balances per commercial account.

The Bancorp uses certificates $100,000 and over as a method to fund earning assets. At December 31, 2015, certificates $100,000 and over decreased $303 million, or 10%, compared to December 31, 2014 primarily due to the maturity and run-off of retail and institutional certificates of deposit since December 31, 2014.

 

 

The following table presents the components of average deposits for the years ended December 31:

 

TABLE 29: COMPONENTS OF AVERAGE DEPOSITS                       

TABLE 30: COMPONENTS OF AVERAGE DEPOSITS

                  
($ in millions)          2015    2014    2013    2012    2011               2017     2016      2015       2014       2013           

Demand

   $35,164      31,755      29,925      27,196      23,389       $35,093      35,862      35,164      31,755      29,925     

Interest checking

    26,160      25,382      23,582      23,096      18,707        26,382      25,143      26,160      25,382      23,582     

Savings

    14,951      16,080      18,440      21,393      21,652        13,958      14,346      14,951      16,080      18,440     

Money market

    18,152      14,670      9,467      4,903      5,154        20,231      19,523      18,152      14,670      9,467     

Foreign office

    817      1,828      1,501      1,528      3,490        388      497      817      1,828      1,501     

Transaction deposits

    95,244      89,715      82,915      78,116      72,392        96,052      95,371      95,244      89,715      82,915     

Other time

    4,051      3,762      3,760      4,306      6,260        3,771      4,010      4,051      3,762      3,760     

Core deposits

    99,295      93,477      86,675      82,422      78,652        99,823      99,381      99,295      93,477      86,675     

Certificates $100,000 and over(a)

    2,869      3,929      6,339      3,102      3,656        2,564      2,735      2,869      3,929      6,339     

Other

    57       -      17      27      7        277      333      57      -      17     

Total average deposits

   $        102,221      97,406      93,031      85,551      82,315       $        102,664          102,449          102,221          97,406          93,031     
(a)

Includes$1,4101.4 billion,$1,424, $1,283, $1,6781.5 billion,$1.6 billion, $1.8 billion and $1,732$2.1 billion of average institutional, retail and wholesale certificates $250,000 and over during the years endedDecember 31,20152017, 2016, 2015, 2014 2013, 2012 and 2011,2013, respectively.

 

On an average basis, core deposits increased $5.8 billion, or 6%, compared to$442 million from December 31, 20142016 primarily due to increasesan increase of $5.5 billion, or 6%,$681 million in average transaction deposits and $289partially offset by a decrease of $239 million or 8%, in average other time deposits. The increase in average transaction deposits was driven by increases in average money market deposits, average demandinterest checking deposits and average interest checkingmoney market deposits partially offset by decreases in average savingsdemand deposits and average foreign officesavings deposits. Average interest checking deposits increased $1.2 billion, or 5%, from December 31, 2016 primarily due to the acquisition of new commercial customers. Average money market deposits increased $3.5 billion,$708 million, or 24%4%, from December 31, 2014primarily due to competitive pricing related to a promotional product offering during the second half of 2017 which drove customer acquisition for consumer accounts. The money market promotional product offering also drove balance migration from average savings deposits, which decreased $1.1 billion,$388 million, or 7%3%, fromcompared to December 31, 2014 driven by a promotional product offering. 2016.

The remaining increase in average money market deposits was due to an increase inpartially offset by lower average commercialbalances per account balances and the acquisition of newfor commercial customers. Average demand deposits increased $3.4 billion, or 11%, from December 31,

2014 primarily due to an increase in average commercial account balances and new commercial customer accounts. Average interest checking deposits increased $778decreased $769 million, or 3%2%, from December 31, 20142016 primarily due to an increase inlower average commercial account balances and new commercial customer accounts. Average foreign office deposits decreased $1.0 billion, or 55%, from December 31, 2014 primarily due to lower balances per account for commercial customers. Average other time deposits increased $289decreased $239 million, or 8%6%, from December 31, 20142016 primarily driven by the acquisition of new customers due to promotional interest rates. a decrease in average certificates less than $100,000 as a result of the low rate environment. The change in average core deposits from December 31, 2016 included the impact of the sale of $511 million of deposits as part of the branches sold in the St. Louis MSA and Pittsburgh MSA during the first half of 2016.

Average certificates $100,000 and over decreased $1.1 billion,$171 million, or 27%6%, from December 31, 20142016 due primarily to the maturity andrun-off of retail and institutional certificates of deposit since December 31, 2014.2016.

 

 

Contractual Maturities

The contractual maturities of certificates $100,000 and over as of December 31, 2017 are summarized in the following table:    

55  Fifth Third BancorpTABLE 31: CONTRACTUAL MATURITIES OF CERTIFICATES $100,000 AND OVER
($ in millions)

Next 3 months

$805    

3-6 months

184    

6-12 months

383    

After 12 months

1,030    

Total certificates $100,000 and over

$        2,402    

62  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The contractual maturities of certificates $100,000 and over as of December 31, 2015 are summarized in the following table:    

TABLE 30: CONTRACTUAL MATURITIES OF CERTIFICATES $100,000 AND OVER

($ in millions)2015

Next 3 months

$401     

3-6 months

203     

6-12 months

237     

After 12 months

1,751     

Total certificates $100,000 and over

$        2,592     

The contractual maturities of other time deposits and certificates $100,000 and over as of December 31, 20152017 are summarized in the following table:

 

TABLE 31:32: CONTRACTUAL MATURITIES OF OTHER TIME DEPOSITS AND CERTIFICATES $100,000 AND OVER

  

($ in millions)  2015

 

Next 12 months

  $2,4253,266     

13-24 months

   1,5701,365     

25-36 months

   6371,136     

37-48 months

   1,025339     

49-60 months

   93062     

After 60 months

   24     

9    
 

Total other time deposits and certificates $100,000 and over

  $        6,611     

6,177    
 

 

Borrowings

Total borrowings increased $835 million,The Bancorp accesses a variety of short-term and long-term funding sources. Borrowings with original maturities of one year or 5%, from December 31, 2014.less are classified as short-term and include federal funds purchased and other short-term borrowings. Table 32 33

summarizes the end of period components of

total borrowings. As of December 31, 2015,Average total borrowings as a percentagepercent of average interest-bearing liabilities were 21% compared to 20% at December 31, 2014.2017 compared to 22% at December 31, 2016.

 

 

TABLE 32: COMPONENTS OF BORROWINGS

          

 

 
As of December 31 ($ in millions)  2015   2014   2013   2012   2011 

 

 

Federal funds purchased

  $151     144     284     901     346      

Other short-term borrowings

   1,507     1,556     1,380     6,280     3,239      

Long-term debt

   15,844     14,967     9,633     7,085     9,682      

 

 

Total borrowings

  $        17,502         16,667         11,297         14,266         13,267      

 

 

The following table summarizes the end of period components of borrowings:

TABLE 33: COMPONENTS OF BORROWINGS    

          

 

 
As of December 31 ($ in millions)  2017   2016   2015   2014   2013 

 

 

Federal funds purchased

  $174    132    151    144    284     

Other short-term borrowings

   4,012    3,535    1,507    1,556    1,380     

Long-term debt

   14,904    14,388    15,810    14,932    9,605     

 

 

Total borrowings

  $        19,090        18,055        17,468        16,632        11,269     

 

 

 

Other short-termTotal borrowings decreased $49 million, or 3%, from December 31, 2014 driven primarily by a decrease in commercial repurchase agreements. Long-term debt increased $877 million,$1.0 billion, or 6%, from December 31, 20142016 primarily due to increases in long-term debt and other short-term borrowings. Long-term debt increased $516 million from December 31, 2016 primarily driven by the issuances of $1.1$1.5 billion of unsecured senior fixed-rate bank notes, $1.3 billion$300 million of unsecured senior floating-rate bank notes and the issuance of asset-backed securities by a consolidated VIE of $750 million related to an automobile loan

securitization in 2015.during the year ended December 31, 2017. These increases were partially offset by the maturity of $500$787 million of subordinated fixed-rate bank notes and $1.7 billion of paydownspay downs on long-term debt associated with automobile loan securitizations.securitizations and the maturity of $650 million of unsecured senior bank notes and $500 million of unsecured subordinated debt during the year ended December 31, 2017. For additional information regarding

automobile securitizations and long-term debt, refer to Note 11 and Note 16, respectively, of the Notes to Consolidated Financial Statements.

TABLE 33: COMPONENTS OF AVERAGE BORROWINGS

          

 

 
For the years ended December 31 ($ in millions)  2015   2014   2013   2012   2011 

 

 

Federal funds purchased

  $920     458     503     560     345      

Other short-term borrowings

   1,721     1,873     3,024     4,246     2,777      

Long-term debt

   14,677     12,928     7,914     9,043     10,154      

 

 

Total average borrowings

  $        17,318           15,259           11,441           13,849           13,276      

 

 

Average total Other short-term borrowings increased $2.1 billion, or 13%, compared to$477 million, from December 31, 2014, due to increases2016 driven by an increase of $625 million in average long-term debt and average federal funds purchased,FHLB short-term borrowings partially offset by a $115 million decrease in average other short-term borrowings. The increase in average long-term debt of $1.7 billion, or 14%, was driven primarily by the issuances of long-term debt as discussed above and the issuance of asset-backed securities by a consolidated VIE of $1.0 billion related to an automobile loan securitization during the fourth quarter of 2014. The impact of these issuances was partially offset by the aforementioned maturity of subordinated fixed-rate bank notes and paydowns on long-term debt associated with automobile loan securitizations since December 31, 2014.sold under repurchase agreements. The level of average federal funds purchased and average other short-term borrowings can fluctuate significantly from period to period depending on

funding needs and which sources are used to satisfy those needs. For further information on the components of other short-term borrowings, refer to Note 15 of the Notes to Consolidated Financial Statements.

The following table summarizes the components of average borrowings:

TABLE 34: COMPONENTS OF AVERAGE BORROWINGS    

          

 

 
For the years ended December 31 ($ in millions)  2017   2016   2015   2014   2013 

 

 

Federal funds purchased

  $557    506    920    458    503     

Other short-term borrowings

   3,158    2,845    1,721    1,873    3,024     

Long-term debt

   13,804    15,394    14,644    12,894    7,886     

 

 

Total average borrowings

  $        17,519            18,745          17,285          15,225          11,413     

 

 

Total average borrowings decreased $1.2 billion, or 7%, compared to December 31, 2016, primarily due to a decrease in average long-term debt partially offset by an increase in average other short-term borrowings. Average long-term debt decreased $1.6 billion compared to December 31, 2016. The decrease was driven primarily by the maturities of unsecured senior notes and subordinated debt, as discussed above, during the first half of 2017, and paydowns on long-term debt associated with automobile loan securitizations. These were partially offset by the issuances of long-term debt, as discussed above, primarily during the second half of 2017. Average

other short-term borrowings increased $313 million compared to December 31, 2016, driven primarily by the aforementioned increase in FHLB short-term borrowings partially offset by the decrease in securities sold under repurchase agreements. Information on the average rates paid on borrowings is presenteddiscussed in the Net Interest Income subsection of the Statements of Income Analysis section of MD&A. In addition, refer to the Liquidity Risk Management subsection of the Risk Management section of MD&A for a discussion on the role of borrowings in the Bancorp’s liquidity management.

 

 

56  Fifth Third Bancorp

63  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RISK MANAGEMENT - OVERVIEW

 

ManagingRisk management is critical for effectively serving customers’ financial needs while protecting the Bancorp and achieving strategic goals. It is also essential to reducing the volatility of earnings and safeguarding our brand and reputation. Further, risk management is anintegral to the Bancorp’s strategic and capital planning processes. It is essential component of successfully operating a financial services company. Thethat the Bancorp’s business strategies consistently align to its overall risk appetite and capital considerations. Maintaining risks within the Bancorp’s risk management approach includes processesappetite requires that risks are understood by all employees across the enterprise, and appropriate risk mitigants and controls are in place to limit risk to within the risk appetite. To achieve this, the Bancorp implements a framework for managing risk that encompasses business as usual activities and the utilization of a risk process for identifying, assessing, managing, monitoring and reporting risks.

Fifth Third uses a structure consisting of three lines of defense in order to clarify the roles and responsibilities for effective risk management.

The ERM division, led by the Bancorp’s Chief Risk Officer, ensures the consistency and adequacy of the Bancorp’s risk management approach within the structure of the Bancorp’s operating model. Managementtaking functions within the lines of business and support functionscomprise the first line of defense. The first line of defense originates risk through normal business as usual activities; therefore, it is essential that they monitor, assess and manage the risks associated withbeing taken, implement controls necessary to mitigate those risks and take responsibility for managing their activitiesbusiness within the Bancorp’s risk appetite.

Control functions, such as the Risk Management organization, are the second line of defense and determine if actions need to be taken to strengthen risk management or reduce risk given their risk profile. They are responsible for considering risk when making business decisionsproviding challenge, oversight and for integrating risk management into business processes. In addition,governance of activities performed by the Internalfirst line.

The Audit division is the third line of defense and provides an independent assessment of the Bancorp’s internal control structure and related systems and processes.

The assumption of risk requires robust and active risk management practices that comprise an integrated and comprehensive set of activities, measures and strategies that apply to the entire organization. The Bancorp has established a Risk Appetite Framework, approved by the Board, that provides the foundations of corporate risk capacity, risk appetite and risk tolerances. The Bancorp’s risk capacity is represented by its available financial resources. Risk capacity sets an absolute limit on risk-assumption in the Bancorp’s annual and strategic plans. The Bancorp understands that not all financial resources may persist as viable loss buffers over time. Further, consideration must be given to regulatory capital buffers required per Capital Policy Targets that would reduce risk capacity. Those factors take the form of capacity adjustments to arrive at an Operating Risk Capacity which represents the operating risk level the Bancorp can assume while maintaining its solvency standard. The Bancorp’s policy currently discounts its Operating Risk Capacity by a minimum of 5% to provide a buffer; as a result, the Bancorp’s risk appetite is limited by policy to, at most, 95% of its Operating Risk Capacity.

Economic capital is the amount of unencumbered financial resources required to support the Bancorp’s risks. The Bancorp measures economic capital under the assumption that it expects to maintain debt ratings at strong investment grade levels over time. The Bancorp’s capital policies require that the Operating Risk Capacity less the aforementioned buffer exceed the calculated economic capital required in its business.

Risk appetite is the aggregate amount of risk the Bancorp is willing to accept in pursuit of its strategic and financial objectives. By establishing boundaries around risk taking and business decisions, and by incorporating the needs and goals of its shareholders, regulators, rating agencies and customers, the Bancorp’s risk appetite is aligned with its priorities and goals. Risk tolerance is the maximum amount of risk applicable to each of the eight specific risk categories included in its Enterprise Risk Management Framework. This is expressed primarily in qualitative terms; however certain risk types also have quantitative metrics that are used to measure the Bancorp’s level of risk against its risk tolerances. The Bancorp’s risk appetite and risk tolerances are supported by risk targets and risk limits. Those limits are used to monitor the amount of risk assumed at a granular level. On a quarterly basis, the Risk and Compliance Committee of the Board reviews current assessments of each of the eight risk types relative to the established tolerance. Information supporting these assessments, including policy limits and key risk indicators, is also reported to the Risk and Compliance Committee of the Board. Any results outside of tolerance require the development of an action plan that describes actions to be taken to return the measure to within the tolerance.

The risks faced by the Bancorp include, but are not limited to, credit, market, liquidity, operational, regulatory compliance, legal, reputational and strategic. Each of these risks is managed through the Bancorp’s risk program which includes the following key functions:

ERM is responsible for developing and overseeing the implementation of risk programs and reporting that facilitate a broad integrated view of risk. The department also leads the continual fostering of a strong risk management culture and the framework, policies and committees that support effective risk governance, including the oversight of Sarbanes-Oxley compliance;

Commercial Credit Risk Management is responsible for overseeing the safety and soundness of the commercial loan portfolio within an independent portfolio management framework that supports the Bancorp’s commercial loan growth strategies and underwriting practices, ensuring portfolio optimization and appropriate risk controls;

Risk Strategies and Reporting is responsible for quantitative analysis needed to support the commercial dual rating methodology, ALLL methodology and analytics needed to assess credit risk and develop mitigation strategies related to that risk. The department also provides oversight, reporting and monitoring of commercial underwriting and credit administration processes. The Risk Strategies and Reporting department is also responsible for the economic capital program;

Consumer Credit Risk Management is responsible for overseeing the safety and soundness of the consumer portfolio within an independent management framework that supports the Bancorp’s consumer loan growth strategies, ensuring portfolio optimization, appropriate risk controls and oversight, reporting, and monitoring of underwriting and credit administration processes;

Operational Risk Management works with lines of business and regional management to maintain processes to monitor and manage all aspects of operational risk, including ensuring consistency in application of operational risk programs;

Bank Protection oversees and manages fraud prevention and detection and provides investigative and recovery services for the Bancorp;

Capital Markets Risk Management is responsible for instituting, monitoring, and reporting appropriate trading limits, monitoring liquidity, interest rate risk and risk tolerances within Treasury, Mortgage and Capital Markets groups and utilizing a value at risk model for Bancorp market risk exposure;

Regulatory Compliance Risk Management provides independent oversight to ensure that an enterprise-wide framework, including processes and procedures, are in place to comply with applicable laws, regulations, rules and other regulatory requirements; internal policies and procedures; and principles of integrity and fair dealing applicable to the Bancorp’s activities and functions The Bancorp focuses on managing regulatory compliance risk in accordance with the Bancorp’s integrated risk management framework, which ensures consistent processes for identifying, assessing, managing, monitoring and reporting risks; and

The ERM division creates and maintains other functions, committees or processes as are necessary to effectively oversee risk management throughout the Bancorp.

57  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Risk management oversight and governance is provided by the Risk and Compliance Committee of the Board of Directors and through multiple management committees whose membership includes a broad cross-section of line-of-business, regional market and support representatives. The Risk and Compliance Committee of the Board of Directors consists of five outside directors and has the responsibility for the oversight of risk management for the Bancorp, as well as for the Bancorp’s overall aggregate risk profile. The Risk and Compliance Committee of the Board of Directors has approved the formation of key management governance committees that are responsible for evaluating risks and controls. The primary committee responsible for the oversight of risk management is the ERMC. Committees accountable to the ERMC, which support the core risk programs, are the Corporate Credit Committee, the Operational Risk Committee, the Management Compliance Committee, the Asset/Liability Committee and the Enterprise Marketing Committee. Other committees accountable to the ERMC

oversee the ALLL, capital, model risk and regulatory change management functions. There are also new products and initiatives processes applicable to every line of business to ensure an appropriate standard readiness assessment is performed before launching a new product or initiative. Significant risk policies approved by the management governance committees are also reviewed and approved by the Risk and Compliance Committee of the Board of Directors.

Credit Risk Review isdivision provides an independent function responsible forassessment of credit risk, which includes evaluating the sufficiency of underwriting, documentation and approval processes for consumer and commercial credits, the accuracy of risk grades assigned to commercial credit exposure, nonaccrual status, specific reserves and monitoring for charge-offs. Credit Risk Review reports directly

Fifth Third’s core values and culture provide a foundation for supporting sound risk management practices by setting expectations for appropriate conduct and accountability across the organization.

All employees are expected to conduct themselves in alignment with Fifth Third’s core values and Code of Business Conduct & Ethics, which may be found onwww.53.com, while carrying out their responsibilities. Fifth Third’s Corporate Responsibility and Reputation Committee provides oversight of business conduct policies, programs and strategies, and monitors reporting of potential misconduct, trends or themes across the enterprise. Prudent risk management is a responsibility that is expected from all employees across the first, second and third lines of defense and is a foundational element of Fifth Third’s culture.

Below are the Bancorp’s core principles of risk management that are used to ensure the Bancorp is operating in a safe and sound manner:

Understand the risks taken as a necessary part of business; however, the Bancorp ensures risks taken are in alignment with its strategy and risk appetite.

Provide transparency and escalate risks and issues as necessary.

Ensure Fifth Third’s products and services are designed, delivered and maintained to provide value and benefit to its customers and to Fifth Third, and that potential opportunities remain aligned to the Riskcore customer base.

Avoid risks that cannot be understood, managed and Compliance Committeemonitored.

Act with integrity in all activities.

Focus on providing operational excellence by providing reliable, accurate and efficient services to meet customer’s needs.

Maintain a strong financial position to ensure that the Bancorp meets its strategic objectives through all economic cycles and is able to access the capital markets at all times, even under stressed conditions.

Protect the Bancorp’s reputation by thoroughly understanding the consequences of business strategies, products and processes.

Conduct business in compliance with all applicable laws, rules and regulations and in alignment with internal policies and procedures.

Fifth Third’s success is dependent on effective risk management and understanding and controlling the risks taken in order to deliver sustainable returns for employees and shareholders. The Bancorp’s goal is to ensure that aggregate risks do not exceed its risk capacity, and that risks taken are supportive of the Bancorp’s portfolio diversification and profitability objectives.

Fifth Third’s Risk Management Framework, states its risk appetite and the linkage to strategic and capital planning, defines and sets the tolerance for each of the eight risk types, explains the process used to manage risk across the enterprise and sets forth its risk governance structure.

The Board of Directors (the “Board”) and administrativelyexecutive management define the risk appetite, which is considered in the development of business strategies, and forms the basis for enterprise risk management. The Bancorp’s risk appetite is set annually in alignment with the strategic, capital and financial plans, and is reviewed by the Board on an annual basis.

The Risk Management Process provides a consistent and integrated approach for managing risks and ensuring appropriate risk mitigants and controls are in place, and risks and issues are appropriately escalated. Five components are utilized for effective risk management; identifying, assessing, managing, monitoring and reporting risks.

The Board and executive management have identified eight risk types for monitoring the overall risk of the Bancorp; Credit Risk, Market Risk, Liquidity Risk, Operational Risk, Regulatory Compliance Risk, Legal Risk, Reputation Risk and Strategic Risk, and have also qualitatively established a risk tolerance, which is defined as the maximum amount of risk the Bancorp is willing to take for each of the eight risk types. These risk types are assessed on an ongoing basis and reported to the Chief Auditor.board each quarter, or more frequently, if necessary. In addition, each business and operational function (first line of defense) is accountable for proactively identifying and managing risk using its risk management process. Risk tolerances and risk limits are also established, where appropriate, in order to ensure that businesses and operational functions across the enterprise are able to monitor and manage risks at a more granular level, while ensuring that aggregate risks across the enterprise do not exceed the overall risk appetite.

The Bancorp’s risk governance structure includes management committees operating under delegation from, and providing information directly or indirectly to, the Board. The Bancorp Board delegates certain responsibilities to Boardsub-committees, including the RCC as outlined in each respective Committee Charter, which may be found onwww.53.com.

64  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The ERMC, which reports to the RCC, comprises senior management from across the Bancorp and reviews and approves risk management frameworks and policies, oversees the management of all risk types to ensure that aggregated risks remain within the Bancorp’s risk

appetite, and fosters a risk culture to ensure appropriate escalation and transparency of risks.

 

 

CREDIT RISK MANAGEMENT

The objective of the Bancorp’s credit risk management strategy is to quantify and manage credit risk on an aggregate portfolio basis, as well as to limit the risk of loss resulting from the failure of a borrower or counterparty to honor its financial or contractual obligations to the Bancorp. The Bancorp’s credit risk management strategy is based on three core principles: conservatism, diversification and monitoring. The Bancorp believes that effective credit risk management begins with conservative lending practices.practices which are described below. These practices include conservative exposurethe use of intentional risk-based limits for single name exposures and counterparty limitsselection criteria designed to reduce or eliminate exposure to borrowers who have higher than average default risk and conservativedefined weaknesses in financial performance. The Bancorp carefully designed and monitors underwriting, documentation and collection standards. The Bancorp’s credit risk management strategy also emphasizes diversification on a geographic, industry and customer level as well as ongoing portfolio monitoring and timely management reviews of large credit exposures and credits experiencing deterioration of credit quality. Credit officers with the authority to extend credit are delegated specific authority amounts, the utilization of which is closely monitored. Underwriting activities

are centrally managed, and ERM manages the policy and the

authority delegation process directly. The Credit Risk Review function provides independent and objective assessments of the quality of underwriting and documentation, the accuracy of risk grades and thecharge-off, nonaccrual and reserve analysis process. The Bancorp’s credit review process and overall assessment of the adequacy of the allowance for credit losses is based on quarterly assessments of the probable estimated losses inherent in the loan and lease portfolio. The Bancorp uses these assessments to promptly identify potential problem loans or leases within the portfolio, maintain an adequate reserveallowance for credit losses and take any necessary charge-offs. The Bancorp defines potential problem loans and leases as those rated substandard that do not meet the definition of a nonaccrual loan or a restructured loan. Refer to Note 6 of the Notes to Consolidated Financial Statements for further information on the Bancorp’s credit grade categories, which are derived from standard regulatory rating definitions. In addition, stress testing is performed on various commercial and consumer portfolios using the CCAR model and for certain portfolios, such as real estate and leveraged lending, the stress testing is performed by Credit department personnel at the individual loan level during credit underwriting.

 

 

The following tables provide a summary of potential problem portfolio loans and leases as of December 31:leases:

 

TABLE 34: POTENTIAL PROBLEM PORTFOLIO LOANS AND LEASES

  

TABLE 35: POTENTIAL PROBLEM PORTFOLIO LOANS AND LEASES

TABLE 35: POTENTIAL PROBLEM PORTFOLIO LOANS AND LEASES

 

 

 
2015 ($ in millions)  

Carrying

Value

   Unpaid
Principal
Balance
   Exposure  
As of December 31, 2017 ($ in millions)  Carrying
Value
   Unpaid
Principal
Balance
   Exposure  

 

 

Commercial and industrial loans

  $            1,383     1,384     1,922     $911    912    1,370  

Commercial mortgage loans

   170     171     172      138    138    138  

Commercial construction loans

   6     6       

Commercial leases

   36     36     39      70    70    70  

 

 

Total potential problem portfolio loans and leases

  $1,595                 1,597                 2,140     $            1,119                1,120                1,578  

 

 

 

TABLE 35: POTENTIAL PROBLEM PORTFOLIO LOANS AND LEASES

  

TABLE 36: POTENTIAL PROBLEM PORTFOLIO LOANS AND LEASES

TABLE 36: POTENTIAL PROBLEM PORTFOLIO LOANS AND LEASES

 

 

 
2014 ($ in millions)  Carrying
Value
   Unpaid
Principal
Balance
   Exposure  
As of December 31, 2016 ($ in millions)  Carrying
Value
   Unpaid
Principal
Balance
   Exposure 

 

 

Commercial and industrial loans

  $1,022     1,028     1,344     $1,108    1,110    1,807  

Commercial mortgage loans

   272     273     273      102    102    104  

Commercial construction loans

   7     7     11   

Commercial leases

   29     29     29      22    22    22  

 

 

Total potential problem portfolio loans and leases

  $            1,330                 1,337                 1,657     $            1,232                1,234                1,933  

 

 

 

In addition to the individual review of larger commercial loans that exhibit probable or observed credit weaknesses, the commercial credit review process includes the use of two risk grading systems. The risk grading system currently utilized for reserveallowance for credit loss analysis purposes encompasses ten categories. The Bancorp also maintains a dual risk rating system for credit approval and pricing, portfolio

monitoring and capital allocation that includes a “through-the-cycle”“through-the-cycle” rating philosophy for modeling expected losses.assessing a borrower’s creditworthiness. A “through the cycle” rating philosophy uses a grading scale that assigns ratings based on average default rates through an entire business cycle for borrowers with similar financial performance. The dual risk rating system includes thirteen probabilities of default grade categories and an additional sixeleven grade categories for estimating losses given an event of default. The probability of default and loss given default evaluations are not

separated in theten-category risk rating system.

58  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Bancorp has completed significant validation and testing of the dual risk rating system as a commercial credit risk management tool. The Bancorp is assessing the necessary modifications to the dual risk rating system outputs to develop a U.S. GAAP compliant ALLL model and will make a decision onevaluate the use of modified dual risk ratings for purposes of determining the Bancorp’s ALLL onceas part of the FASB has issued a final standard regarding proposed methodology changes toBancorp’s adoption of ASU2016-13Measurement of Credit Losses on Financial Instruments,” which will be effective for the determination of credit impairment as outlined in the FASB’s Proposed ASU–Financial Instruments–Credit Losses (Subtopic 825-15) issuedBancorp on December 20, 2012.January 1, 2020. Scoring systems, various analytical tools and portfolio performance monitoring are used to assess the credit risk in the Bancorp’s homogenous consumer and small business loan portfolios.

65  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Economic growth continues to improve as data has been broadly positive in the fourth quarter of 2017. Growth is expected to continue in 2018 with the implementation of new corporate and consumer tax reduction programs. There have been steady gains in the job market and real GDP is expected to maintain its modest expansionary pattern. Theexpand at a faster pace in 2018. Household spending continues to be the strongest driver of the U.S. job marketeconomy. Inflation continues to run below the FRB’s stated objective, however the rate of inflation is slowly but steadily improving. Housing prices have largely stabilized and are increasingexpected to increase in many markets. However, overall current economic and competitive2018. Improving global conditions are causing weaker than desired qualified loan growth, that combined with a weakness in global economic conditionssupporting U.S. manufacturing activity and a relatively low interest rate environment, may directly or indirectly impact the Bancorp’s growth and profitability.

Among consumer portfolios, residential mortgage and brokered home equity portfolios exhibited the most stress. As of December 31, 2015, consumer real estate loans originated from 2005 through 2008 represent approximately 20% of the consumer real estate portfolio and approximately 60% of total losses for the year ended December 31, 2015. Loss rateshousing prices continue to improve as newer vintages are performing within expectations. Currently,increase across the level of newcountry. With regard to commercial real estate, fundingsthe credit market has become somewhat more selective even though market data and vacancies remain positive. The Bancorp is slightly above the amortization and payoff of the portfolio with growthmonitoring potential increased risks in the commercial construction portfolioRetail sector as those markets have rebounded. The Bancorp continuesa result of profitability declines among many large retailers and theyear-end 2017 results are expected to engage in loss mitigation strategies such as reducing credit commitments, restructuring certain commercial and consumer loans, as well as utilizing commercial and consumer loan workout teams. For commercial and consumer loans owned by the Bancorp, loan modification strategies are developed that are workable for both the borrower and the Bancorp when the borrower displaysshow a willingnesscontinued shift to cooperate. These strategies 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. For residential mortgage loans serviced for FHLMC and FNMA, the Bancorp participates in the HAMP and HARP 2.0 programs. For loans refinanced under the HARP 2.0 program, the Bancorp strictly adheres to the underwriting requirements of the program. Loan restructuring under the HAMP program is performed on behalf of FHLMC or FNMA and the Bancorp does not take possession of these loans during the modification process. Therefore, participation in these programs does not significantly impact the Bancorp’s credit quality statistics. The Bancorp participates in trial modifications in conjunction with the HAMP program for loans it services for FHLMC and FNMA. As these trial modifications relate to loans serviced for others, they are not included in the Bancorp’s TDRs as they are not assets of the Bancorp. In the event there is a representation and warranty violation on loans sold through the programs, the Bancorp may be required to repurchase the sold loans. As of December 31, 2015, repurchased loans restructured or refinanced under these programs were immaterial to the Consolidated Financial Statements. Additionally, as of December 31,

2015 and 2014, $14 million and $22 million, respectively, of loans refinanced under HARP 2.0 were included in loans held for sale in the Consolidated Balance Sheets. For the years ended December 31, 2015 and 2014, the Bancorp recognized $6 million and $13 million, respectively, of noninterest income in mortgage banking net revenue in the Consolidated Statements of Income related to the sale of loans restructured or refinanced under the HAMP and HARP 2.0 programs.

In the financial services industry, there has been heightened focus on foreclosure activity and processes. The Bancorp actively works with borrowers experiencing difficulties and has regularly modified or provided forbearance to borrowers where a workable solution could be found. Foreclosure is a last resort, and the Bancorp undertakes foreclosures only when it believes they are necessary and appropriate and is careful to ensure that customer and loan data are accurate.

At December 31, 2015, the Bancorp’s non-power producing energy portfolio balance was $1.7 billion, representing approximately 2% of total loans and leases. This portfolio continues to be an important part of the Bancorp’s commercial business strategy. Due to the sensitivity of this portfolio to downward movements in oil prices, the Bancorp has seen migration in the portfolio into criticized classifications during 2015. When establishing the ALLL, all portfolio and general economic factors are considered, including the level of criticized assets and the level of commodity prices.online purchasing.

Commercial Portfolio

The Bancorp’s credit risk management strategy includes minimizingseeks to minimize concentrations of risk through diversification. The Bancorp has commercial loan concentration limits based on industry, lines of business within the commercial segment, geography and credit product type.

The risk within the commercial loan and lease portfolio is managed and monitored through an underwriting process utilizing detailed origination policies, continuous loan level reviews, monitoring of industry concentration and product type limits and continuous portfolio risk management reporting.

The Bancorp provides loans to a variety of customers ranging from large multi-national firms to middle market businesses, sole proprietors and high net worth individuals. The origination policies for commercial and industrial loans outline the risks and

underwriting requirements for loans to businesses in various industries. Included in the policies are maturity and amortization terms, collateral and leverage requirements, cash flow coverage measures and hold limits. The Bancorp aligns credit and sales teams with specific industry expertise to better monitor and manage different industry segments of the portfolio.

The origination policies for commercial real estate outline the risks and underwriting requirements for owner and nonowner-occupied and construction lending. Included in the policies are maturity and amortization terms, maximum LTVs, minimum debt service coverage ratios, construction loan monitoring procedures, appraisal requirements,pre-leasing requirements (as applicable), sensitivity andpro-forma analysis requirements and interest rate sensitivity. The Bancorp requires a valuation of real estate collateral, which may include third-party appraisals, be performed at the time of origination and renewal in accordance with regulatory requirements and on an as needed basis when market conditions justify. Although the Bancorp does not back test these collateral value assumptions, the Bancorp maintains an appraisal review department to order and review third-party appraisals in accordance with regulatory requirements. Collateral values on criticized assets with relationships exceeding $1 million are reviewed quarterly to assess the appropriateness of the value ascribed in the assessment of charge-offs and specific reserves. In addition, the Bancorp applies incremental valuation adjustments to older appraisals that relate to collateral dependent loans, which can currently be up to 20-30% of the appraised value based on the type of collateral. These incremental valuation adjustments generally reflect the age of the most recent appraisal as well as collateral type. Trends in collateral values, such as home price indices and recent asset dispositions, are monitored in order to determine whether changes to the appraisal adjustments are warranted.

59  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Other factors such as local market conditions or location may also be considered as necessary.

The Bancorp assesses all real estate andnon-real estate collateral securing a loan and considers all cross-collateralized loans in the calculation of the LTV ratio. The following tables provide

detail on the most recent LTV ratios for commercial mortgage loans greater than $1 million, excluding impaired commercial mortgage loans individually evaluated. The Bancorp does not typically aggregate the LTV ratios for commercial mortgage loans less than $1 million.

 

 

TABLE 36: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION

  

TABLE 37: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION

TABLE 37: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION

 

 

 
As of December 31, 2015 ($ in millions)  LTV > 100%   LTV 80-100%   LTV < 80%      
As of December 31, 2017 ($ in millions)  LTV > 100%   LTV 80-100%   LTV < 80%      

 

 

Commercial mortgage owner-occupied loans

  $119        216        2,063            $79       110        2,222         

Commercial mortgage nonowner-occupied loans

   120        194        2,032             14       169        2,208         

 

 

Total

  $                239                    410                    4,095            $                93                   279                    4,430         

 

 

TABLE 37: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION

  

TABLE 38: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION

TABLE 38: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION

 

 

 
As of December 31, 2014 ($ in millions)  LTV > 100%   LTV 80-100%   LTV < 80%      
As of December 31, 2016 ($ in millions)  LTV > 100%   LTV 80-100%   LTV < 80%      

 

 

Commercial mortgage owner-occupied loans

  $148        248        1,982            $106       178        1,953         

Commercial mortgage nonowner-occupied loans

   243        333        2,423             22       100        2,598         

 

 

Total

  $391        581        4,405            $128       278        4,551         

 

 

 

6066  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following table provides detail on commercial loan and leases by industry classification (as defined by the North American Industry Classification System), by loan size and by state, illustrating the diversity and granularity of the Bancorp’s commercial loans and leases:

 

TABLE 38: COMMERCIAL LOAN AND LEASE PORTFOLIO (EXCLUDING LOANS HELD FOR SALE)

  

TABLE 39: COMMERCIAL LOAN AND LEASE PORTFOLIO (EXCLUDING LOANS AND LEASES HELD FOR SALE)

TABLE 39: COMMERCIAL LOAN AND LEASE PORTFOLIO (EXCLUDING LOANS AND LEASES HELD FOR SALE)

 

 

 
  2015     2014   2017     2016 
  

 

 

   

 

 

     

 

 

 
As of December 31 ($ in millions)        Outstanding     Exposure      Nonaccrual     Outstanding     Exposure     Nonaccrual           Outstanding     Exposure      Nonaccrual     Outstanding     Exposure     Nonaccrual       

 

 

By Industry:

                                            

Manufacturing

   $10,572            20,422       70         10,315           20,496       55        $10,044           18,948      74        10,070          19,646      50       

Real estate

   6,494            10,293       40         5,392           8,612       32         7,713           12,493      25        7,206          11,919      26       

Financial services and insurance

   5,896            13,021       3         6,097           13,557       20         5,792           11,933      1        5,648          11,522      2       

Healthcare

   4,676            6,879       22         4,133           6,322       20         4,712           6,486      35        4,649          6,450      23       

Business services

   4,471            6,765       96         4,644           7,109       79         4,147           6,512      42        4,599          6,996      65       

Wholesale trade

   4,082            7,254       23         4,314           8,004       62      

Retail trade

   3,764            7,391       8         3,754           7,190       22         3,617           7,950      3        4,048          7,598      6       

Transportation and warehousing

   3,111            4,619       1         3,012           4,276       1      

Communication and information

   2,913            5,052       2         2,409           4,140       3         3,322           5,308      -        2,901          4,726      -       

Accommodation and food

   2,507            4,104       6         1,712           2,945       9         3,268           5,321      4        3,051          4,817      5       

Wholesale trade

   3,017           5,363      6        3,482          6,249      24       

Transportation and warehousing

   3,012           4,621      29        3,059          4,473      38       

Construction

   1,871            3,403       8         1,864           3,352       25         2,374           4,449      2        2,025          3,786      3       

Entertainment and recreation

   1,624           2,911      7        1,736          2,979      3       

Mining

   1,499            2,695       36         1,862           3,323       3         1,454           3,001      56        1,312          2,621      246       

Utilities

   1,217            2,854       -         1,044           2,551       -         869           2,333      -        1,168          2,799      -       

Entertainment and recreation

   1,210            2,066       4         1,451           2,321       10      

Other services

   864            1,188       10         881           1,207       11         714           1,017      16        729          945      24       

Public administration

   495            562       -         567           658       -         370           474      -        417          463      -       

Agribusiness

   368            527       4         318           444       11         304           478      2        284          426      2       

Individuals

   139            187       2         170           201       4         27           57      -        66          83      1       

Other

   7            6       6         14           17       -         15           15      4        2          2      5       

 

 

Total

   $56,156            99,288       341         53,953           96,725       367        $56,395           99,670      306        56,452          98,500      523       

 

 

By Loan Size:

                                            

Less than $200,000

   1 %       1       7         1           1       6         1 %      1      5        1          1      3       

$200,000 to $1 million

   4            3       10         5           3       15         3           2      8        3          3      5       

$1 million to $5 million

   10            8       25         11           9       22         7           6      15        9          7      16       

$5 million to $10 million

   8            7       25         8           7       19         6           5      10        7          6      13       

$10 million to $25 million

   24            21       15         25           22       24         21           18      57        23          20      54       

Greater than $25 million

   53            60       18         50           58       14         62           68      5        57          63      9       

 

 

Total

   100 %       100       100         100           100       100         100 %      100      100        100          100      100       

 

 

By State:

                                            

Ohio

   16 %       17       8         17           20       11         14 %      15      7        15          16      4       

Florida

   8           8      6        8          7      5       

Michigan

   8            7       9         9           8       11         7           7      13        7          7      5       

Florida

   8            7       12         7           6       17      

Illinois

   7            8       20         7           8       6         7           6      9        7          7      9       

Indiana

   5            5       4         5           5       5         4           4      3        4          4      2       

Georgia

   4           5      2        4          5      5       

North Carolina

   4            4       1         3           4       2         3           3      1        4          4      -       

Tennessee

   3            3       -         3           3       -         3           3      8        3          3      1       

Kentucky

   3            3       1         3           3       2         3           3      1        3          3      2       

Pennsylvania

   3            3       2         3           2       7      

All other states

   43            43       43         43           41       39      

Other

   47           46      50        45          44      67       

 

 

Total

   100 %       100       100         100           100       100         100 %      100      100        100          100      100       

 

 

The Bancorp’snon-power producing energy and nonowner-occupied commercial real estate portfolios have been identified by the Bancorp as loans which it believes represent a higher level of risk compared to the rest of the Bancorp’s commercial loan portfolio due to economic or market conditions within the Bancorp’s key lending areas.

Due to the sensitivity of thenon-power producing energy portfolio to downward movements in oil prices, the Bancorp saw

migration into criticized classifications during 2015 through the second quarter of 2016. However, in the second half of 2016 and 2017, the energy portfolio has stabilized and has shown improved performance. There has been a decrease in nonperforming assets in the past two quarters, primarily in the reserve-based lending category. Oil prices have stabilized, which has contributed to the improvement in the overall energy sector.

 

6167  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following tables provide an analysis of thenon-power producing energy loan portfolio:

TABLE 40:NON-POWER PRODUCING ENERGY PORTFOLIO

 

 

 
As of December 31, 2017 ($ in millions)                      For the Year Ended  
December 31, 2017  
 

 

  

 

 

 
   Pass     Criticized   Outstanding   Exposure   90 Days
Past Due
   Nonaccrual  Net Charge-offs   

 

 

Reserve-based lending

  $853    118      971      2,031     -    39     -     

Midstream

   309    -      309      1,002     -    -     -     

Oil field services

   26    155      181      269     -    16     5     

Oil and gas

   35    55      90      418     -    -     -     

Refining

   41    -      41      365     -    -     -     

 

 

Total

  $            1,264    328      1,592      4,085     -    55     5     

 

 

TABLE 41:NON-POWER PRODUCING ENERGY PORTFOLIO

 

 

 
As of December 31, 2016 ($ in millions)                      For the Year Ended  
December 31, 2016  
 

 

  

 

 

 
   Pass     Criticized   Outstanding   Exposure   90 Days
Past Due
   Nonaccrual  Net Charge-offs   

 

 

Reserve-based lending

  $            337    338      675      1,368     -    170     -     

Midstream

   308    -      308      1,001     -    -     -     

Oil field services

   153    74      227      357     -    37     19     

Oil and gas

   17    78      95      475     -    37     3     

Refining

   82    -      82      471     -    -     -     

 

 

Total

  $897    490��     1,387      3,672     -    244     22     

 

 

The following tables provide an analysis of nonowner-occupied commercial real estate loans by state (excluding loans held for sale):

TABLE 42: NONOWNER-OCCUPIED COMMERCIAL REAL ESTATE (EXCLUDING LOANS HELD FOR SALE)(a)

 

 

 
As of December 31, 2017 ($ in millions)                 For the Year Ended  
December 31, 2017  
 

 

  

 

 

 
   Outstanding     Exposure   90 Days
Past Due
   Nonaccrual  Net Charge-offs     

 

 

By State:

         

Ohio

  $1,636        2,156      -       1       8      

Florida

   1,016      1,495      -       1       -      

Illinois

   787      1,020      -       -       -      

Michigan

   559      717      -       3       1      

North Carolina

   506      795      -       -       -      

Indiana

   490      768      -       -       -      

Georgia

   481      906      -       -       -      

All other states

   2,142      3,616      -       2       1      

 

 
Total  $            7,617      11,473      -       7       10      

 

 

(a)   Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.

    

TABLE 43: NONOWNER-OCCUPIED COMMERCIAL REAL ESTATE (EXCLUDING LOANS HELD FOR SALE)(a)

 

 

 
As of December 31, 2016 ($ in millions)                 For the Year Ended  
December 31, 2016  
 

 

  

 

 

 
   Outstanding     Exposure   90 Days
Past Due
   Nonaccrual  Net Charge-offs  
(Recoveries)  
 

 

 

By State:

         

Ohio

  $1,393    1,844    -       4       (2)     

Florida

   947    1,521    -       -       1      

Illinois

   656    1,226    -       -       1      

Michigan

   574    709    -       1       3      

North Carolina

   552    788    -       -       -      

Georgia

   307    731    -       -       -      

Indiana

   291    508    -       -       -      

All other states

   2,515    4,105    -       4       3      

 

 
Total  $            7,235    11,432    -       9       6      

 

 

(a)   Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.

    

68  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Consumer Portfolio

Consumer credit risk management utilizes a framework that encompasses consistent processes for identifying, assessing, managing, monitoring, and reporting credit risk. These processes are supported by a credit risk governance structure that includes Board oversight, policies, risk limits, and risk committees.    

The Bancorp’s consumer portfolio is materially comprised of four categories of loans: residential mortgage loans, home equity loans, automobile loans and credit card. The Bancorp has identified certain credit characteristics within these four categories of loans which it believes represent a higher level of risk compared to the rest of the

Bancorp’s commercial loan portfolio, due to economic or market conditions within the Bancorp’s key lending areas.

The following tables provide an analysis of nonowner-occupied commercial real estate loans (excluding loans held for sale):

TABLE 39: NONOWNER-OCCUPIED COMMERCIAL REAL ESTATE(a)

  

 

 
                   For the Year Ended  
December 31, 2015  
 

 

 
As of December 31, 2015 ($ in millions)  Outstanding   Exposure   

90 Days

Past Due

   Nonaccrual   Net Charge-offs  
(Recoveries)  
 

 

 

By State:

          

Ohio

  $            1,334         1,594       -       7        (2)  

Florida

   687         1,041       -       9          

Illinois

   650         1,028       -       2          

Michigan

   598         722       -       13          

North Carolina

   375         669       -       -        (1)  

Indiana

   294         521       -       -          

All other states

   2,467         4,383       -       4        11   

 

 

Total

  $6,405         9,958       -       35        17   

 

 
(a)

Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.

TABLE 40: NONOWNER-OCCUPIED COMMERCIAL REAL ESTATE(a)

  

 

 
                   For the Year Ended  
December 31, 2014  
 

 

 
As of December 31, 2014 ($ in millions)  Outstanding     Exposure   90 Days
Past Due
   Nonaccrual   Net Charge-offs  
(Recoveries)  
 

 

 

By State:

          

Ohio

  $            1,283         1,685       -        7         (1)  

Florida

   575       871       -        16           

Illinois

   449       964       -        6           

Michigan

   724       797       -        9           

North Carolina

   369       537       -        -           

Indiana

   250       344       -        -           

All other states

   1,865       3,560       -        19           

 

 
Total  $5,515       8,758       -        57         18   

 

 
(a)

Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.

Consumer Portfolio

The Bancorp’s consumer portfolio is materially comprised of three categories of loans: residential mortgage, home equity and automobile. The Bancorp has identified certain categories within these loan types which it believes represent a higher level of risk compared to the rest of the consumer loan portfolio due to high loan amount to collateral value.portfolio. The Bancorp does not update LTV ratios for the consumer portfolio subsequent to origination except as part of thecharge-off process for real estate secured loans. Among consumer portfolios, legacy underwritten residential mortgage and brokered home equity portfolios exhibited the most stress during the past credit crisis. As of December 31, 2017, consumer real estate loans, consisting of residential mortgage loans and home equity loans, originated from 2005 through 2008 represent approximately 14% of the consumer real estate portfolio. These loans accounted for 46% of total consumer real estate secured losses for the year ended December 31, 2017. Current loss rates in the residential mortgage and home equity portfolios are belowpre-crisis levels. In addition to the consumer real estate portfolio, credit risk management continues to closely monitor the automobile portfolio performance. The automobile market has exhibited industry-wide gradual loosening of credit standards such as lower FICOs, longer terms and higher LTVs. Fifth Third has adjusted credit standards focused on improving risk-adjusted returns while maintaining credit risk tolerance. Fifth Third actively manages the automobile portfolio through concentration limits, which

mitigates credit risk through limiting the exposure to lower FICO scores, higher advance rates and extended term originations.

Residential Mortgage Portfoliomortgage portfolio

The Bancorp manages credit risk in the residential mortgage portfolio through conservative underwriting guidelines that limit exposure to higher LTV ratios and documentation standardslower FICO scores. Additionally, the portfolio is governed by concentration limits that ensure geographic, product and geographic and productchannel diversification. The Bancorp may also package and sell loans in the portfolio.

The Bancorp does not originate mortgage loans that permit customers to defer principal payments or make payments that are

less than the accruing interest. The Bancorp originates both fixedfixed-rate and ARM loans. Resets of rates on ARMs are not expected to have a material impact on credit costs inWithin the current interest rate environment, asARM portfolio approximately $846$630 million of ARM loans will have rate resets during the next twelve months. Of thosethese resets, 89%95% are expected to experience an increase in rate, with an average increase of approximately one third of a percent.0.6%.

Certain residential mortgage products have contractual features that may increase credit exposure to the Bancorp in the event of a decline in housing values. These types of mortgage products offered by the Bancorp include loans with high LTV ratios, multiple loans on the same collateral that when combined result in aan LTV greater than 80% and interest-only loans. The Bancorp has deemed residential mortgage loans with greater than 80% LTV ratios and no mortgage insurance as loans that represent a higher level of risk.

Portfolio residential mortgage loans from 2010 and later vintages represented 90% of the portfolio as of December 31, 2017 and had a weighted-average LTV of 72% and a weighted-average origination FICO of 760.

 

62  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following table provides an analysis of the residential mortgage portfolio loans outstanding by LTV at origination:origination as of:

 

TABLE 41: RESIDENTIAL MORTGAGE PORTFOLIO LOANS BY LTV AT ORIGINATION

  

TABLE 44: RESIDENTIAL MORTGAGE PORTFOLIO LOANS BY LTV AT ORIGINATION

TABLE 44: RESIDENTIAL MORTGAGE PORTFOLIO LOANS BY LTV AT ORIGINATION

 

 

 
  2015   2014  2017 2016 
  

 

 

    

 

 

  

 

 

   

 

 
      Weighted-
Average LTV
         

Weighted-     

Average LTV     

    Weighted-   Weighted-          
As of December 31 ($ in millions)  Outstanding      Outstanding    Outstanding Average LTV Outstanding Average LTV          

 

 

LTV£ 80%

  $10,198       65.6 %    $9,220     65.1 %   $11,767         66.4 %   $        11,412     65.9 %     

LTV > 80%, with mortgage insurance(a)

   1,300       93.3      1,206     93.8        1,890         94.8   1,664     94.3         

LTV > 80%, no mortgage insurance

   2,218       96.0      1,963     96.2        1,934         94.7   1,975     95.4         

 

 

Total

  $            13,716       73.4 %    $            12,389     73.0 %   $        15,591         73.7 %   $        15,051     73.2 %     

 

 
(a)Includes loans with both borrower and lender paid mortgage insurance.

The following tables provide an analysis of the residential mortgage portfolio loans outstanding with a greater than 80% LTV ratio and no mortgage insurance:

 

TABLE 42: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE

  

TABLE 45: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE

TABLE 45: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE

 

 
As of December 31, 2017 ($ in millions)              For the Year Ended
December 31, 2017
 

 

   

 

 
              For the Year Ended
December 31, 2015
       90 Days         

   Outstanding   Past Due   Nonaccrual   Net Charge-offs 
As of December 31, 2015 ($ in millions)  Outstanding   90 Days
  Past Due  
   Nonaccrual   Net Charge-offs 

 

 

By State:

                

Ohio

  $517         2         4           3              $439        4        2          1           

Illinois

   375         -         1           1               382        1        2          1           

Florida

   287        3        3          1           

Michigan

   280         1         1           2               226        1        1          -           

Florida

   278         1         4           -            

Indiana

   137         1         1           -               138        1        1          -           

North Carolina

   108         -         1           -               85        -        1          -           

Kentucky

   84         1         -           -               76        1        1          -           

All other states

   439         -         1           -               301        2        1          -           

 

 

Total

  $2,218         6         13           6              $1,934        13        12          3           

 

 

 

TABLE 43: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE

  

 

 
               For the Year Ended
December 31, 2014
 

 

 
As of December 31, 2014 ($ in millions)  Outstanding   90 Days
  Past Due  
   Nonaccrual   Net Charge-offs 

 

 

By State:

        

Ohio

  $509         1         10           22            

Illinois

   293         1         4           3            

Michigan

   265         1         5           11            

Florida

   247         1         5           3            

Indiana

   126         1         2           3            

North Carolina

   100         1         1           -            

Kentucky

   78         -         1           2            

All other states

   345         -         2           2            

 

 

Total

  $1,963         6         30           46 (a)            

 

 
(a)

Includes $34 in charge-offs related to the transfer of $720 restructured residential mortgage loans from the portfolio to loans held for sale during the fourth quarter of 2014.

69  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 46: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE    

 

 

 
As of December 31, 2016 ($ in millions)                For the Year Ended
December 31, 2016
 
   Outstanding   90 Days
Past Due
   Nonaccrual  Net Charge-offs 

 

 

By State:

       

Ohio

  $470        2        4         2           

Illinois

   362        1        1         -           

Florida

   290        1        3         -           

Michigan

   244        -        1         1           

Indiana

   143        -        1         -           

North Carolina

   96        -        1         -           

Kentucky

   75        1        -         -           

All other states

   295        -        -         1           

 

 

Total

  $            1,975        5        11         4           

 

 

 

Home Equity Portfolioequity portfolio

The Bancorp’s home equity portfolio is primarily comprised of home equity lines of credit. Beginning in the first quarter of 2013, the Bancorp’s newly originated home equity lines of credit have a10-year interest only interest-only draw period followed by a20-year amortization period. The home equity line of credit previously offered by the Bancorp was a revolving facility with a20-year term, minimum payments of interest onlyinterest-only and a balloon payment of principal at maturity. Peak maturity years for the balloon home equity lines of credit are 2025 to 2028 and approximately 26% of the balances mature before 2025.

The ALLL provides coverage for probable and estimable losses in the home equity portfolio. The allowance attributable to the portion of the home equity portfolio that has not been restructured in a TDR is calculated on a pooled basis with senior lien and junior lien categories segmented in the determination of the probable credit losses in the home equity portfolio. The modeled loss factor

for the home equity portfolio is based on the trailing twelve month historical loss rate for each category, as adjusted for certain prescriptive loss rate factors and certain qualitative adjustment factors to reflect risks associated with current conditions and trends. The prescriptive loss rate factors include adjustments for delinquency trends, LTV trends and refreshed FICO score trends. The qualitative factors include adjustments for credit administrationchanges in policies or procedures in underwriting, monitoring or collections, economic conditions, portfolio mix, lending and portfoliorisk management credit policypersonnel, results of internal audit and underwritingquality control reviews, collateral values and the national and local economy.geographic concentrations. The Bancorp considers home price index trends when determining the national and local economycollateral value qualitative factor.

The home equity portfolio is managed in two primary groups: loans outstanding with a combined LTV greater than 80% and those loans with aan LTV of 80% or less based upon appraisals at origination. For additional information on these loans, refer to

63  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The carrying value of the greater than 80% LTV home equity loansTable 48 and 80% or less LTV home equity loans were $2.7 billion and $5.6 billion, respectively, as of December 31, 2015.Table 49. Of the total $8.3$7.0 billion of outstanding home equity loans:

 

85%88% reside within the Bancorp’s Midwest footprint of Ohio, Michigan, Kentucky, Indiana and Illinois as of December 31, 2015;2017;

 

35%37% are in senior lien positions and 65%63% are in junior lien positions at December 31, 2015;2017;

 

Over 80%79% ofnon-delinquent borrowers made at least one payment greater than the minimum payment during the year ended December 31, 2015;2017; and

 

The portfolio had an average refreshedFICO score of 742 and 740744 at December 31, 2015 and 2014, respectively.2017.

The Bancorp actively manages lines of credit and makes reductionsadjustments in lendingcredit limits when it believes it is necessary based on FICO score deterioration and property devaluation.that a customer has encountered financial difficulties and/or a decreased ability to repay their current obligations. The Bancorp does not routinely obtain appraisals on performing loans to update

LTV ratios after origination. However, the Bancorp monitors the local housing markets by reviewing various home price indices and incorporates the impact of the changing market conditions in its on-goingongoing credit monitoring processes. For junior lien home equity loans which become 60 days or more past due, the Bancorp tracks the performance of the senior lien loans in which the Bancorp is the servicer and utilizes consumer credit bureau attributes to monitor the status of the senior lien loans that the Bancorp does not service. If the senior lien loan is found to be 120 days or more past due, the junior lien home equity loan is placed on nonaccrual status unless both loans are well-secured and in the process of collection. Additionally, if the junior lien home equity loan becomes 120 days or more past due and the senior lien loan is also 120 days or more past due, the junior lien home equity loan is assessed for charge-off, unless it is well-secured and in the process of collection.charge-off. Refer to the Analysis of Nonperforming Assets subsection of the Risk Management section of MD&A for more information.

 

70  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following table provides an analysis of home equity portfolio loans outstanding disaggregated based upon refreshed FICO score as of:

 

TABLE 44: HOME EQUITY PORTFOLIO LOANS OUTSTANDING BY REFRESHED FICO SCORE

  

 

 
($ in millions)  December 31, 2015   

% of

Total

  December 31, 2014   

% of      

Total      

 

 

 

Senior Liens:

       

FICO < 620

  $159     2 %  $178     2 %    

FICO 621-719

   563     7    613     7        

FICO > 720

   2,210     26    2,257     25        

 

 

Total senior liens

   2,932     35    3,048     34        

Junior Liens:

       

FICO < 620

   389     5    471     6        

FICO 621-719

   1,399     17    1,542     17        

FICO > 720

   3,581     43    3,825     43        

 

 

Total junior liens

   5,369     65    5,838     66        

 

 

Total

  $                    8,301     100 %  $                    8,886     100 %    

 

 

64  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Bancorp believes that home equity portfolio loans with a greater than 80% combined LTV ratio present a higher level of risk. The following table provides an analysis of the home equity portfolio loans outstanding in a senior and junior lien position by LTV at origination:

TABLE 45: HOME EQUITY PORTFOLIO LOANS OUTSTANDING BY LTV AT ORIGINATION

  

TABLE 47: HOME EQUITY PORTFOLIO LOANS OUTSTANDING BY REFRESHED FICO SCORE

TABLE 47: HOME EQUITY PORTFOLIO LOANS OUTSTANDING BY REFRESHED FICO SCORE

 

 
  2017 2016 
As of December 31 ($ in millions)  Outstanding   % of Total     Outstanding % of Total     

 

Senior Liens:

      

FICO£ 659

  $246       4 %  $262     3 % 

FICO660-719

   358       5       424     6     

FICO³ 720

   1,976       28       2,112     27     

 

Total senior liens

   2,580       37       2,798     36     

Junior Liens:

      

FICO£ 659

   541       8       633     8     

FICO660-719

   853       12       975     13     

FICO³ 720

   3,040       43       3,289     43     

 

Total junior liens

   4,434       63       4,897     64     

 

Total

  $            7,014       100 %  $            7,695     100 % 

 

The Bancorp believes that home equity portfolio loans with a greater than 80% combined LTV ratio present a higher level of risk. The following table provides an analysis of the home equity portfolio loans outstanding in a senior and junior lien position by LTV at origination:

The Bancorp believes that home equity portfolio loans with a greater than 80% combined LTV ratio present a higher level of risk. The following table provides an analysis of the home equity portfolio loans outstanding in a senior and junior lien position by LTV at origination:

 

TABLE 48: HOME EQUITY PORTFOLIO LOANS OUTSTANDING BY LTV AT ORIGINATION

TABLE 48: HOME EQUITY PORTFOLIO LOANS OUTSTANDING BY LTV AT ORIGINATION

 

 

 
  2015 2014   2017 2016 
As of December 31 ($ in millions)        Outstanding 

Weighted-  

Average LTV  

 Outstanding 

Weighted-     

Average LTV     

         Outstanding   Weighted-      
Average LTV      
 Outstanding Weighted-     
Average LTV     
 

 

 

Senior Liens:

           

LTV£ 80%

  $            2,557       55.1 %  $            2,635      55.2 %    $            2,266       54.9 %  $            2,454     55.1 % 

LTV > 80%

   375       89.1   413      89.1         314       88.9       344     89.0     

 

 

Total senior liens

   2,932       59.7   3,048      60.0         2,580       59.3       2,798     59.5     

Junior Liens:

           

LTV£ 80%

   3,088       67.6   3,281      67.4         2,603       67.5       2,892     67.6     

LTV > 80%

   2,281       90.9   2,557      91.1         1,831       90.4       2,005     90.7     

 

 

Total junior liens

   5,369       79.2   5,838      79.6         4,434       78.3       4,897     78.7     

 

 

Total

  $8,301       71.8 %  $8,886      72.4 %    $7,014       70.9 %  $7,695     71.2 % 

 

 

The following tables provide an analysis of home equity portfolio loans by state with a combined LTV greater than 80%:    

 

TABLE 46: HOME EQUITY PORTFOLIO LOANS OUTSTANDING WITH A LTV GREATER THAN 80%

TABLE 49: HOME EQUITY PORTFOLIO LOANS OUTSTANDING WITH AN LTV GREATER THAN 80%

TABLE 49: HOME EQUITY PORTFOLIO LOANS OUTSTANDING WITH AN LTV GREATER THAN 80%

 

 

For the Year Ended

December 31, 2015

As of December 31, 2017 ($ in millions)                        For the Year Ended
December 31, 2017
 

  Outstanding   Exposure   90 Days
Past Due
   Nonaccrual   Net Charge-offs 
As of December 31, 2015 ($ in millions)  Outstanding   Exposure   

90 Days

Past Due

   Nonaccrual   Net Charge-offs    

 

By State:

                    

Ohio

  $1,081        1,830   ��  -        10               6  $1,047        1,943        -          9          4           

Michigan

   519        773      -        5               5   357        569        -          5          1           

Illinois

   305        457      -        3               3   228        357        -          3          2           

Indiana

   220        352      -        3               3   155        264        -          3          1           

Kentucky

   208        344      -        2               1   143        257        -          2          1           

Florida

   95        129      -        2               1   68        98        -          2          -           

All other states

   228        320      -        5               2   147        216        -          3          -           

 

Total

  $            2,656        4,205      -        30              21  $            2,145        3,704        -          27          9           

 

TABLE 47: HOME EQUITY PORTFOLIO LOANS OUTSTANDING WITH A LTV GREATER THAN 80%

For the Year Ended

December 31, 2014

As of December 31, 2014 ($ in millions)  Outstanding   Exposure   

90 Days

Past Due

   Nonaccrual   Net Charge-offs    

By State:

          

Ohio

  $1,123        1,838      -        9               9

Michigan

   613        882      -        7               8

Illinois

   346        507      -        6               6

Indiana

   260        404      -        4               3

Kentucky

   246        390      -        3               3

Florida

   107        143      -        2               2

All other states

   275        376      -        5               4

Total

  $2,970        4,540      -        36              35

 

6571  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

TABLE 50: HOME EQUITY PORTFOLIO LOANS OUTSTANDING WITH AN LTV GREATER THAN 80%    

 

 

 
As of December 31, 2016 ($ in millions)  For the Year Ended  
December 31, 2016  
 
   Outstanding   Exposure   90 Days
Past Due
   Nonaccrual      Net Charge-offs  

 

 

By State:

          

Ohio

  $1,029        1,826        -    9         5 

Michigan

   434        666        -    5         2 

Illinois

   264        402        -    3         3 

Indiana

   185        302        -    2         1 

Kentucky

   172        297        -    2         1 

Florida

   82        114        -    2         - 

All other states

   183        260        -    4         3 

 

 

Total

  $            2,349        3,867        -    27         15   

 

 

Automobile Portfolioportfolio

The Bancorp’s automobile portfolio balances have declined since December 31, 2016 as payoffs exceeded new loan production due to a strategic shift focusing on improving risk-adjusted returns. Additionally, the concentration of lower FICO (<690) origination

balances remained within the Bancorp’s targeted credit risk tolerance during the year ended December 31, 2017. All concentration and guideline changes are monitored monthly to ensure alignment with original credit performance and return projections.

The following table provides an analysis of automobile portfolio loans outstanding disaggregated based upon FICO score as of:

TABLE 51: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING BY FICO SCORE AT ORIGINATION    

 

 

 
   2017  2016 

 

As of December 31 ($ in millions)

  Outstanding   % of Total          Outstanding   % of Total     

 

 

FICO£ 690

  $1,563        17 %  $1,714        17 % 

FICO > 690

   7,549        83        8,269        83     

 

 

Total

  $            9,112        100 %  $            9,983        100 % 

 

 

The automobile portfolio is characterized by direct and indirect lending products to consumers. As of December 31, 2015, 50%2017, 45% of the automobile loan portfolio is comprised of loans collateralized by

new automobiles. It is a common industry practice to advance

on automobile loans an amount in excess of the automobile value due to the inclusion of negative equitytrade-in, maintenance/warranty products, taxes, title and other fees paid at closing. The Bancorp monitors its exposure to these higher risk loans.

 

 

The following table provides an analysis of automobile portfolio loans outstanding by LTV at origination:origination as of:

 

TABLE 48: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING BY LTV AT ORIGINATION

  

TABLE 52: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING BY LTV AT ORIGINATION

TABLE 52: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING BY LTV AT ORIGINATION

 

 

 
  2015 2014  2017 2016 
As of December 31 ($ in millions)  Outstanding   Weighted-
Average LTV
 Outstanding   

Weighted-    

Average LTV    

  Outstanding   Weighted-        
Average LTV        
 Outstanding Weighted-  
Average LTV  
 

 

 

LTV£ 100%

  $7,740        81.7 %  $8,212        81.6 %   $            5,814        82.1 %  $            6,637      82.0 % 

LTV > 100%

   3,753        111.3   3,825        111.0        3,298        112.4       3,346      111.7     

 

 

Total

  $            11,493        91.7 %  $            12,037        91.3 %   $9,112        93.5 %  $9,983      92.4 % 

 

 

The following table provides an analysis of the Bancorp’s automobile portfolio loans with aan LTV at origination greater than 100%: as of and for the years ended:

 

TABLE 49: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING WITH A LTV GREATER THAN 100%     

  

 

 
As of ($ in millions)  Outstanding   

90 Days Past

Due and Accruing

   Nonaccrual         Net Charge-offs for the
Year Ended
 

 

 

December 31, 2015

  $                        3,753     5     1     20  

December 31, 2014

   3,825     5     1     16  

 

 

TABLE 53: AUTOMOBILE PORTFOLIO LOANS OUTSTANDING WITH AN LTV GREATER THAN 100%

 

 

 
($ in millions)  Outstanding   90 Days Past
Due and Accruing
   Nonaccrual   Net Charge-offs 

 

 

December 31, 2017

  $            3,298        7        1        24     

December 31, 2016

   3,346        5        1        23     

 

 

Credit card portfolio

The credit card portfolio consists of predominately prime accounts with 97% of loan balances existing within the Bancorp’s footprint as of December 31, 2017. At December 31, 2017 and December 31,

2016, 76% and 78%, respectively, of the outstanding balances were originated through branch-based relationships with the remainder coming from direct mail campaigns and online acquisitions.

72  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table provides an analysis of credit card portfolio loans outstanding disaggregated based upon FICO score as of:

TABLE 54: CREDIT CARD PORTFOLIO LOANS OUTSTANDING BY FICO SCORE AT ORIGINATION 

 

 
   2017   2016 

 

As of December 31 ($ in millions)

  Outstanding   % of Total          Outstanding   % of Total     

 

 

FICO£ 659

  $61       3 %   $45       2 % 

FICO660-719

   581       25         521       23     

FICO³ 720

   1,657       72         1,671       75     

 

 

Total

  $            2,299       100 %   $            2,237       100 % 

 

 

 

European Exposure

The Bancorp has no direct sovereign exposure to any European government as of December 31, 2015.2017. In providing services to our customers, the Bancorp routinely enters into financial transactions with foreign domiciled and U.S. subsidiaries of foreign businesses as well as foreign financial institutions. These financial transactions are in the form of loans, loan commitments, letters of credit, derivatives, guarantees, bankersbanker’s acceptances and securities. The

Bancorp’s risk appetite for foreign country exposure is managed by

having established country exposure limits. The Bancorp’s total exposure to European domiciled or owned businesses and European financial institutions was $3.7$3.2 billion and funded exposure was $1.9$1.6 billion as of December 31, 2015.2017. Additionally, the Bancorp was within its established country exposure limits for all European countries.

The Bancorp continues to monitor the Brexit situation and its potential impact on the Bancorp. The Bancorp’s United Kingdom exposure is shown in the following table.

 

 

The following table provides detail about the Bancorp’s exposure to all European domiciled and ownedU.S. subsidiaries of European businesses andas well as European financial institutions as of December 31, 2015:2017:

 

TABLE 50: EUROPEAN EXPOSURE

  

 

TABLE 55: EUROPEAN EXPOSURE

TABLE 55: EUROPEAN EXPOSURE

 

             
 Sovereigns   Financial Institutions   Non-Financial
Institutions
   Total 

 
  

 

 

   Sovereigns   Financial Institutions   Non-Financial
Institutions
   Total 
($ in millions) 

Total

 Exposure(a)

   Funded
Exposure
   Total
Exposure(a)
   Funded
Exposure
   Total
Exposure(a)
   Funded
Exposure
   Total
Exposure(a)
   Funded
Exposure
       Total
    Exposure(a)
 Funded    
Exposure    
   Total
Exposure(a)
   Funded 
Exposure 
   Total
Exposure(a)
   Funded 
Exposure 
   Total
Exposure(a)
   Funded 
Exposure 
 

 

 

Peripheral Europe(b)

 $ -     -     270     228     43     24     313     252    $                    -    -      79    37    265    87    344    124 

Other Eurozone(c)

  -     -     
294
  
   133     
1,850
  
   994     
2,144
  
   1,127        -      341    116    1,366    759    1,707    875 
  

 

 

 

 

Total Eurozone

 $ -     -     564     361     1,893     1,018     2,457     1,379    $   -      420    153    1,631    846    2,051    999 

United Kingdom

      -      135    135    929    453    1,064    588 

Other Europe(d)

  -     -     145     92     
1,058
  
   417     1,203     509        -      -    -    72    20    72    20 
  

 

 

 

 

Total Europe

 

$

 -     -     
709
  
   453     
2,951
  
   1,435     
3,660
  
   1,888    $   -      555    288    2,632    1,319    3,187    1,607 

 

 
(a)

Total exposure includes funded exposure and unfunded commitments.

(b)

Peripheral Europe includes Greece, Ireland, Italy, Portugal and Spain.

(c)

Eurozone includes countries participating in the European common currency (Euro).

(d)

Other Europe includes European countries and territories not part of the Eurozone (primarily the United KingdomNorway, Sweden, Switzerland and Switzerland)Isle of Man).

 

Analysis of Nonperforming Assets

Nonperforming assets include nonaccrual loans and leases for which ultimate collectability of the full amount of the principal and/or interest is uncertain; restructured commercial and credit card loans which have not yet met the requirements to be classified as a performing asset; restructured consumer loans which are 90 days past due based on the restructured terms unless the loan is both well-secured and in the process of collection; and certain other assets, including OREO and other repossessed property. A summary of nonperforming assets is included in Table 51.56. For further information on the Bancorp’s policies related to accounting for delinquent and nonperforming loans and leases, refer to the Nonaccrual Loans and Leases section of Note 1 of the Notes to Consolidated Financial Statements.

Nonperforming assets were $659$495 million at December 31, 20152017 compared to $783$751 million at December 31, 2014.2016. At December 31, 2015, $122017, $6 million of nonaccrual loans were held for sale, compared to $39$13 million at December 31, 2014. The decrease in nonaccrual loans held for sale from December 31, 2014 was primarily due to the sale in 2015 of $10 million of held for sale residential mortgage loans classified as TDRs. The remaining decrease was due to paydowns and additional sales of nonaccrual loans held for sale.2016.

Nonperforming assets as a percentage of total loans and leases and OREO, as of December 31, 2015 were 0.70%, compared to 0.86% as of December 31, 2014. Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO were 0.70%0.53% as of December 31, 2015,2017 compared to 0.82%

0.80% as of December 31, 2014.2016. Nonaccrual loans and leases secured by real estate were 43%33% of total nonaccrual loans and leases as of December 31, 20152017 compared to 50%25% as of December 31, 2014.2016.

66  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Commercial portfolio nonaccrual loans and leases were $341$306 million at December 31, 2015,2017, a decrease of $26$217 million from December 31, 2014 as charge-offs, loan paydowns/payoffs, loan transfers2016 primarily due to OREO and loans sold outpaced new nonaccruals.a decrease of $189 million in the energy related portfolio, of which $131 million was related to the reserve-based lending energy portfolio.

Consumer portfolio nonaccrual loans and leases were $165$131 million at December 31, 2015,2017, a decrease of $47$6 million from December 31, 2014. The decrease was primarily due to charge-offs, loan paydowns/payoffs and transfers to accrual status and OREO which outpaced new nonaccrual loans. Geographical market conditions continue to be a large driver of nonaccrual activity as Florida properties represent approximately 11% of residential mortgage balances, but represent 27% of nonaccrual loans at December 31, 2015.2016. Refer to Table 5257 for a rollforward of the portfolio nonaccrual loans and leases.

OREO and other repossessed property was $141$52 million at December 31, 2015,2017, compared to $165$78 million at December 31, 2014.2016. The Bancorp recognized $24$10 million and $26$17 million in losses on the sale or write-down of OREO properties during the years ended December 31, 20152017 and 2014,2016, respectively. The decrease from the prior year was primarily due to a modest improvement in general economic conditions.

During the years ended December 31, 20152017 and 2014,2016, approximately $35$36 million and $49$41 million, respectively, of interest income would have been recognized if the nonaccrual and renegotiated loans and leases on nonaccrual status had been current in accordance with their original terms. Although these values help demonstrate the costs of carrying nonaccrual credits, the Bancorp does not expect to recover the full amount of interest as nonaccrual loans and leases are generally carried below their principal balance.

 

 

TABLE 51: SUMMARY OF NONPERFORMING ASSETS AND DELINQUENT LOANS    

  

 

 
As of December 31 ($ in millions)  2015    2014     2013     2012     2011       

 

 

Nonaccrual portfolio loans and leases:

         

Commercial and industrial loans

  $82    86     127     234     408      

Commercial mortgage loans

   56    64     90     215     358      

Commercial construction loans

   -    -     10     70     123      

Commercial leases

   -    3     3     1     9      

Residential mortgage loans

   28    44     83     114     134      

Home equity

   62    72     74     30     25      

Other consumer loans and leases

   -    -     -     1     1      

Nonaccrual portfolio restructured loans and leases:

         

Commercial and industrial loans

   177    142     154     96     79      

Commercial mortgage loans(c)

   25    71     53     67     63      

Commercial construction loans

   -    -     19     6     15      

Commercial leases

   1    1     2     8     3      

Residential mortgage loans

   23    33     83     123     141      

Home equity

   17    21     19     23     29      

Automobile loans

   2    1     1     2     2      

Credit card

   33    41     33     39     48      

 

 

Total nonaccrual portfolio loans and leases(b)

   506    579     751     1,029     1,438      

OREO and other repossessed property(d)

   141    165     229     257     378      

 

 

Total nonperforming portfolio assets

   647    744     980     1,286     1,816      

Nonaccrual loans held for sale

   1    24     6     25     131      

Nonaccrual restructured loans held for sale

   11    15     -     4     7      

 

 

Total nonperforming assets

  $            659                783                 986             1,315             1,954      

 

 

Loans and leases 90 days past due and accruing:

         

Commercial and industrial loans

  $7    -     -     1     4      

Commercial mortgage loans

   -    -     -     22     3      

Commercial construction loans

   -    -     -     1     1      

Residential mortgage loans(a)

   40    56     66     75     79      

Home equity

   -    -     -     58     74      

Automobile loans

   10    8     8     8     9      

Credit card

   18    23     29     30     30      

 

 

Total loans and leases 90 days past due and accruing

  $75    87     103     195     200      

 

 

Nonperforming portfolio assets as a percent of portfolio loans and leasesand OREO

   0.70 %   0.82     1.10     1.49     2.23      

ALLL as a percent of nonperforming portfolio assets

   197    178     161     144     124      

 

 

73  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 56: SUMMARY OF NONPERFORMING ASSETS AND DELINQUENT LOANS    

 

 

 
As of December 31 ($ in millions)  2017  2016   2015   2014   2013     

 

 

Nonaccrual portfolio loans and leases:

         

Commercial and industrial loans

  $            144   302    82    86    127     

Commercial mortgage loans

   12   27    56    64    90     

Commercial construction loans

   -   -    -    -    10     

Commercial leases

   -   2    -    3    3     

Residential mortgage loans

   17   17    28    44    83     

Home equity

   56   55    62    72    74     

Nonaccrual portfolio restructured loans and leases:

         

Commercial and industrial loans

   132   176    177    142    154     

Commercial mortgage loans(c)

   14   14    25    71    53     

Commercial construction loans

   -   -    -    -    19     

Commercial leases

   4   2    1    1    2     

Residential mortgage loans

   13   17    23    33    83     

Home equity

   18   18    17    21    19     

Automobile loans

   1   2    2    1    1     

Credit card

   26   28    33    41    33     

 

 

Total nonaccrual portfolio loans and leases(b)

   437   660    506    579    751     

OREO and other repossessed property(d)

   52   78    141    165    229     

 

 

Total nonperforming portfolio assets

   489   738    647    744    980     

Nonaccrual loans held for sale

   5   4    1    24    6     

Nonaccrual restructured loans held for sale

   1   9    11    15    -     

 

 

Total nonperforming assets

  $495   751    659    783    986     

 

 

Loans and leases 90 days past due and still accruing:

         

Commercial and industrial loans

  $3   4    7    -    -     

Residential mortgage loans(a)

   57   49    40    56    66     

Automobile loans

   10   9    10    8    8     

Credit card

   27   22    18    23    29     

 

 

Total loans and leases 90 days past due and still accruing

  $97   84    75    87    103     

 

 

Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO

   0.53  %   0.80    0.70    0.82    1.10     

 

ALLL as a percent of nonperforming portfolio assets

   245   170    197    178    161     

 

 
(a)

Information for all periods presented excludes loansadvances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. These loansadvances were$335290, $312, $335, $373 $378, $414 and $309$378 as ofDecember 31, 20152017, 2016, 2015, 2014 2013, 2012, and 2011,2013, respectively. The Bancorp recognized losses of$85, $6, $8, $13 $5, $2 and immaterial$5 for the years endedDecember 31, 20152017, 2016, 2015, 2014 and 2013, 2012 and 2011, respectively, due to claim denials and curtailments associated with these advances.respectively.

(b)

Includes$63, $4, $6, $9, $10, $10 and $17$10 of nonaccrual government insured commercial loans whose repayments are insured by the SBA atDecember 31, 20152017, 2016, 2015, 2014 and 2013, 2012 and 2011, respectively, andof which$2,3,$4, $2, $1,1,$2, $4, and $2 ofwere restructured nonaccrual government insured commercial loans atDecember 31, 20152017, 2016, 2015, 2014 2013, 2012 and 2011,2013, respectively.

(c)

Excludes$ $19, 20, 21, and 21 of restructured nonaccrual loans atDecember 31, 2016, 2015, and $21 at both December 31, 2014 and 2013, respectively, associated with a consolidated VIE in which the Bancorp hashad no continuing credit risk due to the risk being assumed by a third party. Refer to Note 11 of the Notes to Consolidated Financial Statements for further discussion on the deconsolidation of the VIE associated with these loans in the third quarter of 2017.

(d)

Excludes$14, $71 $77, $72 and $64$77 of OREO related to government insured loans atDecember 31, 2015, 2014 2013, 2012 and 2011,2013, respectively. The Bancorp hashad historically excluded government guaranteed loans classified in OREO from its nonperforming asset disclosures. Upon the prospective adoption on January 1, 2015 of ASU2014-14, “Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure,” government guaranteed loans meeting certain criteria will beare reclassified to other receivables rather than OREO upon foreclosure. As ofDecember 31, 2015, the Bancorp had$44 of government guaranteed loans classified as other receivables. Refer to Note 1 of the Notes to Consolidated Financial Statements for further information on the adoption of this amended guidance.

 

6774  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following table provides a rollforward of portfolio nonaccrual loans and leases, by portfolio segment:

 

TABLE 52: ROLLFORWARD OF PORTFOLIO NONACCRUAL LOANS AND LEASES

  

TABLE 57: ROLLFORWARD OF PORTFOLIO NONACCRUAL LOANS AND LEASES

TABLE 57: ROLLFORWARD OF PORTFOLIO NONACCRUAL LOANS AND LEASES

 

 

 
For the year ended December 31, 2015 ($ in millions)  Commercial 

Residential

Mortgage

 Consumer Total 
For the year ended December 31, 2017 ($ in millions)  Commercial   Residential
Mortgage  
   Consumer   Total   

 

 

Balance, beginning of period

  $367    77    135    579      $523     34     103     660    

Transfers to nonaccrual

   515    65    155    735    

Transfers to nonaccrual status

   300     46     130     476    

Transfers to accrual status

   (9  (39  (68  (116)      (86)    (26)    (55)    (167)   

Transfers from held for sale

   -    5    -    5    

Transfers to held for sale

   (12  -    (1  (13)      (5)            (5)   

Loans sold from portfolio

   (11  -    -    (11)      (16)            (16)   

Loan paydowns/payoffs

   (189  (15  (28  (232)      (282)    (10)    (29)    (321)   

Transfers to OREO

   (32  (29  (18  (79)      (2)    (10)    (7)    (19)   

Charge-offs

   (298  (13  (61  (372)      (154)    (4)    (41)    (199)   

Draws/other extensions of credit

   10    -    -    10       28             28    

 

 

Balance, end of period

  $341    51    114    506      $306     30     101     437    

 

 
             

 

 

For the year ended December 31, 2014 ($ in millions)

     

For the year ended December 31, 2016 ($ in millions)

        

 

 

Balance, beginning of period

  $                    458               166               127               751      $                  341                     51                     114                     506    

Transfers to nonaccrual

   520   135   219   874    

Transfers to nonaccrual status

   716     51     149     916    

Transfers to accrual status

   (71 (79 (88 (238)      (13)    (43)    (70)    (126)   

Transfers to held for sale

   (4 (24  -   (28)      (42)            (42)   

Loans sold from portfolio

   (43  -    -   (43)      (11)            (11)   

Loan paydowns/payoffs

   (181 (41 (9 (231)      (256)    (7)    (31)    (294)   

Transfers to OREO

   (41 (67 (22 (130)      (8)    (14)    (11)    (33)   

Charge-offs

   (279 (13 (92 (384)      (232)    (4)    (48)    (284)   

Draws/other extensions of credit

   8    -    -   8       28             28    

 

 

Balance, end of period

  $367   77   135   579      $523     34     103     660    

 

 

 

Troubled Debt Restructurings

If a borrower is experiencing financial difficulty, the Bancorp may consider, in certain circumstances, modifying the terms of their loan to maximize collection of amounts due. Typically, these modifications reduce the loan interest rate, extend the loan term, reduce the accrued interest or in limited circumstances, reduce the principal balance of the loan. These modifications are classified as TDRs.

At the time of modification, the Bancorp maintains certain consumer loan TDRs (including residential mortgage loans, home equity loans, and other consumer loans) on accrual status, provided there is reasonable assurance of repayment and performance according to the modified terms based upon a current, well-documented credit evaluation. Commercial loans modified as part

of a TDR are maintained on accrual status provided there is a sustained payment history of six months or greater prior to the modification in accordance with the modified terms and all remaining contractual payments under the modified terms are reasonably assured of collection. TDRs of commercial loans and credit card loans that do not have a sustained payment history of six months or greater in accordance with the modified terms remain on nonaccrual status until a six monthsix-month payment history is sustained.

Consumer restructured loans on accrual status totaled $979$927 million and $905$958 million at December 31, 20152017 and 2014,2016, respectively. As of December 31, 2015,2017, the percentage of restructured residential mortgage loans, home equity loans, and credit card loans that are past due 30 days or more were 30%28%, 11% and 31%37%, respectively.

 

 

The following tables summarize portfolio TDRs by loan type and delinquency status:

 

TABLE 53: ACCRUING AND NONACCRUING PORTFOLIO TDRs

  

TABLE 58: ACCRUING AND NONACCRUING PORTFOLIO TDRs

TABLE 58: ACCRUING AND NONACCRUING PORTFOLIO TDRs

 

   Accruing               Accruing      
As of December 31, 2015 ($ in millions)   Current   

30-89 Days

Past Due

   

90 Days or

More Past Due

   Nonaccruing   Total 
As of December 31, 2017 ($ in millions)          Current    30-89 Days
Past Due
   90 Days or
More Past Due
  Nonaccruing  Total      

 

Commercial loans(c)(b)

 

$

   487       4       -         203       694      $    249    -         -      150       399  

Residential mortgage loans(a)

    443       54       110         23       630         478    52         122           13       665  

Home equity

    307       20       -         17       344         236    12         -        18       266  

Automobile loans

    17       -       -         2       19         8    -         -          1           9  

Credit card

    24       4       -         33       61         16      3         -        26         45  

 

Total

 

$

           1,278               82               110                 278               1,748      $    987    67         122         208    1,384  

 

(a)

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 ofDecember 31, 20152017, these advances represented$202282of current loans,$4240of30-89 days past due loans and$99108of 90 days or more past due loans.

(b)

As ofDecember 31, 2015, excludes$7 of restructured accruing loans and$20 of restructured nonaccrual loans associated with a consolidated VIE in which the Bancorp has no continuing credit risk due to the risk being assumed by a third party.

(c)

Excludes restructured nonaccrual loans held for sale.

 

6875  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

TABLE 54: ACCRUING AND NONACCRUING PORTFOLIO TDRs

  

TABLE 59: ACCRUING AND NONACCRUING PORTFOLIO TDRs

TABLE 59: ACCRUING AND NONACCRUING PORTFOLIO TDRs

 

  Accruing                   Accruing                    
As of December 31, 2014 ($ in millions)    Current    30-89 Days
Past Due
  90 Days or    
More Past Due    
 Nonaccruing  Total        
As of December 31, 2016 ($ in millions)    Current     30-89 Days
Past Due
   90 Days or    
More Past Due    
 Nonaccruing   Total         

Commercial loans(b)(c)

 $     867      2     -  214    1,083      $     319      3        -      192        514     

Residential mortgage loans(c)(a)

  312      54    119  33    518       458      56        121      17        652     

Home equity

  337      23     -  21    381       269      18        -      18        305     

Automobile loans

  22      1     -  1    24       12      -        -      2        14     

Credit card

 31      6     -  41    78      20      4        -      28        52     

Total

 $     1,569      86    119  310    2,084      $     1,078      81        121      257        1,537     
(a)

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, 2014,2016, these advances represented $165$230 of current loans, $42$46 of30-89 days past due loans and $102$107 of 90 days or more past due loans.

(b)

As of December 31, 2014,2016, excludes $7 of restructured accruing loans and $21$19 of restructured nonaccrual loans associated with a consolidated VIE in which the Bancorp hashad no continuing credit risk due to the risk being assumed by a third party. Refer to Note 11 of the Notes to Consolidated Financial Statements for further discussion on the deconsolidation of the VIE associated with these loans in the third quarter of 2017.

(c)

Excludes restructured nonaccrual loans held for sale.

 

Analysis of Net Loan Charge-offs

Net charge-offs were 4832 bps and 6439 bps of average portfolio loans and leases for the years ended December 31, 20152017 and 2014,2016, respectively. Table 5560 provides a summary of credit loss experience and net charge-offs as a percentage of average portfolio loans and leases outstanding by loan category.

The ratio of commercial loan and lease net charge-offs to average portfolio commercial loans and leases decreased to 4622 bps during the year ended December 31, 20152017, compared to 4833 bps induring the year ended December 31, 2016. Commercial loan net charge-offs decreased $65 million for the year ended December 31, 2017, compared to the same period in the prior year, primarily as a result of an increase in average commercial loan and lease balances of $2.3 billion. Commercial net charge-offs were flatyear. The decrease for the year ended December 31, 2015 compared to2017, was driven by a decrease in net charge-offs on commercial and industrial loans. Included in net

charge-offs on commercial and industrial loans for the yearyears ended December 31, 2014.2017 and 2016 were $25 million and $30 million, respectively, of charge-offs related to certain healthcare loans and $5 million and $39 million, respectively, of charge-offs in the energy related portfolio including oil field services and coal mining loans.

The ratio of consumerConsumer loan and lease net charge-offs toas a percent of average portfolio consumer loans and leases decreased to 51were 49 bps for the year ended December 31, 20152017 compared to 8648 bps for the year ended December 31, 2014. Residential mortgage2016. Consumer loan net charge-offs which typically involve partial charge-offs based upon appraised values of underlying collateral, decreased $109increased $1 million from

December 31, 2014. The decrease in net charge-offs on residential mortgage loans was primarily due to an $87 million charge-off related to the transfer of certain residential mortgage loans from portfolio to held for sale in the fourth quarter of 2014. The remaining decrease was due to improvements in delinquencies and loss severities. The Bancorp expects the composition of the residential mortgage portfolio to improve as it continues to retain high quality residential mortgage loans.

Home equity net charge-offs decreased $20 million compared to the year ended December 31, 2014, primarily due to improvements in loss severities. In addition, management actively manages lines of credit and makes reductions in lending limits when it believes it is necessary based on FICO score deterioration and property devaluation.

Automobile loans, credit card and other consumer loans and leases net charge-offs remained relatively flat2017 compared to the same period in the prior year. The Bancorp utilizesRefer to Table 60 for a risk-adjusted pricing methodology to ensure adequate compensation is received for those products that have higher credit costs.summary of net charge-offs by consumer loan category.

 

 

6976  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

TABLE 55: SUMMARY OF CREDIT LOSS EXPERIENCE   
TABLE 60: SUMMARY OF CREDIT LOSS EXPERIENCETABLE 60: SUMMARY OF CREDIT LOSS EXPERIENCE  
For the years ended December 31 ($ in millions)     2015    2014    2013    2012    2011        2017         2016         2015         2014         2013        

Losses charged-off:

                                             

Commercial and industrial loans

   $    (253)     (248)     (207)     (194)     (314)   $   (136)      (205)      (253)      (248)      (207)  

Commercial mortgage loans

     (39)     (37)     (66)     (120)     (211)     (16)      (22)      (39)      (37)      (66)  

Commercial construction loans

     (4)     (13)     (9)     (34)     (89)           -      (4)      (13)      (9)  

Commercial leases

     (2)     (1)     (2)     (10)     (1)     (2)      (5)      (2)      (1)      (2)  

Residential mortgage loans

     (28)     (139)     (70)     (129)     (180)     (15)      (19)      (28)      (139)      (70)  

Home equity

     (55)     (75)     (114)     (172)     (234)     (32)      (41)      (55)      (75)      (114)  

Automobile loans

     (46)     (44)     (44)     (55)     (85)     (58)      (54)      (46)      (44)      (44)  

Credit card

     (94)     (95)     (92)     (90)     (114)     (94)      (89)      (94)      (95)      (92)  

Other consumer loans and leases

     (21)     (27)     (33)     (33)     (86)     (28)      (21)      (21)      (27)      (33)  

Total losses charged-off

    (542)     (679)     (637)     (837)     (1,314)     (381)      (456)      (542)      (679)      (637)  

Recoveries of losses previously charged-off:

                                             

Commercial and industrial loans

     24      26      39      29      38      25      33      24      26      39  

Commercial mortgage loans

     12      11      19      21      16      4      7      12      11      19  

Commercial construction loans

     1      1      5      9      4      -      1      1      1      5  

Commercial leases

     -       -      1      2      3      -      1      -      -      1  

Residential mortgage loans

     11      13      10      7      7      8      9      11      13      10  

Home equity

     16      16      17      15      14      13      14      16      16      17  

Automobile loans

     18      17      22      24      32      21      19      18      17      22  

Credit card

     12      13      14      16      16      10      9      12      13      14  

Other consumer loans and leases

     2      7      9      10      12      2      1      2      7      9  

Total recoveries of losses previously charged-off

    96      104      136      133      142      83      94      96      104      136  

Net losses charged-off:

                                             

Commercial and industrial loans

     (229)     (222)     (168)     (165)     (276)     (111)      (172)      (229)      (222)      (168)  

Commercial mortgage loans

     (27)     (26)     (47)     (99)     (195)     (12)      (15)      (27)      (26)      (47)  

Commercial construction loans

     (3)     (12)     (4)     (25)     (85)                 (3)      (12)      (4)  

Commercial leases

     (2)     (1)     (1)     (8)     2      (2)      (4)      (2)      (1)      (1)  

Residential mortgage loans

     (17)     (126)     (60)     (122)     (173)     (7)      (10)      (17)      (126)      (60)  

Home equity

     (39)     (59)     (97)     (157)     (220)     (19)      (27)      (39)      (59)      (97)  

Automobile loans

     (28)     (27)     (22)     (31)     (53)     (37)      (35)      (28)      (27)      (22)  

Credit card

     (82)     (82)     (78)     (74)     (98)     (84)      (80)      (82)      (82)      (78)  

Other consumer loans and leases

     (19)     (20)     (24)     (23)     (74)     (26)      (20)      (19)      (20)      (24)  

Total net losses charged-off

   $    (446)     (575)     (501)     (704)     (1,172)   $   (298)      (362)      (446)      (575)      (501)  

Net losses charged-off as a percent of average portfolio loans and leases:

                                             

Commercial and industrial loans

         0.54%     0.54      0.44      0.50      0.97      0.27 %      0.40      0.54      0.54      0.44  

Commercial mortgage loans

     0.38      0.34      0.56      1.02      1.89      0.17      0.23      0.38      0.34      0.56  

Commercial construction loans

     0.11      0.79      0.51      3.08      4.96      -      0.01      0.11      0.79      0.51  

Commercial leases

     0.04      0.01      0.04      0.22      (0.08)     0.06      0.10      0.04      0.01      0.04  

Total commercial loans and leases

    0.46      0.48      0.44      0.63      1.26      0.22      0.33      0.46      0.48      0.44  

Residential mortgage loans

     0.13      0.99      0.48      1.07      1.75      0.04      0.07      0.13      0.99      0.48  

Home equity

     0.46      0.65      1.02      1.51      1.97      0.26      0.33      0.46      0.65      1.02  

Automobile loans

     0.24      0.22      0.18      0.26      0.47      0.39      0.33      0.24      0.22      0.18  

Credit card

     3.60      3.60      3.67      3.79      5.19      3.93      3.69      3.60      3.60      3.67  

Other consumer loans and leases

     3.26      5.80      6.71      7.02      15.29      2.57      2.93      3.26      5.80      6.71  

Total consumer loans and leases

    0.51      0.86      0.77      1.13      1.79      0.49      0.48      0.51      0.86      0.77  

Total net losses charged-off as a percent of average portfolio loans and leases

    0.48%     0.64      0.58      0.85      1.49      0.32      0.39      0.48      0.64      0.58  

 

Allowance for Credit Losses

The allowance for credit losses is comprised of the ALLL and the reserve for unfunded commitments. The ALLL provides coverage for probable and estimable losses in the loan and lease portfolio. The Bancorp evaluates the ALLL each quarter to determine its adequacy to cover inherent losses. Several factors are taken into consideration in the determination of the overall ALLL, including an unallocated component. These factors include, but are not limited to, the overall risk profile of the loan and lease portfolios, netcharge-off experience, the extent of impaired loans and leases, the level of nonaccrual loans and leases, the level of 90 days past due loans and leases and the overall level of the ALLL as a percent of portfolio loans and leases. The Bancorp also considers overall asset quality trends, credit administration and portfolio management practices, risk identification practices, credit policy and underwriting practices, overall portfolio growth, portfolio concentrations and

current national and local economic conditions that might impact the portfolio. Refer to the Critical Accounting Policies section of MD&A for more information.

During the year ended December 31, 2015,2017, the Bancorp did not substantively change any material aspect of its overall approach in the determination of the ALLL and there have been no material changes in assumptions or estimation techniques as compared to prior periods that impacted the determination of the current period allowance. In addition to the ALLL, the Bancorp maintains a reserve for unfunded commitments recorded in other liabilities in the Consolidated Balance Sheets. The methodology used to determine the adequacy of this reserve is similar to the Bancorp’s methodology for determining the ALLL. The provision for unfunded commitments is included in other noninterest expense in the Consolidated Statements of Income.

70  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The ALLL attributable to the portion of the residential mortgage and consumer loan and lease portfolio that has not been restructured is determined on a pooled basis with the segmentation based on the similarity of credit risk characteristics.

77  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Loss factors for real estate backed consumer loans are developed for each pool based on the trailing twelve month historical loss rate, as adjusted for certain prescriptive loss rate factors and certain qualitative adjustment factors. The prescriptive loss rate factors and qualitative adjustments are designed to reflect risks associated with current conditions and trends which are not believed to be fully reflected in the trailing twelve month historical loss rate. For real estate backed consumer loans, the prescriptive loss rate factors include adjustments for delinquency trends, LTV trends, refreshed FICO score trends and product mix, and the qualitative factors include adjustments for credit administrationchanges in policies or procedures in underwriting, monitoring or collections, economic conditions, portfolio mix, lending and portfoliorisk management practices, credit policypersonnel, results of internal audit and underwriting practicesquality control reviews, collateral values and the national and local economy.geographic concentrations. The Bancorp considers home price index trends in its footprint when determining the national and local economy qualitative factor. The Bancorp also considers the volatility of collateral valuation trends when determining the unallocated component of the ALLL.collateral value qualitative factor.

The Bancorp’s determination of the ALLL for commercial loans is sensitive to the risk grades it assigns to these loans. In the event that 10% of commercial loans in each risk category would experience a downgrade of one risk category, the allowance for

commercial loans would increase by approximately $149$157 million at December 31, 2015.2017. In addition, the Bancorp’s determination of the ALLL for residential mortgage loans and consumer loans and leases is sensitive to changes in estimated loss rates. In the event that estimated loss rates would increase by 10%, the ALLL for residential mortgage loans and consumer loans and leases would increase by approximately $32 million at December 31, 2015.2017. As several qualitative and quantitative factors are considered in determining the ALLL, these sensitivity analyses do not necessarily reflect the nature and extent of future changes in the ALLL. They are intended to provide insights into the impact of adverse changes to risk grades and estimated loss rates and do not imply any expectation of future deterioration in the risk ratings or loss rates. Given current processes employed by the Bancorp, management believes the risk grades and estimated loss rates currently assigned are appropriate.

During the third quarter of 2017, the United States incurred two major hurricanes impacting the states of Texas and Florida. The Bancorp provided assistance to customers that were negatively impacted. The Bancorp’s ALLL included $10 million for the estimated impact of hurricane related losses at December 31, 2017.

 

 

TABLE 56: CHANGES IN ALLOWANCE FOR CREDIT LOSSES  
TABLE 61: CHANGES IN ALLOWANCE FOR CREDIT LOSSESTABLE 61: CHANGES IN ALLOWANCE FOR CREDIT LOSSES  
For the years ended December 31 ($ in millions)       2015     2014     2013     2012     2011                 2017       2016     2015     2014     2013         

ALLL:

                                         

Balance, beginning of period

  $      1,322       1,582       1,854       2,255       3,004    $    1,253      1,272      1,322      1,582      1,854  

Losses charged-off

     (542     (679     (637     (837     (1,314     (381     (456     (542     (679     (637 

Recoveries of losses previously charged-off

     96       104       136       133       142       83      94      96      104      136       

Provision for loan and lease losses

     396       315       229       303       423       261      343      396      315      229  

Deconsolidation of a VIE(a)

     (20     -      -      -      -  

Balance, end of period

  $      1,272       1,322       1,582       1,854       2,255    $    1,196      1,253      1,272      1,322      1,582  

Reserve for unfunded commitments:

                                         

Balance, beginning of period

  $      135       162       179       181       227    $    161      138      135      162      179  

Provision for (benefit from) unfunded commitments

     4       (27     (17     (2     (46)          -      23      4      (27     (17 

Charge-offs

     (1     -       -       -       -  

Lossescharged-off

     -      -      (1     -      -  

Balance, end of period

  $      138       135       162       179       181    $    161      161      138      135      162  
(a)

Refer to Note 11 of the Notes to Consolidated Financial Statements for further discussion on the deconsolidation of a VIE.

 

Certain inherent but unconfirmed losses are probable within the loan and lease portfolio. The Bancorp’s current methodology for determining the level of losses is based on historical loss rates, current credit grades, specific allocation on impaired commercial credits above specified thresholds and restructured loans and other qualitative adjustments. Due to the heavy reliance on realized historical losses and the credit grade rating process, the model-derived estimate of ALLL tends to slightly lag behind the deterioration in the portfolio in a stable or deteriorating credit environment, and tends not to be as responsive when improved conditions have presented themselves. Given these model

limitations, the qualitative adjustment factors may be incremental or decremental to the quantitative model results.

An unallocated component toof the ALLL is maintained to recognize the imprecision in estimating and measuring loss. The unallocated allowance as a percent of total portfolio loans and leases at both December 31, 20152017 and 20142016 was 0.13% and 0.12%., respectively. The unallocated allowance was 10% and 9% of the total allowance as of December 31, 2015 compared to 8% as of December 31, 2014.2017 and 2016, respectively.

As shown in Table 57,62, the ALLL as a percent of portfolio loans and leases was 1.37%1.30% at December 31, 2015,2017, compared to 1.47%1.36% at December 31, 2014.2016. The ALLL was $1.2 billion and $1.3 billion at both December 31, 20152017 and 2014.2016, respectively.

 

 

7178  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

TABLE 57: ATTRIBUTION OF ALLOWANCE FOR LOAN AND LEASE LOSSES TO PORTFOLIO LOANS AND LEASES  
TABLE 62: ATTRIBUTION OF ALLOWANCE FOR LOAN AND LEASE LOSSES TO PORTFOLIO LOANS AND LEASESTABLE 62: ATTRIBUTION OF ALLOWANCE FOR LOAN AND LEASE LOSSES TO PORTFOLIO LOANS AND LEASES 
As of December 31 ($ in millions)       2015     2014     2013     2012     2011            2017     2016     2015     2014     2013     

Attributed ALLL:

                                        

Commercial and industrial loans

  $      652       673       767       802       929        $    651      718      652      673      767     

Commercial mortgage loans

     117       140       212       333       441           65      82      117      140      212     

Commercial construction loans

     24       17       26       33       77           23      16      24      17      26     

Commercial leases

     47       45       53       68       80           14      15      47      45      53     

Residential mortgage loans

     100       104       189       229       227           89      96      100      104      189     

Home equity

     67       87       94       143       195           46      58      67      87      94     

Automobile loans

     40       33       23       28       43           38      42      40      33      23     

Credit card

     99       104       92       87       106           117      102      99      104      92     

Other consumer loans and leases

     11       13       16       20       21           33      12      11      13      16     

Unallocated

     115       106       110       111       136           120      112      115      106      110     

Total attributed ALLL

  $      1,272       1,322       1,582       1,854       2,255        $    1,196      1,253      1,272      1,322      1,582     

Portfolio loans and leases:

                                        

Commercial and industrial loans

  $      42,131       40,765       39,316       36,038       30,783        $    41,170      41,676      42,131      40,765      39,316     

Commercial mortgage loans

     6,957       7,399       8,066       9,103       10,138           6,604      6,899      6,957      7,399      8,066     

Commercial construction loans

     3,214       2,069       1,039       698       1,020           4,553      3,903      3,214      2,069      1,039     

Commercial leases

     3,854       3,720       3,625       3,549       3,531           4,068      3,974      3,854      3,720      3,625     

Residential mortgage loans

     13,716       12,389       12,680       12,017       10,672           15,591      15,051      13,716      12,389      12,680     

Home equity

     8,301       8,886       9,246       10,018       10,719           7,014      7,695      8,301      8,886      9,246     

Automobile loans

     11,493       12,037       11,984       11,972       11,827           9,112      9,983      11,493      12,037      11,984     

Credit card

     2,259       2,401       2,294       2,097       1,978           2,299      2,237      2,259      2,401      2,294     

Other consumer loans and leases

     657       418       364       290       350           1,559      680      657      418      364     

Total portfolio loans and leases

  $      92,582       90,084       88,614       85,782       81,018        $    91,970      92,098      92,582      90,084      88,614     

Attributed ALLL as a percent of respective portfolio loans and leases:

                                        

Commercial and industrial loans

     1.55     1.65       1.95       2.23       3.02           1.58 %      1.72 %      1.55      1.65      1.95     

Commercial mortgage loans

     1.68       1.89       2.63       3.66       4.35           0.98      1.19      1.68      1.89      2.63     

Commercial construction loans

     0.75       0.82       2.50       4.73       7.55           0.51      0.41      0.75      0.82      2.50     

Commercial leases

     1.22       1.21       1.46       1.92       2.27           0.34      0.38      1.22      1.21      1.46     

Residential mortgage loans

     0.73       0.84       1.49       1.91       2.13           0.57      0.64      0.73      0.84      1.49     

Home equity

     0.81       0.98       1.02       1.43       1.82           0.66      0.75      0.81      0.98      1.02     

Automobile loans

     0.35       0.27       0.19       0.23       0.36           0.42      0.42      0.35      0.27      0.19     

Credit card

     4.38       4.33       4.01       4.15       5.36           5.09      4.56      4.38      4.33      4.01     

Other consumer loans and leases

     1.67       3.11       4.40       6.90       6.00           2.12      1.76      1.67      3.11      4.40     

Unallocated (as a percent of portfolio loans and leases)

     0.12       0.12       0.12       0.13       0.17           0.13      0.12      0.12      0.12      0.12     

Attributed ALLL as a percent of portfolio loans and leases

      1.37     1.47       1.79       2.16       2.78            1.30 %      1.36 %      1.37      1.47      1.79     

 

MARKET RISK MANAGEMENT

Market risk arises fromis theday-to-day potential for the value of a financial instrument to increase or decrease due to movements in market fluctuationsfactors. The Bancorp’s market risk includes risks resulting from movements in interest rates, foreign exchange rates, and equity prices that may result in potential reductions in net income.and commodity prices. Interest rate risk, a component of market risk, isprimarily impacts the exposure to adverse changes in netBancorp’s NII and interest sensitive fee income or financial position due tocategories through changes in interest rates.income on earning assets and cost of interest bearing liabilities, and through fee items that are related to interest sensitive activities such as mortgage origination and servicing income. Management considers interest rate risk a prominent market risk in terms of its potential impact on earnings. Interest rate risk canmay occur for any one or more of the following reasons:

 

Assets and liabilities may mature or reprice at different times;

 

Short-term and long-term market interest rates may change by different amounts; or

 

The expected maturitymaturities of various assets or liabilities may shorten or lengthen as interest rates change.

In addition to the direct impact of interest rate changes on net interest income,NII, interest rates can indirectly impact earnings through their effect on loan and deposit demand, credit losses, mortgage originations, the value of servicing rights and other sources of the Bancorp’s earnings. Stability of the Bancorp’s net income is largely dependent upon the effective management of interest rate risk. Management continually reviews the Bancorp’s balance sheet composition and

earnings flows and models the interest rate risk, and possible actions to reduce this risk, given numerous possible future interest rate scenarios. A series of Policy Limits and Key Risk Indicators are employed to ensure that this risk is managed within the Bancorp’s risk tolerance.

Interest Rate Risk Management Oversight

The Bancorp’s ALCO, which includes senior management representatives and is accountable to the ERMC, monitors and manages interest rate risk within Board approved policy limits. In addition to the risk management activities of ALCO, the Bancorp has a Market Risk Management function as part of ERM that provides independent oversight of market risk activities.

Net Interest Income Sensitivity

The Bancorp employs a variety of measurement techniques to identify and manage its interest rate risk, including the use of an NII simulation model to analyze the sensitivity of net interest incomeNII to changingchanges in interest rates. The model is based on contractual and assumed cash flows and repricing characteristics for all of the Bancorp’s assets, liabilities andoff-balance sheet exposures and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and attrition rates of certain liabilities. The model also includes senior management’s projections of the future volume and pricing of each of the product lines offered by the Bancorp as well as other pertinent assumptions. Actual results may differ from simulated results due to timing, magnitude and frequency of interest rate changes, deviations from projected assumptions, as well as from changes in market conditions and management strategies.

The Bancorp’s interest rate risk exposure is evaluated by measuring the anticipated change in net interest income over 12-month and 24-month horizons assuming 100 bps and 200 bps parallel ramped increases and a 25 bps parallel rate decrease in interest rates.

 

 

7279  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

In accordance with policy,The Bancorp’s interest rate risk exposure is evaluated by measuring the anticipated change in NII over12-month and24-month horizons assuming 100 bps and 200 bps parallel ramped increased rate movements are assumed to occur over one yearincreases and are sustained thereafter. The 25a 75 bps parallel rateramped decrease is an immediate change.in interest rates. The analysis would typically include 100 bps and 200 bps parallel ramped decreases in interest rates; however, this analysis is currently omitted due to the current low levels of certain interest rates. Applying the ramps would result in certain interest rates becoming negative in the parallel ramped decrease scenarios.

In this economic cycle, banks have experienced significant growth in deposit balances, particularly in noninterest-bearing demand deposits. The Bancorp, like other banks, is exposed to deposit balancerun-off in a rising interest rate environment. In consideration of this risk, the Bancorp’s NII sensitivity modeling assumes that approximately $2.5 billion of noninterest-bearing demand deposit balancesrun-off over 24 months above what is included in senior management’s baseline projections for each 100 bps increase in short-term market interest rates. These lostSimilarly, the Bancorp’s NII sensitivity modeling incorporates approximately $2.5 billion of growth in noninterest-bearing demanddeposit balances over

24 months above senior management’s baseline projections for each 100 bps decrease in short-term market interest rates. The noninterest-bearing demand deposit balancesbalancerun-off and growth are modeled to flow into and out of funding products that reprice in conjunction with market rate increases.changes.

Another important deposit modeling assumption is the amount by which interest-bearing deposit rates will increase or decrease when market interest rates increase.increase or decrease. This deposit repricing sensitivity is known as the beta, and it represents the expected amount by which the Bancorp deposit rates will increasechange for a given increasechange in short-term market rates. The Bancorp’s NII sensitivity modeling assumes a weighted-average rising rate interest-bearing deposit beta of approximately 70%, which is approximately 20 percentage points higher than the 50% beta that the Bancorp experienced in the last FRB tightening cycle from June 2004 to June 2006.69% at December 31, 2017.

The Bancorp continually evaluates the sensitivity of its interest rate risk measures to these important deposit modeling assumptions. The Bancorp also evaluatesregularly monitors the sensitivity of other important modeling assumptions, such as loan and security prepayments and early withdrawals on fixed-rate customer liabilities.

 

 

The following table shows the Bancorp’s estimated NII sensitivity profile and ALCO policy limits as of December 31:

 

TABLE 58: ESTIMATED NII SENSITIVITY PROFILE

  

 

 
   2015  2014 
  

 

 

  

 

 

 
   

 

 % Change in NII (FTE) 

      ALCO Policy Limits       % Change in NII (FTE)       ALCO Policy Limits     
  

 

 

  

 

 

  

 

 

  

 

 

 
Change in Interest Rates (bps)  12 Months  13-24 
Months 
  12 Months  13-24    
Months    
  12 Months  13-24
Months
  12 Months   13-24
Months
 

 

 

+200

   2.05   %   5.93    (4.00  (6.00  2.19    6.49    (4.00)     (6.00)  

+100

   1.12    3.87    -    -    1.16    4.18           

  -25

   (1.39  (2.49  -    -    (1.43  (2.41         

 

 

TABLE 63: ESTIMATED NII SENSITIVITY PROFILE AND ALCO POLICY LIMITS

 

 

 
   2017  2016 
  

 

 

  

 

 

 
   

 

 % Change in NII (FTE) 

      ALCO Policy Limits       % Change in NII (FTE)       ALCO Policy Limits     
  

 

 

  

 

 

  

 

 

  

 

 

 
Change in Interest Rates (bps)  

12

Months

  13-24 
Months 
  

12

Months

  13-24    
Months    
  

12

Months

  13-24
Months
  

12

Months

   13-24
Months
 

 

 

+200 Ramp over 12 months

   2.05   %   6.34   (4.00  (6.00  1.88   6.78   (4.00)    (6.00) 

+100 Ramp over 12 months

   1.23   3.78   -   -   1.13   4.32        

 -75 Ramp over 9 months

   (4.97  (9.44  (8.00  (12.00             

 -75 Ramp over 6 months

   -   -   -   -   (5.77  (10.62       

 

 

 

At December 31, 2015,2017, the Bancorp’s net interest incomeNII would benefit in both year one and year two under parallel ramp increases and suffer from athe parallel rate curve decline.ramp increases. The benefit to rising rates wasBancorp’s NII would decline in both year one and year two under the parallel 75 bps ramped decrease in interest rates. The NII sensitivity profile is attributable to the combination of floating-rate assets, including the predominantly floating-rate commercial loan portfolio, and certain intermediate-term fixed-rate liabilities. As the Federal Reserve has increased its target range for federal funds, the sensitivity to declining rates has increased, which is a reflection of the balance sheet mix described above. Reductions in the yield of the commercial loan portfolio would be expected to be only partially offset by a decline in the cost of interest-bearing deposits in this

scenario. The rising rates benefit was down modestlychanges in the estimated NII sensitivity profile as of December 31, 2017 compared to December 31, 2014. The decline in the NII benefit was2016 were primarily attributable to growthchanges in the

composition of the investment portfolio, with a partialincluding premium and discount positions, and higher outstanding fixed-rate debt balances. These items were partially offset from coreby lower demand deposit growth. The year two benefit was also impacted by changes to wholesale funding assumptions, which include a greater reliance on floating-rate debt.balances.

Tables 5964 and 6065 provide information on the Bancorp’s estimated net interest income sensitivityNII profile givenat December 31, 2017 with changes to certain deposit balances or certain keyand deposit repricing sensitivity (betas) assumptions.

 

 

The following table shows the Bancorp’s estimated net interest income sensitivity profile with a $1 billion decrease and a $1 billion increase in demand deposit balances as of December 31, 2015:

TABLE 59: ESTIMATED NII SENSITIVITY ASSUMING A $1 BILLION CHANGE IN DEMAND DEPOSIT BALANCES

  

 

 
   % Change in NII (FTE) 
  

 

 

 
               $1 Billion Balance Decrease                           $1 Billion Balance Increase             
  

 

 

   

 

 

 
Change in Interest Rates (bps)  

12

Months

  

13-24

Months

   

12

Months

   

13-24    

Months    

 

 

 

+200

   1.77   %   5.37     2.33     6.49      

+100

   0.98    3.59     1.26     4.14      

 

 

The following table shows the Bancorp’s estimated net interest income sensitivity profile with a 25% increase and a 25% decrease to the deposit beta assumption as of December 31, 2015. The resulting weighted-average interest-bearing deposit beta included in this analysis is approximately 88% and 52%, respectively, as of December 31, 2015:

7380  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

TABLE 60: ESTIMATED NII SENSITIVITY WITH DEPOSIT BETA ASSUMPTION CHANGES

  

 

 
   % Change in NII (FTE) 
  

 

 

 
                       Betas 25% Higher                                           Betas 25% Lower                      
  

 

 

  

 

 

 
Change in Interest Rates (bps)  

12

Months

  

13-24

Months

  

12

Months

   

13-24    

Months    

 

 

 

+ 200

   (1.07) %   (0.30  5.16     12.16      

+ 100

   (0.44)    0.75    2.68     6.98      

 

 

The following table includes the Bancorp’s estimated NII sensitivity profile with an immediate $1 billion decrease and an immediate $1 billion increase in demand deposit balances as of December 31, 2017:

TABLE 64: ESTIMATED NII SENSITIVITY ASSUMING A $1 BILLION CHANGE IN DEMAND DEPOSIT BALANCES

 

 

 
   % Change in NII (FTE) 
  

 

 

 
     Immediate $1 Billion Balance Decrease       Immediate $1 Billion Balance Increase   
  

 

 

   

 

 

 
Change in Interest Rates (bps)  

12        

Months        

  

13-24        

Months        

   

12        

Months        

   

13-24            

Months            

 

 

 

+200 Ramp over 12 months

   1.80 %   5.84    2.30    6.84     

 

+100 Ramp over 12 months

   1.11   3.54    1.35    4.03     

 

 -75 Ramp over 9 months

   (5.22)   (9.62)    (4.72)    (9.26)     

 

 

 

The following table includes the Bancorp’s estimated NII sensitivity profile with a 25% increase and a 25% decrease to the 69% rising rate deposit beta assumptions as of December 31, 2017. The resulting weighted-average interest-bearing deposit betas included in this analysis are approximately 86% and 52%, respectively, as of December 31, 2017:

 

 

TABLE 65: ESTIMATED NII SENSITIVITY WITH DEPOSIT BETA ASSUMPTION CHANGES

 

 

 
   % Change in NII (FTE) 
  

 

 

 
   Betas 25% Higher   Betas 25% Lower 
  

 

 

   

 

 

 
Change in Interest Rates (bps)  

12    

Months    

  13-24        
Months        
   12        
Months        
   13-24        
Months        
 

 

 

+200 Ramp over 12 months

   (0.87) %           0.50    4.97    12.18         

 

+100 Ramp over 12 months

   (0.23)   0.87    2.69    6.70         

 

 

 

Economic Value of Equity Sensitivity

The Bancorp also uses EVE as a measurement tool in managing interest rate risk. Whereas the net interest incomeNII sensitivity analysis highlights the impact on forecasted NII on an FTE basis(non-GAAP)over one and two year time horizons, the EVE analysis is a point in time analysis of the economic sensitivity of current positions that incorporates all cash flows over their estimated remaining lives. The EVE of the balance sheet is defined as the discounted present value of all asset and net derivative cash flows less the discounted value of all liability cash flows. Due to this

longer horizon, the sensitivity of EVE to changes

in the level of interest rates is a measure of longer-term interest rate risk. EVE values only the current balance sheet and does not incorporate the balance growth assumptions used in the NII sensitivity analysis. As with the NII simulation model, assumptions about the timing and variability of existing balance sheet cash flows are critical in the EVE analysis. Particularly important are assumptions driving loan and security prepayments and the expected balance attrition and pricing of transaction deposits.

 

 

The following table shows the Bancorp’s estimated EVE sensitivity profile as of December 31:

 

TABLE 61: ESTIMATED EVE SENSITIVITY PROFILE

  

 

 

   2015  2014   
  

 

 

  

 

 

  
Change in Interest Rates (bps)      Change in EVE      ALCO Policy Limit      Change in EVE          ALCO Policy Limit   

 

+200

   (5.21)  %   (12.00  (2.21  (12.00 

+100

   (2.30      (0.62  -   

+25

   (0.44      (0.06  -   

 -25

   0.32        (0.05  -   

 

TABLE 66: ESTIMATED EVE SENSITIVITY PROFILE

 

 

 

 
   2017  2016    
  

 

 

  

 

 

 
Change in Interest Rates (bps)    Change in EVE  ALCO Policy Limit    Change in EVE  ALCO Policy Limit    

 

 

+200 Shock

   (4.87) %   (12.00  (4.96  (12.00 

+100 Shock

   (1.82  -   (2.00  -  

 -100 Shock

   (1.57  -   -   -  

 -75 Shock

   -   -   (0.14  -  

 

 

 

The EVE sensitivity to the +200 bps rising rates was modestlyrate scenario is moderately negative at December 31, 20152017, and exposureslightly negative to rising rates has increased froma 100 bps decline in market rates. The changes in the estimated EVE sensitivity atprofile from December 31, 2014. The2016 are primarily related to the effects of a flatter yield curve, higher level of EVE risk since December 31, 2014 was attributable to growth in the investment portfoliobase case loan and certaindeposit values and lower fixed-rate consumer loans.loan balances.

While an instantaneous shift in interest rates wasis used in this analysis to provide an estimate of exposure, the Bancorp believes that a gradual shift in interest rates would have a much more modest impact. Since EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (e.g., the current fiscal year). Further, EVE does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships and changing product spreads that could

mitigate or exacerbate the impact of changes in interest rates. The NII simulations and EVE analyses do not necessarily include certain actions that management may undertake to manage risk in response to anticipatedactual changes in interest rates.

The Bancorp regularly evaluates its exposures to a static balance sheet forecast, LIBOR, Prime Rate and other basis risks, yield curve twist risks and embedded options risks. In addition, the impact on NII on an FTE basis and EVE of extreme changes in interest rates is modeled, wherein the Bancorp employs the use of yield curve shocks and environment-specific scenarios.

Use of Derivatives to Manage Interest Rate Risk

An integral component of the Bancorp’s interest rate risk management strategy is its use of derivative instruments to minimize significant fluctuations in earnings caused by changes in market interest rates.

81  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Examples of derivative instruments that the Bancorp may use as part of its interest rate risk management strategy include

interest rate swaps, interest rate floors, interest rate caps, forward contracts, forward starting interest rate swaps, options, swaptions and TBA securities.

As part of its overall risk management strategy relative to its residential mortgage banking activity,activities, the Bancorp enters into forward contracts accounted for as free-standing derivatives to economically hedge IRLCs that are also considered free-standing derivatives. Additionally, the Bancorp economically hedges its exposure to residential mortgage loans held for sale through the use of forward contracts and mortgage options.

The Bancorp also establishesenters into derivative contracts with major financial institutions to economically hedge significant exposuresmarket risks assumed in interest rate derivative contracts with commercial customer accommodation derivative contracts.customers. Generally, these contracts have similar terms in order to protect the Bancorp from market volatility. Credit risk arises from the possible

inability of counterparties to meet the terms of their contracts, which the Bancorp minimizes through collateral arrangements, approvals, limits and monitoring procedures. For further information including the notional amount and fair values of these derivatives, refer to Note 13 of the Notes to Consolidated Financial Statements.

Portfolio Loans and Leases and Interest Rate Risk

Although the Bancorp’s portfolio loans and leases contain both fixed and floating/adjustable-rate products, the rates of interest earned by the Bancorp on the outstanding balances are generally established for a period of time. The interest rate sensitivity of loans and leases is directly related to the length of time the rate earned is established.

The following table summarizes the carrying value of the Bancorp’s portfolio loans and leases expected cash flows, excluding interest receivable, as of December 31, 2015:

74  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2017:

 

TABLE 62: PORTFOLIO LOANS AND LEASES EXPECTED CASH FLOWS

  

TABLE 67: PORTFOLIO LOANS AND LEASES EXPECTED CASH FLOWS

TABLE 67: PORTFOLIO LOANS AND LEASES EXPECTED CASH FLOWS

 

 

 
($ in millions)        Less than 1 year     1-5 years     Over 5 years     Total                 Less than 1 year     1-5 years      Over 5 years     Total         

 

 

Commercial and industrial loans

  $21,699           18,933       1,499        42,131            $22,195          17,858      1,117        41,170         

Commercial mortgage loans

   2,728           3,781       448        6,957             2,731          3,365      508        6,604         

Commercial construction loans

   1,301           1,881       32        3,214             1,905          2,583      65        4,553         

Commercial leases

   751           1,756       1,347        3,854             868          1,972      1,228        4,068         

 

 

Total commercial loans and leases

   26,479           26,351       3,326        56,156             27,699          25,778      2,918        56,395         

 

 

Residential mortgage loans

   2,446           6,229       5,041        13,716             2,739          6,661      6,191        15,591         

Home equity

   1,050           1,654       5,597        8,301             1,873          3,523      1,618        7,014         

Automobile loans

   5,159           6,203       131        11,493             3,977          4,783      352        9,112         

Credit card

   452           1,807              2,259             460          1,839      -        2,299         

Other consumer loans and leases

   482           135       40        657          

Other consumer loans

   833          697      29        1,559         

 

 

Total consumer loans and leases

   9,589           16,028       10,809        36,426          

Total consumer loans

   9,882          17,503      8,190        35,575         

 

 

Total portfolio loans and leases

  $36,068           42,379       14,135        92,582            $37,581          43,281      11,108        91,970         

 

 

Additionally, the following table displays a summary of expected cash flows, excluding interest receivable, occurring after one year for both fixed and floating/adjustable-rate loans and leases as of December 31, 2015:2017:

 

TABLE 63: PORTFOLIO LOANS AND LEASES EXPECTED CASH FLOWS OCCURRING AFTER 1 YEAR 
TABLE 68: PORTFOLIO LOANS AND LEASES EXPECTED CASH FLOWS OCCURRING AFTER 1 YEARTABLE 68: PORTFOLIO LOANS AND LEASES EXPECTED CASH FLOWS OCCURRING AFTER 1 YEAR 

 

 
   Interest Rate    Interest Rate 
  

 

 

   

 

 

 

($ in millions)

                    Fixed                            Floating or Adjustable                               Fixed                           Floating or Adjustable          

 

 

Commercial and industrial loans

       $  2,729   17,703                           $  2,416  16,559                     

Commercial mortgage loans

  958   3,271                        835  3,038                     

Commercial construction loans

  4   1,909                        66  2,582                     

Commercial leases

  3,103    -                        3,200   -                     

 

 

Total commercial loans and leases

  6,794   22,883                        6,517  22,179                     

 

 

Residential mortgage loans

  8,113   3,157                        9,731  3,121                     

Home equity

  624   6,627                        443  4,698                     

Automobile loans

  6,280   54                        5,096  39                     

Credit card

  535   1,272                        444  1,395                     

Other consumer loans and leases

  20   155                      

Other consumer loans

  478  248                     

 

 

Total consumer loans and leases

  15,572   11,265                      

Total consumer loans

  16,192  9,501                     

 

 

Total portfolio loans and leases

       $  22,366   34,148                           $  22,709  31,680                     

 

 

 

Residential Mortgage Servicing Rights and Interest Rate Risk

Effective January 1, 2017, the Bancorp elected to prospectively adopt the fair value method for all existing classes of its residential mortgage servicing rights portfolio. Upon this election, all servicing rights are measured at fair value at each reporting date and changes in the fair value of servicing rights are reported in mortgage banking net revenue in the Consolidated Statements of Income in the period in which the changes occur. Prior to the election of the fair value method, servicing rights were initially recorded at fair value and subsequently amortized in proportion to, and over the period of, estimated net servicing revenue. Servicing rights were assessed for

impairment monthly, based on fair value, with temporary impairment recognized through a valuation allowance.

The fair value of the residential MSR portfolio was $858 million at December 31, 2017 and the net carrying amount of the residential MSR portfolio was $784 million and $856$744 million as of December 31, 2015 and 2014, respectively.2016. The value of servicing rights can fluctuate sharply depending on changes in interest rates and other factors. Generally, as interest rates decline and loans are prepaid to take advantage of refinancing, the total value of existing servicing rights declines because no further servicing fees are collected on repaid loans.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Bancorp maintains anon-qualifying hedging strategy relative to its mortgage banking activity in order to manage a portion of the risk associated with changes in the value of its MSR portfolio as a result of changing interest rates.

Mortgage rates decreased during the year ended December 31, 2017 which caused modeled prepayment speeds to increase, leading to fair value adjustments on servicing rights. The fair value of the MSR portfolio decreased $1 million due to changes to inputs to the valuation model including prepayment speeds and OAS spread assumptions and decreased $121 million due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs for the year ended December 31, 2017.

Mortgage rates increased during the year ended December 31, 20152016 which caused actual prepayments on the servicing portfolio to decrease. The decrease in actual prepayments on the servicing portfolio caused the modeled prepayment speeds to decrease, which ledleading to a recovery of temporary impairment of $4$7 million on the servicing rights during the year ended December 31, 2015. Mortgage rates decreased during the year ended December 31, 2014 which caused actual prepayments on the servicing portfolio to increase. The increase in actual prepayments on the servicing portfolio caused the modeled prepayment speeds to increase, which led to a temporary impairment of $65 million onyear. Previously, servicing rights during the year ended December 31, 2014.

Servicing rights arewere deemed temporarily impaired when a borrower’s loan rate iswas distinctly higher than prevailing rates. Temporary impairment on servicing rights iswas reversed when the prevailing rates returnreturned to a level commensurate with the borrower’s

loan rate. In addition to the MSR valuation, the

The Bancorp recognized net gains of $90$4 million and $95$24 million, respectively, on derivatives associated with itsnon-qualifying hedging strategy during the years ended December 31, 20152017 and 2014, respectively.2016. These amounts include net gains on securities related to the Bancorp’snon-qualifying hedging strategy which were $2 million and zero, respectively, during the years end December 31, 2017 and 2016. The Bancorp may adjust its hedging strategy to reflect its assessment of the composition of its MSR portfolio, the cost of hedging and the anticipated effectiveness of the hedges given the economic environment. Refer to Note 12 of the Notes to Consolidated Financial Statements for further discussion on servicing rights and the instruments used to hedge interest rate risk on MSRs.

Foreign Currency Risk

The Bancorp may enter into foreign exchange derivative contracts to economically hedge certain foreign currency denominated loans.

The derivatives are classified as free-standing instruments with the revaluation gain or loss being recorded in other noninterest income in the Consolidated Statements of Income. The balance of the Bancorp’s foreign denominated loans at December 31, 20152017 and December 31, 20142016 was $812$939 million and $720$827 million, respectively. The Bancorp also enters into foreign exchange contracts for the benefit of commercial customers involved in international trade to hedge their exposure to foreign currency fluctuations. Similar to the hedging of interest rate risk from interest rate derivative contracts, the Bancorp also enters into foreign exchange contracts with major financial institutions to economically hedge a substantial portion of the exposure from client driven foreign exchange activity. The Bancorp has risk limits and internal controls in place to help ensure excessive risk is not being taken in providing this service to customers. These controls include an independent determination of currency volatility and credit equivalent exposure on these contracts, counterparty credit approvals and country limits.limits performed by the Capital Markets Credit department and Capital Markets Risk department.

Commodity Risk

The Bancorp also enters into commodity contracts for the benefit of commercial customers to hedge their exposure to commodity price fluctuations. Similar to the hedging of foreign exchange and interest rate risk from interest rate derivative contracts, the Bancorp also enters into commodity contracts with major financial institutions to economically hedge a substantial portion of the exposure from client driven commodity activity. The Bancorp may also offset this risk with exchange traded commodity contracts. The Bancorp has risk limits and internal controls in place to help ensure excessive risk is not taken in providing this service to customers. These controls include an independent determination of commodity volatility and credit equivalent exposure on these contracts and counterparty credit approvals performed by the Capital Markets Credit department and Capital Markets Risk department.

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY RISK MANAGEMENT

The goal of liquidity management is to provide adequate funds to meet changes in loan and lease demand, unexpected levels of deposit withdrawals and other contractual obligations. Mitigating liquidity risk is accomplished by maintaining liquid assets in the form of cash and investment securities, maintaining sufficient unused borrowing capacity in the debt markets and delivering consistent growth in core deposits. A summary of certain obligations and commitments to make future payments under contracts is included in Note 17 of the Notes to Consolidated Financial Statements.

The Bancorp’s Treasury department manages funding and liquidity based onpoint-in-time metrics as well as forward-looking projections, which incorporate different sources and uses of funds under base and stress scenarios. Liquidity risk is monitored and managed by the Treasury department, and a series of Policy Limits and Key Risk Indicators are established to ensure risks are managed within the Bancorp’s risk tolerance. The Bancorp maintains a contingency funding plan that provides for liquidity stress testing, which assesses the liquidity needs under various scenarios ofvarying market conditions, time horizons, asset growth rates and credit rating downgrades. The plan includes liquidity stress testing which measures various sources and uses of funds under the different scenarios.other events. The contingency plan provides for ongoing monitoring of unused borrowing capacity and available sources of contingent liquidity to prepare for unexpected liquidity needs and to cover unanticipated events that could affect liquidity. The contingency plan also outlines the Bancorp’s response to various levels of liquidity stress and actions that should be taken during various scenarios.

Liquidity Risk Management Oversight

The Bancorp’s ALCO, which includes senior management representatives and is accountable to the ERMC, monitors and manages liquidity and funding risk within Board approved policy limits. In addition to the risk management activities of ALCO, the Bancorp has a Market Risk Management function as part of ERM that provides independent oversight of liquidity risk management.

Sources of Funds

The Bancorp’s primary sources of funds relate to cash flows from loan and lease repayments, payments from securities related to sales and maturities, the sale or securitization of loans and leases and funds generated by core deposits, in addition to the use of public and private debt offerings.

Table 6267 of the Market Risk Management subsection of the Risk Management section of MD&A illustrates the expected maturities from loan and lease repayments. Of the $29.0$31.8 billion of securities in the Bancorp’savailable-for-sale and other portfolio at December 31, 2015, $3.92017, $4.4 billion in principal and interest is expected to be received in the next 12 months and an additional $3.7$3.5 billion is expected to be received in the next 13 to 24 months. For further information on the Bancorp’s securities portfolio, refer to the Investment Securities subsection of the Balance Sheet Analysis section of MD&A.

Asset-driven liquidity is provided by the Bancorp’s ability to sell or securitize loans and leases. In order to reduce the exposure to interest rate fluctuations and to manage liquidity, the Bancorp has developed securitization and sale procedures for several types of interest-sensitive assets.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

A majority of the long-term, fixed-rate single-family residential mortgage loans underwritten according to FHLMC or FNMA guidelines are sold for cash upon origination. Additional assets such as certain other residential mortgages,mortgage loans, certain commercial loans, home equity loans, automobile loans and other consumer loans are also capable of being securitized or sold. For the years ended December 31, 2015 and 2014, theThe Bancorp sold or securitized loans totaling $6.4$7.5 billion and $9.4during the year ended December 31, 2017 compared to $7.4 billion respectively.during the year ended December 31, 2016. For further information, on the transfer of financial assets, refer to Note 11 and Note 12 of the Notes to Consolidated Financial Statements.

Core deposits have historically provided the Bancorp with a sizeable source of relatively stable and low cost funds. The Bancorp’s average core deposits and average shareholders’ equity funded 82%83% of its average total assets duringfor the yearsyear ended December 31, 20152017 and 2014.82% for the year ended December 31, 2016. In addition to core deposit funding, the Bancorp also accesses a variety of other short-term and long-term funding sources, which include the use of the FHLB system. Certificates $100,000 and over and deposits in the Bancorp’s foreign branch located in the Cayman Islands are wholesale funding tools utilized to fund asset growth. Management does not rely on any one source of liquidity and manages availability in response to changing balance sheet needs.

As of December 31, 2015, $8.92017, $8.2 billion of debt or other securities were available for issuance under the currentthen-current Bancorp’s

Board of Directors’ authorizations and the Bancorp is authorized to file any necessary registration statements with the SEC to permit ready access to the public securities markets; however, access to these markets may depend on market conditions. On July 27, 2015,June 15, 2017, the Bancorp issued and sold $1.1 billion$700 million of unsecured senior fixed-rate notes.

The Bank’s global bank note program has a borrowing capacity of $25.0 billion, of which $16.7 billion was available for issuance as of December 31, 2017. On October 30, 2017, the Bank issued and sold $1.1 billion in aggregate principal amount of unsecured senior bank notes.

At December 31, 2015,2017, the Bancorp has approximately $38.6$40.8 billion of borrowing capacity available through secured borrowing sources including the FHLB and FRB.

The Bancorp’s banking subsidiary’s global bank note program hasIn a borrowing capacitysecuritization transaction that occurred in September of $25 billion. On August 20, 2015, the Bank issued and sold $1.0 billion of senior fixed-rate notes and $250 million of senior floating-rate notes. The Bank has $18.4 billion of borrowing capacity under the bank note program as of December 31, 2015.

For the year ended December 31, 2015,2017, the Bancorp transferred approximately $750 million$1.1 billion in consumeraggregate automobile loans to a bankruptcy remote trust which subsequently issued approximately $1.0 billion of asset-backed notes, of which approximately $261 million of the asset-backed notes were retained by the Bancorp, resulting in approximately $747 million of outstanding notes included in long-term debt in the Consolidated Balance Sheets as of December 31, 2017. The bankruptcy remote trust was deemed to be a VIE. TheVIE and the Bancorp, concluded that it isas the primary beneficiary, of this VIE and, therefore, has consolidated thisthe VIE. The assets of this VIE are restricted to the settlementthird-party holders of the notes and other obligations of the VIE. Third-party holders of theasset-backed notes do not have recourse to the general assets of the Bancorp. Refer to Note 11 for additional information.

Liquidity Coverage Ratio and Net Stable Funding Ratio

A key reform within the Basel III framework to strengthen international liquidity standards was the BCBS’ introduction of the LCR and NSFR. On January 7, 2013, the BCBS issued a final standard for the LCR applicable to large internationally active banking organizations. The BCBS issued a final NSFR standard in the fourth quarter of 2014 and disclosure requirements in the second quarter of 2015 which are applicable to internationally active banks. The NSFR will become a minimum standard by January 1, 2018. The Bancorp is currently evaluatingsubject to the BCBS’ standard for NSFR and will begin to conform to a domestic version of the NSFR once adopted by the U.S. banking regulators.

Section 165 of the DFA requires the FRB to establish enhanced liquidity standards in the U.S. for BHCs with total assets of $50 billion or greater. On October 10, 2014, the U.S. banking agencies published final rules implementing a quantitative liquidity requirement consistent with the LCR standard established by the BCBS for large internationally active banking organizations, generally those with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure. In addition, a Modified LCR requirement, was finalized forwhich stipulates that BHCs with $50 billion or more in total consolidated assets that are not internationally active, such as the Bancorp. The Modified LCR requires BHCs toBancorp, maintain HQLA equal to itstheir calculated net cash outflows over a 30calendar-day stress period multiplied by a factor of 0.7. The Modified LCR is effective January 1, 2016 and requires BHCs to calculate its LCR on a monthly basis. The final rule includes a transition period for the modified LCR in which BHCs must maintain HQLA of 90% of its calculated net cash outflows for 2016 and then 100% beginning in 2017. The Bancorp estimates itsBancorp’s Modified LCR was 116%129% at December 31, 2015 calculated2017.

On June 1, 2016, the U.S. banking agencies published a notice of proposed rulemaking to implement a modified NSFR for certain bank holding companies with at least $50 billion but less than $250 billion in total consolidated assets and with less than $10 billion inon-balance sheet foreign exposures, including the Bancorp. Generally consistent with the BCBS’ framework, under the Modified LCR final rule. For more information on LCR, referproposed rule banking organizations would be required to hold an amount of ASF over aone-year time horizon that equals or exceeds

the institution’s amount of RSF, with the ASF representing the numerator and the RSF representing the denominator of the NSFR. Banking organizations subject to the Non-GAAP Financial Measures sectionmodified NSFR would multiply the RSF amount by 70%, such that the RSF amount required for these institutions would be equivalent to 70% of MD&A.the RSF amount that would be required pursuant to the full NSFR generally applicable to institutions with at least $250 billion in total consolidated assets or $10 billion or more inon-balance sheet foreign exposures under the proposed rule. The comment period for this proposal ended on August 5, 2016. The Bancorp is currently awaiting the final rule from the U.S. banking agencies.

Credit Ratings

The cost and availability of financing to the Bancorp and Bank are impacted by its credit ratings. A downgrade to the Bancorp’s or Bank’s credit ratings could affect its ability to access the credit markets and increase its borrowing costs, thereby adversely impacting the Bancorp’s or Bank’s financial condition and liquidity.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Key factors in maintaining high credit ratings include a stable and diverse earnings stream, strong credit quality, strong capital ratios and diverse funding sources, in addition to disciplined liquidity monitoring procedures.

The Bancorp’s and Bank’s credit ratings are summarized in Table 64.69. The ratings reflect the ratings agency’s view on the Bancorp’s and Bank’s capacity to meet financial commitments.*

* As an investor, you should be aware that a security rating is not a recommendation to buy, sell or hold securities, that it may be subject to revision or withdrawal at any time by the assigning rating organization and that each rating should be evaluated independently of any other rating. Additional information on the credit rating ranking within the overall classification system is located on the website of each credit rating agency.

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 64:69: AGENCY RATINGS

 

As of February 25, 201628, 2018  Moody’s  Standard and Poor’s Fitch  DBRS

 

Fifth Third Bancorp:

    

Short-term

   No rating   A-2 F1 R-1L

Senior debt

  Baa1 BBB+ AA- AL

Subordinated debt

  Baa1 BBB A-BBB+     BBBH 

Fifth Third Bank:

    

Short-term

  P-1 A-2 F1 R-1L

Long-term deposit

  Aa3         No rating           A+         AA

Senior debt

  A3 A- AA- A

Subordinated debt

  Baa1 BBB+ A-BBB+ AL

Rating Agency Outlook for Fifth Third Bancorp and Fifth Third Bank:

StableStable        Stable        Positive

 

 

OPERATIONAL RISK MANAGEMENT

Operational risk is the risk of loss resulting from inadequate or failed processes or systems or due to external events that are neither market nor credit-related. Operational risk is inherent in the Bancorp’s activities and can manifest itself in various ways including fraudulent acts, business interruptions, inappropriate behavior of employees, unintentional failure to comply with applicable laws and regulations, cyber-security incidents and privacy breaches or failure of vendors to perform in accordance with their arrangements. These events could result in financial losses, litigation and regulatory fines, as well as other damage to the Bancorp. The Bancorp’s risk management goal is to keep operational risk at appropriate levels consistent with the Bancorp’s risk appetite, financial strength, the characteristics of its businesses, the markets in which it operates and the competitive and regulatory environment to which it is subject.

To control, monitor and govern operational risk, the Bancorp maintains an overall Risk Management Framework which comprises governance oversight, risk assessment, capital measurement, monitoring and reporting as well as a formal three lines of defense approach. ERM is responsible for prescribing the framework to the lines of business and corporate functions, and to provide independent oversight of its implementation (second line of defense). In 2015, Business Controls Directors were appointedgroups are in place in each of the lines of business to ensure consistent implementation

and execution of managing day to day operational risk (first line of defense).

The Bancorp’s risk management framework consists of five integrated components, including identifying, assessing, managing, monitoring and independent governance reporting of risk. The corporate Operational Risk Management function within Enterprise Risk is responsible for developing and overseeing the implementation of the Bancorp’s approach to managing operational risk. This includes providing governance, awareness and training, tools, guidance and oversight to support implementation of key risk programs and systems as they relate to operational risk management, such as risk and control self-assessments, new product/initiative risk reviews, key risk indicators, Vendor Risk

Management, cyber security risk management and review of operational losses. The function is also responsible for developing reports that support the proactive management of operational risk across the enterprise. The lines of business and corporate functions are responsible for managing the operational risks associated with their areas in accordance with the risk management framework. The framework is intended to enable the Bancorp to function with a sound and well-controlled operational environment. These processes support the Bancorp’s goals to minimize future operational losses and strengthen the Bancorp’s performance by maintaining sufficient capital to absorb operational losses that are incurred.

The Bancorp also maintains a robust information security program to support the management of cyber security risk within the organization with a focus on prevention, detection and recovery processes. Fifth Third utilizes a wide array of techniques to secure its operations and proprietary information such as Board approved policies and programs, network monitoring and testing, access controls, and dedicated security personnel. Fifth Third has adopted the National Institute of Standards and Technology Cyber Security Framework for the management and deployment of cyber security controls and is an active participant in the financial sector information sharing organization structure, known as the Financial Services Information Sharing and Analysis Center. To ensure resiliency of key Bancorp functions, Fifth Third also employs redundancy protocols that include a robust business continuity function that works to mitigate any potential impacts to Fifth Third customers and its systems.

Fifth Third also focuses on the reporting and escalation of operational control issues to senior management and the Board of Directors. The Operational Risk Committee is the key committee that oversees and supports Fifth Third in the management of operational risk across the enterprise. The Operational Risk Committee reports to the ERMC, which reports to the Risk and Compliance Committee of the Board of Directors.

 

COMPLIANCE RISK MANAGEMENT

Regulatory Compliance Riskcompliance risk is defined as the risk of legal or regulatory sanctions, financial loss, or damage to reputation as a result of noncompliance with (i) applicable laws, regulations, rules and other regulatory requirements (including but not limited to the risk of consumers experiencing economic loss or other legal harm as a result of noncompliance with consumer protection laws, regulations and requirements); (ii) internal policies and procedures, standards of best practice or codes of conduct; and (iii) principles of integrity and fair dealing applicable to Fifth Third’s activities and functions. Fifth Third focuses on managing regulatory compliance risk in accordance with the Bancorp’s integrated risk management framework, which ensures consistent processes for identifying, assessing, managing, monitoring and reporting risks. The Bancorp’s

risk management goal is to keep compliance risk at appropriate levels consistent with the Bancorp’s risk appetite.

The current regulatory environment, including heightened regulatory expectations and material changes in laws and regulations, increases compliance risk. To mitigate compliance risk,

Compliance Risk Management provides independent oversight to ensure consistency and sufficiency in the execution of the program, and ensures that lines of business, regions and support functions are adequately identifying, assessing and monitoring compliance risks and adopting proper mitigation strategies. The lines of business and enterprise functions are responsible for managing the compliance risks associated with their areas. Additionally, Compliance Risk Management implements key compliance programs and processes including but not limited to, risk assessments, key risk indicators program, issues tracking, regulatory compliance testing and monitoring, anti-money laundering, privacy, and oversees the Bancorp’s compliance with the Community Reinvestment Act.

Fifth Third also focuses on reporting and escalation of compliance issues to senior management and the Board. The Management Compliance Committee is the key committee that oversees and supports Fifth Third in the management of compliance risk across the enterprise. The Management Compliance Committee addresses Fifth Third-wide compliance issues, industry best practices, legislative developments, regulatory concerns, and other leading indicators of compliance risk. The Management Compliance Committee reports to the Enterprise Risk Management Committee, which reports to Risk and Compliance Committee of the Board of Directors.

 

 

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Additionally, the Chief Compliance Officer is responsible for establishing and overseeing the Compliance Risk Management program which implements key compliance processes including but not limited to, risk assessments, key risk indicators, issues tracking, regulatory compliance testing and monitoring, anti-money laundering, privacy and, in partnership with the Corporate Responsibility and Reputation team, oversees the Bancorp’s compliance with the Community Reinvestment Act.

Fifth Third also focuses on the reporting and escalation of compliance issues to senior management and the Board of Directors. The Management Compliance Committee, which is chaired by the Chief Compliance Officer, is the key committee that oversees and supports Fifth Third in the management of

compliance risk across the enterprise. The Management Compliance Committee oversees Fifth Third-wide compliance issues, industry best practices, legislative developments (in coordination with the Regulatory Change Management Committee), regulatory concerns and other leading indicators of compliance risk. The Management Compliance Committee reports to the ERMC, which reports to the Risk and Compliance Committee of the Board of Directors.

CAPITAL MANAGEMENT

Management regularly reviews the Bancorp’s capital levels to help ensure it is appropriately positioned under various operating environments. The Bancorp has established a Capital Committee which is responsible for making capital plan recommendations to management. These recommendations are reviewed by the ERMC and the annual capital plan is approved by the Board of Directors.

The Capital Committee is responsible for execution and oversight of the capital actions of the capital plan.

Regulatory Capital Ratios

The Basel III Final Rule was effective for the Bancorp on January 1, 2015 subject to phase-in periods for certain of its components and other provisions. It established quantitative measures that assign risk weightings to assets and off-balance sheet items and also defined and set minimum regulatory capital requirements. Prior toratios as well as defined the measure of “well-capitalized”.

TABLE 70: PRESCRIBED CAPITAL RATIOS

 

   Minimum                Well-Capitalized                  

 

CET1 capital

   4.50  %  6.50      

Tier I risk-based capital

   6.00  8.00      

Total risk-based capital

   8.00  10.00      

Tier I leverage

   4.00  5.00      

 

On January 1, 2015,2016, the Bancorp wasbecame subject to the General Risk-Based Capital Rules (Basel I). The minimum capital ratios established under the Basel III Final Rule are 4.5% for the CET1 capital ratio, 6% for the Tier I risk-based capital ratio, 8% for the Total risk-based capital ratio and 4% for the Tier I Leverage ratio (Tier I capital to average

consolidated assets). The PCA provisions adopted by the U.S. banking agencies define “well-capitalized” ratios for CET1 capital, Tier I risk-based capital, Total risk-based capital and Tier I Leverage greater than or equal to 6.5%, 8%, 10% and 5%, respectively. Additionally, the Basel III Final Rule includes a capital conservation buffer of CET1which will be phased in over a three-year period ending January 1, 2019. Once fullyphased-in, the capital ofconservation buffer will be 2.5% in additionaladdition to the 4.5% minimum requirement, or 7%,capital ratios, in order to avoid limitations on certain capital distributions and discretionary bonus payments to executive officers. The capital conservation buffer was 0.625% in 2016 and is 1.25% in 2017. The

Bancorp exceeded these “well-capitalized” and “capital conservation buffer” ratios for all periods presented.

The Bancorp made aone-time permanent election to not include AOCI in regulatory capital in the March 31, 2015 FFIEC 031 and FRY-9C filings. The Basel III Final Rule phases out the inclusion of certain TruPS as a component of Tier I capital. Under these provisions, these TruPS would qualify as a component of Tier II capital. At December 31, 2015, the Bancorp’s Tier I capital included $13 million of TruPS representing approximately 1 bp of risk-weighted assets under the transition provisions of the Basel III Final Rule.

 

The following table summarizes the Bancorp’s capital ratios as of December 31:

 

TABLE 65: CAPITAL RATIOS

           

TABLE 71: CAPITAL RATIOS

          

 

 
($ in millions)       2015    2014   2013    2012    2011           2017            2016       2015        2014        2013  

 

 

Average total Bancorp shareholders’ equity as a percent of average assets

  11.32 %   11.59      11.56      11.65      11.41     11.80 %   11.67     11.33     11.59     11.56  

Tangible equity as a percent of tangible assets(d)(a)

  9.55    9.41      9.44      9.17      9.03     9.90        9.82     9.55     9.41     9.44  

Tangible common equity as a percent of tangible assets(d)(a)

  8.59    8.43      8.63      8.83      8.68     8.94        8.87     8.59     8.43     8.63  
 Basel III                  Basel III         
 

  Transitional(b)  

   Basel I(c)  

  Transitional(b)  

   Basel I(c) 

CET1 capital

 

$

 11,917    N/A     N/A     N/A     N/A   

$

 12,517        12,426     11,917          

Tier I capital

  13,260    12,764      12,094      11,685      12,503     13,848        13,756     13,260     12,764     12,094  

Total regulatory capital

  17,134    16,895      16,431      15,811      16,876     17,887        17,972     17,134     16,895     16,431  

Risk-weighted assets

  121,290              117,878          115,969          109,301          104,219               117,997            119,632         121,290         117,878         115,969  

Regulatory capital ratios:

                     

CET1 capital

  9.82 %   N/A     N/A     N/A     N/A    10.61 %   10.39     9.82          

Tier I risk-based capital

  10.93    10.83      10.43      10.69      12.00     11.74        11.50     10.93     10.83     10.43  

Total risk-based capital

  14.13    14.33      14.17      14.47      16.19     15.16        15.02     14.13     14.33     14.17  

Tier I leverage

  9.54    9.66      9.73      10.15      11.25   

Tier I common equity(a)

  N/A    9.65      9.45      9.54      9.41   

Tier I leverage (to quarterly average assets)

  10.01        9.90     9.54     9.66     9.73  

 
 

Basel III

Fully Phased-In

     
CET1 capital(a)  9.72 %   N/A     N/A     N/A     N/A  

 
(a)

These arenon-GAAP measures. For further information, refer to theNon-GAAP Financial Measures section of MD&A.

(b)

Under the U.S. banking agencies’ Basel III Final Rule, assets and credit equivalent amounts ofoff-balance sheet exposures are calculated according to the standardized approach for risk-weighted assets. The resulting weighted values are added together resulting in the total risk-weighted assets. Under the banking agencies’ Final Rule published in November 2017 pertaining to certain regulatory items for banks subject to the standardized approach, the Bancorp is no longer subject to certain transition provisions and phase-outs beyond 2017.

(c)

These capital amounts and ratios were calculated under the Supervisory Agencies general risk-based capital rules (Basel I) which were in effect prior to January 1, 2015.

(d)

Excludes unrealized gains and losses.

Preferred Stock Offering

As contemplated by the 2014 capital plan part of the FRB’s CCAR, on June 5, 2014, the Bancorp issued in a registered public offering 300,000 depositary shares, representing 12,000 shares of 4.90% fixed-to-floating rate non-cumulative Series J perpetual preferred stock, for net proceeds of $297 million. Each preferred share has a $25,000 liquidation preference. The preferred stock accrues dividends, on a non-cumulative semi-annual basis, at an annual rate of 4.90% through but excluding September 30, 2019, at which time

it converts to a quarterly floating rate dividend of three-month LIBOR plus 3.129%. Subject to any required regulatory approval, the Bancorp may redeem the Series J preferred shares at its option in whole or in part, at any time on or after September 30, 2019, or at any time following a regulatory capital event. The Series J preferred shares are not convertible into Bancorp common shares or any other securities.

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Stress Tests and CCAR

In 2011 the FRB adopted the capital plan rule, which requires BHCs with consolidated assets of $50 billion or more to submit annual capital plans to the FRB for review. Under the rule, these capital plans must include detailed descriptions of the following: the BHC’s internal processes for assessing capital adequacy; the policies governing capital actions such as common stock issuances,

dividends and share repurchases; and all planned capital actions over a nine-quarter planning horizon. Further, each BHC must also report to the FRB the results of stress tests conducted by the BHC under a number of scenarios that assess the sources and uses of capital under baseline and stressed economic scenarios.

86  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The FRB launched the 20152017 stress testing program and CCAR on October 23, 2014,February 3, 2017, with firm submissions of stress test results and capital plans to the FRB due to the FRB on JanuaryApril 5, 2015,2017, which the Bancorp submitted as required. ReferAs a CCAR institution, the Bancorp is required to disclose the results of itscompany-run stress test under the supervisory adverse and supervisory severely adverse scenarios and to provide information related to the types of risk included in its stress testing, a general description of the methodologies used, estimates of certain financial results and pro forma capital ratios, and an explanation of the most significant causes of changes in regulatory capital ratios. On June 22, 2017 the Bancorp publicly disclosed the results of itscompany-run stress test as required by the DFA stress testing rules, which is available on Fifth Third’s website atwww.53.com. With Fifth Third’s designation as a Large andNon-complex Bank, it is no longer subject to the qualitative aspects of the CCAR program.Refer to Note 3 and Note 23 of the Notes to Consolidated Financial Statements for a discussion on the FRB’s review of the capital plan, the FRB’snon-objection to the Bancorp’s proposed capital actions and the Bancorp’s capital actions taken in 2015.

The FRB launched the 2016 stress testing program and CCAR on January 28, 2016. The stress testing results and capital plan are required to be submitted by the Bancorp to the FRB by April 5, 2016.

The FRB expects to release summary results of the 2016 stress testing program and CCAR in June of 2016. The results will include2017.

supervisory projections of capital ratios, losses and revenues under the supervisory adverse and supervisory severely adverse scenarios. The FRB will also issue an objection or non-objection to each participating institution’s capital plan submitted under CCAR. The FRB’s summary results will also include an overview of methodologies used for supervisory tests. Additionally, as a CCAR institution, the Bancorp will be required to disclose the results of its company-run stress test as required by the DFA, within 15 days of the date the FRB discloses the results of its DFA supervisory stress test.

Dividend Policy and Stock Repurchase Program

The Bancorp’s common stock dividend policy and stock repurchase program reflect its earnings outlook, desired payout ratios, the need to maintain adequate capital levels, the ability of its subsidiaries to pay dividends, the need to comply with safe and sound banking practices as well as meet regulatory requirements and expectations. The Bancorp declared dividends per common share of $0.52$0.60 and $0.51$0.53 during the years ended December 31, 20152017 and 2014,2016, respectively. The Bancorp entered into or settled a number of accelerated share repurchase transactions during the years ended December 31, 20152017 and 2014.2016. Refer to Note 23 and Note 31 of the Notes to Consolidated Financial Statements for additional information on the accelerated share repurchases.

 

The following table summarizes shares authorized for repurchase for the years ended December 31:as part of publicly announced plans or programs:

 

TABLE 66: SHARE REPURCHASES

  

TABLE 72: SHARE REPURCHASES

TABLE 72: SHARE REPURCHASES

 

 

 
  2015   2014 
For the years ended December 31  2017   2016 

 

 

Shares authorized for repurchase at January 1

   73,180,368     43,071,613     81,641,397     30,572,513  

Additional authorizations(a)

   -     64,908,628         85,702,105  

Share repurchases(b)

   (42,607,855)     (34,799,873)     (58,493,506)    (34,633,221) 

 

 

Shares authorized for repurchase at December 31

                   30,572,513                     73,180,368                     23,147,891                     81,641,397  

 

 

Average price paid per share(b)

  $19.60     20.87    $27.00     18.86  

 

 
(a)

In March 2014,2016, the Bancorp announced that its Board of Directors had authorized management to purchase 100 million shares of the Bancorp’s common stock through the open market or in any private transaction.transactions. The authorization does not include specific price targets or an expiration date. This share repurchase authorization replaces the Board’s previous authorization pursuant to which approximately 35$14 million shares remained available for repurchase by the Bancorp.

(b)

Excludes1,930,2332,397,589 and 2,116,3702,430,179 shares repurchased during the years endedDecember 31, 20152017 and 2014,2016, respectively, in connection with various employee compensation plans. These purchases are not included in the calculation for average price paid per share and do not count against the maximum number of shares that may yet be repurchased under the Board of Directors’ authorization.

79  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OFF-BALANCE SHEET ARRANGEMENTS

 

In the ordinary course of business, the Bancorp enters into financial transactions that are consideredoff-balance sheet arrangements as they involve varying elements of market, credit and liquidity risk in excess of the amounts recognized in the Bancorp’s Consolidated Balance Sheets. The Bancorp’soff-balance sheet arrangements include commitments, guarantees, contingent liabilities, guarantees and transactions withnon-consolidated VIEs. A brief discussion of these transactions is as follows:

Commitments

The Bancorp has certain commitments to make future payments under contracts, including commitments to extend credit, letters of credit, forward contracts related to residential mortgage loans held for sale, residential mortgage loans, noncancelable operating lease obligations, purchase obligations, capital commitments for private equity investments, capital expenditures and capital expenditures.lease obligations. Refer to Note 17 of the Notes to Consolidated Financial Statements for additional information on commitments.

Guarantees and Contingent Liabilities

The Bancorp has performance obligations upon the occurrence of certain events provided in certain contractual arrangements, including residential mortgage loans sold with representation and warranty provisions or credit recourse. Refer to Note 17 of the Notes to Consolidated Financial Statements for additional information on guarantees and contingent liabilities.

Transactions withNon-consolidated VIEs

The Bancorp engages in a variety of activities that involve VIEs, which are legal entities that lack sufficient equity to finance their activities, or the equity investors of the entities as a group lack any of the characteristics of a controlling interest. The investments in those entities in which the Bancorp was determined not to be the primary beneficiary but holds a variable interest in the entity are accounted for under the equity method of accounting or other accounting standards as appropriate and not consolidated. Refer to Note 11 of the Notes to Consolidated Financial Statements for additional information onnon-consolidated VIEs.

 

 

8087  Fifth Third Bancorp


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

 

The Bancorp has certain obligations and commitments to make future payments under contracts. The aggregate contractual obligations and commitments at December 31, 20152017 are shown in Table 67.73. As of December 31, 2015,2017, the Bancorp has unrecognized tax benefits that, if recognized, would impact the effective tax rate

in future periods. Due to the uncertainty of the amounts to be ultimately paid as well as the timing of such payments, all uncertain tax liabilities that have not been paid have been excluded from the following table. For further detail on the impact of income taxes, refer to Note 20 of the Notes to Consolidated Financial Statements.

 

 

TABLE 67: CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

  

TABLE 73: CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

TABLE 73: CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

 

 

 
As of December 31, 2015 ($ in millions)  

Less than 1

year

   1-3 years   3-5 years   

Greater than

5 years

   Total 
As of December 31, 2017 ($ in millions)  Less than 1
year
   1-3 years   3-5 years   Greater than
5 years
   Total 

 

 

Contractually obligated payments due by period:

                    

Deposits with a stated maturity of less than one year(a)

  $96,594     -     -     -     96,594  

Deposits with no stated maturity(a)

  $96,985    -    -    -    96,985 

Long-term debt(b)

   2,412    5,673    3,852    2,967    14,904 

Time deposits(c)

   2,425     2,207     1,955     24     6,611     3,266    2,501    401    9    6,177 

Short-term borrowings(e)

   1,658     -     -     -     1,658     4,186    -    -    -    4,186 

Long-term debt(b)

   3,844     4,813     3,484     3,703     15,844  

Forward contracts related to held for sale residential mortgage loans(d)

   1,330     -     -     -     1,330  

Forward contracts related to residential mortgage loans held for sale(d)

   1,284    -    -    -    1,284 

Noncancelable operating lease obligations(f)

   91     166     136     242     635     87    154    108    219    568 

Partnership investment commitments(g)

   212     86     37     32     367     162    128    24    41    355 

Pension benefit payments(i)

   19     35     32     79     165     17    34    34    77    162 

Purchase obligations and capital expenditures(h)

   47     31     12     -     90     85    69    24    3    181 

Capital lease obligations

   7     12     6     2     27     6    11    8    1    26 

 

 

Total contractually obligated payments due by period

  $            106,227     7,350     5,662     4,082             123,321    $        108,490    8,570    4,451    3,317        124,828 

 

 

Other commitments by expiration period:

                    

Commitments to extend credit(j)

  $28,469             13,095             17,774     7,606     66,944    $27,539    22,893    10,232    7,490    68,154 

Letters of credit(k)

   1,700     771     530     54     3,055     1,170    583    416    16    2,185 

 

 

Total other commitments by expiration period

  $30,169     13,866     18,304     7,660     69,999    $28,709    23,476    10,648    7,506    70,339 

 

 
(a)

Includes demand, interest checking, savings, money market and foreign office deposits. For additional information, refer to the Deposits subsection of the Balance Sheet Analysis section of MD&A.

(b)

Interest-bearing obligations are principally used to fund interest-earning assets. As such, interest charges on contractual obligations were excluded from reported amounts, as the potential cash outflows would have corresponding cash inflows from interest-earning assets. Refer to Note 16 of the Notes to Consolidated Financial Statements for additional information on these debt instruments.

(c)

Includes other time deposits and certificates $100,000 and over. For additional information, refer to the Deposits subsection of the Balance Sheet Analysis section of MD&A.

(d)

Refer to Note 13 of the Notes to Consolidated Financial Statements for additional information on forward contracts to sell residential mortgage loans.

(e)

Includes federal funds purchased and borrowings with an original maturity of less than one year. For additional information, refer to Note 15 of the Notes to Consolidated Financial Statements.

(f)

Includes rental commitments.

(g)

Includeslow-income housing and historic tax investments. For additional information, refer to Note 11 of the Notes to Consolidated Financial Statements.

(h)

Represents agreements to purchase goods or services and includes commitments to various general contractors for work related to banking center construction.

(i)

Refer to Note 21 of the Notes to Consolidated Financial Statements for additional information on pension obligations.

(j)

Commitments to extend credit are agreements to lend, typically having fixed expiration dates or other termination clauses that may require payment of a fee. Many of the commitments to extend credit may expire without being drawn upon. The total commitment amounts include capital commitments for private equity investments and do not necessarily represent future cash flow requirements. For additional information, refer to Note 17 of the Notes to Consolidated Financial Statements.

(k)

Letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. For additional information, refer to Note 17 of the Notes to Consolidated Financial Statements.

 

8188  Fifth Third Bancorp


MANAGEMENT’S ASSESSMENT AS TO THE EFFECTIVENESSEVALUATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING

DISCLOSURE CONTROLS AND PROCEDURES

The Bancorp conducted an evaluation, under the supervision and with the participation of the Bancorp’s management, including the Bancorp’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Bancorp’s disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange Act)Act of 1934). Based on the foregoing, as of the end of the period covered by this report, the Bancorp’s Chief Executive Officer and Chief Financial Officer concluded that the Bancorp’s disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Bancorp files and submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required and information is accumulated and communicated to management on aincluding its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely basis.decisions regarding required disclosure.

MANAGEMENT’S ASSESSMENT AS TO THE EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Fifth Third Bancorp is responsible for establishing and maintaining adequate internal control, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Bancorp’s management assessed the effectiveness of the Bancorp’s internal control over financial reporting as of December 31, 2015.2017. Management’s assessment is based on the criteria established in theInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and was designed to provide reasonable assurance that the Bancorp maintained effective internal control over financial reporting as of December 31, 2015.2017. Based on this assessment, management believes that the Bancorp maintained effective internal control over financial reporting as of December 31, 2015.2017. The Bancorp’s independent registered public accounting firm, that audited the Bancorp’s consolidated financial statements included in this annual report, has issued an audit report on our internal control over financial reporting as of December 31, 2015.2017. This report appears on page 8390 of the annual report.

CHANGES IN INTERNAL CONTROLS

The Bancorp’s management also conducted an evaluation of internal control over financial reporting to determine whether any changes occurred during the year covered by this report that have materially affected, or are reasonably likely to materially affect, the Bancorp’s internal control over financial reporting. Based on this evaluation, there has been no such change during the year covered by this report.

 

  LOGOLOGO

 

LOGOLOGO

Greg D. Carmichael

 

        Tayfun Tuzun

Chairman, President and Chief Executive Officer

 

        Executive Vice President and Chief Financial Officer

February 25, 201628, 2018

 

        February 25, 201628, 2018

 

8289  Fifth Third Bancorp


REPORTREPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Fifth Third Bancorp:

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Fifth Third Bancorp and subsidiaries (the “Bancorp”) as of December 31, 2015,2017, based on criteria established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Commission (COSO). In our opinion, the Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established inInternal Control – Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB) the consolidated financial statements as of and for the year ended December 31, 2017, of the Bancorp and our report dated February 28, 2018 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Bancorp’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment as to the Effectiveness of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Bancorp’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Bancorp in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of theits inherent limitations, of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established inInternal Control— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2015 of the Bancorp and our report dated February 25, 2016 expressed an unqualified opinion on those consolidated financial statements.

LOGOLOGO

Cincinnati, Ohio

February 25, 201628, 2018

90  Fifth Third Bancorp


REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Fifth Third Bancorp:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Fifth Third Bancorp and subsidiaries (the “Bancorp”) as of December 31, 20152017 and 2014, and2016, 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, 2015. These consolidated financial statements are2017, and the responsibility ofrelated notes (collectively referred to as the Bancorp’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)“financial statements”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidatedthe financial statements present fairly, in all material respects, the financial position of Fifth Thirdthe Bancorp and subsidiaries as of December 31, 20152017 and 2014,2016, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 2015,2017, in conformity with accounting principles generally accepted in the United States of America.States.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Bancorp’s internal control over financial reporting as of December 31, 2015,2017, based on the criteria established inInternal Control—Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 201628, 2018 expressed an unqualified opinion on the Bancorp’s internal control over financial reporting.

Basis for Opinion

LOGOThese 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.

LOGO

Cincinnati, Ohio

February 25, 201628, 2018

We have served as the Bancorp’s auditor since 1970.

 

8391  Fifth Third Bancorp


CONSOLIDATED BALANCE SHEETS

 

As of December 31 ($ in millions, except share data)  2015  2014   2017   2016 

Assets

       

Cash and due from banks(a)

  $2,540   3,091    $2,514     2,392  

Available-for-sale and other securities(b)

   29,044   22,408     31,820     31,183  

Held-to-maturity securities(c)

   70   187     24     26  

Trading securities

   386   360     862     410  

Other short-term investments(a)

   2,671   7,914     2,753     2,754  

Loans held for sale(d)

   903   1,261  

Loans and leases held for sale(d)

   492     751  

Portfolio loans and leases(a)(e)

   92,582   90,084     91,970     92,098  

Allowance for loan and lease losses(a)

   (1,272 (1,322   (1,196)    (1,253) 

Portfolio loans and leases, net

   91,310   88,762     90,774     90,845  

Bank premises and equipment(f)

   2,239   2,465     2,003     2,065  

Operating lease equipment

   707   728     646     738  

Goodwill

   2,416   2,416     2,445     2,416  

Intangible assets

   12   15     27      

Servicing rights(g)

   785   858     858     744  

Other assets(a)

   7,999   8,241     6,975     7,844  

Total Assets

  $141,082   138,706    $                  142,193                     142,177  

Liabilities

       

Deposits:

       

Noninterest-bearing deposits

  $36,267   34,809    $35,276     35,782  

Interest-bearing deposits

   66,938   66,903     67,886     68,039  

Total deposits(g)

   103,205   101,712     103,162     103,821  

Federal funds purchased

   151   144     174     132  

Other short-term borrowings

   1,507   1,556     4,012     3,535  

Accrued taxes, interest and expenses

   2,164   2,020     1,412     1,800  

Other liabilities(a)

   2,341   2,642     2,144     2,269  

Long-term debt(a)

   15,844   14,967     14,904     14,388  

Total Liabilities

  $125,212   123,041    $125,808     125,945  

Equity

       

Common stock(h)

  $2,051   2,051    $2,051     2,051  

Preferred stock(i)

   1,331   1,331     1,331     1,331  

Capital surplus

   2,666   2,646     2,790     2,756  

Retained earnings

   12,358   11,141     15,122     13,441  

Accumulated other comprehensive income

   197   429     73     59  

Treasury stock(h)

   (2,764 (1,972   (5,002)    (3,433) 

Total Bancorp shareholders’ equity

  $15,839   15,626    $16,365     16,205  

Noncontrolling interests

   31   39     20     27  

Total Equity

   15,870   15,665     16,385     16,232  

Total Liabilities and Equity

  $            141,082               138,706    $142,193     142,177  
(a)

Includes$1520 and $179$85 of cash and due from banks,$2,53762and $3,378$0 of other short-term investments,$1,297and $1,216 of portfolio loans and leases,$(28)(6) and $(22)$(26) of ALLL,$207 and $25$9 of other assets,$32 and $5$3 of other liabilities and$2,4931,190and $3,434$1,094 of long-term debt from consolidated VIEs that are included in their respective captions above atDecember 31, 20152017 and 2014,2016, respectively. For further information, refer to Note 11.

(b)

Amortized cost of$28,67831,644and $21,677$31,024 atDecember 31, 20152017 and 2014,2016, respectively.

(c)

Fair value of$7024and $187$26 atDecember 31, 20152017 and 2014,2016, respectively.

(d)

Includes$519399and $561$686 of residential mortgage loans held for sale measured at fair value atDecember 31, 20152017 and 2014,2016, respectively.

(e)

Includes$167137and $108$143of residential mortgage loans measured at fair value atDecember 31, 20152017 and 2014,2016, respectively.

(f)

Includes$8127 and $26$39 of bank premises and equipment held for sale atDecember 31, 20152017and 2014,2016, respectively. For further information refer to Note 7.

(g)

Includes$628 and $0Effective January 1, 2017, the Bancorp has elected the fair value measurement method for all existing classes of deposits held for saleits residential mortgage servicing rights. The servicing rights were measured at fair value atDecember 31, 20152017and 2014, respectively.were measured under the amortization method at December 31, 2016. For further information refer to Note 7.12.

(h)

Common shares: Stated value $2.22 per share; authorized 2,000,000;2,000,000,000; outstanding atDecember December 31, 20152017785,080,314693,804,893(excludes 138,812,267230,087,688treasury shares),20142016824,046,952750,479,299 (excludes 99,845,629173,413,282 treasury shares).

(i)

446,000 shares of undesignated no par value preferred stock are authorized and unissued at December 31, 20152017and 2014; 2016;fixed-to-floating ratenon-cumulative Series H perpetual preferred stock with a $25,000 liquidation preference:24,000authorized shares,issued and outstanding at December 31, 20152017and 2014; 2016;fixed-to-floating ratenon-cumulative Series I perpetual preferred stock with a $25,000 liquidation preference:18,000authorized shares, issued and outstanding atDecember 31, 20152017and 2014;2016; andfixed-to-floating ratenon-cumulative Series J perpetual preferred stock with a $25,000 liquidation preference:12,000 authorized shares, issued and outstanding atDecember 31, 20152017and 2014.2016.

Refer to the Notes to Consolidated Financial Statements.

 

8492  Fifth Third Bancorp


CONSOLIDATED STATEMENTS OF INCOME

 

 

 
For the years ended December 31 ($ in millions, except share data)  2015 2014   2013    2017   2016 2015 

 

 

Interest Income

          

Interest and fees on loans and leases

  $3,151   3,298     3,447     $3,478    3,233  3,151  

Interest on securities

   869   724     520      996    952  869  

Interest on other short-term investments

   8   8          15    8   

 

 

Total interest income

   4,028   4,030     3,973      4,489    4,193  4,028  

Interest Expense

          

Interest on deposits

   186   202     202      277    205  186  

Interest on federal funds purchased

   1    -          6    2   

Interest on other short-term borrowings

   2   2          30    10   

Interest on long-term debt

   306   247     204      378    361  306  

 

 

Total interest expense

   495   451     412      691    578  495  

 

 

Net Interest Income

   3,533   3,579     3,561      3,798    3,615  3,533  

Provision for loan and lease losses

   396   315     229      261    343  396  

 

 

Net Interest Income After Provision for Loan and Lease Losses

   3,137   3,264     3,332      3,537    3,272  3,137  

Noninterest Income

          

Service charges on deposits

   563   560     549      554    558  563  

Investment advisory revenue

   418   407     393   

Wealth and asset management revenue

   419    404  418  

Corporate banking revenue

   384   430     400      353    432  384  

Card and processing revenue

   313    319  302  

Mortgage banking net revenue

   348   310     700      224    285  348  

Card and processing revenue

   302   295     272   

Other noninterest income

   979   450     879      1,357    688  979  

Securities gains, net

   9   21     21      2    10   

Securities gains, net - non-qualifying hedges on mortgage servicing rights

   -    -     13      2    -    

 

 

Total noninterest income

   3,003   2,473     3,227      3,224    2,696  3,003  

Noninterest Expense

          

Salaries, wages and incentives

   1,525   1,449     1,581      1,633    1,612  1,525  

Employee benefits

   323   334     357      356    339  323  

Net occupancy expense

   321   313     307      295    299  321  

Technology and communications

   224   212     204      245    234  224  

Card and processing expense

   153   141     134      129    132  153  

Equipment expense

   124   121     114      117    118  124  

Other noninterest expense

   1,105   1,139     1,264      1,215    1,169  1,105  

 

 

Total noninterest expense

   3,775   3,709     3,961      3,990    3,903  3,775  

 

 

Income Before Income Taxes

   2,365   2,028     2,598      2,771    2,065  2,365  

Applicable income tax expense

   659   545     772      577    505  659  

 

 

Net Income

   1,706   1,483     1,826      2,194    1,560  1,706  

Less: Net income attributable to noncontrolling interests

   (6 2     (10)     -    (4 (6) 

 

 

Net Income Attributable to Bancorp

   1,712   1,481     1,836      2,194    1,564  1,712  

Dividends on preferred stock

   75   67     37      75    75  75  

 

 

Net Income Available to Common Shareholders

  $1,637   1,414     1,799     $2,119    1,489  1,637  

 

 

Earnings per share - basic

  $2.03   1.68     2.05     $2.88    1.95  2.03  

Earnings per share - diluted

  $2.01   1.66     2.02     $2.83    1.93  2.01  

 

 

Average common shares outstanding - basic

         798,628,173         833,116,349           869,462,977      728,289,200    757,432,291  798,628,173  

Average common shares outstanding - diluted

   807,658,669   842,967,356     894,736,445                    740,691,433          764,495,353        807,658,669  

Cash dividends declared per common share

  $0.52   0.51     0.47     $0.60    0.53  0.52  

 

 

Refer to the Notes to Consolidated Financial Statements.

 

8593  Fifth Third Bancorp


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 
For the years ended December 31 ($ in millions)  2015         2014         2013   2017 2016 2015 

 

 

Net Income

  $1,706   1,483   1,826     $2,194  1,560  1,706  

Other Comprehensive (Loss) Income, Net of Tax:

    

Other Comprehensive Income (Loss), Net of Tax:

    

Unrealized gains on available-for-sale securities:

        

Unrealized holding gains (losses) arising during the year

   21  (130 (227) 

Reclassification adjustment for net losses (gains) included in net income

   4  (7 (10) 

Unrealized (losses) gains on cash flow hedge derivatives:

    

Unrealized holding (losses) gains arising during the year

   (227 378   (295)     (7 19  48  

Reclassification adjustment for net (gains) losses included in net income

   (10 (24   

Unrealized gains on cash flow hedge derivatives:

    

Unrealized holding gains (losses) arising during the year

   48   39   (8)  

Reclassification adjustment for net gains included in net income

   (49 (29 (29)     (12 (31 (49) 

Defined benefit pension plans, net:

        

Net actuarial (loss) gain arising during the year

   (5 (25 25   

Net actuarial gain (loss) arising during the year

   1  (1)  (5) 

Reclassification of amounts to net periodic benefit costs

   11   8   10      7  12  11  

 

 

Other comprehensive (loss) income, net of tax

   (232 347   (293)  

Other comprehensive income (loss), net of tax

   14  (138 (232) 

 

 

Comprehensive Income

   1,474   1,830   1,533      2,208  1,422  1,474  

Less: Comprehensive income attributable to noncontrolling interests

   (6 2   (10)     -  (4 (6) 

 

 

Comprehensive Income Attributable to Bancorp

  $              1,480   1,828   1,543     $                  2,208              1,426              1,480  

 

 

Refer to the Notes to Consolidated Financial Statements.

 

8694  Fifth Third Bancorp


CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

 
 Bancorp Shareholders’ Equity      Bancorp Shareholders’ Equity     
($ in millions, except per share data) Common
Stock
 Preferred
Stock
 Capital
Surplus
 Retained
Earnings
 Accumulated
Other
Comprehensive
Income
 Treasury
Stock
 Total
Bancorp
Shareholders’
Equity
 Non-
Controlling
Interests
 Total
Equity
  Common
Stock
 Preferred
Stock
 Capital
Surplus
 Retained
Earnings
 Accumulated
Other
Comprehensive
Income
 Treasury
Stock
 Total
Bancorp
Shareholders’
Equity
 Non-
Controlling
Interests
 Total
Equity    
 

 

 

Balance at December 31, 2012

 $2,051   398   2,758   8,768   375   (634 13,716   48   13,764   

Net income

    1,836     1,836   (10 1,826   

Other comprehensive loss

     (293  (293  (293)  

Cash dividends declared:

         

Common stock at $0.47 per share

    (407   (407  (407)  

Preferred stock(a)

    (37   (37  (37)  

Shares acquired for treasury

   (78   (1,242 (1,320  (1,320)  

Issuance of preferred stock

  1,034       1,034    1,034   

Redemption of preferred stock, Series G

  (398 (142   540    -       

Impact of stock transactions understock compensation plans, net

   22     38   60    60   

Other

   1   (4  3    -   (1 (1)  

 

Balance at December 31, 2013

 2,051   1,034   2,561   10,156   82   (1,295 14,589   37   14,626   

Net income

    1,481     1,481   2   1,483   

Other comprehensive income

     347    347    347   

Cash dividends declared:

         

Common stock at $0.51 per share

    (427   (427  (427)  

Preferred stock(b)

    (67   (67  (67)  

Shares acquired for treasury

   72     (726 (654  (654)  

Issuance of preferred stock

  297       297    297   

Impact of stock transactions understock compensation plans, net

   13     47   60    60   

Other

    (2  2    -       

 

Balance at December 31, 2014

 2,051   1,331   2,646   11,141   429   (1,972 15,626   39   15,665    $          2,051      1,331      2,646  11,141  429  (1,972 15,626  39  15,665  

Net income

     1,712      1,712    (6  1,706       1,712    1,712  (6 1,706  

Other comprehensive loss

      (232   (232   (232)  

Other comprehensive loss, net of tax

     (232  (232  (232) 

Cash dividends declared:

                  

Common stock at$0.52 per share

     (417    (417   (417)      (417   (417  (417) 

Preferred stock(c)

     (75    (75   (75)  

Preferred stock(a)

    (75   (75  (75) 

Shares acquired for treasury

    (3    (847  (850   (850)     (3   (847 (850  (850) 

Impact of stock transactions understock compensation plans, net

    23      52    75     75      23    52  75   75  

Other

     (3   3    -    (2  (2)      (3  3   -  (2 (2) 

 

 

Balance at December 31, 2015

 $        2,051    1,331    2,666    12,358    197    (2,764  15,839    31    15,870    $2,051  1,331  2,666  12,358  197  (2,764 15,839  31  15,870  

Net income

    1,564    1,564  (4 1,560  

Other comprehensive loss, net of tax

     (138  (138  (138) 

Cash dividends declared:

         

Common stock at $0.53 per share

    (405   (405  (405) 

Preferred stock(a)

    (75   (75  (75) 

Shares acquired for treasury

   7    (668 (661  (661) 

Impact of stock transactions under stock compensation plans, net

   83  1   (4 80   80  

Other

    (2  3  1    

 

 

Balance at December 31, 2016

 $2,051  1,331  2,756  13,441  59  (3,433 16,205  27  16,232  

Net income

     2,194     2,194    2,194  

Other comprehensive income, net of tax

      14    14    14  

Cash dividends declared:

         

Common stock at$0.60 per share

     (436    (436   (436) 

Preferred stock(a)

     (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   15,122   73   (5,002  16,365   20   16,385  

 
(a)

For the year ended December 31, 2013, dividends were $1,074.31 per preferred share for Perpetual Preferred Stock, Series G and $796.88 per preferred share for Perpetual Preferred Stock, Series H.

(b)

For the year ended December 31, 2014, dividends were $1,275.00 per preferred share for Perpetual Preferred Stock, Series H, $1,757.46 per preferred share for Perpetual Preferred Stock, Series I and $391.32 per preferred share for Perpetual Preferred Stock, Series J.

(c)

For the yearyears endedDecember 31, 20152017, 2016 and 2015, dividends were $1,275.00$1,275.00 per preferred share for Perpetual Preferred Stock, Series H,$1,656.24 per preferred share for Perpetual Preferred Stock, Series I and$1,225.00per preferred share for Perpetual Preferred Stock, Series J.

Refer to the Notes to Consolidated Financial Statements.

 

8795  Fifth Third Bancorp


CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 
For the years ended December 31 ($ in millions)                          2015     2014     2013   2017 2016 2015 

 

 

Operating Activities

              

Net income

  $1,706       1,483       1,826    $2,194  1,560  1,706  

Adjustments to reconcile net income to net cash provided by operating activities:

              

Provision for loan and lease losses

   396       315       229     261  343  396  

Depreciation, amortization and accretion

   441       414       507     341  453  441  

Stock-based compensation expense

   100       83       78     118  111  100  

(Benefit from) provision for deferred income taxes

   (71     79       253  

Benefit from deferred income taxes

   (251 (148 (71) 

Securities gains, net

   (5     (21     (21   (3 (7 (5) 

Securities gains, net - non-qualifying hedges on mortgage servicing rights

   -       -       (13

(Recovery of) provision for MSR impairment

   (4     65       (192

Securities gains,net-non-qualifying hedges on mortgage servicing rights

   (2  -    

MSR fair value adjustment

   122   -    

Recovery of MSR impairment

   -  (7 (4) 

Net gains on sales of loans and fair value adjustments on loans held for sale

   (98     (67     (622   (108 (101 (98) 

Net losses on disposition and impairment of bank premises and equipment

   101       19       6     -  13  101  

Gains on sales of certain retail branch operations

   -  (19   

Net losses on disposition and impairment of operating lease equipment

   33       -       -     39  9  33  

Loss on extinguishment of debt

   -       -       8  

Proceeds from sales of loans held for sale

   5,102       5,477       22,047  

Loans originated for sale, net of repayments

   (5,142     (4,874     (19,003

Dividends representing return on equity method investments

   25       42       54  

Gain on sale of Vantiv, Inc. shares

   (331     (125     (327   (1,037  -  (331) 

Gain on the TRA associated with Vantiv, Inc.

   (31     (23     (9   (44 (197 (31) 

Proceeds from sales of loans held for sale

   6,453  6,895  5,102  

Loans originated or purchased for sale, net of repayments

   (6,054 (7,014 (5,142) 

Dividends representing return on equity method investments

   46  28  25  

Net change in:

              

Trading securities

   (34     (16     (131   (442 (23 (34) 

Other assets

   94       (221     (672   (23 351  94  

Accrued taxes, interest and expenses

   327       1       8     (138 (157 327  

Other liabilities

   (191     (555     569     22  24  (191) 

 

 

Net Cash Provided by Operating Activities

   2,418       2,076       4,595     1,494  2,114  2,418  

 

 

Investing Activities

              

Proceeds from sales:

              

Available-for-sale and other securities

   16,828       5,234       9,328     12,637  18,280  16,828  

Loans

   741       147       657     164  360  741  

Bank premises and equipment

   37       24       33     40  82  37  

Proceeds from repayments / maturities:

              

Available-for-sale and other securities

   2,865       2,265       3,191     2,331  3,776  2,865  

Held-to-maturity securities

   117       20       74     3  44  117  

Purchases:

              

Available-for-sale and other securities

   (26,733     (10,691     (16,216   (15,295 (24,636 (26,733) 

Bank premises and equipment

   (164     (216     (274   (200 (186 (164) 

MSRs

   (109  -    

Proceeds from sales and dividends representing return of equity method investments

   458       279       674     1,363  64  458  

Net cash paid on sales of certain retail branch operations

   -  (219   

Net cash paid on acquisitions

   (44)   -    

Net change in:

              

Other short-term investments

   5,243       (2,798     (2,695   1  (83 5,243  

Loans and leases

   (3,238     (3,136     (4,750   (446 (243 (3,238) 

Operating lease equipment

   (85     (66     (206   (31 (126 (85) 

 

 

Net Cash Used in Investing Activities

   (3,931     (8,938     (10,184

Net Cash Provided by (Used in) Investing Activities

   414  (2,887 (3,931) 

 

 

Financing Activities

              

Net change in:

              

Deposits

   1,493       2,437       9,758     (659 1,146  1,493  

Federal funds purchased

   7       (140     (618   42  (19  

Other short-term borrowings

   (49     176       (4,900   477  2,028  (49) 

Dividends paid on common stock

   (422     (423     (393   (430 (402 (422) 

Dividends paid on preferred stock

   (75     (67     (37   (75 (52 (75) 

Proceeds from issuance of long-term debt

   3,091       6,570       5,044     2,490  3,735  3,091  

Repayment of long-term debt

   (2,205     (1,399     (2,225   (1,969 (5,119 (2,205) 

Repurchases of treasury shares and related forward contracts

   (850     (654     (1,320

Issuance of preferred stock

   -       297       1,034  

Repurchases of treasury stock and related forward contracts

   (1,605 (661 (850) 

Other

   (28     (22     (17   (57 (31 (28) 

 

 

Net Cash Provided by Financing Activities

   962       6,775       6,326  

Net Cash (Used in) Provided by Financing Activities

   (1,786 625  962  

 

 

(Decrease) Increase in Cash and Due from Banks

   (551     (87     737  

Increase (Decrease) in Cash and Due from Banks

   122  (148 (551) 

Cash and Due from Banks at Beginning of Period

   3,091       3,178       2,441     2,392  2,540  3,091  

 

 

Cash and Due from Banks at End of Period

  $2,540       3,091       3,178    $                      2,514                      2,392                      2,540  

 

 

Refer to the Notes to Consolidated Financial Statements. Note 2 contains cash payments related to interest and income taxes in addition tonon-cash investing and financing activities.

 

8896  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

 

Nature of Operations

Fifth Third Bancorp, an Ohio corporation, conducts its principal lending, deposit gathering, transaction processing and service advisory activities through its banking andnon-banking subsidiaries from banking centers located throughout the Midwestern and Southeastern regions of the United States.

Basis of Presentation

The Consolidated Financial Statements include the accounts of the Bancorp and its majority-owned subsidiaries and VIEs in which the Bancorp has been determined to be the primary beneficiary. Other entities, including certain joint ventures, in which the Bancorp has the ability to exercise significant influence over operating and financial policies of the investee, but upon which the Bancorp does not possess control, are accounted for by the equity method of accounting and not consolidated. The investments in those entities in which the Bancorp does not have the ability to exercise significant influence are generally carried at the lower of cost or fair value. Intercompany transactions and balances among consolidated entities have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Due From Banks

Cash and due from banks consist of currency and coin, cash items in the process of collection and due from banks. Currency and coin includes both U.S. and foreign currency owned and held at Fifth Third offices and that isin-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.

Securities

Securities are classified asheld-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 asheld-to-maturity and reported at amortized cost. Securities are classified asavailable-for-sale when, in management’s judgment, they may be sold in response to, or in anticipation of, changes in market conditions. Securities are classified as trading when bought and held principally for the purpose of selling them in the near term.Available-for-sale securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in OCI. Trading securities are reported at fair value with unrealized gains and losses included in noninterest income. The fair value of a security is determined based on quoted market prices. If quoted market prices are not available, fair value is determined based on quoted prices of similar instruments or DCF models that incorporate market inputs and assumptions including discount rates, prepayment speeds and loss rates. Realized securities gains or losses are reported within noninterest income in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method.

Available-for-sale andheld-to-maturity securities with unrealized losses are reviewed quarterly for possible OTTI. For debt securities, if the Bancorp intends to sell the debt security or will

more likely than not be required to sell the debt security before

recovery of the entire amortized cost basis, then an OTTI has occurred. However, even if the Bancorp does not intend to sell the debt security and will not likely be required to sell the debt security before recovery of its entire amortized cost basis, the Bancorp must evaluate expected cash flows to be received and determine if a credit loss has occurred. In the event of a credit loss, the credit component of the impairment is recognized within noninterest income and thenon-credit component is recognized through OCI. For equity securities, the Bancorp’s management evaluates the securities in an unrealized loss position in theavailable-for-sale portfolio for OTTI on the basis of the duration of the decline in value of the security and severity of that decline as well as the Bancorp’s intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in the market value. If it is determined that the impairment on an equity security is other-than-temporary, an impairment loss equal to the difference between the amortized cost of the security and its fair value is recognized within noninterest income.

Portfolio Loans and Leases

Basis of Accountingaccounting

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). Subsequent to the acquisition date, increases in expected cash flows over those expected at the acquisition date are recognized prospectively as interest income over the remaining life of the loan. The present value of any decreases in expected cash flows resulting directly from a change in the contractual interest rate are recognized prospectively as a reduction of the accretable yield. The present value of any decreases in expected cash flows after the acquisition date as a result of credit deterioration is recognized by recording an ALLL or a directcharge-off. Subsequent to the purchaseacquisition date, the methods utilized to estimate the required ALLL are similar to originated loans. LoansThis 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 are excluded from the scope of this guidance on loans acquired with deteriorated credit quality.agreements.

89  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Bancorp’s lease portfolio consists of both direct financing and leveraged leases. Direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property, less unearned income. Interest income on direct financing leases is recognized over the term of the lease to achieve a constant periodic rate of return on the outstanding investment.

97  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Leveraged leases are carried at the aggregate of lease payments (less nonrecourse debt payments) plus estimated residual value of the leased property, less unearned income. Interest income on leveraged leases is recognized over the term of the lease to achieve a constant rate of return on the outstanding investment in the lease, net of the related deferred income tax liability, in the years in which the net investment is positive.

Nonaccrual Loansloans and Leasesleases

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 nonperformingnonaccrual status for an extended time as the foreclosure process typically lasts longer than 180 days. Home equity loans and lines of credit are reported on nonaccrual status if principal or interest has been in default for 90 days or more unless the loan is both well-secured and in the process of collection. Home equity loans and lines of credit that have been in default for 60 days or more are also reported on nonaccrual status if the senior lien has been in default 120 days or more, unless the loan is both well secured and in the process of collection. Residential mortgage, home equity, automobile and other consumer loans and leases that have been modified in a TDR and subsequently become past due 90 days are placed on nonaccrual status unless the loan is both well-secured and in the process of collection. Commercial and credit card loans that have been modified in a TDR are classified as nonaccrual unless such loans have sustained repayment performance of six months or more and are reasonably assured of repayment in accordance with the restructured terms. Well-secured loans are collateralized by perfected security interests in real and/or personal property for which the Bancorp estimates proceeds from the sale would be sufficient to recover the outstanding principal and accrued interest balance of the loan and pay all costs to sell the collateral. The Bancorp considers a loan in the process of collection if collection efforts or legal action is proceeding and the Bancorp expects to collect funds sufficient to bring the loan current or recover the entire outstanding principal and accrued interest balance.

Nonaccrual commercial loans and nonaccrual credit card loans are generally accounted for on the cost recovery method. The Bancorp believes the cost recovery method is appropriate for nonaccrual commercial loans and nonaccrual credit card loans because the assessment of collectability of the remaining recorded investment of these loans involves a high degree of subjectivity and uncertainty due to the nature or absence of underlying collateral. Under the cost recovery method, any payments received are applied to reduce principal. Once the entire recorded investment is collected, additional payments received are treated as recoveries of amounts previouslycharged-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 uponwhen cash receiptis received, to the extent to which itsuch 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 acharge-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 forcharge-off to the ALLL when such loans or lines of credit have become past due 120 days if the senior lien is also 120 days past due, unless such loans are both well-secured and in the process of collection. Automobile and other consumer loans and leases that have principal and interest payments that have become past due 120 days are assessed for acharge-off to the ALLL, unless such loans are both well-secured and in the process of collection.

Restructured Loansloans and Leasesleases

A loan is accounted for as a TDR if the Bancorp, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. A TDR typically involves a modification of terms such as a reduction of the stated interest rate or remaining principal amount of the loan, a reduction of accrued interest or an extension of the maturity date at a stated interest rate lower than the current market rate for a new loan with similar risk. In 2012, the OCC, a national bank regulatory agency, issued interpretive guidance that requiresnon-reaffirmed loans included in Chapter 7 bankruptcy filings to be accounted for as nonperforming TDRs and collateral dependent loans regardless of their payment history and capacity to pay in the future. The Bancorp’s banking subsidiary is a state chartered bank which therefore is not subject to guidance of the OCC. The Bancorp does not consider the bankruptcy court’s discharge of the borrower’s debt a concession when the discharged debt is not reaffirmed and as such, these loans are classified as TDRs only if one or more of the previously mentioned concessions are granted.

The Bancorp measures the impairment loss of a TDR based on the difference between the original loan’s carrying amount and the present value of expected future cash flows discounted at the original, effective yield of the loan. Residential mortgage loans, home equity loans, automobile loans and other consumer loans modified as part of a TDR are maintained on accrual status, provided there is reasonable assurance of repayment and of performance according to the modified terms based upon a current, well-documented credit evaluation. Commercial loans and credit card loans modified as part of a TDR are maintained on accrual status provided there is a sustained payment history of six months 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 are reasonably assured of collection.terms.

 

 

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TDRs of commercial loans and credit cards that do not have a sustained payment history of six months or more in accordance with their modified terms remain on nonaccrual status until a six month payment history is sustained. In certain cases, commercial TDRs on nonaccrual status may be accounted for using the cash basis method for income recognition, provided that full repayment of principal under the modified terms of the loan is reasonably assured.

Impaired Loansloans and Leasesleases

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 under the fair value option.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, represents property acquired through foreclosure or other proceedings and is carried at the lower of cost or fair value, less costs to sell. All OREO property is periodically evaluated for impairment and decreases in carrying value are recognized as reductions in other noninterest income in the Consolidated Statements of Income. For government-guaranteed mortgage loans, upon foreclosure, a separate other receivable is recognized if certain conditions are met for the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. This receivable is also included in other assets, separate from OREO, in the Consolidated Balance Sheets.

ALLL

The Bancorp disaggregates its portfolio loans and leases into portfolio segments for purposes of determining the ALLL. The Bancorp’s portfolio segments include commercial, residential mortgage and consumer. The Bancorp further disaggregates its portfolio segments into classes for purposes of monitoring and assessing credit quality based on certain risk characteristics. Classes within the commercial portfolio segment include commercial and industrial, commercial mortgage owner-occupied, commercial mortgage nonowner-occupied, commercial construction and commercial leasing. The residential mortgage portfolio segment is also considered a class. Classes within the consumer portfolio segment include home equity, automobile, credit card and other consumer loans and leases. For an analysis of the Bancorp’s ALLL by portfolio segment and credit quality information by class, refer to Note 6.

The Bancorp maintains the ALLL to absorb probable loan and lease losses inherent in its portfolio segments. The ALLL is maintained at a level the Bancorp considers to be adequate and is based on ongoing quarterly assessments and evaluations of the collectability and historical loss experience of loans and leases. Credit losses are charged and recoveries are credited to the ALLL. Provisions for loan and lease losses are based on the Bancorp’s review of the historical credit loss experience and such factors that, in management’s judgment, deserve consideration under existing economic conditions in estimating probable credit losses. The Bancorp’s strategy 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, TDRs and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection andcharge-off experience. An unallocated allowance is maintained to recognize the imprecision in estimating and measuring losses when evaluating allowances for individual loans or pools of loans.

 

 

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Larger commercial loans included within aggregate borrower relationship balances exceeding $1 million that exhibit probable or observed credit weaknesses, as well as loans that have been modified in a TDR, are subject to individual review for impairment. The Bancorp considers the current value of collateral, credit quality of any guarantees, the guarantor’s liquidity and willingness to cooperate, the loan structure and other factors when evaluating whether an individual loan is impaired. Other factors may include the industry and geographic region of the borrower, size and financial condition of the borrower, cash flow and leverage of the borrower and the Bancorp’s evaluation of the borrower’s management. When individual loans are impaired, allowances are determined based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral and other sources of cash flow, as well as an evaluation of legal options available to the Bancorp. Allowances for impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, fair value of the underlying collateral or readily observable secondary market values. The Bancorp evaluates the collectability of both principal and interest when assessing the need for a loss accrual.

Historical credit loss rates are applied to commercial loans that are not impaired or are impaired, but smaller than the established threshold of $1 million and thus not subject to specific allowance allocations. The loss rates are derived from a migration analysis,analyses for several portfolio stratifications, which trackstrack the historical netcharge-off experience sustained on loans according to their internal risk grade. The risk grading system utilized for allowance analysis purposes encompasses ten categories.

Homogenous loans and leases in the residential mortgage and consumer portfolio segments are not individually risk graded. Rather, standard credit scoring systems and delinquency monitoring are used to assess credit risks and allowances are established based on the expected net charge-offs. Loss rates are based on the trailing twelve month netcharge-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. Factors that managementThe prescriptive loss rate factors include adjustments for delinquency trends, LTV trends and refreshed FICO score trends.

The Bancorp also considers qualitative factors in determining the analysisALLL. These include the effects of the national and local economies; trends in the nature and volume of delinquencies, charge-offs and nonaccrual loans;adjustments for changes in loan mix; credit score migration comparisons; asset quality trends;policies or procedures in underwriting, monitoring or collections, economic conditions, portfolio mix, lending and risk management personnel, results of internal audit and loan administration; changes inquality control reviews, collateral values and geographic concentrations. The Bancorp considers home price index trends when determining the internal lending policies and credit standards; collection practices; and examination results from bank regulatory agencies and the Bancorp’s internal credit reviewers.collateral value qualitative factor.

The Bancorp’s primary market areas for lending are the Midwestern and Southeastern regions of the United States.U.S. When evaluating the adequacy of allowances, consideration is given to these regional geographic concentrations and the closely associated effect changing economic conditions have on the Bancorp’s customers.

In the current year, the Bancorp has not substantively changed any material aspect to its overall approach to determining its ALLL for any of its portfolio segments. There have been no material changes in criteria or estimation techniques as compared to prior periods that impacted the determination of the current period ALLL for any of the Bancorp’s portfolio segments.

Reserve for Unfunded Commitments

The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated

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 other noninterest expense in the Consolidated Statements of Income.

Loan Sales and Securitizations

The Bancorp periodically sells loans through either securitizations or individual loan sales in accordance with its investment policies. The sold loans are removed from the balance sheetConsolidated Balance Sheet and a net gain or loss is recognized in the Consolidated Financial Statements at the time of sale. The Bancorp typically isolates the loans through the use of a VIE and thus is required to assess whether the entity holding the sold or securitized loans is a VIE and whether the Bancorp is the primary beneficiary and therefore consolidator of that VIE. If the Bancorp holds the power to direct activities most significant to the economic performance of the VIE and has the obligation to absorb losses or right to receive benefits that could potentially be significant to the VIE, then the Bancorp will generally be deemed the primary beneficiary of the VIE. If the Bancorp is determined not to be the primary beneficiary of a VIE but holds a variable interest in the entity, such variable interests are accounted for under the equity method of accounting or other accounting standards as appropriate. Refer to Note 11 for further information on consolidated andnon-consolidated VIEs.

The Bancorp’s loan sales and securitizations are generally structured with servicing retained. As a result,retained, which often results in the recording of servicing rights. The Bancorp may also purchase servicing rights. Effective January 1, 2017, the Bancorp elected to prospectively adopt the fair value method for all existing classes of its residential mortgage servicing rights resultingportfolio. Upon this election, all servicing rights are measured at fair value at each reporting date and changes in the fair value of servicing rights are reported in mortgage banking net revenue in the Consolidated Statements of Income in the period in which the changes occur. The election of the fair value method did not require a cumulative effect adjustment to retained earnings as there was no difference between the carrying value of the servicing rights, net of valuation allowance, and the fair value.

Servicing rights are valued using internal OAS models. Key economic assumptions used in estimating the fair value of the servicing rights include the prepayment speeds of the underlying loans, the weighted-average life, the OAS spread and the weighted-average coupon rate, as applicable. The primary risk of material changes to the value of the servicing rights resides in the potential volatility in the economic assumptions used, particularly the prepayment speeds. In order to assist in the assessment of the fair value of servicing rights, the Bancorp obtains external valuations of the servicing rights portfolio from residential mortgage loan sales arethird parties and participates in peer surveys that provide additional confirmation of the reasonableness of the key assumptions utilized in the internal OAS model.

Prior to the election of the fair value method, servicing rights were initially recorded at fair value and subsequently amortized in proportion to, and over the period of, estimated net servicing revenues and are reported as a component of mortgage banking net revenue in the Consolidated Statements of Income.revenue. Servicing rights are assessedwere tested for impairment monthly, based on fair value, with temporary impairment recognized through a valuation allowance and other-than-temporary impairment recognized through a write-off of the servicing asset and related valuation allowance. Key economic assumptions used in measuring any potential

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Amortization and provisions for impairment of the servicing rights include the prepayment speedswere recorded as a component of the underlying loans, the weighted-average life, the discount rate and the weighted-average coupon, as applicable. The primary risk of material changes to the value of the servicing rights residesmortgage banking net revenue in the potential volatility in the economic assumptions used, particularly the prepayment speeds. The Bancorp monitors risk and adjusts its valuation allowance as necessary to adequately reserve for impairment in the servicing portfolio. For purposesConsolidated Statements of measuring impairment, the mortgage servicing rights are stratified into classes based on the financial asset type (fixed-rate vs. adjustable-rate) and interest rates. Income.

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.

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The Bancorp establishes a residential mortgage repurchase reserve related to various representations and warranties that reflects management’s estimate of losses based on a combination of factors.

The Bancorp’s estimation process requires management to make subjective and complex judgments about matters that are inherently uncertain, such as future demand expectations, economic factors and the specific characteristics of the loans subject to repurchase. Such factors incorporate historical investor audit and repurchase demand rates, appeals success rates, historical loss severity and any additional information obtained from the GSEs regarding future mortgage repurchase and file request criteria. At the time of a loan sale, the Bancorp records a representation and warranty reserve at the estimated fair value of the Bancorp’s guarantee and continually updates the reserve during the life of the loan as losses in excess of the reserve become probable and reasonably estimable. The provision for the estimated fair value of the representation and warranty guarantee arising from the loan sales is recorded as an adjustment to the gain on sale, which is included in other noninterest income at the time of sale. Updates to the reserve are recorded in other noninterest expense.

Legal Contingencies

The Bancorp and its subsidiaries are parties to numerous claims and lawsuits as well as threatened or potential actions or claims concerning matters arising from the conduct of its business activities. The outcome of claims or litigation and the timing of ultimate resolution are inherently difficult to predict and significant judgment may be required in the determination of both the probability of loss and whether the amount of the loss is reasonably estimable. The Bancorp’s estimates are subjective and are based on the status of legal and regulatory proceedings, the merit of the Bancorp’s defenses and consultation with internal and external legal counsel. An accrual for a potential litigation loss is established when information related to the loss contingency indicates both that a loss is probable and that the amount of loss can be reasonably estimated. This accrual is included in other liabilities in the Consolidated Balance Sheets and is adjusted from time to time as appropriate to reflect changes in circumstances. Legal expenses are recorded in other noninterest expense in the Consolidated Statements of Income.

Bank Premises and Equipment and Other Long-Lived Assets

Bank premises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method based on estimated useful lives of the assets for book purposes, while

accelerated depreciation 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.

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, to the extent that it is effective, are recorded in AOCI and subsequently reclassified to net income in the same period(s) that the hedged transaction impacts net income. For free-standing derivative instruments, changes in fair values are reported in current period net income.

Prior to 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. This process includes linking the derivative instrument designated as a fair value or cash flow hedge to a specific asset or liability on the balance sheet or to specific forecasted transactions and the risk being hedged, along with a formal assessment at both inception of the hedge and on an ongoing basis as to the effectiveness of the derivative instrument in offsetting changes in fair values or cash flows of the hedged item. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued.

Tax Receivable Agreements

In conjunction with Vantiv, Inc.’s IPO in 2012, the Bancorp entered into two TRAs with Vantiv, Inc. The TRAs provide for payments by Vantiv, Inc. to the Bancorp of 85% of the cash savings actually realized as a result of the increase in tax basis that results from the historical or future purchase of equity in Vantiv Holding, LLC from the Bancorp or from the exchange of equity units in Vantiv Holding, LLC for cash or Class A Stock, as well as any tax benefits attributable to payments made under the TRA. Any actual increase in tax basis, as well as the amount and timing of any payments made under the TRA depend on a number of uncertain factors, the most significant of which is the realization of the tax benefits by Vantiv, Inc., which depends on the amount and timing of Vantiv, Inc.’s reportable taxable income. The Bancorp accounts for these TRAs as gain contingencies and recognizes income when all uncertainties surrounding the realization of such amounts are resolved.

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Income Taxes

The Bancorp estimatesaccounts for income taxes using the asset and liability method, which requires the recognition of deferred tax expense based on amountsassets and liabilities for expected to be owed tofuture tax consequences. Under the various tax jurisdictions in which the Bancorp conducts business. On a quarterly basis, management assesses the reasonableness of its effective tax rate based upon its current estimate of the amountasset and components of net income, tax credits and the applicable statutory tax rates expected for the full year. The estimated income tax expense is recorded in the Consolidated Statements of Income.

Deferred incomeliability method, deferred tax assets and liabilities are determined usingby applying the balance sheet methodfederal 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 asset or liability by taxing jurisdiction isassets and liabilities are reported in other assets orand accrued taxes, interest and expenses in the Consolidated Balance Sheets. Under this method, the netAny effect of a change in federal or state tax rates on deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities andis recognized in income tax expense in the period that includes the enactment date. The Bancorp reflects enacted changes inthe expected amount of income tax rates and laws. Deferredto be paid or refunded during the year as current income tax assets are recognized to the extent they exist and are subject to a valuation allowance based on management’s judgment that realization is more likely than not. This analysis is performed on a quarterly basis and includes an evaluation of all positive and negative evidence, such as the limitation on the use of any net operating losses, to determine whether realization is more likely than not.

expense or benefit. Accrued taxes represent the net estimatedexpected 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 assessesnegative evidence available at the relative risksbalance 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 appropriatetax-planning strategies. The Bancorp records a valuation allowance for deferred tax treatmentassets where the Bancorp does not believe that it ismore-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 ismore-likely-than-not that the uncertain tax position will be sustained based solely on the technical merits of transactionsthe tax position and filing positions after considering statutes, regulations, judicial precedentconsideration of the relevant taxing authority’s widely understood administrative practices and other informationprecedents. If the Bancorp does not believe that it ismore-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 maintainspenalties related to unrecognized tax accruals consistent with its evaluation of these relative risks and merits. Changes to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and changes to statutory, judicial and regulatory guidance that impact the relative risks of tax positions.

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These changes, when they occur, can affect deferred taxes and accrued taxes as well as thebenefits within current period’s income tax expense and can be significant to the operating results of the Bancorp. Any interest and penalties incurred in connection with income taxes are recorded as a component of income tax expense in the Consolidated Financial Statements. For additional information on income taxes, referexpense. Refer to Note 20.20 for further discussion regarding income taxes.

Earnings Per Share

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Earnings per diluted share is computed by dividing adjusted net income available to common shareholders by the weighted-average number of shares of common stock and common stock equivalents outstanding during the period. Dilutive common stock equivalents represent the assumed conversion of dilutive convertible preferred stock, the exercise of dilutive stock-based awards and warrants and the dilutive effect of the settlement of outstanding forward contracts.

The Bancorp calculates earnings per share pursuant to thetwo-class method. Thetwo-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 thetwo-class method, restricted shares that contain nonforfeitable rights to dividends are considered

participating securities until vested. While the dividends declared per share on such restricted shares are the same as dividends declared per common share outstanding, the dividends recognized on such restricted shares may be less because dividends paid on restricted shares that are expected to be forfeited are reclassified to compensation expense during the period when forfeiture is expected.

Goodwill

Business combinations entered into by the Bancorp typically include the acquisition of goodwill. Goodwill is required to be tested for impairment at the Bancorp’s reporting unit level on an annual basis, which for the Bancorp is September 30, and more frequently if events or circumstances indicate that there may be impairment. The Bancorp has determined that its segments qualify as reporting units under U.S. GAAP.

Impairment exists when a reporting unit’s carrying amount of goodwill exceeds its implied fair value. In testing goodwill for impairment, U.S. GAAP permits the Bancorp to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In this qualitative assessment, the Bancorp evaluates events and circumstances which may include, but are not limited to, the general economic environment, banking industry and market conditions, the overall financial performance of the Bancorp, the performance of the Bancorp’s common stock, the key financial performance metrics of the Bancorp’s reporting units and events affecting the reporting units. If, after assessing the totality of events and circumstances, the Bancorp determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing thetwo-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.

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During Step 2, the Bancorp determines the implied fair value of goodwill for a reporting unit by assigning the fair value of the reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. This assignment process is only performed for purposes of testing goodwill for impairment. The Bancorp does not adjust the carrying values of recognized assets or liabilities (other than goodwill, if appropriate), nor does it recognize previously unrecognized intangible assets in the Consolidated Financial Statements as a result of this assignment process. Refer to Note 9 for further information regarding the Bancorp’s goodwill.

Fair Value Measurements

The Bancorp measures certain financial assets and liabilities at fair value in accordance with U.S. GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques theThe Bancorp usesemploys various valuation approaches to measure fair value includeincluding the market, approach, income approach and cost approach.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:

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Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Bancorp has the ability to access at the measurement date.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 – Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Bancorp’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best 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 27 for further information on fair value measurements.

Stock-Based Compensation

The Bancorp recognizes compensation expense for the grant-date fair value of stock-based awards that are expected to vest over the requisite service period. All awards, both those with cliff vesting and graded vesting, are expensed on a straight-line basis. Awards to employees that meet eligible retirement status are expensed immediately. As compensation expense is recognized, a deferred tax asset is recorded that represents an estimate of the future tax deduction from exercise or release of restrictions. At the time awards are exercised, cancelled, expire or restrictions are released, the Bancorp may be required to recognizerecognizes an adjustment to income tax expense for the difference between the previously estimated tax deduction and the actual tax deduction realized. For further information on the Bancorp’s stock-based compensation plans, refer to Note 24.

Pension Plans

The Bancorp uses an expected long-term rate of return applied to the fair market value of assets as of the beginning of the year and the expected cash flow during the year for calculating the expected investment return on all pension plan assets. Amortization of the net gain or loss resulting from experience different from that assumed and from changes in assumptions (excluding asset gains and losses not yet reflected in market-related value) is included as a component of net periodic benefit cost. If, as of the beginning of the year, that net gain or loss exceeds 10% of the greater of the

projected benefit obligation and the market-related value of plan assets, the amortization is that excess divided by the average remaining service period of participating employees expected to receive benefits under the plan. The Bancorp uses a third-party actuary to compute the remaining service period of participating employees. This period reflects expected turnover,pre-retirement mortality and other applicable employee demographics.

Other

Securities and other property held by Fifth Third Investment Advisors,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. Investment advisoryWealth and asset management revenue in the Consolidated Statements of Income is recognized on the accrual basis. Investment advisoryWealth and asset management service revenues are recognized monthly based on a fee charged per transaction processed and/or a fee charged on the market value of average account balances associated with individual contracts.

The Bancorp recognizes revenue from its card and processing services on an accrual basis as such services are performed, recording revenues net of certain costs (primarily interchange fees charged by credit card associations) not controlled by the Bancorp.

The Bancorp purchases life insurance policies on the lives of certain directors, officers and employees and is the owner and beneficiary of the policies.

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The Bancorp invests in these policies, known as BOLI, to provide an efficient form of funding for long-term retirement and other employee benefits costs. The Bancorp records these BOLI policies within other assets in the Consolidated Balance Sheets at each policy’s respective cash surrender value, with changes recorded in other noninterest income in the Consolidated Statements of Income.

Other intangibleIntangible assets consist of core deposit intangibles, customer lists, customer relationships,non-compete agreements, trade names and cardholder relationships. Other intangiblerent intangibles. Intangible assets are amortized on either a straight-line or an accelerated basis over their estimated useful lives. The Bancorp reviews other intangible assets for impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.

Securities sold under repurchase agreements are accounted for as secured borrowings and included in other short-term borrowings in the Consolidated Balance Sheets at the amounts at which the securities were sold plus accrued interest.

Acquisitions of treasury stock are carried at cost. Reissuance of shares in treasury for acquisitions, exercises of stock-based awards or other corporate purposes is recorded based on the specific identification method.

Advertising costs are generally expensed as incurred.

ACCOUNTING AND REPORTING DEVELOPMENTS

Accounting and Reporting DevelopmentsStandards Adopted in 2017

The Bancorp adopted the following new accounting standards effective January 1, 2017:

ASU2016-05 – Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting for Investments in Qualified Affordable Housing ProjectsRelationships

In January 2014,March 2016, the FASB issued amended guidanceASU2016-05 which clarifies that a change in counterparty in a derivative contract does not, in and of itself, represent a change in critical terms that would permit the Bancorprequire discontinuation of hedge accounting provided that other hedge accounting criteria continue to make an accounting policy election to account for its investments in qualified affordable housing projects using a proportional amortization method if certain conditions are met and to present the amortization as a component of income tax expense. The amended guidance would be applied retrospectively to all periods presented and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014, with early adoption permitted. Regardless of the policy election, the amended guidance requires disclosures to enable the users of the financial statements to understand the nature of the Bancorp’s investments in qualified affordable housing projects and the effect of the measurement of the investments in qualified affordable housing projects and the related tax credits on the Bancorp’s financial position and results of operation.

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met. The Bancorp adopted the amended guidance prospectively on January 1, 2015 and did not make an accounting policy election to apply the proportional amortization method for its investments in qualified affordable housing projects. Therefore, the adoption of the amended guidance did not have a material impact on the Consolidated Financial Statements. The required disclosures are included in Note 11.

Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure

In January 2014, the FASB issued amended guidance that clarifies when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized2017 and the real estate property recognized. The amended guidance clarifies that an in substance repossession or foreclosure occurs and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either 1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or 2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. In addition, the amended guidance requires interim and annual disclosures of both 1) the amount of foreclosed residential real estate property held by the creditor and 2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amended guidance may be applied prospectively or through a modified retrospective approach and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014, with early adoption permitted. The Bancorp adopted the amended guidance on January 1, 2015 and the adoption of the amended guidance did not have a material impact on the Consolidated Financial Statements. The required disclosures are included in Note 6.

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity

In April 2014, the FASB issued amended guidance that changes the criteria for reporting discontinued operations. The amended guidance requires a disposal of a component of an entity or a group of components of an entity to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when any of the following occurs: 1) the component of an entity or group of components of an entity meets the criteria to be classified as held for sale; 2) the component of an entity or group of components of an entity is disposed of by sale; or 3) the component of an entity or group of components of an entity is disposed of other than by sale (for example, by abandonment or in a distribution to owners in a spinoff). The amended guidance requires an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position, as well as additional disclosures about discontinued operations. The amended guidance is to be applied prospectively for 1) all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years; and 2) all businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual

periods beginning on or after December 15, 2014, and interim periods within those years. The Bancorp adopted the amended guidance on January 1, 2015 and the adoption of the amended guidance did not have a material impact on the Consolidated Financial Statements.

ASU2016-06 – Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments

In March 2016, the FASB issued ASU2016-06 which clarifies the requirements for determining when contingent put and call options embedded in debt instruments should be bifurcated from the debt instrument and accounted for separately as derivatives. A four-step decision sequence should be followed in determining whether such options are clearly and closely related to the economic characteristics and risks of the debt instrument, which determines whether bifurcation is necessary. The Bancorp adopted the amended guidance on January 1, 2017 on a modified retrospective basis and the adoption did not have a material impact on the Consolidated Financial Statements.

ASU2016-07 – Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting

In March 2016, the FASB issued ASU2016-07 to eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations and retained earnings retroactively on astep-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity

method of accounting as of the date the investment becomes qualified for equity method accounting, eliminating the requirement to retrospectively apply the equity method of accounting back to the date of the initial investment. The Bancorp adopted the amended guidance prospectively on January 1, 2017 and the adoption did not have a material impact on the Consolidated Financial Statements.

ASU2016-17 – Consolidation (Topic 810): Interests Held Through Related Parties That Are Under Common Control

In October 2016, the FASB issued ASU2016-17 which changes the accounting for the consolidation of VIEs in certain situations involving entities under common control. Specifically, the amendments change how the indirect interests held through related parties that are under common control should be included in a reporting entity’s evaluation of whether it is a primary beneficiary of a VIE. Under the amended guidance, the reporting entity is only required to include the indirect interests held through related parties that are under common control in a VIE on a proportionate basis. The Bancorp adopted the amended guidance retrospectively on January 1, 2017 and the adoption did not have a material impact on the Consolidated Financial Statements.

Standards Issued but Not Yet Adopted

The following accounting standards were issued but not yet adopted by the Bancorp as of December 31, 2017:

ASU2014-09Revenue from Contracts with Customers (Topic 606)

In May 2014, the FASB issued amended guidance on revenue recognition from contracts with customers. The standardASU2014-09 which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most contract revenue recognition guidance, including industry-specific guidance. The core principle of the amended guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amended guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods withinSubsequent to the reporting period, and should be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effectissuance of initially applying the amendments recognized at the date of initial application. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016 and interim reporting periods within those fiscal years. The Bancorp is currently in the process of evaluating the impact of the amended guidance on its Consolidated Financial Statements.

Repurchase-to-Maturity Transactions, Repurchase Financings and Disclosures

In June 2014,ASU2014-09, the FASB has issued amendedadditional guidance that changesto clarify certain implementation issues, including ASUs2016-08 (Principal versus Agent Considerations),2016-10 (Identifying Performance Obligations and Licensing),2016-12 (Narrow-Scope Improvements and Practical Expedients), and2016-20 (Technical Corrections and Improvements) in March, April, May and December 2016, respectively. These amendments do not change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. The amended guidance also requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will resultcore principles in secured borrowing accounting for the repurchase agreement. The amended guidance requires disclosures for certain transactions comprising: 1) a transfer of a financial asset accounted for as a saleASU2014-09 and 2) an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. The amended guidance also requires new disclosures for repurchase agreements, securities lending transactions and repurchase-to-maturity transactions accounted for as secured borrowings. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014, with early adoption prohibited. Changes in accounting for transactions outstanding on the effective date should be presented as a cumulative-effect adjustment to retained earnings as ofand transition requirements are consistent with those in the beginning of the period of adoption. The disclosures for certain transactions accounted for as a sale are required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosures for repurchase agreements, securities lending transactions and repurchase-to-maturity transactions accounted for as secured borrowings are required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015.original ASU. The Bancorp adopted the amended guidance on January 1, 20152018, using a modified retrospective approach. Because the amended guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP, the adoption of thethis amended guidance did not have a material impact on the Bancorp’s Consolidated Financial Statements. The required disclosuresHowever, effective with the filing of the Bancorp’s first quarter of 2018 Form10-Q, the Bancorp will be subject to expanded disclosure requirements and after adoption has updated its revenue recognition policies and procedures. While the Bancorp has concluded the following changes are includednot material to its Consolidated Financial Statements, upon adoption the Bancorp changed its presentation of certain underwriting expenses incurred by its broker-dealer subsidiary from net to gross presentation and also changed its presentation of certain credit card rewards program expenses from gross to net presentation. These changes will be reflected in Note 15.the Bancorp’s first quarter of 2018 Form10-Q and neither change had an impact on income before income taxes or net income.

 

 

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Accounting for Share-Based Payments When the Terms of the Award Provide That a Performance Target Could be Achieved after the Requisite Service Period

In June 2014, the FASB issued amended guidance which clarifies that a performance target that affects vesting and can be achieved after the requisite service period be treated as a performance condition. The amended guidance provides that an entity should apply existing guidance as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The amended guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. The amended guidance may be adopted either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying the amended guidance as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. The Bancorp adopted the amended guidance prospectively on January 1, 2016 and the adoption of the amended guidance did not have a material impact on the ConsolidatedASU2016-01 Financial Statements.

Measuring the Financial Assets and Financial Liabilities of a Consolidated Collateralized Financing Entity

In August 2014, the FASB issued amended guidance that provides an alternative to ASC Topic 820: Fair Value Measurement for measuring the financial assets and financial liabilities of a CFE, such as a collateralized debt obligation or a collateralized loan obligation entity consolidated as a VIE when a) all of the financial assets and the financial liabilities of that CFE are measured at fair value in the consolidated financial statements and b) the changes in the fair values of those financial assets and financial liabilities are reflected in earnings. If elected, the measurement alternative would allow the Bancorp to measure both the financial assets and the financial liabilities of the CFE by using the more observable of the fair value of the financial assets or the fair value of the financial liabilities and to eliminate any measurement difference. When the measurement alternative is not elected for a consolidated CFE within the scope of this amended guidance, the amendments clarify that 1) the fair value of the financial assets and the fair value of the financial liabilities of the consolidated CFE should be measured using the requirements of Topic 820 and 2) any difference in the fair value of the financial assets and the fair value of the financial liabilities of that consolidated CFE should be reflected in earnings and attributed to the Bancorp in the Consolidated Statements of Income. The amended guidance may be applied retrospectively or through a

modified retrospective approach and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Bancorp adopted the amended guidance on January 1, 2016 and the adoption did not have a material impact on the Consolidated Financial Statements.

Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure

In August 2014, the FASB issued amended guidance clarifying the classification of certain foreclosed mortgage loans that are either full or partially guaranteed under government programs. The amended guidance requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: 1) the loan has a government guarantee that is not separable from the loan before foreclosure; 2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and 3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable would be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amended guidance may be applied prospectively or through a modified retrospective approach and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014, with early adoption permitted. The Bancorp adopted the amended guidance prospectively on January 1, 2015 and the adoption of the amended guidance did not have a material impact on the Consolidated Financial Statements. The required disclosures are included in Note 6.

Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or Equity

In November 2014, the FASB issued amended guidance that clarifies how current U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative features being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The amended guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The effects of initially adopting the amended guidance should be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year for which the amendments are effective and shall be reported as a cumulative-effect adjustment directly to retained earnings as of the beginning of the year of adoption. The Bancorp adopted the amended guidance on January 1, 2016 and the adoption of the amended guidance did not have a material impact on the Consolidated Financial Statements.

Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items

In January 2015, the FASB issued amended guidance that eliminates the concept of extraordinary items from U.S. GAAP. Presently, an event or transaction is presumed to be an ordinary and usual activity of a reporting entity unless evidence clearly supports its classification as an extraordinary item, which must be both unusual in nature and infrequent in occurrence.

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An entity was required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. An entity was also required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The amended guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The amended guidance may be applied prospectively or retrospectively to all periods presented in the financial statements. The Bancorp adopted the amended guidance prospectively on January 1, 2016 and the adoption of the amended guidance did not have a material impact on the Consolidated Financial Statements.

Amendments to the Consolidation Analysis

In February 2015, the FASB issued amended guidance that changes the analysis a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amended guidance 1) modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities; 2) eliminates the presumption that a general partner should consolidate a limited partnership; 3) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and 4) provides a scope exception from consolidation guidance for reporting entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted. The amended guidance may be applied using either a retrospective approach or a modified retrospective approach with a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The Bancorp adopted the amended guidance on January 1, 2016 and the adoption of the amended guidance did not have a material impact on the Consolidated Financial Statements.

Simplifying the Presentation of Debt Issuance Costs

In April 2015, the FASB issued amended guidance to address the different balance sheet presentation requirements for debt issuance costs and debt discounts and premiums. The amended guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amended guidance. The amended guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted for financial statements that have not been previously issued. The amended guidance should be applied retrospectively, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the amended guidance. As of December 31, 2015 and 2014, the Bancorp had approximately $34 million and $36 million of debt issuance costs, respectively, recorded within other assets in the Consolidated Balance Sheets that were required to be reclassified and presented as a direct deduction from the debt liability upon the adoption of the amended guidance on January 1, 2016.

Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets

In April 2015, the FASB issued amended guidance intended to simplify an entity’s measurement of the fair value of plan assets of a defined benefit pension or other postretirement benefit plan when the fiscal year-end does not coincide with a month end. For an entity with a fiscal year-end that does not coincide with a month-end, the amended guidance provides a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The amended guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The amended guidance should be applied prospectively. The adoption of the amended guidance did not have an impact on the Consolidated Financial Statements as the Bancorp’s fiscal year-end coincides with a month end.

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement

In April 2015, the FASB issued amended guidance on a customer’s accounting for fees paid in a cloud computing arrangement. Under the amended guidance, if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amended guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The amended guidance may be applied either prospectively to all arrangements entered into or materially modified after the effective date, or retrospectively. The Bancorp adopted the amended guidance prospectively on January 1, 2016 and the adoption did not have material impact on the Consolidated Financial Statements.

Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share

In May 2015, the FASB issued amended guidance to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amended guidance also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The amended guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amended guidance should be applied retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity’s financial statements. Earlier application is permitted. The Bancorp adopted the amended guidance on January 1, 2016 and the adoption did not have a material impact on the Consolidated Financial Statements.

Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-Of-Credit Agreements

In August 2015, the FASB issued amended guidance about the presentation and subsequent measurement of debt issuance costs associated with line of credit arrangements.

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Given the absence of authoritative guidance for debt issuance costs related to line of credit arrangements within ASU 2015-03, the amended guidance provides that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there were any outstanding borrowings on the line of credit arrangement. The amended guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amended guidance should be applied retrospectively, where in the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the amendments. Early adoption is permitted for financial statements that have not been previously issued. The Bancorp adopted the amended guidance on January 1, 2016 and the adoption did not have a material impact on the Consolidated Financial Statements.

Simplifying the Accounting for Measurement-Period Adjustments

In September 2015, the FASB issued amended guidance to simplify the accounting for adjustments made to provisional amounts recognized in a business combination. The amended guidance eliminates the requirement to retrospectively account for those adjustments and requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer shall record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amended guidance requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amended guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with earlier application permitted for financial statements that have not been issued. The amended guidance should be applied prospectively to adjustments to provisional amounts that occur after the effective date of the amended guidance. The Bancorp adopted the amended guidance on January 1, 2016 and the adoption did not have an impact on the Consolidated Financial Statements.

Instruments—Overall (Subtopic825-10):Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued amended guidance to improve certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Specifically, the amendments significantly reviseASU2016-01 which revises an entity’s accounting related to 1) the classification and measurement of investments in equity securities, 2) the presentation of certain fair value changes for financial liabilities measured at fair value, and 3) certain disclosure requirements associated with the fair value of financial instruments. The amendments require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes as a result of an observable price change. The amendments also simplify the impairment assessment of equity investments for which fair value is not readily determinable by requiring an entity to perform a qualitative assessment to identify impairment. If qualitative indicators are identified, the entity will be required to measure the investment at fair value. For financial

liabilities that an entity has elected to measure at fair value, the amendments require an entity to present separately in other comprehensive incomeOCI the portion of the change in fair value that results from a change in instrument-specific credit risk. For public business entities, the amendments 1) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate fair value for financial instruments measured at amortized cost and 2) require, for disclosure purposes, the use of an exit price notion in the determination of the fair value of financial instruments. The Bancorp adopted the amended guidance on January 1, 2018. The adoption did not have a material impact on the Consolidated Financial Statements. However, for certain equity securities without a readily determinable fair value that are not accounted for using the equity method, the Bancorp has elected to use the permitted measurement alternative, which is to adjust the cost basis of the investment upon either the occurrence of an observable price change or the identification of an impairment. For these securities, the amended guidance was applied prospectively to investments that existed on or after January 1, 2018.

ASU2016-02 – Leases (Topic 842)

In February 2016, the FASB issued ASU2016-02 which establishes a new accounting model for leases. The amended guidance requires lessees to record lease liabilities on the lessees’ balance sheets along with correspondingright-of-use assets for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the lessee’s statements of income. From a lessor perspective, the accounting model is largely unchanged, except that the amended guidance includes certain targeted improvements to align, where necessary, lessor accounting with the lessee accounting model and the revenue recognition guidance in ASC Topic 606. The amendments also modify disclosure requirements for an entity’s lease arrangements. The amended guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2017. Upon adoption, the Bancorp on January 1, 2019, with early adoption permitted. The amendments should be applied to each prior reporting period presented using a modified retrospective approach, although the amended guidance contains certain transition relief provisions that, among other things, permit an entity to elect not to reassess the classification of leases which existed or expired as of the date the amendments are effective. In January 2018, the FASB proposed additional amendments to the new guidance which, among other things, include an option to recognize a cumulative effect adjustment to retained earnings in the period of adoption instead of applying the guidance to prior comparative periods, but these additional amendments are not yet final. The Bancorp will adopt the

amended guidance on the required effective date of January 1, 2019, and expects to elect the transition relief provisions. From a lessee perspective, the Bancorp is currently finalizing its inventory of all leases, accumulating the lease data necessary to apply the amended guidance, and evaluating the business process and technology requirements which will be requirednecessary after adoption. The Bancorp is continuing to make a cumulative-effect adjustment toevaluate the impact of the amended guidance on its Consolidated Financial Statements, but the effects of recognizing most operating leases on the Consolidated Balance Sheets asare expected to be material. The Bancorp expects to recognizeright-of-use assets and lease liabilities for substantially all of its operating lease commitments based on the beginningpresent value of the fiscal year of adoption. The guidance on equity securities without readily determinable fair value will be applied prospectively to all equity investments that existunpaid lease payments as of the date of adoption, ofbut does not expect a material impact to expense recognition. From a lessor perspective, given the standard. Earlylimited changes, the Bancorp does not expect adoption of the amended guidance to have a material impact, based on its preliminary analysis. However, the Bancorp is continuing to evaluate the impact of the amended guidance, particularly related to the deferral of costs incurred in originating leases. The Bancorp also expects to record a cumulative-effect adjustment to retained earnings upon adoption to recognize any remaining deferred gains on sale-leaseback transactions that occurred prior to the date of initial application. The Bancorp had approximately $11 million of such deferred gains recorded as of December 31, 2017. These expectations may change as the implementation process continues.

ASU2016-04 – Liabilities—Extinguishments of Liabilities (Subtopic405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products

In March 2016, the FASB issued ASU2016-04 which permits proportional derecognition of the liability for unused funds on certain prepaid stored-value products (known as breakage) to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. The amendments do not apply to any prepaid stored-value products that are attached to a segregated customer deposit account, or products for which unused funds are subject to unclaimed property remittance laws. The Bancorp adopted the amended guidance on January 1, 2018 using a modified retrospective approach. The adoption did not have a material impact on the Consolidated Financial Statements.

ASU2016-13 – Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU2016-13 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, andoff-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 foravailable-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.

105  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amended model states that an entity will recognize an allowance for credit losses onavailable-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 onavailable-for-sale debt securities immediately in earnings as opposed to in interest income over time. There are also additional disclosure requirements included in this guidance. The amended guidance is effective for the Bancorp on January 1, 2020. Early adoption is permitted as soon as January 1, 2019, but the Bancorp currently expects to adopt on the mandatory effective date. The amended guidance is to be applied on a modified retrospective basis with the exceptioncumulative effect of initially applying the amendments recognized in retained earnings at the date of initial application. However, certain provisions of the presentation of certain fair value changes for financial liabilities measured at fair value for which early application is permitted. Theguidance are only required to be applied on a prospective basis. While the Bancorp is currently in the process of evaluating the impact of the amended guidance on its Consolidated Financial Statements, it currently expects the ALLL to increase upon adoption given that the allowance will be required to cover the full remaining expected life of the portfolio upon adoption, rather than the incurred loss model under current U.S. GAAP. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of the Bancorp’s loan and lease portfolio at the time of adoption.

ASU2016-15 – Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU2016-15 to clarify the classification of certain cash receipts and payments within an entity’s statement of cash flows. These items include debt prepayment or extinguishment costs, settlement ofzero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of BOLI policies, distributions received from equity method investees, and beneficial interests in securitization transactions. The amended guidance also specifies how to address classification of cash receipts and payments that have aspects of more than one class of cash flows. The Bancorp adopted the amended guidance retrospectively on January 1, 2018 and will apply the requirements of this amended guidance in its first quarter of 2018 Form10-Q. The adoption did not have a material impact on the Consolidated Financial Statements.

ASU2016-16 – Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory

In October 2016, the FASB issued ASU2016-16 which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Current U.S. GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The Bancorp adopted the amended guidance on January 1, 2018, using a modified retrospective approach and will apply the requirements of this amended guidance in its first quarter of 2018 Form10-Q. The adoption did not have a material impact on the Consolidated Financial Statements.

ASU2017-01 – Business Combinations (Topic 805): Clarifying the Definition of a Business

In January 2017, the FASB issued ASU2017-01 which clarifies the definition of a business in order to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amended guidance provides a screen which states that when substantially all of the fair value of assets acquired (or disposed) is concentrated in a single asset or

group of similar assets, then the set of assets and activities would not be considered a business. The Bancorp adopted the amended guidance prospectively on January 1, 2018 and will apply this amended guidance to future transactions to determine if they should be accounted for as acquisitions (or disposals) of assets or businesses.

ASU2017-04 – Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU2017-04 which simplifies the test for goodwill impairment by removing the second step, which measures the amount of impairment loss, if any. Instead, the amended guidance states that an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, except that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This would apply to all reporting units, including those with zero or negative carrying amounts of net assets. The amended guidance is effective for the Bancorp on January 1, 2020, with early adoption permitted, and is to be applied prospectively to all goodwill impairment tests performed after the adoption date.

ASU2017-05 – Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

In February 2017, the FASB issued ASU2017-05 which clarifies the scope of Subtopic610-20 and defines the term “in substance nonfinancial asset.” The amendments require that an entity should initially identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. The amendments provide specific guidance on accounting for partial sales of nonfinancial assets, which require an entity to derecognize a distinct nonfinancial asset or in substance nonfinancial asset in a partial sale transaction when it 1) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset and 2) transfers control of the asset. Once an entity transfers control of a distinct nonfinancial asset or distinct in substance nonfinancial asset, it is required to measure any noncontrolling interest it receives (or retains) at fair value. The Bancorp adopted the amended guidance on January 1, 2018, using a modified retrospective approach. The adoption did not have a material impact on the Consolidated Financial Statements.

ASU2017-08 Receivables—Nonrefundable Fees and Other Costs (Subtopic310-20): Premium Amortization on Purchased Callable Debt Securities

In March 2017, the FASB issued ASU2017-08 which shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amended guidance is effective for the Bancorp on January 1, 2019, with early adoption permitted, and is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Bancorp shall provide a disclosure regarding the change in accounting principle. The Bancorp plans to adopt the amended guidance on its required effective date of January 1, 2019 and is currently in the process of evaluating the impact of the amended guidance on its Consolidated Financial Statements. However, the Bancorp does not currently expect the impact of adoption to be material.

 

 

99  Fifth Third Bancorp

106  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ASU2017-09 Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting

In May 2017, the FASB issued ASU2017-09 which provides guidance about which changes to the terms or conditions of a share-based payment award require the application of modification accounting in Topic 718. The amendments specify that an entity should account for the effects of such changes as a modification unless the fair value, vesting conditions and classification (as an equity or liability) of the awards are all unaffected by the change. The Bancorp adopted the amended guidance prospectively on January 1, 2018. The adoption did not have a material impact on the Consolidated Financial Statements.

ASU2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued ASU2017-12 which makes several amendments to existing guidance for hedge accounting. The amendments are intended to simplify the application of hedge accounting guidance in current U.S. GAAP, improve the alignment of financial reporting with an entity’s risk management strategies

and allow more financial and nonfinancial hedging strategies to be eligible for hedge accounting. Among other things, the amendments 1) permit hedge accounting for risk components in certain hedging relationships including nonfinancial risk and interest rate risk, 2) provide new alternatives for designating and measuring fair value changes in the hedged item for fair value hedges of interest rate risk, 3) modify the recognition and presentation requirements for the effects of hedging instruments, 4) allow entities to exclude certain components from the assessment of hedge effectiveness and 5) ease the application of current guidance related to the assessment of hedge effectiveness. There are also additional modifications to disclosure requirements. As permitted, the Bancorp elected to early adopt the amended guidance on January 1, 2018. The amended presentation and disclosure guidance was applied prospectively while the elimination of separate measurement of ineffectiveness for cash flow hedges was applied on a modified retrospective basis by recording a cumulative-effect adjustment to retained earnings, the amount of which was not material.

 

2. SUPPLEMENTAL CASH FLOW INFORMATION

 

Cash payments related to interest and income taxes in addition tonon-cash investing and financing activities are presented in the following table for the years ended December 31:

 

 

 
($ in millions)  2015     2014      2013    2017                 2016                 2015             

 

 

Cash Payments:

                    

Interest

  $                    475       429       406     $                    699      578      475  

Income taxes

   400       550       535      1,035      800      400  

Non-cash Investing and Financing Activities:

          

Transfers:

          

Portfolio loans to loans held for sale

   487       855       641      255      238      487  

Loans held for sale to portfolio loans

   288       31       44      29      28      288  

Portfolio loans to OREO

   105       145       204      34      49      105  

Loans held for sale to OREO

   -       2         

Capital lease obligation

   4       15         

 

 

3. RESTRICTIONS ON CASH, DIVIDENDS AND OTHER CAPITAL ACTIONS

 

Reserve Requirement

The FRB, under Regulation D, requires that banks hold cash in reserve against deposit liabilities when total reservable deposit liabilities are greater than the regulatory exemption, known as the reserve requirement. The reserve requirement is calculated based on atwo-week average of daily net transaction account deposits as defined by the FRB and may be satisfied with average vault cash during the followingtwo-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, 20152017 and 2014,2016, the Bancorp’s banking subsidiary reserve requirement was $1.9$1.5 billion and $1.8$1.6 billion, respectively. TheAdditionally, the Bancorp’s banking subsidiary satisfied itsaverage reserve requirement duringwas $1.4 billion and $1.6 billion in 2017 and 2016, respectively.

Restrictions on Cash Dividends

The principal source of income and funds for the two-week maintenance periods covering December 31, 2015 and 2014. The noninterest-bearing portion of the Bancorp’s deposit at the FRB is held in cash and dueBancorp (parent company) are dividends from banks in the Consolidated Balance Sheets while the interest-bearing portion is held in other short-term investments in the Consolidated Balance Sheets.

its subsidiaries. The dividends paid by the Bancorp’s indirect banking subsidiary are subject to regulations and limitations prescribed by state and federal supervisory agencies. The Bancorp’s indirect banking subsidiary paid the Bancorp’s direct nonbank subsidiary holding company, which in turn paid the Bancorp $1.0$2.3 billion and $1.1$1.9 billion in dividends during the years ended December 31, 20152017 and 2014,2016, respectively. The Bancorp’s nonbank-subsidiaries are also limited by certain federal and state statutory provisions and regulations covering the amount of dividends that may be paid in any given year.

Capital Actions

In 2011, the FRB adopted the capital plan rule, which requires BHCs with consolidated assets of $50 billion or more to submit annual capital plans to the FRB for review. Under the rule, these capital plans must include detailed descriptions of the following: the BHC’s internal processes for assessing capital adequacy; the policies governing capital actions such as common stock issuances, dividends and share repurchases; and all planned capital actions over a nine-quarter planning horizon. Further, each BHC must also report to the FRB the results of stress tests conducted by the BHC under a number of scenarios that assess the sources and uses of capital under baseline and stressed economic scenarios. The FRB launched the 20152017 stress testing program and CCAR on October 23, 2014,February 3, 2017, with firm submissions of stress test results and capital plans due to the FRB due on JanuaryApril 5, 2015,2017, which the Bancorp submitted as required.

The FRB’s review of the capital plan assessed the comprehensiveness of the capital plan, the reasonableness of the assumptions and the analysis underlying the capital plan. Additionally, the FRB reviewed the robustness of the capital adequacy process, the capital policy and the Bancorp’s ability to maintain capital above theeach minimum regulatory capital ratios and above a Tier I common ratio (changed to CET1 on January 1, 2015) of 5% on a pro forma basis under expected and stressful conditions throughout the planning horizon. The FRB assessed the Bancorp’s

strategies for addressing proposed revisions to the regulatory capital framework agreed upon by the BCBS and requirements arising from the DFA.

On March 11, 2015,June 28, 2017, the Bancorp announced the results of its capital plan submitted to the FRB as part of the 20152017 CCAR. For BHCs that proposed capital distributions in their plans, the FRB either objected to the plan or provided anon-objection whereby the FRB permitted the proposed 2015 capital distributions.

107  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The FRB indicated to the Bancorp that it did not object to the following capital actions for the period beginning AprilJuly 1, 20152017 and ending June 30, 2016:2018:

  

The potential increase in the quarterly common stock dividend to $0.16 from $0.14 per sharebeginning in 2016;the third quarter of 2017 and to $0.18 beginning in the second quarter of 2018;

  

The potential repurchase of common shares in an amount up to $765 million;$1.161 billion, or a 76% increase over the 2016 capital plan. These repurchases include $88 million in repurchases related to share issuances under employee benefit plans and $48 million in repurchases related to previously-recognized TRA transactionafter-tax gains;

  

The additional ability to repurchase common shares in the amount of anyafter-tax gains capital generated from the sale of Vantiv, Inc. common stock.stock;

The additional ability to repurchase common shares in the amount of anyafter-tax cash income generated from the termination and settlement of gross cash flows from existing TRAs with Vantiv, Inc. or potential future TRAs that may be generated from additional sales of Vantiv, Inc.

As contemplated by the 2014 capital plan partThe Bancorp recognized a gain on sale of the FRB’s CCAR,Vantiv, Inc. shares of $1.0 billion during the first quarter of 2015, the Bancorpyear ended December 31, 2017 and also entered into a $180 million accelerated share repurchase transaction. As contemplated by the 2015 capital plan part of the FRB’s CCAR, the Bancorp entered into $155 million, $300 million and $215 million of accelerated share repurchase transactions during the second, thirdyears ended December 31, 2017 and fourth quarters of 2015, respectively.

Additionally, as a CCAR institution, the Bancorp is required to disclose the results of its company-run stress test under the supervisory severely adverse scenario, and to provide2016. For more information related to these transactions, refer to Note 19 and Note 23. In the types of risk included in its stress testing; a general description of the methodologies used; estimates of certain financial results and pro forma capital ratios; and an explanation of the most significant causes of changes in regulatory capital ratios. On March 5, 2015 the Bancorp publicly disclosed the results of its company-run stress test as required by the DFA stress testing rules, in a press release.

The BHCs that participated in the 2015 CCAR, including the Bancorp, were required to also conduct mid-cycle company-run stress tests using data as of March 31, 2015. The stress tests must be based on three BHC defined scenarios – baseline, adverse and severely adverse. The Bancorp submitted the results of its mid-cycle stress test to the FRB by the required July 6, 2015 submission date. In addition, the Bancorp published a Form 8-K providing a summary of the results under the severely adverse scenario on July 27, 2015. These results represented estimates of the Bancorp’s results from the second quarter of 2015 through the secondthird quarter of 2017, under the severely adverse scenario.Bancorp increased the quarterly common stock dividend to $0.16.

 

 

100108  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4. INVESTMENT SECURITIES

 

The following table provides the amortized cost, fair value and unrealized gains and losses for the major categories of theavailable-for-sale and other andheld-to-maturity investment securities portfolios as of December 31:

 

 

 
   2015 2014    2017 2016 
($ in millions)   

 Amortized

Cost 

 

Unrealized

Gains 

 

Unrealized

Losses

 

Fair

Value

 

Amortized

Cost 

 

Unrealized

Gains 

 

Unrealized

Losses

 

Fair

Value

     Amortized
Cost 
 Unrealized
Gains 
 Unrealized
Losses
 Fair    
Value    
 Amortized
Cost 
 Unrealized
Gains 
 Unrealized
Losses
 Fair
Value
 

 

 

Available-for-sale and other securities:

                  

U.S. Treasury and federal agencies securities

 $     1,155       32      -        1,187     1,545      87       -       1,632      $   98           98    547     2      -  549    

Obligations of states and political subdivisions securities

   50       2      -        52     185      7       -       192        43           44    44     1      -  45    

Mortgage-backed securities:

                  

Agency residential mortgage-backed securities(a)

   14,811       283      (13)       15,081     11,968      437      (1)      12,404        15,281     118    (80)    15,319   15,525     178     (95)     15,608    

Agency commercial mortgage-backed securities

   7,795       100      (33)       7,862     4,465      101      (1)      4,565        10,113     92    (38)    10,167   9,029     87     (61)     9,055    

Non-agency commercial mortgage-backed securities

   2,801       35      (32)       2,804     1,489      61       -       1,550        3,247     51    (5)    3,293   3,076     51     (15)     3,112    

Asset-backed securities and other debt securities

   1,363       13      (21)       1,355     1,324      40      (2)      1,362        2,183     46    (11)    2,218   2,106     28     (18)     2,116    

Equity securities(b)

   703       2      (2)       703     701      3      (1)      703        679        (2)    681   697     3     (2)     698    

 

 

Total available-for-sale and other securities

 $     28,678       467      (101)       29,044     21,677      736      (5)       22,408      $   31,644     312    (136)    31,820    31,024     350     (191)     31,183    

 

 

Held-to-maturity securities:

                  

Obligations of states and political subdivisions securities

 $     68       -      -       

 

68  

  

 186       -       -       186      $   22      -        22    24      -        24    

Asset-backed securities and other debt securities

   2       -      -        2     1       -       -       1        2      -        2    2      -        2    

 

 

Total held-to-maturity securities

 $     70       -      -        70     187       -       -       187      $   24      -        24    26      -        26    

 

 
(a)

Includes interest-only mortgage-backed securities of$5034and $175$60 as of December 31, 20152017 and 2014,2016, respectively, recorded at fair value with fair value changes recorded in securities gains, net, in the Consolidated Statements of Income.

(b)

Equity securities consist of FHLB, FRB and DTCC restricted stock holdings of$248,$355362, and$12, respectively, atDecember 31, 20152017 and $248, $352$358 and $0,$1, respectively, at December 31, 2014,2016, that are carried at cost, and certain mutual fund and equity security holdings.

Trading securities were $862 million as of December 31, 2017 compared to $410 million at December 31, 2016. The following table presents net realized gains and losses that were recognized in income fromavailable-for-sale and other securities for the years ended December 31:

 

 
($ in millions)  2015         2014         2013          

 

 

Realized gains

  $97     70      77         

Realized losses

             (76   (9)     (102)        

OTTI

   (5   (24)     (74)        

 

 

Net realized gains (losses)(a)

  $16     37      (99)        

 

 
(a)

Excludes net losses on interest-only mortgage-backed securities of$4 and $17 for the years endedDecember 31, 2015 and 2014, respectively, and net gains on interest-only mortgage-backed securities of $129 for the year ended December 31, 2013.

Trading securities were $386 million as of December 31, 2015, compared to $360 million at December 31, 2014. The following table presentswell as total gains and losses that were recognized in income from trading securities for the years ended December 31:

 

 

 
($ in millions)  2015        2014        2013          

 

 

Realized gains(a)

  $6    8    5         

Realized losses(b)

             (10  (7  (8)        

Net unrealized (losses) gains(c)

   (3  (3  3         

 

 

Total trading securities losses

  $(7  (2  -         

 

 

 

 
($ in millions)  2017         2016    2015         

 

 

Available-for-sale and other securities:

     

Realized gains

  $85     72   97        

Realized losses

   (34)    (45  (76)       

OTTI

           (54)    (16  (5)       

 

 

Net realized (losses) gains onavailable-for-sale and other securities(a)

  $(3)    11   16        

 

 

Total trading securities gains (losses)(b)

  $10     -   (7)       

 

 

Total gains and losses recognized in income fromavailable-for-sale and other securities and trading securities

  $    11   9        

 

 
(a)

Includes realized gainsExcludes net losses on interest-only mortgage-backed securities of$62, $4 and $4 for the years endedDecember 31, 20152017, 20142016 and 2013,2015, respectively.

(b)

Includes a net gain of$1and net losses of $3 and $4for the years endedDecember 31, 2017, 2016 and 2015, respectively, recorded in corporate banking revenue and investment advisorywealth and asset management revenue in the Consolidated Statements of Income.

The following table provides a summary of OTTI by security type:

 

 
($ in millions)  2017        2016   2015          

 

 

Available-for-sale and other debt securities

  $(54  (15  (5)       

Available-for-sale equity securities

               -   (1  -        

 

 

Total OTTI(a)

  $(54  (16  (5)       

 

 
(b)(a)

Includes realized losses of$10, $7 and $8 for the years endedDecember 31, 2015, 2014 and 2013, respectively, recordedIncluded in corporate banking revenue and investment advisory revenue in the Consolidated Statements of Income.

(c)

Includes an immaterial amount ofsecurities gains, net, unrealized gains for the years endedDecember 31, 2015, 2014 and 2013 recorded in corporate banking revenue and investment advisory revenue in the Consolidated Statements of Income.

 

At December 31, 20152017 and 2014,2016, securities with a fair value of $11.0$7.8 billion and $14.2$10.1 billion, respectively, were pledged to secure

borrowings, public deposits, trust funds, derivative contracts and for other purposes as required or permitted by law.

 

 

101109  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The expected maturity distribution of the Bancorp’s mortgage-backed securities and the contractual maturity distribution of the remainder of the Bancorp’savailable-for-sale and other andheld-to-maturity investment securities as of December 31, 20152017 are shown in the following table:

 

 

 
 Available-for-Sale and Other Held-to-Maturity  Available-for-Sale and Other Held-to-Maturity 
($ in millions)     Amortized Cost Fair Value           Amortized Cost Fair Value            Amortized Cost Fair Value           Amortized Cost Fair Value       

 

 

Debt securities:(a)

          

Less than 1 year

 $ 695        707         43         43           $ 140       141        5        5         

1-5 years

  7,277        7,441         12         12            9,695       9,707        13        13         

5-10 years

  18,191        18,372         13         13            17,592       17,734        4        4         

Over 10 years

  1,812        1,821         2         2            3,538       3,557        2        2         

Equity securities

  703        703          -          -            679       681         -         -         

 

 

Total

 $               28,678        29,044         70         70           $               31,644       31,820        24        24         

 

 
(a)

Actual maturities may differ from contractual maturities when there exists 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 onavailable-for-sale and other securities in an unrealized loss position, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of December 31:

 

 

 
 Less than 12 months     12 months or more     Total  Less than 12 months     12 months or more     Total 
  

 

 

   

 

 

     

 

 

     

 

 

 
       Unrealized           Unrealized           Unrealized        Unrealized           Unrealized           Unrealized     
($ in millions) Fair Value     Losses     Fair Value     Losses     Fair Value     Losses      Fair Value     Losses         Fair Value     Losses         Fair Value     Losses        

 

 

2015

                      

2017

                      

U.S. Treasury and federal agencies securities

 $  98       -          -           -           98       -      

Agency residential mortgage-backed securities

 $  2,903        (13)          -           -           2,903        (13)        7,337       (59)         479          (21)          7,816       (80)    

Agency commercial mortgage-backed securities

   3,111        (33)          -           -           3,111        (33)        2,900       (22)         526          (16)          3,426       (38)    

Non-agency commercial mortgage-backed securities

   1,610        (32)          -           -           1,610        (32)        449       (2)         145          (3)          594       (5)    

Asset-backed securities and other debt securities

   623        (11)          226           (10)          849        (21)        317       (2)         386          (9)          703       (11)    

Equity securities

          (1)          37           (1)          38        (2)              -          37          (2)          37       (2)    

 

 

Total

 $                8,248        (90)          263           (11)          8,511        (101)      $                11,101       (85)         1,573          (51)          12,674       (136)    

 

 

2014

                      

2016

                      

U.S. Treasury and federal agencies securities

  199       -           -           -           199       -      

Agency residential mortgage-backed securities

 $ 73        (1)          -           -           73        (1)      $ 6,223       (88)         172          (7)          6,395       (95)    

Agency commercial mortgage-backed securities

  355        (1)          -           -           355        (1)       3,183       (61)         -           -           3,183       (61)    

Non-agency commercial mortgage-backed securities

  1,052       (15)         -           -           1,052       (15)    

Asset-backed securities and other debt securities

  286        (1)          74           (1)          360        (2)       422       (8)         336          (10)          758       (18)    

Equity securities

          -           30           (1)          30        (1)              -           37          (2)          37       (2)    

 

 

Total

 $ 714        (3)          104           (2)          818        (5)      $ 11,079       (172)         545          (19)          11,624       (191)    

 

 

 

Other-Than-Temporary Impairments

The Bancorp recognized $5 million, $24 million and $74 million of OTTI on its available-for-sale and other debt securities, included in securities gains, net and securities gains, net – non-qualifying hedges on mortgage servicing rights in the Consolidated Statements of Income during the years ended December 31, 2015, 2014 and 2013, respectively. The Bancorp did not recognize OTTI on any of its available-for-sale equity securities or held-to-maturity debt securities during the years ended December 31, 2015, 2014 and 2013. At December 31, 2015, 1%2017 and 2016, an immaterial amount of unrealized losses in theavailable-for-sale and other securities portfolio were represented bynon-rated securities, compared to less than 1% at December 31, 2014. securities.

 

 

102110  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

5. LOANS AND LEASES

 

The Bancorp diversifies its loan and lease portfolio by offering a variety of loan and lease products with various payment terms and rate structures. Lending activities are generally concentrated within those states in which the Bancorp has banking centers and are primarily located in the Midwestern and Southeastern regions of the United States.U.S. The Bancorp’s commercial loan portfolio consists of lending to various industry types. Management periodically reviews the

the performance of its loan and lease products to evaluate whether they are performing within acceptable interest rate and credit risk levels and changes are made to underwriting policies and procedures as needed. The Bancorp maintains an allowance to absorb loan and lease losses inherent in the portfolio. For further information on credit quality and the ALLL, refer to Note 6.

 

 

The following table provides a summary of commercial loans and leases classified by primary purpose and consumer loans and leases classified based upon product or collateral as of December 31:

 

 

 
($ in millions)  2015     2014             2017       2016           

 

 

Loans and leases held for sale:

          

Commercial and industrial loans

  $20     36             $-      60          

Commercial mortgage loans

   34     11              6      5          

Commercial construction loans

   -     2           

Commercial leases

   -     1           

Residential mortgage loans

   708     1,193              486      686          

Home equity

   35     -           

Automobile loans

   4     -           

Credit card

   101     -           

Other consumer loans and leases

   1     18           

 

 

Total loans and leases held for sale

  $903     1,261             $492      751          

 

 

Portfolio loans and leases:

          

Commercial and industrial loans

  $42,131     40,765             $41,170      41,676          

Commercial mortgage loans

   6,957     7,399              6,604      6,899          

Commercial construction loans

   3,214     2,069              4,553      3,903          

Commercial leases

   3,854     3,720              4,068      3,974          

 

 

Total commercial loans and leases

   56,156     53,953              56,395      56,452          

 

 

Residential mortgage loans

   13,716     12,389              15,591      15,051          

Home equity

   8,301     8,886              7,014      7,695          

Automobile loans

   11,493     12,037              9,112      9,983          

Credit card

   2,259     2,401              2,299      2,237          

Other consumer loans and leases

   657     418           

Other consumer loans

   1,559      680          

 

 

Total consumer loans and leases

   36,426     36,131           

Total consumer loans

   35,575      35,646          

 

 

Total portfolio loans and leases

  $            92,582               90,084             $            91,970      92,098          

 

 

 

Total portfolio loans and leases are recorded net of unearned income, which totaled $624$523 million as of December 31, 20152017 and $665$503 million as of December 31, 2014.2016. Additionally, portfolio loans and leases 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 $220$282 million and $169$240 million as of December 31, 20152017 and 2014,2016, respectively.

The Bancorp’s FHLB and FRB advances are generally secured by loans. The Bancorp had loans of $11.9$13.0 billion and $11.1$13.1 billion at December 31, 20152017 and 2014,2016, respectively, pledged at the FHLB, and loans of $33.7$39.8 billion and $33.9$40.0 billion at December 31, 20152017 and 2014,2016, respectively, pledged at the FRB.

 

103  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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:

 

 

 
   Balance              90 Days Past Due
        and Still Accruing
   

      Net

      Charge-Offs

    

Carrying Value

           90 Days Past Due        
        and Still  Accruing        
   

Net

    Charge-Offs (Recoveries)    

 
   

 

 

    

 

 

    

 

 

   

 

 

 
($ in millions)   2015       2014          2015    2014   2015   2014            2017       2016       2017   2016       2017   2016          

 

 

Commercial and industrial loans

 $   42,151     40,801       7     -     229     222           $   41,170    41,736     3    4        111    172          

Commercial mortgage loans

    6,991     7,410       -     -     27     26              6,610    6,904     -    -        12    15          

Commercial construction loans

    3,214     2,071       -     -     3     12              4,553    3,903     -    -        -    (1)         

Commercial leases

    3,854     3,721       -     -     2     1              4,068    3,974     -    -        2    4          

Residential mortgage loans

    14,424     13,582       40     56     17     126              16,077    15,737     57    49        7    10          

Home equity

    8,336     8,886       -     -     39     59              7,014    7,695     -    -        19    27          

Automobile loans

    11,497     12,037       10     8     28     27              9,112    9,983     10    9        37    35          

Credit card

    2,360     2,401       18     23     82     82              2,299    2,237     27    22        84    80          

Other consumer loans and leases

    658     436       -     -     19     20          

Other consumer loans

    1,559    680     -    -        26    20          

 

 

Total loans and leases

 $           93,485                 91,345                   75                     87                     446                       575           $           92,462                92,849                 97                84                        298                      362          

 

 

Less: Loans and leases held for sale

 $   903     1,261             $   492    751          

        

        

Total portfolio loans and leases

 $   92,582     90,084             $   91,970    92,098          

 

 

 

The Bancorp engages in commercial lease products primarily related to the financing of commercial equipment. The Bancorp had $3.1$3.4 billion and $2.8$3.3 billion of direct financing leases, net of unearned income, at December 31, 20152017 and 2014,2016, respectively, and $801$674 million and $874$701 million of leveraged leases, net of unearned income, at December 31, 20152017 and 2014,2016, respectively.

Pre-tax income loss from leveraged leases was $27$11 million during the year ended December 31, 2015 and $252017, which included a remeasurement of $27 million related to the tax treatment of leveraged leases resulting from the impact of the TCJA during the fourth quarter of 2017.

111  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Excluding the impact of the remeasurement,pre-tax income from leveraged leases was $16 million during both the yearsyear ended December 31, 20142017.Pre-tax income from leveraged leases was $38 million and 2013 andincluded $16 million of gains on early terminations during the year ended December 31, 2016. The tax effect of this income was an

expense of $1$6 million for the year ended December 31, 2015 and $9a benefit of $10 million during both the years ended December 31, 20142017 and 2013.2016, respectively.

 

 

The following table provides the components of the commercial lease financing portfolio as of December 31:

 

 

 
($ in millions)  2015             2014            2017           2016          

 

 

Rentals receivable, net of principal and interest on nonrecourse debt

  $3,550     3,589           $3,684  3,551        

Estimated residual value of leased assets

   906     779            885  903        

Initial direct cost, net of amortization

   22     17            22  23        

 

 

Gross investment in lease financing

   4,478     4,385            4,591  4,477        

Unearned income

   (624)     (665)           (523 (503)       

 

 

Net investment in commercial lease financing(a)

  $            3,854     3,720           $            4,068  3,974        

 

 
(a)

The accumulated allowance for uncollectible minimum lease payments was$4714and $15 atDecember 31, 2017and $45 atDecember 31, 2015and 2014,2016, respectively.

 

The Bancorp periodically reviews residual values associated with its leasing portfolio. Declines in residual values that are deemed to be other-than-temporary are recognized as a loss. The Bancorp recognized $8$4 million and $4$1 million of residual value write-downs related to commercial leases for the years ended December 31, 20152017 and 2014,2016, respectively. The residual value write-downs related to

commercial leases are recorded in corporate banking revenue in the Consolidated Statements of Income. At December 31, 2015,2017, the minimum future lease payments receivable for each of the years 20162018 through 20202022 was $715$865 million, $632$814 million, $532$625 million, $449$463 million and $333$414 million, respectively.

 

 

104112  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

6. CREDIT QUALITY AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES

 

The Bancorp disaggregates ALLL balances and transactions in the ALLL by portfolio segment. Credit quality related disclosures for loans and leases are further disaggregated by class.

Allowance for Loan and Lease Losses

The following tables summarize transactions in the ALLL by portfolio segment for the years ended December 31:

 

     Residential             
2017 ($ in millions)  Commercial  Mortgage  Consumer  Unallocated   Total        

Balance, beginning of period

  $831       96       214       112        1,253    

Lossescharged-off

   (154)      (15)      (212)      -        (381)   

Recoveries of losses previouslycharged-off

   29       8       46       -        83    

Provision for loan and lease losses

   66       -       186       9        261    

Deconsolidation of a VIE(a)

   (19)      -       -       (1)       (20)   

Balance, end of period

  $753       89       234       120        1,196    

(a) Refer to Note 11 for further discussion on the deconsolidation of a VIE.

(a) Refer to Note 11 for further discussion on the deconsolidation of a VIE.

    

  
            

     Residential         
2016 ($ in millions)  Commercial  Mortgage  Consumer  Unallocated   Total        

Balance, beginning of period

  $840       100       217       115        1,272    

Lossescharged-off

   (232)      (19)      (205)      -        (456)   

Recoveries of losses previouslycharged-off

   42       9       43       -        94    

Provision for loan and lease losses

   181       6       159       (3)       343    

Balance, end of period

  $831       96       214       112        1,253    

            

    Residential                  Residential             
2015 ($ in millions)  Commercial Mortgage  Consumer  Unallocated   Total         Commercial  Mortgage  Consumer  Unallocated   Total        

Balance, beginning of period

  $875   104        237        106         1,322        $                  875       104       237       106        1,322    

Losses charged-off

   (298)    (28)       (216)       -         (542)        (298)      (28)      (216)      -        (542)   

Recoveries of losses previously charged-off

   37    11        48        -         96         37       11       48       -        96    

Provision for loan and lease losses

   226    13        148        9         396         226       13       148       9        396    

Balance, end of period

  $840    100        217        115         1,272        $840       100       217       115        1,272    

           

   Residential          
2014 ($ in millions)  Commercial Mortgage  Consumer  Unallocated   Total       

Balance, beginning of period

  $1,058   189        225        110         1,582      

Losses charged-off

   (299)   (139)       (241)       -         (679)     

Recoveries of losses previously charged-off

   38   13        53        -         104      

Provision for loan and lease losses

   78   41        200        (4)        315      

Balance, end of period

  $875   104        237        106         1,322      

           

   Residential          
2013 ($ in millions)  Commercial Mortgage  Consumer  Unallocated   Total       

Balance, beginning of period

  $            1,236   229        278        111         1,854      

Losses charged-off

   (284)   (70)       (283)       -         (637)     

Recoveries of losses previously charged-off

   64   10        62        -         136      

Provision for loan and lease losses

   42   20        168        (1)        229      

Balance, end of period

  $1,058   189        225        110         1,582      

The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment:

The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment:

  

  

The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment:

 

  

    Residential                  Residential             
As of December 31, 2015 ($ in millions)  Commercial Mortgage  Consumer  Unallocated   Total       
As of December 31, 2017 ($ in millions)  Commercial  Mortgage  Consumer  Unallocated   Total        

ALLL:(a)

                       

Individually evaluated for impairment

  $119 (c)   67        49        -         235        $94       64       42       -        200    

Collectively evaluated for impairment

   721    33        168        -         922         659       25       192       -        876    

Unallocated

   -    -        -        115         115         -       -       -       120        120    

Total ALLL

  $840    100        217        115         1,272        $753       89       234       120        1,196    

Portfolio loans and leases:(b)

                       

Individually evaluated for impairment

  $815 (c)   630        424        -         1,869        $560       665       320       -        1,545    

Collectively evaluated for impairment

   55,341    12,917        22,286        -         90,544         55,835       14,787       19,664       -        90,286    

Loans acquired with deteriorated credit quality

   -    2        -        -         2         -       2       -       -           

Total portfolio loans and leases

  $56,156    13,549        22,710        -         92,415        $56,395       15,454       19,984       -        91,833    

(a)

Includes$51 related to leveraged leases atDecember 31, 20152017.

(b)

Excludes$167137of residential mortgage loans measured at fair value, and includes$801674 of leveraged leases, net of unearned income, atDecember 31, 20152017.

113  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2016 ($ in millions)      Commercial  Residential
Mortgage
   Consumer   Unallocated   Total     

ALLL:(a)

         

 Individually evaluated for impairment

  $118(c)   68    44    -    230     

 Collectively evaluated for impairment

   713   28    170    -    911     

 Unallocated

   -   -    -    112    112     

Total ALLL

  $831   96    214    112    1,253     

Portfolio loans and leases:(b)

         

 Individually evaluated for impairment

  $904(c)   652    371    -    1,927     

 Collectively evaluated for impairment

   55,548   14,253    20,224    -    90,025     

 Loans acquired with deteriorated credit quality

   -   3    -    -    3     

Total portfolio loans and leases

  $            56,452   14,908    20,595    -    91,955     
(a)

Includes $2 related to leveraged leases at December 31, 2016.

(b)

Excludes $143 of residential mortgage loans measured at fair value, and includes $701 of leveraged leases, net of unearned income at December 31, 2016.

(c)

Includes five restructured loans atDecember 31, 20152016 associated with a consolidated VIE in which the Bancorp hashad no continuing credit risk due to the risk being assumed by a third party, with a recorded investment of$27 $26 and an ALLL of$15.

105  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2014 ($ in millions)      Commercial Residential
Mortgage
  Consumer  Unallocated  Total    

ALLL:(a)

              

Individually evaluated for impairment

   $179(c)   65     61     -     305     

Collectively evaluated for impairment

    696    39     176     -     911     

Unallocated

    -    -     -     106     106     

Total ALLL

   $875    104     237     106     1,322     

Portfolio loans and leases:(b)

              

Individually evaluated for impairment

   $1,260(c)   518     483     -     2,261     

Collectively evaluated for impairment

    52,693    11,761     23,259     -     87,713     

Loans acquired with deteriorated credit quality

    -    2     -     -     2     

Total portfolio loans and leases

   $            53,953    12,281     23,742     -     89,976     
(a)

Includes $6 related $18. Refer to leveraged leases at December 31, 2014.

(b)

Excludes $108Note 11 for further discussion on the deconsolidation of residential mortgage loans measured at fair value and includes $874 of leveraged leases, net of unearned income, at December 31, 2014.

(c)

Includes five restructured loans at December 31, 2014a VIE associated with a consolidated VIEthese loans in which the Bancorp has no continuing credit risk due to the risk being assumed by a third party, with a recorded investmentquarter of $28 and an ALLL of $10.2017.

 

CREDIT RISK PROFILE

Commercial Portfolio Segment

For purposes of analyzing historical loss rates used in the determination of the ALLL and monitoring the credit quality and risk characteristics of its commercial portfolio segment, the Bancorp disaggregates the segment into the following classes: commercial and industrial, commercial mortgage owner-occupied, commercial mortgage nonowner-occupied, commercial construction and commercial leases.

To facilitate the monitoring of credit quality within the commercial portfolio segment, and for purposes of analyzing historical loss rates used in the determination of the ALLL for the commercial portfolio segment, the Bancorp utilizes the following categories of credit grades: pass, special mention, substandard, doubtful and loss. The five categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter.

Pass ratings, which are assigned to those borrowers that do not have identified potential or well defined weaknesses and for which there is a high likelihood of orderly repayment, are updated at least annually based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter.

The Bancorp assigns a special mention rating to loans and leases that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may,

at some future date, result in the deterioration of the repayment

prospects for the loan or lease or the Bancorp’s credit position.

The Bancorp assigns a substandard rating to loans and leases that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans and leases have well defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans and leases in this grade also are characterized by the distinct possibility that the Bancorp will sustain some loss if the deficiencies noted are not addressed and corrected.

The Bancorp assigns a doubtful rating to loans and leases that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.

Loans and leases classified as loss are considered uncollectible and arecharged-off in the period in which they are determined to be uncollectible. Because loans and leases in this category are fullycharged-off, they are not included in the following tables.

 

106  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables summarize the credit risk profile of the Bancorp’s commercial portfolio segment, by class:

 

As of December 31, 2015 ($ in millions)        Pass    Special
Mention
    Substandard    Doubtful    Total    
As of December 31, 2017 ($ in millions)        Pass     Special
Mention
     Substandard     Doubtful     Total     

Commercial and industrial loans

   $        38,756       1,633       1,742       -       42,131       $        38,813      1,115       1,235          7        41,170     

Commercial mortgage owner-occupied loans

    3,344       124       191       -       3,659        3,207      75       80          -        3,362     

Commercial mortgage nonowner-occupied loans

    3,105       63       130       -       3,298        3,117      28       97          -        3,242     

Commercial construction loans

    3,201       4       9       -       3,214        4,553            -          -        4,553     

Commercial leases

    3,724       93       37       -       3,854        3,922      72       74          -        4,068     

Total commercial loans and leases

   $52,130       1,917       2,109       -       56,156       $53,612      1,290       1,486          7        56,395     
                                         
As of December 31, 2014 ($ in millions)        Pass    Special
Mention
    Substandard    Doubtful    Total    
As of December 31, 2016 ($ in millions)        Pass     Special
Mention
     Substandard     Doubtful     Total     

Commercial and industrial loans

   $38,013      1,352      1,400       -      40,765       $38,844      1,204       1,604          24        41,676     

Commercial mortgage owner-occupied loans

   3,430      137      267       -      3,834        3,168      72       117          3        3,360     

Commercial mortgage nonowner-occupied loans

   3,198      76      284      7      3,565        3,466            69          -        3,539     

Commercial construction loans

   1,966      65      38       -      2,069        3,902            -          -        3,903     

Commercial leases

   3,678      9      33       -      3,720        3,894      54       26          -        3,974     

Total commercial loans and leases

   $50,285      1,639      2,022      7      53,953       $53,274      1,335       1,816          27        56,452     

114  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, automobile loans, credit card and other consumer loans and leases. The Bancorp’s residential mortgage portfolio segment is also a separate class.

The Bancorp considers repayment performance as the best indicator of credit quality for residential mortgage and consumer

loans, which includes both the delinquency status and performing versus nonperforming status of the loans. The delinquency status of all residential mortgage and consumer loans is presented by class in the age analysis section while the performing versus nonperforming status is presented in the following table. Refer to the nonaccrual loans and leases section of Note 1 for additional delinquency and nonperforming information.

 

 

The following table presents a summary of the Bancorp’s residential mortgage and consumer portfolio segments, by class, disaggregated into performing versus nonperforming status as of December 31:

 

    2015    2014    2017       2016 
($ in millions)    Performing    Nonperforming    Performing    Nonperforming        Performing     Nonperforming       Performing     Nonperforming     

Residential mortgage loans(a)

 $    13,498       51      12,204      77  $    15,424        30            14,874        34           

Home equity

   8,222       79      8,793      93    6,940        74            7,622        73           

Automobile loans

   11,491       2      12,036      1    9,111        1            9,981        2           

Credit card

   2,226       33      2,360      41    2,273        26            2,209        28           

Other consumer loans and leases

   657       -      418       - 

Total residential mortgage and consumer loans and leases(a)

 $  36,094       165      35,811      212 

Other consumer loans

   1,559        -            680        -           

Total residential mortgage and consumer loans(a)

 $    35,307        131             35,366        137           
(a)

Excludes$167137 and $108$143 of residential mortgage loans measured at fair value atDecember 31, 20152017 and 2014,2016, respectively.

107  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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              Current     Past Due        90 Days Past     
          Loans and    30-89  90 Days  Total      Total Loans  Due and Still              Loans and     30-89   90 Days   Total       Total Loans   Due and Still     
As of December 31, 2015 ($ in millions)          Leases(c)    Days(c)  or More(c)  Past Due      and Leases  Accruing    
As of December 31, 2017 ($ in millions)          Leases(b)(c)     Days(c)   or More(c)   Past Due       and Leases   Accruing     

Commercial loans and leases:

                              

Commercial and industrial loans

   $41,996     55     80     135     42,131     7   $41,027        42    101     143        41,170      3           

Commercial mortgage owner-occupied loans

    3,610     15     34     49     3,659     -    3,351        3        11        3,362      -           

Commercial mortgage nonowner-occupied loans

    3,262     9     27     36     3,298     -    3,235        -        7        3,242      -           

Commercial construction loans

    3,214     -     -     -     3,214     -    4,552        1        1        4,553      -           

Commercial leases

    3,850     3     1     4     3,854     -    4,065        3        3        4,068      -           

Residential mortgage loans(b)(a)

    13,420     37     92     129     13,549     40    15,301        66    87     153        15,454      57           

Consumer loans and leases:

                  

Consumer loans:

            

Home equity

    8,158     82     61     143     8,301     -    6,888        70    56     126        7,014      -           

Automobile loans

    11,407     75     11     86     11,493     10    8,992        107    13     120        9,112      10           

Credit card

    2,207     29     23     52     2,259     18    2,230        36    33     69        2,299      27           

Other consumer loans and leases

    656     1     -     1     657     - 

Other consumer loans

   1,554        5        5        1,559      -           

Total portfolio loans and leases(a)

   $        91,780     306     329     635     92,415     75   $        91,195        333    305     638        91,833      97           
(a)

Excludes$167137 of residential mortgage loans measured at fair value atDecember 31, 20152017.

(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 ofDecember 31, 2015,$1022017, $95 of these loans were30-89 days past due and$335290 were 90 days or more past due. The Bancorp recognized$8 $5of losses during the year endedDecember 31, 20152017 due to claim denials and curtailments associated with these insured or guaranteed loans.

(c)

Includes accrual and nonaccrual loans and leases.

 

            Current    Past Due      90 Days Past    
           Loans and    30-89  90 Days  Total      Total Loans  Due and Still    
As of December 31, 2014 ($ in millions)          Leases(c)    Days(c)  or More(c)  Past Due      and Leases  Accruing    

Commercial loans and leases:

                  

Commercial and industrial loans

   $40,651     29     85     114     40,765     - 

Commercial mortgage owner-occupied loans

    3,774     7     53     60     3,834     - 

Commercial mortgage nonowner-occupied loans

    3,537     11     17     28     3,565     - 

Commercial construction loans

    2,069     -     -     -     2,069     - 

Commercial leases

    3,717     3     -     3     3,720     - 

Residential mortgage loans(a)(b)

    12,109     38     134     172     12,281     56 

Consumer loans and leases:

                  

Home equity

    8,710     100     76     176     8,886     - 

Automobile loans

    11,953     74     10     84     12,037     8 

Credit card

    2,335     34     32     66     2,401     23 

Other consumer loans and leases

    417     1     -     1     418     - 

Total portfolio loans and leases(a)

   $        89,272     297     407     704     89,976     87 

115  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, 2016 ($ in millions)          Leases(b)(c)     Days(c)   or More(c)   Past Due       and Leases   Accruing     

Commercial loans and leases:

            

    Commercial and industrial loans

  $41,495      87    94      181        41,676        4         

    Commercial mortgage owner-occupied loans

   3,332      6    22      28        3,360        -         

    Commercial mortgage nonowner-occupied loans

   3,530      2    7      9        3,539        -         

    Commercial construction loans

   3,902      1    -      1        3,903        -         

    Commercial leases

   3,972      -    2      2        3,974        -         

Residential mortgage loans(a)

   14,790      37    81      118        14,908        49         

Consumer loans:

            

    Home equity

   7,570      68    57      125        7,695        -         

    Automobile loans

   9,886      85    12      97        9,983        9         

    Credit card

   2,183      28    26      54        2,237        22         

    Other consumer loans

   679      1    -      1        680        -         

Total portfolio loans and leases(a)

  $91,339      315    301      616        91,955        84         
(a)

Excludes $108$143 of residential mortgage loans measured at fair value at December 31, 2014.2016.

(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, 2014, $992016, $110 of these loans were30-89 days past due and $373$312 were 90 days or more past due. The Bancorp recognized $14$6 of losses during the year ended December 31, 20142016 due to claim denials and curtailments associated with these insured or guaranteed loans.

(c)

Includes accrual and nonaccrual loans and leases.

108  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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:

 

2015 ($ in millions)       Unpaid
Principal
Balance
     Recorded
Investment
 ALLL   
2017 ($ in millions)       Unpaid
Principal
Balance
     Recorded
Investment
 ALLL      

With a related ALLL:

                      

Commercial loans and leases:

                      

Commercial and industrial loans

  $      412       346    84      $    433      358   87     

Commercial mortgage owner-occupied loans(b)

     28       21    5    

Commercial mortgage owner-occupied loans

     16      14   7     

Commercial mortgage nonowner-occupied loans

     75       64    12         4      3   -     

Commercial construction loans

     4       4    2    

Commercial leases

     3       3    1         4      4   -     

Restructured residential mortgage loans

     450       444    67         469      465   64     

Restructured consumer loans and leases:

           

Restructured consumer loans:

           

Home equity

     226       225    32         172      172   27     

Automobile loans

     17       16    2         8      7   1     

Credit card

     61       61    15         52      45   14     

Total impaired portfolio loans and leases with a related ALLL

  $      1,276       1,184    220       $    1,158      1,068   200      

With no related ALLL:

                      

Commercial loans and leases:

           

Commercial loans:

           

Commercial and industrial loans

  $      228       182    -      $    151      131   -     

Commercial mortgage owner-occupied loans

     54       51    -         18      15   -     

Commercial mortgage nonowner-occupied loans

     126       111    -         35      35   -     

Commercial construction loans

     9       5    -    

Commercial leases

     1       1    -    

Restructured residential mortgage loans

     210       186    -         218      200   -     

Restructured consumer loans and leases:

           

Restructured consumer loans:

           

Home equity

     122       119    -         97      94   -     

Automobile loans

     3       3    -         2      2   -     

Total impaired portfolio loans and leases with no related ALLL

      753       658    -     

Total impaired portfolio loans with no related ALLL

  $    521      477   -      

Total impaired portfolio loans and leases

  $      2,029       1,842(a)   220       $    1,679      1,545(a)   200      
(a)

Includes$491, $607249, $652 and$372275, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and$203,$23150, $13 and$5245, respectively, of commercial, residential mortgage and consumer portfolio TDRs on nonaccrual status atDecember 31, 20152017.

116  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 
2016 ($ in millions)        Unpaid
      Principal
      Balance
         Recorded
      Investment
      ALLL        

 

 

With a related ALLL:

     

Commercial loans and leases:

     

Commercial and industrial loans

  $440     414     94         

Commercial mortgage owner-occupied loans(b)

   24     16     5         

Commercial mortgage nonowner-occupied loans

       6     1         

Commercial leases

       2     -         

Restructured residential mortgage loans

   471     465     68         

Restructured consumer loans:

     

Home equity

   202     201     30         

Automobile loans

   12     12     2         

Credit card

   52     52     12         

 

 

Total impaired portfolio loans and leases with a related ALLL

  $1,210     1,168     212         

 

 

With no related ALLL:

     

Commercial loans and leases:

     

Commercial and industrial loans

  $394     320     -         

Commercial mortgage owner-occupied loans

   36     35     -         

Commercial mortgage nonowner-occupied loans

   93     83     -         

Commercial leases

       2     -         

Restructured residential mortgage loans

   207     187     -         

Restructured consumer loans:

     

Home equity

   107     104     -         

Automobile loans

       2     -         

 

 

Total impaired portfolio loans and leases with no related ALLL

  $842     733     -         

 

 

Total impaired portfolio loans and leases

  $2,052     1,901  (a)   212         

 

 
(a)

Includes $322, $635 and $323, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $192, $17 and $48, respectively, of commercial, residential mortgage and consumer portfolio TDRs on nonaccrual status at December 31, 2016.

(b)

Excludes five restructured loans atDecember 31, 20152016 associated with a consolidated VIE in which the Bancorp hashad no continuing credit risk due to the risk being assumed by a third party, with an unpaid principal balance of$27, $26, a recorded investment of$27 $26 and an ALLL of$15.

109  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 
2014 ($ in millions)        Unpaid
      Principal
      Balance
         Recorded
      Investment
      ALLL          

 

 

With a related ALLL:

     

Commercial loans and leases:

     

Commercial and industrial loans

  $598      486      149          

Commercial mortgage owner-occupied loans(b)

   54      46      14          

Commercial mortgage nonowner-occupied loans

   69      57      4          

Commercial construction loans

   18      15      -          

Commercial leases

        3      2          

Restructured residential mortgage loans

   388      383         65          

Restructured consumer loans and leases:

     

Home equity

   203      201      42          

Automobile loans

   19      19      3          

Credit card

   78      78      16          

 

 

Total impaired portfolio loans and leases with a related ALLL

  $1,430      1,288      295          

 

 

With no related ALLL:

     

Commercial loans and leases:

     

Commercial and industrial loans

  $311      276      -          

Commercial mortgage owner-occupied loans

   72      68      -          

Commercial mortgage nonowner-occupied loans

   251      231      -          

Commercial construction loans

   48      48      -          

Commercial leases

        2      -          

Restructured residential mortgage loans

   155      135       -          

Restructured consumer loans and leases:

     

Home equity

   183      180      -          

Automobile loans

        5      -          

 

 

Total impaired portfolio loans and leases with no related ALLL

   1,027      945      -          

 

 

Total impaired portfolio loans and leases

  $2,457      2,233  (a)   295          

 

 
(a)

Includes $869, $485 and $420, respectively, $18. Refer to Note 11 for further discussion on the deconsolidation of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $214, $33 and $63, respectively, of commercial, residential mortgage and consumer portfolio TDRs on nonaccrual status at December 31, 2014.

(b)

Excludes five restructured loans at December 31, 2014a VIE associated with a consolidated VIEthese loans in which the Bancorp has no continuing credit risk due to the risk being assumed by a third party, with an unpaid principal balancequarter of $28, a recorded investment of $28 and an ALLL of $10.2017.

The following table summarizes the Bancorp’s average impaired portfolio loans and leases, by class, and interest income, by class, for the years ended December 31:

 

 

 
  2015     2014     2013     2017   2016   2015 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
($ in millions)      Average  
    Recorded  
    Investment  
     Interest    
  Income    
  Recognized    
       Average  
    Recorded  
    Investment  
    Interest  
 Income  
 Recognized  
     Average  
  Recorded  
  Investment  
     Interest      
  Income      
  Recognized      
       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

  $663       21         786       25     517       16        $579      10        691      10    663      21     

Commercial mortgage owner-occupied loans(a)

   92       2         149       4     146       4         35      -        63      1    92      2     

Commercial mortgage nonowner-occupied loans

   224       7         268       8     321       8         61      1        139      5    224      7     

Commercial construction loans

   41       1         92       2     108       4         -      -        3      -    41      1     

Commercial leases

   5       -         13       -     11       -         3      -        5      -    5      -     

Restructured residential mortgage loans

   586       23         1,273       54     1,311       53         657      25        647      25    586      23     

Restructured consumer loans and leases:

            

Restructured consumer loans:

            

Home equity

   361       13         394       20     429       23         281      12        325      12    361      13     

Automobile loans

   22       1         24       1     29       1         11      -        17      -    22      1     

Credit card

   68       6         62       5     68       4         50      4        56      5    68      6     

Other consumer loans and leases

   -       -         -       -     2       -      

 

 

Total average impaired portfolio loans and leases

  $2,062       74         3,061       119     2,942       113        $1,677      52        1,946      58    2,062      74     

 

 
(a)

Excludes five restructured loans associated with a consolidated VIE in which the Bancorp hashad no continuing credit risk due to the risk being assumed by a third party, with an average recorded investment of$2713, $26 and $27 for the yearyears endedDecember 31, 20152017, 2016, and $28 for both of the years ended December 31, 2014 and 2013.2015, respectively. An immaterial amount of interest income was recognized during the years endedDecember 31, 20152017, 20142016, and 2013.2015. Refer to Note 11 for further discussion on the deconsolidation of the VIE associated with these loans in the third quarter of 2017.

 

110117  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Nonperforming Assets

Nonperforming assets include nonaccrual loans and leases for which ultimate collectability of the full amount of the principal and/or interest is uncertain; restructured commercial and credit card loans which have not yet met the requirements to be classified as a performing asset; restructured consumer loans which are 90 days past due based on the restructured terms unless the loan is both well-secured and in the process of collection; and certain other assets, including OREO and other repossessed property. The following table presents the Bancorp’s nonperformingnonaccrual loans and leases, by class, and OREO and other repossessed property as of December 31:

 

 

 
($ in millions)  2015     2014           2017     2016         

 

 

Commercial loans and leases:

            

Commercial and industrial loans

  $259       228            $276      478         

Commercial mortgage owner-occupied loans(a)(c)

   46       78             19      32         

Commercial mortgage nonowner-occupied loans

   35       57             7      9         

Commercial leases

   1       4             4      4         

 

 

Total nonaccrual portfolio commercial loans and leases

   341       367             306      523         

 

 

Residential mortgage loans

   51       77             30      34         

Consumer loans and leases:

      

Consumer loans:

      

Home equity

   79       93             74      73         

Automobile loans

   2       1             1      2         

Credit card

   33       41             26      28         

 

 

Total nonaccrual portfolio consumer loans and leases

   114       135          

Total nonaccrual portfolio consumer loans

   101      103         

 

 

Total nonaccrual portfolio loans and leases(c)(b)

  $506       579            $437      660         

 

 

OREO and other repossessed property(d)

   141       165             52      78         

 

 

Total nonperforming portfolio assets(d)(b)

  $                647       744            $                489      738         

 

 
(a)

Excludes$206 and $21$13 of restructured nonaccrual loans and leases held for sale atDecember 31, 20152017and2014, respectively,associated with a consolidated VIE in which the Bancorp has no continuing credit risk due the risk being assumed by a third party. 2016, respectively.

(b)

ExcludesIncludes$12and $39 of nonaccrual loans held for sale atDecember 31, 20153 and 2014, respectively.

(c)

Includes$6and $9$4 of nonaccrual government insured commercial loans whose repayments are insured by the SBA atDecember 31, 20152017and 2014,2016, respectively, andof which$23 and $4 of$1 are restructured nonaccrual government insured commercial loans atDecember 31, 20152017 and 2014,2016, respectively.

(d)(c)

Excludes$14 and $71 $19 of OREO related to government insuredrestructured nonaccrual loans atDecember 31, 2015 and 2014, respectively. The Bancorp has historically excluded government guaranteed loans classified2016 associated with a consolidated VIE in OREO from its nonperforming asset disclosures. Upon the prospective adoption on January 1, 2015 of ASU 2014-14 “Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure”, government guaranteed loans meeting certain criteria were reclassified to other receivables rather than OREO upon foreclosure. AtDecember 31, 2015,which the Bancorp had$44 of government guaranteed loans classified as other receivables. no continuing credit risk due the risk being assumed by a third party. Refer to Note 111 for further informationdiscussion on the adoptiondeconsolidation of this amended guidance.the VIE associated with these loans in the third quarter of 2017.

 

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 $303$235 million and $260 million as of December 31, 2015.2017 and 2016, respectively.

Troubled Debt Restructurings

If a borrower is experiencing financial difficulty, the Bancorp may consider, in certain circumstances, modifying the terms of their loan to maximize collection of amounts due. Within each of the Bancorp’s loan classes, TDRs typically involve either a reduction of the stated interest rate of the loan, an extension of the loan’s maturity date with a stated rate lower than the current market rate for a new loan with similar risk, or in limited circumstances, a reduction of the principal balance of the loan or the loan’s accrued interest. Modifying the terms of a loan may result in an increase or decrease to the ALLL depending upon the terms modified, the method used to measure the ALLL for a loan prior to modification, and whether any charge-offs were recorded on the loan before or at the time of modification. Refer to the ALLL section of Note 1 for 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 valuation allowance because it is probable that all cash flows will be collected under the modified terms of the loan. In addition, if the stated interest rate was increased in a TDR, the cash flows on the modified loan, using thepre-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 ischarged-off to the ALLL.

As of December 31, 2015, theThe Bancorp had $39 million and $23 million in line of credit and letter of credit commitments respectively, compared to $63 million and $26 million in line of credit and letter of credit commitments as of December 31, 2014, respectively, to lend additional funds to borrowers whose terms have been modified in a TDR.TDR, consisting of line of credit and letter of credit commitments of $53 million and $78 million, respectively, as of December 31, 2017 compared with $82 million and $57 million, respectively, as of December 31, 2016.

 

 

111118  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:

 

 

 
2015 ($ 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    
 
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

   77                $146     7          3             75    $          237        (5)        6         

Commercial mortgage owner-occupied loans

   18     16     (2)         -             9    8        5         -         

Commercial mortgage nonowner-occupied loans

   12     7     (1)         -             4    -        -         -         

Commercial leases

   1    4        -         -         

Residential mortgage loans

   1,089     155     8          -             830    116        5         -         

Consumer loans and leases:

        

Consumer loans:

        

Home equity

   267     16     (1)         -             150    10        -         -         

Automobile loans

   440     7     1          -             102    -        -         -         

Credit card

   12,569     62     11          7             8,085    38        8         1         

 

 

Total portfolio loans and leases

   14,472                $409     23          10             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.

 

 

 
2014 ($ 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    
 
2016 ($ 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
to ALLL Upon
Modification
   Charge-offs
Recognized Upon
Modification
 

 

 

Commercial loans and leases:

                

Commercial and industrial loans

   128                $230     12          6             74    $          183        14         -         

Commercial mortgage owner-occupied loans

   32     54     (1)         -             12    11        -         -         

Commercial mortgage nonowner-occupied loans

   28     30     (3)         2             4    5        2         -         

Commercial leases

   5    16        -         -         

Residential mortgage loans

   1,093     160     8          -             924    137        8         -         

Consumer loans and leases:

        

Consumer loans:

        

Home equity

   284     12     -           -             219    15        -         -         

Automobile loans

   608     10     1          -             221    3        -         -         

Credit card

   8,929     52     10          -             9,519    43        8         4         

 

 

Total portfolio loans and leases

   11,102                $548     27          8             10,978    $          413        32         4         

 

 
(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.

 

 

 
2013 ($ 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    
 
2015 ($ 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 loans:

        

Commercial and industrial loans

   146                $604     39          44             77    $            146        7         3         

Commercial mortgage owner-occupied loans(c)

   65     19     (2)         -             18    16        (2)        -         

Commercial mortgage nonowner-occupied loans

   59     72     (7)         -             12    7        (1)        -         

Commercial construction loans

   4     34     (2)         -          

Commercial leases

   1     2     (5)         -          

Residential mortgage loans

   1,620     249     28          -             1,089    155        8         -         

Consumer loans and leases:

        

Consumer loans:

        

Home equity

   695     37     (1)         -             267    16        (1)        -         

Automobile loans

   499     14     1          -             440    7        1         -         

Credit card

   8,202     50     7          -             12,569    62        11         7         

 

 

Total portfolio loans and leases

   11,291                $1,081     58          44          

Total portfolio loans

   14,472    $            409        23         10         

 

 
(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.

(c)

Excludes five loans modified in a TDR during the year ended December 31,2013associated with a consolidated VIE in which the Bancorp has no continuing credit risk due to the risk being assumed by a third party. The TDR had a recorded investment of $29 at modification, the ALLL increased $7 upon modification and a charge-off of $2 was recognized upon modification.

 

The Bancorp considers TDRs that become 90 days or more past due under the modified terms as subsequently defaulted. For commercial loans not subject to individual review for impairment, loss rates that are applied for purposes of determining the ALLL include historical losses associated with subsequent defaults on loans previously modified in a TDR. For consumer loans, the Bancorp performs a qualitative assessment of the adequacy of the

consumer ALLL by comparing the consumer ALLL to forecasted consumer losses over the projected loss emergence period (the forecasted losses include the impact of subsequent defaults of

consumer TDRs). When a residential mortgage, home equity, automobile or other consumer loan that has been modified in a TDR subsequently defaults, the present value of expected cash flows used in the measurement of the potential impairment loss is

112  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATMENTS

generally limited to the expected net proceeds from the sale of the loan’s underlying collateral and any resulting impairment loss is reflected as acharge-off or an increase in ALLL. The Bancorp

recognizes ALLL for the entire balance of the credit card loans modified in a TDR that subsequently default.

 

 

119  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables provide a summary of TDRs that subsequently defaulted during the years ended December 31, 2017, 2016 and 2015 2014 and 2013 that waswere within twelve months of the restructuring date:

 

 

 
December 31, 2015 ($ in millions)(a)  Number of
Contracts 
   Recorded     
        Investment    
 
December 31, 2017 ($ in millions)(a)  Number of
Contracts 
   Recorded     
        Investment    
 

 

 

Commercial loans and leases:

    

Commercial loans:

    

Commercial and industrial loans

   7    $11         7   $17     

Commercial mortgage owner-occupied loans

   3     1         4    1     

Residential mortgage loans

   156     21         172    24     

Consumer loans and leases:

    

Consumer loans:

    

Home equity

   15     1         16    2     

Automobile loans

   8     -      

Credit card

   1,935     8         1,633    8     

 

 

Total portfolio loans and leases

   2,124    $            42      

Total portfolio loans

   1,832   $            52     

 

 
(a)

Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality.

 

 

 
December 31, 2014 ($ in millions)(a)  Number of
Contracts 
   Recorded     
        Investment    
 
December 31, 2016 ($ in millions)(a)  Number of
Contracts 
   Recorded     
        Investment    
 

 

 

Commercial loans and leases:

        

Commercial and industrial loans

   11    $36         8   $            5     

Commercial mortgage owner-occupied loans

   3     4         2    -     

Commercial mortgage nonowner-occupied loans

   2     1      

Commercial leases

   2    1     

Residential mortgage loans

   235     32         172    25     

Consumer loans and leases:

    

Consumer loans:

    

Home equity

   30     2         17    1     

Automobile loans

   6     -         2    -     

Credit card

   2,059     12         1,715    7     

 

 

Total portfolio loans and leases

   2,346    $            87         1,918   $            39    

 

 
(a)

Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality.

 

 

 
December 31, 2013 ($ in millions)(a)  Number of
Contracts 
   Recorded     
        Investment    
 
December 31, 2015 ($ in millions)(a)  Number of
Contracts 
   Recorded     
        Investment    
 

 

 

Commercial loans and leases:

    

Commercial loans:

    

Commercial and industrial loans

   6    $            11         7   $            11     

Commercial mortgage owner-occupied loans

   7     1         3    1     

Residential mortgage loans

   375     58         156    21     

Consumer loans and leases:

    

Consumer loans:

    

Home equity

   65     4         15    1     

Automobile loans

   4     -         8    -     

Credit card

   1,768     11         1,935    8     

 

 

Total portfolio loans and leases

   2,225    $            85      

Total portfolio loans

   2,124   $42     

 

 
(a)

Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality.

 

113120  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

7. BANK PREMISES AND EQUIPMENT

 

The following table provides a summary of bank premises and equipment as of December 31:

 

 

 

($ in millions)

  

 

Estimated Useful Life

  

 

2015

 

 

2014 

   Estimated Useful Life   2017         2016         

 

 

Land and improvements(a)

    $685   793       $644  663  

Buildings(a)

  2 - 30 yrs.   1,755   1,807      2 - 30 yrs.    1,679  1,672  

Equipment

  2 - 30 yrs.   1,696   1,682      2 - 20 yrs.    1,876  1,761  

Leasehold improvements

  5 - 30 yrs.   403   416      1 - 30 yrs.    399  398  

Construction in progress(a)

     85   98        93  99  

Bank premises and equipment held for sale:

          

Land and improvements

     55   23        17  29  

Buildings

     20          9   

Equipment

     3           1   

Leasehold improvements

     3      

Accumulated depreciation and amortization

     (2,466 (2,357)       (2,715 (2,567

 

 

Total bank premises and equipment

    $            2,239           2,465       $            2,003          2,065  

 

 
(a)

AtDecember 31, 20152017 and 2014,2016, land and improvements, buildings and construction in progress included$10291and $165,$92, respectively, associated with parcels of undeveloped land intended for future branch expansion.

 

Depreciation and amortization expense related to bank premises and equipment was $256$234 million, $254$242 million and $245$256 million for the years ended December 31, 2015, 20142017, 2016 and 2013,2015, respectively.

The Bancorp monitors changing customer preferences associated with the channels it uses for banking transactions to evaluate the efficiency, competitiveness and quality of the customer service experience in its consumer distribution network. As part of this ongoing assessment, the Bancorp may determine that it is no longer fully committed to maintaining full-service branches at certain of its existing banking center locations. Similarly, the Bancorp may also determine that it is no longer fully committed to building banking centers on certain parcels of land which had previously been held for future branch expansion. On June 16, 2015, the Bancorp’s Board of Directors authorized management to pursue a plan to further develop its distribution strategy, including a plan to consolidate and/or sell certain operating branch locations and certain parcels of undeveloped land that had been acquired by the Bancorp for future branch expansion (the “Branch Consolidation and Sales Plan”).

On September 3, 2015, the Bancorp announced the decision to enter into an agreement to sell branch banking locations, retail accounts, certain private banking deposits and related loan

relationships in the Pittsburgh MSA to First National Bank of Pennsylvania. On September 30, 2015, the Bancorp announced the decision to enter into an agreement to sell its retail operations, including retail accounts, certain private banking deposits and related loan relationships in the St. Louis MSA to Great Southern Bank. Both transactions are part of the Branch Consolidation and Sales Plan and are expected to close in the first half of 2016. As of December 31, 2015, the Bancorp intended to consolidate and/or sell 107 operating branch locations and to sell an additional 32 parcels of undeveloped land that had been acquired by the Bancorp for future branch expansion. For further information on a subsequent event related to the Branch Consolidation and Sales Plan, refer to Note 31.

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 $109$7 million, $20$32 million and $6$109 million for the years ended December 31, 2015, 20142017, 2016 and 2013,2015, respectively. The recognized impairment losses were recorded in other noninterest income in the Consolidated Statements of Income.

114  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the assets and liabilities classified as held for sale as a result of the Branch Consolidation and Sales Plan as of:

($ in millions)

December 31, 2015(d)

Assets:

Loans held for sale:

Commercial and industrial loans

$20

Commercial mortgage loans

22

Residential mortgage loans

188

Home equity

35

Automobile loans

4

Total loans held for sale(a)

$                                  269

Bank premises and equipment held for sale (included in the preceding table):

Land and improvements(b)

25

Buildings(b)

14

Equipment(b)

3

Leasehold improvements(b)

3

Total bank premises and equipment held for sale (included in the preceding table)

$45

Total assets held for sale

$314

Liabilities:

Deposits held for sale:

Noninterest-bearing deposits

$117

Interest-bearing deposits

511

Total deposits held for sale(c)

$628

Total liabilities held for sale

$628

(a)

Included in loans held for sale in the Consolidated Balance Sheets.

(b)

Included in bank premises and equipment in the Consolidated Balance Sheets.

(c)

Included in noninterest-bearing deposits and interest-bearing deposits in the Consolidated Balance Sheets.

(d)

Included in the Branch Banking, Consumer Lending and Investment Advisors business segments.

Gross occupancy expense for cancelable and noncancelable leases, which is included in net occupancy expense in the Consolidated Statements of Income, was $110$101 million, $100 million and $98$110 million for the years ended December 31, 2015, 20142017, 2016 and 2013,2015, respectively, which was reduced by rental income from leased

premises of $18$13 million, $17$16 million and $16$18 million during the years ended December 31, 2015, 20142017, 2016 and 2013,2015, respectively. The Bancorp’s subsidiaries have entered into a number of noncancelable operating and capital lease agreements with respect to bank premises and equipment.

 

 

The following table provides the annual future minimum payments under noncancelable operating leases and capital leases for the years ending December 31:

 

 
($ in millions)  

 

Noncancelable
Operating Leases

   Capital Leases   Noncancelable
Operating Leases
   Capital Leases       

 

2016

  $91     7   

2017

   84     6   

2018

   82     6     $87     

2019

   74     5      83     

2020

   62     1      71     

2021

   57     

2022

   51     

Thereafter

   242     2      219     

 

Total minimum lease payments

  $                          635                         27     $                          568                        26  

Less: Amounts representing interest

   -     

 

Less: Amounts representing interest

   -     3   

Present value of net minimum lease payments

   -     24      -    22  

 

8. OPERATING LEASE EQUIPMENT

 

As partThe Bancorp performs assessments of a periodic reviewthe recoverability of long-lived assets forwhen events or changes in circumstances indicate that their carrying values may not be recoverable. Total impairment losses associated with operating lease assets during the first quarter of 2015, the Bancorp identified an impairment regarding certain medium and large cabin corporate aircraft subject to leases expiring in 2017 and later. After applying the appropriate tests under current accounting guidance, it was determined that such recoverability was in doubt and the assets had, in fact, been impaired. The impact of the impairment was $30were $52 million, which was recognized as a reduction to corporate banking revenue in the Consolidated Statements of Income during the first quarter of 2015 as such$20

diminution in value of the assets was associated with both the first quarter of 2015 and prior periods. The Bancorp assessed the materiality of this impairment and concluded it was immaterial to interim amounts during the first quarter of 2015 and previously reported annual and interim amounts. During the second and third quarters of 2015, the Bancorp recorded $4 million and $2$36 million respectively, offor the years ended December 31, 2017, 2016 and 2015, respectively. The recognized impairment associated with operating lease assets. The impact of the impairments was recognized as a reduction tolosses were recorded in corporate banking revenue in the Consolidated Statements of Income.

 

 

115121  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

9. GOODWILL

 

Business combinations entered into by the Bancorp typically include the acquisition of goodwill. Acquisition activity includes acquisitions in the respective period in addition to purchase accounting adjustments related to previous acquisitions. Duringacquisitions, if any. The Bancorp completed its annual goodwill impairment test as of September 30, 2017 by performing a qualitative assessment of goodwill at the fourth quarterreporting unit level to determine whether any indicators of 2008,impairment existed. In performing this qualitative assessment, the Bancorp evaluated events and circumstances since the last

impairment analysis, macroeconomic conditions, banking industry and market conditions and key financial metrics of the Bancorp as well as reporting unit and overall Bancorp financial performance. After assessing the totality of the events and circumstances, the Bancorp determined that it was not more likely than not that the fair values of the Commercial Banking, Branch Banking and Consumer LendingWealth and Asset Management reporting units’ goodwillunits were less than their respective carrying

amounts exceeded their associated implied fair values by $750 million and, $215 million, respectively. The resulting $965 milliontherefore, the first and second steps of the quantitative goodwill impairment charge was recorded in the fourth quarter of 2008 and represents the total amount of accumulated impairment losses as of December 31, 2015.test were deemed unnecessary.

 

Changes in the net carrying amount of goodwill, by reporting unit, for the years ended December 31, 20152017 and 20142016 were as follows:

 

 

 
($ in millions)        Commercial  
      Banking  
   Branch
Banking
   Consumer    
Lending    
   Investment  
Advisors  
   Total 

 

 

Net carrying value as of December 31, 2013

  $                        613                  1,655                         -                 148                      2,416   

Acquisition activity

   -     -                         -     -       

 

 

Net carrying value as of December 31, 2014

  $613      1,655                         -     148      2,416   

Acquisition activity

        -                         -     -       

 

 

Net carrying value as of December 31, 2015

  $613      1,655                         -     148      2,416   

 

 

The Bancorp completed its annual goodwill impairment test as of September 30, 2015 and the estimated fair values of

the Commercial

Banking, Branch Banking and Investment Advisors reporting units substantially exceeded their carrying values, including goodwill.

 

 
($ in millions)        Commercial  
      Banking  
   Branch
Banking
   Consumer    
Lending    
   

Wealth and Asset    

Management    

     Total         

 

 

Goodwill

  $                        1,363                         1,655                215           148               3,381  

Accumulated impairment losses

   (750)            -    (215)          -               (965) 

 

 

Net carrying amount as of December 31, 2015

  $613             1,655                -           148               2,416  

Acquisition activity

   -             -    -           -                

 

 

Net carrying amount as of December 31, 2016

  $613             1,655    -           148               2,416  

Acquisition activity

   -             -    -           29               29  

 

 

Net carrying amount as of December 31, 2017

  $613             1,655    -           177               2,445  

 

 

10. INTANGIBLE ASSETS

 

Intangible assets consist of core deposit intangibles, customer lists, customer relationships,non-compete agreements, trade names and cardholder relationships.rent intangibles. Intangible assets are amortized on either a straight-linestraight-

line or an accelerated basis

over their estimated useful lives. IntangibleThe increase in gross carrying amount of intangible assets have an estimated remaining weighted-average life atfrom the year ended December 31, 2015 of 4.3 years.2016 reflects acquisition activity during 2017.

 

The details of the Bancorp’s intangible assets are shown in the following table:

 

 

 
($ in millions)  

Gross Carrying

Amount

     Accumulated
Amortization
     Net Carrying        
Amount        
   

Gross Carrying

Amount

     Accumulated
Amortization
     Net Carrying        
Amount        
 

 

 

As of December 31, 2015

          

As of December 31, 2017

          

Core deposit intangibles

  $                            34           (26)        8            $                    34              (29)        5         

Customer relationships

   16              -      16         

Non-compete agreements

   13              (10)        3         

Other

   33           (29)        4             6              (3)        3         

 

 

Total intangible assets

  $67           (55)        12            $69              (42)        27         

 

 

As of December 31, 2014

          

As of December 31, 2016

          

Core deposit intangibles

  $122           (112)        10            $34              (27)        7         

Non-compete agreements

   10              (10)        -         

Other

   45           (40)        5             5              (3)        2         

 

 

Total intangible assets

  $167           (152)        15            $49              (40)        9         

 

 

 

As of December 31, 2015,2017, all of the Bancorp’s intangible assets were being amortized. Amortization expense recognized on

intangible assets was $2 million for each of the years ended December 31, 2015, 20142017, 2016 and 2013 was $2 million, $4 million and $8 million, respectively.

2015. The Bancorp’s projections of

amortization expense shown below arein the following table is based on existing asset balances as of December 31, 2015.2017. Future amortization expense may vary from these projections.

Estimated amortization expense for the years ending December 31, 20162018 through 20202022 is as follows:

 

 

 
($ in millions)  Total               Total             

 

 

2016

  $                    2              

2017

   2              

2018

   2                $                3             

2019

   1                 3             

2020

   1                 3             

2021

   2             

2022

   2             

 

 

 

116122  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

11. VARIABLE INTEREST ENTITIES

 

The Bancorp, in the normal course of business, engages in a variety of activities that involve VIEs, which are legal entities that lack sufficient equity at risk to finance their activities without additional subordinated financial support or the equity investors of the entities as a group lack any of the characteristics of a controlling interest. The primary beneficiary of a VIE is generally the enterprise that has both the power to direct the activities most significant to the economic performance of the VIE and the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. For certain investment funds, the primary beneficiary is the enterprise that will absorb a majority of the fund’s expected losses or receive a majority of the fund’s expected residual returns. The

Bancorp evaluates its interest in certain entities to determine if these entities meet the definition of a VIE and whether the Bancorp is the primary beneficiary and should consolidate the entity based on the variable interests it held both at inception and when there is a

change in circumstances that requires a reconsideration. If the Bancorp is determined to be the primary beneficiary of a VIE, it must account for the VIE as a consolidated subsidiary. If the Bancorp is determined not to be the primary beneficiary of a VIE but holds a variable interest in the entity, such variable interests are accounted for under the equity method of accounting or other accounting standards as appropriate.

 

 

Consolidated VIEs

The following tables provide a summary of the classifications of consolidated VIE assets, liabilities and noncontrolling interests included in the Consolidated Balance Sheets as of:

 

 

 
December 31, 2015 ($ in millions)   Automobile Loan
Securitizations
   CDC
Investments
   Total   
December 31, 2017 ($ in millions)   Automobile Loan
Securitizations
   CDC
Investments
   Total   

 

Assets:

         

Other short-term investments

 $   62           -           62  

Commercial mortgage loans

   -           20           20  

Automobile loans

   1,277           -           1,277  

ALLL

   (6)          -           (6 

Other assets

   7           -           7  

 

Total assets

 $               1,340           20                       1,360                

 

Liabilities:

         

Other liabilities

 $   2           -           2  

Long-term debt

   1,190           -           1,190  

 

Total liabilities

 $   1,192           -           1,192  

 

Noncontrolling interests

 $   -                       20           20  

 
         

 
December 31, 2016 ($ in millions)   Automobile Loan
Securitizations
   CDC
Investments
   Total   

 

 

Assets:

                                              

Cash and due from banks

 $     151             1      152    $  84          1          85  

Commercial mortgage loans

   -      47      47      -          46          46  

Automobile loans

   2,490      -      2,490     1,170           -          1,170  

ALLL

   (11    (17    (28   (6)         (20)         (26 

Other assets

   20      -      20     9           -          9  

 

 

Total assets

 $                 2,650                  31                  2,681                  $  1,257          27          1,284  

 

 

Liabilities:

                  

Other liabilities

 $     3      -      3    $  3           -          3  

Long-term debt

   2,493      -      2,493     1,094           -          1,094  

 

 

Total liabilities

 $     2,496      -      2,496    $  1,097           -          1,097  

 

 

Noncontrolling interests

 $     -      31      31    $   -          27          27  

 

 
         

 
December 31, 2014 ($ in millions)   Automobile Loan
Securitizations
 CDC
Investments
   Total   

 

Assets:

         

Cash and due from banks

 $    178     1     179   

Commercial mortgage loans

   -     47     47   

Automobile loans

  3,331      -     3,331   

ALLL

  (11   (11   (22 

Other assets

  23     2     25   

 

Total assets

 $     3,521      39      3,560   

 

Liabilities:

         

Other liabilities

 $     5      -      5   

Long-term debt

  3,434      -     3,434   

 

Total liabilities

 $     3,439      -      3,439   

 

Noncontrolling interests

 $     -     39     39   

 

 

Automobile Loan Securitizationsloan securitizations

In a securitization transactionstransaction that occurred during the years ended December 31, 2015 and 2014,in September of 2017, the Bancorp transferred an aggregate amount of $1.1 billion in consumer automobile loans to a bankruptcy remote trust which was deemed to be a VIE. This trust then subsequently issued approximately $750$1.0 billion of asset-backed notes, of which approximately $261 million and $3.8 billion, respectively,were retained by the Bancorp. Refer to Note 16 for further information. Additionally, in prior years the Bancorp completed securitization transactions in which the Bancorp transferred certain consumer automobile loans to bankruptcy remote trusts which were also deemed to be VIEs. The primary purposes of the VIEs were to issue asset-backed securities with varying levels of credit subordination and payment priority, as well as residual interests, and to provide the Bancorp with access to liquidity for its originated loans. The Bancorp retained residual interests in the VIEs and, therefore, has an obligation to absorb losses and a right to receive benefits from the VIEs that could potentially be significant to the VIEs. In addition, the Bancorp retained servicing rights for the underlying loans and, therefore, holds the power to direct the activities of the VIEs that most

significantly impact the economic performance of the VIEs. As a result, the Bancorp concluded that it is the primary beneficiary of the VIEs and therefore, has

consolidated these VIEs. The assets of the VIEs are restricted to the settlement of the notesasset-backed securities and other obligations of the VIEs. Third-party holders of the notes do not have recourse to the general assets of the Bancorp.

The economic performance of the VIEs is most significantly impacted by the performance of the underlying loans. The principal risks to which the VIEs are exposed include credit risk and prepayment risk. The credit and prepayment risks are managed through credit enhancements in the form of reserve accounts, overcollateralization, excess interest on the loans and the subordination of certain classes of asset-backed securities to other classes.

CDC Investmentsinvestments

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.

117  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CDC generallyco-invests with other unrelated companies and/or individuals and typically makes investments in a separate legal entity that owns the property under development.

123  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. Typically, the general partner or managing member will be the party that has the right to make decisions that will most significantly impact the economic performance of the entity. The Bancorp’s subsidiaries serve as the managing member of certain LLCs invested in business revitalization projects.projects and have the right to make decisions that most significantly impact the economic performance of the LLCs. Additionally, the investor members do not own substantivekick-out rights or substantive participating rights over the managing member. The Bancorp has provided an indemnification guarantee to the investor member of these LLCs related to the qualification of tax credits

generated by the investor members’ investment. Accordingly, the Bancorp concluded that it is the primary beneficiary and, therefore, has consolidated these VIEs. As a result, the investor members’ interests in these VIEs are presented as noncontrolling interests in the Bancorp’s Consolidated Financial Statements. This presentation

includes reporting separately the equity attributable to the noncontrolling interests in the Consolidated Balance Sheets and Consolidated Statements of Changes in Equity and reporting separately the comprehensive income attributable to the noncontrolling interests in the Consolidated Statements of Comprehensive Income and the net income attributable to the noncontrolling interests in the Consolidated Statements of Income.

During the third quarter of 2017, the Bancorp’s indemnification guarantee for one of the CDC investments for which a Bancorp subsidiary served as the managing member expired and the Bancorp transferred its remaining ownership interest in the VIE to the investor member thus removing the Bancorp from future operations of the VIE. As a result, the Bancorp deconsolidated the VIE during the third quarter of 2017 resulting in a decrease of $27 million in commercial mortgage loans, a decrease of $20 million in ALLL associated with the commercial mortgage loans and a decrease of $18 million in indemnification guarantee exposure. The Bancorp’s maximum exposure related to these indemnifications at December 31, 20152017 and 20142016 was $27$17 million and $24$31 million, respectively, which is based on an amount required to meet the investor members’member’s defined target rate of return.

 

 

Non-consolidated VIEs

The following tables provide a summary of assets and liabilities carried on the Consolidated Balance Sheets related tonon-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, 2015 ($ in millions)  

Total  

Assets 

   Total     
Liabilities
   Maximum            
Exposure             
 
December 31, 2017 ($ in millions)  

Total 

Assets 

   Total
Liabilities
     Maximum            
Exposure              
 

 

 

CDC investments

  $1,455     367      1,455                 $            1,376                  355                1,376                

Private equity investments

   211          271                  102                  -                150                

Loans provided to VIEs

   1,630          2,599                  1,845                  -                            2,910                

Automobile loan securitization

   1          1               

 

 
              

 

 
December 31, 2014 ($ in millions)  

Total  

Assets 

   Total     
Liabilities
   Maximum            
Exposure             
 
December 31, 2016 ($ in millions)  

Total 

Assets 

   Total
Liabilities
     Maximum            
Exposure              
 

 

 

CDC investments

  $                        1,432     364      1,432                 $                1,421                   357                1,421                

Private equity investments

   189          267                  176                  -                232                

Loans provided to VIEs

   1,900          2,759                  1,735                  -                2,672                

Automobile loan securitization

   2          2               

 

 

 

CDC Investmentsinvestments

As noted previously, CDC typically invests in VIEs as a limited partner or investor member in the form of equity contributions.contributions and has no substantivekick-out or substantive participating rights over the managing member. The Bancorp has determined that it is not the primary beneficiary of these VIEs because it lacks the power to direct the activities that most significantly impact the economic performance of the underlying project or the VIEs’ ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. This power is held by the general partners/managing members who exercise full and exclusive control of the operations of the VIEs. Accordingly, the Bancorp accounts for these investments under the equity method of accounting.

During the fourth quarter of 2017, the Bancorp recognized $68 million of impairment on certain affordable housing investments primarily due to the change in the federal statutory corporate tax rate pursuant to the TCJA. This impairment charge was recorded in other noninterest expense in the Consolidated Statements of Income. Refer to Note 27 for further information.

The Bancorp’s funding requirements are limited to its invested capital and any additional unfunded commitments for future equity

contributions. The Bancorp’s maximum exposure to loss as a result of its involvement with the VIEs is limited to the carrying amounts of the investments, including the unfunded commitments. The

carrying amounts of these investments, which are included in other assets in the Consolidated Balance Sheets, and the liabilities related to the unfunded commitments, which are included in other liabilities in the Consolidated Balance Sheets, are included in the previous tables for all periods presented. The Bancorp has no other liquidity arrangements or obligations to purchase assets of the VIEs that would expose the Bancorp to a loss. In certain arrangements, the general partner/managing member of the VIE has guaranteed a level of projected tax credits to be received by the limited partners/investor members, thereby minimizing a portion of the Bancorp’s risk.

At both December 31, 20152017 and 2014,2016, the Bancorp’s CDC investments included $1.3 billion of investments in affordable housing tax credits recognized in other assets in the Consolidated Balance Sheets. The unfunded commitments related to these investments were $356$355 million and $357$349 million as ofat December 31, 20152017 and 2014,2016, respectively. The unfunded commitments as of December 31, 20152017 are expected to be funded from 20162018 to 2033.2034.

 

124  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Bancorp has accounted for all of its investments in qualified affordable housing tax credits using the equity method of accounting. The following table summarizes the impact to the Consolidated Statements of Income relating to investments in qualified affordable housing investments:

 

 

 
  Affected Line Item in the         Consolidated Statements of       
For the years ended December 31 ($ in millions)  Consolidated Statements of Income  2015 2014 2013      Income Caption 2017 2016 2015     

 

 

Pre-tax equity method and impairment losses(a)

  Other noninterest expense  $                  126                     118                     90        

Pre-tax investment and impairment losses(a)

             Other noninterest expense $                  207                    144                    126       

Tax credits and other benefits

  Applicable income tax expense   (205 (185 (164)                   Applicable income tax expense  (246 (220 (205)     

 

 
(a)

The Bancorp recognized$68 of impairment losses primarily due to the change in the federal statutory corporate tax rate during the year endedDecember 31, 2017 and did not recognize impairment losses resulting from the forfeiture or ineligibility of tax credits or other circumstances during the years endedDecember 31, 2015,20172014, 2016 and 2013.2015.

 

118  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Private Equity Investmentsequity investments

The Bancorp, through Fifth Third Capital Holdings, a wholly-owned indirect subsidiary of the Bancorp, invests as a limited partner in private equity fundsinvestments 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 funds.investments. The funds finance primarily all of their activities from the partners’ capital contributions and investment returns. Under the VIE consolidation guidance still applicable to the funds, theThe Bancorp has determined that it is not the primary beneficiary of the funds because it does not have the obligation to absorb a majority of the funds’ expected losses or the right to receive a majority of the funds’ expected residual returns.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 substantivekick-out rights over the general partner. Therefore, the Bancorp accounts for its investments in these limited partnerships under the equity method of accounting.

The Bancorp is exposed to losses arising from the negative performance of the underlying investments in the private equity funds.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 included in the previous tables. Also, as ofat December 31, 20152017 and 2014,2016, the Bancorp’s unfunded commitment amounts to the private equity funds were $60$48 million and $78$56 million, respectively. TheAs part of previous commitments, the Bancorp made capital contributions of $30 million and $27 million to private equity investments of $11 million and $14 million during the years ended

December 31, 2017 and 2016, respectively. The Bancorp recognized a gain of $11 million on the sales of certain private equity funds during the year ended December 31, 2017. The Bancorp recognized $1 million, $9 million and $1 million of OTTI primarily associated with certain nonconforming investments affected by the Volcker Rule during the years ended December 31, 2017, 2016, 2015, and 2014, respectively. The Bancorp recognized $1 million, zero and $4 million of OTTI on its investments in private equity funds during the years ended December 31, 2015, 2014 and 2013, respectively. Refer to Note 27 for further information.

Loans Providedprovided to VIEs

The Bancorp has provided funding to certain unconsolidated VIEs sponsored by third parties. These VIEs are generally established to finance certain consumer and small business loans originated by third parties. The entities are primarily funded through the issuance of a loan from the Bancorp or a syndication through which the Bancorp is involved. The sponsor/administrator of the entities is responsible for servicing the underlying assets in the VIEs. Because the sponsor/administrator, not the Bancorp, holds the servicing responsibilities, which include the establishment and employment of default mitigation policies and procedures, the Bancorp does not hold the power to direct the activities that most significantly impact the economic performance of the entity and, therefore, is not the primary beneficiary.

The principal risk to which these entities are exposed is credit risk related to the underlying assets. The Bancorp’s maximum exposure to loss is equal to the carrying amounts of the loans and unfunded commitments to the VIEs. The Bancorp’s outstanding loans to these VIEs are included in commercial loans in Note 5. As of December 31, 20152017 and 2014,2016, the Bancorp’s unfunded commitments to these entities were $969 million$1.1 billion and $859$937 million, respectively. The loans and unfunded commitments to these VIEs are included in the Bancorp’s overall analysis of the ALLL and reserve for unfunded commitments, respectively. The Bancorp does not provide any implicit or explicit liquidity guarantees or principal value guarantees to these VIEs.

Automobile Loan Securitization

The Bancorp previously securitized and sold certain automobile loans with a carrying amount of approximately $509 million in a transaction that qualified for sale accounting. The Bancorp has concluded that it is not the primary beneficiary of the trust because it has neither the obligation to absorb losses of the entity that could potentially be significant to the VIE nor the right to receive benefits from the entity that could potentially be significant to the VIE. The Bancorp is not required and does not currently intend to provide any additional financial support to the trust. Investors and creditors only have recourse to the assets held by the trust. The interest the Bancorp holds in the VIE relates to servicing rights which are included in the Consolidated Balance Sheets. The maximum exposure to loss is equal to the carrying value of the servicing asset.

 

 

119125  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

12. SALES OF RECEIVABLES AND SERVICING RIGHTS

 

Residential Mortgage TDR Loan Sale

In March of 2015, the Bancorp recognized a $37 million gain, included in other noninterest income in the Consolidated Statements of Income, on the sale of certain HFS residential mortgage loans with a carrying value of $568 million that were previously modified in a TDR. As part of this sale, the Bancorp provided certain standard representations and warranties.warranties which have expired. Additionally, the Bancorp did not obtain servicing responsibilities on the sales of these loans and the investors have no credit recourse to the Bancorp’s other assets for failure of debtors to pay when due.

Residential Mortgage Loan Sales

The Bancorp sold fixed and adjustable-rate residential mortgage loans during the years ended December 31, 2015, 20142017, 2016 and 2013.2015. In those sales, the Bancorp obtained servicing responsibilities and provided certain standard representations and warranties, however the investors have no recourse to the Bancorp’s other assets for failure of debtors to pay when due. The Bancorp receives annual servicing fees based on a percentage of the outstanding balance. The Bancorp identifies classes of servicing assets based on financial asset type and interest rates.

 

Information related to residential mortgage loan sales and the Bancorp’s mortgage banking activity, which is included in mortgage banking net revenue in the Consolidated Statements of Income, for the years ended December 31 is as follows:

 

 
($ in millions)  2015   2014     2013     2017     2016     2015   

 

Residential mortgage loan sales(a)

  $            5,078  (b)          5,467             21,529     $            6,369            6,927            5,078(b) 

Origination fees and gains on loan sales

   171   153     453      138    186    171 

Gross mortgage servicing fees

   222   246     251      206    199    222 

 
(a)

Represents the unpaid principal balance at the time of the sale.

(b)

Excludes$568 $568 of HFS residential mortgage loans previously modified in a TDR that were sold during the first quarter of 2015.

Servicing Rights

Effective January 1, 2017, the Bancorp elected to prospectively adopt the fair value method for all classes of its residential mortgage servicing rights portfolio. Upon this election, all servicing rights are measured at fair value at each reporting date and changes in the fair value of servicing rights are reported in mortgage banking net revenue in the Consolidated Statements of Income in the period in which the changes occur. The election of the fair value method did not require a cumulative effect adjustment to retained earnings as

there was no difference between the carrying value of the servicing rights, net of valuation allowance, and the fair value.

Prior to the election of the fair value method, servicing rights were initially recorded at fair value and subsequently amortized in proportion to, and over the period of, estimated net servicing revenue. Servicing rights were assessed for impairment monthly, based on fair value, with temporary impairment recognized through a valuation allowance.

The following table presentstables present changes in the servicing rights related to residential mortgage and automobile loans for the years ended December 31:

 

 

($ in millions)

   2017   

 

Balance, beginning of period

  $                744  

Servicing rights originated - residential mortgage loans

   127  

Servicing rights acquired - residential mortgage loans

   109  

Changes in fair value:

   

Due to changes in inputs or assumptions(a)

   (1 

Other changes in fair value(b)

   (121 

 

Balance, end of period

  $858  

 

(a) Primarily reflects changes in prepayment speed and OAS spread assumptions which are updated based on market interest rates.

(b) Primarily reflects changes due to collection of contractual cash flows and the passage of time.

   

 
($ in millions)  2015   2014      2016        

 

Carrying amount before valuation allowance:

       

Balance, beginning of period

  $            1,392               1,440     $            1,204  

Servicing rights that result from the transfer of residential mortgage loans

   63   73      83  

Amortization

   (140 (121    (131 

Other-than-temporary impairment

   (111  -   

 

Balance, end of period

  $1,204   1,392     $1,156  

 

Valuation allowance for servicing rights:

       

Balance, beginning of period

  $(534 (469   $(419 

Recovery of (provision for) MSR impairment

   4   (65 

Other-than-temporary impairment

   111    -   

Recovery of MSR impairment

   7  

 

Balance, end of period

   (419 (534    (412 

 

Carrying amount after valuation allowance

  $785   858     $744  

 

 

Amortization expense recognized on servicing rightsforFor the years ended December 31, 2016 and 2015, 2014 and 2013 was $140 million, $121 million and $168 million, respectively. The Bancorp’s projections of

amortization expense shown below are based on existing asset balances and static key economic assumptions as of December 31, 2015. Future amortization expense may vary from these projections.

Estimated amortization expense for the years ending December 31, 2016 through 2020 is as follows:

 

($ in millions)  Total   

 

2016

  $                114   

2017

   103   

2018

   93   

2019

   85   

2020

   77   

 

Temporarytemporary impairment, or impairment recovery, affectedeffected through a change in the MSR valuation allowance, iswas captured as a component of mortgage banking net revenue in the Consolidated Statements of Income. Other-than-temporary impairmentAmortization expense recognized through a write-off of the servicing right and related valuation allowance is captured as a component ofon servicing rights onfor the Consolidated Balance Sheets. years ended December 31, 2016 and 2015 was $131 million and $140 million, respectively.

The Bancorp maintains anon-qualifying hedging strategy to manage a portion of the risk associated with changes in

the value of the MSR portfolio. This strategy includesmay include the purchase of free-standing derivatives and variousavailable-for-sale and trading securities.

126  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 discount rates,OAS spreads, earnings rates and prepayment speeds. The fair value of the servicing asset is

based on the present value of expected future cash flows.

 

120  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table displays the beginning and ending fair value of the servicing rights for the years ended December 31:

 

 
($ in millions)  2015     2014     2017     2016     

 

Fixed-rate residential mortgage loans:

          

Balance, beginning of period

  $            823                 929     $            722                    757  

Balance, end of period

   757     823      841    722  

Adjustable-rate residential mortgage loans:

          

Balance, beginning of period

   33     38      22    27  

Balance, end of period

   27     33      17    22  

Fixed-rate automobile loans:

          

Balance, beginning of period

   2     4      -    1  

Balance, end of period

   1     2      -    -  

 

The following table presents activity related to valuations of the MSR portfolio and the impact of thenon-qualifying hedging strategy which is included in the Consolidated Statements of Income for the years ended December 31:

 

 

($ in millions)  2015     2014    2013     

 

Securities gains, net - non-qualifying hedges on MSRs

  $-     -                  13   

Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio (mortgage banking net revenue)

                   90                   95    (30 

Recovery of (provision for) MSR impairment (mortgage banking net revenue)

   4     (65  192   

 

 

 
($ in millions)  2017    2016     2015      

 

 

Securities gains, net -non-qualifying hedges on MSRs

  $2          -             

Changes in fair value and settlement of free-standing derivatives purchased
to economically hedge the MSR portfolio(a)

               2                      24                 90   

MSR fair value adjustment(a)

   (122)         -             

Recovery of MSR impairment(a)

   -          7             

 

 
   (a)  

Included in mortgage banking net revenue in the Consolidated Statements of Income.

As of December 31, 2015 and 2014, theThe 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 securitizationpurchase resulting from transactions completed during the years ended December 31 were as follows:

 

 
     2015  2014     2017     2016 
  Rate  Weighted-
Average
Life
(in years)
   Prepayment
Speed
(annual)
 OAS Spread
(bps)
  Weighted-
Average
Default Rate
  Weighted-
Average
Life
(in years)
  Prepayment
Speed
(annual)
 Discount Rate
(annual)
 Weighted-
Average
Default Rate
  Rate  

    Weighted-    
    Average Life    

    (in years)    

   

Prepayment
Speed

(annual)

 

OAS Spread

(bps)

     

    Weighted-    
    Average Life    

    (in years)    

   

Prepayment
Speed

(annual)

 

OAS Spread

(bps)

     

 

Residential mortgage loans:

Residential mortgage loans:

             

Residential mortgage loans:

              

Servicing rights

  Fixed   6.9         11.0    534  N/A     6.6   11.3         10.0 %  N/A  Fixed        7.5    9.1     497           7.2    10.3    584   

Servicing rights

  Adjustable   3.4         25.2      303  N/A     3.7   22.3         11.7    N/A  Adjustable        2.7    32.1      660           2.8    30.2     679   

 

 

During the first quarter of 2015, the Bancorp adopted an OAS valuation approach for valuing its MSRs. This approach projects servicing cash flows over multiple interest rate scenarios, which are then discounted at risk-adjusted rates.

Based on historical credit experience, expected credit losses for residential mortgage loan servicing assets have been deemed

immaterial, as the Bancorp sold the majority of the underlying loans without recourse. At December 31, 20152017 and 2014,2016, the Bancorp serviced $59.0$60.0 billion and $65.4$53.6 billion, respectively, of residential

mortgage loans for other investors. The value of MSRs that continue to be held by the Bancorp is subject to credit, prepayment and interest rate risks on the sold financial assets.

 

At December 31, 2015,2017, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in prepayment speed assumptions and immediate 10% and 20% adverse changes in other assumptionsOAS spread are as follows:

 

 

 
             Prepayment
Speed Assumption
     

Residual Servicing

Cash Flows

               

Prepayment

Speed Assumption

     

OAS

Spread Assumption

 
        

 

 

         

 

 

 

($ in millions)(a)

  

Rate

  

Fair

Value

   

Weighted-
Average Life

(in years)

     Impact of Adverse Change
on Fair Value
   

OAS Spread

(bps)

  

 

Impact of Adverse
Change on Fair
Value

   Rate   

Fair

Value

   

Weighted-
Average Life

(in years)

      Impact of Adverse Change
on Fair Value
   

OAS Spread

(bps)

   

 

Impact of Adverse Change
on Fair Value

 
   

 

 

   

 

 

     

 

 

   

 

 

 
  Rate 10% 20% 50%       10%     20%             Rate  10%    20%  50%    10%  20%     

 

 

Residential mortgage loans:

                                 

Servicing rights

  Fixed  $        757     5.9     11.8  $(32 (61 (134)     618  $(18 (34)         Fixed   $        841    6.0    11.4  $        (36)    (69 (158)     549   $(17 (33)     

Servicing rights

  Adjustable   27     3.0     27.0    (2 (3 (7)     703   (1 (1)         Adjustable    17    3.3    24.6           (1)    (2 (5)     785    -  (1)     

 

 
(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.

 

 

121127  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

13. DERIVATIVE FINANCIAL INSTRUMENTS

 

The Bancorp maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce certain risks related to interest rate, prepayment and foreign currency volatility. Additionally, the Bancorp holds derivative instruments for the benefit of its commercial customers and for other business purposes. The Bancorp does not enter into unhedged speculative derivative positions.

The 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 and swaptions. Interest rate swap contracts are exchanges of interest payments, such as fixed-rate payments for floating-rate payments, based on a stated notional amount and maturity date. Interest rate floors protect against declining rates, while interest rate caps protect against rising interest rates. Forward contracts are contracts in which the buyer agrees to purchase, and the seller agrees to make delivery of, a specific financial instrument at a predetermined price or yield. Options provide the purchaser with the right, but not the obligation, to purchase or sell a contracted item during a specified period at an agreed upon price. Swaptions are financial instruments granting the owner the right, but not the obligation, to enter into or cancel a swap.

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, TBAsTBA securities and interest rate swaps) to economically hedge prepayment volatility. Principal-only swaps are total return swaps that are based on changes in the value of the underlying mortgage principal-only trust.TBAstrust. 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, 20152017 and 2014,2016, the balance of collateral held by the Bancorp for derivative assets was $821$409 million and $830$444 million, respectively. For derivative contracts cleared through certain central clearing parties who have modified their rules to treat variation margin payments as settlement of the derivative contract, the payments for variation margin of $74 million were applied to reduce the respective derivative contracts and were also not included in the total amount of collateral held as of December 31, 2017. The credit component negatively impacting the fair value of derivative assets associated with customer accommodation contracts as of December 31, 20152017 and 20142016 was $9$3 million and $16$6 million, respectively.

In measuring the fair value of derivative liabilities, the Bancorp considers its own credit risk, taking into consideration collateral maintenance requirements of certain derivative counterparties and the duration of instruments with counterparties that do not require collateral maintenance. When necessary, the Bancorp posts collateral primarily in the form of cash and securities to offset changes in fair value of the derivatives, including changes in fair value due to the Bancorp’s credit risk. As of December 31, 20152017 and 2014,2016, the balance of collateral posted by the Bancorp for derivative liabilities was $504$365 million and $574$399 million, respectively. Additionally, $31 million of variation margin payments were applied to the respective derivative contracts to reduce the Bancorp’s derivative liabilities as of December 31, 2017 and were also not included in the total amount of collateral posted. Certain of the Bancorp’s derivative liabilities contain credit-risk related contingent features that could result in the requirement to post additional collateral upon the occurrence of specified events. As of December 31, 20152017 and 2014,2016, the fair value of the additional collateral that could be required to be posted as a result of the credit-risk related contingent features being triggered was immaterial to the Bancorp’s Consolidated Financial Statements.TheStatements. The posting of collateral has been determined to remove the need for further consideration of credit risk. As a result, the Bancorp determined that the impact of the Bancorp’s credit risk to the valuation of its derivative liabilities was immaterial to the Bancorp’s Consolidated Financial Statements.

The Bancorp holds certain derivative instruments that qualify for hedge accounting treatment and are designated as either fair value hedges or cash flow hedges. Derivative instruments that do not qualify for hedge accounting treatment, or for which hedge accounting is not established, are held as free-standing derivatives. All customer accommodation derivatives are held as free-standing derivatives.

The fair value of derivative instruments is presented on a gross basis, even when the derivative instruments are subject to master netting arrangements. Derivative instruments with a positive fair value are reported in other assets in the Consolidated Balance Sheets while derivative instruments with a negative fair value are reported in other liabilities in the Consolidated Balance Sheets. Cash collateral payables and receivables associated with the derivative instruments are not added to or netted against the fair value amounts.

 

 

122128  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, 2015 ($ in millions)      

Notional    

Amount    

   

Derivative

Assets

   

    Derivative    

Liabilities

 

 

 

Qualifying Hedging Instruments

        

Fair value hedges:

        

Interest rate swaps related to long-term debt

  $      2,705     372       

 

 

Total fair value hedges

       372       

 

 

Cash flow hedges:

        

Interest rate swaps related to C&I loans

     5,475     39       

 

 

Total cash flow hedges

       39       

 

 

Total derivatives designated as qualifying hedging instruments

       411       

 

 

Derivatives Not Designated as Qualifying Hedging Instruments

        

Free-standing derivatives - risk management and other business purposes:

        

Interest rate contracts related to MSRs

     11,657     239       

Forward contracts related to held for sale residential mortgage loans

     1,330     3       

Stock warrant associated with Vantiv Holding, LLC

     369     262       

Swap associated with the sale of Visa, Inc. Class B shares

     1,292     -     61   

 

 

Total free-standing derivatives - risk management and other business purposes

       504     71   

 

 

Free-standing derivatives - customer accommodation:

        

Interest rate contracts for customers

     29,889     242     249   

Interest rate lock commitments

     721     15       

Commodity contracts

     2,464     294     276   

Foreign exchange contracts

     16,243     386     340   

 

 

Total free-standing derivatives - customer accommodation

       937     865   

 

 

Total derivatives not designated as qualifying hedging instruments

       1,441     936   

 

 

Total

      $                1,852     938   

 

 
        

 

 
           Fair Value 
December 31, 2014 ($ in millions)      Notional    
Amount    
   Derivative
Assets
       Derivative    
Liabilities
 

 

 

Qualifying Hedging Instruments

        

Fair value hedges:

        

Interest rate swaps related to long-term debt

  $      2,205     399       

 

 

Total fair value hedges

       399       

 

 

Cash flow hedges:

        

Interest rate swaps related to C&I loans

     3,150     36       

 

 

Total cash flow hedges

       36       

 

 

Total derivatives designated as qualifying hedging instruments

       435       

 

 

Derivatives Not Designated as Qualifying Hedging Instruments

        

Free-standing derivatives - risk management and other business purposes:

        

Interest rate contracts related to MSRs

     4,487     181       

Forward contracts related to held for sale residential mortgage loans

     999     -       

Stock warrant associated with Vantiv Holding, LLC

     691     415       

Swap associated with the sale of Visa, Inc. Class B shares

     1,092     -     49   

 

 

Total free-standing derivatives - risk management and other business purposes

       596     55   

 

 

Free-standing derivatives - customer accommodation:

        

Interest rate contracts for customers

     29,558     272     278   

Interest rate lock commitments

     613     12       

Commodity contracts

     3,558     348     338   

Foreign exchange contracts

     16,475     417     372   

 

 

Total free-standing derivatives - customer accommodation

       1,049     988   

 

 

Total derivatives not designated as qualifying hedging instruments

       1,645     1,043   

 

 

Total

      $2,080     1,043   

 

 

123  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 
         Fair Value 
December 31, 2017 ($ 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

  $   3,705   297    

 

 

Total fair value hedges

     297    

 

 

Cash flow hedges:

     

Interest rate swaps related to C&I loans

    4,475   -   12  

 

 

Total cash flow hedges

     -   12  

 

 

Total derivatives designated as qualifying hedging instruments

     297   17  

 

 

Derivatives Not Designated as Qualifying Hedging Instruments

     

Free-standing derivatives - risk management and other business purposes:

     

Interest rate contracts related to MSRs

    11,035   54   15  

Forward contracts related to residential mortgage loans held for sale

    1,284   1    

Stock warrant

    20   20    

Swap associated with the sale of Visa, Inc. Class B Shares

    1,900   -   137  

Foreign exchange contracts

    112   -    

 

 

Total free-standing derivatives - risk management and other business purposes

     75   154  

 

 

Free-standing derivatives - customer accommodation:

     

Interest rate contracts for customers

    42,216   154   145  

Interest rate lock commitments

    446   8    

Commodity contracts

    4,125   165   167  

TBA securities

    26   -    

Foreign exchange contracts

    12,654   124   119  

 

 

Total free-standing derivatives - customer accommodation

     451   431  

 

 

Total derivatives not designated as qualifying hedging instruments

     526   585  

 

 

Total

    $                823   602  

 

 
     

 

 
         Fair Value 
December 31, 2016 ($ 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   323   12  

 

 

Total fair value hedges

     323   12  

 

 

Cash flow hedges:

     

Interest rate swaps related to C&I loans

    4,475   22    

 

 

Total cash flow hedges

     22    

 

 

Total derivatives designated as qualifying hedging instruments

     345   12  

 

 

Derivatives Not Designated as Qualifying Hedging Instruments

     

Free-standing derivatives - risk management and other business purposes:

     

Interest rate contracts related to MSRs

    10,522   165   39  

Forward contracts related to residential mortgage loans held for sale

    1,823   20    

Swap associated with the sale of Visa, Inc. Class B Shares

    1,300   -   91  

Foreign exchange contracts

    111   -    

 

 

Total free-standing derivatives - risk management and other business purposes

     185   133  

 

 

Free-standing derivatives - customer accommodation:

     

Interest rate contracts for customers

    33,431   205   210  

Interest rate lock commitments

    701   13    

Commodity contracts

    2,095   107   106  

Foreign exchange contracts

    11,013   202   204  

 

 

Total free-standing derivatives - customer accommodation

     527   521  

 

 

Total derivatives not designated as qualifying hedging instruments

     712   654  

 

 

Total

    $1,057   666  

 

 

 

Fair Value Hedges

The Bancorp may enter into interest rate swaps to convert its fixed-rate funding to floating-rate. Decisions to convert fixed-rate funding to floating are made primarily through consideration of the asset/liability mix of the Bancorp, the desired asset/liability sensitivity and interest rate levels. For all interest rate swaps

designated as fair value hedges as of December 31, 2015,2017, an assessment of hedge effectiveness using regression analysis was performed and such swaps were accounted for using the “long-haul” method. The long-haul method requires a

quarterly assessment of hedge effectiveness and measurement of ineffectiveness. For interest rate swaps accounted for as a fair value hedge using the long-haul method,

129  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Hedge ineffectiveness is the difference between the changes in the fair value of the interest rate swap and changes in fair value of the related hedged item attributable to the risk being hedged. The ineffectiveness on interest rate swaps hedging fixed-rate

funding is reported within interest expense in the Consolidated Statements of Income.

 

 

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
     2015      2014    2013          

Consolidated Statements of

Income Caption

   2017    2016    2015        

 

 

Interest rate contracts:

            

Change in fair value of interest rate swaps hedging long-term debt

   Interest on long-term debt      $        (29)               120             (279)           Interest on long-term debt   $            (33)            (59)            (29)       

Change in fair value of hedged long-term debt attributable to the risk being hedged

   Interest on long-term debt       25       (126)     276            Interest on long-term debt    31     54     25        

 

 

 

Cash Flow Hedges

The Bancorp may enter into interest rate swaps to convert floating-rate assets and liabilities to fixed rates or to hedge certain forecasted transactions. The assets or 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, 2015,2017, all hedges designated as cash flow hedges were assessed for effectiveness using regression analysis. Ineffectiveness is generally measured as the amount by which the cumulative change in the fair value of the hedging instrument exceeds the present value of the cumulative change in the hedged item’s expected cash flows attributable to the risk being hedged. Ineffectiveness is reported within other noninterest income in the Consolidated Statements of Income. The effective portion of the cumulative gains or losses on cash flow hedges are reported within AOCI and are reclassified from AOCI to current period earnings when the forecasted transaction affects earnings. As of December 31, 2015,2017, the maximum length of time over which the

Bancorp is hedging its exposure to the variability in future cash flows is 4824 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, 20152017 and 2014, $222016, $9 million of net deferred losses, net of tax and $23$10 million respectively, 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, 2015, $252017, $3 million in net deferred gains, net of tax, recorded in AOCI are expected to be reclassified into earnings during the next twelve months. This amount could differ from amounts actually recognized due to changes in interest rates, hedgede-designations, and the addition of other hedges subsequent to December 31, 2015.2017.

During the years ended 20152017 and 2014,2016, there were no gains or losses reclassified from AOCI into earnings associated with the discontinuance of cash flow hedges because it was probable that the original forecasted transaction would no longer occur by the end of the originally specified time period or within the additional period of time as defined by U.S. GAAP.

 

 

The following table presents the pretaxpre-tax net (losses) 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)  2015     2014     2013          

 

 

Amount of pretax net gains (losses) recognized in OCI

  $                74       60       (13)          

Amount of pretax net gains reclassified from OCI into net income

   75       44       44           

 

 

 

 
For the years ended December 31 ($ in millions)  2017     2016     2015          

 

 

Amount ofpre-tax net (losses) gains recognized in OCI

  $            (11)      30      74         

Amount ofpre-tax net gains reclassified from OCI into net income

   19       48      75         

 

 

 

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, TBAsTBA securities and interest rate swaps) to economically hedge changes in fair value of its largely fixed-rate MSR portfolio. Principal-only swaps hedge the mortgage-LIBOR spread because these swaps appreciate in value as a result of tightening spreads. Principal-only swaps also provide prepayment protection by increasing in value when prepayment speeds increase, as opposed to MSRs that lose value in a faster prepayment environment. Receive fixed/pay floating interest rate swaps and swaptions increase in value when interest rates do not increase as quickly as expected.

The Bancorp enters into forward contracts and mortgage options to economically hedge the change in fair value of certain residential mortgage loans held for sale due to changes in interest

rates. IRLCs issued on residential mortgage loan commitments that will be held for sale are also considered free-standing derivative

instruments and the interest rate exposure on these commitments is economically hedged primarily with forward contracts. Revaluation gains and losses from free-standing derivatives related to mortgage banking activity are recorded as a component of mortgage banking net revenue in the Consolidated Statements of Income.

In conjunction with the initial sale of the Bancorp’s 51% interest in Vantiv Holding, LLC in 2009, the Bancorp received a warrant which iswas accounted for as a free-standing derivative. Refer to Note 27 for further discussion of significant inputs and assumptions used in the valuation of the warrant. During the year ended December 31, 2015, the Bancorp both sold and exercised part of the warrant. For more information, refer to Note 19.During the year ended December 31, 2016, the Bancorp exercised the remaining portion of the warrant.

In conjunction with the sale of Visa, Inc. Class B sharesShares 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 sharesShares into Class A shares.

124  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Shares. This total return swap is accounted for as a free-standing derivative. Refer to Note 27 for further discussion of significant

inputs and assumptions used in the valuation of this instrument.

 

130  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The net gains (losses) recorded in the Consolidated Statements of Income relating to free-standing derivative instruments used for risk management and other business purposes are summarized in the following table:

 

 

 
For the years ended December 31 ($ in millions) 

Consolidated Statements of

Income Caption

    2015     2014   2013        Consolidated Statements of
Income Caption
    2017     2016   2015       

 

 

Interest rate contracts:

                     

Forward contracts related to residential mortgage loans held for sale

 Mortgage banking net revenue    $            8            (18   24       Mortgage banking net revenue    $        (17)           14  8      

Interest rate contracts related to MSR portfolio

 Mortgage banking net revenue     90            95     (30)       Mortgage banking net revenue     2            24  90      

Foreign exchange contracts:

                     

Foreign exchange contracts for risk management purposes

 Other noninterest income     23            14     5       Other noninterest income     (7)          2  23      

Equity contracts:

                     

Stock warrant associated with Vantiv Holding, LLC

 Other noninterest income     325  (a)        31     206       Other noninterest income     -            73  (a)   325  (a) 

Swap associated with sale of Visa, Inc. Class B shares

 Other noninterest income     (37)           (38   (31)      

Stock warrant

 Other noninterest income     (1)          -   -       

Swap associated with sale of Visa, Inc. Class B Shares

 Other noninterest income     (80)          (56 (37)     

 

 
(a)

The Bancorp recognized a net gain of $9 on the exercise of the remaining warrant during the fourth quarter of 2016 and a net gain of $89 million on both the sale and partial exercise of the warrant during the fourth quarter of 2015.

 

Free-Standing Derivative Instruments – Customer Accommodation

The majority of the free-standing derivative instruments the Bancorp enters into are for the benefit of its commercial customers. These derivative contracts are not designated against specific assets or liabilities on the Consolidated Balance Sheets or to forecasted transactions and, therefore, do not qualify for hedge accounting. These instruments include foreign exchange derivative contracts entered into for the benefit of commercial customers involved in international trade to hedge their exposure to foreign currency fluctuations and commodity contracts to hedge such items as natural gas and various other derivative contracts. The Bancorp may economically hedge significant exposures related to these derivative contracts entered into for the benefit of customers by entering into offsetting contracts with approved, 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 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, 20152017 and 2014,2016, the total notional amount of the risk participation agreements was $1.7$2.8 billion and $1.1$2.5 billion, respectively, and the fair value was a liability of $3$5 million at December 31, 20152017 and $2$4 million at December 31, 2014,2016, which is included in other liabilities in the Consolidated Balance Sheets. As of December 31, 2015,2017, the risk participation agreements had a weighted-average remaining life of 3.22.9 years.

The Bancorp’s maximum exposure in the risk participation agreements is contingent on the fair value of the underlying interest rate derivative contracts in an asset position at the time of default. The Bancorp monitors the credit risk associated with the underlying customers in the risk participation agreements through the same risk grading system currently utilized for establishing loss reserves in its loan and lease portfolio.

 

 

Risk ratings of the notional amount of risk participation agreements under this risk rating system are summarized in the following table:

 

 

 
At December 31 ($ in millions)  2015             2014             2017             2016           

 

 

Pass

  $                1,650       1,052        $                2,748      2,447     

Special mention

   7       59         66      14     

Substandard

   7       2         24      6     

 

 

Total

  $1,664       1,113        $2,838      2,467     

 

 

 

125131  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
 2015      2014      2013          Consolidated Statements of
Income Caption
 2017      2016  2015         

 

 

Interest rate contracts:

        

Interest rate contracts for customers (contract revenue)

 Corporate banking revenue $          23   19   29        Corporate banking revenue $          21  22  23      

Interest rate contracts for customers (credit losses)

 Other noninterest expense  (1 (3 (3)       Other noninterest expense  (5  -  (1)     

Interest rate contracts for customers (credit portion of fair value adjustment)

 Other noninterest expense  1   3   7        Other noninterest expense  2  1  1      

Interest rate lock commitments

 Mortgage banking net revenue  111   124   58        Mortgage banking net revenue  93  114  111      

Commodity contracts:

        

Commodity contracts for customers (contract revenue)

 Corporate banking revenue  5   6   7        Corporate banking revenue  6  6  5      

Commodity contracts for customers (credit losses)

 Other noninterest expense  (2  -    -        Other noninterest expense  1  (1 (2)     

Commodity contracts for customers (credit portion of fair value adjustment)

 Other noninterest expense  6   (7  -        Other noninterest expense  -  1  6      

Foreign exchange contracts:

        

Foreign exchange contracts for customers (contract revenue)

 Corporate banking revenue  70   72   69        Corporate banking revenue  48  62  70      

Foreign exchange contracts for customers (credit losses)

 Other noninterest expense  2  (2  -      

Foreign exchange contracts for customers (credit portion of fair value adjustment)

 Other noninterest expense  -    -   (2)       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 thenon-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.securities and do not include variation margin payments for derivative contracts with legal rights of setoff for the year ended December 31, 2017.

 

 

 

 
   

Gross Amount

Recognized in the
Consolidated Balance Sheets(a)

   Gross Amounts Not Offset in the
Consolidated Balance Sheets
     
As of December 31, 2015 ($ in millions)            Derivatives               Collateral(b)             Net Amount 

 

 

Assets

        

Derivatives

      $1,575             (512)     (627)        436  

 

 

Total assets

   1,575             (512)     (627)        436  

Liabilities

        

Derivatives

   938             (512)     (173)        253  

 

 

Total liabilities

      $938             (512)     (173)        253  

 

 

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, 2017 ($ in millions)            Derivatives               Collateral(b)             Net Amount   

 

 

Assets:

        

Derivatives

      $815            (213)    (362)       240   

 

 

Total assets

   815            (213)    (362)       240   

Liabilities:

        

Derivatives

   602            (213)    (155)       234   

 

 

Total liabilities

      $602            (213)    (155)       234   

 

 
(a)

Amount does not include the stock warrant associated with Vantiv Holding, LLC and IRLCs because these instruments are not subject to master netting or similar arrangements.

(b)

Amount of collateral received as an offset to asset positions or pledged as an offset to liability positions. Collateral values in excess of related derivative amounts recognized in the Consolidated Balance Sheets were excluded from this table.

 

 

 
  

Gross Amount
Recognized in the

Consolidated Balance Sheets(a)

   Gross Amounts Not Offset in the
Consolidated Balance Sheets
       

Gross Amount
Recognized in the

Consolidated Balance Sheets(a)

   Gross Amounts Not Offset in the
Consolidated Balance Sheets
   
As of December 31, 2014 ($ in millions)          Derivatives               Collateral(b)             Net Amount 
As of December 31, 2016 ($ in millions)  

Gross Amount
Recognized in the

Consolidated Balance Sheets(a)

       Derivatives           Collateral(b)       Net Amount   

 

 

Assets

        

Assets:

      

Derivatives

      $1,653             (440)     (684)        529        $1,044            (374 (377)     293   

 

 

Total assets

   1,653             (440)     (684)        529     1,044            (374 (377)     293   

Liabilities

        

Liabilities:

      

Derivatives

   1,043             (440)     (293)        310     665            (374 (125)     166   

 

 

Total liabilities

      $1,043             (440)     (293)        310        $665            (374 (125)     166   

 

 
(a)

Amount does not include the stock warrant associated with Vantiv Holding, LLC and IRLCs because these instruments are not subject to master netting or similar arrangements.

(b)

Amount of collateral received as an offset to asset positions or pledged as an offset to liability positions. Collateral values in excess of related derivative amounts recognized in the Consolidated Balance Sheets were excluded from this table.

 

126132  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

14. OTHER ASSETS

 

The following table provides the components of other assets included in the Consolidated Balance Sheets as of December 31:

 

 

 
($ in millions)  2015   2014    2017     2016     

 

 

Derivative instruments

  $1,852     2,080   

Partnership investments

   1,756     1,685   

Accounts receivable and drafts-in-process

   1,653     1,452     $1,763      2,158     

Bank owned life insurance

   1,651     1,623      1,720      1,681     

Partnership investments

   1,557      1,689     

Derivative instruments

   823      1,057     

Accrued interest and fees receivable

   378      350     

Investment in Vantiv Holding, LLC

   360     394      219      414     

Accrued interest and fees receivable

   329     312   

OREO and other repossessed personal property

   155     236   

Vantiv, Inc. TRA put/call receivable

   105      165     

Prepaid expenses

   101     97      87      83     

Income tax receivable

   -     107      66      1     

OREO and other repossessed personal property

   54      84     

Other

   142     255      203      162     

 

 

Total other assets

  $        7,999     8,241     $        6,975      7,844     

 

 

 

The Bancorp utilizes derivative instruments as partpurchases life insurance policies on the lives of its overall risk management strategy to reduce certain risks related to interest rate, prepaymentdirectors, officers and foreign currency volatility. The Bancorp also holds derivatives instruments foremployees and is the benefitowner and beneficiary of its commercial customers and for other business purposes. For further information on derivative instruments, referthe policies. Certain BOLI policies have a stable value agreement through either a large, well-rated bank or multi-national insurance carrier that provides limited cash surrender value protection from declines in the value of each policy’s underlying investments. Refer to Note 13.1 for further information.

CDC, a wholly-owned indirect subsidiary of the Bancorp, was created to invest in projects to create affordable housing, revitalize business and residential areas and preserve historic landmarks, which are included above in partnership investments. In addition, Fifth Third Capital Holdings, a wholly-owned indirect subsidiary of the Bancorp, invests as a direct private equity investor and as a limited partner in private equity funds, which are included above asin partnership investments. The Bancorp has determined that these partnership investments are VIEs and the Bancorp’s investments represent variable interests. Additionally, the Bancorp recorded impairment on certain affordable housing investments during the year ended December 31, 2017 and OTTI on investments in certain private equity funds during the years ended December 31, 2017 and 2016. Refer to Note 11 for further information. The Bancorp recognized $1 million, zero and $4 million of OTTI on its investments in private equity funds during

the years ended December 31, 2015, 2014 and 2013, respectively. Refer to Note 27 for further information.

The Bancorp purchases life insurance policiesutilizes derivative instruments as part of its overall risk management strategy to reduce certain risks related to interest rate, prepayment and foreign currency volatility. The

Bancorp also holds derivatives instruments for the benefit of its commercial customers and for other business purposes. For further information on the lives of certain directors, officers and employees and is the owner and beneficiary of the policies. Certain BOLI policies have a stable value agreement through either a large, well-rated bank or multi-national insurance carrier that provides limited cash surrender value protection from declines in the value of each policy’s underlying investments. Referderivative instruments, refer to Note 1 for further information.13.

In 2009, the Bancorp sold an approximate 51% interest in its processing business, Vantiv Holding, LLC. As a result of additional share sales completed by the Bancorp, its current ownership share in Vantiv Holding, LLC isas of December 31, 2017 was approximately 18%8.6%. The Bancorp’s ownership in Vantiv Holding, LLC is currently accounted for under the equity method of accounting. Refer to Note 19 for further information.

In 2016, the Bancorp entered into an agreement with Vantiv, Inc. in which Vantiv, Inc. may be obligated to pay up to a total of approximately $171 million to the Bancorp to terminate and settle certain remaining TRA cash flows, totaling to a then estimated $394 million, upon the exercise of certain call options by Vantiv, Inc. or certain put options by the Bancorp. The Bancorp received $63 million in settlement for certain call options and put options exercised during 2017. Refer to Note 19 and Note 31 for further information.

OREO represents property acquired through foreclosure or other proceedings and is carried at the lower of cost or fair value, less costs to sell. Refer to Note 1 for further information.

 

 

127133  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

15. SHORT-TERM BORROWINGS

 

Borrowings with original maturities of one year or less are classified as short-term and include federal funds purchased and other short-term borrowings. Federal funds purchased are excess balances in reserve accounts held at the FRB that the Bancorp purchased from

other member banks on an overnight basis. Other short-term borrowings include securities sold under repurchase agreements, derivative collateral, FHLB advances and other borrowings with original maturities of one year or less.

 

The following table summarizes short-term borrowings and weighted-average rates:

 

 

 
 2015      2014         2017   2016       
  

 

 

   

 

 

   

 

 

 
($ in millions)   Amount     Rate      Amount   Rate                   Amount   Rate                   Amount   Rate         

 

 

As of December 31:

           

Federal funds purchased

 $  151    0.30  $144   0.08 %    $174   1.37%   $132  0.61% 

Other short-term borrowings

   1,507    0.11            1,556   0.08         4,012   1.28                3,535  0.54    

 

 

Average for the years ended December 31:

           

Federal funds purchased

 $  920    0.13  $458   0.09 %    $557   1.01%   $506  0.39% 

Other short-term borrowings

   1,721    0.12    1,873   0.10         3,158   0.96        2,845  0.36    

 

 

Maximum month-end balance for the years ended December 31:

           

Federal funds purchased

 $  200    $286     $        1,495    $739  

Other short-term borrowings

   4,904    3,756      6,307     6,374  

 

 

The following table presents a summary of the Bancorp’s other short-term borrowings as of December 31:

 

 

 
($ in millions)  2015   2014                     2017   2016                   

 

 

FHLB advances

  $3,125    2,500       

Securities sold under repurchase agreements

  $925     995           546    661       

Derivative collateral

   582     561           341    374       

 

 

Total other short-term borrowings

  $                    1,507     1,556          $                    4,012    3,535       

 

 

 

The Bancorp’s securities sold under repurchase agreements are accounted for as secured borrowings and are collateralized by securities included inavailable-for-sale and other securities in the Consolidated Balance Sheets. These securities are subject to changes

in market value and, therefore, the Bancorp may increase or decrease the level of securities pledged as collateral based upon

these movements in market value.

The following table summarizes the Bancorp’s As of both December 31, 2017 and 2016, all securities sold under repurchase agreements were secured by the type of collateral securing the borrowing andagency residential mortgage-backed securities with an overnight remaining contractual maturity as of December 31:maturity.

 

($ in millions)    2015  2014

 

   Amount        

Remaining Contractual

Maturity

  Amount       Remaining Contractual      
Maturity      

 

Collateral type:

        

Agency residential mortgage-backed securities

  $646    Overnight  $896    Overnight

U.S. Treasury and federal agencies securities

   279    Overnight   99    Overnight

 

Total securities sold under repurchase agreements

  $                  925      $                  995    

 

 

128134  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

16. LONG-TERM DEBT

 

The following table is a summary of the Bancorp’s long-term borrowings at December 31:

 

 

 
($ in millions)  Maturity    Interest Rate      2015   2014       Maturity    Interest Rate   2017   2016     

 

 

Parent Company

                     

Senior:

                     

Fixed-rate notes

  2016    3.625%    $1,000     1,000     2019    2.30%  499    499  

Fixed-rate notes

  2019    2.30%     500     499     2020    2.875%  1,097    1,096  

Fixed-rate notes

  2020    2.875%     1,099         2022    2.60%  697     

Fixed-rate notes

  2022    3.50%     498     497     2022    3.50%  497    497  

Subordinated:(a)

                     

Floating-rate notes(c)

  2016    0.99%     250     250   

Fixed-rate notes

  2017    5.45%     520     539     2017    5.45%  -    501  

Fixed-rate notes

  2018    4.50%     532     544     2018    4.50%  505    519  

Fixed-rate notes

  2024    4.30%     748     748     2024    4.30%  747    746  

Fixed-rate notes

  2038    8.25%     1,327     1,317     2038    8.25%  1,305    1,312  

Subsidiaries

                     

Senior:

                     

Fixed-rate notes

  2016    1.15%     1,000     1,000     2017    1.35%  -    650  

Fixed-rate notes

  2016    0.90%     400     400     2018    2.15%  996    997  

Floating-rate notes(c)

  2016    0.87%     750     750   

Floating-rate notes(c)

  2016    0.82%     300     300   

Fixed-rate notes

  2018    1.45%  600    598  

Floating-rate notes(b)

  2018    2.35%  250    250  

Fixed-rate notes

  2017    1.35%     652     654     2019    2.375%  849    849  

Fixed-rate notes

  2018    2.15%     998         2019    2.30%  749    748  

Fixed-rate notes

  2018    1.45%     598     597     2019    1.625%  736    737  

Floating-rate notes(c)

  2018    1.28%     250       

Floating-rate notes(b)

  2019    2.26%  250    249  

Fixed-rate notes

  2020    2.20%  744     

Floating-rate notes(b)

  2020    1.63%  299     

Fixed-rate notes

  2019    2.375%     850     850     2021    2.25%  1,247    1,246  

Fixed-rate notes

  2021    2.875%     846     846     2021    2.875%  846    845  

Subordinated:(a)

                     

Fixed-rate bank notes

  2015    4.75%    �� -     502     2026    3.85%   747    746  

Junior subordinated:(b)

            

Floating-rate debentures(c)

  2035    1.93% - 2.20%     52     51   

Junior subordinated:

         

Floating-rate debentures(b)

  2035    3.01%-3.28%  52    52  

FHLB advances

  2016 - 2041    0.05% - 6.87%     37     41     2018 - 2041    0.05% - 6.87%  30    33  

Notes associated with consolidated VIEs:

                     

Automobile loan securitizations:

                     

Fixed-rate and floating-rate notes(c)

  2016 - 2022    0.43% - 1.79%     2,493     3,434   

Fixed-rate notes

  2018 - 2024    1.30%-2.03%  982    1,061  

Floating-rate notes(b)

  2020    1.63%  75    33  

Other

  2016 - 2039    Varies     144     148     2018 - 2039    Varies  105    124  

 

 

Total

          $      15,844     14,967          $      14,904    14,388 

 

 
(a)

QualifiesIn aggregate,$2.6 billion and $2.7 billion qualifies as Tier II capital for regulatory capital purposes.purposes as ofDecember, 31 2017 and 2016, respectively.

(b)

Under the Basel III Final Rule transition provisions, $13 million qualifies as Tier I capital as of December 31, 2015 while the remaining amount qualifies as Tier II capital. The entire amount qualified as Tier I capital as of December 31, 2014. Refer to Note 28 for further information.

(c)

These rates reflect the floating rates as ofDecember 31, 2015.2017.

The Bancorp pays down long-term debt in accordance with contractual terms over maturity periods summarized in the above table. The aggregate annual maturities of long-term debt obligations (based on final maturity dates) as of December 31, 20152017 are presented in the following table:

 

 

 
 ($ in millions)      Parent   Subsidiaries     Total         

 

 

2016

  $                  1,250     2,594     3,844   

2017

   520     954     1,474   

2018

   532     2,807     3,339   

2019

   500     1,221     1,721   

2020

   1,099     664     1,763   

Thereafter

   2,573     1,130     3,703   

 

 

Total

  $6,474     9,370     15,844   

 

 

129  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 
  ($ in millions)      Parent  Subsidiaries    Total         

 

 

2018

  $                  505   1,907   2,412   

2019

   499   2,600   3,099   

2020

   1,097   1,477   2,574   

2021

   -   2,195   2,195   

2022

   1,194   463   1,657   

Thereafter

   2,052   915   2,967   

 

 

Total

  $5,347   9,557   14,904   

 

 

 

At December 31, 2015,2017, the Bancorp hadBancorp’s long-term borrowings consisted of outstanding principal balances of $15.5$14.7 billion, net discounts of $21 million, debt issuance costs of $31 million and additions formark-to-market adjustments on its hedged debt of $298 million. At December 31, 2016, the Bancorp’s long-term borrowings consisted of outstanding principal balances of $14.1 billion, net discounts of $24 million, debt issuance costs of $33 million and additions formark-to-market adjustments on its hedged debt of $382 million. At December 31, 2014, the Bancorp had outstanding principal balances of $14.6 billion, net discounts of $25 million and additions for mark-to-market adjustments on its hedged debt of $407$328 million. The Bancorp was in compliance with all debt covenants at December 31, 2015.2017 and 2016.

Parent Company Long-Term Borrowings

Senior Notesnotes

On January 25, 2011, the Bancorp issued and sold $1.0 billion of senior notes to third-party investors. The senior notes bear a fixed-rate of interest of 3.625% 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, 2016. The notes are not subject to redemption at the Bancorp’s option at any time prior to maturity.

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 which senior notesand 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.

135  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. TheThese fixed-rate senior notes are not subject to redemption atwill be redeemable by the Bancorp’s option at any time untilBancorp, in whole or in part, on or after the date that is 30 days prior to maturity.the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date.

On February 28, 2014, the Bancorp issued and sold $500 million of senior notes to third-party investors. The senior notes bear a fixed-rate of interest of 2.30% per annum. The notes are unsecured, senior obligations of the Bancorp. Payment of the full principal amounts of the notes is due upon maturity on March 1, 2019. TheThese fixed-rate senior notes are not subject to redemption atwill be redeemable by the Bancorp’s option at any time untilBancorp, in whole or in part, on or after the date that is 30 days prior to maturity.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. TheThese fixed-rate senior notes are not subject to redemption atwill be redeemable by the Bancorp’s option at any time untilBancorp, in whole or in part, on or after the date that is 30 days prior to maturity.the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date.

On June 15, 2017, the Bancorp issued and sold $700 million of senior notes to third-party investors. The senior notes bear a fixed-rate of interest of 2.60% per annum. The notes are unsecured, senior obligations of the Bancorp. Payment of the full principal amounts of the notes is due upon maturity on June 15, 2022. These fixed-rate senior notes will be redeemable by the Bancorp, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date.

Subordinated Debtdebt

The subordinated floating-rate notes due in 2016 pay interest at three-month LIBOR plus 42 bps. The Bancorp has entered into interest rate swaps to convert its subordinated fixed-rate notes due in 2017 and 2018 to floating-rate, which pay interest at three-month LIBOR plus 42 bps and 25 bps respectively, at December 31, 2015.2017. The ratesrate paid on the swaps hedging the subordinated floating-rate notes due in 2017 and 2018 were 0.78% and 0.66%, respectively,was 1.73% at December 31, 2015.2017. Of the $1.0 billion in 8.25% subordinated fixed-rate notes due in 2038, $705 million were subsequently hedged to floatingfloating-rate and paid a rate of 3.46%4.53% at December 31, 2015.2017.

On November 20, 2013, the Bancorp issued and sold $750 million of 4.30% unsecured subordinated fixed-rate notes with a maturity date ofdue 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 Debtsubordinated 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. On February 25, 2013,Under the Bancorp’s banking subsidiary updated and amended its existingsubsidiary’s global bank note program. The amended global bank note program, increased the Bank’s capacity to issue its senior and subordinated unsecured bank notes from $20 billion tois $25 billion. As of December 31, 2015, $18.42017, $16.7 billion was available for future issuance under the global bank note program.

On February 28, 2013, the Bank issued and sold, under its amended bank

notes program, $1.3 billion in aggregate principal amount of unsecured senior bank notes. The bank notes consisted of: $600 million of 1.45% unsecured senior fixed-rate bank notes due on February 28, 2018; $400 million of 0.90% senior fixed-rate notes due on February 26, 2016; and $300 million of senior floating-rate notes due on February 26, 2016. Interest on the floating-rate notes is three-month LIBOR plus 41 bps.2018. These bank notes will be redeemable by the Bank, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest through the redemption date.

On November 20, 2013, the Bank issued and sold, under its amended bank notes program, $1.8 billion in aggregate principal amount of unsecured senior bank notes. The bank notes consisted of $1.0 billion of 1.15% senior fixed-rate notes due on November 18, 2016 and $750 million of senior floating-rate notes due on November 18, 2016. Interest on the floating-rate notes is three-month LIBOR plus 51 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 April 25, 2014, the Bank issued and sold, under its amended bank notes program, $1.5 billion in aggregate principal amount of unsecured senior bank notes. The bank notes consisted of $850 million of 2.375% senior fixed-rate notes due on April 25, 2019 and $650 million of 1.35% senior fixed-rate notes due on June 1, 2017.2019. These bank notes will be redeemable by the Bank, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date.

On September 5, 2014, the Bank issued and sold, under its amended bank notes program, $850 million of 2.875% unsecured senior fixed-rate bank notes with a maturity date ofdue on October 1, 2021. These bank notes will be redeemable by the Bank, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date.

On August 20, 2015, the Bank issued and sold, under its amended bank notes program, $1.3 billion in aggregate principal amount of unsecured senior bank notes. The bank notes consisted of $1.0 billion of 2.15% senior fixed-rate notes due on August 20, 2018 and $250 million of senior floating-rate notes due on August 20, 2018. The Bancorp entered into interest rate swaps to convert the fixed-rate notes to floating-rate, which resulted in an effective rate of three-month LIBOR plus 90 bps. Interest on the floating-rate notes is three-month LIBOR plus 91 bps. These bank notes will be redeemable by the Bank, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date.

On March 15, 2016, the Bank issued and sold, under its bank notes program, $1.5 billion in aggregate principal amount of unsecured bank notes. The bank notes consisted of $750 million of 2.30% senior fixed-rate notes due on March 15, 2019; and $750 million of 3.85% subordinated fixed-rate notes due on March 15, 2026. These bank notes will be redeemable by the Bank, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date.

On June 14, 2016, the Bank issued and sold, under its bank notes program, $1.3 billion of 2.25% unsecured senior fixed-rate notes due on June 14, 2021. These bank notes will be redeemable by the Bank, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date.

On September 27, 2016, the Bank issued and sold, under its bank notes program, $1.0 billion in aggregate principal amount of unsecured senior bank notes due on September 27, 2019. The bank notes consisted of $750 million of 1.625% senior fixed-rate notes and $250 million of senior floating-rate notes at three-month LIBOR plus 59 bps. The Bancorp entered into interest rate swaps to convert the fixed-rate notes to a floating-rate, which resulted in an effective interest rate of three-month LIBOR plus 53 bps. These bank notes will be redeemable by the Bank, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date.

 

 

130136  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

On October 30, 2017, the Bank issued and sold, under its bank notes program, $1.1 billion in aggregate principal amount of unsecured senior bank notes due on October 30, 2020. The bank notes consisted of $750 million of 2.20% senior fixed-rate notes and $300 million of senior floating-rate notes at three-month LIBOR plus 25 bps. The Bancorp entered into an interest rate swap to convert the fixed-rate notes to a floating-rate, which resulted in an effective interest rate of three-month LIBOR plus 24 bps. These bank notes will be redeemable by the Bank, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date.

Junior Subordinated Debtsubordinated debt

The junior subordinated floating-rate bank notes due in 2035 were assumed by the Bancorp’s banking subsidiary as part of the acquisition of First Charter in MayJune 2008. The obligation was issued to First Charter Capital Trust I and II, respectively. The notes of First Charter Capital Trust I and II pay a floating-ratefloating rate at three-month LIBOR plus 169 bps and 142 bps, respectively. The BankBancorp’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 Advancesadvances

At December 31, 2015,2017, FHLB advances have rates ranging from 0.05% to 6.87%, with interest payable monthly. The Bancorp has

pledged $17.3$15.6 billion of certain residential mortgage loans and securities to secure its borrowing capacity at the Federal Home

Loan Bank which is partially utilized to fund $37$30 million in FHLB advances that are outstanding. The FHLB advances mature as follows: $2 million in 2016, $1 million in 2017, $4 million in 2018, $9$8 million in 2019, $4$3 million in 2020, $3 million in 2021, $1 million in 2022, and $17$11 million thereafter.

Notes Associatedassociated with Consolidatedconsolidated VIEs

As previously discussed in Note 11, the Bancorp was determined to be the primary beneficiary of various VIEs associated with certain automobile loan securitizations completed during the years ended December 31, 2015, 2014 and 2013. As such, $2.5 billion of long-term debt related to these VIEs was consolidated in the Bancorp’s Consolidated Financial Statements as of December 31, 2015.securitizations. Third-party holders of this debt do not have recourse to the general assets of the Bancorp. In a securitization transaction that occurred in September of 2017, the Bancorp transferred an aggregate amount of $1.1 billion in consumer automobile loans to a bankruptcy remote trust which was deemed to be a VIE. This trust then subsequently issued approximately $1.0 billion of asset-backed notes, of which approximately $261 million were retained by the Bancorp, resulting in approximately $747 million of outstanding notes included in long-term debt in the Consolidated Balance Sheets as of December 31, 2017. Additionally, in prior years the Bancorp completed securitization transactions in which the Bancorp transferred certain consumer automobile loans to bankruptcy remote trusts which were also deemed to be VIEs. As such, approximately $310 million of outstanding notes related to these VIEs were included in long-term debt in the Consolidated Balance Sheets as of December 31, 2017.

 

 

131137  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

17. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES

 

The Bancorp, in the normal course of business, enters into financial instruments and various agreements to meet the financing needs of its customers. The Bancorp also enters into certain transactions and agreements to manage its interest rate and prepayment risks, provide funding, equipment and locations for its operations and invest in its communities. These instruments and agreements involve, to varying degrees, elements of credit risk, counterparty risk and market risk in

excess of the amounts recognized in the Consolidated Balance

Sheets. The creditworthiness of counterparties for all instruments and agreements is evaluated on acase-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 further detail below: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)  2015       2014             2017       2016             

 

 

Commitments to extend credit

  $              66,884                     63,827          $              68,106                    67,909         

Letters of credit

   3,055     3,974           2,185    2,583         

Forward contracts related to held for sale residential mortgage loans

   1,330     999        

Forward contracts related to residential mortgage loans held for sale

   1,284    1,823         

Noncancelable operating lease obligations

   635     697           568    576         

Purchase obligations

   144    57         

Capital commitments for private equity investments

   60     78           48    59         

Purchase obligations

   60     77        

Capital expenditures

   30     28           37    29         

Capital lease obligations

   27     37           26    19         

 

 

 

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 both December 31, 20152017 and 2014,2016, the Bancorp had a reserve for unfunded commitments, including letters of credit, totaling $138$161 million and $135 million, respectively, included in other liabilities in the Consolidated Balance Sheets. The Bancorp monitors the credit risk associated with commitments to extend credit using the same risk rating system utilized within its loan and lease portfolio.

 

 

Risk ratings under this risk rating system are summarized in the following table as of December 31:

 

 

 
($ in millions)  2015       2014             2017       2016           

 

 

Pass

  $              65,645                     62,787          $              67,254                    66,802       

Special mention

   647     660           330    338       

Substandard

   592     380           522    753       

Doubtful

   -    16       

 

 

Total commitments to extend credit

  $66,884     63,827          $68,106    67,909       

 

 

Letters of credit

Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party and expire as summarized in the following table as of December 31, 2015:2017:

 

 

 
($ in millions)    

 

 

Less than 1 year(a)

  $                                1,7001,170  

1 - 5 years(a)

   1,301999  

Over 5 years

   5416  

 

 

Total letters of credit

  $3,0552,185  

 

 
(a)

Includes $28$7 and $15$1 issued on behalf of commercial customers to facilitate trade payments in U.S. dollars and foreign currencies which expire less than 1 year and between 1 and- 5 years, respectively.

 

Standby letters of credit accounted for approximately 99% and 97% of total letters of credit at both December 31, 20152017 and 2014, respectively,2016 and are considered guarantees in accordance with U.S. GAAP. Approximately 65%61% and 60%62% of the total standby letters of credit were collateralized as of December 31, 20152017 and 2014,2016, respectively. In the event of nonperformance by the customers, the Bancorp has rights to the underlying collateral, which can include commercial

real estate, physical plant and property, inventory, receivables, cash

and marketable securities. The reserve related to these standby letters of credit, which is included in the total reserve for unfunded commitments, was immaterial at December 31, 2015 and $1$6 million at December 31, 2014.2017 and $3 million at December 31, 2016. The Bancorp monitors the credit risk associated with letters of credit using the same risk rating system utilized within its loan and lease portfolio.

 

 

132  Fifth Third Bancorp

138  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Risk ratings under this risk rating system are summarized in the following table as of December 31:

 

 

 
($ in millions)  2015        2014              2017        2016            

 

 

Pass

  $                2,606     3,483          $                1,830    2,134       

Special mention

   130��    147           67    98       

Substandard

   258     299           218    290       

Doubtful

   61     45           70    61       

 

 

Total letters of credit

  $3,055                         3,974          $2,185                        2,583       

 

 

 

At December 31, 20152017 and 2014,2016, the Bancorp had outstanding letters of credit that were supporting certain securities issued as VRDNs. The Bancorp facilitates financing for its commercial customers, which consist of companies and municipalities, by marketing the VRDNs to investors. The VRDNs pay interest to holders at a rate of interest that fluctuates based upon market demand. The VRDNs generally have long-term maturity dates, but can be tendered by the holder for purchase at par value upon proper advance notice. When the VRDNs are tendered, a remarketing agent generally finds another investor to purchase the VRDNs to keep the securities outstanding in the market. As of December 31, 20152017 and 2014,2016, total VRDNs in which the Bancorp was the remarketing agent or were supported by a Bancorp letter of credit were $1.3 billion$602 million and $1.7 billion,$929 million, respectively, of which FTS acted as the remarketing agent to issuers on $1.1 billion$508 million and $1.4 billion,$784 million, respectively. As remarketing agent, FTS is responsible for finding purchasers for VRDNs that are put by investors. The Bancorp issued letters of credit, as a credit enhancement, to $921$331 million and $1.2 billion$609 million of the VRDNs remarketed by FTS, in addition to $187$94 million and $247$145 million in VRDNs remarketed by third parties at December 31, 20152017 and 2014,2016, respectively. These letters of credit are included in the total letters of credit balance provided in the previous table. The Bancorp held $1 million and $6 million of these VRDNs in its portfolio and classified them as trading securities at December 31, 2017 and 2016, respectively.

Forward contracts related to residential mortgage loans held for sale residential mortgage loans

The Bancorp enters into forward contracts to economically hedge the change in fair value of certain residential mortgage loans held for sale due to changes in interest rates. The outstanding notional amounts of these forward contracts are included in the summary of significant commitments table for all periods presented.

Noncancelable operating lease obligations and other commitments

The Bancorp’s subsidiaries have entered into a number of noncancelable lease agreements. The minimum rental commitments under noncancelable lease agreements are shown in the summary of significant commitments table. The Bancorp has also entered into a limited number of agreements for work related to banking center construction and to purchase goods or services.

Contingent Liabilities

Private mortgage reinsurance

For certain mortgage loans originated by the Bancorp, borrowers may be required to obtain PMI provided by third-party insurers. In some instances, these insurers cede a portion of the PMI premiums to the Bancorp, and the Bancorp provides reinsurance coverage within a specified range of the total PMI coverage. The Bancorp’s reinsurance coverage typically ranges from 5% to 10% of the total PMI coverage. The Bancorp’s maximum exposure in the event of nonperformance by the underlying borrowers is equivalent to the Bancorp’s total outstanding reinsurance coverage, which was $27 million at December 31, 2015 and $29 million at December 31, 2014. At both December 31, 2015 and 2014, the Bancorp maintained a reserve of $2 million related to exposures within the reinsurance portfolio which was included in other liabilities in the

Consolidated Balance Sheets. During 2009, the Bancorp suspended the practice of providing reinsurance of PMI for newly originated mortgage loans.

Legal claims

There are legal claims pending against the Bancorp and its subsidiaries that have arisen in the normal course of business. Refer to Note 18 for additional information regarding these proceedings.

Guarantees

The Bancorp has performance obligations upon the occurrence of certain events under financial guarantees provided in certain contractual arrangements as discussed in the following sections.

Residential mortgage loans sold with representation and warranty provisions

Conforming residential mortgage loans sold to unrelated third parties are generally sold with representation and warranty provisions. A contractual liability arises only in the event of a breach of these representations and warranties and, in general, only when a loss results from the breach. The Bancorp may be required to repurchase any previously sold loan or indemnify (make whole) the investor or insurer for which the representation or warranty of the Bancorp proves to be inaccurate, incomplete or misleading. For more information on how the Bancorp establishes the residential mortgage repurchase reserve, refer to Note 1.

During the fourth quarter of 2013, the Bancorp settled certain repurchase claims related to residential mortgage loans originated and sold to FHLMC prior to January 1, 2009 for $25 million, after paid claim credits and other adjustments. The settlement removes the Bancorp’s responsibility to repurchase or indemnify FHLMC for representation and warranty violations on any loan sold prior to January 1, 2009 except in limited circumstances.

As of December 31, 20152017 and 2014,2016, the Bancorp maintained reserves related to loans sold with representation and warranty provisions totaling $25$9 million and $35$13 million, respectively, 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, 2015,2017, are reasonably possible. The Bancorp currently estimates that it is reasonably possible that it could incur losses related to mortgage representation and warranty provisions in an amount up to approximately $27$11 million in excess of amounts reserved. This estimate was derived by modifying the key assumptions previously discussed to reflect management’s judgment regarding reasonably possible adverse changes to those assumptions. The actual repurchase losses could vary significantly from the recorded mortgage representation and warranty reserve or this estimate of reasonably possiblypossible losses, depending on the outcome of various factors, including those previously discussed.

During both the years ended December 31, 20152017 and 2014,2016, the Bancorp paid $2$1 million and $11 million, respectively, in the form of make whole payments and repurchased $74$12 million and $59$17 million, respectively, in outstanding principal of loans to satisfy investor demands. Total repurchase demand requests during the years ended December 31, 2017 and 2016 were $15 million and $22 million, respectively. Total outstanding repurchase demand inventory was $1 million at December 31, 2017 compared to $2 million at December 31, 2016.

 

 

133139  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Total repurchase demand requests during the years ended December 31, 2015 and 2014 were $75 million and $97 million,

respectively. Total outstanding repurchase demand inventory was $4 million at December 31, 2015 compared to $7 million at December 31, 2014.

 

The following table summarizes activity in the reserve for representation and warranty provisions for the years ended December 31:

 

 

 
($ in millions)  2015 2014          2017 2016        

 

 

Balance, beginning of period

  $                35   44           $                13  25        

Net (reductions) additions to the reserve

   (3 6         

Net reductions to the reserve

   (3 (10)       

Losses charged against the reserve

   (7 (15)           (1 (2)       

 

 

Balance, end of period

  $25                       35           $9                      13        

 

 

The following tables provide a rollforward of unresolved claims by claimant type for the years ended December 31:

 

 

 
  GSE Private Label   GSE   Private Label 
2015 ($ in millions)              Units  Dollars   Units  Dollars      
2017 ($ in millions)          Units  Dollars               Units  Dollars      

 

 

Balance, beginning of period

   37   $    1   $                1          13  $2        -  $-       

New demands

   436    33     261    42          109   15        1   -       

Loan paydowns/payoffs

   (29  (2)    -    -          (2  -        -   -       

Resolved demands

   (428  (33)    (260  (43)         (114  (16)       -   -       

 

 

Balance, end of period

   16   $                4     2   $-          6  $                1        1  $            -       

 

 

     

 

   GSE   Private Label 
  GSE Private Label 
2014 ($ in millions)  Units  Dollars               Units  Dollars      
2016 ($ in millions)  Units  Dollars       Units  Dollars      

 

 

Balance, beginning of period

   264   $41    33   $5          16  $4        2  $-       

New demands

   744   95    14   2          309  22        4   -       

Loan paydowns/payoffs

   (44 (5)   (2 (1)         (8 (1)       -   -       

Resolved demands

   (927 (125)   (44 (5)         (304 (23)       (6  -       

 

 

Balance, end of period

   37   $            6    1   $1          13  $2        -  $                -       

 

 

Residential mortgage loans sold with credit recourse

The Bancorp sold certain residential mortgage loans in the secondary market with credit recourse. In the event of any customer default, pursuant to the credit recourse provided, the Bancorp is required to reimburse the third party. The maximum amount of credit risk in the event of nonperformance by the underlying borrowers is equivalent to the total outstanding balance. In the event of nonperformance, the Bancorp has rights to the underlying collateral value securing the loan. The outstanding balances on these loans sold with credit recourse were $465$312 million and $548$374 million at December 31, 20152017 and 2014,2016, respectively, and the delinquency rates were 3.0% at December 31, 20152017 and 4.0%3.2% at December 31, 2014.2016. The Bancorp maintained an estimated credit loss reserve on these loans sold with credit recourse of $9$5 million and $7 million at December 31, 20152017 and $11 million at December 31, 20142016, respectively, recorded in other liabilities in the Consolidated Balance Sheets. To determine the credit loss reserve, the Bancorp used an approach that is consistent with its overall approach in estimating credit losses for various categories of residential mortgage loans held in its loan portfolio.

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 $10$15 million at both December 31, 20152017 and $13 million at December 31, 2014.2016. In the event of any customer default, FTS has rights to the underlying collateral provided. Given the existence of the underlying collateral provided and negligible historical credit losses, the Bancorp does not maintain a loss reserve related to the margin accounts.

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, 20152017 and 2014.2016.

Visa litigation

The Bancorp, as a member bank of Visa prior to Visa’s reorganization and IPO (the “IPO”) of its Class A common shares (the “Class A Shares”) in 2008, had certain indemnification obligations pursuant to Visa’s certificate of incorporation andby-laws and in accordance with their membership agreements. In accordance with Visa’sby-laws prior to the IPO, the Bancorp could have been required to indemnify Visa for the Bancorp’s proportional share of losses based on thepre-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,insufficient; Visa issued additional Class A Shares and deposited the proceeds from the sale of the Class A Shares into the litigation escrow account.

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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.

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In 2009, the Bancorp completed the sale of Visa, Inc. Class B Shares and entered into a total return swap in which the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Class B Shares into Class A Shares. The swap terminates on the later of the third anniversary of Visa’s IPO or the date on which the Covered Litigation is settled. Refer to Note 27 for additional information on the valuation of the swap. The counterparty to the swap as a result of its ownership of the Class B Shares will be impacted by dilutive adjustments to the conversion rate of the Class B Shares into Class A Shares caused by any Covered Litigation losses in excess of the litigation escrow account. If actual judgments in, or settlements of, the Covered Litigation significantly exceed current expectations, then additional funding by Visa of the litigation escrow account and the resulting dilution of the Class B Shares could result in a scenario where the Bancorp’s ultimate exposure associated with the Covered Litigation (the “Visa Litigation Exposure”) exceeds the value of the Class B Shares owned by the swap counterparty (the “Class B Value”). In the event the Bancorp concludes

that it is probable that the Visa Litigation Exposure exceeds the Class B Value, the Bancorp would record a

litigation reserve liability and a corresponding amount of other noninterest expense for the amount of the excess. Any such litigation reserve liability would be separate and distinct from the fair value derivative liability associated with the total return swap.

As of the date of the Bancorp’s sale of the Visa Class B Shares and through December 31, 2015,2017, the Bancorp has concluded that it is not probable that the Visa Litigation Exposure will exceed the Class B value.Value. Based on this determination, upon the sale of the Class B Shares, the Bancorp reversed its net Visa litigation reserve liability and recognized a free-standing derivative liability associated with the total return swap. The fair value of the swap liability was $61$137 million and $49$91 million at December 31, 20152017 and 2014,2016, respectively. Refer to Note 13 and Note 27 for further information.

After the Bancorp’s sale of the Class B Shares, Visa has funded additional amounts into the litigation escrow account which have resulted in further dilutive adjustments to the conversion of Class B Shares into Class A Shares, and along with other terms of the total return swap, required the Bancorp to make cash payments in varying amounts to the swap counterparty as follows:

 

 

 

Period ($ in millions)  

Visa

Funding Amount

 

    Bancorp Cash            

    Payment Amount            

   

Visa

Funding Amount

     Bancorp Cash            
    Payment Amount             

 

Q2 2010

  $500     20              $500  20          

Q4 2010

   800     35               800  35          

Q2 2011

   400     19               400  19          

Q1 2012

                           1,565     75                                       1,565  75          

Q3 2012

   150     6               150  6          

Q3 2014

   450     18               450  18          

 

 

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18. LEGAL AND REGULATORY PROCEEDINGS

 

DuringLitigation

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®MasterCard ® and several other major financial institutions in the United States District Court for the Eastern District of New York.York (In re: Payment Card Interchange Fee and Merchant Discount Antitrust Litigation). The plaintiffs, merchants operating commercial businesses throughout the U.S. and trade associations, claimed that the interchange fees charged by card-issuing banks were unreasonable and sought injunctive relief and unspecified damages. In addition to being a named defendant, the Bancorp is also subject to a possible indemnification obligation of Visa as discussed in Note 17 and has also entered into judgment and loss sharing agreements with Visa, MasterCard and certain other named defendants. In October 2012, the parties to the litigation entered into a settlement agreement. On January 14, 2014, the trial court entered a final order approving the class settlement. A number of merchants have filed appeals from that approval. The appellate courtU.S. Court of Appeals for the Second Circuit held a hearing on those appeals and on September 28, 2015, andJune 30, 2016, reversed the matter is under consideration. In addition, on July 28, 2015, the merchants who opposedistrict court’s approval of the class settlement, filed a motion inremanding the Districtcase to the district court for further proceedings. On March 27, 2017, the Supreme Court to set aside the order approving the settlement because of alleged misconduct by one of the merchant class counsel in another case andUnited States denied a former attorneypetition for MasterCard. Defendants opposedwrit of certiorari seeking to review the motion on August 17, 2015. The court has not set a hearing on the motion.Second Circuit’s decision. Pursuant to the terms of the overturned settlement agreement, the Bancorp previously paid $46 million into a class settlement escrow account. Previously,Because the Bancorp paid an additional $4 millionappellate court ruling remands the case to the district court for further proceedings, the ultimate outcome in another settlement escrow in connection with the settlement of claims from plaintiffs not included in the class action.this matter is uncertain. Approximately 8,000 merchants have requested exclusion from the class settlement. Pursuantsettlement, and therefore, pursuant to the terms of the overturned settlement agreement, approximately 25% of the funds paid into the class settlement escrow account have beenwere already returned to the control of the defendants through Class Exclusion Takedown Payments.defendants. The remaining approximately 75% of the settlement funds paid by the Bancorp are maintained in the escrow account. More than 460500 of the merchants who requested exclusion from the class have filed separate federal lawsuits against Visa, MasterCard and certain other defendants alleging similar antitrust violations. These “opt-out”individual federal lawsuits have beenwere transferred to the United States District Court for the Eastern District of New York. TheWhile the Bancorp was notis only named as a defendant in anyone of the opt-outindividual federal lawsuits, butit may have obligations pursuant to indemnification arrangements and/or the judgment or loss sharing agreements noted above. In addition, one merchant filed a separate state court lawsuit against Visa, MasterCard and certain other defendants, including the Bancorp, alleging similar antitrust violations. The state court lawsuit has been settled. On July 18, 2015, the court in which all but one of the opt-out federal lawsuits have been consolidated denied defendants’ motion to dismiss the complaints. Refer to Note 17 for further information.

On January 15, 2016, the Bancorp agreed to pay $6 million and make certain changes to the Bancorp’s profit sharing plan to settle two class action lawsuits consolidated asDudenhoeffer vKlopfenstein v. Fifth Third BancorpBank

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. (Case No. 1:08-cv-538)filed in 2008 inv. 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. The complaints alleged that the Bancorp and certain officers violated ERISA by continuing to offerIn 2013, four similar putative class actions were filed against Fifth Third stockBank in federal courts throughout the country (Lori and Danielle Laskaris v. Fifth Third Bank, Janet Fyock v. Fifth Third Bank, Jesse McQuillen v. Fifth Third Bank, and Brian Harrison v. Fifth Third Bank). Those four lawsuits were transferred to the Southern District of Ohio and consolidated with the original

lawsuit as In re: Fifth Third Early Access Cash Advance Litigation. On behalf of a putative class, the plaintiffs seek unspecified monetary and statutory damages, injunctive relief, punitive damages, attorney’s fees, andpre- and post-judgment interest. On March 30, 2015, the court dismissed all claims alleged in the Bancorp’s profit sharing plan when it was no longerconsolidated lawsuit except a prudent investment. The settlement is subject to court approval.claim under the federalTruth-In-Lending Act. No trial date has been scheduled.

        In November 2014, a shareholder of the BancorpNina Investments, LLC v. Fifth Third Bank

On July 5, 2012, Nina Investments, LLC (“Nina”) filed a shareholder derivative suitlawsuit against Fifth Third Bank (Nina Investments, LLC. v. Fifth Third Bank, et al.) in the Circuit Court of Common PleasCook County, Illinois, alleging fraud and conspiracy to commit fraud related to a credit facility established by Fifth Third Bank in 2007 to finance life insurance premiums. Nina invested funds in an entity related to the borrower under the credit facility and is claiming over $70 million in damages based on its alleged loss of these funds. Nina alleges that it would have made different investment decisions if Fifth Third had disclosed fraud committed by the borrower with the alleged knowledge of Fifth Third employees. Nina filed this lawsuit in response to a lawsuit filed by Fifth Third Bank in the same court on June 11, 2010 against Nina and other defendants (Fifth Third Bank v. Concord Capital Management, LLC, et al.) alleging fraud and breach of contract. In 2015, the court dismissed Fifth Third’s contract and fraud claims against certain defendants. On March 17, 2017, after hearing motions for summary judgment, the court dismissed, in part, Nina’s fraud claims against Fifth Third, Fifth Third’s claims against the other defendants and Fifth Third’s claim for fraudulent conveyance against Nina. On June 9, 2017, the parties entered into a confidential settlement agreement fully and finally resolving their respective claims in this action within existing accruals for this matter and before accounting for any recovery on related insurance policies. The Court entered an order dismissing the matter with prejudice on June 20, 2017.

Helton v. Fifth Third Bank

On August 31, 2015, trust beneficiaries filed an action against Fifth Third Bank, as trustee, in the Probate Court for Hamilton County, Ohio against current and former members(Helen Clarke Helton, et al. v. Fifth Third Bank). The plaintiffs allege breach of the Bancorp’s Boardduty to diversify, breach of Directors, the Bancorp’s former Chief Financial Officer, Daniel T. Poston,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 Bancorp’s former Chief Executive Officer, Kevin T. Kabat,plaintiffs’ benefit. The lawsuit seeks over $800 million in alleged damages, attorney’s fees, removal of Fifth Third as trustee, and nominally,injunctive relief. Fifth Third denies all liability. On January 5, 2016, the Bancorp. The suit allegesCourt denied Fifth Third’s motion to dismiss. On January 4, 2018, Fifth Third moved for summary judgment seeking dismissal of all the plaintiffs’ claims on statute of limitations and other grounds. Plaintiffs also moved for summary judgment on their breach of fiduciary duty wasteclaim. Trial is currently scheduled for June 18, 2018.

Upsher-Smith Laboratories, Inc. v. Fifth Third Bank

On February 12, 2016, Upsher-Smith Laboratories, Inc. (“Upsher-Smith”) filed suit against Fifth Third Bank in the Fourth Judicial District, Hennepin County, Minnesota (Upsher-Smith Laboratories Inc. v. Fifth Third Bank), alleging that Fifth Third improperly implemented foreign exchange transactions requested by plaintiff’s authorized employee who allegedly was the victim of corporate assetsfraud by a third party. Plaintiff asserts claims for breach of contract and unjust enrichmentthe implied covenant of good faith and fair dealing under Article4A-202 of the Uniform Commercial Code, with losses allegedly totaling almost $40 million. Fifth Third denies all liability in connection withthis matter.

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On March 3, 2016, Fifth Third removed the Bancorp’s alleged violations of

federal and state securities laws, among other charges, in relationcase to its administrative settlement with the United States Securities and Exchange Commission announced on December 4, 2013 to resolveDistrict Court for the previously reported investigationDistrict of the Bancorp’s historical accounting and reporting with respect to certain commercial loans that were sold or reclassified as held for sale by the Bancorp in the fourth quarter of 2008. The suit seeks, among other things, unspecified monetary damages, disgorgement of profits, certain corporate governance and personnel actions and compliance and disclosure changes. On January 16, 2015,Minnesota. Fifth Third filed a motion to dismisstransfer venue to the complaintUnited States District Court for the Southern District of Ohio on April 7, 2016, which was fileddenied on behalf of all defendants,December 29, 2016. No trial date has been scheduled.

The Champions Home Owners Association, Inc. v. Jeffrey D. Quammen, et al.

On July 12, 2017, Fifth Third Bank and Royce Pulliam, P&P Real Estate, LLC and Global Fitness Holdings, LLC (“Plaintiffs”) entered into a settlement agreement pursuant to which the plaintiff opposed. On May 18, 2015,Plaintiffs paid Fifth Third Bank $2.2 million following a 2017 bench trial and ruling and award in favor of Fifth Third Bank in the court dismissedCircuit Court of Jessamine County, Kentucky. The Plaintiffs had filed their cross-complaint against Fifth Third Bank on September 12, 2013, alleging that Fifth Third Bank breached a contract to provide commercial funding for Plaintiffs’ national fitness franchise. The Plaintiffs claimed to have sustained over $50 million in damages from the complaint with prejudicealleged contract breach. Fifth Third Bank denied that any breach of contract occurred, and no appeal was filed. This matter has been concluded.further asserted that Plaintiffs executed multiple releases waiving the claims at issue in the litigation.

Other litigation

The Bancorp and its subsidiaries are not parties to any other material litigation. However, there are other litigation matters that arise in the normal course of business. While it is impossible to ascertain the ultimate resolution or range of financial liability with respect to these contingent matters, management believes that the resulting liability, if any, from these other actions would not have a material effect upon the Bancorp’s consolidated financial position, results of operations or cash flows.

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, 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. Additional matters will likely arise from time to time. Any of these matters may result in material adverse consequences to the Bancorp, its affiliates and/or their respective directors, officers and other personnel, including adverse judgments, findings, settlements, fines, penalties, orders, injunctions or other actions, amendments and/or restatements of the Bancorp’s SEC filings and/or financial statements, as applicable, and/or determinations of material weaknesses in our disclosure controls and procedures. Investigations by regulatory authorities may from time to time result in civil or criminal referrals to law enforcementenforcement. Additionally, in some cases, regulatory authorities such as the Department of Justice or a United States Attorney.

On September 30, 2015, the Bancorp agreed to pay approximately $85 million to cover losses on approximately 500 loans for which HUD had paid FHA insurance claims, and an additional $2 million to HUD, in connection with the Bancorp’s entry into a Stipulation and Order of Settlement and Dismissal with the Department of Justice and HUD, which was approved by the U.S. District Court for the Southern District of New York on October 5, 2015, and a related Settlement Agreement with HUD. The total amount is within the amount the Bancorp had previously included in its accrual for this matter. The Bancorp has also agreed to indemnify HUD for any losses related to approximately 900 loans which have not been the subject of mortgage insurance claims. The settlement resulted in part from the Bancorp’s voluntary disclosure of approximately 1,400 mortgagesmay take supervisory actions that it had previously certified as eligible for FHA insurance but which were later determinedare considered to be ineligible for such insurance.

        On September 28, 2015, the Bancorp entered into consent orders and agreed, without admitting or denying any of the findings of fact or conclusions of law (except to establish jurisdiction), to pay $18 million to consumers in a settlement with the Department of Justice and the CFPB related to an investigation into whether Fifth Third Bank engaged in any discriminatory practices in connection with the Bank’s indirect automobile loan portfolio. This amount is within the amount included in the Bancorp’s accrual for this matter. This total amount is also subject to a credit of between $5 million and $6 million for remediation the Bancorp had already paid.

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confidential supervisory information which may not be publicly disclosed.

 

The consent orders also provide that the Bancorp will implement a new dealer compensation policy and that the Bancorp’s BoardReasonably Possible Losses in Excess of Directors will oversee its compliance with the consent orders.

On September 28, 2015, the Bancorp agreed to pay an amount not less than $3 million in redress to consumers and a civil penalty of $500,000 to the CFPB in connection with its entry into a consent order with the CFPB related to the marketing and administration of the Bancorp’s debt protection credit card “add-on” product for those enrolled in the product from January 1, 2007, through November 11, 2013. This $3.5 million is within the amount the Bancorp had included in its accrual for this matter. As part of this settlement, the Bancorp has also agreed, without admitting or denying any findings of fact or conclusions of law (except to establish jurisdiction), to adopt a compliance plan with respect to the advertising, marketing, promotion, offering or sale of any credit card add-on products, the performance of any such products and the management of its vendors with respect to such products and not to market or sell similar debt protection add-on products without first securing a determination of non-objection from the CFPB.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: plaintiff claims often include significant legal uncertainties, damages alleged by plaintiffs are often unspecified or overstated, discovery may not have started or may not be complete and material facts may be disputed or unsubstantiated. As a result of these factors, the Bancorp is not always able to provide an estimate of the range of reasonably possible outcomes for each claim. An accrual for a potential litigation loss is established when information related to the loss contingency indicates both that a loss is probable and that the amount of loss can be reasonably estimated. Any such accrual is adjusted from time to time thereafter as appropriate to reflect changes in circumstances. The Bancorp also determines, when possible (due to the uncertainties described above), estimates of reasonably possible losses or ranges of reasonably possible losses, in excess of amounts accrued. Under U.S. GAAP, an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight.” Thus, references to the upper end of the range of reasonably possible loss for cases in which the Bancorp is able to estimate a range of reasonably possible loss mean the upper end of the range of loss for cases for which the Bancorp believes the risk of loss is more than slight. For matters where the Bancorp is able to estimate such possible losses or ranges of possible losses, the Bancorp currently estimates that it is reasonably possible that it could incur losses related to legal and regulatory proceedings in an aggregate amount up to approximately $37$31 million in excess of amounts accrued, with it also being reasonably possible that no losses will be incurred in these matters. The estimates included in this amount are based on the Bancorp’s analysis of currently available information, and as new information is obtained the Bancorp may change its estimates.

For these matters and others where an unfavorable outcome is reasonably possible but not probable, there may be a range of possible losses in excess of the established accrual that cannot be estimated. Based on information currently available, advice of counsel, available insurance coverage and established accruals, the Bancorp believes that the eventual outcome of the actions against the Bancorp and/or its subsidiaries, including the matters described above, will not, individually or in the aggregate, have a material

adverse effect on the Bancorp’s consolidated financial position. However, in the event of unexpected future developments, it is possible that the ultimate resolution of those matters, if unfavorable, may be material to the Bancorp’s results of operations for any particular period, depending, in part, upon the size of the loss or liability imposed and the operating results for the applicable period.

 

 

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19. RELATED PARTY TRANSACTIONS

 

The Bancorp maintains written policies and procedures covering related party transactions towith 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, 20152017 and 2014,2016, certain directors, executive officers, principal holders of Bancorp common stock and their related interests were indebted, including undrawn commitments to lend, to the Bancorp’s banking subsidiary.

 

The following table summarizes the Bancorp’s lending activities with its principal shareholders, directors, executives and their related interests at December 31:

 

 

 
($ in millions)  2015   2014    2017     2016      

 

 

Commitments to lend, net of participations:

          

Directors and their affiliated companies

  $831             525     $546      618      

Executive officers

   5          6      4      

 

 

Total

  $          836     528     $          552      622      

 

Outstanding balance on loans, net of participations and undrawn commitments

  $97     63     $20      54      

 

 

 

The commitments to lend are in the form of loans and guarantees for various business and personal interests. This indebtedness was incurred in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties. This indebtedness does not involve more than the normal risk of repayment or present other features unfavorable to the Bancorp.

Vantiv Holding, LLC

On June 30, 2009, the Bancorp completed the sale of a majority interest in its processing business, Vantiv Holding, LLC. Advent

International acquired an approximate 51% interest in Vantiv

Holding, LLC for cash and a warrant. The Bancorp retained the remaining approximate 49% interest in Vantiv Holding, LLC.

During the first quarter of 2012, Vantiv, Inc. priced an IPO of its shares and contributed the net proceeds to Vantiv Holding, LLC for additional ownership interests. As a result of this offering, the Bancorp’s ownership of Vantiv Holding, LLC was reduced to approximately 39%. The impact of the capital contributions to Vantiv Holding, LLC and the resulting dilution in the Bancorp’s interest resulted in a gain of $115 million recognized by the Bancorp in the first quarter of 2012.

 

 

The following table provides a summary of the sales transactions that impacted the Bancorp’s ownership interest in Vantiv Holding, LLC after the initial IPO:

 

 

 
($ in millions)  Ownership    
Percentage Sold    
     Gain on Sale     Remaining Ownership  
Percentage(a)  
    

    Gain on Sale

    
    Remaining Ownership  
Percentage(a)  
 
 

 

 

Q4 2012

   6 %           $                  157             33%                $                  157                           33.1  %         

Q2 2013

   5           242             28                242                          27.7              

Q3 2013

   3           85             25                85                          25.1              

Q2 2014

   3           125             23                125                          22.8              

Q4 2015

   5           331             18                331                          18.3              

Q3 2017

   1,037                          8.6              

 

 
(a)

The Bancorp’s remaining investment in Vantiv Holding, LLC of$360219 as ofDecember 31, 20152017 was accounted for as an equity method investment in the Bancorp’s Consolidated Financial Statements.

 

The Bancorp agreed during the fourth quarter of 2015 to cancel rights to purchase approximately 4.8 million Class C Units in Vantiv Holding, LLC, the wholly-owned principal operating subsidiary of Vantiv, Inc., underlying the warrant in exchange for a cash payment of $200 million. Subsequent to this cancellation, the Bancorp exercised its right to purchase approximately 7.8 million Class C Units underlying the warrant at the $15.98 strike price. This exercise was settled on a net basis for approximately 5.4 million Class C Units, which were then exchanged for approximately 5.4 million shares of Vantiv, Inc. Class A Common Stock that were sold in the secondary offering. The Bancorp recognized a gain of $89 million in other noninterest income on the 62% of the warrant that was settled or net exercised. Additionally, during the fourth quarter of 2015, the Bancorp exchanged 8 million Class B Units of Vantiv Holding, LLC for 8 million Class A Shares in Vantiv, Inc., which were also sold in the secondary offering and on which the Bancorp recognized a gain of

$331 million in other noninterest income.

During the fourth quarter of 2016, the Bancorp exercised its right to purchase approximately 7.8 million Class C Units underlying the warrant at the $15.98 strike price. This exercise was settled on a net basis for approximately 5.7 million Class C Units, which were then exchanged for approximately 5.7 million shares of Vantiv, Inc. Class A Common Stock of which 4.8 million shares were sold in a secondary offering and 0.9 million shares were repurchased by Vantiv, Inc. The Bancorp recognized a gain of $9 million in other noninterest income in the Consolidated Statements of Income in 2016 on the exercise of the remaining warrant in Vantiv Holding, LLC.

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During the third quarter of 2017, the Bancorp and Fifth Third Bank entered into a transaction agreement with Vantiv, Inc. and Vantiv Holding, LLC under which Fifth Third Bank agreed to exercise its right to exchange 19.79 million of its Class B Units in Vantiv Holding, LLC for 19.79 million shares of Vantiv, Inc.’s Class A Common Stock and Vantiv, Inc. agreed to repurchase the newly issued shares of Class A Common Stock upon issue directly from Fifth Third Bank at a price of $64.04 per share, the closing share price of the Class A Common Stock on the New York Stock Exchange on August 4, 2017. As a result of these transactions, the Bancorp recognized a gain of approximately $1.0 billion during the third quarter of 2017.

As of December 31, 2017, the Bancorp continued to hold approximately 15 million Class B Units of Vantiv Holding, LLC which may be exchanged for Class A Common Stock of Vantiv, Inc. (now Worldpay, Inc.), on aone-for-one basis or at Worldpay, Inc.’s option for cash which represented approximately 8.6% ownership of Vantiv Holding, LLC as of December 31, 2017. In addition, the Bancorp holds approximately 15 million Class B Common Shares of Worldpay, Inc. which give the Bancorp voting rights, but no economic interest in Worldpay, Inc. These securities are subject to certain terms and restrictions. For more information on a subsequent event related to Vantiv Holding, LLC, refer to Note 31.

The Bancorp recognized $47 million, $66 million and $63 million, respectively, in other noninterest income as part of its equity method investment in Vantiv Holding, LLC for the years ended December 31, 2017, 2016 and 2015 and received cash distributions totaling $19 million, $9 million and $11 million during the years ended December 31, 2017, 2016 and 2015, respectively. Given the nature of Vantiv Holding, LLC’s structure as a limited liability company and contractual arrangements with Vantiv Holding, LLC, the Bancorp’s remaining investment in Vantiv Holding, LLC continues to be accounted for under the equity method of accounting as of December 31, 2017.

During the fourth quarter of 2015, the Bancorp entered into an agreement with Vantiv, Inc. under which a portion of its TRA with Vantiv, Inc. was terminated and settled in full for a cash payment of

approximately $49 million from Vantiv, Inc. Under the agreement, the Bancorp sold certain TRA cash flows it expected to receive from 2017 to 2030, totaling anto 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 20152015.

During the third quarter of 2016, the Bancorp entered into an agreement with Vantiv, Inc. under which a portion of its TRA with Vantiv, Inc. was terminated and is notsettled in full for consideration of a cash payment in the amount of $116 million from Vantiv, Inc. Under the agreement, the Bancorp terminated and settled certain TRA cash flows it expected to receive in the years 2019 to 2035, totaling to a then estimated $331 million. The Bancorp recognized a gain of $116 million in other noninterest income from this settlement. Additionally, the agreement provides that Vantiv, Inc. may be obligated to pay up to a total of approximately $171 million to the Bancorp to terminate and settle certain remaining TRA cash flows, totaling to a then estimated $394 million, upon the exercise of certain call options by Vantiv, Inc. or certain put options by the Bancorp. In 2016, the Bancorp recognized a gain of $164 million in other noninterest income associated with these options. The Bancorp received $63 million in settlement for the call options and put options exercised during 2017. If the remaining associated call options or put options are exercised during 2018, the Bancorp expects to receive $108 million in 2018. This agreement did not impact the TRA payment to bepayments recognized in the fourth quarter of both 2017 and 2016.

In addition to the impact of the TRA terminationterminations discussed above, the Bancorp recognized $44 million, $33 million and $31 million $23 million and $9 million in other noninterest income in the Consolidated Statements of Income associated with the TRA during the years ended December 31, 2017, 2016 and 2015, 2014 and 2013, respectively.

The Bancorp agreed during the fourth quarter of 2015 to cancel rights to purchase approximately 4.8 million Class C units in Vantiv Holding, LLC, the wholly-owned principal operating subsidiary of Vantiv, Inc., underlying the warrant in exchange for a

cash payment of $200 million. Subsequent to this cancellation, the Bancorp exercised its right to purchase approximately 7.8 million Class C units underlying the warrant at the $15.98 strike price. This exercise was settled on a net basis for approximately 5.4 million Class C units, which were then exchanged for approximately 5.4 million shares of Vantiv, Inc. Class A common stock that were sold in the secondary offering. The Bancorp recognized a gain of $89 million on the 62% of the warrant that was settled or net exercised.

        Additionally, during the fourth quarter of 2015, the Bancorp exchanged 8 million Class B units of Vantiv Holding, LLC for 8 million Class A shares in Vantiv, Inc., which were also sold in the secondary offering and on which the Bancorp recognized a pre-tax gain of $331 million. The Bancorp’s remaining investment in Vantiv Holding, LLC continues to be accounted for under the equity method of accounting.

As of December 31, 2015, the Bancorp continued to hold approximately 35 million Class B units of Vantiv Holding, LLC and a warrant to purchase approximately 7.8 million Class C non-voting units of Vantiv Holding, LLC, both of which may be exchanged for Class A common stock of Vantiv, Inc. on a one-for-one basis or at Vantiv, Inc.’s option for cash.

 

 

138  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In addition,The following table provides the Bancorp holds approximately 35 million Class B common sharesestimated cash flows to be received as of Vantiv, Inc. The Class B common shares giveDecember 31, 2017 associated with the Bancorp voting rights, but no economic interest in Vantiv, Inc. The voting rights attributable to the Class B common shares are limited to 18.5% of the voting power in Vantiv, Inc. at any time other than in connection with a stockholder vote with respect to a change in control in Vantiv, Inc. These securities are subject to certain terms and restrictions.

The Bancorp recognized $63 million, $48 million and $77 million, respectively, in other noninterest income as part of its equity method investment in Vantiv Holding, LLCTRA for the years endedending December 31, 2015, 20142018 and 2013 and received cash distributions totaling $11 million, $23 million and $40 million during the years ended December 31, 2015, 2014 and 2013, respectively.thereafter:

 

 
($ in millions)     Cash Flows to be Received
from Put/Call Option
Exercises (Fixed Amounts)(b)
  Estimated Cash Flows to
be Received not Subject
to Put/Call Option(a)
     

 

 

2018

    108               44                           

2019

    -           20                           

2020

    -           25                           

2021

    -           26                           

2022

    -           26                           

2023

    -           27                           

2024

    -           27                           

2025

    -           28                           

2026

    -           29                           

Thereafter

    -           279                           

 

 

Total

  $  108           531                           

 

 
(a)

The 2018 cash flow of $44 has been agreed upon with Vantiv, Inc. (now Worldpay, Inc.), for settlement in January 2018 and was recognized as a gain in other noninterest income during the fourth quarter of 2017. The remaining estimated cash flows in this column (which include TRA benefits associated with the net exercise of the warrant in 2016 and the subsequent exchange of Vantiv Holding units in the third quarter of 2017) will be recognized in future periods when the related uncertainties are resolved.

(b)

As part of the agreement the Bancorp entered into with Vantiv, Inc. on July 27, 2016, Vantiv, Inc. made payments to the Bancorp of $63 during the year ended December 31, 2017 and may be obligated to pay a total of approximately $108 to the Bancorp to terminate certain remaining TRA cash flows, initially estimated to be $394, upon the exercise of certain call options by Vantiv, Inc. (now Worldpay, Inc.), or certain put options by the Bancorp.

The Bancorp and Vantiv Holding, LLC have various agreements in place covering services relating to the operations of Vantiv Holding, LLC. The services provided by the Bancorp to Vantiv Holding, LLC were initially required to support Vantiv Holding, LLC as a standalone entity during the deconversion period. The majority of services previously provided by the Bancorp to support Vantiv Holding, Inc. as a standalone entity are no longer necessary and are

now limited to certain general business resources. Vantiv Holding, LLC paid the Bancorp $1 million for these services for each of the years ended December 31, 2015, 20142017, 2016 and 2013.2015. Other services provided to Vantiv Holding, LLC by the Bancorp, have continued beyond the deconversion period, include interchange clearing, settlement and sponsorship. Vantiv Holding, LLC paid the Bancorp $47$68 million, $44$58 million and $34$47 million for these services for the years ended December 31, 2017, 2016 and 2015, 2014 and 2013, respectively.

145  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In addition to the previously mentioned services, the Bancorp previously entered into an agreement under which Vantiv Holding, LLC will provide processing services to the Bancorp. The total amount of fees relating to the processing services provided to the Bancorp by Vantiv Holding, LLC totaled $89$72 million, $83$76 million and $88$89 million for the years ended December 31, 2015, 20142017, 2016 and 2013,2015, respectively. These fees are reported as a component of card and processing expense in the

Consolidated Statements of Income.

As part of the initial sale, Vantiv Holding, LLC assumed loans totaling $1.25 billion owed to the Bancorp, which were refinanced in 2010 into a larger syndicated loan structure that included the Bancorp. The outstanding carrying value of loans to Vantiv Holding, LLC was $191$203 million and $204$210 million at December 31, 20152017 and 2014,2016, respectively. Additionally, as of December 31, 2017 and 2016, the Bancorp had derivative assets of $2 million and $7 million, respectively, related to interest rate contracts entered into with Vantiv Holding, LLC which are included in other assets on the Consolidated Balance Sheets. Interest income relating to the loans was $5 million, $4 million $5and $4 million and $7 million, respectively, for the years ended December 31, 2017, 2016 and 2015, 2014 and 2013respectively, and is included in interest and fees on loans and leases in the Consolidated Statements of Income. Vantiv Holding, LLC’s unused line of credit was $46$4 million and $50$59 million as of December 31, 20152017 and 2014,2016, respectively.

SLK Global

As of December 31, 2015,2017, the Bancorp owns 100% of Fifth Third Mauritius Holdings Limited, which owns 49% of SLK Global, and accounts for this investment under the equity method of accounting. The Bancorp’s investment in SLK Global was $6 million at both December 31, 2015 and 2014. The Bancorp recognized $3 million in other noninterest income in the Consolidated Statements of Income as part of its equity method investment in SLK Global for the yearsyear ended December 31, 2015 and 2014 and $2 million for2017. The Bancorp did not receive cash distributions during the year ended December 31, 2013 and received an immaterial amount of cash distributions during the years ended2017. The Bancorp’s investment in SLK Global was $22 million at December 31, 2015, 2014 and 2013.2017. The Bancorp paid SLK Global $17$21 million, $13$20 million and $16$17 million for their process and software services during the years ended December 31, 2017, 2016 and 2015, 2014 and 2013, respectively.respectively, which are included other noninterest expense in the Consolidated Statements of Income.

CDC Investments

The Bancorp’s subsidiary, CDC, has equity investments in entities in which the Bancorp had $5$83 million and $76 million of loans outstanding to its CDC investments at both December 31, 20152017 and 20142016, respectively, and unfunded commitment balances of $88$80 million and $9$18 million at December 31, 20152017 and 2014,2016, respectively. The Bancorp held $23$26 million and $29$28 million of deposits for its CDC investmentsthese entities at December 31, 20152017 and 2014,2016, respectively. For further information on CDC investments, refer to Note 11.

 

 

139146  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

20. INCOME TAXES

 

The Bancorp and its subsidiaries file a consolidated federal income tax return. The following is a summary of applicable income taxes included in the Consolidated Statements of Income for the years ended December 31:

 

 

 
($ in millions)            2015 2014 2013              2017   2016   2015 

 

 

Current income tax expense:

          

U.S. Federal income taxes

  $662   424   494     $763     598     662  

State and local income taxes

   55   34   23      68     55     55  

Foreign income taxes

   13   8        (3)        13  

 

 

Total current income tax expense

   730   466   519      828     653     730  

 

 

Deferred income tax (benefit) expense:

    

Deferred income tax benefit:

      

U.S. Federal income taxes

   (78 71   232      (252)    (133)    (78) 

State and local income taxes

   6   9   23          (14)     

Foreign income taxes

   1   (1 (2)         (1)     

 

 

Total deferred income tax (benefit) expense

   (71 79   253   

Total deferred income tax benefit

   (251)    (148)    (71) 

 

 

Applicable income tax expense

  $            659   545   772     $            577     505     659  

 

 

The following is a reconciliation between the federal statutory U.S. Federal incomecorporate tax rate and the Bancorp’s effective tax rate for the years ended December 31:

 

 

 
  2015       2014 2013     2017       2016   2015   

 

 

Statutory tax rate

   35.0 %  35.0   35.0   

Federal statutory corporate tax rate

   35.0  %  35.0     35.0  

Increase (decrease) resulting from:

         

State taxes, net of federal benefit

   1.7   1.4   1.2      1.6  1.3     1.7  

Tax-exempt income

   (1.7 (1.4 (1.1)     (1.2 (2.7)    (1.7) 

Credits

   (7.5 (8.1 (6.0)  

Unrealized stock-based compensation benefits

   -    -   0.3   

Low-income housing tax credits

   (6.0 (7.9)    (6.6) 

Other tax credits

   (0.5 (0.9)    (0.9) 

U.S. tax legislation impact on deferred taxes

   (7.9       

Other, net

   0.3    -   0.3      (0.2 (0.4)    0.3  

 

 

Effective tax rate

   27.8 %  26.9   29.7      20.8  %  24.4     27.8  

 

 

 

CreditsOther tax credits in the rate reconciliation table include Low-Income Housing, 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/chargesincome on life insurance policies held by the Bancorp, and certain gains on sales of leases that are exempt from federal taxation.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation known as the TCJA. The TCJA makes broad and complex changes to the U.S. tax code including, but not

limited to, reducing the top federal statutory corporate tax rate from 35 percent to 21 percent effective for tax years beginning after December 31, 2017. U.S. GAAP requires the Bancorp to recognize the tax effects of changes in tax laws and rates on its deferred taxes in the period in which the law is enacted. As a result, for the year ended December 31, 2017, the Bancorp remeasured its deferred tax assets and liabilities and recognized an income tax benefit of approximately $220 million.

 

The following table provides a reconciliation of the beginning and ending amounts of the Bancorp’s unrecognized tax benefits:

 

 

 
($ in millions)            2015    2014    2013              2017   2016   2015 

 

 

Unrecognized tax benefits at January 1

  $11           18     $24     13     11  

Gross increases for tax positions taken during prior period

                  17          

Gross decreases for tax positions taken during prior period

             (7)     (1)         

Gross increases for tax positions taken during current period

                           

Settlements with taxing authorities

             (5)     (7)         

Lapse of applicable statute of limitations

   (1)          (1)     (2)        (1) 

 

 

Unrecognized tax benefits at December 31(a)

  $            13      11          $            34     24     13  

 

 
(a)

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, 2015, 2014,2017, 2016 and 20132015 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.

 

 

140147  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Deferred income taxes are comprised of the following items at December 31:

 

($ in millions)  2015 2014   2017   2016 

Deferred tax assets:

       

Allowance for loan and lease losses

  $445   463    $251     439  

Deferred compensation

   118   113     77     122  

Reserve for unfunded commitments

   34     56  

Reserves

   61   96     29     57  

Reserve for unfunded commitments

   48   47  

State net operating loss carryforwards

   10   18          

Other

   194   189     102     223  

Total deferred tax assets

  $876   926    $502     906  

Deferred tax liabilities:

       

Lease financing

  $935   896    $616     940  

MSRs and related economic hedges

   111     202  

State deferred taxes

   64     64  

Bank premises and equipment

   42     61  

Investments in joint ventures and partnership interests

   248   329     34     219  

MSRs and related economic hedges

   245   237  

Other comprehensive income

   106   231     21     34  

State deferred taxes

   79   81  

Qualifying hedges and free-standing derivatives

   58   105  

Bank premises and equipment

   53   103  

Other

   160   148     137     173  

Total deferred tax liabilities

  $1,884   2,130    $1,025     1,693  

Total net deferred tax liability

  $        (1,008   (1,204  $           (523)         (787) 

 

At both December 31, 20152017 and 2014,2016, the Bancorp recorded deferred tax assets of $10$9 million, and $18 million, respectively, related to state net operating loss carryforwards. The deferred tax assets relating to state net operating losses (primarily resulting from leasing operations) are presented net of specific valuation allowances of $22$27 million and $19$25 million at December 31, 20152017 and 2014,2016, respectively. If these carryforwards are not utilized, they will expire in varying amounts through 2035.2037. At December 31, 2015,2017 and 2016, the Bancorp recorded a deferred tax asset of $5$2 million and $3 million, respectively, related to a foreign tax credit carryforward. If not utilized, the deferred tax asset relating to the foreign tax credit carryforward will begin to expire in 2025.

The Bancorp has determined that a valuation allowance is not needed against the remaining deferred tax assets as of December 31, 20152017 or 2014.2016. The Bancorp considered all of the positive and negative evidence available to determine whether it is more likely than not that the deferred tax assets will ultimately be realized and, based upon that evidence, the Bancorp believes it is more likely than not that the deferred tax assets recorded at December 31, 20152017 and 20142016 will ultimately be realized. The Bancorp reached this conclusion as the Bancorp has taxable income in the carryback period and it is expected that the Bancorp’s remaining deferred tax assets will be realized through the reversal of its existing taxable temporary differences and its projected future taxable income.

The IRS has concluded its auditexamination of the Bancorp’s 2010 and 2011 federal income tax returns. No material issues were identified as a result of the IRS audit and there are no contested issues

outstanding. The IRS is currently examining the Bancorp’s 2012 and 2013 federal income tax returns.returns and is currently examining the

Bancorp’s 2014 federal income tax return. The statute of limitations for the Bancorp’s federal income tax returns remains open for tax years 2010-2015.2012-2017. On occasion, as various state and local taxing jurisdictions examine the returns of the Bancorp and its subsidiaries, the Bancorp may agree to extend the statute of limitations for a reasonable period of time. Otherwise, the statutes of limitations for state income tax returns remain open only for tax years in accordance with each state’s statutes.

Any interest and penalties incurred in connection with income taxes are recorded as a component of income tax expense in the Consolidated Financial Statements. During the years ended December 31, 2015, 20142017 and 2013,2016, the Bancorp recognized $2 million and $1 million, respectively, of interest expense in connection with income taxes and an immaterial amount of interest expense/benefit in connection with income taxes.for the year ended December 31, 2015. At December 31, 20152017 and 2014,2016, the Bancorp had accrued interest liabilities, net of the related tax benefits, of $3 million and $1 million.million, respectively. No material liabilities were recorded for penalties related to income taxes.

Retained earnings at December 31, 20152017 and 20142016 included $157 million in allocations of earnings for bad debt deductions of former thrift subsidiaries for which no income tax has been provided. Under current tax law, if certain of the Bancorp’s subsidiaries use these bad debt reserves for purposes other than to absorb bad debt losses, they will be subject to federal income tax at the current federal statutory corporate tax rate.

 

 

141148  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

21. RETIREMENT AND BENEFIT PLANS

 

The Bancorp’s qualified defined benefit plan’s benefits were frozen in 1998, except for grandfathered employees. The Bancorp’s other retirement plans consist ofnon-qualified defined benefit plans which are frozen and funded on an as needed basis. A majority of these plans were obtained in acquisitions from prior years and are included with the qualified defined benefit plan in the following tables (“the Plan”). The Bancorp recognizes the overfunded and

underfunded status of the Plan as an asset and liability, respectively, in the Consolidated Balance Sheets. The Plan had an underfunded projected benefit obligation at both December 31, 20152017 and 2014.2016. The underfunded amounts recognized in other liabilities in the Consolidated Balance Sheets were $54$24 million and $52$34 million at December 31, 20152017 and 2014,2016, respectively.

 

 

The following table summarizes the Plan as of and for the years ended December 31:

 

($ in millions)  2015 2014   2017             2016             

Fair value of plan assets at January 1

  $195   200    $172  166 

Actual return on assets

   (6 12     28  11 

Contributions

   4   3     6  20 

Settlement

   (17 (11   (11 (15

Benefits paid

   (10 (9   (10 (10

Fair value of plan assets at December 31

  $166   195    $185  172 

Projected benefit obligation at January 1

  $247   221    $206  220 

Interest cost

   9   10     8  9 

Settlement

   (17 (11   (11 (15

Actuarial (gain) loss

   (9 36  

Actuarial loss

   16  2 

Benefits paid

   (10 (9   (10 (10

Projected benefit obligation at December 31

  $220   247    $209  206 

Underfunded projected benefit obligation at December 31

  $(54 (52  $(24 (34

Accumulated benefit obligation at December 31(a)

  $                        220                     247    $                        209                    206 
(a)

Since the Plan’s benefits wereare 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 bothDecember 31, 20152017 and 2014.2016.

 

The estimated net actuarial loss for the Plan that will be amortized from AOCI into net periodic benefit cost during 20162018 is $10$7 million. The estimated net prior service cost for the Plan that will be

amortized from AOCI into net periodic benefit cost during 20162018 is immaterial to the Consolidated Financial Statements.

 

 

The following table summarizes net periodic benefit cost and other changes in the Plan’s assets and benefit obligations recognized in OCI for the years ended December 31:

 

($ in millions)  2015 2014 2013   2017       2016       2015       

Components of net periodic benefit cost:

        

Interest cost

  $9   10   10    $8  9  9 

Expected return on assets

   (13 (14 (13   (10 (11 (13

Amortization of net actuarial loss

   10   7   11     7  11  10 

Settlement

   7   5   5     4  7  7 

Net periodic benefit cost

  $13   8   13    $9  16  13 

Other changes in plan assets and benefit obligations recognized in other comprehensive income:

        

Net actuarial loss (gain)

  $9   37   (38

Net actuarial (gain) loss

  $(1 2  9 

Amortization of net actuarial loss

   (10 (7 (11   (7 (11 (10

Settlement

   (7 (5 (5   (4 (7 (7

Total recognized in other comprehensive income

   (8 25   (54   (12 (16 (8

Total recognized in net periodic benefit cost and other comprehensive income

  $            5           33           (41  $              (3            -              5 

 

142149  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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)   Fair Value Measurements Using(a) 
  

 

 

   

 

 

 
2015 ($ in millions)  Level 1   Level 2   Level 3   Total Fair Value 
2017 ($ in millions)  Level 1    Level 2    Level 3    Total Fair Value    

 

 

Equity securities(b)

      $52     -     -     52              $73    -    -    73         

Mutual and exchange-traded funds:

                

Money market funds

   15     -     -     15           7    -    -    7         

International funds

   -     35     -     35           -    30    -    30         

Domestic funds

   -     31     -     31           -    29    -    29         

Debt funds

   -     3     -     3           -    1    -    1         

Alternative strategies

   -     11     -     11           1    9    -    10         

Commodity funds

   6     -     -     6           5    -    -    5         

 

 

Total mutual and exchange-traded funds

      $21     80     -     101              $13    69    -    82         

Debt securities:

                

U.S. Treasury and federal agencies securities

   2     2     -     4           8    2    -    10         

Mortgage-backed securities:

                

Agency residential mortgage-backed securities

   -     3     -     3           -    1    -    1         

Agency commercial mortgage-backed securities

   -     2     -     2           -    2    -    2         

Non-agency commercial mortgage-backed securities

   -     1     -     1           -    1    -    1         

Asset-backed securities and other debt securities(c)(b)

   -     3     -     3           -    16    -    16         

 

 

Total debt securities

      $2     11     -     13              $8    22    -    30         

 

 

Total plan assets

      $                          75                         91                         -                         166              $                    94      ��                 91                        -                            185         

 

 
(a)

For further information on fair value hierarchy levels, refer to Note 1.

(b)

Includes holdings in Bancorp common stock.

(c)

Includes corporate bonds.

 

 

 
  Fair Value Measurements Using(a)   Fair Value Measurements Using(a) 
  

 

 

   

 

 

 
2014 ($ in millions)  Level 1   Level 2   Level 3   Total Fair Value 
2016 ($ in millions)  Level 1   Level 2   Level 3   Total Fair Value    

 

 

Equity securities(b)

      $56     -     -     56              $56    -    -    56         

Mutual and exchange-traded funds:

                

Money market funds

   7     -     -     7           6    -    -    6         

International funds

   -     38     -     38           -    31    -    31         

Domestic funds

   -     31     -     31           -    39    -    39         

Debt funds

   -     22     -     22           -    5    -    5         

Alternative strategies

   -     22     -     22           1    9    -    10         

Commodity funds

   6    -    -    6         

 

 

Total mutual and exchange-traded funds

      $7     113     -     120              $13    84    -    97         

Debt securities:

                

U.S. Treasury and federal agencies securities

   3     -     -     3           7    1    -    8         

Mortgage-backed securities:

                

Agency residential mortgage-backed securities

   -     4     -     4           -    1    -    1         

Agency commercial mortgage-backed securities

   -     7     -     7           -    2    -    2         

Non-agency commercial mortgage-backed securities

   -     2     -     2        

Asset-backed securities and other debt securities(c)

   -     3     -     3           -    8    -    8         

 

 

Total debt securities

      $3     16     -     19              $7    12    -    19         

 

 

Total plan assets

      $                          66                       129                         -                         195              $                      76                        96                        -                        172         

 

 
(a)

For further information on fair value hierarchy levels, refer to Note 1.

(b)

Includes holdings in Bancorp common stock.

(c)

Includes corporate bonds.

 

The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Equity securities

The Plan measures common stock using quoted prices which are available in an active market and classifies these investments within Level 1 of the valuation hierarchy.

Mutual and exchange-traded funds

All of the Plan’s mutual and exchange-traded funds are publicly traded. The Plan measures the value of these investments using the fund’s quoted prices thatwhich are available in an active market and classifies these investments within Level 1 of the valuation

hierarchy. Level 1 securities include money market funds, alternative strategies and commodity funds. Where quoted prices are not

available, the Plan measures the fair value of these investments based on the redemption price of units held, which is based on the current fair value of the fund’s underlying assets. Unit values are determined by dividing the fund’s net assets at fair value by its units outstanding at the valuation dates to obtain the investment’s net asset value. Therefore, investments such as international funds, domestic funds, debt funds and alternative strategies are classified within Level 2 of the valuation hierarchy.

Debt securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or DCFs.

 

 

143150  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Examples of such instruments, which are classified within Level 2 of the valuation hierarchy, include federal agencyagencies securities, agency residential mortgage-backed securities, agency commercial mortgage-backed securities,non-agency commercial mortgage-backed securities and asset-backed securities and other debt securities.

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. In 2015, the Bancorp updated the mortality assumption which resulted in a decrease of $3 million to the projected benefit obligation.

 

 

The following table summarizes the weighted-average plan assumptions for the years ended December 31:

 

 

 
  2015            2014            2013            2017                2016                2015          

 

 

For measuring benefit obligations at year end:(a)

        

Discount rate

   4.16%   3.82   4.72           3.47 %  3.97  4.16       

Rate of compensation increase

   N/A(a)    N/A(a)   4.00        

Expected return on plan assets

   7.00    7.25   7.50           6.00  7.00  7.00       

For measuring net periodic benefit cost:

    

For measuring net periodic benefit cost:(a)

    

Discount rate

   3.82    4.72   3.83           3.97  4.16  3.82       

Rate of compensation increase

   N/A(a)    N/A(a)   4.00        

Expected return on plan assets

   7.00    7.25   7.50           6.00  7.00  7.00       

 

 
(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 20152017 pension expense by approximately $1 million.

Based on the actuarial assumptions, the Bancorp expects to contribute $3 million to the Plan in 2016.2018. Estimated pension benefit payments which reflect expected future service, are $19 million in 2016, $18 million in 2017, $17 million infor each of the years 2018 $16 million in 2019 and $16 million in 2020.through 2022. The total estimated payments for the years 20212023 through 20252027 is $79$77 million.

Investment Policies and Strategies

The Bancorp’s policy for the investment of plan assets is to employ investment strategies that achieve a range of weighted-average target asset allocations relating to equity securities (including the Bancorp’s common stock), fixed-income securities (including U.S. Treasury and federal agencies securities, mortgage-backed securities, asset-backed securities and asset-backed securities)corporate bonds), alternative strategies (including traditional mutual funds, precious metals and commodities) and cash.

 

 

The following table provides the Bancorp’s targeted and actual weighted-average asset allocations by asset category for the years ended December 31:

 

 

 
   Targeted Range(b)                2015               2014             Targeted Range(b)               2017      2016        

 

 

Equity securities

    69  %  62          76  %  73     

Bancorp common stock

    2   2          1  2     

 

 

Total equity securities(a)

   60-90 %   71   64         60-90        %   77  75     

Fixed-income securities

   5-25    16   20         5-25   16  14     

Alternative strategies

   3-11    7   12         3-11   3  6     

Cash

   0-13    6   4         0-13   4  5     

 

 

Total

    100  %  100          100  %  100     

 

 
(a)

Includes mutual and exchange-traded funds.

(b)

These reflect the targeted ranges for both the yearyears endedDecember 31, 2015.2017 and 2016.

 

The risk tolerance for the Plan is determined by management to be “moderate to aggressive”, recognizing that higher returns involve some volatility and that periodic declines in the portfolio’s value are tolerated in an effort to achieve real capital growth. There were no significant concentrations of risk associated with the investments of the Plan at December 31, 20152017 and 2014.2016.

Permitted asset classes of the Plan include cash and cash equivalents, fixed-income (domestic andnon-U.S. bonds), equities (U.S.,non-U.S., emerging markets and REITS)real estate investment trusts), equipment leasing, precious metals, commodity transactions and mortgages. The Plan utilizes derivative instruments including puts, calls, straddles or other option strategies, as approved by management. Per ERISA,

the Bancorp’s common stock cannot exceed 10% of the fair value of plan assets.

Fifth Third Bank, as Trustee, is expected to manage plan assets in a manner consistent with the plan agreement and other regulatory, federal and state laws. As of December 31, 2017 and 2016, $185 million and $172 million, respectively, of plan assets were managed by Fifth Third Bank. The Fifth Third Bank Pension, Profit Sharing401(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.

144  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2015 and 2014, $166 million and $195 million, respectively,2017, there was no Bancorp common stock in Plan assets. As of plan assets were managed by Fifth Third Bank, a subsidiary of the Bancorp.December 31, 2016, Plan assets included $4$5 million of Bancorp common stock, at both December 31, 2015 and 2014.which was below the 10% ERISA threshold previously discussed. Plan assets are not expected to be returned to the Bancorp during 2016.2018.

Other Information on Retirement and Benefit Plans

The Bancorp has a qualified defined contribution savings plan that allows participants to make voluntary 401(k) contributions on apre-tax or Roth basis, subject to statutory limitations. The Bancorp amended and restated the qualified defined contribution savings plan in its entirety, effective as of January 1, 2015. Beginning with the 2015 plan year, the Bancorp provides a higher company 401(k) match contribution.

151  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Expenses recognized for matching contributions to the Bancorp’s qualified defined contribution savings plan were $71$79 million, $44$75 million and $43$71 million for the years ended December 31, 2015, 20142017, 2016 and 2013,2015, respectively. The Bancorp did not make a profit sharing contributioncontributions during the year ended December 31, 2015. The Bancorp’s profit sharing plan expense was $19 million and $32 million for the years ended December 31, 20142017, 2016 and 2013, respectively.2015. In addition, the Bancorp has anon-qualified defined contribution plan that allows certain employees to make voluntary contributions into a deferred

compensation plan. Expenses recognized by the Bancorp for itsnon-qualified defined contribution plan were $3$4 million for the year ended December, 31 20152017 and $2$3 million for both of the years ended December 31, 20142016 and 2013.2015.

 

 

145152  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

22. ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The tabletables below presents the activity of the components of OCI and AOCI for the years ended December 31:

 

 
    

Total Other

Comprehensive Income

     Total Accumulated Other
Comprehensive Income
       Total OCI     Total AOCI   
   

 

 

    

 

 

   

 

 

 
($ in millions)    Pretax
    Activity    
 Tax
    Effect    
 Net
    Activity    
   Beginning    
Balance    
 Net
    Activity    
 Ending
Balance
 
2017 ($ in millions)          Pre-tax
    Activity
       Tax
    Effect
   

Net

Activity

     Beginning
    Balance    
     Net
    Activity
     Ending
    Balance
   

 

2015

           

Unrealized holding losses on available-for-sale securities arising during the year

        $   (349  122    (227      

Reclassification adjustment for net gains on available-for-salesecurities included in net income

    (16  6    (10      

Unrealized holding gains onavailable-for-sale securities arising during the year

    $14    7    21       

Reclassification adjustment for net losses onavailable-for-sale securities included in net income

     3    1    4       

     

      

Net unrealized gains on available-for-sale securities

    (365  128    (237    475    (237  238        17    8    25     101   25   126  

Unrealized holding gains on cash flow hedge derivatives arisingduring the year

    74    (26  48        

Reclassification adjustment for net gains on cash flow hedgederivatives included in net income

    (75  26    (49      

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 gains on cash flow hedge derivatives

    (1  -    (1    23    (1  22   

Net unrealized losses on cash flow hedge derivatives

     (30   11    (19    10   (19  (9 

Net actuarial loss arising during the year

    (9  4    (5      

Net actuarial gain arising during the year

     1    -    1       

Reclassification of amounts to net periodic benefit costs

    17    (6  11             11    (4   7       

     

      

Defined benefit pension plans, net

    8    (2  6      (69  6    (63      12    (4   8     (52  8   (44 

 

Total

        $   (358  126    (232    429    (232  197       $(1   15    14     59   14   73  

 

2014

           

Unrealized holding gains on available-for-sale securities arising during the year

        $  580   (202 378        

 
      Total OCI     Total AOCI   
    

 

 

   

 

 

 
2016 ($ in millions)          Pre-tax
    Activity
   

    Tax

    Effect

   

Net

Activity

     Beginning
    Balance    
 

    Net

    Activity

     Ending
    Balance
   

 

Unrealized holding losses onavailable-for-sale securities arising during the year

    $(196   66    (130      

Reclassification adjustment for net gains on available-for-sale securities included in net income

   (37 13   (24           (11   4    (7      

     

      

Net unrealized gains on available-for-sale securities

   543   (189 354      121   354   475        (207   70    (137    238  (137 101  

Unrealized holding gains on cash flow hedge derivatives arising during the year

   60   (21 39             30    (11   19       

Reclassification adjustment for net gains on cash flow hedge derivatives included in net income

   (44 15   (29           (48   17    (31      

     

      

Net unrealized gains on cash flow hedge derivatives

   16   (6 10      13   10   23        (18   6    (12    22  (12 10  

Net actuarial loss arising during the year

   (37 12   (25           (2   1    (1      

Reclassification of amounts to net periodic benefit costs

   12   (4 8             18    (6   12       

     

      

Defined benefit pension plans, net

   (25 8   (17    (52 (17 (69      16    (5   11     (63 11  (52 

 

Total

        $  534   (187 347      82   347   429       $(209   71    (138    197  (138 59  

 

2013

           

 
      Total OCI     Total AOCI   
    

 

 

   

 

 

 
2015 ($ in millions)          Pre-tax
    Activity
   

    Tax

    Effect

   

Net

Activity

     Beginning
    Balance    
 

    Net

    Activity

     Ending
    Balance
   

 

Unrealized holding losses on available-for-sale securities arising during the year

        $  (454 159   (295          $(349   122    (227      

Reclassification adjustment for net losses on available-for-sale securities included in net income

   6   (2 4        

Reclassification adjustment for net gains onavailable-for-sale securities included in net income

     (16   6    (10      

     

      

Net unrealized gains on available-for-sale securities

   (448 157   (291    412   (291 121        (365   128    (237    475  (237 238  

Unrealized holding losses on cash flow hedge derivatives arising during the year

   (13 5   (8      

Unrealized holding gains on cash flow hedge derivatives arising during the year

     74    (26   48       

Reclassification adjustment for net gains on cash flow hedge derivatives included in net income

   (44 15   (29           (75   26    (49      

     

      

Net unrealized gains on cash flow hedge derivatives

   (57 20   (37    50   (37 13        (1   -    (1    23  (1 22  

Net actuarial gain arising during the year

   38   (13 25        

Net actuarial loss arising during the year

     (9   4    (5      

Reclassification of amounts to net periodic benefit costs

   16   (6 10             17    (6   11       

     

      

Defined benefit pension plans, net

   54   (19 35      (87 35   (52      8    (2   6     (69 6  (63 

 

Total

        $  (451 158   (293    375   (293 82       $(358   126    (232    429  (232 197  

 

 

146153  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

 2015 2014 2013   

Consolidated Statements of

Income Caption

   2017 2016 2015 

 

 

Net unrealized gains on available-for-sale securities:(b)

             

Net gains (losses) included in net income

  Securities gains, net $  16   37   (6)  

Net (losses) gains included in net income

  Securities gains, net $   (3 11  16 
    

 

 

      

 

 

 
  Income before income taxes   16   37   (6)    Income before income taxes    (3 11  16 
  Applicable income tax expense   (6 (13     Applicable income tax expense    (1 (4 (6) 
    

 

 

      

 

 

 
  Net income   10   24   (4)    Net income    (4 7  10 
    

 

 

      

 

 

 

Net unrealized gains on cash flow hedge derivatives:(b)

             

Interest rate contracts related to C&I loans

  Interest and fees on loans and leases   75   44   45     Interest and fees on loans and leases    19  48  75 

Interest rate contracts related to long-term debt

  Interest on long-term debt   -    -   (1)  
    

 

 

      

 

 

 
  Income before income taxes   75   44   44     Income before income taxes    19  48  75 
  Applicable income tax expense   (26 (15 (15)    Applicable income tax expense    (7 (17 (26) 
    

 

 

      

 

 

 
  Net income   49   29   29     Net income    12  31  49 
    

 

 

      

 

 

 

Net periodic benefit costs:(b)

             

Amortization of net actuarial loss

  Employee benefits expense(a)   (10 (7 (11)    Employee benefits expense(a)    (7 (11 (10) 

Settlements

  Employee benefits expense(a)   (7 (5 (5)    Employee benefits expense(a)    (4 (7 (7) 
    

 

 

      

 

 

 
  Income before income taxes   (17 (12 (16)    Income before income taxes    (11 (18 (17) 
  Applicable income tax expense   6   4       Applicable income tax expense    4  6  6 
    

 

 

      

 

 

 
  Net income   (11 (8 (10)    Net income    (7 (12 (11) 
    

 

 

      

 

 

 

             

 

 

Total reclassifications for the period

  Net income $                48                 45                 15     Net income $                 1                26                48 

 

 
(a)

This AOCI component is included in the computation of net periodic benefit cost. Refer to Note 21 for information on the computation of net periodic benefit cost.

(b)

Amounts in parentheses indicate reductions to net income.

154  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

23. COMMON, PREFERRED AND TREASURY STOCK

 

The table presents a summary of the share activity within common, preferred and treasury stock for the years ended:

 

 

 
 Common Stock Preferred Stock Treasury Stock  Common Stock           Preferred Stock                   Treasury Stock         
  

 

 

  

 

 

   

 

 

   

 

 

 
($ in millions, except share data) Value Shares Value Shares Value Shares  Value   Shares   Value   Shares   Value   Shares 

 

 

December 31, 2012

 $ 2,051     923,892,581     $398    16,450    $(634)   41,740,524   

Shares acquired for treasury

   -      -             (1,242)   65,516,126   

Issuance of preferred shares, Series I

   -      -     441    18,000           

Issuance of preferred shares, Series H

   -      -     593    24,000           

Redemption of preferred shares, Series G

   -      -     (398)   (16,450)   540    (35,529,018)  

Impact of stock transactions under stock compensation plans, net

   -      -             38    (3,697,042)  

Other

   -      -                556,246   

 

December 31, 2013

 $ 2,051         923,892,581     $1,034    42,000    $(1,295)   68,586,836   

 

Shares acquired for treasury

   -      -             (726)   34,799,873   

Issuance of preferred shares, Series J

   -      -     297    12,000           

Impact of stock transactions under stock compensation plans, net

   -      -             47    (3,493,671)  

Other

   -      -                (47,409)  

 

December 31, 2014

 $ 2,051     923,892,581     $1,331    54,000    $(1,972)   99,845,629    $2,051      923,892,581     $1,331      54,000     $(1,972)    99,845,629  

 

Shares acquired for treasury

   -      -              (847)    42,607,855    -      -      -      -      (847)    42,607,855  

Impact of stock transactions under stock compensation plans, net

   -      -              52     (3,593,406)    -      -      -      -      52     (3,593,406) 

Other

   -      -                  (47,811)    -      -      -      -          (47,811) 

 

 

December 31, 2015

 $          2,051      923,892,581     $        1,331             54,000    $  (2,764)    138,812,267    $2,051      923,892,581     $1,331      54,000     $(2,764)    138,812,267  

 

 

Shares acquired for treasury

  -      -      -      -      (668)    34,633,221  

Impact of stock transactions under stock compensation plans, net

  -      -      -      -      (4)    42,357  

Other

  -      -      -      -          (74,563) 

 

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

  -      -      -      -          (125,597) 

 

December 31, 2017

 $        2,051      923,892,581     $    1,331   ��  54,000     $    (5,002)    230,087,688  

 

 

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-ratenon-cumulative Series J perpetual preferred stock, for net proceeds of $297 million. Each preferred share has a $25,000 liquidation preference. The preferred stock accrues dividends, on anon-cumulative semi-annual basis, at an annual rate of 4.90% through but excluding September 30, 2019, at which time it converts to a quarterly floating-rate dividend of three-month LIBOR plus 3.129%. Subject to any required regulatory approval, the Bancorp may redeem the Series J preferred shares at its option, in whole or in part, at any time on or after September 30, 2019, or

any time prior following a regulatory capital event. The Series J preferred shares are not convertible into Bancorp common shares or any other securities.

Preferred Stock—Series I

On December 9, 2013, the Bancorp issued, in a registered public offering, 18,000,000 depositary shares, representing 18,000 shares of 6.625% fixed to floating-ratenon-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 anon-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%.

147  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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-ratenon-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 anon-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.

Preferred Stock—Series G

In 2008, the Bancorp issued 8.50% non-cumulative Series G convertible preferred stock. The depositary shares represented 1/250th of a share of Series G convertible preferred stock and had a liquidation preference of $25,000 per preferred share of Series G stock. The preferred stock was convertible at any time, at the option of the shareholder, into 2,159.8272 shares of common stock, representing a conversion price of approximately $11.575 per share of common stock.

On June 11, 2013, pursuant to the Amended Articles of Incorporation, the Bancorp’s Board of Directors authorized the conversion into common stock, no par value, of all outstanding shares of the Bancorp’s Series G perpetual preferred stock. The Articles grant the Bancorp the right, at its option, to convert all outstanding shares of Series G preferred stock if the closing price of common stock exceeded 130% of the applicable conversion price for 20 trading days within any period of 30 consecutive trading days. The closing price of shares of common stock satisfied such threshold for the 30 trading days ended June 10, 2013, and the Bancorp gave the required notice of its exercise of its conversion right.

On July 1, 2013, the Bancorp converted the remaining 16,442 outstanding shares of Series G preferred stock, which represented 4,110,500 depositary shares, into shares of the Bancorp’s common stock. Each share of Series G preferred stock was converted into 2,159.8272 shares of common stock, representing a total of 35,511,740 issued shares. The common shares issued in the conversion are exempt securities pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended, as

the securities exchanged were exclusively with the Bancorp’s existing security holders where no commission or other remuneration was paid. Upon conversion, the depositary shares were delisted from the NASDAQ Global Select Market and withdrawn from the Exchange.

Treasury Stock

On March 14, 2013, the Bancorp announced the results of its capital plan submitted to the FRB as part of the 2013 CCAR. The FRB indicated to the Bancorp that it did not object to the potential repurchase of common shares in an amount up to $984 million, including any shares issued in a Series G preferred stock conversion and the repurchase of common shares in an amount equal to any after-tax gains realized by the Bancorp from the sale of Vantiv, Inc. common stock. On March 19, 2013, 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 August of 2012.

On March 18, 2014,15, 2016, the Board of Directors authorized the Bancorp to repurchase up to 100 million common shares in the open market or in privately negotiated transactions and to utilize any derivative or similar instrument to effect share repurchase transactions. This share repurchase authorization replaced the Board’s previous authorization from March of 2013.

On March 26, 2014, the Bancorp announced the results of its capital plan submitted to the FRB as part of the 2014 CCAR. The FRB indicated to the Bancorp that it did not object to the potential repurchase of $669 million of common shares with the additional ability to repurchase common shares in an amount equal to any after-tax gains realized by the Bancorp from the sale of Vantiv, Inc. common stock for the period beginning April 1, 2014 and ending March 31, 2015.2014.

On March 11, 2015, the Bancorp announced the results of its capital plan submitted to the FRB as part of the 2015 CCAR. The FRB indicated to the Bancorp that it did not object to the potential repurchase of $765 million of common shares with the additional ability to repurchase common shares in an amount equal to anyafter-tax gains realized by the Bancorp from the sale of Vantiv, Inc. common stock for the period beginning April 1, 2015 and ending June 30, 2016.

On June 29, 2016, the Bancorp announced the results of its capital plan submitted to the FRB as part of the 2016 CCAR. The FRB indicated to the Bancorp that it did not object to the potential repurchase of $660 million of common shares with the additional ability to repurchase common shares in an amount equal to anyafter-tax gains realized by the Bancorp from the sale of Vantiv, Inc. common stock or from the termination and settlement of any portion of the TRA with Vantiv, Inc., if executed, for the period beginning July 1, 2016 and ending June 30, 2017.

On June 28, 2017, the Bancorp announced the results of its capital plan submitted to the FRB as part of the 2017 CCAR. The FRB indicated to the Bancorp that it did not object to the potential repurchase of $1.161 billion of common shares with the additional ability to repurchase common shares in an amount equal to anyafter-tax gains realized by the Bancorp from the sale of Vantiv, Inc. common stock or from the termination and settlement of any portion of the TRA with Vantiv, Inc., if executed, for the period beginning July 1, 2017 and ending June 30, 2018.    

The Bancorp entered into a number of accelerated share repurchase transactions during the years ended December 31, 20142016 and 2015.2017. As part of these transactions, the Bancorp entered into forward contracts in which the final number of shares delivered at settlement was based generally on a discount to the average daily volume weighted-average price of the Bancorp’s common stock during the term of these repurchase agreements.

155  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accelerated share repurchases were treated as two separate transactions: (i) the acquisitionrepurchase of treasury shares on the acquisitionrepurchase date and (ii) a

forward contract indexed to the Bancorp’s common stock.

 

148  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents a summary of the Bancorp’s accelerated share repurchase transactions that were entered into or settled during the years ended December 31, 20142016 and 2015.2017:

 

 

 
     Shares Repurchased on
Repurchase Date
  Shares Received from Forward
Contract Settlement
  Total Shares
Repurchased
    
Repurchase Date Amount ($ in millions)       Settlement Date 

 

 

November 18, 2013

  200    8,538,423    1,132,495    9,670,918    March 5, 2014  

December 13, 2013

  456    19,084,195    2,294,932    21,379,127    March 31, 2014  

January 31, 2014

  99    3,950,705    602,109    4,552,814    March 31, 2014  

May 1, 2014

  150    6,216,480    1,016,514    7,232,994    July 21, 2014  

July 24, 2014

  225    9,352,078    1,896,685    11,248,763    October 14, 2014  

October 23, 2014

  180    8,337,875    794,245    9,132,120    January 8, 2015  

January 27, 2015

  180    8,542,713    1,103,744    9,646,457    April 28, 2015  

April 30, 2015

  155    6,704,835    842,655    7,547,490    July 31, 2015  

August 3, 2015

  150    6,039,792    1,346,314    7,386,106        September 3, 2015  

September 9, 2015

  150    6,538,462    1,446,613    7,985,075    October 23, 2015  

December 14, 2015

  215    9,248,482    1,782,477         11,030,959    January 14, 2016  

 

 

 

 
     

Shares Repurchased on

Repurchase Date

  

Shares Received from

Forward Contract Settlement

  

Total Shares

Repurchased

    
Repurchase Date Amount ($ in millions)       Settlement Date 

 

 

December 14, 2015

  215   9,248,482   1,782,477   11,030,959   January 14, 2016 

March 4, 2016

  240   12,623,762   1,868,379   14,492,141   April 11, 2016 

August 5, 2016

  240   10,979,548   1,099,205        12,078,753   November 7, 2016 

December 20, 2016

  155   4,843,750   1,044,362   5,888,112   February 6, 2017 

May 1, 2017

  342   11,641,971   2,248,250   13,890,221   July 31, 2017 

August 17, 2017

  990   31,540,480   4,291,170   35,831,650   December 18, 2017 

December 19, 2017

  273   7,727,273   (a)   (a)   (a) 

 

 
(a)

The settlement of the transaction is expected to occur on or before March 19, 2018.

For further information on a subsequent event related to an accelerated share repurchase transaction refer to Note 31.

Open Market Share Repurchase Transactions

Between June 17, 2016 and June 20, 2016, the Bancorp repurchased 1,436,100 shares, or approximately $26 million, of its outstanding common stock through open market repurchase transactions.

24. STOCK-BASED COMPENSATION

 

The Bancorp has historically emphasized employee stock ownership. The following table provides detail of the number of shares to be issued upon exercise of outstanding stock-based

awards

and remaining shares available for future issuance under all of the

Bancorp’s equity compensation plans approved by shareholders as of December 31, 2015:2017:

 

 

Plan Category (shares in thousands)  Number of Shares to be
Issued Upon Exercise
 Weighted-Average
Exercise Price Per Share
   Shares Available for  
Future Issuance    
  Number of Shares to be
Issued Upon Exercise
 Weighted-Average
Exercise Price Per Share
   Shares Available for  
Future Issuance    

Equity compensation plans approved by shareholders

         24,667 (a)

Equity compensation plans

         21,687 (a)

SARs

   (b)  N/A                   (a)   (b)   -                      (a)

RSAs

   8,281   N/A                   (a)   2,321   -                      (a)

RSUs

   371   N/A                   (a)   6,986   -                      (a)

Stock options(c)

   7   $32.26                   (a)   2  $16.50                      (a)

Phantom stock units

   (d)  N/A    N/A

PSAs

   (e)  N/A                   (a)   (c)   -                      (a)

Employee stock purchase plan

         6,813 (f)         5,653 (d)

Total shares

   8,659     31,480        9,309    27,340     

(a)

Under the 20142017 Incentive Compensation Plan, 3617.5 million shares were authorized for issuance as SARs, RSAs, RSUs, stock options, performance share or unit awards, dividend or dividend equivalent rights and stock awards.

(b)

The number of shares to be issued upon exercise will be determined at exercise based on the difference between the grant price and the market price on the date of exercise and the calculation of taxes owed on the exercise.

(c)

Excludes 0.1 million outstanding options awarded under plans assumed by the Bancorp in connection with certain mergers and acquisitions. The Bancorp has not made any awards under these plans and will make no additional awards under these plans. The weighted-average exercise price of the outstanding options is $13.89 per share.

(d)

Phantom stock units are settled in cash.

(e)

The number of shares to be issued is dependent upon the Bancorp achieving certain predefined performance targets and ranges from zero shares to approximately 12 million shares.

(f)(d)

Represents remaining shares of Fifth Third common stock under the Bancorp’s 1993 Stock Purchase Plan, as amended and restated, including an additional 1.5 million shares approved by shareholders on March 28, 2007 and an additional 12 million shares approved by shareholders on April 21, 2009.

 

Stock-based awards are eligible for issuance under the Bancorp’s Incentive Compensation Plan to executives, directors and key employees of the Bancorp and its subsidiaries. The 2017 Incentive Compensation Plan was approved by shareholders on April 15, 201418, 2017 and authorized the issuance of up to 366 million shares, including 16in addition to the 11.5 million unused shares for Full Value Awards,from the 2014 Incentive Compensation Plan, as equity compensation and provides for SARs, RSAs, RSUs, stock options, performance share or unit awards, dividend or dividend equivalent rights and stock awards. Full Value Awards are defined as awards with no cash outlay for the employee to obtain the full value. Based on total stock-based awards outstanding (including SARs, RSAs, RSUs, stock options and PSAs) and shares remaining for future grants under the 20142017 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%9%. SARs, RSAs, RSUs, stock options and PSAs outstanding represent 7%6% of the Bancorp’s issued shares at December 31, 2015.2017.

All of the Bancorp’s stock-based awards are to be settled with stock. The Bancorp has historically used treasury stock to settle

stock-based awards, when available. SARs, issued at fair value based

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 either ratably or fully 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 vestare released after three or four years or ratably over three or four years of continued employment. RSAs include dividend and voting rights.rights while RSUs receive dividend equivalents only. Stock options were previously issued at fair value based on the closing price of the Bancorp’s common stock on the date of grant, had up to ten year terms and vested and became fully exercisable ratably over a three or four year period of continued employment. PSAs have three year cliff vesting terms with market conditions and/or performance conditions as defined by the plan. All of the Bancorp’s executive stock-based awards contain an annual performance hurdle of 2% return on tangible common equity. If this threshold is not met allin any one of the three years during the performance period,one-third of PSAs that would vest in the next year are forfeited andforfeited. Additionally, if this threshold is not met, all SARs, RSAs and RSAsRSUs 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, 2015.2017.

 

 

149156  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Stock-based compensation expense was $100$118 million, $83$111 million and $78$100 million for the years ended December 31, 2015, 20142017, 2016 and 2013,2015, respectively, and is included in salaries, wages and incentives in the Consolidated Statements of Income. The total related income tax benefit recognized was $36$41 million, $30$39 million

and $28$36 million for the years ended December 31, 2015, 20142017, 2016 and 2013,2015, respectively.

Stock Appreciation Rights

The Bancorp uses assumptions, which are evaluated and revised as necessary, in estimating the grant-date fair value of each SAR grant.

 

 

The weighted-average assumptions were as follows for the years ended December 31:

 

 

 
  2015         2014           2013               2017         2016           2015             

 

 

Expected life (in years)

      6     6           6    6     

Expected volatility

   35  35     36         37  37    35     

Expected dividend yield

   2.7    2.4     3.0         2.1   3.1    2.7     

Risk-free interest rate

   1.6    2.0     1.0         2.1   1.5    1.6     

 

 

 

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.Themodel. The weighted-average grant-date fair value of SARs granted was $5.52, $6.53$8.55, $5.16 and $4.56$5.52 per share for the years ended December 31, 2015, 20142017, 2016 and 2013,2015, respectively. The total grant-date fair value of SARs that vested during the years ended December 31, 2017, 2016 and 2015 2014 and 2013 was $35$29 million, $34$32 million and $29$35 million, respectively.

At December 31, 2015,2017, there was $45$36 million of stock-based compensation expense related to nonvestedoutstanding SARs not yet recognized. The expense is expected to be recognized over an estimated remaining weighted-average period at December 31, 20152017 of 2.42.3 years.

 

 

 
     2015  2014  2013 
  

 

 
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

    45,590    $19.79          48,599    $19.98          44,120    $20.41        

Granted

    5,219     18.99          4,526     21.63          10,267     16.16        

Exercised

    (3,242)    13.59          (4,408)    13.63          (2,904)    11.18        

Forfeited or expired

    (3,438)    32.96          (3,127)    34.19          (2,884)    21.78        

 

 

Outstanding at December 31

    44,129    $19.14          45,590    $19.79          48,599    $19.98        

 

 

Exercisable at December 31

    29,721    $19.71          27,950    $21.71          26,462    $24.14        

 

 

 

 
      2017  2016  2015 
   

 

 

  

 

 

  

 

 

 
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

    40,041   $18.30         44,129   $19.14         45,590   $19.79       

Granted

    3,672    26.52         6,379    17.68         5,219    18.99       

Exercised

    (6,953)   16.00         (6,291)   14.47         (3,242)   13.59       

Forfeited or expired

    (4,831)   35.08         (4,176)   32.02         (3,438)   32.96       

 

 

Outstanding at December 31

    31,929   $17.22         40,041   $18.30         44,129   $19.14       

 

 

Exercisable at December 31

    21,403   $15.30         26,898   $18.28         29,721   $19.71       

 

 

The following table summarizes outstanding and exercisable SARs by grant price per share at December 31, 2015:2017:

 

 

 
 Outstanding SARs Exercisable SARs  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)
  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)

 

 

 

Under $10.00

 2,943    $3.98         3.3           2,943    $3.98         3.3          1,762   $3.98        1.3          1,762   $3.98        1.3        

$10.01-$20.00

 30,488    15.99         6.3           19,074    15.37         5.3          23,899   16.33        5.3          17,650   15.71        4.4        

$20.01-$30.00

 4,047    21.64         8.2           1,053    21.66         8.1          6,268   24.31        7.8          1,991   21.63        6.3        

$30.01-$40.00

 6,069    38.66         0.8           6,069    38.66         0.8         

Over $40.00

 582    40.11         1.3           582    40.11         1.3         

 

 

All SARs

 44,129    $19.14         5.5           29,721    $19.71         4.2          31,929   $17.22        5.6          21,403   $15.30        4.3        

 

 

 

Restricted Stock Awards

The total grant-date fair value of RSAs that vestedwere released during the years ended December 31, 2017, 2016 and 2015 2014 and 2013 was $43$39 million, $32$55 million and $40$43 million, respectively. At December 31, 2015,2017, there

was $101$21 million of stock-based compensation expense related

to nonvestedoutstanding RSAs not yet recognized. The expense is expected to be recognized over an estimated remaining weighted-average period at December 31, 20152017 of 2.71.3 years.

 

 

150157  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 
                                   2015                                 2014 2013                       2017                      2016 2015 
  

 

 

   

 

 

  

 

 

  

 

 

 
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

   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

 

 

 

Nonvested at January 1

   7,253   $17.98             6,710   $15.11         6,379   $14.32        

Outstanding at January 1

   4,638  $19.44            8,281  $18.88        7,253  $17.98       

Granted

   4,250    19.11             3,264   21.61         3,583   16.21           7   21.14            3  20.65        4,250  19.11       

Exercised

   (2,580  16.86             (2,183 14.84         (2,720 14.71        

Released

   (2,063  19.10            (3,090 17.92        (2,580 16.86       

Forfeited

   (642  18.64             (538 16.73         (532 14.97           (261  19.75            (556 19.20        (642 18.64       

 

 

Nonvested at December 31

   8,281   $18.88             7,253   $17.98         6,710   $15.11        

Outstanding at December 31

   2,321  $19.72            4,638  $19.44        8,281  $18.88       

 

 

The following table summarizes nonvestedoutstanding RSAs by grant-date fair value at December 31, 2015:2017:

 

 

 
                          Nonvested RSAs                                        Outstanding RSAs             
  

 

 

   

 

 

 
RSAs (in thousands)  Shares       

Weighted-Average    

Remaining    

Contractual Life    

(in years)    

   Shares       

Weighted-
Average    
Remaining    

Contractual Life    

(in years)    

 

 

 

$10.01-$15.00

   690     0.3            

$15.01-$20.00

   5,153     1.6               1,627    0.9           

$20.01-$25.00

   2,438     1.4            

Over $20.00

   694    0.5           

 

 

All RSAs

   8,281     1.4               2,321    0.8           

 

 

 

Restricted Stock Units

The total grant-date fair value of RSUs that vestedwere released during the yearyears ended December 31, 2017, 2016 and 2015 was $21 million, $2 million.million and $2 million, respectively. At December 31, 2015,2017, there

was $4$91 million of stock-based compensation expense related

to nonvestedoutstanding RSUs not yet recognized. The expense is expected to be recognized over an estimated remaining weighted-average period at December 31, 20152017 of 2.92.6 years.

 

 

 

 
  2015                               2017                      2016 2015 
  

 

 

   

 

 

  

 

 

  

 

 

 
RSUs (in thousands, except per share data)      Shares 

  Weighted-Average  
  Grant-Date  

  Fair Value  

  Per Share  

 
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

 

 

 

Nonvested at January 1

   -   $N/A            

Outstanding at January 1

   5,086  $17.84            371  $19.56         -  $-       

Granted

   377   19.58                3,652   26.71            5,029  17.75        377  19.58       

Released

   (5 21.63                (1,194  17.64            (79 19.76        (5 21.63       

Forfeited

   (1 19.46                (558  21.02            (235 17.89        (1 19.46       

 

 

Nonvested at December 31

   371   $19.56             

Outstanding at December 31

   6,986  $22.25            5,086  $17.84        371  $19.56       

 

 

The following table summarizes nonvestedoutstanding RSUs by grant-date fair value at December 31, 2015:2017:

 

 

 
          Nonvested RSUs                   Outstanding RSUs         
  

 

 

   

 

 

 
RSUs (in thousands)      Shares         Weighted-Average  
  Remaining  
  Contractual Life  
  (in years)  
        Units          Weighted-Average  
  Remaining  
  Contractual Life  
  (in years)  
 

 

 

$10.01-$15.00

   407    0.6         

$15.01-$20.00

   318     1.8             2,973    1.2         

$20.01-$25.00

   53     -             228    1.0         

$25.01-$30.00

   3,360    1.7         

$30.01-$35.00

   18    2.0         

 

 

All RSUs

   371     1.6             6,986    1.4         

 

 

 

Stock Options

The grant-date fair value of stock options is measured using the Black-Scholes option-pricing model.Theremodel. There were no stock options granted during the years ended December 31, 2015, 20142017, 2016 and 2013.2015.

The total intrinsic value of stock options exercised was $1 millionimmaterial for both the years ended December 31, 2015, 20142017 and 2013, respectively.2016 and $1 million for the year ended December 31, 2015. Cash received from stock options exercised was $2 million,immaterial for the year ended December 31, 2017 and $1 million and $2 million for the years

ended December 31,

2015, 2014 2016 and 2013,2015, respectively. The tax benefit realized from exercised stock options was immaterial to the Bancorp’s Consolidated Financial Statements during the years ended December 31, 2015, 20142017, 2016 and 2013.2015. All stock options were vested as of December 31, 2008, therefore, no stock options vested during the years ended December 31, 2015, 20142017, 2016 or 2013.2015. As of December 31, 2015,2017, the aggregate intrinsic value of both outstanding stock options and exercisable stock options was $1 million.immaterial.

 

 

151158  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 
 2015 2014 2013  2017 2016 2015 
 

 

 

  

 

 

  

 

 

  

 

 

 
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 

    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

  265       $                14.25             546       $                20.72             3,877      $                45.00              25      $                19.17            119      $                14.97            265     $                14.25           

Exercised

  (126)       13.67             (115)      12.84             (190)     11.88              (18)      14.05            (94)     13.86            (126)    13.67           

Forfeited or expired

  (20)       13.59             (166)      36.42             (3,141)     51.23              (5)      40.98             -       -            (20)    13.59           

 

 

Outstanding at December 31

  119       $14.97             265       $14.25             546      $20.72              2      $16.50            25      $19.17            119     $14.97           

 

 

Exercisable at December 31

  119       $14.97             265       $14.25             546      $20.72              2      $16.50            25      $19.17            119     $14.97           

 

 

The following table summarizes outstanding and exercisable stock options by exercise price per share at December 31, 2015:2017:

 

 
  Outstanding and Exercisable Stock Options 
  

 

 

 

 
Stock Options (in thousands, except per share data)  Number of Options 

Weighted-Average
Exercise Price

Per Share

 

Weighted-Average  

Remaining  

Contractual Life  

(in years)  

   Number of
Options
   Weighted-Average
Exercise Price
Per Share
 

Weighted-Average

Remaining
Contractual Life
(in years)

 

 

 

Under $10.00

   1           $8.59           3.0             1      $   8.59      1.0       

$10.01-$20.00

   112           13.89           0.8             -     -       -       

$20.01-$30.00

   1           24.41           2.0             1     24.41       -       

$30.01-$40.00

   -            -            -          

Over $40.00

   5           40.98           1.0          

 

 

All stock options

   119           $                14.97           0.8             2      $   16.50      0.5       

 

 

 

Other Stock-Based Compensation

The Bancorp’s Board of Directors previously approved the use of phantom stock units as part of its compensation for executives in connection with changes made in response to the TARP compensation rules. On February 22, 2011, the Bancorp redeemed its Series F preferred stock held by the U.S. Treasury under the CPP. As a result of this redemption, the last payment of phantom stock occurred in April 2011. The phantom stock units were issued under the Bancorp’s 2008 Incentive Compensation Plan. The number of phantom stock units was determined each pay period by dividing the amount of salary to be paid in phantom stock units for that pay period by the reported closing price of the Bancorp’s common stock on the pay date for such pay period. The phantom stock units vested immediately upon issuance. Phantom stock was expensed based on the number of outstanding units multiplied by the closing price of the Bancorp’s stock at period end. The phantom stock units did not include any rights to receive dividends or dividend equivalents. Phantom stock units issued on or before June 12, 2010 were settled in cash upon the earlier to occur of June 15, 2011 or the executive’s death. Units issued thereafter were settled in cash with 50% settled on June 15, 2012 and 50% settled on June 15, 2013. The amount paid on settlement of the phantom stock units was equal to the total amount of phantom stock units settled at the reported closing price of the Bancorp’s common stock on the settlement date. Under the phantom stock program, no phantom stock units were granted during the years ended December 31, 2015, 2014 and 2013. No phantom stock units were settled during both the years ended December 31, 2015 and 2014 and 200,130 phantom stock units were settled during the year ended December 31, 2013.

PSAs are payable contingent upon the Bancorp achieving certain predefined performance targets over the three-year measurement period. Awards granted during the years ended December 31, 2015, 20142017, 2016 and 20132015 will be entirely settled in stock. The performance targets are based on the Bancorp’s performance relative to a defined peer group. PSAs use a performance-based metric based on return on tangible common equity in relation to peers. During the years ended December 31, 2017, 2016 and 2015, 2014407,069, 583,608 and 2013, 458,355 322,567 and 348,595 PSAs, respectively, were granted by the Bancorp. These awards were granted at a weighted-average grant-date fair value of

$26.52, $14.87 and $19.48 $15.61 and $16.15 per unit during the years ended December 31, 2015,

20142017, 2016 and 2013,2015, respectively.

The Bancorp sponsors an employee stock purchase plan that allows qualifying employees to purchase shares of the Bancorp’s common stock with a 15% match. During the years ended December 31, 2015, 20142017, 2016 and 2013,2015, there were 617,829, 599,101475,466, 684,885 and 690,039617,829 shares, respectively, purchased by participants and the Bancorp recognized stock-based compensation expense of $1 million in each of the respective years.

 

 

152159  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

25. OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE

 

The following table presents the major components of other noninterest income and other noninterest expense for the years ended December 31:

 

 

 
($ in millions)  2015        2014       2013         2017        2016       2015       

 

 

Other noninterest income:

            

Gain on sale of Vantiv, Inc. shares

  $331      125      327         $1,037         331      

Valuation adjustments on the warrant associated with sale of Vantiv Holding, LLC

   236      31      206       

Gain on sale and exercise of the warrant associated with Vantiv Holding, LLC

   89           -       

Operating lease income

   89      84      75          96     102     89      

Cardholder fees

   54     46     43      

BOLI income

   52     53     48      

Equity method income from interest in Vantiv Holding, LLC

   47     66     63      

Income from the TRA associated with Vantiv, Inc.

   80      23      9          44     313     80      

Equity method income from interest in Vantiv Holding, LLC

   63      48      77       

BOLI income

   48      44      52       

Cardholder fees

   43      45      47       

Gain on loan sales

   38           3       

Private equity investment income

   28      27      24          36     11     28      

Consumer loan and lease fees

   23      25      27          23     23     23      

Banking center income

   21      30      34          20     20     21      

Insurance income

   14      13      25              11     14      

Loss on swap associated with the sale of Visa, Inc. Class B Shares

   (80)    (56)    (37)     

Net (losses) gains on loan sales

   (2)    10     38      

Gain on sale of certain retail branch operations

       19     -      

Gain on sale and exercise of the warrant associated with Vantiv Holding, LLC

           89      

Valuation adjustments on the warrant associated with Vantiv Holding, LLC

       64     236      

Net losses on disposition and impairment of bank premises and equipment

   (101)     (19)     (6)             (13)    (101)     

Loss on swap associated with the sale of Visa, Inc. Class B shares

   (37)     (38)     (31)      

Other, net

   14      12      10          22     10     14      

 

 

Total other noninterest income

  $979      450      879         $1,357     688     979      

 

 

Other noninterest expense:

            

Impairment on affordable housing investments

  $145      135      108         $222     168     145      

FDIC insurance and other taxes

   127     126     99      

Marketing

   114     104     110      

Loan and lease

   118      119      158          102     110     118      

Marketing

   110      98      114       

FDIC insurance and other taxes

   99      89      127       

Operating lease

   74      67      57          87     86     74      

Professional services fees

   70      72      76       

Professional service fees

   83     61     70      

Losses and adjustments

   55      188      221          59     73     55      

Data processing

   58     51     45      

Travel

   54      52      54          46     45     54      

Postal and courier

   45      47      48          42     46     45      

Data processing

   45      41      42       

Recruitment and education

   33      28      26          35     37     33      

Donations

   29      18      24          28     23     29      

Supplies

   14     14     16      

Insurance

   17      16      17          12     15     17      

Supplies

   16      15      16       

Provision for (benefit from) the reserve for unfunded commitments

        (27)     (17)      

Provision for the reserve for unfunded commitments

       23     4      

Other, net

   191      181      193          186     187     191      

 

 

Total other noninterest expense

  $        1,105            1,139            1,264         $        1,215           1,169     1,105      

 

 

 

153160  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

26. EARNINGS PER SHARE

 

The following table provides the calculation of earnings per share and the reconciliation of earnings per share and earnings per diluted share for the years ended December 31:

 

 

 
 2015 2014 2013  2017 2016 2015 
  

 

 

   

 

 

  

 

 

  

 

 

 
($ in millions, except per share data) Income   Average  
Shares
 Per Share
Amount
 Income 

  Average  

Shares

 Per Share
Amount
 Income   Average  
Shares
 Per Share  
Amount  
  Income   Average  
Shares
 Per Share
Amount
 Income   Average  
Shares
 Per Share
Amount
 Income   Average  
Shares
 Per Share  
Amount  
 

 

 

Earnings per Share:

          

Net income attributable to Bancorp

 $  1,712     $1,481     $1,836    

Dividends on preferred stock

   75     67     37    

 

Earnings Per Share:

          

Net income available to common shareholders

   1,637     1,414     1,799       2,119    1,489    1,637   

Less: Income allocated to participating securities

   15     12     14       23    15    15   

 

 

Net income allocated to common shareholders

 $  1,622    799   $2.03   $1,402   833   $1.68   $1,785   869   $2.05    $  2,096   728   2.88  1,474  757  1.95  1,622  799  2.03 

 

 

Earnings per Diluted Share:

          

Earnings Per Diluted Share:

          

Net income available to common shareholders

 $  1,637     $1,414     $1,799     $  2,119    1,489    1,637   

Effect of dilutive securities:

                    

Stock-based awards

   -    9     -   10     -   8      -   13    -  7    -  9  

Series G convertible preferred stock

   -    -     -    -    18   18   

 

 

Net income available to common shareholders plus assumed conversions

   1,637     1,414     1,817    

Net income available to common shareholders

   2,119    1,489    1,637   

plus assumed conversions

          

Less: Income allocated to participating securities

   15     12     14       22    15    15   

 

 

Net income allocated to common shareholders plus assumed conversions

 $          1,622    808   $        2.01   $        1,402   843   $        1.66   $        1,803   895   $          2.02    $          2,097   741   2.83  1,474  764  1.93  1,622  808  2.01 

 

 

 

Shares are excluded from the computation of net incomeearnings per diluted share when their inclusion has an anti-dilutive effect on earnings per share. The diluted earnings per share computation for the years ended December 31, 2017, 2016 and 2015 2014 and 2013 excludes 164 million, 1319 million and 2416 million, respectively, of SARs and an immaterial amount for both the years ended December 31, 2015 and 2014 and 1 million for the year ended December 31, 2013, of stock options because their inclusion would have been anti-dilutive.

The diluted earnings per share computation for the year ended December 31, 2017 excludes the impact of the forward contract related to the December 19, 2017 accelerated share repurchase transaction. Based upon the average daily volume weighted-average price of the Bancorp’s common stock during the fourth quarter of 2017, the counterparty to the transaction would have been required to deliver additional shares for the settlement of the forward contract as of December 31, 2017, and thus the impact of the forward contract related to the accelerated share repurchase transaction would have been anti-dilutive to earnings per share.

The diluted earnings per share computation for the year ended December 31, 2016 excludes the impact of the forward contract

related to the December 20, 2016 accelerated share repurchase transaction. Based upon the average daily volume weighted-average price of the Bancorp’s common stock during the fourth quarter of 2016, the counterparty to the transaction would have been required to deliver additional shares for the settlement of the forward contract as of December 31, 2016, and thus the impact of the forward contract related to the accelerated share repurchase transaction would have been anti-dilutive to earnings per share.

The diluted earnings per share computation for the year ended December 31, 2015 excludes the impact of the forward contract related to the December 14, 2015 accelerated share repurchase transaction. Based upon the average daily volume weighted-average price of the Bancorp’s common stock during the fourth quarter of 2015, the counterparty to the transaction would have been required to deliver additional shares for the settlement of the forward contract as of December 31, 2015, and thus the impact of the forward contract related to the accelerated share repurchase transaction would have been anti-dilutive to earnings per share.

The diluted earnings per share computation for the year ended December 31, 2014 excludes the impact of the forward contract related to the October 23, 2014 accelerated share repurchase transaction. Based upon the average daily volume weighted-average price of the Bancorp’s common stock during the fourth quarter of 2014, the counterparty to the transaction would have been required to deliver additional shares for the settlement of the forward contract as of December 31, 2014, and thus the impact of the forward contract related to the accelerated share repurchase transaction would have been anti-dilutive to earnings per share.

The diluted earnings per share computation for the year ended December 31, 2013 excludes the impact of the forward contracts related to the November 18, 2013 and December 13, 2013 accelerated share repurchase transactions. Based upon the average daily volume weighted-average price of the Bancorp’s common stock during the fourth quarter of 2013, the counterparty to the transactions would have been required to deliver additional shares for the settlement of the forward contracts as of December 31, 2013, and thus the impact of the forward contracts related to the two accelerated share repurchase transactions would have been anti-dilutive to earnings per share.

 

 

154  Fifth Third Bancorp

161  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

27. FAIR VALUE MEASUREMENTS

 

The Bancorp measures certain financial assets and liabilities at fair value in accordance with U.S. GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also establishes a fair value

hierarchy, which prioritizes the inputs to valuation techniques used

to measure fair value into three broad levels. For more information regarding the fair value hierarchy and how the Bancorp measures fair value, refer to Note 1.

 

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables summarize assets and liabilities measured at fair value on a recurring basis including residential mortgage loans held for sale for which the Bancorp has elected the fair value option as of:

 

 

 
 

 

Fair Value Measurements Using

    

 

Fair Value Measurements Using

   
 

 

 

   

 

 

  
December 31, 2015 ($ in millions)          Level 1(c)                   Level 2(c)                  Level 3             Total Fair Value     
December 31, 2017 ($ in millions)      Level 1(c)           Level 2(c)          Level 3         Total Fair Value     

 

 

Assets:

        

Available-for-sale and other securities:

        

U.S. Treasury and federal agencies securities

 $100    1,087    -    1,187    $98   -   -     98  

Obligations of states and political subdivisions securities

  -    52    -    52     -   44   -     44  

Mortgage-backed securities:

        

Agency residential mortgage-backed securities

  -    15,081    -    15,081     -   15,319   -     15,319  

Agency commercial mortgage-backed securities

  -    7,862    -    7,862     -   10,167   -     10,167  

Non-agency commercial mortgage-backed securities

  -    2,804    -    2,804     -   3,293   -     3,293   

Asset-backed securities and other debt securities

  -    1,355    -    1,355     -   2,218   -     2,218  

Equity securities(a)

  98    1    -    99     68   1   -     69  

 

 

Available-for-sale and other securities(a)

  198    28,242    -    28,440     166   31,042   -     31,208  

Trading securities:

        

U.S. Treasury and federal agencies securities

  -    19    -    19     1   11   -     12  

Obligations of states and political subdivisions securities

  -    9    -        -   22   -     22  

Mortgage-backed securities:

        

Agency residential mortgage-backed securities

  -    6    -      

Residential mortgage-backed securities

  -   395   -     395  

Asset-backed securities and other debt securities

  -    19    -    19     -   63   -     63  

Equity securities

  333    -    -    333     370   -   -     370  

 

 

Trading securities

  333    53    -    386     371   491   -     862  

Residential mortgage loans held for sale

  -    519    -    519     -   399   -     399  

Residential mortgage loans(b)

  -    -    167    167     -   -   137     137  

MSRs(f)

  -   -   858     858  

Derivative assets:

        

Interest rate contracts

  3    892    15    910     1   505   8     514  

Foreign exchange contracts

  -    386    -    386     -   124   -     124  

Equity contracts

  -    -    262    262     -   20   -     20  

Commodity contracts

  54    240    -    294     39   126   -     165  

 

 

Derivative assets(d)

  57    1,518    277    1,852     40   775   8     823  

 

 

Total assets

 $588    30,332    444    31,364    $577   32,707   1,003     34,287  

 

 

Liabilities:

        

Derivative liabilities:

        

Interest rate contracts

 $1    257    3    261    $1   172   5     178  

Foreign exchange contracts

  -    340    -    340     -   120   -     120  

Equity contracts

  -    -    61    61     -   -   137     137  

Commodity contracts

  37    239    -    276     38   129   -     167  

 

 

Derivative liabilities(e)

  38    836    64    938     39   421   142     602  

Short positions(e)

  22    7    -    29     25   6   -     31  

 

 

Total liabilities

 $60    843    64    967    $64   427   142     633  

 

 
(a)

Excludes FHLB, FRB and DTCC restricted stock holdings totaling$248, $362,$355and$12,, respectively, atDecember 31, 20152017..

(b)

Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.

(c)

During the year endedDecember 31, 2015,2017, 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 SheetsSheets.

(f)

Effective January 1, 2017, the Bancorp has elected the fair value measurement method for all existing classes of its residential mortgage servicing rights. The servicing rights were measured at fair value atDecember 31, 2017 and were measured under the amortization method at December 31, 2016.

 

155162  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 
 Fair Value Measurements Using   
  Fair Value Measurements Using     
December 31, 2014 ($ in millions)            Level 1(c)                 Level 2(c)                 Level 3           Total Fair Value     
December 31, 2016 ($ in millions)   Level 1(c)             Level 2(c)             Level 3     Total Fair Value     

 

 

Assets:

            

Available-for-sale and other securities:

            

U.S. Treasury and federal agencies securities

  $25     1,607     -     1,632    $471  78   -  549  

Obligations of states and political subdivisions securities

   -     192     -     192     -  45   -  45  

Mortgage-backed securities:

            

Agency residential mortgage-backed securities

   -     12,404     -     12,404     -  15,608   -  15,608  

Agency commercial mortgage-backed securities

   -     4,565     -     4,565     -  9,055   -  9,055  

Non-agency commercial mortgage-backed securities

   -     1,550     -     1,550     -  3,112   -  3,112  

Asset-backed securities and other debt securities

   -     1,362     -     1,362     -  2,116   -  2,116  

Equity securities(a)

   84     19     -     103    90  1   -  91  

 

 

Available-for-sale and other securities(a)

   109     21,699     -     21,808    561  30,015   -  30,576  

Trading securities:

            

U.S. Treasury and federal agencies securities

   -     14     -     14     -  23   -  23  

Obligations of states and political subdivisions securities

   -     8     -         -  39   -  39  

Mortgage-backed securities:

            

Agency residential mortgage-backed securities

   -     9     -         -  8   -   

Asset-backed securities and other debt securities

   -     13     -     13     -  15   -  15  

Equity securities

   316     -     -     316    325   -   -  325  

 

 

Trading securities

   316     44     -     360    325  85   -  410  

Residential mortgage loans held for sale

   -     561     -     561     -  686   -  686  

Residential mortgage loans(b)

   -     -     108     108     -   -  143  143  

Derivative assets:

            

Interest rate contracts

   -     888     12     900    20  715  13  748  

Foreign exchange contracts

   -     417     -     417     -  202   -  202  

Equity contracts

   -     -     415     415   

Commodity contracts

   68     280     -     348    22  85   -  107  

 

 

Derivative assets(d)

   68     1,585     427     2,080    42  1,002  13  1,057  

 

 

Total assets

  $493     23,889     535     24,917    $928  31,788  156  32,872  

 

 

Liabilities:

            

Derivative liabilities:

            

Interest rate contracts

  $6     276     2     284    $3  257  5  265  

Foreign exchange contracts

   -     372     -     372     -  204   -  204  

Equity contracts

   -     -     49     49     -   -  91  91  

Commodity contracts

   58     280     -     338    27  79   -  106  

 

 

Derivative liabilities(e)

   64     928     51     1,043    30  540  96  666  

Short positions(e)

   16     5     -     21    17  4   -  21  

 

 

Total liabilities

  $80     933     51     1,064    $47  544  96  687  

 

 
(a)

Excludes FHLB, FRB and FRBDTCC restricted stock holdings totaling $248, $358 and $352,$1, respectively, at December 31, 2014.2016.

(b)

Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.

(c)

During the year ended December 31, 2014,2016, 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 SheetsSheets.

 

The following is a description of the valuation methodologies used for significant instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-sale and other securities and trading securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities and exchange-traded equities. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics or DCFs. Examples of such instruments, which are classified within Level 2 of the valuation hierarchy,securities include federal agencies securities, obligations of states and political subdivisions securities, agency residential mortgage-backed securities, agency andnon-agency commercial mortgage-backed securities, and asset-

backedasset-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.

156  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ARM loans classified as held for sale are also classified within Level 2 of the valuation hierarchy due to the use of observable inputs in the DCF model. These observable inputs include interest rate spreads from agency mortgage-backed securities market rates and observable discount rates.

Residential mortgage loans

Residential mortgage loans held for sale that are reclassified to held for investment are transferred from Level 2 to Level 3 of the fair value hierarchy. It is the Bancorp’s policy to value any transfers between levels of the fair value hierarchy based on end of period fair values.

163  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

DerivativesMSRs

Exchange-traded derivatives valued using quoted prices and certain over-the-counter derivatives valued using active bids are classified within LevelEffective January 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. At December 31, 2015 and 2014, derivatives classified as Level 3, which are valued using models containing unobservable inputs, consisted primarily of a warrant associated with the initial sale of the Bancorp’s 51% interest in Vantiv Holding, LLC to Advent International and a total return swap associated with the Bancorp’s sale of Visa, Inc. Class B shares. For further information on the warrant, refer to Note 19. Level 3 derivatives also include IRLCs, which utilize internally generated loan closing rate assumptions as a significant unobservable input in the valuation process.

As of December 31, 2015, the warrant allows2017, the Bancorp to purchase approximately 7.8 million incremental nonvoting units in Vantiv Holding, LLC at an exercise price of $15.98 per unit and requires settlement under certain defined conditions involving change of control. The fair value of the warrant is calculated in

conjunction with a third-party valuation provider by applying Black-Scholes option-pricing models using probability weighted scenarios which contain the following inputs: Vantiv, Inc. stock price, strike price per the Warrant Agreement and several unobservable inputs, such as expected term and expected volatility.

For the warrant, an increase in the expected term (years) and the expected volatility assumptions would result in an increase in the fair value; conversely, a decrease in these assumptions would result in a decrease in the fair value. The Accounting and Treasury departments, both of which report to the Bancorp’s Chief Financial Officer, determined the valuation methodology for the warrant. The Accounting and Treasury departments review changes in fair value on a quarterly basis for reasonableness based on changes in historical and implied volatilities, expected terms, probability weightings of the related scenarios and other assumptions.

Under the terms of the total return swap, the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Visa, Inc. Class B shares into Class A shares. Additionally, the Bancorp will make a quarterly payment based on Visa’s stock price and the conversion rate of the Visa, Inc. Class B shares into Class A shares until the date on which the Covered Litigation is settled. The fair value of the total return swap was calculated using a DCF model based on unobservable inputs consisting of management’s estimate of the probability of certain litigation scenarios, the timing of the resolution of the Covered Litigation and Visa litigation loss estimates in excess, or shortfall, of the Bancorp’s proportional share of escrow funds.

An increase in the loss estimate or a delay in the resolution of the Covered Litigation would result in an increase in fair value; conversely, a decrease in the loss estimate or an acceleration of the resolution of the Covered Litigation would result in a decrease in fair value. The Accounting and Treasury departments determined the valuation methodology for the total return swap. The Accounting and Treasury departments 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 fair value asset of the IRLCs at December 31, 2015 was $15 million. Immediate decreases in current interest rates of 25 bps and 50 bps would result in increases inelected the fair value measurement method for all existing classes of the IRLCs of approximately $6 million and $11 million, respectively. Immediate increases of current interest rates of 25 bps and 50 bps would result in decreases in the fair value of the IRLCs of approximately $7 million and $14 million, respectively. The decrease in the fair value of IRLCs due to immediate 10% and 20% adverse changes in the assumed loan closing rates would be approximately $2 million and $3 million, respectively, and the increase in the fair value due to immediate 10% and 20% favorable changes in the assumed loan closing rates would be approximately $2 million and $3 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.

157  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  Equity    
  Trading  Mortgage  Derivatives,  Derivatives,  Total         
For the year ended December 31, 2015 ($ in millions) Securities  Loans  Net(a)  Net(a)  Fair Value     

 

 

Balance, beginning of period

 $-    108    10    366    484   

Total gains or losses (realized/unrealized):

     

Included in earnings

  -    -    111    288    399   

Purchases

  -    -    (2)   -    (2)  

Sale and exercise of warrant

  -    -    -    (477)   (477)  

Settlements

  -    (28  (107)   24    (111)  

Transfers into Level 3(b)

  -    87    -    -    87   

 

 

Balance, end of period

 $-    167    12    201    380   

 

 

The amount of total gains for the periodincluded in earnings attributable to the change inunrealized gains or losses relating to assetsstill held at December 31, 2015(c)

 $-    -    17    66    83   

 

 
(a)

Net interest rate derivatives include derivative assets and liabilities of$15and$3, respectively, as ofDecember 31, 2015. Net equity derivatives include derivative assets and liabilities of$262 and$61, respectively, as ofDecember 31, 2015.

(b)

Includes 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    
  Trading  Mortgage  Derivatives,  Derivatives,  Total      
For the year ended December 31, 2014 ($ in millions) Securities  Loans  Net(a)  Net(a)  Fair Value  

 

 

Balance, beginning of period

 $1    92    8    336    437   

Total gains or losses (realized/unrealized):

     

Included in earnings

  -    4    125    (7)   122   

Purchases

  -    -    (1)   -    (1)  

Sales

  (1  -    -    -    (1)  

Settlements

  -    (17  (122)   37    (102)  

Transfers into Level 3(b)

  -    29    -    -    29   

 

 

Balance, end of period

 $-    108    10    366    484   

 

 

The amount of total gains (losses) for the periodincluded in earnings attributable to the change inunrealized gains or losses relating to assetsstill held at December 31, 2014(c)

 $      -    4    13    (7)   10   

 

 
(a)

Net interest rate derivatives include derivative assets and liabilities of $12 and $2, respectively as of December 31, 2014. Net equity derivatives include derivative assets and liabilities of $415 and $49, respectively, as of December 31, 2014.

(b)

Includes 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    
  Trading  Mortgage  Derivatives,  Derivatives,  Total      
For the year ended December 31, 2013 ($ in millions) Securities  Loans  Net(a)  Net(a)  Fair Value  

 

 

Balance, beginning of period

 $1    76    57    144    278   

Total gains or losses (realized/unrealized):

     

Included in earnings

  -    (1  59    175    233   

Purchases

  -    -    (2)   -    (2)  

Settlements

  -    (17  (106)   17    (106)  

Transfers into Level 3(b)

  -    34    -    -    34   

 

 

Balance, end of period

 $1    92    8    336    437   

 

 

The amount of total gains (losses) for the periodincluded in earnings attributable to the change inunrealized gains or losses relating to assetsstill held at December 31, 2013(c)

 $-    (1  11    175    185   

 

 
(a)

Net interest rate derivatives include derivative assets and liabilities of $12 and $4, respectively, as of December 31, 2013. Net equity derivatives include derivative assets and liabilities of $384 and $48, respectively, as of December 31, 2013.

(b)

Includes residential mortgage loans held for sale that were transferred to held for investment.

(c)

Includes interest income and expense.

158  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 during the years ended December 31, 2015, 2014 and 2013 as follows:

 

 
($ in millions)  2015   2014  2013       

 

 

Mortgage banking net revenue

  $110     127    57        

Corporate banking revenue

   1     2    1        

Other noninterest income

   288     (7  175        

 

 

Total gains

  $            399                 122                233        

 

 

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, 2015, 2014 and 2013 were recorded in the Consolidated Statements of Income as follows:

 

 
($ in millions)  2015   2014  2013       

 

 

Mortgage banking net revenue

  $16     16    10        

Corporate banking revenue

   1     1    -        

Other noninterest income

   66     (7  175        

 

 

Total gains

  $              83                   10                185        

 

 

The following tables present information as of December 31, 2015 and 2014 about significant unobservable inputs related to the Bancorp’s material categories of Level 3 financial assets and liabilities measured on a recurring basis:

 

 
As of December 31, 2015 ($ in millions) 

 

 
Financial Instrument     Fair Value Valuation Technique 

Significant Unobservable

Inputs

  Ranges of
Inputs
  Weighted-Average 

 

 

Residential mortgage loans

 $  167 Loss rate model Interest rate risk factor   (9.2) - 16.5%    3.1%  
   Credit risk factor   0 - 80.5%    1.3%  

 

 

IRLCs, net

     15 Discounted cash flow Loan closing rates   5.8 - 94.0%    76.3%  

 

 

Stock warrant associated with Vantiv Holding, LLC

     262 Black-Scholes option- Expected term (years)   2.0 - 13.5    5.9  
  pricing model Expected volatility(a)   22.6 - 31.2%    25.9%  

 

 

Swap associated with the sale of Visa, Inc.Class B shares

     (61) Discounted cash flow 

Timing of the resolutionof the Covered Litigation

   
 
12/31/2016 -
3/31/2021
  
  
  NM  

 

 
(a)Based on historical and implied volatilities of Vantiv, Inc. and comparable companies assuming similar expected terms.

 

 
As of December 31, 2014 ($ in millions) 

 

 
Financial Instrument      Fair Value Valuation Technique 

Significant Unobservable

Inputs

  Ranges of
Inputs
  Weighted-Average 

 

 

Residential mortgage loans

  $  108 Loss rate model Interest rate risk factor   (7.2) - 17.7%    5.0%  
    Credit risk factor   0 - 46.6%    1.8%  

 

 

IRLCs, net

      12 Discounted cash flow Loan closing rates   8.8 - 86.7%    65.2%  

 

 

Stock warrant associated with Vantiv Holding, LLC

      415 Black-Scholes option- Expected term (years)   2.0 - 14.5    6.0  
   pricing model Expected volatility(a)   22.9 - 32.2%    26.5%  

 

 

Swap associated with the sale of Visa, Inc.Class B shares

      (49) Discounted cash flow 

Timing of the resolutionof the Covered Litigation

   
 
12/31/2015 -
6/30/2020
 
  
  NM  

 

 
(a)Based on historical and implied volatilities of Vantiv, Inc. and comparable companies assuming similar expected terms.

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.

159  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, 2015 and 2014, and for which a nonrecurring fair value adjustment was recorded during the years ended December 31, 2015 and 2014, 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, 2015 ($ in millions)      Level 1     Level 2      Level 3  Total    For the year ended December 31, 2015     

 

 

Commercial loans held for sale

  $-             -    13       13     3      

Residential mortgage loans held for sale

   -             -    68       68     (2)      

Automobile loans held for sale

   -             -    2       2     -       

Credit cards held for sale

   -             -    4       4     (2)      

Commercial and industrial loans

   -             -    344       344     (137)      

Commercial mortgage loans

   -             -    103       103     (41)      

Commercial construction loans

   -             -    6       6     (5)      

Residential mortgage loans

   -             -    55       55     (1)      

MSRs

   -             -    784       784     4       

OREO

   -             -    58       58     (24)      

Bank premises and equipment

   -             -    83       83     (101)      

Operating lease equipment

   -             -    42       42     (33)      

Private equity investment funds

   -             -    13       13     (1)      

 

 

 

Total

  

 

$

 

            -         

 

  

  

 

 

 

            -            

 

  

 

 

 

 

        1,575   

 

  

 

 

 

 

    1,575

 

  

  

 

 

 

(340)    

 

  

 

 
        

 

 
   Fair Value Measurements Using      Total Losses     
As of December 31, 2014 ($ in millions)      Level 1    Level 2      Level 3   Total    For the year ended December 31, 2014     

 

 

Commercial loans held for sale

  $-           -                33       33     (12)      

Residential mortgage loans held for sale

   -           -                554       554     (87)      

Commercial and industrial loans

   -           -                456       456     (382)      

Commercial mortgage loans

   -           -                110       110     (36)      

Commercial construction loans

   -           -                23       23     (1)      

MSRs

   -           -                856       856     (65)      

OREO

   -           -                90       90     (26)      

Bank premises and equipment

   -           -                22       22     (20)      

 

 

Total

  $            -                       -                        2,144           2,144     (629)      

 

 

The following tables present information as of December 31, 2015 and 2014 about significant unobservable inputs related to the Bancorp’s material categories of Level 3 financial assets measured on a nonrecurring basis:

 

 
As of December 31, 2015 ($ in millions)                  

 

 
Financial Instrument  Fair  
Value
   Valuation Technique  Significant Unobservable
Inputs
  Ranges of
Inputs
   Weighted-Average     

 

 

Commercial loans held for sale

  $      13    Discounted cash flow  Discount spread   NM     4.4%  

 

 

Residential mortgage loans held for sale

   68    Loss rate model  Interest rate risk factor

Credit risk factor

   
 
(7.5) - 0.1%
NM
  
  
   

 

(1.6%)

0.1%

  

  

 

 

Automobile loans held for sale

   2    Discounted cash flow  Discount spread   NM     3.1%  

 

 

Credit cards held for sale

   4    Comparable transactions  Estimated sales proceeds from
comparable transactions
   NM     NM  

 

 

Commercial and industrial loans

   344    Appraised value  Collateral value   NM     NM  

 

 

Commercial mortgage loans

   103    Appraised value  Collateral value   NM     NM  

 

 

Commercial construction loans

   6    Appraised value  Collateral value   NM     NM  

 

 

Residential mortgage loans

   55    Appraised value  Appraised value   NM     NM  

 

 

MSRs

   784    Discounted cash flow  Prepayment speed   1.0 - 100%     

 

(Fixed) 11.8%

(Adjustable) 27.0%

  

  

      OAS spread (bps)   364-1,515    

 

 

 

 

(Fixed) 618

(Adjustable) 703

 

  

  

 

 

OREO

   58    Appraised value  Appraised value   NM     NM  

 

 

Bank premises and equipment

   83    Appraised value  Appraised value   NM     NM  

 

 

Operating lease equipment

   42    Appraised value  Appraised value   NM     NM  

 

 

Private equity investment funds

   13    Liquidity discount applied
to fund’s net asset value
  Liquidity discount   NM     18.0%  

 

 

160  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 
As of December 31, 2014 ($ in millions)               

 

 
Financial Instrument  Fair  
Value
     Valuation Technique  

Significant Unobservable

Inputs

  

Ranges of    

Inputs    

   Weighted-Average           

 

 

Commercial loans held for sale

  $33    Appraised value  Appraised value   NM     NM  
      Cost to sell   NM     10.0%  

 

 

Residential mortgage loans held for sale

       554    Comparable transactions  Estimated sales proceeds from comparable transactions   NM     15.0%  

 

 

Commercial and industrial loans

   456    Appraised value  Collateral value   NM     NM  

 

 

Commercial mortgage loans

   110    Appraised value  Collateral value   NM     NM  

 

 

Commercial construction loans

   23    Appraised value  Collateral value   NM     NM  

 

 

MSRs

   856    Discounted cash flow  Prepayment speed   0 - 100%     

 

(Fixed) 12.0%

(Adjustable) 26.2%

  

  

      Discount rates   9.6 - 13.2%     

 

(Fixed) 9.9%

(Adjustable) 11.8%

  

  

 

 

OREO

   90    Appraised value  Appraised value   NM     NM  

 

 

Bank premises and equipment

   22    Appraised value  Appraised value   NM     NM  

 

 

Commercial loans held for sale

During the years ended December 31, 2015 and 2014, the Bancorp transferred $37 million and $28 million, respectively, of commercial loans from the portfolio to loans held for sale that upon transfer were measured at the lower of cost or fair value. These loans had fair value adjustments during the years ended December 31, 2015 and 2014 totaling $1 million and $10 million, respectively, and were generally based on either appraisals of the underlying collateral or were estimated by discounting future cash flows using the current market rates of loans to borrowers with similar credit characteristics, similar remaining maturities, prepayment speeds and loss severities and were, therefore, classified within Level 3 of the valuation hierarchy. Additionally, during the years ended December 31, 2015 and 2014 there were fair value adjustments on existing loans held for sale of $1 million and $2 million, respectively. The fair value adjustments were also based on appraisals of the underlying collateral. The Bancorp recognized $5 million in gains on the sale of certain commercial loans held for sale during the year ended December 31, 2015.

The Accounting department determines the procedures for the valuation of commercial loans held for sale using appraised value which may include a comparison to recently executed transactions of similar type loans. A monthly review of the portfolio is performed for reasonableness. Quarterly, appraisals approaching one year old are updated and the Real Estate Valuation group, which reports to the Bancorp’s Chief Risk Officer, in conjunction with the Commercial Line of Business review the third-party appraisals for reasonableness. Additionally, the Commercial Line of Business Finance department, which reports to the Bancorp’s Chief Financial Officer, in conjunction with the Accounting department reviews all loan appraisal values, carry values and vintages. The Treasury department, which reports to the Bancorp’s Chief Financial Officer, is responsible for the estimate of fair value adjustments when a discounted future cash flow valuation technique is employed.

Residential mortgage loans held for sale

During the year ended December 31, 2015, the Bancorp transferred $233 million ofits residential mortgage loans from the portfolio to loans held for sale that upon transfer were measured at the lower of cost or fair value using significant unobservable inputs. Fair values were estimated based on mortgage-backed securities prices, interest rate risk and an internally developed credit component. These loans had $2 million of fair value adjustments during the year ended December 31, 2015. The Secondary Marketing department, which

reports to the Bancorp’s Head of the Consumer Bank, in conjunction with the Consumer Credit Risk department, which reports to the Bancorp’s Chief Risk Officer, 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.

During the year ended December 31, 2014 the Bancorp transferred $720 million of restructured residential mortgage loans from the portfolio to loans held for sale that upon transfer were measured at the lower of cost or fair value using significant unobservable inputs. These loans had fair value adjustments during the year ended December 31, 2014 totaling $87 million. The fair value adjustments were based on estimated third-party valuations utilizing recent sales data from similar transactions. Broker opinion statements were also obtained as additional evidence to support the third-party valuations. The Treasury department worked with the third-party advisor to estimate the fair value adjustments. The discounts taken were intended to represent the perspective of a market participant, considering among other things, required investor returns which include liquidity discounts reflected in similar bulk transactions.

Automobile loans held for sale

During the year ended December 31, 2015, the Bancorp transferred $5 million of automobile loans from the portfolio to loans held for sale that upon transfer were measured at the lower of cost or fair value using significant unobservable inputs. Fair values were estimated by discounting future cash flows using the current market rates of loans to borrowers with similar credit characteristics, similar remaining maturities, prepayment speeds and loss severities. These loans had an immaterial amount of fair value adjustments during the year ended December 31, 2015. The Treasury department, which reports to the Bancorp’s Chief Financial Officer, is responsible for the estimate of fair value adjustments.

Credit cards held for sale

During the year ended December 31, 2015, the Bancorp transferred $102 million of credit cards from the portfolio to loans held for sale that upon transfer were measured at the lower of cost or fair value using significant unobservable inputs.

161  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair values were estimated based on recent sales data from similar transactions. These loans had fair value adjustments of $2 million during the year ended December 31, 2015. The Consumer Credit Risk department, which reports to the Bancorp’s Chief Risk Officer, in conjunction with the Accounting department, which reports to the Bancorp’s Chief Financial Officer, are responsible for the estimate of fair value adjustments.

Commercial loans held for investment

During the years ended December 31, 2015 and 2014, the Bancorp recorded nonrecurring impairment adjustments to certain commercial and industrial loans, commercial mortgage loans and commercial construction loans held for investment. Larger commercial loans included within aggregate borrower relationship balances exceeding $1 million that exhibit probable or observed credit weaknesses are subject to individual review for impairment. The Bancorp considers the current value of collateral, credit quality of any guarantees, the guarantor’s liquidity and willingness to cooperate, the loan structure and other factors when evaluating whether an individual loan is impaired. When the loan is collateral dependent, the fair value of the loan is generally based on the fair value of the underlying collateral supporting the loan and therefore these loans were classified within Level 3 of the valuation hierarchy. In cases where the carrying value exceeds the fair value, an impairment loss is recognized. The fair values and recognized impairment losses are reflected in the previous tables. Commercial Credit Risk, which reports to the Bancorp’s Chief Risk Officer, is responsible for preparing and reviewing the fair value estimates for commercial loans held for investment.

Residential mortgage loans held for investment

During the year ended December 31, 2015, the Bancorp transferred approximately $55 million of restructured residential mortgage loans from held for sale to the portfolio as the Bancorp no longer had the intent to sell the loans. Upon transfer, the Bancorp recognized a nonrecurring fair value adjustment of $1 million on these loans, which had previously been transferred to held for sale in the fourth quarter of 2014.

MSRs

Mortgage interest rates increased during the year ended December 31, 2015 which led to a recovery of temporary impairment on servicing rights. Mortgage rates decreased during the year ended December 31, 2014 and the Bancorp recognized temporary impairment in certain classes of the MSR portfolio and the carrying value was adjusted to fair value. MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs do occur, the precise terms and conditions typically are not readily available. Accordingly, the Bancorp estimates the fair value of MSRs using internal OAS models with certain unobservable inputs, primarily prepayment speed assumptions, OAS and weighted-average lives, resulting in a classification within Level 3 of the valuation hierarchy. Refer to Note 12 for further information on the assumptions used in the valuation of the Bancorp’s MSRs. The Secondary Marketing department and Treasury department are 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 certainover-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, 2017 and 2016, derivatives classified as Level 3, which are valued using models containing unobservable inputs, consisted primarily of a total return swap associated with the Bancorp’s sale of Visa, Inc. Class B Shares. Level 3 derivatives also include IRLCs, which utilize internally generated 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, 2017 was $8 million. Immediate decreases in current interest rates of 25 bps and 50 bps would result in increases in fair value of the IRLCs of approximately $3 million and $7 million, respectively. Immediate increases of current interest rates of 25 bps and 50 bps would result in decreases in fair value of the IRLCs of approximately $4 million and $8 million, respectively. The decrease in fair value of IRLCs due to immediate 10% and 20% adverse changes in the assumed loan closing rates would be approximately $1 million and $2 million, respectively, and the increase in fair value due to immediate 10% and 20% favorable changes in the assumed loan closing rates would be approximately $1 million and $2 million, respectively. These sensitivities are hypothetical and should be used with caution, as changes in fair value based on a variation in assumptions typically cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear.

The Consumer Line of Business Finance department, which reports to the Bancorp’s Chief Financial Officer, and the aforementioned Secondary Marketing department are responsible for determining the valuation methodology for IRLCs. Secondary Marketing, in conjunction with a third party valuation provider, periodically review loan closing rate assumptions and recent loan sales to determine if adjustments are needed for current market conditions not reflected in historical data.

164  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     Derivatives,  Equity  Total        
For the year ended December 31, 2017 ($ in millions) Loans  MSRs(d)  Net(a)  Derivatives  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 ofDecember 31, 2017.

(b)

Includes certain residential mortgage loans originated as held for sale that were transferred to held for investment.

(c)

Includes interest income and expense.

(d)

Effective January 1, 2017, the Bancorp has elected the fair value measurement method for all existing classes of its residential mortgage servicing rights. The servicing rights were measured at fair value atDecember 31, 2017 and were measured under the amortization method at December 31, 2016.

 

 
          Fair Value Measurements Using Significant Unobservable Inputs  (Level 3)         
  Residential  Interest Rate  Equity    
  Mortgage  Derivatives,  Derivatives,  Total        
For the year ended December 31, 2016 ($ in millions) Loans  Net(a)  Net(a)  Fair Value    

 

 

Balance, beginning of period

 $167          12          201          380  

Total gains (losses) (realized/unrealized):

    

Included in earnings

  (2)         115          17          130  

Purchases

  -          (3)         -          (3)  

Sale and exercise of warrant

  -          -          (334)         (334)  

Settlements

  (40)         (116)         25          (131)  

Transfers into Level 3(b)

  18          -          -          18  

 

 

Balance, end of period

 $143          8          (91)         60  

 

 

The amount of total (losses) gains for the period included in earnings attributable to the change in unrealized gains or losses relating to instruments still held at December 31, 2016(c)

 $(2)         13          (56)         (45)  

 

 
(a)

Net interest rate derivatives include derivative assets and liabilities of $13 and $5, respectively, as of December 31, 2016. Net equity derivatives include derivative assets and liabilities of $0 and $91, respectively, as of December 31, 2016.

(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  Derivatives,  Derivatives,  Total        
For the year ended December 31, 2015 ($ in millions) Loans  Net(a)  Net(a)  Fair Value    

 

 

Balance, beginning of period

 $108          10          366          484  

Total gains (realized/unrealized):

    

Included in earnings

  -          111          288          399  

Purchases

  -          (2)         -          (2) 

Sales and exercise of warrant

  -          -          (477)         (477) 

Settlements

  (28)         (107)         24          (111) 

Transfers into Level 3(b)

  87          -          -          87  

 

 

Balance, end of period

 $167          12          201          380  

 

 

The amount of total gains for the period included in earnings attributable to the change in unrealized gains or losses relating to instruments still held at December 31, 2015(c)

 $-          17          66          83  

 

 
(a)

Net interest rate derivatives include derivative assets and liabilities of $15 and $3, respectively, as of December 31, 2015. Net equity derivatives include derivative assets and liabilities of $262 and $61, respectively, as of December 31, 2015.

(b)

Includes certain residential mortgage loans held for sale that were transferred to held for investment.

(c)

Includes interest income and expense.

165  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The total gains and losses included in earnings for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) were recorded in the Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015 as follows:

 

 
($ in millions)  2017  2016    2015        

 

 

Mortgage banking net revenue

  $(29  112    110       

Corporate banking revenue

   2   1    1       

Other noninterest income

   (80  17    288       

 

 

Total (losses) gains

  $            (107              130                399       

 

 

The total gains and losses included in earnings attributable to changes in unrealized gains and losses related to Level 3 assets and liabilities still held at December 31, 2017, 2016 and 2015 were recorded in the Consolidated Statements of Income as follows:

 

 
($ in millions)  2017             2016    2015        

 

 

Mortgage banking net revenue

  $(113)    10   16       

Corporate banking revenue

       1   1       

Other noninterest income

   (80)    (56  66       

 

 

Total (losses) gains

  $          (191)                  (45)               83       

 

 

The following tables present information as of December 31, 2017 and 2016 about significant unobservable inputs related to the Bancorp’s material categories of Level 3 financial assets and liabilities measured at fair value on a recurring basis:

 

 
As of December 31, 2017 ($ in millions) 

 

 
        Financial Instrument     Fair Value      Valuation Technique     

Significant Unobservable

Inputs

  

Ranges of

Inputs

  

Weighted-

Average

 

 

 

Residential mortgage loans

 $          137     Loss rate model     Interest rate risk factor   (10.6) - 14.5%   3.1% 
       Credit risk factor   0 - 52.1%   1.4% 

 

 

MSRs

             858     Discounted cash flow     Prepayment speed   0 - 98.1%   

(Fixed) 11.4%

(Adjustable) 24.6%

 

 

       OAS spread (bps)   450 - 1,515   

(Fixed) 549

(Adjustable) 785

 

 

 

 

IRLCs, net

             8     Discounted cash flow     Loan closing rates   12.5 - 97.7%   71.8% 

 

 

Swap associated with the sale of Visa, Inc. Class B Shares

             (137)     Discounted cash flow 

    Timing of the resolution of the Covered Litigation

   
12/31/2020 -
12/31/2023
 
 
  8/15/2021 

 

 

 

 
As of December 31, 2016 ($ in millions) 

 

 
        Financial Instrument     Fair Value      Valuation Technique     

Significant Unobservable

Inputs

  

Ranges of

Inputs

  

Weighted-

Average

 

 

 

Residential mortgage loans

 $          143       Loss rate model     Interest rate risk factor   (11.5)-13.8%   2.3% 
       Credit risk factor   0 - 75.6%   1.4% 

 

 

IRLCs, net

           12     Discounted cash flow     Loan closing rates   23.8 -99.5%   76.8% 

 

 

Swap associated with the sale of Visa, Inc. Class B Shares

           (91)     Discounted cash flow 

    Timing of the resolution of the Covered Litigation

   
12/31/2018 -
12/31/2022
 
 
  8/24/2020 

 

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at

fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.

166  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables provide the fair value hierarchy and carrying amount of all assets that were held as of December 31, 2017 and 2016 and for which a nonrecurring fair value adjustment was recorded during the years ended December 31, 2017 and 2016, and the related gains and losses from fair value adjustments on assets sold during the period as well as assets still held as of the end of the period.

 

 
  Fair Value Measurements Using      Total Losses    
As of December 31, 2017 ($ in millions)     Level 1    Level 2      Level 3       Total   For the year ended December 31, 2017    

 

 

Commercial loans held for sale

 $-           -   1        1   (33)  

Commercial and industrial loans

  -           -   327        327   (99)  

Commercial mortgage loans

  -           -   19        19   (12)  

Commercial leases

  -           -   4        4   (6)  

OREO

  -           -   27        27   (10)  

Bank premises and equipment

  -           -   24        24   (6)  

Operating lease equipment

  -           -   60        60   (42)  

Private equity investments

  -           -   8        8   (1)  

Affordable housing investments

  -           -   1,178        1,178   (68)  

 

 

Total

 $            -           -   1,648        1,648   (277)  

 

 
       

 

 
  Fair Value Measurements Using      Total (Losses) Gains    
As of December 31, 2016 ($ in millions) Level 1  Level 2  Level 3   Total  For the year ended December 31, 2016      

 

 

Commercial loans held for sale

 $-         -               5        5   (32)  

Commercial and industrial loans

  -         -               412        412   (166)  

Commercial mortgage loans

  -         -               15        15   (4)  

Commercial construction loans

  -         -               -        -     

Commercial leases

  -         -               3        3   (3)  

MSRs(a)

  -         -               744        744     

OREO

  -         -               42        42   (17)  

Bank premises and equipment

  -         -               28        28   (31)  

Operating lease equipment

  -         -               37        37   (9)  

Private equity investments

    60        60   (9)  

 

 

Total

 $            -                     -               1,346        1,346   (262)  

 

 
(a)

Effective January 1, 2017, the Bancorp has elected the fair value measurement method for all existing classes of its residential mortgage servicing rights. The servicing rights were measured at fair value at December 31, 2017 and were measured under the amortization method at December 31, 2016.

The following tables present information as of December 31, 2017 and 2016 about significant unobservable inputs related to the Bancorp’s material categories of Level 3 financial assets and liabilities measured on a nonrecurring basis:

 

 
As of December 31, 2017 ($ in millions)           

 

 
                Financial Instrument      Fair Value   Valuation Technique  Significant Unobservable Inputs  Ranges of
Inputs
   Weighted-Average     

 

 

Commercial loans held for sale

  $      1      Appraised value  Appraised value
Costs to sell
   

NM

NM

 

 

   
NM
10.0%
 
 

 

 

Commercial and industrial loans

   327    Appraised value  Collateral value   NM    NM 

 

 

Commercial mortgage loans

   19     Appraised value  Collateral value   NM    NM 

 

 

Commercial leases

   4      Appraised value  Collateral value   NM    NM 

 

 

OREO

   27     Appraised value  Appraised value   NM    NM 

 

 

Bank premises and equipment

   24     Appraised value  Appraised value   NM    NM 

 

 

Operating lease equipment

   60     Appraised value  Appraised value   NM    NM 

 

 

Private equity investments

   8      Liquidity discount applied
to fund’s net asset value
  Liquidity discount   2.5 - 15.0%    5.8% 

 

 

Affordable housing investments

   1,178   Appraised value  Appraised value   NM    NM 

 

 

167  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 
As of December 31, 2016 ($ in millions)           

 

 
    Financial Instrument        Fair Value       Valuation Technique  

Significant Unobservable

Inputs

  Ranges of
Inputs
   Weighted-Average     

 

 

Commercial loans held for sale

   $          5          Appraised value  Appraised value   NM    NM 

 

 

Commercial and industrial loans

   412        Appraised value  Collateral value   NM    NM 

 

 

Commercial mortgage loans

   15         Appraised value  Collateral value   NM    NM 

 

 

Commercial construction loans

   -          Appraised value  Collateral value   NM    NM 

 

 

Commercial leases

   3          Appraised value  Appraised value   NM    NM 

 

 

MSRs

   744        Discounted cash flow  Prepayment speed   0.7 - 100%    

(Fixed) 10.2%

(Adjustable) 25.3%

 

 

      OAS spread (bps)   100 - 1,515   

 

 

 

(Fixed) 654

(Adjustable) 738

 

 

 

 

 

OREO

   42         Appraised value  Appraised value   NM    NM 

 

 

Bank premises and equipment

   28         Appraised value  Appraised value   NM    NM 

 

 

Operating lease equipment

   37         Appraised value  Appraised value   NM    NM 

 

 

Private equity investments

   60         Liquidity discount applied
to fund’s net asset value
  Liquidity discount   5.0 - 37.5%    12.8% 

 

 

Commercial loans held for sale

During the years ended December 31, 2017 and 2016, the Bancorp transferred $85 million and $140 million, respectively, of commercial loans from the portfolio to loans held for sale that upon transfer were measured at the lower of cost or fair value. These loans had fair value adjustments during the years ended December 31, 2017 and 2016 totaling $31 million and $30 million, respectively, and were generally based on appraisals of the underlying collateral and were, therefore, classified within Level 3 of the valuation hierarchy. Additionally, during the years ended December 31, 2017 and 2016 there were fair value adjustments on existing loans held for sale of an immaterial amount and $2 million, respectively. The fair value adjustments were also based on appraisals of the underlying collateral. The Bancorp recognized $2 million in losses on the sale of certain commercial loans held for sale during the year ended December 31, 2017 and an immaterial amount of net gains on the sale of certain commercial loans held for sale during the year ended December 31, 2016.

The Accounting department determines the procedures for the valuation of commercial loans held for sale using appraised value which may include a comparison to recently executed transactions of similar type loans. A monthly review of the portfolio is performed for reasonableness. Quarterly, appraisals approaching a year old are updated and the Real Estate Valuation group, which reports to the Bancorp’s Chief Risk Officer, in conjunction with the Commercial Line of Business, review the third party appraisals for reasonableness. Additionally, the Commercial Line of Business Finance department, which reports to the Bancorp’s Chief Financial Officer, in conjunction with the Accounting department reviews all loan appraisal values, carry values and vintages.

Commercial loans and leases held for investment

During the years ended December 31, 2017 and 2016, the Bancorp recorded nonrecurring impairment adjustments to certain commercial and industrial loans, commercial mortgage loans, commercial construction loans and commercial leases held for investment. Larger commercial loans included within aggregate borrower relationship balances exceeding $1 million that exhibit probable or observed credit weaknesses are subject to individual review for impairment. The Bancorp considers the current value of collateral, credit quality of any guarantees, the guarantor’s liquidity and willingness to cooperate, the loan structure and other factors when evaluating whether an individual loan is impaired. When the loan is collateral dependent, the fair value of the loan is generally based on the fair value of the underlying collateral supporting the loan and therefore these loans were classified within Level 3 of the valuation hierarchy. In cases where the carrying value exceeds the

fair value, an impairment loss is recognized. The fair values and recognized impairment losses are reflected in the previous tables. Commercial Credit Risk, which reports to the Bancorp’s Chief Risk Officer, is responsible for preparing and reviewing the fair value estimates for commercial loans held for investment.

MSRs

Effective January 1, 2017, the Bancorp elected the fair value measurement method for all existing classes of its residential mortgage servicing rights. The servicing rights were measured at fair value at December 31, 2017 and under the amortization method at December 31, 2016. Mortgage interest rates increased during the year ended December 31, 2016 and the Bancorp recognized a recovery of temporary impairment in certain classes of the MSR portfolio and the carrying value was adjusted to fair value. Refer to the MSRs section of the Assets and Liabilities Measured at Fair Value on a Recurring Basis discussion for additional information.

OREO

During the years ended December 31, 20152017 and 2014,2016, the Bancorp recorded nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO and measured at the lower of carrying amount or fair value. These nonrecurring losses were primarily due to declines in real estate values of the properties recorded in OREO. For the years ended December 31, 20152017 and 2014,2016, these losses include $14$4 million and $12$8 million, respectively, recorded as charge-offs, on new OREO properties transferred from loans during the respective periods and $10$6 million and $14$9 million, respectively, recorded as negative fair value adjustments on OREO in other noninterest expense in the Consolidated Statements of Income subsequent to their transfer from loans. As discussed in the following paragraphs, the fair value amounts are generally based on appraisals of the property values, resulting in a classification within Level 3 of the valuation hierarchy. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. The previous tables reflect the fair value measurements of the properties before deducting the estimated costs to sell.

The Real Estate Valuation department which reports to the Bancorp’s Chief Risk Officer, is solely responsible for managing the appraisal process and evaluating the appraisal for commercial properties transferred to OREO. All appraisals on commercial OREO properties are updated on at least an annual basis.

The Real Estate Valuation department reviews the BPO data and internal market information to determine the initialcharge-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.

168  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

These properties are reviewed at least every 30 days after the initial interior inspections are completed. The Asset Manager receives a monthly status report for each property which includes the number of showings, recently sold properties, current comparable listings and overall market conditions.

Bank premises and equipment

The Bancorp performs assessments of the recoverability of long-lived assets when events or changes in circumstances indicate that their carrying values may not be recoverable. These properties were written down to their lower of cost or market values. At least annually thereafter, the Bancorp will review these properties for market fluctuations. The fair value amounts were generally based on appraisals of the property values, resulting in a classification within Level 3 of the valuation hierarchy. Corporate Facilities, which reports to the Bancorp’s Chief Administrative Officer, in conjunction with Accounting, isare responsible for preparing and reviewing the fair value estimates for bank premises and equipment. For further information on bank premises and equipment and discussion on changes to the branch network, refer to Note 7 and Note 31.7.

Operating lease equipment

During the yearyears ended December 31, 2015,2017 and 2016, the Bancorp recorded nonrecurring impairment adjustments to certain operating lease equipment. When evaluating whether an individual asset is impaired, the Bancorp considers the current fair value of the asset, the changes in overall market demand for the asset and the rate of change in advancements associated with technological improvements that impact the demand for the specific asset under review.

162  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As part of this ongoing assessment, the Bancorp determined that the carrying values of certain operating lease equipment were not recoverable and as a result, the Bancorp recorded an impairment loss equal to the amount by which the carrying value of the assets exceeded the fair value. The fair value amounts were generally based on appraised values of the assets, resulting in a classification within Level 3 of the valuation hierarchy. During the years ended December 31, 2017 and 2016, the Bancorp recorded net losses of $42 million and $9 million, respectively, as a reduction to corporate banking revenue in the Consolidated Statements of

Income. The Commercial Leasing department, which reports to the Bancorp’s Chief Operating Officer, is responsible for preparing and reviewing the fair value estimates for operating lease equipment. Refer to Note 8 for further information on the impairment chargecharges related to certain operating lease equipment.

Private equity investment fundsinvestments

OnIn December 10, 2013, the U.S. banking agencies finalizedissued final rules to implement section 619 of the DFA, known as the Volcker Rule, which became effective April 1, 2014. Though the final rule was effective April 1, 2014, the FRB granted the industry an extensionplaces limitations on banking organizations’ ability to own, sponsor or have certain relationships with certain private equity funds. The Bancorp recognized $1 million and $9 million of time until July 21, 2015 to conformOTTI primarily associated with certain of its activities related to proprietary trading to comply withnonconforming investments affected by the Volcker Rule. In addition,Rule during the FRB has granted the industry an extension of time until July 21, 2016, and announced its intention to grant a one year extension of the conformance period until July 21, 2017, to conform certain ownership interests in, sponsorship activities of and relationships with private equity or hedge funds as well as holding certain collateralized loan obligations that were in place as ofyears ended December 31, 2013. It is expected that over time the2017 and 2016, respectively. The Bancorp may need to sell or redeem these investments, however no formal plan to sell has been approved as of December 31, 2015. As a result of the announced conformance period extension, the Bancorp believes it is likely that these investments will be reduced over time in the ordinary course of events before compliance is required. As a result, the Bancorp has performed nonrecurring fair value measurements on a fund by fund basis to determine whether OTTI exists.existed. The Bancorp estimated the fair value of a fund by using the net asset value reported by the fund manager, and in some cases, applying an estimated market discount to the reported net asset value of the fund. Because the length of time until the investment will become redeemable is generally not certain, these funds were classified within Level 3 of the valuation hierarchy. The Bancorp recognized $1 million of OTTI on its investments in private equity funds

during the year ended December 31, 2015. The Bancorp did not recognize OTTI on its investments in private equity funds during the year ended December 31, 2014. An adverse change in the reported net asset values or estimated market discounts, where applicable, would result in a decrease in the fair value estimate. In cases where the carrying value exceeds the fair value, an impairment loss is recognized. The Bancorp’s Private Equity department, which reports to the Chief OperatingStrategy Officer, in conjunction with Accounting, is responsible for preparing and reviewing the fair value estimates.

Affordable housing investments

During the year ended December 31, 2017, the Bancorp recorded $68 million of nonrecurring impairment adjustments to certain affordable housing investments. The impairment charges reflected the decline in value of the investments primarily due to the change in the federal statutory corporate tax rate pursuant to the TCJA. The Accounting department is responsible for preparing and reviewing the fair value estimates. For further information on affordable housing investments refer to Note 11.

169  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Option

The Bancorp elected to measure certain residential mortgage loans held for sale under the fair value option as allowed under U.S. GAAP. Electing to measure residential mortgage loans held for sale at fair value reduces certain timing differences and better matches changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. Management’s intent to sell residential mortgage loans classified as held for sale may change over time due to such factors as changes in the overall liquidity in markets or changes in characteristics specific to certain loans held for sale. Consequently, these loans may be reclassified to loans held for investment and maintained in the Bancorp’s loan portfolio. In such cases, the loans will continue to be measured at fair value.

Fair value changes recognized in earnings for instruments held at December 31, 20152017 and 20142016 for which the fair value option was elected, as well as the changes in fair value of the underlying IRLCs, included gains of $17$14 million and $26$6 million, respectively. These gains are reported in mortgage banking net revenue in the Consolidated Statements of Income.

Valuation adjustments related to instrument-specific credit risk for residential mortgage loans measured at fair value negatively impacted the fair value of those loans by $2 million at both December 31, 20152017 and 2014.2016. Interest on residential mortgage loans measured at fair value is accrued as it is earned using the effective interest method and is reported as interest income in the Consolidated Statements of Income.

 

The following table summarizes the difference between the fair value and the unpaid principal balance for residential mortgage loans measured at fair value as of:

 

($ in millions)  

    Aggregate

    Fair Value

   Aggregate Unpaid    
Principal Balance    
   Difference          

    Aggregate

    Fair Value

 Aggregate Unpaid    
Principal Balance    
   Difference        

December 31, 2015

      

December 31, 2017

     

Residential mortgage loans measured at fair value

  $                                686     669    17  $                                536   522   14 

Past due loans of 90 days or more

   2     2    -   5   5   

Nonaccrual loans

   2     2    -   1   1   

December 31, 2014

      

December 31, 2016

     

Residential mortgage loans measured at fair value

  $669     643    26  $829  823   

Past due loans of 90 days or more

   2     2    -   2  2   

Nonaccrual loans

   3     3    -   1  1   

 

163170  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       Net Carrying           Fair Value Measurements Using         Total       
   

 

 

     

 

 

  
As of December 31, 2015 ($ in millions)  Amount         Level 1         Level 2         Level 3       Fair Value     
As of December 31, 2017 ($ in millions)  Amount   

 

    Level 1    

     Level 2         Level 3         Fair Value       

 

 

Financial assets:

            

Cash and due from banks

  $2,540    2,540    -    -    2,540     $2,514   2,514   -   -   2,514  

Other securities

   604    -    604    -    604      612   -   612   -   612  

Held-to-maturity securities

   70    -    -    70    70      24   -   -   24   24  

Other short-term investments

   2,671    2,671    -    -    2,671      2,753   2,753   -   -   2,753  

Loans held for sale

   384    -    -    384    384   

Loans and leases held for sale

   93   -   -   93   93  

Portfolio loans and leases:

            

Commercial and industrial loans

   41,479    -    -    41,802    41,802      40,519   -   -   41,718   41,718  

Commercial mortgage loans

   6,840    -    -    6,656    6,656      6,539   -   -   6,490   6,490  

Commercial construction loans

   3,190    -    -    2,918    2,918      4,530   -   -   4,560   4,560  

Commercial leases

   3,807    -    -    3,533    3,533      4,054   -   -   3,705   3,705  

Residential mortgage loans

   13,449    -    -    14,061    14,061      15,365   -   -   15,996   15,996  

Home equity

   8,234    -    -    8,948    8,948      6,968   -   -   7,410   7,410  

Automobile loans

   11,453    -    -    11,170    11,170      9,074   -   -   8,832   8,832  

Credit card

   2,160    -    -    2,551    2,551      2,182   -   -   2,616   2,616  

Other consumer loans and leases

   646    -    -    643    643   

Unallocated allowance for loan and lease losses

   (115  -    -    -      

Other consumer loans

   1,526   -   -   1,621   1,621  

Unallocated ALLL

   (120  -   -   -    

 

 

Total portfolio loans and leases, net

   91,143    -    -    92,282    92,282     $90,637   -   -   92,948   92,948  

 

 

Financial liabilities:

            

Deposits

                 103,205    -    103,219    -    103,219     $103,162   -   103,123   -   103,123  

Federal funds purchased

   151    151    -    -    151      174   174   -   -   174  

Other short-term borrowings

   1,507    -    1,507    -    1,507      4,012   -   4,012   -   4,012  

Long-term debt

   15,844    15,637    625    -    16,262      14,904   15,045   529   -   15,574  

 

 
              

 

 
  Net Carrying Fair Value Measurements Using Total       Net Carrying         Fair Value Measurements Using         Total       
   

 

 

     

 

 

  
As of December 31, 2014 ($ in millions)  Amount Level 1 Level 2 Level 3 Fair Value     
As of December 31, 2016 ($ in millions)  Amount Level 1 Level 2 Level 3 Fair Value       

 

 

Financial assets:

            

Cash and due from banks

  $3,091   3,091    -    -   3,091     $2,392  2,392   -   -  2,392  

Other securities

   600    -   600    -   600      607   -  607   -  607  

Held-to-maturity securities

   187    -    -   187   187      26   -   -  26  26  

Other short-term investments

   7,914   7,914    -    -   7,914      2,754  2,754   -   -  2,754  

Loans held for sale

   700    -    -   700   700   

Loans and leases held for sale

   65   -   -  65  65  

Portfolio loans and leases:

            

Commercial and industrial loans

   40,092    -    -   40,781   40,781      40,958   -   -  41,976  41,976  

Commercial mortgage loans

   7,259    -    -   6,878   6,878      6,817   -   -  6,735  6,735  

Commercial construction loans

   2,052    -    -   1,735   1,735      3,887   -   -  3,853  3,853  

Commercial leases

   3,675    -    -   3,426   3,426      3,959   -   -  3,651  3,651  

Residential mortgage loans

   12,177    -    -   12,249   12,249                            14,812   -   -  15,415  15,415  

Home equity

   8,799    -    -   9,224   9,224      7,637   -   -  8,421  8,421  

Automobile loans

                 12,004    -    -   11,748   11,748      9,941   -   -  9,640  9,640  

Credit card

   2,297    -    -   2,586   2,586      2,135   -   -  2,503  2,503  

Other consumer loans and leases

   405    -    -   414   414   

Unallocated allowance for loan and lease losses

   (106  -    -    -      

Other consumer loans

   668   -   -  678  678  

Unallocated ALLL

   (112  -   -   -    

 

 

Total portfolio loans and leases, net

   88,654    -    -   89,041   89,041     $90,702   -   -  92,872  92,872  

 

 

Financial liabilities:

            

Deposits

   101,712    -   101,715    -   101,715     $103,821   -  103,811   -  103,811  

Federal funds purchased

   144   144    -    -   144      132  132   -   -  132  

Other short-term borrowings

   1,556    -   1,561    -   1,561      3,535   -  3,535   -  3,535  

Long-term debt

   14,967   14,993   655    -   15,648      14,388  14,288  545   -  14,833  

 

 

 

Cash and due from banks, other securities, other short-term investments, deposits, federal funds purchased and other short-term borrowings

For financial instruments with a short-term or no stated maturity, prevailing market rates and limited credit risk, carrying amounts approximate fair value. Those financial instruments include cash and due from banks, other securities consisting of FHLB, FRB and FRBDTCC restricted stock, other short-term investments, certain deposits (demand, interest checking, savings, money market, and foreign office deposits and other deposits), federal funds purchased and other short-term borrowings excluding FHLB borrowings. Fair

values for other time deposits, certificates of deposit $100,000 and over and FHLB borrowings were estimated using a DCF calculation that applies prevailing LIBOR/swap interest rates and a spread for new issuances with similar terms.

Held-to-maturity securities

The Bancorp’sheld-to-maturity securities are primarily composed of instruments that provide income tax credits as the economic return on the investment. The fair value of these instruments is estimated based on current U.S. Treasury tax credit rates.

 

 

164171  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

LoansLoan and leases held for sale

Fair values for commercial loans and leases held for sale were valued based on executable bids when available, or on DCF models incorporating appraisals of the underlying collateral, as well as assumptions about investor return requirements and amounts and timing of expected cash flows. Fair values for residential mortgage loans held for sale were valued based on estimated third-party valuations utilizing recent sales data from similar transactions. Broker opinion statements were also obtained as additional evidence to support the third-party valuations. Fair values for other consumer loans held for sale were based on contractual values upon which the loans may be sold to a third party and approximate their carrying value.

Portfolio loans and leases, net

Fair values were estimated based on either appraisals of the underlying collateral or by discounting future cash flows using the current market rates of loans to borrowers with similar credit

characteristics, similar remaining maturities, prepayment speeds and loss severities. The Bancorp estimates fair values at the transaction level whenever possible. For certain products with a large number of homogenous transactions, the Bancorp employs a pool approach. This approach involves stratifying and sorting the entire population of transactions into a smaller number of pools with like characteristics. Characteristics may include maturity date, coupon, origination date and principal amortization method.

Long-term debt

Fair value of long-term debt was based on quoted market prices, when available, or a DCF calculation using LIBOR/swap interest rates and, in some cases, Fifth Third credit and/or debt instrument spreads for new issuances with similar terms.

 

 

165172  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

28. CERTAIN REGULATORY CAPITAL REQUIREMENTS AND CAPITAL RATIOS

 

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 the appropriate state and federal supervisory authorities. 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.

The Bancorp’s banking subsidiary must maintain cash reserve balances when total reservable deposit liabilities are greater than the regulatory exemption. These reserve requirements may be satisfied with vault cash and balances on deposit with the FRB. In 2015 and 2014, the Bancorp’s banking subsidiary was required to maintain average cash reserve balances of $1.8 billion and $1.7 billion, respectively.

The Board of Governors of the Federal Reserve System issued capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a BHC and in analyzing applications to it under the BHCA of 1956, as amended. These guidelines include quantitative measures that assign risk weightings to assets andoff-balance sheet items, as well as define and set minimum regulatory capital requirements. The regulatory capital requirements were revised by the Basel III Final Rule which was effective for the Bancorp on January 1, 2015, subject tophase-in periods for certain of its components and other provisions. It revised theestablished quantitative measures used to define risk weightings to assets and off-balance sheet items and also defined the regulatory capital components and setdefining minimum regulatory capital requirements. Therequirements as well as the measure of “well-capitalized”

status. Additionally, the Board of Governors of the Federal Reserve System issued similar guidelines for minimum capital ratios established under the Basel III Final Rule are Common equity Tier 1 capital of at least 4.5% (CET1 ratio), Tier I capital (core capital) of at least 6% of risk-weighted assets (Tier I risk-based capital ratio), Total regulatory capital (Tier I plus Tier II capital) of at least 8% of risk-weighted assets (Total risk-based capital ratio)requirements and Tier I capital of at least 4% of adjusted quarterly“well-capitalized” measurements for banking subsidiaries.

Quarterly average assets (Tier I leverage ratio). Failure to meet the minimum capital requirements can initiate certain actions by regulators that could have a direct material effect on the Consolidated Financial Statements of the Bancorp.

The Basel III Final Rule provided for certain banks, including the Bancorp, to opt out of including AOCI in regulatory capital and also retained the treatment of residential mortgage exposures consistent with the current Basel I capital rules. The Bancorp made

a one-time permanent election to not include AOCI in regulatory capital in the March 31, 2015 FFIEC 031 and FR Y-9C filings. The Basel III Final Rule phases out the inclusion of certain TruPS asare a component of the Tier I capital. Under these provisions, these TruPS would qualify as a component of Tier II capital. At December 31, 2015, the Bancorp’s Tier I capital included $13 million of TruPS representing approximately 1 bp of risk-weighted assets. Tier II capital consists principally of term subordinated debtleverage ratio and subject to limitations, allowances for credit losses.

The Bancorp’s assets and credit equivalent amounts of off-balance sheet items are assigned to one of several broad risk categories according to the Standardized Approach for risk-weighting assets as defined in the Basel III Final Rule. The aggregate dollar value of the amount of each category is multiplied by the associated risk weighting. The resulting weighted values from each of the risk categories in sum is the total risk-weighted assets. Quarterly average assets for this purpose do not include goodwill and any other intangible assets and other investments that the FRB determines should be deducted from Tier I capital.

The Board of Governors

 

 
   Minimum              Well-Capitalized                 

 

 

CET1 capital

   4.50   6.50       

Tier I risk-based capital

   6.00    8.00       

Total risk-based capital

   8.00    10.00       

Tier I leverage

   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 Federal Reserve System issuedBancorp. Additionally, when fullyphased-in in 2019, the Basel III Final Rule will include a capital adequacy guidelines for banking subsidiaries substantially similarconservation buffer requirement of 2.5% in addition to those adopted for BHCs, as described previously. In addition, the U.S. banking agencies have issued substantially similar regulations to implement the system of prompt corrective action established by Section 38minimum capital requirements of the FDIA. Under the regulations, a bank generally shall be deemed to be well-capitalized if it has a CET1, ratio of 6.5% or more, a Tier I risk-based capital ratio of 8% or more, aand Total risk-based capital ratio of 10% or more, a Tier I leverage ratio of 5% or moreratios in order to avoid limitations on capital distributions and is not subjectdiscretionary bonus payments to any written capital order or directive. If an institution becomes undercapitalized, it would become subject to significant additional oversight, regulations and requirements as mandated by the FDIA.executive officers.

The Bancorp and its banking subsidiary, Fifth Third Bank, had a CET1 capital, ratio above the well-capitalized level at December 31, 2015 and Tier I risk-based capital, Total risk-based capital and Tier I leverage ratios above the well-capitalized levels at both December 31, 20152017 and 2014.2016. To continue to qualify for financial holding company status pursuant to the Gramm-Leach-Bliley Act of 1999, the Bancorp’s banking subsidiary must, among other things, maintain “well-capitalized” capital ratios. In addition, the Bancorp exceeded the “capital conservation buffer” ratio for all periods presented.

 

 

The following table presents capital and risk-based capital and leverage ratios for the Bancorp and its banking subsidiary at December 31:

 

 

 
   2015   2014 
   Basel III
Transitional(a)
   Basel I(b) 
($ in millions)  Amount     Ratio               Amount           Ratio       

 

 

CET1 capital (to risk-weighted assets):

            

Fifth Third Bancorp

  $        11,917       9.82 %     N/A       N/A       

Fifth Third Bank

   14,216       11.92          N/A       N/A       

Tier I risk-based capital (to risk-weighted assets):

            

Fifth Third Bancorp

   13,260       10.93         $12,764       10.83 %  

Fifth Third Bank

   14,216       11.92          13,760       11.85       

Total risk-based capital (to risk-weighted assets):

            

Fifth Third Bancorp

   17,134       14.13          16,895       14.33       

Fifth Third Bank

   15,642       13.12          15,213       13.10       

Tier I leverage (to average assets):

            

Fifth Third Bancorp

   13,260       9.54          12,764       9.66       

Fifth Third Bank

   14,216       10.43          13,760       10.58       

 

 
(a)

Under the U.S. banking agencies’ Basel III Final Rule, assets and credit equivalent amounts of off-balance sheet exposures are calculated according to the standardized approach for risk-weighted assets. The resulting weighted values are added together resulting in the total risk-weighted assets.

(b)

These capital amounts and ratios were calculated under the Supervisory Agencies general risk-based capital rules (Basel I) which were in effect prior to January 1, 2015.

 

 
   2017   2016 
($ in millions)  Amount     Ratio                 Amount     Ratio       

 

 
CET1 capital (to risk-weighted assets):                    

Fifth Third Bancorp

  $        12,517      10.61 %   $        12,426      10.39 % 

Fifth Third Bank

   14,008      12.06         14,015      11.92      

Tier I risk-based capital (to risk-weighted assets):

            

Fifth Third Bancorp

   13,848      11.74         13,756      11.50      

Fifth Third Bank

   14,008      12.06         14,015      11.92      

Total risk-based capital (to risk-weighted assets):

            

Fifth Third Bancorp

   17,887      15.16         17,972      15.02      

Fifth Third Bank

   16,126      13.88         16,175      13.76      

Tier I leverage (to quarterly average assets):

            

Fifth Third Bancorp

   13,848      10.01         13,756      9.90      

Fifth Third Bank

   14,008      10.32         14,015      10.30      

 

 

 

166173  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

29. PARENT COMPANY FINANCIAL STATEMENTS

 

 

                                                            

Condensed Statements of Income (Parent Company Only)

          

 

 

For the years ended December 31 ($ in millions)

   2015                     2014                     2013                  2017                  2016                  2015              

 

 

Income

          

Dividends from subsidiaries:

          

Consolidated nonbank subsidiaries(a)

  $            1,040     1,094     859             $            2,343  1,886  1,040          

Interest on loans to subsidiaries

   15     14     14              21  18  15          

 

 

Total income

   1,055     1,108     873              2,364  1,904  1,055          

 

 

Expenses

          

Interest

   178     163     178              176  171  178          

Other

   22     17     36              42  18  22          

 

 

Total expenses

   200     180     214              218  189  200          

 

 

Income Before Income Taxes and Change in Undistributed Earnings of Subsidiaries

   855     928     659              2,146  1,715  855          

Applicable income tax benefit

   69     62     74              68  63  69          

 

 

Income Before Change in Undistributed Earnings of Subsidiaries

   924     990     733              2,214  1,778  924          

Change in undistributed earnings

   788     491     1,103              (20 (214 788          

 

 

Net Income

  $1,712     1,481     1,836             $2,194  1,564  1,712          

 

 

Other Comprehensive Income

   -     -     -              -   -   -          

 

 

Comprehensive Income Attributable to Bancorp

  $1,712     1,481                 1,836             $2,194  1,564              1,712          

 

 
(a)

The Bancorp’s indirect banking subsidiary paid dividends to the Bancorp’s direct nonbank subsidiary holding company of$1.02.3 billion, $1.1$1.9 billion and $859 million$1.0 billion for the years endedDecember 31,2015 2017, 20142016 and 2013,2015, respectively.

 

                                                            

Condensed Balance Sheets (Parent Company Only)

         

 

 

As of December 31 ($ in millions)

              2015                   2014                               2017                        2016            

 

 

Assets

         

Cash

                               $128    -                                           $80        130          

Short-term investments

    3,728   3,189               3,493        3,074          

Loans to subsidiaries:

         

Nonbank subsidiaries

    982   984               843        969          

 

 

Total loans to subsidiaries

    982   984               843        969          

 

 

Investment in subsidiaries

    

Investment in subsidiaries:

     

Nonbank subsidiaries

    17,831   17,186               17,695        17,588          

 

 

Total investment in subsidiaries

    17,831   17,186               17,695        17,588          

 

 

Goodwill

    80   80               80        80          

Other assets

    432   451               329        366          

 

 

Total Assets

   $23,181   21,890              $22,520        22,207          

 

 

Liabilities

         

Other short-term borrowings

   $404   426              $315        344          

Accrued expenses and other liabilities

    433   405               472        461          

Long-term debt (external)

    6,474   5,394               5,348        5,170          

 

 

Total Liabilities

   $7,311   6,225              $6,135        5,975          

 

 

Shareholders’ Equity

    

Equity

     

Common stock

   $2,051   2,051              $2,051        2,051          

Preferred stock

    1,331   1,331               1,331        1,331          

Capital surplus

    2,666   2,646               2,790        2,756          

Retained earnings

    12,358   11,141               15,122        13,441          

Accumulated other comprehensive income

    197   429               73        59          

Treasury stock

    (2,764 (1,972)              (5,002)       (3,433)         

Noncontrolling interests

    31   39               20        27          

 

 

Total Equity

    15,870   15,665               16,385        16,232          

 

 

Total Liabilities and Equity

   $23,181   21,890              $22,520        22,207          

 

 

 

167174  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Condensed Statements of Cash Flows (Parent Company Only)

            

 

 
For the years ended December 31 ($ in millions)          2015                   2014                 2013                   2017                    2016                     2015           

 

 

Operating Activities

            

Net income

  $        1,712             1,481             1,836            $        2,194             1,564             1,712          

Adjustments to reconcile net income to net cash provided by operating activities:

            

Benefit from deferred income taxes

   (4)             (1)             (1)          

Provision for (benefit from) deferred income taxes

   2             -             (4)         

Net change in undistributed earnings

   (788)             (491)             (1,103)             20             214             (788)         

Net change in:

            

Other assets

   (19)             8              13             37             14             (18)         

Accrued expenses and other liabilities

   32             (40)             (28)             (15)            (35)            31          

 

 

Net Cash Provided by Operating Activities

   933             957              717             2,238             1,757             933          

 

 

Investing Activities

            

Net change in:

            

Short-term investments

   (539)             (684)             976             (419)            654             (539)         

Loans to subsidiaries

   2             (10)             47             126             13             2          

 

 

Net Cash (Used in) Provided by Investing Activities

   (537)             (694)             1,023             (293)            667             (537)         

 

 

Financing Activities

            

Net change in other short-term borrowings

   (22)             115              (255)             (29)            (60)            (22)         

Dividends paid on common stock

   (430)            (402)            (422)         

Dividends paid on preferred stock

   (75)            (52)            (75)         

Proceeds from issuance of long-term debt

   1,099             499              750             697             -             1,099          

Repayment of long-term debt

   -             -              (1,500)             (500)            (1,250)            -          

Dividends paid on common shares

   (422)             (423)             (393)          

Dividends paid on preferred shares

   (75)             (67)             (37)          

Issuance of preferred shares

   -             297              1,034          

Repurchase of treasury shares and related forward contract

   (850)             (654)             (1,320)          

Repurchase of treasury stock and related forward contract

   (1,605)            (661)            (850)         

Other, net

   2             (30)             (19)             (53)            3             2          

 

 

Net Cash Used in Financing Activities

   (268)             (263)             (1,740)             (1,995)            (2,422)            (268)         

 

 

Increase in Cash

   128             -              -           

(Decrease) Increase in Cash

   (50)            2             128          

Cash at Beginning of Period

   -             -              -              130             128             -          

 

 

Cash at End of Period

  $128             -              -             $80             130             128          

 

 

175  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

30. BUSINESS SEGMENTS

 

The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors.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 bylevel. By employing an FTP methodology. This methodology, insulates the business segments are insulated from most benchmark interest rate volatility, enabling them to focus on serving customers through loan originationsthe origination of loans and deposit taking.acceptance of deposits. The FTP systemmethodology assigns charge rates and credit rates to classes of assets and liabilities, respectively, based on expectedthe estimated amount and timing of cash flows for each transaction. Assigning the FTP rate based on matching the duration and the U.S. swap curve. Matching durationof 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 rate risk. In a rising rate environment, the Bancorp benefits from the widening spread between deposit costs and wholesale funding costs. However, therates. The Bancorp’s FTP system credits this benefitmethodology also allocates the contribution to net interest income of the asset-generating and deposit-providing businesses such as Branch Banking and Investment Advisors, on a duration-adjusted basis. The netbasis to better attribute the driver of the performance. As the asset and liability durations are not perfectly matched, the residual impact of the FTP methodology is captured in General Corporate and Other. The charge rates and credit rates are determined using the FTP rate curve, which is based on an estimate of Fifth Third’s marginal borrowing cost in the wholesale funding markets. The FTP curve is constructed using the U.S. swap curve, brokered CD pricing and unsecured debt pricing.

The Bancorp adjusts the FTP charge rates and credit rates as dictated by changes in interest rates for various interest-earning assets and interest-bearing liabilities and by the review of behavioral assumptions, such as prepayment rates on interest-earning assets and the estimated durations for the indeterminate-lived deposits. TheKey assumptions, including the credit raterates provided for demand deposit accounts, isare reviewed annually based upon the account type, its estimated durationannually. Credit rates for deposit products and the

corresponding fed funds, U.S. swap curve or swap rate.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, 20152017 to reflect the current market rates and updated market assumptions. These rates were generally lowerhigher than those in place during 2014,2016, thus net interest income for deposit-providing businessesbusiness segments was negativelypositively impacted during 2015.2017. FTP charge rates on assets were affected by the prevailing level of interest rates and by the duration and repricing characteristics of the portfolio. As overall market rates increased, the FTP charge increased for asset-generating business segments during 2017.

The Bancorp’s methodology for allocating provision for loan and lease losses expense to the business segments are charged provision expense based on theincludes charges or benefits associated with changes in criticized commercial loan

levels in addition to actual net charge-offs experienced by the loans and leases owned by each business segment. Provision for loan and lease losses expense attributable to loan and lease growth and changes in ALLL factors areis captured in General Corporate and Other. The financial results of the business segments include allocations for shared services and headquarters expenses. Additionally, the business segments form synergies by taking advantage of cross-sell opportunities and when funding operations by accessing the capital markets as a collective unit.

The results of operations and financial position for the years ended December 31, 2014 and 2013 were adjusted to reflect the transfer of certain customers and Bancorp employees from Commercial Banking to Branch Banking, effective January 1, 2015. In addition, the balances for the years ended December 31, 2014 and 2013 were adjusted to reflect a change in internal allocation methodology.

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.

168  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Branch Banking provides a full range of deposit and loan and lease products to individuals and small businesses through 1,2541,154 full-service banking centers. Branch Banking offers depository and loan products, such as checking and savings accounts, home equity loans and lines of credit, credit cards and loans for automobiles and other personal financing needs, as well as products designed to meet the specific needs of small businesses, including cash management services.

Consumer Lending includes the Bancorp’s residential mortgage, home equity, automobile and other indirect lending activities. Direct lending activities include the origination, retention and servicing of residential mortgage and home equity loans or lines of credit, sales and securitizations of those loans, pools of loans or lines of credit, and all associated hedging activities. Indirect lending

activities include extending loans to consumers through correspondent lenders and automobile dealers.

Investment AdvisorsWealth and Asset Management provides a full range of investment alternatives for individuals, companies andnot-for-profit organizations. Investment AdvisorsWealth and Asset Management is made up of fourfive main businesses: FTS, an indirect wholly-owned subsidiary of the Bancorp; ClearArc Capital, Inc., an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Insurance Agency, Inc., an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Private Bank; and Fifth Third Institutional Services. FTS offers full service retail brokerage services to individual clients and broker dealerbroker-dealer services to the institutional marketplace. ClearArc Capital, Inc. provides asset management services. Fifth Third Insurance Agency, Inc. assists clients with their financial and risk management needs. Fifth Third Private Bank offers holistic strategies to affluent clients in wealth planning, investing, insurance and wealth protection. Fifth Third Institutional Services provides advisory services for institutional clients including states and municipalities.

 

 

Results176  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 are:31:

 

 

 
2015 ($ in millions) Commercial
Banking   
 Branch
Banking
 Consumer
Lending
   Investment
Advisors
   General
Corporate
and Other
 Eliminations Total       
2017 ($ in millions) Commercial
Banking   
 Branch  
Banking  
 Consumer
Lending
 

Wealth

and Asset
Management

   General
Corporate
and Other
 Eliminations   Total       

 

 

Net interest income

 $1,625    1,555    249     128     (24  -    3,533    $1,652   1,782   240   154    (30      3,798  

Provision for loan and lease losses

  239    159    45     3     (50  -    396     38   153   40   6    24       261  

 

 

Net interest income after provision for loan and lease losses

  1,386    1,396    204     125     26    -    3,137     1,614   1,629   200   148    (54      3,537  

 

 

Total noninterest income

  853  (c)   652  (b)   407     418     822    (149)  (a)   3,003     838  (c)   756  (b)   237   419    1,106   (132)(a)    3,224  

Total noninterest expense

  1,402    1,567    436     455     64    (149  3,775     1,496   1,621   467   454    84   (132)    3,990  

 

 

Income before income taxes

  837    481    175     88     784    -    2,365   

Applicable income tax expense

  98    170    63     30     298    -    659   

Income (loss) before income taxes

  956   764   (30  113    968       2,771  

Applicable income tax expense (benefit)

  150   270   (11  39    129       577  

 

 

Net income

  739    311    112     58     486    -    1,706   

Net income (loss)

  806   494   (19  74    839       2,194  

Less: Net income attributable to noncontrolling interests

  -    -    -     -     (6  -    (6)    -   -   -   -    -        

 

 

Net income attributable to Bancorp

  739    311    112     58     492    -    1,712   

Net income (loss) attributable to Bancorp

  806   494   (19  74    839       2,194  

Dividends on preferred stock

  -    -    -     -     75    -    75     -   -   -   -    75       75  

 

 

Net income available to common shareholders

 $739    311    112     58     417    -    1,637   

Net income (loss) available to common shareholders

 $806   494   (19  74    764       2,119  

 

 

Total goodwill

 $613    1,655    -     148     -    -    2,416    $613   1,655   -   177    -       2,445  

 

 

Total assets

 $        58,166    53,587    22,656     9,938     (3,265  -    141,082    $        58,568   57,892   22,218   9,485    (5,970)  (d)   -    142,193  

 

 
(a)

Revenue sharing agreements between Investment Advisorswealth and Branch Bankingasset management and branch banking are eliminated in the Consolidated Statements of Income.

(b)

Includes an impairment chargecharges of$1097 for branches and land. For more information refer to Note 7 and Note 27.

(c)

Includes an impairment chargecharges of$3652 for operating lease equipment. For more information refer to Note 8 and Note 27.

(d)

Includes bank premises and equipment of$27 classified as held for sale. For more information, refer to Note 7.

 

 

 
2014 ($ in millions) Commercial
Banking   
   Branch
Banking
 Consumer  
Lending  
 Investment
Advisors
   General
Corporate
and Other
 Eliminations Total       
2016 ($ in millions) Commercial
Banking   
 Branch  
Banking  
 Consumer
Lending
   

Wealth

and Asset
Management

   General
Corporate
and Other
   Eliminations   Total       

 

 

Net interest income

 $1,627     1,573   258   121     -    -   3,579    $1,814  1,669  248    168    (284)        3,615  

Provision for loan and lease losses

 235     181   156   3     (260  -   315    76  138  44    1    84         343  

 

 

Net interest income after provision for loan and lease losses

 1,392     1,392   102   118     260    -   3,264    1,738  1,531  204    167    (368)        3,272  

 

 

Total noninterest income

 880     726  (b)  350   410     253    (146)  (a)  2,473     907  (c)   755  (b)  303    399    463     (131)(a)    2,696  

Total noninterest expense

 1,317     1,554   554   445     (15 (146 3,709    1,426  1,621  475    422    90     (131)    3,903  

 

 

Income (loss) before income taxes

 955     564   (102 83     528    -   2,028   

Applicable income tax expense (benefit)

 155     199   (36 29     198    -   545   

Income before income taxes

 1,219  665  32    144            2,065  

Applicable income tax expense

 224  234  12    51    (16)        505  

 

 

Net income (loss)

 800     365   (66 54     330    -   1,483   

Net income

 995  431  20    93    21         1,560  

Less: Net income attributable to noncontrolling interests

  -     -    -    -     2    -       -   -   -    -    (4)        (4)  

 

 

Net income (loss) attributable to Bancorp

 800     365   (66 54     328    -   1,481   

Net income attributable to Bancorp

 995  431  20    93    25         1,564  

Dividends on preferred stock

  -     -    -    -     67    -   67     -   -   -    -    75         75  

 

 

Net income (loss) available to common shareholders

 $800     365   (66 54     261    -   1,414   

Net income available to common shareholders

 $995  431  20    93    (50)        1,489  

 

 

Total goodwill

 $613     1,655    -   148     -    -   2,416    $613  1,655   -    148            2,416  

 

 

Total assets

 $        56,306     51,462   22,567   10,443     (2,072  -   138,706    $        58,092  55,940  22,041    9,487    (3,383)(d)    -    142,177  

 

 
(a)

Revenue sharing agreements between Investment Advisorswealth and Branch Bankingasset management and branch banking are eliminated in the Consolidated Statements of Income.

(b)

Includes an impairment chargecharges of $20$32 for branches and land. For more information refer to Note 7 and Note 27.

(c)

Includes impairment charges of $20 for operating lease equipment. For more information, refer to Note 8 and Note 27.

(d)

Includes bank premises and equipment of $39 classified as held for sale. For more information, refer to Note 7.

 

169  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 
2013 ($ in millions) Commercial
Banking
   Branch  
Banking  
 Consumer  
Lending  
 Investment 
Advisors 
 General 
Corporate 
and Other 
 Eliminations  Total       
2015 ($ in millions) Commercial
Banking   
 Branch  
Banking  
 Consumer
Lending
   Wealth
and Asset
Management
   General
Corporate
and Other
   Eliminations   Total       

 

 

Net interest income

 $1,569         1,380   312   154   146    -   3,561    $1,625  1,555  249    128    (24)        3,533  

Provision for loan and lease losses

 195         211   93   2   (272  -   229    298  151  44    3    (100)        396  

 

 

Net interest income after provision for loan and lease losses

 1,374         1,169   219   152   418    -   3,332    1,327  1,404  205    125    76         3,137  

 

 

Total noninterest income

 811         745  (b)  755   406   654    (144)  (a)  3,227     853  (c)   652  (b)  407    418    822     (149)(a)    3,003  

Total noninterest expense

 1,230         1,576   685   453   161   (144 3,961    1,369  1,598  440    455    62     (149)    3,775  

 

 

Income before income taxes

 955         338   289   105   911    -   2,598    811  458  172    88    836         2,365  

Applicable income tax expense

 157         119   102   37   357    -   772    93  161  61    30    314         659  

 

 

Net income

 798         219   187   68   554    -   1,826    718  297  111    58    522         1,706  

Less: Net income attributable to noncontrolling interests

  -         -    -    -   (10  -   (10)    -   -   -    -    (6)        (6) 

 

 

Net income attributable to Bancorp

 798         219   187   68   564    -   1,836    718  297  111    58    528         1,712  

Dividends on preferred stock

  -         -    -    -   37    -   37     -   -   -    -    75         75  

 

 

Net income available to common shareholders

 $798         219   187   68   527    -   1,799    $718  297  111    58    453         1,637  

 

 

Total goodwill

 $613         1,655    -   148    -    -   2,416    $613  1,655   -    148            2,416  

 

 

Total assets

 $          54,495         47,788   22,624   10,711   (5,175  -   130,443    $        58,105  53,609  22,656    9,939    (3,261)(d)    -     141,048  

 

 
(a)

Revenue sharing agreements between Investment Advisorswealth and Branch Bankingasset management and branch banking are eliminated in the Consolidated Statements of Income.

(b)

Includes an impairment chargecharges of $6$109 for branches and land. For more information refer to Note 7 and Note 27.7.

(c)

Includes impairment charges of $36 for operating lease equipment. For more information, refer to Note 8.

(d)

Includes bank premises and equipment of $81 classified as held for sale.

177  Fifth Third Bancorp


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

31. SUBSEQUENT EVENTEVENTS

 

On January 29, 2016,16, 2018, Vantiv, Inc. completed its previously announced acquisition of Worldpay Group plc. with the resulting combined company named Worldpay, Inc. As a result of this transaction, the Bancorp closed the previously announced sale of its retail operations, including retail accounts, certain private banking deposits and related loan relationships in the St. Louis MSAexpects to Great Southern Bank. The sale included loans, premises and equipment and deposits with aggregate carrying amountsrecognize a gain of approximately $158$415 million $18 million and $228 million, respectively. The Bancorp recorded a gain on the sale of approximately $8 million that will be recognizedin other noninterest income in the Bancorp’s first quarter 2016of 2018 Quarterly Report on Form 10-Q.10-Q for the dilution in its ownership interest in Vantiv Holding, LLC from approximately 8.6% to approximately 4.9%. The Bancorp’s remaining interest in Vantiv Holding, LLC continues to be accounted for as an equity method investment given the nature of Vantiv Holding, LLC’s structure as a limited liability company and

contractual arrangements between Vantiv Holding, LLC and the Bancorp.

On February 8, 2018 the Bancorp entered into an accelerated share repurchase transaction with a counterparty pursuant to which the Bancorp paid $318 million on February 12, 2018 to repurchase shares of its outstanding common stock. The Bancorp is repurchasing the shares of its common stock as part of its Board approved 100 million share repurchase program previously announced on March 15, 2016. The Bancorp expects the settlement of the transaction to occur on or before May 14, 2018.

 

 

170178  Fifth Third Bancorp


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR

15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20152017

Commission file number001-33653

 

LOGOLOGO

Incorporated in the State of Ohio

I.R.S. Employer IdentificationNo. 31-0854434

Address: 38 Fountain Square Plaza

Cincinnati, Ohio 45263

Telephone:(800) 972-3030

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Name of each exchange


on which registered:

Common Stock, Without Par Value The NASDAQ Stock Market LLC
Depositary Shares Representing a 1/1000th1000th Ownership Interest in a Share of 6.625%Fixed-to-Floating RateNon-Cumulative Perpetual Preferred Stock, Series I The NASDAQ Stock Market LLC

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes:x No:¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes:¨ ☐ No:x ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes:x ☒ No:¨ ☐

Indicate by check mark whether the Registrantregistrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes:x ☒ No:¨ ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K.x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company or an emerging growth company. See

definitions of “large accelerated filer,” “accelerated

filer” and filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.

Large accelerated filerx Accelerated filer¨Non-accelerated Non-accelerated filer¨ (Do not check if a smaller reporting company) Smaller reporting company¨ ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark whether the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). Yes:¨ No: x

There were 783,231,128694,212,973 shares of the Bancorp’s Common Stock, without par value, outstanding as of January 31, 2016.2018. The Aggregate Market Value of the Voting Stock held bynon-affiliates of the Bancorp was $16,277,829,299$19,144,447,530 as of June 30, 2015.2017.

DOCUMENTS INCORPORATED BY REFERENCE

This report incorporates into a single document the requirements of the U.S. Securities and Exchange Commission (SEC) with respect to annual reports on Form10-K and annual reports to shareholders. The Bancorp’s Proxy Statement for the 20162018 Annual Meeting of Shareholders is incorporated by reference into Part III of this report.

Only those sections of this 20152017 Annual Report to Shareholders that are specified in this Cross Reference Index constitute part of the Registrant’sregistrant’s Form10-K for the year ended December 31, 2015.2017. No other information contained in this 20152017 Annual Report to Shareholders shall be deemed to constitute any part of this Form10-K nor shall any such information be incorporated into the Form10-K and shall not be deemed “filed” as part of the Registrant’sregistrant’s Form10-K.

10-K Cross Reference Index

PART I  
Item 1. Business   16-20, 172-178180-185 
 Employees   4045 
 Segment Information   42-49, 168-17048-55, 176-177 
 Average Balance Sheets   3641 
 Analysis of Net Interest Income and Net Interest Income Changes   35-3740-42 
 Investment Securities Portfolio   53-54, 101-10259-61, 109-110 
 Loan and Lease Portfolio   52-53,103-10458-59,111-112 
 Risk Elements of Loan and Lease Portfolio   57-7265-79 
 Deposits   55-5661-63 
 Return on Equity and Assets   1531 
 Short-term Borrowings   56,12863, 134 
Item 1A. Risk Factors   26-34186-196 
Item 1B. Unresolved Staff Comments   None 
Item 2. Properties   179197 
Item 3. Legal Proceedings   136-137142-143 
Item 4. Mine Safety Disclosures   N/A 
 Executive Officers of the Bancorp   179197 
PART II  
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   180198 
Item 6. Selected Financial Data   1531 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations   15-8131-88 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk   72-7579-83 
Item 8. Financial Statements and Supplementary Data   84-17092-178 
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   None 
Item 9A. Controls and Procedures   8289 
Item 9B. Other Information   None 

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PART III  
Item 10. Directors, Executive Officers and Corporate Governance   182200 
Item 11. Executive Compensation   182200 
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   
149-152,182156-159,
200

 
Item 13. Certain Relationships and Related Transactions, and Director Independence   182200 
Item 14. Principal Accounting Fees and Services   182200 

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PART IV  
Item 15. Exhibits, Financial Statement Schedules   182-185200-204 
SIGNATURES   186205 

PART I

ITEM 1.    BUSINESS

General Information

Fifth Third Bancorp (the “Bancorp”), an Ohio corporation organized in 1975, is a bank holding company (“BHC”) as defined by the Bank Holding Company Act of 1956, as amended (the “BHCA”), and is registeredhas elected to be treated as such witha financial holding company (“FHC”) under the Gramm-Leach-Bliley Act of 1999 (“GLBA”) and regulations of the Board of Governors of the Federal Reserve System (the “FRB”).

The Bancorp’s principal officeBancorp is locateda diversified financial services company headquartered in Cincinnati, Ohio. As of December 31, 2017, the Company had $142 billion in assets and operates 1,154 full-service Banking Centers, and 2,469 ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Georgia and North Carolina. Fifth Third operates four main businesses: Commercial Banking, Branch Banking, Consumer Lending, and Wealth & Asset Management. As of December 31, 2017 Fifth Third’s interest in Vantiv Holding, LLC was approximately 8.6%. The carrying value of the Bancorp’s investment in Vantiv Holding, LLC was $219 million as of December 31, 2017. Fifth Third is among the largest money managers in the Midwest and, as of December 31, 2017, had $362 billion in assets under care, of which it managed $37 billion for individuals, corporations andnot-for-profit organizations.Investor information andpress releases can be viewed atwww.53.com. Fifth Third’s common stock is traded on the NASDAQ® Global Select Market under the symbol “FITB.”

The Bancorp’s subsidiaries provide a wide range of financial products and services to the retail, commercial, financial, retail, governmental, educational, energy and medical sectors, includinghealthcare sectors. This includes a wide varietyrange of checking, savings and money market accounts, wealth management solutions, payments and commerce solutions, insurance services and credit products such as commercial loans and leases, mortgage loans, credit cards, installment loans, mortgage loans and leases.auto loans. These products and services are delivered through a variety of channels including the Company’s Banking Centers, other offices, telephone sales, the internet and mobile applications. Fifth Third Bank has deposit insurance provided by the Federal Deposit Insurance Corporation (the “FDIC”) through the Deposit Insurance Fund.Fund (the “DIF”). Refer to Exhibit 21 filed as an attachment to this Annual Report on Form10-K for a list of subsidiaries of the Bancorp as of December 31, 2015.2017.

The Bancorp derives the majority of its revenues from the U.S. Revenue from foreign countries and external customers domiciled in foreign countries is immaterial to the Bancorp’s Consolidated Financial Statements.

Additional information regarding the Bancorp’s businesses is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Availability of Financial Information

The Bancorp files reports with the SEC. Those reports include the annual report on Form10-K, quarterly reports on Form10-Q, current reports on Form8-K and proxy statements, as well as any amendments to those reports. The public may read and copy any materials the Bancorp files with the SEC at the SEC’s Public Reference Room at 450 Fifth100 F Street, NW,NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.www.sec.gov. The Bancorp’s annual report on Form10-K, quarterly reports on Form10-Q, current reports on Form8-K, proxy statements and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are accessible at no cost on the Bancorp’s web site at https://www.53.com on a same day basis after they are electronically filed with or furnished to the SEC.

Competition

The Bancorp competes for deposits, loans and other banking services in its principal geographic markets as well as in selected national markets as opportunities arise. In addition to traditional financial institutions, the challenge of attracting and retaining customers for traditional banking services, the Bancorp’s competitors includeBancorp competes with securities dealers, brokers, mortgage bankers, investment advisors, specialty finance, telecommunications, technology and insurance companies.companies as well as large retailers. These competitors, with focused products targeted at highly profitable customer segments,companies compete across geographic boundaries and provide customers increasing access towith meaningful alternatives to traditional banking services in nearly all significant products. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology,

product delivery systems and the accelerating pace of consolidation among financial service providers. These competitive trends are likely to continue.

Acquisitions and Investments

The Bancorp’s strategy for growth includes strengthening its presence in core markets, expanding into contiguous markets and broadening its product offerings while taking into account the integration and other risks of growth. The Bancorp evaluates strategic acquisition and investment opportunities and conducts due diligence activities in connection with possible transactions. As a result, discussions, and in some cases, negotiations may take place and future acquisitions involving cash, debt or equity securities may occur. These typically involve the payment of a premium over book value and current market price, and therefore, some dilution of book value and net income per share may occur with any future transactions.

Regulation and Supervision

In addition to the generally applicable state and federal laws governing businesses and employers, the Bancorp and its banking subsidiary are subject to extensive regulation by federal and state laws and regulations applicable to financial institutions and their parent companies. Virtually all aspects of the business of the Bancorp and its banking subsidiary are subject to specific requirements or restrictions and general regulatory oversight. The principal objectives of state and federal banking laws and regulations and the supervision, regulation and examination of banks and their parent companies (such as the Bancorp) by bank regulatory agencies are the maintenance of the safety and soundness of financial institutions, maintenance of the federal deposit insurance system and the protection of consumers or classes of consumers, rather than the specific protection of shareholders of a bank or the parent company of a bank.

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The Bancorp and its subsidiaries are subject to an extensive regulatory framework of complex and comprehensive federal and state laws and regulations addressing the provision of banking and other financial services and other aspects of the Bancorp’s businesses and operations. Regulation and regulatory oversight have increased significantly over the past five years, primarilysince 2010 as a result of the passage of The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DFA”). The DFA imposes regulatory requirements and oversight over banks and other financial institutions in a number of ways, among which are (i) creating the Consumer Financial Protection Bureau (the “CFPB”) to regulate consumer financial products and services; (ii) creating the Financial Stability Oversight Council to identify and impose additional regulatory oversight on large financial firms; (iii) granting orderly liquidation authority to the FDIC for the liquidation of financial corporations that pose a risk to the financial system of the U.S.; (iv) requiring financial institutions to draft a resolution plan that contemplates the dissolution of the enterprise and submit that resolution plan to both the Federal Reserve and the FDIC; (v) limiting debit card interchange fees; (vi) adopting certain changes to shareholder rights and responsibilities, including a shareholder “say on pay”) vote on executive compensation; (vii) strengthening the SEC’s powers to regulate securities markets; (viii) regulating OTC derivative markets; (ix) restricting variable-rate lending by requiring the ability to repay to be determined for variable-rate loans by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain

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other revisions; (x) changing the base upon which the deposit insurance assessment is assessed from deposits to, substantially, average consolidated assets minus equity; and (xi) amending the Truth in Lending Act with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations. To the extent the following material describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation. In addition, due to the volume of regulations required by the DFA, not all proposed or final regulations that may have an impact on the Bancorp or its banking subsidiary are necessarily discussed.

Regulators

The Bancorp and/or its banking subsidiary are subject to regulation and supervision primarily by the FRB, the CFPBConsumer Financial Protection Bureau (the “CFPB”) and the Ohio Division of Financial Institutions (the “Division”) and additionally by certain other functional regulators and self-regulatory organizations. The Bancorp is also subject to regulation by the SEC by virtue of its status as a public company and due to the nature of some of its businesses. The Bancorp’s banking subsidiary is subject to regulation by the FDIC, which insures the bank’s deposits as permitted by law.

The federal and state laws and regulations that are applicable to banks and to BHCs regulate, among other matters, the scope of their business, their activities, their investments, their capital and liquidity levels, their ability to make capital distributions (such as share repurchases and dividends), their reserves against deposits, the timing of the availability of deposited funds, the amount of loans to individual and related borrowers and the nature, the amount of and collateral for certain loans, and the amount of interest that may be charged on loans as applicable. Various federal and state consumer laws and regulations also affect the services provided to consumers.

The Bancorp and/or its banking subsidiary are required to file various reports with, and is subject to examination by regulators, including the FRB and the Division. The FRB, the Division and the CFPB have the authority to issue orders for BHCs and/or banks to cease and desist from certain banking practices and violations of conditions imposed by, or violations of agreements with, the FRB, the Division and the CFPB. Certain of the Bancorp’s and/or its banking subsidiary regulators are also empowered to assess civil money penalties against companies or individuals in certain situations, such as when there is a violation of a law or regulation. Applicable state and federal laws also grant certain regulators the authority to impose additional requirements and restrictions on the activities of the Bancorp and or its banking subsidiary and, in some situations, the imposition of such additional requirements and restrictions will not be publicly available information.

Acquisitions

The BHCA requires the prior approval of the FRB for a BHC to acquire substantially all the assets of a bank or to acquire direct or indirect ownership or control of more than 5% of any class of the voting shares of any bank, BHC or savings association, or to increase any suchnon-majority ownership or control of any bank, BHC or savings association, or to merge or consolidate with any BHC.

The BHCA prohibits a BHC from acquiring a direct or indirect interest in or control of more than 5% of any class of the voting shares of a company that is not a bank or a BHC and from

engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its banking subsidiaries, except that it may engage in and may own shares of companies engaged in certain activities the FRB

has determined to be so closely related to banking or managing or controlling banks as to be proper incident thereto.

Financial Holding Companies

The Gramm-Leach-Bliley Act of 1999 (“GLBA”) permits a qualifying BHC to become a financial holding company (“FHC”) and therebyA FHC is permitted to engage directly or indirectly in a broader range of activities than those permitted for a BHC under the BHCA. Permitted activities for a FHC include securities underwriting and dealing, insurance underwriting and brokerage, merchant banking and other activities that are declared by the FRB, in cooperation with the Treasury Department, to be “financial in nature or incidental thereto” or are declared by the FRB unilaterally to be “complementary” to financial activities. In addition, a FHC is allowed to conduct permissible new financial activities or acquire permissiblenon-bank financial companies withafter-the-fact notice to the FRB. A BHC may elect to become a FHC if each of its banking subsidiaries is well capitalized, is well managed and has at least a “Satisfactory” rating under the Community Reinvestment Act (“CRA”). The DFA also extended the well capitalized and well managed requirement to the BHC. In 2000, the Bancorp elected and qualified for FHC status under the GLBA. To maintain FHC status, a holding company must continue to meet certain requirements. The failure to meet such requirements could result in material restrictions on the activities of the FHC and may also adversely affect the FHC’s ability to enter into certain transactions (including mergers and acquisitions) or obtain necessary approvals in connection therewith, as well as loss of FHC status. If restrictions are imposed on the activities of an FHC, such information may not necessarily be available to the public.

Dividends

The Bancorp depends in part upon dividends received from its direct and indirect subsidiaries, including its indirect banking subsidiary, to fund its activities, including the payment of dividends. The Bancorp and its banking subsidiary are subject to various federal and state restrictions on their ability to pay dividends. The FRB has authority to prohibit BHCs from paying dividends if such payment is deemed to be an unsafe or unsound practice.

The FRB has indicated generally that it may be an unsafe or unsound practice for BHCs to pay dividends unless a BHC’s net income is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organization’s capital needs, asset quality and overall financial condition. TheIn addition, the Bancorp’s ability to paymake capital distributions, including dividends may be further limited by provisionsis subject to the FRB’snon-objection to the Bancorp’s capital plan as part of the DFAFRB’s Comprehensive Capital Analysis and implanting regulationsReview (“CCAR”) process discussed below (see SystematicallySystemically Significant Companies and Capital).

Source of Strength

Under long-standing FRB policy and now as codified in the DFA, a BHC is expected to act as a source of financial and managerial strength to each of its banking subsidiaries and to commit resources to their support. This support may be required at times when the BHC may not have the resources to provide it.

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FDIC Assessments

As contemplated byUnder the DFAFDIC’s assessment system for determining payments to the FDIC has revised the framework by whichDIF insured depository institutions with more than $10 billion in assets (“large IDIs”) are assessed for purposes of payments to the Deposit Insurance Fund (the “DIF”). The final rule implementing revisions to the assessment system took effect for the quarter beginning April 1, 2011.

Prior to the passage of the DFA, a large IDI’s DIF premiums principally were based on the size of an IDI’s domestic deposit base.

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The DFA changed the assessment base from a large IDI’s domestic deposit base to its total assets less tangible equity. In addition to potentially greatly increasing the size of a large IDI’s assessment base, the expansion of the assessment base affords the FDIC much greater flexibility to vary its assessment system based upon the different asset classes that large IDIs normally hold on their balance sheets.

To implement this provision, the FDIC created an assessment scheme vastly different from the deposit-based system. Under the new system, large IDIs are assessed under a complex “scorecard” methodology that seeks to capture both the probability that an individual large IDI will fail and the magnitude of the impact on the DIF if such a failure occurs. The assessment base of a large IDI is its total assets less tangible equity. This assessment base affords the FDIC much greater flexibility to vary its assessment system based upon the different asset classes that large IDIs normally hold on their balance sheets.

During the first quarter of 2016, the FDIC issued a final rule implementing a 4.5 bps surcharge on the quarterly FDIC insurance assessments of large IDIs. The Bancorp became subject to the FDIC surcharge and reduced regular FDIC insurance assessments on July 1, 2016. The surcharges will continue through the quarter that the DIF reserve ratio first reaches or exceeds 1.35% of insured deposits, but not later than December 31, 2018. If the reserve ratio does not reach 1.35% by December 31, 2018, the FDIC will impose a shortfall assessment on March 31, 2019, on insured depository institutions with total consolidated assets of $10 billion or more, such as the Bancorp.

Transactions with Affiliates

Sections 23A and 23B of the Federal Reserve Act and the FRB’s Regulation W restrict transactions between a bank and its affiliates, (as defined in Sections 23A and 23B of the Federal Reserve Act), including a parent BHC. The Bancorp’s banking subsidiary is subject to certainthese restrictions, which include quantitative and qualitative limits on the amounts and types of transactions that may take place, including but not limitedextensions of credit to restrictions on loans to its affiliates, on investments in the stock or securities thereof, on the taking of such stock or securities as collateral for loans to any borrower,affiliates, purchases of assets from affiliates and on the issuance of a guarantee or letter of credit on their behalf. Amongcertain other things, thesetransactions with affiliates. These restrictions limit the amount of such transactions, require collateral in prescribed amounts for extensions of credit, prohibit the purchase of low quality assets andalso require that the terms of such transactions be substantially equivalent to terms of comparablecredit transactions with non-affiliates.affiliates be collateralized and that transactions with affiliates be on market terms or better for the bank. Generally, the Bancorp’s banking subsidiary is limited in its extension of credit toa bank’s covered transactions with any affiliate are limited to 10% of the banking subsidiary’sbank’s capital stock and surplus and its extension of credit tocovered transactions with all affiliates are limited to 20% of the banking subsidiary’sbank’s capital stock and surplus.

Community Reinvestment Act

The CRA generally requires insured depository institutions, including the Bank, to identify the communities they serve and to make loans and investments and provide services that meet the credit needs of those communities and the CRA requires the FRB to evaluate the performance of such depository institutions with respect to these CRA obligations. Depository institutions must maintain comprehensive records of their CRA activities for purposes of these examinations. The FRB must take into account the record of performance of depository institutions in meeting the credit needs of the entire community served, includinglow- and moderate-income neighborhoods. For purposes of CRA examinations, the FRB rates such institutions’ compliance with the CRA as “Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial Noncompliance.” The Bank must be well-capitalized, well-managed and maintain at least a “Satisfactory” CRA rating for the Bancorp to retain its status as a financial holding company. Failure to meet these requirements could result in the FRB placing limitations or conditions on the Bancorp’s activities (and the commencement of new activities, including merger with or acquisitions of other financial institutions) and could ultimately result in the loss of financial holding company status. The FRB conducted a regularly scheduled examination covering 20112014 through 20132016 to determine the Bancorp’s banking subsidiary’s compliance with the CRA. Although the FRB has not made a final determination, the Bancorp believes that the results of suchThis CRA examination may resultresulted in a change in rating offrom “Needs to Improve” to “Outstanding”. If that would occur, such rating would last at least until the Bancorp’s banking subsidiary’s next CRA examination.

Capital Generally

The FRB has establishedBancorp and its banking subsidiary are subject to the FRB’s capital guidelines for BHCs and FHCs. The FRB, the Division and the FDIC have also issued regulations establishing capital requirements for banks.adequacy rules. Failure to meet capital requirements could

subject the Bancorp and its banking subsidiary to a variety of restrictions and enforcement actions. In addition, as discussed previously, the Bancorp and its banking subsidiary must remain well capitalized and well managed for the Bancorp to retain its status as a FHC.

Systemically Significant Companies and Capital

Pursuant to Title I of the DFA, creates a new regulatory regime for large BHCs. U.S. BHCs with $50 billion or more in total consolidated assets, including Fifth Third, are subject to enhanced prudential standards and early remediation requirements under Title I. Title I of the DFA establishes a broad framework for identifying, applying heightened supervision and regulation to, and (as necessary) limiting the size and activities of systemically significant financial companies.

requirements. The DFA requires the FRB to imposeimposes enhanced capital and risk-management standards on these firms and mandates the FRB to conductconducts annual stress tests on all BHCs with $50 billion or more in assets to determine whether they have adequate capital available to absorb losses in baseline, adverse, or severely adverse economic conditions. In November 2011, the FRB adopted final rules requiring

BHCs with $50 billion or more in consolidated assets tomust submit capital plans to the FRB on an annual basis. basis, and those BHCs are generally required to receive the FRB’snon-objection to their capital plan before making a capital distribution, such as a share repurchase or dividend. In addition, even with an approved capital plan, a BHC must seek the approval of the FRB before making a capital distribution if, among other reasons, the BHC would not meet its regulatory capital requirements after making the proposed capital distribution.

Under the final rules,its CCAR process, the FRB annually will evaluate an institution’sevaluates capital adequacy, internal capital adequacy, assessment processes and capital distribution plans such as dividend payments and stock repurchases. Banks are also required to report certain data to the FRB on a quarterly basis to allow the FRB to monitor progress against the approved capital plans.

of BHCs with $50 billion or more in assets. The CCAR process is intended to help ensure that those BHCs have robust, forward-looking capital planning processes that account for each company’s unique risks and that permit continued operations during times of economic and financial stress. The mandatory elements of the capital plan are an assessment of the expected uses and sources of capital over a nine-quarter planning horizon, a description of all planned capital actions over the planning horizon, a discussion of any expected changes to the Bancorp’sBHC’s business plan that are likely to have a material impact on its capital adequacy or liquidity, a detailed description of the Bancorp’sBHC’s process for assessing capital adequacy and the Bancorp’sBHC’s capital policy. The stress tests require increased involvement by boards of directors in stress testing and public disclosure of the results of both the FRB’s annual stress tests and a BHC’s annual supervisory stress tests, and semi-annual internal stress tests.

In 2014, the FRB amended its capital planning and stress testing rules to, among other things, generally limit aA BHC’s ability to make quarterly capital distributions – that is, dividends and share repurchases – commencing April 1, 2015is subject to limitations if the amount of the bank’sBHC’s actual cumulative quarterly capital issuances of instruments that qualify as regulatory capital are less than the bank hadamounts indicated in its submittedthe BHC’s capital plan as to which it received anon-objection from the FRB. For example, if the BHC issued a smaller amount of additional common stock than it had stated in itsThe 2018 capital plan it wouldmust be required to reduce common dividends and/or the amount of common stock repurchases so that the dollar amount of capital distributions, net of the dollar amount of additional common stock issued (“net distributions”), is no greater than the dollar amount of net distributions relating to its common stock included in its capital plan, as measured on an aggregate basis beginning in the third quarter of the nine-quarter planning horizon through the end of the then current quarter.

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However, not raising sufficient amounts of common stock as planned would not affect distributions related to Additional Tier I Capital instruments and/ or Tier II Capital. These limitations also contain several important qualifications and exceptions, including that scheduled dividend payments on (as opposed to repurchases of) a BHC’s Additional Tier I Capital and Tier II Capital instruments are not restricted if the BHC fails to issue a sufficient amount of such instruments as planned, as well as provisions for certain de minimis excess distributions. The 2014 amendments also revised the due date for capital plan and stress testing submissions. BHCs with consolidated asset of $50 billion or more are required to submit their 2016 capital plansubmitted to the FRB by April 5, 2016.2018.

In December of 2010 and revised in June of 2011,2013, the Basel Committee on Banking Supervision (the “Basel Committee”) issued Basel III, a global regulatory framework, to enhance international capital standards. Basel III is designed to materially improve the quality of regulatory capital and introduces a new minimum common equity requirement. Basel III also raises the minimum capital requirements and introduces capital conservation and countercyclical buffers to induce banking organizations to hold capital in excess of regulatory minimums. In addition, Basel III establishes an international leverage standard for internationally active banks.

In July of 2013, U.S. banking regulators approved the final enhanced regulatory capital rules (“Final(the “Final Capital Rules”). The Final Capital Rules that substantially reviserevised the risk-based capital requirements applicable to BHCs and their depository institution subsidiaries, such as the Bancorp and its banking subsidiary, as compared to the previous U.S. risk-based capital and leverage ratio rules,capital rules. The Final Capital Rules were based on the Basel Committee on Banking Supervision’s (“Basel Committee”) capital framework for enhancing international capital standards (referred to as Basel III) and thereby implementalso implemented certain provisions of the DFA.

The Final Capital Rules, among other things, (i) introduceinclude a new capital measure “Common Equity Tier I” (“CET1”), (ii) specify that Tier I capital consists of CET1 and “Additional Tier I capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the adjustments as compared to existing regulations. CET1 capital consists of common stock instruments that meet the eligibility criteria in the final rules, including;including common stock and related surplus, net of treasury stock, and retained earnings, certain minority interests and, for certain firms, accumulated other comprehensive income (“AOCI”), if elected.. Under the Final Capital Rules, the Bancorp made aone-time election (the“Opt-out Election”) to filter certain AOCI components, with the result that those components are not recognized in the Bancorp’s CET1.

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When fullyphased-in on January 1, 2019, the Final Capital Rules require banking organizations to maintain (i) a minimum ratio of CET1capital conservation buffer. For more information related to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased-in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier I capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer, (which is addedrefer to the 6.0% Tier I capital ratio as that buffer is phased-in, effectively resulting in a minimum Tier I capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital (that is, Tier I plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased-in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a

minimum Tier I leverage ratio of 4.0%, calculated as the ratio of Tier I capital to adjusted average consolidated assets.

Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer will face limitations on the payment of dividends, common stock repurchases and discretionary cash payments to executive officers based on the amountNote 28 of the shortfall.Notes to Consolidated Financial Statements.

The Final Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant common stock investments innon-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. UnderIn September 2017, the U.S. banking regulators proposed to revise and simplify the deductions for these items for banking organizations, such as the Bancorp, that are not subject to the “advanced approaches” under the Final Capital Rules, the Bancorp made a one-time election (the “Opt-out Election”) to filter certain AOCI components, comparable to the treatment under the current general risk-based capital rule.Rules.

The Final Capital Rules were effective for the Bancorp on January 1, 2015, with certain provisions subject tophase-in periods for certain of their components and other provisions. Although not currently required, Fifth Third Bancorp believes periods. In November 2017, the aforementioned capital ratios underU.S. banking regulators revised the revised Final Capital Rules meet or exceedto extend the ratios on a fully phased-in basis. Refer tocurrent transitional treatment of the Non-GAAP Financial Measures sectiondeductions described above fornon-advanced approaches banking organizations until the September 2017 proposal is finalized.

In December 2017, the Basel Committee published standards that it described as the finalization of MD&A for an estimated CET1 capital ratio under the Basel III Final Rule (fully phased-in)post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”). Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including by recalibrating risk weights and introducing new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of December 31, 2015.credit) and provides a new standardized approach for operational risk capital. Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Bancorp or the Bank. The impact of Basel IV will depend on the manner in which it is implemented by the U.S. banking regulators.

In February 2014, the FRB approved a final rule implementing several heightened prudential requirements. Beginning in 2015, theThe FRB’s rules require BHCs with $10 billion or more in consolidated assets to establish risk committees and require BHCs with $50 billion or more in total consolidated assets to comply with enhanced liquidity and overall risk management standards, includingcompany-run liquidity stress testing using various time horizons and a buffer of highly liquid assets based on projected funding needs for variousa30-day time horizons, including 30, 60, and 90 days.horizon. These liquidity-related provisions are designed to be complementary and in addition to the Final LCR Rule applicable to BHCs (as discussed below). Rules to implement two other components of the DFA’s enhanced prudential standards –single-counterparty credit limits and early remediation requirements– are still under consideration by the FRB. Fifth Third has conducted a self evaluationself-evaluation of all the requirements within the enhanced prudential standards, and believe the necessary steps have been taken to ensure compliance with all requirements regarding liquidity, risk exposures, and early remediation.

Liquidity Regulation

Liquidity risk management and supervision have become increasingly important since the financial crisis. On September 3, 2014,In addition to the FRB and otherliquidity buffer requirement discussed above, the Bancorp is subject to the U.S. banking regulators adopted final rules (“Finalrule (the “Final LCR Rule”) implementing a U.S. version of the Basel Committee’s Liquidity Coverage Ratio requirement (“LCR”), which is designed to ensure that the banking entity maintainsentities maintain an adequate level of unencumbered high-quality liquid assets (“HQLA”) equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute30-day liquidity stress scenario. The rules applyLCR Rule applies in modified, less stringent form to banking organizations,BHCs, such as the Bancorp, having $50 billion or more but less than $250 billion in total consolidated assets butand less than $250 billion.$10 billion in totalon-balance sheet foreign exposure. The LCR is the ratio of an institution’s stock of HQLA (the numerator) over projected net cashout-flows over the30-day horizon (the denominator), in each case, as calculated pursuant to the Final LCR Rule.

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Once The Final LCR Rule became fullyphased-in on January 1, 2017, and a subject institution must maintain an LCR equal to at least 100% in order to satisfy this regulatory requirement.. Only specific classes of assets, including U.S. Treasuries, other U.S. government obligations and agency mortgaged-backed securities, qualify under the rule as HQLA, with classes of assets deemed relatively less liquid and/or subject to greater degree of credit risk subject to certain haircuts and caps for purposes of calculating the numerator under the Final LCR Rule. The total net cash outflows amount is determined under the rule by applying certain hypotheticalprescribed outflow and inflow rates which reflect certain standardized stressed assumptions, against the balances of the banking organization’s funding sources, obligations, transactions and assets over the30-day stress period. Inflows that can be included to offset outflows are limited to 75% of outflows (which effectively means that banking organizations must hold high-quality liquid assetsHQLA equal to 25% of outflows even if outflows perfectly match inflows over the stress period). The total net cash outflow amount for the modified LCR applicable to the Bancorp is capped at 70% of the outflow rate that applies to the full LCR.

The initial compliance date for the modified LCR was January 31, 2016, with the requirement fully phased-in by January 2017. The LCR is a minimum requirement, and the FRB can impose additional liquidity requirements as a supervisory matter.

In addition, the Bancorp is also subject to the liquidity-related requirements of the enhanced prudential supervision rules adopted by the FRB under Section 165 of the DFA, as described above. As of December 31, 2015, the Bancorp’s estimated LCR complied with the fully phased-in LCR requirements which become effective in 2017 as outlined in the final rule.

In addition to the LCR, the Basel III framework also included a second standard, referred to as the net stable funding ratio (“NSFR”), which is designed to promote moremedium-and long-term funding of the assets and activities of banks over aone-year time horizon. Although the Basel Committee finalized its formulation of the NSFR in 2014,In May, 2016, the U.S. banking agenciesregulators proposed a rule to implement the NSFR. As proposed, the most stringent requirements would apply to firms with $250 billion or more in assets or $10 billion or more inon-balance sheet foreign exposure. Holding companies with less than $250 billion, but more than $50 billion in assets and less than $10 billion inon-balance foreign exposure, such as the Bancorp, would be subject to a less stringent, modified NFSR requirement. As proposed the NSFR rule would have taken effect on January 1, 2018; however, the U.S. banking regulators have not yet proposed an NSFR for application to U.S. banking organizations or addressed the scope of banking organizations to which it will apply. The Basel Committee’sissued a final NSFR document states that the NSFR applies to internationally active banks, as did its final LCR document as to that ratio.rule.

Privacy and Data Security

The FRB, FDIC and other bank regulatory agencies have adopted final guidelines (the “Guidelines) for safeguarding confidential, personal customer information. The Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.

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In addition, various U.S. regulators, including the Federal Reserve and the SEC, have increased their focus on cyber-security through guidance, examinations and regulations. The Bancorp has adopted a customer information security program that has been approved by the Bancorp’s Board of Directors.

The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers tonon-affiliated third parties. In general, the statute requires explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required

by law, prohibits disclosing such information except as provided in the banking subsidiary’s policies and procedures. The Bancorp’s banking subsidiary has implemented a privacy policy.

Anti-Money Laundering and Sanctions

The Uniting and Strengthening America by Providing Appropriate Tools RequiredBancorp is subject to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”),federal laws that are designed to deny terroristscounter money laundering and othersterrorist financing, and transactions with persons, companies, or foreign governments sanctioned by the ability to obtain access toUnited States. These include the Bank Secrecy Act, the Money Laundering Control Act, the USA PATRIOT Act, and regulations for the International Emergency Economic Powers Act and the Trading with the Enemy Act, as administered by the United States financial system, has significant implications forTreasury Department’s Office of Foreign Assets Control. These laws obligate depository institutions brokers, dealers and other businesses involvedbroker-dealers to verify their customers’ identity, conduct customer due diligence, report on suspicious activity, file reports of transactions in the transfer of money. The Patriot Act, as implementedcurrency, and conduct enhanced due diligence on certain accounts. They also prohibit U.S. persons from engaging in transactions with certain designated restricted countries and persons. Depository institutions and broker-dealers are required by varioustheir federal regulatory agencies, requires financial institutions, including the Bancorp and its subsidiaries,regulators to implementmaintain robust policies and procedures in order to ensure compliance with these obligations.

Failure to comply with these laws or amend existing policiesmaintain an adequate compliance program can lead to significant monetary penalties and procedures with respect to, among other matters, anti-money laundering, compliance, suspicious activityreputational damage, and currency transaction reporting and due diligence on customers. The Patriot Act and its underlying regulations also permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the FRB (and other federal banking agencies) toregulators evaluate the effectiveness of an applicant in combating money laundering activities when considering applications filed under Section 3determining whether to approve a proposed bank merger, acquisition, restructuring, or other expansionary activity. There have been a number of significant enforcement actions by regulators, as well as state attorneys general and the BHCA or the Bank Merger Act.Department of Justice, against banks, broker-dealers andnon-bank financial institutions with respect to these laws and some have resulted in substantial penalties, including criminal pleas. The Bancorp’s Board has approved policies and procedures that are believed to be compliant with the Patriot Act.these laws

Exempt Brokerage Activities

The GLBA amended the federal securities laws to eliminate the blanket exceptions that banks traditionally have had from the definition of “broker” and “dealer.” The GLBA also required that there be certain transactional activities that would not be “brokerage” activities, which banks could effect without having to register as a broker. In September 2007, the FRB and SEC approved Regulation R to govern bank securities activities. Various exemptions permit banks to conduct activities that would otherwise constitute brokerage activities under the securities laws. Those exemptions include conducting brokerage activities related to trust, fiduciary and similar services, certain services and also conducting a de minimis number of riskless principal transactions, certain asset-backed transactions and certain securities lending transactions. The Bancorp only conducts non-exempt brokerage activities through its affiliated registered broker-dealer.

Financial Stability Oversight Council

The DFA created the Financial Stability Oversight Council (“FSOC”), which is chaired by the Secretary of the Treasury and composed of expertise from various financial services regulators. The FSOC has responsibility for identifying risks and responding to emerging threats to financial stability. The Department of Treasury established an assessment schedule for the collection of fees from BHCs and foreign banks with at least $50 billion in assets to cover the expenses of the Office of Financial Research and FSOC. The fees would also cover certain expenses incurred by the FDIC. The Bancorp paid approximately $1 million for the assessment periods from October 1, 2014 through March 31, 2016.

The FRB also adopted a final rule to implement an assessment provision under the DFA equal to the expense and the FRB estimates are necessary or appropriate to supervise and regulate BHCs with $50 billion or more in assets. The Bancorp paid approximately $3 million for the 2015 annual assessment period under the FRB’s rule.

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Executive Compensation

The DFA provides for a say on pay for shareholders of all public companies. UnderPursuant to the DFA, the SEC adopted rules in 2011 requiring that each public company must give its shareholders the opportunity to vote on the compensation of its executives at least once every three years. The DFASEC also addsadopted rules on disclosure and voting requirements for golden parachute compensation that is payable to named executive officers in connection with sale transactions.

The SEC adoptedSEC’s rules finalizing these say on pay provisions in January 2011.

Pursuant to the DFA, in June 2012, the SEC adopted a final rule directingalso direct the stock exchanges to prohibit listing classes of equity securities of a company if a company’s compensation committee members are not independent. The rulerules also providesprovide that a company’s compensation committee may only select a compensation consultant, legal counsel or other advisor after taking into consideration factors to be identified by the SEC

that affect the independence of a compensation consultant, legal counsel or other advisor.

TheIn August 2015, the SEC is required underadopted final rules implementing the pay ratio provisions of the DFA to issue rules obligating companies to disclose in proxy materials for annual meetings of shareholders information that shows the relationship between executive compensation actually paid to their named executive officers and their financial performance, taking into account any change in the value of the shares of a company’s stock and dividends or distributions. The DFA also requires the SEC to propose rulesby requiring companies to disclose the ratio of the compensation of its chief executive officer to the median compensation of its employees. TheUnder SEC adopted final rules implementingguidance issued in September 2017, companies such as the payBancorp will be able to use widely-recognized tests to determine who counts as an employee under the rule, use existing internal records such as payroll and tax information and describe the ratio provisions in August 2015.as an estimate. For a registrant with a fiscal year ending on December 31, such as Bancorp, the pay ratio will be required as part of its executive compensation disclosure in proxy statements or Form10-Ks filed starting in 2018.

The DFA provides that the SEC must issue rules directing the stock exchanges to prohibit listing any security of a company unless the company develops and implements a policy providing for disclosure of the policy of the company on incentive-based compensation that is based on financial information required to be reported under the securities laws and that, inlaws. In the event the company is required to prepare an accounting restatement due to the material noncompliance of the company with any financial reporting requirement under the securities laws, the company will recover from any current or former executive officer of the company who received incentive-based compensation during the three-year period preceding the date on which the company is required to prepare the restatement based on the erroneous data, any exceptional compensation above what would have been paid under the restatement.

The DFA requires the SEC to adopt a rule to require that each company disclose in the proxy materials for its annual meetings whether an employee or board member is permitted to purchase financial instruments designed to hedge or offset decreases in the market value of equity securities granted as compensation or otherwise held by the employee or board member.

Corporate Governance

The DFA clarifies thatIn June 2016, the SEC may, but is not requiredand the federal banking agencies issued a proposed rule to promulgate rules that would require that a company’s proxy

materials include a nominee forimplement the boardincentive-based compensation provisions of directors submitted by a shareholder. Although the SEC promulgated rules to accomplish this, these rules were invalidated by a federal appeals court decision. The SEC has said that they will not challenge the ruling, but has not ruled out the possibility that new rules could be proposed.

The DFA requires stock exchanges to have rules prohibiting their members from voting securities that they do not beneficially own (unless they have received voting instructions from the beneficial owner) with respect to the election of a membersection 956 of the boardDFA. The proposal would establish new requirements for incentive-based compensation at institutions with assets of directors (other than an uncontested election of directors of an investment company registered under the Investment Company Act of 1940), executive compensation or any other significant matter, as determined by the SEC by rule.at least $1 billion. No final rule has been issued.

Debit Card Interchange Fees

The DFA provides for a set of new rules requiring that interchange transaction fees for electric debit transactions be “reasonable” and proportional to certain costs associated with processing the transactions. The FRB was given authority to, among other things, establish standards for assessing whether interchange fees are reasonable and proportional. In June 2011, theThe FRB has issued a final rule establishing certain standards and prohibitions pursuant to the DFA, including establishing standards for debit card interchange fees and allowing for an upward adjustment if the issuer develops and implements policies and procedures reasonably designed to prevent fraud. The provisions regarding debit card interchange fees and the fraud adjustment became effective October 1, 2011. The rules imposerule imposes requirements on the Bancorp and its banking subsidiary and may negatively impact ourits revenues and results of operations. On July 31, 2013, the U.S. District Court for the District of Columbia issued an order granting summary judgment to the plaintiffs in a case challenging certain provisions of the FRB’s rule concerning electronic debit card transaction fees and network exclusivity arrangements (the “Current Rule”) that were adopted to implement Section 1075 of the DFA, known as the Durbin Amendment. The Court held that, in adopting the Current Rule, the FRB violated the Durbin Amendment’s provisions concerning which costs are allowed to be taken into account for purposes of setting fees that are reasonable and proportional to the costs incurred by the issuer and therefore the Current Rule’s maximum permissible fees were too high. In addition, the Court held that the Current Rule’s network non-exclusivity provisions concerning unaffiliated payment networks for debit cards also violated the Durbin Amendment. The Court vacated the Current Rule, but stayed its ruling to provide the FRB an opportunity to replace the invalidated portions. The FRB appealed this decision and on March 21, 2014, the D.C. Circuit Court of Appeals reversed the District Court’s grant of summary judgment and remanded the case for further proceedings in accordance with its opinion. The merchants have filed a petition for writ of certiorari to the U.S. Supreme Court. However, on January 20, 2015, the U.S. Supreme Court declined to hear an appeal of the Circuit Court reversal, thereby largely upholding the Current Rule and substantially reducing uncertainty surrounding debit card interchange fees the Bancorp is permitted to charge. Refer to the Noninterest Income subsection of the Statements of Income Analysis section of MD&A for further information regarding the Bancorp’s debit card interchange revenue.

FDIC Matters and Resolution Planning

Title II of the DFA creates an orderly liquidation process that the FDIC can employ for failing systemically important financial companies.

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Additionally, the DFA also codifies many of the temporary changes that had already been implemented, such as permanently increasing the amount of deposit insurance to $250,000.

In January 2012, the FDIC issued a final rule that requires

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The FDIC’s rules require an insured depository institution with $50 billion or more in total assets to submit periodic contingency plans to the FDIC for resolution in the event of the institution’s failure. The Bancorp’s banking subsidiary is subject to this rule and submitted its most recent resolution plan pursuant to this rule as of December 31, 2015.

In October 2011, the FRBThe FRB’s and FDIC issued a finalFDIC’s rule implementing the resolution planning requirements of Section 165(d) of the DFA. The final ruleDFA requires BHCs with assets of $50 billion or more and nonbank financial firms designated by FSOC for supervision by the FRB to annually submit resolution plans to the FDIC and FRB. Each plan shall describe the company’s strategy for rapid and orderly resolution in bankruptcy during times of financial distress. Under the final rule, companies must submit their initial resolution plans on a staggered basis. In August 2016, the FDIC and the FRB announced that 38 firms, including Fifth Third, will be required to submit their next resolutions by December 31, 2017. The Bancorp submitted its most recent resolution plan pursuant to this rule as of December 31, 2015.2016 by the required December 31, 2017 deadline.

Proprietary Trading and Investing in Certain Funds

The DFA sets forth new restrictions on banking organizations’ ability to engage in proprietary trading and sponsors ofsponsor or invest in “covered funds,” such as private equity and hedge funds (the “Volcker Rule”). The final regulations implementing the Volcker Rule (“Final Rules”) were adopted on December 10, 2013. The Volcker Rule generally prohibits any banking entity from (i) engaging in short-term proprietary trading for its own account, and (ii) sponsoring or acquiring any ownership interest in a private equity or hedge fund. The Volcker Rule and Final Rules contain a number of exceptions. The Volcker Rulebut permits transactions in thecertain securities (such as securities of the U.S. government and its agencies, certain government-sponsored enterprises and states and their political subdivisions, as well as certain investments in small business investment companies. Transactionsgovernment), transactions on behalf of customers and in connection with certainactivities such as market making, underwriting and market making activities, as well as risk-mitigating hedging activities and certain foreign banking activities are also permitted. The Final Rules exclude certain funds from the prohibition on fund ownership and sponsorship including wholly-owned subsidiaries, joint ventures, and acquisitions vehicles, as well as SEC registered investment companies.De minimis ownership of private equity or hedge funds is also permitted under the Final Rules.hedging. In addition, to the general prohibition on sponsorship and investment, the Volcker rule contains additional requirements applicable toRule limits the sponsorship of or investment in a covered fund by any private equity or hedgebanking entity. The Volcker Rule also prohibits certain types of transactions between a banking entity and any covered fund that is sponsored by the banking entity or for which it serves as investment manager or investment advisor. The Bancorp is required under the Final Rulesadvisor, similar to demonstrate that it has a Volcker Rule compliance program. In connection with the issuance of the Final Rules, the Federal Reserve extended the conformance period generally until July 21, 2015. The Final Rules became effective April 2014those transactions between banks and in December 2014, the FRB extended the compliance period through July 2016 for investments in and relationships with such covered funds that were in place prior to December 31, 2013, and indicated that it intends to further extend the compliance period for such investments through July 2017. Further, with respect to covered fundstheir affiliates that are “illiquid funds”, thelimited as described above. The FRB has the authoritygranted extensions to grant up to five more years forbanking entities, including the Bancorp, to conform to the finalrequirements of the Volcker Rule with respect to such illiquid funds.“illiquid funds”, as defined in the Volcker Rule. The Bancorp is also required to maintain a satisfactory Volcker Rule compliance program.    

Derivatives

Title VII of the DFA includes measures to broaden the scope of derivative instruments subject to regulation by requiring clearing and exchange trading of certain derivatives, imposing new capital and margin requirements for certain market participants and imposing position limits on certainover-the-counter derivatives. Certain affiliates of the Bancorp that engage in significant swap activities may be required to registerFifth Third Bank is provisionally registered with the Commodity Futures Trading Commission or the SEC as a swap dealer, security-based swap dealer, major swap participant or major security-based swap participant.dealer. As with the Volcker Rule, the Bancorp will beBank is required to demonstrate that it hasmaintain a satisfactory compliance program to monitor its activities under these regulations. Certain regulations implementing Title VII of the activities of any such entity registered under the new regulations.DFA have not been finalized. The ultimate impact of these derivatives regulations, and the time it will take to comply, continues to remain uncertain. The final regulations willmay impose additional operational and compliance costs on us and may require us to restructurethe restructuring of certain businesses and may negatively impact our revenues and results of operations.

Future Legislative and Regulatory Initiatives

Federal and state legislators as well as regulatory agencies may introduce or enact new laws and rules, or amend existing laws and rules, that may affect the regulation of financial institutions and their holding companies. The impact of any future legislative or regulatory changes cannot be predicted. However, such changes could affect Bancorp’s business, financial condition and results of operations.

 

 

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ITEM 1A. RISK FACTORS

The risks listed below present risks that could have a material impact on the Bancorp’s financial condition, the results of its operations, or its business. Some of these risks are interrelated, and the occurrence of one or more of them may exacerbate the effect of others.

CREDIT RISKS

Deteriorating credit quality has adversely impacted Fifth Third in the past and may adversely impact Fifth Third in the future.

When Fifth Third lends money or commits to lend money the Bancorp incurs credit risk or the risk of loss if borrowers do not repay their loans, leases, credit cards or other credit obligations. The performance of these credit portfolios significantly affects the Bancorp’s financial results and condition. If the current economic environment were to deteriorate, more customers may have difficulty in repaying their credit obligations which could result in a higher level of credit losses and reserves for credit losses. Fifth Third reserves for credit losses by establishing reserves through a charge to earnings. The amount of these reserves is based on Fifth Third’s assessment of credit losses inherent in the credit portfolios including unfunded credit commitments. The process for determining the amount of the ALLL and the reserve for unfunded commitments is critical to Fifth Third’s financial results and condition. It requires difficult, subjective and complex judgments about the environment, including analysis of economic or market conditions that might impair the ability of borrowers to repay their loans.

Fifth Third might underestimate the credit losses inherent in its portfolios and have credit losses in excess of the amount reserved. Fifth Third might increase the reserve because of changing economic conditions, including falling home prices or higher unemployment, or other factors such as changes in borrower’s behavior. As an example, borrowers may “strategically default,” or discontinue making payments on their real estate-secured loans if the value of the real estate is less than what they owe, even if they are still financially able to make the payments.

Fifth Third believes that both the ALLL and the reserve for unfunded commitments are adequate to cover inherent losses at December 31, 2017; however, there is no assurance that they will be sufficient to cover future credit losses, especially if housing and employment conditions decline. In the event of significant deterioration in economic conditions, Fifth Third may be required to increase reserves in future periods, which would reduce earnings.

For more information, refer to the Credit Risk Management subsection of the Risk Management section of MD&A and the Allowance for Loan and Losses and Reserve for Unfunded Commitments subsections of the Critical Accounting Policies section of MD&A.

Fifth Third may have more credit risk and higher credit losses to the extent loans are concentrated by location or industry of the borrowers or collateral.

Fifth Third’s credit risk and credit losses can increase if its loans are concentrated to borrowers engaged in the same or similar activities or to borrowers who as a group may be uniquely or disproportionately affected by economic or market conditions. Deterioration in economic conditions, housing conditions and commodity and real estate values in certain states or locations could result in materially higher credit losses if loans are

concentrated in those locations. Fifth Third has significant exposures to businesses in certain economic sectors such as manufacturing, real estate, financial services and insurance and weaknesses in those businesses may adversely impact Fifth Third’s business, results of operations or financial condition. Additionally Fifth Third has a substantial portfolio of commercial and residential real estate loans and weaknesses in residential or commercial real estate markets may adversely impact Fifth Third’s business, results of operations or financial condition.

Problems encountered by financial institutions larger than or similar to Fifth Third could adversely affect financial markets generally and have direct and indirect adverse effects on Fifth Third.

Fifth Third has exposure to counterparties in the financial services industry and other industries, and routinely executes transactions with such counterparties, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of Fifth Third’s transactions with other financial institutions expose Fifth Third to credit risk in the event of default of a counterparty or client. In addition, Fifth Third’s credit risk may be affected when the collateral it holds cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure. The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading, clearing or other relationships between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Bancorp interacts on a daily basis, and therefore could adversely affect Fifth Third.

LIQUIDITY RISKS

Fifth Third must maintain adequate sources of funding and liquidity.

Fifth Third must maintain adequate funding sources in the normal course of business to support its operations and fund outstanding liabilities, as well as meet regulatory expectations. Fifth Third primarily relies on bank deposits to be a low cost and stable source of funding for the loans Fifth Third makes and the operations of Fifth Third’s business. Core deposits, which include transaction deposits and other time deposits, have historically provided Fifth Third with a sizeable source of relatively stable andlow-cost funds (average core deposits funded 71% of average total assets for the year ending December 31, 2017). In addition to customer deposits, sources of liquidity include investments in the securities portfolio, Fifth Third’s sale or securitization of loans in secondary markets and the pledging of loans and investment securities to access secured borrowing facilities through the FHLB and the FRB, and Fifth Third’s ability to raise funds in domestic and international money and capital markets.

Fifth Third’s liquidity and ability to fund and run the business could be materially adversely affected by a variety of conditions and factors, including financial and credit market disruptions and volatility or a lack of market or customer confidence in financial markets in general similar to what occurred during the financial crisis in 2008 and early 2009, which may result in a loss of customer deposits or outflows of cash or collateral and/or ability to access capital markets on favorable terms.

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Other conditions and factors that could materially adversely affect Fifth Third’s liquidity and funding include:

a lack of market or customer confidence in Fifth Third or negative news about Fifth Third or the financial services industry generally, which also may result in a loss of deposits and/or negatively affect the ability to access the capital markets;
the loss of customer deposits to alternative investments;
inability to sell or securitize loans or other assets,
increased regulatory requirements,
and reductions in one or more of Fifth Third’s credit ratings.

A reduced credit rating could adversely affect Fifth Third’s ability to borrow funds and raise the cost of borrowings substantially and could cause creditors and business counterparties to raise collateral requirements or take other actions that could adversely affect Fifth Third’s ability to raise capital. Many of the above conditions and factors may be caused by events over which Fifth Third has little or no control such as what occurred during the financial crisis. While market conditions have stabilized and, in many cases, improved, there can be no assurance that significant disruption and volatility in the financial markets will not occur in the future.

Recent regulatory changes relating to liquidity and risk management may also negatively impact Fifth Third’s results of operations and competitive position. Various regulations have been adopted to impose more stringent liquidity requirements for large financial institutions, including Fifth Third. These regulations address, among other matters, liquidity stress testing and minimum liquidity requirements. In addition, the NSFR has been proposed. Given the overlap and complex interactions of these new and prospective liquidity-related regulations with other regulatory changes, including the resolution and recovery framework applicable to Fifth Third, the full impact of these regulations will remain uncertain until their full implementation. It is also uncertain whether adopted and proposed regulations will ultimately be rolled back or modified as a result of the change in administration in the U.S. Uncertainty about the timing and scope of any such changes as well as the cost of complying with a new regulatory regime may negatively impact Fifth Third’s business.

If Fifth Third is unable to continue to fund assets through customer bank deposits or access capital markets on favorable terms or if Fifth Third suffers an increase in borrowing costs or otherwise fails to manage liquidity effectively, then Fifth Third’s liquidity, operating margins, and financial results and condition may be materially adversely affected. Fifth Third may also need to raise additional capital through the issuance of stock, which could dilute the ownership of existing stockholders, or reduce or even eliminate common stock dividends or share repurchases to preserve capital.

Fifth Third and/or the holders of its securities could be adversely affected by unfavorable ratings from rating agencies.

Fifth Third’s ability to access the capital markets is important to its overall funding profile. This access is affected by the ratings assigned by rating agencies to Fifth Third, certain of its subsidiaries and particular classes of securities they issue. The interest rates that Fifth Third pays on its securities are also influenced by, among other things, the credit ratings that it, its subsidiaries and/or its securities receive from recognized rating agencies. A downgrade to Fifth Third or its subsidiaries’ credit

rating could affect its ability to access the capital markets, increase its borrowing costs and negatively impact its profitability. A ratings downgrade to Fifth Third, its subsidiaries or their securities could also create obligations or liabilities of Fifth Third under the terms of its outstanding securities that could increase Fifth Third’s costs or otherwise have a negative effect on its results of operations or financial condition. Additionally, a downgrade of the credit rating of any particular security issued by Fifth Third or its subsidiaries could negatively affect the ability of the holders of that security to sell the securities and the prices at which any such securities may be sold.

If Fifth Third is unable to maintain or grow its deposits, it may be subject to paying higher funding costs.

The total amount that Fifth Third pays for funding costs is dependent, in part, on Fifth Third’s ability to maintain or grow its deposits. If Fifth Third is unable to sufficiently maintain or grow its deposits to meet liquidity objectives, it may be subject to paying higher funding costs. Fifth Third competes with banks and other financial services companies for deposits. If competitors raise the rates they pay on deposits, Fifth Third’s funding costs may increase, either because Fifth Third raises rates to avoid losing deposits or because Fifth Third loses deposits and must rely on more expensive sources of funding. Also, customers typically move money from bank deposits to alternative investments during rising interest rate environments, an environment that the U.S. is expected to see over the medium-term. Checking and savings account balances and other forms of customer deposits may decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. Fifth Third’s bank customers could take their money out of the Bank and put it in alternative investments, causing Fifth Third to lose a lower cost source of funding. Higher funding costs reduce Fifth Third’s net interest margin and net interest income.

The Bancorp’s ability to receive dividends from its subsidiaries accounts for most of its revenue and could affect its liquidity and ability to pay dividends.

Fifth Third Bancorp is a separate and distinct legal entity from its subsidiaries. Fifth Third Bancorp typically receives substantially all of its revenue from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on Fifth Third Bancorp’s stock and interest and principal on its debt. Various federal and/or state laws and regulations, as well as regulatory expectations, limit the amount of dividends that the Bancorp’s banking subsidiary and certain nonbank subsidiaries may pay. Regulatory scrutiny of liquidity and capital levels at bank holding companies and insured depository institution subsidiaries has resulted in increased regulatory focus on all aspects of capital planning, including dividends and other distributions to shareholders of banks such as the parent bank holding companies. Also, Fifth Third Bancorp’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of that subsidiary’s creditors. Limitations on the Bancorp’s ability to receive dividends from its subsidiaries could have a material adverse effect on its liquidity and ability to pay dividends on stock or interest and principal on its debt. For further information refer to Note 3 of the Notes to Consolidated Financial Statements.

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OPERATIONAL RISKS

Fifth Third is exposed to cyber-security risks, including denial of service, hacking, and identity theft, which could result in the disclosure, theft or destruction of confidential information.

Fifth Third relies heavily on communications and information systems to conduct its business. This includes the use of networks, the internet, digital applications, and the telecommunications and computer systems of third parties to perform business activities. Additionally, digital and mobile technologies are leveraged to interact with customers, which increases the risk of information security breaches. Any failure, interruption or breach in security of these systems could result in disruptions to Fifth Third’s accounting, deposit, loan and other systems, and adversely affect its customer relationships. While Fifth Third has policies and procedures designed to prevent or limit the effect of these possible events, there can be no assurance that any such failure, interruption or security breach will not occur or, if any does occur, that it can be sufficiently remediated.

There have been increasing efforts on the part of third parties, including through cyber-attacks, to breach data security at financial institutions or with respect to financial transactions. There have been several recent instances involving financial services, credit bureaus, and consumer-based companies reporting the unauthorized disclosure of client or customer information or the destruction or theft of corporate data, by both private individuals and foreign governments. Specifically, the recent Equifax breach included the compromise of millions of consumer records, some of which were Fifth Third customers. In addition, because the techniques used to cause such security breaches change frequently, often are not recognized until launched against a target and may originate from less regulated and remote areas around the world, Fifth Third may be unable to proactively address these techniques or to implement adequate preventative measures. Furthermore, there has been a well-publicized series of apparently related distributed denial of service attacks on large financial services companies, including Fifth Third Bank, and “ransom” attacks where hackers have requested payments in exchange for not disclosing customer information.

Cyber threats are rapidly evolving and Fifth Third may not be able to anticipate or prevent all such attacks. These risks are heightened through the increasing use of digital and mobile solutions which allow for rapid money movement and increase the difficulty to detect and prevent fraudulent transactions. Fifth Third may incur increasing costs in an effort to minimize these risks or in the investigation of such cyber-attacks or related to the protection of the Bancorp’s customers from identity theft as a result of such attacks. Fifth Third may also be required to incur significant costs in connection with any regulatory investigation or civil litigation resulting from a cyber-attack. Despite its efforts, the occurrence of any failure, interruption or security breach of Fifth Third’s systems or third-party service providers (or providers to such third-party service providers), particularly if widespread or resulting in financial losses to customers, could also seriously damage Fifth Third’s reputation, result in a loss of customer business, result in substantial remediation costs, additional cyber-security protection costs and increased insurance premiums, subject it to additional regulatory scrutiny, or expose it to civil litigation and financial liability.

Fifth Third relies on its systems and certain third party service providers, and certain failures could materially adversely affect operations.

Fifth Third collects, processes and stores sensitive consumer data by utilizing computer systems and telecommunications networks operated by both Fifth Third and third party service providers. Fifth Third has security, backup and recovery systems in place, as

well as a business continuity plan to ensure the systems will not be inoperable. Fifth Third also has security to prevent unauthorized access to the systems. In addition, Fifth Third requires its third party service providers to maintain similar controls. However, Fifth Third cannot be certain that the measures will be successful. A security breach in the systems and loss of confidential information such as credit card numbers and related information could result in significant reputational harm and the loss of customers’ confidence in Fifth Third. As a result, we may lose existing and new customers and incur significant costs, including privacy monitoring activities.

Fifth Third’s necessary dependence upon automated systems to record and process its transaction volume poses the risk that technical system flaws or employee errors, tampering or manipulation of those systems will result in losses and may be difficult to detect. Fifth Third may also be subject to disruptions of its operating systems arising from events that are beyond its control (for example, computer viruses or electrical or telecommunications outages).

Third parties with which the Bancorp does business both domestically and offshore, as well as vendors and other third parties with which the Bancorp’s customers do business, can also be sources of operational risk to the Bancorp, particularly where activities of customers are beyond the Bancorp’s security and control systems, such as through the use of the internet, personal computers, tablets, smart phones and other mobile services. Security breaches affecting the Bancorp’s customers, or systems breakdowns or failures, security breaches or employee misconduct affecting such other third parties, may require the Bancorp to take steps to protect the integrity of its own operational systems or to safeguard confidential information of the Bancorp or its customers, thereby increasing the Bancorp’s operational costs and potentially diminishing customer satisfaction. If personal, confidential or proprietary information of customers or clients in the Bancorp’s possession were to be mishandled or misused, the Bancorp could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could include circumstances where, for example, such information was erroneously provided to parties who are not permitted to have the information, either through the fault of the Bancorp’s systems, employees or counterparties, or where such information was intercepted or otherwise compromised by third parties. The Bancorp may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond the Bancorp’s control, which may include, for example, security breaches; electrical or telecommunications outages; failures of computer components or servers or other damage to the Bancorp’s property or assets; natural disasters or severe weather conditions; health emergencies; or events arising from local or larger-scale political events, including outbreaks of hostilities or terrorist acts. For example, it has been reported that there is a fundamental security flaw in computer chips found in many types of computing devices, including phones, tablets, laptops, and desktops. While the Bancorp believes that its current resiliency plans are both sufficient and adequate, there can be no assurance that such plans will fully mitigate all potential business continuity risks to the Bancorp or its customers and clients.

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Any failures or disruptions of the Bancorp’s systems or operations could give rise to losses in service to customers and clients, adversely affect the Bancorp’s business and results of operations by subjecting the Bancorp to losses or liability, or require the Bancorp to expend significant resources to correct the failure or disruption, as well as by exposing the Bancorp to reputational harm, litigation, regulatory fines or penalties or losses not covered by insurance. The Bancorp could also be adversely affected if it loses access to information or services from a third party service provider as a result of a security breach or system or operational failure or disruption affecting the third party service provider.

Fifth Third may not be able to effectively manage organizational changes and implement key initiatives in a timely fashion, or at all, due to competing priorities which could adversely affect its business, results of operations, financial condition and reputation.

Fifth Third is subject to rapid changes in technology, regulation, and product innovation, and faces intense competition for customers, sources of revenue, capital, services, qualified employees, and other essential business resources. In order to meet these challenges, Fifth Third is or may be engaged in numerous critical strategic initiatives at the same time. Accomplishing these initiatives may be complex, time intensive and require significant financial, technological, management and other resources. These initiatives may consume management’s attention and may compete for limited resources. In addition, organizational changes may need to be implemented throughout Fifth Third as a result of the new products, services, partnerships and processes that arise from the execution of the various strategic initiatives. Fifth Third may have difficulty managing these organizational changes and executing these initiatives effectively in a timely fashion, or at all. Fifth Third’s failure to do so could expose it to litigation or regulatory action and may damage Fifth Third’s business, results of operations, financial condition and reputation.

Fifth Third may not be able to successfully implement future information technology system enhancements, which could adversely affect Fifth Third’s business operations and profitability.

Fifth Third invests significant resources in information technology system enhancements in order to provide functionality and security at an appropriate level. Fifth Third may not be able to successfully implement and integrate future system enhancements, or may not be able to do so on a cost-effective basis, which could adversely impact the ability to provide timely and accurate financial information in compliance with legal and regulatory requirements, which could result in sanctions from regulatory authorities. Such sanctions could include fines and result in reputational harm and have other negative effects. In addition, future system enhancements could have higher than expected costs and/or result in operating inefficiencies, which could increase the costs associated with the implementation as well as ongoing operations. Failure to properly utilize system enhancements that are implemented in the future could result in impairment charges that adversely impact Fifth Third’s financial condition and results of operations and could result in significant costs to remediate or replace the defective components. In addition, Fifth Third may incur significant training, licensing, maintenance, consulting and amortization expenses during and after systems implementations, and any such costs may continue for an extended period of time.

Fifth Third’s framework for managing risks may not be effective in mitigating its risk and loss.

Fifth Third’s risk management framework seeks to mitigate risk and loss. Fifth Third has established processes and procedures intended to identify, measure, monitor, report, and analyze the types of risk to which it is subject, including liquidity risk, credit risk, market risk, legal risk, compliance risk, strategic risk, reputational risk, and operational risk related to its employees, systems and vendors, among others. Any system of control and any system to reduce risk exposure, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. A failure in Fifth Third’s internal controls could have a significant negative impact not only on its earnings, but also on the perception that customers, regulators and investors may have of Fifth Third. Fifth Third continues to devote a significant amount of effort, time and resources to improving its controls and ensuring compliance with complex regulations.

Additionally, instruments, systems and strategies used to hedge or otherwise manage exposure to various types of market compliance, credit, liquidity, operational and business risks and enterprise-wide risk could be less effective than anticipated. As a result, Fifth Third may not be able to effectively mitigate its risk exposures in particular market environments or against particular types of risk. If Fifth Third’s risk management framework proves ineffective, Fifth Third could incur litigation, negative regulatory consequences, reputational damages among other adverse consequences and Fifth Third could suffer unexpected losses that may affect its financial condition or results of operations.

Fifth Third may experience losses related to fraud, theft or violence.

Fifth Third may experience losses incurred due to customer or employee fraud, theft or physical violence. Additionally, physical violence may negatively affect Fifth Third’s key personnel, facilities or systems. These losses may be material and negatively affect Fifth Third’s results of operations, financial condition or prospects. These losses could also lead to significant reputational risks and other effects. The sophistication of external fraud actors increases and in some cases includes large criminal rings, which increases the resources and infrastructure needed to thwart these attacks. The industry fraud threat continues to evolve, including but not limited to card fraud, check fraud, social engineering and phishing attacks for identity theft and account takeover. Fifth Third continues to invest in fraud prevention in the forms of people and systems designed to prevent, detect and mitigate the customer and financial impacts.

Fifth Third could suffer if it fails to attract and retain skilled personnel.

Fifth Third’s success depends, in large part, on its ability to attract and retain key individuals. Competition for qualified candidates in the activities and markets that Fifth Third serves is intense, which may increase Fifth Third’s expenses and may result in Fifth Third not being able to hire candidates or retain them. If Fifth Third is not able to hire qualified candidates or retain its key personnel, Fifth Third may be unable to execute its business strategies and may suffer adverse consequences to its business, operations and financial condition.

Compensation paid by financial institutions such as Fifth Third has become increasingly regulated, particularly under the DFA, which regulation affects the amount and form of compensation Fifth Third pays to hire and retain talented employees.

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If Fifth Third is unable to attract and retain qualified employees, or do so at rates necessary to maintain its competitive position, or if compensation costs required to attract and retain employees become more expensive, Fifth Third’s performance, including its competitive position, could be materially adversely affected.

REGULATORY COMPLIANCE RISKS

Fifth Third is subject to extensive governmental regulation which could adversely impact Fifth Third or the businesses in which Fifth Third is engaged.

Government regulation and legislation subject Fifth Third and other financial institutions to restrictions, oversight and/or costs that may have an impact on Fifth Third’s business, financial condition, results of operations or the price of its common stock.

Fifth Third is subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of its operations and limit the businesses in which Fifth Third may engage. These laws and regulations may change from time to time and are primarily intended for the protection of consumers and depositors and are not designed to protect security-holders. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact Fifth Third or its ability to increase the value of its business. Additionally, actions by regulatory agencies or significant litigation against Fifth Third could cause it to devote significant time and resources to defending itself and may lead to penalties that materially affect Fifth Third and its shareholders. Future changes in the laws, including tax laws, or regulations or their interpretations or enforcement may also be materially adverse to Fifth Third and its shareholders or may require Fifth Third to expend significant time and resources to comply with such requirements.

Although there is uncertainty regarding whether the programs implemented and the legislation passed following the financial crisis will remain in place or be modified or repealed under the new administration in the U.S., any new proposals for legislation and regulations introduced could further substantially increase compliance costs in the financial services industry. In addition, changes to laws and regulations could have a negative impact in the short term even if the longer-term impact of those changes may be expected to be positive for Fifth Third. Fifth Third cannot predict whether any pending or future legislation will be adopted or the substance and impact of any such new legislation on Fifth Third. Changes in regulation could affect Fifth Third in a substantial way and could have an adverse effect on its business, financial condition and results of operations. Additionally, legislation or regulatory reform could affect the behaviors of third parties that Fifth Third deals with in the course of business, such as rating agencies, insurance companies and investors. The extent to which Fifth Third can adjust its strategies to offset such adverse impacts also is not known at this time.

In addition, changes in laws or regulations that affect Fifth Third’s customers and business partners could negatively affect Fifth Third’s revenues and expenses. Certain changes in laws such as recent tax law reforms that impose limitations on the deductibility of interest may decrease the demand for Fifth Third’s products or services and could negatively affect its revenues and results of operations. Other changes in laws or regulations could cause Fifth Third’s third party service providers and other vendors to increase the prices they charge to Fifth Third and negatively affect Fifth Third’s expenses and financial results.

Fifth Third is subject to various regulatory requirements that may limit its operations and potential growth.

Under federal and state laws and regulations pertaining to the safety and soundness of insured depository institutions and their holding companies, the FRB, the FDIC, the CFPB and the Ohio Division of Financial Institutions have the authority to compel or restrict certain actions by Fifth Third and its banking subsidiary, Fifth Third Bank. Fifth Third and its banking subsidiary are subject to such supervisory authority and, more generally, must, in certain instances, obtain prior regulatory approval before engaging in certain activities or corporate decisions. There can be no assurance that such approvals, if required, would be forthcoming or that such approvals would be granted in a timely manner. Failure to receive any such approval, if required, could limit or impair Fifth Third’s operations, restrict its growth and/or affect its dividend policy. Such actions and activities subject to prior approval include, but are not limited to, increasing dividends paid by Fifth Third or its banking subsidiary, entering into a merger or acquisition transaction, acquiring or establishing new branches, and entering into certain new businesses.

Failure by the Bancorp or Fifth Third Bank to meet the applicable eligibility requirements for FHC status (including capital and management requirements and that Fifth Third Bank maintain at least a “Satisfactory” CRA rating) may result in restrictions on certain activities of the Bancorp, including the commencement of new activities and mergers with or acquisitions of other financial institutions, and could ultimately result in the loss of financial holding company status.

Fifth Third and other financial institutions are subject to scrutiny from government authorities, including bank regulatory authorities, stemming from broader systemic regulatory concerns, including with respect to stress testing, capital levels, asset quality, provisioning, AML/BSA, consumer compliance and other prudential matters and efforts to ensure that financial institutions take steps to improve their risk management and prevent future crises.

In this regard, government authorities, including the bank regulatory agencies and law enforcement, are also pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial activities, which heightens the risks associated with actual and perceived compliance failures and may also adversely affect Fifth Third’s ability to enter into certain transactions or engage in certain activities, or obtain necessary regulatory approvals in connection therewith. The government enforcement authority includes, among other things, the ability to assess significant civil or criminal monetary penalties, fines, or restitution; to issue cease and desist or removal orders; and to initiate injunctive actions against banking organizations and institution-affiliated parties. These enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices.

In some cases, regulatory agencies may take supervisory actions that may not be publicly disclosed, which restrict or limit a financial institution. Finally, as part of Fifth Third’s regular examination process, Fifth Third’s and its banking subsidiary’s respective regulators may advise it and its banking subsidiary to operate under various restrictions as a prudential matter. Such supervisory actions or restrictions, if and in whatever manner imposed, could negatively affect Fifth Third’s ability to engage in new activities and certain transactions, as well as have a material adverse effect on Fifth Third’s business and results of operations and may not be publicly disclosed.

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Fifth Third could face serious negative consequences if its third party service providers, business partners or investments fail to comply with applicable laws, rules or regulations.

Fifth Third is expected to oversee the legal and regulatory compliance of its business endeavors, including those performed by third party service providers, business partners, other vendors and certain companies in which Fifth Third has invested. Legal authorities and regulators could hold Fifth Third responsible for failures by these parties to comply with applicable laws, rules or regulations. These failures could expose Fifth Third to significant litigation or regulatory action that could limit its activities or impose significant fines or other financial losses. Additionally, Fifth Third could be subject to significant litigation from consumers or other parties harmed by these failures and could suffer significant losses of business and revenue, as well as reputational harm as a result of these failures.

As a regulated entity, the Bancorp is subject to certain capital requirements that may limit its operations and potential growth.

As a BHC and an FHC, the Bancorp is subject to the comprehensive, consolidated supervision and regulation of the FRB, including risk-based and leverage capital requirements, investment practices, dividend policy and growth. The Bancorp must maintain certain risk-based and leverage capital ratios as required by the FRB which can change depending upon general economic conditions and the Bancorp’s particular condition, risk profile and growth plans. Compliance with the capital requirements, including leverage ratios, may limit operations that require the intensive use of capital and could adversely affect the Bancorp’s ability to expand or maintain present business levels.

U.S. federal banking agencies’ capital rules implementing Basel III became effective for the Bancorp on January 1, 2015, subject tophase-in periods for certain components and other provisions. The need to maintain more and higher quality capital as well as greater liquidity could limit Fifth Third’s business activities, including lending, and the ability to expand, either organically or through acquisitions. Moreover, although the capital requirements are being phased in over time, U.S. federal banking agencies take into account expectations regarding the ability of banks to meet the capital requirements, including under stressed conditions, in approving actions that represent uses of capital, such as dividend increases and share repurchases.

Failure by the Bancorp’s banking subsidiary to meet applicable capital requirements could subject the Bank to a variety of enforcement remedies available to the federal regulatory authorities. These include limitations on the ability to pay dividends, the issuance by the regulatory authority of a capital directive to increase capital, and the termination of deposit insurance by the FDIC.

Fifth Third’s ability to pay or increase dividends on its common stock or to repurchase its capital stock is restricted.

Fifth Third’s ability to pay dividends or repurchase stock is subject to regulatory requirements and the need to meet regulatory expectations. As part of CCAR, Fifth Third’s capital plan is subject to an annual assessment by the FRB, and the FRB may object to Fifth Third’s capital plan if Fifth Third does not demonstrate an ability to maintain capital above the minimum regulatory capital ratios under baseline and stressful conditions throughout a nine-quarter planning horizon. If the FRB objects to Fifth Third’s capital plan, Fifth Third would be subject to limitations on its ability to make capital distributions (including paying dividends and repurchasing stock).

Regulation of Fifth Third by the CFTC imposes additional operational and compliance costs.

The Commodity Futures Trading Commission, (“CFTC”) and SEC regulate the U.S. derivatives markets pursuant to the authority provided under Title VII of DFA. While most of the provisions related to derivatives markets are now in effect, several additional requirements await final regulations from the relevant regulatory agencies for derivatives, the CFTC and the SEC. One aspect of this regulatory regime for derivatives is that substantial oversight responsibility has been provided to the CFTC, which, as a result, now has a meaningful supervisory role with respect to some of Fifth Third’s businesses. In 2014, Fifth Third Bank provisionally registered as a swap dealer with the CFTC and became subject to new substantive requirements, including real time trade reporting and robust record keeping requirements, business conduct requirements (including daily valuations, disclosure of material risks associated with swaps and disclosure of material incentives and conflicts of interest), and mandatory clearing and exchange trading of all standardized swaps designated by the relevant regulatory agencies as required to be cleared. Although the ultimate impact will depend on the promulgation of all final regulations, Fifth Third’s derivatives activity is subject to FRB margin requirements and may also be subject to capital requirements specific to this derivatives activity. These requirements will collectively impose implementation and ongoing compliance burdens on Fifth Third and will introduce additional legal risk (including as a result of newly applicable antifraud and anti-manipulation provisions and private rights of action). Once finalized, the rules may raise the costs and liquidity burden associated with Fifth Third’s derivatives activities and could have an adverse effect on its business, financial condition and results of operations.

We may become subject to more stringent regulatory requirements and activity restrictions if the FRB and FDIC determine that Fifth Third’s resolution plan is not credible.

The DFA and implementing regulations jointly issued by the FRB and FDIC require bank holding companies with more than $50 billion in assets to annually submit a resolution plan to the FRB and the FDIC that, in the event of material financial distress or failure, establish the rapid, orderly resolution under the U.S. Bankruptcy Code. If the FRB and the FDIC jointly determine that Fifth Third’s resolution plan is not “credible,” Fifth Third could become subjected to more stringent capital, leverage or liquidity requirements or restrictions, or restrictions on Fifth Third’s growth, activities or operations, and could eventually be required to divest certain assets or operations in ways that could negatively impact its operations and strategy.

Deposit insurance premiums levied against Fifth Third Bank may increase if the number of bank failures increase or the cost of resolving failed banks increases.

The FDIC maintains a DIF to protect insured depositors in the event of bank failures. The DIF is funded by fees assessed on insured depository institutions including Fifth Third Bank. Future deposit premiums paid by Fifth Third Bank depend on FDIC rules, which are subject to change, the level of the DIF and the magnitude and cost of future bank failures. Fifth Third Bank may be required to pay significantly higher FDIC premiums if market developments change such that the DIF balance is reduced or the FDIC changes its rules to require higher premiums.

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If an orderly liquidation of a systemically important bank holding company ornon-bank financial company were triggered, Fifth Third could face assessments for the Orderly Liquidation Fund.

The DFA created authority for the orderly liquidation of systemically important bank holding companies andnon-bank financial companies and is based on the FDIC’s bank resolution model. The Secretary of the U.S. Treasury may trigger liquidation under this authority only after consultation with the President of the United States and after receiving a recommendation from the boards of the FDIC and the Federal Reserve upon atwo-thirds vote. Liquidation proceedings will be funded by the Orderly Liquidation Fund established under the DFA, which will borrow from the U.S. Treasury and impose risk-based assessments on covered financial companies. Risk-based assessments would be made, first, on entities that received more in the resolution than they would have received in the liquidation to the extent of such excess, and second, if necessary, on, among others, bank holding companies with total consolidated assets of $50 billion or more, such as Fifth Third. Any such assessments may adversely affect Fifth Third’s business, financial condition or results of operations.

MARKET RISKS

Interest rates on our outstanding financial instruments might be subject to change based on regulatory developments, which could adversely affect our revenue, expenses, and the value of those financial instruments.

LIBOR and certain other “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. It is unclear whether, at that time, LIBOR will cease to exist or if new methods of calculating LIBOR will be established. If LIBOR ceases to exist or if the methods of calculating LIBOR change from current methods for any reason, interest rates on our floating rate obligations, loans, deposits, derivatives, and other financial instruments tied to LIBOR rates, as well as the revenue and expenses associated with those financial instruments, may be adversely affected. Further, any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the value of our floating rate obligations, loans, deposits, derivatives, and other financial instruments tied to LIBOR rates.

Weakness in the U.S. economy, including within Fifth Third’s geographic footprint, has adversely affected Fifth Third in the past and may adversely affect Fifth Third in the future.

If the strength of the U.S. economy in general or the strength of the local economies in which Fifth Third conducts operations declines, this could result in, among other things, a decreased demand for Fifth Third’s products and services, a deterioration in credit quality or a reduced demand for credit, including a resultant effect on Fifth Third’s loan portfolio and ALLL and in the receipt of lower proceeds from the sale of loans and foreclosed properties. These factors could result in higher delinquencies, greater charge-offs and increased losses in future periods, which could materially adversely affect Fifth Third’s financial condition and results of operations.

Global political and economic uncertainties and changes may adversely affect Fifth Third.

Global financial markets, including the United States, face political and economic uncertainties that may delay investment and hamper economic activity. International events such as separatist movements, leadership changes and political and military conflicts could adversely affect global financial activity and markets and could negatively affect the U.S. economy. Additionally, the Federal Reserve and other major central banks have begun the process of removing or reducing monetary accommodation, increasing the risk of recession and may also negatively impact asset values and credit spreads that were impacted by extraordinary monetary stimulus. These potential negative effects on financial markets and economic activity could lead to reduced revenues, increased costs, increased credit risks, and volatile markets and could negatively impact Fifth Third’s businesses, results of operations and financial condition.

Changes in interest rates could affect Fifth Third’s income and cash flows.

Fifth Third’s income and cash flows depend to a great extent on the difference between the interest rates earned on interest-earning assets such as loans and investment securities, and the interest rates paid on interest-bearing liabilities such as deposits and borrowings. These rates are highly sensitive to many factors that are beyond Fifth Third’s control, including general economic conditions in the U.S. or abroad and the policies of various governmental and regulatory agencies (in particular, the FRB). Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the prepayment speed of loans, the purchase of investments, the generation of deposits and the rates received on loans and investment securities and paid on deposits or other sources of funding as well as customers’ ability to repay loans. The impact of these changes may be magnified if Fifth Third does not effectively manage the relative sensitivity of its assets and liabilities to changes in market interest rates. Fluctuations in these areas may adversely affect Fifth Third, its customers and its shareholders.

Changes and trends in the capital markets may affect Fifth Third’s income and cash flows.

Fifth Third enters into and maintains trading and investment positions in the capital markets on its own behalf and manages investment positions on behalf of its customers. These investment positions include derivative financial instruments. The revenues and profits Fifth Third derives from managing proprietary and customer trading and investment positions are dependent on market prices. Market changes and trends may result in a decline in wealth and asset management revenue or investment or trading losses that may impact Fifth Third. Losses on behalf of its customers could expose Fifth Third to litigation, credit risks or loss of revenue from those clients and customers. Additionally, losses in Fifth Third’s trading and investment positions could lead to a loss with respect to those investments and may adversely affect Fifth Third’s income, cash flows and funding costs.

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Fifth Third’s stock price is volatile.

Fifth Third’s stock price has been volatile in the past and several factors could cause the price to fluctuate substantially in the future. These factors include, without limitation:

Actual or anticipated variations in earnings;

Changes in analysts’ recommendations or projections;

Fifth Third’s announcements of developments related to its businesses;

Operating and stock performance of other companies deemed to be peers;

Actions by government regulators and changes in the regulatory regime;

New technology used or services offered by traditional andnon-traditional competitors;

News reports of trends, concerns and other issues related to the financial services industry;

U.S. and global economic conditions;

Natural disasters;

Geopolitical conditions such as acts or threats of terrorism, military conflicts and withdrawal from the EU by the U.K. or other EU members.

The price for shares of Fifth Third’s common stock may fluctuate significantly in the future, and these fluctuations may be unrelated to Fifth Third’s performance. General market price declines or market volatility in the future could adversely affect the price for shares of Fifth Third’s common stock, and the current market price of such shares may not be indicative of future market prices.

Fifth Third’s mortgage banking net revenue can be volatile from quarter to quarter.

Fifth Third earns revenue from the fees it receives for originating mortgage loans and for servicing mortgage loans. When rates rise, the demand for mortgage loans tends to fall, reducing the revenue Fifth Third receives from loan originations. At the same time, revenue from MSRs can increase through increases in fair value. When rates fall, mortgage originations tend to increase and the value of MSRs tends to decline, also with some offsetting revenue effect. Even though the origination of mortgage loans can act as a “natural hedge,” the hedge is not perfect, either in amount or timing. For example, the negative effect on revenue from a decrease in the fair value of residential MSRs is immediate, but any offsetting revenue benefit from more originations and the MSRs relating to the new loans would accrue over time. It is also possible that even if interest rates were to fall, mortgage originations may also fall or any increase in mortgage originations may not be enough to offset the decrease in the MSRs value caused by the lower rates.

Fifth Third typically uses derivatives and other instruments to hedge its mortgage banking interest rate risk. Fifth Third generally does not hedge all of its risks, and the fact that Fifth Third attempts to hedge any of the risks does not mean Fifth Third will be successful. Hedging is a complex process, requiring sophisticated models and constant monitoring. Fifth Third may use hedging instruments tied to U.S. Treasury rates, LIBOR or Eurodollars that may not perfectly correlate with the value or income being hedged. Fifth Third could incur significant losses from its hedging activities. There may be periods where Fifth Third elects not to use derivatives and other instruments to hedge mortgage banking interest rate risk.

LEGAL RISKS

Fifth Third and/or its affiliates are or may become involved from time to time in information-gathering requests, investigations and litigation, regulatory or other enforcement proceedings by various governmental regulatory agencies and law enforcement authorities, as well as self-regulatory agencies which may lead to adverse consequences.

Fifth Third and/or its affiliates are or may become involved from time to time in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by governmental regulatory agencies and law enforcement authorities, as well as self-regulatory agencies, regarding their respective customers and businesses, as well as their sales practices, data security, product offerings, compensation practices, and other compliance issues. Also, a violation of law or regulation by another financial institution may give rise to an inquiry or investigation by regulators or other authorities of the same or similar practices by Fifth Third. In addition, the complexity of the federal and state regulatory and enforcement regimes in the U.S. means that a single event or topic may give rise to numerous and overlapping investigations and regulatory proceedings. In addition, Fifth Third and certain of its directors and officers have been named from time to time as defendants in various class actions and other litigation relating to Fifth Third’s business and activities, as well as regulatory or other enforcement proceedings. Past, present and future litigation have included or could include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Enforcement authorities may seek admissions of wrongdoing and, in some cases, criminal pleas as part of the resolutions of matters, and any such resolution of a matter involving Fifth Third which could lead to increased exposure to private litigation, could adversely affect Fifth Third’s reputation, and could result in limitations on Fifth Third’s ability to do business in certain jurisdictions.

Each of the matters described above may result in material adverse consequences, including without limitation, adverse judgments, settlements, fines, penalties, injunctions or other actions, amendments and/or restatements of Fifth Third’s SEC filings and/or financial statements, as applicable, and/or determinations of material weaknesses in its disclosure controls and procedures. In addition, responding to information-gathering requests, reviews, investigations and proceedings, regardless of the ultimate outcome of the matter, could be time-consuming and expensive.

Like other large financial institutions and companies, Fifth Third is also subject to risk from potential employee misconduct, includingnon-compliance with policies and improper use or disclosure of confidential information. Substantial legal liability or significant regulatory or other enforcement action against Fifth Third could materially adversely affect its business, financial condition or results of operations and/or cause significant reputational harm to its business. The outcome of lawsuits and regulatory proceedings may be difficult to predict or estimate. Although Fifth Third establishes accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, Fifth Third does not have accruals for all legal proceedings where it faces a risk of loss. In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, amounts accrued may not represent the ultimate loss to Fifth Third from the legal proceedings in question.

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Thus, Fifth Third’s ultimate losses may be higher, and possibly significantly so, than the amounts accrued for legal loss contingencies, which could adversely affect Fifth Third’s results of operations.

In addition, there has been a trend of public settlements with governmental agencies that may adversely affect other financial institutions, to the extent such settlements are used as a template for future settlements. The uncertain regulatory enforcement environment makes it difficult to estimate probable losses, which can lead to substantial disparities between legal reserves and actual settlements or penalties.

Please see “Legal and Regulatory Proceedings” in Fifth Third’s Notes to Consolidated Financial Statements for information on specific legal and regulatory proceedings.

Fifth Third may be required to repurchase residential mortgage loans or reimburse investors and others as a result of breaches in contractual representations and warranties.

Fifth Third sells residential mortgage loans to various parties, including GSEs and other financial institutions that purchase residential mortgage loans for investment or private label securitization. Fifth Third may be required to repurchase residential mortgage loans, indemnify the securitization trust, investor or insurer, or reimburse the securitization trust, investor or insurer for credit losses incurred on loans in the event of a breach of contractual representations or warranties that is not remedied within a specified period (usually 60 days or less) after Fifth Third receives notice of the breach. Contracts for residential mortgage loan sales to the GSEs include various types of specific remedies and penalties that could be applied to inadequate responses to repurchase requests. If economic conditions and the housing market deteriorate or future investor repurchase demand and Fifth Third’s success at appealing repurchase requests differ from past experience, Fifth Third could have increased repurchase obligations and increased loss severity on repurchases, requiring material additions to the repurchase reserve.

STRATEGIC RISKS

If Fifth Third does not respond to intense competition and rapid changes in the financial services industry or otherwise adapt to changing customer preferences, its financial performance may suffer.

Fifth Third’s ability to deliver strong financial performance and returns on investment to shareholders will depend in part on its ability to expand the scope of available financial services to meet the needs and demands of its customers. In addition to the challenge of competing against other banks in attracting and retaining customers for traditional banking services, Fifth Third’s competitors also include securities dealers, brokers, mortgage bankers, investment advisors, and specialty finance, telecommunications, technology and insurance companies as well as large retailers who seek to offerone-stop financial services in addition to other products and services desired by consumers that may include services that banks have not been able or allowed to offer to their customers in the past or may not be currently able or allowed to offer. Many of these other firms may be significantly larger than Fifth Third and may have access to customers, and financial resources that are beyond Fifth Third’s capability. Fifth Third competes with these firms with respect to capital, access to capital, revenue generation, products, services, transaction execution, innovation, reputation and price.

This increasingly competitive environment is primarily a result of changes in regulation, changes in technology and product delivery systems, as well as the accelerating pace of consolidation among financial service providers. Rapidly changing technology and consumer preferences may require Fifth Third to effectively implement new technology-driven products and services in order to compete and meet customer demands. Fifth Third may not be able to do so or be successful in marketing these products and services to its customers. As a result, Fifth Third’s ability to effectively compete to retain or acquire new business may be impaired, and its business, financial condition or results of operations, may be adversely affected.

Fifth Third may make strategic investments and may expand an existing line of business or enter into new lines of business to remain competitive. If Fifth Third’s chosen strategies, for example, the NorthStar Strategy initiatives, are not appropriate to effectively compete or Fifth Third does not execute them in an appropriate or timely manner, Fifth Third’s business and results may suffer. Additionally, these strategies, products and lines of business may bring with them unforeseeable or unforeseen risks and may not generate the expected results or returns, which could adversely affect Fifth Third’s results of operations or future growth prospects and cause Fifth Third to fail to meet its stated goals and expectations.

Changes in retail distribution strategies and consumer behavior may adversely impact Fifth Third’s investments in its bank premises and equipment and other assets and may lead to increased expenditures to change its retail distribution channel.

Fifth Third has significant investments in bank premises and equipment for its branch network including its 1,194 full-service banking centers, 50 parcels of land held for the development of future banking centers and 8 properties that are developed or in the process of being developed as branches, as well as its retail work force and other branch banking assets. Advances in technology such ase-commerce, telephone, internet and mobile banking, andin-branch self-service technologies including automatic teller machines and other equipment, as well as changing customer preferences for these other methods of accessing Fifth Third’s products and services, could affect the value of Fifth Third’s branch network or other retail distribution assets and may cause it to change its retail distribution strategy, close and/or sell certain branches or parcels of land held for development and restructure or reduce its remaining branches and work force. Further advances in technology and/or changes in customer preferences could have additional changes in Fifth Third’s retail distribution strategy and/or branch network. These actions could lead to losses on these assets or could adversely impact the carrying value of other long-lived assets and may lead to increased expenditures to renovate and reconfigure remaining branches or to otherwise reform its retail distribution channel.

Difficulties in identifying suitable opportunities or combining the operations of acquired entities or assets with Fifth Third’s own operations or assessing the effectiveness of businesses in which we make strategic investments or with which we enter into strategic contractual relationships may prevent Fifth Third from achieving the expected benefits from these acquisitions, investments or relationships.

Inherent uncertainties exist when assessing or integrating the operations of an acquired business or investment or relationship opportunity. Fifth Third may not be able to fully achieve its strategic objectives and planned operating efficiencies in an acquisition or strategic relationship.

194  Fifth Third Bancorp


In addition, the markets and industries in which Fifth Third and its potential acquisition and investment targets operate are highly competitive. Acquisition or investment targets may lose customers or otherwise perform poorly or unprofitably, in the case of an acquired business or strategic relationship, cause Fifth Third to lose customers or perform poorly or unprofitably. Future acquisition and integration activities and efforts to monitor new investments or reap the benefits of a new strategic relationship may require Fifth Third to devote substantial time and resources and may cause these acquisitions, investments and relationships to be unprofitable or cause Fifth Third to be unable to pursue other business opportunities.

After completing an acquisition, Fifth Third may find certain items were not accounted for properly in accordance with financial accounting and reporting standards. Fifth Third may also not realize the expected benefits of the acquisition due to lower financial results pertaining to the acquired entity or assets. For example, Fifth Third could experience higher charge-offs than originally anticipated related to the acquired loan portfolio. Additionally, acquired companies or businesses may increase Fifth Third’s risk of regulatory action or restrictions related to the operations of the acquired business.

Future acquisitions may dilute current shareholders’ ownership of Fifth Third and may cause Fifth Third to become more susceptible to adverse economic events.

Future business acquisitions could be material to Fifth Third and it may issue additional shares of stock to pay for those acquisitions, which would dilute current shareholders’ ownership interests. Acquisitions also could require Fifth Third to use substantial cash or other liquid assets or to incur debt. In those events, Fifth Third could become more susceptible to economic downturns and competitive pressures.

Fifth Third may sell or consider selling one or more of its businesses or investments. Should it determine to sell such a business or investment, it may not be able to generate gains on sale or related increase in shareholders’ equity commensurate with desirable levels. Moreover, if Fifth Third sold such businesses or investments, the loss of income could have an adverse effect on its earnings and future growth.

Fifth Third owns, or owns a minority stake in, as applicable, severalnon-strategic businesses, investments and other assets that are not significantly synergistic with its core financial services businesses or, in the future, may no longer be aligned with Fifth Third’s strategic plans or regulatory expectations. Further, Fifth Third is expected to conform to the final Volcker Rule with respect to certain illiquid funds within an extended compliance period. Fifth Third has, from time to time, considered and undertaken (and, in the case of Vantiv, has announced its intention to continue) the sale of such businesses, investments and/or interests, including, for example, portions of Fifth Third’s stake in Vantiv Holding, LLC and certain illiquid funds that do not conform to the Volcker Rule. In any such sales, Fifth Third would be subject to market forces that may affect the timing, pricing or result in an unsuccessful sale. If Fifth Third were to complete the sale of any of its businesses, investments and/or interests in third parties, it would lose the income from the sold businesses and/or interests, including those accounted for under the equity method of accounting, and such loss of income could have an adverse effect on its future earnings and growth. Additionally, Fifth Third may encounter difficulties in separating

the operations of any businesses it sells, which may affect its business or results of operations.

The results of Vantiv Holding, LLC could have a negative impact on Fifth Third’s operating results and financial condition.

In 2009, Fifth Third sold an approximate 51% interest in its processing business, Vantiv Holding, LLC (formerly Fifth Third Processing Solutions). As a result of additional share sales completed by Fifth Third between 2013 and 2017, the Bancorp ownership share in Vantiv Holding, LLC as of December 31, 2017, was approximately 8.6% (which was reduced further to approximately 4.9% after the closing of Vantiv’s acquisition of Worldpay Group plc.). The Bancorp’s investment in Vantiv Holding, LLC is currently accounted for under the equity method of accounting and is not consolidated based on the nature of Vantiv Holding, LLC’s structure as a limited liability company and contractual arrangements between Vantiv Holding, LLC and Fifth Third. Vantiv Holding, LLC’s operating results could be poor and could negatively affect the operating results of Fifth Third. Also, Fifth Third participates in a multi-lender credit facility to Vantiv Holding, LLC and repayment of these loans is contingent on the future cash flows of Vantiv Holding, LLC, which are subject to their own risks and uncertainties. Additionally, Fifth Third’s contractual arrangements with Vantiv Holding, LLC are subject to further unique risks and uncertainties.

Changes in Fifth Third’s ownership in Vantiv Holding, LLC could have an impact on Fifth Third’s stock price, operating results, financial condition, and future outlook.

Fifth Third expects that it will reduce its equity investments in Vantiv Holding, LLC and its publicly traded parent, Worldpay, Inc. (formerly, Vantiv, Inc.), in whole or in part, but there can be no assurance that such sales will occur or as to when they will occur or the value that might be received by Fifth Third. A reduction in Fifth Third’s Vantiv ownership interest may result from a series of sale transactions similar to transactions in Vantiv securities engaged in by Fifth Third to date, or could occur as a result of one or more larger transactions, depending on strategic considerations, market conditions, or other factors deemed important by Fifth Third. Additionally, Fifth Third’s ownership in Vantiv could be affected by additional transactions that Vantiv may undertake. The nature, terms, and timing of transactions engaged in by Vantiv may not be entirely within Fifth Third’s control, if at all. If and when Fifth Third’s ownership in Vantiv is reduced, such changes in ownership could have a material impact, positive or negative, on Fifth Third’s stock price, operating results, financial condition and future outlook.

GENERAL BUSINESS RISKS

Changes in accounting standards or interpretations could impact Fifth Third’s reported earnings and financial condition.

The accounting standard setters, including the FASB, the SEC and other regulatory agencies, periodically change the financial accounting and reporting standards that govern the preparation of Fifth Third’s consolidated financial statements. These changes can be hard to predict and can materially impact how Fifth Third records and reports its financial condition and results of operations. In some cases, Fifth Third could be required to apply a new or revised standard retroactively, which would result in the recasting of Fifth Third’s prior period financial statements.

195  Fifth Third Bancorp


Fifth Third uses models for business planning purposes that may not adequately predict future results.

Fifth Third uses financial models to aid in its planning for various purposes including its capital and liquidity needs and other purposes. The models used may not accurately account for all variables and may fail to predict outcomes accurately and/or may overstate or understate certain effects. As a result of these potential failures, Fifth Third may not adequately prepare for future events and may suffer losses or other setbacks due to these failures.

Also, information Fifth Third provides to the public or to its regulators based on models could be inaccurate or misleading due to inadequate design or implementation, for example. Decisions that its regulators make, including those related to capital distributions to its shareholders, could be affected adversely due to the perception that the models used to generate the relevant information are unreliable or inadequate.

The preparation of financial statements requires Fifth Third to make subjective determinations and use estimates that may vary from actual results and materially impact its results of operations or financial position.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make significant estimates that affect the financial statements. If new information arises that results in a material change to a reserve amount, such a change could result in a change to previously announced financial results. Refer to the Critical Accounting Policies section of MD&A for more information regarding management’s significant estimates.

Weather related events or other natural disasters may have an effect on the performance of Fifth Third’s loan portfolios, especially in its coastal markets, thereby adversely impacting its results of operations.

Fifth Third’s footprint stretches from the upper Midwestern to lower Southeastern regions of the United States. These regions have experienced weather events including hurricanes and other natural disasters. The nature and level of these events and the impact of global climate change upon their frequency and severity cannot be predicted. If large scale events occur, they may significantly impact its loan portfolios by damaging properties pledged as collateral as well as impairing its borrowers’ ability to repay their loans.

Fifth Third is exposed to reputational risk.

Fifth Third’s actual or alleged conduct in activities, such as certain sales and lending practices, data security, corporate governance and acquisitions, behavior of employees, association with particular customers, business partners, investment or vendors, as well as developments from any of the other risks described above, may result in negative public opinion and may damage Fifth Third’s reputation. Actions taken by government regulators, shareholder activists and community organizations may also damage Fifth Third’s reputation. Additionally, whereas negative public opinion once was primarily driven by adverse news coverage in traditional media, the advent and expansion of social media facilitates the rapid dissemination of information. Though Fifth Third monitors social media channels, the potential remains for rapid and widespread dissemination of inaccurate, misleading or false information that could damage Fifth Third’s reputation. Negative public opinion can adversely affect Fifth

Third’s ability to attract and keep customers and can increase the risk that it will be a target of litigation and regulatory action.

196  Fifth Third Bancorp


ITEM 2. PROPERTIES

The Bancorp’s executive offices and the main office of Fifth Third Bank are located on Fountain Square Plaza in downtown Cincinnati, Ohio in a32-story office tower, a five-story office building with an attached parking garage and a separateten-story office building known as the Fifth Third Center, the William S. Rowe Building and the 530 Building, respectively. The Bancorp’s main operations centercampus is located in Cincinnati, Ohio, inand is comprised of a three-story building with an attached parking garage known as the George A. Schaefer, Jr. Operations Center, and atwo-story building with surface parking known as the Madisonville Operations Center.Office Building. The Bank owns 100% of these buildings.

At December 31, 2015,2017, the Bancorp, through its banking andnon-banking subsidiaries, operated 1,2541,154 banking centers, of which 902835 were owned, 243221 were leased and 10998 for which the buildings are owned but the land is leased. The banking centers are located in the states of Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, North Carolina, West Virginia, Pennsylvania, Missouri,Georgia and Georgia.North Carolina. The Bancorp’s significant owned properties are owned free from mortgages and major encumbrances.

EXECUTIVE OFFICERS OF THE BANCORP

Officers are appointed annually by the Board of Directors at the meeting of Directors immediately following the Annual Meeting of Shareholders. The names, ages and positions of the Executive Officers of the Bancorp as of February 25,28, 2018 are listed below along with their business experience during the past five years:

Greg D. Carmichael, 54.56. Chairman of the Board since February 2018, Chief Executive Officer of the Bancorp since November 2015 and President since September 2012. Previously, Mr. Carmichael was Chief Operating Officer of the Bancorp from June 2006 to August 2015, Executive Vice President of the Bancorp from June 2006 to September 2012 and Chief Information Officer of the Bancorp from June 2003 to June 2006.

Lars C. Anderson, 55.56. Executive Vice President and Chief Operating Officer of the Bancorp since August 2015. Previously, Mr. Anderson was Vice Chairman of Comerica Incorporated and Comerica Bank since December 2010.

Chad M. Borton, 45. Executive Vice President of the Bancorp since April 2014. Previously, Mr. Borton was Head of Retail Banking for Fifth Third Bank from July 2012 to April 2014. Prior to that, Mr. Borton served in multiple positions at JP Morgan Chase including the Head of Branch Administration from August 2011 to July 2012; Senior Vice President and Market Manager from August 2010 to August 2011; Head of Retail Distribution from 2008 to 2010 and Consumer Bank Chief Financial Officer from 2006 to 2008.

Frank R. Forrest, 61.63. Executive Vice President and Chief Risk Officer of the Bancorp since April 2014. Previously, Mr. Forrest was Executive Vice President and Chief Risk and Credit Officer of the Bancorp since September 2013. Prior to that, Mr. Forrest served with Bank of America Merrill Lynch. From March 2012 until June 2013, Mr. Forrest served as Managing Director and Quality Control Executive for Legacy Asset Services, a division of Bank of America. From September 2008 until March 2012, Mr. Forrest was Managing Director and Global Debt Products Executive for Global Corporate and Investment Banking. Formerly from January 2007 to September 2008, Mr. Forrest was Risk Management Executive for Commercial Banking.

Mark D. Hazel, 50.52. Senior Vice President and Controller of the Bancorp since February 2010. Prior to that, Mr. Hazel was the Assistant Bancorp Controller since 2006 and was the Controller of Nonbank entities since 2003.

Heather Russell KoenigAravind Immaneni, 44.47. Executive Vice President and Chief LegalOperations and Technology Officer and Corporate Secretary of the Bancorp since September 2015.November 2016. Previously Ms. Koenig was Global Chief Regulatory CounselMr. Immaneni worked for TD Bank as Executive Vice

President and Head of the Office of Public Policy and Regulatory Affairs of Bank of New York MellonRetail Distribution Strategy & Operations since July 2011 and Associate General Counsel at Bank of America from October 2006 through June 2011.

Randolph J. Koporc,49. Executive Vice President of the Bancorp since October 2010. Previously, Mr. Koporc was President and Chief Executive Officer of Fifth Third Bank (Georgia) from October 2010 to March 2014.

Gregory L. Kosch, 56. Executive Vice President of the Bancorp since June 2005. Previously, Mr. Kosch wasNovember 2014, Senior Vice President and headHead of the Bancorp’s Commercial Division in the Chicago affiliate since June 2002.Retail Bank Operations from August 2013 to November 2014, and Senior Vice President and Head of Deposit & Debit Operations from February 2011 to August 2013.

James C. Leonard, 46.Executive48. Executive Vice President since September 2015 and Treasurer of the Bancorp since October 2013. Previously, Mr. Leonard was Senior Vice President from October 2013 to September 2015, the Director of Business Planning and Analysis from 2006 to 2013 and the Chief Financial Officer of the Commercial Banking Division from 2001 to 2013.2006.

Philip R. McHugh, 51.53. Executive Vice President of the Bancorp since December 2014. Previously, Mr. McHugh was Executive Vice President of Fifth Third Bank since June 2011 and was Senior Vice President of Fifth Third Bank from June 2010 through June 2011. Prior to that, Mr. McHugh was the President and CEO of the Louisville Affiliate of Fifth Third Bank from January 2005 through June 2010.

Joseph R. RobinsonJelena McWilliams, 48.44. Executive Vice President, and Chief InformationLegal Officer and Corporate Secretary since January 2017. Previously Ms. McWilliams was Chief Counsel since January 2015 and Deputy Staff Director of Information Technology and Operationssince July 2016 of the Bancorp since September 2009.U.S. Senate Committee on Banking, Housing and Urban Affairs. Previously Mr. Robinsonshe was Executive Vice PresidentSenior Counsel to the U.S. Senate Committee on Banking, Housing and Chief Information Officer of the Bancorp since April 2008.Urban Affairs from July 2012 to December 2015. Prior to that, he was Senior Vice Presidentshe served as Assistant Chief Counsel to the U.S. Senate Small Business and DirectorEntrepreneurship Committee and before that as an attorney at the Federal Reserve Board of Central Operations since November 2006Governors. Prior to government service, she practiced as an attorney with Morrison & Foerster LLP in Palo Alto, California and Senior Vice President of IT Enterprise Solutions since March 2004.then with Hogan & Hartson LLP (now Hogan Lovells LLP) in Washington, D.C.

Timothy N. Spence, 37.39. Executive Vice President and Head of Payments, Strategy and Digital Solutions since 2017, Chief Strategy Officer of the Bancorp since September 2015. Previously, Mr. Spence was a senior partner in the Financial Services practice at Oliver Wyman since 2006, a global strategy and risk management consulting firm.

Teresa J. Tanner, 47.49. Executive Vice President and Chief Administrative Officer since September 2015. Previously, Ms. Tanner was the Executive Vice President and Chief Human Resources Officer of the Bancorp since February 2010 and Senior Vice President and Director of Enterprise Learning since September 2008. Prior to that, she was Human Resources Senior Vice President and Senior Business Partner for the Information Technology and Central Operations divisions since July 2006. Previously, she was Vice President and Senior Business Partner for Operations since September 2004.

Tayfun Tuzun, 51.53. Executive Vice President and Chief Financial Officer of the Bancorp since October 2013. Previously, Mr. Tuzun was the Senior Vice President and Treasurer of the Bancorp from December 2011 to October 2013. Prior to that, Mr. Tuzun was the Assistant Treasurer and Balance Sheet Manager of Fifth Third Bancorp. Previously, Mr. Tuzun was the Structured Finance Manager since 2007.

 

 

179197  Fifth Third Bancorp


PART II

ITEM  5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Bancorp’s common stock is traded in theover-the-counter market and is listed under the symbol “FITB” on the NASDAQ®NASDAQ® Global Select Market System.

 

High and Low Stock Prices and Dividends Paid Per ShareHigh and Low Stock Prices and Dividends Paid Per Share High and Low Stock Prices and Dividends Paid Per Share 

 

 
2015  High     Low     Dividends Paid
Per Share
 
2017  High     Low     Dividends Paid  
Per Share      
 

 

 

Fourth Quarter

   $21.14       $18.15       $0.13       $31.83       $27.38       $0.16   

Third Quarter

   $21.93       $18.21       $0.13       $28.06       $24.66       $0.16   

Second Quarter

   $21.90       $18.63       $0.13       $26.69       $23.20       $0.14   

First Quarter

   $20.53       $17.14       $0.13       $28.97       $24.02       $0.14   

 

 
2014  High     Low     

 

Dividends Paid
Per Share

 
 

 
2016  High     Low     Dividends Paid  
Per Share      
 

 

 

Fourth Quarter

   $20.82       $17.65       $0.13       $27.88       $19.57       $0.14   

Third Quarter

   $21.79       $19.45       $0.13       $21.11       $16.26       $0.13   

Second Quarter

   $23.41       $19.82       $0.13       $19.34       $16.02       $0.13   

First Quarter

   $23.90       $20.37       $0.12       $19.73       $13.84       $0.13   

 

 

See a discussion of dividend limitations that the subsidiaries can pay to the Bancorp discussed in Note 3 of the Notes to Consolidated Financial Statements. Additionally, as of December 31, 2015,2017, the Bancorp had 44,67840,387 shareholders of record.

 

Issuer Purchases of Equity Securities

Period  Total Number
of Shares
Purchased(a)
   Average Price Paid
Per Share
 

 

Total Number of Shares
Purchased as Part of Publicly
Announced Plans or
Programs

 Maximum Number of    
Shares that May Yet be    
Purchased Under the Plans    
or Programs(b)    
  Total Number
of Shares
Purchased(a)
   Average Price Paid
Per Share
 

 

Total Number of Shares
Purchased as Part of Publicly
Announced Plans or
Programs

 

Maximum Number of    

Shares that May Yet be    
Purchased Under the Plans    
or Programs(b)    

October 2015

   1,525,580    $18.79   1,446,613                       39,820,995

November 2015

   53,701     19.31    -                       39,820,995

December 2015

   9,286,351     19.95   9,248,482                       30,572,513

October 2017

   108,119   $27.63   -                      35,166,334

November 2017

   76,403    27.87   -                      35,166,334

December 2017

   12,124,851    29.17  12,018,443                      23,147,891

Total

   10,865,632    $                    19.78   10,695,095                       30,572,513   12,309,373   $                    29.15  12,018,443                      23,147,891

(a)

The BancorpIncludes 290,930 shares repurchased 78,967, 53,701 and 37,869 shares during October, November and Decemberthe fourth quarter of 2015, respectively,2017 in connection with various employee compensation plans of the Bancorp. These purchases do not count against the maximum number of shares that may yet be purchased under the Board of Directors’ authorization.

(b)

In March of 2014,2016, the Bancorp announced that its Board of Directors had authorized management to purchase 100 million shares of the Bancorp’s common stock through the open market or in any private party transactions. The authorization does not include specific price targets or an expiration date. This share repurchase authorization replaces the Board’s previous authorization pursuant to which approximately 14 million shares remained available for repurchase by the Bancorp.

See further discussion on accelerated share repurchase transactions and stock-based compensation in Note 23 and Note 24 of the Notes to Consolidated Financial Statements.

 

180198  Fifth Third Bancorp


The following performance graphs do not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Bancorp specifically incorporates the performance graphs by reference therein.

Total Return Analysis

The graphs below summarize the cumulative return experienced by the Bancorp’s shareholders over the years 20092012 through 2015,2017, and 20042007 through 2015,2017, respectively, compared to the S&P 500 Stock and the S&P Banks indices.

FIFTH THIRD BANCORP VS. MARKET INDICES

 

LOGOLOGO

LOGO

 

181199  Fifth Third Bancorp


PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item relating to the Executive Officers of the Registrant is included in PART I under “EXECUTIVE OFFICERS OF THE BANCORP.”

The information required by this item concerning Directors and the nomination process is incorporated herein by reference under the caption “ELECTION OF DIRECTORS” of the Bancorp’s Proxy Statement for the 20162018 Annual Meeting of Shareholders.

The information required by this item concerning the Audit Committee and Code of Business Conduct and Ethics is incorporated herein by reference under the captions “CORPORATE GOVERNANCE” and “BOARD OF DIRECTORS, ITS COMMITTEES, MEETINGS AND FUNCTIONS” of the Bancorp’s Proxy Statement for the 20162018 Annual Meeting of Shareholders.

The information required by this item concerning Section 16 (a) Beneficial Ownership Reporting Compliance is incorporated herein by reference under the caption “SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” of the Bancorp’s Proxy Statement for the 20162018 Annual Meeting of Shareholders.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference under the captions “COMPENSATION DISCUSSION AND ANALYSIS,” “COMPENSATION OF NAMED EXECUTIVE OFFICERS, AND DIRECTORS,” “BOARD OF DIRECTOR COMPENSATION,” “CEO PAY RATIO,” “COMPENSATION COMMITTEE REPORT” and “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION” of the Bancorp’s Proxy Statement for the 20162018 Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Security ownership information of certain beneficial owners and management is incorporated herein by reference under the captions “CERTAIN BENEFICIAL OWNERS,” “ELECTION OF DIRECTORS,” “COMPENSATION DISCUSSION AND ANALYSIS”ANALYSIS,” “BOARD OF DIRECTOR COMPENSATION,” and “COMPENSATION OF NAMED EXECUTIVE OFFICERS AND DIRECTORS”OFFICERS” of the Bancorp’s Proxy Statement for the 20162018 Annual Meeting of Shareholders.

The information required by this item concerning Equity Compensation Plan information is included in Note 24 of the Notes to Consolidated Financial Statements.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated herein by reference under the captions “CERTAIN TRANSACTIONS”, “ELECTION OF DIRECTORS”, “CORPORATE GOVERNANCE” and “BOARD OF DIRECTORS, ITS COMMITTEES, MEETINGS AND FUNCTIONS” of the Bancorp’s Proxy Statement for the 20162018 Annual Meeting of Shareholders.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is incorporated herein by reference under the caption “PRINCIPAL INDEPENDENT

EXTERNAL AUDIT FIRM FEES” of the Bancorp’s Proxy Statement for the 20162018 Annual Meeting of Shareholders.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

 

Financial Statements Filed

   Pages 

 

 

Report of Independent Registered Public Accounting Firm

   8390-91 

Fifth Third Bancorp and Subsidiaries Consolidated Financial Statements

   84-8892-96 

Notes to Consolidated Financial Statements

   89-170

97-178
 

The schedules for the Bancorp and its subsidiaries are omitted because of the absence of conditions under which they are required, or because the information is set forth in the Consolidated Financial Statements or the notes thereto.

The following lists the Exhibits to the Annual Report on Form10-K.

 

2.1

Master Investment Agreement (excluding exhibits and schedules) dated as of March 27, 2009 and amended as of June 30, 2009, among Fifth Third Bank, Fifth Third Financial Corporation, Advent-Kong Blocker Corp., FTPS Holding, LLC and Fifth Third Processing Solutions, LLC. Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on FormForm 8-K filed with the Commission on July 2, 2009.

3.1

Amended Articles of Incorporation of Fifth Third Bancorp, as Amended. Incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form10-Q for the fiscal quarter ended June 30, 2014.

3.2

Code of Regulations of Fifth Third Bancorp, as Amended as of September 15, 2014. Incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form10-K filed with the SEC on February 25, 2016.

4.1

Junior Subordinated Indenture, dated as of March 20, 1997 between Fifth Third Bancorp and Wilmington Trust Company, as Trustee. Incorporated by reference to Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on March 26, 1997.

4.2

Indenture, dated as of May 23, 2003, between Fifth Third Bancorp and Wilmington Trust Company, as Trustee. Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on May 22, 2003.

4.3

Global Security representing Fifth Third Bancorp’s $500,000,000 4.50% Subordinated Notes due 2018. Incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on May 22, 2003.

4.4

First Supplemental Indenture, dated as of December 20, 2006, between Fifth Third Bancorp and Wilmington Trust Company, as Trustee. Incorporated by reference to Registrant’s Annual Report on FormForm 10-K filed for the fiscal year ended December 31, 2006.

4.5

Global Security representing Fifth Third Bancorp’s $500,000,000 5.45% Subordinated Notes due 2017. Incorporated by reference to Exhibit 4.15 to the Registrant’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2006.

4.6

Global Security representing Fifth Third Bancorp’s $250,000,000 Floating Rate Subordinated Notes due 2016. Incorporated by reference to Exhibit 4.16 to the Registrant’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2006.

4.7

First Supplemental Indenture dated as of March 30, 2007 between Fifth Third Bancorp and Wilmington Trust Company, as trustee, to the Junior Subordinated Indenture dated as of May 20, 1997 between Fifth Third Bancorp and the Wilmington Trust Company. Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on March 30, 2007.

4.84.6

Global Security dated as of March 4, 2008 representing Fifth Third Bancorp’s $500,000,000 8.25% Subordinated Notes due 2038. Incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on FormForm 10-Q filed for the quarter ended March 31, 2008. (1).

200  Fifth Third Bancorp


4.94.7

Indenture for Senior Debt Securities dated as of April 30, 2008 between Fifth Third Bancorp and Wilmington Trust Company, as

182  Fifth Third Bancorp


trustee. Incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on May 6, 2008.

4.104.8

First Supplemental Indenture dated as of January 25, 2011 between Fifth Third Bancorp and Wilmington Trust Company, as Trustee, to the Indenture for Senior Debt Securities dated as of April 30, 2008 between Fifth Third and the Trustee. Incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on January 25, 2011.

4.114.9

Global Security dated as of January 25, 2011 representing Fifth Third Bancorp’s $500,000,000 3.625% Senior Notes due 2016. Incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 25, 2011. (2)

4.12

Second Supplemental Indenture dated as of March 7, 2012 between Fifth Third Bancorp and Wilmington Trust Company, as Trustee, to the Indenture for Senior Debt Securities dated as of April 30, 2008 between Fifth Third Bancorp and the Wilmington Trust Company. Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on March 7, 2012.

4.134.10

Global Security dated as of March 7, 2012 representing Fifth Third Bancorp’s $500,000,000 3.500% Senior Notes due 2022. Incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form8-K/A filed with the Securities and Exchange Commission on March 7, 2012.

4.144.11

Deposit Agreement dated as of May 16, 2013, between Fifth Third Bancorp, as issuer, Wilmington Trust, National Association, as depositary and calculation agent, American Stock Transfer & Trust Company, LLC, as transfer agent and registrar, and the holders from time to time of the depositary receipts issued thereunder. Incorporated by reference to Exhibit 4.3 of the Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on May 16, 2013.

4.154.12

Form of Certificate Representing the 5.10%Fixed-to-Floating RateNon-Cumulative Perpetual Preferred Stock, Series H, of Fifth Third Bancorp. Incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on May 16, 2013.

4.164.13

Form of Depositary Receipt for the 5.10%Fixed-to-Floating RateNon-Cumulative Perpetual Preferred Stock, Series H, of Fifth Third Bancorp. Incorporated by reference as Exhibit A to Exhibit 4.44.3 of the Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on May 16, 2013.

4.174.14

Global Security dated as of November 20, 2013 representing Fifth Third Bancorp’s $500,000,000 4.30% Subordinated Notes due 2024. Incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on November 20, 2013. (2)

4.184.15

Deposit Agreement dated December 9, 2013, between Fifth Third Bancorp, as issuer, Wilmington Trust, National Association, as depositary and calculation agent, American Stock Transfer & Trust Company, LLC as transfer agent and registrar, and the holders from time to time of the depositary receipts issued thereunder. Incorporated by reference to Exhibit 4.3 of the Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on December 9, 2013.

4.194.16

Form of Certificate Representing the 6.625%Fixed-to-Floating RateNon-Cumulative Perpetual Preferred Stock, Series I, of Fifth Third Bancorp. Incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on December 9, 2013.

4.204.17

Form of Depositary Receipt for the 6.625%Fixed-to-Floating RateNon-Cumulative Perpetual Preferred Stock, Series I, of Fifth Third Bancorp. Incorporated by reference as Exhibit A to Exhibit 4.3 of the Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on December 9, 2013.

4.214.18

Deposit Agreement dated June 5, 2014, among Fifth Third Bancorp, as issuer, Wilmington Trust, National Association, as depositary and calculation agent, American Stock Transfer & Trust Company, LLC as transfer agent and registrar, and the holders from time to time of the depositary receipts issued thereunder. Incorporated by reference to Exhibit 4.3 of the Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on June 5, 2014.

4.224.19

Form of Certificate Representing the 4.90%Fixed-to-Floating RateNon-Cumulative Perpetual Preferred Stock, Series J, of Fifth Third Bancorp. Incorporated by reference to Exhibit 4.2 of the Registrant’s

Current Report on Form8-K filed with the Securities and Exchange Commission on June 5, 2014.

4.234.20

Form of Depositary Receipt for the 4.90%Fixed-to-Floating RateNon-Cumulative Perpetual Preferred Stock, Series J, of Fifth Third Bancorp. Incorporated by reference as Exhibit A to Exhibit 4.44.3 of the Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on June 5, 2014.

4.244.21

Third Supplemental Indenture dated as of February 28, 2014 between Fifth Third Bancorp and Wilmington Trust Company, as Trustee, to the Indenture for Senior Debt Securities dated as of April 30, 2008 between Fifth Third Bancorp and the Trustee. Incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form8-K filed with the Commission on February 28, 2014.

4.254.22

Global Security dated as of February 28, 2014, representing Fifth Third Bancorp’s $500,000,000 in principal amount of its 2.30% Senior Notes due 2019. Incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form8-K filed with the Commission on February 28, 2014.

4.264.23

Deposit Agreement dated June 5, 2014, among Fifth Third Bancorp, as issuer, Wilmington Trust, National Association, as depositary and calculation agent, American Stock Transfer & Trust Company, LLC as transfer agent and registrar, and the holders from time to time of the depositary receipts issued thereunder. Incorporated by reference to Exhibit 4.3 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 5, 2014.

4.27

Form of Certificate Representing the 4.90% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series J, of Fifth Third Bancorp. Incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 5, 2014.

4.28

Form of Depositary Receipt for the 4.90% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series J, of Fifth Third Bancorp. Incorporated by reference to Exhibit 4.4 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 5, 2014.

4.29

Fourth Supplemental Indenture dated as of July 27, 2015 between Fifth Third Bancorp and Wilmington Trust Company, as Trustee, to the Indenture for Senior Debt Securities dated as of April 30, 2008 between Fifth Third Bancorp and the Trustee. Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form8-K filed with the Commission on July 27, 2015.

4.304.24

Global Security dated as of July 27, 2015, representing Fifth Third Bancorp’s $1,100,000,000 in principal amount of its 2.875% Senior Notes due 2020. Incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form8-K filed with the Commission on July 27, 2015.

4.25

Fifth Supplemental Indenture dated as of June 15, 2017 between Fifth Third Bancorp and Wilmington Trust Company, as Trustee, to the Indenture for Senior Debt Securities dated as of April 30, 2008 between Fifth Third Bancorp and the Trustee. Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form8-K filed with the SEC on June 15, 2017.

4.26

Form of 2.600% Senior Notes due 2022. Incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form8-K filed with the SEC on June 15, 2017.

4.27

Certain instruments defining the rights of holders of long-term debt securities of the Registrant and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of RegulationS-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.

10.1

Fifth Third Bancorp Unfunded Deferred Compensation Plan forNon-Employee Directors, as Amended and Restated. Incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form10-Q for the quarter ended June 30, 2013.*

10.2

Indenture effective November 19, 1992 betweenFirst Amendment to Fifth Third Bancorp IssuerUnfunded Deferred Compensation Plan forNon-Employee Directors, as Amended and NBD Bank, N.A., Trustee.Restated effective June 1, 2013. Incorporated by reference to Exhibit 10.5 to the Registrant’s CurrentQuarterly Report on Form 8-K10-Q filed with the Securities and Exchange Commission on November 18, 1992 and as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-3, Registration No. 33-54134.August 8, 2017.*

10.3

Second Amendment to Fifth Third Bancorp Unfunded Deferred Compensation Plan forNon-Employee Directors, as Amended and Restated effective June 1, 2013. Incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form10-Q filed with the Commission on November 6, 2017.*

10.4

Fifth Third Bancorp Master Profit Sharing Plan, as Amended and Restated. Incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form10-K for the year ended December 31, 2011.*

10.410.5

First Amendment to Fifth Third Bancorp Master Profit Sharing Plan, as Amended and Restated. Incorporated by reference to Exhibit 10.6 to the Registrant’s Annual Report on Form10-K for the year ended December 31, 2011.*

10.510.6

Second Amendment to Fifth Third Bancorp Master Profit Sharing Plan, as Amended and Restated. Incorporated by reference to Exhibit 10.7 to the Registrant’s Annual Report on Form10-K for the year ended December 31, 2012.*

10.610.7

Third Amendment to Fifth Third Bancorp Master Profit Sharing Plan, as Amended and Restated. Incorporated by reference to Exhibit 10.8 of the Registrant’s Quarterly Report on Form10-Q for the quarter ended June 30, 2013.*

201  Fifth Third Bancorp


10.710.8

Fifth Third Bancorp 401(k) Savings Plan, as Amended and Restated. Incorporated by reference to Exhibit 10.7 to the Registrant’s Annual Report on Form10-K for the fiscal year ended December 31, 2014.*

10.810.9

First Amendment to Fifth Third Bancorp 401(k) Savings Plan, as Amended and Restated. Incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form10-K filed with the SEC on February 25, 2016.*

183  Fifth Third Bancorp


10.910.10

Second Amendment to Fifth Third Bancorp 401(k) Savings Plan, as Amended and Restated effective January 1, 2015. Incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form10-Q filed with the Commission on August 8, 2017.*

10.11

Third Amendment to Fifth Third Bancorp 401(k) Savings Plan, as Amended and Restated effective January 1, 2015. Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form10-Q filed with the Commission on November 6, 2017.*

10.12

Fourth Amendment to Fifth Third Bancorp 401(k) Savings Plan, as Amended and Restated effective January 1, 2015.*

10.13

The Fifth Third Bancorp Master Retirement Plan, as Amended and Restated. Incorporated by reference to Exhibit 10.8 of the Registrant’s Annual Report on Form10-K for the fiscal year ended December 31, 2014.**

10.1010.14

First Amendment to The Fifth Third Bancorp Master Retirement Plan, as Amended and Restated. Incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form10-K filed with the SEC on February 25, 2016.*

10.1110.15

Second Amendment to The Fifth Third Bancorp Master Retirement Plan, as Amended and Restated. Incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form10-K filed with the SEC on February 24, 2017.*

10.16

Third Amendment to The Fifth Third Bancorp Master Retirement Plan, as Amended and Restated.*

10.17

Fifth Third Bancorp Incentive Compensation Plan. Incorporated by reference to Annex 2 to the Registrant’s Proxy Statement dated February 19, 2004.*

10.1210.18

Fifth Third Bancorp 2008 Incentive Compensation Plan. Incorporated by reference to Annex 2 to the Registrant’s Proxy Statement dated March 6, 2008.*

10.1310.19

Fifth Third Bancorp 2011 Incentive Compensation Plan. Incorporated by reference to Annex 1 to the Registrant’s Proxy Statement dated March 10, 2011.*

10.20

Fifth Third Bancorp 2014 Incentive Compensation Plan. Incorporated by reference to Annex A to the Registrant’s Proxy Statement dated March 6, 2014.*

10.1410.21

Fifth Third Bancorp 2017 Incentive Compensation Plan. Incorporated by reference to Annex A to the Registrant’s Proxy Statement dated March 9, 2017.*

10.22

Amended and Restated Fifth Third Bancorp 1993 Stock Purchase Plan. Incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form10-K for the year ended December 31, 2011.*

10.1510.23

Fifth Third BancorpNon-qualified Deferred Compensation Plan, as Amended and Restated. Incorporated by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form10-K for the year ended December 31, 2013.*

10.1610.24

Amendment to the Fifth Third BancorpNon-qualified Deferred Compensation Plan, as Amended and Restated. Incorporated by reference to Exhibit 10.14 of the Registrant’s Annual Report on Form10-K for the fiscal year ended December 31, 2014.*

10.1710.25

Second Amendment to the Fifth Third BancorpNon-qualified Deferred Compensation Plan, as Amended and Restated effective January 1, 2013. Incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form10-Q filed with the Commission on August 8, 2017.*

10.26

Third Amendment to Fifth Third BancorpNon-qualified Deferred Compensation Plan, as Amended and Restated effective January 1, 2013. Incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form10-Q filed with the Commission on November 6, 2017.*

10.27

Fifth Third Bancorp Stock Option Gain Deferral Plan. Incorporated by reference to Annex 5 to the Registrant’s Proxy Statement dated February 9, 2001.*

10.1810.28

Amendment No.  1 to Fifth Third Bancorp Stock Option Gain Deferral Plan. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on May 26, 2005.*

10.1910.29

Amended and Restated First National Bankshares of Florida, Inc. 2003 Incentive Plan. Incorporated by reference to Exhibit 10.10 to First National Bankshares of Florida, Inc.’s Annual Report on Form10-K for the year ended December 31, 2003.*

10.2010.30

Fifth Third Bancorp Executive Change in Control Severance Plan, effective January 1, 2015. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on November 21, 2014.*

10.2110.31

Warrant dated June 30, 2009 issued by Vantiv Holding, LLC to Fifth Third Bank. Incorporated by reference to Exhibit L to the Registrant’s Schedule 13D/A filed with the Commission on December 30, 2015.

10.22

Second Amended  & Restated Limited Liability Company Agreement (excluding certain exhibits) dated as of March 21, 2012 by and among Vantiv, Inc., Fifth Third Bank, FTPS Partners, LLC, Vantiv Holding, LLC and each person who becomes a member after March  21, 2012. Incorporated by reference to Exhibit C to the Registrant’s Schedule 13D filed with the Commission on April 2, 2012.

10.2310.32

Amendment and Restatement Agreement and Reaffirmation (excluding certain schedules) dated as of June 30, 2009 among Fifth Third Processing Solutions, LLC, FTPS Holding, LLC, Card Management Company, LLC, Fifth Third Holdings, LLC and Fifth Third Bank. Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on FormForm 8-K filed with the Commission on July 2, 2009.

10.2410.33

Registration Rights Agreement dated as of March 21, 2012 by and among Vantiv, Inc., Fifth Third Bank, FTPS Partners, LLC, JPDN Enterprises, LLC and certain stockholders of Vantiv, Inc. Incorporated by reference to Exhibit E to the Registrant’s Schedule 13D filed with the Commission on April 2, 2012.

10.2510.34

Exchange Agreement dated as of March 21, 2012 by and among Vantiv, Inc., Vantiv Holding, LLC, Fifth Third Bank, FTPS Partners, LLC and such other holders of Class B Units and Class CNon-Voting Units that are from time to time parties of the Exchange Agreement. Incorporated by reference to Exhibit B to the Registrant’s Schedule 13D filed with the Commission on April 2, 2012.

10.2610.35

Recapitalization Agreement dated as of March 21, 2012 by and among Vantiv, Inc., Vantiv Holding, LLC, Fifth Third Bank, FTPS Partners, LLC, JPDN Enterprises, LLC and certain stockholders of Vantiv, Inc. Incorporated by reference to Exhibit D to the Registrant’s Schedule 13D filed with the Commission on April 2, 2012.

10.2710.36

Stock Appreciation Right Award Agreement. Incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form10-Q for the quarter ended June 30, 2013.*

10.2810.37

Performance Share Award Agreement. Incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form10-Q for the quarter ended June 30, 2013.*

10.2910.38

Restricted Stock Award Agreement (for Directors). Incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form10-Q for the quarter ended June 30, 2013.*

10.3010.39

Restricted Stock Award Agreement (for Executive Officers). Incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly Report on Form10-Q for the quarter ended June 30, 2013.*

10.3110.40

Stock Appreciation Right Award Agreement. Incorporated by reference to Exhibit 10.34 of the Registrant’s Annual Report on Form10-K for the fiscal year ended December 31, 2014.*

10.3210.41

Performance Share Award Agreement. Incorporated by reference to Exhibit 10.35 of the Registrant’s Annual Report on Form10-K for the fiscal year ended December 31, 2014.*

10.3310.42

Restricted Stock Unit Agreement (for Directors). Incorporated by reference to Exhibit 10.36 of the Registrant’s Annual Report on Form10-K for the fiscal year ended December 31, 2014.*

10.3410.43

Restricted Stock Award Agreement (for Executive Officers). Incorporated by reference to Exhibit 10.37 of the Registrant’s Annual Report on Form10-K for the fiscal year ended December 31, 2014.*

10.3510.44

Master Confirmation for accelerated share repurchase transaction between Fifth Third Bancorp and Deutsche Bank AG, London Branch, with Deutsche Bank Securities Inc. acting as agent. Incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form10-Q filed with the Commission on August 7, 2013.**

10.45

Master Confirmation, as supplemented by a Supplemental Confirmation, for accelerated share repurchase transaction dated October 20, 2014 between Fifth Third Bancorp and Deutsche Bank AG, London Branch. Incorporated by reference to Exhibit 10.38 of the Registrant’s Annual Report on Form10-K for the fiscal year ended December 31, 2014.**

202  Fifth Third Bancorp


10.3610.46

Master Confirmation, as supplemented by a Supplemental Confirmation, for accelerated share repurchase transaction dated July 29, 2015 between Fifth Third Bancorp and Morgan Stanley & Co. LLC. Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on FormForm 10-Q filed with the Commission on November 5, 2015.**

10.3710.47

Supplemental Confirmation dated September 3, 2015, to Master Confirmation, dated May 21, 2013, for accelerated share repurchase transaction between Fifth Third Bancorp and Deutsche Bank AG, London Branch, with Deutsche Bank Securities Inc. acting as agent. Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form10-Q filed with the Commission on November 5, 2015. Master Confirmation is incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 7, 2013.**

10.3810.48

Separation Agreement between Fifth Third Bancorp and Dan Poston dated October 2, 2015. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form8-K/A filed with the Commission on October 6, 2015.

10.3910.49

Master Confirmation, as supplemented by a Supplemental Confirmation, for accelerated share repurchase transaction dated April 27, 2015 between Fifth Third Bancorp and Barclays Bank PLC, through its agent Barclays Capital Inc. Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form10-Q filed with the Commission on August 5, 2015.**

10.4010.50

Offer letter from Fifth Third Bancorp to Lars C. Anderson. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form8-K filed with the Commission on July 16, 2015**

10.4110.51

Master Confirmation, dated January 22, 2015, and Supplemental Confirmation, for accelerated share repurchase transaction dated January 22, 2015 between Fifth Third Bancorp and Wells Fargo Bank, National Association. Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form10-Q filed with the Commission on May 11, 2015.**

10.4210.52

Supplemental Confirmation dated December 9, 2015, to Master Confirmation dated January 22, 2015, for accelerated share repurchase transaction between Fifth Third Bancorp and Wells Fargo Bank, National Association. Incorporated by reference to Exhibit 10.42 to the Registrant’s Annual Report on Form10-K filed with the SEC on February 25, 2016.**

10.53

Supplemental Confirmation dated March 1, 2016, to Master Confirmation dated July 29, 2015, for accelerated share repurchase transaction between Fifth Third Bancorp and Morgan Stanley & Co. LLC. Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form10-Q filed with the Commission on May 6, 2016**

10.54

Supplemental Confirmation dated August 2, 2016, to Master Confirmation dated January 22, 2015, for accelerated share repurchase transaction between Fifth Third Bancorp and Wells Fargo Bank, National Association. Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form10-Q filed with the Commission on November 9, 2016** 

10.55

Bancorp Director Pay Program. Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form10-Q filed with the Commission on November 9, 2016*

10.56

Supplemental Confirmation dated December 15, 2016, to Master Confirmation dated May 21, 2013, for accelerated share repurchase transaction between Fifth Third Bancorp and Deutsche Bank AG, London Branch. Incorporated by reference to Exhibit 10.47 of the Registrant’s Annual Report on Form10-K for the fiscal year ended December 31, 2016.** 

10.57

2016 Restricted Stock Unit Grant Agreement (for Directors). Incorporated by reference to Exhibit 10.48 of the Registrant’s Annual Report on Form10-K for the fiscal year ended December 31, 2016.*

10.58

2017 Stock Appreciation Right Award Agreement (for Executive Officers). Incorporated by reference to Exhibit 10.49 of the Registrant’s Annual Report on Form10-K for the fiscal year ended December 31, 2016.*

10.59

2017 Performance Share Award Agreement. Incorporated by reference to Exhibit 10.50 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.*

10.60

2017 Restricted Stock Unit Grant Agreement (for Executive Officers). Incorporated by reference to Exhibit 10.51 of the Registrant’s Annual Report on Form10-K for the fiscal year ended December 31, 2016.*

10.61

Long-Term Incentive Award Overview February 2017 Grants. Incorporated by reference to Exhibit 10.52 of the Registrant’s Annual Report on Form10-K for the fiscal year ended December 31, 2016.*

10.62

Supplemental Confirmation dated April 26, 2017, to Master Confirmation, dated May 21, 2013, for accelerated share repurchase transaction between Fifth Third Bancorp and Deutsche Bank AG, London Branch, with Deutsche Bank Securities Inc. acting as agent. Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form10-Q filed with the Commission on August 8, 2017.**

10.63

Restricted Stock Unit Agreement (for Directors) for Fifth Third Bancorp 2017 Incentive Compensation Plan. Incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form10-Q filed with the Commission on August 8, 2017.*

10.64

Supplemental Confirmation dated August 15, 2017, to Master Confirmation, dated April 23, 2012, for accelerated share repurchase transaction between Fifth Third Bancorp and Goldman, Sachs & Co. LLC. Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form10-Q filed with the Commission on November 6, 2017.**

10.65

Supplemental Confirmation dated December  15, 2017, to Master Confirmation, dated July 29, 2015, for accelerated share repurchase transaction between Fifth Third Bancorp and Morgan Stanley & Co. LLC.**

10.66

Supplemental Confirmation dated February  8, 2018, to Master Confirmation, dated July 29, 2015, for accelerated share repurchase transaction between Fifth Third Bancorp and Morgan Stanley & Co. LLC.**

10.67

2018 Stock Appreciation Right Award Agreement (for Executive Officers).*

10.68

2018 Performance Share Award Agreement.*

10.69

2018 Restricted Stock Unit Agreement (for Executive Officers.) *

10.70

Long-Term Incentive Award Overview 2018 Grants.*

12.1

Computations of Consolidated Ratios of Earnings to Fixed Charges.

12.2

Computations of Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements.

21

Fifth Third Bancorp Subsidiaries, as of December 31, 2015.2017.

23

Consent of Independent Registered Public Accounting Firm-Deloitte  & Touche LLP.

31(i)

Certification Pursuant to Section  302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.

184  Fifth Third Bancorp


31(ii)

Certification Pursuant to Section  302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.

32(i)

Certification Pursuant to 18 U.S.C. Section  1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.

32(ii)

Certification Pursuant to 18 U.S.C. Section  1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.

99.1

Consent Order pursuant to the Consumer Financial Protection Act of 2010, dated September 28, 2015, between Fifth Third Bank and the U.S. Department of Justice regarding indirect auto loans. Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on FormForm 8-K filed with the Commission on September 29, 2015.

99.2

Consent Order pursuant to the Consumer Financial Protection Act of 2010, dated September 28, 2015, between Fifth Third Bank and the Consumer Financial Protection Bureau, including the Stipulation and Consent to the Issuance of a Consent Order, dated September 28, 2015, by Fifth Third Bank regarding indirect auto loans. Incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on FormForm 8-K filed with the Commission on September 29, 2015.

99.3

Consent Order pursuant to the Consumer Financial Protection Act of 2010, dated September 28, 2015, between Fifth Third Bank and the Consumer Financial Protection Bureau, including the Stipulation and Consent to the Issuance of a Consent Order, dated September 28, 2015, by Fifth Third Bank regarding credit cardadd-on products. Incorporated by reference to Exhibit 99.3 to the Registrant’s Current Report on Form8-K filed with the Commission on September 29, 2015.

99.4

Settlement Agreement entered into on September 30, 2015, between the United States Department of Housing and Urban Development and Fifth Third Bancorp and its subsidiaries. Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form8-K filed with the Commission on October 7, 2015.

203  Fifth Third Bancorp


99.5

Stipulation and Order of Settlement and Dismissal entered into on September 30, 2015, by and among plaintiff the United States of America and on behalf of the United States Department of Housing and Urban Development and the Federal Housing Administration and Fifth Third Bancorp and its subsidiaries (excluding exhibits). Incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on FormForm 8-K filed with the Commission on October 7, 2015.

101

Interactive data files pursuant to Rule 405 of RegulationS-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements tagged as blocks of text and in detail.

 

(1)

Fifth Third Bancorp also entered into an identical security on March 4, 2008 representing an additional $500,000,000 of its 8.25% Subordinated Notes due 2038.

(2)

Fifth Third Bancorp also entered into an identical security on January 25, 2011November 20, 2013 representing an additional $500,000,000$250,000,000 in principal amount of its 3.625% Senior4.30% Subordinated Notes due 2016.2024.

*    Denotes management contract or compensatory plan or arrangement.

**  An application for confidential treatment for selected portions of this exhibit has been filed with the Securities and Exchange Commission.

 

 

185204  Fifth Third Bancorp


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FIFTH THIRD BANCORP

 
Registrant 

/s/ Greg D. Carmichael

 
Greg D. Carmichael 
Chairman, President and CEO 
Principal Executive Officer 
February 25, 201628, 2018 

Pursuant to requirements of the Securities Exchange Act of 1934, this report has been signed on February 25, 201628, 2018 by the following persons on behalf of the Registrant and in the capacities indicated.

 

OFFICERS: 

/s/ Greg D. Carmichael

 
Greg D. Carmichael 
Chairman, President and CEO 
Principal Executive Officer 

/s/ Tayfun Tuzun

 
Tayfun Tuzun 
Executive Vice President and CFO 
Principal Financial Officer 

/s/ Mark D. Hazel

 
Mark D. Hazel 
Senior Vice President and Controller 
Principal Accounting Officer 

DIRECTORS:

/s/ James P. Hackett

James P. Hackett
Chairman 

/s/ Marsha C. Williams

 
Marsha C. Williams 
Lead Director 

/s/ Nicholas K. Akins

 
Nicholas K. Akins 

/s/ B. Evan Bayh III

 
B. Evan Bayh III 

/s/ Jorge L. Benitez

 
Jorge L. Benitez 

/s/ Katherine B. Blackburn

 
Katherine B. Blackburn 

/s/ Ulysses L. Bridgeman, Jr.

Ulysses L. Bridgeman, Jr.

/s/ Emerson L. Brumback

 
Emerson L. Brumback

/s/ Jerry W. Burris

Jerry W. Burris 

/s/ Greg D. Carmichael

 
Greg D. Carmichael 

/s/ Gary R. Heminger

 
Gary R. Heminger 

/s/ Jewell D. Hoover

 
Jewell D. Hoover 

/s/ Kevin T. KabatEileen A. Mallesch

 
Kevin T. KabatEileen A. Mallesch 

/s/ Michael B. McCallister

 
Michael B. McCallister 

/s/ Hendrik G. Meijer

Hendrik G. Meijer
 

 

186205  Fifth Third Bancorp


CONSOLIDATED TEN YEAR COMPARISON

 

AVERAGE ASSETS FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS) 

 

 

 
   Interest-Earning Assets          
 

 

 

    
      Year  Loans and
Leases
  Federal Funds
Sold
(a)
  Interest-
Bearing
Deposits in
Banks
(a)
  Securities  Total  Cash and Due
from Banks
  Other
Assets
  Total Average
Assets
 

 

 

 
       2015   $      93,339    1    3,257    26,987    123,584    2,608    15,212    140,111        
       2014    91,127    -    3,043    21,823    115,993    2,892    14,539    131,943        
       2013    89,093    1    2,416    16,444    107,954    2,482    15,053    123,732        
       2012    84,822    2    1,493    15,319    101,636    2,355    15,695    117,614        
       2011    80,214    1    2,030    15,437    97,682    2,352    15,335    112,666        
       2010    79,232    11    3,317    16,371    98,931    2,245    14,841    112,434        
       2009    83,391    12    1,023    17,100    101,526    2,329    14,266    114,856        
       2008    85,835    438    183    13,424    99,880    2,490    13,411    114,296        
       2007    78,348    257    147    11,630    90,382    2,275    10,613    102,477        
       2006    73,493    252    144    20,910    94,799    2,477    8,713    105,238        

 

 

 

AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS) 

 

 

 
  Deposits    
 

 

 

   
      Year  Demand  Interest
Checking
  Savings  Money
Market
  Other
Time
  Certificates
$100,000 and
Over
  Foreign
Office
  Total  Short-Term
Borrowings
  Total      

 

 

 
       2015   $      35,164    26,160    14,951    18,152    4,051    2,869    874    102,221    2,641    104,862       
       2014    31,755    25,382    16,080    14,670    3,762    3,929    1,828    97,406    2,331    99,737       
       2013    29,925    23,582    18,440    9,467    3,760    6,339    1,518    93,031    3,527    96,558      ��
       2012    27,196    23,096    21,393    4,903    4,306    3,102    1,555    85,551    4,806    90,357       
       2011    23,389    18,707    21,652    5,154    6,260    3,656    3,497    82,315    3,122    85,437       
       2010    19,669    18,218    19,612    4,808    10,526    6,083    3,361    82,277    1,926    84,203       
       2009    16,862    15,070    16,875    4,320    14,103    10,367    2,265    79,862    6,980    86,842       
       2008    14,017    14,191    16,192    6,127    11,135    9,531    4,220    75,413    10,760    86,173       
       2007    13,261    14,820    14,836    6,308    10,778    6,466    3,155    69,624    6,890    76,514       
       2006    13,741    16,650    12,189    6,366    10,500    5,795    3,711    68,952    8,670    77,622       

 

 

 

INCOME FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA) 

 

 

 
                        Per Share(b)       
      

 

 

 
                           Originally Reported 
         

 

 

 
      Year  Interest
Income
  Interest
Expense
  Noninterest
Income
  Noninterest
Expense
  Net Income (Loss)
Available to
Common
Shareholders
  Earnings  Diluted
Earnings
  Dividends
Declared
  Earnings  Diluted  
Earnings
 

 

 

 
       2015   $      4,028    495    3,003    3,775    1,637    2.03    2.01    0.52    2.03   $    2.01       
       2014    4,030    451    2,473    3,709    1,414    1.68    1.66    0.51    1.68    1.66       
       2013    3,973    412    3,227    3,961    1,799    2.05    2.02    0.47    2.05    2.02       
       2012    4,107    512    2,999    4,081    1,541    1.69    1.66    0.36    1.69    1.66       
       2011    4,218    661    2,455    3,758    1,094    1.20    1.18    0.28    1.20    1.18       
       2010    4,489    885    2,729    3,855    503    0.63    0.63    0.04    0.63    0.63       
       2009    4,668    1,314    4,782    3,826    511    0.73    0.67    0.04    0.73    0.67       
       2008    5,608    2,094    2,946    4,564    (2,180  (3.91  (3.91  0.75    (3.94  (3.94)      
       2007    6,027    3,018    2,467    3,311    1,075    1.99    1.98    1.70    2.00    1.99       
       2006    5,955    3,082    2,012    2,915    1,188    2.13    2.12    1.58    2.14    2.13       

 

 

 

MISCELLANEOUS AT DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA)          

 

 

 
      Bancorp Shareholders’ Equity       
  

 

 

   
      Year  Common
Shares
Outstanding
  Common
Stock
  Preferred
Stock
  Capital
Surplus
  Retained
Earnings
  Accumulated
Other
Comprehensive
Income
  Treasury
Stock
  Total  Book Value
Per Share
  Allowance for
Loan and
Lease Losses
 

 

 

 
       2015    785,080,314   $2,051    1,331    2,666    12,358    197    (2,764  15,839    18.48   $          1,272      
       2014    824,046,952    2,051    1,331    2,646    11,141    429    (1,972  15,626    17.35    1,322      
       2013    855,305,745    2,051    1,034    2,561    10,156    82    (1,295  14,589    15.85    1,582      
       2012    882,152,057    2,051    398    2,758    8,768    375    (634  13,716    15.10    1,854      
       2011    919,804,436    2,051    398    2,792    7,554    470    (64  13,201    13.92    2,255      
       2010    796,272,522    1,779    3,654    1,715    6,719    314    (130  14,051    13.06    3,004      
       2009    795,068,164    1,779    3,609    1,743    6,326    241    (201  13,497    12.44    3,749      
       2008    577,386,612    1,295    4,241    848    5,824    98    (229  12,077    13.57    2,787      
       2007    532,671,925    1,295    9    1,779    8,413    (126  (2,209  9,161    17.18    937      
       2006    556,252,674    1,295    9    1,812    8,317    (179  (1,232  10,022    18.00    771      

 

 

 
AVERAGE ASSETS FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS) 

 

 

 
   Interest-Earning Assets          
 

 

 

    
      Year  

Loans and

Leases

  Federal Funds
Sold
(a)
  Interest-Bearing
Deposits in
Banks
(a)
  Securities  Total  Cash and Due
from Banks
  Other Assets  Total Average
Assets
 

 

 

 
       2017  $          92,731             1         1,389          32,172    126,293   2,224       13,345         140,636       
       2016   94,320             1         1,865          30,099    126,285   2,303       14,963         142,266       
       2015   93,339             1         3,257          26,987    123,584   2,608       15,179         140,078       
       2014   91,127             -         3,043          21,823    115,993   2,892       14,505         131,909       
       2013   89,093             1         2,416          16,444    107,954   2,482       15,025         123,704       
       2012   84,822             2         1,493          15,319    101,636   2,355       15,643         117,562       
       2011   80,214             1         2,030          15,437    97,682   2,352       15,259         112,590       
       2010   79,232             11         3,317          16,371    98,931   2,245       14,758         112,351       
       2009   83,391             12         1,023          17,100    101,526   2,329       14,179         114,769       
       2008   85,835             438         183          13,424    99,880   2,490       13,326         114,211       

 

 

 
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS) 

 

 

 
  Deposits   
 

 

 

   
    Year  Demand  Interest
Checking
  Savings  Money
Market
  Other Time  Certificates
$100,000 and
Over
  

Foreign

Office and
Other

 ��Total  Short-Term
Borrowings
  Total       

 

 

 
     2017    $        35,093           26,382     13,958   20,231   3,771     2,564         665      102,664   3,715      106,379       
     2016     35,862           25,143     14,346   19,523   4,010     2,735         830      102,449   3,351      105,800       
     2015     35,164           26,160     14,951   18,152   4,051     2,869         874      102,221   2,641      104,862       
     2014     31,755           25,382     16,080   14,670   3,762     3,929         1,828      97,406   2,331      99,737       
     2013     29,925           23,582     18,440   9,467   3,760     6,339         1,518      93,031   3,527      96,558       
     2012     27,196           23,096     21,393   4,903   4,306     3,102         1,555      85,551   4,806      90,357       
     2011     23,389           18,707     21,652   5,154   6,260     3,656         3,497      82,315   3,122      85,437       
     2010     19,669           18,218     19,612   4,808   10,526     6,083         3,361      82,277   1,926      84,203       
     2009     16,862           15,070     16,875   4,320   14,103     10,367         2,265      79,862   6,980      86,842       
     2008     14,017           14,191     16,192   6,127   11,135     9,531         4,220      75,413   10,760      86,173       

 

 

 
INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA) 

 

 

 
                        Per Share(b)       
      

 

 

 
                               Originally Reported   
         

 

 

 
      Year  Interest
Income
  Interest
Expense
  Noninterest
Income
  Noninterest
Expense
  Net Income (Loss)
Available to Common
Shareholders
  Earnings  Diluted
Earnings
  Dividends
Declared
  Earnings  Diluted  
Earnings
 

 

 

 
       2017  $        4,489     691   3,224      3,990      2,119            2.88   2.83   0.60    2.88   2.83      
       2016   4,193     578   2,696      3,903      1,489            1.95   1.93   0.53    1.95   1.93      
       2015   4,028     495   3,003      3,775      1,637            2.03   2.01   0.52    2.03   2.01      
       2014   4,030     451   2,473      3,709      1,414            1.68   1.66   0.51    1.68   1.66      
       2013   3,973     412   3,227      3,961      1,799            2.05   2.02   0.47    2.05   2.02      
       2012   4,107     512   2,999      4,081      1,541            1.69   1.66   0.36    1.69   1.66      
       2011   4,218     661   2,455      3,758      1,094            1.20   1.18   0.28    1.20   1.18      
       2010   4,489     885   2,729      3,855      503            0.63   0.63   0.04    0.63   0.63      
       2009   4,668     1,314   4,782      3,826      511            0.73   0.67   0.04    0.73   0.67      
       2008   5,608     2,094   2,946      4,564      (2,180)           (3.91  (3.91  0.75    (3.94  (3.94)      

 

 

 
MISCELLANEOUS AT DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA) 

 

 

 
      Bancorp Shareholders’ Equity       
  

 

 

   
      Year  Common Shares
Outstanding
  Common
Stock
  Preferred
Stock
  Capital
Surplus
  Retained
Earnings
  Accumulated Other
Comprehensive
Income
  Treasury
Stock
  Total  Book Value
Per Share
  Allowance for
Loan and
Lease Losses
 

 

 

 
       2017   693,804,893     $        2,051      1,331   2,790   15,122   73             (5,002)     16,365   21.67     1,196     
       2016   750,479,299      2,051      1,331   2,756   13,441   59             (3,433)     16,205   19.82     1,253     
       2015   785,080,314      2,051      1,331   2,666   12,358   197             (2,764)     15,839   18.48     1,272     
       2014   824,046,952      2,051      1,331   2,646   11,141   429             (1,972)     15,626   17.35     1,322     
       2013   855,305,745      2,051      1,034   2,561   10,156   82             (1,295)     14,589   15.85     1,582     
       2012   882,152,057      2,051      398   2,758   8,768   375             (634)     13,716   15.10     1,854     
       2011   919,804,436      2,051      398   2,792   7,554   470             (64)     13,201   13.92     2,255     
       2010   796,272,522      1,779      3,654   1,715   6,719   314             (130)     14,051   13.06     3,004     
       2009   795,068,164      1,779      3,609   1,743   6,326   241             (201)     13,497   12.44     3,749     
       2008   577,386,612      1,295      4,241   848   5,824   98             (229)     12,077   13.57     2,787     

 

 

 
(a)

  Federal funds sold and interest-bearing deposits in banks are combined in other short-term investments in the Consolidated Financial Statements.

(b)

  Adjusted for accounting guidance related to the calculation of earnings per share, which was adopted retroactively on January 1, 2009.

 

187206  Fifth Third Bancorp


DIRECTORS AND OFFICERS

 

FIFTH THIRD

BANCORP DIRECTORS

James P. Hackett, ChairmanGreg D. Carmichael

Interim Director of AthleticsChairman, President & Chief Executive Officer

University of Michigan

Vice Chair and Director

Steelcase, Inc.Fifth Third Bancorp

Marsha C. Williams, Lead Director

Retired Senior Vice President & Chief Financial Officer

Orbitz Worldwide, Inc.

Nicholas K. Akins

Chairman, President & CEO

Chief Executive Officer

American Electric Power

Company

B. Evan Bayh III

Partner

McGuireWoods LLP

Jorge L. Benitez

Retired CEO (U.S.) andChief Executive Officer

Senior Managing Director

(North America),America of Accenture plc

Katherine B. Blackburn

Executive Vice President

Cincinnati Bengals, Inc.

Ulysses L. Bridgeman, Jr.

President

B.F. Companies

Emerson L. Brumback

Retired President & COOChief Operating Officer

M&T Bank

Greg D. CarmichaelJerry W. Burris

Retired President & CEOand Chief Executive Officer

Fifth Third BancorpAssociated Materials Group, Inc.

Gary R. Heminger

President, CEOChief Executive Officer & DirectorChairman

Marathon Petroleum

Corporation

Jewell D. Hoover

Principal & Bank ConsultantRetired Senior Official

Hoover and Associates, LLCComptroller of the Currency

Kevin T. KabatEileen A. Mallesch

Vice ChairmanRetired Chief Financial Officer

Fifth Third BancorpNationwide Property & Casualty Segment,

Nationwide Mutual Insurance Company

Michael B. McCallister

Retired Chairman & CEOChief Executive Officer

Humana Inc.

Hendrik G. Meijer

Co-Chairman, Director

& CEO

Meijer, Inc.

FIFTH THIRD BANCORP OFFICERS

Greg D. Carmichael

Chairman, President &

Chief Executive Officer

Lars C. Anderson

Executive Vice President &

Chief Operating Officer

Chad M. Borton

Executive Vice President

Frank R. Forrest

Executive Vice President &

Chief Risk Officer

Mark D. Hazel

Senior Vice President &

Controller

Heather Russell KoenigAravind Immaneni

Executive Vice President &

Chief Legal Officer &Operations

Corporate Secretary

Randolph J. Koporc

Executive Vice President

Gregory L. Kosch

Executive Vice Presidentand Technology Officer

James C. Leonard

Executive Vice President &

Treasurer

Philip R. McHugh

Executive Vice President

Joseph R. RobinsonHead of Consumer Bank

Jelena McWilliams

Executive Vice President,

Chief Legal Officer &

Chief Operations

and Technology OfficerCorporate Secretary

Timothy N. Spence

Executive Vice President &

ChiefHead of Payments, Strategy Officerand

Digital Solutions

Teresa J. Tanner

Executive Vice President &

Chief Administrative Officer

Tayfun Tuzun

Executive Vice President &

Chief Financial Officer

REGIONAL PRESIDENTS

Ralph S. Michael IIISteven Alonso

(Group Regional President)

Donald Abel, Jr.

Michael Ash

Steven AlonsoKevin Hipskind

David A. Call

Hal ClemmerMichael McKay

Timothy Elsbrock

(Market President)

David Girodat

Thomas Heiks

Jerry KelsheimerLee Fite

(Market President)

Joseph DiRocco

Randy Koporc

Robert W. LaClair

Brian Lamb

Jordan A. Miller, Jr.

Robert A. SullivanFrancie Henry

(Market President)

Eric Smith

Thomas G. Welch, Jr.

FIFTH THIRD BANCORP BOARD COMMITTEES

Audit Committee

Emerson L. Brumback, Chair

Nicholas K. Akins

Katherine B. Blackburn

Jerry W. Burris

Jewell D. Hoover

Finance Committee

Gary R. Heminger, Chair

Nicholas K. Akins

Emerson L. Brumback

James P. HackettJewell D. Hoover

Kevin T. KabatMichael B. McCallister

Marsha C. Williams

Human Capital and Compensation Committee

Marsha C. Williams,Michael B. McCallister, Chair

Nicholas K. Akins

Gary R. Heminger

Michael B. McCallister

Hendrik G. MeijerEileen A. Mallesch

Nominating and Corporate Governance Committee

Ulysses L. Bridgeman, Jr.,Nicholas K. Akins, Chair

B. Evan Bayh III

Jorge L. Benitez

Katherine B. Blackburn

Gary R. Heminger

Hendrik G. Meijer

Regulatory Oversight Committee

Marsha C. Williams Chair

Nicholas K. Akins

Emerson L. Brumback

Jewell D. Hoover

Risk and Compliance Committee

Jewell D. Hoover, Chair

B. Evan Bayh III

Jorge L. Benitez

Hendrik G. MeijerJerry W. Burris

Marsha C. WilliamsEileen A. Mallesch

 

 

188207  Fifth Third Bancorp